Bloomberg News

Russia Outlook Cut to Negative by S&P as Obama Widens Sanctions

March 20, 2014

Russia’s credit rating outlook was reduced to negative from stable by Standard & Poor’s, which said the economy is threatened by Western sanctions over its annexation of Ukraine’s breakaway Crimea region.

S&P affirmed Russia’s ranking at BBB, the second-lowest investment grade, on par with Brazil, South Africa and Italy. The rating company said “heightened geopolitical risk” could accelerate capital flight and weaken the economy further.

“Russia’s economy is already running out of steam,” Ian Hague, founding partner of New York-based Firebird, which manages $1.3 billion of assets including Russian stocks, said by phone yesterday. “With everything happening, it’s clear that costs of capital are going up. It puts stress on the government’s budget because of lower growth.”

The cut came after U.S. President Barack Obama ordered financial sanctions on a wider swath of Russian officials and billionaires seen as allies to President Vladimir Putin. Obama also authorized possible penalties directly targeting the economy. Russia’s intervention in the Crimean peninsula has driven relations with the West to a post-Cold War low.

Russia’s economic growth slowed to 1.3 percent last year, the weakest pace since a contraction in 2009. Even before the U.S. and the EU announced sanctions, the economy was showing signs of “crisis,” Deputy Economy Minister Sergei Belyakov said March 17.

Economic Forecast

S&P lowered Russia’s growth forecast this year to 1.2 percent, from an estimate of 2.2 percent in December. It said that about $60 billion left Russia in the first three months of this year, approaching the total outflow for the whole 2013.

“Heightened geopolitical risk and the prospect of U.S. and European Union economic sanctions following Russia’s incorporation of Crimea could reduce the flow of potential investment, trigger rising capital outflows, and further weaken Russia’s already deteriorating economic performance,” S&P analysts wrote in a note yesterday.

Russia’s dollar-denominated bonds lost 0.4 percent yesterday, extending their decline this year to 3.5 percent, according to data compiled by JPMorgan Chase & Co.

Investors demanded an extra yield of 304 basis points, or 3.04 percentage point, to hold Russian debt over U.S. Treasuries, JPMorgan’s data show. The so-called spread rose to a 21-month high of 350 basis points on March 14.

The ruble-denominated bonds due in 2023 fell yesterday, sending yields up 0.06 percentage points to 9.31 percent, Bloomberg data show. The government scrapped its sixth local debt sale of this year on March 18, as borrowing costs soared amid the crisis with Ukraine.

Putin said March 18 he will annex Crimea after citizens in the region voted in a disputed referendum to secede from Ukraine, ratcheting up tensions in a stand-off with the West.

European Union

Obama is set to travel next week to Europe, where he’ll consult with European Union officials about coordinated action to increase pressure on Russia. The EU saddled 21 Russian and Crimean officials with asset freezes and visa bans on March 17, and may widen that list to include close Putin associates at a two-day summit in Brussels that started yesterday.

“We expect that the EU and U.S. will impose further sanctions,” the S&P analysts said in the note. “In our view, these sanctions could further undermine Russia’s economic growth prospects.”

To contact the reporters on this story: Olga Tanas in Moscow at otanas@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

To contact the editors responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net Rita Nazareth


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