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. Last Updated: 07/27/2016

S&P Downgrades Outlook for Russia

Standard & Poor's lowered its outlook for Russia to negative on Thursday, warning of the costs of bailing out troubled banks, hours after data showed that Moscow spent another big chunk of its reserves defending the ruble.

Gold and foreign exchange reserves fell by $15 billion in the latest week to $515.7 billion on Oct. 17, raising further doubts about the sustainability of its currency policy as the cost of insuring Russia's sovereign debt soared.

"The outlook revision reflects the likelihood of a downgrade if costs to the Russian government of the bank rescue operations continue to increase," S&P credit analyst Frank Gill said.

Rating agencies see Russia's reserves as a key factor behind its investment-grade debt rating.

Russia has pledged a total of $210 billion to support the economy, including more than $70 billion from reserves. State-run lenders will receive $35 billion in subordinated loans to support the banking system.

"It is difficult at present to determine the ultimate impact on the public sector balance sheet of the banking system bailout, not least due to the uncertain outlook on asset quality," Gill said.

As reserves dwindle, the cost of insuring sovereign Russian debt against restructuring or default hit record highs, with the debt now classified as distressed.

Russia's portion of the EMBI+ soared 135 points to 769 over U.S. Treasuries.

Reserves are set to fall further when the government transfers the money for the rescue package. The Central Bank said it was not seeking nationalization of the banking sector but that it wanted to encourage consolidation.

The country's reserves, which became the world's third-largest during the period of high oil prices, have fallen from their peak of $597.5 billion on Aug. 8, when Russia sent tanks into Georgia.

Since then, the Central Bank has been intervening in the currency market to support the ruble amid capital outflows, which are expected to continue to reach $20 billion in net terms in 2008.

"[The latest fall in reserves] is due mostly to interventions, which is not surprising. There is an attack on the ruble under way," said Nikolai Kashcheyev, analyst at MDM Bank.

Russia runs a managed float of the ruble, and officials have pledged to support the currency as long as it is needed. Amid falling prices for oil, however, analysts question the sustainability of this policy.

The Central Bank continued intervening on Thursday, fighting to slow the ruble's slide as it breached 27 against the dollar to hit its lowest level since July 2006.

Falling Russian shares also put pressure on the ruble as an emerging markets sell-off engulfed Russian equity markets.

Investors dumped Russian paper, driving the value of shares in Sberbank down nearly 10 percent before the MICEX exchange suspended them.

The benchmark RTS Index closed down 4.4 percent at 636.5 points, and the MICEX Index lost 4.7 percent to finish at 598.9.

The Central Bank decided Thursday to further cut the limit on currency-swap operations, used by speculators to bet on the currency's depreciation, setting Thursday's limit at 15 billion rubles.

The Central Bank calculated that with the average price of oil at $66 per barrel in 2009 the reserves will fall while the current account will run a deficit.

"[The outlook change] is a simple acknowledgement that Russia's economy heavily depends on oil. Everyone knows about these risks, but today they simply came in the spotlight because of the oil price decline," said Natalya Orlova, chief economist at Alfa Bank.

n The Central Bank said Thursday that it had raised its main deposit rates by 0.5 percentage points from Friday to fight against capital outflows.

The regulator said in a statement that it had raised one-day deposit rates to 4.75 percent from the previous 4.25 percent and one-week deposit rates to 5.25 percent from the previous 4.75 percent.