S&P downgrades Russia to junk

By bne IntelliNews January 27, 2015

bne IntelliNews -


Standard & Poor's downgraded Russia's credit rating to junk status late on January 26, a move which precipitated the rouble's fall by more than 6%.

S&P lowered Russia's credit rating to BB+, one step below investment grade, as renewed fighting in Ukraine raised the threat of tighter Western sanctions, while oil prices stay below $50 per barrel. 

Russia, which has held investment grade for a decade, is still ranked one notch above junk by the other two main agencies, Fitch Ratings and Moody's. Russia's investment grade rating of 2004 marked a remarkable return to international respectability only six years after a national default in 1998.

In unusually hard hitting comments for a credit agency, S&P suggested Russia has now lost that respectability, pinpointing corruption and authoritarianism as the underlying weaknesses in Russia's credit profile: “Political power is highly centralised with few checks and balances, in our opinion,” the agency said in its analysis. “We do not currently expect that the government will be able to effectively tackle the long-standing structural obstacles - perceived corruption, the weak rule of law, the state's pervasive role in the economy, and the challenging business and investment climate - to stronger economic growth over our 2015-2018 forecast horizon,” S&P concluded.

Russia's international reserves will now haemorrhage, believes S&P, because of massive private sector capital flight, which hit $152bn in 2014, after averaging $57bn between 2009-2013. Russia's hard currency outflows in 2015 will reach nearly 85% of current account receipts, the agency believes.

As a result, Russia's international reserves will fall to what is regarded as a critically low level – only three months of import coverage - by 2017.

According to S&P, the pressure on its financial account results from corporates' need to roll over debt, while the country is cut off from international capital markets due to sanctions. “Stresses could mount for Russian corporations and banks that have foreign currency debt service requirements without a concomitant foreign currency revenue stream,” S&P wrote in the analysis.

The drop in budget revenues - resulting from a 50% collapse in the price of oil since June 2014 - will hit Russia's fiscal position hard, with a 1.3% budget deficit forecast for 2015 deepening to an average annual deficit of 2.5% over 2015-2018 - draining the 'rainy day funds' Russia has put aside to cope with a sharp drop in the oil price.

S&P expects inflation in Russia to exceed 10% in 2015, with banking assets set to deteriorate sharply, and consumer demand to drop.

S&P's growth forecast for Russia did not detail the size of the anticipated recession in 2015, but forecast average 0.5% annual growth 2015-2018, down from 2.4% annual growth over the last four years.

According to the Financial Times, traders said that since two of the three major agencies still rated Russia at investment-grade, the S&P downgrade should not trigger a wave of automatic selling.

The ruble was already under pressure on January 26 as markets anticipated the downgrade. When S&P announced its decision, the ruble plummeted by as much as 6.2% against the dollar after the S&P announcement, to 68.4 rubles to the dollar. “I would expect Fitch and Moody's to follow relatively soon [in downgrading Russia]” Standard Bank's Tim Ash said in a research note.


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