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Rules for providing budget subsidies to Russian exporters of manufactured goods to partially reimburse their interest rates on the loans received from Russian credit institutions, as approved by the RF Government Resolution No.357 of June 6, The procedure for qualifying the goods as those with high degree of processing is currently defined by Order No.31 of the RF Ministry of Industries and Trade issued on February 2, Federal Law No.204-FZ of November 24, 2008, On Federal 2009 Budget and 2010-2011 Plan granted the RF Government the right to allocate up to Rb 175 bn (as effectively amended up to Rb 450 bn) within the Federal Budget to support capital market (as effectively amended to support capital and labor markets, and sectors of Russian economy, social net for Russian citizens and other social policy measures) RF Government Resolution No.24 of January 14, 2009 (Rb 3 bn were allocated for the same purpose in 2008) Order No.144 of the RF Ministry of Industries and Trade, Order No.144 of the RF Ministry of Finance issued on March 27 2009; Order No.250 of the RF Ministry of Industries and Trade, Order No.175 of the RF Ministry of Finance issued on April 20, 2009.

RF Government Resolution No.996 of December RUSSIAN ECONOMY IN trends and outlooks Subsidizing the RF constituent entities (regional governments) to reimburse interest rates on the loans received by agricultural and food processing companies This measure practically combines 2 areas stipulated by the RF Government Anti-Crisis Program: subsidizing interest rates on the loans issued to meat and dairy products manufacturers (Rb 7 bn) and other sub-sectors of agriculture and food processing (Rb 10 bn). The legal framework of this particular measure2 is different from the others and sets a two-stage procedure for allocating such subsidies: first the funds are allocated within the Federal Budget to regional government, and only then they are distributed between agriculture and food processing companies. Payments of interest on short-term loans (up to 1 year) used to procure Russian-make agricultural feedstock and for some other needs, as well as payments of capital loans used to procure certain types of equipment, transport vehicles and machinery (the list defined by the RF Ministry of Agriculture), as well to fund upgrading of farms, storage facilities, greenhouses, etc. may be subject to reimbursement. For certain types of loans issued to meat and dairy companies the amount of subsidies was set at 100% of the refinancing rate, while as in other cases it makes 80%3.

In February 2009 the RF Government allocated Rb 17 bn to implement this measure, out of which Rb 12.1 bn were meant to reimburse the interest on capital loans, and Rb 4.9 bn interest on short-term loans4. During the first 3 quarters of 2009 Rb 16.9 bn were remitted to the RF regions: Rb 12.1 bn to reimburse the interest on capital loans, and Rb 4.8 bn interest on short-term loans. Let us note that over 90% of the funds were disbursed in H1 2009.

Most likely, members of the List of Strategic Companies were among the end beneficiaries of funds; however, we do not have reliable data on the amount of subsidies granted to those particular entities under this measure.

Subsidizing companies of the forestry sector The legal framework for this particular mechanism was the last one to be developed in late June of 20095. In particular, it stipulated the following:

- Loans subject to partial interest rate subsidies should be received from Russian credit institutions in 20082009 and used for setting up the shoulder-season stock of timber, feedstock and fuel;

- Subsidies should cover 2/3 of the interest rate not to exceed 2/3 of the Central Bank refinancing rate.

In September 2009 the RF Ministry of Industries and Trade decided to subsidize 11 companies from the forestry sector for the total amount of Rb 59 mln6. In early October these funds were effectively disbursed to the recipients. The names of such recipients were not officially published, however, as per mass media, at least one of them belonged to the List of Strategic Companies OJSC Arkhangelsk pulp-and-paper plant (received Rb 15 mln).

Subsidizing defense industry companies engaged in government procurement As approved at the RF Government session on December 30, Federal Law No.318-FZ of December 30, 2008, On Amendments to Articles 11 and 18 of the Federal Law On Development of Agriculture; RF Government Resolution No.90 of February 4, In addition, regional budgets are used for additional reimbursement in the amount exceeding the Central Bank refinancing rate by 3% for meat and dairy manufacturers, and in the amount of 20% of the refinancing rate for other companies.

RF Government Resolution No.140 of February 24, RF Government Resolution No.528 of June 25, Order No. 866 by the RF Ministry of Industries and Trade issued on September 28, Section Institutional Problems This mechanism stipulates subsidies to defense industry companies performing as contractors (including as prime contractors) of the government procurement to cover a part of their interest rate payments on the loans received from Russian credit institutions to sustain their core business operations. The respective legal framework was developed in late March 20091, but the actual disbursement of funds started only in H2 2009. According to the RF Government Anti-Crisis Program, the aggregate amount of this type of subsidies for should be making Rb 15 bn; however, according to the available data, the companies effectively received only about Rb 5.5 bn. Over 50 companies became the recipients for these funds, and 2/3 of them either belonged to the List of Strategic companies themselves, or comprised subsidiaries of strategic companies. About of the effectively disbursed subsidies (Rb 4 bn) covered this 2/3 of the companies.

Subsidizing automotive and transport engineering companies In January 2009 the RF Government allocated Rb 2.5 bn as subsidies to Russian automotive and transport engineering companies to reimburse part of their interest rate payments on the loans used for technical upgrade and refurbishment2. However, the legal framework for this mechanism was developed only by the end of March3, while as the criteria for selecting the refurbishment projects only by the end of May 20094. It was defined that 2/3 of the interest rate is subject for subsidizing, not to exceed 2/3 of the Central Bank refinancing rate.

In August 2009 additional opportunity aroused for receiving subsidies for partial reimbursement of funds paid by Russian automotive manufacturers as coupon yields on the bonds issued in 2009 to finance their own or subsidiaries refurbishment projects5. Subsidies were to cover 2/3 of coupon yields payments, not to exceed 2/3 of the Central Bank refinancing rate.

In December 2009 the RF Government reduced budget allocations for such subsidies from Rb 2.5 bn down to 1.5 bn6. By this time the RF Ministry of Industries and Trade had reviewed 15 requests for subsidies (9 of them submitted by automotive businesses and 6 by transport engineering companies). In October 2009 the RF Ministry of Industries and Trade drafted the first Resolution on granting the subsidies for the total amount of RB 59 mln7. Nevertheless, no effective disbursement of funds had been initiated by mid-December.

The key areas of the RF Government anti-crisis measures for 2010 stipulate subsidies to automotive and transport engineering companies to reimburse part of their interest rate payments on the loans received in 2008-2009 and used for technical upgrade and refurbishment for the total amount of Rb 2.5 bn.

The following overall conclusion may be made with regards of planned and actually effected interest rates subsidizing:

- The total budget allocations covering 7 areas of subsidizing in accordance with the RF Government Anti-Crisis Program were to make Rb 42 bn. Defense industries together RF Government Resolution No.255 of March 26, RF Government Resolution No.24 of January 14, RF Government Resolution No.262 of March 30, Order No.453 of the RF Ministry of Industries and Trade issued on May 28, RF Government Resolution No.675 of August 19, RF Government Resolution No.996 of December 10, Materials for parliamentary hearings of the RF Council of Federations Commission for Interaction with he Accounting Chamber of the Russian Federation on the topic: Modernization of economy as the Main Anti-Crisis Measure, December 17, RUSSIAN ECONOMY IN trends and outlooks with agricultural and food processing companies were to become the main recipients of these funds;

- In the majority of cases interest rate subsidies were to cover no more than 2/3 of the refinancing rate, while as for meat and dairy products manufacturers the subsidies were set at 100% of the Central Bank discount rate;

- These measures covered loans issued not only in 2009, but in earlier periods as well (in 2008, and in some cases in preceding years). Thus, subsidies were targeted (at least partially) at servicing the debt accumulated by the respective companies and improving financial stability of these companies;

- The measures implemented rather quickly subsidies to exporters of manufactured goods and to agricultural and food processing companies represented continuation of programs implemented over the preceding years, while as in other cases actual disbursement of funds either was initiated after a significant delay, or was not effected at all;

- During 10 months of 2009, according to the available data, the funds were disbursed only within 5 measures (Table 1). The actual federal budget spent in these areas amounted to circa Rb 32 bn, 80% of which were received by defense industries together with agricultural and food processing companies;

- The overall amount of interest rate subsidies to strategic companies and their subsidiaries (without accounting for the funds provided to agricultural and food processing companies out of the regional budgets) made about Rb 7 bn. The defense industries were the dominating recipients of these funds. Among civil industries the most meaningful amounts of subsidies were granted to strategic companies in nuclear and automotive industries.

Table Interest Rate Subsidizing Mechanisms Funds DisAlloca- disbursed bursed Execu- Time of tions, Rb to strategic Purposes of borrowing funds, Rb tion, % borrowing bn1 companiesbnRb bnInterest rate subsidies 6 / 94 9.1 102 6.7 Export of goods with high degree of proc- 2005to exporters essing Interest rate subsidies 17 16.95 99 NA to agricultural manufacturers and food processing companies -for capital loans 12.1 12.15 100 NA Procurement of equipment, specialized Beginning vehicles and machinery, pedigree stock of (materials; establishment of perennial plantings and vineyards; construction and upgrading of grafting facilities for perennial plants, of livestock units (farms), breeding and forage production facilities, storage facilities for potatoes, vegetables and fruit, greenhouses, etc.

-for short-term loans 4.9 4.85 99 NA Procurement of lubricants, spare parts and Beginning materials for repairing agricultural ma- of 2004, chinery, mineral fertilizers, crop-protective 2005, 2007, agents, forage, veterinary preparations and 2008 or other material resources for seasonal op- 2009 erations; procurement of young stock, of depending Russian-make agricultural feedstock for on the primary processing and industrial food recipient processing, etc. and purSection Institutional Problems Funds DisAlloca- disbursed bursed Execu- Time of tions, Rb to strategic Purposes of borrowing funds, Rb tion, % borrowing bn1 companiesbnRb bnposes of borrowing Interest rate subsidies 0.325 0.06 18 No less Set-up of shoulder-season timber, feed- 2008to forestry companies than 0.015 stock and fuel stock Interest rate subsidies 2.5 / 1.53 0 0 0 Implementation of technical refurbishment 2008and bond loans inter- projects est payments reimbursement to automotive and transport engineering companies Interest rate subsidies 15 / 5,3 5,5 104 4 Core business operations to defense industry companies performing in the capacity of 2008prime contractors (contractors) for government military procurement Interest rate subsidies 1 0 0 0 Implementation of innovations and into defense industry vestment projects to assure hi-tech produccompanies to imple- tion ment innovations and investment projects in accordance with the RF Government Anti-Crisis Program for during 10 months of accounting for the subsidiaries after adjustments during 9 months of Additional capitalization for strategic companies The following measures were implemented within this area of support:

(1) using budget monies to fund issue of new private companies shares (to increase of collective capital funds of unitary enterprises);

(2) additional asset contributions to state-owned corporation Rostekhnologiyi Increasing charter capitals of private companies In the end of 2008 and throughout 2009 the RF Government adopted several resolutions about additional capitalization of 13 organizations either members of the List of Strategic Companies, or directly linked to companies from the List. Rb 118 bn were allocated within the Federal Budget for this purpose. 10 organizations represented the defense industry, however (Rb 57 bn). As a rule, additional capitalization for such companies was aimed at stabilizing their financial positions, redemption of debt and working capital replenishment.

The major bulk of the allocations were granted to OJSC Russian railways. With that, the RF Government issued to separate resolutions about increase of the companys charter capital: the first one in December 20081 by Rb 41.5 bn, and the second one in July 20092 by RF Government Directive No.1877-p of December 16, RF Government Directive No.918-p of July 7, RUSSIAN ECONOMY IN trends and outlooks Rb 11.3 bn, 3 bn out of which were to be spent on purchasing products from Tverskoy coachbuilding works, and 8.3 bn on construction of track between Yayva and Solikamsk.

In addition, in 2009 the RF Government adopted resolutions on additional capitalization of 2 other strategic companies: Research and Production Center Urals wagon Works by Rb 4.4 bn to redeem the debt1, and OJSC Rus Hydro by Rb 4.3 bn to fund the construction of discharge sluice at Sayano-Shushenskaya hydroelectric plant2.

The Law on the Federal 2010 Budget allocated funds for additional capitalization of several dozens of companies, some of which are part of the List of Strategic Companies.

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