Rise of the Regions

26 december 2013

Developing Russia’s Territories

Vladimir Ryzhkov is Co-Chairman of the RPR-Parnas party and is a former State Duma Deputy representing the Altai Territory.

Rostislav Turovsky is Vice President of the Center for Political Technologies.

Resume: The regions are hindering Russian progress by their loss of initiative, interest in independent development, parasitism, betting on shadow lobbying, and fear of sanctions by the center. Excessive centralization results in numerous and inevitable administrative errors.

The article is an abridged version of a section of Strategy XXI project. The authors appreciate the ideas and recommendations from all the participants in the case study “Russia’s New Regional Policy” that took place in Moscow on 15 April 2013. The material is based on conclusions and ideas in the Strategy 2020 section “Regional Federalism, Municipal Government, Inter-budgetary Policy;” the state program “Regional Policy and Federative Relations;” the Valdai Discussion Club’s report “Towards the Great Ocean or The New Globalization of Russia;” the World Economic Forum report “Scenarios for the Russian Federation;” and the FBK agency report “Economic Differentiation of Regions: Opinions, Dynamics, Comparison.”

Russia is the world’s largest country in total land area and has a vast resource potential, which gives it a huge global advantage. Yet a national economic model based on extracting minerals distributed unevenly across the country has caused enormous imbalances and resulted in an ineffective use of human potential.

Notably, Russia has a singularly high concentration of economic, financial, and intellectual potential in just a few regions and in the capital Moscow. Indeed, a mere nine regions account for half of total Russian GDP. Although Moscow’s share of the overall population is minor compared with other world capitals (just 8.1% according to the 2010 census), the city accounted for 22.9 % of GDP in 2011.

In terms of per capita Gross Regional Product, the economic gap is extreme between rich and poor regions. Large areas of poverty have developed in Russia. Despite the overall positive socio-economic trends of the 2000s, Russia still has regions where people who live below the subsistence level account for more than 20%-30% of the local population.

Inconsistent economic development and a difficult investment climate have led to enormous imbalances in investment. Some regions like the North Caucasus have negligible or even no foreign direct investment.

Even more acute are disproportions in the distribution of financial and tax potential. Regional financial problems are aggravated by the specifics of the Russian tax system and the concentration of resources in the hands of large companies. The bulk of these companies are registered in Moscow and pay taxes there. A moderate redistribution of tax revenue in favor of manufacturing regions by establishing consolidated taxpayer groups has had no serious impact on the situation so far. In 2011, Moscow contributed 20.9% of revenue to the federal budget and public non-budgetary funds; the Khanty-Mansiysk Autonomous Region accounted for 15.3%; the Yamal-Nenets Autonomous Region put in 4.7%; and Moscow Region and St. Petersburg amounted to 4.6% each. Thus, five regions account for half of all Russian revenue.

Regional budget deficits remain a persistent problem and even rich regions often fail to cope with their financial commitments. High-ranking officials are the winners in the struggle for budget allocations, dictating terms to low-level administrations and impeding their development. The regional share of Russian budget revenue is consistently below 50%, but a regional budget makes up the core of a consolidated local budget (approximately 81.2% in 2012). The contribution of municipal budgets is insignificant. In municipal budgets, rural towns and cities account for a mere 2.15% of consolidated regional budgets.

Regional budget problems stand in the way of effective social security policy, which is barely afloat. Rural areas, home to more than one quarter of Russia’s population, are experiencing the most difficult socio-economic problems. In 2011, 68.8% of people living in rural Russia were employed, while less than 50% had jobs in some regions of the North Caucasus.

Siberia and the Far East are struggling, despite the fact that these two regions contain tremendous reserves of minerals and are close to promising Asian markets. The intellectual potential in Russia’s Far East is not balanced: the number of people with university degrees is below the Russian average, yet the region does have strong science and education centers, such as in Novosibirsk and Tomsk.

Russia has dramatic, if not disastrous, imbalances in the distribution of intellectual potential. For example, Moscow has 32.3% of the country’s research and development potential; while Moscow region accounts for 11.7%; and St. Petersburg for 11%.

Russian officials have repeatedly made efforts towards balancing socio-economic development and supporting the regions. However, they have proven ineffective because regional policy lacked a strategic course.

One of the key problems is power sharing between federal, regional, and municipal administrations, which is crucial in forming active civil patriotism. Centralized power often has an unfunded mandate in regions due to huge financial disproportions. Also, centralized power is ineffective in many areas where the regional authorities are better equipped to handle problems; for example in forestry.

Regions are also experiencing problems with poorly designed federal programs, regional development strategies, and development incentives. Meager budget funding and excessive demands by interested agencies continuously disrupt the deadlines of targeted federal programs. Most of the special economic zones do not work, and some have not recorded a single resident. As a result, the process is moving in reverse. As special economic zones close, Investment Fund projects are scaled back, and targeted federal programs are revised and replaced with new state programs.

The third problem concerns unstable government institutions that deal with regional policy or represent regional interests at the federal level. Governorship, as an institution in post-Soviet Russia, has taken shape through an endless number of experiments. The Federation Council, the upper house of the Russian parliament, is unstable. Its formation procedures and regional participation by the elites are changing constantly.

Municipal government deadlock is the fourth problem. Municipal reform, launched in 2003, is still unfinished. Financial problems crucial for local government are still not resolved. Residents are not interested in local self-government, as witnessed by the low turnout in municipal elections (less than 20% of the electorate turns out for mayoral elections in large cities).

The current situation hampers the creative energy and production potential of Russians, and is a major obstacle towards increasing the country’s human capital. Centralization processes in Russia have reached a level where they impede the country’s economic development and social wellbeing, and parasitical attitudes have formed in the regions. The constitutional norms that affirm Russia as a federative state are actually not being implemented.

REGIONALIZATION OF RESOURCE AND HUMAN POTENTIAL

Regionalizing resource and human potential should become the first step towards an effective state and a true federalism. It is important that re-distributing power to the regions follows the regionalization of resources. In the present situation it is useless and dangerous to delegate authority quickly to the cash-strapped and to those who are unable to shoulder additional responsibility. Most Russian regions are not equipped to function effectively under decentralization.

The phased implementation of this strategy envisions about ten years for the regionalization of resources, after which it will be possible to embark on a more radical decentralization of power. That process will require at least five to ten years. Regionalizing resources should develop along the following three tracks:

A. Regionalization of intellectual potential

Consistent efforts are required to bring regional universities and research centers to a global standard. Large cities should become centers of intellectual growth together with so-called technological centers that have the required potential (see below for 30 “new capitals” of Russia and 10 “innovation centers”). Research and education will need federal and regional investment in order to grow. Budgets of all levels will have to set minimum research spending guidelines. Training management personnel should become a priority in the growth centers.

B. Regionalization of production potential

New types of production should be launched in undeveloped regions interested in economic recovery and budget replenishment. Tax, infrastructure, or other indirect incentives should incite investors to select a province most in need of economic recovery (whereas now the money goes to regions with the largest lobby or accumulated development resources). At the municipal level, new industries should not be placed in major Russian cities, but in suburbs or smaller centers (“100 home centers,” see below). Large cities (the 30 “capitals”) should give priority to science-intensive and hi-tech productions.

A project that meets production regionalization criteria qualifies for government guarantees, budget co-funding, and loans from the Russian Regional Development Bank (see below) or Vnesheconombank (VEB) if the latter is committed to opening such credit lines. Identifying territories in desperate need of investment projects should be the responsibility of a Spatial Development Institute (see below) to be established as the key think tank in regional development policy.

Tax breaks (that do not damage regional budgets whose replenishment is a regional policy priority), government co-funding of infrastructure projects, credit lines from the Russian Regional Development Bank or VEB, and reduced prices to connect to the power grid or service lines can all be used to attract investors to underdeveloped regions.

C. Regionalization of tax potential

Replenishing regional and local budgets by letting the regions collect all revenue from the profit tax and excise duty (on Russian-made goods) should be the key priority in economic regionalization. Additionally, the regions should be entitled to 30% of the revenue from the Value Added Tax on Russian-made products, with subsequent distribution between regional budgets proportionate to population.

According to our estimates, these measures will boost tax and non-tax revenue to regional budgets by more than 15% in 2012 (including the proposed deduction of a portion of the income tax from regional budgets in favor of municipalities). Such redistribution will provide extra opportunities for the regions without having a serious impact on the federal budget, whose tax and non-tax revenue is expected to decrease by 10%. In five to ten years it might be possible to distribute a certain portion of the mining tax between regional budgets in proportion to the population.

It is important to preclude increased inequality between the regions, so production regionalization should favor the regions most in need. For the same reason, a balanced model needs to be adopted to redistribute VAT and the mining tax in favor of the regions, tying it to the size of the population. Large taxpayers, i.e. leading Russian companies, should be encouraged to register in the regions where their production capacities are located and move their headquarters and managers there. Those companies should pay the lion’s share of taxes in the regions where their production is located (as consolidated taxpayers).REGIONAL SOCIO-ECONOMIC EXPERIMENTS

In order for Russia to develop, the regions have to participate in designing socio-economic experiments; subsequently launching and implementing them as part of specific development programs. The regions will determine the number, nature, and timelines for such pilot projects, while the center will have the right to veto as it sees fit any socially and geopolitically dangerous moves under a special law on regional policy.

Socio-economic pilot projects can be implemented in different sectors.

A. The most complex experiments are carried out within the framework of long-term programs for regional socio-economic development. Regions approve such programs according to strategies fully or partially funded from the regional budget, without using federal money. The center should not entice all regions to develop such programs or strategies, as this might impair their quality and make them unfeasible.

B. To create effective instruments and stimuli to revive business activity and improve the investment climate, Russia’s regions should experiment with tax and administrative regimes. This might prove more effective than direct federal investment. Changing the administrative regime implies a cut in bureaucratic barriers to registration and functioning of businesses (simplified registration, quick and streamlined allocation of land plots for lease or ownership, connection and access to infrastructure, etc).

C. To improve the mood among local residents concerning social security, regional experiments in the social sphere might target individuals or certain groups. These could include benefits for low-income Russians (lower tax rates or tax exemptions in the transport, housing, and public utilities sectors), as well as regional allowances or payments in addition to federal subsidies, such as student grants.

This system enables the federal authorities to establish a general and quite flexible framework while retaining the right to:

  • make strategic decisions and maintain strict control over implementation of those decisions;
  • shut down or forbid pilot projects that could lead to the country’s disintegration and social upheaval;
  • support and launch successful experiments in new territories; provide financial support to the most underdeveloped regions lacking organizational, financial, and intellectual resources for experimentation.

A SPATIAL DEVELOPMENT STRATEGY FOR RUSSIA

Coming up with a resource maneuver targeting regional development requires a clear system of growth points. At present, “ready” points are practically unavailable. New raw materials projects have been proposed for Sakhalin and the Yamal-Nenets Autonomous District. Moscow can no longer be a point of growth because it has exhausted its potential. Yet it would be naïve to assume that decentralization would quickly turn regions into points of growth. It is more likely that disproportions would benefit a few resource-rich regions.

In order to meet the interests of Russia’s development, the federal government should establish guidelines for initial regionalization and its priorities in a special spatial development strategy. Such a strategy would form a single framework for the country’s socio-economic development that might envision new areas of growth.

The Spatial Development Strategy would need three types of points of growth, each with its own specialization.

A. The “30 new capitals of Russia” are large and developed cities that are usually natural regional centers. These “capitals” have the best opportunities for integrating into global economic and intellectual space, and developing communication, economic, and humanitarian ties between each other and the outside world, without Moscow’s mediation. A world-class university must be available in each regional center.

The following is a list of “the new capitals of Russia” selected for the initial stage:

 

 

Over time, thirty “new Russian capitals,” along with the two largest cities, Moscow and St Petersburg, might become the focal points for the appearance of an entirely new federal structure with new regions that have strong economy and developed ties with the outside world.

B. “100 basic centers”. To avoid the formation of a new center of power and to prevent all the resources and population from moving in droves to the 30 “new capitals,” a proposal was put forth to create a network of 100 mid-sized centers with good resources and opportunities, although not as comprehensive as those in the 30 “new capitals.” These mid-sized centers would create and/or operate large industrial facilities and have a well-developed social infrastructure in place.

C. 10 innovation centers. The development of ten compact innovation centers is possible based on existing technological cities and closed administrative-territorial units. Specifically, these centers will differ from other points of growth in their narrow research and production specialization. They will target the development and implementation of economic innovation or those in public life.

Russia’s spatial development strategy should revise the role of Moscow and St. Petersburg, whose hypertrophied growth is causing a lot of problems for the entire country. A polycentric model for the Moscow region has been proposed instead of the unsuccessful Greater Moscow project. The polycentric model consolidates Moscow districts (municipalities). It also grants the status of city districts to certain compact and detached parts of the city that would make these city regions constituent entities of the federation. Such re-organization will require a powerful municipal government in the capital.

TURNING EAST

The slow development and depopulation of Siberia and the Russian Far East are preventing these vast territories from becoming an integral part of the rapidly developing Asia-Pacific region. Those regions are unable to use the tremendous opportunities offered by the Asia-Pacific region and create geopolitical threats to Russia. Despite Russia’s recent attention to the Asia-Pacific region and financial injections, the government has no effective mechanisms to develop Siberia and the Far East and create the necessary infrastructure. Priority is given to raw-materials initiatives that do not contribute to the development of all the territories. These measures are aimed at expanding existing production, although there is no guarantee of long-term demand (as indicated by the slower implementation of oil/gas, coal, and metallurgical projects, and a shortage of strategic investors).

Speeding up the development of the eastern regions requires:

  • a change in the attitudes of the Russian leadership and society towards the regions, and a movement away from Eurocentrism;
  • a phased restructuring of the regional economy in favor of high-level processing and the use of available resources, taking into account the needs of the Asia-Pacific region and Russia’s competitive advantages. Given the shortage of freshwater resources in Asia, Russia could capitalize on its relative abundance of those resources by launching the production of water-intensive goods, such as chemical fibers, pulp and paper products, and foodstuffs (with the advanced implementation of state-of-the-art water purification technologies);
  • the integration of the Siberian and Far Eastern infrastructure with that of APR countries; Russia not only has insufficient East-West transport links, it almost completely lacks transport corridors running north to south;
  • massive foreign investment from all developed APR and European countries (not just from China) in order to avoid dependence on one country. Russia should create special conditions for this investment.

The Russian government is still focused on using Siberian and Far Eastern resources, but a strategic prospect requires that: (1) revenue should contribute to the development of the territory where it is generated; and (2) the economy should undergo phased diversification in favor of hi-tech processing while using the intellectual potential of eastern regions.

In identifying the priority, i.e. state-supported specialization of Siberia and the Far East, it is necessary to give preference to exporting products with a high level of processing, not raw materials. At the first stage, the bulk of exports will encompass oil, gas, ferrous, non-ferrous, and precious metals, diamonds, timber, etc., but even in this case preference should be given to export-targeted processing (liquefied natural gas, petroleum products, special steel, paper, etc).

In the next three to five years, the raw materials vector in developing Siberia and the Far East should gradually be complemented – thanks to the priorities of state support – with products that are not manufactured in sufficient quantities (or are not processed into value-added products). Yet there is growing demand for those products and their competitive advantages: for instance, foodstuffs (grain, meat, fish, etc), timber, and pulp and paper products.

Furthermore, the intellectual potential of the eastern regions need to be tapped, especially where there is still a considerable portion of young people, as well as large research and education centers, i.e. the hubs of hi-tech industry. Siberia and the Far East would accommodate several “new capitals” and innovation centers for which the necessary conditions already exist. As a result, the raw materials vector of the eastern regions would gradually be complemented, and eventually replaced with hi-tech sectors. The largest cities would integrate into the system of economic, transport, and information and communication ties for the Asian-Pacific region.

Eastern regions should use resources in their own interests. Such a policy would be in stark contrast to the current model, which is actually colonial, and benefits the federal budget and large corporations located in Moscow. The federal government and regional officials in Siberia and the Far East could set up an Eastern Regions Development Fund. Tax revenue flowing to the federal budget from Siberia and the Far East could be placed in such a fund and then used in those regions.

Replenishing regional and local budgets, along with the launching of new projects, should become a top priority. Tax incentives should be offered at the expense of federal budget tax revenue – i.e. the mining tax – that, in part, should replenish the Eastern Regions Development Fund. Special tax and customs regimes should cover certain projects and areas, not the entire territory of Siberia and the Far East.

Attracting foreign labor to eastern regions is inevitable, as it is crucial for intensive development. Those who permanently work in Siberia and the Far East, first of all the residents of former Soviet republics, should qualify for a simplified naturalization procedure. However, it is important to preserve the cultural and intellectual core formed by the indigenous population. The establishment of powerful research/education and hi-tech centers would help to keep the educated population active in the region and replenish the elite. New measures are needed to attract specialists to the eastern regions from central regions. For instance, offering incentives such as free housing and guaranteed employment.SHARING POWERS AND RESPONSIBILITY

Using regional economic resources and human potential requires a stronger role of and independence for regions and municipalities that must have broader rights and powers.

From the viewpoint of impact on everyday life and development of public consciousness, the government system should be rearranged to have municipal agencies and their heads as the key elements instead of the president and governors.

Municipal self-government is the most natural and promising school of Russian democracy for forming civic consciousness. All attempts to implement democratic reforms “from the top” are doomed to failure until citizens form a capability for and develop an interest in local self-government. That is the reason for transferring real powers and adequate financial resources to municipal government agencies, which enables them to take responsibility for creating a comfortable environment. The local government has a comprehensive understanding of this sphere and citizen feedback is much more effective at this level.

Municipal government agencies should have the following main functions:

  • a functioning public utilities system that provides such services as water/power/heat/gas supply, etc.;
  • functioning transport and communication systems (except federal or regional links if a region assumes federal powers in the sector);
  • environmental monitoring and protection to set up a municipal (volunteer) environmental police force (see the section on the environment as an instrument to cultivate new patriotism);
  • territorial planning and zoning.

The financial independence of municipal government is a serious challenge, but Russia can no longer postpone moving towards this goal. Transfers of extra income tax deductions are needed to replenish municipal budgets, while residents will be required to pay the tax at their place of residence. Ensuring that municipalities receive 50% of income tax revenue instead of the current 20% should be made a priority. According to our calculations, this will secure an almost 40% increase in tax and non-tax revenue for municipal budgets.

The current territorial structure of municipal government is a serious problem, because a majority of municipalities do not have even the slightest opportunity to provide resources and professional personnel for themselves. Given the depopulation of liminal regions, there are too many municipalities right now.

While not entirely rejecting a two-tiered municipal government, the number of economically weak municipalities (towns) should be reduced by merging them (in each case, the merger should have an economic basis and not go against the interest of citizens). Rural areas and towns should take the initiative to compensate for a lack of elective institutions and administrations by developing direct democracy institutions with broader functions (public meetings, local referenda, and compulsory public hearings that can also address such issues as area planning and development).

A uniform nationwide model to form municipal government agencies is not necessary. Instead, an independent decision on the model made by local authorities and citizens through a referendum would be sufficient. The most important thing is to prevent any direct interference by the regional authorities in establishing municipal government agencies. The regional authorities should neither participate in the work of the commission that selects candidates to head municipal agencies nor should they have the power to fire those officials (therefore, a mechanism should be in place to recall an official).

The responsibility of the regional authorities in the proposed sharing of power/responsibility should foremost include care for human capital and the business climate. Assessing regional efficiency needs to be revised and be based on (1) social well-being dynamic indices; (2) the level of investment (including foreign capital) and socio-economic development attained through regional efforts); (3) developing small and mid-sized businesses. In addition, the regions should participate in decision-making at the federal level.    

As for the federal authorities, the new policy of spatial development is impossible without changing the federal center’s ideology. It needs a revised federalism and regionalization based on subsidiarity, i.e. the transfer of power to a government level capable of administering them.

This does not mean that the center is giving up its supervising functions (which, however, must be reduced to strategic issues), its active role (including financial matters, for example, with respect to Siberia and the Far East), or its broad mandate (given the inability of some regions to execute these powers). The center should retain strict control over the implementation of strategic functions of federal authorities, such as preserving territorial integrity and the unity of legal, economic, and social space.

Power sharing with the regions should be phased out, taking into account the fact that Russia’s size and political tradition require a high degree of centralization.

As for structural organization, an effective system of government and consulting agencies should be set up at the federal level to represent the regions and/or contribute to regional development.

The Federation Council is one institution that should ensure real representation of regional interests. It was a mistake to cut some of its powers in the 2000s. Current measures are insufficient to set up mechanisms for a broader representation of those who really work in the regions they represent (a residency requirement and election of governors in majority constituencies are especially important). Firstly, it is necessary to ensure a mechanism of a governor’s responsibility to the region for the official’s decisions and actions (regular public accounting, implementing orders from the regional authorities, including by voting for parliamentary deputies, and ensuring a voter’s right to recall a governor).

Secondly, the Federation Council should have broader powers, especially over regional policy. For example, procedures for passing laws in regional policy should be reversed, i.e. it is the Federation Council that should pass laws, while the State Duma should subsequently approve them.

The draft federal budget would need the initial approval of the Federation Council before it could be submitted to the State Duma for debate.

Also, the system of consultative institutions representing the regions and their administrations at the federal level has to be improved. The first thing to do is to legalize the State Council and the Council of Legislators.

The practice where presidential representatives run federal districts, which played a key role in centralization, must be replaced. A deputy prime minister for federation affairs and regional development could become the coordinator and guarantor of all government agencies and implement all their functions in regional policy, as well as serve as a “liaison” between the center and the regions.

The government does not need the Regional Development Ministry. In effect, all the ministries, given the critical importance of regional policy in Russia, are “regional development ministries,” each working in its respective area. Thus, it is important to avoid the doubling of functions and determine the responsibility of each ministry in regional policy.

The Regional Development Ministry is unable to the play the role of a full-fledged expert and analytical agency. Financial and expert development institutions, such as the Bank of Development (with its regional branches and/or the Russian Regional Development Bank, as well as the Fund for Developing Eastern Regions), should play the leading role in implementing Russia’s regional policy.

The government needs to establish an Institute of Spatial Development, a non-governmental think tank (which nevertheless would work closely with the state in executing the functions handed over by the latter) that would engage in expert assessment, draft recommendations for government agencies, conduct research, host competitive selection of regional development projects, hold expert meetings, etc. The institute could be more efficient than government or parliamentary agencies, and their weak and often partisan information and analytical services.

Restructuring different levels of government should be timed to the transfer of state and municipal functions to self-regulated public organizations, a tentative name for non-governmental and non-profit organizations that function under the principles of outsourcing and use competitive selection and grants for funding. Three special state-run organizations could be created to implement those procedures: the National Cultural Policy Fund, the Infrastructure Policy Fund, and the Social Policy Fund. However, many functions should and can be a joint product of municipal institutions and individual and civil initiatives.

The procedures for interaction between government agencies of all levels, consultative institutions, and self-regulated non-governmental organizations, as well as the power-sharing mechanisms, should be spelled out in a special law on regional policy. Such a law must become a basic federal law; in effect, “a small constitution.”

*  *  *

The regions are hindering Russian progress by their loss of initiative, interest in independent development, parasitism, betting on shadow lobbying, and fear of sanctions by the center. Excessive centralization results in numerous and inevitable administrative errors. Furthermore, centralization is fraught with plunging support for the federal authorities in the event of crises, and poses a real threat to the future of the country and its territorial integrity.

The proposed measures for regional development suggest inevitable cuts in the overblown army of regional federal officials who represent supervisory institutions and federal agency branches. Some supervisory functions should be handed over to the regions and municipalities, and some to judicial authorities to eliminate violations and settle conflicts. This, in turn, will require more judicial reform.

The federal center will keep its leading role in resource regionalization, to be followed by administrative regionalization. But its tasks will change: the federal center should abandon ineffective centralization and become (1) a guarantor of the country’s integrity; (2) a coordinator of consistent and balanced regional development; and (3) an arbiter to reconcile different regional interests.

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