Russia's credit rating was downgraded Monday, falling below investment grade for the first time in a decade to what the financial world calls “junk status.”
The influential Standard & Poor's financial services firm cut Moscow's sovereign credit rating a notch, from BBB minus to BB plus, and said it has a negative outlook on the Russian economy. S&P said Russia's financial problems are likely to worsen.
Russia is predicting its economy will shrink this year because of falling world prices for oil, its key export, and the effect of U.S. and European economic sanctions imposed on Moscow.
Western powers levied the restrictions against Moscow and key associates of President Vladimir Putin in response to Russia's annexation last year of Ukraine's Crimean peninsula and what they say is its direct involvement in the deadly eastern Ukraine conflict between pro-Russian separatists and Kyiv's forces.
The credit rating cut led to an immediate five percent drop in the value of the ruble, to under 68 to the dollar.
The S&P downgrade could hurt Russia's image among investors and also increase the country's borrowing costs since key investment and pension funds often have rules against making investments in the securities of any corporation or nation that are not classed as investment grade.
Russian stocks were also down, with the ruble-based MICEX two percent lower at 1,639 points and the dollar-based RTS down five percent at 780 points.
Analysts say the latest downturn was triggered in part by U.S. and EU threats of new sanctions against Moscow over the recent escalation of violence in eastern Ukraine.
Adding to the pressure on Russian assets on Monday, the oil price was also weaker, with benchmark Brent shedding around 0.5 percent to $48.55 per barrel.