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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES April 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 Political and Economic Developments of April 2006............................................................................. 3 Budgetary and Tax Policy....................................................................................................................... 5 Monetary Policy...................................................................................................................................... 9 Financial Markets.................................................................................................................................. 12 How fast will the RF Stabilization Fund grow...................................................................................... 23 The Real Sector of the Economy: Major Factors and Trends............................................................... 24 Oil and natural gas sector...................................................................................................................... 28 IET Business Survey: Industry in May of 2005.................................................................................... 32 Foreign Trade........................................................................................................................................ 34 Directions of Optimization of the Budgetary Financing of Science..................................................... 37 Issues discussed at the meetings held by the Government of the Russian Federation on April 13 and 20 of 2006................................................................................................................... 40 A review of budget legislation introduced in April of 2006................................................................. A review of regulatory documents concerning taxation issues, which were made public in March and April of 2006................................................................................................................... A review of economic legislation: April of 2006.................................................................................. Political and Economic Developments of April After the eventful March of 2006, one could not observe a lot of them (political events) in April.

Contrary to the expectations, the annual Putins address had never been made public. Moreover, rumors were circulated in the press that different groups of authors of the address (that were competing) appeared and the customer, allegedly, was not satisfied with one or all of them (at a time).

In late April, Vladimir Putin suddenly interfered in the debates around the construction of East Siberia oil pipeline from Taishet to port Nakhodka and to China. As is known, for the purpose of cutting the costs (an alternative route will be longer and will require considerably greater amount of funds) of the project operator Transneft The RF government decided to construct the pipeline not far from (800 m) the Lake Baikal, in a seismically dangerous zone. Since March 2006, mass protest actions were held in Irkutsk oblast. It is interesting that not only opposition organizations, but also not long ago appointed governor of the oblast, A.Tishanin, the leadership of the regional branch of Single Russia etc., took part in them. One might think for a long time that the power paid no attention to those protest actions thus, in early April, the pro-president majority of the parliament adopted amendments to the Water Code that admitted the construction. However, at the meeting on the problems of development of the Siberian Federal okrug V.Putin suddenly conducted a PR-action and read the head of Transneft S.Vainsttok a lecture in public in the presence of A.Tishanin and the representative of the scientific community, when he said that the construction of the oil pipeline should be started to the North of the Lake Baikal. Most likely, the Putins order will gradually be softened (in order to make it effective, it is necessary to annul the respective government resolution, a new environmental expertise will be needed etc. its hard to believe in such things, likewise the phrase to the North), however, a small victory of society and opposition can be noted because without such protest actions, no cause would be for PR-action. On the other hand, the second in two months PR-action (after release, at the request of the Single Russia party the driver O.Shcherbinsky, who was to be blamed for the car accident (but in reality it was the official who drove at a dangerous rate) and who became, for a while, a symbol of motorists struggle for their rights) suggests that the power mastered a new tactics first creating problems for citizens, and then their elimination by wise guides. Its not for certain that it will be useful for the powers the society wall have (in this case) incentives for fighting.

In April there was another escalation of gas war of the Russian government, this time it was for the most part verbal one. Gazprom leadership required to raise gas prices for Belarus and once again for the Ukraine (both of these countries reasonably ignored the requirement because of absence of transit alternatives for Gazprom), and in the middle of the month made a number of bellicose statements this time concerning the European Union. Gazprom accused EU in squeezing out the gas concern from the market and promised simply to go to those markets where we are long wished for. By squeezing out Gazprom meant a refusal to admit the gas concern to sale of gas in EU countries. Finally, V.Pu0tin joined the discussion and assure everyone in absence of Gazprom plans for buying of British gas-distributing companies (earlier confirmed by Gazprom) and again promised to redirect gas supplies to Asia. The EU was equivocal: The British Premier hotly assured Putin in absence of intentions to hinder buying by Gazprom the gas-distributing companies, while Brussels officials responded in the following way: they stressed politicization of the issue by the Russian gas concern and, as a result, dropped a hint of doubt in Gazprom reliability.

While assessing the next circle energy dialogue prior to the summit, one can see that it is not beneficial to the Russian powers, which position itself abroad as a reliable supplier of resources in conditions of the world jump in prices for energy sources and degradation of domestic and business situation in many oil-producing countries (Iraq, Iran, Venezuela, Nigeria, and Saudi Arabia). Agreeing all the seriousness of the problem, in the years to come until 2008 at a minimum Russia has no alternative to European supplies short-range plans concerning the construction of gas pipeline to China relate even to 2011, while nobody can be deceived by the talks of construction of a gas pipeline to the South Korea via the North Korea. By contrast, the more realistic plan of the North-European gas pipeline, which is under way, is a senseless idea from the perspective of supplies to Asia. On the whole, premature (well in advance of possible realization) threats do not testify to a force, but set on the alert. One cannot but mention next unpleasant news regarding possible Russias WTO accession.

Despite the U.S. consent to the Ukraines WTO accession, Americans are not in a hurry to sign the corresponding protocol with Russia, putting both standard (liberalization of banking sector), and specific (civil aviation) or hard verified (intellectual property protection) terms. In April, Russian negotiators in fact certified that it wont be possible for Russia to join WTO in 2006.

The premier M.Fradkov signed a resolution on the procedure of control of the Stabilization fund.

Let us bear in mind that this document was actually blocked by departments, and even in a higher degree by the Government Office during a year and a half, and because of its absence the investment by means of the funds of the Stabilization fund had not been performed. Recently, such a situation gave rise to a rising criticism from every side, equally as in the RF government itself. Alongside with that, this resolution does not mean the end of discussions. The normative documents of the Ministry of Finance are to be approved, which should specify technical details the list of financial instruments being subject to investment (and, in this case, the question is not solved whether this will be only the government papers of foreign countries or the companies shares as well), investment environment, investment executive body (bodies) etc.

In April V.Putin critisized the implementation of the national project affordable housing. Besides the reproaches of negligence of bureaucrats (naturally, at the local level), there was an opinion that construction and preparing sites is necessary where not individual houses are built up, but the whole urban districts. Instead of distributing the land lots to builders who participated in the national project, local officials gave them to their property developers. While talking with D.Medvedev, who told about the malign non-use of the land lots by local powers, Putin offered to take the decisive measures:

As regards the land lots, which were distributed without necessary legislative procedures, I would like to ask our colleagues from the State Duma to think of how to withdraw such land lots.

Even without that, the existing legislation provides for withdrawal of inappropriately used land lots, however, the problem is in that no mythical wastelands (which were repurchased by dishonest property developers in big cities) really exist. In fact, the question is either about infill construction or breakdown of natural landscape in a town (parks, squares etc.), or demolition of existing buildings.

Most probable, the latter variant is suggested. Let us hope that construction of houses for one category of people would not lead to its loss by the other, just in the manner its happening within the frame of struggle for observance of environmental regulation in the Moscow region (Podmoskoviye).

In April the situation again aggravated around Svyazinvest (the fifth year in succession there is talk about privatization of this holding, more specifically, of its state-owned stake, however, the operation is constantly postponed). Rumors of the resignation of general director Yashin continue to circulate, while in April the chairman of the Russian Fund of Federal Property, Yu.Petrov, was the first to make a stand against the sale of Svyazinvest stake. Still more curious is the fact that there was not (in this case) a scientifically grounded refusal of privatization that appeals to greater efficiency of the state property and establishing 30-40 state-owned holdings, such as Gazprom. One might suggest that somewhat latish Petrovs opinion, call the tune for the future course of official ideology in line with the realities of the current government policy.

There was conducted an ordinary congress of the Russian Union of Industrialists and Entrepreneurs (RUIE). Its new president, A.Shokhin, tried to suggest a liberal economic manifesto (based on the report prepared under the editorship of E. Yasin). He criticized inability of the government to control the expansion of the government sector (noncompetitive sphere) and compared it with private business. The following officials are represented in the board of RUIE the head of the Federal Service on Financial Markets, O. Vyugin, deputy minister of MERT (Russia's Ministry of Economic Development and Trade), T A. Sharonov, deputy minister of the Minpromenergo (Russia's Industry and Energy Ministry) A. Reus, first deputy of the Central Bank of Russia, A. Ulyukaev. Thus, one may certify that the new management of RUIE tries to position itself as a center of consolidation of the liberal concept, supported by business. They somehow managed to do it, but one should bear in mind that there were not many big entrepreneurs among the participants of the congress, and it was not V.Putin, who spoke speak from the scaffold (as it was before), but a notorious deputy Procurator General, V.Kolesnikov.

In the spirit of the posed task of distribution of land lots to the participants of the national projects the State Duma started to consider the amendments to the federal law On general principles of organization of legislative and executive bodies of state power of the Russian Federations Subjects and On general principles of organization of local self-governance in the RF. The amendments are aimed at further liquidation of local self-governance. For the past several years the Russian power achieved much success in this direction, having provided for possibility of appointment of a citymanager, that accumulates financial flows and deprives the selected head of major powers, a possibility of introducing temporary state administration (in acts of God, defaulted debt above 30% of own profits and inappropriate use of subventions), and having wide experience of dismissal of unwanted mayors (via courts) from office. Now it suggested that the legislative bodies of the Federations Subject (which, as a rule, are controlled by governors) had a possibility by themselves to devise a ground for introduction and the period of temporary state administration, first of all in the sphere of housing and utilities sector, transport and land-utilization i.e. in the most significant for citizens and most profitable for officials spheres.

Direct appointment of mayors by governors would radically conflict the European charter of local self-governance and could create considerable problems in the European agencies (primarily, in the Council of Europe and OSCE), that is why the offered form of correction of corruption vertical looks by far more preferable. However, it is not excluded that considering Shcherbinsky case the proposals will be corrected, the more so, in most of regions open conflicts between mayor and governor are in times past, furthermore, much more stronger position of governors may strike a warning note for some in the Kremlin.

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