21 Russia: A Case Study

Marc Robinson
Published Date:
October 2007
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Elena Belyanova, Ole Hovland and Alexey Lavrov 

Implementation of performance budgeting methods in Russia started in 2003. The system being built is essentially a program budgeting system with strategic goals and performance targets. The most important changes from January 2003-September 2005 have been achieved in the preparation of the federal budget. Limited progress has so far been reached in linking performance measures to budget execution, reporting, and evaluation procedures. This means that the performance budgeting concept is not fully implemented at this stage. Further important steps remain to be completed. The next years will be critical to ensure lasting positive effects of the reform.

This chapter will describe what steps have been taken so far, what is working well, what needs to be improved, and which additional measures need to be implemented.

History of the reform

The reform process started in spring 2003 when macroeconomic conditions were stabilized and the economic situation in Russia had improved. The budget showed surplus and macroeconomic indicators developed favorably, mainly due to higher oil prices, ruble devaluation, and some growth in the manufacturing sector.

When President Putin addressed the Federal Assembly in May 2003 he claimed that Russia’s most severe problems were the ineffectiveness of the state and weak government. He advocated that the national goal of high competitiveness for the country should also include the activities of state bodies and local governments, and that the bureaucracy needed to be strengthened by modern and efficient managers. To achieve this it was necessary to carry out vital administrative reform programs.

Against this background the government launched a broad range of reforms in public governance:

  • an administrative reform introducing a two-level government structure and aiming at optimization of government functions, reducing state interference in the economic activity of enterprises and in securing deregulation

  • a civil service reform aiming at (1) creating a modern, merit-based, depoliticized, and professional civil service; (2) reducing corruption in the civil service; (3) increasing internal and external accountability and transparency; and (4) creating a performance and service orientation in the civil service (DFID/WB, 2005)

  • a budget process reform.

The planning of the reform in the budget sector started in the Ministry of Finance (MoF) in early 2003. A Concept Paper for budget reform was developed through 2003 and approved by the government in May 2004, and one important element of the reform strategy proposed in the paper was the introduction of performance budgeting. The preparation of the 2004 budget in spring and summer 2003 was, however, based on an attempt to introduce performance-oriented budgeting in the budget preparation phase in parallel with traditional input budgeting. Input controls have remained in place, but at a less detailed level, mainly because of simplification and improvement of the economic classification.

The Concept Paper for reforming the budget sector included the following main elements:

1. improve budget classification and accounting

2. establish a distinction between “existing” and “proposed new” activities

3. improve medium-term financial planning

4. develop and extend the use of programs and performance budgeting methods

5. streamline procedures for budget formation and scrutiny.

The new budget classification was envisaged to be close to international best practices (Government Finance Statistics Manual (GFSM) 2001 modified to cash) and to take into account the new structure and functions of the government that followed the administrative reform. The new chart of accounts was to be integrated with budget classification and prepared for accrual accounting, and to allow for accounting of executed expenditures based on administrative, economic, functional, and program classifications.

The second and third areas of the budget reform were intended for securing increased reliability of medium-term budget planning by including in the framework a distinction between previous approved budget measures and new government policy priorities. Medium-term budget planning had in principle been in place for some time, but the plans were not integrated with the annual budgets or developed beyond the macro level and played a minor or non-existent role in the preparation of new budgets.

The fourth main reform area introduced performance budgeting as “a procedure for evaluating the effectiveness of budget expenditures, a phased transition away from the principle of (input) line-item planning and financing of expenditures towards budgeting oriented to achievements of final socially important and measurable results (outcomes).” The proposed procedure was intended to go beyond the use of performance information in budget preparation, so that when the system is fully developed expenditures should be linked to expected results. Reports on performance against the proposed targets were intended to be used in the budget preparation process for efficient allocation of future resources.

The fifth reform area highlighted improved administrative procedures to scrutinize annual and medium-term performance-oriented budgets, including more efficient budget procedures in the State Duma. The Concept Paper points out that the procedures for passing the budget through the State Duma and Federal Assembly are very time-consuming and need to be streamlined, and that the State Duma should focus more on evaluating priorities of budget policies. The Concept Paper further specifies that there is a need to clarify the differentiation of budget powers and responsibilities between the legislative and executive authorities. The differentiation of powers and responsibilities is vague and inconsistent under the present system.

The main reform events that have taken place in the period January 2003-September 2005 are presented in Table 21.1. The main accomplishments so far have been the following areas:

  • Strategic goals, objectives, and performance indicators for budget administrators have been established.

  • The government sector structure has been improved, and procedures have been started to avoid overlap of functions and to systematically go through what shall be government tasks in the future and what is better left to the markets and private sectors.

  • The economic and functional classifications at the higher levels have been improved in line with international standards. A new chart of accounts has been developed prepared for accrual accounting.

  • First steps have been taken to introduce medium-term budget planning as an integrated part of the budget process, and to present the results to the public in a user-friendly way.

Table 21.1.Implementation of the budget reform: major events(February 2003-September 2005)
Feb 18, 03The first seminar on performance-oriented budgeting was initiated by the Budget Policy Department, MoF, with support of the EU-funded “State Budget Reform” project. The seminar addressed main managers of the federal budget funds (mostly ministries)
Jun-Jul 03Main managers of budget funds developed Performance Reports for 2004-06 and submitted them to the MoF. The reports included strategic goals, objectives, and performance indicators for the two-year period
March 9, 04Decree of the RF President No. 314, On the System and Structure of Federal Bodies of Executive Power. The government sector is restructured into ministries, federal services, and agencies. A total of 44 subjects of budget planning (usually ministries but also some federal services reporting directly to the President) will be responsible for all issues linked to budget preparation and execution, also for subordinate units
Apr 30, 04RF Government Resolution No. 225 to establish the Government Commission to increase the effectiveness of budget expenditures, chaired by Deputy Prime Minister Alexander Zhukov
May 22, 04RF Government Resolution No. 249 of May 22, 2004, On the Measures to Increase the Effectiveness of Budget Expenditures and the Concept of Reforming the Budget Process in the Russian Federation in the Years 2004-06. The concept contained an action plan for developing regulations to amend the budget process and specific requirements to produce Performance Reports
Jun-Jul 04Subjects of budget planning (the name for ministries and a limited number of main managers of budget funds after the administrative reform) developed Performance Reports for 2005-07 and submitted them to the MoF and the Ministry for Economic Development and Trade
Aug 12, 04Consolidated Report on the goals and indicators of the Russian Federation and subjects of budget planning for 2005-07 prepared by Deputy Prime Minister’s Secretariat, presented to and approved by the government
Jun-Oct 04Participants of the “Experiment” prepare the requested documentation. The “Experiment” is a two-year project where participating subjects of budget planning compete to be the best in using performance-oriented methods in the budget planning process. The winner(s) receive some additional funding to further improve procedures, to prioritize projects, and to upgrade staff qualifications
Nov 30, 04RF Government Commission on the increase of budget expenditures’ effectiveness approves the results (winners) of the “Experiment”
Dec 23, 04The federal law. On the Introduction of Amendments to the Federal law “On the RF Budget Classification” and the RF Budget Code, No. 174-FZ was passed on December 23, 2004. The law gives the legal base for the improvements in the economic and functional classifications and to establish ministerial targeted programs
Mar 2, 05RF Government Resolution No. 100, On the Government Commission on Budget Projections for the Current Year and for Medium-term Perspective, chaired by the Prime Minister, Michail Fradkov
March 6, 05RF Government Resolution No. 118, On Endorsing the Regulations on the Development of the Medium-term Financial Plan of the RF and the Draft Federal Budget Law for the next financial year
March 05Methodical guidelines for preparation of 2006-08 Performance Reports by subject of budget planning is published on the MoF’s website, <www.>
April-May 05Subjects of budget planning submit their ministerial targeted programs claiming additional funding to the MoF
April 19, 05RF Government Resolution No. 239 On Endorsing the Regulations on the Development, Endorsement and Implementation of Ministerial Targeted Programmes
April-July 05Subjects of budget planning develop Performance Reports for 2006-08
July 05Elaboration of a draft performance-oriented budget compliant Explanatory Note to be disseminated in the parliament alongside the traditional budget
July 16, 05RF Government Resolution No. 440 On the Procedures for Keeping the Register of Spending Commitments of the Russian Federation
July 20, 05Submission of the Performance Reports for 2006-08 to the MoF and the Ministry of Economic Development and Trade
July 05Draft Consolidated Report on goals and indicators of the Russian Federation and subjects of budget planning for 2006-08 prepared by Deputy Prime Minister Secretariat and disseminated among experts for comments
Aug-Sept 05Explanatory Note “Budget Policy 2006-08” approved and published on Ministry of Finance’s website

Preconditions for introducing medium-term budgeting and performance budgeting

Many of the preconditions mentioned in the literature (see Diamond, 2003, 2004a, 2004b) for moving forward to introducing medium-term budget planning and performance-oriented methods were in place in Russia when the reform process started. As mentioned above, macroeconomic conditions were favorable, annual budgets were realistic, budgets were in surplus, most extrabudgetary funds had been integrated into the budget, and most of the revenues and expenditures from commercial activities were channeled through and recorded by a well-functioning Treasury. Budget execution in total was under the disciplined control of the Federal Treasury.

It was also acknowledged that the reform process towards good governance should include a wide range of reforms, such as improving the structure of the government and the civil service in addition to the budget process. One particular area of the budget system that needed to be improved before the medium-term/performance budgeting reforms could be completed was the budget classification system and also the accounting system.

Input-based line-item controls were very detailed, allowing little flexibility for spending units to execute budgets in an efficient manner. Expenditures on heating were, for instance, split into several sub-categories (expenditures on heating, payment for natural gas consumption, payment for heating oil consumption, payment for electricity). This may be an advantage for internal control and information purposes, but when budget units are not allowed to shift funds between sub-categories, it reduces the possibilities for efficient and cost-effective use of resources. The economic classification did not follow international standards. The functional classification that had been used for parliamentary approval of the budget was also very detailed and contained a mixture of functional and economic elements (for example, it included investment as a “functional” category). The economic classification and the first and second levels of the functional classification have now been improved to follow international standards. The details of the functional classification still need to be improved. Earmarked expenditures and type of expenditures (the third and fourth levels of the functional classification) still contain a mixture of functional and economic elements that are not properly organized in a hierarchical structure.

It was also recognized that it was necessary to establish a well-functioning expenditure program structure as part of the reform process. Strategic goals and objectives of the federal ministries are to a large extent to be achieved by ministerial programs aimed at reaching specific measurable targets. The structure for establishing these ministerial targeted programs needed to be put in place. This issue was confused by the fact that the federal budget already included a number of federal targeted programs which were split between several ministries. These programs amounted in 2004 to some 7 percent of total expenditures. In principle these programs were linked to outcomes, but the formulation of the outcomes was in many cases so general that it was difficult to measure any kind of performance. The federal targeted programs need to be reorganized so program objectives can be linked to measurable indicators. Work in this area is still in progress.

The Concept Paper also pointed out weaknesses related to cash accounting. Cash accounting does not give the full cost of program execution, and makes it difficult to compare the costs of services provided by the state with the cost of obtaining the same services in the market. The Concept Paper further argued that accrual accounting will increase the transparency of the operations of the state and will give information showing the financial consequences of the decisions taken in the fiscal and budgetary sphere. A new chart of accounts developed to handle accrual accounting has been developed in Russia. Budget classification and budget accounting have been fully integrated.

The administrative reform approved in March 2004 was a radical reform aimed at strengthening top-down control and increasing the ability to implement structural and social reforms effectively. Effectiveness was to be increased through eliminating duplicating structures and by assigning a key role to ministers in order to strengthen internal accountability. Responsibilities were clarified. This was a precondition for setting strategic targets and specific performance indicators for each budget institution, and for avoiding overlap between institutions. The old system had six different kinds of government bodies: ministries, state committees, federal commissions, federal services, agencies, and federal inspections. The reformed system consisted of a two-level structure: ministries and their subordinate federal services and agencies.

The number of ministries was reduced from 23 to 16 and is now more in line with international recommendations. The size of the cabinet was reduced from 31 to 19. Ministries were reorganized; the number of departments within the ministries was reduced significantly. The old practice with a large number of deputy ministers in each ministry was also abolished. In the new system each minister has only one or two deputy ministers. The total number of government bodies increased, however, from 54 in the old system to 73 in the new system.

Federal services and agencies report normally to a ministry. The minister is responsible for approving annual budget plans, for performance indicators, and for submitting the performance report from all units within his or her responsibility. In this way the ministry determines the policies within its sector. The ministries are responsible for legislative drafting and for managing the performance of their services and agencies. This should include monitoring and evaluation of progress in government bodies within the ministry’s jurisdiction.

The administrative reform was to be implemented from the middle of 2004. It is a huge reform. It was particularly challenging to change the government structure so dramatically in the middle of the budget year. The magnitude of the reform took some of the focus away from other budget preparation and execution reforms. The overall effects of the reform are far-reaching, but have not been properly evaluated at this stage. Some signs of reconsideration have emerged recently—for example, the agricultural agency is to be reintegrated in the ministry.

Performance information requirements

From the very start of the reform process, performance measurement was to be developed within a comprehensive framework. The reform process started actually more than a year before the government approved the Concept Paper. The MoF arranged a seminar in February 2003 on performance-oriented budget methods for budget administrators, supported by an EU-funded program, “State Budget Reform.” This project was heavily supporting the reform process from January 2003 to September 2005 and is followed up now by the “Public Expenditure Management” project, also funded by the EU. This project lasted until the end of December 2006.

Budget administrators in Russia have normally sent a budget proposal to the MoF based on line-item budgeting in July each year. As part of the 2004 budget preparation, the MoF sent a letter to budget administrators requesting them to add performance information as part of the budget proposal. The request was far-reaching. Budget administrators were supposed to prepare performance reports describing strategic goals, objectives, functions, outputs and outcomes, performance indicators, and targets. The budget proposals were also to be linked to these goals and objectives. This request implied a lot of extra work. Many administrators were not prepared for this task, but most budget administrators included this information as part of the budget proposal.

The MoF had worked out a questionnaire to evaluate the reports. These evaluations were completed both by the budget institutions themselves and by the MoF with expert assistance. These evaluations were then used as information to develop the Concept Paper on budget reform.

According to the Concept Paper, ministries and agencies should identify both outputs and outcomes and identify the indicators to be used to measure progress. The annual performance reports should, according to the paper, include the following elements:

  • identify main goals and objectives for activities within the responsibility of the ministries and their subordinate agencies and services, and show that these activities support government general policy priorities

  • expenditures should be allocated to the relevant activity, including estimated revenues that are managed by the subject of budget planning

  • measurable results in the reporting period and planned results for the medium term, should be linked with the budget programs aimed at achieving the targets

  • expenditures should be allocated by goal targets and programs in the reporting and planning period

  • the effectiveness of expenditures within the responsibility of the subject of budget planning should be assessed, and also what measures can be taken to increase effectiveness.

The performance reports have been prepared annually since mid-2003. Substantial progress has been made over these years in identifying strategic goals and indicators for output and outcome (see examples in Table 21.2).

Table 21.2.Output and outcome indicators from Performance Reports for 2006-08
Goal/objective of the ministryOutput indicatorsOutcome indicators
Ministry of Agriculture

Improving quality of products of agricultural, fishery, and food processing industries
Decrease in diseases common in humans and animalsNumber of incidents of people infected through the use of food produced from bad quality raw materials of animal origin
Ministry of Industry and Energy

Modernization of defense industry’s production capacities
Rate of growth of investment in capital assets in the defense industryShare of innovative products in the total output of the defense industry
Improving technical condition of heating and electric power plants and distribution systemsNumber of investigated objectsDecrease in damage resulting from failures and accidents on such objects

Organization of the reform process

The MoF continued to push the reform process in 2004, and a number of seminars and training sessions were arranged with support from donors. As part of the 2005 budget preparation process, budget administrators were requested to prepare performance reports again.

Top levels of the government got heavily involved in the reform process after the presidential elections in March 2004. After the new government was formed, Deputy Prime Minister Zhukov was appointed to head the new Government Commission to increase the effectiveness of budget expenditures. The principal task of the Commission is to manage implementation of the public expenditure reforms in line with government decisions.

The Deputy Prime Minister and his secretariat developed a three-level goal tree with four main social and economic indicators at the top. Sub-goals and performance indicators were developed so progress could be measured within each level. The three-level goal tree was attached to the budget letter the MoF sent to budget administrators for preparing the 2005 budget. Each budget administrator was expected to show the relationship between their own goals and the goals at the national level (see Box 21.1). A number of working groups were set up by the Deputy Prime Minister and his secretariat to examine the 2005 budget proposals prepared by the budget administrators. The working groups were expected to ensure that goals were properly connected at all levels and that relevant indicators were formulated.

Box 21.1.Main social and economic goals and indicators at the national level

Goal 1. “Increasing standards of living and improving the quality of life”


  • Share of citizens satisfied with their quality of life (by public surveys)

  • Life expectancy at birth

  • Fatalities per 1,000 people

Goal 2. “Enhancing national security”


  • Share of military personnel serving on contract terms in the total number of privates and sergeants

  • Number of deceased in natural and man-made catastrophes

Goal 3. “Maintaining a high rate of sustainable economic growth”


  • GDP rate of growth

  • Labor productivity

  • Energy consumption per GDP unit (relative to 2003 level)

Goal 4. “Creating potential for future development”

Indicators: available for sub-goals only.

After the government approved the Concept Paper, the Ministry of Economic Development and Trade (MEDT) became part of the reform leadership. The MoF and the MEDT have been made jointly responsible for many legislative acts related to the performance budgeting reform. Both ministries are also responsible for consideration and approval of line ministry programs.

In addition, in March 2005, as the move to effective multi-year budget planning was under consideration, the Prime Minister was appointed to lead the Government Commission on budget projections for the current year and for the medium term. The Commission should revise both annual budget plans and medium-term budget plans before the plans are submitted to the government for approval.

Table 21.3 below illustrates some of the most important powers and responsibilities for the four key decision-makers in the reform process: the MoF, the MEDT, the Deputy Prime Minister’s Commission, and the Prime Minister’s Commission.

Table 21.3.Main responsibilities for the major reform stakeholders
MoFMEDTCommission on



(chaired by

Prime Minister)
Commission to

increase the

effectiveness of

budget expenditures

(chaired by Deputy

Prime Minister)
Annual budgetPrepare draft annual budget, negotiate with budget administrators, fiscal policies and debt managementForecasting of economic and social parameters Decide main economic and social parameters to be used in the budget preparation process Control of programs, investment, and other capital expendituresFinal revision of the draft budget before the draft is submitted to the government for approval
Medium-term financial planPrepare draft medium-term financial plan, negotiate with budget administrators, fiscal policies and debt management for the medium termForecasts of economic and social parameters to be used in the medium-term budget plans Participate in preparing the medium-term planPreparation and final revision of the medium-term budget plan before the draft is submitted to the government for approval
Ministerial targeted programsExpertise (appraisal)Settling disputes on the issues of resources required for programsSettling disputes on goals and indicators
Developing the list of ministerial targeted programsApproving the list of ministerial targeted programsApproves recommendations to increase the effectiveness of ministerial targeted programs
Reports on the results achieved (performance reports) and the main activities of a budget administratorControlling implementation of ministerial targeted programs Developing methodical guidelinesCoordinating the preparation of reports

Having several main stakeholders in the reform process—MoF, the MEDT, the Deputy Prime Minister and his Commission and secretariat, the Prime Minister and his Commission and secretariat—has some advantages but probably more complications. It increases the pressure from above to make progress in reform implementation. On the other hand, the MoF and the MEDT often have conflicting views. Since both ministries have equal authority in settling many reform elements, this will complicate the decision-making process and delay reform progress. The Prime Minister’s involvement in budget preparation issues also raises difficulties: he will often have too many other responsibilities to be able to handle detailed budget preparation issues effectively.

All in all, the budget reform has enough top-down support. In addition to what has been mentioned above, the reform process has been fully supported by the President through his annual budget addresses, through speeches and government meetings broadcasted on TV. The problems lie in a reform leadership structure which is too top-heavy. This raises problems of coordination, decision-making, and conflicting signals sent to budget administrators, the overall effects of which could be reduced enthusiasm for the reform in line ministries and agencies and a slowing down of the reform process.

Human resources constraints

It is fair to say that budget administrators were relatively unprepared for the huge reforms that were introduced as part of the preparation of the 2004 budget. Line ministries and agencies are necessarily the most important stakeholders in the reform process. The MoF with donor project support arranged seminars presenting the new ideas, but most civil servants working on budget preparation and execution were firmly based in old budget traditions and procedures. The steps that have been taken so far have to a large degree been forced from above, and budget administrators have very much progressed in the way of “learning by doing.” The MoF with support of donors has, however, provided substantial support through additional seminars, training in line ministries, and direct assistance to develop the necessary documents that were introduced as part of the reform process. When moving forward with a top-down approach, it is of course necessary and extremely important to get line ministries and agencies motivated for the reforms. Over time, it should be line ministries and agencies that perceive themselves as the “owners” of the reform.

An experiment conducted by the MoF towards the end of 2004 has been one important element in the emerging strategy to increase motivation. Candidate agencies were invited to improve their Performance Reports by supplementing them with medium-term budget projections, and information on the status and quality of the financial management and on their achievements in restructuring subordinate units. The participants of the “Experiment” were competing for relatively small amounts of funds. The most important motivating factor was probably not the funds but to show who was “the best” and in the lead in the reform process. The MoF was due to run a similar experiment in 2006, and can probably use this technique in future years to increase motivation.

In April-May 2005 the “State Budget Reform Project” conducted a survey among budget administrators to study how the participants in the budget process perceive the reform. A total of 73 participants from 34 federal executive bodies participated in the survey. Many respondents said that the reform had increased their workload without extra remuneration and that the work on the performance reform was complicated by the lack of a legal and methodical framework. However, many respondents recognized that the work on preparing the budget had become more interesting and saw possible future impacts in the effectiveness of public spending. All the interviewed officials thought that after ten years of reform implementation Russia would achieve either or both enhanced efficiency of public sector bodies and public spending, and improved quality of public services. Some main points emerging from the survey respondents were:

  • the need for improved methodological support

  • that the essence, goals, ideology, and instruments of the reform should have been explained better from the start. As a result of the failure to do this, when the formal reporting requirements are put in place, they will be seen as an additional burden

  • the reform timetable should have been more realistic

  • consensus should have been developed between reform leaders before implementation

  • there is a need for clearer rules of the game—rules which are not changed every year

  • increased responsibility and authority for program managers is needed

  • reform leaders should listen to the opinions of ministries and subordinate units.

Phasing in of reform implementation

The Concept Paper identified the laws, regulations, and other documents that had to be drafted and approved to establish the necessary legal basis for the reform (see Table 21.4). These included a regulation for the layout and content of the performance reports that budget administrators should prepare. Such regulatory guidance is important, but is not sufficient to enable line ministries to grasp the total implications of the reform. Unfortunately, no detailed implementation plan or action plan was developed at this stage. The initial focus of the reform was also directed towards the budget preparation process with limited consequences for budget execution and reporting. Moreover, the anticipated timeframe for completing the reform was clearly too optimistic from the start.

Table 21.4.Concept Paper plan of measures for implementation of the concept of reforming the budget process in the Russian Federation in 2004-06
TaskForm of documentDeadline for

submission of draft to

the RF government

Making amendments to the budget classificationDraft federal lawQ3 2004MoF
Amendments to the procedure for development, approval, and implementation of federal targeted programsDraft resolution of the governmentQ3 2004MEDT MoF
Establishing the procedure for formation of the medium-term financial plan and the draft federal budgetDraft resolution of the governmentQ4 2004MoF MEDT
Establishing the procedure for keeping a register of spending commitments of the Russian FederationDraft resolution of the governmentQ1 2005MoF
Establishing the procedure for the development, approval, and implementation of ministerial targeted programsDraft resolution of the governmentQ1 2005MoF
Adoption of standards of accounting and financial reporting for bodies in the state management sectorDraft resolution of the governmentQ1 2005MoF
Introduction of amendments to the Budget Code of the Russian Federation concerning the regulation of the budget processDraft federal lawQ2 2005MoF
Establishing the procedure for the development, approval, and implementation of budget targeted programs financed from the federal budgetDraft resolution of the governmentQ4 2005MoF MEDT
Adoption of legal acts of the government of the Russian Federation, ensuing from the draft federal law “On Amendments to the Budget Code of the Russian Federation Concerning the Regulation of the Budget Process”Drafts of acts of the government of the Russian FederationWithin three months after the adoption of the Draft Federal LawMoF

The development of a medium-term budget plan lagged behind in the reform process. The first steps towards introducing multi-year budgeting on a rolling basis were taken as part of the 2006 budget preparation process. The reform process could have benefited from establishing fiscal policies and sector priorities for the medium term at an earlier stage in the process. More time could have been used to train line ministry staff in performance budgeting methods and in establishing administrative (ministerial programs) before this part of the reform was put in motion. The impact of the reform on the budget execution process and reporting should have been better developed at an earlier stage, including line ministries’ responsibilities in shifting funds between programs to achieve more efficient allocation of resources.

Next steps

The reform process has been gaining momentum over the past three years, but success is not guaranteed. There is a lot of work that remains to be done. Some important next steps are discussed below. Unless substantial progress is made in these areas over the next two to three years, there is a clear danger that the reform will collapse, and that budget preparation and execution again will be based on traditional input budgeting, perhaps with some marginal use of performance indicators.

Complete the structure of administrative programs to finalize the overall framework of the reform. The overall structure and classification of federal targeted programs and ministerial programs needs to be finalized. The federal targeted programs need to be restructured (and if possible scaled down) to establish clear responsibilities and to avoid having sub-programs that span several functions and budget administrators. Programs should be “mono-functional” so that each program is linked to only one function.

The integration of both federal and ministerial programs with lower levels of the functional classification needs to be completed, and the lower levels of the functional classification need to be set up in a hierarchical structure. Each budget administrator (subjects of budget planning) needs to finalize the design of the ministerial programs that will govern the use of resources within his or her responsibilities. These programs must be linked to overall federal priorities, but be defined in a way that supports political decision-making and prioritization within the concerned sector. Programs should be hierarchically constructed. Each program can have a number of sub-programs; each sub-program can be decomposed into a number of activities and projects. Each sub-program must be linked to only one program and each activity or projects linked to only one sub-program. Program-based information must be included in the chart of accounts.

Plan and distribute budget expenditures in a multi-year framework. A regulatory framework for multi-year budgeting has been established, and more detailed procedures need to be further developed. Medium-term budget planning must be established on a rolling basis where the second year is the starting point for the next budget cycle. It is necessary to improve the integration of multi-year economic forecasts and the budget guidelines at the start of the budget cycle. The guidelines must be based on a clear fiscal policy for the medium term, with defined parameters of fiscal responsibilities. The capacity to develop such strategies needs to be strengthened within the MoF. It is probably necessary to start the budget preparation cycle earlier to allow time for improved annual and medium-term budget planning in the ministries and federal services.

Better integration of medium-term budgeting and performance-oriented budgeting. For the reform to be sustainable it is necessary to fully integrate performance budgeting with medium-term budget plans. This will give better predictability of budget expenditures and programs for specific budget sectors, and allow for more efficient allocation of resources within the sector and between the sectors. The quality of strategic budget policy decisions can be improved when moving from annual to multi-year budget plans, and budget plans can be developed within a sound overall fiscal policy for the medium term.

Improve the impact of performance measures on budget execution and later-year budgets. Performance measures must be designed so the results are useful in making decisions to allocate more or less resources to a specific program. Procedures to measure performance during the budget year on a regular basis need to be developed and be used together with information on program costing to improve the efficiency of resources during the year. This involves clear procedures for spending units’ authority to reallocate resources between programs. End-of-year reporting, including information on program costing, must be structured to influence the allocation of resources for the medium-term planning period. It is necessary to provide more training and support to budget administrators on the use of performance measures to manage resources in a more effective way and to evaluate alternative courses of action.

Financial management. This must be fundamentally improved, with new, clear allocation of responsibilities for results and the activities and resources to achieve them. The Chart of Accounts and classification need further improvement to enable the information required for good financial management to be produced in a timely and user-friendly manner. The financial information system needs to be updated and coordinated with the development of the Federal Treasury system, to store and process the transactions that are needed to support and control the financial management.

Motivation. Budget negotiations between the hierarchies of institutions (ministry—agency/service—spending units) within the responsibility of one ministry or budget administrator should be based on performance targets and accountability mechanisms. This will strengthen the use of programs and performance indicators. It is important to further develop the framework to encourage and reward positive developments in resource management. The rewards and the criteria for the rewards must be transparent. Examples of spending agencies that succeed in attracting additional funding and managerial flexibility through high-quality planning and management should be published and used as positive examples.

The pace of the reform should be set to ensure a reasonable match between budget administrators’ capacities and the innovations expected from them.

To reinforce budget administrators’ commitment to the reform, effective incentive systems need to be developed and regularly updated. Some of the steps required (for example, changes in civil service remuneration) lag behind. The timing of budget administration and civil service reforms should be planned so each reform element can create positive synergy effects for other reforms.

The experiments that the MoF has been running in 2004 and 2006 to improve reporting, financial management capabilities, and the structure of subordinate units are one important measure to increase knowledge and motivation. The winners of the Experiments should receive a lot of positive publicity in media and government websites. Appreciation from high-level government officials could perhaps also encourage further efforts to improve the budget process among line ministries and agencies.

Reform leadership. It is necessary to establish a clearer allocation of powers and responsibilities among the key decision-makers—the MoF, the Ministry of Economic Development and Trade, the Prime Minister’s Office, the Deputy Prime Minister’s secretariat, and the Commission on Budget Projections. It is especially difficult to have two ministries involved in the reform with the same level of authority. The MoF should be given the overall ministerial responsibility for the reform process and the Ministry of Economic Development and Trade could play an advisory role.

Detailed plan of action. A detailed plan of action should be developed to cover the remaining parts of the performance budgeting reform including the introduction of a system of rolling forward medium-term budget plans. It is important that the plan has a clear distribution of responsibilities among the reform leaders. The outcome of each step of the process should be illustrated. The plan must also cover budget execution procedures and reporting, including line ministries’ responsibilities and authorities in the reformed system.


In the last two years the performance budgeting reform in Russia has taken off from the government’s blueprints and entered into the daily life of the Russian public sector. Most of the actual changes have so far been made to the budget preparation and planning phase at the federal level. The reform can be assessed as quite comprehensive and is based on international best practices, especially in the conceptual design. Compared to similar experiences in other countries, the Russian reform can be characterized by a combination of rapid pace and massive scale. Using the lessons available from international experiences, Russian reformers have adopted an implementation strategy that combines the benefits of uniform sequential implementation and implementation through selected in-depth pilot projects.

In this chapter, we have described what has been achieved in Russia since spring 2003 to introduce performance budgeting into the budget preparation phase at the federal level. The analysis also reveals that much remains to be done in the future. This is not surprising: for example, after almost six decades the US Comptroller General stated that “developing credible information on outcomes achieved through federal programs remains a work in progress” (GAO, 2002, p. 10).

In our view, the reform has now reached a critical stage. To advance further it is necessary to capitalize on the achieved gains and address the following main challenges:

  • the design of a comprehensive and effective incentive systems for reform stakeholders

  • the achievement of some tangible results visible to the reform participants and to the general public.


    DFID/WB Donor Secretariat for Civil Service and Administrative Reform in Russia2005Toolkit for International Consultants Involved in Implementation of Public Administration Reform in the Russian Federation third edition July (Russia: DFID/WB Donor Secretariat).

    DiamondJ.2003From Program to Performance Budgeting: The Challenge for Emerging Market Economies,IMF Working Paper June (Washington: IMF).

    DiamondJ.2004aEstablishing a Performance Management Framework for Government,IMF Working PaperApril (Washington: IMF).

    DiamondJ.2004bThe Institutional Basis of Budget Reform,IMF Working PaperApril (Washington: IMF).

    GAO2002Performance Budgeting Opportunities and Challenges GAO-02-1106T (Washington: Government Printing Office).

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