2020 will be a very difficult year for regional budgets. As a result of the pandemic and the low cost of oil, the state announced a number of business breaks. However, these breaks will negatively affect the revenue side of regional budgets. Federal authorities are developing measures to ease restrictions on budget debt loads, create new tools to attract debt, and allocate additional funds to support regional authorities.
On April 15, 2020, the President of the Russian Federation proposed sending additional financial assistance to Russian regions in the amount of RUB 200 bln to ensure the stability and balance of regional budgets, noting that the regions should be able to use these funds flexibly. The principles of distributing these funds, as well as the terms and conditions for their provision, have not yet been announced.
However, according to media reports, the Russian Ministry of Finance is considering canceling grants to regions used to achieve the performance targets of executive authorities in the amount of RUB 50 bln.
ACRA notes that the need for additional financial assistance in the regions will be high. Only a quarter of Russian regions managed to generate significant balances on their accounts, allowing them to ensure uninterrupted expense financing while income falls for several months. In the current situation, other regions may face cash gaps that can be financed only with federal aid.
Despite the aid potentially being insufficient compared to the possible amount of revenue lost by regional budgets in 2020, it can be effective if it is provided promptly.
The State Duma adopted a bill1 that states in 2020, regional authorities will be allowed to provide budget loans to other regions for up to three years. The purpose of a given inter-budget loan and the cost of use will be determined by the regions themselves. According to ACRA, this measure will not be very popular in a crisis year. Only regions with significant account balances will be able to provide loans and only if, according to the budget law for the current year and for the forecast period 2021-2022, a given region does not plan to spend account balances to finance its own deficit. There is also a question about the cost of the loans provided. Regions lending will have to find a balance between the yield of the deposit and the profitability of the operation to provide these loans, and regions borrowing will need to look for the cheapest sources of financing.
Amendments to the bill also provide regions that do not have ACRA or Expert RA2 credit ratings the opportunity to place bonds. However, if the issuer does not have a rating at a certain level, the yield of its bonds on placement should not exceed the +1% key rate of the Bank of Russia. Investors may perceive the lack of a rating negatively and as a result, regions with relatively low creditworthiness will not be able to meet the necessary demand for their bonds and may face a liquidity deficit. There are many regulations on the use of ratings by investors. A low rate will not compensate investors for possible restrictions on investing in bonds. The cost of borrowing was already capped in 2017. At that time, when restructuring budget loans, one of the conditions was to attract bank loans at a rate no higher than the +1% key rate of the Bank of Russia. This measure was introduced to reduce the cost of debt servicing, but led to a sharp jump in failed auctions to buy credit funds from banks.
1 Bill No. 941158-7 “On amendments to the Budget Code of the Russian Federation and the Federal law ‘on suspending certain provisions of the Budget Code of the Russian Federation and establishing the specifics of budget execution of the budget system of the Russian Federation in 2020.’”
2 According to Resolution of the Government of the Russian Federation No. 40, dated January 20, 2014, “On requirements for the minimum level of credit ratings of subjects of the Russian Federation and municipalities,” a borrower is required to have a minimum credit rating of BBB-(RU) (ACRA) or ruBBB- (Expert RA).
Read more in ACRA’s piece Regional bond market: reasons for stagnation
The Ministry of Finance announced a change in the terms of the 2017 budget loan restructuring for Russian regions.
Firstly, the repayment schedule for restructured loans is being changed. In 2020, the regions will be fully exempt from paying debts on state loans. In 2021-2024, debt repayment will be provided annually in the amount of 5% of the amount owed. Then, in 2025-2029, the remaining part will be repaid annually in equal shares. Extending the repayment schedule will make it possible for regions to use freed up funds to minimize the worsening economic situation.
Secondly, there is an exemption from liability for exceeding the limits on the amount of deficit, public debt, and the share of commercial debt in total borrowings. In fact, the excess is allowed for the amount of funds allocated to fight the coronavirus and the worsening economic situation, as well as for the amount of lost internal budget revenues.
According to ACRA, clear criteria in defining expenses as anti-crisis measures have not yet been laid out, which gives regional authorities some freedom when increasing the volume of deficit and debt. However, the regions should take a very balanced approach to violating the previously established standards, as the Ministry of Finance has focused on the need to reduce the level of regional public debt over the past three years. After the situation stabilizes, Russian regions will probably have to reduce debt obligations again, which may cause a number of problems with the significant increase in debt obligations this year.