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Kadyrov's Chechnya Appears Exempt From Russian Funding Cuts

Moscow's decision to continue allocating enough funding to Chechnya to cover its expenditures appears to be indicative of the unique relationship between Chechen Republic head Ramzan Kadyrov (right) and Russian President Vladimir Putin. (file photo)

The economic sanctions imposed by Western governments on Russia in retaliation for its annexation of Crimea in 2014, in conjunction with plummeting world oil prices, have necessitated stringent cuts in funding to Russia's constituent subjects, many of which are dependent on federal subsidies to balance their budgets.

Health care has been hit, with some large towns reportedly left without a single hospital; public transport in many rural areas has been discontinued.

But there is one glaring exception to that trend: The Chechen Republic is seemingly exempt from such belt-tightening.

Russian Finance Minister Anton Siluanov told the TASS news agency last month that, exceptionally, Moscow will automatically allocate enough funding to Chechnya to cover the republic's "justifiable" planned expenditures.

That commitment reflects both the perceived need to address the aftermath of the wars of 1994-96 and 1999-2000, and the unique relationship between Chechen Republic head Ramzan Kadyrov and Russian President Vladimir Putin.

It also ignores the possibility -- raised, for instance, by oppositionist Ilya Yashin in his study of Kadyrov published last year -- that considerable financial resources channeled to Chechnya over the past 15 years have been diverted for the personal use of Kadyrov and a small circle of his associates.

Critics have suggested that Putin essentially gave Ramzan Kadyrov carte blanche to stamp out armed Chechen opposition to Moscow's authority and cow the republic's population into submission after the death in 2004 of Kadyrov's father, Akhmed-hadji Kadyrov, whom Putin had installed as Chechen leader.

Vast Sums

In return, under that scenario, the Russian government made available vast sums of money for postconflict reconstruction (464 billion rubles, or $7.8 billion at the current exchange rate, between 2002 and 2012) and turned a blind eye when some of it was diverted for other purposes.

Those funds enabled Chechen authorities to rebuild much of Grozny but not necessarily revive production; as of 2011, Chechnya's Industry and Energy Minister estimated that "a mere 6-7 percent of the prewar economy has been restored," according to a study published two years ago by the International Crisis Group (ICG).

Ramzan Kadyrov makes a speech during lavish party to mark his 35th birthday in Grozny in 2011. Suspicions have been voiced that government funds were diverted to help pay for the event.
Ramzan Kadyrov makes a speech during lavish party to mark his 35th birthday in Grozny in 2011. Suspicions have been voiced that government funds were diverted to help pay for the event.

In 2012, the Russian government switched tack. Rather than adopting a third economic program specifically for Chechnya, as Grozny had requested, it drafted a far broader program for the economic development of the entire North Caucasus until 2025, the estimated cost of which has already been revised numerous times.

In 2015, however, the Russian government decided that the funds in question should be used primarily to finance economic development and thus contribute to the creation of new jobs rather than cover the cost of social subsidies (pensions, family allowances, unemployment benefits), according to Kommersant, which quoted federal Minister for the North Caucasus Lev Kuznetsov.

Subsidy Dependent

Consequently, given its meager tax base and paucity of other revenues, Chechnya has remained dependent on subsidies from the federal center to finance even basic social provisions. For the past several years, such subsidies have accounted for 80-82 percent of Chechnya's annual budget (down from 87 percent in 2010-11).

Meanwhile, the republic's reputation as a financial black hole is blamed for deterring all but the most intrepid investors. It may also account for the fact that the special economic zone created in southern Chechnya four years ago to promote investment tourism has proved less effective than any other comparable initiative anywhere in Russia, according to a recent evaluation by Russia's Audit Chamber.

In October 2016, the federal Finance Ministry published a draft budget for 2017 in which Chechnya's budget, and consequently also the amount the republic would receive in subsidies to bridge the gap between its own revenues and projected expenditures, were slightly lower than the level for 2016. Kadyrov, who in June 2015 declared that Chechnya's model of economic development had proved so successful that in the near future the republic would become self-financing and would no longer need subsidizing, immediately pronounced that reduction "unacceptable," given that "we are only just getting back on our feet."

In response to his complaints, the Finance Ministry duly allocated 40.4 billion rubles toward Chechnya's budget expenditure for 2017, plus a further 16.4 billion to balance its budget, in addition to the other subsidies that Chechnya is entitled to. Moreover, Putin said more cash would be made available in 2018-19 to fund the federal development program for the North Caucasus. The amount earmarked for that program for 2017 had been slashed in March 2016 from 31.8 billion rubles to just 13.7 billion rubles.

'Parallel Budget'

Chechnya's total budget for 2017 is thus some 60 billion rubles. However, that figure is arguably misleading in light of what economist Denis Sokolov terms the existence of a parallel budget over which federal agencies have little control.

One of its components is the direct transfer of subsidies received by the Chechen government from the federal budget into the so-called Akhmed-Hadji Kadyrov Regional Public Fund. The stated objective of the fund, to which public-sector employees say they are required to "donate" at least 10 percent of their salaries, is "to provide charitable assistance to citizens in need and to create jobs for the republic's population." But suspicions have been voiced that on occasion the cash in question is diverted for other purposes, such as to pay millions of dollars to Western celebrities to attend Kadyrov's lavish birthday party in 2011.

Whether the cost of the first match that Grozny's former Terek soccer club played after being renamed in honor of Kadyrov's late father was covered by the eponymous fund or by Kadyrov's official reserve fund is not clear. The Russian TV station Dozhd estimated that cost, including soccer jerseys for all the budget sector employees who were dragooned into attending the match earlier this month, at tens of millions of dollars, the news portal Caucasian Knot reported.

Economist Denis Sokolov (file photo)
Economist Denis Sokolov (file photo)

Chechnya's business community, too, is under constant pressure to pay kickbacks to local bureaucrats who in turn pay a cut to their immediate superiors, the International Crisis Group (ICG) and others have argued. Sokolov suggested that pressure creates "insurmountable barriers" to the development of a private business sector, insofar as any potential entrepreneur is subject to extortion and blackmail that negate any prospect of profit. That, in turn, precludes both the creation of new jobs and a substantive rise in tax revenues, according to Sokolov.

Sokolov explained in detail in November to RFE/RL's North Caucasus Service how the parallel budget functions and its impact on Chechen domestic politics. Apart from the Akhmad-hadji Kadyrov Fund, Sokolov alleged, Chechnya receives funds allocated under various federal programs, part of which "is reallocated among the republic's elite, and quite a large proportion of which ends up at the disposal of the republic head."

In such a situation, Sokolov argued, any reduction in federal funding means not only less financing for Chechnya but less for Kadyrov's personal projects and those of his cronies. This in turn narrows Kadyrov's scope for maneuver on both the financial and management fronts, and thus risks undermining his position, insofar as his personal security is directly contingent on his subordinates' collective confidence in his ability to protect their economic interests, he said.

On the other hand, Sokolov said, insofar as many Moscow decision-makers still perceive Kadyrov, if not as the guarantor of stability in Chechnya then as the lesser of two evils, few are willing to incur his wrath by publicly advocating a further cut in funding for Chechnya -- even at the risk of public protests elsewhere in Russia against the special economic status that Kadyrov is seen to enjoy.

The views expressed in this blog post do not necessarily reflect those of RFE/RL.

About This Blog

This blog presents analyst Liz Fuller's personal take on events in the region, following on from her work in the "RFE/RL Caucasus Report." It also aims, to borrow a metaphor from Tom de Waal, to act as a smoke detector, focusing attention on potential conflict situations and crises throughout the region. The views are the author's own and do not represent those of RFE/RL.


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