"There is no alternative to decentralization"
Andrey Yakovlev on the real federalization of the Russian economy
Tatiana Rybakova
We continue our series of interviews with participants of the project “Normalization Platform: Returning the Future,” dedicated to the measures that will need to be taken in post-Putin Russia (all materials of the project will be collected in bookToday, "NotMoscow Speaking" spoke with economist Andrei Yakovlev, a visiting researcher at the Free University of Berlin and the author of the economic section of the project, about what needs to be done with regional elites and how to restore normalcy to regional economies.
Who will the governors betray?
In your articles for the project on normalization in post-Putin Russia, you talked about how How the economy became complicit in war, What did the war do to the economy? и What should a transitional economy be like?However, unfortunately, I didn't find a sufficiently detailed description of what needs to be done at the regional level. Meanwhile, many note that systemic reforms must proceed from the bottom up. Let's fill this gap. My first question is: what should be done in post-Putin Russia with governors and other regional elites, many of whom are Kremlin appointees?
"Indeed, there has been a long-standing process of installing "outsiders" in the regions, who are supposed to be controlled by the Kremlin, not local elites. But these outsiders are also different. For example, the recently dismissed governor of the Belgorod region." Vyacheslav Gladkov - they put him there instead Evgeniya Savchenko, which had taken root in the region, was quite popular among the people. And despite finding himself in such a difficult situation, facing first the COVID epidemic and then the war, Gladkov nevertheless acted quite actively and gained some popularity.
Therefore, I wouldn't talk about whether specific individuals are "outsiders" or locals, but about the real political ambitions of specific people, even those appointed at the behest of Sergei Kiriyenko or Putin. If these people, once in a specific region, were able to start doing something and achieve something, then they can become serious political players. Like, for example, Alexey Gordeev, who arrived in the Voronezh region as a complete outsider, but nevertheless did quite a lot for the region. And when he left, he was truly quite popular.
So, do you believe that effective governors, in a situation of change, will side with the regions they lead, and not with the Presidential Administration that appointed them?
"What I'm getting at is that, in any case, I see no alternative to decentralizing power. Everyone is tired of the over-centralization of Putin's "vertical" power structure; it's causing a lot of stress. In reality, this centralization is based on resources distributed from the center. But these resources don't just appear out of thin air. One source, of course, is oil rents, but another, no less important, is the highly centralized nature of tax collection. By taking almost all resources from the regions, the center is able to distribute the collected revenues to the regions, while simultaneously imposing its own conditions on them: those same KPIs, primarily socio-political ones."
The problem is that resources are becoming increasingly scarce. And if we're talking about regime change, it will likely occur against a backdrop of much greater economic problems, when the situation will be somewhat reminiscent of the 1990s. And then, most likely, the most the center can really give the regions is a greater degree of autonomy and independence. Remember Yeltsin's dictum: "Take as much sovereignty as you can"? But it's important to understand that in the early 1990s, against the backdrop of the collapse of the USSR, there was a certain renewal of the federal elite, and the new Russian government included quite a few new people. Meanwhile, in the regions, the leaders were, in most cases, former chairmen of regional executive committees or second secretaries of regional CPSU committees. Moreover, the Soviet system was much more nomenklatura-based than the current one; no one, to put it mildly, expected the emergence of new politicians at the federal level—and yet it was precisely from this system that both Gorbachev and Yeltsin emerged. And when, against the backdrop of the collapse of the Union, the transformation of the Russian political system began, new players from the old party elite appeared at the regional level - like Mintimer Shaimiev, Eduard Rossel, who were generally sane. Of course, there were some like Evgeniy Nazdratenko In Vladivostok, a local, but essentially a gangster, this also happened. And, unfortunately, it will likely happen again. Therefore, I wouldn't judge the situation by the "outsider" or "local" principle. In any case, in my opinion, there is no alternative to decentralization, and with decentralization, new players may emerge from the regional level that we simply don't know about right now.
No taxes without representation
How can taxes and responsibilities be redistributed between the center, regions, and municipalities? Is it possible to introduce local taxes? And how can equal social guarantees be maintained throughout the country?
This is a complex issue, and it needs to be discussed with figures and with people who are much more knowledgeable about this topic. We have had discussions with colleagues on this topic, but these were more strategic and constitutional in nature. We proceeded from the premise that we need to talk about restoring democracy through the restoration of federalism. And this should begin not even at the regional level, but at the municipal level, which needs to regain real powers. Because today they formally have obligations, but the current structure, created, in my opinion, quite deliberately, is such that municipalities do not have their own resources to fulfill their assigned responsibilities. They are forced to ask their governors for resources. In turn, most regions, with the exception of Moscow and perhaps a few rich oil-producing regions like the Tyumen region, are in the same situation – they are forced to ask the federal government for resources. From my contacts before 2022, I know that many vice-governors spent a significant portion of their working time begging federal agencies in Moscow for resources for their regions. And I don’t think that anything has changed here during the war.
Regarding regional inequality, certain standards for providing basic social services—education, healthcare, social security—are necessary. Yes, there should probably be a federal mandate in this area, which should be funded through taxes, primarily generated by natural resource rents. But I personally believe it's important that even in this case, a co-financing system is needed. A wealthy region like Moscow can finance all of this independently, while poorer regions will receive a federal transfer, but not entirely—it's important that they contribute at least something. At the same time, there should certainly be differences across different areas. For example, when we talk about healthcare: with regard to the basic network of medical institutions (emergency medical care, local clinics), the authority and resources should rest with the regions, as municipalities (especially small ones) won't be able to support all of this at the required level. But regional authorities' decisions in this area must be accountable to the municipalities and citizens. In recent years, some reforms have been implemented in this area, but they were implemented exclusively in a centralized manner, with resources and authority concentrated at the highest level, without any accountability to lower levels. Along with a regional core network, the healthcare system should also have federal competence in areas related to oncology, rare and severe diseases, which require expensive equipment, medications, and specialized specialists. These functions should remain with the federal center.
What about education, a unified educational standard? What about pensioners, who still receive varying amounts of regional supplements?
— Speaking of education, secondary schools should certainly be the responsibility of the regions and municipalities. In my opinion, autonomy here could be much broader, and the emphasis here should be on the municipal level rather than the regional one. Of course, we need a federal standard that guarantees children receive basic knowledge, and resources for these purposes should be allocated depending on the level of regional development. But key decisions about the use of these resources (including personnel decisions on the appointment of school principals) should be made at the municipal level. At the same time, municipalities should have a fairly high degree of autonomy in choosing educational programs, taking into account local conditions, the interests of minorities, and other factors.
Pensioners: there should definitely be a full federal mandate for pension provision, but again, with an understanding of how much money the center has available for this.
In other words, the obligations of municipalities and regions must be balanced overall, with the goal of providing them with the capacity and resources to fulfill their obligations (so that they don't have to constantly run to higher levels and beg for resources, as is the case now). However, since inequality across regions exists and will inevitably persist, a redistribution from rich to poor regions will be necessary to maintain uniform social standards. Such a redistribution carries the risk of consumer sentiment—when poor regions begin to live off the rich. Under these conditions, it's important that regions and municipalities simultaneously have incentives for development and for increasing their own revenues. To achieve this, municipalities must transfer to themselves those taxes that are dependent on the municipality—primarily, personal income tax and corporate profit tax. These taxes are already formally retained, but at the regional level, whereas they should remain primarily at the municipal level. Furthermore, the difference between the old and current profit tax rates is currently being absorbed by the federal center.
Should the tax hike itself be reversed? It's hit businesses hard, especially small ones.
My colleagues and I had a discussion about whether the recent tax hike should be reversed. In my opinion, what's absolutely necessary is a return to the old tax regime for small businesses. This whole VAT revenue threshold reduction thing generated marginal revenue for the budget, but it had a literally devastating impact on small businesses. Regarding the corporate income tax: as far as I remember, previously—at a rate of 20%—almost all of it went to the regions, with only 2% going to the federal government. Since last year, the federal government has received 7% of the increased 25% rate. Municipalities receive nothing from this tax at all. In my opinion, a redistribution in favor of the municipalities is needed.
At the same time, absolute tax reductions (with a return to VAT from 22% to 20% and corporate income tax from 25% to 20%) are unlikely to be possible in the near future, as the economy will likely be significantly worse off by the time of regime change than it is now. And in the post-Putin transition period, it will hardly be possible to implement radical tax reform. However, a shift toward municipal interests and decentralization of tax collection, especially those that genuinely depend on the actions or inactions of a municipality or region, is, in my opinion, necessary. This primarily concerns the redistribution of corporate income tax and personal income tax revenues.
Another important point: this is the transfer of personal income tax not to the location of the employer (as is currently the case), but to the budget of the municipality where the employee—the taxpayer—lives. This is the practice worldwide, but objections to the transition to this practice in Russia have been regularly raised. The main arguments are that this would require all citizens to file tax returns, which would be labor-intensive and difficult to administer. However, with the current level of digitalization, when the tax service has complete information about the taxpayer, including their home address, there is no problem transferring personal income tax collected by the employer to the budget of the municipality where the employee is registered.
You know, I started paying my own taxes in Serbia for the first time, and it greatly influenced my perception of the state's responsibilities. In Russia, many people still don't even realize how much they actually pay in taxes. This largely explains their indifference to how the state manages this money.
— And so that people understand how much they pay in taxes and where these taxes go, there was a good proposal Alexandra Auzana A portion of the income tax should be calculated and reflected in the taxpayer's personal account, allowing them to choose how to spend it: on public amenities, roads, or local transportation. This is necessary so that people are truly involved in local government. And now, in the age of digitalization, all of this is quite solvable—if there's decent internet access, of course.
As for local taxes, Russia already had them; individual regions used them in the 1990s and early 2000s. I don't see any problem with this. Because if taxes are decentralized, tax competition will still arise. And if someone gets too carried away with introducing local taxes, businesses will simply start abandoning them. The same applies to the right to introduce tax breaks—such rights exist now, and nothing terrible will happen.
Conversion 2.0 – How to Avoid Collapse?
How can we demilitarize the economy and convert military production without collapsing the economies of regions currently dependent on the defense industry, import substitution, and the development of domestic tourism due to restrictions on foreign tourism?
— Here, we'll need to look at the specific situations of individual cities and regions, but overall, we need to understand that the process of real regime transformation will begin, as I've already said, in a much worse economic climate than we have now, when the federal government won't have many resources to assist. Nevertheless, there is a reserve in the form of current high military spending, which, judging by my conversations with colleagues and experts, is much greater than is being reported. If military action ceases, a significant portion of this spending is freed up. Of course, there will still be spending on replenishing arsenals—because, unfortunately, there's no hope for disarmament in the current international situation. Clearly, the people currently working in military factories can't simply stop paying them. But, for example, drone production could be converted to civilian use, and much less money could be spent on their production. Current payments to contract soldiers could be reduced after the military ceases. The freed-up funds can be used for social programs, the conversion of production, and basic social guarantees for those returning from the front—abandoning them to their fate is wrong and politically dangerous.
Regarding import substitution, I think sanctions will remain in place for a long time. So, domestic tourism, for example, is unlikely to immediately decline significantly—besides the sanctions, people, excuse me, won't have much money to travel abroad. In the automotive industry, import substitution is currently mostly expressed in the "screwdriver-like assembly" of Chinese cars. At least European manufacturers brought their technology with them, unlike the Chinese. I don't know whether the Europeans will return, but if sanctions are eased, it's not the manufacturing itself that will disappear, but rather the intermediaries that currently supply imported components. And I doubt there's any need to worry about these intermediaries.
Overall, I would say that regions and municipalities will need to be given real resources to fulfill their responsibilities, while also ensuring basic social guarantees for the people. And perhaps special subsidies will be needed for regions whose prosperity was tied to the war and could decline sharply after its end.
