Moody's Interfax Rating Agency has today affirmed Vologda Oblast national scale issuer rating of Aa3.ru. Please see ratings tab on the issuer/entity page on moodys.com for information on Global Scale Rating. RATINGS RATIONALE Moody's Interfax rating takes into consideration Vologda's growing financing deficit, which is likely to widen to between -12% and -13% of total revenue in 2013 from -6.8% posted in 2012. The deterioration reflects an acute decline in corporate income tax (CIT) proceeds, particularly from its largest taxpayers in the steel and chemical sectors. Overall, CIT proceeds are expected to decrease by 47% in 2013 relative to 2012, which is likely to be the worst result posted by Moody's -rated Russian regions in 2013. In addition, inflationary adjustments and a substantial increase in public salaries following President Putin's decrees have also put adverse pressure on the oblast's budget expenditure. Moody's Interfax also considers Vologda's increasing debt burden, with its net direct and indirect debt (NDID) ratio anticipated to reach 86% of operating revenue at year-end 2013, from 74.7% posted in 2012. Moody's notes that this debt ratio will be among the highest levels recorded by Moody's -rated Russian sub-sovereigns. The debt pressures are exacerbated by its short-term debt-redemption profile, with around one-third of its direct debt due in 2014. Although 16% of forthcoming debt repayments are represented by federal low-interest soft loans that are likely to be refinanced or rolled over the federal government, this will be insufficient to seriously mitigate short-term refinancing risks. The aforementioned adverse pressures, however, have not resulted in an immediate rating downgrade due to the region's substantial budget consolidation efforts, which are expected to improve its financial profile in 2014-16. Vologda's budget plan envisages a decline in financing deficits to around -5% of total revenue in 2014-16 on average. The regional government also aims to stabilise its NDID ratio at around 84% over next three years, while its debt-maturity profile will be enhanced towards three-to-five-year bank loans and rouble bonds. Moody's notes that some recovery in CIT proceeds, which is currently not foreseen by Vologda's three-year budget, will likely partially offset short-term debt repayments. WHAT COULD CHANGE THE RATING UP/DOWN Considering the negative outlook attached to the region's Ba3 global scale issuer rating assigned by Moody's Investors Service , any rating upgrade is unlikely. In turn, persistently high financing deficits and any further debt growth, as well as a significant deterioration in market conditions for debt refinancing could result in a rating downgrade. The Vologda Oblast is situated in the North European part of Russia and has a population of 1.2 million. The oblast's gross regional product (GRP) per capita on a purchasing power parity (PPP) basis is around 80% of the Russian average. The steel industry (mainly represented by OAO Severstal) dominates the local industrial output, which accounts for 45% of Vologda's GRP. Moreover, chemicals, food processing and the timber industry play an important role in the oblast's economy. Around 90% of its industrial production is concentrated in the cities of Cherepovets and Vologda.
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