The credit rating of the Kemerovo Region – Kuzbass (hereinafter, the Region) is based on the Region’s large amount of liquidity, which, according to ACRA, will significantly finance the high deficit of the current year without changing the Region’s credit quality. Moderately flexible budget expenses and a low debt load also support the rating. The rating is limited by moderate economic development compared to the national average as well as economic and budgetary dependence on the dominant industry in the Region.

The Region is part of the Siberian Federal District and is home to 2.65 million people (1.8% of Russia’s total population). According to the Region, its GRP amounted to RUB 1.253 tln in 2019, nearly 1.2% Russia’s total GRP annually.

Key rating assessment factors

Low debt load with minimal refinancing risk. According to ACRA, debt to current revenues will increase from 23% at the end of 2019 to 28% at the end of this year and 38% at the end of 2021. In absolute terms, the debt could amount to RUB 38 bln at the end of 2020. The current version of the budget law assumes a more aggressive increase in debt to RUB 42 bln, but ACRA believes that planned expenses will not be fully implemented, which will reduce the actual deficit. As of January 1, 2020, the Region’s debt amounted to RUB 33.2 bln and consisted of bonds (27%), budget loans (49%), guarantees (3%), and other debt obligations (21%). Interest expenses are not burdensome for the Region with this debt structure. The average1 level of interest expenses in 2017–2021 should amount to just over 1% of total budget expenses excluding subventions. The majority of the Region’s debt (55%) is due in the beginning of 2023. In 2020, the Region needs to repay (refinance) 6% of its debt, mostly budget loans that regions are expected to be exempt from paying this year. That figure stands at 18% for 2021 and 21% for 2022.


1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.

Sufficient budget liquidity will help finance this year’s deficit. The Region’s strong liquidity is based on a large amount of funds in treasury accounts (RUB 22 bln as of January 1, 2020). Over the past 18 months, account balances at the end of the month have regularly exceeded monthly expenses by more than two times. The Region has placed funds in deposits since 2017. As of July 1, 2020, accumulated liquidity covers almost two-thirds of the Region’s total debt. Accumulated funds will be used to finance the current and future deficits.

Moderate budget profile with moderate flexibility in budget expenses. This year, regional budget revenues will be negatively affected by low prices for coal, the main raw material produced in the Region. The slowdown in business activity associated with the coronavirus pandemic will put additional pressure on budget revenues. As a result, ACRA expects that tax and non-tax revenues (TNTR) will decrease by 19% compared to 2019 (the current version of the budget law assumes a 10% reduction). Over the five months of this year, the Region’s TNTR decreased by 30% compared to the same period last year, including income tax receipts by 51%. The planned growth of transfers by 52% will ensure that the revenue part of the budget is close to the 2019 level. However, in the current conditions, implementing planned expenses is unlikely, even taking into account the significant amount of balances that the Region plans to fully spend on financing this year’s deficit. The capital expense program will probably not be fully implemented, and current expenses will also be partially reduced. ACRA expects a budget deficit this year of 11% of current revenues (15% of TNTR) with an increase to 16% (19% of TNTR) in 2021. The averaged ratio of balance of current operations to current revenues should remain at an acceptable level in 2017−2021 (7.65%), while the modified budget deficit should be -3.7%.

The averaged share of TNTR in budget revenues (excluding subventions) should equal 82% for 2017-2021, with the averaged share of capital expenses equaling approximately 15%.

The Region’s economy is highly concentrated on the mining sector. The Region’s economy relies primarily on coal mining and related industries. Traditionally, the Region’s largest taxpayers are enterprises of the coal and metallurgical industries. In 2019, seven of the ten largest taxpayers in the Region worked in these areas. The main contribution to tax revenues is made by the coal industry (according to ACRA, 39% in 2017 and 2018, and 32% in 2019). The Region’s average GRP per capita in 2015−2018 was 77% of the national average. The ratio of averaged wages to regional subsistence minimum in 2016-2019 exceeded 3.5.

Key assumptions

  • Maintaining conservative budget and debt policies;
  • TNTR decreasing by 19% in 2020 compared to 2019;
  • Budget expenses increasing by 5% in 2020 compared to 2019;
  • Using accumulated liquidity to finance the budget deficit. 

Potential outlook or rating change factors

The Stable outlook assumes that the credit rating will most likely remain unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Increased operational efficiency in the budget without the need for debt financing;
  • Increased flexibility in budget expenses.

A negative rating action may be prompted by:

  • Current budget deficit above 11% of current revenues (15% TNTR);
  • Financing current budget expenses with accumulated liquidity.

Issue ratings

Kemerovo Region, 35002 (ISIN RU000A0ZYB40), maturity date: September 26, 2024, issue volume: RUB 9 bln — A-(RU).

Rationale. In ACRA’s opinion, the bond listed above is a senior unsecured debt instrument, the credit rating of which corresponds to the credit rating of the Kemerovo Region − Kuzbass.

Regulatory disclosure

The credit ratings have been assigned to the Kemerovo Region – Kuzbass and the bond (RU000A0ZYB40) issued by the Kemerovo Region 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. In the course of assigning a credit rating to the bond issue above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

The credit rating of the Kemerovo Region – Kuzbass and the credit rating of the bond (RU000A0ZYB40) issued by the Kemerovo Region were first published by ACRA on August 29, 2017, and October 2, 2017, respectively.

The credit rating of the Kemerovo Region – Kuzbass and its outlook, as well as the credit rating of the bond (RU000A0ZYB40) issued by the Kemerovo Region are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned based on data provided by the Kemerovo Region – Kuzbass, 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 ratings are solicited, and the Kemerovo Region – Kuzbass Government participated in their assignment.

No material discrepancies between the provided data and data officially disclosed by the Kemerovo Region – Kuzbass in its financial reports have been discovered.

ACRA provided no additional services to the Kemerovo Region – Kuzbass Government. No conflicts of interest were discovered in the course of credit rating assignment.

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Analysts

Elena Anisimova
Senior Director — Head of Sovereign and Regional Ratings Group
+7 (495) 139 04 86
Evgenia Trautman
Senior Analyst, Sovereign and Regional Ratings Group
+7 (495) 139 04 80, ext. 104
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