Balances like to be counted

Analysis of the annual liquidity of the budgets of Russian regions¹

The balances of temporarily free funds in budget accounts is one of the most important liquidity instruments available to regional governments for financing budget deficits. As of the end of 2022, the total accumulated funds of Russian regions amounted to around RUB 2.3 tln, out of which around a third was held by Moscow (RUB 770 bln), and around half was held by Moscow and four other regions (Saint Petersburg (RUB 236 bln), the Yamalo-Nenets Autonomous Okrug and the Kemerovo Region — Kuzbass (RUB 99 bln and 85 bln, respectively), and the Krasnodar Krai (RUB 82 bln). The regions with the lowest accumulated funds as of the end of last year were the Chukotka Autonomous Okrug, the Republic of Karelia, the Pskov Region (around RUB 0.3 bln each), and the Republics of Tyva and Kalmykia (RUB 0.1 bln and 0.05 bln, respectively).

Almost every year, the largest volume of the regions’ funds is formed at the end of summer, as this is when a significant amount of revenues have already been transferred to budgets and the main expenses have not yet been made. In addition, regions have the opportunity to raise temporarily free funds of autonomous and state-funded institutions, which allows them to temporarily increase their liquidity. This year was not an exception — according to the Single Portal for the Budget System of the Russian Federation (SPBS) Electronic Budget, the total volume of funds in regions’ accounts as of October 1, 2023 had increased by 19% year-on-year and amounted to more than RUB 4.1 tln, which is one of the best results since records began. Nevertheless, the volume of temporarily free funds declined in 29 regions compared to the same period last year, despite the growth in the aggregate indicator. At the same time, a number of regions, on the contrary, showed a significant increase in the indicator, including 17 regions where the indicator more than doubled, which made the dynamics of the total indicator positive².

¹The calculation does not include the budgets of Russia’s four new regions due to insufficient information.
² See Appendix.

Figure 1. Liquidity in accounts as of October 1, 2023 exceeded liquidity in previous years, RUB bln

A distinctive feature of recent years has been the growth in the total volume of temporarily free funds in regional accounts while Moscow’s share has decreased. In 2019–2020, the capital’s share in the total liquidity of the regions exceeded 50%, however, starting in 2021 it began to decline. At the same time, the share of regions, with the exception of Moscow, and the five largest regions in terms of available funds (the regions that form this five are different every year) began to increase significantly. ACRA assumes that in general this may be due to the growth of accumulated liquidity in other regions with a relatively stable volume of account balances in Moscow.

Figure 2. Moscow’s share in the total volume of balances is declining

Sources: SPBS, ACRA

According to data as of October 17, 2023, the total target deficit of all of Russia’s regions this year may exceed RUB 2.8 tln (target values are usually quite conservative). At the same time, ACRA believes that some regions will be able to fully finance their deficits using temporarily free funds. Thus, in 47 regions, balances at the beginning of the year covered more than half of the target budget deficits for the current year, while in 23 regions, the planned deficit was fully covered by balances. However, in eight regions, including the Republics of Kalmykia Buryatia, and Karelia, Chukotka Autonomous Okrug, and the Pskov Region, balances at the beginning of the year covered less than 5% of the budget deficit planned for the year.

Figure 3. More than half of the regions can finance the target deficits using account balances

* The calculated value for the Tomsk Region exceeds the limits of Fig. 3.
Sources: SPBS, ACRA

Funds held in accounts not only allow cash gaps to be closed during the year and finance budget deficits at the end of the year, but also serve as a source of additional non-tax revenues for regional budgets. Interest income from placing temporarily free funds in deposits at banks or from placement in the single treasury account (STA)³ as of September 1, 2023 amounted to RUB 128 bln, which is 43% less than the indicator a year earlier, but more than double the value as of September 1, 2021.

³ This mechanism, which was introduced in 2021, is for regions that are not allowed to place deposits or for those that do not take advantage of this opportunity.

Figure 4. Interest income of regions reached a maximum at the end of 2022, RUB bln

Sources: SPBS, ACRA

According to budget financial reports, as of January 1, 2023, 12 regions⁴ had placed funds in deposits to a total of RUB 1.3 tln (RUB 0.6 tln excluding Moscow). The Bank of Russia’s data shows that by August 1, 2023, RUB 1.9 tln in budget funds had been deposited. Almost every year, as of August the maximum share of funds is placed at VTB Bank (data is not available for 2022). In ACRA’s opinion, the placement of funds in deposits may be a more flexible instrument for regions compared to depositing funds in the STA because it allows them to independently manage their money and the duration it is deposited. At the same time, placing funds in the STA enables regions to reduce liquidity management costs through external management of such operations.

⁴ Possibilities of placement are limited by Article 236 of the Budget Code of the Russian Federation.

Figure 5. Largest holders of deposits of Russian regions

Sources: Bank of Russia, ACRA

Funds of regions are consolidated in the STA, including free funds not deposited or invested in other liquidity management instruments. Excluding Moscow’s funds, the share of funds held in the STA amounted to 62% of the total cash balances (if Moscow’s funds, mostly held in deposits, were included, the share of funds held in the STA did not exceed 43%). Thanks to the STA, all regions receive interest income, and the amount of this income is maximized.

The concentration of liquid balances is observed mainly in regions with high credit ratings. This is mostly due to these regions’ ability to finance some year-end expenditures out of accumulated liquidity without the need to increase the debt burden, which, in turn, helps to offset the risks of volatility of budget revenues and finance cash gaps, if any, in the middle of the year.

Figure 6. Regions with higher credit ratings have larger account balances (as of January 1, 2023)

* Excluding Moscow
Sources: UPBS, ACRA

The ability to finance expenditures using accumulated funds within the year can be identified by comparing region’s account balances at the beginning of month to the amount of expenditures at the end of the same month. Calculations indicate that in regions with higher credit ratings this indicator is generally higher than in regions with lower ratings. At the same time, the a balance-to-expenditure of regions in the BB(RU) and BBB(RU) categories is lower than the average for Russia, and in some months, it is below 1. Regions in the AA(RU) and AAA(RU) categories, on the contrary, have account balances several times higher than monthly budget expenditures for most of the year.

Figure 7. Monthly incoming account balances of regions with higher credit ratings exceed expenditures in that month

Regions’ account balances can play a key role in covering budget deficits at the end of this year. They will allow some regions to avoid a debt increase, while other regions will continue to receive interest income. Interest income for nine months of 2023 has already exceeded this income for all of 2021 and it is likely to grow until December. At the same time, the historical maximum of intra-annual liquidity of regions, on the one hand, indicates that growth of revenues outruns that of expenditures, and on the other hand, suggests a sufficient amount of balances will be maintained by the end of the year, which will allow regions to cover expected deficits in 2024.

APPENDIX

Volume of temporary free funds held on Russian regions’ accounts as of the specified date, RUB mln

* Excluding the new
regions due to a lack of information.
Sources:
SPBS, ACRA