ALEXANDER DERYUGIN: “SUBSIDIES TO NEW REGIONS WILL BE ALMOST 90%"

According to the publication, the Donetsk and Luhansk People's Republics and the Zaporizhzhia and Kherson regions which were annexed last fall, live mostly on untargeted subsidies, allowing their authorities to decide what to spend their money on. Moreover, a number of laws including budgetary rules and procedures are not in force in the new regions due to martial law. The budgets of the annexed regions have been approved for one year, not for three as in other RF regions.

According to the available data, the new regions received almost Rb185 bn from the federal budget, which is 32% of all non-repayable transfers from the center to highly subsidized regions. There are a total of 22 regions in Russia whose self-sufficiency is below 50%.

The Zaporizhzhia region was the most subsidized in the country, i.e., Rb28.3 bn of uncompensated receipts (mainly subsidies from the federal budget) provided 94.8% of its income at the end of May. The subsidy level of the Kherson region is 92.5% (Rb16.9 bn). The uncompensated receipts in the LPR, Rb59.1 bn, provided 86.8% of its income and in the DPR (Rb80.5 bn) - 85.7%.

According to the Gaidar Institute, in comparison with other regions of Russia, the annexed territories spent more on national security and law enforcement (7.5% vs 1.3% across Russia), social policy (57.6% vs 23%), and less on the national economy (4.5% vs 19.2%), utilities (2.2% vs 8.8%) and education (12.8% vs 23.8%).

Thus, Zaporizhzhia region planned its budget for 2023 with 5% of its own revenues. The authorities of Kherson region called the budget "expenditures". The DPR was counting on 13% of its own revenues, but in April it asked for another Rb30 bn in subsidies for pensions and burial benefits. The LPR planned for 15% self-sufficiency.

The Gaidar Institute has calculated the share of the new regions' own revenues within the margin of error. The PIT collections brought only 3.8% to the budgets of new regions in January-March 2023, while another 1.4% were revenues from paid services and compensation of state costs.

The DPR government expects that the region will stop to be subsidized in 10 years. Mines, metallurgical and machine-building enterprises operate in the republic, and their products are supplied to Russian regions, Belarus, Turkey and some other states, the DPR Prime Minister Vitaly Khotsenko reported in January.

"In the past, Donbass had very high economic capacity. As part of Ukraine, these regions were the most developed, as metallurgical, mining and chemical industries were concentrated there," said Alexander Deryugin.

As noted in the Gaidar Institute's review, Q1 2023 was marked by a surge in regional spending. Spending by all regions of Russia together increased by 20% in January-March compared to the same period of 2022. This is higher than inflation (almost 12% for 2022) and the growth rate of budget revenues.

According to the estimates of the Gaidar Institute economists, in Q1 the Crimea (90.3%, mostly on roads and social security), Sevastopol (56.8%, major expenses, housing and utilities, national defense, fuel and energy complex and health care) and the Kursk region bordering the Ukraine (58.4%, spending on national defense, road economy and health care) increased the most. The spending growth in the leading regions in terms of expenditures was spurred by subsidies. During the same period revenues of the Crimea grew by 84.4%, Sevastopol by 44.9%, Belgorod region by 48.4% due to transfers from the federal budget. "Regions received targeted money for specific needs and they spent it on those needs," added Alexander Deryugin.

The expert noted that the surge in spending is still at safe levels. Moreover, the majority of regions, 72 out of 89, finished Q1 showing surplus. However, it is too early to judge a stable trend of high growth rates of regional expenditures based on the data for 3 months. The data for H1 will be more indicative, says the economist.

According to the Gaidar Institute estimates, regional spending on national issues increased almost 1.5 times (+49.8%) in Q1. They include expenditures on the government staff, while funding of budgetary institutions is conducted under other sections, Alexander Deryugin explained. "A spike in management costs could have been partially due to the regions’ additional administrative burden of mobilization and support of the "special operation"," the expert noted.