The upgrade of the credit rating of the Sverdlovsk Region (hereinafter, the Region) stems from the growth of the Region’s budget profile indicators amid an intensive development of certain sectors of the regional economy. ACRA also notes a moderately low level of the budget’s debt load and insignificant debt refinancing risks, as well as a partial dependence of the economy on the local metals industry.
The Sverdlovsk Region is part of the Ural Federal District and borders seven other regions of the Russian Federation. The Region’s population is about 4.23 mln (3% of Russia’s population). According to the Region’s estimates, its gross regional product (GRP) will be close to RUB 4.5 tln in 2024 (the Region’s GRP is consistently around 3% of the total GRP generated by Russia’s regions).
KEY ASSESSMENT FACTORS
High budget self-sufficiency and flexibility of budget expenditures. After 2020, when the share of tax and non-tax revenues (TNTR) in the total revenues of the Region (excluding subventions) has significantly decreased to 80% against the background of the pandemic, the indicator has been consistently growing. Its averaged1 value for 2021–2025 is projected to be 91%, which corresponds to the highest score as per ACRA” methodology. This growth was driven, among other things, by an increase in the volume of TNTR. ACRA expects that the ratio of TNTR to budget revenues will not decrease significantly.
This year’s budget deficit is expected to be rather high, and it will be financed mainly using the accumulated funds. At the same time, for ten months of this year, the budget was executed with a significant interim surplus.
The averaged ratio of the balance of current operations to current revenues of the Region for 2021–2025 is expected at 15%. The forecasted current account balance is 5% of the Region’s current revenues in 2024, which is much lower than last year’s indicator; the reduction is caused by a planned increase in current expenses amid a potential decrease in current revenues. Nevertheless, positive operational efficiency indicates that current revenues are sufficient to cover all current and part of the Region’s capital expenditures, while the indicator’s forecasted value for 2025 and 2026 shows a growth on the back of a gradual increase in the current account balance.
The averaged share of capital expenditures in the Region’s total expenditures for 2021–2025 will amount to around 21%, which corresponds to the highest level of flexibility of budget expenditures. Capital expenditures are almost three-quarters funded by the Region independently.
In the Agency’s opinion, the ratio of the modified budget deficit to current revenues averaged over the abovementioned period may be negative. Regardless significant amounts held in budget accounts, this indicator was not adjusted as these amounts are expected to be used to cover budget deficits.
The volume of tax preferences in 2022–2023 exceeded 5% of TNTR, the main share being stimulus (investment) tax benefits. No violations of budget legislation were identified. The Region is replacing subsidies from the regional budget to equalize the budgetary provision of municipal districts (urban districts) with additional standards for deductions from personal income tax. The Region’s budget is reviewed on average once or twice a year; significant deviations from the plan (if any) are explained mainly by market conditions. The quality assessment of the budget profile is moderately strong.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
Moderately low debt load and insignificant short-term debt refinancing risks. As of January 1, 2024, the Region’s debt load amounted to 26% of its current revenues. As of October 17, 2024, the size and structure of the debt was practically unchanged.
ACRA expects that the Region’s debt load may grow slightly on the back of current revenues falling to 30%. In the forecast period of 2025–2027, the debt load is expected to stay at around 30%.
The Region’s debt repayment schedule is balanced in terms of the debt structure of which two thirds are budget loans falling due until 2039, and a third is long-term bonds falling due until 2027. As of January 1, 2024, the Region had to repay or refinance 16% of its debt by the end of the year and 20% of the debt in 2025. All liabilities to be repaid in 2024 and 2025 were covered by funds held in the Region’s accounts. As of October 17, 2024, 13% of the debt (mainly bonds) was to be repaid by the end of 2024 and slightly more than 20% — in 2025.
Interest expenses are not burdensome for the Region since interest expenses averaged for 2021–2025 will amount to 1% of total budget expenditures (excluding subventions).
The ratio of debt to GRP annually does not exceed 4%, which corresponds to a low total debt load as per ACRA’s methodology.
The debt of public sector companies as of the start of the year did not exceed RUB 10.5 bln (the main debtors were Titanovaya Dolina Special Economic Zone JSC, Food Market Development Agency JSC, and housing and utilities companies); overdue payables of public sector companies amounted to RUB 0.5 bln. There is no information about significant volumes of commercial liabilities of the Region that could influence its creditworthiness. The Region has entered into 10 concession agreements that are to be implemented by 2032, nine municipal concessions are provided with subsidies from the regional budget. The Region’s current account balance is consistently positive, and the debt structure is diversified. The average debt repayment period consistently exceeds four years. The Region has a good credit history.
The debt load of municipal entities is low and continues to decline. The ratio of the total debt of these entities to total TNTR declined from 13% in 2016 to 3% in 2023. The absolute value of debt declined in the indicated period from RUB 6.5 bln to RUB 2.6 bln. The largest borrowers are the Kamensk-Uralsky urban district, Nizhny Tagil, and the Serov urban district. The Region’s debt profile is considered strong based on the sum of all the above factors.
High volume of available liquidity. In 2023, the Region’s account balances (including funds of autonomous and budgetary institutions, as well as funds of organizations that are not part of the budget process) on average exceeded monthly budget expenditures by two times. At the same time, the monthly volume of the regional budget’s internal funds amounts to a much smaller value. The Region deposits its accumulated liquidity with banks, which allows it to receive interest income.
In view of the expected deficit in 2024, the ratio of the Region’s budget liquidity will be 120%.
As of January 1, 2024 and October 1, 2024, the Region did not have any overdue payables. In 2023, the Region obtained a loan from the Federal Treasury Department (FTD) for advance financing of expenditures; loans were not obtained to finance cash gaps. The Region has not entered into any agreements with the FTD in 2024. Debt refinancing risks are insignificant.
Failed purchases of credit lines in 2022 were due to the lack of applications from credit institutions. The Region has no open but unused bank limits. The liquidity profile is assessed as strong.
Diversified economy with moderate concentration on the metals industry. The Region’s GRP per capita averaged for 2019–2022 amounted to 86% of the national average. The ratio of wage to regional subsistence minimum averaged for 2020–2023 was 4. At the end of 2023, the unemployment rate averaged over the last four years calculated according to the ILO’s methodology amounted to 2.4%.
ACRA notes the moderate concentration of the economy on the metals industry which produces about a tenth of Russia’s steel and finished rolled products, up to a quarter of steel pipes, a fifth of iron ore, and a third of copper cathode. About a quarter of the world’s titanium is produced in the Region. According to ACRA’s estimates, the contribution of the metal production industry to the Region’s tax revenues averaged for 2020–2023 exceeded 20%. In 2023, six of the ten largest organizations in the Region (in terms of revenues) were related to the metals industry. Mechanical engineering and chemicals are also the key industries for the Region.
KEY ASSUMPTIONS
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Maintaining a high share of TNTR in the budget’s revenue structure.
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Maintaining a low or moderately low debt load.
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:
- The Region’s debt load consistently low, along with a low budget liquidity and low refinancing risks.
A negative rating action may be prompted by:
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Considerable growth of the budget’s need for debt financing;
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Significant growth of the short-term portion of debt.
issue ratings
Sverdlovsk Region, 35003 (ISIN RU000A0JWZ77), maturity date: November 15, 2024, issue volume: RUB 5 bln — АA(RU).
Sverdlovsk Region, 35004 (ISIN RU000A0ZYDU3), maturity date: October 22, 2025, issue volume: RUB 10 bln — АA(RU).
Sverdlovsk Region, 35005 (ISIN RU000A0ZZQH9), maturity date: October 23, 2026, issue volume: RUB 5 bln — АA(RU).
Sverdlovsk Region, 35006 (ISIN RU000A1016N9), maturity date: December 15, 2026, issue volume: RUB 5 bln — АA(RU).
Sverdlovsk Region, 34007 (ISIN RU000A101UG7), maturity date: June 28, 2025, issue volume: RUB 10 bln — АA(RU).
Sverdlovsk Region, 35008 (ISIN RU000A101Z17), maturity date: July 29, 2027, issue volume: RUB 12 bln — АA(RU).
Sverdlovsk Region, 35009 (ISIN RU000A102CT6), maturity date: November 17, 2027, volume: RUB 8 bln — АA(RU).
Sverdlovsk Region, 34010 (ISIN RU000A102DQ0), maturity date: November 23, 2024, volume: RUB 10 bln — АA(RU).
Rationale. In ACRA’s opinion, the bonds of the Sverdlovsk Region are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Sverdlovsk Region.
REGULATORY DISCLOSURE
The credit ratings have been assigned to the Sverdlovsk Region and the bond issues (ISIN RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7, RU000A101Z17, RU000A102CT6, RU000A102DQ0) of the Sverdlovsk Region 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 Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of the Sverdlovsk Region and the government securities (ISIN RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7, RU000A101Z17, RU000A102CT6, RU000A102DQ0) of the Sverdlovsk Region were published by ACRA for the first time on September 8, 2017, October 24, 2017, October 24, 2017, October 18, 2018, December 11, 2019, June 29, 2020, July 24, 2020, November 18, 2020, and November 20, 2020, respectively. The credit rating of the Sverdlovsk Region and its outlook, as well as the credit ratings of the government securities of the Sverdlovsk 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 Sverdlovsk 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 Sverdlovsk Region participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to the Government of the Sverdlovsk Region. No conflicts of interest were discovered in the course of credit rating assignment.
