ACRA affirms BBB-(RU) to the Kostroma Region, outlook Positive

The credit rating of the Kostroma Region (hereinafter, the Region) is based on the Region’s high debt load, limited flexibility of budget expenses, and weak economic development indicators as compared to the national average.

The credit rating outlook reflects ACRA’s expectations regarding the Region’s debt load stabilizing below 65% of current income in 2020 and the debt repayment schedule not entailing significant refinancing risks through 2023.

The Kostroma Region is located in the Central Federal District. The Region’s population is nearly 0.4% of the total Russian population, and its gross regional product (GRP) is around 0.2% of the aggregate GRP of all Russian regions.

Key rating assessment factors

The Federal Treasury has been supporting the Region’s budget since 2018. ACRA notes that this support regulates the execution of expenses and does not aim to contribute to the growth of budget revenues. Therefore, ACRA assesses this support of regional budget expenses as neutral.

The Region continued to reduce its debt load in 2019, refinancing risks remain low. The Region’s debt to current income ratio decreased to 60% in 2019 from 72% a year earlier. The debt to tax and non-tax revenues (TNTR) ratio fell from 115% to 90% in the specified period. ACRA does not expect these indicators to exceed 64% and 96% respectively at the end of this year. The reduction of the Region’s debt load in 2019 was due to an increase in revenues, which allowed reducing the absolute amount of its debt. As of January 1, 2020, the Region’s debt included budget (62%) and bank (38%) loans.
The debt repayment schedule assumes that over the next three years, the annual amount of the Region’s refinancing will be equal to the volume of budget loan repayment (annually, from 5 to 10% of TNTR planned for 2020). In 2023, the Region will have to refinance half of its debt, which mostly includes long-term bank loans.

Structural change in budget revenues may persist in the mid-term. Since 2018, the Region has been receiving transfers that had not previously been provided and are significant for its budget. The total amount of transfers rose by 28% (RUB 3.4 bln) in 2019 and amounted to RUB 15.6 bln (a year earlier, transfers increased by 74%, or RUB 5.2 bln). As a result, the share of TNTR in the Region’s income (excluding subventions) will total nearly 60% in 2018–2020 compared to 70–74% in 2014–2017.

In 2019, the Region’s TNTR rose by 13%, or RUB 2.4 bln, with income tax revenues up by 25%. A year earlier, TNTR inched up by 9%, while income tax revenues rose by 1%. Considering that TNTR in 2019 grew faster than in 2018 and given a higher growth of spending (19% in 2019 vs 11% in 2018), the 2019 budget surplus amounted to 11% of TNTR as in the previous year.

At the end of 2019, the current operations balance to current income ratio stood at 0.23. Considering changes in the macroeconomic environment, ACRA expects a decline in the Region’s current income, which, in turn, will lead to a decrease of the above-mentioned indicator down to 0.16 as of the end of 2020. At the same time, its average1 value will remain stable (around 0.17–0.18). Despite the fact that the share of capital expenses in the total budget expenses doubled in 2019, ACRA believes that the flexibility of budget expenses did not change compared to 2015–2018, because the specified growth was due to a three-fold increase in transfers.

ACRA expects that the share of capital expenses will remain high in 2020 due to federal budget transfers. The Agency believes that this is due to the implementation of national projects and this structure of budget expenses may persist in the mid-term.


1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.

The Region has sufficient liquidity to meet its debt obligations on time.
As of March 1, 2020, account balances covered half of the Region’s debt obligations due in 2020. The remaining debt can be refinanced through unused credit lines, which repayment period is one year, however. When it comes to liquidity management, the Region uses funds of the Federal Treasury Department, as well as those of autonomous and public sector institutions.

Weak but sufficiently diversified economy. The regional economy is dominated by the wood processing, metal, jewelry, food, and electricity industries. At the same time, GRP per capita is low (around 50% of the national average). Average wages amount to nearly 2.3–2.5 times the regional minimum subsistence level.

Key assumptions

  • Share of capital expenses remaining high due to the federal budget transfers;
  • Adhering to the 2017 budget loan restructuring agreement in 2020–2022.

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Sustainable deficit-free budget excluding one-off transfers;
  • Sustainable debt to current income ratio not exceeding 65%.

A negative rating action may be prompted by:

  • Reduction of TNTR by more than 2% in 2020 and the inability to cut budget expenses;
  • Growth of the debt to current income ratio above 65%.

Issue ratings  

None.

Regulatory disclosure

The credit rating has been assigned to the Kostroma Region under the national scale for the Russian Federation based on the Methodology for Credit Rating Assignment to Regional and Municipal Authorities of the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating of the Kostroma Region was published by ACRA for the first time on October 12, 2017. The credit rating of the Kostroma Region and its outlook are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit rating was assigned based on data provided by the Kostroma Region Administration, 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 rating is solicited, and the Kostroma Region Administration participated in its assignment.

No material discrepancies between the provided data and data officially disclosed by the Kostroma Region in its financial report have been discovered.

ACRA provided no additional services to the Kostroma Region Administration. No conflicts of interest were discovered in the course of credit rating assignment.

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