The struggling Russian economy was short on good news last week as Moody’s Investors Service slashed the country’s credit rating to its second lowest level, Baa2, citing the crisis in Ukraine and Western sanctions.
The move follows similar ratings downgrades by Fitch Ratings Ltd and Standard & Poor’s and reaffirms Russia’s meager medium-term growth prospects. In the more immediate future, Russian equity markets remain a risky play. Long term, the picture is less clear and Russia’s vitally important energy industry is riddled with uncertainties.
Amid Western sanctions over Russia’s actions in Ukraine, plummeting oil prices have contributed to the ruble’s rapid decline – already down 19 percent on the year against the dollar. To date, Russia’s central bank has spent approximately $60 billion to prop up the struggling currency. If commodity prices remain low for a prolonged period, Moody’s has warned that it could further downgrade Russia’s rating, a step that former Finance Minister Alexei Kudrin views as the end of the line for Russia’s financial markets.
The recent downgrade, while not a death knell, does create more difficulties for Russian companies seeking loans or quick cash. Furthermore, any budget deficit next year would be difficult to finance.
Investment shortfalls are particularly crippling for the energy sector, and Russian heavy-hitters Rosneft and LUKoil are feeling the squeeze. In August, Rosneft asked the state for $42 billion in aid, a figure nearly triple their record net income in 2013. LUKoil recently began production five months early at their Imilorskoye fields in an effort to increase revenue and boost declining production in the region. Both companies face uphill battles as their primary Western partners, ExxonMobil, Total, and Anglo-Dutch Shell, have put on hold their participation in joint ventures.
Still, reversing production shortfalls does not equal demand, and demand is what Russia desperately needs. Demand growth is lower across the board and specifically where Russia needs it. Economic activity in the European Union has stalled, shrinking a market that is already set on reducing its dependence on Russian oil. China, too, has seen its economic growth slow and in turn, its need for Russian gas, dampening Gazprom CEO Alexei Miller’s grandiose plans.
A seemingly perfect storm of economic woes has forced Russia to act with urgency as they seek to shore up their books for the coming year. Investor confidence is not likely to return as the dispute in Ukraine continues and private property rights remain up for discussion. Capital flight remains high and Russia’s bank is preparing for the worst. Demand and political might continue to ebb and flow, but Russia will remain a price taker.
By Colin Chilcoat of Oilprice.com
More Top Reads From Oilprice.com:
- Russia Opens Criminal Probe Into Plane Crash Death Of Total CEO
- Putin Threatens Gas Reduction To Europe
- World War III: It's Here And Energy Is Largely Behind It