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Fitch Affirms City of Moscow at 'BBB'; Outlook Stable

Fitch Ratings affirmed the Russian City of Moscow's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB', with Stable Outlooks, the rating agency informed.

The affirmation reflects Moscow's capital status, its robust wealth and economic indicators, sound budgetary performance, capex flexibility and strong debt ratios. The ratings also factor in the slowdown of tax revenue due to the national economy's deceleration and corresponding pressure on its operating balance.

Fitch forecasts that the operating balance will remain sound at about 15% of operating revenue in 2013 and improve to 16%-17% in 2014-2015. Despite the deterioration in the city's operating margin to 15%-20% in 2009-2013 compared with the high pre-crisis levels of 35%-40%, Moscow has a sound financial position, reflecting its capacity to absorb shocks.

Moscow receives significant tax proceeds from major national businesses headquartered in the city. However, due to the large proportion of direct taxes in its budget, it is vulnerable to economic shocks. In addition, new national tax regulation regarding corporate income tax paid by large consolidated taxpayers negatively affected the city's budget. That, together with the decline of current transfers from the federal budget, led to a deceleration of operating revenue growth to about 1.5% yoy in 2013, below the 3% growth of operating expenditure.

Fitch expects operating expenditure growth will not outpace the moderate increase in tax revenue that is expected to be a maximum of 6% in 2014-2015. The city is expected to limit its operating expenses due to a slowdown of tax revenues.

Fitch expects that the city's recent territorial expansion will not lead to considerable investments in the medium term but additional spending for new infrastructure development will be performed in the next 10-15 years.

Moscow's debt burden is low both by national and international standards. Fitch expects Moscow's direct risk will decrease to about RUB179bn (USD5.4bn) at end-2013 and then it will grow to about RUB193bn by end-2015 staying at a low 12% of current revenue. The city has strong debt coverage and a long direct risk maturity profile up to 2022. These factors, together with strong liquidity, underpin its financial position.

The city directly and indirectly controls an extensive public sector. This involves additional contingent risk and puts pressure on budget expenditure via administrative expenses and subsidies. The administration is making a significant and successful effort to reduce the number of public companies and has privatised several shareholdings. Due to the large size of the city's budget, Fitch does not consider risk from the sector to be significant.

Moscow benefits from its status as the Russian capital and the country's economic and financial centre. It has a strong, service-oriented economy and contributed about 18% of Russia's GDP in 2011. Per capita gross city product was almost four times the national median in 2011, making the city one of the wealthiest regions in the country.

The ratings are constrained by the Russian Federation's ratings. Moscow could be positively affected by a sovereign upgrade accompanied by continued sound budgetary performance, low debt and strong debt coverage (direct risk/current revenue) well below the debt maturity profile.

Unless the sovereign is downgraded, it is unlikely that Moscow would be downgraded. A downgrade could occur, however, if unexpected additional large infrastructure needs and a fall in tax receipts caused a significant deterioration in Moscow's debt position and budgetary performance, Fitch emphasizes.

"AK&M", 23.12.2013 17:24


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