October 30, 2013 / 4:37 PM / 4 years ago

Fitch Affirms Russia's Republic of Karelia at 'BB-'; Outlook Stable

MOSCOW/MILAN/LONDON, October 30 (Fitch) Fitch Ratings has affirmed the Russian Republic of Karelia's Long-term foreign and local currency ratings at 'BB-' and the Short-term foreign currency rating at 'B'. The National Long-term rating has been affirmed at 'A+(rus)'. The Outlooks on the Long-term ratings are Stable. Karelia's outstanding senior unsecured domestic bonds (ISIN RU000A0JQX51, RU000A0JRYA9, RU000A0JT7L9 and RU000A0JU1V8) of RUB5.25bn have also been affirmed at 'BB-' and 'A+(rus)'. KEY RATING DRIVERS Fitch expects Karelia's prudent fiscal management to continue in 2013-2015, leading to satisfactory budgetary performance with an operating margin of above 5%. The republic's operating balance remained stable at about 8% of operating revenue in 2011-2012, while its deficit before debt variation widened to 8.1% of total revenue in 2012 from 0.3% in 2011. Fitch expects the region to post a full-year deficit close to 7%-8% of total revenue in 2013, reflecting increased operating expenditure and a sluggish recovery of operating revenue. Karelia's tax revenue is moderately concentrated. The share of the top 10 taxpayers fell to 32% of total tax revenue in 2012 (2011: 37%), due to a new tax regime in 2012. The new fiscal regulation led to reduced payments from a key taxpayer in the metallurgy sector. Fitch expects a slow recovery of the republic's tax revenue to be mitigated by equalisation grants from the federal government in 2013-2014. The region's economic profile is dominated by the industrial sector, which contributed 34% of gross regional product in 2012. Local industries were negatively affected by a downturn in the timber and pulp and paper sectors in 2012. The administration expects the economic downturn to continue in 2013, with a 5% yoy contraction before gradually recovering in 2014-2015. In its base case scenario Fitch expects direct risk to increase up to 45%-50% in 2013-2015, from 42% in 2012, due to a widening budget deficit. The average maturity of its debt profile improved to 3.8 years in 2012, from three years in 2011. The republic's liquidity position is adequate, with an available cash balance of RUB1.5bn at end-Q313 (2012: RUB1.8bn and 2011: RUB1.5bn). The region also had at end-H113 committed credit lines from local banks totalling RUB2.4bn. Karelia's contingent risk is low and limited to the modest indebtedness of its broader public sector and few issued guarantees. The aggregate debt of the region's public-sector entities stood at RUB324m in 2012 (2011: RUB348m), while the republic had RUB194m worth of issued guarantees outstanding at end-2012. RATING SENSITIVITIES The rating could be positively affected by a sound operating margin of close to 10% in combination with direct risk at 40% of current revenue. A downgrade could result from deterioration of the budgetary performance, a resurgence of refinancing risk, as well as debt coverage ratios weaker than Fitch's expectations (direct risk at 46%-48% of current revenue) for two consecutive years. Contact: Primary Analyst Konstantin Anglichanov Director +7 495 956 99 94 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Behruz Ismailov Associate Director +7 495 956 99 80 Committee Chairperson Raffaele Carnevale Senior Director + 39 02 87 908 72 03 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 at www.fitchratings.com. Applicable Criteria andALL 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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