R 241419Z JUL 09
FM AMCONSUL ST PETERSBURG
TO SECSTATE WASHDC 2807
INFO AMEMBASSY MOSCOW 
AMCONSUL ST PETERSBURG 
AMCONSUL VLADIVOSTOK 
AMCONSUL YEKATERINBURG 
EUROPEAN POLITICAL COLLECTIVE

UNCLAS ST PETERSBURG 000093 
 
 
E.O. 12958: N/A 
TAGS: ECON RS PGOV
SUBJECT: ECONOMIC CRISIS IMPACTS REGIONAL GOVERNMENT BUDGETS 
 
REF: ST. PETERSBURG 32 
 
 
1.(SBU) Summary.  Regional governments in Northwest Russia are 
reviewing their budgets again - a review prompted by sharp 
declines in revenue in 2009 from earlier projections.  St. 
Petersburg, Kaliningrad, Vologda and Arkhangelsk oblasts have 
all implemented drastic budget cuts ranging from 19 to 30 
percent, while Leningrad, Novgorod and Murmansk oblasts have 
implemented only minor budget cuts so far.  Pskov oblast's 
budget has been only marginally revised.  Most of the regions 
expect to receive assistance from the federal government, and 
have not ruled out additional possible cuts later this year in 
the event that the unfavorable economic climate continues.  End 
Summary 
 
¶2. (SBU) According to the Federal Ministry of Regional 
Development, only 8 out of Russia's 83 regions will be able to 
make it through 2009 without major revisions to their regional 
budgets.  The Ministry expects the regions will be forced to 
make some hard decisions regarding their budget priorities due 
to their reluctance to cut expenditures despite large declines 
in tax revenues.  The Ministry also is concerned that many of 
the regions have not yet proactively responded to the crisis, 
and thus have failed to revise their budgets accordingly. 
 
¶3. (SBU) In all of Northwest Russia, the most substantial budget 
revisions were made in St. Petersburg.  Between the first and 
second readings of the draft budget in October-November 2008, 
the city government predicted a 6.4 percent reduction in revenue 
and proposed a 6.7 percent reduction in expenditure.  Later, in 
February 2009, the budget was cut even more dramatically. 
Overall, the revised budget (with revenues of $7.4 billion and 
expenditures of $8.5 billion) is about 30 percent smaller than 
the original.  This has made 2009 the first year in the past 15 
in which the city budget is smaller than it was in the previous 
year. 
 
¶4. (SBU) St. Petersburg's budget cuts have hit the city's large 
infrastructure projects particularly hard.  These include the 
Okhta Center, Orlovsky Tunnel, the Elevated Express (an expanded 
tram line), and the Western High-Speed Ring road - projects 
which have all been postponed or downsized.  Additionally, the 
city significantly reduced expenditures on road repair and 
construction, and general administrative expenses. 
 
¶5. (SBU) In April 2009, the St. Petersburg Legislative Assembly 
approved additional changes to the city budget, increasing its 
planned expenditures by $350 million.  However, there was no 
corresponding planned increase in revenue.  Hence, the projected 
budget deficit has grown to nearly $1.5 billion.  According to 
recently published statistics by the federal government, budget 
revenues in St. Petersburg dropped by 30 percent during the 
first five months of 2009 -  which confirms the accuracy of the 
city government's financial team's forecast during the first 
budget review.  These figures mean that St. Petersburg has 
experienced one of the country's worst relative declines in 
budget revenue. 
 
¶6. (SBU) As in St. Petersburg, Kaliningrad oblast passed its 
budget in November 2008.  However, the budget underwent 
significant revisions almost immediately after being adopted, so 
the oblast entered 2009 with the budget already adjusted to the 
crisis conditions.  The revised budget slashed expenditures from 
$1.17 billion to $950 million.  Projected revenue was reduced by 
$226 million.  The expenditure cuts were across the board, 
including reductions in various regional infrastructure 
projects, in government employee salaries, and in the 
introduction of green measures designed to improve the oblast's 
energy efficiency.  Governor Georgiy Boos reportedly has not 
ruled out further budget cuts if unfavorable economic conditions 
continue.  In particular, he mentioned the possibility of 
cancelling the indexing to inflation of payments to veterans - a 
sensitive budget item which thus far has remained untouched. 
 
¶7. (SBU) Although Vologda oblast delayed revising its budget 
longer than any other region in Northwest Russia, it also 
implemented a 25% cut in both revenue projections and 
expenditures.  The reductions, approved in July this year, 
included cuts in almost all expense items, with the notable 
exception of most government employees' salaries.  Also 
unaffected were schools and hospitals.  As a result, social 
expenditures now make up around 70 percent of the new budget. 
The new budget deficit totals $312 million, which the local 
government hopes will be covered by federal funds. 
 
¶8. (SBU) The 2009 budget of Arkhangelsk oblast shrank by 22% 
percent compared to its initial projections from fall 2008.  As 
initially approved, revenues were expected to be $1.5 billion, 
and expenditures about $1.7 billion.  The economic crisis began 
taking its toll, however, and in April, 2009, revenues and 
expenditures were reduced by $323 million and $254 million, 
respectively.  The reduction of expenditures involved cutting 
capital investments by $123 million, $76 million in reduced pay 
for employees working for government-funded organizations, and a 
$10 million reduction in the government's administrative 
expenses. 
 
¶9. (SBU) Other regions in the Northwest District, including the 
oblasts of Murmansk, Leningrad, Novgorod, the Republic of 
Karelia, and Pskov, have been more reluctant to reduce 
expenditures in the face of revenue shortfalls.  For example, 
Murmansk oblast has revised downwards by 12% its projected 
budget revenue, but reduced its planned expenditures by less 
than 3%.  As a result, the new budget deficit is nearly twice as 
high as the initial one (nearly $200 million).  The reduced 
expenditures primarily were related to infrastructure projects 
in the city of Murmansk. 
 
¶10. (SBU) In May, Novgorod oblast cut both its projected 
revenues ($587 million) and expenditures ($650 million) for 2009 
by 7%.  The main cuts were in government infrastructure spending 
(decreased by $26 million) and in reduced transfers to local 
governments within the oblast (cut by $20 million).  Also, 
salary increases for government employees that had been planned 
for April, 2009, have been postponed until September. 
 
¶11. (SBU) Leningrad oblast made only modest budget cuts in May 
2009, cutting projected revenues ($1.53 billion) by 4% and 
expenditures ($1.64 billion) by just over 5%.  The cuts included 
a reduction in infrastructure spending by $11 million and a $3 
million reduction in various administrative expenses.  Similar 
to his Kaliningrad colleague, Lenoblast's governor Valeriy 
Serdyukov warned that the budget may have to undergo further 
cuts later this year. 
 
¶12. (SBU) In Karelia, initial budget projections (revenues $677 
million, expenditures $726 million) was reduced by about 5% in 
May 2009.  Infrastructure programs suffered the majority of the 
cuts, and the republic's governmental administrative expenses 
were reduced by about $2 million.  The new budget increased 
social spending, boosting support to the unemployed by $1.4 
million, as well as creating a new $2 million fund to support 
small and medium business enterprises.  Overall, the republic's 
deficit remained essentially unchanged at $49 million. 
 
¶13. (SBU) Pskov oblast, which is generally one of the most 
economically depressed regions in European Russia, relies 
heavily on federal money even in non-economic-crisis years.  The 
initial budget plan (predicting revenues of $454 million and 
expenditures of $529 million) was revised several times from 
February through May of this year due to shifting predictions of 
subsidies and grants from the federal budget, but ultimately the 
net result has been an overall increase of $22 million in 
Pskov's projected budget revenue, with just a $1 million 
reduction in its expenditures. 
 
¶14. (SBU) Comment: The economic crisis in Russia has had a 
profound impact on the fiscal health of the northwest districts 
of Russia, with most regions severely curtailing infrastructure 
spending and cutting other spending corners wherever they can. 
For the most part, regional governments have been proactive on 
this front, recognizing that continued spending on the scale 
they had initially planned would be financial ruinous given 
their radically reduced revenues.  It is notable, however, that 
despite large reductions in overall spending, spending in the 
social sphere has not commensurately declined, a strong 
indication of the governments' desire to maintain social 
stability. 
 
¶15. (SBU) Comment continued.  Pskov, with its atypical increase 
in revenue projections and marginal budget cuts, presents a 
unique situation, yet shows how Moscow "favors its own."  The 
governor of Pskov, Andrey Turchak, has strong ties to Moscow, 
but had few ties to the oblast before President Medvedev 
appointed him to his position in February, 2009 (reftel) - just 
as the financial impact of the crisis was beginning to be felt. 
As such, it would have been inconvenient for Turchak if one of 
the first things he had to do was revise the oblast's budget 
downwards.  Fortunately for him, however, he was spared the 
necessity of undertaking this unpopular action both because his 
region's economy was already at a low base and because the 
federal government came through for him and increased its 
subsidies to his oblast.  For this combination of reasons, 
Pskov, unlike any other region in our district, actually enjoyed 
a projected increase in revenue compared to its earlier budget, 
and absorbed only minimal expenditure cuts. 
 
 
GWALTNEY