What Does Downgrade To ‘Junk’ Status Mean For Russia?

Russia was making headlines again Tuesday, and the news didn’t get any better for the country’s battered economy, which is teetering on the brink of recession.

Ratings agency Standard and Poor’s cut Russia’s foreign currency credit rating to BB+ and issued a negative outlook for the future.

Why The Cut?

Standard and Poor’s gave several reasons for the downgrade. The ruble has lost more than half its value in a matter of months.

Plummeting oil prices and international economic sanctions imposed on Russia by the U.S. and other countries stemming from Russia’s intervention in the Ukraine are dragging Russia’s economy down.

Russia’s GDP is expected to contract by up to 5 percent in 2015 for the first time since the global financial crisis in 2009.

What Does It Mean?

While a one-notch credit cut alone is not devastating, the cut to BB+ level has the potential to be particularly harmful. BB+ rated investments are considered to be non-investment grade or “junk” status.

This is the first time Russia’s credit has been rated at junk status by Standard and Poor’s since 2004. Many international investment funds are prohibited from investing in junk-rated debt, and the downgrade could make it a lot more expensive for Russia’s government to borrow in international markets.

What’s Next?

Investors will be watching the other two main credit ratings agencies, Moody’s Investor Service and Fitch Ratings, both of which still have investment-grade ratings assigned to Russia. If one or both of the other agencies downgrade Russia to junk status in upcoming months, it could exacerbate Russia’s difficulties in staving off a deep recession.

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