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2) if a resulting amount of grants is bigger than that of the preceding year multiplied by a forecast consumer price index, the amount of grants for equalization should be determined based on the following procedure;

3) if the amount is less than the previous years amount of grants multiplied by the forecast consumer price index, then the amount of grants for equalization for the planning year should be determined by multiplying the amount of grants for the current year by a planned growth in consumer prices;

4) beginning with the 3rd year of application of the new procedure for measurement of the Funds size, it would be possible to adjust calculation of the size given the difference between actual inflation and budgeted figures.

Such approach will prevent any substantial reduction in real terms of the Funds size and make, with a certain lag though, adjustment given the difference between actual and forecast inflation. As a result, the proposed method combines the advantages of the effective approach towards measurement of the FFSRs size and the method of indexation of its size in 2003 2007, and a combination of these approaches allows one to a large extend to cope with the weaknesses of the methods severally.

Total amount of subsidies is planned to increase to Rb 483,5bn in 2012 from Rb 481,3bn in 2011 or by 0.5% in nominal terms.

It should be noted that no subsidies are provided for several lines of -financing of regional expenditures in 2012:

subsidies for roadway replacement and repair of public motor roads at the administrative centers of the constituent territories of the Russian Federation and the administrative centers of the Moscow and Leningrad Regions, as well as subsidies for full repair and repair of the territory and facilities adjacent to blocks of flats, access roads to the territory and facilities adjacent to blocks of flats;

measures of social support to rehabilitees and persons recognized as victims of political repressions;

child support in the foster family and home, as well as remuneration payable to the adopting parent.

Complete cessation of -financing of road facilities in this line was related to the establishment of regional road funds from 2012. The other two lines relate to redivision of powers In Clause 2, Article 131 of the Budget Code of Russia.

RUSSIAN ECONOMY IN trends and outlooks within the framework of a balanced package on assigning of financing of the police force to the federal budget from 2012.

Let us examine in detail the redivision of revenue and spending powers among the federation and the regions within the framework of delegation of financing of the police force under the federal jurisdiction. The following amendments will take effect from 2012:

federal secondary vocational education institutions and disinfection institutions, as well as the powers to promote employment (save for social benefits to the unemployed) and the powers to pay a lump-sum benefit for adoption of orphan, will be placed under the jurisdiction of the constituent territories of the Russian Federation;

the state due on vehicle registration (which is currently payable to budgets municipal and urban districts), as well as 60% of revenues from excise duties on alcoholic products with a.b.v. of more than 9% (100% of such excises were payable to the budget of the regions until 2012) will be payable to the federal budget;

financial aid to child support in foster families and homes, as well as measures of social support to rehabilitees will be covered by exclusively with the budget of the constituent territories of the Russian Federation.

The aforesaid redivision of powers seems to be disputable from the point of view of both the fiscal federalism theory and the practice of intergovernmental fiscal relations in most of the developed countries with multilevel budget systems. First of all, there are doubts regarding the rationale of placing all powers of ensuring public security as part of law enforcement under the jurisdiction of federal branch of power. Police services constitute a local benefit whose primary recipient is, above all, the local community. In addition, international practice shows that financing of the police force normally falls under the jurisdiction of regional/local government bodies, not the central government (United States, Canada, etc.). It should be noted that Paragraph b), Article 72 of the Constitution of the Russian Federation reads that the joint jurisdiction of the Russian Federation and the constituent territories of the Russian Federation includes: ensuring the rule of law, law and order, public security ; and Paragraph 1, Article 132 thereof reads that the local self-government bodies shall independently ensure the protection of public order . Therefore, the Constitution of the Russian Federation already laid the ground for law enforcement powers of regional and municipal government bodies. In addition, there are questions regarding the cessation of federal budget -financing of measures of social support to rehabilitees and persons recognized as victims of political repressions. These categories of persons entitled to benefits emerged by virtue of decisions made in due time by the central government. From this point of view, it would have been more logical to place these powers under the federal jurisdiction. Generalizing the aforesaid, it should be noted that effectiveness of implementation of the proposals within the framework of placing all powers of financing of the police force under the jurisdiction of the federal government is disputable.

In accordance with budget projections, total number of federal budget subsidies allocated to the budget of the constituent territories of the Russian Federation must decease to 94 in 2012 from 105 in 2011 and then keep deceasing gradually to 70 in 2013 and 62 in 2014. In general, this trend should be regarded as positive. The effective system of large number of odd subsidies with the amount being less than (or slightly more than) Rb 1bn for some items is responsible for a visibly lower degree of effectiveness and transparency of the Russias system of intergovernmental fiscal relations, above all, in terms of restricting the freedom of decision-making on the side of regional government bodies amid non-conformity of federal and Section The Monetary and Budget Spheres regional priorities in some cases. However, the proposed decrease in the number of subsidies seems to be insufficient.

It should be noted that transition to a result-oriented method of formation of the federal budget creates certain obstacles on creating an intersectoral consolidated (block-based) subsidies. Even this fact, however, fails to explain 62 subsidies planned for 2014. Russian Government Ordinance No. 1950-r, dd. November 11, 2010, approved a list of 40 public programs of the Russian Federation (as amended and updated). These programs cover more than 97% of the federal budget expenditures in 20122014. It is also obvious that not every program provides for federal budget co-financing of regional expenditures, simply because relevant powers fall exclusively under the jurisdiction of the federal government. This refers to such programs as Russias Space Activity (No. 21), Development of the Nuclear Power Generation Complex (No. 22), National Defense Capability (No. 31), Federal Property Management (No. 37), Foreign Policy (No. 40), etc. Therefore, one may say that the number of subsidies planned for 2014 is twice as much as the number of public programs. The aforesaid proves that the proposed measures of streamlining the system of subsidies in the Russian Federation are insufficient.

Total amount of subventions is planned to decrease in nominal terms by 24.1%, to Rb 256,0bn in 2012 from Rb 337,5bn in 2011. Again, the decrease is conditioned mainly by redivision of powers among the federal center and the regions due to the fact that the police force will be financed by the federal budget from 2012. As noted above, a part of the powers will be placed under the regional jurisdiction (lump-sum benefit payable for any type of adoption of children with are deprived of parental care; promotion of employment, save for unemployment benefits). In addition, in 2012, no subventions will be allocated for exercising powers of preparation and carrying out statistic censuses, because relevant measures have been completed.

Total amount of other interbudget transfers must be reduced to Rb 36,5bn in 2012 from Rb 63,4bn in 2011, or by 42.4% in nominal terms, mostly due to the cessation of allocation of interbudget transfers providing an increase, which is equal to that in the Ministry of the Interior of Russia, in the money allowance payable to the personnel and wages of the employees of public security police units (the amount of this transfer accounted almost 35% of the total amount of other interbudget transfers allocated in 2011).

The following regulations stipulated in the Federal Law "On the Federal Budget for and the Planning Period of 2013 and 2014" should be noted. First, an increase in the cost of budget loans (Clause 2, Article 13 thereof) from 1/2 to 2/3 of a refinancing rate quoted by the Central Bank of the Russian Federation (save for financing of measures relating to natural and man-made disaster management). Second, a new regulation appeared, under which transfers can be allocated exclusively pursuant to legal acts issued by the Government of the Russian Federation rather than federal executive bodies (Clause 2, Article 12 thereof). These changes can be regarded as positive and improving the effectiveness of the effective system of intergovernmental fiscal relations. It should be noted, however, that the second regulation must, strictly speaking, be applicable to the Budget Code of the Russian Federation on a long-term basis.

In general, it should be noted that the parameters of the Federal Law "On the Federal Budget for 2012 and the Planning Period of 2013 and 2014" with regard to intergovernmental fiscal relations with the constituent territories of the Russian Federation give rise to a series of serious questions in terms of enhancing the effectiveness of the Russians system of federalism.

RUSSIAN ECONOMY IN trends and outlooks Section Financial Markets and Financial Institutions Section 3. Financial Markets and Financial Institutions 3.1. The Russian Financial Market Post-Crisis Recovery In 2010, it seemed that after the 2008-2009 collapse, the Russian market will bounce back to its pre-crisis values faster than it had done after the 1997-1998 crisis. However, the fell short of justifying the hopes. During the year, the Russian indices tumbled once again:

specifically, RTS plunged by 21.9% and MICEX - by 16.9%. The indexes recovery trajectory was increasingly less resembling the V-shaped form and beginning to gradually drift closer to the W-shaped one.

The fall of indexes during the 2008-2009 crisis proved less intense and shorter vis--vis the one noted back in 1997-1998 (Table 1). In the late 90s, the RTS index plummeted by 91.3% and the MICEX index - by 73.0%; the intensity of the fall of both indices in 2008-2009 was 78.2% and 68.2%, respectively. In 1997-1998 the RTS index has been tumbling for months, while the MICEX index - for 13 months; by contrast the duration of the indexes fall over 2008-2009 was 8 and 7 months, respectively.

Table Financial Crises of 1997/98 and 2008/09 and the Subsequent Recovery of the Market Crisis 1997/98 Crisis 2008/1. Fall from the peak 1.1. Intensity, % RTS index -91.3 -78.MICEX index -73.0 -68.1.2. Time-line, months RTS index 14 MICEX index 13 2. Recovery, months RTS index 58 MICEX index 8 Source: the RTS and MICEX data as of 01.02.2012.

However, it has become increasingly evident that the process of recovery of stock quotations during the recent financial crisis has been delayed. During the 1997-1998 crisis, because of a 5-fold depreciation of the Ruble, the MICEX Rb-denominated index bounced back to its pre-crisis peak values just in 8 months, while the RTS exchange index did it in 58 months. In 2008-2009 the Ruble depreciated by about 50% and won back roughly a half of the fall in the course of its subsequent appreciation. For this reason, both indices are now recovering at a roughly equal pace: the RTS index has done so for 36 straight months, while the MICEX index - for 37 months.

Against the background of major long-term financial crises of the last century (see Fig. 1) the Russian 2008-2009 financial crisis appears a short one, being even shorter in terms of duration of the "peak-to-recovery" than the domestic crisis of 1997-1998. When it comes to the W-shaped trajectory it is gaining, the crisis in question can be compared with the Korean month-long financial crisis of 1989, albeit Russias current slump to recovery process has thus far lasted for 44 months. As of January 2012, the RTS index recovered by 64.1% of its peak value reported in May 2008. The change in its recovery path from V- to W-shaped trajectory does not appear critical as yet. That said, given accumulation of challenges facing the RUSSIAN ECONOMY IN trends and outlooks global economy (the looming new wave of recession in numerous economies, the global economic growth running out of steam, the Eurozone crisis, among others), it should be remembered that in the modern history, stock market indices have not always been capable to bounce back to their earlier peak values. After its fall in 1989, Japans Nikkei-225 has been struggling for 265 months to clear a bar above 22.6% of its pre-crisis value. In a three-year span, the index would be able to beat the 303 month-long recovery record DJIA had set in the wake of the Great Recession of 1929-1933. NASDAQ has likewise struggled to recover for 143 months and in January 2012 ended up being at just a 59.9% level of its peak value of 2000.

USA (DJIA) 1929;

Russia (RTS) 2008; Russia (RTS) 1997;

Korea 1989, 183 months 44 months; 64.1% 72 months USA (NASDAQ) 2000 143 months;

59.9% Japan 1989; months; 22.6% Months USA 1907 USA 1929 Japan Korea 1989 Russia (RTS) 1997 USA (NASDAQ) USA 2007 Russia (RTS) Source: the RTS and MICEX data, and www.finance.yahoo.com.

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