(The following statement was released by the rating agency)
Nov 14 - Standard & Poor’s Ratings Services assesses the public finance system for Russian local and regional governments (LRGs) as “developing and unbalanced”. In a report published Nov. 12, 2012, titled, “Russian System For Regional Governments Is Developing And Unbalanced”, Standard & Poor’s acknowledges that some positive developments in the fiscal policy framework, budget execution, accounting, and reporting that have taken place over the last six or seven years. But these continue to be counterbalanced by such fundamental constraints as low systemic predictability, material revenue/spending mismatches, little revenue autonomy, and the weak degree of fiscal equalization. However, the federal government’s solid track record of providing material extraordinary support to regions under stress in 2009-2010, if tested again, could improve our overall assessment of the system.
“The predictability and stability of Russia’s public finance system is constrained by such unresolved fundamental issues as an extremely concentrated tax base, low regional autonomy in revenue policies, and the very centralized nature of federal decision-making,” said Standard & Poor’s credit analyst Karen Vartapetov. “For example, the federal government’s unpredictable spending decisions in the run-up to the federal elections in 2011-2012 again highlight regions’ very limited planning horizon and their constrained leeway over federal policies.”
Strong financial performance at the regional level is often achieved at the cost of underfinancing of infrastructure spending. Russia’s fiscal rules do not always prevent exposure to refinancing and liquidity risks and this lack of public sector accountability undermines technical improvements in budgetary transparency. Moreover, huge regional economic disparities undermine the degree of fiscal equalization. Extraordinary financial support to regions often flows to governments in need, but such support is not institutionalized and is relatively nontransparent.
However, we note progress made in enhancing the fiscal policy framework, which has become clearer than in the early 2000s, and universal constraints on regional deficit, debt, and borrowings have been imposed, including stricter rules for federal-grant-dependent regions.
Depending on the federal government’s ability to institutionalize transparent and effective allocation criteria for ongoing and extraordinary support to weakening regions and to enhance the system’s predictability by refraining from unilateral and arbitrary financial and political interference, we could change our assessment of the system support element of the institutional framework score. However, the overall score for the Russian system is likely to improve only provided there are no negative developments in other areas, such as revenue/expenditure matches and the predictability of the system in the medium term.
Details on how we assess public finance systems and how this assessment is incorporated within our ratings methodology are provided in “Methodology: Assessing The Institutional Framework For International Local And Regional Governments”, published July 30, 2009, on RatingsDirect on the Global Credit Portal.