OREANDA-NEWS. March 16, 2015. Fitch Ratings has affirmed the Russian Republic of Sakha's (Yakutia) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-', Short-term foreign currency IDR at 'F3' and National Long-term rating at 'AA+(rus)'. The Outlooks on the Long-term IDRs are Negative and the Outlook on the National Long-term rating is Stable.

The republic's outstanding senior unsecured domestic bonds have been affirmed at Long-term local currency 'BBB-' and National Long-term 'AA+(rus)'.

KEY RATING DRIVERS
The ratings reflect Sakha's strong economy and low levels of debt. They also factor in its high contingent liabilities and the deteriorating national economic environment, which will put pressure on budgetary performance. The Negative Outlook reflects that on the sovereign.

Sakha's ratings are underpinned by a strong economy, which is exceptionally rich in natural resources such as diamonds, coal, oil, natural gas and gold. The natural resources industry is dominated by OJSC ALROSA (BB/Stable/B), the world's largest diamond producer with more than a 25% share of global rough diamond production. Completion of the East Siberia-Pacific Ocean (ESPO) pipeline in 2009 has helped develop the republic's untapped oil and gas reserves.

On 1 September 2014, Russia launched the construction of a new gas pipeline in Sakha's capital, Yakutsk. The Power of Siberia pipeline will largely follow the path of ESPO oil pipeline and will be fed from the Chayanda gas and oil field located in Sakha supplying natural gas worth USD400bn to China for 30 years.

Sakha's gross regional product per capita is higher than the national median by about 130% and its average salary exceeds the national median by 1.5x. Russia's major diamond, oil, gas, pipeline, coal, railway and energy companies have made significant investments in Sakha. Fitch expects the economy to grow above national rates in 2015-2016 at 2%-3% in real terms. However, the tax concentration on the top three taxpayers, at above 40% in 2013-2014, will remain a risk in the foreseeable future.

Fitch expects Sakha's direct risk to remain low at under 30% of current revenue in 2015-2017. As of 1 January 2015, direct risk was RUB21.2bn or 14% of current revenue (2013: RUB17.1bn or 13%). However, Sakha has high contingent liabilities, comprising issued guarantees of RUB9.2bn and debt at companies under the region's control of about RUB27bn, net of the guaranteed amount at 1 January 2015.

The republic has a wide network of public sector enterprises, mainly because its vast territory, under-developed infrastructure and severe climate result in high entry costs for private companies. Disproportionate growth of contingent risk will put pressure on Sakha's creditworthiness.

Sakha has low refinancing risks thanks to historically sound liquidity and low debt. Its refinancing needs for 2015 are RUB3bn, while cash was RUB5.9bn at 1 February 2015. Sakha faces a refinancing peak of RUB9.8bn in 2016, but Fitch does not expect the republic to face difficulties in accessing debt markets.

Fitch expects stable operating performance in 2015-2017, but operating surpluses are likely to be below historical levels, at 8%-10% of operating revenue. The operating surplus improved to above 10% of operating revenue in 2014 from 8.4% in 2013 primarily thanks to strong tax revenue growth by 34% year on year. However Fitch expects a decline in tax revenue in 2015 of at least 5% due to the national economic slowdown, while the federal government's election pledges to raise public sector salaries will continue to fuel growth of operating expenditure.

RATING SENSITIVITIES
A downgrade of Russia or growth of net overall risk to above 50% of current revenue coupled with a sharp deterioration of debt coverage ratios would lead to a downgrade.