It’s no wonder Fitch has downgraded Russia’s sovereign rating by another six notches further into the junk territory to ‘C’ from ‘B’, saying a default is imminent because sanctions and trade restrictions have undermined its willingness to service debt.
The change comes less than a week after Fitch revoked Russia’s investment-grade status, slashing its rating six notches to “B” from “BBB.”
Now Russia’s rating is ‘C’ which in Fitch’s assessment is only one step above default, bringing it in line with the Moody’s current equivalent score of ‘Ca’.
Hours before the Fitch announcement, President Putin ordered his cabinet to compile a list of commodities and countries (and companies?) as the basis for Russian sanctions on the west and a supporter of his in the country’s parliament suggesting nationalising the factories and other facilities of companies that had stopped dealing with the country since the invasion on February 24.
Earlier Putin had decreed that foreign creditors could be paid in roubles (now almost worthless) instead of US dollars as specified in loan agreements.
At the same time a growing list of banks and other companies revealed potential losses from their sanctions – with big oil leading the way with total write downs and impairments heading past $US50 billion with losses on more than $US170 billion of direct portfolio investments still to be worked through.
The key sanction from the West – against Russia’s central bank and several other banks cutting them off from dealings with Europe and the US and elsewhere (but not China, it seems) – has crippled Russia’s finances.
In its rating announcement, Fitch pointed to the Presidential decree on repayments which Fitch said could potentially force a re-denomination of foreign-currency sovereign debt payments into local currency for creditors in specified countries.
“Further ratcheting up of sanctions and proposals that could limit trade in energy increase probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations,” the ratings agency said in a statement.
On March 16 (next Wednesday), Russia is due to pay $US107 million in coupons across two bonds, though it has a 30-day grace period to make the payments. Any attempt to make a payment in roubles would probably see the country put on the verge of default.
Tuesday night’s decree about possible Russian sanctions on the west followed the decision by the Biden administration to ban imports of Russian oil, the European Union saying it would cut imports of Russian gas by two thirds and the UK government adding that it would end Russian oil imports by the end of this year and would also look at cutting imports of gas.
The actual commodities to be banned from export will be determined by the Russian cabinet, the decree said (according to Reuters and the Wall Street Journal). Mr. Putin gave them two days to come up with a list of commodities and of countries subject to the ban.
Russia is the third-largest oil producer in the world after the US and Saudi Arabia and the biggest exporter of natural gas.
Russia is also a major supplier of grains and metals such as aluminium, nickel and palladium, which it accounts for 40% of the world’s production.
The decree was a follow-up to earlier measures taken by the Kremlin in retaliation for Western sanctions. It described the goal of the commodity-export ban as “ensuring the security of the Russian Federation and the uninterrupted functioning of industry.” The ban will be in effect until December 31, according to the decree.
What commodity analysts can’t understand is how Russia will avoid shooting itself in the foot by banning exports of key products. The only option seems to be that Russia will continue to produce these products and try and engage in sanction busting shipments through central Asia and China.
Russia accounts for around 10% of global nickel production of around 2.5 million tonnes. Prices have already soared to the point where the London metal Exchange suspended nickel trading Tuesday after prices reached a record $US101,000 a tonne before easing back to around $US71,000. That was after Monday’s 61% surge. The trading halt will apply until Friday at the earliest.
Palladium is a key metal for renewables, but there are other smaller sources in South Africa and larger sources to come from Australia – Chalice Mining for example’s Gonneville prospect in WA and prospects around Broken Hill in NSW. These are several years off.
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Meanwhile poker machine maker, Aristocrat Leisure said in Wednesday that it had suspended its Russian operations and was preparing to relocate most of its 1,000 employees in Ukraine.
“To date, Aristocrat has assisted over two-thirds of our Ukraine based employees and their families to voluntarily relocate, either internationally or to safer locations within the country. A special task force has been set up in Poland to assist staff and families on the ground,” it said in a statement to the ASX.
Aristocrat said in the statement that the Ukraine crisis will not impact on earnings. The company’s first half is due to close on March 31.
“Unfortunately, operating in Russia is currently not viable and Aristocrat confirms it will suspend operating our mobile games in Russia,” it says.
“In respect of our Russia based employees, we are exploring our strategic options and we will continue to do what we can to support our Russia based employees.”
Aristocrat says it will continue to closely monitor impacts of the crisis and provide an update at its half year financial results in May.
