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August 17, 2004

Analysis: Battling Over Benefits

by Julie A. Corwin

President Vladimir Putin is expected to sign into law a bill converting certain social benefits, such as free public transportation and medicine, to cash payments, and regional leaders are already signaling that they do not plan to implement it vigorously. It's little wonder. The bill has inspired weeks of protests across Russia. Polling data shows the public is pessimistic about how their own economic well-being will be affected. And regional leaders have been set up to take the blame if any hitches occur along the way.
Prior to the bill's adoption, in late July, 10 of the 12 governors who are members of the Far East and Trans Baikal Interregional Association sent a letter to President Putin asking him to suspend the process of monetizing social benefits. The governors charged that the planned reform violates the constitution by altering the social character of the state. At a meeting last week of the Coordination Council of Far East Governors, presidential envoy to the Far East Federal District Konstantin Pulikovskii declared that the letter was a "political mistake" orchestrated by Khabarovsk Governor Viktor Ishaev and Sakha Republic President Vyacheslav Shtyrov, "Rossiiskaya gazeta" reported on 14 August. He accused them of trying to create the impression that the federal center does not care about citizens' welfare. "This is not so," he insisted.

Other regional leaders have adopted a similar stance to the Far Eastern rebels, declaring their intention to protect their electorate from Moscow's arbitrary whims. After the Duma passed the bill on 5 August, Moscow Mayor Yurii Luzhkov stated in a press conference on 7 August that his government will preserve all benefits Muscovites currently possess, Interfax-Moscow reported on 8 August. "Our veterans and other persons eligible for social welfare payments, including pensioners, will receive all [their] current benefits, including free passage on city public transportation. We will proceed as I promised earlier: People will not suffer as result of the reform," Luzhkov pledged. And before the bill had passed even its first reading, Sergei Katanandov, president of Karelia declared on 3 June that his government will not convert in-kind benefits, such as the installation of phones and free medicine, to monetary payments if the recipients of these benefits do not want such a conversion, RIA-Novosti reported, citing the republican government's press service. "For those [residents] who want to [continue] receiving [such] benefits and not cash, the government will provide this opportunity. Payments for these benefits will come out of the republican budget. There is no reason to be afraid," Katanandov said.


The adoption of the social welfare benefits reform takes place against a backdrop of tightening federal control over regional revenues and a reduced share of revenues from the tax on profits and water. This month the State Duma and Federation Council passed amendments to the Budget and Tax Code, which "virtually require the transfer of all budgets of all levels to the federal treasury," "Gazeta" reported on 3 August. The new Budget Code also abolishes grants to the regions to pay state-sector wages or disaster relief. In the future whenever a region needs funds urgently, it will have to borrow the money from Moscow and pay interest -- a very low percentage of interest, but interest nonetheless.

In an address to the Federation Council, Finance Minister Aleksei Kudrin reassured the representatives that the amendments to the budget law will not leave regions without enough revenue, RIA-Novosti reported. He said that a special reserve fund of 30 billion rubles ($1 billion) is being created to ensure that regional budgets are balanced in 2005. However, some regional officials remain "indignant" about the new federal budget policy, according to "Vedomosti" on 12 August. An unidentified official from the Volga Federal District told the daily that "According to the new rules, we cannot compete for federal money, but we don't have enough budget resources. We plan to raise money by other means, for example, to take credits for state securities -- this is quicker and simpler than asking for federal money." The Sakha Republic is similarly bewildered about how it will pay for social benefits. The republic's Finance Minister Ernst Berezkin said on 11 August that paying cash benefits for the region's 55,000 persons who are eligible to receive social welfare benefits would create an enormous budget deficit in 2005 of 400 million rubles ($14 million), Regnum reported. The basic sources for additional revenue, besides tax receipts, would be the sale of government property. However, the plan for the sale of government property only anticipates the generation of 100 million rubles in the first half of 2005. Natalya Golovanova of the Center for Fiscal Policy noted that "the Finance Ministry [in Moscow] is always saying that the grants will be distributed for the balancing of the budgets according to a formula, but nobody sees this formula."

Countdown to Elections

Further complicating implementation is the fact that gubernatorial and parliamentary elections are coming up in a number of regions. Elections for new governors or presidents will be held in 13 regions before the end of the year. Parliamentary elections will take place in 11 regions. In Volgograd Oblast, where incumbent Governor Nikolai Masyuta is up for re-election in December, the benefits reform has already come up as an issue in the election campaign. Media controlled by Volgograd Mayor Yevgenii Ishchenko criticized Masyuta for proposing on the floor of the State Council a moratorium on introduction of the monetization and accused him of trying to rebel against President Putin, "Nezavisimaya gazeta" on 9 August. When this characterization failed to bring Ishchenko any political dividends, Maksyuta was then attacked from the opposition direction as "governor-traitor" not to Putin but "of the region's interests." Maksyuta, who is nominally a communist, is so far taking a wait-and-see approach. He told the daily that around 2/3 of the oblast population is eligible for social welfare benefits to a greater or lesser extent. He said the price of the benefits is estimated at 4.7 billion rubles a year, and it is not yet known what part of this sum will be covered in the oblast budget and what part in the federal budget. "People are talking about only 12 percent of our expenses for this compensation coming from the federal center," he said. "This would be too great a load."

In Saratov Oblast, Governor Dmitrii Ayatskov is not facing re-election but he is facing an ongoing corruption investigation. And perhaps not coincidentally, he seems determined to find a solution to the problems created by the new reform without blaming Moscow. In an interview with "Novaya gazeta," No. 56, Ayatskov said that of the 2.674 million residents in his region, 1.5 million receive some kind of other benefits. "Many of these are unjustified. For example, a mother, who drives around in a Mercedes, gets a child subsidy," he said. He also noted that "if the budget was amended to divide social spending responsibilities equally between Moscow and the regions, we would be able to meet those commitments. But what is being proposed at present -- 64 percent paid by the regions and 36 percent paid by Moscow would be difficult for us." In order to raise the necessary funds, he vowed to cut government staff in Saratov beginning with his own.

In an article in "Novaya gazeta," No. 54, Rostislav Turovskii of the Center for Political Technology concluded that the first rebellion by regional leaders to the benefits reform -- the letter from the 10 Far East governors -- "is evidence that the system is experiencing some sort of crisis." Turovskii characterized the situation as one in which "the governors are losing control over regional economics" and are becoming "social workers" who are responsible for the welfare of the budget sector. Moscow is shifting responsibility for social payments -- to state-sector workers, citizens eligible for benefits, and veterans -- onto meager regional budgets. Turovskii asserted that the Kremlin had decided to make governors deal with the worsening situation in the social sphere. However, it may come to rue this decision: "In Russia, the question 'who is to blame?' can split the elite even under the most authoritative regime, for not only the president is concerned about his rating." He continued, "Small wonder that now instead of expressing unanimous approval, the governors are arguing about the hot issue of social reform."
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