Russia Rating Cut by Moody’s on Sluggish Economic GrowthYe Xie and Elena Popina
Russia’s credit rating was cut to the second-lowest investment grade by Moody’s Investors Service, which cited sluggish growth prospects worsened by the crisis in Ukraine and international sanctions.
Moody’s downgraded the government one level to Baa2 from Baa1 and kept a negative outlook on the country’s rating. It is in line with Fitch Ratings Ltd.’s credit grade and one notch above Standard & Poor’s, which lowered Russia to BBB- in April.
Russia has spent $13 billion from its foreign reserves this month to bolster the ruble as tumbling oil prices add to the woes of an economy that’s teetering toward recession amid the sanctions by the U.S. and European Union. President Vladimir Putin and European negotiators are struggling to hold together a six-week truce in eastern Ukraine, inching forward in talks to prevent the fighting from escalating.
The downgrade is driven by “Russia’s increasingly subdued medium-term growth prospect,” Kristin Lindow, an analyst at Moody’s Investors Service Inc., said in a phone interview. “The gradual and ongoing erosion of the country’s international reserve buffer” contributed to a weakening of Russia’s creditworthiness, she said.
The extra yield investors demand to own Russia’s dollar-denominated government bonds instead of U.S. Treasuries was 3.23 percentage points yesterday, the highest premium since June 2012, according to data compiled by Bloomberg. The spread has almost doubled from 169 basis points at the end of 2013 as the U.S. and its allies accused Russia of inciting the rebellion in eastern Ukraine, an allegation Putin denies.
The ruble has lost 13 percent against the dollar in the past three months, more than any other currency tracked by Bloomberg, extending its drop this year to 19 percent. Foreign reserves have declined 11 percent this year to a four-year low of $452 billion as the central bank acted to shore up the ruble.
Brent crude’s 25 percent drop from its June peak further damped Russia’s growth outlook. The country derives more than half its budget revenue from energy.
“The ruble is getting hammered, with the largest catalyst for change being oil prices,” Constantin Gurdgiev, finance lecturer at Trinity College Dublin, wrote on his website today. “We are starting to see some serious concerns in both the central bank and the Kremlin that more devaluations will be translating into serious pain on the ground for ordinary consumers.”
‘Burn Up’ Reserves?
Putin said yesterday that Russia won’t deplete all its reserves defending the ruble.
“Bank of Russia, on the one hand, will pursue balanced financial policies,” Putin told reporters on a trip to Milan. “That means that it will use elements of a floating exchange rate and won’t mindlessly burn up all its reserves. But there’s enough reserves to adjust the level of the national currency.”
Moody’s expects Russia to fall into a recession in 2015 for the second time since 2009, contracting 1 percent after growing 0.5 percent this year, Lindow said. That is more bearish than the International Monetary Fund, which predicts a growth rate of 0.5 percent next year.
“This is the price Russia’s economy and credit rating are paying for the Ukrainian crisis,” Nicholas Spiro, managing director at London-based Spiro Sovereign Strategy, said by phone today.
Putin this week met Ukraine President Petro Poroshenko for their first bilateral negotiations at the Asia-Europe summit in Milan. German Chancellor Angela Merkel signaled before the last round of talks that while Russia had demonstrated some openness, the gap with Western leaders was still too wide to move toward reconciliation.
Almost half the time, government bond yields fall when a rating action 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 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.
The Moody’s cut “will produce a short-term shock effect on the market,” Andrey Shenk, an analyst at Alfa Capital in Moscow, said by phone. “The situation in the market will depend on how the government will tackle the depreciation of the ruble, declining oil prices and the uncertainty around Ukraine.”