Moody's downgrades Russia's credit rating to Baa2

Ratings agency Moody`s downgraded Russia`s credit rating to Baa2 from Baa1 citing poor growth prospects, the Ukraine crisis and sanctions as well as capital flight.

Paris: Ratings agency Moody`s on Friday downgraded Russia`s credit rating to Baa2 from Baa1 citing poor growth prospects, the Ukraine crisis and sanctions as well as capital flight.

"The first driver for the downgrade ...relates to the longer term damage the already weak Russian economy is likely to incur as a result of the ongoing crisis in Ukraine and, relatedly, the additional sanctions imposed against Russia," the agency said in a statement, adding that it was maintaining Russia`s outlook at "negative".

"Even prior to the crisis in Ukraine, the potential growth rate of the Russian economy was falling, constrained, according to the IMF, by economic rigidities such as infrastructure bottlenecks and shortfalls in labor skills and education." it said.

"The tightening of sanctions against Russia has already begun to aggravate the slowdown in economic growth and to undermine consumer and investor confidencein the country," it said. 

"Domestic demand slumped in the second quarter, including a notable decline in inventories and investment," Moody`s said, adding that it expected this trend to continue as long as the Ukraine unrest and ensuing sanctions persisted.

Russia`s economy has been hit hard by the fallout from the Ukraine crisis, that has seen the EU and US impose the harshest sanctions on Moscow since the end of the Cold War. 

The sanctions have cut a raft of major Russian firms off from key international debt markets -- a tough prospect for the estimated $55 billion of loan repayments coming due by the end of the year. 

Capital flight from the country has rocketed and is set to reach some $100 billion this year, according to the International Monetary Fund, while inflation has risen to over eight percent.