Debt Load of Regions Increased

Since the beginning of the year increased the number of Russian regions in which the amount of government debt exceeds the limit set by the Budget Code of the 100% of its own budget revenues.

In the first 9 months of 2015 the number of regions in which the amount of government debt exceeds the limit of 100% of their own budget revenues increased from 10 to 12. The biggest debt load as of October 1 have Mordovia (176.2%), North Ossetia (126.1%), and Kostroma Oblast (123.6%). Only 2 out of 85 regions do not have a government debt – Sakhalin Oblast and Sevastopol. Such data is contained in a study made by National Rating Agency (NRA), which our editorial office has.

The study presents the rating of Russian regions on their relative debt load – this indicator is calculated as the ratio of government debt of a region on October 1, 2015, to its own budget revenues (tax and non-tax) for the last year (September 2014 – September 2015). In the Budget Code the limit value of this parameter is fixed at 100%, therefore the amount of region's debt should not exceed the total amount of annual revenues. In the Code a government debt of a region is defined as its obligations with regard to commercial and budgetary loans, government securities issued on behalf of the region, and state guarantees for the obligations of third parties.

NRA's study shows that as of October 1, 2015, the critical level of 100% is exceeded in 12 regions, whereas at the beginning of the year it was 10. At the end of three quarters of the year, two regions were excluded from the blacklist – Ingushetia and Karachay-Cherkessia, where debt load is reduced to less than 100%. But at the same time, in four regions the ratio of public debt to revenues has exceeded the critical level – Udmurtia, Amur Oblast, Khakassia, and Zabaykalsky Krai. In Khakassia, for instance, the ratio increased from 85.7% to 107.6%, in Zabaykalsky Krai – from 87.9% to 108.2%.

In Mordovia the debt load in the first three quarters of 2015 increased from 121.2% to 176.2%, which, as of October 1, 2015, is a record value among all Russian regions. Earlier this year, the highest debt load had Chukotka Autonomous Okrug – 144.4%. The low level of debt load recorded in Moscow (9.1%), St. Petersburg (3.5%), Khanty-Mansi Autonomous Okrug (6.5%), Altai Krai (4.5%), Nenets Autonomous Okrug (3.6%), the Republic of Crimea (1.3%).

The structure of government debt has also changed. The proportion of commercial loans (from foreign and Russian banks and international financial organizations) decreased from 42% to 38%, while the proportion of public debt attributable to budget credits increased from 31% to 37%. The proportion of government securities in the debt portfolio of regions in 2015 fell slightly (from 21% to 20%), while the proportion of government guarantees remained unchanged at 5%.

Senior Researcher at Development Center Institute of Higher School of Economics (HSE) Andrey Chernyavsky reminded that there is a clause in the Budget Code, which states that until 2018 when calculating the maximum amount of government debt of Russian regions budgetary credits can be ignored. With that in mind, he says, in all Russian regions the ratio of government debt to budget revenues is less than 100%. However, even if the limits stipulated by the Budget Code are not formally violated, says the expert, the fact of government debt exceeding the revenues puts pressure on the remaining expenses of a region. There is also a risk of default.

'But despite the big debt load, there was only one known case earlier this year when Novgorod Oblast was not able to make the loan payment to VTB,' says Chernyavsky. 'Then, the region was able to refinance the debt at the bank. Banks are likely to restructure debts in other cases when there is a risk of non-fulfillment of obligations by regions. Another issue is that it would be more difficult to get new loans, especially for regions with a significant debt load.'

Moreover, says the Head of NRA's Regional and Municipal Ratings Department Alexander Pahalov, the federal center has a policy on the replacement of commercial loans with budgetary loans. That is what caused an increase in the proportion of budget credits in the structure of government debt of Russian regions.

'The purpose of this policy is to support the regions, giving them access to cheap instrument of budget deficit financing. Interest rate on budgetary loans provided to cover part of the regional budget deficit is only 0.1% per annum. It is impossible to get a commercial loan with such percentage,' says Pahalov. 'Even now the government debt of a number of Russian regions is almost completely formed from budget credits. These are mainly that which experience difficulty in attracting loans in the commercial sector and are in need of federal support.'

For example, government debt in Ingushetia, Kamchatka Krai, and Vladimir Oblast is fully formed at the expense of budget credits. In the structure of public debt of Altai Krai and Chukotka Autonomous Okrug their share exceeds 99%, in Tyva and Chechnya – 98%.

According to a famous economist Mstislav Afanasiev, in the environment of reduced business acitivity, the revenue base of regional budgets also reduces, it is based primarily on the two taxes – profit tax and individual income tax. And prospects in this regard, the expert says, are 'rather negative'. At the same time the total amount of government debt of Russian regions is growing. According to the Ministry of Finance, since the beginning of the year its size increased by 4% and reached on October 1, 2015, 2.172 trillion rubles. This is a record value since – at least – 2009.

'Under certain circumstances, the federal budget has the opportunity to help these regions with the critical level of debt, but now the economic situation in general is quite complicated,' said Afanasiev. 'In such conditions, one need to talk about strategic decisions. If the federal budget (apart from oil and gas revenues) is based on such reliable source as the value added tax, which is easy to predict and collect, the ideology of the formation of the regional budgets' revenue base, as already noted, is very fragile. Therefore, we can strategically approach the problem, or discuss local issues – how to help a particular region at a particular time.'

Izvestia, 26/11/2015