Article by Olga Kuvshinova. Guest translation by Keary Iarussi.
In the 10 years from 2006 to 2015, the number of “donor regions” in Russia dropped from 25 to 14; fewer even than the 19 that existed in 2001. Experts from the Leontief Center presented a report at a conference at the Higher School of Economics in April which identified the policy of centralized budget revenues as the main reason for the drop-off, alongside economic crises.
According to the Budget Codex, a region is considered a “donor” if it can finance government services above a set minimum which is calculated on a per capita basis, i.e. if it does not require subsidization from the state.
In 2006, the 25 donor regions provided about 80% of overall regional tax revenue. In 2015, the remaining 14 donor regions accounted for just over 60%, and of this figure, two-thirds came from four regions: Moscow, Khanty-Mansiisk, Yamalo-Nenetsk, and oil-rich Tyumen. Over the 10 years from 2006, the share of these four “core donors” dropped. This was due mostly to the reallocation of their revenues to the federal budget, and the centralization of the mineral extraction tax (MET) revenue. Despite the reallocation [изъятия] and a falling share of the tax profit in these regions’ revenues, the report’s authors conclude that the regions remain the core of the budget system.
The report identified some weak donors among the other ten donor regions (see chart). The Nenetsk, Samara and Sverdlovsk regions may drop out of the donor list due to declining contributions to both the regional and municipal budgets. Meanwhile, the Bashkortostan, Perm, Omsk and Tomsk regions could return to the donor list after having previously dropped off: their share of contributions to the budget system is growing.
The federal budget has offset the loss of revenues for a few regions by increasing subsidies, which depend either on the regional elite’s strength of negotiating position (Tatarstan, Chelyabinsk, Orenburg regions) or a change in the regional political leadership, according to the experts. For example, despite the Moscow and Yaroslavl regions’ robust tax revenue growth they received significant subsidies after changes in leadership. Meanwhile, the report links rising reallocation of revenues to the federal budget and lowered subsidies in Krasnodar, Irkutsk and Astrakhan regions with a push by the federal center to bring regions with strong local interest groups under its control.
It seems that the goal of intergovernmental budget policy is to control the actions of regional governments through centralizing rent revenues in exchange for aid.
The use of subsidies as a means of exerting influence on regions is seen in the fact that some donor regions that are not eligible for equalization payments continue to receive subsidies and other financial aid. Meanwhile, some regions that have lost their donor status receive almost nothing besides the equalization payments set out by the law.
It seems that the goal of intergovernmental budget policy is to control the actions of regional governments through centralizing rent revenues in exchange for aid. The report concludes that such measures do not create the incentive or economic stimulus needed to increase tax revenue or raise the effectiveness of expenditures.
According to the Director of the Institute for Public Finance Reform, Vladimir Klimanov, the revenue sharing arrangement preserves the regional economies’ ineffective structures. He contends that they are “overloaded” with a large number of different types of aid (there are more than 80 types of subsidies alone) that overlap and go to the same regions. Subsidies push regions into inefficient practices: for example, you can get funds to co-finance the construction of a school, but only after the school has been built. Klimanov says that regions rush projects along, often to the detriment of quality. Agriculture, which has low labor productivity, is the sector leader in terms of federal. “Money earmarked for projects, in contrast to equalization subsidies,” Klimanov says, “should be co-financing development of new high-tech infrastructure, but we continue down the path of co-financing the current expenditures of failing sectors”.
The strongest regions are stripped of co-financing for development. Kaluga Region is a prime example: as soon as its fiscal capacity exceeded the statutory ratio of 0.008, it was removed from all aid programs and co-financing programs for targeted investment projects, which then had to be halted, according to Kaluga Governor Anatoly Artamonov. Klimanov says that in response to the “Kaluga phenomenon”, adjustments were made to the methodology so that the regions would not lose so much.
According to Klimanov another issue is overregulation. Federal funding has become a way for the center to control the actions of regions and municipalities, restricting their ability make independent decisions. Of the RUB11.5 trillion of consolidated regional expenditures (including healthcare funding), regions have control over just RUB0.8tn-10.7tn. This means more than 90%, is regulated, according to Deputy Prime Minister Dmitry Kozak: the federal center decides how much the regions receive and how they spend the funding.
The latest decisions to centralize revenues has caused discontent among regional governors. The decisions see the shrinking of regional shares of oil product excises, and an increase of one percentage point on the 20% federal tax on profits. As of 2017, the regions take 17 percentage points, down from 18. Tatarstan lost RUB8bln, or around 5% of its revenue, taking away the motivation for development. “Citizens are indifferent, they only see government – they do not care what level it is,” says Tatarstan President Rustam Minnikhanov. “If the president’s confidence is there, it means there should be enough authority to carry out his policy.”
Krasnodar Governor Viktor Tolokonsky complained at the Gaidar Forum of the demotivating influence of the intergovernmental budget policy. “We are not evening out social inequalities, but putting the brakes on investment.” Natalya Zubarevich of the Independent Institute for Social Policy has concluded that flows of federal transfers reflect current political – and especially since 2014 – geopolitical, priorities: the Far East, North Caucasus and Crimea.
Keary Iarussi is an editor and translator at an investment bank in Moscow. He has studied the Russian language for more than five years, including through a CLS grant in Kazan and a FLAS grant at Indiana University. He holds degrees in Eurasian studies and global politics from Miami University (OH). His interests include fiscal policy, domestic politics and Russia’s political and economic development since the late Soviet period.