Page 6 - bne IntelliNews Country Report: Russia Dec17

2.0 Politics
2.1 Russia’s self inflicted regional debt crisis
Domestic policies in Russia can sometimes feel immune to change – until Vladimir Putin intervenes, that is. At a late-October meeting with government officials, Putin again voiced his concerns about growing debts on regional balance sheets. Turning his attention towards regions in which debt substantially exceeds annual revenues, Putin cautioned, “At this level of debt, regions will not be able to effectively deal with the challenges of development.” Worse yet, failing to address sub-sovereign indebtedness stands to “lead to serious financial imbalances” between the regions. Putin is right to pay attention to domestic fiscal problems – especially as the March 2018 presidential election approaches. But this is a case of “too little, too late” and obscures that federal government policies sparked the regional debt boom in the first place.
As the Russian economy lurched into stagnation in late 2012, then tumbled downward as low oil prices and Western sanctions combined in 2014 to slash tax revenues, the Kremlin was busy pressuring ill-resourced regional governments to boost expenditures. Within hours of his third inauguration, Putin delivered on populist campaign promises and unleashed a program which included, among other costly endeavors, a decree mandating that public-sector salaries be increased by 50 percent by 2018. Regional governments were tasked with executing the orders, known collectively as the May Decrees, but were not provided adequate funds to do so without turning to commercial banks for high-interest loans. Total regional debts have increased fivefold over the last decade, but consolidated figures mask an even more dire reality in many regions. Mordovia’s debt-to-revenue ratio stands at a mind-boggling 185 percent, but the republic is hardly alone; twelve regions have debt-to-revenue ratios between 80 and 100 percent, while seven worse-off regions are burdened with debts equal to between 100 and 125 percent of their revenues.
Federal policy with regard to this issue has been reactive rather than proactive. The Ministry of Finance managed to decelerate the growth rate of consolidated regional liabilities by 2015 by replacing high-interest commercial debt with practically zero-interest loans from the federal budget (“budget loans” or “budget credits”) which had a maximum maturity of three years.
As the maturity date of the budget loans approached, regional coffers remained starved of funds, and the Kremlin again kicked the can down the road. In September of this year, Putin announced a “restructuring” program which would begin January 1, 2018, and would allow regions an additional seven years to repay their debts to Moscow. Some regions, Putin said, would have as long as twelve years to fulfill their obligations. The details of the restructuring program suggest a twofold strategy from the Kremlin: to avoid regional defaults by delaying repayment as long as possible and to hope in the meantime that Russia’s economy will recover. The first two years of the restructuring program limit the regions’ pain – they will only need to repay 5
6 RUSSIA Country Report December 2017 www.intellinews.com