Moody's Downgrades Russia's Rating to Lowest Investment Grade after Slump in Oil Prices

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Researched by Industrial Info Resources (Sugar Land, Texas)--Russia's credit rating was cut to the lowest investment grade by Moody's Investors Service (New York, New York), as plunging oil prices and the worst currency crisis since 1998 drag on growth. Moody's lowered the country to Baa3, one step above junk, from Baa2. The rating is on review for a further reduction. The credit ratings grade matched those of Standard & Poor's and Fitch Ratings, as the country's economic outlook worsened under the pressure of Western sanctions and declining oil prices.

"As for the long-term situation, the decision will naturally have a negative impact, as it will decrease the possibilities for foreign investors to invest in Russia, as most of them have restrictions on which assets they can invest in, depending on the credit rating," said Sergei Romanchuk, head of markets at Metalinvest in Moscow.

Romanchuk, who also is the president of the Financial Markets Association, said that a further downgrade would discourage foreign investment in Russia. Russia reached investment-grade status in 2004.

According to a statement from Moody's Investors Service, the analysts predicted further stress in financial situation of Russia's public and private sectors: "The severe--and likely to be sustained--oil price shock, alongside Russian borrowers' highly restricted international market access due to ongoing sanctions, is undermining economic fundamentals and increasing financial stresses on both the public and private sectors."

In its updated growth outlook for Russia, Moody's expects real GDP contractions of about 5.5% in 2015 and 3% in 2016, bringing real growth over the 10 years through 2018 to virtually zero.

According to latest forecasts, the World Bank has predicted a 2.9% contraction for the Russian economy. The Russian budget is highly dependent on oil and gas export revenues. The free-fall in oil prices, which have more than halved since last June from $110 to below $50 per barrel, had placed the Russian economy in a difficult situation.

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