Moscow Tries to Tighten Grip on North Caucasus’ Economic Life

Deputy Russian Prime Minister Alexander Khloponin made a surprising statement earlier this month (June) about impending sweeping changes in how Moscow subsidizes the North Caucasus. “Instead of subsidies for the republics we will be developing ‘anchors’—key projects in which federal budget funds will be invested even if the general government funding decreases,” he said. According to Khloponin, the new fund is expected to accumulate about $3 billion over the period of 2017 to 2025. That same amount of money is expected to be removed from Moscow’s current subsidies for the North Caucasus. The current program of government investment in the North Caucasus is called the “South of Russia” Federal Special Program (Rbc.ru, June 17).

The initial plan was that the program would last from 2014 until 2020, but the Russian government appears willing to terminate the program earlier and start redistributing the funds according to the new rules. The program now in force funds infrastructure projects throughout the North Caucasus and was expected to accumulate about $3 billion. The big difference between the current program and the newly proposed one is that, according to the new plan, instead of subsidizing infrastructure projects across the entire region and ensuring equality among the republics of the North Caucasus, the new government fund will only finance three “anchor” projects. About $800 million will be spent on the ski resorts in Karachaevo-Cherkessia and Kabardino-Balkaria, $500 million will pay for the construction of a medical facility in Stavropol region and the remaining funds, about $1.8 billion, will be used for unspecified projects in Dagestan (Rbc.ru, June 17).

Alexander Khloponin served as Moscow’s envoy to the North Caucasus from 2010 to 2014. He came with promises that there would be huge investment in the region’s tourist industry: the government promised to pour billions of dollars into the region to construct world-class ski resorts. Many experts doubted that the resorts would be financially viable, due to the region’s endemic violence, corruption and low popularity among potential tourists. Talk about investment in the North Caucasus quickly dissipated as the Sochi Winter Olympic Games approached. It appeared that the entire project for ski resorts in the North Caucasus was invented for internal propaganda purposes. The fate of the new promises to redirect funds from an ineffective government program to a supposedly more effective program may be quite similar. In other words, the Russian government may plan to cut spending on the North Caucasus drastically, but instead of saying so, it promises to create a new, more effective program with financing beyond the time horizon Moscow can possibly plan for. An alternative explanation is that Moscow simply decided to further undermine the authority of the republican governments in the North Caucasus. The new program’s financing will bypass the republican governments and go directly to the managers of the projects. A combination of both—cutting the funds and centralizing the distribution of the remaining funds—is also plausible.

At a government meeting on June 11, Prime Minister Dmitry Medvedev inadvertently confessed that the federal programs for developing peripheral regions, including the North Caucasus, had stalled. “Large funds were reserved for the implementation of the programs, but the results of the first quarter indicate that the programs are practically not financed,” Medvedev said (Kavkazskaya Politika, June 21).

Meanwhile, regional officials in the North Caucasus are still unaware of the upcoming changes in the financing of their regions, while anonymous Moscow officials admit that the changes are related to uncertainty regarding budget funds in 2016 and beyond. Speaking at the recent St. Petersburg economic forum, Dagestani Governor Ramazan Abdulatipov sounded upbeat, insisting that Dagestan was among Russia’s leaders in terms of industrial output growth. Abdulatipov promised that the giant Russian energy companies Lukoil and Rosneft would start operating on the Dagestani part of the Caspian shelf. Vietnam Oil and Gas Group will putatively invest $150–300 million in Dagestan’s oil industry. However, Dagestani expert Mair Pashaev told the Kavkazskaya Politika website that Dagestan is never mentioned as being one of the leaders of economic development among Russia’s regions. The republican government has no power to manage its natural resources, such as oil. Only Moscow decides what companies may extract oil in the country, and where. Abdulatipov’s overtures to the Vietnamese company, asking it to invest in shelf gas and oil, are also unfounded. The Dagestani Government Oil and Gas Company, which will supposedly partner with PetroVietnam, has authorized share capital of under $200,000 (Kavkazskaya Politika, June 22).

As Russia’s economy contracts, the federal government, instead of allowing the country’s regions greater economic freedom, is trying to tighten its grip on them. The consequences of the economic crisis are becoming evident in the regions, and the Russian government will either have to find funding sources or significantly expand the regions’ economic and political freedoms. Since the former is unlikely, a transformation of relations between the central government and the regions may lie ahead.