As a background for a forthcoming report, I am highlighting some stories from the past month that show how Russia’s domestic political machinery shifts financial and political costs during the war. As the country is facing an increasingly uncertain-looking summer, I also ask a question that I asked four years ago: would it make sense for Putin to call off the upcoming elections? Read below about these and a selection of regional news.

Cost-shifting stories

In a short while I will have a new report out for Delphi GRC about veteran reintegration. I have already written about the topic more extensively both in this newsletter and, last year, for the Foreign Policy Research Institute. However, in the upcoming report I am focusing on cost-shifting, specifically how the internal logic of Russia’s domestic political machinery shifts the political and financial costs of reintegration away from the federal center onto regions and employers. 

This, of course, is not an isolated mechanism. Here are a couple of examples from the past month that show how cost-shifting is happening in the context of the war. 

The most obvious example from the recent past would be the various effects of the fuel supply disruptions on regional finances. In the coming months a lot will be written about this, including, I imagine, by me. Therefore I will only mention this briefly for now. The most direct way, in which the developing crisis will impact already struggling regional budgets is governors having to choose between subsidizing public services depending on fuel – such as waste collection, ambulances or public transportation – letting them atrophy or passing the costs on to users. In some regions services have already been cut, while in others service providers asked the regional government for support. The crisis will also further depress regional fiscal incomes, although this effect is going to play out later as fuel disruptions and price hikes affect downstream industries. 

Regional officials are also increasingly open about the choices that continued warfare forces on regional budgets. The legislature of the Maritime Territory adopted budget cuts at the end of May (for the second time already this year, following cuts in February), after the federal government cut subsidies for the region. The new cuts affected expenditures on road repair, education and even some social aid, all while the region once again topped up its military reserve fund. Vera Shcherbina, the region’s prime minister, highlighted that 2 billion rubles a month (adding up to roughly 8 percent of the budget) would have to be spent “on matters of state significance” until the end of the war. In the Novosibirsk Region, another region struggling with a growing fiscal deficit and its consequences, first deputy prime minister Vladimir Znatkov openly justified freezing construction projects in the region with the need to provide social aid to “special military operation participants and the population”. Even the trend of governors establishing more hands-on cabinets of ministers seems to be a reaction to these growing budget squeezes where governors understand their role as lobbyists with, and executors of the federal government, while trying to insulate themselves from the consequences of fiscal problems. 

At the same time, there has been no major financial shift from the federal center towards regions. In the first four months of the year, interbudgetary transfers remained essentially flat while inflation accelerated (albeit with structural change: discretionary transfers declined by almost 20 percent year-on-year, while subventions – transfers to regions to perform a delegated function – grew). While the federal government has continued its debt forgiveness program, now augmented with debt deferral and a renewed push to provide regions with cheap budgetary loans, this will not help regions in the long run. First, changed rules of the debt forgiveness program suggest that the federal government wants to incentivize regions to spend more on war-related objectives. Second, at the same time, to qualify for interest-free credit, regions need to keep their deficits under 10 percent of their own revenues, incentivizing them to cut everything else. Regions with severe revenue shortfalls will still be tempted to take out loans from the market (which have demonstrably benefited business circles close to Putin). Third, the deferred loan repayment makes it more likely that – barring significant revenue growth that would allow regions to rebuild financial buffers, or the further extension of debt forgiveness – regions are going to face higher debt servicing costs towards the end of the decade. 

But it is not only regional budgets – the corporate sector is also facing higher pressure. Another recent development to watch is the fate of lawsuits that the residents of Volgograd filed against mobile operators. The plaintiffs are seeking 30,000 rubles each in compensation for internet outages. As in many other regions, the internet shutdowns were introduced as a security measure but have continued practically indefinitely. If the court agrees with the plaintiffs (there is limited precedent) and especially if this is replicated in several other regions, this would mark another case of the authorities shifting the costs of domestic restrictions pushed by the security elite onto the private sector. A similar dissatisfaction is brewing in the Belgorod Region, bordering Ukraine, where even connection to whitelisted sites is reported to be spotty, in spite of the governor’s order to restore stable access. 

It is also becoming increasingly obvious that further tariff hikes are in the books for the population and for industrial users alike. In June, at its annual shareholder meeting, the major thermal and hydropower company RusHydro, which is the sole electricity provider in many of Russia’s Eastern regions, announced that it was facing bankruptcy risks due to the projected costs of maintaining and upgrading its Far Eastern infrastructure vs. the losses it is making in the same regions due to electricity prices being kept low for political reasons. The proposed solution, based on extending a dividend moratorium, essentially assumes that tariffs would eventually be raised to market levels in the coming couple of years, passing the costs onto industrial users and the population. A very similar story, on a smaller scale, is playing out in Volgograd, where the Rosseti grid operator asked Putin to allow the company’s local subsidiary to build debt servicing costs into electricity tariffs. Given the political significance of tariff hikes, the pushback of corporate users and the widespread anger over unexpected price increases earlier this year, this is not going to be an easy ride. 

And it is not just state-owned companies. In industrialized regions dominant corporations perform several state-like functions and the federal and regional governments regularly rely on this capacity reserve. Often these functions are embedded in agreements between regional and federal institutions. But when profits are squeezed, as they are in several key industrial sectors from metal to coal, so will this capacity, and companies will be incentivized to do the bare minimum and cook the books. In a recent example, at the end of June, Nornickel’s annual sustainability report noted that the company had directed nearly a third of its annual revenue to sustainability projects. Local residents however publicly ridiculed the claims, pointing out that the company conflated environmental compliance costs with quality-of-life improvements in order to be able to claim a larger investment, all while construction projects in the city are suffering further delays. 

In short, in order to be able to continue financing the war in Ukraine and suffer its consequences, the federal government is putting further stress on domestic state capacity, hollowing out its reserves. 

Elections ahead? 

Preparations for the September federal legislative and regional elections are in full swing, in spite of the growing uncertainties about the domestic social and political situation. As of today it looks like the elections are going ahead as planned, even though, as Meduza reported, there have been rumors of the security elite lobbying for the postponement of the votes. This would be technically possible under the state of high alert that, at this point, three regions have introduced due to the developing fuel crisis. As I mentioned above, this will likely have secondary effects in the coming months as growing fuel prices and shortages spill over into downstream industries such as agriculture, petrochemicals or transportation. 

The situation was similar in 2022, when the (regional) elections were eventually held. Back then I argued that the postponement of elections was likely would have been viewed by elites as well as voters as a dangerous knee-jerk reaction with unpredictable consequences,  and that the authorities had multiple other tools at their disposal to keep the votes under control as long as the administrative elite played along. 

These tools still exist and, in fact, the past four years have seen a remarkable tightening of the screws over even the tamed opposition. To lessen risks even further, the authorities have done a lot over the past year. They have engaged in a systematic pressure campaign against the more active regional chapters of the Communist Party (in the Altai Territory, the Komi Republic, etc.), which has traditionally been viewed as the second party and thus, barring any real opposition, the more or less clear choice for disgruntled voters, even as it has lost a lot of influence over the past years. Based on how they are moving candidates around, the communists do indeed seem to be engaged in damage control. Then, there is an ongoing case against the liberal Yabloko party – the last to more or less openly criticize the war – over technicalities with its candidate submissions, which may still end up with the party disqualified (the communists are also facing a similar threat in Tver’s regional elections). Furthermore, throughout the year political as well as security authorities have tried to minimize the chances of opposition parties benefiting from issues such as internet restrictions that have caused widespread discontent, both by signaling that opposition to these is taken very seriously and trying to make United Russia take the win when some minor restrictions were rolled back. Online voting, a tool not just to make the process of voting and tabulating more opaque, but also to shift the responsibility for administrative pressure and rigging away from local elites (and thus the Kremlin’s reliance on them), will be rolled out in 33 regions, among them many with major population centers where United Russia is likely massively unpopular. Opposition parties may try to push back against some of these restrictions or focus on local grievances to try and turn out the vote, but this is pretty much the new normal.  

At the same time, there are arguments for the opposite too. The past four years have seen both a notable growth in the influence of the security services on domestic politics, partly to ensure elite control in an increasingly volatile environment, and, as Alexandra Prokopenko pointed out in an excellent op-ed for FT, an erosion of Russia’s legalistic domestic framework, with the authorities now routinely disregarding rules that they themselves set, e.g. by accelerating the adoption of key amendments to the budget code, for the sake of fueling the war further. And, after all, even Putin’s spokesman, Dmitry Peskov is talking about a “war” now, after Ukraine’s successful drone campaign. 

Therein lies the main intrigue of the election. These rules are not only there to preserve the semblance of rule of law and legal stability, but also to set the framework for elite conflict resolution. Similarly, as I argued in my 2022 piece, controlled elections in an autocracy also serve to provide an outlet for voters to vent their frustration and send a message to the authorities who know the actual result. Cutting corners, scrapping elections – or even rendering them meaningless beyond measure – would also mean that the main political authorities of the country are no longer interested in maintaining these frameworks and channels. And that would signal a meaningful shift in the nature of the regime. 

Also-happeneds

• Waste on the agenda: visiting Tatarstan, deputy prime minister Dmitry Patrushev talked about municipal waste management, including expectations to install cameras at construction sites, digitally monitor waste collection at the level of the government’s Coordination Center and a personal responsibility of regional officials. Several regions have approved new standards for waste management based on the latest federal regulation. And there is further federal criticism and criminal cases too: a North Caucasian waste management operator is investigated for embezzlement and tax evasion, and the Novosibirsk Region’s failures to carry out its waste management reform were criticized in the government paper Rossiyskaya Gazeta. Of course, as many pointed out, this latter might just be interpreted in the context of a background campaign against Novosibirsk’s governor. However, taken together the full picture suggests that the federal government is aware of the political salience of the failed waste reform, but still expects to solve it with more technology and devolved responsibility, even though the problem is, as I laid out last year, with the incentives underlying the reform. 
• Municipal troubles: regions have continued implementing the federal reform of municipal administrations, de facto the scrapping of lower-level municipalities and their representative organs, in spite of the backlash that the reform created last year, and which is still resonating at the regional level. In the Republic of Komi the regional legislature adopted the reform in spite of a referendum proposal on it by local deputies. In the Khabarovsk Territory, local deputies in several districts have refused to approve the region’s reform, albeit the regional government is clearly exerting pressure on local councils to do so. In spite of the pushback, it appears that the authorities’ strategy to prolong the time frame, in which the reform needs to be adopted by regions, is working, even in relatively more pluralistic regions (where the simplification of the administrative system is likely more important for the federal government). Meanwhile, however, growing law enforcement pressure on regional and municipal officials and the diminishing returns of partaking in regional-level opposition politics is making municipal management more complicated. In June, Vladivostok’s (indirect) mayoral election attracted zero applications in its first three weeks after opening, with the city’s incumbent (caretaker) mayor Konstantin Shestakov finally being announced as a candidate at the end of June (but the rules need at least two candidates proposed by the governor for the vote to go ahead), while in the Krasnodar Territory, which has seen a wave of corruption cases over the past year, four districts remain without district heads due to a lack of suitable candidates. 
• New regional security structures: the spreading of the effects of more direct warfare onto a growing number of regions seems to leave its mark on the structure of regional institutions too, leading to the emergence of new dedicated regional security structures. In late May the Nizhny Novgorod Region created a ministry for the protection against unmanned aerial vehicles, probably the first region to do so rather than relying on existing emergency management or security structures for drone defense, with a dedicated budget line in the future. Hot on the heels of Nizhny Novgorod, the Kaliningrad Region created a “Ministry for Regional Security” at the end of June, which will also oversee drone defense among other things. 
• Arctic plans: at the sidelines of the St. Petersburg International Economic Forum the State Council’s commission on the Northern Sea Route and the Arctic identified some priority development projects for Russia’s Arctic region, to be completed until 2050. While, based on past experience, it is very likely that many of these projects will later be reviewed, postponed or cancelled, it is nevertheless worth noting what the government regards as priority investment directions: namely a full metallurgical industrial cluster in Murmansk and hydrogen production and transportation infrastructure in Yakutia. Both are likely targeting Asian (mainly Chinese) markets via the Northern Sea Route, which has so far underperformed the Kremlin’s lofty expectations, used mainly for hydrocarbon shipping. The main question will likely also be whether Chinese companies are able and willing to invest in these ventures beyond creating demand. 
• New verdict in the Ponomarenko case: Maria Ponomarenko, the Barnaul journalist who was sentenced to 6 years for reporting about the Russian army’s attack on the Mariupol Drama Theater, received a further sentence of 1 year and 10 months for an alleged conflict with a prison guard. Ponomarenko is one of the highest-profile political prisoners in Russia today, and the fact that the renewed verdict (most likely an attempt at psychological torture) received little attention highlights the bleak situation of political prisoners without a chance of being exchanged.