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The January February 2010 volume of budget receipts from VAT also dwindled. The fall in the general government budgets receipts from this tax amounted to 0.4 p.p. of GDP (Table 2). At the same time, they considerably grew in absolute terms. Their rise was caused by the improved administration of VAT and by a relative resurgence of the business activity of economic agents as compared to the previous year. However, it should be taken into consideration that VAT for Q IV 2009 was to be carried forward to January 2010.

The January February 2010 decline in the revenues of the general government budget has forced the authorities to begin curbing budget expenditure growth. As a result, the general government budgets expenditure dropped by 1.4 p.p. of GDP (Table 3). At the same time it should be noted that in absolute terms, the volume of budget expenditures during the first two months of 2010 slightly rose on the corresponding period of the previous year. That was largely a result of their accelerated spending within the framework of the financial year.

Table THE EXECUTION OF THE GENERAL GOVERNMENT EXPENDITURE BUDGET IN JANUARY FEBRUARY 2009 AND 2010, AS % OF GDP January February January February Deviation, 2010 as % of as % of p.p. of GDP bn Rb bn Rb GDP GDP Expenditure, total 1,757.7 28.4 1,572.2 29.8 1. Including Nationwide issues 151.9 2.5 151.3 2.9 0.Of these, servicing of state and municipal debts 43.2 0.7 35.4 0.7 National defense 128.4 2.1 123.8 2.4 0.National security and law-enforcement activity 172.2 2.8 160.9 3.1 0.National economy 138.3 2.2 202.9 3.9 1.Housing and utilities system 58.4 0.94 57.9 1.1 0.Environment protection 2.2 0.04 1.7 0.03 + 0.Education 187.5 3.0 169.8 3.2 0.Culture, cinematography and mass media 31.7 0.5 30.6 0.6 0.Public health care and sports 167.1 2.7 167.9 3.2 0.Social policy 719.9 11.6 504.9 9.6 + 2.Source: RF Treasury, IET estimates.

RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES According to preliminary estimates, the largest deviation from last years volumes was registered under the Social Policy item, with social allocations from the general government budget having increased by 2 p.p. of GDP on the corresponding period of 2009. Itemized in accordance with the current budget functional classification, the expenditures under all the other budget items displayed a downward trend. The largest negative deviation from last years parameters was registered under the National Economy item, with the expenditures having fallen by 1.7 p.p. of GDP. Under the rest of budget items, negative deviation did not exceed 0.5 p.p. of GDP.

The execution of the RF Federal Budget in Q I According to the on-line data published by the RF Ministry of Finance, the January March 2010 revenues of federal budget amounted to 20.1 % of GDP, representing a drop of 0.3 p.p. of GDP from the same period of 2009. However, federal budget revenues increased in absolute terms.

The Q I rise in the federal budgets receipts in absolute terms was due to a number of factors, including the growing revenues of the oil and gas complex that boosted budget receipts from tax on mineral resources extraction and revenues from foreign trade. At the same time, the implementation of a number of innovations in the tax administration system resulted in a certain deceleration of the growth rate of the federal budgets non-oil and gas revenues compared to the year 2009.

Over the period under consideration, the federal budgets expenditure increased by almost 2.p.p. of GDP on the corresponding period of the previous year to 23.3 % of GDP (Table 4). However, the expenditure growth in Q I 2010 does not seem to portent a general rise in expenditure by the results of the year. That growth was largely the result of an acceleration in budget spending and in a faster reception of budget funds by their end-recipients. The year 2010 marks the beginning of a sharp reduction in the volume of allocations to anti-crisis measures: thus, in 2009, more than 1.trillion Rb in budget funds was spent on implementing the anti-crisis program, while the volume of budget funds planned to be allocated for these purposes in 2010 amounts to 195 bn Rb (139 bn Rb of that amount has already been distributed). It is planned that anti-crisis funding from the federal budget will be discontinued by 2012. According to some forecasts, it is precisely by 2012 that the Russian economy is going to completely exit from the crisis. It should be noted that previously the Russian authorities had planned to roll back the anti-crisis measures more smoothly, by gradually cutting their financing until 2015.

As a result of the multidirectional change displayed by the federal budgets parameters over Q I 2010, the federal budget deficit rose to 3.3 % of GDP vs. 0.4 % of GDP in 2009. At the same time, according to preliminary estimates, the non-oil-and-gas deficit amounted to more than % of GDP. The hugeness of the non-oil-and-gas deficit indicates the existence of significant public expenditures not covered by the oil and gas revenues of the federal budget. Potentially, this state of affairs can result in a considerable weakening of Russias budgetary system.

Table THE MAIN PARAMETERS OF THE RF FEDERAL BUDGET IN JANUARY MARCH 2009 AND January March JanuaryMarch Execution of Deviation 2010 . 2009 .

budget, as % of annual budget revenue as % of p.p. of bn Rb bn Rb bn Rb bn Rb and expenditure GDP GDP Revenue, 1,953.3 20.1 1,732.7 20.4 28.1 220.6 0.including:

Revenues from oil and 877.6 9.0 509.1 6.0 27.5 368.5 + 3.gas Deductions to Reserve Fund and National 0 0 205.1 2.4 Welfare Fund (Stabilization Fund) Expenditure, 2,260.9 23.3 1762.4 20.8 22.9 498.5 + 2. including:

interest 71.1 0.7 63.8 0.8 23.4 7.3 - 0.non-interest 2,189.7 22.6 1,698.6 20.0 22.9 491.1 + 2.THE STATE BUDGET Table 4, contd January March JanuaryMarch Execution of Deviation 2010 . 2009 .

budget, as % of annual budget revenue as % of p.p. of bn Rb bn Rb bn Rb bn Rb and expenditure GDP GDP Federal budget surplus 307.6 3.2 - 29.7 - 0.4 22.9 277.9 2.(deficit) Non-oil-and-gas deficit 1,185.2 12.2 538.8 6.4 19.3 646.4 5.GDP estimates 9,701.0 8,482.Source: RF Ministry of Finance (preliminary estimates), IET estimates.

The 2010 federal budget deficit has been primarily covered from domestic sources, in particular the Reserve Fund. Over the first three months of 2010, its volume shrank by 277 bn Rb, down to 1,553 bn Rb. The Reserve Funds direct allocations to the budget amounted to 169.5 bn Rb. In the course of the same period, the National Welfare Fund shrank by 139 bn Rb, down to 2.63 trillion Rb (Table 5).

Table THE DYNAMICS OF THE FORMATION AND USE OF THE OIL AND GAS REVENUES IN THE FEDERAL BUDGET IN JANUARY MARCH 2010 2009, BN RB Allocated in January March Index Oil and gas revenues in federal 2057.2 877.6 budget Areas for allocating oil and gas revenues:

Oil and gas transfer 2,531.1 877.Reserve Fund 1,830.5 5,147.5 0 169.0 0 1,553.National Welfare Fund 2,769.0 26.5 2,630.Total 4,599.5 904.1 169.0 0 4,183.* residuals as recalculated at the exchange rate as of March Source: Federal Treasury.

Table 6 shows the dynamics of execution of the expenditure side of the federal budget in the first 2 months of 2010 in accordance with the functional classification of budget expenditures. The dynamics of execution was more robust than in 2009. As regards the expenditure side as a whole, the positive deviation from the corresponding period of the previous year amounted to 2.8 p.p.

The largest positive deviation was registered under the Interbudgetary Transfers item. Spending under this item increased by more than 9 p.p. This impressive growth in interbudgetary transfers was primarily due to the current years significant growth in pensions and to the accelerated allocation of resources to the Pension Fund.

The rates of spending under the National Defense, National Security and Law-Enforcement Activity and Education items were also higher than in the corresponding period of 2009, with the positive deviation amounting to between 0.7 p.p. and 2.2 p.p.

However, the rates of execution of the Public Health Care and Sports and Servicing of State and Municipal Debts items of expenditure were lower than last year. As of March 2010, these expenditure items had been executed 1.7 3.2 p.p. behind last year. By comparison with the budget March transfer March Approved for well-balanced on oil and gas federal budget on maintaining Received in January Fund residuals, end of Fund residuals, end of RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES corresponding period of 2009, the largest drop in the rate of financing was registered under the National Economy item of expenditure. It amounted to almost 9 p.p.

Table FEDERAL BUDGET EXECUTION IN CASH TERMS IN JANUARY - FEBRUARY 2009 AND 2010, AS A PERCENTAGE OF ANNUAL BUDGET REVENUE AND EXPENDITURE January February 2010 January February Budget expenditure, total 14.9 12.Including Nationwide issues 8.3 8.Servicing of state and municipal debts 11.8 15.National defense 10.2 9.National security and law-enforcement activity 12.9 12.National economy 5.3 14.Housing and utilities system 5.9 2.Environment protection 9.6 5.Education 10.3 8.Culture, cinematography and mass media 10.5 10.Public health care and sports 6.4 8.Social policy 9.3 9.Interbudgetary transfers 24.9 15.Source: RF Ministry of Finance; IET estimates.

According to on-line data of the RF Ministry of Finance, in January March 2010, ministries and departments received 99.8 % of the federal budget allocation planned for that period1. At the same time, the ministries and departments released to their subordinate establishments only % of the planned expenditure allocations. In particular, these establishments did not receive the full volume of funds planned for financing the implementation of federal target programs. One of the reasons for delay in allocating funds to the end-recipients of budget resources is the deficiency of legal and administrative procedures: out of the 107 government normative acts necessary for budget execution, only 97 have been adopted so far.

An Overview of the Main Developments in the Sphere of Budgetary Policy in April It was planned that, in April 2010, the RF Ministry of Finance would submit, to the RF Government, a draft document on Russias tax policy priorities in 2011 - 20132. In fact, this document will comprise the initiatives in the field of tax policy stated in March. However, some of those initiatives have been considerably altered from their original form. Thus, the financial authorities have taken the decision that the transitional period for insurance contributions to off-budget funds should not be extended to 2011, and that the rate of insurance contributions should be increased from 26 % to 34 %. This marks a departure from the previous position of the RF Ministry of Finance repeatedly stated by its representatives throughout 2009. According to the now abandoned concept, the rate of insurance contributions should be gradually risen to 32 % by the year 2011 (by way of preserving the existing rate of contributions to the Federal Mandatory Health Insurance Fund) and then to 36 % by the year 2012. If this measure had been realized in its original form envisaging a gradual rise in the rate of insurance contributions, the load on enterprises would have been significantly reduced. If the rate is increased to its upper limit from the year 2011, the expected increase in contributions to off-budget funds could fail to materialize.

Instead of granting universal tax relief, the main parameters of Russias tax policy for the next three years will be focused on granting pin-point tax preferences to individual sectors and types of businesses. The load on the wages funds of innovative companies, residents of zones for technical 1 http://www.rbc.ru/rbcfreenews/20100412155428.shtml 2 http://www.rg.ru/2010/04/12/innovator-poln.html THE STATE BUDGET development, and small enterprises at higher educational establishments and research centers will amount to 14 % until 2020. The load on the wages funds of the mass media will be 26 %, with a gradual rise in the period until 2015. Also, it is planned to grant tax benefits to entities engaged in modernization. At the same time, in April, the authorities announced the forthcoming creation of a special council of experts for the purpose of identifying innovative enterprises potential recipients of tax benefits. However, it is most likely that these measures will benefit only a very small number of enterprises. Thus, according to Aleksandr Shokhin, President of the Russian Union of Industrialists and Entrepreneurs, in the whole of the country, only about 200 companies will be able to take advantage of these benefits.

In April 2010, it was announced that 1 October could become the permanent date for submitting draft three-year federal budgets to the State Duma1. In 2009, the date for submitting the draft federal budget for 2010 2012 was shifted from 26 August to 1 October. Now this measure can become a permanent norm with corresponding alterations being introduced in the RF Budget Code.

The substantiation for this decision has been the fact that the basic forecast parameters of the federal budget can usually be determined with greater precision if it is formed at a later date:

by 1 October, adjusted macro-parameters will, as a rule, already become available, tax policy priorities will have been approved, and the volumes of federal target programs will be properly adjusted.

1 http://minfin.ru/ru/press/speech/index.phpid4=RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES MORTGAGES IN THE RUSSIAN FEDERATION G.Zadonsky The volume of mortgages 35 1,issued in February 30 1,exceeded by nearly 60% the volume of credits in February 25 1,2009. However this positive 20 1,fact can hardly be considered 15 1,as an evidence for the starting 10 1,considerable growth of the mortgages market. Sberbank 5 1,has abolished all the tariffs 0 0,and commission fees when issuing a credit and for the first time in the Russian bank practice the credit rate is the only parameter defining the Volume of home loans issued over the month to natural persons (leftcost of borrowed funds for hand scale, RUR billion) Stale debt for issued mortgages (left-hand scale, RUR billion) clients.

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