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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES July 2003 MONTHLY BULLETIN Moscow 2003 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 On progress in reforms (July 2003)............................................................................................................... 3 The State of the Federal Budget.................................................................................................................... 4 Monetary and credit policy............................................................................................................................ 8 Financial markets......................................................................................................................................... 10 The real sector: factors and trends............................................................................................................... 19 The IET business survey: July 2003............................................................................................................ 21 Import substitution in Russian Federation between 1998-2002.................................................................. 22 Foreign trade................................................................................................................................................ 27 The government policy in the area of renewal of the research staff structure............................................. 30 The YUKOS case: an attempt of interpretation........................................................................................... 33 2 On progress in reforms (July 2003) President Putin signed a decree on main administrative reform measures, and the government created the respective commission. The Government has so far failed to adopt a new medium-term program. The Government abolished control over private individuals large spending and passed the law on lowering the VAT rate effective as of 2004.

The existing civil service system is characterized by a low efficiency and insufficient flexibility. Should it be retained, the implementation of other reforms may slowdown or even cease. The administrative reform guidelines in 2003 are the civil service reform, enhancement of efficiency of state property management, promotion of debureaucratization processes, and the environmental management reform.

In June 2003, President Putin signed a Decree that sets guidelines for civil service reform in 2003-04.

According to the Decree, the Government established a high-level commission on civil service reform chaired by Vice Prime-Minister B. Aleshin.

The division of powers between different tiers of government forms one of the key challenges in the administrative reform area. In July, President Putin signed the federal law On amending the Federal Law On fundamentals of organization of legislative (representative) and executive bodies of state power of Subjects of the Russian Federation.

Promotion of the tax reform forms one of the major missions of the Government. In late July, President signed the federal law On amendments to Section Two of the tax Code of the Russian Federation, amending some other statutes of the Russian Federation and recognizing invalid some other statutes of the Russian Federation submitted by the RF Government. The bill supplements the Tax Code of RF with a chapter The taxation system under implementation of production sharing agreements.

One of the key guidelines of the tax reform is refusal from an inefficient system of control over private individuals expenses. In July, President Putin signed the federal law On recognizing invalid of provisions of statutes of he Russian Federation in the part of tax control over private individuals expenses.

As well, in July President signed the federal law that provides a decrease in the VAT rate form the current 20 to 18% and indexation of excise rates, both effective as of 2004.

In July, the work on the property tax system reform was underway. In June 2003 the State Duma passed in the second reading the bill that provide amending the Tax Code with a chapter on corporate property tax, while a chapter of the Tax Code on inheritance and gift tax was passed in the first reading. The suggested principles of collection of the noted taxes should encourage an efficient property use.

The state of market infrastructure appears important for the state of the investment and business climate, which makes institutional and infrastructural reforms a priority. In 2003 the reformers focus has been on the national financial system and natural monopolies.

The work on the railway transportation reform was underway. In June, President signed two federal laws aimed at preventing unjustified federal budget expenditures and ensuring interests of the Russian Federation in the area of defense and security, as well as specification of single provisions of federal statutes.

In June 003, the governmental Resolution approved an action plan on reforming the electricity sector for 2003-2005.

In June 2003, the governmental Resolution approved a concept for development of the market for liquid gas for household needs; the concept is aimed at furthering liberalization of this particular market.

In June 2003, President Putin signed anew version of the federal law On communication. The new statute introduces provisions of direct effect that should ensure an openness of procedures of granting and cancellation of licenses in the communication area, operators accession to the general use network and their interaction.

In July, President Putin signed a Decree on organization of alternative military service.

The Government puts a strong emphasis on securing the economys openness and is keen to bring the national law in line with WTO procedures and standards as well as to promote liberalization in the foreign trade are, among other priorities.

In June, the State Duma passed in the second reading the bill On special protective, antidumping and compensatory measures in the course of importation of goods whose protective measures stipulated therein have been completely brought in line with the WTO procedures and standards.

The Government paid a serious attention to the social sphere, with major objectives for 2003 being the healthcare and educational reforms that at most determine the quality of human capital, and furthering the pension reform.

In the sphere of education, one of priorities is creation of conditions to ensure students conscious choice of their future profession and account of needs on the labor market: this should be accomplished particularly by introduction of a profile education in educational institutions that provide comprehensive secondary education. In June 2003 the Government passed a resolution on conducting such an experiment, whose purpose is to establish a system of a specialized training (profile education) in senior forms, testing new contents and forms of organization of the educational process.

As well, the work on development and adoption of statutes and other legal acts needed to further the pension reform was underway.

In June 003, the Government adopted a resolution regarding the insured persons eligibility for the choice of an investment portfolio (management company) in compliance with the federal law on investing funds to finance the savings part of the labor pension in RF. The Resolution sets, among other things, procedures of information of insured persons on the state of a special part of their individual account and their submission of applications on the choice of an investment portfolio (investment company).

The Government continued its work on organization of pension savings management. The respective Resolution passed in June 2003 approves a standard trust agreement between the Pension Fund of RF and a management company selected basing on tender procedures, among other legal acts.

O. Fomichev The State of the Federal Budget In the first five months of 2003, the revenues of the state budget (cash execution) made 21.3 % of GDP, while expenditures made 17.7 % of GDP (see Table 1). Therefore, the federal budget surplus made 3.6 % of GDP.

Table The monthly execution of the federal budget of the Russian Federation (in % of GDP1[1], in comparable prices).

IV`02 V`02 VI`02 VII`02 VIII`02 IX`02 X`02 XI`02 XII`02 I`03 II`03 III`03 IV03 VRevenues Corporate profit tax 1,9% 1,9% 1,7% 1,7% 1,7% 1,6% 1,7% 1,6% 1,6% 1,2% 1,1% 1,4% 1,5% 1,4% Personal income tax 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% VAT, special tax and excises 3,9% 3,6% 3,5% 3,5% 3,3% 3,2% 3,1% 3,1% 3,1% 2,4% 2,7% 2,8% 2,9% 2,9% Tax on foreign trade and 9,3% 9,3% 9,3% 9,3% 9,1% 9,0% 8,9% 8,9% 8,9% 11,2% 10,1% 9,9% 9,6% 9,6% foreign trade operations Other taxes, duties and 6,9% 7,0% 7,0% 7,0% 7,0% 6,9% 6,9% 6,9% 6,9% 8,5% 7,4% 7,2% 7,2% 7,2% payments Total- taxes and charges 2,4% 2,3% 2,3% 2,2% 2,1% 2,0% 2,0% 1,9% 2,0% 2,7% 2,7% 2,6% 2,4% 2,3% Non- tax revenues 3,0% 2,9% 2,9% 2,9% 2,8% 2,8% 2,8% 2,9% 3,0% 3,4% 3,4% 3,4% 3,5% 3,5% Revenues, total 8,7% 8,4% 1,8% 2,0% 2,0% 2,0% 2,1% 2,1% 2,1% 0,5% 1,7% 2,0% 2,2% 2,1% Expenditure 19,9% 19,6% 19,3% 19,4% 18,9% 18,5% 18,6% 18,5% 18,6% 18,8% 19,0% 19,4% 19,6% 19,4% Public administration 1,3% 1,2% 1,3% 1,4% 1,4% 1,4% 1,6% 1,4% 1,4% 17,5% 8,5% 1,3% 1,2% 1,7% National defense 21,2% 20,9% 20,6% 20,9% 20,4% 20,0% 20,2% 20,1% 20,1% 20,8% 20,6% 20,9% 21,0% 21,3% International activities Judicial power 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,5% 0,3% 0,3% 0,4% 0,4% 0,4% Law enforcement and 2,3% 2,4% 2,5% 2,5% 2,5% 2,4% 2,4% 2,5% 2,7% 1,5% 2,1% 2,6% 2,7% 2,7% security activities 1[1] Because of the estimated data on GDP, the indices may be subject to revision.

IV`02 V`02 VI`02 VII`02 VIII`02 IX`02 X`02 XI`02 XII`02 I`03 II`03 III`03 IV03 VFundamental research 0,4% 0,4% 0,4% 0,4% 0,3% 0,3% 0,3% 0,3% 0,3% -0,3% 0,0% 0,2% 0,2% 0,3% Services provided for the 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,2% 0,2% 0,2% 0,1% 0,1% 0,1% 0,2% 0,2% national economy Social services 1,2% 1,2% 1,3% 1,4% 1,4% 1,4% 1,4% 1,5% 1,7% 1,1% 1,4% 1,7% 1,7% 1,7% Servicing of public debt 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,3% 0,3% 0,1% 0,2% 0,2% 0,2% 0,3% Other expenditure 0,5% 0,6% 0,7% 0,8% 0,8% 0,8% 1,2% 1,3% 1,5% 0,2% 0,4% 0,5% 0,6% 0,7% Expenditure, total 5,3% 5,2% 5,2% 5,2% 5,1% 4,9% 5,5% 5,6% 5,6% 1,5% 1,8% 2,0% 2,3% 2,2% Loans, redemption exclusive 2,6% 2,5% 2,4% 2,3% 2,4% 2,4% 2,2% 2,0% 2,0% 1,7% 2,9% 3,0% 2,3% 2,1% Expenditure and loans, 3,9% 4,0% 4,0% 4,0% 3,9% 3,8% 3,9% 3,9% 3,8% 6,6% 7,1% 7,0% 7,0% 7,1% redemption exclusive Budget deficit (-) 16,9% 17,1% 17,2% 17,2% 17,1% 16,9% 17,8% 18,0% 18,7% 12,7% 16,4% 17,7% 17,7% 17,7% Domestic financing 4,3% 3,8% 3,4% 3,7% 3,3% 3,1% 2,4% 2,1% 1,4% 8,1% 4,2% 3,2% 3,3% 3,6% Other taxes, duties and -2,0% -1,8% -1,6% -1,8% -1,3% -1,2% -0,5% -0,2% 0,6% -6,6% -1,7% -1,0% -1,0% -0,5% payments Total- taxes and charges -2,3% -1,9% -1,8% -1,9% -1,9% -1,9% -1,9% -1,9% -2,0% -1,4% -2,5% -2,2% -2,3% -3,1% Non- tax revenues -4,3% -3,8% -3,4% -3,7% -3,3% -3,1% -2,4% -2,1% -1,4% -8,1% -4,2% -3,2% -3,3% -3,6% as % of GDP; ** the Unified Social Tax is included in tax revenues As compared with the figures registered in January through May of 2002, the budget revenues decreased by 0.4 p. p. of GDP in January through May of 2003, while expenditures increased by 0.6 p. p. and budget surplus respectively decreased by 0.2 p. p. At the same time, without UST the budgetary revenues increased by 0.8 p. p. of GDP and made 18.4 % of GDP.

VAT accounted for the major share of federal tax revenues 33.8 % of the total tax revenues what is by about 0.3 p.p. above the level observed in the respective period of 2002.

According to preliminary estimates, the cash execution of federal budget revenues made 20.5 % of GDP in January through May of 2003, what is by 0.1 p. p below the respective level observed in January through May of 2002. At the same time the cash execution of expenditures made 17.6 % of GDP (17.2 % of GDP in 2002); therefore, the surplus made up 2.9 % of GDP (3.4 % of GDP in 2002).

According to the preliminary estimates of the Finance Ministry, in terms of fulfilled funding2[2] the expenditures of the federal budget in January through May of 2003 made 19.2 % of GDP (see Table 2), while on June 1 of 2002 this indicator was at 18.9 % of GDP. As a result, the surplus of the federal budget in terms of fulfilled funding in the first four months of 2003 has also decreased by 0.3 p.p. in comparison with the figures registered in the respective period of 2002 and made 1.3 % of GDP.

Table 2.

The monthly execution of the federal budget of the Russian Federation (in % GDP, fulfilled funding).

IV`02 V`02 VI`02 VII`02 VIII`02 IX`02 X`02 XI`02 XII`02 I`03 II`03 III`03 IVTotal 21,2% 20,8% 20,5% 20,5% 20,5% 20,0% 20,1% 21,4% 21,2% 20,9% 21,0% 21,3% 20,5% Public administration 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,6% 0,6% 0,6% 0,6% 0,5% National defense 2,7% 2,7% 2,7% 2,7% 2,7% 2,6% 2,6% 2,5% 3,2% 3,3% 3,2% 3,1% 3,0% International activities 0,5% 0,4% 0,4% 0,4% 0,3% 0,3% 0,3% -0,4% 0,1% 0,1% 0,3% 0,3% 0,3% Judicial power 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% Law enforcement and 1,5% 1,5% 1,6% 1,9% 1,6% 1,6% 1,7% 1,9% 2,3% 2,3% 2,2% 2,2% 2,0% security activities 2[2] The execution of the budget in terms of fulfilled (actual) financing is equal to the sum of the funds transferred to managers of budget funds, while the cash execution of the budget is equal to the sum of funds spent by managers of funds (i.e. without account of funds remained on their accounts).

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