Russia is considered more likely to default on its debts than Iraq, Ecuador or Ethiopia after Moody’s slashed the country’s credit rating to the second-lowest rung.
The ratings agency suggested that Moscow is on the brink of defaulting on its sovereign debt after cutting Russia’s rating deeper into “junk” territory.
It reduced Russia’s creditworthiness by four rungs from a “B3” grade to “Ca”. It is the second-lowest grade at Moody’s, and only collapsed economies Venezuela and Lebanon have a sovereign debt rating below “Ca”.
A government defaults when it fails to repay its debts and interest costs.
Defaulting and falling down the credit ratings ladder makes it more difficult and more expensive to borrow money on financial markets.
Moody’s said the latest downgrade was triggered by expectations the Russian central bank will impose capital controls that stop cross-border payments being made, including on its government bonds. Russia’s economy has been hit with a wave of severe sanctions from Western governments amid international outrage at Vladimir Putin’s invasion of Ukraine.
Russia’s grade is now equal to serial debt defaulter Argentina and communist island Cuba, while it is below many poorer junk-rated countries, including Iraq and Ethiopia.
Moody’s warned “risk of a default occurring has significantly increased” as it predicted a 7pc plunge in Russian GDP in 2022, higher inflation and a slump in living standards.
The “negative” outlook given by the ratings agency suggests the country could soon be downgraded to the bottom rating.
Russia said on Sunday that its payments to foreign creditors would depend on sanctions imposed on Moscow, raising fears of a looming default. It has faced a flurry of downgrades from the credit ratings giants after the onslaught of Western sanctions stoked fears of a huge economic contraction and Moscow missing debt payments.
“The downgrade to Ca is hence driven by severe concerns around Russia’s willingness and ability to pay its debt obligations,” said Moody’s.
“Concerns around the government’s willingness to pay and the unpredictability of government actions could result in larger than historical average losses for investors… an increasing unpredictability of government actions is a reflection of a lack of checks and balances around the executive.”
S&P and Fitch have also handed Russia hefty ratings cuts in recent weeks as its economy is battered by Western sanctions and companies suspend operations in the country.
Credit default swaps – financial products that insure against the risk of default – rocketed to record highs last week, signalling a 65pc change of Russia failing to repay its debt.