Economy

What The Russia-China Credit Rating Agency Lacks: Credibility

A press conference of the People's Bank of China in March
A press conference of the People's Bank of China in March
Sun Xingjie

-Commentary-

BEIJING — Seeing a strategic opportunity to dilute the global monopoly of the three major credit rating agencies, China and Russia recently announced plans to establish a joint credit rating agency. The idea is that it would evaluate Sino-Russian cooperation projects, then eventually enter the international market.

But there is a deep divide between desire and reality. Credit rating agencies are a key link to financial markets. A government can't properly develop one simply by signing a piece of paper.

The world's "Big Three" ratings agencies — Standard & Poor's, Moody's and Fitch — account for 95% of the world market, which can definitely be regarded as a monopoly for the West. The current situation not only displeases Russia, but it also irritates some in the European Union. Although Fitch is a European-owned agency, the UK is not a eurozone country.

Russia is particularly sensitive to financial hegemony these days. International rating agencies continue to lower Russia's sovereign credit rating, which is now just a grade higher than junk status. It is suffering from the cold current of a capital outflow. In fact, during this year's first quarter, more than $60 billion has left Russia, more than the whole of last year. The adverse effect on the Russian economy is likely to lead to a shrinking GDP this year.

Successive rounds of sanctions from the West have threatened the soft underbelly of the Russian economy. Highly dependent on energy exports, Russia doesn't have its own international settlement and payment systems. Its energy exports rely on Europe and American systems, so if Europe and America jointly adopted sanctions against Russia similar to those in place in Iran, it would be obliged to seek an alternative.

It's in the face of such a devastating situation that the government of Russian President Vladimir Putin is promoting this financial cooperation with China. But it's not so easy to change the world's credit rating landscape. During the European debt crisis, eurozone heads of state were very dissatisfied with the agencies' practices, which in some cases exacerbated the problems by lowering the ratings for countries in difficulty: the harder the financing and the higher the cost, which creates a vicious cycle.

It is because of very low ratings that countries such as Greece and Portugal couldn't obtain market financing and were obliged to accept international aid.

Meddlesome but crucial

But eurozone countries can't interfere with these agencies. Investors believe in the agencies' judgment. To a certain extent, credit rating agencies affect investor decision-making. And that's why they exist — because the financial market is full of risks. Investors can't possibly maintain a full grasp on all relevant information, so they require the advisory services of these specialized institutions.

The Big Three didn't gain their virtual monopoly status by force but by credibility. Baptized by more than a hundred years of market competition, they have accumulated unshakable reputations and positions in financial markets. If these agencies weren't able to come up with fair, objective and unbiased judgments, then investors wouldn't have trusted them and they would naturally have been eliminated from the market.

After the 2008 financial crisis, the three major rating agencies were criticized for not delivering an advance warning. Ratings agencies are, to a certain degree, meant to play the role of crow. During the eurozone crisis, they collectively became the crow and downgraded various countries. The United States, for example, lost the gold-plated AAA rating it had enjoyed for so long, annoying President Barack Obama tremendously.

A Sino-Russia agency could only rival the Big Three if the international market wanted it to, but the will of two governments is not enough. Without independence, the credit rating agency would dig its own grave.

Currently, Russia's rating agency is in its infancy, with only 18 employees. Meanwhile, China's Dagong Global Credit Rating has launched global strategies and obtained a ticket for entering the European market. Apart from Dagong, there are several other Chinese rating agencies forming a competitive structure. In contrast to China's market-oriented approach, Russia is assigning its first deputy prime minister the job of creating an agency.

The rating agencies are an inevitable component of well-developed financial markets. Neither China nor Russia is yet a true financial power. Before a financial market is fully developed, there won't be much market demand for credit rating firms. So rather than hastily teaming up to establish a rating agency, the two countries would do better to accelerate their financial reforms and cooperation. A credit rating agency would emerge naturally from such market competition.

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Paying tribute to the victims of the attack in Kongsberg

Terje Bendiksby/NTB Scanpix/ZUMA
Carl-Johan Karlsson

The bow-and-arrow murder of five people in the small Norwegian city of Kongsberg this week was particularly chilling for the primitive choice of weapon. And police are now saying the attack Wednesday night is likely to be labeled an act of terrorism.

Still, even though the suspect is a Danish-born convert to Islam, police are still determining the motive. Espen Andersen Bråthen, a 37-year-old Danish national, is previously known to the police, both for reports of radicalization, as well as erratic behavior unrelated to religion.

Indeed, it remains unclear whether religious beliefs were behind the killings. In an interview with Swedish daily Dagens Nyheter, police attorney Ann Iren Svane Mathiassens said Bråthen has already confessed to the crimes, giving a detailed account of the events during a three-hour interrogation on Thursday, but motives are yet to be determined.

Investigated as terrorism 

Regardless, the murders are likely to be labeled an act of terror – mainly as the victims appear to have been randomly chosen, and were killed both in public places and inside their homes.

Mathiassens also said Bråthen will undergo a comprehensive forensic psychiatric examination, which is also a central aspect of the ongoing investigation, according to a police press conference on Friday afternoon. Bråthen will be held in custody for at least four weeks, two of which will be in isolation, and will according to a police spokesperson be moved to a psychiatric unit as soon as possible.

Witnesses have since described him as unstable and a loner.

Police received reports last year concerning potential radicalization. In 2017, Bråthen published two videos on Youtube, one in English and one in Norwegian, announcing that he's now a Muslim and describing himself as a "messenger." The year prior, he made several visits to the city's only mosque, where he said he'd received a message from above that he wished to share with the world.

Previous criminal history 

In 2012, he was convicted of aggravated theft and drug offenses, and in May last year, a restraining order was issued after Bråthen entered his parents house with a revolver, threatening to kill his father.

The mosque's chairman Oussama Tlili remembers Bråthen's first visit well, as it's rare to meet Scandinavian converts. Still, he didn't believe there was any danger and saw no reason to notify the police. Tlili's impression was rather that the man was unwell mentally, and needed help.

According to a former neighbor, Bråthen often acted erratically. During the two years she lived in the house next to him — only 50 meters from the grocery store where the attacks began — the man several times barked at her like a dog, threw trash in the streets to then pick it up, and spouted racist comments to her friend. Several other witnesses have since described him as unstable and a loner.

The man used a bow and arrow to carry the attack

Haykon Mosvold Larsen/NTB Scanpix/ZUMA

Police criticized

Norway, with one of the world's lowest crime rates, is still shaken from the attack — and also questioning what allowed the killer to hunt down and kill even after police were on the scene.

The first reports came around 6 p.m. on Wednesday that a man armed with bow and arrow was shooting inside a grocery store. Only minutes after, the police spotted the suspect; he fired several times against the patrol and then disappeared while reinforcements arrived.

The attack has also fueled a long-existing debate over whether Norwegian police should carry firearms

In the more than 30 minutes that followed before the arrest, four women and one man were killed by arrows and two other weapons — though police have yet to disclose the other arms, daily Aftenposten reports. The sleepy city's 27,000 inhabitants are left wondering how the man managed to evade a full 22 police patrols, and why reports of his radicalization weren't taken more seriously.

With five people killed and three more injured, Wednesday's killing spree is the worst attack in Norway since far-right extremist Anders Breivik massacred 77 people on the island of Utøya a decade ago.

Unarmed cops

As questions mount over the police response to the attack, with reports suggesting all five people died after law enforcement made first contact with the suspect, local police have said it's willing to submit the information needed to the Bureau of Investigation to start a probe into their conduct. Police confirmed they had fired warning shots in connection to the arrest which, under Norwegian law, often already provides a basis for an assessment.

Wednesday's bloodbath has also fueled a long-existing debate over whether Norwegian police should carry firearms — the small country being one of only 19 globally where law enforcement officers are typically unarmed, though may have access to guns and rifles in certain circumstances.

Magnus Ranstorp, a terrorism expert and professor at the Swedish Defence University, noted that police in similar neighboring countries like Sweden and Denmark carry firearms. "I struggle to understand why Norwegian police are not armed all the time," Ranstorp told Norwegian daily VG. "The lesson from Utøya is that the police must react quickly and directly respond to a perpetrator during a life-threatening incident."

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