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Russia’s Integrity: Negotiated Federalism

Created: 10.06.2005 17:45 MSK (GMT +3), Updated: 17:45 MSK > document.write(get_ago(1118411132)); </SCRIPT> , 16 hours 8 minutes ago

Alexei Makrushin, Ksenia Yudayeva

Vedomosti

Lately, an interesting discussion has appeared in Russian public discourse. More and more often, the topic of maintaining the nation’s integrity is being discussed. This happens in such a tone that one gets the impression the country is on the verge of collapse. In the conditions of a vertical system of power, the return to a problem more typical of the early Yeltsin era seems rather strange... But the fact that the issue is brought up in the first place forces us to look once again not only at the political, but the financial relations between the center and the regions, as the main mechanism holding the country together.

The history of fiscal federalism in Russia has gone through several periods. Yeltsin’s call to “take as much sovereignty as you can swallow” made it necessary for the federal center to build up individual relations with each region. De facto decentralization was much deeper than de jure. Regional leaders got real power with undetermined authority and responsibility that seriously exceeded their financial capabilities. Russia inherited a rather uneven regional division from the Soviet Union, leading to the necessity of redistributing considerable financial means among the various regions. In these conditions, the wellbeing of each region depended on the negotiating power of each governor in the struggle for money from the federal center.

Later, after “buying” the separatist regions the federal center started rewarding loyal allies, which quickly turned opposition governors into formidable business managers. The lack of formal rules and institutes not only failed to guarantee fair distribution of financial resources, but also led to a loss of stimuli for developing an independent taxation base in the regions. But it also led to the improvement of the services offered by budget organizations.

With the arrival of President Vladimir Putin, the situation began to change drastically. Hefty political resources and a lack of any responsibilities for the regional elite allowed Putin to radically resolve the problem of governors – first they were removed from the <NOBR>Federation Council</NOBR>, and now they will be appointed by the federal center. The financial trails to the regions became much more formalized, while regional legislation was brought into line with federal laws. A new budget bill was passed, and a separation of powers occurred between the federal center and the regions.

According to the new budget law, most of the financial help that goes to the regions is distributed through three foundations.

By analyzing regional budgets, one can discover, however, that full formalization remained unattainable. Until recently, regions had a loophole allowing them to use negotiations to get funding from the federal center, including loans. In practice, regions get loans for agricultural achievements, for the salaries of civil servants, to prepare the region for winter. This means that in most cases, loans are given out to cover planned expenses, not unpredictable ones. In principle, from the economic – but not political – standpoint there is nothing wrong with this: the federal center acts as insurance. And, in an underdeveloped financial system, this is not the worst way out. A bigger economic problem is low financial discipline in the choice of patronized regions and in the administration of the financing. But here the situation is improving as well – if in 2002 nearly 13 billion rubles in loans were not returned to the federal center, in 2003 and 2004 most of the regions not only returned the loans, but paid off their long-term debts.

But now, in place of budget loans come subsidies to help balance the regional budgets. Such subsidies have been offered since the middle of 2002. But the way they are distributed has an informal character.

In this way, a tendency – albeit not a striking one – towards negotiated federalism has reappeared. How could it have developed a “vertical of power” scheme? As strange as it may seem, in contemporary Russia the main threat to budget federalism is from the federal center. First of all, the vertical of power, having de facto destroyed all mechanisms of checks and balances, allows for the methods of financial distribution to be changed rather easily. Secondly, by appointing governors, the federal center becomes less and less impartial in its budgeting policy. Having done away with regional governor elections, the center takes all responsibility for the failures of regional administrations. There is a major temptation to financially help out the governors who have not been effective. Meanwhile, appointing “cronies” to regions that were up until then relatively independent from the center must be accompanied by additional financial aid. It becomes even harder to withstand the temptation to use transfers to manipulate elections....

For the sake of objectivity one should note that Russia is not likely to completely avoid the influence of political factors in the formation of financial transfers. Regional inequality and the necessity for the federal center to act as an “insurance company” objectively push the federal center to return to the old way of individual negotiation. The existence of the power vertical, meanwhile, creates the illusion that all this will not play on the effectiveness of the system.

Unfortunately, short-term and long-term aims of the center are not the same, and such a policy is doomed. Only by keeping up strict institutional limitations can we maintain a balance between effectiveness and fairness (equality). If Russia does not stop its return to negotiated federalism soon, it risks reliving the mistakes of the past in a new stage of history.

This text was translated and abridged from an article published June 9 by the Vedomosti business daily.

http://www.mosnews.com/commentary/2005/06/10/russiafederal.shtml