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How will Russia's downgrade to 'junk' affect you?

Just when it looked like things couldn't get much worse for Russia's finances, credit rating agency Standard & Poor’s downgraded its rating to ‘junk’ for the first time in ten years. This is likely to make it harder for the government and banks to borrow, and will have complex implications for you if were planning to invest in the country. We take a look at how this happened and unravel the consequences.

The downgrade was triggered by Russia's weakened economy, caused by the falling price of oil combined with Western sanctions after the crisis in Ukraine. Standard & Poor’s has also blamed a lack of flexibility in the country’s financial policies. Other commentators have been more blunt, blaming mismanagement of the economy.

The new rating could begin a domino effect for Russia’s financial systems. It’s expected that other credit agencies will follow Standard and Poor’s' assessment over the coming months, narrowing the marketplace for investors. This will bump up the cost of borrowing, as some mainstream investors and pension funds aren’t allowed to buy junk bonds (risky, but potentially high-yield investments).

The prospect of high returns might make this seem like a good time to invest. However, many experienced investors lost in 2014 by assuming that Russia had hit its lowest point. It hadn’t; the rouble plunging from just over 0.03 US dollars per rouble to half that by December 2014. Around half of the country’s export income is from oil, so Russian assets are likely to be a better investment once oil prices bottom out. For now, they’re still falling.

The question for investors is when they can expect that decline to end. Standard & Poor’s has said that Russia’s credit rating could be reinstated over the next year. However, that's only if the outlook on financial stability and economic growth improves. If conditions stay the same, the firm only expects the economy to expand by just 0.5% in the next three years. 

Some commentators are predicting a full recession, meaning that if you're considering investing in Russia, it's best to wait for further declines in the rouble and Russian stock exchange. With a ₽1tn bank bailout on the horizon, it could be a long time before the Russian market is once again a solid investment opportunity.

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