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The 2009 tax revenues to the RF Subjects consolidated budget shrank by 13.5% in nominal terms, while their proportion in the aggregate revenues to regional budgets slid from 71% to 64%. Non-tax revenues also dropped by 15.4%, and their proportion slid from 9.8% to 8.7%. Meanwhile, transfers out of the federal budget grew by 31.4% in nominal terms, with their proportion in the aggregate revenues soaring from 18 to 25%. So, in the conditions of crisis, the role of the federal aid grew substantially. Transfers from the federal budget have formed a cushion, thanks to which regions were able to more painlessly pass the peak of the economic crisis (more on federal transfers below).

Republic of Dagestan, Chelyabinsk, Yaroslavl, Sverdlovsk, Kemerovo oblasts, Republic of Chuvashia, Permsky Krai RUSSIAN ECONOMY IN trends and outlooks 7 6 5 Other non-repayable transfers 4 Transfers from the Federal Budget Non-tax revenues 3 Tax revenues 2 1 2008 Source: the Federal Treasury, the IET calculations.

Fig. 1. Revenues to the Consolidated Budget of the RF Subjects in 20082009, by Components The expenditure part of the RF Subjects consolidated budget also underwent substantial modifications. It should be noted that the year 2009 saw interruption of the previous 2007-trend to growth of regional expenditures in the consolidated budget of RF (see Table 1). The proportion of regional expenditures tumbled from 49.2% in 2008 to 43.4% in 2009. This situation emerged due to the fact that expenditures of the RF Subjects consolidated budget remained practically at their 2008 level (with their increase accounting for a meager 0.04%), while the federal budget expenditures (less transfers to regions) posted a 26% increase compared to the respective figure of the prior year.

But given that the aggregate volume of expenditures has remained unchanged, their structure underwent certain transformations (see Table 3).

The data of Table 2 evidence that it was regional transfers by sections Social policy and Interbudgetary transfers (this concerns largely transfers to the CMI Territorial Funds), as well as those on servicing the public and municipal debts, that posted the greatest increase.

The rise in the debt servicing expenditures was fueled by more intense subnational borrowings in 2009, while the increase in expenditures on the social policy was driven by greater expenditures on implementation of the government employment policy (funded with subventions out of the federal budget), among other factors.

Rb bn Section Monetary and Budgetary Spheres Table Expenditure Structure of the Consolidated Budget of the RF Subjects in 20082009 (as %) 2008 2009 Change (p.p.) General public administration matters 7.1 7.3 0.Including servicing the public and municipal debts 0.6 1.0 0.National security and law enforcement activities 4.1 3.9 0.National economy 19.6 18.1 1.Housing and utilities sector 16.3 13.6 2.Environment 0.3 0.3 0.Education 20.8 21.5 0.Culture, motion picture industry, and mass media 3.5 3.4 0.Healthcare and sport 12.7 12.1 0.Social policy 12.2 15.3 3.Interbudgetary transfers (IBT) 3.3 4.4 1.Source: the Federal Treasury, the IET calculations The greatest decrease in the proportion in the aggregate expenditures was noted across sections Housing and utilities sector and National economy, with expenditures on the former being cut in nominal terms by 16.2%, while those on the national economy - curtailed by 8% vis--vis the respective figures of 2008. The cuts in the housing and utilities sector occurred largely due a 23% fall in capital investment therein. As concerns support of the national economy, it is important to examine the expenditure dynamic across its subsections. The cuts in expenditures on the national economy can be ascribed primarily to a 3.8% curtailing of the funding of the road construction, maintenance and repair sector (aka the road sector), which in 2008 accounted for 37% of the aggregate expenditures on this particular sector. Meanwhile, expenditures on the subsection General economic expenditures increased substantially (1.7 times). This can be attributed primarily to a greater volume of funding of measures on alleviating the stretching situation on the labor market. As well, expenditures on the support to the agrarian sector were also up (by 8.7%). It should be noted that all the three expenditure directions in the sphere of national economy are funded with subsidies out of the federal budget.

In all, speaking of the dynamic and structure of expenditures of the 2009 RF Subjects consolidated budget, the following phenomena are worth referencing to: it was capital expenditures that were trimmed most intensively, while expenditures on servicing the public and municipal debts, as well as expenditures on directions that are (co-) financed out of the federal budget posted a substantial increase.

Table Volume of the Public Debt of the Subjects of RF in 2008Volume of the public debt, as Rb bn:

Increase in Increase As of As of Increase in As of As of the 1st half over the 01.01.08 01.01.09 2008 01.07.09 01.12.2009 months All RF Subjects 456.9 599.6 142.7 725.4 125.8 787.7 188.The city of Moscow 89.3 121.5 32.2 208.1 86.5 232.3 110.Moscow oblast 92.1 156.1 63.9 164.6 8.6 158.1 2.RF Subjects (less the city of Moscow and 275.4 322.0 46.5 352.7 30.7 397.3 75.Moscow oblast) Source: the RF Ministry of Finance, the IET calculations.

RUSSIAN ECONOMY IN trends and outlooks With a drastic decline in tax and non-tax revenues to the regional budgets in 2009, the RF Subjects have renewed their pro-active borrowing policy (see Table 4).

As evidenced by the data of Table 4, the aggregate volume of borrowings over the months of 2009 proved to be up 32% vs. the respective figure of the whole 2008. But worth a particular notice is the fact that 59% of the borrowings falls on the city of Moscow alone. The Moscow mayor office nearly doubled the citys debt over the period in question. Other Russian regions proved to be more conservative in this regard, but as of December 1, 2009, their aggregate debt volume posted a 23% growth compared with the respective figure as of January 1, 2009. The modification of the format of presentation of the RF Subjects public debt by the RF Ministry of Finance allows tracking down the dynamic of borrowings by their individual kinds only over the first half 2009. That said, just as much as 41% of the volume of the increase of the debt over the 11 months of 2009 (less the city of Moscow) falls on the first half-year. But the respective data give a certain idea of the structure of the RF Subjects borrowings in 2009, nonetheless (Table 5).

Table Volume of the Public Debt of the Subjects of the Federation by Kinds of Liabilities in the First Half of including:

Total, across the RF SubAcross the RF Subjects (without regard The city of Moscow jects to the city of Moscow) Loans to the RF Subjects as of 01.01.2009, Rb bn 268.9 81.5 187.as of 01.07.2009, Rb bn 323.9 152.1 171.change (+/), Rb bn 55.0 70.6 15.increase rate % 20.4 86.7 8.Loan agreements and contracts as of 01.01.2009, Rb bn 166.3 32.4 133.as of 01.07.2009, Rb bn 180.7 34.2 146.change (+/), Rb bn 14.4 1.8 12.increase rate % 8.7 5.6 9.Government guarantees as of 01.01.2009, Rb bn 123.2 3.2 120.as of 01.07.2009, Rb bn 143.8 17.2 126.change (+/), Rb bn 20.6 14.0 6.increase rate % 16.7 436.9 5.Budget loans as of 01.01.2009, Rb bn 40.8 4.5 36.as of 01.07.2009, Rb bn 76.8 4.5 72.change (+/), Rb bn 36.0 0.0 35.increase rate % 88.2 0.9 99.Other debt liabilities as of 01.01.2009, Rb bn 0.4 0.as of 01.07.2009, Rb bn 0.3 0.change (+/), Rb bn 0.1 0.increase rate % 19.3 19.Liabilities, total as of 01.01.2009, Rb bn 599.6 121.5 478.as of 01.07.2009, Rb bn 725.4 208.1 517.change (+/), Rb bn 125.8 86.6 39.increase rate % 21.0 71.3 8.Source: the RF Ministry of Finance, the IET calculations.

Section Monetary and Budgetary Spheres It should be first noted that the volume of bonded loans across Subjects of RF (less the city of Moscow) in the first half 2009 did not post any growth, but even slid by 8.4%. This can be ascribed to several factors. First, the luxury to attract loans on the security market is not within an immediate reach of all the Subjects of the Federation, as there exist technical complexities and the necessity to meet certain criteria. For example, as of late 2009, it was only 19 Subjects that had earned an S&P rating. Second, the overall situation on the financial market had drastically aggravated since the second half 2008. That resulted in higher lending rates and, fairly frequently, the impossibility for second-class borrowers to place their papers.

Yet another peculiarity of the RF Subjects borrowings in 2009 became a growing role of budget loans disbursed from of the federal centers pool. By results of the first half 2009 the budget loans have increased nearly 3-fold compared with banks commercial loans (on the whole, across the RF Subjects, less the city of Moscow). Thus, in the conditions of a substantial fall of tax and non-tax revenues to regional budgets, and a substantial worsening of conditions of borrowings and an increase of lending rates, budget loans from the federal center, together with transfers, formed one of the pivotal financial pools for the RF Subjects budgets.

2.3.2. Financial aid from the federal budget In all, the 2009 volume of financial resources the federal budget transferred to the RF Subjects ones rose by 34%. The biggest increase was posted by subventions (up 71%) and budget loans whose volume was more than 10-fold greater than the respective figures of 2008. Transfers increased by 36% and subsidies by 12%. By contrast, the volume of other extrabugetary transfers shrank by 30%. All that resulted in some transformation of the structure of federal transfers to regions (see Fig. 2).

1 1 1 1 Other interbudgetary transfers Subventions Subsidies Transfers 2008 2009 (in 2008 prices) Source: the Federal Treasury, the IET calculations.

Fig. 2. Transfers to Regions out of the Federal Budget in 2008 Rb. bn RUSSIAN ECONOMY IN trends and outlooks On the whole, it was the proportion of subventions in the aggregate amount of federal transfers that posted the greatest pace of growth from 14% in 2008 to 12.9% in 2009. The proportion of transfers was on the rise, too, - from 36% to 39%. In contrast, the proportion of subsidies slid from 40 to 36%, while the one of other interbudgetary transfers plunged by 4.6 p.p., to 5.9% of the aggregate amount of transfers.

Let us examine individual kinds of transfers out of the federal budget in a greater detail (see Table 5 at the end of the present section). As already noted, their 2009 volume surged in real terms by 36% vs. the respective figures of the prior year. But the growth was fueled primarily by a substantial increase in transfers on getting the regional budgets balanced. While transfers on equalizing the budget sufficiency out of the Federal Fund for Financial Support of Regions increased in real terms just by 4.6%, the volume of the balancing transfers soared 3.8 times compared with 2008. Meanwhile, the proportion of the balancing transfers in the overall volume of transfers rose from 4% in 2008 to 13% in 2009. It should also be noted that a drastic increase in such transfers to regions fell on the second half 2009 (see Fig.

3).

1st Q 2nd Q 3rd Q 4th Q 2008 Source: the Federal Treasury, the IET calculations.

Fig. 3. Transfers on Support of the Regional Budgets Balance in 2008On the one hand, the increase in transfers on getting the regional budgets balanced is partially justified by grave challenges the subfederal budgets were facing in 2009. On the other hand, as it was repetitiously noted in the earlier reviews, this particular kind of transfers forms one of the most opaque interbudgetary relations instruments and one of main sources of soft budget constraints in the national system of federalism.

Whilst considering the dynamic of budget loans disbursed out of the federal budget to regions in 2009, it is worth noting that it appears similar to the dynamic of the balancing transfers (see Fig. 4). Their biggest amounts once again fell on the second half-year, with Rb. bn Section Monetary and Budgetary Spheres those allocated in the 4th quarter accounting practically for a half of the annual sum of the respective appropriations. It should be emphasized that since 2009 budget loans have become available for the term of up to three years. In 2009, the federal center extended a total of Rb.

170bn in budget loans vis--vis Rb. 20 bn disbursed in 2008. As a result, budget loans accounted for nearly 8% of the aggregate amount of financial aid to the RF Subjects. That said, the 2009 balancing transfers and budget loans combined were worth a total of Rb. 319bn, or 20% of the amount earmarked to the regional budgets (in 2008, the respective figure was just 5.2%).

1st Q 2nd Q 3rd Q 4th Q 2008 Source: the Federal Treasury, the IET calculations.

Fig. 4. Loans Disbursed out of the Federal Budget in 2008-As noted above, the 2009 volume of subventions out of the federal budget also posted a substantial growth vs. the one of 2008 (up by Rb 136.2bn). The greatest growth rates were registered across the following directions:

On exercise of the Russian Federations powers in the area of assistance to the population employment, including expenditures on the exercise of these powers (up by Rb 40bn, or more than twice);

On provision of individual categories of citizens with housing, as per federal act of January 12, 1995 5-FZ On veterans (up by Rb 31 bn, or more than thrice);

On payment for housing and utilities to certain categories of citizens (up by Rb 18.4bn, or by 28%);

On delivery to individual categories of citizens a social service in the form of an extra free medical assistance with regard to provision of medicines, medical items and specialized medical food products for disabled children (up by Rb 6.8bn, or by 27%).

So, it is the anti-crisis subventions allocated to fund the employment measures and those on provision of housing to the GPW veterans due to celebration of the 65th anniversary of the victory in the Great Patriotic War (in compliance with presidential decree of May 7, 2008, 714 (On provision of housing to veterans of the Great Patriotic War 1941-1945) that posted the highest growth rates.

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