S&P announced on Monday evening that it had lowered Russia's sovereign credit rating below investment grade (to BB+ from BBB-) and retained its negative outlook.
The agency stressed reduced monetary policy flexibility and the weakening growth outlook as the main rationale behind the downgrade. S&P thus removed the ratings from CreditWatch (placed in late December), but retained the negative outlook.
The rating agency mentioned i) further decline in monetary policy flexibility, specifically the imposition of exchange controls and ii) the materially faster than expected pace of deterioration in external and fiscal buffers over the next 12 months as triggers for potential further negative rating actions. We believe capital controls are a very unlikely development, while forced current account rebalancing following RUB devaluation alone with the moderation of savings dollarization in the environment of very high interest rates should contain the FX reserve drain. On the fiscal side, S&P expects the general government deficit to widen to 3.4% of GDP this year and fall back to 2.1% in 2016, which could hardly be reached without sizable spending cuts to the approved budget plan. The authorities were recently signalling readiness to cut fiscal spending by up to 10%, but we need to wait for the final decisions, as consolidation of this magnitude is likely to involve politically sensitive defence and social spending.
In any case, in practice a country can linger on with a negative outlook for an extended period of time, while the more immediate risk is a potential downgrade by Moody's. Moody's has recently already downgrade Russia's sovereign rating to the lowest investment grade (Baa3) and placed the ratings under review for further downgrade. We remind that in practice it usually takes about 2-3 months before the rating agency completes the review and follows through with the rating action.