Where does the money go?
Russia is split in two
Author: Tatyana Rybakova
Despite the "pivot to the East" announced back in 2022, after the war began, the Russian economy continues to grow, driven by its western regions and the center. This conclusion can be drawn from a report by the Institute of Economic Forecasting of the Russian Academy of Sciences. Even the government's targeted efforts, albeit short-lived, were unable to change the situation. If the war ends and trade with Europe resumes, the situation risks becoming even worse than it was before the war.
It seems logical that after the "structural transformation" and "pivot to the East" announced in 2022—that is, the strengthening of the defense industry and the transition to trade with and through China—the main beneficiaries of the economic restructuring should have been the Siberian and Far Eastern regions. However, as the May report According to the Institute of Economic Forecasting of the Russian Academy of Sciences, "Monetary and Fiscal Policy in Russia: Peculiarities of Interaction," this hasn't happened: Moscow and Russia's western regions continue to provide the bulk of the economy, while Siberia, home to the largest defense industry machine-building facilities and mining operations, is faring worse than it did in peacetime. The problem could worsen after the war ends: the government will need extraordinary efforts to at least prevent the gap between the regions from widening. But the budget is unlikely to have the funds for this.
Who had time, he ate
The report's authors cite the high inertia of territorial distribution—both production and population—as the most important factor in the persistence of negative imbalances in the country's spatial development. One of the most striking examples is the coal-mining regions of Siberia. Despite the coal industry's crisis having lasted for several years, no new major clusters of other sectors have emerged there, nor has there been any significant population shift—except that unemployed miners are increasingly signing contracts with the Ministry of Defense and leaving for war. Meanwhile, much talk is being made about development, revival, strengthening, and so on.
The reasons are also clear. Repurposing an entire region, especially one as complex as Siberia, requires a tremendous amount of effort—and investment. In a truly federal environment, regional authorities offer preferences to new companies in such territories, singling out those that can quickly attract investment and create numerous related businesses. The most striking example is the state of Texas, where Elon Musk relocated part of his production. In a Chinese-style administrative economy, territorial development plans are drawn up, and the center allocates substantial funds, despite mounting debts. Thus, the CPC deliberately developed coastal regions, establishing free economic zones there, and is now developing China's interior.
Russia, as always, has its own unique path: decisions are made by the center, but there's no money or special benefits. As a result, everything follows a natural course—money gravitates toward money, and production gravitates toward economically active regions. However, as Ekaterina Shulman aptly observes, tooth decay is a natural process, while brushing one's teeth is unnatural, since it is precisely the hallmark of human civilization, which bends the natural course of events to its own advantage.
Meanwhile, at the moment when money, primarily government money, was going in the direction he needed, the effect was astonishing.
Thus, in 2022, Russia's GDP not only did not decline, but even grew by 0,2%, primarily due to the country's eastern regions. This is despite the fact that the Northwest and Central regions, which accounted for the majority of foreign economic interaction with Europe, suffered a significant decline. The growth of the total GRP (domestic regional product) in 2023, when budget funds were poured into defense and import substitution, was 5,2%, and in 2024 it was 4,5%. The lower growth in 2024 is due to the fact that the "military Keynesian" multiplier faded in the second half of the year, and budget reserves were depleted. At the same time, an interesting development occurred: it was the western regions, which had suffered at the beginning of the war, that took advantage of the situation, while the Urals and Siberia began to fall further and further behind—and as a result, as the authors of the report write, their lag became progressively worse.
Production is increasingly concentrated in the top 10 regions, which accounted for 54,6% of total GRP in pre-war 2021, and 55,8% in 2024. "The regional structure of GRP continued to shift toward the western regions, driven by an increasing share of the Central Federal District in total GRP and a decreasing share of the eastern districts (Ural Federal District, Siberian Federal District, and Far Eastern Federal District), which occurred primarily due to a decline in Siberia's share," the report states. Overall, from 2022 to 2024, 79,7% of the total GRP growth was driven by the country's western regions.
Why did this happen? Of course, one of the most important factors was the decline of the mining sector, primarily the coal industry, due to weak Chinese demand and Europe's rejection of Russian coal. The oil and gas sector in the eastern regions was also affected by oil sanctions and the shutdown of gas supplies to the EU. But the northwestern regions, particularly those specializing in the forestry and wood processing industries, suffered no less in 2022. Oil production in the European part of the country also declined significantly. However, they managed to find new niches, particularly in the Volga region and the Central Federal District. Yes, this primarily resulted from the creation of drone assembly plants and the "Russification" of Chinese products, from automobiles to electronics, in their territories. Now, more than 80% of the growth in the manufacturing industry is being driven by the western part of the country. Half of the total increase in manufacturing output was accounted for by nine major manufacturing centers: the Moscow Region, Moscow, Tatarstan, Sverdlovsk Region, St. Petersburg, and the Tula, Nizhny Novgorod, Samara, and Leningrad Regions. In a number of Far Eastern and northern regions, manufacturing has not fully recovered, with its volumes in 2024 not reaching 2021 levels. In the Far East, this situation has developed in the manufacturing industry of the Magadan Region, Buryatia, Kamchatka Krai, and Zabaykalsky Krai, and in the Northwest – in the Murmansk, Novgorod, and Kaliningrad Regions, Karelia, and the Komi Republic.
However, the agricultural sector in the western regions also grew, compensating for the poor harvest in the southern regions. Meanwhile, the eastern regions also experienced favorable weather during those same years. And, speaking of drones, it was the regional authorities who managed to convince the Kremlin to locate production facilities on their territory, providing land, infrastructure, and personnel. Incidentally, the decision to expand modern weapons production to the European part of the country turned out to be a poor one, judging by the way Ukrainian drones are methodically approaching them.
However, the biggest contribution to regional economic growth wasn't made by drones or other military products. Commercial services, primarily driven by Moscow, accounted for the largest share: information and communications services, hospitality and food service, finance, and insurance. Incidentally, even within the manufacturing sector, the driver wasn't just the defense industry but also the consumer sector: clothing, furniture, pharmaceuticals and materials, and printing, where import substitution was underway.
The freebie is over
However, all this happened until early 2025, while budget funds were flowing like a river to wherever regional leaders had managed to act early. And in 2025, the money ran out. As a result, by the end of the first quarter of 2026, some previously successful regions began to fail.
For example, in the Bryansk region, the industrial production index rose by 5,2% by the end of 2025. This was primarily due to growth in the defense industry. Officials reported successes, with record after record. But in 2026, based on the first two months, there was a 16,4% decline. The manufacturing sector itself plummeted by 17,5%. Production of "other transport vehicles and equipment" (this is where drones and other self-propelled military equipment are usually hidden) plummeted by 28,3%. Everything else was falling, too. Yes, the Ukrainian Armed Forces' strike on the Bryansk Chemical Plant—which produces gunpowder, industrial explosives, and warheads for missile systems—most likely had an impact. But the missile strike on the Kremniy El plant, a manufacturer of microelectronics for the defense industry, occurred on March 10 of this year, so it didn't affect February's results (but will affect March-April). Finally, excuse me, but what caused the 12,1% decline in the water supply, sanitation, and waste disposal sector? Perhaps it was because the regional governor, Alexander Bogomaz, resigned after arrest one of his deputies in a corruption case, and the acting governor appointed was former prime minister of the so-called "LPR," Yegor Kovalchuk? One of the latest official reports about this: the acting governor visited circus.
Money to money
That the issue isn't just a matter of changing external conditions is evidenced by the fact that regional differentiation hasn't diminished. On the contrary, the report's authors write, it has persisted and continues to intensify. This is primarily due to the fact that the central and Far Eastern regions are the priority areas for investment, especially public investment. And where public money goes, growth follows (though not always). The Far East has been the primary beneficiary of this, thanks to the rapid development of ports and logistics hubs for trade with China. As a result, in 2025, the Amur, Leningrad, Sverdlovsk, and Tver regions, Khabarovsk and Perm Krais, and Tatarstan will be among the leaders in terms of investment growth. In other words, these are either regions with strong production of modern weapons (primarily drones) or regions involved in the transshipment of Russian exports.
When own funds are scarce and credit is expensive, two investment options remain: third-party investment, either direct or market (stock market), or budget funds—in the form of government procurement, subsidies, loan incentives, etc. The share of companies' own funds in investment increased from 52,2% in 2014–2021 to 54,6% in 2022–2024, while the share of credit remained unchanged at 10% (presumably due to government incentives, given the high Central Bank interest rate). However, as noted in the report, the regional composition of credit resources changed: over 80% was invested in the country's western regions, with 43,4% going to the Central Federal District.
Where does the most budget money go? Moscow, Tatarstan, St. Petersburg, the Moscow, Rostov, Nizhny Novgorod, and Sverdlovsk regions, Krasnodar Krai, and the Republic of Bashkortostan. Moreover, they attract the most money from both regional and federal budgets. Clearly, Moscow is a special case here, but Rostov and Sverdlovsk regions are clearly not much different from their neighbors. It seems the saying "money attracts money" applies here as well—even when it comes to budget funds.
The result, however, isn't good for the country as a whole—regional polarization has intensified. The top ten regions are increasingly lagging behind the rest. The report specifically notes that the eastern regions, which played a role in stabilizing the economy in 2022, are falling further and further behind, especially those in the raw materials sector. True, the authors merely document the situation without analyzing the causes, but they are obvious: these regions are completely dependent on large raw materials companies, either state-owned or affiliated with the Kremlin, and for these companies' executives, spending money on regional development and creating a diversified economy is pointless. It's worth noting that raw materials companies in Tatarstan and Bashkortostan have much stronger ties to regional leadership—as a result, these regions have become some of the main beneficiaries of the "structural transformation." And there's no doubt that if the war ends, they will be able to perform a similarly effective U-turn.
Meanwhile, the center is increasingly demanding that the regions dig themselves out of the hole—there's no money in the federal budget either. For example, the Federal Tax Service instructed Regional authorities should explore the possibility of raising taxes to close local budget deficits, which reached a record high of 1,5 trillion rubles last year. A real estate inventory is proposed, as well as a more active search for land that is not being used for its intended purpose—frankly, a poor idea. But what can be done? Some regions already have budget deficits exceeding 30% of their revenues (Kemerovo, Vologda, Arkhangelsk, and Tyumen Oblasts), while others exceed 25% of their revenues (the Komi Republic, Yamalo-Nenets Autonomous Okrug, Sakhalin, Orenburg, Chelyabinsk, and Murmansk Oblasts). It's worth noting that these are the same underdogs who couldn't—or weren't able—to take advantage of the situation in 2023-24, when they could have used the federal budget to establish highly profitable production facilities or tap into export flows. The top five "outsiders" are particularly surprising in this regard: the ice-free ports of Arkhangelsk and Murmansk, given the Center's efforts to divert cargo to the Northern Sea Route, could become an alternative to western routes; the Vologda Region is traditionally "rich" in defense industry enterprises; the Tyumen Region is not only rich in oil, but also in the support of Moscow Mayor Sergei Sobyanin; and the Kemerovo Region, although it suffered from a drop in demand for coal, is the fiefdom of Putin's niece. Anna Tsivileva and her husband. It seems worth remembering another proverb: "Some look for reasons, others for opportunities."
One could celebrate the success of regional government managers and lament the incompetence or lack of qualifications of those who are unsuccessful, but this ultimately creates a problem for the entire country. Because the deepening division of the country's economy could lead to a situation where for many years to come we will have a successful West and a depressed East—especially if the war ends and ties with Europe are restored. Then, talk of Russia's disintegration will cease to be theoretical.
