Russia Debt Rating Cut to Step Above Junk at S&P

Russia’s sovereign debt rating was cut to the lowest investment grade at Standard & Poor’s, which said further downgrades are possible if economic growth deteriorates and the conflict in Ukraine sparks wider sanctions.

S&P cut Russia’s rating one step to BBB-, it said in a statement today. The grade, on par with Brazil and Azerbaijan, has a negative outlook. S&P last downgraded Russia in December 2008. Russia’s currency and bonds fell.

“The tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects,” S&P said in the statement.

The U.S. and its allies have a list of additional sanctions ready and will enact them if there is no progress de-escalating the crisis in Ukraine, where security forces are moving against pro-Russia separatists in the country’s east, U.S. President Barack Obama said yesterday in Tokyo. Last month, Russia was placed on review for a downgrade by Moody’s Investors Service and Fitch Ratings cut its outlook to negative.

Russia’s dollar bonds due April 2020 fell for a fifth day, lifting the yield 13 basis points to 4.90 percent, the highest since March 17. The ruble weakened 0.6 percent against the dollar to trade at 35.9800 at 11:28 a.m. in Moscow. It has declined 8.6 percent this year, the second-worst performance among 24 emerging-market currencies tracked by Bloomberg.

Ratings Ignored

Investors routinely ignore ratings companies’ decisions. In almost half the instances, yields on government bonds fall when a rating action by Moody’s and rival Standard & Poor’s suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields down to records.

The downgrade was expected by investors and won’t significantly change their behavior, Russian Economy Minister Alexei Ulyukayev told reporters today.

Russian President Vladimir Putin told reporters in St. Petersburg yesterday that “sanctions are not effective in the contemporary world and are not bringing the desired outcome.”

Yields may rise at least 60 basis points, or 0.6 percentage point, for each level Russia’s rating is cut, Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow, said by e-mail today.

Russia Selloff

Russia’s annexation of Crimea from Ukraine last month sparked a selloff in Russian assets as the U.S. and the European Union imposed sanctions against officials and threatened to broaden the penalties. The world’s largest energy exporter’s $2 trillion economy may expand less than 0.5 percent this year or growth may halt as “geopolitical uncertainty” drives capital outflows, Finance Minister Anton Siluanov said April 15.

Capital outflows amounted to $50.6 billion in the first three months of the year, compared with $63 billion for the whole of 2013. Gross domestic product expanded 1.3 percent last year, the slowest pace since a 2009 recession.

“The decision is partially expected -- Russia is almost in recession, even without sanctions,” Dmitry Dorofeev, a money manager at BCS Financial group, said by phone.

S&P said it may lower the rating further “if tighter sanctions were to be imposed on Russia and further significantly weaken the country’s net external position.”

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