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In accordance with the Decree of the Government of the Russian Federation from 22 May No from 1 June 2008 export duty rate for crude oil will be increased by 17.1% from USD 340.1 per ton to USD 398.1 per ton. Export duty rate for light oil products will go up from USD 241.4 per ton to USD 280.5 per ton, for dark oil products from USD 130.1 per ton to USD 151.1 per ton.

Average monthly world prices for aluminum and nickel at London Metal Exchange decreased in January-March 20088 as compared with the corresponding period of 2007 by 2.1% and 30.1%, respectively, prices for copper went up by 31.4%. In March 2008 as compared with the previous month prices for aluminum, copper and nickel increased, respectively, by 8.2%, 7% and 11.7%. As compared with last years March prices for nickel decreased and prices for aluminum and copper increased.

Table Average Monthly World Prices in March of the Corresponding Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Oil (Brent), USD/bbl 19.2 13.0 13.7 26.9 25.5 24.1 29.1 33.6 53.7 60.9 62.05 102.Natural gas, USD /mln BTU 1.870 2.170 2.120 2.828 5.200 2.996 5.757 5.267 7.234 6.123 7.25 9.Petroleum, USD /gallon 0.645 0.467 0.527 0.934 0.890 0.783 1.005 1.12 1.581 1.7 1.91 2.Copper, USD/ton 2424.8 1772 1477.1 1779.1 1780.3 1605 1681.6 3018.0 3254.4 5103 6452.5 8421.Aluminum, USD/ton 1635.5 1441.3 1251.1 1584.2 1511.2 1403.2 1393.1 1660.0 1988.6 2429 2761.7 2986.Nickel, USD/ton 7929.5 5380 4934.5 10270 6140.3 6503.3 8402.4 13730 16190 14897 46324.8 31005.Source: calculated on the basis of London Metal Exchange, International Petroleum Exchange (London) data Table Dynamics of Average World Prices for Some Agricultural Goods 2005 2006 2007 January February March April Wheat, USD per ton Canadian, CWRS 197.6 216.8 300.4 513.8 732.4 618.8 537. American, HRW 152.4 192.0 255.2 370.7 425.0 439.6 362. Australian, SRW 135.7 159.0 238.6 343.8 388.7 419.6 348.American corn, USD per ton 98.7 122.9 163.0 206.7 220.1 234.4 246.Barley, USD per ton 95.0 117.0 172.0 206.0 216.2 228.6 237.Soybean, USD per kilo 274.4 268.4 384.0 541.0 572.0 575.0 558.Soy oil, USD per ton 545.1 598.6 881.0 1276.0 1400.0 1476.0 1425.Thai rice, USD per ton 304.9 326.4 375.6 464.8 594.0 907.Source: World Bank.

Prices for foodstuffs and agricultural goods currently have diverse dynamic. In recent months the drop of prices for wheat has been observed, since it is expected that the production will go up in the biggest exporting countries: the EU, Ukraine, The USA, Australia, Canada, Russia. Prices for corn and barley continue to grow but the growth rates have diminished. At the same time sharp growth of world prices for rice is observed they reached record-breaking values in April 2008. The main factor contributing in the increase of world prices for rice is the complicated situation with the provision of the necessary amount of export supplies. In order to decrease inflation pressure in the countries, some leading exporters (Cambodia, Egypt, India, Vietnam) introduced limitations or direct bans for rice export. Some countries, dependent on rice import and worried by insufficient amount of its resources for internal consumption, increased the purchase at the world market, which contributed into further prices growth.

In 1 quarter 2008 the basis of Russian export was still fuel and power commodities, which comprised 69.8% of all the Russian export as compared with 64% a year ago. Such a considerable expansion of the proportion of the biggest export group is connected with the growth of contract prices for oil by 1.7 times, for oil products by 1.6 times, for natural gas by 29.3%. The proportions of other goods groups has decreased: metals and goods thereof from 15.5% to 12.2%, machinery, equipment and transport vehicles from 4.7% to 4.3%, chemistry industry goods from 6.2% to 5.8%, wood, pulp-and-paper goods from 3.7% to 2.8%, foodstuffs and agricultural raw materials from 2.1% to 1.5%.

As compared with 1st quarter 1997, over the 1st quarter 2008 the volume of fuel and power commodities increased by 67% up to USD 75.761 bln, including oil by 64.9% up to USD 38.556 bln, gas - by 69.5% up to USD 17.872 bln; metals and goods thereof by 21.2% up to 13.281 bln, of which ferrous metals and goods thereof by 30.8% up to 7.384 bln, non-ferrous metals and goods thereof - by 10.6% up to USD 5.527 bln; machinery, equipment and transport vehicles by 40.3% up to USD 4.662 bln.; chemistry industry production by 42.7% up to USD 6.33 bln; wood and wood processing complex - by 16.4% up to USD 3.045 bln.

Physical volumes of wheat supplies decreased by 45.1%, of barley by 99.2%, whereas as to rye supplies the growth by 5.1% was observed.

In 1st quarter 2008 export prices indices anticipated physical volumes indices (see Table 3).

Table Influence of Individual Factors on Changes in Russian Federations Trade Balance in 1st Quarter Russias foreign trade, as Indices, taking 1st quarter 2007 as USD bln st 1st quarter quarter Physical volumes Prices index Cost index 2008 2007 index Goods export (fob) 109.7 72.0 111.1 135.6 150.of which:

Fuel and energy complex goods 74.3 43.9 105.6 160.4 169.Other goods 35.4 28.1 119.7 101.2 121.Goods import (fob) 59.8 43.1 130.0 109.1 141.Source: basing on the Central Bank of the Russian Federation data Basis for import value growth was the increase of its physical from non-CIS countries. Recently, however, the significance of price factor has increased, for instance, prices for foodstuffs and agriculture raw materials as well as other import goods especially from CIS countries are growing.

In 1st quarter 2008 the share of machinery and equipment increased up to 52.3% as compared with 47.6% in the corresponding period of the previous year. This has led to the decrease in the share of other goods group, despite the increase in their value volumes.

Machinery and equipment import growth rates were considerably ahead the import growth rates as a whole. Machinery, equipment and transport vehicles import increased by 61.3% up to USD 28.715 bln over the 1st quarter of 2008, foodstuffs and agriculture raw materials import by 25% up to USD 7.309 bln, chemistry industrys production import by 38.2% up to USD 7.407 bln.

On 19 May 2008 next round of negotiations on Russias accession to the WTO took place in Geneva. The following issues were on agenda: customs and technical regulations, intellectual property protection, government support for agriculture. The most complex problem for our potential partners in the WTO, whose number involve big European agriculture goods producers, is the amount of agriculture subsidies the issue to be agreed on with the USA and Cairns group main agriculture goods exporting countries as well. This is the subject to which the round of talks in Geneva was devoted this spring, and they will be continued at the end of May beginning of June.

So far no agreements have been reached with Saudi Arabia and Georgia. And whereas it is highly probable that al necessary documents with Saudi Arabia are to be signed in June, the situation with Georgia is by far more complicated. April announcement of the Russian side on establishment of council relations with Abkhazia and South Osetia became a serious obstacle for receipt of Tbilisis agreement on Russias accession to the WTO.

Ukraine, which officially became the WTO member on 16 May 2008, submitted the application on joining to the Working Group on 14 May hoping to lift the limitations for import of some Ukranian goods to Russia.

Budgetary and Tax Policy . Kirillov In April 2008 federal budget revenues in terms of GDP share have significantly exceeded the March indicator and accounted to 33.7 percent of GDP. In expenditures there is a trend to a more reasonable fiscal policy. Throughout 2008 the RF Stabilization Fund was being reduced in terms of GDP share.

As of the first four months of 2008 results, federal revenues amounted to 25.1 per cent of GDP, expenditures made 16.1 per cent of GDP, while the federal budget surplus amounted to 9 per cent of GDP. The revenues and expenditures of the RF budget share in GDP within the period under review significantly exceeded the relevant indicators of 2007. (Fig. 1). The dynamics of the basic parameters of the RF federal budget is presented in Table.As one can see, the curve of income within the first four months of 2008 is close to the level of 2006 and is substantially above the same period of 2007, whereas the federal budget expenditures in terms of GDP share in the current year exceed not only the indicatiors of preceding year, but the indicators of three past years. In Fig. 2 a sharp increase is clearly observed in federal budget expenditures in October 2007, which has reached the peak in January 2008, but returned to an average level of 2005-2006 in April 2008, which was inspired by parliamentary and presidential elections, held in the country.

We will review the federal budget revenues in detail. In April 2008, upon some decline in proceeds since the beginning of the year, revenues of the federal budget amounted to 33.7 per cent, which is the peak indicator of the current year. (See Fig. 3).

38% 35% 32% 29% 26% 23% 20% . . . . . . . .

2005 2006 2007 Fig. 1. RF Federal Budget Revenues in 2005-2008, % in GDP % 20% 18% 16% 14% 12% 10% . . . . . . . .

2005 2006 2007 Fig. 2. RF Federal Budget Expenditures in 2005-2008, % in GDP 40% 35% 30% 25% 20% 15% 10% 5% 0% . . . . . . . .

2005 2006 2007 Fig. 3. RF budget Monthly Revenues in 2005 2008 (% versus GDP) Such a sharp increase in revenues in April 2008 occurred largely due to tax and other payments, administered by Federal Tax and Customs Services. Those tax administrators have exceeded the respective indicators of January - April 2007 by 2 per cent of GDP and 1.6 per cent of GDP accordingly.

% % To assess the dynamics in revenues, as broken down by the major tax administrators in detail, well refer to Table 1. Unfortunately, the data of the RF Federal Treasury is published with a two-months delay, but the data available allows to assess the trends of the year beginning faily enough.

1.

Federal Budget Revenues (by Basic Budget Lines) within 2006-2008, % of GDP 2006 March 07 2007 March TOTAL BUDGET REVENUES 23,58 20,95 23,91 23,1. Corporate profit tax 1,92 1,76 1,97 2,2. Unified social tax 1,19 1,21 1,24 1,3. Taxes on goods and services, sols on the RF territory 3,82 3,41 4,61 1,3.1.VAT 3,47 3,08 4,27 1,3.2. Excise tax 0,35 0,33 0,33 0,4. Import customs duty 2,27 2,62 2,76 2,4.1. VAT 2,20 2,54 2,68 2,4.2. Excise tax 0,06 0,08 0,08 0,5. Mineral extraction tax 4,11 3,27 3,45 4,6. Import customs duty 1,28 1,42 1,50 1,7. Export customs duty 7,12 5,86 5,64 7,Source: RF Treasury, IET estimates Table Expenditures of the RF Federal Budget within 2006-2008, % in GDP 2006 IV Q 2007 2007 I Q Federal issues 1,99 4,15 2,50 2,Including expenditures associated with the servicing of federal and 0,64 0,28 0,44 0,municipal debt National defense 2,56 3,19 2,56 2,National security and law 2,07 2,42 2,05 1,enforcement National Economy 1,30 4,35 2,13 1,Housing and public utilities 0,20 2,75 0,91 0,Environmental protection 0,02 0,03 0,03 0,Education 0,80 1,26 0,91 0,Culture, cinematography and mass 0,21 0,32 0,22 0,media Health care and sports 0,55 0,96 0,60 0,Social policy 0,76 0,73 0,66 0,Interbudgetary transfers 5,63 6,08 5,84 6,Total expenditures 16,08 26,25 18,39 16,Source: RF Treasury, IET estimates.

The largest growth in GDP share within January - March 2008 have demonstrated export customs duties, grown by 2 percentage points of GDP as compared with the same period of 2007. Similar increase by 1.2 per cent versus the indicators January-March 2007 was noted in revenues from mineral extractin tax. The increase in revenues from those taxes, in the first place, provides the greatest impact on the growth of federal revenues, since the share of those taxes in the total proceeds from taxes and other revenues to the RF federal budget accounts to 33.5 per cent and 19 per cent, respectively.

Revenue growth from other taxes over the preceding year indicators is not so expressed5, while the revenue from value-added tax on goods and services, sold in the territory of the Russian Federation, is declined by 1.95 per cent of GDP as compared with January-March 2007. This is caused by the transition to the quarterly VAT payment scheme in 2008 and we expect growth of proceeds under that budget line as of six-month results.

Let us consider the expenditures of the federal budget as broken down by basic budget lines. The growth in budget funds expenditures within January-March 2008 as compared with the same period in 2007 occurred in all major budget lines, except for expenditures for national defence, which is reduced by 0.05 percentage points in GDP share. However, due to the impact of the political factor, it would be more illustrative to compare the federal budget expenditures in the IV quarter of 2007 and I quarter of 2008.

Within January - March 2008 the utmost growth in expenditures, as compared with October - December 2007 was observed in interbudgetary transfers (+ 0.41 percentage points of GDP) and social policy (+ 0.10 percentage points of GDP). The growth of interbudgetary transfers expense occurred in subventions to the budgets of the RF subjects and municipal entities, as well as in interbudgetary transfers to public extrabudgetary funds. In the social policy budget line, the growth of expenditures is noted in pensions.

Under the other budget lines the expenditure level in the first quarter of 2008 is signinfcantly lower the indicator of the fourth quarter of 2007. The highest reduction in the federal budget expenses is recorded in the national economy (-3.29 percentage points of GDP), housing and public utilities (-2.percentage points of GDP), federal issues (-1.69 percentage points of GDP) and national defence (1.06 percentage points of GDP).

16% 14% 12% 10% % 8% 6% 4% 2% 0% . . . . . . . .

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