The war between Russia and Ukraine entered its eighth day on Thursday.
New Delhi:
Moody’s and Fitch lowered Russia’s rating to “junk” on Thursday, following strict sanctions by Western countries.
While Moody’s Investors Service downgraded Russia’s long-term issuer and senior unsecured debt (local and foreign exchange) to ‘B3’ from ‘Baa3’, Fitch downgraded the country’s rating to ‘B’ from ‘BBB’, putting it at ‘Rating Watch Negative’.
The downgraded rating is in the speculative or junk category and reflects default risk. It means that even if the financial obligations are currently being met, the state is vulnerable to high credit risk.
“The multiple downgrades in Russian ratings and the maintenance of the rating for further downgrades were caused by the severe sanctions Western countries have imposed on Russia, including those imposed by the Central Bank of the Russian Federation (CBR) and some major financial institutions, in response to the military invasion of Ukraine and retaliation by the Russian authorities,” Moody’s said in a statement.
Fitch Ratings said the rigor of international sanctions has increased macro-financial stability risks, represents a huge shock to Russia’s credit fundamentals and could undermine its willingness to service public debt.
The war between Russia and Ukraine entered its eighth day on Thursday, with fighting intensified in the Ukrainian capital Kiev and other major cities. Last week, the Group of Seven (G-7) major economies imposed punitive sanctions on Russia’s central bank.
They also decided to remove Russian banks from the SWIFT interbank system – which is intended to isolate Russia from world trade.
Moody’s said strong concerns over Russia’s willingness to service its debts are a reflection of the country’s institutional strength having weakened significantly with mounting evidence that the executive branch faces few checks and balances.
“The imposition of strict and coordinated sanctions, along with the financial impact of the potential delays in sovereign debt repayments, increase the likelihood of a continued disruption of the Russian economy and financial sector, which could limit access to Russia’s financial reserves, which are built to withstand adverse shocks is hampered,” Moody’s said.
In its report, UK-based Fitch said the announced sanctions and sharp depreciation of the ruble will fuel macro volatility and significantly increase the risk of a general loss of domestic confidence, leading to bank deposit outflows and ‘dollarization’ .
“Foreign currency bank deposits (mainly in US dollars) amount to nearly $200 billion (25 percent of total deposits) and their outflows would pose a greater risk to the stability of the system, given the CBR’s ability to support banks with ruble liquidity,” Fitch said.
The rating agency went on to say that sanctions will also significantly weaken Russia’s GDP growth potential from its previous assessment of 1.6 percent, in part by limiting the ability to settle trade payments, with 55 percent of Russian exports denominated in U.S. dollars. and 29 percent in euros.
In addition, trading partners will seek alternatives to imports from Russia, especially in the energy sector (which accounted for $241 billion or 44 percent of Russia’s exports in 2021), it added.
