Financial basis

Fitch and Moody’s cut Russia’s sovereign rating to the trash

March 3 (Reuters) – Ratings agencies Fitch and Moody’s downgraded Russia six notches to junk status, saying Western sanctions were undermining its ability to service debt and would weaken the economy.

Russian financial markets have been rocked by sanctions imposed following its invasion of Ukraine, the biggest attack on a European state since World War II. Read more

The invasion triggered a wave of credit rating moves and dire warnings about the impact on the Russian economy. S&P downgraded Russia to speculator status last week.

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It also prompted index providers FTSE Russell and MSCI to announce on Wednesday that they would remove Russian stocks from all their indexes, after a senior MSCI executive earlier this week called the Russian stock market ‘uninvestable’. . Read more

FTSE Russell said the decision will be effective from March 7, while MSCI said its decision would be implemented in one step across all MSCI indices from the March 9 close. MSCI said it is also reclassifying the MSCI Russia indices from emerging markets to stand-alone markets. status.

Russia (.MIRU00000PUS) has a weight of 3.24% in MSCI’s Emerging Markets benchmark (.MSCIEF) and a weight of around 30 basis points in the provider’s global benchmark. indices (.MIWD00000PUS).

The Institute of International Finance predicts a double-digit contraction in economic growth this year. Read more

Fitch downgraded Russia from “B” to “B” and placed the country’s ratings on “negative watch”. Moody’s, which flagged the possibility of a downgrade last week, also downgraded the country’s rating six notches from Baa3 to B3.

Fitch said the only other precedent for such a six-notch downgrade on a single sovereign entity was South Korea in 1997.

“The severity of international sanctions in response to Russia’s military invasion of Ukraine has heightened risks to macro-financial stability, represents a huge shock to Russia’s credit fundamentals and could undermine its resolve to repay debt. public,” Fitch said in a statement.

Fitch said U.S. and European sanctions barring any dealings with the Central Bank of Russia would “have a far greater impact on Russia’s credit fundamentals than any previous sanctions,” rendering much of Russia’s international reserves unusable for intervention in the foreign exchange market.

“Sanctions could also weigh on Russia’s willingness to repay its debt,” Fitch warned. “President Putin’s response to put nuclear forces on high alert appears to diminish the prospect that he will change course on Ukraine to the extent necessary to roll back rapidly tightening sanctions.”

Fitch said he expects a further increase in sanctions against Russian banks.

Moody’s said Thursday that the scope and severity of the sanctions “exceeded Moody’s initial expectations and will have material credit implications.”

Sanctions imposed by Western countries will also significantly weaken Russia’s GDP growth potential from the rating agency’s previous assessment of 1.6%, Fitch said.

“In this case, frozen/falling assets, driven by sanctions, have bumped the ratings dog,” Mizuho analysts wrote. They added that “revealed benchmark ratings and risks could worsen capital outflow as benchmark funds are forced to liquidate rather than hold.”

Sanctions on Russia have significantly increased the country’s default risks on its dollar-denominated government debt and other international markets, analysts at JPMorgan and elsewhere said Wednesday. Read more

Russia has responded to the sanctions with a series of measures to bolster its economic defenses and retaliate against Western restrictions. He raised his main policy rate to 20%, banned Russian brokers from selling foreign-owned securities, ordered export companies to strengthen the ruble and said he would prevent foreign investors from selling assets. Read more

The government also plans to tap into its National Wealth Fund (NWF), a cushion for rainy days, to help counter the sanctions. Read more

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Reporting by Mehr Bedi in Bengaluru and Megan Davies in New York; Additional reporting by Andrew Galbraith in Shanghai and Vidya Ranganathan in Singapore; Editing by Leslie Adler and Stephen Coates

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