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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES January 2008 MONTHLY BULLETIN Moscow 2008 Institute for the Economy in Transition, 1996.

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (495) 203-88-16 Fax: (495) 202-42-24 E- Mail: todorov@iet.ru 1 Main events................................................................................................................................................. 3 The political and economic results of January 2008 (S. Zhavoronkov)......................................................... 3 Inflation, Monetary and Credit Policy (P. Trunin)....................................................................................... 6 Financial Markets (N. Burkova)................................................................................................................ 10 Budgetary and Tax Policy (. Kirillov)..................................................................................................... 17 Real Sector: Trends and Factors (O. Izryadnova)...................................................................................... 21 Foreign Trade 9N. Volovik)....................................................................................................................... 24 Business Survey in January 2008 (S. Tsukhlo)........................................................................................... 27 Public Sector and Property Policy (. Radygin, G. Malginov)................................................................... 31 Meetings of the Government of the Russian Federation in January 2008 (M. Goldin)................................. 34 Review of Economic Legislation over January 2008 (I. Tolmacheva)........................................................ 35 Review of Regulatory Documents Concerning Taxation over December 2007 January 2008 (L. Anisimova)................................................................................. Review of the Budgetary Legislation over January 2008 (M. Goldin)........................................................ Comparison of the Income Declared by a Tax-Payer with his Living Standard.

Some Aspects of Legislation and Procedures in the Great Britain (N. Kornienko)..................................... Main events By the results of the general election, four parties got access to the Duma. The outcome of the Duma elections can be summarized as a successful referendum to test confidence in Putin, which yielded a positive result, although the methodology of its actual implementation has cast doubt as to its legitimacy. The candidate to succeed to the post of this countrys president has been determined. As to V. Putin, he himself was offered the post of Prime Minister by D. Medvedev, in the event of the latters very likely victory in the presidential election. Such developments may give rise to the emergence of an institute of co-rulers, wherein Medvedevs role will be eventually becoming more prominent, while that of Putin will diminish. The stability of this dual power will depend, most importantly, on adequacy of the levels of political ambitions of them both..

Inflation in November remained high, CPI amounted to 1.2 % against 0.6 % in November 2006. At the same time, international reserve assets continued to grow, their volume in this country by mid-December having become more than $ 467 billion. In November December the situation on RF interbank market was stabilized both due to the appearance on the market of the funds allocated by the Government in order to finance development institutions, and to the measures undertaken by the Bank of Russia.

Federal budget expenditure in November was much higher than revenue. This had to do both with the uneven spending of budget resources throughout the year and with the considerable softening of budgeting policy within the political cycles framework. Growth of budget expenditure directly resulted in the enhanced inflation rate observed toward the years end.

In October 2007 the volumes of exports and imports reached their historic high of the last 17 years. The second half-year was characterized by an increased role of the price factor in the formation of external trade aggregates. The exports growth rate in October, for the first time during the year, became higher than that of imports. At the same time, the number of countries with which Russia has a negative balance of trade is also growing. Russia and Poland signed a memorandum lifting the more than two-year-long ban on supplies of Polish meat to Russia, which should help in providing solutions to a number of strategic issues of foreign trade integration.

Another record of 2007 was an increase in the share of investments in fixed assets up to 19.4 % of GDP.

In 2007 the volume of investments, according to preliminary estimations, rose by 18.8 % against 13.7 % in 2006 and against the average 12.1 % observed in 2000 - 2005. The high rate of investment demand was sustained by an increasing role of the domestic market in the shaping of the economys dynamics.

As estimated by directors of enterprises, the year 2007 was rounding up in a situation of a noticeable slowdown in demand throughout industry, which prompted enterprises to suppress their output growth. The output growth forecasts for early 2008 are less optimistic than similar forecasts made in late 2006. In Q IV the financial and economic status of enterprises was no longer improving, while at the same time approximately 90 % of enterprises are assessing their financial situation as good or satisfactory.

In December the Russian stock market demonstrated growth of quotations on the share market, which was associated with more positive global expectations concerning investments. Investor activity on the market of derivative financial instruments displayed a stable growth rate.

At the RF Government meeting the implementation of federal target programs and the federal targeted investment program during the first 9 months of 2007 was discussed in detail. On the basis of a newly adopted federal law, one more big state-owned corporation Rostekhnologia will be created. Besides, several important economic laws were approved, including the Laws On mutual insurance and On self-regulating organizations.

The political and economic results of January S. Zhavoronkov The months most important political event is the presidential election campaign. Beside the candidates nominated by parliamentary parties Medvedev, Ziuganov and Zhirinovsky, - only one candidate was registered, the Kremlins back-up figure Bogdanov. Former Prime Minister Kasianov was denied registration.

Thus, the authorities deliberately chose the way of de-legimatizing the forthcoming election by cutting off the democratic opposition, even in view of the fact that Kasianov represents no threat for the successor being elected. Medvedevs most impressive pre-election promise was the declaration that already in the next few years we are planning to double the amount of pension.

After the eventful December, which encompassed both the parliamentary elections and the determination of the candidate to become the presidents successor, January turned out to be less illustrative in terms of political news. Nevertheless, it still provided background for further developing some of the themes that dominated the discussions in December.

The development of the presidential election campaign, without any doubt, should be considered the most important event. This campaign in Russia, in fact, will last only one month (the previous month being spent on the registration of candidates). Thus, the current regime, with its monopoly of TV channels, gains considerable advantages, since it actually becomes intermittently in the lead of the election campaign, while its opponents can obtain access to the forms of promotion available to them only during the last month preceding the election. However, even this was not sufficient for the authorities. In addition to D. Medvedev, G.

Ziuganov and V. Zhirinovsky, nominated by parliamentary parties, only one candidate was registered, the Kremlins back-up appointee A. Bogdanov. Registration was denied to Former Prime Minister M. Kasianov because of lack of proper formalization of the signatures collected in his support. This situation gives rise to many questions in view of the fact that A. Bogdanov, whose organization during the parliamentary elections one month ago collected less than 90,000 votes across the country, within the next month, according to the authorities, managed to collect 2 million properly formalized signatures which means that during that time the support for this virtually unknown politician increased 20-fold (!).

Thus, the authority quite consciously chose the way of de-legimatizing the forthcoming election, from which the democratic opposition has been cut off, even in view of the fact that Kasianov represents no threat for the successors election. It is interesting to note that the issue of Kasianovs registration was not predetermined in December many pro-Kremlin mass media predicted both his registration and the negligible percentage of votes that he would be capable to collect at the presidential election.

It is not easy for us to judge which particular groups of influence in the Kremlin turned out to be winners as a result of such a decision. But the most probable reasons for the denial of registration could be as follows. Firstly, the authorities may have feared that the number of votes gained by Kasianov at the polls would fail to equip him with the popularity credit for the future. In view of the very low results obtained by SPS and Yabloko at the last elections, the fact of Kasianov having gathered even as few as 5 7 % of votes would have been regarded by the liberal electorate as success, this outcome of the election becoming quite possible if sufficient funding was to be allocated to the election campaign. Secondly, there could have been a fully conscious desire not to invest the presidential election with more legitimacy than the parliamentary elections, given that the lower level of competition and smaller resources available to those participants in the presidential election campaign who represent rivals to the authorities appointee would predetermine for the successor not a lower, but a higher result than that demonstrated in December 2007 by United Russias list of candidates headed by V. Putin. This assumption has been confirmed by both the official sociologists and independent surveys. Thirdly, there was fear that an independent candidate would choose the way of appointing multiple observers and using aggressively the information on violations gathered by those observers during the election. Although the Communist Party of the Russian Federation (CPRF) also regularly place their observers at the election polls, the Communists have never applied the results of their observations for any serious purposes1.

Thus, the Russian authorities are in some respects are ahead even of the Belarusian and Kazakh leaders who, despite their questionable manner of counting votes, have never prevented the opposition to put forth their candidates. The scale of diminishing the oppositions representation at the election, by comparison with the year 2004, is also impressive then there were three candidates from radical opposition (I. Khakamada, S. Glaziev and I. Rybkin). No less illustrative is the fact that, similarly to the parliamentary elections, there were problems with invitations for observers from the EU countries. The formally alternative options available during the Russian elections (also available, by the way, in Turkmenistan and Uzbekistan) cannot change the existing situation in any radical way.

Many had expected that D. Medvedev, during the first month after his nomination as the successor, would declare his political program, provided that some experts described him as a moderate liberal. However, so far his most impressive pre-election promise was that already in the next few years we are planning to double the pension, and for this purpose the State, together with employers, will take measures aimed at forming pension capital. Thus, the results of the recent parliamentary elections were disputed by the CPRF only in the case of Mordovia, while in Ingushetia, where the turn-out was 99 %, and the same 99 % of the vote was in favor of the party of power, the chairman of the regional organization of the CPRF went as far as to confirm the official results.

The very obvious loss of control over inflation has served as an important backdrop for the forthcoming election. According to official estimates, its rate was approximately 12 % in 2007, although those who are criticizing the government insist that the growth rate of prices of basic consumer goods was much higher.

Although January is traditionally considered to be an unfavorable month from the point of view of growth of prices, inflation for the second time within a very short period of time became the focus of a broad public discussion. This, most probably, was the reason why the government extended the term (which was to expire on February 1) of the agreement with big producers and sellers of foodstuffs concerning the freezing of the prices of socially important products for another three months until May 1, 2008, that is, in fact, until the successors inauguration. So far the government has not departed from the principles of market economy (these agreements being rather of an indicative character), although the calls for administrative regulation of prices, nearly forgotten for some years, sound rather alarming.

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