Ratings of Russia's and Kazakhstan's Oil & Gas and Metallurgical Companies
Elena Anankina, Director, Standard & Poor's, Moscow
Standard & Poor's is the world's foremost provider of credit ratings for companies, financial institutions, and regional and local administrative bodies. The credit rating of a company is an expert opinion by a credit agency as to whether the borrower is able and willing to promptly discharge its financial obligations.
Most of the major corporate borrowers in the CIS currently have credit ratings from Standard & Poor's. This article analyses the credit risks for oil & gas and metallurgical companies in Russia and Kazakhstan, their exposure to country risks and forecasts these ratings' dynamics.
As of 10 June 2004, corporate ratings in Russia (Graph 1) and Kazakhstan (Graph 2) were lower than the sovereign ratings of these countries, although oil & gas and metallurgical companies held medium and upper rating positions (Table 1).
The main reason for Russian and CIS companies' ratings being lower than the sovereign one is that they are exposed to country risk, which is not associated directly with sovereign risk. Country risk is the risk of doing business in a country, whereas sovereign risk shows the probability of default on a sovereign loan. The creditworthiness of the Russian and Kazakh governments is guaranteed by high financial indices (not tied to corporate ratings), while political and institutional factors are the first and foremost deterrents for companies.
The main element of both Russia's and Kazakhstan's country risks is institutional weaknesses: the drawbacks of the judicial system (entailing inadequate protection of property rights and less-than-perfect contractual performance); politically motivated government; underdeveloped corporate management; a lack of transparency and centralised decision-making. Added to these are the lack of economic diversification (dependence on primary industries), unequal incomes, and an underdeveloped financial system (though to a different extent). Country risk is always taken into account when assessing ratings of Kazakh and Russian companies. In the meantime, selective pressures (such as in the case of YUKOS) may cause a sharp drop in any company's rating.
The major "common" risks for oil & gas and metallurgical companies in both Russia and Kazakhstan are country risks, industry-specific political risks, risks relating to industry regulation and taxation, and transport restrictions that increase costs and sensitivity to price fluctuations. On the other hand, the countries' main advantages include competitive internal costs, extensive natural resources (oil, gas, coal, ores, etc.), impressive production growth, and a high proportion of exports. Despite these similarities, the industry structure in the two countries is clearly different. The Russian oil and metallurgical industries mainly consist of large vertically-integrated private companies controlled by local investors whereas in Kazakhstan there are more cases of government support for infrastructure companies and active participation by foreign investors.
It should be emphasised that the economic dependence on the oil and gas sector increases the risk for both Russian and Kazakh oil & gas companies. Firstly, their resistance to the fluctuations in oil prices will depend on how the tax system functions in the event of a financial crisis. The oil & gas sector pays the lion's share of taxes, which are a significant part of oil & gas companies' costs (in Russia, taxes are higher and less stable; in Kazakhstan, a serious constraint is transport costs) although it should be noted that these risks are partially moderated by the governments' financial reserves. Secondly, high oil prices and low per capita incomes increase the political importance of the oil & gas industry.
A government's influence on the oil & gas sector is among the most important factors in determining future companies' ratings. In Russia, credit ratings upgrades may be constrained by tax and licensing risks. The YUKOS case is quite specific and while Standard & Poor's do not expect that the same scenario would work for other companies, it is an example of selective sovereign intervention which may affect any market player. However the credit ratings of Russian companies, including strategically important players such as Transneft or Gazprom, depend on their own creditworthiness: no direct government financial aid was provided in the past; the government's interests are focused on the operating and financial activities of the companies; and the government support offers limited benefits for the companies' creditors. One never can tell if the Russian government will change its policy as it increases pressure on the industry.
The situation in Kazakhstan is different. The government used to guarantee some obligations of national companies; however, the higher the sovereign risk is, the more important the country risks and the less strong the government support. Kazmunaigaz's pre-emptive right to participate in oil and gas projects may reduce the opportunities for companies with foreign participation.
We believe that the dynamics of the ratings of Russia's and Kazakhstan's oil & gas and metallurgical companies will depend on the following factors:
The companies' ability to maintain competitive costs throughout the industry cycle. Although the extensive reserves are a positive factor, an important role will be played by high transport costs and the companies' ability to manage their expenses in order to reduce the impact of increases in the real exchange rates.
Financial policy and corporate governance. The companies' transparency (including the timely publication of statements) and the predictability of major transactions, arrears, dividend policies, and the spending of funds accumulated during high-price periods (such as capital investment, purchases, etc.) will play an increasingly important role.
The future of the institutional environment in both countries. Two factors are crucial: the strengthening of the government's role and foreign investor interest.
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