Minus twenty

Profit tax revenues have not been a driver of higher revenues since this July. Given the limited information about budget execution, ACRA has relied on preliminary data published on the Unified Portal of the Budget System of the Russian Federation (UPBS) for this analysis. As of 9M 2022, the total nonconsolidated revenues of Russian regions had grown by 19% compared to the same period in 2021 and amounted to RUB 12.66 tln.

Although this was generally due to higher tax and non-tax revenues (TNTR) during the analyzed period (an increase of RUB 1.68 tln), transfers also grew, by RUB 300 bln.

Figure 1. TNTR has exceeded last year’s indicators almost every month in 2022

In terms of TNTR, the dynamics of revenue execution have been better than last year, except in July, when TNTR declined by 4%. At the same time, proceeds fr om corporate income tax (CIT) most significantly exceeded the 2021 indicators in the period up to May, which for the most part reflects the impact of a successful last year for many industries.

Fr om July to September 2022, monthly CIT revenues were lower than in the same months in 2021, which slowed down the rate of growth of total TNTR. A 30% decline in July led to total TNTR shrinking, however, in August and September this decrease was not as significant, so total TNTR increased. At the same time, according to ACRA’s calculations, CIT proceeds were 20% lower in Q3 2022 compared to Q3 2021.

Other key taxes — personal income tax, total income tax, and partly property tax — recorded mostly positive dynamics.

Total CIT proceeds for 9M 2022 are currently 22% higher than proceeds from the same period in 2021, and this is driven by higher CIT revenues at the start of this year. At the same, a quarter of Russia’s regions have already experienced a decline of CIT revenues, which was strongest in those wh ere the metallurgy sector plays a major role in the local economy. For example, the Lipetsk, Belgorod, and Kursk Regions (decline of 46%, 40%, and 37%, respectively), the Republic of Karelia (-21%), and the Chelyabinsk, Vologda, and Sverdlovsk Regions (decline of 21%, 19%, and 10%, respectively). The high base effect was working in many of these regions, as described by ACRA in more detail in the research paper Analysis of Russian Regions’ Budget Execution in 2021 and Budget Plans for 2022. The largest growth of CIT was recorded in the regions wh ere coal mining plays a significant role — the Kemerovo Region and the Republic of Khakassia (growth of 144% and 175%, respectively). Similar dynamics were observed in regions that generate the largest part of their revenues fr om oil and gas production or oil refining — St. Petersburg (+134%), the Astrakhan and Omsk Regions (growth of 73% and 47%), the Republics of Tatarstan, Yakutia, and Komi (growth of 58%, 47%, and 46%), the Sakhalin, Tomsk, Ryazan, and Irkutsk Regions (growth of 78%, 60%, 58%, and 44%, respectively), and the Yamalo-Nenetsk Autonomous Okrug (+63%). CIT growth (+73%) in the Novgorod Region seems to be driven by high fertilizer prices.

As for personal income tax, after the April decline, proceeds fr om this type of tax recovered and the regions are currently recording monthly growth of personal income tax.

Total transfers for the first nine months increased by 12%, yet the volume of dotations remained practically unchanged and targeted subsidies grew considerably. The dynamics of subventions and other inter-budgetary transfers were worse than last year.

From January to September, 18 regions received lower transfers than they did over the first nine months of 2021.

The seemingly unprecedented drop in transfers to the Kaliningrad Region (see Fig. 3) is explained, apparently, by falling support for manufacturers who rely on imported components. Such support, which was considered another inter-budgetary transfer but, in fact, was more of a subvention that reflected obligations to support local businesses, does not involve the regional budget and does not directly affect social spending or the region’s ability to fulfill its obligations. In contrast, for the Magadan Region, a comparable drop in transfers, along with a decrease in TNTR and an increase in expenditures, may complicate the execution of the budget this year. Moscow and St. Petersburg, which too have recorded noticeable cuts in transfers, do not depend on them to any significant extent.

Over the first nine months of 2022, the regions’ budget expenditures grew by 16% (RUB 1.6 bln). In absolute terms, the most sensitive increase in expenditures was observed in education, road maintenance, utility services, and social security, which, in aggregate, amounted to almost 70% of the total increase in expenditures.

More than 40% of the surplus falls on Moscow and St. Petersburg. From January to September, the regions collectively achieved a surplus of RUB 1.26 tln, which is 43% higher than in the same period last year.

However, 21 regions had a budget deficit (a year earlier, 14 regions recorded a deficit). For clarity, the comparison of the deficits and TNTR for 9M shows that some regions have significant relative budget deficits — the Chechen Republic (38%), the Republics of Tyva and Dagestan (34% and 29%), the Magadan and Belgorod Regions (27% and 17%), and the Jewish Autonomous Region (13%). These regions, except the Belgorod Region, do not have a significant liquidity reserve.

The aggregate budget surplus of the remaining 64 regions (which all recorded surpluses) for 9M amounted to RUB 1.32 tln, with over 40% of this generated by Moscow and St. Petersburg and 7% by the Kemerovo Region. This situation is typical for Moscow, given the scale of the capital city’s budget; in contrast, for St. Petersburg and, especially, the Kemerovo Region, it is the result of a strong increase in profit tax revenues. The total surplus of the remaining regions is RUB 686 bln, which, in general, can be considered a significant liquidity cushion.

Based on data available for January–August 2022, about half of the regions experienced a decrease in the industrial production index (IPI). The most affected regions are ‘metal producing’ regions, wh ere profit tax revenues have been declining, and the Kaluga Region, which, apparently, has been affected by difficulties in the automotive industry.

Table 1. Regions wh ere the IPI and profit tax revenues are declining concurrently

Sources: Rosstat, UPBS, ACRA

By the end of 2022, the total revenues of the regions should increase due to, among other things, some growth of CIT revenues on the back of increased prices for commodities and the absence of trade barriers at the beginning of the year. However, next year we should expect lower CIT revenues, given the high likelihood of a drop in tax revenues from the oil and gas and financial sectors. It is possible that growing revenues from other taxes (for example, inflationary growth in personal income tax) will drive up regions’ TNTR in 2023, but currently, ACRA estimates the potential for this growth at 1%.