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Fitch Cuts Israel's Credit Rating amid Rising Middle East Tensions

The Fitch Ratings logo is seen at their offices at Canary Wharf financial district in London,Britain, March 3, 2016. REUTERS/Reinhard Krause/File Photo Purchase Licensing Rights
The Fitch Ratings logo is seen at their offices at Canary Wharf financial district in London,Britain, March 3, 2016. REUTERS/Reinhard Krause/File Photo Purchase Licensing Rights
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Fitch Cuts Israel's Credit Rating amid Rising Middle East Tensions

The Fitch Ratings logo is seen at their offices at Canary Wharf financial district in London,Britain, March 3, 2016. REUTERS/Reinhard Krause/File Photo Purchase Licensing Rights
The Fitch Ratings logo is seen at their offices at Canary Wharf financial district in London,Britain, March 3, 2016. REUTERS/Reinhard Krause/File Photo Purchase Licensing Rights

Credit ratings agency Fitch downgraded Israel's credit rating to "A" from "A-plus" on Monday, citing worsening geopolitical risks as the war in Gaza drags on, and kept the rating outlook negative, meaning a further downgrade is possible.

"In our view, the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts," the ratings agency said in a statement, Reuters reported.

"The downgrade following the war and the geopolitical risks it creates is natural," Israeli Finance Minister Bezalel Smotrich said on X.

Fears that the conflict in Gaza could turn into a broader Middle East war have escalated after the killing of Hamas leader Ismail Haniyeh in Iran and top Hezbollah military commander Fuad Shukr in Beirut.

Israel's shekel fell as much as 1.7% against the dollar on Monday and stocks ended over 1% lower in Tel Aviv (.TA125), opens new tab as investors fret over a possible attack on Israel.

Heightened tensions between Israel and Iran and its allies could imply significant additional military spending, destruction of infrastructure and damage to economic activity and investment, Fitch said.

The ratings agency expects the Israeli government to permanently increase military spending by close to 1.5% of GDP versus pre-war levels as the country strengthens its border defenses.

"Public finances have been hit and we project a budget deficit of 7.8% of GDP in 2024 and debt to remain above to 70% of GDP in the medium term," Fitch said. It forecast the country's debt will remain on an upward trend beyond 2025 if higher military spending and economic uncertainties continue.

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Billions in Dollar and Euro Notes Reach Russia despite Sanctions

Euro and Dollar banknotes and words "Sanctions" are placed on Russian flag in this illustration taken, May 16, 2024. REUTERS/Dado Ruvic/Illustration/File Photo Purchase Licensing Rights
Euro and Dollar banknotes and words "Sanctions" are placed on Russian flag in this illustration taken, May 16, 2024. REUTERS/Dado Ruvic/Illustration/File Photo Purchase Licensing Rights
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Billions in Dollar and Euro Notes Reach Russia despite Sanctions

Euro and Dollar banknotes and words "Sanctions" are placed on Russian flag in this illustration taken, May 16, 2024. REUTERS/Dado Ruvic/Illustration/File Photo Purchase Licensing Rights
Euro and Dollar banknotes and words "Sanctions" are placed on Russian flag in this illustration taken, May 16, 2024. REUTERS/Dado Ruvic/Illustration/File Photo Purchase Licensing Rights

Around $2.3 billion in dollar and euro bills have been shipped to Russia since the United States and EU banned the export of their banknotes there in March 2022 following the invasion of Ukraine, according to customs data seen by Reuters.
The previously unreported figures show Russia has managed to circumvent sanctions blocking cash imports, and suggest that dollars and euros remain useful tools for trade and travel even as Moscow strives to reduce its exposure to hard currencies.
The customs data, obtained from a commercial supplier that records and compiles the information, shows cash was transported to Russia from countries which have not imposed restrictions on trade with Russia. The country of origin for more than half the total was not stated in the records.
The US government in December threatened penalties for financial institutions that help Russia circumvent sanctions and has imposed sanctions on companies from third countries throughout 2023 and 2024.
China's yuan has overtaken the greenback to become the most traded foreign currency in Moscow, although significant payment problems persist.
Dmitry Polevoy, head of investment at Astra Asset Management in Russia, said many Russians still wanted foreign currency in cash for trips abroad, as well as small imports and domestic savings.
"For individuals, the dollar is still a reliable currency," he told Reuters.
Wall Street's main indexes closed mixed on Monday as investors braced for more key economic data in the hope of gauging the Federal Reserve's next policy moves.

Russia started labelling the dollar and euro as "toxic" in 2022 as sweeping sanctions cut its access to the global financial system, hampering payments and trade. Around $300 billion of the Bank of Russia's foreign reserves in Europe have been frozen.

A European Commission spokesperson said it could not comment on individual cases of sanctions application. The spokesperson said the European Union engages with third countries when it suspects that sanctions are being circumvented.
The customs records cover March 2022 to December 2023 and Reuters could not access more recent data.
The documents showed a surge in cash imports just prior to the invasion. Between November 2021 and February 2022, $18.9 billion in dollar and euro banknotes entered Russia, compared with just $17 million in the previous four months.
Daniel Pickard, International Trade & National Security Practice Group Leader at US law firm Buchanan Ingersoll & Rooney, said the pre-invasion spike in shipments suggested some Russians wanted to insulate themselves against possible sanctions.
"While the US and its allies have learned the importance of collective action in maximizing economic consequences, Russia has been learning how to avoid and mitigate those same consequences," Pickard said. He added that the data almost certainly understated actual currency flows.
Russia's central bank quickly curtailed individuals' foreign currency cash withdrawals following the invasion of Ukraine, in a bid to support the weakening rouble.
According to the data, just $98 million in dollar and euro banknotes left Russia between February 2022 and end-2023.
Foreign currency inflows, by contrast, were far higher. The largest single declarant of foreign currency was a little-known company, Aero-Trade, that offers duty-free shopping services in airports and aboard flights. It declared around $1.5 billion in bills during that period.