What Does Russia’s Junk Bond Rating Mean?

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By Jacob Maslow

russia ruble bank notes in crisisNow that global debt rating company Moody’s has cut Russia’s debt rating to ‘junk’, it may bode ill for Russia in the short term, and the rest of the world possibly in the midterm. The short-term pain for Russia is pretty easy to see. The lower the rating is for a country’s bonds and government debt, the more expensive it would be for that country to borrow from global financial markets. They would have to pay a higher interest rate for their sovereign debts.

Moody’s did not cut Russia’s bond rating to ‘junk’ status for no reason. Thanks to the implosion of global petroleum prices recently, Russia’s economy is looking very vulnerable. Keep in mind that Russia is primarily a monoculture. A huge chunk of its economy is dependent on oil and energy exports. This is one aspect of the negative rating. The other aspect, of course, is the ongoing economic sanctions imposed by the European union and the Americans on Russia due to Russia’s involvement in the turmoil in the Ukraine.

Put these all together and it looks like that there will be serious short-term pain for Russia’s economy. In fact, according to Moody’s, Russia’s economy is highly likely to experience ‘deep’ recession this year. This may all turn into bad news for the rest of the world. If the Russian bear is wounded and is feeling cornered due to the economic pressure from Europe and elsewhere, it might lash out. Russia might take even bolder and more reckless moves. It would definitely be a good idea to think twice regarding the current sanctions being imposed on Russia. Another key concern is that Russia’s increasingly worsening financial state might force it to engage in an unofficial race to the bottom of oil prices in Asia.

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