Russian Federation Country Study. A Public Finance Perspective
the government finally began to crack down on misrepresentation "in case of
noncompliance with this requirement or intentional provision of false
information in the notice submitted to taxation organ enterprise in arrears
that had performed the transactions in question will be fined by the
taxation organ in the amount of the transaction value". It has proposed to
improve the tax system by scrutinizing financial transactions through
banks. If an enterprise opens a bank account, the bank or other type of
credit institution must immediately inform the tax organs about the
accounts for tax purposes. Such tax policy will let the tax agencies
observe tax payments more efficiently as everything will be recorded.
Presidential Decree No 1212 of August 18, 1996 also introduced policies
concerning cases containing the circumstances stipulated in the Law of the
Russian Federation on Insolvency (Bankruptcy) of Enterprises, the Federal
Department on Insolvency (Bankruptcy) at the State Property Management
Committee of the Russia Federation shall file with arbitration court
request to institute proceedings on insolvency (bankruptcy) against
enterprises that have repeatedly violated this Decree during one calendar
year. As it was with collective farms and state farms, enterprises can just
change their names and continue to evade taxes. An important issue related
to insolvency is loss of massive amounts of jobs and what will workers and
one enterprise" towns do for a living and revenue.
On the bases of the decree, the government has widened its crackdown on tax
evaders--adding several leading oil companies to a list of tax delinquents
that might be forced into bankruptcy court unless they pay their arrears.
The move was the latest in a series of desperate measures the government is
taking to boost tax collection and mend its thread bare budget. The
government hopes that by threatening major tax evaders with bankruptcy,
they will scare the country's errant tax payers into filling empty coffers.
Major companies targeted for bankruptcy can avoid insolvency proceedings,
if their accounts showed the government owes them an amounts equal to their
tax debts for fuel supplied to state organizations.
The most recent step in fighting tax evaders was Russian presidential
decree No 1428, (dated (October 11, 1996, which created a Processional
Emergency Commission (the Commission) on strengthening fiscal discipline.
The major principals and objectives are:
. Control over the timely and full payment of taxes and customs and other
compulsory payments; . The elaboration of measures to secure a full-scale
collection of taxes and other compulsory payments; . Securing the legality
and efficiency of the work of tax and customs, as well as tax police
agencies; . Control over the timely and special-purpose use of the
resources of the federal budget and state extra budgetary funds. . Take
decisions to carry out checks of the financial and economic activity of
legal entities and compliance by individuals and entities with the tax,
customs and banking legislation of the Russian Federation; . Check the
operations of tax and customs bodies;
. Organize check of the timely and special-purpose use of the resources of
the federal budget and state extra budgetary funds.
In addition, the President granted broad powers to the Commission to meet
the objectives of the decree and secure its accountability.
Monetary Policy
Interest rates, much to the chagrin of reformers, in the past barely
reacted to currency stabilization and the ensuing drop in inflation. Little
confidence existed in the sustainability of reforms while inflation
expectations remained high. In 1996, interest rates finally started to come
down--albeit slowly. Real interest rates, however, are still very high. As
recently agreed by the Russian government and the IMF, the ruble is due to
become convertible by 1997. Better access to the ruble market could thus
lead to a rapid increase in international interest in the currency.
Nevertheless, the ruble is trying to join the club of respectable
currencies. Due to the establishment of a crawling peg, the currency's
downslide is almost under control. A generally more stable economic
environment and high interest rates could make the ruble more attractive.
The ruble's recent past has been eventful to say the least. Between January
1992--effectively the start of economic reform under Yeltsin--and March
1995,the currency depreciated by a massive 2,130 percent. In the second
quarter of 1995, an over-restrictive monetary policy led to a severe
shortage of the currency which then duly appreciated by 15 percent within
three months. As concerns rose that too rapid currency appreciation would
further destabilize the economy, the free-floating ruble program was
abandoned and a 'ruble corridor', which envisaged further depreciation but
within predetermined limits, was introduced. The ruble corridor program has
proven to be quite successful. The Central Bank, which has been intervening
repeatedly in the market, has managed to keep its foreign exchange reserves
at a satisfactory level, and the business community has been able to rely
on a more predictable exchange rate trend. In July 1996, the 'fixed' ruble
corridor (the upper and lower limits of which only had to be redefined
every few months) was transformed into a 'variable' ruble corridor, with
the band shifting on a daily basis. Under this program, monthly
depreciation now stands at around 1.5 percent. By the end of December 1996,
the exchange rate against the dollar should have reached Rb 5,700/US $.
Russia's monetary environment started showing promising signs of
stabilizing in 1996. During 1995, inflation reached 200 percent by
December. 1996 is drawing to a close and the inflation rate seems set to
fall to 19 percent. The central bank has been pursuing a very consistent
policy lately, so its goal of maintaining monetary stability looks
credible. Moreover, low inflation is one of the conditions imposed by the
IMF in return for its monthly credit and it is therefore hardly in the
government's interest to start emission based means of financing the budget
deficit. The main risk for inflation could come from a high budget deficit
due to low tax revenues. Financing the deficit has become easier than in
the past due to good international credit ratings--for example, IBCA: BB+,
Moody's: Ba2.--are making it cheaper for Russia to borrow on the foreign
capital markets.
A key element of Russia's macroeconomic stabilization program has been a
tight monetary policy to soak up excess rubles floating around the Russian
economy and fueling inflation. That policy's success is among the factors
that drove T-bill yields up by 26.6 percent Monday to an annualized 121.4
percent on the secondary market. Just a month ago, yields stood at 53.33
percent, according to Skate-to Press Consulting Agency.
The reason for the jump, analysts say, is simple supply and demand - little
ruble supply in the market at a time when government spending demands
revenue. The banks do not have the money to invest in GKO (treasury bills)
at 3 percent per month--but they will find the money to invest for 10
percent per month. Russia's monetary expansion under the IMF agreement is
not to exceed 3 percent, compared with 9 percent in December. Combined with
promises by Yeltsin to repay wage arrears and ease the impact of reforms on
the social sphere, that tight policy has forced the government to raise
yields as a lure to banks to loan the government money.
Intergovernmental Finance
The decentralization of the Russian Federation's intergovernmental
financial relationships began with a series of successive tax sharing
arrangements along with the regions expenditure responsibilities
increasing. This sharing and reassignment strategy continued up to and on
through the adoption of a new constitution in December 1993. In Russia, the
tax formula sharing rates vary by region and are often negotiated by each
locality with the center. This makes any assessment about the equity impact
of transfers or their effects on local revenue effort difficult. A general
disadvantage of tax sharing is that it does little to enhance local
accountability or efficiency. Localities receive revenue regardless of
their tax effort and have no discretion to set the tax rate or base. If
they view these revenues as costless, their incentive to spend efficiently
is lessened. The result may be undue expansion of subnational spending. In
Russia shared taxes are retained by (or accrue to) the jurisdiction in
which they are collected. This differs from most market industrial and
developing economies where shared taxes (like the VAT in Germany) may be
shared through a formula based on factors such as population, per capita
income, urbanization or other factors. Derivation-based sharing as a rule
channels resources to high income areas where the tax base and, therefore,
revenue collections are largest. It is thus inherently counter-equalizing.
This may be a problem in countries where regional inequities are serious
and where the intergovernmental system lacks other instruments (such as
transfers) to address such imbalances.
The intergovernmental fiscal relations of the Russian Federation continues
to be highly opaque due to the bargain-based system which presently is
being utilized. The bargain-based system is making accountability in fiscal
policy even worse than is necessary--therefore further reducing the
transparency. The size and structure of the Russian Federation contributes
to the problems occurring in its fiscal relationships. It is made up of 89
regions consisting of 29 republics, 50 oblasts, 6 krais, and 10 autonomous
okrugs, plus 2 metropolitan cities (Moscow and St. Petersburg) which are
referred to as the 89 "subjects of the federation" in the constitution. The
regions are even further subdivided into more than 2000 districts, where
all the local governments within a region report to the regional
governments and are subject to regional regulations, although each local
government has independent" (emphasis added) budgetary and administrative
status.
Effects of Decentralization
Economic decentralization has led to the transfer of a number of services
with major benefit spillovers (education, health, and social welfare) to
the regional and local levels. While the administration of these programs
by local governments may be appropriate because they are closer to the
people, the many small local governments that have been created as a result
of the strong political push for decentralization cannot likely provide
these services at an adequate level from their own resources. In some
regions, enterprises' "public" spending exceeds budgetary social spending
and, in a few "one-company towns" there is no public spending by the budget
at all on non-administrative functions. Enterprises did not provide these
services once privatized, and responsibility fell onto regional and local
governments to finance them. But local governments will need revenue
sources to finance the additional burden.
Decentralization, which led to ownership assignment and financial
responsibility, has caused the regions to become more involved in the
commercial sector through producer subsidies, capital transfers, and
privatization. It has also led to the budgetary expenditures by the
regional governments to increase from 13 percent of the GDP in 1992 to
around 18 percent in 1994. Recent policy changes have suggested that this
trend of more subnational spending is likely to continue.
The Federal government has approved legislation which led to the previously
discussed changes in expenditure assignment and also gave local governments
the power to formulate budgets and raise revenues without worrying that
their surpluses were going to be extracted by the central government. These
new assignments of expenditures are not efficient, in part because the
federal government has passed down" many of the expenditure assignments
which were formerly the responsibility of the Soviet state. Revenue
autonomy has not been reached partially due to the yearly changes in tax
sharing rates. Disparities between the rich and poor regions has also
contributed to a problem budgetary concern. Along with these disparities,
the high rate of inflation has significantly contributed to revenue
unpredictability of the rayons and oblasts. Revenue predictability and the
subnational area's economic state due is of the utmost importance when one
is considering expenditure assignment of the federation.
Social Welfare and Russia
The significance and necessity of an efficient social safety net in the
Russian Federation can only be understood within the context of the Soviet
experience of social security and how today the ideological inclination
toward a welfare state is affecting Russian society. The state's pervasive
role in Soviet society affected both economic and social conditions.
Economically, a state-caused inverse relationship existed between GDP and
the state's commitment to social safety during the Brezhnev regime.
Economic and political stagnation characterized the latter years of the
Brezhnev era. Economically, GNP growth declined precipitously between 1961
and 1985 (see A1 and A2). Prior to 1960, the USSR utilized extensive rather
than intensive factors of production--specifically labor, capital (stock),
and natural resources. In essence, Soviet authorities were able to take
advantage of Imperial Russia's lack of a strong industrial base by
transferring much of the population from agriculture to industrial
production during Stalin rapid industrialization drive of the 1930s and
1940s. The emphasis placed on heavy industry produced a correspondingly
high rate of consumer saving which allowed for increased capital growth,
that when combined with the natural resource abundance and intensive use of
existing capital helped sustain economic growth The USSR's ability to
sustain economic growth in the 1970s was fostered by its large reserve of
oil that helped finance imports of western technology.
The exhaustion of labor surplus, declining birth rates, inefficient use of
natural resources and other factors of production, the growing expenditures
needed to maintain military parity with the United States, and the sudden
drop in oil prices, and the mis-development of the economy all were factors
that contributed to the USSR's economic stagnation in the late 1970s and
early 1980s. While economic efficiency decreased during the Brezhnev
period, the USSR's leadership demonstrated increased commitment to the
Soviet version of the social safety net. The party-state's pervasive role
in society had the effect of slowing economic growth through poor re-
allocation of resources and the social effect of retarding the development
of a civic society. As a result, Soviet society developed an enduring
attachment to the idea of an omnipotent state which provided for their
basic needs regardless of the economic costs.
From a Western perspective, the Soviet Union was ideologically a hyper"
welfare state in the sense that prior to the Gorbachev era, the state
attempted to provide a high level of social security for every citizen,
often to the point of harming economic efficiency. Additionally, it heavily
restricted the development of private sector in order to prevent wide wage
disparity. As mentioned above, the CPSU's monopoly on power extended to
every aspect of society and in exchange for party dominance the working
population received implicit social guarantees in the form of a social
contract." Linda J. Cook succinctly identifies each sides' basic
commitments and responsibilities:
Basically, the regime provided broad guarantees of full and secure
employment, state controlled and heavily subsidized prices for essential
goods, fully socialized human services, and egalitarian wage policies. In
exchange for such comprehensive state provision of economic and social
security, Soviet workers consented to the party's extensive and
monopolistic power, accepted state domination of the economy, and compiled
with authoritarian political norms. Maintenance of labor peace in this
political system thus required relatively little use of overt coercion.
The weakening of the party and other unintended consequences of glasnost
and perestroika such as the emergence of the Russian Republic, the decision
to release Eastern Europe from Soviet domination, and the attempt to make
state owned enterprises more efficient all had a direct impact on lowering
the standard living for the USSR's population. Gorbachev tried and failed
to cut the guarantees of the social contract. In contrast to earlier in the
Soviet period, the perestroika reforms had the effect of giving
significance to money" in the sense that inputs had developed value through
the economic decisions which constituted perestroika. From the center's
perspective, the problems caused by the inability to cut expenditures
through revision of the social guarantees were compounded by revenue loss
in three key areas: vodka sales, turnover tax, and republic contribution to
the center--especially from the Russian Republic.
Gorbachev began perestroika with an attack on worker efficiency. One
measure adopted to combat this perceived evil was restriction on the sale
of alcohol. The consequence was a loss in revenue which was further
compounded by expenditures related to the Chernoybl disaster and the
massive Armernian earthquake in 1987. In 1990, the center granted state
owned enterprise (SOEs) greater leeway in the setting of prices--between 50
percent and 100 percent of state mandated prices. Since retail prices were
unaltered, the state lost a huge amount of revenue from the turnover tax.
In addition, Russia offered to lower the profit tax for those enterprises
willing to pledge" allegiance to the Russian Republic. Finally, the
dissolution of the Soviet Union was hastened by the rise of Russian
nationalism and populism both of which had economic implications. The
Russian Republic provided 80 percent of the revenue to the USSR's budget.
Yeltsin, using his powerful position within the Russian parliament,
declared in October of 1989 that the Republic would halt all payment to
Union institutions. He followed this devastating maneuver by nationalizing"
the USSR Ministry of Finance and seizing its mints. In October of that
year, Russia seized her share of the USSR'S precious metals. Faced with
such tremendous loss of revenue which created a budget deficit that equaled
10 percent of GNP, the Soviet government elected to increase the amount of
money in circulation without a corresponding increase in the production of
consumer goods and services. The decision to increase money circulation,
through wage increases, had a jarring effect on Soviet society. The first
impact, characterized by the indelible image of long bread lines and the
stereotype that a large profit could be made on a pair of Levis familiar to
many Westerner was the result of the disruption of goods and services to
the general population.
Price stability began to go by the wayside in the fall of 1988 with an
estimated inflation rate of 7 percent which mushroomed to 10 percent in
1990. As Table A3 and A4 indicate, the state increased both the level of
wages and subsidies in the other which constituted the component parts of
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