OREANDA-NEWS. S&P Global Ratings today affirmed its 'BB+/B' long - and short-term foreign currency issuer credit ratings and its 'BBB-/A-3' long - and short-term local currency issuer credit ratings on Russian government-owned development bank Vnesheconombank (VEB). The outlooks remain negative.

We base the ratings on our opinion of VEB as a government-related entity (GRE) with an almost certain likelihood of receiving extraordinary support from the Russian government in the event of financial difficulties. Accordingly, we equalize our ratings on VEB with those on Russia.

In accordance with our criteria for GREs, our view that there is an almost certain likelihood of extraordinary government support is based on our assessment of VEB's:Critical role for Russia as the government's prime public development institution, a role that cannot be readily undertaken by a private entity. The VEB group's assets currently represent about 5.5% of Russia's GDP; andIntegral link with Russia. This is because of VEB's unique status as a state corporation operating under the law "On The Bank For Development," with strong oversight from the federal government and prime minister, represented on its supervisory board. Also, the government has a proven track record of providing timely support to VEB in all circumstances, including through a recent $6 billion subsidy resulting from a lower interest rate on subordinated deposits and direct capital injections to VEB. Furthermore, high-ranking government and central bank officials have reiterated the government's strong commitment to VEB after the imposition of U. S. sanctions. We have changed our assessment of VEB's stand-alone credit profile (SACP) to 'ccc+' from 'b-' as we now assess VEB's business position as adequate instead of strong. The 'ccc+' SACP reflects our view that without continued support from the government, VEB is vulnerable to nonpayment and depends on favorable business, financial, and economic conditions to meet its financial commitments (see "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published Oct. 1, 2012 on Ratings Direct).

Our assessment of VEB's business position stems from its unique status as a primary state financial arm and development institution in Russia. It provides long-term bank funding for complex investment projects in infrastructure, machinery, and other strategic sectors defined by Russia's government. We believe that with the sale of its commercial bank subsidiaries, VEB will lack business diversification and will refocus its role on a relatively narrow mandate. We note that with this sale VEB will compare with peers that have adequate business positions in Russia.

Our assessment of capital and earnings as weak reflects that our projected risk-adjusted capital (RAC) ratio for VEB, before diversification, will stay between 3% and 4% over the next three years.

Our assessment of VEB's risk position incorporates the bank's public policy role and its involvement in government-led projects, especially loss-making ones. According to International Financial Reporting Standards, VEB's gross nonperforming loans represented 20% of the loan book at year-end 2015, significantly higher than that of Russian banking peers and development institutions globally.

Our assessment of funding and liquidity reflects possible refinancing risks stemming from the negative effect of the U. S. treasury's sanctions on VEB's future capital market access, despite our expectation of ongoing support from the authorities in case of need. We note that as of Jan. 1, 2016, VEB had RUB491 billion of liabilities (12.5% of total liabilities) under which counterparties had the right to demand the early repayment because of the rating trigger. We note that none of those liabilities were called in recent stress events.

Given VEB's high strategic importance to the government, we view the bank's liabilities as resilient to a loss of market confidence. As of Dec. 31, 2015, about 24% of the bank's liabilities stem from the National Welfare Fund, Russian government and central bank. We estimate VEB's foreign currency denominated debt due in 2016-2018 as modest with some increase expected in 2020. We believe that VEB will rely on government to refinance this debt.

The negative outlook reflects that on Russia, as well as the possibility that we could reconsider our assessment of the likelihood of government support.

We would lower the ratings on VEB in the next 12-18 months if we lowered the sovereign rating on the Russian Federation. We might also lower the ratings over the next two years--even if the sovereign ratings remain unchanged--if in our view the likelihood of government support had reduced. This could be seen, for example, in a rising risk of material and rapid weakening of VEB's capitalization or liquidity, in the absence of the government's explicit commitment to provide timely and sufficient financial support. We could take a similar action if the government reduced VEB's role as a prime development institution.

We might revise the outlook to stable if we revised the outlook on Russia to stable, and VEB continued to receive financial support from the Russian Federation to ensure timely redemption of its debt obligations.