OREANDA-NEWS. April 28, 2015. Fitch Ratings has affirmed the Russian Kemerovo 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 'A+(rus)'. The Outlooks on the Long-term ratings are Stable.

Fitch has also affirmed the region's senior unsecured debt at Long-term local currency 'BB-' and at National Long-term 'A+(rus)'.

KEY RATING DRIVERS
The ratings reflect Kemerovo's weak budgetary performance with a marginally positive operating balance and gradually growing direct risk, remaining consistent with the region's ratings. The ratings also factor in a strong but stagnating local economy and low contingent risk.

Fitch expects the region's operating balance to consolidate at low positive values during 2015-2017, although the current balance will remain negative. The budgetary performance will be underpinned by on-going transfers from the federal budget and gradual growth of tax proceeds from 2016. In 2014, the operating balance returned to a positive territory driven by a 50% increase in transfers and modest restoration of corporate income tax driven by the improving earnings of local exporters following the stabilisation of the market price of key commodities and the devaluation of the local currency.

Kemerovo demonstrated close to zero economy growth in real terms in 2014 following the deterioration of the national economic environment. Fitch considers that the region's tax proceeds will stagnate in 2015 due to the sluggish economy.

Fitch expects Kemerovo's direct risk will grow and may reach 75% of current revenue by end-2017, which is consistent with the region's ratings. The wide deficit before debt during 2012-2014 has resulted in a rapid rise in direct risk to RUB50.8bn (57% of current revenue) at end-2014, from RUB19bn (21%) in 2011. The debt maturity profile is evenly distributed between 2015 and 2018, which eases refinancing pressure.

Immediate refinancing risk is moderate as the region's debt is 43% comprised from subsidised budget loan, which likely to be rolled over by the federal government. Another 11% is long-term quasi-market loan from Vnesheconombank (VEB: BBB-/Negative/F3) that the region assumed in the mid-2000s.

VEB's loan is denominated in US dollars and exposes the region to unhedged foreign-currency risk. The risk is mitigated by the fact that the loan bears a 1% annual interest rate and the maturity profile has been smoothed out to 1 January 2035, which takes the immediate pressure off its debt servicing burden.

Kemerovo has low contingent risk stemming from public sector entities' financial debt and issued guarantees. In late 2011, the region imposed a moratorium on new guarantees issuance and as of 1 April 2015 the region had no outstanding guarantees.

The region has a strong economy dominated by coal and metal industries. This provides an extensive tax base for the region's budget, allowing the region to rely on its own budget revenue rather than transfers from the federal budget. However, a large portion of tax revenues depends on companies' profits, resulting in high revenue volatility.

RATING SENSITIVITIES
An improvement in the operating balance to 6%-8% of operating revenue and maintenance of debt coverage ratio (direct risk to current balance) below 10 years on a sustainable base could lead to an upgrade.

The inability to maintain a positive operating balance on a sustained basis or an increase in direct risk far beyond Fitch's expectations could lead to a downgrade.