Statehood: The Regional Dimension

21 november 2005

Leonid Grigoriev is 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.

Yulia Urozhaeva

Resume: Russia clearly needs to rely on a couple dozen big and prosperous cities 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.

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 policy.


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.


Does 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 level.


The 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.


Russia 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.


Capitalism 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 prices.


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.


Economic 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


Our 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 resources.


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 potentialities.


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.


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

Finally, 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 agriculture.


Every 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.




Russia’s 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 state-controlled).


Either 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 competition. 


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 dynamics.

This 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?


The 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.


This 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.


This 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.


Russia’s 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.


Although 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.




When 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 society;

– 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 groups.


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 worldwide.


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 now.


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


The 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 environments.


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.


The 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).


The 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.


Economic 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 property.


EU Lessons


In 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 level.


The 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 issues.


With 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 footpaths.


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 democracy.


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

Last updated 21 november 2005, 19:04

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