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RUSSIAN ECONOMY in trends and outlooks Table 20 (contd) Interest Balances in Budget Surplus Surplus Attracted Net Borrow- Net borBudget revenues expenses budget (deficit) (RUR (deficit) to borrowed ing to Reve- rowings (RUR thousand) to reve- accounts to thousand) revenues funds nues to surplus nues revenues Siberian Federal Superregion Republic of Altai 5 078 798 72 145 1.42 1.21 -1.30 2.75 0.90 -91.Republic of Buryatia 16 159 292 -813 537 -5.03 29.43 9.16 21.45 0.44 -181.Tyva Republic 6 630 974 -90 742 -1.37 2.56 1.49 1.07 0.43 -109.Republic of Khakassya 5 373 442 -101 136 -1.88 8.95 2.14 7.05 1.16 -113.Altai Krai 24 399 905 -83 150 -0.34 3.15 -0.97 4.12 0.57 283.Krasnoyarsk Krai 45 649 093 -2 756 977 -6.04 19.63 8.01 12.29 2.29 -132.Irkutsk Oblast 26 845 721 -740 695 -2.76 7.16 3.11 4.24 2.90 -112.Kemerovo Oblast 34 067 810 -155 646 -0.46 5.99 0.32 5.72 2.75 -70.Novosibirsk Oblast 26 481 996 -1 050 088 -3.97 140.89 10.68 133.20 2.24 -269.Omsk Oblast 15 934 118 -164 477 -1.03 35.97 2.64 34.84 0.66 -255.Tomsk Oblast 13 737 001 218 908 1.59 23.36 0.19 24.89 2.28 12.Chita Oblast 15 395 419 41 863 0.27 0.31 0.18 0.13 1.71 65.Aginsk Buryat 1 403 452 24 506 1.75 3.00 3.00 0.00 5.33 171.Autonomous Okrug Taimyr (Dolgan - Nentsi) Autonomous 4 018 959 -90 507 -2.25 0.00 0.00 0.00 10.60 0.Okrug Ust-Orda Buryat 2 341 159 9 244 0.39 1.07 0.41 0.66 1.23 103.Autonomous Okrug Evenki Autonomous 2 322 467 -1 025 234 -44.14 142.03 85.77 86.31 5.40 -194.Okrug Total 245 839 606 -6 705 523 -2.73 28.00 4.61 24.42 2.05 -169.Far Eastern Federal Superregion Republic of Sakha 35 634 038 -1 332 367 -3.74 10.10 3.07 7.24 2.45 -82.(Yakutia) Primorsky Krai 26 357 485 82 564 0.31 7.27 0.78 6.67 1.41 248.Khabarovsk Krai 23 444 193 -924 339 -3.94 7.41 1.76 5.79 1.83 -44.Amur Oblast 13 107 451 -177 051 -1.35 4.35 1.49 3.14 1.28 -110.Kamchatka Oblast 10 119 323 -281 694 -2.78 13.08 3.35 10.13 1.25 -120.Magadan Oblast 8 802 916 -49 323 -0.56 4.95 2.74 2.23 2.68 -489.Sakhalin Oblast 11 519 640 -221 605 -1.92 11.21 0.04 11.30 1.34 -2.Jewish Autonomous 3 447 347 91 710 2.66 0.75 -0.71 1.74 5.07 -26.Oblast Koryak Autonomous 1 895 213 -246 883 -13.03 16.20 12.09 4.71 0.87 -92.Okrug Chukotka Autonomous 9 496 626 822 782 8.66 2.63 2.47 0.16 12.21 28.Okrug Total 143 824 232 -2 236 206 -1.55 7.96 2.04 6.11 2.58 -131.Total Federal Super1 892 654 207 -44 116 461 -2.33 11.40 2.70 9.45 3.44 -115.regions Source: IET calculations on the basis of data provided by the RF Ministry of Finance Over 61 percent of the total deficit fell to the share of four entities of the Russian Federation: Moscow with 40,6 percent of the total deficit, or RUR 22.4 billion, the Khanty-Mansi Autonomous Okrug with 9.5 percent or RUR 5.2 billion, Moscow Oblast with 6.1 percent, or RUR 3.4 billion, and Krasonyarsk Krai with 5.0 percent, or RUR 2.8 billion. Consequently, it is the policy of debt management in Moscow that continues to have the greatest influence over the resulting picture of the balance of the regions' consolidated budget in Russia on the INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru whole. One year before, in 2001, Moscow implemented the budget with a surplus of RUR 8.billion, which accounted for more than 44 percent of the total surplus of the Russian regions' budget.

Changes in the Structure of the Accumulated Debt In 2002 the accumulated debt of the regions' consolidated budget grew RUR 51.1 billion, or 0.47 percent of the GDP. Practically all of the growth amount resulted from an increase of the internal debt (i.e., the debt nominated in Roubles). The external debt of regional consolidated budgets decreased RUR 4.2 billion and the internal debt grew RUR 55.3 billion.

Alongside with a growth of the debt on securities in the amount of RUR 17.7 billion, the debt on loans from the federal budget and on internal bank lending grew RUR 12.8 billion; the debt on other borrowings, including bank lending, grew RUR 20.1 billion.

The considerable increase in the debt of regional government agencies, supported by a growth in the offer of free credit funds, results from the surplus of the federal budget and lower credit risks. On the one hand, favourable market conditions allow to expand the volume of potentially effective investments into modernisation of public infrastructure facilities; on the other hand, it creates the obvious risks of preserving an inefficient structure of budget expenses coupled with providing funds for investment projects known to bring low returns and realised only in the selfish interests of representatives of regional government agencies.

Interest Expenses The total interest expenses of regional budgets reached RUR 178.9 billion, or 9.45 percent of the revenue side of the regional consolidated budget. Debt service costs were RUR 14.15 billion, or 0.75 percent of the revenue side of the consolidated budgets. In the Evenki Autonomous Okrug the costs of debt servicing reached a menacing value of 30.05 percent of the total revenues of the consolidated budget (including grants). In all other regions debt service costs did not exceed 3 percent of budgetary revenues.

Structure of Borrowings In 2002 the total borrowings of the consolidated regional budget were RUR 215.8 billion, including RUR 4.7 billion in external borrowings (received by: St.Petersburg, RUR 4.674 billion, and Kaliningrad, RUR 2.4 million). The total internal borrowings by regions and municipalities were RUR 211.1 billion. The largest borrowers were the Novosibirsk Oblast with RUR 37.3 billion, Moscow with RUR 33.3 billion, the Moscow Oblast with RUR 21.8 billion, St.-Petersburg with RUR 12.5 billion and Krasonyarsk Krai with RUR 9.0 billion.

The largest net borrowings to budget revenues ratio was observed in the regions with a pronounced budget deficit, namely: the Evenki Autonomous Okrug (in which the amount of net borrowings exceeded the amount of the revenue side of the budget, including transfers from the federal budget) with 85.8 percent, Koryak Autonomous Okrug with 12.1 percent, Novosibirsk Oblast with 10.7 percent and the Republic of Buryatia with 9.1 percent.

The largest net borrowers were: Moscow with RUR 17.5 billion, the Moscow Oblast with RUR 6.5 billion, Krasnodar Krai with RUR 3.7 billion, Novosibirsk Oblast with RUR 2.8 billion, Evenki Autonomous Okrug with RUR 2.0 billion, Khanty-Mansi Autonomous RUSSIAN ECONOMY in trends and outlooks Okrug with RUR 1.6 billion, Republic of Komi with RUR 1.5 billion, Voronezh Oblast with RUR 1.4 billion and Republic of Sakha (Yakutia) with RUR 1.0 billion.

The following borrowers take first place in reducing the accumulated debt: the YamalNentsi Autonomous Okrug: RUR 2.0 billion; St. Petersburg: RUR 0.7 billion; Tyumen Oblast: RUR 0.5 billion; Leningrad Oblast: RUR 0.5 billion; Tatarstan: RUR 0.4 billion; and, to smaller extents: the Yaroslavl, Ivanovo, Vologda, Pskov, Penza, Saratov, Sverdlovsk and Chelyabinsk Oblasts, the Altai Krai, Republic of Altai, Jewish Autonomous Oblast and KomiPermyak Autonomous Okrug.

Security issues accounted for 13.8 percent, loans from the federal budget for 11.9 percent and other borrowings (primarily, bank loans) for 74.2 percent in the total internal borrowings of the consolidated budget.

Table Structure of Internal Borrowings by Subnational Budgets in 2002 (percent).

Year 2002 Year Regional Consoli- Regional Municipal Regional Consoli- Regional Municipal dated Budget Budgets Budgets dated Budget Budgets Budgets Total (RUR mil194 001.7 148 424.1 89 726.2 100 803.9 77 432.0 54 113.lion) Security Issues 15.0 19.0 1.1 15.0 18.4 1.Loans from the 13.0 48.5 15.6 20.5 56.17.Budget Other Borrowings 72.0 64.6 51.4 69.4 61.1 41.Table S & P International Credit Rating Russia's Ratings on the International Scale Date of Assignment (Latest Name of Issuer In Foreign Currency / Forecast In Local Currency / Forecast Revision) Sovereign Rating Russian Federation 05.12.2002 BB/Stable BB+/Stable Ratings of Regions and Municipalities Bashkiria 13.11.2001 B/Positive --/-- Vologda Oblast 04.02.2003 B/Stable --/-- Irkutsk Oblast 04.10.2002 B-/Positive --/-- Moscow 06.12.2002 BB/Stable --/-- Moscow Oblast 24.01.2003 B/Stable --/-- Nizhny Novgorod Oblast 06.09.1999 Rating withdrawn Rostov Oblast 31.07.2000 Rating withdrawn Samara Oblast 21.10.2002 B+/Stable --/-- St. Petersburg 06.12.2002 BB/Stable BB/Stable Sverdlovsk Oblast 14.11.2002 B-/Positive B-/Positive Surgut 20.12.2002 B/Stable B/Stable Tatarstan 09.10.2001 CCC+/Positive --/-- Khanty-Mansi Autonomous Okrug 20.12.2002 BB-/Stable --/-- Yamal-Nentsi Autonomous Okrug 22.10.2002 B-/Positive --/-- Source: Standard & Poors.

In the course of 2002 the total balances in budget accounts of the regional and local budgets nominally increased only by RUR 5.1 billion (a growth of 8.5 percent), which, in real terms, means a decrease of almost 7 percent. This is explained both by increasing salary expenses in the public sector and by improving financial resource management upon transfer to the treasury system of budget implementation.

INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru Owing to the economic growth, steady debt servicing by the federal government and stable condition of the budget, Standard and Poor's have upgraded the Russian Federation's international rating to BB, which has lead to subsequent growth of the credit rating of federation entities that have been servicing their debts on time. (See Table 22).

The upgrading of credit ratings improves the prospects for attracting borrowed assets by subnational government agencies. At the same time, efficient application of the borrowed assets remains a crucial issue.

Internal Bonded Loans In 2002 bonded loans of 20 RF constituent entities and five municipal entities were registered (compared to 11 regional and three municipal loans in 2001). The issuers were: Moscow, St.-Petersburg, Republic of Karelia, Republic of Bashkiria, Chuvash Republic, Republic of Sakha (Yakutia), Komi Republic, Republic of Mordovia, the Volgograd, Irkutsk, Kostroma, Kursk, Tomsk, Tver, Murmansk, Moscow, Belgorod, Sakhalin Oblasts, the Khabarovsk Krai, Khanty-Mansi Autonomous Okrug, the cities of Ufa, Volgograd, Ekaterinburg, Nizhny Novgorod and Yuzhno-Sakhalinsk (See Table 23).

The largest issuers were as follows: Moscow, RUR 11.85 billion, or 40.7 percent of the total issues of subfederal and municipal securities; St.-Petersburg, RUR 7.86 billion, or 27.percent; the Khanty-Mansi Autonomous Okrug, RUR 1.33 billion, or 4.6 percent, and the Republic of Bashkiria, RUR 1.27 billion. or 4.4 percent.

Table Placement of Subfederal and Municipal Securities in Amount of Issue to Total Amount of Issue (RUR Share in Total Amount of Issue Constituent Entity of the Federation Internal Borrowings (perMillion) (percent) cent) Belgorod Oblast 300.0 50.0 1.Voronezh Oblast 2.0 0.1 0.Kostroma Oblast 3.4 0.6 0.Kursk Oblast 95.5 22.2 0.Moscow Oblast 2 705.1 12.6 9.Tver Oblast 532.6 33.9 1.Moscow 11 847.8 35.6 40.Republic of Karelia 178.7 16.6 0.Komi Republic 836.6 19.3 2.Arkhangelsk Oblast 15.0 6.7 0.Murmansk Oblast 250.0 13.6 0.St.-Petersburg 7 858.8 62.7 27.Stavropol Krai 4.8 0.3 0.Volgograd Oblast 317.1 14.0 1.Republic of Bashkiria 1 270.3 100.0 4.Republic of Mari-El 7.9 1.5 0.Chuvash Republic 254.0 54.7 0.Nizhny Novgorod Oblast 200.0 4.6 0.Sverdlovsk Oblast 92.5 10.7 0.Khanty-Mansi Autonomous Okrug 1 331.5 25.7 4.Yamal-Nentsi Autonomous Okrug 206.8 6.3 0.Irkutsk Oblast 257.2 13.7 0.Tomsk Oblast 30.2 1.0 0.Republic of Sakha (Yakutia) 450.9 13.0 1.Sakhalin Oblast 100.0 7.8 0.Total 29 141.8 13.8 100.Source: IET calculations on the basis of data provided by the RF Ministry of Finance RUSSIAN ECONOMY in trends and outlooks Borrowings in the form of securities grow more slowly than the total borrowings by cities and regions. While the volume of municipal and subfederal security issues almost doubled, growing from RUR 29.1 billion in 2002 compared with RUR 15.1 billion in 2001, the percentage of securities in the total internal borrowings by cities and regions reduced from 15.0 percent to 13.8 percent, which is far below the market capacity. E.g., the ratio of the current amount of subfederal securities in circulation to the GDP is less than 30 percent of the 1997 level (See Table 24).

Table Volume of Subfederal and Municipal Security Issues (percent of GDP) Year 1996 1997 1998 1999 2000 2001 Issue 0.63 0.77 0.47 0.31 0.19 0.17 0.Redemption 0.47 0.56 0.48 0.36 0.46 0.23 0.Net Financing 0.16 0.22 -0.01 -0.05 -0.27 -0.07 0.Source: IET calculations on the basis of data provided by the RF Ministry of Finance It should be noted that there is a negative balance between the number of issuers increasing their debt issued in the form of securities and the number of regions reducing such a debt. Only in 16 constituent entities of the Federation have issuers been able to attract via the market for subfederal and municipal securities the funds exceeding the nominal value of the bonds to be redeemed. These issuers are as follows: Moscow (the amount of borrowings less expenses on repayment of debt on securities was RUR 8.6 billion); the Moscow Oblast, RUR 2.7 billion; St.-Petersburg, RUR 2.5 billion; Khanty-Mansi Autonomous Okrug, RUR 1.3.

billion; Republic of Komi, RUR 0.8 billion; the Tver Oblast, RUR 0.5 billion; Republic of Sakha (Yakutia), RUR 0.4 billion; the Murmansk Oblast, RUR 0.3 billion, Belgorod Oblast, RUR 0.3 billion, and others (See Table 23).

At the same time, a reduction of the debt granted in the form of securities was observed in 28 regions, including: the Omsk Oblast, RUR 0.2 billion; Volgograd Oblast, RUR 0.1 billion; Novosibirsk Oblast, RUR 0.1 billion. While, owing to the overall growth of borrowings by cities and regions, the prospects for expanding the market for subfederal and municipal bonds are good, the market expansion is contained by a relatively high level of transaction costs related to primary offerings. Therefore, the regions give preference to bank loans, and two thirds of the market fall to the share of Moscow and St.-Petersburg.

Against this background the share of securities placed by municipalities in the total issues by territorial government agencies is continuing to diminish. E.g., in 2001 the percentage of municipal bonds was almost one quarter of the 2000 amount, 5.9 percent compared to 22.percent, respectively, of the total issue of subfederal and municipal securities. In 2002 it again reduced to almost a half of the previous amount, falling to 3.3 percent.

The amount of net funding does not equal the difference between the issue and redemption due to approximation error.

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