Russia: Current sovereign debt ratings will be ignored

Russia’s Central Bank has announced it will use credit ratings of lenders before March 1 of last year (2014) in determining its capital requirements, artificially easing pressure on debt ridden Russian companies struggling for refinancing. Without access to Western capital markets, companies have either been forced to accept egregiously high interest rates from non-Western banks, or rely on subsidies from the Russian government. With Russian dollar reserves still in the hundreds of billions, the government has been propping up companies and industries that would have otherwise needed to default, averting a banking crisis.

Credit ratings are often used to calculate risk weightings for loans – and the fact that the Russian Central Bank is reverting to old ratings all but confirms that most Russian private (and public debt) is in danger of becoming junk. While this sends yields skyrocketing, it raises the risk that  interest coupons will be unable to be paid.

Western ratings agencies have been, one after another, downgrading Russian government debt. The largest of these, Standard and Poor’s, announced that it is 50% likely to cut the sovereign to junk for the first time since Russia’s recovery from the 1998 financial crisis.

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