ECONOMY
Kremlin Turns Its Attention to Growing Problem of Regional Debt
May 6, 2026
- Maxim Blant
Economist
Russia’s regions have seen their aggregate annual deficit balloon to almost RUB2 trillion, versus the RUB200-300 billion recommended by the Finance Ministry. Economist Maxim Blant looks at the drivers of regional debt and the carrot-and-stick approach now being adopted by the Kremlin to head off a crisis.
This is a translated version of an article originally published by Republic.
Russian President Vladimir Putin has ordered two thirds of Russian regions’ debt on federal loans to be written off, conditional on regions agreeing to direct the freed-up money toward investment and other “significant goals.” In addition, repayment of the remaining third is to be postponed to future years. Meanwhile, Finance Minister Anton Siluanov has demanded that regions narrow their planned budget deficits for this year by half.
The Kremlin has become increasingly concerned about the dire state of regional finances after regions ran a deficit of RUB1.5 trillion last year. According to Siluanov, that figure is at least five times a “normal” consolidated deficit level of RUB200-300 billion.
Overall, the process of shoring up regional finances is set to follow the traditional carrot-and-stick approach.
For understandable reasons, Putin took upon himself the task of distributing carrots. Speaking before the Council of Legislators under the Federal Assembly, he recalled the recent decision to write off regions’ debt to the federal budget, noting “we are talking about more than RUB1 trillion by 2030.”
“A trillion” sounds impressive, but “by 2030” diminishes it somewhat. An unprecedented RUB1.5 trillion hole in regional budgets emerged in 2025, and this year it is set to be even bigger. Thus, far more important is how much debt relief regions will actually receive this year. Indirectly, Putin answered that question as well, announcing support for an initiative by United Russia – in a Duma election year, the “party of power” cannot do without populist initiatives – to defer repayment of the remaining debt to later years.
Meanwhile, there is the stick Siluanov threatened the same day. Lamenting that after a record RUB1.50 trillion deficit, regions penciled in an even larger planned deficit of RUB1.96 trillion for 2026, he demanded they cut the figure to RUB1 trillion – almost by half.
To do so, regions will have to turn to spending cuts and measures aimed at bringing more of the economy out of gray areas and ensuring tax compliance. They will have to cut RUB960 billion in spending – triple the amount they will no longer have to repay to the Finance Ministry.
To assess what all this means, it is useful to understand how things got to this point in the first place. The main sources of revenue for regional budgets are personal income tax and profit tax, and it was a collapse in receipts from the latter – which, recall, rose from 20% to 25% on January 1, 2025 – that tore the hole in regional budgets last year, something Siluanov himself noted.
Unlike the VAT, which goes to the federal budget and is paid regardless of companies’ financial performance, the profit tax depends on whether companies are actually making profits. And currently, Russian businesses are struggling.
Russian President Vladimir Putin has ordered two thirds of Russian regions’ debt on federal loans to be written off, conditional on regions agreeing to direct the freed-up money toward investment and other “significant goals.” In addition, repayment of the remaining third is to be postponed to future years. Meanwhile, Finance Minister Anton Siluanov has demanded that regions narrow their planned budget deficits for this year by half.
The Kremlin has become increasingly concerned about the dire state of regional finances after regions ran a deficit of RUB1.5 trillion last year. According to Siluanov, that figure is at least five times a “normal” consolidated deficit level of RUB200-300 billion.
Overall, the process of shoring up regional finances is set to follow the traditional carrot-and-stick approach.
For understandable reasons, Putin took upon himself the task of distributing carrots. Speaking before the Council of Legislators under the Federal Assembly, he recalled the recent decision to write off regions’ debt to the federal budget, noting “we are talking about more than RUB1 trillion by 2030.”
“A trillion” sounds impressive, but “by 2030” diminishes it somewhat. An unprecedented RUB1.5 trillion hole in regional budgets emerged in 2025, and this year it is set to be even bigger. Thus, far more important is how much debt relief regions will actually receive this year. Indirectly, Putin answered that question as well, announcing support for an initiative by United Russia – in a Duma election year, the “party of power” cannot do without populist initiatives – to defer repayment of the remaining debt to later years.
Meanwhile, there is the stick Siluanov threatened the same day. Lamenting that after a record RUB1.50 trillion deficit, regions penciled in an even larger planned deficit of RUB1.96 trillion for 2026, he demanded they cut the figure to RUB1 trillion – almost by half.
To do so, regions will have to turn to spending cuts and measures aimed at bringing more of the economy out of gray areas and ensuring tax compliance. They will have to cut RUB960 billion in spending – triple the amount they will no longer have to repay to the Finance Ministry.
To assess what all this means, it is useful to understand how things got to this point in the first place. The main sources of revenue for regional budgets are personal income tax and profit tax, and it was a collapse in receipts from the latter – which, recall, rose from 20% to 25% on January 1, 2025 – that tore the hole in regional budgets last year, something Siluanov himself noted.
Unlike the VAT, which goes to the federal budget and is paid regardless of companies’ financial performance, the profit tax depends on whether companies are actually making profits. And currently, Russian businesses are struggling.
Crude oil supertanker AbQaiq. Source: Wiki Commons
According to Rosstat, the share of loss-making companies rose to 27.1% in 2025, while aggregate corporate financial results were 4% worse than in 2024. All this led to the hole in regional budgets increasing fivefold to RUB1.5 trillion. This year, Rosstat has released data only for January, reporting that the share of loss-making companies jumped from 27.1% to 38.0%. No wonder the decline in profit-tax receipts.
Fresher estimates have been provided by RBC. Citing data from the nonprofit Chamber of Commerce and Industry, it reported 65% of Russian companies did not turn a profit in the first quarter of 2026.
At first glance, the Finance Ministry’s demand that regions cut their deficits and thus spending appears prudent; yet the latter improves the economy only when it takes place amid economic growth and is accompanied by tax cuts. In that case, the labor market can smoothly absorb those who have lost their jobs, the fiscal burden on businesses is reduced, profits rise and tax revenues increase.
Under the current conditions, however, things will only worsen. This is because cuts to spending by regions will mean less investment – regardless of what Putin says on the matter – as well as layoffs of public-sector employees.
Cuts to regional government investment will hit local construction and infrastructure firms, which are already mired in a crisis. For them, profitability has long been out of the question, but once they lose government contracts – for which they had been promised “a line in the budget” – many of these companies will simply go bankrupt. Laid-off public-sector employees will be joined by unemployed construction and road workers. All this will lead to lower personal income tax revenues and higher social payments to low-income citizens, whose numbers will grow.
Worse still, purchasing power in the regions will decline, dealing an additional blow to companies. The main burden will fall on small and medium-sized businesses. The real risk for regions – especially those unlucky enough not to have many military factories – is a spiral from which neither spending cuts nor measures to reduce the gray economy will be able to rescue them.
Fresher estimates have been provided by RBC. Citing data from the nonprofit Chamber of Commerce and Industry, it reported 65% of Russian companies did not turn a profit in the first quarter of 2026.
At first glance, the Finance Ministry’s demand that regions cut their deficits and thus spending appears prudent; yet the latter improves the economy only when it takes place amid economic growth and is accompanied by tax cuts. In that case, the labor market can smoothly absorb those who have lost their jobs, the fiscal burden on businesses is reduced, profits rise and tax revenues increase.
Under the current conditions, however, things will only worsen. This is because cuts to spending by regions will mean less investment – regardless of what Putin says on the matter – as well as layoffs of public-sector employees.
Cuts to regional government investment will hit local construction and infrastructure firms, which are already mired in a crisis. For them, profitability has long been out of the question, but once they lose government contracts – for which they had been promised “a line in the budget” – many of these companies will simply go bankrupt. Laid-off public-sector employees will be joined by unemployed construction and road workers. All this will lead to lower personal income tax revenues and higher social payments to low-income citizens, whose numbers will grow.
Worse still, purchasing power in the regions will decline, dealing an additional blow to companies. The main burden will fall on small and medium-sized businesses. The real risk for regions – especially those unlucky enough not to have many military factories – is a spiral from which neither spending cuts nor measures to reduce the gray economy will be able to rescue them.
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