The credit rating assigned to the Kaliningrad Region (hereinafter — the Region) is determined by the influence of one procyclical industry on the regional economy, the tightness of the local market, and a heavy reliance of budget indicators on federal transfers.
The Kaliningrad Region belongs to Russia’s North-Western Federal District and has no land borders with other RF regions. Its population makes up less than 1% of the country’s total. In 2015, its gross regional product (GRP) amounted to RUB 304 bln (roughly 0.5% of Russia’s aggregate GRP).
Key rating assessment factors
Federal-market-driven economy. Industrial manufacturing forms the foundation of the Region’s federal-market-driven economy (23% of GRP). The industry comprises vehicle manufacturing and food processing (50% and 33%, and 25% and 35% in 2014 and 2015, respectively). Although the regional budget does not rely on one large taxpayer, significant tax risks are brought by the tightness of the local market, the logistical remoteness of local manufacturers from their primary sales markets, and the procyclical nature of vehicle manufacturing.
Federal-transfer-reliant budgeting. On average, own revenues amount to 62% (2013–2015), which signals of a moderate reliance of the regional budget on government financing. At the same time, ACRA notes that the Region’s economy and taxation base are highly dependent on federal support measures, namely from earmarked federal funding provided since 2016 to reimburse the elimination of its SEZ resident customs privileges.
Capital expenditures are financed from the federal budget. The building of new infrastructure in 2014–2016 was made possible by earmarked programs in the highway construction and housing & utilities sectors. In 2017–2018, the lion share of capital expenditures will be channeled into the new 2018 FIFA World Cup infrastructure, while funding of the housing & utilities sector will be limited to the level required to maintain the current 70% wear and tear level of the existing infrastructure.
Refinancing risk alongside a significant share of long-term loans. Despite the regional debt structure having a large share of long-term federal loans with annual amortization after 2024 (31%), 25% of loan portfolio (bank loans and publicly funded loans) used to cover year-end expenditure obligations, is refinanced once a year (19–27% of expenditures in December 2013–2015). Additional pressure on the budget is exerted by the debt of public sector enterprises suffering from an unstable financial situation, on the one hand, and the debt of municipalities, on the other. However, ACRA is positive on changes to the debt strategy of the Region that provide for longer borrowing via bond issuance.
- Maintaining federal transfer volumes compensating producers’ customs privileges;
- Prolongation of the state program for development of the Kaliningrad Region until 2025;
- Possibility of debt redemption (support) of municipalities and public sector companies from the regional budget;
- Longer debt portfolio strategy implementation.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the
12 to 18-month horizon.
A positive rating action may be prompted by:
- Diversification of the industrial output structure in the Region and reduction of its dependence on procyclical production;
- Engineering infrastructure development aimed at replacement of obsolete fixed assets;
- A change in debt structure in terms of building up proportion of longer debt;
- An improvement of municipalities’ and public sector companies’ financial situation;
- An increase in the budget liquidity level.
A negative rating action may be prompted by:
- A significant curtailing of federal transfers that compensate for customs privileges granted to local producers;
- A dramatic decline in the proportion of federal transfers spent on capital expenditures;
- A debt portfolio growth while maintaining the current redemption schedule.
On the date of issuer credit rating assignment no outstanding issues were rated.
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
A credit rating has been assigned to the Kaliningrad Region for the first time. The credit rating and its outlook are expected to be revised within 182 days following the rating action (December 20, 2016).
The assigned credit rating is based on the data provided by the Kaliningrad Region, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), as well as ACRA’s own databases. The credit rating is solicited, and the Kaliningrad Region participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by the Kaliningrad Region in its financial report have been discovered.
ACRA provided no additional services to the Kaliningrad Region. No conflicts of interest were discovered in the course of credit rating assignment.