Federal Transfers in Russia: Their Impact on Regional Revenues and Incomes

Abstract

Since 1991, the Russian system of federal intergovernmental transfers has moved from equalizing to counter-equalizing, both in the case of regional revenue equalization and in the case of regional personal income equalization. This change happened despite increasing revenue and income differentials and despite an introduction of a special equalization fund in 1994. The counter-equalizing effect has been weaker in real terms than in nominal terms indicating that regional price differentials have impicitly been taken into account. The main reasons for increasing counter-equalization seem to be: (i) a relatively small share of transfers in the budget and GDP; (ii) flaws in the equalization formula resulting in the lack of sufficient focus on the poorest regions; and (iii) a non-transparent character of other transfers redistributing often to the most politically powerful regions. The major recommendations for the future are (i) to increase (dramatically) the transparency of expenditure assignment, and (ii) to keep the system simple.