The credit rating of the Chelyabinsk Region (hereinafter, the Region) is based on the Region’s low debt load, smooth debt repayment schedule, and significant volume of funds accumulated in the Region's accounts. The rating is supported by a significant amount of capital expenditures. The rating is constrained by the Region’s economic development indicators, some of which are below national averages, as well as the regional budget’s dependence on revenues generated by the dominant industry.
The Chelyabinsk Region is located in the Ural Federal District. Three and a half million people live in the Region, which is just over 2% of the Russian population. The Region’s GRP amounted to RUB 1.615 tln in 2020 or about 1.7% of the total GRP of Russia’s regions. According to the Region's estimates, its GRP increased to RUB 1,911 bln in 2021.
KEY ASSESSMENT FACTORS
Balanced budget indicators and a significant need to use accumulated funds. The averaged1 ratio of current account balance to current revenues of the Region in 2018–2022 will amount to 24%. The current account balance will remain positive in 2022, which indicates that current revenues are sufficient to finance current expenditures.
The averaged share of capital expenditures in total expenditures for 2018–2022 will amount to around 35%, which corresponds to the highest level of flexibility of budget expenditures according to ACRA’s methodology. On average, the Region finances about three fourths of capital expenditures on its own.
The averaged share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will amount to 78% in 2022.
The ratio of the modified budget deficit (MBD) to current revenues for 2018–2022 will amount to -1%, and the MBD is expected to be much lower than zero in 2022, which is explained by the need to cover the forecasted budget deficit for the year. To finance its capital expenditures, the Region will have to use accumulated funds.
In 2021, the Region’s revenues exceeded revenues recorded in 2020 by more than 40%, which is explained by extra revenues coming from the metals industry. The budget’s TNTR in this period increased by 61% compared to 2020: corporate income tax revenues grew by more than 2.5 times, gross income tax revenues increased by 44%, and personal income tax revenues increased by 15%. The volume of federal budget transfers remained almost unchanged against 2020, having decreased by slightly less than 1.5%. Budget expenditures grew by 2% in 2021. Budget surplus amounted to RUB 42.4 bln or 21% of TNTR (a year earlier, the deficit was 23% of TNTR).
According to the updated plan of the Region, in 2022, a significant reduction (by more than 19%) of total budget revenues is expected compared to 2021 due to a 14% decrease in TNTR. The latter will be caused primarily by a decrease in corporate income tax revenues by more than a quarter compared to last year. A possible reduction in transfers by almost 35% is also projected. The expenditure side of the Region's budget is expected to increase by 11%. In this case, the budget deficit will be 22% of TNTR and will be fully covered by accumulated funds.
Low debt load and smooth debt repayment schedule. As of January 1, 2022, the Region’s debt stood at RUB 24.3 bln, having declined by RUB 1.4 bln. The absolute debt has fallen last year since some of the Region’s state guarantees were written-off and the planned volume of budget loans was repaid. As of January 1, 2022, the bulk of debt (55%) was made up of budget loans, about 29% of the debt portfolio was bonds, and the remainder included the Region’s state guarantees.
From January 1 to March 1, 2022, the debt declined slightly (by RUB 146 mln, the Region's state guarantees), and the repayment schedule remained almost unchanged. The current debt repayment schedule is smooth, without any significant peak repayment periods. Over the next four years, the Region will have to repay or refinance no more than 15% of its debt annually. In 2022, the Region should repay RUB 0.7 bln (around 3% of the total debt).
In 2021, the Region applied for the federal program for infrastructure budget loans, under which the Region will receive RUB 6.6 bln this year. These funds will allow the Region to finance a portion of its capital expenditures, which, in ACRA's opinion, may help the Region lessen the need to use accumulated liquidity.
As of the end of 2021, the ratio of the Region’s debt to its current revenues was 10%. Given the need to use accumulated funds to cover the planned budget deficit, ACRA expects this indicator to remain almost unchanged in 2022, which corresponds to a low debt load according to the Agency’s methodology.
The ratio of the Region's debt to GRP will slightly exceed 1%, which indicates a low total debt load.
Interest expenditures are not a burden on the Region’s budget — interest expenditures averaged for 2018–2022 will amount to 0.1% of total budget expenditures (excluding subventions).
Account balances will allow the Region to cover future deficits. Since the beginning of 2021, the Region’s account balances were over two times higher, on average, than monthly budget expenditures. The Region placed most of accumulated liquidity in bank deposits. In ACRA's opinion, the volume of accumulated liquidity is high enough to cover budget deficit expected in 2022 and to repay the debt as planned for this period.
In 2022, the Region's budget liquidity ratio will exceed 140%, which is an indication of a high level of available liquidity as per the Agency's methodology.
Moderately diversified economy with high concentration on the metals industry. According to ACRA’s calculations, up to 40% of the Region’s tax revenues may come from the metalworking sector (the share averaged for 2018–2021). According to the Region, in 2021, the top ten companies generated about 40% of tax revenues. The largest companies in the Region are MMK PJSC, ChelPipe PJSC, and ChMK PJSC.
In 2017–2020, the Region’s averaged GRP per capita amounted to 72% of the national average. The averaged unemployment rate for the same period amounted to 5.5%. In 2021, the average monthly salary in the Region was more than three times higher than the regional subsistence minimum.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
KEY ASSUMPTIONS
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Budget execution in line with the Region’s projections.
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Use of free liquidity accumulated in the Region’s accounts to cover expected budget deficits.
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Receipt of infrastructure budget loans to finance a portion of capital expenditures in the forecast period.
potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Higher diversification of the economy.
A negative rating action may be prompted by:
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Operating balance declining below 20% of current revenues;
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Debt to current revenues ratio exceeding 30%;
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Significant decline in available liquidity coupled with increased expenditures and waning revenues.
ISSUE RATINGS
Chelyabinsk Region, 35001 (ISIN RU000A102FV5), maturity date: November 30, 2027, issue volume: RUB 7 bln — AA(RU).
Chelyabinsk Region, 35002 (ISIN RU000A102L61), maturity date: December 17, 2027, issue volume: RUB 8 bln — AA(RU).
Chelyabinsk Region, 35003 (ISIN RU000A102L79), maturity date: December 17, 2027, issue volume: RUB 8 bln — AA(RU).
Rationale. In the Agency’s opinion, the bonds of the Chelyabinsk Region are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Chelyabinsk Region.
REGULATORY DISCLOSURE
The credit ratings of the Chelyabinsk Region and the bond issues of the Chelyabinsk Region (ISIN RU000A102FV5, RU000A102L61, RU000A102L79) have been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Regions and Municipal Entities 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 on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of the Chelyabinsk Region and the bond issues of the Chelyabinsk Region (ISIN RU000A102FV5, RU000A102L61, RU000A102L79) were published by ACRA for the first time on December 26, 2017, December 1, 2021, December 21, 2021, and December 21, 2021, respectively. The credit rating and its outlook, as well as the credit ratings of the government securities of the Chelyabinsk Region, are expected to be revised within 182 days following the publication date of this press release as per the Calendar of sovereign credit rating revisions and publications.
The credit ratings were assigned based on data provided by the Chelyabinsk Region, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), and ACRA’s own databases. The credit ratings are solicited, and the Government of the Chelyabinsk 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 additional services to the Government of the Chelyabinsk Region. No conflicts of interest were identified in the course of credit rating assignment.
