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. Last Updated: 07/27/2016

Moody’s Says Sovereigns Safe

Russia is likely to maintain its sovereign investment grade next year, but an increase in nonperforming loans and a rise in quasi-sovereign debt issuance could jeopardize that, Moody’s Investor Service said at a conference Thursday.

“If you want a forecast, we think that Russia’s rating will remain within A3-Baa2 next year, which means it will not jump high and will not fall low,” said Jonathan Schiffer, vice president of Moody’s.

Moody’s was the only one of the three major credit ratings agencies to maintain Russia’s credit rating as the crisis hit, with Fitch and Standard & Poor’s cutting their grades to BBB.

Russia’s Baa1 rating will be maintained even in the event of a 20 percent ruble devaluation, he said, because the government has the resources to manage such a decline in the currency.

Falling oil prices and capital flight in the wake of the world financial crisis pushed the ruble down 35 percent from August 2008 to January 2009. The Central Bank sold off more than a third of its foreign currency reserves in a floating devaluation to ease the ruble’s decline.

The Central Bank has started buying up dollars again to cool off an appreciating ruble and the country’s reserves are currently estimated at $429.3 billion, down from more than $600 billion at their precrisis peak.

Nevertheless, Schiffer said the government’s management of the economy was sometimes excessive.

“We call it ‘activist predilections and political unpredictability.’ This means that the government lacks consistency. It likes to intervene, but often does that in unpredictable ways for investors,” he said, without elaborating.

One of the main factors holding down Russia’s credit rating is its institutional strength, which, despite overall stability, is regarded as “low” by the agency, as government efficiency remains insufficient and property rights are still weak, Schiffer said.

“For our calculations we use World Bank reports on government accountability, the functioning of the judicial system, tax collection, the actions of the Finance Ministry and the Central Bank,” he said. “And this is an area, we think, where the Russian government needs to put in additional efforts to improve.”

Contingent liabilities, or debts that could end up on the government’s books, are also a factor that affects the investment rating of the country, he said.

“These quasi-sovereign debts are accumulated by the quasi-state companies, like Gazprom and Sberbank, for example,” he said. “The debt accumulation by a number of state-related companies reached $136.2 billion in the second quarter of 2009, with banks owing $50.4 billion and the rest $85.8 billion owed by the other sectors.”

Further, banks’ accumulation of nonperforming loans, which may account for 20 percent of the banking system in 2009, are a cause for concern, Moody’s said.

“We have a figure considerably higher than the forecast made the Central Bank,” said Yevgeny Tarzimanov, associate vice president of Moody’s. “We believe it will continue to rise and will reach 20 percent by year-end.

The rise will continue in 2010, reaching a total of 25 percent.”

Central Bank First Deputy Chairman Alexei Ulyukayev said earlier this month that the volume of nonperforming loans would not exceed 10 percent in 2009.

Tarzimanov defended Moody’s estimate, however, saying the agency used detailed calculations to come to that conclusion.

“We took every type of loan and estimated it using separate ratings, we personally met representatives of all the banks we are working with in order to estimate their credit quality level on an individual basis,” he said. “The picture we witnessed showed us that a 20 percent accumulation of non-performing loans is quite realistic. The figure is critical, but the system will cope with the load.”

A lack of liquidity in the financial system is another problem in the offing, although monetary measures taken by the Central Bank have partly ameliorated the problem, Tarzimanov said.

“Despite the support from the Central Bank, liquidity remains vulnerable,” he said. “If the regulator stops its operations, banks will find it difficult to pay back. We see no exit from this situation so far, but hopefully banks will come out of this trouble.”

The bank has channeled huge amounts of money through special credit facilities in attempts to prop up liquidity as private lending stalled and interest rates rose.

The Central Bank announced Thursday that it would lower its refinancing rate by another 50 basis points to 9.5 percent, the lowest the rate has ever been.

The Central Bank has lowered the interest rate eight times from its recent high of 13 percent in December.