Russia Credit Rating Cut Toward Junk

Since the price of oil may continue to fall from its $50 level, the pressure on Russian gross domestic product will tighten. Some experts believe the price of oil could drop below $40 and remain there for some time. Although Russia argues that the sanctions against it are for the equivalent of a takeover of part of Ukraine, these sanctions are wide enough so the claim is unlikely.

According to Fitch Ratings researchers:

Fitch Ratings has downgraded Russia’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘BBB-‘ from ‘BBB’. The issue ratings on Russia’s senior unsecured foreign and local currency bonds have also been downgraded to ‘BBB-‘ from ‘BBB’. The Outlooks on the Long-term IDRs are Negative. The Country Ceiling has been lowered to ‘BBB-‘from ‘BBB’.

Among the reasons:

The economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the rouble, coupled with a steep rise in interest rates. Western sanctions first imposed in March 2014 continue to weigh on the economy by blocking Russian banks’ and corporates’ access to external capital markets. Having grown by just 0.6% in 2014, Fitch now expects the economy to contract by 4% in 2015, compared with our previous forecast of minus 1.5%, as steep falls in consumption and investment are only partially offset by an improvement in net exports, driven by a sharp drop in imports. Growth may not return until 2017.

ALSO READ: Russian Oil Production Sets Post-Soviet High

Also:

Plunging oil prices have exposed the close link between growth and oil prices, notwithstanding the impact of a more flexible exchange rate. For 2015, Fitch is assuming oil prices average USD70/bbl, markedly lower than the USD100/bbl we assumed in July 2014. 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 manoeuvre.

Fitch may be much too optimistic about the price of crude.

The Putin government continues to indicate that it has a firm grip on running the country. His popularity has not eroded at all, based on most observations However, if Fitch is right, Russia is in for a much deeper and more prolonged period of economic ruin than the population expects.

ALSO READ: 5 Things That Could Save Russia From Recession in 2015