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Regions cut costs, boost debts

The regional budget is cut by one fourth, but the export-oriented industry still keeps Murmansk economy afloat.

Russian regions feel the pain as the country’s economy spirals into depression. In Murmansk Oblast, the governor cuts her budget with 25 percent.

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Governor Marina Kovtun argues that economic stability in Murmansk Oblast is not in jeopardy and that all the major companies in the region continue to support the regional budgets. However, at the same time she announces a 25 percent  budget cut, which will affect all budget posts, except social spending.

Murmansk has over several years struggled with major budget deficits. In 2014, the deficit amounted to 9,8 billion rubles, or about 15 percent, figures from the regional statistical service show.

Murmansk is not alone. Most of the Russian regions are forced to make budget reductions as the country dips into recession. In addition, they increase their debts in order to keep up with obligations dictated by Moscow. In 2014 the federal subjects boosted their accumulated debts with about 18 percent and as many as 35 of them now have debts exceeding 50 percent of their regional budgets. The lending was the most intensive in December, Newsru.com reports.

That debt burden is getting increasingly heavy to carry. According to Vladimir Solovyov, a leading representive of the Russian Communist Party, a number of regions will bankrupt unless they get more money from Moscow. His party now calls for a major new tax reform, which will leave the regions with a substantially bigger share of their tax revenues. If adopted by the State Duma, the reform will leave the regions with 60 percent of the taxes paid by companies, newspaper Nezavisimaya Gazeta reports. Currently, Moscow grabs 70 percent of all the taxes collected in the regions.

The regional budget cuts will inevitably heighten pressure also on the social sector. Following the higher level of inflation, consumer power is vanishing for big parts of the population and especially for weak groups like pensioners. As described by Patchwork Barents, the regional data portal, consumer price growth in Murmansk only the last two months amounted to as much as seven percent.

Estimates from the IMF, announced in late January, indicate a 3 percent shrinking of the Russian economy in 2015 and another one percent in 2016.

In Murmansk, the regional anti-crisis plan will lead to cuts in government staff and lower salaries, as well as a general “optimization” of expenditure. However, the regional economy will still be able to lean on the major industrial companies operating in the region. These companies, most of them export-oriented, are making good money despite the economic downturn. As a matter of fact, thanks to the plummeting ruble rates, the companies are boosting their financial results. As previously reported, Severstal, which operates the iron ore mines in Olenegorsk, in 2014 had its best result in six years, and Norilsk Nickel, the owner of regional nickel and copper miner Kola GMK, significantly increases its margins. Tax revenues and other kind of tranfers from these companies will Murmansk afloat during the crisis.

The situation is worse however for the neighoring regions, which do not have the same export-oriented industry. Back in 2013, before the current crisis, revenues from the profit tax in Arkhangelsk Oblast dropped by 11 percent, in Komi Republic – by nearly 30 percent, and in Karelia almost twice.