Chelyabinsk Region introduces austerity measures

04.10.2013 — Analysis

And remembers about the "safety cushion".

The Congress of the Council of Chelyabinsk Regional Municipal Entities was held at the end of September. Sergei Komyakov, the chairman of the regional government, met with its delegates.

He told the administrative heads of cities and districts that the year of 2014 is not going to be easy: The stagnation in the manufacturing sector is still going on, the investment and profits of companies are shrinking, while the budget expenditures are going up. The Prime Minister thinks that in this situation the municipalities should revise their budgets, diversify the economy and find new sources of revenues.

In January-July 2013, the economic situation in Russia was very challenging: The prices for exported raw materials dropped, the fixed capital expenditures shrank, the industrial growth came to a standstill. The situation in the regions developed in different ways: some of them enjoyed economic growth, while others reported deep recession. For example, the manufacturing sector in the Astrakhan Region improved by 40%, while Moscow faced a downturn of 33%. The Chelyabinsk Region was also hit by the crisis: The industrial production index got stuck at the level of the first seven months of 2012; the investment decreased almost by 4%.

Experts explained to RusBusinessNews that the relationship between the economic growth and investment activity is not clear-cut: For example, in the depressed Kurgan Region the fixed capital expenditures decreased by 25% over seven months, while the region’s economy demonstrated a 10% gain. The Perm Region has quite an opposite situation: The industrial capitalization increased by 22%, which did not prevent its further decrease by 2.5%. Nevertheless, the finance played a key role in helping the regions to remain stable.

Natalia Zubarevich, the director of the regional program of the Independent Institute for Social Policy, explains the notable growth in the Astrakhan and Irkutsk Regions by development of oil and gas fields. In the Primorye Territory the industrial production growth was supported by the investment in the processing industrial sectors, whereas in the Amur Region the investment was made in gold mining. In the expert’s opinion, the Russian constituent entities that are almost completely dependent on the federal budget fund transfers or receive funds for investment in implementation of ambitious projects such as the Olympic Games in Sochi were least affected by the economic crisis. The other territories where the well-being depends mainly on heavy industry were hit worst in the first half of 2013.

The crisis in the iron-and-steel industry resulted in not only the decreased investment, but also reduced tax revenues to the budget. In January-June the profits of the companies operating in the Chelyabinsk Region shrank almost by 30% as compared to the similar period of the previous year, while in the Sverdlovsk Region they decreased by 25%. The reduction in revenues was exacerbated by the situation that the regional budgets had to refund the previously paid tax amounts to the metallurgists (in 2013 the Chelyabinsk Region had to refund approximately 5 billion rubles), which, in fact, shot down profits as one of the sources of treasury reimbursement. In 2013, with reference to the statistics data, realized revenues from the profit tax were received only in Moscow, St. Petersburg, oil-and-gas regions of Western Siberia.

The Chelyabinsk Region had to offset the shortage of funds by using credits and earnings of the future periods. At the moment, the public debt of the Chelyabinsk Region is 16 billion rubles, where the government guarantees for loans aimed at implementation of investment projects and the budget deficit account for 11 billion rubles and 17.1 billion rubles, respectively.

On the other hand, the situation in Russia is not unprecedented: Today, most of the regions of the country have to carry the burden of the public debt and budget deficit. Only Moscow, St. Petersburg and the Sakhalin Region can boast surplus – the Sakhalin Region adopted blatantly conservative financial policy, placing a hold on the funds or not absorbing them during implementation of government contracts.

The Chelyabinsk Region used to adhere to the similar tactics by allocating, for example, subsidies for reconditioning of roads only to 3-4 out of 43 municipal territories. However, when Mikhail Yurevich took the governor’s office, he made a reasonable conclusion that when the money is tight, the industrial growth can be supported only through budget expenses, and started to develop the infrastructure of the region. Over three years, more than 20 billion rubles were channeled into the building and reconditioning of the road system of the South Urals; another 13 billion rubles were allocated for renovation of hospitals and purchasing of medical equipment. The regional authorities spent sizeable amounts on building of daycare centers.

The result was not long in coming: Since 2010 the construction sector gained in weight in the gross regional product by 1.2%. The sector is steadily turning into a powerhouse for the economy: Most of the Russian regions are facing recession in the construction sector, while the Chelyabinsk Region has been enjoying a 6.6% gain since the beginning of 2013. In terms of the growth rate, Chelyabinsk construction companies outperform their neighbors from the Sverdlovsk, Tyumen, Orenburg Regions and Bashkortostan. The higher rate of growth is observed only in the construction sector of the Perm Region; however, in terms of the physical output, Chelyabinsk companies commission 1.9 times more housing than the Perm Region.

Yet, the economic crisis has affected the growth of the construction sector: As compared to January-July 2012, the commissioned housing decreased by nearly 14%. The regional government understands that in 2014 it will not be able to support the economic growth through budget investment. Today, it can focus only on fulfillment of its social obligations assumed previously.

Sergei Komyakov, head of the regional government, recommended the heads of the cities and districts to put things right in using land, which still does not bring the expected returns to the budget, and to revise the expenditure to the fullest extent. In addition, the municipalities were recommended to attract investors to the sectors that are steadily growing even during the economic crisis.

The specialists of the Chelyabinsk Regional Ministry for Economic Development are convinced that the growth of the gross regional product can be achieved with the help of the mining, food industry and manufacturing as well as through production of building materials. In the near future these sectors are expected to demonstrate a 2-3% growth even if the conditions are very unfavorable, while the growth rate of mining and equipment-making sectors will increase by 7-8% a year.

Special hopes of the regional government are pinned on agriculture. Although the competition became tougher after Russia’s joining WTO, the pork production in the Chelyabinsk Region has increased by 26% since the beginning of the year, whereas the poultry production has demonstrated a 24% gain. The beef-cow population has increased by 2,000 cows; the beef production has increased by 7.6%. The region’s agricultural sector is growing three times faster than in Russia, in general.

At the same time, the authorities of the Chelyabinsk Region keep increasing subsidies granted to milk producers and grain-growing farms. The beef breeding herd is also growing: Within three years the budget has allocated more than 350 million rubles for the support of the beef stock farming. The region has about 40% of Russia’s Herefords who are sold to other regions, including CIS countries. The growth of the beef sector is restrained only by the absence of the standards and regulations applicable for meat products.

Sergei Burguchev, head of the Department for Agricultural Development at the Chelyabinsk Regional Ministry for Agriculture, thinks that natural meat and meat from genetically modified organisms as well as sausage made from meat and sausage made from meat products must be clearly differentiated. Besides, there must be protectionist entry barriers against meat imported from Argentina. In his opinion, prices for fresh and frozen meat must be different. Different quality categories should be applied to beef of Hereford cows and slaughtered milk cows – the latter, in the opinion of S. Burguchev, is classified as "a by-product of the milk production" rather than natural beef.

The absence of the standards and regulations prevents the market from being transparent and causes substantial damage to bona fide producers. The Governor Mikhail Yurevich thinks that it is necessary to establish civilized trading rules and strict control at least over the sausage sector. In his opinion, the regulations adopted for meat products, when coupled with subsidies, will help to revive the domestic livestock farming considerably and will result in increasing revenues to the budget.

The experts point out that the adoption of protectionist measures during the crisis is justified not so much economically as politically: Tax revenues from agriculture as well as from other investment-attractive sectors of economy can efficiently compensate for dropping out revenues from the metallurgical industry and give the municipalities confidence that the social obligations to the citizens will be fulfilled.

Based on the data of the Chelyabinsk Regional Ministry for Economic Development, in January-August 2013 the tax revenues from the construction industry increased by 22%, from agriculture – by 18%, from mining operations – by 60%.

"All these figures prove the main point: We have our own "safety cushion". It snapped into action at the critical moment – and we expect that the effect will be long-term," Mikhail Yurevich says.

Vladimir Stepanov