Yahoo Finance Russia credit rating downgrade pushes it to the brink of bankruptcy
Russia is on the brink of defaulting on its debts as Fitch Ratings has cut its credit ratings on the country further into junk territory.
The ratings agency has downgraded Russia’s sovereign debt to its second lowest level, down six notches to C. That is just one step above borrowers who have defaulted.
“The 'C' rating reflects Fitch's view that a sovereign default is imminent,” Fitch said in a statement, pointing to recent actions by the Kremlin and the Bank of Russia. Moody's and S&P had also lowered their sovereign ratings of Russia.
Russia’s creditworthiness has rapidly collapsed since it invaded Ukraine. Just as recently as February 26, the country was deemed investment-grade worthy by all three major credit-rating agencies.
The intensifying sanctions could also lead Moscow to default on its obligations.
"Further ratcheting up of sanctions and proposals that could limit trade in energy increase probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations," the ratings agency said in a statement.
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This week, Moscow said its bond payments may be affected by sanctions.
“Sanctions are basically bankrupting Russia. It can’t access half its reserve system, its financial system is toast. Only the emergence of a bipolar financial world with a new Sino-Russia axis can get it out of this mess. That or pulling the troops out once certain objectives are met,” Neil Wilson, chief market analyst at markets.com, told Yahoo Finance UK.
Russia's financial markets have been thrown into a turmoil by Western sanctions after Vladimir Putin ordered the invasion of Ukraine, raising significant concerns over its ability and willingness to pay its debts.
“The sanctions are certainly putting severe pressure on Russia and that is making a default more likely. The Moscow administration will be doing all it can to ensure it has enough free cash to continue its war as well as maintaining a functioning domestic economy,” David Madden, market analyst at Equiti Capital, told Yahoo Finance UK.
“Making a coupon payment is the least of Russia’s worries now, if anything Putin would probably see it as an opportunity to financially hit back at the West.”
Western sanctions, including a ban on Russia’s central bank from accessing foreign currency reserves, are preventing Putin from accessing much of the $630bn (£478bn) war chest built up in foreign currencies before the invasion.
Russia has allowed borrowers to make payments on their overseas debt, but only using roubles even for foreign-currency bonds, while the Russian central bank has effectively blocked coupon payments on onshore debt to foreign bondholders.
Overseas investors have generally been reducing exposure to Russia since 2014 and the imposition of sanctions after the seizure of Crimea.
“As such, the ripple effect may not be that big, although anyone holding Russian debt could be left with a big loss on both the paper and the currency and the holdings may end up being a total write-off,” Russ Mould, investment director at AJ Bell, said.
“The issue then is whether there is any contagion as institutional investors liquidate holdings in other (emerging) markets to cover any losses in Russia or redemption requests from nervous customers, and there always remains the risk that someone has taken on a lot more risk than market realise by leveraging their positions. Only time will tell."
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If Russia did fail to make payments on its debt it raises the possibility of the first major default on the country's sovereign bonds since 1998.
“As Russia becomes increasingly isolated from the global economy, it will become more difficult for that country to pay its debts to external lenders. However, of equal importance, is Russia’s willingness to pay, as coupon and maturity payments represent the leakage of precious dollars from an economy where the local currency has slid precipitously,” Dan Kemp, global CIO of Morningstar Investment Management, told Yahoo Finance UK.
"While it is not possible to predict the outcome for Russia with any confidence, the low prices ascribed to Russian assets are indicative of long-term economic damage that has been inflicted on the Russian people by president Putin, alongside the appalling violence he has inflicted on the people of Ukraine.”
A country defaulting on its debts can have a knock-on effect on other economies, particularly those with close financial ties.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The Fitch downgrade of Russia reflects the severity of the sanctions that have been imposed in the wake of the invasion of Ukraine. Not only are these sanctions causing major problems for the Russian economy, they have also reduced Russia’s willingness to service their external debt.
“It is highly likely that Russia will respond to the Western actions against their banking and energy sectors by withholding payments on their foreign-currency denominated debt or potentially by using roubles rather than US Dollars or Euros to meet their liabilities. Either way, investors in Russian assets are having to face up to some serious losses while the impact of rising commodity prices continues to weigh on markets more broadly.”
Jason Hollands, managing director of investing platform Bestinvest, told Yahoo Finance UK that very few investors will have direct exposure to Russia’s debt but warned that the situation could blow back in unexpected places, as seen in the credit crisis.
“There has been some anxiety about the extent to which some European banks hold Russian debt in recent days, so banks have been clamouring to reveal their exposure and reassure the markets,” he said.
“A default will make it extremely difficult for Russia to raise new debt, which will have very serious implications for the financing of the Russian state. The Russian economy faces a very brutal recession, good shortages and the potential for hyper-inflation which will wipe out savings as the price for its invasion of Ukraine.”
On March 16, Russia is due to pay $107m (£81m) in coupons across two bonds, although it has a 30-day grace period to make the payments.
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