OREANDA-NEWS. April 28, 2015. Fitch Ratings has affirmed the Russian City of Izhevsk's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B+' with Stable Outlooks and its Short-term foreign currency IDR at 'B'. Its National Long-term rating has also been affirmed at 'A(rus)' with Stable Outlook.

KEY RATING DRIVERS

The ratings reflect the city's ongoing budget deficit and increasing dependence on transfers from the Udmurtia Republic (BB-/Negative/B), which are balanced by stable budgetary performance in line with Fitch's forecast, and moderate direct risk with low immediate refinancing pressure. The Stable Outlook reflects our expectation of stable budgetary performance in 2015-2017, with a small positive current balance.

Fitch expects Izhevsk's operating balance to average 6% of operating revenue annually, in line with 2014's outturn. Budgetary performance improved in 2014 as increased current transfers from the republic's budget more than offset weaker tax revenues.

The city's operating margin rose to 5.9% in 2014 from 3.2% in 2013, but its current balance remained weak due to increasing cost of funding. This resulted in weak debt coverage (direct risk to current balance) and left the city dependent on capital grants and new borrowing for financing of capital outlays and principal debt repayment. Fitch does not expect any material improvement of the current balance in the medium-term, which is likely to remain close to zero in the medium term.

Izhevsk receives a steady flow of current transfers from the regional budget, which accounted for 51.5% of operating revenue in 2014 (2013: 36.4%). The increase stemmed from a transfer of staff cost for pre-school education to the regional budget. In return the city sacrificed half of its personal income tax share, which results in reduced financial flexibility. Overall, earmarked grants for delegated responsibilities, mainly salaries, accounted for 76% of current transfers in 2014.

Fitch expects Izhevsk's direct risk to rise to RUB4.2bn, or moderate 43% of current revenue, by end-2015 from RUB3.7bn (36.7%) in 2014. In the medium-term the city's direct risk will continue to increase on a nominal basis, but will stabilise between 40%-45% in relative terms. As of 1 April 2015, the city's immediate refinancing pressure was low, with repayment of only RUB400m during 2015-2016. Izhevsk's direct risk is dominated by bank loans, RUB3.4bn of which (82% of total risk as of 1 April) is due in 2017. Fitch will closely monitor the city's ability to overcome this peak.

The city has no outstanding guarantees and no plans to issue new guarantees. Contingent liabilities, stemming from public sector entities debt, accounted for a low RUB3.8m or less than 0.1% of operating revenue in 2014. Indirect risk is well monitored by Izhevsk and, in Fitch's view, manageable.

With a population of 637,300 inhabitants, the city is the capital of the Republic of Udmurtia, part of the Privolzhskiy Federal District. Udmurtia's economy demonstrated close to zero growth in real terms in 2014. Fitch forecasts a 4.5% contraction in national GDP in 2015, which would affect the city's tax revenue.

RATING SENSITIVITIES

Maintaining an operating balance about 5% of operating revenue on a sustainable basis, coupled with moderate debt in line with Fitch's forecast, could lead to an upgrade.

A weak operating balance insufficient to cover interest payments along with significant growth of refinancing risk due to increasing reliance on short-term debt could lead to a downgrade.