- The redistributing role of the budget is diminishing. Due to a waning share of federal budget transfers in regional budget revenues, the gap between Russia’s wealthiest and poorest regions in terms of budget revenues per capita is widening (it has shown a 10% increase since 2012). Presently, federal loans help to smooth out this disparity by 1.7 times, but their role in regional budget revenues will continue to dwindle.
- Total budget revenues of Moscow and St. Petersburg are growing more rapidly (by 7% H-o-H) than in the other regions of the Russian Federation (by 1%, on average). The growth of total budget revenues has slowed down from 12% to 3% since mid-2015. The main sources of the observed growth are personal income tax (PIT) revenues and excise duties revenues.
- The largest portion of budget expenditures is made up by operating costs. Apart from Moscow and St. Petersburg, Russia’s regions are not in a position for hefty capex increases, despite the fact that those make up only 5% of their total expenses against the average 19% in Moscow and St. Petersburg.
- The difference between debt load levels is growing. The most heavily indebted regions keep borrowing at a rate that exceeds the growth rate of their own revenues, which puts them in an even tighter financial squeeze.
- Debt servicing costs are growing despite the mounting share of federal loans. The lack of an apparent influence of the substitution effect on debt servicing costs stems from the emergence of expensive loans in regional debt portfolios throughout Russia in 2015.
Redistributing role of budget is curtailed
Here and below, ACRA estimates are based on non-consolidated regional budget data
As of 1H16, regional budget revenues went up by 3% (and dropped by 5% in real terms), while the inequality gap between them became wider still: revenues of the wealthiest 20% of regions grew by 1.7%, while revenues of the poorest 20% of regions grew by a mere 0.3%. In total, since 2012 the gap between regional budget revenues showed a 10% surge. The problem is rooted in the waning share of federal budget transfers.
The disparity ratio was calculated as the ratio of budget revenues per capita of the wealthiest 20% of regions to the poorest 20% of regions
Figure 1. Federal transfers help smooth out regional disparity almost by twofold, but their dwindling results in a widening inequality gap
Own revenues are made up of tax related and non-tax related revenues of regions and do not include non-repayable receipts
The difference between own revenues of various regions remains acute and little prone to change: the wealthiest 20% of regions collect 6.8 times higher revenues than the poorest 20%. The escalating growth of this disparity in 2015 was linked to the ruble devaluation, which drove revenue growth in regions with larger export oriented taxpayer shares (the Sakhalin Region, the Khanty-Mansiysk Autonomous District, and the Krasnoyarsk Territory).
Figure 2. The dwindling share of federal loans in regional budget revenues
As of 1H16, the volume of federal loans to regions dropped by 12%, while their share in budget revenues plummeted by 17% compared to the 20% mark in 1H15 and the 32% mark in 1H09. Provided that the federal tax policy remains unchanged, the share of federal loans in regional budget revenues will keep sliding by 1% annually, which in turn will stimulate an even greater disparity going forward.
Real earnings of Russian regions suffer 5% decrease
In 1H16, the nominal growth of regional budget revenues amounted to 3% compared to 12% the year before. Regions are observing a slowing growth rate of own earnings (6% against 14% in 1H15) and a curtailed volume of federal transfers (by 12% against 1H15).
Tax-related budget revenue structure in 1H16:
- Income tax — 37%
- Personal income tax — 32%
- Property tax — 12%
- Excise duties — 8%
- Other — 11%
Table 1. Growth rate of regional revenues went down with relation to all balance sheet items except personal income taxes and excise taxes
In 2016, regional budgets have only two remaining sources of growth: personal income tax (PIT) and excise duties. Growth of excise duties receipts was possible due to a nominal growth of excise duties rates.
An inflow of PIT receipts into the budgets of Moscow and St. Petersburg amounted to an average 11% in 1H16 vs. 1H15, compared to an average 8% in other regions (net of the Crimea). PIT receipts depend on both employment and average wage dynamics. Russia’s employment rate has not changed over the past 12 months; however, in terms of wage growth (5-month period), Moscow and St. Petersburg are staying ahead of the rest of the country.
Figure 3. In 1H16, real wage growth resumed, although owing mainly to Moscow and St. Petersburg
The forthcoming growth of unreported employment will put pressure on budget revenue performance, since it will force PIT receipts to go down. Considering the fact that additional ways of employing devaluation and import substitution effects were used up in 2015, all available sources of boosting income tax receipts in 2016 have been exhausted.
Growth of capital expenditures is secured mainly by Moscow and St. Petersburg
Total regional expenditures have been climbing more rapidly than revenues, i.e., by 5% in 1H16 against 1H15. The growing expenses are not evenly spread across the board; for instance, since the start of 2016, federal subjects’ spending on education has been almost the same as the year before, while spending on national economies has grown by as much as 12%.
Regional budget expenditure structure in 1H16:
- Education — 26%
- Social policies — 20%
- Healthcare — 17%
- National economy — 17%
- Other — 20%
Figure 4. Dynamics of key budget expense items
Russia’s regions have been steadily intensifying their social expenditures. As of 1H16, the share of those grew by 18% against 1H15 and amounted to 18% of total expenses. Although social security payments make up almost one fifth of real disposable household income, their influence is hardly noticeable: real disposable household income has been steadily sliding over the past 18 months.
During 1H16, the dynamics of regional capital expenditures has followed a variety of trends, and total growth of this indicator amounted to 8%, or RUB 23 bln. The lion’s share of this increase, a whopping 85%, was secured by Moscow and St. Petersburg, which were jointly responsible for more than half of Russia’s total capital expenditures. Thus, the combined growth of capital expenditures in the two capital regions reached 13%, while the rest of the country contributed a meager 2%, on average. In Moscow, the growth of capital expenditures was accompanied by a 20% plunge of wage-and-salary disbursements. In the other regions, average payroll expenditures have not changed since 1H15. As of today, capital expenditures in non-capital regions make up only 5% of total budget expenditures, and resources that would allow to boost those without a negative impact on operating expenses, are no longer available.
Read more on forecast budget indicators in ACRA report of March 02, 2016 “Regional Budgets to be Saved Again by Public Budget Loans in 2016”
Russia’s regions still manage to maintain an aggregate surplus (net of Moscow’s surplus) and avoid accruing more debt. However, the growing gap between their revenue growth rates and debt loads will inevitably lead to a deficit by YE2016. Another deficit-causing factor will be higher expenditures in the second half of 2016 and an ebbing volume of federal transfers.
Heavily indebted regions continue to accrue more debt
As of 1H16, the aggregate debt incurred by Russian regions has not changed year-on-year: the shrinking nominal debt load of the most heavily indebted regions was offset by the growing debt load of the least indebted regions. The only two federal subjects that were able to cut back on borrowing were the Chukotka Autonomous Region and the Jewish Autonomous Region.
Read more about federal subjects’ debt load in ACRA report of June 23, 2016 “Regions Face Higher Cost of Debt And Increased Inequality while Repaying Federal Loans”
Table 2. Debt accrued by 10 most heavily indebted regions
Beginning from mid-2013, own revenue growth rates of the most heavily indebted regions (in terms of Debt / Own Revenues ratio) have been steadily falling short of debt accrual rates. Hence, their Aggregate Debt to Aggregate Own Revenues ratios have been deteriorating, putting them in an even tighter financial squeeze.
Figure 5. Continued growth of debt load of most heavily indebted regions
Cost of federal borrowing by regions amounts to 0.1% annually
In the course of the past 12 months, the share of commercial loans within the regional debt structure has gone down from 57% to 50%, while the commercial debt balance has tapered off by 60 bln RUB. At the same time, since the start of 2016, debt servicing expenditures of federal subjects have gone up by 7% year-on-year. According to ACRA’s estimates, the observed growth was due to expensive bank borrowings that regions took out during a high interest rate period in 2015.
Figure 6. Changes in volume and structure of regional debt obligations, RUB bln
Read more about the outlook for federal subjects’ debt load in ACRA’s report of June 23, 2016 “Regions Face Higher Cost of Debt And Increased Inequality while Repaying Federal Loans”
In the course of this year, against the backdrop of a growing volume of federal loans to regions, the upsurge of their debt servicing costs will decelerate. However, according to ACRA’s estimates, active replacement of commercial loans by federal loans will be petering out by 2017. The need to repay federal loans will force regions back onto the lending market, which in turn will push their weighted average interest rates back into the growth phase.
