Russia’s spluttering economy was dealt another blow this week as Standard & Poor’s cut the country’s debt rating to junk status and E.U. leaders warned they may impose more economic sanctions against Russia amid escalating violence in eastern Ukraine.
Standard & Poor’s cut Russia’s sovereign rating from BBB- to BB+ on Monday evening, after European markets closed, but while the U.S. stock exchange was open. It is the first major credit agency to downgrade Russia to junk status in more than a decade.
A few hours later E.U. leaders put out a joint statement saying they will consider extending sanctions against Russia. It said that the E.U. foreign ministers meeting on Thursday would be asked to “to consider any appropriate action, in particular on further restrictive measures, aiming at a swift and comprehensive implementation of the Minsk agreements.”
A ceasefire negogiated in Minsk last September has been repeatedly violated by both sides as violence has escalated over the past week.
The downgrade and talk of extending sanctions are likely to push the Russian economy into recession this year.
Many analysts had been expecting a downgrade, but Russian stocks listed on the U.S. stock exchange fell sharply after the announcement anyway. The ruble ended Monday trading 6.6 percent lower against the U.S. dollar, at 68.8 rubles.
The other major credit ratings groups, Moody’s Investors Service and Fitch Ratings, still rate Russia as one step above junk status, but may well cut the country's rating also. Moody’s cut its ratings on January 16, and said it is keeping a close eye on Russia's balance sheet and foreign currency reserves.
Bloomberg reported that the Russian prime minister, Anton Siluanov, said the downgrade showed “excessive pessimism” but was not a surprise.
“The decision shouldn’t have a further serious impact on the capital market because market participants already priced in the risks of a downgrade to Russia’s credit rating,” Mr. Siluanov said.
“Going from investment grade to junk is a big move, and the fact that one agency has done it will make it easier for others to follow,” Timothy Ash, the London-based head of emerging markets research at Standard Bank, told Handelsblatt Global Edition.
“It is bad news for the Russia story. Ratings are quite slow to move and it will now be very difficult for Russia to get back to investment grades," he said. "This downgrade will have a long term impact on the Russian economy.”
Mr. Ash said that while many had expected the downgrade, Standard & Poor’s negative outlook for the Russian economy would drag the ruble down further. The agency said “we also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy.”
It added: “We believe that Russia’s financial system is weakening and therefore limiting the central bank of Russia’s ability to transmit monetary policy. The central bank faces increasingly difficult monetary policy decisions while also trying to support sustainable GDP growth.”
Russian corporate borrowers have already been locked out of many international debt markets through sanctions imposed by the U.S. and Europe over Ukraine. S&P’s rating cuts will make it even harder for them to access credit.
Russia, which is the world’s biggest energy exporter, has been hit by the double whammy of falling oil prices and sanctions, but Mr. Ash said the Russian economy had deeper structural problems. “When oil prices were high, Russia didn’t implement enough reforms and it didn’t spend enough energy diversifying its economy. Little wonder it is in trouble now when oil prices are falling,” he said.
The downgrade comes amid signs the European Union is losing patience with Russia and its military intervention in eastern Ukraine.
Over the weekend, at least 30 people were killed and 100 injured during a rocket attack on a market in the strategically important port city of Mariupol on the Azov Sea. The Ukrainian government blamed pro-Russian separatists for the attack, but the separatists denied responsibility and said the Ukrainian army had been responsible.
The attack came as the leader of the pro-Russian separatists, Alexander Zakharchenko, announced a major new military offensive, saying his troops wanted to conquer the whole of the Donetsk region.
On Monday night there was more fighting in eastern Ukraine and nine civilians were reported killed.
In a statement issued Tuesday morning, E.U. leaders said "We note evidence of continued and growing support given to the separatists by Russia, which underlines Russia’s responsibility. We urge Russia to condemn the separatists’ actions and to implement the Minsk agreements."
The E.U has also said it will provide an extra €15 million in humanitarian assistance to eastern Ukraine to provide food, water, medicine and tents.
A Kremlin spokesman, Dmitry Peskov said Russia’s position remained that the Ukrainian government should talk to the pro-Russian separatists, a line the government in Kiev has repeatedly rejected.