Fitch Cuts Russia's Sovereign Debt Rating

Fitch downgraded Russia's sovereign rating on Wednesday, prompting scorn from Russian investors over whether international agencies could offer credible ratings in view of their apparent miscalculations before the global crisis.

Fitch lowered Russia's foreign and local currency ratings by a notch to BBB -- two rankings above junk -- over concerns about dwindling foreign exchange reserves, falling oil prices and corporate debt refinancing.

It was the first time that Fitch has cut the country's rating since 1998, when Russia devalued the ruble and defaulted on its domestic debt. Standard & Poor's downgraded Russia in December.

"The scale of capital outflows and the pace of decline in Russia's foreign exchange reserves have materially weakened the sovereign balance sheet," said Edward Parker, head of Fitch's department for emerging markets in Europe.

Reserves have shrunk by more than a third to $386.5 billion since August as the Central Bank has defended the ruble amid lessening oil export revenues.

Fitch said its outlook for Russia was negative. "The recession, anti-crisis measures and lower oil prices will cause the budget to swing into deficit this year," it said in a statement.

Russian investors questioned whether the downgrade was warranted, noting that some foreign companies that received high marks a year ago were now bankrupt or struggling to survive.

"Now that we know the agencies gave A's to companies that later went bankrupt, their estimations look less credible than before the crisis," Troika Dialog chairman Ruben Vardanyan said at a conference organized by his investment bank.

He suggested that the United States, where the financial crisis had its roots, deserved a ratings cut more than Russia. "The real question is why the United States' rating hasn't been downgraded," he said.

Alrosa president Sergei Vybornov also scoffed at the downgrade. "The rating agencies used to stick AAA's on real junk," he said on the sidelines of the Troika conference.

"The ratings agencies don't seem to understand the responsibility they take in putting labels on companies and states," he added. "They could actually be sued for that."

There has been a precedent of a Russian company suing a ratings agency. Russian Standard Bank filed a multimillion-dollar lawsuit against RusRating, an independent ratings agency, over a comment made by one of its analysts in 2007 about a downgrade of the bank. A court ruled in favor of Russian Standard, ordering RusRating to pay a symbolic $800 in damages, but then threw out the case on appeal.

Finance Minister Alexei Kudrin, asked about the Fitch downgrade at a conference in London, said, "We're facing some very difficult challenges, so certainly the forecast for Russia at the moment is worse now than at the end of 2008," Reuters reported.

"The conditions of the crisis ... will affect the rating, but we will carry on as normal," Kudrin said.

He said Russia's economic growth this year would still outpace that of developed countries, including Britain.