Fitch and Moody's downgrade Russia to 'junk' as sanctions bite economy

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Fitch and Moody's Investors Service downgraded Russia's sovereign credit rating to "junk" status due to a wave of US and EU sanctions that have been imposed on the country in response to its military offensive in Ukraine.

Moody's cut Russia's long-term issuer and senior unsecured debt ratings six notches to non-investment grade B3 from Baa3 and they remain on review for further downgrade. A B3 rating is given to entities that are undergoing financial instability or may not have adequate cash reserves relative to their business needs and financial obligations, which makes them speculative and considered high credit risk.

Fitch Ratings downgraded Russia's long-term foreign currency default rating to B from BBB. It also placed the country's ratings on a "rating watch negative". On Friday, S&P Global Ratings also lowered Russia’s credit rating to junk, downgrading it to BB+, below investment grade, from BBB-.

While the EU has barred Russia from accessing its capital markets, the cut in ratings will also make it difficult for Russia and Russian companies to raise funding globally.

The downgrade of Russia's ratings is driven by "heightened risk of disruption to sovereign debt repayment given the severe and coordinated sanctions and significant concerns around Russia's willingness to service its obligations," Moody's said.

The rating agency also said the cut is also a result of the "likelihood of a sustained disruption to the economy and financial sector from the sanctions that limit access to Russia's international reserves intended to buffer Russia from adverse shocks. The scope and severity of the sanctions announced to date have gone beyond Moody's initial expectations and will have material credit implications".

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From Apple to BP: major western companies exit Russia amid Ukraine crisis

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Russia’s economy has taken a hit after the US and its allies took punitive actions against Moscow following its decision to undertake a military operation in Ukraine. Russian companies and oligarchs in President Vladimir Putin's inner circle face having their assets frozen, while European countries have closed their airspace to Russia's private and commercial aircraft.

Some Russian banks have also been barred from the Swift global financial network, while the US Treasury prohibited Americans from engaging in transactions with the Bank of Russia, the Russian Direct Investment Fund and the country's Ministry of Finance.

Russia’s central bank imposed capital controls on Monday and more than doubled interest rates to 20 per cent, their highest in nearly two decades, to support the currency. The Bank of Russia also restricted the transfer of coupon payments to foreign holders of rouble bonds and kept the Moscow stock exchange closed for a fourth day.

"Severe and coordinated sanctions imposed on Russia together with its retaliatory response in recent days have materially impaired its ability to execute cross-border transactions, including for sovereign debt payments," Moody's said.

"Russia's prohibition on transfers of foreign currency outside of the country in response to the sanctions, which appears at this stage not to apply to repayments of legacy debt, undermines Russia's track record of willingness to service its debt and leaves debt servicing flows highly vulnerable to further intervention."

Customers rushed to Russian Sberbank in the centre of Zagreb in an attempt to retrieve their money following Russia's military offensive in Ukraine. AFP

On Wednesday, Russian lender Sberbank said it is exiting European markets as a result of big cash outflows and threats to its staff and property. On Wednesday, the European Union said it will also ban seven major Russian banks out of the Swift messaging system that facilitates global financial transactions effective March 12.

On Thursday, the London Stock Exchange suspended trading of 28 securities linked to Russia. Global index providers MSCI and FTSE Russell are also excluding Russian equities from their indexes tracked by investors with trillions of dollars of assets under management, stemming the flow of investments into Russia from a large segment of the investment-fund industry.

The majority of market participants deem Russia’s equity market “uninvestable” and its securities will be removed from emerging markets indexes effective March 9, MSCI said. FTSE Russell will be removing Russia equities from its index at a zero value on March 7.

The Russian rouble tanked as much as 28 per cent, falling to a record low of 118 against the US dollar at the start of trading on Monday, well above its 75 mark. The currency's freefall appeared to come to a halt on Tuesday but it fell again on Wednesday to 107.50 against the greenback. On Thursday it was 97.9 to the dollar at 7.11am UAE time.

The imposition of severe and co-ordinated sanctions led to "a significant confidence shock, which will likely result in a prolonged disruption to the economy and financial sector," Moody's said.

"A sustained depreciation of the rouble will have severe economic consequence in the form of higher inflation, a marked deceleration of economic activity and lower living standards. Significant deposits withdrawals that reduce liquidity in the banking system would add to the risks to financial stability and could require the government to step in to support the banking sector."

The review period for a potential further downgrade will allow Moody's to assess the extent of disruptions to forthcoming sovereign debt repayments, the agency said. It will continue to monitor further indications around Russia's willingness to pay, including the possibility of a further tightening of restrictions on foreign-currency transactions.

Russia has eurobond coupon payments of $117 million due on March 16, which if it fails to make or is delayed in paying, may lead to further changes to its ratings.

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

How to keep control of your emotions

If your investment decisions are being dictated by emotions such as fear, greed, hope, frustration and boredom, it is time for a rethink, Chris Beauchamp, chief market analyst at online trading platform IG, says.

Greed

Greedy investors trade beyond their means, open more positions than usual or hold on to positions too long to chase an even greater gain. “All too often, they incur a heavy loss and may even wipe out the profit already made.

Tip: Ignore the short-term hype, noise and froth and invest for the long-term plan, based on sound fundamentals.

Fear

The risk of making a loss can cloud decision-making. “This can cause you to close out a position too early, or miss out on a profit by being too afraid to open a trade,” he says.

Tip: Start with a plan, and stick to it. For added security, consider placing stops to reduce any losses and limits to lock in profits.

Hope

While all traders need hope to start trading, excessive optimism can backfire. Too many traders hold on to a losing trade because they believe that it will reverse its trend and become profitable.

Tip: Set realistic goals. Be happy with what you have earned, rather than frustrated by what you could have earned.

Frustration

Traders can get annoyed when the markets have behaved in unexpected ways and generates losses or fails to deliver anticipated gains.

Tip: Accept in advance that asset price movements are completely unpredictable and you will suffer losses at some point. These can be managed, say, by attaching stops and limits to your trades.

Boredom

Too many investors buy and sell because they want something to do. They are trading as entertainment, rather than in the hope of making money. As well as making bad decisions, the extra dealing charges eat into returns.

Tip: Open an online demo account and get your thrills without risking real money.

Sole survivors

Cecelia Crocker was on board Northwest Airlines Flight 255 in 1987 when it crashed in Detroit, killing 154 people, including her parents and brother. The plane had hit a light pole on take off
George Lamson Jr, from Minnesota, was on a Galaxy Airlines flight that crashed in Reno in 1985, killing 68 people. His entire seat was launched out of the plane
Bahia Bakari, then 12, survived when a Yemenia Airways flight crashed near the Comoros in 2009, killing 152. She was found clinging to wreckage after floating in the ocean for 13 hours.
Jim Polehinke was the co-pilot and sole survivor of a 2006 Comair flight that crashed in Lexington, Kentucky, killing 49.

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Fitch and Moody's downgrade Russia to 'junk' as sanctions bite economy

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