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Rating Action:

Moody's downgrades ratings of seventeen Russian regions and cities and three Russian government-related entities

Global Credit Research - 20 Jan 2015

Actions follow downgrade of Russia's government bond rating to Baa3

London, 20 January 2015 -- Moody's Investors Service has today downgraded the ratings of seventeen Russian regions and cities and three government-related issuers and placed them on review for further downgrade.

Concurrently, Moody's placed the ratings of Moscow Oblast and Mordovia Republic on review for downgrade, reflecting potential deterioration of their credit profiles in an environment of increased systemic risk.

These rating actions follow the weakening of Russia's credit profile as captured by the downgrade of the sovereign government bond rating to Baa3 (review for downgrade) from Baa2 (negative) on 16 January 2015.

For additional information, please refer to the related announcement: https://www.moodys.com/research/--PR_316487.

Specifically, Moody's has downgraded by one notch the ratings of the cities of Moscow and St. Petersburg, SUE Vodokanal of St. Petersburg and OOO Vodokanal Finance, OJSC "Western High-Speed Diameter", Republic of Bashkortostan, Republic of Tatarstan, Autonomous-Okrug (region) of Khanty-Mansiysk, Samara Oblast, Chuvashia Republic, Krasnoyarsk Krai, Komi Republic, Oblast of Omsk, Oblast of Nizhniy Novgorod, City of Krasnodar, City of Omsk, City of Volgograd, Belgorod Oblast and Vologda Oblast. The rating of Krasnodar Krai was downgraded by two notches. These ratings are on review for further downgrade.

The full list of affected issuers and credit ratings can be found at the end of this press release.

RATINGS RATIONALE

-- RATIONALE FOR DOWNGRADES ON RATINGS OF THE CITY OF MOSCOW, CITY OF ST. PETERSBURG, SUE VODOKANAL OF ST. PETERSBURG, VODOKANAL FINANCE AND WESTERN HIGH-SPEED DIAMETER

The downgrades of the ratings on the cities of Moscow and St. Petersburg reflect their strong institutional links with the federal government and their lack of special status, which prevents them from being rated above the sovereign. In addition, both cities are exposed to market risks and ongoing deterioration in the operating environment.

The downgrades of the issuer ratings of SUE Vodokanal of St. Petersburg, the senior unsecured rating of OOO Vodokanal Finance, and senior unsecured rating of OJSC Western High-Speed Diameter reflect their status as government-related issuers that are fully owned by the St. Petersburg government.

The downgrade of OJSC Western High-Speed Diameter's bond rating reflects its link with the City of St. Petersburg and the guarantee that the Russian government provides on its bond principal payments. This guarantee covers overall principal payments (including put options) and principal acceleration.

-- RATIONALE FOR REVIEW FOR DOWNGRADE ON RATINGS OF THE CITY OF MOSCOW, CITY OF ST. PETERSBURG, SUE VODOKANAL OF ST. PETERSBURG, VODOKANAL FINANCE AND WESTERN HIGH-SPEED DIAMETER

The review for downgrade on the ratings of the cities of Moscow and St. Petersburg reflects the cities' institutional and macroeconomic linkages with the federal government and mirrors the review for downgrade on the sovereign bond rating.

The review for downgrade on the ratings of SUE Vodokanal of St. Petersburg reflects its strong institutional, financial and operational linkages with the city of St. Petersburg.

The review for downgrade on the rating of OJSC Western High-Speed Diameter mirrors the review for downgrade on the City of St. Petersburg and the sovereign government bond rating.

--RATIONALE FOR DOWNGRADE ON THE REMAINING 15 REGIONAL AND LOCAL GOVERNMENTS' (RLGs') RATINGS

The downgrade reflects the increase in systemic risks following the weakening of Russia's credit profile, as captured in the downgrade of the government bond rating. The higher systemic risk is reflected in the deteriorating operating environment in Russia as Moody's expects Russian GDP to contract by 5.5% in 2015 and 3% in 2016. As a result, these 15 Russian RLGs will face increasing pressure on their revenue base, as their corporate income tax proceeds are expected to decline significantly in 2015, while personal income tax will also likely reduce. In addition, higher borrowing costs could potentially heighten refinancing and liquidity risks, and negative pressure on federal government finances will likely limit federal subsidies to RLGs.

Moody's downgrade of the ratings of the Republic of Bashkortostan, the Republic of Tatarstan, and the Autonomous-Okrug Khanty-Mansiysk reflects their exposure to increased systemic pressures. In addition, these issuers have weaker intrinsic strength relative to the cities of Moscow and St. Petersburg.

The downgrade of the ratings of another 12 RLGs (Samara Oblast, Krasnodar Krai, Krasnoyarsk Krai, Komi Republic, Chuvashia Republic, Oblast of Belgorod, Oblast of Omsk, Oblast of Nizhniy Novgorod, Oblast of Vologda, City of Krasnodar, City of Omsk, and City of Volgograd) takes into account the inherent weaknesses in their financial performances, which undermine their ability to cope with a deterioration in the macroeconomic environment. Each of the 12 regions is vulnerable to this systemic deterioration through one or a combination of the following factors: (1) moderate or low operating balances, translating into moderate or weak flexibility of financial performance; (2) refinancing risk and/or usually a high or rapidly growing debt burden; (3) modest liquidity; and 4) in many cases, vulnerability of local economies to domestic cycles, which implies earnings volatility.

The downgrades of Krasnodar Krai and Oblast of Belgorod also reflect the significant deterioration of their performances during the last several years, which will make them increasingly vulnerable to the growing systemic risk. Such weaknesses are reflected in the regions' poor budgetary performances and high debt levels.

-- RATIONALE FOR REVIEW FOR DOWNGRADE ON THESE ENTITIES' RATINGS

The decision to place these ratings on review for downgrade reflects the growing systemic risks.

For the Republic of Tatarstan, Moody's also continues its review initiated on 22 December 2014 (please see https://www.moodys.com/research/--PR_315548) following increased uncertainty surrounding the ability of the Tatarstan government to address the covenant breach of SINEK's $250 million bond, for which it has provided a guarantee. Moody's understands that some progress has been made by the Republic as it recently provided a letter of notice to the issuer stating its intention to increase the guarantee on the bond. At the same time, the review continues to focus on further implementation of Tatarstan's and SINEK management's action plan to increase the guarantee. Any future sharp FX rate dynamics will also be taken into consideration during the review.

-- RATIONALE FOR REVIEW FOR DOWNGRADE ON RATINGS OF MOSCOW OBLAST AND MORDOVIA REPUBLIC

The decision to place these ratings on review for downgrade reflects the potential deterioration of these issuers' credit profiles in an environment of increased systemic risk (in the short term) which will likely outweigh the relative strength of financial fundamentals of the Moscow Oblast and exhaust the tolerance buffer against the sovereign downgrade of Russia for Mordovia.

Both have been placed on review for downgrade, rather than downgraded, as Moscow Oblast's rating includes (1) solid financial fundamentals; and (2) a moderate probability of support from the Russian government, while the rating positioning of the Mordovia Republic demonstrates significant detachment from the sovereign.

--FOCUS OF THE REVIEW FOR DOWNGRADE FOR ALL 17 RLGs AND 3 GRIs

The review will focus on the impact of growing systemic risks and deteriorating operating environment for Russian regions, as reflected by the downgrade of the sovereign rating and its placement on review for further downgrade. The conclusion of the review would likely follow the conclusion of the review at the sovereign level.

The review for downgrade on Tatarstan's rating will also focus on the successful implementation of Tatarstan's and SINEK management's action plan to increase the guarantee.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Given the review for downgrade of the sovereign rating, an upgrade of regions' ratings is unlikely. If systemic pressures abate, the ratings are likely to be confirmed, provided there is no deterioration in RLGs' budget performances. Further deterioration in the sovereign's credit quality could exert downward pressure on Russian regions.

-- RATINGS AFFECTED

-- THE RATINGS OF THE FOLLOWING TWENTY ISSUERS WERE DOWNGRADED AND PLACED ON REVIEW FOR FURTHER DOWNGRADE

Moscow, City of: the issuer ratings and backed senior unsecured rating downgraded to Baa3 from Baa2 and placed on review for downgrade.

St. Petersburg, City of: the issuer ratings and senior unsecured rating downgraded to Baa3 from Baa2 and placed on review for downgrade.

SUE Vodokanal of St. Petersburg: the issuer ratings downgraded to Ba1 from Baa3 and placed on review for downgrade.

OOO Vodokanal Finance: the backed senior unsecured rating downgraded to Ba1 from Baa3 and placed on review for downgrade.

OJSC Western High-Speed Diameter: the backed senior unsecured rating downgraded to Ba2 from Ba1 and placed on review for downgrade.

Bashkortostan, Republic of: issuer rating downgraded to Ba1 from Baa3 and placed on review for downgrade.

Tatarstan, Republic of: issuer rating downgraded to Ba1 from Baa3 and remain on review for downgrade.

Khanty-Mansiysk AO: issuer rating downgraded to Ba1 from Baa3 and placed on review for downgrade.

Samara, Oblast of: issuer rating downgraded to Ba2 from Ba1 and placed on review for downgrade.

Krasnodar, Krai of: issuer and debt ratings downgraded to Ba3 from Ba1 and placed on review for downgrade.

Komi, Republic of: issuer rating downgraded to Ba3 from Ba2 and placed on review for downgrade.

Krasnoyarsk, Krai of: issuer rating downgraded to Ba3 from Ba2 and placed on review for downgrade.

Chuvashia, Republic of: issuer and debt ratings downgraded to Ba3 from Ba2 and placed on review for downgrade.

Omsk, Oblast of: issuer rating downgraded to Ba3 from Ba2 and placed on review for downgrade.

Nizhniy Novgorod, Oblast of: issuer rating downgraded to Ba3 from Ba2 and placed on review for downgrade.

Belgorod, Oblast of: issuer and debt ratings downgraded to Ba3 from Ba2 and placed on review for downgrade.

Krasnodar, City of: issuer rating downgraded to Ba3 from Ba2 and placed on review for downgrade.

Vologda, Oblast of: issuer rating downgraded to B1 from Ba3 and placed on review for downgrade.

Omsk, City of: issuer rating downgraded to B1 from Ba3 and placed on review for downgrade.

Volgograd, City of: issuer rating downgraded to B1 from Ba3 and placed on review for downgrade.

-- THE RATINGS OF THE FOLLOWING 2 ISSUERS WERE PLACED ON REVIEW FOR DOWNGRADE

Moscow, Oblast of: issuer rating of Ba2 placed on review for downgrade.

Mordovia, Republic of: issuer and debt ratings of B1 placed on review for downgrade.

The sovereign action required the publication of this credit rating action on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.

Specific economic indicators as required by EU regulation are not applicable for these entities.

On 16 January 2015, a rating committee was called to discuss the ratings of the Russian sub-sovereign entities. The main points raised during the discussion were: The systemic risk in which the issuers operate has materially increased.

The principal methodology used in rating Russia RLGs was Regional and Local Governments published in January 2013. The principal methodology used in rating Russia GRIs was Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vladlen Kuznetsov
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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Moody's downgrades ratings of seventeen Russian regions and cities and three Russian government-related entities
No Related Data.
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