ANTIQUES SHOPS

These weaknesses are partly offset by the krai's low debt burden, expected moderate budgetary performance, and strong liquidity position.

Significant taxpayer concentration and exposure to commodity markets result in budget revenue volatility and restrict budgetary flexibility for Krasnoyarsk Krai. The majority of tax revenues are provided by the two largest taxpayers: OJSC MMC Norilsk Nickel (BBB-/Negative/--; Russia national scale 'ruAA+') and CJSC Vankorneft (not rated), a subsidiary of OJSC Oil Co. Rosneft (BBB-/Stable/--). Despite an expected decrease in corporate profit tax (CPT) payments from Vankorneft in 2012, the krai might receive up to 6.5% of additional operating revenues from Rosneft and several other large taxpayers, which have taken advantage of the opportunity granted by new federal tax regulations. These new regulations will allow them to pay CPT as a consolidated enterprise and redistribute CPT payments to the regions where they actually operate, rather than where their headquarters are registered.

Over the long term, the krai is set to benefit from massive federal and private investments in the Lower Priangariye and other large natural resource extraction projects. This should gradually diversify the structure of the krai's gross regional product (GRP) and boost economic growth.

In 2011, the krai's budgetary performance somewhat weakened because operating spending accelerated in the fourth quarter, although it was supported by a still-solid tax revenue growth. The krai lost an estimated 8% of tax revenues due to increased export customs duties on oil, copper, and nickel; but the amount of CPT remained almost equal to 2010, thanks to high commodity prices and the strong financial results of the krai's largest taxpayers.

Our base-case scenario assumes that budgetary performance should remain moderately sound over the next three years, with operating balances of about 6%-8% of adjusted operating revenues. Nevertheless, the operating margin will likely gradually weaken in 2012 compared with very strong results of 2010-2011, because tax revenues will likely grow only modestly due to lower forecast commodity prices. The krai will likely continue to increase operating expenditures due to the need to raise public sector salaries and social payments.

We also expect that the krai will receive federal cofinancing for its large infrastructure projects and will maintain its substantial capital program. Deficits after capital accounts should stay close to 10% of total revenues in 2012-2014.

After the krai spends part of the federal cash earmarked for capital projects, it will likely attract higher direct debt to finance its deficits. As a result, we expect that total tax-supported debt will likely increase to 24% of consolidated operating revenues on average in 2012-2014, but that it will nevertheless remain lower than that of international peers.

Liquidity

We consider Krasnoyarsk Krai's liquidity to be "positive." Our base-case scenario assumes that the krai's ample cash reserves will exceed debt service falling due throughout 2012-2014. At the same time, we view the krai's access to external liquidity as "limited," as it is for most Russian local and regional governments, given the weaknesses of the domestic capital market, to which we assign a Banking Industry Country Risk Assessment score of '7', with '1' being the lowest risk and '10' being the highest (see "Banking Industry Country Risk Assessment: Russia", published March 19, 2012, on RatingsDirect on the Global Credit Portal).

During the previous five years, the krai enjoyed a net creditor position. It accumulated high cash reserves (both own cash and federal funds, earmarked for capital projects), which exceeded its very low direct debt. Throughout the first four months of 2012, the krai had an average of Russian ruble (RUB) 9.7 billion ($292 million) cash in the treasury and kept an average of RUB18 billion ($542 million) on deposit with the largest Russian banks. Part of these funds was exposed to counterparty risk. Total cash reserves equaled about 22% of expected operating spending in 2012 and exceeded direct debt almost twofold.

In our base-case scenario, we expect the krai to spend part of its ample cash cushion to finance the capital program in 2012-2013 and to gradually accumulate direct debt. Nevertheless, we believe the krai's financial management will adhere to its prudent debt policy and will rely on amortizing medium-term bonds. We also expect that debt service should stay low at least until 2015.

Recovery analysis

The senior unsecured bonds issued by Krasnoyarsk Krai are rated 'BB+/ruAA+', in line with the issuer and national scale ratings. The '3' recovery rating on Krasnoyarsk Krai's unsecured debt indicates our expectation of meaningful (50%-70%) recovery in the event of a payment default.

Outlook

The stable outlook reflects our view that Krasnoyarsk Krai's budgetary performance in 2012-2014 might weaken, but will likely remain moderately sound, because continued pressure on operating expenditures will be counterbalanced by modest tax revenue growth and management's adherence to prudent financial policies. Our base-case scenario assumes a positive liquidity position and a low debt service of about 4%-6% of adjusted operating revenues.

We could take a negative rating action within the next 12 months if the krai's management were unable to control operating spending growth and capital-spending flexibility decreased. Combined with weaker revenues stemming from a sharp correction in world commodity prices, this would lead to a structurally weakening budgetary performance with negative operating balances and debt accumulation, in line with our downside scenario.

We could raise the ratings if the krai's long-term planning and financial policies were formalized, and a liquidity policy that we considered sufficient to offset the krai's revenue volatility was institutionalized. However, this process would likely take more than our outlook horizon time of one year. Ongoing economic diversification, which would decrease exposure to the largest taxpayers, would also have a positive effect on the ratings over the long term.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal.

-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010

-- Methodology And Assumptions: Assigning Recovery Ratings To International Local And Regional Governments' Speculative-Grade Debt, Feb. 3, 2009

-- Public Finance System Overview: The System For Russia's Regions Is Developing And Unbalanced, Oct. 21, 2011

-- Banking Industry Country Risk Assessment: Russia, March 19, 2012

* Greece seen closer to agreeing coalition govt

* Euro resistance at $1.2748, post-election high

By Nia Williams

LONDON, June 20 (Reuters) - The euro steadied versus the dollar on Wednesday, holding gains made on speculation the U.S. Federal Reserve will adopt further monetary stimulus, although the risk of those expectations being disappointed left the common currency vulnerable.

The euro also gained some support from signs that Greek parties may be close to forming a coalition government.

Strategists said the Fed's policy decision due later on Wednesday would take centre stage and the common currency could be rangebound between $1.26 and $1.2750 in the run up to it.

The euro was last down 0.1 percent at $1.2674, within sight of a one-month high of $1.2748 hit on Monday after a narrow win for pro-bailout parties in the Greek election. It clung on to much of the 0.9 percent gain made against a broadly softer dollar on Tuesday.

"The weakness in the dollar is understandable but once that speculation is out of the way, and we know what the Fed are going to do, concerns about the euro zone will come back to the fore," said Simon Derrick, head of currency research at Bank of New York Mellon.

"You wouldn't want to hold euros on a long-term basis."

Signs that the euro zone debt crisis is intensifying - through political uncertainty in Greece, weakening German economic indicators and rising Spanish bond yields - have prompted some market players to bet central banks will step in with measures to safeguard global growth.

Many market players doubt that the Fed will go so far as to launch another round of quantitative easing, a policy that entails the expansion of its balance sheet via bond purchases. But there might still be some disappointment if the Fed holds off from such stimulus.

A more likely scenario is for the Fed to extend "Operation Twist", a programme aimed at pushing down long-term borrowing costs by selling short-term securities to buy longer-term ones. The scheme is now due to end in June.

If all the Fed does is to extend "Operation Twist", the dollar could recover, said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.

"There is some, perhaps in our view misplaced, hope for QE3 today. We believe the Fed will probably extend its Operation Twist, but think QE3 seems unlikely at this stage," Kotecha said. "So that could provoke a bit of disappointment if that is the case."

The dollar was steady against a basket of currencies at 81.437, near a one-month low of 81.186 hit on Tuesday.

PERIPHERAL DEBT PRESSURED

With Spain's 10-year government bond yields having hit euro-era highs this week, fanning speculation that Spain may need a full-blown bailout, market players expected any further euro gains to be limited.

One idea that might help curb rises in Spain's borrowing costs is an Italian proposal, put forward at a G20 summit on Tuesday, for the euro zone's rescue funds to start buying the debt of distressed European countries.

The proposal is expected to be discussed at a meeting of European leaders on Friday.

The euro could see a short-covering bounce if the proposal is implemented although a sustained rise is unlikely, said a trader for a major Japanese bank in Singapore.

"It probably won't be seen as a step that provides any fundamental solution, and it might just give people a good selling opportunity," the trader said.

The euro edged 0.2 percent lower against the safe-haven yen , to 99.94 yen, while the dollar also slipped against the Japanese currency to 78.85 yen.

The Australian dollar dipped 0.1 percent versus the greenback to $1.0179, holding close to a six-week high of US$1.0202 hit on Tuesday as investors bet more Fed stimulus would boost growth-linked currencies.