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One of the key amendments to Article 25 of the RF Tax Code Tax on profits of organizations is the change in the shares of taxes due to the federal and regional budgets. On January 1, 2004, there entered into force federal law No. 117 FZ of July 7, 2003, On amendments to Section 2 of the RF Tax Code and certain other legislative acts of the Russian Federation, as well as on invalidation of certain legislative acts (provisions of legislative acts) of the Russian Federation, which set forth that the amount of tax calculated at the rate of 5 per cent (in stead of previously used rate of 6 per cent) is due to the federal budget. Accordingly, the tax due to RF subjects budgets should be calculated at the rate of 17 per cent (in stead of previously used rate of 16 per cent). The rate of taxes due to local budgets is 2 per cent, this provision has not been changed. However, at present there is discussed the issue of an increase in the share of the federal budget in the respective tax revenues since the next year in connection to the transformation of certain social allowances in monetary form and probable assignment of obligations concerning the payment of these funds to the federal budget.

The same law envisages that the resources received for the formation of the Russian fund of technological development, as well as other branch and interbranch funds for financing of R & D registered in accordance with the procedures envisaged by the federal law On science and state science and technological policy in the from of not for profit organizations should be treated as targeted funds and not be included in the tax base. Targeted receipts of the said funds should be also excluded from the respective tax base. As concerns the budget item Expenditures for R & D it is permitted to diminish the tax base by the expenditures for formation of funds for R & D financing registered in accordance with the procedures envisaged by the federal law On science and state science and technological policy. Previously, the tax base could be diminished only as concerned the expenditures relating to the formation of funds for financing of R & D included in the list approved by the RF Government in accordance with the said law. On condition of adequate control over the expenditure of financial resources accumulated in the said funds, this measure may facilitate voluntary financing of scientific research. It should be noted that it is of outmost importance to switch to identification of funds entitled for this financing privilege basing on the provisions of the law from arbitrary decisions of officials.

Later, law No. 163 FZ of December 8, 2003, established that the said rules of determination of the tax base should be applicable to the Russian fund of technological development and funds for financing R & D created at the federal executive authorities in 2003.

Law No. 117 FZ of July 7, 2003, introduced very important amendments to the RF Budget Code.

These changes concern the distribution of tax revenues generated by small businesses entitled to the simplified taxation system: 30 per cent of the single tax previously received by the federal budget should now be entered in the budgets of RF subjects. This procedure may stimulate regional authorities to create conditions for development of small businesses. However, it would be more feasible to assign a larger part of revenues generated by small businesses to local budgets. In the absence of an adequate evaluation of the real estate tax base, taxes collected from small businesses could become an independent revenue source of local budgets with more evenly distributed tax base in comparison with, for instance, the tax on profits, since small businesses may be more developed both in large cities and localities without large enterprises and with predominately residential housing. Moreover, the respective tax base depends on the efforts of local authorities aimed at creation of conditions favorable for small businesses and the assignment of a larger part of these tax revenues to local authorities could create incentives for such effort.

Law No. 163 FZ of December 8, 2003, On amendments to certain legislative acts of the Russian Federation concerning taxes and fees, which also entered into force on January 1, 2004, introduces changes in the terms of privileges granted to regional and local authorities in accordance with the law On profit tax (this law permitted regional and local authorities to grant certain privileges to taxpayers in addition to those set forth by the law). These privileges were abolished since January 1, 2004.

Law No. 178 FZ of December 23, 2003, On amendments to Articles 251 and 291 of the RF Tax Code (this law should enter into force in one month after its promulgation on December 27, 2003, but not before the beginning of the next tax period) envisages that insurance contributions made by banks in the deposit insurance fund in accordance with the federal law on insurance of household deposits at banks of the Russian Federation should be excluded from the respective tax base, and that banks should have the right to determine such contributions as expenditures for taxation purposes.

A number of changes in the procedures governing taxation of organizations proceeds is currently discussed at the RF State Duma. In particular, the Finance Ministry introduced proposals aimed to amend the current procedure of tax accounting, which envisage harmonization of tax and general accounting across a number of positions. Besides, there is discussed the proposal to decrease tax rates on profits of organizations as concerns proceeds from mortgage securities (the tax rate should be at 6 per cent for proceeds from securities issued prior to January 1, 2007, and 15 per cent for securities issued after 2007). At present RF laws do not set forth any special treatment of proceeds from such securities as concerns the profit tax. It is also proposed to set a 6 per cent rate with respect to proceeds from municipal securities issued prior to January 1, 2007 (for securities issued later the profit tax rate should be set at the current 15 per cent). The latter draft envisages a significant decrease in tax rates alongside with a package of other measures to be in force for a limited term (i.e. the period of formation of the mortgage crediting market). In the case these measures could facilitate the said development process, there may be achieved advantages associated with the economy of scale, which could compensate possible losses. Probably, it would be also feasible to limit the period of validity of the privileges relating to the interest yields of mortgage securities issued after January 1, 2007, which should be taxed at 15 per cent. The arguments for such a decision are as follows: after a certain time mortgage may loose its priority, while the abolition of an earlier introduced privilege has always been a complicated political problem, and not only in Russia. Therefore, in the case such a limitation is absent, it is possible that such privileges might be extended to other types of activities (there will be always certain arguments for such an extension, for instance, by comparing between social advantages of activities already entitled for the privilege and those with respect to which such privileges are recommended).

These developments will inevitably result in distortions, losses of the budget, and tax evasion. In the case by the date of expiration of the privilege the effect of the economy of scale is not exhausted yet, the privilege may be prolonged by a new law.

E. V. Shkrebela Monetary policy Growth rates of consumer price index (CPI) in RF recorded in May slowed down to 0.7 percent per month. Gold and foreign currency reserves resumed growing and in May they went up by 3.6 percent.

In response to reduced liquidity in banking sector, the Bank of Russia cut down the rate of mandatory reservation and refinancing rate as well as widened the list of stock, which are accepted as collateral in signing repo contracts with commercial banks.

According to data published by Goskomstat of RF, consumer price index recorded in May amounted to 0.7 percent (see Graph 1). In such a way, Aggregate inflation rate for the period between the beginning of the year through May constitutes 5.4 percent (7.1 percent in the corresponding period of 2003).

Highest price growth as before was recorded in the sphere of paid consumer services population and amounted to 1.4 percent in May and 10 percent for the period between January through May of the current year (1.5 percent and 14.2 percent correspondingly in the year 2003). On the whole, except prices charged for preschool education and charged by organizations of culture, paid consumer services record lower growth rate in comparison with previous year in all other price groups.

Lowest inflation growth rate in May in comparison with December 2003 is recorded in the category of nonfood products and constituted 2.8 percent (4.1 percent in corresponding period of 2003). This growth rate in comparison with previous month amounted to 0.8 percent. Prices on all without exception groups of products, which fall into this category, grew slower between January and May than in the same period of last year. However, increased price growth on gasoline became a distinctive feature in the period of April through May. If in the period between January through March this growth constitutes only 0.6 percent then in the period between January through May price growth surpassed 7 percent. It is necessary to note a small increase in price growth on tobacco products recorded in May.

Basic inflation4 recorded in May noticeably went down: in April0.8 percent, in May0.6 percent. This reduction is linked both with decreased pressure of money supply and dedollarization of the economy. On the one hand, considerably lower, than in October-December, cash growth rate recorded in the first quarter of current year (0.5 percent against 6.2 percent) starts influencing the consumer price index. On the other hand, due to stable nominal ruble exchange rate to the dollar preserves incentives to dedollarization of the populations assets. This, in its turn, leads to the reduction in velocity of cash circulation. This results in the reduction of sensitivity of consumer prices to the dynamics of the monetary base.

According to preliminary estimates, consumer price growth rate recorded in June will not surpass percent and, thus, inflation rate in Russia will amount to 6.2-6.5 percent for the first six months of 2004.

The Base Consumer Price Index (BCPI) is an indicator reflecting the inflation rate on the consumer market. It leaves out of account the seasonal (prices of fruits and vegetables) and administrative (tariffs on regulated types of services etc.) factors, calculated by the Statistics Service of the RF.

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Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2003 - 2004.

1160 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) 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% Gold and foreign currency reserves of RF grew in May by 3.6 percent (plus 2.9 billion dollars, see Graph 2). In the beginning of June gold and foreign currency reserves continued growing: for the first three weeks they increased by 3.7 percent. However, the volume of monetary base (in broad definition)5 fell in May by 1.3 percent and from the start of the yearby 2.3 percent. Reduction in the volume of monetary base is linked, first of all, with the decrease of such its components as bank deposits with the Bank of Russia and credit organizations corresponding accounts with the Bank of Russia.

The RF Monetary Base in broad definition includes cash in circulation, the Ruble denominated funds in mandatory reserves relating to the borrowings of credit organizations, and funds in credit organizations correspondent accounts and commercial banks' deposits with the Bank of Russia.

billion rubles billion dollars 2-8.12.1-7.06.8-14.09.6-12.10.4-10.11.9-15.03.6-12.04.4-10.05.22-28.09.20-26.10.18-24.11.16-22.12.13-19.01.10-16.02.23-29.03.20-26.04.18-24.05.15-21.06.27.01-2.02.24.02-1.03.30.12.03-5.01.Jul Jul Jan Jan Jan Sep Sep Mar Mar Mar Nov Nov May May May Evidently, this is explained by serious problems related to liquidity, which were recorded in the interbank market in May.

Money supply in Russia (according to methodology of monetary overview) increased for the period of 4 months of current year by 9.5 percent and amounted by 1 May the sum of 4.34 trillion rubles. In particular, in April money supply increased by 3.4 percent. The volume of money, which represent all funds in the economy that can be used as means of payment (aggregate 1) increased by 3.7 percent for four months and amounted to 2.26 trillion rubles as of 1 May 2004 (growth in April0.4 percent).

Net foreign assets of monetary regulation bodies (CB of RF and Ministry of finance of RF) and credit organizations amounted according to preliminary estimates to the sum of 2.34 trillion rubles as of May. Net assets increased by 16 percent (growth in April5.9 percent) in comparison with this indicator as of 1 January of current year.

On June 11 of current year the Bank of Russia announced a reduction in assignments norm for banks to the Fund of mandatory reservation on attracted funds of legal entities in domestic currency and attracted funds of legal and physical persons in foreign currency from 9 percent down to 7 percent.

This decision followed a reduction of refinancing rate from 14 percent down to 13 percent annualized as well as widening of securities list accepted as collateral in signing with banks direct repo contracts.

In all probability, adoption of these measures was stipulated by lack of liquidity in short-term funds in the Russian market. At the same time, it should be noted that change in the refinancing rate does not have such a significant influence in financial markets and in the real sector of the economy as it does in the majority of the developed countries. However, by increasing the list of securities, on which security banks can obtain funds from CB, thereby the Bank of Russia broadened the base for liquidity management in the banking system P. Trunin Financial Markets In June of 2004, the situation on the Russias financial market was characterized by mixed trends.

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