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. Last Updated: 07/27/2016

Regions Bristle as Kremlin Pays Debt

The government announced Wednesday that it plans to come up with billions of dollars next year to pay off Soviet-era debts — if necessary — even as regional leaders are complaining that federal authorities are already siphoning too much revenue out of the provinces.

The powerful governors have been growling for weeks about the Cabinet’s plans to tilt the 2001 national budget in favor of the central government at the expense of regions.

On Wednesday, Finance Minister Alexei Kudrin added a new twist: At a news conference to discuss some of the 2001 budget parameters, Kudrin said the government was still seeking a restructuring deal on Soviet-era debts held by other nations. But he added that Russia was also prepared to honor all of the $14.5 billion in various foreign debts that come due in 2001, should no rescheduling be possible.

Obviously, the government would prefer for its Paris Club creditors — all sovereign nations — to give it a break. It would also welcome more loans from the International Monetary Fund and the World Bank (both of which are owed money next year).

If it is asked to come up with $14.5 billion in 2001, however, Kudrin said Russia would do so. He said federal revenues next year were being forecast at 1.187 trillion rubles (about $39.6 billion at the budgeted exchange rate of 30 rubles to the dollar), or about 15.3 percent of the expected gross domestic product of 7.75 trillion rubles ($258 billion).

But instead of spending a third of the budget on foreign debt retiring, presumably Russia could also dip into the hard-currency reserves of the Central Bank, which are now above $23 billion.

For comparison, the 2000 budget, which cruised through parliament at the end of last year, foresees expenditures of 855 billion rubles (about $30.8 billion at current exchange rates) and a GDP of 5.35 billion rubles ($192.4 billion).

But while the federal government’s plans may prompt some optimistic remarks on the part of the Paris Club debt holders, governors are crying foul and are squaring up for a tedious session of haggling with the Kremlin over next year’s draft budget.

"Execution of this [planned] budget in line with [new changes to] the Tax Code will lead to a situation where the president and the country as a whole will find themselves in a dire fiscal state," said Novgorod Governor Mikhail Prusak on Tuesday.

In remarks reported by Interfax, Prusak — an early supporter of President Vladimir Putin — seemed to turn on him, in part apparently over anger that the plans for 2001 mean allocating more tax revenues for the federal government and less for the Novgorod and other regions.

Some of these federal-tilted plans have already been enshrined in law, such as the cut in the 2 percent road turnover tax. Others, however, represent government intentions as expressed in working documents — for example, the government plans to allocate to itself 100 percent of all value-added tax collected across the nation, while at the moment, it only takes 85 percent for itself and leaves 15 percent in the regions.

Such talk has the Novgorod region expecting to see its budget shrink to 1.1 billion rubles from 1.3 billion rubles, primarily thanks to the loss of 243 million rubles in VAT revenues it was planning to earn.

"This [cut into regional revenues] will be a source of future debts for gas and electricity," said Valentina Smirnova, deputy head of Novgorod’s finance committee. "Also, we will be unable to make any capital expenditures, except for minor renovations of school premises."

"If governors continue supporting [Putin] and voting for all the foolish decisions of the government, then I don’t think the president will accomplish much," Prusak said.

Other governors were equally critical — particularly in those richer regions, such as Novgorod and Moscow, which now subsidize the poorer rest of the nation with their tax takes.

"Regions that transfer to the federal coffers more than they receive will start seeking handouts," Moscow Mayor Yury Luzhkov warned Tuesday. "Again, we shall see an egalitarian approach; again, socialism will return."

In the vague 2001 plans, Moscow has calculated it will apparently lose some 45 billion rubles ($1.5 billion given the federal government’s budgeted exchange rate of 30 rubles to the dollar) in revenues — or about 20 percent of Moscow’s preliminary 2001 budget revenues, now set at about 210 billion rubles (about $7 billion).

It is a similarly sad tale in the Samara region. Yelena Vzyatkina, who monitors tax collection in the Samara government’s finance department, said that without the planned 2001 revenue redistributions, the region would collect 8.8 billion rubles next year, but with them, estimates have been revised down to about 6.5 billion rubles (about $216 million).

"Samara will have to turn to subsidies from the federal government for the first time in years," Vzyatkina said.

But Alexei Aleksandrov, deputy head of the Samara government’s budget department, said in a telephone interview Wednesday that "nothing has been lost" yet, because the exact ratios of federal-to-regional tax distribution can still be fought out in parliament all this year.

"The kind of statements we hear on both sides foreshadow fights over the next year’s budget," agreed Feliks Eigel, director for public finance with the EA-Ratings agency. "Final decisions have not been made."

Kudrin made some conciliatory statements Wednesday, suggesting the government would give the regions back their customary 15 percent of VAT through regional spending.

He also ticked off other subsidies and grants to the regions and said that in the end, revenues would be split between the federal government and the regions in a proportion of 51.6 percent to 48.4 percent.

But it is clear the government’s exact stand toward the regions could well depend on progress in talks with the Paris Club.

Barring a restructuring deal, Kudrin said the government would set aside about $10.5 billion to pay off Paris Club debts, including about $6 billion to repay interest and $4.5 billion in principal.

Limits on borrowing from the IMF and the World Bank have been tentatively set at $1.8 billion and $900 million, respectively, for next year, he said.