The S&P rating downgrade has no drastic impact on Russia’s economy

Standard and Poor's (S&P) downgraded the sovereign foreign currency credit rating of Russia on January 26, 2015 to ВВ+ from ВВВ- with a negative outlook.

Although there might be political reasons for the downgrade, the S&P argumentation seems to be reasonable. According to S&P analysts, Russia's monetary policy lacks some flexibility while Russia's economic growth prospects have seriously worsened. Furthermore, S&P points to the increasing risk of external and budget reserves shrinking because of worsening external market conditions and mounting state support of the economy.

S&P believes that the financial situation in Russia has been deteriorating, thereby weakening the Bank of Russia's potential to efficiently implement the monetary policy. The Central Bank of Russia has to take increasingly more complex decisions concerning the monetary policy, while making efforts to shore up a steady GDP growth. This is related to the inflationary effects of the weakening national currency as well as the Western sanctions and the Russian government's tit-for-tat response.

Overall, the S&P credit rating downgrade will have no heavy, adverse impact on the economic situation in Russia, because Russian companies have already been closed down from the European and U.S. money markets.

Nonetheless, the downgraded rating may affect the current portfolio investment in Russia, whose volumes have already been shrinking. The downgrade may further follow the downtrend.

Aleksandr Knobel, Ph.D. in Economics, Head of Foreign Trade Department