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Section The Monetary and Budget Spheres tures on the development of road facilities decreased in real terms by 24.0% in 2009 against 2008 (refer to Fig. 20), which was conditioned by both a slump of tax revenues in regional budgets (by 13.5% in nominal terms vs. the percentage reported in 2008) and a decrease in federal subsidies for road facilities (the relevant allocations were cut off within 2009 by 33% against the initial budget projections). Expenditures on road facilities continued to decrease in 2010, but as early as 2011, expenditures on road facilities of the consolidated budget of the constituent territories of the Russian Federation grew up substantially to Rb 424,5bn, a 9.6% growth in real terms against 2010, as the regional economics recovered. It should be noted, however, that the level of related expenditures was much lower in 2011 than the pre-recession level of 2008 (a decrease of 26.1% in real terms). It is hard to make an ambiguous assessment of the decrease in expenditures on road facilities both at the regional and federal levels amid economic recession. International practice proves that increase in expenditures on road construction amid economic recession may be an efficient counter-recession channel of expenditures which facilitate (besides direct effect as newly constructed roads) creation of new jobs and recovery growth in industries relating somehow to the road construction sector.

Source: Federal Treasury, Gaidar Institutes estimates.

Fig. 20. Expenditures on road facilities and principal sources of financing of road funds of the consolidated budget of the constituent territories of the Russian Federation in the period between 2008 and 2011 (in real terms) The following should be noted through a detail examination of the dynamics of federal budget allocations on the development of road facilities for subnational budgets in 2008-2011, (refer to Fig. 20). A share of road subsidies decreased gradually to 12.0% in 2011 from 23.4% in 2008 in the structure of federal budget subsidies. In addition, subsidies for roadway replacement and repair of public motor roads will cease to exist from 2012 at the administrative centers of constituent territories of the Russian Federation and administrative centers of Moscow and Leningrad Regions, as well as subsidies for full repair and repair of the territory and facilities adjacent to blocks of flats, access roads to the territory and facilities adjacent to blocks of flats. Moreover, subsidies on the development of road facilities allocated within the framework of various federal special purpose programs (a 2.4-fold decrease in real terms) de RUSSIAN ECONOMY IN trends and outlooks creased substantially in the period between 20082011. In addition, it should be emphasized that special budget loans to finance road facilities will no longer be extended from 20121.

In Russia at large, given the amount of expenditures on road facilities which were allocated in the period between 2008 and 2011 (refer to Fig. 20), they would have been covered 64.9% in 2011 from 29.8% in 2008 (had regional road funds existed in that period) by principal taxes transport tax and taxes on oil products. Considering the fact that Rb 47,6bn of federal subsidies for road facilities is expected to be paid to the regional budgets in 20122, a decrease of Rb 10bn vs. the level of 2011, no substantial increase in expenditures on road facilities is expected in all regions without a visible increase in the relevant taxes. This will be implemented in part. Article 193 of the Tax Code of the Russian Federation provides for a stagewise increase in the rates of excises payable to the road fund of the constituent territories of the Russian Federation. However, the planned increase is unlikely to be sufficient for all regions. Analysis of regional expenditures on road facilities and revenues from transport tax revenues and excises on oil products revealed that creation of road funds in a series of the constituent territories of the Russian Federation may give rise to serious risks in terms of implementing a balanced budget policy. Had regional road funds (with relevant rates) existed in 2011, 53 constituent territories of the Russian Federation would have had to increase their expenditures on road facilities, with more than double increase in 19 of the regions (refer to Table 24). As a result, it would have required an involuntary reallocation of cash flows towards the development of road facilities, which would have forced a major revision of other budget expenditures and regional priorities.

Table A breakdown of Russias regions by the ratio of the amount of certain excises and transport tax to the amount of expenditures on road facilities in the consolidated budget of a constituent territory of the Russian Federation (net of subsidies) 2008 2009 2010 More than 200% 0 4 20 From 150% to 200% 1 4 10 From 100% to 150% 2 22 14 From 75% to 100% 9 14 16 From 50% to 75% 28 19 6 From 25% to 50% 24 13 13 Less than 25% 19 7 4 Source: Federal Treasury, Gaidar Institutes estimates.

As noted above, only 26 of 83 regions showed consolidated regional budget surplus at year-end 2011. Creation of road funds may result in growth in total amount of regional budget expenditures and the need to look for extra reserves to generate budget revenues or reduce financing of other important items, namely healthcare or education. As a result, one may detect some tricks concealed by the government bodies of certain constituent territories of the Russian Federation in the adopted regional laws on road funds. For instance, the government bodies of the Republic of Khakassia updated the standards for payments by source of financ Russian Government Ordinance No. 1062, dd. December 18, 2010, On the Approval of Rules for the Extension (Use, Repayment) of Federal Budget Loans to the Budget of the Constituent Territories of the Russian Federation for 2012 (as revised on 30.12.2011).

Now it includes subsidies for road facilities only within the frameworks of a federal special purpose program.

Section The Monetary and Budget Spheres ing of the road fund1. It was established that 60% for revenues from excises on oil products were to be paid to the budget the Republic of Khakassia, while 40% to the regional budget and allocated to other items which have nothing to do with road facilities.

In should be emphasized that regions which have insufficient funds to finance the road fund and road facilities are entitled to special subsidies under Russian Government Ordinance No. 293, dd. April 18, 2011 On the Amendments to the Federal Special Purpose Program The Development of Transport System of Russia (for the period of 20102015). However, these subsidies only can be allocated to co-finance property assets designed to increase the number of rural settlements which have a year-round access to public hard-top motor roads, as well as regional and municipal property assets of national or regional importance being under construction (reconstruction) in pursuance of regulations and orders issued by the President and the Government of the Russian Federation.

In spite of ambiguous nature of creation of road funds in the Russian Federation, such funds have long been existing in many foreign countries. Furthermore, the international practice classifies all road funds into first generation road funds and second generation road funds.

First generation road funds are a budget form, as a budget-funded entity or, like in Russia, funded from the budget of a government authority. Second generation road funds may have founders represented by the state or social agencies, organizations of road users which may provide an extra control of spending and take part in discussions of projects. International experience shows that first generation road funds lack of effectiveness to be able to stepwisely develop the road construction sector. However, road funds in Russia are currently based on this form. More questions arise with regard to sources of financing of road funds. Expenditures on road facilities could be linked tighter to revenues from car owners by introducing a motor road toll (i.e. imposing a charge on road users rather than a tax). Furthermore, advanced technologies allow administration costs to be reduced by using GPS navigation technologies intended to accurately measure the distance covered by a specific car driver over a certain period of time.

In general, the following should be noted. Creation of special purpose road funds results in bigger amount of administration costs against budget financing, lower degree of transparency in spending, poor flexibility of the budgetary process. In addition, creation of road funds may have a heavy impact on the balancing of the consolidated budget of the constituent territories of the Russian Federation in 2012. Should funds revenues undergo substantial reallocation, the regions would have to either reduce their expenditures or increase fundraising, or wait for support from the federal budget.

2.3.5. The Federal Law On the Federal Budget for and the Planning Period of 2013 and 2014 with regard to allocation of interbudget transfers to other levels of the budget system Federal Law No. 371-FZ, dd. November 30, 2011, On the Federal Budget for 2012 and for the Planning Period of 2013 and 2014 provides for a total of Rb 1275,0bn of federal budget transfers allocated to the budget of the constituent territories of the Russian Federation, a decrease in nominal terms of 13.4% vs. the year-end 2011. The following types of transfers are to be reduced in 2012: a decrease of 11.5% for grants, 24.1% for subventions, Law of the Republic of Khakassia No. 93-ZRX, dd. 8.11.2011, On the Road Fund of the Republic of Khakassia.

RUSSIAN ECONOMY IN trends and outlooks 42.4% for other interbudget transfers. The decrease was related to both allocation of large amounts of transfers to the regions as part of the governmental counter-recession program, which was almost completed in 2011, and reallocation of spending powers between the federal center and the regions as a result of the transfer of powers of financial provision of the police force from 2012. On the contrary, from 2012 subsidies are planned to see a small increase of 0.5% in the amount of financing against the level of 2011.

The amount of grants in 2012, as noted above, must be reduced in nominal terms by 11.5%, to Rb 498,9bn from Rb 563,5bn (in 2011). This dynamics is maintained through the planned reduction of 40.9%, to Rb 91,2bn in 2012 from Rb 154,3bn in 2011 of grants for the provision of support to measures of budget balancing. During 2012, however, the amount of this type of grants is likely to increase like in 2011 (the initial amount totaled Rb 115,6bn, i.e.

an increase of Rb 38,7bn or by 25.0% took place within the fiscal year). It should be noted that allocation of grants for budget balancing still remains one of the least transparent tools of intergovernmental fiscal relations. The following expenditure items specified in the Federal Law On the Federal Budget for the Period of 20122014 (which are recognized as a separate entry beyond any methodological framework of allocation of remaining sums of grants for budget balancing) is a good illustration of non-transparency of this arrangement is This refers to the following transfers:

Rb 26994,1m grants for balancing of the Chechen Republic budget in 2012, Rb 1000,0m grant for balancing of the Omsk Region budget (and the same amount in 20132014 ), Rb 20000,0m grants to the budget of St. Petersburg for the purpose of increasing the charter capital of OJSC Zapadny Skorostnoi Diametr in 2012 (as well as Rb 20000,0m in 2013, Rb 10709,7m in 2014).

The latter amount allocated to the budget of St. Petersburg arises more questions. Though this is definitely a special purpose transfer, as may be seen by its title, it was allocated in the form of no-purpose transfer, i.e. grants.

The amount of grants for fiscal capacity equalization of the constituent territories of the Russian Federation in 20122014 is to be maintained at the level of 20102011, i.e.

Rb 397,0bn. Therefore, no indexation of the amount of the Fund for Financial Support for Regions (FFSR) is planned within the entire 5-year period, i.e. visible reduction in real terms of the amount of this Fund was actually planned. It is obvious, however, that the need to narrow interregional differences at least remains the same. This issue is related to the effective legislative regulations under which total amount of grants shall be determined on the need to achieve the minimum degree of estimated fiscal capacity of a constituent territory of the Russian Federation, which shall be determined as an arithmetic mean value of total indicators of the degree of estimated fiscal capacity prior to allocation of grants among the constituent territories which are ranked neither among the 10 constituent territories with the maximum degree of fiscal capacity, nor 10 constituent territories with the lowest degree of fiscal capacity1. Furthermore, the FFSRs size must not be reduced in nominal terms.

In the period between 1994 and 2002, the FFSRs size was determined as a share of tax revenues in the federal budget (initially, as a share of VAT, a share of all tax revenues, save Pursuant to paragraph 1 of the Method of Allocation of Grants for Fiscal Capacity Equalization of The Constituent Territories of the Russian Federation approved by Russian Government Ordinance No. 670, dd. November 22, 2004 (as may be amended).

Section The Monetary and Budget Spheres for customs duties, since 1996). In the period between 2003 and 2007, the FFSRs size was determined by multiplying the last years Funds size by the inflation rate forecasted for the ensuing fiscal year (consumer price index). This regulation was established in the Budget Code of the Russian Federation in 20051. Since actual inflation rate often was equal to or lower than the forecast, this method of measurement of the FFSRs size resulted in a visible decrease in real terms over the period under review. Furthermore, this approach failed to take account of the real need of the regions for fiscal capacity equalization. To overcome this problems, the measurement procedure was changed in 2008. However, a new approach also had some serious weaknesses.

The following arrangement is offered to enhance the measurement procedure:

1) first, the amount of grants should be determined for equalization by using the procedure in effect;

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