From surplus to debt: will Moscow be able to spend its financial reserves

Yelena Ivanova, Natalia Seibil

Moscow is a rich city. The GDP of the Russian capital is twice the budget of Ukraine and is comparable to that of Finland. Moscow's budget is over three trillion rubles. Unlike other regional budgets, which depend on transfers from the federal center, in Moscow two taxes form the basis of the revenue side. 40% of the budget is formed by the tax on individuals. One third of the budget is corporate income tax. The assistance of the federal center to the capital is minimal - no more than 3%, and then we are talking about subsidies and subventions. Over the past years, the city authorities did not always have time to even spend the income received, as a result of which a surplus was formed. This money can be spent on early repayment of the debt, or the mayor's office was allowed to collect money in the accounts. Therefore, Moscow did not need borrowing, like other regions, and it did not place its bonds for 8 years in a row. This was the case before the pandemic. Yelena Anisimova, Senior Director, Head of the ACRA Regional Ratings Group, recalls:

- The balances on Moscow's accounts decreased in 2020, it was difficult. There were about a trillion balances at the beginning of 2020, it became 600 billion at the beginning of 2021. You cannot say that this is a critical level. How will it develop... It's no secret that at the end of the year, various government contracts are paid. Capital expenditures are paid at the end of the year, which increases the expenditure side of the budget quite dramatically. The significant budget surplus in the middle of the year does not yet say that the situation will be the same at the end of the year.

Budget reserves in the amount of 600 billion rubles were spent on the fight against covid, as announced by Mayor Sobyanin. In this case, we are talking about their own funds, in addition to their allocated federal budget. This year the city authorities have already borrowed 115 billion rubles on the market and are going to do it again.

S & P alarm is justified, says Head of "Finance and Economics", Institute of Contemporary Development economist Nikita Maslennikov. The rating agency's duty is to warn investors that the situation requires careful scrutiny. Since Moscow has already issued its own bonds this year and is going to do it again to cover the city budget deficit, the agency's duty is to warn investors about the risks that may be associated with this:

- This is not a red light for an investor, but an even shimmering yellow. Some say - look carefully, others - yes, we see this concern. In principle, there are good prospects for the implementation of the budget, we will fulfill everything that we have committed to, but nevertheless, the likelihood of a deficit still remains. "We will enter the borrowing market." The vice-mayor didn’t tell about it directly, but you won’t be fooled.

The mayor's office states that it does not have an airbag, and it was not provided. But this also means that its creation was not envisaged because the mayor's office intends to enter the bond market, experts say. In other words, the Moscow authorities, not hoping for a favorable situation, expect a budget deficit by the end of the year, which will need to be covered by new debt. There was no talk of cutting costs either at the beginning of the year or now. The mayor's office has always stated that it will not cut its capital spending because it will affect the city's economy.

- If we promised to bring the metro line down, we cannot postpone plans for the development of urban transport or other infrastructure projects. The authorities do not want the city's economy to stop. For the sake of this, bond issues were carried out, which took place in April-June of this year, - explains the position of the capital's authorities, Yelena Anisimova.

Despite the decline in the revenue base and the increase in spending on the fight against the pandemic, the attitude of the Moscow authorities to the cost of improvement, repair and renovation has not changed one iota. When asked about the rationality of these expenses, Yelena Anisimova refers to the deputies. Moscow City Duma deputy Yelena Shuvalova recalls President Putin's words to Mayor Sobyanin:

- Even the president, when communicating with Sobyanin, bluntly said that you do not have a deficit. I do not understand why the federal government will not bring them to clean water.

According to the deputy, talk about a deficit budget is nothing more than financial games to get preferences from the "federals". The amount of tax on citizens, personal income tax, which is collected in the capital, covers all the endless construction projects of the Moscow mayor's office. There are more taxpayers in Moscow than the able-bodied population of the capital itself. This is due to the fact that if a person works in Moscow, but is registered or lives in neighboring regions, the capital still receives his taxes. However, spending money raises many questions. Elena Shuvalova says:

- The budget is spent absolutely irrationally. To say that it is irrational is to say nothing. This is pumping money of Muscovites into the pockets of construction and transport oligarchs. Huge sums are being collected. You can remove the asphalt today and put the tiles, tomorrow remove the tiles and put the asphalt.

In June, on Leninsky Prospekt, flowerbeds with annuals were planted on the dividing strip, the deputy gives an example. They spent the money, and a month later they dug up the dividing line together with the flowers.

- How long will this chaos continue. Why did you plant flowers for big money, if you have a road reconstruction plan? The right hand does not know what the left is doing”, - she says indignantly.

Economist Maslennikov also points to the irrationality and redundancy of spending. The renovation costs are poorly calculated. The mayor's office is pushing for reorganization with all its might, while prices for building materials have skyrocketed. As a result, the state order will cost a third more. And Moscow landscaping is a byword:

- We began to dig everything up everywhere, change the curbs. Annual trouble and waste. Moreover, they will not have time to finish on a number of objects before the September 19 elections. Think guys how you will conduct the elections. Everything has been dug up in Chertanovo, now it is simply physically impossible to approach the polling station. I'm not sure if they'll get it done by September. Or, if they did, it would be better if they did not. These expenses are absolutely not rational and, I'm afraid, uncontrollable. And there are many such examples.

The plan for the development of Moscow's transport infrastructure remains a big mystery. Whether it is or not, experts ask. The latest initiative of the mayor's office to abandon the capital's master plan and replace it with an ever-changing master plan is puzzling. For independent deputies of the Moscow City Duma, the announced innovation means only one thing - there will be no more general plan.

- The city cannot develop without a master plan. They are going to cancel the master plan. We will start liquidation in September. Thanks to the Edrosov majority, it will be canceled. Everyone works in the interests of construction and transport oligarchs . - Shuvalova thinks.

As for budget replenishment, the market understands: Moscow will borrow 200 billion rubles annually in the next 2 years. If the mayor's office borrowed a trillion rubles, it would be dangerous, financiers say. Now there is no alarm, but the concern and the need for tracking are definitely there. The Finance Ministry's plans to fine-tune the profit tax may lead to the fact that Moscow will lose part of its current income. Then the metropolitan authorities will have to demand compensation from the federal center. The pandemic is also not over yet. That is why the rating agency is warning investors. But the “snapshot” also provokes an immediate reaction from the capital's officials. But the fact remains - whether a safety cushion was planned in Moscow or not, the reserves were spent.

- The situation is now much better than it was last year. The Moscow economy is reviving, there are additional income receipts. The economic situation throughout the country is changing dramatically, notes Yelena Anisimova . - Tax revenues for most of the subjects of the federation are growing faster than they covered in their budgets this year. It is likely that this year will end with a smaller deficit than both Moscow and other regional authorities predicted.

Therefore, it is not clear why the Moscow mayor's office reacts so nervously to any comment about its budget.