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2.5. Russian Financial Markets 2.5.1. Internal Debt Market In 2006, the internal debt of the Russian Federation in securities grew in vol ume by nearly 20.8 per cent, from RUR 851.15 bln to 1,028.04 bln ...

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This situation provides grounds for placing the focus of attention once more on the urgent necessity to diversify the instruments and to liberalize the procedure for investing the pension savings formed for the benefit of those persons who have not made their investment choices67. The intention to this effect was declared by the RG Government as early as 2004, but so far it has not been practically imple mented.

2.6. Municipal Reform: the First Year of Implementation The year 2006 stands apart within the overall process of the implementation of municipal reform. According to the reforms initial concept, it is in this year that the full scale implementation of Federal Law of 6 October 2003, No. 131 FZ, On the general principles of the organization of local self government in the Russian Fed eration, was to begin all over the countrys territory. That Law envisaged certain fundamental transformation in the system of local self government in the Russian Federation. The key ideas of reform was to establish in legislation, clearly and with a single interpretation, the structure and functions of municipal formations of vari ous types, and on that basis to determine their spending powers and to consolidate to them, on a permanent basis, appropriate sources of revenue. The main direc tions of transformations were to be as follows:

- on the greater part of the countrys territory, it was intended to establish a two tier model of local self government, with municipal formations being formed both at the level of settlements and at the level of raions;

one tier municipal formations city okrugs could be created in urban territories by decision of regional authorities;

- rigid lists of issues of local importance were established for each type of mu nicipal formations settlements, municipal raions, city okrugs;

on the whole, the competence of bodies of local self government was noticeably reduced by comparison with the pre reform situation;

- a more precise regulation was established for the transfer, to the local level, of certain state powers and for their financial backing from the budgets of superior levels;

For more details, see L. V. Mikhailov, L. I. Sycheva Predlozheniia po izmeneniiu poriadka investi rovaniia sredstv pensionnykh nakoplenii zastrakhovannykh lits, ne vospolzovavshikhsia pravom vy bora investitsionnogo portfelia [Proposals concerning changes to the procedure for investing the pension savings of those insured persons who have not made use of their right to choose an in vestment portfolio] // Ekonomiko politicheskaia situatsiia v Rossii [The economic and political situa tion in Russia]. M., IET, 2005 (11).

Section Monetary and budgetary spheres - the legislatively consolidated requirements to bodies of local self government were made more strict;

in particular, it was envisaged that each municipality was to have a representative body, a head official and a local administration;

the number of deputies to that representative body was subject to special regula tion, etc.;

at the same time, the opportunities for regional authorities to influ ence the organization and composition of the bodies of local self government were expanded;

- the list of property that could be placed in municipal ownership was limited;

those objects that fell beyond the legislatively established restrictions were to be used for other purposes or alienated;

- sources of revenue were consolidated to municipal formations on a permanent basis;

the principles and mechanisms for the granting of financial assistance to municipalities were rigidly consolidated in federal legislation (including the pos sibility of negative transfers for municipal formations with the most favorable fi nancial situation).

During the preparation for the implementation of reform, it became obvious that the suggested model of the organization of the system of local self government was too rigid and not totally adequate, while at the same time the nec essary prerequisites for its practical implementation in many regions were lacking.

The crisis in the implementation of municipal reform developed in mid 2005, when a group of deputies submitted to the State Duma a draft amendment whereby the timelines for the transformations as envisaged in legislation were to be extended. In a somewhat softened version this amendment was adopted on 21 September 2005. The changes introduced into Law No. 131 FZ envisaged that a transition pe riod was to be established until 1 January 2009, within the framework of which, as far as the newly created municipal formations were concerned, the Federations subjects could on their own distribute issues of local importance and sources of revenue between municipal raions and settlements, and thus largely determine the rate of implementation and directions of municipal reform.

That amendment marked just one important step in the sequence of changes being introduced into Law No. 131 FZ, influenced both by the lobbyism on the part of regional authorities and by the pressure of objective circumstances, which ne cessitated that the Laws excessively rigid structure was to be adjusted to the de mands of practicality. One characteristic feature of all those changes was that the Laws intrinsic ideology, aimed at a strict division of the spheres of competence be tween the bodies of local self government of different types of municipal forma tions and at the introduction of financial equalization mechanisms, designed to en dow municipal formations with appropriate financial resources, was becoming more and more vague under the influence of currently arising problems and short term demands. In this connection, no acknowledgement was made of the fact that the viability of the conceptual approaches that laid the foundation of municipal re form had never been tested, nor that the existing situation had to be rethought comprehensively from the point of view of the strategic prospects for the develop ment of the entire system of local self government in Russia. The necessary pre RUSSIAN ECONOMY IN trends and outlooks requisite for such rethinking was an analysis of the real situation surrounding the implementation of municipal reform in different regions. From this point of view, the monitoring of reform as it was developing in 2006 is of especial interest. In a situa tion when regional authorities were given ample opportunities for determining the rate and directions for implementing municipal reform until 2009, more than a half of the regions declared that they were going to initiate full scale reform of local self government from 1 January 2006. This means that we now can make assess ments not only of the preparatory measures, but the of transformations proper as they were envisaged in legislation.

2.6.1. Normative Legal Regulation of the Ongoing Transformations In contrast to the years 2004 and 2005, the changes introduced into legisla tion on local self government in 2006 did not influence in any significant way the division of powers between municipal raions and settlements. Some serious amendments were made only to land legislation. By Federal Law of 17 April 2006, No. 53 FZ, On making changes to the Land Code of the Russian Federation, Fed eral Law On the enactment of the Land Code of the Russian Federation, Federal Law On State registration of the rights to immovable property and the transactions therewith, and On the recognition as null and void of some provisions of the legis lative acts of the Russian Federation it was determined that the disposal of the plots of land the State ownership of which has not been divided should be executed by the bodies of local self government of municipal raions and city okrugs.

Such regulation cannot be recognized as logical, because the main powers in the sphere of the regulation of the use of land have been consolidated to the bodies of local self government of settlements. Thereby, at the level of settlements, in re spect of those lands the State ownership of which has not been divided, there should be established rules for the use of lands and their construction develop ment, as well as construction permits should be issued, while the disposal of these lands (that is, the allocation of plots of land) is the prerogative of a municipal raion.

Thus, there emerge additional grounds for conflict between two levels of authority within local self government: the bodies of local self government of settlements may refuse to issue construction permits in respect of a plot of land allotted by the raion, simple because they have taken no part in related decision making. Besides, the costs being borne by the recipient of a plot of land become higher, because he has to effectuate coordination at two administrative levels instead of just one.

By the same normative act it was established that the plots of land in those settlements that are administrative centers or capitals of RF subjects should be disposed of by the bodies of local self government of the said settlements, if by the laws of the corresponding RF subjects it is not established that the disposal of those plots of land should be carried out by the executive bodies of state authority of RF subjects. This provision appears to be rather bizarre, because the situation when a settlement and not a city okrug is the capital of a Federations subject can be regarded as a rare exception. This can be observed only in a few autonomous city okrugs in particular, Nenets AO, Agin Buriat AO, and Ust Ordynskii Buriatskii AO. In this connection it is unclear why it has become necessary to separately Section Monetary and budgetary spheres regulate this specific instance. However, this is an illustration of the general trend that characterizes nearly every initiative aiming at introducing changes into the normative legal regulation of local self government in 2006 namely, the inten tion to shift the balance of power between the bodies of local self government lo cated in regional capitals and the bodies of state authority of the Federations sub jects in favor of the latter.

More obviously this trend has revealed itself in the draft Federal Law On making amendments to Article 26 of the Federal Law On the general principles of the organization of the legislative (representative) and executive bodies of state au thority of subjects of the Russian Federation and to Article 75 of the Federal Law On the general principles of the organization of local self government in the Rus sian Federation, submitted to the State Duma in late April 2006 by deputies V. S.

Mokryi, V. A. Zhidkikh, and A. V. Ogonkov. Under this draft law, it was intended that subjects of the Federation should be granted the right to temporarily execute some of the powers of the bodies of local self government of those settlements and city okrugs that are administrative centers of the Federations subjects, for purposes of ensuring the uniform functioning of their utilities and communications systems and other infrastructure. The draft contained no specific fundamental principles or conditions for temporary regulation of the life support systems in big cities at the level of the Federations subjects. Up to ten key issues of local importance could be potentially withdrawn from the jurisdiction of big municipal formations, including the organization of the supply of heating, gas, electric power and water;

the organi zation of removal and utilization of domestic and industrial waste;

the construction and maintenance of motor roads and bridges;

the organization of transport ser vices to the population;

the establishment of rules for the use of land and its con struction development, and the control over the use of lands. It was suggested that the timelines for the temporary withdrawal of powers and the specific grounds for such actions should be established by laws of the Federations subjects.

The draft law stirred strong public response, and opinions in society became divided. The draft laws critics pointed to its lack of democracy and incompatibility with the RF Constitution and the European Charter of local self government, and to local self government becoming discredited in the eyes of the population as a re sult of its adoption. In this form, the draft law could not even find support among all the subjects of the Federation (thus, for example, the Legislative Assembly of Uli anovsk Oblast, in its resolution, declared that the amendments violate the essence of local self government, the RF Constitution and the European Charter of local self government). Under the pressure from the public, the State Duma adjourned the consideration of this amendment.

In its stead, however, and under the same number, in October 2006 by a simi lar group of deputies from the faction United Russia a somewhat different amendment to Law No 131 FZ was suggested. The draft law put forth by the depu ties envisaged that in administrative centers and capitals of subjects of the Russian Federation local self government may be executed either within the borders of an administrative center or the capitals of a subject of the Russian Federation as a RUSSIAN ECONOMY IN trends and outlooks whole, or in inner urban territories68. In this connection, in both instances to re gional capitals, in fact, the regulation was extended which was envisaged for the inner urban municipal formations of the two cities of federal importance Moscow and St. Petersburg. In particular, it was suggested that legislation of the Federa tions subject should regulate the following issues:

- with due regard to the opinions of the population, to establish and change the borders of inner urban municipal formations, and to effectuate their transforma tions;

- to determine lists of issues of local importance, sources of revenue for local budgets;

- to establish the powers of the bodies of local self government to make deci sions concerning the issues of local importance from the list established by fed eral legislation;

- to establish the composition of municipal property on the basis of the federal composition of property and the regional list of issues of local importance, de termined for the corresponding municipal formations by laws of the Federa tions subjects.

Besides, it was suggested that amendments should be made to the RF Budget Code to the effect that to the Federations subjects should be consolidated the right to determine the sources of revenue for the budgets of those city okrugs and settlements that have the status of administrative centers, capitals of subjects of the Russian Federation, as well as of the inner urban municipal formations lo cated on their territories, and the list of spending powers and the procedure for their execution.

The emergence of such suggestions is quite logical in terms of the structure of the vertical of power. Since it became clear that within the existing RF Constitu tion it would be impossible to introduce the mechanism of actual appointment of mayors similar to that being executed in respect to governors, another pathway was chosen that of limiting the independence of elective bodies of local self government in biggest regional centers, which in most cases have the powers to dispose of vast resources, namely, regional capitals69.

At the same time it is obvious that such an initiative, which, similar to the previ ous one, being designed to dramatically shift the balance of powers in favor of the Federations subjects and to actually restrict the protection of the rights of local self government (ensured by federal legislation) in regional capitals, was met with indignant response of the municipal community. Negative opinions were voiced not only domestically, but also by international organizations. As a result, the amend ment was not considered by the State Dume, and the ultimate fate of this initiative is still unclear.

Accordingly, it was suggested that legislation should reflect the definition of such an inner urban territory as part of the territory of an administrative center or the capitals of a subject of the Russian Federation, within the borders of which local self government is executed by the population directly and (or) through elective bodies of local self government.

Only in two regions Vologda Oblast and Kemerovo Oblast the regional capital is not the largest city in their respective territories.

Section Monetary and budgetary spheres The last among the significant legislative acts of 2006, which had to do with local self government, was Federal Law of 29 December 2006, No. 258 FZ, On making amendments to some legislative acts of the Russian Federation in connec tion with the improvement of the division of powers. The new law deals mainly with the division of powers between the Federation and subjects of the Federation, al though it does, indeed, also touche upon the activity of bodies of local self government. In respect to the latter, the changes introduced into legislation can be subdivided into two groups: some of them bring order and classification to the changes introduced earlier, while others actually touch upon the sphere of compe tence of bodies of local self government.

These changes consolidate a rather complicated and controversial interpreta tion of the sphere of competence of bodies of local self government, which incor porates the following:

- the settlement of issues of local importance;

- the execution of delegated state powers;

- the participation in the execution of other state powers, if this participation is envisaged by federal laws;

- the settlement of other issues, which are not placed within the sphere of com petence of the bodies of local self government of other municipal formations or bodies of state authority, or not withdrawn from the sphere of their competence by federal laws or laws of subjects of the Russian Federation.

At the same time, in respect to each type of municipal formations, a list of those issues is specified, which do not belong to the category of issues of local im portance, but can be dealt with by bodies of local self government. These issues are very versatile in their nature. Some of them can be treated as non delegated state powers, in the execution of which bodies of local self government may par ticipate, which has become possible after the introduction of amendments into Law No. 131 FZ in late 2005. However, for example, the right to found local museums can hardly be fully compatible with this category, from the point of view of its es sence. One gets the impression that, alongside the evolution of the division of pow ers, there also emerge the foundations for the subdivision of issues of local impor tance into compulsory and voluntary, which has already been practiced for a long time in foreign countries. However, the process itself if rather inconsistent and con troversial.

It should be noted that the new classification of the spheres of competence of municipal formations is not quite compatible with their powers in the financial sphere (Article 86 of the RF Budget Code), because it is not defined precisely to which category of powers belong the rights of bodies of local self government to deal with those issues that are not placed within the category of issues of local im portance.

As for the specific set of issues of local importance, which are placed within the sphere of competence of bodies of local self government but not on the estab lished list, the recognition of the right of the bodies of local self government of set tlements to execute notarial actions in the event of absence of a notary in a settle RUSSIAN ECONOMY IN trends and outlooks ment is of utmost importance70, because otherwise in many instances the popula tions access this service would have become more difficult. In order to realize this right, in the Fundamental Legislation of the RF on the notariat some amendments were made, whereby the head of a local administration of a settlement and the specially empowered official of the local self government of a settlement should have the right to execute the following notarial actions:

- to certify wills;

- to certify powers of attorney;

- to take appropriate measures for the protection of bequeathed property and, in an event of necessity, appropriate measures for its management;

- to attest to the correctness of copies and extracts from documents;

- to attest to the authenticity of a signature on a document.

By legislation of the Federations subject, this list can be expanded.

At the same time, on accordance with the RF Budget Code, the State duty, as well as the fees for the execution of notarial actions by notaries working at state no tarys offices and appropriately empowered by legislative acts of the Russian Fed eration and subjects of the Russian Federation, by government officials of bodies of executive authority, and by bodies of local self government, are to be trans ferred to the budget of a municipal raion. Thus, there emerges a discrepancy be tween the execution of notarial actions at the level of settlements and the transfer of the corresponding revenues to the budgets of municipal raions As for any changes to issues of local importance, the lawmakers have revived the trend of excluding social issues from the sphere of competence of bodies of local self government71. From the list of issues of local importance of settlements such issues have been excluded as aid in establishing trusteeship and guardian ship, as well as the computation of subsidies for the housing and utilities fees and the organization of the procedure for granting subsidies to those citizens who are entitled to them. This last issue was placed on the list of issues of local importance only a year ago. This inconsistence in the lawmakers behavior does not make any easier the organization of the work of bodies of local self government. As for mu nicipal raions, the issue of trusteeship and guardianship has been withdrawn from the sphere of their competence. Accordingly, the whole bulk of these issues has also been withdrawn from the sphere of activity of city okrugs and placed within the sphere of competence of the Federations subjects. In this connection, the partici pation in the activity relating to trusteeship and guardianship had been placed on the list of issues that are not classified as those issues of local importance that can be settled by the bodies of local self government of all types of municipal forma tions72.

The provisions of Law No. 131 FZ concerning this right are to enter into force from 15 January 2008.

The corresponding items of Articles 14, 15, 16 of Law No. 131 FZ will become null and void from January 2008.

The corresponding provisions of Law No. 131 Fz concerning this right will enter into force from January 2008.

Section Monetary and budgetary spheres Such changes can hardly be regarded as positive. It is highly doubtful that the distancing, from the grassroots, of certain social issues, especially issues like as trusteeship and guardianship, which are so delicate and require an in depth knowl edge of the situation (including the specific family situations), could indeed result in improved performance. As for the issue of the computation and granting of subsi dies, its successful settlement also depends on the knowledge of local specificities and the opportunities provided by the resources of local budgets, which has also become impossible in the situation of the new division of powers.

To the list of issues of local importance assigned to settlements and city ok rugs, that of creating appropriate conditions for the activity of voluntary population units for the protection of public order was added73, while to the list of issues of lo cal importance assigned to all types of municipal formations not only that of the replenishment of library holdings, but also of the ensuring of their adequate protec tion.

It should be noted that this legislative is not free of the imprecision that was characteristic of the previously adopted documents of a similar type. The new pow ers of the bodies of local self government, assigned by the amendments to branch legislation, have not been fully reflected in the amendments introduced to Law FZ and are poorly compatible with the issues of local importance consolidated by this Law to municipal formations. The most vivid example of this incompatibility are the amendments made to the Fundamental Principles of Legislation of the Russian Federation on the Protection of Citizens Health.

2.6.2. The Implementation of Reform in Certain Regions: General Trends and Local Features The amendments to Law No. 131 FZ adopted in 2005 enabled the regions to determine on their own the volume of powers to be executed and the sources of revenue applicable to the newly created settlements. In this connection, different subjects of the Federation provided different solutions to that issue: some of them declared that they were going to implement municipal reform full scale in 2006, while others took advantage of the right granted to them by the newly adopted amendments to legislation and resorted to the evolutional variant of reform imple mentation. Thus, the first question to be answered by the monitoring of reform in 2006 is as follows: how great is the actual difference between the situation in those regions where municipal reform has been fully implemented and in those where the transformations planned at the municipal level were not in their entirety carried out in 2006.

The analysis of the situation as it exists in some regions74 has demonstrated that nowhere do the newly created municipal formations of the settlement level deal with all the issues of local importance envisaged in Law No. 131 FZ. From this This amendment to Articles 14 and 16 of Law No. 131 FZ will enter into force from 1 January 2008.

In 2006, a detailed analysis of the situation with the implementation of municipal reform was con ducted in Vologda Oblast, Cheliabinsk Oblast, Orenburg Oblast, Kaluga Oblast, Tver Oblast and the Republic of Chuvashia, while information on the other regions was sketchier.

RUSSIAN ECONOMY IN trends and outlooks point of view, those regions that have declared full scale implementation of mu nicipal reform do not in any significant way differ from those where the evolutional variant has been chosen. In this connection, in those regions where full scale im plementation of reform has been declared, the instrument of agreements as to the transfer of powers between the bodies of local self government of settlements and municipal raions is applied, in order to limit the competence of the bodies of local self government of settlements. As for those regions where reform has not yet been fully implemented, there the powers of settlements are limited both by re gional legislation and by agreements on the transfer of powers. Nevertheless, we may point out certain differences between the regions where reform has been im plemented full scale from the rest of the subjects of the Federation. Thus, the share of the budgets of settlements in the consolidated budgets of municipal raions, as can be derived from the information relating to the first half year 2006, in the former category of regions amounts to 16.6%, while in the other regions it is only 6.2%.

Of some interest also the question as to the ratios of competence of the bod ies of local self government of newly created and previously existing settlements.

In all propability, the situation varies greatly between regions. For example, in Orenburg Oblast, where prior to the onset of reform there existed only 4 municipal formations of the settlement type, the differences between the powers granted to newly created and previously existing settlements are rather substantial. Thus, the competence of the bodies of local self government of newly created settlements in 2006 was restricted by both regional legislation and by agreements on the transfer of powers, while the previously existing municipal formation Chernorechenskii selsovet was not only dealing with all the issues of local importance envisaged in Law No. 131 FZ, but was also continuing to finance from the local budget the ob jects of public education and public healthy care located in its territory. Quite a dif ferent situation developed in Cheliabinsk Oblast, where prior to the onset of reform the two tier model of territorial organization had already been implemented. Here, in order to restrict the competence not only of the newly created, but also of the previously existing settlements the mechanism of transfer of powers is applied. Si multaneously, there is an obvious intention to bring the powers granted to the bod ies of local self government of settlements to that level which emerged in the pre reform period.

It is evident that the main instrument for restricting the competence of the bodies of local self government of settlements, applied in the regions where mu nicipal reform has been implemented full scale, as well as in the regions where the process of transformation has not been completed yet, is the agreement on the transfer of powers. And this instrument may be widely applied not only within the framework of the transition period, but also after 1 January 2009. Therefore, the character and peculiarities of the application of this instrument need to be analyzed in more detail.

The possibility of and the conditions for the conclusion of an agreement on the transfer of powers are envisaged in Law No. 131 FZ, and not in its transitory provisions, but in its text body (Article 15). By legislation it is thus envisaged that:

Section Monetary and budgetary spheres - the transfer of powers may be effectuated both from the bodies of local self government of settlements to the raion level, and from the bodies of local self government of municipal raions to settlements;

- the agreements must provide for the financial backing of the powers being thus transferred from the subventions granted from the local budgets of those mu nicipal formations that have transferred their powers;

the procedure for deter mining the annual volume of subventions must be determined by the agree ment;

- the agreements must envisage the transfer not of an issue of local importance as such, but a part of the powers assigned to the bodies of local self government for the decision making in respect to a certain issue of local impor tance;

- the agreements must be concluded for a certain period of time;

- the agreements must contain provisions establishing the grounds and proce dure for their termination, including early termination;

- the agreements must envisage financial sanctions for the non execution of the agreements.

In actual practice, in a vast majority of cases, the agreements are concluded with violations of existing legislation. The most typical violations are as follows.

1. The agreements are not voluntary in their essence (being an obligation in stead of a right). A model agreement is adopted at the level of either a whole re gion, or one municipal raion. Thus, for example, the Administration of the President of the Republic of Chuvashia developed a model agreement containing a list of powers assigned to settlements, which the Republics bodies of state authority recommend to be transferred from settlements to the level of raions. The corre sponding agreement in most cases is signed, without any changes, by the bodies of local self government of municipal raions with all the settlements on a uniform basis. In this connection, no regard is given to the specific potential of each settle ment for dealing with issues of local importance, and from the instrument designed to adjust to the shortage of material resources and personnel in certain settlements the agreement is turned into a universal instrument for restricting their powers.

In some cases the individualization of agreements is allowed to previously ex isting settlements. Thus, in Maloyaroslavets raion of Kaluga Oblast, individual agreements were signed by only two previously existing settlements with the status of municipal formations: Posiolok Detchino and the town of Maloyaroslavets (in this latter case the volume of powers actually being transferred was minimal). At the same time, all the newly created settlements signed agreements in a single format determined by the administration of the municipal raion, despite their organiza tional potentials being entirely different. An attempt made by the largest of the newly created settlements with the population of approximately 4,000 to limit the volume of powers being transferred to the raion level resulted in a serious person nel reshuffle at the settlement level.

However, in some other regions the situation is less oppressive: there are some rebel municipal formations who are defending their right to execute a wide RUSSIAN ECONOMY IN trends and outlooks range of powers than that envisaged by the standard approached. Nevertheless, in none of the surveyed regions the number of such settlements, according to repre sentatives of local administrations, is more than 10%. And in only some regions the oblast administration does not impose the unification of the mechanism of transfer of powers and truly wants to take into account the local peculiarities. One such ex ample is Tver Oblast.

2. Not the powers but the whole issues of local importance are transferred. As a result, the bodies of local self government of settlements actually lose control over a certain issue of local importance. The transfer of issues of local importance generally, without any specification of the powers being transferred, results in a situation when the actual activity of the bodies of local self government of the mu nicipal raion in their dealing with a given issue may substantially differ from the set tlements expectations. Thus, in one of the rural settlements in Nizhnii Novgorod Oblast the bodies of local self government, as admitted by their representatives, when transferring to the raion level the issue of providing appropriate conditions for the development of mass scale physical culture and sport in the settlements terri tory, believed that rural children would thus obtain the opportunity to regularly visit the raion center in order to train at a local sports school, while the hockey field in the village would be repaired, and the sports organizer would be receiving meth odological assistance from the raion. At the same time, the bodies of local self government of the municipal raion were planning to receive additional funding for the upkeep of the administrative apparatus, for the participation of athletes in inter raion and regional competitions, as well as for the upkeep of the sports school, al though it was not planned that rural children would be brought to train at that school.

The transfer of issues of local importance in their full volume implies that the bodies of local self government of settlements, in fact, will lose control over the decision making in respect of a given issue of local importance, while remaining formally accountable for that issue to the population. Accordingly, the agreements envisage neither monitoring nor any control by the bodies of local self government of settlements over the execution of the powers transferred to the municipal raion, or any accountability of the raion bodies of local self government to settlements, etc. Thus, the provision concerning financial sanctions for the non execution of an agreement cannot be realized in actual practice, either. At the same time, it should be noted that in those cases when powers are transferred from a municipal raion to settlements (which actually happens sometimes), the situation may become en tirely different. This asymmetry can be observed in the agreements being made in Cheliabinsk Oblast. Thus, in Troitsk raion, in the agreement on the transfer of pow ers from settlements to the municipal raion there is neither a special section con cerning the rights of a settlement nor any sanctions for the non execution of the obligations undertaken by the raion. At the same time, sanctions are envisaged for settlements if they do not transfer in due time the subventions to cover the execu tion of the transferred powers (as a rule, it is a penalty in the amount of 1/300 of the rate of interest esytablished by the RF Central Bank for each day of delay). As for the agreements on the transfer of powers from the municipal raion to settlements Section Monetary and budgetary spheres (this transfer of powers has taken place in the sphere of pre school education), their structure is quite different. There exists a well elaborated section in the agreement concerning the rights of the municipal raion in respect to the agree ments execution, including the conduct of checks and revisions, experts assess ment of pre school educational establishments, the formation of an estimate of ex penditure for each establishment, the establishment of the regime of operation for each establishment, the procedure for demanding explanations, the issue of in structions, etc.

3. Subventions for the financing of the powers being transferred are either not established altogether, or are determined on a purely formal basis in an amount clearly insufficient for the backing of the relating activity. The main bulk of expendi tures to cover the transferred powers come from the budget of a municipal raion. It should be noted that no such participation in the financing of the powers trans ferred under an agreement is envisaged in legislation, in contrast to the transferred state powers that can be co financed from local budgets. Thus, no references to the lack of financial resources in the budget of a settlement may be regarded as le gitimate grounds for making an agreement. In actual practice, the bodies of local self government are attempting to bypass these restrictions, entering into agree ments of other types, instead of the agreements on the transfer of powers. For ex ample, in Orenburg Oblast and in the Republic of Chuvashia they apply agreements on the interaction between the administration of a municipal raion and settlements in the decision making with regard to issues of local importance. However, such approaches cannot be recognized as being fully compatible with the existing legal space.

4. The bodies of local self government of settlements transfer to a municipal raion such powers, which by their very nature cannot be treated as transferable.

Thus, for example, the powers for ownership, use and disposal of a settlements property are transferred. In this connection it is not clear how, in absence of any opportunities for the execution of its property rights, a settlement can deal with is sues of local importance. Evidently, the necessity of transferring appropriate pow ers in a certain specific sphere may follow from the transfer to the raion level of the powers to provide the population with some municipal services;

however, no trans fer of powers for the ownership, use and disposal of a settlements property as a whole may be regarded as being lawful.

A similar situation arises when the transfer of powers may give rise to a con flict of interests. Thus, for example, it happens in a situation when to the bodies of local self government of a municipal raion the right to represent the interests of a settlement in a court of justice is transferred. This right cannot be executed in an event of direct court proceeding between a municipal raion and a settlement and may give rise to a conflict of interests when, while representing the interests of a settlement, the municipal raion has its own related interest in a given case, which is different from the settlements interests.

The procedure of the transfer of powers cannot always ensure the best possi ble division of rights and responsibilities between municipal raions and settlements, RUSSIAN ECONOMY IN trends and outlooks either. For example, the surveying of this issue in one of the raions in Orenburg Oblast yielded the following picture. Although the oblast has declared that from 2007 it is implementing full scale municipal reform, the actual volume of powers assigned to settlements has not increased by comparison with the year 2006. The text of the agreement elaborated by the raion administration for 2007 envisages the transfer to the raion level of 12 key issues of local importance, including in the sphere of utilities, constructioin and maintenance of motor roads, cultutal services, physical culture and sport, library services, the formation of a settlements archival funds, the use of lands and construction thereon, civil defense, mobilization readi ness, promotion of agricultural production and small businesses, childrens and youth activities, and the calculation of housing and utilities subsidies and the provi sion of these subsidies.

All the settlements in a raion make agreements in a single format, in condi tions of rigid administrative pressure. The decision concerning the transfer of pow ers is made by the representative bodies of settlements orally, no materials in writing being distributed. The whole list is being voted on, and not each power separately. The raion administration submits no report as to how it has been exe cuting the powers transferred to it for the previous period, or which funds have been spent in this connection. The division of objects of property does not corre late in any way with the division of powers: for example, the powers for utilities ser vices are transferred to the bodies of local self government of a municipal raion, while boiler stations are transferred into municipal ownership.

As a result, one may come to the conclusion that, although the list of issues of local importance to be actually dealt with by newly created settlements, as it has emerged under the influence of both regional legislation and the agreements being concluded, does, indeed, differ from region to region, most often the bodies of lo cal self government of settlements realize their powers in the following spheres:

- creation of adequate public recreation conditions for the residents of a settle ment and the organization of adequate equipment of popular public recreation sites;

- organization of the collection and removal of domestic waste and litter;

- organization of the provision of all amenities and the planting of urban greenery on the territories of settlements;

- organization of street lighting and the setting up of signs with names of streets and numbers of buildings;

- organization of funeral services and the maintenance of cemeteries.

In some instances, these issues are supplemented by the maintenance of roads, childrens and youth activities, and the provision of cultural services to the residents. In a great majority of cases, the issues of the disposal of land resources are concentrated at the raion level. The treasury execution of the budgets of set tlements also takes place at the level of municipal raions.

Although the large scale transfer of powers is directed from the bodies of lo cal self government of settlements to those of municipal raions, there are also some instances of a reverse process the transfer of powers from municipal raions to settlements. Most often, the organization of pre school education is transferred Section Monetary and budgetary spheres to settlements (which is quite understandable, this service being of a local nature), and sometimes also such issues as the organization of supplementary training, current upkeep of educational establishments, current upkeep of medical institu tions, primarily first aid and tocological stations (FATS). However, this process is better developed at previously existing settlements and reflects the aforesaid trend of bringing the competence of the bodies of local self government of these settle ments to its pre reform level: while previously such issues were dealt with at the settlement level, now they are transferred to the same level by agreements.

Special problem is represented by the organization of financing procedures at the newly created municipal formations. Nearly all the regions have been faced with difficulties in that sphere. No adequate base has existed either for forecasting the revenues of settlements, or for planning their budget expenditures.

Also, certain difficulties arose in connection with the land tax, for which the tax base from the year 2006 has been radically altered. According to the information from the regions, the forecasting of revenues from this tax has, nevertheless, been done from the achieved level, on the basis of the data of previous years. This has resulted in serious errors, because the volumes of revenues from the land tax have changed significantly, being different in different regions and municipal formations.

Thus, in the municipalities of Kaluga Oblast the revenues from this tax declined nearly by one order, while in some regions of Orenburg Oblast the land tax pay ments increased six fold.

Different regions are practicing entirely different approaches to the granting of financial assistance to settlements from covering the difference between the actual or standard expenditures and the revenues, to applying complicated mechanisms of computations, with the determination of the tax potential index and the spending needs index. However, the application of the methodological recom mendations originating from the provisions of the Budget Code cannot by itself en sure any real financial equalization of settlements. Thus, in Orenburg oblast, where financial equalization represents a regional power delegated to the raion level, and financial assistance is being distributed on the basis of the equalization of budget sufficiency with due regard for the indices of tax potential and spending needs (that is, the existing system is fully compatible in this respect with federal legislation), the actual differences in the budget sufficiency of settlements in different raions are greater than by 10 times. The practice of granting dotations to settlements has also become quite widespread, which completely distorts the nature of this instrument.

As for the treasury execution of the budgets of settlements, such powers, with a few exceptions, have been transferred to the raion level.

2.6.3. The price of municipal reform is the cost of administration While the preparations to the implementation of municipal reform were going on, there was no end to discussions as to what would be the result of transforma tions from the point of view of the efficiency of budget expenditure. This issue if of especial significance in terms of administrative costs. Here, two opposite stand points have emerged. On the one hand, there existed the opinion that the approach RUSSIAN ECONOMY IN trends and outlooks suggested in Law No. 131 FZ to the reforming of local self government can sub stantially lower the level of performance in the administrative sphere and result in growing administrative costs. On the other, there were also some contrary argu ments since the total volume of powers assigned to the bodies of state authority and local self government was not to be changed, and was only to be redistributed between different levels of authority, the associated administrative costs were not to become greater, either. Only an analysis of the actual administrative costs can provide an adequate answer to the question as to whether resulting from the crea tion of tens of thousands of new municipal formations at the settlement level there will be significant losses due to the insufficient scale of administrative activity, as sociated with increased costs.

Naturally, it is yet too early to draw any final conclusions. Nevertheless, the analysis of this issue on the basis the national budget statistics for the first half year 2006, as well as surveys of the situations existing in some regions, has yielded the following results.

Firstly, the growth of administrative costs in municipal budgets in 2006, by comparison with 2005, was far ahead of the corresponding index of the previous years. This can be explained by different factors;

at the same time, the conclusion that this has largely been produced by the implementation of municipal reform seems to be well substantiated. Such a conclusion is confirmed by the fact that in those regions where full scale implementation of reform from 2006 was declared, the corresponding growth was higher than in all other regions. At the same time, the highest growth was observed in those regions where municipal reform had been fully implemented, and the number of municipal formations had been accord ingly greatly increased. While the costs of the upkeep of the bodies of local self government grew in all regions, on the average, by 30.7% in real terms, in those regions where municipal reform had been fully implemented the growth was 32.8%, while in those where municipal reform had been fully implemented and the number of municipal formations increased more than twice by 41.7%.

Secondly, during our study certain facts have been revealed, which are indicative of the existence of real losses due to the insufficient scale of activity at the level of settlements, this problem, not having been softened in the course of re form, has become even more acute. This conclusion can be substantiated by the following arguments:

as shown by the results of the analysis of budgets in the first half year 2006, the share of expenditures on the upkeep of the bodies of local self government at the level of settlements amounts to more than 30%, while at the level of raions it is lower more than four fold, and amounts to 7%;

in some settlements, where the situation was analyzed during regional studies, to more than 80%;

the estimated numbers of residents of a settlement per one staff member of a local administration demonstrate a rather distinct inverse dependence on the number of residents in a settlement;

in other words, the less residents there are in a settlement, the higher is the relative number of staff in the local administra tion;

Section Monetary and budgetary spheres in some settlements, which existed prior to the onset of municipal reform, re sulting from the reformed division of powers and the implementation of other provisions of Law No. 131 FZ, the share of administrative costs has become much higher;

thus, for example, in Khomutinskii rural settlement in Cheliabinsk Oblast it has more than doubled.

Thirdly, the growth potential of administrative costs, associated with the im plementation of municipal reform, have not yet been exhausted in either those re gions where the evolutional approach to municipal reform has been chosen, or in those where its full scale implementation has been declared. The increased admin istrative costs will be determined by several factors:

the inevitable growth in the number of the administrative staff of settlements in many regions, and, accordingly, the associated growing costs of their upkeep (at present, the growth in the number of administrative staff is being restricted by administrative measures, thus preventing them from any real decision making in respect to issues of local importance);

the necessity to provide the local administrations with additional technical re sources: computers, office equipment, service motor transport;

the acute need for better qualification of the personnel.

Thus, any full scale reform of local self government will entail additional budget expenditures, and, as estimated, the costs will be comparable to those as sociated with the insufficient scale of administrative activity at the level of a settle ment. Thus, the issue of the need to optimize such costs through a rational division of issues of local importance between municipal raions and settlements, as well as the organization of adequate cooperation between municipalities, will become of utmost importance. At the same time, it has become obvious that this growth in administrative costs is largely inevitable in view of the specific model of municipal reform that has been selected, and the attempts to restrict it by administrative measures, which are being made by regions, may result only in disorganization of the smooth operation of the bodies of local self government of settlements.

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