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Rating Action:

Moody's upgrades Bashkortostan's rating to Baa3, stable outlook

 The document has been translated in other languages

Global Credit Research - 27 Jun 2013

London, 27 June 2013 -- Moody's Investors Service has today upgraded the global-scale foreign and local-currency issuer ratings of the Bashkortostan Republic in Russia to Baa3 from Ba1. The outlook on the rating has been changed to stable from positive.

The rating upgrade was driven by three factors, namely: (1) the region's consistently strong liquidity position; (2) strong operating balances; and (3) its low debt levels.

RATINGS RATIONALE

The first driver of the upgrade is the consistent strength of Bashkortostan's liquidity, which reflects the region's prudent budget management. Moody's notes that the region maintains the strongest liquidity position among its Russian sub-sovereign peers at 28% of operating revenue in 2012 or two times the region's debt stock. In addition, the region's reserves are cautiously invested (in bank deposits and treasury accounts) and are readily available in case of need. Going forward, its liquidity position may marginally decrease, but will likely be supported by large asset sales anticipated in 2013-14.

The second driver of the action is Bashkortostan's strong gross operating balance-to-operating balance ratio of around 17% in 2012, with its financing deficit at a moderate level of 6.5% to total revenue. Going forward, Moody's expects the region's operating balances to remain at double-digit levels, while financing requirements will fluctuate within the single-digit range, which are both in line with Baa rated peers.

The third driver is the region's low debt levels of around 12% of operating revenue in 2012. While future financing requirements will add to the region's debt stock, Moody's notes that debt is unlikely to exceed 20% of operating revenue over next three years and considers the region's capacity to meet all debt repayments without any recourse to new borrowing as strong and more appropriate for the Baa rating category.

WHAT COULD CHANGE THE RATING UP/DOWN

The sustainable long-term improvement in the region's operating balances to around 20% of operating revenue and/or the maintenance of a strong liquidity profile capable of meeting any short-to-medium term refinancing needs would be considered credit positive. Moreover, given the region's persistence revenue dependence on oil-producing and processing industries, the diversification of its budget revenue base would exert upward pressure on the rating.

Conversely, the ratings could come under downward pressure following significant changes in Bashkortostan's budget and debt policy that led to rapid growth in its market debt exposure and a depleting liquidity cushion. Specifically, any new federal initiatives to introduce increases in mandatory and inflexible operating expenditure (such as salaries and social benefits) would be considered credit negative.

Specific economic indicators as required by EU regulation are not applicable for this entity.

On 25 June 2013, a rating committee was called to discuss the rating of the Bashkortostan, Republic of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The systemic risk in which the issuer operates has not materially changed.

The principal methodology used in this rating was Regional and Local Governments published in January 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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

The Republic of Bashkortostan's population is around 4 million and accounts for 2.8% of the Russian total. The republic's gross regional product (GRP) accounts for approximately 2.1% of the national GDP. Key components of the regional GRP are industrial output (2012: 42.8%), broad trade and services sector (another 42.4%), construction (7.2%) and the remainder in agriculture (7.6%). Bashkortostan's GRP grew by strong 8.2% in 2011 compared with 5.2% in 2010. Although data for 2012 is not yet available, the republic government expects a GRP growth of 5.0%, thanks to solid industrial growth of 5.7%.

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

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 upgrades Bashkortostan's rating to Baa3, stable outlook
No Related Data.

 

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