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The best policy measure in the situation with lower oil prices is RUR devalua tion. It is very important to declare at the initial stage of energy sources price de cline, before they reach the lowest point, that financial authorities will make no ef forts to support the RUR rate at a certain level with the help of gold and foreign currency reserves, regardless any political consequences. This measure will bring potential attacks to RUR to minimum and reduce the crisis impact in the economy.

2.4. Interbugetary Relations and Subnational Finance Last year saw no drastic changes in the system of interbudgetary relations.

The structure of tax revenues and tax powers exercised by different tiers of gov ernment has remained basically unchanged. At the federal level, there continued to exist channels of financial support to regional budgets, which have been stable over recent years 44. Against the background of the increasing revenues to the fed eral budget in real terms, the financial situation of subnational budgets, with ac count of the federal financial aid, can be characterized as relatively stable.

But the complex of decisions made and/or promulgated in 2005 2006 allows conclusion that Russia continues to progress along the path of formation of the corporate federalism. In the previous review, we have already highlighted peculiarities of such a model: at the federal level, a uniform legislation on all the critical matters is complemented by the administrative and political control over regional administrations, with the federal authorities viewing regions as branches of a single corporation. This is proved by such decisions as considered in the last years review actual cancellation of elections of regions heads, the federal centers unilateral decisions on the monetization of benefits, division of powers and implementation of the so called national projects. These tendencies have further intensified in 2006, which can be evidenced by the already passed Act on the 2007 federal budget, which provides for a considerable increase in the proportion of subsidies and subventions in interbudgetary transfers. This proves that the subnational authorities are increasingly assigned the role of executive executors of certain measures planned, funded and controlled by the federal center.

See: Russian Economy. Trends and Outlooks. M., IET (issues 2127) RUSSIAN ECONOMY IN trends and outlooks 2.4.1. Evolution of Budgetary Federalism in Russia The Russian federalism has advanced in a pendulum mode, when the cen tralized structure of the USSR was substituted by a serious decentralization of the 1990s. However, the latter was in turn again replaced by the prevailing tendency to centralization. Underlying the tendencies to centralism in Russia were several causes:

1) First, the institutional environment of the Russian federalism was extremely flexible, or, more precisely, nascent the Constitution has failed to set a closed list of rights and obligations of the Subjects of the Federation, with a consider able part of critical for the society governmental powers falling under the joint jurisdiction. The balance of division of government powers could be easily bro ken either in favor of a further decentralization (up to the countrys break up), or towards centralization (up to a de facto unitary state). The selection of either option was dependent on who, regions or the federal center, would be able to concentrate in his hands financial and state power resources. Other causes for the centralization explain why the shaky equilibrium of the 1990s has been re placed by the current centralization.

2) In the conditions of economic crises (those of the early 1990s and in 1998) and an uneven dispersion of production, numerous regions had no sufficient finan cial resources in hand to exercise the powers granted by the federal center. As a result, the latter acquired additional powers associated with redistribution of resources between regions, most of whom were keen to participate in such a redistribution.

3) Many regions pursued incompatible interests; regional authorities have failed to form a joint front with respect to the division of powers and advocacy of their stand before the federal center.

4) The need for promoting nationwide reforms and solving nationwide challenges (for instance, repayment of a huge external debt or the need to consolidate the society in the light of the terrorist threat) has helped form the value of the integ rity of the political and economic space in the eyes of the society.

5) The correlation between the todays level of decentralization and the state of the respective institutions in the past45. In retrospective, all Russias institutions and the society on the whole was closely associated with the planned economy and the hypercentralized administrative and command decision making system, which to a significant extent has affected redistribution of the power and finan cial resources in favor of the federal center.

Thus, Russia has witnessed a gradual rise of a country specific model of fed eralism. It displays a unique combination of fundamentals of cooperation and com petition with the federal centers administrative control. On the one hand, regions compete with each other for placement in their territories of the most profitable en terprises, as well as for financial aid from the center and public investment re sources. But, on the other hand, the federal center has concentrated in its hands Path dependence Arzaghi M., Henderson J. Why countries are fiscally decentralizing// Journal of Public Economics. Vol. 89, No. 7, 2005 P. 11861188.

Section Monetary and budgetary spheres key powers and financial resources, and it sets a uniform legislation on all the criti cal matters and enforces the uniformity of the tax system across the Federation.

These are characteristic features of the cooperative federalism of the German type.

However, in Germany, subnational governments can maintain a significant influ ence on the federal centers policies by means of the party system and the Bundesrath. In Russia, the nascent party system challenged the federal center with a complex mission of ensuring efficacy of the regional governance by means of administrative methods. Hence, as noted above, the federal center is compelled to regard regions as branches of a single corporation, to formulate strategic objec tives for them and evaluate the regional authorities performance.

2.4.2. Main Trends of Development of Relationships between Budgets of Different Levels To analyze main trends of 2006 in the area of relationship between budgets of different tiers, let us consider the revenue and expenditure structure of the RF con solidated budget and its evolution over several recent years. Table 22 below con tains data that characterize the proportion of tax revenues and expenditures of budgets of the RF Subjects in the nations consolidated budget.

Table The Proportion of Some Indicators of Budgets of Subjects of the Federation in the Respective Indices of the Consolidated Budget of the Russian Federation in 19922006 (as %) Tax revenues 44.2 53.1 53.4 47.6 49.5 53.1 56.6 49.2 43.5 37.4 35.1 39.6 36.1 30.9 31.Expenditures 34.0 40.3 37.7 43.4 45.4 48.1 54.1 51.9 54.4 54.2 49.3 50.0 50.8 49.5 43.Source: the RF Ministry of Finance, the authors calculation.

The data in the Table 22 evidence that the trend to centralization of taxes in the federal budget, which had started in 1999, has been somewhat modified in 2006. While between 1999 and 2005 the share of tax revenues to budgets of the RF Subjects in Russias consolidated budget revenues slid from 56.6% in 1998 to 30.9% in 2005, a year later, in 2006, it posted a 31.8% growth. Meanwhile, the pro portion of expenditures of budgets of the RF Subjects in expenditures of the na tions consolidated budget plunged from 49.5% to 43.4%. Such a decline was caused by a faster increase in the federal budget expenditures. Whilst considering the state of tax revenues to consolidated regional budgets in 2005, one can note that, as before, it is revenues from two taxes, that is, personal income tax and cor porate profit tax, that account for over a half of the tax revenues (34% and 42% of tax revenues to regional budgets, respectively). In 2006, the share of revenues from these two taxes in tax revenues to regional budgets slightly slid vis vis 2005 from 80% to 77%, which can be attributed to a slight decline in the share of corporate profit tax. It should be noted that revenues from personal income tax to consolidated budgets of the RF Subjects rose up to 3.5% of GDP (in 2005 3.3.% RUSSIAN ECONOMY IN trends and outlooks of GDP), while revenues from corporate profit tax slid to 4.35% of GDP (4.41% in 2005). Excise taxes continued their decline to 0.6% of GDP (vs. 07% in 2005), while revenues from payments for the use of natural resources remained on the same level (0.26% of GDP). Small businesses have now found themselves taxed at a greater level (0.36% of GDP vs. 0.33% reported last year), while revenues form property taxes in the shares of GDP equivalent remained stable and accounted for 1.17% of GDP.

Given the above, an analysis of the indicator of tax revenues to consolidated budgets of the RF Subjects in per capita terms shows that in 2006 the cross regional unevenness of this indicator continued to decline. Thus, the respective value of Jini coefficient fell over the year and accounted for 0.48 (vs. 0.57 in and 0.51 in 2005). The last years decline in the cross regional unevenness of per capita tax revenues to consolidated budgets of the RF Subjects occurred mostly because of the fall in the proportion of an unevenly distributed corporate profit tax in the said budgets. Yet another reason behind the fall in the unevenness of this in dicator became integration of the data on execution of budgets of Krasnoyarsk krai, Taymyr and Evenk autonomous okrugs. It is also possible to suggest a hy pothesis, according to which in the aftermath of an economic crisis the renewal of economic activity starts in a small number of regions (in Russia, those are oil producing regions and the largest economic centers). As a result, regions began to diverge from each other in terms of various indicators and those of tax revenues in particular. Such a trend was noted in Russia between 1999 and 2004. Expanding across new regions, economic growth leads to a lower unevenness in distribution of tax revenues. Time will show whether the hypothesis is accurate. Presently, it seems too premature to judge its accuracy basing solely on the tax revenue data, as the 2005 reduction in the cross regional differentiation of per capita tax reve nues to consolidated budgets of the RF Subjects was caused mostly by the cen tralization in the federal budget of unevenly distributed taxes, namely, the mineral tax (9.4% of it in the part of oil and gas condensate) and corporate profit tax (1.5%).

Revenues to the consolidated budgets of the RF Subjects grew by 18% in real terms, with just 7 Subjects reporting their decline in real terms46. It should be noted that Novgorod oblast and the Republic of Sakha (Yakutia) have experienced just an insignificant fall in their budget revenues at 0.66 and 0.67%, accordingly. In most cases, underlying a decline in regional budget revenues is the abandonment of a large corporate taxpayer, followed by a fall in revenues from corporate profit tax.

Thus, the 2006 revenues from this particular tax slid in real terms vs. the respective indices of 2005 in the following regions: Chukotka AO at 86%, Republic of Mor dovia 68%, Khanty Mansy AO 62%, Omsk oblast 51%. Interestingly, in the proportion of corporate profit tax in the budgets of these regions was consid Novgorod oblast, Republic of Mordovia, Republic of Tatarstan, Khanty Mansy AO, Omsk oblast, the Republic of Sakha (Yakutia), Chukotka AO.

Section Monetary and budgetary spheres erably greater than the respective average indices reported across the country. As these regions appear so dependent on revenues from corporate profit tax, an abandonment of a large taxpayer obviously could not help but trigger a fall in their budgetary revenues.

The maximum increments in tax revenues in absolute terms were reported by the city of Moscow, Saint Petersburg and Krasnoyarsk krai. These regions have displayed a great level of budget sufficiency and reported a great share of corpo rate profit tax in their 2006 tax revenues structure. For reference, the respective in dex has slid nationwide from the average 32% in 2005 to 31% in 2006, while the said regions, on the contrary, reported a growth of this index: the city of Moscow:

from 44 to 47%, Krasnoyarsk krai from 35 to 43%, and Saint Petersburg from 22 to 32% (1.4 times!). However, it was Aginsky Buryatsky AO that posted a record breaking increment in budgetary receipts per capita in real terms (7.48 times vs.

the 2005 level). Such a breathtaking rise in budgetary revenues was caused by the registration in the region of a large corporate taxpayer (in 2006, the local budgetary revenues from corporate profit tax were reported to soar 17.8 times).

As regional budgets appear greatly dependent on corporate profit tax reve nues, the situation result in an intensification of the race between regional authori ties for getting large corporate taxpayers registered in the respective regions. In this competition regions are not anxious to improve a local investment climate.

Rather, they are keen to attract a taxpayer by means of administrative resource or bribing him with budgetary subsidies on projects whose implementation is profit able for specific companies.

The problem can be remedied in two ways: first, by curbing the mobility of corporate profit tax; second, by getting the budgetary system adapted to prompt and sizeable migrations of tax bases.

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