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Table Indirect military expenditures related to previous military activities Difference be- Share in expenditures (%) / Amount in tween expendi- increment in comparison with FB 05 (Rub. tures of FB 05 and the figures in 2004, p. p.

No. Sections and subsections mil.) / FB 04 (Rub. mil.) Same in and increment in In relation to In relation to prices of 2004 expenditures (in FB 05 GDP %) 4.1 Military pensions due to the 65 842 7 660 2,16 0,servicemen of the Defense Min- 58 945 13,00 0,25 0,istry 4.2 Pensions paid to the servicemen 53 103 6 776 1,74 0,and persons granted the similar 47 540 14,25 0,27 0,status serving in security agencies and law enforcement agencies 4.3 Subprogram State Housing 8 950 809 0,29 0,Certificates in years 2004 8 013 10,00 0,03 through On the whole, the aggregate indicators of military and related expenditures (see Table 5) in absolute and relative terms will increase rather significantly, especially taking into account the fact that in real terms the expenditure items of the federal budget declined by 1.4 per cent in comparison with the figures registered in the preceding year.

Table Aggregate indicators of military and related expenditures Difference be- Share of expenditures in FB-tween expendi- in % (share / change in share in Amount in tures of FB 05 comparison with FB-03) FB 05 (Rub.

and FB No. Expenditures mil.) / (Rub. mil.) and Same in In relation to In relation to increment in prices of 2004 FB-04 FB-expenditures (in %) 1 Total direct military expenditures 671 089 49 186 22,02 3,600 795 8,19 2,09 0,2 Aggregate direct and indirect mili- 736 931 49 186 24,18 3,tary expenditures related to the 659 741 7,46 2,12 0,present and past military activity 3 Total expenditures for national 930 029 86 694 30,51 4,defense, law enforcement, and state 832 613 10,41 3,57 0,security 4 Amount of direct and indirect fed- 1 079 978 86 694 35,43 5,eral expenditures related to present 966 856 8,97 3,64 0,and past military and law enforcement activity and national security Unfortunately, the traditional secrecy persisted as concerns the expenditures of the federal budget for year 2005. Thus, in the section National Defense 43 per cent of the total expenditures are classified, while in the expenditures of the Defense Ministry the share of classified outlays makes 33 per cent. On the whole, 12 per cent of the FB 05 are classified. The traditional lament of experts that this practice is not only irrational, but unlawful as well remains true also in 2005.

The most serious issue is the problem of priorities of the national budget planning in the sphere of defense.

Thus, over the last year, the mass media prompted by the Defense Ministry informed the public that the Ministry set combat training as its first priority. Many reports from the military maneuvers visited by top state officials, confident reports of the Defense Minister could have created the impression that this goal was being efficiently achieved, if the results of real combat actions in the Northern Caucasus did not bear witness to the contrary. Beside the fact that as it became clear that the troops were trained for a wrong combat expected in a wrong place, by the end of the year it turned out that the financing of the expenditures for combat training made only one fourth of the necessary amount. In particular it was true as concerns the necessary minimum level 7 of consumption of fuel, which was set at 3.million metric tons; however, the budget financing of this item of expenditures sufficed the purchase of only 2.9 million metric tons of fuel, while the real volume of purchased fuel made only 2.6 million metric tons.

Judging by the statements made by the military leadership, in 2005 the priority was the state arms program. It was planned that in the course of implementation of this program there should be developed about 300 new and modernized models of armaments. It was publicly stated that the leadership opted in favor of equipment and increased the spending for the arms program in stead of raising, for instance, food rations 8 and indexing the money allowances paid to servicemen and salaries of civilian personnel. However, as it turned out the military leadership regarded the increase in the share of expenditures for military equipment up to 40 per cent as a success and an indicator of the quality of the functioning of the Armed Forces, while the perspective target in this sphere is the growth of this share to 50 per cent by year 2010. This policy is supported by the argument that it is necessary to follow Izvestiya. 2004. No. 41. March 6.

Voyenno-promyshlennyi kurier. 2005. No. 4.

international practices proceeding from the recommendations set forth by the RF Security Council in 2000.

Not only the apparent lack of relationship between the expenditures for military equipment and the quality of functioning, but even the most superfluous analysis of the international practices (see Fig. 1) cast serious doubt on the adequacy of the aims pursued by our military leaders and the priorities they set forth.

100% 16,6% 90% 21,2% 25,6% 34,2% 38,0% 80% 46,0% 70% 60% 50% 83,4% 40% 78,8% 75,0% 65,8% 62,0% 30% 54,0% 20% 10% 0% US Great Britain France Germany Poland Russia Maintenance Equipping Source: calculations carried out by IET.

Fig. 1. The structure of expenditures for equipment and maintenance of armed forces in different countries in Judging by the real levels of financing of military expenditures, when over a number of years the rated cost of rations was maintained at one third of its real price and only half of conscripted servicemen are provided with uniforms, at present the maximum strength of the Armed Forces should make from 500 thousand to 600 thousand, i.e. about 50 per cent of its present strength. It is obvious that in the case the strength of the RF Armed Forces is reduced to the realistic figures, there will arise the opportunity not only to fulfill the armaments program so cherished by the Defense Ministry, but simultaneously or even to give priority to the achievement of the adequate living standards for servicemen and civilian personnel, to ensure the attractiveness of military service and sufficient prestige of the Armed Forces. At the same time, the combat training would not suffer (because of the lack of fuel and other similar reasons), there would be a real chance to achieve a sufficient combat efficiency of the Armed Forces, what is not true at present.

Apparently, the necessary qualitative improvement of the budgeting of military spending will be achieved in the result of the current administrative reform and switching to the performance budgeting. However, it seems feasible to pay attention to the absent at present practice of public discussion of the budget requests of the Defense Ministry and further confirmation of it by the authority of the President of the country. Is the figure of 300 models of armaments excessive or insufficient The society has no possibility to find out the justification of such programs and no opportunity to influence the respective decision making process.

V. B. Zatsepin, A. V. Lebedeva Monetary Policy In 2004, the rates of inflation in the RF exceeded the upper limit of the official forecast (10 per cent) and made 11.7 per cent. In 2004, there was observed a more moderate increase in the monetary base as compared with the figures registered in 2003. However, in the 4th quarter it grew at a faster rate than in the respective quarter of the last year. By the end of 2004, the amount of the national gold and foreign exchange reserves exceeded US $ 125 billion. In 2004, there were made payments relating to the external debt amounting to RUR 574 billion.

In December of 2004, the increase in the consumer price index made 1.1 per cent (1.1 per cent in December of 2003), and 11.7 per cent since the beginning of the year (12 per cent in January through December of the preceding year, see Fig. 1). The most significant rise was observed in the group of food products (1.7 per cent as compared with 1.5 per cent registered in the respective month of 2003).

The increment as compared with the figures observed in December of 2003 made 12.3 per cent, what is significantly above the increase observed in the respective period of the preceding year (10.2 per cent). In the first seven months of this year, there were registered more moderate rates of growth in consumer prices of food products as compared with the figures observed in the respective period of the last years. However, after a relatively insignificant seasonal decline in prices of fruits and vegetables observed in August and September, the CPI characterizing this group of products began to exceed the value of this indicator registered over the preceding years. As concerns the period from January till December of 2004, over this time the pasta products, meat, poultry, fish, sea products, and sugar have increased in prices more significantly than in the respective period of the preceding year. Besides, in 2004 the prices of fruits and vegetables grew by 3.3 per cent, while in 2003 the respective prices went down by 4.2 per cent.

In 2004, the most significant rise in prices was observed in the group of paid consumer services (by 17.7 per cent as compared with 22.3 per cent registered in the preceding year). The increase in December made 1 per cent (as compared with 0.9 per cent observed in the respective month of 2003). It should be noted that in January through October of 2004 the increase in the consumer prices of paid services to the population was below the indicators registered in the last two years; however, in December the prices of paid services grew more significantly than in 2003, what is an alarming trend.

Over the last month the services of passenger transport demonstrated the most considerable growth (+ 3.8 per cent), while the most significant rise of prices in 2004 was observed with respect to HPU services (+ 23.5 per cent).

This year, the prices of nonfood goods also grew at lower rates as compared with the indicators registered last year. Thus, in December the increase made 0.4 per cent (as compared with 0.6 per cent registered in December of 2003), while in the 12 months of this year the prices of nonfood products grew by 7.4 per cent (by 9.2 per cent in the respective period of the preceding year). In December, the prices of gasoline at last decreased by 1.7 per cent. On the whole, in 2004 the respective prices grew by 31.3 per cent what was practically twice above the indicators registered in 2003 (+ 16.8 per cent).

In November, the growth in the Base Consumer Price Index (BCPI) 9 made 1 per cent. Therefore, since the beginning of the year the increase in the BCPI made 10.5 per cent (the total increase in the BCPI in 2003 made 11.2 per cent).

According to preliminary estimates, in January of 2005 inflation in the RF will make about 2.5 per cent.

The Base Consumer Price Index (BCPI) is an indicator reflecting the inflation rate on the consumer market. It leaves out of account the seasonal (prices of fruits and vegetables) and administrative (tariffs on regulated types of services etc.) factors, calculated by the Statistics Service of the RF.

The Growth Rate of the CPI in 2002 - 2004 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% Fig. In December of this year, the monetary base of the Russian Federation (in the broad definition10) increased by RUR 303 billion and made RUR 2.39 trillion. As on December 1, 2004, the amount of the monetary base of the Russian Federation (in the broad definition) was at RUR 2.08 trillion. Therefore, in December the growth in the monetary base made 14.5 per cent. Therefore, in 2004 the monetary base increased by 24.7 per cent. In the respective period of the preceding year the growth made 55.per cent. Below, the dynamics of the monetary base will be analyzed across its components.

The amount of cash in circulation (as adjusted for cash balances of crediting organizations) made RUR 1.67 trillion as on January 1 (+ 17.8 per cent as compared with the level registered on December 1 of this year). On the same date, the amount of accounts of crediting organizations with the Central Bank of Russia made RUR 486.4 billion (+ 74.4 per cent), the amount of mandatory reserves was at RUR 121.7 billion (+ 2.3 per cent), the amount of banks deposits in the Bank of Russia made RUR 91.4 billion (- 52.6 per cent), the amount of the Bank of Russia bonds held by crediting organizations made RUR 9.7 billion (- 63.8 per cent), the amount of the Central Banks liabilities related to the reverse repurchase of securities was at RUR 2.5 billion (-93.8 per cent), and the funds transferred to the Bank of Russia as the reserves related to foreign exchange operations made RUR 4.7 billion (- 37.per cent).

In December of 2004, there was registered a simultaneous growth in the amount of cash in circulation (+ 17.8 per cent) and mandatory reserves (+ 2.3 per cent), what resulted in an increase in the narrowly defined monetary based (cash plus mandatory reserves) by 16.6 per cent (see Fig. 2). This growth was determined by a significant amounts of purchase of foreign exchange on the part of the Bank of Russia: in December the gold and foreign exchange reserves of the Bank of Russia grew by 6.1 per cent and made US $ 124.5 billion. In the first weeks of January, the amount of gold and foreign exchange reserves declined to the level of US $ 120.1 billion (- 3.5 per cent).

On the whole, in 2004 there was observed a more moderate growth in the monetary base than in 2003. However, in the 4th quarter the monetary base increased at a more rapid rate than a year ago. It should be noted that until September the gold and foreign exchange reserves grew at a slower rate than in 2003. On the other hand, after the summer reduction of the requirements concerning the mandatory reserves, the amount of reserves of commercial banks has significantly declined; however, the impact of this factor ceased in the autumn. It should be also noted that in 2004 there was continued the policy The RF Monetary Base in broad definition includes cash in circulation, the Ruble denominated funds in mandatory reserves relating to the borrowings of credit organizations, and funds in credit organizations correspondent accounts and commercial banks' deposits with the Bank of Russia.

Jul Jul Jul Jan Jan Jan Sep Sep Sep Mar Nov Mar Nov Mar Nov May May May of active sterilization of the forex denominated export proceeds via the Stabilization Fund, the amount of which made more than RUR 500 billion by the end of 2004.

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