By Peter Schroeder - 03/20/14 01:52 PM EDT
Standard & Poor’s took a step toward downgrading Russia’s credit standing, saying that the standoff over Russia’s actions in Crimea were already harming the nation’s economy.
The agency assigned a negative outlook to Russia's rating, scrapping the stable outlook it previously assigned. It cited U.S. sanctions and “heightened geopolitical risk.”
It could get worse for Russia soon, with the European Union and U.S. mulling further sanctions on important Russian figures and institutions.
S&P also said there is a “material risk” that the conflict could expand beyond Crimea, as violence between Russian backers and critics could spread to parts of Eastern Ukraine. If the dispute expands, the pressure from the West could grow as well.
“Should the situation deteriorate, we believe further and wider sanctions could be imposed against Russian institutions and individuals, potentially including trade restrictions,” S&P said. “In our view, these sanctions could further undermine Russia's economic growth prospects.”
On Thursday, President Obama announced a second set of sanctions against Russia, targeting 20 senior government officials, influential businessmen, and a bank supportive of allies to Russian President Vladimir Putin. Obama also signed a new executive order that would give him the power to impose sanctions on “key sectors of the Russian economy” but did not provide specific details.
Earlier this week, the U.S. announced an initial set of sanctions targeting 11 individuals. The U.S. and European allies have repeatedly called Russia’s actions in the Crimean peninsula, as Russian troops have advanced into Crimea and secured military bases there.
On Sunday, Crimea voted overwhelmingly to secede from Ukraine and join Russia, but the U.S. and Western allies have refused to acknowledge the vote as legitimate.
Russia has responded to U.S. action with sanctions of its own. After Obama announced further steps on Thursday, Russia said it had barred nine U.S. officials in Congress and the administration from entering the country.
S&P said in its analysis that Russia’s central bank has taken drastic steps to aid the Russian economy since the standoff began. The rater said Russia has seen its currency lose roughly 10 percent of its value in 2014, and already has experienced capital outflow equivalent to all of 2013.
The rater also noted that Russia’s economy, heavily dependent on oil revenue, was already slowing before the tension over Ukraine began. Its economy grew by 1.3 percent in 2013, its lowest level in 1999, and could fall further if the international standoff continues.
“In our view, there is a significant downside risk that growth will fall well below 1 percent if the uncertainties caused by the geopolitical tensions do not subside in the near term,” the rater said.
By assigning a negative outlook to Russia’s credit, S&P is saying it believes there is at least a 1-in-3 chance it could lower the rating within the next two years. The rater currently assigns a ‘BBB’ rating on Russia’s foreign currency.