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Junk status looms for inflating Russia

Thursday, January 15, 2015 - 02:10

Russia's credit rating is expected to be downgraded to ''junk'' in the next few days. It's already cut its budget and with a worsening situation in eastern Ukraine and still falling oil prices Sonia Legg asks now much worse it can get.

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In many parts of the world the hot topic is deflation - but in Moscow prices are rising - fast. In fact, the government expects inflation to peak at somewhere between 15 and 17% in March or April. And shoppers are feeling the pinch. (SOUNDBITE) (Russian) CUSTOMER, LYUDMILA, SAYING: "We feel it almost every day. Of course it hurts, but for now it's bearable." (SOUNDBITE) (Russian) CUSTOMER, KONSTANTIN, SAYING: "I was just telling the cashier that the price for sugar has almost doubled. Sausages are up, so are most meat and dairy products." Russia's economic problems are now so acute it's looking at a credit rating downgrade to "junk" status for the first time in a decade. That would exclude its bonds from a couple of high-profile indices and could set off a wave of capital outflows. James Bevan is Chief Investment Officer at CCLA. (SOUNDBITE) (English) JAMES BEVAN, CHIEF INVESTMENT OFFICER, CCLA, SAYING: "Russia borrowing in roubles is fine - Russia borrowing in dollars is not fine and there will be many people who are very anxious not to lend in the context of dollar-denominated debt." Moscow's slashed its spending plans by 10% to weather the crisis. Overall expenditure in 2015 will only increase by 5 percent, instead of close to 12 percent. Revenues are expected to drop by $45 billion this year if oil remains around the $50 a barrel mark. Sanctions are hurting too and the rouble continues to fall, using up central bank reserves. But Prime Minister Dmitry Medvedev says Russia intends to remain a global player. (SOUNDBITE) (Russian) RUSSIAN PRIME MINISTER, DMITRY MEDVEDEV, SAYING: "Russia, even under current conditions, is not going to cut itself off from the world, to change its course from creating a mobilised model of economic development. We made a huge step from a (OVER FORUM IN PROGRESS) post-Soviet, half-ruined economy to a major Western-style economy. It would be a monstrous mistake to return to the past." But ordinary Russians are beginning to see signs of the bad old days. And with the country starved of investment pressure is mounting for stronger government action. There's no sign of that in terms of ending the Ukraine crisis though. And some may be disappointed that the new cuts exclude defence spending.

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Junk status looms for inflating Russia

Thursday, January 15, 2015 - 02:10