ECONOMIC CRISIS IMPACTS REGIONAL GOVERNMENT BUDGETS

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