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Moody's downgrades Russian debt

February 21, 2015

Ratings agency Moody's now regards Russian sovereign debt as non-investment grade - a term commonly known as "junk" status. Moscow said the reduction from Baa3 to Ba1 was based on "factors of a political character."

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Russland Währung Rubel Banknoten
Image: Reuters/E. Korniyenko

Moody's offered three primary reasons for its decision to downgrade Russian debt one notch on Friday, also awarding the country a "negative" outlook, meaning further reductions are conceivable in the short term. The move came less than a month after the last Moody's downgrade of Russian debt.

"The continuing crisis in Ukraine and the recent oil price and exchange rate shocks will further undermine Russia's economic strength and medium-term growth prospects, despite the fiscal and monetary policy responses," Moody's wrote in a press release announcing the move.

International sanctions brought to bear on Russia because of the conflict in Ukraine, coupled with the collapse of oil prices worldwide, have helped push the ruble into a major slide against other currencies. Russia's currency was trading at 62.38 rubles to $1 (70.30 rubles to 1 euro) at the close of trading on Friday, compared to roughly 35 rubles to the dollar a year ago, prior to the annexation of Crimea.

Moskau Russland Symbolbild Rubel Dollar Euro
The ruble has recovered slightly from these December 18th rates - but is well down over the course of the past yearImage: picture-alliance/dpa/Maxim Shipenkov

"The government's fiscal strength will diminish materially as a result of fiscal pressures and the continued erosion of Russia's foreign exchange reserves in light of onging capital outflows and policy responses," Moody's wrote, before adding a third factor in its decision.

"The risk is rising, although still very low, that the international response to the military conflict in Ukraine triggers a response by the Russian authorities that directly or indirectly undermines timely payments on external debt service," the agency said.

Finance Minister Siluanov: political factors at play

Rusian Finance Minister Anton Siluanov, responding to the Friday evening decision from Washington in the eary hours of Saturday morning in Moscow, said that the Moody's downgrade was based on "unrealistic" forecasts.

"I consider the evaluation of Moody's not simply extremely negative, but based on extremely pessimstic forecasts that have no analogies today," Siluanov said. "I suppose that in taking the decision about lowering the rating, the agency was led first of all by factors of a political character."

Siluanov claimed that other factors, like Russia's low national debt and high levels of foreign currency reserves, were not taken into account by Moody's.

The "Big Three" credit ratings agencies - Fitch, Moody's and Standard & Poor's - have all payed close attention to Russia in recent months. S&P downgraded Russian debt into "junk" territory last month; Fitch moved it to BBB - that agencys lowest investment-grade or "non-junk" level - earlier in January.

Siluanov was similarly critical of Standard & Poor's Russian downgrade late in January. All of the Big Three agencies operate globally but are headquartered in the US; Fitch has head offices in both New York and London.

msh/rc (AFP, AP, Reuters)