By Vincent J. Truglia
I am writing this to correct some misunderstandings, which have appeared in various news articles, about the establishment of Russia’s newest credit rating agency, ACRA or the Analytical Credit Rating Agency. I can speak with some authority about ACRA since I am a member of its Board of Directors.
I was approached in the latter half of 2015 asking if I might be interested in being a board member of a soon-to-be established rating agency. My initial reaction was skepticism because I immediately assumed that since Russian government entities were behind the project, that it wouldn’t meet my requirements for independence. However, as I learned more, I found the project not just doable, but in the case of Russia, intellectually robust.
What I have found at every step is that the only requirement given the board was to establish a world-class rating agency. I was impressed by the recognition of everyone involved that a rating agency will not be viable if it is not independent and free of even the appearance of any conflicts of interest.
Uniquely Structured Board
For starters, the board is required to be made up of foreigners, including two Americans, one Frenchman and one Austrian. The board conducts all its meetings in English. All documents are translated from Russian to English. At first, one might think that the Russians don’t trust themselves. However, this is not the case. It is simply that most senior Russian executives already sit on various boards of Russian companies. Since the job of this agency is to rate Russian securities, it was thought that to avoid even the appearance of a potential conflict of interest, a foreign board would be better suited to the Russian environment.
Atomized Shareholder Base
ACRA has 27 shareholders, with no shareholder allowed to own more than 3.7% of the shares. The shareholders include the biggest companies and financial institutions in Russia plus the foreign subsidiaries of Raiffeisen, Unicredit and SocGen. It was thought that with no shareholder having a significant shareholding, possible interference in ACRA would be avoided.
As a result of its shareholder base, it is well capitalized, with over R. 3 billion in capital, or slightly over $40 million.
I have read all sorts of conspiracy theories about why ACRA was started. Fortunately, I have spoken with and know most of the people behind the idea of setting up a national rating agency.
Until 2015, Russia had remained the world’s largest market without practical rating agency regulation. This was considered an anomaly and inconsistent with Russia’s desire to make Moscow, over time, a major international financial center. Also, it was obvious that the lack of regulation gave the Big 3 CRAs a number of competitive advantages, which would prevent any local rating agency from every being able to compete, even if these local agencies followed all the rules.
In September 2013, a year before the imposition of any Western sanctions against Russia, the Central Bank of Russia became the formal regulator charged with supervising the domestic rating industry. The central bank wanted to mimic worldwide best practices for supervising rating agencies. As done elsewhere, the supervisory authority was eventually accomplished through legislation.
The new legislation, which was adopted last summer, requires rating agencies to open full-fledged subsidiaries in Russia for their ratings to be used for national regulatory purposes. This is exactly what is already required in Western Europe. To date, at least two of the Big 3 CRAs have indicated they will withdraw from the Russian national scale rating market. Since the Big 3 already meet these same regulatory requirements in Western Europe, I can only conclude that the desire to withdraw is based on company specific cost/benefit analysis.
The imposition of foreign sanctions on Russia, which affected certain major companies, was not the cause of the new regulation. However, it certainly accelerated the process. To understand why, we simply need to keep in mind that ratings are used within the Russian financial market in a similar fashion as in other countries. Government agencies, including the central bank, among others, use credit ratings to help determine creditworthiness. When sanctions were put in place in 2014, these various actors no longer had timely information on the creditworthiness of various companies affected by the sanctions. This would be seen as unacceptable for any financial system.
Early in the process of establishing regulations, it became clear that the Big 3 might not want to participate in a newly regulated rating regime. One option, seen as an important contingency, in case the Big 3 didn’t want to participate in national scale ratings going forward, was to create a new Russian world-class rating agency. The result was ACRA.
Procedures to Avoid Conflicts of Interest
I can’t over emphasize how much effort is going into creating a rating agency, which will meet the highest international standards. For instance, to avoid contact between the analytical staff and the rest of the staff, the offices are physically divided into two separate sections, even including separate bathrooms and separate kitchen areas.
All emails are automatically copied to at least one other staff member to avoid anyone writing or receiving inappropriate emails. Documents can only be printed when the person requesting the documents goes to the printer and produces a key, which allows the printing of only those designated documents. That way no papers are left unattended. Many other IT security features are being put in place, which I don’t need to discuss in detail.
Although the analytical staff prepares the methodologies, the board is responsible for making sure that all methodologies are sound. All methodologies and important policies are made public, and there are always requests for comments. To date, ACRA has received many comments on its methodologies.
It should be obvious that this board of directors is expected to be a quite active board.
ACRA is the first rating agency to apply for a license under the new European-style regulations. Hopefully, others will follow. ACRA is expected to receive its ratings license by the August at the very latest. Obviously, we hope the license will be granted sooner. Once the license is received, ACRA will start issuing ratings. For anyone who wishes to read a bit more about ACRA, the website is: www.acra-ratings.com.
As always, Clear and Candid.