Fitch downgrades Russia’s credit rating and says default is ‘imminent’ as sanctions take hold

The downgrades serve as signals to investors to steer clear of Russia, lest they get caught up in the expanding sanctions or sink money into assets that are bleeding value by the day.

The exchange rate for Russian rubles Wednesday afternoon was 120 to $1, and the Kremlin has barred its citizens from withdrawing more than $10,000 in hard currency from the nation’s banks. Russian President Vladimir Putin said the country could force a redomination of foreign currency sovereign debt payments into rubles for creditors in certain countries.

The effect, experts say, is that Russia is running out of dollars and other standard global currencies with which to pay creditors, and covering debts with rubles could only serve to further devalue the currency because it basically worthless in global markets.

Western sanctions — President Biden on Tuesday said the U.S. would stop importing Russian fossil fuels, and the European Union said it would cut its consumption by two-thirds this year — in response to Putin’s invasion of Ukraine also serve to starve the Russian economy of new revenue. That means injections of even rubles into its domestic economy could be hard to come by.

“If the currency nose-dives, by definition that means the country doesn’t have the ability to pay back its dollar denominated debts. It just doesn’t have the dollars,” said Chris Rupkey, chief economist at market research firm FWD Bonds. “The currency doesn’t buy anything if it’s worth nothing.”

Fitch downgraded Russia’s long-term foreign currency Issuer Default Rating, or IDR, from “B” to “C,” a classification that shows major concern for Russia’s ability and willingness to service its debt.

On the Fitch scale, AAA denotes the lowest default risk and an “exceptionally strong” capacity for meeting financial commitments. A “C” rating is an indication that a default process has begun or that “payment capacity is irrevocably impaired,” according to the company.

Putin turns Russia into the world’s most-sanctioned country, dwarfing Iran and North Korea

“The ‘C’ rating reflects Fitch’s view that a sovereign default is imminent,” the agency said, pointing to “developments” that have “further undermined Russia’s willingness to service government debt.”

“The further ratcheting up of sanctions, and proposals that could limit trade in energy,” the firm added, “increase the probability of a policy response by Russia that includes at least selective nonpayment of its sovereign debt obligations.”

The Biden administration said Tuesday that it would ban the importation of oil and natural gas from Russia, expanding already sweeping economic sanctions. The European Union also promised to cut its use of Russian gas by two-thirds this year and has imposed wide-ranging sanctions on Russia’s economy.

“Americans have rallied to support the Ukrainian people and have made it clear we will not be part of subsidizing Putin’s war,” Biden said, explaining why he was instituting a ban that carries enormous geopolitical consequences.

Numerous global businesses also have announced their intentions to pull out of the Russian market.

Russia bars purchases of dollars by citizens in sign of hard-currency pinch

In explaining the downgrade, Fitch pointed to sanctions on the country’s central bank and “technical barriers to servicing debt,” such as through clearing systems or transferring funds, as well as a Russian presidential decree on March 5 that it said could force a re-denomination of foreign-currency sovereign debt payments into local currency for creditors in specified countries.

On March 16, Russia is supposed to pay $107 million of interest on two bonds, although it has a 30-day grace period to make the payments, according to Reuters.

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After its invasion of Ukraine, Russia has become the most-sanctioned nation in the world, according to the global database Castellum.ai, dwarfing the high sanction totals imposed on Iran, North Korea and Syria. Moscow faces 5,532 sanctions from the United States, the European Union, Japan and even historically neutral Switzerland.

Russia’s central bank this week announced that it is prohibiting citizens from using rubles to buy U.S. dollars and other hard currencies for the next six months as it tries to keep the ruble’s value from plummeting further. The central bank also will limit to $10,000 the amount of U.S. dollars that clients can withdraw from hard-currency accounts at Russian banks, it said.

The measures are designed to prevent Russians from making a run on dollars as the ruble plummets to new lows under Western sanctions, which have limited the central bank’s access to its massive hard currency reserves.