The ever-tightening noose of sanctions and tumbling oil prices are combining to put the Russian economy in “double trouble” as 2015 approaches, according to a new IHS report revealed exclusively to GTR this week.

The rouble has dropped 25% against the US dollar this year, and the ratings outlook for the country will continue to darken should Russian companies’ access to western debt markets remain limited.

“It’s not just the slow burn nature of sanctions that are beginning to bite, but the sagging oil price is providing a double whammy for Russia’s finances and growth prospects,” says director of sovereign risk at IHS and author of the global insight provider’s 2014 third quarter Sovereign Risk Review, Jan Randolph.

Oil prices have fallen close to US$80 per barrel in recent months amid weak global demand and excess supply, narrowing Russia’s current account surplus and placing further pressure on its ailing economy.

According to the report, further ratings downgrades are expected, as Russian companies must increasingly rely on the domestic banking market for credit, given an inability to roll-over existing facilities and service debts on pre-existing US dollar-denominated liabilities due to sanctions. The report outlines the likely scenario of additional downward pressure on Russia’s foreign exchange reserves and more capital flight.

“One hears a lot at the moment about Russian risks, but I’ve been told that, historically, Russians are good customers that always pay on the nail,” Randolph tells GTR in an exclusive conversation.

“But the broader implications for trade are that the economy is weakening, and it’s an ongoing story. After several rounds of sanctions, [Angela] Merkel has made it absolutely clear that the deliberate moving of borders [in Ukraine] is absolutely unacceptable in 21st century Europe.”

The IHS report shows that over the last year, there have been a total of 100 sovereign rating upgrades and 68 downgrades, compared with 92 upgrades and 114 downgrades in 2013. In the first three quarters of 2014, a net positive ‘ratings surge’ was experienced, fuelled largely by a mixed-paced economic rebound on the peripheries of Europe. The pace of this surge, however, has slowed more recently.

“In the year ahead, weaker growth and declining commodity prices will undermine key sovereign ratings,” says Randolph. “A general movement into net positive ratings has slowed down and we are seeing huge weaknesses that leads directly from a decline in commodity prices, not just oil, but iron ore and others.”

The report collates ratings from all three major ratings agencies: S&P, Fitch and Moody’s, identifying key trends and prospects for investors. Randolph describes it as a “unique mapping and tracking vehicle”. “The ratings are gathered on a quarter-by-quarter basis, but on this occasion we looked a bit further back to see what the trends were,” Randolph tells GTR.

Not all doom and gloom
Despite major growth challenges effecting Latin America’s (LatAm) larger economies caused by slowing Chinese growth, export-oriented foreign direct investment has seen small and medium-sized LatAm economies flourish. Peru, Colombia, Uruguay, Paraguay and Bolivia have all received upgrades in 2014.

“The smaller LatAm economies are often overlooked but they’re actually doing very well,” says Randolph. “Another positive message is that negative oil prices will benefit some economies, like India and the Philippines, which have large oil import bills.”