NY Dispatches: COVID-19 and governors

Having left business owners to their own devices, the Kremlin now wants governors to come up with plans to handle the COVID-19 pandemic. Without more fiscal autonomy this will be a tall order. But high uncertainty means that governors can and probably should take initiatives.

Vladimir Putin addressed Russian citizens about the COVID-19 pandemic for a second time on April 2. The president announced the extension of a “non-working week” initially planned for the first week of April, to the whole month. The president left employers guessing how they should pay for this, given that the government has not announced any meaningful additional relief for business and made it clear that it would strictly monitor layoffs in this period.

Even as it is busy keeping its purse strings tight, the government is clearly scrambling for more money. A month after, likely at the behest of Rosneft CEO Igor Sechin, it pulled out of the so-called OPEC+ deal, it now looks likely to re-enter it despite disagreements over production cuts. Putin hopes that this will push oil prices above $42 per barrel – which is questionable, given the significant drop in demand – but the federal budget will reportedly also be rewritten with a breakeven price of $20, less than half of what was originally planned. If oil prices actually remained around $20, that would result in a deficit of 3-4 trillion rubles if expenditures are kept at level, not counting the deficit of the pension, health care and social security funds, which may face an additional gap of between 285 billion and 2.5 trillion rubles this year due to reduced contributions under the government’s pandemic relief scheme and falling employment.

To fill the gap in the budget, the government can also use the National Welfare Fund (NWF), which had accumulated about 11 trillion rubles worth of currency from oil exports by March 2020; indeed, this is what the NWF is there for. This fund, however is not entirely liquid, and of the liquid part the government had intended to use about 2.2-2.3 trillion rubles to pay for the sale of Sberbank (with part of the proceeds to be returned to the budget). Additionally, if the fund drops under 5% of GDP, the amount that can be used to cover the deficit is limited by law. But so far the government has not even shown desire to use the NWF to pay for pandemic relief. Instead, it intends to borrow 1-1.5 trillion rubles on the market. This might be the cheapest option – Russia’s sovereign debt is comfortably low at 16.5% of its GDP – but selling bonds in this period of high uncertainty will almost certainly be a challenge. Foreign investors have been fleeing Russian bonds for weeks.

And expenditures will certainly have to change too. The National Projects, a development scheme, which was supposed to be the landmark project of Putin’s fourth presidential term, and on which the government planned to spend 25.7 trillion rubles over six years, are being deprioritized, even though this will undoubtedly ruffle some feathers. But even this may be a far cry from what is needed. Echoing leading economists, last week Alexey Kudrin, the head of the Account Chamber said that Russia might need a fiscal stimulus amounting to 5-10 percent of its GDP. This would require extra spending totaling at least four times as much as has been announced so far.

So far Putin, and to a certain extent prime minister Mikhail Mishustin have been trying to avoid responsibility for the decisions that this entails. In a move that was both characteristic and iconoclastic, Putin also announced last week that when it comes to defense against COVID-19, the bucket stopped with governors who were now able to lay out preventive plans as they see fit. At the first sight this makes perfect sense. Russia’s 83 regions have not been and probably will not be affected equally by the pandemic. This will depend on population structure and density, the availability of health care equipment and the structure of their economies.

However, it seems that governors received a mandate to take decisions without the funds to back up whatever measures they will take. The fiscal and political autonomy of the regions have been steadily decreasing under Putin’s two decades in powers (presently the average region sends more than half of its revenues to the federal budget), while their financial obligations grew about twofold. Heavy borrowing to meet these extra obligations – including the cost of Putin’s so-called “May Decrees”, issued in 2012 and, in some regions the costs of the 2018 FIFA world cup – almost led to a debt crisis in 2015-16, which the Ministry of Finance averted by replacing high-interest bank loans with low-interest budgetary loans. But this came with strings attached: under a “traffic light” system introduced by the government, the most indebted regions lose their fiscal autonomy further and are put under the supervision of the ministry. This discourages spending (and borrowing) more, especially if a region is already in deficit (last year 35 were, a steep increase from 15 a year before). But regional reserves are stretched thin as well:  the National Credit Rating Agency estimated that if oil prices remain low in 2020, the cost of debt financing for the regions could result in 62 out of 83 regions depleting their reserves.

Until this situation is fixed, real power will lie not with governors, but their minders in Moscow: the Ministry of Finance, the presidential representatives and certain State Council bodies (although Sergey Sobyanin, the Mayor of Moscow who heads the Council’s working group on the pandemic, reportedly suggested governors to turn to the government). And even though several governors have reportedly taken initiatives to introduce stricter lockdowns and suspend transfer links – and they have the right to introduce a “disaster situation” in their own region – so far most of them (save for some regions or governors with a higher degree of independence) have been looking for guidance from the federal level: not just a model from Sobyanin to follow, but a nod from Putin or at least Mishustin, because this is what they have gotten used to in recent years.

Governors still can, and perhaps some will take the opportunity to exercise real political power and prove themselves as efficient managers. By doing so, they may risk running deficits that will require additional transfers from the federal budget and come with stricter supervision by the government. Their best bet is still to go ahead and order lockdowns when necessary, try and fill the gaps where federal funding is missing (if needed, from their own budget) to help small enterprises and local residents, and deal with the fiscal consequences later (in the autumn when they need to apply for federal funding). However reluctant the Kremlin seems to spend more money on pandemic relief, it needs policies that work in the regions as it faces a constitutional referendum this year and elections in 26 regions planned for September. It seems very likely that the resignation of the governor of the Arkhangelsk region and the head of the Komi Republic – who had already been in hot water due to local protests against a massive landfill on the border of the two regions – was a move to allow new, reasonably popular governors to take their place and build themselves up before the September vote.

Making governors responsible for most pandemic-related measures without backing it up with the necessary funds is, in a way, just an extension of what has been happening in Russia for almost two decades. However, unlike in the case of the May Decrees or the National Projects, governors can ill afford to muddle along. It is precisely the uncertainty that offers regions an opportunity to challenge the deal that they have been getting from Moscow in the past years – if there are any takers.

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