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Russia: Regional Favoritism Adds To Budget Woes -- Analysis

Moscow, 23 April 1997 (RFE/RL) - Kremlin officials are meeting International Monetary Fund (IMF) official this week in Moscow to try to unblock disbursements of more than $1 billion in loans, which were scheduled to have been released in the first quarter of the year. To qualify, according to IMF officials, Russia's Government must raise revenues, cut tax privileges, and enact improvements in the federal tax code.

Russian officials, starting with President Boris Yeltsin, blame the ballooning budget deficit on tax avoidance by big corporations, as well as on free-spending among opposition deputies in Parliament. Budget experts point at the Kremlin itself, claiming that regional favouritism and trading taxes for votes with local governments, are a bigger reason for the budget crisis than federal or regional politicians want to admit.

According to the Budget Committee of the Federation Council, President Yeltsin has signed 26 treaties with subjects of the Federation that create special terms for tax collection, revenue-sharing, and spending between local governments and the Kremlin. The treaties themselves are for five years. They are supplemented by annual agreements between local officials and the Ministry of Finance in Moscow.

Quite often, says Irina Podporina, an advisor to the Budget Committee and a professor of public finance at the Russian Academy of State Service, the terms of these deals between the regional and federal governments are kept as secret as possible. "This is a political act which economists have always protested," Podporina said. There has been public controversy over the tax breaks Yeltsin granted the Presidents of Tatarstan, Mintimer Shaimiev, and of Sakha, Mikhail Nikolaev. Much less is known about other regional finance pacts. No one claims to have calculated how much revenue the federal government has foregone.

What the evidence shows, according to Podporina, is that the number of "donor" regions -- those that contribute more to the federal fund for regional assistance than they receive -- is shrinking rapidly. In 1994, there were 25; in 1996, 12. This year, the "donors" number just 8 -- Moscow (city), Lipetsk, Samara, Bashkortostan, Sverdlovsk (region), Khanty-Mansiisk, Yamalo-Nenetsky, and Krasnoyarsk (krai). The recipient regions are getting more numerous, and relatively poorer. The poorest eight in Russia are now Tuva, Pskov, Bryansk, Ivanovo, Vladimir, Ryazan, Astrakhan, and Chita.

Observers of the process say it's a case of the Kremlin, needing election support, giving to those that are already relatively well-off, and taking from those that are not. Podporina said the distinction between "donor" and "recipient" regions can be misleading. It only applies to one category of revenue-sharing. If subsidies, subventions, credits, and enterprise benefits are counted as well, some of the "donors" may turn out to be big recipients as well. Moscow is one of them.

When the Finance Ministry proposed cutting levels of revenue sharing with 34 regions, in order to provide more money to the poorest ten, the Duma and Federation Council reacted by blocking the plan. According to Council calculations, Nizhny Novgorod, which was headed by Boris Nemtsov - until he was named First Deputy Prime Minister - should have become a net donor to the federal budget, and received less assistance. Nemtsov voted no.

Podporina says the shortfall in federal collections means there is less money in the federal fund for assistance to be distributed to the regions. She that as this fund has shrunk, the Finance Ministry has tried delaying pay-outs to the regions. The regional governments have reacted by halting the pay-in, and offering to negotiate a tax bargain with Moscow. Known as "mutual accounting," where the region withhold as much money as they believe the federal treasury is obligated to pay them, the result is a financial free-for-all, and serious loss of federal control.

"We can't call this a tax rebellion," says Podporina. But if this goes further, she says, "economically this would be a disaster."

"In most countries,"says Podporina, "the process of unification of the financial and tax system started from the bottom up. Here it is the reverse. The center forces the regions to compete for the revenues and tax base." It is this leverage over the regions that a proposed new budget code would transfer from the Government to Parliament. That's one of the reasons the Government is lobbying against its passage.