Can Credit Markets Discipline Subnational Governments in Russia?
Andrey Timofeev CERGE-EI, Charles University, Prague Access to credit markets is essential for the ability of subnational governments to develop local infrastructure without resorting to disruptive increases in tax rates. However, local governments might pursue an unsustainable borrowing path unless they face appropriate incentives. Up until recently there was little hierarchical control over subnational borrowing in Russia. However, data that became available after the new Budget Code required the maintenance of debt ledgers, report the accumulated stock of subnational debt to be at a modest level of twenty percent of annual subnational expenditures. It can be argued that the market forces, being the only constraint on subnational borrowing, have generally precluded subnational governments from unsustainable borrowing. Indeed, credit markets can potentially correct irresponsible fiscal behavior by charging adequate risk premia or excluding a profligate jurisdiction from further borrow
