MOSCOW/LONDON, February 05 (Fitch) The large increase in debt
Region, which is hosting the Winter Olympics from Thursday, is
because the region's economy is well diversified and there is a
steady flow of
funding from the federal government, Fitch Ratings says.
Krasnodar Region's indebtedness rose rapidly to 47% of the
revenue in 2013, from 3% in 2009, largely related to building
in and around Sochi. Previously, there was limited investment
from the regional
budget, and despite the significant rise in debt the direct risk
federal budget loans) to current revenue ratio is within the
range of 'BB+'
rated Russian region peers.
We expect direct risk for the region to stabilise at 40%-46% of
in 2014-2015. Krasnodar Region's strong, diversified economy
provides a broad
tax base and growing tax revenue flows. We believe it will
continue to benefit
from its strong industrial base, transport sector and natural
endowment. The infrastructure for the games should also boost
of the region's seaside and ski resorts. However, maintenance
costs for these
facilities are likely to add to the region's budget expenses in
the medium term.
Funding is supported by the federal government, which provided
58% of the
region's debt. The extension of this debt with final maturities
now in 2032, and
reduction of interest rates to 0.5% a year last year should
smooth the region's
debt profile and ease debt servicing. We believe this helps
offset the risks
from debt growth leading up to the Winter Olympics by improving
Russian banks have also contributed to the funding for the
event. But generally
there is limited concentration in their loan books.
Russia's development bank, has been one of the main providers of
finance for the project. It has committed to lend RUB239bn
equivalent to 12% of its loan portfolio and largely disbursed.
maturities are 5-15 years, but Deputy Prime Minister Dmitry
announced the extension of the grace period on interest and
for borrowers until end-2015.
We believe the risks from VEB's Winter Olympics infrastructure
largely be offset by funding from the authorities. The National
Welfare Fund is
likely to convert around RUB200bn deposits held at the bank into
subordinated securities. VEB's policy role as a development bank
and its close
ties with the authorities means its 'BBB' rating is equalised
with that of the
Russian sovereign to reflect the high probability of support.
Overall, the widely reported USD50bn costs relating to the
Winter Olympics are
less than 2.5% of our 2013 GDP estimate for Russia. With some
funded, the impact on the sovereign's finances is minimal.
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