(Adds Moody’s quotes, background and context)
March 28 (Reuters) - Moody’s Investors Service on Friday placed Russia’s government bond rating of ‘Baa1’ on review for a downgrade as the conflict with Ukraine weighs on the country’s economic outlook.
The credit rating agency said the crisis in Ukraine could significantly hurt investor sentiment and further weaken Russia’s medium-term growth prospects, which had already been lowered by the Russian authorities in 2013.
Another driver underlying the review is the agency’s concern regarding Russia’s “rising susceptibility to political and financial event risk, primarily driven by the risk of further escalation of hostilities,” Moody’s said.
Russia’s seizure of Crimea earlier this month after the ousting of Ukraine’s pro-Moscow president following mass protests has triggered the worst East-West crisis since the Cold War.
“The rating agency believes that the current crisis could significantly dampen investor sentiment for several years to come by adding to existing deterrents to investment posed by Russia’s weak rule of law and high levels of corruption,” Moody’s said in a statement.
“This could further damage the country’s economic outlook given its large investment needs. It could also further constrain its ability to diversify the economy away from over-reliance on oil and gas,” the agency said.
Moody’s said it acknowledges Russia’s large foreign-currency reserves and limited external debt repayments and the current strength of the government’s balance sheet. But it noted that “wider economic sanctions and potential countermeasures by Russia could, were they to materialize, erode those financial buffers.”
Earlier this month, Standard & Poor’s and Fitch Ratings revised their outlooks for Russia to negative, saying they were concerned about the potential impact of EU and U.S. sanctions on Russia’s economy and business environment. The United States and other Western states have sought to isolate Russia diplomatically and charge it an economic price for the annexation of Crimea.
Targeted U.S. and EU visa bans and asset freezes against senior Russian and Crimean officials, with the threat of tougher economic sanctions to come if Putin goes any further, have accelerated capital flight from Russia.
During its ratings review, Moody’s said it will seek to obtain greater clarity on the extent to which the current crisis will exacerbate the country’s growth challenges as well as the resilience of Russia’s economy, public finances and external position if the crisis worsens.
Russia’s economy is already in trouble, with growth slowing to under 2 percent, inflation up and investment levels stagnant around 20 percent, well below necessary levels.
Russian Economy Minister Alexei Ulyukayev said on Thursday capital outflows could total around $100 billion this year, and would slow economic growth for full-year 2014 to well below earlier forecasts of 2.5 percent. (Reporting by Narottam Medhora and Will Dunham)