Whether the Trump administration will or won’t soften U.S. sanctions against Russia has been in the news — a lot. There’s been far less analysis of what’s actually going on in Russia, however.
A closer look suggests the Kremlin faces serious domestic problems — far beyond the scope of U.S. policy. Moscow’s relations with regional governments are fraying, threatening the centralized authority upon which President Vladimir Putin’s rule relies.
Amidst long-term structural decline, the Russian economy is entering its fourth year of hardship. Depressed global oil prices and sanctions have hurt the Russian economy, though it had been stagnating since 2013.
In October 2016, even the Russian Ministry of Economic Development admitted that living standards are unlikely to improve until 2035. Although the International Monetary Fund projects modest growth in the Russian economy in 2017 — after contracting 3.7 percent in 2015 and .6 percent in 2016 — a strained federal budget is pitting the periphery against the center.
Regional governments are battling for federal funds …
Russia’s regional governments are positioning themselves to hold onto their respective shares of the shrinking federal budget. In August, Samara governor Nikolai Merkushkin warned citizens that the region would need “to fight for every ruble from the federal budget.”
In September, the central government adopted a plan to increase the federal budget’s share of Russia’s national 20 percent profit tax from two to three percent. This would give Moscow more rubles to transfer to cash-strapped regions. But just 14 of Russia’s 83 regions send more revenues to Moscow than they receive through subsidies. So this approach would mean narrow but deep losses for wealthier regions.
… and becoming increasingly frustrated with Moscow
Tatarstan’s President Rustam Minnikhanov publicly ridiculed the plan in December as “stupidity” and “an extremely dangerous move,” in a jolt to Russia’s typically cloistered political culture. Historian Edward Keenan called this tradition of secrecy, summed up in the rule ‘Iz izby soru ne vynesi’ — literally, “Do not carry rubbish out of the hut” —- the defining feature of Russian statecraft since Ivan the Terrible.
Minnikhanov reiterated his dissatisfaction with Kremlin policy in early January at Moscow’s Gaidar Forum, a platform for leaders in politics and business to discuss economic issues. This time, Minnikhanov’s counterparts from across the Russian Federation backed him up.
The governor of Kaluga, another net-donor region, lamented, “God forbid if you manage to grow your budget revenues — you will immediately be eliminated from federal subsidy programs.” Meanwhile, the governors of Kaliningrad and Ulyanovsk called for the Kremlin to transfer more executive power to the regions.
Some observers then accused the Kremlin of a crude ploy to distract the media from the governors’ show of dissent: dispatching the leader of a pro-Putin biker gang to the Forum to promote patriotic tourism in Russian-annexed Crimea.
Minnikhanov leading the governors’ protest is also significant. In the 1990s, under Minnikhanov’s predecessor, Tatarstan was first Russian region to successfully negotiate a bilateral treaty with Moscow and has since acted as bellwether for center-periphery interaction.
Putin also created a regional debt crisis
An intractable regional debt crisis further fuels discontent. In 2012, campaigning for his third term in the Kremlin, Putin ran on a populist platform that included a promise to increase public-sector wages by up to 50 percent by 2018. To cement his popularity among employees of Russia’s state bureaucracy, within hours of his inauguration Putin codified these promises into a series of executive orders, the “May Decrees.”
But the federal budget provided little funding to the regional authorities who would be responsible for paying the higher wages to state employees — nearly one-fourth of the country’s workforce. The worst-off regions resorted to high-interest loans from commercial banks and their deficits quickly spiraled out of control.
In eight Russian regions, debt loads exceed fiscal revenues when subsidies are not considered. The situation remains most dire in regions that did not receive early assistance from the central government. The Kremlin, meanwhile, simultaneously demands that regional administrations balance their budgets while also implementing the very decrees that have bankrupted them.
Prime Minister Dmitry Medvedev frequently admonishes regional governments to become more fiscally self-sufficient, threatening to replace governors who fail to rein in their budgets.
But with Russia’s 2018 presidential elections approaching, Putin remains transfixed by the implementation of the popular but costly May Decrees. Ministry of Finance 2017 plans further complicate matters since officials intend to slash the low-interest credit available to indebted regions.
How do these fiscal pressures play out at the regional level?
Mounting pressure on the regions is dredging up grassroots activism. Protests over unpaid wages are rising across Russia. Even the main soccer club in Mordovia, a highly indebted Russian region, has not paid its players’ salaries since March 2016. The team is currently on strike, an embarrassing fact considering that Mordovia’s capital Saransk is supposed to host matches during the 2018 World Cup.
The World Cup itself is stoking regional frustrations. At a demonstration in Kurgan Oblast on January 27, protestors exclaimed their region’s entire annual budget is less than the cost of the World Cup soccer arena currently under construction in St. Petersburg.
If protestors continue to link the Kremlin’s symbolic mega-projects to worsening economic conditions in the regions, the ruling party could find itself in a bind as the 2018 presidential election approaches.
With internal fiscal realities already precipitating problems in Russia’s center-periphery relations, whatever gains the Kremlin may hope to get from the Trump presidency will be unlikely to change this dynamic.
Christopher Jarmas is a master’s candidate in Russian, Eastern European, and Central Asian area studies at Harvard University.