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Fitch Affirms Russian Bashkortostan Republic at 'BBB-'; Outlook Stable
June 2, 2017 / 8:17 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:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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