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In addition, the RF Government issued four regulations in the course of the year: "On the Order of Interaction of Agencies of State Authority of a Constituent Entity of the Rus sian Federation and Local Self Governance Agencies with Territorial Agencies of a Federal Agency of Executive Power Authorized in the Area of Taxes and Duties" (August 2004); "On Qualification Requirements to the Head of the Financial Agency of a Constituent Entity of the Russian Federation and the Head of the Financial Agency of a Local Administration" (November 2004); "On the Authorized Federal Agency for the Approval of Boundaries of Municipal Formations" (December 2004) and "On Approving the Rules for Delineation of Municipal Formations' Obligations and for Preparation of the Act of Transfer (Delineation)" (December 2004). The RF Government regulated the issues of determining territories with low and high population density in its decree of 25 May 2004, which approved the list of constituent entities of the Russian Federation and separate districts of entities (within the existing borders) belonging to the territories with low population density and the list of constituent entities of the Russian Federation and separate districts of entities (within the Section 4.

Institutional and Macroeconomic Challenges existing borders) belonging to the territories with high population density. The draft law on state registration of municipal formations was prepared in 2004; however, it has not been introduced for approval in the State Duma.

Owing to the fact that property redistribution between the regional and municipal lev els was quite actively carried out in 2004 in connection with preparation for the implemen tation of Law No. 95 FZ, lack of a normative legal act regulating the order of such redistri bution affected the course of reforms especially negatively.

Adoption of amendments to the Tax Code and Budget Code has become a most im portant novation that has a considerable effect on preparation of a full scale introduction of Law No. 131 FZ. These documents regulate such issues as assigning sources of in come to various type municipal formations (including a list of local taxes), possible mecha nisms of establishment of interbudgetary relations, introducing provisional financial ad ministration etc. The notion of local budget undergoes a fundamental change: it is now defined as a form of amassing and spending funds for financial year, which are allocated for the execution of specific expenditure liabilities of the relevant municipal formation, and not for implementing tasks and functions reckoned among issues of local self governance in general. Expenditure liabilities arise out of normative legal acts and agreements adopted at the municipal level. It is made obligatory for agencies of local self government to keep a register of their expenditure liabilities.

At the same time, not all of financial issues provided for in Law No. 131 FZ were de scribed in the new version of the Budget Code. E.g., the Budget Code has failed to provide for adequate forms of including the citizens' self taxation in the local budget's income.

4.7.2. Determining the Boundaries and Status of Municipal Formations:

Practice and Problems In the course of determining the boundaries and status of municipal formations the regions encountered a number of problems arising both out of flawed regulation of these norms in Law No. 131 FZ and out of objective contradiction between various municipal formation types that started to appear as early as at the stage of organization of municipalities. Municipal districts were affected by such reforms least of all; the district structure has remained unchanged practically everywhere. Problems have been mainly connected with the establishment of two municipal formation types, namely rural settlements and urban districts. By the time the municipal reform began there were no full fledged municipalities at the village level in an overwhelming majority of Russian regions. In most of Federation entities with a developed municipal formation structure there were sub municipal entities at that level, namely settlements, village soviets, rural areas, volosts, etc.

While the head of such an entity was appointed by the district management and its funding was carried out according to a cost estimate, the real status of these structures varied greatly from one region to another. In some Federation entities they took an intermediary position between the district administration's subdivisions and independent municipal formations because the heads of sub municipal structures were appointed in consultation with the local population, their fairly broad authorities were confirmed in the charters of municipal formations, and they had a certain degree of freedom in disposing of the formation's finances, both in respect of a part of the cost estimate, when it included the reserve fund in one way or another, and the self taxation funds, where these played a considerable role. In some of Federation entities municipal structures formally existed at the village level, but in most cases they had no independent budget and were funded according to a cost estimate.

RUSSIAN ECONOMY in trends and outlooks In reorganizing the territorial structure of local self governance, in particular in creat ing a system of rural settlements, the regions had to take account of the following condi tions and restrictions that resulted from Law No. 131 FZ:

The entire territory of the Federation entity, with the exception of the territories with low population density, must be delimited between settlements;

The settlement's administrative center must be close enough to reach it on foot within one working day from any inhabited locality included in its structure;

As a rule, the population of a settlement must be over 1000 inhabitants, and for territo ries with high population density, over 3000 inhabitants; however, this condition does not apply to independent municipal formations that existed as of the date the law was adopted;

The list of local matters must be codified in the law.

As early as at initial stages of territorial structure reforms it turned out that the legally codified benchmarks were quite vague and did not match. E.g., it remained unclear how one should determine the proximity on foot and what population categories were taken into account in the process of such determination. This criterion per se was criticized as being archaic and not in line with the present posture of affairs. Moreover, the requirement of on foot accessibility in many cases did not match the necessity to take into account criteria related to the number of inhabitants in rural settlements. The proposal made by a number of region to substitute transportation accessibility for on foot accessibility was not adopted; however, in the amendments to Law No. 131 FZ that were made in December 2004 this requirement was somewhat softened.

Problems encountered in the course of establishing settlements also occurred be cause the right to determine the list of underpopulated territories, in which the principle of territory delimitation between settlements would not apply, had been legally overcentral ized at the level of the RF Government. Moreover, such a list could include only either con stituent entities of the Federation as a whole or districts within such Federation entities, while population density may differ considerably not only from one district to another but also within one district. In some districts there are territories with inhabited localities, in which there remain only few inhabitants. Further still, even in densely populated areas there are practically unpopulated spots (reserves, forestlands etc.). Under these condi tions it is fairly difficult to ensure delimitation of the entire territory between settlements' municipalities; at the same time, such delimitation stops to make sense because the most part of the territory of some settlements turns out to be unpopulated. However, no steps had been made in 2004 to expand the regions' authority to determine underpopulated ter ritories.

Along with the contradictions related to legal benchmarks for the formation of the ter ritorial structure, this process also brought to light deeper problems. Assigning certain is sues to settlements implied that municipal formations of that level were capable of imple menting the functions assigned. However, the number of inhabitants or on foot accessibility does not generate such capabilities. It is necessary to take into account other factors, namely availability of an adequate infrastructure, economic base etc., although the law does not say that these are necessary. The importance of such factors is further underscored by the fact that the experience and traditions of establishing co operation between municipalities are lacking in Russia, and so municipal formations are quite wary of such an approach to local matters. All the attempts at establishing intermunicipal coopera tion that the authors have considered in the course of researching this problem were either short lived and ineffective or resulted in such tensions that the parties concerned made efforts to find other ways of providing the population with municipal services.

Section 4.

Institutional and Macroeconomic Challenges Under these conditions, the regions usually followed one of the three below mentioned strategies in forming rural localities' territorial structure Strategy No. 1 was to keep the district structure of municipal formations unchanged despite the novations introduced in the new law. The solution selected was to form urban regions that included the entire territory of a district even if the district in question was to a great extent rural. Without breaking the letter of the law, such an approach clearly contra dicted the municipal reform concept. Therefore, the definition of the territory of an urban region was detailed in the amendments to Law No. 131 FZ so as to prevent broad interpre tation. Under these amendments, the territory of an urban settlement (including an urban region) can incorporate territories, including rural territories, that, in accordance with the general layout, are designed for the development of its social, transportation and other in frastructures. In the event that the town (settlement) that is to receive the status of an ur ban settlement has no general layout or its existing territory exceeds the urban boundary and in the event that there are territorial disputes between the town (settlement) and other municipal formations that have not been determined in a judicial proceeding, the composi tion and boundaries of the urban settlement in question shall be fixed:

On the basis of the town's (settlement's) historical territory and in accordance with the boundaries of plots of land allotted for urban development and of the territories de signed for the development of the town's (settlement's) social, transportation and other infrastructures;

In accordance with the boundaries of the territories and plots of land specified in the legal acts, which determine that the disputed territories and plots of land are part of the town's (settlement's) territory.

As of now, it is still unclear what will be the steps of the regions adhering to this strat egy after the amendments to Law No. 131 FZ have been passed; they will have to change their approach to the formation of the territorial structure in a very short period of time, namely before 01 March 2005.

Strategy No. 2 was to form rural settlements on the basis of existing sub municipal structures, namely village soviets. Under this strategy, there usually occurred no problems with on foot accessibility, but the criteria relating to the number of inhabitants were some times not observed. Such an approach formally conforms to the legally fixed requirements and takes into account historical relations. However, in the event of a full scale implemen tation of the law it can cause serious difficulties because it ignores both real capability of the created structures to solve local issues assigned to them and availability of the neces sary personnel, infrastructure and economic potential. Furthermore, this approach ceteris paribus will cause the greatest increase in administrative expenses and expansion of the managerial staff machinery.

Strategy No. 3 proceeded from the necessity to take into account a bunch of factors that would ensure the most favorable starting conditions for the operation of rural settle ments. It considered both formal criteria provided for in the law and transportation acces sibility, available infrastructure and economic base. As a result, in the regions adhering to this strategy the number of rural settlements is appreciably, up to several times, lower than the number of sub municipal structures existing in that territory. Under these conditions, a settlement's ability to solve local issues increases and administrative expenses grow to a lesser extent; however, this is achieved at the expense of on foot accessibility. In this event the distance from some inhabited localities to the administrative center can exceed 30 km.

Thus, as a result of applying this approach the administration may become estranged from the population instead of moving nearer to it as this was proclaimed when Law No. 131 FZ was adopted.

RUSSIAN ECONOMY in trends and outlooks Under these conditions it becomes especially important to provide municipal ser vices to the population of the territories where administrative structures (village soviets) had existed previously and were liquidated in the course of the reforms.

It is thus clear that each of the strategies used to form territorial structures in the ru ral area has internal contradictions that are bound to come to the fore in the course of a full scale implementation of the municipal reform thus complicating management in new conditions.

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