Window on Eurasia: Deepening Economic Crisis in Regions Forcing Moscow to Bail Out Regional Governments

Paul Goble

            Staunton, November 23 – Moscow now faces Greek and Spanish-style economic and political crises in many regions within its borders because an increasing number of them are suffering from declining economic activity and falling tax revenues, a trend that is forcing the central government to spend ever more to bail them out.

            These differences in regional activity and tax collections as well as Moscow’s transfer payment could easily spark political problems, just as they have done within the European Union, with recipient regions seeking ever more funds to prevent social disasters and donor ones asking why they should have to pay for those seeking such money.

            Analysts at Finmarket, the NR2.ru agency reported this week, say that Russia’s relatively good economic performance overall obscures the growing signs of “an obvious crisis in many regions and entire federal districts,” crises that resemble those like in Greece and Spain (www.nr2.ru/economy/413030.html).

            These crisis regions are located “not only in the south but also in ‘Northern’ oil and gas regions and even some not far from Moscow.” In them, falling industrial production and declining corporate profits have created a situation in which “regional and local budgets are experiencing problems with the collection of taxes.”

            In 34 regions, Finmarket said, industrial production during September 2012 was lower than it had been in the same month a year ago.  In a few places, such as Smolensk and Daghestan, production was down more than 14 percent, a pattern not suggested by figures for the country as a whole.

            “If the statistics for production in Chechnya, Ingushetia, Daghestan, Tuva and Kalmykia” are no surprise, “the presence in the first ten by decline of production of such powerful resource processing territories as Sakhalin, Yamalo-Nenets and Khanty-Mansiisk cannot fail to be striking”

            In 36 federal subjects, corporate profits during the first three quarters of 2012 are smaller than they were a year earlier.  That is hurting not only the companies involved but also the regional governments, because, since they heavily rely on taxing such profits, they are seeing their revenues fall, leading them to ask for more help from Moscow or forcing them into deficit.

            For the country as a whole, taxes on profits fell during the first three quarters of this year 2.3 percent compared to the year before. But in 29 regions it fell far more: In Chechnya, it fell 46 percent, in Chukotka 44 percent, and in Lipetsk 35 percent.  Collections of taxes on profits also declined in the two capitals.

            These declines have led to deficit spending in the regions and an upsurge in federal subsidies.  During the first eight months of this year, Moscow transferred to the regions 27.5 percent more than it had a year earlier – some 320 billion rubles (10 billion US dollars), increasing the dependency of some regions on Moscow and angering tax payers elsewhere.

            Had the federal center not done so, the Finmarket analysts conclude, “the budgets of 47 subjects of the federation would have been running a deficit.

            In short, the financial analysts concluded, “there are almost all signs of a full-blown financial-economic crisis in eleven regions of Russia with a decline in production, a fall-off of the financial results of companies [located there], and budgetary problems” arising from those two other trends.

            Particularly worrisome is the fact that these subjects include not just the non-Russian republics of the North Caucasus and the Far East, but areas along the Chinese border and Vologda, Kemerovo and Murmansk oblasts, where economic activity had been recovering at the 2008 crisis.