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The development of indirect regulation measures has revealed the existence of several terminological and methodological gaps. This is one of the reasons why the consideration of the other tax initiatives has been postponed. Another problem is represented by the definition, for purposes of taxation, of the notions of research and development and innovation activity. It is quite understandable that without a well developed terminology and clear basic definitions it would be difficult to apply the suggested exemptions and privileges, because the subject of regulation has not been determined precisely.

Kuznetsov B., Kusyk M., Simachev Yu., Chulok A., Tsukhlo S. Osobennosti sprosa na tehnologicheskie innovatsii i otsenka potenstialnoi reaktsii rossiiskikh promyshlennykh predpriiatii na vozmozhnye mehkanizmy stimulirovaniia innovatssionnoi aktivnosti ( The peculiar features of the demand for technological innovations and an estimation of the potential response of Russian indus trial enterprises to the potential mechanisms for stimulation of innovation activity) // VII International Scientific Conference Modernization of the economy and the State. M.: HSE, 5 April 2006.

RUSSIAN ECONOMY IN trends and outlooks The main discussion was generally centered around the definition of research and development by means of a variety of possible types of activity (for example, the drawing up of an exhaustive list), but such an approach is labor consuming and not the most efficient one. Foreign experience has shown that it is more convenient to define research and development through types of expenditures, which can also be better understood. Then tax exemptions and privileges would be applied to a certain list of expenditures (salaries, costs of materials necessary for carrying out research and development, purchases of software, etc.).

There exists no official definition of an innovation oriented enterprise or of in novation activity, either and not for purposes of taxation only: the term innova tion activity itself is absent from federal legislation. It has been suggested that the definition of innovation activity should be based on the notion of objects of non military turnover, which can be found in the RF Civil Code (objects of intellectual property, projects, technological products, new equipment, financial assets, etc.).

Although the positive aspect of such an approach is the presence of those basic components by means of which innovation activity is defined, nevertheless, in the RF Civil Code it appears to be too complicated and to allow for a broad interpreta tion of innovation activity. At the same time, the Ministry of Public Education and Science once more decided to revive its activity aimed at elaborating the Law on innovation activity. The draft which exists today represents a certain collection of general definitions, which it would be difficult to apply for purposes of defining the object of taxation. If one borrows foreign experience and defines an innovation oriented enterprise by the criterion of the level of expenditures on research and de velopment, then it may become quite operational in terms of indirect regulation.

On the whole, the increased attention to indirect incentives represents a posi tive trend, and besides, the measures designed to encourage particularly the pri vate sector to provide financing for research and development are also of para mount importance.

Section 5. Institutional Problems 5.1. Institutional development in 2000s Among the formal terms and expressions that would characterize most pre cisely the year 2006, the following may be selected: predictability, stability and prevailing trends of the past years. The institutional trends of the several previous years, however, are pretty ambiguous. Moreover, by early 2007 some vague incon sistencies or, to be more precise, substitution of notions of institutional develop ment that may play a principal role on a long term basis came to the foreground.

5.1.1. Politics versus economy: asymmetry of mutual influence All quantitative indicators of the development of the Russian economy in demonstrate an economic revival (for more detail see above)1. By late 2006 capi talization of the Russian companies was $908 billion; thus Russia may be consid ered one of the major developing markets, with China only being ahead for this in dicator in 2006.

The dynamically growing Russian economy (by formal quantitative indicators) demonstrates higher economic (credit) ratings of the country. In 2006 according to the largest rating companies (Fitch Standard&Poors), Russia had a BBB+ credit rating denominated in foreign currency which meant that the country acquired a new investment quality at the international financial markets and reduced costs for Russian borrowers. Next expected step for Russia will be moving to A level rat ings. OECD Council at its meeting of January 26, 2007, included Russia in the 3rd (from the top zero down to seven) group of credit risks where such countries as South Africa, Israel, India, Thailand, Morocco, Latvia, Hungary, Bulgaria, Rumania and other states are present.

The economic growth coupled with higher financial indicators of the compa nies (the growth of consolidated returns and, according to the survey results of the Center of Economic Market Situation under RF Government, in December 2006, satisfaction of the companies with their financial position across the industry) was accompanied by an unprecedented increase of private capital net inflow. Accord ing to the RF Central Bank, in 2006 the net inflow of private foreign capital into Rus sia increased by almost 40 times vs 2005 ($41.6 billion including $25.1 into the banking sector vs $1.1 billion in 2005 and outflow of $8.4 billion in 2004). Repatri Herein and in sections 5.2 through 5.5. the sources used are official web sites, pres releases and interviews with the Leaders of the RF Ministry of Economic Development and Trade, Federal Agency for Federal Property Management, Federal Antimonopoly Service, Federal Service on RF Financial Markets and other federal government authorities; information materials of Prime TASS, Inter fax, RBK, lin.ru Project, and regular publications such as Commersant, Vedomosti, Izves tia, Vremya Novostey, Finance, Expert, M&A; ratings of specialized agencies and organiza tions, corporate sites and other sources of 2006 2007. In writing this section of the report the author also used the relevant materials by A. Abramov, E. Apevalova, G. Malghinov, and K. Yanovsky and materials from numerous published research papers of Institute of Economy in Transition (IET) and Academy of National Economy under RF Government on the problems of institutional develop ment (see: www.iet.ru).

RUSSIAN ECONOMY IN trends and outlooks ated Russian capital (see Section 5.4 describing the growth of investments from the traditional off shores) apparently accounts for a considerable share in this in flow, however, no clear distinction can be made between residents and non residents. Nevertheless the assessments of direct foreign investments into Russia in 2006 are pretty close ranging from $28.4 bio (UNCTAD) to $31 bio (Bank of Rus sia).

The year of 2006 also saw an essential growth of external financing of largest banks and companies (IPO and corporate bonded loans at the internal and external markets). In 2006 the external debt of non financial companies and commercial banks amounted to $135.4 billion and $78.5 billion, accordingly. The external debt of the Russian corporate sector jumped up to $57 billion against $54.5 billion in 2005. In 2006 the aggregate value of 18 major IPO (including Rosneft) was about $21 billion. Corporate bonds became a driver of debt market emission: their vol ume grew from RUR260.6 billion in 2005 to RUR465.3 billion in 2006 (or by 1.times). The overall amount of RUR denominated bonds at the market including federal securities, corporate and regional bonds increased from RUR 1.5 trillion in 2005 to RUR 2.2 trillion in 2006 or by 1.4 times.

According to the analysts of some investment banks, in 2007 IPO total volume of the Russian companies may reach $20$22 billion, and with account of Sber bank and Vneshtorgbank $30 $40 billion. Around 60 Russian companies plan IPO in 2007, however, (due to the market situation) only some 30 companies will be able to do this realistically. There is a more pessimistic outlook: according to Citi group Global Markets, in 2007 the Russian companies will not be able to exceed the 2006 indicators (2007 forecast: 32 IPO and $18.4 billion), after the 2008 presi dential elections the situation will be close to that of 2005 (in 2005 $5.2 billion, and 2008 forecast is 18 IPO and $4.7 billion). The current sharp growth of IPO is associated directly with the determination to be secured against risks of a new phase of the political and business cycle after March 2008.

The boom of initial public offering in 2006 2007 in the context of political risks finds its confirmation when the specific motivations of the Russian companies are being analyzed2. It is the consumer sector (about 80% of the IPO participants re cently) that gets investments for its business development; this sector unlike the feedstock companies does not generate major cash nor has a simplified access to bank credits. The sector began to show its interest in IPO back in 2003 when the companies in the absence of a proper loan base and considerable debt burden had to look at stock placement. The major part of the consumer companies who were actually ready for IPO were using this practice. Another motivation for the compa nies with no bright prospects for development or those in need of finances to sup port deals on acquisition of new assets, compensation of exit of the part ners/shareholders from businesses, etc. was the fixed value of the company and drawing up cash funds for the shareholders needs. A huge number of major feed stock companies issuers that have no need in getting investment resources via IPO strive to increase and fix their capitalization as an insurance against their exits if Y. Korotetsky, L. Moskalenko, M. Talskaya. IPO is out of fashion // Expert, 2006, 39, p. 1927.

Section Institutional Problems the largest shareholders will have to dispose their ownership due to adverse politi cal reasons. Some of the companies have secured themselves already by fixing their values having sold part of the stocks and legalized the remaining assets. Ap parently a bonded loan is a cheaper source of external financial resources, though it does no insure the company against political risks.

The global expansion of a large number of Russian major private companies (groups of companies) in 2005 2006 was associated not only with the rationale of corporate development, the desire to strengthen their positions on new markets and search of facilities for investment but also with their preparation for the upcom ing political and business cycle in Russia.

These considerations apply to some larger state companies though the lat ters motivations may be different (see section 5.2). At the end of January 2007 the Head of the Federal Agency for Federal Property Management, announced a pos sibility of another public offering of Rosneft stock up to 25% (worth around $20 bil lion), however this announcement was almost immediately disowned by G. Gref, Head of the Ministry of Economic Development and Trade. These contradictory approaches, as some believe, are the evidence of more serious attempts to trans fer the largest possible portion of the Rosneft state owned stock to private owner ship by March 2008 with the subsequent legalization for the sake of a narrow group of the stakeholders.

The election cycle, according to some forecasts, will obviously push down the amount of direct foreign investments (where it is difficult to separate foreign and Russian repatriated funds) in 2007. The forecasts are unanimous concerning the expected decline however the driving factors are different. Standard&Poors believes the expected decline is linked to the ongoing processes of boom decline at the feedstock markets that stimulated investments into the feedstock assets of the developing countries and nationalization of energy assets in Russia, Bolivia, Venezuela and Ecuador. The Russian Union of Industrialists and Entrepreneurs explains the decline by future political risks related to parliamentary and presi dential elections in Russia. There is also a problem of preparedness of the Rus sian companies3.

Political risks that are not directly related to the election cycle are pretty essen tial for most conservative foreign institutional investors unlike the Russian owners.

One can give a reliable example of a rating developed for a number of years by one of the largest and most conservative global investors U.S. Pension Fund California Public Employees Retirement System (CalPERS) which assets amount to $225 billion (see section 5.4.). Whenever CalPERS enters a developing market, In 2006 Tatneft initiated delisting at NYSE. Tatneft example is indicative for the Russias corporate sector. According to AIM (Alternative Investment Market) dataof London Stock Exchange, in shares of 7 companies of Russia and some other post Soviet states were listed here while in there were 15 such companies. This is an outcome of the absence of adequate financial control re quired for listing (consolidated reporting, financial statements, etc). Thought 2007 trends are as sessed as positive, the value results of 2006 will hardly be exceeded.

RUSSIAN ECONOMY IN trends and outlooks it gives to the market a certain quality mark attractive for other major institutional investors.

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