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16 June 2016

Money, regions and power

Political economics of the electoral cycle under way in Russia

The May primaries of the United Russia party kicked off the Russian 2016-2018 electoral cycle. The return to the mixed electoral system for the State Duma against the backdrop of the deep economic crisis brings the regions out of the shadow of Russian politics. The iconostasis of Putin’s entourage alone no longer tells the whole story.

The main source of suspense over the next two years will be the way regions fight for access to the resources in the hands of the Kremlin and the way the Kremlin manages this access in order to maintain the existing power system.

The goal of regional elites is to maintain their wellbeing and to increase their chances of political survival. The methods used to achieve this goal are aggravation of intra-elite competition, and reliance on their clientele.

The Kremlin’s goal is to maintain the existing system of distribution of power and of economic resources. The methods for attaining this goal are trading subsidies for loyalty.

The paradox is that, when it comes to bargaining, both parties are increasingly tempted to increase citizens’ tax revenues and thereby face the risk of clashing with them.

The phenomenon of the rentier state

The Russian state is a rentier whose economic stability is not decided by its citizens, businesses or regions. The position of regional elites is objectively weak in such a system. Their voice is not heard on military and foreign policy, nor is it heard on the problem of Russia’s economic crisis. The federal authorities do not intend to listen to this voice in the future either, since they do not intend to give up their monopoly on policy development and important decision-making based on material grounds.

In Russia, the lion’s share of tax revenues which make up the federal budget is derived from two taxes: natural resources extraction tax (NDPI) – 2938.6 billion rubles from January-November 2015 or 47% of all the tax revenues; and value-added tax (VAT) – 2150.5 billion rubles for the same period or 34.4%. Only 11 out of 83 regions account for 80% of these taxes:

 

Region

VAT

(billion rubles)

NDPI

(billion rubles)

Total

(billion rubles)

1

Khanty-Mansi Autonomous Okrug

191.82

1363.8

1555.61

2

Moscow

588.36

2.44

590.79

3

Yamalo-Nenets Autonomous Okrug

127.63

456.71

584.34

4

Tatarstan

37.7

155.09

192.79

5

Moscow Oblast

176.05

0.24

176.29

6

Krasnoyarsk Krai

34.68

128.01

162.69

7

Saint Petersburg

160.85

0

160.85

8

Orenburg Oblast

34.37

114.78

149.15

9

Samara Oblast

56.98

75.19

132.17

10

Perm Krai

29.76

83.08

112.84

11

Bashkortostan

26.19

74.61

100.8

 

Total

1464.39

2453.95

3918.32

 

A hugely disproportionate trend is apparent: even among these 11 regions, the remote and sparsely-populated Khanty-Mansi and Yamalo-Nenets Okrugs, and the relatively well-developed capital are the leaders in terms of tax revenues. There is simply no need to listen to the regions while regional elites consider it irrelevant to show elevated activity given the influx of revenue generated from major hydrocarbon deposits or within walking distance from the Kremlin.

These taxes account for barely half of all revenues of the Russian federal budget. Customs generates the other half. Export duties, the bulk of which also comes from hydrocarbons, generate 37.7% of budget revenue while a further 12.6% is collected on goods imported into the country.

In fact, the Russian rentier state exists thanks to customs, several oil-and-gas groups, fully controlled by the Kremlin, and a number of smaller oil-and-gas companies. And its main goal during the 2016-2018 electoral cycle is to maintain the existing system and, accordingly, ensure that the citizens and regions remain loyal.

Regions on the financial leash

One of the main tools for achieving this goal is federal subsidies for regions. The trading of these subsidies constitutes an ace up the Kremlin’s sleeve, and these resources are far from being depleted despite the crisis. This ploy will be used maximally during the 2016-2018 electoral cycle.

Subsidies account for 17.67% of regional revenues on average, although regional averages differ greatly. For example, this figure amounts to as little as 2.45% in Moscow, 13.47% in Tatarstan, 15.15% in the Perm Krai, 34.85% in the Kaliningrad Oblast, 62.98% in Kamchatka and as much as 85.57% in Ingushetia.

However, when we shift our attention from proportions to absolute numbers, the picture looks different. In 2014, slightly more than 1500 billion rubles was earmarked in the form of direct subsidies from the budget of the Russian Federation for the 83 regions. Among them, the following regions received subsidies much higher than the average:

 

Region

Subsidies

(billion rubles)

1

Yakutia

64.14

2

Dagestan

63.01

3

Chechnya

56.88

4

Moscow Oblast

56.68

5

Kamchatka Krai

39.30

6

Altai Krai

39.03

7

Moscow

38.09

8

Rostov Oblast

38.06

9

Krasnodar Krai

34.02

10

Saint Petersburg

32.39

11

Bashkortostan

32.05

12

Krasnoyarsk Krai

31.58

13

Stavropol Krai

30.46

14

Tatarstan

29.21

There is no clear principle that governs the distribution of resources from the federal budget. Yakutia, rich in diamonds, is awarded even more than the poor, troubled North Caucasus by the central government, and the Russian capital is competing over an extra billion with distant Kamchatka. It is the cocktail of Kremlin political considerations and the lobbying potential of the leadership of each of the regions that is at work here.

Subsidies are also used as a disciplinary tool – regional authorities spare no effort in securing them. This does not even broach upon federal special-purpose programs. Vast sums are spent on these programs, too.

Citizens are secondary for regional elites

Hypothetically, regions should depend on citizens and businesses since their budgets are replenished by taxes on the income and property of these very citizens as well as taxes on business profits. Accordingly, regional elites should be more in touch with their communities in contrast to the state, which exists as a thing in itself.

But in fact, the major taxpayers in the economically strong regions are the very same oil-and-gas groups and/or their subsidiaries. They are accompanied by local big businesses operating in trade, construction and industry. Personal income taxes in leading regions account for 1/3 of the revenue of their consolidated budget whereas property taxes, for just a few per cent. Moscow is an exception; personal income taxes make up almost half of the capital’s revenue.

Under these circumstances, regional elites simply have no incentive to represent the interests of local residents. Besides, the latter are hired as employees in the very same oil-and-gas related businesses or in the public sector and, therefore, their personal income tax is merely a derivative of the existence of the rentier state. It is only logical that, given such a constellation, an increase in their own wealth is objectively the purpose of the regional elites’ activities. The same situation is typical of all other regions in Russia and, what’s more, those regions are economically weak.

However, this “idyllic” picture contains a serious flaw: economic instability and redistribution of federal resources in favor of Vladimir Putin’s immediate entourage instills uncertainty in regional elites. Thus, the struggle for power and, therefore, available economic resources among regional elites, worsens.

Hence, the main goal of the regional elites in the 2016-2018 electoral cycle is to preserve their well-being and increase their chances of political survival.

Clientele as the “cannon fodder” of politics

Attainment of the set goal under the conditions of the economic crisis and limited lobbying potential takes place in a growing struggle amongst elites. This is evidenced both by the wave of criminal prosecutions of mayors, governors, high-ranking officials and businessmen close to the authorities which started back in 2015 in a number of regions, and scandals connected with the straw vote.

Representatives of regional elites try to take advantage of developed patron-client relationships maximally. The first steps in mobilizing the clientele were demonstrated during the primaries of United Russia. For example, judging by the results, administrative and financial heavy-weights were “backed” by candidates with no public, administrative or financial resources in many constituencies. They merely created an illusion of competition.

All in all, candidates of the ruling party who will make it to the State Duma in autumn in their constituencies will, to a large extent, be bound by their promises made not only to their voters directly, but also to those who help them shed the millstone of regional inner elite struggle. And, in some cases, such candidates will be patrons who rely on their own resources in their regions while, in others, they will be “clients” of governors or large companies who help them pave their way to parliament.

As a result, the main suspense of the 2016-2018 electoral cycle will be about the way regional elites, immersed in internal squabbles against the backdrop of the crisis, fight for access to the currently overflowing coffers of the rentier state, and the way in which the Kremlin manages this access in order to maintain the existing power system.

The paradox lies in the fact that, through their bargaining, both parties are increasingly tempted to increase citizens’ tax revenues. The authorities consider citizens in the economic sense but do not include them in their political calculations. Consequently, there is an ever-growing risk that the Kremlin and regional elites will clash with citizens in the political field. 

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