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Ratings Agency: Russia's Debt Is Junk

Standard and Poor's declared that Russia's debt was junk rated, thanks to "the effect we expect Russia's weakening economy to have on its financial system."

Posted on January 26, 2015, at 3:10 p.m. ET

Maxim Zmeyev / Reuters

The ratings agency Standard and Poor's lowered its rating of Russian debt to BB+, otherwise known as below investment grade or junk. The ratings agency attributed the latest downgrade to lower prospects for economic growh in the next few years and the "heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy."

The ratings agency also said that the country's financial system was "weakening," and thus making the Central Bank of Russia's efforts to support the economy less effective.

The Russian economy has been hammered both by EU and US sanctions and, more significantly, the plummeting price of oil. Russia is one of the world's leading oil exporters and has seen its currency, the ruble, has fallen precipitously in the last year. Today, one dollar buys about 68 rubles, a year ago it would have bought only 35.

Standard and Poor's projected that Russia's inflation rate would rise to above 10% this year, thanks to imports getting more expensive. S&P also criticized the Russian government, saying that its "institutional and governance effectiveness" is a "a rating weakness." S&P projected the Russian economy would basically cease growing in the next three years, saying it would likely grow by only .5% a year through 2018.

Russia has had to support some banks that have suffered thanks to the declining economy and depreciating ruble, including almost $2.4 billion to National Bank Trust. The government announced a plan last week to recapitalize Russian banks with almost $16 billion.

The other two major ratings agencies, Fitch and Moody's, have Russia's debt at one step above junk-level.

Other countries with BB+ rated sovereign debt are Indonesia, Turkey, and Bulgaria.