Russia bonds cut to 'junk', EU sanctions blamed

It said the downgrade “reflects a lack of external financing due to the introduction of economic sanctions and the sharp decline in oil prices”.

“We anticipate that asset quality in the financial system will deteriorate given the weaker rouble; restricted access of key areas of the economy to international capital markets due to sanctions; and economic recession in 2015”, it added.

“We do not currently expect that the government will be able to effectively tackle the long-standing structural obstacles (perceived corruption, the weak rule of law, the state’s pervasive role in the economy, and the challenging business and investment climate) to stronger economic growth”.

The Russian finance minister, Anton Siluanov, accused the US-based company of “exorbitant pessimism”.

“There’s no reason to dramatise the situation … there are no grounds for foreign investors’ withdrawing assets from Russia”, he told Russian media the same day.

Russian leader Vladimir Putin at a government meeting also on Monday noted his parliament will on Tuesday approve an "anti-crisis” plan in order to “ensure social stability”.

But the S&P news saw the value of the rouble and of Russian shares fall even further, while yields on Russian bonds due in 2023 went up to 7.3 percent.

Russia has a rainy day fund believed to be worth $380 billion.

But market watchers, such as Marlen Kruzhkov, a US-based lawyer who represents what he calls several Russian "oligarchs", say it could be quickly burnt up.

"It will disappear if Putin needs to bail out one or more of his big banks - just look at the amount of money Europe had to pump into its banking system during the [euro] crisis", he told EUobserver.

EU and US economic sanctions are designed to create “market uncertainty”.

They have so far blocked several Russian banks, energy firms, and arms suppliers from raising capital on international markets, making it harder for them to service their dollar-denominated debt.

US treasury chief Jack Lew and EU leaders have warned they are willing to increase the “strain” if Russia launches more attacks in east Ukraine.

"In view of the worsening situation we ask the upcoming Foreign Affairs Council [on Thursday] to assess the situation and to consider any appropriate action, in particular on further restrictive measures", EU leaders said in a joint statement agreed late on Monday.

But Russia remains defiant.

It said on Monday it is preparing a 12th “aid” convoy to Russia-occupied territories in east Ukraine - an exercise Western states say is used to supply Russia-controlled fighters and to smuggle home bodies of dead Russian soldiers.

The threats of more sanctions come after Russia-controlled forces fired rockets into the Ukrainian city of Mariupol at the weekend, killing 30 people.

Russian foreign minister Sergei Lavrov and its UN ambassador, Vitaly Churkin, said no one knows who did it.

Lavrov also continued to cast doubt on accusations the Russian side shot down flight MH17 in July 2014 - the last time the EU imposed economic measures.

“I can say that our Western partners and the Ukrainian authorities have developed a chronic habit of immediately pointing fingers at the militias and Russia no matter what happens”, he told press at a meeting with Israeli FM Avigdor Lieberman in Moscow.

“Such tragedies can be used to distort the truth, get ahead of the results of an objective investigation, ratchet up anti-Russian hysteria or justify the positions of a group of Western countries who want blood and more sanctions”, he added.

Referring to France and Germany as Russia’s “partners”, he said: “I hope that reason and objective, legitimate national interests will prevail”.