WTP452 Subnational Budgeting in Russia

WORLD BANK TECHNICAL PAPER NO. 452

Europeand CentralAsia PovertyReduction and Economic ManagementSeries

Work in progress for public discussion WTP452 Public Disclosure Authorized

Subnational Budgeting in Russia Preemptinga PotentialCrisis Public Disclosure Authorized Public Disclosure Authorized

Lev Freinkman Public Disclosure Authorized DanielTreisman StepanTitov Recent World Bank Technical Papers

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Subnational Budgeting in Russia Preemptinga PotentialCrisis

Lev Freinkman Daniel Treisman Stepan Titov

The World Bank Washington,D.C. Copyright C 1999 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A.

Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. Permission to photocopy items for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use, is granted by the World Bank, provided that the appropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed to 202-522-2422.

ISBN: 0-8213-4593-1 ISSN: 0253-7494

Lev Freinkman is an economist at the World Bank. Daniel Treisman is assistant professor in the Department of Political Science at UCLA. Stepan Titov is an economist at the World Bank's Moscow Resident Mission.

Library of Congress Cataloging-in-Publication Data has been applied for.

Freinkman, L. M. Subnational budgeting in Russia: preempting a potential crisis / Lev Freinkman, Daniel Treisman, Stepan Titov. p. cm. - (World Bank technical paper; no. 452) Includes bibliographical references. ISBN 0-8213-4593-1 1. Intergovernmental fiscal relations-Russia (Federation). 2. Local finance-Russia (Federation). 3. Russia (Federation)-Economic policy-1991- . I. Treisman, Daniel. II. Titov, Stepan, 1962- . III. Title. IV. Series.

HJ1211.52.Z7 F74 1999 352.4'8214'0947-dc2l 99-047572 Contents

Foreword ...... vii Acknowledgments ...... viii Executive Summary ...... 1 Introduction ...... 8

1. Subnational Budgeting and Economic Reform in Russia ...... 10 Economic Developments in Russia's Regions ...... 10 Organization of the State ...... 10...... Regional Economic Conditions ...... 10 Differences in Standard of Living ...... 12 Economic Policies ...... 12 Trends in the Russian Regional Fiscal System ...... 18 Legal Framework for Regional and Local Finance ...... 18 Fiscal Contraction ...... 19 Decentralization ...... 20 Interregional Variation ...... 23 Russia Compared to East European Post-Communist States ...... 25 Central Responses to Regional Economic and Fiscal Diversity ...... 27 Intergovernmental Fiscal Transfers ...... 27 Disbursement Pattern of Federal Transfers ...... 29 Asymmetric Federalism and Bilateral Treaties ...... 31 Main Problems and Policy Options ...... 33

2. Subnational Budget Deficits and Their Financing ...... 37 Growing Regional Deficits and Debt in Russia ...... 38 Legal Framework for Subnational Debt ...... 42 Implicit Forms of Debt: Arrears and Guarantees ...... 44 Arrears on Payments for Goods or Services Bought by the Subnational Government . .44 Guarantees of Loans ...... 45 Growing Regional and Municipal Bond Markets ...... I 46 Ruble-Denominated Bonds ...... 47 Eurobonds ...... 48 Main Problems and Policy Options ...... 50

3. Fiscal Federalism at the Subnational Level ...... 52 Intergovernmental Fiscal System within Regions ...... 52 Local Revenues ...... 53 Local Expenditures ...... 55 Budget Equalization and Its Consequences ...... 57 Instability ...... 57 Punitive Extraction ...... 57

iii Soft Budget Constraints and Expenditure Misallocation ...... 57 Revenue Concealment ...... 60 Other Unresolved Issues ...... 61 Unclear Delineation of Property ...... 61 Unfunded Mandates ...... 61 Main Problems and Policy Options ...... 61

4. Reshaping the Subnational Budget Process ...... 63 Importance of the Budget Process ...... 63 Main Problems with the Subnational Budget Process ...... 63 Budget Coverage and Classifications ...... 64 Unclear Role of the "Minimum Budget"...... 65 Budget Execution ...... 65 Cash and Debt Management ...... I ...... 66 Reporting, Disclosure, and Audit ...... 66 Noncash Budget Execution ...... 66 Main Types of Noncash Execution ...... 68 Tax Payments in Form of Goods and Services ...... 68 Money Surrogates ...... 68 WVrite-offs...... 69 Tax Exemptions ...... 69 Reforms Included in the Draft Budget Code ...... 69 Main Problems and Policy Options ...... 70

5. Conclusion: Short-Term Priorities for Reform ...... 74 Experience of Eastern Europe ...... 74 Federal Government: A New Emphasis on Regional Finance Reform ...... 74 Medium-Term Agenda for Reform ...... 75

Statistical Annex ...... 79

Analytical Annex. Russian Subnational Finance: A Preliminary Statistical Analysis ...... 113

References ...... 129

Boxes Box 1. The Republic of Tuva: Demand for Federal Transfers and Need for Expenditure Adjustment ...... 13 Box 2. Moscow City Budget: Major Gains from Biases in the Taxation System ...... 14 Box 3. Tatarstan: Special Fiscal Status Brings Fiscal Gains that are Used for Extensive Interventions into the Enterprise Sector ...... 16 Box 4. International Practice: How Other Countries Regulate Subnational Borrowing ..... 45

Iv Box 5. Land and Real Estate Tax Reform in Novgorod and Tver ...... 54 Box 6. Legal Framework for Local Finance: The Law "On the Financial Foundations of Local Government in the Russian Federation" ...... 56 Box 7. Samara: New Mechanisms of Budget Financing in Education ...... 60 Box 8. St. Petersburg: Effective Reforms of Financial Management ...... 71

Tables Table 1.1. Russia Consolidated Budget Execution in 1992-1997, as Percent of GDP ...... 20 Table 1.2. Fiscal Shares of Municipalities (Percent) ...... 24 Table 1.3. Share of Local/Regional Government Revenues in Consolidated General Government Revenues (in Percent), Selected Eastern European and Former Soviet Union Countries ...... 26 Table 1.4. Russian Federal Budget Transfers to Regions from 1992 to 1997, Percent of GDP ...... 27 Table 2.1. Stock of Subnational Debt in Russia by the Year's End, 1994-97, Billions of Denominated Rubles ...... 39 Table 2.2. Regions with Reported Budget Deficit Exceeding 15 Percent of Their Net Budget Revenues from 1995 to 1997 ...... 40 Table 2.3. Regions with Accumulated Debt (Including Reported Budget Arrears) Exceeding Their Net Budget Revenues from 1996 to 1997 ...... 41 Table 3.1. Municipal Budgets (Percent of GDP) ...... 52 Table 3.2. Tax Sharing Rates for Raions in Yaroslavl Oblast, 1994-98, Percent of Total Collections ...... 62

Statistical Annex Tables Annex Table 1. Industrial Output, Investment, Unemployment, and Poverty ...... 79 Annex Table 2 and 2a. Main Budget Data Per Capita in 1991 Prices ...... 82 Annex Table 3. Budget Arrears, Transfers, and Deficit as Percentage of Expenditures ..... 88 Annex Table 4. Deficit and Debt Indicators ...... 91 Annex Table 5. Tax Revenues Left with Federal Budgets as Percentage of Total Taxes Collected in the Region, 1993-95 ...... 94 Annex Table 6. Tax Arrears and Tax Revenues Collected in Noncash Form ...... 97 Annex Table 7. Distribution of VAT Proceeds between Federal and Regional Budgets .... 100 Annex Table 8. Regional Budgets Measured through the Level of Regional Subsistence Minimum ...... 103 Annex Table 9. Budget Expenditures by Level of Government as Percent of GDP ...... 106 Annex Table 10. Shares of Different Levels of Government in Consolidated Itemized Expenditures ...... 107 Annex Table 11. Shares of Itemized Expenditures in Total Expenditures at Different Levels of Government ...... 108 Annex Table 12. Shares of Different Levels of Government in Consolidated Itemized Revenues ...... 109

v Annex Table 13. Shares of Itemized Revenues in Total Revenues at Different Levels of Government ...... 110 Annex Table 14. Shares of Municipalities in Consolidated Regional Tax Revenues by Region ...... 111

Analytical Annex Tables Table 1. Regression Analysis of Regional Budget Deficits in 1997. Results for Regression Coefficients ...... 115 Table 2. Regression Analysis for Noncash Revenues in Russia's Regional Budgets, 1997-Results for Regression Coefficients...... 121 Table 3. Regression Analysis for Tax Arrears by Region in 1997. Results for Regression Coefficients ...... 123 Table 4: Do Federal Transfers Equalize Regional Revenues? Comparison of Variation in Per Capita Revenue Indicators ...... 125

Analytical Annex Figures Figure 1. Change in Regional Adjusted Revenues and Change in Regional Deficit, 1995-96 ...... 119 Figure 2. Change in Regional Expenditures and Change in Regional Deficit, 1995-96 ...... 119 Figure 3. Change in Regional Adjusted Revenues and Change in Regional Deficit, 1994-95 ...... 119 Figure 4. Change in Regional Expenditures and Change in Regional Deficit, 1994-95 ...... 120 Figure 5. Dependence on Federal Transfers and Change in Regional Own Revenues, 1994-96 ...... 126 Figure 6. Change in Federal Transfers 1993-95, and Change in Pretransfer Regional Deficit Next Year ...... 127

vi Foreword The Poverty Reduction and Economic Management Unit in the World Bank's Europe and Central Asia Region has been undertaking a series of analytical work on issues pertinent to the economies in the region. These issues include: transition issues; issues of economic integration pertinent for the Central and Eastern Europe countries which are candidates for accession to the European Union; poverty issues; and other economic management issues. The analytical work has been conducted by staff of the unit, other Bank staff as well as specialists outside of the Bank. This technical paper series was launched to promote wider dissemination of this analytical work, with the objective of generating further discussions of the issues. The studies published in the series should therefore be viewed as work in progress. The findings, interpretations and conclusions are the authors' own and should not be attributed to the World Bank, its Executive Board of Directors, or any of its member countries.

PRADEEP MITRA DIRECTOR POVERTY REDUCTION AND ECONOMIC MLANAGEMENTUNIT EUROPE AND CENTRAL ASIA REGION THE WORLD BANK

vii Acknowledgments

This report has been prepared by a team composed of Lev Freinkman (team leader, the World Bank), professor Daniel Treisman (University of California in Los Angeles), and Stepan Titov (the World Bank). Background papers for the report were provided by Andrew Dobson, Sergei Khurtsevich, Alexei Lavrov, Maxim Kulikov, Zarema Kasambieva, Magomed Yandiev, and the team from the Institute of Urban Economy (Moscow) led by Alexei Novikov. The team received valuable advice and comments from Mark Agronovitch, Alam Asad, Andrew Dobson, Bert Hofman, Kristin Gilbertson, Natalia Kalinina, Galina Kurlyandskaya, Alexei Lavrov, Allister Moon, Alexander Morozov, Helga Muller, Joao Oliveira, and Deborah Wetzel. Maria Shkaratan and Plamen Yossifov provided major statistical analyses.

viii ExecutiveSummary

Reforms of Russia's budgetary system at the subnational level are vital to preserve macroeconomic stability, improve the efficiency and accountability of government, and enhance incentives for local and regional governments to vigorously support economic growth. Previous analytical and reform efforts have focused on possible changes at the federal level and in the system of center-region relations. An opportunity now exists to make progress by providing reform advice and conditional aid to policymakers at the regional and subregional level. The paper was prepared in summer of 1998, before the August 1998 crisis led to aggravation of the trends described below, including numerous defaults by subnational governments on their domestic and external debt obligations.

CurrentTrends-An ApproachingCrises? The greatest threat to continued macroeconomic stability is the problem of fiscal adjustment that Russia continues to face. At present, incentives throughout the multitiered fiscal system do not encourage effective tax collection and efficient allocation of public resources. Further reforms are needed to address current fiscal weaknesses. These weaknesses are increasingly apparent at the subnational level. From small surpluses in the early 1990s, most regional budgets have slipped into deficit. Commercial debt at both the regional and local levels is also growing. By early 1998, subnational government debt amounted to about 1.5 percent of GDP, or as much as 6 percent if nonreported debts are included. Though the current level of indebtedness does not itself yet constitute a major fiscal risk, its rapid growth-70 percent in 1997-is alarming. Various other features-high real interest rates, short-term maturities of subnational debt, falling real subnational budget revenues, and the use of budget arrears and other nontransparent liabilities-combine to exacerbate subnational governments' financial problems. These pressures are converging on regional and local governments before an effective regulatory mechanism to monitor and limit debt accumulation is in place. Besides its impact on macroeconomic stability, subnational fiscal adjustment is important to support economic growth and increase the efficiency of public spending. Large deficits at any level of the state drive up interest rates and crowd out private sector investment. Current patterns of expenditure-including excessive subsidies-reduce the resources available for growth- promoting public spending on infrastructure and public goods and encourage rent seeking behavior within the private sector. Poor expenditure control at all levels of the state helps to account for the perceived deterioration in the quality and quantity of services in education, health, social protection, and housing. Mlostprevious fiscal reforms in Russia have focused on problems at the federal level or in the system of federal transfers to the regional governments. (For instance, in November 1997 the Government of Russia (GOR) announced a Fiscal Action Plan to increase federal tax collections and strengthen its control over federal budget expenditures.) This report focuses instead on opportunities for reform at the subnational level. It reviews recent trends in fiscal adjustment, budgeting, and government debt at the regional and local levels in Russia. It analyzes major

I problems and suggests a number of measures and performance indicators that could form part of a reforrm strategy initiated by the Government of Russia.

Federal Government:A New Emphasison RegionalFinance Reform

In the early post-Soviet years, political and economic crises kept the GOR from focusing on fiscal developments within the subnational units. Some attention was paid to reforming fiscal relations between center and regions, but more urgent priorities at the time included resolving the federal government's own fiscal problems, reducing inflation, and developing a brand of flexi- ble federalism that would contain political strains. As a result, a clear imbalance has developed between fiscal adjustment efforts at the federal and subnational levels. The legal framework for subnational budgeting is undeveloped and con- troversial. At the same time, subnational governments do not have strong incentives to push important structural reforms that are their responsibility (such as in housing, utilities, agriculture, and real estate). This has reduced the overall effectiveness of structural reform in Russia. Reforms of subnational finance in Russia lag behind those of some East European countries, which did not have to contend with the political complications of vast regional diversity and federal structure. For instance, Poland, Hungary, and Bulgaria were able to reduce local spending on housing and housing subsidies soon after the fall of their communist governments-a problem with which Russia continues to struggle. This report suggests that a politically and constitutionally weak central government attempting to reform subnational finance may have to depend to a greater extent on incentives. Rather than challenging constitutional divisions of power head on, central government may achieve more through the targeted use of conditional aid. Recently, the GOR has endorsed plans to accelerate structural reforms at the subnational level. Its Medium-Term Program for 1997-2000 identifies subnational reform among its major policy objectives. In September 1997, the GOR managed to get the Duma to pass, over the Federation Council's veto, a law titled "On the Financial Foundations of Local Government in the Russian Federation," which made a number of improvements in principle. The law declared that the devolution of unfunded mandates was prohibited. It established minimum shares of various shared taxes that the regions must allocate to municipalities, though it did not require that each municipality receive this minimum share-only that the condition be met on average. The law prohibited the lowering of municipalities' tax shares or transfers if they collected greater own revenues than anticipated. In addition, the law established the right of municipalities to set up their own tax services to collect municipal taxes, and their own treasuries. It did not, however, require stable rates of tax sharing. The Budget Code, which recently passed the second Duma reading, is expected to have a major impact on the quality of public finance management in Russia, including at the subnational level. The code contains major provisions for budget preparation, execution, and audit, budget consolidation, debt management, and expenditure sharing, as well as provisions for several other areas. The third reading is expected later this year.

2 A draft Tax Code, if approved by the parliament, would streamline tax administration, possibly helping to improve revenue performance at all government levels. It would eliminate numerous small local taxes and grant regional governments the right to introduce a sales tax, as well as consolidating the currently segmented system of asset taxation into a single real estate tax. The code would also drastically reduce the number of existing exemptions on the personal income tax, expanding the tax base of local governments. In the context of the financial crisis that threatened the ruble's stability in mid 1998, the government took a number of additional initiatives. Most notable was a presidential decree of May 5.1 This decree required all regions wishing to get additional budget assistance to sign agreements with the federal government on the rehabilitation of government finances, establishing conditions for future federal budget aid. The federal government would only roll over budgetary loans for clearing wage arrears debt to the regions that sign such agreements, and future federal budget assistance other than equalizing transfers will also be conditional on signing and implementing such an agreement. In a dramatic move, the decree simply suspended all bilateral agreements previously signed with regions that contradicted parts of thel998 budget law. Several of the GOR's initiatives in subnational fiscal reform correspond closely to those suggested in this report. However, much more needs to be done to address adequately the numerous distortions that have accumulated in this area. The next section suggests a number of directions in which the GOR's strategy should be expanded and modified.

SubnationalFiscal Reform Agenda Key directions for subnational fiscal reform include the following.

* Clarification of Subnational Government Functions. Subnational governments need to complete the clarification of responsibilities between public and private sectors as well as between regional and municipal government levels. Both of these have direct implications for fiscal performance of subnational governments. e Developing a Regulatory Framework. Subnational governments need to adopt regional and local laws and regulations that are consistent with federal laws and enhance the transparency, predictability, and accountability of the budget process. Laws and regulations should clarify responsibilities within regional and local governments and legislatures for budget preparation, approval, implementation, and control. * Budget Consolidation. Major forms of off-budget activities (especially extrabudgetary funds, tax exemptions, budget guarantees, and noncash government operations) need to be reduced in scope and integrated within the regular budget. * Budget Preparation and Expenditure Management. Necessary reforms cover several key areas: (i) reorganization of budget classification system; (ii) introduction of expenditure accounting on the commitment basis; (iii) establishing a treasury system of budget execution; (iv) expansion of competitive tendering for public procurement; (v) introduction of new budgeting principles in key sectors (such as education and health); (vi) improvements in budget preparation to reduce the need for budget sequestration; (vii) strengthening the budget audit function; and (viii) adoption of standards for budget disclosure.

3 * Accelerate Expenditure Restructuring. The immediate priorities with respect to changing the expenditure structure should include the following: (i) phasing out explicit and implicit subsidies (like those for housing, utilities, and agriculture) and directed credits to the private sector; (ii) rationalization of expenditures on administration; (iii) strengthening local capacity for social protection by consolidating various benefits and better target- ing of income support; (iv) expansion of under-developed public sector functions (public infrastructure). * Debt Management. Governments need to develop a realistic timetable for a full conversion to a more transparent system of borrowing by subnational governments. This change will require the following: (i) the discontinuation of issuing money substitutes; (ii) compliance with debt limits introduced by the draft Budget Code; (iii) introduction of adequate debt monitoring and management system; and (iv) restructuring of the existing debt to service providers. * Reform of Local Taxation. Subnational governments should contribute to federal efforts to strengthen tax administration.. They will have to adopt local tax laws that correspond to the provisions of the Tax Code. A specific priority is the introduction of value-based property taxation and other local taxes. * Capital Budgeting. A modern framework for public investment management needs to be introduced, including project evaluation, multi-year investment budgeting, and strengthening implementation monitoring.

FederalActions to Support Implementation of This Agenda Certain actions of the federal government could help to implement this agenda for subnational reform and greatly increase the chances of success. For each policy objective, there are three main approaches the federal government could adopt. First, there is often a role for additional federal legislation and regulation. Second, within Russia's federal system, many objectives can be pursued only by providing subnational governments with positive incentives in the form of aid conditional on demonstrable reform. Third, the federal government could rely on the discipline of the internal capital market to encourage responsible policy at the subnational level. By stimulating the development of this market, it could increase the influence of the center over subnational policyrnakers. Determining the appropriate balance between these three approaches on each aspect of fiscal reform will require considerable thought and intergovernmental negotiation. Below, some possible priorities are suggested.

Developing the Legal Framework for Subnational Budgeting The success of subnational fiscal reform will depend on the preparation of a variety of new laws, amendments to existing laws, and on the support of reform law through the process of debate and voting in the Duma. Among possible legislative priorities are the following. The political dif- ficulty of getting many of these laws and amendments passed dictates that a realistic strategy will include only a subset of them as short-term goals:

4 * Passing the Budget Code, Tax Code, and appropriate laws on their implementation * Amendments to existing legislation to eliminate inconsistencies between the main fiscal laws (Tax and Budget Codes, Law on Local Self-Governance, Law on Municipal Securities, Law on Financial Foundations of Local Government) * Amendments to the Law on the Financial Foundations of Local Government that would establish more stable rules of tax sharing between regions and municipalities while not decreasing the average municipal tax base * A federal law to regulate borrowing and issuing of securities by subnational governments * A federal law to restrict external borrowing to the most creditworthy regions with sustainable budget practice * Legislation that would ensure a cross-region allocation of the tax base of multi-region enterprises that is more proportional to the interregional location of their economic activities (for instance, some formula based on location of sales, payroll, and assets.) * A federal law on intergovernmental fiscal relations * Implementation of the main ideas of the Concept for Intergovemment Fiscal Transfers in the annual budget laws for 1999 and 2000 * A federal law on a Special Budget Management Regime for regions facing severe fiscal difficulties * Amendments to the Budget Classification Law to make it consistent with the GFS standards * Amendments to key laws (on Veterans, the Status of Servicemen, Child Benefits, etc.) to cancel or suspend unfunded mandates imposed on lower level governments (requiring provision of benefits in housing, utilities, transportation and other social assistance). This will be extremely politically sensitive, and may not be realistic.

Developing Supporting Regulations Besides working for the passage of laws and amendments, the GOR can improve the regulatory environment by enacting certain regulations and helping to prepare model laws and programs for regional and local governments. In particular, the following areas are relevant:

* Regulations that would require centralized registration by the Ministry of Finance of non- securitized forms of municipal debt (commercial loans, guarantees) * A model scheme for restructuring the existing stock of subnational budget debt to service providers. * Recommendations for regions on budget equalization across municipalities (Model Regulations for Regional Equalization Fund) * Recommendations to help regional authorities to clarify expenditure assignments and tax sharing between regional and municipal governments * Recommendations on allocation of public assets between subnational and municipal government levels * A federal regulation to support demarcation of territory between various municipalities and approval of city limits

5 * A model package of regional regulations to formalize the process of subnational budget preparation, approval, implementation, control and disclosure, including but not limited to: a) model regional law on the budget process b) model agreement between regional government and federal Treasury on regional budget execution through the Treasury c) model regional law on financial reporting by local and regional governments * Federal guidelines for subnational transition to new budget management practices * A new Budget Classification Instruction and new Instruction on Subnational Budget Accounting (modify instructions on the implementation of these) * Federal recommendations on capital budgeting: preparation, disbursement, reporting * Eliminate federal regulations that require the forced securitization of regional debts (for example, as agrobonds), which.undermines longer term sustainability of the regional and municipal bond markets

ChangingIncentives for RegionalGovernments The federal government can create positive incentives for reform. It could usefully strengthen the budget constraints of subnational governments through a comprehensive reform of federal transfers to introduce more transparency and equalization into the process. Policy conditional- ity for transfer disbursement should become a widespread element of the system. Access to certain kinds of federal transfers can be conditioned on demonstrable progress on aspects of the program discussed above. Similarly, access to loans from international financial organizations (IFIs) could be conditioned on reform progress. The federal government could also establish differentiated limits for subnational borroving, conditioned on regional capacity for efficient budget management. In addition, access to direct external borrowing could be limited to those regions that demonstrate sustainable progress.

Expanding the Capacity of the Federal Government to Monitor Subnational FiscalReforms A number of measures are needed to strengthen the Ministry of Finance's capacity to monitor subnational fiscal performance. Besides the development of model regulations for regions noted above, the Ministry of Finance should arguably be involved in supporting the preparation of regional fiscal adjustment programs, controlling for compliance with federal standards, and designing training programs for local budget staff. The Ministry of Finance needs gradually to build a capacity for prompt and adequate responses to possible defaults on debts by subnational governments. While major improvements in the legal and regulatory framework are critical to minimize both the possibility and the sever- ity of a potential subnational debt crisis, the government still needs a capacity to manage such a crisis if it occurs.

6 Notes

1. No.495, "On Additional Measures to Ensure Payment of WAagesto Budgetary W'orkers and on Rehabilitation of Government Finances."

7 Introduction

Significant successes have been achieved in Russian economic reform since 1992. Privatization transferred the majority of Russian enterprises from state to some form of private ownership. Inflation has been brought down to moderate levels-22 percent in 1996 and 11 percent in 1997-making possible a fall in nominal interest rates from a peak of over 150 percent in mid 1996 to under 20 percent in late 1997.1 Exports have increased markedly, though they dropped slightly in 1997, and the current account has been in surplus (US$19.8 billion in 1997. All dol- lar amounts in this report are U.S. unless otherwise indicated). In 1997, positive economic growth was recorded for the first time since reforms began, albeit at a rate of only 0.8 percent. After years of belt tightening, consumers have begun to feel the first stirrings of an economic revival. Consumption increased in 1997, fueled by higher real wages (5 percent higher for the year as a whole) and a reduction in public sector wage arrears (from a peak of 11.4 billion new rubles in June 1997 to 4.9 billion in December). Consumer confidence measured through household surveys was at its highest level since late 1992.2 The recent improvements are all linked to the success of macroeconomic stabilization. And the sustainability of these fragile beginnings of a turnaround depend crucially on the continuation of low inflation. Pressures from international markets alarmed by the Asian crisis make pre- serving monetary stability both more difficult and even more important to Russia's short-term economic development. The greatest threat to continued macroeconomic stability is the problem of fiscal adjustment that Russia continues to face. At present, incentives throughout the multitiered fiscal system do not support effective tax collection and efficient allocation of public resources. Further reforms are needed to address current fiscal weaknesses. These weaknesses are increasingly apparent at the subnational level. From small surpluses in the early 1990s, most regional budgets have slipped into deficit. The debt of both regional and local governments has also increased and has been growing at a high annual rate. While such problems are in their early stages in Russia, the trend is worrying. The experience of various other countries suggests that slow subnational fiscal adjustment and poor regulation of subnational borrowing can have a serious macroeconomic impact. In Argentina, Brazil, South Africa, and various other countries, subnational budget deficits have recently ended up being financed by additional federal transfers, or federal budgets have been forced to take on lower level governments' debt obligations. Timely attention to such problems can prevent grave cori- sequences later on. Fiscal adjustment at the subnational level is also important for other reasons than its impact on macroeconomic stability. Large deficits at any level of the state drive up interest rates and "crowd out" private sector investment. Current patterns of expenditure-including excessive subsidies-reduce the resources available for growth-promoting public spending on infrastructure and public goods. Poor expenditure control at all levels of the state helps to account for the perceived deterioration in the quality and quantity of services in education, health, social protection, and housing. Until subnational governments have the proper incentives to introduce expenditure rationalization and budget savings, they are unlikely to promote structural reforms in sectors that fall under their responsibilities.

8 Most previous fiscal reforms in Russia have focused on problems at the federal level or in the system of federal transfers to the regional governments. For instance, in November 1997 the Government of Russia (GOR) announced a Fiscal Action Plan to increase federal tax collections and strengthen its control over federal budget expenditures. Recently, however, the GOR has endorsed plans to accelerate structural and fiscal reforms at the subnational level. Its Medium- Term Program for 1997-2000 identifies among its objectives control of the budget deficit, strengthening fiscal performance of subnational governments, reducing public sector borrowing, and reform of intergovernmental fiscal relations. This report reviews recent trends in fiscal adjustment, budgeting, and government debt at the subnational level in Russia. It analyzes major problems in the fiscal area, and suggests a number of measures and performance indicators that could form part of a reform strategy initiated by the Government of Russia. It does not deal in detail with sector-specific issues (such as expenditure composition or comparative efficiency of various sectoral expenditures). Other studies have covered this ground (particularly regarding housing, social protection, and education). Detailed analysis of Russia's problems in the areas of tax administration and center-region fiscal relations is also left to other studies. Previous World Bank reports and publications have offered insights into Russia's vast interregional differences in fiscal capacity and into the system of center-region transfers.3 This report builds on such work, but focuses at a lower level-the budgetary policies and relationships ivithinRussia's 89 regions. It analyzes trends in fiscal policies and suggests recommendations for fiscal adjustment at the level of regional and municipal budgets.

Notes

1 Russian Economic Trends, 30 January 1998. The Asian economic crisis subsequently pushed interest rates back up to around 150 percent in mid 1998. 2. Russian Economic Trends, 30 January 1998. 3. See Le Houerou (1995) and Wallich (1994).

9 1. SubnationalBudgeting and EconomicReform in Russia

This chapter begins by describing trends in the recent economic development of Russia's regions and the evolving subnational fiscal system. It highlights a growing diversity between richer regions, with more stable finances but disincentives to interregional redistribution, and poorer regions, which are becoming increasingly dependent on federal aid. The chapter concludes by outlining the main problems that reduce the efficiency of the subnational fiscal system. One response by Russia's federal government to the increasing economic and fiscal diversity of regions has been to negotiate particularistic political arrangements with them. The asymmetric federalism that resulted has been criticized on a number of grounds. This report departs somewhat from such criticisms, and instead emphasizes the political and economic benefits that such asymmetry can at times entail in an economy in transition.

EconomicDevelopments in Russia'sRegions Organization of the State Russia is a decentralized federal state consisting of 89 "subjects of the federation"-88 excluding Chechnya, the status of which has been under negotiation since a ceasefire was signed in 1996. These include 21 ethnically defined republics (20 without Chechnya), 6 krais (territories), 49 oblasts (provinces), the Jewish Autonomous Oblast, 10 autonomous okrugs (areas), and the two federal cities of Moscow and St. Petersburg. Subjects of the federation have their own legislatures and executives, both of which are elected. The republics also have their own constitu- tions. All subjects of the federation have independent budgetary and administrative status.] Beneath the level of subject of the federation, two tiers of local government exist. The first tier comprises raions (districts) and cities under regional jurisdiction. There are 1,868 raions and 650 first-tier cities. Below them, the second tier consists of 437 cities under districtjurisdic- tion, as well as 2,022 townships and 24,307 villages.2 Large cities are subdivided into city districts.

Regional Economic Conditions Russia inherited from the communist era an economic structure that was-and still is-highly geographically concentrated. Large shares of output in major industries are produced in a handful of regions. Oil and gas come mostly from the two Siberian regions of Khanti-Mansiiskiy Autonomous Okrug (AO) and Yamalo-Nenetskiy AO, which between them produce four-fifths of Russia's oil and one-fifth of the world's supply. The two Urals oblasts of Sverdlovsk and Chelyabinsk dominate metallurgy, accounting for 28 percent of national output. As of 1995, 75 percent of metals and 74 percent of fuels were produced in just 10 regions.3 More than 50 percent of machinery was also produced in the top 10 regions. The Siberian republic of Sakha pro- duces 25 percent of the world's diamonds. Some powerhouse regions feature among Russia's top ten producers in two or more branches of industry. In 1995, Chelyabinsk was both the second largest metals producer and the sev- enth largest manufacturer of machinery; Samara, the biggest machinery producer, was also the

10 eighth largest fuel producer; Kemerovo came fourth in both fuels and metals production. However, most regions do not have diversified industrial structures. The dependence of many on a single sector of economic activity left them extremely vulnerable as liberalization phased out prereform price distortions and trade restrictions. 4 As a result, most of the country's GDP is produced in a minority of regions. The State Statistical Agency, Goskomstat, prepared estimates of regions' gross product in 1995. According to these estimates, the top ten regions that year produced about 44 percent of the country's total GDP.5 Moscow city by itself accounted for 13.1 percent. It was followed by the oil-producing Khanti-Mansiiskiy Autonomous Okrug, the Volga River industrial center of Samara, and Moscow Oblast. At the same time, a number of regions are small (with population below 300,000), underdeveloped, located in remote regions, and lack the human capital necessary for truly independent economic and fiscal policy. They have a long history of dependence on federal assistance. Such patterns of regional concentration have probably increased during the 1990s. Since 1990, industrial output has dropped sharply across Russia, but the contraction varies from region to region. Average regional output dropped 57 percent in real terms between 1990 and 1996 (see table Al in the statistical annex). However, the drop in individual regions ranged from 87 percent in Aginskiy-Buryatskiy Autonomous Okrug to just 15 percent in Nenetskiy Autonomous Okrug. Interregional variation in the speed of contraction has also increased: while the coefficient of variation for industrial output annual change in 1991 was 0.06, by 1996 it had doubled to 0.12. Some regions have apparently made up for sharp drops in industrial output with increases in services. To do this, location and infrastructure appear to be important prerequisites. Moscow city, for instance, suffered a decline in regional industrial output in the period 1990-96 of 71 percent, compared to the national average of 57 percent. St. Petersburg reported a 68 percent drop, and Sverdlovsk 59 percent. However, these cities are among those currently more economically successful. Moscow city experienced growth in the nominal output of services that was above the national average. Regions vary dramatically in the proportion of enterprises that are operating at a loss. In Tatarstan, Moscow city, St. Petersburg, Yaroslavl, Belgorod, Chelyabinsk, Samara, and the Evenkiiskiy AO, fewer than one third of enterprises reported losses in 1996. By contrast, in Kalmykia, Aginskiy-Buryatskiy AO, Chukotskiy AO, Tuva, Buryatia, Nenetskiy AO, Komi- Permyatskiy AO, and Sakha, more than two-thirds of firms could not balance their books. In 1996 the most profitable region, Khanti-Mansiiskiy AO, reported net profits per capita almost ten times the national average. At the other end of the scale, the Koryakskiy AO reported a large per capita net loss. Investment-what there is of it-floods into the more successful regions, accentuating the pattern of differentiation. While in most regions investment slowed to a trickle between 1991 and 1996, in a few regions it held up relatively better. In Moscow city investment in 1996 was at 83 percent of the 1991 level, and in Samara Oblast it fell only to 53 percent (statistical annex table Al). Foreign investment concentrates on a few leading regions. As of mid-1996, total foreign investment in Russia came to about $8.5 billion. Of this, more than 40 percent was invest- ed in the city of Moscow alone, and another 33 percent in nine other raw materials-producing, industrially strong, or capital city regions.

11 Differences in Standard of Living

The variation in economic performLance and specialization noted above translate into sharp interregional divergences in the standard of living. As of the mid-1990s, unemployment levels ranged widely. In the average region, unemployment in 1995 stood at 10.2 percent (see table Al). Far higher rates were recorded in depressed Kalmykia (19.8 percent), Dagestan (22.3 percent), and the Jewish Autonomous Oblast (15.9 percent). On the other hand, the lowest rates were to be found in Moscow city, Omsk Oblast, and Chukotskiy AO, each of which reportedjust 5.2 percent. Generally, rises in unemployment correlate with the rate of industrial decline, but some regions have been able to replace lost jobs in industry with service sector positions. Moscow city, despite having one of the highest rates of industrial decline, actually tied for the lowest unemployment rate in 1995. Income inequality across regions is considerable. Residents of Moscow-with 7 percent of the population and 13 percent of GDP-earned about 20 percent of total nationwide personal income in 1995, by Goskomstat's measure. This was largely due to the city's remarkable domi- nance of income from entrepreneurial activity, property, shadow economy activity, and currency sales, since Moscow residents received less than 10 percent of the Russia's wage income.' Even these figures may be an underestimate, since more than 22 percent of nationwide expenditures on goods and services occurred in Moscow, as did 27 percent of the increase in financial savings in 1995.7 Not surprisingly, the incidence of poverty is also regionally concentrated. In Tula, Kemerovo, and Ulyanovsk only about 16 percent of the population had incomes below the poverty line in 1995. Moscow city had about 19 percent poverty. At the other end of the scale, three quarters of the residents of Tuva were classified as poor, along with two thirds of the population of Chita Oblast (see box 1, and table Al in the statistical annex). In short, Russia's 89 regions exhibit dramatic variation in economic structure and performance-a pattern that appears to have increased in the post-communist years. Wealth, economic activity, and with it the tax burden, are increasingly concentrated in a small number of regions-most notably, the city of Moscow-while many other regions remain economically depressed, with high unemployment, unprofitable enterprises, and a growing reliance on federal transfers. Variation in economic conditions leads to diversity of regional interests, rendering it difficult at times to build consensus regarding key parameters of economic policies. Such major differences, rooted in geographical variation and inherited economic structure, cannot be overcome in the short run and will continue to provide a serious challenge to decision makers.

Economic Policies Not only are Russia's regions economically diverse, but the policies that regional governments have adopted to deal with the strains of economic transition also vary widely. Some regions have generally embraced market reforms, while others have sought to preserve enclaves of socialism, with price restrictions, large subsidies, and barriers to trade. Still others have managed to combine market reforms with populist policies of regional government-directed economic development and service provision. One observer has even characterized the growing variation in

12 Box 1 The Republic of Tuva: Demandfor Federal Transfers and the Needfor Expenditure Adjustment

The Republic of Tuva, located in the south of Eastern Siberia, is a small, relatively isolated region with population of about 310,000. It is one of the poorest Russian regions, with a mostly agrarian economy and some mining industry. Politically, it was the last region to join the Soviet Union in mid for- ties; before that Tuva was formally an independent state. During Soviet times, Moscow pumped significant investment into the republic annually to build its industrial and social infrastructure. For about 40 years, the region enjoyed the benefits of having the status of an internal (autonomous) republic, wvhichassured much higher per capita norms of public funding compared to the regular Russian oblasts. This resource inflow also included forced migration of skilled labor. The structure and mechanisms of this development assistance led to major imbalances between local budget expenditure needs and revenue capacity. The current social infrastructure of Tuva, relatively developed by Russian standards, provides most of the rural population with easy access to basic medical, educational, and cultural facilities. At the same time, the tax base is completely insufficient: agriculture is not profitable, industrial and service sectors are underdeveloped, and transportation is hampered by the lack of good roads connecting Tuva with the rest of Russia. In 1996 per capita own revenues (the net of federal budget transfers) of Tuva's consolidated budget amounted to 489,000 rubles or 26 percent of the Russian average. At the same time, per capita budget expenditure equaled 2,101,000 rubles or 91 percent of the average. Thus, budget expenditures are more than 4 times higher than own budget revenue, and the remaining fiscal gap of about 75 percent of budget expenditures was almost entirely covered by federal budget assistance. In real terms, this level of both expenditures and transfers amounts to only about 40 percent of the their peak in 1994, when transfers were at their height and per capita budget expenditure adjusted for price differences was among the 15 highest in the country. As a result, Tuva is on the list of the major recipients of federal budget transfers. Per capita federal transfers, including budget loans, to Tuva amounted to 1,548,000 rubles in 1996, which is 4.5 times more than the Russian average of 339,000 rubles. Moreover, about 30 percent of federal assistance to Tuva in 1996 came through soft budget loans, the most negotiable and least predictable form of federal money. The major source of this fiscal imbalance in Tuva relates to its overextended social infrastructure. It is overdeveloped notjust in relative terms (compared to its revenue capacity) but in absolute terms. Forty-five percent of its labor force is employed by the government. In addition, the high birth rate (which means that 55 percent of the total population is out of the labor force) further increases demands on social spending. Total per capita social budget spending is 1.5 times higher than the Russian average and 45 percent higher than in comparable regions of Eastern Siberia. Per capita budget expenditures on education are about 60 percent higher than the average, those on healthcare and culture are 40 percent higher, and administrative expenditures are about 25 percent higher. The region does not have sufficient own resources to support the social infrastructure inherited from Soviet times in its present state. Tuva needs a long-term program of federal assistance that will not only be focused on economic development and an increase in revenue capacity but also on in depth reorganization of its budget sphere, including downsizing of both education and healthcare systems and general restructuring of budget expenditure.

economic development and policy as a "dangerous heterogeneity" which might lead to political fragmentation.' An example of the first type is Nizhny Novgorod, where small-scale privatization got off to a rapid start, price controls were quickly reduced, efforts were made to support small enterprise, and economic openness was the rule. The prototype of the second model is the region of

13 Ulyanovsk, where a communist administration retained price limits and high levels of subsidies, and imposed barriers to prevent goods leaving the oblast. Moscow city exemplifies the third model. While accepting price liberalization and encouraging foreign investment, the administration of Mayor Luzhkov has used the city's investment programs and leverage over local busi- nesses to support city-coordinated development and a popular expansion of housing construction. The ability to pursue this strategy is greatly helped by the disproportionate tax resources concentrated within the city (see box 2). Price liberalization was the first major issue on which regional strategies diverged. After the January 1992 central freeing of prices, some regional governments attempted to restrain the huge price jumps by imposing regional price controls and barriers to exporting goods outside the region. Often this merely put off large price rises until later, but it did result-along with differences in transport costs-in cross-regional price differences that still exist. The coefficient

Box 2 Moscow City Budget: Major Gainsfrom Biases in the Taxation System

In the Russian Federation even the largest corporations with a nationwide network of branches pay most of their taxes in the region of their legal location (registration). For some specific taxes (pri- marilyprofit tax and property tax) the legislation was recently amended to require such corporations to share tax payments between their various locations, in proportion to the number of employees or the asset value of their branches (or both). While there is growing evidence that such tax sharing is gradually becoming more common between municipalities within the same oblast, including municipalities within metropolitan areas, cross-oblasttax sharing is still relativelyrare and the corresponding legislation is not enforced. Such tax payment arrangements bring additional benefits to the city of Moscow,where the head- quarters of most leading Russian companies are situated. For example, the largest Russian monop- oly, Gazprom, provides significant tax payments to the Moscowbudget although it does not have any operations related to gas extraction, transportation, and processing on the city's territory. In 1996 Gazprom provided 9.7 percent of total city revenue and 11.4 percent of total tax revenue, including 16.1percent of profit tax collected and 7.1 percent of value added tax. In 1997 such proportions were even higher because, under political pressure, Gazprom had to reduce its tax arrears to the federal budget, which automatically increased revenues of the Moscowcity budget. Gazprom is hardly unique. Six major Russian corporations-Gazprom itself, Lukoil (oil production), Transneft (oil transportation), RAO UES (energv), Rostelecom (communications), and Glavnefteproduct-Rosneft(oil)-together paid the city 5.1 trillion rubles (US$1billion) in 1996.This figure constituted 15.1 percent of total Moscowcity budget revenues and 17.9 percent of its total tax revenue. Under proper tax arrangements most of these taxes would go to other subnational budgets across the country. The five trillion rubles these companies paid to Moscowcan be compared to the 23.6 trillion rubles disbursed by the federal government's fund for financial support of the regions in 1996. A more proportional allocation of taxes-that is, one in which the payment of taxes corre- sponded more closelyto the location of economic activity-might thus reduce the need for budget redistribution through the equalization fund by up to 20 percent of its current level. As a result of its favorable tax position, Moscow city is able to finance per capita budget expenditures which, when adjusted for price differences, are about 2.5 times the Russia average. At the same time, the city government manages to keep a substantial part (not less than 10 percent) of its revenue outside the officialbudget. Moscowtaxpayers also provide more than 20 percent of total federal tax revenues. Surprisingly,despite such tax advantages, the city of Moscowmanaged to receive additional support from the federal budget, amounting to more than 2.5 trillion rubles a year from 1996 to 1997 (about 5 percent of the city budget).

14 of variation of the cost of a basket of 19 basic consumer goods (that make up the so-called subsistence minimum) has remained relatively stable since 1993, indicating continuing geographical divergence in the price level (statistical annex table 8). Much of the difference in prices can be explained by different transport costs. The regions with the highest prices are almost without exception the more remote regions of the Far East and Siberia. Nevertheless, further down the scale, ideology also seems to have played a part. The regions with the lowest prices include those whose communist-oriented administrations retained price controls on food relatively longer. Ulyanovsk Oblast managed to keep the retail price of milk 12 times lower than the national average in 1992 and 4.5 times lower in 1993. Even as of December 1996, Ulyanovsk residents were still paying less than residents of any other region for their standard food baskets. Other regions of the agricultural "red belt" south of Moscow such as Bryansk, Oryol, Tambov, and Belgorod also appeared in the bottom ten in 1996, as did the republics of Tatarstan and Bashkorstan. Price liberalization in January 1992 was followed that summer by the adoption of a national program for mass privatization. While some regions moved fast in encouraging enterprises to privatize, others delayed. Differences in the rate can be inferred from differences in the proportion of fixed assets that as ofJanuary 1, 1995 were still in the ownership of regional and local governments. While in 13 regions, the rate of regional and municipal ownership remained above 40 percent, 16 regions had rates of less than 15 percent. As prices rose and central subsidies decreased, regional governments often stepped into the gap. Regional budget-financed price subsidies increased from 20 percent of spending and 3.5 percent of GDP in 1994 to 24 percent of spending and 4.3 percent of GDP in 1995. More than two thirds of this went toward housing subsidies.9 Regions varied in the extent of subsidization: as of the mid-1990s there was a fourteen-fold difference between regions within the temperate zones of European Russia in the degree of housing and utility subsidization. The rate of subsidization of agriculture also varied substantially. In 1995, farms in Samara Oblast received about 1.5 rubles in regional subsidies for every 100 rubles of output; those in Khabarovsk received up to 29 rubles. Among those with the highest subsidies to agriculture (those receiving more than 17.6 rubles for every 100 rubles of output) were the Siberian regions of Irkutsk and Tomsk, as well as the republics of Tatarstan, Bashkortostan, and Sakha. Regions also differ in the degree to which they protect their internal markets from "imports" from other regions. Article 74 of the Russian Constitution prohibits the creation of any "customs borders, tariffs, levies and any other obstacles to the free movement of goods, services and capital" on the federation's territory. But in practice many such barriers exist. One survey found examples of export limits in Ulyanovsk, Bashkortostan, Belgorod, Rostov, and Lipetsk.10 Limits on the import of goods are more common. Many regions had by late 1996 introduced restrictions on the import of vodka, including Lipetsk, Manii El, Mordovia, Tatarstan, Krasnoyarsk, Chuvashia, Ulyanovsk, Voronezh, Ryazan, Kirov, Karelia, Vologda, and the city of Yaroslavl. Most of these charged high taxes-from 10 percent to 80 percent-while others imposed a high minimum price or a quota. Not just vodka was affected: some regions imposed limits on the import of other food goods, or requirements for quality certification that in practice seemed to serve the same purpose.

15 On many of these indicators, a pattern is visible: regions that have a status of internal republic tended to embrace market reform far less enthusiastically than ethnically Russian regions. As of mid 1996, the eight regions with the slowest rates of mass privatization were republics. Of the 13 regions with more than 40 percent of fixed assets still in regional and municipal ownership as of January 1995, 10 were republics and two autonomous okrugs. 1 A similar picture emerges regarding small-scale privatization: as of July 1, 1996, small-scale privatization averaged 84 percent across Russia, and of the seven regions with the lowest rates at that time, six were republics. On the extent of subsidies, however, the picture is somewhat different-presumably because providing subsidies requires financial resources, which not all republics had. While some of the more depressed ethnic republics were among those allocating less than 20 percent of total regional expenditures to subsidies, richer republics such as Tatarstan and Bashkortostan were at the other end of the scale (see box 3).

Box 3 Tatarstan Special Fiscal Status brings Fiscal Gains that are Usedfor Extensive Interventionsinto the Enterprise Sector

Politicaland EconomicPeculiarities of the Region.Since 1992, the Volga republic of Tatarstan has managed to carve out a relationship with the federal government that is the envy of many of its ethnically Russian counterparts. Its leadership has exploited to the full the willingnessof federal politicians to engage in negotiation with regional bosseswho are assertive but not extreme in their demands. A series of agreements signed with the federal government provided Tatarstan with unique economic and political benefits (see text). These include a smaller regional contribution to the federal budget, transfer of most enterprises located on the territory from federal to regional ownership, and an expansion of Tatarstan's rights in the area of foreign economic relations (including external borrowing). The estimated annual gain from the special tax regime amounted to 1 trillion rubles in 1995, or 15 percent of actual consolidated regional budget spending. Given the favorable prereform industrial structure of the region (including a high share of oil extraction and oil processing) and a lower rate of overall industrial decline during the period 1992-95, these agreements brought about fast accumulation of financial resources by the regional government. At the moment, Tatarstan is one of the wealthiest Russian regions in terms of per capita public expenditures and there is evidence that various regional social indicators such as health and educational expenditures and employment have been maintained at levels far above the Russian average.

EconomicPolicy. Tatarstan's government has been following a fairly conservative regional economic policy.It has used the benefits of greater political independence from Moscowto follow a slower path of economic reforms than in most other Russian regions. Price and trade controls are more extensive, privatization has been slower, and there is widespread government intervention in various aspects of industrial enterprise restructuring. An unacceptably high share of public resources is spent on various types of explicit and implicit transfers to the enterprise sector.

The Scaleand Main Formsof Government-EnterpriseTransfers. Major forms of government transfers to enterprises in Tatarstan include: (i) conventional subsidies and investment grants funded by the regional budget, (ii) tax exemptions, (iii) extrabudgetary fund transfers, (iv) regional government guarantees for commercial bank borrowing (including external loans), and (v) federal budget grants to local enterprises, which are extracted with the active involvement of the Tatarstan government.

(Box continueson next page)

16 (Box 3 continued)

Budgeted enterprise support and tax exemptions together exceeded Rbl2 trillion in 1995-about 38 percent of consolidated regional budget spending-with nonbudgeted transfers amounting in addition to about 2 trillion rubles. Of the budgeted transfers, subsidies to agricultural and food processing enterprises came to Rbll.5 trillion, constituting the largest single item. This included providing farms with commodity credits and with traditional preferential cash credits. The region still pre- serves substantial control over both basic food prices and profit margins in the food industry, which is one of the potential rationales for these subsidies. Tax exemptions, defined by the republic's annual budget law and approved by the republican Parliament, are targeted at encouraging industrial investments. In 1995, 330 billion rubles (about 6 percent of the regional budget) was given in the form of profit and VAT tax exemptions to 188 enterprises. Investment grants are provided from various sources such as the republican budget (200 billion rubles in 1995), regional extrabudgetary funds (40 billion rubles), and the separate Hard Currency Fund. The latter is funded mainly from foreign loans granted to Tatarstan, including those to be repaid in crude oil through barter transactions. The annual volume of the Hard Currency Fund program is estimated as $300-$400 million. These expenditures are not reflected in the budget.

GovernmentSystem of TransferAllocation. During the first years of transition, the system of transfer allocation in Tatarstan was quite decentralized and chaotic. Various government agencies had authority to decide on providing support to a particular enterprise based on submitted feasibility studies and business plans and to administer various elements of the enlarged regional budget quite independently. For example, decisions on support from the regular budget were approved by the Ministries of Finance and Economy, while decisions on allocations from extrabudgetary funds were taken by the State Committee for Industrial Policy, and the Ministry of Foreign Economic Relations administered the Hard Currency Fund. The resulting system was fragmented and arbitrary. Starting in 1995, the Tatarstan Government initiated reforms to unify and make the system of enterprise support more transparent. A key decision was taken that year to establish the high-pow- ered Inter-Agency Commission on Structural and Investment Policy. The Commission decides on the provision of financial support (such as grants and loans) and tax exemptions to enterprises on a competitive basis, operating within a financial limit imposed by the Parliament. The Government is required to report to the Parliament quarterly on the actual utilization of the granted tax exemptions and other enterprise benefits. The idea of unifying the provision of Government support was developed further by the adoption in May of 1996 of the law titled "On the Status of an Approved Investment Project wvith the Participation of a Foreign Investor." The law spells out the requirements for investment projects to receive support from public funds and the procedure for obtaining the status of an "approved" project supported by the state. The National Center for Investment Promotion was set up to operate an integrated system of preparation, analysis, organization, and promotion of investment projects to be implemented under the guarantees of the Tatarstan Government.

Evaluation. The overall level of government transfers is too high, and, in combination with remaining policy distortions, it consolidates an economic environment that is not supportive to genuine economic restructuring. The system of transfer allocation is still not driven by market signals. The dom- inance of tax exemptions as a means of support, rather than budgetary subsidies, introduces an element of improvisation into the system. While decisions to allocate budgetary subsidies can be based on a ex ante rigorous assessment of restructuring needs, derived from an analysis of market forces, tax exemptions are more frequently granted as an ex post compensation. Such exemptions, by providing temporary relief from the adverse effects of policy distortions, may indeed perpetuate market distortions. Tatarstan, therefore, has more to do to reform its system of providing support to the enterprise sector.

17 Trendsin the RussianRegional Fiscal System Legal Framework for Regionaland Local Finance Within this context of economic decline, growing regional differentiation, and divergent political responses, a new system of fiscal relations has been developing. It has emerged out of a corn- bination of legislation, intergovernmental bargaining, and the unilateral assertion of rights. Legal rights were devolved to the regional level governments-or simply taken over by them- before the federal level could develop the instruments necessary to monitor and regulate regional fiscal behavior and ensure it stayed within sustainable limits. The main legislative framework consists of a number of sometimes inconsistent laws and decrees that regulate the formation and execution of regional and local budgets-some of which have never actually been implemented. The Russian Federation Constitution enumerates the rights and obligations of both the federal government and the 89 subjects of the federation. However, it does not name any instruments for their implementation. It also states in Article 12 that "local government is recognized and guaranteed." Local governments are entitled, according to Article 132, to manage municipal property independently; to form, approve and administer local budgets; and to impose local taxes and rates. The Constitution says almost nothing on fiscal federalism arrangements. This results in a contradictory situation: regions enjoy a high level of fiscal independence, while the federal government remains responsible for macroeconomic stability. Activities of local governments are also regulated both by a federal law "On the General Principles of Organizing Local Government in the Russian Federation" passed in August 1995, and by the laws on local government passed by the relevant region. The law "On the General Principles..." assigns local governments various rights in addition to those enumerated in the Constitution.

A number of laws define regional and local governments' rights in raising tax revenue.

* The "Basic Principles of Taxation" law of December 1991 introduced a basic framework for how revenues would be divided between levels of government. VAT revenues were to go entirely to the federal budget. * In fact, however, rates of sharing of various taxes were set in annual budget laws of the Russian Federation and the regions. VAT was actually shared with regional budgets from 1992 on, as was profit tax. * A decree of PresidentYeltsin signed on December 22, 1993 expanded the rights of regions and localities to introduce additional taxes of their own, beyond the ones enumerated in the "Basic Principles of Taxation" law. This was in force until mid-1996, when it was repealed by another presidential decree. * The law "On the Financial Foundations of Local Govermnent in the Russian Federation," passed over the Federation's Council's veto in September 1997, established some autonomy of local governments from their superior regional administrations. It also established, for the first time, fixed minimum shares that the local governments should receive of certain taxes shared with regional and federal levels (see the discussion in Chapter 3).

18 Expenditure assignment across levels of government is not clearly defined by federal law, though the Constitution gives some guidelines. Laws since 1991 have established that regional and local governments have a right to borrow. Two basic laws (law 1735-1 "On Foundations of Budget Organization and the Budget Process" of October 10, 1991 and law 4807-1 "On Foundations of Budget Rights and Rights to Form and Use Extrabudgetary Funds" of April 15, 1993) provide that subnational governments are eligible for deficit financing through borrowing and issuing municipal debt instruments, and are free to decide on the allocation of corresponding proceeds. The recently enacted law "On the Financial Foundations of Local Government in the Russian Federation" restricts the issuing of local government bonds to investment purposes and limits the total of municipal issues to 15 percent of budget expenditures. A draft law, "On the Emission and Circulation of State and Municipal Securities" would, if enacted, establish a limit on deficit finance of 30 percent of the region or municipality's own revenues, and restrict debt service payments to 15 percent of own revenues (that is, all revenues of the subnational budget excluding interbudgetary transfers received). Two 1997 presidential decrees established limits on the issuing by regions of debt denominated in foreign currency (for more detail, see Chapter 2.) While both the Budget Code and the Law on State and Municipal Securities are still pending their full approval by the Parliament, a third presidential decree (No. 696 of June 9, 1998) introduced as an interim measure a requirement that all regions planning to issue Eurobonds must comply with similar but somewhat less restrictive quantitative limits on their annual deficit and debt service costs. In addition, the new decree stipulated that the regional executive must receive federal permission for any operation that affects the capital account of the balance of payments. This provision is designed to introduce systematic control and to somewhat limit the scale of subnational government guarantees on external borrowing by commercial enterprises, and to also restrict other forms of subnational external borrowing, such as a recent six-month loan received by the Moscow Oblast government from a syndicate of western banks.'2 In addition to federal law, different regional laws regulate most aspects of tax, expenditure, and financial relations within the region.

FiscalContraction From the height of the late communist period, the proportion of national income flowing through the fiscal system has dropped precipitously. In part, this represents a healthy and delib- erate adjustment to the smaller, more efficient model of state consistent with market economics. It also reflects a spontaneous and more worrying erosion of fiscal capacity that has weakened the government's ability to provide basic public goods. Revenues of the consolidated budget fell quite sharply in from 1992 to 1996. Total revenues dropped from 30.7 percent of GDP in 1992 to 25.4 percent in 1996, while tax revenues fell from 26.4 to 21.5 percent of GDP (see table 1.1; totals are calculated net of intergovernmental transfers).'3 Though revenues of the regional budgets increased slightly as a percentage of GDP during the same years, this masks a sharp drop in their real value since GDP itself was falling. In real terms regional budget expenditures in 1997 dropped by about 18 percent compared to 1994 and this contraction of real resources came at a time when expenditure responsibilities were being pushed down by the federal government to lower levels.

19 The contraction occurred for a number of reasons. In part, it reflected changes in the definition of tax rates or bases-for instance, the basic rate of VAT was lowered from 28 percent to 20 percent in 1993, and the excess wage tax first had its base reduced in 1994 and then was abol- ished fromjanuary 1996.14In part, it was caused by macroeconomic changes associated with the transition. Real exchange rate appreciation reduced the value of foreign trade taxes and revenues as a percent of GDP, and falling inflation may have reduced the over-estimation of accounting profits. The drop in revenues was probably exacerbated by perverse incentives within the fiscal system, which led to poorer tax administration. Expenditures dropped even more rapidly. Consolidated budget expenditures fell from 50.1 percent of GDP in 1992 (net of intergovernmental transfers) to 32.1 percent in 1996.

Decentralization The second marked trend in Russia's fiscal accounts is decentralization. Revenues underwent a sharp decentralization from federal to regional levels from 1992 to 1994. Federal revenues fell from 18.8 percent of GDP to 13.6 percent, while regional revenues increased from 13.8 percent to 18.2 percent (in part as a result of larger center-region transfers). The share of consolidated

Table 1.1 Russia ConsolidatedBudget Executionin 1992-1997, as Percent of GDP

1992 1993 1994 1995 1996 1997 prel. Federalgovernment Revenues 18.80 13.13 13.60 14.24 14.56 13.12 1. Total tax revenues 14.48 9.58 11.91 10.76 11.56 10.07 II. Non-tax receipts 4.32 3.55 1.69 3.48 2.99 3.05 Expeneditures 39.65 23.77 23.40 18.45 21.79 19.21 o/w: Intergovernmental 1.67 2.57 3.84 2.18 2.82 2.91 transfers to regions o/w: Net budget loans n.a. 0.04 0.02 0.05 0.23 0.65 Balance, after transfers -20.85 -10.65 -9.80 -4.21 -7.23 -6.09 Balance, before transfers -19.44 -8.08 -6.20 -2.10 -4.42 -3.19

Consolidated regional government Revenues 13.78 16.59 18.23 14.83 15.45 16.60 I. Total tax revenues 11.95 14.02 14.49 11.60 11.62 12.64 II. Nontax receipts 1.84 2.57 3.74 3.23 3.83 3.96 Expenditures 12.34 16.06 18.24 15.15 15.99 17.17 o/w: Intergovernmental 0.26 0.00 0.24 0.08 0.02 0.00 Transfers to Federal government Balance, after transfers 1.45 0.53 -0.01 -0.32 -0.54 -0.58 Balance, before transfers 0.04 -2.04 -3.62 -2.43 -3.35 -3.48 GDP, trln Rbl 19 171.5 610.7 1630.1 2200 2602.3 n.a. = Not applicable. ANote:Revenues includes privatization proceeds, CBR profit, and for 1992-93 off budget revenues/expend. related to external trade. Excludes social and other federal and local EBFs, on cash basis, In 1992-94 commercial bank loans and cash at the year beginning are netted out from regional revenues. Centralized export is considered non-tax revenue. Transfers and regional revenues include net federal budget loans to regions. Source:Authors' estimates based on the consolidated budget report from the Ministry of Finance.

20 regional budgets in total revenues (including transfers) grew from around 42 to about 57 percent. However, the trend reversed slightly in subsequent years. The fall in regional revenues from 1994 to 1996 (from 18.2 to 14.9 percent of GDP) exceeded the fall in federal revenues (from 13.6 to 12.8 percent). By 1996, the regional share was down to 54 percent of total revenues. Taxes in Russia consist of two main categories-those whose revenues accrue entirely to one level of government and those whose revenues are shared between levels. As described above, the 1991 "Basic Principles of Taxation" law had envisioned a system in which most of the main taxes would be separately owned by one level of government. Revenues from VAT, excises, tax on bank and insurance profits, and customs duties would accrue entirely to the federal budget. Revenues from all 21 local taxes were to go to the local budget. The federal government could transfer part of the revenues from enterprise income or profit tax and personal income tax to lower level budgets, as defined in the annual budget law, and the regions and localities were each to receive half of the proceeds from enterprise property tax. However, in the face of political opposition this provision was never implemented. Instead, most of the main "federal" taxes have continued to be shared on a derivation basis with the regions at rates defined in each year's federal budget law. The actual division of revenues from shared taxes often differs from that dictated by law. This occurs in part because arrears on shared taxes have tended to accrue faster to the federal than to the regional level, despite various legislative attempts to eliminate such a disparity. The federal share of profit tax revenues fell from 34 percent in 1994 to 32 percent in the first nine months of 1997, against a statutory share of 37 percent. 15 In addition, the federal share of VAT on domestic goods and services fell from 72 percent in 1995 to 62 percent in 1997, despite the federal budget's formal entitlement to 75 percent of these receipts. Regional governments acquire this disproportionate share of receipts through various types of mutual offsets with local enterprises and through accepting payment in nonmonetary forms that the federal budget cannot easily accept. Such regional policies affect both federal revenue collections and overall payment discipline within the enterprise sector, which in turn undermines the subnational tax base. A second reason for the lower federal share of receipts in practice than in law is that the federal government or president signed bilateral agreements with some regions, circumventing the general regulations and entitling them to retain larger tax shares. A third reason in the case of VAT is that part of the equalization transfers under the Federal Fund for Support of the Regions (see below) are in fact paid in the form of permission to retain larger shares of VAT.Overall, as annex table A5 suggests, in most regions growth in tax collections in regional budgets in 1997 exceeded growth in taxes transferred to the federal budget.' 6 Correspondingly, regional governments are much more successful in recovery of tax arrears compared to the federal government. By the end of 1997, tax arrears to regional budgets amounted on average (non-weighted) to 26 percent of 1997 actual tax collections by corresponding budgets, while the similar average for federal tax arrears amounted to 84 percent (statistical annex table 6). Local taxes play a very limited role in subnational budgets. The lion's share of all subnational tax revenues derives from four major federal taxes that are shared on a derivation basis, and subnational governments have almost no leverage regarding tax rates and tax bases."7 In fact, local governments have very limited room for collecting more revenues through additional tax-

21 ation, which distorts their incentives by encouraging borrowing as the only available alternative. At the same time, insufficient discretion of local governments over their tax sources does not generate sufficient accountability: local leaders can always argue that higher governments deprive them of the necessary instruments to increase revenues and thus improve service delivery. The regional governments' share in expenditures has also grown, reflecting de facto changes in expenditure sharing. In early 1992, consumer subsidies, cash subsidies for vulnerable groups, welfare programs for pensioners and the disabled, family and child allowances, and support for the homeless all became responsibilities of the regional governments.' 8 As federal investment funding was cut, the demand for investment credit and subsidies also shifted to the regional level. Apart from this, the formal assignment of expenditure responsibility has not changed greatly. Exclusively defense (with the exception of military housing, provided by regions), and predominantlyjustice and internal security as well as foreign economic relations remain federal responsibilities (see statistical annex table 10). A number of factors combined to increase regional spending responsibilities. Divestiture of social assets left housing, kindergartens, clinics, and other service providers in municipal government hands. Rising energy prices drove up the costs of operating municipal housing and transport, and subnational government failed to pass the cost increase on to consumers through sufficient increases in tariffs. Regional governments stepped in to provide additional financing to federal mandates (in part, because of systematic federal budget arrears that led to social ten- sions), including military units, universities, tax inspection branches, and law enforcement agencies. At the same time, new federal laws (such as the Law on Veterans and the Law on Disabled Persons) introduced numerous additional social benefits for various groups that had to be funded from regional budgets. These increases in responsibilities came at a time of falling real revenues for the subnational governments. Despite the growth in the subnational share of consolidated budget revenues mentioned above, subnational revenues dropped between 1994 and 1997 from 18.2 to 16.6 percent of GDP, which is equivalent to a 21 percent decline in real terms. Growing responsibilities, expansion in unfunded mandates daueto the lack of clear expenditure assignment, and the contraction in available funding constitute the core factors that have led to the recent accumulation of fiscal problems at the subnational level. The implied decentralization is visible in the statistics. While federal government expenditures (including intergovernmental transfers) fell from 39.7 percent of GDP in 1992 to 19.8 percent in 1996, those of regional governments rose from 12.3 percent of GDP to 15.6 percent (table 1.1). The share of consolidated regional budgets in total budgetary expenditures rose from 24 percent in 1992 to 44 percent in 1996. This reflected a large increase in the regional governments' involvement both in social sector spending and in support to the enterprise sector. The regional budgets' share in consolidated budget education and social protection budgetary spending grew from 66 and 28 percent in 1992 respectively to 85 and 69 percent in 1996, and their share in spending on the national economy-including subsidies to enterprises-rose from 19 to 72 percent. As of 1996, regional and local governments were responsible for 86 percent of spending on education, 100 percent of spending on housing, 90 percent of spending on health and sport, 69 percent of spending on social policy, 65 percent of spending on culture and the mass media, and 36 percent of

22 spending on state administration and law enforcement, primarily a federal responsibility (table AIO). Federal budget spending increasingly concentrated on defense, international activity, emergencies, basic research and science, law enforcement, and industry, energy and construction. In some respects, the regions have spontaneously taken over the more economically inefficient types of spending that reformers in the federal government reduced. Changing spending on subsidies is particularly noteworthy. While federal government funded subsidies were reduced dramatically in the early 1990s, those financed by regional governments increased during the same period.' 9 Total federal budget subsidies fell from 41.5 percent of GDP in 1992 to 2.2 percent in 1995. But regional budget subsidies rose from 3.4 percent to 5.2 percent during the same period. The proportion of regional government spending that went toward subsidies increased from 26 percent to 36 percent in 1992-95, and if measured on a commitment basis the total would be still higher. The majority of regional subsidies-about 4 percent of GDP in 1994, or about two thirds of zotal regional subsidies-went toward housing. This reflected in part the regions' attempt to compensate for withdrawn federal consumer subsidies and support for housing and public transportation. The rise in regional expenditures on subsidies coincided with and was in part financed by increased center-region fiscal transfers during 1993-94. When in subsequent years, as a result of fiscal stabilization, transfers went down, the unsustainability of subnational expenditure policy became quite clear. Notjust revenues and expenditures have been decentralized-deficits, logically enough, have also been pushed downward. Since 1992, the Russian federal budget deficit has dropped sharply, from about 21 percent of GDP in 1992 to an estimated 6.1 percent of GDP in 1997.20 Though this is still too high a level to be sustainable in the long run, the reduction represents a considerable accomplishment. However, as the federal budget balance improved, that of the regional budgets deteriorated. Consolidated regional budgets went from a cash surplus of 1.45 percent of GDP in 1992 to a cash deficit of 0.6 percent of GDP in 1997. These figures reflect the balance afterfederal transfers are included. The balance before federal transfers deteriorated from a 0.04 percent of GDP surplus in 1992 to a 3.48 percent of GDP deficit in 1997. As described in Chapter 2, when measured on a commitment basis, consolidated subnational budget deficits are much higher. Within the regions, the figures also suggest considerable decentralization of tax revenues during these years (see table 1.2). Between 1992 and 1996, the share of consolidated regional budget tax revenues that municipalities received grew from 57 to 65 percent. The municipal share in expenditures was more stable and increased from 65 to 69 percent. At the same time, dependence of municipalities on regional governments for financial support increased. While transfers from the regional budget financed 25 percent of municipal spending in 1992, in 1996 such transfers financed 31 percent. Largely thanks to such transfers, deficits have been kept at the regional level rather than being passed down to the municipalities.

Interregional Variation As might be expected, given the economic differentiation of Russia's regions, their fiscal situation and policies have also diverged. At one end of the scale are roughly ten "donors" to the federal budget-industrial, raw materials-exporting, or capital city regions that pay more in feder-

23 Table 1.2 Fiscal Shares of Municipalities (Percent)

Parameter/Year 1992 1993 1994 1995 1996 Share of municipal tax revenues in consolidated regional tax revenues 57 56 61 61 65 Share of municipal expenditures in consolidated regional expenditures 65 n.a 67 68 69 Ratio of regional transfers to municipalities * to total municipal expenditures 25 n.a 33 29 31 n.a. = Not applicable. *ExcludingSt. Petersburgand Moscow.All numbers represent weighted averages. Note:Local governments' total expendituresare calculatedas the sumof the total expendituresof all tiersof localgov- ernmentminus the interbudgetarytransfers from one municipalityto another.Consolidated regional budget expendituresare calculatedas the sum of the total expendituresof localand regionalgovernments minus the interbudgetary transfersfrom regionsto municipalitiesand frommunicipalities to regions. Source:Staff's estimates based on the data from the Ministryof Finance. al taxes than they receive in federal transfers. Prominent among these are Moscow city, St. Petersburg, Moscow Oblast, and Yamalo-Nenetskiy AO. In the opposite category are a collection of regions-for the most part, those already noted as the most economically depressed-that run large deficits and depend heavily on federal aid. Many of the southern ethnic republics fall in this group, both in the North Caucasus and in southern Siberia. While a few regions ran small surpluses in 1996, others ran post-transfer deficits, which in several cases exceeded 15 percent of expenditures (see Chapter 2 and statistical annex table 3). The southern republic of Dagestan, with a 22 percent deficit, is a good example. In many regions, deficits were kept to moderate levels only by lavish transfers from the federal budget. The most heavily subsidized regions in 1996 were as follows: Chechnya (where transfers financed 93 percent of expenditures); Ust-Ordynskiy Buryatskiy AO (64 percent); Dagestan (61 percent); Kalmykia (54 percent); and Tuva (51 percent) (statistical annex table 3). A third category of regions comprises those rich in natural resources but remote from the European heartland, in the far north or east, where transport costs for basic goods are high. Developed at a time when investments did not need to meet criteria of market rationality, many of these were heavily supported by the socialist system's implicit price subsidies. They generally continue to rely on federal subsidies to provide food, energy, and other supplies. Some, like Sakha, combine huge mineral wealth (in particular, diamonds and gold) with underdeveloped infrastructure, poor transportation links, and inhospitable climate.2 1 Revenues vary both between regions and between localities within them. While some depressed agricultural regions of the south (many in the North Caucasus) have receipts far below the national average, the resource rich regions of Khanti-Mansiiskiy AO and Yamalo- Nenetskiy AO, along with Moscow and St. Petersburg, far exceed the national average. Most federal taxes are paid by a handful of the richest regions. However, these are also the regions with the largest arrears to the federal budget and the main holders of large extrabudgetary funds that do not have to be shared. Although by law all the main taxes have to be shared between regions and the center in fixed proportions, in practice, due to the reasons described in the previous section, regions vary great-

24 l, in the share of taxes left with their budgets (as a percentage of total taxes collected in the region). While the average nonweighted share of regionally withheld taxes during 1995-97 remained close to 65 percent (statistical annex table 5), it varied from less than 40 percent (Khanty-Mansiiskiy AO in 1995) to more than 80 percent (Evenkiisky AO in 1996). By the end of 1997, no regions had tax arrears exceeding the volume of annual tax collections to their own budgets, and just a few of them had tax arrears of 50 to 80 percent of regional tax collection. However, with respect to federal tax arrears, variation in regional performance was much larger. Several regions, including Evenkiiskiy AO, Kemerovo, Magadan, and Taimyrskiy AO had outstanding tax arrears to the federal budget larger than 200 percent of annual collections of federal taxes (statistical annex table 6). Regional budget spending in Russia is highiy unequal by international standards. The coefficients of variation of per capita regional budget spending in Russia hovered around one in the mid-1990s, compared to a value of about .42 for per capita state-local spending in the United States in the mid-eighties.2 2 In Russia in 1996, the most lavish region (Yamalo-Nenetskiy AO) out- spent the most frugal (Dagestan) in per capita terms by a factor of 21! (table A2). While some fortunate regions have actually managed to increase per capita regional spending (Kostroma was the leader, with a 90 percent increase in per capita real spending from 1992 to 1996), others have had to cut back expenditures sharply (the republic of Tuva suffered a 56 percent drop). As varied as the fiscal conditions different regions encounter are the policies that their governments have chosen to deal with them. The richer regions tend to lobby for the right to retain larger proportions of tax, and those that have been able to pose a credible separatist threat based on ethnic difference have managed to extract visible concessions. Others rely heavily on federal subsidies, and bargain over the size of these. Regions also vary in how they allocate resources across different categories of spending. Some spend far larger proportions of the budget on subsidies than others. Such heavily subsidized regions consist of two types: fiscally wealthier regions and those that receive more in federal transfers. A statistical study of the determinants of such subsidies did not find evidence that these subsidies were strongly influenced by the local level of need for such support. Even controlling for fiscal resources, economically depressed regions tended to spend less on subsidies than more economically thriving regions. Rural regions tended to spend the most on subsidies, probably because of the association between rural populations and communist-oriented local governments. 2 3 Finally, regions also differ in their degree of fiscal decentralization. Regions with the most conservative policies as well as those that are the most dependent on federal transfers tend to concentrate more resources at the regional level and impose stricter controls over municipal spending.

RussiaCompared to East European Post-CommunistStates In some ways, Russia's fiscal experience resembles that of other states transitioning from communism. But in others, its problems are quite distinct. Across the region, central governments have attempted to devolve welfare spending and social safety net support downward, without always providing appropriate sources of finance. The dependence of regional and local governments on transfers and shared taxes in Russia is also broadly shared. In 1993, for instance, the percentage of local and regional government rev-

25 enue that came from transfers and shared revenue was 55.5 percent in Poland, 76.1 percent in Hungary, 77.0 in Romania, 89.6 percent in Russia, 94.7 percent in Bulgaria, 96.8 percent in Ukraine, and 100 percent in Albania.2 4 However, the extent of decentralization in Russia, the only federal state to have survived the transition from communism more or less in one piece, is quite unusual (see table 1.3). Overall, reforms of subnational finance in the East European countries appeared to succeed more quickly, and with less political controversy, than those in Russia. This especially seems to be the case if one considers rationalization of local expenditures, elimination of subsidies and budget arrears, and transparency and predictability of the fiscal environment. For instance, Poland, Hungary, and Bulgaria were able to reduce local spending on housing and housing subsidies soon after the fall of their communist governments-a problem with which Russia continues to struggle. In Poland, local government spending on subsidies to housing and municipal enterprises dropped from 4.4 trillion zloties in 1991 to 1.5 trillion in 1993 (a drop from 10.1 percent of total local spending to 1.6 percent).2 5 At the same time, as recent experience of Poland and Hungary suggests, even the most advanced reformers in Eastern Europe still face major challenges in reforming and strengthening local governments. The obvious difference, which explains the greater complexity of these problems in Russia, is the Russian federal structure. Besides local governments, the central government must deal with regional governments that have considerable powers and autonomy. East European experience does suggest the benefits of having central transfers allocated directly to localities rather than via regions. This has proved politically to be aii extremely difficult change to make in Russia. A politically and constitutionally weaker central government attempting to reforrn subnational finance must depend to a greater extent on positive incentives. This is a major justification for the strategy of conditional provision of technical and financial assistance proposed in this report.

Table 1.3 Share of Local/Regional Government Revenues in General Government Revenues (in Percent), Selected Eastern European and Former Soviet Union Countries

1989 1990 1991 1992 1993 1994 1995 1996 92-95 Czech Republic 14 16 16 16 SlovakRepublic 9 11 8 7 -2 Hungar-y 11 11 10 13 11 10 13 0 Poland 11 13 9 12 13 11 +2 Bulgaria 18 18 19 18 16 11 11 11 -7 Romania 8 13 6 3 6 7 Slovenia 9 9 9 8 -1 Estonia 27 28 24 14 13 15 Latvia 16 19 19 20 22 +4 Lithuania 22 18 15 20 23 25 24 22 +4 Russia 31 40 41 38 +7

Note:Includes main socialextrabudgetary ftunds. Source:Working figures compiled by Martha de Melo,World Bank, and calculationsfrom IMF(1997).

26 CentralResponses to RegionalEconomic and FiscalDiversity

Since 1992, the Russian federal government has struggled to find effective policies to accommodate the extreme economic and fiscal differentiation of regions discussed in the previous sec- tions. The most immediate policy question has been the extent and manner of allocation of federal financial aid to different regions.

Intergovernmental FiscalTransfers Financial aid flows from the federal budget to the regions along a number of channels, many of which are nontransparent and unpredictable (table 1.4). The main ones are enumerated below.26 Table 1.4 shows the growth in federal transfers from 1.7 percent of GDP in 1992 to 3.6 percent in 1994, major cuts to 2.2 percent of GDP in 1995 as a part of fiscal stabilization effort, and some recovery during 1996-97 to the level of 2.9 percent of GDP. Overall the size of federal transfers in Russia remains quite small compared to both the experience of other federal countries and to the scale of Russia's cross-regional disparities.

Subventions These are grants allocated to specific regions. Until 1994, subventions were used for budget deficit support to individual regions on an ad hoc basis. Since 1994, their scale has been greatly reduced (from 0.75 percent of GDP in 1992 to 0.1 percent in 1996). Moscow city has received a large subvention in most years for fulfilling the functions of the country's capital city.

FFSRTransfers In 1994, a new system was created to channel general purpose deficit-support aid to regions. A "Federal Fund for Financial Support of the Subjects of the Federation" or "Federal Fund for Support of the Regions" (FFSR) was created to replace most subventions and formalize the procedures for their allocation. It was financed initially from 22 percent of federal VAT revenues,

Table 1.4 Russian Federal Budget Transfers to Regionsfrom 1992 to 1997, Percent of GDP

1992 1993 1994 1995 1996 1997,prel.

Intergovernmental Transfers 1.67 2.57 3.84 2.18 2.80 2.91 a. Equalization fund 0 0 0.37 1.25 1.18 n.a. o/w: Direct transfers 0 0 0.16 0.89 0.82 n.a. Transfers against VAT 0 0 0.21 0.35 0.37 n.a. b. Mutual settlements 0.83 1.85 2.93 0.70 1.14 n.a. c. Subventions 0.75 0.66 0.43 0.12 0.12 n.a. d. Subsidies to "closed cities" n.a. 0.02 0.10 0.07 0.13 n.a. e. Net budget loans 0.09 0.04 0.02 0.05 0.22 0.65 Loans to budgets n.a. n.a. n.a. 0.12 0.63 0.67 Repayment of budget loans (-) n.a. n.a. n.a. 0.07 0.41 0.01

n.a. = Not applicable. Source:Staff's estimates based on the data from the Ministryof Finance.

27 later changed to 15 percent of total federal tax revenues in 1996 and 1997 (not counting import duties in 1997). The FFSR was supposed to become the main and the most transparent type of intergovernment transfer. These intentions were not fulfilled: in 1996 only 42 percent of all transfers were allocated through this channel and even less in 1997, and despite considerable progress (especially compared to other forms of transfers) their disbursements are still far from transparent. The FFSR, included in the federal budget each year and run from within the Finance Ministry, allocates transfers on the basis of a formula. Initially, there were two criteria on which a given region could receive funds. Regions were labeled "needy" if their per capita budget revenues in a base year were lower than 95 percent of the revenues in the average region. They qualified as "especially needy" if their approved per capita expenditures (that is, expenditures in a base year increased to take into account newly acquired spending responsibilities) exceeded the average per capita regional budget revenues for all regions. In order to accelerate the disbursement of transfers to recipients, part of the transfers were in the form of permission to regions to keep a larger proportion of VAT collected on their territory than originally budgeted. In 1994, the first year, about 60 percent of actual payments under the FFSR were made in this form.2 7 Annex table A7 shows the regional variation in ultimate sharing in VAT proceeds between regional and federal governments from 1994 to 1997. Most of the variation in the table compared to the original proportion of 75:25 relates to these case-by-case permissions to get equalization transfers through additional VAT withholding. Given existing deficiencies in the allocation of the FFSR transfers (such as the unpredictable character of disbursements due to delays and arrears and disbursements in different proportions from those approved by the budget law), permission to keep an additional part of VAT constitutes a major benefit to its recipients and as such is a serious distortion in the equalization mechanism. It should be eliminated simultaneously with the introduction of more transparent rules for FFSR transfer disbursement and reporting. The formula used to calculate regions' allocations has the disadvantage of encouraging over- spending, rewarding poor tax collection, and also encouraging regional governments to conceal revenues by routing them through extrabudgetary funds and commercial organizations. Regions are allowed by law to give tax deferrals or exemptions to regional taxpayers from the part of the tax owned by the regional budget, but such exemptions are not taken into account when calculating the region's need for federal revenue support. The number of regions receiving transfers under the FFSR has increased over the years. In 1994, 64 of the 89 regions received transfers. By 1995, the number had risen to 78. The number of "especially needy" regions more than doubled during 1994-95, from 23 to 53.28 In 1996 there were 14 regions not receiving FFSR transfers. The 1997 final version of the budget law foresaw only nine-Moscow, Bashkortostan, Krasnoyarsk, Khanti-Mansiiskiy AO, Yamalo-Nenetskiy AO, Lipetsk, Samara, and Sverdlovsk. In any case, the budgeted FFSR allocations are not always reliably implemented. While most regions in fact received less in transfers under the FFSR than had been budgeted for 1996, some actually received more. For instance, while Saratov Oblast received only 539 billion rubles of the

28 1,012 billion allocated in the budget law and Tyumen Oblast received only 226 of 805 billion rubles budgeted, Perm Oblast received 48 billion and Kamchatka 115 billion-despite being budgeted none at all.2'9

Mutual Settlements Mutual settlements in theory represent compensations for federally mandated expenditure responsibilities that are met by the regions. They also in practice include discretionary transfers. They are negotiated on an individual basis between regions and the federal government. In 1993 and 1994, mutual settlements constituted the lion's share of all federal-region transfers, but since then their role has somewhat decreased. Still in 1996 they amounted to 40 percent of the total. Clarification of the composition of "mutual settlements," reductions in their amounts, and stricter regulations for their budgeting and disbursement constitute an important component for the intergovernment fiscal reform.

BudgetLoans Short-term loans are used to finance temporary revenue shortfalls, often with low interest rates or completely written off after the fact. They constitute the least predictable component of the transfer system. Their allocation is not part of the annual budget laws and depends upon full discretion of the Ministry of Finance. In addition, the mechanism of their repayments is uncer- tain: while in the past most of these loans were either written off or rolled over, the Ministry of Finance keeps substantial leverage over individual regions by controlling timing and conditions of their debt write-offs. Substantial expansion in the amount of budget loans during 1996-97 reflects overall deterioration in the quality of budget transfer structure. Besides these main categories, numerous other pathways of funding between federal and regional governments exist. Subsidies are allocated in the federal budgets to specific sectors and even enterprises-in particular, to agricultural producers and coal mining areas-which tend to have a geographically concentrated impact. Aid is also allocated in the federal budget to help the northern territories import goods during the short summer season when rivers are naviga- ble. Federal extrabudgetary funds-the pension fund, medical insurance fund, and so forth- provide benefits to claimants in different regions. Federal tax exemptions and deferrals target enterprises in different locations.

DisbursementPattern of Federal Transfers The results of central fiscal redistribution vary greatly. Since 1992, Russian political geographers have prepared estimates of the net balance of financial flows between the center and each of Russia's regions.30 These represent the balance when each region's remittances of federal taxes are subtracted from the total of all traceable federal transfers to that region. These flows continue to show major interregional variation. In 1996, Khanti-Mansiiskiy AO paid an estimated 14 million rubles per inhabitant more in taxes to the federal budget than it received in aggregate center-region flows. Yamalo-Nenetskiy AO was in second place, with 10.2 million rubles per inhabitant, and Moscow city in third, with 7.5 million. By contrast, the

29 biggest per capita recipient of net transfers, Ust-Ordinskiy AO, received 19.3 million rubles per inhabitant more than it paid. It was followed by two other autonomous okrugs, the Evenkiiskiy AO (9.4 million rubles per inhabitant) and Koryakskiy AO (4.6 million rubles), and then the republic of Tuva, which received a net transfer of 3.3 million rubles per inhabitant.3 " The explicit economic rationale for some types of center-region transfer is to reduce inequalities in the fiscal resources of regions and to ensure some minimum level of public services even in the poorest. Analysts who have studied the data conclude, however, that in general the flow of federal transfers has not been equalizing, though it may have become more so during 1995-96.32 This is borne out by a more detailed analysis in the annex, which considers an estimate of real transfers, adjusted for price differences in basic goods across regions. While federal transfers-both those under the FFSR and other types-exacerbated regional revenue inequality in 1994, they appear to have somewhat reduced it in 1996 and 1997 (see analytical annex). If equalization is not the only determinant of patterns of redistribution, what does explain why some regions get larger amounts of federal aid than others? Recent analysis suggests that while the underdevelopment or economic "need" of regions may be becoming more important, major motives in the past have been political.3 3 Treisman (see endnote 33) analyzed the pattern of distribution of net transfers for the years 1992, 1994, 1995, and 1996. He found that regions that demonstrated the capacity and resolve to threaten economic or constitutional order tended to be rewarded with larger fiscal transfers and tax benefits. These political factors remained significant even controlling for the various other possible determinants of fiscal transfers, including measures of relative regional need, access to policymakers, and commitrnent to economic reform. In all four years, greater net transfers went to regions that had recently voted more strongly against central, proreform parties or leaders (such as Yeltsin in 1991, Russia's Choice in 1993, and Russia's Choice and Yabloko in 1995). Regions whose population had recently staged major strikes (in 1991), whose leadership had declared sovereignty (in 1990), or had opposedcentral incumbent politicians at key moments (publicly criticizing Yeltsin in the September-October 1993 crisis, or not supporting the progovernment "Our Home is Russia" bloc in the 1995 election) also received significantly greater fiscal benefits. Political motivations appeared to influence not just the formal allocation of benefits (for instance, in the budget legislation) but also the way that such allocations were later misapplied. In 1996, as mentioned above, many regions received far smaller transfers under the FFSR than had been budgeted. However, those regions whose population had voted more strongly against the proreform parties in the 1995 parliamentary election were less subject to cuts than regions that had supported them.3 4 Such federal aid, in turn, appears to influence the pattern of regional government expenditure. Research suggests that federal transfers were an important determinant of the level of regional housing subsidies. From 1993 to 1995, for every additional ruble transferred to a region, housing subsidies increased by 30 kopeks.3 5 Spending on housing subsidies is coun- terequalizing since the poorest regions have much less developed utility networks whose services are subsidized, and transfers were concentrated in regions with the most distorting policies. Regional leaders often reallocate earmarked federal transfers from more economically justified to less justified uses-for instance, from the repayment of local wage arrears to subsidizing the completion of investment projects.

30 The 1998 budget law (passed by the State Duma on March 4, 1998) requires that FFSR transfers to regions be reduced by the amount that the recipient region allocates to subsidies, tax breaks, and other benefits beyond those established by federal legislation. Presumably this would include housing subsidies not federally approved. However, there were similarly worded articles in the 1996 and 1997 budgets.3 6 They were not implemented. Recently, as a part of the Concept for Inter-Government Fiscal Reform, the GOR launched a major effort to introduce substantial changes in budget transfer allocation in the 1999 budget, including drastic reduction in both the amount of transfers (the proposed amount equals 0.9 percent of GDP) and number of recipients (they suggest that 32 regions will be the donors next year). The GOR plans to eliminate the most distorting types of transfers, to strengthen federal control over their use by regions, and to introduce more transparent rules for their disbursement. The new transfer formula will be heavily focused on the poorest regions and thus could improve the equalization effect of federal transfers. The GOR also made commitments to use federally defined expenditure norms to determine expenditure needs and to switch to a new system of measuring revenue capacity that would not affect regional incentives to increase revenue collections. Though the formula will be substantially modified, it is important to remember that it covers only one component of the equalization mechanism. In addition to fixing the formula, the GOR needs to answer the following critical questions:

* What should be the overall size of federal transfers and how much should they be protected against potential revenue fall in the federal budget (at the moment they are subject to automatic sequestration, which renders regional budgets highly vulnerable to poor federal tax collections)? • How should total transfers be divided between formula-based and non formula-distrib- uted transfers? * How can it be guaranteed that actual disbursements are made regularly and in full compliance with the formula? * What should be mandatory conditions to region-recipients regarding their fiscal policy and performance? * Should a part of equalization transfers be switched to new forms of federal budget assistance (such as specific and matching grants) to assure concentration of funding in areas of national importance (such as education and health)? * Should regions be requested to allocate a portion of federal transfers among municipalities?

Nontransparency in federal-regional fiscal relations hampers progress in regional fiscal management by generating unpredictability in revenue flows and expenditure responsibilities; creating de facto soft budget constraints because regions can count on additional federal assistance at the end of the day; and holding regional governments insufficiently responsible for the effective use of federal funds.

Asymmetric Federalismand BilateralTreaties Such politically motivated asymmetries are not limited to the system of fiscal flows between Russia's federal and regional governments. In fact, though it is rarely admitted openly, asymmetry has become a characteristic feature of the country's federal politics. The centerpiece of

31 asymmetric federalism is a series of bilateral "power-sharing agreements" that the federal government has signed with assorted regions during the past four years. The federal constitution, enacted in December 1993, permits regional and federal governments to transfer responsibilities between themselves on the basis of bilateral agreements (Article 78). It also classifies some responsibilities as shared without defining precisely how. This opened the way for regions to negotiate with the federal government about how to define the division of power and benefits more concretely. The first bilateral power-sharing agreement was signed with Tatarstan in February 1994. By August 1997, 32 of the 89 subjects of the federation had signed such treaties, and byJune 1998 the total had reached 45.37While many of the early treaties were with the more assertive ethnic republics, many were also concluded with ethnically Russian oblasts and krais. These treaties differed in their contents and in the sometimes secret protocols that accompanied them. But, in the aggregate, they represented an institutionalization of the more informal bargaining during 1992-93. Various treaties contained agreements on budgetary relations, economic regulation, division of state property, ownership and use of natural resources, environmental protection, and interregional migration.3 8 The agreements with leading ethnic republics such as Tatarstan and Bashkortostan provided for a particularly high degree of regional autonomy. The treaty with Tatarstan gave the republic various rights and benefits beyond those accorded other regions, such as additional control over natural resources, greater autonomy in foreign trade, and benefits for its young men with respect to military service in the Russian army.3 ' A similar treaty with Bashkortostan was signed in August 1994, giving the republic more control over its budget,judiciary, and prosecutorial office.40 Fiscally, these agreements devolved downward both federal spending responsibilities (in education, administration, environmental protection, and construction) and federal revenue sources. Some treaties allocate revenue sources that are federal by law to republic budgets. For instance, the treaty with Bashkortostan specified that excises on spirits, vodka and liqueurs, on natural gas and oil, land payrnent, and the special tax would be turned over to the republic in the amount necessary to finance certain environmental programs. The federal government also agreed with Tatarstan and Bashkortostan to leave the regions an additional 25 percent of VAT revenues in return for financing federal agencies and programs on their territory. (See also box S above.) Such bilateral agreements, like the allocation of federal transfers, are clearly moves within a political game. The rate of concluding them increased noticeably during the presidential election campaign of 1996, and statistical analysis suggests that regions with which the federal government had concluded a bilateral treaty by the time of the election tended to have higher votes of support for Yeltsin than regions which had no agreements. 41 In the case of the most assertive republics (excluding Chechnya), the signing of the bilateral treaties also transformed a situation of tense deadlock-in which virtually all federal tax was withheld by the republics-into one of regularized, though highly favorable, treatment for the republics in question. During 1992-93, Tatarstan and Bashkortostan sent practically none of the tax collected on their territories to the federal budget. After signing their bilateral treaties, the amount rose to 15 and 29 percent respectively in 1996. The Siberian republic of Sakha reportedly withheld almost all taxes through 1995, but in 1996, after its agreement was signed, it sent 28 percent of tax revenues to Moscow.42

32 Other asymmetric benefits have been provided to particular regions through the designation of all or parts of their territories as "special" or "free economic zones." Such status has been awarded to a large number of towns and regions via individual legislative acts-either federal laws (Kaliningrad and Ingushetia) or presidential and government decrees or orders. The relevant legislation confers particular privileges with regard to the tax or customs regime, though many of the declared special zones reportedly do not receive the benefits in practice.4 3 In some cases, the bilateral treaties appear to conflict with the federal constitution, and they have aroused criticism from various quarters. In the view of this report's authors, asymmetric relations with different subjects of the federation are not the major problem for the Russian fiscal system at this point, and trying to shift the balance too rapidly to one of interregional equal- ity is fraught with political dangers. In other transitional, multiethnic states, similar types of asymmetries have proved politically stabilizing without undermining the ability to collect revenues and reform the economy. For instance, in post-Franco Spain, the Basque region and Navarre were given the right to levy and collect all taxes except customs and excises on tobacco and petroleum products. In return, they are required to make lump-sum annual payments to the central government to compensate for centrally provided services.4 4 In the Philippines, the Muslim regions of Mindanao and Cordillera have been accorded greater autonomy since 1989. Regional government in Mindanao was devolved considerable expenditure and taxation power, and it keeps 60 percent of regionally collected revenue.4 5 Such arrangements, at times, help to stabilize tense political situations. However, Russia's bilateral power-sharing agreements may soon recapture the political spot- light. The 1998 federal budget requires the government within two months "to introduce changes into all bilateral treaties and/or agreements with subjects of the RF ... to bring them into correspondence with those norms established by... this law." The budget law also makes allocation of funds from the FFSR conditional on having signed and fulfilled the Federation Treaty of 1992 without any exceptions, additions, or special conditions-a condition which would seem to rule out many of the republics. (Other regions can receive federal subventions, but not the formula-determined FFSR funds.) Nine republics reportedly attached special conditions to the Federal Treaty (including Bashkortostan, Karelia, Sakha and Kalmykia), and two never signed it. This provision of the budget law would not affect Tatarstan and Bashkortostan, however, since they were not in any case among the regions that had been budgeted a share of the FFSR. The political obstacles to eliminating the existing asymmetries in power sharing and tax arrangements do not vitiate the recommendations of this report about developing and enforc- ing universal national standards of fiscal management. Like standard a&counting rules in the commercial sector, national standards in budget classification, information disclosure, debt registration, and so forth have to be shared by all subnational governments.

MainProblems and PolicyOptions The subnational budgetary system suffers from many deficiencies that complicate the process of continued economic reform. Each of these needs to be addressed within the framework of a comprehensive subnational fiscal reform program. The particular problems and their possible remedies are examined in the following chapters. Here we review them briefly.

33 First, subnational budgeting suffers from an underdeveloped legal framework. At the federal level, a Budget Code and Tax Code still need to be enacted, and they and various other laws need to be made consistent. A law on subnational securities has yet to be passed. In many regions, laws on the budget process, on tax sharing, or on transfers to municipalities are needed or need to be amended to be made consistent with federal law. The high degree of practical and constitutional autonomy of many regions makes it difficult for the federal government to ensure the necessary improvements in subnational law without the deployment of powerful positive incentives. Second, current practices of intergovernmental redistribution discourage lower level governments from rationalizing their expenditure policy and trying to improve tax collection. Increases in a region or municipality's revenues end up reducing its allocation of benefits from higher levels. Such effects occur at the level of interregional redistribution (as discussed in this chapter), but also at the level of intermunicipality redistribution within the regions (see Chapter 3). Third, patterns of expenditure are inefficient and expenditure liabilities do not correspond to the real tax base. A large share of regional and local spending goes toward various subsidies, especially in housing and utilities, which tend to benefit the better off rather than the most needy households. Such subsidies discourage investment and private participation in the affected sectors. Procurement practices at the regional and local levels do not always require open tendering, though such open tendering is required by law. Subnational budget spending should be subject to substantial adjustment and rationalization similar to the fiscal adjustments that happened at the federal level over 1995-1997. They should include inter alia subsidy cuts; phasing out of tax exemptions, tax offsets, and directed credits; consolidation of extrabudgetary funds; switching to new forms of budget allocation in social sectors; stopping deficit financing through arrears accumulation; and better control over the use of budget funds across the board. Fourth, systems of regional and local budget management and control are in many ways inefficient, outdated, supportive of corruption, and lack the capacity to implement the fiscal adjustment mentioned above. Some regional and local governments have taken the positive step of either setting up their own treasury or signing an agreement with the regional branch of the federal Treasury to execute the budget. In many regions and localities reports on budget execution are not published in a timely and complete fashion, if published at all. Auditing of budget and extrabudgetary funds by independent auditors is rare. For reformers at the federal level, a general dilemma concerns how best to attempt to stimulate desirable reforms in the regions. In most countries, central governments rely on some combination of three types of leverage, each of which has advantages and problems. First, central legislation and regulation can require improvements at the regional level: the main diffi- culty in this approach is the problem of enforcement. Second, the center can provide positive incentives-grants, devolution of authority, and so forth-conditional on desirable regional measures. The main difficulties with this method, besides the obvious need to finance such "car- rots," concern the need for accurate monitoring of implementation in the regions. A third option is to rely on the discipline created by capital markets to ensure that regional governments are fiscally responsible. The problem with depending on market discipline is that, even in long-established capitalist economies, some markets remain incomplete and various economic acts have costlv externalities for others. Devising the most effective combination of

34 reform measures in a given time and place requires an understanding of the relative strength and advantages of each type of leverage.

Notes

1. In what follows,the term "region" will be used to refer to all subjects of the federation. 2. Goskomstat Rossii,Rossiiskiy statisticheskiy yezhegodnik 1996,Moscow: 1997, pp.16-17. 3. Russian Economic Trends, 1997, 2. 4. Sagers (1992), pp. 487-515. 5. Sagers (1992), p.'2 3 . 6. Sagers (1992), p.12 3 . 7. Russian Economic Trends, 30January 1998. 8. Sapir (1995). 9. See World Bank (1998a). 10. "EkonomicheskayaPolitika SubyektovRossiiskoi Federatsii," Background Paper prepared for WAorld Bank, November 1996, p.72 . I1. "EkonomicheskayaPolitika SubyektovRossiiskoi Federatsii," Background Paper prepared for WAorld Bank, November 1996, p.5. 12. Oxford Analytica Brief, 1998,June 15. 13. Consolidated budget as defined here includes budgets of federal, regional, and municipal governments but excludes extrabudgetary funds. See also footnote to Table 1.1 for a further definition. 14. See Treisman (1998c). 15 Russian Economic Trends, 1997:4,p. 1 7. 16. The trend was somewhat different in 1996 when many republics (such as Sakha, Kalmykia,Dagestan, and so forth) lost a portion of their tax benefits and increased substantially their payments to the federal budget from a very low base. 17. The single largest local tax-tax on upkeep of social assets-amounted to 7-10 percent during 1996-97 of total budget revenues in cities that have been used it actively.However, the draft Tax Code provides for elimination of this tax (together with other similar taxes levied on gross turnover). 18. Le Houerou (1995), p.22 . 19. Freinkman and Haney (1997). 20. Here and elsewhere in the text, if not additionally specified, "deficit" means "deficit after intergovernmental transfers." 21. In Sakha's case, there is also skilled political leadership good at shaping the republic's case for federal aid. 22. Fisher (1991), p. 265. 23. Freinkman and Haney (1997). 24. Bird, Ebel, and Wallich (1996), p.24 . 25. Bird, Ebel, and Wallich (1996). 26. See Morozov (1998) for a detailed analysisof this system. 27. Treisman (1998b), pp. 185-200. 28. Lavrov (1995). 29. Russian Economic Trends, pp.139-40 30. See Smirnyagin (1993), p. 2; Lavrov (1995), p. 5; and Lavrov (1997). 31. Information provided by Aleksei Lavrov. 32. See Le Houerou and Rutkowski (1998), pp.21-44, and Treisman (1998a). 33. See Treisman(1996), pp. 299-335, and Treisman (1998b). 34. Treisman (1998a). 35. Freinkman and Haney (1997). 36. "EkonomicheskayaPolitika SubyektovRossiiskoi Federatsii," November 1996, p.5 . 37. OECD (1997), p.19 1. 38. OECD (1997), p.19 1 . 39. Teague (1996).

35 40. Treisman (1999). 41. Treisman (1999). 42. OECD (1997), p.192 . 43. See OECD (1997) for a listingof relevant legislation. 44. McLure,Jr, Wallich, and Litvackin Bird, Ebel, and U'allich, (1995), p.385. 45. McLure, Wallich,and Litvackin Bird, Ebel, and Wallich, (1995), p.38 5.

36 2. SubnationalBudget Deficits and Their Financing

Recent experience from around the world suggests a number of reasons why central governments should be concerned about the sustainability of subnational debt and the efficiency of subnational debt markets. These include the following:

* Macroeconomic and Fiscal Risk. Default on debt by subnational governments, especially the biggest ones, is a politically sensitive issue for many central governments. In many cases, central governments end up bailing out subnational governments that cannot honor their debts. Therefore, subnational debt constitutes a contingent liability for central governments that could lead to deterioration of the overall fiscal balance and macroeconomic performance. * Contagion from Default. Default of a single subnational borrower, especially in a situation where investors' confidence in markets for government debt is low, could have a spillover effect on debt issued by other borrowers, including the central government. * Effects on Interest Rates and Private Borrowing. Excessive expansion in subnational borrowing may lead to tightening of credit markets and higher interest rates, driving up the cost of borrowing for central government and crowding out private sector borrowing. * Source for Infrastructure Financing. Subnational borrowing in many instances is the most efficient instrument for capital mobilization for financing large projects in public infrastructure. Therefore, efficient markets for subnational debts make infrastructure investments less expensive, in the longer term stimulating economic growth. * Source of Market Discipline. Developed markets for subnational debt impose quite strict discipline on their participants: any change in economic policy that might lead to serious deterioration in fiscal performance would result in more expensive borrowing and thus demonstrate to policymakers the incremental costs of their policies. * Instrument for Capital Market Diversification. Subnational borrowing, in particular municipal bonds, has features that compliment characteristics of other capital market instruments and provide investors with more opportunities for risk minimization.

A number of examples from a variety of countries suggest cautionary lessons for Russia. In Argentina during the 1980s, provincial governments borrowed heavily from provincial banks. When some of these subsequently went bankrupt, the central bank ended up absorbing part of the losses, in the process bailing out provincial government debtors and adding to inflationary pressures. Though the fiscal position of subnational governments improved in the early 1990s, by the middle of the decade provincial deficits were rising again-from 0.2 percent of GDP in 1992 to 1.2 percent in 1995.1 By the end of 1995, provincial debt had reached an estimated $14.9 billion, about half thought to be short-term. To secure loans, provinces were permitted to use unconditional fiscal transfers from the federal budget as collateral, subject to approval by the Ministry of Economy. The state-owned Banco de la Naciated $14.9 billion, about half thought to be short-term. To secure loans, provinces were permitted to use unconditional fiscal transfers from the federal budget as collateral, subject to approval by financial crisis and reduced the perceived risk to creditors.

37 Brazil suffered from similar problems in the 1980s. State governments ran up deficits that were often financed by borrowing from banks that were actually owned by the same state governments. By 1991, outstanding state government debt had reached $57 billion, and by 1995 it had doubled to $110 billion.2 To prevent a banking crisis, the central bank took over management of certain troubled banks. The ballooning of subnational debt is increasingly seen as a potential threat to Brazil's successful macroeconomic stabilization. In response to the crisis of provincial finance, the central government in Brazil initiated a program of fiscal adjustment at the provincial level. The Ministry of Finance helped the provinces to restructure their debts in exchange for explicit agreements to introduce measures that in the longer term will bring cuts in budget liabilities and provide fiscal sustainability. The agreements include detailed arrangements for regular reviews of subnational progress with reform implementation. Macroeconomic strains have also developed in China. Local branches of the central bank were given discretion over the allocation of 30 percent of the bank's total annual lending to the financial system.3 They could then fund local branches of the state bank that wanted to finance local government and state enterprise investments. This led to overheating of the Chinese economy in the early 1990s, and an extremely high volume of banking sector bad loans. After its overthrow of apartheid, South Africa introduced a system of nine provincial governments with autonomous fiscal rights. By February 1998, the central budget had to be amended to include an additional 2.1 billion rand (about $444 million) to bail out provinces that had overspent.4 Given the experience in these and other developing countries, there is reason to be concerned at the emerging-though still moderate-budget deficits in Russia's regions. These are the subject of the next section.

GrowingRegional Deficits and Debt in Russia The Russian federal government deficit dropped from 20.9 percent of GDP in 1992 to 4.2 percent in 1995, though it rebounded upward to 7.0 percent in 1996. The falling deficit, especially between 1994 and 1995, helped to secure macroeconomic stabilization. However, as the central deficit fell, regional consolidated budget deficits have crept upward. Regional budgets have gone from a surplus of 1.45 percent of GDP in 1992 to a deficit of 0.6 percent in preliminary figures for 1997. Unexpected growth in federal transfers in 1997 (in part by granting regions additional budget loans) helped to keep the deficit below one percent of GDP. The actual situation is somewhat more alarming if one considers the regions' deficits before federal transfers. In this case, the overall regional balance changed from a .04 percent surplus to a deficit of 3.48 percent of GDP in 1997. All budget deficits are reported on a cash basis, and thus do not reflect accumulation of arrears by governments. While accounting of government payables is not comprehensive, the available data suggest that over the last three years, since inflation declined and stopped erod- ing the arrears stock, government arrears have been increasing on average by one percent of GDP a year. Arrears of subnational governments grew from 6.6 percent of expenditures in 1995 to 15.0 percent in 1997 (see table 2.1). To get a better sense of actual regional deficits, this one percent of GDP should be added to reported cash deficits.

38 Table 2.1 Stock of Suinational Debt in Russia by the Year's End, 1994-97, Billions of Denominated Rubles

1994 1995 1996 1997 Source Subnationa] commercial debt, total 700 6855 20,027 39,189 Estimates for 1994 Municipals securities 150 1,372 5,508 11,110 Other borrowing 550 5,483 14,519 28,079 o/w: loans from commercial banks n.a. 700 2,800 13,000 CBR data, est. for 1997 based the data on 11/1/97 Commercial debt, as % of regional 0.63 2.78 5.84 8.77 budget expenditures Commercial debt, as % of GDP 0.11 0.42 0.91 1.51 Commercial debt, as % of the 0.61 2.92 4.46 6.08 overall domestic debt Commercial debt, as % of own 0.80 3.33 7.23 11.00 regional budget revenues Budget arrears n.a. 16,378.29 41,736.94 67,149.32 Budget data from the MoF as % of expenditures 6.63 12.18 15.03 as % of GDP 1.00 1.90 2.58 Memo: outstanding stock of veksels 5841 6876 Survey data for 62 regions Total domestic debt, trln 115.4 235.1 448.8 645 o/w: GKO/OFZ 0.6 76.1 237.1 385 Municipal securities as % of GKO/OFZ stock 1.80 2.32 2.89 Memo: GDP, trln 610.7 1,630.1 2,200 2,602.3

Own budget revenues of subnational governments, bln Rbl 87,860.0 206,154.4 277,123.8 356,285.8 Net of federal transfers Registered emission of municipal bonds 2,701 6,516 10,789 29,488 Flow, IET, FSC

n.a. = Not applicable. Note: Debts to the federal government are excluded. Source:Minisury of Finance, unless stated othenrise.

By early 1998, the reported commercial debt of subnational governments (not including budget arrears and guarantees, and debts to the federal government) came to about 40 billion rubles ($6.5 billion). This was equivalent to 1.5 percent of GDP and 6 percent of total Russian domestic debt. At the same time, a significant part of subnational budget debts remained unre- ported. When non-reported debts are included, the total subnational debt equals an estimated 150-180 billion rubles ($25 billion)-about 6 percent of GDP. Available statistics do not distinguish between debt issued by regional and municipal governments. It is estimated that the municipal portion of the overall stock is relatively small and amounts to about 20 percent of the total.

39 This level of indebtedness does not in itself constitute a major fiscal risk. The serious concern derives not from the level of the debt as such but from the combination of its growth (70 percent in 1997), the decline in real subnational revenues, high real interest rates and short maturities, incidence of budget arrears and other forms of quite non-transparent liabilities, and the lack of a regulatory mechanism that could effectively stop further unsustainable debt accumulation. Chapter 1 noted the large variation in fiscal performance across regions, and deficits were no exception. In 1996, a few regions ran small surpluses (Chechnya, Moscow city, Nenetskiy AO, and Oryol Oblast). Others ran deficits as large as 47 percent (Koryakskiy AO), 34 percent (Sakha), and 22 percent (Dagestan and Taimir AO) of expenditures (see table A3). In some cases, the deterioration from 1994 to 1996 has been quite extreme. For instance, the north Caucasus republic of Dagestan went from a surplus of 18 percent of expenditures in 1994 to a deficit of 22 percent in 1996, largely due to the reduction in the share of spending paid for by federal transfers. Many of the other ethnic republics in southern Russia have experienced similar sharp increases in deficits during 1994-96. For instance Kabardino-Balkaria, Kalmykia, and Karachaevo-Cherkessia all went from a small surplus to a large deficit. More surprisingly, the relatively prosperous republic of Sakha and the city of St. Petersburg also saw large deteriora- tions in budget balance (from +2.1 percent of expenditures to -33.9, and +0.3 to -18.7 percent

respectively) .5 The draft Budget Code stipulates the following requirements for regional budget deficits and debts: (i) annual deficit should not exceed 15 percent of budget revenues net of transfers; and (ii) accumulated debt should not exceed annual budget revenues net of transfers. Tables 2.2 and 2.3 suggest that a number of regions from 1996 to 1997 already did not comply with these requirements. These regions at least should not be allowed to issue new government securities until they adjust their fiscal performance. At the same time, municipal budget balance also shows a deterioration. From an aggregate surplus of about 0.8 percent of GDP in 1992, municipal budgets slipped to an aggregate deficit

Table 2.2 Regions with Reported Budget Deficit Exceeding15 Percent of Their Net Budget Revenues from 1996 to 1997

Deficit as % Deficit as % 1996 of net revenues 1997 of net revenues

KoryakskiyAO 232.93 KoryakskiyAO 129.43 Dagestan Republic 124.57 Sakha (Yakutia)Republic 38.77 Sakha (Yakutia)Republic 77.79 Kamchatka Oblast 36.00 KalmykiaRepublic 57.64 Ingush Republic 27.97 TaimirskiyAO 38.01 KalmykiaRepublic 15.92 Kabardino-Balkariarep. 37.78 St.Petersburg 23.67 Karachaevo-Cherk.rep. 21.63 UlyanovskOblast 18.87 Kostroma Oblast 18.44

Source:Authors' estimates based on the data from the Ministryof Finance.

40 Table 2.3 Regions with Accumulated Debt (Including Reported Budget Arrears) Exceeding Their Net Budget Revenues from 1996 to 1997

Debt as % of Debt as % of 1996 net revenues 1997 netrevenues KoryakskiyAO 421.4 KoryakskiyAO 252.6 Ingush Republic 240.0 Ingush Republic 219.3 Dagestan Republic 176.1 Gorniy AltayRepublic 163.3 KalmykiaRepublic 167.2 Tuva Republic 154.5 Tuva Republic 159.7 Dagestan Republic 138.4 Sakha (Yakutia)Republic 146.6 YevreyskayaAO 129.3 AginskiyBuryatskiy AO 120.3 ChukotskayaAO 125.5 GorniyAltay Republic 107.6 Sakha (Yakutia)Republic 121.9 Northern Osetiya rep. 118.3 Buryatia Republic 110.2 Amur Oblast 106.4 Kamchatka Oblast 103.4

Source:Ministry of Finance.

of about -0.1 percent in 1995. Without intergovernmental transfers, the aggregate municipal balance would have fallen from a deficit of-1.2 percent of GDP to a deficit of-2.4 percent during these years. How have these increasing regional deficits been financed? A number of different methods (beyond transfers from the federal budget, which are factored in before calculating the deficit) have contributed. First, regional administrations have borrowed from commercial banks. Second, many have issued bonds. Third, many have also issued bills of exchange, or veksels, instead of money in return for goods and services provided. What data are available suggest a changing structure of subnational debt in recent years. Both bonds and bank credits represented an increasing share of subnational commercial debt. The share of subnational securities in subnational debt increased from 20 percent in 1995 to 28 percent in 1997, while the share of loans from commercial banks grew from 10 percent to 33 percent. The shifting proportions probably reflect a fall in 1997 in the use of regional veksels, as this became heavily restricted under the March 1997 law. But it is worth noting that deficits have been kept relatively low only through a large accumulation of arrears (deficits are calculated on a cash not a commitment basis) and through off-budget or quasi-fiscal spending such as the provision of guarantees when enterprises take loans from commercial banks, instead of providing direct subsidies. Arrears grew from one percent of GDP in 1995 to 2.6 percent in 1997. The stock as of 1997 was 70 percent higher than the stock of outstanding subnational commercial debt. By the end of 1997, direct borrowing from commercial banks constituted the largest single item (a third of the total) in the structure of subnational government debt. The market for such loans is non-transparent, and most deals are made through personal connections between local officials and banks. There is not much systematic information about the terms of this lending, and it is assumed that while in many cases nominal terms may sound quite favorable, many

41 governments provide "friendly" banks with various additional benefits through tax exemptions, preferential access to municipal real estate, and preferential conditions of handling governments' cash accounts. There is a clear need to develop regulations to require a competitive selection of banks by subnational governments and to introduce mandatory disclosure of the terms under which loans are granted. Also, from the bank supervision perspective, it seems important that prudential regulations fully reflect the high risk of lending to subnational governments through the introduction of adequate risk provisions. Moreover, while current law bans municipal banking, regional governments-including the cities of Moscow and St. Petersburg-continue to be able to own commercial banks. Prudential banking regulations that govern lending to related parties should be fully applicable in cases where subnational governments borrow from banks they control. Until 1996, promissory notes-or veksels-were a dominant form of subnational debt. The popularity of veksels was related to soft regulatory requirements concerning their issue and circulation as well as to additional benefits from seignorage derived from these money substitutes, The law on "Bills of Exchange and Promissory Notes" banned this practice in early 1997 (see below). However, a large regional survey in late 1997 revealed that many subnational governments continue to issue them.6 (See Accounts Chamber1997.) As of the end of 1997, the total volume of government-backed veksels amounted to 8-10 billion rubles. Moreover, in the situation of severe monetary tightness, subnational governments look for other ways to issue money substitutes. Instead of traditional veksels, they tend to switch to alternative instruments which perform similar functions but bear different names (for instance, commodity receipts). Also, governments turned to a wider usage of veksels issued by commercial entities, including veksels of public companies under their control. This problem of illegal circulation of promissory notes has to be resolved within a more general framework that would provide the GOR with adequate monitoring capacity and a set of instruments that could be used in a cases of direct violation of the federal fiscal legislation. Because of the problems with debt accounting, various other components of subnational government debt remain mostly unaccounted for by the traditional budget statistics. These include, in particular, external borrowing by regions through means other than Eurobonds. So far, the most common form of such debt was related to subnational projects of the International Bank for Reconstruction and Development (IBRD) and the European Bank for Reconstruction and Development (EBRD), which together could account for $1.5 billion in commitments. Another form of off-budget debt is direct external borrowing by the regions that de facto had received special budget rights. For instance, Tatarstan managed to get several such loans backed by oil output of the local oil company. Other major sources of off-budget debts are associated with borrowing by government extrabudgetary funds and by local publicly owned companies. The latter are usually backed by budget guarantees.

LegalFramework for SubnationalDebt From the very beginning of transition, subnational governments in Russia have received quite strong rights for borrowing and issuing debt. Early laws established the right of subnational governments to finance deficits by borrowing and issuing municipal debt instruments, and their

42 freedom to decide how to use the proceeds. These laws did not, however, introduce any specific regulatory requirements concerning debt limits and registration, allowed types of subnational securities, or disclosure rules. Although some of these drawbacks have been addressed recently, progress with the regulatory framework continues to lag behind market developments. While the regulatory framework is most effective for publicly traded subnational securities, direct borrowing from the financial system and budget arrears are not covered by law to any significant degree. Several laws stipulate that regional and local governments have the right to borrow and issue bonds: "On the Foundations of the Budget System and the Budget Process in the RSFSR" of October 10, 1991, amended in 1994, 1995, and 1996; "On Local Government in the Russian Federation" of July 6, 1991, amended in 1992, 1993, and 1995; "On the General Principles of Organization of Local Government in the Russian Federation" of August 28, 1995; and "On the Financial Foundations of Local Government in the Russian Federation" of September 1997). The law "On the Basis of Budget Rights and Rights in the Formulation and Execution of Extrabudgetary Funds" of April 15, 1993, in addition to asserting the right of regions and municipalities to take out loans for investment purposes, gives regional legislatures the right to set a limit for the region's budget deficit. Recently legislation has begun to establish clearer restrictions on the issuing of regional and municipal bonds. A federal law "On the Securities Market" of April 22, 1996 introduced relatively developed authorization and registration requirements for subnational bonds as publicly traded securities, including a set of disclosure rules concerning financial performance of the issuer. Two other laws are particularly significant-the law "On the Financial Foundations of Local Govermnent in the Russian Federation," of September 1997 and the draft law "On the Emission and Circulation of State and Municipal Securities," not yet enacted. The law "On the Financial Foundations of Local Government in the Russian Federation" was the first to introduce general limits on the volume of subnational borrowing. The total obligations a municipality can issue may not exceed 15 percent of its budget expenditures in a given year (Article 16.7). However, since the law governs only local government, it does not restrict the size of regional government debt. In addition, it limits only the annual increase, not the size of total accumulated debt. The provision may also contradict the 1996 federal law "On the Securities Market," which states that "representative bodies of state power and local self-government establish limits on the volume of securities issued by state bodies of the respectivelevels" (Article 38). Which law takes precedence has not been tested in court. The law on the financial foundations also establishes that regional and local government bonds can be issued only for investment purposes (razvitie munitsipalnogo obrazovania) (Article 16.2). It asserts that the state does not bear responsibility for municipal bonds (Article 16.5). In another provision it also imposes a ban on establishing municipal banks-an important measure for separating public and commercial banking sectors and for avoiding potential losses from the soft lending that could derive from municipal ownership of banks. The draft law "On the Emission and Circulation of State and Municipal Securities" will, if passed, regulate the issuing and use of securities denominated in Russian currency by the federal government, subjects of the federation, and municipalities. Under this bill, financing of the budget deficit of a region or municipality may not exceed 30 percent of its own budget revenues.

43 In addition, no more than 15 percent of the budget's own revenues can go toward servicing the debt in any year. It also requires mandatory registration of bond issues, and imposes disclosure requirements on issuers. The administrations of regions and municipalities issuing securities would be required to publish quarterly accounts of budget execution, accounts of the redemption of securities, and to provide information about new issues in the media or by other means at least two working days before the issue. The draft law on state and municipal securities would, if enacted, go a long way toward bring- ing the legislative environment for subnational bond issues up to international standards (see box 4 for a review of these standards). At present, it appears to face a difficult battle in the Council of Federation, where regional governors will be reluctant to see their freedoms reduced in significant ways. When fully effective, the Budget Code is expected to greatly improve the overall transparency of subnational finance. It should therefore support the development of the subnational debt market by ensuring more reliable information on debt issuers to both investors and regulators. The major drawback of the existing draft of the Budget Code with respect to debt regulation is its lack of a framework for establishing a system that would report and register all types of the debt, securitized and non-securitized. The code also does not require subnational governments to select creditor banks through competitive tendering. While both the Budget Code and the law on state and municipal securities are still pending their full approval by the Parliament, the Presidential Decree No. 696 of June 9, 1998 introduced as an interim measure a requirement that regions planning to issue Eurobonds must comply with similar but somewhat less restrictive quantitative limits on their annual deficit and debt service costs. In addition, this new decree stipulated that the regional executive must receive federal permission for any operation that affects the capital account of the balance of payment. This provision is designed to introduce systematic control and to somewhat limit the scale of subnational government guarantees on external borrowing by commercial enterprises. It also restricts other forms of subnational external borrowing, such as a recent six-month loan received by the Moscow oblast government from a syndicate of WVesternbanks. 7

Implicit Formsof Debt: Arrearsand Guarantees Besides borrowing from banks, issuing bonds, or engaging in other ways of raising finance famil- iar in developed market economies, Russian subnational governments use several implicit techniques to fund spending and decrease official deficits. These make calculating the government's total debt burden difficult, lead to inefficiencies, and have other undesirable consequences.

Arrears on Paymentsfor Goods or ServicesBought by the Subnational Government The simplest way for a subnational government to deal with its inability to finance deficits is simply not to pay its suppliers. Wages of regional employees have been known to go unpaid for months, and enterprises supplying energy or other goods to budget sector installations often report long delays in payment. By the end of 1997, reported budget arrears of subnational governments amounted to 67 billion rubles ($11 billion). The stock of arrears has been rising at an

44 Box 4 International Practice:How Other Countries Regulate Subnational Borrowing

Countries around the world exhibit a range of approaches to the monitoring and regulation of subnational borrowing. 8 At one extreme, discipline is left to the market: subnational governments are restricted primarily by the legal contracts they sign with creditors and by their need to preserve a rep- utation for reliability. At the other extreme are systems of detailed, intrusive control by the central government or other central body-or even outright prohibition of subnational borrowing. Most systems fall somewhere in between. A more or less pure market approach exists in Canada for provincial governments' borrowing. Until the late 1980s, this was also true of the Brazilian system. However, such approaches have often failed to preserve sufficient macroeconomic stability, and exclusive reliance on market discipline is particularly rare among developing countries.9 Even in Canada, where the market did seem to work as hoped, assessing different implicit risk premia for each province's debt, this was not enough to fine tune the growth of debt. Total provincial debt increased steadily in the early 1990s, reaching 23 percent of GDP by 1994. This necessitated a relatively severe fiscal retrenchment. In some federal systems, control over subnational borrowing involves an element of center-region bargaining. In Australia, a Loan Council establishes annual limits on financing through a process that involves negotiations including federal and state governments. A variant of this type of negotiated limits approach also exists in Germany. Some countries have rules established by law or the constitution that restrict subnational borrowing. These may impose a variety of limits: on the total level of debt, on the purposes of borrowing (for instance, restricting it to financing investment), on borrowing from the central bank or from foreign investors, or other restrictions. In Germany and Switzerland, under the so-called "Golden Rule," borrowing is limited to investment purposes. Some U.S. states and regional and local governments in Spain are required by law to repay any borrowing for short-term liquidity purposes by the end of the fiscal year. In Argentina, provinces need approval of the federal congress to take out foreign loans.10 Subnational governments in many countries have found ingenious ways to circumvent such rules. Expenditures can be reclassified from current to capital investment; off-budget entities are used to bypass the budget; borrowing occurs through state-owned enterprises rather than directly; and payment arrears can be run up temporarily at the end of the fiscal year to facilitate debt repayment. In some countries, the central government directly controls subnational government borrowing. The central government may set periodic limits on debt for specific jurisdictions, or review and authorize individual operations. Alternatively, all government borrowing may be centralized, with on- lending from the central government to regional and local ones. Some examples of such control can be found in the UK, France, Japan, and India, wvherethe constitution gives the central government authority to approve or prohibit borrowing by states indebted to the center. Regulation of subnational borrowing also varies among the different post-communist countries of Eastern Europe. In some, subnational governments were given broad borrowing authority. Hungary's law on local self-government granted local governments unrestricted domestic borrowing authority for both current and capital spending."1 In Albania, local governments could borrow without limit for investment. In Poland, however, local governments were allowed to borrow no more than 5 percent of current budgeted expenditures each year. estimated rate of about one percent a year. Most arrears are concentrated in the areas of utility payments, wages of local civil servants, and capital expenditure.

Guarantees of Loans Regional administrations often provide guarantees for loans taken out by enterprises within the region. This is viewed as a way of providing needed credits to government-supported enterprises or to government suppliers without the regional government having to put up the money. However, when the loans go unpaid, the regional government is called upon to fulfill its

45 guarantee. It is estimated that up to 90 percent of all budget guarantees are granted to commercial enterprises for financing regular commercial projects in areas that, based on traditional criteria, are not those for which public support could be justified. (Institute for Urban Economy 1997, pp. 1 7 -1 8.) During 1994, for instance, the Samara Oblast administration issued 10 guarantees, amounting to a total of 24.4 billion rubles. Seventy percent of the value of these loans was eventually paid by the Oblast. The number of such guarantees decreased in subsequent years in Samara, though such guarantees continued to go unrecorded in the budget at the moment of their issue. 12 The existing accounting and reporting system does not require any systematic reporting of guarantees. While such commitments obviously differ from actual spending-and should not simply be added to expenditures to calculate the budget deficit-they need to be appropriately incorporated into the government accounts. Uncertainty about the proportion of such guaranteed loans that will go unpaid makes calculating the government's financial position extremely difficult. The draft Budget Code suggests closing this loophole in the accounting procedures. However, the current version of the draft provides too restrictive a solution to the problem: it suggests that all budget guarantees (which are potential liabilities) must be accounted as own government debt (which are actual liabilities) and fails to distinguish between these two. This law's requirement should be amended through introduction of provisions that would reflect the actual government costs of granting guarantees. Because of the lack of data, there is at present no basis to estimate actual budget costs associated with guarantee provision. Anecdotal evidence, however, suggests that in most cases budget guarantees are used as a form of indirect subsidization of commercial enterprises, including those in private ownership.

Growing Regionaland Municipal Bond Markets Since their introduction in 1994, markets for municipal and regional bonds have developed from scratch, emulating the growth of federal GKOs and other government securities. The stock of municipal securities has increased from an estimated .02 percent of GDP in 1994 to about 0.4 percent of GDP in 1997. In 1997 alone, the amount of bond issues registered almost tripled to reach 29.5 billion rubles, and by the end of 1997 more than a quarter of the outstanding subnational government debt was issued in the form of bonds. Still, the stock of subnational bonds amounts to less than 3 percent of the outstanding stock of federal bonds (GKO and OFZ). The outstanding stock of municipal bonds as of 1997-nearly $2 billion-does not compare to that in developed market economies (for comparison, $100-200 billion worth of municipal bonds are issued annually in the United States), but the growth has been rapid. Because of the short maturities of many bonds, the reported stock of the bond debt has been growing much slower than the growth of their emission. A substantial portion of registered bond issues have failed to be placed due to lack of demand, especially later in 1997, when the consequences of the Asian crisis resulted in drastic changes in investors' senti- ments regarding emerging market risks.

46 Ruble-Denominated Bonds

A few regions have blazed a trail in the market for ruble-denominated regional bonds. Ironically, though logically enough, it has been the regions with the healthiest finances-and thus the lowest need for deficit funding-that have led the way. The pioneer was the city of St. Petersburg, which placed 11.3 trillion rubles of bonds in March 1995. Since then, Moscow and Tatarstan have also made substantial issues. In all, about 70 regions have issued bonds. Under current legislation, all bond issues must be registered with the Ministry of Finance. Some regional bonds are sold on the market in public trade, but others are circulated in closed subscriptions to selected buyers. For instance, Moscow Oblast issued loan bonds in the summer of 1997 by closed subscription. Volgograd Oblast has also issued bonds in this way.'3 The secondary market is usually organized either by regional exchanges or by regional dealers themselves. Regions sometimes have special arrangements with the agents they appoint to manage the issue. Until the beginning of 1997, some regional and municipal bonds were tax exempt, but this benefit has been eliminated. Domestic regional and municipal bonds tend to be due in 1-5 years, though some have due dates of less than one year. The yield tends to be 5-10 percent above that of federal securities for high quality bonds, and can reach as high as 40 percent above for more risky issues.14 Bonds are sometimes guaranteed by specific budget revenues, real estate, reserve funds, or third party guarantees (provided by enterprises, banks, or insurance companies) .15The proceeds of regional issues have generally been designated for general governmental purposes, and have not been tied to specific projects.16 , However, the revenues from some issues are specifically targeted. So-called "housing bonds" often promise redemption in the form of government-built apartments. These are sometimes issued by regions, but more often by municipalities (for instance, the cities of Samara, Tula, and Omsk) to raise money for housing construction. This type of issue has been relatively small (the average volume of issues in 1994-95 amounted to about $5 million).' 7 Designed as a form of extraordinary financing of local public housing programs, housing bonds may have a negative longer-term impact on the overall development of the local housing market.II They threaten to extend the existing overexposure of local governments in housing finance and hamper the development of truly market-based schemes of private housing financing. While the existing form of "targeted" bonds in Russia should be discouraged, there is great potential for expansion in subnational borrowing linked to financing of specific investment projects in the public sector. Such borrowing in the form of revenue bonds would be repaid through user fees from future customers of the facilities constructed. With due attention to the quality of project preparation and analysis, revenue bonds could improve the overall quality of subnational debt and at the same time help to accelerate transition to new principles of financing and operating infrastructure facilities. Another sizable segment of the market is in "agrobonds." The issue of such bonds accounted for a quarter of all new bond issues in 1997. In early 1997, the government required that regions with outstanding debt for the so-called "commodity credits" issued to support agriculture in 1996 convert this debt into tradeable securities. The commodity credit was a scheme by

47 which the federal government financed credits to agricultural producers in the form of fuel and raw materials supplies before the harvest, on the agreement that the credits would be repaid after the harvest. However, much of the commodity credit debt was not been repaid. Agrobonds were required to have a redemption date of no longer than three years. As of October 1, 1997, issues of these bonds had been registered by 54 regions, for a total of 5.6 trillion rubles."9 By the end of the year, seventy of the 89 regions had registered issues.72 The bonds were issued to the federal Ministry of Finance, as payment for the region's commodity credit debt (at nominal value). The finance ministry then sold these bonds on the market at a discount-which, in the fall of 1997, averaged about 20 percent.2" The proceeds went into a special fund for the crediting of the agroindustrial complex at below-market rates. This innovation substantially expanded the size of the bond market, but the quality of this addition is quite poor. The way in which agrobonds were issued is not regarded by regions as their voluntary decision, and many of them do not feel responsible for their service. It is not accidental, therefore, that of the first five regions whose agrobonds matured in June of 1998, three did not pay them off on time. These defaults will have a longer-term negative impact on the market because they changed overall investors' attitude towards the risks associated with subnational debts. While the federal government managed to obtain some short-term fiscal gains from issuing agrobonds in 1997, the longer-term losses from undermining investor confidence and higher costs of borrowing by subnational governments seem to be much greater. The GOR should avoid continuation of this kind of program, since it tends to overburden the market with low quality securities. As with all nascent markets, considerable uncertainty surrounds the future development of the regional and municipal bond markets. A major default by one region on a large issue could undermine confidence more broadly. Monitoring and prudential regulation by the federal securities commission appears justified.

Eurobonds In 1997, the first regional governments took to the international capital markets with issues of Eurobonds. St. Petersburg led the way with a $300 million issue on May 6, 1997, but Moscow city soon took the lead with a $500 million issue on May 27. Both cities' bonds carried a coupon payment of 9.5 percent. The St. Petersburg issue had a five-year period of circulation and sold at an average price of 99.6 percent of nominal value, while the Moscow issue had a three-year period and sold for 99.8 percent. By 1998, a total of five major Eurobond issues had been executed- two by Moscow city, one by St. Petersburg, one by Nizhni Novgorod Oblast and one by Novgorod Oblast. The maturities ranged from 2 to 5 years. Eurobond issues are closely supervised by the federal Ministry of Finance. A presidential decree of April 8, 1997 regulated the first issues by the cities of Moscow and St. Petersburg and by Nizhni Novgorod Oblast. This decree limited the total of all kinds of borrowing by these regions to no higher than 30 percent of their own budget revenues and restricted the share of the budget that went toward servicing all forms of regional obligations to no more than 15 percent of own revenues. These conditions were later extended to issues by Leningrad, Oryol, and Samara oblasts and to the Republic of Komi. Another presidential decree of October 18, 1997,

48 established the right for three more regions-Moscow Oblast, Sverdlovsk Oblast, and Krasnoyarsk Krai-to issue Eurobonds. This decree states that the right to issue Eurobonds will only be accorded to regions which have balanced budgets and are not receiving fiscal transfers from the center. As of the end of 1997, there were 12 eligible regions, including Moscow and St. Petersburg cities, Nizhni Novgorod, Moscow, Sverdlovsk, and Tyumen oblasts, and Krasnoyarsk Krai, among others. However, this has not prevented other regions that do not meet the finance ministry's requirements from preparing their own foreign bond issues. A third presidential decree, enacted inJune 1998, sought to regulate subnational borrowing on foreign markets more extensively. It reiterates the previous conditions that limit total borrowing to 30 percent and debt service to 15 percent of own revenues. In addition, those regions wishing to issue Eurobonds are required to publish data on their budget revenue, expenditure, deficits, and financing sources for the previous three years. They must also transfer revenues due the federal budget on time and refrain from barter and other nonmonetary forms of budget execution. In addition, the federal government's external borrowing needs take priority, in a somewhat unclear sense, over those of the subnational governments. This aspect of the decree elicited vocal opposition from Moscow's mayor Luzhkov. Direct external regional borrowing carries with it particular problems. Russian regions intend to start building their foreign debt at a time when their fiscal position is extremely vulnerable, exchange risks are quite high, and fiscal management practices are heavily underdeveloped and do not provide sufficient assurance for timely debt service. The danger of a default by regional borrowers scaring away investors is particularly severe in the case of foreign capital. In the event of a default, the federal government would experience strong pressure to assume responsibility. This creates moral hazard for the issuing authorities, and justifies close federal monitoring and regutation. An ideal scenario might be the following. By strengthening disclosure requirements, raising overall budget reporting standards, and introducing effective instruments to protect investors' rights, the GOR could push for gradual improvement in the quality of subnational securities and a reduction in the risk of investments in domestic bonds. This should lead to the inflow of additional funds, including those from nonresidents, and a decline in domestic interest rates, in turn weakening the incentives for subnational governments to borrow abroad. The draft Budget Code suggests a full ban on external borrowing by subnational governments. While fully justifiable from a public management perspective, it is not clear if this provision would be politically acceptable to influential regional leaders given the existing large difference between external and internal interest rates. The GOR may be forced to look for a com- promise, which should include permission to borrow abroad for regions that meet a certain set of stricter conditions on the following: (i) overall debt size; (ii) limit of external portion of the debt: and (iii) compliance with federal norms of fiscal management. Under this scenario, the GOR might try to use regulated access to external borrowing as an incentive mechanism both to strengthen overall federal regulation of subnational borrowing and to encourage specific improvements in fiscal performance by those subnational governments that are interested in regular Eurobond issues.

49 Main Problemsand Policy Options

As the central government budget deficit has declined, making possible the stabilization of inflation in recent years, subnational deficits have been growing. The size of these is not vet a severe threat to the country's financial stability, but the trend is worrying. At the same time, the large number of subnational governments running deficits and attempting to finance them through credit and bond markets increases the danger that a spectacular failure of one would depress confidence in all the others. On the one hand, subnational borrowing offers many benefits. Regional and municipal bond markets can provide valuable public investment finance and generate incentives for subnational governments to improve their financial practices in order to attract investors. On the other hand, such borrowing carries substantial risks. The market could become a source of severe macroeconomic pressure on the federal budget and, in the worst case, could prompt a panicked withdrawal of funds by investors fromn both subnational and federal debt. International practice for dealing with such problems varies, but almost all countries rely on some combination of central legislation and regulation, central monitoring, positive incentives, and market discipline. Existing debates focus on the appropriate balance between these. Working out the optimal combination of measures in Russia will require balancing the benefits of rapid growth in subnational bond markets against the risks and determining what types of central monitoring and control are politically feasible. We would argue that certain reforms of legislation are currently important. A federal law to establish a framework for borrowing and the issuing of securities by subnational governments is urgently needed (the draft law on municipal securities would serve in part, and the law "On the Financial Foundations of Local Government in the Russian Federation" does establish some useful debt limits). A federal law to restrict external borrowing to the most creditworthy regions with sustainable budget practice would also reduce the risk of regional defaults souring the market for all external bond issues. Federal regulations requiring the centralized registration of all borrowing by subnational governments-notjust borrowing in the form of securities-would make it easier to monitor total debt levels and foresee danger points. At present, assessing the scale of subnational debt is also complicated by the widespread use of nonmonetary or other unconventional forms of borrowing via the issue of bills of exchange, loan guarantees, and budget arrears. Existing arrears need to be restructured. These problems are discussed at greater length in Chapter 4. The recent failure of several regional governments to service their agrobonds drew additional public attention to the problerm of investor protection. A standard procedure needs to be developed that will help investors in c:ase of default to recover part of their investments from the future revenue stream of subnational governments. Without effective instruments of investor protection and default resolution, the debt market will not be able to impose fiscal discipline on market participants and become a real regulator of their fiscal performance. Insufficient mechanisms for investor protection were a major factor that led to the current arrangements for subnational Eurobond issues, which were sold under the explicit guarantees of the federal government. Such federal guarantees are definitely an unwelcome development, since they shift major risk to the cenrtral government, without providing it with sufficient lever-

50 age to recover the costs of the guarantees. In particular, in contrast to other countries (such as Brazil), Russian law does not contain a provision that would allow the federal government to recover costs associated with such guarantees from future federal transfers to regions. The federal government could also usefully support building subnational capacity for responsible borrowing and strong debt monitoring. Amnong immediate priorities for such support are the development of (i) a model framework for a subnational debt management unit; (ii) recommendations for preparation and evaluation of public sector projects for funding through government borrowing; and (iii) benchmarks for good practice in public debt management (such as structure of the debt by type and maturity, interest rate caps, maturity limits, and so forth). Finally, transition to a transparent and well-regulated debt market will be impossible without radical improvements in the system of accounting (see Chapter 4).

Notes 1. World Bank (1996), p. i. 2. Wildasin (1997). 3. World Bank (1997), p.125. 4. Economist (1998), p.49 . 5. As discussedbelow, there are plausible explanations for both of these cases. Sakha'sbudget deficit was financed in large part by borrowing from extrabudgetary organizations of the regional government. Had these been consolidated within the regional budget, the deficit would have been smaller. St. Petersburg's growing deficit may reflect the relative ease with which the city has been able to finance it. St. Petersburg was a pioneer in issuing both domestic bonds and Eurobonds. 6. Accounts Chamber of the Russian Federation (1997). 7. Oxford Analytica Brief, 1998, June 15. 8. See Ter-Minassian (1997) for a useful review. 9. Ter-Minassian (1997), p.1 0. 10. World Bank (1996a), p.vi. 11. Bird, Ebel, and Wallich (1995), p.26 . 12. World Bank (1996b). 13. Accounts Chamber of the Russian Federation, 1997, pp.17-18 14. Russian Economic Trends 1997: 3, p.2 6. 15. Ekonomicheskaya Politika Subyektov Rossiiskoi Federatsii, November 1996, p. 104. 16. Robert Serafini, "White Paper on Russian Municipal Debt," USAID: Moscow, October 1997. 17. Yandiev, 1997, p.12 1 18. Koganova and Petersen, 1997. 19. Accounts Chamber of the Russian Federation (1997), p.2 7. 20. Anielyan (1998),June 10. 21. Accounts Chamber of the Russian Federation (1997), p.2 9 .

51 3. FiscalFederalism at the SubnationalLevel

Most discussion to date of reforms to the system of fiscal federalism in Russia has focused on relations between central and regional governments. However, fiscal relations between regional governments and municipalities may have equally important consequences for the economy. The current system of fiscal relations between regional and local governments redistributes between districts in ways that are unpredictable and growth inhibiting. This chapter examines the details of existing arrangements and explores the opportunities for reforn.

IntergovernmentalFiscal System Within Regions In some regards, the relationship between municipalities and their superior regional governments resembles the system of ties between regions and the federal government. Municipalities have full control over certain local taxes, and receive revenues from other taxes that are shared with the regional budget on a derivation basis. Regional governments redistribute resources between subordinate municipalities through differentiated sharing rates on the shared taxes and regional "equalization" funds for support of the municipalities. Both these elements of redistribution are deeply political, and bargaining over the proportions is a continual activity of mayors and governors-to a greater degree even than at the federal level. As noted in Chapter 1, the share of municipalities in consolidated regional tax revenues has been growing recently. The municipal share rose from 57 percent in 1992 to 65 percent in 1996 (see table 1.2). Municipalities' share of expenditures, however, has remained relatively constant, around 58 percent of the total. At the same time, municipalities have become somewhat more dependent on transfers from the regional budgets. These transfers constituted 23 percent of municipal expenditures in 1992; by 1996, they had risen to 29 percent. Anecdotal evidence suggests that the reported numbers may exaggerate the true degree of regional decentralization. Various expenditures are nominally funded from local budgets while all decisions on their allocation are made at the regional level, with municipalities merely executing regional government decisions. Some regions have recentralized certain types of expenditures, such as infrastructure investments. At least among regions that are recipients of federal transfers, regional authorities have full control over the revenue and expenditure patterns of municipal governments. However, the regional capital cities are an exception. Most of the subnational tax base originates in the capi-

Table 3.1 Municipal Budgets (Percent of GDP)

1992 1993 1994 1995 1996

Total revenues 9.31 11.27 11.39 9.18 n.a. Total expenditures 8.52 10.87 11.16 9.26 9.91 Surplus/deficit 0.79 0.40 .23 -.08 n.a. Surplus/deficit net of intergovernmentaltransfers -1.20 n.a. -2.44 -2.4 n.a.

n.a. = Not applicable. Source: Authors' estimates based on the consolidated budget report from the Ministry of Finance.

52 tal cities, and these municipalities are usually quite powerful and able to compete with regional governments for control over these taxes. This competition often leads to serious political ten- sions between these two governments. The widespread use of noncash schemes for budget execution further supports the trend toward greater regional control since schemes of mutual settlements enjoy significant economies of scale. Given current Russian realities, the federal government should be more decisive in protecting local self-governance and autonomy. To this end, it should develop and enforce some universal models of interactions between regional and municipal governments that-within the limits of the constitution-would guarantee some autonomy in local decisionmaking.

Local Revenues Local budgets officially derive revenues from three sources: own revenues, shares in taxes shared with the regional budget, and transfers from the regional level. Statistical annex table 12 shows the structure of tax sharing between different government levels. Own revenues of local governments include the revenues from local taxes and charges, proceeds from privatization of municipal property, leases and rents on municipal real estate, and revenues from various other sources. The 1991 law "Basic Principles of Taxation" included a list of 21 local taxes and fees that municipalities could levy. The main ones were personal property tax and land tax, supplemented by a variety of different fees and charges such as parking and dog ownership fees. In late 1993, a presidential decree gave localities the right to introduce new taxes without restriction. This was repealed in mid-1996. In all periods, however, the revenues from local taxes have been meager. In 1996, they came to about 5.4 percent of total tax collections, and in individual regions the proportion ranged from 0.3 to 12.4 percent.' If approved by the parliament, the Tax Code will eliminate numerous small local taxes and grant regional governments the right to introduce a sales tax, as well as consolidating the currently segmented system of asset taxation into a single real estate tax. The latter reform has been implemented on an experimental basis in the cities of Tver and Novgorod (see box 5). The code would also drastically reduce the number of exemptions on personal income tax, expanding the tax base of subnational governments. Under current arrangements, the shares of shared taxes that each local budget receives are negotiated annually-or sometimes several times a year-between the local and regional governments. The shares tend to be differentiated sharply across municipalities, with a few industrial, urban regions often contributing large shares of shared taxes, while rural raions keep 100 percent. In rare cases of regions with really uniform rates of tax sharing (such as Sverdlovsk Oblast), rates are established at quite a low level for municipalities within a very centralized model of regional public finance. In Samara Oblast, for instance, there are 37 first tier local governments-27 raions and 10 oblast-level cities. The region's 1996 budget allowed 30 of these to keep 100 percent of the consolidated regional budget's share of profit tax collected on the territory. By contrast, the city of Samara was only allowed to keep 33 percent, and Tolyattii, the location of the automobile fac- tory Avtovaz, got to keep only 24 percent. All but four of the 37 municipalities were allowed to retain 25 percent of the region's share in VAT. Samara and Tolyatti were allowed 17 and 8 percent respectively, and two other cities received shares of 15 and 22 percent. 2

53 Box 5 Land and Real Estate Tax Reform in Novgorod and Tver

The project "Creation of the system of real estate taxation based on market pricing in the Russian Federation", coordinated by the Ministry of Finance of the Russian Federation and sponsored by the LISAID,was started in October 1995.The project is to be completed in September 1998. The objective of the project is to develop a concept of real estate taxation applicable for the Russian Federation, prepare the necessary legal and regulatory base for its implementation, and implement it in two to four cities as an experiment. Based on the outcomes of the experiment, amendments will be made to the draft Tax Code. The newly developed consolidated real estate tax should be based on real estate market value and should replace existing property and land taxes. At the same time, a new market-based methodology for the assessment of rent payments for land, non- residential, and residential real estate should be developed as a part of the project. Four cities were chosen on a competitive basis for the implementation of the project: Novgorod and Tver for full-scaleimplementation, Psov and Bor (both in Nizhni Novgorod Oblast) to join in the second tier of implementation. The conceptual, legal, and regulatory parts of the work were completed in September 1997, and the new taxes were to be introduced in Novgorod and Tver in early 1998.

ResultsAchieved by May 1998: * A concept of real estate taxation applicable for the Russian Federation and a strategy for its implementation was prepared by the Interagency Working Group by October 1996. * A federal law "On the Implementation of the Real Property Tax Experiment in the Cities of Novgorod and Tver," prepared by the Interagency Working Group, passed the Duma in June 1997 and was signed by the President in July 1997. The law gives the two cities a special tax status, by which they can introduce real estate tax before the Tax Code is effective. * A registry of real estate objects in Novgorod and Tver was completed in September 1997. The registry includes 111,000 objects in Novgorod and 186,000 in Tver and contains technical description of all objects, their legal status, and information about title holders. A real estate registry is being prepared for Psov and Bor. * A methodology for real estate valuation for tax purposes was developed. The methodology is based on real estate sales. * Economic and social consequences of real estate tax implementation were analyzed, the impact of taxation on different social groups under different tax scales scenarios was estimated, and recommendations on the tax base for different types of real estate were prepared. * Several training seminars were organized for the representatives of municipal administrations interested in participating in the project in the future.

LessonsLearned: * The creation of a complete real estate registry requires enormous efforts and resources. It took almost two years to prepare registries for Novgorod and Psov.It is clear that dissemination of the experience could only be gradual. * Municipal incentives to introduce the tax, as in the case of other local taxes, are heavily con- strained by unresolved problems in the system of intergovernmental fiscal relations. If not addressed, these problems will hamper dissemination of the experience. So far, any increases in collections of local taxes have been likely to reduce transfers from higher level budgets.

The sharing rates vary notjust between urban and rural districts within the same oblasts, but also between urban districts in different oblasts. In 1993, the city of Tver was permitted to keep 3 percent of profit tax revenues, 4.3 percent of VAT,and 5 percent of personal income tax raised

54 in the city. The rest went to federal and regional budgets. The corresponding rates for the city of Yaroslavl, however, were 12, 10, and 80 percent.3 Perhaps not coincidentally, the representa- tion of urban districts in the regional legislature is much higher in Yaroslavl than in Tver Oblast, where in 1997 only 7 of the Duma's 33 members were from the city of Tver.4 The law "On the Financial Foundations of Local Government in the Russian Federation" of September 1997 established minimum shares that the localities must receive in the main shared taxes (see box 6). However, these shares are defined as average shares across all municipalities in the region, so they do not prevent the regional government from allocating larger shares to some and smaller shares to other local budgets. Regional budget transfers to the localities are determined in different ways in different regions. Some have explicit formulae for receiving transfers from the region's equalization fund. In many, a local expenditure target is negotiated between local and regional officials, and transfers are allocated from the regional budget to cover any deficit. The practice, according to observers, often resembles one of incremental upward adjustments of expenditure targets-a version of "planning from the achieved level." Incrementalism is complemented by political bargaining and pressures. Mechanisms for the formation of regional equalization funds vary also. Some are funded through a share of all taxes collected by the regional budgets, others are linked to a few specific taxes, and in some regions federal transfers are also pooled into such a fund. Novgorod Oblast provides an interesting example of intraregional equalization arrangements. De facto, the oblast has two separate equalization funds: (i) the Financial Support Fund, based on a portion federal transfers received by the oblast, and (ii) the Oblast Stabilization Fund, based on share of total tax revenues of oblast nonconsolidated budget and shares of personal income tax from the two wealthiest municipalities. Such a two-channel system helps to reduce volatility of funding and stabilize budget financing, especially in rural areas that are heavily dependent on interbudgetary transfers. LocalExpenditures Expenditure assignment between regional and local levels of government has not been precisely laid down in law, and the actual division of responsibility has evolved somewhat spontaneously, like that between federal and regional levels. Primar-y and secondary schools usually fall under municipaljurisdiction, while technical and vocational schools are funded by the regional budgets. Primary health clinics and secondary hospitals are under local jurisdiction, tertiary hospitals under regional. Municipalities are permitted to have their own police forces; units at the regional level are branches of the federal ministry of the interior. The different subnational levels share responsibility for housing and road construction, and various kinds of subsidies. The draft Budget Code currently under consideration by the Duma attempts to clarify the assignment of expenditure responsibilities to different levels of government. Until now, the only legal basis for expenditure sharing in Russia was the law on the foundations of budget rights of 1993, which contained too general a description of expenditure assignments to be made operational. The basic principle of expenditure sharing in the draft code is that governments are responsible for financing entities that they own (Article 57). This principle is not without complications, since the process of dividing ownership of public assets between governments has not

55 Box 6 Legal Framework for Local Finance: The Law "Onthe Financial Foundations of Local Government in the Russian Federation"

The law "On the Financial Foundations of Local Government in the Russian Federation" was enacted in September 1997, over the Council of Federation's veto. Until this law was passed, municipalities' budgeting rights had derived mostlyfrom two laws:the law "On the Basis of Budget Rights and Rights in the Formulation and Execution of Extrabudgetary Funds" of April 15, 1993, and the 1991 law "On Fundamentals of the Budget Structure and Budget Planning in the RSFSR,"amended in 1994, 1995 and 1996. The 1997 law affirms the independence of local governments in forming and executing budgets (Article2). The local representative organs have the right to independently define how local budget resources are spent. Local governments may also set up their own municipal tax service to collect local taxes and their own municipal treasuries. Yetthe law also givesconsiderable authority to the federal and regional governments to regulate various aspects of local finance (Article 4), including the right to determine the allocation of federal and regional aid among the municipalities. The law also requires that when the federal government or regional governments devolve powers downward, these be accompanied by the necessary sources of finance, and that decisions which reduce the income of local budgets must be compensated (Article4). The law refers to "state mini- mal social standards" but does not define these. The law was the first to define minimum shares in shared taxes that regions must leave to the municipalities. However,it prescribes shares that must be met "on average" across municipalities in the region, and therefore offers individual municipalities no security on this score. The regional legislatures decide what the shares willbe for particular municipalities,subject to these requirements for the average region. The provisionsfor minimum sharing rates are contradicted, though, by some articles of the draft Budget Code. Some uncertainty surrounds the question whether the federal government has a constitutional right to dictate how regions share revenues with municipalities. The minimum average norms stipulated by the law are quite small, and are generally lower than the historical shares of taxes left to municipal budgets. There is a risk, therefore, that the law may stimulate regional governments to adjust their tax sharing system towards those tax sharing rules described by the law, which would cause additional centralization of the regional budgets. Another drawback of the tax sharing regulation in the law is that it does not require multi-year stabilityof tax sharing norms. The law also establishes the right of regions to set up funds for the support of municipalities, financing them with a portion of tax revenue, and to allocate the funds in accordance with a "fixed formula" that may take into account a variety of different demographic, geographical, and economic characteristicsof regions. The federal government has not yet provided regions with specificguide- lines for establishing such a formula. Thus, the law stipulates two simultaneous channels for fiscal redistribution within regional budgets-differentiated tax sharing rates and a formula-based equalization fund. The coexistence of two channels does not seem justifiable and provides too much discretion for regional governments. It would be better to have single tax sharing rates (or introduce major restrictions on their intraregional variation) and concentrate all redistribution efforts through the equalization fund. In Article 9, the law states that an "actual increase in the own revenues of local budgets during the financial year, resulting from financial or economic activity on the municipality's territory, ma)' not serve as a basis for the regional government to lower the shares of that municipality in shared taxes or in transfers from the regional fund for financial support of municipalities the followingyear." This outlawsin theory the sort of punitive extraction noted below. However,it is not clear how such a prohibition will be enforced in the environment of annually changeable tax sharing norms, or how the motive for reducing a municipality'sallocations could be proved. Several amendments to the law need to be developed to further expand the municipal tax base and ensure more stabilityin the system.

56 been finished. However, it represents a major step forward and will help to avoid the most common controversies in the area of expenditure responsibilities, such as intergovernmental dis- putes on sources for school funding. It declares several functions (such as social protection, support for the enterprise sector, and R&D) to be a joint responsibility of all government levels.

Budget Equalizationand Its Consequences The variation across municipalities of tax-retention rates was noted above. No less varied are the amounts allocated to different local budgets in the form of transfers from regional "equalization funds." Existing schemes of intermunicipality budget equalization have a number of seriously undesirable consequences. In Samara, for example, the 1996 budget allocated transfers to municipalities according to a formula. Of the oblast's 37 municipalities, 27 received a positive transfer. As with tax sharing, the redistribution flowed in general from urban to rural regions. Twenty-five of the twenty-seven rural raions received subsidies, while only two of the ten cities did. The raions received about 90 percent of the total transferred, and the cities about 10 percent.

Instability Rates of revenue sharing and transfer allocation are reset yearly by the regional legislature's budget law. Sometimes, they are also revised in mid year. This makes long-term planning on the part of municipal mayors almost impossible, and depresses investment and growth. Table 3.2 presents the trend in tax sharing rates for raion budgets in Yaroslavl oblast in 1994-98. As in most other Russian regions, all 12 rural raions are beneficiaries of regional budget redistribution and have been receiving maximum possible tax shares. In contrast, all urban raions are facing a gradual decline in their tax share. The rate of this decline is not monotonic, is influenced by the bargaining power of specific municipal leaders, and hardly could be predicted in advance by municipal authorities.

Punitive Extraction The problem is notjust that revenue shares and subsidy allocations change frequently. Research suggests that they change in ways that create major disincentives for urban local governments to encourage economic growth and try to collect taxes more effectively. Municipalities are pun- ished for better revenue performance by having their allocations lowered. One study of the budgets of 35 large cities from 29 of Russia's regions in the years 1992 to 1997 found that for every ruble that a local budget's own revenues increased in a given year, about 90 kopeks were taxed away by reductions in the transfers and tax share that the superior regional government allowed.5 Thus, any increase in the effectiveness of tax collection or increase in local revenues due to growth-promoting policies would leave the local government almost no better off than before.

Soft Budget Constraints and Expenditure Misallocation Another way of putting the last point is that budget constraints are soft for local governments. The same study found that local governments that faced softer budget constraints (that is, decreases in own revenues were met with increases in shared revenues and vice versa) tended to

57 spend less on healthcare and education and probably more on inefficient subsidies to enterprises and housing. The soft budget constraints reduce the incentives for regional and local governments to achieve budget savings through the implementation of structural reforms in areas under their responsibility, including reforms of housing, utility, transportation, agriculture, and other sectors.' The incentive problem is most serious in major industrial centers, which are locations with the highest growth potential, the largest revenue base, and are the donors within their regional fiscal systems. Under the current arrangements, municipal governments in these cities are not interested in phasing out housing subsidies, introducing more effective utility regulations, accel- erating development of the market for urban land and real estate, or supporting other policies that are important notjust for fiscal performance but also for stimulating economic growth. Housing subsidization is the clearest example. Subsidies to the housing sector are by far the largest single component of subnational budgets and the largest type of subsidy remaining in the fiscal system.7 Explicit budgeted subsidies for housing and related utility services accounted for about 3 percent of GDP and 40 percent of municipal budget expenditures in 1996. At the same time, arrears of municipalities to maintenance and utility providers came to about one percent of GDP by 1996. Meanwhile the real volume of capital repair in housing experienced a fourfold decline from 1990 to 1996. The current situation provides little incentive for investment in housing and utilities by local and regional governments or by private agents. As of early 1997, households were paying only about one third of the actual cost of utilities and physical maintenance of housing. The result has been both deterioration of the housing stock and growth in social frustration. Nor are the subsidies supported by this fiscal arrangement primarily benefiting the worst-off groups in society. In fact, such subsidies increase economic inequality. Research suggests that residents in less comfortable, poorly equipped housing tend to receive less in government subsidies than those living in more comfortable housing. Bottled gas for cooking and wood or coal for heating have been much less subsidized than centralized utility service, increasing the relative costs for the generally rural housing which is not connected to centralized fuel supplies. Total housing expenditures were on average about 50 percent higher for families in housing with less access to centralized utilities. Poor families not only live in less comfortable housing, they have to pay more for it.8 The framework in which responsibility for housing and utilities was decentralized did not provide incentives for effective housing reform. Besides the disincentive for municipalities to invest in cutting costs because of the pattern of punitive extraction by the regions, two other distortions were important:

1. Local governments were encouraged to introduce a special turnover tax of up to 1.5 percent of enterprise turnover to help cover the costs of taking over housing and other social assets divested by enterprises. However, the regulation did not stipulate that proceeds from this tax had to be earmarked for housing maintenance or make receipt of the tax conditional on actual divestment. At the same time, the proceeds were not enough to counter- balance the costs to local authorities of subsidizing and maintaining housing after divestiture. The turnover tax did not provide strong incentives to local authorities to proceed.

58 2. The federal government provided municipalities with budget transfers designated to cover incremental costs of divestiture. However, the Ministry of Finance did not have the capacity to accurately assess the actual fiscal gap that divestiture would cause in each municipality. In addition, the level of transfers promised could not be sustained, resulting in the accumulation of budget arrears in the disbursement of these transfers. These arrears gave municipalities justification for delaying further divestiture. At the same time, the Ministry of Finance did not disburse these transfers direct to municipalities, but instead via the regional governments; and, in fact, the regional governments were able to divert transfers from designated municipalities to fund other needs. No effective verification mechanism was in place: municipalities and regions could report that assets had been divested and claim corresponding federal funds when in fact enterprises were still providing housing and maintenance.

Though housing subsidies have recently drawn most public attention, there is much evidence that substantial budget savings are possible in other municipal sectors such as primary education, where a recent decline in the number of students was not accompanied by adequate adjustments in the number of teachers. At the same time, the current system of school financing remains too centralized and does not provide school managers with incentives for either savings at the micro level (through utility tariffs, for instance) or for adequate reporting of their off- budget sources of financing. Crossregional analysis of subnational budgetary educational expenditures demonstrates high inter- and intra-regional variation in the level of spending per school student. Wealthier regions may spend up to 50-60 percent more per student (in comparable prices) than those that have a smaller per capita budget. Per student spending across municipalities within the same oblast may differ by 70 percent (World Bank 1998b). In addition, availability of off-budget funding in the education sector tends to correlate with the expenditure level provided by the regular budget and thus further aggravates inequality. However, the existing budgeting and managing mechanisms do not ensure that a higher level of funding in the sector results in higher quality of school education. The link between spending and quality is distorted by a variation in the student/teacher ratio. Teachers' salaries constitute the largest component of the educational budget, and when their number is growing, other factors being equal,9 this leaves less room for spending on non-wage components that are critical for education quality, including training materials and continuing education for teachers. Rural schools are the most affected. Teacher/student ratios are 20-30 percent lower than in cities, because of the much lower population density and a different age profile in rural com- munities. While budget spending per student in rural schools is currently somewhat higher than average, the difference is not sufficient to both accommodate additional wage costs in rural areas and to leave funds for improvements in education quality. The system of subnational budgeting for school education requires substantial adjustments to introduce more equalization, accountability, and adequate incentives. Regional government in Samara Oblast has pioneered several new finance mechanisms since 1998 (box 7). Another major area of subnational budget inefficiency is remaining budget subsidies to commercial enterprises, which are increasingly granted in the form of soft budget loans. It should

59 Box 7 Samara: New Mechanisms of Budget Financing in Education

Administrative assessment of the recent changes by Samara Education Administration identified the following primary causes of growing per-unit costs: (i) distortive formula for budget allocation between raions; (ii) reallocation of received educational funds by raion governments; and (iii) the small size of many schools, reflecting recent demographic trends that have not been addressed through rationalization of the school network. Starting in 1998,the regional government introduced changes to address all the above mentioned problems. NormativeFinancing. A new funding formula to allocate educational subventions to raions was introduced for the 1998 budget. The new formula is essentiallya capitation system whereby "money follows students." Oblast budget allocations are based on the number of students in each raion, with some differences to reflect factors known to affect per student costs. The differences include (i) the level of education (more money for higher grades than for lower); (ii) the type of education (for example, more for vocational schools than for general); and (iii) location, which reflects a wage and benefit supplement for rural teachers. Centralized Control.While the previous system amounted to block grants, the proposed mechanism is close to a specific grant system. Raions that receive educational subventions can no longer reallocate them for other purposes. The oblast is controlling actual spending through a sort of local treasury system. Raions may spend this money as they wish as long as such spending is within the education sector. SchoolRationalization. It is proposed to create school clusters to achieve larger class groups and to benefit from economies of scale. In particular, senior classes of small rural schools could be combined with schools in the nearest town centers.

Source:World Bank (1998b).

be mentioned that several regional governments, including those of Moscow city and Samara Oblast, use their lending programs to local enterprises as a primary justification for their own borrowing programs. De facto in these cases, regional borrowing strategies are intended to impose on corresponding budgets the functions of commercial banks that channel public debt into commercial credits. Such a strategy not only leads to serious distortions in both enterprise behavior and credit markets, but also is too costly for governments. Analysis of lending practices of individual subnational governments suggests that the rate of repayment of budget loans does not exceed 60 percent. 10

RevenueConcealment The expectation of punitive extraction by the regional government in areas of potential economic growth creates incentives for local governments to keep revenues hidden. This is done through techniques similar to those used by regional governments to trick the federal level. Various local charges can be concealed in extrabudgetary funds or special accounts, so as to increase the local budget deficit announced to the region. One city government recently abol- ished all local taxes on December 28 so that the year-end accounts would not have to reveal to regional financial officials what revenue had been raised under them during the year. They were

60 reinstated again in earlyJanuary. The result of such ploys is a high degree of nontransparency in municipal finances.

Other UnresolvedIssues Unclear Delineation of Property In some cases, the physical boundaries of municipalities are not clearly defined by law. As a result, neither are the boundaries of the tax base. For instance, the city of Orenburg does not include in its charter a detailed description of the city's boundaries. As of early 1996, the city had recently claimed eight settlements containing major taxpayers. Some of these were "more than 100 km distance from the city center and do not have a common border with it.""l Such acts of urban imperialism can increase the resources of one municipality at a cost to others.

Unfunded Mandates Local governments, which play an important role along with regional governments in providing welfare benefits and social services, complain that additional burdens are placed on them by federal legislation without corresponding resources being provided. According to the chair of the Tver city Duma, free public transport is granted by federal law to 53 categories of people, including employees of the police and prosecutor's office and various other public agencies. More than 50 percent of the city's residents enjoyed benefits of one kind or another. Other legislation provides for free drugs for various categories of people. The law on the fundamentals of local government finance prohibits the creation of such unfunded mandates, but it is not clear that such practices have ended.

Main Problemsand Policy Options A number of possible reforms to the system of subnational fiscal federalism could alleviate some of the problems discussed in this chapter. Objectives might include the following:

* The commitment of the regional authorities to stable, predefined sharing rates for each municipality, fixed for at least a three-year period. These rates should be high enough to give municipal governments a strong incentive to support local economic growth. This would reduce the uncertainty and perverse incentives municipalities currently face, reducing their motivation to promote growth of the tax base. For such a commitment on the part of regional authorities to be credible, there would need to be some built-in penalty for reneging. For instance, violation might be made a ground for cutting off certain types of federal aid, or the losing party might be given a legal right to appeal the change in court. * The introduction of norm-based formulae for the allocation of budget-support transfers to municipalities. Formulae should be based on revenue potential, population, or other demographic variables as well as climatic or geographical factors, rather than on past fiscal or economic performance, in order to avoid creating incentives to underreport or deliberately repress the latter.

61 * The enactment of regional laws clearly specifying a division of expenditure responsibilities between oblast and municipalities. * Establishment of clear boundaries for all municipalities in their charters and in correspondence with regional law. * Amendments to main legislation to expand the municipal tax base.

Federal policies to stimulate these kinds of regional reforms should include some combination of legislation (within constitutional boundaries), positive incentives (for instance, condi- tionality of federal transfers), and support for the growth of capital markets that would favor regional governments that the markets perceive as adopting sound fiscal policies.

Table 3.2 Tax Sharing Ratesfor Raions in Yaroslavl Oblast, 1994-98, Percent of Total Collections

Raion VAT PIT CorporateProfit tax 94 95 96 97 98 94 95 96 97 98 94 95 96 97 Urban raions: Yaroslavl-city 12.5 12.5 12.5 12.5 12.5 100 100 100 100 100 12.5 13.5 13.5 13.5 Yarislavl-suburbs 25 5 25 9 10 100 100 100 100 89 22 22 22 22 Rybinsk 25 25 25 25 25 100 100 100 100 100 12.6 13.1 13.1 13.1 Rostovskiv 25 25 25 22.8 22.8 100 100 100 100 100 22 22 22 21.2 Pereslavl 25 25 25 19.7 19.7 100 100 100 100 100 22 22 22 14.6 Uglichskiy 25 25 25 25 25 100 100 100 100 100 22 22 22 22 Tutaevskiy 25 25 25 18.1 18.1 100 100 100 100 100 22 22 22 17.6 12 rural raions 25 25 25 25 25 100 100 100 100 100 22 22 22 22

Source:Yaroslavl Oblast administration; annual budget laws.

Notes

1. Information from Ministry of Finance. 2 Samara Oblast, law "On the Consolidated Budget of the Oblast and the Oblast Budget for 1996," January 1996. 3. Institute for Local Government and Public Service (1994), p.18 5 . 4. Treisman, interview with Alexander Belousov, mayor of Tver, August 1997. 5. Zhuravskaya (1998). 6. WTorldBank (1998a). 7. World Bank (1998a). 8. World Bank (1998a) 9. In Russia teacher salary levels are regulated by the federal government and in general are out of control of regional authorities. 10. Institute for Urban Economy (1998), p.30. 11. Institute for Urban Economy (1998), p. 1 9 .

62 4. Reshapingthe SubnationalBudget Process

The way in which budgets are drafted, enacted, and executed at the regional and municipal levels leaves many opportunities for improvement. Different aspects of the budget process can affect both macroeconomic outcomes and microeconomic incentives for entrepreneurial activity. Certain procedures may encourage rent-seeking and universalistic "log-rolling," while others may make possible more rapid fiscal adjustment in the face of external shocks.

Importanceof the Budget Process Recent research suggests that differences in the way budgets are enacted can have important effects on fiscal stability. For instance, Alesina, Hausmann, Hommes, and Stein find that among Latin American countries, "the nature of budget procedures strongly influence fiscal outcomes" .' Such effects are as likely to be important at the subnational as at the national level. Budget procedures differ in countries of the world-and, within some countries, between regions and municipalities. Academic analysis has focused on three key components: laws that establish numerical targets for budget deficits, such as balanced budget laws; procedures for preparing and voting on the budget; and transparency of the budget document, along with all preparatory documents and execution reports.2 States in the United States differ on the first component; some have strict and others far more lenient limits on their ability to run deficits. Research suggests that stricter restrictions do lead to lower average deficits and faster responses to shocks.3 On the other hand, balanced budget laws make it impossible to smooth the path of taxes and spending in years of peak or trough of the business cycle, or to engage in Keynesian expansions. Rules requiring balanced budgets can also be circumvented by-and may even encourage-creative accounting. Other possible rules can include the imposition of a debt ceiling. On the procedures for voting on the budget, some empirical research suggests that fiscal discipline is enhanced if voting is divided into two stages and the legislature votes first on the aggregate revenue, spending, and deficit limits, and only after that on the allocation of funds among specific spending programs.4 Procedures also differ in the extent of authority given the budget's drafter (at the national level, the finance ministry or more broadly the government; at regional level, the regional finance department) to refuse to consider amendments from other ministries or from members of the legislature and to insist on an up-or-down vote. Studies suggest that procedures that centralize control of the budget under the ministry of finance or prime minister are associated with lower primary deficits. The third issue-transparency of the budget document-is itself quite transparent. The more complicated and opaque are budget laws and regulations, the less effective will be controls over them.

Main Problemswith Subnational Budget Process On these points and various others, common practice in drafting, adopting, and executing budgets at the regional and municipal levels in Russia suffers from serious deficiencies.

63 Budget Coverageand Classifications

Russian budget classification does not fully correspond to international practice. It does not distinguish properly between (i) budget and off-budget liabilities; (ii) between current and capital revenues and expenditures; (iii) between budget expenditures and deficit financing; and (iv) between debt service and debt repayment. All these deficiencies create major problems for efficient budget management. Lack of reliable budget information makes it difficult for municipalities to follow good budget planning and execution practices, including development of an adequate investment and borrowing strategy. For investors, lack of information hampers proper evaluation of the government's fiscal position, including comparative analysis of various municipalities, and also complicates legislative control over execution of the approved budget laws. There are also numerous problems with the functional classification, which for example makes it difficult to provide adequate accounting for budget subsidies and transfers to both households and the enterprise sector. Reported revenues can also be reduced through misclas- sification. Various charges or taxes that are nonrepayable and should therefore be classified as revenues are often instead classified as sources of financing, which leads to larger reported deficits. Probably the most serious problem is the freedom regions and municipalities enjoy to conceal budgetary operations in extrabudgetary funds and accounts. Such freedoms can be used to misreport official revenues and inflate the declared budget deficit in order to attract financial aid from higher levels. Any regional administration can organize its accounting such that revenues show up in extrabudgetary funds or accounts not included in calculating the deficit, while spending is all reported in the main budget. In contrast to other countries, where extrabudgetary funds are collected primarily from user fees and their use justified on the grounds that they improve incentives for service delivery, in Russia these funds usually accrue through a special tax or duty imposed on the largest local enterprises, which are frequently exporters. In 1996, the Siberian Republic of Sakha ran one of the largest deficits in the country-2.4 trillion rubles, amounting to 62 percent of budget revenue or 9.2 percent of gross regional product. 5 In fact, almost half of the deficit was financed by loans from off-budget Republican agencies at zero interest rates. In other words, one part of the regional administration was lending to another. Had all the off-budget agencies been included in the Republican budget, the deficit would have been much smaller. Municipal governments may also conspire with enterprises to conceal profits during the months when shares of profit tax are negotiated between municipal and regional governments. One city government reportedly abolishes all local taxes for a few weeks at the end of the reporting year so that revenues derived from them do not have to be reported to the regional administration, justifying an increase in demands for regional assistance for the next year's budget. Some regions keep receipts from the issue of certain securities in off-budget funds, and do not include them among sources of financing of the budget deficit. Others do not include borrowing within the budget. In addition, loan guarantees extended by the budget are often not included in any way, making it difficult to calculate total commitments. Regional governments often have to make good on large proportions of such guarantees, using budget funds.

64 Unclear Role of the "Minimum Budget"

Legislation includes the concept of a "minimum budget" for local governments. For instance, the law "On General Principles of Local Self-governance" states that local budgets should be provided through tax sharing arrangements with amounts sufficient to cover their minimum budget expenditures. The idea is to ensure that local governments can afford the provision of essential services to every Russian citizen at a minimum acceptable level. It is assumed that that the minimum budget estimates have to be based on federal and regional social standards, taking into account both quantities of services provided and the unit costs of their provision. However, these standards have never been developed and in reality budget planning is based on a system of average expenditure norms approved by regional financial departments and imposed on municipalities for the purposes of their budget planning. The major deficiency of such norms is that they tend to follow past budget allocation trends. Municipalities with more developed networks of public services become the primary beneficiaries of the system, which tends to allocate, for instance, educational funding based on the number of schools but not on the number of students. Transition to a more efficient method of budget allocation, such as per capitation in education, is proceeding quite slowly and has so far been accomplished by only a few regions. Regional officials seem to realize the need for more efficient budget systems, but even in the reform-oriented regions there is a sense that such reforms should be aggressively pushed by the federal government through some centrally selected systems and tools. The draft Budget Code does not contain sufficient clarification on this issue. Budget Execution Three problems particularly affect execution of regional and local budgets. First, actual spending may differ from that approved by the legislature in the budget. Large divergences have been quite typical. This partially derives from the weak local capacity to develop adequate forecasts of their expected revenues combined with unpredictable disbursement patterns of federal transfers. Inaccurate spending estimates are also a reflection of a weak budget execution process, wherein local executives may modify spending priorities during the fiscal year, often in response to pressures from various interest groups. For instance, the 1995 Khabarovsk budget indicated an allocation of 4.6 percent of spending for housing, but execution figures show it was actually allocated 20.6 percent. The corresponding figures for Voronezh Oblast were 2.7 percent and 18.6 percent, for Kaluga Oblast 2.0 percent and 21.7 percent, and for Leningrad Oblast 6.2 percent and 33.9 percent. Spending on transport also tended to outstrip regional budget allocations. On the other hand, agriculture, industry, and construction spending generally fell short of allocations. 7 The second major problem is that large proportions of both revenue and spending parts of regional and local budgets are executed in noncash forms (see separate section below). Third, various regional governments and many local ones have not yet changed over to a treasury system of execution. Instead, "authorized banks" are used to manage budget accounts and dispense allocated funds. Numerous anecdotes suggest that such arrangements can be vitiated by the inherent conflict of interest between the banks and the regional government. Banks are

65 said to delay-even, at times, to divert-funds from their budgeted purpose in order to use them en route to generate profits which are not fully shared with the government.

Cashand Debt Management Systems of accounting and reporting on levels of subnational debt are inadequate. To a great extent, this reflects the above-mentioned problems with budget classification. For instance, there is no single methodology for calculating regional budget deficits and debt service costs, and for determining the extent of government indebtedness. Substantial liabilities are not reflected in budgets and not reported in any systematic way. In most regions, responsibility for public borrowing and accounting of government debts are not centralized. Several units in the regional administration are allowed to engage in short-term borrowing. Debt management is furiher undermined by the absence of approved debt limits in most regional budget laws. Revenue forecasting and cash management is generally quite weak, which makes timely debt service more expensive since larger cash balances must be kept on hand. The high volatility of revenue flows and large share of noncash revenues additionally increase risks of defaults. The law "On the Securities Market" of April 1996 requires administrations issuing securities to report to the registration body any substantial facts affecting their financial and economic activity within five working days. Hlowever, many administrations report such facts only with delays, or do not report them at all, and release information about the placement of issues with delays, violating the law. The proceeds from issues are often transferred by the agent to the administration's account only after a delay.

Reporting, Disclosure, and Audit The transparency of subnational bucdgets is low. The annual budget of several hundred million dollars is usually developed and presented to the local legislature in a consolidated form without detailed description of budget appropriations, and usually is not longer than 15 pages. The executive branch has full discretion for specific allocation within generic budget items, including discretion for providing various subsidies to specific private and quasi-private entities. Budget laws rarely provide specific mechanisms for ensuring the accountability of the executive for compliance with the law. While the law is usually published in the press, there is no requirement for publishing accounts of budget execution throughout the year, especially in comparison with the passed law. The system for auditing regional budgets is not always clear and universally accepted. In Samara Oblast, for example, budget execution was monitored by local Ministry of Finance Audit Department bodies. However, during 1992-95 little auditing was done there since the authority of higher levels to audit lower levels was disputed. In addition, oblast administrations carry out their own routine monitoring of the use of targeted budgetary funds, but there are no general requirements for disclosure of the results of such monitoring.

Noncash Budget Execution The 1991 federal law on the budget system and budget defined the budget as the "manner of formation and expenditure of monetary resources for the fulfillment of functions of the organs

66 of state power." The use of nonmonetary resources for budget purposes would seem to be dis- allowed, but in fact, budgets at all levels and especially at the local and regional levels execute a variety of spending and revenue functions by means other than cash transactions. One recent study examined the use of nonmonetary resources in the consolidated regional budgets of 55 regions, containing more than half the country's population and contributing most of the country's tax. It found that on average about one third of revenue payments were made in media other than money, while about one quarter of expenditures were in nonmonetary forms.8 The use of nonmonetary resources varied quite drastically between different regions. In a few-such as Moscow city, St. Petersburg, Krasnodar, Ingushetia, and Taimyskiy AO-nonmonetary tax payments were less than 30 percent (table A6). In others-such as Altai, Buryatia, Evenkiiskiy AO, Kursk, Kurgan, and Yamalo-Nenetskiy AO-they constituted more than 70 percent of total tax payments to the consolidated regional budget. Explaining this variation is not straightforward (see the analytical annex for a preliminary analysis), but one pattern does emerge from a cursory review of the data. Regions of the far north tend to have a high share of nonmonetary payments in budget revenues, but a low share in budget spending. Presumably, such regions tend to use raw material payments to barter with other regions for import of manufactured goods and food. This may constitute a way that raw material producing regions avoid sharing tax with federal budget. Consider, for instance, Yamalo-Nenetskiy AO, the country's preeminent producer of natural gas. An amazing 82 percent of the region's budget revenues were collected in raw materials, but none of the region's spending was in nonmonetary form. Presumably, the region was able to sell the tax payments it received in gas or other raw materials, and could then use the proceeds without having to share them with the federal budget. Similar divergences between forms of collection and expenditure appear in the statistics for diamond-producing Sakha and metal-rich Chelyabinsk. Noncash budget execution has a number of drawbacks. It is highly inefficient, forcing government agencies to sideline in wholesale trade. It leads to vertical imbalances in fiscal receipts. Because the federal government is less able to deal with nonmonetary payments than regional or local levels, barter becomes a means for lower level governments to avoid sharing taxes with the federal budget. Noncash payments also distort priorities of budget policy by expanding the share of items that are easier to pay for in money substitutes (such as utility payments) at the expense of wages and cash benefits. The use of securities and bills of exchange for budget execution makes it difficult to calculate actual revenue, spending, and deficit levels, since the market values of such items change and accounting may be done in nominal rather than discount- ed terms. Other drawbacks of noncash budget execution are distorted fiscal statistics, inaccurate analysis of fiscal developments, and hampered improvements in both budget planning and evaluation. In part, the problem derives from distorted, above-market prices, which are used in noncash transactions. In addition, because many noncash (primarily mutual offsets) operations are executed after the end of the fiscal year, their outcomes have never been properly reported. For instance, in March and April of 1997, the federal government conducted a large offset operation, in which it cleared mutual debts for 35 trillion rubles (1.6 percent of GDP). This amount was reported as 1996 federal budget revenues and expenditures and was included in the final

67 report for 1996 budget execution published in fall of 1997. On the expenditure side, about a third of these funds (10.5 trillion rubles) was reported as part of 1996 federal transfers to regions, which constitutes about 20 percent of total federal transfers for that year. However, the Ministry of Finance has never published details of the specific regional allocation of this portion of transfers. As a result, the ultimate picture of cross-regional transfer allocation for 1996 (as well as for 1997) remains unknown, which makes the ministry's analysis, including the one conducted in this report, less reliable.9

Main Types of NoncashExecution

Tax Paymentsin Form of Goods and Services

These may be subsequently sold by regional governments, but they can also be used to discharge their spending obligations in kind. In the Republic of Komi, for instance, a fund called "Northern Resources" was set up by decree of the Republic's head of state to collect arrears to the Republic and municipal budgets as well as to the road fund in the form of goods and raw materials."'

Money Surrogates Both taxes and expenditures are often paid in the form of bills of exchange, or veksels. This occurs in three main forms. First, the regional government may itself issue a veksel. It sells the veksel to a bank at a discount on the nominal value, which then sells the veksels to its clients, who can use them to pay their taxes at the bill's nominal value. Second, veksels may be issued by a commercial bank in agreement with the administration. The administration then accepts these bills in tax payments and uses them to pay for expenditure on goods and services. They circulate as a parallel money supply. Third, the issuer may be a regional utility or major company. The company pays its taxes in the form of its own veksels, which the government then uses to pay for state orders from the company. Or utilities pay their taxes in their own veksels, the government uses these to pay for state orders from companies, and the companies then use them to pay their utility bills. As was discussed in Chapter 2, by the end of 1997, the stock of government-backed veksels in circulation amounted to about 10 billion rubles. The second scheme-bank-issued veksels-can be found, for example, in Irkutsk, Stavropol, Moscow Oblast, and Nizhni Novgorod Oblast.'" A risk is involved in such schemes, namely, the failure of the issuing bank. For instance, the administrations of Kemerovo, Murmansk, Nizhny Novgorod, Perm, Sakhalin, Chelyabinsk, and other regions accepted as tax payments the veksels of Tveruniversalbank. Each suffered financial losses when the bank was declared bankrupt. 12 A federal law "On Bills of Exchange and Promissory Notes" of March 1997 attempted to limit the growing use of veksels. It effectively forbade the issue of veksels by government administrations except in a few specified circumstances. However, this did not prohibit the second and third schemes discussed above, which is the use of bank or company veksels by regional and local governments. The Accounts Chamber Report of November 1997 found that a number of regions-Karelia, Kalmykia, Adygea, Mordovia, Bryansk, Tambov, Oryol and Leningrad Oblasts, and Yamalo-Nenetskiy AO-had continued to issue veksels freely even after the prohibition

68 went into force. Some regions-Sverdlovsk and Nizhny Novgorod Oblasts and the Republic of Dagestan-were continuing to issue paper monies.

Write-offs The regional government, rather than paying an enterprise for goods or services received, directly "writes off' their value from that enterprise's tax bill.

TaxExemptions Another way to provide benefits to particular recipients without providing money up front is to confer a tax exemption. By 1996, nearly all regions had created systems of tax breaks. These usually aimed to support social policy, particular economic sectors, or to stimulate economic growth in general. Though according to federal law regions are only permitted to give tax breaks on the part of shared taxes that accrue to them, in practice regions also gave exemptions to the federal tax obligations of local taxpayers.13 For instance, in Yaroslavl Oblast enterprises were allowed to write off 10 percent of pretax profits for financing social infrastructure. 14

ReformsIncluded in the Draft BudgetCode The Budget Code, if approved, would greatly clarify the framework for the budget process at all levels of government. Major specific improvements are as follows:

(Clarification of the respective roles of legislative and executive branches * Clear description of stages in budget preparation and approval IDefinition of the respective roles of various agencies in the process of budget preparation * Streamlining of procedures for budget adjustment during the process of budget execution in response to changes in the economic environment * A major move towards budget consolidation through (i) a ban on all off-budget activities (except several federal extrabudgetary finances related to specific social protection functions), (ii) imposing universal reporting requirements for all budgets extrabudgetary finances, (iii) mandatory consolidation of all off-budget (commercial) proceeds of public sector entities * A mandatory switch to full-scale treasury budget execution, including stronger control over both commitments and disbursements * Requirements for openness of the budget process as well as disclosure of budget information * Guidelines for developing multiyear budgeting at all government levels * Limits on budget subsidies and transfers to private sector enterprises * The elimination of major problems in the existing budget classification system and con- vergence toward international standards

Implementation of the Budget Code will require numerous changes in budget rules and procedures. Determined effort by the authorities will be needed to put new principles into effect. For this reason, it was recommended to the Government to establish a special task force to promote and oversee implementation of the code in the central government, sectoral ministries,

69 field agencies, and subnational governments.' 5 The task force should consult with appropriate members and staff of the Duma to ensure an orderly transition to the new system. One of the early tasks should be to survey the resources and competence of ministries, regions, and local governments to implement the provisions of the code.

Main Problemsand Policy Options Improvements in budget management at the subnational level are urgently needed. To be successful, many of the necessary reforms need to be introduced simultaneously. Possible objectives of reform issue directly from the problems discussed in this chapter."5 A first set of objectives relates to regional legislation on subnational budgets. Where this is not already the case, regions need to adopt laws establishing formal procedures for the preparation, enactment, execution, and auditing of the regional budget. Localities should be encouraged to adopt similar documents. These laws should define the procedure for enactment of and any subsequent adjustment to the budget, as well as defining the roles of the various parties involved. Such budget laws or procedural rules might include some way to establish limits on the total debt permitted or on increases in the debt (though not necessarily a balanced budget requirement). The regional laws on the budget process should require timely and complete publication of the annual budget laws, as well as timely, complete, and accurate publication of reports on budget execution. In the interest of transparency, governments could be required to disclose information on their overall stock of liabilities, including budget arrears and guarantees, at least once a year. Additional objectives relate to possible improvements in the budget process. Where possible, regions might be encouraged to invest in expanding their capacity for better revenue forecasting and for basing annual budgets on more realistic expenditure commitments. This should help to reduce financial and political losses associated with budget sequestration and the accumulation of budget arrears. Annual budgeting should be supplemented by multiyear plans, especially for capital spending and borrowing strategy. Budget classifications should be brought into conformity with international Government Financial Statistics (GFS) standards, and better accounting of the deficit and sources of its financing should be an immediate priority. Finally, regional and municipal extrabudgetary funds should, with a few clearlyjustified exceptions, be consolidated in the regional and local budgets. Third, much room remains for improvements to existing systems for budget execution and audit. Both regional and local governments should be encouraged to move to treasury systems for budget execution, either by setting up their own treasury or by contracting with the regional branch of the federal treasury. This will improve cash management and strengthen control over both budget commitments and disbursements. During the transition to the treasury system, all budget accounts held in commercial banks should be regularly audited and should receive no less than the prevailing market rate of interest. For reasons discussed in this chapter, noncash forms of budget execution-tax payments in kind, veksels, offsets, and so forth-should be phased out. At the same time, the system of debt management could be improved. Government officials' authority to accrue debt should be made transparent and centralized. Governments need to develop a capacity for accurate measuring of future debt service costs relative to their

70 budget capacity and for assessing the corresponding risks. In addition, budgets at all levels and all extrabudgetary funds should be subject to annual audits by independent professional auditing companies. The role of the federal government in encouraging such changes may-as in other areas of budgeting reform-combine the provision of technical assistance with the creation of positive incentives (for instance, by making transfers or access to international capital markets conditional on meeting specified requirements.) Its contribution should include developing supporting regulations, providing training and other technical assistance to regions, and developing its own monitoring capacity to be able to identify the most severe violators of rules and norms that become effective after the approval of the Budget Code. The experience of St.Petersburg suggests that local political will, adequate incentives, and properly chosen technical assistance are major factors that help to expedite these kinds of reforms (see box 8).

Box 8 St. Petersburg:Effective Reforms of Financial Management

On the advice of the World Bank and other technical advisers (EBRD,TACIS, and the Know-How Fund, among others), the city of St. Petersburg developed a comprehensive plan to improve its financial management system in 1997.This was approved by an order of the city's governor in mid-1997.

The action plan contained policy and institution-building measures in the following areas: * Improving budget preparation * Strengthening expenditure management and control, including setting up a municipal treasury to centralize expenditure, debt, and risk management functions * Restructuring of municipal services, including those in utilities, housing, and transport * Reform in subsidy allocation policy to replace indirect price subsidies with direct subsidies to low income families * Establishinga sustainable borrowing program * Development of a multiyear investment program * Increased transparency in government procurement Demonstrating progress in the implementation of this plan was made a condition of EBRD assistance in the placement of St. Petersburg's Eurobond. This provided an additional incentive to begin implementation rapidly. In addition to the fiscal management action plan, the city administration and legislature have approved several other important regulations. They include the following:

(i) A medium-term financial plan for 1998-2001,which provides a set of benchmarks for budget planning and outlines measures in areas of tax and budget policy that will support plan implementation. This wasapproved by the city legislature inJune of 1997. (ii) An investment and borrowing strategy (approved by the governor in November of 1996). (iii) Amendments to the local tax law (passed by the city legislature in November and December of 1996). (iv) A strategic development plan (approved by the City Conference in November 1997). The strategic development plan contains an important fiscal reform package.

(Box continueson next page)

71 (Box 8 continued)

As a result, by early 1998 the city had successfully achieved the following objectives of its fiscal management action plan: Launching the Municipal Treasury The local treasury was established in June 1997, eliminating the previous system of separate bank accounts for each local government committee and budgetary organization. This system was expected to be fully operational-and to provide centralized control and cash management- by the end of 1998. The treasury system includes centralized debt management and risk management procedures. Enhancing Budget Planning and Achieving a Balanced Budget A rolling four-year financial plan has been developed. In June 1997 the city's legislative assembly approved the "Principal Performance Indicators of the Budget for Years 1998-2001." Special attention was devoted to financial ratios to ensure strict financial discipline. For the first time in the post- Soviet period, the government of St. Petersburg submitted a truly deficit-free budget, for 1998. Debt Restructuring and Debt Strategy In order to refinance short-term debt with longer maturities, on June 13, 1997 the city issued $300 million worth of five-year Eurobonds. The successful placement of these helped to reduce substantially the overall costs of debt service. At the same time, the city debt strategy emphasizes the importance of maintaining the stability of the municipal bond market. Strengthening Investment Planning The recession in St. Petersburg since 1990 has resulted in substantially reduced volumes of capital spending. The city intends to increase its capital spending in 1998 to approximately $186 million. For the first time, the Capital Investment Program for 1998 was approved as a part of the 1998 budget document. New approaches have been introduced into the capital expenditure budgeting process, such as increasing the share of projects with a real rate of return in the capital budget and increasing the share of investments in the municipal infrastructure. Implementation of a Modern Financial Reporting and Auditing System A new budget classification system was introduced, based on newly approved classification principles and accounting standards. In addition, new reporting procedures are in place, which provide better budget transparency and help to enhance budget analysis, forecasting, and planning.

Notes

1. Alesina, Hausmann, Hommes, and Stein (1996). 2. Alesina, Roubini, and Cohen (1997), p.23 6. 3. Alt and Lowry (1994), pp.811-28 ; Poterba (1994), pp.3 29 -3 7. 4. Alesina, Roubini, and Cohen, p.237. 5. Kassabiyeva and Koulikov (1998), p.21 . 6. Accounts Chamber of the Russian Federation (1997). 7. Ekonomicheskaya Politika Subyektov Rossiiskoi Federatsii, November 1996, p.27 . 8. Khurtsevich (1998). 9. All statistical results presented in this report that relate to transfer dependence of individual regions during 1996-97 derive from the data on region-by-region allocation of the transfers that represent only 80 percent of their total amount. 10. Khurtsevich (1998, p.2). 11. Ekonomicheskaya Politika Subyektov Rossiiskoi Federatsii, November 1996, p.10 7 .

72 12. Ekonomicheskaya Politika Subyektov Rossiiskoi Federatsii, November 1996, p.18. 13. Ekonomicheskaya Politika Subyektov Rossiiskoi Federatsii, November 1996, p.83 . 14. Titov (1997), p.7. 15. Moon (1998). 16. Some of these proposals are developed in greater detail in Dobson (1998).

73 5. Conclusion:Short-Term Priorities for Reform

Experienceof EasternEurope

International experience suggests the importance of attention to the organization and practices of budgeting at the subnational level for macroeconomic stabilization, growth, and public sector efficiency. Particularly relevant to Russia's current problems are the experiences of the post-communist countries of Eastern Europe in reforming subnational finance. Almost all of the former Eastern Bloc countries inherited government structures that were formally highly centralized. They all attempted to decentralize fiscal power and responsibilities to the subnational levels. Many of the problems faced were common to all countries. Expenditure assignments between levels of government have been imprecise or contested. Legislation has been unclear and unstable. Local governments have complained of unfunded mandates being pushed downward. Main taxes have been shared between levels, and local governments have remained fiscally dependent on higher levels. In many countries, intergovernmental transfer svstems have-by relating current transfers to past revenues-tended to discourage improvements to local tax collection effort. Overall, reforms of subnational finance in the East European countries appeared to succeed more quickly, and with less political controversy, than those in Russia. This is true of rationalization of local expenditures, elimination of subsidies and budget arrears, and increasing the transparency and predictability of the fiscal environment The obvious difference, which explains the greater complexity of these problems in Russia, is the latter's federal structure. A politically and constitutionally weaker central government attempting to reform subnational finance must depend to a greater extent on positive incentives. This is a majorjustification for the strategy of conditional provision of technical and financial assistance proposed in this report.

Federal Government'A New Emphasison RegionalFinance Reform Most attempts at fiscal reform to date have focused on changes at the federal level and in the system of intergovernmental transfers between center and regions. Improvements in budget management at the regional and local levels have received less attention. As discussed in Chapter 3, the 1997 law "On the Financial Foundations of Local Government in the Russian Federation" made a number of improvements in principle, though not all of these have been implemented in practice. It prohibited the devolution of unfunded mandates. It established minimum shares of various shared taxes that the regions must allocate to municipalities, though it did not require that each municipality receive this minimum share, only that the condition be met on average. It prohibited the lowering of municipalities' tax shares or transfers if they collect greater own revenues than anticipated. The law also established the right of municipalities to set up their own tax services to collect municipal taxes, as well as their own treasuries. It did not, however, require stable rates of tax sharing.

74 The Budget Code is expected to have a major impact on the quality of public finance management in Russia, including at the subnational level. The code contains major provisions in the areas of budget preparation, execution, and audit; budget consolidation; debt management; expenditure sharing; and several other provisions. A draft Tax Code, if approved by the parliament, would streamline tax administration, possibly helping to improve revenue performance at all government levels. It would eliminate numerous small local taxes and grant local governments the right to introduce a sales tax, as well as consolidating the currently segmented system of asset taxation into a single real estate tax. The code would also drastically reduce the number of existing exemptions on the Personal Income Tax, thus expanding the tax base of local governments. In the context of the financial crisis that threatened the ruble's stability in mid-1998, the government has taken a number of additional initiatives. Most notable is a presidential decree of May 5.' This decree required all regions that hope to get additional budget assistance to sign agreements with the federal government on the rehabilitation of government finances, establishing conditions for future federal budget aid. The federal government would only roll over budgetary loans for clearing wage arrears debt to those regions that signed such agreements, and future federal budget assistance other than equalizing transfers were also to be conditional on signing and implementing such an agreement. In a dramatic move, the decree suspended all bilateral agreements previously signed with regions that contradicted parts of thel998 budget law. In the required agreements, the regional governments would commit themselves to major adjustments of their fiscal policy, including elimination of tax offsets, increase in cost recovery in housing and utility, strengthening control over energy consumption in the public sector, reviewing its investment policy, and so forth. Several of the GOR's initiatives in subnational fiscal reform correspond closely to those suggested in this report. However, much more needs to be done to address adequately the numerous distortions that have accumulated in this area. The next section suggests a number of directions in which the GOR's strategy should be expanded and modified.

Medium-TermAgenda for Reform A number of important problem areas remain in subnational budgeting which reforms could usefully address. First, features of existing arrangements reduce the incentive for subnational governments to actively seek to increase the size of their tax bases (and, simultaneously, the health of the local economy). The current formula for federal transfers to the regions favors those that collect lower own revenues. Many regions use similar formulae to distribute aid to municipalities. As discussed in Chapter 3, empirical evidence suggests that tax shares and transfers to municipalities are reduced when these municipalities increase their own revenue collection. Besides the problem of redistribution from regions and municipalities that collect revenues or stimulate tax base growth more effectively to those that do so less effectively, current arrangements are characterized by great instability, which reduces the ability of subnational governments to plan ahead. A second problem area is the rapid growth of regional debt before a reliable regulatory framework is in place, and the dangers this poses for macroeconomic stability. However insis-

75 tently the federal government claims not to be liable for regional and municipal bonds or other debts, the risk that a major default would undermine investor confidence throughout the economy will create pressures for federal bailouts. Already, the federal government is under pressure to assume responsibility if regions fail to service their agrobonds. Limiting the growth of this debt, or increasing the accountability of the borrowers while protecting responsible members of the market, is essential. Third, lower level governments continue to complain about unfunded mandates-the imposition of spending requirements on them by higher level governments, without the provision of corresponding funds. More broadly, the division of expenditure responsibilities between federal and regional, and especially between regional and local governments, remains unclear in many respects. This reduces the ability of local and regional electorates to hold public officials accountable for poor service provision. All levels of government are free to blame the others. In part because of the lack of clarity about responsibility for provision of particular public services, subnational governments continue to fund inefficient and excessively costly measures-such as subsidies for loss-making enterprises and inefficient heating of public housing-that would be hard to justify if their true costs and benefits were public knowledge. Fourth, transparency is undermined and transaction costs increased throughout the fiscal system by the dramatic increase in tax arrears to budgets at all levels and by the widespread use of noncash means of payment and surrogate monies. Arrears and noncash payments make accounting extremely complex, and render published accounts misleading. They also erode payment discipline and further soften budget constraints. The lack of transparency makes it even less likely that local voters will be able to effectively monitor public officials' use of funds and register approval or disapproval at the polls. Technically, each of these four sets of problems might be addressed by more than one type of policy. The creation of stable incentives for lower level governments to "grow" their tax bases and harvest them effectively might be accomplished by the introduction of stable formulae for tax-sharing and transfers at each level, such that each unit kept a large share of the marginal tax ruble obtained. A more radical proposal would involve eliminating the current system of sharing the revenues from the main taxes (such as VAT and profits tax) and assigning each tax base to just one level of government. The key problem in either case is how to make the commitments of governments to stable rates credible, and how to interest governments in replacing the schemes for interunit redistribution that they currently use for their own political benefit. The expansion of local and regional debt might be addressed by additional federal legislation, the creation of incentives through federal conditional aid, or by market discipline. In different countries, systems for regulating subnational debt combine these types of measure in different proportions. Finding the appropliate combination for Russia will require considerable attention to the details and political negotiation. International practice also varies somewhat in how expenditure responsibilities are allecated to different levels of government. Numerous measures might be suggested as possible ways to reduce tax arrears and noncash payments, from legislation banning such practices to insistence that arrears be securitized and traded, in the hope that markets would impose discipline better than the state. While the latter option appears to the authors of this study dangerous considering the potential risk to fledgling debt markets, choosing the appropriate mix of strategies remains a task for the actors involved.

76 The successful introduction of reforms in all of these areas will require concerted action of both the federal and subnational governments. As discussed in Chapter 1, the federal government has a number of choices in how to attempt to stimulate such reforms. An obvious role exists for federal legislation, but equally important given Russia's federal structure will be the selective, measured use of positive incentives to encourage specific reforms. By making federal aid conditional on demonstrable performance, the center can increase the motivation of regional decisionmakers to implement efficiency-enhancing changes. Finally, in any system, some aspects of regulating fiscal behavior are advisedly left to the discipline of the market. Such discipline may become more important in Russia as capital markets develop and acquire greater capacity for evaluating risk.

Notes

1. Presidential Decree No.495, "On Additional Measures to Ensure Payment of Wages to Budgetary Workers and on Rehabilitation of Government Finances."

77 I Annex Table 1 Industrial Output, Investment, Unemployment, and Poverty

Poverty Real induotrial outptl g,rowlth (rowvth in investments Unemployment

to the,previmr year General Unemlryment Ratioof laveragemoney Shamuof poo% to theporviom year Peroar incomoland oubeimrte lpopuhtaton,% mancror minimum, %

% % % % % % % % % % % % % % % % % % MiTI num6er 1996 to 1996 to 1995 1995 1994 1995 1996t 1994 1995 1991 1992 1993 1994 1995 1996 1990 1992 1993 1994 1995 1996 199(0 27.1 9.9 43.4 144.0 129.0 115.6 46.3 46.4 Adygeya Reptublic 97.0 78.4 76.3 62.1 97.2 74.0 25.9 109.0 119.6 56.8 64.2 57.0 1,050.0 Aginsk Biuyat AO 83.0 80,7 82.1 85.5 51.1 55.0 13.2 32.7 55.0 19.1 10.8 18.9 176.0 158.0 133.3 22.8 33.7 Altay Mrai 99.9 83.1 85.5 59.2 97.6 88.0 36.1 66.5 78.7 56.2 104.5 62.0 23.4 11.1 94.4 385.0 188.0 131.1 15.3 26.2 Altay Repuiblic 103.0 87.4 86.7 70.5 74.5 63.0 25,8 67.6 109.1 65.0 74.1 66.0 19.8 13.0 14.3 145.0 175.0 169.7 47.1 37.9 Amulr Oblast 94.0 81.9 93.5 76.4 85.5 77.0 36.2 65.7 75.2 74.2 81.9 66.0 17.7 11.3 111.8 185.0 152.0 138.3 20.8 26.9 Arkliatigel'skOblast 95.0 89.5 94.1 78.8 92.1 87.0 50.5 80.9 61.4 75.9 88.8 53.0 26.5 13.1 8.3 161.0 143.0 134.5 28.1 32.3 Astuakhan Oblast 99.5 92.5 104.3 76.0 89.0 70.0 45.5 59.2 78.7 72.0 105.2 75.0 Baslkoktostani 7.9 10.5 172.0 158.0 172.8 29.8 32.4 Repuiblic 100.6 91.5 83.7 79.2 100.0 93.0 56.7 95.8 98.0 66.4 96.8 88.0 53.1 5.5 6.9 250.0 200.0 217.2 14.1 1999. Belgorod Oblast 99.5 88.4 96.6 84.7 98.6 89.0 63.2 100.7 67.3 70.0 85.3 86.0 34.9 9.9 9.3 43.5 213.0 169.0 182.5 20.1 22.7 BryaniskOblast 92.0 81.5 81.3 65.6 87.5 76.0 26.6 71.4 54.4 62.8 71.4 57.0 31.4 13.7 29.4 154.0 122.0 124.4 33.0 55.2 BRiryatiaRepublic 88.0 85.2 100.0 73.3 94.5 94.0 48.9 79.3 80.8 62.0 98.7 80.0 74.0 34.1 8.3 11.5 164.0 171.0 173.5 28.3 27.9 _ Chelyabinsk Oblast 99.0 83.8 84.3 71.4 92.0 91.0 41.9 83.5 81.6 72.9 92.8 72.1 80.7 79.5 65.0 20.4 10.2 99.5 154.11 99.0 100.6 27.4 66.5 s Chita Oblast 87.0 79.3 81.2 78.6 81.8 93.0 33.5 67.9 8.9 5.2 23.5 250 ChbikotkaAO 92.0 89.1 87.8 83.3 80.0 98.0 47.0 46.9 66.8 46.3 62.1 99.4 79.0 31.0 9.6 49.0 173.0 145.0 141.5 23.6 27.3 Chuivashia Repuiblic 99.0 77.8 85.7 62.1 92.7 80.0 30.4 68.2 78.1 63.6 115.9 41.9 22.3 102.6 99,0 86.0 90.2 45.0 Dagestan Repuiblic 85.0 76.5 78.5 47.1 83.3 81.0 16.2 77.0 98.8 75.9 103.7 70.0 57.1 Evenk AO 93.0 90.3 108.3 82.4 78.7 55.0 32.5 63.5 49.0 383.1 61.0 Iroglusletia 67.7 32.2 9.2 16.3 223,0 170.0 187.6 17.7 32.3 Ilkuttsk Oblast 96.0 87.5 86.9 86.3 101.6 86.0 55.0 82.0 63.9 73.3 98.6 85.0 11.3 14.9 183.9 146.0 138.0 128.8 25.2 33.7 Ivanovo Oblast 98.() 66.3 87.7 66.7 78.9 89.0 26.7 55.7 60.7 72.0 70.1 66.0 Kabardino-Balkaria 37.6 14.7 25.2 136.0 128.0 136.6 36.7 42.5 Republic 94.0 67.0 104.8 48.5 100.0 80.0 25.6 49.4 97.7 78.0 96.1 104.0 21.1 9.4 17.1 213.0 155.0 166.3 21.6 26.6 Kaliningrad Oblast 96.0 83.3 82.5 62.1 90.2 83.0 30.7 65,8 117.0 60.4 72.0 63.0 39.0 7.7 19.8 457.6 138.0 100.0 106.0 37.0 60.3 Kaliykia Repuiblic 90.0 90.0 88.9 80.6 72.4 67.0 28.1 50.1 78.4 67.6 74.6 7.4 8.3 8.4 237.0 197.0 187.9 16.5 26.6 Kaltga Oblast 97.0 75.3 80.8 78.0 100.0 85.0 39.1 60.7 65.0 85.3 88.1 25.0 16.8 8.5 5.2 228.0 211.0 176.1 16.7 22.7 Kamchatka Oblast 92.0 72.8 94.0 68.3 109.3 1110.2 47.1 64.5 154.1 53.9 49.1 64.0 18.1 24.0 30.8 131.0 123.0 114.2 28.3 45,7 Karachay-Cherkessia 94.0 73.4 85.5 64.4 71.1 85.0 23.0 67.9 69.5 66.3 75.1 77.0 59.0 21.0 11.6 53.9 196.0 163.0 186.8 18.9 23.6 Kai elia Repuiblic 95.0 83.2 87.3 79.7 101.8 84.0 47.0 84.9 73.8 70.6 80.6 72.0 46.1 6.6 7.5 278,0 254.0 208.4 14.3 16.1 Kerrnerovo Oblast 92.0 83.7 90.9 87.1 100.0 90.0 54.9 122.3 78.0 68.4 98.2 20.6 11.6 12.5 184.0 153.0 163.0 21.8 29.4 Khlabarovsk Ktai 99.0 85.9 82.4 58.6 80.5 86.0 28.4 70.9 79.2 52.8 79.7 87.0 35.3 9.6 14.3 218,0 161.0 156.0 22.1 25.3 Khakassia Republic 109.0 89.9 99.0 83.5 95.1 91.0 70.1 116.5 52.2 93.9 83.5 74.0 67.0 8.3 Klianuy-MansiAO 89.0 82.0 89.0 92.3 96.7 97.0 56,3 102.2 70.0 21.2 9.3 21.2 160.0 137.0 147.6 26.3 32.0 Kitov Oblast 99.0 81.8 85.2 68.1 97.9 88.0 40.5 66.0 66.7 71.9 95.4 79.0 42.4 11.7 16.8 206.0 194.0 184.6 18.4 19.2 Komi Republic 94.0 88.3 91.6 80.3 93.4 90.0 51.3 103.2 55.6 84.2 111.2 60.0 - 172.7 Komni-PerinyakAO 108.0 85.2 90.2 61.4 115.7 93.0 54.9 60.2

(ulble continues on next Pa'ge) (Annex leble I conlinu.el)

Reailinel..tfial outputgrowth G7rowthin invetmtwrensl Unempltrment Ploverty tot)thprwio yror tothe nmomvyor y.enewl UnemploymnotRholooflaloomun7y Shwreofpoor vwofnry itoo mioimunz,po07d .t%itoe Ioooeo

% % % % % % % % % % % % % mOo nunder % % % % % 1996to 1996 to 1991 1992 1993 1994 1995 1996 1990 1992 1993 1994 1995 1996 1990 1995 1995 1994 1995 1996 1994 1995

Ko-yakAO 93.0 62.4 139.7 65.4 83.0 68.0 29.9 36.5 47.0 162.5 Kostomiia Oblast 99.0 77.8 87.0 65.7 84.1 82.0 30.3 57.3 78.8 73.0 70.6 77.0 17.9 8.8 29.3 191.0 182.0 172.7 20.9 30.5 Krasnodar Krai 99.0 82.8 89.0 82.2 90.0 85.0 45.9 80.7 104.3 71.5 88.2 76.0 40.3 8.7 7.9 215.0 175.0 195.0 23.7 32.4 Krasnoyarsk Krai 97.0 85.6 85.5 83.1 100.0 98.0 57.8 90.1 68.4 71.4 104,4 88.0 40.5 9.1 18.2 218.0 246.0 238.7 18.3 24.2 Kurgan Oblast 96.0 75.0 93.1 65.7 90.9 83.0 33.2 52.1 89.8 67.5 81.2 72.0 18.5 8.5 30.2 150.0 113.0 125.6 33.2 50.4 KoirskOblast 98.0 86.7 90.6 74.0 101.8 92.0 53.4 80.7 76.0 58.8 91.9 77.0 25.5 6.0 10.1 199.0 179.0 167.0 17.7 20.2 LeoiingradOh6Obast 99.0 88.9 88.6 75.6 103.4 93.0 56.7 80,8 69,7 75.3 106.3 75.0 33.8 11.0 67.7 180.0 146.0 172.0 24.3 29.1 LipetskOblast 91.0 90.1 86.6 81.7 113.8 97.0 64.0 112.2 70.6 59.6 94.8 102.0 45.7 6.3 3.2 213.0 181.0 225.9 18.7 18.6 Magadani Oblast 97.0 91.8 89.9 87.5 87.1 87.0 53.1 69.4 67.2 52.4 68.6 80.0 13.4 10,4 7.4 169.0 202.0 166.9 21.4 24.6 43.2 Matiy El Repuiblic 95.0 73.7 94.3 75.8 84.0 83.0 34.9 69.9 72.8 66.0 77.6 72.0 18.7 11.2 57.3 177.0 120.0 105.7 22.1 MorldoviaRepuiblic 102.0 80.4 92.7 55.3 81.0 83.0 28.2 61.8 61.8 55.1 93.5 91.0 17.9 10.2 25.2 150.0 132.0 117.4 24.2 34.7 Moscow City 98.0 76.5 88.0 77.3 82.4 70.0 29.4 85.7 121.6 107.6 93.9 79.0 83.2 5.2 0.8 641.0 520.0 574.9 13.7 19.1 31.2 Moscow Oblast 98.0 77.6 86.8 68.2 86.7 80.0 31.2 73.5 128.5 64.0 76.9 66.0 30.7 9.5 6.0 228.0 143.0 142.4 22.5 19.1 22.0 C MunijlManskOblast 97.0 85.6 86.7 87.5 96.8 97.0 59.2 94.9 63.9 73.9 73.0 56.0 18.3 12.9 28.4 197.0 183.0 205.4 NenietsAO 99.0 96.0 101.1 94.8 84.6 111.0 85.5 55.0 47.5 22.11 Nizhegorod Oblast 99.9 93.1 98.9 68.5 87.3 88.0 48.4 81.3 119.2 56.3 93.3 65.0 33.1 7.8 6.9 217.0 181.0 185.5 18.7 North Osetia Repuiblic 104.0 65.4 72.1 73.5 91.7 90.() 29.7 62.9 86.5 81.8 74.7 91.0 30.2 24.0 20.7 118.01 128.0 137.3 33.1 42.8 22.8 Novgoiod Oblast 106.0 87.7 90.3 73.8 90.3 85.0 47.6 49.6 78.1 61.8 107.0 121.0 31.0 9.4 18.1 194.0 174.0 2(08.8 17.5 NovosibbiskOblast 97.0 79.4 89.6 73.9 94.1 92.0 44.2 64.9 78.3 84.1 88.1 78.0 29.4 9.5 6.9 207.0 136.0 134.7 25.6 39.8 OnilskOblast 99.5 86.4 81.4 75.7 96.2 89.0 45.4 77.7 71.7 71.1 83.4 70.0 23.1 5.2 6.0 199.0 157.0 189.8 20.2 29.7 22.7 Ooel Oblast 94.0 79.8 85.3 65.6 88.1 90.0 33.3 67.0 62.5 50.9 82.9 68.0 12.0 7.3 12.5 272.0 214.0 223.6 15.9 Orenbiuig Oblast 100.0 89.0 88.8 79.7 96.8 88.0 53.7 85.3 87.8 68.7 109.4 71.0 40.1) 6.9 3.0 141,0 115.0 150.1 46.3 49.3 Peluza Oblast 97.0 83.5 87.7 66.2 87.2 74.0 30.3 61,7 91.7 56.4 81.2 78.0 20.2 12.5 42.1 178.0 148.0 122.4 20.3 30.2 25.7 Pei n' Oblast 98.0 88.8 86.2 78.7 98.3 89.0 51.6 85.4 92.8 70.9 90.5 71.0 36.2 8.6 26.4 193.0 184.0 214.7 24.7 Pritorskiy Krai 96.0 93.8 87.8 70.9 100.0 91.0 51.0 65.9 87.2 60.5 81.4 54.0 15.3 10.7 17.8 176.0 144.0 151.7 30.0 PskovOblast 95.() 80.0 90.8 59.4 80.5 83.11 27.4 63.0 68.7 67.2 91.2 58.0 15.4 11.7 89.2 155.0 128.0 141.2 25.1 42.7 RostovOblast 99.0 88.9 78.4 66.7 84.8 87.0 33.9 82.0 70.6 82.5 96.8 60.0 27.8 8.2 3.6 167.0 146,0 186.0 31.0 33.4 Ryazat' Oblast 94.0 78.7 90.5 73.1 87.8 74.0 31.8 56.5 85.3 68.8 94.3 55.0 17.2 6.4 13.6 186.0 158.0 170.5 22.4 24.4 Saklha Republic 98.0 79.6 96.2 100.0 100.0 102.0 76.5 96.9 67.9 67.0 72.8 59.0 19.0 6.4 3.8 167.0 170.0 171.2 22.7 29.2 Sakltalini Oblast 103.() 78.6 72.8 89.8 109.4 84.0 48.7 53.7 87.1 62.9 89.1 69.0) 18.1 12.7 17.7 153.0 145.0 140.9 23.3 24.6 21.2 Santaia Oblast 94.11 89.4 91.7 76.6 101.7 97.( 58.2 102.6 104.2 64.2 81.5 94.0 52.6 7.3 13.0 231.0 188.0 196.4 18.1 Saratov Oblast 97.0 88.7 91.9 64.6 84.3 92.0 39.6 75.9 81.4 54.5 96.1 84.11 27.1 9.6 8,5 164.0 138.0 128.4 25.2 35.3 Suiloleiisk Oblast 99.0 81.8 92.6 80.0 90.0 94.0 50.8 52.5 68.6 64.5 70.0 79.0 12.9 9.6 7.2 228.0) 185.0 189.9 17.3 19.8 St. Petersburg City 1111.0 81.2 89.0 64.4 87.2 79.0 32.4 65,6 77.6 94.7 118.2 69.1) 39.3 9.8 2.3 257.0 229.0 294.0 23.0 20.0

(7able eontinue'son next page) (Annex Table I aontinued)

Realindus&iiot lpout gmvwth (;roth in invesiment' Unemployrntrz Poverly tothe previoa year it theInevious yeir GeneralUnemonplzymeon Rtaio of aorvngevnmey Sharp,'of or lr(mne incame,and .,taitenre lqpatatw,% vacang, minimu%n,% % % % % % % % % % % % % % % mln number % % % % 1996 1o 1996 to 1991 1992 1993 1994 1995 1996 1990 1992 1993 1994 1995 1996 1990 1995 1995 1994 1995 1996 1994 1995 36.5 39.6 Staviopol' Krai 95.0 72.6 92.8 70.3 106.7 87.0 41.8 55.8 87,8 71.5 122.8 48.0 20.7 9.2 11.6 161.0 151.0 171.4 174.0 25.0 29.5 Sveidlovsk Oblast 96.0 71.9 85.5 79.7 95.7 91.0 41.0 97.2 79.9 73.5 109.2 78,0 48.6 8.5 6.8 172.0 163.0 176.6 34.9 22.0 TauiabovOblast 98.0 84.7 98.8 74.4 91.8 80.0 44.8 70.1 75,6 51.7 83.2 78.0 17.8 10.1 45.9 150.0 183.0 220.5 15.4 22.1 Tatarstan Repiublic 98.0 87.8 90.7 80.8 101.6 103.0 65.9 89,5 89,9 62.5 102.1 73.0 37.5 6.4 9.1 255.0 194.0 Taymiyr-AO 124.0 78.2 79.4 89.6 92.8 98.0 62.7 99.7 127.0 15.1 196.0 21.9 30.6 TomnskOblast 102.0 88.2 100.0 82.2 95.9 96.0 68.2 84.3 76.2 66.0 90.4 73.0 28.0 8.5 24.9 187.0 173.0 251.0 200.0 195.4 15.1 16.2 CO Tuila Oblast 98.0 84.7 89.2 74.3 96.4 76.0 40.3 77.8 71.4 58.6 89.8 81.0 23.7 5.9 14.1 76.1 66.8 73.2 Tuiva Reptiblic 88.0 80.7 97.2 81.2 89.3 78.0 39.0 46.3 67.5 78.0 63.6 26.0 4.0 14.2 185.2 102.0 84.0 19.8 28.6 Tver' Oblast 95.0 80.0 90.8 71.0 85.7 84.0 35.3 75.1 79.2 59.1 95.8 56.0 18.9 8.0 15.0 194.0 153.0 163.5 11.5 19.2 Tyumen' Oblast 93.0 86,0 88.8 91.5 96.9 98.0 61.7 129.3 72.1 63.2 106.5 75.0 47.0 6.1 7.0 317.0 290.0 329.4 24.6 26.1 Udmilrtia Repuiblic 98.0 76.5 89.3 77.6 84.6 85.0 37.4 71.0 80.8 79.4 77.9 73.0 25.9 11.3 48.9 163.0 158.0 153.6 16.3 Ul'yanovsk Oblast 104.0 92.3 102.1 87.8 79.1 90.0 61.2 70.3 70.3 63.7 78.8 80.0 19.8 7.8 8.2 286.0 198.0 221.7 14.5 Ust'-Orda Buiryat AO 80.0 57.5 84.8 94.9 100.0 80.0 29.6 63.6 83.0 34.3 20.7 27.9 VladimiriiOblast 97.0 78.4 89.5 67.6 91.3 84.0 35.3 70.8 62.6 62.8 77.1 87.0 18.7 12.3 31.6 187.0 144.0 143.1 26.6 33.2 Volgogiaci Oblast 97.0 79.4 84.4 69.2 91.1 90.0 36.9 65.1 70.3 90.3 117.6 53.0 25.8 10.3 7.9 171.0 141.0 147.9 19.2 20.1 Vologda Oblast 94.0 94.7 88.8 83.5 10)4.5 98.0 67.6 76.8 89.5 61.3 102.1 67.0 28.9 8.1 30.5 202.0 190.0 186.0 18.7 23.1 Voronezh Oblast 97.0 87.6 87.1 62.2 87.0 83.0 33.2 68.6 87.3 65.1 92.9 78.0 28.2 7.4 7.1 214.0 182.0 185.2 Yai,alo-Nenets AO 99.0 91.9 91.2 95.2 94.9 99.8 74.9 100.7 86.0 7.6 19.1 21.3 Yaroslavl' Oblast 97.0 79.4 87.0 74.6 82.0 79.0 32.4 63.0 91.4 69.5 87.3 65.0 22.7 11.5 22.1 194.0 180.0 189.2 18.2 31.8 YevreyskayaAO 95.0 74.7 66.2 70.2 63.6 76.0 16.0 76.1 72.6 59.7 83,5 89.0 24.5 15.9 12.2 173.05 23.96 30.61 Average 96.81 82.41 89.44 74.95 91.23 86.10 43.23 74.96 80.73 68.21 86.74 71.90 26.37 10.17 52.00 197.45 166.4 62.85 8.96 11.29 St. deviation 5.62 7.54 8.89 10.48 10.35 9.92 14.77 17.55 18.00 10.87 16.89 16.58 13.04 3.78 128.73 69.82 55.6 Varoant,e 5.80 9.15 9.94 13.98 11.34 11.52 34.17 23.42 22.30 15.94 19.47 23.06 49.43 37.15 247.57 35.36 33.4 36.32 37.40 36.89

Soune: Goskomstat. Annex Table 2 Main Budget Data Per Capita in 1991 Prices

1 992 /993 /994 1995 199b 1996/1992 f 992 199 3 1994 1995 i9J' 1 996/1992

Ady5/,y:a RIpilbliic 839.77 1,133.26 1/1106i 441.1(0 G11.26 72.8% 80)2.51 1,0)87.(2 9)7.34 44.7') 617.82 77.()% Agi skiy Biya~kiy A\) 1,747.49 1,162.63 9G6G51 365.1)1 842.43 48.2% 1,650. 19 1,1 f63.96 89)1.49 3(66(.8) 6.1i4 52.3% Alt;lyskiy Klai 1,045.58 1,180.37 1,181 89 715.54 96'7.91 92.6% 954.70) 1,138.72 1I6I(i 56 738. 14 1,001,57 10409(% AmianrskayiaO(bl/, 1,()41.29 1,2()/.52 1,18 .)2 773.15 1,043.42 1((.'2% )53.11/) 1,i0/7.35 ),111 .I1 8021()i0 1,058.91) I t.1% Ai khmai-I)skayal ()/ibait 968.85 1,(2862 1,138.05 787.)9 7(0.44 72.3% 9111.)7 91)2.09 1,()19123 817. 5'2 766.66 41 v1% ASit/lkhik)iya ()hbl,st 9)3.3.1)7 1,072,57 97'5.15 513.28 771.77 82.6% 89(/632 1,021.01) 911"71i 61l 550 844.501 !)1.91% 2,4 1,5 3i3.16 1,538.82 1,511.55 5577% 2,024.52 1 /1)1.8)) 1,5211.87 1,51S 17 1,i78.21 7S.11% 1v,uinik/,a, illhIi,6 2,715.53 I?.625 Ielgqwil kayik1 ObIlat 1,180).24 1,352 614 1,252.11/ 831.44 7/1.9) (i(/.1(% 1,080.1/6 1,228.72 1,25. 78 833/ 57 761.78 7().5% hli viiisk6y a O(h/,1as 8211.1)1/ ')6S18 8)12.11 57t).1'7 $55.1)0 67.81% 751.49 91)827 873,1/) 598.28 8iS

(7Tabe ronlnw/I u on next Page) (Annex tzable 2 continuedl)

Adjustedtreewues ExpendlituresIoat Rtublespert apfita 1995 1996 i196/1992 1992 1993 1994 1995 1996 1996/1992 1992 1993 1994 990.13 889.04 533.88 672.29 76.4% Ksisgauiskaya Oblast 992.72 1,006.98 913.96 522.76 663.28 66.8% 880.42 901.13 693.89 595.66 769.45 88.6% Kuicskaya Oblast 1,062.49 934.64 714.34 592.14 707.60 66.6% 868.76 1,427.93 1,154.38 967.74 1,084.33 107.4% Lenuingradskaya Oblast 1,198.09 1,543,14 1,188.99 969.14 1,005.58 83.9% 1,010.05 1,280.82 977.53 944.01 1,120.39 112.6% I.ipetskaya Oblast 1,159.34 1,366.23 1,008.48 950.37 1,102.11 95.1% 995.38 3,055.48 3,687.29 2,793.23 3,815.76 120.2% Magadariskaya Oblast 3,595.67 3,467.49 3,772.67 2,743.56 3,681.16 102.4% 3,175.05 1,443.07 1,229.47 710.00 745.54 68.1% Maii-EI Republic 1,146.62 1,444.75 1,234.64 709.00 722.23 63.0% 1,094.19 1,1(02.46 900.46 592.21 875.32 64.4% Mordovia Republic 1,505.42 1,133.89 913.63 564.07 861.65 57.2% 1,359.36 2,698.49 3,566.10 2,421.50 2,455.72 152.1% Moscow 1,695.41 2,863.94 3,579.57 2,427.79 2,473.89 145.9% 1,614.73 1,564.69 1,325.30 1,600.26 182.6% Moskovskaya Oblast 1,064.21 1,827.51 1,573.71 1,339.53 1,559.7(0 146.6% 876.31 1,603.29 929.89 1,010.71 64.4% Muci usuanskayaOhlast 1,815.51 1,715.31 1,332.35 913.97 983.33 54.2% 1,568.24 1,636.69 1,294.30 1,536.61 2,450.10 51.0% Nenetskiy AO 4,862.21 2,403.20 2,378.78 1,540.15 2,455.94 50.5% 4,804.91 2,401.78 2,378.78 773.30 786.19 83.1% Nizhegoroclskaya Oblast 1,116.03 1,463.91 1,005.03 773.06 779.81 69.9% 946.43 1,308.90 985.91 425.69 676.99 60.0% Nolthern Osetia Reptuhlic 1,153.50 963.97 837.74 422.34 676.46 58.6% 1,128.39 861.94 837.31 637.24 841.17 68.4% NovgorociskayaOblast 1,347.43 1,371.37 977.05 636.58 835.22 62.0% 1,23(0.60 1,282.64 952.56 863.55 718.45 750.59 98.4% Novosibitskaya Oblast 866.06 918.77 886.80 697.01 678.05 78.3% 762.98 835.74 751.77 832.46 87.0% Oiuiskaya Oblast 1,009.16 1,095.73 894.84 745.85 768.87 76.2% 957.06 1,070.51 894.84 584.19 778.16 79.0% Oveuiburgskaya Oblast 1,173.34 878.59 844.40 587.05 752.87 64.2% 985.48 861.19 817.23 710.49 806.19 76.3% OiOlovskayaOblast 1,216.85 1,414.76 1,049.84 703.05 807.17 66.3% 1,056.98 1,370.02 1,916.17 WA 514.91 580.39 84.1% Peuizenskaya Oblast 729.89 797.73 795.89 511.13 573.59 78.6% 689.72 779.99 792.05 1,019.84 896.36 953.74 94.2% PecimaskayaOblast 1,092.25 1,212.92 1,061.75 908.76 950,85 87.1% 1,012.02 1,178.46 747.12 728.94 96.5% I'minlorskiy Rai 864.93 1,218.40 1,089.7(0 751.75 712.62 82.4% 755.68 1,11(1.45 1,106.93 778.65 1,279.70 82.0% Pskovskaya Oblast 1,716.10 1,902 67 1,371.82 775.21 1,240.36 72.3% 1,561.10 1,794.23 1,367.54 578.05 665.47 87.1% Rostovskaya Ohlast 849.40 865.74 869.38 577.56 643.66 75.8% 763.72 815.97 861.09 588.53 671.86 79.2% RyazauiskayaOblast 989.59 1,076.52 1,144.93 561.30 657.41 66.4% 848.46 969.05 1,080.25 4,441.12 3,051.71 3,823.62 57.0% Sakha (Yakitia) Republic 7,183.18 3,334.61 4,538.84 2,055.49 2,526.36 35.2% 6,708.50 3,191.18 1,241.72 850.91 962.65 44.9% Sakialisiskaya Oblast 2,213.03 1,773.41 1,248.58 833.59 922.86 41.7% 2,146.09 1,660.78 1,304.66 971.23 1,061.75 77.8% Samarskaya Oblast 1,521.62 1,599.33 1,350.75 926.22 1,(342.22 68.5% 1,364.17 1,388.34 944.93 703.00 900.94 116.1% SatatovskayaOhlast 911.71 1,080.82 968.48 695.31 874.42 95.9% 775.90 1,043.95 615.40 675.93 84.1%/ SusoleuiskayaOblast 885.11 1,060.61 993.78 613.92 671.13 75.8% 804.10 1,013.47 985.57 5 1,394.98 1,167.99 1,329.53 140.5% ST etershburg 1,093.41 1,805.18 1,411.57 1,059.48 1,080.71 98.8% 946.04 1,633.10 856.77 534.09 584.68 98.4% Stavsopolskiy KRai 656.03 852.23 882.41 537.21 564.02 86.0% 594.04 766.87 1,122.86 1,367.88 116.7% Sveidlovskaya Oblast 1,273.29 1,443.14 1,312.38 1,111.82 1,319.35 103.6% 1,172.04 1,388.03 1,277.80 891.07 605.49 687.77 85.4% Tausbovskaya Oblast 855.90 901.72 917.07 597.79 679.04 79.3% 805.29 879.47 1,380.71 1,736.04 89.7% Tatarstari Repuiblic 2,446.77 1,984.79 1,451.26 1,307.21 1,643.48 67.2% 1,934.62 1,798.16 1,405.88 Taynipyvskiy/Dolgano- 4,232.57 2,352.08 3,153.23 107.4% Nenetsk. AO 3,384.76 4,336.77 5,174.12 2,677.77 2,450.03 72.4% 2,935.23 3,810.70 1,261.88 1,442.25 94.8% Toisuskaya Oblast 1,726.67 1,756.65 1,391 22 1,257.39 1,367.65 79.2% 1,521.76 1,665.19 1,391.22 695.78 767.67 100.2% Tsllskaya Ohl4st 930.28 860.92 948.75 686.06 746.14 80.2% 765.81 837.77 932.82 956.04 813.86 43.6% Tssva Repuiblic 1,960.80 1,571.81 2,129.20 874.89 787.79 40.2% 1,868.46 1,545.37 1,997.00 814.98 992.22 113.0% Tverskaya Ohlast 1,0)41.99 1,383.25 1,215.46 804.15 971.47 93.2% 878.27 1,253.78 1,192.51 2,307.85 2,276.59 1,863.12 1,025.28 50.0% Tulmerlskaya Oblast 2,133.12 2,419.10 2,346.91 1,747.75 1,018.25 47.7% 2,051.99

(7iible confinues on nzext Page) (Annex l6zble2 continuedc)

Adjusried revenurs ExPendituris totail RP41ospier erapita 1992 1993 1994 1995 1 996 1996/1992 1992 1993 1994 1995 1996 1996/1992

Udinurtia Repoiblic 1,016.01 1,101.97 1,010.78 777.01 1,052.42 103.6% 920.15 1,098.93 998.02 770.05 1,091.34 118.6% UlyansovskayaOblast 1,061.28 1,401.90 1,205.56 645.83 613.16 57.8% 984.47 1,18314 1,237.10 743.92 711.52 72.3% Ust-Oi clyskiy B.uryatskiyAO 1,038.55 1,073.11 1,112,05 610.86 731.64 70.4% 992.17 1,111.09 1,081.53 624.99 733.59 73.9% Vladiiriiskaya Oblast 943.78 870.10 778.65 481.24 628.67 66.6% 754.97 815.42 752.89 486.51 651.41 86.3% Volgogtadskaya Oblast 1,014.77 906.30 905.48 687.77 800.81 78.9% 913.33 887.18 877.18 708.79 830.66 90.9% Vologodskaya Oblast 1,190.72 1,732.52 1,566.00 1,181.46 1,186.86 99.7% 1,146.51 1,676.35 1,557.89 1,200.84 1,217.64 106.2% Voronezhskaya Oblast 925.95 1,121.14 973.61 635.36 672.30 72.6% 800.62 1,008.95 956.38 642.18 712.87 89.0% Yanialo-Nenietskaya Repuiblic 7,241.46 5,896.96 7,921.37 6,543.94 11,508.96 158.9% 6,657.30 5,717.76 7,912.92 6,707.34 11,884.64 178.5% Yaroslavskaya Oblast 1,573.18 1,444.74 1,068.88 664.35 860.71 54.7% 1,367.83 1,319.76 1,055.29 686.58 869.30 63.6% YevrcyskayaAO 1,780.29 2,110.83 1,916.48 1,247.91 1,319.25 74.1% 1,557.54 1,970.81 1,671.01 1,257.14 1,347.08 86.5%

ti.a. = Not applicable. Source:Authors' estimllatebased on the data fr-omiithc Mirnistryof Finance anid Roskoiusstat. Annex Table 2a Main Budget Data Per Capita in 1991 Pices

er/hiit (exxpendituresminmus wvenzue) Trazn.s/rs plus loans /rom federal bu(dget Robles per capita 1994 1995 1996 1992 1993 1994 1995 1996 1992 1993 254.34 543.68 453.63 188.24 325.17 AdlygeyaRepuiblic -37.27 -46.24 -1.72 0.68 6.56 1,548.22 1,013.25 796.49 259.46 695.37 AginskiyBuiryatskiyAO -97.26 1.33 -72.02 1.76 21.06 391.72 573.15 277.11 423.57 Altayskiy Krai -90.88 -41.64 -23.33 22.60 33.66 259.18 247.13 365.64 443.78 220.66 462.41 AmrnuskayaOblast -88.23 -100.17 -57.12 28.91 15.51 124.95 168.05 265.99 94.65 147.13 ArkhanagelskayaOblast -57.78 -36.53 -18.82 29.53 66.22 268.05 365.09 307.64 153.99 300.50 Astraklsanskaya Oblast -43.65 -51.48 -33.40 22.21 72.73 1.97 1.16 60.93 0.00 30.26 Baslkoistan Repuiblic -691.01 -450.45 -42.28 -20.65 66.66 68.92 72.74 207.99 58.74 68.30 Belgouodskaya Oblast -100.08 -123.82 -16.23 2.14 49.82 126.91 236.82 184.93 139.93 134.05 Biyauskaya Oblast -68.50 -44.91 -8.95 19.11 28.21 582.45 746.82 545.50 325.34 447.78 Btflyatia Reptublic -62.86 -32.40 -28.64 5.55 30.06 ii.a. n.a. ii.a. n.a. n.a. Clieclinya Reptublic Ma. na. na. n.a. n.a. 175.40 63.38 123.88 35.41 109.19 ClielybiniskayaOblast -228.04 -51.09 -13.94 -3.36 22.80 334.80 286.50 131.92 150.92 CGiitinskayaOblast -63.72 -35.77 0.00 2.24 9.45 318.51 3,362.39 6,407.02 3,069.66 2,370.38 ClzikotskayaAO -223.64 -458.07 -222.14 1,519.39 446.72 4,788.69 329.54 328.93 161.94 144.69 176.78 Clitvaslbia Repuiblic -24.16 -21,27 -8.42 7.71 48.56 869.67 1,241.07 394.70 343.06 Dagestan Repuiblic -66.68 -50,78 -228.42 52.23 121.21 779.84 4,013.82 4,175.53 5,039.11 1,934.42 1,999.72 EvenikiyskiyAO -1,160.49 -246.93 -485.89 163.48 427.76 co 827.35 1,401,53 1,398.15 577.20 629.42 GouniyAltayRepLublic -70.33 -80.83 -71.79 38.01 42.38 in.a. rn.a. n.a. n.a. IngzzslxetiaRepuiblic n.a. na. n,a. in.a. ii.a. n.a. 101.62 177.86 47.49 67.64 IrkuitskayaOblast -61.73 -13.72 -12.87 -1.27 11.71 72.17 127.20 221.30 146.35 239.02 Ivanovskaya Oblast -70.74 -37.01 -36.50 15.56 37.38 27.21 710.32 848.43 239.49 357.97 Kabarldino-Balkaria Repuiblic -36.62 -117.25 -61.78 55.14 153.81 419.30 462.45 183.25 92.45 65.44 Kaliningradskaya Oblast -148.55 -83.99 16.24 23.59 32.42 115.66 699.24 713.63 290.01 355.80 KahluykiaRepuLblic -50.48 -38.13 -38.23 27.59 105.28 864.04 121.78 211.51 238.69 141.43 242.21 Kaltzbskaya Oblast -56.08 -63.58 -31.04 5.68 4.26 1,082.29 1,054.60 482.26 371.79 Karncliatskaya Oblast -169.05 -83.53 -47.80 44.76 88.85 1,126.14 338.61 759.15 797.78 288.77 343.39 Karacbaevo-Clherkessia Repuiblic -136.53 -180.52 -69.30 -27.37 85.48 141.83 159.86 132.80 191.36 Karelia Repuiblic -14.50 -90.05 -12.51 27.78 45.31 461.58 396.04 359.17 248.26 239.59 Kewerovskaya Oblast -284.15 8.94 -19.55 13.99 4.02 311.70 308.35 262.29 430.91 234.93 258.07 Khabarovskiy Ktai -145.55 -83.17 0.00 16.98 16.69 59.37 264.26 337.00 110.63 154.91 KhlakassiaRepujblic -99.48 -43.37 -178.41 11.81 37.86 297.19 102.97 240.47 21.29 311.53 Rhanty-MansiyskiyAO -919.59 -298,91 -93.85 23.43 136.80 96.06 132.43 155.54 89.10 156.15 Kl0ovskayaOblast -88.80 -40.19 -51.03 11.07 26.79 311.57 427.46 461.15 341.22 338.72 KonsiiRepuiblic -240.69 -61.30 -70.53 -7.81 74.10 672.78 1,096.81 849.22 369.79 363.57 Konzzi-PenullyatskayaAO -108.68 -20.01 -46.69 26.03 8.30 5,550.48 7,901.31 3,079.97 2,020.11 KoryakskiyAO -1,567.88 -376.01 0.00 16.77 2,525.06 9,096.44 200.46 385.36 357.87 472.84 916.23 Kostromskaya Oblast -90.77 -36.89 -29.90 17.73 122.44 238.17 260.47 78.32 149.68 KRasiodaclskiyKrai -105.91 -207.77 -45.41 2.97 11.52 66.31 201.84 112.76 144.51 10.97 41.43 Krasanoyatskiy l(ai -259.41 -167,46 -41.31 1.94 40.53 9.02 245.86 239.90 303.36 109.16 216.12 KurganskayaOblast -112.30 -16.85 -24.93 11.12

('Fable conlinues on next Ieage) (Annex 'Thble2n rontmiued)

D)elii (ex1fnlitlur^s mirius rvvfenue,S) ros/efrs plusz loans /iotrrjrdfirl hiukget

Rub6esP'l roauita

1992 1993 1994 1995 1996 1992 1993 1994 1995 1996

KRi-skaya Oblast -193.74 -33.50 -20.45 3.53 61.86 41.52 46.23 104.05 43.92 73.27 Leoiiigtaclskaya Oblast -188.04 -115.20 -34.61 -1.40 78.75 188.59 139,55 194.19 96.84 59.44 I.petskaya Oblast -163.96 -85.41 -30.94 -6.36 18.28 42.6(0 44.54 139.60 10.66 12.97 Magaiaisskaya Oblast -420.62 -412.01 -85.38 49.67 134.60 1,142.11 1,068.51 2,081.84 904.91 1,247.93 Maci-El Republic -52.44 -1.69 -5.17 1.00 23.31 583.98 890.35 521.56 278.36 250.50 Morclovia Reptiblic -146.06 -31.43 -13.17 28.14 13.67 688.11 446.97 289.10 189.64 398.22 Moscow -80.69 -165.45 -13.47 -6.28 -18.16 35.27 337.13 626.53 162.73 160.84 Moskovsk.tya Oblast -187.90 -224.21 -9.02 -14.23 40.56 25.29 158.77 249.41 97.82 139.20 Minvanoskaya Oblast -247.27 -78.62 -38.05 15.91 '27.37 232.72 89.46 276.27 116.72 277.51 Nculetskiy AO -57.30 -1.42 0.00 -3.54 -5.84 4,028.59 1,439.211 1,149.18 476.54 556,02 Nizhegoiodskaya Oblast -169.60 -155.01 -19.11 0.24 6.38 24.78 30.85 60.50 8.14 60.60 Nobtheru Osetia Repuiblic -25.11 -102.03 -0.43 3.34 0.53 540.67 614,40 561.28 233.34 359.61 Novgor odskayaOblast -116.84 -88.73 -24.49 0.66 5.95 400.31 431.13 315.11 147.57 241.42 Novosibirskaya Oblast -103.08 -83.03 -23.25 21.44 72.54 103.21 130.57 160.95 117.76 75.24 CO OiiOskaya Oblast -52.10 -25.22 0.00 5.93 63.59 117.68 302,53 223.53 138.57 155,08 Oretiburgskaya Oblast -187.86 -17.40 -27.17 -2.86 25.30 49.79 37.78 197.18 52.77 83.48 Oilovskaya Oblast -159.88 -44.74 -33.67 7.44 -0.98 270.57 387.00 380.16 244.57 301.41 Peuze;iskaya Oblast -40.17 -17.75 -3.84 3.78 6.80 110.23 179.08 249.78 155.65 189.68 Persulskaya Oblast -80.23 -34.45 -41.91 -12.40 2.89 23.72 81.42 131.54 51.78 78.23 Pc-ihmorskiy Krai -109.26 -107.95 17.23 -4.62 16.32 99.07 245.29 295.59 137.55 159.52 Pskovskaya Oblast -154.99 -108.45 -4.28 3.44 39.34 654.36 830.81 397.43 224.7(0 573.18 Rostovskaya Oblast -85.68 -49.77 -8.29 0.49 21.80 23.55 75.90 127.71 91.24 153.89 Ryazanskaya Oblast -141.13 -107.47 -64.68 27.23 14.45 48.06 39.65 325.67 20.58 159.85 Sakha (Yakuitia) Republic -474.69 -143.44 -97.72 996.21 1,297.27 1,301.84 0.98 226.71 184.71 913.97 Sakhalioskaya Oblast -66.94 -112.63 -6.85 17.32 39.79 875.31 683.88 410.02 241.55 283.98 Saruiacskaya Oblast -157.46 -210.99 -46.09 45.01 19.53 29.75 158.18 149.52 11.29 15.12 Satatovskaya Ohlast -135.82 -36.86 -23.55 7.69 26.52 61.76 1(09.28 179.44 92.76 174.50 Ssssolenskaya Oblast -81.01 -47.14 -8.20 1.48 4.80 40.08 70.67 161.79 65.47 99.75 St.Petelsburg -147.37 -172.08 -16.59 108.51 248.82 125.21 118.70 226.01 4.70 29.59 Stavropolskiy Krai -62.(0 -85.36 -25.64 -3.11 20.66 57.38 267.76 297.94 136.15 158.26 Sverdlovskaya Oblast -101.25 -55.11 -34.58 11.04 48.53 19.70 28.97 77.62 23.46 31.84 Tambovskaya Oblast -50.60 -22.25 -26.00 7.70 8.72 146.77 201.67 233.45 151.37 147.58 Tataistani Repuiblic -512.14 -186.62 -45.38 73.5(0 92.56 1.58 1.42 212.68 11.95 75.21 '1aymiiyrskiy/Dolganio-Nenietsk. AO -449.54 -526.06 -941.56 -325.70 703.20 1,890.86 3,139.04 2,834.33 544.56 599.82 Tomtskaya Oblast -204.91 -91.46 0.00 4.49 74.61) 287.53 474.80 356.66 155.5(1 206.48

(74bWie continues on nexl 1)ige) (Annex bible 2a continued)

Di/i(it (expenditue.srinmins rVrflnuis) Trnawlersplus lonsft fromfdPral budge.t

Rlbblo. p•r cafpita 1992 1993 1994i 1995 1996 1992 1993 1994 1995 1996 201.01 Ttilskaya Ohlast -164.47 -23.15 -15.93 9.71 21.53 29.88 40.36 216.16 80.57 599.25 Ttiva Repuiblic -92.35 -26.44 -132.20 81.15 26.06 1,657.50 1,283.79 1,627.75 688.14 225.91 Tvecskaya Oblast -163 72 -129.47 -22.96 10.83 20.75 105.23 273.96 230.44 130.72 58.80 TyumuenskayaOblast -81.13 -111.26 -70.32 115.37 7.03 434.18 478.19 685.79 139.99 158.67 Udminrtia Rcptublic -95.85 -3.04 -12.75 -6.96 38.92 62.06 150.39 252.53 120.85 91.95 Ulyanovskaya Oblast -76.82 -218.76 31.54 98,08 98.36 61.88 143.65 301.57 89.11 Ust-OicdytnskiyBtuyatskiyAO -46.38 37.97 -30.52 14.13 1.95 792.76 857.8(0 838.12 431.29 515.98 \'Jaclimitskaya Oblast -188.81 -54.68 -25.7G 5.27 22.73 22.47 33.32 165.71 44.44 160.59 \'olgogiadskaya (Oblast -101.43 -19.12 -28.31 21.02 29.85 17.40 38,82 140.37 33.23 102.79 178.46 Vnlogodskaya Oblast -44.21 -56.16 -8.11 19.38 30.78 52 54 191.44 216.72 92.18 129.18 Voionezbskaya Ohlast -125.32 -112.19 -17.23 6.82 40.56 117.50) 128.97 150.97 99.84 233.14 Yamalo-Nncitskaya Repufblic -584.16 -179.20 -8.45 163.40 375.08 472.37 292.15 312.66 75.65 140.05 YamoslavskayaO(blast -205.35 -124.98 -13.58 22.23 8.59 44.17 82.93 125.26 24.49 748.90 YevicyskayaAO -222.75 -140.01 -245.47 9.23 27.83 9114.73 1,062.23 797.94 695.09 nta. = Not applicable. Soarm::Autlibos' estimate baiscdt oni the data ftouti the Ministic of Fitnanlce atcl Roskonistat. Annex Table 3 Budget Arrears, Transfers, and Deficit as Percentage of Expenditures

Increase.in budget arrears as percentage Federal lrtanofrs(including budgetloans) ofJe.xplenstituee.sr s rffpeentlge p oexI)enditures le.uil (is pernenctageof explenditures)

/se.n:e.lt pJIer(ent percent

1996 1997 1992 1993 1994 1995 1996 1997 1992 1993 1994 1995 1996 1997

AdygecyaRepiublic 19.19 26.18 31.7 46.0 49,8 42.6 49.5 49.8 -4.6 -4.3 -0.2 0.2 1.1 3.9 Aginskiy BusyatskiyAO 18.79 4.89 93.8 87.1 86.8 65.2 37.2 31.9 -5.9 0.1 -8.1 0.5 2.4 0.0 Altayskiy Ktai 16.95 38.12 23.3 34.3 45.2 37.5 33.2 33.8 -9.5 -3.7 -2.0 3.1 3.4 -1.0 Aiuccr-skayaOblast 21.37 54.48 25.6 30.1 37.6 27.5 42.1 38.5 -9.3 -9.0 -5.1 3.6 1.5 1.2 Ackhalgelskaya Ohlast 21.06 24.10 13.7 16.9 23.2 11.6 12.7 8.6 -6.3 -3.7 -1.8 3.6 8.6 1.5 Astraklsanskaya Oblast 11.76 12.93 30.1 35.8 30,3 25.0 29.3 25.1 -4.9 -5.0 -3.5 3.6 8.6 7.1 Bashkortostan Reputblic 9.10 11,86 0.1 0.1 3.6 0.0 1.9 0.0 -34.1 -23.0 -2.8 -1.4 4.2 0.5 BelgorocdskayaObtast 11.21 20.01 6.4 5.9 16.5 7.0 7.4 6.3 -9.3 -10.1 -1.3 0.3 6.5 1.5 Bryarcskaya Oblast 21.44 56.81 15.7 25.8 20.6 23.4 22.9 14.5 -9.1 -4.9 -1.0 3.2 4.8 3.5 BucjyatiaRepuiblic 34.20 45.13 46.7 46.9 38.5 33.9 24.0 31.7 -5.2 -2.0 -2.0 0.6 2.7 3.0 Clcechciya Republic ni.a. n.a. 21.8 n.a. n1a. 113.5 92.8 ri.a. -9.8 in.a. n.a. -32.3 -3.3 ni.a. Chelybinskaya Oblast 14.83 21.46 1.7 5.1 12.2 4.2 9.1 14.3 -17.6 -4.1 -1.4 -0.4 1.9 1.9 Cbititnskaya Oblast 26.16 49.61 30.2 39.4 31.0 23.4 20.5 16.2 -6.4 -4.2 0.0 0.4 1.5 -5.6 Cblukotskaya AO 16.05 53.55 70.4 68.9 56.2 36.7 31.5 39.6 -3.3 -9.4 -2.4 21.3 6.7 4.4 CbluvaslciaRepuiblic 11.71 10.()1 33.2 30.2 15.4 19.8 18.1 19.4 -2.4 -1.9 -0.8 1.1 5.6 6.8 Dagestan Republic 29.71 25.80 79.6 86.0 99.0 74.7 61.1 63.7 -7.0 -5.0 -19.4 9.9 21.6 3.6 EvenikiyskiyAO 12.8(0 27.22 104.7 91.5 66.7 45.8 32.5 40.8 -30.3 -5.4 -7.1 3.9 6,9 -0.8 Goruiy Altay Republic 31.49 45.50 70.7 85.1 83.9 71.2 47.9 51.2 -6.1 -4.9 -4.4 4.7 4.5 -10.4 Inguish Reptublic 17.51 26.43 147.7 0.0 89.4 18.0 27.9 64.1) -59.0 i.a. -10.0 1.5 0.5 7.9 Icktutskaya Oblast 19.48 49.33 5.3 9.9 14.5 4.8 4.6 3.7 -4.7 -1.3 -1.1 -0.1 1.2 -0.8 Ivanovskaya Oblast 12.66 10.04 1.1 15.3 28.1 28.1 34.3 38.5 -8.2 -4.4 -4.7 3.0 5.6 -0.5 Kabacdino-Balkaria Rep. 6.08 10.95 46.9 67.7 70.9 40.7 39.1) 45.0 -4.1 -11.9 -5.3 9.4 16.7 3.1 Kalningradiskaya Obhlast 5.40 4.02 7.3 35.6 18,8 14.9 7.2 13,5 -18.1 -6.5 1.7 3.8 4.4 7.7 ICalmcykiaRepuiblic 30.59 19.5() 70.3 80.3 80.4 67.1 54.4 46.4 -4.1 -4.4 -4.3 6.4 16.7 7.4 Ralulzhskaya Oblast 18.45 16.12 12.5 22.0 23.5 21.6 32.0 27.2 -7.5 -6.6 -3.1 0.9 0.6 0.1 Kainclsatskaya Oblast 19.55 24.99 54.0 48.8 47.0 33.2 18.2 33.8 -8.1 -4.0 -2.2 3.1 6.6 17.5 Karachaevo-Cherk. Rep. 13.66 19.54 39.2 73.5 60.0 47.1 41.7 42.7 -18.2 -17.5 -5.5 -4.5 10.4 2.5 Karelia Reptublic 12.43 44.34 29.0 8.0 13.9 15,8 18.5 13.1 -0.9 -6.8 -1.1 3.3 5.1 2.3 KensiesovskayaOblast 20.37 14,26 19.9 25.2 26.0 25.1 18.8 8.9 -18,2 0.6 -1.4 1.4 0,4 6.6 KRabarovskiy Ktai 54.61 28.51 22.9 13.7 28.9 23.3 16.7 22.7 -10.9 -5.5 0.0 1.7 1.4 0.4 KlMakassiyaRepuiblic 21.09 27.22 2.9 21.3 29.9 12.8 9.8 10.1 -10.1 -3.5 -16.2 1.4 3.6 -2.8 Khanty-MansiyskiyAO 6.89 2.99 5.1 1.8 4.5 0.4 3.5 0.0 -15.8 -5.7 -1.8 0.5 1.5 2.1 KihovskayaOblast 19.03 25.31 8.8 15.6 19.6 15.7 22.9 20.9 -11.1 -4.7 -6.5 1.9 3.9 -6.3 KomniiRepuiblic 12.10 15.96 19.1 21.4 21.4 16.0 14.7 3.8 -14.8 -3.1 -3,6 -0.4 3.3 10.9 Konii-PermyatskayaAO 22.71 14.66 75.2 79.0 68.8 52.2 34.9 31.1 -12.2 -1.4 -3.8 3.9 1.2 -0.3 KomyakskiyAO 16.90 12.05 109.2 94.1 80.5 81.3 32.7 23.7 -18.8 -6.4 0.0 0.4 47.1 43.0 KostiomiiskayaOblast 9.14 13.28 19.7 30.0 33.3 43.3 53.6 20.3 -10.1 -2.9 -2.8 1.6 7.2 3.7

(74Tbhe :onninue.s or nexCl )(fge) (Annex 7ŽThle3 continued)

Alnceasein budgetararers s perrenfge FedrIaltranlmn/r.#s (indludizg budget loans) tolewxlwelilusree (s j.er:entuageofepVeMditures Ieeit as p ermlage of expend.iturro) peruen) perient perrent 1996 1997 1996i 1997 1992 1993 1994 1995 1996 1997 1992 1993 1994 1995 -18.6 -4.0 0.4 1.4 0.6 Kr asnodavskiy Ki-ai 10.13 14.77 8.7 21.3 19.0 10.8 18.8 21.4 -13.9 -13.4 -3.1 0.2 3.6 4.2 Kiasuioyaiskiy Krai 18.36 24.07 15.2 5.5 8.1 1.0 2.3 1.2 -20.4 -1.7 -2.8 2.1 1.3 2.6 Klrgatiskayua Ohlast 25.34 31.87 27.9 24.2 33.2 20.4 25.9 18.2 -12.8 -3.7 -2.9 0.6 8.0 5.4 Kurlskaya Oblast 11.41 6.18 4.8 5.1 14.5 7.4 9.5 16.3 -22.3 -8.1 -3.0 -0.1 7.3 9.9 Leiiingrladskaya Oblast 10.30 11.03 16.3 9.8 15.5 10.0 5.5 5.1 -18.6 -6.7 -3.2 -0.7 1.6 5.6 Lipetskaya Oblast 4.30 9.04 4.3 3.5 13.3 1.1 1.2 0.4 -16.5 -13.5 -2.3 1.8 3.5 0.4 Magadaoskaya Oblast 17.34 28.31 36.0 26.1 53.9 23.6 32.7 22.5 -13.2 -0.1 -0.4 0.1 3.1 5.8 Maii-El Republic 21.79 22.76 52.0 55.5 41.5 39.2 32.7 31.4 -4.8 -2.9 -1.5 4.8 1.6 2.6 Morclovia Repuiblic 18.06 8.76 47.8 39.9 31.8 27.6 41.4 32.5 -10.7 -6.1 -0.4 -0.3 -O.7 -3.6 Moscow 1.95 0.05 2.2 12.5 17.5 6.7 6.5 4.7 -5.0 -14.0 -0.6 -1.1 2.5 6.2 Moskovskaya Ohlast 6.14 5.33 1.9 9.8 14.4 7.4 8.7 8.6 -21,4 -4.8 -2.9 1.7 2.7 -1.9 MuromarskayaOblast 13.37 27.81 14.8 5.1 13.0 12,6 17.7 27.5 -15.8 -0.1 0.0 -0.2 -0.2 3.8 NersetskiyAO 7.92 8.41 83.8 59.9 39.1 31.0 22.7 20.6 -1.2 -11.8 -1.9 0.0 0.8 4.5 Nizhegorodskaya Oblast 10.00 6.03 2.6 2.4 5.6 1.1 7.7 3.9 -17.9 -11.8 -0.1 0.8 0.1 -1.5 Northerl Osetia Rep. 34.45 58.64 45.9 71.3 65.1 54.8 48.8 38.3 -2.2 -6.9 -2.6 0.1 0.7 1.3 Novgovodskaya Oblast 10.06 9.47 28.9 32.2 31.4 23.2 27.4 32.0 -9.5 -9.9 -2.7 3.0 9.7 10.5 NovosibihskayaOblast 7.15 8.43 4.4 11.8 18.6 16.4 10.0 7.7 -13.5 -2.4 0.0 0.8 7.6 8.6 Oiiskaya Oblast 20.22 23.47 12.3 28.3 24.3 18.4 15.8 6.6 -5.4 -2.0 -3.3 -0.5 3.3 10.4 Oreuiburi-gskayaOblast 16.27 13.69 3.0 4.4 23.8 9.0 9.8 5.3 -19.1 -3.3 -3.3 1.0 -0.1 -0.3 Orlovskaya Ohlast 11.16 10.54 19.4 28.2 36.9 34.4 37.4 30.7 -15.1 -2.3 -0.5 0.7 1.2 2.3 Petizetiskaya Oblast 18.00 28.44 16.0 23.0 31.4 25.7 31.7 22.2 -5.8 -2.9 -4.1 -1.4 0.3 3.3 Peri skaya OCblast 6.50 8.16 1.8 6.9 12.2 5.8 8.2 2.3 -7.9 -9.7 1.6 -0.6 2.2 -0.3 Pi i.orskiy Krai 22.36 23.24 8.3 21.9 24.8 17.9 18.5 28.7 -14.5 -6.0 -0.3 0.4 3.1 0.1 Pskovskaya Oblast 8.29 26.56 35.1 46.3 28.3 28.9 40,2 34.3 -9.9 -6.1 -1.0 0.1 3.3 7.7 Rostovskaya Oblast 8.43 15.49 2.4 9.3 14.4 15.8 21.9 16.1 -11.2 -11.1 -6.0 4.6 2.2 2.8 Ryazanskaya Oblast 14.37 16.37 3.9 4.1 29.3 3.5 21.9 10.3 -16.6 -4.5 -2.2 32.6 33.9 22.9 Sakha (Yakuitia)Repuiblic 28.66 33.71 19.3 0.0 1.2 6.1 22.5 17.9 -7.1 -6.8 -0.6 2.0 4.1 -6.1 Sakhalitiskaya Oblast 12.54 41.57 40.8 40.9 29.8 28.4 23.7 25.5 -3.1 -15.2 -3.5 4.6 1.8 0.8 SassarskayaOblast 2.22 1.99 2.2 11.3 10.1 1.2 1.4 0.4 -11.5 -3.5 -2.5 1.1 2.9 7.9 Saratovskaya Oblast 8.68 10.17 5.3 10.5 18.4 13.2 16.8 17.0 -17.5 -4.7 -0.8 0.2 0.7 0.2 Siiiolenskaya Oblast 13.82 11.65 2.8 7.0 16.0 10.6 14.8 15.8 -10.1 -10.5 -1.2 9.3 18.7 3.5 St. Petershbueg 7.80 11.56 7.3 7.2 6.7 0.4 2.2 3.1 -15.6 -11.1 -3.0 -0.6 3.5 3.2 Stavropolskiy Krai 13.37 18.82 6.2 34.9 33.5 25.5 27.1 26.7 -10.4 -4.0 -2.7 1.0 3.5 2.9 SverdclovskayaOblast 11.29 13.18 1.6 2.0 5.8 2.1 1.8 1.3 -8.6 -2.5 -2.9 1.3 1.3 1.4 Tausbovskaya Oblast 12.45 15.32 18.2 22.9 26.0 25.0 21.5 22.8 -6.3 -10.4 -3.2 5.3 5.3 0.0 Tatarstani Repuiblic 7.05 15.33 0.1 0.1 14.8 0.9 2.0 1.0 -26.5 -13.8 -22.2 -13.8 22.3 -1.3 TaysniyrskiyAO 25.16 15.04 64.4 82.4 53.4 23.2 19.0 15.7 -15.3

(7?tlblecontinues of next fr(ige) (Annex 7a4bl3 continued)

/ncrewssein bud{gedarrr.ars 1 as CTTe(Ir.ty Beeleral Iranserv ( indhngr ba gel loans) (?fexlendliun.r (s Immenleagoof oxpoediIures D)efrcifas joTeelage ojCexjOOndiIuriv)

prurent port ent percent

1996 1997 1992 1993 1994 1995 1996 1997 1992 1993 1994 1995 1996 1997

TohiiskayaOblast 15.46 10.27 18.6 25.2 25.6 12.3 14.3 11.0 -13.5 -5.5 0,0 0.4 5.2 0.6 TuiiskayaOblast 20.34 25.09 2.9 4.8 22.8 11.6 26.2 11.8 -21.5 -2.8 -1.7 1.4 2.8 10.7 Thva Reptiblic 36.99 27.82 86.7 83.1 79.0 72.0 50.6 37.7 -4.9 -1.7 -6.6 8.5 3.2 1.2 Tvecskaya Oblast 17,85 30.27 7.9 21.9 18.6 16,0 22.8 16.8 -18.6 -10.3 -1.9 1.3 2.1 6.0 TyutsiieitskayaOblast 12.59 14.35 21.2 20.3 30.0 7.5 5.7 11.5 -4.0 -4.8 -3.1 6.2 0.7 4.3 C.UdimurtiaRepiiblic 13.96 22.75 4.7 13.7 25.2 14.5 14.5 18.8 -10.4 -0.3 -1.3 -0.9 3.6 6.1 Ulyactovskaya Oblast 23.28 42.67 6.3 12.1 24.3 12.0 12.9 9.4 -7.8 -18.5 2.5 13.2 13.8 11.5 Ust-Ordynskiy Buiiyat.AO 22.83 25.61 79.9 77.2 77.1 69.0 64.3 54.4 -4.7 3.4 -2.8 2.3 0.3 -0.1 kladimiiskaya Oblast 7.05 12.29 1.9 4.1 21.7 9.1 24.0 16.4 -25.0 -6.7 -3.4 1.1 3.5 1.6 Volgogradskaya Oblast 9.04 15.87 1.8 4.4 15.7 4.7 12.4 6.8 -11.1 -2.2 -3.2 3.0 3.6 -1.6 Vologodskaya Ohlast 26.91 19.80 3.6 11.4 13.2 7.7 9.9 0.1 -3.9 -3.4 -0.5 1.6 2.5 1.0 VocortezihskayaOhlast 12.88 22.25 14.7 8.3 15.5 15.5 18.1 16.3 -15.7 -11.1 -1.8 1.1 5.7 -1.9 Yantalo-NenietskayaRep. 1.41 4.93 7.1 3.2 3.9 1.1 2.0 0.0 -8.8 -3.1 -0.1 2.4 3.2 7.5 Yatoslavskaya Oblast 10.88 8.67 1.4 3.0 10.9 2.8 11.4 7.0 -15.0 -9.5 -1.3 3.2 1.0 4.2 YevreyskayaAO 24.42 47.14 54.9 53.9 47.6 55.3 46.8 41.6 -14.3 -7.1 -14.7 0.7 2.1 -0.8 ma. = Not applicable. Sourre2 Authols' estinate based oni the data from the Minist,y of Finianice anid Roskomistat, Annex Table 4 Deficit and Debt Indicators

Defitit as per.nti,'e Irvenues Ats:umulateddebt (is percentzge Accumulated debt (n.ominal) Deficitras peeenttage o/ GD'P net o/ trnnsfer.san(i toa. o coven.uetse of tranrc/ers per:ent percent Jieceot fiservent 1997 1995 1996 1997 1994 1995 1996 1992 1993 1995 1996 1997 1995 1996 0.00 3.04 6.45 - 7,994 25,378 Adygeya Rep. -0.06 0.03 0.36 -6.37 -7.84 0.27 2.29 8.93 -0.04 0.00 9.95 3.51 - 2,700 1,000 Aginskiy BuciyatskiyAO ni.a. i.a. in.a. -48.82 0.89 1.66 14.32 -1.84 0.59 5.35 -3.01 10,856 134,453 (84,733) AltayskyKtai -0.55 0.63 1.05 -11.56 -5.28 5.16 6.18 0.19 2.79 2.89 2.000 37,799 44,349 Ammskaya Oblast -0.93 0.67 0.46 -11.11 -11.90 5.23 2.67 2.19 ArkhangelskayaOblast 3.12 10,46 2.29 63,057 203,864 59,273 (incl.NenetskiyAO) -0.30 0.60 1.56 -6.85 -4.24 4.26 11.97 1.96 11.45 3.31 15.07 12.81 25,178 152,163 176,995 Astrakhanskaya Oblast -0.81 0.67 3.00 6.55 -7.28 5.06 15.43 0.54 0.00 3.67 0.51 - 384,928 63,423 Baslikinta Rep. -0.57 -0.29 1.02 -25.46 -18.68 -1.34 4.50 1.62 0.00 7.78 0.00 - 135,456 - Belgorodskaya Oblast -0.28 0.04 0.92 -9.01 -9.67 0.28 7.74 4.85 4.45 6.26 0.44 47,494 76,196 6,177 BryaniskayaOhlast -0.21 0.60 1.11 -9.88 -6.18 4.35 6.69 6.63 0.10 1.39 10.22 975 16,793 125,509 BurlyatiaRep. -0.38 0,11 0.63 -9.13 -3.69 0.88 4.58 0.00 0.00 n.a. - - - CliechenskavaRep. n.a. n.a. na. 0 n.a. -2 0 ni.a. 2.30 0.00 2.06 2.79 _ 140,367 194,765 Chelyabinskaya Oblast -0.20 -0.06 0.42 -16.92 -4.19 -0.42 2.15 Ciiitiniskaya Oblast 0.00 0.69 0.33 - 10,200 5,556 (incl, Aginskiy Burlyats.AO) 0.00 0.05 0.26 -8.52 -6.50 0.52 1.95 -8.42 54.72 9.41 10.45 218,666 68,647 63,447 CltikotskiyAO -2.91 17.70 n.a. -9.99 -23.16 59.55 11.53 9.53 9.73 1.20 7.19 9.77 13,585 111,171 196,132 ClChivashiiaRep. -0.18 0.20 1.48 -3.52 -2.72 1.33 7.65 0.00 4.63 12.86 - 17,686 81,915 Dagestani Rep. -11.40 4,40 12.30 -28.18 -26.46 64.13 124.57 17.47 0.00 0.00 3.66 - - 5,559 EvenkiyskyAO n.a. ii.a. ni.a. -118.25 -39.01 7.70 11.46 -1.64 0.00 0.00 1.50 - - 2,000 GorniiyAltayRepuiblic -2.25 1.38 1.68 -17.92 -24.84 19.42 15.26 -36.90 65.38 0.00 0.00 0.00 - - - Inguishskaya Rep. -5.81 1.43 0.56 -522.97 nia. 27.14 6.82 Irkuitskaya Oblast 0.00 0.85 4.64 - 48,861 286,368 (incl. Ust-Ordyn. Buslyat.AO) -0.18 -0.02 0.21 -4.78 -1.46 -0.13 1.37 -0.90 0.00 9.26 -1.66 - 93,715 (20,862) IvaniovskayaOblast -0.99 0.51 1.38 -7.79 -4.98 4.33 9.62 -0.84 12.63 35.17 6.28 45,100 214,529 49,320 Kabatdiiwo-Balkaria Rep. -2.58 2.55 7.74 -7.25 -29.83 18.77 37.78 6.98 5.47 5.01 10.57 48,910 63,087 161,238 Kaliiiiigcadskaya Ohlast 0.40 0.80 1.28 -17.36 -9.12 4.69 5.03 10.10 18.88 10.47 54.10 19.31 10,374 98,493 72,157 Kahinykia-Kiialio-TanigRep. -2.62 2.68 14.56 -12.20 -18.18 24.10 61.60 0.19 0.00 0.68 0.15 - 7,792 2,137 KalhizhskayaOblast -0.62 0.13 0.11 -8.24 -7.85 1.12 0.83 KaimchatskayaOblast 0.87 7.18 40.97 7,322 78,451 387,209 (i.cl KocyakskiyAtton. Okrsig)-0.64 0.75 1.63 -15.01 -7.57 4.84 10.05 43.78 5.11 0.00 8.65 4.58 - 21,140 15,822 Kacachaevo-Cleikessia Rep. -1.78 -0.84 2.97 -24.99 -39.76 -7.77 21.63 3.21 4.02 7.11 3.64 48,164 99,519 60,299 Katelia Rep. -0.21 0.61 1.16 -1.26 -7.03 4.10 6.88 1.18 0.27 3.70 55,818 18,536 297,723 Ketnerovskaya Oblast -0.32 0.25 0.08 -18.51 0.77 1.93 0.46 8.88 0.53 0.00 0.00 0.00 - - - Klsahaiovsky Kcai 0.00 0.35 0.40 -12.45 -6.22 2.25 1.80 -3.49 0.00 0.83 0.18 - 7,993 2,079 Khakassia Rep. -2.21 0.21 0.72 -9.67 -4.24 1.59 4.40 0.51 2.49 2.27 37,685 371,452 554,103 Khanity-ManisiyskiyAO n.a. n.a. ni.a. -14.24 -5.51 0.46 1.63 2.20 -8.51 0.00 4.40 -0.22 - 73,766 (4,713) Kirovskaya Oblast -1.14 0.26 0.72 -11.16 -5.32 2.36 5.36 14.09 0.14 3.53 13.15 4,187 129,634 590,121 KonsiiRep. -0.60 -0.07 0.69 -15.44 -3.75 -0.43 4.10 -0.71 0.00 0.00 0.00 Konsii-Pei-iimyatskayaAO nI.a. n.a. ni.a. -32.90 -6.43 9.61 2.41

('Kbbleconlinues on next p(age) (Annex 'iblef 4 continueld)

Dlf/iit as pffrenl(aogo/ revnawns Ae.umulatel (letI as. pe lntage Accumulat.eddebt Dlf/il (IS. per (age.f/l GDi'(' net q/ tran.4/ers and loains o/ revenuesnet i/ translas (nominnl)

penenni /,errent pene.n percent 1994 1995 1996 1992 1993 1995 1996 1997 1995 1996 1997 1995 1996 1997

KoryakskiyAO na.a. n.a. in.a. -194.9(0 -52.15 2.42 310.29 197.40 5.11 310.08 197.36 3,037 259,609 278,131 Kostotinskaya Oblast -0.62 0.32 2.65 -11.53 -3.95 2.95 18.61 5.22 0.00 18.40 6.18 - 156,050 114,684 Kxasiiodai sky Ka ai -0.95 (1.07 0.29 -13.25 -19.14 0.46 1.82 0.75 0.00 0.25 1.89 - 13,233 117,279 Krasnioyarskiy Krai (iicl. Evenkiys. & Tayinyrs. AO) -(1.42 0.02 0.47 -19.55 -12.85 0.18 3.92 4.76 0.30 2.31 4.64 16,405 152,5(04 434,548 Ksriganiskaya Ohlast -0.57 (1.33 0.32 -15.(4 -2.20 2.69 2.02 3.84 (0.37 2.19 4.15 2,867 22,995 54,357 KuizskayaOblast -0.44 0.09 1.69 -18.98 -3.77 0.64 9.75 7.04 0.31 9.31 9.55 4,249 173,811 190,253 Leningradskaya Oblast -0.50 -0.02 1.45 -18.63 -8.21 -0.16 8.32 12.18 0.52 6.84 11.51 9,652 167,255 328,115 IUpetskayaOblast -0.42 -0.09 0.28 -14.68 -6.46 -0.68 1.68 6.14 0.00 1.16 4.98 - 31,383 150,722 Magalaniskaya Oblast (jiil. ChltkotskayaAO) -0.76 0.72 2.08 -17.14 -17.17 2.70 5.53 0.64 0.00 5.84 3.70 - 78.898 59,510 Mat i-EI Rep. -0.11 0.()3 0.80 -9.32 -0.26 0.23 4.94 10.39 0.00 1.80 10.92 - 12,049 82,270 Mocldovia Rep. -0.38 0.87 0.51 -17.87 -4.58 7.52 2.95 4.49 6.28 3.05 4.88 36,482 27,473 63,571 Moscow -0.12 --0.06 -0.23 -4.86 -6.55 -(0.28 -0.79 -3.59 0.00 0.00 0.00 - - - MoskovskayaOblast -0.12 -0.22 0.71 -18.09 -13.44 -1.15 2.86 7.24 0.40 2.55 8.21 35,818 309,944 1,179,212 MsinlzlaoiskayaOblast -0.50 0.25 0.43 -15.62 -4.84 2.00 3.88 -2.85 0.02 2.40 1.21 333 47,436 37,184 Nenietskiy AO ima. iH.a. n.a. -6.87 -0.15 -0.33 -0.31 5.11 0.00 0.00 5.98 - - 17,866 Nizlsegoioclskaya Oblast -0.28 0.()0 0,12 -15.54 -1(0.82 0.03 0.89 5.07 0.00 2.46 15.32 - 139,654 1,163,158 Notlherin Osetia Rep. -(1.0(2 0.19 0.03 -4.1(0 -29.19 1.77 (0.17 -2.93 0.0( 0.00 0.00 - - - Novgorodskaya Oblast -0.57 0.02 0.20 -12.34 -9.44 0.14 1.00 2.08 0.00 0.88 2.90 - 8,202 32,233 Novosibirskaya Oblast -0.50 0.49 1.82 -13.51 -10.53 3.70 12.03 14.05 5.17 11,46 13.28 158,926 469,342 663,680 OjinskayaOblast 0.00 0.12 1.49 -5.84 -3.18 0.98 10.36 10.75 1.55 13.81 8.33 41,000 477,674 424,109 OiecsbLlogskayaObIast -0.48 -0.07 0.68 -16.72 -2.07 -0,53 3.78 12.97 0.00 2.82 13.57 - 94,846 569,060 OrlovskayaOblast -0.73 0.17 -0.02 -16.90 -4.35 1.62 -0.19 -0.41 0.00 0.00 0.83 - - 10,245 Penizeniskaya Oblast -0.10 0.12 0.28 -6.48 -2.87 1.06 1.77 3.30 0.00 1.57 4.06 - 18,153 63,157 Pei iiskaya Oblast (isicl. Koitmi-Permyatskaya AO) -0.50 -0.15 0.04 -7.51 -3.04 -1.45 0.33 3.57 -0.11 0.64 2.72 (4,153) 33,624 193,062 Prijiinosky Kiai 0.45 -0.13 0.51 -14.27 -11.1(9 -0.75 2.95 -0.51 -0.01 0.56 0.53 (429) 20,471 25,039 PskovskayaOhlast -0.07 0.07 0.85 -14.60 -10.12 0.62 5.90 0.19 0.76 5.85 7.73 3,921 39,159 61,496 RostovskayaOblast -0.21 (D.01 0.63 -10.38 -6.30 0.10 4.45 10.51 0.54 4.01 8.13 17,646 157,953 374,016 RyazaniskayaOblast -1.13 0.60 0.42 -14.99 -10.37 5.04 2.90 3.32 2.07 2.46 3.69 25,926 33,909 71,337 Sakhsa(Yakutiia) Republic -0.75 8.72 11.15 -8.07 -4.30 53.25 80.46 46.09 57.25 78.61 54.15 1,906,709 2,726,017 2,548,410 SakhaiiniskayaOblast -0.14 0.47 1.17 -5.00 -10.34 2.93 6.23 -8.87 0.20 3.70 1.12 2,169 57,516 20,971 Saiiaiskaya Oblast -0.55 0.59 0.27 -10.55 -14.64 4.92 1.90 0.80 0.26 2.22 0.95 14,100 165,345 91,593 SaratovskayaOblast -0.37 0.13 0.50 -15.98 -3.79 1.28 3.79 10.97 0.19 4.01 10.57 4,152 129,552 422,408 SmiioleniskayaOblast -0.14 0.03 0.12 -9.59 -4.76 0.27 0.84 0.31 0.07 0.87 -0.14 633 10,375 (1,960)

('Fble c:afloninuewson next pazgef) (Annex T'able4 continued)

D)efa:itam percentage r?/ revenues Ac.umulated debtas percerntage lAcsntmlated le,tit net otfransfe (nominnd) D)eficita's Perrentage of(GDI'I net of tansfersand loans / rellenue.s Pmeneat Isersent PffrunI fser:ene 1997 1995 1996 1997 1994 1995 1996 1992 1993 1995 1996 1997 1995 1996 12.09 22.40 5.37 918,109 2,109,427 683,910 St. Peteisburg -0.25 1.66 4.73 -15.22 -10.20 10.29 23.67 3.83 0.00 3.77 3.05 - 89,716 81,686 Stavropolsky Krai -0.65 -0.08 0.58 -10.36 -14.60 -0.78 5.09 4.67 0.71 4.19 0.03 48,072 420,376 3,494 Sver-dlovskayaOblast -0.39 0.12 0.57 -8.08 -3.90 1.01 3.77 3.10 0.84 0.99 2.30 7,305 12,884 34,190 Tasubovskaya Oblast -0.61 0.23 0.32 -7.14 -3.18 1.72 1.64 1.94 4.91 6.63 2.57 321,180 650,304 488,773 Tataria Rep. -0.65 0.98 1.20 -20.94 -9.41 5.67 5.90 0.00 Tayiuyrskiy/Dolgano- 0.00 2.36 0.00 - 4,100 - Nenietsk. AO s1.a. ti.a. n.a. -30.09 -43.92 -15.27 38.01 -1.62 0.64 0.06 5.07 -0.38 904 109,820 (13,492) Tomskaya Ohlast 0.00 0.05 0.86 -14.24 -7.13 0.41 6.42 1.23 3.29 15.29 20,847 60,825 331,362 Ttiiskaya Oblast -0.32 0.22 0.61 -18.27 -2.82 1.60 3.95 15.22 16.78 0.04 0.00 19,391 58 6 TutvaRep. -4.76 4.62 1.90 -30.45 -9.18 43.46 13.82 6.83 1.16 1.76 1.57 16,140 32,628 33,610 TvcetskayaOblast -0.34 0.19 0,44 -17.48 -11,67 1.61 2.78 8.35 WTyt'meniskaya Oblast (iiC. Kiatity-ManisiyskiyAO & 6.31 0.96 5.16 152,053 39,040 249,728 Yamssalo-NessetskayaRep.) -0.11 0.16 0.02 -4.78 -5.73 7.18 0.73 5.26 0.07 4.20 9.27 1,085 119,284 310,939 UcdlsssttiaRep. -0.22 -0.14 0.92 -10.05 -0.32 -1.06 4.35 9.01 16.78 18,18 14.47 219,749 285,220 310,487 UlyansovskayaOblast 0.55 2.16 2.39 -7.69 -17.39 17.62 18.87 15.46 0.00 0.04 1.17 - 30 1,000 Ust-Ordyniskiy Biuyatskiy AO Tn.a. ii.a. in.a. -18.87 17.64 7.87 0.91 -0.31 0.08 3,37 2.12 1,150 59,759 48,850 Vladimiiskaya Oblast -0.67 0.16 0.84 -20.49 -6.53 1.21 4.86 1.92 2.27 3.86 1.37 67,095 146,791 54,950 Volgograclskaya Oblast -0.50 0.48 0.76 -10.17 -2.20 3.21 4.28 -1.84 1.37 3.01 1.49 28,123 68,918 45,520 Vologodskaya Oblast -0.08 0.19 0.30 -3.88 -3.64 1.78 3.05 1.09 0.13 7.01 -1.73 2,400 168,161 (52,791) Voroiezhskaya Oblast -0.33 0.14 1.02 -15.50 -11.31 1.27 7.47 -2.20 2.70 3,56 8.18 93,382 262,667 1,146,829 Yansialo-Nenetskaya Republic nl.a. na, i.a. -8.63 -3.20 2.53 3.33 8.12 3.24 1.37 5.26 58,381 34,471 168,701 YaroslavskayaOblast -0.20 0.42 0.20 -13.43 -9.18 3.47 1.19 4.95 0.00 0.00 0.00 - - - YevreyskayaAO -3.38 0.18 0,68 -25.44 -13.35 1,67 4.88 -2.28 nLa. a.a n.a. 4,894,180 13,536,296 17,187,214 SUM n/ reg. da(itai -0.42 0.21 0.38 -13.17 -8.28 10.65 -67.49 -25.94 ii.a. = Not applicable. Note:Regionial GDPsfor 1996 ar-eestiiiated oni the basis of 1995 GDPs and indtusttial procdttction growtlh tates. Source:Autholrs' estimiiate based oni the *lata fitom the Ministty of Finianiceantl Roskomiistat. Annex Table 5 Tax Revenues Left with Federal Budgets as Percentage of Total Taxes Collected in the Region, 1993-95

Regional share Annual growth

1993 'ibal Pt.l razl 'r.g Totazl Fderadl I?e-r,n 'v (ane-ha(l) 1994 1995 1996 1997 96/95 '96/95 '96/95 '97/96 97/96 97/96

AcdygeyaRepublic 61.2 78.6 66.2 68.5 72.1 133.32 124.22 137,97 141.1 125 148.5 AginiskBuclyat AOkh 83.4 79.9 86.1 37.0 156.79 108.10 169.06 247.2 1122.9 106.2 Altay Kiai 62.4 78.0 73.1 69.2 70.8 131.82 151.10 124.73 110.9 105.2 113.5 AIutIrI Oblast 62.5 64.5 67.3 60.9 78.0 152.95 182.46 138.59 77.8 43.9 99.5 Arkbarigel'sk Oblast 64.5 68.5 69.8 72.8 76.8 98.10 88.42 102.29 122.7 104.8 129.4 Astiakhaui Oblast 60.9 70.9 63.0 59.2 62.8 113.90 125.60 107.04 146.5 133.8 155.2 Bashkortostati Reputblic 100 87.5 73.8 72.5 72.2 116.54 122.17 114.54 117.6 119.1 117.1 Belgorod Oblast 54.0 59.0 57.7 62.9 67.0 96.93 85.01 105.65 114.2 101.7 121.5 Biyansk Oblast 60.5 71.2 62.6 54.5 57.3 115.75 140.81 100.79 109.9 103.1 115.5 Butiyatia Reptublic 65.0 77.4 77.8 69.5 74.5 122.48 168.42 109.36 115.6 96.6 123.9 Chelyabinsk Ohlast 49.1 61.4 61.8 68.3 70.1 134.87 111.98 149.03 104.3 98.4 107.1 ChitaOblast 64.0 74.8 71.7 70.6 80.6 133.72 138.97 131.65 100,7 66.6 114.9 Clitkotka AOkr 62.5 77.7 68.9 79.3 72.5 149.53 99.34 172.21 123.9 165 113.2 Chlvaslhia Reptublic 62.0 71.0 67.8 67.6 69.0 142.33 143.42 141.81 124.5 118.9 127.2 Dagestani Reptublic 67.3 84.6 78.6 65.4 61.1 153.04 248.03 127.25 145.3 163.2 135.8 Eve.hkAOkh 78.4 78.6 83.3 75.7 185.07 144.46 196.12 130.7 190.5 118.7 Gorny Altay 66.3 82.3 67.2 59.5 41.9 177.66 219.11 157.41 176.7 253.5 124.4 Ingtushetia 98.3 89.5 10.6 8.8 19,2 153.77 156.90 127.38 61.6 54.6 134.5 ItrkurtskOblast 55.6 64.7 63.9 63.7 75.5 113.44 114.02 113.11 95.9 64.8 113.6 Ivauiovo Oblast 52.5 64.5 63.7 65.2 71.5 114.78 110.15 117.41 110.1 90 120.8 Kabaidiio-Balkauia Republic 64,3 81.8 76.8 69.5 76.0 165.04 217.15 149.30 108.0 84.9 118,2 Kaliriingrad Oblast 62.2 68.1 62.7 64.4 65.3 105.16 100.45 107.97 121.5 118.2 123.3 Kalisykia Republic 67.6 78.3 57.2 42.3 32.7 241.39 325.84 178.28 203.1 236.6 157.4 Kaltuga Oblast 62.0 68.8 62.1 59.6 63.3 120.05 127.79 115,32 119.5 108.5 126.9 KaLsmchatkaOblast 66.6 77.1 74.4 73.2 71.5 110.35 115.47 108.59 98.1 104.5 95.8 Karachay-Cherkessia 71.5 76.5 65.8 59.8 68.8 149.45 175.43 135.94 124.7 96.8 143.4 Kacelia Reptublic 91.9 95.4 67.1 76.7 83.2 105.15 74.32 120.28 111.2 80.1 120.6 KemiierovoOblast 62.1 81.8 73.8 66.4 74.3 135.77 173.82 122.25 104.0 79.6 116.3 KhabarovskKrai 59.7 61.8 64.6 63.3 61.3 142.44 147.33 139.75 107.1 113 103.7 KliakassiaRepublic 65.7 74.2 75.9 80.5 78.5 128.39 103.94 136.18 117.2 129 114.3 Khantiy-MamsiAOkr 58.8 39.7 43.4 53.9 172.74 162.13 188.88 132.0 107.4 164.2 KihovOblast 58.0 70.7 63.7 63.9 65.0 122.19 121.38 122.65 123.6 120 125.7 Koimi Repuiblic 48.3 59.5 57.7 58.4 60.7 127.74 125.89 129.09 116.0 109.5 120.7 Komiii-PermllyakAOkr 80.9 76.9 74.1 76.5 140.46 157.51 135.33 119.5 108.5 123.4 KoiyakAOkr 77.4 67.7 75.3 77.5 124.30 94.93 138.34 168.8 153.7 173.7 KostromiiaOblast 59.7 65.5 60.5 67.9 71.9 113.29 92.10 127.12 152,2 133.1 161,2 Kiasnoclar Krai 64.1 67.2 61.0 62.2 68.3 119.77 116.16 122.08 105.9 88.9 116.3 Krasnoyarsk Krai 54.1 64.7 65.2 74.1 75.7 108.31 80.82 122.97 137.9 129.2 141 KtRuganiOblast 63.3 73.4 70.0 64.2 74.7 133.17 158.78 122.19 100.6 71.2 117 Kuask Oblast 55.4 62.9 62.6 62.2 67.7 123.29 124.74 122.43 118.1 100.9 128.6 L.enitigrad Oblast 50.8 64.9 60.4 65.2 61.8 113.09 99.42 122.06 122.5 134.4 116.2 Iipetsk Oblast 57.4 62.9 60.5 72.5 78.8 99.33 69.09 119.08 104.2 80.6 113.2

(7ahJle continues on next patge) (Annex Table 5 econlinued)

Regionel share Annual groroth Federal Rlegion s 1993 Tholn ledlera)l ]?gm s Total 97/96 (one.-hail) 1994 1995 1996 1997 96/95 '96/95 '96/95 '97/96 97/96 71.4 118 Magaclan Oblast 63.8 68.8 67.5 78.7 80.7 135.53 117.97 144.00 104.8 98.3 111 Maiiy El Republic 62.9 76.6 73.5 59.2 62.1 149.86 230.06 120.88 105.8 109.1 156.9 Moildovia Repuiblic 62.9 77.9 71.9 55.8 64.5 157.95 248.74 122.54 135.8 155.9 136.1 Moscow City 31.5 59.6 54.4 45.6 42.3 146.77 175.08 123.07 146.9 126.5 119.7 Moscow Oblast 58.2 58.2 50.9 52.7 51.3 129.74 125.12 134.19 122.9 104.4 155.4 MurmllatiskOblast 60.6 62.4 63.7 68.6 76.5 101.86 88.15 109.68 139.4 98.2 170.3 NetetsAokr 82.3 69.7 63.3 74.9 187.35 227.19 170.03 143.8 130.1 125.7 134.4 Nizhegoolod Oblast 49.9 57.6 51.9 50.1 51.8 128.80 133.58 124.36 87.8 133.1 North Osetia Repuiblic 62.5 75.1 65.9 63.8 72.8 144.52 153.12 140.06 116.7 91.4 119.3 Novgorod Oblast 62.9 68.0 65.6 67.5 73.1 137.90 130.12 141.99 110.2 112.6 101.9 119,5 Novosibirsk Oblast 62.1 69.8 66.7 60.7 64.5 132.31 156.17 120,42 129.4 127.5 OruiskOblast 61.3 70.6 63.9 63.5 63.1 121.88 123.46 120.98 128.2 105.1 122.2 Orenburg Oblast 52.4 62.8 57.5 61.7 65.2 141.57 127.55 151.93 115.7 87.1 137.3 Orlovsk Oblast 64.4 64.1 59.6 53.3 64.3 131.00 151.27 117.25 113.9 115.7 130.3 PenzaOblast 60.5 72.4 65.5 63.0 65.7 137.12 147.02 131.90 124.9 129.2 132.4 Pei-Il' Oblast 53.5 58.5 53.3 56.3 56.9 128.75 120.36 136.11 131.0 115 109.6 Priinorskiy lirai 60.9 60.8 61.2 66,1 65.1 114.23 99.78 123.38 111.4 113.9 110.3 116 PskovOblast 61.6 75.0 68.2 63.7 64.8 123.09 140.79 114.84 93.1 120 Rostov Oblast 59.1 64.0 58.8 59.9 65.9 105.72 102.73 107.83 109.2 129.7 121.7 134.9 Q.7 Ryazan' Oblast 51.8 57.4 59.4 60.6 63.0 112.62 109.52 114.73 119.8 130.9 Sakha Repuiblic 100 100 99.5 72.4 74.2 134.87 8162.56 98.12 127.8 188 118.5 Sakbalin) Oblast 61.2 73.6 71.2 70.8 60.5 139.31 141.10 138.58 138.8 161.2 126 Saiuiara Oblast 52.0 54.7 52.1 54.2 48.1 132.89 127.03 138.26 142.1 113.9 120.6 Saratov Oblast 60.8 66.5 62.2 62.0 63.3 147.70 148.53 147.19 118.1 112.9 105.7 117.1 Smolensk Oblast 64.1 66.0 63.6 62.8 65.2 120.84 123.67 119.23 108.3 134.6 St. Petersbturg City 60.5 56.6 55.4 56.2 61.4 121.77 119.71 123.43 123.1 90.9 113.1 Stavropol' &rai 62.4 67.8 58.9 56.2 61.5 117.04 124.66 111.72 103.4 76.9 108.3 SvecldlovskOblast 50.5 62.0 56.9 57.9 66.0 148.53 144.95 151.24 95.1 90.3 115.3 TamhbovOblast 65.0 72.7 65.5 63.2 68,7 131.83 140.29 127.37 106.1 144.0 186.5 134 TatmastauiRepublic 100 83.8 77.3 81.0 75.4 145.59 121.73 152.59 59.8 209.1 Tayiyr AOkh 61.0 73.1 70.8 89.4 107.73 116.93 104.34 165.5 124.6 152.9 TomssskOblast 48.9 67.8 56.8 58.4 63.3 128.00 123.14 131.70 141.1 110.1 108.5 110.9 Ttila Oblast 54.9 64.8 63.3 65.1 65.6 106.90 101.59 109.98 119.8 104.7 124.9 TuivaReptiblic 65.1 81.9 74.9 74.5 77.7 114.41 116.18 113.82 109.3 94.9 116.8 Tver' Oblast 57.7 62.4 59.7 65.6 70.1 115.41 98.69 126.69 121.1 107 129.1 Tyulmeni'Oblast 43.2 64.7 64.6 63.9 68,1 161.57 164.52 159.94 123.9 132.9 118.5 Ud1.itstitiaRepublic 55.4 60.9 62.1 62.8 60.1 150.10 147.30 151.81 125.8 119.1 129.8 Ul'yaniovskOblast 52.6 54.3 59.1 62.4 64.4 114.05 104.69 120.53 109.9 134.4 AOkr 85.3 73.1 74.3 78.0 149.06 142.40 151.51 128.1 Ust'-Orda Buiryat 87 126.8 ViacdinmihOblast 51.6 60.0 57.9 61.7 70,1 116.38 106.01 123.91 111.6 105.2 114.8 99.5 Volgogilad Oblast 53.8 62.4 59.6 62.8 59.4 119.94 110.38 126.42 123.3 97.2 132.5 Vologda Oblast 54.5 64.0 66.2 74.0 79,5 102.73 79.00 114.83

(Tiable continues on -next page) (Annex 7lble 5 conlinueed)

Regional share. An.nualAgivath 1993 'Ibtal Ideral ?egi,a 7bttzl lederal Region; (one-hall) 1994 1995 1996 1997 96/95 '96/95 '96/95 '97/96 97/96 97/96

VoronezhOblast 61.5 66.4 60.8 62.2 63.9 123.29 119.12 125.97 115.2 109.8 118.5 YanialroNenctsAOkr 71.5 44.7 59.2 63.9 160.00 118.14 211.74 147.8 130.8 159.6 Yaroslavl' Oblast 52.0 52.2 51.5 51.3 58.2 114.91 115.42 114.44 117.7 101.1 133.4 CD) YevreyskayaAO 63.0 77.1 76.5 73.8 77.6 110.86 123.40 107.01 117.7 100.8 123.7

Average(nan-weighted) 61.35 70.03 64.39 64.10 66.53 131.84 226.09 130.71 123.12 124.23 127.32 SI. Ieiiationl 11.48 9.60 10.37 10.24 11.11 23.01 856.77 21.34 23.93 112.87 18.11 VKiance 18.71 13.71 16.11 15.98 16.70 17.45 378.95 16.33 19.43 90.86 14.23

.Source:Auithors' estimate basedowl the data finoiithe Mihistly of Finance anil Iax Service. Annex Table 6 Tax Arrears and Tax Revenues Collected in Noncash Form

Nim ash rwith reuenue (caleatiamv 7ix arnan dat1/1/96 (omparedwith 7ix acrrars ot l/l/198 comparnd 1997 with 1995 tax coltection with 1997 tax toll(.tion INgioanal arrmarn edertal armars Regamat arrears Tderal arnri citlectioni and tolletia.ms iatal faid colte:tians and (aollectian.s Tbwat and ra.rr.z.I >f/otal tax cioltet:liaf Pemeni Perrent 12.4 51.22 18.5 33.5 10.8 16.8 22.2 Adygeya Republic 22.3 53.16 23.1 64.7 12.7 15.3 11.1 Agiuisk Biicyat AO 14.4 70.51 9.8 21.9 5.4 32.7 77.0 Altay Krai 41.5 63.95 31.6 55.3 20.0 64.7 146.7 Ainur Oblast 32.8 70.86 25.8 48.9 15.9 55.9 132.6 Althangel'sk Oblast 9.3 34.38 5.5 9.1 3.3 17.1 30.2 Astrakliau Oblast 80.8 52.99 22.5 29.7 19.9 79.6 76.5 Baslkoitostaui Repuiblic 18.3 44,24 6.4 7.7 5.5 31.0 56.7 Belgorod Oblast 30.6 50.36 7.6 10.7 5.7 41.0 55.1 Biyanisk(Oblast 12.2 72.29 14.2 38.2 7.3 33.5 95.4 Butiyatia Repuiblic 27.4 57,04 21.7 30.8 16.1 47.1 93.2 Clhelyabinsk Oblast 19.7 63.69 25.6 47.1 17.2 36.2 104.4 (:hita Oblast 44.6 77.25 34.9 60.3 23.4 59.9 100.4 Claikotka AO 13.1 81.98 16.4 25.1 12.3 23.5 46.7 0(hulvaslhia Repuiblic 33.2 52.74 10.6 10.2 10.7 31.9 30.0 Dagestaii Repuiblic 20.6 79.54 15.5 41.4 8.5 67,0 211.3 EveuikAO 23.8 38.33 21.8 29.6 17.9 31.1 36.3 Gorny Altay Repuiblic 30.8 27.08 2.6 1.5 12.0 11.7 7.2 IlugtislbetiaRepuiblic 24.4 57.42 22.9 42.2 11.9 62.4 179.3 Irkittsk Oblast 28.2 66.98 19.8 28.0 15.2 65.0 157.2 IvaTIovoOhlast 28.8 66.54 18.4 43.6 10.8 65.2 180.5 Kabardtino-Balkauia Repuiblic 22.9 31.61 6.6 9.0 5.2 22.3 21.1 Kaliniiigrad Oblast 20.1 31.98 23.0 34.5 14.4 18.7 18.1 KalmiiykiaRepuiblic 16.6 36.75 7.2 8.7 6.3 25.6 41.2 Kaluiga Oblast 39.1 50.01 12.3 20.8 9.4 47.3 68.0 Kauiiclatka Oblast 20.2 41.19 24.0 36.9 17.3 41.4 88.1 KarachayKClierkessia 38.3 45.81 19.3 29.0 14.6 65.0 197.6 Kai-eliaRepuiblic 30.6 64.22 29.9 68.8 16.1 81.3 227.9 KensierovoOblast 29.6 52.48 23.6 34.2 17.7 40.8 58.5 Khabacovsk KRai 20.4 74.84 24.7 64.6 12.0 51.1 162.8 Kbakassia Repitblic 32.6 27.1 62.40 Kharnty-MansiAO 37.8 37.0 39.0 29.6 66.6 33.2 58.69 KbicovOblast 14.4 21.1 10.5 44.9 55.6 88.1 34.6 59.66 Kotnii Repuiblic 28.3 39.8 19.9 41.5 87.0 27.5 59.43 Kouumi-PeruuyakAAO 7.6 18.3 4.4 67.2 176.4 35.6 33.43 Koiyak AO 16.0 27.8 10.3 40.0 100.5 16.4 55.00 KostromiiaOblast 14.1 19.5 10.6 32.1 60.4 19.0 29.31 K1asnodarKr-ai 7.5 11.1 5.3

(Table continues on next page) (A nrwx ']hzblbe6 c:onltiflued)

Noncash

7lx arrtears at 1/1/96 manmparwlw1ithd 7;x 1al-7nrs al 1/1/98 aompatd tith revrn.a collections ivith 1995 lax collertion with 1997 tax Ilec tirmr 1997

I; (urr.vrwleal Resgional arrwar. rl arwsrarrears l?"AR'onll arrears Tw(11 and rrolledlions and c:olleti:ir.n Dirtal and rollrlionen andt rollerlianon Pnrtof io/al I've,rO.l '1Wrenrtl lax wIrler,tion.I

Krasnroyatsk Krai 19.2 33.7 11.4 40.9 102.6 21.0 61.43 Klill-gall Ol3last 13.1 28.5 6.5 35.7 75.7 22.1 70.09 K1xc-skOblast 21.3 31.8 15.0 49.6 88.7 3).9 70.71 Lenittgtdl Obhlast 10.6 10.6 10.6 31.2 44.2 23.2 52.72 Lipetsk Oblast 5.3 4.0 6.1 14.4 30.7 10.0 33.81 Magadan Oblast 42.3 72.7 27.6 99.() 284.8 54.6 59.90 Maziy Fl Re,pblic 15.7 6.2 19.2 37.1 64.5 20.5 61.19 Morldovia Republic 13.3 32.5 5.8 23.8 39.6 15.2 64.64 Moscow City 5.1 6.4 4.1 6.8 5.3 8.9 6.86 Moscow Olaldst 5.7 4.4 7.1 19.0 19.5 18.5 30.94 Mtrrtrratrsk Oblast 24.7 31.1 21.0 41.8 9(0.5 26.8 49.25 Neniets AOkr 69.2 68.8 69.3 39.6 90.6 22.6 33.44 Nizhegoiocl Oblast 18.8 25.9 12.1 42.9 57.9 29.0 48.39 North Osetia Reptiblic 13.0 20.9 9.0 36.8 72.9 23.3 46.47 Novgorod Ohlast 6.8 11.0 4.6 19.6 36.4 13.4 33.08 Novosibirsk Oblast 16.0 28.1 10.1 29.4 52.8 16.4 59.40 O(3rsk Oblast 9.1 15.1 5.7 33.4 60.2 17.7 68.18 Orettbttlg Oblast 37.5 57.9 22.4 57.4 106.1 31.4 56.19 Otlovsk Oblast 4.5 6.0 3.6 , 15.6 20.8 12.8 47.23 Pettza Oblast 11.4 18.6 7.6 30.1 41.9 23.9 53.41 Pertii' Oblast 13.4 17.1 10.1 25.2 31.3 20.5 52.75 Ptinriorskiy Ktai 11.8 14.1 10.4 29.9 37.4 25.8 49.45 Pskov Oblast 8.3 14.0 5.6 26.8 46.4 16.1 44.79 Rostov Oblast 11.8 13.8 10.3 55.7 83.7 41.1 43.82 Ryazatn' Oblast 10.4 15.0 7.3 36.0 71.8 15.0 50.97 Saklha Repuiblic 18.4 0 18.5 34.0 73.3 20.4 68.09 Sakltalits Oblast 29.4 61.7 16.3 42.6 59.3 31.6 50.14 Satttata Oblast 24.1 26.7 21.6 50.3 58.2 41.7 37.29 Saratov Oblast 12.3 21.2 6.9 34.8 64.3 17.7 56.18 Stoletnsk Oblast 19.7 29.9 13.9 57.0 77.1 46.2 43.98 St. Petetsbiltg City 6.4 7.9 5.1 12.2 17.2 9.1 20.03 Stavtopol' Ktai 5.8 7.6 4.5 30.1 42.1 22.7 43.12 Svedllovsk Oblast 23.4 35.0 14.7 48.0 94.6 24.0 59.08 Ta,nibov Oblast 12.8 19.5 9.4 39.8 70.5 25.8 58.92 Tatatstatn Republic 17.7 32.7 13.3 29.8 59.5 20.2 56.83 Tayjinyr AO 26.3 32.0 24.2 105.6 406.9 70.0 9.59

(Table! continues on next pmage) (Annex 7Rtb1e6 continued)

N(mcash reven,ue(olle(ti mrs 7;1x(rrears (it 1/1/96 rompared1zivth 7;x aman(iat 1/1/98 compared with 1997 with 1995 tax c:olkction wvith1997 LtOxcolLectin Fedirfalarrears Ieoifmal arrears Iedlerl1arnars Regiumalarrean cotlhmctm.s 7ltael a(Udcotlektiws arndraoll#etions Dotid tnldcotiectima. and Pegrcent o,/t,oal coUetdim Percenot Prryent taex 39.58 9.4 14.8 5.3 23.1 43.3 11.5 Tonisk Oblast 27.86 7.6 11.0 5.7 44.2 70.3 30.6 TtmlaOblast 16.0 39.61 6.7 12.1 4.9 24,7 55.0 Tuva Repuiblic 51.74 18.1 22.4 15.2 52.6 104.9 30.3 Tver' Oblast 55.16 8.3 11.2 6.7 12.7 23.6 7.6 Tytumiietn'Oblast 11.9 62.20 13.7 24.9 6.9 21.8 36.7 Udlnurlltia Repuiblic 123,8 25.3 68.46 OUl'yanovsk Oblast 19.0 34.6 8.2 60.4 64.1 9.9 60.93 U%t'-Orda Butryat AO 10.7 29.5 3.8 21.8 67.9 18.9 60.75 Vladimir Oblast 8.0 8.2 7.8 33.6 46.9 29.8 47.60 Volgograd Oblast 8.2 9.9 7.0 36.8 95.5 18.3 57,14 Vologda Oblast 7.5 13.8 4.2 34.1 83.5 30.7 57.63 Voronezli Oblast 16.7 25.7 10.9 49.8 64.0 18.1 81.70 Yamalo-Nenets AO 31.9 21.7 44.4 34.7 76.7 32.6 53.40 Yaroslavl' Oblast 21.0 26.9 15.3 51.0 153.9 34.1 60.71 YevreyskayaAO 19.1 43.2 11.7 60.9 84,0 26.0 52.23 A veraige 16.95 26.51 12.55 41.6 70.2 15.6 14.99 .St. deviatiom 10.30 17.13 9.46 26.1 83.7 60.1 28.70 Variance 60.75 64.61 75.38 62.7

Soure: RF State Tax Ser vice. Annex Table 7 Distribution of VAT Proceedsbetween Federal and Regional Budgets

1994, Atr-lDec 1995 1997

Jedii'a .sheire Regional .share Federal share Reginal share Aeeral sh(Ire Regrmnldshare

Adygeya Republic 3.3 96.7 42.4 57.6 68.9 31.1 Agisssk Ruiyat AOkr 4.3 95.7 53.1 46.9 92.4 7.6 Altay Krai 4.7 95.3 41.8 58.2 90.1 9.9 AtIUI- Oblast 48.9 51.1 68,2 31.8 62.5 37.5 Arkhaisgel'sk Oblast 44.9 55.1 65.3 34.7 60 40 Astrakliai Oblast 30.6 69.4 58.1 41.9 69.1 30.9 Baslhkortostau Republic 27.3 72.7 43.6 56.4 58.7 41.3 Belgorod Ohlast 74.3 25.7 75.8 24.2 73.5 26.5 BiyatnskOblast 26.8 73.2 56.1 43.9 68.9 31.1 Buttyatia Repuiblic 7.4 92.6 28.6 71.4 60.1 39.9 Chelyabiuisk Ohlast 74.0 26.0 69.8 30.2 66.1 33.9 Chita Oblast 9.0 91.0 42.8 57.2 59.7 40.3 C.huskotkaAOkr 0.8 99.2 62.4 37.6 70.1 29.9 Chlivashia Repuiblic 25.2 74.8 43.6 56.4 57.4 42.6 Dagestaos Republic 3.5 96.5 11.1 88.9 75 25 Evenik AOkr 30.4 69.6 37.2 62.8 57.5 42.5 GotsiyAltayRepuiblic 2.0 98.0 64.1 35.9 62.1 37.9 Ingstshetia 4.8 95.2 98.0 2.0 93.6 6.4 Irkutsk Oblast 79.2 20.8 73.7 26.3 60 40 Ivanovo Oblast 44.2 55.8 50.5 49.5 60 40 Kabacldino-Balkatia Republic 5,1 94.9 45.4 54.6 60.2 39.8 Kaliiirtgalad Oblast 43.6 56.4 62.5 37.5 74.8 25.2 Kalinykia Repuiblic 9.4 90.6 66.8 33.2 59.5 40.5 Kalliga Oblast 36.5 63.5 60.2 39.8 70.5 29.5 KaLsclaatka Oblast 18.9 81.1 50.0 50.0 74.6 25.4 Karachay-Cherkessia 18.9 81.1 53.3 46.7 61.9 38.1 Karelia Reptublic 9.3 90.7 18.7 81.3 45.4 54.6 KemiiecovoOblast 0.6 99.4 27.2 72.8 58 42 Khabarovsk Krai 67.9 32.1 67.0 33.0 69.4 30.6 Khakassia Republic 21.2 78.8 43.0 57.0 53.1 46.9 Khanty-Maiisi AOkr 61.5 38.5 75.5 24.5 73.5 26.5 Kirov Oblast 34.2 65.8 92.5 7.5 69.4 30.6 KomuiReptublic 71.9 28.1 69.0 31.0 67.3 32.7 Komai-PernyakAOk' 5.3 94.7 44.9 55.1 72.1 27.9 Kotyak AOkr 14.9 85.1 71.7 28.3 51.1 48.9 Kostroma Ohlast 54.8 45.2 67.5 32.5 64.4 35.6 Krasnodar Krai 58.1 41.9 64.6 35.4 63.6 36.4 KrasnioyacskKtai 73.7 26.3 63.8 36,2 52.2 47.8 KurganOblast 29.5 70.5 47.4 52,6 63.2 36.8 KuciskOblast 66.0 34.0 68.6 31.4 66 34 Leningrad Oblast 57.7 42.3 69.0 31.0 68.3 31.7 Lipetsk Oblast 75.4 24.6 74.3 25.7 48.9 51.1 Magadani Oblast 56.4 43.6 68.9 31.1 56.1 43.9

(Taible continues on nexl page) (Annex 7laNe 7 continued)

1994, Apr-Dec 1995 1997 Regional share riernl .har/, Regionawdshare Feerail shareI Rtegionalshare Frleral share 26 5.2 94.8 20.7 79.3 74 Matiy El Repuiblic 33.5 3.6 96.4 30.1 69.9 66.5 Mocdovia Reptiblic 26.5 70.2 29.8 73.2 26.8 73.5 Moscow City 68.6 31.4 Moscow Oblast 70.6 29.4 76.4 23.6 23.6 61.9 38.1 Mstianisk Oblast 72.1 27.9 76.4 99.3 41.2 58.8 87.4 12.6 Nenets AOkc 0.7 27.8 70.8 29.2 73.9 26.1 72.2 Nizhegonlod Oblast 43.2 14.3 85.7 48.4 51.6 56.8 Nortb Osetia Republic 42.1 49.4 50.6 64.3 35.7 57.9 Novgorod Oblast 31.6 22.0 78.0 9.2 90.8 68.4 Novosibicsk Oblast 34 29.5 70.5 56.0 44,0 66 Omssk Oblast 69.1 30.9 Oblast 50.1 49.9 71.5 28.5 Orenhtbttg 65.6 34.4 Orlovsk Oblast 65.4 34.6 63.2 36.8 63.7 36.3 Oblast 27.8 72.2 52.8 47.2 Penza 69.2 30.8 Oblast 75.0 25.0 74.5 25.5 Pet nis' 67.6 32.4 Pitimoskiy Krai 67.6 32.4 73.7 26.3 O 71.5 28.5 Oblast 15.9 84.1 48.7 51,3 Pskov 71 29 Rostov Oblast 54.2 45.8 64.0 36.0 66.2 33.8 Ryazats' Oblast 74.6 25.4 75.1 24.9 69.7 30.3 SaklbaRepstblic 0.0 100.0 2.8 97.2 80 20 Sakhalin Oblast 25.4 74.6 63.3 36.7 26.6 68.9 31.1 Sauisara Oblast 75.0 25.0 73.4 71.5 28.5 Satatov Oblast 50.1 49.9 57.7 42.3 75.3 24.7 Oblast 48.9 51.1 64.6 35.4 Smoletisk 73.7 26.3 St. Petersburjg City 74.4 25.6 73.6 26.4 68.1 31.9 Stavtopol' Krai 35.5 64.5 60.1 39.9 25.3 65.7 34.3 Svetdlovsk Oblast 74.1 25.9 74.7 68.8 31.2 TasuibovOblast 27.6 72.4 57.4 42.6 41.5 58.5 Tata-stani Repuiblic 35.5 64.5 41.1 58.9 65.4 34.6 TaymlycAOkr 39.9 60.1 70.7 29.3 64.4 35.6 TomaiskOblast 63.0 37.0 65.9 34.1 71 29 Ttila Oblast 62.4 37.6 62.1 37.9 70.8 29.2 TusvaRepttblic 8.1 919 35.4 64.6 61.6 38.4 Tver' Oblast 56.2 43.8 68.8 31.2 67.1 32.9 Tyutntiets'Oblast 69.4 30.6 72.0 28.0 38.8 67.1 32.9 UdtiustutiaReptublic 50.7 49.3 61.2

(able continues on next ptzge) (Annex Jiabi 7 conlinuedl)

1994, Apr-)e(: 1995 1997

/deral sharre Regional? share &,terulshawr R?egs,iOna1sheare Peeral share Regional shawm

Ul'yatiovsk Oblast 70.2 29.8 19.8 80.2 67.4 32.6 Ust'-OrclaBit-yat AOkh 7.7 92.3 65.5 34.5 69.5 30.5 Vladimiur Oblast 65.2 34.8 71.3 28.7 65.8 34.2 Volgograd Oblast 70.2 29.8 64.9 35.1 74.1 25.9 VlologdaOblast 73.7 26.3 74.8 25.2 50.3 49.7 Vojonezh Oblast 39.4 60.6 66.1 35.9 66.7 33.3 Yaruialo-NenetsAOkr 61.2 38.8 80.2 19.8 69.3 30,7 Yaroslavl' Oblast 76.0 24.0 74.7 25.3 67.7 32.3 O YevreyskayaAO 16.9 83.1 47.5 52.5 66.7 33.3

Average(non.zeeirghle) 40.4 59.6 58.2 41.8 66.5 33.5 Sl. drevittlion 26.4 26.4 18.2 18.2 8.8 8.8 Variane 65.3 44.2 31.3 43.5 13.3 26.3

Note:Regional Shar-es of VATitclucde a por tioni of equtalization trantsfersdisburlsed tltrough regional withholdiingsof the collected VAT. .S,ource:RF State Tax Ser vice. Annex Table 8 Regional Budgets Measured through the Level of Regional Subsistence Minimum

Adju1ste,d*etreuu Adjuvied s,rs be/uset--uusen, and hu,ss Adij,sted)meneld.s l-lue, equalizatim 1naYls by -onthly rl.inimu peeCapitjsb ieac uivs'd,.dby~ -ashly nnn,,uumhpPM/Oc"Ii.sstbsj,ten, dividedby nwstahlymi,imufv p,f capita 1ubshltece div,ide,, RbleWk Rulabi. Rubls July)9997/ July19971 1uly/1997! 1994 1995 1996 fuly 1997 1994 1994 1995 19 Py 1997 1994 1994 1995 1996 Jully1997 1994 6.2121 3.2624 3.7592 6.3684 102.52% AdygeyaRepsiblic 3.1122 1.8701 1.7594 2.8710 92.25% 3,3741 3.0427 3.1642 6.0729 179.99% 5.2673 1.6825 3.6632 4.6201 87.71% AginskiyBturyatskiyAO 0.9266 0.4866 0.6395 0.6102 65.86% 2.2773 1.5886 1.9629 2.0860 91.60% 11.8240 5.6335 5.0511 5.1945 43.93% Altayskiy Ki.ai 6.1046 3.4518 2,8407 2.6867 44.01% 7,2151 5.0737 4.2478 4.1581 57.63% 141.60% 5.5043 4.6476 5.3346 5.6033 101.80% Atnitiskaya Oblast 3.4141 3.3212 2.9705 2.9840 87.40% 3.5277 4.2819 4.3712 4.9953 6.2499 4.6905 3.6639 4.6434 74.30% Arkhangelskaya Oblast 4.6484 4.1271 2.8943 3.5954 77.35% 4.7420 4.5083 3.1810 3.9103 82.46% 6.4838 4.0907 4.6226 5.5130 85.03% AstrakhaniskayaOblast 4.4383 3.0290 2.8227 3.6785 82.88% 4.6696 3.8078 4.1973 5.0584 108.33% 9.0768 10.0138 9.4307 9.1409 100.71% Bashkorstan Repuiblic 8.7230 10.0138 9.2419 9.1409 104.79% 8.7230 10.0138 9.4307 9.1409 104.79% 9.6009 6.2891 4.9160 4.9667 51.73% BelgorodskayaOblast 8.0059 5.8448 4.4444 4.5437 56.75% 8.0059 5.9159 4.5069 4.6777 58.43% 6.9384 4.6877 4.1200 4.2175 60.78% Bryanskaya Oblast 5.4838 3.5552 3.1265 3.1421 57.30% 5.8195 4.5793 3.9904 3.6755 63.16% 6.4896 4.3850 4.8963 5.2325 80.63% Btiiyatia Reptublic 4.0190 2.8914 2.9106 2.4339 60.56% 4.4376 4.0207 3.8776 4,1045 92.49% n.a. n.a. . n.a. n.a. n.a. Clsecinya Reptiblic n.a. n.a. in.a. n.a. ni.a. n.a. ii.a. n.a. n.a. n.a. 5.4452 4.9848 6.1092 6.5850 120.93% C(helybinskayaOblast 4.7744 4.7748 5.5397 5.4022 113.15% 4.7744 4.8128 5.6263 5.5553 116.35% 5.0228 2.5840 2.7892 3.5158 70.00% Chitinskaya Oblast 3.4615 1.9769 2.1274 2.2250 64.28% 3.7644 2.5162 2.5748 2.7367 72.70% n.a. n.a. rn.a. na. nl.a. ChuakotskapsAO in.a. i.a. n.a. na, na. n.a. n.a. ni.a. in.a. n.a. 7.2607 5.2690 5.2168 5.7884 79.72% Chuivasiia Republic 6.1186 4.2153 4.0799 4.3138 70.50% 6.2960 5.1862 4.9795 5.1513 81.82% 7.0235 3.6157 3.0793 4.9156 69.99% DagestanRepiublic 0.8138 0.6184 0.6804 1.0481 128.79% 1.8201 3.4191 2.3090 3.1743 174.40% 56.2431 34.0160 32.2941 35.5258 63.16% EvenikiyskiyAO 17.8084 17.7943 21.0282 17,9765 100.94% 27,4766 31.8537 30.4903 32.3643 117.79% 13.4949 5.7039 4.8125 5.3775 39.85% Golniy Altay Replublic 2.5010 1.4442 1.4736 1.3703 54.79% 5.4004 4.7655 3.6046 3,3539 62.10% n.a. rn.a. n.a. na. i.a. Ingilsletia Republic n.a. n1.a. in.a. nla. in.a. n.a. in.a. in.a. n.a. n.a. 7.6257 5.5161 5.0266 4.9052 64.32% liknitskaya Oblast 6.4889 5.2519 4.6591 4.1526 63.99% 6,4889 5,4334 4.6623 4.2568 65.60% 5.8280 3.7236 4.2829 5.0675 86.95% IvaniovskayaOblast 4.2485 2.6463 2.6512 2.9803 70.15% 4.6106 3,3438 3.7645 4.5289 98.23% 6.9634 3.7121 5,0316 6.1368 88.13% Kabardino-Balkaria Rep. 2.1084 2.0447 2.6773 2.8047 133.02% 2.8618 3.2411 4.2714 4.7325 165.37% 7.2820 4.3311 4.9037 5.5715 76.51% Kahningralskaya Oblast 5.8766 3.6585 4.4520 4.5786 77.91% 6.0725 4.3235 4.7025 5.2413 86.31% 11.6851 4.7886 5.7676 8.8260 75.53% Kalnsykia Republic 2.6369 1.3551 1.8716 3,7168 14(0.95% 4.8256 4.0139 4.8350 7.6093 157.69% 8.0119 4.9899 5.2339 5.7094 71,26% KaltuzlskayaOblast 6.1336 3.9011 3.5521 3.8448 62.68% 6.2712 4.6687 4.1880 4.8594 77A49% 10.7685 6.4576 4.6443 5.2397 48.66% Kamchlatskaya Oblast 5.6907 4.2449 3.2695 2.5442 44.71% 6.1471 5.4518 3.6125 3.4457 56.05% Kar-achaevo-Clie kessia 3.6324 3.6082 9.8459 132.74% Repuiblic 2.9452 1.9958 1.9305 4.9324 167.47% 3.6989 3.1711 3.0927 8.1254 219.67% 7.4172 5.9664 4.3758 4.8407 5,6938 95.43% Karelia Repuiblic 5.1100 3.6590 3.7505 4.1995 82.18% 5.1975 4.2493 4.4556 4.9548 95.33% 10.6326 7.3921 7.4642 7.4742 70.29% Ketnerovskaya Oblast 7.8871 5.5063 5.8511 5.9061 74.88% 8.7393 7.2362 6,3907 6.5861 75.36% 8.6135 5.2513 6.0772 6.5365 75.89% Khabarovskiy Kaai 6.1102 4.005(0 4.7531 4.3371 70.98% 6.1371 4.5216 5.3006 5,2821 86.07% 7.6499 4.8276 4.6993 5.1757 67.66% Kbakassia Reptublic 5.6329 4.2021 3.9829 4.0349 71.63% 5.8007 4.7926 4.3985 4.4248 76.28% 15.9038 14.2611 21.8060 33.6751 211.74% Khlanty-MansiyskiyAO 15.1706 14.2012 21,025(0 33.6064 221.52% 15.1706 14.2012 21.0250 33.6064 221.52% 5.4185 3.4022 3.8163 4.6164 85.20% Kirovskaya Oblast 4.4077 2.8587 2.9086 3.2068 72.75% 4.5240 3.3467 3.7517 4.1038 90.71% 7.4993 8.5264 7.7864 8.7157 116.22% KonisiRepuLblic 5.8046 7.1667 6.5564 7.5790 130.57% 5.8046 7.4925 6.6900 7.7690 133.84% 7.6399 3.9084 4.2215 5.2921 69.27% Kosni-Pei cinyatskayaAO 2.5385 1.6521 2.0554 2.1392 84.27% 3.9241 3.3970 3.4753 3.6439 92.86% 46.0602 18.1537 10.9656 12.4631 27.06% KoRyakskiyAiton. Okreug 8.0159 3.3313 3.1489 4.7693 59.50% 21.7198 13.2835 7.0653 9.7421 44.85% 7.8552 6.2522 8.3209 9.2766 118.10% KostionsiskayaOblast 5.2848 3.5001 3.4779 6.8963 130.40% 5.5069 5.3481 4.8631 8.6216 156.56% 7.8535 4.8384 4.6991 5.2842 67.28% Krasnodarskiy Kiai 6.1239 4,3143 3.8013 4.0948 66.87% 6.2374 4.6420 4.4460 4.9490 79.34% 7.1754 7.3762 6.0651 7.7800 108.43% KRasnioyacskiyKiai 6.4270 7.3000 5.8315 7.1373 111.05% 6,4270 7.3000 5.8315 7.1373 111.05%

('Mble continues on nexl page) (Annex jTiah68 c:ontinued)

Adijusted enses1,reI/(ner ltzruss/vsaIrde k,ans AdljusiM,nflne pf1nf111e5p/lWtNalUIton lmrnn1sje AdljlLstfvmnnumnesIf abs i,!fN, dividedby mont/hy n,fl e,,lddli Caimitr .misede,wr dmiv,d by atblk/ymliuN,, tW- c/a s'bx1imtence dai,4,dI Iy .lontbhyfluijm,u pn rapita ______R uThtmn R,,b1i, 99 jui'yl 997/ fily! l1tyl7! 997/ 1991 1994 1995 1996 fidy 1997 1991 1994 1995 1996 ju1y1997 1994 1994 1995 1996 1jn5y1997

KiuigamiskayaOblast 3.9489 2.8337 3.0513 3.5670 90.33% 4.2103 3.4561 4.0323 4.5364 107.74% 5.9107 3.5816 4.5261 5.1895 87.80% KuttskayaOhlast 5.8148 5.3264 5.2721 4.6263 79.56% 5,9755 5.7090 5.8475 5.4763 91.65% 6.8062 5.7531 5.8811 5.7283 84.16% LeninmgradskayaOblast 4,9880 4.3759 4.5794 4.0897 81.99% 5.1310 4.4826 4.7377 4.3482 84.74% 5.9617 4,8617 4.8672 4.5390 76.14% Lipetskaya Oblast 7.0004 7.5511 8.0764 7.4797 106.85% 7.0004 7.5511 8.0764 7.4797 106.85% 8.1251 7.6367 8.1726 7.8058 96.07% Magada;iskaya Oblast 4.0356 5.8794 6.8117 7.3612 182.41% 4.1754 7.7152 9.3754 9.6116 230.20% 9.0044 8.7730 10.3052 10.8875 120.91% Mai i-EI Repuiblic 4.7049 2.8514 2.5856 2,6223 55.74% 5.5915 4.5385 3.6978 4.0125 71.76% 8.1462 4.6944 3.9587 4.3918 53.91% Mordiovia Republic 4.7699 2.7173 2.8223 4.0435 84.77% 5,1540 3.6679 3.9646 5.5620 107.92% 6.9779 4.0936 5.2475 6.6778 95.70% Moscow 14.6303 1().9851 9.5406 11.1397 76.14% 14.6303 10.9851 9.5406 11.1397 76.14% 17.7343 11.7743 10.2040 11.6680 65.79% Moskovskaya Oblast 6.4805 5,2685 5.4411 5.4707 84.42% 6.4805 5.5825 5.5875 5.7643 88.95% 7.7010 5.6835 5.9743 6.0217 78.19% Murmaiiskaya Oblast 5.0533 4.0545 3.8351 5.1609 102,13% 5.0533 4.1771 3.8677 5.5064 108.97% 6,3752 4,6480 5.3429 7.9210 124.25% Netnetskiy AO 7.4031 6.3311 9.9467 13.2014 178.32% 8.2955 9.1027 12.7404 16.8625 203.27% 14.3220 9.1677 12.8576 17.0833 119.28% Nizhego-odskaya Oblast 7.2571 5.6819 5.4323 6.3186 87.07% 7.2571 5.6819 5.7117 6.4985 89.55% 7.7219 5.7424 5.8900 6.7961 88.01% Notlhei-n Osetia Rep. 1.9671 1.6150 2.4900 2.7486 139.73% 2.6059 2.8908 4.2333 4.3739 167.85% 5.9607 3.6090 5.3160 5.6234 94.34% Novgocodskaya Oblast 4.3020 3.2081 3.8562 4,1340 96.10% 4.4844 4.0061 5.0402 5.5123 122.92% 6.3499 4.1762 5.4241 6.3519 10(0.03% Novosibhiskaya Oblast 6.8646 4.4100 3.8505 3.6235 52.78% 7.2639 5.2663 4.1813 3.9408 54.25% 8.3868 5.3065 4.3311 4.3619 52.01% OmuiskayaOhlast 6,1271 5.0531 4.9425 6.6443 108.44% 6.2133 6.1275 5.2865 7.1627 115.28% 8.1672 6.2062 6.1913 7.6203 93.30% OmeoibmmrgskayaOblast 3.9927 3.4721 4.9055 5.9667 149.44% 4.1426 3.7221 5.3611 6.3001 152.08% 5.2091 3.8150 5.5172 6.6567 127.79% Orlovskaya Oblast 5.8871 3.7553 3.5881 4.0850 69.39% 6.1782 5.1644 4.7490 5.7848 93.63% 9.2291 5.7586 5.7264 6.5024 70.46% PeoizcouskayaOblast 4.4915 2.6603 2.3281 2.6898 59.89% 4.9379 3.5646 3.3188 3.4625 70.12% 6.5458 3.8252 3.4783 3.7143 56.74% Permskaya Oblast 5.5879 5.2288 5.2114 6.3145 113.00% 5.5879 5.4273 5.2589 6.4458 115.35% 6.3781 5.5448 5.6786 6.5485 102.67% PriwrorskiyKRai 5.2784 4.1366 3.5076 4.1666 78.94% 5.2784 4.4028 3.5556 5.1983 98.48% 7.2432 5,0630 4.5192 6.2375 86.12% I'skovskaya Oblast 3.7151 2.0241 2.4515 2.9298 76,86% 3.9512 2.7096 3.9118 4.2746 108.18% 5.2305 2,8503 4.5577 4,8634 92.98% Rostovskaya Oblast 4.7073 3.2380 3.2980 3.5396 75.19% 4.8101 3.7642 3.7797 4.2662 88.69% 5.5179 3.8456 4.3343 4.4720 81.05% Ryazanskaya Oblast 6.0814 4.5649 3.6664 4.4539 73.24% 6.0814 4,6063 4.0629 5.0019 82.25% 8.4989 4.7386 4.8442 5.1622 60.74% Sakha (Yaktotia) Rep. 10.9250 5.5548 3.8824 4.6540 42.60% 10.9250 6.0967 4.6982 5.4588 49.97% 11.4993 6,1032 6.0831 7.2060 62.66% Saklisaiiskaya Oblast 4.1071 3.5224 3.7192 3.7615 91.59% 4.2765 4.4661 4.6892 4.8457 113.31% 6,1153 4.9595 5.3723 5.8326 95.38% SamnarskayaOhlast 9.2775 6.3808 6.4128 7.3125 78.82% 9.2775 6.3808 6.4128 7.3125 78.82% 10.4323 6.4596 6.5072 7.3488 70.44% Sacalovskaya Oblast 4.3557 3.2483 3.3904 3.9234 90.08% 4.5908 3.7164 3.9556 4.6170 100.57% 5.3462 3.7484 4.2357 5.0)388 94.25% SsmioleoiskayaOblast 6.5068 4.0116 3.6157 3.9118 60.12% 6.6190 4.4217 4.1665 4.5276 68.40% 7.7722 4,4905 4.2469 5.0042 64.39% St. Petersburg 7.1141 6.0233 6.2198 5.4705 76.90% 7.1141 6.0233 6.3314 5.5479 77.98% 8.4703 6,0501 6.3949 5.6953 67.24% Stavropolskiy Krai 4.4589 3.5694 3.3143 2.8600 64.14% 4.6186 4.5894 4.2477 3.7268 80.69% 6,7318 4.7811 4.6070 4.0478 60.13% Sveldlovskaya Oblast 5,3568 4.6283 5.4052 5.3880 100.58% 5.3568 4.6283 5.4052 5.3880 100.58% 5.6935 4.7281 5.5389 5.6319 98.92% TamiibovskayaOblast 3.8996 3.9972 4.1344 4,2399 108.73% 4.0875 5.1494 4,9148 5,3617 131.17% 5.2313 5.3525 5.2824 5.9136 113.04% Tatarstan Repuiblic 9.5144 9.0388 10.3622 16.7751 176.31% 9.5144 9.0388 10.3622 16.7751 176.31% 11.1481 9.1221 10.8591 17.2534 154.76% Tayrryryskiy/Dolgaoio- Nenetsk. AO 17.8463 17.8887 10.4236 18.5394 103.88% 22.7034 22.4242 13.7444 22.0934 97.31% 39.4645 22,4553 13.8028 22.9718 58.21% Tomskaya Oblast 4.9786 5.29119 5.4061 7.3170 146,97% 5.1)757 5.8765 5.9597 8.0296 158.20% 6.6949 6.0387 6.3674 8.4410 126.08% Ttlfskaya Oblast 5.7824 4.3167 3.6657 3.9695 68.65% 6.2189 4.7154 4.1129 4.3356 69.72% 7.4885 4.8911 5.0174 5.11617 67.59% ToivaRepuiblic 2.5613 1.0372 0.9213 1.0638 41.53% 3.9347 2.8143 2.5953 2.8651 72.82% 10.8752 4.8592 3.8495 5.8338 53.64%

(7able continues on next /age) (Annex TQeble8 (onlinued)

Adjuhstpedmrr,.teae,t Adjusle.,!i11,r,' blc(11/ IraIni /- ,a,,!l104,,, Ad/,tO-d te1-mNtses phit er1aalizalianha. s i110t11ady taiai,.a11aPn atila -tittsi,temr dbi,lcd"lby a atti1dy,,,,,,iu,,,n e caita ,v1,ite,,l,. daid,ia,dby vuald/iby,,,i,,in,us, pe -aIiltr ,,,b,isIr,le,r t ireI1lby Ruble, Rt,bic, R_U__ J/t1yl997/ fidy1997/ J1lyl 997/ /995 1996 ltfdy/997 1994 1994 1995 1996 July 1997 1994 1994 1995 1996 fidy 1997 1994 19/9 6.7187 4,5569 4.9944 5.3267 79.28% Tverskaya Oblast 5.4449 3.8162 3.8330 4,0922 75.16% 5.7302 4.4114 4.3371 4.7045 82.10% 7.1558 4.9164 2.5526 3.2587 45.54% TysunieuiskayaOblast 5.0648 4.5226 2.4052 2.7924 55.13% 5.0653 4,8774 2,5389 3.1127 61,45% 5.7899 4.7683 5.5566 6.8079 117.58% Udmiuri-tiaRepuiblic 4.3434 4.0267 4.7188 4.9471 113.90% 4.5980 4.5069 4.9174 5.6098 122.00% 12.5318 6.6085 5.7068 6.0206 48.04% Ulyatiovskaya Oblast 9.3970 5.6968 4.8510 5.0687 53.94% 9.3970 6.3077 5.4802 5.6738 60.38% Ust-Or dyrlskiy 7.1076 3.5987 4.2050 3.7434 52.67% BntryatskiyAO 1.7508 1.0579 1.2395 1.1210 64,03% 3.6889 3.0760 3.3511 3.1537 85.49% 7.0087 4.2204 4.6865 5.0189 71.61% VlaclhmirskayaOblast 5.5171 3.8306 3.4894 4.1233 74.74% 5.7293 4.0951 4.1232 4.8310 84.32% 6.4238 4.8310 5.0174 4.4955 69.98% VolgogcaAdskayaOblast 5.4280 4.5976 4,3734 3.8975 71.80% 5.6055 4.7809 4.7724 4,0615 72.46% 7.8975 6.1129 5.4894 6.1883 78.36% VologodskayaOblast 6.8045 5,6360 4.6640 5.5450 81.49% 6.8045 5.9298 4.7982 5.5450 81.49% 7,3980 4.7852 4.3736 4.6154 62.39% Voionezbskaya Oblast 6.2509 4.0332 3.5333 3.8090 60.94% 6.2829 4.7682 4.2530 4.4979 71.59% Yamiialo-Nenetskaya 18.4079 28.8512 52.3860 216.90% Republic 23.1990 18.1951 28.2667 52.3412 225.62% 23.1990 18.1951 28.2667 52.3412 225.62% 24.1524 7.0646 5.0524 6.3412 6.7953 96.19% Yaioslavskaya Oblast 6.2367 4.8661 5.3095 5.9926 96.09% 6.2367 4.8661 5.3238 6.3086 101.15% 6.0111 3.6755 3.7393 2.6866 44.69% Yevreyskaya Antoni. Oblast 3.5084 1.6282 1.6166 0.9714 27.69% 3.7308 3.1100 3.2404 2.0371 54.60% 9.3920 6.1395 6.3470 7.6970 81.95% Averalge(non-vei,ghted) 5.9734 4.6959 4,7843 5.7645 96.50% 6.6205 5.7722 5.7006 6.9200 104.52% 7.9317 4.4699 4.6216 7.1408 St. levaittion 3.5530 3.3372 4.1493 6.7590 4.4022 4.2282 4.5285 7.1174 84.4514 72.8060 72.8157 92.7732 Variance 59.4806 71.0660 86.7283 117.2524 66,4935 73.2506 79.4386 102.8526 n.a. = Not applicable. SSouree:Authots' estiiates based oni the data fioms the Ministry of Finanice and Roskomstat. Annex Table 9 Budget Expenditures by Level of Government as Percent of GDP

Budget expenditures/year(percent) 1992 1993 1994 1995 1996

Total expenditures 56.06 46.14 46.14 34.50 37.00 - federal 40.91 25.10 24.24 16.89 18.18 - regional 7.38 10.51 11.71 9.08 9.42 - municipal 7.77 10.54 10.20 8.53 9.40

Total expenditures net of interbudgetary transfers 51.63 n.a. 38.64 29.63 31.32 - federal 39.24 22.53 20.39 14.75 15.59 - regional 4.70 n.a. 8.15 6.52 6.49 - municipal 7.69 10.19 10.10 8.36 9.23

Transfers to other levels of government 4.43 n.a. 7.51 4.87 5.68 - federal 1.67 2.57 3.84 2.14 2.59 - regional 2.68 n.a. 3.56 2.56 2.92 - municipal 0.08 0.35 0.10 0.17 0.16

National economy 26.42 13.45 10.60 8.34 8.56 - federal 21.35 6.53 3.22 2.20 2.35 - regional 2.31 3.31 3.68 2.96 2.77 - municipal 2.76 3.61 3.70 3.19 3.43

Education 3.58 4.06 4.51 3.48 3.82 - federal 1.21 0.79 0.90 0.55 0.56 - regional 0.52 0.77 0.86 0.69 0.69 - municipal 1.85 2.50 2.75 2.24 2.58

Health andsport 2.47 3.11 3.25 2.37 2.61 - federal 0.28 0.33 0.38 0.23 0.27 - regional 0.70 0.94 1.08 0.79 0.86 - municipal 1.49 1.85 1.78 1.35 1.48

Social protection 1.08 0.74 0.7B 1.28 1.76 - federal 0.77 0.38 0.39 0.24 0.55 - regional 0.22 0.26 0.27 0.40 0.47 - municipal 0.08 0.10 0.12 0.64 0.74

Administration and justice 1.84 2.32 2.96 2.40 2.78 - federal 1.48 1.85 2.41 1.51 1.77 - regional 0.10 0.14 0.18 n.a. 0.53 - municipal 0.26 0.33 0.37 n.a. 0.48

Culture and mass media 0.61 0.57 0.73 0.55 0.59 - federal 0.31 0.20 0.29 0.17 0.21 - regional 0.13 0.17 0.21 0.17 0.17 - municipal D.17 0.20 0.23 0.21 0.21

Defense 4.50 4.20 4.67 3.04 3.47 - federal 4.50 4.20 4.67 3.04 3.47 - regional 0 0 0 0 0 - municipal 0 0 0 0 0

Loans 5.04 n.a. 2.72 0.99 0.91 - federal 4.61 1.70 2.30 0.58 0.28 - regional 0.20 in.a. 0.34 0.34 n.a. - municipal 0.23 n.a. 0.08 0.06 i.a.

Other expenditures 6.09 n.a. 8.42 7.17 6.80 - federal 4.72 6.55 5.83 6.21 6.14 - regional 0.52 n.a. 1.51 n.a. n.a. - municipal 0.85 n.a. 1.08 n.a. n.a.

.a. = Not applicable. Source:Authors' estimates based on the data from the Ministry of Finance and Roskomstat.

106 Annex Table 10 Shares of Different Levels of Government in ConsolidatedItemized Expenditures

Budget expenditures/year(percent) 1992 1993 1994 1995 1996

Total expenditures 100 100 100 100 100 - federal 73.0 54.4 52.5 48.9 49.1 - regional 13.2 22.8 25.4 26.3 25.5 - municipal 13.9 22.8 22.1 24.7 25.4

Total expenditures net of interbudgetary transfers 100 100 100 100 100 - federal 76.0 n.a. 52.8 49.8 49.8 - regional 9.1 n.a. 21.1 22.0 20.7 - municipal 14.9 n.a. 26.1 28.2 29.5

ahnsfers to other levels of government 100 100 100 100 100 - federal 37.6 n.a. 51.2 43.9 45.7 - regional 60.5 n.a. 47.5 52.6 51.5 - municipal 1.8 n.a. 1.3 3.5 2.9

National economy 100 100 100 100 100 - federal 80.8 48.6 30.4 26.3 27.5 - regional 8.7 24.6 34.8 35.4 32.4 - municipal 10.5 26.8 34.9 38.2 40.1

Education 100 100 100 100 100 -federal 33.8 19.5 19.9 15.9 14.5 - regional 14.5 18.9 19.1 19.7 18.0 - municipal 51.8 61.6 61.0 64.4 67.5

Healthandsport 100 100 100 100 100 -federal 11.3 10.5 11.8 9.9 10.2 - regional 28.5 30.2 33.4 33.4 33.1 - municipal 60.2 59.3 54.8 56.7 56.8

Social protection 100 100 100 100 100 - federal 71.8 52.0 50.3 18.5 31.2 - regional 20.4 34.9 34.9 31.1 26.8 - municipal 7.8 13.2 14.8 50.3 42.0

Administration and justice 100 100 100 100 100 - federal 80.5 79.6 81.4 63.1 63.7 - regional 5.5 6.1 6.2 n.a. 19.0 - municipal 14.0 14.3 12.4 n.a. 17.3

Culture and mass media 100 100 100 100 100 - federal 51.2 34.8 39.6 31.6 34.7 - regional 21.2 30.2 28.9 30.8 29.3 - municipal 27.6 35.0 31.5 37.6 36.0

Defense 100 100 100 100 100 - federal 100 100 100 100 100 - regional 0 0 0 0 0 - municipal 0 0 0 0 0

Loans 101 100 100 100 100 - federal 91.5 ii.a. 84.6 58.9 30.3 - regional 4.0 n.a. 12.5 34.6 n.a. - municipal 4.5 n.a. 3.0 6.5 n.a.

Other expenditures 100 100 100 100 100 - federal 77.5 n.a. 69.2 87 90 - regional 8.5 n.a. 18.0 n.a. n.a. - municipal 14.0 n.a. 12.8 n.a. n.a.

n.a. = Not applicable. Source:Authors' estimates based on the data from the Ministry of Finance.

107 Annex Table 11 Shares of Itemized Expenditures in Total Expenditures at Different Levels of Government

Budget expenditures/year(percent) 1992 1993 1994 1995 1996

Transfers to other levels of government 7.9 n.a. 16.3 14.1 15.4 - federal 4.1 10.2 15.9 12.7 14.3 - regional 36.3 n.a. 30.4 28.2 31.1 - municipal 1.0 3.3 1.0 2.0 1.7

National economy 47.1 29.1 23.0 24.2 23.1 - federal 52.2 26.0 13.3 13.0 12.9 - regional 31.3 31.5 31.4 32.6 29.5 - municipal 35.5 34.2 36.2 37.4 36.5

Education 6.4 8.8 9.8 10.1 10.3 - federal 3.0 3.2 3.7 3.3 3.1 - regional 7.0 7.3 7.3 7.5 7.3 - muniicipal 23.8 23.8 27.0 26.2 27.4

Health and sport 4.4 6.7 7.0 6.9 7.1 - federal 0.7 1.3 1.6 1.4 1.5 - regional 9.5 8.9 9.3 8.7 9.2 - municipal 19.1 17.5 17.4 15.8 15.8

Social protection 1.9 1.6 1.7 3.7 4.8 - federal 1.9 1.5 1.6 1.4 3.0 - regional 3.0 2.4 2.3 4.4 5.0 - muniicipal 1.1 0.9 1.1 7.5 7.9

Administration and justice 3.3 5.0 6.4 7.0 7.5 - federal 3.6 7.4 9.9 9.0 9.7 - regional 1.4 1.3 1.6 n.a. 5.6 - municipal 3.3 3.2 3.6 ni.a. 5.1

Culture and mass media 1.1 1.2 1.6 1.6 1.6 - federal 0.8 0.8 1.2 1.0 1.1 - regional 1.7 1.6 1.8 1.9 1.8 - municipal 2.2 1.9 2.3 2.4 2.3

Defense 8.0 9.1 10.1 8.8 9.4 - federal 11.0 16.8 19.3 18.0 19.1 - regionial 0 0 0 0 0 - municipal 0 0 0 0 0

Loans 9.0 n.a. 5.9 2.9 2.5 - federal 11.3 6.8 9.5 3.5 1.5 - regional 2.7 n.a. 2.9 3.8 ii.a. - municipal 2.9 n.a. 0.8 0.8 ii.a.

Other expenditures 10.9 n.a. 18.3 20.8 18.4 -federal 11.5 26.1 24.1 36.8 33.8 - regional 7.0 n.a. 12.9 n.a. n.a. - muniicipal 11.0 na. 10.6 in.a. n.a.

n-a. = Not applicable. SDurce:Authors' estimates based on the data from the Ministryof Finance.

108 Annex Table 12 Shares of Different Levels of Government in ConsolidatedItemized Revenues

Budget revenues/year(percent) 1992 1993 1994 1995 1996

Total revenues 100 100 100 100 100 - federal 54.5 39.5 39.0 45.2 44.7 - regional 22.3 30.6 32.4 27.9 26.9 - municipal 23.2 29.9 28.5 26.9 28.5

Total revenues net of interbudgetary transfers 100 100 100 100 100 - federal 60.2 ni.a. 47.2 52.4 53.5 - regional 21.0 n.a. 27.4 25.5 23.0 - municipal 18.8 n.a. 25.5 22.1 23.5

Transfers from other levels of government 100 100 100 100 100 - federal 6.6 n.a. 3.5 1.7 0.33 - regional 33.1 n.a. 54.4 42.6 46.4 - municipal 60.3 n.a. 42.1 55.7 53.2

Totaltaxrevenues 100 100 100 100 100 - federal 60.3 45.6 48.3 48.4 49.8 - regional 19.4 28.3 26.4 26.2 23.7 - municipal 20.3 26.1 25.3 25.4 26.5

Profit tax 100 100 100 100 100 -federal 41.3 32.5 35.1 35.6 36.6 - regional 30.1 39.7 38.9 39.0 38.4 - municipal 28.6 27.7 26.1 25.4 25.0

VAT 100 100 100 100 100 - federal 75.1 64.4 67.2 75.4 74.8 - regional 15.1 22.5 21.1 14.0 15.7 - municipal 9.8 13.1 11.7 10.6 9.5

Personal income tax 100 100 100 100 100 - federal 0 0 0.6 9.0 9.2 - regional 22.8 23.2 25.8 24.2 24.6 - municipal 77.2 76.8 73.6 66.8 66.3

Excise taxes 100 100 100 100 100 - federal 47.9 50.5 60.1 72.8 86.8 - regional 41.9 40.2 32.0 21.3 10.3 - municipal 10.2 9.3 7.9 5.8 2.9

Property taxes 100 100 100 100 100 - federal 0 0 0 5.0 0.8 - regional 52.4 45.5 41.8 42.3 44.1 - municipal 47.6 54,5 58.2 52.8 55.1

Naturalresourcestasx 100 100 100 100 100 - federal 0 29.1 15.3 24.4 25.1 - regional 63.9 40.6 44.9 36.4 39.0 - municipal 36.1 30.3 39.7 39.2 35.9

Othertaxes 100 100 100 100 100 - federal 91.8 77.8 70.7 61.3 43.1 - regional 2.3 8.9 13.1 17.3 16.6 - municipal 5.9 13.3 16.2 21.4 40.2

Nontax revenues 100 100 100 100 100 - federal 59.2 n.a. 38.0 70.9 75.1 - regional 33.6 n.a. 35.7 22.2 18.8 - municipal 7.1 n.a. 26.3 7.0 6.1

n.a. = Not applicable. Source:Authors' estimates based on the data from the Ministry of Finance.

109 Annex Table 13 Shares of Itemized Revenues in Total Revenues at Different Levels of Government

Budget revenues/year(percent) 1992 1993 1994 1995 1996

Transfers from other levels of government 10.53 n.a. 18.63 14.24 16.57 -federal 1.28 0.12 1.67 0.55 0.12 - regional 15.54 13.84 31.30 21.73 28.66 - municipal 27.41 n.a. 27.46 29.45 31.00

Total tax revenues 79.45 68.45 72.65 70.52 71.26 - federal 87.84 79.00 89.85 75.54 79.43 - regional 69.26 63.41 59.09 66.17 62.81 - municipal 69.51 59.67 64.50 66.59 66.39

Profit tax 22.07 26.72 21.71 22.70 14.05 -federal 16.71 21.99 19.49 17.88 11.51 - regional 29.79 34.71 26.04 31.74 20.10 - municipal 27.26 24.80 19.83 21.42 12.33

VAT 28.21 17.88 18.46 18.53 22.89 - federal 38.82 29.14 31.80 30.93 38.33 - regional 19.15 13.15 12.00 9.32 13.37 - municipal 11.94 7.84 7.57 7.29 7.63

Personal income tax 6.08 6.98 7.77 7.06 7.83 - federal 0.00 0.00 0.12 1.41 1.61 - regional 6.23 5.29 6.20 6.12 7.16 - municipal 20.26 17.93 20.03 17.54 18.24

Excise taxes 2.96 2.83 3.31 4.68 8.73 - federal 2.60 3.61 5.09 7.55 16.97 - regional 5.55 3.72 3.27 3.58 3.34 - municipal 1.30 0.88 0.92 1.01 0.89

Property taxes 0.76 0.87 2.14 3.26 5.12 - federal 0.00 0.00 0.00 0.36 0.09 - regional 1.79 1.29 2.76 4.93 8.41 - municipal 1.56 1.58 4.37 6.39 9.92

Natural resources tax 1.72 1.35 1.08 2.39 3.14 - federal 0.00 1.00 0.42 1.29 1.76 - regional 4.92 1.80 1.50 3.11 4.56 - municipal 2.68 1.37 1.50 3.48 3.96

Other taxes 17.65 11.82 18.17 11.88 9.49 - federal 29.70 23.26 32.92 16.12 9.16 - regional 1.84 3.46 7.33 7.36 5.88 - municipal 4.51 5.25 10.31 9.46 13.42

Nontax revenues 10.02 n.a. 8.72 15.25 12.17 - federal 10.89 20.88 8.48 23.91 20.45 - regional 15.10 22.75 9.61 12.10 8.53 - municipal 3.09 n.a. 8.05 3.96 2.61

n.a. =Not applicable. Source.Authors' estimates based on the data from the Minisuty of Finance.

110 Annex Table 14 Shares of Municipalities in ConsolidatedRegional Tax Revenues by Region

.;\70. Regions of the Russian Federation 1992 1993 1994 1993 1996

l Adygeya Republic 53.14 64.43 58.10 73.17 75.19 2 Aginsk Burvat AOkr 96.22 97.33 100 97.46 94.96 3 Altay Krai 65.57 71.04 75.53 66.65 75.00 4 Altay Republic 89.25 86.42 90.22 96.93 92.17 5 Amur Oblast 63.19 57.61 63.22 66.61 66.62 6 Arkhangel'sk Oblast 68.83 62.30 62.06 61.53 73.98 7 Astrakhan Oblast 49.95 48.69 52.76 54.90 62.77 8 Bashkortostan Republic 33.25 37.47 36.14 29.51 46.68 9 Belgorod Oblast 52.73 41.66 50.76 46.76 62.92 10 Brvansk Oblast 67.80 64.97 57.13 74.67 82.34 11 Buryatia Republic 79.82 81.11 82.35 80.83 91.02 12 Chechenia n.a. n.a. n.a. n.a. n.a. 13 Chelyabinsk Oblast 66.46 64.25 67.12 58.40 57.65 14 Chita Oblast 73.11 80.22 76.23 71.92 71.24 15 Chukotka AOkr 56.78 72.91 73.15 87.98 85.57 16 Chuashia Republic 59.46 51.53 46.45 53.95 56.61 17 Dagestan Republic 90.76 87.93 96.36 in.a. 83.83 18 Evenk AOkr 80.87 84.39 42.64 58.83 54.74 19 Ingushetia 100.00 94.08 92.91 99.32 99.93 20 Irkutsk Oblast 55.08 58.47 68.88 68.46 74.81 21 Ivanovo Oblast 67.93 49.43 57.42 70.07 72.87 22 Kabardino-Balkaria Republic 73.75 68.89 60.29 61.65 77.05 23 Kaliningrad Oblast 54.34 63.33 57.10 64.50 80.53 24 Kalrnykia Republic 94.14 86.33 93.55 92.46 87.99 25 Kaluga Oblast 62.75 62.78 61.87 65.34 69.21 26 Kamchatka Oblast 79.60 75.06 64.61 75.19 73.07 27 Karachay-Cherkessia 60.58 58.26 64.94 72.33 76.38 28 Karelia Republic 34.35 36.81 46.62 66.38 68.65 29 Kemerovo Oblast 68.90 58.80 54.05 65.08 61.85 30 Khabarovsk Krai 59.81 54.46 50.37 62.79 63.24 31 Khakassia Republic 70.68 63.10 65.55 68.07 71.58 32 Khanity-Mansi AOkr 76.68 73.12 78.83 72.57 73.37 33 Kirov Oblast 54.30 53.58 48.89 56.99 64.38 34 Komi Republic 63.83 50.19 60.70 57.64 61.12 35 Komi-Permyak AOkr 85.09 74.77 62.16 86.13 85.32 36 Koryak AOkr 93.08 92.98 91.07 94.15 89.10 37 Kostroma Oblast 60.53 64.41 60.10 75.51 74.29 38 Krasnodar Krai 71.67 72.22 68.34 62.75 74.25 39 Krasnoyarsk Krai 61.96 44.47 55.22 47.44 58.99 40 Kurgan Oblast 68.13 66.51 60.22 69.37 69.77 41 Kursk Oblast 42.45 37.49 50.97 50.71 65.19 42 Leningrad Oblast 66.38 43.99 67.22 65.62 57.28 43 Lipetsk Oblast 48.84 45.88 51.66 44.15 64.21 44 Magadan Oblast 70.00 72.93 76.46 83.03 71.10 45 Mariy El Republic 59.09 61.26 58.37 49.93 48.01 46 Mordovia Republic 56.41 49.07 43.08 50.08 62.50 47 Moscow City 0 0 0 0 0 48 Moscow Oblast 52.27 51.63 61.54 66.50 66.84 49 Murmansk Oblast 45.75 61.40 56.54 63.77 68.15 50 Nenets AOkr 41.21 38.75 27.41 15.45 13.16 51 Nizhegorod Oblast 47.46 47.77 60.20 57.90 71.53 52 North Osetia Republic 81.92 80.55 81.34 75.82 71.69 53 Novgorod Oblast 51.83 56.40 60.83 62.23 74.59 54 Novosibirsk Oblast 61.35 59.86 55.90 63.05 63.50 55 Omsk Oblast 55.14 58.95 53.84 59.42 70.95 56 Orel Oblast 48.25 54.49 67.23 72.88 71.19 57 Oreniburg Oblast 61.28 57.36 63.58 58.67 62.63 58 Penza Oblast 72.45 63.91 68.13 68.52 70.21 59 Perm' Oblast 59.66 62.64 61.87 68.11 73.43 60 Primorskiy Krai 73.89 62.70 67.96 66.99 76.75 61 Pskov Oblast 66.09 72.00 61.68 76.73 85.48 62 Rostov Oblast 61.43 55.88 56.42 70.83 82.28 63 Ryazan' Oblast 58.62 45.80 53.11 59.23 67.37 64 Sakha Republic 29.10 37.58 55.50 50.17 47.05 65 Sakhalin Oblast 70.16 87.58 78.33 86.88 90.39 66 Samara Oblast 54.79 61.47 65.71 60.84 70.21 67 Saratov Oblast 70.57 41.14 53.34 54.82 67.73

(Table continues on next page)

1111 (Annex Table 14 continuedl)

68 Smolensk Oblast 61.72 48.20 57.99 68.41 67.56 69 St. Petersburg City 0.15 0.08 0 0 0 70 Stavropol' Krai 61.95 73.72 71.82 88.45 82.08 71 Sverdlovsk Oblast 63.41 59.85 70.81 65.88 45.00 72 Tambov Oblast 63.05 54.33 49.26 57.55 73.03 73 Tatarstan Republic 38.33 41.34 49.37 43.79 45.92 74 Tavmyr AOkr 70.04 76.28 54.26 41.49 64.34 75 Tomsk Oblast 56.87 63.96 70.87 56.28 61.68 76 Tula Oblast 64.50 49.86 45.22 44.81 54.04 77 Tuva Republic 85.81 87.90 92.30 90.76 89.74 78 Tver' Oblast 55.12 53.18 57.80 62.40 61.11 79 Tyumen' Oblast 58.61 59.33 59.93 51.94 50.78 80 Udmurtia Republic 64.57 63.92 69.85 70.17 68.20 81 Ul'yanovsk Oblast 43.89 35.25 47.24 49.64 53.66 82 Ust'-Orda Buryat AOkr 94.03 100 100 96.15 88.28 83 'ladimir Oblast 69.80 60.69 68.68 67.73 81.66 84 Volgograd Oblast 58.49 62.02 61.88 62.32 64.59 85 Vologda Oblast 60.14 62.45 60.12 58.87 74.15 86 Voronezh Oblast 60.59 63.98 49.43 63.85 76.91 87 Yamalo-Nenets AOkr 59.26 71.04 59.60 58.00 58.00 88 Yaroslavl' Oblast 64.88 67.97 70.74 72.98 70.84 89 Yevreyskava AO 70.49 74.28 56.30 71.53 74.28

Average for the Russian Federation 57.25 56.33 60.61 60.68 64.97 n.a. = Not applicable. Source:Authors' estimates based on1the data from the Ministry of Finance.

112 AnalyticalAnnex. Russian Subnational Finance: A PreliminaryStatistical Analysis

The main part of this report described trends and problems observable in recent fiscal performance at the subnational level in Russia. However, various questions remained. Statistical analysis of available fiscal data-much of which is assembled in the statistical annex to the report- may suggest some answers. This annex presents a preliminary attempt to explore the data. The analysis is primarily descriptive rather than explanatory. It suggests hypotheses and identifies empirical correlations, rather than demonstrating causal mechanisms. Further research would be necessary to answer the questions raised with greater confidence. The analysis breaks down into three topics: (1) the geography of regional deficits in Russia in recent years, (2) the prevalence of noncash tax payments and tax arrears, and (3) assessing the consequences of federal transfers.

The Geographyof RegionalDeficits Chapter 2 identified a potentially worrying trend of increase in subnational deficits and debt. As noted there, consolidated regional budget balance deteriorated in the aggregate from a surplus of 1.45 percent of GDP in 1992 to a deficit of 0.6 percent in the preliminary figures for 1997. If the federal government's transfers to regional budgets are excluded, the regional balance fell from a .04 percent surplus to a 3.48 percent deficit. The aggregate figures, however, conceal a wealth of variation. In 1997, the median region had a deficit before federal transfers of 22 percent of its expenditures. Pretransfer deficits ranged from just one percent in Bashkortostan, Tatarstan, Moscow city, Samara, and Vologda to 72 percent in Ingushetia. Recent changes in the size of regional pretransfer deficits have also varied dramatically. On the one hand, the Siberian republic of Sakha went from running a small surplus and receiving hardly any federal transfers or loans in 1994 to a deficit of 23 percent of expenditures even after receiving federal transfers and loans worth 18 percent of its expenditures in 1997. On the other, the Aginsky-Buryatsky Autonomous Okrug actually saw its deficit plus federal transfers and budget loans fall from 79 percent of expenditures in 1994 to just 32 percent in 1997-an impressive fiscal adjustment. What types of regions run larger deficits? What types of regions have experienced the worst fiscal declines in recent years? A picture of such regions can be constructed from the results of regression analysis. Below, we look first for simple geographical patterns. Are some parts of Russia experiencing greater fiscal difficulties than others? Second, we consider whether deficit regions had a distinctive economic structure. The economies of Russia's regions vary markedly, as discussed in Chapter 1. Regions have suffered to different degrees from the dislocation of economic reform, depending on their level of development, raw materials endowments, and economic profile. Such differences might also explain variation in fiscal performance. Third, whatever the economic structure of a region, one would expect economic performance to correlate with fiscal outcomes. Fourth, a considerable literature in economics and political science suggests that the nature of political institutions and the choice of policies may systematically influence fiscal performance.

113 The main dependent variable we consider below is the pre-federal-transfer deficit of consolidated regional budgets, since this better captures the region's relative fiscal adjustment than the post-transfer deficit. In a later section, we consider the impact of federal transfers. Pretransfer deficits are expressed as a percentage of regional expenditures.

Geography A clear geographical pattern can be discerned among the regions with larger pretransfer deficits. As can be seen in table 1, column 1, when the pretransfer deficit is regressed on three geographical indicators, several are significant. Regions further south tended to have larger pretransfer deficits than those to the north. A result with lower statistical significance is that regioris further east tended to have larger deficits than those to the west. As one might expect, a third result is that the two capital cities of Moscow and St. Petersburg had particularly low pretransfer deficits-just one percent and seven percent of expenditures respectively. The low deficit for St. Petersburg represents a sharp adjustment from the previous year, when the pretransfer deficit had reached about 21 percent of expenditures.

Economic Structure What might account for the geography of deficits? The shift to the market in Russia after 1991 affected regions quite differently depending on their established economic profile (see Chapter 1). While all saw output and real incomes drop, the fall was far more severe and slower to bottom out in some parts of the country than others. Agriculture saw a sharp detrimental shift in the terms of trade, but raw materials producers benefited from the rise toward world prices and the increased freedom to export. Most of the agricultural land under cultivation in Russia is in the south, while the north has a heavily extractive economy. Finally, those regions able to attract foreign investment might be better able to fund public services without a large deficit or aid from the federal budget. Might these differences in regional economic structure explain why some regions accumulated larger deficits? Since these economic characteristics will obviously be correlated, caution is required in drawing conclusions about which are more important. Economic output, raw materials production, and exports were all closely correlated in the early 1990s. The regression shown in table 1, column 2, suggests as expected that exporting regions tended to have lower deficits. (Regions with greater economic output may also tend to have smaller deficits, but this was not significant in this simple model.) Agricultural regions, also as expected, had higher deficits. The level of 1995 foreign investment was not significant. For a given level of exports and economic output, regions with a larger output of raw materials had larger deficits-a surprising result-but this likely reflects the high correlation between 1993 exports and raw materials production (r = .68). If the pretransfer deficit is regressed on just raw materials production, or on raw materials production along with the geographical variables, its coefficient is negative rather than positive. As column 3 of table 1 shows, these economic structure variables can account for most of the greater propensity of southern regions to have larger pretransfer deficits. When they are included together with the geographical variables, the north-south latitude variable drops to insignificance. Controlling for geography also reduces the size of the agricultural employment

114 Table 1 RegressionAnalysis of Regional Budget Deficits in 1997. Resultsfor Regression Coefficients. Dependentvariable is 1997 regionalbudget deficit beforefederal transfers as percentof expenditures.

(1) (2) (3) (4) (5) (6)

Geography Degrees latitude -. 84*** -. 34 .02 North (.31) (.44) (.46) Degrees longitude .10* .10 .11 East (.06) (.07) (.07) Capital city -13.95*** -15.27*** -8.00 (4.13) (5.04) (8.34) EconomicStructure Estimated economic -.009 -. 01** -.004 output 1993 (.006) (.005) (.005) Exports per capita -. 034** -. 03* -.03** 1993 (.017) (.02) (.01) Foreign investment .012 .005 -.01 per capita 1995 (.011) (.009) (.02) Agricultural employ- .58** .32 -.21 ment 1993 (.24) (.23) (.20) Region's share in 1.12*** 1.13*** .83** RF raw materials (.37) (.36) (.36) output 1993 EconomicPerformance Industrial output -. 43* -.19 growth 1995-96 (.21) (.23) Unemployment per .04*** .06*** vacancy 1995 (.02) (.02) Average income as -.09*** -. 03 a percent of subsistence (.02) (.03) minimum Politics and Policy Republic 9.84** 5.13 (3.93) (3.74) Head of executive -7.91*** -3.94 elected by 1996 (2.67) (2.36) Vote for Communists .63*** .72*** 1993 election (.18) (.20) Constant 62.88*** 23.42*** 43.16* 72.99*** 16.16*** 32.05 (18.35) (6.64) (25.68) (19.19) (3.26) (32.27) R2 .196 .331 .433 .337 .227 .598 N 86 76 76 76 87 75

Note:OLS regression coefficients;White (1980) heteroskedasticity-correctedstandard errors in parentheses. * p < .10, ** p < .05, *** p < .01. Estimated economic output = industrial + agricultural + services output per capita in 1993. Source:Authors' analysis.

115 coefficient, suggesting that in part in the previous regression it may have been picking up the impact of some other factor correlated with north-south location.

Economic Performance For economic structure to affect the fiscal performance of regional governments, one would expect it first to influence observable aspects of economic performance. Are agricultural regions more depressed than industrial ones? Are raw-materials-producing regions and exporting regions less depressed? Did less developed regions suffer higher unemployment rates that would have increased demand for local public spending? Simple correlations do suggest some evidence for such linkages. Those regions with higher economic output in 1993 tended to have higher industrial output growth in 1996 (and higher cumulative industrial output growth from 1990 to 1996): the more developed regions were less harshly affected by the dislocations of the mid-1990s. Such regions also had higher average incomes as a percentage of the subsistence minimum in 1996, as well as lower rates of poverty and unemployment perjob vacancy in 1995. Exporting and raw-materials-producing regions had higher industrial output growth, higher real incomes, and possibly lower poverty. By contrast, agricultural regions tended to have more unprofitable enterprises, lower industrial output growth, lower real incomes, and higher rates of poverty and unemployment. These indicators of poor economic performance are highly correlated, so one should not read too much into the significance of any one indicator. We tried including the 1996 industrial output growth, income as a percentage of the subsistence minimum, and the number unem- ployed perjob vacancy in the regression of the 1997 pretransfer deficit. (Each of these was only moderately correlated with any of the others, at r < .4.) The regression results in column 4 find significant evidence that regions with lower growth, higher unemployment, and lower real incomes did tend to run larger pretransfer deficits. Interestingly, the measures of unemployment and low real incomes remain significant even controlling for the indicators of economic structure, suggesting that recent economic performance was at least one of the pathways by which economic structure affected fiscal performance.

Politicsand Policy The economic structure and economic perforrnance of regions can explain a considerable proportion of the variation in regions' 1997 pretransfer deficits. (When the deficit is regressed on all variables from columns 2 and 4, the R2 is .436.) Theory leads one to believe, however, that aspects of regions' political institutions or policy choices on the part of their governments may also influence the fiscal outcomes. For instance, in other countries researchers have found evidence that the size of subnational deficits may be influenced by balanced budget rules and other statutory limitations, and by division of power between politicians of different parties in state legislatures and executives. Unfortunately, data were not available to test these hypotheses. Perhaps the most significant source of institutional variation among Russia's regions is their constitutional status. While 21 (including Chechnya) are republics, 10 are autonomous okrugs, one is an autonomous oblast, and the rest are oblasts, krais or federal cities. The republics are widely believed to receive different fiscal treatment than the other types of regions. A second source of variation, among the republics and autonomous okrugs and oblast, is the degree of ethnic division. Various scholars have suggested that patterns of public spending are affected by

116 the degree of ethnic division, and Alesina and colleagues have argued that more ethnically divided cities tended to have lower spending on public goods in the United States.' A third question concerns the role of electoral pressures. Elections of regional governors were phased in in Russia, starting mostly with the republics, and only embracing all regions by 1997. Were those regions where the govemor had been elected by 1996 more or less likely to run deficits than those where the governor remained a central appointee? Finally, the demand for deficit spending might vary between regions depending on the political attitudes of the population. As an imperfect first test, I examined whether regions which had recorded a particularly high vote for the Communist Party in the 1993 parliamentary elections were more likely to run large deficits in 1997. Because of the obvious high correlation between republic status and ethnic division, I do not generally include them together in the same regression. A simple regression of the pretransfer deficit on the three main political indicators (with republic status but not ethnic division) found each significant. Surprisingly given the perception that elections encourage irresponsible public spending, regions in which the executive had been elected by 1996 actually tended to have lower deficits than those where the governor remained a central appointee. Regions which had supported the Communists strongly in 1993 also tended to have larger deficits. In addition, republics had larger deficits than other types of regions (see table 1, column 5). Furthermore, among republics and other ethnically defined units, the larger the non-Russian population in the region, the larger the deficit. When both republic dummy and the ethnic variable are included together, the size of the non-Russian population is significantly related to a higher deficit; the republic variable falls to insignificance. Do these results remain significant controlling for regional economic structure or performance? After all, one might expect the Communists to register greater support in more economically depressed regions-which might, because of their economic problems, tend to run higher deficits. Many of the southern republics suffered particularly severe economic crises. In fact, the Communist vote variable is even more significant when controlling for all the economic structure and performance variables in columns 2 and 4. (It is also highly significant when controlling in addition for geography.) This, at least, suggests the hypothesis that some regions run larger pretransfer deficits because the electorate is more Communist in sympathy (and therefore supportive of deficit spending.) The elected executive and republic dummies both fell in significance to about the .10 level when economic structure and performance variables were added, which makes it difficult to determine in this dataset whether they have an independent influence on fiscal performance. How robust are these results? I performed similar regressions for the pretransfer deficit in 1996. The results were very similar. In the 1996 regression for just geographical factors, southern location still correlated with higher deficits. The east-west variable was not significant, and nor was the capital city variable. (As mentioned already, St. Petersburg in 1996 ran a much larger deficit than in 1997.) A regression forjust economic profile variables yields results similar to those in table 1 column 3, with the exception that more foreign investment is now significantly associated with a higher pretransfer deficit. A regression of the three economic performance variables (appropriately backdated where possible) found these even more significant than in the 1997 regression. Each of the political variables was significant with the same signs as in a 1997 regression forjust political variables.

117 In regressions including all the economic profile, economic performance, and political variables for both 1996 and 1997 a few results were particularly robust and so perhaps merit greater confidence. (1) Greater exports were significantly associated with lower deficits. (2) Higher levels of raw materials production were associated with higher deficits-suggesting perhaps that raw materials production assists fiscal performance if the raw materials can be sold on international markets, but not otherwise. (3) Regions with higher unemployment per job vacancy had higher deficits. (4) Regions that recorded a relatively high vote for the Communist Party in 1993 tended to have higher deficits (even controlling for economic structure and performance in each year). In addition, certain results were significant in one year and marginally significant in the other (at .05 < p < .10). Regions with higher real income had lower deficits, and regions with an executive elected by 1996 had lower deficits. Caution is required in drawing causal inferences from these controlled correlations. But they suggest certain economic and political factors that may help to explain why some regions' fiscal performnance deteriorated so much more than others in the mid-1990s. More economically depressed regions had larger and export-oriented regions lower pretransfer deficits. Raw materials-producing regions that did not have high exports seem to have had poor fiscal performance. At the same time, regions with a large Communist electorate tended to run larger pretransfer deficits, regardless of how well or poorly they were faring economically. Regional elections may increase fiscal discipline, but much additional analysis would be needed to substanti- ate this. Whatever the underlying economic or political causes of regional fiscal deficits, an accoun- tant would trace them to some combination of two proximate causes. Deficits increase when either expenditures rise, revenues fall, or both. It may be useful, therefore, to assess how much of the recent change in regional deficits represents increases in spending and how much represents decreases in revenues. In the aggregate figures in table 1.1, Chapter 1, two periods can be distinguished. Regional consolidated balance has worsened progressively since 1992. But from 1992 to 1994, the worsening balance reflected a rapid increase in expenditures-from 12.3 to 18.2 percent of GDP. Regional revenues actually increased substantially during this period. From 1994 to 1996, both regional revenues and expenditures fell-but expenditures more slowly than revenues, adding to the deficit. It appears, then, the main cause of the growing deficit in these years has been a sharp drop in regional revenues. What patterns emerge when one looks beneath the aggregate figures? Were regions that saw large increases in the deficit more likely to have experienced large increases in spending or large decreases in revenues that year? The dynamic seems to change somewhat from year to year. During 1995-96, there appears to have been a closer relationship between regional change in the deficit and regional change in spending. Figure 2 shows a weak relationship between increases in spending in these years and increases in the deficit. Figure 1 reveals no similar relationship between the 1995-96 change in deficit and change in revenues. On the other hand, during 1994-95, revenues dropped sharply, and expenditures fell with them apparently in response. There is a close relationship in these years between the drop in revenues and the increase in the deficit (figure 3). Thus, one might reason that sharply falling regional revenues in 1995 forced regions to cut spending, but not by enough to prevent a small increase in the average regional deficit. In 1996,

118 Figure 1 Change in Regional Adjusted Revenues and Change in Regional Deficit, 1995-96 4-

1~~~~~~~~~~~~~~~~~~~~~~~~~~~~

; 3 0.~~~ -1~~- 0~~~~~~~~~~~~~~ -4 -3 -2 -1 0 1 bn-2 -.3 o

-4 -4 -3 -2 -1 0 1 2 3 4 Log change in adjusted revenues Note:Changes in rubles per capita, 1991 prices; log taken of absolute value plus one, then original sign restored. Correlation: r= -0.09 Source:Authors' analysis.

Figure 2 Change in Regional Expenditures and Change in Regional Deficit, 1995-96 4

-3 -4 I l

-3 -2 -1 0 1 2 3 4 L.og chanlge in regional expenditure 0~~~~~~~~~~~~~~~~~~~~ 00~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C Note: Changes in rubles per capita, 1991 prices; log taken of absolute value plus one, then original sign restored. Correlation: r = 0.35 Sourre:Authors' 0~~~~~~~~~~~~ analysis.

03 0 4 -1 o 6C Figure u~~~~~~~3 Change in RegionaZAdjusted Revenues and Chanzgein Regional Deficit, 1994-95 4-

Wu 3 o0

-2 0 l 0

0 -0 - 2 3 4

Log change in adjusted revenues Note:Changes in rubles per capita, 1991 prices; log taken of absolute value plus one, then original sign restored. Correlation: r = 0.17 Source:Authors' analysis.

119 Figure 4 Change in Regional Expenditures and Change in Regional Deficit, 1994-95

4 -

C~~~~~~~~~~~C

0 -1

-4 -3 -2 -1 0 1 2 3 Log change in expenditure

Note:Changes in rubles per capita, 1991 prices; log taken of absolute value plus one, then original sign restored. Correlation: r = -0.06 Source: Authors' analysis.

regional spending rebounded faster than the slight rebound in regional revenues, driving deficits up still further.

NoncashTax Paymentsand TaxArrears One of the reasons for falling tax revenues-both to the federal and regional budgets-is the accumulation of arrears by delinquent taxpayers. Chapter 4 discussed the recent increases in tax arrears and the widespread use of nonmonetary forms of fiscal payments. To understand the reasons why these phenomena are spreading, it may be useful to examine in what types of regions they are most pronounced. Consider nonmonetary tax payments first. As of 1997, the median region received about 53 percent of revenues in means other than cash. The proportion varied from less than seven percent in Moscow city to about 82 percent in the Chuvash Republic. What characteristics might explain such extreme differences? Regressions help to identify the pattern. To begin with geography, regions further to the east tended to have a slightly larger proportion of noncash payments (though this is only marginally significant). However, the capital cities had far less noncash payments than average-just 20 percent in St. Petersburg and 7 percent in Moscow. What about economic structure? Is nonmonetary tax payrnent a characteristic of more agricultural or less developed regions? Does exposure to foreign investment or export markets reduce the tendency? As table 2, column 2 shows, there was no significant relationship with either agricultural employment or foreign investment. Deciphering the influence of the other factors is difficult because of their high correlation. If included separately in regressions, regions with higher economic output in 1993 tended to have larger shares of noncash payments. Raw materials producers also had somewhat larger shares (though this was not significant), and exports were not significant at all. The association

120 Table 2 Regression Analysisfor Noncash Revenues in Russia's Regional Budgets, 1997-Resultsfor Regression Coefficients Dependent variable is proportion of revenues of regional budget paid in forms other than cash.

(1) (2) (3) (4) (5)

Geography Degrees latitude .29 North (.38) Degrees longitude o7* East (.04) Capital City -38.38*** (5.03) Economic Structure Estimated economic .01** .007 output 1993 (.005) (.005) Exports per capita -.03** -. 03** 1993 (.01) (.01) Foreign investment .01 .01 per capita 1995 (.01) (.02) Agricultural employ- .34 .04 ment 1993 (.36) (.26) Region's share in .44 .78** RF raw materials (.35) (.32) output 1993 Economic Performance Industrial output .57*** .52** growth 1995-96 (.16) (.20) Unemployment per -.02 -.03 vacancy 1995 (.02) (.02) Average income as -. 10*8* -.11*** a percent of subsistence (.02) (.02) minimum Politics and Policy Republic 8.81** 4.93 (4.05) (3.57) Head of executive -2.58 -1.61 elected by 1996 (3.19) (2.64) Vote for Communists -.21 -.06 1993 election (.17) (.20) Constant 32.40 38.29*** 21.22 54.18*** 21.58 (21.26) (9.30) (15.78) (3.28) (19.76) R2 .209 .104 .320 .050 .433 N 86 76 76 87 75

Neote:OLS regression coefficients: White (1980) heteroskedasticitv-corrected standard errors in parentheses. * p < .10, *p <.05. *** p <.01. Source:Authors' analysis.

121 between economic output and more noncash payment is better explained by geography, however; controlling for north-south and east-west location, economic output is completely insignif- icant, suggesting that regions of the country that for some other reason indulge in noncash tax payments also happen to be more developed. Controlling for the level of economic development of a region, the further east or north it is, the larger is the share of noncash payments in its revenues. And this is not explained by greater raw materials production or economic output. Physical remoteness may have some influence, though there are other possibilities. Economic performance might be related to the use of noncash forms of payment. It is sometimes argued that barter and nonmonetary forms of payrnent are means by which enterprises that are in effect bankrupt continue to operate. While region-level correlations cannot tell us anything directly about the strategies of individual enterprises, some inferences are possible. A couple of correlations emerge in column 3. First, as might be expected, regions with higher average real incomes had lower shares of noncash payments. Where workers are better paid, taxes are paid more frequently in money. The second finding is more surprising: in regions where industrial output grew more (or decreased less) in 1996, the share of noncash payments in tax revenue was greater in 1997. One possible interpretation is that in regions where the government is prepared to accept tax payments in kind, this prolongs the productive life and increases output of industrial enterprises producing goods that cannot be sold at market prices. These two results remain highly significant controlling for all the economic structure variables. It is hard to find any influence of the political factors. In an uncontrolled regression of just the political factors, republic status appears to correlate with higher noncash payment shares. But this effect weakens when one controls for geography. Column 5, in which all variables except the geographical ones have been included, suggests which correlates of noncash tax payments might be considered relatively robust. Exporting regions and those where real incomes are higher tend to have lower noncash tax shares; given the level of exports, raw materials-producing regions have larger shares (perhaps raw materials are more acceptable to regional governments as a means of payment). Regions where output fell less in 1996 tended to be those where larger shares of taxes were paid in means other than cash. Turning now to arrears, what types of regions experienced the greatest accumulation of non- payments to the budget? By the end of 1997, the median region had accumulated tax arrears to federal and regional budgets equal to about 36 percent of 1997 tax collections. The range was from 7 percent in Moscow city to 106 percent in the Taimir Autonomous Okrug. Arrears were lowest in the south, west, and capital cities. These results for the west and capital cities correspond to results for pretransfer budget deficits and noncash payments. But the north-south location result suggests the possibility of a kind of tradeoff. In northern regions, which tend to be more economically successful and which can finance their regional budget more easily without large federal transfers, running up tax arrears may be the most logical way to reduce the region's net contribution to federal programs. Southern regions- which by virtue of their more depressed, less developed economies tend to be net beneficiaries from federal redistributive programs-would be better off paying their small tax bills without arrears but lobbying for larger federal transfers.

122 Table 3 RegressionAnalysis for TaxArrears by Region in 1997. Resultsfor Regression Coefficients Dependentvariable is tax arrearsas of January1, 1998, as percentof 1997 total collections.

(1) (2) (3) (4)

Geography Degrees latitude .93** North (.39) Degrees longitude .15** East (.06) Capital City -29.76*** (2.62) EconomicStructure Estimated economic .02*** output 1993 (.008) Exports per capita -.03 1993 (.03) Foreign investment .03** per capita 1995 (.01) Agricultural employ- -.06 ment 1993 (.35) Region's share in -.86 RF raw materials (.67) output 1993 EconomicPerformance Industrial output .33 growth 1995-96 (.22) Unemployment per -.04 vacancy 1995 (.03) Average income as -. 06*** a percent of subsistence (.02) minimum Politics and Policy Republic .79 (4.82) Head of executive -3.85 elected by 1996 (3.93) Vote for Communists -. 40* 1993 election (.22) Constant -19.30 22.64** 22.99 46.78*** (22.62) (10.88) (22.10) (4.36) R2 .210 .193 .086 .037 N 86 76 76 87

iVote:OLS regression coefficients; White (1980) heteroskedasticity-corrected standard errors in parentheses. * p < .10, ** p < .05, *** p < .01 Source:Authors' analysis.

123 The results for economic structure tend to support this interpretation. Regions that were more developed and those with a larger ability to attract foreign investment were the ones with the largest proportion of arrears, and including the five economic structure variables in the regression for geographical factors reduces the north-south variable to insignificance. Interestingly, the extent to which regions amassed tax arrears did not seem to have much to do with the region's recent economic performance. Regions with higher average real incomes did have significantly lower arrears, but this result is entirely due to the high incomes and low arrears of the two capital cities, Moscow and St. Petersburg. If the capital city dummy is included as a control in the regression shown in table 3, column 3, the real income variable drops to complete insignificance. The only political variable even marginally significant was the 199-3 Communist vote: where the Communists polled better, arrears tended to be lower. However, this results not from a greater fiscal responsibility in areas of Communist support but from the fact that arrears tend to accumulate in the more economically developed and successful regions, where Communists poll less well. When the latitude and longitude variables are included in the column 4 regression, the sign on the Communist coefficient changes from negative to positive. Controlling for geography, a higher Communist vote was associated with larger arrears (though the result is not statistically significant). Finally, if a regression is run including all the geographical, economic, and political variables from columns I to 4, the only two variables that remain significant are the level of economic output (positively associated with arrears) and the dummy for capital city (negatively associated). In sum, the surprising conjecture emerges from these regressions that the regional concentration of tax arrears is determined not so much by patterns of regional economic performance or political differences but from differences in the level of economic development of regions, with the more developed regions collecting taxes less effectively than their less developed counterparts. Combining the results of tables 1, 2, and 3, several generalizations can be made:

1. The capital cities are in particularly good fiscal shape, with lower pretransfer budget deficits, lower reliance on noncash tax payments, and lower tax arrears. 2. Regions further to the east tend to have worse fiscal performance, with larger pretransfer deficits, greater reliance on noncash tax payments, and higher tax arrears. 3. Regions in the South tend to have larger pretransfer deficits but lower tax arrears than their counterparts further north. Tax arrears may, therefore, be a means by which taxpayers in more economically successful northern regions reduce their payments. 4. Exporter regions tend to have lower pretransfer deficits and have lower rates of noncash tax payment. 5. More economically developed regions have lower pretransfer deficits, but tend to run up higher tax arrears. 6. Poorer and more economically depressed regions have higher pretransfer deficits, higher arrears, and more noncash tax payment. 7. Regions which in the past voted more strongly for the Communist Party tended to run up larger pretransfer deficits, perhaps because of a greater demand for public spending and perhaps because past Communist voting was useful for securing the region a larger federal transfer.

124 Tracing the Impact of FederalTransfers

Two questions about the consequences of federal transfers can be tackled with the data at hand. First, do federal 'equalization transfers" have an equalizing effect, reducing revenue disparities between regional governments? Second, are regions that rely more heavily on federal transfers less successful at increasing their own revenues? The formula used to determine regions' allocations under the federal equalization fund explicitly calculates need using the region's revenues from some base year. One would therefore expect the transfers to reduce revenue disparities. But are "equalization transfers" equalizing? Table 4 shows the coefficients of variation for regions' own revenues, own revenues plus equalization transfers, and total revenues (that is, own revenues plus all federal transfers and loans), each expressed as a multiple of the regional per capita monthly minimum subsistence income in order to adjust for differences in the price level. The coefficient of variation-a statistic's standard deviation divided by its mean-is a measure of dispersion: higher values represent greater inequality. By all measures, regions' revenues became more unequal between 1994 and July 1997. The inequality of regions' own revenues grew dramatically. The data suggest an interesting change in the role of equalization transfers. In both 1994 and 1995, such transfers not only did not decrease revenue inequality between regions but actually increasedit. A change occurred in 1996, however. In both 1996 and the first half of 1997, equalization transfers did have a substantial equalizing effect. Interestingly, so did other types of federal transfers and loans. Whereas these had increased inequality in 1994, they decreased it somewhat in 1996 and the first half of 1997. For those who believe that federal transfers should equalize, this represents an encouraging trend.

Table 4 Do Federal TransfersEqualize Regional Revenues? Comparison of Variation in Per Capita RevenueIndicators

1994 1995 1996 July 1997

Adjusted revenues 0.59 0.71 0.87 1.17 before transfers and loans

Adjusted revenues 0.66 0.73 0.79 1.03 plus equalization transfers

Adjusted revenues 0.84 0.73 0.73 0.92 plus all transfers and loans

Note:Table presents standard coefficients of variation.All data dividedby monthlyper capitasubsistence minimum to eliminateimpact of regionalprice variation. Source:Authors' estimate based on the data fromthe Ministryof Financeand Roskomstat.

125 Does dependence on federal transfers reduce the motivation of regional governments to improve collection of their own revenues? Because so many other factors influence a region's revenue-raising capacity, it is hard to infer much from simple correlations. For what it is worth, figure 5 plots the change in regional own revenues between 1994 and 1996 against the log of the share of federal transfers and loans in the region's 1994 total revenues. (The share is logged on the assumption that at high levels of dependence on federal transfers, a small increase in dependence has less impact on policy.) The data appear to show a weak negative relationship- the greater a region's dependence on federal transfers, the larger was its drop in own revenues during 1994-96. There are exceptions: for instance, Magadan saw an increase in own revenues despite heavy dependence on federal transfers, and the republic of Sakha experienced a sharp drop despite low transfers. There is also an alternative explanation-that those regions in worse fiscal shape in 1994 tended to fall into even worse shape by 1996 for reasons unrelated to their tax-collection effort. Do federal transfers encourage or discourage fiscal adjustment? The relationship here is somewhat complex. Figure 6 plots the annual increase in a region's pretransfer deficit in constant prices as a percentage of adjusted revenues (for 1994-95 and 1995-96) against the region's change in receipts of constant-price federal transfers and loans as a percentage of adjusted revenues for the previous year. If increases in federal transfers encourage adjustrnent one would expect to see a negative relationship: increases in federal transfers are followed by decreases in deficits. If increases in federal transfers discourage adjustment one would expect to see a positive relationship: increases in federal transfers reduce the urgency of cutting the deficit the next year. Figure 6 suggests a U-shaped relationship. Very large cuts in federal transfers to regions drive up their deficits the next year. Above a certain point, however-a cut in transfers of about 10 percent of adjusted revenues-the relationship switches to a positive one. Regions that saw

Figure 5 Dependence on Federal Transfers and Change in Regional Own Revenues, 1994-96

80 0 60 4000 0 0 04 20 0 000 0 0 0 Correlation: 0 0

a) -40 ~ ~ 0 00 o00 0 0 0 0 00 0~~~~

-60 ~~~0 00

.4 .6 .8 1.0 1.2 1.4 1.6 1.8 2.0 Log share of transfers in 1994 regional revenues Note: Own revenue as percent p.c. subsistence minimum. Log taken of percent transfers in 1994 regular revenues plus one. Correlation: r =0.16 Source:Authors' analysis.

126 Figure 6 Change in Federal.Transfers 1993-95, and Change in Pretransfer Regional Deficit Next Year

300 Cs ~~~~~~0

X 200 0 0

-10100 0 0 0 a0

a 0 -60 40 -20 0 0 4 6

-100~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ - -80 -60 -40 -20 0 20 40 60 Annual change in federal transfers 1993-95 Note:Federal transfers = federal transfers + loans, 1991 prices, as percent of adjusted revenues; pretransfer deficit, 1991 prices as percent of adjusted revenues. Source: Authors' analysis.

transfers actually increase as a share of revenues tended to have bigger increases in the deficit the following year. The analysis in this section is particularly preliminary, and results should be viewed with caution. But the following three findings emerge-the first quite strong, the second and third more weakly supported.

1 Federal equalization transfers-and in fact all federal transfers-exacerbated interregional revenue inequalities in 1994, but by 1996 and 1997 reduced inequality. 2 Regions that are more dependent on federal transfers may have seen their own revenues fall relatively faster from 1994 to 1997 than less dependent regions. 3 While sharp cuts in federal transfers lead to increases in regions' pretransfer deficits the following year, increases in federal transfers also lead to increases in the pretransfer deficit, perhaps because they encourage fiscal laxity.

Notes

1 Alesina,Baqir, and Easterly 1997.

127

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Recent World Bank Technical Papers (continued)

No. 408 Donovan and Frank, Soil Fertility Management in Sub-Saharan Africa No. 409 Heggie and Vickers, Commercial Management and Financing of Roads No. 410 Sayeg, Successful Conversion to Unleaded Gasoline in Thailand No. 411 Calvo, Optionsfor Managing and Financing Rural Transport Infrastructure No. 413 Langford, Forster, and Malcolm, Toward a Financially Sustainable Irrigation System: Lessonsfrom the State of Victoria, Australia, 1984-1994 No. 414 Salman and Boisson de Chazoumes, International Watercourses: Enhancing Cooperation and Managing Conflict, Proceedings of a World Bank Seminar No. 415 Feitelson and Haddad, Identification of Joint Management Structuresfor Shared Aquifers: A Cooperative Palestinian-Israeli Effort No. 416 Miller and Reidinger, eds., Comprehensive River Basin Development: The Tennessee Valley Authority No. 417 Rutkowski, Welfare and the Labor Market in Poland: Social Policy during Economic Transition No. 418 Okidegbe and Associates, Agriculture Sector Programs: Sourcebook No. 420 Francis and others, Hard Lessons: Primary Schools, Community, and Social Capital in Nigeria No. 421 Gert Jan Bom, Robert Foster, Ebel Dijkstra, and Marja Tummers, Evaporative Air-Conditioning: Applications for Environmentally Friendly Cooling No. 422 Peter Quaak, Harrie Knoef, and Huber Stassen, Energyfrom Biomass: A Review of Combustion and Gasifica- tion Technologies No. 423 Energy Sector Unit, Europe and Central Asia Region, World Bank, Non-Payment in the Electricity Sector in Eastern Europe and the Former Soviet Union No. 424 Jaffee, ed., Southern African Agribusiness: Gaining through Regional Collaboration No. 425 Mohan, ed., Bibliography of Publications: Africa Region, 1993-98 No. 426 Rushbrook and Pugh, Solid Waste Landfills in Middle- and Lower-Income Countries: A Technical Guide to Planning, Design, and Operation No. 427 Marinlo and Kemper, Institutional Frameworks in Successful Water Markets: Brazil, Spain, and Colorado, USA No. 428 C. Mark Blackden and Chitra Bhanu, Gender, Growth, and Poverty Reduction: Special Program of Assistance for Africa, 1998 Status Report on Poverty in Sub-Saharan Africa No. 429 Gary McMahon, Jos6 Luis Evia, Alberto Pasc6-Font, and Jose Miguel Sanchez, An Environmental Study of Artisanal, Small, and Medium Mining in Bolivia, Chile, and Peru No. 430 Maria Dakolias, Court Performance around the World: A Comparative Perspective No. 431 Severin Kodderitzsch, Reforms in Albanian Agriculture: Assessing a Sector in Transition No. 432 Luiz Gabriel Azevedo, Musa Asad, and Larry D. Simpson, Management of Water Resources: Bulk Water Pricing in Brazil No. 433 Malcolm Rowat and Jose Astigarraga, Latin American Insolvency Systems: A Comparative Assessment No. 434 Csaba Csaki and John Nash, editors, Regional and International Trade Policy: Lessonsfor the EU Accession in the Rural Sector-World Bank/FAO Workshop, June 20-23, 1998 No. 436 Roy Prosterman and TIme Hanstad, ed., Legal Impediments to Effective Rural Land Relations in Eastern Europe and Central Asia: A Comparative Perspective No. 437 Csaba Csaki, Michel Dabatisse, and Oskar Honisch, Food and Agriculture in the Czech Republic: From a 'Velvet" Transition to the Challenges of EU Accession No. 443 Luc Lecuit, John Elder, Christian Hurtado, Francois Rantrua, Kamal Siblini, and Maurizia Tovo, DeMISti- fying MIS: Guidelinesfor Management Information Systems in Social Funds No. 444 Robert F. Townsend, Agricultural Incenttives in Sub-Saharan Africa: Policy Challenges No. 445 Ian Hill, Forest Management in Nepal: Economics of Ecology No. 446 Gordon Hughes and Magda Lovei, Economic Reform and Environmental Performance in Transition Economies No. 447 R. Maria Saleth and Ariel Dinar, Evaluating Water Institutions and Water Sector Performance No. 449 Keith Oblitas and J. Raymond Peter in association with Gautam Pingle, Halla M. Qaddumi, and Jayantha Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed Haider Malik, Judicial Challenges in the New Millennium: Proceedings of the Second Summit of the Ibero-American Supreme Courts 4i,

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