The ruble weakened for a fourth day as Russia's economy minister acknowledged the government risks losing its investment-grade rating amid a slump in oil that is tipping the economy into a recession.
The currency lost 1.3 per cent to 66.1170 per dollar by 6:32 p.m. in Moscow, bringing its four-day decline to 8.8 per cent. The ruble trimmed a drop of as much as 2 per cent after Finance Minister Anton Siluanov said Russia could convert as much as 500-billion rubles ($7.58-billion) of its $88 billion rainy-day Reserve Fund to support the currency, which he called "undervalued." Government bonds and stocks climbed.
Oil's 60-per-cent collapse from last year's high is pushing the economy toward recession after U.S. and European Union sanctions over Ukraine shuttered foreign debt markets for Russian companies. Standard & Poor's is reviewing Russia's credit score and there's a "fairly high" risk it will cut the world's biggest energy exporter to non-investment grade, Economy Minister Alexei Ulyukayev said at a conference in Moscow today.
"Expectations S&P might cut Russia to below investment grade have triggered a negative investor reaction to ruble assets," Andrey Verkholantsev, head of research at Kapital Asset Management LLC in Moscow, said. "Oil has fallen a lot and the ruble can't resist such pressure."
Russian assets have come under renewed pressure this year as Fitch Ratings last week lowered the country's credit rating to one level above investment grade. S&P is rethinking its score for the sovereign and may complete the review within days.
A downgrade by S&P could trigger more outflows from Russian assets as bond investors close their positions and switch the rubles they receive into dollars, according to Yury Tulinov, head of research at OAO Rosbank, Societe Generale SA's local arm.
The yield on five-year local-currency bonds, known as OFZs, fell 49 basis points to 17.15 per cent, paring the year-to-date increase to 174 basis points.
The cost of protecting the government's debt against default using credit default swaps fell 24 basis points to 576, trimming its increase in January to 100 basis points. Russia remains the fifth-riskiest credit globally, according to data compiled by Bloomberg.
Speaking in an interview on state television, Mr. Ulyukayev defended Russia's economy, saying that even if S&P cuts Russia, the impact of the decision on the country's economy will be minimal.
"This is unpleasant noise, which doesn't lead to serious macroeconomic consequences," he said. "We have no reason to doubt Russia's ability to pay debt, as debt is 11 per cent of gross domestic product. It's negligible."
Crude oil, which contributes about 50 per cent of Russia's state revenue together with natural gas, slid 0.3 per cent to $46.47 a barrel in London, paring a drop of as much as 2.2 percent earlier.
Support from the Finance Ministry "does make sense under the assumption of oil rebounding from current levels, but it doesn't for the alternative scenario of extra short-term weakening," Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow said by e-mail.
The ruble-denominated Micex stock index added 1.4 per cent to 1,554.14 as diamond producer OAO Alrosa climbed 8.1 per cent. OAO Uralkali, the world's biggest potash producer, rose 3.3 per cent. Exporters benefit from the weaker ruble because they earn in dollars and euros and their costs are mostly in the local currency.
"Exporter stocks are rising on the ruble's decline," Kapital's Verkholantsev said. "They're a defensive option for investors."