The crisis in the Ukraine has increased the risks to  Russia’s already weakening economy presented by currency depreciation and  capital flight, Fitch Ratings says. The situation is still highly unpredictable  but Russia’s sovereign credit profile is robust and events so far do not have  implications for the country’s ‘BBB’ rating.

Market reaction to Russia’s intervention in Crimea saw the rouble fall 2.2% to  an all-time low against the US dollar on Monday, while the MICEX index of  Russian shares fell 10.8% and yields on rouble sovereign debt rose sharply. The  Central Bank of Russia (CBR) raised its key interest rate by 150bp to 7%, and  intervened to support the rouble, selling USD11bn. Losses were partly recovered  on Tuesday as tensions appeared to ease.

The rouble has now fallen around 9% against the dollar this year, partly driven  by fears across emerging markets about the impact of US tapering, but also on  Russia-specific concerns about low growth and the weakening current account  surplus, and in anticipation of further liberalisation of the exchange rate  regime.

Higher energy prices and a weaker rouble should provide a fillip to sovereign  finances by boosting the local-currency value of oil and gas exports, which  contribute around half of federal government revenue and current external  receipts. This will keep the fiscal deficit within the target of 0.6% of GDP in  the budget, making up for a shortfall in non-oil revenue.

Russia’s already strong sovereign balance sheet is characterised by low  sovereign debt levels and high international reserves (around USD490bn in late  February). Sovereign net foreign assets equivalent to 23% of GDP provide an  ample buffer against external shocks, supporting the rating. These are  sufficient to cover gross external financing needs more than three times over.  The Reserve Fund, the government’s main fiscal buffer, contains USD87bn (4.5% of  GDP), giving Russia a cushion against a drop in demand for its sovereign debt.  However, the broader economy stands to gain less from a weaker rouble. A lower  cost base for commodity exporters may promote some current account adjustment  but competitiveness gains for the relatively small non-hydrocarbons export  sector will have a limited impact on GDP. We think the economic drag through  lower business and consumer confidence and a loss of purchasing power will be  more significant.

Russian economic growth has already slipped below the ‘BBB’ category median,  with real GDP growth falling to 1.3% in 2013 due to a decline in investment and  the inventory cycle. We recently revised our growth forecasts for 2014 and 2015  to 1.5% and 2%, respectively (from 2% and 2.5%), as economic data in January and  February showed little sign of improvement. Rising inflation, higher interest  rates and potential capital flight all increase the risks to the downside.

Foreign lenders may also seek to scale back their lending to the Russian private  sector, with adverse economic consequences.

Private capital outflows exceeded 5% of GDP in 2013 and remain a persistent  problem. The Ministry of Economy estimated year-to-date private sector capital  outflows had already reached USD17bn – around half their forecast for 2014 as a  whole – prior to the crisis.

Capital flight could accelerate, particularly if the threat of economic and  financial sanctions increased. While not our base case, were such sanctions to  materialise, the potential impact on growth and investment could lead us to  review our sovereign rating on Russia. However, it is not clear whether Russia’s  European trading partners in particular are prepared to risk the potential  disruption to their own economies, and possible Russian retaliation, that  sanctions would entail.