OREANDA-NEWS. September 21, 2015. Fitch Ratings has affirmed the Russian Orenburg Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', and Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA-(rus)'. The Outlooks on the Long-term ratings are Stable.

Fitch has also affirmed the Long-term local currency rating of Orenburg Region's senior unsecured domestic bonds and JSC Orenburg Housing Mortgage Corporation's (OHMC) senior unsecured bond, guaranteed by the region, at 'BB' and 'AA-(rus)'.

The affirmation reflects Fitch's unchanged base line scenario regarding Orenburg region's ability to record satisfactory operating performance and maintain moderate direct risk commensurate with its ratings in the medium term.

KEY RATING DRIVERS
The 'BB' rating reflects the region's moderate direct risk, satisfactory fiscal performance and good cash position. The ratings also factor in the concentrated nature of the region's tax base to oil and gas companies, which is exacerbated by the current negative economic trend in Russia.

Fitch expects Orenburg region's direct risk to increase up to 45%-47% of current revenue in 2015-2017 from 38% in 2014, fuelled by the funding of expected budget deficits. The region's direct risk as of end-July 2015 was composed of 60% domestic bonds followed by loans contracted from the federal government (40%). Orenburg's 2014 payback period - as measured by direct debt/current balance - reduced to two and a half years from negative 16 years in 2013 in line with our expectations.

Fitch continues to expect the region will maintain satisfactory fiscal performance in 2015-2017 with an average operating surplus of about 7%-8% and deficit before debt variation close to 5%-6% of total revenue. According to interim performance by end-July 2015, the region recorded a minor deficit before debt variation of 3.2% of total revenue, as compared with an interim surplus of 6.2% posted for 7M14.

The region restored its performance in 2014 with an operating surplus of 10%, compared with a deficit of 0.2% in 2013. The recovery was led by a swift increase in taxation, which in turn is partially attributed to significant rouble depreciation and the tax regime for oil and gas companies. The region succeeded in reducing the opex annual growth rate to 6% in 2014 (2013: 8%). The region's deficit before debt variation narrowed to 3.8% in 2014 from 17% in 2013.

The region's contingent risk is limited to guarantees issued to two local companies and self-serviced debt of its public entities. The region guaranteed OHMC's domestic bond of RUB1.5bn issued in 2012. None of the guarantees have been called by the lenders and the financial position of the public sector entities is satisfactory.

Orenburg region's interim cash position was sound with RUB4.3bn worth cash and deposits (2014: RUB1.9bn). The region's interim liquidity is further supported by untapped standby credit lines of up to RUB4bn.

The administration revised its macro forecast and currently expects a contraction of GRP in 2015 by 3.3% yoy. Thereafter it expects slow growth in the region's economy, with a likely increase in GRP of about 1.2%-2.2% yoy in 2016-2018. Orenburg region's economy is dominated by oil and gas companies, which provide a sustainable tax base. However, the concentrated tax base exposes the region to potential changes in the fiscal regime, business cycles or price fluctuations in the sector.

RATING SENSITIVITIES
The ratings could be positively affected by a sustainable debt payback ratio of below four years of the current balance and direct risk remaining below 40% of current revenue.

The ratings could be negatively affected by consistently weaker budgetary performance leading to weak debt coverage (direct debt/current balance) of the region.