The ruble fell to a six-week low after Standard & Poor's downgraded Russia’s sovereign debt to a junk rating. The move has worsened a selloff while fighting in the Ukraine has increased the chances for more Western sanctions.
S&P has issued a BB+ rating for the world’s largest energy exporter’s debt, or below investment grade. Oil prices fell by more than 50 percent in 2014, and the ratings agency said Russia is on its way toward a deep recession with projected annual growth of 0.5 percent for the next three years.
The U.S. and European Union have accused Russia of aiding rebels in eastern Ukraine, and say a rocket attack Saturday on the city of Mariupol could mean increased sanctions. S&P said the opportunities for Russia’s government and companies to service their debt were decreasing.
“In our view, the Russian Federation’s monetary policy flexibility has weakened, as have economic growth prospects,” S&P wrote, according to Bloomberg. “Stresses could mount for Russian corporations and banks that have foreign currency debt service requirements without a concomitant foreign currency revenue stream.”
Russia’s central bank will have to choose between propping up the ruble and aiding domestic banks this year, and S&P said the problem points toward an ominous 2015 for the country. The downgrade will force a investment-grade bond funds to sell Russian debt, fueling the selloff that began at the onset of the crisis in Ukraine and continued with the drop in oil prices.
Both Moody’s and Fitch downgraded Russian debt as well, but not to the level of junk bonds. Russia’s central bank does not formally recognize Western ratings, and Moscow has attempted to build a joint ratings agency with China to replace the three.