Ben Aris in Moscow -

Russia's economy is slowing dramatically, but the pain is not evenly spread. While a few Russian regions are making rapid progress and modernising, the bulk are getting into deep financial trouble.

"Since the 2009 financial crisis, the Kremlin has allowed Russia's regions to take the brunt of the country's economic decline in order to keep the federal government seemingly healthy, with a nominally small budget deficit and large currency reserves," US think-tank Stratfor said in a note in January. "But now most of the regional governments' debt is so high, it is becoming dangerous for the federal government and big banks and could soon become unmanageable."

Between 2010 and 2014 regional indebtedness more than doubled from $35bn to $78bn, according to the rating agency Standard & Poor's. And the size of this debt is now beginning to threaten the health of the Russian economy. If Russia was brought low during the 2008 crisis by over-borrowing amongst a few key large companies, the next crisis looks increasingly like it will be caused by the collapse of a regional debt bubble: the collective level of debt owed by Russia's far-flung regions has risen from just until 4% of GDP in 2010 to just under 8% now, and will top 10% next year according to estimates – a far faster growth rate than the federal government's borrowing growth. Russia's total sovereign debt is currently about $300bn, or 14% of GDP.

Mixed bag

The economic performance of Russia's 83 regions is very mixed. Only about a dozen regions are actually net contributors to the federal budget. The rest live day-to-day on handouts from the central government.

The combination of a slowing economy exacerbated by the political turmoil in Ukraine has caused debt levels to rise alarmingly in a few regions and some are now starting to look default in the eye. "The real pain resulting from Russia’s macroeconomic situation will be felt at the regional level… The deterioration in the finances of Russia’s regional governments is already visible, even in the absence of major outside shocks," analysts at Uralsib said in a recent note.

Russian President Vladimir Putin has set regional governments ambitious development goals – laid out in a series of decrees in May 2012 – but most are struggling to meet them.

Local governments have been hoping the targets will be reduced, the deadlines extended or the central government will come up with more cash. "So far, it does not look like these hopes will materialize," says Uralsib.

Until recently the best regions have been able to finance their growth on the bond markets – both international and domestic. However as Russia slides towards pariah status, the regions have been cut off from raising debt. Analysts say most regions have turned to bank loans and budget credits for financing. 

"Each region has to get federal approval to issue bonds, because regional bonds create more market competition for the federal and business bonds. Most of the banking loans to the regions carry high interest rates and are short term (mostly between two and five years). The federal loans come with much lower rates and longer repayment schedules (mostly between five and 20 years), so naturally federal credits and loans are more attractive for the local governments, though unprofitable for the federal government," Stratfor said.

The City of Moscow is by far the biggest Russian user of international bond markets. It raised approximately $4.8bn in 2013, but has only issued $2.4bn this year due to restrictions on its own budget. The bottom line is that Russia's regions are becoming yet another mouth to feed from the slowly dwindling pot of hard currency reserves.