Does the BRICS grouping need its own rating agency?

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BRICS

Over the past years, the BRICS grouping has greatly increased the scope of its cooperation, ranging from the creation of a development bank, a parliamentary working group and yearly meetings of the BRICS' national security advisers. New proposals are voiced with great frequency, especially in the Russian and Indian media, ranging from a virtual BRICS Secretariat, BRICS Sports Games to more outlandish ideas such as a BRICS space station or inviting Greece to join the BRICS grouping. Many of these ideas only briefly appear in the news and are never taken up by policy makers.

The idea of creating a BRICS-led rating agency, however, has been discussed with some frequency over the past year, and the Russian government is said to be especially interested in pushing the project forward. Russian sous-sherpa for BRICS Vadim Lukov repeatedly pointed out that experts from BRICS countries were discussing the creation of a new independent rating agency to counter a culture of supposedly geopolitically-biased economic assessment by western ratings agencies. Russia's interest in such an agency seems fairly obvious: International rating agency S&P recently downgraded the sovereign credit rating of Russia below the investment rate to BB + with a negative outlook. Of all the BRICS countries, Russia's economy is the most dependent on global commodity prices, and Western sanctions further aggravate the country's economic outlook.

Indeed, the Russian government often accuses Western rating agencies of acting according to US political interests, saying that recent downgrades are meant to hurt Russia rather than provide an independent assessment. Evgeny Stanislavov, director of the Russian Foreign Ministry's Department of Economic Cooperation, believes western agencies' claims that Russia's economy is in a dire state are wrong and have matched "the logic of the consistent and well-orchestrated anti-Russian campaign."

This view is echoed by some analysts in China. “They are all ideological criteria and have nothing to do with a central government’s ability to generate revenues and its ability to repay debts. If one uses these standards to assess credit risks of the United States, one may come to the conclusion that the U.S. economy would never default, because they can repay their debts by printing more money. It is obvious that these criteria are unfair,” said Guan Jianzhong, the president of Dagong, a Chinese rating agency. The only solution, according to the Russian government, is a BRICS-led "independent" rating agency.

UCRG

In 2013, with the support of the Russian and Chinese governments, the Universal Credit Rating Group (UCRG) was launched, and boasts Dominique de Villepin, Kevin Rudd and Shaukat Aziz as members of the advisory council, but it has yet to release its first ratings. "In the beginning, the agency will assess Russian-Chinese investment projects with a view to attracting of [investors from] a number of Asian countries,” Anton Siluanov, Russia’s finance minister, said in Beijing, the Financial Times reports. “Gradually, based on the progress and authority of such an agency, we believe it will rise to a level where its opinions will attract other countries.”

There is no doubt that the geographic concentration of the "Big Three" (Moody's, Standard and Poor's and Fitch) is highly problematic, and it is natural that China, being the world's second largest economy, seeks to build up its own rating agency. After all, ratings issued by the Big Three to large-scale borrowers, such as governments and corporations, are enormously influential, as they play a central role in determining how investors allocate billions of dollars. Their ratings indicate to buyers of debt how likely they are to be paid back.

The challenge will be to assure that UCRG has the credibility and is seen as free of political influence. Only then will its ratings and reports be taken seriously by outside observers. Even though there is anecdotal evidence that Western governments put pressure on western rating agencies, the newcomers face an uphill battle and must be particularly careful not to be seen as acting according to political interests.

If, however, UCRG can establish international trust, the rise of a new player could indeed help spur reform of a system that failed to foresee the crisis in 2008, and which has not adjusted sufficiently since then.

While Russia and China were eager to win the backing of Brazil, India and South Africa for a BRICS-led rating agency, the other BRICS countries have taken a more neutral stance. “A rating agency has to be fully independent from the standpoint of the governments. There is only some extent to which a rating agency can claim to be independent if it is sponsored by government,” Otaviano Canuto, then World Bank advisor and now Brazil's IMF representative recently said, adding that the likelihood of creating such an agency by BRICS members is “very low.” The issue did not appear in the 2015 Ufa declaration, suggestion that either Brazil, India or South Africa is not fully convinced.

That will not deter China, which has broader plans to slowly develop a 'parallel order' to slowly reduce its dependency on Western-led institutions. Building its own rating agency is thus merely one of many other initiatives, ranging from the internationalization of the yuan, the promotion of China Union Pay (to complement MasterCard and Visa) and the Asian Infrastructure Investment Bank (to complement the Asian Development Bank).

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Photo credit: Ria Novosti (AFP) / DAGONG