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Rating Action:

Moody's takes rating actions on Russian sub-sovereigns

 The document has been translated in other languages

01 Apr 2014

London, 01 April 2014 -- Moody's Investors Service has today placed the following ratings on review for downgrade:

(i) the Baa1 foreign and local-currency issuer and senior unsecured ratings of the city of Moscow; (ii) the Baa1 foreign and local-currency issuer and senior unsecured ratings of the city of St. Petersburg; (iii) the Baa2 issuer rating of SUE Vodokanal of St. Petersburg; (iv) the Baa2 senior unsecured rating of OOO Vodokanal Finance; and (v) the Baa3 senior unsecured rating of OJSC "Western High-Speed Diameter". These rating actions follow Moody's placement of Russia's Baa1 government bond rating on review for downgrade on 28 March 2014. For additional information, please refer to the related announcement: https://www.moodys.com/research/Moodys-places-Russias-Baa1-government-bond-rating-on-review-for--PR_294200.

Concurrently, Moody's has also affirmed the ratings and maintained the outlooks on 15 other Russian regional and local governments (RLGs).

At the same time, Moody's has (1) downgraded Belgorod Oblast's issuer and senior unsecured ratings to Ba2 from Ba1, retaining the negative outlook on the ratings; (2) affirmed, but changed the outlook on Krasnodar Krai's Ba1 issuer and senior unsecured ratings to negative from stable. In the case of Belgorod and Krasnodar, the deterioration of their idiosyncratic features has driven the actions.

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

RATINGS RATIONALE

--RATIONALE FOR REVIEW FOR DOWNGRADE: MOSCOW, ST. PETERSBURG, SUE VODOKANAL, OOO VODOKANAL FINANCE, OJSC "WESTERN HIGH-SPEED DIAMETER"

The deterioration in Russia's credit profile has direct implications for the ratings of Moscow and St. Petersburg given their institutional and macroeconomic linkages with the national government. As Moody's believes neither city is sufficiently insulated from national market risks and does not have adequate fiscal autonomy to hold rating exceeding the sovereign level, the review for downgrade has triggered a similar review of both cities' issuer and senior unsecured ratings.

The review for downgrade on the Baa2 issuer rating of SUE Vodokanal of St. Petersburg, Baa2 senior unsecured rating of OOO Vodokanal Finance, and Baa3 senior unsecured rating of OJSC "Western High-Speed Diameter" reflects their status as government-related issuers (GRIs), wholly owned by the St. Petersburg government.

The review for downgrade on OJSC WHSD's bond rating reflects the link with the city of St. Petersburg and the quality of the guarantee provided by the Russian government on its bond principal payments. This guarantee covers overall principal payments (including put options) and principal acceleration.

--FOCUS OF THE REVIEW

The review will focus on growing systemic risks, as reflected in the sovereign bond rating. The conclusion of the review will likely follow the conclusion of the review at the sovereign level.

--RATIONALE FOR AFFIRMATION

Moody's affirmation of the ratings of Moscow Oblast, Bashkortostan, Tatarstan, Khanty-Mansiysk AO; Samara Oblast; Chuvashia Republic, Komi Republic, Krasnoyarsk Krai, Nizhniy Novgorod Oblast, Omsk Oblast, Vologda Oblast, Mordovia Republic, Krasnodar City, Omsk City and Volgograd City reflects the still sufficient capacity of these sub-sovereigns to withstand systemic pressures and to maintain standalone creditworthiness appropriate for their rating categories. The ratings assigned to these sub-sovereigns are already detached from the sovereign by two to seven notches, which confers a certain buffer of tolerance in case of a mild deterioration of the sovereign's creditworthiness.

Moody's notes that these regions demonstrate adequate capacity to manage short-term refinancing risks, both thanks to the national government's liquidity access mechanism for RLGs, which helps to offset immediate liquidity pressures, and ongoing lending from state-owned banks. Their debt structure, which is absent of foreign-currency risk, and growing maturities of their local-currency borrowing also help to mitigate refinancing risks. Finally, the abovementioned Russian sub-sovereigns have better resilience to global energy price volatility compared with the Russian government, given their more limited budget dependence on volatile taxes from the oil and gas sector.

--RATIONALE FOR DOWNGRADE: BELGOROD OBLAST

Moody's decision to downgrade Belgorod Oblast's issuer and debt ratings to Ba2 from Ba1 reflects the region's rapidly deteriorating financial metrics and its failure to deliver on its budget consolidation plan for 2013. The region recorded a -12.6% financing deficit in 2013, while it debt grew to 71.9% of operating revenue from 57.4% in 2012. Moody's notes that this has been driven by the substantial progressive decline in the oblast's corporate income tax proceeds, which followed the recent departure of a large regional corporate taxpayer (due to changes in the national corporate income tax regime), and the pressure weak steel and iron ore prices put on the financials of other key regional taxpayers from the industry.

The negative outlook on the ratings reflects Moody's expectation of further growth in Belgorod's debt burden, following its consistently high financing deficit and below-potential tax revenue.

--RATIONALE FOR NEGATIVE OUTLOOK: KRASNODAR KRAI

Moody's decision to change the outlook to negative from stable reflects Krasnodar Krai's increasing direct debt and its growing operating expenditure, which may add to debt pressures in the medium term.

Krasnodar Krai has substantially increased its direct debt over past few years (76.9% of operating revenue in 2013 from 46.4% in 2012), largely in preparation for the Winter Olympic Games in Sochi in February 2014. This debt pressure is partially mitigated by high share of federal low-interest bearing loans (42% of the regional debt), which are considered as a part of the sovereign pre-Olympic funding and are largely due in 2023-32.

The negative outlook reflects Moody's expectation that the regional government will increase its market borrowings in 2014-15 driven by (i) the need to increase mandatory salaries in education and healthcare; and (ii) likely growth in maintenance costs for new post-Olympic facilities.

WHAT COULD CHANGE THE RATINGS UP/DOWN

--RATINGS UNDER REVIEW

Should the sovereign credit quality deteriorate further, these sub-sovereign ratings will appropriately follow a sovereign rating action. In turn, if systemic pressures abate, review on these sub-sovereign ratings will likely lead to their maintaining at current levels.

--AFFIRMED RATINGS

For all affirmed ratings, downward pressure may arise from the rapid deterioration in their financial metrics, leading to increasing idiosyncratic risks. Further material growth in systemic risk, as reflected in a weakening sovereign credit profile, may also adversely impact these sub-sovereign ratings.

In turn, upward pressure will be determined by improving individual financial profiles of the abovementioned sub-sovereigns, such as significant debt reduction and/or structurally balanced budgets and improving liquidity position.

--BELGOROD OBLAST

Should Belgorod Oblast fail to contain its financing deficit, which will lead to further growth in its net direct and indirect debt ratio towards 80% of operating revenue, Moody's would consider downgrading the rating.

Should the region prove capable of decreasing its debt exposure and containing financing deficits at low single-digit levels, Moody's would consider stabilising the rating outlook.

--KRASNODAR KRAI

Should Krasnodar Krai's market debt grow to 55% of operating revenue, which is largely appropriate for Ba2-rated regions, we will consider rating downgrade.

At the same time, should the region prove capable of containing its public debt at the current levels relative to its operating revenues, this may be considered as a factor supportive of stabilizing the rating outlook.

RATINGS AFFECTED

Moscow, City of: issuer and debt ratings of Baa1 placed on review for downgrade.

St. Petersburg, City of: issuer and debt ratings of Baa1 placed on review for downgrade.

SUE Vodokanal of St. Petersburg: issuer rating of Baa2 placed on review for downgrade.

OOO Vodokanal Finance: debt rating of Baa2 placed on review for downgrade.

OJSC Western High-Speed Diameter: debt rating of Baa3 placed on review for downgrade.

Belgorod, Oblast of: issuer and debt ratings downgraded to Ba2, with negative outlook, from Ba1.

Krasnodar, Krai of: issuer and debt ratings of Ba1 affirmed, outlook changed to negative from stable.

Bashkortostan, Republic of: issuer rating of Baa3 affirmed, outlook stable.

Tatarstan, Republic of: issuer rating of Baa3 affirmed, outlook stable.

Khanty-Mansiysk AO: issuer rating of Baa3 affirmed, outlook stable.

Samara, Oblast of: issuer rating of Ba1 affirmed, outlook stable.

Chuvashia, Republic of: issuer and debt ratings of Ba2 affirmed, outlook stable.

Komi, Republic of: issuer and debt ratings of Ba2 affirmed, outlook stable.

Krasnoyarsk, Krai of: issuer rating of Ba2 affirmed, outlook stable.

Moscow, Oblast of: issuer rating of Ba2 affirmed, outlook stable.

Nizhniy Novgorod, Oblast: issuer rating of Ba2 affirmed, outlook stable.

Omsk, Oblast of: issuer rating of Ba2 affirmed, outlook stable.

Vologda, Oblast of: issuer rating of Ba3 affirmed, outlook negative.

Mordovia, Republic of: issuer and debt ratings of B1 affirmed, outlook stable.

Krasnodar, City of: issuer rating of Ba2 affirmed, outlook stable.

Omsk, City of: issuer rating of Ba3 affirmed, outlook stable.

Volgograd, City of: issuer rating of Ba3 affirmed, outlook stable.

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 27 March 2014, a rating committee was called to discuss the ratings of 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: Methodology Update published in July 2010. 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.

Alexander Proklov
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 M Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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Moody's Investors Service Ltd.
One Canada Square
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SUBSCRIBERS: 44 20 7772 5454
Moody's takes rating actions on Russian sub-sovereigns

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