Russia braces for ‘junk’ downgrade as oil drags

The ruble continues to fall, sanctions are biting and the slide in the price of oil shows no sign of slowing – it's hitting Russia hard and means a credit rating downgrade to "junk" status could be on the way.

Russia's Economy Minister Alexei Ulyukayev said on Wednesday that the chances of the beleaguered country's rating being downgraded to junk were "pretty high," according to the Interfax news agency.

Red Square, Moscow, Russia
Yuri Kadobnov | AFP | Getty Images
Red Square, Moscow, Russia

The comments come after rating agency S&P said last month that it expected to complete a review of Russia -- which it already rates at just one notch above junk with a negative outlook -- by mid-January.

Meanwhile, the World Bank cuts its growth forecast for Russia. It now expects the country's economy to contract by 2.9 percent in 2015 -- a sharp downward revision from a December forecast of a 0.7 percent contraction.

Budget cuts blamed on oil, sanctions

The country's Finance Minister Anton Siluanov added to the gloom on Wednesday, stating that Russia's revenues would fall by 3 trillion rubles ($45.6 billion) next year, if the oil price averages $50 a barrel, Reuters reported.

Currently, global oil prices are below that level, hovering around $45 a barrel on the back of a lack of demand and glut in supply, hitting major oil exporters like Russia hard.

Adding fuel to the fire, Siluanov said that low oil prices – which are down more than 60 percent since June 2014 -- have created a $180 billion shortfall in revenues to date, and that sanctions placed on Russia, as a result of its incursions into Ukraine, have created a shortfall of $60 billion.

As such, Siluanov said he would propose a 10 percent budget cut in 2015, bar defense spending. In addition, Siluanov said that Russia was ready to uncork its reserve fund – a rainy day fund – in an effort to boost liquidity, Reuters reported.

Even if the government appears to be changing its stance on how to tackle the economic crisis, Russia is in a "very difficult situation", according to Andrew Sheets, chief cross-asset strategist at Morgan Stanley.

"The challenge with foreign exchange reserves is always that they're encouraging until you start to use them, and then the market starts to worry that you're burning through them," Sheets told CNBC Europe's "Squawk Box" on Wednesday.

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He added that, instead, markets were likely to focus on the fall in oil prices, which has continued into 2015.

"That is presenting a very fundamental issue even if other measures are taken," he said. "As long as oil is falling, the market will view Russia as being fundamentally challenged."

A dangerous game in Ukraine?

Although Russian President Vladimir Putin's attentions are likely to be focused on problems closer to home, Ukraine is still very much a thorn in his side -- although some analysts believe Putin is continuing to orchestrate a separatist offensive there, despite the Western sanctions.

On Wednesday, there were reports that violence in eastern Ukraine between Russian separatists and the Ukrainian military had flared up in the last 24 hours. Meanwhile, a four-way summit between France, Russia, Ukraine and Germany aimed at ending the tensions was postponed, as German Chancellor Angela Merkel warned of a lack of progress from Russia.

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Russian separatists were poised to gain control over the strategically-important Donetsk airport, according to a note from political risk consultancy Eurasia Group on Wednesday.

"We interpret the Donetsk airport attack – which would almost certainly have required Kremlin acquiescence – as a bid to bolster the separatists' position at a moment of relative European distraction and ahead of any further diplomatic efforts to resolve the crisis," analysts led by Alexander Kliment said.

But despite this latest offensive, Kliment said Russia was unlikely to take it much further.

"We do not see Russia backing down from its position on Ukraine due to economic pressure – but we do think that the Kremlin will be keen to avoid a new escalation that could provoke fresh penalties on Russian sectors or firms," the analysts wrote.

"However, the situation remains very fluid, and the current violence could flare beyond any initial intentions or calculations. Signposts to watch are, first and foremost, the scale of the Ukrainian government's response."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld