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Overall, it can be noted that the federal act On the federal budget for 2010 and for the period through 2012 has preserved a whole string of substantial challenges typical of Russias interbudgetary relations system, namely:

1) an insufficient volume of the FFSR and an unjustifiably low share of transfers in the aggregate volume of interbudgetary transfers;

For more details, see: A. Siluanov, V. Nazarov Vzaimodeystviye federalnogo tsentra I regionov pri provedenii antikrizisnoy politiki: mezhdunarodny opyt/Voprosy ekonomiki 9, RUSSIAN ECONOMY IN trends and outlooks 2) a fairly big number of subventions (including minor ones in particular), which compels one to question the efficacy of the current system of division of expenditure powers between different tiers of government;

3) an excessive number of subsidies and an insufficiently transparent and efficient system of their allocation.

Table Financial Aid out of the Federal Budget to Consolidated Budgets of Subjects of the Federation in 19922009 (as % of GDP) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1. Financial aid to budgets 1.8 2.3 2.5 1.6 1.18 1.43 1.79 2.2 1.94 1.7 1.65 1.52 1.79 1.89 3.of other levels 1.1. Federal target programs 0.05 0.15 0.39 0.54 0.as well as subsidies to RF Subjects on support of the agrarian sector, watereconomic measures, support of small-sized entrepreneurship, rehabilitation of children 1.2.Fund for co-financing of 0.15 0.11 0.04 0.12 0.11 0.10 0.09 0.social expenditures 1.3. Fund for financial sup- 0 0 0.36 1.17 1.04 1.22 1.12 0.99 0.96 1.14 1.36 1.3 1.05 0.88 0.94 0.79 0.79 0.port of regions, including transfers on equalization of 0 0 0.36 0.86 0.68 0.86 1 0.99 0.96 1.14 1.36 1.3 1.05 0.88 0.94 0.79 0.79 0.the budget sufficiency level state support of the North- 0.06 0.08 0.08 0.07 ern Supplies transfers at the expense of 0 0 0 0.31 0.36 0.36 0.12 the VAT 1.4. Transfers and subven- 0 0.02 0.09 0.06 0.09 0.13 0.1 0.06 0.15 0.54 0.28 0.29 0.27 0.36 0.21 0.31 0.22 0.tions, including:

transfers on support of 0.11 0.24 0.16 0.17 0.11 0.measures on provision of balance of budgets 1.5. Resources of the Fund 0 0.01 0.01 0.01 0 0.01 0.01 0.01 0.for reforming regional and municipal finance 1.6. Other free and non- 0.01 0.01 0.01 0.01 0.08 0.17 0.19 0.repayable transfers (subsidies and subventions) 1.7. The regional develop- 0.03 0.05 0.1 0.1 0.15 0.01 0.01 0.02 0.02 ment financing fund 1.8. Resources transferred 0.61 1.95 2.54 0.42 0.81 0.43 0.36 0.14 0.28 0.05 0.2 0.14 0.12 0.01 0.05 0.02 by mutual settlements 1.9.Loans and budget cred- 0.09 0.03 0.02 0.04 0.23 0.64 0.03 0.1 0.08 0.02 0.09 0.01 0.02 0.03 0.04 0.01 0.03 0.its less those paid off to other tiers of the public administration * 0.37 0.38 0.36 0.34 0.17 0.30 0.43 0.51 0.2. Fund for compensations 3. Other interbudgetary 0.18 0.11 0.4 0.45 0.54 0.35 0.33 0.34 0.36 0.27 0.transfers, of which:

State support to the road 0.18 0.11 0.27 0.27 0.31 0.22 0.13 0.15 0.17 0.08 0.sector** Funds transferred to 1.49 2.7 3.4 1.8 2.3 2.5 1.6 1.36 1.54 2.56 3.03 2.84 2.39 2.25 2.17 2.57 2.67 4.budgets of other levels of government, total *Since 2005 only budget loans.

**presently, most of the transfers have been included in section 1.1.

Source: the Federal Treasury, the authors calculations.

Section Monetary and Budgetary Spheres 2.4. The Russian financial market in 2008-2009: trends, crisis mitigation measures, institutional issues 2.4.1. Crisis and recovery in the Russian market At times of crisis, stock market behaviour generally foreshadows changes in the fundamental economic indicators. This time has been no exception: the drop in the RTS market index that started in June 2008, even prior to the slump in oil prices in GDP levels, stopped abruptly in February 2009 and gave way to renewed growth of the index. Meanwhile, industrial indicators for specific sectors and product categories resumed growth only starting from April 20091. By the end of 2009, the RTS index had reached 58.7% of its pre-crisis peak, while the MICEX index reached 71.2%. Based on stock price and market index dynamics, the 20082009 crisis has been less significant in terms of extent and duration than the 1997 1998 crisis (see table 1). Nonetheless, it is yet too early to speak about a full recovery to pre-crisis levels.

Table Quantitative indicators of the 19971998 and 2008-2009financial crises in Russia 19971998 crisis 20082009 crisis 1. Decrease relative to peak 1.1. Extent of drop, % RTS index 91.3 78.MICEX index 73 68.1.2. Duration, months RTS index 14 MICEX index 13 2. Recovery time, months RTS index 59 MICEX index 8 Source: RTS and MICEX data as of January 31, 2010.

The 1997-1998 crisis started in August 1997 and saw the RTS index fall for 18 months, with a total drop of 91.3%. During the current crisis, starting from June 2008, the fall in the RTS index lasted eight months and amounted to a 78.2% drop. Given the threefold devaluation of the ruble in 1998 and an oil price slump that lasted two years, it took 59 months for the RTS index to recover from the bottom to its pre-crisis peak. In 2009, such recovery of the RTS index took only 11 months.

Compared to the major financial crises in the past century (see Fig. 1), the 2008-2009 financial crisis in Russia is a clear example of a V-shaped crisis. In terms of the extent of the index drop, it has been less significant not only compared to the Russian 1997-1998 crisis that holds the absolute record for this indicator among the best known crises in the modern world, but also compared to the slump of the U.S. Dow Jones index during the great depression in 1929 1933 and to the slump of the Japanese Nikkei index in the late 1980s. The duration of the current stock market crisis in Russia that has so far lasted only 19 months is significantly less than the duration both of such past crises as the Russian 1997 1998 crisis ( The Industry Experiences a Reluctant Recovery by D. Butrin, Kommersant, January 25, 2010, page RUSSIAN ECONOMY IN trends and outlooks months), the Korean 1989crisis (184 months), and the Great Depression in the U.S. (months) and of such continuing crises as the NASDAQ stock market crisis that has so far lasted 119 months since 2000 and the Japanese stock market crisis that began in 1989 and has so far lasted 241 months.

Source: RTS and MICEX data, www.finance.yahoo.com Fig. 1. The extent and duration of long-term financial crises worldwide as of December 2009 (market peak = 100%) Source: RTS and MICEX data, www.finance.yahoo.com Fig. 2. The extent and duration of short term financial crises worldwide as of December 2009 (market peak = 100%) Section Monetary and Budgetary Spheres Seen against the most significant instances of short-term financial turmoil in the past decade, such as the blue chip crisis in the U.S. stock market in 1987 and 2007, the Internet bubble crash in 2000, the Mexican crisis in 1994, the Indonesian and Brazilian crises of 1997, the current Russian crisis is deeper than, but of medium duration compared to the above, as shown in Fig. 2.

The two-year crisis has confirmed the status of the Russian stock market as one of the riskiest worldwide. In 2008 the RTS and MICEX indices dropped by 72.4% and 67.2% respectively, outstripping the index drops in all other significant global stock markets. Conversely, in 2009 the Russian indices showed the highest yields, with the RTS index growing by 128.6% and the MICEX index growing by 121.1%. Such a rapid rate of recovery for Russian stock prices could hardly have been expected at the beginning of 2009 (see Fig. 3).

Source: RBC and the Global Stock Exchange Federation Fig. 3. Global stock market index yields in 2008-2009 ( %) The market capitalisation of Russian companies amounted to 643 billion dollars in 2009, having grown by 62% relative to the previous year (see Fig. 4). Notwithstanding the 73.6% drop in market capitalisation in 2008 relative to 2007, trading volumes at Russian stock exchanges grew from 1,206 billion dollars in 2007 to 1,405 billion dollars in 2008, reflecting the large-scale sale of Russian corporate stocks in the first year of the crisis. At the same time, in the first half of the year, stock market transactions were concluded at the high pre-crisis prices. During market recovery in 2009, the growth in market capitalisation was coupled with RUSSIAN ECONOMY IN trends and outlooks a significant decrease in trading volumes that fell to 900 billion dollars. The decrease in trading activity by market participants last year was due to the drop in investment volumes by portfolio investors in the Russian stock market and to the fact the stock prices for most issuers had not yet reached pre-crisis levels in 2009. The volumes of repo transactions likewise decreased due to the restrictions that were in force in the margin lending market up to the middle of June of 2009 (see below)1.

Source: RTS, S&P, IMF.

Fig. 4. Capitalisation, liquidity, and volatility of the Russian stock market Similarly to the 19971998 crisis, the onset of the 2008-2009 crisis was accompanied by a significant increase in the volatility of stock yields. The standard deviation for the daily yield changes of the RTS index in 2008 amounted to 86.4% of the 1998 level, whereas in 2007 it had reached only 27.4%. In 2009, stock market volatility had decreased to 60.5% of the level. However, this is still above the risk level for 2003, the year by which the stock market had recovered from the first crisis.

In 2009, the Russian stock market was able to uphold and strengthen its position vis-a-vis its global competitors in terms of trading volume. This is evidenced by the data on the relative trading volumes for Russian corporate stocks and stock depositary receipts at national and international stock exchanges as shown in Fig. 5.

The specifics of Russian stock market regulation determine the use of the repo transactions as the predominant instrument of margin lending to market participants.

Section Monetary and Budgetary Spheres Source: proprietary analysis based on stock exchange data Fig. 5. Relative weight of stock exchanges in terms of Russian corporate stock trading volumes The share of Russian stock exchanges in the total stock trading volumes had dropped to 23% in 2004, signifying a real risk of the pricing and liquidity hub for Russian corporate stocks moving outside of Russia, to the London Stock Exchange. However, this negative trend was reversed in subsequent years. Russian stock exchanges, above all MICEX, had strengthened their positions as the pricing and liquidity hubs for Russian corporate stocks. By 2009, MICEX was responsible for 73.6% of the total trading volume for Russian shares, while the Russian equity spot market was de facto based at MICEX. However, the RTS stock exchange was able to improve its competitive position with respect to the stock market in 2009 by introducing RTS-Standart(d), a new trading and settlement mechanism for stocks that allows to abandon the obsolete system of depositing securities prior to the start of trading and guarantees settlements by using a centralized clearing system. This innovation has enabled RTS to increase its share in trading Russian corporate stocks from nearly zero in 2008 to 4.percent in 2009.

2.4.2. Similarities and differences between the 1997and 20082009 crises Assessing the effectiveness of government actions during the 2008-2009 crisis is best done by comparing the circumstances of its emergence and subsequent developments with the Russian crisis scenario of 10 years ago. The two crises had much in common in terms of their beginnings. The principal similarity is that both were caused by the cyclical nature of the Russian economy and by its strong dependence upon global raw material prices, above all oil and gas prices, as well as its dependence on the behaviour of foreign portfolio investors. This is RUSSIAN ECONOMY IN trends and outlooks shown by an analysis of the scenarios of both crises in Figs 6 and 7. As oil prices fall, foreign investors show growing fears regarding a possible devaluation of the ruble, while the withdrawal of speculative capital in turn causes a stock market collapse. If the government is subsequently unable to manage the devaluation of the national currency, an unbalance emerges between the foreign currency assets and liabilities of banks and industrial companies with significant foreign currency borrowings, resulting in a growing threat of a banking crisis and debt defaults by real sector companies. If this is coupled with an unbalanced state budget, a default on government debt securities is also possible.

Source: RTS and IMF data.

Fig. 6. Dynamics of the RTS index, Brent oil prices, and the ruble-US Dollar exchange rate (September 1995 = 100%) RTS index and US Dollar exchange rate The 1997-1998 crisis followed the worst-case scenario. The decrease in oil prices starting from January 1997 continued, with the Brent price falling from 23.47 dollars per barrel in December 2007 to 9.8 dollars per barrel in December 1998. The RTS index peaked at 506.45 in July 1997 before the stock market crash started in August 1997, and by January 1999 the RTS index had fallen to 55.12. The stock market collapse was caused by investor expectations regarding the increase in Russia country risk caused in turn by the dropping fuel prices and the expected devaluation of the ruble. The Russian stock market was seriously affected by the Asian stock market collapse in 1997 that had strengthened negative investor perceptions of emerging stock markets including Russia. A year after the stock market collapse, the crisis extended to the debt markets and to the banking system. In August 1998, faced with low oil prices and with the impossibility of increasing budget revenues by continuing placements of short-term government bills (GKO), the government announced a threefold devaluation of the ruble together with a default on ruble-denominated GKO securities. As the largest commerSection Monetary and Budgetary Spheres cial banks were unable to service their obligations to foreign and domestic creditors, the government also announced a moratorium on the fulfilment of commercial bank obligations to non-residents.

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