4 has made a number of attempts to improve its fiscal and enterprise policies and to impose a hard budget constraint. The results of these efforts, however, have been mixed: on the one hand, the government succeeded in drastically cutting explicit federal subsidies to enterprises; most of the previously off-budget forms of support were incorporated into the general budget, thus making the process more transparent. On the other hand, these positive steps were at least partially offset by an increase in regional transfers as well as by the failure to control distortive tax benefits and to maintain tax discipline (World Bank, 1996; Alfandari et al., 1996).

Macroeconomic analysis suggests that regional budgets in Russia have been becoming a relatively more important source of remaining fiscal subsidies and transfers. While subsidies funded by the federal government were cut dramatically over 1992-95, those funded by regional authorities demonstrated the opposite trend, increasing during 1992-94. Even after a significant drop in 1995, when measured as a percent of GDP they were still higher than in 1992.

_Table 1. Federal and Regional Budget Subsidies in Russia, 1992-95, as percent of GDP._

||**1992**|**1993**|**1994**|**1995**|
|---|---|---|---|---|
|Total regional budget subsidies|3.38|5.53|6.19|5.23|
|Total federal budget subsidies|41.48|10.74|5.79|2.17|

Source: World Bank (1996a), Alfandari et al. (1996), other World Bank estimates.

Regional governments expanded their subsidy financing from 3.4% of GDP in 1992 to 6.2% in 1994 and to about 5.2% in 1995 (Table 1). While in 1992 regional subsidies were equivalent to only 8% of those funded by the federal government, in 1995 regional subsidies were 2.5 times larger than federal subsidies. To a large extent, this increase took place in response to the federal government's withdrawal from funding consumer subsidies as well as in reaction to the implementation of the federal policy of cutting traditional consumer subsidies in housing and public transportation which had been provided through cross-subsidization and implicit price control. The increase in real domestic energy prices over 1993-95 brought about additional increases in the real costs of housing and public transportation (through gasoline prices), which, not being accompanied by adequate increases in cost recovery, caused additional demand for regional subsidies.

At least a part of the overall increase in regional subsidies was indirectly funded, especially in 1993-94, by the federal government both through an increase in its transfers to the regions and changes in tax-sharing arrangements (Table 2). The growth in federal transfers to the regions from 1.75% of GDP in 1992 to 2.74% and 3.84% of GDP in 1993 and 1994 respectively was accompanied by the growth in regional subsidies from 3.4% of GDP in 1992 to 6.2% of GDP in 1994. It is worth mentioning that in 1995, when actually disbursed federal transfers came down to 1.82% of GDP due to a high accumulation of federal budget arrears to regions, regional subsidies also decreased. As shown below, cross-regional analysis confirms a positive took Russia four years to cut the share of subsidies in GDP to the same level that was achieved within the fust one or two years of transformation in countries such as the Czech Republic and Poland.