Presentation at Ministry of Finance, P.R. China-World Bank Summit on Subnational Debt Management and Restructuring, Nanning, Guangxi Province, P.R. China. October 22, 2015.

1. John Litwack
Lead Economist
World Bank
Prepared for P.R. Ministry of Finance-World Bank High-Level Summit on Subnational Debt Management and
Restructuring, October 22, 2015, Nanning, Guangxi Province, P.R. China

2. Basic Characteristics
 A high level of formal centralization in determination of
subnational revenues and expenditures.
 A significant share of expenditures (roughly 45%) carried out
at the subnational level, particularly for social sectors and
local infrastructure.
 A significant degree of informal autonomy at the subnational
level.
 Over the last 15 years, informal autonomy has weakened and
central control has strengthened.
 Sustaining subnational budgetary balance and control of
subnational debt has been a continual challenge.

3. Stages in Russian Regional Finance
and Subnational Debt
 1990-1998 – Russian regions (oblasts) could borrow under few
restrictions. Subnational debt accumulated and a large share of
oblasts became insolvent.
 1998-2000 – Russian regions liquidity constrained and still largely
insolvent: little borrowing, large share of tax revenues and
budgetary expenditures carried out in the form of barter and various
forms of offsets, high arrears on debt service and expenditures.
 2000-2008 – Budget reform and New Budget Code implemented,
government finance augmented from higher oil prices, steady
improvement in the financial situation in most Russian regions,
lower debt.
 2009-2015 Oil price shocks, slower growth, and more expenditure
obligations create new challenges for subnational budgetary balance
and controlling debt.

4. In January, 1999, consolidated subnational debt
in Russia reached 8.2% of GDP and many oblasts
were essentially insolvent.
 The servicing of 35% percent of this debt was in arrears.
 That is not counting additional substantial arrears on other budgetary
expenditures.
 Loans from the federal government to restructure debts and reduce arrears
reached 17% of subnational debt.
 The majority of subnational revenues were in money surrogates.

5. New Budget Code and Budgetary
Reform: 2000-2004
 Clarified and better balanced assignments of revenues and
expenditure responsibilities between budgets.
 Strict limits on external borrowing (only oblasts with credit ratings at
national level)
 Imposed limits on subnational borrowing: stock of debt cannot
exceed 100% of annual revenues (50% for oblasts highly dependent on
transfers), debt servicing cannot exceed 15% of expenditures. Regions
in violation cannot issue new debt.
 Comprehensive budgetary accounting required, including for
subnational debt and guarantees.
 Equalization transfer formula made more stable.
 New explicit federal expenditure mandates for subnational
governments must be funded (but implicit mandates remain (salary
increases, orders without explicit legal mandates)).
 No tax revenues can be received in money surrogates or offsets.
 Temporary financial management of a higher level of government can
be imposed on an insolvent subnational administration. (if arrears on
debt service > 30% of own revenues)

6. Subnational debt and guarantees in Russia
fell to less than 2% of GDP by 2008 before
increasing to 3.4% by 2015.

7. Subnational debt and guarantees are still only
34% of own revenues on aggregate, but this
masks huge differences between oblasts.
 Almost half (40) of oblasts have debt exceeding 60% of own
revenues.
 Ten oblasts are now reportedly close to the limit of debt at 100% of
own revenues.
 Term structure of debt is highly unfavorable for some oblasts.

8. The changing structure of subnational debt suggests a trend
of growing Federal loans to bail out regions becoming
increasingly dependent on (short term) bank credit.

9. Some Lessons From the recent Russian
Experience
 Increasing subnational budgetary imbalance in recent years has been
a consequence of greater expenditure mandates since 2012 and slower
revenue growth: it is necessary to preserve balance in revenues
and expenditure obligations to prevent growth in subnational
debt.
 The threat of temporary administration by higher level of
government for insolvent oblasts has lacked credibility: since
Russian oblasts have little control over their own revenues and
expenditure obligations, it is difficult to hold them responsible
for controlling growth in debt.
 Subnational governments in Russia have primary responsibilities for
social expenditures during a time of slower growth and lower
revenues: fiscal adjustment is needed to restore balance.