The credit rating of the Orenburg Region (hereinafter, the Region) is based on the budget’s moderate operating efficiency, moderately low debt load, and smooth debt repayment schedule. The rating is limited by the moderate economic development indicators compared to the national averages, as well as the dependence of economic and fiscal indicators on the dominant industry in the Region, and the growth in public debt.

The Orenburg Region is located in the Volga Federal District at the crossroads of two continents, Europe and Asia. The Region borders five other Russian regions and Kazakhstan. 1.3% of Russia’s population lives in the Region, and it accounts for 1.2% of Russia’s total gross regional product (GRP). The Region produces around 3% of Russia’s crude oil and gas annually.

Key rating assessment factors

Moderately low debt load and minimal refinancing risk. At the start of 2021, the Region’s debt to current revenues ratio was 21.7%. According to the 2021 Budget Law,1 this ratio is to grow to 34%, following an increase in the public debt and an insignificant cut of current revenues. As of January 1, 2021, the Region’s debt amounted to RUB 21.4 bln, and included bonds (43%) and budget loans (57%). By May 1, 2021, the volume and structure of the debt did not change. Thanks to this, the Region’s interest expenses are not burdensome. In 2019–2020, one third of interest expenses was covered by the interest accrued on budget funds deposited with banks. The ratio of averaged2 interest expenses to total budget expenditures (excluding subventions) for 2017–2021 should equal to no more than 2%. The lion’s share of debt (70% of the total) is due after 2024. The Region will have to refinance no more than 8% of its debt annually in the period from 2021 to 2024.

Maintenance of accumulated liquidity this year. The moderately high assessment of the liquidity ratio stems from the Region’s funds held in treasury accounts and deposits (totaling RUB 9.4 bln as of May 1, 2021) alongside RUB 6 bln worth of undrawn credit lines from banks with terms exceeding one year.

In 2020, budget account balances as of the start of month were generally lower than monthly expenditures: on average, balances covered around 80% of forthcoming expenditures. As of May 1, 2021, account balances covered 99% of the Region’s average monthly expenditures in 2020, as well as 44% of the Region’s public debt as of this date. Moreover, the above balances are 5.3 times higher than the public debt due in 2021.

In order to cover any possible cash gaps, the Region has a standing loan agreement with the Federal Treasury Department, but it did not borrow any money under this agreement since the start of 2019. Instead, it deposited funds with banks starting from 2019.

Moderate budget profile. In 2020, the Region's tax and non-tax revenues (TNTR) decreased by 12%, which, along with a significant increase in expenditures (by 15%), led to a budget deficit of 3.9% of TNTR, despite a significant (1.8 times) increase in gratuitous budget transfers. The deficit was covered mainly by account balances. Declining production volumes in the extraction industry had a noticeable effect on corporate income tax revenues: in 2020, they decreased by 34%. At the same time, the Region's budget was supported by personal income tax revenues and revenues from taxes on goods and services, which grew by 6% and 20%, respectively.


1 Orenburg Region Law dated December 18, 2020 No. 2558/716-VI-OZ "On the Region's budget for 2021 and the planned period of 2022–2023."
2 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.

According to the budget law, in 2021, TNTR will grow by 5% compared to 2020, but they will remain 8% below the 2019 level. The positive dynamics of TNTR in 2021 will be mainly driven by revenues from taxes on goods and services and personal income tax, which are expected to grow by 49% and 4%, respectively. The corporate income tax will continue to have a restraining effect on TNTR: the revenues are expected to decrease by 7% compared to 2020 (by 39% compared to 2019). However, corporate income tax revenue rose by 12% y-o-y in the four months of 2021.

A significant decrease in gratuitous transfers (by 31%) will have a negative impact on the dynamics of total revenues, which will decrease by 10%. At the same time, total expenditures will decrease by only 3%, which should lead to a budget deficit at 15% of TNTR. The Region plans to cover the budget deficit with borrowings.

The average ratio of the balance of current operations to operating income is consistently positive; it amounted to 10% for 2017–2020. ACRA expects the Region’s operating efficiency to fall to 8% in 2021, while the ratio of the average modified budget deficit to operating income should be negative (-1%). This indicates the sufficiency of the Region’s current revenues to finance its current expenditures and a possible need for borrowings to cover capital expenditures.

In 2021, the averaged ratio of TNTR to budget revenues (excluding subventions) should slightly grow and amount to 75%.

The flexibility of budget expenditures is moderately high: the averaged ratio of capital expenditures to total expenditures (excluding subventions) for 2017–2021 should be 17%.

Moderately developed economy focused on hydrocarbon production. The backbone of the Region’s economy is the extraction of hydrocarbons and related sectors. According to ACRA’s estimations, the extraction, processing and sale of hydrocarbons accounted for about 40% of the Region’s tax revenues from 2016 to 2020. According to the Region, tax revenues from the ten largest taxpayers accounted for 33.6% of the Region’s consolidated budget in 2020. Five of the taxpayers are part of the oil and gas sector; they provided 25.3% of tax revenues.

The Region’s GRP structure is similar to that of its tax revenues — the largest share of GRP is provided by the mineral extraction sector (41% in 2019). The Region’s averaged per capita GRP has been consistently around 86% of the national average.

The ratio of averaged wage to regional subsistence minimum in 2017–2020 was 3.3, while the local unemployment exceeded the national average in 2020.

Key assumptions

  • TNTR to grow by at least 5% in 2021 compared to 2020;
  • Budget expenditures to decline by at least 3% compared to 2020;
  • Debt load to grow up to 35% of the current revenues.

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:

  • Increased diversification of the economy;
  • Maintaining the growth rate of wages outrunning that of the regional subsistence minimum;
  • The 2021 budget deficit lower than planned.

A negative rating action may be prompted by:

  • GRP growth rate falling behind the national average;
  • Substantial decline in the budget liquidity accompanied by a significant increase in the public debt in accordance with the Budget Law for this year.

Issue ratings

Orenburg Region Government Bond, 35002 (ISIN RU000A0JUPE3); maturity date: June 14, 2021, issue volume: RUB 6 bln — A+(RU).

Orenburg Region Government Bond, 35003 (ISIN RU000A0JVM81); maturity date: July 3, 2025, issue volume: RUB 5 bln — A+(RU).

Orenburg Region Government Bond, 35004 (ISIN RU000A0ZYKH5); maturity date: December 2, 2027, issue volume: RUB 4 bln — A+(RU).

Rationale. In ACRA’s opinion, the bonds issued by the Orenburg Region are senior unsecured debt instruments, and their credit rating is equal to that of the Orenburg Region.

Regulatory disclosure

The credit ratings of the Orenburg Region and the bonds of the Orenburg Region (RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) have 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. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.

The credit rating of the Orenburg Region and the credit ratings of the government bonds (RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) of the Orenburg Region were published by ACRA for the first time on January 31, 2018. The credit rating of the Orenburg Region and its outlook, as well as the credit ratings of the government bonds (RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) of the Orenburg 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 the data provided by the Orenburg 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 ratings are solicited, and the Government of the Orenburg Region participated in their assignment.

In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.

ACRA provided no additional services to the Government of the Orenburg Region. No conflicts of interest were discovered in the course of credit rating process.

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Analysts

Evgenia Trautman
Senior Analyst, Sovereign and Regional Ratings Group
+7 (495) 139 04 80, ext. 104
Dmitry Kulikov
Director, Sovereign and Regional Ratings Group
+7 (495) 139 04 80, ext. 122
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