OREANDA-NEWS. Fitch Ratings has affirmed the Russian Republic of Tatarstan's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with Negative Outlooks, Short-term foreign currency IDR at 'F3' and its National Long-term rating at 'AAA(rus)' with a Stable Outlook. Tatarstan's ratings are constrained by those of the Russian sovereign (BBB-/Negative). The Negative Outlook reflects that on the sovereign ratings.

The affirmation reflects Fitch's unchanged projections that Tatarstan will continue to record a strong budgetary performance and moderate debt with a long-term maturity profile over the medium term.

KEY RATING DRIVERS
The 'BBB-' rating reflects Tatarstan's well-diversified economy, strong operating balance, prudent budget management and moderate direct risk with a long maturity profile. The ratings also factor in the deterioration of the national economic environment, which could put pressure on Tatarstan's budgetary performance.

The republic's strong intrinsic credit profile remains constrained by weak institutional framework for local and regional governments (LRGs) in Russia. Russia's institutional framework for LRGs has a shorter record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities between tiers of government.

Fitch expects Tatarstan to maintain a sound fiscal performance with an operating balance of 25%-30% of operating revenue in 2015-2017 (2014: 31%). Moderate deterioration of operating performance reflects continuing pressure on operating expenditure, which grew 13% annually in 2013 and 2014. Operating expenditure was driven by the higher indexed social transfers as inflation accelerated and by the federal government's decision to increase public sector salaries.

Fitch expects Tatarstan to continue to demonstrate a prudent budgetary policy and keep deficit before debt variation under control in 2015-2017. Fitch forecasts that deficit before debt will decline to 4% of total revenue in 2015 after a peak of 9% in 2014, before narrowing further to 2%-3% in 2016-2017. Debt payback (direct risk-to-current balance) will remain sound at below 2x.

Tatarstan is free of market debt exposure (bonds and bank loans), and as of 1 November 2015 the republic's direct risk consisted of RUB81.4bn loans from the federal budget, or 44% of the republic's expected full-year current revenue for 2015. The bulk of those federal budget loans (RUB67bn) are linked to an investment programme in preparation for Universiade (the student Olympic games held in July 2013 in the City of Kazan, the republic's capital). They carry negligible 0.1% interest rates and mature in 2023-2032, reducing annual debt service and easing refinancing pressure on the budget.

The republic has an extensive public sector, which includes unitary public companies and majority-owned commercial companies. These companies have stable financial performance, but add contingent risk to the budget, including forex exposure. As of 1 November 2015, Tatarstan had RUB8.8bn of outstanding guarantee on a JPY16.5bn loan to OJSC Kamaz - local heavy truck producing company. The loan matures in 2034 and the company is servicing this obligation without Tatarstan assistance.

Tatarstan's contingent risk has declined recently, after OJSC Svyazinvestneftekhim (SINEK) successfully repaid USD250m loan participation notes (LPNs) on 3 August 2015 (see 'Fitch Downgrades SINEK to 'BB+'; Outlook Negative' dated 4 August 2015 at www.fitchratings.com). SINEK is a holding company owned by Tatarstan, and the republic used to have a guarantee on SINEK's LPNs.

The republic's economy has a strong industrial base that provides a diversified tax base, such that its budget is mostly funded through its own resources. Tatarstan is among the top 10 Russian regions by gross regional product (GRP) and its GRP per capita is 1.5x of the national median (2013).

RATING SENSITIVITIES
Tatarstan's ratings are capped by Russia's ratings. Unless the sovereign is downgraded, a downgrade of the republic is unlikely due to its strong budgetary performance and healthy debt metrics. However, a consistent material deterioration of the republic's budgetary performance and debt metrics would be negative for its ratings.