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Russian Regions React to the Crisis in Different Ways

Economic inequality between the Russian regions will manifest itself clearly in the context of the current crisis. While the 2009 crisis passed almost painlessly for regional budgets, the situation today is quite different. The regions will be forced to look for anti-crisis strategies in the context of continuously decreasing oil revenues, said Natalia Zubarevich, Leading Research Fellow at the HSE Centre for Studies of Income and Living Standards, in her presentation on ‘Crises in Russia: Regional Perspective’ as part of the XVI HSE April International Academic Conference.

Champions and outsiders

In recent years, the Russian government has attempted to decrease economic inequality between regions. ‘Over a long-term period, since late 1990s, social inequality has been decreasing by means of oil rent redistribution through pensions and allowances’, said Zubarevich.

But, due to several factors, this hasn’t been fully implemented. These factors include the distant location of most regions from the centre, unequal spatial distribution of the population, as well as economic growth of a small number of regions by means of oil profits.

‘All the discussion about how we are a differentiated country is partly self-deception. Economic differentiation shows itself on the periphery’, Zubarevich said. Very rich regions are at one extreme, and ‘depressed’ regions are at the other extreme. Only seven Russian regions are really successful in terms of their budgets: Moscow, Khanty-Mansi Autonomous Okrug, Tyumen, Sakhalin, Yamalo-Nenets Autonomous Okrug, St. Petersburg, and Nenets Autonomous Okrug.

There is also a small, relatively developed zone of regions that have somewhat greater resources and development factors of their own than the others do. They include, for example, the Kaliningrad Oblast and the Leningrad Oblast. Other regions, according to Zubarevich, present a rather monotonous picture. ‘They don’t have any special advantages, nothing to seize on in order to start developing’, she said, adding that over 60% of the Russian population lives in these ‘average’ regions. Another 18% of Russians live in relatively developed regions. 10-11% live in outsider regions with weak human capital, and 11% of the population finds itself in rich regions.

Due to economic heterogeneity of Russia’s regions, development of the crisis should be studied from the regional aspect, since regions react to declining resources in different ways, Zubarevich emphasized.

Budget leaves much to be desired

The situation with regional budgets is difficult today. In terms of budget revenues for 2014, Zubarevich noted that half of regions in the Far East and part of Siberia fell into arrears. In total, 45% of Russian regions, including ‘outsiders’ and ‘average’ regions, are currently in the zone of maximum risk today, which features budget deficits and large debts. Regions with large debts include Mordovia, Chukotka, the Smolensk Oblast, and the Kostroma Oblast.

According to Zubarevich, one of the reasons behind the difficult situation with regional budgets is the need to implement federal requirements to increase salaries for employees of state-financed organizations. Not all regions are capable of carrying out their current social responsibilities without using credit resources, which is a source of destabilization in regional budgets. And while, for example, the volume of money transfers to regions increased by 30% during the crisis year of 2009, this volume has been gradually shrinking over the last three years.

As a result, in the context of falling oil revenues, decreasing investment activity and declining incomes among the population, resulting in decreased retail activity, each of the regions has to look for ways to balance its budget.

Oil regions, including Khanty-Mansi Autonomous Okrug, Sakhalin, Tyumen, and Yamalo-Nenets Autonomous Okrug, will remain stable, as well as Crimea with its budget surplus. Whatever the outcome, the republics of the North Caucasus will ‘get their share’.

This crisis is different

Natalia Zubarevich believes that the current crisis will be protracted. At the same time, it does not differ structurally from the 1998 and 2009 crises, which passed relatively painlessly for Russian regions. In 1998, the regional budgets were not oil-dependent, and in 2009, oil prices, which fell to $40 per barrel, quickly restored their growth, and by the summer the economy had begun to recover.

‘Falling revenues is a painful process for regional economies, which was avoided in the previous crisis due to the quick recovery of oil prices. This time it is more likely that rent revenues will be lower over a longer period of time’, Zubarevich believes. It will certainly affect the population’s strategies for life. The question is what share of the population will have to choose the strategy of survival over the strategy of development, Zubarevich said.

The current situation is different not only because of the prolonged decrease in oil prices; unlike in 2009, there is no sharp growth of unemployment. Industry growth rates in 2014 were positive in comparison with 2013, when growth was zero.

Clear characteristics of the current crisis are budget deficits, an investment crisis, and a crisis with people’s incomes. ‘We are recording much slower growth in terms of what is associated with the idea of a crisis, such as closing industries or growing unemployment’, Zubarevich noted.

It is too early to forecast how the situation will develop further, Zubarevich believes. However, it is obvious that most Russian regions turned out to be unprepared for what is taking place today. The reason is not only dependency on raw materials and many other factors related to spatial and demographic characteristics of the Russian regions, but also the unsolved problem of agglomeration development.

The agglomeration effect exists in all countries; it means that central locations obtain additional advantages due to the concentration of people and diversification of functions. ‘And this is normal. The classical ‘centre-periphery’ model strengthened in the 1960s when people understood that the space is uneven and that it’s difficult to equalize it. Western science concluded that there are always centres that concentrate resources, but they concentrate them in order to create innovations, which must then move to the periphery’, Zubarevich explained.

In Russia, feedback between the centre and the periphery – when resources go back as products and innovations – is broken. ‘In fact, the country has only one entrance. In 2014, 44% of Russian exports and 46% of imports were with Moscow’, Zubarevich said. Over the last 25 years, the task of regional innovative development hasn’t been solved. As of today, only some of the actors in the service business are independently moving from the centre to the regions. These include consumer services, trade, internet and mobile communication services.

 

Author: Marina Selina, April 20, 2015