1. Russian Regions: Economic Development Trends and Prospects
Crimea Annexation, Sanctions and the Other Risks
Natalia Zubarevich
MSU-IISP

2. Trends and Risks Russian regions economic stagnation
Russia's foreign trade: EU and China. Is shift to the East possible?
2014: Money incomes stagnation
Risk of federal budget dependence on oil&gas revenues
Regional budgets destabilization
Regional projection of sanctions
Crimea annexation costs

3. Economic Development Trends and Risks
Crimea

4. Economic stagnation started before sanctions Industrial output dynamics: Russia total – 0% (2013 to 2012), 1,5% growth (Jan.-Sep. 2014) Decline – 1/3 of regions, the worst - Urals, Siberia, North-West Industrial output dynamics, 2013 to 2012, %
Center
N-West
South NC
Volga
Urals
Siberia
Far East

5. Investment decline is accelerating Russia total: -0,2% (2013 to 2012), - 2,5% (Jan-Sep 2014) Decline – 40% of regions. Far East, North-West and Siberia are the worst Investment dynamics, %
Center
N-West
South NC
Volga
Urals
Siberia
Far East

6. Turn to the East: Far East share in total investment is small and has declined after APEC Summit and eastern pipeline construction Federal Districts share in Russia total investment, %

7. FDI decline. Russian BB offshores FDI prepotency Foreign Direct Investment to Russia, $ bln
TNK-BP sale to Rosneft (offshore)
China's FDI share – 1,3%
Cyprus and the Netherlands FDI share – 54% (Russian BB)

8. FDI: Far East is behind exepting Sakhalin (PSA) Share of regions in total FDI, %
2008
2009
2010
2011
2012
2013
Russia
100
Center 46 58 59 44 41 54
Moscow 32 36 27 22 23 40
Moscow region 8 13 16 14 7
Kaluga region 2 3 4
North-West 12 15 17
Leningrad region 6
Ct-Petersburg 5
Volga 9
Far East
Sakhalin region
Urals 10
Siberia
South

9. Russia's Foreign Trade 2013. Turn to the East?
Export
$ mln %
Import
Total
526392
100
317806
Europe total
264146
50,2
133393
42,0
Netherlands
70126
13,3
Germany
37916
11,9
Italy
39315
7,5
14554
4,6
37028
7,0
France
13012
4,1
Poland
19582
3,7
8334
2,6
United Kingdom
16449
3,1
8106
Finland
13308
2,5
5846
1,8
9203
1,7
5409
Switzerland
8878
Czech Republic
5318
Belgium
7727
1,5
Spain
4915
China
35631
6,8
53212
16,7
Turkey
25500
4,8
USA
16537
5,2
Japan
19649
13563
4,3
11196
2,1
7256
2,3
CIS countries
73490
14,0
41309
13,0
Ukraine
23796
4,5
15791
5,0
Belarus
20028
3,8
13555
Kazakhstan
17460
3,3
9011
2,8

10. Quick shift to China is impossible Russia's Foreigh Trade, $ bln
Export to China
is 7,5 times less
than to Europe

11. Rissian regions foreigh trade: European direction dominates
Asia

12. Money incomes growth ends off Putin's social contract "Political stability in exchange for incomes growth" disappears Real money incomes dynamics to the previous year, %
2009
2010
2011
2012
2013
2014
Jan.- Aug.
0.9
3.8
1.1
4.8
3.6

13. Money incomes decline: Far East, Siberia, Urals, North-West, Center including Moscow Money incomes dynamics, Jan-Aug 2014 to 2013, %
Center
N-West
South NC
Volga
Urals
Siberia
Far East

14. Risks of money Income inequality: Money incomes of 40%
Russians (1-2 quintails) are still under the Soviet times level
Real money incomes dynamics for quintale groups
crisis
quintale
quintale
Source: IISP (L.Ovcharova)
Russia total

15. Resource rent: Share of oil & gas taxes and dues constitutes 50% of federal budget revenues (2013) Mineral extraction tax, 80% of custom dues, 1/3 excise duty
Federal budget revenues 2014
Oil prices drop is compensated
by ruble weakening:
-1$ per barrel bln rub
-1 rub/$ exchange rate
+200 bln rub

16. Spatial structure of taxes going to the federal budget: 4 regions give 60% (MET & VAT), 75 regions – 30% Share of regions, % (2013)

17. Decline of federal budget transfers and reduction of regions support – no connection with sanctions

18. Regional budgets destabilisaton – no connection with sanctions 2013: Profit tax drop due to economic stagnation and reduction of transfers from the federal budget. 2014: Regional budgets revenue growth Regional budgets revenue dynamics, %

19. Putin's decrees to increase wages in public sector were aimed to keep political support. Regions have to pay for it. Regions' budget expenditures dynamics, %

20. Russian regions average –8%
Regions' budget deficit has grown 2,3 times – no connection with canctions Deficit, % of region's budget revenues
Russian regions average –8%

21. Russian regions average –31%
Debts: 40% of regions are in dangerous situation Regional and municipal debts – 2 trln rub (42 billion euro) – debts are stable (no growth) Debts (Oct. 2014), % of region's budget revenues without transfers
Russian regions average –31%

22. Influence of sactions: oil&gas extracting regions,
federal cities and a few industrial regions
Crimea

23. Russia's counter-santions: food import prohibition Russia's dependency on import
1992
2000
2005
2008
2009
2010
2011
2012
2013
Meat and meat products, mln ton
Production
8,3
4,4
5.0
6,3
6,7
7,2
7,5
8,1
8,5
Import
1,4
2,1
3,1
3,2
2,9
2,8
2,7
2,5
Share of import (incl. reserves), % 13 30 36 31 28 26 25 23 21
Milk and milk products, mln ton
47,2
32,3
30,8
32,4
32,6
31,8
31,7
30,7
4,7
7,1
7,3 7
8,2
7,9
9,4 6 12 18 17 20 19 22

24. Meat production ths ton
Domestic production growth prospects are more
favorable for poultry and pigs, not for cattle
Meat production ths ton
Total number
of livestock
mln
Years
Cattle
Pigs
1992
52,2
31,5
2000
27,5
15,8
2005
21,6
13,8
2008 21
16,2
2009
20,7
17,2
2010 20
2011
20,1
17,3
2012
18,8
2013
19,5
19,2
2013 to 1992 drop, times
2,7
1,6
Lack of budget resources
to support production growth

25. Crimea problems and Russia's Policy
Water supply (irrigation for agriculture). Market price for water from Ukraine (mainly needed for agriculture) – 400 mln $, agriculture output in Crimea – 120 mln $.
Lack of infrastructure: electric power deficit, poor conditions of the road network
Logistic problems: railroad traffic restrictions, bridge construction is needed
Low budget revenues: transfers from Ukraine budget – 60% of Crimea budget revenues
Shadow economy dominates

26. Crimea programs under development
Federal Program variants: - 7 bln euro (320 bln rub) - 23 bln euro (1100 bln rub) - 25 bln euro (1200 bln rub)
Free Economic Zone?
Gambling zone?
State enforcement Russian BB to invest? (Sochi case) – big risks for business
TRANSFERS!
April – August 2014 (5 months) – 67 bln rub, in annual terms – 161 bln rub, + pensions transfers – 200 bln rub total per year
Share of transfers – 83% of total Crimea budget revenues (like Chechen Republic)

27. Crimea costs are big but bearable for Russia's budget
15%
13%
10% of total transfers to the regions (1560 bln rub in 2013)
It is comparable to: - 2% of all regions budget expenditures - 1,5% of federal budget expenditures
Long-term Crimea costs (+infrastructure) are comparable to Sochi Olimpic Games
Federal budget investment redistribution is on the way (Sochi case)
10%
Transfers from federal budget, bln rub

28. Conclusion
Negative internal factors are still more significant than canctions
"Turn to the East" seems to be fairy tale
Federal authorities are able to keep regions budget destabilisation under control
"Crimea costs" for Russia budget will be bearable
They will be higher for Russian business because of investment climate deterioration and problem of corporate debts ($700 bln)
"Crimea costs" for Russians – back in USSR
How long movement to the Soviet past will continue? Inertia is huge …