NY Dispatches: Regions and bankruptcy

One of the news that generated significant interest over the past week was the “bankruptcy” of Ingushetia, a North Caucasian region. But Ingushetia going “bankrupt” is not exactly what happened. What Ingushetia is going through is close to bankruptcy, but not exactly that. A short explainer.

Russia’s regions faced a significant centralisation of political power and revenues in the past two decades, after the 1990s when certain regions with significant revenues declaring de facto or de jure independence seemed like a real threat. Russian regions emerged from the fall of the USSR with vastly differring degrees of autonomy and some – not only Chechnya or Tatarstan – did indeed flirt with acquiring more of it, e.g. during the 1998 financial meltdown.

This centralization has left most of Russia’s regions heavily dependent on federal financing. Regions have been required to transfer an ever-growing share of their income to the federal budget, which then redistributes this money, providing regions with grants, subsidies and other transfers (including loans).

Regions are, at the same time, obliged to fork out more money to implement policies set on the federal level, notably Putin’s 2012 “May Decrees”, containing mostly increased social spending, and the development goals called “National Projects“, set in 2018. But of course regional governments also have to fulfil their main function, that is, keeping voters reasonably satisfied and elite conflicts at bay. And unlike the federal budget where the government can cut big capital investments, military expenses, etc. 70-80% of regional expenses go on health care, social aid, and education. These are significantly more difficult to cut.

Moreover, while the federal budget has a $124bn rainy-day fund, only the wealthiest regions have reserves that could see them through more than a couple of weeks of fiscal troubles.

Up until 2016 many regions borrowed heavily to stay on top of their fiscal duties, which almost led to a serious debt crisis. Then the federal government stepped in and gradually replaced risky loans with cheaper loans from the budget. In addition to this, the Finance Ministry started monitoring regions’ budgeting more strictly, putting them into green, yellow, and red categories, with “yellow” regions not allowed to take out fresh debt without explicit approval, and “red” regions only allowed to refinance debt, but prohibited from taking out new loans. Indebted regions also have to sign agreements with the federal government on steps to reduce their debt servicing costs. The Ministry then evaluates progress and decides whether a region has done enough to be promoted; unless freshly appointed, governors can also suffer consequences (read: they can expect to be dismissed).

2019 was a good year altogether, as several regions managed to reduce their debt burden and some even built up reserves. But this progress has been wiped out entirely by the COVID crisis and the federal government’s aid has been insufficient.

But what about Ingushetia?

Well, the region was one of the worst performers to begin with. According to the Finance Ministry’s report on 2019 overdue debt repayments made up 17.1% of its budgetary expenses, more than in any other region. It also missed the targets on raising revenues, debt servicing, the ministry’s fiscal roadmap, fiscal legislation, the effectiveness of budgetary funds, the quality of fiscal management and it added budgetary expenses that were not approved.

Then in January-September this year its budgetary expenses increased by 36% and its debt burden by 64% to 3.3 billion rubles or 80% of the region’s planned so-called “own revenues” (revenues without transfers from the federal budget, which have since fallen significantly). Some of this was due to the multiplication of health care expenses, for which the federal government provided some – though unevenly distributed and limited – help to regions, but expenses on housing and education also increased. We should add that Ingushetia is also one of the most cash-strapped regions when it comes to municipal budgets, and had the worst unemployment (26%) even before the pandemic, which made it even worse.

At the same time, it is one of the so-called “protest regions” (a land grab by Chechnya, approved by the regional government and Moscow sparked protests in Magas, the capital, in 2018-19). In these cases the regional government is encouraged not to take unpopular decisions. In short, there was no way to resolve Ingushetia’s situation without the federal government stepping in, but the government is already doing similar things in other highly indebted regions, e.g. Mordovia, Kostroma or Khakassia. In October the government requested Ingushetia (and the Magadan Region) to sign an agreement that will effectively cede control over the region’s finances to the federal government until the situation is stabilized. The regional government won’t be able to start new investments or take out new loans.

What the agreement doesn’t tell us is how the region’s finances will be stabilized. Will they be forced to cut expenses? Where? Will the federal budget pay or excuse some of its debts? If yes, how will the government ensure that other regions won’t go down this road?

The problem is exactly that regional budgets are stretched thin and as Natalya Zubarevich, an expert on regional economies warned, due to falling revenues many faced deficits in the middle of the year that they would normally face at the end of the year.

Ingushetia may be a small region, and putting indebted regions under the stewardship of the Finance Ministry may be a standard procedure, but several other North Caucasian and South Siberian regions face similarly unbalanced finances, which will cause problems in the near future, especially as the second covid wave puts revenues of regional budgets in danger and the federal government is reluctant to increase the financial autonomy of regions.

This entry was posted in Dispatches, Policies and tagged , , , , , , , , , . Bookmark the permalink.