S&P downgrades Russia ratings deeper into 'junk' for second time in a week

Agency said latest cut was a result of G7 government restrictions imposed on the country in response to its military offensive in Ukraine

Light trails from heavy traffic on Tverskaya Street by the State Historical Museum in Moscow. The Bank of Russia doubled interest rates to try and shield the nation’s $1.5 trillion economy from sweeping sanctions that hit key banks and pushed the rouble to a record low. Bloomberg

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S&P Global Ratings downgraded Russia's ratings deeper into "junk" territory for the second time in a week as the country comes under mounting pressure from a wide range of sanctions and other measures that are targeting its economy and raising the risk of a default.

The country's ratings were cut eight notches to CCC- on Thursday after S&P had downgraded it to BB+ last Friday, the agency said. The sovereign ratings remain on negative watch, which means a further downgrade is possible and S&P said it could lower them again in the next few weeks.

On Thursday Fitch and Moody's Investors Service downgraded Russia's sovereign credit rating six notches to "junk" or non-investment grade status due to a wave of US and EU sanctions. The downgrade in ratings signals a country is undergoing financial instability or may not have adequate cash reserves relative to its needs and financial obligations, which makes it speculative and considered a high credit risk. That will make it difficult for Russia and Russian companies to raise funding globally.

S&P said its latest downgrade was a result of new G7 government restrictions imposed on Russia in response to its military offensive in Ukraine that target its economy and Moscow's response to them.

Sanctions and other measures led to the Russian rouble plunging more than 28 per cent against the US dollar, a record low against the greenback, which prompted a run on the banks in the country. The Bank of Russia doubled interest rates and imposed capital controls to try and shield the country's $1.5 trillion economy from the economic fallout. Punitive measures also led to the Moscow stock exchange tanking last week with the central bank suspending trading at the exchange for the past five days.

S&P said it believes the confluences of measures "will likely substantially increase the risk of default".

"We estimate that international sanctions have reduced Russia's available foreign exchange reserves by as much as one half, including foreign currency deposits and securities domiciled in the US, the EU, and Japan," the rating agency said.

"This has substantially weakened Russia's external liquidity during a period of rising foreign currency demand. The sanctions also imposed restrictions that deny or significantly diminish access of the Russian banking system to the global financial system, markets, and infrastructure."

Capital control measures that ban cross-border financial flows, debt service payments of both the private sector and the government "will very likely restrict the ability of nonresident domestic and foreign currency bondholders to receive interest and/or principal payments on time", S&P said.

Key Russian banks have 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.

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 military offensive in Ukraine is also impacting Russia's energy industry. The country produces about 10 million barrels of oil a day and European countries rely on Russia also for gas.

"A a week into the war, two thirds of Russian oil is struggling to find buyers. Some businesses don’t want to do business with Russia as the reputational risk ... became too high, and some simply try to cut exposure to the Russian oil as early as possible and to find alternative suppliers in fear and in preparation of future sanctions on Russian oil," said Ipek Ozkardeskaya, a senior analyst at Swissquote.

A wave of US and European companies have exited Russia, are ceasing operations or refraining from investing further in their existing operations in the country.

ExxonMobil is ceasing operations in Russia and refrain from making new investments in the country. It will discontinue operations and take measures to exit the business, valued at more than $4 billion, according to its last annual report.

French energy giant TotalEnergies said it supports EU sanctions against Russia in response to its military offensive in Ukraine "regardless of the consequences [currently being assessed] on its activities in Russia," but the company stopped short of saying it would divest or pull out of the country. It holds a 19.4 per cent interest in Novatek, as well as other oil and gas projects in Russia, according to its website.

TotalEnergies said it will no longer provide capital for new projects in Russia and "condemns" Russia's military offensive in Ukraine.

Austria’s OMV also said it terminated a sale agreement with Gazprom for a 24.98 per cent stake in the development in the Urengoy gas and condensate field, and says it will review involvement in Nord Stream 2 Pipeline.

Rival BP agreed to unload its Rosneft 20 per cent stake and Shell said it will end its alliance with Gazprom as well. Italian oil company Eni said it plans to sell its stake in the Blue Stream pipeline carrying Russian gas to Turkey that it co-owns with Russia's Gazprom, according to Reuters. British Gas owner Centrica said it will exit gas supply agreements with its Russian counterparts, including Gazprom, due to the Ukraine crisis.

Updated: March 06, 2022, 8:12 AM
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