Russian Ruble Firms After OverNight Falls Driven by S&P Move

        (Adds market reaction.)
        By Olga Razumovskaya
        MOSCOW--The Russian ruble firmed slightly in early trade Tuesday after a sharp drop overnight driven by a downgrade of Russia's sovereign credit rating by Standard & Poor's Corp. to "junk" for the first time in more than a decade.
        Citing Russia's poor flexibility in using monetary policy to support flagging economic growth, S&P carried out its threat from a month ago and cut Russia's rating below investment grade. Although the decision was widely expected and priced in, it spurred the market volatility.
        "To a large extent there is nothing new here. After all, the vulnerabilities identified by S&P are surely already well known by investors," said Neil Shearing, chief emerging markets economist at Capital Economics.
        The ruble firmed 1.7% to 67.63 against the dollar by 0917 GMT, heading away from levels of around 70 seen after the rating downgrade late on Monday.
        The ruble's rather muted reaction could be explained by the fact that Russia has so far maintained its investment grade status with Fitch Ratings and Moody's Investors Service Inc., meaning that the country still meets most the definition of being investment grade at most funds, Mr. Shearing said.
        S&P's decision to maintain Russia's investment grade rating on local currency sovereign bonds, in which government debt is overwhelmingly denominated, also speaks for a limited market reaction.
        In the longer run, Russia's junk rating may pose a greater threat for the ruble. The lower rating will prompt foreign creditors to request an early debt redemption from Russia, which will add to downside pressure on the ruble at times when the country is cut off from global capital markets by Western sanctions. According to Alfa Bank estimates, the overall debt redemption this year may rise to up to $70 billion from an initially planned $40 billion.
        On the stock market, the reaction to the S&P decision was mixed. The ruble-traded Micex index climbed 1.33% higher, supported by the overall ruble weakness. Its dollar-traded peer RTS was down by 1%, losing around 2% so far this year.
        Write to Olga Razumovskaya at olga.razumovskaya@wsj.com
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        January 27, 2015 05:11 ET (10:11 GMT)

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