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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES April 2003 MONTHLY BULLETIN Moscow 1999 Institute for the Economy in Transition, 1996. Licence, 021018 of 09.11.95 5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (095) 203-88-16 Fax: (095) 202-42-24 E- Mail: todorov@iet.ru The State of the Federal Budget......................................................................................................................... 3 Monetary Policy................................................................................................................................................. 6 External factors of monetary policies in the Russian Federation....................................................................... 8 The Real Sector: Factors and Trends............................................................................................................... 14 IET Business Survey: Industry........................................................................................................................ 16 Foreign Trade................................................................................................................................................... 18 On the progress of reforms in March and april of 2003................................................................................... 21 2 The State of the Federal Budget In February of 2003, the revenues of the state budget (cash execution) made 20.6 % of GDP, while expenditures made 16.4 % of GDP (see Table 1). Therefore, the federal budget surplus made 4.2 % of GDP.

Table 1 The monthly execution of the federal budget of the Russian Federation (in % of GDP1, in comparable prices).

III`02 IV`02 V`02 VI`02 VII`02 VIII`02 IX`02 X`02 XI`02 XII`02 I`03 II`03 III`03 I`02 II`02 Revenues Corporate profit tax 1,4% 1,4% 1,5% 1,9% 1,9% 1,7% 1,7% 1,7% 1,6% 1,7% 1,6% 1,6% 1,2% 1,1% Personal income tax 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% VAT, special tax and 4,9% 4,4% 4,0% 3,9% 3,6% 3,5% 3,5% 3,3% 3,2% 3,1% 3,1% 3,1% 2,4% 2,7% excises Tax on foreign trade and 9,3% 9,1% 9,3% 9,3% 9,3% 9,3% 9,3% 9,1% 9,0% 8,9% 8,9% 8,9% 11,2% 10,1% foreign trade operations Other taxes, duties and 6,9% 6,4% 6,8% 6,9% 7,0% 7,0% 7,0% 7,0% 6,9% 6,9% 6,9% 6,9% 8,5% 7,4% payments Total- taxes and charges 2,4% 2,6% 2,5% 2,4% 2,3% 2,3% 2,2% 2,1% 2,0% 2,0% 1,9% 2,0% 2,7% 2,7% Non- tax revenues 3,2% 3,3% 3,2% 3,0% 2,9% 2,9% 2,9% 2,8% 2,8% 2,8% 2,9% 3,0% 3,4% 3,4% Revenues, total 9,7% 9,1% 8,7% 8,7% 8,4% 1,8% 2,0% 2,0% 2,0% 2,1% 2,1% 2,1% 0,5% 1,7% Expenditure 20,4% 19,6% 19,6% 19,9% 19,6% 19,3% 19,4% 18,9% 18,5% 18,6% 18,5% 18,6% 18,8% 19,0% Public administration 2,1% 1,6% 1,4% 1,3% 1,2% 1,3% 1,4% 1,4% 1,4% 1,6% 1,4% 1,4% 17,5% 8,5% National defense 22,4% 21,2% 20,9% 21,2% 20,9% 20,6% 20,9% 20,4% 20,0% 20,2% 20,1% 20,1% 20,8% 20,6% 20,9% International activities Judicial power 0,1% 0,2% 0,3% 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,5% 0,3% 0,3% Law enforcement and 1,0% 1,5% 1,9% 2,3% 2,4% 2,5% 2,5% 2,5% 2,4% 2,4% 2,5% 2,7% 1,5% 2,1% security activities Fundamental research 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,3% 0,3% 0,3% 0,3% 0,3% -0,3% 0,0% Services provided for the 0,0% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,2% 0,2% 0,2% 0,1% 0,1% national economy Social services 0,6% 0,9% 1,0% 1,2% 1,2% 1,3% 1,4% 1,4% 1,4% 1,4% 1,5% 1,7% 1,1% 1,4% Servicing of public debt 0,0% 0,1% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,3% 0,3% 0,1% 0,2% Other expenditure 0,1% 0,3% 0,4% 0,5% 0,6% 0,7% 0,8% 0,8% 0,8% 1,2% 1,3% 1,5% 0,2% 0,4% Expenditure, total 3,7% 4,8% 4,8% 5,3% 5,2% 5,2% 5,2% 5,1% 4,9% 5,5% 5,6% 5,6% 1,5% 4,7% Loans, redemption 2,0% 3,4% 3,4% 2,6% 2,5% 2,4% 2,3% 2,4% 2,4% 2,2% 2,0% 2,0% 1,7% 2,9% 0,3% exclusive Expenditure and loans, 2,9% 3,3% 3,6% 3,9% 4,0% 4,0% 4,0% 3,9% 3,8% 3,9% 3,9% 3,8% 6,6% 4,2% redemption exclusive Budget deficit (-) 10,9% 15,0% 16,1% 16,9% 17,1% 17,2% 17,2% 17,1% 16,9% 17,8% 18,0% 18,7% 12,7% 16,4% 18,0% Domestic financing 11,5% 6,2% 4,8% 4,3% 3,8% 3,4% 3,7% 3,3% 3,1% 2,4% 2,1% 1,4% 8,1% 4,2% 2,9% Other taxes, duties and -11,2% -4,6% -2,7% -2,0% -1,8% -1,6% -1,8% -1,3% -1,2% -0,5% -0,2% 0,6% -6,6% -1,7% -2,9% payments Total- taxes and charges -0,4% -1,6% -2,1% -2,3% -1,9% -1,8% -1,9% -1,9% -1,9% -1,9% -1,9% -2,0% -1,4% -2,5% -2,2% Non- tax revenues -11,5% -6,2% -4,8% -4,3% -3,8% -3,4% -3,7% -3,3% -3,1% -2,4% -2,1% -1,4% -8,1% -4,2% -5.1% * % ; ** As compared with the figures registered in February of 2002, the budget revenues decreased by 0.6 p.p., while expenditures increased by 1.4 p.p. and budget surplus decreased by 2.0 p.p. At the same time, without SST the budgetary revenues increased by almost 1.1 p.p. of GDP and made 17.9 % of GDP.

In February of 2003, VAT accounted for the major share of federal tax revenues 36 % of the total tax revenues what is by about 6 p.p. above the level observed in the respective period of 2002.

According to preliminary estimates, the cash execution of federal budget revenues made 20.9 % of GDP in January through March of 2003, what is at the respective level observed in January through March of 2002.

At the same time the cash execution of expenditures made 18.0 % of GDP (16.1 % of GDP in 2002);

therefore, the surplus made 2.9 % of GDP (4.8 % of GDP in 2002).

According to the preliminary estimates of the Finance Ministry, in terms of fulfilled funding2 the expenditures of the federal budget in January through March of 2003 made 20.8 % of GDP (see Table 2), while on April 1 of 2002 this indicator was at 18.6 % of GDP. As a result, the surplus of the federal budget Because of the estimated data on GDP, the indices may be subject to revision.

The execution of the budget in terms of fulfilled (actual) financing is equal to the sum of the funds transferred to managers of budget funds, while the cash execution of the budget is equal to the sum of funds spent by managers of funds (i.e. without account of funds remained on their accounts).

in terms of fulfilled funding in the first three months of 2003 has also decreased by 2.2 p.p. in comparison with the figures registered in the respective period of 2002 and made 0.1 % of GDP.

Table The monthly execution of the federal budget of the Russian Federation (in % GDP, fulfilled funding) I`02 II`02 III`02 IV`02 V`02 VI`02 VII`02 VIII`02 IX`02 XII`02 I`03 II`03 III`22,2% 21,0% 20,9% 21,2% 20,8% 20,5% 20,5% 20,5% 20,0% 20,1% 21,4% Total 21,2% 20,9% Public 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,6% 0,6% administration 1,7% 2,4% 2,4% 2,7% 2,7% 2,7% 2,7% 2,7% 2,6% 2,6% 2,5% National defense 3,2% 3,3% International 0,4% 0,2% 0,4% 0,5% 0,4% 0,4% 0,4% 0,3% 0,3% 0,3% -0,4% 0,1% 0,1% activities Judicial power 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% Law enforcement and security 1,6% 1,4% 1,4% 1,5% 1,5% 1,6% 1,9% 1,6% 1,6% 1,7% 1,9% 2,3% 2,3% activities Fundamental 0,3% 0,3% 0,2% 0,3% 0,3% 0,3% 0,2% 0,3% 0,3% 0,3% 0,3% 0,3% 0,3% research Services provided for the national 0,3% 0,6% 0,8% 0,9% 1,0% 1,0% 1,1% 1,1% 1,0% 1,5% 0,6% 0,8% 0,9% economy Social services 5,0% 5,7% 5,3% 5,9% 5,7% 5,5% 5,6% 5,4% 5,2% 5,7% 2,6% 2,8% 2,7% Servicing of public 1,9% 3,4% 3,4% 2,7% 2,5% 2,4% 2,6% 2,4% 2,4% 2,0% 1,7% 3,0% 3,0% debt Other expenditure 3,5% 4,0% 3,9% 4,0% 4,6% 4,2% 4,0% 4,0% 4,0% 3,8% 7,0% 7,8% 7,3% Total expenditure 15,5% 18,7% 18,6% 19,1% 19,4% 18,9% 19,1% 18,6% 18,2% 18,7% 16,9% 21,1% 20,8% (+) / 6,8% 2,3% 2,3% 2,1% 1,4% 1,6% 1,4% 1,8% 1,7% 1,4% 4,5% 0,1% 0,1% (-) According to the estimates of the Revenue Ministry, in March of 2003 tax revenues of the federal budget made Rb. 115.3 billion (without the single social tax). In real terms the revenues made 265.5 % of the level registered in January of 1999, while the respective indicator was at 234.8 % in 2002 and 227.6 % in (see Table 3).

Table Actual tax revenues to the federal budget, according to the data of the MTC (in % of the data for January of 1999)3.

I II III IV V VI VII VIII IX X XI XII 100,0% 115,1% 122,0% 122,1% 104,5% 112,9% 127,0% 127,5% 124,3% 141,4% 160,8% 213,1% I II III IV V VI VII VIII IX X XI XII 149,3% 160,5% 181,3% 205,8% 233,1% 186,9% 181,0% 186,4% 173,1% 181,1% 201,7% 254,1% I II III IV V VI VII VIII IX X XI XII 204,4% 198,4% 227,6% 267,5% 252,2% 233,3% 231,9% 235,6% 219,4% 237,5% 247,3% 360,6% 2002* I II III IV V VI VII VIII IX X XI XII 218,7% 187,1% 234,8% 277,8% 239,6% 218,0% 284,4% 246,5% 254,8% 299,7% 241,0% 250,2% 2003* I II III 230,0% 229,2% 265,5% * .

It was decided to choose January of 1999 as the benchmark in order to render the comparison more reliable. January of 1999 is not a remarkable date in terms of tax revenues.

200% 180% Profit tax VAT 160% 140% 120% 100% 80% Fig 1. Rate of growth of the real tax arrears to the federal budget (in % to June of 1999) Table Execution of the RF consolidated budget (in % of GDP).

I II III IV V VI VII VIII IX X XI XII Taxes 16,2% 17,4% 18,1% 19,3% 19,7% 19,8% 19,8% 19,4% 18,8% 18,5% 18,6% 19,6% Revenues 18,8% 20,1% 21,2% 22,4% 23,0% 23,2% 23,2% 22,9% 22,3% 22,0% 22,0% 24,5% Expenditures 25,3% 23,8% 27,0% 28,1% 28,6% 29,5% 29,4% 28,6% 27,4% 26,9% 27,1% 29,5% Deficit -6,5% -3,7% -5,8% -5,7% -5,7% -6,3% -6,2% -5,7% -5,2% -5,0% -5,0% -5,1% I II III IV V VI VII VIII IX X XI XII Taxes 16,8% 16,6% 18,1% 19,9% 20,1% 20,5% 20,8% 20,8% 20,3% 20,2% 20,9% 22,1% Revenues 19,2% 18,9% 20,6% 22,7% 23,2% 23,9% 24,3% 24,5% 24,1% 24,0% 24,8% 26,3% Expenditures 18,6% 20,3% 23,6% 25,6% 26,6% 27,3% 27,4% 27,4% 26,7% 26,3% 26,7% 29,2% Deficit 0,6% -1,5% -3,1% -3,0% -3,4% -3,4% -3,1% -2,9% -2,7% -2,3% -1,9% -2,9% I II III IV V VI VII VIII I X XI XII Taxes 20,8% 21,4% 22,6% 24,2% 25,5% 25,4% 24,9% 24,8% 24,1% 23,7% 24,0% 24,6% Revenues 24,4% 24,8% 26,4% 28,2% 29,7% 29,7% 29,3% 29,2% 28,4% 28,0% 28,6% 30,0% Expenditures 19,6% 21,1% 23,8% 24,8% 25,2% 25,5% 22,3% 25,1% 24,5% 24,2% 24,6% 27,0% Deficit 4,7% 3,7% 2,6% 3,4% 4,5% 4,3% 7,0% 4,1% 3,9% 3,8% 4,0% 3,0% I II III IV V VI VII VIII I XI XII Taxes 22,7% 23,6% 23,9% 25,4% 26,4% 26,0% 26,1% 25,9% 25,0% 24,8% 25,4% 27,1% Revenues 25,9% 27,1% 27,4% 29,3% 30,5% 29,8% 29,9% 29,7% 28,3% 28,2% 28,8% 29,5% Expenditures 16,8% 22,8% 23,7% 24,7% 25,1% 25,3% 25,5% 25,6% 24,9% 24,7% 25,0% 25,6% Deficit 9,1% 4,2% 3,7% 4,7% 5,4% 4,4% 4,4% 4,1% 3,5% 3,5% 3,8% 3,9% I II III IV V VI VII VIII IX X XI XII Taxes 28,7% 23,6% 24,3% 26,5% 26,6% 25,9% 26,4% 25,9% 25,2% 25,4% 25,4% 25,5% Revenues 32,9% 31,3% 31,4% 33,6% 33,6% 32,7% 33,3% 32,5% 31,7% 32,0% 32,1% 32,1% Expenditures 18,3% 23,7% 26,0% 28,4% 28,4% 28,8% 29,1% 28,9% 28,4% 29,3% 29,7% 31,1% Deficit 14,6% 7,7% 5,4% 5,3% 5,2% 3,8% 4,2% 3,7% 3,3% 2,7% 2,4% 1,0% I II Taxes 25,6% 24,4% Revenues 32,0% 30,3% Expenditures 20,7% 25,3% Deficit 11,3% 5,0% * June August October December February April June August October December February April June August October December February April June August October December February The debts related to the payments due to the federal budget made for VAT Rb. 231.6 billion as on April 1, 2003, the arrears of the profit tax made Rb. 30.6 billion. The dynamics of real arrears relating to major debts since June of 1999 is presented in Fig. 1. On the whole, the dynamics and the latest data still demonstrate a gradual decrease in the level of accumulated arrears as concerns the profit tax and a certain trend towards a decline in VAT arrears.

The revenues of the consolidated budget in February of 2003 made 32.3 % of GDP, including tax revenues (without SST) at 24.4 % of GDP (see Table 4). Expenditures of the consolidated budget increased by 1.6 p.p. in comparison with the figures registered in February of 2002 and made 25.3 % of GDP. The surplus of the consolidated budget in February of 2003 made 5.0 % of GDP, what is below the level observed in January of 2002 (7.7 % of GDP).

S. Batkibekov Monetary Policy Inflation in Russia stabilised at the level of 1.1 percent per month. The Central Bank of RF introduced a new procedure for the establishment of the official RUR - US$ rate; from now on the rate will be established based on the results of the special SELT session with settlements 'tomorrow'.

In March 2003 inflation in Russia fell to 1.1 percent (see Fig. 1). The average daily price growth in March did not exceed 0.034 percent; this is lower than in the corresponding period of 2002 (0.035 percent) and in the previous month (0.058 percent). In March the index of foodstuff prices was 101 percent (104.8 percent since the beginning of the year); for non-foods: 100.8 percent (102.8 percent); for payable services to the population: 101.7 percent (110.6 percent). The base consumer price index (BCPI) (that does not take into account "short-term irregular price changes under the influence of individual factors of administrative, occasional or seasonal nature") grew 0.7 percent in the course of the past month or 2.8 percent since the beginning of the year. Thus, in Quarter 1, 2003, consumer prices grew 5.2 percent as against 5.4 percent in the corresponding period of 2002, slightly exceeding the upper five percent limit set in the forecast by the Ministry for Economic Development. It should be reminded that the official inflation forecast for the year is 12 percent.

According to preliminary estimates, the CPI did not change in April as compared to March, remaining at the level of 101.1 points.

Rates of consumer price index growth in 2002-2003 (% per month) 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Fig. 1.

In March and April of 2003 foreign reserves of the Bank of Russia continued to grow (see Fig. 2).

As at 1 April, 2003, they reached US$ 55.4 billion or 16.1 percent more than at the beginning of 2003. At the same time, the rate of foreign reserve growth fell in March to 4.3 percent (February:

7.7 percent). During the first three weeks of April foreign reserves increased US$ 2.3 billion, reaching the level of US$ 57.7 billion on 20 Aril.

Dynamics of money supply (limited indicator) and foreign reserves in the second half of 2002 - 990 930 860 800 (. .) (. $) Fig. 2.

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