Russia’s sovereign rating was cut to the lowest investment level at Standard & Poor’s and may face further downgrades if growth deteriorates and the U.S. and Europe apply wider sanctions over the conflict in Ukraine.

S&P cut Russia’s rating to BBB- from BBB after lowering its outlook to negative in March, according to a statement today. S&P last downgraded Russia in December 2008.

“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,” S&P said in the statement.

The U.S. and its allies have an additional list of sanctions ready and will act on it if there is no progress de-escalating the crisis in Ukraine, where security forces are moving against pro-Russia separatists in the country’s east, U.S. President Barack Obama said yesterday in Tokyo. Russia was placed on review for a downgrade by Moody’s Investors Service on March 28 and Fitch Ratings cut its outlook to negative.

“The decision is partially expected — Russia is almost in recession, even without sanctions,” Dmitry Dorofeev, a money manager at BCS Financial group, said by phone.

Russia’s dollar bonds due April 2020 fell for a fourth day yesterday, lifting the yield 15 basis points to 4.77 percent, the highest since March 18.

Yields Rise

Yields may rise as much as 60 basis points for each level Russia’s rating is cut, Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow, said by e-mail today.

President Vladimir Putin’s annexation of Crimea last month sparked a selloff in Russian assets as the U.S. and the European Union imposed sanctions against officials and threatened to broaden the penalties.

Russia’s $2 trillion economy may expand less than 0.5 percent this year or growth may halt as “geopolitical uncertainty” drives capital outflows, Finance Minister Anton Siluanov said April 15.

Capital outflows amounted to $50.6 billion in the first three months of the year, compared with $63 billion for the whole of 2013. Gross domestic product expanded 1.3 percent last year, the slowest pace since a 2009 recession.

The Russian currency has weakened 8.4 percent against the dollar this year, the second-worst performer among 24 emerging-market currencies tracked by Bloomberg after the Argentinian peso.

S&P said it may lower the rating further “if tighter sanctions were to be imposed on Russia and further significantly weaken the country’s net external position.”

(Source: Bloomberg)