For the state of Russia's finances, consider places likeChukotka, the territory separated from Alaska by a narrowstrait.

The government there has racked up debt equal to 144 percent ofits revenue, excluding federal grants which are the highest inRussia, according to Standard & Poor's. Regions from Belgorodnear Ukraine to three North Caucasus republics are also promptingconcern with ratios topping 100 percent. The premium investorsdemand to hold Russian municipal bonds over sovereign securities isthe highest in more than a month and 103 basis points more thanlast year's average, according to UralSib Capital data.

The clock is ticking for President Vladimir Putin to defuse asituation he set off in 2012 with decrees to raise social spending.That contributed to a doubling in the debt load of Russia's morethan 80 regions to 2.4 trillion rubles (US$42 billion) in the pastfive years. Strains on their finances will grow critical in two orthree years, raising the risk of bailouts from a federal budgetalready running a deficit for the first time since 2010, accordingto S&P.

“A default by a large region could block market access for theFinance Ministry itself,” said Karen Vartapetov, associate directorof S&P's Moscow office. “Right now the federal center has anopportunity to help regions. In three years, there may be fewerresources, while regional debt may be bigger, and that will resultin greater risks.”

The Finance Ministry in Moscow didn't reply to a request forcomment on the risks facing regional governments.

Yawning Gap in Finances of RussianMunicipalities

Threats to municipal finances are snowballing as sanctions overUkraine choke access to capital markets, forcing local governmentsto fund social outlays with costlier bank loans.

While regional debt sales are down 53 percent so far this year,Moody's Investors Service estimates borrowing will grow as much as25 percent in 2015, driven by spending on health care, education,and utilities.

The squeeze is putting regions in jeopardy. They're facing “anincreasing likelihood of defaults,” S&P warned in June. Atleast one non-rated local government delayed a principal repaymenton a bank loan in the first quarter, it said.

Local administrations are running a 625 billion-ruble deficit,up 42 percent from 2014, according to S&P. Seventy-five regionshad a budget gap last year, the Higher School of Economics inMoscow said in a May report.

Belgorod, a region of 1.5 million people, is one of only fivemunicipal borrowers this year, placing 5.3 billion rubles ofsinkable five-year notes this month at a coupon of 12.65 percent.That compares with an 8.3 percent coupon on seven-year bonds soldin 2013. The yield on Belgorod's notes due June 2020 has fallenthree basis points to 13.15 percent since trading began July 8.

The authorities in Moscow want to ease the crisis by helpingregions replace bonds and commercial loans with subsidized loansfrom the federal budget, offered at a 0.1 percent annual rate.Russia will allocate 310 billion rubles to this in 2015, accordingto Prime Minister Dmitry Medvedev, who's backed converting someforeign-currency debt into rubles.

Even so, local governments continue to rely on commercial loans,increasing bank debt by a quarter since the start of 2014, to 1trillion rubles on March 1, central bank data show.

Risks of imbalances in regional budgets will probably grow thisyear as the economy shrinks, the central bank said in June.

“Because of the high debt burden, access to market sources offinancing may be partly closed for some regions,” it said. “Inaddition, these regions may have difficulties with refinancingexisting debt because banks are becoming more selective inassessing regional risk.”

–With assistance from Paul Abelsky in Prague.

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