Why Moody’s Cut Russia to Two Notches above Junk | Wolf Street.
It was not the most productive summit in the history of mankind. President Vladimir Putin, after watching a military parade in Belgrade, Serbia, and questioning Kosovo’s independence, arrived in Milan on Friday so late that Chancellor Angela Merkel, with whom a private meeting had been scheduled, had to cool her heels for hours. Once done at 2 a.m., he headed over to his buddy’s place, persona non grata in EU politics, Silvio Berlusconi. But the Russian economy was not amused.
Russians know that the ruble is in trouble, and are not so naïve to think that their currency will start to strengthen again soon. Countless factors point in favor of further depreciation, not least the inability of Russian entities to borrow from international markets, recent marked falls in oil prices, and expectations of future US rate hikes…. Government estimates that capital flight is likely to reach between $90-120 billion this year look too conservative to us.
[A]s ever with Russia, there are countless risks. What if capital flight accelerates to rates well beyond expectations to generate genuine unease about the adequacy of the CBR’s [Central Bank of Russia] reserves? What if the ruble is completely irresponsive to interest rate hikes, and simply depreciates rapidly further beyond the CBR’s comfort zone, fueling a jump in inflation into double digits? And what if companies, already unable to borrow from international markets because of sanctions, struggle to meet debt repayments? And – perhaps most obviously – what if the geopolitical situation, which is well beyond the control of the CBR, further deteriorates?
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