Fiscal federalism in the Russian Federation and its Asian regions

Abstract

The Asian regions of the Russian federation play a disproportionately important role in the economy of the country. While only about one-quarter of Russia’s population lives in Asia, they produce almost 30% of the country’s gross domestic product (GDP). This chapter describes the intergovernmental fiscal framework in Russia and examines its effects on regional fiscal incentives, economic growth, and inequality, focusing on the Asian regions. The analysis suggests that fiscal incentives, both in the Asian regions and the rest of Russia, generated by the tax assignment policy and transfers from the federal budget are relatively weak. However, explicit fiscal rules aimed mostly at fiscally weak regions enhance fiscal incentives. Although federal transfers do not seem to impede economic growth of the Asian regions, overall transfer dependence and particularly balancing transfers are associated with lower regional growth in the European part of Russia. Transfers do reduce inter-regional inequality with respect to budgetary revenues and expenditures, but the effect is smaller for equalization transfers. The balancing transfers reduce inequality the least and sometimes even increase it. This is true both for the Asian regions and for the country as a whole. Overall inter-regional revenue inequality with and without transfers decreased in 2005-2007, stabilized in 2007-2013, and increased significantly through 2015.