4 Oct 2010 17:50

Russian regions ride out downturn with federal help, future defaults still a possible

MOSCOW. Oct 4 (Interfax) - The Russian federal government acted swiftly in the recent downturn to extend financial support to the country's cash-strapped regions, but such support is not a guarantee against future defaults in the country's local and regional government sector, Standard & Poor's Ratings Services says in a special report.

The report, titled "Russian Federal Support Helps Regions Survive Downturn, But Future Defaults Can't Be Ruled Out", recalls that in late 2008 and 2009, falling commodity prices and tightening global capital markets placed significant stress on the Russian economy.

Tax revenues at both the federal and subfederal levels declined rapidly and the federal government, backed by massive cash reserves, responded with a number of measures to support the rapidly weakening finances of the country's local and regional governments.

The report says the downturn tested the federal government's willingness and capacity to support regional governments in various ways, but stresses that in the post-downturn environment some of this support may no longer be available.

In the report, Standard & Poor's evaluates the outcome of government support to regional governments and its impact on their creditworthiness over the next two to three years.

The report concludes that although Standard & Poor's regards the likelihood of default by a regional government over the next few years as low, negative developments are possible, given the reduced resources available to the federal government while the system's structural drawbacks, namely low predictability, revenue and spending mismatches, and limited financial flexibility, remain unaddressed.