Russia
Recent Economic Developments

This paper describes economic developments in the Russian Federation during 1995–96. It reviews trends in the domestic economy. It describes developments in the public finances, monetary policy, financial sector, and the external sector. The paper highlights that the output decline slowed to 4 percent in 1995, the smallest decline since the beginning of the transition. The decline accelerated to 6 percent in 1996, with lower investment—generally attributed to the uncertainty associated first with the presidential elections and subsequently with the President’s health being a major source of the decline.

Abstract

This paper describes economic developments in the Russian Federation during 1995–96. It reviews trends in the domestic economy. It describes developments in the public finances, monetary policy, financial sector, and the external sector. The paper highlights that the output decline slowed to 4 percent in 1995, the smallest decline since the beginning of the transition. The decline accelerated to 6 percent in 1996, with lower investment—generally attributed to the uncertainty associated first with the presidential elections and subsequently with the President’s health being a major source of the decline.

I. The Domestic Economy

A. Output and Expenditure

Overall trends

1. Following the disintegration of the Soviet Union in 1991, Russia suffered a massive output collapse, with real GDP estimated to have fallen by 35 percent during the 1991–94 period. The dissolution of the CMEA, combined with the disruption of traditional supply arrangements within the former Soviet Union and the breakup of firms that spanned republic borders, all contributed to the dramatic contraction (Table 1).2

Table 1.

Russian Federation: Selected Indicators of Economic Activity, 1990–96

(Annual percentage change)

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Source: Goskomstat.

Includes estimates for small enterprises.

Percentage change over January–June 1995.

2. According to official statistics, the output decline slowed to 4 percent in 1995, the smallest decline since the beginning of the transition. The decline is reported to have accelerated to 6 percent in 1996, with lower investment—generally attributed to the uncertainty associated first with the presidential elections and subsequently with the President’s health being a major source of the decline. Many observers believe, however, that official statistics do not capture the full extent of the economy. In particular, the informal sector3 and new private businesses may not be adequately reflected and also the underreporting of production and profits by enterprises may have become more prevalent in 1996 as tax evasion became increasingly pervasive.4

3. In recent statements to the press, Goskomstat officials have acknowledged that the 1996 national accounts understate shadow economy activity—including unreported activity of known businesses, the informal sector, and illegal activity—and therefore overall output. Goskomstat now reports that it estimates shadow economy activity had grown to the equivalent of 30 percent of reported activity by end–1996, while the official statistics for the year had incorporated an estimate of only an additional 25 percent in activity—i.e., the share of the shadow economy in the official GDP data amounted to 20 percent. The higher estimate has already been reflected in monthly GDP estimates for 1997 and will be reflected in revised 1996 statistics, to be issued in the course of 1997.5 At the same time, Goskomstat officials have stated that the economy appears to have begun to rebound in the second half of 1996 although the growth is difficult to ascertain from the seasonally–unadjusted official data. Central Bank of Russia (CBR) estimates of trend GDP also show output rising from mid–1996.6

Expenditure side developments

4. As in 1994, the decline in output in 1995–96 mainly reflected large drops in investment. Official estimates of private fixed investment indicate declines of 8 percent in 1995 and another 19 percent in 1996 (Table 2). In both years, uncertainties about the course of policy and prospective investment returns, combined with high real interest rates, discouraged borrowers and encouraged lenders and investors to purchase treasury bills rather than participating in risky business investment decisions. In 1996, the investment climate was also adversely affected by political uncertainty and its possible implications for economic policies. Meanwhile, public investment fell markedly in 1996 as government spending was cut sharply in the face of a weakening in tax revenues. Inventory investment is also estimated to have fallen during 1995–96; this reported decline, however, may reflect the improved estimation of inventory accumulation—which had been recorded at excessively high levels during the high inflation years—rather than actually lower stockbuilding.

Table 2.

Russian Federation: GDP by Expenditure, 1994–96

(Annual percentage change)

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Source: Goskomstat.

Consumption of goods and services provided by the government, i.e. healthcare, education, and government financed culture.

Including, defense and government administration.

Goods and services provided by enterprises for their employees; i.e., housing services, health care, and child care.

5. Among other demand components, consumption (private and public taken together) fell somewhat less than overall output, declining by roughly 4 percent in both 1995 and 1996. Household consumption contracted by 5 percent a year in 1995–96. The decline in household spending in 1995 was small in relation to the reported drop in average real wages of 24 percent, reflecting consumption smoothing, underreporting of total compensation, and households’ reliance on other sources of income such as informal sector earnings. In 1996, however, the weakening in consumption occurred despite rising real wages. Two factors that appear to explain the rising propensity to save in 1996 are the high real interest rates offered on bank deposits and securities, and political uncertainty. Also, a sharp increase in wage arrears may have reduced the propensity to consume as well as constrained the ability to spend. Government consumption remained broadly unchanged in real terms during 1995–96. After falling by 30 percent in 1995, the consumption of nonprofit organizations was roughly stable in 1996, as enterprises reduced sharply the level of social services they provided to their neighboring communities. Real net exports were the sole source of output expansion in 1995–96. In particular, in 1996 the change in net exports contributed 2 percent to GDP. Exports of energy rose strongly, while imports were relatively stable in real terms.

Sectoral trends

6. The goods and services sectors each account for roughly one–half of GDP. Industrial activity accounts for nearly 30 percent of GDP, while construction contributes close to 9 percent and agriculture about 7 percent. Services are dominated by trade (about 15 percent of GDP) and transportation (about 11 percent). Nonmarket services, including education, health care, and government, jointly account for about 12 percent of GDP. More than two–thirds of GDP is now produced in the private sector.7

7. Following a slowing of the decline in industrial output to 3 percent in 1995, the reported drop in industrial production in 1996 accelerated slightly to 5 percent in 1996 (Table 3). It is difficult to evaluate the true change in the health of the industrial sector. The 1996 industrial output decline may be overstated as a result of the same reporting problems as those associated with the GDP statistics. To be sure, gradually rising unemployment and layoffs (see discussion in Section B below) demonstrate that some enterprises have downsized their operations, although this may have had a salutary effect on productivity. Similarly, the renewed escalation of interenterprise and wage arrears and enterprises’ increased reliance on barter transactions in 1996 may indicate a deterioration of enterprises’ financial position, but may also reflect efforts to make enterprise profits and revenues less transparent so as to evade taxation. Statistical reports indicate that the output of medium and large enterprises—all former state-owned enterprises—fell by 8 percent in real terms. Small business surveys, however, indicate that their output expanded strongly. This development may reflect an increase in the number of small businesses, which is reported to have risen by 8 percent in 1996 (mostly in light industries such as clothing and footwear, food processing, and construction materials), but it may also reflect growth in average output of individual firms. Although some export sectors, notably mining and chemicals, expanded in 1995, the official data show declines for all sectors in 1996.

Table 3.

Russian Federation: Gross Industrial Output by Sector, 1991–96 1/

(Annual average percentage changes)

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Source: Goskomstat.

Data for large and medium enterprises.

Starting in November 1996, chemicals and petrochemicals are combined.

8. Agriculture has suffered two consecutive bad years, with output losses of 6 and 7 percent, respectively, in 1995 and 1996. In 1995, unfavorable weather conditions led to a poor grain crop (mainly due to a poor wheat harvest). Continued bad weather conditions, as well as falling livestock production, accounted for the further drop in agricultural output in 1996. As in industry, the accuracy of official production statistics is uncertain, and Ministry of Agriculture officials have commented publicly that, due to underreporting, the official crop statistics likely understate production. (Annex III describes recent trends in agriculture in more detail.)

B. Labor Market Trends

9. The composition of employment across sectors has changed little in Russia since 1991, although total employment has declined (Table 4). Industry continues to provide the largest number of jobs, employing 26 percent of all workers in 1995; the social sphere (including health care, education, and culture) is the next largest employer, accounting for 20 percent of jobs.

Table 4.

Russian Federation: Distribution of Employment by Sector, 1991–95 1/

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Source: Goskomstat.

Average for the year; does not include students.

10. The decline in employment since 1991 has been rather slow in relation to the large cumulative output loss. Total employment fell by 10 percent during 1992-95, and the rate of unemployment, even according to ILO definitions, has never exceeded 10 percent (Table 5). According to ILO definitions, the unemployment rate reached 9.5 percent in February 1997; registered unemployment, however, remains significantly lower, standing at 3.5 percent8

Table 5.

Russian Federation: Unemployment and Vacancies, 1992–February 1997

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Source: Goskomstat.

Allocated benefits.

11. Regional disparity in unemployment is very substantial. In March 1996, when the nationwide unemployment rate was 8.9 percent, unemployment rates ranged from a low of 4.7 percent in Moscow to a high of 33 percent in the Republic of Ingushetia. Of Russia’s 89 regions, six had unemployment rates below 6.5 percent, while twenty recorded unemployment rates exceeding 12 percent.9

12. The gap between the magnitude of the output and employment loss highlights several characteristics of the Russian transition. In the absence of effective bankruptcy procedures or strict enforcement of payment obligations, Russian enterprises have remained open and have largely maintained their work forces despite a drop in output of unwanted products. As such, open unemployment has been limited, and firms have instead managed their wage bills by allowing wages to decline substantially in real terms—a trend which only began to abate in 1995—and by delaying wage payments, often incurring large cumulative arrears to their employees (Table 6 and 7). In mid-1996, roughly one-third of employees were owed some back wages.

Table 6.

Russian Federation: Monthly Wages, 1987–March 1997

(In rubles)

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Source: Goskomstat.
Table 7.

Russian Federation: Wage Arrears in Industry, Agriculture, and Construction, 1992–February 1997

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Source: Goskomstat.

In billions of rubles, first of month.

In constant March 1992 prices, deflated by CPI.

13. The reluctance of nonviable enterprises to downsize their work forces seems to relate closely to the administrative cost of firing. Whereas firms incur no penalty for running up wage arrears, for each worker they discharge permanently they must pay severance equal to twice the average monthly wage and, if the Federal Employment Service cannot find the worker a new job within two months, the firm must then pay the equivalent of a third monthly wage in severance. High severance costs also explain why many firms elect to put employees on administrative leaves or part-time schedules, enabling them to pay reduced wages without incurring severance bills (Table 8).

Table 8.

Russian Federation: Indicators of Hidden Unemployment, 1993–96 1/

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Source: Goskomstat.

In industry, construction, transportation, communication, services, science, and scientific support.

For 1993, 1995, and 1996 data include number of people on shortened workday at the end of each quarter, for 1994 data show those on shortened workdays over the course of the period.

Without pay or with partial pay.

Data for last month of the quarter.

Full-quarter estimate based on data for last month of the quarter.

14. At the same time, enterprise sector jobs carry a variety of social benefits including housing and health insurance, providing the incentive for employees to remain officially on enterprise payrolls. Because many of the newly-created jobs in the economy are in the new private sector where firms typically do not register their payrolls with the Federal Employment Service, and where social benefits are not provided, workers may take a second job as a new source of income, undetected, while remaining on their enterprise payroll in order to maintain their social benefits. In high unemployment regions where vacancies are few, workers may similarly prefer to remain on the payroll, even if they are unpaid, just to maintain their benefits.

15. While layoffs have been relatively limited, voluntary turnover in the Russian labor market is substantial. About 5½ million workers, or 11 percent of regular employees, left jobs at medium and large enterprises in the first half of 1996. Of this number, 92 percent were voluntary quits, presumably almost all for new employment. Of workers who voluntarily left their jobs, 79 percent were replaced by new employees. Despite rising overall unemployment, enterprises in competitive industries are maintaining their labor force levels and filling vacancies. As such, many skilled workers with experience in these industries, or with broadly applicable skills, can and do change jobs frequently.10

16. Nontraditional employment patterns, as compared to the Soviet standard of permanent employment by an organization, are becoming increasingly common. A recent Goskomstat survey found that over 10 percent of employed workers are self employed, including farmers and proprietors of small businesses. In addition, over 6 million workers were hired under fixed-term contracts rather than as permanent employees, of which 70-80 percent also held another, “permanent,” job. Survey data also revealed that at least 2.8 million workers hold two or more jobs.

C. Prices and Wages

Price developments

17. The rate of increase in consumer prices has declined steadily since the beginning of 1995. From an average monthly rate of 10.1 percent during 1994, monthly CPI inflation moderated to 7.2 percent during 1995, with the rate of increase falling to 3.2 percent by December(Table 9). This steady decline continued during 1996, with average monthly inflation registering 1.7 percent. The average monthly inflation rate remained at 1.7 percent during the first quarter of 1997. However, given that food prices tend to rise in winter, it is estimated that the underlying rate would be in the 1.0 percent range or even less.

Table 9.

Russian Federation: Consumer Price Inflation, 1992–March 1997 1/

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Source: Goskomstat.

The Russian authorities have discontinued the practice of publishing average monthly inflation rates since November 1994. Data reported in this table, since December 1994, are on an end of period basis.

Includes food, beverages, and tobacco.

Includes clothing and footwear, household goods, medicines, recreation, education, and culture, and personal care and effects.

Includes rent, water, fuel and power, transport, and communication.

18. Within the aggregate CPI, services prices have consistently risen more rapidly than goods prices, due to the continuing gradual adjustment in the administered prices for rent, utilities, and transportation; generally, such publicly provided services still remain below-cost, subsidized either directly or through cross-subsidization of households by industrial customers. Among goods, prices on food and nonfood items have risen at similar rates.

19. Producer price inflation has also declined, but remains somewhat above CPI inflation. From an average monthly rate of 10.5 percent during 1994, producer price inflation moderated to 8.8 percent per month during 1995, and then fell to 1.9 percent monthly over the course of 1996 (Table 10).

Table 10.

Russian Federation: Industrial Producer Prices, 1991-February 1997

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Source: Goskomstat.

20. Although PPI inflation has consistently exceeded CPI inflation, individual producer prices have tended to signal price increases on downstream consumer products whose prices are unregulated, with a lag of two to three months. The linkage between the PPI and CPI indices is broken by administered consumer prices. On these goods, a producer price increase without a subsequent rise in the administered consumer price—for example, an increase in gasoline prices without an administered increase in bus fares—generally squeezes profits of suppliers of final goods or services. In addition, producer price inflation has tended to increase with the economy-wide accumulation of interenterprise arrears. This may mean that, as arrears again became increasingly common in 1996, enterprises increasingly build implicit interest into their contract prices; in fact, some contracts explicitly stipulated penalties for late payments.

Wage developments

21. Any discussion of nominal wages in Russia needs to recognize the distinction between reported wage rates and actual compensation. Many workers—roughly one-third by mid-1996—are not paid their full wages as scheduled, as many enterprises are constantly behind on wage payments. The problem of wage arrears has intensified since mid-1995, after moderating somewhat in the first half of 1995 (Table 8). On average, only about 80 percent of wages are paid when due. Statistics on wage arrears indicate that typically 80 percent of arrears have been due to enterprises’ lack of funds, and the other 20 percent due to delays in payments from the budget either directly to workers or to enterprises which have in turn delayed wage payments. Although the federal government coordinated the clearance of public sector wage arrears in March and April 1996, such arrears began to rise again by the summer.

22. For many workers, especially those in the new private sector, reported wages may compose only a small share of compensation. In order to avoid payroll taxes, many firms have devised indirect means of employee compensation. One such scheme involves making non–withdrawable bank deposits in the name of employees, with the employee keeping the interest that accrues on the deposit. Because it is not clear how large or widespread indirect compensation schemes are, it is difficult to assess to what extent wage statistics—collected from medium and large enterprises and budgetary institutions rather than households or private sector employers—understate average paid compensation.

23. Subject to these caveats, average nominal wages are reported to have risen by 114 percent in 1995, which was well short of keeping pace with inflation, which amounted to 191 percent on average (Table 6). Some of this loss was made up in 1996, with average nominal wages up 65 percent relative to 1995.

24. In contrast to the fluctuations in ruble real wages, the U.S. dollar value of average wages rose rapidly and steadily from January 1995 to mid-1996, before falling back somewhat by end-1996. As stabilization took hold in 1995 and the pace of the nominal depreciation of the ruble slowed well below the inflation rate, the average monthly wage in dollars rose by 80 percent, from $79 in January 1995 to $142 in January 1996, and peaked at $170 in July 1996. Since then, depreciation of the ruble and the decline in wage inflation has reduced the dollar value of wages, to an average of $160 during August-December 1996.

II. Public Finances

25. Since 1994, the major aim of budgetary policy has been to reduce the fiscal imbalance by halting and reversing the decline in revenues and by reducing unproductive expenditures. Some headway to that end was made during 1995, but lack of progress in resolving weaknesses in revenue collection put the whole burden of fiscal adjustment on deep expenditure cuts. The sustainability of these deep cuts remained in doubt—particularly in the absence of a coherent program of restructuring government expenditures—leaving the fiscal position fragile and vulnerable to shocks. In 1996, consolidation of the overall fiscal position was set back by a further decline in revenues and a sharp increase in the interest burden linked to uncertainties about the presidential election. The deficit rose and budgetary arrears began to increase. A sustained improvement in the fiscal position will require further improvements in tax administration and reforms of the tax system, the budget process, and expenditure management and control.

A. Overview, 1993–96

26. Beginning in the spring of 1993, the Russian authorities launched an ambitious fiscal adjustment program, focussed on eliminating monetary financing of the budget and phasing out the quasi–fiscal operations of the CBR (such as directed credits). Prudent limits were placed upon government credits to CIS countries, import subsidies were phased out, and tight expenditure control was implemented through cash rationing. The outcome of this program was a reduction in the deficit of the federal government to 6½ percent of GDP in 1993 from 10½ percent of GDP in 1992.11 The fiscal adjustment of the enlarged government12 was even greater, with the deficit shrinking by 10 percentage points of GDP, to 7½ percent of GDP (Table 11).

Table 11.

Russian Federation: Summary Operations of the Enlarged Government, 1992-96

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Source: Ministry of Finance, CBR, Goskomstat, and IMF staff calculations.

Unconsolidated revenues and expenditures (inclusive of intragovernmental transfers).

Scheduled principal payment in 1995.

3/ Excludes budgetary funds before 1994 Road fund, ecological fond, STS funds).

27. While the fiscal tightening continued in early 1994, the stabilization effort was ultimately not sustained. The 1994 federal budget, passed in mid–year, allowed a rapid expansion of budgetary lending to agriculture and industry, which led to an increase in the federal deficit 11½ percent of GDP in that year. The enlarged government deficit also rose sharply to 10½ percent of GDP. Moreover, during 1994 there was a resurgence of monetary emission on a significant scale as a means of deficit financing.

28. In early 1995, a renewed effort toward fiscal adjustment was initiated under the program supported by a stand-by arrangement. The key elements of the tightening in fiscal policy were incorporated in the federal budget, and enhanced with a supplementary revenue package and a new Central Bank law which eliminated direct credits to the government from the CBR.13 Despite a further decline in revenue collections, the federal deficit was brought down to 4¾ percent of GDP while the enlarged government deficit was reduced to 5 percent of GDP. However, the run-up to the parliamentary elections in December 1995 brought heavy pressures to increase government noninterest expenditures. A partial accommodation of these pressures raised the deficit of both the federal and the enlarged governments to over 9 percent of GDP in the last quarter of 1995.

29. The economic program for 1996 envisaged a further reduction of the deficit to 4 percent of GDP, for both the federal and enlarged governments. However, the performance of revenues deteriorated markedly, and there also was a surge in interest rates on Treasury bills in the run-up to the presidential election. The combination of weak revenue and higher-than-anticipated interest expenditure led to a rise in the federal deficit to 6¼ percent of GDP, although substantial cuts in noninterest spending held the primary deficit unchanged from that recorded in 1995. Delays in federal wage payments and in the federal contribution to the Pension Fund led to an accumulation of arrears, with the outstanding amount of these unpaid federal obligations estimated at ½ percent of GDP at the end of 1996. Significant arrears also arose on other goods and services. The fiscal outcome of the enlarged government in 1996 was broadly similar to that of the federal government.

30. As the above description of fiscal developments pertaining to the federal and enlarged governments indicates, local and regional governments and the social extrabudgetary funds moved slightly into deficit in 1995-96, although the magnitude of their deficits was largely constrained by the absence of well-developed financing mechanisms.14 Expenditure pressures were accommodated frequently through increases in payments arrears, notably on wages in 1995 and social payments (particularly pension benefits) in 1996.

B. Key Features of 1995–96 Developments

Federal government expenditure

31. As indicated above, a major expenditure adjustment occurred in 1995–96, with noninterest federal expenditure (cash basis) being reduced by 10 percent of GDP during those two years; the great bulk of the spending reduction took place during 1995 (Table 12 and 13). Measured in relation to GDP, reductions were largest—with declines of two–thirds—in spending on industry, energy and construction (largely transfers and investment subsidies), and net lending (mainly subsidies to the Northern regions, agriculture, and industry). Intergovernmental transfers fell in 1996 to less than half their 1994 level (as a ratio to GDP), while spending on defense and internal security fell by nearly one–half. Other spending—including on public administration, science, higher education, international activity, and road building—was reduced by about 15 percent as a share of GDP.

Table 12.

Russian Federation: Federal Government Operations, 1992–96 1/

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Source: Ministry of Finance; and IMF staff estimates.

Excludes budgetary funds (road and ecological funds) before 1994.

Includes float and statistical discrepancy. In 1996 includes 3.8 trillion rubles in extrabudgetary expenditure in 1996 for compensation of Sberbank depositors.

Table 13.

Russian Federation: Federal Government Budget Operations, 1992–1996

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Source: Ministry of Finance; and IMF staff estimates.

Excludes budgetary funds (road fund, ecological funds) before 1994.

Includes float and statistical discrepancy. In 1996 includes 3.8 trillion rubles in extrabudgetary expenditure in 1996 for compensation of Sberbank depositors.

32. While only limited data are available on the economic classification of federal spending, the available evidence suggests that the burden of expenditure adjustment fell on subsidies, transfers (particularly to regions), net lending, and capital expenditure. Categories which were relatively less affected included wages, other goods and services, and social transfers. The share of wages and social insurance payments in total expenditure is estimated to have increased to 22 percent of noninterest expenditure in 1996, reflecting an increase in government wages in real terms in 1996. Capital expenditures were curtailed sharply and were down to a little over 1 percent of GDP in 1996.

33. The weak control over expenditure commitments—due both to a somewhat decentralized federal treasury system and to legislation preventing energy suppliers from cutting off a group of energy users for the reason of nonpayment (so–called strategic energy customers which include a number of budgetary organizations)—was a major factor contributing to payment arrears.15 By end-1995, federal arrears approached 1 percent of (annual) GDP, largely reflecting delayed wage and federal contributions to the Pension Fund. During 1996, arrears on wages and pensions taken together remained broadly unchanged in nominal terms and fell somewhat in relation to (annual) GDP, with federal wage arrears falling but large new arrears arising on federal transfers to the Pension Fund. In addition, however, delays on payments for goods and services (particularly energy) emerged; while information is incomplete, various estimates suggest that such arrears may have amounted to ½-1 percent of 1996 GDP at the end of the year. Moreover, expenditures financed by the issuance of government guarantees against borrowing from commercial banks amounted to ½ percent of GDP in 1996.16 Finally, there was also an increase in off-budget activity 2 funded by profits from oil exports executed under state contracts during 1996; net proceeds from this activity amounted to about ¼ percent of GDP.

Financial position of local and regional governments

34. The financial position of local and regional governments has deteriorated in the past few years as a result of the assumption of new expenditure responsibilities and a drop in revenue collections. Accordingly, the overall balance of the local and regional governments swung from a modest surplus of ¼ percent of GDP in 1994 to a deficit of ½ percent of GDP in 1996 (Table 14). In the period from 1992 through 1994, expenditures of local and regional governments had increased from 12 percent to 17½ percent of GDP, as the result of responsibilities transferred from the federal government, notably the payment of child allowances and some education expenditures. Also, the transfer of welfare functions from enterprises, including subsidized housing and utilities, increased the expenditure burden on local and regional governments. Until 1995, revenues largely kept pace, particularly as the federal government increased transfers corresponding to higher local spending responsibilities.

Table 14.

Russian Federation: Local Government Operations, 1992–1996

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Sources: Ministry of Finance; CBR; and IMF staff estimates.

For 1992-94 defined as 75 percent of expenditure in national economy category.

Includes float/statistical discrepancy.

35. However, in 1995, federal transfers were cut sharply, and other revenues also declined with the general weakening of revenue performance. As a result, local expenditures were reduced by 5 percentage points of GDP and payment arrears—particularly on wages, goods, and services—are believed to have increased significantly. The main expenditure reductions occurred in subsidies for household utilities (which in turn led to increased payment arrears on electricity, district heating, and gas), and health and education expenditures. Outlays on social benefits and other spending, including administration, were reduced only modestly. In 1996, local government expenditure fell by a further 0.8 percent of GDP, but core expenditures on health, education, communal services, and social security were maintained.

36. The deficits of local and regional governments have been constrained by their limited financing capacity. However, the issuance of domestic securities, often collateralized by investment or housing projects, has increased since 1995, although net issues during 1995–96 amounted to less than ¼ percent of GDP. In addition, several regions have announced plans to finance expenditure with the issue of Eurobonds in 1997 and subsequent years.

Financial position of extrabudgetary funds

37. The financial position of the social extrabudgetary funds— the Pension, Employment, Social Insurance, and Medical Insurance Funds—has deteriorated since 1994 due to a shrinkage in the payroll tax revenue base, leaving not only financial imbalances but also a benefits system which is increasingly unable to provide adequate support for the most needy segments of Russian society. The combined social funds balance, after transfers from the federal government, weakened from a surplus of 0.5 percent of GDP in 1994 to a deficit of 0.2 percent of GDP in 1996 (Table 15). Moreover, arrears have accumulated on pension payments.

Table 15.

Russian Federation: Extrabudgetary Fund Operations, 1992–96

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Source: Extrabudgetary funds.