Financial stability ranking of the Volga Federal District’s regions

An analysis of financial stability of the regions in the VFD

• The Volga Federal District (VFD) is home to several major industrial centers related to machine building. In a number of regions, a large part of gross regional product (GRP) is contributed by mineral extraction. Agriculture is also a major sector of the economy, but the regions where its share in GRP is highest are characterized by lower per capita GRP, which limits their ability to finance budget expenditures.

• Dependence on transfers fr om the federal budget is higher in the VFD than the average for Russia. Tax and non-tax revenues (TNTR) in the VFD regions averaged 73% of their total revenues in 2017–2021, which is below the national average of 77%.

• The VFD regions have low flexibility of budget expenditures. According to ACRA’s assessments, capital expenditures[1] in this federal district averaged around 10% of total expenditures in 2017–2021 (amid a national average of 12%). The share of capital expenditures exceeded the national average in only three of the 14 regions.

• In 2017–2021, the budgets of the VFD regions were largely executed with surpluses. Only in 2020 was the combined financial result of the VFD regions negative, which was due to higher spending caused by the COVID-19 pandemic and a fall in internal revenues in a number of regions due to the unfavorable situation in the oil market.

• The debt load of the VFD regions is falling. Fr om 2017 to 2021, the ratio of the regions’ debt to internal revenues declined from 53% to 39%. The largest share in the debt structure of the VFD regions falls on long-term budget loans granted at preferential interest rates.

• The combined account balances of the VFD regions have more than doubled over the past five years. In five regions, balances as of the end of 2021 exceeded average monthly expenditures for the aforementioned year, and only in two regions the ratio of balances to average monthly expenditures was lower than 40%.

• When compiling this financial stability ranking of the VFD’s regions, ACRA identified three groups of regions. The highest indicators that reflect financial stability of regional budgets were found in the regions with the most developed extractive and manufacturing industries. Regions from the second group on average have a lower share of internal revenues, higher debt load, and lower liquidity reserves compared to the regions from the first group. The regions that are part of the third group have significant budget deficits, substantial debt loads, and low budget liquidity.

¹ Includes expense codes 241, 243, 400, 522, 821.

VFD REGIONS ENJOY HIGH ECONOMIC DIVERSIfication

The VFD regions are characterized by a high level of economic diversification. The federal district is home to major industrial centers with developed chemicals and machine building industries, minerals are extracted (mainly oil), and a developed agricultural sector is present.

Manufacturing companies contribute the largest share of GRP in the VFD (21.8% in 2020). The structure of shipped products of the manufacturing industry in the VFD was dominated by the following sectors in 2020: petroleum products (21.3%), machine building (19.5%), chemicals (15.3%), and food production (14.3%). The share of manufacturing companies in GRP in 2020 exceeded 20% in nine of the 14 regions of the VFD. Manufacturing companies account for the largest share of GRP in the Perm Krai (29.8%), Kirov Region² (28.2%), and the Nizhny Novgorod Region (28.1%). In the Orenburg Region³, the share of manufacturing companies in GRP is the smallest among all the regions of the VFD (11.8% in 2020).

The share of mineral extraction in the GRP of the VFD declined from 15.6% in 2019 to 11.9% in 2020, which ACRA assumes may be the result of an unfavorable situation in the hydrocarbons market. Oil and natural gas production dominate (77.2% in 2020) in the structure of shipped products for this area of activity. Mineral extraction occupies a significant share of GRP in only five of the federal district’s regions — the Orenburg Region (35% of GRP in 2020), Republic of Tatarstan⁴ (21.1%), Udmurt Republic (20.9%), Perm Krai (17.1%), and the Samara Region⁵ (13.4%). In the other regions it accounted for less than 5% of GRP in 2020.

² ACRA rating BBB+(RU), outlook Stable.
³ ACRA rating A+(RU), outlook Stable.
⁴ ACRA rating AAA(RU), outlook Stable.
⁵ ACRA rating AA(RU), outlook Stable.

Figure 1. The manufacturing and extractive industries account for a third of the GRP of the VFD’s regions

⁶ Data for 2020.

In terms of the volume of agricultural products, the VFD ranked second among all federal districts in 2020. Three of the 10 Russian regions that have the largest volumes of agricultural products in GRP are located in the VFD: the Republic of Tatarstan, Republic of Bashkortostan, and the Saratov Region. The highest share of agriculture in GRP in 2020 was in the Penza Region (18.7%), Republic of Mordovia⁷ (15.7%), Mari El Republic (14.6%), and the Saratov Region (14.5%).

GRP per capita in the VFD stood at 73% of the national indicator in 2020. The Republic of Tatarstan was the only region wh ere this indicator was higher than the Russian average. In addition, a rather high level of GRP compared to the national average (around 70–80%) is present in regions wh ere a significant share of GRP comes fr om mineral extraction — the Perm Krai, and the Orenburg and Samara Regions. The lowest per capita GRP is found in the Chuvash Republic and the Republic of Mordovia — around 45% of the Russian average.

⁷ ACRA rating BB(RU), outlook Stable.

The VFD’s dependence on transfers from the federal budget is higher than the average for Russia

In 2017–2021, the share of internal revenues (TNTR) in the VFD regions averaged 73% of their total revenues, which is lower than the national average of 77%.

Figure 2. The share of TNTR in the total revenues of the VFD regions fell from 79% to 68% in 2017–2021

Prior to 2019, the share of TNTR in the total revenues of the VFD’s budget stood at around 76–79%. In 2020, the district’s regions, like other Russian regions, received additional transfers to finance measures to fight against the coronavirus pandemic. In addition, amid an unfavorable situation in the hydrocarbons market, a number of the district’s regions received significant subsidies to support budget balancing measures in order to make up for lost income. As a result, in 2020, 38% of revenues of regional budgets came from federal budget transfers. In 2021, the share of transfers fell to 31%.

Last year, 12 VFD regions received subsidies to equalize budget sufficiency, with the exception of the Republic of Tatarstan and the Samara Region. Nevertheless, the share of subsidies in total transfers from the federal budget to the VFD was lower than the average for Russia.

In 2021, out of all the regions of the district, the share of internal revenues exceeded the national average only in the Republic of Tatarstan and the Perm Krai. In 2017–2019, in addition to these two regions, the share of internal revenues was higher than average also in the Samara and Nizhny Novgorod Regions. In 2020, out of the regions of the VFD, only in the Republic of Tatarstan this indicator was higher than the average for Russia.

The lowest share of internal revenues among the VFD regions in 2017–2021 was recorded in the Mari El Republic and the Chuvash Republic (TNTR accounted for approximately 50% of total revenues on average for this period).

In absolute terms, one of the largest recipients of transfers from the federal budget in the VFD is the Republic of Bashkortostan, which also leads by volume of subsidies to equalize budget sufficiency. Nevertheless, relative to this region’s total revenues, the average share of transfers for the past five years was around 29%.

In the structure of internal revenue of the regions of the VFD, the largest part falls on profit tax proceeds — about 40% in 2021. These revenues are unevenly distributed among the district’s regions: their share is the highest in the regions wh ere mining and machine building occupy a significant share of the economy. In 2021, the highest share of profit tax in the structure of TNTR was in the Perm Krai (53%), the Orenburg Region (47%), the Republic of Tatarstan (43%), and the Samara Region (43%).

Figure 3. The share of TNTR exceeded the Russian average in only two regions of the VFD in 2021

the share of capital expenditures is below the national average

An important factor ensuring a budget’s resilience to potential deterioration of the situation in the economy is the flexibility of its expenditure part. The amount of capital expenditures is generally used to assess this flexibility. In some cases, a portion of planned expenditures (in contrast to salaries, social benefits, and current expenses of state-funded organizations) can be attributed to future periods, which allows costs to be reduced when revenues drop. At the same time, when revenues grow, capital expenditures contribute to the development of regional infrastructure and, consequently, economic growth.

According to ACRA’s estimates, capital expenditures in the VFD in 2017–2021 averaged approximately 10% of total expenditures compared to the national average of 12%, while the Republic of Tatarstan, the Samara Region and the Republic of Mordovia exceeded the national average. Given the low share of capital expenditures in most regions of the VFD, the possibilities of reducing their expenditures in crisis conditions are limited, as well as the possibilities of developing their own infrastructure.

Figure 4. Only three VFD regions had an average share of capital expenditures in total expenditures in 2017–2021 that was higher than the national average

Sources: Treasury of Russia, ACRA

over the past five years, Most regional budgets in the VFD were executed with a surplus

From 2013 to 2021, the total financial result of the execution of the budgets by the VFD regions was negative five times and positive four times. The largest deficit was recorded in 2020 (RUB 122 bln, or 11% of TNTR), and the largest surplus was recorded in 2021 (RUB 92 bln, or 6% of TNTR).

In 2017–2021, the budgets of the VFD regions were executed mainly with a surplus. Only in 2020, the aggregate financial result of the VFD regions was negative, which was caused by growing expenditures on the back of the COVID-19 pandemic and a decrease in internal revenues in a number of regions of the district due to unfavorable oil market conditions.

Only the following four regions of the VFD on average⁸ executed budgets with a deficit in 2017–2021: the Republic of Mordovia (-9%), the Ulyanovsk Region (-8%), the Udmurt Republic (-7%), and the Republic of Bashkortostan (-5%). The Samara Region (7%), the Orenburg Region (6%), and the Mari El Republic (6%) demonstrated the most significant budget surpluses relative to their internal revenues over the past five years. Only three regions executed their budgets with an annual surplus in 2017–2021: the Samara Region, the Kirov Region, and the Chuvash Republic.

⁸ Five-year average ratio of budget execution to TNTR.

Figure 5. Over the past five years, the aggregate financial result of budget execution by the VFD’s regions was negative only in 2020, RUB bln

budget loans dominate the debt structure of the VFD regions

From 2017 to 2021, the public debt of the VFD regions increased by 5% in absolute terms (+RUB 25 bln), but their debt load relative to their internal revenues decreased from 53% to 39%. The VFD regions’ public debt structure is dominated by budget loans (70% as of January 1, 2022). Bonds and bank loans account for 22% and 6% of debt obligations, respectively, and the remaining portion includes state guarantees.

As of January 1, 2022, the Republic of Mordovia (ratio of debt to TNTR is 166%) and the Udmurt Republic (95%) were the leaders in terms of debt load. This ratio exceeded 50% in the Ulyanovsk, Saratov and Nizhny Novgorod Regions (77%, 64% and 59%, respectively). The lowest debt load was recorded in the Perm Krai (9%).

Budget loans are present in the debt structure of all the VFD regions. As of January 1, 2022, the lowest share of budget loans was observed in the Samara Region (40%). In the Perm Krai, the Chuvash Republic, the Republic of Tatarstan and the Republic of Mordovia, on the contrary, almost the entire volume of debt obligations is represented by budget loans. The terms of budget loans include longer repayment periods and subsidized interest rates, which makes them extremely attractive.

Figure 6. Over 2017–2021, the debt load of the VFD regions declined from 53% to 39% of TNTR, RUB bln

As of January 1, 2022, nine regions of the VFD had outstanding bonds: the Nizhny Novgorod, Samara, Ulyanovsk, Orenburg, Saratov and Kirov Regions, the Republic of Bashkortostan, the Udmurt Republic, and the Mari El Republic. In the Samara Region, the share of bonds in the debt structure was 60%, and in the Republic of Bashkortostan and the Nizhny Novgorod Region it was 56% and 47%, respectively. The Kirov Region only has one outstanding bond with a par value of RUB 1,000.

As of January 1, 2022, bank loans were present in the debt portfolios of only half of the VFD regions (the Saratov, Penza, Kirov and Ulyanovsk Regions, the Republic of Mordovia, the Udmurt Republic, and the Mari El Republic). The Mari El Republic had the highest share of bank debt (33%). The maturity of bank loans, as a rule, does not exceed three years, so a high share of bank loans in the structure of debt portfolios increases refinancing risks, and in the long term, carries significant interest rate risks.

In 2021, the Government of the Russian Federation granted budget loans due in 2029 to regions of the Russian Federation. This made it possible to reduce the interest expenses of the regions and the refinancing risks of debt obligations. This also was the main factor in reducing the amount of bank debt of the VFD regions from RUB 148 bln (26% of debt obligations) at the end of 2020 to RUB 37 bln (6%) at the end of 2021.

Figure 7. As of January 1, 2022, the Republic of Mordovia had the highest debt load, RUB bln

Sources: Russian Ministry of Finance, Treasury of Russia, ACRA

total balances in the vfd regions’ accounts have doubled over the past five years

An important factor that increases budget resilience to potential cash gaps is the availability of sufficient account balances. Along with borrowings, account balances can also be used by regional authorities to cover budget deficits. In addition, regions that receive relatively small transfers can manage their temporarily free funds by placing them in bank deposits, and starting from 2021, after budget balances were consolidated in a single treasury account (STA), all regions of the Russian Federation can earn interest income by depositing their balances.

The aggregate balances held in the accounts of the VFD regions as of the end of 2021 exceeded the amount of balances at the end of 2017 by two times. The largest increase in percentage terms was demonstrated by the Orenburg Region (account balances, including deposits, increased by 123 times) and the Penza Region (balances increased by 43 times), and in absolute terms by the Samara and Nizhny Novgorod Regions (by RUB 31 bln and RUB 24 bln, respectively). Account balances declined in only two regions: the Republic of Bashkortostan and the Udmurt Republic.

Account balances are distributed among the VFD regions unevenly. As of January 1, 2022, one fifth of the entire district’s account balances belonged to the Samara Region, and 16% and 15% belonged to the Nizhny Novgorod Region and the Republic of Tatarstan, respectively.

In five VFD regions (the Orenburg Region, the Samara Region, the Chuvash Republic, the Nizhny Novgorod Region, and the Perm Krai), account balances on the specified date exceeded average monthly budget expenditures in 2021. In the Republic of Tatarstan, account balances covered 95% of average monthly expenditures. The ratio of balances to average monthly expenditures exceeded 40% in 12 regions of the VFD.

The Udmurt Republic (3%) and the Ulyanovsk Region (3%) had the lowest ratios of account balances as of January 1, 2022 and average monthly expenditures in 2021. Such a small reserve of internal liquidity increases the risks of cash gaps for these regions and their dependence on external liquidity sources.

In 2021, five VFD regions deposited their temporarily free funds with banks (the Samara Region, the Republic of Tatarstan, the Orenburg Region, the Republic of Bashkortostan, and the Perm Krai). All the other regions also received income in 2021 from their funds held in the STA and managed by the Federal Treasury Department.

a developed industrial sector facilitates the financial stability of vfd regions

ACRA based its assessment of the financial stability of VFD regions and ranking on the following factors⁹:

• Budget self-sufficiency (average ratio of TNTR to total revenues in 2017–2021);

• Flexibility of budget expenditures (average share of capital expenditures in total expenditures in 2017–2021);

• Budget deficit ratio (average ratio of deficit/surplus to TNTR in 2017–2021);

• Debt load (ratio of debt to TNTR as of January 1, 2022);

• Internal liquidity ratio (ratio of account balances as of January 1, 2022 to average monthly expenditures in 2021).

⁹ Factors are identical to those applied in the Ranking of the regions of the Far Eastern Federal District by level of financial stability and Ranking of the regions of the Siberian Federal District by level of financial stability. Factor score ranges vary by federal district.

Table 1. ACRA’s financial stability ranking of VFD regions

Source: ACRA

Table 1 shows that VFD regions can be placed into three groups by their financial stability.

The Agency includes the Samara Region, the Republic of Tatarstan, the Orenburg Region, the Perm Krai, the Republic of Bashkortostan, and the Nizhny Novgorod Region in the first group. These regions have a relatively high share of TNTR in total revenues, relatively low debt load, and significant account balances, as well as the highest level of industrial development (mining and processing segments) among the VFD regions.

Figure 8. VFD regions grouped by financial stability

Source: ACRA

The second group includes the Chuvash Republic, the Kirov Region, the Penza Region, the Saratov Region, and the Mari El Republic. These regions on average have a lower share of internal revenues, higher debt load, and lower liquidity reserves.

The third group includes the Republic of Mordovia, the Ulyanovsk Region, and the Udmurt Republic. The budgets of these regions were executed with significant deficits over the past five years, which caused heavy debt loads and low levels of budget liquidity. In ACRA’s opinion, a more conservative fiscal policy could help reduce the debt load and increase the liquidity of the budgets of these regions in the medium term.