OREANDA-NEWS. November 30, 2015.  Fitch Ratings has affirmed the Russian Leningrad Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) 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 region'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 the region's sound budgetary performance and low direct risk. The Negative Outlook reflects that on the Russian Federation (BBB-/Negative).

KEY RATING DRIVERS
The ratings factor in the region's low debt and contingent liabilities, strong liquidity, sound budgetary performance and a well-diversified economy. The ratings also take into account the nationwide economic downturn, which could negatively affect the region's financials.

Fitch expects Leningrad Region will maintain sound budgetary performance over the medium term, with the operating margin normalising at its historical average of 17%-19%, after the peak of 27.7% in 2014 in the wake of rouble depreciation. Fitch estimates that following the exceptionally high budget surplus before debt at 14.2% of total revenue in 2014, the region will finish 2015 with a 4.9% surplus and will run small budget deficits of 2%-4% over the medium term.

In 2014 the region's largest taxpayers benefited from the sharp rouble depreciation as a sizeable part of their income is denominated in foreign currency. A tax base redistribution within consolidated groups of taxpayers and the rouble depreciation lifted corporate income tax (CIT) by 72% yoy. Fitch expects CIT to grow a further 10% in 2015. However, this leaves the region's revenue prone to volatility and FX fluctuations. Tax concentration has increased considerably with the top 10 taxpayers contributing 40.4% of total tax revenue in 2014, up from 27.6% in 2013. Positively, this risk should be mitigated by the region's conservative financial policy, vast liquidity reserves and fiscal flexibility.

Fitch expects the region's direct risk will remain low at 7%-8% of current revenue in 2015-2017. In 2014, direct risk decreased to 9.3% of current revenue from 11.6% a year earlier. Debt coverage (direct risk-to-current balance) was well below one year in 2014. The region turned net cash-positive in 2014, with cash reserves and deposits exceeding both direct risk and contingent liabilities. Issued guarantees (RUB2.4bn as of 1 November 2015) are likely to end the year higher, but should remain manageable. So far, no guarantees have been called by lenders.

Fitch assesses refinancing risk for the region as immaterial. Its remaining 2015 maturities are limited to RUB0.7bn and well-covered by cash holdings (RUB34.5bn as of 1 November 2015). We expect the region will deplete part of its cash for operating and capital expenditures. We forecast liquidity at end-2015 will be at around RUB20bn in cash and deposits, more than 2x the region's total outstanding direct risk. The region also has RUB0.5bn of unused credit lines with banks.

The region's administration expects the local economy to grow 0.2% yoy in 2015 amid the national economic downturn (Russia's GDP projected to shrink 4%). Leningrad Region's gross regional product increased 1% yoy in 2014 (2013: down 1.4%), above the national 0.6% growth. The region has a well-diversified economy based on the processing and transport sectors. Its wealth indicators are strong with GRP per capita at 149% of the national median in 2013. The region's location on the Baltic shore makes it the country's strategic export- import hub.

RATING SENSITIVITIES
A sharp deterioration of budgetary performance leading to debt coverage above 10 years or a sovereign downgrade would lead to negative rating action.