Fitch Rates Kaluga Region 'BB-'; Outlook Stable

Fitch Ratings-London/Moscow-29 October 2008: Fitch Ratings has today assigned the Russian Kaluga region Long-term foreign and local currency ratings of 'BB-’ (BB minus), a Short-term foreign currency rating of 'B' and a National Long-term rating of 'A+(rus)'. The Outlooks for the Long-term ratings are Stable. The rating action affects RUB2.6bn outstanding domestic bonds issued by the region.

The ratings reflect an increase in the region’s overall risk, including its contingent liabilities and below-national average economic strength. The ratings also factor in Kaluga’s sound and stable budget performance, with high levels of capital expenditure - indicating considerable expenditure flexibility - and prudent budget management. The Stable Outlooks reflect Fitch’s expectation that the region will be able to consolidate its budget performance via control over both its operating expenditure and debt burden.

The overall scale of the region’s economy is relatively modest. Per capita gross regional product (GRP) was 53% of the average of Russian regions in 2006. However, during 2006-2008, the region demonstrated fast economic development and attracted several international strategic investors. Volkswagen AG, PSA Peugeot Citroеn, Volvo Truck Corporation and Samsung Electronics are all in the process of setting up manufacturing plants in the region.

Kaluga has demonstrated consistent revenue growth; tax revenue rose to RUB11bn in 2007 from RUB3bn in 2003. Over the last five years, the region has become more reliant on its own revenue sources and financial aid as a share of total budget revenue declined to 10% in 2007 from 25% in 2003. The region’s prudent budget management has resulted in tightly controlled operating expenditure, high capital expenditure and stable budgetary performance. During 2005-2007, Kaluga’s operating balance averaged 10% of operating revenue and capital expenditure accounted for 21% of total expenditure.

The region has seen a notable increase in its total debt burden during the last five years, albeit from a low base. Nevertheless, its current debt burden remains manageable, with a total debt/current balance payback ratio below three years during 2006-2008. As at 1 October 2008 the region’s direct debt and guarantees totalled RUB6bn or 25% of expected full-year revenue. The region’s contingent liabilities increased to RUB2.8bn as of 1 October 2008 from RUB243m at end-2007, due to a single guarantee issued to Development Corporation of Kaluga Region (DCKR), which is majority-owned by the region and actively involved in the infrastructure development of industrial parks. The region guaranteed a RUB2.4bn bank loan granted to DCKR by Vnesheconombank (‘BBB+’/Stable/‘F2’), which will be funded indirectly by Kaluga given DCKR’s limited revenues.

Kaluga is located in the central part of Russia. The region contributed 0.4% of the Russian Federation's GDP in 2006 and accounted for 0.7% of the country's population.