Russia's FX credit rating lowered to junk

• S&P cuts Russia’s debt rating for the first time in six years.

• Geopolitical risks continue to weigh on the RUB as the situation in eastern Ukraine worsens.

Assessment and outlook

• Yesterday the rating agency Standard & Poor’s (S&P) cut Russia’s long- and shortterm FX debt ratings to junk level (BB+ and B from BBB and A-3 accordingly) preserving a negative outlook, as the country’s economic growth prospects have deteriorated and ‘monetary policy flexibility has weakened’. At the same time the country’s local currency debt ratings were cut to BBB- and A-3 from BBB/A-2.

• S&P claims in its statement that other reasons for the downgrade are ‘rising external pressures and increased government support to the economy’. The agency is also seeing that ‘Russia’s financial system is weakening’ as a result of the falling RUB and the sanction war between the West and Russia having an impact on GDP growth. According to S&P Russia’s central bank’s aggressive monetary policy is weighing on economic growth allowing it to expand 0.5% annually in 2015-2018. The slumping oil price is causing a severe terms-of-trade shock. Capital outflows reached almost USD152bn in 2014 and we estimate that Russia’s corporate debt outstanding in 2015 is approximately USD160bn. Yet, due to the large RUB depreciation, the country’s budget is better balanced. At the same time the agency points out that the economic slowdown started ‘before the recent developments in the Ukraine’. The next rating publication on Russia will be released on 17 April 2015.

• For similar reasons we cut our 2015 GDP forecast to -7.9% y/y from -1.8% y/y on 19 December 2014. Demand- and supply-side shocks will further curb fixed investments and have a significant impact on business sentiment and productivity growth hitting loan growth and private consumption.

• The RUB saw significant pressure falling 4.6% against the USD after the statement was released. We expect the fall in the RUB, Russian stocks and sovereign bonds to continue this week. At the same time geopolitical pressure on Russian assets is rising, as fighting in Ukraine is escalating and the West is urging to introduce new sanctions. Yet, our main concern is Russia’s reaction to the rating cut and new sanctions when introduced.