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. Last Updated: 07/27/2016

Primakov Wins First Budget Fight

Despite opposition from regional governors, the State Duma approved the draft 1999 budget's optimistic macroeconomic targets Thursday, after Prime Minister Yevgeny Primakov threatened to resign.

In last-minute negotiations, the Duma, parliament's lower house, and Primakov reached a vague compromise on the budget aimed at giving regions more funds and thus settling the main complaint of the upper house, the Federation Council.

The draft budget passed in the first reading by 303-65, with nine abstentions, several hours after Primakov told President Boris Yeltsin that "we will quit" if the draft is rejected. The bill needed 226 votes to pass the first reading.

The approval of the draft's tough basic targets, including a primary surplus of revenues over expenditures equal to 1.65 percent of gross domestic product, provide the government with a vital argument in its negotiations with the International Monetary Fund and other lenders.

"This budget is necessary for our relations with our Western partners, but I must add, that to them the strength of our government is the parliament's support for it," Primakov told the house.

The vote was held Thursday despite earlier announcements by the largest factions that they wanted to delay it until next week in order to allow regional leaders to introduce their own amendments.

Regional leaders, who comprise the Federation Council, had complained to the Duma on Wednesday that the draft budget leaves too few funds at their disposal.

The budget is based on tax changes that would strip regions of their share of value-added tax revenues and channel some of their income tax revenue to the federal budget.

The tax changes have received basic approval from the Duma but its details still have to be finalized. If the measures are implemented as proposed by the government, the federal budget's revenue would increase by 80 percent in ruble terms, while regional budgets would gain only 13 percent, well below next year's projected inflation of 30 percent, said Konstantin Titov, the head of the Federation Council's budget committee.

This would give the federal budget a much greater share of revenue. Previously, revenues were split almost equally between the federal and regional budgets.

After the government's initial presentation of the budget, Primakov held talks with Duma Speaker Gennady Seleznyov, Federation Council Speaker Yegor Stroyev and leaders of Duma factions. Primakov convinced the leaders to hold the vote Thursday rather than delay the bill.

According to participants, the deal reached at the meeting provided for an equal 50/50 split of all revenue between the federal and regional budgets, although it was not specified how the federal budget's total revenue figure would survive the amendment or how specific taxes would be split.

Later most factions approved the proposal, except for Liberal Yabloko group, which maintained its opposition to the draft despite Primakov's personal presence at the meeting. Yabloko leader Grigory Yavlinsky, who initially proposed Primakov to the post of prime minister in the wake of the August crisis, told the Duma that his faction would still vote against the budget.

Before the crucial vote, Primakov called on the house to show unity. "I would like to use my presence on this rostrum to call on everybody to come to accord," he said. "Work on the budget has started today and it will continue. We accept your demand that the implementation of the budget should be revised on a quarterly basis. It has been said that if we fail to meet the regions' demands, the regions will turn their back on us. The government will do its best so that nobody turns their back on us."

Primakov's own threat to resign was the only clear-cut argument in favor of passing the first reading on Thursday. Although the majority of the house supported the budget on the formal grounds that a compromise had been reached, there was no certainty as to what exactly the deal involved.

Some deputies asked for a clarification of what types of revenues should fall under the 50/50 scheme.

One major area of confusion was an argument over control of the Federal Road Fund. Citing the regional governors requests, the deputies said that the Federal Road Fund, an off-budget fund that is funded with a special tax, should be excluded from the 50/50 arrangement.

The fund's projected revenues stand at 29.5 billion rubles, or 6.2 percent of total revenue. Although it is formally listed as part of federal revenues, all of its money gets transferred to regional budgets. By keeping it out of the 50/50 split, regions would be able to increase their share of the consolidated budget. But seconds before the vote took place, Primakov said that all revenues will fall under the scheme.

Another major uncertainty concerns VAT, a key area where the budget cuts funds to the regions. Deputy Prime Minister Gennady Kulik said the federal government might agree to give a share of VAT to regional governments.

The VAT is currently set at 20 percent and split 15/5 between the federal and regional governments. But the government has proposed cutting the tax to 15 percent, with the federal government retaining all the revenues and the regions getting nothing.

Sergei Don, a Yabloko deputy, also said that restoring one or two percentage points of VAT was being discussed as an option. That would help the government in talks with the IMF, which has objected to cutting any taxes at a time when the government is desperate for revenue.