Regional issues complicate the already enormous task of overhauling Russia’s Soviet-era tax code. The legislature, which failed to act on tax reform in 1996 and 1997, will get a third crack at the problem when a new government proposal is presented next month. The government wants to simplify administration, reduce evasion, increase collection, and encourage business investment. It proposes to cut the number of taxes from around 200 to about 30; end most exemptions; cut corporate tax rates; and prohibit "offsets" that allow government agencies to barter their debts to suppliers against the suppliers’ unpaid taxes.

But the government has not proposed to overhaul revenue sharing, under which at least 15% of all federal revenue goes to a Regional Assistance Fund for distribution to most — but not all — of Russia’s 89 regions. Regional leaders call revenue sharing unfair and corrupt — unfair, because allotments are arbitrary and manipulated for political purposes, and corrupt, because without the appropriate bribes the transfers often don’t happen at all.

For tax reform, which the IMF calls vital, this issue could be a deal-breaker. Any tax package must pass the Federation Council, where all Russia’s regional leaders hold seats.