Training on sovereign risk credit analysis, October 24

ACRA assigns A-(RU) to Nizhny Novgorod, outlook Stable

The credit rating assigned to Nizhny Novgorod (hereinafter, Nizhny Novgorod, or the City) is based on high debt load, relatively low flexibility of budget expenditures, and high share of capital expenditures, which is compensated by high liquidity and well-developed economy.

Nizhny Novgorod is the administrative center of the Nizhny Novgorod Region and the Volga Federal District. It stands fifth in Russia in terms of population (over 1.25 million people), and it is among eight Russian cities that have own metro systems. According to the City Administration, in 2016, the City’s share in the GRP of the Nizhny Novgorod Region may amount to 50% (up to RUB 581 billion). Nizhny Novgorod is a major transportation hub of the Volga Federal District and one of the largest industrial centers of Russia.

Key rating assessment factors

The City’s economy rests upon industrial potential and transport infrastructure; comparably high salaries and low unemployment underpin tax base. A half of goods, work and services is generated by the processing industries, and 40% of such goods are transport vehicles and equipment. Thanks to well-developed intra- and inter-city transport infrastructure, the transportation and communications sector generates about 1/5 of the total product output. The share of products manufactured by the City’s largest enterprise is not more than 10%.

Wages and salaries are stably higher than the national average (by 12% in 2014–2016) and support the tax base of the City, as the personal income tax forms almost a half of the City’s own revenues. The unemployment rate is consistently low.

Budget discipline hinges on high capital expenditures, mostly supported by gratuitous revenues. Own revenues of the City mainly include personal income tax, property taxes (land tax charged from corporate entities), UTII and income from the use of property. A significant share of own revenues (8%) comes from a source regulated by the regional legislation, according to which 3% of personal income tax to be transferred to the regional budget is transferred to the budgets of urban districts. In 2014–2017, own revenues amounted to 72% of total budget revenues (excluding subventions), but the mandatory expenses were high (76%). At the same time, ACRA notes that from 2015 to 2016 the mandatory expenses have grown significantly due to an increase in the current expenses of the road fund and the housing and utilities sector. As a result, the operating balance was not more than 17% in the period under review, and it may fall to 6–8% in 2018–2019. Average capital expenditures amount to 23% of total budget expenditures; two thirds of capex come from higher-level budget transfers. The self-sufficiency of the City’s budget will grow, which will make it possible to compensate for the projected reduction in capital expenditures funded by budget transfers.

The expected bond issue will ease the high debt load with irregular maturities. Since Nizhny Novgorod relies primarily on short-term loans to finance the budget deficit, the operating balance sheet, net of interest expenses, does not cover annual repayments. Despite the fact that the expected bond issue will smooth out the debt repayment schedule, the debt load of the City will continue to rise. At the end of 2017, the debt-to-operating balance ratio will be 4.65 (last year, this indicator was 2.29). The growth in the relative debt load is partly caused by a decrease in the operating balance resulting from higher current expenses for housing and road infrastructure. The debt load is aggravated by the City’s obligations under vehicle lease contracts. ACRA categorizes such obligations as a direct debt load, but this debt is pre-planned and it influences the capital investments of the city budget, which is positively assessed by the Agency.

High liquidity. The City maintains liquidity high enough to timely make obligatory payments, including interest payments. Monthly budget account balances are generally lower than expenditures, as temporary free funds of higher-level budgets are under the operating management, which allows the City to use them as a tool to decrease the cost of loans. Since 2015, Nizhny Novgorod has been able to attract budget loans to replenish its budget, which loans have been borrowed mainly to push down interest payments under credit lines (for short-term refinancing of bank loans).

Key assumptions 

  • In 2018–2019, higher-level budget subsidies to go down, but not lower than the 2014-2016 average;
  • The growth rate of mandatory expenditures not to outpace the inflation rate expected in 2018–2019.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Higher tax revenues caused by increasing tax base or changing tax revenue distributions at the regional level, not accompanied by a corresponding increase in the mandatory budget expenditures;
  • Lower mandatory budget expenditures, provided that current tax revenues remain unchanged;
  • Longer maturities of new borrowings and smoother schedule of repayments.

A negative rating action may be prompted by:

  • Lower self-sufficiency of the budget caused by insufficiency of own revenues (by 6% or more of those expected in 2018–2019);
  • Changes in regional legislation (i.e. redistribution of personal income tax revenues in favor of the Nizhny Novgorod Region);
  • Growing interest expenses against the operating balance sheet of the City.

Issue ratings


Rating history


Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating has been assigned to Nizhny Novgorod for the first time. The credit rating and credit rating outlook are expected to be revised within 182 days following the rating action date (November 17, 2017).

The credit rating was assigned based on the data provided by Nizhny Novgorod, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), as well as ACRA’s own databases. The credit rating is solicited, and Nizhny Novgorod participated in its assignment.

Disclosure of deviations from the methodologies: to estimate the personal cash incomes in the City, the average nominal accrued salary was taken into account.

No material discrepancies between the data provided and the data officially disclosed by Nizhny Novgorod in its financial report have been discovered.

ACRA provided no additional services to Nizhny Novgorod. No conflicts of interest were discovered in the course of credit rating assignment.

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