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- calculation of the acid test ratio (N2) encompasses liquidity placed with resident banks of RF for the term of 1 day or on demand that are on the balance sheet for no longer than 10 calendar days discharge of obligations by which as per an agreement is provided for not later than on the date following the day of their demand and on condition the said assets are recognized as the 1st class quality loans;

- the international development banks committed loans have been classified as liquid assets for the sake of calculation of the current liquidity (N3);

- classification as highly liquid and liquid of cast interest claims with respect to the 2ndclass quality assets as per CBRs Statute of March 26, 2004, 254- and on the 1st- and 2nd class quality assets as per CBRs Statute of March 20, 2006, 283- for the sake of calculation of standards N2, N3.

Overall, the amendments were of a qualifying nature and have brought the law on compulsory standards in consistency with the realities of the crisis. We regard their introduction as an attempt to spur concentration in Russias banking system for one part, and to soften to some degree standards in the crisis conditions, on the other hand.

8. In compliance with federal act of October 13, 2008, 173-FZ On additional measures on support of the financial system of the Russian Federation, the CBR extended Rb. 500bn Section Monetary and Budgetary Spheres in subordinated loans to Sberbank of Russia under 8% annualized with the term of credit until December 31, 2009. Besides, in compliance with the federal act, Rb. 410bn (resources of the National Welfare Fund) may be deposited with the VEB in order to disburse loans to Russian credit institutions. As of October 1, 2009, as many as 14 banks were granted subordinated loans worth a total of Rb. 267.4bn, including 225bn. extended in loans to two banks in and another 42.4bn. to twelve banks in 2009.

The moves have boosted recapitalization of a number of large banks that had found themselves under pressure of a rapidly mounting delinquency. It should be noted though that with the economic situation stabilizing, demand for such loans plunged considerably.

2.2. The State Budget In 2009 Russias economy has completed its journey from the recession noted in the first half of the year to the stabilization with initial signs of revival. The latter phenomenon was mirrored in some improvement of economic indicators vis--vis expectations, particularly the ones in the area of public finance. Behind the improvement there had been huge injections of public funds into the economy. Quite illustratively, the enlarged governments aggregate expenditures hit a record-breaking value ever reported in the 2000s. In tandem with a sizeable fall in budget revenues, that had resulted in the budgets of all levels running deficit by the end of the year.

It was the Reserve Fund whose resources in 2009 formed a major cushion ensuring a greater balance of the budget system in 2009. However, it is envisaged that the Fund would be completely run out of its resources this year already. The imperative to pursue an anticrisis fiscal policy in 2010 paired with the necessity to fulfill the earlier assumed expenditure obligations have compelled the RF government to revise their public borrowing program towards its extension. So, with the current correlation between the robustness of the budget system and the situation in the foreign trade area, the state of affairs in the sphere of public finance has remained challenging and far from its pre-crisis fairly balanced state.

2.2.1. Overview of the Budget System of the Russian Federation The slump in the real sector in the late 2008 with a subsequent recession since the early 2009 has had an adverse effect on the state of the public finance, which resulted in the rise of a steady budget deficit at all the tiers of the government. The 2009 volume of revenues to the budget of the enlarged government plunged ay 4.4 p.p. of GDP vs the respective figures of the same period of 2008 (see Table 1). Behind the nosedive was chiefly a considerable fall in the federal budget revenues (by 3.7 p.p. of the nations GDP).

The crisis period made the domestic corporations survival a critical imperative. That is why the RF government devised a set of measures to support various industries and the social sphere. Within a fairly short time (practically since November 2008) the government introduced a broad package of anti-crisis measures, unprecedented by the variety of forms and avenues of the governments influence on the economy, as well as by the volume of resources deployed. In the autumn 2008, given tight timelines, the anti-crisis measures were more of pin-point response ones and required largely the use of manual- control mechanisms. The RF governments 2009 comprehensive anti-crisis Program had been developed by March 2009.

The need to finance the Programs priority avenues necessitated amending the act on the federal budget. Subsequently, the earlier approved budget appropriations were axed by Rb.

RUSSIAN ECONOMY IN trends and outlooks 943.3bn, while as much as Rb. 1.61trln, including thus available funds, was earmarked to stabilize the financial market, support the strategic nationwide and local backbone corporations as well as individual, particularly vulnerable to the crisis, industries in the real sector, and the social protection of the population. The measures, to some extent, had been implemented in the pre-crisis period, but it is in the crisis conditions that they emerged as the priority ones. As a result, the enlarged governments budget expenditures rose at 6.7 p.p. of GDP vs the prior year, with the rise driven primarily by growth in the expenditure volume of the federal budget (some 6.4 p.p. of GDP). With the gap between collection and spending of budget funds widening, 2009 has become the first year over the past decade when the budget deficit of the enlarged government was reported to account for 6.2% of GDP.

Table Execution of Revenues and Expenditures of Budgets of All the Tiers of the Government in 20082009 2008 .

Bias as p.p. of GDP As Rb.bn. As % of GDP As Rb.bn. As % of GDP Federal budget Revenues 7336.8 18.8 9274.1 22.5 3.Expenditures 9636.8 24.7 7566.6 18.3 +6.Deficit () /Surplus(+) 2300.0 5.9 1707.5 4.2 10.Consolidated budgets of the RF Subjects Revenues 5927.2 15.2 6199.1 15.0 +0.Expenditures 6256.3 16.0 6253.5 15.2 +0.Deficit () /Surplus(+) 329.1 0.8 54.4 0.2 0.Budget of the enlarged government Revenues 13420.7 34.4 16003.4 38.8 4.Expenditures 15847.3 40.6 13989.2 33.9 +6.Deficit () /Surplus(+) 2426.6 6.2 2014.2 4.9 11.For reference: 39016.1 41256.GDP. as Rb. bn.

Source: The RF Ministry of Finance; IET calculations Notwithstanding the gravity and scale of budget infusions in the domestic economy, the measures not only came late (their real financing and an immediate delivery of the funds to recipients under the auspices of the anti-crisis program kicked off only between May and June 2009), but suffered a lack of consistency and, in certain instances, the absence of the muchneeded for their implementation legal base.

2.2.2. An Analysis of Main Parameters of Execution of the Budget of the Enlarged Government A sizeable contraction of the volume of revenues to the national budget system (Table 2) took place under the impact of negative ramifications of the global financial crisis and debilitation of the economy against the backdrop of the earlier emerged, extremely exposed to external shocks, mineral structure of Russias exports. It was revenues from taxes and levies that directly depend on the prices of, and demand for Russian exports namely, revenues from the mineral tax and from foreign trade, that plunged most drastically. When compared with 2008, these revenues to the budget of the enlarged government slid by 1.3 p.p. and 1.7 p.p. of GDP, respectively. The main cause for such a fall in revenues became a drastic price downfall for energy sources: the 2009 average price of Urals on world markets was some USD 61/bbl, or down by 35.5% relative to the average 2008 price level. The effect from the price drop was aggravated by the contraction of the physical volumes of production and export of carbohySection Monetary and Budgetary Spheres drates (mostly natural gas). A rapid plunge of revenues from the said taxes and levies was registered in the first half 2009, when contracts concluded in late 2008 by compulsory low prices were due to be exercised. But the depreciation of the Rb. against the USD between late 2008 and early 2009 to some extent mitigated the dynamic of the fall of revenues from the mineral tax to the budget1. With the price situation improving between the 1st and the 3rd quarters last year, the dynamic of collection of revenues from the oil-and-gas taxes once again became positive.

Table Dynamic of the Level of Tax Burden and Collection of Main Taxes to the Budget of the Enlarged Government of RF in 20042009 (as % of GDP) 2004 2005 2006 2007 2008 The level of tax burden (1+2+3) 35.8 36.3 35.9 36.1 35.6 30.1. Tax revenues, including: 27.5 25.7 24.4 25.7 23.9 20.Corporate profit tax 5.1 6.2 6.2 6.6 6.0 3.Personal income tax 3.4 3.3 3.5 3.8 4.0 4.Uniform social tax* 3.5 2.0 1.9 2.0 1.9 2.VAT 6.3 6.8 5.6 6.9 5.1 5.Excise taxes 1.4 1.2 1.0 1.0 0.8 0.Mineral tax 3.0 4.2 4.1 3.6 4.1 2.2. Insurance contributions to the compulsory pension insurance 2.8 2.9 2.9 3.1 3.1 3.3. Foreign trade revenues 5.5 7.8 8.6 7.3 8.6 6.*Without regard to insurance contributions to the compulsory pension insurance.

Source: The RF Ministry of Finance; IET calculations The export duty rates for oil were revised following the improvement of the situation with the world oil prices. More specifically, between January and June 2009 the figure has been fluctuating within the range of USD 100-135 per ton of crude oil. Between July and August it was raised up to USD 222/t, while between September and December it was fluctuating between USD 231-271/t. The increase in the export duty rate has inevitably resulted in growing revenues from foreign trade, but failed to attain the 2008 relative volumes of tax revenues, nonetheless.

In addition to external factors, the amount of oil-and-gas revenues in 2009 found itself affected by changes in the mineral tax administration procedures, including the following ones:

- increase of the exempt minimum threshold from 9 USD/bbl to 15 USD/bbl;

- since 2009 for the sake of taxation the volume of the extracted oil was identified in net mass units;

- the list of fields subject to application of zero rate of the mineral tax was extended;

- the subsoil use license write-off procedure was modified for all the oil companies.

As well, the year of 2009 saw adoption and promulgation of a new procedure of collection of the mineral tax-based revenues. The revenues from the carbohydrate minerals, oil and gas condensate in full have now become subject to collection to the federal budget. As a reminder, the tax was previously collected to the federal budget at a rate of 95%. Whereas the respective proportion of revenues from the mineral tax in the revenue structure of budgets of The USD/RB exchange rate is used to calculate the coefficient of the oil price dynamic, which is used to set the mineral tax rate with respect to oil.

RUSSIAN ECONOMY IN trends and outlooks the Subjects of the Federation has recently accounted for a meager 1.5-2%, such redistribution has not entailed any considerable fall in the said revenues. Plus, the increase of rates of individual regional taxes (the transport tax, state levies, excise taxes) effective since 2010 may offset a possible withdrawal of a fraction of regional resources due to the modification of the mineral tax distribution procedure.

Declining revenues, primarily in the oil-and-gas sector and the general slump of business activity in other industries have resulted in a plunge of revenues from the corporate profit tax.

Between January and December 2009 the revenues to the enlarged governments budget accounted for 3.2% of GDP compared with 6% of GDP in 2008. As of early 2010, financially, most enterprises have found themselves in dire straits, while the government stimulus package was delivered to a limited number of the most critical, backbone corporations and fell short of securing a mass positive effect. Meanwhile, it is worth noting some stabilization of the financial health of corporations in individual sectors over the last months of 2009.

In all, according to the preliminary data, over 11 months of 2009 the real sector posted an aggregate financial result of Rb. 3,639,3bn, or more than 1.2 times lower than the respective figure of 2008, while the proportion of profit-making organizations in their overall number dwindled by 5.8 p.p. and accounted for some 67%.

In addition, the corporate profit tax underwent some reform in 2009. Specifically, its rate slid from 24% to 20%, while the regional component soared to 18% instead of the previous 17.5%. As well, the year of 2009 saw some amendments to Art. 25 of the Tax Code in the part of administering the corporate profit tax levied on organizations and improvement of the taxpayers situation come in force. More specifically, the following novelties are worth notion:

- simplification of the procedure of payment of the corporate profit tax by virtue of transition from the quarterly-advance arrangement to its monthly payment on the basis of effective profit;

- increase of the bonus depreciation rate (attribution of a part of the initial costs of capital assets to expenses in the ongoing tax period) from 10 to 30%;

- provision of the possibility for amortization of capital assets identified as a result of stocktaking;

- granting organizations the right to factor in costs of training of their staff by major, as well as complementary professional programs;

- possibility to consider individual kinds of R&D costs with the use of an increasing coefficient -1.5.

The above modifications of the procedure of administration and accounting of the corporate profit tax reduce the tax base. But that was counterbalanced by some new modifications, including:

- obligation to restore the bonus depreciation by capital assets which are sold prior to the 5year deadline of their use;

- payments to members of the Board of Directors are not subject to their accounting as costs.

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