Monday, December 22, 2014

Window on Eurasia: Collapse of Oil Prices and Ruble Exchange Rate Hits Russia’s Regions Differently than Many Assume, Zubarevich Says

Paul Goble


            Staunton, December 22 – The budgets of regional governments are still in trouble, but their situation is actually somewhat better now than it was a year ago not only because of Moscow’s decision to provide more help but because of a quirk in the way in which their budgets are financed, according to social geographer Natalya Zubarevich.


            Zubarevich, who three years ago attracted widespread attention for her ideas about the existence of “four Russias” each of which was moving in a different direction and at a different speed now says that as a result of the crisis, the four are moving together, although for how long it is impossible to say (


            Part of the reason for that, she says, is that the Russian finance ministry has changed its approach to the regions and has slowed its efforts to cut back transfer payments to them while helping the regions to obtain financing from banks in the center.  As a result, the situation during the first eight months of this year looks somewhat better than a year earlier.


            But a more important reason is this, she says. “More than half of the federal budget comes from the sale of oil and gas. This income is in dollars. According to various estimates, each dollar decline in the price of a barrel of oil leads to losses in the federal budget of 90 to 100 billion rubles.”


            At the same time, however, “for each decline of the ruble to the dollar,” the Russian government “receives an additional 180 to 200 billion rubles.” And since the budget it is based on rubles not dollars, it is likely to end this year with a surplus rather than a deficit, and the regions will thus not suffer in the ways many are predicting, at least not from this source.


            Although Zubarevich does not say so, this combination of factors may be the one that explains Vladimir Putin’s strange and otherwise inexplicable comment last week that the decline in the ruble-dollar exchange rate will give Moscow more rubles to handle its expenses.


            No one should think that this is either a good or sustainable situation for Russia as a whole or for the regions. Both will have to spend far more on imported goods when they can get them, both will face inflationary pressures in many areas, and both will find demands on their budgets outpacing such income.


            The main problem of the current crisis, Zubarevich says, is the collapse in investment across the country. Second in importance is the end in the growth of real incomes of the population, and their decline in 40 percent of the regions.  But she says she does not expect unemployment to go up as much as some are predicting.


            She gives three reasons for this: first, Russia’s demographic decline means that the number of people available to work is falling. Second, the low level of unemployment now is very low and would rise some but not a lot in any case.  And third, there is likely to be a shift from the official economy to the shadow economy.


            That will hurt government revenues in the longer term, and it will make corruption even more difficult to root out. But Russians who want to work will mostly have jobs, the social geographer says, and that means the prospects for mass protest are significantly less than many assume.


            She says that in her opinion “the situation will remain under control if the crisis doesn’t go on too long.” At the same time, however, the attention the authorities are paying to industrial cities is entirely “understandable. There the potential for protest in the event of mass dismissals is higher.” In short, city residents will seek jobs in the shadow sector, and rural residents will as usual turn to the land.


            At present, she concludes, four subjects of the Russian Federation supply 60 percent of the income for the federal budget, the result of raw material rents and “the rent of the capital status.”  This is how Russians now live, but in the longer term, it is unsustainable, the social geographer says.


            “We need decentralization, but efforts at tax decentralization will lead to a situation in which the richest regions will become richer, and the rest will be left behind.” That is a dead end. A new redistribution of rents is needed but finding such a solution is extraordinarily difficult, and it will remain all the more difficult under the current economic conditions.


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