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Russia: OECD Calls For Economic Reform In Regions

The Organization for Economic Cooperation and Development released an unflattering report on the Russian economy today (Wednesday). RFE/RL correspondent Tuck Wesolowsky reports that the organization says the Russian regions, in particular, need to improve tax collection and allow failing companies to fail.

Prague, 8 March 2000 (RFE/RL) -- The Russian economy continues to make progress, but will not take off without "further, deep reforms."

That's the overall conclusion of an economic survey on the Russian economy, carried out by the Organization for Economic Cooperation and Development, or OECD. The report was released Wednesday in Paris.

Economist John Litwack is one of the authors of the OECD report. He says that, in general, Russia has taken appropriate measures to stabilize inflation and the ruble exchange rate following the country's 1998 financial crash.

"We generally think the macroeconomic measures, and macroeconomic policies, taken by the Russian government in the wake of the crisis, have been effective in restoring at least some degree of stability and providing a foundation for some economic recovery."

But the OECD survey notes that poverty and social distress have increased for a large segment of the Russian population following the 1998 crash. The report says unemployment rose substantially in the early months of the crisis, although it has subsided somewhat along with the industrial recovery.

Litwack says this OECD economic survey of Russia -- the group's third -- has more of a regional focus than previous surveys, partly because of concerns that the Russian regions are failing to create the conditions needed for economic growth.

He says the report faults the poor division of fiscal responsibilities between officials in Moscow and the outlying regions.

"That problems in fiscal federalism, or the division of fiscal authority between different levels of government in Russia, are central in creating poor incentives for responsible policies at the regional and local levels."

Litwack says regional governments, facing their own crushing social and federal tax burdens, have devised schemes to cheat the Kremlin taxman.

"So, for example, an enterprise will owe taxes to their regional government, but the regional government will arrange for the enterprise, in agreement with the regional government, to, instead of paying taxes, this enterprise will make a delivery of goods to another enterprise and maybe somewhere at the end of the cycle, someone makes a payment to someone who's a budgetary recipient. So, in this way, the budget is fulfilled, and avoids using cash altogether."

The lack of cash transactions and the frequency of barter agreements in Russia's economy is another focus of the report. Non-cash barter accounts for nearly 40 percent of industrial trade in Russia.

The OECD says monopolies, such as those in the gas and electricity industries, are particularly prone to resort to barter agreements. One of the reasons for that is that energy suppliers are not allowed to simply cut off non-paying customers at will.

Among its recommendations, the OECD says Russia needs to reform tax laws and force through bankruptcy of indebted companies and even regions. The OECD says bankruptcy and the threat of it could be used to force companies to pay taxes on time and in cash. But it warned that the policy needs to be accompanied by budgetary reforms.

The OECD report says the federal government should shoulder more social costs, continue new policies to allocate some funds to regions on the basis of need. It recommends sending temporary fiscal managers to those regions that fail to meet their financial obligations.

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    Tony Wesolowsky

    Tony Wesolowsky is a senior correspondent for RFE/RL in Prague, covering Belarus, Ukraine, Russia, and Central Europe, as well as energy issues. His work has also appeared in The Philadelphia Inquirer, the Christian Science Monitor, and the Bulletin Of The Atomic Scientists.