S&p Lowered Russia's Credit Rating Below Investment Level

- International rating company Standard & Poor's, lowered its sovereign credit ratings on Russia to 'BB+/B' from 'BBB-/A-3', below investment grade level, due to slowing economy hit by economic sanctions and sharp decline in oil prices, the company said in a statement.

"We also lowered the long and short-term local currency sovereign credit ratings to 'BBB-/A-3' from 'BBB/A-2'. In addition, we removed these ratings from CreditWatch, where they were placed with negative implications on December 23; the outlook on the long-term ratings is negative" S&P said in the statement.

The company also had revised the transfer and convertibility assessment on Russia to 'BB+' from 'BBB-'. "The downgrade reflects our view that Russia's monetary policy flexibility has become more limited and its economic growth prospects have weakened" S&P said. "We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy."

SANCTIONS AND COUNTER-SANCTIONS
The S&P said, Russia's financial system was weakening and therefore limiting the Central Bank of Russia's (CBR's) ability to transmit monetary policy. "In our opinion, the CBR faces increasingly difficult monetary policy decisions while also trying to support sustainable GDP growth."

These challenges had result from the inflationary effects of exchange-rate depreciation and sanctions from the West as well as counter-sanctions imposed by Russia, according to the rating company. "We project Russia's real GDP per capita growth to average less than economies with comparable levels of per-capita income over our 2015-2018 rating horizon."

SHARP DECLINE IN OIL PRICES
The Russian economy would expand by about 0.5 percent annually in 2015-2018, below the 2.4 percent of the previous four years, S&P said. "We see this muted projected growth partly as a legacy of a secular economic slowdown that had already begun before the recent developments in the Ukraine. It also reflects a lack of external financing due to the introduction of economic sanctions and the sharp decline in oil prices."

Ruble depreciation would subdue GDP per capita in dollar terms, whith a forecast at 8,600 dollars in 2015 and declining domestic purchasing power as a result of exchange rate depreciation and rising inflation would likely hamper Russia's growth prospects.

STRONG CORRELATION BETWEEN RUBLE AND OIL PRICES
Historically, there was usually a strong correlation between the external value of the ruble and oil prices, tha S&P reminded and said, "To mitigate oil-price vulnerability, in 2013 the government instituted a fiscal rule that caps government spending based on long-term historical oil prices, while targeting a central government deficit of less than 1 percent of GDP."

"This rule is designed to lead to asset accumulation when oil prices are high, and to allow the government to draw on assets when prices are low, thereby reducing the pro-cyclicality of fiscal policy. We expect fiscal policy to
significantly loosen as the sharp decline in oil prices, compared to historical prices, allows for higher deficits."

OUTLOOK
The negative outlook reflected its view that Russia's monetary policy flexibility could diminish further, the S&P's said and went on:

"For example, the imposition of exchange controls, if implemented, could further hamper monetary flexibility. We could also lower the ratings if external and fiscal buffers deteriorated at a materially faster pace over the next 12 months than we currently expect. We could revise the outlook to stable if Russia's financial stability and economic growth prospects were to improve."