Vladimir Kuznetsov Moscow
RUSSIA’S first junk rating in a decade pushed the nation’s bond lower for a second day and stocks declined as the threat of fresh sanctions over the conflict in Ukraine and an oil price slump batter the country’s economy.
The rouble closed at a record low on Monday after Standard & Poor’s (S&P) became the first of the big three ratings companies to strip Russia of its investment grade, citing weaker growth prospects and a deterioration of fiscal buffers. Russia’s central bank spent $88 billion (R1 trillion) propping up the rouble last year.
European leaders threatened to tighten sanctions as soon as tomorrow in reaction to renewed attacks on eastern Ukraine by pro-Kremlin separatists.
“Clouds are gathering” and the central bank might have intervened to slow the rouble’s decline, Artem Roschin, a foreign exchange dealer at Aljba Alliance bank, said. “Many people expected the rating to be cut and it has been partially priced in. Now we’re waiting for the second unpleasant part: ratings action from the other two agencies.”
The yield on five-year government debt climbed 19 basis points to 15.44 percent at 12.56pm in Moscow. The cost of insuring Russian debt against default using credit-default swops climbed seven basis points to 598.
Decline
The rouble, which has weakened 17 percent since S&P first put Russia’s rating on review on December 23, gained 1.4 percent after closing at a record 68.799 to the dollar. The dollar-denominated RTS index of stocks fell 0.7 percent following yesterday’s 4.8 percent decline.
Russia’s Finance Ministry said yesterday that Russia was proceeding with its second bond auction this year, testing appetite for floating-rate notes after S&P’s downgraded the nation’s foreign-currency credit rating to junk.
The Finance Ministry, which sold only a fifth of the domestic OFZ bonds offered at its first auction in two months last week, will seek to sell 5 billion roubles (R846 million) of securities due in 2017 today
Russia was lowered one step to BB+ by S&P on Monday. Moody’s Investors Service and Fitch Ratings cut Russia to one level above junk this month.
The country’s debt will no longer be eligible for some indexes that track investment-grade sovereigns if two of the three biggest rating companies cut it to junk.
While the Bank of Russia abandoned its managed exchange rate policy last year, policymakers preserved the right to intervene unannounced if they see a threat to financial stability. The central bank publishes its interventions data with a two-day lag.
Russia’s greatest strength was its strong government and external balance sheets, although the latter had been eroded “quite a bit” and the former d been weakened “to the extent that the government is now a net debtor to the rest of the world”, Moritz Kraemer, the managing director for sovereign ratings at S&P, said on Bloomberg Television yesterday.
Crisis plan
Russia would not “mindlessly spend” its international reserves, Finance Minister Anton Siluanov said.
The government was reacting to the economic situation and developed a one-year crisis plan that included budget optimisation and structural reforms, he said. – Bloomberg