Today's actions by big-3 ratings powerhouse Fitch threw some cold water on the fevered threat of a "new Cold War" between the US and Russia after the latter's absorption of Crimea. While Russia certainly has the US beat in terms of land area, nuclear stockpile and proven oil reserves, America's economy remains eight times larger than Russia's, making it better suited to withstand whatever economic sanctions that Moscow might eventually aim to lob at its Western rivals.
Russia, on the other hand, remains far more susceptible to economic turmoil, as illustrated by this morning's negative revision by Fitch to its outlook on Russia's long-term foreign and local currency issuer default ratings. In its downgrade, Fitch specifically cited "the potential impact of sanctions on Russia's economy and business environment," noting that the financial retaliation against Russia's incursion into Ukraine could exacerbate an already shaky economic situation characterized by slowing GDP growth and reduced investment.
"Since US and EU banks and investors may well be reluctant to lend to Russia under the current circumstances, the economy may slow further and the private sector may require official support," Fitch said, noting that while the direct impact of the sanctions so far has been minor, "the incorporation of Crimea into the Russian Federation will likely lead the EU and US to extend sanctions further in response. Furthermore, foreign investors may anticipate further official action and restrict Russian entities' access to external financing."
The US and EU previously placed visa restrictions on specific allies of Russian President Vladimir Putin while also freezing their property and assets. In response, Putin barred a handful of American officials and lawmakers from Moscow. The former action is expected to have greater economic ramifications than the latter, to put it mildly, and Fitch knows it too. An hour after downgrading Russia, Fitch affirmed the US' 'AAA' credit rating and bumped its rating watch to stable, after marking it down to negative following the debt ceiling crisis in the fall of 2013.
The timing of the affirmation was incidental, as Fitch's ruling on the US aligned with its previously set review schedule. Nonetheless, the contrast between the economic standing of these two superpowers locking horns on the geopolitical stage is worth remembering.
- Jacob Barron, CICP, NACM staff writer