OREANDA-NEWS. Fitch Ratings has affirmed Russia's Khanty-Mansyisk Autonomous Region's (KMAR) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB', its Short-term foreign currency IDR at 'F3', and its National Long-term rating at 'AAA(rus)'. The Outlooks on the Long-term IDRs are Negative, and on the National Long-term rating Stable.

KEY RATING DRIVERS
The ratings reflect KMAR's robust economy, low debt and expected improvement of the region's operating performance in the medium term. They also consider material widening of the region's deficit before debt variation in 2013 leading to significant depletion of its cash reserves and concentration of the tax base in the oil and gas sector.

Fitch expects KMAR to recover operating surpluses in 2014 onwards to 6% of operating revenue in 2014 and between 8% and 10% in 2015-2016, from an operating deficit 3.9% in 2013. This will primarily be aided by a recovery of the oil and gas sector expected in 2014. The agency also expects KMAR's deficit before debt variation to narrow to 8% of total revenue in 2014 from 20.7% in 2013 (2012: surplus before debt), on the back of reduced capital spending and optimisation of operating expenditure.

The region's operating performance significantly deteriorated in 2013 beyond Fitch's expectations. This was due to reduced tax proceeds on the back of new fiscal rules, comprising advanced deprecation and the introduction of consolidated groups of taxpayers for large corporations. Fitch believes that the federal government's election pledges to raise public sector salaries will continue to fuel growth of operating expenditure in the medium term.

The region's direct risk is likely to remain moderate in 2014-2016, despite an expected increase of up to 14% by end-2014 and 17%-18% in 2015-2016. The region is likely to replace a portion of its short-term bank loans with a domestic bond scheduled to be issued in 2014, which will improve its average portfolio maturity and thus reduce immediate refinancing risk. The debt coverage ratio is likely to improve to about two years of current balance by end-2014, from a negative 2.7 years in 2013.

Accumulated cash reserves allowed KMAR to cover materially increased deficit before debt variation in 2013, but as a result were significantly depleted.
Taxes composed 93% of KMAR's operating revenue in 2013 (2012: 94.6%). The region's top 10 taxpayers are all Russia's major oil and gas companies, which contributed 52.1% of total taxes in 2012 (2011: 51.5%). In the administration's view the region's oil and gas sector will restore profitability from 2014, after having been negatively affected by fiscal changes in 2013.

RATING SENSITIVITIES
A downgrade could result if the sovereign is downgraded, or in the absence of a sovereign downgrade, from consistently weak budgetary performance leading to insufficient debt service coverage and a material increase of refinancing risk.