Market Discipline vs Budget Support: The Dilemma of the Effectiveness of Sub-federal Bonds in Russia

Over the past decade, Russia has witnessed a sharp shift in the structure of sub-federal borrowing. The study aims to identify the contradiction between market discipline (sub-federal bonds) and budget support (budget loans) and assess their debt efficiency. Methods: Based on Russian Ministry of Finance data for 2014–2025, a modified market index (Rt*) to quantify the shift toward centralized financing. A proprietary metric was developed to measure how changes in the volume of specific debt instruments impact debt service costs. Results: The share of budget loans in regional debt increased from 7.1% to 79.3%, while the share of market instruments fell from 65.8% to 18.6%. The market index Rt* dropped from 0.314 to 0.091, confirming the weakening of market discipline. The efficiency comparison showed that only 5 out of 36 regions that used bonds achieved higher efficiency with them than with budget loans. These regions increased their bond volumes and resorted less actively to budget loans (2.2% of GRP vs 3.5%). Conclusions: The wide availability of budget loans creates soft budget constraints, suppressing the motivation for market borrowing and reducing its efficiency. Regions oriented towards bonds demonstrate greater financial independence.