The Russian economy is heading into a deep recession: the projected average growth over the next three years has been estimated at 0.5%. The years of the Russian oil boom are fading fast and tensions continue to rise with the West, in light of Russian pugilistic actions in the Ukraine. Standard & Poor's has judged the Russian government's prospects for servicing the debt as continuing to narrow, with few options left for the central bank of Russia to employ: available mechanisms are scaffolding for the teetering Russian banking sector or propping up the ruble. Following the credit downgrade, the ruble fell 7% in after-hour trading to reach a new low of 68 rubles to the dollar.
In what appears to be a terrible and perfect storm, the Russian economic growth prospects are diminished, the flexibility of the monetary policy of the Russian Federation has weakened, and Russian banks and corporations with foreign currency debt service requirements face the prospect of not having a foreign currency revenue stream. Bond funds that may only own investment-grade securities will be forced to sell Russian debt.
A more jaundiced eye shows that the downgrade of Russia's credit rating was just a single notch, but it was sufficient to propel the government's debt into the junk bond category (Baa3). The downgrade has been coming for some time as the world has watched the conflict in the Ukraine escalate and Russian oil prices hit a slippery slope. Other rating agencies, Fitch and Moody's, downgraded Russia's sovereign debt in January 2015, too, but not straight to junk bond status. Russia has turned a cold shoulder to the actions of the ratings agencies since the Russian central bank doesn't formally recognize the Western agency ratings when it can circumvent doing so for some types of transactions. In the works, too, have been talks between China and Russia to create their own joint ratings agency, which would enable the nations to supplant the Western ratings giants -- and underscore their disregard of Western pressure.
Russian current account has been running a surplus for years -- a cumulative surplus of more than $900 billion. This should not suggest a country in debt, but apparently the Russian banks and corporations have borrowed abroad and invested in British real estate, and the like.
The external debt as a percentage of GDP is considered low risk and…
Sources Used in Document:
Kramer, A.E. (2015, January 26). S.&P. cuts Russian debt one notch to junk level. The New York Times.
Krugman, P. (2014, December 18). Notes on Russian debt. The New York Times.
The timing of the quantitative easing is therefore essential. The first round of QE in 2009 essentially served the purpose of stabilizing the economy; the second round is intended to sustain the ongoing economic recovery by providing sufficient capital in the system that the positive momentum generated in the economy will eventually become a feedback loop of its own that results in the restoration of GDP growth and a reduction