Publication: Prism Volume: 2 Issue: 16

Russia’s Regions Strike Out on Their Own

By Mikhail Gershaft

At the end of March, elections were held for the presidency ofthe republic of Tatarstan, which is part of the Russian Federationand a place which was once a trouble spot. The only candidate,Mintimer Shaimiev, was reelected virtually unanimously. In aninterview with Moscow television the day after the elections,he said that economic reforms in Tatarstan would continue, nomatter what kind of government took power in the Kremlin, reformistor Communist.

We will leave the character, depth, and nomenklatura-driven natureof the market reforms underway in this republic, as in many otherregions of Russia, for future analysis. Shaimiev’s statement wasmade three months before Boris Yeltsin’s July 3 victory over theCommunists, when the outcome of the confrontation was still unclear,and moreover, when opinion polls were showing that the scalescould tip against the incumbent president. This statement didnot reflect the personal bravery of the president of Tatarstan.What is significant here is what the statement says about thedegree of independence of Russian regions in the spheres of politicaland especially, socio-economic, transformation.

Regional Economics — or the Economy of the Regions

One must recognize that in general, an increase in the role ofregions and regional elites in the political-economic processalways takes place during a crisis.

It has turned out that Russia’s regions, which exist in a singleeconomic space and within a single stream of centrally-implementedreforms, are nevertheless developing a market economy, or on theother hand, trying to resist its development, by various methods,and with differing results. There are many reasons for such divergence.Sometimes, success in implementing reforms at the local levelis linked to a region’s export orientation or its predominantlyurban population, the victory of reformist forces in the regionalelections, and sometimes it can be attributed to the factor ofpersonality, or ethnic resistance to Moscow.

On the extreme free-market flank (if one may use such terms),there is Nizhny Novgorod and the surrounding oblast. Here, thereare virtually no attempts to control the free formation of prices,to control the export of production outside the region, to introducerationing for essential food products, or to increase local taxesexcessively to fill the regional government’s coffers. In thecities and the oblast, the level of privatization is highest ofall in the service, trade, and food producing sectors; higherthan the Russian average. This oblast is among the leaders inthe number of large banks, insurance companies, and other financialinstitutions.

There have been profound changes in the agrarian sphere in theNizhny Novgorod oblast. The oblast is a testing ground for internationalfinancial consulting organizations. And although the results oftheir recommendations have been slightly disappointing, due tothe consultants’ unfamiliarity with Russian and local conditions,the "image" of being a pro-market region has allowedNizhny Novgorod to attract a significant number of investors andobtain international credits.

A subjective factor — the role of the young technocrat-governorBoris Nemtsov, whom many reformers would like to see as a futurepresident of Russia–is also of no small significance here. Theoblast administration has enabled — or rather — has tried notto hinder the course of the transition to the market, and hasnot tried to subordinate the market process to the administration.The reforms continue. The oblast administration proposes, in thecourse of three years, to lower the taxes on the profits of enterprisesand banks, to lift taxes on export producers, and to simplifythe tax system for small business. Although the "Nizhny Novgorodmodel" is most popular, no less significant results havebeen achieved in other Russian regions — Chelyabinsk, Ekaterinburg,Samara, Tomsk, and Tyumen.

On the other extreme, you have the so-called "Ulyanovsk phenomenon."In the city and oblast where Vladimir Ilyich was born, its presentleaders have succeeded, for a prolonged period of time, in maintaininglow prices on food and other necessary goods. The region limitsthe export of goods produced in the oblast and bases its existenceon internal self-sufficiency. The source of this policy is theimplementation of administrative rule, additional taxation ofbusinesses, redistribution of incomes, and the formation of specialfunds to subsidize prices for certain consumer goods. At times,the policies are simply economically illiterate. For example,in Nizhny Novgorod oblast, they "extracted" money forsupporting the poor by introducing a sales tax and proposed apartial income redistribution. In Ulyanovsk, they introduced aprofits tax, thus taking away a source of investment which wasscanty to begin with.

This mechanism has appeared most obviously and sharply in thesituation this summer in Primorsky krai in the Russia’s Far East.The krai administration, for populist reasons, cut prices forcoal and other energy sources in half for "its" businessesand consumers. In six months to a year, the coal mines, which,even without an "operation" like this, were runningat a loss, began to experience difficulties in paying salaries,not to mention other things necessary for the normal functioningof any business.

The krai administration recommended, as always, to cover the lossesby means of subsidies and payments from Moscow. But this time,the center, which had just succeeded in winning a previously unattainablevictory over inflation, stood firm. Against the background ofa real threat of starvation and under the pressure of unprecedentedlysevere strikes, money was sent to the Primorsky krai, energy priceswere raised, and the actions of the local administration wereoverruled by the president.

But this case revealed not only the cost and the consequencesof regional "games" with prices and "flirtations"with the people, but also the strength of the regional elitesand the reaction of the workers, who don’t want to hear any explanationsabout the consequences of the operation of economic laws. Now,the governor of the Primorsky krai is proposing to hold a referendumon his powers, and on his pseudo-market policy. This means thathe still considers himself to be strong, and is counting on thesupport of the people…

The events of 1992-1993 played a definite role in the confrontationbetween the center and the regions, when, during the hard-foughtstruggle between the president and the parliament, several regionsstopped making payments to the federal budget completely. Butthe money withheld was used, not for investment, but for the populistgoal of strengthening the local, newly formed elites.

Most regions, both in the content and the results of implementedmarket reforms, are to be found somewhere between these two poles.This is not to be taken literally, because some federation subjectsare gradually "lifting their feet off the brakes," anda corrupt bureaucratic government apparatus is gradually "givingup," or, more accurately, "selling off" its defensiveposition, and is starting to issue licenses for firms, banks,and other financial institutions to open up. At the same time,even the most steadfastly "red" regions triumphantlywelcome and try to recruit rich foreign investors, thus demonstratingthe age-old Russian contradiction between harsh words which incitethe population’s xenophobia, on one hand, and pragmatic actions,nourished by foreign capital and their hopes for more employmentand more goods for the local market, on the other.

But a region’s "red," or even "pink," orientationtends to scare off potential Western investors. This often leadsto contradictions between a region’s political and economic elites.Thus, for example, the Ulyanovsk Automobile Factory (UAZ), whichwas trying to set up a joint venture with Mercedes-Benz, lastyear refused to pay additional taxes out of its income to supportsubsidized prices and help the regional administration createthe impression of paternal care for the oblast’s population.

On the other hand, the existence and development of market structuresin what seem to be purely free-market regions is also marked byconstant disagreements and confrontations with the regional authorities,which are always trying to subordinate these structures to themselvesand lay claim to a significant share of their income, which theyneed in order to consolidate their power and prolong their existence.Bankers and businessmen constantly complain of the high-handedbehavior of local officials, forced to cover any shortfalls ofthe regional budget and the ambition of their leaders. Unfortunately,one cannot say that regions which are carrying out free-marketpolicies are any more prosperous than "conservative, pro-Communist"oblasts. If it were really so simple, people who lived in "conservative"regions would have voted for consistent reformers in the lastelections, thus completing the process of forming a free marketin Russia. On the contrary, real income statistics, calculated,for example, on the prices of 19 essential goods, show a clearsuperiority for Ulyanovsk oblast over Nizhny Novgorod oblast.

In Soviet times, the clout of the local authorities, and to asignificant degree, the extent to which a region was "well-stocked"and prosperous, depended on how often the oblast’s leader hadbeen able to get in to see the General Secretary or some otherPolitburo member in charge of economic issues. These "imperial"traditions continue to this day. Clearly, these traditions serveto reinforce the inequality in the various regions’ economic development.During the hard-fought presidential election campaign, Moscowflooded the regions with promises and privileges. In April, forexample, Boris Yeltsin signed a decree, offering a five-year investmenttax credit to defense industry enterprises in his native Sverdlovskoblast. A little earlier, a number of enterprises in Tatarstaninvolved in civilian production were also granted a five-yeartax credit in an directive signed by Viktor Chernomyrdin. Afterthat, the difficulties in collecting taxes and meeting budgetrevenue targets became understandable. This is such a big problemnow that Finance Minister Aleksandr Livshits has raised the questionof abolishing all privileges granted during the campaign. Butafter the presidential elections come the regional elections,and a refusal to support the regional elites could lead to a victoryfor the national-Communist opposition. The regional economic pictureof reformers battling conservatives on the map of Russia needsto be supplemented by the factor of the regions’ export orientationand, in connection with this, their interest in keeping part ofthe income from these exports. Tatarstan has achieved its first,albeit small, successes in doing this. It has been permitted tokeep the income from part of the oil it extracts and refines (about20 percent) for its own needs.

But the interests of regions which live on subsidies from thecenter run counter to such a policy. Any sign of independenceand any attempt on the part of a region to keep "budget resources"for itself, when such resources are scarce, leads to the sourcedrying up for others. First Tatarstan, then Bashkortostan, andthe republic of Yakutia-Sakha, which has built its prosperityon the mining and selling of diamonds, have won the right to keepa significant share of their export income for their own use.This year, a number of other federation "subjects" (not"national republics,") and oblasts are trying to winthe same right for themselves. Economists have calculated thatif Ekaterinburg alone wins the right to keep a quarter of itsprofit, it will lead to a 9 to 12 percent drop in total governmentrevenue. The Sverdlovsk oblast chief of administration, EduardRossel, has pointedly stressed that the money would go towardsdeveloping the oblast itself, and not, as before, towards supportingthe subsidized regions.

But these measures could be a delayed-action bomb. More and moreregions are winning the right to redistribute their regions’ income,which benefits them, while harming the federal treasury. On theother hand, regions use these resources for subsidizing prices,supporting pensioners and low-income people. Of course, by doingthis, the regional elites win support in public opinion as fightersfor their republic’s or oblast’s prosperity against the "voracious"center.

In addition, these measures enrich the local elites, and allowthe bureaucratic administrative apparatus to swell unbelievably.At the same time, the low, subsidized prices began to lead todemands that people show their passports to prove that they arelegal residents of the oblast before being permitted to buy things,and to other limitations. This leads to the virtual destructionof the single economic space, and economic separatism, and indicatesmovement not to the market, but "from" it.

The young Russian market is constantly shaken up by the strugglebetween the center and the regions for power and the propertyof the "tastiest" giant enterprises, the producers ofnickel and aluminum, gold and diamonds, oil and timber, automobilesand arms. Naturally, the regional elites have no desire to giveup to the insatiable center the packets of shares and "packetsof power" that were left to them after all the muddle ofthe beginning of the 90s.

One can now add to the picture of regional economies and regionalinterests the factor of a region’s economic specialty, its orientation,above all, towards the fuel and energy complex, the military-industrialcomplex, or the unprestigious and traditionally-forgotten consumergoods sector of the economy — agricultural processing and lightindustry. As a rule, the leaders of the regional elites are recruitedfrom the representatives of the branch of industry which is predominantin the region. These persons had close ties with the structuresin Moscow governing these industries, and had been able to obtainprivileges for their regions, which guaranteed them local support.

In structure and social origin, the regional elites are stillthe old late-Soviet, pre-perestroika ruling class, which has onlypartially been able to replenish itself with new people. But theseelites have been able to adapt to the new political and economicconditions, and have serious grudges against, and disagreementswith, Zyuganov’s Communists. The local leaders do not wish togive up their power to them, or their property, whose redistributionwould be inevitable in the event of a Communist victory. Thusone may say that at the present time, the Russian economy is arather colorful conglomerate of regional economies, each developingmarket reforms and institutions at a different level and a differentpace. The elections of regional chiefs of administration, governors,and legislators taking place from September through December willbe fought in this atmosphere. The Communists, who lost the presidentialrace, intend to take revenge in these elections.

Preliminary Conclusions

The regions’ political and administrative elites may have comefrom the party-economic nomenklatura, but they have no desireto see the Communists return to power, and do not desire to returnto the bosom of the party.

Although Tatarstan is not one of the regions where elections willbe held this fall and winter, its president obviously expressesthe opinion of the leaders of these regional elites: that theCommunist demands to increase the role of the state and to reexamineproperty relations will inevitably lead to a destabilization ofthe situation, a threat to their own power, and to the loss ofthe property that the representatives of the elites had takensuch pains to amass.

The elites in the national republics which are "subjects"of the Russian Federation are especially concerned about the Communists’possible return to power. Mintimer Shaimiev has noted that atthe May 1 (pro-Communist) demonstrations in Tatarstan’s capital,Kazan, there were 50 red RSFSR flags with the hammer and sickle,and in Naberezhnye Chelny, the republic’s second largest city– there were 47, one white-blue-red flag of the Russian Federation,and not a single green-white-red flag of Tatarstan. "Thisexample," in the words of the president of Tatarstan, "makesyou think."

The situation in the national republics, although many of theelections for their leaders, as was stated above, have alreadybeen held, nevertheless is quite symptomatic. Yeltsin lost inseven of the ten national republics in the first round, gettingfrom 20 to 37 percent of the vote. The local authorities saw thedefeat of the incumbent president as not only a sign of dissatisfactionwith their own governments, but also as a sign of disloyalty.According to the press, which quoted OSCE observers, many regionsresorted to "stuffing the ballot box" in the secondround of the presidential elections, or adopted measures whichled to unprecedented results: an enormous number of votes unexpectedlywent "for" Yeltsin, an inexplicable change of the voters’positions between June 16 and July 3. If, in the first round,Yeltsin won in only 18 out of Tatarstan’s 60 raions, in the secondround, he won 59 out of 60. Yeltsin’s vote in the second roundwent up by almost 68 percent in Tatarstan, in Karachaevo-Cherkessia– by 90.7 percent, and in Dagestan, by more than 100 percent.

Thus, it is obvious that the regional elites as a whole, who inmost cases have a Communist past, have almost completely adaptedto existing conditions and even fear being seen as disloyal tothe present government. If the romantic democratic oppositionused to attack them for their party-nomenklatura origins, thisargument will not hurt them now in their election campaigns.

It is worth noting that in the regions, as in Russia as a whole,no parties, in the traditional, organizational, sense of the word,have been formed. The "party of power" is really morelike a clan formed around the leader and his entourage. This doesnot rule out, but rather presupposes, the possibility of infightingbut these fights will most often take place "behind closeddoors" and will result in compromises.

In spite of demonstrations of loyalty to Yeltsin, in the regionalelections, the representatives of regional clans who are ableto distance themselves sharply, and criticize the federal authorities,stand the best chance of winning. In principle, this will alwaysbe profitable, in view of the present inconsistency and contradictionsof the Yeltsin Administration and its leader.

To run in the gubernatorial elections under Communist slogansnow would be counterproductive in most regions. But at the sametime, criticism of the present federal authorities and distancingoneself from them is proving to be a winning policy.

In this regard, the most probable approach will be to adopt national-patrioticrhetoric, mixed with a little xenophobia and talk about internaleconomic self-sufficiency, while admitting the need for a "softentrance into the market."

The pose will most likely be that of the "good manager"who does not play "dirty political games," defends theinterests of his region in the fight against the federal authoritiesand has achieved an acceptable level of prosperity in the region.

It is interesting to note that two years ago, the magazine "Voprosyistorii" published the results of an analysis of lettersfrom the regions of the Soviet Union to Moscow from the end ofthe 1920s to the beginning of the 1930s. According to the historianwho wrote the article, the authors of the letters were dissatisfiedwith the policies of the local authorities and were asking forhelp from the center. Nowadays, it’s the other way around. Thepeople not only have no hope of help from the center; they don’teven think they can get an acceptable explanation of policiescarried out by the center. In the traditional Russian mentalityof "looking for an enemy," the center is now fit forthe role. But the center, by coming to the defense of the "weakregions," can continue to carry out its policy, neutralizingthe pressure and blackmail of the elites of the stronger regions.

Thus, the coming period can be characterized by the politicizationof economic processes, and the solidity of the platform on whichRussia’s further economic development will take place will dependupon their outcome.

Translated by Mark Eckert