Is Moscow squeezing Moody's out of Russia?

Moody's will stop issuing domestic ratings for Russian companies to avoid being caught in a legal crossfire between Moscow and the West.

The Kremlin is set to usher in rules next year that will require agencies to create new, Russia-regulated subsidiaries. Under the regulations, any new rating assignment and withdrawal by these subsidiaries would have to be approved by the country's central bank. This would mean that agencies like Moody's would not be able to withdraw ratings if ordered to do so by foreign governments, potentially putting the firms at loggerheads with western sanctions law.

According to a statement Wednesday, Moody's will withdraw ratings for approximately 150 Russian companies over the course of 2016, citing "legislative changes and other potential restrictions applicable to the business."

Rival rating agency Fitch also seemed unsteady about the Kremlin's pending regulation, telling CNBC in an emailed statement that it would put their subsidiary "in direct conflict" with "regulatory obligations." Last month Bloomberg reported that Fitch was also considering a withdrawal, but in its statement to CNBC, Fitch said they were continuing talks with the central bank and remained "committed to Russia."

Kirill Kudryavtsev | AFP | Getty Images

Control Risks' managing director for Russia, Tim Stanley, told CNBC via email that Moody's decision was, "another example of the slow but steady impact of western sanctions on the Russian business environment," but said it was unlikely to have a major impact on the businesses themselves.

The planned Russian legislation and resulting nervousness of the ratings agencies has sparked speculation that the moves could help a nascent, Kremlin-supported agency carve out a greater share in the domestic ratings market.

The Russian Analytical Credit Ratings Agency (ACRA) launched last year amid complaints from Russian officials about western bias firms including Standard & Poor's, Fitch and Moody's. After Russia saw its sovereign rating downgraded last January, Deputy Foreign Minister Vasily Nebenzya accused S&P of taking part in "politicized, biased and politically motivated" efforts to undermine the economy.

Joseph Dayan, head of markets for BCS Global Markets, which has been operating in Russia for over 20 years, said via email that the impact of Moody's decision shouldn't be overstated, and that there was likely sound business rationale behind the agency's decision, pointing to the recent sluggishness across the Russian bond market.

Chris Weafer, a senior partner with Macro-Advisory, told CNBC that he wouldn't be surprised if the big three global agencies all eventually leave the market after ACRA starts issuing ratings later this year supplanting international agencies as the benchmark ratings firm for local investors, lenders and pension funds.

"For purely commercial reasons, rather than say political reasons, I would expect them to pull out. It won't be worth it to stay," he told CNBC by phone.

Moscow, with the Kremlin in the background.
Russia plans first bond issuance since sanctions

Weafer said he expected yields on corporate debt to rise slightly after Moody's departs, but only until investors got used to the new agency. ACRA, he explained, was aware about concerns regarding transparency and would need to apply their risk assessment consistently across the board in order to gain investor confidence.

Meanwhile, Moody's will continue covering high-level evaluations like sovereign ratings as well as global scale ratings - which are comparable across countries - for some Russian companies.

Though it's still unclear whether an eventual lifting of sanctions could lure Moody's back into the domestic Russia

market, Weafer believes there will be enough foreign-denominated debt issued at that point – estimated at $20 billion worth of euro-denominated corporate paper – to satiate global ratings agencies.

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Clarification: This story was updated to reflect that Russia will continue to issue global scale ratings for some Russian companies as well as sovereign ratings.