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More Losses Loom for Russian Bonds

More Losses Loom for Russian BondsMore Losses Loom for Russian Bonds

Russia’s credit rating looks set to tumble into junk for the first time in more than a decade, a move that would exclude its bonds from a couple of high-profile indexes and may set off another wave of capital outflows.

The Fitch agency cut its rating on Russia to ‘BBB minus’ from ‘BBB’ on Friday, citing a significant deterioration in the country’s economic outlook due to the slump in oil prices and falling value of the ruble, Reuters reported.

That is still investment grade, the category that implies low default risk, but only one notch away from so-called junk, the grade Russia rose out of in 2004.

Bigger rival Standard & Poor’s has Russia already at ‘BBB minus’, with a negative outlook, meaning the next move will likely push it into junk. It says it will review the rating in mid-January and again in April.

“A downgrade to junk for Russia...is a foregone conclusion,” said Hung Tran, executive managing director at global industry body, the Institute of International Finance.

A fall to junk will deal a blow both to Russia’s already-battered economic prospects and to its image as a global power. Peers in the BRICS group of big world economies – China, India, Brazil and South Africa – are all rated investment grade.

Markets are already pricing Russia as junk, according to bond yields and debt insurance costs. While that should cap capital outflows from the move itself, knee-jerk losses are still likely.

Many conservative funds are barred from buying sub-investment grade securities, so loss of this coveted rating can trigger selling of existing securities and raises future borrowing costs for a country and its companies.

 Sanctions Working

Western sanctions imposed over Moscow’s role in the Ukraine crisis and oil’s price collapse are tipping Russia’s economy into recession, while central bank reserves have fallen by more than $100 billion – unlike during the 2008 crisis, reserve volumes fall short of total debt. “We expect Russia to fall from the investment grade category by March or early April,” Societe Generale strategist Regis Chatellier said, predicting some forced selling of Russian debt.

Russian officials were unavailable for comment due to the country’s extended New Year break but Finance Minister Anton Siluanov said late last month the dangers were “exaggerated”. “We are working (with rating agencies) and explaining the economic situation,” he told reporters. “It seems to me that foreign understanding doesn’t always correspond to what is actually the case.”

An oil price bounce or a lifting of sanctions could bring respite. But Moody’s said on Dec. 22 it expected “limited upward pressure on ratings”, while predicting downward moves if oil prices stayed at “current levels”.

Since then, crude futures have tumbled another $10 a barrel.

Financialtribune.com