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Share in investment portfolio, % RF government securities 6.4 26.0 4.8 4.8 4.Including in foreign currencies 0.0 0.0 0.0 0.0 0.Government securities of RF subjects 21.1 21.5 36.7 33.6 31.Bonds of municipal formations 8.6 0.0 0.0 8.2 7.Bonds of Russian economic societies 5.2 0.0 14.5 10.4 11.Shares of Russian issuers 2.5 44.3 24.9 25.7 26.Monies on accounts at credit institu 26.7 0.3 0.0 0.0 0.tions Rouble denominated deposits at 0.0 0.0 0.0 0.0 0.credit institutions Receivables 29.5 7.9 19.0 17.4 19.including monies transferred to professional 28.7 7.4 17.9 16.2 17.participants of the securities market receivables against interest income 0.8 0.5 1.2 1.2 1.on securities other receivables 0.0 0.0 0.0 0.0 0. RUSSIAN ECONOMY IN trends and outlooks The data published by the FSFM offer no exhaustive information concerning the amounts of money being placed by asset managers at credit institutions. The corresponding tables, compiled by asset managers, contain no information on bank deposits, which is available only for the system as a whole. Thus, a rather substantial percentage of assets has remained hidden. For some asset managers, this index is higher than 15%, although the total number of asset managers (or in vestment portfolios) decreased in 2005 from 28 to 15.

The statistics published by the PFR makes it possible to obtain a more com plete picture concerning the use of bank deposits by asset managers. As of the end of Q 2006, this instrument was represented in only 10 investment portfolios, while their share in the aggregate investment portfolio of PAMs was less than 6%.

At the same time, the percentage of the monies being transferred by asset manag ers to brokers and/or exchange settlement systems for purposes of purchasing securities is still high. For the aggregate investment portfolio of PAMs this index amounted to 8%, while the total percentage of monies placed within the banking system was thus equal to 16%.

As for the pension savings in the NGPF, the data published by the Federal Service for Financial Markets make it possible to estimate the structure of the in vestment portfolios only at one date as of the end of 2005. The data are arranged by the list of those funds, which participated in the mandatory pension insurance system.

As compared to the aggregate investment portfolio of the private asset man agers administering the monies of the Pension Fund of the Russian Federation, the percentage of shares in the aggregate portfolio of the NGPF earmarked for manda tory pension insurance is lower (10% against 19%). As of the end of 2005, the highest percentage of investments in shares was 31% (by the NGPF Volga Kapi tal), while 10 of 43 NGPFs had no shares in their investment portfolios earmarked for mandatory pension insurance. The percentage of RF government securities in the investment portfolios of the NGPF earmarked for mandatory pension insurance varies between 0% and 99% (the NGPF StalFond), amounting to 21% in the ag gregate portfolio, which is by 6 p. p. higher than the average index of private asset managers as of the same date. On the whole, the instruments with fixed rate of re turn (federal, subfederal, municipal, corporate bonds) constituted 77% in the in vestment portfolio, which was also higher than the same index of private asset managers. The most popular type of assets among both private asset managers and the NGPFs were subfederal bonds: as of the end of 2005, the average per centage of subfederal bonds in the aggregate investment portfolio of private asset managers was 26%, that of NGPF 33 %.

Section Monetary and budgetary spheres Note: The bonds of other Russian issuers include corporate and municipal bonds.

Source: Calculated on the basis of the data published by the Federal Service for Financial Markets.

Fig. 26. The structure of the aggregate investment portfolio of non government pension funds as of end of The sum of assets being administered by private asset managers under agreements with the Pension Fund of the Russian Federation amounted, as of the end of 2005, to 5.6 bn roubles, while the sum of assets of NGPFs earmarked for mandatory pension insurance, as of the same date, to 2 bn roubles. In their ag gregate investment portfolio the percentage of subfederal bonds was 28%. How ever, among the total volume of subfederal bonds being circulated on the market, pension savings constituted only 1.5%65. An even less percentage of pension sav ings (0.4%) was on the corporate bond market. So far, the only segment where the presence of pension savings represents a significant factor has remained the mar ket for rouble denominated federal bonds (OFZ). Even without the investments made by the Pension Fund of the Russian Federation itself66, their share was, as of the end of 2005, equal to 18.1%, where Vneshekonombank accounted for 17.9%.

The share of pension savings invested in the foreign currency denominated bonds of the Russian Federation is much smaller about 2% of the total volume of RF eurobonds in face value.

Since the data concerning the structure of the investments of pension sav ings, formed by NGPFs in 2006 was not yet available by the moment of publication, the role of the institutes participating in the mandatory pension system within the corresponding segments as of later dates can be assessed only by the data on the asset managers investing the PFRs monies. Thus, the percentage of pension sav Estimation based on the date posted at www.rusbonds.ru concerning the volume of subfederal and municipal bonds in circulation, in face value.

If all the contributions to the funded component of labor pension invested by the PFR were placed in OFZ, then it accounted for another 11% of OFZ being circulated on the market.

RUSSIAN ECONOMY IN trends and outlooks ings invested by asset managers in rouble denominated government securities in creased, by the end of Q III 2006, to 22% of the total volume of marketed OFZ is sues. At the same time, the share of pension savings on the corporate bonds mar kets and share markets remains negligible (0.2 and 0.01%, respectively). If one takes it into account that pension savings may be invested only in high level listed securities the situation will change only slightly. The share of pension savings in the total volume of bonds listed as A1 at the Russian exchanges constituted only 2.2%, in the capitalization of shares included in those lists 0.04%.

This situation provides grounds for placing the focus of attention once more on the urgent necessity to diversify the instruments and to liberalize the procedure for investing the pension savings formed for the benefit of those persons who have not made their investment choices67. The intention to this effect was declared by the RG Government as early as 2004, but so far it has not been practically imple mented.

2.6. Municipal Reform: the First Year of Implementation The year 2006 stands apart within the overall process of the implementation of municipal reform. According to the reforms initial concept, it is in this year that the full scale implementation of Federal Law of 6 October 2003, No. 131 FZ, On the general principles of the organization of local self government in the Russian Fed eration, was to begin all over the countrys territory. That Law envisaged certain fundamental transformation in the system of local self government in the Russian Federation. The key ideas of reform was to establish in legislation, clearly and with a single interpretation, the structure and functions of municipal formations of vari ous types, and on that basis to determine their spending powers and to consolidate to them, on a permanent basis, appropriate sources of revenue. The main direc tions of transformations were to be as follows:

- on the greater part of the countrys territory, it was intended to establish a two tier model of local self government, with municipal formations being formed both at the level of settlements and at the level of raions; one tier municipal formations city okrugs could be created in urban territories by decision of regional authorities;

- rigid lists of issues of local importance were established for each type of mu nicipal formations settlements, municipal raions, city okrugs; on the whole, the competence of bodies of local self government was noticeably reduced by comparison with the pre reform situation;

- a more precise regulation was established for the transfer, to the local level, of certain state powers and for their financial backing from the budgets of superior levels;

For more details, see L. V. Mikhailov, L. I. Sycheva Predlozheniia po izmeneniiu poriadka investi rovaniia sredstv pensionnykh nakoplenii zastrakhovannykh lits, ne vospolzovavshikhsia pravom vy bora investitsionnogo portfelia [Proposals concerning changes to the procedure for investing the pension savings of those insured persons who have not made use of their right to choose an in vestment portfolio] // Ekonomiko politicheskaia situatsiia v Rossii [The economic and political situa tion in Russia]. M., IET, 2005 (11).

Section Monetary and budgetary spheres - the legislatively consolidated requirements to bodies of local self government were made more strict; in particular, it was envisaged that each municipality was to have a representative body, a head official and a local administration; the number of deputies to that representative body was subject to special regula tion, etc.; at the same time, the opportunities for regional authorities to influ ence the organization and composition of the bodies of local self government were expanded;

- the list of property that could be placed in municipal ownership was limited;

those objects that fell beyond the legislatively established restrictions were to be used for other purposes or alienated;

- sources of revenue were consolidated to municipal formations on a permanent basis; the principles and mechanisms for the granting of financial assistance to municipalities were rigidly consolidated in federal legislation (including the pos sibility of negative transfers for municipal formations with the most favorable fi nancial situation).

During the preparation for the implementation of reform, it became obvious that the suggested model of the organization of the system of local self government was too rigid and not totally adequate, while at the same time the nec essary prerequisites for its practical implementation in many regions were lacking.

The crisis in the implementation of municipal reform developed in mid 2005, when a group of deputies submitted to the State Duma a draft amendment whereby the timelines for the transformations as envisaged in legislation were to be extended. In a somewhat softened version this amendment was adopted on 21 September 2005. The changes introduced into Law No. 131 FZ envisaged that a transition pe riod was to be established until 1 January 2009, within the framework of which, as far as the newly created municipal formations were concerned, the Federations subjects could on their own distribute issues of local importance and sources of revenue between municipal raions and settlements, and thus largely determine the rate of implementation and directions of municipal reform.

That amendment marked just one important step in the sequence of changes being introduced into Law No. 131 FZ, influenced both by the lobbyism on the part of regional authorities and by the pressure of objective circumstances, which ne cessitated that the Laws excessively rigid structure was to be adjusted to the de mands of practicality. One characteristic feature of all those changes was that the Laws intrinsic ideology, aimed at a strict division of the spheres of competence be tween the bodies of local self government of different types of municipal forma tions and at the introduction of financial equalization mechanisms, designed to en dow municipal formations with appropriate financial resources, was becoming more and more vague under the influence of currently arising problems and short term demands. In this connection, no acknowledgement was made of the fact that the viability of the conceptual approaches that laid the foundation of municipal re form had never been tested, nor that the existing situation had to be rethought comprehensively from the point of view of the strategic prospects for the develop ment of the entire system of local self government in Russia. The necessary pre RUSSIAN ECONOMY IN trends and outlooks requisite for such rethinking was an analysis of the real situation surrounding the implementation of municipal reform in different regions. From this point of view, the monitoring of reform as it was developing in 2006 is of especial interest. In a situa tion when regional authorities were given ample opportunities for determining the rate and directions for implementing municipal reform until 2009, more than a half of the regions declared that they were going to initiate full scale reform of local self government from 1 January 2006. This means that we now can make assess ments not only of the preparatory measures, but the of transformations proper as they were envisaged in legislation.

2.6.1. Normative Legal Regulation of the Ongoing Transformations In contrast to the years 2004 and 2005, the changes introduced into legisla tion on local self government in 2006 did not influence in any significant way the division of powers between municipal raions and settlements. Some serious amendments were made only to land legislation. By Federal Law of 17 April 2006, No. 53 FZ, On making changes to the Land Code of the Russian Federation, Fed eral Law On the enactment of the Land Code of the Russian Federation, Federal Law On State registration of the rights to immovable property and the transactions therewith, and On the recognition as null and void of some provisions of the legis lative acts of the Russian Federation it was determined that the disposal of the plots of land the State ownership of which has not been divided should be executed by the bodies of local self government of municipal raions and city okrugs.

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