Weak corporate governance weighs on the ratings of Russian corporates, Fitch Ratings says in a special report.

Weak corporate governance is perceived as a negative rating factor and may restrict a company’s rating regardless of how strong its financial profile may seem, the rating agency said.

“Fitch’s analysis of governance in Russian corporates reflects the complexity of standard governance problems in the Russian market and their impact on the ratings of Russian companies,” says Angelina Valavina, director in Fitch’s Industrial group.

Currently Russian corporates are implementing a completely new set of corporate governance practices, driven primarily by their expansion into the international capital markets, it said. In Fitch’s view, visible progress has been achieved regarding transparency in financial information disclosure and ownership structure. “Nonetheless, the main challenges remaining are in board quality and related-party transactions. It is evident, therefore, that further enhancement of corporate governance performance is necessary,” it added.

Fitch notes that Russia’s underdeveloped corporate environment, immature institutional investors and ineffective shareholding systems, all pose a hurdle for further development. “Further progress cannot be achieved by the efforts of a dozen large corporations, unless this initiative is taken up at the national level through the development of a necessary regulatory framework and legislation and enforcement by the state,” it warned.

Fitch said that it believes that companies with poor corporate governance performance tend to have lower ratings. “It is worth mentioning, though, that it is not any single factor, but rather a combination of factors, that determines a rating. In the meantime, weak governance tends to have a negative impact on business operations, and consequently on financial performance – which is then reflected in the rating,” it concluded.