S&P downgrades Russia credit grade to junk level

Rating agency Standard & Poor's (S&P) lowered its long- and short-term foreign currency sovereign credit ratings on the Russian Federation to 'BB+/B' from 'BBB-/A-3'.

The agency also lowered the long- and short-term local currency sovereign credit ratings to 'BBB-/A-3' from 'BBB/A-2', adding the outlook on the long-term ratings remains negative for Moscow.

The rating agency said the downgrade reflected the view that Russia's monetary policy flexibility had become more limited and its economic growth prospects had weakened, while increasing external pressures would see fiscal buffers deteriorate.

“We believe that Russia's financial system is weakening and therefore limiting the Central Bank of Russia's (CBR) ability to transmit monetary policy,” S&P said in a note on Monday.

“In our opinion, the CBR faces increasingly difficult monetary policy decisions while also trying to support sustainable gross domestic product growth.”

In December, the CBR increased its key interest rate by 7.50% over five days to 17%, in a bid to keep the declining ruble under control while curbing inflation at the same time.

While the Russian currency briefly rose against the dollar, it continued to decline ever since, reaching about 66 rubles to the dollar compared to about 35 in January 2014.

The interest rate on interbank loans increased substantially, to well above the key rate, a move S&P believed to be a strong indicator of a weakening monetary transmission mechanism.

“We expect that credit to the economy will be curtailed, which will likely further undermine growth,” the rating agency said.

“We also understand that during 2014 the Russian public had been converting rubles into foreign currency, thereby fueling depreciation.

“Given the pass-through of more expensive imports to domestic prices generally, we now expect that inflation will rise above 10% in 2015.”

S&P added that the declining conditions of Russia’s financial system were likely to push the country into recession in 2015.

“We anticipate that asset quality in the financial system will deteriorate given the weaker ruble, restricted access of key areas of the economy to international capital markets due to sanctions and economic recession in 2015,” S&P said.