Report: Russia's weaker institutions separate it from investment-grade Brazil

The key factor differentiating the sovereign credit ratings on Russia and Brazil are that Russia has weaker institutions Brazil, says Standard & Poor's Ratings Services in its report "Russia's Weaker Institutions Separate It From Investment-Grade Brazil."

The sovereign credit ratings on Brazil and Russia have followed similar trajectories over the past decade in the “BB” and “BBB” categories, the report says.

In 2014, S&P lowered the long-term foreign currency ratings on both Brazil and Russia to “BBB-.” However, S&P subsequently downgraded Russia to “BB+” in January. S&P says that the outlook on Brazil is now stable, while the outlook on Russia remains negative, indicating a chance that S&P may lower the ratings further over the next one or two years.

"Our view of Russia's weak government institutional effectiveness and policymaking constrains the sovereign rating and has contributed to recent negative rating actions," says Trevor Cullinan, S&P credit analyst. "We see little evidence that the Russian government's institutional and policymaking effectiveness are improving."

By contrast, S&P sees Brazil's creditworthiness as stronger, largely due to the comparatively stronger effectiveness, stability, and predictability of policymaking, political institutions, and civil society.

"We believe Brazil's established political institutions underpin a broad commitment to policies to maintain economic stability, as exemplified by the various policy changes currently under way," says Lisa Schineller, S&P credit analyst. "Our expectation that the Brazilian government will implement these policy corrections supports the sovereign rating and stable outlook."

The main difference between S&P’s ratings on Russia and Brazil is S&P's institutional assessment score, one of six key factors that feed in to S&P’s sovereign ratings. S&P considers government institutions and policymaking as a weakness for Russia but neutral for Brazil. Its criteria afford institutional assessment, alongside economic assessment, a higher weighting (25% each) in the final rating than each of the other four factors. External and monetary assessments each contribute 17%, while S&P’s two fiscal assessment categories each contribute 8% to the final rating. Therefore, although S&P assesses Russia's debt burden as a strength and Brazil's as a weakness, its weaker institutional assessment carries greater weight.

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