Standard & Poor’s rating agency has downgraded Russia’s credit grade by one notch to junk status, citing a weakened economic outlook.
The agency dropped the rating to BB+ from BBB- since it sees the country’s financial buffers at risk. That’s due to a slide in the country’s currency, as well as weakening revenue from oil exports. “In our view,” says S&P, “the Russian Federation’s monetary policy flexibility has weakened, as have its economic growth prospects.”
As reported by The Wall Street Journal, that puts the country’s rating “below investment-grade territory for the first time in more than 10 years.”
Read: 4 emerging markets trends to watch
The Russian currency tumbled on the downgrade, dropping some 7% to about 68.5 rubels to the dollar.
Standard & Poor’s says Russia’s financial system is weakening, limiting room for manoeuvre for Russia’s Central Bank. It predicts the bank “faces increasingly difficult monetary policy decisions,” while also trying to preserve incentives for growth.
The Russian economy is expected to contract by 4% to 5% in 2015.
One problem is capital outflows, which averaged $57 billion annually during 2009 to 2013 and soared to $152 billion last year. “Stresses could mount for Russian corporations and banks that have foreign currency debt service requirements without a concomitant foreign currency revenue stream,” says S&P.
Read: BRICs fall out of favour
Russia’s Finance Minister Anton Siluanov has sought to play down the cut to the country’s credit rating, saying it reflects the rating agency’s “excessive pessimism.” He emphasized the Russian economy’s strong fundamentals, such as high level of hard currency reserves, trade surplus and low level of state debt.
Prior to the announcement, Putin had a meeting with cabinet members on anti-crisis measures. He said the government should focus on the following:
- cutting spending;
- keeping inflation under control; and
- making sure the country doesn’t waste its hard currency reserves.
Also read: