Putin's Truthteller Turns Pariah as Banks Cringe at Ratings

(Bloomberg) -- Besieged by sanctions for three years, Russia has rushed its homegrown financial plumbing into place.

One vital piece has been a harder fit -- its own ratings company.

Investors depend on credit ratings to make decisions on what to buy and judge the relative safety of a security. In Russia, a domestic alternative to international providers -- ACRA, whose name stands for Analytical Credit Rating Agency -- has been created from scratch. But its birth pangs have complicated an effort meant to be both “resilient to geopolitical risks” and credible enough to serve as the keystone of Russia’s domestic market infrastructure. 

With top lenders like VTB Group faulting its toughness, the firm has only published ratings of 10 companies and six corporate issues. Although ACRA has signed dozens of contracts since last November, the delays have forced both the central bank and the Finance Ministry to put off plans to start using its ratings instead of assessments by international credit providers.

“We don’t allow any interference in our work,” ACRA’s chief Ekaterina Trofimova said in an interview. “Independence in decision making and avoiding conflict of interest are among our basic principles.”

Into Junk

Formed after Russia was cut to junk in 2015 by Moody’s Investors Service and S&P Global Ratings, ACRA also marked a new beginning in another way. It was meant as a break with a checkered past of Russian providers, many of them discredited in the eyes of regulators and investors by assigning high ratings to banks that later failed.

Still, the authorities made little secret that the prime motivation for tightening rules for international companies and forming a homegrown alternative was a geopolitical crisis with the West. The decision capped years of criticism, with President Vladimir Putin previously calling the rankings given to his country an “outrage” that increased borrowing costs for both domestic companies and the government.

After Russia came under sanctions over its involvement in Ukraine, S&P, Moody’s and Fitch Ratings withdrew ratings of blacklisted companies and declined to rate new issues of penalized banks, including the country’s biggest -- Sberbank PJSC and VTB.

ACRA, which says it abides by “the newest regulatory requirements,” was founded by 27 large Russian companies and banks. Trofimova, who previously headed S&P’s financial institutions group in Paris, was picked to lead the new company, whose several dozen employees included analysts from the three biggest international rating firms.

Too Demanding?

Differences have been difficult to spot for the likes of VTB, one of ACRA’s founders. The firm “doesn’t take into account a number of factors,” the head of the country’s second-biggest bank, Andrey Kostin, said in February.

VTB commissioned an ACRA rating last October, but none has been released to date. Trofimova declined to comment on VTB’s unpublished assessment. “We only react to attempts to put pressure on us with constant and thorough explanations of our opinions and positions,” she said. 

The rating process takes up to 30 days, and delays may be caused by insufficient information provided by a company, according to Trofimova. Companies also have the right to prevent their rating’s publication if they don’t like the assessment.

One beneficiary of ACRA’s fitful start is its older Russian rival, Expert RA, which has been operating since 1997. In December it received the central bank’s official seal of approval.

In February, Expert RA gave VTB its highest possible rating. Two other lenders won the top rating, including Gazprombank JSC and Bank Rossiya, partly owned by one of Putin’s closest allies, Yury Kovalchuk. Gazprombank got the third-highest grade from ACRA.

Client First

Expert RA’s chief, Sergei Tishchenko, concedes that a number of clients that weren’t comfortable working with ACRA turned to his company instead. Its advantage is a large database for corporate defaults, as well the ability to tailor “approaches” to suit clients and willingness to “hear their arguments,” he said.

Given ACRA’s “effectively monopolistic” status, authorities try to respond to complaints -- if they are deemed substantiated -- by brokering talks between both sides to attempt to find an agreement, Deputy Finance Minister Alexey Moiseev said in an interview.

While Expert RA was added to the list of approved firms, its ratings weren’t yet used for placing state funds, according to Moiseev. That won’t happen until its scale -- which allows more companies to get the top grade -- is brought in line with ACRA’s, he said. 

Russia has lost more than 100 billion rubles ($2 billion) by placing money in “banks that weren’t very safe, and that shouldn’t continue,” Moiseev said. “The toughness of ACRA’s methods is essentially a question of economic security.”

It’s a sentiment that resonates with investors. The process by which ACRA and Expert RA won regulatory approvals as an alternative to international competitors is questionable and doesn’t amount to “fair play,” said Konstantin Artemov, a money manager at Raiffeisen Capital Asset Management.

“Russian agencies don’t have a good reputation after defaults of corporates with high ratings, so why should I look at their assessments?” he said. “I need to see their track record before I trust them.”

To contact the reporter on this story: Anna Baraulina in Moscow at abaraulina@bloomberg.net.

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Mark Sweetman at msweetman@bloomberg.net, Paul Abelsky, Alex Nicholson