Standard & Poor's Ratings Services on Monday cut its
foreign-currency rating on Russia to junk for the first time in
more than 10 years.
A one-notch downgrade was largely expected and priced into
Russian asset prices.
"The downgrade was largely as expected," said Tim Ash, a
strategist at Standard Bank. "This reflects a combination of lower
oil prices, sanctions and the conflict in Ukraine with the
difficult geopolitical tussle with the West which shows no sign of
easing. These factors have and are expected to continue to weigh on
Russia's balance sheet and overall credit matrix.
"I would expect Fitch and Moody's to follow relatively soon," he
added.
But Alexey Pogorelov, Russian economist at Credit Suisse, said
the downgrade "might be more damaging for the Russian assets and
the ruble than everyone thinks."
Mr. Pogorelov said in recent days the pressure on the ruble has
increased mainly from the geopolitical tension in the south-east of
Ukraine and a threat of further sanctions.
On Dec. 23, S&P placed the country on negative watch,
indicating a downgrade was likely, citing the rapid deterioration
of its monetary flexibility and the impact of the weakening economy
on the country's financial system.
"The outlook is already very bleak as the economy is firmly on
the path that leads to recession following the sharp fall in oil
and the full-scale currency crisis that unfolded in December," said
Piotr Matys, a rates strategist at Rabobank.
The downgrade to junk cements the underlying trend of investors
selling off their assets in Russia, which means that Russia's
central bank will have to support the ruble by keeping interest
rates at 17% and may have to intervene directly in the foreign
exchange market, Mr. Matys said.
"If capital outflows accelerate and international reserves
continue to shrink rapidly, market speculations that Russia might
implement capital controls are likely to escalate," he said.
Despite the downgrade, Russia remains classified as
investment-grade, based on most global fixed-income indexes' rules
as the country's average rating--including S&P, Moody's
Investors Service and Fitch Ratings--is triple-B-minus. But another
downgrade below junk level would render Russia ineligible for most
investment-grade indexes.
On Jan. 16, Moody's cut its Russia's ratings to the brink of
junk territory, bringing it in line with Fitch's rating, and noted
it was reviewing the country's balance sheet, particularly its
foreign-currency-reserves cushion.
"Moody's caught up and they struck an appropriately negative
tone when they kept Russia on review for another downgrade," said
Per Hammarlund, a strategist at SEB.
He added: "Given the weakness of the ruble and the high level of
local rates, international lenders and investors will be attracted
to Russia if sanctions are eased. Even if they don't fully reverse
net capital outflows, it will ease the burden on public finances
and the pressure on" Central Bank of Russia reserves.
"In addition," Mr. Hammarlund said, "if oil prices find a floor
as seems reasonable in the second or third quarter and recover
towards the end of 2015, both public finances and the ruble will
look better."
The ruble was trading at 67.67 to the dollar, down 3.5%.
Write to Chiara Albanese at chiara.albanese@wsj.com and Maria
Armental at maria.armental@wsj.com
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