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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES February 2007 MONTHLY BULLETIN Moscow 2007 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 The politico-economic results of February 2007........................................................................................... 3 Budget and tax policies................................................................................................................................ 5 Monetary policy.......................................................................................................................................... 8 Financial markets....................................................................................................................................... 12 Real economy sector: trends and factors..................................................................................................... 21 Business Survey in February 2007............................................................................................................. 25 Foreign Trade............................................................................................................................................ 27 Priority National Project in the Field of Public Health Service: First Results.............................................. 30 Changes in the trends of migration during the post Soviet period............................................................. 32 Investments of pension savings in the system of mandatory pension insurance in 2006.............................. 37 Military expenditures in the 2007 federal budget........................................................................................ 44 Issues considered at the meetings of the RF Government on 31 January 2007............................................. An overview of economic legislation adopted in February 2007................................................................. A review of normative documents concerning taxation issues for January February 2007....................... A review of budget legislation for February 2007....................................................................................... The politico-economic results of February February 2007 was rich in important events in the upper echelons of power. In particular, there was a cabinet reshuffle - the most radical the RF Government had experienced since November 2005. But the main event, in our opinion, was something quite different both in the political and media spheres a dramatic increase in the probability that V. Putin would keep his post of the countrys leader for the third term or, better say, indefinitely long - was registered.

At first glance, the reasons for concern are far from numerous - the case in point is V. Putins remark made by him during his tour of Arab countries in the interview to Al-Djazira: Not only the leader of Arab states, but even the leaders of some European countries said to me, in personal conversations, that in this period of transition they too would consider it advisable for me to remain on the post of President of the Russian Federation. I have frequently heard such recommendations not only abroad but back at home as well. It should be noted that it was the first Putins statement since September 2005 in which such pieces of advice were not rejected outright but were treated rather favorably and attributed not to some nonentities but to the heads of European countries. However, this statement is worth considering also in the context of state propaganda starting from early February, it has again become fashionable for the state owned TV channels to promote the theme of Putin remaining in the highest government office. Several months ago this theme somewhat faded it even seemed that it would be buried for good by the efforts, for example, of G.

Pavlovskii, who did explain, in December, that to keep Putin in office for the third term would mean a decay similar to that under Brezhnev, and that this course of events was in the pecuniary interest of some bad people. Moreover, in February the state-owned TV channels tolerated quite a number of assessments, made to the effect that D. Medvedevs chances to become the successor of Putin were rather poor. Undoubtedly, all this cannot be accidental on the contrary, what is going on is indicative of Putins mood even to a greater extent than his own slips of tongue and reasoning. However, it is still too early to speak about some predetermination: to arrive at it, it would take no less than three of four months, if some sweeping alterations are to be introduced in the Constitution. An important indicator of the competitive struggle for the third term is the further dynamics of responses, from subjects of the Federation, to the so-called Chechen draft law, which removes the time limits of staying in the office of President at present, the opinions split almost fifty fifty, with a small preponderance of negative responses, but it should be remembered that most of the subjects of the Federation have not submitted their responses yet. And the main interested parties in this struggle are Putin himself (as is known, since the times of Simeon Bekbulatovich (the 15th century) the real Head of State has always coincided with the nominal one), provided that he is ready to sacrifice the material and symbolic foreign assets, and that part of his entourage which does not have a convincing candidate for succession, and therefore risks to become demonstratively called to account and expropriated after Putins departure.

The second important context was the cabinet reshuffle (it is quite significant that at that time Premier Fradkov was abroad). S. Ivanov was appointed First Second Deputy Chairman of the Government, while previously M. Fradkov had one first deputy, D. Medvedev. The head of the government apparatus, S.

Naryshkin, while retaining this post, became Vice Prime Minister in charge of economic relations with the CIS countries. A. Serdiukov, the former head of the Federal Tax Service, replaced Ivanov as RF Minister of Defense. The new minister is even less related to the army than his predecessor most of his life he was a businessman, and before having been appointed head of the FTS he spent just a few years working in a corresponding state service. M. Mokretsov became the new head of the FTS after being Serdukovs subordinate for the past few years.

Shortly after the reshuffle, a new distribution of powers between the members of the Government was announced. D. Medvedev remained in charge of the national projects, education, public health care, social security, construction, the housing and utilities sector, nature management, and the agro industrial complex.

S. Ivanov got in charge of industry, power engineering (previously supervised by D. Medvedev), transport, communication, the military industrial complex, science, and the power structures (which is rather amusing because, in accordance with the Constitution, they are to be in charge of the Head of State one can presume that in reality this provision will continue to be observed). The untitled Deputy Chairman of the RF Government, A. Zhukov, will continue to deal with macroeconomics: the socio economic development of the country and the implementation of the integrated financial, tax, and budget policy. The head of the government apparatus and the Deputy Chairman of the RF Government, S. Naryshkin, will coordinate for eign economic activity, customs and tariff regulation, federal property management, the implementation of administrative reform, and the development of culture and tourism.

The majority of commentators have interpreted the cabinet reshuffle as a significant strengthening of S.

Ivanovs position in the struggle of succession and as a certain weakening of D. Medvedevs position.

They also noted the strengthening of S. Naryshkin, and even of M. Fradkov. In our opinion, this view is only partly true. It is absolutely clear that Medvedev has become weakened. Previously the main candidate for succession, he has, in fact, been reduced to being a rank and file one in the list which comprises at least five or six names (provided that the situation will not develop in any unconstitutional way, the possibility of which is not so small), including himself and Ivanov, and, apparently, S. Chemezov, V. Yakunin, and M. Fradkov. But it is quite difficult to agree that Ivanovs appointment means his promotion. In fact, under the existing system of functioning of the Government, the Vice Premiers are semi nominal figures. Despite the impressive names of their functions, they do not have the signing authority in personnel, financial and coordination matters, which habitually constitutes the administrative resource and reflects the importance of an official. All such rights are concentrated in the hands of the prime minister, the ministers, the heads of services and agencies, and the apparatus of the RF Government, not to mention V. Putin. Unlike the Vice-Premiers, the Minister of Defense, who has the honor of supervising the defense budget of more than 800 billion roubles, intentionally made secret in this pre-electoral year, is an extremely important figure from the financial point of view. The performed castling strongly resembles the special operation aimed at removing D. Kozak from the Government it was also explained then by the necessity to concentrate the best intellectual and administrative forces and to dispatch them to solve the problems of the North Caucasus.

In this connection, the appointment of a professional financier to the post of Minister of Defense also becomes clear, the more so as A. Serdiukov had already managed to prove himself as a person both loyal to I.

Sechin and with his own resource of acceptability owing to his Petersburg past.

Naryshkin, who has preserved his key post, which implies the coordination of practically all issues being considered by the RF Government, now has the chances to establish his control over the customs service, state property management, and the trade in energy carriers in the CIS. At least the first two of the above listed spheres were previously considered to be in the exclusive competence of the Prime Minister. So it can be said that the competence of the former has been even reduced. Apart from this, it is symbolic that in the course of reforming the Government M. Fradkov has not managed to achieve any progress in his long cherished plans to dissect the Ministry of Economic Development and Trade and the Ministry of Power Engineering and to curb the influence of their influential leaders. And Putins statement, at a press conference in early February, that those who have had this in mind are already holding their posts and that there is no point in fussing with regard to this matter, which was initially interpreted as a certain guarantee given to Fradkovs cabinet, looks absolutely meaningless just half a month later, after all this reshuffling.

Personnel reshuffling in Chechnya have not got proper attention. The nominal President of Chechnya, A.

Alahanov, had been transferred to Moscow, and Ramzan Kadyrov was appointed to this post. The personality and political course of this leader of Chechnya are characterized by his public initiative of last year from the demands to increase the financing of subsidies to the republic ten fold (!) to the demands to all the Chechen inmates of Russian prisons. Kadyrovs road to power was not too elegant: first Prime Minister of Chechnya S. Abramov, who had been reluctant to return to the republic and had let Kadyrov to get his post, met with a traffic accident, then the journalist Anna Politkovkaya, who had been writing about Kadyrov being the perpetrator of the gravest crimes, including a number of murders, was killed by an unidentified gunman, and then, in Moscow, a Chechen armed formation gunned down the former commander of Kadyrovs bodyguards, M. Baisarov, who had made similar accusations with regard to his former boss. In recent months, the nominal President of Chechnya, A. Alhanov, who had failed to organize a sufficiently broad anti terrorist coalition, was, in fact, was hiding in Moscow; it was forbidden to publish any positive references to him in the Chechen press, and the handful of officials who remained in his apparatus, as well as his relatives, were virtually under siege. After Kadyrovs having been appointed President, no checks and balances with regard to his faction have remained in Chechnya the relatively independent formations of S. Yamadaev and S. Kakiev will now be cautious enough not to display any signs of disobedience, while the power structures (HQ COMD of the Ministry of Defenses anti terrorist operation, RB-2) are, in fact, being squeezed out from the republic. In fact, a regime openly hostile to Russian society and its constitutional and cultural traditions has been created in Chechnya at the expense of the Russian taxpayers. Its freedom of action exceeds everything known in the days of Dudaev and Maskhadov - who, for example, did not dare to lay claims to the finance flows of the Chechen diaspora in Russia.

In February, a number of party and political events took place. First, the leadership of United Russia, and in particular its chairman B. Gryzlov, intensified their efforts to entice V. Putin to officially join their party, and made a statement that it considered such a step to be advisable. Also, United Russia put forth a number of initiatives aimed at reducing the right of S. Mironov to appoint senators and remove them from office1.

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