OREANDA-NEWS. Fitch Ratings has affirmed Russian Yaroslavl Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Stable Outlooks, and Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA-(rus)' with a Stable Outlook.

The region's outstanding RUB8bn senior unsecured domestic bonds' ratings (ISINs RU000A0JSU45, RU000A0JU0W8) have been affirmed at 'BB' and 'AA-(rus)'.

KEY RATING DRIVERS
The affirmation reflects Fitch's expectation on restoration of the region's operating performance in 2014, moderate direct risk and well-developed economy. The ratings also factor in the weak debt coverage and continuous pressure on operating expenditure.

Fitch expects the region's operating balance will recover in 2014 to the level sufficient to cover interest payments. In 2013 the operating balance deteriorated to 1.4% of operating revenue (2012: 4.4%) affected mainly by the one-off returns of corporate income tax payments from the regional budget to the taxpayers and continuous high pressure on opex. The latter was driven by the increase of salaries to public employees mandated by the federal government.

The administration intends to limit opex growth in 2014 based on the developed set of measures, which will contribute to the improvement of the region's budgetary performance. Fitch believes the region's deficit before debt variation will narrow to 8% of total revenue in 2014 from a high 13.3% in 2013 due to both improvement in operating performance and capex reduction.

Fitch expects the direct risk will continue to grow in the medium-term, but at a slower pace, and will stay below 60% of current revenue, or RUB33bn by the end-2016. In 2013 the direct risk increased to RUB22bn, or 47% of current revenue (2012: 38.3%). The region's direct risk maturity profile is stretched until 2032 due to the long-term loans from the federal government. However, the region is exposed to refinancing risk as it will need to repay around RUB6.8bn or 30% of total debt stock in 2014. The risk is mitigated by RUB4.2bn committed credit lines with commercial banks.

Fitch believes the region will not have any problems with refinancing its debt obligations in 2014. On 15 April 2014 the region successfully redeemed RUB2bn of one of its domestic bonds and plans to issue another RUB7bn domestic bond in 2014. The upcoming bond will have a seven-year maturity, which will smooth out the region's maturity profile.

Yaroslavl region's economy is well-developed with wealth metrics that are in line with the national median. The economy mostly relies on various sectors of the processing industry, which provides a diversified tax base. In 2013 the regional economy grew by 2.3% yoy outpacing the national average growth of 1.3% yoy. The administration forecasts Yaroslavl's economy will grow by a moderate 2%-3% per year in 2014-2016.

RATING SENSITIVITIES
Inability to restore a positive current balance and to narrow the deficit to below 10% of total revenue would lead to a downgrade.

An operating balance improvement to above 10% of operating revenue and debt coverage (direct risk to current balance) in line with debt maturity profile would lead to a positive rating action.