OREANDA-NEWS. March 30, 2015. Fitch Ratings has affirmed Russian 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 are Negative on the Long-term IDRs, and Stable on the National Long-term rating.

Fitch has also affirmed local currency long-term rating of the region's senior unsecured bonds at 'BBB-' and National Long-term rating at 'AAA(rus)'.

KEY RATING DRIVERS

The affirmation reflects the region's improved fiscal performance, its robust economy, sound liquidity and low debt. The ratings also consider the concentration of the region's tax base in the oil and gas sector amid the current negative economic trend in Russia.

Fitch expects KMAR's fiscal performance to stabilise over the medium term, with an operating margin close to 10% and moderate deficit before debt variation below 5% of total revenue. This follows a sharp rebound to an operating surplus of 20% in 2014 (versus our expectations of 6%) after an operating deficit of negative 4% in 2013.

The region posted surplus before debt variation at 7% of total revenue at end-2014 following a deficit of 21% a year earlier. Improved fiscal performance is attributed to restored tax revenue, primarily driven by local currency devaluation and the tax regime for oil and gas companies.

Fitch expects the region to maintain debt at below 10% of current revenue in the medium term. KMAR's debt position remained low at 7% of current revenue at end-2014 (2013: 9%). The region replaced bank loans with a five-year domestic bond in October 2014. The strengthened financial position led to a favourable payback ratio (direct debt/current balance) in 2014, which fell to less than a year, compared with a negative three years in 2013.

The region's cash position improved materially with cash held on accounts increasing to RUB22.6bn in 2014 from RUB6.4bn in 2013. KMAR returned to its net cash positive status, which it temporarily lost in 2013.

Khanty-Mansyisk's economy is dominated by oil and gas companies, providing the region with a strong tax base. Taxes represented 94% of KMAR's operating revenue in 2014 (2013: 93%). Restored profitability of the oil and gas companies in 2014 aided the recovery of fiscal performance. However, the concentrated tax base exposes the region to potential changes in the fiscal regime and business cycle or price fluctuations in the oil and gas sector. This is particularly true in the currently depressed economic environment in Russia.

RATING SENSITIVITIES

The ratings are constrained by those of the sovereign.

A downgrade could result from consistently weak budgetary performance leading to insufficient debt service coverage and a material increase of refinancing risk. Downgrade of the sovereign would also lead to the downgrade of KMAR.