World Economy

Fitch Downgrades Russia Rating by 1 Notch

Fitch Downgrades  Russia Rating by 1 NotchFitch Downgrades  Russia Rating by 1 Notch

The international rating agency Fitch has downgraded Russia’s long-term rating from BBB to BBB-, the lowest possible investment grade, and added a negative outlook to the rating.

A press release from the agency was distributed the Friday. The short-term foreign currency IDR has been affirmed at F3, and the country’s ceiling has been lowered to BBB- from BBB, Itar Tass reported.

Fitch experts associated the decline of Russia’s position with the rapid deterioration of the economic outlook compared to the middle of last year, which is caused by sharp falls in the oil price, the depreciation of the national currency and an increase in interest rates.

“Western sanctions first imposed in March 2014 continue to weigh on the economy by blocking Russian banks’ and corporations’ access to external capital markets,” TASS cited Fitch’s press release. According to the ratings agency, in 2015 Russia’s GDP will decrease by 4% compared with our previous forecast of minus 1.5%. Inflation next year is projected at 8.5%. It is expected that the economy will return to growth no earlier than 2017.

Russia’s international reserves have shrunk faster than Fitch expected, and now are continuing to shrink.

  Decline in Reserves

The accelerated transition to a floating exchange rate haltex the decline in reserves, but at the end of 2014 they were already less than $390 billion, which is more than $120 billion less than at the end of 2013, and worse than our previous forecasts,” Fitch said. “The depreciation of the ruble, the volatility of the stock market and the sharp rise in interest rates from 10% to 17% have dealt a serious blow to the banking sector,” reported Fitch.

 But the leaders of Russia, Fitch experts say, have taken all the necessary measures to strengthen the domestic economy. The agency Standard & Poor’s has left Russia’s sovereign rating at ‘BBB-’ with a negative outlook. The country’s rating by Moody’s of ‘Baa2’ was also with a negative outlook.

The Russian authorities have reacted to this rating with disbelief: an expert from the government regarded the rating as “politically engaged and economically totally unmotivated,” Tass said.

 Oil to Recover

Fitch has predicted that prices will recover to around $70 a barrel this year, a view shared by Igor Sechin, the chairman of Rosneft, which has been hit so hard by the oil price collapse that it has been forced to has request $46b in state aid to help meet repayments and cover investment, Business Insider reported.

However, if oil stays significantly below $70 a barrel, “it could precipitate a deeper recession and put further strain on public finances, severely limiting the authorities’ room for maneuver”.

“If oil drops to $45 or lower and stays there, Russia is going to face a big problem,” said Mikhail Liluashvili, from Oxford Economics. “The central bank will try to smooth volatility but they will have to let the ruble fall and this could push inflation to 20 percent.”

The ruble, which has slumped around 20 percent since Christmas and was trading at 63 against the dollar on Friday, is in lockstep with Brent crude. Fitch cited the collapsing currency as one of the reasons Russia’s banking sector has suffered a major shock, the others being “intense market volatility” and the central bank’s decision to hike interest rates from 10 percent to 17 percent.

That shock move – Bank of Russia’s sixth increase in 2014 – took rates to heights not seen since the country’s default in 1998, and “is aimed at limiting substantially increased ruble depreciation risks and inflation risks”, the bank said.