OREANDA-NEWS. July 28, 2015.  Fitch Ratings has affirmed Volgograd Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+', Short-term foreign currency IDR at 'B' and National Long-term rating at 'A(rus)'. The Outlooks on the Long-term ratings are Stable.

The region's outstanding senior unsecured domestic bond issues have been affirmed at 'B+' and 'A(rus)'.

The affirmation reflects Fitch's unchanged baseline scenario regarding Volgograd's budgetary performance and the region's key stable credit metrics over the last six months.

KEY RATING DRIVERS
The ratings reflect Volgograd's low operating balance and persistent budget deficit leading to growth of direct risk. The ratings also factor in moderate refinancing pressure and low contingent liabilities.

Fitch expects the region will consolidate its operating balance at about 2% of operating revenue in 2015-2017 (2014: 1%), amid stagnation of operating revenue and cost control measures undertaken by the regional government. Volgograd recorded 15% growth of tax revenue in 1H15, driven by corporate income tax payments from export-oriented producers and import-substituting enterprises. Fitch expects tax growth for 2015 to be offset by a decline in current transfers from the federal budget.

Fitch forecasts current balance to remain at a negative 3% of current revenue in the medium term, in line with its average in 2013-2014, due to high interest payment. The latter will be 2.5x operating balance in 2015-2017 (2014: 3.9x). Fitch expects the region's deficit before debt variation will remain close to 9% of total revenue in 2015-2017, extending the deficit trend of prior years. Volgograd plans to issue five-year RUB9bn bonds in 2015 to fund its budget deficit.

Fitch expects Volgograd's direct risk will rise to RUB48.4bn by end-2015 or 70% of current revenue (2014: RUB40.8bn, 57%). By end-2017, direct risk may further grow towards 80%. Positively, the region's debt portfolio is diversified and comprises three-year bank loans (25%), five-year bond issues (36%) and subsidised budget loans (39%).

The region's refinancing needs are moderate: RUB14.2bn or 35% of direct risk matures in 2015-2016. Fitch expects that the maturing budget loans (RUB2.6bn) will be rolled over by the federal government while market debt (RUB11.6bn) will be refinanced by new bonds and bank loans.

Volgograd region has an industrialised economy with a strong but concentrated tax base. The top 10 taxpayers are subsidiaries of large national companies operating in oil&gas, power generation, transportation and financial sectors. They contributed 42% of total tax revenue in 2013-2014, which makes the region's revenue vulnerable to economic cycles. Fitch expects the Russian economy will contract 3.5% in 2015, which could negatively affect the region's economic prospects.

RATING SENSITIVITIES
The region's inability to curb continuous growth of total indebtedness, accompanied by persistent high refinancing pressure and a negative current balance, would lead to a downgrade.

Additional support from the federal government leading to a stabilisation of indebtedness and improvement of the operating balance sufficient to cover interest payments could lead to an upgrade.