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Oil Prices in the First Quarter of 2006 and Average prices for Urals oil, USD per barrelTP F FPT 2006 January 59,18 49,February 56,37 53,March 57,53 58,3) One of the basic reasons for reduction of the share in GDP of VAT proceeds to the federal budget was the decreased level of VAT for goods and services, provided on the RF territory. It could be explained to some extent by the transfer to the notification procedure of VAT refund to exporters, introduced from January 1, 2007. As a result, the procedure of VAT refund has been considerably accelerated. Under the former VAT refund procedure, in the first quarter of 2007 the refund would be provided to the taxpayers, who made export operations in 2006, and the majority of taxpayers, who exported their goods or services in the first PT TP Those prices are applied for tax purposes.

quarter of 2007 (or even in 2006), would have obtained the refund later. With the new VAT refund procedure the majority of taxpayers of both categories have been refunded in the first quarter of 2007, which has resulted in a decrease of that tax proceeds.

As per results of January-April of 2007, the expenditures and revenues of the RF consolidated budget accounted to 33.1 per cent and 23.8 per cent of GDP accordingly. According to Table 6, one can see that those indicators are much lower than the relevant indicators of 2006 (36.5 per cent and 25.0 per cent of GDP accordingly). The surplus of the RF consolidated budget in January-April of 2007 made 9.3 per cent of GDP, what is also lower than the indicator of 2006 (11.5 per cent of GDP). According to the RF Treasury information on the budget execution of the extended RF government within January-April of 2007, the volume of budget revenues made 37.5 per cent of GDP, expenditures 27.4 per cent of GDP, while the surplus accounted to 10.1 per cent of GDP.

As of June 1, 2007 the volume of assets of the RF Stabilization Fund made RUR 3 026,7 bln, as opposed to RUR 2 920,5 bln on May 1, 2007, what makes 10.9 per cent and 10.6 per cent of GDP in annual terms accordingly.

Table 6.

Execution of the RF Consolidated Budget in 2006 2007 (in per cent of GDP) I II III IV V VI VII VIII IX X XI XII Revenues 36,2 34,4 37,9 36,5 37,2 36,8 36,6 35,4 35,4 35,1 34,8 35,Expenditures 17,6 21,0 24,2 25,0 24,7 25,5 25,3 25,1 24,8 24,7 25,1 27,Deficit/ 18,7 13,4 13,6 11,5 12,5 11,3 11,3 11,4 10,6 10,4 10,7 7,Surplus I II III IV V VI VII VIII IX X XI XII Revenues 33,30,9 29,6 32,Expenditures 23,14,2 19,0 22,Deficit/ 16,7 10,6 10,3 9,Surplus Source: RF Ministry of Finance, IET estimates Major developments in the budgetary sphere.

One of the major events of June was the international Economic Forum held in St. Petersburg. The most significant statements in regard to fiscal sphere were made at the economic forum by Alexei Kudrin, the Minister of Finance, at a meeting with representatives of foreign businesses.

The Minister noted that the federal budget of the Russian Federation in 2008 will be balanced in case the price of oil will be maintained at the level of 45 dollars per barrel. With that level of oil price, the deficit of the RF budget will not exceed 1per cent of GDP (the level, envisaged in the new version of the RF Budget Code). An increase of the deficit might be possible only if the oil price drops dramatically versus the estimated value, and in this case the need will arise to use the Reserve fund.

The Minister reminded, that in 2008 all revenues of the RF budget were designated as oil and non-oil proceeds, and the Stabilization Fund will be transformed into Reserve Fund for National Welfare.

Some oil and gas revenues will be used to finance current expenditures, but the volume of those resources will be gradually decreased in the period from 2008 to 2010 and will make 3.7 per cent of GDP from 2011.

Alexei Kudrin stressed that the measures are aimed at reducing risks to the economy. Alexei Kudrin has pointed out, that those measures are aimed at reduction of risks to the economy. According to the Head of the Ministry of Finance, in the next year, the external debt will reach the minimum level (within the last years) and account to 8.4per cent of GDP. He noted that the total share of the external debt and the private sector in the GDP is getting reduced. In 2000 that indicator made 50per cent of GDP, while in 2006 it was 30per cent of GDP. Thus, according to Mr. Kudrin, the situation in this sphere is getting more safe and stable.

The fact that the bill on the differentiation of the tax on mineral extraction (in regard to coal), submitted to the State Duma, should also be mentioned. S. Shatalov, Deputy Minister of Finance, noted that the RF government has provided provisional approval on the draft law, submitted by the Deputies, proposing differentiation of tax on natural resources extraction (in regard to coal) as to the conditions of production and the quality of the coal produced. The government supported the draft law, under condition that prior to the first reading it will be considerably improved, as there were many critical comments to that draft. The purpose of the amended law (according to its authors) is to create the economic conditions for implementation of the program for technical upgrading of coal-producing enterprises. The objectives of the program are to ensure up-to-date safety level of the miners labor, as well as to improve the competitiveness of coal as an energy source in the domestic market.

In the area of administration of that tax, the transfer from ad valorem tax to special tax rate on coal production. It is proposed to establish the rate of tax on coking coals in the amount of RUR 40 per 1 ton, while the rate for other coals RUR 9 rubles per 1 ton.

"Furthermore, adjustment indices will be applied to the special rate of tax on mineral extraction (indices will be applied with regard to geographical location, methane proportion and tendency to spontaneous combustion of coal layers). As noted in a memorandum to the draft law, further tax differentiation should be applied to certain mining regions, on the basis of a feasibility study, to address the large differences in geological and mining conditions, including labor safety.

.Kirillov, .Mamedov Monetary and Credit Policy In May of the current year inflation in the RF (+ 0.6 per cent) was sustained as compared with April and accelerated versus the relevant period of preceding year (+ 0.5 per cent). There were observed the speedy growth of foreign currency and gold reserves in the country, which have reached the volume of USD 405 bln, and the monetary base(+ 16.4 per cent). In June the RF Central Bank has decreased the rate of refinancing from 10.6 per sent to 10 per cent and published "Basic trends of consolidated monetary and credit policy for 2008.

In May the consumer price index has made 0.6 per cent (against 0.5 per cent in May 2006; see Fig.1).

Like in April, the utmost input in consumer prices growth in April was made by food stuffs. Their prices have been increased by 1 per cent per cent on average country-wide (as opposed to + 0.5 per cent in May of 2006). It should be noted that the explicit growth rate of food stuffs price in comparison with the previous year was based on the increased CPI in April and May like in the relevant period of 2006. The utmost growth of price was observed for vegetables and fruit (+ 7.8 per), grits and beans (+ 0.8 per cent), alcohol beverages (+ 0.5 per cent), bread and bakery products ( + 0.4 per cent). Some decrease in May of the current year was observed in prices for granulated sugar ( 0.1 per cent).

Upgrading of prices for commercial public services in May reached 0.5 per cent (+ 0.6 per cent in May of 2006). The utmost growth was observed in regard to health-care and resort services due to vocational season (+ 2.3 per cent). Besides, significant growth was observed in regard to public transport (by 1.4 per cent), foreign tourism (+1.1 per cent) and public services (+1 per cent). There was no decrease in any type of those services in May.

Non-food products have also grown in price in May; they have been raised by 0.4 per cent on average (+ 0.4 per cent in May of 2006). The growth of non-food products prices was caused mainly by the growth of prices for construction materials (+ 1.3 per cent) petrol (+ 0.9 per cent). It should be mentioned, that in May there was observed some decrease for audio-and video products (by 0.5 per cent).

The basic consumer price indexF4F in May 2007 made 0.3 per cent (versus the relevant period of preceding year in the amount of 0.4 per cent). According to the bulletin of approximation short-term estimates of the RF socio-economic indicators, published by IET, the CPI in May 2007 made 0.5 per cent.

Therefore, the basic growth index versus the relevant period of preceding year for consumer goods in the RF in the past months is the growth of price for non-food products.

With the new crop, those prices will be stabilized, which can reduce inflationary pressure. We should note, that the basic CPI, not reflected by seasonal factor, happened to be lower in June than in the same period of the previous year.

PT TP Basic index of consumer prices is an indicator of the inflation level without regard to seasonal price reduction (fruit and vegetable products) and to administrative measures (tariffs for government-regulated services, etc.). It is estimated by the RF Statistics Service The Growth Rate of the CPI in 2002 - 2007 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% T Source: RF Statistical Service Within May 2007 the volume of cash in circulation (in broad definitionTF FP) has been increased by RUR P T 752.4 (to RUR 5346.6 bln (+ 16.4%). The volume of monetary base in broad definition as of May 1, was RUR 4594.2 bln. Let as consider the dynamics of monetary base in broad definition by components.

In this background gold and foreign exchange reserves of the RF Central Bank have grown by 9.2 per cent and made RUR 403.2 billion in May. Within the first three weeks of June, they have been further increased by 0.4 per cent and reached the amount of USD 405 billion. The major part of incoming liquidity has been accumulated in the RF Stabilization Fund, the volume of which has reached as of June 1, 2007 RUR 3026,billion, or 10.5 per cent of GDP (plus 106.2 bln as compared with May 1, 2006). In comparison with the relevant period of the preceding year the volume of Stabilization Fund has grown by RUR 128.7 bln.

According to the information of the Federal Treasury, payments under external debt in May of the current year have made USD 267.4 million. The amount of USD 93.5 million was addressed to repayment of the external debt and USD 173.9 million was paid for the services thereof. Herewith, USD 44.9 million was million was spent to cover the debt of Russia, USD 36 million for the World Bank and EBRD loans, USD 112.3 million for loans raised upon bonds and USD 74.3 million for intergovernmental agreements.

Since June 19, the RF Central Bank refinancing rate has been lowered to 10%. Before that downgrading the refinancing rate made 10.5 per cent (See Fig. 3). It should be noted that this level of January 2007 was established after a decrease, made by the Bank of Russia from 11 %. At the same time, the rate of overnight credit has been decreased from 10,5 % to 10 %. Therefore, refinancing rate has been decreased for the second time in the current year. It should be reminded, that in 2006 the Bank of Russia has reduced the refinancing rate twice: since June 26 it was decreased from 12 % to 11.5 %, and since October 23 it was established at the level of 11%.

PT TP The RF monetary base in broad terms with no regard to the cash issued by the Bank of Russia and the balance of Compulsory Reserve Accounts on credit organizations in national currency, deposited in the Bank of Russia, taking into account the assets of correspondent accounts and bank deposits, allocated in the Bank of Russia..

Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2005 - 2007.

2910 2270 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Source: RF Central Bank Central Bank and CPI refinancing rate within 1999 2007.

140% 120% 100% 80% 60% 40% 20% 0% ( ) Source: RF Central Bank The decrease of refinancing rate apparently was aimed at the upgrading of the role of the interest rates in credit and monetary policy. In fact, the effective refinancing rate is far beyond the rate, which is applied for inter-bank credits, which makes the changes of refinancing rate ineffective to monetary and credit policy. Its should be noted, that the reduction of refinancing rate is performed in line with upgrading of the rates on deposits of credit organizations of the Central Bank, resulting in greater attractiveness to the banks, i.e., to sterilization of liquidity in the Bank of Russia billion rubles billion dollars 1-7.09.3-9.11.2-8.06.9-15.06.6-12.01.19-25.05.21-27.07.11-17.08.22-28.09.13-19.10.24-30.11.16-22.12.17-23.02.10-16.03.21-27.04.12-18.05.28.04-4.05.30.06-6.07.27.01-2.02.31.03-6.04.10.06.24.01.07.03.21.03.10.07.04.11.09.04.07.08.17.02.21.06.15.01.15.06.26.12.26.06.23.10.29.01.19.06.At the same time, the RF Central Bank is prudent in its approach to raising the interest rates, as this measure could lead to a further inflow of speculative capital and increase inflationary pressure.

In June, the Bank of Russia has published a draft of "Key directions of consolidated government monetary and credit policy for 2008". In that document the Bank of Russia has again clearly identified its primary objectives for 2007, one of them is inflation suppression (6 - 7% as of 2008 results, 5.5-6.5 % for 2009 and up to 5 to 6 % in 2010). As to the target for RUR index in real terms, the document envisages the range of changes from 0 % to 10 %. In our understanding of the document wording, the Bank of Russia enables to conduct monetary policy more effectively without trying to achieve two conflicting goals. Growth of monetary base in 2007, in narrow definition, in accordance with Central Bank forecast, will make 18.7 - 22.9 per cent. Foreign currency and gold reserves should account to USD 456 to 486 billion by the end of 2007.

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