Vladimir the Cautious

Policies guided by risk-avoidance have allowed Russia to build up significant fiscal reserves before the pandemic hit. But risk-avoidance does seem to serve the country well during the pandemic and it did not neutralize the adverse effects of an overcentralized political system ridden with cronyism, either. Vladimir Putin may prefer to sit this crisis out to avoid making risky choices, but it increasingly looks like he might not have this luxury.

In a remarkable exchange during a conference call on 17 April, Vladimir Sipyagin, the governor of the Vladimir region complained to Vladimir Putin that only 28 percent of infection specialist positions and barely half of resuscitator positions were filled in the region, which had 71 ventilators for a population of 1.4 million. In response, Putin pretty much told Sipyagin off, telling governors that it was their responsibility to overcome these problems. This has more or less been the president’s standard response to any bad news coming out of the regions in recent weeks. When it turned out, for instance, that more than 200 people were infected on a single construction site in the Murmansk region, Putin blamed it on the governor’s “sloppiness”. The site belonged to Novatek, a gas company linked to Gennady Timchenko, a Putin ally.

Looking for cues

It was not surprising that Sipyagin raised the issue. After all, he was one of three governors from “systemic opposition” parties who were elected to head their regions in a series of surprising electoral upsets in September 2018 (in the fourth region, the Primorsky Krai, federal authorities annulled the results and ushered in a new United Russia governor). This does not mean that Sipyagin is an opposition politician in a strict sense of the word, but he is able to comment on problems more freely than his colleagues from United Russia whom the Kremlin is trying to build up as the new pillars of the governing party. But Vladimir is not even the worst equipped to deal with the pandemic: according to Meduza’s simulation (from two weeks ago) the region would probably have enough ventilators in a scenario when the spread of the virus is slowed down to draw out the duration of the pandemic to 10 or more weeks from the beginning of its peak. Other regions – Kurgan, Ulyanovsk, Kaluga – may be hit much harder and no doubt Sipyagin’s words resonated with many of them.

Two days before the call, Putin announced new measures to fight the economic consequences of the pandemic. These included a 200-billion-ruble boost to regional budgets, which is probably welcome but hardly enough. To put it in perspective, consider that this sum is 28 percent of the planned federal support to regional budgets in 2020 and about 27 percent of regional reserves (Moscow’s reserves excluded). It is about two-thirds of the sum that the Finance Ministry originally suggested to spend on domestic investments from the National Welfare Fund (NWF) this year, before the National Projects were deprioritized. It is also roughly 40 percent of regions’ aggregated debt servicing costs in a scenario when oil prices remain low – as it now seems to be the case, despite a new OPEC deal. Even with earlier concessions that allowed higher deficits (measured against revenues), higher debt and flexibility in budgetary planning, this is very little.

As I have stressed before, the biggest problem is that more or less throughout the past two decades the fiscal and political autonomy of most Russian regions have been gradually weakened. Between 2012 and 2018 the revenues of the federal budget grew by an estimated 77 percent while the revenues of regional budgets only grew, on average, by five percent; a consequence of a steady growth of their financial obligations towards the federal budget, which grew about twofold between 2003 and 2019. In 2019 35 regions ran deficits, but this does not mean that only 35 regions struggled with public spending, or even that these 35 regions (which included Moscow) did. Cash-strapped regions are incentivized not to run significant deficits because budgetary transfers from the federal budget come with strings attached: the Finance Ministry will establish tight control over the spending of the most indebted regions. This means that governors – especially technocratic outsiders with no strong links to local power groups or businesses – will likely feel compelled to cut expenses that are not strictly necessary for carrying out their core responsibilities. And these core responsibilities are more likely to include feeding a compliant state apparatus, delivering election results and keeping protests at bay, than they are to include investment in public services.

It also means that most regions have not been allowed to develop the necessary political and fiscal autonomy to take significant decisions without orders or at least cues from Moscow. When in September 2018 partial voting results in the Primorsky Krai started showing bad news for United Russia, local authorities froze and waited for instructions from Moscow. When in May 2019 protesters in Yekaterinburg occupied a city park to prevent the construction of a church, local authorities froze until Putin intervened to stop the construction. No wonder that when in April 2020 Putin told governors that they would be tasked with coming up with measures to contain the pandemic – indeed, they would be held responsible if these plans were to go awry –, many were looking for cues. When Putin dropped a hint about potentially ending a non-working period before the planned date of 30 April, 56 regions loosened their restrictions.

The reluctant hegemon

It is a widely held view among Russia-watchers (and to a certain extent among Russian citizens) that Putin took a back seat in the COVID-19 crisis. There is little empirical evidence to support this claim, but the president indeed seems to have decided to let others take risky decisions, perhaps in a bid to prevent a planned (and now postponed) vote on his constitutional reform from becoming a referendum on his handling of the crisis.

This has pushed Moscow mayor Sergey Sobyanin into the limelight. The mayor, one of the Moscow power brokers who in recent years have built an extensive power network in the regions, was eager to take the opportunity to expand his authority and in a conference call this week many governors thanked him for leading with example. But this comes with risks. First, while Sobyanin was praised for his raising awareness to the necessity of more stringent measures and more extensive testing in the early stage of the pandemic, now Moscow’s mistakes are also on full display.

So is the huge discrepancy between the income of the capital and of most regions. While most regions were starved of cash, Moscow’s fiscal position has significantly improved since 2011-12, with its budget growing almost twofold to finance a costly but politically important revamp. In 2020 the income of Moscow, home to slightly more than 8 percent of Russia’s population, was 2.8 trillion rubles while the total income of the rest of Russia’s 83 regions (plus the occupied Crimea) amounted to 9.3 trillion. Per-capita expenditures were more than three times as high as in an average region. Even as the epicenter of the crisis, Moscow has a significant fiscal cushion to fall back on, which most regions do not. And Sobyanin does not seem to be able to lobby for strengthening the political autonomy of the regions either. Two weeks ago at a conference call with regional leaders several governors reportedly asked him to lobby for more authority for regions to suspend transit links but Sobyanin wasn’t able to promise this. The mayor may have done well to lead by example, but if it turns out that he is overplaying his hand, this could still backfire.

Putin, on the other hand, seems to be caught between two opposing risks. The government has so far carried on with the same extremely conservative fiscal policy that it had developed before the crisis. Pandemic relief measures amount to a mere 2.8 percent of GDP (or 1.8 percent if you ask the Ministry of Economic Development) while leading economists have been calling on the government for weeks to ramp up spending to 5-10% of GDP, start spending the funds of the National Welfare Fund and transfer money directly to citizens. Economists are right that as long as regions lack the authority and the funds to handle the pandemic, this would be a sensible and likely necessary decision.

Yet, the government has been reluctant to do this. Perhaps there is fear that a worse economic shock is yet to come: if oil prices and oil production both remain low, the dangerous combination of a significant fiscal shock and an inflationary shock may soon follow. Furthermore, plans have very likely already been made to distribute the funds of the NWF, therefore spending it would run against entrenched interests. But almost 40 percent of Russians according to the Levada Center now think that Putin represents oligarchic interests – more than those thinking that he represents the security elite and significantly more than those who regard him as a representative of “common people”. Caught between his two constituencies, it is understandable why Putin would like to put off tough decisions for as long as possible. But he can ill afford to do so.

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