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IMF and Southern Methodist University, respectively. The paper was initiated while the second author was visiting Fiscal Affairs Department of the International Monetary Fund. We wish to thank George Abed, Ehtisham Ahmad, Nadezhda Bikalova, Ke-Young Chu, Luc Leruth, John Norregaard and Vito Tanzi for stimulating discussions. This paper will be appearing in ed. M. Cuddy and R. Gekker (ed.) “Institutions and their Change in Transition Economies,” (Ashgate 2002).
The Russian federation is made up of 89 regions consisting of 21 ethnically defined republics, 49 oblasts (provinces), the Jewish Autonomous Oblast, 6 krais (territories), 10 autonomous okrugs (areas), and 2 metropolitan cities (Moscow and St. Petersburg). These are collectively referred to as 89 “subjects of the federation”.
Lavrov et al. (2001) argue that federal funds are distributed to regions not only in the forms of transfers but also as direct expenditures (in the form of wage payments to federal employees, funding of federal programs, etc.), which are at least as important as other forms of financial aid provided to regions. Accounting for federal budgetary expenditures can often obfuscate the distinction between donor and subsidy regions. In this paper, however, we abstract from federal budgetary expenditures in regions.
It is interesting to note that due to the heavy economic burden imposed by the unification of East and West Germany, the transfer system used there exhibited a degree of over-equalization. Spahn and Fottinger (1997) note that while the fiscal capacity of poorer former East German provinces increased after the transfers, the contribution paid by rich former West German states reduced their fiscal capacity below the average.
Russia Economic Trends (1997).
In 1996, the most heavily subsidized regions were Chechnya (where transfers financed 93 percent of expenditures), Dagestan (61 percent), and Tuva (51 percent) (OECD (2000)). Some natural resource rich regions that are remote from the European hinterland, such as Sakha, also continue to rely excessively on federal subsidies to provide food, energy, and other supplies.
The revenue base of each region can be regarded as the “own revenues” of that region.
Notice that actual revenues collected could differ from the revenue base, which can be interpreted as the revenue base.
In reality, the size of B may depend upon existing tax sharing arrangements between the center and regions. For instance, if B is funded through shared federal taxes, a smaller number of donors could imply a smaller pool of funding for equalization transfers.
Intergovernmental transfers in Russia can be divided into two general categories: equalization transfers (since 1994, the Fund for Financial Support of Regions (FFSR)) and other transfers. The size of these other transfers in Russia during the 1994–98 period in some years exceeded the funding of the FFSR. A large share of the other transfers took the form of “mutual settlements”, which included negotiated injections of funds, compensation for central government programs and mandated emergency grants, and other forms of non-budgeted support.
See Dabla-Norris, Martinez Vazquez and Norregaard (2001) for details.
In addition, actual revenue sharing between the federal government and regions has often differed significantly from the statutory rates stated in the law.
In 1998, they represented close to 2 percent of GDP and less than 14 percent of total subnational revenues.
The remaining 59 regions were either recipients over the entire period or were donors in some years.
The regions that stopped or greatly reduced remittances to the federal government early in 1992 included the ethnic republics of Tatarstan, Chechnya, Sakha (Yakutia) and Bashkortostan.
Shliefer and Treisman (2000) note that, “In essence, the federal government appeased regions that threatened political or economic stability-by declaring sovereignty, staging strikes, or voting for the opposition in elections-by allocating them larger transfers or tolerating their tax withholding”.
The territory of administrative units formed by the republics, oblasts, and autonomous okrugs covers 53 percent of the territorial area of Russia and includes 20 percent of the total population.