The Russian economy has started to see the economic impact of the invasion of Ukraine as the U.S., the European Union, and other Western countries imposed a flurry of sanctions to isolate Moscow on the global stage.
In a fresh blow to Russia, global rating agencies Fitch and Moody's on Wednesday downgraded the country's sovereign credit rating to "junk" status, citing the severity of international sanctions in response to Russia's invasion of Ukraine.
The credit review was triggered after Russia announced military invasion of Ukraine on February 25, which led to harsh sanctions against Moscow’s financial institutions and businesses, resulting in a slump in the stock market and a record fall in local currency, ruble.
Moody's has lowered Russia's sovereign credit rating by six notches to ‘B3’ from ‘Baa3’, adding that the ratings remain on review for further downgrade. The downgrade of Russia's ratings has been driven by the heightened risk of disruption to sovereign debt repayment given the severe and coordinated sanctions and significant concerns around Russia's willingness to service its obligations, it says.
“The multi-notch downgrade of Russia's ratings and maintaining the review for further downgrade were triggered by the severe sanctions that Western countries have imposed on Russia, including the sanctioning of the Central Bank of the Russian Federation (CBR) and some large financial institutions, in response to its military invasion of Ukraine (B3 review for downgrade) and retaliatory measures taken by the Russian authorities,” Moody’s added.
The global rating agency warned that there is likelihood of a sustained disruption to the economy and financial sector from the sanctions that limit access to Russia's international reserves intended to buffer the country from adverse shocks.
Moody’s said that inflows of foreign currency from the export of Russian oil and gas may provide a cushion to the impact of these severe sanctions, but this does not preclude the high likelihood of a sustained economic disruption and increased susceptibility to shocks.
Meanwhile, Fitch has downgraded Russia's sovereign rating to 'B' from 'BBB'. The ratings have been placed on Rating Watch Negative (RWN). “The RWN reflects the high degree of volatility in international relations, including the potential for further sanctions tightening and uncertainty over Russia's policy response such as not servicing its debt, and the risk of a more acute loss of domestic economic confidence,” says Fitch.
The agency said that international sanctions on Russia have heightened macro-financial stability risks, which represents a huge shock to its credit fundamentals and could undermine its willingness to service government debt. “Developments will weaken Russia's external and public finances, severely constrain its financing flexibility, markedly reduce trend GDP growth, and elevate domestic and geopolitical risk and uncertainty,” it added.
“The sanctions could also weigh on Russia's willingness to repay debt. President Putin's response to put nuclear forces on high alert appears to diminish the prospect of him changing course on Ukraine to the degree required to reverse rapidly tightening sanctions,” Fitch said.
The agency opined that the U.S. sanctions prohibiting transactions with the Ministry of Finance will not impede the servicing of Russia's sovereign debt but this is unclear and the risk of such a severe measure has increased markedly.