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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES April 2005 MONTHLY BULLETIN Moscow 2005 Institute for the Economy in Transition, 1996. Licence, 02079 19 2000 .

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (095) 203-88-16 Fax: (095) 202-42-24 E- Mail: todorov@iet.ru 1 Politico-economical developments of April 2005.................................................................................. 3 Budgetary and Tax Policy....................................................................................................................... 5 Monetary Policy.................................................................................................................................... 10 Financial Markets.................................................................................................................................. 13 The Real Sector of the Economy: Factors and Trends.......................................................................... 23 IET Business Survey: Industry in April of 2005................................................................................... 26 Oil and Gas Sector................................................................................................................................. 28 Collapse of YUKOS and ownership rights protection.......................................................................... 33 New approach to budget financing of the Russian agrifood sector....................................................... 39 Foreign trade......................................................................................................................................... 42 Changes in the State Priorities of Scientific and Technological Development..................................... 45 Issues Considered at the Sessions of the RF Government on April 7 and 21....................................... A review of regulatory documents concerning taxation, which were made public in April of 2005.......................................................................................................................... A review of economic legislation: April of 2005.................................................................................. Politico-economical developments of April Major event of April 2005 was the annual Presidents address.

The address was in a classical liberal spirit. Vladimir Putin stated: - I consider the development of Russia as a free and democratic state to be the main political and ideological goal. Having made a traditional excursion into the history, that boils down to the fact that we managed to normalize the situation after geopolitical disaster of the century (i.e. disintegration of the USSR), Putin described further a number of problems serving their own interests bureaucracy, arbitrary behavior of power and taxation bodies, corruption etc. Summing up the above said Vladimir Putin pointed out to the following:

- The right to be elected or appointed to a state post must be equally available to all the countrys citizens;

- Access to mass-media is to be provided for all parliamentary factions;

- The procedure of parliamentary investigations must be confirmed by law;

- The President can propose a representative of the party that wins the regional elections as candidate for the post of the head of executive power of the Federations subjects.

- In freeing major mass media from the oligarchs censorship, we failed to protect them from the unhealthy zeal of certain officials.

- Focusing the efforts of law enforcement bodies on the fight against crime, including tax evasion, we encountered frequent violations of the rights of our businessmen, and sometimes a blatant racket on the part of state officials;

- Instead of being proud of a man in uniform, a law-abiding citizen crosses the street while seeing him;

- The prosperity of every individual should be determined by his or her labor and abilities, qualifications, and effort , and everyone has the right to dispose of what he or she earned at will, - Stability of the right to private property is the alpha and omega of any business. The rules to which the state adheres in this sphere should be clear to everyone, and, importantly, these rules should be stable. This enables to normally plan both developing their business, acquisition of housing or its privatization;

- Citizens should be allowed to declare the money they have saved in previous years, in the previous period, in a simplified procedure, with payment of a 13 per cent income tax and depositing the relevant sums into Russian bank accounts;

- It is necessary to reduce to three years the statute of limitations regarding application of consequences of invalidity of void transactions;

- Such ways should be found for repaying the back taxes from previous years that provide the interests of the state, but would not destroy the economy and push business into a corner.

- It is necessary to draft and legally formalize a system of criteria to determine the limitations on foreign participation in the sectors of the economy, having determined, at the same time, a list of industries or facilities that shall not be extended; And so on and so forth.

It is interesting that Vladimir Putin blamed the RF Government for sluggishness, specifically for non-fulfillment of the initiatives on introducing changes in the state control of the RF on the statute of limitations regarding the performed transactions and claimed that only one word in one article must be changed.

Having made (without dispute) the most liberal in the history address, Putin did not say a word about those priority tasks he put in his previous address (reform of education and health care, accessibility of housing, military reform, Kaliningrad). And, it seems, that was not by chance, as on the four from five listed issues nothing could be promised to society (except for mortgage initiatives). Not a word had also been said about the monetization of benefits, populations response, and subsequent sharp increase in expenditures of the budgets of all levels in restoration of a part of benefits in kind.

Instead Putin pointed out to availability on the Northern Caucasia of not bad preconditions for priority rates of economic growth.

One cannot take this address differently than a PR-product, intended for a certain category of population (and also the foreign public opinion), which is far from truth and categorically unachievable.

First, talking of the democratic path of development and some indulgences (like appointing a governor a representative of the political party a winner in the region), nothing had been said that over the passed year a package of dramatic changes set towards limitation of citizens rights had been set in the voting system, on the initiative of Vladimir Putin. In particular, liquidation of the active right of RF citizen, difficulties n its implementation for a group of citizens of the RF (liquidation of electoral blocks, rising from 10 to 50 thou. a membership barrier for political parties, liquidation of constituencies, cancellation of governor elections, on retention of governors representation in the Soviet of the Federation), and the declared intentions can change nothing. Moreover, another package of amendments to the Federal Law On Elections of the State Duma Deputies was adopted in April, even more simplifying the arbitrary behavior of the government. If, earlier, detection of 15% of false signatures was sufficient for refusal of the party list registration, now the figure is reduced to 5%. Such amendments aimed obviously to satisfy the interests of Single Russia party, enable to assess the democratic initiatives (including unclear format of parties representation on the TV screen, etc), that were laid down in the address, as usual fiction.

Second, no doubt that the stability of private property and legal property relations are very important for the economy. But it is clear that such stability not only confines a possibility of becoming rich for officials (including top-level officials), but also their political power. An entrepreneur, who has both feet on the floor, paid transparent taxes, and who is conscious of his own interests, is no longer a rightless marginal (even if wealthy), who may suddenly be deprived of everything, but is the one, capable, among other things, to accumulate political capital for realization own active citizenship or economic interest. The first threatens the political power, while the second divests the executive power of monopoly economic rent. So, the crackdown on political and economic rights of citizens, carried out from mid-2003, developed in parallel. Its only natural to raise a question of changing the course.

But, is it so Changing the course and implementation of the initiatives laid down in the address means reviewing numerous novelties (which are explosive for the countrys legal framework), that emerged in rulemaking and judicial practice in the course of YuKOS case), which, talking of it, is far from being formally completed (for final expropriation of the company it is necessary to dispose of the second and third in size producing enterprises Tomskneft and Samaraneftegaz, Novokuibyshevsk refinery, sales network etc., which requires a certain period of time in most rapid conducting the case). In addition, appeals may arise for this and root case etc, which will take some time. Reviewing novelties means dismissing the majority of YuKOS criminal cases, rehabilitation of the majority of convicts and restoring most part of property. It is apparent that in todays countrys leadership this wont be happened. Therefore, the initiatives voiced in the address will not be implemented, or their realization will lead to such insignificant new provisions, which may be neglected.

Some statements of the address sound humoristic, for example, an intention to give a possibility for tax obligators to pay taxes without bankruptcy of their companies, in consideration of last year Putins statements saying that he is not interested in YuKOS bankruptcy and hopes that the government will refrain from measures of such kind. The fact that even now the tax legislation allows the tax service to conduct debt restructuring for selected enterprises, means nothing for those enterprises which are not that category.

One should also bear in mind that large claims had been urged to a number of companies in April (pretensions to TNK- for Rb 22 bn, assignment of the North-Urengoi gas field Nortgaz OAO Gasport, that had been in operation for 11 years, which actually means Nortgaz expropriation, lodging new tax pretensions to daughter enterprises Japan Tobacco, amounting them to more than $million), which, in keeping previous precedents give little chance for optimism. Of course, it must not be ruled out that taxation bodies operate as inefficient as does the RF Government in the case with 3year limitation period, but our forecast of its operation remains negative. The same concerns regulation of the activities of foreigners, particularly, scandalous refusals to FAS Siemens and Total for acquisition of the stock of Power Machines and Novato, correspondingly.

In the end, in the third part of Presidents address it is said about the power structures and their abuse of their authority. As no concrete measures for their removal had been stated in the address, no comments may be offered as yet. Looks highly symbolic, in this connection, introducing by V. Putin to the Federation Council of the candidature of V. Ustinov for reaffirmation to the post of ProsecutorGeneral (approved with one abstainee).

In the spirit of the Presidents address sounded also declarations of the group of Single Russia members on forming a write wing (A.Lebedev, P.Krasheninnikov, M.Prusak, D.Zelenin, A.Makarov etc.) under the direction of the former lawyer A.Sobchak and the head of the State Duma Committee on Constitutional Legislation, Victor Pligin. Blaming the powerful forces for their attacks on liberal values, the participants of the press-conference spoke openly about their fears concerning consolidation of the opposition, observed of late in the country, who stood out with slogans - Everyone against Single Russia and Let us Come Together against Putin. In order to prevent this, it had been announced on forming this legally inexplicit wing, however, the participants of the action announced that, in the event the faction takes a decision, they will vote in accordance with the party discipline and confirmed their voting on a package of bills concerning the cancellation of elections.

Though, in its present form, the project has not had long life less than in a week, at the meeting of the General Council of Single Russia its leader B. Gryzlov disowned the wings. Its only natural that he did so creation of wing with a view to transform it to political party prior to elections means loosing by the Single Russia of its qualified majority in the parliament and a part of regional parliaments (in the latter at times even majority), and the legislative rent connected with that, being in possession, currently, of the faction leadership and the head of the Expert Council of the Single Russia, V.Reznik. Moreover, in accordance with the law of political positioning, the new formation will try to maximize differences, making them a deal-making issue, not to mention the negative PR-effect for backbone party etc. Though, from the point of view of political technologies, creation of new pseudo-parties may be quite efficient in conditions of the fall of rating of powers.

At the General Council of Single Russia the representatives of Petersburg diplomats General Secretary V. Bogomolov (supervising regional party formation) and political executive Yu. Volkov had been dismissed. To replace them were appointed deputy of the chairman of the faction V. Volodin (considered to be close to the group of Yu. Louzhkov) and the State Duma deputy, son of the deputy Minister of the Emergency Situations Ministry, A. Vorobiev, accordingly. Partly this may be considered as weakening Gryzlov, also a Petersburg diplomat, partly as a reaction to weak activity of predecessors.

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