Russia Junked Again

Moody's Investors Service downgraded the government of Russia's sovereign debt rating on Feb. 20 to junk status. The drop in rating comes one month after Standard & Poor’s made a similar call, the first time Russia dipped below investment grade in more than a decade, according to news reports.

Moody’s cut the rating from Baa3 to Ba1 with a negative outlook and identified several factors that led to the drop:
  • Continuing crisis in Ukraine and the recent fall in oil prices and of the ruble exchange rate;
  • Fiscal pressures and continued erosion of Russia’s foreign exchange reserves in light of ongoing capital outflows and restricted access to international capital markets; and
  • Although still low, increasing risk that international response to the military conflict in Ukraine might trigger a decision by Russian authorities that would directly or indirectly undermine timely payments on external debt service.
“In Moody’s view, the existing and potential future international sanctions, the erosion of the country’s foreign exchange buffers and persistently lower oil prices plus high and rising inflation will take a negative toll on incomes as well as business and consumer confidence,” the credit agency said. “As a result, Russia is expected to experience a deep recession in 2015 and a continued contraction in 2016.”

The negative outlook reflects the potential for more severe political or economic shocks to emerge, related to the Ukraine conflict or a renewed decline in oil prices. Moody’s also has lowered Russia’s country ceilings for foreign currency debt to Ba1NP from Baa3/P3; its country ceilings for local currency debt and deposits to Baa3 from Baa2; and its country ceiling for foreign currency bank deposits to Ba2/NP from Ba1/NP. “A country ceiling generally indicates the highest rating level that any issuer domiciled in that country can attain for instruments of that type and currency denomination,” Moody’s said.

Although it doesn’t anticipate upgrading Russia’s rating in the near term, the credit agency said it “would consider stabilizing the outlook if the macroeconomic and financial market conditions were to stabilize, if the risks of financial market volatility were to subside, and/or if there was a serious prospect of the Ukraine crisis being resolved in such a way that the risk of ongoing or escalating military hostilities and further sanctions were to dissipate.”

Moody’s also said it would consider downgrading the country’s government bond rating if the macroeconomic and financial market conditions deteriorated substantially below the agency’s base case, or if the Russian government watered down or abandoned its fiscal and structural reform plans. Other factors that could negatively influence Russia’s rating include additional sanctions due to an escalation in the military conflict that would further undermine its economic strength as well as actions that could create more uncertainty about the government’s capacity or willingness to continue to service its debt, Moody’s said.

- Diana Mota, NACM associate editor

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