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4,3,3,2,2,1,1,0,0,newly-erected buildings secondary housing rent mortgage deals cottages Fig. 23. Dynamics of the number of deals on the Moscow realty market and on the cottages market in the Moscow Region (according to the data of the MIEL Realty company) According to the data, as provided by the respective mortgage department, volumes of the mortgage deals on the primary and secondary realty markets of Moscow grew up drasti cally in the first half year (2.5 times relative to the December 2002), kept slightly increasing in the second half year and in December this index of the respective turnover already reached 2.9. The total share of such mortgage deals (for both the primary and the secondary mar kets of the living apartments) grew from 2 % in 2003 up to 8 % in the end of 2004 (Fig. 24).

9,00% 8,00% 7,00% 6,00% 5,00% 4,00% 3,00% 2,00% 1,00% 0,00% Fig. 24. Dynamics of the mortgage deals on the realty market of Moscow in 2003 2004 (%) Jul. Jul. Jun Jun Sep. Oct. Sep. Oct. Jan. Jan. Dec. Feb. Dec. Feb. Dec. May May Apr. Nov. Apr. Nov. Aug. Aug. Mar. Mar. Oct. Oct. Feb. Jun. Feb. Jun. Dec. Dec. Apr. Apr. Aug. Aug. Section 4.

Institutional and Macroeconomic Challenges Thus, both positive and negative trends were present on the realty market of Moscow in the second six months of the year.

Certain impacts were indeed exerted by the consequences of the negative develop ments in the finance sphere which took place during the respective spring and summer periods. As a consequence of the recent liquidity crisis (possibly, almost overcome al ready) we now have slower growth rates of the industrial production. Not all banks have yet fully recovered their ability (particularly so taking into account higher norms for reserv ing the respective funds in the RF Central Bank) and wish to give crediting to developers (especially those having problems with servicing the credits received earlier). Quite a number of them, particularly bigger ones, who have entered the market of borrowing (ob viously for purposes of preparing their further expansion into certain RF regions), turn out to be unable to settle accounts with their respective creditors and/or contractors even though they are doing their best to hide their insolvency under a thick smokescreen of noisy and aggressive advertising. While the middle size developers, as well as some big ones, have sufficient working capital even under conditions of slower rates in attracting private investors which quite significantly helps them to successfully develop their respec tive business projects. Although, on the whole, the building industry has not yet fully over come the falling profitability factor certain improvements are already visibly the share of unprofitable enterprises still remains rather high but is nevertheless somewhat going down.

All the external factors which exerted certain impacts on the realty market in the second half year also had both positive and negative variables. The respective trends were (as before) determined mainly by unstable balances of foreign currency flows, i.e.

the correlation between the level of the world oil prices and that of the foreign currency outflow from the country. Oil prices on the world markets remained sufficiently high.

The outflow of capital abroad (net export of capital from the private sector in accordance with the data on the RF payment balance as estimated by the RF Central Bank) caused by the worsening investment climate in Russia as well as by the notorious capital power confrontation, increased in the year of 2004 about four times over as compared against 2003, having thus actually returned to the 2002 level even though there was some net inflow in the last quarter.

Forecasting the trends on the realty market The following factors capable of exerting stimulating influences on the realty market were primarily taken into consideration when forecasting the level of realty prices in Mos cow for the new year of 2005 (Fig. 25): confidence of analysts in maintaining sufficiently high oil prices and amounts of energy carriers exported from Russia, potential attractive ness of the country for returning the national capital and inflow of foreign investments, de velopment of the market legislation in the housing sphere which creates conditions neces sary for further development of the mortgage crediting.

RUSSIAN ECONOMY in trends and outlooks Fact December 2003 forecast July 2004 forecast Forecast for the year of Fig. 25. Forecasting the dynamics of realty prices in Moscow However, the macroeconomic situation in the country gives little grounds for making undoubtedly positive forecasts. In 2005, the realty market may have to face serious up heavals. Conditions for normal business activities are becoming neither better nor any more definite. The package of laws (adopted at the end of 2004) which is expected (at least from the respective official point of view) to stimulate more efficient development of the accessible housing markets, will be practically capable of exerting any positive influ ences after three to four years at best. Accordingly, the nearest feasible time promises but only quite painful consequences for all players of the realty sphere because of uncom pleted transition of financing the housing and communal services (HCS) to the non subsidy system and quite unclear perspectives for full monetization of privileges with re gard to the HCS, the precocity and unjustified toughness of a number of norms in the new Housing and Town Planning codes from the viewpoints of expected social consequences, hardness of struggling against monopolistic structures and practices in the housing busi ness (as demonstrated by the process of restructuring the natural monopolies and the present situation on the Russian fuel market, achievement of the real competition is not evident even several years after the respective normative and legislative basis has been enacted). Rather improper beginning of the practical implementation of the law on mone tization of privileges has caused social tension in the country while measures being under taken to overcome it will undoubtedly lead to unforeseen growth of inflation.

Under such conditions, disposition of the population to spending money, to crediting (mortgage included) will indeed be decreasing while that for saving will most definitely be on the rise. However, under conditions of stable and somewhat going down prices on re alty the latter ceased being an attractive means for saving monies and investing. Having become convinced in insufficiency of the purchasing capacity for realty, developers will simply have to begin to cut down prices in order to improve the value of the liquidity factor.

Nevertheless, we are still of the opinion that they are already somewhat late: the attendant combination of both macroeconomic and microeconomic factors is expected to lead not to greater market turnover and adequate support of the price levels but rather to compara tively prolonged falling of prices in the spring and summer periods by 15 to 20 % before $/m Sep-Sep-Sep-Sep-Dec-Jun-Dec-Jun-Dec-Jun-Dec-Jun-Dec-Mar-Mar-Mar-Mar-Section 4.

Institutional and Macroeconomic Challenges the end of the year. Then the said realty market will return to the trajectory of the second scenario forecast which was calculated in December of 2003. By the end of the year, the average price level of realty supply in Moscow will comprise 1700 1750 US dollars/sq. m.

4.7. Issues of Practical Implementation of the Local Self Governance Reform 4.7.1. Normative and Legal Regulation of Reforms In October 2003 a new version of the Law "On General Principles of Organization of Local Self Governance in the Russian Federation" (Law No. 131 FZ) was adopted. It is en visaged that the Law will fully enter into force on 01 January 2006.118 Chapter 12 "Transi tional Provisions" of the Law describes peculiar properties of local self governance in the period of transition and the actions of government agencies of various levels aimed at pre paring full scale implementation of the municipal reform. In particular, the following ac tions aimed at implementing the provisions of the new version of the Law were to be carried out.

It was intended to establish the boundaries of municipal formations before 01 Janu ary 2005 and to endow these entities with the status of an urban or rural settlement, a city region or municipal district. As it will be shown below, this process has been developing with many complications and not without contradictions (experts warned it would); this ne cessitated additional legislative control. In December 2004 Law No. 186 FZ "On Introduc ing Changes into the Federal Law "On General Principles of Organization of Local Self governance in the Russian Federation" was adopted, in which the deadline for establishing the boundaries and endowing municipal formations with a status was shifted to 01 March 2005.

The necessity to solve a number of issues of redistributing powers, property etc. be tween the regional and municipal levels in 2004 was related to the provisions of Law No. 95 FZ "On Introducing Changes In and Additions To the Federal Law "On General Principles of Organization of Legislative (Representative) and Executive Government Agencies of Constituent Entities of the Russian Federation" that came into force on January 2005 (one year earlier than the legislation on local self governance).

It had been planned at the level of the Russian Federation government:

Before 01 June 2004, to approve the list of territories with low and high population den sity;

Before 01 June 2005, to approve the order of property redistribution between the Rus sian Federation, entities of the Russian Federation and municipal formations as well as the order of delimitation of property in municipal ownership between various types of municipal entities;

Before 01 January 2005, to introduce in the State Duma draft federal laws on making changes in and additions to federal laws that regulate the order of lodging local self governance agencies with individual government powers, the authorities of local self governance agencies to solve local issues and the rights local self governance agen cies for legal defense.

Before 01 January 2005, to approve the order and dates of preparation of the act of transfer (delimitation) determining the local self governance agencies' obligations that appear as a result of legal succession.

In two entities of the Federation, Stavropol Krai and the Novosibirsk Oblast, the Law comes into force on 01 January 2005.

RUSSIAN ECONOMY in trends and outlooks In its decree of 03 March 2004 the RF Government approved the plan of preparing legal acts necessary to implement the Federal Law "On General Principles of Self Governance in the Russian Federation". This plan envisaged implementing nine items in cluding development of two federal level draft legal acts (one, on making changes in fed eral laws due to the coming into force of new legislation on Federation entities and on local self governance, and, two, on state registration of municipal entities' charters) and a num ber of RF Government's regulations on qualification requirements to the heads of munici palities' financial agencies, to the relationship between tax inspectorates and municipali ties etc. It had been intended to prepare the regulation on delimitation of territories with high and low population density in April 2004, and the regulation on segregation of prop erty and regulation of legal succession issues, in November 2004. It had been recom mended on the level of constituent entities of the Federation to approve similar plans, and most of the regions followed this recommendation.

Although, by the end of 2004 most of the envisaged normative legal acts had been ei ther adopted or prepared to a high degree, not all of the plan items had been imple mented.

E.g., in August 2004 Federal Law "On Making Changes in Legal Acts of the Russian Federation and Acknowledging Some Legal Acts of the Russian Federation as Inoperative due to Adoption of Federal Laws "On Making Changes in and Additions to the Federal Law "On General Principles of Organization of Law making (Representative) and Executive Bodies of State Power of Constituent Entities of the Russian Federation" and "On General Principles of Organization of Local Self governance in the Russian Federation" No. 122 FZ was adopted that provided for introducing changes to more than 150 legal acts of the Rus sian Federation. At the same time, the procedure for regulation of a number of issues that is contained in this Law does not correspond to the provisions contained in laws No. 95 FZ and No. 131 FZ. E.g., this law stipulates for making changes in the Law "On Education", in accordance with which it is the competence of entities of the Russian Federation to provide state guarantees for citizens' rights to free for all and publicly accessible pre school and general education as well as additional education by means of allocating to local authori ties subventions in an amount necessary for the implementation of basic programs of gen eral education. At the same time Law No. 131 FZ stipulates that organizing the process of granting additional education and free for all and publicly accessible pre school educa tion is a local level issue; moreover, as opposed to the case of primary, basic and secon dary general education, in this case no reservation is made that the authority to fund edu cation are excluded from local issues.

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