NEW LOCAL SELF-GOVERNMENT REFORM IN RUSSIA:
A STEP TO DECENTRALIZATION OR CONSOLIDATION OF VERTICAL
AUTHORITY?
Turgel I.D.
Vice Rector for Research
Urals Academy of Public Administration
Ekaterinburg
Russia
Since 2006 in most of Federation subjects local government has been acting on the basis of new principles of
territory organisation and financial and economic governance. The key objective of the paper is to analyze the
accordance of declared and real objectives of the municipal reform: whether it has provided real economic
independence of local government and its protection from voluntarism decisions taken at the level of Federation
subjects. Basing on the comparative analyze of fiscal decentralization indicators the author make conclusions on
how these officially declared aims have been realised and formulated main results of the reform. Formally the
significant financial stabilization of local self-government has been observed. But real economic and financial
autonomy of municipalities has been constrained sharply. For examples, the list of local taxes has been
shortened, now having only personal assets tax and land tax. Thus, on the one hand forming of territorial
organisation of local government on settlement principle leads to having a big number of small, low-integrated
municipalities. On the other hand, as a rule, the policy of Federation subjects is aimed at preserving economic
and political dependence of local government. In this situation, in short-term period, the activities of local
authorities should be aimed at the overcoming of negative consequences connected with the forming of huge
numbers of small and financially dependant settlements. One of the solutions of this problem could be activation
of integration and intermunicipal cooperation. But in the long-term period, the sustainable political and
economic development of Russian municipalities will be provided only on the base of the true economic
autonomy and real political independence.
The beginning of the 1990s was the period when there were launched important actions
aimed at development of Russian local government. In 1995 the Federal Law, establishing
general principles of local self-government in Russia was adopted. In the majority of
Federation subjects direct general elections of mayors took place. The municipal financial
system and system of local taxes began to form. In 1998 Russia signed European Charter of
Local Self-Government. But municipal reform of the 90s was not a completed and well
thought-out project. There were few reasons explaining that situation.
Firstly, the formation of local self-government coincided with the deepest economic
recession and budget crisis. As a result of it the tempo of the financial base formation
seriously lagged behind the tempo of the municipal political system formation.
Secondly, as consequence of the government system demolishing, significant part of
federal recourses and political powers went to the level of federation subjects. Regional
government bodies either executed or did not execute Federal Laws at their will. But Federal
Centre had no sufficient recourses for controlling the regional authorities.
Thirdly, municipal reform was not the main political priority at that time. Federal
authorities were forced to solve crucial current problems and could not concentrate on
strategic aims.
Regionalization of Local Self-Government Reform generated wide diversity of
municipal policy in different regions. In some regions local bodies were organized only on
the level of rural settlements (for example, in Tatarstan). We could observe successful
development of local autonomy if at the same time few conditions combined. The first one
was appearing of active local reform actors (power mayors or local council). The second
condition was the agreement between regional and local authorities concerning the place and
functions of local self-government in a concrete region. The third one was the formation of
effective institutes regulating self-governments activity at the regional level. But often local
self-government authorities were under the rigid control of the regional government. Also the
political autonomy of local self-government was not supplemented by financial and economic
autonomy. As a result most part of municipalities formed deficit budget. For example in 2003
there were deficit aggregated local budgets in 74 Federation Subjects.
The high budget provision could have only two types of municipalities. The first type
was capitals of Federation Subjects with high economic potential and tax base. The second
type was towns with successful town-forming enterprises, mostly specializing in exporting
raw materials. But in the last case the high budget provision did not mean the real economic
autonomy. The municipal policy was controlled by owners of town-forming enterprises
directly.
So we could conclude that in the most part of Russian regions the municipal reform
was a very formal process. Municipalities could not represent local interests without clear
regulation of interactions between federal, regional and local authorities and without precise
definition of local self-government powers.
But in 2000 social and economic situation in Russia began to change. The economic
recession transformed into economic growth. The Federal Centre began to regain the control
over regional authorities. The reestablishment of political control was supplemented by the
serious centralization of financial resources. The share of federal budget revenues in
aggregated state budget increased from 40% in 1998 to 66% in 2006. The significance of
open public struggle and political discussions declined sharply.
As consequence of that change of political priorities in 2003 there was established a
new Federal Law “On General Principles of Local Self-Government”. The main point of that
new law became bureaucratic rationalization. The transformation period lasted from 2003 till
2006. Since 2006 in most of Federation subjects local government has been acting on the
basis of new principles of territory organisation and financial and economic governance.
What is the essence of main changes?
Russia has moved to a two-level model of local government organisation. The
structure and organization of Russian government after Local Government Reform is
presented in fig.1 As you can see now the municipal levels consists of two sublevels. The first
is the city and municipal levels and the second is urban and rural settlements.
Federal Government
Federation Subjects
Municipalities
City Districts
Municipal Districts
Urban
Settlements
Rural
Settlements
Figure 1. Structure and Organization of Russian Government after Local Government
Reform in 2003
As a result of transition to a two-level model of local government organisation (the
first level is municipal districts and city districts; the second level is urban and rural
settlements), the number of municipal entities in Russia have increased more than twice.
In
2006 the number of municipal entities accounted for 24 372, whereas in 2005 it was 11 733.
Changes of principles of territory organisation have produced changes in structure and
organization of budget system. The structure and organization of Russian budget system after
Local Government Reform is presented in fig. 2. Now each new municipality has their own
budget. As a result the structure of budget system has become seriously complicated.
Expanded Government Budget
Federal Budget
Budgets of
Federation
Subjects
Budgets of City
Districts
Aggregated RF
Budget
Budgets of State
Social Funds
Aggregated
Budgets
of Federation
Subjects
Budgets of State
Federation
Subjects
Social Funds
Aggregated
Budgets of
Municipalities
Aggregated
Budgets
of Municipal
Districts
Budgets of
Municipal
Districts
Budgets of
Urban
Settlements
Budgets of
Rural
Settlements
Figure 2. Structure and Organization of Russian Budget System after Local
Government Reform in 2003
Also financial recourses for municipality development have changed too (figure 3).
Federal and regional transfers have begun to fulfill the main role among local financial
recourses.
Federal and Regional Transfers
Shares of Federal
and Regional
Taxes, Fixed for
Local Budgets
Federal and Regional Target
Programs
Loans Lent by
Regional
Authorities
MUNICIPALITIES
Local Taxes
and Fees
Recourses
of Citizens
Voluntary
RatePaying
Revenues
from
Municipal
Property
Use
Municipal
Securities
Emissions
Loans Taken
By Local
Authorities on
Free Financial
Market
Figure 3. Financial Recourses for Russian Municipalities Development
Shares of federal and regional taxes have been fixed for local budgets on a permanent
base (in practice for three years). The new order of tax revenue formation has been very
important for improving of budget planning. Earlier shares of federal and regional taxes were
fixed for local budgets but could change every year. Also the list of financial recourses has
been enlarged by addition of citizen’s voluntary rate-paying.
The system of financial transfers has been subjected most serious changes. Now the
federation subject has organized complete system of funds providing financial support for
municipalities. Main types of regional funds providing financial support for municipalities are
presented in table 1. Before adopting new Law, the rules of regional transfers system
formation were determined by subject Federation authorities independently from Federal
Government.
Table 1. Main Types of Funds Providing Financial Support For Municipalities
Funds
Source of Recourses
Types of Grants
Aim
Revenues of
General grant
Leveling of Local
Fund of Financial
Federation Subjects
(donation)
Government
Support for
and
Settlements
Financial
Settlements
Opportunities
Revenues of
General grant
Leveling of City and
Fund of Financial
Federation Subjects,
(donation)
Municipal Districts
Support for City
City and Municipal
Financial
and Municipal
Districts
Opportunities
Districts
Subvention from
subvention
Financing of State
Compensation
Federal Compensation
Powers Delegated to
Fund
Fund, own Federation
the Local Level
Subjects Revenues
Federation Subjects
subsidy
Financing of
Municipal
Revenues
Municipal
Development Fund
Infrastructure
Investment
Programmes
Federation Subjects
subsidy
Financing of Priority
Fund of Social
Revenues
Municipal Social
Expenditures Joint
Expenditures
Financing
One of the key issues being currently discussed by experts and local community is the
accordance of declared and real objectives of the municipal reform: whether it has provided
real economic independence of local government and its protection from voluntarism
decisions taken at the level of Federation subjects. And today we can make conclusions on
how these officially declared objectives have been realised. Analyzing the first results of
municipal reform we can emphasize few main points.
Formally we can observe the significant financial stabilization of local self-government.
Local Budget Revenues without subvention from Federal and Regional Compensation Fund
in 2006 reached 1 084.1 billion rubles, and increased comparing with 2005 by 215.8 billion
rubles. The surplus of aggregated local budgets reached 10.2 billion rubles, although
the
execution of aggregated local budgets was planed by Federal Government with deficit in sum
57.4 billion rubles. In 2006 we could observe the growth of share of local budget revenues in
Russia’ GDP (table 2).
Table 2. Share of Local Budget Revenues in Russia’s GDP (2000-2006), billion rubles
Year
GDP
Local Budget Revenues As a Percentage of GDP
7 302
480.6
6.6
2000
9 041
588.5
6.5
2001
10 863
710.6
6.5
2002
13 304.7
835.4
6.3
2003
16 856.5
1 048.0
6.2
2004
21 930.2
1 152.8
5.3
2005
26 882.9
1 521.6
5,7
2006
Source: Monitoring of Local Finance. Finance Ministry of Russian Federation.
http://www1.minfin.ru/ru/reforms/local_government/monitoring/. Russian Statistical Year-Book. 2007. Federal
Agency of Government Statistics. http://www.gks.ru/bgd/regl/B07_13/Main.htm
But real economic and financial autonomy of municipalities has been constrained
sharply.
1.
In the revenues structure of local budgets the share of transfers from the budgets of
RF subjects has grown substantially whereas local taxes are being cut.
Table 3. Structure of Local Budget Revenues, %
Tax Revenues
Non-Tax Revenues
Interbudget Transfers
Compensation Fund
Other Revenues
Source: Monitoring of Local Finance. Finance
http://www1.minfin.ru/ru/reforms/local_government/monitoring/.
2006
30.7
9.0
29.3
28.8
2.3
Ministry
of
Russian
Federation.
The general grants have prevailed in structure of interbudget transfers. The general
grants have formed 57.4%, subsidies - 27.9%, other transfers - 14.7% from the total sum of
interbudget transfers without Compensation Fund. But general grants are grants which have
no stimulation effects on local development. This form of transfers can only level current
budget provision but can not produce stimulus for economic self-development.
2. The list of local taxes has been shortened, now having only personal assets tax and
land tax. The share of local taxes in total taxes revenues of aggregated local budgets has been
only 10% (table 4).
Table 4. Structure of Local Budget Tax Revenues, %
Local Taxes
Individual Income Tax
Tax on Aggregated Income
(Small Business Income Tax)
Other Taxes and Fees
Source: Monitoring of Local Finance. Finance
http://www1.minfin.ru/ru/reforms/local_government/monitoring/.
2006
10.0
61.4
11.7
17.0
Ministry
of
Russian
Federation.
3. There has been very high diversity in the level of the budget provision among
different types of municipalities. City districts have been municipalities with the highest
financial provision. The share of city districts where general grant has formed more than half
of local budget revenues has been only 8.7%. The share of municipal districts with the same
level of general grants in local budget revenues has been 27.9%, the share of urban settlement
– 28.3%. We can observe the hardest financial situation in rural settlements. The share of
rural settlements with the highest level of dependence from regional transfers has reached
56.9% (table 5).
Table 5. Share of General Grant in Local Budget Revenues, 2006
Share of
Types of Municipalities,%
General Grant
Municipal
City district
Urban
in Local Budget
district
settlement
Revenues,%
Under 5
10.6
21.6
12.0
From 5 to 10
4.1
12.7
10.0
From 10 to 20
13.9
25.9
13.7
From 20 to 50
43.4
31.1
36.0
From 50 to 100
27.9
8.7
28.3
Source: Monitoring of Local Finance. Finance
http://www1.minfin.ru/ru/reforms/local_government/monitoring/.
Ministry
of
Rural
settlement
13.1
4.8
5.0
20.2
56.9
Russian
Federation.
4. City districts have concentrated the main part of tax revenues. So settlements which
formed the first level of new territorial organization of local self-government have been the
lowest grade of real budget autonomy compared with large municipalities, representing the
second level of the territorial organization (table 6).
Table 6. Local Budget Revenues of Municipalities Different Types, 2006
Types of Municipalities,%
Municipal district
City district
Settlements
Tax Revenues
25.13
37.14
22.7
Non-Tax Revenues
10.56
12.65
5.12
Total Tax and Non30.26
49.79
33.26
Tax Revenues
Interbudget
33.16
22.80
50.67
Transfers (without
Compensation
Fund)
Compensation Fund
34.71
24.57
14.72
Other Revenues
1.88
2.84
1.35
Total
100
100
100
Source: Monitoring of Local Finance. Finance
http://www1.minfin.ru/ru/reforms/local_government/monitoring/.
Ministry
of
Russian
Federation.
5. Also we can note the limitations in the use of local real estate and providing of local
public service. The competition between regional and local authorities has become tougher
due to division of land and other immovables. Municipal bodies are limited in providing
public service because some parts of important powers in education, medical care, social
security have been transferred to the level of the Federation subject.
Thus, on the one hand forming of territorial organisation of local government on
settlement principle leads to having a big number of small, low-integrated municipalities. On
the other hand, as a rule, the policy of Federation subjects is not aimed at stimulating
economic and political independence of local government.
As you can see, the first results of local self-government reform realization were not
very optimistic. But at this moment we can analyze first official data presenting trends of
2007. These data have permitted us to hope that the most difficult reform period has been
overcome and we can observe the first positive trends. The most important positive trends of
2007 are the rise of local budget revenues, providing economic independence of
municipalities, such as local taxes and subsidies. Also we have noted the formation of
organisation conditions for enlarging of local self-government financial base, that statistic
information about tax base collected by Federal Tax Office for municipalities includes 21
taxes (in 2006 – only 5 taxes). In 2007 Federal Law “On State Immovable Cadastre” was
adopted. This Law provides the enlarging of a base of the local immovable taxes. Federation
Subjects have begun more actively to assign the additional share of some regional taxes for
local level and to form Municipal Development Funds. But of course these organisation
conditions should have been formed not in 2007, but before the beginning of the reform. The
low attention to the forming of new effective institutions is one of the main mistakes on the
first stage of local self-government reform.
So we have summarized the first results of local self-government reform, but what are the
main tasks for the next stage? At the present moment the main threat for local selfgovernment reform is the increasing of the economic opportunities gap between huge
numbers of small municipalities at settlement level and large city and municipal districts. In
this situation the activities of authorities in short-term period should be aimed at the
overcoming of negative consequences connected with the forming of such numbers of new
financially dependant settlements. One of the solutions of this problem could be activation of
integration and intermunicipal cooperation. Turning to foreign experience shows that in
Western Europe there is a steady trend of forming highly-integrated municipal systems. Thus
in Western Europe the share of municipalities with population of less than 1000 residents
amounts to no more than 5% of their total number. The situation is similar in Lithuania,
Estonia, Slovenia and Poland, where at the very beginning of the reforms they followed the
way of setting up integrated systems of local government when municipalities are directed
towards involving bigger part of population without taking into account the geographical
borders of the settlement.
There might be the following forms of integration interaction:
•
activation of interaction between primary territorial-governing entities and stimulating
of horizontal integration;
•
creating intermediary levels of territorial governance between municipalities and
Federation subjects, coordinating the activities of municipalities in specific economic
and social projects;
•
reviewing distribution of powers between different levels of authorities and enhancing
the efficiency of interbudget relations on the basis of applying tools that stimulate selfdevelopment of municipal entities.
The tasks of further research are to develop the model of integration interaction that
takes into account the Russian specific character of local government and that is capable of
modification considering the conditions of a concrete Federation subject.
But in the long-term period, we are sure, that sustainable political and economic
development of Russian municipalities will be provided only on the base of the true economic
autonomy, clear distribution of rights and powers between federal, regional and municipal
bodies, and real political independence of local self-government, representing interests of
local community.
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