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16% 14% 12% 10% % 8% 6% 4% 2% 0% . . . . . . . .

2006 2007 Fig. 3. Aggregate volume of the RF Reserve Fund and National Welfare Fund within 2006-2008, % in GDP The crisis will test the financial stability of Russias budget already in the nearest future I. Sokolov The statistical data based on the results of the past autumn have made it possible to believe that Russia is now only beginning to enter the crisis stage of the cycle, and so will hit the bottom no earlier than by the middle of next year. Apparently, the progressive worsening of the financial situation faced by economic actors is inevitably going to result in contraction of budget revenue, thus putting in question the financial stability of the entire budget system of Russia. Under these conditions, it is necessary for this country to pursue a very cautious budget policy. The policy makers should avoid any reductions in the rates of those taxes which are relatively less dependent on world oil prices.

At present, the financial crisis and its consequences are the most frequently discussed theme both in this country and abroad. Before autumn 2008, Russias authorities and population alike had been cherishing hopes that the crisis would by-pass Russia, or at least that the impending reduction in the rate of business activity and decline in the incomes of citizens would be limited to export-oriented industries. However, the received statistics have indicated that Russia is just entering the crisis stage of the cycle, and will hit the bottom of it no earlier than by the middle of next year.

Over the first nine months of 2008, the share of the general governments revenues in GDP amounted to about 39.6 % against 40.4 % in 2007, and its decline is still continuing. During the period under consideration, the dynamic of revenue generation in the budgets of all levels was characterized by an increase in the amplitude of fluctuations of monthly tax receipts15, which was clearly attenuating in the process (see Fig. 1).

Tax revenues (receipts) are understood here as a sum total of taxes and levies collected in accordance with the RF Tax Code, and customs duties.

70,0% 60,0% 50,0% 40,0% 30,0% 20,0% 10,0% 0,0% "" Fig 1. The dynamics of tax and non-tax revenues of the general governments budget, and of oil prices in 2007 2008.

The main reason for the dynamics of tax receipts to have changed by comparison with 2007 was the fact of internal VAT having been paid on a quarterly basis since the beginning of 2008. This circumstance explains the January, April, July and October upsurges in tax receipts, followed by two-monthlong drops in revenues by comparison with the corresponding periods of 2007, when the absence of VAT receipts was repeatedly compensated for from the budget. However, in connection with the crisis, the RF Government took a decision that VAT payments in the third quarter of 2008 could be made by installments, and as a result there was a rather considerable drop in tax receipts in October.

The overall decline in tax revenues in January October 2008 amounted to 0.7 percentage points of GDP by comparison with the level of the corresponding period of 2007.

8,0% 7,0% 6,0% 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% - 2007 - . 2. The volume of tax and customs receipts of Russias budget system in January October 2007 and 2008.

As is seen from Fig. 2, the greatest decline was recorded in VAT collection; however, if the value equal to the repayment of Ukos tax arrears (approximately 0.7 p.p. of GDP) is excluded from the volume of VAT receipts, and if the quarterly nature of VAT incomings and the aforesaid decision to permit the payment of VAT by installments are taken into account, the amount of VAT receipts in the first ten months of 2008 will exceed that of the corresponding period of 2007 by 0.5 p.p. of GDP.

% . / % Nevertheless, it would have been very shortsighted to make any hasty conclusions as to the financial stability of the budget system being absolutely guaranteed even in the existing crisis conditions.

Thus, according to the RF Ministry of Finance, as early as November 2008, the Federal Tax Service had a much smaller tax-take than in November 2007 204 billion rubles vs. 323 billion rubles. The sharpest fall was in revenues from Profits Tax: in November 2008 they amounted to only 38 % of the 2007 level. Because of the collapse in oil prices (see Fig. 1), the budget system received much less from Mineral Extraction Tax (in November 2007, the oil companies paid this tax on the basis of the estimated price of 80 USD per barrel; in November 2008, this price was estimated at 70 USD). To make matters worse, the part of VAT which was to be received by the budget in November within the framework of the three-month-installment turned out to be much smaller than expected because of the shortage of liquidity on the part of enterprises or of the shortfall in VAT having been compensated for from the budget at an accelerated rate.

As the financial situation of Russian enterprises is further worsening because of the contraction of business activity, it should be expected that the budgets receipts from Profits Tax, Personal Income Tax and the Single Social Tax will continue to shrink as a result of the inevitable rise in the numbers of unemployed and a drop in incomes from labor and entrepreneurial activity. Property taxes (Tax on the Property of Organizations, Land Tax, Transport Tax, etc.) will be more stable, but if the crisis phenomena in the economy are long-term, receipts from those taxes will shrink as well.

There can be no doubt that the budget system has had acquired a relatively significant margin of safety, and this is especially true of the federal budget. The record-high oil and gas revenues of the current year have made it possible to create a considerable financial reserve in the form of a budget surplus. Until now, the existence of this surplus permitted the State not only to fully implement its spending obligations, but also to replenish, on a monthly basis, the existing budget funds (see Table 1).

Table The dynamics of the formation and use of the federal budgets oil and gas revenues in Index Feb March April May June July Aug Sept Oct Nov Oil & gas revenues of federal budget, includ- 303.36 371.20 328.88 345.37 368.01 391.40 454.60 432.35 435.77 411.ing:

Mineral Extraction Tax (imposed on extraction 122.62 123.54 120.14 135.82 136.24 159.77 166.82 173.36 150.57 131.of hydrocarbon materials) Export duty on oil 111.41 146.63 123.80 137.79 160.01 151.49 179.79 168.41 196.74 188.Export duty on natural 32.23 59.91 43.33 35.10 28.48 37.14 46.89 42.44 36.11 44.gas Export duty on goods based on petroleum 37.10 41.11 41.61 36.66 43.28 43.01 61.11 48.13 52.35 47.products Directions of use of oil 303.36 371.20 328.88 345.37 368.01 391.40 454.60 432.35 435.77 411.& gas revenues:

For financing transfer of 303.36 371.20 328.88 345.37 368.01 391.40 26.77 0.00 0.00 0.oil & gas Allocations to Reserve 0.00 0.00 0.00 0.00 0.00 0.00 420.60 0.00 0.00 0.Fund Allocations to National 0.00 0.00 0.00 0.00 0.00 0.00 7.23 432.35 435.77 411.Welfare Fund Nevertheless, the November data indicative of a drop in the tax revenues in the general governments budget have explicitly demonstrated that the state officials no more experience any euphoria, so characteristic of their past attitudes based on a stable budget surplus and high oil prices. Therefore, now is the time to resort to a more cautious budget policy, coordinating the volumes of obligations assumed by the government with the actual possibility of their financial backing.

However, it can be noted with some justice that the tax policy currently being implemented by the RF Ministry of Finance is quite correct, because it is aimed at diminishing the dependence of the budgetary systems tax revenues on international oil prices. In particular, the dispute between the Ministry of Finance and the Ministry of Economic Development on the issue of bringing down the rate of either of the two taxes VAT or Profits Tax, that took place in summer 2008, was resolved in favor of the former Ministry, and thus the rate of Profits Tax: was decreased to 20 %. In the present situation, in view of the existing trend toward diminishing the structural component of the budgetary systems revenues (that is, the component that does not depend on estimated levels of world oil prices), it is necessary at least to maintain the quality of administering the base and rates of those taxes that are less directly depend on world oil prices (value added tax, excises).

Oil and Gas Sector Yu. Bobylev It was the slow-down of the world economic growth, decrease in demand for oil in the developed countries and outflow of the capital from the goods exchange markets that accounted for the dramatic drop of prices for oil. In December the price of the Russian oil at the world market fell by more than three times as compared with the level of July. For the first time over the recent years the reduction of oil production in Russia is observed. This testifies the exhaustion of reserves for the increase in the oil production in the country by the intensification of the exploitation of the oil fields currently in operation and the necessity of more active actions to develop new oil fields. In 209 the drop of world oil prices and the increase in capital, operation and transportation expenses will lead to the considerable reduction in the tax earnings from the oil sector and net profit of oil companies.

In 2008 world prices for oil were at a remarkably high level. In July 2008 average monthly prices for oil exceeded USD 130 per barrel and reached the figure of the historical records not only in nominal but also in real terms. It was the increased level of demand for oil, which was the result of high growth rates of the world economy, in particular the economies of China, India and other Asian countries, conservative policy of the OPEC concerning the increase in oil production by the organizations member-countries as well as low growth of oil production outside the OPEC that were the main factors of price growth. Decrease in oil production growth rates in Russia and the reduction in production in the oil fields of the Nordic Sea had a considerable effect on the dynamics of oil production. An important factor contributing in the increase of the world prices for oil was a considerable inflow of the capital to the goods exchange markets.

In September-December 2008 the slow-down of the world economic growth, decrease in demand for oil in the developed countries and outflow of the capital from the goods exchange markets accounted for the considerable decrease in world prices for oil. IN December the price for Russian oil at the world market dropped down to USD 41.3 per barrel (average from the first to the twenty-second of December 2008) or in other words fell by more than three times as compared with July level (table 1).

Table World Prices for Oil in Nominal Terms in Second Half of 2008, as USD per barrel 2008 De2008 Au- 2008 Sep- 2008 Oc- 2008 No 2008 July cember gust tember tober vember (1.1222.12) Price for oil grade 133.2 113.0 98.1 71.9 52.5 41.Brent, the UK Price for oil grade 130.1 111.9 97.5 70.8 51.5 41.Urals, Russia Source: OECD International Energy Agency, OPEC.

In the environment of the sharp decrease in the world prices for oil the OPEC has adopted a number of resolutions on reduction of oil production by member countries in order to support prices for oil. In September 2008 the OPEC decided to adhere to the quota of September 2007 corrected taking into account the joining of Angola and Ecuador to the cartel but not including Iraq and Indonesia, which decreased the volume of oil production by the member countries by 520 thousand of barrels as compared with July 2008. In October 2008 the OPEC adopted the resolution on reduction of the production by 1.5 mln of barrels a day on the level of September 2008 starting with 1 November 2008.

These decisions did not, however, have any visible effect on the market. This is due to both the incomplete fulfillment of the liabilities taken by the OPEC member countries and the decrease in demand for oil in the developed countries in the environment of the started recession. In December the OPEC decided to reduce oil production by 4.2 barrels a day as compared with the level of 1 January 2009.

In the recent years the oil production growth rates in Russia have decreased considerably. Whereas in 2004-2006 increase in oil production made 8.9-11% a year, in 2006-2007 annual increase was equal only to 2.1%, and in 2008 there was a decrease in oil production observed for the first time. In January-November 2008 the oil production reduced by 0.7% as compared with the corresponding period of the previous year (table 2), which indicates the exhaustion of reserves for oil production at the expense of intensification of the exploitation of the oil fields in operation and testifies the necessity to develop new oil fields more actively.

Oil processing has been growing at higher rates than oil production in recent years, which was accounted for by the fast growth of oil products export. At the same time the extent of oil processing has increased but little and was equal to only 72.6% in January-October 2008, whereas in the leading industrial countries it reaches 90-95%. The efficiency of oil processing and quality of the oil products made in Russia remain substantially below the world level.

Table Oil, Oil Products and Natural Gas Production in 2002-2008, as percentage on the previous year 2002 2003 2004 2005 2006 (months) Oil, gas condensate 109.0 111.0 108.9 102.2 102.1 102.1 99.included Primary oil processing 103.3 102.7 102.6 106.2 105.7 103.8 103.Car petrol 104.9 101.2 103.8 104.8 107.4 102.1 101.Diesel oil 104.7 102.0 102.7 108.5 107.0 103.4 104.Furnace oil 107.1 100.3 97.8 105.8 104.5 105.2 102.Natural gas 101.9 103.4 101.6 100.5 102.4 99.2 102.Source: Federal State Statistics Service.

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