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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES December 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 December 2005..................................................................... 3 Budget and tax policies........................................................................................................................... 5 Monetary policy...................................................................................................................................... 8 Financial markets................................................................................................................................. 11 Investments in the real sector of the economy...................................................................................... 20 Foreign investments.............................................................................................................................. 23 The real sector of the economy: factors and trends............................................................................... 28 The situation in industry in December 2005........................................................................................ 33 Foreign trade......................................................................................................................................... 34 Formation of the Development Strategy of National Innovation System............................................. 37 Municipal reform: the law is postponed, what is next......................................................................... 40 Issues Considered at the Session of the RF Government on December 22, 2005................................ 42 An overview of the economic laws and normative legal acts adopted in December 2005.................. An overview of budget legislation adopted in December 2005............................................................ Political and Economic Developments of December In December 2005 major events took place on the party and pre-election front.

Elections were held in the legislatures of ten RF Subjects, including the Moscow State Duma. As it had already been mentioned, there are no special grounds to compare this campaign with All-Russia primaries (primarily, because of low turnout, specifics of capital and presence of still a two-year period to 2007) However, both parties and the power itself estimated high the results of elections.

The party Rodina, which not without reason pretended in the first half of the year to have a status of the main opposition party, became the main looser of the elections. The Supreme Court of the RF upheld the decision of the Moscow city court and did not permit it to participate in the elections under the pretext of nationalist character of its advertising video clip. Great recourses (according to estimates, no less than $7 million) turned to be spent in vain. Nothing had been done either for establishing interaction with democratic opposition, or for mobilization of the resource of international support concerning the social-democratic movement. Until the last day, counting on positive verdict of the Supreme Court, member of Rodina party refused to conduct mass protest actions, and thus being not only squeezed to the wayside of the political; process, but also granting score points to their direct rival KPRF, to whom defected a considerable part of Rodina electors.

The elections were conducted under the working resource majority of the ruling party, ra9ther a weak voting campaign of major rivals (with the exception of Rodina), and in conditions wherein a falsification was possible. A serious stake was placed on the so-called Complexes for processing ballot papers (KOIB) electronic scanners for counting votes, covering almost a third of the Moscow polling stations. Interestingly, that they were primarily concentrated in those okrugs where planned or occurred nomination of serious candidates from opposition the Moscow State Duma deputies. Manual counting of votes, counted by KOIB, was carried out only on several polling stations. Besides, cases were registered of withdrawal of observers from the stations.

As a result, in turnout a little higher than 33%, Single Russia collected 47,25% votes, KPRF collected 16,75% of Moscovites, while joint democrats 11,11%. LDPR could not overcome 10% barrier about 8% of votes.

Similar results had also been achieved at other regional elections. Single Russia won everywhere, collecting, as a rule, about half of votes (the worst result is in Kostroma 29%), the second place occupied (with wide margin) KPRF, then all the others. The provincial specifics lied in the fact that, as a rule, Rodina and LDPR were elected (though with minor margin) to the legislature, while democrats, the other way round, overcame the barrier only in 1 of 9 of the remaining regions.

The conclusions are clear: without presence of single list the present democratic parties have no sense to participate in the elections, but, even if they have such a list, this will not ensure a victory in conditions of the present-day management and the pressure on the part of the powers. This lesson proved to be learned several days prior to the elections: SPS and Yabloko leaders announced about the forthcoming merger of their parties (it should be reminded that G.Yavlinsky never did anything of that kind). It seems that technical parameters may be discussed in the next months to come, while technologically such a merger is real, and the past autumn ;clearly demonstrated it.

Generally, the substance of what had happened in autumn is legitimization of the result of Single Russia prior to federal elections of 2007. In turn, the formal law (that came into force this month) of the right1 of parties to offer their governor candidatures and continued talks about the party membership of the government do not exclude now (as before) an actual transition to one-party system.

The RF constitutional court, having the two special opinions, while considering the complaint of V.

Grishkevich of violation of his constitutional rights in assigning of governors, dismissed it, having cited that Constitution does not consider elections as the only allowable mechanism of forming the bodies of power. The Court disregarded also its own Resolutions of 1996 (which considered unconstitutional even simple election of the governor by regulators, without any representations or sanctions for its dismissal), and art.55 p.2 of the Constitution, that guarantees unimpaired rights of citizens2, and However, today also any citizen or a party have the right to offer anything to V.Putin.

No laws must be issued in the RF, which cancel or belittle the rights and liberties of man and citizen.

the absence of such a right in the list of Presidents authorities, and by the fact that the existing order, coupled with the procedure of forming the Federation Council, means violation of the principle of division of powers.

In fact, headed by judge V. Zorkin (who opposed this Constitution even as early as in 1993) the Constitutional court somehow lost a legal function and, after the manner of the Supreme Court and the Supreme Arbitration Court itself begins to issue absurd new laws, and should not be considered other than an instrument in political struggle.

V.Putin signed the amendments to the law On gas supply. The stock turnover of GAZPROM is allowed at any exchanges. Moreover, all restrictions are abolished for foreigners operations with GAZPROM shares3. However, one cannot observe great rise in prices of GAZPROM shares actually, all necessary correction had been made earlier. Removing administrative barriers on the stock market of the company, which gradually overmasters considerable segments of the economy, is a positive action for it, but such an action does not solve the companys other questions, such as giants rates of building-up its debts, non-transparency of the methods of management, and high politicization.

In December news emerged on the market of the electric power industry. Though caused cheers, they appeared not too consolatory for investors. The energy reform, which was close to its key issue the method of receiving quotas in generating companies, and also their possible privatization, slipped just after coming to power of M.Fradkov, stopped, despite regular promises and approaching of the formal date of RAO UES liquidation (thus far it is 2006). A number of resolutions of the government and RAO UES planned a new way currently for attraction of investments the question is about additional capital stock issues of individual companies (of course attracting like TGK-1 or Mosenergo generating). Certainly, the holders of big packages and potential investors of these companies may be even glad (though, so far, no refusal of the State from the controlling stake is observed as). However, whatever is the final method of solution of the problem, this means a dismantling of the reform in the form it was afoot early in 2000. In additional issuing, the shareholders of RAO and generating companies, will actually have to pay twice for their ownership, considering the fact that such additional issuing does not solve the key issues (majority private property and possibility of price action on the market for holders). The cancellation of moratorium on the sale of generating assets of , as well as boosting commercial activity of RAO itself, which received FAS (Federal Antimonopoly Service) consent for acquiring the shares of Silovyie mashiny and planning participation in the construction of aluminum plants i.e. working with big assets, which distribution between RAO UES shareholders is absolutely unclear, could not also be glad news for shareholders.

The December demonstrated a sharp escalation of the so-called gas war between Russia and Ukraine. As is known, an interesting and rather a contradictory contract exists between the parties for many years, the essence of which boils down, in some sections of the agreement, to an obligation of supplying gas (until 2009) for the Ukraine for $ 50 per thou. cub.m in the price of transit $1.09 for pumping over of thou. cub.m. per 1 km. In other paragraphs of this agreement it is stated of the necessity to reconclude the agreement every year (adjusting the price of gas, basing on a number of formulas, for which the parties cannot agree and which had not been changed for many years already). As a result, GAZPROM raised the price more than four times (first to $160, and then - $230), having agreed to the right of sovereign Ukraine to raise the rte for transit more than two times to $1.75. Its clear that the events are of pre-election character pretensions for western credits and the resources from denationalization (which Ukrainian powers, naturally planned to spend for other things) could be heard in the speech of V.Putin. The main reasons of the Russian powers are as follows: after reduction of the pressure of gas supplied, the Ukrainian powers, which are eager to enter the EU, will not dare to do like A.Lukashenko did in his time (i.e. to take the gas planned for the EU countries, according to Ukrainian understanding of the agreements), and in the case this happens, it will be Ukraine, rather than Russia, who will suffer pressure on the part of the European Union.

S. Zhavoronkov Now they can buy the papers of the concern only upon authorization of the FSFR, while an aggregate share of non-residents in the capital of concern is restricted by 20%. This led to division of the market for domestic (shares) and external (depositary receipts for them) securities, which prices sometimes differed twice, though such difference was minimized of late due to grey schemes of holding of shares.

Budget and tax policies According to the preliminary results of the budgets execution in January through November 2005, the revenue level of the RF federal budget amounted to 24.20% of GDP, the expenditure level of the RF federal budget - to 15.65% of GDP, while budget surplus was 8.55% of GDP. In January through September 2005 the revenues of the RF consolidated budget amounted to 36,0% of GDP, consolidated budget expenditures to 27.2% of GDP, and budget surplus to 8.8% of GDP. As of 1 December 2005, the amount of the RF Stabilization Fund was 1236.5 billion roubles, as compared to 1094.5 billion roubles as of 1 November of the current year.

The status of the state budget In accordance with the preliminary estimates made by the RF Ministry of Finance concerning the budgets execution in cash terms in January through November 2005, the federal budget was executed in respect to its revenues in the amount of 4 602.27 billion roubles (24.20% of GDP), and in respect to its expenditures - in the amount of 2 976.57 billion roubles (15.65% of GDP). Federal budget surplus amounted to 1 625.70 billion roubles (8.55% of GDP). In should be noted that the volume of federal budget revenues in 2005 is much higher than the similar index observed during the corresponding period of the year 2004, which was 3 075.15 billion roubles (20.5% of GDP). Federal budget expenditures in January through November 2005 also demonstrated growth, as compared to the corresponding index of 2004 (2 288.79 billion roubles, or 15.2% of GDP). The budget surplus in the period under consideration was also considerably higher than that in 2004 (786.36 billion roubles, or 5.2% of GDP).

The volume of federal budget revenues in October and November 2005 amounted to 472.49 billion roubles and 453.33 billion roubles, respectively, or to 23.43% and 23.42% of the monthly GDP. Federal budget expenditures in October and November 2005 were 204.89 billion roubles (21.35% of GDP) and 262.22 billion roubles (13.54% of GDP), respectively, federal budget surplus 267.61 billion roubles and 191.11 billion roubles, constituting, in respect to GDP, 13.27% and 9.87%, respectively. Judging by these figures, it can be stated that there has occurred a stabilization of the RF federal budget revenues, alongside a considerable growth of federal budget expenditures by comparison with the previous months indices.

The structure of revenues in the period under consideration is shown in Table 1.

Table 1.

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