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. Last Updated: 07/27/2016

New Rating System Assesses Regions

With local capital markets showing signs of life, a Russia-based affiliate of Standard & Poor's rating agency has launched a new rating system assessing the credit risk of cities and regions.

EA-Ratings rates more than 50 prospective borrowers by assigning long-term credit ratings from "two," or default, to "triple five," which means the borrower has minimal credit risk. Short-term risks are gauged by ratings varying from "ru-2" to "ru-8."

EA-Ratings will upgrade the data on regional borrowers on a weekly basis, providing rating information for free and charging only for additional research, the agency said Thursday.

EA-Ratings this week released 21 of the ratings to the press, saying that under agreements with regional authorities the other ratings would remain confidential.

Of those 21 regions, an overwhelming majority - 13 - were assigned an s2, or selective default. The Belgorod and Samara regions got the highest rating of any regions, double fours.

Ratings analysts acknowledged that local governments remain risky borrowers, but said that recently there have been signs that borrowing activities could soon resume.

"There were very positive signs showing that they had not scrapped borrowing plans," said Elena Okorotchenko, associate director with Standard & Poor's.

Some regions are even taking steps to make good on the debts, measures that Standard & Poor's gave a nod to earlier this year when it gave the Rostov region a CCC minus rating. The assignment was the first new rating the agency had given a region in the two years since the 1998 financial crisis.

Okorotchenko said the upgrade of the sovereign Eurobond rating to triple C plus from triple C opened the way for an upward revision of local ratings.

Recently, Standard & Poor's said Russia's sovereign rating, currently at selective default, could be upgraded further upon "ratification of the agreement with the London Club creditors and launch of an exchange offer of new securities to replace the old debt."

However, investors are probably going to be shy about lending to the regions after the string of defaults that took place across the country in 1998.

"Corporate borrowers at the moment seem to be more reliable than regional and municipal borrowers," said Alexei Novikov, director general of EA-Ratings.

Loopholes in local legislation make it virtually impossible to declare regional borrowers in default and claim property on assets that could be used as collateral.

Similar problems arise on a corporate level only if dodgy schemes are used to strip the company of its assets, Novikov said.

The major financial risk now stems from how taxes are split between the regions and the federal government, according to EA-Ratings.

"The budget code and the tax code virtually deprived regions of fiscal autonomy," Novikov said.

About 90 percent of budget revenues in the regions are regulated by federal authorities - including tax sharing of common sources of revenues. That deprives governors of incentives to raise regional tax collection and instead encourages them to use their lobbying power to negotiate higher share of revenues of a consolidated budget, analysts said.

Twelve regions were allowed to raise funds on international capital markets in 1997 and 1998, five of which received funding from the federal government because they could not meet their own expenditures.

Three regions - Moscow, St. Petersburg and Nizhny Novgorod - borrowed a total of $1.35 billion and later experienced serious financial difficulties repaying the debts, which were nominated in foreign currencies.

Nizhny Novgorod restructured its debts, but is headed for another default or restructuring since it cannot service the debt at the renegotiated terms, EA-Ratings said in a report on regional Eurobond issues.


Long-term Borrower

credit rating

44 Belgorod region, Samara region

44- Vologda region

4+ Cherepovets

333 Petrozavodsk, Chuvashia Republic

33 Ryazan, Orenburg

s2 Adygeya Republic, Altai region, Chelyabinsk region, Moscow region, Leningrad region, Mordovia, Nizhny Novgorod region, Novgorod region, Novosibirsk region, Omsk region, Orenburg region, Tatarstan Republic, Khabarovsk region

Source: EA-Ratings (April 7, 2000)