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INSTITUTE OF THE ECONOMY IN TRANSITION 5, Gazetny pereulok, Moscow, 125993, Russian Federation Phone (495)629-6736, fax (495)697-88-16 Email: lopatina@iet.ru www. iet.ru RUSSIAN ECONOMY:


BASIC DEVELOPMENTS AND TRENDS 2 THE POLITICO-ECONOMIC RESULTS OF APRIL 2009 (S.Zhavoronkov) 4 INFLATTION AND MONETARY POLICY (N.Luksha) 8 FINANCIAL MARKETS (N.Burkova, E.Khudko) 15 REAL ECONOMY SECTOR: TRENDS AND FACTORS (O.Izryadnova) 26 RUSSIAN INDUSTRY IN APRIL 2009 (S.Tsukhlo) 30 FOREIGN TRADE (N.Volovik) 34 BUDGETARY AND TAX POLICY (O.Kirillov) 38 THE RF MARKET FOR RESTRUCTURING OF MORTGAGE CREDITS (G.Zadonsky) 43 MILITARY EXPENDITURE IN THE 2009 FEDERAL BUDGET (V.Zatsepin) 47 ON THE PRINCIPLES OF RESPONSIBLE BUDGETING POLICY FOR THE YEAR 2010 AND THE PLANNING 53 PERIOD OF 20112012 (V.Nazarov) MUNICIPAL REFORM AND VERTICAL OF POWER: THE FINAL DIAGNOSIS 59 (I.Starodubrovskaya, N.Mironova) ON POSITION OF SMALL-SCALE ENTERPRISES IN 2008 (O.Izryadnova) 62 MEETINGS OF THE GOVERNMENT OF THE RUSSIAN FEDERATION IN APRIL 2009 (M.Goldin) 67 REVIEW OF ECONOMIC LEGISLATION (I.Tolmacheva) 70 REVIEW OF REGULATORY DOCUMENTS CONCERNING TAXATION OVER MARCHAPRIL 2009 72 (L.Anisimova) REVIEW OF BUDGETARY LEGISLATION (M.Goldin) 76 RESULTS OF WORLD TRADE WITH GOODS AND SERVICES IN 2008 AND PROSPECTS FOR DEVELOPMENT OF 78 RUSSIAS FOREIGN TRADE (A.Pakhomov) SOME ASPECTS OF IMPROVEMENT OF MEASURES TO CONTROL TRANSFER PRICING (N.Kornienko) 84 - - - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES BASIC DEVELOPMENTS AND TRENDS In April, an updated national budget for 2009 has been adopted. Despite the crisis, it is not foreseen to cut down public expenditures. To finance the budget deficit, it is planned to spend three-quarters of the Reserve Fund, which reflects a challenging confidence of the Russian authorities, that the crisis will be overcome in a short term. The Russian President Dmitry Medvedevs democratic approach is getting extended. There were repeated allusions to his commitment to pursue democratic policy and moreover, for the first time within his Presidency term, a practical step in this direction was made in the framework of a highprofile criminal case: one of the Yukos employees, S. Bakhmina, mother of an infant, has been discharged from confinement. Nevertheless, an opposite trend is also observed. Thus, the State Duma has adopted in a second reading a shocking edition of the law on the right to dismiss the elected Heads of Municipalities by the decision of local government deputies, based on a wide range of reasons. The debate on such amendments has demonstrated the major controversion between supporters and opponents of those innovations not only in regard to local governments, but in terms of principles of the government system in general.

In the I-st quarter of 2009, the GDP made 90.5 per cent of the volume of the relevant period of the preceding year, i.e. the decline has exceeded the earlier estimates of the Ministry of Economic Development. Macroeconomic situation in early 2009 was developing under the impact of the simultaneous reduction of domestic and external markets, based on a cumulative effect of the low national business activity and the reduced income per capita. Within January-March 2009, the decline of investments in fixed assets has amounted to 15,0 per cent, the retail trade turnover has decreased by 1,1 per cent and real income of population has declined by 2.3 per cent. Unfavorable trends in the international trade, developed in the IV-th quarter of 2008, continued to provide negative effect on the economy in the I-st quarter of the current year.

Due to the restricted access to the national statistics, the surveys among business enterprises during the crisis become both, efficient and reliable source of information on the actual situation in the real sector. IET regular survey has demonstrated that in April, according to the estimates of enterprises, there were no significant changes in the level of output and demand in the industrial sector, which is practically unchanged since the beginning of the year. Enterprises expectations for prompt recovery in demand and output level have not been realized. The industrial sector is preparing for the new reduction in demand, output and sell prices in the coming months. In April, an access to credits has been improved, but paying capacity of enterprises has reduced.

As of the March results, the RF CPI amounted to 1.3 per cent, which is slightly higher against the relevant period of preceding year. The volume of foreign currency reserves remained practically unchanged, having made by the end of the month USD 383.9 bln.

RUR real effective exchange rate has grown by 3.3 per cent and as of the results of the I-st quarter, it has declined to 11.9 per cent. Within the I-st quarter of 2009, the external corporate debt has declined by USD 29 bln, i.e., by 6.4 per cent, having reached USD 423 bln at the end of the quarter. The value of the two-currency basket, for the first time since July of 2008, has decreased, amounting to RUR 38.93. Since April 24, for the first time since summer of 2007, the refinancing rate was reduced to 12.5 per cent per annum. At the same time, interest rates on credits and deposits of commercial banks in the RF Central bank were reduced as well.

AND TRENDS BASIS DEVELOPMENTS Positive response of international investors to the plan on the global economy recovery, developed during the summit of the big twenty governments, positive macroeconomic news from the USA and successful financial performance of a number of international companies, reduced interest rate of the ECB to 1.25 per cent per annum, as well as the RF Government approval of measures to support the national financial and labor markets, stabilization of the national currency have contributed to the growth of the Russian stock market. Herewith, positive trends were particularly expressed in the stock market, where the investors activity has increased by 22 per cent, as well as in quotations of all blue chips shares. Indicators of recovery were observed in the domestic corporate bond market. The activity of investors in the secondary bond market has also significantly increased.

Herewith, the volumes of issued and refinanced mortgages are getting reduced, while the interest rates are growing. The Agency for Restructuring of Mortgage Credits is intended to provide support to about 100 thousand of borrowers in the current year. 23,4 thousand of individuals have been allowed to use the mothers capital to pay off credits, in the amount of RUR 6.3 bln.

At an extended meeting of the Board of the RF Ministry of Finance on April 14, 2009, the Minister of Finance Alexey Kudrin has pointed out to the need to reduce budget expenditures in 2010. In the near future the RF Ministry of Finance will prepare a draft on basic trends of budget policy for 2010 and for the planned period of 2011 and 2012.

In late March early April significant amendments were introduced in economic legislation: the procedure for the appointment of the RF Subjects Heads has been modified; inventory of assets, in which insurance premiums can be invested to finance the funded part of labor pensions has been updated, a new procedure for educational activity licensing has been adopted and the refinancing rate of the Bank of Russia has been reduced.

- - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES THE POLITICO-ECONOMIC RESULTS OF APRIL S.Zhavoronkov In April, Russia adopted a new state budget for the year 2009 where, despite the current crisis, no cutting of government expenditures was envisaged. The budget deficit was planned to be financed from the reserve fund, three-quarters of which was to be spent for this purpose the fact that reveals the authorities dangerous confidence that the crisis phenomena will be quickly overcome. RF President Dmitrii Medvedev intensified his rhetoric, which now included numerous hints as to his reputed adherence to democratic norms. Moreover, for the first time during his presidency, Medvedev even made a concrete step in this direction within the framework of one of the loudest criminal cases, when he released from detention one of the former Yukos employees, S. Bakhmina, the mother of a recently born baby.

At the same time, a reverse trend also continued to manifest itself. Thus, the State Duma adopted in the second reading a scandalous version of a law vesting local deputies with the right to remove from office the elected heads of municipal formations, with a broad range of grounds for removal having been established. United Russias candidate A. Pakhomov won a landslide victory in the crucial election for Sochi mayor, leaving all his rivals from the opposition far behind. However, the election was marred by a scandal that involved regulated early voting on a massive scale.

In April, maybe for the first time during the current presidency, D. Medvedevs rhetoric was aimed at a liberal audience. Medvedev conducted a social problems round table at the Institute of Contemporary Development (INSOR). Previously, the Institute, where Medvedev nominally holds the post of Chairman of the Supervisory Council, had been ignored by the President, while his Administration had been repeatedly criticizing INSOR for such high-sounding nonsense as producing reports on the need for gradual democratization. Medvedev also had a meeting with members of the Council on Civil Society (which included a number of prominent human-rights activists known for their criticism of the authorities). And finally, Medvedev gave an interview to the independent Novaia Gazeta [New Newspaper]. However, in this interview Medvedev did not say anything that could be interpreted as smacking of trailblazing, and preferred to stick instead to his habitual evasiveness void of any concrete promises. The Novaia Gazetas uncomfortable questions on the second Khodarkovskii case, on elections being turned into a farce, on censorship, and on the Presidents attitude to democracy and United Russia were, in fact, left without any answers, while Medvedevs words that for him, as a President, by contrast with analysts, there can be no freedom of commenting, sounded rather dubiously.

It seems that the Russian authorities by now have already understood that talk alone has become insufficient. In April, the authorities made a crucial decision, which had long been insisted upon by human-rights activists and the public. This decision also the first of its kind to be taken during the first year of D. Medvedevs presidential term was passed by the Preobrazhenskii court in Moscow, which ruled that the appeal for parole of S. Bakhmina, the former Yukos lawyer convicted for stealing shares in Tomskneft and tax evasion, should be satisfied. Bakhmina was arrested in 2004, and sentenced to 7 years of deprivation of freedom in 2006. In 2008, she was already due for parole and started to appeal for it, initially with no success. In late 2008, Bakhmina gave birth to a child, and lodged a parole appeal to D. Medvedev, but the appeal mysteriously got lost, and its author followed suit, while representatives of the power structures started to give rather THE POLITICO-ECONOMIC RESULTS OF THE APRIL confused explanations concerning her ever changing whereabouts. From the very beginning, the Bakhmina case was seen as a symbol of Russian judicial arbitrariness, because Bakhmina had been a rank and file employee of Yukos, and her duties had been such that she simply could not participate in any strategic decision making. Also, Bakhmina had not been concerned with any political activities whatsoever.

Further keeping Bakhmina in detention could have become detrimental to D. Medvedevs reputation, because it was senseless in all respects but one it served as a proof of the Russian authorities infallibility. In this case, it was impossible for them to refer to any independent court of justice, etc, because the decision to parole a convict was, and is, within the competence of the RF President. As a result, Bakhminas release from detention was, after all, carried out by a court ruling (apparently in order not to create an impression that Medvedev acted in defiance of the judicial authorities or of his own predecessor).

However, it is still too early to affirm that humanism has carried the day: first, we should become truly convinced that Bakhmina is not being forced to give evidence and testimony against M. Khodarkovskii (one of the charges brought against him has to do with the same old story with Tomskneft).

April saw the denouement of the highly emotional campaign for mayor election in Sochi (as the previous mayor had resigned before the expiry of his term in office, the election campaign was completed outside of the framework of a single day of voting). As far as the Russian authorities were concerned, the Sochi election was highly important: among the contestants for the post of mayor was B. Nemtsov, a Sochi native and an opposition politician; while the general situation in Sochi (tensions caused by the towns preparation for the Olympic Games, the endless parade of mayors recommended from above, coming out of the blue and quick to resign) had been creating an atmosphere of intrigue. Bearing in mind United Russias loss of popularity, which had been clearly demonstrated at the March elections, the authorities decided to show its ability to win an election carried out on a competitive basis; in the case of Sochi this task was made easier for them due to the considerable resources they were able to concentrate there1. The authorities managed to prove their mettle with the voters turnout being low (about 40 %), the acting city mayor, United Russias candidate A. Pakhomov, won in the first round with 76 % of the vote. B.

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