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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES May 2004 MONTHLY BULLETIN Moscow 2004 Institute for the Economy in Transition, 1996. Licence, 02079 19 2000 .

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (095) 203-88-16 Fax: (095) 202-42-24 E- Mail: todorov@iet.ru May of 2004: Political and economic outcomes................................................................................................ 3 On the Progress of Reforms in May of 2004..................................................................................................... 6 The State of the Federal Budget......................................................................................................................... 7 Monetary Policy............................................................................................................................................... 10 Financial Markets............................................................................................................................................ 13 Enterprises and organizations: the state of payments...................................................................................... 22 The Real Sector: Factors and Trends............................................................................................................... 29 IET Business Survey: Industry in May of 2004............................................................................................... 31 Russia: Draft Law on Regulating Agriculture................................................................................................. 33 Foreign Trade................................................................................................................................................... 36 Organizational changes in the sphere of science............................................................................................. Municipal reform: the experience of the Leningrad oblast.............................................................................. Issues discussed at the meetings held by the Government of the Russian Federation on May 13, 20, and 27 of 2004........................................................................................................................ Review of economic legislation: May of 2004................................................................................................ May of 2004: Political and economic outcomes May witnessed a large number of events of national importance. However, it is difficult to single out the key event from the range including the annual address of the RF President to the chambers of the Federal Assembly, reappointment of the Government after the inauguration of the incumbent RF President as required by the RF Constitution and the respective reshuffling of the Cabinet, murder of the Chechen President A. Kadyrov, the decision of the Moscow Arbitration Court to exact US $ 3.5 billion from the OAO NK YUKOS as repayment of the allegedly due taxes for year 2000, and a relative success of negotiations between Russia and the European Union concerning the support of the Russias accession to WTO.

The address of the RF President to the Federal Assembly was the least interesting among the events listed above. According to V. Pitin, Our objectives are quite clear. They include high national living standards, safe, free, and comfortable life. They include developed democracy and developed civil society. They include consolidation of Russias positions in the world. And, I repeat, the key objective is a significant increase in the welfare of citizens. The address declared in general terms that human capital is the base for the development of the competitive capacity and the improvement of the quality of this capital requires the settlement of the most urgent for the citizens problems in the country. These problems primarily include the quality and availability of housing, education, health care. It was promised that by 2010, alongside with the doubling of GDP, at least one third of the citizens would be able to purchase housing at the expense of their own savings and housing credits. Among the instruments required to achieve this goal there were named the elimination of the monopoly on construction markets and simplification of procedures governing construction.

The RF President noted the poor quality of the Russian health care system, low life span, and high rates of infant mortality. He advanced the slogan of accessibility and quality of health care for broad strata of the population. According to V. Putin, in order to achieve these goals it is necessary to approve the standards of health care for each type of decease, what could permit to assess the actual costs of medical treatment and transit from budget financing of medical institutions to the payment for rendered services. However, the address fails to answer the key question: who should be the administrator of the mandatory medical insurance funds insurance companies or medical institutions.

The President also believes that it is necessary to make higher education available for all and to create a transparent system allowing to evaluate the quality of school education. However, the address did not directly mentioned the problem of the single state examination. Therefore, there were not indicated concrete ways out of the present situation, where higher education establishments are free to recognize or reject the general system of testing. At the same time, President Putin advanced an original idea that students should make special agreements according to which they should either work according to their specialization for a certain term (in the public or private sector! S. Zh.) or return the money spent for their education.

As concerns taxes, the address mentions that they should present no heavy burden on businesses. It should concern not only the levels of tax rates, but also procedures governing calculation and payment of taxes, streamlining of tax inspections and tax relating accounting. The address put forward the task of reduction of the single social tax and its withdrawal from wages and salaries, a further reduction of VAT and timely compensation of VAT relating to export operations and capital investment, it was also proposed to exempt advance payments from taxation.

The address sets forth the task to settle the problems encountered in creation of the transport infrastructure, transport networks, primarily as concerns transportation of energy resources. However, the address fails to mention what the state should do in order to create respective incentives for businesses in the case it is determined to keep state monopoly for pipelines.

The President again addressed the military reform, however, there were made no new proposals concerning this issue. However, this section of the address may be positively assessed, since it demonstrates that the top leadership of the country has not agreed to the ideas of general conscription advocated by certain officials (V. Filippov, V. Putilin and others)..

However, the address fails to mention rights and liberties, inviolability of private property, equality of citizens before the law, the rule of law principle, independence of the judiciary system and mass media, destruction of the institution of elections, Chechnya, and so on. Instead, V. Putin addressed the issue of non-state sources of citizens incomes, in particular, the organizations, whose priority became to receive financing from influential foreign foundations and servicing of dubious groupings and commercial interests. It is proposed to interpret any reproaches concerning the political system of Russia as manifestations of the global competition struggle. It should be also noted that in this address the usual package of difficult tasks and objectives is supplemented by the tasks absent in the real politics.

In May, there was published the Presidential decree The issues pertaining to the structure of the federal executive authorities. It should be reminded that according to the structure of the Government established in March, ministries were vested with normative and legal regulation, services were vested with supervisory functions, while agencies rendered services on behalf of the state. However, observers, first, noted that the mixing of supervision and control was wrong (since control, licensing, registration are in practice regulation), and, second, criticized the subjecting of agencies and services to the ministries. According to the new decree, federal executive authorities controlled by the RF Government should perform the functions relating to approval of normative and legal acts alongside with other functions. It is difficult to comment on changes which occurred over the two months in the framework of the administrative reform and in the framework of other paradigms. In fact this means that minimum eight services and agencies can, as before, issue any instructions.

As it was forecasted, the re-division of the spheres of influence in the Government continued. This time, in accordance with the new Presidential decree the services responsible for technological and atomic supervision, the federal tariff service, the federal space agency and the federal agency for atomic energy, as well as a number of less important services were subjected directly to the Prime Minister. There was reestablished the Ministry for communications and information technologies headed as before by L. Reiman (who was initially appointed as a deputy minister of transport and communications). The issues concerning the status and control over former State Customs Committee, Tax Ministry, and RFFI remain unresolved, since it requires amendments to the legislation.

The RF Government approved the draft law On the accrual mortgage system of insurance of servicemen (the draft law envisages the purchase of housing on installment basis, the state guarantees of bank credits, the contracts made for 20 years). However, the proposals of the Ministry for Economic Development concerning reduction of licensing and introduction instead of other types of control gave rise to disputes (the Ministry of Economic Development proposed to abolish more than 50 types of licensing). The question was not settled and the proposals were returned for further elaboration, however, the Ministers responsible for coordination of this work most actively protested against the reduction of licensing (S. Shoigu, the Minister for Emergencies, and V. Khristenko, the Minister of Industry and Power Engineering).

In May, M. Fradkov, the Prime Minister, declared new changes in the plans of the pension reform. Initially, it was envisaged that all citizens born after 1957 should be entitled to participate in the formation of the cumulative part of the pension. Later, due to the decision of the Government to reduce the single social tax in 2005, it was proposed to exclude citizens born before 1967 from the cumulative system in order to compensate for the revenues generated by the SST. The Government recommended citizens to accumulate pension savings on their own by making voluntary transfers of 4 per cent of wages and salaries to the cumulative segment of the pension. The Government promised to pay additional 2 per cent of wages and salaries (however, no more that Rub. 2 thousand) on behalf of such citizens. According to M. Fradkovs statement, there should be taken balanced decisions aimed at improvement of pensioners living standards. However, according to the Prime Minister, it seems that the citizens born before 1967, who were initially included in the cumulative pension system and later excluded from it, may be entitled to participate in this system again.

On the whole, the new debates and significant reshuffling of the Government occurring only 2 months after its formation indicate that the Fradkovs Cabinet is far from reaching internal unity and conceptual clarity.

On May 9 of 2004, A. Kadyrov, the President of the Chechen Republic died in the result of a terrorist attack. Kadyrov was an influential figure in the Republic, he disposed of his own military and financial resources. The successful attack clearly demonstrated that the situation in the Republic is far from stabilization even after four years of the antiterrorist operation and there arise new problems. The system of government in the Chechen Republic has been often changed in the period from the aggression against Dagestan and the peak of terrorist activities in 1999. However, no changes could create a clear and responsible government. In the civilian sphere the responsibility was divided among the Kadyrov administration and the Chechen Government consequently headed by non-Chechens, and numerous federal agencies and commissions for restoration of the Chechen economy. As concerns the military sphere, there the responsibility was divided among the 58th Army of the RF Defense Ministry controlled by the Staff for antiterrorist operation in Chechnya (in fact, FSB), special military units, the system of VOVD (formed from servicemen out of other regions), and Chechen units, such as the Security Service of the President of the Chechen Republic (special brigades East and West, the Chechen Interior Ministry and other paramilitary units). By 2004, Kadyrov could form a semblance of hierarchy of Chechen authorities (the Moscow oriented Chechen leaders were expelled).

However, the complicated system of military command remained. After his death, there is still no equal leader, since his relatives have no comparable authority and there may be expected conflicts between representatives of the pro-Moscow administration (expelled earlier) and local Chechen leaders. Naturally, this situation is favorable for Islamic extremism and separatism. For the time being, there was chosen the variant where Kadyrovs son was appointed as the first vice prime minister of the Chechen government in stead of running for Chechen Presidency, what seems a good option. However, the issue of the real successor and the policy this successor would pursue remains open.

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