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Section The Monetary and Budget Spheres In our opinion, the first-priority task associated with maintaining this countrys macroeconomic stability should be a return to the budgetary rule that regulates the procedure for the use of those budget revenues which depend on fluctuations in the prices of energy resources, while at the same time imposing restraints on the growth of expenditures and government debt.

The unpredictable character of oil and gas revenues makes it imperative that Russia should adopt a conservative approach to determining the level of allocations from that source that may be safely used in order to maintain proper stability of the state budget. We believe that an adequate estimate of the guaranteed level of budget revenue can be obtained on the basis of revenue calculation at the base price of oil. Accordingly, the federal budget should be balanced at the base price of oil.

We suggest that the base price of oil should represent the settlement price of Urals crude estimated as the moving average price of oil for the past 10 years. For example, in 2012 the base price of oil amounts to about $ 60-65 per barrel. It is evident that at that level of oil prices Russia cannot achieve a balanced budget in 2012 (according to our estimates, the federal budget can be deficit-free only if the average prices of oil do not slide below $ 115 per barrel). However, we believe it possible for Russia to reintroduce the budgetary rule from 2016, when the base price will amount to $ 90-95 per barrel, provided that the behavior of oil prices entered in the RF Ministry of Economic Developments forecast may indeed be materialized. As regards the transition period, the base price of oil, for the purposes of properly drawing up the federal budget, may be set at $ 105 per barrel in 2013, $ 100 per barrel in 2014, and $ 95 per barrel in 2015.

In that case, the upper limit of expenditure should be determined as the sum of the amount of revenues estimated at an established base price of oil and the amount of net debt financing at a level of no more than 1% of GDP. So, if the actual price of oil becomes the same as the base one, the budget will have a deficit under 1% of GDP, thus making it possible to prevent the volume of state debt from climbing above 25% of GDP. Such levels of state debt can be considered safe from the point of view of the size of the debt load on the budget and the economy in the event of short-term drops in oil prices (a period up to 1 to 2 years) and in Russias country risk level. We believe that, in order to minimize foreign exchange risks, it would be advisable for Russia to issue bonds exclusively denominated in the national currency, although the form of issuing can vary between federal domestic bonds and ruble Eurobonds.

If there occurs a rise in the actual price of oil and, consequently, in the level of revenues, the proceeds should be primarily allocated to the Reserve Fund until the moment when it reaches its prescribed volume (8-10% of GDP, which will enable Russia to smoothly descend, over the course of three years, to a lower level of budget expenditures in the event of a 20% fall in oil prices). The next steps should be a reduction in net drawings (if deemed necessary by the Government) and a replenishment of the National Welfare Fund.

When the price of oil is relatively low, the loss of revenue should be compensated from the Reserve Fund. At the same time, the amount of funds drawn from the Reserve Fund over the course of one year should be determined with taking into account the total volume of the Reserve Fund and the risk of revenue losses in the following years.

As the alternative budgetary rules one may suggest either the concept of oil and gas transfer (applied in Russia prior to the 2008 crisis), or the rule that the base price of oil should be adjusted when the actual oil prices drop below their forecasted values.

RUSSIAN ECONOMY IN trends and outlooks At the same time, we believe that for Russia to return to the concept of oil and gas transfer in the current circumstances, when there exists a strong probability of sharp fluctuations in oil prices, would by no means be an optimal solution because, although the oil and gas transfer is equivalent to the base price of oil (which is constantly increasing so as to compensate for the continuing shrinkage of the oil and gas sectors share in Russias GDP), it cannot be adapted to changes in current prices.

However, the adjustment of the base price level in a situation of declining oil prices for example, if the previous years price is taken as the base price for the next budget year (when it is below forecasts) increases the volatility of budget expenditure.

In order to provide adequate financing for the modernization of the Russian economy and a higher level of investments in human capital, it is necessary to alter not only the structure of government expenditure, but also the approaches to the allocation of budgetary funding.

In fact, the majority of the budget-funded public sectors use rather inefficiently the financial resources allocated to them, and so budgetary funding should be allocated to those sectors on condition that they carry out all the necessary transformations. In other words, this means discontinuation of the practice of increasing the size of budget allocations to the items sensitive to the quality of the institutions that act as recipients of those allocations.

In addition to these measures, it is necessary to gradually diminish the role of the federal budget as the principal source for covering the Pension Funds deficit; to implement a program of further job cuts in the budget-funded sector; to achieve optimization of the expenditures on national defense and national security, rigidly linking this countrys foreign policy strategy with the available resources; to abandon the practice of large-scale involvement of budget resources in image-making construction projects; to limit the use of subsidies strictly to the purposes of recovery of or restructuring of strategic enterprises in the real sector, etc.

According to our estimations, altering the structure of financing in the direction of priority treatment of the issues of infrastructure and human capital development, with a simultaneous improvement of the cost-effectiveness of budget resources allocation, will result in an increase in the size of funding allocated to these items by 4% of GDP over the period until 2020. At the same time, reductions in the budgetary systems ineffective and excessive expenditures will make it possible, as early as 2014, to obtain additional resources in the amount of approximately 2% of GDP, resulting from cuts in the expenditures on national defense and law-enforcement activity by 0.9% of GDP, those on the national economy and the housing and utilities system by 0.8% of GDP, and those on nationwide issues by 0.3% of GDP.

In order to provide adequate financing for the modernization of the Russian economy and a higher level of investments in human capital, it is necessary to alter not only the structure of government expenditure, but also and most importantly the approaches to the allocation of budget funding.

Besides, it will be feasible, in order to enhance the incentive-creating function of taxes and the reliability of financial coverage of government obligations, to abstain, for as long as possible, from increasing the tax load on the economy, by expanding instead the structural component of the tax system. As demonstrated by the worlds experience, when taxes on consumption are raised simultaneously with a cut in the tax load on labor and capital, it becomes possible for a country to substantially increase the competiveness of its economy. With regard to Russias taxes on consumption, acceleration of upward adjustment of the rates of excises on alcohol and tobacco products will be advisable.

Section The Monetary and Budget Spheres In an event of a stable surplus displayed by the general government budget, the bestsubstantiated measure aimed at achieving a well-balanced budget will be to cut down the rate of insurance contributions say, to 26%, and to simultaneously increase the revenue margin above which the rate of 5% is to be applied.

Besides, if a truly just and effective taxation system is to be created in Russia, it will be necessary to gradually abolish the export duties on oil and petroleum products and compensate for the resulting loss of revenues by increasing the rate of the Mineral Resources Extraction Tax (MRET), introducing the Tax on Extra Income (TEI) in the oil extraction sector, establishing progressive tax rates in metallurgy, mineral fertilizers production, etc.

The progressivity of income and property taxes should be increased, and the taxation system should be made more environment-friendly (by means of increasing the fines for environment pollution and introducing a tax on carbon emission).

Special attention must be paid to the issues of improving the quality of customs and tax administration. In particular, it is necessary to implement reform of customs administration through introducing selective control based on the results of risks analysis and to complete that process in the sphere of tax administration; and to promote further computerization of the administration procedures and implementation of contactless methods for dealing with taxpayers.

Tables 16 and 17 contain forecasts of the aggregate balances of the general government budget and the federal budget for the period of 20122020 if the new budgetary rules are introduced and the aforesaid budgetary and tax policy measures are implemented.

The structural deficit peak (the difference between expenditure and the estimated revenue volume at the base price of oil) will be achieved in 2016 (1.9% of GDP), and then by 2020 it will decline to 0.8% of GDP. This type of deficit is covered by net borrowings from the federal budget. By 2020, the volume of government debt will effectively reach its marginal value of 25% of GDP (22.6% of GDP), which will necessitate balancing the federal budget, from 2021 onwards, at the level of revenue structure.

The aggregate federal budget deficit will reach its peak (1.7% of GDP) in 2013 and then decline to 0.4% of GDP by 2020; it should be noted that between one-third and one-half of this deficit is covered by revenues from privatization of state property. Since the forecasted oil prices are higher than the base ones, and the actual deficit is lower than the structural deficit, part of federal budget revenue is transferred to the Reserve Fund whose size, nevertheless, in 2020 fails to achieve its normative value of 6% of GDP (5.6% of GDP). Consequently, the opportunities for transferring a part of the extra revenues to the National Welfare Fund will emerge only after 2020.

Over the greater part of the period under consideration, the general government budget appears to be properly balanced, with due regard to the estimated size of revenues from privatization.

Table Parameters of the General Government Budget, % of GDP 2012 2013 2014 2015 2016 2017 2018 2019 1 2 3 4 5 6 7 8 9 Revenue, including: 38.1 37.7 37.2 37.0 37.0 36.8 36.6 36.4 36.VAT 5.7 5.7 5.5 5.4 5.4 5.4 5.4 5.5 5.Tax on profit 6.3 6.5 6.3 6.3 6.1 6.2 6.3 6.1 PIT 4.0 3.8 3.8 3.8 3.9 3.9 4 3.9 4.Insurance contributions 5.7 5.8 5.9 5.9 6 6 6.1 6.1 6. RUSSIAN ECONOMY IN trends and outlooks contd 1 2 3 4 5 6 7 8 9 MRET/TEI (Tax on Extra Income) 3.3 3 2.9 2.8 2.8 2.7 2.7 2.6 2.excises 1.4 1.5 1.6 1.8 1.9 1.9 1.9 1.9 1.taxes on property 1 1.1 1.2 1.2 1.3 1.3 1.3 1.4 1.customs duties 7.7 7.3 7.0 6.7 6.5 6.3 5.9 5.9 5.other revenues 3.0 3.0 3.0 3.1 3.1 3.1 3.0 3.0 3.Expenditure, including: 38.0 38.1 37.9 37.6 37.3 37.2 37.1 36.5 35.nationwide issues 2.65 2.5 2.5 2.2 2 1.8 1.7 1.6 1.national defense 2.8 2.6 2.4 2.4 2.4 2.4 2.4 2.4 2.national security 2.6 2.5 2.3 2.3 2.3 2.3 2.3 2.3 2.national economy, including 5.8 5.9 6.0 5.9 5.7 5.6 5.2 4.9 4.road system 1.5 1.8 2.1 2.3 2.5 2.7 2.9 2.9 2. agriculture and fishery 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0. communications and informatics 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0. national economy, less road system, 3.6 3.4 3.2 2.9 2.5 2.2 1.6 1.3 1.agriculture, communications and informatics housing and utilities system 2.2 2.1 2.1 1.9 1.7 1.5 1.3 1.1 0.environment protection 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.education 4.1 4.1 4.2 4.3 4.5 4.8 5.3 5.3 5.culture, cinematography 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.mass media 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.health care 3.7 4.0 4.2 4.2 4.2 4.2 4.2 4.2 4.physical culture and sports 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.social policy, including 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12. aggregate expenditures on labor 7.9 7.6 7.6 7.7 7.7 7.7 7.6 7.5 7.pensions (less social pensions and budget-funded compensations) social policy, less expenditures on 4.1 4.4 4.5 4.3 4.3 4.3 4.4 4.5 4.labor pensions government debt servicing 1 1.2 1.1 1.2 1.3 1.4 1.5 1.5 1.Deficit /surplus 0.1 -0.4 -0.7 -0.6 -0.3 -0.4 -0.5 -0.1 0.Revenues from privatization 0.3 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.Source: Estimates made by the Ye. T. Gaidar Institute for Economic Policy and the Higher School of Economics National Research University.

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