Russia’s Sovereign Rating Downgraded To Junk By Ratings Agency Fitch, And Moody’s
Rating agencies Fitch and Moody downgraded Russia’s sovereign ratings to “junk” status, downgrading it by six notches, citing Western sanctions that have put the country’s capacity to service debt in question and weakening the economy.
Sanctions imposed on Russia due to its invasion of Ukraine, the worst attack on a European country since World War II, have plunged its financial systems into chaos.
The invasion has resulted in a cascade of credit rating changes and severe predictions about the economic consequences on Russia. Last Friday, S&P downgraded Russia’s credit rating to junk.
It also caused index producers FTSE Russell and MSCI to declare on Wednesday that Russian shares will be removed from all of their indexes, with a top MSCI official calling Russia’s stock market “uninvestable” earlier this week.
According to FTSE Russell, the decision will take effect on March 7, while MSCI stated it would be implemented in one step across all MSCI indices as of March 9 close. MSCI recently announced that the MSCI Russia Indexes would be reclassified from developing to standalone markets.
Russia has a 3.24% weighting in MSCI’s emerging market benchmark and a 30 basis point weighting in the index provider’s global benchmark.
According to the Institute of International Finance, this year’s economic growth is expected to be in the double digits.
Russia’s ratings were lowered to “B” from “BBB” by Fitch, and the country’s ratings were placed on “rating watch negative.” Moody’s, which had hinted at a downgrade last week, also lowered the country’s rating by six notches, to B3 from Baa3.
The only other time a single sovereign body was downgraded by six notches, according to Fitch, 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.
According to Fitch, US and EU sanctions forbidding any transactions with Russia’s Central Bank would have a “much larger impact on Russia’s credit fundamentals than any previous sanctions,” leaving much of Russia’s overseas reserves useless for foreign exchange intervention.
“The sanctions could also weigh on Russia’s willingness to repay debt,” Fitch warned. “President Putin’s response to putting 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 said it anticipates more severe sanctions on Russia to happen, the rating agency said.
The extent and severity of the sanctions “have gone beyond Moody’s initial expectations and will have material credit implications, ” Moody’s said on Thursday.
According to Fitch, the sanctions imposed by Western countries would significantly reduce Russia’s GDP growth potential, which was previously estimated at 1.6%.
“In this case, the sanctions-driven frozen/falling assets tail-wagged the rating 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.”
Analysts at JPMorgan and others warned Wednesday that sanctions on Russia had increased the likelihood of the country defaulting on its dollar and other foreign market government debt.
Russia has taken several steps to strengthen its economic defenses and fight against Western limitations in response to the sanctions. It raised its primary lending rate to 20%, prohibited Russian brokers from selling foreigners’ equities, urged exporting enterprises to support the rouble and stated that foreign investors would not be allowed to sell assets.
To offset sanctions, the government plans to use its National Wealth Fund (NWF), a rainy-day fund.