Moody’s cut Russia’s credit rating to one step above junk level Friday and warned the country was under review for a further downgrade.
Moody’s said that the plunge in oil prices and in the ruble would further erode Russia’s economic growth potential and that it had concerns about the government’s financial strength.
The grade was cut by one notch to Baa3 from Baa2. Baa3 is the lowest level for “investment grade” sovereign bonds; another cut would take it into “speculative” or junk bond grade.
“The severe — and likely to be sustained — oil price shock, alongside Russian borrowers’ highly restricted international market access due to ongoing sanctions, is undermining economic fundamentals and increasing financial stresses on both the public and private sectors,” Moody’s said.
It forecast the Russian economy would contract this year by 5.5 percent and another 3.0 percent in 2016, “bringing real growth over the 10 years through 2018 to virtually zero.”
It also cited “nearer-term concerns over the negative impact on the government’s financial strength of the erosion in official foreign exchange buffers and fiscal revenues.”
“Russia’s nominal FX reserves could fall by at least as much this year as they did in 2014, when they declined by around $125 billion,” it noted.
“Added to that,” Moody’s said, “the risk of politically motivated actions which either directly or indirectly raise risks to creditors is rising in the context of current geopolitical tensions.”
The agency said it was already embarking on another review which could lead to another rating cut.
It explained that the government’s ability to remain financially solid rested on a large number of assumptions, each one of which could deteriorate: the oil price, the longevity of sanctions over Moscow’s support for Ukraine rebels, the impact of recession, and the policy response from the government to the challenges.
If oil prices stay low through 2016, it said, the recession will persist for more than two years.
“The loss of investor and consumer confidence would be even more profound, leading to continued capital flight,” Moody’s said, adding that its review will weigh the options available to the central bank and the government to support the economy in those circumstances.