Russia's sovereign rating is cut again

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.

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