10 January 2015

Russia cut to one step above junk!

Bloomberg Businessweek: 10. January 2015
By Agnes Lovasz and Ott Ummelas

Russia’s credit rating was cut to the lowest investment grade by Fitch Ratings after plummeting oil prices and the conflict over Ukraine triggered the worst currency crisis since the country’s 1998 default.
Fitch, which last downgraded Russia in 2009, cut the sovereign one step to BBB-, according to a statement issued Friday in New York. The grade, on par with India and Turkey, has a negative outlook.
“The economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the ruble, coupled with a steep rise in interest rates,” Fitch said in the statement. “Plunging oil prices have exposed the close link between growth and oil.”

The world’s biggest energy exporter is on the brink of a recession after crude fell more than 50 percent since June and the U.S. and its allies imposed sanctions following President Vladimir Putin’s annexation of Crimea from Ukraine in March. The penalties have locked Russian corporate borrowers out of international debt markets and curbed investor appetite for the ruble, stocks and bonds.

The downgrade by Fitch puts it in line with the nation’s assessment by Standard & Poor’s, which cut Russia to BBB- in April. Authorities have responded to the currency crisis with emergency moves that included the biggest interest-rate increase since 1998, a 1 trillion-ruble ($17 billion) bank recapitalization plan and measures to force exporters to convert more of their foreign revenue into rubles.

Ruble plunge

“This decision is showing Russia is now caught in a vicious cycle in which the plunge in oil prices, the much harsher sanctions regime, the uncertainty about the entire policy regime and the depth of the recession are all feeding on each other,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said in a telephone interview from London. “It will be very difficult to escape being junked.”
The Bank of Russia has raised its key rate six times since March and spent $88 billion in interventions last year to support the ruble, the world’s second-worst performing currency in 2014 after Ukraine’s hryvnia.

Net capital outflow will probably amount to $134 billion in 2014, more than double the total from a year before, the central bank estimated. The economy may contract as much as 4.7 percent in 2015, the most since 2009, if oil averages $60 a barrel in its “stress scenario,” according to the central bank.

S&P warning

“A one-notch cut is unlikely to have serious implications as markets already price Russia as a below-investment-grade credit,” Vladas Zaborovskis, who helps manage assets including Russian debt at SEB’s Eastern European Bond Fund, said by e-mail from Tallinn before the announcement. “Changes in the oil price, geopolitical developments and the response by Russian authorities to the situation in the currency market and the banking system will drive Russia spreads.”

S&P warned last month there’s at least a 50 percent chance that Russia may lose its investment grade for the first time in a decade as it put the country on negative credit watch. The rating company said it expects to conclude its review by mid-January.
“What will be a really big deal is when Russia gets cut to junk,” Win Thin, the global head of emerging-market strategy at Brown Brothers Harriman & Co. in New York, said Friday. “I expect S&P to cut Russia to junk within the next three months.”

Investors often disregard ratings companies’ credit grade and outlook changes. Finland’s 10-year yield declined to 1.41 percent at an auction on Oct. 21 from 2.29 percent in the previous auction in January 2013 even as S&P stripped the northernmost euro member of its top AAA-rating on Oct. 10.

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