Russian financial markets saw a muted reaction on Tuesday (January 27) after ratings agency S&P downgraded the country's sovereign credit rating to "junk", with the rouble strengthening and Moscow-listed shares broadly steady.
Although the rouble fell sharply on Monday (January 26) and bond yields rose, analysts said that the immediate implications of the downgrade were limited, as the move was largely priced in and other major agencies still rate Russia above junk.
Grigory Birg, an oil and gas analyst at Moscow based Investcafe research company, told Reuters the S&P downgrade, while anticipated by market participants, added to a "perfect storm" brewing over the Russian economy.
"The main problem is the uncertainty of how to deal with this current situation, because it is a sort of a perfect storm, with high double digit inflation, already high interest rates, Russia being shut out of the international capital markets, all the while the commodity prices are dropping, which is clearly going to impact the economy. And I think the general consensus is that we are facing two to three years of recession," said Birg.
S&P cut Russia's rating from BBB- to BB+, citing Russia's weakened economic growth prospects, hit by low oil prices and Western sanctions over the Ukraine crisis.
Two other major ratings agencies, Moody's and Fitch, have yet to downgrade Russia to below investment grade.
Birg said Russia's rating may dissuade foreign investors.
"What this credit rating review is going to do is it is going to exacerbate the outflow of capital out of Russia and the interests of foreign investors in Russian assets, be it debt or equity. And, so it is going to be a hard time for people who are looking to come into the market and invest, it is going to be a very hard time for them to take that decision. I think more than likely, some investors will decide to wait out and see how long this crisis is going to continue," said Birg.
The rouble fell 6 percent on Monday, with around half the loss following S&P's downgrade in the evening. Russian assets had already fallen sharply before the decision because of renewed fighting in Ukraine and the threat of fresh Western sanctions against Russia.
Birg said the market had expected the downgrade.
"The yields on Russian government bonds were not representative of investment grade already before they were downgraded by the S&P to 'junk' and this is clearly indicative of the fact that certain investors have already closed down their positions in Russian securities. And the same actually applies to the equities. Russian equities have been deeply, greatly, under-priced for quite a while and this S&P's decision, at this stage unfortunately, is only a drop in the ocean of all the negative things that have been happening to the Russian economy," he added.