Russia’s credit rating is ‘junk’

What does this mean? Stated simply, it means that ratings agencies – who try to judge how reliable a debtor is – have issued a warning about the Russian government. If traders in the bond market doubt Russia’s ability to pay back debts, it will make it much harder, or at least more expensive, for Russia’s government to borrow.

According to the BBC, the ratings agency Standard and Poor (S&P) gave Russia a rating of BB+, which puts it at the same level as Indonesia and Bulgaria. Why might it have made this statement? The factors that cause alarm bells to ring are typically:

• Instability due to inflation, or significant exchange rate change
• Steeply falling government revenues, or rising spending commitments
• Political uncertainty

In more colourful terms, “Russia’s monetary-policy flexibility has become more limited and its economic growth prospects have weakened,” S&P said in a statement. “We… see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy,” it added.

Russia’s economy has been in free fall since the middle of last year, when plummeting oil prices cut the income for its oil industry and the unrest in Ukraine led to international sanctions. Oil prices have plunged over 50% since the middle of last year, to $45 a barrel, which has been particularly difficult for Russia, which expected prices to stay near $100 per barrel in 2015. Russia’s economy is expected to contract by 4% to 5% this year. The currency has depreciated over 40% against the dollar in the past year.

I've tried to explain how bond markets work here.