Back to the USSR

Russia or the Russian Federation, as the name implies, is a federal country where regional governments are supposed to have considerable independence and take responsibility for local economies. This is how it should be. The biggest country in the world spanning 11 time zones cannot be managed from a single centre.

The main financial documents, the budget and the data on tax collection, however, suggest that this is not the case and it is unlikely to be so in the foreseeable future.

According to the Federal Tax Service, in 2009 total tax revenues fell by a quarter. The contraction itself in times of crisis is not surprising or dramatic. What is worrying is the shift in the relative contribution of each source into the country’s pocket.

The inflow from income tax has dropped by more than half. Earnings from taxes on natural resources have also plunged by fifty per cent. By contrast, revenues from indirect taxes, primarily VAT and excise, have grown. The collection of taxes on the payroll has already risen and is due to increase even more in 2010.

Russia has always been dependant on consumption taxes, but now it lives on them almost entirely. It makes the economy less entrepreneurial, the country centralised, and local governments sluggish and irresponsible.

In the federal budget adopted yesterday by the Russian Parliament the two largest items of expenditure - together they constitute nearly a quarter of all federal spending - are transfers to regions and subsidies to the economy.

In plain language, the federal centre collects taxes, first of all on consumption, and then redistributes the revenues among regions and individual enterprises. Russia is becoming a country with a centralised economy.



November 26, 2009