Debt goes into trillions: cities and regions queued up for loans

Alexander Dybin

According to the public procurement portal, since November 1, the constituent entities of the Russian Federation and municipal administrations have announced more than 250 auctions for opening credit lines in banks. And since the beginning of the year, more than 600 such purchases have been announced. It is noteworthy that not only regional governments, but also municipalities are actively borrowing, among them both large ones, like Novosibirsk, and small ones, for example, they plan to occupy Novoshakhtinsk, Nizhny Tagil or the city of Nerekhta, Kostroma region.

The Ministry of Finance of the Russian Federation maintains statistics on the debt burden on the regions. According to the department for this year, it has grown by more than 280 billion rubles. So, as of February 1, 2022, the total public debt was 2.45 trillion rubles, and as of November 1, it was already 2.73 trillion. And the regions continue to actively occupy, contracts that have not yet been concluded are not reflected in these statistics. And if we compare it with pre-Covid times, the growth is even greater. On January 1, 2020, the total public debt amounted to 2.1 trillion rubles.

In the structure of the debt of the regions, the largest share is occupied by budget loans - 1.94 trillion rubles. These are perhaps the most comfortable debts, the regions receive this money from the federal budget at a low interest rate, and the creditor is always loyal to prolongation. In the last couple of years, so-called infrastructure loans have begun to be practiced, when the federal center finances large projects through such a debt, such as the construction of a subway, a road or the reconstruction of airports.

“The debts that regions and municipalities are now plunging themselves into are either patching up short-term holes: incomes have fallen, expenses have increased, you need to pay right now, or an infrastructure loan program”, - says Anastasia Kuzminova, director of the So invest analytical agency, candidate of economic sciences. - According to it, the regions take tens of billions of rubles to modernize, for example, municipal transport in million-plus cities. It is assumed that the source of repayment of these loans will be their budgetary effect, but the payback of infrastructure is sometimes a matter of decades. Now Khusnullin is lobbying the topic of infrastructure loans, but the Russian Ministry of Finance will solve the problem of repaying these loans. And he, apparently, has nowhere to go, and the loans will either be refinanced or forgiven. Now the Russian economy is receiving powerful monetary stimulus through defense spending and infrastructure construction. Infrastructure loans in this case are a mechanism for distributing obligations for these stimulating actions throughout the entire budget system”.

The regions borrowed 708 billion through the issuance of government securities. 46 billion rubles are commercial loans, the most unpleasant option, such a debt requires constant servicing. Often you have to take out a new loan to cover the old one. Another 29 billion are state guarantees issued by the regions. In addition, 370 billion debts of municipalities are added to regional debts. Of these, 76.8 billion are commercial borrowings.

If experts look at the credits of the regions calmly, then the debts of the municipalities cause maximum concern.

“You can't say anything good about lending to municipal budgets, given their total dependence on appropriations from the region. This is definitely getting into the pocket of not only your own for future periods, but also your neighbors in the region, because the region will obviously have to solve the problem, - says Anastasia Kuzminova, - everything is not so simple with borrowing regional budgets. The regions receive conflicting signals from the federation about how to behave correctly: on the one hand, there are measures that encourage “living within our means”, on the other hand, filling holes in the federal budget with funds in those regions that have disobeyed, got into debt and something done something important. In April, there was a powerful signal when a significant share of the regions' debts on commercial loans were replaced by long-term and almost free budget ones.

The most indebted, according to the report of the Ministry of Finance, were the Moscow region - 277 billion of debt (of which 123 are securities obligations), Moscow - 131 billion (115 billion - securities), St. Petersburg - 93 billion (85 - bonds), Krasnodar Krai - 110 billion, Nizhny Novgorod region - 132 billion, Sverdlovsk region - 111 billion.

The only region that owes nothing to anyone is Sevastopol. Subjects with a minimum debt burden: Vladimir region - 6 billion of budget credit, Leningrad region - 6 billion, Nenets Autonomous Okrug - 1 billion, Adygea - 3 billion, Crimea - 5 billion, Karachay-Cherkessia - 5 billion, Kabardino-Balkaria - 7 billion , Tyumen Region - 6 billion, Yamal - 3 billion, Altai Republic - 2 billion, Tyva - 4 billion, Altai Territory - 5, Sakhalin Region - 2 billion.

Most of the debts for municipalities in the Moscow region, Tatarstan, Samara, Saratov and Novosibirsk regions.

Incomes are rising, but money is scarce

As State Duma deputy Valery Gartung told Novye Izvestia, the growth in debts of regions and municipalities is an understandable trend:

“The economy is not growing, many people have left, the incomes of citizens are not growing. And the main source of income for local budgets is income tax. His income is declining, - says the deputy. - At the same time, local budgets have increased spending. Perhaps they are not so significant, but they were not taken into account anywhere in advance - these are the costs associated with the training of conscripts, which have become an additional burden on the municipalities. No matter how the Ministry of Defense says that all tasks have been solved, unfortunately, the municipalities are also involved in this. This is also one of the reasons why their debts are growing. Naturally, in order to close these debts, municipalities borrow money from commercial banks. If the municipalities are left alone with commercial loans, this will lead to the bankruptcy of the municipality. But I don't think it will come to that. Still, the federal center will respond. Maybe belatedly, but it will respond to increased spending by municipalities and lower tax revenues. And he will start helping the regions”.

According to the analytical portal of the federal tax service, in the first two quarters of 2022, Russia received more revenue than in 2021. In the first quarter, the budget received 10.2 trillion (2.5 more than a year earlier), in the second - 20.9 (4.3 trillion more). But if we delve deeper into the structure of revenues, then according to analysts, two taxes, which largely form regional (and municipal) budgets, are sinking. We are talking about income tax and personal income tax. The Federal Tax Service has not yet published data for the third quarter. According to economist Sergey Gordeyev, it was a good start to the year that blurred the picture, which forced officials to compensate for the drop in income with loans.

“We see an imbalance of expenses and incomes”, - the expert says, “this is partly influenced by the correctness of the calculation of the inflation rate. This year it is growing in leaps and bounds, these fluctuations were not included in the budget. The price level rose by double digits, and costs were indexed by 8 percent, and actually even lower. Inevitably, there is a gap between income and expenditure. If the situation with expenses began to change since March, then the situation with income caught up with us late. This applies to income tax. In addition, there is a tendency to reduce personal income tax. At the same time, there is a paradox of statistics: there is an increase in wages, but this is not confirmed by an increase in personal income tax. This means that the structure of employment is changing. Ultimately, formally, the indicators are not bad, but this leads to a gap between income and expenses. This is a serious phenomenon - the imbalance of the economy. This could have many consequences. The question is how effective are the measures taken against it. I think the main thing now is to adequately assess reality and respond to changes. We find ourselves in a different economic reality with different processes and it will no longer be possible to live in the old way. Here it is important to reflect in such documents as the budget the real values of the same inflation or other indicators. Instead of taking the position of an ostrich, changes occur, but we do not notice them. Authorities in the regions are not accustomed to providing such a quick response to external challenges. The situation has been visible since the middle of the year and no one was ready for it. Until now, if you look at some development forecasts, then for example, the Chelyabinsk region is planned to grow profits for 2023 to almost record levels. It is clear that this is beyond common sense, but such unbalanced decisions are made at the regional level and this creates a budget that is obviously unrealistic”.

Recovery takes 2-3 years

According to economist Dmitry Dovzhenko, the ultimate motivation for obtaining a commercial loan from the regions or the municipality can be various factors: either there is not enough money to cover this year's expenses, pay for won back contracts, etc. Another option is a purely formal budget spending for the next year, you need to “secure” something, for this they open a credit line, which, most likely, will not be used.

“It is necessary to understand each specific case separately, for rich regions there may be one motive, for the poor - others,” the expert says, “someone’s budget revenues begin to decline, but programs have already been adopted, contracts have been won. Part of the loans is taken for the execution of these contracts. In a number of regions there was a practice of underestimating income, and in order to be able to plan expenses, credit lines were opened. But they were not going to use them, because they knew that they would receive more taxes or transfers. There is another nuance that the money that came in excess of the planned budget could be spent bypassing the representative bodies and the governors and mayors directed them to some operational needs. But it was like that before, now we see a drop in revenues and many regions, especially not rich ones, can take loans precisely to close gaps in the budgets”.

State Duma Deputy Vladimir Pavlov believes that the popularity of loans among regions and municipalities was influenced not only by the turbulent year 2022, but also by the previous two years of the pandemic.

“There are the accumulated problems of the two covid years, in addition, the pressure on the economy leads to problems with filling the budgets,” he says. - But this is a normal practice when regions take loans. It is necessary to evaluate according to the degree of entrustment of the subject or municipality and the quality of financial management. It is necessary to treat this instrument competently, not only to collect debts, but also to sequester costs. If possible, it is better to borrow from the federal budget; this is the task of governors and regional governments. These loans are incredibly cheap and convenient for a number of programs. The federal budget in relation to others is like the head of the family who subsidizes or lends to his children. This is a priority source, whatever one may say, it is all one state. Taxes from the region go to the budget of the Russian Federation and it is normal that in difficult times it helps the regions. Commercial loans are a much more dangerous story. Both the government and the Ministry of Finance work with this trend on a daily basis. It is caused by objective reasons, but in the future the situation will still change, everything develops along a sinusoid: from crisis to crisis. On the whole, although our incomes have declined, but not in the way that Western strangers thought. We found partners, refocused, it takes some time, we need to rebuild new logistics. On the horizon of two or three years, the situation will level off and reconfigure”.

State Duma deputy Valery Gartung notes that the regions are able to repay their accumulated debts, both commercial and budget, but only if the economy grows:

“If the situation changes, for example, the economy starts to grow, then it is quite possible. If the economy gets on a growth trajectory, income tax begins to be paid, 1.9 trillion is not that much money for regional budgets, - he says, - two years of good growth at a rate of 4-5% per annum - and from this debt nothing will be left. But to do this, the government must be engaged in creating a basis for economic growth, and this is precisely what it is not doing now. Therefore, given the current inaction in this direction, of course, this figure is alarming”.