S&P Upgrades Novosibirsk

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May 2 – Standard & Poor’s upgraded Russia’s third largest city, Novosibirsk, from “stable” to “positive,” the credit-rating agency said in a statement issued this Monday.

The ratings are constrained by what the agency regards as the city’s limited financial flexibility and predictability, as well as low economic productivity. However, these constraints are mitigated by a relatively diverse economy, moderate debt, and prudent debt management which is resulting in a favorable debt profile.

As with other Russian local and regional governments, Novosibirsk’s financial predictability and flexibility is severely limited because the federal government regulates tax rates and shares and distributes responsibilities to different layers of the government. Standard & Poor’s still regard Russia’s institutional frameworks as “developing and unbalanced” as defined by the credit-rating agency’s criteria.

“Novosibirsk’s post-crisis revenue recovery [tax and operating grants] coupled with reasonable cost containment should allow it to report a moderate budgetary performance in 2012-14. This is despite some relaxation of spending triggered by a pre-election hike in public salaries and other operating spending in 2011, especially in the fourth quarter of the year. Our base-case scenario foresees Novosibirsk reporting operating surpluses of about 2 percent on average in the medium term,” S&P said.

Novosibirsk’s economy continues to recover. However, wealth levels are still only slightly above the Russian average and on the same level as cities such as Surgut and Niznny Novgorod.

“The city’s economy suffers from low productivity, especially in the industrial sector, and the state of the municipal infrastructure is poor, with a number of bottleneck issues such as obsolete transportation, utilities, and housing. These constraints are mitigated by Novosibirsk’s status as Russia’s third-largest city and a regional economic center, with important service, transport, and research and development (R&D) sectors” which S&P said help support the city’s economic potential.

S&P sees the city’s financial predictability and flexibility as being severely limited because the federal government regulates tax rates and shares and distributes responsibilities to different layers of the government.

The agency foresees capital spending at more than 25 percent of total expenditures. Recovering property markets will also contribute positively to capital revenues. Because of these factors, S&P supposes that Novosibirsk will have only moderate deficits after capital accounts of some 5 percent of total revenues in 2012-2013.

For this reason, tax-supported debt is likely to stay lower than 45 percent of consolidated operating revenues through to 2014, which the rating agency identifies as modest by international standards.

Gross regional product per capita in Novosibirsk was US$7,100 in 2011, according to S&P estimations. According to local government data, 1,475,119 people lived in the city at the beginning of last year.

Novosibirsk is home to Russia’s most powerful shortwave relay station east of the Ural Mountains. This relay station can reach most of South Asia, the Middle East, and China.

There are seven international research centers operating in the city. They were established as joint ventures with foreign organizations as voluntary non-governmental organizations.

Novosibirsk has 47 offices of foreign business companies working there. International business partnerships connect Novosibirsk with 85 countries worldwide.

As the main business center of the Asian part of Russia, the city has over 30 banks and the Siberian Interbank Currency Exchange.