Deficit: the budget in Abkhazia

Throughout 2022, the authorities of Abkhazia have talked about success and growth in key sectors of the economy and promise the population an increase in living standards. But the decline in Russian financial assistance, critical to the republic, the risks for local businesses and the market amid international sanctions against Russia that are rebounding on Abkhazia, and the state budget planned for 2023, suggest this is a myth.
Life without light
“This story should be called: “How to live without light with children and not go crazy,” says 28-year-old Ilona. “Yes, we already have gas cylinders, batteries and camel wool blankets. But all this does not work if there are children in the house.”

For several years now, every autumn and winter Abkhazia has been living in a critical state, with no electricity for six to eight hours a day. But this problem, which people call the most important in all polls, cannot be seen in the budget of Abkhazia planned for 2023. Experts speak with concern not only about the unprecedented budget deficit, but also about the difficulty of fulfilling even the existing revenue side and about non-transparent items of expenditure, with minimal energy spending and greatly reduced spending on social spheres.

According to the version adopted on the first reading, it will be the most sparsest in history - expenditures will exceed revenues by almost 1,700,000,000 rubles [about $27 million], which is 15% of the entire budget.
Budget of Abkhazia for 2023
  • 9.6 billion
    about $154 million
  • 11 billion about $181 million
  • 1679101.9
    about $27 million

Since the military phase of the Georgian-Abkhaz conflict in the early 1990s Abkhazia has lived in isolation from the world. Of the major countries of the world only Russia has recognized its independence, while the entire Western and even Eastern world community continues to consider Abkhazia a part of Georgia.

Almost all large installations in Abkhazia are built and reconstructed at the expense of the Russian gratuitous investment program. Up to 80% of the budget of Abkhazia was filled with financial assistance from Russia, including the payment of pensions and salaries of state employees. All the presidents and governments in Abkhazia over the years have reported this as their achievement.

Managers, however, avoid mentioning that their own income item has hardly grown during these decades. And they never report that all projects end up the same way: the execution is stretched out for years and decades (or does not happen at all), and the initial estimate is exceeded several times.
A beautiful park along the coast of Staraya Gagra, between the gorges of Zhoekvara and Gagrypsh, was founded in the 1900s by the Russian aristocrat the Prince of Oldenburg. The unique architecture of the palace and unusual sculptures in the park were supplemented with elements of a botanical garden, with unique plants brought from all over the world. The reconstruction of this park, which fell into ruin after the 1990s, was one of the first projects included in the program of Russian aid to Abkhazia. But instead of the two years allotted for it, the reconstruction continued for several years, and experts say that the sums spent on this far exceeded the original budget.
The same happened with the reconstruction of the water supply system in Gagra, the construction of a hospital in Tkuarchal, and the repair of roads and sidewalks in Sukhum.
Photo of Jonua street, which was repaired for several years instead of the scheduled two

The most scandalous story is connected with the permanent energy crisis, which Ilona told us about, and with which Abkhazia has been living for several years.

Cryptocurrency mining farms have become a direct catalyst of the problem. Because of these, the level of electricity consumed by the republic has surpassed all norms. While in 2020 it reached 2 billion kW, a year later it increased to 3 billion kW. The consequences are worn-out lined and frequent accidents.

There was no income from mining in the treasury. The project to create transformer substations in the villages and repair the Achguara high-voltage line, again funded by Russia, was supposed to solve the problem. But all these exist only on paper, and there is still no light in homes.

"During the purchase of equipment and materials, tens of millions of rubles were stolen. The cost of some components in the estimate turned out to be overestimated by up to three or more times," Adgur Ardzinba, leader of the Abkhaz opposition, says. The prosecutor's office has begun checking these data.

Relying on Russian financial support has become the norm in Abkhazia. For decades Moscow formed almost the entire budget of the republic. The authorities are strengthening the faith of the population that this will continue, but like confident claims of economic growth, this too is a myth.

In fact, the volume of gratuitous funding from Russia has consistently declined in recent years. In 2023 the amount of support will be reduced by 10%, and will amount to only half of the budget of Abkhazia. In 2022 Russia for the first time refused to support Abkhazia during its winter energy crisis and to supply electricity. As experts say, in order to force Abkhazia to transfer the entire system of generation and distribution into the hands of Russian companies.

Even the latter may be a problem. The Russian economy and the state budget are in recession and experts expect further impoverishment.

There are also risks associated with this for more than 20% of the budget and planned tax revenues. Although Turkish entrepreneurs have become more active in Abkhazia, the main part of its business is again connected with Russia.

It turns out that the president’s recent bravura speech with bright slides about the economic achievements of his government has a dangerous background for the population:

  • Another 10% reduction in funding from Russia,
  • For 15% of the budget, it is unknown where to get the money from
  • Another 20% of income depends on the economic well-being of Russia, which is doubtful considering the war in Ukraine.

The population in Abkhazia is little interested in this context, because traditionally they rely little on the support of the authorities and form their budget in parallel. This is a separate chapter in this study.
Analysis of the revenue and expenditure parts of the budget
From the main figures:

• Abkhazia's own income is expected to grow by 21% in 2023.

• Russia's aid, on the contrary, will decrease by 10%. This process will continue in the future, as the interstate agreement between Abkhazia and the Russian Federation speaks of a systematic reduction in financial assistance under the program investing in the budget of Abkhazia.
Budget revenue for 2023:

9,622,244,900 rubles
[approximately $154 million]

Main budget-forming incomes:

  • Corporate income tax - approximately 13% of the budget.
  • Income tax is about 17%
  • VAT - 35.5%
  • Customs duties - 8%
  • Customs fees - 5.5%
  • Excise is little less than 5%
  • Free assistance to Russia is a little less than half of the budget.

In addition to taxes, non-tax payments go to the budget. The main types of payments of this kind are payment for notary services, consular offices and the migration service.

The largest share belongs to the fee for a work permit in Abkhazia for foreigners. And the traffic police, for example, expects to collect more payments by installing cameras on the roads.
Tax collection is the most painful issue
The Ministry of Finance explains the growth of the budget primarily by an expected increase in tax collections.

This also applies to income tax, since more entrepreneurs and thus employers have appeared in Abkhazia.

In addition, new taxpayers are also being identified. Most of these were found in the tourism industry. At a meeting at the Center for Humanitarian Research under the President, Minister of Tourism Teymurz Khishba said that some owners of accommodation and food facilities received licenses voluntarily, while others were identified through control measures.

But the fact is that a significant number of potential taxpayers have become “real”, and this has affected the growth of tax collection.

Judging by the data of the Ministry of Finance, imports also increased and thus the collection of VAT. Compared to 2022, value-added tax revenues are projected to increase overall by about 386 million rubles [approximately $6.2 million], or 17%.

The issue of VAT is very painful in Abkhazia for both business and politicians. It is worth recalling that President Aslan Bzhaniya’s election platform was about its complete abolition. But, obviously, because the tax is budget-forming, it is not advisable to abolish it.

Imports: prices rise - tax revenues rise

An increase in imports occurs in the summer when the tourist season begins in Abkhazia. Food products make up the lion's share of all imported goods. In the off-season, profits in the budget come from imported building materials.

Sanctions have affected which goods are imported, and Abkhazia is forced to adapt to how Russia reorients its imports. Because of this, the prices of many goods have increased significantly, and, accordingly, the taxes thereon.

There has also been a noticeable increase in Turkish goods in Abkhazia. While earlier it was mainly textiles, now Turkish cosmetics, household chemicals, hygiene products and even medicines are popular. Experts say that it was access to the Turkish market and the quick response of local businesses that helped the people of Abkhazia avoid a sharp shortage of household goods, due to heavy dependence on Russian business under sanctions.
The myth of salvation? How spending will be distributed and why there is a gap of 1,700,000,000

“Income from tourism has become more transparent in our country, and payment in the reserve on Lake Ritsa and in the New Athos cave is better collected. Tax payments from the owners of tourist accommodations too. But this will not affect the population of Abkhazia in any way.”

This is the opinion offormer deputy Natalia Smyr, who headed the budget committee during her work in the National Assembly.

The problem, she says, is inadequate spending.

“Having familiarized myself with the individual expenditure items of the draft law on the state budget for 2023, I began to doubt the approach of the Minister of Finance when planning budget expenditures.

For example, 90 million rubles [approximately $1,440,000] are provided for the modernization of budget accounting. Another 50 million rubles [approximately $800,000] for the creation of a unified information processing and storage system. That is, in total, 140 million rubles [approximately $2,300,000] were allocated for these purposes. And for the energy sector, where the catastrophe occurs, only 15 million rubles [about $ 240,000]," Natalie Smyr says.

Spending, given the scale of problems in the industries, is incommensurate, she believes.

Smyr calls the modernization of accounting and digitalization incomprehensible measures that the authorities will not be able to explain to the people, especially if they do not have a stable electricity supply.

“Tell a mother that she will not be able to warm her children up in winter and feed them, because the Minister of Finance decided not to give people light and heat, but to spend it on financial accounting. There is a huge number of such people. It is comical to talk about digitalization when people do not have electricity in their homes,” the deputy maintains.

According to MP Dmitry Marshania, who is a member of the parliamentary budget committee, the government will not be able to cope with such a large deficit with the measures they have outlined.

He draws this conclusion primarily because the items of expenditure are not transparent. The budget does not indicate the specific areas where the money will go:

“There is a program in the budget to support sectors of the economy for 180 million rubles. But it is not clear exactly what positions the funds will be allocated for. Fifty-six million rubles are allocated for a plastic pipe plant, and 350 million rubles are allocated for a house on Nazadze Street. The house was declared an emergency, but no one showed any estimated documentation, so why such an amount? It could be less or more, there is no explanation.

The same applies to Chernomorenergo, which will have to solve the electricity problem. They have been allocated 150 million rubles of subsidized funds. But we don’t know where exactly this money will be directed, it has no intended purpose, so it’s almost impossible to control it.”

The myth of the minimum wage, or how the population earns

Trade and tourism are the main activities yielding maximum iincome in Abkhazia. There are several large industries ⁠— for example wine, beer, building materials and furniture. But most of the population is still engaged in small business. Almost all residents of the first coastline, if they do not own hotels, rent housing to tourists, even rooms in their own houses.

The Cabinet of Ministers of Abkhazia last changed the minimum wage on July 28, 2022. It is just over 8,000 rubles [$125]. But in fact it is impossible to live on this money in Abkhazia today. Employees of public institutions survive by combining several rates. The average salary for a public worker is about 20,000 rubles [$300].

No one even attempts to mythologize social benefits in Abkhazia. The pension for those who do not receive a Russian pension is 2,500 rubles [$40]. A little more for child allowance - 3,000 rubles. But it is paid every three months and only for children up to one and a half years, although it is this benefit that is planned to be more than doubled from 2023 to 7,000 rubles.

In order to survive, families in Abkhazia are creative in the formation of their family budget. Basically, a salary from one, the main place of work, seasonal earnings and periodic provision of services are combined; it can be cultivating the land, decorating, repairing equipment or selling goods.

In Abkhazia, assistance with online orders and delivery from pickup points that are outside of Abkhazia is popular. Often a grandparent’s Russian pension is another source of income.

Most of the population of Abkhazia is associated with the village,hence agriculture. The family budget in families who have access to their own milk, meat, corn, fruit is significantly different from those who buy products exclusively at the market.

Almost every Abkhazian family spends two thirds of the family budget on food. This is not difficult to calculate if you calculate income, approximate needs and prices in the market.

How people spend
The main item of household expenditure is food. But of course a family must also spend money on transport, clothes, occasionally on medicines, a hairdresser, phones, and the internet. There are also specific local expenses ⁠— weddings, funerals and birthdays, which can cost upwards of 5,000 rubles [about $80].

Thus working adults need to collectively earn at least 100,000 rubles [about $1,200]. Few can make this kind of money, so Abkhazians often live in debt. You can buy clothes on the market in installments, and even in convenience stores they still sell “by writing in a notebook”.

So budgeting in Abkhazia is becoming ever tighter, and people do so without a second thought for what the government thinks of their fate.

Until summer, families must find ways to manage without electricity.
“The fact that it’s dark and cold isn’t the whole problem” Ilona says. “First, along with the light, water is always turned off. How much can you stock up? You have to bathe.

Second, when evening comes, and in winter it comes early, parents have to make efforts to keep their children busy. Reading or playing with them in the dark is very difficult, and putting them to bed at six o'clock is impossible. We arrange circus performances with song and dance to keep them happy. But not all children take to this, and not all parents have the patience for such performances. Colds and nervous breakdowns are very common in Abkhazia."
Marianna Kotova
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