OREANDA-NEWS. September 15, 2015.  Fitch Ratings has affirmed the Russian Republic of Sakha's (Yakutia) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-', Short-term foreign currency IDR at 'F3' and National Long-term rating at 'AA+(rus)'. The Outlooks on the Long-term IDRs are Negative and the Outlook on the National Long-term rating is Stable.

The republic's outstanding senior unsecured domestic bonds have been affirmed at Long-term local currency 'BBB-' and National Long-term 'AA+(rus)'.

The affirmation reflects Fitch's unchanged baseline scenario regarding Sakha's strong budgetary performance and stable key credit metrics over the last six months. The Negative Outlook reflects that on the Russian Federation (BBB-/Negative).

KEY RATING DRIVERS
The ratings reflect Sakha's fairly low direct risk, and sound operating performance supported by a strong economy. The ratings also take into account sizeable contingent liabilities and the national economy's downtrend, which could negatively influence the republic's budgetary performance.

Despite an increase of debt Fitch expects Sakha will maintain a low level of debt at below 30% of current revenue over the medium-term (2014: 14.2%). Sakha was among the few Russian regions to have tapped the domestic bond market so far in 2015. In May 2015 the republic issued a RUB5.5bn domestic bond with final maturity in 2020 on rather favourable terms. Issued debt represents more than 40% of Sakha's direct risk.

Sakha has high contingent liabilities comprising guarantees and debt of companies under the region's control. Contingent liabilities exceeded the republic's direct risk by 1.7x in 2014. The large amount of contingent liabilities is explained by the necessity to support under-developed infrastructure across the republic's vast territory amid extremely severe climate. Fitch considers the expected continuing growth of its contingent liabilities should remain consistent with the current rating over the medium-term. However, disproportionate growth of contingent risk will put Sakha's creditworthiness under pressure.

Fitch expects the region will maintain stable operating balance at 8%-10% of operating revenue over the medium-term. This will be supported by continuous growth of tax revenue, albeit lower than in 2014 and by current transfers from the federal government. Current transfers contributed an average 45% of operating revenue in 2012-2014, and we do not expect a significant decline in 2015-2016.

Strong tax growth in 2014 led to an improvement in the operating margin to 10.5%, from 8.4% in 2013. Corporate income tax grew 58% in 2014, as the sharp rouble depreciation boosted the revenue of one of the republic's largest taxpayers, which is an export-oriented company.
Sakha has a strong economic profile supported by rich deposits of natural resources, such as diamonds, coal, oil, natural gas and gold. Sakha's gross regional product per capita is more than 2x higher than the national median while average salary exceeded the national median by 2.5x in 2014. While the concentration of top three taxpayers, at above 40% in 2014, remains a risk in the foreseeable future, this is mitigated by sustainable demand, both domestically and internationally, for the republic's natural resources.

RATING SENSITIVITIES
A downgrade of Russia or growth of net overall risk to above 50% of current revenue, coupled with a sharp deterioration of its direct debt-to-current balance ratio, would lead to a downgrade.