Russia Credit Risk Soars to Six-Year High as Ruble Slides on Oil

Updated on

The cost of insuring Russian bonds against default rose to the highest level in almost six years on speculation a cut in the nation’s credit rating to junk is imminent. The ruble tumbled for a second day.

Five-year credit default swaps jumped 56 basis points to 594 by 6:54 p.m. in Moscow, the most since March 2009 on a closing basis and the fifth-highest sovereign globally. The contracts rose 118 basis points in the past three days. The ruble lost 1.9 percent to 62.0265 a dollar as Brent crude slid toward $50 a barrel for the first time in almost six years.

Russia’s investment-grade status is being tested after the price of oil, its main export earner, more than halved in value since June and sanctions over the conflict in Ukraine threaten the economy with a recession. Standard & Poor’s said last month it will probably lower Russia to non-investment grade within 90 days. Fitch Ratings will announce the results of its credit-rating review on Jan. 9.

“There’s concern with regards to Russia’s ability to maintain its budget commitments and over Russia being downgraded to junk,” Dmitri Petrov, an analyst at Nomura Holdings Inc. in London, said by phone. “Oil is trading substantially below even the worst expectations of the government. Every move from here onwards will be increasingly painful for the currency.”

Negative Watch

Russian Eurobonds due in April 2042 retreated for a third day, sending the yield up 16 basis points to 7.66 percent, the highest since closing at a record on Dec. 16. The yield on local-currency bonds maturing in August 2023 dropped 32 basis points to 15.87 percent after reaching an all-time high 16.19 percent yesterday. The nation’s markets will be shut tomorrow for a public holiday.

S&P, which said it will conclude its review of the sovereign’s BBB- rating in mid-January, put it on negative watch based on “what we view as a rapid deterioration of Russia’s monetary flexibility and the impact of the weakening economy on its financial system,” it said Dec. 23.

A cut by Fitch, which currently rates the nation two steps above junk with a negative outlook, to BBB- is “almost a certainty,” while junk status from S&P may be forthcoming, analysts at Tradition brokerage in London said in an e-mailed report today. “A junk rating will trigger additional capital flight as index reweighting and possible exclusions take place,” they said.

Market Access

Only Venezuela, Ukraine, Greece and Pakistan have more expensive credit-default swaps, according to data compiled by Bloomberg.

The penalties imposed by the U.S. and its allies have locked Russian corporate borrowers out of international debt markets. That pushed the government to rush legislation through parliament last month allowing the Deposit Insurance Agency to buy stakes in banks before they face bankruptcy proceedings to keep the system stable.

Russia’s foreign-currency reserves fell by $10.4 billion to $388.5 billion in the week ended Dec. 26, according to central bank data. It spent $88 billion supporting the ruble last year.

Moody’s Investors Service cut Russia’s credit score one level to its second-lowest investment grade in October, citing concern that the sanctions will hurt its economy. The continued erosion of Russia’s foreign-exchange reserves because of capital flight, low oil prices and borrowers’ lack of access to credit were also cited by Moody’s.

The economy of the world’s largest energy exporter will shrink 2.3 percent this year, according to the median of estimates compiled by Bloomberg.

Oil Momentum

The ruble tumbled 41 percent against the dollar last year on the Micex exchange, its worst performance since 1998 when Russia defaulted on local debt. The dollar-denominated RTS Index of equities slumped 2 percent today to the lowest in almost three weeks. The benchmark Micex index climbed 3.1 percent.

Brent, the oil grade traders use to price Russia’s main export blend, declined 2.6 percent to $51.72 a barrel today, the lowest level since May 2009. The government gets about 50 percent of its budget revenue from oil and natural-gas industries.

“The momentum in oil is currently downwards and we are likely to see Brent trade near, if not below, $50 per barrel” in the first quarter, Chris Weafer, a senior partner at Macro Advisory in Moscow, said in an e-mailed note. “That implies we can expect renewed downward pressure on the ruble exchange rate and a strong possibility that Russia’s credit rating will be cut to junk in the first quarter by at least one of the credit agencies.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE