Fitch Affirms Russia's Republic of Sakha at 'BBB-'; Outlook Stable

Fri Mar 21, 2014 12:50pm EDT

(The following statement was released by the rating agency) LONDON/MOSCOW/FRANKFURT, March 21 (Fitch) Fitch Ratings has affirmed the Republic of Sakha's (Yakutia) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-', Short-term foreign currency IDR at 'F3' and National Long-term rating at 'AA+(rus)'. The Outlooks on the Long-term ratings are Stable. The republic's outstanding senior unsecured domestic bonds of RUB8.75bn (ISIN RU000A0JP6V4, RU000A0JRHB2, RU000A0JS850 and RU000A0JTVM6) have been affirmed at Long-term local currency 'BBB-' and National Long-term 'AA+(rus)'. KEY RATING DRIVERS The ratings reflect Sakha's strong economy and low levels of debt. They also factor in high contingent liabilities and worsening, but still sound, budgetary performance. The Stable Outlook reflects Fitch's view that despite high pressure on expenditure and nation-wide economic slowdown, the republic will sustain its current level of creditworthiness in the medium term and through the economic slowdown. Sakha's ratings are underpinned by its strong economy that is exceptionally rich in natural resources such as diamonds, coal, oil, natural gas and gold. The natural resources industry is dominated by OJSC ALROSA (BB/Stable/B), the world's largest diamond producer with a share of more than 25% of global rough diamond production. Completion of the East Siberia-Pacific Ocean pipeline in 2009 has enabled development of the republic's untapped oil and gas reserves. Sakha's gross regional product (GRP) per capita was higher than the national median by about 130% and its average salary exceeded the national median by 1.5x. Russia's major diamond, oil, gas, pipeline, coal, railway and energy companies have made significant investments in Sakha. Fitch expects the economy to grow at above national rates in 2014-2016 at 3%-4% in real terms. However, high tax concentration on top three taxpayers, at above 40% in 2013, will remain in the foreseeable future. Fitch expects Sakha's direct risk to remain low at under 20% of current revenue in 2014-2016. In 2013, direct risk rose to RUB17bn or 13% of current revenue, from 8% a year earlier. Debt coverage by current surplus deteriorated to four years at end-2013, from less than one year in 2012. Nevertheless, interest paid accounted for less than 1% of operating revenue in 2013. The republic has a wide network of public sector enterprises, mainly due to its vast territory, under-developed infrastructure and severe climate. Sakha's indirect risk accounted for about 60% of the region's total indebtedness and exceeded RUB26bn at end-2013. Disproportionate growth of contingent risk will put pressure on Sakha's creditworthiness. Sakha historically has cash buffers that mitigate its refinancing risks. The republic had RUB5.8bn liquidity balance as of 1 March 2014, while refinancing needs for 2014 are RUB2.6bn (2015 - RUB2.5bn). Sakha has a refinancing peak of RUB9.5bn in 2016, but Fitch does not expect any difficulties for the republic in accessing debt markets. Fitch expects Sakha's operating performance to slightly improve in 2014-2016, but operating surpluses are likely to be at 4%-5% of operating revenue, below historical levels. The federal government's election pledges to raise public sector salaries will continue to fuel growth of operating expenditure, while revenue growth will not return to pre-2012 levels due to the economic slowdown. This will result in low operating surpluses in the medium term and gradual growth of debt. Sakha's operating surplus continued to deteriorate in 2013, falling to 3% of operating revenue (16% in 2010-2011), below Fitch expectations. RATING SENSITIVITIES Improvement of Sakha's budgetary performance well above Fitch's expectations, coupled with a reduction of net overall risk to about 20% of current revenue, from about 30% at end-2013, would lead to an upgrade. Growth of net overall risk to above 50% of current revenue or sharp deterioration of debt coverage ratios could lead to a downgrade. Contact: Primary Analyst Behruz Ismailov Associate Director +7 495 956 99 80 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Konstantin Anglichanov Director +7 495 956 99 94 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria', dated 9 April 2013, are available on www.fitchratings.com. Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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