Most Russian regions would rank speculative grade – S&P

(Interfax – MOSCOW. April 17, 2013) Most of Russia’s regions would rank speculative grade, Standard & Poor’s Ratings Services said.

In an article published on April 16 and titled “Most Russian Regions’ Creditworthiness Is Below Investment Grade Due To A Weak Intergovernmental System, Economy, And Management”, S&P explains its estimate of the credit quality of all 83 Russian regions.

The agency believes it would view only 6% of them in the investment-grade category of ‘bbb’, while the rest would likely be almost equally divided between the ‘bb’ and ‘b’ rating categories.

“In our opinion, Russia’s developing and unbalanced institutional framework constrains all Russian regions’ creditworthiness in an international comparison,” S&P said.

“We base our assessment of the Russian regional sector’s credit quality on our public ratings on 15 regions, as well as on our credit opinions for the remaining 68 unrated entities. Our credit opinions are based on our methodology for rating local and regional governments (LRGs), publicly available economic and financial data, and a series of internal assumptions. We note that these opinions are different from credit ratings by nature, as they do not include an interactive rating process with the respective entities, that is, we did not have access to detailed, qualitative, and forward-looking perspective on the regional management’s financial strategies as we normally have in the course of assigning and maintaining a credit rating. However, we believe that if we were to convert credit opinions on unrated regions into full-scale credit ratings, the outcome would likely fall within one notch from our credit opinions.

In other articles published April 16, titled “Growing Federal Mandates And Reduced Federal Subsidies Threaten Russian LRGs’ Operating Performance” and “Russian Local And Regional Government Debt Could Double By 2015”, Standard & Poor’s Ratings Services presents its medium-term forecasts for Russian local and regional governments (LRGs) in light of growing federal spending mandates and reduced federal subsidies. LRGs are also being forced to address the poor state of infrastructure.

“In our base-case scenario, we expect Russian LRGs’ nominal direct debt to more than double by year-end 2015 to about Russian ruble (RUB) 3 trillion from the current RUB1.4 trillion. While average Russian LRG debt is likely to remain modest in an international context, we expect it to account for more than 30% of operating revenues at year-end 2015, from a low 16%-17% in 2010-2011.

We believe that an increasing number of Russian LRGs will not be able to keep deficits under control in 2013-2015 without additional support from the federal government. In our view, the growing salaries mandated by the federal government will now be the key reason for further performance deterioration.

Earmarked financing and rapidly deteriorating infrastructure are other reasons explaining the regions’ lack of flexibility, in our view,” S&P said.