Experts note regions are moving towards total austerity

16 june 2015

Statistics suggest regions are cutting spending on utilities (-2% in four months in 36 regions) and the national economy, meaning less money going on construction and road maintenance. There are also attempts to cut social programs, especially education: total education spending rose by a mere 0.4% while 32 regions slashed their education expenditures.

Under the classification used by experts at the Center for Studies of Income and Living Standards of the Higher School of Economics 19 Russian regions that are deep in debt and have low budget revenue can be classified as being in default. Experts conclude that dependence on short-term expensive bank loans has put even the more ‘responsible’ regions in an awkward position. For instance as of May 1 the Perm Territory (which was the first to obtain an anti-crisis budget loan to refinance its business debt this spring) has a debt load of just 10%. Darya Andreeva, an expert of the Analytical Center, agrees with her colleagues by and large. “The Perm Territory has low debt but late last year they had to take out a loan at a high interest rate to meet their budget obligations,” Ms. Andreeva explains. “Regions spend money unevenly throughout the year and towards the end of the year there’s always more money going out. So a lot of regions were caught in this situation where in December they had to take on almost a third of the total debt for last year.”

“Under the anti-crisis plan 310 billion rubles is to be allocated to refinance bank loans that must be paid off in 2015. As of May 1, 70.7 billion rubles has already been spent of that money with the rest to be made available later in the year. In the meantime, the Finance Ministry keeps giving out large amounts of treasury loans while banks are continuing to bankroll the regions at the same level as last year at high interest rates and, regretfully, nobody’s stopping them. So at this point it is difficult to say if the money allocated by the Finance Ministry will be enough and if regional governments are continuing to get bank loans, then in 2016 they’re going to be facing the same problem, but a lot more than 310 billion rubles will be needed to help them out then,” Ms. Andreeva says.

“Increased income tax revenue resulted from the extra high profits of oil, chemical and metal producing companies. There are two factors at play here: exports are cheap at the moment but domestic prices are rising very fast, catching up with the global market,” the experts says, noting good performance of Russia’s major producers of mineral fertilizers and metal makers. “Industries that don’t export their products are seeing their performance decline, and another very worrying sign is that the revenue from personal income tax is rising very slowly, much slower than the inflation. Currently monthly statistics is distorted by devaluation but over the past three years the personal income tax accounted for a larger share of regional budget revenues than the corporate income tax (30.1% versus 20%). The low rise in personal income tax revenues means that employee pay is falling and in all probability personal income tax revenues will shrink by the end of the year as well,” Ms. Andreeva notes.