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Fitch Affirms Russian Bashkortostan Republic at 'BBB-'; Outlook Stable
June 2, 2017 / 8:13 PM / 6 months ago

Fitch Affirms Russian Bashkortostan Republic at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, June 02 (Fitch) Fitch Ratings has affirmed Russian Bashkortostan Republic's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' and Short-Term Foreign Currency IDR at 'F3'. The Outlooks on the Long-Term IDRs are Stable. The region's outstanding senior unsecured domestic bonds have also been affirmed at 'BBB-'. KEY RATING DRIVERS The 'BBB-' rating reflects Bashkortostan's sound budgetary performance, supported by a well-diversified economy, low direct risk and strong liquidity. The ratings also take into account a weak institutional framework for Russian sub-nationals. Fitch forecasts Bashkortostan's operating balance will remain sound and exceed 10% of operating revenue in 2017-2019. This will be supported by steady tax proceeds from the republic's strong tax base, which contribute more than 70% of operating revenue. The republic's government exercises strong control over operating expenditure, which grew below inflation in 2014-2016 at 2%-4% p.a. In 2016, the region's operating balance peaked at about 20% (2014-2015: average 10%) due to 12% growth of tax revenue and higher dividends from minority shareholdings (namely, Bashneft (BBB-/Stable) and Bashkir Soda Company). In its base case scenario, Fitch projects operating revenue growth to decelerate in 2017-2019 due to revised allocation of excise duty and corporate income tax proceeds and lower dividends from the region's public sector. Fitch projects Bashkortostan may record a small deficit at 1%-2% of total revenue in 2017-2019 after an exceptional surplus of 7% in 2016. The deficit, if any, will likely be funded by the region's high liquidity, while new borrowings will be for refinancing needs only. The republic's self-financing capacity remains strong and we project current balance and capital revenue will cover about 90% of capex over the medium term (2016: 139%). Fitch forecasts the republic's direct risk will remain low at 20% (2016: 15%) of current revenue while net overall risk will likely be negligible over the medium term due to strong cash reserves. In its debt policy, Bashkortostan relies on long- and medium-term financing and has a diversified debt portfolio. At end-April 2017, direct risk was unchanged from last year at RUB23.4 billion and was 45% composed of budget loans, followed by bonds (42%) and bank loans (13%). About 80% of maturities are spread over 2017-2022 and the remaining 20% are budget loans due in 2023-2034. The republic's weighted average debt maturity of 4.3 years materially exceeds its debt payback (direct risk-to-current balance) of 0.8 years in 2016. This is rating- positive and we project the trend to continue over the medium term. The republic has a large number of public sector entities (PSEs) under its control (2016: 86 entities). Fitch views contingent risk stemming from the debt of Bashkortostan's PSEs as moderate (2016: RUB2.9 billion, below 2% of current revenue). Additionally, the republic owns 25% in PJSOC Bashneft and benefits from dividend proceeds (2016: RUB7 billion). Despite the acquisition of the company's majority stake by Rosneft in 2016 (see 'Fitch Upgrades Bashneft to 'BBB-' After Acquisition by Rosneft' dated 11 May 2017), the region expects to continue to receive stable dividends from the company over the medium term. Russia's institutional framework for sub-nationals is a constraint on the republic's ratings. Frequent changes in both the allocation of revenue sources and the assignment of expenditure responsibilities between the tiers of government limit Bashkortostan's forecasting ability and hamper the region's strategic planning and debt and investment management. Bashkortostan is one of Russia's largest industrial centres. Local industry generates about 40% of the region's gross regional product (GRP) and is dominated by production of petroleum products (33%), mining (17%) and chemical manufacturing (13%). According to the administration's estimate, the region's GRP stagnated in 2016 and will grow by 1.7%-3.4% p.a. in 2017-2019, supported by prime industrial sectors and agriculture. RATING SENSITIVITIES An upgrade of the sovereign could lead to an upgrade of the region's rating if the republic's operating margin consistently improves above 15% while debt remains low. A sharp deterioration of budgetary performance leading to a debt payback above 10 years or a sovereign downgrade would lead to negative rating action. Contact: Primary Analyst Elena Ozhegova Director +7 495 956 24 06 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Konstantin Anglichanov Director +7 495 956 99 94 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Fitch has made a number of adjustments to the official accounts to make the LRG comparable internationally for analysis purposes. For the republic of Bashkortostan these adjustments include: - Transfers received of capital nature were re-classified from operating revenue to capital revenue. - Transfers made of capital nature were re-classified from operating expenditure to capital expenditure. - Goods and services of capital nature were re-classified from operating expenditure to capital expenditure. Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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