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Russia: Analysis From Washington--Toward Fiscal Federalism In Russia

Washington, 5 March 1997 (RFE/RL) - The decision by the governor of a Far Eastern Russian region to withhold tax payments owed to Moscow could lead the leaders of other regions to follow suit, a Moscow newspaper warned on Tuesday.

According to "Segodnya," Irkutsk governor Yuriy Nozhikov has announced that he will suspend the transfer of tax revenues owed to Moscow for one month because the federal government owes the region some two trillion rubles (approximately $357 million) in back wages, pensions and benefits.

The newspaper cited another regional governor as saying that "the amount of funds that remain in the regions is patently deficient," an indication that other regional officials may be thinking about following Nozhikov's lead.

And it cited Vladimir Suryenov, the presidential official responsible for work with Russian regions in the Far East, as saying that he could understand Nozhikov's action even though he could not approve something that was in clear violation of the law.

If Nozhikov's action remains an isolated case, it will have only a limited impact on fiscal arrangements in the Russian Federation. But even in that case, it highlights three continuing problems in that country's taxation system.

First, it serves as a reminder that there is no true federalism in the Russian tax system. Russia still lacks a system where the central government collects federal taxes, the regions regional taxes and the localities local taxes. And consequently, regional leaders will always be tempted to try to withhold the taxes they owe especially if Moscow is failing to return promised revenues.

Second, it calls attention to the spreading payments crisis in the Russian government and economy. As one unit attempts to bring its books more closely into balance, it will inevitably be tempted to do so by not paying others, a pattern that can snowball into a crisis for the country as a whole. And if it succeeds, it will increase its popular support at Moscow's expense.

And third, Nozhikov's actions also demonstrate the difficulties Russia is facing in its attempts to build a modern, democratic legal system. In contrast to Soviet times, Moscow lacks the enormous police power to compel obedience. And in the absence of such power, many Russians -- including governors -- often see little reason to obey laws passed in Moscow.

But if Nozhikov's action is copied by other regional leaders, it could lead to three even more serious problems.

Were a large number of regions to follow the lead of the Irkutsk governor, Moscow would face an even more severe budget deficit than it does now. And it would not be able to pay even those officials and workers it does now.

Such a fiscal crisis would quickly become a political crisis, one that would likely spark demands either that Moscow adopt a tougher line regarding the regions or that Moscow and the regions develop some new deal in their relations with each other on both tax questions and other matters.

And efforts to implement either of these could lead to a transformation of current political arrangements in Russia as a whole.

But in addition to exacerbating center-periphery relations, a decision by a larger number of regions to withhold taxes from Moscow would also lead to a deterioration of relations among the regions. Most Russian regions are dependent on Moscow for subsidies, and they would inevitably resent the actions of their wealthier neighbors, even if they too withheld some tax money.

Moscow can easily play on these concerns to limit the likelihood that the Irkutsk approach will spread, but if a number of regions decide to go ahead anyway given their current difficult situations, Moscow's ability to do that would quickly be exhausted. And economic tensions among the regions could quickly translate into political divisions and blocs.

And finally, any generalized withholding of tax money to the central authorities would almost certainly make it impossible for the Russian government to meet standards laid down by the World Bank and the International Monetary Fund for additional loans.

Both institutions have repeatedly urged Moscow to improve its collection of taxes and warned that they will not provide the central Russian government with additional loans unless it does so. If a large number of regions failed to send Moscow the taxes they owe, both the central Russian government and the international financial community would face some unpalatable choices.

Moscow might be forced to turn to draconian measures to collect taxes, something that could spark political resistance and certainly prompt some Russian politicians to blame the West for Moscow's problems.

And the international financial bodies might be forced either to back down at the cost of their credibility in the future or to somehow come up with yet more money for Russia.

The announcement of what one news agency called a "tax mutiny" in one Russian region does not mean that any of these things will happen, but it is a reminder of the challenges ahead for Moscow and its regions as they attempt to build genuine fiscal federalism.