Ranking goes down in expectation of more sanctions against Russia

Standard & Poor’s has downgraded Russia’s long-term foreign exchange ranking on liabilities denominated in foreign currency to BBB- from ВВВ, which a forecast ranking being “negative”. The long-term ranking denominated in the national currency was downgraded to BBB from ВВВ+, with a forecast ranking being “negative” too.


The short-term ranking denominated in foreign currency has been lowered to A-3 from А-2 while the short-term ranking denominated in the national currency confirmed А-2. The ranking decisions are based on risks of worsening conditions for external financing of the Russian economy.

The rankings have been downgraded not for economic reasons, but rather because of uncertainty and anticipation of more sanctions, and their effects, by western countries. Capital outflow from Russia has been presented as a reason for the ranking downgrade. I don’t think, however, that capital outflow may have such a serious effect on macroeconomic stability given the current balance of trade and ruble exchange rate.

Regretfully, it should be noted that internal investment activity is very low in Russia, thereby weakening domestic companies’ demand for foreign capital. Indeed, most part of capital outflow has been resulted not from foreign capital fleeing Russia, but rather from Russian economic agents’ increased demand for foreign currency. Therefore, changes to business activity in Russia may reverse the situation with capital outflow.

A capital outflow forecast of $100bn for this year looks quite realistic. The Central Bank of Russia has sufficient kit of instruments for taking measures aimed at stemming capital outflow. First of all, commercial banks’ liquidity should be restricted and respective exchange rate policy pursued. Furthermore, it implies liquidity restriction, not transition to a fixed ruble exchange rate, so that banks have no opportunity to invest available funds in foreign currency, thereby pushing down the ruble exchange rate.

Banks are facing no liquidity problems, because the ruble exchange rate is weakening and someone is buying foreign currency. Given that banks are having a large amount of accumulated foreign currency, all speculations about liquidity deficit are ambiguous: indeed, nothing prevents banks from selling foreign currency if they need for rubles.  To stop the ruble falling, a crimping demand for the rubles should be artificially created in the market and a part of foreign currency deposits should be converted back into ruble ones.

No foolish things like imposing retaliatory sanctions – closing the economy and refusing dollars – should be made to stabilize the situation in the Russian economy.

Should serious sanctions be imposed against Russia, our economy will be closed in any case on the side of western economic partners. This will require taking measures aimed at economic surviving and developing in autarky. However, such measures shouldn’t be taken preventively as long as the Russian economy remains open.

At the same time, it should be taken into account that sweeping sanctions are unlikely to be imposed. If we begin to take measures aimed at closing the economy while no sanctions will eventually be imposed, then we will create preconditions that might further deteriorate the economic situation.  

As long as sanctions are demonstrative, symbolic, we should follow the previous economic course factoring in worsened external conditions, weak investment activity inside the country.

In case of economic isolation from the West, Russia could potentially get itself reoriented towards the East. However, we should face the reality: in the past few decades Russia has been building up relationship with Eastern countries within the APEC framework, making efforts to implement a series of projects, but all these projects are long-term.

Such sanctions are painful, because in the short run, 1 to 2 years, in any case, we will not be able to be quick enough to redirect trade flows in volumes required to compensate for losses of restricted trade with western countries. The existing demand for Russian-made goods in Asian countries is being satisfied in full. There are two ways to intensify the trade: first, make Russian-made goods more competitive, second, ensure an infrastructure, e.g. gas-transmission infrastructure. However, this cannot be done in the short run. Should sweeping sanctions be imposed, the Russian economy will respond fast. Overall, redirecting trade flows is long-term project to be implemented whether or not such sanctions are imposed.

Sergey Drobyshevsky, Doctor of Economics, Research Director