* Central bank unexpectedly raises rates by 50 basis points
* S&P cuts credit ratings to one notch above junk
* Says could cut again if sanctions toughened over Ukraine
* Economy Minister says politics a factor in rating cut
(Adds analyst comment, market moves)
By Lidia Kelly and Oksana Kobzeva
MOSCOW, April 25 Russia unexpectedly raised
interest rates for the second time in two months on Friday and
suffered its first credit rating cut in five years, highlighting
the impact of the Ukraine crisis on the teetering economy.
The central bank raised its key rate by 50 basis points to
7.5 percent to prevent a weakening rouble fuelling inflation.
Hours earlier, Standard & Poor's cut Russia's credit rating
to just one notch above junk status and warned more could follow
if tighter sanctions were imposed and capital flight, which saw
$64 billion haemorrhage from the country in the first quarter,
was not stemmed.
"The central bank is indirectly trying to defend the rouble
against the backdrop of credit ratings downgrade and the West's
tough rhetoric about the possibility of new sanctions against
Russia," said Dmitry Polevoy, an analyst at ING Bank in Moscow.
Both moves highlighted the impact on Russia's weakening
economy of the tense standoff with the West over Ukraine.
President Vladimir Putin acknowledged this week that
sanctions imposed in response to Russia's annexation of
Ukraine's Crimea region last month are already hurting the
Russian economy, thought not critically.
The West has threatened tougher sanctions, with U.S.
Secretary of State John Kerry warning Russia on Thursday that it
would be making "an expensive mistake" if it did not change
course over the Ukraine crisis.
Friday's hike came less than two months after the central
bank raised rate by an emergency 150 bps in early March. It said
the move was due to accelerating inflation due to the weakening
rouble and the a rise in inflation expectations.
It said it did not intend to lower rates in the coming
S&P kept its outlook negative and stressed the impact of
capital flight. Foreign investors withdraw $63.7 billion from
Russia in the first three months of the year.
"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," it said.
The World Bank has estimated capital flight may reach a
record $150 billion this year.
Economy Minister Alexei Ulyukayev dismissed the downgrade,
saying, "Partially, it is kind of a politically motivated
But analysts said other rating agencies were likely to
follow suit, and Russia's already battered financial markets
fell further on Friday.
The rouble briefly firmed after the rate hike but
gave up all its gains and was last down 0.7 percent on the day
at 36.02 to the dollar. The MICEX stock index fell 1
"Russia is going backwards as reflected by developments in
relations with Ukraine and the West," said Timothy Ash, analyst
at Standard Bank.
"(This is)... bad for growth (long term and short term), bad
for investment, bad for capital flows, and bad for broader
political, economic reform and institutional reform.
The central bank said the probability of inflation exceeding
its 2014 target of 5 percent had increased significantly and the
decision to raise rates would ensure that inflation stays now
below 6 percent this year.
"The central bank is now skewed towards excessively tight
monetary policies to earn market trust on its path to inflation
targeting," VTB Capital analyst Daria Isakova said in a note.
But analysts at BNP Paribas said, however, that the tight
policy may not be enough to stop the rouble, which has lost
nearly 9 percent against the dollar this year, falling further.
"The relatively minor increase in rates will do little to
prevent further pressure on currency if the conflict in Ukraine
continues escalating," the analysts said in a note.
Russia's $2 trillion economy grew 0.8 percent in the first
quarter and the economy ministry has said growth may not exceed
0.5 percent this year. The central bank said the impact on
growth of the rouble depreciation would be limited.
Analysts say Russia's external financial position remains
strong. Its debt to GDP ratio stood at around 11 percent at the
end of last year, compared to more than 100 percent among
countries such as Italy or Greece.
(Additional reporting by Denis Dyomkin in Khabarovsk and Jason
Bush, Vladimir Abramov and Elena Orekhova in Moscow; Writing by
Lidia Kelly and Nigel Stephenson; Editing by Tom Heneghan)