The ZATO Archipelago Revisited - Is the Federal Government Loosening Its Grip? A Research Note

Abstract

IN THE LITERATURE,1 the closed cities of Russia or ZATO have been described both in terms of their geographical location and public finance. The system of closed cities can be seen as a fiscal archipelago weakening Russia's ability to become a true federation. This note examines how the closed cities fared during the 1998 crisis, using very recent 1998 annual budget data combined with earlier 1996 data to reveal a public finance crisis within cities containing some of Russia's most sensitive production plants. In addition, new data reveal that regions where the cities are located do interact fiscally with the closed cities but only in the area of road maintenance. As in earlier work, severe data limitations restrict the analysis to a descriptive one, with 11 cities assumed to be representative of the larger, unknown ZATO population. The cities are scattered across Russia plus the space centre of Leninsk in Kazakhstan. Most closed cities are heavily subsidised by the federal government as tax revenue collected within each city is insufficient to cover even basic expenditure needs. What tax revenue is collected is dominated by federally controlled taxes that are supposed to be shared with lower levels of government (the profit, VAT and personal income taxes). As in other Russian cities, true local taxes that remain 100% at the city level generate little revenue, ensuring that each closed city has little own revenue authority and remains dependent on federal authority. We first discuss the 1998 annual budgets of 12 closed cities, and then compare