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Monetary and budgetary spheres ated with provision of state and municipal services will never enter into force29. In this situa tion, federal legislators should exclude this article from the Code; however the article stipulating the norms of financial costs was preserved in its old version.

Interbudgetary transfers granted from the federal budget According to the new version of article 16 of the RF Budget Code enunciated and in troduced by law No. 120 FZ, all free transfers among the budgets and extra budgetary funds were consolidated in the category of interbudgetary transfers. At the same time, federal financial resources are transferred to regional and local budgets in the forms set forth by the RF Budgetary Code:

Financial aid to the budgets of RF subjects, including the grants from the Federal Fund of Financial Support of RF Subjects and other grants and subsidies;

Subventions to the budgets of RF subjects from the Federal Compensatory Fund and other subventions;

Financial aid to the budgets of certain municipal entities granted in the cases and in ac cordance with the procedures set forth by federal laws;

Other free and irrevocable transfers;

Budgetary credits to the budgets of RF subjects.

Therefore, there was indicated the distinction between the financial aid, i.e. the sup port of relatively poor regions, and compensations for the expenditures associated with the exercise of delegated powers provided by the federal authorities, and assistance to investment in the region.

Article 130 of the RF Budget Code reflects the major conditions of granting of inter budgetary transfers. In the course of comparison of key conditions of granting of financial resources of the federal budget to RF subjects in the new and old versions of the RF Budget Code there may be singled out the following changes.

1. According to the new version of the RF Budget Code, interbudgetary transfers from the federal budget (with the exception of subventions provided from the Federal Compensatory Fund) are granted on condition the state authorities of RF subjects and lo cal governments comply with the budget legislation of the Russian federation and the leg islation of the Russian Federation on taxes and fees.

2. Budgetary credits from the federal budget are extended to the budgets of RF sub jects on condition that the respective state authorities of RF subjects have no overdue in debtedness to the federal budget. The use of budgetary credits received by the budgets of RF subjects from the federal budget for granting budgetary credits to legal entities is pro hibited. This innovation was intended for toughening of budgetary discipline, although the prohibition to use federal budgetary credits for extending budgetary credits to legal enti ties may be interpreted in two ways. In the first interpretation, regions can not use for cred iting of legal entities exactly the budgetary credits extended by the federal center; how ever, it would be difficult to control. At the same time, the legislators could imply that the regions receiving budgetary credits are prohibited to extend credits to legal entities. In this case this provision should be clarified.

3. Grants from the Federal Fund of Financial Support of RF subjects and budgetary credits from the federal budget are provided to the budgets of RF subjects, where over two of the last three reporting years the share of such grants in the total amount of own reve nues exceeded 50 per cent. The grants and credits are provided for three financial years starting form the next financial year and on condition of complying with the agreement concluded with the RF Finance Ministry with respect to the measures aimed at the en In accordance with federal law No. 159 FZ of July 9, 1999, On the enactment of the Budget Code, article 177 of the RF Budget Code should have been enacted on the date of entering in force of the federal law on state minimal social standards.

RUSSIAN ECONOMY in trends and outlooks hancement of efficiency of utilization of budget financial resources and growth of tax and non tax revenues of the budget of the RF subject.

The preceding version of the RF Budget Code set forth quite different requirements with respect to the regions recipients of FFSR grants. On the one hand, these require ments were much more precise: RF subjects had no right to create better conditions for state employees financed from the budget of the RF subject (wages and salaries, traveling allowances and other expenditures) in comparison with state employees of federal institu tions (taking into account regional wage coefficients), extend budgetary credits to legal entities exceeding 3 per cent of the total expenditures of the budget of the RF subject, give state guarantees on behalf of the RF subject exceeding 5 per cent of the total expenditures of the budget of the RF subject. On the other hand, these requirements were set for all re cipients of financial aid from FFSR (at present this condition is applicable only to heavily subsidized regions).

These developments may indicate certain shifts in the policy pursued by the federal center with respect to subsidized regions: the federal center grants to lightly subsidized regions relatively higher financial independence, while with respect to heavily subsidized regions there is carried out the transition to a very high level of control over the manage ment of subnational finances.

4. In the case the state authorities of RF subjects and local governments infringe upon the conditions of granting of interbudgetary transfers from the federal budget set by the budgetary legislation, the RF Finance Ministry should have the right to suspend the granting of interbudgetary transfers (with the exception of subventions from the Federal Compensatory Fund) to the respective RF subjects (municipal entities). This provision in fact introduces the option of imposition of sanctions with respect to the regions failing to comply with the conditions of granting of interbudgetary transfers, what should enhance the responsibility of regional authorities as concerns their regional policies. The old version of the RF Budget Code did not envisage such tough sanctions for failures to comply with the conditions of granting of financial aid.

The new version of article 131 of the RF Budget Code sets forth the procedures govern ing the formation and expenditure of the financial resources of the Federal Fund of Financial Support of RF Subjects. The most important novellas of this article are the following provisions.

1. The key principles of allocation of the Funds financial resources were fixed in the framework of the legislation, there was envisaged that the RF Government should approve the Methods of allocation of the financial resources of the Fund.

2. There was established the procedure of evaluation of the amount of the Federal Fund of Financial Support of RF Subjects, which should be approved for the next financial year. According to the new version of the RF Budget Code, this amount is evaluated by multiplying the amount of the Fund subject to approval for the current financial year by the estimated rate of inflation in the next financial year (Consumer Price Index). Earlier, the amount of FFSR was formed at 14 per cent of the expenditures of the federal budget al though this rate has not been indicated in the legislation. The legislative fixation of the amount of FFSR should render financial policy pursued by the federal center more predict able for regions. At the same time, in the case the objective circumstances require signifi cant changes in the amounts of resources provided in the form of transfers from FFSR, it will require to make amendments to the RF Budget Code.

3. There was established the procedure governing the estimation of transfers by the RF Finance Ministry. According to the requirements of the new version of the RF Budget Code, the RF Finance Ministry should forward to the executive authorities of RF subjects the initial data for the conduct of calculation with respect to the allocation of the financial resources of the Federal Fund of Financial Support of RF Subjects for the nest financial Section 2.

Monetary and budgetary spheres year prior to August 1 of the current financial year. Prior to October 1 of the current finan cial year, the Ministry should carry out a comparative check of the said initial data with rep resentatives of executive authorities of RF subjects.

The changes in the RF Budget Code noted above render the allocation of FFSR fi nancial resources more predictable for regional authorities: the methods of allocation can be changed only by a resolution of the Government and in the framework of the legislation currently in force; the amount of FFSR is easily to estimate in advance; the terms of calcu lations for the further allocation of FFSR grants are clearly determined.

4. It was legislatively prohibited to use actual or prognosticated indicators of revenues and expenditures of regional budgets for the estimation of the level of budgetary security.

5. It was set forth that the level of rated budgetary security of RF subjects as adjusted for grants provided from the Federal Fund of Financial Support of RF Subjects should not exceed the level of the rated budgetary security as adjusted for grants provided from the Federal Fund of Financial Support of RF Subjects of any other RF subject, which prior to the allocation of grants from the Federal Fund of Financial Support of RF Subjects demon strated a higher level of the rated budgetary security.

These two changes in fact have legislatively determine the key principles of the Methods of allocation of FFSR grants, which has been discussed above in the respective section of the study.

6. The new version of the RF Budget Code has regulated the issues of granting of fi nancial aid to the autonomous okrugs being in the composition of other RF subjects. In ac cordance with this version of the RF Budget Code, the grants provided from FFSR to krais and oblasts, which include autonomous okrugs, should be estimated for consolidated budgets of such krais and oblasts, including the budgets of autonomous okrugs, and should be entered in the budgets of such krais and oblasts if there are no other arrange ments set forth by a contract and (or) an agreement between the authorities of the krai or oblast and the authorities of the autonomous okrug.

This change in the legislation is an important step in the regional policy pursued by the federal center with the purpose of gradual elimination of such a type of region as autonomous okrugs being in the composition of other RF subjects and their integration in the respective oblasts and krais.

The new version of article 132 of the RF Budget Code envisages the objectives of creation and certain aspects of functioning of two sources of financial aid to regions: the regional development fund aimed at the granting to the budgets of RF subjects of subsi dies for participation financing of investment programs, and the Fund of co financing of social expenditures, which is formed for financing of priority socially important expendi tures of consolidated budgets of RF subjects. These funds have functioning without legis lative fixation even prior to the adoption of law No. 120 FZ.

The new version of article 133 of the RF Budget Code sets forth regulation of the granting of transfers from the Compensatory Fund. Since 2005, the Compensatory Fund should accumulate financial resources for financing of all explicit federal expenditure mandates existing in the legislation. The Federal Compensatory Fund is formed within the federal budget and is aimed at the granting of subventions for the execution of expenditure obligations of RF subjects and (or) municipal entities, whose financial security is ensured at the expense of subventions granted from the federal budget in accordance with the law On the general principles of organization of legislative (representative) and executive au thorities of RF subjects and (or) On the general principles of organization of local gov ernment in the Russian Federation. Subventions from the Federal Compensatory Fund are distributed among the sub jects of the Russian Federation in accordance with the methods approved by the RF Gov RUSSIAN ECONOMY in trends and outlooks ernment and in compliance with the requirements set forth by the RF Budget Code, federal laws, and normative legal acts of the RF President and the RF Government.

Subventions from the Federal Compensatory Fund are distributed among all subjects of the Russian Federation in accordance with the standard method applicable to the re spective type of subventions pro rata of the size of the population (separate groups of population), consumer of respective budgetary services, eligible recipients of transfers to individuals, and other indicators taking into account objective conditions affecting the costs of provided budgetary services (amount of payments) in RF subjects.

In the course of allocation of subventions provided by the Federal Compensatory Fund, it is prohibited to use the indicators characterizing own revenues of the budgets of RF subjects (local budgets).

In accordance with the new version of the RF Budget Code, which does not envisage such type of financial aid as budgetary loans, there is set forth a stringent requirement about the repayment of budgetary credits to the budgets of RF subjects within the budget year. In the case the extended budgetary credits are not repaid in time, the balance of non repaid credits including interests, penalties and fines is repaid at the expense of grants from the Federal Fund of Financial Support of RF subjects and at the expense of the shares in the revenues generated by federal taxes and fees, taxes set forth in the framework of special tax treatments (with the exception of local taxes) due to the budgets of RF sub jects.

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