By Sneha Shankar - Standard and Poor’s Financial Services, or S&P, on Friday lowered Russia's currency ratings, and hinted at the possibility of a further sovereign rating downgrade if the country's failing creditworthiness, hurt by slowing economic growth and sanctions from the Ukraine crisis, worsened further.
S&P cut Russia's short-term foreign currency sovereign ratings to 'BBB-/A-3' from 'BBB/A-2' and lowered the long-term local currency sovereign rating to 'BBB' from 'BBB+' and reaffirmed the short-term local currency sovereign rating at 'A-2'.
"The outlook on both the foreign and local currency ratings remains negative. If we perceived increased risks to Russia's creditworthiness stemming from much weaker medium-term economic growth or due to reduced monetary policy flexibility, we could lower our sovereign ratings on Russia further," a statement from the rating agency said.
The ratings actions were prompted by a sharp increase in capital outflows in the first quarter of the year amid rising political tensions, S&P said in the statement, adding that, as a result, external financing could see a steep drop. Before this, the ratings agency had downgraded the country in 2008. The ratings agency noted that the country’s outflows -- at $51 billion for the first quarter of 2014 -- almost matched the $57 billion that flowed out of the country in the five years until 2013. Russia's economy slowed down to 0.8 percent in the first quarter from 2 percent in the previous quarter.
“The decision is partially expected -- Russia is almost in recession, even without sanctions,” Dmitry Dorofeev, a money manager at BCS Financial group, said according to Bloomberg.
According to Bloomberg, the Russian currency weakened more than 8 percent against the U.S. dollar this year, and S&P expects that continued economic weakness and growing imports will deplete Russia’s current account surplus by 2015.
“Russia's political institutions remain comparatively weak and political power is highly centralized. Protesters, opposition members, nongovernmental organizations, and liberal members of the political establishment have come under increasing pressure. We do not expect the government to decisively and effectively tackle the long-standing structural obstacles to stronger economic growth over our forecast horizon (2014-2017),” the agency said, in the statement.
The annexation of Crimea by Moscow started a sell-off in Russian assets amid sanctions imposed by the U.S. and the European Union. Since then, the unrest has spread to other parts of Ukraine, and Russia’s actions on the Ukrainian border have heightened the risk of more sanctions.
“The tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects,” the agency in the statement. "We could also lower our ratings on Russia if tighter sanctions were to result in additional weakening of Russia's net external position."