Ruble Drops on Oil as Russia Credit Risk Climbs After Fitch Cut

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The ruble weakened for a second day and the cost of insuring Russian debt against default increased after oil extended losses and Fitch Ratings lowered the country’s credit score to one step above junk.

The currency of the world’s biggest energy exporter dropped 2.3 percent to 63 versus the dollar by 8 p.m. in Moscow. The yield on Russia’s five-year ruble bonds rose 126 basis points to 16.68 percent, the highest since Dec. 17. Five-year credit default swaps increased 22.5 basis points to 601, making it the world’s sixth-riskiest credit, according to data compiled by Bloomberg.

Russia’s investment-grade status is under threat after plummeting oil prices and the conflict over Ukraine triggered the worst currency crisis since the country’s 1998 default. Brent crude slid 4.7 percent to $47.74 a barrel today, after plunging 11 percent last week. That was the lowest level since April 2009.

“Oil remains the key factor pressuring the Russian financial markets,” Slava Smolyaninov, the chief strategist at UralSib Financial Corp. in Moscow, said by e-mail. “The Fitch downgrade brings Russia closer to the verge of the non-investment grade status, clearly. The bond market has already priced in Russia far below the current ratings.”

Tumbling oil prices and sanctions over Ukraine have made the ruble the worst-performing currency worldwide since Russia’s annexation of Crimea in March. The nation’s economic outlook has “deteriorated significantly” and forced a “steep rise” in interest rates, Fitch said in its decision on Jan. 9.

Russia’s inflation rate will average 13.7 percent this year after accelerating to 11.4 percent in December, Morgan Stanley analysts led by Diana Pasquale said in an e-mailed note. That will prevent the central bank from lowering the key rate from 17 percent, the emergency level it introduced last month to stem the ruble collapse, according to the note.

Oils Downgrade

Russia’s government receives about 50 percent of its budget revenue from the country’s oil and gas industry and crude has tumbled amid concern a global surplus will persist. OPEC is battling a U.S. shale boom by resisting production cuts, signaling it’s prepared to let futures fall to a level that slows American output.

The dollar-denominated RTS Index slid 3.3 percent to 756.63. The ruble-denominated Micex Index fell 0.1 percent to 1,513.22 as the nation’s largest gas producer OAO Gazprom lost 1 percent, while preferred shares of OAO Surgutneftegas declined 2 percent after Goldman Sachs Group Inc. cut the stock to neutral, citing “limited upside.”

Renaissance Capital also cut the stock to hold along with OAO Novatek and OAO Rosneft. “Downside” risks in the oil and gas industry are set to prevail in the short-term amid sanctions and funding concerns, RenCap said in an e-mailed note.

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