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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES November 2008 MONTHLY BULLETIN Moscow 2008 Institute for the Economy in Transition, 2008.

5 Gazetny pereulok, Moscow 125993, Russian Federation Phone: (495) 629-67-36 Fax: (495) 203-88-16 E- Mail: lopatina@iet.ru 1 Major developments and trends.......................................................................................................... 3 The political and economic results S. Zhavoronko.............................................................................. 4 Budgetary and Tax Policy N.Lukshin................................................................................................. 7 Financial Markets N. Burkova, E. Khudko....................................................................................... 12 Real Economy: Trends and Factors O. I. Izryadnova....................................................................... 23 Russian industry in november 2008 S. Tsukhlo................................................................................ 27 External trade N. Volovik................................................................................................................. 29 Budgetary and Tax Policy . Kirillov.............................................................................................. 32 Meetings of the Government of the Russian Federation in November 2008 M. P. Goldin................ 36 An overview of economic legislation I. Tolmacheva........................................................................ 38 Review of legal regulations on tax issues, October-November 2008 L.I. Anisimova......................... 41 An overview of budget legislation M. P. Goldin............................................................................. 44 Economic growth factors in 2000-2008. E.Astafyeva....................................................................... 4 % .............................................................................................................. Investing retirement savings in the system of mandatory pension insurance in the first six months of 2008 L. Mikhailov, L. Sychev........................................................................................................... Principle of reciprocity in cases of cross-border bankruptcy .. Lebed........................................... Defense in the 2008 federal budget V. Zatsepin............................................................................... Major developments and trends D. Medvedev has announced in the presidential message on the upcoming extension of the term of presidential powers from 4 to 6 years. Herewith, the issue under review is the next presidential term (from 2012). This statement has confirmed the assumption of a possible resig-nation of D. Medvedev from his post in 2012 or even earlier, and Vladimir Putins resignation of the President position. S.

Ignatiev, the Head of the Central Bank, has announced, that he does not exclude RUR devaluation, and the authorities are making attempts to mitigate this process.

The Russian Government is trying to take additional measures to mitigate the negative impact of the global financial crisis. At the tenth Congress of the ruling party United Russia there were announced new initiatives to be implemented in the short term. The major ones in the public sector include amendments to the tax legislation and additional programs on budget ex-penditures. A vast-scale and not entirely transparent system of distribution of public funds for the support of selected private companies is on-going.

The macroeconomic situation is being developed against the background of a sharp slow-down of investments in the fixed assets, the scope of construction and manufacturing reduction, while a high level of consumer demand and growth in turnover of retail trade are sustained. The structure of industrial growth is dependant on the slowdown in dynamics in mining and manufac-turing industries. Basing on the analysis of the prevailing trends, the expected GDP growth as per the outcome of 2008 is estimated in the range of 106.5-106.8 per cent. The total number of unemployed in October 2008, as compared with the relevant period of 2007, has grown by 8.7 per cent. By the end of the year further increase of unemployment is expected. However, despite the ongoing slowdown in the global economy and deteriorating global market conditions, high rate of growth of the basic indicators of the Russian foreign trade are maintained.

Deterioration in the Russian industry is going on. Following the sharp decline in sales, businesses are beginning to cut down production rates, reduce prices and cut down their staff. At the same time, financial and economic situation of enterprises is getting deteriorated. The November forecasts of producers majority are discouraging: due to credit constraints in the upcoming months, a significant decrease in demand and further output reduction are anticipated.

As of October results, the CPI in Russia amounted to 0.9 per cent, what is lower than the indicator of the relevant period of preceding year (by 1.6 per cent). However, the consumer price growth within January-October has reached 11.6 per cent, what is higher than the growth in prices within the same period in 2007 (9.3 per cent).

In October, the international reserves of Russia have decreased by 13 per cent, and in the period of October 17 - 24 there was recorded a peak reduction in reserves by 6 per cent (by USD 31 billion).

The outflow of capital has increased twice, as compared with September level, hav-ing reached over USD 50 billion a month. To reduce the rate of prices growth and stabilize the financial system, the refinancing rate was increased, as well as the interest on the RF CB depos-its. Herewith, from late October, to ensure additional liquidity, the RF Central Bank began issu-ing unsecured credits to improve the domestic credit institutions liquidity.

Further deterioration in the domestic corporate bonds market was observed in November. The volatility of market affects the risks of its participants, what as reflected in the level of bonds yields. In the recent months, the nominal volume of registered bond issues has been downgraded several times, which involves the reduction of the internal market of corporate bonds in the near-est future.

In November 2008, in Geneva, a new round of consultations on the RF accession to the World Trade Organization (WTO) was arranged.

In the first six months of 2008, the value of the assets in the mandatory pension fund, re-gardless insurance deductions, has increased only by 1.8 per cent as compared with 2.6 per cent in the first six months of 2007.

A number of significant decisions in economic policy was taken, namely:

Major trends of the Russian Government for the period up to 2012;

Federal budget for 2009-2011;

Significant amendments to the RF Budget Code and Tax Code;

Russian Government budgetary authority is expanded;

The terms and conditions to grant subsidies for co-financing from the Russian In-vestment Fund to the RF subjects for capital construction are defined;

Minimum and maximum unemployment benefits are upgraded;

The main trends of the common public monetary and credit policy for 2009 and for the period of 2010 - 2011 years are approved;

the Law on amendments to the Law On Customs Tariffs, amending the meth-odology of export duties on oil assessment is adopted.

The political and economic results S. Zhavoronko In his Presidential Message, D. Medvedev declared that the presidential term in office is going to be extended from 4 to 6 years. As it later became known, he meant the next term to begin from 2012). This has strengthened the assumptions that D. Medvedev will probably leave his post in or earlier, to give way to the returning Putin. The RF Central Banks head, S. Ignatiev, said that he could not rule out the possibility of the rubles exchange rate going down, and so the authorities adopted a policy aimed at softening this process. V. Putin, quite unexpectedly, announced the lowering of the profits tax rate. The large-scale, and far from transparent, distribution of government funds in support of certain private companies is continuing.

The main news in November was the first Presidential Message signed by D. Medvedev in his capacity of the RF President. When that post was occupied by V. Putin, the Message was usually issued in spring (even in 2000, when Putin had just been inaugurated as Head of State, his Message came out in July). The Message had been looked forward to for two reasons: firstly, there had still been some hopes for some fundamental innovations, and secondly, everybody had been curious as to the authorities reaction to the financial crisis, which had begun to acquire specifically Russian features, thus becoming significantly different in a negative way from the global context.

The political part of the Message contained only one important news the introduction of changes into the RF Constitution and the extension of the presidential and State Duma terms from four to six and five years respectively. During the same month, the amendments were approved by the State Duma and the Council of the Federation.

Still, we should like also to assess the other political initiatives put forth in the Message. All but one are of no specific significance. The new principle of formation of the Council of the Federation exclusively from the deputies of representative bodies of regional and municipal levels has not changed anything: simply, in order to obtain a senators seat, one will now have to secure not only the consent of the governor or a majority in legislature, but also become a local deputy, which presents no problem, providing the first two conditions are met. The allotment of one or two places in parliament for those parties that have collected between 5 and 7 % of votes, that is, a fraction of one per cent share in the total number of 450 deputy seats in the lower chamber not only clearly violates the principle of voters equality, but also has no practical sense, since neither in 2003 nor in 2007 there were any parties in Russia gaining 5 to 7 % of votes. The possible appointment of governors by recommendation of a party winning in a regional election is no real change, either: firstly, the actual decision as to a governors candidacy is to be made by the President, and secondly, this was already promised by V. Putin two years back. However, even in that single case when a regional election was won by a party other than United Russia (Stavropol Krai, March 2007), the leader of the winning party, instead of being appointed governor, was declared to be wanted by the police. The declaration concerning the publication of information on the activity of the parliamentary parties is also a repetition of V. Putins earlier promises, that has produced no actual results. As for the introduction of a constitutional norm requiring the RF Government to report annually to the State Duma on the results of its activity, it is of purely procedural character and has no impact on the balance of power in this country.

The only measure of real significance is the declared abolition of money collateral within the framework of elections of all levels, which in actual practice will mean strengthening of the authorities control over the appointment of candidates, because the lists of petition signatures (the only remaining requirement of any importance for the registration of candidates and parties not represented in federal parliament), when submitted by would-be candidates from the opposition, are declared, on a regular basis, to be improperly executed.

As for the extension of the presidential term, initially the observers noted that the Message contained no indications as to whether Medvedev himself is implied in that context, or another President the one to be elected in 2012. However, when the draft law was submitted to parliament, it became evident that this innovation will have to do with the next President and parliament. This confirms the assumptions that in 2012 D. Medvedev is not going to run for a second term, and so it is V. Putin who will be elected for the new, longer term, thus becoming, as he has let it slip repeatedly in the past, President for a new term not in succession. Moreover, many experts believe it possible that Medvedev might resign from his post early, because the declared amendments to the RF Constitution represent a good reason for calling a new election. In our opinion, the latter hypothesis is hardly plausible.

In face of a worsening economic situation a new election, despite its relative character, may yield results that will somewhat differ from what is desirable. Besides, it would be much more logical to live through the crisis with the present President, D. Medvedev, who thus will shoulder the main responsibility for the impending economic losses. The remaining three years of the current Presidents term in office may even be politically profitable, because the authority is thus keeping up the intrigue by giving no direct indications that two six-year terms for V. Putin are being planned. This latter assumption, if it becomes true, resembles a direct switchover to presidency for life, and so is fraught, to say the least, with damage to the Presidents public image.

It seems worthwhile to note two more interesting points in the presidential message. One of them has to do with facts. When mentioning reform of the judicial system, D. Medvedev urged the judges to apply a better weighted approach to initiating such measures as arrest and isolation from society.

Besides, he promised to shorten the period of consideration of criminal cases and develop mechanisms designed to redeem the damages inflicted on citizens in instances when their rights to justice are violated. Such changes to the judicial procedure, in case they are actually implemented, will really mean some improvements on the current situation, when the fact of a citizen being brought into a court automatically means a judgment of guilt1. However, one would be able to speak of any such improvements only if the ideas voiced in the Message take shape of some concrete legislative initiatives.

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