S&P lowers Russia’s sovereign rating to BBB from BBB+ on capital outflow; Bank Rossii raises key rate to 7.5%

RUSSIA ENERGY / FINANCE - In Brief 25 Apr 2014 by Marcel Salikhov

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S&P lowered its long-term and short-term FX sovereign credit ratings on the Russian Federation to BBB- from BBB. Local currency sovereign rating was lowered to BBB from BBB+. The outlook on both ratings remained negative. In second half of March all major rating agencies put Russia on negative watch and S&P was the first one take the action. In S&P’s view, ‘the tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects’. S&P last downgraded Russia in December 2008. Bank Rossii was quick to react and increased today key rate from 7.0% to 7.5% citing ‘rising inflationary risks’. Previously, key rate was increased by 1.5% on March, 3th on turbulence in financial markets due to Crimean crisis. By April 21, 2014 CPI stood 7.2% y-o-y. It’s much higher than previous official target for 2014 of 5.0%. It seems that Bank Rossii changed its official CPI target to ‘no more than 6.0% by the end of 2014’. CPI acceleration was boosted mainly by inflationary effects of RUB devaluation. Rate hike couldn’t support RUB on today's FX market. RUB/USD exceeded 36 RUB and RUB/EUR reached 50 RUB. Rating decrease was expected on growing gepolitical risks and possible economic recession. It’s reasonable to believe that this week’s failure of Geneva agreements to bring pacification to Eastern Ukraine has triggered rating action. While we think that Bank Rossii does what it can do in current environment the most risk are beyond its reach.