UNCLAS ST PETERSBURG 000093


E.O. 12958: N/A
TAGS: ECON RS PGOV
SUBJECT: ECONOMIC CRISIS IMPACTS REGIONAL GOVERNMENT BUDGETS

REF: ST. PETERSBURG 32


1.(SBU) Summary. Regional governments in Northwest Russia are
reviewing their budgets again - a review prompted by sharp
declines in revenue in 2009 from earlier projections. St.
Petersburg, Kaliningrad, Vologda and Arkhangelsk oblasts have
all implemented drastic budget cuts ranging from 19 to 30
percent, while Leningrad, Novgorod and Murmansk oblasts have
implemented only minor budget cuts so far. Pskov oblast's
budget has been only marginally revised. Most of the regions
expect to receive assistance from the federal government, and
have not ruled out additional possible cuts later this year in
the event that the unfavorable economic climate continues. End
Summary


2. (SBU) According to the Federal Ministry of Regional
Development, only 8 out of Russia's 83 regions will be able to
make it through 2009 without major revisions to their regional
budgets. The Ministry expects the regions will be forced to
make some hard decisions regarding their budget priorities due
to their reluctance to cut expenditures despite large declines
in tax revenues. The Ministry also is concerned that many of
the regions have not yet proactively responded to the crisis,
and thus have failed to revise their budgets accordingly.


3. (SBU) In all of Northwest Russia, the most substantial budget
revisions were made in St. Petersburg. Between the first and
second readings of the draft budget in October-November 2008,
the city government predicted a 6.4 percent reduction in revenue
and proposed a 6.7 percent reduction in expenditure. Later, in
February 2009, the budget was cut even more dramatically.
Overall, the revised budget (with revenues of $7.4 billion and
expenditures of $8.5 billion) is about 30 percent smaller than
the original. This has made 2009 the first year in the past 15
in which the city budget is smaller than it was in the previous
year.


4. (SBU) St. Petersburg's budget cuts have hit the city's large
infrastructure projects particularly hard. These include the
Okhta Center, Orlovsky Tunnel, the Elevated Express (an expanded
tram line), and the Western High-Speed Ring road - projects
which have all been postponed or downsized. Additionally, the
city significantly reduced expenditures on road repair and
construction, and general administrative expenses.


5. (SBU) In April 2009, the St. Petersburg Legislative Assembly
approved additional changes to

the city budget, increasing its
planned expenditures by $350 million. However, there was no
corresponding planned increase in revenue. Hence, the projected
budget deficit has grown to nearly $1.5 billion. According to
recently published statistics by the federal government, budget
revenues in St. Petersburg dropped by 30 percent during the
first five months of 2009 - which confirms the accuracy of the
city government's financial team's forecast during the first
budget review. These figures mean that St. Petersburg has
experienced one of the country's worst relative declines in
budget revenue.


6. (SBU) As in St. Petersburg, Kaliningrad oblast passed its
budget in November 2008. However, the budget underwent
significant revisions almost immediately after being adopted, so
the oblast entered 2009 with the budget already adjusted to the
crisis conditions. The revised budget slashed expenditures from
$1.17 billion to $950 million. Projected revenue was reduced by
$226 million. The expenditure cuts were across the board,
including reductions in various regional infrastructure
projects, in government employee salaries, and in the
introduction of green measures designed to improve the oblast's
energy efficiency. Governor Georgiy Boos reportedly has not
ruled out further budget cuts if unfavorable economic conditions
continue. In particular, he mentioned the possibility of
cancelling the indexing to inflation of payments to veterans - a
sensitive budget item which thus far has remained untouched.


7. (SBU) Although Vologda oblast delayed revising its budget
longer than any other region in Northwest Russia, it also
implemented a 25% cut in both revenue projections and
expenditures. The reductions, approved in July this year,
included cuts in almost all expense items, with the notable
exception of most government employees' salaries. Also
unaffected were schools and hospitals. As a result, social
expenditures now make up around 70 percent of the new budget.
The new budget deficit totals $312 million, which the local
government hopes will be covered by federal funds.


8. (SBU) The 2009 budget of Arkhangelsk oblast shrank by 22%
percent compared to its initial projections from fall 2008. As
initially approved, revenues were expected to be $1.5 billion,
and expenditures about $1.7 billion. The economic crisis began
taking its toll, however, and in April, 2009, revenues and
expenditures were reduced by $323 million and $254 million,
respectively. The reduction of expenditures involved cutting
capital investments by $123 million, $76 million in reduced pay
for employees working for government-funded organizations, and a
$10 million reduction in the government's administrative
expenses.


9. (SBU) Other regions in the Northwest District, including the
oblasts of Murmansk, Leningrad, Novgorod, the Republic of
Karelia, and Pskov, have been more reluctant to reduce
expenditures in the face of revenue shortfalls. For example,
Murmansk oblast has revised downwards by 12% its projected
budget revenue, but reduced its planned expenditures by less
than 3%. As a result, the new budget deficit is nearly twice as
high as the initial one (nearly $200 million). The reduced
expenditures primarily were related to infrastructure projects
in the city of Murmansk.


10. (SBU) In May, Novgorod oblast cut both its projected
revenues ($587 million) and expenditures ($650 million) for 2009
by 7%. The main cuts were in government infrastructure spending
(decreased by $26 million) and in reduced transfers to local
governments within the oblast (cut by $20 million). Also,
salary increases for government employees that had been planned
for April, 2009, have been postponed until September.


11. (SBU) Leningrad oblast made only modest budget cuts in May
2009, cutting projected revenues ($1.53 billion) by 4% and
expenditures ($1.64 billion) by just over 5%. The cuts included
a reduction in infrastructure spending by $11 million and a $3
million reduction in various administrative expenses. Similar
to his Kaliningrad colleague, Lenoblast's governor Valeriy
Serdyukov warned that the budget may have to undergo further
cuts later this year.


12. (SBU) In Karelia, initial budget projections (revenues $677
million, expenditures $726 million) was reduced by about 5% in
May 2009. Infrastructure programs suffered the majority of the
cuts, and the republic's governmental administrative expenses
were reduced by about $2 million. The new budget increased
social spending, boosting support to the unemployed by $1.4
million, as well as creating a new $2 million fund to support
small and medium business enterprises. Overall, the republic's
deficit remained essentially unchanged at $49 million.


13. (SBU) Pskov oblast, which is generally one of the most
economically depressed regions in European Russia, relies
heavily on federal money even in non-economic-crisis years. The
initial budget plan (predicting revenues of $454 million and
expenditures of $529 million) was revised several times from
February through May of this year due to shifting predictions of
subsidies and grants from the federal budget, but ultimately the
net result has been an overall increase of $22 million in
Pskov's projected budget revenue, with just a $1 million
reduction in its expenditures.


14. (SBU) Comment: The economic crisis in Russia has had a
profound impact on the fiscal health of the northwest districts
of Russia, with most regions severely curtailing infrastructure
spending and cutting other spending corners wherever they can.
For the most part, regional governments have been proactive on
this front, recognizing that continued spending on the scale
they had initially planned would be financial ruinous given
their radically reduced revenues. It is notable, however, that
despite large reductions in overall spending, spending in the
social sphere has not commensurately declined, a strong
indication of the governments' desire to maintain social
stability.


15. (SBU) Comment continued. Pskov, with its atypical increase
in revenue projections and marginal budget cuts, presents a
unique situation, yet shows how Moscow "favors its own." The
governor of Pskov, Andrey Turchak, has strong ties to Moscow,
but had few ties to the oblast before President Medvedev
appointed him to his position in February, 2009 (reftel) - just
as the financial impact of the crisis was beginning to be felt.
As such, it would have been inconvenient for Turchak if one of
the first things he had to do was revise the oblast's budget
downwards. Fortunately for him, however, he was spared the
necessity of undertaking this unpopular action both because his
region's economy was already at a low base and because the
federal government came through for him and increased its
subsidies to his oblast. For this combination of reasons,
Pskov, unlike any other region in our district, actually enjoyed
a projected increase in revenue compared to its earlier budget,
and absorbed only minimal expenditure cuts.


GWALTNEY