Russia’s May decrees pushed the poorest regions into debt

Russia’s May decrees pushed the poorest regions into debt
Tobolsk in the Tyumen region.
By Filip Brokes in St Petersburg February 27, 2018

After his return to the presidency in 2012, and under pressure from the first large-scale public protests of his rule, Vladimir Putin tasked regional governors to implement a series of executive orders known as the May Decrees. The 57-page document divided into 11 sections encompassed a large variety of social, economic, health-care and housing policies that formed the basis of Putin’s third presidency agenda. The key goals were to improve Russia’s competitiveness on the world markets, improve the overall quality of life in Russia and set the Russian economy on the path to sustainable economic growth.

The May decrees have an obvious political goal: they allow the Kremlin to point to concrete actions it has taken to improve people’s lives, but if the targets are missed it can also lay the blame at the feet of “incompetent” or “corrupt” regional governors, ignoring the responsibility of creating enough resources so poor regions can fund the centre’s demands. The Kremlin has been so enamoured of the scheme that in the last week of February rumours surfaced in the Russian press that the Kremlin is about to release another round of May decree goals.

But the top-down socioeconomic goals set out in the decrees were going to cost a lot of money. Putin’s grand plan involving mass government spending, which were formulated under extremely favourable economic conditions, with oil selling at around $113 a barrel.

Only two years later Russia was hit by an economic crisis that quickly emptied state coffers. Russia’s new impoverishment notwithstanding, the old plan for Russia’s socioeconomic development remained in place. This meant that the responsibility for carrying out the orders was basically delegated to regional governors without providing them with the means to do so. While the federal government enjoys significant income from raw material export duties, Russia’s regions have to live on what they collect from more mundane taxes – largely VAT and personal income taxes. Nominally, regions should get a slice of corporate profit taxes too, but as any large company worth its salt has registered its HQ in Moscow, the lion’s share of this money goes to the capital.

Regions have been struggling to carry this can. For example, the executive order number 597 on social policy that is part of the decrees states that by 2018 the average wage of social workers across Russia has to match the average wage in their respective regions. For doctors, university professors and scientific workers, the target was set much higher – 200% of the average wage in their respective region. Moreover, among other measures, Putin promised to create 25mn high-skilled jobs and give workers more decision making powers in both state and private enterprises.

In December 2017, during his annual press conference in Moscow, Putin proudly proclaimed that 90% of the targets stipulated in the May Decrees had been met. “Hadn’t we set these goals for wage raises for social workers, the situation would have been worse, so it was the right decision,” Putin said at his annual marathon phone in.

But just a couple of months before Putin’s televised assurances, at the meeting of the State Council, Alexei Anisimov, head of the executive committe of the All-Russia People’s Front, was much more cautious. “We have inspected 179 of your executive orders in the framework of the May Decrees implementation monitoring. Out of those 179 orders, we have found 35 to be fully implemented, 44 not implemented and 100 have been implemented only partially and need to be finalised,” Anisimov said,according to Medusa.

Regional disparities aggravated

Despite Putin’s optimism, the economic situation in many of Russia’s poorer regions has deteriorated significantly – partly as a result of the burden of the May decrees. Stuck between a rock and a hard place, the central government’s insistence these orders be carried out while at the same time reducing federal funding has thrown regional governors on their own devices. As a consequence, Moscow’s inflexibility seems to have created further economic disparities among the already extremely economically unequal regions. Roughly speaking, a third of Russia’s regions are prosperous, a third are breaking even,and a third are in trouble.

Some Russian regions, rich in natural resources or well situated for international trade, such as Saint Petersburg, have embraced the May reforms. The Leningrad region (which surrounds the northern capital but does not include it) has used the federal policies as an incentive to further develop the already strongly performing regional economy. The new regional export strategy is designed to dramatically increase the amount of exports, up to 190% by 2025.

To achieve this goal, a large warehouse logistics centre will be built near the port of Ust-Luga, 68 miles west of Saint Petersburg, along with a terminal for trans-shipment of mineral fertilisers, an airport and a new cargo air terminal in the port. The region in north-western part of Russia is already one of the main Russian exporters of goods and services, with annual exports worth approximately $5bn. The Leningrad region is also one of the best performers among Russian regions in terms of debt to revenue ratio, with a mere 4.7% as of October 2017.

However, most Russian regions have neither the quality of infrastructure nor the favourable geographical location that the Leningrad region enjoys. Opportunities to engage in foreign trade are scarce and one of the main sources of income comes from federal funding. After the crisis hit Russia in 2014, and the state coffers became quickly depleted, many Russian regional governors found themselves seriously short of cash. The targets for social and economic development were still in place, but the funding from the centre needed to meet them was not forthcoming.

Many governors turned to credit institutions for help.  According to the Russian Ministry of Finance, the aggregate debt of all Russian regions went up by 28.6% in 2013, 20% in 2014 and 11% in 2015. In 2017, eight Russian regions’ debt-to-revenue ratio were above 100%, with Mordovia’s 194.2% debt-to-revenue ratio topping the list. Mordovia’s indebtedness might be exceptionally high, but the problem is widespread: 23 Russian regions’ debt-to-revenue ratio was above 80% in 2017. The most burdened regions are Mordova, Kostromsk, Khakasia, Karelia, Smolenks, Pskov and the Kardino-Balkar republic.

The corresponding numbers for the capital city Moscow and Saint Petersburg were 2.4% and 1.6%, respectively.

The pressure on regional budgets has eased somewhat in 2017 thanks to the return to growth. International ratings agency Standard & Poor’s (S&P) said that regional budget incomes were rising in a report released in January but that many regions were not out of the woods yet.

The simple fact is that a great number of Russian regions simply can’t afford the cost associated with the reforms. A case in point is the Republic of Kalmykia. Roughly the size of Syria, Kalmykia’s GDP in 2015 stood at around RUB47bn ($804mn). According to the Federal Service of State Statistics, there are 3,475 doctors in Kalmykia with the average salary at RUB45,000 ($80) per month. To meet the Moscow-set-targets for doctor's pay, the local government has to spend RUB52mn, or more than 1% of its GDP. The same would then apply to university professors, assistant teachers, researchers and all social workers. And that’s only talking about the social sphere.

No easy fix

As the final date for the implementation of some of Putin’s executive orders approached, many regional governors across Russia started boasting about their achievements.  

In the Krasnodar region, during a meeting of the Legislative Assembly in late January, representatives from the Ministry of Healthcare discussed with the local MPs the implementation of Putin’s orders in their region.

“Looking at the numbers from the fourth quarter of 2017, I can say that the programme has been nearly concluded. Doctor’s wages have reached 187% of the average regional wage, and senior and junior medical personal’s wages reached 96.8% and 81%, respectively. Those are averages calculated from data we received from 140 medical institutions in our region,” Krasnodar’s healthcare minister Vadim Janin said during the meeting, according to SMnews.

Janin then added that programme will be fully concluded at the beginning of 2018. The cost will be a bit over RUB2bn. “A second budget revision will be needed,” he said.

The timely implementation of Putin’s orders seems to have become a matter of prestige for many regional governors. According to the rating put together by Medialogia, the Ryazan region, just a couple of miles southeast of Moscow, ranked as the second best region in implementing the May Decrees in 2017.

Earlier this year, the Ryazan information agency quoted the regional governor, Nikolai Lyubimov, saying that, “the implementation of the May Decrees is the key goal of his administration and that it will improve the quality of life in the region.” In November 2017, Lyubimov explained to the heads of regional ministries that they will be held personally accountable for not implementing the orders in time.

The top down approach created enough pressure to ultimately help meet the targets, which also have an obvious political goal. However, soon it became clear that many hospitals, forced to raise wages without the means to do so, solved the problem by simply cutting the working hours by half. Many doctors thus suddenly became part-time employees with the same responsibilities and the same pay.

From a short-term perspective, this might not be that big of an issue for Moscow. What matters is that the orders are implemented, at least on paper, and the results can be presented to Russian voters before the upcoming elections this March. However, for the regions, the problem runs deeper. Many of them became heavily indebted without significantly improving their socioeconomic states. Now they will become even more dependent on the federal funding. With the current state of the economy, that relationship could be sustained. The question is for how long.

Russia's regions: GDP vs debt
 Region    GDP in 2015, thousands of rub   GDP per capita 2016   Debt in thousands of rub (as of December 1, 2017)  Debt to Revenue Ratio in % (Jan-Oct, 2017)
Central Federal District  22,713,911,130.50  38,856.44  458,092,187.01  -  
 Belgorod region  686,356,977.80  29,155.63  40,112,487.38 72,9 
 Bryansk region  269,933,259.90  24,869.44  10,256,545.56 41,3 
 Vladimir Region  357,913,080.50  22,507.75  3,258,246.77 8,7 
 Voronezh Region  823,133,582.80  29,234.56  23,880,207.50 41,3 
 Ivanovo region  171,019,535.90  23,334.88  16,296,352.27 86,4 
 Kaluga region  334,825,705.20  28,326.94  30,177,622.45 73,3 
 Kostroma region  157,705,652.70  23,549.13  21,834,339.33 163,7 
 The Kursk Region  335,300,338.30  25,395.19  6,956,769.09 27,2 
 Lipetsk region  457,558,009.80  28,038.50  15,027,413.50 35,8 
 Moscow region  3,213,873,128.50  40,427.19  87,481,248.22 22,1 
 Orel region  205,763,485.70  22,872.44  16,549,008.10 93,2 
 Ryazan Oblast  316,080,053.80  24,083.50  23,027,112.06 67,5 
 Smolensk region  257,098,905.90  24,132.06  29,140,159.97 107,9 
 Tambov Region  344,879,606.90  25,489.06  15,683,261.77 77,5 
 Tver region  341,202,542.10  23,458.00  17,529,231.33 43,3 
 Tula region  476,649,305.50  27,033.81  17,476,396.00 32,5 
 Yaroslavl Region  432,019,939.40  27,576.13  35,609,153.14 75,3 
 Moscow  13,532,598,019.80  58,270.94  47,796,632.58 2,4 
North-West Federal District  6,790,148,142.40  32,841.19  198,072,677.03  -  
 The Republic of Karelia  211,133,624.70  25,382.94  23,343,444.41 116,9 
 Komi Republic  523,211,182.40  31,260.81  35,913,863.99 63,9 
 Arhangelsk region  617,128,006.10  32,101.00  35,166,650.03 75,8 
       including the Nenets Autonomous District  217,605,265.30  70,005.50  2,600,000.00 16,5 
 Arkhangelsk region without JSC  399,522,741.10  30,630.44   75,8 
 Vologda Region  468,763,850.90  27,087.81  22,839,939.91 57
 Kaliningrad region  328,760,037.20  25,778.56  21,297,815.56 59,8 
 Leningrad region  853,584,612.50  26,947.75  3,952,648.22 4,7 
 Murmansk region  390,390,043.40  35,579.06  17,042,798.78 38,7 
 Novgorod Region  240,362,698.20  24,760.19  15,353,938.30 72,1 
 Pskov region  132,841,789.80  21,743.38  15,818,769.83 103,7 
 Saint-Petersburg  3,023,972,297.20  40,722.31  4,742,808.00 1,6 
Southern Federal District  4,590,595,020.30  25,958.56  263,728,363.98  -   
 Republic of Adygea  82,583,697.10  23,193.38  2,998,412.14 32,7 
 Republic of Kalmykia  47,291,744.70  14,301.50  4,127,026.34 99,3 
 Republic of Crimea  248,280,130.50  17,794.38  387,440.93 0,9 
 The Krasnodar Krai  1,946,759,712.30  32,413.44  144,034,291.90 75,3 
 Astrakhanskaya oblast  320,734,963.70  22,524.94  26,056,940.00 96,8 
 Volgograd region  735,293,137.10  20,393.56  53,439,154.01 90,8 
 Rostov region  1,171,784,071.40  26,587.75  32,685,098.66 33,9 
 city ​​of Sevastopol  37,867,563.50  24,780.50  -    
North-Caucasian Federal District  1,704,330,787.90  22,832.44  74,759,591.44  -  
 The Republic of Dagestan  559,673,113.20  27,069.13  12,173,597.57 65,3 
 The Republic of Ingushetia  54,330,433.60  14,932.56  2,390,242.80 94,0 
 Kabardino-Balkar Republic  125,393,100.10  19,386.19  12,817,228.37 120,7 
 Karachaevo-Chepetskaya Republic  67,355,187.90  16,627.56  5,396,191.82 87,4 
 Republic of North Ossetia-Alania  127,543,887.00  21,835.13  9,455,180.70 90,5 
 Chechen Republic  160,503,135.60  22,638.13  4,871,111.34 46,2 
 Stavropolsky Krai  609,531,930.50  22,049.00  27,656,038.84 52,1 
Volga Federal District  9,916,064,206.80  25,369.13  524,091,803.63  -  
 Republic of Bashkortostan  1,317,431,401.00  27,483.56  17,563,104.54 17,8 
 Republic of Mary El  165,531,034.10  18,325.63  13,513,824.08 81,6 
 Republic of Mordovia  187,397,349.60  17,467.19  48,812,790.59 194,2 
 The Republic of Tatarstan  1,833,214,547.10  32,064.00  93,515,400.18 45,8 
 Udmurt Republic  497,684,976.50  23,612.88  49,579,337.81 99,3 
 Chuvash Republic  250,408,911.60  17,598.19  8,591,447.31 37,4 
 PERM REGION  1,048,018,611.90  28,097.38  10,639,643.99 13,3 
 Kipovskaya oblast  276,506,396.00  20,985.00  26,062,790.80   97,9
 Nizhny Novgorod Oblast  1,069,280,186.80  30,322.88  76,256,490.48 64,4 
 Orenbourg region  774,858,966.40  21,812.00  27,006,032.00 48,9 
 Penza region  336,489,813.60  21,545.63  20,243,807.10 64,4 
 Samarskaya Oblast '  1,240,319,763.80  26,418.88  56,792,490.68 47,6 
 Saratovskaya oblast  617,497,596.60  19,069.63  50,330,082.73 84,5 
 Ulyanovsk region  301,424,651.80  22,117.50  25,184,561.35 63,8 
Ural federal district  8,980,445,689.10  32,282.06  132,868,769.69  -  
 Kurgan Region  179,711,801.40  20,163.94  16,586,948.84 90,5 
 Sverdlovsk Region  1,779,446,434.10  34,770.06  52,981,887.90 29,9 
 Tyumen region  5,850,973,954.30  40,954.69  1,692,897.12 1,3 
 including:    -    -    -  
 Khanty-Mansi Autonomous Area-Yugra  3,136,831,908.60  44,217.63  12,527,817.00 10,5 
 The Yamalo-Nenets Autonomous District  1,813,393,202.80  66,875.19  25,376,590.00 16,0 
 Tyumen Region without JSC  900,748,842.00  27,792.44  -    -  
 Chelyabinsk region  1,170,313,499.30  23,226.56  23,702,628.83 21,2 
Siberian Federal District  6,751,925,782.90  23,385.50  337,042,763.90  -  
 Altai Republic  41,776,792.40  17,664.81  1,421,633.81 42,4 
 Republic of Buryatia  204,156,205.70  24,868.25  8,125,364.11 39,6 
 Tyva Republic  47,287,338.00  13,832.69  2,047,839.00 58,3 
 The Republic of Khakassia  171,663,871.20  20,993.19  24,656,500.42 144,5 
 Altai kray  492,138,916.00  20,916.44  2,193,497.40 4,4 
 Transbaikal region  248,847,631.50  22,462.31  27,685,936.16 91,7 
 Krasnoyarsk region  1,618,165,986.60  27,737.38  97,843,835.52 54,6 
 Irkutsk Region  1,013,542,285.00  22,043.06  12,585,587.01 12,0 
 Kemepovskaya oblast  842,618,851.80  20,987.25  55,991,352.77 54,7 
 Novosibirskaya oblast  980,850,469.50  24,905.31  39,451,019.13 45,5 
 Omsk Region  617,184,356.70  25,015.81  38,550,691.19 68,0 
 Tomsk Region  473,693,078.50  24,125.38  26,489,507.38 60,5 
 Far Eastern Federal District  3,549,618,517.60  35,809.56  153,095,674.92  
 The Republic of Sakha (Yakutia)  749,987,456.90  38,062.13  50,137,259.21 44,6 
 Kamchatka Krai  171,900,136.40  40,425.81  3,297,332.94 16,3 
 The Primorsky Krai  716,650,024.70  31,967.25  4,984,337.40 6,7 
 Khabarovskiy Kray  571,524,776.30  36,862.94  38,305,501.77 53,9 
 Amur Region  276,877,107.50  29,208.50  27,470,402.79 74,5 
 Magadan Region  124,596,899.80  49,891.88  12,622,764.00 64,0 
 Sakhalin Oblast  829,298,586.30  49,008.13  -    -  
 The European Autonomous Region  44,873,336.40  23,285.75  5,210,873.81 102,0 
 The Chukotka Autonomous Okrug  63,910,193.70  61,529.25  11,067,203.00 89,6 
Source: Federal State Statistic Service of the Russian Federation