Moody’s places Russia and Ukraine ratings on review for downgrade

The decision reflects the negative credit implications from severe sanctions, ratings agency says

No 10 Downing Street in London is lit blue and yellow in solidarity with Ukraine after the Russian invasion. EPA

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The Cinquantenaire Arch lit up on the sidelines of a special meeting of the European Council to discuss the Ukrainian crisis, in Brussels. Bloomberg

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Moody’s Investors Service placed the sovereign ratings of both Russia and Ukraine on review for downgrade following Vladimir Putin’s decision to militarily invade the neighbouring country.

Russia’s Baa3 long-term issuer and senior unsecured ratings, as well as the P-3 other short-term rating, have been placed on review for downgrade, Moody’s said in a statement on Saturday.

“The decision to place the ratings on review for downgrade reflects the negative credit implications for Russia’s credit profile from the additional and more severe sanctions being imposed,” the credit rating agency said.

“These events represent a significant further elevation of the geopolitical risks that Moody’s had previously highlighted, which is being accompanied by additional and more severe sanctions on Russia, potentially including those that could impact sovereign debt repayment.”

Moody’s also placed Ukraine’s B3 long-term issuer ratings and foreign-currency senior unsecured rating on review for downgrade, it added.

Russia and Ukraine have been at loggerheads since 2014, when Russia annexed Crimea. Concerns have been rife over a possible Russian invasion as the country increased its troop presence along the Ukrainian border. Western nations have swiftly imposed financial and economic sanctions on Moscow following the attack and bombardment of cities in Ukraine on Thursday.

The conflict is having a “serious economic impact”, which will worsen the longer it continues, Kristalina Georgieva, managing director of the International Monetary Fund, said in a statement on Friday.

“This crisis comes at a delicate time, when the global economy is recovering from the ravages of the Covid-19 pandemic, and threatens to undo some of that progress.”

The IMF is exploring options for further financial support, including under the existing stand-by arrangement for an outstanding amount of $2.2 billion, she added.

“Beyond Ukraine, the repercussions of the conflict pose significant economic risks in the region and around the world,” Ms Georgieva said.

“We are assessing the potential implications, including for the functioning of the financial system, commodity markets and the direct impact on countries with economic ties to the region.”

Meanwhile, the Organisation for Economic Cooperation and Development Council decided to formally terminate the accession process with Russia, which was postponed in 2014, it said in a statement on Friday.

The council also asked the secretary-general to take necessary steps to close the OECD Moscow office and stop all invitations to Russia at ministerial levels.

The council further instructed the secretary general to take necessary steps to stop any projects funded through voluntary contributions from Russia, which have not yet started, the OECD statement added.

“The ultimate severity of the impact of new sanctions on Russia’s credit profile will depend on their scope, the sectors targeted and the degree of coordination between Western countries,” Moody’s said.

“With respect to Ukraine, an extensive conflict could pose a risk to the government’s liquidity and external positions given Ukraine’s sizeable external maturities in the coming years and the reliance of its economy on foreign-currency funding.”

Moody’s will also consider the degree to which Russia’s substantial buffers are able to mitigate the disruption brought about by the new sanctions and protracted military conflict, the agency said.

Russia has substantial fiscal buffers, with reserves in the National Wealth Fund amounting to about 11 per cent of gross domestic product at the end of 2021, according to Moody’s estimates.

“The accumulation of large foreign-exchange buffers has strengthened Russia’s external position. Foreign-currency reserves excluding gold, which stood at $469bn at the end of January 2022, are more than three times external debt repayment needs for 2022 and cover almost the entire stock of external debt,” the rating agency said.

The imposition of “severe and co-ordinated sanctions that materially disrupt the economy, public finances and the financial system for a sustained period” and therefore could impair Russia’s ability to service and refinance its debt, Moody’s said.

For example, sanctions that hinder Russian banks’ access to foreign currencies or international payment systems, such as Swift, would likely have a material impact on the economy and financial system, it added.

“Sanctions that lead to delays in the repayment of debt obligations may result in a default under Moody’s definition and a downgrade of the ratings,” the agency explained.

On February 26, the US in co-ordination with the European Commission, France, Germany, Italy, the UK and Canada, said they would disconnect certain Russian banks from Swift, escalating the intensity of economic sanctions on Russia.

Washington and its allies also pledged “restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions".