The ruble slid to a six-week low after Standard & Poor’s downgraded Russia to junk, exacerbating a selloff as bloodshed in Ukraine raised the likelihood for tougher sanctions.
Russia was lowered one step to BB+, putting it below investment grade for the first time in a decade, as the economy of the world’s energy largest exporter heads for a recession after oil fell by more than half in the past year. The decision came as the U.S. and European Union warned that Russia, which they accuse of aiding rebels in eastern Ukraine, may face further repercussions after a rocket attack on the port city of Mariupol on Saturday.
“We had thought that the cut to junk was largely priced in, but the ruble is under pressure now and most likely the weakness will continue,” Dmitry Polevoy, an economist at ING Groep NV in Moscow, said in e-mailed comments. “There’s likely going to be selling in bonds.”
S&P’s rating is one step below Moody’s Investors Service and Fitch Ratings, which both knocked the sovereign’s credit score to the lowest investment grade this month. Worsening violence in Ukraine, where the death toll climbed to more than 5,000, is returning to the radar of investors whose focus had for months switched to slumping oil, higher interest rates and risks to Russia’s creditworthiness.
The currency declined as much as 6.2 percent against the dollar after the S&P announcement, before trading 5.5 percent weaker at 67.9895 per dollar by 7:02 p.m. in London. S&P, which last downgraded Russia in April, took the sovereign to the same level as Bulgaria and Indonesia, with a negative outlook.
The cost of insuring Russian debt against default is the fifth-highest globally after jumping 113 basis points this month to 589, near the riskiest in almost six years. The contracts climbed 33 basis points before the S&P decision today.
“This is clearly a major headline risk that is going to affect ruble assets in the near term, even though current prices would suggest that a move was to a large extent priced in,” Benoit Anne, the head of emerging-markets strategy at Societe Generale SA in London, said by e-mail. “It will be interesting to watch what forced selling occurs on the sovereign debt. Some will inevitably occur, but it will not be immediate.”
Government bonds declined, sending the yield on five-year local-currency notes up 55 basis points to 15.25 percent before the S&P cut. The rate on the securities has almost doubled since President Vladimir Putin’s incursion into Crimea started last March, leading to the annexation of the Black Sea peninsula.
The standoff that ensued with the U.S. and EU left Russian companies shut off from international debt markets, prompting a dollar shortage at home that was among the reasons behind the ruble’s 46 percent plunge last year.
The rating cut could signal an opportunity to “move in” for some bond funds, Simon Quijano-Evans, the head of emerging-market research at Commerzbank AG in London, said by e-mail. Even after the jump, five-year credit-default swaps signal a 34 percent probability of default, according to CMA. Russia’s international reserves, excluding gold, are still the eighth-biggest globally, according to data compiled by Bloomberg.
“The initial reaction by the ruble may prove an exaggeration,” Richard Segal, the head of emerging-markets credit strategy at Jefferies International Ltd. in London, said by e-mail.
The currency weakened to the lowest since the day after the central bank hoisted interest rates by 650 basis points to 17 percent on Dec. 16 in Moscow, prioritizing the ruble’s stability over shoring up the economy, which analysts expect will contract 3.5 percent this year. The central bank will keep the rate on hold at its Jan. 30 meeting, according to all but one of 18 economists in a Bloomberg survey.
Today’s weakness in the ruble was earlier triggered by speculation that OAO Rosneft will swap proceeds from a 400 billion-ruble ($6.1 billion) debt sale into dollars. The dollar-denominated RTS Index slid 4.8 percent to 781.31, the most among more than 90 benchmark equity gauges tracked by Bloomberg.
“I am afraid we will see more selling, not panic selling, but positions will be trimmed again,” Aleksei Belkin, the chief investment officer at Kapital Asset Management LLC in Moscow, said by e-mail. “Unfortunately, with the way things are going, it’s very easy to imagine a follow-up rating cut from another agency.”