Fitch and Moody’s reduced Russia’s sovereign ratings to “junk” level, a six-notch fall, citing Western sanctions that have questioned the country’s ability to service debt and weakened the economy.
Russia’s financial institutions have been thrown into disorder as a result of sanctions implemented in response to its invasion of Ukraine, the deadliest attack on a European country since World War II.
The invasion has triggered a chain reaction of credit rating downgrades and dire forecasts for Russia’s economic future. S&P lowered Russia’s credit rating to junk on Friday.
It also prompted index creators FTSE Russell and MSCI to announce on Wednesday that Russian stocks will be withdrawn from all of their indexes, after a top MSCI official’s earlier this week declaration that Russia’s stock market is “uninvestable.”
According to FTSE Russell, the decision will take effect on March 7, but MSCI announced that it will be implemented in one step across all MSCI indexes as of March 9 close. The MSCI Russia Indexes were recently reclassified from emerging markets to standalone markets by MSCI.
Russia has a weighted of 3.24 percent in MSCI’s emerging market benchmark and a weighting of 30 basis points in the index provider’s global benchmark.
According to the Institute of International Finance, this year’s economic growth will be in the double digits.
Fitch downgraded Russia’s ratings to “B” from “BBB,” and the country’s ratings were placed on “rating watch negative.” Moody’s, which had hinted at a downgrade last week, slashed the country’s credit rating by six notches, from Baa3 to B3.
According to Fitch, the only previous occasion a single sovereign state was downgraded by six points was South Korea in 1997.
“The severity of international sanctions in response to Russia’s military invasion of Ukraine has heightened macro-financial stability risks, represents a huge shock to Russia’s credit fundamentals and could undermine its willingness to service government debt,” Fitch said in a report.
US and EU sanctions prohibiting any transactions with Russia’s Central Bank, according to Fitch, would have a “much larger impact on Russia’s credit fundamentals than any previous sanctions,” rendering much of Russia’s offshore reserves worthless for foreign exchange intervention.
“The sanctions could also weigh on Russia’s willingness to repay debt,” Fitch warned. “President Putin’s response to put nuclear forces on high alert appears to diminish the prospect of him changing course on Ukraine to the degree required to reverse rapidly tightening sanctions.”
Fitch expects more severe sanctions against Russia, according to the ratings agency.
The sanctions’ scope and severity “have gone beyond Moody’s initial expectations and will have substantial credit repercussions,” according to Moody’s.
The sanctions imposed by Western nations, according to Fitch, would severely lower Russia’s GDP growth potential, which was previously projected at 1.6 per cent.
“In this case, the sanctions-driven frozen/falling assets tail-wagged the ratings dog,” analysts at Mizuho wrote. They added that “ratings and benchmark risks revealed may compound further capital exodus as benchmark funds are forced to liquidate rather than hold.”
On Wednesday, analysts at JPMorgan and others cautioned that Russia’s sanctions had increased the chances of the nation defaulting on its dollar and other foreign market government debt.
Russia has taken a variety of moves in reaction to the sanctions to bolster its economic defences and combat Western restrictions. It increased its primary lending rate to 20%, barred Russian brokers from selling foreigners’ stocks, pushed exporting companies to support the rouble, and declared that foreign investors would not be permitted to sell assets.
The government intends to use the National Wealth Fund (NWF), a rainy-day fund, to help offset sanctions.
(Adapted from TheQuint.com)