Page 63 - bne Magazine February 2023

bne February 2023 Eastern Europe I 63
Most of Russia’s internal regions are specialist producers based on their natural resources and have been differently affected depending on the product. For example, Toth-Czifra
says there are continued problems in the timber producing regions of the Northwest, as well as regions which are heavily exposed to carmaking, such as Kaluga, Tartarstan and Tolyatti, after the automotive industry collapsed. Entire cities are dependent on carmaking,
so the collapse of the sector is causing local crises that can't be easily solved.
Machine building, coal mining, metallurgy and more recently gas producing regions, all of which are either facing export bans or logistic bottlenecks thanks to the railways clogging up, are all feeling pain.
These problems are manifest in the region tax revenue collection, which was holding up well in the first half of this year but began to tumble in the third quarter, says Toth-Czifra. While the regional budgets are currently
on track to end the year on plan, it is already clear that the centre will have to start paying subsidies or offering credits
to a lot more regions in 2023 as their financial situation worsens. At the end of July only nine of Russia’s 82 regions had collected less than half their due taxes. But November 17 regions had fallen behind the budget plan for tax collection.
“Siberia and the Far East are still doing relatively OK, with some notable exceptions. But due to a lack of infrastructure and very concentrated investments into a handful of big projects, there's a limit to how much these regions can heat up as others cool down,” says Toth-Czifra.
The picture Toth-Czifra's deep dive paints is that Russia is not in trouble yet, but is clearly already feeling some pain and the situation is deteriorating, but not crashing.
“Even if the situation still worsens before the end of the year, the federal budget will likely simply increase transfers for now. But these problems will continue and receipts – including personal income tax, which has been fairly stable so far – will drop further in 1H2023,” Toth-Czifra said in a post on social media.
In the long term Europe has already won. Russia has been through five big crises in the last three decades and it has bounced back from each stronger and richer. However, it cannot recover from this crisis like it has done from the others.
Since 1991 Russia has been a market economy and outward looking, trading actively with the whole of the rest of
the world. The difference with this crisis is that is no longer true. It has turned inward and the sanctions seek to restrict its trade.
Russian oil exports are a perfect example. Until February, Russia was selling oil at market rates and had finally joined the OPEC+ cartel to be better able to manipulate international prices. Since February Russia has been happy to offer discounts as deep as 35% on the market price, simply to keep
the revenues coming in. The Kremlin is now more focused on earning enough cash to pay for the war and economic support at home than it is on profitability. And this mentality will have to remain in place until sanctions are lifted and it is returned to the
Industrial production dynamics, February to June 2022
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