Thread by @NoYardstick

We know that Russia’s federal budget is cracking under the weight of sanctions and that the government is forced to use the National Welfare Fund to finance a ballooning deficit. But what’s happening to regional budgets? A short thread 🧵

For those who aren’t familiar with Russian budgeting: regional budgets finance vital state functions. About 90 percent of them are spent on five broad areas. “National economy” includes investments.

Their three main sources of income are personal income tax, profit tax and (in most, but not all regions) various transfers from the federal budget. The two income taxes make up roughly 65-70 percent of “own revenues” (revenues without transfers).

Regional budgets had a very good start of the year: the economic recovery that followed the nadir of the covid crisis still lasted, energy prices were high, helping other areas of the economy, and spending on the “National Projects” picked up.

Considering inflation, initial budgetary plans for 2022 overall envisaged only a modest growth in the "housing" and "national economy" headings, building on the revenue surpluses accumulated in 2021 and planned for 2022.

Official data suggests that things are still going great. The recorded income in regional budgets is around 79 percent overall for the first nine months of the year, which is comparable to 2021. However, if you scratch the surface, troubles are visible.
budget.permkrai.ru/compare_budget…

Looking at corporate income tax receipts, one finds that while most regions recorded hefty increases in H1 2022 over H1 2021, Q3 was much worse. Revenues from this tax fell well short of 2021 (and this without accounting for inflation).

Among the worst performers we can see metallurgical regions, timber-producing regions, but it is also impressive to see the bumper profits of the coal-producing Kemerovo, or even some oil and gas producing regions, turn around in Q3.

Personal income tax receipts have so far not followed this trend. Overall, they have slightly outpaced inflation over the first nine months of the year. But note that this is partly because mass layoffs haven’t started yet. 2020 was very similar in this regard.

Why is this significant? Because this crisis is not going away. It didn’t start with mobilization, but a policy that takes hundreds of thousands of people out of the workforce (either because they’re drafted or because they’re hiding) will greatly exacerbate this problem.

And, similarly to the covid crisis, regional governments are supposed to take ownership of the consequences of the war, from payments to mobiks and their families, to maintaining regional economies and ensuring the supply of vital goods & services.

Some recent examples, for instance, indicate that several regions are already struggling to make money available for mobilized citizens, need to rearrange expenses, etc. (See e.g. the example below from Novosibirsk, but there have been many others.)

https://twitter.com/taygainfo/status/1585119297923424258

Given the difficulties of raising money on the market, especially for poorer regions, if these trends worsen, regional budgets may either have to cut their expenses significantly (up to 15-20% or more), or hope that the federal government will pick up the bill.

And with the federal budget tightening, this may not always be an option. Even if it is financially feasible, it won’t be automatic. Regions have gradually lost their fiscal autonomy together with their political autonomy over the past two decades & this process is still ongoing

Over the past years, for instance, transfers that come with strings attached or that are the discretion of the government took the place of freely usable grants. Even systemic officials, such as Alexey Kudrin raised this problem.
kommersant.ru/doc/5409823

(I have also written a lot about this (e.g. here: imrussia.org/en/authors/and…, here: ridl.io/russia-s-belea…, here: fpri.org/wp-content/upl… and also here: noyardstick.com/?p=968 ) so I won’t repeat myself in this thread.)

Enough to say that to fulfill the ever-growing set of tasks, governors will increasingly either need to have a back channel to Moscow (or a story to catch the government's attention) to successfully compete for funds, or be able to put pressure on local businesses – once again.

In short, sanctions and mobilization will add pressure not only on the federal budget, but also on regional finances; and through it, the whole system of governance.

PS: as it happens, ACRA came to similar conclusions in their report today. If you read both: their numbers are about the whole 9 months of the year. I look at H1 & Q3 separately. The numbers check out, they have further insights about transfers & industry.
moscowtimes.ru/2022/10/27/ros…

I wrote up all the above, with some additions, for @cepa.
cepa.org/article/russia…