Today, in the media, messages are constantly slipping about assigning Russia an assessment with the specific name “garbage” rating. This definition remains incomprehensible to many, because an ordinary person may not be well versed in financial terms, and if the rating is more or less clear, then such slang expressions as “garbage” should be described in more detail. About this and other relevant things from the field of economics later in this article.
What it is
To understand what a “junk” rating means, you first need to understand the definition of “credit rating”. Any individual, company or even country may have its own solvency rating. For example, banks in most cases compose their own ratings of borrowers, and when it comes to assessing the solvency of large corporations or states, specialized independent rating agencies do this. Among them are Fitch Ratings, Moody's and Standard and Poor's (S&P), whose activities extend to the whole world, and most investors listen to their opinion.
In relation to the states, these indicators are compiled on the basis of an analysis of the economic situation, the national currency exchange rate and other signs.
This is not to say that there is some generally accepted rating compilation system, each agency has its own methods and indicators. All estimates can be divided into obligations of the highest, highest, average quality. This is followed by risky and speculative guarantees, as well as forecasts regarding an imminent default. A garbage rating is an obligation of this type.
Causes of the crisis in Russia
Although in recent years the credit rating of Russia was not at a high level, it was not “garbage” and there was no particular doubt about the country's solvency. Problems began in 2014, after the annexation of Crimea and the subsequent sanctions by the United States and the European Union. Everything was aggravated by the fall in oil prices, which provoked a significant depreciation of the ruble. These and other events gave rise to talk about the crisis and even the possibility of default in Russia.
Typically, countries with a junk rating have a weak economy with many problems. Now the international community has seriously started talking about including Russia on this unpopular list. By the way, the last time the country's credit rating was at the “junk” level in 2005.
Pessimistic forecasts
At the end of 2014, ex-Finance Minister Alexei Kudrin said that a full-fledged economic crisis was beginning in the country. According to him, Russia in 2015 may well be assigned a “garbage” rating, this will be caused not only by low oil prices - sanctions also provoke a recession in the economy. According to the forecast of the former head of the ministry, the country's GDP will decrease by at least 2%, provided that oil costs $ 80, at low prices in the region of $ 60, the economic decline could reach 4%.
Kudrin also believes that the government is pursuing inadequate policies, so low or zero growth is inevitable without external difficulties associated with oil prices and sanctions.
Rating downgrade
At the very beginning of 2015, Fitch lowered Russia's solvency rating to BBB-, which is the last step in the investment zone, followed by a “garbage” rating. Russia was given a negative outlook for the near future.
Soon after, the rating agencies S&P and Moody's downgraded Russia's credit rating to speculative or so-called “junk”. According to their reports, one of the reasons for the decline in ratings is the ongoing conflict in Ukraine, which, one way or another, can affect the economic situation in Russia itself. In addition, the rating is negatively affected by low oil prices and an unstable national currency.
Moody's, among other things, believes that there is a likelihood of the Russian government making decisions that can, to one degree or another, affect the servicing of the country's external debt on time.
It is worth noting that if the ratings of different agencies are different, then the worst-case forecast is taken into account first.
Objectivity ratings
The rating agencies of the "Big Three" are independent institutions, their assessments are considered to be impartial and objective. However, the fact that the agencies assign the garbage rating of Russia one after another is considered by the Russian Foreign Ministry as a political decision, unjustified from an economic point of view and aimed at weakening the country. The ministry is confident that such assessments are part of the Western policy of pressure on Russia through sanctions.
It is noteworthy that Kudrin considered the decision of Moody's to assign Russia a rating of Ba1, which implies a “junk” rating, which was still inexplicable, despite the fact that he had previously suggested that it would be possible to reduce Russia's sovereign rating to speculative. It is puzzling that the rating was revised only a month ago - it is not clear why this is necessary right now.
What threatens the country
The “junk" rating itself does not pose much of a threat, especially since the economy is affected to a greater extent by such key factors as the price of oil, the ruble exchange rate, as well as the debt burden of companies and the public. We can say that a low rating reflects the existing difficulties.
Countries with a junk rating may have difficulty obtaining loans abroad, and in the case of Russia, given the sanctions imposed on it, low ratings by agencies will not change much - the flow of investments in the country has significantly decreased back in 2014. However, many investment funds impose a ban on investing in the economy of countries with a “junk” rating, so the influx of foreign funds may decrease slightly, but this is unlikely to become critical for the economy.
Talk about default
As for the rumors about the possibility of default, they are, of course, an exaggeration and escalation of panic. If we talk about low ratings, then to category D, which means a high possibility of default, Russia is still far away.
A “garbage” rating is not a sentence, besides, the external debt of the Russian Federation is not so great and amounts to a little more than 10% of GDP, while other countries with a higher rating have public debt that can exceed their GDP. If necessary, Russia can service its obligations at the expense of gold and foreign exchange reserves.
What does “garbage” rating mean for Russia
First of all, it should be said that a “garbage” rating does not mean the country's final slide into the crisis pit. Amid poor assessments of Russia's solvency, as well as low oil prices, analysts predicted a further depreciation of the ruble and other problems in the economy. However, in the spring, the ruble appreciably strengthened against the dollar, and oil prices stabilized. The government is taking appropriate measures to overcome the crisis.
For example, the “garbage” rating of Ukraine actually reflects the deplorable state of affairs in the country, whose economy is directly dependent on Western loans. In the case of Russia, everything can change. Sooner or later, the situation will improve, and then rating agencies will revise their ratings for the better.