OREANDA-NEWS. Fitch Ratings has upgraded the Russian City of Kazan's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BB-' from 'B+' and affirmed the Short-term foreign currency IDR at 'B'. The National Long-term rating has been upgraded to 'A+(rus)' from 'A(rus)'. The Outlooks on the Long-term ratings are Stable.

The city's outstanding RUB0.6bn senior unsecured domestic bonds' ratings (ISINs RU000A0JR688, RU000A0JS249) were also upgraded to 'BB-' from 'B+' and 'A+(rus)' from 'A(rus)'.

KEY RATING DRIVERS
The upgrade reflects the following rating drivers and their relative weights:

High:
Fitch expects the city's budgetary performance will remain sound in 2014-2016 with close to balanced budget and operating balance at 10%-12% of operating revenue. According to Fitch's preliminary estimates, the operating balance accounted for 11% of operating revenue in 2013. The city recorded a deficit before debt variation at 4.6% of total revenue. The deficit was fully covered by accumulated cash reserves.

Fitch expects the city's direct debt (issued debt and bank loans) will continue to decline in 2014-2016. Kazan's direct debt decreased to RUB4.8bn, which corresponds to 26.1% of preliminary estimated current revenue in 2013 (2012: 28.1%). The city successfully refinanced bank loans maturing at end-2013 with new short-term bank loans.

Refinancing pressure will persist in 2014 as Kazan will have to refinance all its direct debt during the year, which includes RUB4.2bn repayment of short-term bank loans and RUB0.6bn of maturing bond. However, refinancing pressure is mitigated by the moderate amount of direct debt and the city's long and successful track record of relationships with commercial banks. Fitch expects that from 2014, the city will gradually extend the maturity of its direct debt obligations beyond one-year, smoothing the debt maturity profile.

Kazan's direct risk, which includes budget loans, remains high and accounted for 164% of preliminary estimated current revenue in 2013. The bulk of direst risk relates to RUB25.4bn sub-loans from the federal government, which were earmarked for infrastructure development in preparation for the international student sport competition, Universiade 2013. In mid-2013, the terms of budget loan repayment were changed, with the introduction of a grace period until 2023 and the principal to be amortised in 10 annual instalments from 2023 to 2032.

Kazan's ratings also reflect the following rating drivers:

Kazan is the capital of Tatarstan (BBB/Stable/F3), one of the most developed Russian regions. The city received large capital transfers from the republic in the mid-2000s to finance its capital expenditure. This has remained high during the past five years and Fitch expects the republic to be supportive in future if necessary.

The city's economy is well-diversified and has a developed industrial sector. The latter is dominated by petrochemicals, machine-building and food processing. In 2012, the city's economy grew by 5% exceeding the national growth rate of 3.4%. The administration expects average growth will account for 5% annually in 2014-2015.

The ratings are negatively affected by the evolving nature of the institutional framework for local and regional governments (LRGs) in Russia. It has a shorter track record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is constrained by the continuous reallocation of revenue and expenditure responsibilities between the tiers of government.

RATING SENSITIVITIES
The decline of direct risk to below 100% of current revenue accompanied by maintenance of sound operating performance in line with 2012-2013 actuals could lead to a further upgrade.

The increase of market direct debt (bank loans and issued debt) to above 50% of current revenue, and/or deterioration of operating balance to below 5% of operating revenue could lead to a downgrade.