Russia hires J.P. Morgan to avoid ratings downgrade

MOSCOW, Russia – Russia’s finance ministry said on Friday, May 24, it had hired the US banking major J.P. Morgan as a consultant for helping improve its image with the world’s 3 main ratings agencies amid worries of an imminent downgrade.

The announcement came days after Deputy Finance Minister Sergei Storchak confirmed that one of the ratings giants had sent a team to Moscow with a view of reviewing its grade for Russia’s credit.

Storchak never spelled out whether this review intended to raise or lower Russia’s investment outlook.

But the markets are concerned that the revision will be made to the downside owing to rapidly slowing economic growth and inflation that has outpaced expectations.

Russia’s First Deputy Prime Minister Igor Shuvalov essentially confirmed that Moscow was trying to avoid a sovereign ratings downgrade in comments earlier this week.

“We have been warning experts and the ratings agencies about certain negative consequences in view of slow rates of economic growth,” Shuvalov told Russian media on Thursday, May 23.

“We have no additional signs (of an economic) slowdown.”

Russia’s growth outlook has already been slashed to 2.4% of gross domestic product from 3.6% while inflation has consistently stood at more than 7%.

This double-edge sword has paralyzed the central bank — unable to stimulate growth through lower interest rates because of the inflation risk — and sparked speculation among analysts for a need for urgent fiscal measures.

“The continued weakness of Russia’s economy has led to questions about what policymakers can do to stimulate growth and, with the central bank reluctant to loosen monetary policy, there is a growing likelihood that the government will turn to fiscal measures to revive the economy,” the London-based Capital Economics consultancy said in a research note.

Creating a global financial center

Any sovereign rating downgrade would make Russian foreign borrowing more expensive and put a further strain on a budget that is expected to reach a deficit this year.

Russia today has similar investment-grade ratings with Standard and Poor’s (BBB) as well as Moody’s (Baa1 and Fitch (BBB).

But Moscow has set itself the goal of securing the highest ratings possible from the 3 agencies by 2016 at the latest.

Storchak told the RIA Novosti news agency that “we have agreed with J.P. Morgan for it to be our official partner in relations with the ratings agencies.”

He said the bank, the largest US lender had beat out a number of competitors with its offer but provided no other details.

J.P. Morgan itself issued no immediate comment.

The Russian authorities have already hired the US investment banking leader Goldman Sachs as its official adviser on its overall economic image.

Russia has spent most of the past decade trying to polish its image in order to attract investment to a Moscow market that has been hurt by low stock liquidity and wild price swings that most closely reflect those of the global oil market.

The country has been grappling with corruption and an ineffective legal system that has been spooking foreign investors and forcing the country’s stocks to be sold at a discount.

But Russian President Vladimir Putin is set on making Moscow into a global financial center that one day will link the Hong Kong markets with those in London and New York. – Rappler.com