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Sunday, March 18, 2018

Rich regions will continue to get richer, the poor are at risk of going bankrupt

Russian regions are waiting for a test of sobriety budget: Federal policy to reduce the budget deficit spending will have to cut, and cut often nothing, with the exception of investments, without which the development would have to forget. Developed regions have no such problem – they are making even in a crisis, but the increases in some will be offset by a deepening depression in others.

The formation of the regional budgets for 2017 will be the most difficult over the last few years. The leadership of most subjects of the Federation have to minimize costs without regard to the fact that the Federal center may, on occasion, to lean on, and no hope for increasing their own revenues. Critics of the current course of fiscal policy call to give regions more freedom in the disposal of finances and not to burden them with new obligations, but these proposals hardly fit into the principles, declared by the Ministry of Finance of the Russian Federation.

Actors in the budget trap

“Regions such as Tatarstan, Krasnodar Krai, Kaluga, Tyumen, Ulyanovsk region managed last time to significantly improve, despite the General negative economic environment,”

Next year a key priority of fiscal policy will be reduction of the deficit, which this year will amount to 3.7%. As reported late last week at the international investment forum in Sochi, Russian Finance Minister Anton Siluanov, in 2017, the task is to reduce it to 3.2% with subsequent annual reduction by one percentage point. As a result, by 2019, the deficit should be 1%. “This is the optimal unbalance that we can afford,” added the Finance Minister assured that taxes will not rise.

To expect that the deficit reduction will occur due to the growth of the economy, it is not necessary. Last forecast Ministry for GDP growth for 2017 in the baseline scenario – plus 0,6%, last time the Central Bank’s forecast is slightly more optimistic – 1%, but in that and in other case, the growth is expected within statpogreshnosti. A significant part of economic agents, not to mention the population, this growth in itself will not feel.

However, stated at the same forum, the President of Sberbank German Gref, Russia’s economy has almost fully adapted to low oil prices, can not be said about the budget. “Prospects for budgetary “pie” will grow strongly in the coming years and we will be able to feed them all the suffering, not so much, he said. – On the agenda comes the most rational allocation of resources. We are talking about budget consolidation policy – the maximum consolidation of income, reduction of costs”.

In other words, in conditions of almost zero economic growth, the only possible way of reducing the budget deficit is spending cuts. “Between 2014 and 2019 in real terms, the spending of all budgets will fall to 19-20 percent,” – predicted Deputy Chairman of the Economic Council under the President Alexei Kudrin.

The most painful this process will be for the Russian regions, to whom the Federal centre has reduced the amount of uncompensated care. Over the past five years, the proportion of interbudgetary transfers to regional budgets fell from 15 to 9.8 per cent though in absolute terms the volume of transfers remained approximately at the same level (and respectively 1,643 1,579 trillion rubles in 2011 and 2016). Simultaneously, the expenditures of regional budgets fell sharply, the share of investment expenditures from 15.1% in 2011 to 10.1% in 2015.

This means that the subjects reduce the funding infrastructure for the future growth of the economy by increasing social spending. This trend became apparent almost immediately after the start of the “may decrees” of Vladimir Putin, increasing social commitments of the regions. The Prime Minister Dmitry Medvedev confirmed the loyalty of the old rate. “All social obligations, which the government have taken will be fulfilled. The budget remains the principal instrument of our social policy”, – he said at the plenary session of the Sochi forum.

“Thank You, Mr Siluanov”

One of the most important arguments of the opponents of the “may decrees” is that their implementation has led to a sharp increase in the debt burden on regional budgets. Indeed, from September 2013 to September 2014 the total debt of the Federation, according to the Ministry of Finance of the Russian Federation, increased by 25.8% (1,373 to 1,727 trillion roubles), and for the next year is still 22.5% (up to 2,116 trillion rubles). The problem was fixed by the Ministry of Finance, and in the last year the rapid expansion of the regional debt failed to stop. On September 1, the total amount of debt of subjects of Federation was equal to 2,267 trillion rubles – this is broadly comparable with the previous year, the increase amounted to 7.1%.

Important changes have occurred in the structure of regional debt. If earlier the greatest share in debts of regional budgets has taken loans from commercial banks at commercial interest now in first place came low cost loans costing to the regions of conditionally free (on the principle of communicating vessels). On 1 September last year, the ratio between these types of loans amounted to 771,7 806,3 billion roubles, and after a year of 1.11 trillion against the 662.5 billion. If the debt compare current statistics with data from two years ago (653 billion of commercial loans and 527,7 billion budget for September 1, 2014), it turns out that just a couple of years the Federal government has increased its lending to the regions more than doubled.

“Thank you, Mr Siluanov, asked at a business Breakfast of the savings Bank to the Minister of Finance Anton Siluanov, the Deputy of the state Duma Andrey Makarov, in the last convocation of the lower house who led the budget Committee. – Budget loans slightly improved the situation slightly reduced debt service costs, although this is certainly not a means of solving problems.”

Meanwhile, the gradual replacement of commercial loans budget is not to be taken as a gesture or charity on the part of the Ministry of Finance – the state has to take this step simply because among the regions is becoming less creditworthy borrowers. According to Gref, Sberbank has divided all the regions into three categories: those who can and should continue to lend, those who cannot increase lending, and those where it is necessary to reduce commercial lending. “The third group every year grows very much and very greatly reduced. I don’t think anyone has the answer to the question what to do if we have a trillion, we will increase the expenses of the subjects, because the increase in social wages the overwhelming majority of will fall on the subjects,” – said Gref.

“There is no money – give freedom”

The current situation with the formation of the regional budgets, again puts a question over the existing principles of interbudgetary relations, in which the Federal Treasury gets unconditional priority over the actors (not to mention the municipalities, who gets the crumbs of the notorious budget “pie”). “It’s a little time let go of the reins. When incomes grow, the center would like to control more – who give, those looking. Now the control is less than that, and we’re finally, maybe, realize that the formation of the regions do not go, they are different”, – said the expert of regional policy Professor Natalia Zubarevich.

Its formula optimal fiscal policy of the Federal center towards the regions is: “there is no money – give me freedom.” While Zubarevich recognizes that not all regional leaders to understand “the peculiarity of the moment”: incomes will not grow, intergovernmental transfers are reduced, and lobbying efforts, the situation is likely to improve will be less. Moreover, some of the most akreditovannye regions actively continue to increase spending, believing that the Federal center, as always, will help them.

It seems that those who have not yet realized the changed realities, it is necessary to do so in the coming weeks in the process of formation of regional budgets in 2017. But this does not detract from the longer-term question of mobilizing the regions ‘ own untapped resources. During the discussion on the division of the budget “pie” Andrey Makarov recalled that by the end of 2015, the net profit of Russian companies grew one and a half times that of the enterprises on accounts in banks are trillions of rubles, but the money invested nowhere. “We had many structural reforms? How many development institutions we have created? Lose count, fingers and toes missing. But the problem is not the lack of money and in the investment climate,” stated Makarov.

From this point of view the current situation in the public sector is developing in a classic for any crisis scenario: the strong become stronger and the weak even weaker. Regions such as Tatarstan, Krasnodar Krai, Kaluga, Tyumen, Ulyanovsk region, was able lately to significantly improve, despite the overall negative economic environment. The best indicator of this are foreign direct investment, which are leading regions continue to attract, despite Western sanctions. For example, Krasnodar Krai at the St. Petersburg economic forum signed a major agreement with the German engineering company Claas on the expansion of production in the region, and Ulyanovsk region signed in Sochi spetsinvestproject with German concern DMG that will participate in the creation of Russia’s largest machine tool enterprises.

A lot of outsiders, such as the republics of the North Caucasus, far worse – their dependence on the Federal centre in recent years has become even stronger, and significantly increase the investment attractiveness of their leadership and failed. This means that at zero economic growth in the whole country, the gap between leaders and Laggards will become even more growth in some will be offset by a deepening depression in others, giving a result of zero-sum. But considering the low quality of management teams in many regions, the vesting of all subjects more freedoms can easily lead to even worse results.


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