Economic Health of Russia’s Regions · 4 INTEGRAL ASSESSMENT A Positive Trend Has Emerged The...

Positive Outlook

March 2020, Moscow

Economic Healthof Russia’s Regions

Economic Health of Russia’s Regions, Positive Outlook

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Economic Health of Russia’s Regions, Positive Outlook:

Authored by:

Tatyana Tirskikh, Lead Analyst, Corporate & Sovereign Ratings

Gulnaz Galieva, Senior Director, Corporate & Sovereign Ratings

Pavel Mitrofanov, Managing Director, Corporate & Sovereign Ratings


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ContentsSUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

INTEGRAL ASSESSMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

ECONOMIC HEALTH OF THE REGIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

ECONOMIC HEALTH OF THE POPULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

ECONOMIC HEALTH OF REGIONAL BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

ECONOMIC HEALTH OF THE REGIONS’ CONSOLIDATED BUDGET . . . . . . . . . . . . . . . . .8

MAPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

REGION’S ECONOMIC HEALTH INDEx: METHODOLOGY IN BRIEF . . . . . . . . . . . . . . . . . 12

APPENDIx 1 Economic health of Russian regions: integral ranking of the regions, current level and trend pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

APPENDIx 2 Credit Ratings of Russian Regions & Municipalities As of 05 .02 .2020 . . . . . . . . .17


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sUMMARYEconomic health of Russia’s regions has generally improved in 2019, having been sup-ported by the combination of such factors as inflation slowdown, fall in lending rates, moderate wage growth and robust construction activity.

Although the economic environment of some regions remains relatively poor, with high unemployment rate, low purchasing power and debt-ridden regional budgets . The improvement is possible only through federal support, by implementing national pro-jects and enforcing the presidential decree aimed to combat poverty . If the task is suc-cessfully accomplished, the first signs of positive changes may be seen by late 2020 .


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INTEGRAL ASSESSMENTA Positive Trend Has Emerged

The agency notes that the indicators which are relevant for the assessment of eco-nomic health of the regions have grown for the second consecutive year, indicating a positive trend . This is true both for outperforming and underperforming regions . The ratio between the leaders and outsiders in the ranking regions has improved compared to the previous year . But in terms of economic development and living standards, the spread between these two types of regions is still large . However, there are regions which economic health is either moderately high or moderately low . The list of top 10 regions has barely changed since 2018, with some participants having exchanged positions .

Table 1. Экономическое здоровье российских регионов: интегральный рэнкинг регионов по оценке текущего уровня и динамики изменений

№ Russian region Current economic health index

Index of the economic health sentiment

1 Moscow 98 45

2 Sakhalin region 97 59

3 Tyumen region 83 32

4 Yamalo-Nenets district 81 27

5 Khanty-Mansy autonomous district, Yugra 80 31

6 Saint Petersburg 76 10

7 Moscow region 74 -4

8 Tatarstan republic 70 25

9 Magadan region 65 23

10 Leningrad region 64 30

76 Chechen republic -49 32

77 Altai republic -51 16

78 Buryatia republic -51 0

79 Kabardino-Balkar republic -53 10

80 Kurgan region -54 9

81 Zabaikal territory -55 20

82 Kalmykia republic -63 39

83 Karachaevo-Cherkess republic -64 3

84 Ingushetia republic -66 19

85 Tyva republic -70 39

Sources: Russian Federal Statistics Service (Rosstat), Finance Ministry, Russian Federal Treasury, Expert RA

High development level is seen in 8 regions, with 12 regions being moderately devel-oped, while the above average level is spotted in 19 regions and the average level – in 11 regions . Current development level of 35 regions varies between below average and low . Amid lack of strong growth momentum or mayhems, there was a moderate upward trend in the regional economies (59 regions) in 2019 . Outperforming regions of the coun-try edged up as investors turned to their reserves and market capacity . Underperforming regions also may show quite notable positive momentum, but mainly due to the low base effect, when the growth is more notable because of the low starting positions .


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ECONOMIC HEALTH OF THE REGIONS

Raw Materials Endowment vs Federal Support

Commodity-rich regions that have a well-developed refining sector and enjoy insti-tutional rent (profit related to privileges available for Moscow) head the ranking. In contrast, underperforming regions either lack mineral reserves or have a limited amount of raw materials. As a rule, the economy of such regions highly depends on fiscal injections, while their corporate sector is weak.

As a matter of fact, economically healthy regions are those that enjoy commodity rent, depend on raw materials . These are the regions which GRPs include massive pro-duction industry share . The ratio between production and refining industries in such regions is also quite impressive . Commodity orientation not only affects economic expansion rate, it also predetermines regional imbalances in socio-economic develop-ment . Commodity regions attract investment, they attract skilled and mobile work-force, which boosts socio-economic data .

As for underperforming regions, their economic development level, prosperity of population and business performance largely depend on local government’s stance and federal support . It’s also important to what extent the activities of the local au-thorities are sustained and consistent . To prepare a set of urgent measures necessary to develop the state of ten economically depressed regions – namely Karelia republic, Tyva, Chuvashia, Kalmykia, Mary El, Adygeia, Pskov and Kurgan regions, Altai territory – a few federal ministers were assigned to supervise them in summer 2019 . Supervisors are called upon to define infrastructure pressure points, pick up the most promising investment projects, develop and implement local socio-economic development pro-grams .

Positive trend is backed by most regions’ persisting efforts to expand the tax base, curb debt burden, optimize costs and maintain investment activity . Such measures gain support if Finance Ministry target budgetary policy to a narrower spread between the economic development levels of the regions, not least because of incentive mecha-nisms for outperforming regions .

Implementation of presidential decrees aimed at the improvement of population’s prosperity and living standards, as well as implementation of national projects, will spur economic development of the regions in the medium term . Such measures as de-mographic support, poverty reduction, investment, innovation and venture funding promotion will also add to the efforts .

ECONOMIC HEALTH OF THE POPULATION

Low Inflation and Modest Wage Growth

The economic health of the population in the regions is improving due to low infla-tion and moderate wage growth. Increase in spare cash allows the population to pur-chase goods and services that lie beyond the necessary wants and encourages growth in prosperity. As for underperfoming regions, they face the barrier of high consumer price index and high unemployment rate, as well as low purchasing power of average per capita income.


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Table 2. Ranking of the regions based on integral estimate of current economic health index and trends

№ Russian regions Current economic health index

Index of economic health sentiment


2 Moscow 95 31



5 Khanty-Mansy district - Yugra 82 5


7 Saint Petersburg 77 -6

8 Magadan region 74 -14

9 Sverdlovsk region 72 9


76 Buryatiya republic -36 -40

77 Jewish autonomous region -37 -3

78 Zabaikal territory -39 -14





83 Kalmyk republic -65 14

84 ingush republic -70 -14

85 Tyva republic -73 -1

Sources: Federal Statistics Service, Bank of Russia, Expert RA

Enhanced purchasing power of per capita income is typical for the regions which pop-ulation’s economic health is robust . Thus, the population of the region is able to acquire three fixed sets of goods and services at prices that are typical for the area . In the major-ity of the top-ranked regions low customer price index is low, so is unemployment rate .

The regions that are in the lead in terms of population’s economic health can be divided into a few types:• regions with a developed commodity sector, which ensures high household income • metropolitan region and areas close to the capital;• industrialized regions with a highly diversified economy and large population .

Low purchasing power of per capita income and weak retail trade are typical for un-derperforming regions . For instance, per capita income in Tyva republic is lower than the price of the fixed set of goods and services, while in Kalmykia, Karachaevo-Cherkess re-public, Kurgan region, Jewish autonomous region and Altai republic, per capita income is only 27 percent higher than the price of fixed set of goods and services . Adding to that, in some outperforming regions consumer prices index is high and so is unemployment rate . Thus, the strongest unemployment in September-November 2019 was seen in Ingushetia, totaling 27 .1 percent, in Tyva – 13 .6 percent, and in Altai republic with 12 .7 percent .

Economic health of 45 out of 85 regions has shown positive momentum over the past 12 months . Positive trend in wages growth and retail turnover was spotted almost


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in all regions . Inflation slowdown and wage growth contributed to the surge . In 17 out of 85 regions, each of three relevant indicators moved upwards . Downward trend was not spotted in any of the regions .

Among outperforming regions, there are large and small ones with low current de-velopment level . Thus, Sakhalin region is one of the leaders both in terms of popula-tion’s economic health and dynamics: the real monetary income of the population is growing, with retail trade and amount of commercial services increasing too .

Reduced amount of fee-based public services is typical for the underperforming re-gions . Other indicators show mixed signals . Real monetary incomes slumped in 11 out of 85 regions, retail turnover declined in 9 regions, with 44 having witnessed fall in the amount of fee-based public services .

ECONOMIC HEALTH OF REGIONAL BUSINESS

Construction Surge Spurs Growth

Rising construction sector, increased tax revenue and investment promotion are the key factors, supporting economic health of the regional business.

Table 3. Ranking of the regions based on integral estimate of current economic health of regional businesses and trends



1 Moscow 100 75


3 Sakha republic (Yakutia) 89 23


5 Krasnoyarsk territory 83 56



8 Khanty-Mansy district, Yugra 75 74



76 Ivanovo region -72 27


78 Karachaevo-Cherkess republic -74 -9

79 Ingush republic -74 60

80 Altai territory -76 14

81 Buryatia republic -77 45


83 North Ossetia republic, Alaniya -83 19



Sources: Federal Statistics Service, Finance Ministry, Expert RA


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The assessment of current economic health of regional businesses showed that the regions, where high investment activity is seen, which companies are highly effective and in which the small business is relatively developed, hold the leading positions . In these regions housing construction is in bloom, indicating effective demand (including the neighbouring regions) and corresponding construction, energy, financial etc . infra-structure . It is worth noting that some of these regions are sparsely populated, due to which the specific investments indicators, profit tax revenues and small business taxes are high .

Low housing construction is witnessed in Russian Extreme North due to ongoing out migration . Thus, out migration in Murmansk region resulted in weak housing demand, which led to the nearly complete extinction of the construction sector in the region and boosted availability of the secondary housing . Retrofitting program that is being implemented in Moscow, in its turn, will raise the housing supply per head of popula-tion .

The assessment says that low investment activity and poorly performing regional businesses, which brings down specific income tax and lumpsum tax rates, are typical for the lagging regions . At the same time, although housing construction – despite generally hovering at levels -- in some regions is close to the levels seen in outper-forming regions . In economically developed regions such as Saint Petersburg and the Yamalo-Nenets autonomous region, housing supply per capita are comparable to those in Buryatia republic .

Positive momentum in economic health of regional businesses is seen at 82 out of 85 regions, with 21 regions showing the positive trend in all three aspects . There are no regions that would have decreased indicators .

Among the regions where the trends in business’ economic health are positive, there are both small ones as low base effect impacts and large industrially developed regions, where positive trends are due to high business efficiency, leading to a larger amount of profit tax and lumpsum tax revenues .

As for the regions with slow trends, most of them are those with the slowdown in housing construction and mixed trend in business tax revenues .

New government’s resettlement plans significantly improve the economic health of regional business . Positive trend may be achieved through joint measures of regional authorities and local business community . Thus, by helping local companies to access public debt market, investment development can be promoted .

Possible forms of cooperation are awareness-building efforts and funding of ex-penditures (on infrastructure, underwriter, receiving rating from rating agency, etc .) that occur at initial bonds placement . This policy will help – without overloading the budget -- to attract funds into the regional economy which later will be allocated to investment programs and business development, which , in its turn, will push up the amount of tax revenues .

ECONOMIC HEALTH OF THE REGIONS’ CONSOLIDATED BUDGET

Debt Burden Shrinks, Tax Base Expanses

Economic health of the consolidated budget has been strong for the second consecu-tive year amid persisting the positive growth momentum of the tax base and reduced debt servicing costs. The regions took advantage of the rate cut cycle, making their


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loan portfolio more. diversified. Rate lock through long bonds issue, keeping the mo-mentum in tax revenues and efficient expenditures allocation both to social costs and implementation of national projects, will support the economic health.

Table 4. Ranking of regions based on integral assessment of current economic health of consolidated budgets and trends


Index of economic health index sentiment


2 Moscow 99 -23

3 Yamalo-Nenets district 92 -22

4 Saint Petersburg 91 -23

5 Khanty-Mansy district, Yugra 90 -44

6 Nenets district 86 -40

7 Leningrad region 84 -36

8 Murmansk region 77 2

9 Perm territory 74 -18

10 Tyumen region 70 -35

76 Tambov region -25 -24

77 Kalmyk republic -27 -33


79 Pskov region -30 -28

80 Kostroma region -32 -11

81 Khakasia republic -35 -79

82 Oryol region -37 -18

83 Karachaevo-Cherkess republic -38 -1

84 Kurgan region -41 -25

85 Mordovia republic -65 -24

Sources: Finance Ministry, Expert RA

Economically healthy consolidated budget is seen mainly in the regions with a de-veloped energy sector, which brings a significant batch of tax revenue to the budget . Typical for such regions is a relatively conservative debt policy, due to which they ei-ther did not expand the debt the 2015-2016 crisis, or already paid off the debt that had formed then . With low debt burden, these regions rarely allocate their tax revenues to service the debt . The lowest debt burden of 1-3 percent in tax and non-tax revenues (TNTR) was seen in Moscow, Leningrad and Tyumen regions, Altai territory . These re-gions also spend the least to service the debt .

As for the outsiders, these are the regions with a relatively low level of tax and non-tax revenues and heavy burden of plain debt, on which service they spend a significant batch of their income . Thus, the debt burden of Mongolia republic exceed 200 percent of TNTR, while debt servicing costs -- more than 5 percent .

The share of tax and non-tax revenue in the revenue structure slumped by the end of 2019 due to the launch of national projects and transfers from federal budget allo-cated to their implementation .


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Positive trends in economic health of the consolidated budget is seen in 11 out of 85 regions . At the same time, positive developments have been spotted in 4 regions, with 24 regions showing generally negative dynamics .

As the Crimea republic is still being integrated into Russia’s economy, the region’s budget has improved significantly with the decline in the debt loan, while the costs for debt service lowered in view of the growth in tax and non-tax revenue . Profit tax and personal income tax grew the most in Crimea in 2019 . The hike is due to the economic development and large investment injections, job creation and salary hike .

Economic health of even underperforming regions’ budget is relatively stable, with no signs of significant deterioration . Although the budget of Khakassia republic con-siderably deteriorated: TNTR of the consolidated budget fell by 12 .1 percent in 2019 . This was due primarily to a slump in personal income tax revenues by 36 .2 percent, while there was a huge tax payment of of 5 .5 billion rubles in 2018 from a taxpayer registered in the republic’s territory .


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MAPS

Map 1. Differentiation of the current level of development of the Russian regions

Map 2. Differentiation of regional dynamics


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REGION’S ECONOMIC HEALTH INDEx: METHODOLOGy IN BRIEF

Economic health index is used to assess current development level of Russia’s regions (status map), as well as to assess changes in regional economy (dynamic map) . The status map shows regional differentiation by current development level . The dynamic map reveals regional differentiation by the pace of change, indicating in which regions there is an upward trend and in which the indicators have deteriorated .

Development of this index is sensible for a number of reasons . First of all, there is a significant lag (more than one year and a half) with which Russian regions’ GRP (gross regional product) data is issued . Moreover, the GRP indicators do not fully reflect the situation in the region: a significant part of the GRP can be redistributed in favor of the federal center; therefore, high GRP indicators in a given region do not fully affect the economic health of the population, business and the budget . Secondly, various de-partments issue large data on many aspects of the functioning of regional economies, within short periods of time . In our opinion, the use of a part of these data package in the form of integral indicators allows to monitor thorouhhly both the current state of the region’s economic health and the trend of its change .

Operation data by Russia’s Finance Ministry, Federal Treasury and Federal Statis-tics was used as a source of information . Most of the existing indicators are estimated based on the data for the past 12 months (sliding window method), while the balance sheet ratio is estimated through the most recent available data .

Indicators to assess current development of the region:

Economic health of the region’s population

Purchasing power of per capita income

Retail turnover per capita

Consumer price index

Unemployment rate

Economic health of regional business

Investment in fixed capital per capita

Housing supply per capita

Health of the business: income tax per capita

Health of small and middle-sized business: small and medium-sized business tax per capita

Economic health the region’s consolidated budget

Direct debt to TNTR of the region’s consolidated budget

Costs from CB allocated to serve the debt to TNTR

TNTR of CB of the region per capita (adjusted for the price of the fixed set)

TNTR ratio in the region’s CB

Note:

CB – consolidated budget; TNTR – tax and non-tax revenues; plain debt – amount of the region’s debt, including sovereign bond debt, bank and public budget loan debt, other debts; municipality’s debt in form of the bonds, bank loans and other debts . The definition does not cover rescission bonds and municipal public budget loan debt .


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Indicators for measuring changes (dynamics) in regional economy:

Trends in economic health of the region’s population

Real incomes of people development

Retail trading dynamics

Changes in fee-based public services

Trends in economic health of regional business

Housing supply dynamics

Growth in profit tax payments

Growth in lumpsum tax payments to the region's total consolidated budget

Trends in economic health of the region’s consolidated budget

Dynamics of plain debt of CB to TNRT CB of the region

Trends in costs allocated to service the debt to the tax and non-tax revenues from the of consolidated budget of the region

Growth in TNTR of the consolidated budget per capita

the TNTR dynamics in the region’s consolidated budget

With the use of linear functions and given benchmarks, the values of the listed indicators were transformed in the assessment . (С помощью линейных функций и заданных бенчмарков значения перечисленных показателей преобразовывались в оценке) Based on the estimates, as well as on the weight vector (the expertly deter-mined values, including depending on the significance of the indicator), integral points were obtained for the current level (state) of the region’s economic health and for the economic trends^ i .e . development of the economic state .


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APPENDIx 1

Economic health of Russian regions: integral ranking of the regions, current level and trend pattern



1 Moscow 98 45




5 Khanty-Mansy district, Yugra 80 31




9 Magadan region 65 23


11 Murmansk region 54 33

12 Nenets district 54 17

13 Sakha republic (Yakutia) 54 1

14 Chukotka district 53 -2

15 Krasnoyarsk region 50 22

16 Lipetsk region 47 34

17 Sverdlovsk region 39 18

18 Vologda region 38 38

19 Belgorod region 37 31

20 Voronezh region 36 36

21 Komi republic 35 -9

22 Kursk region 34 19

23 Arkhangelsk region 32 10

24 Krasnodar territory 32 25

25 Perm territory 30 31

26 Kaluga region 26 29

27 Amur region 24 28

28 Irkutsk region 23 9

29 Tula region 21 35

30 kamchatka territory 20 21

31 Nizhny Novgorod region 20 35

32 Bashkortostan republic 17 5

33 Samara region 17 4

34 Novosibirsk region 12 6

35 Orenburg region 12 24


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36 Kaliningrad region 11 28

37 Khabarovsk region 11 4

38 Rostov region 10 28

39 Primorsky territory 9 27

40 Sevastopol 6 22

41 Chelyabinsk region 5 10

42 Adygeya republic 4 35

43 Tver region 3 57

44 Veliky Novgorod region 1 14

45 Kemerovo region -2 -5

46 Republic of Crimea -3 -5

47 Vladimir region -5 26

48 Smolensk region -5 6

49 Tambov region -5 -4

50 Astrakhan region -6 15

51 Kareliya republic -6 37

52 Ryazan region -6 2

53 Yaroslavl region -6 6

54 Omsk region -7 20

55 Udmurt republic -9 -5

56 Tomsk republic -10 7

57 Bryansk republic -13 35

58 Uliyanov region -13 6

59 Penza region -17 27

60 Saratov region -17 2

61 Pskov region -21 14

62 Stavropol region -21 18

63 Volgograd region -23 11

64 Oryol region -23 -4

65 Kirov region -24 23

66 Chuvash republic -25 27

67 Ivanovo region -28 22

68 Kostroma region -29 26

69 Khakasiya republic -30 29

70 Altay territory -31 17

71 Mary El republic -33 -23

72 Dagestan republic -34 7

Continuation of table


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73 Mordoviya republic -34 17


75 North Ossetia republic - Alaniya -46 15



78 Buryatiya republic -51 0




82 Kalmyk republic -63 39


84 Ingush republic -66 19


Sources: Federal Statistics Service, Russian Federal Treasury, Expert RA

End of table


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APPENDIx 2

Credit Ratings of Russian Regions & Municipalities As of 05 .02 .2020

Name Rating Outlook

Volgograd Region ruA- Stable

Voronezh Region ruA A- Stable

Irkutsk Region ruA A+ Stable

Kaliningrad Region ruBBB+ Stable

Kamchatka Territory ruA+ Stable

Kirov Region ruBBB+ Stable

Krasnodar ruBBB+ Stable

Krasnodar Territory ruA A- Stable

Nenets Autonomous Area ruA+ Stable

Nizhny Novgorod Region ruA Stable

Novosibirsk ruA- Stable

Omsk region ruBBB+ Stable

Republic of Adygea ruBBB Stable

Republic of Bashkortostan ruAAA Stable

Republic of Buryatia ruBBB+ Stable

Republic of Karelia ruBBB- Stable

Republic of Tatarstan ruA A A Stable

Republic of Sakha (Yakutia) ruA A- Stable

Saratov Region ruA- Stable

Sverdlovsk Region ruA A- Stable

Stavropol Territory ruA Stable

Tula Region ruA+ Stable

ReDublic of Udmurtia ruBBB- Stable

Ulyanovsk region ruBBB+ Stable

Khabarovsk Territory ruBBB Stable

Chuvash Republic ruA Stable

Yamalo Nenets Autonomous area ruAAA Stable

Yaroslavl Region ruBBB Stable

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