Chinese Ratings Agency, Dagong, Rates Gazprom Debt Higher than U.S. Government in Strategic Effort to Facilitate Funding
In a move seemingly designed to artificially clear the way for low-cost Chinese loans to troubled Russian state-owned enterprises, China’s Dagong Global ratings agency gave Gazprom on Monday (February 2) its highest credit rating possible of AAA “with a stable outlook.” According to reports, this is a higher rating than the same agency currently assigns to either the Russian state or the United States government. Despite the transparently inflated nature of this rating, it is expected — at least by authorities — that this rating will positively influence Chinese investors.
The rationale provided by Dagong for its AAA rating of Gazprom was based on the deals that the company signed this past year with the Chinese government for the long-term supply of natural gas. This is a significant precedent, however, as it creates a clear conflict of interest within the Chinese government, whereby it is able to prop up a specific company by engaging it strategically and then enhance that company’s credit profile — and viability — by assigning it a higher-than-deserved credit rating based on its own dealings.
Moreover, Dagong concluded that the Russian economy faces only a short-term slowdown that will have little impact on the ability of Gazprom to repay its debts. It added, ‘‘‘The local currency repayment capacity and foreign currency repayment capacity are both extremely strong.‘ Such a statement should be viewed through the lens of new tactics coming to the fore (by both China and Russia), where “information” and “influence” are significant parts of a new brand of “hybrid warfare.” China and Russia realize that shaping the narrative within financial markets is just as critical strategically, as doing so among target populations and before more mainstream audiences.
Not coincidentally, on Tuesday (February 3), Gazprom Deputy Chairman, Andrey Kruglov, referenced the company’s discussions with several Chinese (and other Asian) banks about long-term loans. He said, “When it comes to ‘long’ money, we are currently negotiating with major Chinese banks. The talks are constructive, in my opinion. When it comes to Chinese banks, we may announce good news in the near future.” The recent favorable rating is expected to clear the way for fundraising in Hong Kong.
Regardless of Gazprom’s true creditworthiness, the fact that the company is rated better than both its largest shareholder (the Russian government) and the U.S. government undermines its own narrative. Gazprom may repay its debts, but the flawed logic of the Chinese ratings agency demonstrates the strategic influence of the state on these decisions. During this same timeframe, S&P downgraded Russian debt to “junk” status and the country’s sovereign credit to Baa3 (one notch above speculative grade). It has also lowered ratings on Gazprom — as well as Transneft, LUKOIL and Rosneft.
Such artificial “credit rating” maneuvers will likely be a staple of global positioning in the economic and financial (E&F) domain going forward, as Russia and China seek to create a competing ratings system and dilute the credibility of those run out of the United States and elsewhere in the West, which they believe have outsized influence over their ability to access the capital required to fund themselves. The Russian Central Bank has said that it will ignore credit ratings issued after March 1, 2014 by S&P, Fitch and Moody‘s. Russia and China are also working to strengthen their new Universal Credit Rating Group (UCRG) that will reportedly release its first ratings in 2015.