Siberian region of Khakassia: Is It Pondering a Financial Suicide?

Siberian region of Khakassia: Is It Pondering a Financial Suicide?


The Ministry of Finance of Khakassia, Russia’s constituent republic located in the south of Siberia, has said that the region may face a default in the short term. Khakassia lacks about 14 billion rubles to meet its spending commitments for this year, including social ones.

Last week, reports said that a commission of the Federal Treasury is doing an inspection in the republic. Khakassia is under the control of Russia’s Federal Treasury for the third year in a row because of the huge state debt. The inspection was initiated by the republic itself. At least, this was announced by the government of the Republic of Khakassia. 

"It's necessary to do analysis of the budget revenue and spending. Today, Khakassia's state debt reaches 100%. The republic's accounts have been blocked for years. The share of overdue accounts payable reaches 9.9%. The republic needs help from the federal budget, and there is no other option," said Irina Voynova, finance minister of the Republic of Khakassia. 

Then the information about the analytical note of the republic’s Ministry of Finance leaked the media. It suggests that Khakassia’s financial standing is not just bad. It is extremely bad, in fact. The budget of the region has a shortfall of about a third of its revenue part. The deficit for financing budgetary institutions alone exceeds 7 billion rubles. The current situation is so tough that kindergarteners and schoolchildren might be left soon without meals and heating. 

This is not the first time Khakassia is complaining about poverty. Vladimir Shtygashev, spokesman of the Supreme Council of Khakassia, has repeatedly stated that it was caused by the financial policy of the federation. According to him, given the presence of large metallurgical, coal and generating companies on the territory of Khakassia, it may well feed itself. The only problem is that all the taxes trickle away to Moscow or to offshore accounts. 

On the one hand, Valentin Konovalov, the incumbent head of the Republic of Khakassia, has someone to put blame on -- his predecessor Viktor Zimin who is a top executive of Russian Railways (RZD) state railway corporation now. It was him who saddled the republic with debts. However, Konovalov’s excuses do not work so effectively anymore because he himself and his team also made a copious amount of mistakes. Just a couple of months ago, the government of the region reported how ambitious Khakassia’s plans for the 2020 budget were. And do we actually see now that the skeptics were right, and the republic is heading for a failure? 

Experts are confident that things are worse in reality than it seems at first sight. Yes, Khakassia is in a difficult position. But chances are that the government of the republic is consciously exaggerating. Probably, it pretends to be poor in order to get financial aid from the Russian Finance Ministry. Even on the background of the Moscow’s apparent dislike for the region headed by a member of the Communist Party, the federation will not be able to let the creditors grill it.  After all, for Russia, it is a question of reputation. According to Evgeny Mamayev, the head of the local branch of the All-Russia People's Front, as of the end of January, the budget of the Russian Federation collected only 1.1 billion rubles. For comparison, in January last year it was 3 billion rubles. "The situation remains really alarming,” he said in an interview with “Coal prices are very low now. Let us recall that in January 2018, the budget received 1.3 billion rubles, which is comparable to current payments. I do not remember that at that time, the Ministry of Finance was trumpeting about the risk of default. In addition, it should be recalled that a default is a failure to pay on loans on time. And the next payment is not yet soon."

The republic's income for this year is 26.2 billion rubles, while expenditures are 28.5 billion. The budget is primarily focused on corporate income taxes which is 10.5 billion rubles and personal income tax -- 6 billion rubles. Government grants and subsidies in the amount of 12 billion rubles have also been scheduled. Social obligations make up 70% of the Khakassia’s budget expenditures -- including 40% for the salaries of public sector workers. 

In Mamayev’s opinion, the real risk for the region might be estimated at 4 billion rubles. These are "bloated" revenues included into budget, which Khakassia may lose due to unfavorable market conditions. A total of 14 billion rubles, which officials are talking about, is the amount of money which they are planning to "wheedle out" from Moscow. 

"When Konovalov took up office, he gave a clear assessment of the economic results of his predecessor: "The entire Department of Economics will be dismissed because it was ineffective," Mamayev said. “But the department is headed by none other than a former finance minister of that very same economic bloc. As far as I understand, the purpose of all this show is to wait for the reaction of the federal Ministry of Finance – in monetary terms. It's interesting to see whether the federal agency is going to lay down demands such as dismissing all the people who worked on the budget for 2020 and “contributed” to development of the regional economy.