By Dimitra DeFotis

Citing lower oil prices and the slumping ruble, Moodys downgraded Russian government debt late Friday.

Moodys Investors Service lowered Russias sovereign bond rating to Baa3/Prime 3 from Baa2/Prime 2, and said it is reviewing the resiliency of the Russian governments balance sheet, including its foreign currency reserves in light of low oil prices and sanctions. A further downgrade is possible. Fitch Ratings downgraded Russia debt Jan. 9 .

Associated Press Russian President Vladimir Putin.

Moodys expects Russias real GDP to contract 5.5% in 2015, and sees zero growth through 2018. It listed two drivers for the downgrade, which is a step above a junk rating: The first is that oil-price and exchange-rate shocks will further undermine Russias economic growth prospects and have already undermined consumer and investor confidence.

While oil prices moved higher Friday for the first time in weeks, Moodys said:

The severe and likely to be sustained oil price shock, alongside Russian borrowers highly restricted international market access due to ongoing sanctions, is undermining economic fundamentals and increasing financial stresses on both the public and private sectors Even if interest rates are lowered over time, lending will remain constrained; asset quality and profitability problems in the banking system will likely escalate the longer that the recession lasts despite efforts by the government to bolster the systems capital and funding base.

The second driver of the downgrade: Eroding foreign exchange buffers and fiscal revenues are having a negative impact on the governments financial strength.

Although the rating agency expects Russias current account to stay in surplus due to import compression and continued capital flight, the ongoing repayment of external debt by the corporate, banking and public sectors and the outflow of direct investment will likely increase the speed of erosion of official foreign reserves, says Moodys. In Moodys view, Russias nominal FX reserves could fall by at least as much this year as they did in 2014, when they declined by around $125

billion.

Russian stocks moved higher Friday as oil prices increased, sending the bears scrambling. A leveraged trading vehicle, the Direxion Daily Russia Bear 3x  ETF (RUSS ), fell 10%. The Market Vectors Russia ETF  (RSX ) rose 3.4% Friday and was up 0.5% for the week.

Among energy names, Rosneft  (ROSN.Russia) rose 2.8% in local trading and in the U.S. shares of Gazprom  (OGZPY ) were up 3.6% and Lukoil (LUKOY ) rose more than 5%. Sberbank  (SBRCY ) was up 2.7%. The best performer of the day and the week was Mechel (MTL ), a mining company and producer of coal, iron ore, steel and nickel that has been dancing with bankruptcy.