Russia's downgrade: what consequences will have sanctions on the economy?

Will Russia's downgrade affect the economy?

In the last month, the world geopolitical order has been upset by the conflict between Russia and Ukraine. Russia has militarly invaded the country following geopolitical tensions lasting since 2014. The international community's reaction foreshadows a series of harsh sanctions, especially economic ones, which could cause progressive economic isolation of Russia.

We asked Christian Raimondo, Rating analyst at modefinance, what the consequences of the sanctions that NATO countries imposed on Russia might impact on the international economy.

Raimondo says: 

A first consequence was the downgrade of Russia's creditworthiness by the world's most important rating agencies. 

The three big rating agencies Moody's, Fitch, and Standard & Poor's, starting from February 25th have continually revised the ratings assigned to Russia's creditworthiness, forecasting a serious risk of default. The Country already risked bankruptcy on March 16th, when a 117 million payment on bonds issued by the Russian State was due. The actual refund in dollars, and not in rubles as Moscow had initially planned, avoided default, anyway not preventing a further downgrade of Russia by the Standard & Poor's rating agency. According to S&P evaluation, the Country is just two steps above default (CC).

What could be the impact on Russia?

To understand the impact of the sanctions on the Russian economy, it's worth analyzing the state of health of Russian business enterprises. An analysis of a sample of 50,000 Russian companies reveals that their overall state of health before the outbreak of the war was good, despite the effects of the pandemic. In 2020, explains Raimondo: 

Over 43% of Russian companies of the sample confirmed their creditworthiness. The distribution by rating class shows 35.56% of companies fall between classes B and BB, while 48.21% of companies obtained a rating between BBB and AAA, thus revealing  that the state of health of Russian companies before the war was overall good.

Distribution graph of Russian companies per rating class

The consequences of sanctions of the Crimean War

Quantifying the consequences of possible economic sanctions against Russia is tough, but we can look at what happened in 2014 in a similar, albeit less dramatic, scenario. In 2014 the political crisis between the two nations over the Crimean Peninsula ended with Russian military intervention and the entry of Crimea into the Russian Federation. The EU responded with economic sanctions ranging from a ban on the importation of goods, restrictions on trade and investment, and a ban on the export of certain goods and technologies. Despite the sanctions applied by the European Community, "Russian companies did not suffer any serious consequences", says Raimondo, 

The distribution of Russian companies [...] shows that in 2014 the creditworthiness of the sample analyzed remained little changed overall. 

Russian companies remained virtually immune to the sanctions applied, and any relevant deterioration has been detected. It's worth to remember that the rating assigned to Russia by the agencies did not undergo any upheaval at that time, remaining close to BBB (first investment grade), albeit with a negative outlook.

The consequences of war on the international economy?

Although Russia might have prepared itself to resist the sanctions by accumulating currency reserves over the years,

the freezing of the Russian Central Bank's foreign currency reserves risks being the real move to destabilize the Russian economy, making Moscow unable to support the rouble on international markets" - said Raimondo

The situation is unstable and it's not clear yet which consequences the  economic isolation of Russia will impact on other countries. Italy especially could suffer above all from the so-called 'return sanctions': as a matter of fact, Italian companies export more than 7.1 billion euros toward Russia every year. The main sectors involved are the clothing sector, the machinery and equipment industry, the chemical and food sector. 

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