Regions could curtail their investment costs

The total amount of debt during the period under review changed because of increase in the debt on government securities of constituent territories (+20.3% of the level recorded at 2013 year-end, hereinafter is shown exclusive of the city of Moscow and the Moscow Region) and on publicly funded loans (+33.1% of the level recorded as of January 1, 2014) with simultaneous contraction in the volume of public guarantees (-10.1% of the level recorded at 2013 year-end). The debt on commercial (bank) loans during the period under review decreased slightly as well (-6.2% of the level recorded at 2013 year-end).

In absolute terms, the commercial debt remained almost unchanged while the share of securities increased and the share of bank loans shrank within the first 10 months of 2014. The debt was therefore growing within the first 10 months of 2014 mainly because of the accumulation of debt on publicly funded loans.

The fact that regional debt growth rates have slowed down considerably at the end of the first 10 months of 2014 doesn't suggest any normalization of the situation with the execution of regional budgets. The 2012-2013 practice shows that it is at the end of a year when the debt tend to grow by 15-20% (due to the persistent inequality in budget spending and the need to discharge all obligations until the year ends). For instance, in December 2013, the public debt increased in volume by 16.5% of the previous month in nominal terms (by Rb 245,9bn, to Rb 1737,5bn from Rb 1491,5bn) while the municipal debt saw a rise of 15.8% (by Rb 39,4bn, to Rb 288,9bn from Rb 249,4,2bn). Overall, the total volume of sub-national debt is not yet big, about 2.6% of GDP.
It's worth noting that only two constituent territories of the Russian Federation – the city of Moscow and the Moscow Region – previously accounted for the principal share of regional debt (40.7% of the total regional debt as of January 1, 2011). As of November 1, 2014 the foregoing regions accounted for only 11% of the total debt. Within the first 10 months of 2014 the same constituent territories of the Russian Federation saw their public debt further decline by 23.5%.

Nowadays, the principal borrowers (in terms of accrued debt volumes) are the city of Moscow (Rb 136bn), the Krasnodar Territory (Rb 134bn), the Moscow Region (Rb 89bn) and the Republic of Tatarstan (Rb 85bn). It's worth noting that the Krasnodar Territory was the first, after the city of Moscow, constituent territory of the Russian Federation to have liabilities more than Rb 100bn. In 2013, this region increased its USD-denominated liabilities by 61.3% compared to the debt early in 2013 and by 12.6% within the first 10 months of 2014.

Overall, the regional data also show an increase in the debt burden in many constituent territories of the Russian Federation. Within the first 10 months of 2014 the public debt increased in volume in 54 of 82 constituent territories of the Russian Federation, while 31 regions saw a substantial growth in debt volume (more than 15%). Eight constituent territories of the Russian Federation saw growth in debt by more than 50%. The debt was growing considerably in the Perm Territory (1193%), the Irkutsk Region (201%), the Magadan Region (95%), the Voronezh Region (68%), the Jewish Autonomous Region (66%).

However, as noted above, the public debt tend to increase considerably at the end of a year, therefore one may expect the currently available debt figures to see further increase late in 2014 (annual data will not be published until February). At the same time, the downtrend in availability of bank loans (due to lifted interest rates) and the problems faced by the stock market (hence difficulties in placing bonds) at the end of the previous year might pose headwinds to the debt volume growth . This, of course, by no means can be interpreted as recovery of the regional finance situation, because the regions could cut even more of their investment costs on economic development (above all, infrastructure costs).

Arseniy Mamedov, Head of Gaidar Institute's Budget Policy Department