Fitch Affirms Russia's Republic of Karelia at 'BB-'; Outlook Stable


MOSCOW/MILAN/LONDON, October 30 (Fitch) Fitch Ratings hasaffirmed the Russian Republic of Karelia's Long-term foreign and local currencyratings at 'BB-' and the Short-term foreign currency rating at 'B'. The NationalLong-term rating has been affirmed at 'A+(rus)'. The Outlooks on the Long-termratings are Stable.Karelia's outstanding senior unsecured domestic bonds (ISINRU000A0JQX51, RU000A0JRYA9, RU000A0JT7L9 and RU000A0JU1V8) of RUB5.25bn havealso been affirmed at 'BB-' and 'A+(rus)'.KEY RATING DRIVERS Fitch expects Karelia's prudent fiscal management to continue in2013-2015, leading to satisfactory budgetary performance with an operatingmargin of above 5%. The republic's operating balance remained stable at about 8%of operating revenue in 2011-2012, while its deficit before debt variationwidened to 8.1% of total revenue in 2012 from 0.3% in 2011. Fitch expects theregion to post a full-year deficit close to 7%-8% of total revenue in 2013,reflecting increased operating expenditure and a sluggish recovery of operatingrevenue.Karelia's tax revenue is moderately concentrated. The share ofthe top 10 taxpayers fell to 32% of total tax revenue in 2012 (2011: 37%),due to a new tax regime in 2012. The new fiscal regulation led to reducedpayments from a key taxpayer in the metallurgy sector. Fitch expects a slow recoveryof the republic's tax revenue to be mitigated by equalisation grantsfrom the federal government in 2013-2014.The region's economic profile is dominated by the industrialsector, which contributed 34% of gross regional product in 2012. Localindustries were negatively affected by a downturn in the timber and pulp andpaper sectors in 2012. The administration expects the economic downturn tocontinue in 2013, with a 5% yoy contraction before gradually recovering in 2014-2015.In its base case scenario Fitch expects direct risk to increaseup to 45%-50% in 2013-2015, from 42% in 2012, due to a widening budget deficit.The average maturity of its debt profile improved to 3.8 years in 2012, fromthree years in 2011. The republic's liquidity position is adequate, with an availablecash balance of RUB1.5bn at end-Q313 (2012: RUB1.8bn and 2011: RUB1.5bn). Theregion also had at end-H113 committed credit lines from local banks totallingRUB2.4bn.Karelia's contingent risk is low and limited to the modestindebtedness of its broader public sector and few issued guarantees. The aggregatedebt of the region's public-sector entities stood at RUB324m in 2012 (2011:RUB348m), while the republic had RUB194m worth of issued guarantees outstandingat end-2012.RATING SENSITIVITIES The rating could be positively affected by a sound operatingmargin of close to 10% in combination with direct risk at 40% of current revenue.A downgrade could result from deterioration of the budgetaryperformance, a resurgence of refinancing risk, as well as debt coverage ratiosweaker than Fitch's expectations (direct risk at 46%-48% of current revenue)for two consecutive years.Contact: Primary AnalystKonstantin AnglichanovDirector+7 495 956 99 94Fitch Ratings CIS Ltd26 Valovaya StreetMoscow 115054Secondary AnalystBehruz IsmailovAssociate Director +7 495 956 99 80Committee ChairpersonRaffaele CarnevaleSenior Director + 39 02 87 908 72 03Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495956 9908, Email:; Peter Fitzpatrick,London, Tel: +44 20 3530 1103, Email: information is available on"> criteria 'Tax-Supported Rating Criteria' dated 14August 2012 and 'International Local and Regional Governments Rating Criteria'dated 9 April 2013 are available at"> Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS ANDDISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THISLINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION,RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLEON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS,CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'SCODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATEFIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLEFROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHERPERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES.DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN ANEU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUERON THE FITCH WEBSITE.

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