Financial Defaults May Loom for North Caucasian Republics

Russian news agencies reported in early June that Novgorod Oblast in central Russia had become the country’s first region to default on its financial obligations. An official from the Novgorod financial department told RBK news agency that the region failed to make a payment of $33 million to the Russian state bank VTB (Rbc.ru, June 9). VTB Group is the second largest financial institution in the country and the Russian state is its primary stockholder (Vtb.ru, accessed June 22).

Russian authorities, however, appeared reluctant to admit Novgorod’s financial default. Meanwhile, Standard & Poor’s credit rating agency said that Russia’s federal government has prescribed inflexible social welfare expenditures for the regions, but is unlikely to be able to provide them with adequate budgetary funds, so the regions increasingly borrow to fulfill their obligations. Moreover, even when the government has the funds to prop up the regions, the assistance often arrives only after the region is hit by a payments crisis (Rbc.ru, June 9).

The political damage done by regions defaulting is quite severe in Russia because it undermines the government’s paternalistic model of economic development. It is notable how reticent government officials and even VTB representatives were about Novgorod’s default. The S&P report stated that “at least one region” has defaulted on its obligations since the start of 2015 (Cbonds.com, June 4).

In fact Novgorod Oblast is by no means in the worst financial situation among Russia’s regions. At this stage of Russia’s economic crisis, regional defaults are caused primarily by the central government’s propensity to order the regions to provide social welfare without giving them resources to do so, and to be late in helping the regions when they are facing difficult circumstances. However, the situation is projected to deteriorate further as Russia continues to be the target of Western economic sanctions over its aggressive actions in Ukraine.

The North Caucasian republics are among the most economically vulnerable in the Russian Federation to the fluctuations of government revenues. More than 50 percent of the budget revenues in each of the seven republics in the region—Adygea, Karachaevo-Cherkessia, Kabardino-Balkaria, North Ossetia, Ingushetia, Chechnya and Dagestan—come from Moscow. However, Moscow’s handouts have been shrinking in the current economic environment, forcing some republics to step up their borrowing. The current financial slump appears to be deepening because of the lag between the plummeting industrial output, the decrease in tax revenues and subsequent shrinking of government budgets (Ranepa.ru, June 11).

In an interview with the Russian publication The Insider, Natalya Zubarevich, the well-known Russian economist who is an expert on the country’s regions, said that financial defaults in the regions can be only “technical”: the Russian government is unwilling to admit defaults of regions for political reasons. According to the economist, one of the worst consequences of the economic crisis is the rise of uncertainty, particularly over the government’s economic policies (Theins.ru, June 11). President Vladimir Putin demonstrated the government’s view of the economy recently at the St. Petersburg economic forum, saying that Russia was successfully weathering the crisis, despite reports about Russian regions running out of money (Novaya Gazeta, June 19).

According to the latest data, the North Caucasus leads the Russian Federation in only one indicator—life expectancy. According to all other socio-economic indicators, the region lags behind the rest of the country. Dagestan places 80^th among Russia’s 85 regions in terms of per capita production of goods and services. Low as it is, Dagestan’s indicator of goods and services production is twice as high as that of its two neighbors, Chechnya and Ingushetia, both of which also have the highest degree of dependency on handouts from Moscow—over 80 percent of their budget revenues come from the central government. Even relatively well-off North Caucasian republics like North Ossetia have quite poor economic indicators, especially in terms of dependency on the central government and having a level of regional government debt (Kavkazskaya Politika, June 17).

Moscow’s strategy of resource reallocation has been predictable, but may be quite unsustainable. The Russian government resolved to invest more in unstable republics of the North Caucasus and sideline the stable republics. For example, conflict-ridden Ingushetia’s budget for 2014 reached an estimated $600 million (Garant.ru, January 17). The budget for relatively quiet North Ossetia that year was slightly less—$500 million (RIA Novosti, November 11, 2014). While North Ossetia’s population is nearly twice that of Ingushetia—700,000 versus 400,000—per capita budget resources in Ingushetia were twice as high as those in North Ossetia.

Moscow’s rationale for its policy toward the regions, especially the North Caucasus, may be that the greater their dependency on the central government, the greater their loyalty. While that has worked fairly well for Moscow over the past 15–20 years, this model of relations appears to be under strain as government revenues are projected to decrease. Moscow certainly can afford to discriminate between various republics within the North Caucasus, as in the case of Ingushetia and North Ossetia. Russian ethnic majority regions, however, are unlikely to tolerate such discrepancies in a time of crisis.