One more downgrade, and Russia’s government bond rating will be junk. The trend is moving rapidly in that direction, as Moody’s lowered its rating one slot to Baa3. The credit agent’s analysts also noted it was on “further review for future downgrade.”
Source: Wikimedia Commons
Sanctions against Russia, based on its military action in Ukraine, and the remarkable drop in oil prices will push Russian into recession, if it is not already there. Open to debate is how deep the recession will be: a modest but painful 2% or one as extreme as 5% or more. Given Russia’s reliance on oil, if crude remains below $50 for long, a deeper recession is certain.
Moody’s commented the primary reasons for the change:
1) Moody’s expectation that the substantial oil price and exchange rate shock will further undermine the country’s already subdued growth prospects over the medium term; and
2) Moody’s nearer-term concerns over the negative impact on the government’s financial strength of the erosion in official foreign exchange buffers and fiscal revenues.
The effects of the rating change, and the situation that triggered it, will put more pressure on the Putin government to rethink its Ukraine policy in the hopes that sanctions can be lifted quickly. Without mentioning this situation directly, Moody’s researchers expressed worry about Russia’s current direction in its comments about what could make its rating worse:
The government’s ability to sustain its financial strength, which is the main factor supporting the country’s investment grade rating, rests on a large number of assumptions regarding, for example: oil prices and the exchange rate; the longevity of sanctions; capital flows; the effect of import compression on the current account balance; the impact of recession and inflation on the government’s fiscal position; and the policy response to domestic or external financial pressures. Small changes in assumptions could imply a more severe decline of reserves and a more rapid accumulation of debt by the government.
The “longevity of sanctions” is something the government can control.
ALSO READ: 5 Things That Could Save Russia From Recession in 2015
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