Moody's and Fitch on Thursday downgraded Russia's sovereign rating to 'junk' grade following severe sanctions by western countries. While Moody's Investors Service downgraded Russia's long-term issuer and senior unsecured (local-and foreign-currency) debt ratings to 'B3' from 'Baa3', Fitch pulled down the rating on the country to 'B' from 'BBB', putting it on 'Rating Watch Negative'.
The downgraded rating is in the speculative or junk category reflecting default risk. It signifies that even though financial commitments are currently being met, the sovereign is vulnerable to high credit risk.
"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 and retaliatory measures taken by the Russian authorities," Moody's said in a statement.
Fitch Ratings said the severity of international sanctions has heightened macro-financial stability risks, represents a huge shock to Russia's credit fundamentals and could undermine its willingness to service government debt.
The Russia-Ukraine war entered its eight day on Thursday, with fighting intensifying in the Ukrainian capital Kyiv and other big cities. Last week, the Group of Seven (G-7) major economies imposed punitive sanctions against the Russian central bank.
They also decided to remove Russian banks from the SWIFT inter-banking system -- which is intended to isolate Russia from global trade.
Moody's said the significant concerns around Russia's willingness to service its debt are a reflection that the country's institutional strength has materially weakened with increasing evidence that the executive faces few checks and balances.
"The imposition of severe and coordinated sanctions, together with the financial ramifications from the potential delays to sovereign debt repayments, raise the probability of sustained disruption to Russia's economy and the financial sector that impairs access to Russia's financial reserves that were built to withstand adverse shocks," Moody's said.
In its report, UK-based Fitch said the announced sanctions and sharp rouble depreciation will fuel greater macro-volatility, and markedly increase the risk of a broad-based loss of domestic confidence, triggering bank deposit outflows and 'dollarisation'.
"Foreign-currency-denominated bank deposits (predominantly in US dollars) are near USD 200 billion (25 per cent of total deposits) and their outflow would represent a greater risk to the stability of the system, given the CBR's capacity to support banks with rouble liquidity," Fitch said.
The rating agency further said sanctions will also markedly weaken Russia's GDP growth potential relative to its previous assessment of 1.6 per cent, partly through constraining the ability to clear trade payments, with 55 per cent of Russian exports denominated in US dollars and 29 per cent in euros.
"In addition, trade partners will seek substitutes for imports from Russia, particularly in the energy sector (which accounted for USD 241 billion or 44 per cent of Russia's exports in 2021)," it added.
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