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INSTITUTE OF THE ECONOMY IN TRANSITION 5, Gazetny pereulok, Moscow, 125993, Russian Federation Phone (495)629-6736, fax (495)697-88-16, Email: lopatina@iet.ru www. iet.ru RUSSIAN ECONOMY:

TRENDS AND PERSPECTIVES 012010 MONTHLY BULLETIN:

RUSSIAN ECONOMY IN JANUARY 2010: TENTATIVE INDICATORS AND MAJOR TRENDS 2 THE POLITICAL AND ECONOMIC RESULTS OF JANUARY 2010 (S.Zhavoronkov) 4 INFLATION AND CREDIT AND MONETARY POLICY (N.Luksha) 8 FINACIAL MARKETS (N.Burkova, E.Khudko) 13 REAL ECONOMY SECTOR: TRENDS AND FACTORS (O.Izryadnova) 22 RUSSIAN INDUSTRY IN JANUARY 2010 (S.Tsukhlo) 27 FOREIGN TRADE (N.Volovik, K.Resenkova) 30 MORTGAGES IN THE RUSSIAN FEDERATION (G.Zadonsky) 34 THE STATE BUDGET (E.Fomina) 37 INFRASTRUCTURAL PROBLEMS OF THE RUSSIAN GRAIN MARKET (N.Karlova) 44 THE NEW IMAGE OF THE RF ARMED FORCES: THE ISSUES OF THE MILITARY PERSONNEL NUMBER AND THE 47 INCREASE OF THEIR MONEY ALLOWANCE (E.Trofimova) STIMULATING OF INNOVATIONAL DEVELOPMENT IN THE CONTEXT OF ECONOMY MODERNIZATION 51 (I.Dezhina) FOREIGN ECONOMY COMPLEX OF RUSSIA AND PROBLEMS WITH MECHANISM FOR EXPORT SUPPORT 56 FUNCTIONING (A.Pakhomov) THE PRACTICE OF REGULATING ECONOMIC CONCENTRATION IN MERGER AND TAKEOVER DEALS 60 (O.Smirnova) REVIEW OF MEETINGS OF THE GOVERNMENT OF THE RUSSIAN FEDERATION IN JANUARY 2010 (M.Goldin) 65 REVIEW OF REGULATORY DOCUMENTS CONCERNING TAXATION OVER DECEMBER 2009 JANUARY 67 2010 (L.Anisimova) REVIEW OF ECONOMIC LEGISLATION (I.Tolmacheva) 73 CHANGES IN NORMATIVE BASIS OF BUDGET PROCESS (M.Goldin) 75 RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES RUSSIAN ECONOMY IN JANUARY 2010:

TENTATIVE INDICATORS AND MAJOR TRENDS A series of resignations and appointments of governors, accomplished by President D. Medvedev in January happened to be the most important developments in political environment. In the first days of the new year the appointment of six governors has been announced (four of them are reappointed, two governors are new), and later it was informed on the replacement of such prominent figures as Mintimer Shaimiev, President of Tatarstan, and probably, Muha Aliev, President of Dagestan. One cannot track any logic in the decisions on reapointment or replacement of the governors: for example, such unpopular and even scandalous figures as Alexander Berdnikov, the Altai governor and Sergei Darkin, Primorski Krai governor retained their positions; indicators of socio-economic development in the regions are also disregarded in those decisions. Moreover, policy to limit the governors service with three terms (announced after resignation of M. Shaimiev) is not observed: Oleg Bogomolov, the Kurgan region governor, has been reappointed in early January for the fourth term.

In general, the procedure and incentives of appointment remain explicitly nontransparent and are not disclosed to public. The appointment of Alexander Khloponin as a Representative of the President in the North Caucasus Federal Region and Deputy Chairman of the government was another innovation in the regional policy. The personality of the appointee, combination of the two positions and some accompanying solutions (application for the goods customs clearance in the territory of the Chechen Republic, as well as a sudden decision to return of RussNeft Company to Mikhail Gutseriev) demonstrate, that Moscow is seeking to create economic conditions to stabilize the situation in the Northern Caucasus.

The accelerated inflation can be regarded as the most remarcable development of January. Within the period from January 1 to 25, it amounted to 1.7%, which allows to expect the monthly inflation rate of 2%. The inflation rate in January is certainly seasonal, and the price growth in the current January was lower than in January of 2008-2009 (2.3% and 2.4% accordingly), but higher than in January 2007 (1.7% within the month).

The price growth rate in autumn 2009 was 2-3 times lower than in the relevant periods of preceding years, though as of January results, this gap seems insignificant, so the official inflation estimates for the year at the rate of 7-7.5% looks unrealistic against this background, especially since the Central Bank expects inflation to accelerate in the second half of 2010 due to monetary factors (in December 2009 growth of the monetary base amounted to 23.9%, becoming the most significant since December 2003). It should be noted, that in January, for the first time since April 2009, the Bank of Russia did not take further actions to reduce the refinancing rate. Accelerated inflation was mostly due to increased charges for heating, hot water and energy (the growth made 11-14%), as well as for public transport; prices for foodstuffs, such as sugar, vegetables and alcohol (due to the increased excise tax) have also grown.

Within December - January, oil prices, which have the most significant impact on the Russian trade balance and macroeconomic indicators, showed a higher volatility than in preceding months. In the period from December 20, 2009 to January 6, 2010 prices increased by more than 10% - to the post-crisis maximum level (up to USD 82 per barrel for Brent), but later demonstrated the same intensity in decline (to USD 71 per barrel on January 30). The RF gold and foreign currency reserves in January slightly declined (USD 435.5 billion on January 22 against USD 440.6 billion on January 1) for the second consecutive month (post-crisis maximum was recorded in early December and made USD 451.2 billion). The dollar, after falling in the first half of the month returned to the pre-New Year values, Euro continued to decline, which was observed from the second decade of December. Within the period from December 1, 2009 to February 1, 2010 the nominal exchange rate of dollar against ruble grew by 4.7% to RUR 30.43/USD 1, and Euro, by contrast, has fallen down by 3%, to RUR 42.46/Euro 1. As a result, the value of the two-curRUSSIAN ECONOMY IN JANUARY 2010: TENTATIVE INDICATORS...

rency basket1 started to decrease again, amounting to RUR 35.84 (-0.4 per cent) by February 1.

The dynamics of oil prices had an impact on the stock market: dealings for a rise in the first week after Christmas holidays has been replaced by a downward trend, which returned the indices to slightly higher values than the pre-New Year indicators (MICEX on January 29 - 1419 points against points on December, 31). At the same time, a favorable situation with ruble liquidity and changes in the international rating agency Fitch Ratings estimates for Russias credit rating from negative to stable supported the government bond market, where the investors activity grew by 70%.

According to the RF State Statistics Service, industrial production in late 2009 demonstrated a positive dynamics: growth in production in December, as compared with November amounted to 5%, as compared with December 2008 by 2.7%. However, these figures have urged contradictory comments of experts, due to both the incompleteness of data in the tentative estimates of the Federal State Statistics Service, and the base effect - in December 2008, production was rapidly decreasing.

Herewith, business surveys in January 2009 provide grounds to believe in further positive dynamics of production. First of all - and most important is that assessment of the current demand is getting improved: for the first time during the crisis, the share of reports on declining sales was equal to the reports on their growth. In the food industry 73% of companies are satisfied with sales, in metallurgy 56%, in chemistry 49%. Estimates of expected demand improved significantly as well. According to the estimates, production dynamics is coming back to normal together with the demand;

decrease in output (after seasonal factor cleaning) was observed in January only in the construction industry, timber industry and light industry. Output plans of enterprises for February-March significantly improved. The new year began with the extension of business portfolio: orders schedule in portfolio increased from 4.9 to 7.2 months within a quarter and returned to the pre-crisis level (as compared with January 2006 6.7 months; 2007 6.7; 2008 - 7 months).

However, the positive dynamics of demand and growth of orders urge companies to raise prices.

Improving dynamics of demand has already caused rather intense cycle of increase in prices in August and October, but in November-December that trend has been reversed. Optimistic position of businesses is contributed by planned improvement in the availability of credits in the industry. Average minimum interest rate on credits in January declined to 16.8% per annum against 17.4% in December, although to small businesses credits are offered in the best case under 19%.

In November-December 2009 the RF Statistical Service observed some increase in unemployment after several months of its decline in the mid-year. Surveys of enterprises performed in January indicate, that the intensity of dismissals remained at the same level. However, in view of positive changes in the estimates of demand and sales, HR plans of companies seem to be very optimistic: the balance of the forecast of hiring and dismissals for the first time since the crisis became positive.

Therefore, the beginning of the year looks quite favorable for the Russian economy. However, instability in the global economy and volatility in commodity markets pose a significant threat to these positive trends. The dynamics of industrial production is likely to be dependent on the sustainability of recovery trend.

1 Two-currency basket is the RF Central Bank operational indicator in its foreign currency policy. Currently the share of EURO in the currency basket makes 45 per cent, USD 55 per cent.

RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES THE POLITICAL AND ECONOMIC RESULTS OF JANUARY S.Zhavoronkov In January, a new official responsible for the North Caucasus was appointed former Krasnoyarsk Governor and big entrepreneur A. Khloponin, who made a declaration as to the necessity to adopt a new course with regard to the region thus causing concerns among some of the local top officials, and primarily R. Kadyrov. M. Shaimiev, who for many years has been President of Tatarstan, announced his intention to retire from his post. On the basis of the results of the January meeting of the State Council where D. Medvedev admitted the necessity of political modernization, the authorities agreed to introduce only some minor alterations in electoral legislation aimed at abolishing early voting, which is by no means the primary instrument currently applied for falsifications. The RF State Duma ratified the protocol on reform of the European Court on Human Rights designed to speed up its operation. The ultimate effect of this decision will only be judged by the speed (or lack of speed) in the Courts consideration of the case Yukos versus Russia.

In January, much of the news had to do with regional politics. Russia declared that a new North-Caucasian Federal Okrug (NCFO) will be created incorporating Dagestan, Ingushetia, Kabardino-Balkaria, Karachaevo-Cherkessia, North Osetia, Chechnya, and Stavropol Krai with its center in Piatigorsk (previously, the center of the larger Southern Federal Okrug was the city of Rostov). The new presidential plenipotentiary representative, whose appointment was announced in the Presidential Message but was then delayed for a long time, became former Krasnoyarsk Governor A. Khloponin, an owner (quite officially) of a substantial fortune, who had come into politics from the Interros conglomerate The core right obtained by the presidential plenipotentiary representative as part of his new powers is that of coordinating the appointment of heads in the structures subordinated to the federal center in the Okrugs territory.

North Caucasus can be characterized without any exaggeration the most problem-ridden region in Russia. Several of its regions Chechnya, Dagestan, Ingushetia are effectively a battleground between the power structures and the armed Islamist underground; the development and outcome of this war being far from clear. Last year the Islamists increased the number of their attacks on representatives of official structures; thus, they managed to kill Dagestans Minister of Internal Affairs A. Magomedtagirov, and Ingushetias head Yu. Yevkurov survived only by a happy chance after his car had been blown up by a suicide bomber. Even officials admit that the Islamist underground in these three republics has created networks which exist in parallel with the formal governance structures and actively prey on the population and businesses alike. The corruption level in the region is extremely high, the bulk of its population is very poor, while the broad range of the informal authority enjoyed by the power structures often affects the peaceful population (however, the borderline between peaceful and non-peaceful population in such zones of conflict is largely conditional). In this situation any simple increase in the amount of financing (the budget-funded target programs for the development of the Caucasian republics in the next few years amount to more than 100 billion rubles) and in the numbers of power structures personnel cannot be viewed as a way to achieve success, because the money is mostly stolen, and some of it goes as a security tax to the gunmen, while the power structures terrorize the population irrespective of its relation to the underground and create no incentives for its cooperation with the authorities.

By way of offering council to Khloponin, D. Medvedev said as follows: I trust that already year the extraordinarily high level of crime and corruption in the North Caucasus... Most of the problems plaguing that region have their roots in a weak economy and absence of any prospects for the people who live there .

The first statements made by Khloponin himself demonstrate his concerns about the existence of these problems: really, it is not difficult to attract investment it is the people with whom THE POLITICAL AND ECONOMICAL RESULTS OF JANUARY one has to work side by side that are important. Indeed, the appointment of Khloponin fits into a certain logic that the new heads must be those who have worked for a long time elsewhere; the same logic has been behind the appointment of the heads of Ingushetia, Karachaevo-Cherkessia and Kabardino-Balkaria, and so it can also be applied to appointing the president of Dagestan.

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