As Russia deals with the heavy toll of Western sanctions and falling oil prices, a major credit ratings agency on Monday downgraded the country’s sovereign debt to below investment grade, the first time it has fallen to that level in more than a decade.
With Russia’s oil boom years fading and tensions rising with the West, the ratings agency, Standard & Poor’s, cited narrowing possibilities for the Russian government and companies to service their debt. A looming problem, the agency’s analysts highlighted, was the lack of options for the Russian central bank, which will have to decide this year between propping up the ruble or helping the teetering domestic banking sector.
“In our view, the Russian Federation’s monetary policy flexibility has weakened, as have economic growth prospects,” the ratings agency wrote. Russia’s economy is already heading into a deep recession. The agency said it projected average growth of 0.5% each year for the next three.
“Stresses could mount for Russian corporations and banks that have foreign currency debt service requirements without a concomitant foreign currency revenue stream,” Standard & Poor’s wrote.
The downgrade cut Russia’s credit rating by only one notch. But that was enough to push the government’s debt into the category of junk bonds.
S&P, along with the other agencies, have been whittling away at Russia’s credit ratings since the conflict with Ukraine began, and oil prices started to slide. The two other main ratings agencies, Fitch and Moody’s, also downgraded Russia’s sovereign debt this month, though not to the level of junk bonds.
Russia’s government has tried to shrug off the ratings actions. The central bank does not formally recognize Western ratings for some banking transactions. But even the single downgrade by Standard & Poor’s could ripple widely through Russia’s economy. It will force many bond funds permitted to own only investment-grade securities to sell Russian debt.
The ratings downgrade had been anticipated for weeks, and yet after its publication on Monday the rouble plunged to new lows against the dollar. The currency fell about 7% in after-hours trading to more than 68 roubles to the dollar.