September 18, 2017 / 10:37 AM / in a year

Fitch: Russian LRGs to Post an Aggregate Fiscal Surplus in 2017

(The following statement was released by the rating agency) MOSCOW/LONDON, September 18 (Fitch) The budgetary performance of Russian local and regional governments (LRGs) in the first half of 2017 means we now expect the sector to record its first aggregate full-year fiscal surplus for a decade, Fitch Ratings says. The figures confirm our view that the performance of the sector has started to improve, although it still varies widely across regions. We think maintaining surpluses will prove challenging. Recent data from the Russian Treasury show that LRGs' revenues increased by 9.4% yoy in 1H17, outpacing the 6.3% growth in expenditure over the same period. The higher revenue proceeds were driven by taxes, particularly corporate income tax (CIT), which grew by 12.3% as the macroeconomic environment improved. This resulted in a mid-year surplus of RUB437 billion (USD7.6 billion), more than 1.5 times higher than in 1H16. Aggregate subnational debt will stabilise this year at RUB2.6 trillion, keeping the collective debt burden low by international standards at 26% of total revenue. However, individual subnationals' 1H17 budget balances varied considerably. Of the 85 regions in the Russian Federation, six recorded a surplus of over 15% of revenue, while seven posted a deficit of greater than 10%, with the remainder in the intervening range. <iframe src=" " title="Russian LRGs 1H17" width="550" height="" scrolling="no" frameborder="0" allowfullscreen="allowfullscreen"> Taxes are the regions' main revenue source (78% of revenues in 1H17), and revenues from the major taxes - CIT and personal income tax (PIT) - closely reflect a region's level of economic development and activity. This makes revenue performance uneven, as the size and dynamism of the subnational economies are very diverse. The 10 regions with the largest economies accumulated about half of all tax revenues received by Russian LRGs in 1H17, including 55% of CIT and 53% of PIT. Ensuring that each region has the financial capacity to provide the public services for which it is responsible can therefore be challenging. Some equalisation occurs under the system of intergovernmental transfers established more than 10 years ago, and more recently tax-sharing mechanisms have been introduced. Some income from excise levies on gasoline and alcohol is redistributed across the regions, but the volume is small (only 4.2% of tax revenues in 2016). Redistribution may become more meaningful, however. Starting this year, a new mechanism for CIT allocation means that 1pp of CIT revenue will be redistributed to financially weaker regions. If this system had been in place in 2016, about RUB127 billion would have been redistributed, or around one-third of the total deficit of those regions that recorded deficits. We think there is scope for more active use of tax sharing, which could help reduce the fiscal imbalance between LRGs, without necessarily weakening the financial stability of the stronger regions. Over the longer term, we think Russian LRGs may struggle to consolidate their recent budgetary improvement, if cost cutting and greater budget discipline, partly imposed by the federal government as part of its effort to reduce the general government deficit, cannot be maintained, for example due to pressure on public services. If revenue growth slows, the ability of individual LRGs to control expenditure will again be key to sustaining or improving their credit profiles. Contact: Vladimir Redkin Senior Director International Public Finance +7 495 956 2405 Fitch Ratings CIS Ltd 26 Valovaya St. Moscow, 115054 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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