Pandemic shock

The arrival of the coronavirus in Russia has knocked this whole system off its feet again. Spending has soared as regions scramble to beef up healthcare facilities and at the same time try to offer subsidies and stimulus packages for the local economies. Even those regions that have managed to accumulate some reserves have found they do not have enough to fully absorb the corona-shock. Early this year, 37 regions only had reserves amounting to less than 5% of their income in 2019. All the regions are being forced to turn to the centre for help.

“Regions, on the whole, lost about 26% of their revenues in the first seven months of this year compared to the same period in 2019. Although regional revenues rebounded slightly in the summer, they can easily plunge again in the second wave of the pandemic,” Toth-Czifra says. “Oil- and gas-producing and processing hubs, such as the Yamal-Nenets Autonomous District, the Krasnoyarsk Territory, the Astrakhan Region, and the Komi Republic suffered a double whammy –pandemic and oil price decline – and lost up to half of their revenues in the second quarter.”

The situation has somewhat improved since, but federally mandated deferments of tax payments mean that revenues are still lagging significantly behind plans. Even wealthy regions like Tatarstan had to rely on state guarantees to cover healthcare expenses as the federal budget absorbed two-thirds of the republic’s tax revenues.

The federal government has transferred RUB2.13 trillion ($27.97bn) in the first eight months of the year to the regions, which is RUB697bn ($9.13bn) more than in the same period a year earlier.

“This includes at least RUB200bn ($2.62bn) of extra grants announced in April, with RUB100bn ($1.31bn) still to be transferred by the end of the year and RUB100bn next year,” says Toth-Czifra.

And the money has been unequally distributed, with the politically powerful regions taking more and the politically weak regions getting less than they need to meet their requirements, according to Toth-Czifra.

As part of the pandemic response the MinFin has eased the rules on commercial loans, but this has been capped: regions can double their debt to pay for pandemic responses by turning to the banks, but only to the limit of what they are allowed to borrow from the federal government. This gives the green regions a lot more firepower, but the red regions are not allowed to borrow anything at all and so have been left behind. Overall the total borrowing available to all Russian regions is effectively capped at RUB74bn ($970mn) – a small amount when compared to the size of the transfers already made from the centre during the first eight months of this year.

Ironically these rules also encourage regions to get into as much debt as they can, as that improves their ability borrow. The tiny Republic of Mordovia, for example, with a population of less than a million people, can borrow an extra RUB3.96bn ($51.8mn) in debt because it was already deeply indebted to the Ministry of Finance.

The Ministry is still working on the problem. As bne IntelliNews has reported, Russia’s tax system has already been through a drastic and highly success reform that has seen the price a barrel of oil needs to be for the federal budget to break even fall from $115 in 2008 to around $42 today. Scams have been closed down, every cash register in the country has been hooked up to the tax ministry’s IT system and IFRS9 accounting rules have been imposed on everyone. The tax reforms have now moved a new phase where the whole mineral extraction tax (MET) regime is being overhauled and new rules for oil, gas and metals have been passed by the Duma in just the last month that totally change the way these taxes are calculated and charged.

And how the regions are funded have also been caught up in the MinFin’s brio. In October, MinFin seemingly agreed to expand regions’ rights to use funds under budgetary loan agreements, says Toth-Czifra.

“Additional funds might be redirected from the National Projects – a series of Russia’s spending priorities in 13 policy areas – the deadline for which has been pushed back by six years to 2030 and will almost certainly be refocused on the healthcare system,” Toth-Czifra wrote. “But already some governors have indicated that these measures are still not going to be enough.”

Alexey Teksler, head of the Chelyabinsk Region, called for the removal of borrowing restrictions altogether. Alexander Tsybulsky of the Arkhangelsk Region, who in May tried (and failed) to solve his region’s financial problems by absorbing the Nenets Autonomous District, concurred, adding that his region had received only about a third of the support needed.

After bouncing back nicely over the summer the International Monetary Fund (IMF) recently improved Russia’s GDP outlook from a 6% contraction this year to only 4.4%. This was due to the strong recovery in consumption that lifted the economy. But everything started to go wrong again in the last week of September when the corona-infection rates surged and set fresh records for daily infections.