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. Last Updated: 07/27/2016

Regions Returning to Capital Markets

Ranking the Regions
Regions with the most investment potential
'01-'02'00-'01 Region
22St. Petersburg
33Moscow region
89Nizhny Novgorod
Source: Expert magazine
After four years of studying why they were shunned, many regional governments are now ready to return to the capital markets.

With few exceptions, Russia's 89 regions have fully recovered from the 1998 debt default and are now fully creditworthy, the Finance Ministry said Tuesday.

"Today I am pleased to say that most Russian regions have either paid or restructured their 1998 debts and meet the [Finance Ministry's] borrowing parameters," First Deputy Finance Minister Bella Zlatkis told a roundtable on regional borrowing.

A sound fiscal policy and solid public works projects will allow regions to avoid default, she said.

Since 1998, only comparatively wealthy Moscow and St. Petersburg have been able to attract new money on a constant basis, but that is now changing, Zlatkis said. She said that as more regions find willing lenders the pace of borrowing is likely to quicken. "I expect interest rates to decline further in the coming years, while maturates will become longer," she said.

Zlatkis said most regions will soon be able to attract five- to eight-year loans at 14 percent per year, provided the economy continues to grow and borrowing policies are sound.

Moscow currently has 10 outstanding ruble-denominated loans worth 15.5 billion rubles ($488 million) and is planning to attract another 11 billion rubles through three new issues in the first half of 2003. Moscow was also the only region able to attract money abroad last year, issuing $750 million in eurobonds.

St. Petersburg has raised 13.5 billion rubles since the 1998 crisis but has not tapped foreign markets. According to the web site, regions will borrow more than 16.6 billion rubles in 2002.

"Regional borrowing is once again the flavor of the season, as it was before 1998," said Sergei Vasilyev, head of the Federation Council's financial markets committee.

With their fiscal houses in order, the main question for regions now is how they will spend the money they borrow, he said. "I think they need to shift their focus from covering budget gaps to concrete investment projects that can generate revenues over the long term," he said.

The main problem with local government borrowing programs, both in Russia and abroad, is that public works projects are often not profitable enough to cover borrowing costs. "Of course it all depends on concrete projects, but in most cases the costs are shifted to the taxpayers," said Alexander Kudrin, a fixed-income analyst at Troika Dialog.

Gennady Oleynik, a senator representing Khanty-Mansiisk, said poor tax-collection rates remain a credit obstacle for some regions. "But it depends on the economic strength of the particular region, which is very uneven across Russia," he said.

A handful of regions are still struggling. Nizhegorodsk, for example, recently announced plans to restructure nearly $60 million of eurobond debt. The Finance Ministry allowed the region to borrow 700 million rubles domestically, but it is not enough to cover the debt.

And Kaliningrad may default on a $15 million loan from Germany's Dresdner Bank. The loan matures in February, and there is no provision in the region's budget to make the payment.