Richard Hainsworth, President of the GlobalRating Group and General Director of the national rating agency RusRating, Certified Financial Analyst and President of the CFA Association (Russia) // Maya Marlinskaya, Bankir.Ru

I’d like to start off with a provocative question. Why, in your opinion, has the Central Bank taken such a negative attitude towards Russian rating agencies?

I don’t think the CBR takes a negative attitude. I would call it cautious – something a regulator should be. And in my opinion the main reason is that Russian rating agencies have upped their ratings since the start of the crisis, while foreign agencies have cut theirs. That much is obvious. The question is how to integrate them. For example, we raised several bank ratings in February. In fact I had been planning to review our ratings since September [last year] – and for what I feel is a good reason, namely, indications that the banks are now functioning as a system instead of separate entities, as they did before.

But September saw the first signs of a crisis in Russia…

Yes, and so our rating committee told me: “Richard, now is not the right time!” Which, incidentally, illustrates the fact that I’m not the only one who makes decisions in the agency.

It would have looked odd if you upped ratings at the very moment when depositors were lining up to make withdrawals.

It looked odd anyway when we revised our ratings upwards in February! Some people said we did it because last November the Central Bank began admitting banks to its auctions of five-week uncovered loans on the basis of our ratings. Supposedly the ratings were increased because for many banks they opened the door to cash…

That’s the first thing that comes to mind…

Understandably. But the background was more complex. There were some banks that got higher ratings because we were suddenly able to identify a concrete positive factor – one that objectively had to give the rating an upward push. I don’t think we can be accused of assigning ratings casually. We take a conservative approach, but crisis conditions always reveal that some banks have been overrated and others underrated. They mark a turning point of sorts when everything changes. So there’s no reason to see rating increases under crisis conditions as unreasonable. It’s a logical process. Particularly since by February it had become clear that the Russian banking system was working, that it would survive. That made rating increases appropriate.

Yes, but isn’t it possible that the system wouldn’t have survived without prompt assistance from the Central Bank beginning last October?

Why does that matter? Yes, Russia’s Central Bank has an excellent grasp of its role and is prepared to help. It has been clear since last fall that the CBR is working through the state-sector banks – Sberbank, VTB and Gazprombank – which gave a great deal of assistance to, say, Russian Standard Bank. Russian Standard received substantial state support because the government didn’t want to see it default on its obligations to foreign creditors. Any such default at the start of the crisis would have had a major impact on the banking system as a whole. So they did what they could to maintain market stability. In my opinion, both the Central Bank and the government made very effective use of their reserves.

And there was another factor involved, too. The government made a lot of noise about various support mechanisms that in fact went into effect only after considerable delays. For example, there was a promise of money for small and mid-sized businesses, to be channelled through the Russian Development Bank. It was promised by the end of the year but appeared only in July. And large sums were allocated to infrastructure projects that are still under discussion. As I see it those delays were intentional: Russia suffers from the cancer of an uncontrolled bureaucracy. When it comes to drawing down reserves that constraint turned out to be a blessing: the Ministry of Finance, which built up the gold and foreign currency reserves, was in no hurry to see them all spent.

On the subject of delayed measures, let’s come back to those uncovered auctions. They were introduced only in October, although emergency was needed as earlier as mid-September, when KIT-Finance and Svyaz Bank stopped payments due to a lack of liquidity…

That came about because of contradictions in the law itself. According to the Federal law “On the Central Bank of the Russian Federation” the CBR is the lender of last resort, but in practice it was unable to play that role because article 46.1 (of the same law) says that the Central Bank can only extend loans backed by collateral. The problem is that by the time a bank turns to the CBR as lender of last resort it has already disposed of all liquid assets and has nothing to pledge as collateral. Recall the situation many years ago with SBS-Agro, which drew on a substantial CBR stabilisation loan. Everybody knew about it, everybody agreed it was necessary, but afterwards the CBR Vice-Chairman who signed off on the contract was condemned because the law didn’t permit the CBR to extend uncovered loans. That made the loan illegal.

A banking system must have a lender of last resort. I have always said this should be a function for the CBR. But some people at the Central Bank objected and backed up those objections with logical reasons. In extending uncovered loans the CBR takes on risks like a commercial lender – a role that ought to be played by commercial banks. In theory that argument is totally sound, but during a crisis it’s essential that the CBR be able to respond promptly. At the start of this crisis it tried to convince the biggest banks – Sberbank, VTB and Gazprombank – to make liquidity available to smaller and mid-sized counterparties. And what happened? Those banks took in huge amounts of cash, prompting protests from other market participants, who said that the government wasn’t interested in helping anyone else and that the rest were, supposedly, left to fend for themselves.

In actual fact CBR’s motive was the right one. But it overlooked the fact that Sberbank is not oriented towards the interbank market. Up until 1995 it was an active player, but a subsequent political decision called on it to stop making loans to other commercial banks. Now, once again, Sberbank is a leading interbank creditor – but only one of them! Even though it accounts for some 60% of the liquidity in the Russian banking system. Which in theory means it shouldn’t be just “one of” of the market leaders, it should be the country’s number one interbank creditor. Yet up until the crisis the loans were going to its own regional subsidiaries – the ones that needed additional liquidity.

Why, in your opinion, is Sberbank so reluctant to finance other Russian banks?

Sberbank is very sceptical about other Russian banks and it wants to compete with the global players [such as] Deutsche, Citi or JP Morgan. It has positioned itself accordingly. It had no desire to work with Russian counterparties, had established no credit limits or loan procedures. So when the CBR extended that loan there was no resulting flow of liquidity into the banking system. That’s what triggered amendments to the legislation and allowed the CBR to make loans available directly. And it chose credit ratings as the guideline for determining access to those loans. To begin with only international ratings were considered, but we lobbied actively for Russian ratings to be added to the list.

Lobbied in what way?

We submitted requests to regulators and legislators, acted via the Association of Russian Regional Banks, met with the chairmen and other members of the relevant State Duma and Federation Council committees. And we spoke at conferences, took part in government hearings, and met with Central Bank, Ministry of Finance, Ministry of Economic Development and VEB representatives, as well as members of the National Banking Council and the Board of Directors of the Central Bank. The initiative group set up by three Russian rating agencies – AK&M, National Rating Agency and RusRating – was quite effective.

Was Expert RA not involved?

We invited them but they didn’t take part. If you recall, back in December 2007 the same three agencies jointly developed a Code of Professional Ethics that took into consideration mistakes made at the international level. We also discussed the possibilities for an institution that would accredit rating agencies. Expert RA was welcome to become involved, but they have taken a fundamentally different approach to ratings. In our view ratings should be based on qualitative assessments, which means having a team of analysts. Ratings based solely on computer analysis are rankings, not ratings – although the boundary can be unclear.

Richard, there are several banks that you rate for free. Is that out of nothing more than altruism?

When we started operations in 2001 nobody knew who we were and we assigned [all] ratings for free. We earned our money from investors who paid to read our reports. And we selected banks that were active on the interbank market. The first year there were twenty of them, that later rose to forty. It was only in 2003 that some banks started to pay for ratings. Since that time we’ve been gradually cutting down on the number of unpaid ratings and now there are only fifteen that aren’t covered by contracts. Incidentally, one of them is Bank of Moscow, which campaigned energetically against unpaid ratings.

In effect [in these cases] you’re assigning ratings without access to full information from the bank. That means the rating can be less than objective and/or reliable. Is that their reason [for objecting]?

Yes, that was one of their arguments. At the conference in Sochi one Bank of Moscow representative asked where we got our information and called our assessment a “pseudo-rating”. But our information came directly from the bank, which made it available as it would to an interbank market counterparty. It was the same with Russian Standard – our information came straight from the bank.

Some bankers argue that rating agencies should be accredited by the Association of Russian Banks and that ratings themselves should be initiated by the issuer (bank). But given the nature of business in Russia, an issuer initiated rating is a contracted rating. But that’s another subject. Personally I think it’s wrong for the issuer to pay for the rating. And I know my colleague National Rating Agency Director Viktor Chetverikov, agrees. It’s just that many banks don’t want to see ratings assigned without their involvement.

How long does it take to assign a rating?

In our agency a minimum of two weeks from the date on which we receive full information about the bank. Depending on complexity, it might take as long as two months. A lot depends on how complex the bank is. In other words, are its beneficiary owners apparent from its formal ownership structure and are there a large number of affiliated companies? Every rating is accompanied by a monthly report.

International ratings cost around €/$45-50 000 per year. How much does a Russian rating cost?

We conducted a marketing analysis and asked the banks how much their international ratings cost. There is no fixed price – different banks pay different amounts. And costs have also changed since the start of the crisis.

Are they lower?

Just the opposite! Prior to 2008 we charged $15 000, in January last year I approved an increase to $20 000. Then that was upped to €20 000. We received a lot of rating requests after the crisis hit and some banks were prepared to pay anything to get a rating quickly. But by June it was clear that we couldn’t raise the price any further, since our services didn’t cost that much less than those of the “big three”. Unlike us, however, they require their clients to cover costs over and above the price of the rating, which adds another 20-25% to the final charge. According to our banks, S&P has upped its price to $90 000 since the start of the crisis, Moody’s to $65 000 and Fitch to $50-60 000.

We ought to remember here that rating agencies, in principle, should be competing on the quality of their analysts and not on price. I know some market players even hire students to do their analysis, but for us it’s anything but a routine job. There are three stages. The first is to collect information and identify trends. The second is to understand what is causing the changes. And the third requires an ability to explain exactly what is going on at the bank. Sometimes that third element is lacking. How is it possible to put out a fifty-page report and leave things unexplained?

Earlier I mentioned our code of ethics. I’m firmly convinced that one important criterion in weighing ratings is the extent to which an agency upholds those standards. I have even suggested that the Central Bank should inspect our work. Its response was to say that with respect to rating agencies it is a client like everyone else, and not a regulator. But I would even be prepared to pay for such a review, because for us it’s important to demonstrate the quality of our ratings. I don’t suppose I should speak on behalf of all [rating] market participants, but personally I would say: let them check on all of us and then nobody will have any reason to question the work we do. And that would be a good thing for the Russian rating agency as an institution.