By Jessica Menton -
Moody's Investors Service downgraded Russia's sovereign debt rating to junk status Friday, driven by the ongoing crisis in Ukraine and the dramatic drop in oil prices. The move comes a month after credit rating agency Standard & Poor’s also slashed Russia’s credit rating to junk status, marking the first time the country has slipped below investment grade in over a decade.
Moody's cut Russia's rating to Ba1 from Baa3 with a negative outlook. "Russia is expected to experience a deep recession in 2015 and a continued contraction in 2016," Moody's said in a statement Friday. "The risk is rising, although still very low, that the international response to the military conflict in Ukraine triggers a decision by the Russian authorities that directly or indirectly undermines timely payments on external debt service," it said.
Oil prices have lost more than half of their value in the last seven months, dropping more than 40 percent since June. Russia’s $3.5 trillion economy depends heavily on exports, and oil accounts for roughly half of the government’s revenue. As a result, the country is reeling from the combination of trade sanctions resulting from its invasion of Ukraine and Crimea, and the precipitous drop in global oil prices since June.
Economists expect the Russian economy to contract 5 percent this year, according to Neil Shearing, chief emerging markets economist at Capital Economics.
In a surprise announcement in December, the Russian central bank said it would raise its key interest rate to 17 percent from 10.5 percent in a bid to prop up the ruble after the currency plunged to a record low at the end of 2014. This was the largest single increase since 1998, when Russian rates rose more than 100 percent, which led the government to default on its debt.
However, Russia reversed course and unexpectedly lowered its key interest rate in January by 2 percentage points to 15 percent.
The ruble posted its longest run of weekly gains in nine months Friday, buoyed by global oil prices trading above $60 a barrel. The Russian ruble gained more than 2 percent in the past five days, and rose more than 0.7 percent against the U.S. dollar Friday to 61.87. Brent crude, the benchmark for global oil prices, edged down 0.16 percent Friday to $60.05 a barrel for April 15 delivery on the London ICE Futures Exchange.