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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES July 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 On the Course of Reforms in June-July 2005......................................................................................... 3 Budgetary and Fiscal Policy.................................................................................................................... 4 Monetary Policy in the Russian Federation............................................................................................. 7 Financial Markets.................................................................................................................................... 9 Real Economy Sector: Trends and Factors........................................................................................... 19 Oil and Gas Sector................................................................................................................................. 21 Administrative reform in the agrifood sector: results of the first year.................................................. 26 Foreign trade......................................................................................................................................... 29 Development of Modern Forms of Integration of Science and Education............................................ 32 Sessions of the RF Government of July 7 and 14, 2005....................................................................... 34 Review of the Economic Laws for July 2005....................................................................................... 36 2 On the Course of Reforms in June-July 2005 June and July continued (started from the end of 2003) a number of months free of reforms. Only adoption of long-suffering law of special economic zones and the burst of activity in the sphere of science reform could be considered today, to some extent, as reforms. Once again the medium-term draft program of the Government was returned to finishing. The rest of activities of the legislative and executive power had a routine character.

It is rather hard to write, last months, in Russia, about the reforms in the sphere of social and economic policies too few actions of the government and legislators can be regarded as reforms. In fact, the reforms are stopped in such spheres as education and the health care, less frequently are talks about the reform of judicial and law-enforcement systems, with great difficulties the reform is being conducted in the sphere of management of natural resources (considering the Water and Forestry Codes in new wordings are constantly went over, by doing so, amendments are introduced that distort the reform ideology itself).

The administrative reform is advancing very slowly (if discussing the prepared plan of actions in the sphere of administrative reform may at all be called advancing a reform). And the above mentioned are most important of the reforms. Also, practically no progress is seen for more than twenty of the already started reforms (war against poverty, the reform of the housing and utilities sector, electrical energy industry, gas industry, railway transport, traffic engineering, restructuring the budget network, developing civil society institutions, etc.).

Against this background, adoption of the long-suffering law of special economic areas, that (strictly speaking) can hardly be considered a reform, looks by far a reforming deed. Nonetheless, adoption of this law is surely a positive event for the economy. The two types of zones provided in the law are to solve the two important tasks developing science-intensive production clusters, stimulating small innovation business (technical-promotional zones) and creating modern industrial potential in underdeveloped regions (industrial-production zones). In addition, how the law will be enforced will be an indicator of readiness (as concerns competence and professionalism) of the state to play the more active part in boosting investment processes, in co-operation with business within the frame of private-government partnership.

The idea of creation in Russia of special tourist-recreational economic zones is being intensively discussed now, with even appropriate amendments to be made to the legislation. If, the right system of incentives for private business is formed during the development of this idea, it may be hoped that Russia will considerably develop its tourist potential in a number of regions of Russia.

While adoption of the law of special economic zones by all means may be considered as a positive event in the socio-economic sphere, the situation with the Forestry Code and the reform of science is hardly be called positive.

As before, the Forestry Code is far from being adopted by the State Duma, but a number of amendments to it had been stated which significantly distorted its ideology. Among such amendments is introducing competitive assignment of forest plots in addition to auctions (which, in absence of significant socio-economic benefits, will give freedom for corruption), an actual prohibition against private property for forest areas (up to now the private property for forest was present in the text, but in order it is effected a separate law is to be passed), prohibition against an access to forestry-based and timber industry activities of foreigners.

If those and similar amendments have been approved, an economic effect from introducing the new Forestry Code will be minimized, with considerable costs to be born for the reform of the system of state administration in the timber sector provided for by the Code. It is obvious, however, that with such costs we are having a negative economic effect, that discredits another, not so bad reform.

Next burst of activity happened in the reform of science. This time discussing the problems of Russian science had the formal cause reviewing at the session of the Government the Strategy of science developing prepared by the Ministry for Education and Science. The draft strategy was a clearcut compromise, as was agreed upon with the Russian Academy of Science (major subject to be reformed), and thus, in a very broad sense, could suit neither of the parties. Nonetheless, debates were held not between the Ministry for Education and Science and RAS, who agreed the document, but between the Ministry for Education and Science and the Ministry of Economic Development and Trade of Russia, which rightly stressed an excessively (to the detriment of efficiency) compromise character of the document, dragged out implementation period, absence of specifics in the document.

It should be noted that RAS had to side with the Ministry for Education and Science even though to keep the compromise that had been reached. Though the document was generally approved, it rather became not a breakthrough in the sphere of science reform, but another undisputed question.

At the background of slackness of reforms of federal level considerable activation in the regions is observed. This is caused by both subjective (because of introducing governor appointments, regions are to demonstrate to the center their mobility, activity, professionalism and other positive qualities), and objective circumstances. The major objective factor is real necessity of reforms in a number of spheres of socio-economic activity. And if problems are not solved at a federal level, there will be regions that recapture the initiative.

A great number of all kinds of forums, congresses and conferences are observed held by regional powers on general business and federal themes. The number of regions is increased, developing or prepared to develop the full-fledged regional strategies, and this is, no doubt, one of most positive events for last half year. The only thing that may hamper it the federal center initiatives concerning creation of the strategy of territorial development of Russia. As of today, the ideas and decisions comprising the strategy concept are capable rather to disrupt regions incentives to development, than to strengthen them.

In conclusion, it is to be said, in particular, on the draft medium-term program (the more so, it will soon be a year since the time an instruction on its development was issued). The Governments medium-term program he heads all the records as of duration of its finishing the former government took half a year for this process (and then it felt as if it was a long period), while the present government took a year already and the end of the task is not yet in sight (a while ago the document was again returned to finishing to the Ministry of Economic Development and Trade of Russia). The country continues to live without a clear cut plan of actions even for a medium-term perspective, and it looks like it really reflects the situation in the power in the last year.

Fomichev O.V.

Budgetary and Fiscal Policy According to the preliminary data on execution of the RF federal budget in the period between January and June 2005, the federal budget revenues accounted for 26.06% of GDP, the federal budget expenditures accounted for 15.80% of GDP, and the federal budget surplus was 10.26% of GDP. In the period between January and May 2005, the RF consolidated budget revenues accounted for 38.8% of GDP, the RF consolidated budget expenditures accounted for 26.5% of GDP, and the budget surplus was 12.3% of GDP.

As of July 1, 2005 the value of the RF Stabilization Fund totaled 617,9 bln rubles against 954.5 bln rubles as of June 2005. Such a substantial reduction of the Stabilization Fund was caused by withdrawals to the amount of 430,1 bln rubles in repayment of the RF foreign debt to the Paris Club creditors in April.

State Budget Position According to the preliminary estimation of budget execution by cash in the period between January and June 2005 made by the RF Ministry of Finance, the federal budget was executed to the amount of 2 383,11 bln rubles (26.06% of GDP ) in terms of revenues, and 1 444,73 bln rubles (15.80% of GDP ) in terms of expenditures. The federal budget surplus amounted to 938,38 bln rubles (10.26% of GDP ). It should be noted that the volume of revenues to the federal budget in 2005 exceeds considerably that in the similar period in 2004, which was 1 538,70 bln rubles ( 20.6% of GDP ). The federal budget expenditures in the period between January and June 2005 also grew against the similar parameter in 2004 in real terms, but slightly reduced in terms of GDP shares (1 184,60 bln rubles or Revenue and expenditure items of the RF consolidated budget were not analyzed due to changes in classification of budget revenue and expenditure items as well as lack of official information on execution of the RF consolidated budget in 2005.

15.9% of GDP in 2004 ). The budget surplus over the period under review also exceeds considerably the similar parameter in 2004 (354,10 bln rubles or 4.7% of GDP ).

In May and June 2005, the volume of federal budget revenues amounted to 379,71 bln rubles and 416,32 bln rubles respectively, which accounts for 23.61% and 25,12% of the monthly GDP. In April and May 2005, the Federal budget expenditures amounted to 262,85 bln rubles ( 16.35% of GDP ) and 216,17 bln rubles ( 13.05% of GDP ) respectively, the federal budget surplus was 116,86 bln rubles and 200,15 bln rubles respectively, which accounts for 7.27% and 12.08% of GDP respectively.

Hence it should be noted that the RF budget revenues increased, while budget expenditures were reduced both in real terms and percentage-wise to GDP in June as compared to May.

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

Table Revenues of the RF Federal Budget in the Period Between January and June 2005 (as % of GDP, by Cash Execution) Cash Execution April May June Taxes and other payments adminis13.98% 12.87% 12.27% tered by the Federal Tax Service Taxes and payments administered by 9.31% 9.59% 10.24% the Federal Customs Service Revenues administered by the Federal Agency for Federal Property Manage- 0.16% 0.18% 0.28% ment Federal budget revenues, administered 0.82% 0.97% 2.33% by other federal agencies Total revenues 24.27% 23.61% 25.12% According to Table 1, most of the budget revenues generated in June 2005 were represented by taxes and other payments administered by the Federal Tax Service ( 12.27% ), as well as taxes and payments administered by the Federal Customs Service ( 10.24% ). 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 2.61% of GDP. Hence tax revenues at the end of June 2005 slightly increased as compared to the similar parameter calculated foe the end of May of the current year.

The RF Ministry of Finances preliminary data on financing of the RF federal budget expenditures in the period between January and June 2005 are shown in Table 2.

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