(The following statement was released by the rating agency)
Nov 05 -
-- The Russian region Sverdlovsk Oblast has reported a moderate financial
performance, modest debt, and strong liquidity, in line with our base-case
-- From our reading of the region's 2013-2015 draft budget, the new
management's financial policies appear cautious.
-- We are affirming our 'BB+' rating on the oblast.
-- The stable outlook reflects the balance between the volatility of the
oblast's budget revenues and material operating and capital spending needs,
and the continuation of cautious spending policies.
On Nov. 5, 2012, Standard & Poor's Ratings Services affirmed its 'BB+'
long-term issuer credit rating on the Russian region Sverdlovsk Oblast,
located in the Urals Federal District of the Russian Federation. The outlook
The ratings reflect Sverdlovsk Oblast's limited budget predictability and
flexibility, volatile budget revenues, and material spending pressures. The
oblast's creditworthiness benefits from low debt, strong liquidity, and a
moderate budgetary performance.
Like that of many other Russian regions, the oblast's financial policy lacks
predictability and stability due to the weak institutional system. In addition
to its low flexibility, the oblast's budget revenues are volatile due to its
dependence on metallurgy and pipe production, which are driven by global
commodity markets and economic cycles and together contribute about 25% of the
oblast's tax revenues.
In view of slowing economic growth and higher operating spending related to
federally mandated increases in public-sector salaries, we anticipate
Sverdlovsk Oblast's operating budgetary performance weakening in the medium
term. However, the oblast's cautious approach to spending will likely support
still-strong operating surpluses of about 5% of operating revenues on average
in 2013-2015, in our view after, 9% on average in 2010-2011. Importantly,
continued prudent spending allocation, as shown by the management's 2013-2015
budget draft in October 2012, is an important assumption in our base-case
In September 2012, the oblast's capital city, Yekaterinburg, was named one of
the hosts for the International Federation of Football Associations (FIFA)
World Cup in 2018. This puts significant pressure on the oblast, owing to the
need for material investments in transport, utilities, and sports facilities
to meet FIFA's requirements. The cost of the preparations is not yet clear,
but according to the oblast's initial estimates it could amount to as much as
Russian ruble (RUB) 100 billion ($3.2 billion). Considering the regulations of
the federal authorities, we assume that at least half of the required spending
will be cofinanced by the federal budget. Under this scenario, Sverdlovsk
Oblast's deficits after capital accounts are unlikely to exceed 5%-6% of
revenues on average in 2013-2015, with capital spending accounting for about
15% of total expenditures in the medium term.
We believe the region's strong self-financing capacity will result in only
moderate debt expansion in the medium term. The currently low tax-supported
debt of 17%-18% of consolidated operating revenues, which also includes
guarantees and debt of non-self-supporting government-related entities, is not
likely to exceed 30% by 2015, according to our base-case scenario.
We regard Sverdlovsk Oblast's liquidity position as "positive", as defined in
our criteria. Our base-case scenario assumes that the oblast's free cash will
exceed annual debt service in the medium term.
After a historical peak in August 2012, when Sverdlovsk Oblast's cash position
stood at a solid RUB22 billion (about $710 million), we anticipate that the
oblast's cash reserves will likely decrease somewhat, due to the expected
moderate weakening of budgetary performance in 2013-2015. However, cash levels
are likely to stay relatively strong, exceeding payments on debt interest and
In view of Sverdlovsk Oblast's established track record, our base-case
scenario factors in a smooth debt repayment profile in the medium term, which
could translate into debt service of a modest 5%-6% of operating revenues. The
oblast's debt burden will mostly consist of direct obligations, including
medium-term bonds and bank and budget loans.
In 2013-2015 the oblast is planning to set aside RUB2 billion in a contingency
fund to tackle the volatility of its revenues. The rules for fund allocation
have been legislated. This could be an important step in combating
concentration risks in the long term, although the allocation criteria are
still to be tested.
However, the Russian capital market remains volatile. Consequently, we regard
all Russian local and regional governments, like Sverdlovsk Oblast, as having
"limited" access to external liquidity. The weaknesses of the domestic banking
sector are reflected in our Banking Industry Country Risk Assessment (BICRA)
score of '7' for Russia ('1' being the lowest risk and '10' being the
highest). For more details see "BICRA On Russia Revised To Group '7' From
Group '8'," published on Nov. 9, 2011, on RatingsDirect on the Global Credit
The stable outlook reflects our view that the volatility of Sverdlovsk
Oblast's revenues and material operating and capital spending needs will
likely be counterbalanced by the new management's continuation of cautious
spending policies. We believe this will translate into a strong liquidity
position and only modest debt.
Positive rating actions would hinge on the oblast's ability to improve its
medium-term financial planning and institutionalize reserve and liquidity
policies, which would help offset revenue volatility and cover future debt
service. Sverdlovsk Oblast's maintenance of a budgetary performance similar to
those in 2010 and 2011 could also lead to positive actions.
Negative rating actions would result if difficulties in addressing existing
expenditure pressure, in particular related to the salary hikes or investments
related to the World Cup preparations, led to a significant increase in
operating and capital spending from 2013. If this were to occur, the oblast's
budgetary performance would structurally deteriorate in line with our downside
scenario, eroding its liquidity position, in particular through a rapid
decline of accumulated cash reserves.
Related Criteria And Research
6916848&rev_id=1&sid=918789&sind=A&", Nov. 9, 2011
6169911&rev_id=1&sid=918789&sind=A&", Sept. 20, 2010
-- Methodology and Assumptions For Analyzing The Liquidity Of Non-U.S.
Local And Regional Governments And Related Entities And For Rating Their
Commercial Paper Programs, Oct. 15, 2009
Issuer Credit Rating BB+/Stable/--