Russia loses second IG rating

• Moody’s follows S&P in downgrading Russia to non-investment grade.

• Pressure on the rouble set to persist as Russian markets re-open tomorrow after today’s public holiday.

Assessment and outlook

• Late on 20 February Moody’s downgraded Russia’s sovereign debt rating to Ba1/Not Prime (NP) from Baa3/Prime-3 (P-3). The rating outlook is negative. The cut concluded the review for downgrade that was initiated on 16 January.

• Moody’s stated its main reasons were:

• ‘The continuing crisis in Ukraine and the recent oil price and exchange rate shocks will further undermine Russia's economic strength and medium-term growth prospects, despite the fiscal and monetary policy responses;

• The government's financial strength will diminish materially as a result of fiscal pressures and the continued erosion of Russia's foreign exchange (FX) reserves in light of ongoing capital outflows and restricted access to international capital markets;

• The risk is rising, although still very low, that the international response to the military conflict in Ukraine triggers a decision by the Russian authorities that directly or indirectly undermines timely payments on external debt service.’

• Moody’s followed Standard & Poor’s, which in January cut Russia’s long- and shortterm FX debt ratings to junk (BB+ and B from BBB and A-3) retaining its negative outlook, as the country’s economic growth prospects had deteriorated and ‘monetary policy flexibility [had] weakened’. At the same time, it cut the country’s local currency debt ratings to BBB- and A-3 from BBB and A-2.

• We had been expecting a cut by Moody’s or Fitch for a while, seeing it as one of two major risks for the rouble and sentiment towards Russian assets. Another risk – capital controls – remains possible, but is unlikely unless USD/RUB spikes over 80 or capital outflows reach USD80bn in Q1 15.

• We expect pressure on the rouble to increase in the coming days as the rouble market reopens tomorrow after the Defender of the Fatherland holiday today. Brent falling below USD60/bbl and the downgrade will also depress the corporate debt market, pushing yields up and widening spreads.