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Crisis Management Portfolio for the Far East Regions and Regional Fiscal Sustainability
7 September 2022
12:30—14:00
KEY CONCLUSIONS
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The Far East is a unique macro-territory in our country, which is also true when it comes to its fiscal system. It’s impossible not to notice this – after all, the Far East accounts for two fifths of the total area of Russia, and if you look at the map, it’s clear that it cannot be disregarded. However, the region nevertheless accounts for a relatively very small volume of Russia’s total budget. In terms of the population, 8 million people is two thirds the population of Moscow. Therefore, when discussing how the Far East should be reflected in fiscal terms, we must always bear in mind that this is a region with its own specific conditions. That is true in terms of finance, geography, and natural features. And there are also all the additional factors which dictate its special status — Vladimir Klimanov, Director, Institute for Public Finance Reform (IPFR); Head of the Regional Policy Center, Russian Presidential Academy of National Economy and Public Administration (RANEPA).

The principle whereby Moscow distributes money to the regions is not always clear. They are restrained in what they can spend, and they operate a fiscal deficit

Complaints regarding the federal authorities mainly boil down to: a) a lack of understanding as to how money is transferred and in what quantity, and b) the incredible increases in subsidies which bind the regions and gives them no room to manoeuvre in terms of their resources. One should co-finance! And finally, there’s the issue of fiscal deficits. We see deficits as early as the first half of the year — Natalya Zubarevich, Professor of the Department of Economic and Social Geography of Russia, Faculty of Geography, Lomonosov Moscow State University.

Compared to most other regions, the trends we can see in the Far East for the first half of the year are not so optimistic. Basically, we do indeed have a few parts of this region which are already operating a deficit — Natalya Trunova, Auditor, Accounts Chamber of the Russian Federation.

The Far East is a very expensive macro-region for the country, but a crucial one too

The entire north-eastern corner of Russia – if I may say so without offending anyone – really is particularly expensive for the entire Russian Federation and its fiscal system — Vladimir Klimanov, Director, Institute for Public Finance Reform (IPFR); Head of the Regional Policy Center, Russian Presidential Academy of National Economy and Public Administration (RANEPA).

Is this little corner of ours really so problematic? It is indeed! But at the same time, we are the outpost of our nation — Anton Basansky, Deputy Chairman of the Committee of the State Duma of the Federal Assembly of the Russian Federation for the Development of the Far East and the Arctic.

Revenue from raw materials can either skyrocket or plummet back down

As we can see, the positive price situation today affects figures relating to different types of taxes. We realize that the situation in some regions – Sakhalin and Chukotka – is of a fairly temporary nature. And these are of course fairly significant risks which will manifest themselves notably as early as next year — Natalya Trunova, Auditor, Accounts Chamber of the Russian Federation.

Revenue from raw materials which are traded on global markets for skyrocketing prices have generated enormous profits. In a great many regions today – including in the Far East – corporate income tax has come out on top as opposed to personal income tax. This is not unusual for Sakhalin. However, overall, this also remains a situation which – if one could put it like this – is characterized by a risk of financial instability on the part of the Russian regions. That is because corporate income tax revenue fluctuates greatly, and could suddenly double, and then plummet in the following period simply due to an emerging lack of profitability — Vladimir Klimanov, Director, Institute for Public Finance Reform (IPFR); Head of the Regional Policy Center, Russian Presidential Academy of National Economy and Public Administration (RANEPA).

Trillions of roubles are being invested in development institutions as population incomes continue to melt away

You know, put bluntly, it puts me a little on edge when I hear all this talk of development institutions, advanced special economic zones and the like. That’s because trillions upon trillions of roubles have been poured into all of them. And yet, what are we seeing in 2022 and 2023? Today we need to be honest with you, and admit that the population’s real incomes have fallen for the second quarter in a row — Sardana Avksentieva, Deputy Head of the Faction, "New People" Political Party.

ISSUES
Some regions of the Far East depend very heavily on exports

In terms of tax revenue, we can see that we have a number of regions whose budgets are hyper-dependent on the global market and on volumes of goods shipped abroad. There are certain risks here too, of course — Natalya Trunova, Auditor, Accounts Chamber of the Russian Federation.

Officials are provided with insufficient context regarding the sanctions when addressing fiscal issues

Perhaps now, in 2022, the focus will shift to what is actually happening? Let’s look at the risks. Kamchatka Territory is going to the dogs: industry has almost halved due to COVID-19 in China – the risks are increasing sharply. Primorye Territory is seeing a 13% drop in manufacturing – things are not so easy. What risks are we looking at in plain terms? Sakhalin is declining. There is no celebration in store, because Sakhalin-I has essentially ground to a halt, and it won’t be up and running again quickly. We can already see that construction in Amur Region is subsiding. It began well, but now it is stalling. That means there will be none of the additional income earmarked for the Amur Gas Chemical Complex. Japan and South Korea have just now refused to import any more Russian coal. That does not only mean that all coal producers in the Far East will have to compete with coal from Kemerovo Region – which will have a knock-on effect on eastern ports – but also that they will lose sales markets. The slump will be very serious indeed. Now let’s look at sales of diamonds. The British stock exchange has prohibited it, and not everything will be sold to the state fund. How will Yakutia operate in a situation where their ability to earn revenue is being curtailed? Sales of gold will now also be restricted — Natalya Zubarevich, Professor of the Department of Economic and Social Geography of Russia, Faculty of Geography, Lomonosov Moscow State University.

Everything is becoming very expensive in the Far East, and regional budgets cannot keep up

Prices in the Far East are growing exponentially compared to the centre. Take the construction of a school for 800 children in the Far East – such as Magadan, Kamchatka, or Chukotka – it will cost around RUB 2.5 billion. The same school in one of Russia’s central districts will cost somewhere between RUB 800 million and RUB 1 billion — Anton Basansky, Deputy Chairman of the Committee of the State Duma of the Federal Assembly of the Russian Federation for the Development of the Far East and the Arctic.

What is the Far East? It’s not just about the common underlying factor of inflation and all the rest. But when you take this situation, and multiply it by the difficult multimodal logistics you have in the region, you get prices for goods and services which are significantly higher than the average situation emerging in Russia. And let’s say that it’s clear that the region’s fiscal capacity does not fully reflect this... — Evgeniy Chekin, Chairman of the Government of of Kamchatka Territory.

Year after year, some regions are unable to receive what would amount to relatively small levels of funding to cover certain needs

What is a federal budget made up of? First of all, there are customs revenues. We sell hydrocarbons and the enormous amount of money we get goes into the federal budget. Then there is mineral extraction tax, VAT, and excise duties. Where does all this come from, and what does it all go on? On the very same gas, motor fuel, and electric power. It all goes somewhere. Then there’s production of goods... The vast majority of all this is produced in the Far East, Siberia, and the Arctic. And despite having this enormous RUB 25-trillion budget which is largely collected in this way year after year – I really don’t know what it is we’re doing! – we cannot solve an issue that would boil down to a few billion roubles — Alexander Osipov, Governor of Trans-Baikal Territory.

At times, regional spending is impacted by the local political environment

Unfortunately, we see that money is not always spent effectively in some regions of Russia. This is due to certain political cycles. These are aimed more at supporting individual areas which are not that significant in our eyes. However, facts are facts — Leonid Gornin, First Deputy Finance Minister of the Russian Federation.

The harsh climate means that mistakes made in funding can translate into enormous expenditures which could have been easily avoided

It’s crucial to simply allocate a billion or two each year. That’s much better than pouring money in later. Here’s a specific example: we don’t have money to properly maintain a school’s roof and drainage system, and with the temperatures we have, the entire school disintegrates. It gets completely inundated! Something gets into the foundation, and as a result, the entire school falls apart 3–4 years later. All that was needed was RUB 50,000–100,000 for maintenance, and now a new school needs to be built for RUB 1.5 billion! And it’s the same story with the roads... — Alexander Osipov, Governor of Trans-Baikal Territory.

Some regions are not so poor, despite how they appear on paper

The actual provision of grants in the regions is a fictional story! It’s a theoretical figure. Which region of Yakutia benefits from grants, for example? Nevertheless, this sort of thing happens — Sardana Avksentieva, Deputy Head of the Faction, "New People" Political Party.

Regions in the Far East should be given more freedom in financial matters

Let’s discuss how and by what means the federal ministry can mitigate the clearly growing risk of fiscal deficits, and how it can give at least some freedom to manoeuvre. After all, the volume of grants is declining, while the volume of subsidies grew by 53%. Let’s run things further away from your federal ministries! It’s so clear what is happening in the Far East, that you sometimes want to cry — Natalya Zubarevich, Professor of the Department of Economic and Social Geography of Russia, Faculty of Geography, Lomonosov Moscow State University.

SOLUTIONS
In the future, the regions may be given the freedom to distribute money as they see fit

Looking to the future, and of course bearing in mind the fact that this is a federal state, we must without doubt set ourselves a goal – to provide more freedom and room to manoeuvre. Decisions should be taken by regional teams and the governors of each region of the Russian Federation — Leonid Gornin, First Deputy Finance Minister of the Russian Federation.

Even areas where resources are extracted may not have enough money for development; more money must remain in the region

What is being asked for is a fairer allocation of revenue in places where resources are extracted... That’s because it is indeed the case that people don’t understand... A few weeks ago, I visited Usinsk – a town of oil workers with a population of 27,000 in the Komi Republic. Revenue worth RUB 103 billion is generated in the region, yet the town’s budget is RUB 3 billion. People said, ‘Give us just a few resources for a development budget – even 5–7% would help transform life in the area. So, I think there is room for improvement when it comes to ensuring a fair distribution of corporate income tax — Marat Shamyunov, Deputy Minister of the Russian Federation for the Development of the Far East and the Arctic.

Prior to the presidential resolution of 2012–2013, the Far East was essentially sinking for the most part. However, following this resolution, it began to rise once more. So, how about we add a little sustainability, and economic and social infrastructure? Just a few more resources! We will work a little faster to pump out this water that’s flooding in — Alexander Osipov, Governor of Trans-Baikal Territory.

Today’s crisis offers a reason to create safety nets for the regions; however, the Far East already has such safety nets

I think that together with our colleagues from the Ministry for the Development of the Far East, we will already be able to once again review approaches to the fiscal process for 2023–2025. In addition, we will be able to adjust the volumes required to address the new challenges and risks we face, including in the Far East — Leonid Gornin, First Deputy Finance Minister of the Russian Federation.

We need to ensure that there are reserves in place. For Russia, today’s world is most extreme considering that decisions need to be taken quickly. We never know what tomorrow holds in store, and therefore things cannot at all be done according to a plan — Evgeniy Chekin, Chairman of the Government of of Kamchatka Territory.

Unallocated reserves in accounts – the liquidity of regions in the Far East – is close to RUB 190 billion. That’s a fairly large resource – virtually the size of our government programme. Let’s look at it together and take the structural measures needed right now. We need to be ready to face these challenges, including in Sakhalin — Leonid Gornin, First Deputy Finance Minister of the Russian Federation.

Decentralizing excise duties in favour of the regions could help them

Decentralize some or all revenue from tobacco and alcohol excise duties to the regions. You know that the biggest responsibility of the regions and municipalities is to promote a healthy lifestyle and enact a family-friendly policy. It would therefore probably be fair if they had some additional revenue from these excise duties. This would help bolster these programmes — Marat Shamyunov, Deputy Minister of the Russian Federation for the Development of the Far East and the Arctic.

Excise duties on tobacco products – at least a percentage of them – primarily go on combatting illegal products. Not that it should be much, but up to 15% according to estimates. We said that it should begin with 10% just to help boost the coefficient so that those who can genuinely make reductions will do so. And of course, the regions will combat this much more effectively than what’s being done at the federal level — Natalya Trunova, Auditor, Accounts Chamber of the Russian Federation.