NEW YORK (REUTERS) - Fitch and Moody’s have downgraded Russia’s sovereign credit rating by six notches to “junk” status, saying Western sanctions threw into doubt Russia’s ability to service its debt and would weaken its economy.
Russia’s financial markets have been thrown into turmoil by sanctions imposed over Russia’s invasion of Ukraine, the biggest attack on a European state since World War II.
The invasion has triggered a flurry of credit rating moves and dire warnings about the impact on Russia’s economy. S&P lowered Russia’s rating to junk status last week.
It also prompted index providers FTSE Russell and MSCI to announce on Wednesday that they will remove Russian equities from all their indexes, after a top MSCI executive earlier this week called Russia’s stock market “uninvestable”.
Russia’s economy could contract by double digits this year, the Institute of International Finance has predicted.
Fitch downgraded Russia to B from BBB and placed the country’s ratings on “rating watch negative”, which means more downgrades are possible. Moody’s, which last week had flagged the possibility of a downgrade, also cut the country’s rating by six notches, to B3 from Baa3.
“The severity of international sanctions in response to Russia’s military invasion of Ukraine has heightened macro-financial stability risks, represents a huge shock to Russia’s credit fundamentals and could undermine its willingness to service government debt,” Fitch said in a report.
Fitch said that US and EU sanctions prohibiting any transactions with the Central Bank of Russia would have a “much larger impact on Russia’s credit fundamentals than any previous sanctions”, rendering much of Russia’s international reserves unusable for forex intervention.
“The sanctions could also weigh on Russia’s willingness to repay debt,” Fitch warned. “President (Vladimir) Putin’s response to put nuclear forces on high alert appears to diminish the prospect of him changing course on Ukraine to the degree required to reverse rapidly tightening sanctions.”
Fitch said it expects further ratcheting up of sanctions on Russian banks. Moody’s said the scope and severity of the sanctions “have gone beyond Moody’s initial expectations and will have material credit implications”.
The sanctions imposed by Western countries will also markedly weaken Russia’s economic growth potential relative to the ratings agency’s previous assessment of 1.6 per cent, Fitch said.
Sanctions imposed on Russia have significantly increased the chance of the country defaulting on its US dollar and other international market government debt, analysts at JPMorgan and elsewhere said on Wednesday.
Russia has responded to the sanctions with a range of measures to shore up its economic defences and retaliate against Western restrictions. It hiked its main lending rate to 20 per cent, banned Russian brokers from selling securities held by foreigners, ordered exporting companies to buttress the rouble and said it would stop foreign investors from selling Russian assets.
The government also plans to tap its National Wealth Fund, a rainy day cushion, to help counter sanctions.