November 29, 2012 / 1:16 PM / 5 years ago

TEXT-S&P:New Russian loan policy may cut regions' refinancing pressure

(The following statement was released by the rating agency)

Nov 29 - Standard & Poor’s Ratings Services said today that recent amendments to the 2012 federal budget proposed by the Russian federal government might relax debt repayment and refinancing pressure on some Russian regions. However, although additional support might be provided, it continues to lack predictability and does not equally help all regions in need, as we have highlighted in our previous reports.

Budget loans, which played an important role during crisis-ridden 2009-2010 as a measure for extraordinary support, now account for about 30% of Russia’s total regional debt. Most of them were granted for three years, which means that many loans are due in 2012-2013. For several regions, budget-loan repayment needs have mounted to more than 7%-9% of operating revenues in 2012-2013, substantially increasing overall debt service. This increases regions’ need to either refinance loans with market debt and more expensive borrowing or to seek government support via loan extensions or restructuring.

In addition to partial refinancing of budget loans already available under the 2012 and 2013 federal budget--Russian ruble (RUB) 105 billion ($3.4 billion) allocated in 2012 and RUB75 billion in 2013--the federal government has recently suggested that the Duma (parliament) consider the following solutions soon:

-- Budget loans to those regions involved in preparing for large sporting events and regions recently hit by natural disasters will be extended to 2023 and then amortized gradually by 2032. These loans to be extended account for at least 30% of the existing stock of budget loans, or about 10% of total regional direct debt. For some regions, like Tatarstan and Krasnodar Krai, this will decrease debt service severalfold.

-- An additional RUB25 billion to the initially budgeted issuance of RUB105 billion loans will be allocated by year-end 2012 to extend loans to those weaker entities exposed to loan repayment needs this year, which would make overall refinancing issued in 2012 about the same as repayment needs (RUB130 billion of new issuance versus RUB135 billion of loans due).

Overall, if these measures are implemented as planned, debt refinancing needs might decrease severalfold for Tatarstan and about twofold for Krasnodar Krai. A few other weak regions, such as Vologda Oblast or the republics of North Ossetia and Mordovia could potentially benefit noticeably, too.

If the Duma approves them and the president signs them, these measures could potentially confirm the willingness of the federal government to provide extraordinary support even while it has weaker resources.

Support is an important element of our assessment of the public finance system. Depending on the combination of the federal government’s ability to institutionalize allocation criteria for ongoing and extraordinary support and to enhance the system’s predictability by refraining from unilateral and arbitrary financial and political interference, we could change our assessment of the system support element of the institutional framework score (see our recent reports published on Nov. 12, 2012, “Russia’s System For Regional Governments Is Developing And Unbalanced” and “Weaker Russian LRGs Will Lose Room To Maneuver In 2013-2014, But Strong Entities Should Stay Creditworthy”).

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