The following article is devoted to some urgent issues of federalism process in the Russian Federation. It has actually appeared in its present format because of my colleague and respected researcher in the mentioned field Mr. Abdurahman Sayed. Mr. Sayed supposes that the Russian experience of turning from the rather authoritarian regime to the new democratic state might be of interest to the wide eritrean community around the world considering the fact of continuous struggle in Eritrea for better life. 

The Constitution adopted on December 12, 1993 established Russian Federation consisting of 89 equal in rights subnational governmental units called "subjects". Among these "subjects" there are 21 republics; one is autonomy region, 10 autonomy districts and 55 counties ("krai", subnational regions) and two federal cities (Moscow and St. Petersburg). Republics have their own constitutions and legislation. As for the other "subjects" they have statutes and legislation. However, Russian Constitution doesn’t clarify the legitimate difference between the political statuses of all the subnational governmental units. According to the article 5 of the Law Russian Federation is based on principles of wholeness, unity, delimitation of power among the governmental bodies of Federation and its units, equality and right of about 100 different nations to self-determination. We can assume that the formulations stated in the article 5 of the Law are compromised and reflect the political instability. There could be imposed a number of questions concerning the special status of the republics, the difference between statutes and republican constitutions or whether the 100 nations living in Russia have a right to declare an independence etc.

Even though the Constitution doesn’t smooth the edges mentioned above, Russian Federation in spite of the tremendous national variety is able to exist in relative unity. This could be explained because of highly centralized governance and the very important role of Moscow. Still in Russia according to the Constitution there are three levels of authority: central, regional ("subjects") and local. Actually only central and regional authorities function efficiently and named by the Law to be the only governmental bodies existing in Russia. As for the local authorities Constitution devotes one chapter to this issue however it doesn’t name it in the system of the organs of government.

Russia is a very young federation and it is still going through the rather complicated transition period. All of the important existing legislation was adopted during the last ten years and this process is to be continued. In the year 2000 we elaborated and adopted the new Tax Code. According to the code in Russian Federation there are three levels of taxation: federal taxes and duties, regional and local. Federal taxes and duties are established by the code and have to be paid on the whole territory of the Russian Federation: VAT, excise duties, income tax, natural resources taxes etc. Regional taxes and duties are established by the code and the laws of the "subjects" of the Russian Federation elaborated according to the code and should be levied on the territory of the referred "subjects": corporation property tax, sales tax, transport tax, gambling tax. The local taxes and duties are established by the code and by the laws of the local authorities: land tax, individual property tax and some others.

The distribution of taxes among the different levels of governance is based on three different taxation models. For example, the income tax is 24% (2003) and it is distributed among the three levels of jurisdiction on the point of withdrawing. The Tax Code states that 7,5% of the tax go to the federal budget, 14,5% go to the regional budget and 2% are taken to the local budget. However, the "subject" is able to reduce the regional income tax up to 10,5% for some categories of taxpayers or limit the amount of tax going to the local budget to 0,0% and make the transfer of all the 16,5% to the regional budget. As for the VAT the whole amount of taxes levied goes to the federal budget since 2001 but before that it could be distributed among the budgets only after withdrawing. The corporation property tax is secured only to the regional budget and is not distributed anyhow.

In the Russian Federation tax revenues are the most important and they make 92,21% of the year 2003 budget. These tax revenues include 62,3% of VAT, sales taxes and royalties, 17,75% customs duties, 9,68% payments for using natural resources, 9,91% income tax etc. As you can see in the Russian fiscal system VAT is the most valuable tax and its overall share in the country’s GDP is 6,8%. In the regional budgets the income tax’s share is the most significant and it is equal 2,6% of GDP.

From this brief description we can make a few interesting conclusions. First of all, Russian Constitution doesn’t declare the division of fiscal powers between the different levels of government but it just fixes the statement of the joint competence of federation and its "subjects" in the sphere of fiscal relations. Second, Russian fiscal system is based on domination of federal taxes while the regional authorities receive a few rights to define more precisely the taxation base and the level of taxing. Third, in Russia there exists unitary federal fiscal system that administrates not only federal taxes but also regional and local taxes.

The analysis of the Russian intergovernmental fiscal system shows us the existence of the considerable horizontal misbalance. For some regions it is necessary to take governmental loans or some other credits for financing operational expenses. At the same time other regions don’t have any budget deficit or attraction of loans on the open market finances it. Around one third of the "subjects" in Russia are not able to finance its own expenses and one third of other "subjects" have profits which significantly exceed the expenses. Some economists explain these huge gaps by the inefficient work of the state authorities collecting taxes on the regional level. Moreover, even though there is no exact data on vertical misbalance we can also declare the existence of the mentioned above problem because almost all the "subjects" receive financial help from the central government. In our view in order to cope with horizontal and vertical misbalance it is necessary to reform the existing scheme of distribution of fiscal powers and tax profits.

Nevertheless, it seems to us, it is too early to talk about any considerable improvements in the decentralization process in Russia. This is especially difficult in the context of last events when President Putin officially declared that one of his main goals was strengthening the "vertical of power". Even though the measures taken by the Russian government in some respect tend to be opposite to the common opinion of the civilized market world, the way of development chosen by Russia could be excused. Russia has to build everything on the plain ground learning from zero but we know that any reforms could be successful only when certain stability is reached. In this sense a great amount of improvements in the intergovernmental fiscal system could be accomplished. We mean starting from changing the general governmental course and finishing with the exact transformations in the way of collecting taxes, delimitation of fiscal powers and giving more real but not nominal rights to the regional and local government.

By: Dr. Evgenij Gribov

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