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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES September 2004 MONTHLY BULLETIN Moscow 2004 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 Political and Economic Developments in September of 2004.............................................................. 3 Budgetary and Fiscal Policy............................................................................................................... 5 Monetary Policy................................................................................................................................. 9 Financial Markets............................................................................................................................. 11 The state of the market of non-state pensions.................................................................................... 21 Foreign investment in the Russia's economy..................................................................................... 24 The Real Sector of the Economy: Factors and Trends....................................................................... 29 Oil and Gas Sector........................................................................................................................... 32 Foreign Trade.................................................................................................................................. 35 Urgent nature of the military reform problems.................................................................................. 38 Scenary Macroeconomic Forecast for 2004 and 2005....................................................................... 44 Issues discussed at the meetings held by the Government of the Russian Federation on September 9 and 22 of 2004.................................................................... Economic Legislation Review, September 2004............................................................................... Political and Economic Developments in September of On the 1st of September tragic events took place in North Ossetia where a group of terrorists captured a school in Beslan-city. On the 3d of September the bloody upshot of this situation happened in Beslan school.

A few days later Vladimir Putin made a political statement. He said that the tragic events that took place were of international terrorists doing. In his address, the President told nothing of Chechen problem. No actions of the power structures before and during the storm (which, allegedly, was not prepared and happened only because of a chain of explosions, following which the high death toll among hostages became inevitable) were also given an assessment. As in 1999, in analysis of reasons causing the acts of terrorism dominated such characteristics as weakness and disintegration of the Russian State, but, this time two more were added - disintegration of the USSR and actions of unknown countries not interested in Russias strengthening. Absurdity of any talks with terrorists was ascertained, as well as the need for political and financial isolation of their emissaries and the coordinated efforts of the departments. On September 13, on extraordinary session of the RF Government it was announced of an appointment of Dmitry Kozak (Head of the RF Government Office) Representative of the RF President in the South Federal Okrug, and also head of commission combining the power agencies efforts in this region. It was also announced that the draft laws will be submitted to the Parliament for consideration, aimed at changing the procedure of governors appointment, namely, through their appointment as regional legislatures on recommendation of President, and also draft laws concerning switching to elections in the State Duma only through party lists. Presently acting governors and those from regions where elections have already been announced, will keep their posts until expiration of their terms in office. On 27th of September, the respective draft laws were submitted to the State Duma for consideration. In conformity with the above, appointment will be made by regional legislature on non-alternative basis, and in the case a nominee is twice rejected, the President have the right to dissolve the legislature and must appoint an acting governor. Dismissal of a governor is performed by the President on different occasions, including loss of Presidents confidence. The draft laws on the election of State Duma deputies have not yet been submitted for consideration, the same is true for the draft laws (assumed by experts) on liquidation of local governments.

The foreign countries leaders, including the US President George W. Bush, were concerned of tendency to refuse to follow democratic principles in Russia. The same thoughts were also presented in an interview with the first President of Russia Boris Yeltsin.

It is to be noted that no public commitments of Vladimir Putin make sense any longer, as, according to journalists, the attempts to appoint regional leaders, were refuted by him six times at the minimum.

Every time he used rather a sharp terminology, such as contempt of electorate, violation of Constitution etc., last time it took place in December 2003.

The discretionary regulation system, based on nondisclosed notions of what is due and essential, has nothing in common with stability, as stability means not only invariability of a leader, but to a considerably greater extent - invariability and clear vision in taking decisions.

When talking about perspectives of the reform of the election system and that of regional bodies of executive power, strangely enough, but we should note that they are of minor importance for the midterm and long-term outlook. In absence of guarantees of free elections (the right to recount bulletins, independent (on power) funding sources, non-manipulated television, etc) both forms of voting - majority and proportional are of minor importance. Though, and it is natural, switching to elections exclusively through party lists (in conditions of strict requirements to Russian retarded parties and total distrust in them of population) leaves better chance for manipulations. As regards governors, in reality, many of them were appointed de-facto by way of withdrawal from elections of disagreeable candidates and falsification of the results of voting. Also, one cannot say that that the overwhelming majority of governors show, in some or other way, even minor self-dependence in federal policy, that they are stable to pressure, etc. In principle, it is natural that the appointed governors will never represent interests of the electorate, and would rather act exclusively in interests of the officials who appointed them, and (in case they lack their own resource) in interests of their sponsors. However, this is not the matter of next year. More interesting is the fact that most of nominees will hold their posts by the year 2008, when next political reform will apparently be conducted, the essence of which will be to prolong the authority of the country chief executive in power. For civil society, of vital importance becomes the future of local government, as guarantee of executive power polyarchy in a region and information source alternative for Moscow. In Boris Yeltsin ruling, the Presidents representative in a region or the supported from Moscow mayor of the regional center often served as counterbalance to governor. That system was broken even at the first term of Putins stay in power (for example, his assisting to remove mayors of Omsk, Khabarovsk, Novorossisk, etc.) No doubt that in the power hierarchy the reform sharply expands the influence of V. Surkov, Deputy Head of the Presidents Administration, who not only supervises regional policy by function, but is also entrusted to make public (and, most likely, to prepare) the final wording of draft laws package.

Incidentally, Dmitry Kozak, a politician, who is considered a person being most close to Vladimir Putin, fell a victim of the reorganization being performed. Instead of (very important, but rare in public) post of a Head of the Government Office, he became a Special Envoy in Northern Caucasus the role being extremely responsible, but without any powers (except for

Abstract

coordination).

Though, some experts see no big trouble in it, as, a mere absence of big tragedies like that occurred in Beslan will be considered, as they believe, stabilization of the situation. The following circumstance also supports the above assumption: Dmitry Kozak could promote to the key post of a Head of the Government Office a loyal person S. Naryshkin.

In our viewpoint, this is not so. It is natural that the situation in Nothern Caucasus becomes more complicated. Serious unrests took place in North Ossetia and Kalmykia over the passed month, the situation is not yet solved in Dagestan. At the same time, the coalition of new malcontents has nothing in common with islamic extremists, their only intention is to remove the present-day leadership of republics from office or fix a certain status quo. But, like islamic extremists, in case of need, they are ready to use different forms of argumentation. In North Ossetia the head of the Republic Dzasokhov had to resign the Cabinet and, judging by his address to the meeting, he was ready to resign himself.

Though the latter did not occur: the analogies might be too obvious. In Kalmykia, the oppositionists, who enjoy serious support of the Federal Agencies, were attacked by the law-enforcement bodies resulted in death toll. It is indicative that D. Kozak, who promised to punish severely riots that may arise for both sides (according to official version of Ilyumzhinov supporters, the forces of international terrorism became more active in Kalmykia populated predominantly by Buddhists), in fact, took the oppositions side. Though, it is too early to discard Ilyumzhinov himself, even because of the role of Kalmyk offshore in TNK- activities.

Even so (as a rule, the administrative resource of a political and not administrative staff appointee is stronger at the very beginning), nowadays D. Kozak has no real power. The factor of geographic remoteness from Kremlin should also be borne in mind, just as the fact that top executives posts are unsafe in Northern Caucasus.

In the sphere of economy, bidding has been summed up for the sale of Lookoil public shareholdings. Despite intriguing participation of the alternative contenders, the bidding has been completed quickly and with an insignificant edge of the U.S. Conoco company. At the same time, a forthcoming merger of Gazprom and Rosneft was announced. This is explained by the need of the State to hold the controlling GAZPROM shareholdings through adding a state-held asset to the company. This suggestion has little force in fact, after the year 2000, at shareholder meetings the State has never voted for less than 50% + 1 vote of the number of shareholders that took part in the voting, besides, the consolidated by Federal Government and Gazprom subsidiaries shareholdings are under 50% by less than one percent. In our opinion, the two Government-entrusted (to managing their own assets) figures A.

Miller and S. Bogdanchikov - could come into collision, as the executive body of the unified company suggests undivided authority. We believe that Millers chances are higher. In the mid-term outlook, taking into account the organization of a vertically integrated holding (including oil, petrochemical, electric power, media and other assets) on the basis of Gazprom, possibility is not excluded of partial privatization of the stock of new Gazprom, in which foreigners will take part as minority shareholders.

In September, the political parties did not show much activity, putting mild blaming on the Presidents actions. The only fact worth mentioning is the support of presidential initiatives by the LDPR and Rodina, which once more show that they serve as bridge-structures to the executive power.

S. Zhavoronkov Budgetary and Fiscal Policy By the end of July 2004, the level of revenues to the federal budget of the Russian Federation increased by 1 percentage point of the GDP as compared to the previous month and accounted for 21.6% of the GDP, while the revenues to the consolidated budget of the Russian Federation accounted for nearly 33.1% of the GDP. The level of expenditures of the federal budget declined as compared to the previous month and accounted for 15.8% of the GDP. The consolidated budget expenditures reached 27% of the GDP in July, which is equal to the figure of the previous month.

According to the estimates of the RF Ministry of Finance, the stabilization funds volume is expected to reach 574.4 bln rubles by the end of 2004. The stabilization funds volume is estimated to reach 719.5 bln rubles by the end of 2005, taking into account financing of the Pension Funds deficit and foreign debt payments from the stabilization fund.

National Budget Status In the period between January and July of 2004, cash execution of the federal budget revenues accounted for 21.6% of the GDP, while the budget expenditures amounted to 15.8% of the GDP ( Table 1 ). This resulted in budgetary surplus which accounted for 5.8% of the GDP.

Table 1.

Execution of the federal budget of the Russian Federation ( in % of the GDP1 by cash execution).

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