Moody's Investors Service has downgraded the ratings of 95 non-financial Russian companies after western sanctions were imposed on the country's economy in response to its military offensive in Ukraine.
The baseline credit assessments of government-related issuers have also been cut, Moody’s said on Friday.
On Thursday, the Institute of International Finance (IIF) estimated that Russia's economy will shrink 15 per cent this year as it slides into a deep recession that will be twice as severe as the 2009 recession.
“The speed and severity of sanctions imposed on Russia after its invasion of Ukraine [are] remarkable. They have led to a drastic and unprecedented tightening in financial condition,” the IIF said.
“Further escalation of the war may bring more boycotts of Russian energy, which would drastically impair Russia’s ability to import goods and services, deepening the recession. Our baseline forecast assumes continued fighting, but not a sharp escalation in the conflict.”
Moody's said its rating action on companies follows its downgrade of Russia's sovereign rating deeper into “junk”, or non-investment grade territory. The agency cut Russia's rating twice within two weeks and forecasts that the economy will contract 7 per cent in 2022.
“While liquidity alone was not the main driver for these actions, the intensifying pressures on the domestic banking system and rising risk of international banks distancing themselves from Russian issuers may threaten the reliability of previously committed liquidity lines,” Moody’s said.
“We will continue to monitor issuer-specific liquidity and issuers' own responses to this changing environment, with liquidity risk a possible driver of future rating actions.”
The rating action was also driven by Russia's March 5 presidential decree that requires non-resident investors holding foreign currency-denominated sovereign debt to be repaid in local currency.
“If such a condition were applied to corporate debt and be contrary to the terms of an indenture, this could be considered a default if it resulted in a diminished payment relative to the original promise,” the rating agency said.
On March 6, Moody’s slashed Russia’s long-term issuer and senior unsecured debt ratings to “Ca”, from “B3", with a negative outlook. The downgrade came after the February 25 slashing of the country's rating.
The decision was prompted by the Russian central bank's capital control measures put in place after sanctions were imposed on the country by the US, Europe and other countries.
Moscow's capital control measures are expected to restrict cross-border payments, including debt service on government bonds, the rating agency said at the time.
Russia’s economy has taken a massive hit after the US and its allies took punitive actions against Moscow after its military offensive in Ukraine. Russian companies and oligarchs in President Vladimir Putin's inner circle have put under sanctions and their assets frozen by western countries.
Many western companies have exited or temporarily suspended operations in Russia. Moscow is now considering nationalising the assets of foreign companies that have severed business ties.
Such a move will pile more pressure on its economy and is likely to deter future foreign investment.
The US and UK have banned the import of Russian crude while Europe, which imports more than 40 per cent of its natural gas and 30 per cent of its oil from Russia, has pledged to reduce its reliance on Moscow for its energy needs.
The International Energy Agency has tabled a 10-point initiative for the EU to reduce its reliance on Russian natural gas.
The rating actions on the affected companies are a “direct consequence” of Russia’s sovereign rating and reflect Moody's view that ratings of Russian companies are constrained by the country’s “Caa2" foreign-currency ceiling.
“The negative outlooks, which are aligned with the sovereign outlook, reflect the severe risks to Russia's macroeconomic stability posed by the imposition of severe and co-ordinated sanctions and the financial ramifications from central bank capital controls and delays to sovereign debt repayments,” Moody’s said.
“Negative actions could be driven by further stress on Russia or a lowering of the ceiling, and also by issuer-specific weaknesses such as business disruptions, liquidity stresses, currency mismatches or expectations of debt-restructuring arrangements.”
The spillover effects of the conflict between Russia and Ukraine, which account for 29 per cent of the world's wheat, should hit trade, mostly in Eastern Europe, and affect commodity importers such as Turkey and Egypt because of higher oil and wheat prices, according to the IIF.
“A sharp escalation of the conflict will cause a broad-based pull-back in emerging markets capital flows, such that nowhere is immune. Such a scenario would see a flight to safety into the US dollar and potential market dislocations. The trajectory of the conflict is therefore all-important for markets,” IIF said.
Every $10 rise in oil prices will widen Turkey’s current account deficit in 2022 by 0.3 percentage points, raising its dependence on foreign capital inflows at a time when global risk appetite is unsettled, the IIF said.
A $50 rise in wheat prices per metric tonne — also a 10 per cent rise approximately — boosts the current account deficit of Egypt by 0.2 per cent of GDP.
Oil prices hit a 14-year high this week, with international benchmark Brent nearly touching $140 a barrel. Prices have retreated in the past two days but remain above $100 a barrel.
“A sharp escalation in the conflict will likely see a flight to safety and indiscriminate capital outflows from emerging markets. In that case, there may be nowhere to hide,” the IIF said.
