Fitch: Russian LRG Institutional Framework Remains Weak

Wed Aug 6, 2014 3:00am EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Institutional Framework for Russian Subnationals here MOSCOW, August 06 (Fitch) Fitch Ratings says in a new report that the evolving institutional framework for Russia's local and regional governments (LRGs) remains a constraint on their credit quality. The major challenge comes from frequent changes of expenditure responsibilities and tax-sharing allocation across tiers of governments, which limits LRGs' medium- and long-term budgeting, investment and debt planning. The fiscal autonomy and financial self-sustainability of Russian LRGs is limited by the significant concentration of tax-setting authority at the federal level. Strategic decisions on major economic and financial issues are influenced by the upper levels of government. Furthermore, the regions' tax proceeds are mostly income-based and subject to economic cycles and are therefore often volatile. Continuous reallocation of responsibilities among federal, regional and local governments, as well as imposing on LRGs' budgets with additional expenditure during 2013-2014, has had a negative impact on LRGs' credit strength. This underlines the overall weakness and evolving nature of the Russian institutional framework. The deterioration of Russian LRGs' budgetary performance in 2013 and 1H14 was reflected in widening deficits and increased debt that was largely driven by new spending obligations imposed by the federal government. The social-oriented presidential decree published in May 2012 was aimed, among others, at increasing the salaries of teachers and medical personnel to align them with the average regional salary. Being the decision at the federal level this additional spending responsibility was imposed on regional governments without adequate financial compensation from the federal government. Moderate debt by international standards, albeit growing, remains the supportive factor for LRGs' credit ratings. Russian legislation imposes strict limits on total debt and annual interest payments. Furthermore, limitations on external borrowing minimise foreign exchange risk. LRGs' debt management, however, lacks sophistication, and high reliance on short-term bank loans causes high refinancing pressure, especially during periods of tension in financial markets. Russian LRGs focus on a cash-based approach in their budget accounting practices in contrast to most international peers, which use accrual accounting. The national budgetary regulation does not segregate operating and capital revenue/expenditure, complicating the analysis of LRGs' operating performance and investment needs. The special report, entitled 'Institutional Framework for Russian Subnationals', is one of a series of Fitch reports examining the institutional frameworks for subnationals in various countries which are available at www.fitchratings.com. Contact: Victoria Semerkhanova Associate Director +7 495 956 99 65 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Vladimir Redkin Senior Director +7 495 956 99 01 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Elena Ozhegova Associate Director +7 495 956 99 87 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 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. 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.