Fitch cuts ratings on Russia to junk

Fitch Ratings said it expects the Russian economy to contract by 4% this year, compared with its previous forecast of minus 1.5%, based on the slight growth seen in 2014.Dow Jones/MoscowFitch Ratings cut its credit ratings on Russia to the brink of junk territory, saying the country’s economic outlook has deteriorated significantly over the past six months amid sharp declines in oil prices and the ruble. The downgrade brings Fitch’s ratings on Russia in line with those from Standard & Poor’s Ratings Services. Fitch, which lowered its ratings by one notch to triple-B-minus, said the Western sanctions first imposed in March 2014 continue to weigh on the economy by blocking Russian banks’ access to external capital markets. The ratings outlook is negative as the ratings firm said it expects the Russian economy to contract by 4% this year, compared with its previous forecast of minus 1.5%, based on the slight growth seen in 2014. Fitch said continued exchange-rate volatility, sustained low oil prices and a faster-than-expected depletion of international reserves, among other things, could lead to further ratings cuts. Analysts and investors said the downgrade was mostly priced in the market and it is unlikely to stem a significant selloff in Russian assets, which remain classified as investment grade. But a similar downgrade by another agency, which would lead to the reclassification of Russia as junk, would have a far bolder impact, analysts said. This could be not far off. Late last month, S&P said it was reviewing Russia’s credit rating, with at least a 50% chance that it would lower the rating within the next 90 days. Moody’s Investors Service downgraded Russia’s debt to Baa 2-two notches above junk-in October, placing it under “negative outlook” status. “The country was put under negative watch [by S&P] two weeks ago, hinting a likely downgrade in the next few weeks. A downgrade from Moody’s may come pretty much at the same time: statistically, nearly 60% of the rating actions are taken within the three to nine months after being placed under negative outlook status,” said Régis Chatellier, a credit analyst at Société Générale. The bank is advising clients to remain underweight Russia. A rush of cuts below investment grade would see Russia taken out of most investment grade indexes, leading to a significant portfolio rebalancing. “Although there are significant cushions that underpin Russia’s credit metrics, recent events have increased the risks of their accelerated erosion. If Russia lost its investment grade status, which would require two credit-rating firms moving the country to speculative grade, it would be excluded from global investment grade benchmark indices,” Barclays said in a note Thursday. Russian assets, which sold off sharply in December as the country faced its worst financial crisis since 1998, had already partly priced the risk of a downgrade by the agency, according to market analysts. The ruble was trading around 61.64 against the dollar earlier Friday, far from the record lows hit in mid-December amid plunging oil prices and Western sanctions over Russia’s intervention in Ukraine. The cost of insuring Russia’s debt against a default of the country rose sharply in the first week of the year as oil prices continued to fall, with the cost of ensuring 10mn of Russian debt for 5 years rising to more than 600,000. The pressure has partly eased in the first days of January, with the cost at around 566,000 a year on Friday. In separate moves Friday, Fitch affirmed its ratings on the Netherlands, Serbia, San Marino and Cote d’Ivoire. Its ratings on the Netherlands are at triple-A, while San Marino has investment-grade-ratings and Serbia and Cote d’Ivoire are in junk territory.