The roots of the problem

For a few months in 1998, Vladimir Putin was the deputy head of Boris Yeltsin’s presidential administration, where he was responsible for regions and the head of a commission on regional powers. 1998 was a tough year. Following on the heels of Russia’s financial meltdown, a banking crisis accelerated insolvency, and to prevent what many saw as potential uprisings, several regions started adopting unconstitutional laws. Nizhny Novgorod announced that it would pay salaries to its public servants before transferring taxes to Moscow, and it even raised the possibility of creating its own banking system. The Kaliningrad and Sverdlovsk regions contemplated declaring a state of emergency and initiating price controls. Some regions even made independent foreign policy initiatives. This was the situation that Putin had to handle for a few months, which he did by abruptly terminating previous efforts to come to agreements with regional governments that specified their powers based on regional spending data.

After he was elected president, Putin started to centralize power to prevent the 1998 chaos from ever happening again. In 2003-05, the Russian government significantly tightened control over the regions both in a fiscal and in a political sense, culminating in the abolishment of direct gubernatorial elections in 2005. While regions had to give up their revenues from the mineral extraction tax and part of their income tax revenues, their financial obligations gradually kept growing. By 2019 they had become roughly twice as large as in 2003.

Fast forward to 2012 when one of the reforms initiated under Dmitry Medvedev’s presidency restored direct gubernatorial elections, albeit in response to one of the largest protests in Russia’s modern history. Following Putin’s return to the presidency, this reform was watered down with a law that allows regions to abolish direct elections and the president to handpick governors. But before this could happen, Putin issued a series of orders known as the “May Decrees,” which further impaired the fiscal situation of the regions, by obliging them to fork out money on costly and politically crucial pay raises. Meanwhile, their budgetary strings were further tightened. The government took one percent of corporate income taxes, consolidated groups of taxpayers, and made movable property exempt from taxes (although the regions did receive a one-time compensation for this in 2019). Maxim Reshetnikov, head of the Russian State Council working group on economy and finance, estimated that between 2012 and 2018 the revenues of regional budgets grew by five percent on average while the federal budget’s revenues grew by 77 percent.

The debt crisis

Russia’s regions cannot go bankrupt: if they are unable to cover their obligations from their own resources or by borrowing, the federal budget steps in and helps them out. But this comes with strings attached; therefore, in 2012, regional governments started borrowing heavily. This led to a near-miss debt crisis in 2015-16 that the federal government solved, essentially by throwing money at the problem: the Finance Ministry replaced high-interest bank loans that made up more than 40 percent of regional debt in 2013 with low-interest budgetary loans that now make up almost half of total regional debt. The Ministry also introduced a traffic light system, under which the most problematic and indebted regions are taken under the government’s stewardship. What the government did not do is increase the fiscal autonomy of the regions. As of 2019, the average region sent slightly more than half of its tax revenues to the federal budget, which redistributed 921 billion rubles ($14 billion) in various subsidies to all regions except for Kaluga and Moscow.

The underlying idea of this redistribution system is that since regions cannot choose their geography and thus their resources, wealthier regions are obliged to support poorer ones. Ideally, in the long term, this would mitigate differences between them. Only this is not happening. On the contrary: in 2001, funds were redistributed from 25 so-called “donor” regions to the rest, but in 2019, only 13 “donor” regions gave the distributable surplus to 70 others (and the occupied Crimea). The revenues of some of these 70 regions—e.g. the Tuva Republic, the Altai Republic, Chechnya, Dagestan and Ingushetia—depend heavily (almost or more than 50 percent) on federal transfers. Of the “donor” regions, Moscow, St. Petersburg, and the hydrocarbon-rich Khanty-Mansi and Yamal-Nenets autonomous okrugs provided more than half of all positive transfers.

Moscow vs. regions

Following the 2011-2012 mass protests, the Kremlin opted for a two-pronged approach: repressions against some protesters and various benefits for the rest of the Muscovites. An ambitious urban renovation project was launched in 2015 with a price tag of more than 200 billion rubles ($3 billion). By 2018, under Mayor Sergey Sobyanin, Moscow’s budget almost doubled. In 2019, it accounted for 25 percent of all the budgets of 82 other Russian regions together. In short, in order to appease an already wealthy region, the Kremlin redirected funding from other regions.

The regions’ grudges with Moscow did not stop here. A telling story is the ongoing protest wave against the failure of effective waste collection, which started in 2018 in the town of Volokolamsk in the Moscow Region. Even though the root of the problem was the spectacular failure of waste management in the capital, officials simply decided to take the waste elsewhere and quietly started building landfills further to the north—near Shies in the Arkhangelsk Region—sparking further protests. Public frustration is increasingly aimed at the one person who seemingly has the power and the financial means to help them—President Putin.

Recent years have seen such issues multiply. Protests that started in Ingushetia against a border agreement benefiting Putin’s ally, Chechen President Ramzan Kadyrov, and continued, against all odds, through spring 2019, required intervention from Moscow. A protest against the construction of a church in Yekaterinburg in 2019 ended only when Putin personally intervened. In 2018, voters in four regions turned out in large numbers to vote the Kremlin’s handpicked governors out of office and, very likely, to send a message to the president.

Underpinning all these developments is a serious crisis of political responsibility, especially when it comes to the relationship between the regions and Moscow. Even if they are officially elected, most governors are appointed from Moscow and are often “managed” by the Kremlin alongside their supposed “opposition.” With a few exceptions (Kadyrov or Rustam Minnikhanov, president of Tatarstan), governors have little political authority or fiscal autonomy. They are there to manage, not to govern their regions. They are accountable to their keepers in Moscow, not to their voters. It matters little whether the governors are “young technocrats” (as many of the latest appointees are referred to), Putin’s former bodyguards (several of whom were appointed to head regions), or local heavyweights.

Ironically, according to the Levada Center, governors’ ratings have been rising in recent years, while Putin’s popularity has fallen. This can be explained by the fact that new governors tend to be initially more popular than their predecessors. And as the Kremlin has prioritized not losing elections in the regions, the rotation of governors has picked up the pace: in 2017 and 2018, 20 governors were replaced—twice as many as in the 12 years before. In 2019, there were 21, who also tended to be significantly younger.

Still, these measures constitute a mere facelift covering up a bigger problem: regions are not becoming more fiscally independent and their leaders more accountable to their voters.

Potential solution?

Vladimir Putin’s constitutional reform is set to introduce a “unified system of power,” which will enshrine upwards accountability in Russia—with mayors being accountable to governors and governors to the federal government. This proposal has already drawn grumbles from local officials. 

One piece of the reform remains a big question mark. The State Council, an advisory body made up mostly of Russia’s governors, is supposed to set the “main directions” of future domestic, foreign, social, and economic policy, according to the first reading of the reform. What this means in practice—and whether Putin himself becomes its leader following his departure from the presidency—remains unknown.

The State Council might still become the basis of a new leg of the power vertical: an institution through which governors are empowered and participate in policymaking. It seems to be certain, however, that the question of effective regional and local governance (or the lack thereof) will be of key importance in the coming years.

* András Tóth-Czifra is a political analyst based in New York.