The Taxation of Natural Resources and the Future of the Russian Federation

This paper is an examination of the vertical and horizontal division of revenues from taxing natural resources, a crucial issue for the future of the Russian Federation. Assigning resource revenues entirely to subnational governments would undermine the fiscal capacity of the central government, Resources arc so concentrated geographically that allocating revenues primarily to jurisdictions where production occurs would create large fiscal disparities among subnational governments. Either of these policies could encourage the disintegration of the Federation—as could a contrary policy. After a brief review of the concept of economic rent, the theory of tax assignment is examined and applied to taxes on natural resources. Whereas economic arguments tend to favor centralization of resource rents, political realities suggest decentralization. It is noted that there will be many claimants to potential rents from Russian natural resources, including consumers, native peoples, suppliers of oilfield equipment, pipeline companies, foreign investors, and managers and employees in the energy sector and its suppliers. Last, consideration is given to whether resource rents should be placed in trust funds, by either native peoples or the government of producing regions, and the experience of Alberta and Alaska in this area is reviewed.