Financial crisis takes its toll on regional budgets

In October, the governments of all the Northwest Russian regions presented 2009 budgets to the regional Deputies Assemblies. In most cases, no serious amendments were made by the regional parliaments. At the same time, a necessity of cutting budget expenses in the future and probably even this year is getting more and more evident.

Less federal transfers

This follows from the speech of Russian Minister of Finance Alexey Kudrin pronounced at a seminar for representatives of the regional budget committees in Moscow last week. Kudrin noted that the regions will meet difficulties in getting cash subsidies from the federal budget from the beginning of next year. Today, such subsidies in average total 15 percent of the regional budgets.

Kudrin said in particular that Moscow is not going to support the regions financially in their plans of increasing salaries for civil servants on regional level. At the same time, the salaries of the state employees of the federal level will be increased by 30 percent from the 1 January 2009. This means that the regions will have to look for their own sources in order to smooth the salary disproportions. The increase of the salaries of the regional civil servants is already accounted in the 2009 regional budgets. In Murmansk Oblast it will total 10 percent, in Arkhangelsk Oblast and the Komi Republic – 30 percent.

In addition, the possibilities for regional co-financing of big investments projects with the Federal Investments Fund will also be limited.

Arkhangelsk Oblast

The regional administrations are already thinking about possible reductions of their budget expenses. Director of Arkhangelsk Regional Department of economic development Mr. Roman Nakozin recently informed the regional parliament that the implementation of investments projects in the region is to be stopped. This will first of all affect the volume of construction in the region.

Speaking at the session of the Regional Council, Arkhangelsk Governor Ilya Mikhalchuk said that the regional administration does not exclude in the future a correction of the regional budget in a “pessimistic variant”. On Monday this week, Mikhalchuk announced that the staff of the regional administration will be cut by 30 percent. Information now indicates that the cuts in the regional budget could reach six billion RUB, which is more than 11 percent of the total budget expenses. Mr. Dmitry Pletnev, the Vice-Governor on Finance and Economic informed that the Regional administration has already established a special anti-crisis group which is working at a package of urgent economic measures.

Republic of Karelia

In the Republic of Karelia, the regional government has announced that it is going to cut expenses the administrative staff. The salary fund of the ministries and departments will be reduced by 5 percent, expenses for material and technical supply – by 20 percent. These measures will allow for the administration to save 150 million RUB in the budget. It is also planned to cut expenses in the regional investments program. The government for example made a decision to temporarily stop the construction of the new ice palace in regional capital Petrozavodsk.

Komi Republic

In the Komi Republic, the Chairman of the State Council Mrs. Marina Istkhovskaya reported that it so far is impossible to calculate how the financial crisis will influence future budget revenues. She want the council to establish a financial reserve of 600 million RUB in the 2009 budget in order to secure the possibility of needed urgent measures. At the same time, the budget deficit in Komi is planned on the level of 2,5 billion RUB (6%).

The budgets of all the Russian Barents regions are formed with deficits which were supposed to be covered by bank credits and federal subsidies. The financial crisis makes these expectations unreal. Nevertheless, the regional authorities are so far not going to make corrections in the indicators of future economic growth and still their 2009 budgets are quite optimistic. Thus, the Gross Regional Product (GRP) of Arkhangelsk oblast is expected to grow by 8,8 percent in 2009, Komi – by 5,7 percent, Karelia – by 3,8 percent. The GRP of Murmansk oblast is planned to grow by 10% during the next three years.

Meanwhile the Russian Institute of Transitional Economy predicts that the rate of economic growth in the North-Wets Russia will slow down by 1,5-2 percent in 2009 and in the whole Russia it will not exceed 3,5-4 percent.

The regional authorities are obviously accepting the inevitable consequences of the financial crisis, but are still not able to literally measure its real scales.

Rescue plan

The recently proclaimed federal action plan for the financial situation recovery did not yet bring big optimism to the northern regions. The plan is definitely tuned towards the support of big banks, “natural monopolies” and small business. Among the branches of economy which can expect for the state support are housing construction, agriculture, car construction, the military-industrial complex, raw materials production and transport infrastructure.

The federal plan can to some extent help out only the Severodvinsk military plants (Arkhangelsk Oblast) which will definitely not remained without state support. From the other side, the timber industry including pulp and paper production which is a basis of economy in Arkhangelsk oblast, Karelia and Komi remain outside the priorities of the federal government. The situation in this part of economy is already close to collapse. In Karelia, timber manufacturing dropped down by 16 percent and pulp and paper production - by 1 percent over the first nine months of 2008.

Companies in trouble

In Arkhangelsk, one of the biggest producers – the Solombala pulp and paper mill announced a full production stop for the next two week. And decline in this sector will continue in the next year, say the experts. In Arkhangelsk oblast about 40 percent of the budget incomes come from taxes and duties paid by oil companies in the Nenets Autonomous Okrug. The slump of oil prices will make the regional administration to reassess the plans not only in the investments activity but also in the social sector.

The real consequences of the financial crisis will most likely affect adversely the regional budgets no earlier than in the fist quarter of 2009. The industrial companies normally pay the taxes in advance based on their results in the previous three months. The situation shows that the companies are awaiting a decline in the last months of 2008. Subsequently, the tax amount to be paid in the regional and federal budgets is going to be sufficiently reduced.

In this situation the regional authorities should inevitably face a necessity of finding new strategies of economic and social development and reassess all ambitious plans for 2009, as well as for the next three years.

BarentsObserver Arkhangelsk, 12 November 2008