- Though Russia stands to pull out of its recession this year, many of the country's regions will continue their economic decline.
- Some regions will keep pushing back against the Kremlin's policies, which are compounding their economic problems, by defaulting on loans and running large deficits.
- The Kremlin will try to crack down on the regions and their leaders, perhaps by imposing internal sanctions and stringent security measures.
After two and a half years in a deep economic recession, the Russian economy has taken a turn for the better. Moscow has tightened its belt, and its efforts are paying off, even though oil prices have not recovered and the economic sanctions against the country remain in place. In fact, Russia stands to pull out of recession this year. The country's economy is expected to start growing again in 2017 — by 1.5 percent, according to World Bank projections — thanks to a budget based on more realistic oil prices and a slimmer spending plan. Foreign investment has also started trickling back in as the rest of the world grows accustomed to navigating Russia's sanctions. Western credit rating agencies such as Standard & Poor's have even raised the country's outlook from negative to stable.
But despite the overall economic upturn, Russia's people are still in dire straits. One-quarter of Russian companies cut salaries in 2016, at times even skipping payments to their employees. The average monthly wage in Russia dropped 8 percent last year (after falling 9.5 percent in 2015) to under $450 — less than the mean monthly pay in China, Poland or Romania — while the poverty rate jumped to nearly 15 percent. And the country's regional governments are not faring much better, much to the Kremlin's consternation.
An Overwhelming Problem
Russia's vast territory is split into 85 official regions of varying shapes, sizes and designations. (Two of these regions, Sevastopol and Crimea, are not internationally recognized as Russian territory since Moscow annexed them from Ukraine in 2014.) According to the Russian Finance Ministry, only 10 of Russia's 85 official regions — most of them commodity producers and metropolitan areas with substantial tax bases — are economically or financially stable, down by half since 2015. Of the country's remaining regions, 30 manage to scrape by because direct federal subsidies make up at least 33 percent of their revenues. Half of the $3.5 billion in subsidies that the Kremlin disburses each year goes to just 10 of those regions: Dagestan, Chechnya, Yakutia, Kamchatka, Crimea, Altai, Tuva, Buryatia, Stavropol and Bashkortostan. That leaves more than half of Russia's regions struggling to fulfill their social obligations and meet the federal government's demands for funding.
Seventy of Russia's regions send 63 percent of the income they generate to the federal budget, keeping only the remaining 37 percent. The federal government, meanwhile, returns at most 20 percent of the money by way of subsidies and intergovernmental transfers. The Kremlin has raised the amount of income it takes from these regions by 12 percent over the past four years, and it is set to increase its cut by another 2 percent this year. To make matters worse, Moscow foisted much of the burden of social spending off on regional governments after the 2008-09 financial crisis. Russian President Vladimir Putin then issued a series of decrees in 2011 and 2012, after winning a third term in office, calling for various improvements in the country, from replacing dilapidated housing to increasing salaries for doctors and teachers. The so-called unfunded edicts added tens of billions of dollars to regional budgets. Just a few years later, the country found itself back in financial crisis.
The combination of recession and growing financial obligations forced most Russian regions to run higher budget deficits. Rumor has it that the Finance Ministry allowed several regional governments to run deficits near 10 percent between 2016 and 2018, so long as they promised to get them back down to the Kremlin's official 3 percent limit by 2019. But 17 regions are running deficits above even the 10 percent threshold; the Republic of Khakassia, for instance, currently has a 43 percent deficit. Regional governments also increased their borrowing to fill the gaps and finance soaring debt, turning to state budgetary loans, commercial loans, securities and bonds, and financial credits. As the federal budget came under greater strain, regions began to rely more and more on commercial loans, mainly from Russian banks. (State-run Sberbank has issued 75 percent of the loans.) Though the Russian government's regional debt figures change constantly and differ from agency to agency, Standard & Poor's estimates that the country's regions have more than $100 billion in debt. If that number is accurate, then Russia's regional governments are responsible for the majority of Russia's overall debt.
The Regions Rise Up
The regions' plight bodes ill for the Kremlin, and not just from a financial perspective. Throughout Russia's history, the Kremlin has granted leaders of the country's many regions a fair amount of autonomy to compensate for the fact that Moscow could not possibly tend to all of them at once. This system eased the struggle of controlling the ungainly Russian landmass, but ensuring the regional rulers' steadfast loyalty to the federal government has been a source of constant concern for the Kremlin. Dozens of regions tried to break away or gain more autonomy from Russia after the fall of the Soviet Union; Chechnya's attempts at independence sparked two wars in the 1990s. During the 1998 financial crisis, many regional heads bucked the federal government's demands for funding, prioritizing their own financial survival.
Today, the Kremlin is facing a similar problem. At the end of 2016, more than 25 Russian regions had debt-to-revenues ratios of over 85 percent; the Republic of Mordovia's is nearing 200 percent. What's more, the regions have no path to economic recovery outside of increased borrowing — hardly a viable solution. Standard & Poor's estimates that regional governments would need to borrow another $20 billion just to cover the debt payments they have due this year. Between their high deficits and their high debt-to-revenues ratios, seven regions are teetering on the brink of financial instability. Yet the Kremlin has continued its demands for more money. Now, many regions are starting to push back.
In growing numbers, regional governments are failing to repay their federal or state bank-issued loans. The Ministry of Finance has admitted that more than a dozen regions have stopped paying off their government loans over the past two years, and four regions have reportedly defaulted on international loans. Mounting financial stress, moreover, has provoked backlash from some regional leaders. On Dec. 27, Tatar President Rustam Minnikhanov decried the Kremlin's plan to increase its take of regional income as "extremely dangerous" and an example of "stupidity." Minnikhanov even likened Moscow's current economic policies to Josef Stalin's dekulakization program, an initiative under which the Soviet government snatched private farmlands and turned them into catastrophic collective farms, killing millions of people in the process. Responding to Minnikhanov's tirade — which was broadcast on national television — Prime Minister Dmitri Medvedev warned the leader to "know Tatarstan's place."
Moscow Looks for an Answer
Beyond Medvedev's censure, the Kremlin's response to the regions' economic turmoil and discontent has been mixed. Putin called the rising regional debt levels a "serious" issue at his press conference in December but seemed to blame it on the regions themselves for violating the federal government's deficit rules. The Economic Development Ministry, meanwhile, has proposed boosting financial support for the regions by 9 percent ($30 billion) this year — a vast increase over the $300,000 bump laid out in the current budget. But Moscow has not adjusted its budget and intends instead to impose tougher economic policies on the regions. Putin has called on Finance Minister Anton Siluanov to implement a new budget code by 2019 to enforce existing standards for regional deficits and debt ratios. Any region that fails to fall in line with the regulations would be subject to sanctions (though what kind remains unclear), a plan that quickly gained traction among lawmakers in the Duma.
At the same time, Moscow has cracked down on regional leaders, arresting three different governors on corruption charges in less than two years' time. One of these leaders, the former governor of Kirov, was affiliated with the liberal technocratic circle that the Kremlin has systematically targeted in recent years. But another fallen governor, the former head of Komi, was a member of Putin's own United Russia party. Russian media devoted extensive coverage to each arrest, running pictures of cash-laden tables, diamond-encrusted fountain pens and elaborate gifts that the leaders had supposedly presented to call girls. Putin struck another blow to regional leadership Jan. 23 when he signed legislation requiring all governors to disclose their assets and incomes. In addition, although the Kremlin typically has a hand in gubernatorial elections, recent votes have ushered an extraordinary number of security services members into office. Putin has also begun appointing regional and district court judges to cut into governors' authority.
The Kremlin's somewhat scattered response to the regional upheaval is due in part to a battle raging between Russia's security services over which agency oversees regional policies. In 2016, the Federal Security Service (FSB) developed a new system to evaluate governors' performance based, at least in principle, on their regions' economic stability, their electoral performance and the Kremlin's confidence in them. Soon after, the Federal Protective Service (FSO) — which is fiercely loyal to Putin and has been feuding with the FSB for the past few years — came up with its own color-coded system to track governor performance and regional stability. Putin then ordered his personal forces, the National Guard, to hit the streets alongside FSO members to gauge local satisfaction with regional leadership, just as the FSB had reportedly begun beefing up its presence in various regions.
The financial instability plaguing Russia's regions is as much a product of the country's difficult economic position as it is the result of power struggles dividing the Kremlin. Though Moscow has the means to pre-empt and respond to the financial crises unfolding in its regions, it cannot settle on how best to do so. And until the federal government has settled its internal disputes, it will be of little help to its regional subjects.