Fitch, Moody’s Cut Russia’s Sovereign Rating to ‘Junk,’ Rouble Dives to Record Low

People walk past the Central Bank headquarters in Moscow, Russia, on Feb. 11, 2019. Maxim Shemetov/Reuters

Rating agencies Fitch and Moody’s have downgraded Russia’s sovereign rating to junk status as a consequence of tough Western sanctions over the Kremlin-ordered invasion of Ukraine, sending the rouble plunging to a record low.

Fitch downgraded Russia to “B” from “BBB” and put the country’s ratings on “rating watch negative.” Moody’s cut Russia’s rating by six notches, to B3 from Baa3. With the move, the two rating agencies followed in the footsteps of S&P, which last week similarly slashed Russia’s rating to junk.

Turbulence has roiled Russia’s financial markets as a result of harsh sanctions imposed over the attack on Ukraine, which on Thursday entered its eighth day as Ukrainian forces continued their resistance against the invading forces.

Russia’s advance on Kyiv appeared stalled on Thursday and, despite heavy Russian shelling, Ukrainian forces still held Kharkiv and several other cities under attack, according to British military intelligence.

More than a million people have fled Ukraine since Russia’s President Vladimir Putin ordered his forces to launch the multi-pronged assault.

A Polish border guard assists refugees from Ukraine as they arrive to Poland at the Korczowa border crossing, Poland, on Feb. 26, 2022. Czarek Sokolowski/AP Photo

The invasion of Ukraine was denounced by the United Nations in a historic vote, while global brands exited Russia and its currency sank.

The rouble was more than 10 percent weaker against the dollar at 117.5 on the Moscow Exchange at 8:30 a.m. GMT, marking the first time the Russian currency has traded above 110 to the dollar in Moscow.

A top executive at index provider MSCI earlier this week called Russia’s stock market “uninvestable,” with MSCI and FTSE Russell both announcing on Wednesday that they would cut Russian equities from all their indexes.

Echoing that view was Peter Harrison, chief executive of British money manager Schroders, who on Thursday told Reuters that Russian stocks and bonds are now “in the realms of utterly uninvestable.”

In announcing its downgrade, Fitch said it expects U.S. and EU sanctions to have a much larger impact on Russia’s credit fundamentals than any previous sanctions in history.

“The severity of international sanctions in response to Russia’s military invasion of Ukraine has heightened macro-financial stability risks, represents a huge shock to Russia’s credit fundamentals, and could undermine its willingness to service government debt,” Fitch said in a statement.

Moody’s said the scope and severity of the sanctions have exceeded their expectations and have material implications for credit.

“Severe and coordinated sanctions imposed on Russia together with its retaliatory response in recent days have materially impaired its ability to execute cross-border transactions, including for sovereign debt payments,” Moody’s said in a statement.

“Russia’s prohibition on transfers of foreign currency outside of the country in response to the sanctions, which appears at this stage not to apply to repayments of legacy debt, undermines Russia’s track record of willingness to service its debt and leaves debt servicing flows highly vulnerable to further intervention,” it added.

Russia has responded to the sanctions with a raft of measures, including more than doubling its key interest rate to 20 percent, prohibiting Russian brokers from selling securities held by foreigners, and ordering Russian exporters to sell a large portion of their hard-currency revenues to bolster the beleaguered rouble.