Downward Revision of the Rating Forecast Does not Entail Any Risks to the Russian Banking Sector

So, Fitch Ratings, an international rating agency changed the issuer default rating forecasts from stable to negative for the Sberbank, the Bank for Foreign Economic Affairs, Rosselkhozbank, Gasprombank, Rosagrolizing, the National Clearing Center (NCC), Raiffeizenbank, Citibank, Nordea Bank, Danske Bank, SEB Bank, HSBC Bank, ING Bank, Rosbank, Deltacredit Bank, Rusfinansbank, Russian subsidiary of the China Construction Bank and ZAO Credit Agricole CIB. The forecast has become a negative one for Gasprom, RusHydro, RZhD, Atomenergoprom, LUKoil, FSK UES, ZAO Grazhdanskie Samolety Sukhogo, the Federal Passenger Company and Gasprom Oil.

Such a decision was explicitly meant to inform international investors about the danger related to growth in political and economic risks due to a situation in Crimea.

The financial theory points to the fact that there is a considerable dependence of the cost of borrowing of funds by companies on their credit rating, while the practice confirms that the spread between the weighted average cost of borrowing of funds for companies with a high reliability rating and a risk-free rate amounts to 0.2%, while that index for companies with a rating below the investment one may amount to 7% or more depending on the tax and debt burden.

In the short-term prospect, downward revision of the forecast on the long-term rating of Russian credit institutions does not involve any substantial risks either to the Russian banking sector or individual credit institutions.

For evaluation of the consequences of a possible downward revision of ratings in future, it is important to pay attention to dependence of Russian banks on foreign borrowings and the pattern of the Russian foreign corporate debt.

According to the estimates of the Central Bank of the Russian Federation, as of January 1, 2014 the foreign debt of Russian banks amounted to $215bn, that is, 29% in the pattern of the foreign debt or a bit more that 17% of the total amount of borrowed funds. Growth in the cost of foreign borrowings even in case of a dramatic downward revision of ratings of Russian banks will not affect greatly the stability of the Russian banking sector.

It is to be noted that foreign borrowings are of a long-term nature, while placement of funds takes place mainly in treasury instruments for liquidity management purposes. In addition to the above, a larger portion of the corporate foreign debt is made up of obligations of Russian non-financial entities to shareholders of Russian companies in countries with privileged tax and financial regulation who use such jurisdictions for tax optimization and regulation of dividend payments, as well as protection of business in Russia by mean of equal participation in the meeting of creditors in case of reorganization of a company. Decisions of rating agencies for such creditors are the least important.

Taking into account the above factors, the specifics of management of the ratings of Russia and Russian companies, as well as other aspects which permit to judge about the stability of the Russian banking sector, it can be concluded that a downward revision of rating forecasts due to international political decisions is not reasonably aimed at reduction of confidence of international investors in the Russian public and private sectors, which situation, in its turn, points to a need to reform the system of assignment of credit ratings on the basis of transparency and independent decision-making.

Yuri Kondrashin, Expert of the Structural Research Center