Investing in stagnation

We haven’t seen sweeping personnel changes following Russia’s legislative election this year. But things are shifting below the surface. It seems that the authorities’ quest for stability is accelerating changes in the relationship between the federal government and the regions, and may breed further stagnation.

Something that has been missing from the aftermath of the September Duma election in Russia is the usual reshuffle of officials, from governors to government ministers – somewhat oddly, since even though the election produced the result desired by the authorities, this came at the cost of massive rigging, widespread trickery, and with significant regional variations.

Instead of sweeping changes, in early October prime minister Mikhail Mishustin continued showing up in various regions – a tour that he started before the election – mostly to inspect ongoing investment projects, promise more money and have public talks with governors. In the Kursk Region, for instance, Mishustin promised more than 6 billion rubles of federal funds to finance hospital construction. In the Oryol Region, on the other hand – whose governor, Andrey Klychkov is a communist politician – Mishustin publicly berated the regional authorities for delays in the construction of a hospital.

Over the past year, Mishustin has gradually taken over these duties from Vladimir Putin who would normally play the role of tsar ex machina in regions. Apart from the prime minister’s visits, the government’s efforts to centralize the collection of complaints from the regions and set up a rapid reaction task force to react to these has looked like a scaled-up institutionalization of what usually happens before and during Putin’s yearly call-in show. The president himself has not completely given up on these activities, either – in early October, for instance, Putin decorated Sergey Tsivilev, the head of the Kemerovo Region, who promptly suggested some grandiose urban development projects to the president – but it seems that either due to Putin’s extreme risk avoidance during the pandemic or because he is gradually withdrawing from day-to-day politics, Putin saves his time for the leaders of important regions, like Kemerovo.

A new distribution of duties…

Mishustin’s trips, together with the government’s recent moves to take firmer control over regional development (the appointment of deputy prime ministers to oversee federal districts, or the increasingly centralized data collection and monitoring of complaints) fit the pattern of an emerging new division of powers and duties where the government oversees grand projects, the security services control domestic politics and keep elites in check, governors manage local conflicts, initiatives by grassroots organizations and above all, elections, and personnel decisions ultimately depend on the president.  Recently announced changes to the legal status of governors underline this distribution of tasks. Governors can keep their jobs infinitely – and not worry about their career progress – but can still be dismissed by the president for a “loss of trust”, which in future does not have to be specified, and which may also prevent them from being appointed to lead another region for five years. Governors will have less say in appointing key regional officials.

The appointment of “varangians” – officials with little to no connection to the region where they are working – is continuing. Following the election, Putin appointed two governors to head the Tambov and Vladimir Regions; both are outsiders. The president’s plenipotentiaries are quietly bringing in lower-level officials to manage regions deemed problematic, e.g. the Transbaikal Territory where associates of deputy prime minister and presidential plenipotentiary Yury Trutnev have been appointed to key positions.

Mishustin’s warnings in Oryol and the election of Vladimir governor Vladimir Sipyagin – a politician of the Liberal Democratic Party – to the Duma (an effective dismissal) also indicate that opposition governors, especially communist politicians, will likely face significantly more pressure in the future. The Kremlin definitely does not want anyone having ideas about becoming another “people’s governor”. Besides coming an uncomfortably close second in the Duma election (before “corrections”), riding on a wave of protest votes and grassroots campaigning, the Communist Party was also able to strengthen its position in most of the regions where regional elections were held in September. The stronger this vote becomes, the more difficult it will be for the authorities to engineer elections in comparably less intrusive ways, e.g. switching to a majoritarian electoral system. Local and regional legislatures matter: they adopt legislation governing cities and other municipalities; they control election infrastructure from committee appointments, to deciding who can run for office; and – as David Szakonyi pointed out in his research – serve as an important institution for local businesspeople to represent their interests directly in politics. The bigger the political diversity is in a region, the higher the chances that local power brokers will bet on up-and-coming opposition outlets – however tame they are. Planned changes to the status of part-time deputies who will, in future, face the same transparency requirements as full-time parliamentarians likely aim to mitigate the risk of exactly this by placing a sword of Damocles over the heads of local elites playing politics.  

…with the old distribution of tax rubles

One can see the similar directions in the policies that have the most direct impact on the central question of politics – who gets what, when and how – fiscal and development policies.

After 2020, which saw the federal government distributing more than 800 billion rubles of additional aid to regions in various forms, this year the government seemingly counts on regions to increase their income themselves. This did happen in the first two-thirds of the year as regional incomes grew by 25 percent on average, though not everywhere to the same extent: regions relying on metallurgy – e.g. Belgorod, Chelyabinsk, Lipetsk or Vologda fared better than (richer) oil and gas regions and (poorer) Far Eastern regions. Leonid Gornin, a deputy finance minister pointed out that 75 of 83 regions (plus the two occupied territories in Ukraine) are in surplus, and the surplus of consolidated regions budgets was 966 billion rubles.

According to recently announced budgetary plans, thus, the federal government will cut transfers to regional budgets relative to 2020-21. The federal budget will distribute 3.2 trillion rubles in grants, subsidies, subventions and other transfers, as opposed to 3.4 trillion in 2021.

While regional budgets, on the whole, seem to be in a good shape now and the cut is not very significant, it is worth considering that they face huge expectations. Over the past decade, the burden on regional budgets to finance various projects from the so-called “May Decrees” in 2012 to the National Projects, announced in 2018 and the “National Development Goals” defined thereafter, has constantly grown. Now they are expected to invest in social infrastructure and pay off debts (currently a total of 2.5 trillion rubles) at the same time. The inevitable changes triggered by Putin’s newfound interest in carbon neutrality have not even been priced in.

And the National Projects were not put on the back burner during the pandemic: their execution still constitutes an important factor in assessing the job of governors. And as the governor of the Omsk Region pointed out last month, the real, actual level of co-financing expected from the regions can be much higher than the officially expected 2 percent. It is also worth considering that the pandemic is not nearly over and regions are responsible for health care expenses: in January-July these dropped, on average, by almost a fifth relative to 2020, which allowed governors to repair roads and build before the election; in August, however regional spending on health care rose again as the deadly third wave of the pandemic started.

Most of the money that will come from the federal purse, will do so with strings attached: of the 3.2 trillion, only 957 billion is foreseen for grants that regions can use as they please, signalling a trend over the past years as the federal government has exerted increasing influence over policies planned and carried out in regions.

This is one of the common themes running through an otherwise not always consistent collection of development policies in recent years. Whether it is ppp structures, lending between regions, infrastructure loans, restructured budget loans or additional grants for the most hard-pressed regions, either the regional government or a rich and privileged region (Moscow) remains in charge.

The government will continue to chip away at the remaining fiscal independence of the regions. The increased taxation of the metallurgical sector, from which the government hopes to raise revenue for the federal budget, will, in practice, reallocate income in favor of the federal budget by reducing the tax base for regional budgets. There are plans to compensate regions for this move, but only partially. Obviously, this does not concern all regions, but it will hurt a fair number of them: metallurgy provides at least 20 percent of tax receipts in 16 regions. Planned changes to the distribution of excise tax receipts, though less significant in value, will affect more regions. Again, regional budgets will likely be compensated, but both measures will shift the balance of fiscal power more emphatically towards the center.

There are also plans to add further federal subjects to the government’s list of depressed regions, and to expand this support scheme by five years, until 2030. Right now, this list contains ten regions with the worst average income, poverty, unemployment and investment figures: Adygeia, the Altai Territory, the Altai Republic, Kalmykia, Karelia, the Kurgan Region, the Republic of Mari El, the Pskov Region, Tuva and Chuvashia, and the support scheme consists of five billion rubles of additional aid and a minder in Moscow. As of late October, no decision has been taken on adding further regions to the list, but regions as diverse as the Jewish Autonomous District, a sparsely populated, poor backwater and the Astrakhan Region, a solidly middle-of-the-pack region have been rumored as potential additions. It is possible that none of the rumored regions will be added to the list, but the news have highlighted the opaqueness of the government’s decisions on development policy.

Stagnation over change

This is not the only example. While in recent years the government has increased the type of grants that regions have received since 2017 to compensate them for a part of corporate income tax that the federal government took away from them, the base itself has not been indexed. This means that poorer regions that collect a smaller amount of income taxes are worse off than comparatively wealthier ones.

The development of poorer Far Eastern regions has periodically been at the forefront of government policies, at least rhetorically. Recently, a range of initiatives and events, from Sergey Shoigu’s grand visions of urban construction and infrastructural development, to a Far East Economic Forum and frequent visits by high-ranking officials, signaled this interest. Recently the government even held a “strategic session” on population growth in the Far East, and according to the Finance Ministry 17 percent of federal investment funds go to far eastern regions. But these have failed to increase revenues substantially for either budgets or residents. The share of the Far East in federal budgetary transfers has dropped over the past decade. In September Far Eastern governors complained that they did not have funds to invest because their budget is barely enough for their regions’ finances to survive.

One of the main underlying problems remains that due to a low degree of private investment, which is a result of legal uncertainty, sagging demand, and in certain cases, growing import costs, the state remains the most important, yet quite inefficient, investment vehicle in the country. This mostly – and increasingly – means the federal government, due to a relentless centralization of fiscal and political power that has left regional finances gutted. The other problem is that despite some degree of diversification, Russia’s finances still mostly rely on redistributing hydrocarbon rents.

Add to this an increasingly insecure, control-obsessed federal elite that is in desperate need of tangible economic improvements. The government needs short-term returns and it knows very well that these are not going to come from depressed regions, but from regions that drive Russia’s present export-heavy growth. The government has recently raised the possibility of compensating “donor” regions so as not to stifle investments.

It is difficult to say what the first test of this arrangement is going to be. Stagnation is not necessarily an undesirable thing from the point of view of the powers that be. The risk is rather that the more invested the authorities are in maintaining it, lest unexpected consequences may arise, the more difficult it will be to initiate changes when they become inevitable. It is possible that in the future Mishustin’s techno-authoritarianism will revolutionize governance and after a consolidation period the government will shower Russia’s reserves on grand infrastructure projects. Right now, however, the government seems unable to get a good grip on the problems of a stubbornly high inflation, ballooning consumer debts, or the pandemic, mostly as a result of risk aversion and entrenched interests – which really makes one wonder how it will deal with issues that require bigger changes and more flexibility, such as climate change and decarbonization, which are menacingly close.

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