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Subject Russia’s Debt Rating Cut by S&P. Will they default AGAIN?
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Original Message Dec. 8 (Bloomberg) -- Russia’s long-term debt rating was lowered for the first time in nine years by Standard & Poor’s, which cited capital outflows and the “rapid depletion” of the foreign currency reserves.

The rating was cut one level to BBB, the second-lowest investment grade, from BBB+, Standard & Poor’s said in an e-mailed statement today. The last time S&P downgraded Russia was in January 1999, when the country had a rating of SD, or ‘selective default,’ after the government reneged on $40 billion of debt. Russia’s outlook remains “negative.”

Russia, the world’s largest energy producer, raised interest rates twice last month and drained $143 billion, or about a quarter, of its foreign-currency reserves to prop up the ruble as oil prices plunged. S&P had raised Russia’s ratings during the past decade of oil-led economic growth by eight levels, helping to reduce borrowing costs for companies and the government.

“The massive accumulation of reserves is the main reason why Russia kept getting ratings increases, so without that it’s only natural that the rating would go down,” said Vladimir Osakovsky, an economist in Moscow for UniCredit SpA. “This will worsen the already-poor sentiment toward Russia.”

The benchmark 30-year government bond retained early gains after the announcement. The 7.5 percent dollar bonds snapped a five-day decline today, pushing the yield 34 basis points lower to 11.55 percent. The Micex index of corporate bonds erased an earlier advance to trade unchanged at 81.89.

‘Sharp’ Swings

Prime Minister Vladimir Putin said last week that Russia will avoid “sharp” swings in the ruble by using reserves to support the currency. The central bank has expanded the trading band against its euro-dollar basket four times since Nov. 11, allowing a 4 percent depreciation against the mechanism in that period.

“The rapid depletion of reserves in order to resist a more substantive adjustment of the nominal exchange rate increases the chances of discontinuous exchange-rate movements later, at a lower level of international reserves, with even more severe consequences for the private sector,” said Frank Gill, S&P’s primary credit analyst in London, in the statement.

The downgrade is “unjustified,” said Jerome Booth, who helps manage about $32 billion in emerging-market holdings at Ashmore Group Plc in London, including Russian government and corporate debt.

‘Not an Issue’

“Russia’s capacity to pay is not an issue, and it is completely in their interest to remain current on their obligations,” he said. “Look at the country’s reserves; there is less of a chance of Russia defaulting than some of the countries in western Europe.”

The government has pledged more than $200 billion to stem the worst financial crisis since 1998, including a banking liquidity boost worth $86 billion, following capital outflows. Slumping commodities prices, the war with Georgia and the seizing up of global capital markets prompted investors to pull at least $190 billion from Russia since Aug. 8, BNP Paribas SA estimates.

The managed currency has slumped 16 percent against the dollar since August as investors withdrew about $190 billion from the country amid Russia’s worst financial crisis since the 1998 debt default, according to BNP data.

The ruble was little changed at 31.6096 against the central bank’s basket of dollar and euro after slumping to 31.6236 last week, the weakest level since March 2005.

Current-Account Surplus

S&P said it expected Russia’s current-account surplus to swing into a deficit equivalent to 2.6 percent of gross domestic product next year, compared with a surplus of 5 percent in 2008 due to a “sharp deterioration in the country’s terms of trade,” the statement said. Russia’s GDP growth should decline “sharply” in 2009, it added.

Russia’s economy may shrink as much as 4 percent next year if prices for the raw materials it exports stay low, Interfax reported, citing Oleg Vyugin, chairman of MDM Bank and a former central banker.

The price of Russia’s Urals blend of crude oil was $39.54 today, a 72 percent drop from its July high of 142.50 per barrel. Energy, including crude oil and natural gas, accounted for 73 percent of exports to countries outside of the former Soviet Union except for the three Baltic states, in the first 10 months of the year, the Federal Customs Service said today.

‘Shift Into Deficit’

The budget is likely to “shift into deficit” as the government rushes emergency tax cuts into law, commodities prices stay low, and a weaker economy generates less tax revenue, S&P said. Russia’s budget surplus amounted to 7.8 percent of GDP in the first 10 months, the Finance Ministry said on Nov. 13, citing preliminary figures.

Russia may need to use all of the money in its two oil funds to cover its budget deficit and recapitalize banks, should oil prices stay at about current levels. The National Wellbeing Fund and the Reserve Fund held a combined $209 billion as of Dec. 1.

The ratings cut “might affect sentiment of those investors not that familiar with Russia. Others, though, won’t be that surprised,” said Elina Ribakova, chief economist in Moscow at Citigroup Inc.

“There isn’t significant enough foreign capital left in Russia for this to have an effect,” she said.
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