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Rating Action:

Moody's takes rating actions on Russian sub-sovereigns

 The document has been translated in other languages

Global Credit Research - 01 Jul 2014

Actions follow confirmation of Russia's Baa1 government bond rating

London, 01 July 2014 -- Moody's Investors Service has today confirmed the ratings of two Russian sub-sovereign and three government-related issuers following the rating agency's confirmation of Russia's sovereign bond rating at Baa1 with a negative outlook on 27 June 2014. For additional information, please refer to the related announcement: https://www.moodys.com/research/PR_301804.

Specifically, Moody's has confirmed the following ratings:

(1) the foreign- and local-currency issuer ratings and foreign-currency senior unsecured rating of the City of Moscow at Baa1

(2) the foreign- and local-currency issuer ratings and local-currency senior unsecured rating of the City of St. Petersburg at Baa1

(3) the foreign- and local-currency issuer ratings of SUE Vodokanal of St. Petersburg at Baa2

(4) the senior unsecured rating of OOO Vodokanal Finance at Baa2

(5) the senior unsecured rating of OJSC Western High-Speed Diameter at Baa3.

All the above-mentioned ratings carry negative outlooks, and today's actions conclude the review that Moody's initiated on 1 April 2014.

In addition, Moody's has affirmed the ratings of 17 Russian regional and local governments (RLGs) with their existing outlooks. The ratings of 14 RLGs were affirmed with stable outlooks. The ratings of Krasnodar Krai, Belgorod Oblast and Vologda Oblast have also been affirmed with negative outlooks.

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

RATINGS RATIONALE

--- RATIONALE FOR THE CONFIRMATIONS

The confirmation of the ratings on the cities of Moscow and St. Petersburg directly follows the confirmation of the sovereign bond rating, given their institutional and macroeconomic linkages to the national government.

The confirmation 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 reflects their status as government-related issuers (GRIs), wholly owned by the St. Petersburg government.

The confirmation of OJSC Western High-Speed Diameter's bond rating reflects its link with the City of St. Petersburg and the quality of 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 ASSIGNING NEGATIVE OUTLOOKS ON THESE ENTITIES

The negative outlooks on the ratings of the cities of Moscow and St. Petersburg mirror the negative outlook on the sovereign bond rating. The ratings of these cities continue to incorporate a moderate probability of extraordinary support coming from the federal government if the cities were to face acute liquidity stress. This support ensures one notch of uplift from their respective baseline credit assessments.

The negative outlooks on the ratings of SUE Vodokanal of St. Petersburg reflect the negative outlook on the City of St. Petersburg. SUE Vodokanal of St. Petersburg is strongly dependent on ongoing and extraordinary support from the city.

The negative outlook on the ratings of OJSC Western High-Speed Diameter mirrors the negative outlook on the City of St. Petersburg and the sovereign government bond rating.

--- RATIONALE FOR AFFIRMATIONS OF 14 RLGs WITH STABLE OUTLOOKS

Moody's affirmations of 14 RLG ratings (please see the end of this press release for details) with stable outlooks reflect these entities' capacity to withstand moderate systemic pressure. The ratings of these RLGs remain between two and six notches below the sovereign, and their positioning on the rating scale confers a certain tolerance buffer if the sovereign's creditworthiness incurs mild deterioration.

Moody's notes that Russian regions usually demonstrate adequate capacity to manage short-term refinancing risks during periods of greater systemic risk, aided both by the national government's liquidity access mechanism for RLGs (which helps to offset immediate liquidity pressures) and by ongoing lending from state-owned banks. The RLGs' debt structure, which is almost free of foreign-currency risk, and the growing maturities of local-currency borrowing also help to mitigate refinancing risks.

--- RATIONALE FOR AFFIRMATION OF 3 RLGs WITH NEGATIVE OUTLOOKS

The ratings of Krasnodar Krai, Belgorod Oblast and Vologda Oblast were affirmed with negative outlooks which continue to reflect the expected deterioration of their key financial and debt metrics (please see details on the individual issuers on www.moodys.com).

WHAT COULD CHANGE THE RATINGS UP/DOWN

--- RATINGS WITH NEGATIVE OUTLOOKS

For City of Moscow and St. Petersburg, the ratings will move in tandem with the sovereign rating. In turn, if the outlook on the sovereign rating is changed to stable, the negative outlook on these sub-sovereign ratings will also likely be changed to stable, provided there is no deterioration in idiosyncratic factors (e.g., debt burden, budgetary performance and/or liquidity) below projected metrics.

For SUE Vodokanal, a downward revision of the ratings will likely follow the revision of St. Petersburg's ratings. Substantial debt growth, coupled with weak margins -- in addition to negative changes in the institutional and financial framework under which SUE Vodokanal operates -- could also exert downward pressure on the company's ratings. Upward rating pressure, unlikely in the short term, will stem from a stabilisation of St. Petersburg's ratings. A steady improvement in margins and an ability to extend debt maturities, coupled with a sustainable debt burden, could also exert upward pressure on the ratings.

Changes to the ratings of OJSC Western High-Speed Diameter will directly mirror the rating evolution of St. Petersburg, the sovereign, and their respective outlooks.

For Krasnodar Krai, Belgorod Oblast and Vologda Oblast, downward pressure would stem from a continued deterioration of their financial and debt metrics. Upward pressure would develop if debt levels reduce steadily and if the accounts become more structurally balanced (for details please see the relevant Credit Opinions on www.moodys.com).

--- RATINGS WITH A STABLE OUTLOOK

For all Russian RLGs whose ratings have a stable outlook, downward pressure may materialise from the rapid deterioration in their financial metrics, leading to significantly increasing idiosyncratic risks. In contrast, upward rating pressure on Russian RLGs will be determined by the improving individual financial profiles of the above-mentioned sub-sovereigns, such as significant debt reduction and/or structurally balanced budgets and improving liquidity profiles.

RATINGS AFFECTED

THE RATINGS OF THE FOLLOWING FIVE ISSUERS WERE CONFIRMED:

- Moscow, City of: Baa1 issuer and debt ratings, outlook negative.

- St. Petersburg, City of: Baa1 issuer and debt ratings, outlook negative.

- SUE Vodokanal of St. Petersburg: Baa2 issuer rating, outlook negative.

- OOO Vodokanal Finance: Baa2 debt rating, outlook negative.

- OJSC Western High-Speed Diameter: Baa3 debt rating, outlook negative.

THE RATINGS OF THE FOLLOWING 17 ISSUERS WERE AFFIRMED:

- Bashkortostan, Republic of: Baa3 issuer rating, stable outlook maintained

- Tatarstan, Republic of: Baa3 issuer rating, stable outlook maintained

- Khanty-Mansiysk AO: Baa3 issuer rating, stable outlook maintained

- Samara, Oblast of: Ba1 issuer rating, stable outlook maintained

- Krasnodar, Krai of: Ba1 issuer and debt ratings, negative outlook maintained

- Komi, Republic of: Ba2 issuer and debt ratings, stable outlook maintained

- Krasnoyarsk, Krai of: Ba2 issuer rating, stable outlook maintained

- Moscow, Oblast of: Ba2 issuer rating, stable outlook maintained

- Chuvashia, Republic of: Ba2 issuer and debt ratings, stable outlook maintained

- Omsk, Oblast of: Ba2 issuer rating, stable outlook maintained

- Nizhniy Novgorod, Oblast of: Ba2 issuer rating, stable outlook maintained

- Krasnodar, City of: Ba2 issuer rating, stable outlook maintained

- Belgorod, Oblast of: Ba2 issuer and debt ratings, negative outlook maintained

- Omsk, City of: Ba3 issuer rating, stable outlook maintained

- Volgograd, City of: Ba3 issuer rating, stable outlook maintained

- Vologda, Oblast of: Ba3 issuer rating, negative outlook maintained

- Mordovia, Republic of: B1 issuer and debt ratings, stable outlook maintained

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 26 June 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.

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

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

Releasing Office:
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's takes rating actions on Russian sub-sovereigns
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