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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES January 2007 MONTHLY BULLETIN Moscow 2007 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 Budgetary and Tax Policy............................................................................................................................ 3 Monetary and Credit Policy......................................................................................................................... 6 Financial Markets....................................................................................................................................... 8 Real Economy Sector: Trends and Factors................................................................................................. 17 Oil and gas sector...................................................................................................................................... 20 Business Survey in January 2007............................................................................................................... 22 Foreign Trade............................................................................................................................................ 23 The Law On agricultural development.................................................................................................... 26 The Characteristic Features of the Development of Special Economic Zones in the Russian Federation..... 28 The Forecast of the Population of the Russian Federation over the Medium Term..................................... 31 The Agenda of the Cabinet Meetings of 18 and 25 January 2007................................................................ 34 Review of Economic Legislation Between Late December 2006 and January 2007................................... Review of Legal Documents on Taxation Issues over The Period Between December 2006 And January 2007.......................................................................................................................................................... Budgetary and Tax Policy According to the tentative performance of the budget in terms of revenues as of December 2006, the level of revenue of the RF federal budget made 22.93 per cent of GDP; the expenditures of the federal budget accounted to 15.87 per cent of GDP, budget surplus has come up to 7.06 per cent of GDP. Within January - November of 2006 the RF consolidated budget revenues made 34.8 per cent of GDP, consolidated budget expenditures made 25.1 per cent of GDP, and consolidated budget surplus accounted to 9.7 per cent of GDP.

As of January 1, 2007 the volume of financial reserves of the RF Stabilization Fund made RUR 2.346.billion, as compared with RUR 2 189.5 on December 1, 2006, which makes 8.7 per cent of GDP and 8.2 per cent of GDP accordingly versus accumulated GDP within January-December of 2006.

The State of the Federal Budget The dynamics of basic indicators of the RF federal budget within 2004-2006 is presented in Table 1. According to the tentative estimates the federal budget execution on cash basis, made by the RF Ministry of Finance, the federal budget was executed within January-December of 2006 in terms of revenue in the amount of RUR 6 209.8 billion (22.93 per cent of GDP), in terms of expenditures in the amount of RUR 4 298.1 billion (15.87 per cent of GDP). The budget surplus made RUR 1 948.2 billion (7.06 per cent of GDP). It should be noted that regardless that the amount of revenues of the federal budget within of 2006 in absolute terms was higher than the respective indicator of the relevant period of 2005 (RUR 5 115.7 billion), some decline was registered in the relevant period with regard to GDP (24.23 per cent of GDP in 2005). The amount of federal budget expenditures throughout the year of 2006 has grown in nominal terms in comparison with the relevant period of the year 2005 (RUR 3 7494.3 billion); however, in relation to the share in GDP it demonstrated an explicit decline (by 16.55per cent of GDP in 2005).

A comparison of revenue and expenditure shares of the federal budget within the year and three quarters of the past year shows a decline of revenue share in GDP (23.74 per cent in the third quarter of 2006), which was in line with the trend of the first two quarters of 2006. As opposed to that, the share of budget expenditure in GDP has reached its peak for the entire year (15.87).

As Table q shows, revenues in I, II III Quarters made 26.56%, 24.87 per cent and 23.74 per cent of GDP, while revenues maid 15.71 per cent, 15.87 per cent and 15.06 per cent of GD accordingly.

Table 1.

Basic Parameters of the RF Federal Budget (per cent of GDP) 2004 2005 I Q 2006 II Q 2006 III Q 2006 Revenues 20,4% 24,23% 26,56% 24,87% 23,74% 22,93% Expenditures 16,1% 16,55% 15,71% 15,87% 15,06% 15,87% Deficit ()/ 4,4% 7,68% 10,85% 9,00% 8,68% 7,06% Surplus (+) The revenues of the RF federal budget within November and December of 2006 amounted to RUR 558.and RUR 615.4, bln, i.e. 22.22 per cent and 23.35 per cent of the monthly GDP respectively. The expenditures of the consolidated budget in November-December 2006 have made RUR 472.2 bln (18.78 per cent of GDP) and RUR 608.7 bln (23.09 per cent of GDP) accordingly. The surplus of the federal budget made RUR 86.7 and 6.8 bln accordingly, which make 3.45 per cent and 0.26. per cent of the monthly GDP respectively. Therefore, as of results of December, a growth of the federal budget revenues and expenditures can be noted versus the preceding month in absolute terms and in regard to monthly GDP value as well. Nevertheless, the federal budget surplus value in nominal terms and in relation to GDP has explicitly lowered in comparison with November indicators.

For the structure of revenues over the period under observation, see Table 2.

As one can see in the Table, in 2006 the structure of tax revenues as broken by individual sections did not practically change in comparison with the data registered in 2005, as well as against the indicators of the first three quarters of 2006. However, tax revenues were considerable lower in terms of GDP share. Thus, the bulk of the tax revenues were associated with the taxes and other payments administered by the RF Federal Tax Service, their share in GDP made 11.08 per cent, as compared with 12.62 per cent of GDP registered in 2005. As opposed to that, the amount of revenues administered by the Federal Tax Service made 10.58 per cent of GDP, having noticeably exceeded the relevant indicator of the year of 2005, i.e. 9.9 per cent of GDP. The amount of revenues administered by the Federal Agency for Property Management in 2006 has made o.26 per cent of GDP, practically the same as the relevant indicator of the preceding year (0.27 per cent of GDP). Revenues of the federal budget, administered by other federal bodies, have demonstrated some downgrading as compared with the relevant indicators of the preceding year (by 1.88 per cent of GDP), they made 1.23 per cent of GDP.

The dynamics of taxes and revenues varied greatly within 2006. Thus, the Table given below shows, that as per the year results, the lowest level of tax revenues, administered by the Federal Tax and Customs Services, was observed within the first three quarters of the year. However, other indicators, presented in the Table, show an increase in GDP share in January December of 2006 as compared with the data of the first three quarters of the year.

For the preliminary data on the financing of the expenditures borne by the RF federal budget in January through December of 2005 and 2006 presented by the RF Ministry of Finance, see Table 3.

Table 2.

Amounts of Revenues to the RF Federal Budget (per cent of GDP in terms of cash basis execution) I Quarter II Quar- III Quar- Quarter 2006 ter 2006 ter 2006 Taxes and other payments adminis12,62% 13,74% 12,33% 11,69% 11,08% tered by the Federal Tax Service Taxes and other payments administered by the Federal Customs Ser- 9,96% 11,51% 11,09% 10,77% 10,58% vice Receipts administered by the Federal Agency for Management of Federal 0,27% 0,21% 0,21% 0,22% 0,26% Property Revenues of the federal budget ad1,38% 1,10% 1,25% 1,06% 1,23% ministered by other federal structures Total revenues 24,23% 26,56% 24,87% 23,74% 23,14% Table 3.

Amounts of Financing of the RF Federal Budget Expenditures (% of GDP) Financing of Expenditures I Quarter II Quarter III Quarter Jan.Oct.

2006 2006 2006 Federal issues 2,64% 2,96% 2,32% 2,31% 2,15% Including expenditures associated with the servicing of federal and 1,08% 1,28% 0,75% 0,79% 0,64% municipal debt National defense 2,77% 3,52% 3,03% 2,62% 2,52% National security and law enforce2,10% 2,64% 2,31% 2,13% 2,04% ment National Economy 1,19% 1,05% 1,22% 1,23% 1,29% Housing and public utilities 0,04% 0,12% 0,20% 0,20% 0,19% Environmental protection 0,02% 0,03% 0,03% 0,03% 0,02% Education 0,75% 0,82% 0,95% 0,78% 0,76% Culture, cinematography and mass 0,23% 0,22% 0,23% 0,21% 0,20% media Health care and sports 0,43% 0,58% 0,59% 0,58% 0,55% Social policy 0,90% 1,17% 0,95% 0,86% 0,79% Interbudgetary transfers 5,91% 6,58% 6,28% 5,72% 5,59% Total expenditures 16,98% 19,70% 18,10% 16,65% 16,12% One can observe rather high volatility of the total financed expenditures within different periods. Thus, they made 12.12 per cent of GDP against 16.98 per cent of GDP in of 2005. The fluctuations of that indicator within the first three quarters of the year were even higher: the share of quarterly expenditures varied within the range of 16.65 per cent to 19.7 per cent of GDP.

Comparison of the structure of expenditures shows that in spite of the similarity of the structure of expenditures within 2005 and 2006, noticeable differences were observed in some expenditure lines. For instance, the Share of expenditures for federal issues has been decreased from 2.64 per cent in 2005 to 2.15 per cent of GDP, which was caused by considerable reduction of costs of the federal and municipal debt services.

The indicator of Interbudgetary transfers has diminished from 5.91 per cent to 5.59 per cent of GDP in the preceding year and National Defense from 2.77 to 2.59 per cent of GDP. As opposed to that, there was observed a growth in a number of expenditure lines in the past year, namely in Housing and public utilities from 0.04 per cent of to 0.19 per cent; Healthcare and sports from 0.43 per cent to 0.55 per cent of GDP). As concerns other largest expenditure items, the differences were less significant. Comparison of other quarterly data shows also significant differences in a number of the budget expenditure lines Table 4.

Execution of the RF Consolidated Budget in January through November of (in per cent of GDP) I II III IV V VI VII VIII IX X XI XII Taxes* 25,6% 24,4% 25,6% 27,4% 27,1% 26,0% 26,1% 25,7%25,0% 25,0% 25,1% 25,2% Revenues 32,0% 30,3% 31,5% 33,4% 33,6% 32,2% 32,2% 31,6%30,9% 30,8% 30,7% 31,1% Expenditures 20,7% 25,3% 27,7% 28,8% 28,8% 28,6% 28,7% 28,5%28,2% 27,8% 27,9% 29,7% Deficit/ 11,3% 5,0% 3,8% 4,5% 4,7% 3,5% 3,6% 3,1% 2,7% 3,0% 2,8% 1,4% Surplus I II III IV V VI VII VIII IX X XI XII Taxes* 6,1% 21,8% 27,4% 27,4% 26,6% 27,2% 27,1% 26,4% 26.5% 26.9% 26,8% Revenues 30,6% 28,2% 29,8% 32,9% 32,9% 32,5% 33,1% 32,9% 31,9% 32.0% 32.3% 32,3% Expenditures 18,5% 22,8% 25,4% 27,3% 26,9% 27,0% 27,0% 26,9% 26,0% 25.9% 26.1% 27,8% Deficit/ 12,1% 5,4% 4,4% 5,6% 6,0% 5,5% 6,1% 6,0% 5,9% 6.1% 6.2% 4,5% Surplus I II III IV V VI VII VIII IX X XI XII Revenues 48,8% 40,3% 40,3% 40,8% 38,8% 38,2% 37,6% 37,0% 36,0% 35,9% 35,8% 36,1% Expenditures 22,2% 23,3% 24,9% 27,1% 26,5% 26,6% 26,7% 26,6% 27,2% 26,1% 25,9% 28,1% Deficit/ 10,0% 26,5% 17,0% 15,4% 13,7% 12,3% 11,6% 11,0% 10,5% 8,8% 9,8% 7,9% Surplus I II III IV V VI VII VIII IX X XI XII Revenues 36,2% 34,4% 37,9% 37,1% 37,2% 36,8% 36,6% 36,5% 35,4% 35,1% 34,8% Expenditures 17,6% 21,0% 24,2% 25,4% 24,7% 25,5% 25,3% 25,1% 24,8% 24,7% 25,1% Deficit/ 18,7% 13,4% 13,6% 11,7% 12,5% 11,3% 11,3% 11,4% 10,6% 10,4% 10,7% Surplus **regardless Unified Social Tax As of the results of January-December of 2006, the revenues of the RF consolidated budget made 34.8 per cent of GDP as compared with 35.8 per cent of GDP, registered in the respective period of 2005.

The expenditures of the consolidated budget have also been reduced as compared with the respective indicator of 2005 and made 25.1 per cent of GDP (against 26.1 per cent of GDP in 2005). The surplus of consolidated budget in January-November 2006 made 10.7 per cent of GDP, what is somewhat higher than the 2005 indicator (10.0 per cent).

Therefore, as of results of eleven months of 2006, an expressed decrease was observed in the revenues and in expenditures of the RF consolidated budget in terms of the share in GDP, what caused some growth of the surplus of the consolidated budget. Moreover, the RF Ministry of Finance has published the data of the RF enlarged government on the budget execution in January through November of 2006. In accordance with the presented indicators, the amount of revenues made 38.7 (against 38.8 per cent of GDP in JanuaryOctober of 2006), the expenditures made 28 per cent of GDP (27.8 per cent of GDP in 2005), whereas the surplus made 10.7 per cent of GDP.

As of January 1, 2007 the financial reserves of the RF Stabilization Fund made RUR 2 346.92 billion as opposed to RUR 2 189.5 billion as of December 1006, what makes 8.7 per cent and 8.2 per cent of GDP respectfully in relation to the accumulated GDP within January-December of 2006.

Major developments in the budgetary sphere In January the Mr. A. Serdyuk, the Head of the Federal Tax Service, has declared, that the tax burden in the Russian economy has been reduced to 27.4 per cent of GDP, whereas it made 33.6 per cent of GDP before.

According to his words, there are fourteen kinds of taxes and levies, effective in the RF at this point, while there were fifty of tax types at the beginning of the nineties. The input of the Tax authorities in the budget has made 64 per cent of all revenues. However, Mr. Serdyuk noted, that the current indicators are still not in line with the real economic situation, as with its current growth rates tax revenues should be significantly higher. Among other problems in the current situation, he mentioned various schemes of tax minimization, filing of minimal profits and lowest cost efficiency.

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