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The federal center, when determining the goals of its own development and planning the ways for their achievement, must also guarantee autonomy to each level of authority; provide all the regions with equal conditions for modern growth; ensure transparency, simplicity and predictability of the rules of the game applied in the relations within the federation, including interbudgetary relations. These goals can be achieved through expanding the revenue base of regions and municipalities, while at the same time increasing the level of their responsibility and accountability to the population for the execution of their powers in the sphere of social policy. This will require the introduction of some serious alterations in the tax system, including those implying its decentralization.

An important priority for the federal authorities in the sphere of spatial policy must become the task of providing transport links to territories possessing their own economic potential, as well as that of supporting the naturally evolving centers of development. It will be necessary to create incentives for improving the conditions for doing business at the level of regional and local authorities by making federal support performance-based in terms of economic development results (and primarily the rate of investment attraction).

One of the main issues is to ensure that the heads of municipal formations with adequate financial bases, as well as heads of regional bodies of authority, are elected to their posts. In 2011, both the RF President and the Chairman of the RF Government suggested that direct gubernatorial elections should be reintroduced. However, it is very important to consistently implement that principle on the municipal level.

1.1.5. Political Processes and the Economy The past year was marked by the growing political activity of different social strata. The December elections to the RF State Duma escalated political tensions across the whole of Russia, because a considerable part of society was not prepared to recognize the election results as legitimate.

Over the last decade, Russia has been consistently constructing a one-and-a-half-party democracy that has become well-known from the experience of Italy and Japan in the 1950s80s and Mexico for a greater part of the 20th century. This type of democracy is characterized by a decades-long single-party rule, while there also exist other political forces that participate in elections but are incapable of exerting any significant influence on the decisionmaking process. The main drawback of that model is a high level of corruption, which is inevitably associated with a long-term rule of one and the same political force. On the brighter side, the government usually achieves political stability and successful economic growth. The model has been quite appropriate for Russia given her current level of economic development historical features.

RUSSIAN ECONOMY IN trends and outlooks On the darker side, one-and-a-half-party democracy is poorly compatible with contemporary technological challenges, and especially with the information saturation of contemporary society. It is these factors that push a country towards liberalization, and these ideas can easily gain support of the more informed (and younger) part of the population. Thus, a rise in political activity is not necessarily associated with a worsening economic situation. On the contrary, improved well-being promotes growth of political activity and readiness to present the authorities with some awkward questions. It was Alexis de Tocqueville who noted that revolutions happen in countries characterized by dynamic economic and social development, and not in stagnating societies. The experience of the 20th century, including our domestic experiences, can only serve as a confirmation of that statement.

It would be a mistake to view the current intensification of political processes as a manifestation of a revolutionary situation. Russia experienced a full-scale revolution in 1987 1999, and any repetition of those events nowadays is absolutely improbable. However, it seems quite reasonable to analyze the current political developments in Russia through the prism of the historic experiences of revolutions.

The great revolutions of the past always produced an impact on the development of the corresponding countries that lasted for several decades. This was manifested in periodical (once every 15 to 20 years) dramatic turns in the political situation which occurred as if for no reason at all. Such events never resulted in the total dismantling of the existing system and did not introduce any fundamental changes in economic and political relations. Nevertheless, they brought to power some new socio-economic strata and new generations of politicians. These strata and politicians by no means always denounced their predecessors and, as a rule, had belonged to the previously existing elite. But they answered the needs of the new generation, and thus continued the course towards the post-revolutionary consolidation of society1.

An increasing political uncertainty may have a negative effect on the rate of economic development, and especially on capital movement. However, the economic situation can be threatened not so much by political uncertainty (to which businesses can adapt rather easily) as by political, macroeconomic and social instability. The most important present-day task for the Russian authorities is to avoid destabilization in the forthcoming period.

From the point of view of economics, there exist two sources of destabilization: external and internal.

The external source is, most likely, associated with the prospects of the world recession (or at least recession experiences by Russias main trading partners). This will be followed by a marked decline in the prices for energy resources, which are the main source of revenues from exports and thus the foundation of Russias budget stability. Such a change will produce an internal shock that will have to be countered with some decisive and consistent measures in the spheres of budgetary and monetary policies. The afore-said drop in energy prices will not be a disaster if we duly prepare for it. The introduction of the budgetary rule and the discon A classical example of this type of development is, of course, nineteenth-century Post-Revolutionary France, which underwent considerable political changes in 1830, 1848 and 1870. The Restoration of the Bourbons in 1814 returned to power the landed aristocracy, which was replaced at the helm, in 1830, by a financial oligarchy (under a new monarch who was a relative of the previous king), only to be succeeded, in 1848, by the urban bourgeoisie (under an emperor who was a nephew of the previous emperor). The period of turmoil came to an end with the establishment of the Third Republic in 1870, which ensured that all key interest groups were sufficiently well represented at senior levels of government. It may be said, without going into details, that the same trend can be seen in the aftermath of other great revolutions of the past.

Section Socio-political Context tinuation of the policy aimed at sustaining a stable ruble exchange rate (see above) will represent important steps towards mitigating the effects of the possible shocks. However, that will be not enough: the government must also have at hand a well-elaborated plan for actions to be taken in an event of a dramatic deterioration of the global economic situation.

Internal risks are primarily associated with the danger of switching over to the policy of budget populism. An abundance of budget revenues and a formally very beneficial macroeconomic situation (especially by comparison with the European countries) coupled with a threat of growing socio-political discontent may entail a weakening of the budgetary policy in other words, may result in a rise of expenditure covered by situational revenues from exports and borrowings. Politically, this would be the easiest way but it is fraught with some serious future problems.

Another form of response to the political events of late 2011 would be to develop a comprehensive modernization strategy. The core problem plaguing the three-century history of Russias catch-up modernization has been its non-comprehensive (or, so to say, patchwork) character. The authorities have always tried to emphasize some separate aspects of modernization (military, technological, economic, scientific, educational, or more rarely political), but there has never been a single comprehensive program. That is why the results of Russias previous attempts at such modernization were inconsistent and unstable.

Now, when modernization has become a slogan of the day, it is becoming absolutely necessary to push it in every direction, and in particular to combine modernization of technologies with modernization of institutions (economic as well as political ones).

RUSSIAN ECONOMY IN trends and outlooks Section The Monetary and Budget Spheres Section 2. The Monetary and Budget Spheres 2.1. The Monetary Policy The main developments in the monetary sphere in 2011 can be nominally divided into two periods: from January till August and from August till the end of the year. In the first six months, continuation of the trends typical of the year 2010 was observed, that is, a smooth recovery of the financial sector of the economy with simultaneous growth in the money supply, international reserves of the Bank of Russia and moderate inflation rate. In the above period, the Bank of Russia kept scaling down its anti-crisis support of the financial sector. In August, the second period began and it formally resembled to a great extent the beginning of the crisis of 20082009: due to the outflow of the private capital and closing of foreign markets to Russian borrowers the banking sector started to experience again difficulties in attraction of liquid resources, interest rates went up, while the international reserves decreased. It is to be noted that the growth in the outflow of the capital took place in a situation where global prices on the main commodities of the Russian export remained high. The main factors behind that outflow were the negative trend in the global economy (the debt problems in the EU and the USA in a situation of slow economic growth in those countries).

In all appearances, the development of the global economy will be inconsistent within quite a long period of time, so, the above mentioned fluctuations on the Russian financial market are likely to remain in the next few years. In such a situation, the Central Bank of the Russian Federation gradually gave up its substantial interference in the functioning of the foreign exchange market by means of currency interventions and concentrated its efforts to reduce the inflation rate in the Russian Federation by trying to use the interest rates as the main instrument of the monetary and credit policy.

2.1.1. The Money Market From the beginning of the year till August 2011, as well as in 2010, growth in the international reserve assets of the Bank of Russia was observed (see Fig. 1). The main factor behind such growth in reserves became rising oil prices which in the Q2 2011 reached the recordhigh levels in the past three years. In addition to the above, due to the volatile situation on the global financial markets in the first six months of 2011 prices on gold which is a part of the international reserves of the Bank of Russia rose dramatically. As a result, in August the international reserves amounted to $544bn which is a 13.2% increase from the beginning of the year. The above value was the maximum one since autumn 2008.

Intensification of the capital outflow in September was related to the aggravation of the global financial crisis, that is, downgrading by Standard & Poors, an international rating agency of the US credit rating from to + and the subsequent fall of international stock markets and oil prices. Investors started to withdraw funds from risk assets worldwide, including the Russian Federation. However, a dramatic decrease in the reserves was primarily related to depreciation of the Euro exchange rate against the USD as a drop in the Euro/USD exchange rate resulted in a decrease in the USD value of the portion of the Euro-denominated reserves. The Russian Central Banks interventions on the foreign exchange market were insignificant: the mere $7.5bn and Euro 0.6bn were sold (see Fig. 2).

RUSSIAN ECONOMY IN trends and outlooks 3600 The monetary base in the narrow definition (billion rubles) The gold and foreign exchange reserves (billion $) Source: The Central Bank of the Russian Federation.

Fig. 1. The dynamics of the monetary base in the narrow definition and the international reserve assets of the Central Bank of the Russian Federation in the 2008 2011 period Source: The Central Bank of the Russian Federation.

Fig. 2. Net purchases by the Bank of Russia of foreign exchange in the 20082011 period After the 2008 crisis, the monetary base in the broad definition grew at a higher rate than the international reserves, however, in 2011 the expansion of the monetary base virtually Billion $ Billion rubles 1-7.10.6-12.09.8-14.08.9-15.07.6-12.09.22-28.03.14-20.06.21-27.02.16-22.05.22-28.01.16-22.04.21-27.03.14- The Monetary and Budget Spheres stopped. The rapid recovery of the monetary base in 2009 and 2010 was related primarily with utilization of the resources of the Reserve Fund to finance the budget deficit (see Fig. 3).

It is to be noted that commercial banks returned loans received during the crisis to the Bank of Russia which situation led to a shrinkage of the money supply.

In 2011, the budget was administered with a surplus and there was no need to spend the resources of the Reserve Fund. In addition to that, the surplus of the budget accumulated in the accounts of the Government of the Russian Federation restrained growth in the monetary base. As was stated above, in 2011 the currency interventions by the Bank of Russia happened to be insignificant as well.

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