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S&P: Russian City of Dzerzhinsk Assigned 'B-' Rating; Outlook Stable

January 06, 2009 | "Standard & Poor's"

MOSCOW (Standard & Poor's) Dec. 31, 2008--Standard & Poor's Ratings Services said today that it has assigned its 'B-' long-term issuer credit rating and 'ruBBB-' Russia national scale rating to the City of Dzerzhinsk located in Nizhny Novgorod oblast in the Russian Federation. The outlook is stable.

"The ratings reflect Dzerzhinsk's very limited revenue flexibility, stemming from the low predictability of the oblast's financial policies and its high dependence on the performance of the chemical industry," said Standard & Poor's credit analyst Karen Vartapetov.

They also incorporate poor liquidity combined with a growing exposure to short-term debt. Additionally, the ratings reflect the city's modest budgetary performance until 2007, which is likely to deteriorate as a result of the economic downturn in 2008-2009.

These constraints are, however, mitigated by Dzerzhinsk's favorable location next to the city of Nizhny Novgorod and on the highway to Moscow city, enhanced infrastructure favorable for business inflows, and moderate debt levels.

"The stable outlook incorporates our expectation that the city will be able to significantly curb expenditure growth in a timely manner," said Mr. Vartapetov. In particular we expect the city to keep both the operating balance and the balance after capital expenditure below 5% of operating and total revenues respectively in 2009, before they start improving in 2010. The outlook also factors in a marginal accumulation of short-term debt.

Future positive rating actions will depend on Dzerzhinsk's ability to display a more prudent approach to budget planning (in particular, in terms of expenditures), to improve its budgetary performance to deliver the zero operational and the modest capital expenditure deficits in 2009-2010, and to significantly enhance its liquidity position. The stabilization of the oblast's financial policies and/or the extra resources allocated to the city (in the form of the increased PIT sharing rate and/or extra grants) in 2009-2010 would also support a positive rating action.

Alternatively, if the city's budgetary performance deteriorates greatly, leading to accelerated accumulation of short-term debt driven by either weaker revenues or the reluctance to cut expenditures, or both, the ratings will come under pressure. The absence of cost-containment measures, leading both the operating balance and the balance after capital expenditure to exceed 5% of revenues in 2009 would no longer be compatible with a 'B-' rating.


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