Dec. 8 (Bloomberg) -- Standard & Poor’s Ratings Services lowered Russia’s long-term sovereign credit rating and maintained its negative outlook because of the “rapid depletion” of the country’s financial reserves.

The rating was cut one level to BBB, the second-lowest investment grade, from BBB+, Standard & Poor’s said in an e-mailed statement today. The last time S&P downgraded Russia was in January 1999, when the country had a rating of SD, or ‘selective default,’ meaning S&P felt the nation defaulted on its debt.

“The rapid depletion of reserves in order to resist a more substantive adjustment of the nominal exchange rate increases the chances of discontinuous exchange-rate movements later, at a lower level of international reserves, with even more severe consequences for the private sector,” said Frank Gill, S&P’s primary credit analyst in London, according to the statement.

Russia, the world’s largest energy producer, raised interest rates twice last month and drained $143 billion from its foreign- currency reserves to arrest a 17 percent drop in the ruble since Aug. 1 as oil prices plunged. The reserves currently stand at $455 billion, still the world’s third largest.

‘Sharp’ Swings

The benchmark 30-year government bond retained early gains after the announcement. The 7.5 percent dollar bonds snapped a five-day decline today, pushing yield 34 basis points lower to 11.55 percent. The 8.25 percent note maturing in 2010 yielded 3.55 percent, down 24 points. The Micex index of corporate bonds erased an earlier advance to trade unchanged at 81.89.

Prime Minister Vladimir Putin said last week that Russia will avoid “sharp” swings in the ruble by using the reserves to support the currency. The central bank has expanded the trading band against its euro-dollar basket four times since Nov. 11, allowing a 4 percent depreciation against the mechanism in that period.

“The massive accumulation of reserves is the main reason why Russia kept getting ratings increases, so without that it’s only natural that the rating would go down,” said Vladimir Osakovsky, an economist in Moscow for UniCredit SpA. “This will worsen already-poor sentiment toward Russia.”

The government has pledged more than $200 billion to stem the worst financial crisis since 1998, including a banking liquidity boost worth $86 billion, following capital outflow. Slumping commodities prices, the war with Georgia and the seizing up of global capital markets prompted investors to pull at least $190 billion from Russia since Aug. 8, UniCredit SpA estimates.

Current-Account Deficit

S&P said it expected Russia’s current-account surplus to swing into a deficit equivalent to 2.6 percent of gross domestic product next year, compared with a surplus of 5 percent in 2008 due to a “sharp deterioration in the country’s terms of trade,” the statement said. Russia’s GDP growth should decline “sharply” in 2009, it added.

The price of Russia’s Urals blend of crude oil was $39.54 today, a 72 percent drop from its July high of 142.50 per barrel. Energy, including crude oil and natural gas, accounted for 73 percent of exports to the Baltics and countries outside of the former Soviet Union, in the first 10 months of the year, the Federal Customs Service said today.

The budget is likely to “shift into deficit” as the government rushes emergency tax cuts into law, commodities prices stay low, and a weaker economy generates less tax revenues, S&P said. Russia’s government surplus amounted to 7.8 percent of gross domestic product in the first 10 months, the Finance Ministry said on Nov. 13, citing preliminary figures.

Oil Prices

If oil prices fail to rebound, S&P said that the spending required in 2009 and 2010 to cover the country’s budget deficit, along with the money needed to recapitalize its banks, will be equal to the amount held in Russia’s two oil funds. The National Wellbeing Fund and the Reserve Fund held a combined $209 billion as of Dec. 1, the Finance Ministry said at the start of the month.

The ratings cut “might affect sentiment of those investors not that familiar with Russia. Others, though, won’t be that surprised,” said Elina Ribakova, chief economist in Moscow at Citigroup Inc..

“There isn’t significant enough foreign capital left in Russia for this to have an effect,” she said.

To contact the reporters on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net;

Last Updated: December 8, 2008 08:43 EST