Moody's Interfax places ratings of 7 Russian sub-sovereigns on review for downgrade

Moody's Interfax Rating Agency ("Moody's Interfax") has today placed on review for downgrade the national scale ratings of 6 Russian regions and cities and 1 government-related issuer (GRI). Concurrently, Moody's Interfax has affirmed the ratings of 11 Russian regional and local governments (RLGs).

These rating actions follow the potential weakening of Russia's credit profile as captured by Moody's placement of Russia's Ba1 government bond rating on review for downgrade on 4 March 2016. For additional information, please refer to the related announcement: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_344606

Specifically, Moody's Interfax has placed on review the ratings of the cities of Moscow and St. Petersburg, SUE Vodokanal of St. Petersburg, Autonomous-Okrug (region) of Khanty-Mansiysk, Moscow Oblast, Oblast of Omsk and Republic of Mordovia.

Concurrently, Moody's Interfax has affirmed the ratings of Oblast of Samara, Chuvashia Republic, Krasnoyarsk Krai, Krasnodar Krai, Republic of Komi, Oblast of Nizhniy Novgorod, City of Krasnodar, City of Omsk, City of Volgograd, Oblast of Belgorod and Oblast of Vologda. Moody's Interfax will withdraw the rating of Oblast of Vologda due to insufficient information.

The full list of affected issuers and credit ratings can be found at the end of this press release.

Please see ratings tab on the issuer/entity page on moodys.com for information on Global Scale Rating.

RATINGS RATIONALE

-- RATIONALE FOR RATING REVIEW OF 6 RLGs' AND 1 GRI's RATINGS

The rating review on the ratings of the City of Moscow and the City of St. Petersburg follows the potential weakening of Russia's credit profile. It reflects the strong linkages between the Russian government and these RLGs through institutional, financial and macroeconomic linkages as well as their lack of special status, which prevents them from being rated above the sovereign.

The review on the ratings of Autonomous-Okrug (region) of Khanty-Mansiysk and Oblast of Moscow reflects their susceptibility to an increase in systemic pressures and a certain probability that in response to the drop in oil prices the central government could adopt policy changes which would negatively affect these regions (e.g. a significant decline in transfers, change in the tax regime affecting their key tax payers, a change in its stance on government support).

The rating review on the ratings of Oblast of Omsk and Republic of Mordovia reflects their significant susceptibility to an increase in systemic pressures relative to their rating category. These regions have: 1) significant dependence on federal government financing (Republic of Mordovia) or 2) potential dependence on on-going and extraordinary support (Oblast of Omsk) incorporated in the ratings.

The review of the issuer ratings of SUE Vodokanal of St. Petersburg reflects its status as a GRI fully owned by the St. Petersburg government and its strong credit linkages with the City of St. Petersburg.

--RATIONALE FOR AFFIRMATION OF 8 REGIONS' AND 3 CITIES' RATINGS

The affirmation of the ratings of 11 RLGs (Oblast of Samara, Chuvashia Republic, Republic of Komi, Krasnodar Krai, Krasnoyarsk Krai, Oblast of Belgorod, Oblast of Nizhniy Novgorod, Oblast of Vologda, City of Krasnodar, City of Omsk and City of Volgograd) reflects their relative resilience to a modest increase in systemic pressure, which will enable them to preserve the credit standing adequate for their rating categories. Pressure from refinancing risks has partially abated as soft loans from the central government continue to ease the regions' refinancing needs. Debt affordability remains adequate and is supported by ongoing lending from state-owned banks.

At the same time, Moody's Interfax expects intensifying pressure on revenue growth for these entities, while growing expenses (albeit at a slower pace) will make it challenging to maintain balanced budgets, and will likely cause their debt burdens to increase. Financial markets which lack stability and higher borrowing costs expose regions to some refinancing and liquidity risks.

--RATIONALE FOR OBLAST OF VOLOGDA RATING WITHDRAWAL

Moody's Interfax will withdraw the rating on Oblast of Vologda because of inadequate information to monitor the rating, due to the issuer's decision to cease participation in the rating process. Please refer to the Moody's Investors Service Policy for Withdrawal of Credit Ratings available on its website, www.moodys.com.

The regional government has not communicated any additional information to Moody's Interfax since February 2015. At the same time, the publicly available information is not sufficient to analyse the refinancing risks and budgetary performance, and to make reliable assumptions about future performance.

FOCUS OF THE REVIEW FOR DOWNGRADE ON RATINGS OF 6 RLGs AND 1 GRI

The review will focus on the impact of growing systemic risks and the deteriorating operating environment on Russian regions, as reflected by the potential weakening of Russia's credit profile as captured by the placement on review for downgrade of the sovereign bond rating. The conclusion of the review would likely follow the conclusion of the review at the sovereign level.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Given the review for downgrade on the ratings of 6 RLGs and 1 GRI, an upgrade of their ratings is unlikely. If systemic pressures abate, the ratings are likely to be confirmed, provided the RLGs and the GRI continue to maintain performances adequate for their rating category.

A weakening in the sovereign's credit quality would exert a downward pressure on the ratings of the issuers which have their ratings under review, especially on the ratings of the City of Moscow, the City of St. Petersburg, Oblast of Omsk and Republic of Mordovia as well as for the GRI. Mounting pressure from systemic risks would also negatively affect the ratings of another 2 regions whose ratings are on review for downgrade, especially if accompanied by Russian government policy changes that negatively affect their credit standing.

For affirmed regions, upward rating pressure is unlikely over the medium term. Deterioration in their credit profiles reflected in weak budgetary performances, growing debt and increasing refinancing risks could exert downward pressure.

RATINGS AFFECTED

-- THE RATINGS OF THE FOLLOWING 7 ISSUERS PLACED ON REVIEW FOR DOWNGRADE

Moscow, City of: issuer rating of Aa1.ru placed on review for downgrade.

St. Petersburg, City of: issuer and debt ratings of Aa1.ru placed on review for downgrade.

SUE Vodokanal of St. Petersburg: issuer rating of Aa2.ru placed on review for downgrade.

Khanty-Mansiysk AO: issuer rating of Aa2.ru placed on review for downgrade.

Moscow, Oblast of: issuer rating of Aa2.ru placed on review for downgrade.

Omsk, Oblast of: issuer rating of Aa3.ru placed on review for downgrade.

Mordovia, Republic of: issuer and debt ratings of Baa1.ru placed on review for downgrade.

-- THE RATINGS OF THE FOLLOWING 11 ISSUERS WERE AFFIRMED

Samara, Oblast of: issuer and debt ratings of Aa3.ru affirmed.

Chuvashia, Republic of: issuer and debt ratings of Aa3.ru affirmed.

Komi, Republic of: issuer rating of A2.ru affirmed.

Krasnodar, Krai of: issuer and debt ratings of A2.ru affirmed.

Krasnoyarsk, Krai of: issuer rating of A2.ru affirmed.

Belgorod, Oblast of: issuer and debt ratings of A2.ru affirmed.

Nizhniy Novgorod, Oblast: issuer rating of A2.ru affirmed.

Vologda, Oblast of: issuer rating of Baa1.ru affirmed. Rating will be withdrawn.

Krasnodar, City of: issuer rating of A2.ru affirmed.

Omsk, City of: issuer rating of A2.ru affirmed.

Volgograd, City of: issuer rating of Baa1.ru affirmed.

The specific economic indicators, as required by EU regulation, are not available for these entities. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.

Sovereign Issuer: Russia, Government of

GDP per capita (PPP basis, US$): 24,449 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -3.7% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 13.5% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -3.5% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 5% (2015 Actual) (also known as External Balance)

External debt/GDP: 39% (2015 Actual)

Level of economic development: Moderate level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 4 March 2016, a rating committee was called to discuss the ratings of the Russian sub-sovereign entities. The main points raised during the discussion were: The systemic risk in which the issuers operate has materially increased.

The principal methodology used in rating City of Moscow, Oblast Nizhniy Novgorod, City of St. Petersburg, Oblast of Moscow, Republic of Komi, Krai of Krasnoyarsk, Oblast of Samara, Krai of Krasnodar, Khanty-Mansiysk AO, Republic of Chuvashia, Oblast of Omsk, Oblast of Belgorod, Oblast of Vologda, City of Omsk, Republic of Mordovia, City of Volgograd, and City of Krasnodar was Regional and Local Governments published in January 2013.

The principal methodology used in rating SUE Vodokanal of St. Petersburg was Government-Related Issuers published in October 2014.

Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

Moody's Interfax Credit Rating Agency's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".ru" for Russia. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".