The credit rating of the Komi Republic (hereinafter, the Region) is based on its moderately low debt load, a substantial volume of cash balances on budget accounts, a moderate level of operating efficiency on the back of an anticipated budget deficit in the forecast period. A number of negative trends in the local economy and the budget’s growing need to raise funds to finance capital and current expenditures limit the Region’s rating.
The Region is located in the Northwestern Federal District and part of its territory belongs to Russia’s Far North. As of January 1, 2023, about 726,000 people (0.5% of Russia’s total population) lived in the Region. As of the end of 2021, the Region’s gross regional product (GRP) was RUB 857 bln (0.7% of the total GRP of Russia’s regions). According to the Region’s estimates, 2022 GRP amounted to RUB 880 bln.
key assessment factors
Significant need in additional funds and moderate operating efficiency. The averaged1 ratio of the current account balance to current revenues for 2020–2024 will be 6%, which indicates a moderate operating efficiency of the budget. ACRA assumes that this indicator will be weakly positive in 2023, which indicates that current revenues are high enough to cover all current expenses. However, in the forecast 2024 the operating efficiency indicator may turn negative on the back of anticipated deficit.
The averaged share of capital expenditures in total expenditures in 2020–2024 will be around 15%, which corresponds to a moderately high flexibility of budget expenditures. Capital expenditures are on average by more than two-thirds financed using the Region’s own funds. The share of tax and non-tax revenues (TNTR) in the Region’s total revenues for the specified period (excluding subventions) will exceed 86%.
The ratio of the modified budget deficit to current revenues averaged for 2020–2024 is expected to be -6%. The indicator’s values in the forecast period, according to ACRA’s calculations, show a further growing need to raise additional financing against the backdrop of anticipated budget deficit and declining operating efficiency of the budget.
The 2022 budget recorded a surplus of 13% of TNTR, which enabled the Region to considerably increase the volume of balances in its accounts.
In accordance with the current version of the budget law, the Region’s revenues may shrink by 23% this year. TNTR will decline by about 21%, which is mostly associated with the forecasted decline in corporate income tax revenues by 41%. The volume of transfers is expected to fall by 35%, including a 25% decrease in capital transfers from federal budget. According to the budget law, total expenditures will decline by 4% against 2022, while capital expenditures will grow by 11%. The expected 2023 budget deficit will be 14% of TNTR, which is to be covered with borrowed funds.
According to the draft budget for 2024–2026, next-year revenues will continue to decline by about 2%. TNTR will remain at the level of 2023, and the volume of transfers may decrease by 14%. It is expected that the volume of budget expenditures in 2024 will remain unchanged. The budget deficit will amount to 17% of TNTR, and debt will be attracted to cover the deficit.
In ten months of this year, budget revenues decreased by 1% y-o-y. At the same time, TNTR grew by 4% y-o-y, but the decrease in the volume of transfers was about 27% y-o-y. Budget expenditures increased by 3% y-o-y, and the resulting surplus was about a third less than in the same period of 2022.
In ACRA’s opinion, this year, the decrease in corporate income tax revenues will be much less than stipulated by the budget law, which will contribute to a less significant decrease in total budget revenues. In addition, this year, a significant amount of interest income may be generated by temporarily idle funds held in deposits but not taken into account by the current version of the budget law. Budget expenditures will also show positive dynamics compared to 2022 due to an increase in current expenditures along with the expected inflation. This will result in a budget deficit of about 15% of TNTR, and the Region will have to use a portion of accumulated cash and attract borrowed funds.
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 moderate refinancing risks in the short term. As of the end of 2022, the Region’s debt decreased by 5% and amounted to RUB 32.6 bln. As of January 1, 2023, the Region’s debt portfolio was 69% made up of budget loans, while the remaining part consisted of government bonds. The Agency assesses the refinancing risks of debt obligations as moderate. According to the debt repayment schedule as of January 1, 2023, the Region will repay / refinance 17% of the debt annually over the next two years, which corresponds to 7% of its planned TNTR for this period.
In January–October 2023, the volume of the Region's debt increased by RUB 1.6 bln and amounted to RUB 34.3 bln. In this period, the Region repaid RUB 2.5 bln on bonds and borrowed RUB 4.1 bln in budget loans, which amount is dominated a short-term loan from the Federal Treasury Department falling due in 2023. These budget loans also include loans for advanced financing of expenditure obligations and for the implementation of infrastructure projects. The repayment schedule did not change significantly, and the Region still has to repay 17% of the debt in 2023–2024.
As of the end of 2023, the Region’s ratio of debt to current revenues will be 35%, however, ACRA expects this indicator to grow significantly to over 50% in 2024. Nonetheless, this level will still correspond to a moderately low debt load. The debt load will grow in the next year mainly due to the need to cover the expected budget deficit at the end of the year.
Interest expenses are not burdensome for the Region — interest expenses averaged for 2020–2024 are about 1% of total budget expenditures (excluding subventions). The ratio of debt to GRP is expected to amount to 4% this year.
The volume of accumulated cash will allow the Region to cover a portion of future deficits. In 2022, the Region’s accumulated increased by almost twofold. Over the elapsed period of 2023, cash balances were almost three times higher than monthly expenditures of the Region. ACRA is of the opinion that the Region may apply the most of cash accumulated by the end of the year to finance the expected budget deficit. Any remaining cash may be utilized for the same purposes in 2024. The Region places temporarily free funds in deposits (over RUB 20.5 bln as of November 1, 2023). Along with this, the Region uses funds of its autonomous and budgetary institutions to replenish its own cash balances.
The liquidity ratio of the Region’s budget will be 70% by the end of 2023; however, the Agency expects the ratio to fall in 2024, so that the score for this ratio has been adjusted downwards.
As of October 1, 2023, the Region did not have any overdue payables. An agreement has been concluded with the FTD on the provision of a budget loan to replenish cash balances this year, and relevant funds have been utilized. The Region does not have any open credit lines with a drawdown period of more than one year.
High economic development indicators and significant dependence on the extractive sector. Mineral extraction (coal, oil, gas) amounted for 48% of the Region’s GRP in 2021, which indicates high dependence of the economy on this sector. In 2022, the Region’s enterprises that generate the most revenues, including LUKOIL-Komi LLC, Gazprom Transgaz Ukhta LLC, Syktyvkar Lumber Factory JSC, and VorkutaUgol JSC, belonged to the extractive and wood processing sectors. According to the Region, its largest taxpayers in 2022 contributed around 50% of TNTR of the Region’s consolidated budget.
In 2022, the largest share of tax revenues (more than 28%) was formed by the wholesale trade sector, and about 22% was provided by the type of activity Professional, Research and Engineering Activities. Crude oil and gas production provided about 8% of tax revenues in 2022. The largest share of tax revenues, according to averaged data for 2019–2022, also falls on the wholesale trade industry (about 26%). The averaged share of the public sector in total tax revenues is small and is estimated at 11% over the same period.
For nine months of 2023, the share of tax revenues from the Professional, Research and Engineering Activities segment slightly exceeded 13%, the share of wholesale trade amounted to 23%, and the share of oil and gas production was about 13%.
The Region’s population is declining; from 2014 to 2022, its population decreased by 16% to 726,000.
GRP per capita is high; the ratio of averaged per capita GRP of the Region to the national average per capita GRP for 2018–2021 is high and amounted to 126%. The ratio of the Region’s wage to subsistence minimum for the working population averaged for 2019–2022 exceeded 3.5. Historically, the Region has had a high level of unemployment that has exceeded national averages. In 2022, unemployment was 6.7% (vs 3.9% of national average). Averaged unemployment totaled 6.9% in 2019–2022, and according to data for June–August 2023, unemployment rate was 4.0%.
KEY ASSUMPTIONS
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Continued high dependence of the economy on the extractive sector.
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Budget revenues declining less intense than forecasted by the current version of the Region’s budget law, due to a weaker reduction of corporate tax revenues.
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Significant interest income from cash deposits.
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Budget expenditures growing along with the inflation expected in 2023–2024.
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Using the most of cash accumulated in accounts to finance this year’s deficit.
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:
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Decline in the budget’s need to use additional funding;
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Maintaining the ratio of debt to current revenues below 30%;
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Significant increase in the volume of budget account balances by the year-end.
A negative rating action may be prompted by:
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Further decline in the budget’s operating efficiency;
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Debt exceeding 55% of current revenues;
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Financing the budget deficit using short-term debt;
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Significant decline in the budget’s available liquidity.
ISSUE RATINGS
Komi Republic, 35014 (ISIN RU000A0JXUD9), maturity date: June 25, 2024, issue volume: RUB 10 bln — A(RU).
Rationale. In ACRA’s opinion, the bond issue of the Komi Republic listed above is a senior unsecured debt instrument, the credit rating of which corresponds to the credit rating of the Komi Republic.
REGULATORY DISCLOSURE
The credit ratings have been assigned to the Komi Republic and the bond issue (ISIN RU000A0JXUD9) of the Komi Republic 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 the credit rating to the above issue.
The credit rating of the Komi Republic and the credit rating of the government securities (ISIN RU000A0JXUD9) of the Komi Republic were published by ACRA for the first time on September 5, 2017 and March 5, 2018, respectively. The credit rating of the Komi Republic and its outlook, as well as the credit rating of the government securities (ISIN RU000A0JXUD9) of the Komi Republic 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 Komi Republic, 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 Komi Republic 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 Komi Republic. No conflicts of interest were discovered in the course of credit rating assignment.
