In a December 2025 article we have discussed the links between regional economic, fiscal, and political developments in the Irkutsk and Kemerovo Regions, where a severe fiscal crisis had already developed. In this second part, we take a closer look at regions facing growing problems due to the escalating troubles in the metallurgical and automotive industries.
Car manufacturing and metallurgy both saw a brief uptick in recent years but started facing problems again over the last year. Rosstat’s industrial production indices show a steady decline in both steel and pig iron production in the first three quarters of 2025 (the period for which data is available). Car manufacturing—a much smaller but, due to its concentrated nature, important industry—was more than 26 percent below last year’s levels.
Of course, war production still serves as an industrial locomotive: sectors linked to the military-industrial complex (such as ready-made metal products) saw growth in 2025. But it seems that this is not enough to compensate when the civilian core of these industries is struggling. For example, over 75 percent of Russian steel demand comes from the construction sector. Due to the cooling of the housing market and the end of broad mortgage subsidies over the past year, consumption by developers has been falling since late 2024: domestic metal demand fell by around 14 percent year on year in 2025, according to estimates from Russian Steel. Meanwhile, a strong ruble has hindered exports that had already been squeezed by the loss of European markets, forcing a pivot to Asia. High interest rates are making it even more difficult to invest domestically. Expecting a longer decline, Vladimir Potanin, the owner of Norilsk Nickel, described the current economic environment—of higher taxes, import restrictions, and inflation—as a «period of survival.»
Car manufacturing, meanwhile, is undergoing a period of «exhaustion,» according to industry experts—something that becomes obvious when looking at production figures from last year. This is the second major crisis since 2022, when the exit of Western investors tanked the industry for the first time, after which it enjoyed a brief uptick. In 2025, sales of new passenger cars fell by 16 percent to 1.326 million units, while production in the first ten months of the year fell by more than 22 percent. Higher prices did not offset the fall: in monetary terms, the market shrank by 7.8 percent—the first such decline in a decade. This is, to some extent, a consequence of the Russian government’s own economic policies, including the slower-than-expected lowering of the Central Bank’s key rate (which makes car loans expensive) as well as higher taxes and recycling fees, which have forced manufacturers to raise prices. By making spare parts more expensive due to import restrictions, sanctions also play a role.
Curbed expenditures, ballooning deficits
The impact of the crisis appears to have been more pronounced in Samara—home to AvtoVAZ, Russia’s largest car manufacturer—than in other regions that rely on car manufacturing. The Kaluga and Kaliningrad Regions, for example, successfully restarted their automotive clusters in partnership with Chinese firms (albeit after a brutal drop in 2022). While industry experts have warned that these companies are mostly interested in assembly rather than localization, the better performance of Chinese brands still meant that the regions registered virtually no nominal drop in corporate tax receipts. Samara, however—along with Tolyatti, Russia’s largest «monotown,» where AvtoVAZ’s main factory is located—is facing lean times.
In 2025, according to Avtostat, AvtoVAZ’s Lada brand saw its sales fall by almost 25 percent, leading the company to seek export deals in high-risk markets like Yemen and Iran. AvtoVAZ’s leaders have responded to the decline by reducing working hours and furloughing workers—a common practice in Russian industries. While this keeps people employed, the firm’s dominant position means it still impacts other industries and, through them, the region’s finances. Governor Vyacheslav Fedorishchev publicly admitted that the region is experiencing negative growth across all sectors of its economy. The 2026 budget was adopted with a whopping 30.1-billion-ruble deficit (more than 10 percent of regional revenues), with the government seemingly pinning its hopes on economic growth restarting in 2027−28.
The Vologda Region is also among those with a worsening economic and fiscal outlook, largely due to the crisis in the region’s main industry, metallurgy. According to the regional government, Severstal—the region’s primary taxpayer—reported zero profit tax for the first nine months of 2025, contributing to an almost 30-percent drop in corporate income tax revenues in the first eleven months of the year. Importantly, personal income tax receipts—which in most regions made up for a significant part of the shortfall in corporate taxes—also fell in the region, even in nominal terms. This caused a drastically widened deficit, one of the largest among Russian regions at the end of last year.
For 2026, the regional parliament passed a budget with a 10.2-billion-ruble deficit (as in Samara, roughly 10 percent of revenues), even after cutting planned expenditures—relative to last year’s budget—by around 24 percent. These cuts included funding for social and health care programs such as kindergarten equipment and payments for rural medical staff—a curious decision from a regional government that has championed itself as a demographic trailblazer.
The decline of metallurgy has also impacted the budgets of other regions. In the Orenburg Region, a 9.8-percent drop in production at the region’s metallurgical plants—along with troubles in the energy and petrochemical sectors—caused corporate income tax collection to drop by almost 40 percent in the first eleven months of the year, sending the budget into freefall. This is happening at a time when the region is still struggling to restore infrastructure after the devastating floods of 2024.
That year, the region received considerable additional transfers from the federal government, but in 2025 those transfers dropped again. As a result, the region cannot really afford either to maintain spending at current levels next year or to make substantial cuts to infrastructure spending (which is usually the first item regions slash in leaner times). Instead, health care expenditures were reduced by 15 percent and spending on education by 4 percent. Even so, the region’s 2026 budget foresees a deficit of 12.9 billion rubles. As in Vologda, it is questionable whether this is a sustainable target: last year the deficit was originally planned at 18 billion but ended up over 33 billion rubles. Efforts to kick-start economic growth by attracting foreign investment into the Orenburg Special Economic Zone are to a large extent themselves dependent on the region’s leading industries.
Similarly, the Murmansk Region—where metallurgy is a leading industry—suffered a 13-percent decline in corporate tax revenues in the first eleven months of 2025, with port cargo turnover (another major driver of the regional economy) also dropping. Just like the other regions discussed, Murmansk adopted its 2026 budget with a significant deficit—23.7 billion rubles, or almost one-fifth of its revenues. Major cuts are difficult when the government is trying to attract more qualified labor to the region to cement its coveted status as Russia’s Arctic capital.
Figuring out priorities
There is, thus, no easy fix and little hope that changing circumstances will make the problems go away. Both industries have already been lobbying for more aid from the government. Crucially, however—just as in the case of the coal industry—the federal government has been unwilling or unable to give the industries what they actually want: preferential treatment and major demand-side stimulus (e.g., in the form of state procurement or by subsidizing large-scale infrastructure projects), albeit the government did subsidize some smaller-scale vehicle procurement deals. Instead, the government has focused on regulation, offering tax deferments and debt restructuring to metallurgical companies, as well as various protectionist measures to help domestic car manufacturers.
According to industry experts, these do not change the situation much, though they may put pressure on consumers. Last year’s protests in the Russian Far East against the recycling fee hike underlined the delicateness of the issue. Regional budgets—which would normally have to pick up the tab when the federal government is unwilling to address a problem—are themselves facing a fiscal squeeze across the country, not only because of falling revenues but also because of rising expenditures (primarily social payments, though this year’s VAT hike will also put further strain on public procurement). Most of the regions discussed above are planning to cover at least part of their ballooning deficits through expensive commercial loans.
Notably, two of the most problematic regions—Vologda and Samara—are headed by officials belonging to a novel type of gubernatorial cohort, known for their flamboyant communication and patrons in higher places. Vologda governor Georgy Filimonov, known for his unpopular «dry law» and other ultraconservative initiatives, is linked to the deputy head of the Presidential Administration, Sergey Kiriyenko. Samara governor Vyacheslav Fedorishchev is a former associate of State Council secretary Alexey Dyumin. Both governors were engaged in widely publicized power struggles with local political and business elites over the past year, with Filimonov systematically sidelining officials linked to Severstal and Fedorishchev dismissing the entire regional government in mid-December after several standoffs with ruling party deputies.
While there were abundant rumors about the imminent dismissal of both officials in 2025, this has not happened yet, suggesting that—at least up to now—their attempts to rein in local elites have enjoyed the support of the Kremlin. Some of Filimonov’s controversial construction projects are also going ahead next year, in spite of the difficult budget situation. A third affected governor, Yevgeny Solntsev of Orenburg, is a former occupation official in Ukraine—another cohort that the Kremlin is interested in elevating in domestic politics.
But the Kremlin’s first and most important imperative is domestic political stability, and in this it has customarily relied both on regional institutions and major employers that can mitigate or influence local protest movements and even elections. In two regions facing economic decline and social unrest, however, they have turned on each other. As the crises of the automotive and metallurgical industries are set to deepen in 2026—just as Russia’s federal legislative election is nearing—the federal authorities may very well be forced to pay more attention, and perhaps fork out more money, to these industries and regions.
