Moody’s cuts Russia’s credit rating on rising default risk

Ratings agency Moody’s cut Russia’s credit rating on Sunday to the second lowest notch on its scale, citing central bank capital controls that are likely to restrict payments on the country’s foreign debt and lead to a default.

Moody’s said its decision to cut Russia’s rating was “driven by serious concerns about Russia’s willingness and ability to repay its debt obligations.”

Russia’s economy has plunged into crisis as a result of harsh sanctions imposed by the West, which include freezing central bank assets held abroad and withdrawing several Russian banks from Swift’s international payment systems.

Last week, the Russian central bank temporarily suspended payments and on Wednesday said it had banned the payment of coupons to foreign investors holding ruble-denominated sovereign debt.

On Sunday, the central bank said that Russian creditors and those from countries that did not adhere to the country’s sanction would be paid in rubles at the exchange rate prevailing at the time of payment. Creditors can also be paid in the currency in which the debt was issued if they obtain special permission.

For creditors in other countries, payments would be deposited in rubles into a special account that would be governed by rules set by the central bank, he added.

Moody’s said default risks have increased and foreign bondholders are likely to recover only part of their investment.

“The likely recovery for investors will be in line with the historical average, consistent with a rating of Ca,” he said. “At the Ca rating level, recovery expectations are at 35-65% (of face value).”

Moody’s and rating agencies Fitch and S&P Global rated Russia at Baa3/BBB investment grade levels in early March. All three have since lowered their scores by several points, putting the country in the “junk” rating.

S&P rates Russia “CCC-minus” while Fitch is at B with a negative outlook, meaning a downgrade is likely.