RATINGS FOR RUSSIAN REGIONS DOWNGRADED

In conjunction with its downgrade of the Russian Federation’s Long-term foreign currency rating from ‘BB’ to ‘BB-’ (BB minus). Fitch IBCA, the international rating agency, has also reduced the ratings for 7 Russian regions.

Fitch IBCA believes that the financial crisis at the federal level is impacting on regions both directly, through slower economic growth, more expensive credit, and greater difficulty in tax collection, and indirectly, as a result of the federal governments’ policy response. Evidence of financial stress on many of weaker regions has already been seen in the form of ‘agrobond’ defaults.

The anti-crisis measures passed by the Duma will put pressure on regions by making the continuation of federal credits conditional on regions eliminating their use of offsets, wage and other arrears as a source of finance. Although the proposal to shift 20% of the personal income tax to federal level was rejected, the fact that this proposed tax change formed a major part of the anti-crisis measures means that the federal government will have to return to this in the autumn. Personal income tax has been one of regions’ stronger sources of revenue. The proposed new sales tax, which will be a new source of regional revenue, was not fully approved, and in any case is likely, initially, to be more difficult to collect.

Long-term foreign currency ratings for City of St. Petersburg, Krasnoyarsk Krai, Leningrad Oblast and Republic of Komi are therefore reduced in line with the sovereign downgrade from BB to BB-’ (BB minus). These ratings are removed from RatingAlert negative. Their Short-term foreign currency rating remains unchanged at ‘B’. These ratings remain unconstrained by the sovereign ceiling in view of the systemic factors noted above.

Long-term foreign currency ratings for Kaliningrad Oblast and Moscow Oblast, which were originally assigned below the sovereign ceiling, are reduced to B+. The Moscow Oblast is placed on RatingAlert negative because of the significant deterioration in its financial position. The Long-term foreign currency rating for The Republic of Sakha (Yakutia), recently rated B+, is placed on RatingAlert negative following late payment of its ‘agrobond’.

www.fitch.IBCA