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ACRA affirms BBB(RU) to the Komi Republic, outlook Stable, and BBB(RU) to bonds

The credit rating of the Komi Republic (the Republic) is a result of a relatively high debt load and the socioeconomic specifics.

The Republic is located in the North-Western Federal District. A part of the territory belongs to the Far North area. About 0.6% of the Russian population live in the Region. In 2017, the Republic's GRP amounted to RUB 527 billion, which is 0.8% of the aggregate Russian GRP.

Key rating assessment factors

Relatively high debt load and possible risk occurrence in the public sector. The current version of the Budget Law assumes a 10% budget deficit to be financed by new bank loans. Therefore, the debt load is expected to increase by the year-end, but the Region will still meet the budget loans restructuring conditions, since the Region managed to achieve a noticeable reduction in the debt load in 2017, when tax revenues grew. The increase in the debt to operating balance ratio is offset by an improvement in the debt maturity profile. ACRA notes the continuing risk relating to state-owned enterprises, whose burden of arrears may be shifted, to some extent, into the republican budget.

Budget volatility caused by the dependence on the largest taxpayers operating in the extractive sector. After the tax revenues grew in 2017 (mostly due to profit tax that went up by 39% y-o-y), the projected decline in tax revenues (due to a 22% decrease in profit tax revenues caused by overpayment) with the simultaneous 7% growth in mandatory expenditures (largely due to higher expenses under the section "Education") will bring the operating balance of the Republic back to the level of 2016. In 2015–2018, capital expenditures that mainly include republican budgetary funds will average to about 9% of the total expenditures of the Region. Weak sectoral diversification of the economy is reflected in the volatility of tax base and the low diversification of tax revenues.

The regional economy depends on the extractive sector and the climatic conditions. The extraction of minerals (coal, oil, gas), which accounted for 38% of the GRP in 2017, is the main driver of the industrial production and the GRP of the Republic. Together with the sub-sector "Production of petroleum products", the extractive sector generates two-thirds of the industrial production of the Republic.

Key assumptions

  • The share of mandatory expenditures in the total expenditures of the Republic will be kept not higher than 80%;
  • The debt policy will be maintained to perform budget loan restructuring agreements;
  • In 2018–2020, the profit tax revenues, after tax refunds, will exceed same in 2015–2016.

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:

  • A lower share of mandatory budget expenses;
  • A deficit-free budget and a decline in absolute debt;
  • A lower dependence of the budget on the external funding sources.

A negative rating action may be prompted by:

  • A growing share of mandatory expenditures and a declining operating balance down to 10–12% of regular revenues;
  • Volatile budget revenues and a growing relative debt load.

Issue ratings

Komi Republic, 35011 (ISIN RU000A0JUN81), maturity: November 27, 2019, issue volume: RUB 10.1 bln — BBB(RU);

Komi Republic, 35012 (ISIN RU000A0JVKF9), maturity: June 23, 2021, issue volume: RUB 11 bln — BBB(RU);

Komi Republic, 35013 (ISIN RU000A0JWZM1), maturity: November 16, 2022, issue volume: RUB 6.18 bln  — BBB(RU);

Komi Republic, 35014 (ISIN RU000A0JXUD9), maturity: June 25, 2024, issue volume: RUB 10 bln — BBB(RU).

Credit rating rationale. ACRA is of the opinion that the above bonds issued by the Komi Republic are senior unsecured debt instruments, which credit ratings are equal to that of the Komi Republic.

Regulatory disclosure

The credit ratings were assigned to the Komi Republic and bonds (ISIN RU000A0JUN81, ISIN RU000A0JVKF9, ISIN RU000A0JWZM1, ISIN RU000A0JXUD9) issued by the Komi Republic 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 Analytical Credit Rating Agency within the Scope of Its Rating Activities. In the course of assigning credit ratings to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also used.

The credit rating assigned to the Komi Republic and the credit ratings assigned to the government bonds (ISIN RU000A0JUN81, ISIN RU000A0JVKF9, ISIN RU000A0JWZM1, ISIN RU000A0JXUD9) issued by the Komi Republic were first published by ACRA on September 05, 2017 and March 05, 2018, respectively.

The credit rating of the Komi Republic and its outlook, as well as the credit ratings assigned to the government bonds (ISIN RU000A0JUN81, ISIN RU000A0JVKF9, ISIN RU000A0JWZM1, ISIN RU000A0JXUD9) issued by the Komi Republic are expected to be revised within 182 days following the rating action date (August 31, 2018) as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned based on the data provided by the Komi Republic, 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 ratings are solicited, and the Government of the Komi Republic participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by the Komi Republic in its financial reports have been discovered.

ACRA provided no additional services to the Government of the Komi Republic. No conflicts of interest were discovered in the course of credit rating process.

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