The global rating agency Moody’s Investors Service (Moody’s) on Thursday downgraded the Government of Russia’s long-term issuer (local- and foreign-currency) and senior unsecured (local- and foreign-currency) debt ratings by several notches to B3, a junk status, from Baa3.
“The ratings remain on review for further downgrade,” Moody’s Investors Service said in a statement.
The multi-notch downgrade of Russia’s ratings and maintaining the review for further downgrade were triggered by the severe sanctions that Western countries have imposed on Russia, including the sanctioning of the Central Bank of the Russian Federation (CBR) and some large financial institutions, in response to its military invasion of Ukraine (B3 review for downgrade) and retaliatory measures taken by the Russian authorities.
The ongoing review was initially triggered on February 25 by the start of Russia’s military invasion of Ukraine.
The downgrade of Russia’s ratings to B3 is driven by the following rating factors: Heightened risk of disruption to sovereign debt repayment given the severe and coordinated sanctions and significant concerns around Russia’s willingness to service its obligations; and likelihood of a sustained disruption to the economy and financial sector from the sanctions that limit access to Russia’s international reserves intended to buffer Russia from adverse shocks.
The scope and severity of the sanctions announced to date have gone beyond Moody’s initial expectations and will have material credit implications. Severe and coordinated sanctions imposed on Russia together with its retaliatory response in recent days have materially impaired its ability to execute cross-border transactions, including for sovereign debt payments.
Russia’s prohibition on transfers of foreign currency outside of the country in response to the sanctions, which appears at this stage not to apply to repayments of legacy debt, undermines Russia’s track record of willingness to service its debt and leaves debt servicing flows highly vulnerable to further intervention. Moody’s considers willingness to service debt a Governance consideration under its ESG framework.
The significant concerns around Russia’s willingness to service its debt are a reflection that Russia’s institutional strength has very materially weakened with increasing evidence that the executive faces few checks and balances.
This, in conjunction with the higher complexity and technical restrictions that Russia now faces to execute cross-border payments as a result of the sanctions, are commensurate with a sovereign rating no higher than B3.
The imposition of severe and co-ordinated sanctions, together with the financial ramifications from the potential delays to sovereign debt repayments, raise the probability of sustained disruption to Russia’s economy and the financial sector that impairs access to Russia’s financial reserves that were built to withstand adverse shocks.
The review period will allow Moody’s to assess the extent of disruptions to forthcoming sovereign debt repayments, the possibility of any workaround and whether investors are likely to incur losses. Moody’s will also continue to monitor further indications around Russia’s willingness to pay, including the possibility of a further tightening of restrictions on foreign-currency transactions which — if they were to include legacy debt — would formally impose a moratorium on debt repayments.
Concurrently, Moody’s lowered Russia’s local- and foreign-currency country ceilings to B2 and B3 from Baa1 and Baa2 respectively. The one-notch gap between the local-currency ceiling and the sovereign ratings at B3 reflects the increasing unpredictability of the government’s actions and high political risk following the invasion of Ukraine that could affect all Russian issuers.