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The presented memo highlights certain problems of economic development in the Russian regions, the study of these problems may be of theoretical and practical importance. Making use of the theoretical studies of regional economy and considering the experience of Canada and other federal states, we would like to concentrate on certain issues of the organization of economic space of the country and, first of all, to trace the forms of dependence of economic development in the Russian regions on decision making at a federal level and on the implementation of macroeconomic policy.

 

Such problems may involve, in particular, the impact of economic reforms on institutional changes observed in certain regions, structural changes in the real sector of the Russian economy, the specifics of investment development in certain regions, the influence of macroeconomic processes on the Aintensity@ of regional integration and their links with non-payments in the whole economy and in certain regions.

 

There are some other important issues to consider: the role of the 1998 financial crisis in determining the prospects for economic growth in Russia and for the potential of certain regions; the analysis of regional banking systems and of the transfer mechanism for regional implementation of the Central Bank=s monetary policy; the impact of changes in foreign trade flows on regional economies, the exchange rate and foreign money flows; and political and economic problems involving the study of interrelationship between the politics and economy at a regional level.

 

1. Economic reforms and institutional changes.

 

The political and economic reforms carried out at least, at the first stage, inevitably increase the heterogeneity of the entire institutional structure in a country with a great variety of strong distinctions in sufficiency of natural resources, in climatic conditions, in the levels of development of certain territories, their population density, in a country with so different historical and cultural traditions of the regions. At the same time the specific feature of a transition economy is that institutional changes not only can, but also should be analyzed comprehensively, i.e. in the framework of the unified Ainstitutional structure@. One of the basic problems will be, presumably, to single out a certain basic nucleus of regional institutional changes, which would allow to make a preliminary comparisons between the regions in terms of institutional perspectives.

 

Generally, in order to appraise the progress made in the field of institutional changes in the transition economy one should consider, as a rule, the privatization (both Alarge@ and Asmall@), the legislation (laws, legal institutes, their completeness and the efficiency of their application), the state of the financial system (financial intermediaries) and the role of the government. The changes in the property structure under the transition economy are traditionally related to the main body of institutional changes.

 

The starting point of the institutional analysis and of the comparison between the Russian regions could be, in particular, privatization. In this case, it is necessary to consider the privatization process in the broad sense: for example, not only as technical procedures of assets transfer from the public sector to the private hands, but also as a more fundamental process as in its course the institutional prerequisites are formed which are required for the emerging market environment.

 

One of the arguments in favor of the accepted methodological restriction may be the following: it was the mass privatization in Russia that promoted the appearance of a corporate sector (development of the national model of corporate control and management), it has also served as an initial stimulus to develop a corporate securities market.

 

It is planned to cover the following issues:

 

(1) The analysis of the theoretical approaches and general problems of the realization of property rights in Russia (a brief consideration of the evolution of the types of property and private property development, new approaches to the analysis of private property, the economic consequences of the approval of private property rights, and private property in the post-socialist economy).

 

(2) The analysis of the Russian privatization model and the limitations of its application in the regions.

 

(3) The comparative analysis of the Russian regions by the degree of transition to private property (traditional and nontraditional methods of privatization, rates of privatization, large privatization, small privatization, preservation of a state ownership).

 

(4) The formation of the Russian model of corporate control, allowing for the part played by regional authorities (several examples of regional administration activities).

 

(5) The elaboration of recommendations on the appropriate institutional problems at the regional level.

 

Apart from the privatization process proper, it is planned to include in the study an accompanying analysis of the following post-privatization problems: the patterns of stockholding at privatized enterprises, the issues of control acquisition, the protection of shareholders= rights, the institutional aspects of the development of a corporate securities market, the evaluation of prospects to form a Russian model of corporate management.

 

2. Structural changes in the Russian economy and institutional processes in the regions.

 

The changes which took place during the last 10-15 years in the Russian economic pattern appear to have been the most profound since the Second World War. It seems that the defense industry cuts are comparable with the post-war re-conversion, whereas the disorganization of and the decline in the final demand appear similar to the most severe economic recessions in the West. Of crucial importance here was the fact that the preceding development of the Soviet economy was characterized by very specific features of a regional division of labor. One-industry enterprises usually prevailed in some regions. During the transition period the regions with their industries being unwanted (or the demand for their products has abruptly dropped) had to face the music/to bear the brunt.

 

The whole economic zones came into being with extremely high unemployment rates, and with the population incomes much lower than the average figure. At the same time, a number of the subjects of the Russian Federation fared much better, especially Moscow, St.-Petersburg and oil-producing regions, due to the finance concentration, the increase in the relative prices for fuel and energy products, and the expansions of export potential.

 

The differentiation in the infrastructure of modern production, economic well being and living standards of the population between various regions in Russia now considerably exceeds natural distinctions caused by the objective factors or witnessed in developed economies.

 

The disorganization of economy was accompanied by the violent disintegration of industry and commerce. In the 1990s the strength of economic links between the Russian regions, is estimated to have suffered a 3-4-fold drop. It remains a question to what degree this process reflected the elimination of the former - extremely prodigal schemes of autarchic/self-sufficient development and regional specialization of production, and to what degree it could be accounted for by the destructive consequences of the economic collapse. It is a most difficult question to answer, although an in-depth research, could, apparently, give some clues and reveal the potential and prospects for economic integration of the Russian regions.

 

At the same time the transition to the market economy has brought about certain positive developments. It is important to see to what extent/degree the changes in the location of manufacturing production correspond to the long-term forecasts of the Aclassical@ Launhardt-Weber theoretical model. To what extent they have been caused by the price liberalization and the specifics of the transition economy, in particular, by a significant rise in the real transportation tariffs?

 

The research focuses on the investment process features in various regions of the Russian economy, on the differences of investment financing patterns, as well as on the specifics of forming a regional investment environment (and its link with creating investment financing facilities at a federal level). The research is designed to create/generate an initial bank of statistical data covering the dynamics and structure of investments in certain regions, and to attempt to analyze a variety of regional investment functions. In the course of the econometric analysis of statistical data it would be desirable to check some theoretical hypotheses underlying the most widespread models of spatial dynamics.

 

The essential interest could also present a study of interrelationship between the foreign investments to various regions and the availability or absence of a developed market infrastructure, the existing industrial structure of the region, and industrial and fiscal policy of local authorities.

 

3. Macroeconomic factors affecting the dynamics of non-payments in the Russian regions.

 

Every region in Russia may have some comparative advantages due to the differences in its geographical location, climatic conditions, economic development, industry specialization, and resource potential. During the transition period products of many enterprises may never find a market which could be accounted for by low efficiency in the location of production facilities (from the market viewpoint). In this case, excessively priced, by the market criteria, products are not bought which gives rise to a succession of non-payments. The regional price differentials, and, accordingly, the purchasing power of money) may to a large extent contribute to this problem. It is planned to examine the issue to find out to what degree the research methods of currency and trade relations can be useful, since in similar models the regions with over-valued Acurrency@ suffer strongest. There is no doubt that these factors can not be regarded as the main source of non-payments chain, but taking these factors into account may provide better understanding of the regional differences in non-payments growth.

 

At the same time the effect of the macroeconomic factors essentially depends on the industrial structure: thus, the regions supplying gas, oil and other raw materials to their trade partners of Russia in CIS, inevitably meet with more acute non-payments problem. With other things being equal, the regions with enterprises having comparatively longer production cycles are in a more vulnerable position.

 

Since the state has recently proved to be the least reliable partner, the growing non-payments may depend on those regional enterprises which rely on government orders (this factor may be crucial for the regions with a huge share of the defense industry).

 

The essential role in transforming the macroeconomic institutes at a regional level is played by the structure of financial markets and banking sector (the issue is considered in more detail in section 5 of the memo). The peak of tension inside the credit system and the increase in interest rates may lead to most acute non-payments in the regions with better developed credit systems.

 

It is planned to examine the importance of the above factors in the changing pattern of non-payments through econometric models.

 

The structure of the regional markets, including labor markets may to a large extent affect non-payments. Let us consider, for example, the behavior of a monopoly enterprise in one-factory settlements. If the labor legislation is not functioning properly (especially in some narrowly specialized production-oriented settlements) there may take place the effects leading to delays in payments which are beneficial to the monopoly enterprise. Regrettably, taking such hypotheses to test proves to be difficult because of the shortage of the required aggregated database.

 

Tax arrears dynamics can be strongly influenced by political factors (see section 7), and by the ratio between the public and privatized sectors of the economy. Arrears pattern for various taxes can be affected by the pressure exerted on the taxpayers by the federal government or local authorities.

 

4. The effect of financial crisis on economic development of regions.

 

The collapse of the Russian financial system in the fall of 1998 adversely affected the economic and political development of regions, with the results being essentially different. The degree of a destructive influence seems to have depended considerably on the structure of banking in the region, (see section 5). At the same time the introduction of the floating rate of the national currency and the fall in the market value of the rouble affected differently the growth in import-substitution productions and development of export activity of a particular region.

 

The experience of the last few years shows, however, that the weakening economic integration between the regions and the instability of the Russian economy in general causes considerable problems even for those regions, which should have benefited from the depreciated rouble judging by general consideration. For example, many enterprises manufacturing import-substitution and export products had to bear increased costs necessitating spending their foreign exchange currency. The structure of the spatial division of labor became strongly dependent on the changes in the terms of trade and on the fluctuations of the market exchange rates (see section 6). The changes, caused by the crisis, apparently, promoted the economic integration between the Russian regions and CIS countries.

 

he economic crisis hit financial transactions of the local authorities in a different way. A number of regions faced a dramatic drop in tax revenues, and at the same time the necessity to increase considerably (Aanti-crisis@) expenses . One of the most important practical problems turned out to be the solvency of the subjects of the Federation and local authorities in the home and foreign markets. Under financial crisis the internal links between the systems of the federal and sub-federal credit facilities especially clearly emerge: the failure to meet their obligations under the federal loans immediately questions the solvency of both the subjects of the Federation and local authorities. Meanwhile, in the last few years a number of Russian regions have had to place external loans (or they are preparing to make such placements).

 

It is planned to consider theoretical (role play) models which may enable local authorities to carry out adverse selection at foreign and internal financial markets, and to make some practical recommendations which could facilitate revitalization of local financial systems. The special attention is to be attached to the methodology of monitoring the state of regional financial systems and the developments on international and internal financial markets.

 

5. Structure of regional banking systems.

 

The formation of the emerging banking system in Russia has always b een characterized by a high degree of concentration. Thus, by 1998 more than 70% of all credit operations in Russia have been carried out by Moscow banks, according to some estimates. Some largest Moscow banks had a wide network of branches registered in the regions. In some republics and Oblasts they accounted for the most of bank activity. This factor determines a very high degree of certain regions dependence on the business condition of the largest Moscow banks.

 

Since the majority of regional credit institutions were rather small banks (as a rule, regional banks are 5-6 times smaller than their Moscow counterparts), it was the regional banks that had to bear the brunt of activities on liquidation of insolvent credit organizations which were carried out in 1996-1998 by the RF Central Bank. In some regions (Novosibirskaya, Permskaya, Sakhalinskaya etc.) the licenses were revoked from the largest (by their assets) banks. It is important to determine the role of regional banks in causing the instability of all banking system.

 

The Central Bank=s assumption was that the main threat to the stability lies in the inadequacy of smaller banks= ownership capital, and in their extreme vulnerability if and when business conditions change on the financial markets. Yet the bank crises in 1995 and especially in 1998 clearly demonstrated that under transition economy the main source of instability appears to be the largest banks located in the capital.

 

It is planned to study in detail the structural differences of active and passive operations by the metropolitan and provincial banks, and to consider unequal tools of monetary policy carried out by the Central Bank. It is also very important to examine the credit regulations in the regions lacking A bank transparency@. At the same time the development of credit relations in the past few years has shown that, with other things being equal, interest rate changes exerted stronger influence on those regional banks whose/where aggregate costs had a higher share of Apaid@ liabilities and mobile/changing liability costs (first of all, the population deposits).

 

The post-crisis restoration of credit system and further development of regional bank structures would apparently depend on successful implementation of some vitally important measures at a federal level (deposit insurance, toughening the standards ensuring transparency of banking operations), and on formation in a number of Aremaining@ regions of an adequate infrastructure for the accelerated growth of commercial banks and specialized credit institutions.

 

6. Changes in foreign trade activities of Russia and regional economy.

 

Considering the role of foreign trade transactions in policy of regions they can be divided into four groups. The first group comprises the subjects of the Federation, which export minerals or which have large industrial enterprises selling their products on the world market. The second group includes the regions which develop import-substitution products, and the regions with the explored reserves of those minerals which the country has to import. The regions which consume on a large scale imported raw material and/or consumer goods constitute the third group. Finally, the fourth group is made of the regions, whose share of foreign trade transactions in their economies is insignificant (the so-called Aclosed@ regions). It is evident that such classification should be supplemented by the analysis of the international ties.

 

The regional disintegration of the Russian economy was noted above. It should be pointed out that the weakening of economic ties inside the country was accompanied by a significant expansion of economic contacts abroad. The direct dependence of some regions on the changes in demand on the world commodity markets and on the international financial flows thereby has grown. In broad terms the above mentioned processes could signify the transition to more rational schemes of specialization and division of labor worldwide/globally. Yet it undoubtedly limited the possibility of the centralized macroeconomic regulation (especially considering the unequal rights of regions in implementing their economic policy and the heterogeneity of the Apolitical regimes@ formed/created which sprang up in some regions. (See Annex).

 

Sharp swings in prices for oil, gas, and some other types of primary goods on the world market over the last few years account for the differences in economic development of certain regions. It is planned to carry out an economic research of influence exerted by the changes in the terms of trade and in the market value of the national currency on the economy of various subjects of the Federation .

 

The participation of the foreign capital in economic development of regions has been extremely irregular. It is planned to generalize the available isolated data and to study economic and political factors behind/causing rather larger or smaller Ainvestment appeal @ of certain regions. It is obviously important to allocate on the basis of comparisons of the indicated factors of some all-federal condition (availability(presence) of the federal legislation ensuring a reliable Alegal infrastructure@ of investments, confidence to the economic policy) and specifics of regulation implemented by the subjects of the Federation (a political climate inside the region, predictability of the policy of local authorities, regional tax policy etc.)

 

7. Politico-economic problems of the Russian regions.

 

The experience the of post-socialist transformation, has vividly shown that political factors are capable to impose strong restrictions on implementation of those or other economic transformations in certain regions.

 

In a democratic state, which the Russian society strives to create, the politics reflect the interests of various strata; the elections may be looked at as a certain analogue of a political Amarket@, and the factors, determining the outcome of voting, are of particular interest, since in the end they serve as characteristics of the political equilibrium and account for both the motivation, and the restrictions of economic policy.

 

Many Russian and foreign researchers think that, political factors can be more important for the development of regions than economic ones. It seems, however, that at the present stage of development of the Russian society the influence of economic processes on forming political preferences of the population is getting stronger. The importance of regional political elites will grow considerably in the 1999-2000-election campaign. The departure from the bipolar system (Ademocrats vs. communists@), the arrival to the political scene/arena of nationalist forces, the growing political activity of regions - these realities of today are increasingly gaining momentum/more importance for regional economic processes.

 

Alongside with this, the direct access of the electorate to the activity of the regional executive authorities, the higher dependence of daily life of the population on their decisions and policy may prove to be decisive for voting results. Among the factors of socio-economic development which presumably play the most important role for the outcome of the elections are the following: first and foremost the dynamics of Gross Regional Product (GRP) per capita, salaries and wages arrears, the regional levels of poverty and property inequality, in region, the progress of the reforms in the field of housing and municipal services, the share of privatized facilities/enterprises of the social sphere, as well as some demographic indicators, - regional birth and mortality rates, and the average life expectancy.

 

Up to now the impact of financial flows between the federal center and the regions, as well as inside them on the political situation in the respective regions has not been properly examined.

 

The discontent of the people by the living conditions at a micro-level can find expression in strikes and in potential readiness to take part in meetings and demonstrations against price rises and falling living standards etc. The majority of participants seek/strive to improve the local situation (at the enterprise, in towns, in the region). At a macro-level the discontent is expressed through protest voting during parliamentary or presidential elections. It is planned to study the relationship between such protest voting and the changes in regional economic policy carried out by federal authorities.

 

* * *

 

The solution of the problem of distinguishing and grouping the subjects of the Russian Federation by various criteria comprises the selection of typical features which are most important for macroeconomic policy, and the respective methods used for this purpose. To resolve this problem the present-day publications dealing with the empirical analysis of regional policy, the methods of cluster and factor (selection of the main components) analysis are applied, regression models using a binary (range) presentation of a dependent variable, methods of the economic analysis of panel data are widely used. In our research we shall divide the RF subjects into groups with the help of cluster analysis methods on the basis of selecting certain groups (clusters) by typical features of regional political, economic and social development. The study will use agglomerate methods of clusterization. Since some of the above methods may not be used for strict statistical check of theoretical hypotheses, the discriminant analysis methods will be applied to substantiate the results of classification.

 

The special interest presents the selection of direction in the factor interaction, which determines the development of regional economy. The algorithms for construction of causality structures developed by P.Rietveld will be used for this purpose.

 

Annex. Some characteristics of the Russian regions.

 

The Russian Federation consists of 89 subjects of the Federation including 21 Republics, 55 Krais and Oblasts,. Moscow and St.-Petersburg, an autonomous region and 10 autonomous Okrugs. There are 11 economic regions: Northern, Northwest, Central, Centralno-Chernozemny, Volgo-Viatka, Povolzhsky, North- Caucasian, Ural, West-Siberean, East-Siberian, Far East, and Kaliningrad Oblast. Each economic region is a rather complete territorial part of the country having its own industrial specialization and strong internal economic Thus, the major agricultural centers of Russia are concentrated in North-Caucasian, Centralno-Chernozemny and Povolzhsky economic regions. The metallurgical centers of Russia are located in Ural, Central and Siberian regions. Machine building is concentrated in Central, Ural and Povolzsky economic regions.

 

Due to the structural changes of the Russian economy caused by the transition to the market economy, the differences have considerably grown in the distribution of labor/human resources by region. At present there are some types of regions with different specifics of demographic and economic patterns. Some of them are: 1) labor-excessive regions - Northern Caucasus; 2) diversified and depressed regions B the regions of the North; 3) military-industrial regions - Moscow, St.-Petersburg, Ural, industrial agglomerations of the south of Siberia and Nizhny Novgorod region.

 

The Russian Constitution defines several levels of the subjects of the Federation, which enjoy different rights in implementing economic policy on their territories. The republics, being separate national formations have the greatest independence. The other subjects of the Federation (Oblasts and Krais) have less authority in adopting independent economic decisions. The autonomous national formations have certain differences in the level of independence from the federal authorities. The problem is not limited to the securing of this inequality in the Constitution of the Russian Federation. In 1994 - 1998 practically all subjects of the Federation have concluded bilateral agreements on the division of powers on their territory. Under the agreements the regional authorities have acquired additional rights to regulate their economic activities. The republics which are part of the Russian Federation have made the most of it. Some of them have actually proclaimed economic and financial independence from the federal center, the step which caused conflicts between the center and the republics (for example, the distribution of taxes collected in Tatarstan).

 

Thus, by their status the subjects of the Federation are classified into the following groups:

 

- National republics

 

- Oblasts and Krais

 

- Independent national formations.

 

The complexity of political process in Russia in early 90s, the absence of the political and social consensus in the society have led to the existence of actually, different A political regimes on the territory of certain regions. The so-called Ared belt consisting of Oblasts in the south and southeast of the European part of the Russian Federation stands out. The predominance of the rural population, the traditionally strong position of the RF Communist party, the absence of large export-oriented industrial enterprises are combined in these regions with preserving until recently mostly administrative measures of economy regulation, the absence of liberal market reforms, the changes in the regional legislation, and a poor market infrastructure. These factors combined reduce the already low investment appeal of the region, preserve regional economic problems, and prevent the increase of the living standards of the population from growing.