[MOSCOW] Ratings agency S&P cut Russia's sovereign credit rating to below investment grade, or "junk" status, on Monday for the first time in a decade.
The rouble fell after the news to 67.98 against the dollar , more than 5 per cent lower than the previous close on the Moscow Exchange.
S&P said in a statement it had cut the rating from BBB- to BB+, with a negative outlook, and that Russia's economic growth prospects - hit by low oil prices and Western sanctions in the Ukraine crisis - had weakened.
External and fiscal "buffers" were likely to deteriorate because of rising external pressure and increased government support to the Russian economy, it said. "The downgrade throws into stark relief the severity of Russia's financial and economic crisis," said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London. "It's going to make it more difficult for large corporate and banks to refinance themselves, at a time when ratings agencies clearly have doubts about the macroeconomic and external environment for Russia." The downgrade marks the first time in more than 10 years that Russian sovereign debt has been rated below investment grade, in what some call "junk" territory.
The decision could not only harm Russia's image among investors but push up its borrowing costs, as many mainstream investment and pension funds have rules preventing them from buying anything not classed as investment grade.
The cost of insuring Russian sovereign debt for five years widened to 591 basis points after the S&P move, from 552 on Friday, Markit said.
S&P had warned in late December that it could deprive Russia of its investment-grade credit rating as soon as mid-January, following a rapid deterioration of the country's monetary flexibility and a weakening economy.
Russia's economy is expected to slide into recession this year as the low oil prices depresses export revenues, and the sanctions over Ukraine have cut some of its biggest companies off from Western funding.
S&P sees growth flatlining for four years. "We project that the economy will expand by about 0.5 per cent annually in 2015-2018, below the 2.4 per cent of the previous four years," it said.
The central bank said last month Russia's economy may shrink 4.5-4.7 per cent in 2015 and 0.9-1.1 per cent in 2016, if oil averages US$60 a barrel. If oil was at an average of US$40 a barrel, the economy could shrink by 5 percent over the course of 2015, according to the Ministry of Economic Development "I guess if you were thinking of buying Russia risk, again, last week, you have now got your answer. Too early," said Standard Bank analyst Tim Ash after the downgrade.
The United States and the European Union have threatened to impose more sanctions following a surge in violence in Ukraine at the weekend though President Vladimir Putin blames the new violence on Kiev.
His popularity was built partly on providing relative financial stability and prosperity, and this could now be under threat although his personal ratings have been high since Russia annexed the Crimea region last March.
Capital flight soared by a higher than expected US$151.5 billion roubles last year. That trend is expected to continue while higher inflation is also due to compound pressures on the rouble.
Russia's international reserves, managed by the central bank, have collapsed since early last year, falling to their lowest level since early 2009 as Russia has been forced to spend heavily to defend the rouble and capital flight has soared.
The rouble fell about 40 per cent against the US dollar last year and has continued its decline this year. "It's hard to dispute this (downgrade), given the level of oil prices and the fact that we effectively have a banking crisis in Russia. It's all piling up again and we are going to see renewed pressure on the rouble," said Lars Christensen, chief emerging market analyst at Danske Bank in Copenhagen.