OREANDA-NEWS. Fitch Ratings has affirmed Russian Lipetsk Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Stable Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA-(rus)' with a Stable Outlook.

The region's outstanding senior unsecured domestic bonds' ratings (ISIN RU000A0JS8T1, RU000A0JUNK5 and RU000A0JTVZ8) have been affirmed at 'BB' and 'AA-(rus)'.

The affirmation reflects Lipetsk's satisfactory operating performance, moderate, albeit increasing, direct risk and prudent financial management. The ratings also factor in the high concentration of the local economy and continuous pressure on operating expenditure.

Fitch expects the region's operating performance to remain satisfactory with an operating balance sufficient to cover interest payments in 2014-2016. This will be supported by the region's strong tax base and the ability of the administration to control operating expenditure growth.

Higher salaries for public employees in the education and healthcare sectors mandated by the federal government led to a weaker, but still satisfactory, operating balance at 5.9% of operating revenue in 2013 (2012: 8.5%). This, together with high capex, led to a widening of the region's deficit before debt variation to 13.5% of total revenue (2012: 7%).

Fitch believes the deficit before debt variation will narrow to below 10% of total revenue in 2014, with no large-scale investment projects in the pipeline over the medium term following the completed construction of several sports venues in its municipalities in 2013.

Fitch expects that the region's direct risk will continue to increase, but remain moderate in the medium term and will not exceed 60% of current revenue (2013: 41.4%). The region's maturity profile is stronger than for most of its national peers. The region's direct risk is dominated by medium-term bank loans and issued debt with amortising repayments, providing a smooth maturity profile.

Lipetsk was among a few Russian regions that were able to issue debt at acceptable interest rates before western sanctions were introduced. It issued a RUB5bn domestic bond in 2014 with a final maturity in 2019. The region has no repayments till year-end, following an early repayment of its RUB1.15bn of bank loans due in November-December 2014.

The region's economy is developed but concentrated as it hosts of one of the largest Russian metallurgic plants, OJSK Novolipetsk Steel (BBB-/Negative/F3). Ferrous metallurgy contributed 56% of the region's industrial output in 2013, making it vulnerable to fluctuations in the domestic and international steel markets. In 2013 the regional economy grew 1.1% yoy following weak national growth of 1.3%.

The administration's strategic objective is to diversify the local economy by developing a network of special economic zones (SEZs). Since mid-2000, Lipetsk has created ten regional SEZs, comprising four industrial, three agricultural, one technological and two tourist-recreational zones in the historical cities of Zadonsk and Elets. Hence investment into non-metallurgy activities increased to 86% of total investment in 2013 from 63% in 2004.

RATING SENSITIVITIES
Inability to narrow the deficit before debt variation, leading to an increase in direct risk to above 60% of current revenue will lead to a negative rating action.

An operating balance improvement to above 10% of operating revenue and debt coverage (direct risk to current balance) below eight years (2013: 14.7 years) would lead to positive rating action.