We perish because we know not… #TLENews
Russia’s foreign-currency credit rating was cut to junk by Standard & Poor’s, putting it below investment grade for the first time in a decade.
S&P, which last downgraded Russia in April, cut the sovereign one step to BB+, according to a statement released on Monday. The grade, which is on par with Bulgaria and Indonesia, has a negative outlook. Russia’s local currency ratings were reduced to BBB-, the lowest investment grade.
The world’s biggest energy exporter is on the brink of a recession after oil prices fell to the lowest since 2009 and the U.S. and its allies imposed sanctions over President Vladimir Putin’s actions in Ukraine. The penalties have locked Russian corporate borrowers out of international debt markets and curbed investor appetite for the ruble, stocks and bonds.
“Russia’s monetary-policy flexibility has become more limited and its economic growth prospects have weakened,” S&P said in a statement. “We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy.”
The ruble, the world’s second-worst performer last year after a 46 percent plunge against the dollar, plummeted after the S&P decision and was trading 7.5 percent weaker at 69.0615 versus the U.S. currency at 10:57 p.m. in Moscow.
A cut to below investment grade could force ratings-sensitive investors to sell their remaining debt holdings
“We had thought that the cut to junk was largely priced in, but the ruble is under pressure now and most likely the weakness will continue in the morning, and there’s likely going to be selling in bonds.” Dmitry Polevoy, an economist at ING Groep in Moscow, said by e-mail.
A selloff in local-currency bonds, known as OFZs, will be limited because they’re still rated above investment grade, according to Polevoy.
The rating company’s move showed “excessive pessimism,” Russian Finance Minister Anton Siluanov said in a statement.
“There’s no reason to dramatize the situation,” Siluanov said. “The decision shouldn’t have a further serious impact on the capital market because market participants already priced in the risks of a downgrade to Russia’s credit rating.”
Policy makers are struggling to contain the country’s worst currency crisis since 1998. The central bank shifted to a free-floating exchange rate ahead of schedule in November and is overseeing a 1 trillion-ruble ($15 billion) bank recapitalization plan. On Dec. 16, the central bank took its biggest step to shore up the currency, raising its key interest rate to 17 percent from 10.5 percent in a surprise announcement just before 1 a.m. in Moscow that day.
“We believe that Russia’s financial system is weakening and therefore limiting the central bank of Russia’s ability to transmit monetary policy,” S&P said. “The central bank faces increasingly difficult monetary policy decisions while also trying to support sustainable GDP growth.”
While policy makers spent $88 billion in interventions last year to prop up the currency, PresidentVladimir Putin last month scolded the regulator for not reacting to the crisis more quickly. The central bank replaced its head of monetary policy in January, selecting Dmitry Tulin to take on Ksenia Yudaeva’s role in the biggest leadership change since Governor Elvira Nabiullina took charge in June 2013.
Fitch Ratings and Moody’s Investors Service both downgraded Russia to their lowest investment grades this month.
Investors often disregard ratings companies’ credit grade and outlook changes. France’s 10-year yield, which was 3.08 percent when S&P removed its top rating in January 2012, tumbled to a record-low 1.339 percent on Aug. 15 this year.
“The trend of deteriorating ratings is more important than the rating cut itself,” Aleksei Belkin, chief investment officer at Kapital Asset Management LLC in Moscow, said by e-mail. “The cut was rather widely expected and for all practical purposes was well telegraphed and discounted. I am afraid we will see more selling, not panic selling, but positions will be trimmed again.”
Russian officials have bristled at the prospects of rating cuts after S&P last month put the nation’s debt on review for a potential downgrade. A decrease would be “unjustified,” compounding the risks for the economy already brought by sanctions, Economy Minister Alexei Ulyukayev said this month. Putin’s economic aide Andrey Belousov said Jan. 15 that a possible downgrade was already priced in, setting the stage for the ruble’s appreciation.
Even so, the government has acknowledged that the country faces a period of adversity. Russia is in an “extremely difficult” economic situation and must prepare for a hard landing, with the looming challenges worse than the crisis in 2008-2009, First Deputy Prime Minister Igor Shuvalov said last week.
To temper the effects of the unfolding slump, Russia is preparing an anti-crisis program that’s estimated to cost 1.4 trillion rubles, according to Shuvalov.
S&P predicts Russia’s economy will expand about 0.5 percent a year in 2015-2018, slowing from the 2.4 percent pace of the previous four years. Gross domestic product may contract 4 percent to 5 percent this year if oil prices remain at $45 a barrel, according to the Economy Ministry.
“Although the cut was expected our main concern are Russia’s possible counter-measures,” Vladimir Miklashevsky, a strategist at Danske Bank A/S, said by e-mail. “Expectations of retaliation will depress all Russian assets this week.”