JP Morgan joins Goldman Sachs in teaching Russia how to be a fair lady

Today’s edition of business daily Vedomosti.ru reports that investment bank JP Morgan is about to take on the role of adviser to the Russian Ministry of Finance on how to improve the country’s credit rating. Russia’s current credit ratings are Baa1 according to Moody’s, and BBB according to Fitch and S&P. The Ministry’s financial management program forecasts that the ratings will increase to A3 and A, respectively, by 2016. JP Morgan will adapt the Ministry’s documents to suit the rating agencies’ requirements, clarify any contentious points, and maintain regular contact with the agencies. The details of the deal have not been made public and seem to be vague at this point, as this is the first contract of the kind for the Russian Ministry of Finance. Sources from the Ministry claim that JP Morgan will not receive any compensation for its consulting services, as “many banks help the Ministry of Finance on a voluntary basis in order to increase their reputation”. One might argue that the benefit for the banks is obvious – the ability to present the macroeconomic situation in the country to their clients in detail, as well as to gain access to other inside information presents an undeniable advantage.

At the same time, investment bank Goldman Sachs is already working on enhancing Russia’s investment image. However, Goldman Sachs is not doing it on a pro bono basis – it will collect USD 500,000 for the work that includes responsibilities that could lead to a more tangible immediate outcome: organizing meetings and establishing contacts with the investors.

The Ministry of Finance is in contact with the rating agencies only once a year or so, when it decides to float debt on the international markets. JP Morgan will maintain such contacts on a regular basis, which could result in higher credit ratings, as was the case with some other countries that made a similar move. A higher credit rating would be quite helpful to Russia at a time when a shadow of recession looms over its economy. Some experts estimate that the cost of borrowing might drop by between 0.25 and 0.5 percent. Last year, Russia floated 5-year Eurobonds at a rate of 3.3 percent, 10-year Eurobonds at 4.6 percent, and 30-year Eurobonds at 5.8 percent. An enhanced country rating would benefit major Russian companies as well, enabling them to borrow internationally at lower rates and, in some cases, increase their own credit ratings.

Some analysts believe that Russia’s country rating should be higher, as its central budget is balanced and the level of external debt is quite low – approximately 10 percent of the GDP. With a budget deficit of 0.8 percent in 2012 and international reserves of USD 512.4 billion, Russia has a lower rating than some of its peers with a significantly worse macroeconomic situation. However, the rating agencies have already taken the stability of Russia’s central budget into consideration and are more concerned about the structure of the economy. In its report, S&P wrote that oil and gas related revenues account for approximately half of the Government’s revenues, exposing the central budget to risks that outweigh the low level of debt. In order to reconsider Russia’s rating, Fitch requires the level of budget deficit excluding oil and gas revenues to drop from the current 10.6 percent of GDP to 4.7 percent of GDP. However, non-oil and gas deficit is expected to drop to 8.5 percent of the GDP only in 2015.

Credit ratings are not all that matters to investors. For example, Brazil has a similar rating to that of Russia, but its borrowing rate is 0.25 percent lower. An explanation can be found in Fitch’s report, where it is stated that Russia looks unfavorable compared to other countries with a similar rating in terms of the quality and efficiency of the government, the implementation of the rule of law, and corruption. Even the Vice-President of the Government Igor Shuvalov recently concluded that there are currently no grounds for the reassessment of the country’s rating. No investment bank can help the Government implement the kind of reforms that are required in order to enhance the country’s rating and image. A Government official stated that while Goldman Sachs’ weekly reports on investors’ reactions to developments in Russia did not induce the Government to reconsider any of its decisions, they did make the absurdity of the decisions more obvious.

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