In Stratfor's 2017 Fourth-Quarter Forecast we wrote that the Kremlin would be sure to bail out or take over businesses that could make the most difference to the electorate and bolster strategic sectors as the country prepares for elections in March and September 2018. Russian President Vladimir Putin has now ordered action to tackle Russia's regional debts, confirming that analysis and readying the country for a domestic political battle.
The Kremlin is starting to address one of its most dangerous problems: Russia's regional debts. Russian President Vladimir Putin ordered the federal government to start handing out targeted loans for regions to pay off their market debt while the state banks restructure regional debts. Putin has also ordered the regions to cut their debts to less than 50 percent of their revenues by the end of the year, well ahead of the crucial 2018 elections.
The regional governments are floundering in debt under the Russian federal government's hefty tax requirements for nearly all of the 85 official regions. Most of them have been forced to borrow heavily both commercially and from the state. Russia's Finance Ministry calculates that only 10 regions are financially stable — half as many as there were in 2015 — and Standard and Poor's estimates that those remaining owe more than $100 billion, making up nearly all of the country's debt. More than 25 regions have debts that exceed their revenues by over 85 percent, at least four have stopped making payments on state loans, and six have reportedly defaulted on commercial debt payments. According to former Finance Minister Alexei Kudrin, 13 regions could go bankrupt by the end of the year.
The debt problem has persisted for years, causing many regional leaders to buck the federal government's demands for funds and support. The Kremlin responded with a rash of regional purges — ousting 19 governors this year alone — but political restructuring alone can't eliminate the danger from massive debts or prevent bankruptcy. Moscow must finally step in and offer debt restructuring and bailouts, but the question is how much the Kremlin coiffeurs can contribute. The Russian federal government is already taking on financial burdens across the country by bailing out the defense sector and state banks as well as nationalizing the largest struggling private banks — all to the tune of hundreds of billions of dollars.
For now, the Kremlin has funding options: dipping into its $425 billion in state funds, pumping the oligarchs for more cash, or borrowing from the international market. But Russia has long avoided the last option, particularly while the West continues to sanction the country. To get around this problem, Moscow has been making friends in other regions such as China, India, Saudi Arabia and Qatar. There are ways for the Kremlin to stave off regional instability for now while Putin prepares to run for a fourth presidential term in March, but the structural issues that led to the regional debt crisis persist. This issue will rear its head again in the future, and remain a potential source of instability in Russia.