Local self-government is analyzed in this article from the point of view of “principal – agent” theory which the author considers most relevant for state-municipal relations in nowadays Russia. The author concludes that local self-government ceases to fulfill its immanent duties of local community agent and becomes an agent of state power, both federal and regional instead. The study of revenues and expenditures of local self-government has revealed that the principal confines the financial autonomy of its agent and at the same time cannot supply it with necessary resources by way of budget transfers. As a result the agent faces its diminished authority which may be seen in the examples of healthcare where local self-government has ceased its functioning and housing and communal services which have become much less financed. The study of the most well-to-do part of local self-government such as cities and townships, and regional capitals in particular, shows the decreasing level of their financial autonomy. Under such circumstances the introduction of city-manager model which means de facto submission of the cities to the regional authorities looks very logical. Recently both abolishment of direct mayoral elections and governors’ interference with direct elections have led to the change of the most municipal heads, especially representatives of oppositional parties and powerful local groups of elite. In many cases bureaucrats from the regional executive power have become municipal heads instead. As city administrations turn to branches of regional governments it complies to financial realities but at the same time cuts their links with local communities.