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Standard & Poor’s Ratings Services has issued a commentary that finds that the evolution of sovereign creditworthiness especially when it comes to the economic environment and reform progress in a country like the (local currency sovereign credit ratings, BB+/Stable/B; foreign currency sovereign credit ratings, BB/Stable/B) is vital to the changing creditworthiness of individual Russian companies.

The article, entitled “The Impact of Sovereign Risk on Russian Corporate Ratings”, (available on RatingsDirect, Standard & Poor’s web-based credit analysis system, at states that the political and economic environment within which firms operate is of paramount importance in any country.

“It therefore follows that the political and economic institutions and policies that constitute sovereign, or so-called “country”, risk are an important part of Standard & Poor’s assessment of corporate creditworthiness,” says sovereign analyst Helena Hessel. “Standard & Poor’s corporate analysis methodology looks at the ability of any company to benefit from a country’s economic and institutional progress and to channel this into improving and sustainable operating and financial performances.”

According to Hessel, the significance of an appraisal of country risk is more apparent in the former socialist countries like the

  • Russian Federation than elsewhere. “Over the past decade, these countries have been transforming their political and economic systems into democracies and market economies, and a key feature of this transition has been the interplay between the private sector and the newly emergent political, institutional, and legal systems needed to support its development,” Hessel notes. “The move from a socialist to a market economy represents the breaking away from government auspices. In reality, however, that government must create and enforce new rules that will allow the market economy to function (protection of property rights, corporate governance, competition and bankruptcy laws, etc),” she says.

    The commentary examines the recent political and economic developments in Russia that have underpinned the development of the corporate sector in the country at large and influenced Standard & Poor’s individual corporate ratings. It finds that the recent improvement in the credit quality of Russian corporate issuers has followed the steady improvement in Russia ‘s creditworthiness.

    “Standard & Poor’s took seven positive actions on its long-term ratings of the Russian Federation over the two-year period ended December 2002, and recent improvement in the credit quality of Russian corporate issuers has followed the steady improvement in Russia’s creditworthiness, Hessel says. “This is evidenced by recent numerous upgrades and outlook changes, with Standard & Poor’s raising its ratings on 12 companies and assigning a positive outlook to its long-term ratings on seven since January 2002. Looking forward, regulatory reform, gradual diversification of the economy, strengthening of the banking system, and better access to financing in the international capital markets will form the basis for improved credit quality in the country’s corporate sector,” she concludes.