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Amounts of financing of the expenditures borne by the RF federal budget in January through April of 2005 (in per cent of GDP) Distribution of revenues February March April Federal issues 4,81% 3,72% 3,87% Including expenditures associated with the servicing of 3,14% 1,99% 1,92% the public and municipal debt National defense 4,61% 3,58% 4,36% National security and law enforcement 3,38% 2,55% 3,18% National economy 0,92% 1,22% 1,47% Housing and public utilities 0,01% 0,04% 0,05% Environmental protection 0,04% 0,03% 0,04% Education 1,07% 0,94% 1,17% Culture, cinematography, and mass media 0,26% 0,23% 0,27% Health care and sports 0,66% 0,53% 0,61% Social policy 1,25% 1,00% 1,33% Interbudgetary transfers 8,06% 6,27% 9,34% Total expenditures 25,06% 20,10% 25,69% In January through April of 2005, the revenues of the RF federal budget estimated in accordance with the revenue distribution method made 18.57 per cent, while in terms of the cash basis execution the respective figure made 27.28 per cent (see Table 1). The bulk of the tax revenues was associated with the taxes and other payments administered by the RF Federal Tax Service (10.24 per cent in terms of revenue distribution and 15.59 per cent as estimated on the cash basis), as well as the taxes and other payments administrated by the RF Federal Customs Service (7.39 per cent in terms of revenue distribution and 9.19 per cent as estimated on the cash basis). The rest of tax generated revenues fell within the receipts administered by the Federal Agency for Management of Federal Property and the revenues of the RF federal budget administered by other federal structures. The total amount of these revenues in per cent of GDP made about 0.95 per cent in terms of revenue distribution and 2.per cent as estimated on the cash basis. Therefore, by the end of April the tax revenues of the federal budget have somewhat declined in accordance with the respective figures registered at the end of March of this year.

The financing of the expenditures borne by the federal budget (distribution of revenues) is defined as the actual allocation of the amounts of financing carried out by the chief administrators of the financial resources of the federal budget (CABFR) via the expenditure schedules pertaining to the networks within their respective jurisdictions over the period under observation.

In January through April of this year, the expenditures of the RF federal budget evaluated in accordance with the revenue distribution method made Rub. 1 495.47 billion or 25.69 per cent in terms of share in GDP. For the preliminary data on the financing of the expenditures borne by the RF federal budget in January through April of 2005 presented by the RF Finance Ministry, see Table 2.

It should be noted that by the end of April the share of expenditures in GDP made 25.69 per cent, what was significantly above the values of the respective indicators registered in March of 2005. The largest amounts of financing were observed in the sphere of interbudgetary transfers (9.34 per cent of GDP), national defense (4.36 per cent of GDP), federal issues (3.87 per cent of GDP), including the expenditures associated with the servicing of the public and municipal debt (1.92 per cent), and national security and law enforcement (3.18 per cent). Other expenditure items totaled to about 4.94 per cent of GDP.

According to the data as on May 1, 2005, the amount of financial reserves accumulated in the RF Stabilization Fund was registered at Rub. 858.0 billion. Therefore, in March of 2005 Rub. 89.55 billion were transferred in the RF Stabilization Fund.

Major developments in the budgetary sphere On May 13, 2005, the RF Finance Ministry reached an agreement with the Paris Club as concerns the anticipatory repayment of a portion of the RF debt to the Club amounting to US $ 15 billion out of the total amount of the respective debt (US $ 40 billion) at the par value. The advance payments should be carried out starting in early June and until August 20 at the expense of the financial reserves of the RF Stabilization Fund. In spite of this agreement, according to S. Storchak, the Director of the Department for international financial relations, public debt and public financial assets of the RF Ministry of Finance, the RF Finance Ministry does not expect any increase in the credit rating of Russia on the part of world rating agencies related to the reduction of the public debt. Besides, according to the information presented by the RF Finance Ministry, in the course of preparation of proposals concerning the advance repayment of the following portion of the Russia debt to the Paris Club of creditors, there will be taken into account the amount of the reserves accumulated in the Stabilization Fund and support on the part of other federal authorities.

According to the information presented by the RF Ministry of Finance, in January through April of 2005, the RF federal budget provided Rub. 5.685 billion for the payment of compensations related to the pre-reform savings of Russian citizens, what made about 19 per cent of the amount allocated for these purposes in accordance with the budget for year 2005 (Rub. 30 billion as compared with Rub. billion as at the end of 2004).

Also in May, representatives of the RF Finance Ministry presented their comments on the issue of special economic zones (SEZ). Thus, according to M. Motorin, the Director of the Department for tax, customs, and tariff policy of the RF Finance Ministry, later the tax policy applied with respect to special economic zones (SEZ) may be extended to the activities of economic agents outside such economic zones. The representative of the RF Tax Ministry noted that residents of special economic zones (SEZ) are granted rather significant tax privileges. Thus, as concerns technological and innovation zones, where the rate of the single social tax was reduced to 14 per cent, the residents should in fact pay only contributions to the RF Pension Fund, what is a significant development, since the bulk of expenditures borne by SEZ enterprises is associated with wages and salaries of their employees. At the same time, as concerns industrial and manufacturing zones, it is envisaged to permit accelerated depreciation of equipment with coefficient 2, inclusion of R & D costs in the composition of expenditures and to carry forward losses without any restriction. Under the conditions of such tax treatment, in the first 5 to 7 years the residents would not have to pay the profit tax on losses incurred at the initial stages of their operations, since such losses may be carried forward to future periods. According to the RF Finance Ministry official, in the framework of such a system the residents of special economic zones (SEZ) in fact would not have to pay the tax on profits for 10 to 15 years.

In the course of elaboration of the respective draft law special attention has been paid to the problems of the profit tax evasion. Mr. Motorin noted, that in order to prevent tax evasion in special economic zones (SEZ) it was decided not to introduce the zero profit tax rate, but in stead to peg tax privileges to concrete investments.

On May 26, 2005, at the meeting of the Cabinet of Ministers there was taken the decision to submit to the RF State Duma amendments to the first section of the RF Tax Code, which would streamline the procedure governing tax inspections. According to S. Shatalov, the Deputy Finance Minister, the document took into account all issues related to the maintenance of the balance between the interests of the state and businesses.

According to the Deputy Finance Minister, the draft law abolishing the inheritance tax should be approved by the RF State Duma in second reading in June of 2005. The Deputy Finance Minister reminded that the draft law concerning the changes in the procedures governing the payment of the inheritance tax and gift tax had already been approved by the RF State Duma in the first reading. By the time of the second reading the Government should adjust the draft law in such a way as to completely abolish the inheritance tax. At the same time, at present there is no clarity with respect to the exact procedures governing the taxation of gifts. In particular, there should be determined the circle of persons subject to the gift tax, as well as the range of transactions subject to this tax. According to the Deputy Finance Minister, there were discussed three options of determination of the range of such transactions. In the framework of the first option it is envisaged to tax all transactions involving gifts;

in the framework of the second variant there should be taxed only the respective transactions requiring authentication by public notaries; and, finally, in the framework of the third option, which was favored by the RF Ministry of Finance, the gift tax should be imposed on all transactions subject to registration.

D. Polevoy Monetary policy In April, the rate of the growth in consumer prices was 1.1%, as compared to 1% in April 2004.

Thus, it seems that there is little probability even for the achievement of the new target inflation index set by the Government for the year 2005 at 10%. In April there continued the accumulation of the gold and foreign currency reserves: by early May they were in the amount of S 144.3 billion. From 16 May, the Bank of Russia increased the euros share in the two-foreign-currencies basket to 30%.

The consumer price index (CPI) in April 2005 was equal to 1.1% (as against 1% in April 2004 (see Fig. 1)). The main contribution to the growth in prices in April, just as in the preceding month, was made by the increased prices of foodstuffs - by 1.7% (0.8% in April 2004). As seen by the months results, the greatest increase was in the prices of fruits and vegetables (+5.4%), meat and poultry (+2.9%), and fish and seafood (+1.9%). Thus, by Marchs results, the major responsibility for a general rise in the prices of foodstuffs rests with the growth in the prices of fruits and vegetables. Besides, in the first four months of this year, the prices of meat and poultry, as well as of fish and seafood, were also growing rapidly.

The CPI growth is still significantly influenced by the increasing prices of commercial services provided to the population 0.8% (2% in March 2004). It should be noted than every month, since the year 2005 began, the rate of growth in the prices of commercial services was slowing down. The trend was as follows: in January 2005 the greatest increase was demonstrated by housing and utilities (HU) (+19.4%), in February the growth rate as regards these services went down to +4%, while in March it decreased to +1.9%. In March, the cost of services in the sphere of pre-school education grew at the highest rate (+ 1.8%), while that of the services in the sphere of passenger transport and medical services grew at 1.5%). Thus, the impact of the growth in the HU tariffs was less and less influencing the overall growth rate in consumer prices in the RF.

As for nonfood consumer goods, their prices in April grew on the average by 0.5% (in April 2004, the growth rate was similar - + 0,6%). Primarily, we should like to note a marked growth in motor petrol prices (+ 3,0%). Also it must be remembered that in January and February petrol prices were going down, while in March they grew by 0.3%.

The growth in the basic consumer price index4 in April 2005 was 0.9% (while in the same period of the previous year 0.8%). In fact, basic inflation is not decreasing this year, despite the slowed-down growth rate of money supply early in the year.

According to preliminary estimations, the CPI in May was 0.70.9%.

The basic consumer price index is an index that reflects the inflation level on the consumer market, without taking into account the seasonal (prices of fruits and vegetables) and administrative (tariffs of regulated services) factors, and is calculated by the RF Statistics Service.

The Growth Rate of the CPI in 2002 - 2004 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% Figure 1. CPI growth rate in 2002 2005 (% per month).

During April 2005, the monetary base (in a broad sense5) decreased by 12.6 billion roubles - to 2.trillion roubles (- 0.6%). The broad monetary base volume, as of 1 April 2005, amounted to 2.26 trillion roubles. Below we are going to consider the broad monetary bases dynamics by each of its components.

Money in circulation, including that balanced in cash of credit institutions, as of 1 May amounted to 1.67 trillion roubles (+ 5.9%, as compared to 1 April), credit institutions correspondent accounts with the Bank of Russia - to 254 billion roubles (22.3%), mandatory reserves 134.4 billion roubles (+0.8%), banks deposits with the Bank of Russia 93.2 billion roubles (37.8%), the value of the Bank of Russias bonds held by credit institutions 83.1 billion roubles (+37.1%), the RF Central Banks obligations for buyback of securities 2.1 billion roubles (no change), and the reserves for foreign-currency operations deposited with the Bank of Russia 5.1 billion roubles (+21.4%). Thus, one can speak of a certain reduction in the volume of free resources in the banking sectors, while the share of ready money in the monetary base structure increased. This is a negative trend, because it tends to decrease the money multiplier and, therefore, to reduce the possibility for the Bank of Russia to control the money supply in the RF.

The growth in the volume of currency in circulation in April of this year (+5.9%) and the growth in mandatory reserves (+0.8%) resulted in an expansion of the narrow monetary base (cash + mandatory reserves)6 by 3.4% (see Fig. 2). Simultaneously, in April the RF Central Banks gold and foreign currency reserves also grew (+ 5%), amounting, as of 1 May, to $ 144,3 billion (another record). Thus, money supply grew, with a simultaneous increase in gold and foreign currency backing for the rouble.

During three weeks in April, the gold and foreign currency reserves and narrow monetary base grew by 2.6% and 2.4%, respectively.

The RF monetary base in a broad sense, in addition to the cash issued into circulation by the Bank of Russia and the residuals on bank accounts of the mandatory national currency reserves of credit institutions deposited with the Bank of Russia, includes the reserves on credit institutions corresponding accounts and bank deposits placed with the Bank of Russia.

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