Just in case there are some investors in sovereign debt out there who don’t keep up with the news, ratings agency Standard & Poor’s on Monday issued a decision confirming what most everyone interested in the field was already thinking: Buying bonds from the Kremlin these days is an extremely risky investment strategy.
A month after it telegraphed its intentions, S&P downgraded debt issued by the Russian Federation to “junk” status on Monday, which means that the agency has doubts about the country’s ability to pay its debts in the future. A junk rating is considered “below investment grade” and means that in exchange for the added uncertainty of lending to a risky borrower, lenders will demand higher interest rates.
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“The downgrade reflects our view that Russia's monetary policy flexibility has become more limited and its economic growth prospects have weakened,” S&P said.
Institutional bond investors typically do their own assessments of bonds and borrowers rather than simply relying on rating agencies. The S&P downgrade does, however, mean that many public and private investment funds that are barred by their internal rules from investing in securities below investment grade may soon find Russian bonds off limits. Many of the investment rules for such funds require a “junk” rating from more than one recognized ratings firm before barring investment in sovereign debt, so the S&P call won’t be enough. But Moody’s, for example, downgraded Russia last week with the warning that further hits to the Kremlin’s credit rating are on the way.
The S&P analysts warned that they expect Russia’s debt rating will fall farther before it improves.
The S&P analysts added, “We believe that Russia's financial system is weakening and therefore limiting the Central Bank of Russia's (CBR's) ability to transmit monetary policy. In our opinion, the CBR faces increasingly difficult monetary policy decisions while also trying to support sustainable GDP growth.”
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Russian Finance Minister Anton Siluanov on Monday downplayed the S&P decision.
“This decision demonstrates the agency’s exorbitant pessimism. It ignores a range of factors that characterize strong points of the Russian economy,” he said according to government-controlled news agency ITAR-TASS.
The currency markets disagreed, driving the Russian ruble to near-record lows against the U.S. dollar and other global benchmark currencies.
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