The impact of institutions on regional credit ratings in Russia
Abstract
Relevance. Institutions of a fiscal system play a significant role in regional credit ratings. This is reflected in the low creditworthiness of Russian regions from the international perspective.
Research objective. The paper discusses the role of the institutional factors in the credit ratings assigned to Russian regions by Russian and international agencies.
Data and Methods. The study analyzes the rating methodology adopted by Russian and international credit rating agencies and tests the presence of the institutional factors by conducting a formal regression analysis based on the data from the budgetary systems of Russia and the United States.
Results. We demonstrate that international agencies value institutional factors, while Russian agencies use formal quantitative indicators. By applying comparative regression analysis to the economic and fiscal indicators of Russian regions and U.S. states, we found that The Big Three (Fitch Ratings, S&P Global Ratings and Moody's Investors Service) rate Russian regions lower than U.S. states, although the formal indicators between the two fiscal systems at the regional level do not differ as much.
Conclusions. We conclude that the lower creditworthiness of Russian regions in the international perspective reflects the weakness of the institutions in the Russian budgetary system. Practically, the assessment of regional creditworthiness in Russia by the international agencies highlights the areas of intergovernmental fiscal relations that need improvement, most notably the insufficient tax and spending autonomy of local and regional governments.
Keywords
Full Text:
PDFReferences
Afonso, A. (2003). Understanding the determinants of sovereign debt ratings: Evidence for the two leading agencies. Journal of Economics and Finance, 27(1), 56–74. doi: 10.1007/BF02751590
Baskaran, T. (2012). Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975–2005. Journal of Urban Economics, 71(1), 114–127. doi: 10.1016/j.jue.2011.07.003
Beck, R. et al. (2017). Determinants of sub-sovereign bond yield spreads – The role of fiscal fundamentals and federal bailout expectations. Journal of International Money and Finance, 79, 72–98. doi: 10.1016/j.jimonfin.2017.08.003
Bhatia, A.V. (2002). Sovereign Credit Ratings Methodology: An Evaluation. IMF Working Paper, no. WP/02/170.
Boadway, R. (2006). The principles and practice of federalism: Lessons for the EU? Swedish Economic Policy Review, 13, 9–62.
Boadway, R., Watts, R.L. (2004). Fiscal Federalism in Canada, The USA, And Germany. IIGR, Queen’s University Working Paper, 6.
Boumparis, P., Milas, C., & Panagiotidis, T. (2017). Economic policy uncertainty and sovereign credit rating decisions: Panel quantile evidence for the Eurozone. Journal of International Money and Finance, 79, 39–71. doi: 10.1016/j.jimonfin.2017.08.007
Cantor, R., & Packer, F. (1996). Determinants and Impact of Sovereign Credit Ratings. FRBNY Economic Policy Review, 2(2), 37–54.
Chee, S.W., Fah, C.F. and Nassir, A.M. (2015). Macroeconomics Determinants of Sovereign Credit Ratings. International Business Research, 8(2), 118–125. doi: 10.5539/ibr.v8n2p42
De Moor, L. et al. (2018). Subjectivity in sovereign credit ratings. Journal of Banking and Finance, 88, 366–392. doi: 10.1016/j.jbankfin.2017.12.014
Dougherty, S., Harding, M., Reschovsky, A. (2019). Twenty years of tax autonomy across levels of government. OECD Working Papers on Fiscal Federalism, 29. doi: 10.1787/ca7ebc02-en
Gaillard, N. (2009). The determinants of Moody’s sub-sovereign ratings. International Research Journal of Finance and Economics, 31, 194–209.
Henning, C. R., Kessler M. (2012). Fiscal Federalism: US History for Architects of Europe’s Fiscal Union. SSRN Electronic Journal. doi: 10.2139/ssrn.1982709
Kaplan, J. (2020). Annual Survey of State Government Finances 1992-2018. Ann Arbor, MI, Inter-university Consortium for Political and Social Research. doi: 10.3886/E101880V3
Kincaid, J. (2020). United States of America. Polarization Between Democratic and Republican States. In: The Forum of Federations Handbook of Federal Countries 2020. Palgrave. 367–384.
Kincaid, J., Leckrone, J.W. (2022). COVID-19 and American federalism. First-wave responses. In: Chattopadhyay R. et al. (eds.) Federalism and the Response to COVID-19. A Comparative Analysis. Routledge. 239–249.
Klimanov, V., Kazakova, S., & Mikhaylova, A. (2020). Economic and Fiscal Resilience of Russia’s Regions. Regional Science, Policy and Practice, 4(12), 627–640. doi: 10.1111/rsp3.12282
Klimanov, V., Kazakova, S., Mikhaylova, A., & Safina A. (2021). Fiscal resilience of Russia’s regions in the face of COVID-19. Journal of Public Budgeting, Accounting & Financial Management, 1(33), 87–94. doi: 10.1108/JPBAFM-07-2020-0123
Laulajainen, R. (1999). Subnational credit ratings – Penetrating the cultural haze. GeoJournal, 47, 501–510. doi: 10.1023/A:1007006323030
Liu, L. and Tan, K. S. (2009). Subnational Credit Ratings: A Comparative Review. World Bank Policy Research Working Papers, 5013. doi: 10.1596/1813-9450-5013
Mikhaylova, А., & Timushev, Е. (2021). Determinants of Credit Ratings of Russia’s Regions. Regionology = Russian Journal of Regional Studies. 29(2), 355-379. (In Russian). doi: 10.15507/2413-1407.115.029.202102.355-379
Mitra, A., & Chymis, A. (2021). Federalism, but how? The impact of vertical fiscal imbalance on economic growth. Evidence from Belgium. Economics & Politics, ecpo.12200. doi: 10.1111/ecpo.12200
Pettersson-Lidbom, P., & Dahlberg, M. (2003). An Empirical Approach for Evaluating Soft Budget Constraints. Uppsala University Working Paper Series, no. 28.
Pobedin, A., Balynskaya, N., & Williams, D. (2021). Socio-economic consequences of the first and second waves of the pandemic in Russian regions. R-Economy, 3, 146–157. doi: 10.15826/recon.2021.7.3.013
Poghosyan, T. (2012). Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies. IMF Working Papers, 12(271). doi: 10.5089/9781475529142.001
Romanova, O., & Ponomareva, A. (2021). The Structural Factor of Regional Economic Stability in Russia during the Coronacrisis Period. R-Economy, 3, 158–168. doi: 10.15826/recon.2021.7.3.014
Sinelnikov-Murylev, S. et al. (2006). The problem of soft budget constraints of Russian regional authorities. Moscow: Gaidar Institute. (In Russian).
Starodubtsev, A. (2020). Russia (Russian Federation). Autonomy for a Very Few Constituent Units. In: The Forum of Federations Handbook of Federal Countries 2020. Palgrave. 287–300.
Tennant, D., & Tracey, M. (2016). Sovereign Debt and Credit Rating Bias. Palgrave Macmillan US.
Watt,s R.L., & Vigneault, M. (2020). Fiscal Federalism in the United States. Queen’s University Working Paper. November.
Zheng, L. (2012). Are Sovereign Credit Ratings Objective? A Tale of Two Agencies. Journal of Applied Finance and Banking, 2(5), 43–61.
DOI: https://doi.org/10.15826/recon.2022.8.1.004
Copyright (c) 2022 Anna Mikhaylova, Evgeny Timushev
Сertificate of registration media Эл № ФС77-80764 от 23.04.2021
Online ISSN 2412-0731