Fiscal Challenges May Bring Profound Changes to Russia’s Position in the North Caucasus

In his budget address for 2012-2014 on June 29, President Dmitry Medvedev designated decentralization as one of the Russian Federation’s state priorities. The Russian leader also called for privatization, lowering corporate taxes, the overall diminishing of the state’s role in economic activities and other measures to keep the country afloat. Medvedev decreed the creation of two government working groups tasked with outlining the decentralization plan. Deputy Prime Minister Aleksandr Khloponin was put in charge of the financial side of the strategy while Deputy Prime Minister Dmitry Kozak was put in charge of its legal aspects (https://kremlin.ru, June 29). Khloponin is also the current Russian presidential envoy to the North Caucasus, while Kozak was Moscow’s envoy to the region in 2004-2007.

It is hardly any coincidence that two top Russian officials with extensive experience in the North Caucasus were appointed to lead decentralization in the progressively unitary Russian Federation. Apparently, the downside of concentrating all political power in Moscow’s hands had been most evident in the North Caucasus. Drawing on its largely negative experience in this volatile region, the Kremlin seems to be set to devise a more effective model of regional governance. This endows the North Caucasus with a pivotal role in the evolution of modern Russia.

According to Russian Finance Minister Aleksei Kudrin, real changes derived from the decentralization plans are unlikely, for technical reasons, to take place earlier than 2013. The two government working groups are expected to submit their preliminary results by September 15, 2011, and the final strategy for decentralization should be ready by December 2011. The changes may encompass a redistribution of tax revenues from Moscow to the regions of up to 5 percent of the Russian budget or about $35 billion each year, as well as a reallocation of government responsibilities and services (https://kremlin.ru, June 29).

Besides the inefficiencies of Moscow’s policies in the North Caucasus, the underlying cause for the decentralization effort is growing financial pressures on the Russian government. As government revenues grew over the past decade along with skyrocketing energy prices, and thanks to a limited number of liberal economic reforms, Moscow assumed increasingly more social responsibilities and grandiose plans. However, in the current economic environment of uncertainty and low growth, these responsibilities are hard to carry out, yet they are also too painful to shed with the 2011-2012 election cycle in Russia fast approaching. In 2011, Russia’s budget deficit is expected to exceed $25 billion, even with relatively high oil and gas prices (www.vedomosti.ru, June 30).

Financial pressures have forced Moscow to adopt significant changes in its regional policies. The North Caucasus republics, enumerated among the high priority territories by the Kremlin, underwent substantial cuts – 10 percent or higher – in their budgets in 2011. In 2012, Moscow will transfer financial responsibilities for healthcare, education, culture and the state-subsidized farming industry to the regions, relieving them only of the burden of financing the police (www.vedomosti.ru, June 30).

Since all of the North Caucasus regions receive 60 percent or more of their budget revenues as direct infusions from Moscow, the effects of fiscal tightening on this region are likely to be profound. Moscow currently spends an estimated $10 billion per year on the North Caucasus and this number probably does not include special financing for the Russian military and security services that actively operate in this unstable territory (https://www.zavtra.ru/cgi/veil/data/zavtra/11/908/print31.html). Moreover, deep cuts in financial support for the North Caucasus may evoke further popular disappointment among the locals and destabilization. Moscow is also constrained in its support for the North Caucasus because of the growing xenophobia among ethnic Russians. Russian nationalists held a protest against “feeding the Caucasus” in Moscow in April 2011. Diverting resources from the ethnic Russian regions to the North Caucasus under strained circumstances is likely to evoke very serious protests among Russian nationalists that the government will be unable to contain.

Changes in fiscal policy normally go hand-in-hand with political changes. A source in the Russian government told Vedomosti: “The process of financial centralization is tightly connected with changes in politics. The president shied away [from going the whole way]: having said ‘a,’ he should have also said ‘b,’ [that] it is impossible to give the regions mechanically money without giving them political autonomy”. The director of the Center for Fiscal Policy, Galina Kurlyandskaya, also reiterated that economic decentralization without political decentralization would be ineffective (www.vedomosti.ru, June 30).

President Medvedev’s economic advisor, Arkady Dvorkovich, stated that the government strategy for financial decentralization would not change regardless of the results of the Russian presidential elections in 2012. However, experts challenged this view, saying there would be no debate about whether there should be more powers given to the regions as Putin would likely put a halt to this process (www.gazeta.ru, June 29).

In his budget address, Medvedev stressed the importance of Russian regions in attracting private investment. However, in the North Caucasus, the suitability of the regional governors, like Chechnya’s strongman Ramzan Kadyrov and several others, have been measured so far not by their ability to attract investors, but rather their ability to suppress the local insurgency and keep the civil opposition in check. Therefore Medvedev’s latest budget address directly contradicts current Russian regional policy even in the smallest details. The mounting fiscal and political pressures on Russia seem to warrant that whoever comes to power in 2012, significant changes in relations between Moscow and the North Caucasus republics are imminent.