MOSCOW: Standard and Poor's on Friday downgraded its rating of Russia's ability to repay debt as alarm grew over the impact of the Ukraine crisis on the economy amid increased capital flight and slumping growth.
Russia's central bank also hiked interest rates by half a percentage point in a move aimed at curbing inflation which could also help limit pressures on the ruble and halt capital outflows.
Investors withdrew a total of $50.6 billion (37 billion euros) in the first quarter from Russia, twice as much as a year ago, over the uncertainty created by the Ukraine crisis and fears of greater sanctions.
Standard and Poor's cited concerns over capital flight as the main reason for cutting Russia's foreign currency rating a notch to BBB- with a negative outlook.
"In our view, the large capital outflows from Russia in the first quarter of 2014 heighten the risk of a marked deterioration in external financing," the ratings agency said in a statement.
"In our view, the tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy," it said.
It warned that it could downgrade Russia's rating further if Western powers opt to impose tougher sanctions on its economy.
"We could also lower our ratings on Russia if tighter sanctions were to result in additional weakening of Russia's net external position," it said.
-'Real worsening of situation'-
Russia's new credit rating of BBB- is considered the lowest investment grade, just one step above junk status, according to Standard & Poor's. Standard and Poor's had already in March downgraded the outlook on Russia's credit rating from stable to negative following its annexation of Crimea from Ukraine.
In the next few years, Russia is not expected to take effective steps to improve its economy through structural reforms, Standard & Poor's said.
Russia has already brushed off expressions of concern from international ratings agencies, with First Deputy Prime Minister Igor Shuvalov saying Moscow needs to think of setting up its own homegrown ratings agencies. Russia's Economic Development minister Alexei Ulyukayev said the subsequent rating cut was only to be expected, while suggesting it was politically motivated.
"It's clear that it is partly a politically motivated decision, and possibly it is partly a reaction to the real worsening of the macroeconomic situation in which we find ourselves," the minister said, quoted by the Interfax news agency.
Shuvalov also swatted aside the move: "Everyone understands what this change of rating is connected to and I hope that not only those investors in Russia but also the others will take it quite calmly."
Russia could tip into recession in the second quarter of 2014 after the economy contracted by around 0.5 percent in the first three months of the year.
The International Monetary Fund this month slashed its forecast for Russia's 2014 growth by two-thirds to 1.3 percent due to the political uncertainty.
-'Uncertain political situation'-
With Russia also fighting inflation as well as slumping growth, the country's central bank said on Friday it had raised its key interest rate to 7.5 percent from 7.0 percent.
The Bank Rossii said it "took the decision to raise the key interest rate up to 7.5 percent due to the growing inflationary risks."
Russia had hiked its key interest rate from 5.50 percent to 7.0 percent on March 2 in a move which helped take pressure off the ruble.
The new rate rise led analysts to predict the central bank would intervene again this year.
"We think inflation will remain above 7 percent throughout this year. This means interest rate cuts are off the cards for now," said Capital Economics economists in a research note.
"In fact, if tensions in Ukraine escalate further, we would not be surprised to see another rate hike."
The bank said the risk of inflation climbing above 5.0 percent by the end of 2014 had "risen significantly."
"Policymakers seem to admit that inflation is unlikely to return to the target this year," said Capital Economics economists.
The central bank did not refer specifically to Ukraine, but referred to "the uncertainty of the international political situation," which it said was "having a negative effect on the dynamic of production and investments."
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