«FISCAL FEDERALISM IN RUSSIA» EXECUTIVE SUMMARY

by Aleksey Blinov

During the weekend November 17–18, 2001 the «Bor» recreation center served as a venue for the MFIT-arranged international seminar «Fiscal Federalism in Russia».

Leading Russian and foreign experts, researchers, federal and regional public officials, and mass media representatives gathered to address this highly relevant issue. The seminar enabled the participants to look into the principal phases of the ongoing effort to establish the desired Russian fiscal federalism, make assessment of the policy-formulation and implementation blunders committed in the recent period, and suggest concrete measures to be undertaken in order to improve the mechanism of inter-budgetary relations in the years ahead.

The first session «Economic, Political and Legal Aspects of Fiscal Federalism in Russia» was opened with a presentation by Mikhail Deliagin (Director of the Institute for Globalization Problems) who drew some results of the effort recently pursued by the Russian Ministry of Finance vis-à-vis Russian provinces and commented on possible short-term prospects for that policy. The participants particularly paid attention to the issue relating to the Government utilizing the non-committed balance capital amounts that had been generated through price hikes in the international oil markets.

The goal of introducing appropriate fiscal federalism in Russia is of utmost consequence, with its linkage to such major questions as oil prices, ruble exchange rates or other matters being largely irrelevant, according to M.Deliagin. One of the crucial fiscal federalism problems, for one, is made by a tremendous discrepancy between the well-to-do Russian regions and severely-disadvantaged provinces, which might serve to tear the country apart, particularly given the lack of proper political, economic and cultural bonds between the territories within the confines of a vast nation.

While throwing rather a critical look on the Government-pursued economic policies, M.Deliagin primarily was focused on the practice of distributing the federal transfers, which essentially came down to taking unsound external measures to level-out the regions and have the «under-performing» Subjects of the Federation uplifted to match the country's weighted average indicator, rather than to developing a set of balanced criteria for actual needs of that or other region to be determined. The Government, according to M.Deliagin, takes advantage of this approach in order to constrain regional spending levels and prevent the evil of separatism. Clearly, this policy tool would hardly be effective in the matter of countering the danger of regional separatism. M.Deliagin maintains that what needs to be done today is a switch from the biased leveling-out approach to a leveling-out strategy developed to account for the existing social standards, subsistence levels and regional specifics. Meantime, the speaker appreciated the presidential move to restructure and «deflate» the Council of Federation that now would be called upon to become a politically-charged platform designed to rule out arbitrary federal Government practices with regard to the provinces by way of striking non-formal bilateral arrangements and providing meaningful support to loyal governors to the detriment of the general public.

Notably, the speaker emphasized that under the current economic realities (reflective of the global economy's cyclical downturns) we have been increasing growing disarmed in the face of the oncoming instabilities. In particular, M.Deliagin underscored that the Russian FY–2002 budget carries a whole set of inconsistencies relating to the use of Ministry of Finance forecasts to draw up one budget segment and the application of Ministry of Economic Development projections to put together the remaining budget segment, with the target indicators from the two government agencies coming to be out of sync by a factor of 1.5 times. What is more, the FY–2002 law on budget authorizations has become even less transparent than in the past. To add, it has grown to be more difficult to track on account of rather moot and ambiguous language passages and emergence of new revenue distribution vehicles.

As he proceeded to respond to the questions asked by Andrey Fedorov («Director of the Center for Political Studies and Consulting»), Vladimir Komarov (staff correspondent of the «Ekonomicheskaya Gazeta» economic daily) and Nikolai Shaklein (deputy chairperson of the State Duma Committee on Government Development), M.Deliagin called upon the participants to pay special attention to the placement of priorities in the policies pursued by the federal Government: should the top priority be given to the task of meeting the outside creditor demands, the FY–2002 budget is expected to be sequestered. To point out, the principal national economic development goals include: improving the efficiency of government management, tightening the financial policy controls and setting clear and explicit economic growth targets, according to the speaker. The broad-based mass media clamor about the probability of the US dollar-to-ruble exchange rate rising (which could hardly be viewed as a catastrophe) should rather be explained by the oncoming new re-division of properties, different influential clans escalating their competitive battles and seeking to deflate the government-run banks. V.B.Isakov (head of the state Duma legal department), who participated in the discussion, pointed out that Russia had lived for six years with no relevant legislation on implementation of the federal budget, which, as a matter of fact, amounted to a precedent-setting phenomenon the world over. Alexander Torshin (member of the Council of Federation Committee on Budget, Taxation, Financial, Foreign Exchange and Customs Regulatory Policies and Banking Operations) reminded the participants of the Central Bank of Russia being directly and constitutionally responsible for assuring the ruble stability.

The first session's topic was carried on by Alexei Salmin (President of the Foundation «Russian Public and Political Center») who particularly addressed the question of political dimension of the fiscal federalism effort. The Russian fiscal federalism problems have been more impacted by external factors rather than by domestic economic realities. As he went on to make a review of the government program to introduce fiscal federalism in Russia through 2005, he emphasized that the given federal document has been at adds with the obvious scientific certainties and poorly reflective of the present-day realities. Notably, the program comes to be a direct replica of the current mindset held by the domestic political class: we have no good concept for federalism though we do have a program for fiscal federalism. What is more, we continue dropping the «fiscal federalism» notion without really grasping its content. As he referred to the US example, A.Salmin pointed out that the fiscal federalism phenomenon actually amounted to a process, sort of a «tug-of-war», power sharing and use of «gray zones» in the applicable legislation. Notably, we seem to have a totally different perception of this phenomenon. As a matter of fact, Russia can hardly be passed as a federation per se. It merely maintains the right appearance with no substance to it. A true federation is characterized by one principal attribute: distribution of powers between the center and provinces can not be performed unilaterally, with this job normally being done on a multilateral basis. The very «federal center» moniker appears to be a piece of nonsense. Generally, we seem to be closer to the European subsidiarity tradition and the practice of distributing power by echelon of authority, with relevant powers being assigned by the lower to the upper echelon of authority, according to the expert.

Apart from that, the Russian fiscal federalism development program has been imbibed with the so-called universalism ideas. Meantime, it should be underscored that Russia is a country with a motley mix of ethnic, religious and other communities. Though we understand that circumstance in theory, we somehow refuse to acknowledge it as we proceed to tackle practical tasks. Unfortunately, we continue to hold that an asymmetric federation is bad because it might lead to the state going into pieces. Obviously, it is just another piece of mythology. It is now common knowledge that most world nations allow for different strategies designed to assure regional development. Clearly, it makes little difference what kind of federation we have on our hands as long as it is functional and performs well. Understandably, special status arrangements for that or other Subject of Federation ought to be appropriately substantiated and make an exception rather than the rule.

Appearing next was A.Fedorov who focused his attention on the issue of functionality of the recently established federal districts. He particularly pointed out that, on account of true federalism largely lacking in the Russian Federation, the newly created federal districts have been and will continue to be sort of an experiment aimed to create the right conditions for the centralized state to be re-established. Coming to fully confirm this observation have been last summer's debates on the feasibility of passing district-based budgets designed to bolster the idea of having the nation broken down into federal district territories. A.Fedorov argues in the meantime that the plenipotentiary district-level presidential agents seem to have been trying to grow their powers. As they completed their baseline tasks, they proceeded to look into economic policy functions in an effort to become sort of a political pillar that might one day carry the relevant burdens of the newly restructured vertical of federal authority. Now we have reached a watershed when some decision is going to be passed as to the future of the federal districts. Clearly, the conditions appear to be right for their legal status to be appropriately recorded in the Constitution by the Constitutional Assembly than might be convened in the not too distant future, according to the speaker.

A.Fedorov maintains that at the present juncture the federal district functions have come to be at odds with the realities of the day by way of standing in the way of unconstrained regional development. What is more, these functions serve to play rather a negative role through district-level authorities screening the information on the state of affairs in the regions. The speaker believes that the federal district presidential agents' offices should be turned into presidential legal aid clinics in the regions, particularly given that the presidential representatives have already completed their main functions.

A good number of pressing issues have been addressed by the session participants. By way of example, to respond to N.Shaklein's observation on the feasibility for the regions to grow larger in order to improve the quality of government management, A.Fedorov suggested that enlarging the established regions under the current conditions would be out of the question on account of the relevant criteria being unavailable. To underscore, the currently available standards have been unilaterally drafted by Moscow. This shift might lead to a civil war and chaos, particularly in the Northern Caucasus. It is only a strong nation that can safely re-carve the domestic provinces administratively.

For his part, Leonid Roketsky (Deputy Chairman of the Council of Federation Committee on Budget, Taxation, Financial, Foreign Exchange and Customs Regulatory Policies and Banking Operations) spoke of inadequate attention being paid to the issue of local administration. A municipal government should be seen not only as a mechanism designed to boost the level of grass-roots civility and help tackle multitudes of local problems but also as an equitable fiscal-area partner desperately requiring his own funding. Regrettably, over the past few years everything appears to have been done either to destroy the capability for local self-government or have it brought under control of regional or federal political interests.

Viktor Alksnis (member of the State Duma Committee on the Federation Affairs and Regional Policies) concluded that, to all practical purposes, Russia had no fiscal federalism. It might only be needed in the longer term when the country would eventually determine what kind of state governance approach to assume: either a federal or unitary-state system. Clearly, this question will be settled when the clear-cut «rules of the game» have been defined and powers of the players — determined. What is more, he pointed out that a good federation should be grown to feature a geographic principle rather than an ethnic one, the latter version surely being a hopeless case. Today, we have unjustified discrepancies in the status arrangements for different Subjects of the Russian Federation (like regions, territories or republics). This problem needs to be resolved through running a dedicated national governance structural reform.

State Duma Deputy Vladimir Koptev-Dvornikov made a few remarks on the issue of federal districts and their financial relevance. While drawing a historic analogy between the functional federal districts and erstwhile territorial CPSU (Communist Party of the Soviet Union) authorities, he pointed out that in the initial stage of their gestation these intermediary structures merely possessed a measure of political relevance. Just like the Communist Party in the old days, these political institutions have now been seeking to assume certain economic functions in order to exercise some influence on the financial dimension. Providing a good example to that effect would be V.Kazantsev, presidential representative for the southern federal district, who succeeded in his effort to have a dedicated economic program for development of the southern Russia effectively adopted. Further growth of federal districts would serve not only to turn those districts into full-fledged economic players but also to produce the phenomenon of local separatism with global implications. V.Koptev-Dvornikov deems it absolutely unacceptable for this kind of basic questions to be resolved through separate arrangements without relevant parliamentary debates and with regional concerns being unaccounted for. No constructive solution could be achieved should the problem be tackled on the basis of fear and all governance-related legislative moves being meekly confirmed by the State Duma's pro-Cabinet factions.

While carrying on the discussion, V.Isakov pointed out that the newly established federal districts had no budget building authority, which was good because, should that be the case, it would have the poorly streamlined regional authorities even more disarrayed. Now, when it comes to the question of the federal districts being established as Subjects of the Russian Federation, it needs to be reminded that the federal districts had in the first place been set up as dedicated vehicles explicitly designed to help implement the presidential policies. Notably, at this point in time President Putin appears to be taking a pause: looks like, he does not know what new tasks should be assigned to the federal districts. However, it is absolutely clear that for those formations to be legally set up as full-fledged Subjects of the Russian Federation, the Constitutional Assembly mechanism could hardly be employed as the right tool. The matter is that this kind of move is most likely to launch a totally unpredictable sequence of events, with domestic elites eventually clashing with each other. What is more, V.Isakov has the Constitutional Assembly idea linked with the covert objective of eliminating the nation's federative makeup in order to turn the Russian Federation into a unitary state or secure a definitive disintegration of the country.

State Duma Deputy A.Klimov rather sarcastically remarked that, no matter how hard we might try and build our nation on the guidelines of democracy and federalism, we would each time end up with a centralized state on our hands. As he proceeded to address the question of the new tax code, he called it an anti-constitutional document because its provisions bar the local self-government bodies from passing relevant legislation to establish their own taxes. While turning to the FY–2002 federal budget he expressed a good measure of doubt as to whether it was sufficiently market-geared, particularly given the fact that it failed to provide for any substantial investments in the national economy in order to bolster the production growth rates.

While responding to the remarks made by V.Aksnis about the rationale for cancellation of the existing ethnic community-based administrative formations, deputy chairman of the State Duma Committee for Nationalities Svetlana Smirnova pointed out that no good state could be built up and developed either with the ethnic factor being left unaccounted for or with a single set of «rules of the game» (binding on all Subject-of-the-Russian-Federation players) being unavailable.

The second session «Principal Guidelines for Developing Inter-Budgetary Relations in Russia and Prospects for Their Improvement» was launched with a very substantive and sharply focused presentation made by Alexei Lavrov (deputy head of the department for inter-budgetary relations, Ministry of Finance of the Russian Federation). The speaker, inter alia, underscored that the year 2000 saw the launch of a policy under which the recipient-regions have been incessantly backed up and pampered while the donating regions have been increasingly pressured and stifled. Touching on the new fiscal federalism development program, he just mentioned that, while the program offers no new approaches in terms of revenue distribution, it appears to have been reflective of the way things have been over the past three years. Clearly, seeking to find a solution to the outstanding problems merely by way of distributing the secured revenues would basically amount to doing nothing in order to have things really improved. As a matter of fact, this strategy (which essentially boils down to working for political trade-offs) clearly comes to be indicative of the transition character of our national economy. As he proceeded his presentation, A.M.Lavrov indicated that it was of principal importance that fiscal federalism largely should be about distribution of authority rather than about distribution of revenues. Notably, ours is a country where the federal budget resources get decentralized while the budgetary powers are excessively centralized.

The current unsatisfactory situation in the given field is compounded by the tremendous amount of existing regulatory acts and maintenance of the so-called unofficial budgets by the regions that use the readily available resources in order to survive and «jovially carry on». As a matter of fact, it is precisely the unofficial financial vehicles (extra-budgetary funds, informal budgets) that have been helping each Russian region effectively apply the local tax-gathering policies. To underscore, any attempt to constrain the formal regional rights and freedoms in this area would merely serve to fan their «spontaneous autonomy-seeking» sentiments, thereby incrementally getting them beyond the reach of the authorities tasked to assure «augmented verification of the accounting procedures». In particular, A.Lavrov suggests that in this matter the federal authorities should best be advised to opt in favor of an alternative strategy designed to grow the autonomy of regional and local-level authorities and help them switch over to the «my mandate-my budget» formula. This approach would definitely help shed under-funded budgets and non-performing official mandates (basically including the government financial and social responsibilities) and get the Subjects more interested in pushing forward the budget management reform. In fact, what we are having today is a single huge federal mandate hanging over any and all Russian regions and constraining their growth pursuant to their strategies. A.Lavrov maintains that underpinning the nation's policies in this regard should be the «one tax-one budget» principle.

The possibility of regional budgets being assigned to the federal treasury office for cash servicing might lead to the official budgets shrinking in size or to local federal-treasury branches being, as a matter of fact, turned into «double-reporting structures», according to the domestic analysts. Notably, this circumstance would inevitably produce a repeat of the incidents in Orlovskaya Oblast and Kalmykia, with a variety of federal-budget implementation activities being actually put on hold. Asked by Vladimir Mokry (Chairman of the State Duma Committee on the Local Self-Government Affairs) about the extent of conciliation between the adopted fiscal federalism development program and FY–2002 budget, A.Lavrov responded by saying that a good measure of progress had been achieved in order to reduce the federal mandate's uncovered segment. Sergey Riabukhin (Auditor of the Audit Chamber of the Russian Federation) sharply came out against that observation. In particular, he argued that, though the Government had drafted a solid program, it passed a federal budget that came to by out of sync with that important document. While standing up for the tax code, V.Isakov pointed out that an effort should be made to improve the quality of financial validation and cost-analysis of the bills debated and passed by the State Duma. Though this responsibility should lawfully be borne by the Audit Chamber, no practical activities have been carried out to that end, which is largely explained by the stubborn fact that the parliament and the Russian «general accounting office» have not been working closely enough on this matter. As she took the floor, Nadezhda Bikalova (consultant to the Chairman of the State Duma Committee on the Affairs of the Nordic and Far-Eastern Territories) touched on the questions relating to the current status and development of the fiscal federalism effort in Russia. The speaker particularly focused on the delivery of Nordic supplies that have come to be a huge vexed issue in the last few years.

Opening the third session «International Experiences in the Area of Fiscal Federalism» was Steven Rosefielde (Professor of Economics, University of North Carolina, USA) with his presentation «Fiscal Federalist Relations in Russia Through the Eyes of the Washington Consensus». Being a solid expert on comparative economic systems, the speaker shared his thinking with the seminar participants on the «Washington Consensus» ideas vis-à-vis the «fiscal federalism» concept and made a few pointed remarks about the weaknesses and disadvantages of the approaches under discussion. While focusing on the «Washington Consensus» question, S.Rosefielde, inter alia, argued that for the period of Russian reforms this strategy had been the latest macro and microeconomic tool designed to change things for the better in the reforming countries, with the liberalization-based policy being the best possible way to put in place a market economy. Admittedly, in the initial stage of the Russian reforms not a word had been uttered about the so-called transition economies. The matter is that the aforementioned concept was primarily designed to help out the «right» countries embark on the path of modernization. Notably, the recommendation for Russia then was to take the best advantage of the «shock therapy» approach as the right tool to assure establishment of a market economy in this country. Unfortunately, the results of that policy turned out to be nothing short of catastrophic. Now, when it comes to the question of «fiscal federalism», this dimension in the overall government-run economic effort is for the most part aimed to bolster specialized social programs in order to raise production efficiency rates in the workplace. Understandably, fiscal federalism comes to be rather handy as a sort of administrative tool designed to achieve savings of disparate resources. However, one should bear in mind that an effort to apply administrative methods comes to be totally different from an effort to secure some savings. These things are in no way synonymous. As far as Russia is concerned, the notion of fiscal federalism nearly carries no economic content. Apart from that, fiscal federalism should not be regarded as some balanced methodology drafted to boost the Russian economy's production efficiency rates or assure its optimal growth rates. Importantly, fiscal federalism per se is yet to be turn into a process.

Dwelling on the issue of the Russian economy's current status, the expert pointed out that the ongoing transition to a marketplace economy is yet to be completed and that many moves in that direction have been unsuccessful so far. Meantime, it is now largely clear that the «Washington Consensus» idea of fiscal federalism appears to be somewhat utopian: the concept provides no knowledge to answer the questions as to how the present system's weaknesses should be defeated, how the current oligarchs ought to be handled, how the property rights must be assured and how the Russian entrepreneurs should best be backed up. Indeed, the fiscal federalism tool would nearly be a perfect cure should the Russian economy be maintaining competitive markets and should the nation's political system be built around effective democratic institutions. Alas, the Russian national economy remains to be insufficiently market-geared or democratic, while the domestic markets are yet to become sufficiently competitive or fully plugged in the global economy. To underscore, a market economy can hardly be viewed as synonymous with the notion of economic system efficiency. Admittedly, some functional market economies continue to be riddled with problems of their own. Yet, under the right conditions, certain fiscal federalism-based approaches, indeed, can perform well and truly help boost the industrial production efficiency rates.

To point out, the US expert's conclusion was rather explicit: the «Washington Consensus» strategy had failed to provide balanced and competent recommendations for Russia to effectively put in place a market economy. By way of example, the a-la-Chubais privatization had created the worst possible system of property rights that only generated a great deal of hatreds and animosities with everybody working against everybody.

Appearing last with her small presentation was the MGIMO (Moscow State Institute for International Relations, Ministry of Foreign Affairs of the Russian Federation) undergraduate Natalia Vennikova who drew the participants' attention to the powers having to be shared in compliance with the «subsidiarity» principle and then proceeded to make a functional analogy between a federative state and transnational corporation in terms of structural makeup attributes. The speaker backed up the previous presenters in that the fiscal federalism approach appears to be the only plausible strategy to have the country's inter-budgetary relations appropriately sorted out and streamlined.

Concluding the seminar's final session was Vitaly Shlykov (adviser to general director of OAO «United Machine Building Facilities», Uralmash-Izhora Group) with his rather knowledgeable and compelling presentation. While making an overview of the Russian economy's current status, he started with a retrospective glance going deep into the Soviet times. Providing a catalyst for the Soviet Union's disintegration had been the crisis of over-production and tremendous economic imbalances that eventually served to generate abrupt drops in the industrial production growth rates and massive unemployment, according to V.Shlykov. As he drew an analogy between that crisis and the one of the late 1920s in the US, the expert pointed out that an effort to balance out the domestic industrial sector should be the main recipe for the current hardships to be transcended. What mostly caused that past crisis was the Soviet economy mainly featuring mobilization-based attributes, the circumstance largely preventing our country from successfully embarking either on the «Chinese» or «Polish» path, or making a balanced assessment of the national economy as of the given period (which could be explained by many industries maintaining «security-clearance» regimes). As soon as mobilization-based assignments and government orders were phased out and the available industrial capacities ceased to be appropriately matched by the contemporary market demands, the tremendous excess inventories had become evident for all to see. Then, as a consequence, all idling industrial lines actually turned into surplus capital assets. It is precisely this segment of industries (which, as a matter of fact, amounted to huge unaccounted-for assets) that came to be privatized in the first place.

Regrettably, we continue to dodge attacking this outstanding problem, according to V.Shlykov. Notably, major attributes of a centralized economy continue to be visible in the present-day big-foot monopolies. We continue to try and make compatible two wholly incompatible cultures from different economic systems. Structurally, the current Russian economy is more militarized than the Soviet Union's economy ever was in the years of the Great Patriotic War of 1941–1945. While coming to agree with V.Shlykov on major drivers of the Russian economic crisis, S.Rosefielde argued that the USSR's disproportionate economic system had been largely paid for by the Soviet population in the hope of establishing the best safeguards against external threats. Notably, tremendous resources had been released to meet those dangers rather than improve the living standards.

Eventually, the participants generally came to agree that Russia's successful economic future would depend on the domestic economy featuring the balanced and sound structure, legal rules being rigorously enforced, material and human resources being effectively distributed and committed, government migration policies being made increasingly flexible and versatile enough to stimulate augmented levels of horizontal labor mobility and entrepreneurial activities. Notwithstanding the elevated passions (now and again laced with pessimistic notes voiced by some members of the audience) in the course of exchanges on some of the questions, the discussions ended on a relatively optimistic and confident-sounding note. Overall, the experts came to be satisfied with the results of exchanges. Each participant fully realized that the goal of reforming the national economy was certainly a challenging, though achievable, objective.

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