Built for a different purpose

As timelines shift in Russia’s war against Ukraine, costs and risks are reinterpreted by the authorities, but always with the regime’s perceived security interests in mind. The divergence between regime security and Russia’s interests will grow. Consider how budget cuts and mobilization will affect Russia’s system of governance, which was not built to deal with this kind of crises.

Russia’s self-imposed economic crisis has so far first and foremost hit the federal budget. Last week, in face of a ballooning deficit over the summer, the government suggested a ten percent, across-the-board cut in budgetary expenses. In real terms, this will be even more substantial. The haircut will likely disproportionately affect the very investments that the government is relying on to keep the Russian economy afloat, as cutting public sector wages, pensions and military expenses is not on the table. For the coming years, the government is reportedly contemplating raising the tax burden on an already heavily taxed energy sector, all while it is unlikely that Russia’s energy exports are going to return to their pre-invasion level any time soon. Domestic gas prices are expected to rise by at least 15 percent over the next two years.

Regional budgets, meanwhile, have yet to feel the bite of the sanctions. In the first half of the year regional budgets have accumulated a surplus of 1.2 trillion rubles, which, unlike the federal surplus of comparable size, kept growing in July and August. This is unsurprising, as regions’ expenses have not grown considerably: both direct military expenses related to the war and the first measures to cushion the blow of sanctions have been financed from the federal budget. 

But problems are coming.

On September 16 Natalya Trunova of the Audit Chamber warned that the 42 percent of the 1.2 trillion ruble surplus was in the budget of just three regions of a total of 83 (not counting the occupied Crimea): Moscow, St. Petersburg and Kemerovo. This is where the bumper profit that energy exporters have made in the first half of the year appeared, as companies pay taxes where they are headquartered. Kemerovo enjoyed higher coal prices earlier this year, but the EU’s coal embargo, coupled with transit bottlenecks, has practically brought exports to a halt. The region is already experiencing industrial decline, and soon its revenues will also drop. Regions relying on machine building and automotive plants are already facing difficulties – from unpaid salaries to falling revenues from personal and corporate income taxes (the two main sources of income for regional budgets, apart from federal transfers) – and metallurgy-heavy regions are probably going to face the same problems already this year as companies are locked out of export markets and domestic demand tanks.

Regional governments have not been immune to the war, either. Regions have been asked to pay out support for the families of fallen troops, on which they have spent at least 6.3 billion rubles, according to an investigative report by IStories. This may not look like much, but it should be noted that these expenses disproportionately affect poorer regions that have seen a significantly higher number of casualties, and some of which will have to reallocate expenses from other headings. More than forty regions have assumed “shefstvo”, or guardianship over occupied districts, which means that they will have to foot the bill for reconstruction projects. Regional governments have been encouraged to form volunteer battalions – a form of hidden recruitment – since spring, and as it appears that they will be expected to ensure fulfilling mobilization quotas as well. This also will come with costs, both financial and political.

One obvious problem for regional budgets is that the federal budget, which through direct transfers and cheap loans usually ensures liquidity in crisis situations, will itself have to be cut at the same time as regional incomes are falling. The government’s reserve fund, which has been used liberally over the past years to meet the financing needs of regions, mostly because it is easier to dispense than the budget proper, is being used up fast.

Meanwhile, regions are receiving conflicting signals from the federal center. On the one hand, governors have been tasked to ensure that the sanctions cause as little disruption as possible. On the other hand, they have been encouraged to build up savings, if they can, as they are not going to be able to rely on the largesse of the federal budget in the coming years. This has led many to increase expenses on headings such as fixing roads or housing, but economize on some vital functions such as education and social services.

Moreover, while regional development funds may have been replenished in the past months, this does not mean that they can be easily disbursed. The rigid structure and excessive centralization of Russian multi-level budgeting means that regional governments need to jump several hoops before they can support local businesses. Support measures are subject to approval by the federal Ministry of Finance. Investment projects need to be justified by calculating the amount of excess taxes that they will bring to budgets. A government bill in the Duma is making it somewhat easier for regions to apply for subsidies and for the federal government to transfer money in “emergency situations”; it also allows regions to take out loans in excess to what is needed to finance their deficit and further encourages “horizontal lending” (in effect tapping the reserves of wealthier regions) but it is doubtful if, in the face of a highly volatile and unpredictable situation this alone will be enough to keep regions stable, not to mention the scramble for resources that will likely follow.

The way in which responsibilities related to the war are not piled onto governors is similar to how regional governments were entrusted to follow the vague and sometimes contradictory guidelines of the federal government all while assessing the risks in their own regions during COVID-related lockdowns. Regions were then also tasked to carry out a de facto compulsory vaccination campaign, which the federal government was reluctant to announce. To do so, they used both administrative resources and pressure on local businesses, similarly to how they now seem to be addressing their “shefstvo” responsibilities in the districts of the Donbas.

Something similar is likely to happen with the “partial mobilization” announced by Putin on September 21: it seems that the Ministry of Defense will define quotas for regions, which governors will be responsible filling – however, the exact numbers will be kept secret. “Partial” mobilization itself is a vague framework, which suggests a moving target and thus more uncertainty. This suggests that ultimately governors will have to test and provide input on where and how it is safe to conduct forced mobilization, i.e. via pressuring local businesses or recruiting labor migrants, all while avoiding the risk of local protests or violence, and that the government will keep adjusting regional mobilization quotas over time. Or else, governors will do it themselves, quietly easing efforts when they encounter resistance that could negatively affect their standing in Moscow, and falsifying numbers if need be.

(And this only assuming that governors know when and where to stop, which is not always the case. It is rather unlikely that statements like the one made by Mikhail Degtyarev, the governor of the Khabarovsk Territory earlier this month, in which Degtyarev claimed that he himself would gladly volunteer to fight, if only he could abandon his pressing duties in the region, will be considered wise.)

Something similar is likely to happen as regards anti-crisis measures. Regions will be expected to put out fires, but at the same time budgetary transfers will be increasingly ad hoc and thus subject to the lobbying power of governors rather than automatic. Governors will have to walk a fine line, signaling troubles just enough to ensure additional financing when needed, but without risking being chided or dismissed due to inadequate results.

The current, centralized governing system is predicated on the ability of the federal government to predict and prevent risks relying on reliable reporting and enhanced data collection. The system has not been built with a view to delegate the handling of crises; it aims to minimize risks and avoid them overall. The COVID crisis already highlighted some of the inadequacies of the system. Now, however, there are significantly more moving parts and variables, over which officials have little or no control.

In addition, policies like selective mobilization may be used to minimize or avoid the most obvious risks at any given time. But, as the move from cover to overt mobilization shows, what is considered an unavoidable risk is going to be continuously changing. If regime security dictates, more people will be called up and more money will be reallocated, even if this creates problems on the ground that the current system is ill equipped to solve.

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