As the old saying goes, “when it rains, it pours.” It seems that the rash of bad news for the Russian economy and investors in the Russian bond and stock markets continues to flow unabated. The latest bad news involving Russia is the decision by the global credit rating agency S&P to cut Russia’s sovereign credit rating to below investment grade. To top it off, S&P put a negative outlook on its rating. It’s expecting things to deteriorate more before they improve.
This should not be a surprise. Russia has been under a lot of pressure. First, there’s the economic sanctions imposed on it by the United States and the European Union due to its activities in Ukraine. Second and arguably a more important factor, the price of oil has collapsed by more than 50% recently. Russia is, for all intents and purposes, a monoculture. It only has one major export product which is energy. Put all together, these developments have caused a crash in the value of the Russian rouble. The latest bad news from S&P did the rouble no favors. The rouble crashed 5% against the US dollar.
What does this downgrade mean for Russia? It’s going to be harder for Russia to borrow money on the international market. It is also a prediction of Russia’s short-term to mid- term prospects. It would not be a surprise if Russian stocks are negatively affected by this negative rating because it is a judgment on the overall health and future prospects of the Russian economy. Expect things to get worse before they get better. One thing is for sure though: it’s still too early to count the Russians out. Russia’s still has a huge foreign currency reserve and it has a strong energy infrastructure. If the oil market recovers in the short term or mid term, Russia is sure to spring back. By how much is anybody’s guess
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