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The Moscow Arbitration Court made an unprecedented decision to exact US $ 3.4 billion in taxes, allegedly not paid by YUKOS (due to application of tax optimization schemes). Earlier, the Tax Ministry filed the respective claim with the Moscow City Arbitration Court, which arrested all YUKOS assets with the exception of oil and oil products in order to secure the claim. The RF Tax Ministry declared that YUKOS evaded taxes by creating 17 fictitious firms in regions with favorable tax regimes (Mordovia, Kalmykia, and the Evenk autonomous okrug). YUKOS allegedly carried its oil transactions via these companies and a number of closed administrative territorial entities. At the same time, it should be noted that the Russian legislation does not define the term fictitious legal entity and sets forth no applicable criteria.

Certain experts believe that finally there will be found a compromise which could settle the conflict by the way of negotiations and help both YUKOS and the state to save face. One of such ways may be participation in the announced competition for the improvement of the a new tax system. However, it seems that the Russian authorities on the contrary aim at the liquidation of the judiciary system and creation of a precedent allowing to expropriate businesses without any formal justification.

At the congress of the Agrarian Party held in April of 2004, M. Lapshin, the head of the Republic of Altai and the party leader was dismissed and at this post was appointed V. Plotnikov, a former member of the KPRF deputy group in the State Duma, presently a member of the United Russia party. G. Semigin, one of the most important sponsor of Communists, who expected to be nominated as the Communist candidate for Presidency, was expelled from the party on formal grounds (failed to register at this local party organization). The KPRF leadership disposed of a dangerous contender, who could attract support of almost half of the deputies of the last congress. However, Semigin took a strange position as concerns the personal composition of his organization Patriots of Russia, since it lacks the potential to become a serious party and is only one of the splinters of the Communist opposition alongside with agrarians, supporters of G. Seleznev, the Party of Social Justice, etc.

The negotiations between the RF Minister of Economic Development G. Gref and the EU trade commissioner P. Lami were unexpectedly short, however, there was singed a protocol determining the conditions on which European companies received access to the Russian markets of goods and services.

One of the key issues of the negotiations were Russian obligations relating to the energy package. EU recalled the majority of its initial requirements (abolishment of export duties on energy resources and the export monopoly of Gazprom, access of foreign companies to construction of Russian gas pipelines, increase in the domestic prices of natural gas, etc.). The singed protocol contains obligations to include in the domestic prices of natural gas all costs borne by natural gas extracting companies, including the investment component (however, this issue was not clarified, for instance the controversy about the growing debt of Gazprom remained open), as well as promise to refrain from increases in the export duties. Experts believe that the informal part of negotiation included Russias obligations to increase domestic prices of natural gas over US $ 50 per 1000 cubic meters, i.e. 1.5 times. In its turn, EU recalled its demand to lift the ban on establishment of EU banks branches in Russia and abolishment of the restrictions on their participation in the aggregate capital of the Russian banking system.

Among the concessions of the Russian party of negotiations were the decrease in the import tariffs on civil aircraft, completing parts, and motor vehicles, abolishment of the Rostelekom monopoly for long distance communications, the promise to review the stystem of fees relating to EU companies as concerns transSiberian flights, as well as President Putins statement that EU made a concession to Russia by signing the WTO protocol, therefore Russia will accelerate ratification of the Kyoto protocol. Nor Russia, neither the USA have ratified the Kyoto protocol yet.

The agreement between Russia and EU is a significant step on the path of the Russias accession to WTO.

It should be reminded that the negotiations took six years. However, this process is far from completion:

there are expected difficult negotiations with, for instance, China and Australia, while the EU Russia protocol is only a framework agreement. However, the recall of absurd requirements that Russia should increase its domestic prices of certain commodity groups up to the world level is a significant success of the Russian external economic policy.

S. Zhavoronkov On the Progress of Reforms in May of Russia has a new government again; the structure of state authorities has undergone certain changes. As concerns the progress of reforms over the month, there has been done practically nothing due both to the long May holidays (practically, 10 days this year), and changes in the Government. As concerns national projects, after reviewing the package of laws regulating health care and housing the Government started to discuss the package of regulatory and legislative acts aimed at creation of the cumulative mortgage system for servicemen of the Armed Forces. The draft law On special economic zones was once again removed from the agenda of the next Government meeting.

As concerns the social and economic policies pursued by the Government (or, more precisely, the lack thereof), the situation observed in May practically mirrored the situation in March and April. Objective factors had an additional negative impact on the rate of reform progress, such as ten days long holidays (as concerns the state authorities, although formally all ministries and departments should function between holidays, in practice there was done nothing over that time). The organizational restructuring in the ministries and departments relating to the redistribution of functions and personal changes continued.

In May, according to the RF Constitution, there was appointed the new Government of the Russian Federation. As expected, its composition remained the same as in March with one exception. The personal composition of Ministers now includes L. Reiman, who could insist on the separation of the Ministry of Communications from the Ministry of Transport and Communications, which had been created earlier. The very fact that lobbyist efforts of certain groups in the RF Government and the Presidential Administration could infringe upon the seemingly strict principles of the administrative reform raise certain doubts as concerns the further progress of the administrative reform.

In fact, the present situation is practically similar to that existing in the Government prior to the start of the administrative reform with the exception of the strictly enforced, although doubtful in terms of management, principle that each Minister should have no more than two deputies.

Until now, the administrative reform, which as it was hoped should serve as the most effective incentive for the reanimation of reforms, has brought no other results as turmoil and loss of most qualified and professional personnel at the medium level of government.

As concerns social and economic reforms per se, practically nothing was done in May. The only exception was the successful discussion of the package of regulatory and legislative acts aimed at creation of the cumulative mortgage system for servicemen of the Armed Forces worked out by the Shuvalov group at the Center for Strategic Research. The most important law underlying this system has all chances to be soon adopted by the State Duma, especially taking into account the consideration that the President has already indicated his approval of the principles underlying this law..

May can be also considered as the next qualitative stage of struggle between the Ministry of Economic Development and Trade and the Finance Ministry with respect to the issue of the law on free economic zones. The draft was set for discussion at the Government meeting scheduled for May 20, however, the discussion again did not take place. The reason of this was the letter of the Finance Ministry to the Government, which stated that although the Ministry acknowledged the approval of all amendments to the text it introduced, it was categorically against the approval of this law because of its principal considerations.

The situation seems to be insoluble: in its turn, the Ministry of Economic Development sent a letter to the Government informing it about the necessity to have a conciliatory meeting with participation of the Vice Prime Minister as concerns this issue. Taking into account the position taken by Zhukov (at present it is closer to the position of the Finance Ministry), it is very difficult to forecast the further development of the situation.

O. Fomichev The State of the Federal Budget In January through February of 2004, the revenues of the federal budget (cash execution) made 19.7 per cent of GDP, while expenditures made 15.8 per cent of GDP (see Table 1). Therefore, the federal budget surplus made 3.8 per cent of GDP.

Table The monthly execution of the federal budget of the Russian Federation (in % of GDP1, cash execution) II`03 III`03 IV`03 V`03 VI`03 VII`03 VIII`03 IX`03 X`03 XI`03 XII`03 I`04 II`04 III`Revenues Profits tax 1.1% 1.4% 1.5% 1.4% 1.4% 1.4% 1.3% 1.3% 1.3% 1.3% 1.3% 0.9% 0.7% 1.2% Income tax 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Unified social tax (UST) 2.7% 2.8% 2.9% 2.9% 2.8% 2.8% 2.8% 2.7% 2.7% 2.6% 2.7% 2.3% 2.6% 2.8% Indirect taxes 10.1% 9.9% 9.6% 9.6% 9.2% 9.1% 8.9% 8.7% 8.6% 8.5% 8.5% 10.5% 8.5% 7.6% VAT 7.4% 7.2% 7.2% 7.2% 6.9% 6.9% 6.8% 6.7% 6.6% 6.6% 6.6% 8.1% 6.6% 6.2% Excises 2.7% 2.6% 2.4% 2.3% 2.2% 2.2% 2.1% 1.9% 1.9% 1.9% 1.9% 2.3% 1.8% 1.4% Taxes on foreign trade and foreign economic transaction 3.4% 3.4% 3.5% 3.5% 3.4% 3.4% 3.4% 3.3% 3.3% 3.4% 3.4% 3.6% 4.2% 4.4% Other taxes, fees and levies 1.7% 2.0% 2.2% 2.1% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.5% 0.1% -0.2% Total taxes and other payments ** 19.0% 19.4% 19.6% 19.4% 18.8% 18.7% 18.4% 17.9% 17.9% 17.9% 18.0% 19.9% 16.1% 15.9% Non-tax revenues 8.5% 1.3% 1.2% 1.7% 1.6% 1.5% 1.5% 1.4% 1.4% 1.3% 1.3% 0.9% 0.8% 0.9% Total revenues 20.6% 20.9% 21.0% 21.3% 20.6% 20.4% 20.0% 19.5% 19.4% 19.3% 19.4% 20.9% 19.6% 19.7% Expenditures State administration 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.5% 0.2% 0.3% 0.4% National defense 2.1% 2.6% 2.7% 2.7% 2.6% 2.6% 2.6% 2.5% 2.5% 2.5% 2.7% 1.8% 2.2% 2.6% International activity 0.0% 0.2% 0.2% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% -0.1% 0.2% 0.2% Judicial authorities 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.1% 0.1% 0.2% Legal protection and security 1.4% 1.7% 1.7% 1.7% 1.8% 1.7% 1.7% 1.7% 1.7% 1.7% 1.9% 1.1% 1.5% 1.7% Fundamental research 0.2% 0.2% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.1% 0.1% 0.2% Services to national economy 0.4% 0.5% 0.6% 0.7% 0.8% 0.8% 0.8% 0.9% 0.9% 0.9% 1.1% 0.2% 0.4% 0.5% Social services 1.8% 2.0% 2.3% 2.2% 2.2% 2.2% 2.2% 2.1% 2.1% 2.1% 2.3% 1.4% 1.7% 1.9% Government debt servicing 2.9% 3.0% 2.3% 2.1% 2.0% 1.8% 2.0% 2.0% 1.8% 1.7% 1.7% 1.1% 2.1% 2.2% Other expenditures 7.1% 7.0% 7.0% 7.1% 7.1% 7.1% 7.0% 6.9% 6.8% 6.8% 6.9% 5.3% 5.8% 5.9% Total expenditures 16.4% 17.7% 17.7% 17.7% 17.5% 17.4% 17.3% 17.1% 16.8% 16.7% 17.7% 11.1% 14.4% 15.8% Surplus (+) / deficit (-) 4.2% 3.2% 3.3% 3.6% 3.0% 3.0% 2.7% 2.5% 2.6% 2.6% 1.7% 9.8% 5.2% 3.8% Internal financing -1.7% -1.0% -1.0% -0.5% 0.3% 0.0% 0.3% 0.2% -0.1% -0.3% 0.5% -8.8% -3.1% -1.2% External financing -2.5% -2.2% -2.3% -3.1% -3.3% -3.0% -2.9% -2.7% -2.5% -2.3% -2.2% -1.0% -2.1% -2.6% Overall financing -4.2% -3.2% -3.3% -3.6% -3.0% -3.0% -2.7% -2.5% -2.6% -2.6% -1.7% -9.8% -5.2% -3.8% * % ; ** As compared with the figures registered in the three first months of 2003, the budget revenues decreased by 1.2 p. p. of GDP in the respective period of 2004, while expenditures decreased by 1.8 p. p. and budget surplus respectively increased by 0.6 p. p. of GDP. At the same time, without SST the budgetary revenues decreased by 1.2 p. p. of GDP and made 16.9 per cent of GDP. As before, VAT accounted for the major share of federal tax revenues 38.9 per cent of the total tax revenues what is practically at the level observed in the respective period of 2003.

According to preliminary estimates, the cash execution of federal budget revenues made 20.4 per cent of GDP in January through April of 2004, what was by 0.6 p. p of GDP below the level observed in the respective period of the preceding year. At the same time, the cash execution of expenditures made 17.2 per cent of GDP (17.7 per cent of GDP in January through April of 2004); therefore, in the first three months of this year, according to preliminary data, the surplus made 3.2 per cent of GDP.

According to the preliminary estimates of the Finance Ministry, in terms of fulfilled funding2 the expenditures of the federal budget in January through April of 2004 made 19.7 per cent of GDP (see Table 2), while in the respective period of 2003 this indicator was at 20.2 per cent of GDP. In January through April of 2004, Because of the estimated data on GDP, the indices may be subject to revision.

The execution of the budget in terms of fulfilled (actual) financing is equal to the sum of the funds transferred to managers of budget funds, while the cash execution of the budget is equal to the sum of funds spent by managers of funds (i.e. without account of funds remained on their accounts).

the amount of revenues of the federal budget decreased by 0.6 p. p. of GDP in comparison with the figures registered in the respective months of 2003 and made 20.4 per cent of GDP, what was partially caused by a 2.2 p. p. reduction of the VAT rate. Therefore, the surplus of the federal budget in terms of fulfilled funding in January through April of 2004 decreased by 0.1 p. p. in comparison with the figures registered in January through April of 2003 and made 0.7 per cent of GDP.

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