Fitch downgrades Russia, says sovereign default is imminent

Fitch typically does not assign Outlooks or apply modifiers for sovereigns with a rating of 'CCC' or below.

The 'C' rating reflects Fitch's view that a sovereign default is imminent,

said the ratings agency.

This rating action follows a downgrade by Fitch of Russia’s Long-Term Foreign-Currency IDR to 'B'/Rating Watch Negative on 2 March. The rating agency added that

developments since then have further undermined Russia's willingness to service government debt.

This includes the Presidential Decree of 5 March, which could "potentially force a redenomination of foreign-currency sovereign debt payments into local currency for creditors in specified countries."

In addition, the application of Central Bank of Russia regulation has "restricted the transfer of local-currency OFZ debt coupons to non-residents since late last week."

"More generally, the further ratcheting up of sanctions, and proposals that could limit trade in energy, increase the probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations."

"To a lesser extent, the risk of imposition of technical barriers to servicing debt, including through the direct blocking of transfer of funds, or through clearing and settlement systems, have also risen somewhat since our last review."

Fitch said the lowering of the Country Ceiling to 'B-' reflects "the expected impact of capital controls in impeding transfer and convertibility."

"The differential to the Long-Term IDRs is due to the potential for a degree of selective enforcement of capital controls or the potential ability for some entities to make payments," it added.

Fitch's rating is in line with the current rating by Moody's. The firm decided over the weekend to downgrade Russia by two notches to Ca from B3, indicating a near-bankruptcy situation. (This is equivalent to Fitch's current rating.)

Moody's said

the risk of a default occurring has significantly increased.

"The negative outlook reflects the significant risks to macro-economic stability posed by the imposition of severe and co-ordinated sanctions following Russia's invasion of Ukraine (Caa2 review for downgrade) and the financial ramifications from delays to sovereign debt repayments and banking and corporate sector stress that are likely to have negative feedback loops for macro stability.

Concerns around the government's willingness to pay and the unpredictability of government actions could result in larger than historical average losses for investors,

said Moody's.

It is worth noting that Russia was in the investment-grade category with credit rating agencies until early March, even days after it invaded Ukraine.

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