Russia’s financial markets were plunged into turmoil over its attack on Ukraine, the largest military offensive in Europe since World War II, and the imposition of strict Western sanctions.
The war raised warnings of the impact on the Russian economy. Standard & Poor’s last week also cut Russia’s rating to junk, and Moody’s put the country under review for a downgrade.
The Institute of International Finance expects a double-digit contraction in its economic growth this year. Fitch lowered Russia’s rating to B from BBB, and placed it under “Negative Rating Watch”.
“The severity of international sanctions in response to Russia’s military invasion of Ukraine has increased risks to macro-financial stability, represents a massive shock to Russia’s credit fundamentals and could undermine its willingness to service government debt,” it said in a report.
Fitch added that US and EU sanctions banning any transactions with the Russian Central Bank would have “a much greater impact on Russia’s credit fundamentals than any previous sanctions,” rendering much of Moscow’s international reserves unusable for currency-trading interventions.
And Fitch warned that “the sanctions could put pressure on Russia’s willingness to repay the debt.”
“President Putin’s response to putting nuclear forces on high alert appears to reduce the likelihood of him changing course on Ukraine to the degree needed to reverse the impact of the rapid tightening of sanctions,” she added.
Fitch said it expected further escalation of sanctions against Russian banks.
The agency warned that the sanctions imposed by Western countries will significantly weaken the growth potential of Russia’s gross domestic product compared to the agency’s previous assessment of 1.6 percent growth.
Analysts at JPMorgan and others warned on Wednesday that sanctions against Russia have dramatically increased the chance of it defaulting on its dollar and other government debt in the international market.