22 The statistical results in this section suggest that federal transfers have a significant negative impact on regional economic policies. A substantial portion of federal funds (30-40% of all disbursed transfers) is spent by the recipients on financing various local subsidy programs, primarily in housing. In this respect, the existing mechanisms of transfer allocation seems to be quite harmful for the reform process: they help regional governments to delay restructuring in their expenditure policy and thus delay implementation of major structural reforms promoted by the federal government.

At the same time, given the existing structure of federal transfer programs, one could expect that the correlation between federal transfers and regional expenditure on agriculture would be much stronger and the contribution of federal transfers in determining the level of agricultural expenditure would be much larger than those we found. The federal government has continued to run substantial (and quite inefficient) subsidy programs in agriculture (Mudahar and Sahota, 1996), which are funded by direct federal transfers to regional budgets through the socalled system of 'inutual settlements". _De jure,_ the mutual settlements constitute the categorical transfers that are supposed to be spent by recipients on purposes determined by the federal government. However, _defacto,_ the programs are fully administered by regional governments, as federal authorities have been exercising very little supervision over actual use of disbursed funds.

In particular, the program of agricultural subsidies is the largest single item of mutual settlement flows, and it amounted to Rb 3.5 trln or 0.55% of GDP in 1994.23 This constituted 15.5% of the overall amount of federal transfers to regions and amounted to 54% of the reported regional budget expenditures on agriculture. Thus, one could expect that the level of total federal transfers to regions would have a substantial impact on their agricultural spending, and the corresponding 13 coefficients in the Table 11 would be close to 0.08 (15.5*.054). That is, 8 kopecks of every ruble received in federal transfers would be spent on agriculture. In fact, the actual coefficient is much smaller -- 0.015 in 1994. Overall, the influence of the federal transfers and other economic indicators on agricultural expenditure is quite marginal (see below). Actual agricultural spending is substantially different from the amounts of received federal transfers designated for agricultural subsidies. In many regions, actual spending on the sector is more than twice higher than the amount of transfers, while 24 regions spent on agriculture less than they received through targeted agricultural transfers, i.e. they redistributed federal money to other purposes according to their expenditure preferences.

The example of federal transfers targeted for agriculture demonstrates another deficiency of the existing system of federal transfers. The system not only prevents from a much needed acceleration in regional reforms, but it did not help the federal government to protect its own expenditure priorities either.

The overall picture regarding the impact of the federal transfers is very unfavorable for the federal government. While transfers to regions are quite expensive and remain one of the 23 1994 is the only year for which we have access to the very detailed data on the structure of the federal programs funded through the mechanism of the mutual settlements.