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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES January 2006 MONTHLY BULLETIN Moscow 2006 Institute for the Economy in Transition, 1996.

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (495) 203-88-16 Fax: (495) 202-42-24 E- Mail: todorov@iet.ru 1 Budget and tax policies........................................................................................................................... 3 Monetary policy...................................................................................................................................... 6 Financial markets................................................................................................................................... 8 The real sector of the economy: factors and trends............................................................................... 18 Oil and Gas Sector................................................................................................................................. 23 The State of Affairs in Industry in January 2006.................................................................................. 28 Foreign trade......................................................................................................................................... 29 The trends on Russias corporate control market in the year 2005....................................................... 32 National project Development of the agrifood sector........................................................................ 35 Issues Considered at the Session of the RF Government on January 19 and 26.................................. 39 An overview of the normative documents concerning the issues of taxation adopted in December 2005-January 2006................................................................................................................................ 41 An overview of budget legislation for late December 2005 January 2006........................................ An overview of economic legislation adopted in January 2006............................................................ Budget and tax policies According to the preliminary results of the budgets execution in January through December 2005, the revenue level of the RF federal budget amounted to 24.23% of GDP, the expenditure level of the RF federal budget - to 16.55% of GDP, while the budget surplus was 7.68% of GDP. In January through September 2005 the revenue of the RF consolidated budget amounted to 36.0% of GDP, consolidated budget expenditure to 27.2% of GDP, and budget surplus to 8.8% of GDP. As of 1 January 2006, the amount of the RF Stabilization Fund was 1237.0 billion roubles, as compared to 1236.billion roubles as of 1 December 2005. Thus, the size of the Stabilization Fund during last December changed only slightly.

The status of the state budget In accordance with the preliminary estimates made by the RF Ministry of Finance concerning the budgets execution in cash terms in January through December 2005, the federal budget was executed on the revenue side in the amount of 5,15.69 billion roubles (24.23% of GDP), and on the expenditure side - in the amount of 3,494.27 billion roubles (16.55% of GDP). The federal budget surplus amounted to 1,621.42 billion roubles (7.68% of GDP). In should be noted that the volume of federal budget revenue in 2005 was much higher than the similar index observed in the year 2004, which was 3,426.33 billion roubles (20.4% of GDP). Federal budget expenditure in 2005 also demonstrated growth, as compared to the corresponding index of the year 2004 (2,695.62 billion roubles, or 16.1% of GDP). The budget surplus in the period under consideration was also much higher than that in (730.71 billion roubles, or 4.4% of GDP).

The volume of federal budget revenues in November and December 2005 amounted to 459.33 billion roubles and 507.42 billion roubles, respectively, or to 23.44% and 24.97% of the monthly GDP.

Federal budget expenditure in November and December 2005 was 252.38 billion roubles (12.88% of GDP) and 527.55 billion roubles (25.96% of GDP), respectively, while the federal budget surplus amounted to 206.95 billion roubles and -20.13 billion roubles, constituting, with regard to GDP, 10.56% and -0,99%, respectively. On the basis of these data, it can be stated that there occurred a considerable growth in federal budget expenditure, as seen by the results of the last month of the year 2005, alongside a negligible growth in revenue.

The revenue structure in the period under consideration is shown in Table 1.

Table 1.

RF federal budget revenue in October, November and December (as a percentage of GDP, budget execution in cash terms) Execution in cash terms October Novem- December ber Taxes and other payments adminis11.96% 10.91% 10.67% tered by Federal Tax Service Taxes and other payments adminis9.63% 11.53% 12.86% tered by Federal Customs Service Revenues administered by Federal Agency for Management of State 0.66% 0.25% 0.30% Property Revenues of federal budget adminis0.76% 0.75% 1.15% tered by other federal bodies Total revenues 23.01% 23.44% 24.97% As can be seen in Table 1, in December 2005 the structure of tax revenue remained the same as in November. Thus, the main bulk of tax revenue was constituted by the taxes and other payments administered by the Federal Customs Service (12.86% of GDP). The collected amount of taxes and other payments administered by the Federal Tax Service went down by comparison with the previous month, and constituted 10.67% of GDP. The volume of revenues administered by the Federal Agency for the Management of State Property demonstrated a certain increase and amounted to 0.30% of GDP. As for the rest of the federal budget revenues administered by other federal bodies, in December these amounted to 1.15% of GDP, which is markedly higher than the indices registered in October and November.

The preliminary data on the financing of the federal budget expenditures in January through December 2005, submitted by the RF Ministry of Finance, are presented in Table 2.

Table 2.

The volumes of financing of the RF federal budget expenditures in January - December 2005 (as % of GDP) Financing of expenditures January - October January January November December General state issues 2.90% 2.68% 2.64% of these, servicing of state and municipal debts 1.33% 1.20% 1.08% National defense 2.93% 3.03% 2.77% National security and law-enforcement activity 2.40% 2.32% 2.10% National economy 1.20% 1.22% 1.19% Housing and utilities system 0.03% 0.04% 0.04% Environment protection 0.03% 0.02% 0.02% Education 0.88% 0.82% 0.75% Culture, cinematography and mass media 0.24% 0.25% 0.23% Public health care and sports 0.48% 0.47% 0.43% Social policy 1.01% 0.98% 0.90% Interbudgetary transfers 6.91% 6.36% 5.91% Total expenditure 19.00% 18.19% 16.98% Table 3.

The execution of the RF consolidated federal budget in January September 2005 (as % of GDP) 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% Revenue 32.9% 31.3% 31.4% 33.6% 33.6% 32.7% 33.3% 32.5% 31.7% 32.0% 32.1% 32.1% Expenditure 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 / 7.7% 5.4% 5.3% 5.2% 3.8% 4.2% 3.7% 3.3% 2.7% 2.4% 1.0% 14.6% Surplus I II III IV V VI VII VIII IX X XI XII Taxes* 25.6% 24.4% 25.6% 27.4% 27.1% 26.0% 26.1% 25.7% 5.0% 5.0% 5.1% 25.2% Revenue 32.0% 30.3% 31.5% 33.4% 33.6% 32.2% 32.2% 31.6% 0.9% 0.8% 0.7% 31.1% Expenditure 20.7% 25.3% 27.7% 28.8% 28.8% 28.6% 28.7% 28.5% 8.2% 7.8% 7.9% 29.7% Deficit / 11.3% 5.0% 3.8% 4.5% 4.7% 3.5% 3.6% 3.1%.7% 3.0% 2.8% 1.4% Surplus I II III IV V VI VII VIII IX X XI XII Taxes* 6.1% 21.8% 27.4% 27.4% 26.6% 27.2% 27.1% 26.4% 26.5% 26.9% 26.8% Revenue 30.6% 28.2% 29.8% 32.9% 32.9% 32.5% 33.1% 32.9% 31.9% 32.0% 32.3% 32.3% Expenditure 18.5% 22.8% 25.4% 27.3% 26.9% 27.0% 27.0% 26.9% 26.0% 25.9% 26.1% 27.8% Deficit / 12.1% 5.4% 4.4% 5.6% 6.0% 5.5% 6.1% 6.0% 5.9% 6.1% 6.2% 4.5% Surplus I II III IV V VI VII VIII IX X XI XII Revenue 48.8% 40.3% 40.3% 40.8% 38.8% 38.2% 37.6% 37.0% 36.0% Expenditure 22.2% 23.3% 24.9% 27.1% 26.5% 26.6% 26.7% 26.6% 27.2% Deficit / 26.5% 17.0% 15.4% 13.7% 12.3% 11.6% 11.0% 10.5% 8.8% Surplus It can be noted that as of the end of December the share of the federal budgets financed expenditure in GDP was 16.98%, which is much lower that the similar index achieved by the end of November 2005. The highest volume of financing, as before, was seen in respect to interbudgetary transfers (5.91% of GDP), national defense (2.77% of GDP), general state issues (2.64% of GDP), including the servicing of state and municipal debts (1.08%), and national security and law-enforcement activity (2.10% of GDP). The total all the other expenditure items amounted to about 3.56% of the GDP. By the results of December, one can notice the decreased shares in GDP of almost all of the expenditure items.

Judging by the results of the period of January through September 2005, RF consolidated budget revenue amounted to 36.0% of GDP, as compared to 31.9% of GDP during the same period of 2004.

Consolidated budget expenditure grew, as compared to the similar index of 2004 (26.0%), amounting to 27.2% of GDP. The consolidated budget surplus in January through September 2005 was 8.8% of GDP, or considerably higher than a similar index in 2004 (5.9%). Thus, the year 2005 saw a marked growth in RF consolidated budget revenue against the background of almost unchanging expenditure, which resulted in the noted substantial growth in the consolidated budget surplus.

As of 1 January 2006, the amount of the RF Stabilization Fund was equal to 1237.0 billion roubles, as compared to 1236.5 billion roubles as of 1 December 2005. Thus, the size of the Stabilization Fund in December of last year remained practically unchanged. In particular, its resources were used to effectuate the early redemption of the debt to the RF Bank for Foreign Trade in the amount of 123.billion roubles, formed against the credits granted to the RF Ministry of Finance in 1998-1999 for the repayment and servicing of RF external government debt. Besides, in December certain monies were transferred from the Stabilization Fund to the budget of the RF Pension Fund.

The main developments in the budget sphere In January, the RF Ministry of Finance published the draft Federal Law On making amendments to the Budget Code of the Russian Federation in the part regulating the budget process, and recognizing as null and void certain legislative acts of the Russian Federation, which had been developed in accordance with the Concept of reforming the budget process in the RF, approved by Decree of the RF Government as of 22 May 2004. The main innovations suggested in the draft law are as follows:

1) the transition, at all the levels of the budget system, to medium-term financial planning, including for the federal budget and the state off-budget funds of the Russian Federation the formation of budgets for a three-year period;

2) clear coordination of the budget allocations to the provision of state (or municipal) services with the fulfillment of state (or municipal) assignments, creation of appropriate conditions for the emergence of organizations with new organizational-legal forms and for the restructuring of the budgetary network;

3) the bringing in proper order, in accordance with the uniform principles for the organization of the budget process (the preparation, consideration and approval, execution and development of reports concerning the execution of the budgets of the budget system of the Russian Federation, including the budgets of state off-budget funds), including the consolidation of unified requirements to budget planning, and the transition to the approval of a federal law on the federal budget in three readings, and more precise and transparent regulation of the budgets execution;

4) The planning of the expenditures on the implementation of long-term target program and the implementation of budget investments on the basis of a division of the existing obligations (programs and projects approved in the established procedure) and the newly adopted obligations (programs and objects suggested for approval), with each program and object being reflected in the composition of a departmental structure of expenditures within a given budget;

5) a systematic description of the list and the powers of the participants in the budget process, and primarily the principal managers (or managers) and recipients of budget funds, administrators of budget revenues and administrators of the sources of financing to cover budget deficits;

6) strengthening of the incentives for the state authorities of subjects of the Russian Federation and the bodies of local self-government to administer the regional and local finances with efficiency and responsibility;

7) the approval of the basic principles and provisions of the budget classification of the Russian Federation by the Budget Code of the Russian Federation (hereinafter the Budget Code), with a simultaneous expansion of the powers of authorities of different levels relating to its detalization, and the integration of the budget classification with budget accounting.

Besides, the draft law suggests a number of editorial amendments, aimed at eliminating intrinsic contradictions, filling up the existing gaps in legal regulation, or finding more precise wordings for the existing version of the Budget Code. In its entirety, the system of amendments suggested in the draft law will create a legal foundation for a fundamentally new organization of the budget process at all the levels of the budget system of the Russian Federation, for implementing new principles and methods of financial management, for increasing the independence and responsibility of authorities of all levels, and in the final analysis for increasing the efficiency and transparency of the management of public finances.

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