Russian Federation Country Study. A Public Finance Perspective (184136)

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RUSSIAN FEDERATION COUNTRY STUDY

A PUBLIC FINANCE PERSPECTIVE

Ryan Grace rgrace@indiana.edu
Dmitri Maslitchenko dmitri@mailroom.com
David Lamp dlamp@indinana.edu


Political Background

The separation of powers which existed under the Soviet constitution was essentially a myth. A Russian accurately characterized the relationships that existed between party, state and society as, ...The state absorbed the society, the Party absorbed the state, and the Party appartchiks, the nomenclature under the totalitarian leadership of the Secretary-General absorbed the Party." Both legislative and judicial branches served as rubber stamps" to the Presidium of the Supreme Soviet which unlike the Supreme Soviet itself was constantly in session. The development of political reform in the late 1980s weakened the party's control over the reigns of power. The devolution of power from the Presidium occurred through the creation of the office of the President which received the executive powers while the legislative powers were assigned to Congress of Peoples Deputies. The judicial branch also achieved higher visibility during the late Soviet period through the creation of the Committee on Constitutional Supervision. The Soviet Union's collapse in 1992 introduced radical changes into all aspects of Russian society. Russia has little experience with democracy in any form. Without a strong democratic tradition, it should not be unexpected that instability would develop in all aspects of Russian life. The role of governmental finance in post-Soviet society is no exception. Competing explanations exist for Russia's travails but a shared trait of many them is the distribution of power at the federal level and the relationship between the federal and sub-national levels of government.

Political problems did not take long to develop in the Russian Federation after the USSR's dissolution. At the federal level, the creation of the present constitution is one cause of the instability which plagues Russia today. After winning a national referendum on August 15, 1993 in which the electorate was asked to endorse the Yeltsin's reform policy, he convened a constitutional assembly to ratify his version of the new constitution. Three drafts were in contention to replace the constitution under which the Soviet Union was nominally ruled. Other than Yeltsin's constitution which became the one implemented, the two other variants were the communist draft which advocated a strong Presidium of the Supreme Soviet with a chairman who had similar powers to the position of General Secretary during the Soviet period and the Rumyanstev draft which contained plans to restrict executive power and grant the legislative body wide powers. Yeltsin's draft advocated the exact opposite of the aforementioned plans with wide powers to the executive and minimal power delegated to the legislative. After the Duma rejected Yeltsin's order to dissolve, he ordered military troops to forcefully evacuate the building--which they did by shelling it. Briefly, the president is the protector of the constitution, human rights, and civil liberty. In order to protect the constitution and the aforementioned rights, the constitution grants the president wide injunctive and declarative powers. The former powers consist of the president's ability to use "conciliation procedures to resolve disputes between the federal government and the governments of the constituent subjects and disputes between the various subjects of the federation." A three stage procedure exists for the adjudication of disputes but his ability to suspend legislation after it is submitted to the appropriate court" which he deems to be in violation of the constitution is considered by many as inappropriate for a fledgling democracy. The President also has the power to issue decrees and orders which are superior to the laws of the government as long as the decree or order does not violate the constitution. Further, the president has the ability to appoint important member of his government without consent for the Duma and has sole power to appoint and remove the command structure of the Armed Forces. In regards to the legislature, the president has the ability to dissolve the Duma if it passes two no-confidence vote in the Russian government within three months of each other and if it rejects three presidential nominee for Chairman of the Russian government. Although there are limitations of the president's ability to dissolve the Duma, it remains a potential weapon against a contentious parliament that affects every aspect of public finance.

The power of the legislative and judicial branch are limited in relation to the executive. Russia's judicial system consists of a several court systems that have different spheres of federal/national jurisdiction." The most visible court is the Constitutional Court which has the right to review the constitutionally of all federal laws, presidential orders and degrees, legislation of government, and unratified treaties. Challenges to the aforementioned areas must be brought by individuals with standing. Although the Constitutional Court's power seems vast, the president's expansive powers and lack of civil relations between the different branches makes the Court's utilization of this power suspect. Federal law and federal constitution laws are the two types of laws which exist in the Russian Federation. The latter is considered superior to federal laws. The procedure for enactment differ in each case. Once a bill is passed it must presented to the president within five days of the passage by the parliament. The president then has fourteen days to reject the law. In order to veto the federal law, a two-thirds majority must be gained in both parts of the legislative assembly. In the case of federal constitutional law, three quarters of the Federation Council and two thirds of the Duma must approve it for enactment. The constitution does not describe any right for the president to veto federal constitutional laws. According to Article 106 of the Russian Constitution, laws in regard to the following area must be voted upon by the Federation Council: The federal budget, federal taxes and levies, foreign currencies, custom regulation, and currency issuance.

Budgeting

Recently, the Duma rejected the government's first draft of the budget. Deputies were divided over the size of the projected federal budget deficit, which was set at 95.4 trillion rubles or 3.5 percent of GNP. When the budget is rejected by the Duma, the government has 20 days to revise and re-submit the budget. If differences exist between the government's proposed budget and the Duma's, an option exists to create a committee to reconcile their disagreements. The Duma rejected the government's proposed 1997 budget in October 1996 and did not opt initially for such a commission. If no budget agreement is reached, parliament would be forced to pass monthly or quarterly budgets which would cause confusion throughout the economy. Since the initial rejection however, a reconciliation commission (in which both houses of parliament and the government are represented), has been working on a new version. The reconciliation commission is due to have a final meeting on Wednesday, with the Duma giving the budget a new first reading on November 20 or 21. There is no legal framework to cover the failure to pass the budget, but parliament has faced the problem every year of Russia's independence except 1996 and has in the past approved temporary budgets.

The work of the reconciliation commission is being drawn out because neither the communist majority in parliament nor the government wants to take responsibility for making a decision on the budget. Russia is trying to keep to a small deficit in 1997 under pressure from the International Monetary Fund, but the Duma is eager to increase budget spending to a starved economy. Reform minded deputies want a lower budget deficit to achieve lower credit rates--which they say are vital for economic growth but which are kept high through heavy government borrowing. The dilemma is that the communists in the parliament want to increase spending and as a majority they can block implementation of any budget bill.

Taxation

Russia's tax system is an exercise in frustration for both Russians and foreigners. The problem arises because it seems that many taxes spring out of the blue and carry heavy retroactive penalties" which are often three times the tax amount due. Russian tax reform is difficult now because the government desperately needs money and has little room to maneuver since revenues are static and low. The budget take, both federal and regional, came in at just 27.3 percent of GDP, compared to 50 percent in the Czech Republic and 47.7% in Poland Russia's budget deficit has been narrowed in recent years, but this only been achieved by cutting back on expenditures in real terms, almost 50 percent from 1993 to 1995.

Like the United States, Russia has a three-tiered system of taxation. Federal taxes are enforced by Parliament, regional taxes enforced by the regional councils, and local taxes enforced by the local authorities. Under the existing system, very little coordination can be found between the three levels of government which causes serious tax policy problems. In a 1993 decree, regional and local authorities were given the power to decide on types and sizes of taxes for their jurisdictions. The hope was that authorities at each level, being responsible to its citizens, would act within reasonable limits. Local authorities, seeing a way to increase revenue, devised more complicated and exotic taxes. There are 150 locally imposed taxes within the Federation . They were competing who would invent the more interesting taxes at their respective levels--for example a tax on grazing cattle.

Tax Code






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