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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES November 2005 MONTHLY BULLETIN Moscow 2005 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 Economic Developments of November 2005.................................................................... 3 On the Course of Reforms in October-November 2005.......................................................................... 5 Budget and tax policies........................................................................................................................... 7 Monetary policy...................................................................................................................................... 9 Financial markets................................................................................................................................. 12 The real sector of the economy: factors and trends............................................................................... 21 The situation in industry in November 2005......................................................................................... 26 Foreign trade......................................................................................................................................... 27 The expenditures of the federal budget to be placed on the secret list: an ominous tendency.............. 30 The strategy for developing public education and national projects..................................................... 35 Proposals concerning changes in the procedure of investing the pension savings of those insured persons who have not made use of their right to select an investment portfolio.................................. 37 The regulation of the corporate control market..................................................................................... Issues Considered at the Sessions of the RF Government on November 17 and 24............................ An overview of the normative acts concerning taxation issues that were adopted in October November 2005..................................................................................................................................... An overview of economic legislation introduced in November 2005................................................... Political and Economic Developments of November In November this year serious reshuffles took place in the RF government and the Admini8stration of the RF President. D. Medvedev was assigned the first premier of the RF Government. As is known, he had earlier been entrusted the national projects in the spheres of healthcare, education, mortgage and agriculture (more than Rb 550 bn were allocated for their funding for the period of 2006-2008) and now he will supervise them having a new status. S. Ivanov was assigned an ordinary vicepremier with retention of the post of the Minister of Defense.

The aforementioned appointments were interpreted by many as searching for a successor and even,a competence between the challengers. In our opinion, the above appointments first of all considerably undermine the positions of the RF premier M.Fradkov. Though, according to Putin, both appointments had been agreed upon with M.Fradkov. And even inevitable formal redistribution of functions between the vice-premiers and the Government as a whole, which results have not been known to us as yet, cannot but touch his competency, the more so the political implication of the appointment is clear the more powerful figures came to work to the government, than was formerly a single vicepremier A.Zhoukov, who for the year and a half could not gain in authority. Moreover, D.Medvedev already possessed similar position in the RF President Administration in 2000-2003 he worked as first deputy of A.Voloshin and he followed his chief after his resignation in late October 2003. The considerable financial resource was also allocated for Medvedev in the form of the aforementioned national projects. As concerns S.Ivanov, we believe its hardly that he will be able to substantially expand his powers, primarily because of considerable significance of powers of the heads of MVD (The Ministry of Internal Affairs) and FSB (Federal Security Service of Russia), who will hardly find themselves dependent on the new vice-premier.

However, we should note the following. Resignation from the presidential administration, which became (after 1996) the main center of making political decisions to the Government, responsible for the social and economic situation in the country, many times meant reduction of a political heft for a politician. This may also concern the present-day situation, which is formally favorable because of price dynamics concerning energy sources. The reforms entrusted to Medvedev, particularly in education and healthcare, are not considered transparent and popular, while the specific industry ministers, who were engaged in them, gained considerable antirating both in the society and professional environment. Low-observable but still an unpleasant sign serves for Medvedev an appointment by V.Putin of the Tyumen governor S.Sobyanin, as Medvedevs follower, to the post of the head of Putins administration. It is known that Medvedev played once a vital part in wrecking the plans (lobbied by Sobyanin) of integration of the South of Tyumen oblast with autonomous okrugs, where were concentrated major oil and gas resources. It is doubtful that Medvedev could recommend choose this candidature.

It depends only on Sobyanin, if he will be able to retain his new position as influential as it was in Medvedev's time. Obviously, in the beginning he will actually have no appointed by him subordinates, which (as well as other circumstances) point to strengthening of the positions of I.Sechin and V.Surkov. its worth mentioning, however, negative forecasts were also made with regard to Medvedev, who, nonetheless,, could became a focus for decision of many political and economic issues, as well as drew attention of the elite arbitrage figures. Of course there is a negative factor working against Sobyanin he has no years of experience of contacts with V.Putin. The next half a year at a minimum he will be considerably inferior to his deputies and the predecessor as far as influence is concerned. As regards the role of D.Medvedev, the more precise estimate can be made on completion of the formal redistribution of powers between the Cabinet ministers.

Simultaneously Putin substituted his representatives in Privolzhsky and Far East federal okrugs.

Procurator of Bashkiria, A.Konovalov was appointed an ambassador in federal okrug instead of S.Kirienko, while the head of Kazan-city administration, K.Iskhakov - an ambassador of the RF President in the Far East federal okrug instead of K.Pulikovsky. It should be noted that the influence of those two embassies was different. From the date of appointment K.Pulikovsky lost practically all the election campaigns of mayor and governor level he participated. It is unlikely that the former mayor of Kazan could also have a serious influence in the region. As regards S.Kirienko, as politician he had great influence on the interregional level. Its hardly that his follower, who for a long time and without success was fighting against the head of Bashkiria M.Rakhimov, will become an influential figure, though there is an unkind sign in this appointment of Rakhimov, who never gave Bashkir petrochemistry to the Kremlin.

S.Kirienko was appointed the head of the Federal agency on atomic power of Russia (Rosatom).

Earlier (before the administrative reform) Rosatom was headed by A.Rumyantsev, who led the industry since 2001. Management of this agency (which means general direction of the industry, interaction with federal and regional bodies of power, RAS, coordination of fundamental research in the field of atomic power, and even coordination of personnel policies in the industry to which belongs the super profitable FGUP Rosenergoatom), perhaps is a promotion for long awaiting this post officer.

In November a decree was signed of the Government prime-minister on creation of an investment fund in the budget of next year (as much as Rb 69,7 bn is planned for investment fund in the budget for 2006). Relevant amendments to the Budget Code are entrusted to be developed to the RF Ministry of Finance. Meanwhile, as before, the government commission for selection of investment projects is headed by G.Greff.

Nationalization of large enterprises continued (it should be stressed that we mean not formal belonging to the State but to a chain of companies with the government package of shares, making a decisive influence on the formation of an executive body of enterprises). It was announced in November on selling to Gazprom agencies a controlling stake that earlier belonged to K.Bendukidze and the partners of the corporation Combined machine-building plants (OMZ), Some times ago this corporation sold shares in other assets. In fact, for a few months the departure from Russia of the second in Russia oligarch K.Bendukidze (number 1 was Abramovich) was completed. The market is full of rumors about the sales of large packages of shares of Norilsk Nickel by majority shareholders V.Potanin and M.Prokhorov and that the final buyers of these shares will be the CJSC ALROSA, where the State will try in 9turn to collect a controlling stake.

In November there was also announced on the intentions of Rosoboroneksport and the Foreign trade bank to receive control over AVTOVAZ. The largest car producer has an intricate property structure controlled by the management, wherein the main shareholders of the plant belong to it and each other by crossholding. Its not clear as yet, if this is a repurchase of shares or management will simply voluntary leave their posts (candidates for the majority of seats in the Board of Directors were set from the shareholders representatives of Rosoboroneksport and the Foreign trade bank), but its clear already that the government companies acquire an asset. Actually, the events of autumn of 2005 confirm the course of government management directed to chebolizatsiyu of Russian economy, which specific signs are possessing by the State of the controlling stake of companies, flight of stockholder-residents and the declared intention to draw stockholder-non-residents (for example, through IPO).

An acute debates arose in the legislative sphere because of the law On mineral resources, withdrawn by the Government from the parliament and never introduced again. Recall that in its present form it provided for considerable restrictions on issuance of licenses to non-resident companies, but tightened for officers at the same time the principles of their issuance, by making preemptive and diffi9cult to avoid method of sale of license through auction. During his visit to Khanty-Mansisk M.Fradkov said: We would like to adopt the law on mineral resources, but cannot be run without leverages, though they are not too civilized. Those who accompanied the premier attacked the bill with quite a portion of criticism amounted to the necessity of retaining particular conditions for small businesses that demonstrate most advanced methods of extraction, impermissibility of transferring minerals to foreigners who are able to pay for them a maximum sum of money (while the law permits issuance to them of license in case they own over 50% of shares of the enterprise) etc. In our opinion, a key point in this issue is out-of-action issuance of a number of licenses (first of all for shelf) to large government companies, following which the lobbyist resistance will weaken and the remaining less attractive ones may begin to be distributed on auctions.

November demonstrated the fairness of conclusions regarding the influence of the renewed Russian Union of Industrialists and Entrepreneurs and entrepreneurial associations one of its former heads, S.Kiselev, was put on the wanted list. He is accused by A.Usmanov and V.Anisimov of an attempt of misappropriation of the shares of Mikhailovsky GOK, which was realized in putting in a security claim by an offshore company, allegedly belonged to O.Kiselev. No doubt that the latter should make a shot at the Western courts by accusing his enemies of an attempt of illegal deprivation of freedom.

However, the fact of such proceedings evidences we cannot talk as yet of real restoration of public role of big business.

In political sphere, late in November the Moscow city court cancelled registration of the party Rodina on elections to the Moscow State Duma. Its pre-election video clip Lets clear Moscow from rubbish, in which D.Rogozin and Yu.Popov (who is on the top of the list) severely reprimand non-Russian brunets, who litterlouted watermelon rinds, was recognized as agitation that arouses national enmity. A little earlier, in the mode of special operation, the Moscow election committee took an analogous decision, though, up until now there is no results of video clip examination requested by the prosecutor's office. Despite the absence of known figures on the top of the list, the party Rodina, which conducted a convincing campaign focused on problems of the system of illegal immigration (threatening to Muscovites), organized by the powers, and the criticism of schemes plundering the city budget funds (particularly by means of lowering the rent price), obviously could take the second place after the Single Russia in the urban legislature during the elections, which were considered by many as primaries of the federal ones 1.

This situation may still change Rodina has a chance to lodge an appeal. In consideration of Louzhkovs dislike to Rogozin, the Moscow city court decision may well be the result of the city administrative resource. In such a case, it may be annulled, and, on the one hand the campaign of Rodina will be disabled in the first pre-election week, and on the other it will receive an additional PR. Moreover, the fact of Rogozin and Glazievs non-recommendation, the presence on the elective seats of the list of Rodina obvious Putins administration creatures, and also the theme of the elective campaign, that in all its substantiation gives a cause to accuse the authors of xenophobia and raise useful for the powers discussion on Russian fascism, may serve a sign of voluntary execution by Rodina of a number of self-restrictions.

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