(The following statement was released by the rating agency)
Link to Fitch Ratings' Report: Russian Subnationals: Increasing
Pressure on Ratings
MOSCOW, May 21 (Fitch) Fitch Ratings says the ratings of Russian
regional governments (LRGs) are under pressure from increasing
debt to fund
their structural fiscal deficits.
The budget deficits of most Russian subnationals are driven by
economic outlook, which compresses tax proceeds, and by higher
expenditure due to new spending obligations imposed by the
New tax regulation allowing financial loss deductions from
corporate income tax
is also leading to deceleration in tax revenue growth.
Fitch forecasts that Russian regions' direct risk will grow 20%
in 2014, only
slightly lower than the rapid growth of 29% in 2013. Short- and
loans will remain the key funding tool for budget deficits,
risk high. Higher debt stock will also lead to an increase in
while a weak current balance will result in a weak
self-financing capacity of
Fitch assesses the debt burden of Russian regions as moderate on
basis, but expects direct risk to increase over the medium term.
The debt burden
varies substantially across regions: net debt (debt net of cash
varied from zero to even negative for investment grade-rated
LRGs to 70% of
operating revenue for lower-rated LRGs in 2013. Additionally,
often rely on short-term borrowing, leading to high refinancing
significant liquidity risks.
The maturity profiles of short-term market and state budgetary
direct risk) are a source of refinancing risk for most Russian
LRGs. Bank loans
were the main source of deficit funding in 2013, with an average
between one to three years. Short-term bank loans represented
42% of Russian
regions' direct risk at end-2013.
Fitch believes that Russian President Vladimir Putin's recent
ease the debt burden of Russian regions would only contain, but
not reverse, the
structural deterioration in the regions' debt metrics. The
for market funding to be replaced with subsidised federal budget
federal government guarantees to be provided for subnational
debt. In Fitch's
view reversing the deteriorating debt metrics can only be
eliminating the regions' structural imbalance between spending
revenue sources that arose in 2012-2013.
The report, 'Russian Subnationals: Increasing Debt Intensifies
Ratings', is available at www.fitchratings.com or by clicking on
the link above.
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