By Tom Lydon
The Market Vectors Russia ETF (NYSEArca: RSX) lost about three-quarters of a percent early in Friday’s after-hours session after Fitch Ratings lowered Russia’s sovereign credit rating to BBB-, the lowest investment grade, with a negative outlook. Fitch previously rated Russian sovereign debt BBB.
“‘BBB’ ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity,” according to Fitch.
“The economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the rouble, coupled with a steep rise in interest rates. Western sanctions first imposed in March 2014 continue to weigh on the economy by blocking Russian banks’ and corporates’ access to external capital markets. Having grown by just 0.6% in 2014, Fitch now expects the economy to contract by 4% in 2015, compared with our previous forecast of minus 1.5%, as steep falls in consumption and investment are only partially offset by an improvement in net exports, driven by a sharp drop in imports. Growth may not return until 2017,” said Fitch in a statement.
RSX, the largest and most heavily traded Russia ETF, fell 3.7% during traditional trading hours Friday, paring its 2015 gain to 4.3%.
There is evidence to suggest traders are still more comfortable with a bearish view of Russian stocks. Over the past month, over $20 million has been pulled from theDirexion Daily Russia Bull 3x Shares (NYSE: RUSL), but the Direxion Daily Russia Bear 3x Shares (NYSEArca: RUSS) has seen modest inflows. [Cash Rush to Leveraged Russia ETFs]
After soaring almost 10% Friday, RUSS jumped another 4% in after-hours trading.
Prior to the Fitch downgrade, speculation was intensifying that Russia was headed for a junk credit rating. On Dec. 23, Standard & Poor’s placed Russia’s sovereign debt on CreditWatch with negative implications, indicating Russia could lost its already tenuous grasp on its investment-grade credit rating.
In April 2014, Standard & Poor’s lowered its rating on Russian sovereign debt to BBB-, the lowest investment grade. It was the first time the ratings agency has downgraded Russia since 2008. Russia’s BBB- rating is the same as fellow BRIC members Brazil and India, but it looks like Russia is the most vulnerable to being lowered to junk status. [Russia ETFs Slide After S&P Downgrade]
S&P’s move to put Russia on CreditWatch negative reflects the ratings agency’s “view that there is at least a one-in-two likelihood of a negative rating action within 90 days,”according to S&P.
Credit ratings agencies have taken increasingly glum view of Russia’s financial positon as oil prices have plunged. The United States Brent Oil Fund (NYSEArca: BNO) has plunged 45% over the past 90 days. Russia, the largest non-OPEC oil producer, prices crude in Brent.
“Plunging oil prices have exposed the close link between growth and oil prices, notwithstanding the impact of a more flexible exchange rate. For 2015, Fitch is assuming oil prices average USD70/bbl, markedly lower than the USD100/bbl we assumed in July 2014. If the oil price stays well below this, it could precipitate a deeper recession and put further strain on public finances, severely limiting the authorities’ room for manoeuvre,” said Fitch.
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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ETFs: RSX, ERUS, RUSL, RUSS, BNO