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The situation in the fuel and energy complex So far as the foreign trade area is concerned, 2004 has become the most favorable year ever noted in the post Soviet Russias history. The oil prices reached their maximum, staying as high as over USD 30/barrel over the year, and sometimes even sky rocketing up to USD 50/ barrel. It was the government (the budget) and the oil and gas sector1 that benefited form that at most, while judging the past years experience, other industries gained nothing, albeit lost nothing either.

In the light of the existing close relation between the budget revenues and the fuel sectors gains (as the price rise for oil at 1 USD/barrel results in a USD 11.5 bln. growth in budget revenues), it appears quite logical that while discussions in early 2004 were domi nated by the subject of identification of the amount of the permissible increase of the tax burden on the oil producers, by late 2004 the problem of using resources of the Stabilization Fund came to the forefront.

The issue of the withdrawal of the oil rent has always been fairly politicized and until recently it was put forward only by leftist hue economists (S. Glazyev, D. Lvov, etc.). But a number of factors emerged by erarly 2004 allowed to mobilize a new consensus that im plied transferring a maximum possible proportion of the fuel and energy sector proceeds to the budget. Those factors, particularly, were: the declining administrative and public in The gas prices are closely related to those for oil.

RUSSIAN ECONOMY in trends and outlooks fluence of the sectors representatives (the effect of the YUKOS case), a considerable rise in the energy companies profits, and the government course towards lowering main taxes without a radical reduction in public expenditure.

The RF government made its final decision on withdrawal of a significant part of oil revenues in April 2004 by approving the raising of the mineral tax and the respective export duties rates. By the time the oil lobbys capacity to advocate their interests had already been so low that the decision needed no detailed rationale. At this point, it is worth taking note of a key paragraph of the Explanatory Note to the bill2 that justifies the amount of additional withdrawals:

It is evident that only the part of profit that, from the governments viewpoint, may be recognized as inefficiently used should become subject to withdrawal; given certain reser vations, dividends payable in an excessive amount, as well as investment in non profile as sets can be recognized as such. In 2002, by the oil sector as a whole USD 3.0 bln. was spent on dividend distribution, while 2.8 bln. on purchasing assets. In 2003, the respec tive amounts were USD 5.6 bln. and 5.5 bln., respectively. That is why, according to our estimates, under the 2005 projected oil price of USD 24/barrel the sum of USD 1.5 bln.

(equivalent of 50% of dividends distributed in the sector in 2002) can be withdrawn from the oil sector without a notable damage to it without. Should the oil price be USD 27/barrel, the withdrawal could amount up to USD 2.5 bln., roughly equivalent to 45% of dividends distributed in 2003.

Hence, the MiniFin of RF obviously makes a vague reference to oil prices as a main factor that affects the value of dividends. This is not quite obvious by itself, for one can imagine a great number of other factors that affect this particular indicator. For instance, OAO OMZ (Obyedinennye machinostroitelnye zavody) pursued the corporate strategy that provided for refusal to pay dividends during a few years the decision which in no way was affected by produce prices.

Once the MinFin refers to specific circumstances of 2003, it turns its arguments in accurate apriori, for in 2003 roughly as much as 60% of all dividends in the country were paid by YUKOS and Sibneft (USD 4.1 bln. out of 7 bln.). Plus, being a part of a merger transaction, as a minimum, some dividends de facto were not das such. So, the real taxa tion rate of dividends is far greater value than the declared 45%.

Stabilization Fund A rapid rise in the budget revenues fueled by the energy sector has resulted in a no table growth of the Stabilization Fund that accounted roughly for Rb. 500 bln., as of late 2004. Given the dirigist group in the government was solidifying its positions, their raising the issue of using the funds to invest in the industrial sector was easy to forecast. But an implementation of such a proposal would mean the rejection of the Funds stabilizing func tion and the government sector downsizing policy launched in the 1990s.

A compromise was found: that is, a combination of spending in part the Stabilization Fund resources on infrastructure projects and an early debt repayment. But the steadi ness of the compromise can be questioned, as the ministries put forward development strategies and concepts that suggest financing, which cannot be secured at the current state of the federal budget. That, however, the RF government so far publicly has not con sidered unrealistic.

Explanatory Note to the bill On introducing amendments to Art. 3 of the RF Law On customs tariff and Art. 5 of the Fed eral Law on introducing amendments to Section Two of the Tax Code of the Russian Federation and some other statutes of the Russian Federation and on recognition of invalidity of single statutes of the Russian Federation Section 1.

The Socio Political Background Special Economic Zones The idea of fostering special economic zones (SEZ) in Russia, the concept of crea tion of which the government approved in February 2004 was a specific reaction of the moderate liberal wing of the RF Government to the growing dirigism.

The concepts suggests that economic zone should be understood as a part if the ter ritory of the Russian Federation in which the government sets a special regime of entre preneurial and investment operations, as well as establishes a special customs regime.

Accordingly, the concept suggests a special administrative regime there, tax and customs regimes, and a land use regime.

Strengths and weaknesses of CEZ are clear. On the one hand, they can be consid ered an efficient means of a selective, partial liberalization of an economy in the conditions under which opportunities for the overall liberalization are limited. Foreign experiences show that benefits granted to such zones often happen to outspread (in full or in part) throughout the increasingly growing number of territories of a given country.

But CEZ creation to some extent switches competition from the production and sales spheres to the administrative one, thus creating a specific (and often costly) resource as operations within CEZ. Plus, once benefits are granted to single categories of taxpayers, this decreases the number of participants in the political coalition for the general reduction of taxes, customs duties and administrative barriers, and this poses a special problem.

Priority Reform Avenues In his 2004 address to the Federal Assembly President Putin highlighted 5 critical re forms with which a sustained economic growth should become closely associated. Thos are: 1) military reform; 2) educational reform; 3) health care reform; 4) securing the acces sibility of the housing market; 5) solving the problem of the Kaliningrad Oblast as Russias exclave.

There has been no progress in the Russian armed forces manning system, not to mention the military reform. According to leakages to the media, the RF Government con sidered the following options: general conscription of students for the term of 1 year; en croaching on the civil rights of those who failed to serve their term in the army; conscription prior to enrollment to a university, among others. Were all such proposals accepted, Rus sia would rapidly, within 45 years, loose one of the major competitive advantages its human capital.

The implementation of another, educational, reform has so been far from comple tion. There exists a situation intermediary between the old university enrollment examina tion competition system and the new Uniform State Examination system. It is often up to universities to decide whether or not they should recognize USE results as an enrollment examination.

An insufficient free delivery of qualitative medical services unquestionably poses a threat of similar caliber to the national human capital as that of defects of the educational system. However, the health care area still is in the tug of war situation with numerous problems yet unresolved. More specifically those are: who should control compulsory con tributions insurance companies or medical institutions by themselves; to what extent it would be possible to lower the burden on corporate or individual clients in the event they contribute to the system voluntarily; what the minimum assortment of services provided by medical institutions should be.

The package of bills on housing has been designed and submitted to the Parliament, but a number of critical problems have remained unsolved. Thos are, in particular: the fail RUSSIAN ECONOMY in trends and outlooks ure to ensure the access of the banking capital to financing the shared housing building, under which the bank would remain an owner of the housing until the mortgage is repaid;

the volume of shared funding by private individuals is meager, because of swindling against which they remain unprotected. As far as demonopolization of the housing con struction area is concerned, the tender based principle of allocation of construction sites was put off until September 2005, as it had been poorly formulated and allowed numerous loopholes for granting the cites to crony companies. There are no guarantees that the pri vate capital will at least gain access to clearly competitive areas in the housing and com munal system (refurbishment, waste disposal), etc. There also exists an unresolved prob lem of allocation of funds to move non payers (if a private individual has failed to pay for housing and communal services for over half year, he is subject to moving to the municipal housing with hostel housing standards, but there is no such housing available).

There was no progress in negotiations on the special status of the Kaliningrad Oblast have lasted for years. The only innovation became the mandatory requirement to Russians to bear their foreign passports, once they travel to the exclave via Lithuania (but this be came effective since early 2005 for travelers to most CIS countries, too).

Natural Monopolies Reform There was no much progress in regard to other structural reforms that President Putin had not stipulated in his 2004 Address as priory ones, albeit they evidently are criti cal. More specifically, as in 2003, last years efforts to reform natural monopolists failed to get hold of Gasprom, Russian Railways, Rostelecom. The issue of a timetable and proce dures of privatization of electricity generating assets has not been considered as well. So, all the critical anti red tape initiatives have been effectively blocked.

Monetization of Benefits The sole serious institutional step the Government undertook became the adoption by the State Duma of a bill on monetization of benefits (enacted as Federal Law of August, 22, 2004, No 122 FZ On introducing of amendments to legislative statutes of the Russian Federation and recognizing invalidity of some legislative statutes of the Russian Federation due to the adoption of the Federal Laws On introducing amendments to the Federal Law On general principles of organization of legislative (representative) and executive bodies of state power of the Subjects of the Russian Federation and On general fundamentals of organization of local self governance in the Russian Federation.

The law in question bears several main provisions:

1) Abolishment of the o called unfounded mandates the effect of which the law on the federal budget suspends annually;

2) Liquidation of disproportions in operations of economic agents that have pt deliver their services for free or at the part of the price (primarily the housing communal sector and transport) by means of provision of an entitled individual with compensation in cash for which he could buy the respective services;

3) Delegation to the regional level of a number of issues associated with the provision of a considerable part of the respective benefits.

It took the Government just 2 months to pass the bill through the Parliament, with practically no debate on it. It cannot be argued there have been no winners from the mone tization of benefits those were individuals that due to this or that reason had not ever used natural benefits, primarily rural residents. But the law battered heavily the welfare of residents of big cities. The bigger is the city, the more insignificant the amount of the com Section 1.

The Socio Political Background pensation was vis vis the housing communal tariffs and transport fares. The government ignored an evident discrepancy between its computations and the value of given services.

Plus, the government did not care even to explain the essence of a hard choice it hade faced: either equal compensations to everyone, from which the most needy recipients of benefits would benefit the most, or unequal compensations to rural and urban residents, which would mean recognition and fixing of the earlier inequality, or a drastic rise in budget social expenditures. As a result, inevitable claims to reduction in benefits became hyper trophied. Notably, in parallel to Law #122, the Parliament passed another federal statute On public civic service, which reads that bureaucrats and their direct relatives keep their right for free medical and sanatorium rehabilitation services, increased territorial coeffi cients, compensations for migration to a new place of job, increased pensions, among other things, as well as the right for a housing subsidy payable once.

So, from the qualitative perspective 2004 proved to be a fairly successful year, while the quality of the economic policy lowered notably.

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