Intergovernmental Fiscal Relations in Russia

• Author: Nadezhda Bikalova
• Position: Visiting Scholar in the IMF's Fiscal Affairs Department

Although Russia is legally a federation, it has experienced serious problems in developing and maintaining satisfactory fiscal relations between its central government and regional and local governments. How have these problems arisen, and what steps might make Russia's fiscal federalism work better?

The beginning and the end of the twentieth century saw two great experiments in politics and economics, both of which were conducted in Russia. The first began in 1917, when Russia became the first socialist country with communal ownership of property. The second began in 1991, when the Soviet Union collapsed and ownership of the means of production was mainly privatized. Both of these developments were very painful for the people of Russia and the other former Soviet republics, which had to adapt rapidly to a different concept of what the government's role should be in helping them attain normal standards of living (see Ter-Minassian, ed., 1997).

Federalism's beginnings

After the disintegration of the Soviet Union, the federal form of the Russian state was legislatively fixed in its constitution in 1993. (Russia consists of 89 federation members including 21 republics (Chechnya is one of these), 50 oblasts (provinces), 6 krays (territories), 10 autonomous okrugs (areas), the cities of Moscow and St. Petersburg, and more than 12,000 local governments (of rayons (administrative subdivisions of regions or large cities), villages, settlements, cities, and districts within cities).) A decree by the President of Russia (2000) created seven new administrative macro-regions in the federal hierarchy to help enforce federal laws.

Russia's constitution is based on the principles of territorial integrity of the country, unity of the system of state authority, differentiation of responsibilities and power among governmental structures, and the equality and right of self-determination of all Russians. It provides for division of expenditure responsibilities between the federal and regional governments. The legal mechanism that should have given practical effect to the principle of division of rights and responsibilities, and thereby brought about a reasonable balancing of interests between the center and federation members in fiscal matters, was not created, however. Consequently, some researchers (see, for example, Bird, Ebel, and Wallich, eds., 1996) question whether Russia actually is a federation. In fact, Russia's federal system is too centralized (especially regarding taxation), although its regional governments appear to be decentralized.

The fundamental contradiction between the highly centralized formal system and informal subnational autonomy is a major source of problems in fiscal federalism in Russia (see Lavrov, Litwack, and Sutherland, 2001). Budget decentralization in the regions appears in expenditure authorities and financial plans. Subnational governments retain considerable scope to develop and carry out their own informal fiscal policies. Consequently, there is a lack of transparency in the fiscal policies of subnational governments, which are not fully accountable to either their electorates or the federal government.

During 1994-96, an unfortunate effect of Russia's economic transition was that the federal government delegated to the regions-to which allocations of funds were made-a wide variety of responsibilities to provide services and make payments, such as child care and veterans' subsidies, to citizens without granting the regions new opportunities to collect revenues. These responsibilities were delegated as they had been during the era of central planning, principally according to their natural and climatic conditions and natural resource endowments. This has placed many regions in extremely difficult situations. Simultaneously, in accordance with agreements reached between the center (that is, the federal government) and individual regions, some members of the federation have managed to convince the federal government to grant them special privileges. The rich regions-among which are Moscow and St. Petersburg; the Nizhegorodskaya, Samarskaya, and Tymenskaya oblasts; the Khanti-Mansisky and Krasnoyarsky regions; and the Republic of Sakha(Yakutia)-have become known as "donors" (net generators of...