Moody's puts Russia on review for downgrade

The rating agency said that the Ukraine crisis could exacerbate Russia's already troubled economy

Moody’s put Russia’s credit rating on review for a possible downgrade, saying the Ukraine crisis could exacerbate its already troubled economy.

The ratings agency’s Investor Service said yesterday that if the review confirms that Russia's economic strength is being eroded by the situation, it could lead to a one-notch cut in the country's Baa1 rating.

The current crisis “could significantly dampen investor sentiment for several years to come by adding to existing deterrents to investment posed by Russia's weak rule of law and high levels of corruption," Moody's said.

"This could further damage the country's economic outlook given its large investment needs," it added. "It could also further constrain its ability to diversify the economy away from overreliance on oil and gas."

Moody's said it expects that the conflict could contribute to an economic contraction of 1 per cent in 2014, against previous expectations of two per cent growth.

Moody's added that the risk of further escalation of the conflict between Russia and the West over Ukraine was crucial to the review.

It acknowledged that Moscow's huge reserves and low level of foreign debt could buffer any fiscal difficulties for the government.

"However, wider economic sanctions and potential countermeasures by Russia could, were they to materialize, erode those financial buffers,' it said.

Russia's annexation of Ukraine's Crimea region earlier this month and its massing of troops on the country's eastern border this week has led to deep pressure on the economy, including sell-offs of the ruble and Russian equities, and a flight of capital from the country.

The United States and Europe have hit the country with sanctions, on top of political and business figures.

And the European Union is moving to diversify its energy supplies away from dependence on Russian oil and gas -- which are a crucial source of income for Moscow.