OVERVIEW

In our view, the Russian Republic of Bashkortostan remains committed to 
maintaining a high cash buffer and, therefore, positive liquidity.
To this end, we believe Bashkortostan is committed to selling assets and, 
if needed, cutting capital spending.
We are therefore affirming our long-term issuer credit rating on 
Bashkortostan at 'BBB-'.
The outlook is stable, reflecting our view that Bashkortostan will 
contain expenditure pressure and consolidate its solid financial 
performance with deficits after capital accounts of between 5%-7% of 
total revenue in 2014-2016.

RATING ACTION
On April 18, 2014, Standard & Poor's Ratings Services affirmed its 'BBB-' 
long-term issuer credit rating on the Russian Republic of Bashkortostan. The 
outlook is stable.


RATIONALE
The ratings on Bashkortostan reflect its positive liquidity position, low 
debt, moderately strong financial performance, and modest contingent 
liabilities. We also factor in our assessment of Bashkortostan's financial 
management as "neutral" for its creditworthiness in a global context, and 
prudent in the context of Russia.

The ratings are constrained by our view of Russia's "developing and 
unbalanced" institutional framework, which leads to low budget predictability 
and limited financial flexibility. Other constraints include the economy's 
concentration in the oil-processing industry and only modest wealth in an 
international context.

The predictability of Bashkortostan's financial position remains constrained 
by federal controls over revenues and expenditures, which limits revenue and 
spending flexibility, and the evolving nature of Russia's "developing and 
unbalanced" institutional framework. Furthermore, the major tax contributors 
to the regional budget are concentrated in the oil and oil-processing 
industry. A few large oil-related taxpayers and their subsidiaries contributed 
about 20% of Bashkortostan's consolidated budget tax revenues in 2010-2013. 
These contributions remain volatile, leaving the republic exposed to the 
policies of large taxpayers and swings in the economic environment.

Wealth levels remain modest. Bashkortostan's gross regional product (GRP) per 
capita was just below $9,000 in 2013, which is markedly lower than the 
national average.

Nevertheless, we estimate Bashkortostan's economy grew by 3% in 2013--above 
the national average. We expect GRP growth in Bashkortostan to exceed the 
Russian average in 2014-2016, helping to increase revenues and offset spending 
pressures.

We view the republic's financial management as neutral for the rating in the 
global context. We note its strong commitment to maintaining a reserves 
cushion and gradual debt repayment schedule, and, in turn, a positive 
liquidity position. Our assessment also reflects Bashkortostan's commitment to 
spending cuts to achieve its positive liquidity position.

However, we also factor in what we view as its rudimentary long-term planning 
and the limited oversight of its government-related entities (GREs). We 
therefore expect Bashkortostan will maintain a moderately sound budgetary 
performance, despite growing federal pressure to increase spending on 
public-sector salaries and maintain and develop infrastructure.

We project that operating margins will be constrained by federal mandates to 
increase civil servants' pay without adequate matching grants. We estimate 
operating margins will deteriorate to 2%-3% of operating revenues in 
2014-2016, compared with 11% on average in 2011-2013 and 5% in 2013. Our base 
case includes an estimate of a modest average of 5%-7% of total revenue 
deficits after capital accounts in 2014-2016, after a 4% average in 2011-2013, 
as we understand that the republic is committed to keeping overall deficits 
modest.

Bashkortostan's sale of its stakes in gas pipelines in 2013--for Russian 
rubles (RUB) 12 billion--boosted its budgetary performance. We note that the 
republic still has substantial assets, which we estimate are worth well in 
excess of 20% of budget revenues and provide additional capital revenue 
flexibility. Furthermore, we expect continued asset sales to support the 
republic's performance in 2014-2016. We therefore expect Bashkortostan's 
tax-supported debt to stay low, within 30% of consolidated operating revenues 
until 2016 under our base-case scenario.

The republic's contingent liabilities related to municipalities and its 
involvement in local economy are modest, in our view.

Liquidity
We consider Bashkortostan's liquidity position to be "positive". This reflects 
its high cash reserves, which mitigate the republic's "limited" access to 
external liquidity. 

Bashkortostan is currently in a net asset position, and we expect it to remain 
so until the end of 2014. Even though our base-case scenario factors in a 
likely gradual decrease in Bashkortostan's reserves, we assume that the 
republic will maintain cash above RUB20 billion during 2014-2016. This far 
exceeds our estimate for the republic's annual debt service. 

As of April 1, 2014, Bashkortostan's reserves represented about 30% of its 
projected 2014 operating expenditures, which is 1.5x higher than direct debt. 
The allocation of a portion of deposits, within the framework of Russian 
legislation, to banks rated lower than the republic itself exposes it to 
counterparty risk. But even after we apply deductions to reflect those risks, 
under our methodology, the republic remains a net creditor.

We view Bashkortostan's access to external liquidity as "limited," as is the 
case for most Russian local and regional governments, given the weaknesses of 
the domestic capital market. Our Banking Industry Country Risk Assessment 
score for Russia is '7' ('1' being the lowest risk and '10' being the highest; 
see "Banking Industry Country Risk Assessment: Russia," on May 15, 2013 on 
RatingsDirect).


OUTLOOK
The stable outlook reflects our view that, by continuing to apply prudent 
spending policies, Bashkortostan will contain expenditure pressure and 
consolidate its solid financial performance with deficits after capital 
accounts to 5%-7% of total revenues under our base-case scenario. Accordingly, 
we believe that the republic will maintain high cash reserves of more than 
RUB20 billion, well exceeding annual debt repayment and deficits after capital 
accounts in 2014-2015.

We could raise the rating on Bashkortostan in the next 24 months if it 
achieves stronger financial performance in the medium term with noticeably 
higher operating margins of 7%-10% of total revenues. This would, in turn, 
reinforce a very positive internal liquidity position. We do not consider this 
scenario likely, though, due to expenditure pressures. 

We could take a negative rating action if the republic's management deviates 
from its currently prudent policies, leading cash reserves to deplete to below 
expected levels, and causing debt to increase.


PUBLISHED RATING FACTOR SCORES

Table 1

KEY STATISTICS

Table 2

Table 3

KEY SOVEREIGN STATISTICS

For sovereign statistics, please click here: 
http://www.standardandpoors.com/spf/upload/Ratings_EMEA/SRIreport_March_02.04.1
4.pdf "Sovereign Risk Indicators," March 24, 2014.

Interactive version available at http://www.spratings.com/sri

 

RELATED CRITERIA AND RESEARCH


Related Criteria

Methodology For Rating International Local And Regional Governments, 
Sept. 20, 2010
Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local 
And Regional Governments And Related Entities And For Rating Their 
Commercial Paper Programs, Oct. 15, 2009

Related Research

Banking Industry Country Risk Assessment: Russia, May 15, 2013
International Local And Regional Governments Default And Transition 
Study: 2012 Saw Defaults Spike, March 28, 2013 
Public Finance System Overview: Russian System For Regional Governments 
Is Developing And Unbalanced, Nov. 12, 2012

In accordance with our relevant policies and procedures, the Rating Committee 
was composed of analysts that are qualified to vote in the committee, with 
sufficient experience to convey the appropriate level of knowledge and 
understanding of the methodology applicable (see 'Related Criteria And 
Research'). At the onset of the committee, the chair confirmed that the 
information provided to the Rating Committee by the primary analyst had been 
distributed in a timely manner and was sufficient for Committee members to 
make an informed decision.  

After the primary analyst gave opening remarks and explained the 
recommendation, the Committee discussed key rating factors and critical issues 
in accordance with the relevant criteria. Qualitative and quantitative risk 
factors were considered and discussed, looking at track-record and forecasts. 
The chair ensured every voting member was given the opportunity to articulate 
his/her opinion. The chair or designee reviewed the draft report to ensure 
consistency with the Committee decision. The views and the decision of the 
rating committee are summarized in the above rationale and outlook. 



RATINGS LIST
Ratings Affirmed

Bashkortostan (Republic of)
 Issuer Credit Rating                   BBB-/Stable/--     

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