Deciphering Russia's federal finance: Fiscal appeasement in 1995 and 1996

Abstract

FOR OBSERVERS OF RUSSIA'S TRANSITIONAL POLITICS, the often strained relations between the country's centre and regions have been a particular focus of interest.1 Not surprisingly, some of the most controversial questions have concerned flows of money. What determines how fiscal transfers and tax assignments are allocated among Russia's 89 oblasti, kraya, republics, autonomous oblasti and okruga? Do fiscal outcomes reflect the objectives of central policy makers-alleviating need, encouraging reform, buying votes-or the relative lobbying capacity of different regions, all of which are concerned to maximise their share in central largesse? These questions present not just an academic puzzle but a political conundrum which has acquired considerable resonance.2 In previous work, analysing data for 1992 and 1994, I found that the pattern of allocation of net fiscal transfers between centre and regions exhibited a marked political logic. Regions that demonstrated both the capacity and the resolve to threaten economic or constitutional order-by declaring sovereignty, staging strikes, voting against El'tsin and pro-reform parties, or through public opposition to El'tsin by the regional governor in the crisis of September 1993-were subsequently rewarded with larger fiscal transfers and tax benefits. These political factors remained significant even after controlling for the various other possible determinants of fiscal transfers, including measures of relative regional need. And political factors were still important in 1994, even after the government introduced reforms designed to rationalise the regional transfer system. Central responses to regional threats constituted a pattern of fiscal appeasement of the most assertive and credible troublemakers.3 In a recent article in this journal, Alastair McAuley takes issue with this view.4 He analyses data on fiscal transfers in 1995 with the goal of discerning 'how far the pattern and level of federal support for individual regions in 1995 can be explained by indicators of social need'. He asserts that 'if a high degree of correlation between the pattern of transfers and indicators of social need can be established then it may be assumed that decision makers are motivated by a concern for equity', and adds that 'it is not necessary to test explicitly for a relationship between the pattern of transfers and proxies for political power or bargaining skill before rejecting that hypothesis'. Having found a correlation between the pattern of transfers and certain indicators of social need, he concludes that 'federal redistributive policy ... appears to be influenced if not determined by social concern. There is, therefore, little scope for the