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Fitch Affirms Murmansk Region at 'BB'; Outlook Stable

November 27, 2012 Fitch Ratings

Fitch Ratings has affirmed the Russian Murmansk Region's Long-term foreign and local currency ratings at 'BB' and National Long-term rating at 'AA-(rus)'. The Outlooks are Stable. The region's Short-term foreign currency rating has been affirmed at 'B'.
The affirmation reflects the region's low direct risk, its good liquidity and its sound operating performance, supported by region's strong industrial tax base. However the ratings also take into account the region's rigid expenditure and volatile revenue; and Fitch's expectation on the temporary deterioration of the budgetary performance in 2012 due to operating revenue stagnation. However it expected to recover in 2013-2014 and remains in line with the current rating level.
Fitch notes that a recovery of the sound budgetary performance with the operating margin averaging 12% for two consequence years and the maintenance of strong debt coverage ratios in line with Fitch's projections would lead to an upgrade. Conversely, inability to restore and maintain sound budgetary performance sufficient for debt servicing needs and/or significant debt increase well above Fitch projections would lead to a downgrade.
Fitch expects the operating balance to deteriorate to about 4% of operating revenue by end-2012 from a high 13.6% and 9.9% in 2010 and 2011 respectively. The decline will occur due to a cut in taxable profit due to the deceleration of economic conditions for major local tax-payers and changes in the national tax regime. Despite deterioration, the operating balance remains sufficient for debt servicing. Fitch expects a recovery of the performance in 2013-2014, but it is unlikely to exceed the outturn of favourable conditions in 2010-2011.
Murmansk's debt burden is low compared to national and international peers. Fitch expects the debt will increase to RUB5.3bn by end-2012 and stabilise at about 12% of current revenue in 2012-2014. As of 1 November 2012 the region's direct risk accounted for RUB4bn or a 9.3% of projected full-year current revenue. The region's direct risk is composed of amortizing budget loans with subsidised interest rates contracted from the federal government with maturities in 2012-2015.
The administration's prudent approach to budget policy resulted in the accumulation of reserves in favourable years and depletion during the downturns in the economic cycle. Thus Murmansk accumulates high cash reserves at RUB7.1bn during 2010 and gradually depleted it for debt repayment and deficit financing during less favourable conditions in 2011 and 2012. That limits the region's debt growth.
The region's expenditure is rigid. Murmansk possesses relatively high self-financing capacity on capex, however, its level of capital outlays lags behind national peers in the 'BB' category. Fitch expects the region's capex will average 12% of total expenditure in 2012-2014, which leave little room for adjustment in the event of tax revenue deceleration and increasing pressure from the operating expenditure.
The regional economy features a strong industrial base as Murmansk is home to several natural resource development conglomerates. This provides an extensive tax base for the region's budget and the region mostly relies on its own budget revenue; however, tax revenue is highly concentrated. The aggregate contribution of top ten taxpayers is more than 55% of total tax revenue; thus, a large portion of tax revenue depends on market conditions and the companies' business decisions.
The Murmansk Region is located in the north-western part of European Russia. Its capital, the City of Murmansk, is 1,967 km away from Moscow. With a population of 0.787 million (0.6% of the national population) it contributed 0.7% of Russia's GDP in 2010.
Company — Murmansk oblast
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