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Russia Sovereign Debt Risk Climbs to Two-Year High on Downgrade

The cost of insuring against losses on Russian government debt rose to the highest in more than two years after Standard & Poor’s cut the nation’s sovereign rating to one step above junk.

Credit-default swaps on Russia rose as much as 18.5 basis points to 284, the highest since January 2012, and were trading at 281.5 basis points at 3 p.m. in London. It’s the fifth most expensive government debt to insure after Argentina, Ukraine, Venezuela and Croatia, according to data compiled by Bloomberg.

Further downgrades are possible if economic growth deteriorates and the conflict in Ukraine sparks wider sanctions, S&P said in a report. The move will lead to rating cuts at state-run companies OAO Gazprom, OAO Rosneft and Russian Railways JSC within week, according to Mizuho International.

“Given that Gazprom, Rosneft and Russian Railways are closely related to the Russian sovereign, we do not see them as escaping,” Michael Ridley, an analyst at Mizuho in London, wrote in a note. “We see S&P cutting them one notch each to BBB- to be in line with the new Russian rating.”

The Russian swap level compares with 163 basis points at the start of the year and signals an 18 percent probability of default within five years, according to data provider CMA.

Credit-default swaps on Russia were the most traded among 1,000 entities tracked by the Depository Trust & Clearing Corp. last week, with 496 contracts covering a gross $4.3 billion of debt. There were a total of 10,943 contracts covering a net $8.7 billion outstanding as of April 18, DTCC data show.

Russian corporate bonds are the worst performing euro-denominated investment-grade securities this year, according to Bloomberg bond index data. Gazprombank OJSC’s five-year notes issued on October 23 lost 2.67 percent, compared with average gains of 2.74 percent.

Average yields on the nation’s corporate debt rose 10 basis points to a one-month high of 6.85 percent, according to Bank of America Merrill Lynch’s Russia & Former Soviet States Emerging Markets index. The gauge jumped to 7.26 percent on March 14, the highest in more than two years.

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