As the budget deficit in Russia’s regions rose to 1.9 trillion rubles, President Vladimir Putin called for 100 billion rubles to be transferred to the administrations facing the greatest financial difficulties. Putin instructed the government to stabilize regional finances.
Speaking at a meeting with senior officials, Putin said the federal government and the Finance Ministry were directly responsible for the financial stability of the regions. The federal budget deficit has also reached 6.5 trillion rubles.
Federal loans being written off
Finance Minister Anton Siluanov announced that the total debt of regional administrations had reached 3.3 trillion rubles. This amount is equivalent to approximately 17 percent of the regions’ own revenues.
About two-thirds of the debt consists of low-interest loans obtained from the federal government. The remainder consists of higher-interest market debt.
The federal government is writing off some loans and extending the repayment schedules for others to ease the debt burden. Siluanov said federal loans totaling 518 billion rubles held by 76 regions had been written off since the beginning of the year, reducing the regions’ total debt by 115 billion rubles.
Up to two-thirds of the regions’ debt to the federal government can be written off. Repayment of the remaining debt can also be deferred. Repayment of approximately 100 billion rubles in loans due this year has been postponed until 2030, while repayment of one-third of the loans maturing between 2027 and 2029 will be deferred until 2031-2033.
Siluanov said these deferrals would create approximately 300 billion rubles in additional resources that regional administrations could spend over three years. However, a significant portion of these resources is being used for expenditures linked to the war in Ukraine and support for military families.
Military spending rises as health expenditure declines
Siluanov announced that more than 300 billion of the 517 billion rubles written off had been allocated to support military families and other expenses linked to what is called the special military operation. The regions are also making large signing payments to recruit soldiers for the war.
Janis Kluge, a researcher at the German Institute for International and Security Affairs, said the average signing payment per person made by regional administrations had increased by 30 percent over the past year, reaching 1.8-1.9 million rubles. Based on regional budget data, Kluge calculated that 93,000 people signed military contracts in the second quarter and that the total cost of these payments was approximately 167 billion rubles.
Forecasts by the Russian Academy of Sciences’ Institute of Economic Forecasting showed that regional spending on national security rose 36 percent year on year between January and April. Spending on housing and public utilities also increased by 17 percent. While spending on the economy and health declined, interest payments rose to 2.4 times their level a year earlier.
Tax revenues did not move in the same direction across the regions
Most of the additional revenue generated by recent tax increases is being transferred to the federal budget. As a result, the regions are benefiting from these increases only to a limited extent. The two main sources of revenue for regional administrations are corporate income tax and personal income tax.
According to data from the Expert RA rating agency, personal income tax collections rose by 14.9 percent in the first quarter, while corporate income tax revenue fell by 11.8 percent. A slowdown in wage growth could also curb the increase in personal income tax revenue.
Economist Vyacheslav Shiryaev described the federal loan write-off program as a form of hidden default. Shiryaev said the regions were unable to repay their debts and that the federal government was effectively acknowledging the non-fulfillment of obligations by writing off those debts.
