Moody's Downgrades Russia's Sovereign Debt Rating, Outlook Remains Negative

Capital flight, plummeting oil prices and dimming economic prospects caused one of the world's biggest credit ratings agencies Friday to downgrade Russia's sovereign debt by two notches. Moody's chopped the nation's credit ratings to Baa2, which is two notches above "junk" status.

The agency cited two factors in its decision, the first of which is economic. "Russia's increasingly subdued medium-term growth prospects, exacerbated by the prolongation of the Ukraine crisis, including through the impact of expanded international sanctions," it said.

Moody's, which kept its outlook "negative."

The value of the Russian currency, the ruble, has fallen 20 percent this year while the price of oil, which generates an out-sized portion of the nation's revenue, has tumbled about 13 percent.

The second reason for the downgrade is financial. The "gradual, but ongoing erosion of the country's foreign-exchange buffers due to capital flight, Russian borrowers' restricted international market access and low oil prices." The term "capital flight" refers to a wealth-preservation technique in which money is taken out of the country so it can be converted into stronger currencies that are not losing value. Capital flight tends to exacerbate a currency's decline because the capital denominated in that currency is sold to buy a stronger currency.

There is no quick fix, Moody's said.

"Even if trade and current account balances are temporarily strengthening, due in part to the 20 percent fall in the exchange rate this year, the current account surplus has financed only around 60 percent of the $85.2 billion of capital outflows in the first nine months of this year. The Russian government and Russian-domiciled entities have been largely shut out of the international capital markets since the second quarter. "

Moody's may not be done cutting Russia's credit rating.

"Russia's rating would come under downward pressure if the crisis in Ukraine were to escalate further, particularly if this resulted in harsher sanctions, as well as accelerated capital flight and the likelihood of more prolonged lack of market access for Russian corporates and banks," Moody's said.

"Russia's rating would also come under downward pressure from a prolonged period of low commodity prices, given the lack of progress on economic diversification. Moody's would also consider downgrading Russia's sovereign rating if the domestic growth outlook were to deteriorate further, and in particular if lower growth and/or sanctions were to further undermine Russia's fiscal and external accounts."