- The potential for regional instability will grow as Russia's economic crisis drags on.
- Many of Russia's regional governments will default unless the Kremlin steps in.
- Russia's focus will shift inward as its economy worsens, limiting its bandwidth to act abroad.
Russia has entered its second recession in six years. The effects of the country's economic downturn have begun to trickle down from the federal level, spreading to Russia's regions, cities and people. The federal government has long relied on the regional and municipal governments to carry their own burdens, and many are teetering on the verge of bankruptcy or collapse as Moscow siphons off a growing share of their funds. The Russian people are also beginning to feel the economic pressure more acutely as an increasing number of citizens fall under the poverty line and watch their savings dry up.
The Kremlin can do little to alleviate the worsening crises, since its own resources are finite, and the road to economic recovery is long. Instead, it has responded with political and security measures aimed at preventing or cracking down on dissent among the regions and people. But these steps will do little to address the Russian economy's deep structural flaws. Unless oil prices rebound or the Kremlin steps in and drains its coffers, the economic and financial pressure weighing on Russia will only grow over the next few years. The Kremlin, in turn, could tighten its control to prevent mass protests and keep regional governments from destabilizing.
Russia's Regions Carry Heavy Debt Burdens
Russia's massive landmass is split into 83 regions of varying shapes and sizes. Historically, the Kremlin has granted regional leaders the power to run their own territories, provided they remain loyal to the federal government. Crackdowns, of the kind seen during the 1998 financial crisis, and wars, such as the conflicts in Chechnya and Dagestan, have repeatedly tested that loyalty throughout Russia's history. As a result, the stability of the regions - and by extent, the country - remains a persistent concern for the Kremlin. At the same time, the Kremlin can use threats of instability to justify its expansion of power within the regions in an effort to keep them loyal.
The severe economic crisis plaguing Russia is ratcheting up the potential for instability within the regions. Russia's regional governments have long carried a large share of the country's financial burden. Though the country's total debt is only around $300 billion - a relatively small figure for a country whose gross domestic product is nearly $2 trillion - about one-third of that debt is concentrated among regional governments, which do not have as many resources as the federal government. Since the 2008-2009 financial crisis, regional debt has climbed from $35 billion in 2010 to an estimated $103 billion in 2015. Meanwhile, according to Moody's Investors Services, regional debt repayments and borrowing are down 53 percent and up 25 percent, respectively, this year. The regions' budget deficits have risen by 42 percent since 2014, and of the 83 regional governments, 63 are believed to be near bankruptcy or default, according to Russia's Economy Ministry. Moscow's Higher School of Economics found that 20 regions are technically already in default.
Sources of Debt
There are three primary factors underpinning the regions' mounting debts: federal obligations and edicts, economic stagnation and limited credit access.
All of Russia's regions must meet a series of burdensome obligations to the Kremlin and social spending. Of the income each region generates, only 37 percent stays in the region itself; the rest goes to the federal government. The Kremlin returns a small portion of that in the form of subsidies, though no more than 20 percent of the original payment. Since 2011, the federal government has raised regional taxes by 12 percent.