20 years under Putin: a timeline

The rift between “rich” Moscow and “poor” regions has deep roots in Russia, but the inequality between them has become alarmingly more pronounced in recent years, turning into a crucial political and economic issue. While the polemics about pampered Muscovites living off the regions’ money, or incompetent regional elites mismanaging their turfs, often capture public imagination, the real picture is more complicated.

 

September 2017: Moscow mayor Sergei Sobyanin shows president Vladimir Putin the new Zaryadye park that opened in the capital's center as part of the large-scale renovation program. Photo: kremlin.ru

 

Tensions between provinces and the capital city exist in most countries, but in Russia the juxtaposition of Moscow and the regions has become deeply ingrained in the public mind. Today, the old adage “Moscow is not Russia” reflects the regions’ growing frustrations over the highly centralized political and economic system established in the country. According to the independent pollster Levada Center, Russian people increasingly see Moscow as a city that builds prosperity at the expense of the rest of the country: “Moscow sucks all the juices from Russia,” claim some respondents.

Given this view, it comes as no surprise that when in 2019 Moscow Mayor Sergei Sobyanin responded to widespread criticisms about the significant growth of the capital’s budget, he caused mild outrage. Defending the budget, he declared that it was the Russian capital that “fed” other regions and not the other way around: it generated 20 percent of Russia’s GDP and served as a major market for goods produced in the regions. Still, over the course of ten years, Moscow’s budget increased by 2.3 times, reaching 2.8 trillion rubles ($34.3 billion) in 2020. Note also that the increase followed the 2011-12 mass protests in Moscow and was arguably an attempt to appease Muscovites who had taken to the streets demanding political change. It is unclear whether this strategy worked, but Moscow got a much-needed, albeit costly facelift worth $2 billion, transforming it into a modern city on a par with many European capitals. 

However, one would argue that instead of attacking the old grievances harbored by Russian provinces, Sobyanin should really have known better. Before his appointment as mayor of Moscow, he served as governor of the Tyumen Region, whose two autonomous districts—Khanty-Mansi (Sobyanin’s birthplace) and Yamal-Nenets—produce much of the oil (about 48 percent) and gas (about 80 percent) in Russia. In 2020, these two districts delivered more than 17 percent of the federal budget’s tax income. It is true that Moscow contributed more than 13 percent itself, but it also got a better deal: its budget amounted to over 20 percent of the consolidated incomes of the regional budgets, while the two above-mentioned autonomous districts had to transfer most of their tax receipts to the federal center, receiving only a fragment of those amounts back.

 

Life in the Third Rome

Still, Sobyanin had a point. Oil rent makes up only a fraction of Moscow’s budget, which overwhelmingly  relies on income taxes from capital-based companies and employees (more than two-thirds of the budget), including most federal agencies and big state-owned corporations. According to Forbes Russia, in 2020, 107 of Russia’s 200 biggest private companies were headquartered in Moscow (and nine more in the Moscow Region), even as most of them operate outside the capital. Moscow has thus been practically the only region capable of accumulating significant reserves in recent years, which is why last year, in order to avoid tapping federal reserves, the federal government encouraged budgetary transfers from the capital to the regions. 

The discrepancy is, to some extent, due to the structure of the Russian federal budget, which leaves personal income tax receipts (and part of corporate income tax receipts) in regional hands, but collects all mineral extraction tax receipts. But it also has to do with Moscow’s status as Russia’s capital city, with uniquely good infrastructure, and as the center of the decision-making process. Time after time, the government floats the idea of moving the headquarters of federal agencies and state-owned companies to regional cities and encouraging other companies to do so, but these plans never come to fruition (the transfer of the Constitutional Court’s office from Moscow to St. Petersburg is a rare exception).

Apart from extractive industries, which are tied to specific locations, companies will invest in regions with good infrastructure and  have less trouble hiring competent people where living conditions are agreeable, which is why Moscow is the top choice for many. Another reason for companies’ affinity for the capital is that paying taxes in Moscow has political benefits. Having close ties to the Moscow mayor, who is a national political heavyweight, has more perks than a relationship with a regional governor—hardly a person of stature. This calculation also encourages some big companies to exploit the regions’ weak institutions for their own gain. In 2014, Russia’s tax reform introduced so-called “collective groups of taxpayers” with the goal of creating benefits for regional budgets by incentivizing large businesses to organize into groups and pay taxes on their consolidated financial results. This did not prevent the state-owned Rosneft from allegedly pressuring the Khanty-Mansi authorities to rearrange its profits for 2017 and thus deprive the region of tax receipts. 

 

The First Throne 

But there is yet another, likely even more important reason. Business will invest where returns are higher, and in Russia the choice is between Moscow’s vibrant financial and services industry and the oil and gas regions. Largely due to legal uncertainty, the investment rate in Russia (around 20 percent of the 2019 GDP) has been significantly lower than in other emerging markets. Russia’s regional budgets, which allocate most of their income on public services and social transfers, have little room to increase capital investments at their own discretion. This means that the Kremlin’s political and financial support for some investment schemes over others has an outsized influence on the overall investment landscape, even if little private investment is generated in turn. 

It is telling that Moscow-based companies, either linked to the ruling elite or large enough to directly influence grand investment schemes, have been lapping up markets tied to policy areas that recently underwent reform. For example, the main beneficiaries of the 2019 waste collection reform were companies close to the federal political elite. The reform allowed several companies tied to regional elites to secure lucrative contracts—often without competition—but it was Khartiya, a company owned by Igor Chaika, the son of Russia’s former Prosecutor General Yuri Chaika, the state technology giant Rostec, and a company simply called “Waste Management,” controlled by people close to former Deputy Prime Minister Igor Shuvalov, that aggressively expanded their regional presence as a result.

Another example is digital surveillance and artificial intelligence—an area important not only due to its exportability and monetary value, but also because collecting and storing data on citizens is politically significant. Paul Goode, an associate professor at Carlton University, showed how steadily growing government contracts created a large amount of rent in this market, which was barely affected by COVID-19-induced budget constraints. This area initially offered benefits for regional elites, but lately Rostec and Sberbank, involved in the development of the government’s AI strategy, have entered the competition. The pandemic gave an excellent opportunity for Rostec subsidiaries—such as the BARS Group, which developed a system for registering patients, and NTechLab, which worked on facial recognition systems—to grow their presence in the regions at the expense of smaller local players. In 2020, Sobyanin urged the rest of the country to adopt Moscow’s system of digital passes, even though it was neither the first nor the only one in existence. Tatarstan launched its own digital passes two weeks prior to Moscow, but the local developer seems to have lacked connections in the capital.

 

The rules of the fiefdom

The Kremlin’s response to the economic effects of the COVID-19 pandemic created another bone of contention between Moscow and the regions. The response, as a whole, was idiosyncratic. Falling incomes did not cause regional budgets to collapse as significantly as many had predicted—mainly due to federal subsidies and discretionary transfers, but those were distributed in an unclear manner and allocated to finance capital investment under implementation of the National Projects. In the meantime, smaller businesses were left with an increasingly concerning challenge—growing debt burden

When the government offers budgetary assistance, such as subsidies and subsidized loans, it always comes with strings attached, thus keeping regions on a tight leash while allowing the federal center more room to manage investment projects. These conditions invite investors to evaluate markets primarily through the lens of the government’s interest, signaling that the area in which it has a political stake would be the only really safe and sound investment.

Digital surveillance and artificial intelligence may not be as big in Russia today as they are in China or the United States, but this area is clearly politically important and bound to grow. Waste collection may not be particularly lucrative, given that Russians are unwilling to pay for it, but it has become a sensitive political issue, which means money will be pumped into it. All this also means that big companies, typically based in Moscow and well-connected to federal political elites, are going to call the shots in these markets. As long as the federal government maintains a central role in policy development and resource allocation, Moscow—even if it may not technically “feed” the rest of Russia—will decide how to manage regional economies, while Moscow-based businesses will be sure to get their slice of the pie.

Russia under Putin

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