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The urban region issue was just as critical for many regions in the course of forming their territorial structure. Initially, the status of the towns that were not regional capitals or large science towns developed in different and fairly chaotic ways in different regions. In some constituent entities of the Russian Federation practically all of them were independ ent towns of the so called oblast subordination, in other regions an overwhelming majority of them were part of districts. There were regions, in which towns with practically equal numbers of inhabitants and economic potential (including towns with population of 80 to 100 thousand) were independent municipal formations in some cases and were included in the district in other cases. At the same time, relatively small urban settlements with up thousand inhabitants could be made independent municipalities. In the event that a town was part of a district, usually no special sub municipal structures were established in its territory; the district administration carried out the urban management functions directly.

Provisions regulating the formation of urban regions were one of the most actively disputed parts of the legislation on local self governance and in the course of the legisla tion's development they were changed many times. As a result, any references to quantita tive criteria of urban region formation that related to the number of inhabitants were elimi nated from the wording of the law. At the same time, it was proclaimed that an urban settlement that is a full fledged municipal formation must become an urban region unless the law of the constituent entity of the Federation stipulated otherwise before 01 February 2005 (according to the amendments, before 01 March 2005). In doing so, the entity in question was to be governed by two provisions: firstly, both the urban settlement and the territory of the adjacent district were to have a social, transportation and other infrastruc ture necessary for them to independently solve local matters and to carry out certain gov ernmental authorities. Secondly, it is necessary to obtain the consent of the local popula tion to assign or to withdraw the status of an urban settlement. The situation became even more complicated because the article prescribing to find out the population's opinion is to enter into force only from 01 January 2006.

At the same time, assigning the urban region status to urban settlements that were not a full fledged municipal formation required that the above mentioned infrastructure criteria must be taken into account and that the opinion of the population both of the urban settlement and the municipal district that has incorporated this settlement be found out.

As a result, the case of assigning the urban settlement status to urban regions has developed as follows. At this point in time the authors do not know of any case in which the urban settlement status has been assigned to an urban settlement that previously was not an independent municipal formation even if a developed infrastructure allowed both the town and surrounding district to solve local issues independently. The procedure related to such assigning turned out to be overly complicated and costly to apply in practice. The situation with independent municipal formations developed in different ways. In some re gions they were assigned the urban settlement status automatically; in others they were incorporated in districts even in the event of fairly large towns with long time traditions of self regulation. In doing so, no attempts were made at finding out or taking into account the population's opinion about the status of such municipal entities.

Section 4.

Institutional and Macroeconomic Challenges It is clear, like in the first case, that both decisions are pregnant with future conflicts.

Creating an urban region on the basis of an urban settlement that is a district center will in most cases strip the district of any considerable sources of income and is bound to create problems linked to joint use of objects of social infrastructure located in the town's terri tory. On the other hand, incorporating a town in a district as an urban settlement is not a problem free solution either. E.g., in this event one can predict that there will be inevitable conflicts between the head of the district and the head of the district center, which may negatively affect the process of making and implementing decisions that require co operation from both sides.

Different options of solution for the urban settlement problem can lead to controver sial results for municipal formations' investment attraction. E.g., the necessity to get an approval at one more level, namely that of a district, can affect investor interest to urban objects negatively. At the same time, as a result of the lack of a tradition of intermunicipal cooperation, in some instances the town needs a territory for establishing new production and the district needs the infrastructure, but the two entities of municipal power cannot reach an agreement.

The idea that an urban center cannot be the center of the surrounding district, which does not follow from the wording of Law No. 131 FZ directly, has posed a special problem in assigning urban settlements with the urban region status. As a result, in some regions reorganization of the territorial structure of local self governance provided for assigning the urban region status to all urban type independent municipal formations except for dis trict centers, i.e. the largest formations that solid grounds to qualify for this status. A spe cial clarification to this effect has been included in amendments to Law No. 131 FZ, which stated "a town (settlement), which has the status of an urban region and is located within the boundaries of a municipal district can be considered the municipal district's adminis trative center".

The mechanism used in forming the territorial structure of local self governance is of considerable importance from the point of view of the consequences that the introduction of Law No. 131 FZ will have. In most regions district level municipalities that developed drafts of new territorial structures played the main role in this process. As a rule, the heads of sub municipal structures were involved. Population was mainly gathered in the event of a conflict, however, in some districts gatherings were convoked everywhere. Then the pre pared draft was presented to the oblast administration, where a special committee would consider and usually adopt it, although occasionally the draft was returned for rework.

However, we have seen cases of a different approach to this issue, in which the draft of a new territorial structure was worked out at the oblast level together with district heads;

sub municipal structures were not involved and practically no gatherings were convoked.

Clearly, in the first case the process of territorial structure formation included co operation and co ordination of interests of various "players". In this event the heads of sub municipal structures played the role they do play in most cases, namely that of an or ganizer of the local community, and not just a formal role of an employee of the district administration. Although the process of creating the structure of a municipal formation could include more difficulties and conflicts, social adaptation of this structure should ce teris paribus be less painful. Approach No. 2 wholly rests on the formal structure of power and in many respects transfers the procedure for the formation of a territorial structure to the area of administrative solutions. It is clearly not as time consuming as the above mentioned option. However, the advantage that this approach can offer at the stage of ter ritorial structure formation can lead to additional difficulties and problems by the time it is necessary to solve local issues using such a structure. A new territorial structure that has RUSSIAN ECONOMY in trends and outlooks not undergone social adaptation with the local population and has been created without account for information available at the sub municipal structure level can turn out to be so cially and politically vulnerable.

4.7.3. Other Aspects of Municipal Reform Preparation.

It is obvious that preparing the municipal reform at the regional level included two main components, namely establishing the boundaries and determining the status of mu nicipal formations. Other aspects of the reform played a far lesser role. Still, we should not pass over at least three groups of issues that are bound to exert fundamental influence on the creation of municipal formations after 01 January 2006. These groups are: redistribu tion of authorities and property between various levels of power, both between the regional and municipal levels and between districts and settlements, as well as creation of financial mechanisms that conform to the new versions of the Tax Code and Budget Code.

Redistribution of Power and Property In 2004, due to the preparation for enactment of Law No. 95 FZ, authorities were quite actively redistributed between the regional and municipal levels. The most significant change in this respect is the centralization at the regional level of the functions relating to social protection of the population. Some regions transfer such functions to municipal formations in the form of official authorities; others fully centralize them at the regional level, creating subdivisions of regional structures in municipalities.

The management of many municipal structures is quite wary about transferring social functions to the region. It is believed that the real state of affairs and real needs of the peo ple are better known at the local level, while granting social aid from the regional level would only result in bureaucratization of the process. At the same time, they are consider ing options aimed at keeping at the local level certain authorities in the field of social policy under the new legislation. E.g., a number of municipal programs in the field of social assis tance may be changed into programs in the field of education or health care without any essential change in their content.

The transfer of social authorities to the regional level is accompanied by transfer of items of property necessary to implement such authorities. Conflicts arising in the process of property transfer are caused by two main reasons. Firstly, municipal formations have invested considerable amounts of money from local budgets (and, in some instances, money of the population) in a number of social facilities, and transferring them without any compensation is considered unfair. Secondly, difficulties arise when premises and a num ber of other items of property necessary for administrating the social sphere are divided.

As far as distribution of power between districts and settlements is concerned, it should be borne in mind that, despite strict delineation of local issues between the district and the settlement levels, the law provides for a possibility to transfer power from settle ments to the district and from the district to settlements. Such a transfer may be carried out on the basis of agreements concluded for a certain period of time. The authorities transferred must be funded out of subventions granted either from the budgets of settle ments to the budgets of municipal districts or from the budgets of municipal districts to the budgets of settlements.

So far, in most regions this issue has not reached the practical stage. At this point in time only approaches to the delineation of powers between the two levels of municipal formations are being discussed. And since both the necessary human resources and or ganizational potential are lacking at the settlement level, it is now widely believed that the Section 4.

Institutional and Macroeconomic Challenges functions must everywhere be transferred from settlements to districts together with the corresponding financial resources. This in fact means reproducing the previous, pre reform model of organization of municipal formations.

But, even if we forget that such a system contradicts the spirit of the law, it should be taken into account that it is fraught with deep conflicts. The law stipulates for elected bod ies at the settlement level, and such bodies will see their task in protecting the interests of the people that have elected them. If settlement level authorities are deprived of powers and means of solving their inhabitants' daily issues, new authorities will concentrate their main efforts on protecting the interests of their inhabitants at the district level, which will inevitably result in problems and conflicts. In a situation like this the proneness to conflict that is inherent in the two level model (and that has been on many an occasion pointed out by foreign and Russian experts on municipal issues) can grow significantly.

In our opinion, the option providing a greater degree of selectivity in respect of distri bution of powers between the district and settlement levels is more promising. From this point of view, four various settlement groups may be separated:

1. Settlements, to which additional powers are transferred, primarily in the field of educa tion and health care. Such a transfer allows to ensure coordinated growth of the com munal and social infrastructure in the settlement's territory and to optimize use of mu nicipal immovable property. In respect of stations of first medical and obstetrical aid, such a transfer appears advisable practically everywhere. As far as other authorities in the sphere of health care and education are concerned, this is important for urban set tlements in the first place.

2. Settlements that can solve local issues legally assigned to them without external assis tance.

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