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By Samuel R. Avro on Feb 4, 2009 with no responses

Russia’s Debt Rating Near ‘Junk’ Status Partially Due to Low Oil Prices


The falling ruble and sliding oil prices are the main reason Russia received a near 'junk' debt rating from Fitch.

For the first time in more than a decade, Russia’s debt rating was downgraded by Fitch Ratings –to two notches above ‘junk’ status– largely due to falling oil prices and the sliding value of the ruble.

The rating was lowered to BBB, the second-lowest investment grade, from BBB+, Fitch said in a statement on Wednesday. Standard & Poor’s Ratings Services already lowered theirs in the beginning of December.

“The scale of capital outflows and the pace of decline in Russia’s foreign exchange reserves have materially weakened the sovereign balance sheet,” said Edward Parker, Fitch’s head of emerging markets in Europe, in the statement. “The downgrade reflects the negative impact on Russia from the fall in commodity prices and the dislocation to global capital markets that has left Russian banks and companies struggling” to refinance debt.

Fitch also said that they are maintaining the negative outlook on Russia, the world’s largest energy supplier.

Russia staunchly held to their claim for months that the country’s large currency reserves –accumulated during the surge in crude oil prices– would enable them to ride out the global economic storm. Lately, the Russian position has softened as they’ve seen evidence of that not being the case.

The country has already spent more than a third of its reserves, or $200 billion, since August, in a futile attempt to prevent the slide of the ruble.

The worst may not be over yet for Russia, warned Fitch. “Further falls in oil prices, low roll-over rates of external debt, ongoing capital outflows, heightened strains in the banking sector or increased political uncertainty could increase downward pressure on the ratings,” Fitch noted in its release.

Those involved in the Russian economy aren’t taking kindly to the newly released rating, and even mocked the ability of rating agencies to effectively rate corporations and nations.

“Now that we know the agencies gave A’s to companies that later went bankrupt, their estimations look less credible than before the crisis,” said Ruben Vardanyan, chairman at the Russian investment bank Troika Dialog. “The real question is why the United States’ rating hasn’t been downgraded,” he said.

“The ratings agencies don’t seem to understand the responsibility they take in putting labels on companies and states,” said Sergei Vybornov, president of Alrosa, the Russian state-run diamond company which is responsible for 25% of the world’s rough diamond production. “They could actually be sued for that.”