Russia's foreign-currency credit rating was cut to junk by Standard & Poor's, putting it below investment grade for the first time in a decade, as policy makers struggle to boost growth amid international sanctions and a drop in oil prices.
S&P, which last downgraded Russia in April, cut the sovereign one step to BB+, according to a statement released today, the same as countries including Bulgaria and Indonesia.
The ratings firm said the outlook is "negative". Russian stocks on US exchanges tumbled with the ruble following the announcement which came after the close of equity trading in Moscow.
The world's biggest energy exporter is on the brink of a recession after oil prices fell to the lowest since 2009 and the US and its allies imposed sanctions over President Vladimir Putin's actions in Ukraine.
The penalties have locked Russian corporate borrowers out of international debt markets and curbed investor appetite for the ruble, stocks and bonds.
"Russia's monetary-policy flexibility has become more limited and its economic growth prospects have weakened," S&P said. "We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy."
The ruble, the world's second-worst performer last year after a 46 per cent plunge against the dollar, plummeted after the S&P decision and closed 6.6 per cent weaker at 68.7990 versus the US currency.
A Bloomberg index of the most-traded Russian stocks in the US ended a three-day gain, tumbling 5.5 per cent.
The yield on Russia's US$3 billion of bonds due 2023 jumped 0.39 percentage point to 7.04 per cent, according to data compiled by Bloomberg.
That compares with Bank of America's BB US Dollar Emerging Markets Sovereign Index which yields an average 4.62 per cent.
Some investors are prevented from owning debt rated speculative grade. Moody's Investors Service and Fitch Ratings still have Russia as investment grade.
"We had thought that the cut to junk was largely priced in, but the ruble is under pressure now and most likely the weakness will continue in the morning, and there's likely going to be selling in bonds." said Dmitry Polevoy, an economist at ING Groep in Moscow.
A selloff in local-currency bonds, known as OFZs, will be limited because they're still rated above investment grade, according to Polevoy. S&P reduced them to BBB-, one level above junk.
The rating company's move showed "excessive pessimism", said Russian Finance Minister Anton Siluanov.
"There's no reason to dramatise the situation," Siluanov said. "The decision shouldn't have a further serious impact on the capital market because market participants already priced in the risks of a downgrade to Russia's credit rating."
Policy makers are struggling to contain the country's worst currency crisis since 1998. The central bank shifted to a free-floating exchange rate ahead of schedule in November and is overseeing a 1 trillion-ruble bank recapitalisation plan.
Last month, the central bank took its biggest step to shore up the currency, raising its key interest rate to 17 per cent from 10.5 per cent in a surprise announcement.
"We believe that Russia's financial system is weakening and therefore limiting the central bank of Russia's ability to transmit monetary policy," S&P said. "The central bank faces increasingly difficult monetary policy decisions while also trying to support sustainable GDP growth."