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Russia downgrade: Can Putin shrug off the sanctions?

Russia's President Vladimir Putin attends the closing ceremony of the Europe-Asia summit (ASEM) in Milan, Oct. 17, 2014.
Alessandro Garofalo | Reuters

The news on Russia's economy seems to be going from bad to worse, with the latest blow a downgrade of its sovereign credit rating by U.S.-based ratings agency Moody's to just two notches above junk.

Standard & Poor's, Moody's main rival in the U.S., already has Russian debt at one notch above junk status. If a further downgrade came, the cost of Russia's debt would rise, investing in Russian debt would look even more risky, and the amount of money being pulled out of Russian investments would likely accelerate again.

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"The military confrontation in Ukraine and escalating sanctions against Russia are likely to have an increasingly negative macroeconomic impact on Russia's investment climate," Moody's said late Friday.

Dmitry Medvedev, the Russian Prime Minister, told CNBC last week that the sanctions were "destructive" and "stupid" - and that a "reset" of relations with the U.S. is "impossible" as ties between the two countries had been too badly damaged.

Yet the falling oil price is hurting Russian coffers. The slowing down of its economic growth, as measured by gross domestic product (GDP), is likely to continue, with a sharp decline in real wages, reported in September, likely to hit consumption.

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Arguably, Russia's economic reputation should still be higher: It has relatively low debt levels and its public purse has deep pockets. The country has a current account surplus, public debt at 10 percent of GDP, around $480 billion in currency reserves and a $90 billion National Reserve Fund.

Yet credit default swaps, which insure against default, are more expensive for Russian debt than a host of other emerging economies, including neighboring Hungary. Its 10-year bond, the benchmark for its borrowing costs, hit 9.93 percent last week, the highest since 2009.

"Russian yields will remain well above 9 percent," Bob Parker, senior adviser at Credit Suisse, wrote in a research note.

"Investor appetite towards the cheap Russian market will remain limited."

- By CNBC's Catherine Boyle