By Sam Vaknin
Author of "Malignant Self Love - Narcissism Revisited"
A centerpiece of President's Putin overhaul of Russia is the
reversion to the Kremlin of the power to appoint governors, hitherto
voted into office. The popularly elected sort - admittedly a motley
and venal crew - seem to have provoked his ire as far too
independent and, therefore, impudent.
was Putin right to reassert central control over the unruly
provinces?
Russia's history is a chaotic battle between centrifugal and
centripetal forces - between its 50 oblasts (regions), 2 cities
(Moscow and St. Petersburg), 6 krais (territories), 21 republics,
and 10 okrugs (departments) - and the often cash-strapped and graft- ridden paternalistic center. The vast land mass that is the Russian
Federation (constituted officially in 1993) is a patchwork of
fictitious homelands (the Jewish oblast), rebellious republics
(Chechnya), and disaffected districts - all intermittently connected
with decrepit lines of transport and communications.
The republics - national homelands to Russia's numerous minorities -
have their own constitutions and elected presidents (since 1991).
Oblasts and krais used to be run by elected governors until 2005 (a
post-Yeltsin novelty introduced in 1997). They are patchy fiefdoms
composed of autonomous okrugs. "The Economist" observes that the
okrugs (often populated with members of an ethnic minority) are
either very rich (e.g., Yamal-Nenets in Tyumen, with 53% of Russia's
oil reserves) - or very poor and, thus, dependent on Federal
handouts.
In Russia it is often "Moscow proposes - but the governor disposes" - but decades of central planning and industrial policy encouraged
capital accumulation is some regions while ignoring others, thus
irreversibly eroding any sense of residual solidarity.
In an IMF working paper ("Regional Disparities and Transfer Policies
in Russia" by Dabla-Norris and Weber), the authors note that the ten
wealthiest regions produce more than 40% of Russia's GDP (and
contribute more than 50% of its tax revenues) - thus heavily
subsidizing their poorer brethren. Output contracted by 90% in some
regions - and only by 15% in others. Moscow receives more than 20%
of all federal funds - with less than 7% of the population. In the
Tuva republic - three quarters of the denizens are poor - compared
to less than one fifth in Moscow. Moscow lavishes on each of its
residents 30 times the amount per capita spent by the poorest region.
Nadezhda Bikalova of the IMF notes ("Intergovernmental Fiscal
Relations in Russia") that when the USSR imploded, the ratio of
budgetary income per person between the richest and the poorest
region was 11.6. It has since climbed to 30. All the regions were
put in charge of implementing social policies as early as 1994 - but
only a few (the net "donors" to the federal budget, or food
exporters to other regions) were granted taxing privileges.
As Kathryn Stoner-Weiss has observed in her book, "Local Heroes: The
Political Economy of Russian Regional Governance", not all regions
performed equally well (or equally dismally) during the transition
from communism to (rabid) capitalism. Political figures in the
(relatively) prosperous Nizhny-Novgorod and Tyumen regions
emphasized stability and consensus (i.e., centralization and co- operation).
Both the economic resources and the political levers in prosperous
regions are in the hands of a few businessmen and "their"
politicians. In some regions, the movers and shakers are oligarch- tycoons - but in others, businessmen formed enterprise associations,
akin to special interest lobbying groups in the West.
Inevitably such incestuous relationships promote corruption, impose
conformity, inhibit market mechanisms, and foster detachment from
the centre. But they also prevent internecine fighting and open,
economically devastating, investor-deterring, conflicts. Economic
policy in such parts of Russia tend to be coherent and efficiently
implemented.
Such business-political complexes reached their apex in 1992-1998 in
Moscow (ranked #1 in creditworthiness), Samara, Tyumen, Sverdlovsk,
Tatarstan, Perm, Nizhny-Novgorod, Irkutsk, Krasnoyarsk, and St.
Petersburg (Putin's lair). As a result, by early 1997, Moscow
attracted over 50% of all FDI and domestic investment and St.
Petersburg - another 10%.
These growing economic disparities between the regions almost tore
Russia asunder. A clunky and venal tax administration impoverished
the Kremlin and reduced its influence (i.e., powers of patronage)
commensurately. Regional authorities throughout the vast Federation
attracted their own investors, passed their own laws (often in
defiance of legislation by the centre), appointed their own
officials, levied their own taxes (only a fraction of which reached
Moscow), and provided or withheld their own public services (roads,
security, housing, heating, healthcare, schools, and public
transport).
Yeltsin's reliance on local political bosses for his 1996 re- election only exacerbated this trend. He lost his right to appoint
governors in 1997 - and with it the last vestiges of ostensible
central authority. In a humiliating - and well-publicized defeat -
Yeltsin failed to sack the spectacularly sleazy and incompetent
governor of Primorsky krai, Yevgeni Nazdratenko (later "persuaded"
by Putin to resign his position and chair the State Fisheries
Committee instead).
The regions took advantage of Yeltsin's frail condition to extract
economic concessions: a bigger share of the tax pie, the right to
purchase a portion of the raw materials mined in the region
at "cost" (Sakha), the right to borrow independently (though the
issuance of promissory notes was banned in 1997) and to spend "off- budget" - and even the right to issue Eurobonds (there were three
such issues in 1997). Many regions cut red tape, introduced
transparent bookkeeping, lured foreign investors with tax breaks,
and liberalized land ownership.
Bikalova (IMF) identifies three major problems in the fiscal
relationship between centre and regions in the Yeltsin era:
"(1) the absence of an objective normative basis for allocating
budget revenues, (2) the lack of interest shown by local and
regional governments in developing their own revenues and cutting
their expenditures, and (3) the federal government's practice of
making transfer payments to federation members without taking
account of the other state subsidies and grants they receive."
Then came Russia's financial meltdown in August 1998, followed by
Putin's disorientating ascendance. A redistribution of power in
Moscow's favor seemed imminent. But it was not to be until seven
years later.
At first, the recommendations of a committee, composed of
representatives of the government, the Federation Council, and the
Duma, were incorporated in a series of laws and in the 1999 budget,
which re-defined the fiscal give and take between regions and centre.
Federal taxes include the enterprise profit tax, the value-added tax
(VAT), excise, the personal income tax (all of it returned to the
regions), the minerals extraction tax, customs and duties, and
other "contributions". This legislation was further augmented in
April-May 2001 (by the "Federalism Development Program 2001-2005").
The regions are still allowed to tax the property of organizations,
sales, real estate, roads, transportation, and gambling enterprises,
and regional license fees (all tax rates are set by the center,
though). Municipal taxes include the land tax, individual property,
inheritance, and gift taxes, advertising tax, and license fees.
The IMF notes that "more than 90 percent of sub-national revenues
come from federal tax sharing. Revenues actually raised by regional
and local governments account for less than 15 percent of their
expenditures". The federal government has also signed more than 200
special economic "contracts" with the richer, donor and exporting,
regions - this despite the constitutional objections of the Ministry
of Justice. This discriminating practice is now being phased out.
But it has not been replaced by any prioritized economic policies
and preferences on the federal level, as the OECD has noted.
One of Putin's first acts was to submit a package of laws to the
State Duma in May 2000. The crux of the proposed legislation was to
endow the President with the power to sack regional elected
officials at will. The alarmed governors forgot their petty
squabbles and in a rare show of self-interested unity fenced the
bill with restrictions. The President can fire a governor, said the
final version, only if a court rules that the latter failed to
incorporate federal legislation in regional laws, or if charged with
serious criminal offenses. The wholesale dismissal of regional
legislatures requires the approval of the State Duma. Some republics
insisted at the time that even these truncated powers are excessive
and Russia's Constitutional Court had to weigh their arguments in
its pro-Putin ruling.
Putin then resorted to another stratagem. He established, in 2000,
by decree, a bureaucratic layer between centre and regions: seven
administrative mega-regions whose role is to make sure that federal
laws are both adopted and enforced at the local level. The
presidential envoys report back to the Kremlin but, otherwise, are
fairly harmless - and useless. They did succeed, however, in forcing
local elections upon the likes of Ingushetiya - and to organize all
federal workers in regional federal collegiums, subordinated to the
Kremlin.
The war in Chechnya was meant to be another unequivocal message that
cessation is not an option, that there are limits to regional
autonomy, and that the center - as authoritative as ever - is back.
It, too, flopped painfully when Chechnya evolved into a second -
internal - Afghani quagmire.
Having failed thrice, Putin is lately leaning in favor of restoring
and even increasing the Federation Council's erstwhile powers at the
expense of the (incensed) Duma. Governors have sensed the changing
winds and have acted to trample over democratic institutions in
their regions. Thus, the Governor of Orenburg has abolished the
direct elections of mayors in his oblast. Russia's big business is
moving in as well in an attempt to elect its own mayors (for
instance, in Irkutsk).
Regional finances are in bad shape. Only 40 out 89 regions managed,
by February 2002, to pay their civil servants their December 2001
salaries (raised 89% - or 1.5% of GDP - by the benevolent
president). Many regions had to go deeper into deficit to do so.
Salaries make three quarters of regional budgets.
The East-West Institute reports that arrears have increased 10% in
January 2002 alone - to 33 billion rubles (c. $1 billion). The
Finance Ministry considered to declare seven regions bankrupt. Yet
another committee, headed by Deputy Head of the Presidential
Administration, Dimitri Kozak, was on the verge of establishing an
external administration for insolvent regions. The recent housing
reform - which would force Russians to pay market prices for their
apartments and would subsidize the poor directly (rather than
through the regional and municipal authorities) - is likely to
further weaken regional balance sheets.
This culminated in the Putin putsch - the actual abolition of
independent centres of power outside the Kremlin. Disobedient
oligarchs were smashed, imprisoned, or exiled. Governors were
sacked. Elections were cancelled. Once again, the Kremlin appears to
reign supreme.
Luckily for Russia, the regions are less cantankerous and restive
now. The emphasis has shifted from narcissistic posturing to
economic survival and prosperity. The Moscow region still attracts
the bulk of Russian domestic and foreign investments, leaving the
regions to make do with leftovers.
Sergei Kirienko, a former short lived Prime Minister, and then the
president's envoy to the politically mighty Volga okrug, attributes
this gap, in a comment to Radio Free Europe, to non-harmonized
business legislation (between center and regions). Boris Nemtsov, a
member of the Duma (and former Deputy Prime Minister) thinks that
the problem is a "lack of democratic structures" - press freedom,
civil society, and democratic government. Others attribute the
deficient interest to a dearth of safety and safe institutions,
propagated by entrenched interest groups.
Small business is back in fashion after years of investments in
behemoths such as Gazprom and Lukoil. Politicians make small to
medium enterprises a staple of their speeches. The EBRD has revived
its moribund small business funds (and grants up to $125,000 loans
to eligible enterprises).
Bank lending is still absent (together with a banking system) - but
foreign investment banks and retail banks are making hesitant
inroads into the regional markets. Small businessmen are more
assertive and often demonstrate against adverse tax laws, high
prices, and poor governance.
Russia is at a crossroad. It must choose which of the many models of
federalism to adopt. It can either strengthen the center at the
expense of the regions, transforming the latter into mere tax
collectors and law enforcement agents - or devolve more powers to
tax and spend to the regions. The pendulum swings. Putin appears
sometimes to be an avowed centralist - and at other times a liberal.
Contrary to reports in the Western media, Putin failed to completely
subdue the regions. The donors and exporters among them are as
powerful as ever. But he did succeed to establish a modus vivendi
and is working hard on a modus operandi. He also weeded out the
zanier governors. Russia seems to be converging on an equilibrium of
sorts - though, as usual, it is a precarious one.
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AUTHOR BIO (must be included with the article)
Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant
Self Love - Narcissism Revisited and After the Rain - How the West
Lost the East. He served as a columnist for Central Europe Review,
PopMatters, Bellaonline, and eBookWeb, a United Press International
(UPI) Senior Business Correspondent, and the editor of mental health
and Central East Europe categories in The Open Directory and
Suite101.
Until recently, he served as the Economic Advisor to the Government
of Macedonia.
Visit Sam's Web site at http://samvak.tripod.com