Overview

• Russia's military intervention into Ukraine has prompted strong international sanctions, including on large parts of Russia's banking system.
• We believe that the announced sanctions could have significant direct and second-round effects on economic and foreign trade activity, domestic resident confidence, and financial stability. We also expect geopolitical tensions to drag on private-sector confidence, weighing on growth.
• There is high uncertainty about the evolution of the geopolitical conflict and additional sanctions, as well as the ultimate economic and financial repercussions of existing restrictions.
• We lowered our long-term foreign currency sovereign credit rating on Russia to 'BB+' from 'BBB-' and our long-term local currency rating to 'BBB-' from 'BBB' and placed them on CreditWatch with negative implications.

Rating Action

On Feb. 25, 2022, S&P Global Ratings lowered its foreign currency sovereign credit ratings on Russia to 'BB+/B' from 'BBB-/A-3' and its local currency ratings to 'BBB-/A-3' from 'BBB/A-2'. We also revised downward our transfer and convertibility assessment to 'BBB-' from 'BBB'.

At the same time, we placed our ratings on Russia on CreditWatch with negative implications.

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Russia are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2022 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published Dec. 16, 2021, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is the risk of substantial macroeconomic fallout from a new round of international sanctions on Russia. The next scheduled publication on the sovereign rating on Russia is on May 27, 2022.

CreditWatch

We expect to resolve the CreditWatch placement in the next 90 days once we have more clarity on the full macroeconomic repercussions of the existing sanctions and the evolution of the geopolitical conflict, including visibility on the risk of new restrictions. The negative implications of the CreditWatch indicate the possibility that we could lower our ratings on Russia during that period.

Rationale

The downgrade follows the abrupt escalation of Russia's military intervention into Ukraine, which has prompted a series of stringent economic and financial sanctions from the U.S., EU, and U.K. governments, among others. In our view, the sanctions announced to date could carry significant negative implications for the Russian banking sector's ability to act as a financial intermediary for international trade.

Apart from the immediate disruptions to economic activity that the sanctions could cause, second-round effects on domestic confidence could also be substantial. Some of these might be difficult to contain even in the face of Russia's currently strong public and external balance sheets, as well as its conservative macroeconomic management. Under some scenarios, escalating geopolitical tensions could also trigger countermeasures from the Russian government that could worsen the impact.

We believe the uncertainty surrounding the extent of the military conflict poses additional risks. Continued military escalation could result in a new round of strong sanctions. Under some scenarios, this could disrupt part of commodity trade or undermine the Russian government's technical ability or willingness to ensure timely debt service.

Environmental, social, and governance (ESG) credit factors for this change in credit rating/outlook and/or CreditWatch status:

• Other governance factors

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Criteria | Governments | Sovereigns: Sovereign Rating Methodology, Dec. 18, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
• General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Related Research

• Sovereign Ratings List, Feb. 7, 2022
• Sovereign Ratings History, Feb. 7, 2022
• Sovereign Risk Indicators, Dec. 13, 2021. An interactive version is also available at http://www.spratings.com/sri
• Default, Transition, and Recovery: 2020 Annual Sovereign Default And Rating Transition Study, April 12, 2021

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').

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