Merge, subordinate, centralize

Last year’s constitutional reform created the concept of federal territories, a new type of administrative division, and seemed to integrate municipalities into the system of administrative power. 2020 also brought the issue of regional mergers back onto the political agenda. These three main reform directions seem to reflect, reinforce, and potentially codify existing trends in Russia’s domestic politics that are mostly motivated by political and security interests and have little to do with fostering efficiency or economic development.

Merging regions

In April, deputy prime minister Marat Khusnullin, speaking at a roundtable discussion, raised the possibility of merging several Russian regions as the number of federal subjects was “too large”. In particular, Khusnullin called into question the raison-d’etre of the Jewish Autonomous Region, a sparsely populated far eastern region, and suggested that the residents of the relatively poor Kurgan Region would live better if their region were part of the relatively well-off Tyumen Region. Khusnullin later claimed that what he actually advocated was the fostering of cross-regional agglomerations, while conceding that these are already emerging.

Every once in a while, a high-ranking Russian official suggests merging specific regions. The stated reasons usually include more efficient governance, cutting back on administrative expenses, pooling of resources, etc. Valentina Matvienko, the head of the Federation Council said that she wanted “more self-reliant” regions that “have a potential to develop economically”, and also that “some federal subjects are non-viable on their own for objective reasons”. The prospect of merging various republics in the Volga Federal District, or Moscow and St. Petersburg with their surrounding regions, was on the political agenda several times in the past decade. Yet, mergers do not happen often, in fact, none has happened since a wave in 2005-08 when several autonomous districts were merged with their neighboring regions to form the Kamchatka Territory, the Perm Territory, the Transbaikal Territory and the enlarged Irkutsk Region, while local elites agreed on a “matryoshka” arrangement for the Tyumen Region and two energy-rich autonomous districts, the Khanty-Mansi AO and the Yamal-Nenets AO, whereby the two districts kept their administrative and fiscal autonomy but have ceded part of their income to Tyumen. One reason is that mergers are risky. First, there is always the possibility of elite conflicts. Second, there is a vote involved: once regional leaders have indicated their will to the president, a referendum must be held in both regions, and while the necessary results can be engineered, a stability-obsessed federal government would probably not like to create additional risks when it does not have to.

Several studies have analyzed the effects of the 2005-08 mergers on the former autonomous districts, their residents and their elites, and while conclusions slightly differ on the positive effects, there seems to be a remarkable consensus that the stated – and implied – goals of the mergers have not been reached.

A paper by Igor Okuev and Petr Oskolkov, based on interviews with local stakeholders mentions that local elites lost influence as the formerly autonomous districts lost administrative capacities. This in itself is not necessarily a negative development, but often this went hand in hand with a loss of representation of the local population, as the former regions, now degraded to districts – or, in the case of the two regions that joined the Krasnoyarsk Territory, raions, an even lower-level administrative division – were now represented by only a handful of deputies in the regional parliament with a diminished say on budgetary allocations or taxation, and in certain regions, such as the Perm Territory or the Transbaikal Territory, a nominal regional ministry. The Agin-Buryat District, for example, lost its former status as a domestic tax haven. Sure enough, administrative expenses were officially lower following the mergers, as there was a smaller bureaucracy to maintain, but this is typically small change in regional budgets. Meanwhile, the investment boom promised by the proponents of the mergers never came, partly because of the global economic crisis that started in 2008, but mostly because the territories existing as separate regions was likely never the actual problem. State-driven investments also fell short of expectations. Elena Lebedeva mentions in her paper how the government of the Irkutsk region abandoned a list of development priorities that were negotiated with Moscow before the merger.

Positive changes, according to the studies and surveys mentioned above, included minor improvements in salaries and reduction of poverty levels in some regions, and an easier access to health care in several. The absorbed regions typically did not have large cities with reasonably well-equipped and staffed hospitals, which meant that prior to the merger, hospitalization in the nearest big city often required them to navigate Byzantine bureaucratic processes. Following the merger this became easier. The flip side, of course, was that these amenities led to the depopulation of the absorbed regions.

And while the new regional leaderships typically paid lip service to cultural preservation, these translated into largely symbolic acts rather than actual political power or cultural autonomy. But then again, curbing the self-governance of ethnically defined regions was likely a purpose, not a bug of the mergers to begin with, as these policies were informed by the “parade of sovereignties” in the 1990s, which culminated in certain regions openly defying the federal government during the 1998 financial crisis. This fear of effective or open separatism never left the political agenda, indeed, as I have pointed out, it has become more visible over the past two years, especially as the reform of the constitution made it illegal to question Russia’s territorial sovereignty and the security elite started using the threat separatism to justify an ongoing crackdown on civil society.

Money seemed to play a more important role in the failed proposal to merge the cash-strapped Arkhangelsk Region (AO) with the Nenets Autonomous District (NAO), a sparsely populated, but rich oil and gas-producing region last year, at least superficially. One of the arguments in support of the merger was that while the NAO was rich, its income was more sensitive to fluctuations in spot prices, as it exported most of its oil by sea, therefore pooling its resources with the AO would be beneficial for both. Since oil and gas rent is heavily redistributed anyway, this read like a threat, rather than an argument, similarly to when Sergey Kirienko, then presidential envoy to the Volga Federal District, implied that the Komi-Permyak District should merge with the Perm Region or face a shortage of investment and development prospects.

It is possible that, as some suggested, the real purpose of the merger – suggested by two governors with a background in the security establishment – was to start creating a larger northwestern region, overseeing a strategically important part of Russia’s Arctic coastline, and likely also including the Komi Republic or other federal subjects. If this was the case, it was not openly stated, and it would hardly constitute an attractive offer to the residents of these regions. But it is difficult to make a good offer as evidence does not suggest that mergers will lead to better development prospects or better governance, beyond serving the political goals of the federal government or the security elite, as long as fiscal and political decision-making remains highly centralized.

Municipalities and the “unified system of public power”

The 2020 constitutional reform prescribed a “unified system of public power”, implying the integration of municipalities, which are formally independent from regional governments and the federal government. However, like most of the constitutional reform, this would simply codify and likely reinforce a situation that already exists, with municipalities clearly subordinated to higher-level authorities.

As Ben Noble noted recently, municipalities have had to report on key performance indicators to regional authorities since 2008, just like regional authorities have to report to the federal government. But nowhere else is the hierarchy more reflected than in fiscal relations, which leave municipalities even more dependent on regional and federal authorities than regions are on the federal budget and its handlers.

Russian municipalities, like regions, rely both on their “own revenues” as well as transfers from a higher-level budget, typically from regional budgets. Own revenues include taxes, in declining order of importance: part of residents’ personal income taxes (that they share with their region), land taxes; personal property taxes; tax revenues ceded to municipalities by their region, which differ across the country; as well as rents charged on municipal property and service fees, but these are typically minor contributions to municipal budgets. Transfers, as in the case of regional budgets, can take the form of grants (which municipalities can theoretically use freely; in fact, even these can be subject to conditions), subsidies (that come with strings attached, for specific projects), subventions (money paid to the municipality to perform a function that a higher-level government entrusts it with) and “other transfers”, which are more difficult to parse. Of these, subventions are by far the most important: they typically make up around half of all budgetary transfers, followed by subsidies (which in 2019 made up 27 percent).

What municipalities spend the money on depends on their type and size, but in general most of the expenses go on educational and cultural institutions, housing, fixing and building roads, public sanitation, transportation, and certain types of social aid. Cities and towns, on average, spend between half and two-thirds of their income on issues of local importance and most of the rest on carrying out various functions of the state. They are also more likely than smaller municipalities to spend on education or culture; in contrast, smaller towns and villages are more likely to spend on housing.

Natalya Zubarevich, an expert on the regions said in 2018 that 75 percent of municipalities’ income was some kind of transfer. In the same year, the Finance Ministry said that of 4.25 trillion rubles of total municipal income, only 1.5 trillion came from taxes and other fees, while the rest – thus roughly 64.5 percent – were transfers (but this did not include tax allowances). In 2019 this grew to 66 percent. Municipalities in the Central and the Northwestern Federal Districts fared better, while municipalities in the Far East, Siberia and the Urals, needed more transfers.

On the one hand, this is predictable: the Central and Northwestern Federal Districts are more densely populated and relatively well-off regions with several mid-sized cities that have better chances to support a local services economy, in which small and medium-sized enterprises that municipal budgets rely on, would typically work. There are less of these in the sparsely populated Far East and Siberia, or the Urals, where regions rely mostly on resource extraction that is taxed federally. But even within these regions there are significant differences. It probably matters less for municipalities in the Yamal-Nenets Autonomous District, the Tyumen Region or Sakhalin, all oil- and gas-producing regions, that they make very little money from local taxes, since the regions the themselves, which collect some taxes from the energy companies, are able to plug the gap. For municipalities in the Kurgan Region or the Republic of Tuva, which are also among those that can rely on local taxes the least, it probably matters more.

Another way, in which regions hold municipalities in check is debt financing. According to the Finance Ministry in 2019 municipal debt made up 380 billion rubles, or 27.5 percent of municipalities’ income without grants and allowances, which does not look like a lot, but unlike regional debt, in which expensive bank credits have been largely replaced by budgetary loans, more than 68 percent of municipal debt was towards banks. Bank loans, which are more expensive, were predominant even in the North Caucasus and the Volga Federal District, where municipalities had more budgetary loans on their books. Average levels of indebtedness also differed greatly across regions, with Mordovian municipalities having the largest debt burden (Mordovia is also Russia’s most indebted region), but municipalities in Tatarstan, Khusnullin’s home region were also on this list (the deputy prime minister himself mentioned how Tatar municipalities without energy companies struggled to find funding for municipal expenses).  

Regions and municipalities cannot go bankrupt (as I explained here), but they can become illiquid or unable to service a certain debt. It is telling that even with a near-miss regional debt crisis in 2016, regions very rarely become illiquid. A 2018 survey found only two examples: the Moscow Region in 2008 and the Novgorod Region in 2015. Add to this Ingushetia in 2020. Meanwhile, the ACRA credit rating agency – which only looked at a part of Russian municipalities – found that around ten municipalities became illiquid in the four years between 2014 and 2018, including regional capitals like Tambov and Kyzyl.

Sometimes it would seem that regions are unable or unwilling to eliminate municipal debt. In the Kurgan Region, for example, the total debt of municipalities stood at 260 million rubles in 2020, of which 168 million was the debt of the city of Kurgan, the regional center, on communal services. This matters because if municipalities are indebted towards service providers for an extended time, providers will raise their tariffs and try to recover their losses at the expense of citizens, or they cut maintenance and repair expenses, or both, which will ultimately lead to people paying more for lower quality services. Some municipal debt was covered by transfers from the region, which in turn received transfers from the federal budget to balance its finances. But even so, only two of more than twenty raions were debt-free in January 2021. It can hardly be said that these municipalities are independent. Yevgeny Grigoriev, the recently elected mayor of Yakutsk was clear about this in his electoral campaign when he reminded locals that a city drawing most of its revenues from the region cannot afford to argue with higher-level authorities.

In a nutshell, just as the federal government keeps regions on a short leash by de facto controlling their finances and their debt (and recently announced debt restructuring will preserve this situation), most municipalities face even tighter controls. At the same time, mid-level cities and city councils have become the new hot spots of protests and opposition activity, and despite the abolition of direct mayoral elections in most Russian municipalities, seven cities still elect their mayors directly. As the example of Yakutsk shows, they often cannot do a lot with this power, but direct elections and defiant local councils which provide exposure to opposition figures still represent a risk for the authorities, which they will likely want to eliminate.

Federal territories

The constitutional reform also contained a reference to “federal territories” – a new category of administrative unit, which would be directly subordinated to the federal center, bypassing regional and municipal authorities. There is no new law defining where these territories are or should be, how they are created and how they will work. Instead, the Duma created one such territory, Sirius, in the Sochi Olympic Park, which presumably should serve as a test run or model for future federal territories. Sirius will have its own local council and tax system and it will be “assigned” various powers presently exercised by federal, regional and municipal governments.

In April, the pro-Kremlin Argumenty i Fakty reported that the government was considering creating a total of eight such territories, including at Russia’s Black Sea coast, which would include Gelendzhik, a resort town (in)famous for being near “Putin’s palace”, as well as the Northern Sea Route, which could cut the Gordian knot of the AO-NAO merger by simply removing the management of the coastline from among the competences of the two regions.

Indeed, while details are fuzzy and this reform is very much a work in progress, what seems to be clear based on what has been said and done so far is that these territories could become a tool in the hands of the federal government to establish a firmer control over some key resources, bypassing local and regional authorities, if this is deemed necessary. There are indications that the trust in the loyalty of regional elites is weakening as the capacity of the state to create rent is fading: the federal government is reportedly centralizing the collection of citizen complaints and their resolution, bypassing regional authorities; rent created in the health care and pharmaceutical sectors, normally the turf of regional governments that oversee health care systems, is getting attention from the security establishment.

Ultimately, this reform, as the other two reform directions that I mentioned above, seems to highlight and potentially reinforce an already existing trend: that of changing terms of engagement between federal and lower-level elites, characterized by the growing involvement of security elites in domestic politics and business, by a scramble for rent ahead of what many expect to be a shaky period in domestic politics, and, yet again, by a relentless desire to centralize, centralize, and centralize to minimize risks.

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