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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES June 2005 MONTHLY BULLETIN Moscow 2005 Institute for the Economy in Transition, 1996. Licence, 02079 19 2000 .

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (095) 203-88-16 Fax: (095) 202-42-24 E- Mail: todorov@iet.ru 1 Politico-economical developments of June 2005.................................................................................... 3 Budgetary and Fiscal Policy....................................................................................................................4 Monetary Policy in the Russian Federation............................................................................................. 7 Financial Markets..................................................................................................................................10 Investments in Real Economy...............................................................................................................20 Foreign Investments in Russian Economy.............................................................................................23 Real Economy: Factors and Trends.......................................................................................................27 Foreign trade..........................................................................................................................................30 Transferring of Educational Institutions of Primary and Secondary Vocational Level to Competence of the RF Subjects.......................................................... 33 Tax Amnesty Prospects in Russia..........................................................................................................35 Issues Considered at the Sessions of the RF Government on June 9 and 23......................................... 40 A Review of Economic Legislation in the Russian Federation in June 2005........................................ Politico-economical developments of June In June important cadre shakeup took place in natural monopolies. The annual meeting of Gazprom shareholders was held, where the head of the presidential administration and chairman of the board of directors D. Medvedev stated that no obstacles exist any longer for liberalization of the equity market of the monopoly. The state received the controlling stake in Gazprom, and this opens the way to lifting all restrictions to circulation of the societys shares. According to him, the process of liberalization of the companys equity market will be completed by the end of this year. To this effect, it is necessary to make amendments to the law on gas supply and adopt a number of subordinate acts.

According to the company chairman A. Miller, Gazprom is interested in liberalization of the equity market as soon as possible, and it may happen even before completion of paying by Rosneftegaz 10,74% of Gazprom shares.

Recall that the necessity to consolidate the controlling Gazprom stake directly from the state, paying money to Gazprom subsidiaries, served a substantiation for various schemes, that allow to include in it "Yuganskneftegaz, thus getting control over its financial flows. However, despite Putins last year statements, Rosneft head officers I. Sechin and S. Bogdanchikov could block that process on the top level, following which the state decided to redeem 10,74% Gazprom shares (for $7.11 bn), which it needs to receive the controlling stake. Those papers are to be acquired by the stateowned company Rosneftegaz, whereto the state placed 100% Rosneft shares. But Rosneftegaz has no means to pay Gazprom shares. Its still not clear what would be a collateral for credit: Gazprom or Rosneft shares, and who will provide it. This scheme of money moving from pocket-to-pocket is undoubtedly advantageous to the minority shareholders of Gazprombank and Gazfond (the two other subsidiaries Gazprominvestholding and Gazprom Finance BV 100% Gazprom daughters), and also to managers of the whole four structures. Hypothetically, Gazprom has a chance to accomplish an acquisition of Rosneft, but, considering that it was only in the last minute that its managers could block an attempt of introducing into its board I. Sechins proteges I. Shuvalov and S. Oganesyan, its hardly possible.

As a consequence of the accidence with oil wagonage in Tver oblast, [highlighted by TV channels nearly as the most important event of the month, G. Fadeev the president of the JSC RUSSIAN RAILWAYS - was forced to resign. But he was appointed a deputy of M. Fradkov, which may well be regarded as an honorable resignation.

Debating of Mays blackout, in consequence of which the half of Moscow and four neighboring oblasts were left without electricity, continued in June. When giving a TV interview, V. Putin accused the Mosenergo management of cynicism (A. Evstafiev offered to raise tariffs for collection of fund for re-equipment, notwithstanding the fact that Mosenergo is a profitable company) and poor qualification, following which A. Evstafiev had to resign (a professional power engineer, the former premier of Bashkiria, A. Kopsov, was appointed in place of him). As a result of monthly thinking, A. Chubais offered to introduce corrections in plans of power industry reforming. He offers to expand FSK UES.

Now it is 100% daughter of RAO UES, but according to the power reform plan, the state will have in it a 75% share. All transmission networks of 220 and above kV was to be transferred under the control of that company. But this time Chubais said that all the networks with 110 kV voltage and higher are to be under control of FSK. Thus, FSK will become many times as large due to reduction of the number of regional power companies. It is unlikely that this will improve the management and investment process in power engineering, but, nonetheless, such decisions are not improbable (earlier RAO UES Russia offered such an approach).

As concerns the passed meeting of RAO UES shareholders, no principle decisions had been taken at it. The new board of directors of RAO again included the minority shareholders (S. Remes), who lost their place a year ago (big blocks of shares were accumulated by such financial industrial groups (FIG) as Gazprom, Interros, Evrazholding, SUEK, Renova, Base element). The representatives of most aggressively oriented companies did not enter the Board, quite possible because rumors were about on the sale of big stakes by RAO, Evrazholding, and NRB.

In June an event took place organized by Single Russia the forum Our Chance in Conditions of Raw-Material Economy. The forum was attended by the vice-premier A. Zhukov, deputy minister of finance S. Shatalov, Head of the Presidential Experts` Directorate A. Dvorkovich. In his word of salu tation V. Putin expressed the hope that the forum participants will bring constructive proposals. It should be said that the head of the expert council of Delovaya Rossiya is A. Danilov-Danilyan, a predecessor of A. Dvorkovich. Slashing criticism against the governments economic policy was heard at the forum. In main forum requirements the government was accused of inactivity, because of which economic problems are building up, which, in turn may lead to losing of national sovereignty. The requirement was to start spending the Stabilization fund for investment purposes, refuse of surplus budget, to relief from import duties processing equipment and grant tax benefits to entrepreneurs who organize new productions. So that the cabinet was not left in the grip of false liberalism, the anonymous authors of the document require to create the Supreme Economic Council led by Putin. The head of Single Russia B. Gryzlov was not so strict in his estimates and criticized the shortage of funds in the draft budget for construction of roads, development of mortgage and leasing agricultural equipment.

In parallel with that, the executive power representatives no less harshly rejected those requirements. It should be noted that by far not for the first time Single Russia puts forward left-wing populist requirements, and to support at the same time in parliament different, including liberal initiatives of the government. It seems that with approaching of elective campaign populist initiatives concerning the budgetary funds in favor of right projects will be mounting, associating itself with left-wing opposition. It is indicative that in June G. Gref stated that there was the need to put off the reform of educational, heal care and pension system, indistinctly saying something about absence of money. The priorities of electoral tasks, similizing by high officials even to maintaining sovereignty, will undoubtedly be intensified by 2007. In addition, not less serious interests are behind retaining of the current economic block of the government and todays procedure of allocation of investment resources.

It is not by chance that last edinorossy attempts to influence on the economic block of the government remain unsuccessful.

In June, formalization of the expected changes in the party of D. Rogozin Rodina took place.

Having started as a political technology project of Kremlin for splitting off electorate the left-wing electorate from KPRF, underwent the split of Rogozin and Glaziev supporters, the party Rodina, starting from the new year, gave more and more grounds for concern of the presidential administration. Achieving success at regional elections, Rodina attracted considerable financial and regional resources. It refused to function in the local niche (assigned for him) of manipulated nationalists, intimidating the West and domestic intellectuals. D. Rogozin refused to sign the well-known antiSemitic letter, and in June he openly announced that it was a provocation organized by the presidential administration. At June congress Rogozin positioned his party as socio- patriotic, he announced about an intention to enter Socintern (among the guests of the congress there was aged G. Schmidt) and preparing national liberation revolution. According to Rogozin, it is necessary to overthrow the ruling alliance of corrupted bureaucracy and oligarchy. Rogozin put forward classical left-wing populist requirements, but added them with democratic program requirements of democratic elections, judicial and mass-media reform, securing equality before law, cancellation of censorship etc.

Rogozin suggested to decide the question of property via one time payment of compensatory tax by the owners of enterprises who privatize them with abuse of law (particularly, the shares-for-loans auctions were mentioned). In all specifity of Rogozin personality, one cannot but admit his undeniable political gift and an aptitude to ideological maneuver. In conditions of right wing crisis his chances for leadership in opposition are rather favorable.

S. Zhavoronkov Budgetary and Fiscal Policy According to the preliminary data on execution of the RF federal budget in the period between January and May 2005, the federal budget revenues accounted for 26.85% of GDP, the federal budget expenditures accounted for 16.37% of GDP, and the federal budget surplus was 10.48% of GDP. In the period between January and April 2005, the RF consolidated budget revenues accounted for 40.8% of GDP, the RF consolidated budget expenditures accounted for 27.1% of GDP, and the budget surplus was 13.7% of GDP.

As of June 1, 2005 the value of the RF Stabilization Fund totaled 954,5 bln rubles. It means that the RF Stabilization Fund received 96,5 bln rubles in April.

State Budget PositionAccording to the preliminary estimation of budget execution by cash in the period between January and May 2005 made by the RF Ministry of Finance, the federal budget was executed by revenue to the amount of 1 967,92 bln rubles ( 26.85% of GDP ), and by expenditure, 1 199,64 bln rubles ( 16.37% of GDP ). The federal budget surplus amounted to 768,27 bln rubles ( 10.48% of GDP ). It should be noted that the volume of revenues to the federal budget in 2005 exceeds considerably that of the similar period in 2004, which was 1 229,56 bln rubles ( 20.6% of GDP ). The federal budget expenditures in the period between January and May 2005 also grew against the similar parameter in 2004 ( 974,24 bln rubles or 16.3% of GDP ). The budget surplus over the period under review also exceeds considerably the similar parameter in 2004 ( 255,32 bln rubles or 4.3% of GDP ).

In April and May 2005, the volume of federal budget revenues amounted to 390,73 bln rubles and 380,83 bln rubles respectively, which accounts for 26.4% and 23.95% of the monthly GDP. In April and May 2005, the Federal budget expenditures amounted to 294,6 bln rubles ( 19.91% of GDP ) and 234,01 bln rubles ( 14.72% of GDP ) respectively, the federal budget surplus was 96,1 bln rubles and 146,8 bln rubles respectively, which accounts for 6.49% and 9.23% of GDP respectively.

Hence it should be noted that the RF budget revenues and expenditures continued to decrease both by absolute value and by percent of GDP in May as compared to April.

The structure of budget revenues inflow over the period under review is shown in Table 1.

Table 1.

Revenues of the RF Federal Budget in the Period Between January and May ( as % of GDP, by Cash Execution ) Cash Execution March April May Taxes and other payments adminis16.02 % 15.81 % 15.22 % tered by the Federal Tax Service Taxes and payments administered by 9.04 % 9.32 % 9.40 % the Federal Customs Service Revenues administered by the Federal Agency for Federal Property Manage- 0.20 % 0.20 % 0.19 % ment Federal budget revenues, administered 2.83 % 2.33 % 2.04 % by other federal agencies Total revenues 28.10 % 27.66 % 26.85 % According to Table 1, most of the budget revenues generated before May 2005 were represented by taxes and other payments administered by the Federal Tax Service ( 15.22% ), as well as taxes and payments administered by the Federal Customs Service ( 9.49% ). Other tax revenues were represented by the revenues administered by the Federal Agency for Federal Property Management, and the RF federal budget revenues administered by other federal agencies. Total amount of these revenues accounted for nearly 2.23% of GDP. Hence tax revenues at the end of May 2005 slightly decreased as compared to the similar parameter calculated foe the end of April of the current year.

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