OREANDA-NEWS. Fitch Ratings has assigned the Russian City of Izhevsk Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'B+' with Stable Outlooks and a Short-term foreign currency IDR of 'B'. The agency has also assigned the city a National Long-term rating of 'A(rus)' with Stable Outlook.

The ratings factor in the ongoing budget deficit and volatile budgetary performance, mainly due to the decisions of the regional and federal authorities. The ratings also reflect the city's moderate direct risk with low immediate refinancing pressure and Fitch's expectation of stable budgetary performance in 2014-2016, with weak positive operating balance barely sufficient for interest payments coverage.

Fitch expects Izhevsk's operating performance to stabilise in 2014-2016, and that the city will maintain an operating balance averaging 3.2% of operating revenue, which is in line with 2013 outturn. Operating expenditure is under pressure from the federal government's pledge to increase public sector salaries, although these are mostly offset by earmarked transfers from the Republic of Udmurtia (BB-/Stable/B). Izhevsk has suffered from frequent changes in revenue and expenditure allocation between municipal and regional budgets. In 2014, the city lost half of its personal income tax share as compensation for transferring staff cost expenditure for pre-school education to the regional budget.

The city's budgetary performance has been weak, with a negative operating balance in 2008-2011. The operating balance improved in 2012-2013, but current balance remained weak and close to zero in 2013. This caused weak debt coverage (direct risk to current balance) and made the city strongly dependent on capital grants and new borrowing for financing of capital outlays and principal debt repayment.

Fitch expects Izhevsk's direct risk to be about RUB4bn, or 39% of current revenue, by end-2014. The city's absolute direct risk will modestly increase. However, the relative debt burden will remain almost stable at moderate 40% by end-2016. As of 1 October 2014, city's immediate refinancing pressure is low, as it should only repay RUB800m during 2014-2016. Izhevsk's direct risk is dominated by bank loans, RUB2.6bn of which (72% of total risk as of 1 September) is due in 2017. Fitch will closely monitor the city's ability to overcome this peak.

Maintenance of sustainable budgetary performance with operating balance about 5% of operating revenue coupled with moderate debt in line with Fitch's forecast would lead to an upgrade.

Weak operating balance insufficient to cover interest payments along with significant growth of refinancing risk due to increasing reliance on short-term debt would lead to a downgrade.