Russia: S&P complicates the outlook. The worst may not be over yet

On Monday, S&P downgraded Russia’s credit foreign currency sovereign credit rating by one notch to BB+ (junk), keeping the outlook as negative. The key reasons behind the decision were: i) the sharp economic relapse, ii) the central bank’s constraints in achieving the monetary targets, and iii) the possibility of further EU sanctions. The rating downgrade could become a self-fulfilling prophecy for the Russian economy and its financial sector, as it puts other agencies’ investment-grade ratings at risk (with potential exclusion from the big bond indices) and is triggering further exchange-rate depreciation. Given the big corporates’ currency mismatch in terms of liabilities, this would lead to a faster-than-expected deterioration in the macro situation. The worst may not be over yet.

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