• Moody’s cuts Russia’s foreign currency long-term debt rating

  • We cannot rule out the possibility of further sovereign ratings being cut to junk levels

  • We remain bearish on the outlook for the rouble


Assessment and outlook

Moody’s cut Russia’s foreign currency long-term debt rating on Friday, 17 October 2014 from ‘Baa1’ to ‘Baa2’ while keeping the country’s outlook on negative, stating that Russia’s economic prospects are weak and sanctions are weighing on the country’s FX reserves. ‘Baa2’ is the second lowest investment grade level.

As Russia’s capital outflows accelerated in Q1 14 and the central bank initiated overly tight monetary policy in order to support the rouble’s exchange rate, Standard & Poor’s cut the country’s sovereign rating on 25 April 2014 to ‘BBB-’ with a negative outlook, citing that geopolitical risks had risen on a deteriorating situation around Ukraine. Since that, we have argued that a risk of new sovereign ratings cut is possible due to continuing capital outflows, tightening monetary policy and accelerating consumer price inflation on a quickly devaluating rouble and Russia’s food imports ban, introduced in summer 2014 as counter-sanctions against Australia, Canada, the EU, Norway and the US.

In the current situation where the oil price has fallen 18.5% since mid-August 2014, we do not exclude the possibility of further sovereign ratings being cut to junk levels as prospects for economic growth in 2014-15 have deteriorated. Thus, we see additional downside risks for our 2015 GDP forecast of -1.8% y/y as fixed investments will stagnate on rising cost of capital and tightening monetary policy. On the other hand, we expect private consumption to shrink in 2015 as both supply and demand side shocks will keep inflation elevated.

We remain bearish on the RUB and OFZ sovereign bonds, expecting spiking short-term volatility as demand for RUB on tax payments during the last weeks of October 2014 will be pressured by a low oil price and worsening sentiment.

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
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