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UPDATE 2-Russia gets first rating downgrade in 10 yrs

Mon Dec 8, 2008 10:48am EST
 
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(Adds finance ministry reaction, quote, interventions; cuts)

* Russia's S&P rating cut to two notches above junk

* Pressure on reserves from oil, rouble

* S&P decision expected, market reaction muted

MOSCOW/LONDON, Dec 8 (Reuters) - Standard & Poor's on Monday became the first ratings agency to downgrade Russia in a decade, while data showed the central bank had spent $30 billion in currency market interventions last month.

S&P said it was keeping a negative outlook on Russia's new BBB foreign currency rating and BBB+ long-term rouble rating.

"The negative outlook reflects the likelihood of a (further) downgrade if the banking crisis and external pressures continue to impair the government's balance sheet and its still substantial arsenal of liquid assets, amid a weakening of underlying economic fundamentals," it said in a statement.

S&P, which has had Russia on negative outlook since Oct. 23, was the last of the three global ratings agencies to promote Russia to investment grade after Moscow got its house back in order following the 1998 financial crisis.

"It is like a notification to the Russian Finance Ministry, the central bank and the government that even if there is no risk of outright default by the federal government, the rating agencies are watching and that their respect for Russian economic management has fallen after recent events," said Anton Tabakh, fixed income analyst at Troika Dialog in Moscow.

A Finance Ministry official told Reuters the downgrade would limit borrowing opportunities for domestic debt issued next year, but should not hurt bond prices for now [ID:nL8160773].

Russia, which has not recently needed to use bonds to raise cash, stopped issues this year due to a lack of demand.

Investors have pulled back heavily from Russia since the August conflict with Georgia. Pressured by the global financial crisis and plummeting oil prices, Russia has been spending tens of billions of dollars to support its currency, the real economy and the financial markets.

Falling oil prices URL-E mean money may also be needed to prop up the budget.

The ratings decision "is linked to the fall in the oil price and the likely appearance of current account and trade deficits next year. The weakening of the rouble and the situation with the exchange rate could have also played a part," said Yaroslav Lissovolik, chief strategist at Deutsche bank in Moscow.

"To a certain extent markets were already discounting the probability of such an outcome, so it is a negative for markets but it probably won't have a big impact."  Continued...

 

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