WASHINGTON - Fitch Ratings cut Russia's credit grade Friday to just one notch above junk level, saying plunging oil prices and Western sanctions will force a four percent economic contraction this year.
The entrance of Fitch Ratings agency seen on August 8, 2011 in Paris
Fitch lowered its rating for Russian government debt by one step to BBB-, the lowest possible investment grade, and added a negative outlook on the rating.
"The economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the ruble, coupled with a steep rise in interest rates," Fitch said.
"Western sanctions first imposed in March 2014 continue to weigh on the economy by blocking Russian banks' and corporates' access to external capital markets."
The agency said that had forced it to cut its forecast for the Russian economy this year to a 4% contraction, compared with its previous forecast of a 1.5% contraction and growth of 0.6% in 2014.
"Growth may not return until 2017," the agency warned.
Fitch said it was assuming that the price of crude oil, a major source of government income, would average $70 a barrel, well above the $50 level the Brent global benchmark traded at in London Friday.
"If the oil price stays well below this, it could precipitate a deeper recession and put further strain on public finances, severely limiting the authorities' room for maneuver," Fitch said.
It also said that with the ruble still weakening, and sanctions blocking access to global capital markets, Russia banks could suffer more and the government will be challenged to further support them.
On the other hand, the government still merited an investment-grade rating because it has a low level of debt and solid, if deteriorating, foreign assets.
The longer sanctions remain in place, Fitch said, these positive attributes could be eroded.
"Russia's current predicament has done little to hasten the onset of a more liberal economic policy agenda and raises the risk of greater isolationism," it added.