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The Russian ruble has been getting hammered amid western sanctions over last summer’s Ukraine escalation along with the subsequent drop in the price of oil, which Russia heavily relies upon to finance it’s spending. This perfect storm led Russia’s Central Bank to implement a drastic double digit interest rate hike to 17%.
All of this has not gone unnoticed from U.S based sovereign credit rating agency Standard & Poor’s, which today has lowered Russia’s sovereign debt rating to junk. The official release from Standard & Poor’s states the following:
- In our view, the Russian Federation’s monetary policy flexibility has weakened, as have its economic growth prospects.
- We are therefore lowering our foreign currency sovereign credit ratings on Russia to ‘BB+/B’ from ‘BBB-/A-3’ and our local currency sovereign credit ratings to ‘BBB-/A-3’ from ‘BBB/A-2’.
- At the same time, we removed these ratings from CreditWatch, where they were placed with negative implications on Dec. 23, 2014.
- The outlook is negative, reflecting our view that Russia’s monetary policy flexibility could diminish further. We could lower the ratings if external and fiscal buffers deteriorate over the next 12 months faster than we currently expect.
Russia has been prepared to combat the negativity from the U.S based credit agencies for some time by insisting that it would ignore any ratings issued by the Big Three Western ratings agencies – Standard & Poor’s, Fitch, and Moody’s – that were issued after March 2014. Before today’s additional downgrade, Fitch and Moody’s had already downgraded Russia’s sovereign debt to just above junk status.
Furthermore, Russia and China announced last year intentions to launch a competing rating agency to S&P’s, Moody’s, and Fitch in 2015. The two countries are already partnered through the Universal Credit Ratings Group (UCRG), which was set up in Hong Kong in 2013 and already encompasses the most respected agencies from both countries, as well as the US-founded Egan-Jones Ratings Company. The new agency may be an expanded version of UCRG, which is still predominantly used by internal Chinese investors.
It is widely reported that Russia’s foreign currency reserves stand at a $380 billion – the sixth largest in the world – and sufficient to finance any immediate obligations. But the Russian Central Bank has been forced to burn the money keeping the ruble from collapsing further, and budget shortfalls due to oil prices have also put a strain on the treasury. All of this combined has led S&P to forecast 10% inflation for the Russian economy in 2015.
While the Russian ruble and Swiss franc markets play themselves out this year, another dominate headline is the potential move to parity for the EUR/USD. Getting a relief to start the new week after stalling on its approach of the 1.10 handle, this is the pair to watch early in 2015, as many predict parity while others believe the ECB’s latest QE has been priced in and we will now see a rebound in the pair. One thing for sure is that Forex markets have been volatile to start the year, with no bigger shock coming from the Swiss National Bank less than 2 weeks ago when the EUR/CHF floor was dropped. View below the latest chart of Eurodollar: