This past Monday, Standard & Poor’s Ratings Services downgraded Russia’s credit rating to BB+, also known as “junk”, for the first time in more than 10 years. This means that it is below investment grade, reflecting the country’s struggling financial position. The Russian economy has been thrown in a downward spiral because of intensifying pressure from sanctions from the United States and the European Union over the Ukraine crisis, and the steep decline in oil prices, an industry from which Russia derives much of its revenue from.
Though the credit rating is a snapshot in time reflecting the current status, it is indicative of a poor future outlook and anticipative of a recession for the Russian economy. With inflation at 11.4%, the ruble losing 50% of its value to the American dollar, and an estimated 50% of the government’s revenue coming solely from oil and gas exports, the future looks grim.
This could become a troubling issue globally since Russia is a big contributor to the global market. Specifically, European nations are heavily dependent on Russia’s specialty exports in the energy sector with 30 percent of Europe’s gas supply coming directly from Russia. Should Russia fall into a recession, Europe’s economy will suffer as a result of their close ties.
Russia’s economic woes have also affected international investors and have prompted a sell-off of bonds and equities of Russian companies as well as government bonds. This sell-off is due to some investor limitations on holding sub-investment grade securities.
One factor that could reduce the possibility of a recession would be a big policy change from the government. With Putin’s firm stance on Ukraine, international sanctions will continue to strengthen against Russia and further slow the economy. More open diplomatic dialogue and a looser stance on this particular issue could help ease the pressure on the economy. Also, a turnaround in oil prices could prevent a recession, due to Russia's high level of reliability on this industry.