Russian Debt Safer Than U.S.? So Says China Rating House Dagong

Russian Debt Safer Than U.S.? So Says China Rating House Dagong (Bloomberg, Jan 8, 2015):

A currency crisis, recession and plunge in the price of its key export don’t mean Russia is any less creditworthy than the U.S., according to one of China’s biggest debt-rating companies.

Just the opposite — it’s a better credit risk, says Dagong Global Credit Rating Co. The firm, which downgraded U.S. government debt in October 2013 to A-, today said it has decided to maintain Russia’s rating at A with a stable outlook.

“The debt repayment environment has somewhat deteriorated but is expected to stabilize in the medium term,” Dagong said in an emailed statement regarding its assessment. “As the economy stabilizes and the monetary policy normalizes, the domestic credit environment will gradually recover.”

Russia’s economy is forecast to contract 1.8 percent this year versus 3 percent growth in the U.S., which would be the fastest pace in 10 years, according to economists’ projections. Dagong’s optimism contrasts with the biggest ratings companies: Standard & Poor’s said last month it will probably lower Russia to non-investment grade within 90 days, while Fitch Ratings will announce the results of a review tomorrow.

Privately-held Dagong, established in 1994, isn’t formally tied to the Chinese government. It started sovereign ratings in 2010 in a bid to break the monopoly of U.S. rating firms, according to the company’s website, mirroring the government’s strategy of gaining greater influence on the global stage.
Photographer: Goh Chai Hin/AFP via Getty Images

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The rating echoes efforts by China to offer support for Russia’s President Vladimir Putin. China will provide help if needed and is confident Russia can overcome its economic difficulties, Foreign Minister Wang Yi was cited as saying in Bangkok in a Dec. 20 report by Hong Kong-based Phoenix TV.
LGFV Ratings

Dagong also rates many local government financing vehicles in the domestic bond market. In 2013, it gave an AA rating to bonds issued by Jiamusi New Era Infrastructure Construction Investment Group Co., a financing arm of the Jiamusi city authorities in northeastern China. The issuer used fabricated documents regarding land-use rights to help sell the debt, Beijing News reported in July last year.

A media relations manager in Beijing at Dagong didn’t immediately respond to an interview request today.

The ruble tumbled 41 percent against the dollar last year in Moscow, its worst performance since 1998 when Russia defaulted on local debt. Crude oil dropped 46 percent in 2014 and this week fell below $50 a barrel for the first time since 2009.
Russia Risks

The cost of insuring Russian bonds against default rose this week to the highest level in almost six years amid speculation a cut in the nation’s credit rating to junk is imminent. Five-year credit default swaps climbed to 603 basis points on Jan. 6, meaning it cost $603,000 annually to protect $10 million of debt. Only sovereign notes issued by Venezuela, Argentina, Ukraine, Greece and Pakistan are more expensive to protect, while contracts for the U.S. closed yesterday at 21 basis points in New York, data compiled by Bloomberg show.

S&P, which said it will conclude its review of the sovereign’s BBB- rating in mid-January, put it on negative watch based on “what we view as a rapid deterioration of Russia’s monetary flexibility and the impact of the weakening economy on its financial system,” it said Dec. 23.

A cut by Fitch, which currently rates the nation two steps above junk with a negative outlook, to BBB- is “almost a certainty,” while junk status from S&P may be forthcoming, analysts at Tradition brokerage in London said in an e-mailed report this month.

Fitch rates the U.S. AAA, while S&P has a AA+ rating.


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