As we and many in the markets have predicated since early December, Standard and Poors (S&P) was the first of the three major credit rating agencies to drop Russia‘s rating to ‘‘‘BB+‘ or non-investment grade, ‘‘‘junk‘ status. Fortunately for Moscow, it generally takes two of the three major agencies (Moody’s or Fitch) to declare such a ratings cut to junk before investment-grade index funds begin to dump the country‘s sovereign assets. (Such selling is often automatic in a number of index-driven investment vehicles.)
Even though this move was anticipated ‘‘‘ and even ‘‘‘priced in‘ ‘‘‘ by the global markets, the ruble still fell to about 68 to the dollar (with a low of 80 during the ‘‘‘Black Tuesday‘ ruble crisis of December 16, 2014). The upsurge of Russian hostilities in eastern Ukraine and the prospect of new Western sanctions almost surely contributed to the ruble‘s newest woes. It is reasonable to expect that Moodys will be next to downgrade Moscow, followed by Fitch within the next several weeks, particularly if President Putin‘s new military provocations continue.
Another contributor to the ruble‘s decline could be the large-scale issuing of domestic bonds by cash-strapped oil giant Rosneft in the amount of Rbs 400 billion (about $5.9 billion at today‘s exchange rate), its second domestic bond sale in two months. It was the company‘s previous bond sale in December (Rbs 625 billion or roughly $11.6 billion at the time) that rattled currency markets and helped trigger the ruble‘s plunge. The coupon on the six-year bonds was set at 11.9%. Rosneft has crushing dollar debt of some $55 billion stemming from its TNK-BP acquisition deal in 2013.