REGIONAL PROTECTION IN RUSSIA: HARMFUL OR BENEFICIAL?

Evgenia Kolomak

Policy paper

Summary
The regional authorities in Russia acting on the request of the local business groups interfere with local market price mechanism. Almost all regional policy-makers in Russia base the policy on protection of domestic enterprises and on resistance to expansion of the external ones. Tools of the regional protection include tax exemptions, credits, subsidies, budget compensations and direct price control. The regional regulation contradicts to the federal macroeconomic policy and hinders market integration in Russia.
This paper gives a brief description of the situation in Russia, explains why the regional authorities in Russia intervene in local markets combining subsidizing and tax exemptions and proposes several steps towards resolving the problem.

Background
The transformation of the Russian political system in 1992 led to the establishment of the real federation. The sub-federal level of government in Russia has got a real political power. However the distribution of the responsibilities between the levels of the power was not optimal and sometimes interests of the federal authorities and the regional ones contradict. Protection of the local producers is one of the fields where interests of the country as a whole do not correspond to the regional policy. As federal budget subsidies decreased in Russia as regional authorities join more actively in supporting enterprises.

Current situation
Regional leaders do not restrict their interference to the public finance sphere and are inclined to the more active regulation of local economy everywhere in Russia. Fundamental idea of the micro-management at the regional level in Russia is providing more favorable conditions to the local producers and discrimination of the ones from other regions.
The regional authorities may use a wide legal of the protection instruments: from direct (price ceiling, making-up price, limitations on profitability, limitations on trade extra charge, declaration about change in price) to indirect methods (tax exemptions, credits, subsidies, budget compensations, tax payments overdue).
Documents adopted at the sub-federal level in Russia regulate prices and tariffs on a wide range of regional state and private production. It is also observed tendency toward increasing regional budget resources distributed for purposes of local producers subsidizing. Regional tax departments reported about high level of tax payments overdue and that the regional authorities are not insisting on the obtaining this part of regional budget income. However the protection policy is not homogenous among the regions, level of subsidizing, providing tax exemptions and direct price regulation differ essentially among the regions.

Views and concerns of the affected groups
One of the results of the regional regulation is disintegration of the internal market in Russia, what makes difficult to realize a macroeconomic policy in the country at the federal level. There are high thresholds for interregional trade even for neighboring regions, what can not be explained by transport costs. There are also observed diverged time series of price levels in the regions. For instance, in 1998 variation of regional living earnings was 30,9%, in 1997 the variation of indexes of consumer prices was 10%, indexes of electric power price – 18%, values of consumer basket – 47% and its share in population’s money income – 50%.
Very often the regional authorities explain the price control, subsidizing and granting tax exemptions to local producers by social imperatives: a possible decline in the local enterprises, growth of unemployment and social tensions in the region.
However several facts contradict to this thesis. A characteristic of the regional budgets is high level of overdue for salary and transfers to population (more 40%), the next item is overdue to infrastructure monopolies, supplying public utilities (28%). Hence, the biggest part of burden, resulted form regional policy is imposed on population.
Our estimations have shown that the regional protection is provided because of political pressure of lobbing groups representing interests of the local industrial sectors. The social factors are not in the focus of the policy-maker’s regards and are not significant when the authorities make decision about size of budget resources and tools of the local producers’ protection.
More efficient allocation of the budget resources is local infrastructure. Development of market institutional and physical infrastructure decreases transaction costs and stimulates competition. Under the conditions of economic growth, which Russia experience now, a policy of competition suppressing through the protection barriers is especially inefficient for a region and for country as a whole, because of restraining of market integrity of Russia.

Conclusions
When regional authorities have got a real power they became aim of activity of industrial interests groups. This process results in integration of interests of regional policy-makers and local business. Economic consequences of the interactions are implementation of the inefficient protection policy, disintegration of the internal market in Russia, barriers to the competition development.

Proposed actions
The political options that could improve the balance of the federal and regional interests in the field of the protection of the local producers are as follows:
•    discussion and adoption a legal document prohibiting discrimination between local and external producers;
•    discussion and adoption a legal document restricting level of subsidies, tax exemptions and guarantee provided from the regional budget resources;
•    discussion and adoption a legal document about an obligatory competitive elements in the distribution of subsidies and tax exemptions at the expenses of regional budgets;
•    to organize public discussions about scope of the regional interference into market;
•    to organize consultations and round table on the problem of subsidizing among scientists, policymakers of the federal and regional levels;
•    to raise accountability of the regional authorities to the population for the public financial resources;
•    to raise public awareness about regional programs and policy.

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