Page 7 - bne IntelliNews Country Report: Russia Dec17

percent of their debt per year. Repayment requirements increase to 10 percent in 2020, then 20 percent in 2021. The back-loaded repayment scheme is just another way for Russia’s leadership to delay the pain, but it risks applying the most pressure at the most inopportune time, just as the Kremlin begins the difficult process of managing Putin’s succession.
Seeking to ensure that the regions comply with their repayment obligations, the Ministry of Finance announced new sanctions on regions threatened by default. According to the new rules, if a region misses an interest payment (unlikely, since the federal budget loans have just a .1 percent annual rate) or miss a repayment on principal (more likely), the region will theoretically be forced to repay the rest of their debt to the center all at once. Theoretically, at least, as some doubt Moscow’s preparedness to stick to its own rules. Moody’s analyst Vladlen Kuznetsov told RBC that he expects the Ministry of Finance to take “a rather flexible stance in these cases to avoid a regional default.” The Director of the Independent Institute of Regional Policy, Natalya Zubarevich, is also skeptical. “2018 will pass, and we’ll see if it’s possible, for example, for Mordovia and Khakassia to reduce their deficit and debt. While they have only been building them up, no one has been held responsible,” she says, adding that she does not interpret the Ministry of Finance’s statements literally. “Final decisions on imposing financial sanctions on debtor-regions,” Zubarevich notes, “will not be made by the Ministry of Finance. Rather, they will be made in the Kremlin.”
“Final decisions on imposing financial sanctions on debtor-regions,” Zubarevich notes, “will not be made by the Ministry of Finance. Rather, they will be made in the Kremlin.”
The regional governors find themselves caught between a rock and a hard place. The Kremlin continues to pressure even the most indebted regions to fulfill the May Decrees – but the Ministry of Finance’s new rules also limit the regions’ maneuverability. Regions with debt problems are officially prohibited from seeking new loans from banks at interest rates higher than the “key rate + 1 percent” formula. This restriction could prove problematic for some of Russia’s most underwater regions. In September, notes RBC, Mordovia took a loan at 11.5 percent, despite a key rate of 8.5 percent. The federal government’s simultaneous demand of decree fulfillment and fiscal responsibility bodes poorly for Russia’s economy, says Zubarevich: “Some regions will simply cut down all expenditures on the national economy, where possible, and not invest in development at all – but they will fulfill the decrees.”
At least officially, the Kremlin has made clear that governors will now be held accountable for debt problems in their regions. On November 15, Putin signed a decree doubling the number of indicators with which the central authorities will assess regional governor performance. Debt, for the first time, features prominently. Governors must report their region’s debt-to-revenue ratio (without counting fiscal transfers as revenue) annually. Superficially, additional indicators mean added scrutiny for regional governors. But Russian political observer Nikolay Petrov sees a different logic: “In fact, it seems to me that the more indicators, the less rigid and strict evaluation becomes...when you have 24 indicators, the picture is less straightforward.” More flexible evaluation, Petrov adds, means greater flexibility for the Kremlin to replace regional governors. “On one hand, your hands are untied and any governor can be accused and changed because some indicators look worse than they ought to. And on the other hand, it is impossible to objectively assess the performance
7 RUSSIA Country Report December 2017 www.intellinews.com