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By Bloomberg

Russian stocks headed for the biggest two- day drop in more than a month after Standard & Poor’s cut the nation’s credit rating to junk for first time in a decade. The ruble strengthened after tumbling to a record yesterday.

The dollar-denominated RTS Index fell 2.5 percent and bonds declined, lifting the yield on five-year government debt 14 basis points to 15.39 percent. The ruble, which has weakened 17 percent since S&P first put Russia’s rating on review on Dec. 23, gained 1.7 percent to 67.6050 as of 10:24 a.m. in Moscow.

Russia was lowered one step to BB+ yesterday as U.S. and European Union sanctions over Ukraine and a slump in oil prices drove the economy of the world’s largest energy exporter to the brink of recession. Moody’s Investors Service and Fitch Ratings both cut Russia to one level above junk this month. Russia’s central bank spent $88 billion propping up the ruble last year.

“Clouds are gathering” and the central bank may have intervened to slow the ruble’s decline, Artem Roschin, a foreign-exchange dealer at Aljba Alliance bank, said by phone. “Many people expected the rating to be cut and it has been partially priced in. Now we’re waiting for the second unpleasant part: ratings action from the other two agencies.”

Russian debt will no longer be eligible for some indexes that track investment-grade sovereigns if two of the three biggest rating companies cut it to junk.

While the Bank of Russia abandoned its managed exchange rate policy last year, policy makers preserved the right to intervene unannounced if they see a threat to financial stability. The central bank publishes its interventions data with a two-day lag.

Long Dollar

S&P’s decision came after the U.S. and European Union warned that Russia, which they accuse of aiding rebels in eastern Ukraine, may face further repercussions after violence escalated over the weekend.

“The threat of new sanctions and the rating cut are all very negative,” Andrey Mishko, a trader at Nota Bank, said by e-mail. “The trend is clear -- one had better stay long on the dollar, than ruble.”

Moody’s and Fitch still have Russia as investment grade. S&P, which last downgraded Russia in April, has put Russia on par with Bulgaria and Indonesia with a negative outlook. Russia’s local currency ratings were reduced to BBB-, the lowest investment grade.

The S&P move is “negative for the market, despite that it is widely expected and should be largely priced in,” Vladimir Osakovskiy, an analyst at Bank of America said in e-mailed comments. “The news can still add market pressure, at least in the short term, as it will force the exit of any remaining investment grade-dedicated investors out of Russian assets.”

Rates Decision

Local-currency government bonds due in five years snapped three days of gains yesterday, driving the yield 55 basis points higher to 15.25 percent. The rate on the securities has almost doubled since President Vladimir Putin’s incursion into Crimea started last March, leading to the annexation of the Black Sea peninsula. Russia’s Finance Ministry is due to announce today whether it will hold its weekly bond auction.

The central bank raised interest rates 650 basis points to 17 percent on Dec. 16 in Moscow, prioritizing the ruble’s stability over shoring up the economy, which analysts expect will contract 3.5 percent this year. The central bank will keep the rate on hold at its Jan. 30 meeting, according to all but one of 18 economists in a Bloomberg survey.

Yesterday’s downgrade “may give the CBR a good excuse to keep the key rate high for longer than expected,” Natalia Orlova, the chief economist at Moscow-based Alfa-Bank, said by e-mail today. “We definitely do not expect any cut” at the upcoming meeting, she said.