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Thursday, April 17, 2014
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Fitch: Russian Winter Olympics Debt Manageable for Region

05/02/2014 12:56 (70 Day 15:23 minutes ago)


The FINANCIAL -- Fitch Ratings-Moscow/London-05 February 2014: The large increase in debt for Krasnodar Region, which is hosting the Winter Olympics from Thursday, is manageable because the region's economy is well diversified and there is a steady flow of funding from the federal government, Fitch ratings says.


Krasnodar Region's indebtedness rose rapidly to 47% of the region's current revenue in 2013, from 3% in 2009, largely related to building new infrastructure in and around Sochi. Previously, there was limited investment from the regional budget, and despite the significant rise in debt the direct risk (debt including federal budget loans) to current revenue ratio is within the range of 'BB+' rated Russian region peers.

We expect direct risk for the region to stabilise at 40%-46% of current revenue in 2014-2015. Krasnodar Region's strong, diversified economy provides a broad tax base and growing tax revenue flows. We believe it will continue to benefit from its strong industrial base, transport sector and natural resource endowment. The infrastructure for the games should also boost the accessibility of the region's seaside and ski resorts. However, maintenance costs for these facilities are likely to add to the region's budget expenses in the medium term.

Funding is supported by the federal government, which provided 58% of the region's debt. The extension of this debt with final maturities now in 2032, and reduction of interest rates to 0.5% a year last year should smooth the region's debt profile and ease debt servicing. We believe this helps offset the risks from debt growth leading up to the Winter Olympics by improving financial flexibility.

Russian banks have also contributed to the funding for the event. But generally there is limited concentration in their loan books. Vnesheconombank (VEB), Russia's development bank, has been one of the main providers of infrastructure finance for the project. It has committed to lend RUB239bn (USD6.7bn), equivalent to 12% of its loan portfolio and largely disbursed. Financing maturities are 5-15 years, but Deputy Prime Minister Dmitry Kozak recently announced the extension of the grace period on interest and principal repayments for borrowers until end-2015.

We believe the risks from VEB's Winter Olympics infrastructure loans should largely be offset by funding from the authorities. The National Welfare Fund is likely to convert around RUB200bn deposits held at the bank into long-term subordinated securities. VEB's policy role as a development bank and its close ties with the authorities means its 'BBB' rating is equalised with that of the Russian sovereign to reflect the high probability of support.

Overall, the widely reported USD50bn costs relating to the Winter Olympics are less than 2.5% of our 2013 GDP estimate for Russia. With some costs privately funded, the impact on the sovereign's finances is minimal.



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