December 4, 2022

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Fitch and Moody's downgrade Russia's sovereign rating to junk

Fitch and Moody’s downgrade Russia’s sovereign rating to junk

(Reuters) – Ratings agencies Fitch and Moody’s have cut Russia’s rating by six notches to “junk,” saying Western sanctions have cast doubt on its ability to service debt and will weaken the economy.

Russia’s financial markets have been turbulent due to sanctions imposed over its invasion of Ukraine, the biggest attack on a European country since World War II. Read more

The invasion sparked a flurry of credit rating moves and dire warnings about the impact on the Russian economy. Standard & Poor’s cut Russia’s rating to junk last week.

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It also prompted index providers FTSE Russell and MSCI to announce on Wednesday that Russian stocks would be removed from all of their indices, after a senior MSCI executive earlier this week called the Russian stock market “uninvestable.” Read more

FTSE Russell said the decision will be effective from March 7, while MSCI said its decision will be implemented in one step across all MSCI indexes starting from the March 9 closing. MSCI said it was reclassifying MSCI Russia indices from emerging markets to independent markets. the condition.

Russia (.MIRU00000PUS) It has a weight of 3.24% in the MSCI Emerging Markets Index (MSCIEF) And a weight of about 30 basis points into the global benchmark of the index provider (.MIWD00000PUS.).

The Institute of International Finance expects a double-digit contraction in economic growth this year. Read more

Fitch cut Russia’s rating to “B” from “BBB” and placed the country’s ratings on “Negative Rating Watch”. Moody’s, which last week indicated a possible credit rating downgrade, also lowered the country’s rating by six notches, to B3 from Baa3.

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Fitch said the only other precedent for such a significant six-degree downgrade on a single sovereign entity was South Korea in 1997.

“The severity of international sanctions in response to Russia’s military invasion of Ukraine has increased overall financial stability risks, represents a significant shock to Russia’s credit fundamentals and could undermine its willingness to service government debt,” Fitch said. Transfer.

Fitch said US and EU sanctions banning any transactions with the Russian central bank would have a “much greater impact on Russia’s credit fundamentals than any previous sanctions,” rendering much of Russia’s international reserves unusable for foreign exchange intervention.

And Fitch warned that “the sanctions could overburden Russia’s willingness to repay the debt.” “President Putin’s response to putting nuclear forces on high alert appears to reduce the likelihood of him changing course on Ukraine to the degree needed to quickly reverse the tightening of sanctions.”

Fitch said it expected further escalation of sanctions against Russian banks.

On Thursday, Moody’s said the scope and severity of the sanctions “exceeded Moody’s initial expectations and would have material credit implications.”

Fitch said the sanctions imposed by Western countries will significantly weaken Russia’s GDP growth potential compared to the rating agency’s previous assessment of 1.6%.

“In this case, the assets frozen/declining due to sanctions affected the rating dog,” wrote analysts at Mizuho. They added that “the standardized ratings and risks disclosed may compound further capital outflow as standard funds are forced to liquidate rather than be held.”

Analysts at JPMorgan and elsewhere said Wednesday that sanctions against Russia have significantly increased the chance of the country defaulting on its dollar and other government debt in the international market. Read more

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Russia responded to the sanctions with a range of measures to bolster its economic defenses and retaliate against Western restrictions. It raised the main lending rate to 20%, banned Russian brokers from selling securities held by foreigners, ordered issuing companies to support the ruble, and said it would prevent foreign investors from selling assets. Read more

The government also plans to tap the National Wealth Fund (NWF), a cushion for rainy days, to help counter sanctions. Read more

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Additional reporting by Mehr Bedi in Bengaluru and Megan Davis in New York; Additional reporting by Andrew Galbraith in Shanghai and Vidya Ranganathan in Singapore; Editing by Leslie Adler and Stephen Coates

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