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Fitch Revises Russian Kostroma Region's Outlook to Stable; Affirms at 'B+'
February 7, 2014 / 4:50 PM / in 4 years

Fitch Revises Russian Kostroma Region's Outlook to Stable; Affirms at 'B+'

Link to Fitch Ratings' Report: Kostroma Region - Rating Action ReportLONDON/MOSCOW/FRANKFURT, February 07 (Fitch) Fitch Ratings has revised Russia's Kostroma Region's Outlooks to Stable from Positive, and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+' and its National Long-term Rating at 'A(rus)'. The agency has also affirmed Kostroma's Short-term foreign currency IDR at 'B'. The rating action affects the region's outstanding senior unsecured domestic bonds of RUB5.9bn (ISINs RU000A0JU6N4, RU000A0JRWS5). KEY RATING DRIVERS The Outlook revision reflects the following rating drivers and their relative weights: High - Large and Growing Direct Risk The region's direct risk unexpectedly worsened by 14% at end-2013 to stand at 67% of current revenue, as its deficit before debt widened. Fitch had expected a balanced budget to keep direct risk under control. Fitch now expects the region's direct risk to continue deteriorating and to equal 81% of current revenue by end-2016. The region reported a deficit of 10.5% of total revenue in 2013, compared with a surplus of 0.4% in 2012. Fitch expects the region's deficit will gradually improve by 2016 but still represent 6%-7% of total revenue. - Refinancing Pressure The region is dependent on access to capital markets for refinancing its maturing debt after a close to zero current balance in 2013 led to weak debt coverage (direct risk/current balance). As much of its debt is short-term, Kostroma is facing repayment of 43% of total direct risk during 2014. Meanwhile, the administration is seeking to lengthen its debt maturities; at end-2013 it contracted a RUB1,475m loan from the federal budget with a three-year maturity and issued RUB3bn five-year domestic bonds. These transactions extend the region's direct risk maturity profile till 2018 and help to postpone refinancing. - Operating Performance Deteriorates Smaller-than-expected operating revenue and larger operating expenses, resulting from a national government decision to increase public sector salaries, led to a deterioration in operating balance to 3.6% of operating revenue in 2013 (2012: 12.7%). Fitch expects a negative current balance in 2014 (negative RUB30m according to preliminary figures for 2013) with an operating margin of 4%. Historically, the region has suffered volatile operating performance, mostly from increased expenditure responsibilities, which rigid revenues were unable to cover. Kostroma region's ratings also reflect the following key rating drivers - Weak Fiscal Capacity Kostroma's tax base is historically modest, limiting its self-financing capacity. It is, however, supplemented by steady financial aid from the federal government. Federal current transfers averaged 31% of the region's operating revenue in 2012 and 2013, helping to improve its budgetary performance. Fitch expects Kostroma to receive federal transfers in the range of 28%-30% of operating revenue in 2014-2016. - Modest Economy, Steady Growth According to preliminary estimates the region expects the local economy to have expanded 3.5% in 2013, which would be above national growth. Despite higher economic growth Kostroma's socio-economic profile is weaker than the average Russian region. The region's per capita gross regional product was 23% below the national median in 2011. RATING SENSITIVITIES The ratings may be upgraded if the region records an operating balance at 5% of operating revenue on a sustained base, accompanied by direct risk stabilising at below 70% of current revenue and by declining reliance on short-term bank loans. Further growth of the region's total indebtedness above 80% of current revenue, accompanied by persistent refinancing pressure and a negative operating balance, would lead to a downgrade. Contact: Primary Analyst Vladimir Redkin Director +7 495 956 70 64 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Victoria Semerkhanova Analyst +7 495 956 99 65 Committee Chairperson Guido Bach Senior Director +49 69 768 076 111 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 on 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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