Russia faces expanding regional debt crisis

Russia faces expanding regional debt crisis

Recent data released by Russia’s Court of Accounts indicates that the country’s regional governments are facing crisis situations with regional debts.

In the past year, the level of total regional debt has doubled to 642 billion rubles, 3.3 times higher than had been expected from the Ministry of Finance.

The number of regions that have net earnings which can be used by other regional budgets has rapidly shrunk for 19 out of 87 regions in 2005 to 10 of 83 regions in 2013. 35 regions have deficits that are higher than 15 percent of total revenues. Only four regions last year were able to cover costs without federal subsidies.

Regional debts to state-controlled energy giant Gazprom have also increased in the past six months by 60 percent, to 46 billion rubles. Rapidly declining economic growth has led to a shrinking of the regions’ tax bases, but specialists agree that the main culprits are policies pursued by Moscow.

The data from the Court of Accounts was released at the same time meetings were held between Russian President Vladimir Putin and parliamentary and regional leaders to discuss the implementation of his so-called “May Directives” as well as the increasingly dire economic situation in Russia’s monogoroda, or single-industry cities.

Putin’s directives undermine regional finances

The biggest factors behind the soaring levels of regional debt are these “May Directives” that were issued by Vladimir Putin when he returned to the Presidency for the third time in 2012. These directives, which many perceived as an effort to shore up political support, included increases in wages for state employees and increased social spending in a variety of fields, which regional governments are required to fund.

The Ministry of Economic Development had warned in December 2013 that fulfilling the directives on wage increases would not be possible without a 4 percent economic growth rate. As a result, the regional debt crisis is leaving regional governments with ever fewer resources to spend on developing these urban centers.

The other major problem is the increasing reliance of many regions on subsidies from the federal center – this support from Moscow forms over 60 percent of the budgets of seven regions, including the republics of Chechnya, Dagestan, Ingusetia, and Tuva. Subsidies account for over 40 percent of the budgets of another sixteen regions.

As a result of the growing debt crisis, the Ministry of Finance is working on developing laws that would allow governors to be removed if debts reach more than 10 percent the size of a region’s budget.

The regional debt crisis comes amidst a flurry of worrying macroeconomic news for the economy of the Russian Federation. Russia’s railways, the largest employer in the country and a major contributor to the economy, announced net profits for 2013 had sunk by over 60 percent. The International Monetary Fund also announced last week that Russia has now entered a recession, cutting its growth forecast to 0.2 percent.

The soaring costs of continuing military deployments along the Ukrainian border, economic sanctions, and the costs of annexing Crimea all point to a recession will cost both the Russian economy and federal and state budgets dearly. The recession will also likely lead to an even smaller level of tax revenue for regional governments, compounding the regional debt crisis and further straining Moscow’s budget.

About Author

Luke Rodeheffer

Luke Rodeheffer is a cyberthreat researcher at Flashpoint in New York City. He holds an MA from Stanford University, where he was a FLAS Fellow for Turkish. Luke was previously a Fulbright Fellow in Ukraine and a research assistant at Koç University in Istanbul. You can follow him on Twitter @LukeRodeheffer