Russia’s budget will be hard hit by the current crisis as GDP could contract by as much as 20% this year, leading to tax revenues drying up. However, while at the federal level there is plenty of money in the National Welfare Fund (NWF) – some RUB12 trillion ($165bn) or 11% of GDP – the regions are in a much more delicate position.

One of the biggest sources of income for the Russian government is duties on the export and production of oil and gas. However, the regions’ main source of income is income taxes on workers and to a lesser extent VAT and corporate tax. (As most big companies in Russia are officially headquartered in Moscow they pay their corporate taxes there and the city accounts for around 80% of all corporate tax receipts). As a result the regions are going to have severe funding problems this year.

The current crisis won’t hit the banks or big companies, as in previous episodes, but the small and medium-sized enterprises (SMEs) and workers.

The government’s ability to support out of work workers and the SME sector is poor as the “vertical power” structure Russian President Vladimir Putin has built connects the government to the big national champions of Russia, but not the mom & pop stores across the country. Assessing their needs and getting money to them will be very hard.

And the Kremlin has so far been very reluctant to spend any money at all. The first version of the economic support and stimulation plans were limited to a mere 1.3% of GDP of spending whereas other countries have pledged anywhere between 5% and 20% of GDP spending to reboot their economies. Since the start of April Putin has been on telly several times and each time announced more measures that tool the spend just over 6% as of the end of April, but some commentators, like former finance minister and Audit Chamber head Alexei Kudrin, have called for up to half the NWF to be spent this year and more.

The NWF has been wholly tasked to cover the budget deficit caused by the collapse of the oil price. For the first time since Putin took office the government is expecting the current account to go into deficit in the second half of this year.

The federal treasury was in surplus in the first quarter, but income is falling fast. Rather than commit to a big handout of cash now, the Russian government is taking its time to properly assess the damage before bringing out its wallet. The Kremlin clearly thinks things are going to get worse before they get better.

Taxes have not been forgiven but merely postponed. The government will opt for partial compensation of wages and salaries at the level of the maximum unemployment benefit. But it will only do so after May 18. The regional authorities will “exchange” the exemption from lease payments and some property taxes for businesses into the obligation to protect jobs and curb prices.

The main blow will land on small private companies serving end users as well as the service sector. This will undermine income for at least 20mn people — one third of Russia’s economically active population.

Regional budget revenues from personal income tax will fall by 20-25% in low income regions to 40-43% in the big cities like Moscow and St. Petersburg.

The fall in tax revenues will lead to budget cuts that will further depress growth as the Russian economy’s performance remains tightly connected to the budget and that will further hurt the regional economies.

The condition of the federal budget depends as ever on the curve of oil prices and the depth of the economic recession.

“Since the quotations are unlikely to recover by the end of summer, my estimate of the missing budget revenues in the second quarter would be RUB1.6 trillion-1.7 trillion in the oil and gas losses. I expect RUB650bn-800bn lost due to lower income taxes, VAT, excise taxes and other charges. In other words, in the most optimistic scenario, the budget will reach 50% of the target levels,” said Vladislav Inozemtsev, director of the Centre for Post-Industrial Studies in Moscow, in a recent article in Riddle.com. “At the same time, budget expenditure may increase due to increasing transfers to the Pension Fund (by RUB300bn-400bn) and subsidies to regional budgets (by RUB300bn-500bn).”

That will leave a roughly RUB3 trillion hole in the budget from a total planned spend of RUB19.8 trillion that will be taken out of the NWF, which holds circa RUB9 trillion after part of its funds was used by the finance ministry to buy the Central Bank of Russia (CBR) 50%-plus one share in Sberbank in April. In other words there is enough money in the NWF to cover budget deficits for three years at these levels of deficits.

But that is assuming none of the money in the NWF is used to stimulate the economy, which seems very likely to happen. The Kremlin is caught on the horns of a dilemma: on the one hand it needs to deliver on an economic recovery as soon as it can or face rising social tensions and protests, and on the other it wants to conserve as large a reserve as possible to be able to spend its way out of future crises, or even the deterioration of the situation due to the current crisis.

It is a central part of Putin’s thinking that the reserves buy Russia immunity from economic attack by the US and its other rivals and that spending down the reserves to nothing will make Russia vulnerable to pressure or fresh sanctions. Given Washington’s refusal to lift sanctions on Iran, its actions to block Iran’s request for IMF help and even the decision by Washington to impose fresh sanctions on Tehran in the midst of a global public health emergency, Putin probably has a point.

To create some wiggle room the government is likely to trim budget spending to get through this difficult period using as little of its NWF reserves as it can get away with at the expense of letting the economic crisis last a bit longer than otherwise.

“The authorities will doubtless try to reduce the period where they provide support to businesses and pay benefits, shrinking it to one to two months, i.e. until May or June,” says Inozemtsev. “They would do so in the hope that summer and the dacha season may mitigate the severity of financial problems faced by Russians. All this means consumer demand will remain low not only in the next month, but probably until the end of summer; then the Kremlin will think about the strategy for an autumn-winter campaign: it will assess trends in the oil market, calculate losses caused by anti-epidemic measures, estimate the most realistic prospects for resuming growth and identify methods of financing the budget deficit in the third and fourth quarter.”

The upshot of this policy is enough will be spent to support SMEs and those that are unemployed to get them through the next few months. The summer is an easy time in Russia when much of the population move to the dacha and become largely self sufficient. That buys time to get to the autumn when oil prices are expected to recover somewhat, which will give the Kremlin more options.

However, one of the consequences of this policy is that while the economy may not collapse and the government spending plans can progress as originally conceived, companies will stop investing and that will exacerbate the de facto stagnation Russia has already been experiencing over the last five years. The effect is most noticeable in the oil sector, where most of Russia’s western Siberian oil fields are mature. In a recent interview with bne IntelliNews Valery Borisov, the CFO of ChelPipe, pointed out that the rate of drilling has tripled in recent years for only nominal gains in production. Without continuous investment Russia’s oil production will start to fall and the same is true in many other industries. That will lead to fresh budget problems.

But it is not all bad news. Some sectors will escape largely unscathed like the agricultural sector, production of essential foodstuffs and basic consumer goods, housing and utilities services, communications and telecoms. After the bowl of the crisis passes other sectors will see a rebound like retail, group catering and transport in the second half of this year. So as ever Russia will muddle through in one piece and continue to make slow progress.