International

Russia's Credit Rating Cut To Just Above 'Junk'

Saying that "the tense geopolitical situation between Russia and Ukraine" could accelerate the already heavy flow of money coming out of Russia, Standard & Poor's on Friday cut that nation's credit rating to just above "junk" level.

What's more, S&P says it doesn't expect things to improve anytime soon:

"In our view, Russia's political institutions remain comparatively weak and political power is highly centralized. Protesters, opposition members, nongovernmental organizations, and liberal members of the political establishment have come under increasing pressure. We do not expect the government to decisively and effectively tackle the long-standing structural obstacles to stronger economic growth over our forecast horizon (2014-2017). These obstacles include high perceived corruption, comparatively weak rule of law, the state's pervasive role in the economy, and a challenging business and investment climate."

Also looming: More economic sanctions from the U.S. and its allies as they try to dissuade Russian President Vladimir Putin from further interfering in Ukraine's affairs.

Bloomberg News says the downgrade puts Russia "on par with Brazil and Azerbaijan."

From Planet Money — Definition of the term "credit rating":

"A rating, or grade, given to an entity (company or government), to the bonds it issues, or to any other fixed-income security, by a rating agency. The ratings range from AAA to C or D (the largest rating agencies, Moody's and Standard & Poor's, have slightly different scales) and are supposed to indicate the risk of default on that bond.

"Rating agencies evaluate the financial health of the issuing entity (or, in more complicated situations, the cash flows that are going into the security) and set a rating accordingly; ratings can go up or down over time as circumstances change. Ratings matter for several reasons."

The BBC writes that "analysts said other credit rating agencies were likely to follow suit. 'Russia is going backwards as reflected by developments in relations with Ukraine and the West,' said Timothy Ash, analyst at Standard Bank. He said the move was 'bad for investment, bad for capital flows, and bad for broader political, economic reform and institutional reform.' "

Derek Halpenny, a foreign exchange analyst at Bank of Tokyo-Mitsubishi UFJ in London, said in a research note that the downgrade "will only reinforce the capital outflows while the Ukraine tensions persist," The New York Times adds.

Meanwhile, Russia's central bank on Friday raised interest rates. The Financial Times reports the bank "said that the decision was driven by 'increased inflationary risks,' which is a top concern for policy makers as Russians still have painful memories of previous episodes of currency devaluation and price increases in 1997-98 and 2008-09. The rouble has weakened 9 per cent so far this year and core inflation hit 6 per cent in March, above its target of 5 per cent."

Earlier today, we posted about this related news:

Russia Wants To Start World War III, Ukrainian Leader Charges

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