Wealth Gap Widens as Pandemic Hits Russia’s Poorest Regions Hard

The coronavirus pandemic is set to widen the gulf between the richest and poorest parts of Russia as the government pushes the country’s far-flung regions to fend more for themselves.

The federal authorities are pushing regional governments to borrow more to help pay for rising health care and other social costs during the pandemic. Regions will increase their net borrowing by 400 billion rubles ($5.3 billion) next year, compared with almost zero in 2020, according to estimates from NKR, Russia’s national credit ratings agency. Moscow will borrow a similar amount on its own.

“The strongest regions will win out, the weakest will get even weaker,” said Stanislav Ponomarev, who invests in regional debt as a money manager at Transfingroup JSC in Moscow. “Credit quality will decline.”

Wealth Gap Widens as Pandemic Hits Russia’s Poorest Regions Hard

Wealth inequality is already so high between different parts of Russia that a worker in Moscow can expect to earn four times more than someone in one of the four poorest regions. The gap has been exacerbated by the pandemic, which had a devastating impact on areas with underfunded health care.

Russia’s 85 regions get a share of the money collected through taxes and other levies based on their spending requirements, and many face strict limits on how much they can borrow after taking on too much debt. Those rules will be reviewed in 2021, most likely to allow more borrowing. The Finance Ministry didn’t immediately respond to a request for comment.

“Until recently the regions could rely on transfers from the center,” said Elina Ribakova, deputy chief economist at the Institute of International Finance in Washington. “Regional governors are suddenly finding themselves in a position where they need to support local economies and become business friendly if they want to get any revenue to spend.”

Russia’s Recovery Has Lost Momentum, Further Decline Is Likely

Budgets across the country have been hurt by a drop in tax revenue after incomes sank 4.3% this year. Regions that rely on tax revenues from the energy sector have also lost out. S&P Global Ratings estimates that regional budgets will run the widest deficits in two decades this year.

St. Petersburg raised its borrowing limit several times in 2020 to 127 billion rubles to cover budget losses, according to the city’s government. The ceiling will increase to 225 billion rubles next year. The city was hurt by a tourism slump during the pandemic.

Public debt has ballooned this year in the mountainous republic of Ingushetia, one of Russia’s poorest regions. The republic, rocked by years of violence following the wars in neighboring Chechnya, is dependent on transfers from the federal budget, which this year failed to cover excess spending fast enough to help fight the pandemic.

“Regions have more responsibilities than opportunities in terms of their own policies,” said Sofya Donets, chief economist at Renaissance Capital in Moscow. “Those with a larger service sector will be hit harder by the pandemic and the disparity of regional revenue will grow.”

©2020 Bloomberg L.P.

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