Russian Debt Downgraded as Western Leaders Talk Sanctions

Western leaders say they’re readying further sanctions on Russia for meddling in Eastern Ukraine over the past few weeks. Though so far it’s just talk, the threats are already having the desired effect of pushing Russia’s economy further into recession by making investors wary of what might come next.

Rating company Standard & Poor’s downgraded Russia’s debt Friday and warned that it could be further demoted to "junk" status if more sanctions are imposed. S&P said the downgrade was a result of increased risk to the Russian economy because people have moved so much money — $51 billion so far this year — out of the country. That compares to just $63 billion in all of 2013.

"The tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects," the ratings firm said in a statement.

Russian Economy Minister Alexei Ulyukayev dismissed the downgrade, saying it was "partially due to a politically motivated decision," according to a state-run news report.

President Barack Obama spoke with the leaders of France, Germany, Britain, and Italy on Friday about coordinating further costs to be imposed on Russia. The leaders agreed that Russia had failed to live up to a April 17 agreement to lessen tensions by asking pro-Russia militants in eastern Ukraine to lay down their arms, according to a White House statement.

So far, the U.S. and the European Union have levied only limited sanctions against a handful of individuals and one bank, but the threat of further sanctions, especially against the Russian financial sector, has cast a cloud over the Russian economy that has accelerated already poor conditions. While western countries aren’t yet expected to sanction whole sections of the Russian economy, Obama said in Seoul, South Korea, on Friday that the U.S. was laying the groundwork for broader sanctions that could be deployed if Russia invades eastern Ukraine.

Following the downgrade of Russian debt, the country’s central bank increased benchmark interest rates a half point to seven percent to combat inflation caused by the declining value of the ruble, which has fallen almost eight percent against the dollar so far this year. That’s on top of a one and a half point rate hike in March, which the bank had initially said was only temporary. The bank said in a statement Friday that uncertainty about the "international political situation" was holding back production and investment.

Standard Bank analyst Tim Ash said the downgrade was "bad for investment, bad for capital flows, and bad for broader political, economic reform."

But it’s unclear whether this bad economic news affects President Vladimir Putin’s decision-making. Putin said Thursday that sanctions were hurting the Russian economy, but not critically.

"Overall they are harmful for everyone, they destroy the global economy (and) are dishonorable on the part of those who use those types of tools," Putin said in St. Petersburg, according to Reuters.

Western leaders have said many times that Putin could choose to calm the crisis in Ukraine, but President Obama didn’t sound optimistic that would happen. Speaking at a joint press conference with South Korean President Park Geun-hye, he said that a new round of targeted sanctions wouldn’t "necessarily solve the problem."

"What we’ve been trying to do is to continually raise the costs for Russia of their actions while still leaving the possibility of them moving in a different direction," Obama said.