Subsidies funded by Russia's regional governments represented about 5.2 percent of GDP in 1995, almost triple the 2 percent of GDP in subsidies funded by the federal government.
Regional policies vary greatly, influenced more by local factors than by the federal government.
Federal budget transfers are quite distortionary, that is, they encourage regional governments to continue subsidy policies and postpone structural reforms. In fact, federal transfers tend to be concentrated in regions with the most distortionary policies. Housing receives the lion's share of total regional subsidies, and there are greater disparities in housing subsidies than in agricultural subsidies. Federal transfers have less effect on regional subsidies in agriculture, which are influenced more by the region's own tax base and its share of rural population or by such factors as the political influence of local interest groups. To accelerate structural reforms, the federal government might consider reducing the number of recipients of federal budget transfers and changing the rules of allocation of the transfers, in particular by introducing conditional transfers linked to increases in cost recovery.