Looking back on the past couple of weeks in Russian politics, I am going over the state of regional finances as of the end of May, pointing out why and where there are politically risky pressure points that will not be easy to handle while the government’s focus remains the war. I am also musing upon what a series of resignations of mayors across Russia may mean for the directions of the Kremlin’s domestic personnel policy. In the “also-happeneds” section I discuss some news regarding the upcoming September regional election and industrial policies.

(Nearly) mid-year regional finances update

The Finance Ministry wants to introduce a country-wide tourist tax, which would benefit regional budgets. The measure, which has been tried out in four regions over the past years (in a slightly different structure), is expected to bring up to 26.6 billion rubles a year to regional treasuries, albeit not evenly distributed.

On the one hand, the ministry probably wants to harness the uptick in domestic tourism prompted by the war. On the other hand, there are likely wider concerns about the viability of regional and municipal finances that have prompted the federal government to come up with solutions, of which the tourist tax is only one. Due mostly to an economic growth sustained by defense orders, growing wages and an ongoing construction boom, 2023 was a relatively good year for regional finances, which depend mostly on personal and corporate income tax receipts for their own income (and various transfers from the federal budget for the rest), even as expenditures grew even faster. As of May 2024, personal income tax receipts still reflect this income growth and are 35.9 percent above the same period of last year on the whole. However, corporate tax receipts are 13.9 percent below last year’s levels in nominal terms and interbudgetary transfers are roughly the same as last year, meaning lower in real terms. And the aggregate numbers cover wide regional inequalities, both in incomes (the Finance Ministry’s regional budgetary figures can be compared on the websites of some regional governments) and in liquidity. The federal government may celebrate that there are 3.655 trillion rubles in remainders on regional accounts – a historical maximum – but half of this is on the accounts of only five regions: Moscow (1.1 trillion), the Moscow Region, St. Petersburg, Sverdlovsk and the Yamal-Nenets Autonomous District. If one looks at regions outside of the capital, their debts-to-savings ratio has actually slightly worsened.

The problem facing the federal government is not that regions will go bankrupt – more than three-fourths of their debt is held by the federal government itself – but that due to a lack of available funds regions and municipalities will keep putting off investment into infrastructure or spending on essential public services.  

The overwhelming majority of the extra income from the government’s ongoing tax reform will benefit the federal budget (as expected), and while there has been some pushback against this, mostly by opposition politicians (e.g. in Irkutsk or Tomsk), regions cannot really do anything about it. The federal center taking all the money is not necessarily a bad thing; otherwise, tax raises would mostly benefit already affluent regions. However, there is no indication or guarantee in the ongoing tax reform that the extra receipts will be redistributed. For one, the priority of the federal budget remains the war and the financing of construction projects in the occupied territories. In 2023, 541.2 billion rubles were transferred to occupied regions in the form of grants and subsidies – more than half of what Russian regions got in similar transfers – and this does not include the money poured into the occupied regions by other means, including from Russian regions in the framework of the “sheftsvo” system.

All while the Kremlin also wants regions to control prices, to speed up the creation of “cultural clusters”, and of course to spend money on military recruitment bonuses and social payments to soldiers’ families. This is the second year of Putin urging regional budgets to spend more on infrastructure projects, too, mentioning many of them (e.g. a long-planned bridge between Sakhalin and the Russian mainland) during his recent Far East trip. Many of these plans depend on drawing in private investment as well as regional funds, all while higher wages will further reduce the profits on which companies pay corporate taxes and high interest rates limit investments.

Policies such as prioritizing the defense industry, military recruitment and banning migrant workers from various activities will also affect regional and local budgets that will have to spend more on public services or transportation, or face a shortage of bus drivers or police officers. The federal government expects regions also to deal with paramedics who had demanded higher pay in several regions (and indeed some have already announced a slight raise). And some regional leaders are trying to indicate that this is a problem. In a recent interview Radiy Khabirov, the head of Bashkortostan – a tightly controlled, but increasingly unstable region – mentioned that the region needs additional revenues to solve social problems and deal with labor shortages. Former Kaluga governor Anatoly Artamonov suggested that a type of targeted budgetary grant should be introduced for regions to deal with these expenditures, but this does not seem to be high on the federal government’s agenda.  

The plan to introduce a country-wide tourist tax is one part of the push to free up more money in regional budgets at a time when the federal government is reluctant to redistribute more funds for domestic purposes and does not expect to return to a sustainable growth path in the near future. Forgiving two-thirds of budgetary loans, which should save regional budgets an additional 200 billion rubles a year for the next three years – a continuation of the federal government’s policy of replacing market loans with budgetary loans – is another one, even though the details of this have not been worked out yet. Regions will also soon be able to use the remainders of federal transfers to finance investments falling under the National Projects. In fact, in all three cases – the tourist tax, the debt relief and the use of unspent funds – the purposes on which regions can spend the additional funds are tightly circumscribed. The odd measure out would be the indexation of budgetary grants to actual (rather than forecasted) inflation, which the Federation Council proposed earlier this month.

However, along with the above the federal government also wants regional governments to save money by working more efficiently. Ongoing – controversial – municipal reforms in several regions may serve the purpose of “pooling” budgets while eliminating a number of local officials and representatives. More recently, in the framework of the tax reform, the government moved to limit the amount of budgetary funds that regions can allocate to finance public-private-partnership (ppp) projects at 10% of own revenues, while also adding related restrictions on regional debt, likely in an attempt to reduce the cases, in which regional officials favor local allies in inefficient ppp deals. Regions would also be able to introduce similar restrictions on the municipalities in their territory. The government also wants regional tax collection improved, with regional tax offices providing monthly reports on big debtors. Furthermore, it cannot be ruled out that the recent wave of arrests of officials in several regions in corruption cases – many of them having to do with construction and housing – was not simply the consequence of a country-wide green-light on cases that were halted due to the war, but a sign that the party is over until further notice. The impact of such steps in a country where corruption is as much the lubricant of politics as it is a means of elite control, is questionable, to say the least – but this does show that the federal government is actually concerned about governance capacity at an administrative level whose main function is to serve as a buffer between citizens and the Kremlin.

Mayoral resignations

For the Bear Market Brief I covered the increasingly widespread practice of dynastic appointments to key positions at the highest echelons of the government, which echoes regions such as Chechnya – where this has been commonplace for many years – but also highlights the Kremlin’s approach to supervising and benefiting from ballooning war spending, which remains a mixture of efficiency-building and nepotism.

But over the past weeks we have seen significant personnel changes in the regions too, which also reflect the Kremlin’s idea about public administration policy and its evolution. Since the beginning of the year at least 22 mayors resigned or were replaced, many of them in regional centers. Eight mayors resigned just in June.

The context of mayoral resignations is often the appointment of a new governor. As mayors of major cities are regarded, at best, a member of the governor’s team and at worst, a potential rival, and the overwhelming majority of city mayors are not directly elected, the appointment of a new head of the region often leads to changes in cities as well. Intransigent mayors often become targets of corruption investigations. Similarly, the de facto dismissal of mayors is often regarded as part of regular government reshuffles in the regions (e.g. in Ivanovo where the city’s former mayor was appointed to the regional government).

Every once in a while, in the context of these dismissals someone will raise the possibility of reinstating direct mayoral elections, which were gradually scrapped in Russia over the past decade, sometimes facing notable popular opposition (e.g. in Novosibirsk last year). This is not a clear United Russia vs. anyone else issue, but rather a center vs. regions issue. Recently in Voronezh, three deputies requested bringing back direct mayoral elections, one of them sitting with United Russia. In Magadan the city’s mayor himself spoke in favor of direct elections recently (albeit only after local deputies did not approve his report on his activities in 2023). The State Duma discussed bringing back direct mayoral elections twice over the past year, both times in relation to bills written by systemic opposition parties.

It is unclear what exactly bringing back direct mayoral elections would change on the ground. Compared to even a couple of years ago the Kremlin controls the selection of candidates, even at the municipal level, much more tightly. With recent amendments to Russia’s infamous “foreign agent” legislation, the Justice Ministry can disqualify any candidate from any election simply by labeling them a “foreign agent”. Changes planned in the framework of Russia’s public administration reform would allow governors to dismiss mayors more or less at will, and in any case, most municipalities strongly depend on their region and federal funds to finance even the most basic expenditures of their budget. It may just be that the Kremlin does not like to take chances in domestic politics – but the issue is sure to stay on the agenda.

Looking at the new (interim) mayors appointed this year, most can indeed be called associates of their governors. In Novosibirsk and in Sochi former deputy-governors were appointed to serve as mayors (in Sochi the previous mayor had also held this office prior to his appointment), but at least five new mayors were previously members of regional governments. Notably, two mayors are alumni of the School of Mayors, a program set up recently to mirror the School of Governors at the Presidential Academy of National Economy and Public Administration to produce a more homogenous cohort of city officials.

Outsider (“Varangian”) governors without strong links to the region that they were appointed to lead often bring in their own team from their previous station of service and appoint them to key positions gradually, typically within the first year of their term. Consequently, governors do not shy away from promoting outsiders to mayorships (e.g. Tomsk’s mayor, Dmitry Makhinya, appointed by the local assembly with the support of the governor last year, had held office in the Omsk Region). However, mayoral appointees, perhaps due to the nature of the job, are more often locals trusted by the governor. And this is impacting gubernatorial appointments as well: in May, after years of the Kremlin favoring outsider technocrats, three former municipal leaders with local roots were appointed governors: in the Tula and Kemerovo Regions and the Khanty-Mansi Autonomous District (along with the new head of the Kursk Region, another official with local roots who had held the office of deputy governor).

Whether or not this is a conscious staffing strategy of the federal government I do not know. One could draw the conclusion that after several years’ worth of efforts to uniformize public administration officials and weaken local self-governance the Kremlin is more relaxed about allowing local officials into leadership positions. One could also argue, however, that as long as upwards mobility is limited at the top by nepotistic appointments and gerontocrats, the system of cadre rotation is less able to fulfil its core promise to “outsider” officials who agree to spend several years in remote regions with the goal of being promoted to more lucrative federal jobs.

However, this shows that the story is much more complex than the Kremlin steadily cracking down on local officials and elites in favor of interchangeable outsiders. Uniformization is still a key goal of the system, but the emphasis is on loyalty and risk avoidance.

Also-happeneds

• Online voting in September: it emerged in June that the Central Electoral Committee had allowed Moscow to ditch paper ballots and switch to completely electronic and online voting in September when the next elections to the Moscow City Duma will take place. The CEC later denied this – for now – but it is unclear if the situation will change again before September. Moscow has its own online voting system – which has been linked to a series of scandals and dubious results since 2021 – and in the 2024 presidential election the vast majority of votes allegedly cast in the capital were electronic votes. The main problem with the system (both in Moscow and in the regions where it is linked to the government services portal Gosuslugi) is its opaqueness, which arguably allows the authorities to use the same means of electoral manipulation and rigging (coerced voting, ballot stuffing, etc.) as they would with paper ballots, but more efficiently and less visibly to observers. An oft raised argument against it is that a complete switch to electronic and online voting would negatively impact the credibility of the vote, but, given that, according to the Kremlin’s own polling, only a part even of pro-Kremlin voters find the elections credible, perhaps this is less of a concern.  
• Elections in the Altai Republic: the local chapter of the Communist Party – along with independent deputies – is supporting Pyotr Bukach, a 38-year-old local independent deputy of the regional legislature against Andrei Turchak, the region’s recently appointed governor who had, until then, counted as one of the leaders of United Russia with good chances to clinch an important federal function. It is notable that Bukach is part of the same parliamentary group that attempted to force Turchak’s predecessor, Oleg Khorokhordin, to resign after numerous conflicts between Khorokhordin and local elites (I wrote about these in more detail here). Bukach is not going to be the only opposition candidate, but his running suggests that local elites are not rolling out the red carpet to the new governor who is coming in with a team of outsiders.
• Shipbuilding plans: Putin held a meeting on June 26 to discuss the development of shipbuilding, an industry that, according to the government’s plans, needs to ramp up production to support both the army and Russia’s forced trade pivots to Asian markets, but which has been facing delays and halted production due to sanctions. Among other things, Putin ordered the construction of another shipyard in the Russian Far East for the United Shipbuilding Corporation. In addition to that, Rosneft CEO Igor Sechin spoke about a planned metals plant in the Far East to support the Zvezda Shipyard and ultimately the development of the Northern Sea Route where Russia lacks access to ice-class vessels necessary for year-round navigation. Putin has recently appointed Nikolay Patrushev, the former secretary of the Security Council, to serve as his aide for shipbuilding; however, several other political heavyweights are active around the sector, from Sechin to the VTB bank, which acquired the USC last year.
• Belykh walks free: the former governor of the Kirov Region, Nikita Belykh, was freed from prison on June 22 after serving his 8-year sentence for bribe-taking. He served as governor between 2009 and 2016, one of the few regional leaders during Putin’s rule from the ranks of the liberal opposition, and briefly worked with Alexey Navalny who worked as his aide shortly after his appointment (for his reelection in 2014 Belykh was already supported by United Russia). Belykh cannot leave Russia yet, as he is expected to appear in hearings related to an appeal in a different case brough against him by the authorities. He is also unlikely to speak publicly about politics, as doing so would almost certainly worsen his chances of staying out of prison or worse.
• Baikal logging: a bill that would significantly extend the possibility of logging around Lake Baikal for the purposes of construction works and building roads will soon enter its second reading in the State Duma and looks likely to be adopted. Upon its inception in 2022 the bill triggered significant protests in regions around the lake (which even some local officials supported) with people demanding more extensive public discussions with locals. The DumaBingo project, which monitors interest groups behind legislative activity in the State Duma, has launched a petition against the project, which as of June 29, has around 900 signatures. Environmental issues have been one of the few types of issues that over the past years managed to trigger significant public protests in several Russian regions, which the federal authorities largely (though not uniformly) tolerated. Over the past years, however, the authorities have been trying to push back against this type of movements as well.