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. Last Updated: 07/27/2016

Russky Standart Takes Issue with Downgrade

VedomostiRussky Standart is claiming $20 million from RusRating and an analyst.
Russky Standart bank's landmark case against RusRating, an independent ratings agency, took a new turn Wednesday when the bank's lawyers made specific reference to the agency's decision to downgrade Russky Standart, and how it has altered perceptions of the bank.

"This is an open declaration that the bank is pressuring the ratings agency because of its ratings," said Richard Hainsworth, CEO of RusRating, following the hearing. "So long as the case revolved around specific [comments], it wasn't about ratings. They said [today] what we already knew was the case."

In December, RusRating, which is not retained by Russky Standart, downgraded its ratings for the bank from B+ to B. International agencies with which Russky Standart cooperates kept their ratings unchanged. Explaining the downgrade to Profil magazine a week later, RusRating analyst Yulia Arkhipova said: "It's important for any bank not only to attract clients but to keep them. But once a client uses Russky Standart's services, he won't come back to them again."

The bank is seeking $10 million in damages from RusRating and a further $10 million from Arkhipova, claiming that its business reputation has suffered as a result of what it says were her "one-sided and groundless" statements. RusRating has countered that the analyst was making a statement of opinion, not fact, and was entitled to do so.

Hainsworth has described the lawsuit as potentially ruinous for his agency.

Russky Standart rejected the assertion that the suit was connected with the wider issue of ratings. "For [the bank], this is a very narrowly defined case," said Preston Mendenhall, director of communications for Russky Standart. The bank declined to provide further comment, citing the ongoing case.

Arriving at the court with a suitcase full of evidence, the bank's lawyers said Arkhipova had damaged its business reputation and requested that the judge allow them to seek court-backed expert opinion. It was in their closing comments that the bank's lawyers referred to the wider impact of ratings, and in particular RusRating's downgrade, on how the bank is perceived.

Judge Lyubov Barabanshchikova, who heads an informal group of judges dealing with defamation cases, presided over the hearing, held at Basmanny Arbitration Court. The proceedings verged on the comical at times. At the start of the session, the judge mistakenly read out the amount of individual damages sought as $10,000, prompting both plaintiffs and defendants to chorus "$10 million." Clerks entered the room on several occasions to present unrelated documents needing a signature, halting the lawyers in mid-sentence.

Ratings agencies have attracted negative press coverage amid the current global economic turmoil, sparked by the U.S. subprime crisis.

"Rating agencies have globally received a lot of justified criticism on their ability to lead credit rather than lag credit," said Roland Nash, head of research at Renaissance Capital, referring to a tendency to change an opinion after an event, rather than before.

"But to undermine [their independence] for one particular client doesn't make economic sense," Nash said of the biggest agencies.

There are concerns that a ruling against RusRating would hamper the ability of rating agencies in the country to project independent opinions to the media. If a ruling in favor of Russky Standart were to receive very widespread coverage, Nash said, this could have broader implications for analysts at investment houses, too.

In recent months, the consumer lending sector has come under increased scrutiny. In June, the Prosecutor General's Office asked the Central Bank, the Federal Anti-Monopoly Service and the Federal Financial Monitoring Service to investigate Russky Standart's consumer lending practices, following complaints from disgruntled customers.

Consumer watchdogs have claimed that Russky Standart and other lenders were fudging their real consumer lending rates. The Central Bank took action earlier this year, introducing new rules in July that obliged lenders to disclose their effective interest rates.

In an interview this summer, Russky Standart CEO Dmitry Levin said the bank was planning to end the practice.

The next hearing in the RusRating case is scheduled to take place Sept. 26.