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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES July 2006 MONTHLY BULLETIN Moscow 2006 Institute for the Economy in Transition, 1996.

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (495) 203-88-16 Fax: (495) 202-42-24 E- Mail: todorov@iet.ru 1 Political and Economical Results in July 2006........................................................................................3 Budgetary and Fiscal Policy....................................................................................................................6 Monetary Policy in the Russian Federation in June 2006........................................................................9 Financial Markets..................................................................................................................................11 Real Economy Sector: Trends and Factors............................................................................................20 Industrial Environment in Russia in July 2006......................................................................................23 The National Project on Agricultural Industry Development: implementation status and outlooks.....24 Foreign Trade........................................................................................................................................32 New Instruments for Innovation Activity Development....................................................................... 35 G-8 Summits Resolution on Education for Innovative Societies in the 21st Century and Russian Education System Reform.................................................................37 Issues Considered at the Meetings of the Government of the Russian Federation held on July 6, 13, 20, 2006................................................................................................39 Review of Budget Legislation of the Russian Federation in July 2006...................................................Review of Regulatory Documents Concerning Taxation Issued in the Period Between June and July 2006............................................................................................A Review of the Russian economic laws issued in July 2006............................................................... Political and Economical Results in July 2006.

The G-8 Summit at Saint Petersburg became the key event in July 2006, which have intensively been prepared for the last six months. There were several important issues about the Summit that should be focused on. The first one is the Russias status in this club of developed democratic countries, i.e. Russias membership which was found to be questionable after the a series of statutory innovations issued in the period between 2004 and 2005, namely revocation of the governors election system thereby actual appointment of members of the upper Chamber of the Parliament by President Putin, transition to a proportional election system under a non-transparent system of registration of political parties, introduction of an electronic head count system without the right to manual recalculation, etc. Second, the United States was expected to demonstrate its principled stand towards Russia, above all, with regard to the possibility of Russias accession to the WTO. Third, the key issue of the Summit, discussion on energy safety, was expected to take place, which is vital under the circumstances of boosted prices of hydrocarbons over the last few years, and Russias role as one of the top supplies of these resources to the world market.

The heads of the G-8 states did their best to intentionally avoid any straightforward statements concerning the issues offered by Russia as a host, namely global energy safety, virulent disease control, and education, s well as terrorism and crisis spots. The similar neutral, insignificant rhetoric was provided in their speeches, including the issue of democracy in Russia. In this respect, some observers advance an opinion that the fact itself that the Summit went smoothly till its end can be considered as success for Russia.

Basically, it is not worth while to find reasons why the G-8 participants were reluctant to publicly discuss the issues of democracy in Russia because otherwise the idea of Summit would have been pointless, besides, there is logic behind the will to retain Russias status within international organizations and clubs to be able to continue the dialogue with the Russian political authorities. However, regardless of the Kremlins stand, official representatives of the United States and Great Britain met with representatives of the Russian political opposition, while President Bush met with representatives of the non-Kremlin democratic society. This is, however, the only success that was attained at the G-8 Summit in case someone would consider the political component of the Summit as success.

The negotiations on Russias accession to the WTO ended all-around failure. Another round of negotiations with the United States didnt pay off, let alone the Republic of Georgia announced withdrawal of its signature from the protocol with Russia giving consent to Russias accession to the WTO, until Russia withdraws its military forces from the territory of the Republic of Georgia, as well as the administrative embargo imposed on trade of Georgian goods on the territory of Russia1. Neither did Russia reach success on the negotiations on energy security. It is well-known that Russian political authorities demand in their rhetoric about two-direction movement that the G-8 member countries, and, above all, European ones should provide Russian monopolies with unconditional access to their markets, while at the same time Russia not only fails to pursue the same policy in respect to the European companies, but it is also heading opposite direction ( an illustrative example, for instance, in the recently adopted Federal Law On Export of Gas, described below ). Russia is expected to ratify the Energy Charter, the key component of which to assume sovereign obligations for investment protection, which Russian authorities cant accept, because it would not allow them to apply the techniques of uncontrolled enrichment, a prominent example of which is the YUKOS case.

In fact, according to President Putins rhetoric before, during and after the G-8 Summit (from threats to withdraw from the negotiations on the accession to WTO, supply Russian energy sources via unknown routs other than Europe, to personal remarks addressed to R. Cheney and T. Blair ), it is evident that he has been saying goodbye to his hopes for such ambitious plans as seeing Russia as a full-fledged member of the G-8.

In 2004, the newly elected president of the Republic of Georgia Saakashvili M. gave, as goodwill gesture, his consent to sigh the protocol stating that the Republic of Georgia has given its consent to Russias accession to the WTO, but the Protocol was amended with clauses on withdrawal of Russian military forces from the territory of the Republic of Georgia. Most international law experts incline to an opinion that any country may withdraw its signature from the protocol of consent prior to nominees accession to the WTO.

The Federal Law On Export of Gas was passed the second and third readings at the State Duma of the Russian Federation. The draft law entitles Gazprom or its affiliate with an exclusive right to export gas and shall be applicable to gas produced at all types of hydrocarbon fields and transported in gaseous or condensed state ( subject to export of gas produced according to the Production-Sharing Agreement ( PSA ) entered into prior to the entry of the law into force ). This law, which is unfeatured for non-professionals, means substantial losses for oil companies, petrochemical enterprises and independent gas producers, which will have to sell their gas to Gazprom at the monopoly price. Being a pure example of administrative acquisition of profit, there is no economic logic that this law may follow. It is illustrative that the draft law has been adopted by Yedinaya Rossiya ( United Russia ruling political party ) against a series ministries and the Government Office, still the fight around this law is not over yet, however, it will not suffer drastic changes Gazproms administrative power beats that of the oil companies managers.

Provisions of the Federal Law on turnover of alcohol products adopted at the end of the previous year came into force on July 1, 2006, which provide for introduction of the so called Unified Public Computer-Aided Information System for Alcohol Products Accounting (UPCAISAPA ) and a ban on sales of alcohol products with old excise stamps attached. However, the Provision On Approval of the Procedure for Functioning of the UPCAISAPA has not been adopted to date, the said system is out of operation, and excise stamps are in extremely short supply. Russia has encountered with a manmade total deficit of alcohol products, and, above all, high-quality imported ones. The requests made by manufacturers and importers to switch the UPCAISAPA into a test mode until the existing bugs are troubleshot have not been heard, since the system was developed, introduced, and money are collected, by Atlas Research and Technology Center, a state unitary enterprise established under the Federal Security Service of Russia, and its private subcontractors. Though the notorious Alcohol Abuse Prevention Campaign that was launched in the USSR hit really hard the prestige of the country leaders at that time, the inertia of the current Russian Government means that such trivial matters dont bother it.

In July 2006, Yedinaya Rossiya continued, under publicly announced support of President Putin, to adopt a set of laws and regulations concerning the reform of the election system in the Russian Federation, which was started as early as in 2004. At that time, a draft law on abolishment of the against all candidates column at elections at all levels was adopted. This draft law was necessitated because of a ruling of the Constitutional Court which acknowledged this column as a full-fledged participant of the election process, which may be agitated for, and an election fund may be built up in this respect.

The against all candidates column normally accounts for up to 10% of total votes at regional elections ( and even more under the majority election system ) thus being able to become a significant alternative during presidential elections as well. In addition, amendments providing for restoration of early voting ( one of the main mechanisms used for election engineering against which no adequate antidote has been developed to date ) and allowing for refusal of registration of a candidate on the ground of extremist rhetoric, i.e. folk-leasing on a representative of public authorities and even inducement to engage in extremist actions. The draft law was unexpectedly opposed by Chairman of the Central Election Committee Veshniakov A., who stated that it would eliminate political competition and turn elections into a slapstick comedy. It should be noted that the law enforcement practice which as been existing since winter 2005, and, above all, spring 2006, actually outstrips the applicable law, imposes actual ban on active election campaign by all entities involved in the political process, subject to Yedinaya Rossiya, under a threat of getting excluded from elections. In addition, amendments to the Federal Law On Prevention of Extremist Activity passed the second reading at the State Duma, which expand considerably the definition of extremism in the said spirit.

All things considered, there are several conclusions that should be made. First, Yedinaya Rossiya has terribly been afraid of the Russian electorate, because it has been tightening as much as it can the laws that have already been customized to match its needs, which means resignation of normal election procedures and restoration of the system of peoples democracy with allowance for the share of votes, which has been preset and approved by the political administration, for at least one spoiler list designed to collect protest and relatively protest votes. In this respect, it should be recalled that Yedinaya Rossiya often suffered defeat at the latest cycle of governors and legislative body elections in 2004, which were regulated under the old legislation. Second, which cant escape some bureaucrats, peoples democracy means respective zero legitimacy of the elected as well, which may result in serious political and economical costs for the elite itself which has been doing its best to integrate at least into the existing global consumption and saving system.

With regard to the political parties, two significant events are worth mentioning in July 2006. Drugaya Rissiya (Another Russia) political party held a two-day forum on the threshold of the G-Summit, which was positioned as a dialogue place for the opposition and presentation event. The forum was attended by the politicians considering by the Kremlin as most unfavorable and serious adversaries, namely Limonov E., Kasparov G., Kasianov M.. Some of the participants, including PM Glaziev S. and regional public officials, were apprehended, others got beaten by unidentified hooligans or law enforcement authorities, which demonstrated that there is no big difference between the two definitions. Though most of the political parties refused to attend the forum thus demonstrating their respect and loyalty to the ruling authorities, some well-known members of the Communist Party of the Russian Federation, the Right Wing Union ( aka SPS ), Yabloko, Rodina ( aka Motherland ) attended the forum. It should therefore be admitted that Drugaya Rissiya managed to attain one big result by having marked a division line between in-house oppositionists and real opposition.

However, the Drugaya Rissiyas forum ended with the least effective outcomes. Not only did it fail to discuss substantial issues such as building up of a unified ideological base for the political opposition, creating a policy to be pursued relative to the existing political parties and participation in the election process, it also failed to create a mechanism for being able to make such decisions.

the Russian Party of Life headed by Mironov S.

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