The crisis hit Russia’s developed regions first and hardest and the government reaction to the situation was further proof of the shortcomings of the current system of government. Let us start with the budget reforms. The regions receive the revenues from tax on profits, the most unstable of all taxes. This is important for the budgets of the developed regions, as it provides around a third of all revenues.  In the remaining regions it makes only a small contribution. The crisis has meant that average profit tax revenues have been halved (January-October 2009 compared to the same period in 2008) and the regions relying on exports faced a severe drop of anything from 500 to 900%.  As a result, developed regions lost 15-25% of their budget revenue.

Fearing social instability, the federal authorities increased regional grants by 150% (January-August 2009 compared to the same period in 2008), but these grants were oddly distributed. For those regions that had been badly affected by the crisis there was partial compensation for loss of revenue, but even more help was given to regions which had been less, or little, affected by the crisis. To put it simply, money was handed out on an ad hoc basis.  This led to an average 6% increase in regional budget expenditure, despite the crisis. The inevitable result of this windfall of federal money was an increase in inefficient expenditure. In St. Petersburg and the Samara Oblast, for example, public administration costs grew by more than 20%, and the money was spent to no effect in many other regions. In the autumn the federal authorities began to tighten the screws:  they cut federal aid and plan to do even more severely in 2010 with a 20% reduction in the regional grant. This swing of the “pendulum” – from panic handouts out to drastic cuts – shows that the ad hoc system cannot work.

At the same time, the problems of regions with programmes for special zones and major infrastructural and investment projects were not addressed. Matching funds from the regional budget are a mandatory condition for these projects: without them no federal money is forthcoming. The Kaliningrad Oblast had to introduce swingeing cuts in its social spending in order to preserve its investments.  Regions that have taken out development loans for modernisation have larger budget debts.  The Kaluga Oblast is developing technology parks, and the Tomsk Oblast is developing a special economic zone. As a result they have become hostages of the crisis. There is no official system of federal support, so they have to bow and scrape and ask for help individually. And all this is also resolved on an ad hoc basis.

Modernisation is also undermined by costly and ineffective policies in the labour market. The summer drop in regional unemployment is explained by factors like seasonal fluctuation, the beginning of the end of the crisis and successful employment policies.  Each of these things may well be a  contributory factor, but serious doubts have to be raised about how effective the measures for dealing with unemployment actually are. There are already over 1.2 million people on government employment schemes, so the plan has been exceeded. But what sort of work is this? It is mainly in the public sector and financed from the federal centre (clearing patches of land, provision of urban amenities, work in municipal institutions). Registration has been maximally simplified. Workers who are about to be laid off are registered for the schemes centrally, without even going to the employment service offices. Lists are simply submitted to the service, or someone visits the company. But the main thing is that these people are not registered as unemployed, which improves statistics. Temporary jobs are extended, and federal money is so far adequate to cover the miserable salaries. A “quarantine isolation ward” has been created in the labour market, which does not solve the problems of inefficient employment, but does reduce the registered unemployed figures by half. 

Retraining people who have been made redundant is scheduled as part of the Ministry of Health and Social Development anti-crisis measures.  A small amount of money has been allocated for this (about 1,200 rubles per person i.e. $40), and in some regions a solution has been found to fulfill the plan – redundant workers are given lectures on labour protection at the job centres.

Another option is re-settlement, but so far only 5,000 brave people have been found in the entire country who have submitted applications for moving. They evidently don’t realise they don’t have much of a choice – either a low wage at their new place of residence or expensive accommodation rent. Statistics from the Institute of Demography at the Higher School of Economics show that of the almost 1 million vacancies on the Ministry of Health and Social Development website 16% offer a salary of less than 5,000 rubles ($166), almost 40% offer from 5-10,000 rubles ($166– $332), and only 12% of vacancies offer more than 20,000 rubles ($664.5). But all the high-paid situations vacant are in the Moscow capital region, where the rents are so high that these salaries are only enough to cover bread and water.

There are more than 1 million people employed on job schemes, but another way of dealing with the problem is part-time work.  These are people who do not work a full week and are on unpaid leave  which is essentially concealed unemployment. The situation has recently become less acute: 2.9 million people in the first quarter of 2009 fell to 1.6 million in November, but the scale of the problem is almost on a level with registered unemployment (2 million people).

There are enormous regional variations: in the Samara Oblast it is over 8% of those employed, in the Ulyanovsk, Sverdlovsk and Chelyabinsk Oblasts 6.7%, and in the Yaroslavl and Nizhny Novgorod Oblasts 5%. Statistics show that the highest figures for concealed unemployment are in regions where manufacturing has been severely affected. In these regions the level of concealed unemployment is commensurate with the statistics you would expect on the basis used by the International Labour Organisation (ILO) (8%). Why is this congruence so widespread? Regional and local authorities are obliging employers (owners of enterprises) to conceal unemployment, rather than lay off workers. Grounds for redundancy are monitored by the prosecutor’s office, which has become the main arbiter on the labour market.

The job schemes and concealed unemployment distort the figures by upwards of 3 million people.   This is more than 150% higher than the official unemployment figures.  But even these figures are still only half what the unemployment figure would be if calculated using the ILO method (6 million people).  These solutions to the problem were introduced with a massive injection of federal money and pressure on employers and they have more than halved the level of registered unemployment. The political effect is clear for all to see. But have these “Potyomkin villages” really enabled the local labour markets to re-organise, modernise, and develop a sensible policy for additional employee training? The answer is obvious.

The fall in people’s incomes is another problem. Large injections of budget money into social welfare and increased pensions put a slight brake on the decline, but the fallout varies from region to region.  The worst affected are: 1) agglomerations of federal cities and regions with cities of over 1 million, where the service sector and small businesses have shrunk; 2) the leading oil and gas producing regions, where the variable component of salaries for fuel and energy complex workers has dropped and 3) regions where industry has suffered badly and there is the highest level of concealed unemployment. The drop in incomes is less noticeable in regions with a high percentage of public sector workers, pensioners and people employed in the agricultural sector. But what will happen in a year, when the budget reserves start running out? There can be no solution without effective, targeted programmes to support people on low incomes. So far, only a few regions are attempting to develop the necessary support programmes for the economically disadvantaged.  In the majority of regions aid is targeted at categories (veterans, invalids etc.), as it was in Soviet times, which takes no account of household income levels.

The crisis has once more shown that the “vertical of power” is not conducive to the development of effective regional policy.  What is needed in the regions is a clear balance between powers, resources and responsibility, which creates institutional incentives for modernisation. A harsh administrative system and distributing federal money on an ad hoc basis will result in an imitation of good employment statistics, but not in modernisation.

Natalia Zubarevich is the Director of the Regional Programme at the Institute of Social Policy in Moscow.  She is also consultant to the UNDP in Moscow and the Moscow Office of the International Labour Organisation