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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES APRIL 2008 MONTHLY BULLETIN Moscow 2008 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 Major Developments and Trends................................................................................................................. 3 The political and economic results of April 2008 (S. Zhavoronkov)............................................................. 3 Real Sector: Trends and Factors (O. Izryadnova)........................................................................................ 6 Business Survey (S. Tsukhlo).................................................................................................................... 10 Foreign Trade (N. Volovik)....................................................................................................................... 12 Budgetary and Tax Policy (. Kirillov)..................................................................................................... 15 Monetary and Credit Policy (P. Trunin).................................................................................................... 18 Financial Markets (N. Burkova)................................................................................................................ 22 The prospects for reforming tax legislation (V. Nazarov)........................................................................... 28 Summary of World Goods and Services Trade in 2007 and Prospects of Russias Foreign Trade Development (A. Pakhomov).................................................................................................................... 32 Money allowance of servicemen the main factor of transition to a professional army on a voluntary basis (E. Trofimova)........................................................................................................................................... State corporations: peculiarities, risks, prospects (Iu. Simachev, M. Kuzyk)............................................... Meetings of the government of the Russian Federation in April 2008 (Goldin M. P).................................. Review of Economic Legislation (I. Tolmacheva).................................................................................... Review of Budgetary Legislation (M. Goldin)........................................................................................... Review of Regulation Documents Concerning Taxation over March-April 2008 (L. Anisimova)............... Major Developments and Trends Macroeconomic dynamics in early 2008, was distinguished by some slowdown in the industrial growth rates. Industrial growth within January-March made 6.2 per cent, what is 1 p.p. lower than the 2007 indicator. Production growth deceleration was noted in fuel and power resources production as well. However, accelerated growth of aggregate profits and employment in the economy were observed.

Industrial surveys also prove somewhat lower, but rather steady growth rates in both, demand for industrial commodities and output thereof. However, one ca note increasing restrictions in maintaining industrial growth in future: industries are experiencing an increasing shortage of labor sources and stronger import competition. Producers intention to upgrade prices reached its peak ever since October 2004.

As of March results, the CPI in the RF stayed at the high level, having reached 1.2 per cent as compared with 0.6 per cent in the relevant period of 2007. Therefore, the growth of consumer prices in the first quarter actually made it impossible to achieve the Government's benchmark for annual inflation rate of 10%. From April 29, 2008 the RF Central Bank interest rate has been raised up to 10.5 per cent. Herewith, foreign currency reserves were being accumulated in the country, the volume of which amounted to USD 518 bln.

In April the general situation in the banking system remained stable. The RF Ministry of Finance started to place untied budgetary funds to deposits in commercial banks on an auction basis, what served as one more source of liquidity support.

One can judge from the first quarter results, that the trend of mitigated budget policy, pursued since the end of preceding year, is sustained in 2008. There are certain risks to stability of public finance system in view of budget expenditure rapid growth and dependence of the budget on natural resource sector. The Ministry of Finance is preparing a series of innovations in the three-year budget for 2010-2012, as well as in the long-term financial plan for 15 years.

Alternative approaches to tax reform are under discussion. According to IET estimates, in the current situation, when the RF budget revenue is highly dependant on the external market and sustained trend to extend budget expenditures, one should restrain from government policy of tax burden reduction, pursued before.

According to WTO assessment, the decline in the growth of international trade is expected to their lowest level within the past six years, which should not exceed 4.5 per cent. Russian foreign trade development took place, when prices for the basic Russian export commodities were extremely high. The major factors behind the high level of import growth were the upgraded rates of investment and consumer demand. In April 2008 a resolution on completion of negotiations on the RF accession to the WTO was signed with the United Arab Emirates (UAE). Another round of bilateral and multilateral consultations on the RF accession to the WTO was held in Geneva in April 2008 as well.

In April the Russian financial market dynamics was determined by the situation in the global financial markets, based on the new positive trends. In the MISEX futures and options contracts market the investors' activity has increased by nearly 60 per cent, as well as in the Russian corporate bonds market, where the investors' activity growth has exceeded 30 per cent within the month.

In April, Mr. Putin has accepted an unconventional, specially established for him position of the "United Russia" party Chairman, having herewith, avoided to join the party. In fact, this position is symbolic, as Boris Gryzlov, the Head of the Supreme Council, is still in the control of the party bureaucracy. The ideas on the government of political party and party factions were not supported. Appointments, made in May, should clarify the allocation of political authorities between the new and former Presidents. The authority of the Ex-President will be confirmed, above all, by retention of positions by the leaders of the former government and political faction of the Presidential Administration The conflict between "pro-Russian" forces in Chechnya is Escalated.

The political and economic results of April S. Zhavoronkov In April V. Putin took up an unusual post, specially created for him, - that of Chairman of United Russia.

In fact, this post has a purely symbolic significance, for the control over the party bureaucracy had been retained by B. Gryzlov, Head of its Supreme Council. Neither of the two proclaimed ideas that of party government or that of fractions had produced any practical consequences, since the departing President had preferred not to create any formal instruments for maintaining an adequate balance of forces between himself and the future President. The true balance of forces between the two of them will become visible as a result of new appointments in May: the strength of the former one can be confirmed, first of all, by the posts retained by the representatives of the power block and the political wing of the Presidents Administration. Besides, the conflict between pro-Russian groups in Chechnya became more acute.

The main news in April was the scheduled party congress of United Russia. According to analysts estimations, it had been expected that the congress would finalize some of the possible variants of V. Putins new statuss formalization not only that already announced, in the system of executive authority, but also in terms of the party structure of United Russia. According to the most radical forecasts, V. Putin could replace B. Gryzlov as the partys leader, and the Russian government could even be formed on a party basis.

The first move would mean the strengthening, within United Russia, of the people associated with the current leader of the political wing of the Presidents Administration, V. Surkov, while the second - a possibility of a cardinal rearrangement of the state apparatus in order to place United Russia above the government, that is, to reverse the existing situation. The intrigue was thus unfolding: at first B. Gryzlov approved the possibility of V Putins membership in the party, but declared that it would be wrong for D. Medvedev to become its member, since he was going to become the countrys Supreme Commander-in-Chief. But a day later Gryzlov already invited Medvedev to join the party, as well.

As a result, a compromise was reached: V. Putin declared that he was ready to become the partys leader, but only from May 7 (when his Presidents term in office will expire). At the same time, Gryzlovs position did not suffer: he retained the post of Chairman of the Supreme Council with all its powers, while for Putin a special post of the partys Chairman was introduced. So that it could have some true meaning in addition to being a purely nominal one, this post was endowed with the authority to suspend the powers of any party officials. At the same time, it is not obligatory for the Chairman himself to be the partys member. It is interesting that these amendments clearly contradict the Federal Law On political parties, because they require that the partys Chairman should be elected by open voting, while the Law establishes the necessity of secret vote. For his part, Medvedev thanked for the invitation but refused to enter the party.

The issue of attaching the government to the party was not discussed in earnest, and several powerful ministers V. Khristenko, A. Fursenko, A. Kudrin, and L. Reiman reiterated in April their declarations as to their unpreparedness to enter United Russia. The idea of fractions was not further elaborated, either on the eve of the congress it was decided instead that the party should contain certain amorphous clubs, some of which had already existed. Putin said at the congress that the party should be reformed, become open to discussion, and cleared of unnecessary persons; however, these declarations were not translated into any specific decisions. Among the changes that took place prior to the congress in many regions it should be noted that many governors resigned from the posts of heads of regional party departments, to be replaced by less prominent figures; this was the partys reaction to the end of the election cycle.

When making an estimation of the set of party government moves, it is worthwhile to point to their conservative character, since very little has been actually changed. Putins formal post in United Russia has been largely devaluated both by his demonstrative refusal to become part of this structure (which means that he is prepared to govern it, but not to become its equivalent in any sense), and by the absence of resignations, since true opportunities for redistributing powers within United Russia could have appeared only if some people had been deprived of their former posts and powers, while others (for example, from V. Putins entourage) received them. The post of the partys Chairman, even if it is subject to both election and dismissal by a qualified majority, in the presence of the currently existing system of relations between authority and the party provides neither any important additional levers nor any safety devices to be activated in case of emergency it is evident that the party it its current form will be ready to carry out any order issued by the executive authority. Any attempts to expand its formal powers within the state would be indicative of a recognition of certain problems existing in the currently informal system of relations between the retiring President and the President-to-be, and so it was decided to abstain from any such actions.

United Russia submitted to the State Duma a draft law aimed at introducing certain changes into the structure and functions of the government. Some 500 of the existing 3000 responsibilities are to be transferred from the government to ministries, departments, state services and state committees. In this connection, the powers of Vice Prime Ministers (V. Putin confirmed in April that their number will be greater than today) are not increased by comparison with their existing status. The draft law, as it has been declared, by June will be approved in the first reading, and it is not unlikely that some important modifications will be introduced into it.

The draft law, contrary to many forecasts, does not increase but instead rather diminishes the Prime Ministers powers. Evidently, V. Putin has recognized the existence of public risks associated with this post in Russias latest history it has more than once been used as a scapegoat for the presidential authority: even if the Prime Minister was not dismissed from his post, together with his Ministers he could be publicly blamed for certain drawbacks, made to set them right and to report on the results. But now it has been attempted to exempt the prime Minister from any responsibility for applying outdated economic procedures. However, we believe that his costs in this respect will be greater than those borne by the President given the fact that the future President has so far expressed no desire for taking responsibility for any areas controlled by the government.

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