In the last Market Overview discussing
the Russian economic crisis we wrote: “Credit rating agencies will probably
downgrade Russia’s rating to junk status soon.” Indeed, the biggest country
in the world has been recently downgraded to junk status, first time in a
decade. Will this affect the gold market?
On January 26, 2015, S&P issued a BB+ rating,
below investment grade, because “the Russian Federation’s monetary policy
flexibility has weakened, as have economic growth prospects.” Other big
agencies, like Moody’s and Fitch, also downgraded Russian sovereign debt, but
not to junk level.
Lower debt rating means higher borrowing costs. Therefore, the downgrade
may aggravate the economic crisis in Russia. Indeed, the ruble lost more than
5 percent after the S&P’s decision. The S&P’ move has increased the
risk of investing in Russia and may trigger capital flight, since many global
financial institution cannot buy debt classified as junk or invest in such
countries. The change of credit rating can also increase the borrowing costs
of private or quasi-private companies (indeed, S&P announced last week a
number of downgrades to Russian oil and gas companies), and activate clauses
in debt agreements causing Russia's repayment deadlines to be brought
forward. Overall, the downgrade could costs the country up to $30 billion,
according to estimates.
The worsening situation in Russia (partly to the downgrade of credit
rating) led the Central Bank of Russia to unexpectedly cut its main interest
rate from 17 to 15 percent. It implies that banks were faced with a massive,
perhaps too big, liquidity problem, about which we wrote in the
last Market Overview. The interest rate cut may help a little, however it
risks further growth of the already high inflation and a further decline of
ruble.
Summing up, Russia’s economic crisis is more and more severe, which was
reflected by S&P’s downgrade and the recent Central Bank of Russia’s
move. The interest rate cut will probably entail higher inflation, which
could further increase the gold price in Russian rubles (the gold price in
rubles surged more than 70 percent in 2014). However the impact on gold
priced in U.S. dollars is rather unclear and harder to predict, since it
depends on a possible contagion effect. Are you interested what the Russian
crisis could mean for the global economy and the gold market? We analyze this
issue in more details in our last
Market Overview report.
Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor
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