Russia rating nears ‘junk’ status credit rating

Russia’s credit rating looks set to tumble into ‘junk’ for the first time in more than a decade, a move that would exclude its bonds from a couple of high-profile indices and may set off another wave of capital outflows.

The Fitch agency cut its rating on Russia to ‘BBB minus’ from ‘BBB’ on Friday, citing a significant deterioration in the country’s economic outlook, due to the slump in oil prices and falling value of the rouble.

That is still investment grade, the category that implies low default risk, but only one notch away from so-called ‘junk’, the grade Russia rose out of in 2004.

Bigger rival Standard & Poor’s has Russia already at ‘BBB minus’, with a negative outlook, meaning the next move will likely push it into ‘junk’. It says it will review the rating in mid-January and again in April.

“A downgrade to junk for Russia is a foregone conclusion”, said Hung Tran, executive managing director at global industry body, the Institute of International Finance.

A fall to junk will deal a blow both to Russia’s already-battered economic prospects and to its image as a global power. Peers in the China, India, Brazil and South Africa — are all rated investment grade.

Markets are already pricing Russia as junk, according to bond yields and debt insurance costs.

While that should cap capital outflows from the move itself, knee-jerk losses are still likely.

Many conservative funds are barred from buying sub-investment grade securities, so loss of this coveted rating can trigger selling of existing securities and raises future borrowing costs for a country and its companies.

S&P last month placed the country on “creditwatch negative”, implying a 50% chance of a downgrade in the next three months. Its own “market derived” score for Russia indicates a rating five notches below current levels.

Moody’s rates Russia two notches above junk but with a negative outlook, and is expected to follow S&P later in 2015.

Western sanctions imposed over Moscow’s role in the Ukraine crisis and oil’s price collapse are tipping Russia’s economy into recession, while central bank reserves have fallen by more than $100bn (€84.4bn) — unlike during the 2008 crisis, reserve volumes fall short of total debt.

* Reuters