Russia’s Credit Rating Cut as Country’s Economy Falters

Standard & Poor’s cut Russia’s credit rating to a notch above “junk” status, as the country’s economy falters amid Western governments’ threats of harsher sanctions on top of those already in place.

The downgrade on Russia’s currency from BBB to BBB- will make it more expensive for the Kremlin to borrow money. That will likely result in a tighter credit supply, further damaging the country’s economy. BBB- is the lowest investment-grade credit status.

The S&P said when announcing the downgrade that it was reacting to the tense geopolitical situation between Russia and Ukraine, which could lead to foreign investors and domestic capital fleeing Russia.

Approximately $51 billion has flowed out of Russia in the first quarter of the year alone, about equal to the average annual amount of capital flight in the five years before 2013.

Russia’s central bank raised interest rates from 5.5% to 7% shortly after the S&P’s announcement, citing the inflationary impact of the sinking ruble, the New York Times reports.

Russia’s economy grew a measly 1.3% last year. That growth rate could fall well below 1% this year if tensions in Ukraine continue.