Credit ratings agency Standard & Poor's lowered Russia's foreign currency sovereign credit rating a notch on Monday, citing heavy outflows of capital amid the global financial turmoil. Analysts said the drop was largely psychological and was unlikely to make borrowing more expensive for Russian companies because costs are already relatively high.

Lowered reserves

S&P cited the decline in Russia's international reserves, from US$583 billion to US$455 billion since August, in lowering the country's rating. The government has spent billions to prop up the ruble and the country's oil-reliant economy has been pinched by plunging prices for crude.

The decision, credit analyst Frank Gill said in a statement, "reflects risks associated with the sharp reversal in external portfolio and other investment flows, which has increased the cost and difficulty of meeting the country's external financing needs."

S&P said the rating is likely to be further downgraded "if the banking crisis and external pressures continue to impair the government's balance sheet and its still substantial arsenal of liquid assets." Russia's unpredictable business environment also impedes its ability to attract capital, the agency said.

"It's an unavoidable product of a deep fall in oil prices," said Ron Smith, chief strategist at Moscow-based Alfa Bank.

He said the rating would have to be further reviewed if oil prices dip below $40 a barrel. Crude dropped from a record-high US$147 a barrel in July to US$40 last week but are now around US$43.

Russian producers of metals and other commodities have been laying off employees as world commodity prices slip.

Change attitudes

Credit ratings are used guidelines for investment companies and the award of the BBB sovereign rating to Russia in 2004 opened a floodgate of investments. Similarly, a further downgrade of the rating could damage institutional investment.

Ovanes Oganisian, equity analyst at Renaissance Capital, said it is unlikely that one downgrade will change attitudes toward Russia overnight. But he warned that a downgrade from another credit ratings agency would be very negative.

Russian stocks, meanwhile, appeared to shrug off the downgrade, instead rising on stronger oil prices with the MICEX index rising almost 10 percent and some blue chips adding 20 per cent.

- AP