Economist Natalya Zubarevich told how the regions withstood the sanctions blow

Living at someone else’s expense

“As of September 1, the state debt of the regions amounted to 3.1 trillion rubles,” said Galina Izotova, acting chairman of the Accounts Chamber, in early October. There are no more recent statistical data, but, according to Izotova, given the reduction in a number of interbudgetary transfers that are important for the subjects, there is a risk that the state debt of the subjects will continue to grow. Do you agree with this assessment of the situation?

— Dear acting The head of the Accounts Chamber is absolutely right. In general, in January–October 2023, the volume of interbudgetary transfers in rubles decreased by 4%, this does not take into account inflation. In conditions of significant price increases, this is painful for the regions. A reduction in transfers occurred in more than half of the regions of the Russian Federation, but in some places there was a very noticeable increase. These regions can be clearly defined by their geography: Kursk region – plus 32%, Sevastopol – plus 22%, Belgorod region – 2.2 times growth. The majority of high-income, as well as middle-income, entities received less money from the federal center over ten months. And taking into account inflation, the reduction in transfers is even greater.

Now about debt. As of January 1 of this year, the total amount was slightly less than 2.8 trillion rubles; now it is 3.1 trillion rubles. The fact is that so-called budget loans have increased by almost half a trillion rubles. They are provided by the Ministry of Finance at a rate of 0.1% per annum. Yes, formally this is an additional burden on regional budgets, but it has long been known that sometimes these loans are extended, and for some even forgiven. For example, this money, which is actually free, instead of being returned, could be spent in 2023 on modernizing housing and communal services. On the contrary, expensive loans to regions from banks at high rates have halved since the beginning of the year – from 126 billion to 64 billion rubles, they were replaced by budget loans.

— According to Izotova, regions often have no incentive to increase their budget revenues, since in this case they receive less subsidies from the center. How serious is this problem?

– Well, it is so ancient that they have been talking about it for three decades. Yes, underdeveloped regions rely solely on federal assistance and, to put it mildly, don’t bother much. True, recently the Minister of Finance, Mr. Siluanov, addressed the heads of the eight most highly subsidized (above 80%, or even 90% of all incomes) constituent entities of the Russian Federation, including Chechnya, urging them to spend money more carefully and not go into deficit. Let’s see what comes of this. The minister said everything absolutely correctly. But with regard to Chechnya and the four so-called new territories, this is not decided by the Ministry of Finance. In Russia, an interbudgetary system has developed with a huge redistribution of funds. Subjects who know how to earn money themselves are clearly not happy with this state of affairs, but no one asks them. First of all, these are federal cities and oil and gas production regions. On a per capita basis, Crimea and Sevastopol also have high budgetary security. They don’t earn money themselves, they just get special treatment. As for new territories, there are huge flows of financial resources that others have never dreamed of. I won’t name the numbers.

“Today, officials at various levels have especially often complained about the shortage of labor—skilled and unskilled. In which regions is the shortage of personnel most acute, and in which least?

This is a problem for the entire economy, which, of course, also manifests itself on a regional level. The logic is simple: the situation is worse where, firstly, the manufacturing industry and mechanical engineering predominate, secondly, where there are large volumes of construction (for example, in the Far East), including housing, thirdly, where there is a lot of transport and all kinds of logistics . You should be more careful with Moscow and the region: there is still a huge influx of migrants here, mainly young and middle-aged people. Moreover, there are few mechanical engineering facilities in the capital; the economy here is mainly service-based. But in Udmurtia, the Kirov region, and in other industrial regions of the Volga region, the Center and the Urals, the situation is difficult. Workers move to military-industrial complex enterprises, where they work in several shifts for double pay. As a result, in civilian industries there is a wage race to retain employees.

The province is catching up with the capital

— How are things going with the incomes of the population in the regions?

– They are growing. We are undergoing an amazing process: differences in income between the periphery and large cities have begun to smooth out. The gap is still large, and there is no talk of complete leveling. But the growth rate of wages and incomes in many regions is higher than, for example, in Moscow. This is partly just arithmetic: growth from a low base is faster in dynamics than from a high one. Taking into account the official inflation of Rosstat in Russia, in January–September, household incomes increased in real terms by 4.4%. They are increasing faster than in the whole country in the regions of the Volga Federal District, in the industrial Urals, and in the Tula region, where there are many defense enterprises. Even in the Novosibirsk region, income increased by 9%. It turned out that the defense industry here is still very much alive. There are big problems in the North-West, where the timber industry is experiencing sanctions very hard.

— What is the situation with inflation today in a regional context? According to the Central Bank for September, the leaders (above 6%) were Tyva, the Amur region, Crimea and Dagestan. The lowest inflation (up to 3%) was recorded in the Tyumen region, Khanty-Mansiysk and Yamalo-Nenets autonomous okrugs. Why is that?

— I treat these statistics with restraint. Explain: why is the highest inflation in Tyva and none in the Khanty-Mansi and Yamalo-Nenets districts? How was it measured, where, for what types of products? In my analysis I do not look at regional inflation figures. Here you can “play” with measurements. There is official inflation for the general consumer basket – 7.5%. There is a food store where the figure seems to be higher than 9%. This is what you should focus on.

— How do the regions directly bordering China feel? What does this give them in conditions when geopolitical and foreign economic circumstances have changed dramatically for Russia since February 2022?

— Well, firstly, the Far Eastern regions have long been oriented towards China in their trade. This is not connected with the turn to the East of the entire domestic economy that began in 2022. The trade structure of the Amur Region clearly shows that China is its main foreign trade partner. This is correct, it is mutually beneficial, and nothing has changed fundamentally here. Regarding Chinese investments in Russia, including in the Far East, there hasn’t been much of it yet. But if we take trade between the two countries, it has grown sharply. In 2023, foreign trade turnover will be more than $220 billion; China’s share in Russia’s foreign trade has exceeded a third. More oil, gas, coal and other raw materials, produced mainly not in the Far East, but in other regions, went to China from Russia. Imports from China have increased sharply, primarily the supply of machinery and equipment. They mainly go to the industrialized and densely populated European part of the Russian Federation.

“Everyone’s costs have gone up”

— How has the new geopolitical and sanctions reality affected the regional economies? Who is worse off today and who is better off and why?

– Everything is more than clear here. Starting around August 2022, in regions specializing in the military-industrial complex, industrial growth accelerated sharply due to the intensive injection of budget money. In such regions, growth in January–October 2023 reached 15–20%. All subjects of the Russian Federation with a large share of the defense industry and their subcontractors won. The North-West of the European part of Russia, which was focused on trade with Europe and, in particular, supplied timber products there, lost. And Europe closed. Nothing radical has happened with oil, except for the rise in cost of logistics. The main flows simply changed geographically and went to India, China, and Turkey. Production and export volumes are now more dependent on government policy: we will supply as much as the government says. As for gas, authorities say production will fall by only 6% this year as domestic consumption has increased. Which is quite surprising to me, since almost a third of Russian gas was exported, most of it to Europe. Sanctions were imposed on the ferrous metallurgy, but by the end of 2023 the industry recovered due to growing domestic demand for metal not only for the defense industry, but also for construction, which was also growing rapidly.

In general, costs have increased for all industries, since the supply of equipment and components is difficult. In addition, labor costs have risen significantly. The workforce shortage is increasing and is projected to reach 2–4 million people by 2030. Accordingly, employers are forced to organize a wage race. It is not so easy to increase labor productivity without modern machinery and equipment, the access of which to Russia is hampered by sanctions. Summary: the economy has held up, but largely due to rising costs. In addition, the country has hardly changed its economic face: it has remained an exporter of raw materials and an importer of equipment.

— What is the situation with human resources in the regions?

– Bad situation. Firstly, until the end of the 2020s, a very small generation of those born in the late 1990s and early 2000s will enter the labor market. Therefore, the working-age population will continue to decline. This process has been going on for a long time, since the early 2010s. Secondly, depopulation will continue, since today a small generation is giving birth, and representatives of a much larger age group, born in the late 1940s and early 1950s, will die. I understand that I didn’t tell you anything good, but just look at the gender and age pyramid of the Russian Federation, and everything becomes clear. There is no sabotage, this is simply an objective reality.

“And people are traditionally concerned about the situation with a roof over their heads. What are the prospects for the housing market in Russian regions?

— I am very concerned about the state of the housing construction market. There is crazy overheating, there is an incredible increase in prices per square meter. The problem is acute. Preferential mortgages led to a sharp increase in demand, which supply could not keep up with. She broke the connection between the bank rate and the preferential loan. And more and more money needs to be paid from the budget for preferential mortgages: this year the figure will be about 300 billion rubles, and next year, if conditions persist, it will be about half a trillion. Do you know where they build and buy the fastest? In the Moscow and St. Petersburg metropolitan agglomerations, as well as in the warm south – in the Krasnodar Territory. In total, these three territories account for 35% of all housing commissioned in the country. As a result, the concentration of population increases in places where there are already a lot of people. Is this right?