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Markets mostly not fazed by S&P's downgrading of Russia's credit rating to junk level

Markets mostly not fazed by S&P's downgrading of Russia's credit rating to junk level
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There was a muted reaction on Russia’s financial markets to Monday’s downgrade of the country’s sovereign credit rating by the Standard & Poor’s ratings agency.

The rouble fell and the cost of borrowing rose for the Russian government, but investors had anticipated the downgrade which was to below investment grade – or junk.

S&P cited Russia’s weakened economic growth prospects, hit by low oil prices and Western sanctions over Ukraine.

The downgrade will worsen the problem of cash flowing from the country.

Last year companies and banks pulled their money out to the tune of 151.5 billion dollars – worse than the previous record of 133.6 billion set in 2008 during the global financial crisis.

Russia’s economy is expected to slide into recession this year as low oil prices depress export revenues, and as sanctions bite further.

The central bank recently said GDP could shrink by 4.5 to 4.7 this year if oil averages $60 a barrel – currently it is around $48.

‘Anti-crisis plan not taken into account’

Russia’s Finance Minister Anton Siluanov said the downgrade by the S&P probably did not take into account the government’s anti-crisis plan.

He said that the Kremlin plans “new structural reforms”, without saying what they are.

“The decision taken shows the excessive pessimism of the agency. It fails to consider a series of factors which characterise the strong side of the Russian economy: the accumulation of large international reserves, including in the sovereign funds,” he said.

On Monday, Russia approved a package of emergency measures to deal with what it acknowledges is an economic crisis.

First Deputy Prime Minister Igor Shuvalov said on January 21 the plan would include steps to re-capitalise banks and subsidies to help industrial enterprises, farmers and small business. The total cost is put at 1.375 trillion roubles ($21 billion, 18.4 billion euros).

Siluanov said that part of the cost would be paid from a 193 billion-rouble budgetary reserve already factored into this year’s budget calculations. Some funds would also come from reduced spending on existing government programmes, he said.

Shuvalov had said that as well as some funding from the federal budget, the anti-crisis plan would also be financed from the state’s National Wealth Fund, an $80 billion (70 billion euros) sovereign fund that had been earmarked to fund major infrastructure projects.

The Russian newspaper Vedomosti reported on Monday that many of those projects would now be shelved, citing government sources.

The government has already announced a scheme to spend 250 billion roubles (3.26 billion euros) from the National Welfare Fund to help re-capitalise banks.

Siluanov said that “our task is not to spend the sovereign reserves thoughtlessly,” but did not provide further details on the amount that would be spent from non-budgetary sources.

He also told reporters that the plan was consistent with the finance ministry’s aim of balancing the budget by 2017, with oil prices at $70 a barrel.

Analysis from Moscow

For more insight on the situation, euronews spoke to Alexander Knobel​, Head of the International Trade Department at the Gaidar Institute for Economic Policy in Moscow.

Natalia Marshalkovich, euronews: “So, Standard & Poor’s downgraded Russia’s sovereign credit rating to junk status for the first time in 11 years. What does it mean?”

Alexander Knobel​: “Of course that’s bad news for the Russian economy. But investors had been expecting it, as the outlook was negative before. The capital markets have actually been closed to Russian companies since March-April of 2014.

“The rating downgrade of course will formally change the behaviour of some investors, particularly of those, who have been building investment portfolios in the Russian economy, as the rating downgrade will make them change the structure of their portfolios to switch away from Russian stocks.

“As for direct investment – it won’t make a big difference. What’s important for this kind of investment is the general economic situation, the state of which is no secret.

“And the ruble will lose a further three to five percent.”

euronews: “As for the sanctions, they’ve been in place for a while and more could be added soon. Russia’s rating is “junk” now. Where could companies get money from so that they could at least pay their debts?”

Alexander Knobel​: “It depends on the company. It’s true, that Russian companies cannot borrow from the international markets to be able to refinance their debts.

“Some companies that are in shall we say a privileged ( favoured) position (meaning close to Kremlin) could get affordable and cheap loans in the national currency and afterwards they could covert them into dollars, or they could also retain some part of their foreign revenue to be able to pay their external debts.”

euronews: “In theory the rating downgrade means that Russia is approaching default. Obviously, we are not talking about it right now, but could it become possible in the future?”

Alexander Knobel​: “Well, in the medium term, anything is possible. At least if oil prices remain at the current lows and if there are no real changes in the economic and budget policies.

“In this case, starting from 2016 or 2017, the default risk could become real. But I don’t think that this year there is any major risk of a default. The state debts are not that big.

“Of course there are big joint stock companies, which are majority state-owned companies. They are kind of a burden on the public sector. But by taking money from the rest of the economy, and because of the future devaluation of the ruble, there is the possibility that their short term loan problems can be sorted out.”

euronews: “Do you mean currency devaluation is a key element here?”

Alexander Knobel​: “Yes, devaluation, of course. But what’ll happen and which mechanisms will be used to address the crisis, that depends on two factors that we cannot predict right now – that is what happens with [oil] prices and the foreign political situation.”