Fitch Ratings on Friday cut Russia’s credit grade to just one notch above junk level, saying plunging oil prices and Western sanctions will force a 4 percent economic contraction this year.
Fitch lowered its rating for Russian government debt by one step to “BBB-,” the lowest possible investment grade, and added a negative outlook on the rating.
“The economic outlook has deteriorated significantly since mid-2014, following sharp falls in the oil price and the ruble, coupled with a steep rise in interest rates,” Fitch said.
“Western sanctions first imposed in March 2014 continue to weigh on the economy by blocking Russian banks’ and corporates’ access to external capital markets,” Fitch said.
The agency said that had forced it to cut its forecast for the Russian economy this year to a 4 percent contraction, compared with its previous forecast of a 1.5 percent contraction and growth of 0.6 percent for last year.
“Growth may not return until 2017,” Fitch said.
Fitch said it was assuming that the price of crude oil, a major source of government income, would average US$70 a barrel, well above the US$50 level the Brent global benchmark traded at in London on Friday.
“If the oil price stays well below this, it could precipitate a deeper recession and put further strain on public finances, severely limiting the authorities’ room for maneuver,” Fitch said.
It also said that with the ruble still weakening, and sanctions blocking access to global capital markets, Russian banks could suffer more and the government would be challenged to further support them.
The downgrade by Fitch puts it in line with the nation’s assessment by Standard & Poor’s, which cut Russia to “BBB-” in April. Authorities have responded to the currency crisis with emergency moves that included the biggest interest rate increase since 1998, a 1 trillion ruble (US$16.1 billion) bank recapitalization plan and measures to force exporters to convert more of their foreign revenue into rubles.
S&P warned last month that there was at least a 50 percent chance that Russia might lose its investment grade for the first time in a decade, as it put the country on negative credit watch. The ratings company said it expects to conclude its review by the middle of this month.
Additional reporting by Bloomberg
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