ACRA affirms the Murmansk Region at A-(RU), outlook Stable

The credit rating of the Murmansk Region (hereinafter, the Murmansk Region, or the Region) is based on low debt load, high budget self-sufficiency, and medium internal liquidity of budget. The rating is restricted by a substantial dependency of the budget on dominating sectors of the economy and an unevenly distributed debt repayment schedule.

The Murmansk Region is located in the Northwestern Federal District and shares land borders with Finland and Norway. The Region’s territory belongs to the Far North region. 0.5% of the Russian population lives in the Region and its gross regional product (GRP) equals 0.6% of Russia’s total GRP. The Region’s GRP totaled RUB 536 bln in 2019.

Key rating assessment factors

Low debt load and uneven debt repayment schedule. The Region’s debt to current revenues ratio declined from 30% in 2018 to 18% in 2019. According to the current version of the budget law, this ratio will stay below 30% in 2020-2022. Debt to tax and non-tax revenues (TNTR) ratio of the Murmansk Region is substantially below the level as defined in the amendment agreements on budget debt restructuring. According to the stress scenario of ACRA, the debt to current revenues ratio may surge to 45% and debt to TNTR ratio to 52%.

As of January 1, 2020, the Region’s debt comprised budget (61%) and bank (35%) loans as well as guarantees (4%). The debt repayment schedule is unevenly distributed: 45% of the Region’s total debt is due (or has to be refinanced) in 2021; the majority of this debt is bank loans. On March 1, 2020, this debt was replaced by a loan from the Federal Treasury Department, which, however, is not a source of long-term liquidity and will be replaced by commercial borrowings again.

Overdue debt of the Region’s budget is at a minimum level; total debt of municipalities equaled 11% of the total TNTR.

Self-sufficient budget with a dependency on dominant industries. Considering the actual figures for 2016-2019 and the 2020 budget plan figures, ACRA expects the averaged1 share of TNTR in the Region’s revenues (excluding subventions) to be around 88%. The current transactions balance to current revenues ratio fluctuated from 19% in 2016 to 7% in 2020 (or 3% by ACRA estimates). The decline is attributed to lower TNTR in 2020 as planned due to the high base effect from the previous year. Tax revenues of the Region’s budget increased 25% in 2019 (mainly due to higher income tax revenues that were up 56%). In ACRA’s opinion, the increase was driven by a one-off payment related to the operation specifics of a consolidated group of taxpayers in the Region.

The averaged share of capital expenditures in 2016-2020 will total 14%. The Region is capable of financing the bulk of its capital expenditures with its own funds.

The 2020 budget law of the Region provides for a budget deficit at 10% of TNTR to be almost fully covered by raising new debt. As a result, the debt load will return to the 2017 level, which should not affect the budget and debt profile assessments of the Region.

In view of the current macroeconomic environment, ACRA believes that the Region’s tax revenues are likely to decline more substantially than the current version of the budget law indicates. In the base case scenario of ACRA, tax revenues will decline 12% from the actual revenues of 2019. However, even with revenues declining as much as 20% and the need to finance wider budget deficit through raising new bank loans, the credit rating of the Region, in ACRA’s opinion, is likely to stay unchanged in the short 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 timely perform its debt obligations. As of January 1, 2020, account balances covered around half of debt obligations due in 2020. The rest of the debt may be refinanced in full using undisbursed credit lines falling due in over one year. Average monthly account balances available totaled around 50% of the average monthly budget expenses in the last 6 months. The Region uses funds from the Federal Treasury Department as well as funds of autonomous and budgetary entities to manage its liquidity.

Economic indicators of the Region’s development are tied to the international market environment. The Region’s economic performance is driven by global commodity prices (including apatite and nickel) as well as by pro-cyclical transportation industry with Murmansk Commercial Seaport, as the largest taxpayer, involved in the transshipment of thermal coal. According to ACRA estimates, nonferrous metals (extraction and production) accounted for around 30% of total tax revenues in the Region’s budget. The public sector (including public administration and military security services) generated around 20% of tax revenues, with transportation sector generating 8%. The Region features medium GRP performance as compared to other Russian regions and comparatively large wages that are on average 3.6x above the minimum subsistence level. 

Key assumptions

  • If tax revenues decline 20% in 2020 as compared to the actual revenues of 2019, the Region will take action to reduce its budget expenses in 2021 to avoid a further debt load increase;
  • Debt to current revenues ratio of the Region stays below 45%.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Making the debt repayment schedule more evenly distributed;
  • Higher internal liquidity of the budget.

A negative rating action may be prompted by:

  • Tax revenues declining more than 20% in 2020, while cutting budget expenses is impossible;
  • Debt to current revenues ratio rising above 45%. 

Issue ratings

There are no outstanding issues.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings 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 Murmansk Region was published by ACRA for the first time on October 18, 2017. The credit rating and its outlook are expected to be revised within 182 days following the publication date of this press release in compliance with the Calendar of planned sovereign credit rating revisions and publications.

The credit rating was assigned based on the data provided by the Murmansk Region, 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 Murmansk Region Government participated in its assignment.

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

ACRA provided no additional services to the Murmansk Regional Government. No conflicts of interest were discovered in the course of credit rating assignment.

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