S&P Rating Change No Surprise to Many

Russia's sovereign credit rating was cut by Standard & Poor's for the first time in 10 years — but few seemed to care.

"We had a meeting yesterday morning, and somebody walked in and said, 'Standard & Poor's downgraded Russia.' We all said, 'That's nice,' and went back to our conversation," said Ronald Smith, chief strategist at Alfa Bank.

S&P's on Monday dropped Russia's foreign-currency debt to its second-lowest investment-grade rating, BBB, but the move had little negative effect on Russian markets on Monday and Tuesday.

"It was completely expected, so the market sanguinely reacted," said Smith.

The MICEX Index closed up nearly 10 percent following the announcement on Monday and partially pared those gains Tuesday, closing down 1.7 percent at 607.80.

The dollar-denominated benchmark 30-year government bond increased for a second day Tuesday, pushing its yield down slightly to 11.3 percent.

Most analysts agree that the rating downgrade was already priced in to the valuation of the government paper.

"One large downgrade was quite predictable and already more than reflected in market prices," said Marina Vlasenko, senior CIS credit analyst for Commerzbank.

The market's cool reaction to the negative rating might also be a result of lower confidence in rating agencies.

"The market is becoming less and less rating-sensitive. Ratings concerning Russian issuers are clearly lagging behind analyst estimates. We comment on the risk well before the ratings come out, which is quite strange," Vlasenko said.

The U.S. Congress has launched an investigation into several prominent credit agencies, including S&P's, citing possible conflicts of interest and other misdeeds after several agencies gave top ratings to mortgage-backed securities that later deteriorated.

Trust in rating agencies declined sharply after Lehman Brothers' marks remained high a day before the American firm went bankrupt, Vlasenko said.

Monday's credit-rating cut reflects concerns over low oil prices, the steep decrease in Russia's foreign-currency reserves and the giant bailout packages the country has put together for its banking system and private sector, analysts say.

The country's reserves, the third-largest in the world, have fallen from $598 billion in August to $456 billion this month, with $30 billion sold in November alone to support the ruble.

"If reserves continue to fall at the pace we have seen recently, and if the oil price continues to put the government under such a great amount of pressure, you can expect even further downgrades," said Alexander Zakharov, head of equities at IFC Metropol.

"Both the Russian stock and the bond market are priced in at the most negative scenarios. Russian bond prices do not reflect the current situation but a potential future situation of it getting much worse," Zakharov said.

"People have already priced in bankruptcies. But oil prices are key, and prices around $40 a barrel mean that the budget is not going to be fulfilled."