The credit rating of the Krasnodar Krai (hereinafter, the Region) is based on the Region’s moderately low debt load, low refinancing risk in the medium term, stable budget indicators, moderately high diversification of tax revenues, and high internal budget liquidity. The rating is limited by medium socioeconomic indicators.

The Region is part of the Southern Federal District. The Region accounts for nearly 4% of Russia’s population and around 3% of the aggregate GRP of Russian regions. The Region is a consistent leader in terms of agricultural production in Russia. It is also a large health resort destination and an important transportation hub.

Key rating assessment factors

Moderately low debt load with minimal refinancing risk. According to ACRA, the ratio of the Region’s debt to current income could increase from 35% for 2019 to 45% for 2021, indicating a moderately low debt load. According to ACRA, market debt, made up of bonds and bank loans with a comfortable repayment schedule, equaled 39% of the Region’s total debt as of November 1, 2020. Sixty one percent of the debt was budget loans, most of which are due after 2024. The current debt repayment schedule (as of November 1, 2020) indicates minimal refinancing risk. In 2020−2023, the annual level of repayment (refinancing) does not exceed 10% of the Region’s total debt. Debt servicing costs are not burdensome for the regional budget (the averaged level1 of interest expenses in 2017−2021 should be below 2% of the total budget expenses, excluding subventions).


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

High budget liquidity. The Region meets its obligations in a timely manner and places temporarily available funds in bank deposits. As of November 1, 2020, regional budget funds exceeded debt obligations, which are due to be repaid by the end of 2023.

Stable budget profile. The average share of tax and non-tax revenues (TNTR) in total revenues (excluding subventions) in 2017−2021 should be around 83%. The averaged ratio of balance of current operations to current income (according to ACRA’s methodology) for this period should be 12%, while the ratio of averaged modified budget deficit to current income should be -1%. These indicators show that current income is enough to cover current expenses and that there is almost no need to borrow funds to finance capital expenses. Averaged capital expenses in 2017−2021 should amount to 14% of total budget expenses (excluding subventions). The Region finances capital expenses primarily with internal funds, which allows the Region to consider these expenses as a possible reserve for reducing expenses if regional budget revenues decrease.

Diversified economy with economic indicators close to the national average. The major share of the Region’s GRP is generated by sectors like transport and communications (large pipelines run across the Region), trade and repairs, and agriculture (the Region is a leader in Russia in terms of agricultural production). Additionally, manufacturing (including the food industry, whose growth prospects are determined by agricultural processing, and oil refining) and services also contribute greatly to the Region’s GRP. Tax revenues from this sector are uneven, which is due to the specifics of tax legislation and the presence of consolidated groups of taxpayers in the Region. The major share of tax revenues in the regional budget is generated by the wholesale and transport (including pipeline transport) sectors. According to ACRA, in 2016−2019, these sectors generated about 13% and 18% of the regional budget’s tax revenues, respectively. GRP per capita remains below the national average (72% in 2018). Unemployment in the Region fell from 6.0% in 2015 to 4.8% in 2019. In 2019, the average monthly salary in the Region exceeded the regional subsistence minimum by three times.

Key assumptions

  • Reduction in TNTR in 2020 no higher than 17% compared to 2019 and an increase by 5% in 2021;
  • Reduction in expenses if actual revenues are lower than planned revenues;
  • Maintaining high internal liquidity.

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:

  • Decrease in the debt to current income ratio below 30%;
  • Increased flexibility of budget expenses;
  • Reduction in the gap between the Region’s economic indicators and the national average.

A negative rating action may be prompted by:

  • Decrease in the budget’s self-sufficiency;
  • Increase in the debt to current income ratio above 50%;
  • Decline in capital expenses below 10%;
  • Significant decrease in budget liquidity.

Issue ratings

Krasnodar Krai, 35001 (ISIN RU000A0JXYS9), maturity date: August 9, 2024, issue volume: RUB 10 bln — АA-(RU).

Krasnodar Krai, 35002 (ISIN RU000A0ZZ8X4), maturity date: June 3, 2025, issue volume: RUB 10 bln — АA-(RU).

Krasnodar Krai, 35003 (ISIN RU000A1011B5), maturity date: November 12, 2026, issue volume: 10 bln — АA-(RU).

Rationale. In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Krasnodar Krai.

Regulatory disclosure

The credit ratings were assigned to the Krasnodar Krai and bonds issued by the Krasnodar Krai (RU000A0JXYS9, RU000A0ZZ8X4, RU000A1011B5) under the national scale for the Russian Federation based on the Methodology for Credit Rating 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 process of the credit rating assignment to the above issues, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

The credit rating of the Krasnodar Krai and credit rating of the government securities of the Krasnodar Krai (RU000A0JXYS9) were published by ACRA for the first time on October 18, 2017. The credit ratings of the bond issues (RU000A0ZZ8X4, RU000A1011B5) were first published by ACRA on October 17, 2018, and November 12, 2019, accordingly.

The credit rating of the Krasnodar Krai and its outlook as well as the credit ratings of the government securities issues of the Krasnodar Krai (RU000A0JXYS9, RU000A0ZZ8X4, RU000A1011B5) 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 Krasnodar Krai, 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 Krasnodar Krai Administration participated in their assignment.

No material discrepancies between the provided data and data officially disclosed by the Krasnodar Krai in its financial reports have been discovered.

ACRA provided no additional services to the Krasnodar Krai Administration. No conflicts of interest were discovered in the course of credit rating assignment.

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Analysts

Maxim Pershin
Associate Director, Sovereign and Regional Ratings Group
+7 (495) 139 04 85
Ilya Tsypkin
Expert, Sovereign and Regional Ratings Group
+7 (495) 139 03 45
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