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

Fitch has also affirmed the local currency long-term rating of Orenburg Region's senior unsecured domestic bonds and JSC Orenburg Housing Mortgage Corporation's (OHMC) senior unsecured bond, guaranteed by the region, at 'BB' and 'AA-(rus)'.

KEY RATING DRIVERS

The affirmation reflects Orenburg region's restored fiscal performance, satisfactory cash position, and moderate direct risk. The ratings also factor in the concentrated nature of the region's tax base to oil and gas companies, exacerbated by the current negative economic trend in Russia.

Fitch expects Orenburg region to maintain sound fiscal performance in 2015-2017 with an average operating surplus of about 7%-8% and deficit before debt variation close to 5%-6% of total revenue. The region restored its performance in 2014 in line with Fitch's expectations, with an operating surplus of 10%, compared with a deficit of 0.2% in 2013.

The recovery was led by increases in corporate and personal income tax of 27% and 24% respectively. Swift increase in taxation is partially attributed to significant rouble depreciation and the tax regime for oil and gas companies. Additionally the region reduced opex annual growth rate to 6% in 2014 from 8% in 2013. The region's deficit before debt variation as a result narrowed to 3.8% in 2014 from 17% in 2013.

Fitch expects a modest increase in the region's direct risk to up to 45%-47% of current revenue in 2015- 2017 to fund expected budget deficits. This compares with 38% in 2014 and 36% in 2013. Direct risk is composed of 51% domestic bonds, 46% loans contracted from the federal government and 3% bank loans. Orenburg region's payback period - as measured by direct debt/current balance - was reduced to two and a half years in 2014 from negative 16 years in 2013 in line with our expectations.

The region's cash position stabilised with cash reserves at RUB1.9bn by end-2014 (2013: RUB1.8bn). Orenburg region also maintains untapped standby credit lines of up to RUB1bn.

The region's contingent risk is limited to guarantees issued to two local companies and self-serviced debt of its public entities. The region guaranteed OHMC's domestic bond of RUB1.5bn issued in 2012. None of the guarantees have been called by the lenders while financial position of the public sector entities is satisfactory.

The administration expects slow growth in the region's economy, with a likely increase in GRP of about 1.5%-3% yoy in 2015-2017. According to the administration's preliminary estimates GRP grew 0.5% yoy in 2014. Orenburg region's economy is dominated by oil and gas companies, which provide a sustainable tax base. However, the concentrated tax base exposes the region to potential changes in the fiscal regime, business cycles or price fluctuations in the sector.

RATING SENSITIVITIES

The ratings could be positively affected by a sustainable debt payback ratio of below four years of current balance and direct risk remaining below 40% of current revenue.

The ratings could be negatively affected by consistently weaker budgetary performance leading to insufficient debt service coverage (direct debt/current balance) of the region.