17 Apr 2015 4:08 PM (EDT)
Fitch Ratings-Moscow/Milan/London-17 April 2015: Fitch Ratings has revised Russian Yaroslavl Region's Outlook to Negative from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', National Long-term rating at 'AA-(rus)' and Short-term foreign currency IDR at 'B'.

Yaroslavl Region's outstanding senior unsecured domestic bonds have been affirmed at 'BB' and 'AA-(rus)'.

KEY RATING DRIVERS
The revision of the Outlook to Negative reflects the region's continuously large budget deficit before debt and its inability to restore positive current balance in the medium-term.

The Outlook revision reflects the following rating drivers and their relative weights:

HIGH
Fitch expects the current balance will not return to positive territory in 2015-2017, despite possible improvement of the operating balance to 3%-4% of operating revenue in the medium-term (2014: 0.6%). Increased interest rates on the national capital market will continue to put pressure on the region's funding costs, which rose 1.4x in 2014. This led to further deterioration of the current balance to a negative 3.3% of current revenue in 2014, from a negative 1.7% in 2013.

The budget deficit before debt variation remained high at 12.5% of total revenue in 2014. In Fitch's view the region will be able to narrow the budget deficit before debt to 8% of total revenue in 2015 and further to 6%-7% in 2016-2017. This will be supported by moderate revenue growth, strict control over operating expenditure and cutbacks in capital expenditure. The region aims to complete on-going projects with no plans for new ones. As a result Fitch expects the region's capex as a proportion of total spending will average 9% annually in 2015-2017, down from 15% in 2012-2014.

MEDIUM
Fitch expects the region's direct risk will continue to increase gradually to reach close to 70% of current revenue by end-2017. In 2014 direct risk stood at RUB28.6bn, which corresponded to 56% of current revenue (2013: 47.2%).

The region remains under refinancing pressure over the medium-term. Most of the repayments are concentrated in 2015-2017, when the region has to refinance 85% of total direct risk. As of 1 April 2015 the region had to repay RUB9.1bn of debt until the end of the year (31% of total direct risk), of which RUB7.5bn are short-term bank loans.

Positively, part of the debt will be refinanced by RUB5.1bn of subsidised federal budget loans, which the region will receive in 2Q15. The budget loans have a three-year maturity and 0.1% interest rate, which will help the region to save on interest payments over the medium-term. Another mitigating factor is the availability of short-term subsidised loans from the federal treasury for intra-year liquidity replenishment, which the region actively uses.

The remaining part of the debt due in 2015 and the budget deficit will likely be covered by new bank loans. The region plans to undertake the loans in 2H15 on the expectation that market interest rates will be lower. Yaroslavl can also place the remaining RUB2bn of its 2014 bond that was not fully issued last year.

The region's ratings also reflect the following key rating drivers:

Yaroslavl possesses a well-developed industrialised economy with wealth metrics that are in line with the national median. The economy mostly relies on various sectors of the processing industry, which provides a diversified tax base. In 2014 the regional economy grew 1.3% yoy, outpacing weak national growth of 0.6%. The administration forecasts Yaroslavl's economy will grow by a moderate 1%-2% per year in 2015-2017.

RATING SENSITIVITIES
Inability to restore the current balance to positive territory or an increase in direct risk to above 80% of current revenue in the medium-term, driven by short-term debt, could lead to a downgrade.
Contact:

Primary Analyst
Victoria Semerkhanova
Associate Director
+7 495 956 99 65
Fitch Ratings CIS Ltd
26 Valovaya Street
Moscow 115054

Secondary Analyst
Vladimir Redkin
Senior Director
+7 495 956 99 01

Committee Chairperson
Raffaele Carnevale
Senior Director
+39 02 87 90 87 203

Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com.

Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria', dated 23 April 2014, are available on www.fitchratings.com.

Applicable Criteria and Related Research: Yaroslavl Region - Rating Action Report

Tax-Supported Rating Criteria
International Local and Regional Governments Rating Criteria (Outside the United States) – Effective Apr. 19, 2011 to Mar. 5, 2012

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