The 'A+' rating indicates very high credit worthiness of Kursk region, with an insignificant risk of a failure to meet liabilities in time.

The credit rating of Kursk region primarily reflects its fairly low public debt, growing operating budget revenues, and acceptable economic performance indicators.

As of January 1, 2012, the public debt of Kursk region amounted to RUB 3,662 million, 8.1% of its consolidated budget revenues (one of the best ratios among the regions of Russia's Central Federal District whose aggregate debt burden reached 17% of the total budget revenues). By December 1, 2013, the region had reduced its public debt by 22% to RUB 2,846 million. Of particular note is that the region completely repaid the loans taken out from credit institutions. As of December 1, 2013, Kursk region only had liabilities arising from public budget loans and state guarantees. The comfortable public debt structure accounts for a low debt servicing cost (a mere 2.56% of the average amount of debt in 2012, almost three times below the average percentage in Russia's Central Federal District).

On the whole, the region's budget revenues are increasing steadily. In 2012, its consolidated budget revenues amounted to RUB 45.2 billion, up 7.8% against the previous year. The operating budget revenues grew at a similar pace. We also regard the higher share of tax revenues in the consolidated revenue structure of the region (changing from 64% to 71% over the period from 2010 to 2013) as a positive rating driver. In 2012, taxes and other revenues attributable to the federal budget increased 1.7 times covering almost 70% of the non-repayable receipts from other budgets of Russia's budget system.

For the last 3 years, the budget performance ratio was 100.7% (on the revenue side), indicating a good local fiscal discipline. According to the Russian Ministry of Finance's annual monitoring report, Kursk region is one of the few federal subjects of Russia maintaining a high level of regional financial resource management.

The economy of Kursk region may be defined as sustainably developing. In 2008-2012, the composite industrial production index was 113.2% (against 106.1% in the Russian Federation, 108.0% in the Central Federal District). In 2012, the gross regional product of Kursk region increased by 8.4% and reached RUB 233.3 billion. According to preliminary estimates, the stronger-than-average upward trend will persist in 2013. Also, we appreciate the good diversification across economic sectors, the key economy sectors accounting for no more than 20% of the gross regional product. At the same time, the gross regional product per capita (factoring in the purchasing power parity) is still trailing the average levels of the Russian Federation and the Central Federal District. This shortcoming is partially offset by the high consumer income to consumer expenses ratio exceeding the average national level.

Another positive signal for the rating is the positive foreign trade balance and dominance of FSU countries including members of the Customs Union as the key foreign trade partners.

The annual research of the regions' relative credit capacities conducted by CJSC AK&M Rating Agency also indicates a moderately high credit standing of Kursk region compared with other federal subjects of the Russian Federation. In 2012, Kursk region ranked 27st among 83 subjects of the Russian Federation in the cumulative level of relative credit capacity. It will be noted that the region has moved 13 spots up the corresponding AK&M ranking since 2009. Among the other 17 federal subjects of the Central Federal District, the region trailed only Moscow, Moscow region, Vladimir region and Lipetsk region in the relative credit capacity (2012). Also, the difference between the cumulative relative credit capacities of Kursk, Vladimir and Lipetsk regions did not exceed the standard statistical errors and errors of method.

The budget gaps in 2011-2012 and slower economic growth are exerting pressure on the federal subject's rating.

In 2010, the consolidated budget had a RUB 1.544 billion surplus (4.2% of the consolidated revenues), followed by the budget gaps in the amount of RUB 2.092 billion and RUB 0.811 billion in 2011 and 2012, respectively (5.0% and 1.8% of the consolidated revenues, respectively). While the budget was still in the black on December 1, 2013 (RUB +0.266 billion), the financial outcomes in 2011 and 2012 imply a negative budget balance in 2013, meaning the need to borrow more, so as to be able to finance the deficit.

The 9-month industrial production index in Kursk region was a mere 100.02%, against 105.3% in 2011 and 2012. Furthermore, the share of loss-making businesses increased from 24.5% to 31.7%. This temporary stagnation was mainly caused by the shrinking mineral production on account of major overhaul and upgrade works at the Mikhailovsky mining and processing plant, and lower electricity generation at the Kursk nuclear power plant due to longer routine power unit maintenance and upgrade periods.

We also regard the possible reduction in non-repayable receipts to the region's consolidated budget (resulting from the freezing of natural monopolies' tariffs, among other reasons) and lack of certainty as to when, and in what amount, revenues from the economy deoffshorization and lower expenses of state corporations' may flow to the federal budget as risk factors capable of increasing the debt pressure on the regional budget.

Kursk region, a federal subject of the Russian Federation located in the southern part of European Russia, is part of Russia's Central Federal District. Its administrative capital is Kursk city. In 2011, the region accounted for 0.52% of Russia's gross domestic product.

This press release is based on the statement of assigning a credit rating to Kursk region.

The credit rating, along with any information and conclusions provided in this press release, only conveys our opinion on the Bank's reliability and shall not be considered as advice on the purchase and sale of securities or the provision of loan facilities to the region.

CJSC AK&M Rating Agency will not incur any responsibility for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

CJSC AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993. AK&M Rating Agency is accredited by theMinistry of Finance of the Russian Federation (order no. 452 as of September 17, 2010).

AK&M Rating Agency's Ratings are recognized by the Central Bank of Russia (for providing unsecured lending facilities – Regulation 323-P),Vnesheconombank (for granting subordinated loans) and SME Bank (for its program of lending to SME businesses), RUSNANO (when selecting banks to provide cash and settlement services to project and engineering companies implementing investment projects), and the MICEX (for the Corporate Bond Index / MICEX CBI and Municipal Bond Index / MICEX MBI calculation and bond listing purposes). By a resolution of Russia's Government AK&M Ratings count for the recapitalization of banks. Besides, AK&M Rating Agency is recognized by AHML and accredited by SRO National Securities Market Association.

CJSC AK&M Rating Agency
ul. Gubkina 3
Moscow, Russia
www.akmrating.ru
Press release by: A.V. Khibukhin
Phone no. (495) 916-70-30, fax no.: (499) 132-69-18