S&P Cuts Russia For First Time Since '98

Standard & Poor's on Monday became the first ratings agency to downgrade Russia in a decade, while data showed that the Central Bank had spent $30 billion in currency market interventions last month.

S&P said it was keeping a negative outlook on Russia's new BBB foreign currency rating and BBB+ long-term ruble rating.

"The negative outlook reflects the likelihood of a [further] downgrade if the banking crisis and external pressures continue to impair the government's balance sheet and its still substantial arsenal of liquid assets amid a weakening of underlying economic fundamentals," it said in a statement.

S&P's Sovereign Debt rating for russia

Ruble Long-Term Debt
Foreign Currency Long-Term Debt
- Bloomberg
S&P, which has had Russia on negative outlook since Oct. 23, was the last of the three global ratings agencies to promote Russia to investment grade after Moscow got its house back in order following the 1998 financial crisis.

"It is like a notification to the Russian Finance Ministry, the Central Bank and the government that even if there is no risk of outright default by the federal government, the rating agencies are watching and that their respect for Russian economic management has fallen after recent events," said Anton Tabakh, fixed-income analyst at Troika Dialog.

A Finance Ministry official said the downgrade would limit borrowing opportunities for domestic debt issued next year but should not hurt bond prices for now.

Russia, which has not recently needed to use bonds to raise cash, stopped issues this year because of a lack of demand.

Pressured by the global financial crisis and plummeting oil prices, Russia has been spending tens of billions of dollars to support its currency, the real economy and the financial markets.

Falling oil prices mean that money may also be needed to prop up the budget.

The ratings decision "is linked to the fall in the oil price and the likely appearance of current account and trade deficits next year. The weakening of the ruble and the situation with the exchange rate could have also played a part," said Yaroslav Lissovolik, chief strategist at Deutsche Bank.

"To a certain extent, markets were already discounting the probability of such an outcome, so it is a negative for markets, but it probably won't have a big impact."

Russia's stock markets stayed near session highs after the downgrade, focusing more on the day's recovery in oil prices. Benchmark five-year credit default swaps, used as insurance against a default, were also little changed at about 787 basis points compared with about 811 on Friday, traders said.

"There is no justification for a loss of investment grade unless reserves were to fall to about $150 billion," said Chris Weafer, an analyst at UralSib.

"We still assume that the government will bite the bullet and devalue long before getting anywhere close to that. Keeping the ruble stable is a clear current priority. Preserving the country's investment grade status is simply nonnegotiable. It is by far the No. 1 priority. It has to be."