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Opinion
December 1, 2017 www.intellinews.com I Page 23
debt-to-revenue ratio stands at a mind-boggling 185%, but the republic is hardly alone; twelve regions have debt-to-revenue ratios between
80 and 100%, while seven worse-off regions are burdened with debts equal to between 100% and 125% 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” programme 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 programme limit the regions’ pain – they will only need to repay 5% of their debt per year. Repayment requirements increase to 10% in 2020, then 20% 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 re- gions to fulfill the May Decrees – but the Ministry of Finance’s new rules also limit the regions’ maneu- verability. Regions with debt problems are officially prohibited from seeking new loans from banks at interest rates higher than the “key rate + 1%” for- mula. This restriction could prove problematic for some of Russia’s most underwater regions. In Sep- tember, notes RBC, Mordovia took a loan at 11.5%
, despite a key rate of 8.5%. The federal govern- ment’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 devel- opment at all – but they will fulfill the decrees.”
At least officially, the Kremlin has made clear