Russia May Be Downgraded by Moody’s on Tensions With Ukraine

Russia’s credit rating was placed on review for a downgrade by Moody’s Investors Service, which said uncertainty about how the conflict with Ukraine will develop is weighing on its economy.

If there is a downgrade, it would probably be a one-level cut to the country’s Baa1 rating, Moody’s said. Russia has had that score, Moody’s third-lowest investment grade rating, since an upgrade from Baa2 in July 2008. A dissipation of current tensions could lead to the rating’s confirmation, Moody’s said.

The leading reason for the review “is the potential for the current crisis to further exacerbate the recent weakening of the country’s economic strength and medium-term growth potential,” Moody’s said in its statement.

The change comes after Fitch and Standard & Poor’s lowered their outlooks earlier in March and affirmed the former Soviet republic at BBB, their second-lowest investment grade, on par with South Africa and Colombia.

Russia, the world’s largest energy exporter, expanded last year at the slowest pace since 2009, with the economy increasing 1.3 percent. The country’s standoff with the U.S. and Europe over Ukraine, the most intense conflict since the Cold War, has added to Russia’s risk of recession and enhanced capital flight.

Moody’s said it sees gross domestic product shrinking about 1 percent this year, compared with pre-crisis expectations for GDP to expand about 2 percent. The political and economic uncertainty will hurt consumption and investment, which are already contributing to a growth slowdown, Moody’s said.

Sanctions’ Effect

President Vladimir Putin’s decision to annex Crimea led the U.S. and EU to impose visa bans and asset freezes on Russian individuals. President Barack Obama said yesterday that Russia’s military, energy and finance industries are possible targets if it moves deeper in Ukraine.

“Wider economic sanctions and potential countermeasures by Russia” could offset the advantages of the country’s foreign-currency reserves and the strength of the government’s balance sheet, Moody’s said.

Russia’s $2 trillion economy may almost stall at rates below 1 percent and contract if capital outflows soar to $150 billion in 2014, Economy Minister Alexei Ulyukayev said at a conference in Moscow on March 27.

In the first quarter of 2014, Russia will probably see outflows close to $70 billion, Deputy Economy Minister Andrey Klepach told reporters on March 24. That would exceed the $63 billion in capital that left Russia during the whole of 2013.

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