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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES February 2005 MONTHLY BULLETIN Moscow 2005 Institute for the Economy in Transition, 1996. Licence, 02079 19 2000 .

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (095) 203-88-16 Fax: (095) 202-42-24 E- Mail: todorov@iet.ru 1 Politico-economical developments of February 2005............................................................................ 3 Budgetary and Fiscal Policy.................................................................................................................... 5 New Mechanism of Pharmacological Support of Recipients of Benefits............................................... 7 Military and related expenditures in the federal budget for year 2005................................................. 10 Monetary Policy.................................................................................................................................... 15 The Real Sector of the Economy: Factors and Trends.......................................................................... 17 Regions: Dynamics of Industrial Output............................................................................................... 21 IET Business Survey: Industry in February of 2005............................................................................. 24 Foreign trade......................................................................................................................................... 25 Privatization and management of state owned property........................................................................ 28 Efficiency of banking operations in the first 3 quarters of 2004........................................................... 32 Issues discussed at the meetings held by the Government of the Russian Federation on February 3, 10, and 24 of 2005............................................................... A review of regulatory documents concerning taxation, which were made public in January and February of 2005...................................................................................... Review of the economic laws for February 2005.................................................................................. Politico-economical developments of February 2005.

This month an initiative of the resignation of the Government, with which repeatedly launched the representatives of left-wing opposition, bagged the required for inclusion of the issue in agenda one hundred subscriptions of people's deputies. Considering factional composition of the parliament (United Russia - 307, LDPR - 35), this requirement had been supported by all the political forces.

However, naturally, there was not enough votes (112 pro) for resignation on February 9, where the majority of the United Russia abstained from voting (and 5 deputies even cast an affirmative vote).

The initiative on resignation of the Government was attended by PR-action of a group of deputies from the faction Motherland headed by D. Rogozin, who went on hunger-strike and required resignation of the Government and abolition of the bills on monetization of benefits. Revealingly, that this action poorly highlighted by federal TV-channels.

As regards the procedure itself (which visited M. Fradkov, while the ex-premier M. Kasyanov ignore hearing about his resignation in March 2001 and June 2003), it demonstrated its usual demagogical nature. Among the priorities the premier market the growth of the minimum monthly wage to subsistence level, reform of the housing and utilities infrastructure, education and health care, reduction of the size of taxes generally and VAT specifically, support of small and medium business, production of new armaments and creation of mechanisms of private-government partnership.

It is expected that February will be an important month from the point of view of foreign policy events. The long expected meeting of Vladimir Putin and George Bush took place in Bratislava. The day before, a group of American parliamentarians (both democrats and republicans) proposed a draft law requiring suspension of Russias membership in G-8. Even Bush said that he had an intention to raise a question about democracy in Russia during his face-to-face interview with Vladimir Putin. The meeting and the press conference of the heads of the states that followed were held in a friendly atmosphere. Vladimir Putin stated that Russian people 15 years ago made its fundamental choice liberty, he made rather a lengthy commentary on the support of liberty, democracy etc. It was even stated that there is not any special Russian path to democracy (earlier this thesis was popular with the minister of defense of the RF, S. Ivanov). In contrast to the famous1 December meeting with journalists, no qualifications were sounded, reducing the level of democratic declarations,. What is surprising, the parties did not touch the subject of military-technical co-operation of the RF with Iran and Syria, including the unprecedented bargain of forgiveness of 73% of Syria external debt ($9.8 bn) Therefore, one may ascertain that no revision of relations happened so far in a new cadence of G.

Bush between the U.S. and Russia. The decision of the court in Houston (USA), which rejected the Group Menatep in legal proceedings of the case2, became a pleasant surprise, though the case is far from being completed.

At the end of February, an appeal of G. Yavlinsky for the creation of joint democratic party was sounded in the Committee-2008. Yavlinsky recognized that despite all weak points, the reforms of 1990s, that created the market economy, were a progressive event. He says that he does not insist on the name Yabloko and does not consider himself the only democratic leader. Offering to join his party G. Yavlinsky suggests to have in its governing body 50% quota of Yabloko. Such an approach could be justified if we mean only joining of SPS and Yabloko. But it is said about establishing a united democratic party. And it means that some quotas are to be provided for within such a party for small political operators, and for potential investors, and for bright nonparty public opinion leaders. In principle, SPS supported such ideas, having noted that it does not insist on a 50% quota.

The negotiations are being continued, and at this stage SPS and Yabloko might announce that a principle decision had been taken on the formation of a united party, based on one of them, work is Vladimir Putin expressed doubt in a democratic character of the U.S. presidential elections, took care of jobless rate in Poland, self-critically compared the actions on sale of the JSC Yuganskneftegaz with the shares-for-loans auctions, and stated that the war in Chechnya is over.

It is to be noted that the defense chose rather a strange line of conduct trying to substantiate proceedings in the case in the U.S. by the fact of living of the American director of the company a plaintiff in the U.S. and availability there of the companys accounts for tens of thousands of US dollars, instead of the fact of considerable investments of American citizens and companies in the shares of Yukos under way on developing a new Program and the principles of merging. In any case, it is obvious that, separately and without renovation this structures will not go through a voting barrier. In this case their existence complicates also forming a new party project, possibility of which is talked about by G.

Kasparov, V. Ryzhkov, etc. Among the problems that need solving a new flexible ideology, taking into account qualitative changes in the political system in 2003 2004, and renewal of human capital, that removes public functionaries of low rating.

In a year after his resignation the ex-premier of the RF, M. Kasyanov, gave a press conference. Besides the information on his establishing a consulting company, which is of low importance, he made a number of important statements, which, obviously make impossible his further being in power and around it. The current power stood in opposition to the political course which was correct, - a course of market economy, - declared the ex-premier. He cannot agree with the above, so, he is ready to contribute to joining of democratic forces. Kasyanov called Fradkov government inefficient, the situation around Yukos - unbearable, the reform of changing benefits with cash payments - untalented, and abolition of direct governors elections - wrong decision. Russia has no today independent judicial system and mass media, and freedom of enterprise, and private property is not protected at that.

One should not overestimate the Kasyanovs press conference, because without a goal-oriented political activity neither this press conference nor any other will lead to any consequences. It is obvious that hoping, apparently, to the promised post3 Kasyanov to no purpose spent all the year, and there observed a slump in his personality. At the same time, the policy of state TV-channels (suppression of impressive speeches with obligatory presence in the shot of Kasyanov words about the meetings he had in the U.S. with the following allusions on American engagement of the premier) shows a serious concern of the powers at a minimum. The Kasyanovs potential is in his international reputation, his authority in the organs of government and business, his involvement in the clear economic recovery in 2000 2003, in absence of the recognized involvement most patent defects (Chechen war and growing of terroristic threat, criminal degeneration of power structures, performed benefits monetization), in his advantageous appearance, sociability, intellect etc, in comparison with the incumbent heads. The same is true for the majority of pretenders on the part of opposition leaders, and not without reason, appearance of M. Kasyanov also distressed many of those there. The near months will show if Kasyanov is able to choose a distinct for society form of putting forward this own initiatives, attract the real supporters, respectable managers of his own company etc, or become one of those numerous people (though clever enough) involved in the regime criticism.

Some tax initiatives of the Government are put into practice. According to expectation, they are of different nature. On the one hand, at a meeting with the Deputy Prime Minister A. Zhukov the President of the RF approved an initiative of establishing a clear list of documents, which are to be required from the taxpayer, restricting the dates of checking, etc. He also offered the initiatives of the Ministry of Finance of the RF on amendments to the Tax Code, which, in fact, allow tax collectors to set market prices, and ex curia to write off the calculated penalties4. In parallel, an initiative of Vladimir Putin is put forward on renewal of the rate of confiscation of property in criminal legislation5. Hot economic debates are being continued in the government of the RF. The prime-minister of the RF, M. Fradkov, in the support of the Government Office of the RF initiated discussion of measures aimed at spending the funds of the Stabilization fund, exceeding Rb 500 bn, for compensation of budget expenditures to reduce VAT to 13% (also provided for are expenditures for financing of mortgage programs, reforming the housing and utilities infrastructure, innovation expenditures, but they are secondary in relation to compensation of lessening revenues because of reduction of VAT). Major pro arguments were in actual failure negotiations on repayment of debts before maturity to Paris Kasyanov himself mentioned the post of the head of the government agency, which forms the investment consortium for construction of main pipelines, in press there were mentioned also the posts of the president of Sberbank of the RF or Foreign Trade Bank of the RF.

Taxes are additionally calculated, if a price is outside the limits of some market price range, to substantiate prices, enterprises will have to give information on the terms of transaction, revenues, functions of its participants and the methods of price determination. Otherwise, tax inspectors will be able to collect from them additionally calculated taxes and penalties out of court, the same was true for trading with offshore companies.

It is necessary to note that those rates a year (!) ago were excluded at the suggestion of Vladimir Putin.

Club from the funds of the Stabilization fund (Creditor counties not only granted concessionary terms of payments, but also raised a question on unfavorable for the RF reconsideration of the schedule of payments due to improved energy price dynamics). The heads of the Ministry of Finance, A. Kudrin, and the Ministry of Economic Development and Trade of the Russian Federation, G. Gref opposed the decision. But their position was not too radical, and they indicated in their several statements that in presentation of convincing counterarguments, and finishing the proposals they are ready to agree with the reduction of VAT. Despite the fact that the initiative is recaptured now by the supporters of spending the funds of the Stabilization fund, we believe that it is too early for taking a conclusive decision.

Once again the medium-term plan of actions of the government was sent to finishing on the initiative of the prime-minister of the RF, M. Fradkov. The formal content of claims absence of calculations for a number of institutional reforms, and real (minimization of government investments and maintenance of current procedure of their distribution, the key role in which play the Ministry of Finance of the RF, Ministry of Industry of the RF, and the Ministry of Economic Development and Trade of the RF, but not the prime-minister) is the same. From all appearances, this question will again be raised not earlier than in announcement of the President Putins Annual Letter to the Federal Assembly of the RF.

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