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Thursday, December 25, 2014

Russia on Verge of Junk

Russia may lose its investment-gradecredit rating for the first time in a decade after Standard & Poor’s said it’s considering a cut amid the country’s worst economic crisis since the 1998 debt default.

There’s at least a 50 percent chance that Russia will be lowered to junk within 90 days, S&P said in a statement as it put the country on negative credit watch. Moody’s Investors Service and Fitch Ratings rank Russia one step higher than S&P, which lowered the rating one level in April to BBB-.

The move “stems from what we view as a rapid deterioration of Russia’s monetary flexibility and the impact of the weakening economy on its financial system,” S&P said.Oil prices at a five-year low and sanctions over the conflict in Ukraine have pushed the world’s biggest energy exporter to the verge of recession. The central bank in Moscow has spent one-fifth of its international reserves and increased benchmarkinterest rates six times since March, when Russia came under international sanctions after it invaded Crimea.

While the ruble strengthened for a third day as the government told state-run exporters to sell foreign currency, it’s still lost 40 percent against the dollar this year, the second-worst performer among more than 170 currencies tracked by Bloomberg after Ukraine’s hryvnia.Photographer: Kirill Kudryavtsev/AFP via Getty Images

The ruble remained higher following S&P’s announcement, trading at 54.7005 per dollar as of 1:34 p.m. in New York, up 2 percent from yesterday. Dollar-denominated bonds fell, sending yields on notes due 2030 up 0.11 percentage point to 6.24 percent. Yields touched a five-year high of 7.64 percent Dec. 16.

Banking System

The costs to insure Russia’s debt against non-payment for five years more than doubled this year to 4.21 percentage points, according to data compiled by Bloomberg. That compares with 4 percentage points for Lebanon, which is rated B- at S&P, or six levels below Russia.

The S&P warning comes as Russia tries to avert a banking crisis. The central bank put National Bank Trust, the country’s 15th-biggest lender based on retail deposits, under its control yesterday, the first bailout since the currency crisis started.

Lawmakers rushed legislation through the lower house of parliament today allowing the Deposit Insurance Agency to buy stakes in banks before they face bankruptcy proceedings to keep the system stable.

The penalties imposed by the U.S. and its allies have locked Russian corporate borrowers out of international debt markets and curbed investor appetite for the ruble, stocks and bonds.

Capital Outflows

The central bank raised the key rate to 17 percent from 10.5 percent in the early hours of Dec. 16, the biggest increase since 1998.

The economy may shrink as much as 4.7 percent next year, the most since 2009, if oil averages $60 a barrel under a “stress scenario,” according to the central bank. Net capital outflows may more than double this year to $134 billion.

Investors often disregard ratings companies’ credit grade and outlook changes.France’s 10-year yield, which was 3.08 percent when S&P removed its top rating in January 2012, tumbled to a record-low 1.339 percent on Aug. 15 this year.

Moody’s cut Russia’s credit score one level to its second-lowest investment grade in October, citing concern that the sanctions will hurt its economy. The continued erosion of Russia’s foreign-exchange reserves because of capital flight, low oil prices and borrowers’ lack of access to credit were also cited by Moody’s.

Credit to Bloomberg

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