More Pain Lies Ahead For Russia As S&P Downgrade To Junk Status Seen Likely

More pain may lie ahead for Russia in the short term as the nation’s sovereign credit rating is on the horizon of being downgraded into junk territory for the first time in over a decade.

On Friday, Fitch Ratings downgraded Russia’s sovereign rating to ‘BBB-‘ (from BBB) – which happens to be the lowest investment grade before the notorious “junk status” – in addition to placing Russia on a negative watch outlook.

The news from Fitch is another bruise for Russia, whose economy has been battered amid sanctions and turmoil.

However, the move by Fitch comes as no surprise as it was widely expected by investors.

Russia, once a powerful BRIC nation (Brazil, Russia, India, China) amongst its emerging market peers, will remain a dominant piece of the puzzle in the long term, however short-term issues will need to be ironed out to ensure future prosperity and to ease investor concerns.

In regards to the ratings cut from Fitch, which happens to be Russia’s worst rating seen since 2004, this is still a level that separates investment from non-investment, a category that implies low default risk and also does not scare off a worldwide crowd on investors.

Russia’s credit rating now appears to be set to be cut to “junk” status, a move which (again) may not come as a shock to the market, but would impact the nation further as investment into a wide range of emerging market bond or stock indexes would no longer be eligible if there were to be a downgrade of the nation’s credit rating to “junk” status.

Standard & Poor’s (S&P), currently rates Russia at ‘BBB-‘, with a negative outlook, which means that its next move will likely push Russia into “junk” status.

S&P recently said in a statement on December 23, 2014 that it will conclude its review on Russia in mid-January and placed the nation on negative watch due to “a rapid deterioration of Russia’s monetary flexibility and the impact of the weakening economy on its financial system.”

Markets are already pricing Russia as junk, according to bond yields and debt insurance costs, as the Reuters graphic below displays.

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Graphic courtesy of Thomson Reuters.