Russia raised its benchmark interest rate today, delivering the desired effect of putting the brakes on the rouble’s decline but failing to overturn any of this week’s losses.
Investors have bought the rouble on any signs of Russian concessions to end its stand-off with Ukraine and hopes of thawing tensions between Moscow and the West but there appeared few reasons to buy Russian assets this week.
The rouble fell 1 per cent against the dollar over the week to Rbs35.97, undermined by a sell-off in the stock market, where the Micex index fell during all five trading sessions, losing nearly 5 per cent in the process.
Russian benchmark 10-year bond yields, meanwhile, rose 41 basis points this week as prices slid. Losses today were driven by a sovereign downgrade from Standard & Poor’s, which lowered its rating to BBB-, leaving Russian debt teetering one notch above junk grade.
“Russia is already in an environment of international capital deleveraging and that creates a powerful negative spiral: as investors and banks take capital out of Russia, local assets get hit further and Russia local capital flies out of the country,” said Luis Costa at Citi.
Russian bonds slid, sending yields to a six-week high, after S&P’s cut the nation’s credit rating. The yield on government debt due February 2027 jumped 24 basis points to 9.6 per cent, taking this week’s advance to 60 basis points.
S&P said more downgrades are possible if the economy deteriorates and the US and Europe expand sanctions. “What we’re seeing now is a pretty permanent exodus from Russia,” said Lars Christensen, an analyst at Danske Bank A/S in Copenhagen. “It will be very difficult for the central bank to fight it because a consequence of this is a further drop in economic activity. Given the geopolitical risk, given that this shock has been of a permanent nature, I think the S&P downgrade is fully justified.”
Russia was placed on review for a downgrade by Moody’s Investors’ Service and Fitch Ratings cut its outlook to negative. S&P’s “negative outlook will keep investors anxious,” said Igor Golubev, head of fixed-income research at OAO Promsvyazbank in Moscow.
The move "has only partially been priced in" and Russia runs the risk of being lowered to BB+ by S&P at its next review in July, he said.
– Copyright The Financial Times Limited 2014/
Bloomberg
