Russia’s credit rating has been downgraded to junk status for the first time in a decade due to the collapsing oil price, the tumbling value of the rouble and sanctions imposed because of its intervention in Ukraine.
Ratings agency Standard & Poor’s said the downgrade was caused by the country’s reduced flexibility to cut interest rates and a weakening of the financial system.
The ratings agency said the Central Bank of Russia “faces increasingly difficult monetary policy decisions while also trying to support sustainable GDP growth”. It added: “These challenges result from the inflationary effects of exchange rate depreciation and sanctions from the west as well as counter-sanctions imposed by Russia.”
Attempts to shore up the value of the rouble have had only a temporary effect, Standard & Poor’s said, noting that the 750 basis point rise in interest rates last month to take interest rates up to 17% had only a limited impact on the rouble-dollar exchange rate.
“The rouble briefly appreciated against the dollar but has since continued to depreciate, reaching about 66 roubles to the dollar, compared to about 35 a year ago,” S&P said. The move pushed the rouble lower against the US currency on Monday , at 67 per dollar.
The ratings agency warned it had put the new rating on a negative outlook because of fears that the central bank’s ability to move interest rates could become limited, especially if the country imposed exchange controls.
“We could lower the ratings if external and fiscal buffers deteriorate over the next 12 months faster than we currently expect,” the agency said.
But it added: “We could revise the outlook to stable if Russia’s financial stability and economic growth prospects were to improve”.
The agency warned on 23 December that it was considering a downgrade because of concerns about the weakening the economy.
Rival agencies have not pushed Russia’s rating into junk territory although there are expectations that they will echo the S&P decision. The lower the debt rating the more expensive it is to borrow and makes its impossible for some investors to hold the debt at all.
The move comes after data showed the Russian economy contracted for the first time in five years in November, after warnings by economists that the country faced outright recession if oil prices kept falling.
The country is one of the world’s biggest energy exporters and the reduction in the oil price by more than half in the past six months to below $50 a barrel is reverberating through the economy. The central bank has warned that GDP could shrink by as much as 4.8% this year if oil prices fail to recover.
The banking system is already being bailed out and economists at the Capital Economics thinktank have calculated that further support may be need for the financial sector.
“Bank recapitalisations of between 1.2tn roubles (2% of GDP) and 2.5tn roubles (5% of GDP) might be needed to bring the banking sector’s capital adequacy ratio back to the regulatory minimum of 10%,” said William Jackson, the thinktank’s senior emerging markets economist. He said the rouble crisis appeared to have triggered deposit flight, which may have forced banks to sell assets at depressed prices while the forecasts for a fall in GDP could also cause a rise in bad debts.
“At this stage, it’s hard to tell quite how hard the hit to banks has been, but they’re clearly suffering,” said Jackson, adding that there could also be a credit crunch.
According to the analysis by S&P, inflation could rise above 15% this year and the banks will suffer an increase in bad debts on their balance sheets.
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