Published On: Tue, Jan 27th, 2015

Standard & Poor Rates Russia’s Credit as ‘Junk’

S&P russia

Ratings agency S&P cut Russia’s sovereign credit rating to junk status on Monday, bringing it below investment grade for the first time in a decade, Reuters said.

Warning of difficult times ahead for Russia’s economy, S&P said it had cut the rating from BBB- to BB+ and that Russia’s economic growth prospects, hit by low oil prices and Western sanctions over the Ukraine crisis, had worsened, the report said.

The downgrade is the latest blow to the Kremlin, already buffeted by a collapse in oil prices, wild gyrations in the value of the ruble and western sanctions that have all but shut Russian companies out of global capital markets, the Financial Times said.

The ruble weakened to 68.65 against the dollar, more than 6 percent lower than the previous close on the Moscow Exchange, and the cost of insuring Russian sovereign debt for five years rose, in a sign of investors’ concern, Reuters said.

“The downgrade throws into stark relief the severity of Russia’s financial and economic crisis, ” said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, the report said.

“It’s going to make it more difficult for large corporates and banks to refinance themselves, at a time when ratings agencies clearly have doubts about the macroeconomic and external environment for Russia.”

The decision could not only harm Russia’s image among investors but push up its borrowing costs, as many mainstream investment and pension funds have rules preventing them from buying anything not classed as investment grade, according to Reuters.

Other rating agencies could follow suit by downgrading Russian sovereign debt to what some consider junk territory, and there could eventually be a political impact on President Vladimir Putin if the economic crisis keeps worsening, the report said.

But Finance Minister Anton Siluanov played down the situation, Reuters said. “The decision taken shows the excessive pessimism of the agency. It fails to consider a series of factors which characterize the strong side of the Russian economy: the accumulation of large international reserves, including in the sovereign funds, ” he said.

He added that capital markets had factored in the downgrade and it should have no “serious additional effects” on them, according to the report.

S&P warned in late December that it could deprive Russia of its investment-grade credit rating as soon as mid-January, following a rapid deterioration of the country’s monetary flexibility and a weakening economy, Reuters said.

Russia’s economy is expected to slide into recession this year as low oil prices depress export revenues, and the sanctions over Ukraine cut some of its biggest companies off from Western funding, according to the report.

 

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