Citing the tense geopolitical situation between Russia and Ukraine, the S&P; Cut Russia Debt Rating to Step Above Junk and warned further downgrades may come.

S&P; cut Russia’s rating one step to BBB-, it said in a statement today. The grade, on par with Brazil and Azerbaijan, has a negative outlook. S&P; last downgraded Russia in December 2008. Russia’s currency and bonds fell.

“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 downgrade was expected by investors and won’t significantly change their behavior, Russian Economy Minister Alexei Ulyukayev told reporters today.

Russian President Vladimir Putin told reporters in St. Petersburg yesterday that “sanctions are not effective in the contemporary world and are not bringing the desired outcome.”

“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.

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.”

Threats of More Sanctions

The Financial Times reports Angela Merkel Warns Russia it Faces Further Sanctions.

“I spoke to the Russian president this morning and made clear again that on the one hand Ukraine has taken a whole series of steps to implement the Geneva accord but on the other side I see no Russian backing for the accord which would of course have an effect on the separatists in Ukraine,” Ms Merkel said.

The German chancellor made it clear that any additional measures would be an extension of the current financial sanctions, not the introduction of full-blown trade sanction, which include energy.

Merkel Tiptoes Through the Tulips

By making it clear the threats do not involve full-blown trade sanctions, Merkel effectively chose meaningless tiptoe steps that cannot possibly accomplish much. Then again, a full blown trade war will not accomplish much either, except perhaps quickly sink Europe back into recession.

If Russia shuts off gas to Europe, everyone loses. Merkel knows that, so does UK Prime minister David Cameron.

The only person who doesn’t know or doesn’t care is president Obama.

Is Russia in Control of the Separatists?

Merkel stated “Russia has the power, or could have the power, to bring the separatists on to a peaceful path of discussions about the constitution and preparations for elections“.

Is that necessarily true? One can make a case that Russia spawned these uprisings. Some claim Russia even supplied the weapons.

But does that mean Russia is in control of the situation?

Recall that Denis Pushilin, the head of the self-declared Donetsk People’s Republic, told journalists in regards to the now broken peace accord, that “Russian foreign minister Sergei Lavrov did not sign anything for us, he signed on behalf of the Russian Federation.

The only thing Russia clearly has control over, is whether or not to invade if Ukraine responds with more force.

And if Russia does invade, the Ukrainian army will be no match. Let’s hope it does not come to that.

Mike “Mish” Shedlock