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Rb. bn RUSSIAN ECONOMY IN trends and outlooks The volume of subsidies out of the federal budget was increased in nominal terms by Rb 104bn, or up by 20% compared with 2008. But by some directions the funding was curtailed substantially, while by other ones it was increased, thus giving rise to new kinds of subsidies of which the biggest ones became:

Subsidies on implementation of additional measures aimed to mitigate the tension on labor markets of the RF Subjects (Rb 35.6bn);

Subsidies on procurement of motor vehicles and communal equipment (Rb 19.7bn).

It was subsidies on the following directions that posted the greatest increase:

On the government support to small- and medium-sized businesses, including agrarian (farming) enterprises (by Rb 15bn, or more than five-fold) ;

On the government support of the agrarian sector (by Rb 21.4bn, or up 37%).

In parallel with that, cuts were made across a string of subsidies. They were most sizeable by the following directions:

Subsidies on the road construction, maintenance and repair works not included in the federal target programs (Rb 12.6bn, or down 37%);

Subsidies for allocation of sites with communal infrastructure for the purpose of house construction (by Rb 7bn, or down 90%).

2.3.3. Modifications in the federal law in the area of interbudgetary relations and subnational finance in 2009.

The challenges Russias budget system has been facing between late 2008 and 2009 in the conditions of economic crisis have required certain amendments to the federal legislation, primarily to the Budget Code of the Russian Federation. Main modifications introduced with federal act 310-FZ of December 30, 2008, On introducing amendments to the Budget Code of RF and federal act On introducing amendments to the Budget Code of RF with regard to regulation of budgeting and bringing individual legislative acts of RF in consistency with the budget law of RF were analyzed in our 2008 review. But certain amendments were introduced in a number of articles of the Budget Code of RF in 2009, too.

More specifically, on April 9, 2008, federal act 58-FZ On introducing amendments to the Budget Code of RF and individual legislative acts of RF, which has modified a number of clauses of the Budget Code of RF, was promulgated.

First, the amendments concerned Art. 92.1 with regard to the provision that sets a cap on the amount of an RF Subjects budget deficit equaling 15% of the approved aggregate volume of revenues to the regional budget without regard to unrequited revenues. This provision was softened already in act 310-FZ the RF Subjects were permitted to excess the said cap by the sum of revenues from sales of stock and other forms of participation in capital, as well as by diminishing balances on accounts by accounting the regional budgets funds. Act 58-FZ allowed an excess of the capped level of budget deficit by the amount of the balance of budget loans out of the federal budget. In contrast with the previous amendments, the effect of this provision is limited in time, with 1 January 2013 as the deadline. In a similar fashion, local self-governance bodies were allowed to excess the cap rate of the municipal budget deficit (10%) by the balance of budget loans out of the federal budget. In addition, requirements of Art. 107 that concern the ultimate size of the RF Subject (municipal entitys) debt were softened, too, and now it can excess the cap set by the Budget Code of RF by the size of budget loans attracted from other tiers of the budget system.

Section Monetary and Budgetary Spheres Secondly, caps which Art. 139.1 set on the amount of other interbudgetary transfers provided from the RF Subjects budget to local budgets, were modified, too. The volume of other IBTs may exceed 10% of the aggregate volume of transfers (les subventions) by the amount of transfers on support of measures on getting local budgets balanced.

Certain modifications were likewise introduced into clauses of the Budget Code of RF upon promulgation of federal act 192-FZ of July 19, 2009 On introducing amendments to the Budget Code of RF and Art. 45 of the federal act On the Central Bank of the Russian Federation (Bank of Russia). The act suspended the effect of a string of clauses of the BC of RF until January 1, 2010:

the effect of clauses of Art. 53, 59 and 64 that require that acts affecting revenues to the budget system of RF should be promulgated prior to submission of draft budgets of the respective tier of government;

for the year 2009 the timelines stipulated in Art. 131 and 133 were shifted for a month the clauses hold federal agencies to complete until July 20 a check-up of original data necessary for allocating transfers on equalization of budget sufficiency and subventions for the next financial year; as well, the said provisions prohibited introduction any alterations into the data afterwards. For the year 2009 the timeline was shifted to August 20.

It is equally important to pay attention to the joint letter by the RF Ministry of Finance (06-03-06) and the Federal Treasury (42-7.4-05.5.0-251) of May 7, 2009, which clarifies procedures of use of balances of subsidies and subventions out of the federal budget to bridge the regional budgets temporary cash gaps in the course of a financial year. The document reads that such a use of balances of federal funds does not conflict with provisions of the federal law in the event it does not result in growth in payables by expenditure directions, which should be funded at the expense of the said target transfers.

2.3.4. The federal act On the federal budget for 2010 and the period through 2012 with regard to earmarking interbudgetary transfers to other tiers of the budget system.

The total amount of funds planned for transferring to regional and local budgets in roughly accounts for Rb 1,129bn. In nominal terms, this is down by 12.9% vs. the amount provided for by the act on the 2009 federal budget. That said, aggregate expenditures out of the federal budget should rise insignificantly in nominal terms (by 0.42%). Consequently, the proportion of interbudgetary transfers to other tiers of the budget system in the federal budget expenditures should fall from 13.2% in 2009 to 11.4%. Given that in late 1990s the proportion of transfers from the FFSR alone would account for 14% of the federal budget expenditures, and main revenue sources now concentrate in the federal budget, the exercise of cutting back the proportion of interbudgetary transfers to other tiers of the budget system in the federal budget expenditures can be questioned. But in all likelihood the problems with funding the pension system have left no room for maneuver for the government.

It should also be noted that the interbudgetary transfers system has remained a complex and confusing one. In a developed federative state, as a rule, there exist 1-3 largest transfers from the federal budget to territorial ones and 3-15 smaller size transfers. In Russian Federation, in compliance with the act On the federal budget for 2010 and the period through 2012, the number of various transfers is over 87 (4 ones in sub-section on transfers, 43 in sub-section on subsidies, including the federal target programs, 21 in sub-section on subventions, and 19 transfers in sub-section on other interbudgetary transfers). The question is, RUSSIAN ECONOMY IN trends and outlooks whether such a system is efficient. By analogy with taxation, the number of transfers should be acceptable for their efficient administration. The volume of financing by 35 directions does not exceed Rb 1bn, which means that funds earmarked to a Subject of the Federation by a string of directions can make up dozens or hundreds of thousands of Rubles. Clearly, given the target nature of most directions (subsidies and subventions), the costs associated with evaluation of the target nature of use of the expenditures can overweigh benefits from such appropriations. It appears necessary to conduct a thorough examination of the division of powers between the federal center and regions in order to fully assign a series of powers to regions and to return a part of them to the Federations level.

An additional way to solve the problem of existence of a great number of minor target interbudgetary transfers and the need to improve the quality of management of allocated financial resources is their consolidation into block transfers (consolidated subsidies and subventions). The bottom line is that such block transfers give a possibility to spend financial resources consolidated into an interbudgetary transfer on several directions. Meanwhile, the level of government out of whose budget such bloc transfers are earmarked can set both the formula of their allocation and conditions of their spending by each direction of financing.

The level of government that receives the bloc transfer in turn can on its own select proportions of use of the earmarked finds by each direction included in the bloc transfer.

The principal vehicle of financial aid to regional governments that is, transfers on equalization of their budget sufficiency out of the Fund for Financial Support of Regions will grow by 6% (vs. the 2009 figures) and account for Rb 397bn. It should be noted that the year of 2010 should see next attempt to overcome the tendency to contraction of the proportion the Fund holds in the overall volume of interbudgetary transfers according to the 2010 draft budget, the FFSRs proportion in interbudgetary transfers to other levels of the budget system should grow up to 35% compared with 24% in 2009. But it is worth noting a huge gap between an original version of the budget and its ultimate execution. Sectoral ministries, as a rule, succeed in lobbying for a greater amount of subsidies and other interbudgetary transfers;

meanwhile, the aggravation of the situation with regional finance triggers the growth in the balancing transfers and budget loans (should a budget loan be disbursed for the term of years under the interest of of the refinancing rate, it in many ways becomes a substitute for a balancing transfer); by contrast, calculated by a certain formula, the volume of FFSR remains unchanged through the end of the year. It seems to us, while considering all kinds of interbudgetary transfers, priority should be given to FFSR, as its structure matches the best international practices and its funds are allocated following relatively transparent procedures.

Since 2005 the Fund for Compensations has accumulated resources on financing all the legislatively set, in an explicit form, federal expenditure mandates. The draft federal budget for 2010 and though 2012 provides for some growth in the proportion of the FC in interbudgetary transfers to other tiers of the budget system (from 17.6% in 2009 to 20.7% in 2010). The surge in subventions in interbudgetary transfers is conditioned by the rigidness of these obligations. The federal center, as a rule, has to index the obligations by the inflation rate.

With regard to subsidies, the draft 2010 budget projects their Rb 50.4bn decrease in nominal terms, down to Rb 356bn (by 14.6% compared with 2009). The main 2010 expenditure avenues in this regard are:

the state program of development of the agrarian sector and regulation of agrarian markets, raw materials and foods for 2008-2012 - 24.7% of the aggregate amount of subsidies;

Section Monetary and Budgetary Spheres implementation of additional measures aimed to alleviate the problems on the RF Subjects labor markets 10.5% of the aggregate amount of subsidies;

the federal target program The economic and social development of the Far East and Trans-Baikal region for the period through 2013 10.1% of the aggregate amount of subsidies;

financial provision of delivery of an additional medical assistance by local physicians, pediatricians, and general physicians (family doctors) 6.1% of the aggregate amount of subsidies.

The crisis has introduced substantial changes into the list of priority directions co-financed out of the federal budget. More specifically, subsidies for modernization of the transportation system were axed dramatically (by Rb 60.6bn), albeit such cuts may not always be recognized as a justifiable move. The fact of the matter is, subsidies out of the federal budget on the road sector and the federal target program Modernization of Russias transport system (20022010) (currently the federal target program Development of Russias transport system (2010-2015) have a great social importance from the perspective of securing the countrys territorial and economic space and the populations spatial mobility. The respective obligations with regard to implementation of huge road-building repair and maintenance projects are fairly large, while in most cases subfederal (regional and local) budgets cannot fund them without a federal centers contribution. Hence, it appears appropriate to provide for an increase in appropriations on road construction for the sake of creation and development of urban agglomerations. As evidenced by experiences of developed and emerging nations1, an economic crisis is the right time for public investment in infrastructure.

Meanwhile, the volume of subsidies on support of the agrarian sector will be increased unjustifiably (by nearly Rb 21.5bn). The transfer of powers to support the agrarian sector to the regional level results in a situation when the support is rendered most intensively in regions that enjoy the greatest financial capacity to pursue such a policy, rather than in those that have the most favorable natural and climatic conditions. Earmarking resources from the federal budget for these purposes on the co-financing principles just intensifies the tendency. More specifically, it results in backing the better-off financially regions in their trade wars with weaker counterparts for agrarian markets. That is why efficacy of such subsidies raises serious doubts. The problem can be resolved by centralizing the subsidies at the federal level along with minimizing regional expenditures on this direction. In parallel with this, the Federation should corroborate its role in financing expenditures on social development of rural territories.

Considerable resources are earmarked on implementation of measures aimed to diminish the stretching situation on the RF Subjects labor markets and jolt small businesses; however, efficacy of the use of such funds greatly depends on performance of the RF Subjects agencies.

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