Statehood: The Regional Dimension
No. 4 2005 October/December
Leonid Grigoriev

Chief advisor to the head of the Analysis Center under the Government of the Russian Federation, Head of the World Economy Chair of the World Economy and International Affairs Department of the National Research University–Higher School of Economics.

In the
past 15 years, relations between the federal center and the regions
have varied from the “take as much freedom as you can” attitude to
serious concern about the problem of separatism and the inability
of the regions to run their own affairs. Meanwhile, it is no secret
that Russia does not even have a regional economic


Presumably, during the crisis of the transition period there
were no resources available for regional development. At the same
time, however, the net-recipient regions actually received huge
resources from the net-donor regions for maintaining social
stability, supporting various political projects, and perhaps
investing in some sort of corruption-tainted schemes. The resources
depleted, but there was no coherent policy course. The failure to
develop a system of priority objectives, together with the
instruments to achieve them, derives at least partially from the
magic charm of simple solutions dictated by macro-economic policy
that purportedly leads almost automatically to the bliss of
modernization. Russia passed through five years of a consumption
boom (60 percent growth!), as well as an energy export explosion,
to understand that things are not quite so simple.


Russia really have such diversity in its regions that the situation
calls for a case-by-case approach? Intuitively, most people respond
to this question in the affirmative. Nevertheless, it is time to
make a simple analysis of the regions concerning their level and
pattern of development under free market conditions and exposure to
global competition.


States Within the State


We have
divided the Russian regions into three separate groups according to
their development levels: developed (Group A), moderately developed
(Group B), and less developed (Group C) (see Table). The
approximate cutoff levels of per capita Gross Regional Product
(GRP) (indicating price levels by region) in 2003 are as follows:
in Group A, the figure is 70,000 rubles or more; Group B, 50,000
rubles to 70,000 rubles; Group C, 45,000 rubles or less. At this
stage, the three groups comprise 27, 26, and 29 regions with the
population constituting roughly 50 percent, 30 percent, and 20
percent of the country’s total, respectively. 























As will be
shown below, the principal differences between the moderately and
less developed regions are not only and even not so much in the GRP
level as in the type of resources (own or subvention resources)
that are used to achieve a certain GRP or consumption


disparity between some Russian regions on key development
indicators (GRP, investment per capita) can be as great as 20 to 30
times – roughly the same as the gap between UN member countries
except for some extreme cases, which include the most developed
countries, sub-Saharan Africa, and the South and Southeast Asian
countries. The wide disparity of resources in countries sharing the
same continent, reflecting their uneven development, has re-emerged
within the boundaries of individual countries.


must find a way to harmonize its national interests and regional
specifics – for the third time since the onset of capitalist
development – for the purpose of common progress. Russia must
approach this challenging task with the maximum pragmatism
possible, as well as with an understanding of the depth and
specificity of the problems it faces.


in the Russian Empire developed for too short a period and amid
serious impediments and constraints. Therefore, it was unable to
resolve the problem of naturally adjusting labor productivity
levels across an entire continent. The Soviet era, which depended
on a high level of state planning, was marked by a robust
productive-force distribution policy based on low transport and
energy tariffs. The adjustment methods were far from effective and
only appeared practical and successful with an artificial system of
domestic (relative) prices that were greatly at odds with global


With the
onset of free market reform in Russia, the ineffectiveness of a
considerable part of industry emerged in the form of an uneven
structural crisis with irreversible consequences for a number of
sectors. Due to the effects of the crisis during the transition
period, the adaptation to new prices as planned adjustment
(especially in the investment sphere) was almost completely lost:
human resources were eventually concentrated in the wrong sectors
and wrong regions. Since the transition period began 15 years ago,
the different sectors of the planned economy had been downsized and
restored unevenly, thus the regions were also affected to differing
degrees. The global economic upturn that began in 2002, together
with the growth of export prices for a majority of raw materials,
gave many Russian regions new potential resources for development.
However, this scenario highlighted, at the same time, the uneven
distribution of those resources.


growth over the past five years has improved the situation in most
of the regions, but not as substantially as the political elite and
the public had expected in terms of modernization. Economic growth,
including the doubling of GDP, cannot be uniform across the
country. The less developed regions are to a large degree catching
up with the more developed regions not only because of their own
advancement, but also due to growing consumption through the
redistribution of resources from net-donor regions, that is, at
their expense.


Breakdown by Classes


economic policy sometimes naively combines the conflicting ideas of
even regional growth (the ruling authorities require that all
regions double their gross product in accordance with the plan) and
identified growth areas that are supposed to be the pacesetters of
economic development. However, before addressing growth areas and
the related problems, it is essential to take a closer look at the
configuration of resources available in Russia’s three main
regional groups. To this end, it is important to show that these
three groups have a very complex structure. First, it is important
to acknowledge that not every member of the Group A regions is
prosperous. By Russian standards, however, they constitute our
“developed world” which concentrates the main human and natural


Group A
includes, first, Moscow City and St. Petersburg with the
surrounding Moscow and Leningrad Regions that constitute two
distinct socio-economic organisms. Population patterns, the labor
market, and the transport and banking systems are unified in both
cases. The Russian Empire and the Soviet Union invested colossal
resources in developing the transport infrastructure of both
regions, concentrating a huge amount of human resources and
production facilities there (apart from private business). Both
regions have robust services industry, financial, education, and
strategic sectors.


The two
other (developed) subgroups of Group A depend on natural and human
resources, as well as their own production capacities. Most
importantly, these realms of activity depend on the export and raw
materials sector. This scenario came about because of free market
economic development in the midst of private ownership, free price
formation and the liberalization of foreign trade. The raw
materials producing regions gained control of a greater portion of
the revenues generated by the enterprises located on their
territory than under the State Planning Agency of the Soviet Union
(Gosplan). This group, however, features substantially weaker
manufacturing industries both in the civilian and defense related
machine-building sectors. Generally, the share of exports in this
subgroup varies between 30 percent and 50 percent of the entire
added value produced in a particular region, while oftentimes it is
a single product (such as oil and natural gas for the Khanty-Mansi
Autonomous District and Yamalo-Nenets Autonomous District) or a
combination of two or three export products, e.g. natural gas and
timber in the Komi Republic. In addition to the aforementioned the
Khanty-Mansi and Yamalo-Nenets Autonomous Districts and the Komi
Republic, this group includes Krasnoyarsk Territory with its
non-ferrous metals, the Republic of Sakha with its gold and diamond
resources, and Vologda, Lipetsk, and Belgorod regions with their
deposits of ferrous metals.


The third
subgroup has a more balanced structure of industry: it combines
export sectors (mainly raw materials and semi-finished products)
and sectors targeting the national and regional emerging markets,
as well as the defense industry. Although the export sector is also
important for them, it is not a single industry as in the case of
the previous subgroup. It is our belief that these territories
objectively comprise the country’s industrial (manufacturing) core,
capable of meeting the formidable challenge of adapting to global
competition, as was the case with the super-industrialized regions
of Europe and the United States. They can play the role of the
driving force of regional development in Russia, and their focus
must be on growth: these regions will emerge as growth centers in
their geographical areas, spreading their economic expansion to
neighboring regions.


Should the
industrial regions fail to adapt to the new competitive
environment, Russia could become dependent on agrarian and raw
material producing industries and regions. These industries would
have to support the capital cities and the military with revenues
from the export of raw materials. The industrial regions – not
Russia as such – may be forced to find their own way to a
post-industrial society. In other words, Russia may or may not be
able to integrate into a post-industrial society together with
these regions since the other regions have a much longer path to
traverse. These regions, of course, have tremendous human and
management potential necessary for their development; however, ways
need to be found to help them tap their inner resources and


Group B is
comprised of a relatively homogeneous mass of regions,
characterized by not only an average level of development and the
presence of several viable enterprises and educational
establishments, but also, principally, by the lack of a powerful
resource base that could lead them to international markets. In
general, these regions have lost a part of their population and
employment opportunities to Group A, yet they continue to
constitute an important base for the spread of new production
capacities to regions with available space and human resources, as
well as administrations ready to work hard to ensure the survival
of their regions in a new environment. Within this group, there are
marked differences between inland and coastal regions in the
country’s European, Siberian and Far Eastern parts, respectively.


entire history – from Greece to Ireland – shows that the coastal
regions in a free market economy should have higher development

Group C consists of less developed regions with their distinct
specifics, including the ethnic republics in Siberia and the North
Caucasus. It is vital to find effective ways of addressing the
specific problems of these regions for ensuring sustained growth,
as well as dealing with unemployment and an over-reliance on


region of the Russian Federation, of course, is interesting,
valuable and unique in its own way: such are the country’s
specifics. To understand these specifics better, the next two
sections will take a closer look at the subgroups (10 in all) and
the problems of regional development in a highly competitive
environment. We should try to formulate federal, as well as various
regional interests in a more forthright manner so that each region
has a chance, as well as its own path to the future.




regional differences are continental in scale. In terms of their
resource structure, we have the analogs of Portugal and the United
Arab Emirates among the Russian regions. An effective regional
policy in such a country should take into account the objectives of
all sides concerned, both at the center and on the periphery.


There are
at least three major players, each with several specific
objectives: the federal center, the regional elites, and
financial-industrial groups (private or


most countries in the world have fewer players and interests or, by
virtue of their historical development, less pronounced regional
differences. Russia, however, does not fit into any known pattern:
a multitude of contrasts plagued the Russian Empire (from nomads to
German burghers), while the Soviets tried to merge and level out
everything. These historical factors make the task facing modern
Russia even more challenging – to find a path of sustained
development for all of its components, each with very different
start-up positions. Adjustment is not so much about local per
capita consumption as it is about the development of human
resources, democratic institutions, private property and fair


The new
regional classification shows specifically what particular groups
of regions have in common. For example, it makes clear that both
the most and least developed regions follow similar paths in terms
of their GRP dynamics, while the moderately developed regions take
a more independent course. This leads to two conclusions: first,
the economically weaker regions have sufficient bargaining power to
grab their share of the country’s advancement via redistribution
mechanisms; second, the developed regions are also in a position to
keep the dynamics of this redistribution within their growth

observation points to two pronounced groups that have distinct
regional policy interests – net-donor and net-recipient regions.
Krasnoyarsk Governor Alexander Khloponin spoke about these
interests without mincing his words: “The net-donor regions know in
advance that the results of their efforts to ensure regional
economic development will be redistributed by the federal center
through the budget in favor of a backward neighbor via federal
transfers.” The federal center pursues an explicit policy of
adjusting regional development through budget adjustment.
Presumably, the federal center rationalizes this behavior and
thinks, “We follow a budget adjustment policy, and this is
adequate.” But is it?


federal center, with its political authority considerably augmented
in the past five years, has several regional development objectives
that it is compelled to pursue – consciously or maybe even
unconsciously. By far the most conspicuous is the maintenance of
socio-political stability in the country and the preservation of
its integrity by supporting the budgets of the less developed
regions. Incidentally, this kind of support between countries is
usually impossible where resources are transferred from one country
to another as small-scale direct assistance or via complicated
credit mechanisms.


The Failure of Adjustment Policy 


Here we
must note that the international financial institutions have for
decades engaged in something similar to ‘budget adjustment’ but
without particular success. Just recently, the G-8 finance
ministers, with the U.S. and the UK calling the shots, approved a
plan to forgive the total debt for the world’s 27 poorest
countries; this is especially remarkable since this forgiveness
included their debts to the IMF and the IBRD. There is no need for
such a mechanism, however, within an individual country: simply,
the effectiveness of resource redistribution should be measured not
in terms of consumption adjustment but in the degree to which
available resources are used for development purposes. With regard
to Russia, this move would look like “restructuring” (forgiveness)
of all budgetary loans to our “IMF+IBRD” – that is to say, the RF
Finance Ministry.


comparison is important because the RF Finance Ministry also
redistributes large amounts of money. Analysis shows exactly how
this happens (see Diagram 1). The exporting regions receive small
per capita transfers from the federal budget. Less developed
agrarian regions and Russia’s Far East receive quite considerable
amounts of money – up to 5,000 to 6,000 rubles per capita (as of
2003 – that is to say, before the 2005 ‘monetization’). This
accounts for up to 20 percent of apparent consumption in the least
developed regional groups, while the resources are redistributed
via the budget sector. 




























One of the
main clashes in the budget policy of recent years involves the
‘center vs. regions, net donors vs. net recipients.’ This is, in
effect, a clash between the exporters of resources and agrarian
regions, a conflict between accumulation and consumption. The
transfer of resources from the rich to the poor has two effects:
the recipient becomes accustomed to free handouts, while the donor
cannot invest them.


problem is international in scope. Thus, the EU budget has become a
controversial issue: donor countries (Germany, France, Great
Britain, The Netherlands, Sweden, and Austria) are ready to
redistribute 815 billion euros in favor of the less developed
members. The EC is asking for 1,022 billion euros in an effort to
provide financial assistance to the newly admitted EU members
without greatly reducing its assistance to the “old poor” regions
of Greece, Portugal, Spain, and Italy. The EU adjustment concept,
however, boils down to classic (‘anti-liberal’ in Russian
terminology) formulas: job creation programs in the less developed
regions, assistance in developing infrastructure, and, ultimately,
making Europe more competitive.


main problem is that its budget redistribution plan does not
address the federal center’s long-term strategic problems: economic
modernization, making the manufacturing and services industries
more competitive, and, ultimately, achieving higher growth rates.
Until now, leaders explained the absence of a coherent regional
policy with the logic that the best regional policy is for everyone
to develop within a unified, common space. Thus, the raw materials
exporters and industrialized regions automatically acquire the role
of donors. The federal center must have some covert revenue-sharing
agreement with the developed regions or otherwise impose its own
policy on them.


such an adjustment is a national policy objective, it is actually a
complex, long-term process of regulating development, and not
simply a budget adjustment.




speaking about nations, accumulation and saving rates are
interrelated and can be subject to statistical analysis. In the
case of the regions, however, the picture is rather blurred. On the
regional level, just as in a small UN member country, growth can be
predicated either on an external donor (the RF federal budget as
opposed to the World Bank for Africa) or on one or two major
projects. On the level of small, medium-sized and many large
companies, growth will be directly contingent on investment in this
particular region.


On the
other hand, if a region is a capital exporter, its rate of
reinvestment relative to its internal saving rate may be low (just
as in Russia as a whole). In this case, even a developed region
could in the future face the threat of stagnation. Therefore, the
objectives of the local leaders vary depending on the character of
their specific region. All would presumably want more freedom in
spending their resources, as well as more mechanisms for increasing
their development. Yet, depending on the scale of development, some
need to have freedom in decision-making to spend the resources
transferred to them, while others need it to make an effective use
of their own resources. Within the confines of this article, a
summarization of the principal objectives of different groups and
subgroups is as follows:


– the
capitals desire to be on par with the world’s leading capitals,
host Olympic Games, for example, and receive federal funds for
reconstruction programs – the rest would be paid for by rich
residents and newcomers;

– the
exporters of raw materials attempt to control the maximum share of
revenues generated by extracting companies, ensure normal living
standards in the region, deal with environmental and
infrastructural problems and, as a general rule, undertake
large-scale, cutting-edge projects;

– the
developed regions, naturally, dream about preserving their human
resources, finding a new application for them, and graduating from
“planned super-industrialization” to a post-industrial

– the
moderately developed regions hope to pull a lucky ticket, land a
major investment project (the principal attractions being their
available territories and workforce), and achieve a breakthrough;

– the less
developed regions hope to discover oil on their territory, thus
guaranteeing a new pool of resources for their development;

– the
coastal regions will have everything they need naturally arrive to
their doorstep: they only need to create a favorable institutional
environment for investors and harmonize local interests with the
interests of the federal center and financial-industrial


The Third Player: Financial-Industrial Groups


In the
Russian context, in addition to the federal center and the local
elites, there is a third player pursuing (this depends on the
characteristics of the region) various objectives – from
maintaining the inflow of redistributed resources to promoting
regional development. In small countries, this third party is a
foreign company. In the Russian regions, however, they are
financial-industrial groups (FIG), or, in the best-case scenario,
foreign companies. Unlike small and medium-sized businesses that
generally invest locally, FIGs pursue their own (oftentimes global
oriented) policy with regard to the centralization of financial
flow and regional investment. The most important thing is that
these groups are not obligated to reinvest their profits in Russia
or in the region of their origin. Their effectiveness hinges on
effective decision-making. The Russian regions, not much different
from nations for multinational companies, ensure the reproduction
of the work force and the stability of the production (usually
extraction) environment. The objective interest of the FIGs is
their maximum amount of freedom in the movement of capital – that
is to say, the freedom of investment nationwide as well as


During the
reform period, the regions were initially dominated by local
governments, until the financial-industrial groups (private or
state controlled) greatly strengthened their positions. Of course,
local elites in the more developed regions, which enjoyed several
economically developed sectors together with several FIGs, had
greater room to maneuver and greater bargaining power in dealing
with the powerful financial-industrial groups. The federal center
finally intervened in these relations, creating a complex and
dynamic balance between federal interests (national or departmental
interests, which is not always the same thing), FIG interests, and
the interests of regional development.


What is
critical for Russia’s future is how clearly the three major groups
of regional policy players view their interests, together with the
future of the regions and the country as a whole. Either they can
attempt to cut each other out, or they can move along together.
Russia is a complex and mysterious country: everything here is
arcane, especially in regional politics, so it requires resources,
common sense and lots of patience. 




Thus far,
modern Russia’s federal budget never guaranteed the country funding
for real development. Economics Minister Yevgeny Yasin apparently
made the last known attempts in the mid-1990s. The formation of an
investment fund in the 2006 budget, however, gives hope for
investment in modernization projects. Although the creation of
state investment mechanisms appears rather belated (15 years since
the start of the reform process and 5 years since the economic
upturn), the period of uncertainty and suspense seems to be over


In the
past few years, the federal authorities have been preoccupied with
restoring controllability (the vertical chain of command), creating
a unified legal space, and dealing with demographic and migration
problems (although no radical measures were taken). The creation of
a unified investment environment in the country contrasts with the
huge (and growing) gap in labor productivity and per capita GRP. In
the budgetary sphere, the innovations manifested themselves
particularly in the increased share of budget revenues
redistributed through the federal center and in favor of the
federal center. Therefore, up until now, there has not been, nor
could there have been, regional investment policy.


Where the Money Goes, and Why


private sector is the principal investor in Russia; the state has
fled this sphere. The bulk of investment (see Diagram 2) goes to
four groups of regions: capital cities, exporters, industrialized
regions, and coastal regions. In per-capita terms, the exporting
regions and capital cities are in the lead. Traditionally developed
industrial regions maintain a fairly high level of investment,
featuring the highest share of investment in equipment and
facilities (e.g., the Samara Region). These regions of the Urals,
the Volga, Siberia, and the central part of Russia have a
relatively well-developed and diversified production, transport,
and scientific infrastructure, which enable companies to invest in
modernization programs. Still, the rate of accumulation in these
regions is insufficient for a rapid breakthrough into a
post-industrial society, one indication being the small share of
foreign capital. Foreign investors, who are more stringent and more
effective, do not go into regions that lack political stability.
Low taxes and other breaks are not as important to foreign
investors as is stability and predictability of the investment
climate. This is graphically illustrated by the fact that the
regions with the highest share of foreign investment include both
the Krasnodar Territory and the Samara Region – regions with stable
institutions and administrations, but with very different political


Different Make-Ups


The task
of “strengthening the Federation” and “nation building” that
President Vladimir Putin put forward is a means of ensuring
economic development and boosting consumption, as well as the
ultimate objective of effectively running “a huge territory, unique
in its composition” (as quoted by the president’s 2005 state of the
nation address). Apart from political means and methods, history
shows that the most important role here is played by the regions’
own development. Every region should have the power to see its
future, its immediate development horizon, its chance to improve
the living standards. Above all, it should be able to accomplish
these tasks through its own efforts.


Russian Federation’s developed regions believe – and with good
reason – that they know their needs better than anyone else and are
in the best position to make an effective use of their resources.
The objective interest of the regions consists in expanding their
rights and powers. In particular, they want to retain a part of the
growing tax revenues for re-investment in development rather than
for automatic redistribution (the Chinese scenario). Net-recipient
regions, which do not always have definite prospects for their
accelerated development, are in a far more difficult situation. The
role of the federal center here is also much greater since the use
of transferred resources imposes a special responsibility and
presupposes oversight and control by the provider of these
resources, as may also be observed in international practice (cf.
IMF and IBRD loan conditions).


financial-industrial groups, which have the ability to calculate
their investment projects in minute detail, thus enabling them to
build on regional potential and regional differences, conduct their
own regional policy. The resources for pursuing a regional policy
on a nationwide level cannot be overestimated: it is critical to
identify the limits within which each of the three sides (the
federal center, the regional elites, and the FIGs) can make their
contribution to the development of the country’s regions and
republics. The federal center is objectively interested in the
maximum possible mobilization of local efforts both in formulating
development aims and negotiating with other sides on the different
ways of achieving these aims. International experience shows that
the key here is not so much controllability as interaction between
the three groups of objectives and instruments. After all, one can
only rely on something that offers resistance.


The newly
established Ministry of Regional Development is generating much
hope in the expectation that it will introduce a new regional
development concept. We support the view that is being actively
promoted by representatives of the developed regions: all regions
should be guaranteed a certain social standard, while the leaders
should be given an opportunity to make a breakthrough.


modernization in Russia is contingent on the initiative and
activism of the business community and the intelligentsia. It also
depends upon freedom of enterprise (not least freedom from “rent
seekers”), freedom of creativity, and strengthening property rights
to the products of innovation and investment activities. The uneven
distribution of human resources cannot be rectified by an executive
order. The developed regions, in the midst of a prolonged economic
upturn, will support elements of the federal program, such as the
lifting of barriers to the movement of work force, goods and
capital. The program also includes a change in the structure of




formulating a regional policy concept, it would be useful to take
into account the EU’s positive and negative experience in this
field. The advantages of the EU approaches are well known:
stage-by-stage integration, support for the poorer regions (not
countries), creation of a common legal space, dissemination and
consolidation of European institutions, and reliance on solidarity
in addressing regional problems with a limited scale of resource
redistribution. The essence of EU expansion consists not so much in
infrastructure grants as in expanding the markets and adjusting the
quality of free market institutions to a more advanced


disadvantages arose quite unexpectedly in the course of the
discussion and ratification of the EU Constitution, and these
included an excessive reliance on political and bureaucratic
solutions, as well as the abrupt change in the living conditions of
EU citizens in recent years. As a result, there existed a public
backlash against the reforms – which the politicians had placed
such high hope on – due to the lack of public debate on the


regard to Russia, there would need to be better preparation and
elaboration of reform programs (especially considering the
experience in the hasty monetization program).
The process
would demand more time and patience in persuading various groups,
together with more analysis and public discussion. The authorities
would have to take into account the interests of various social and
regional groups before they could conduct a regional policy in such
an unevenly developed country.


Reliance on Leaders


Russia’s regional development during its
relatively long period of economic growth has identified a number
of leading regions by the level of their advancement and the
quality of their economic, legal, and civic institutions. This
makes it possible, in searching for the driving forces of
development, not to adopt artificial schemes but to rely on the
“footpath principle” common to an English lawn: people walk along
the most convenient paths, which eventually become paved


Russia clearly needs to rely on a couple
dozen big and prosperous cities (agglomerations) capable of
developing rapidly in some key areas. These cities are located
especially near seas and oceans, and at communication hubs in
important border areas. It is equally important that they have a
business and political elite with a sense of local patriotism;
individuals who are not prepared to jump ship and move to Moscow at
any moment, while sending their offspring abroad with the bulk of
their capital.


Such cities could realistically form
Russia’s backbone for socio-political stability. Thus, with limited
resources, it is critical to look upon the federal center’s
regional policy as a means of eliminating bottlenecks in internal
development and promoting global competition. It is possible to
fund a number of large-scale projects jointly with the regional
authorities and private business companies through national bond
loans. Such a move would generate an energetic movement toward
reform after a 15-year hiatus.


As concerns regional integration, it is
important, wherever possible, to eliminate hierarchical divisions
and integrate natural neighbors. At the same time, however, each
regional merger should be seen as a complex business project with
all of the ensuing benefits and risks. The recent comment by
Regional Development Minister Vladimir Yakovlev about the formation
of approximately 60 regions is reassuring. Oftentimes there is a
need for new transport arteries since Russia did not (unlike
Germany or the United States) pass through a period of federal road
projects amid severe economic crises. It should be noted that many
federal infrastructure and cooperation programs with FIGs are
possible even without a formal merger.


It is essential to improve the quality
of administration and management, reinforce the law and property
rights, fight corruption and not let standards decline to the
average group levels. Regional policy in Russia is not so much
about money as the improvement of market institutions, the
development of business self-organization and the advancement of


Russia’s principal yardstick should be
the development and modernization of its leading regions – keys to
the country’s success in global competition.