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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES March 2003 MONTHLY BULLETIN Moscow 2003 Institute for the Economy in Transition, 1996. Licence, 021018 of 09.11.95 5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (095) 203-88-16 Fax: (095) 202-42-24 E- Mail: todorov@iet.ru The State of the Federal Budget.......................................................................................................3 Monetary Policy...............................................................................................................................6 Financial Markets.............................................................................................................................7 Banks on the market of Ruble denominated state securities..........................................................15 Investment in fixed assets..............................................................................................................17 Foreign investment in the Russia's economy.................................................................................19 Regions: attracting foreign investment..........................................................................................22 The Real Sector: Factors and Trends.............................................................................................25 IET Business Survey: Industry.......................................................................................................27 Foreign Trade.................................................................................................................................28 The law On the stock market: key novations and possible impact on the market.....................30 2 The State of the Federal Budget In January of 2003, the revenues of the state budget (cash execution) made 21.2 % of GDP, while expenditures made 13.0 % of GDP (see Table 1). Therefore, the federal budget surplus made 8.2 % of GDP.

Table The monthly execution of the federal budget of the Russian Federation (in % of GDP1, in comparable prices) III`02 IV`02 V`02 VI`02 VII`02 VIII`02 IX`02 X`02 XI`02 XII`02 I`03 II`I`02 II`Revenues Corporate profit tax 1,4% 1,4% 1,5% 1,9% 1,9% 1,7% 1,7% 1,7% 1,6% 1,7% 1,6% 1,6% 1,3% Personal income tax 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% VAT, special tax and excises 4,9% 4,4% 4,0% 3,9% 3,6% 3,5% 3,5% 3,3% 3,2% 3,1% 3,1% 3,1% 2,4% Tax on foreign trade and foreign 9,3% 9,1% 9,3% 9,3% 9,3% 9,3% 9,3% 9,1% trade operations 9,0% 8,9% 8,9% 8,9% 11,5% Other taxes, duties and payments 6,9% 6,4% 6,8% 6,9% 7,0% 7,0% 7,0% 7,0% 6,9% 6,9% 6,9% 6,9% 8,7% Total- taxes and charges 2,4% 2,6% 2,5% 2,4% 2,3% 2,3% 2,2% 2,1% 2,0% 2,0% 1,9% 2,0% 2,8% Non- tax revenues 3,2% 3,3% 3,2% 3,0% 2,9% 2,9% 2,9% 2,8% 2,8% 2,8% 2,9% 3,0% 3,5% Revenues, total 9,7% 9,1% 8,7% 8,7% 8,4% 1,8% 2,0% 2,0% 2,0% 2,1% 2,1% 2,1% 0,5% Expenditure 20,4% 19,6% 19,6% 19,9% 19,6% 19,3% 19,4% 18,9% 18,5% 18,6% 18,5% 18,6% 19,2% Public administration 2,1% 1,6% 1,4% 1,3% 1,2% 1,3% 1,4% 1,4% 1,4% 1,6% 1,4% 1,4% 17,9% National defense 22,4% 21,2% 20,9% 21,2% 20,9% 20,6% 20,9% 20,4% 20,0% 20,2% 20,1% 20,1% 21,2% 21,2% International activities Judicial power 0,1% 0,2% 0,3% 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,5% 0,3% Law enforcement and security 1,0% 1,5% 1,9% 2,3% 2,4% 2,5% 2,5% 2,5% 2,4% 2,4% 2,5% 2,7% -0,3% activities Fundamental research 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,4% 0,3% 0,3% 0,3% 0,3% 0,3% 1,5% Services provided for the 0,0% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,2% 0,2% 0,2% 0,1% national economy Social services 0,6% 0,9% 1,0% 1,2% 1,2% 1,3% 1,4% 1,4% 1,4% 1,4% 1,5% 1,7% 1,2% Servicing of public debt 0,0% 0,1% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,3% 0,3% 0,1% Other expenditure 0,1% 0,3% 0,4% 0,5% 0,6% 0,7% 0,8% 0,8% 0,8% 1,2% 1,3% 1,5% 0,2% Expenditure, total 3,7% 4,8% 4,8% 5,3% 5,2% 5,2% 5,2% 5,1% 4,9% 5,5% 5,6% 5,6% 1,5% Loans, redemption exclusive 2,0% 3,4% 3,4% 2,6% 2,5% 2,4% 2,3% 2,4% 2,4% 2,2% 2,0% 2,0% 1,7% 3,0% Expenditure and loans, 2,9% 3,3% 3,6% 3,9% 4,0% 4,0% 4,0% 3,9% 3,8% 3,9% 3,9% 3,8% 6,7% redemption exclusive Budget deficit (-) 10,9% 15,0% 16,1% 16,9% 17,1% 17,2% 17,2% 17,1% 16,9% 17,8% 18,0% 18,7% 13,0% 17,3% Domestic financing 11,5% 6,2% 4,8% 4,3% 3,8% 3,4% 3,7% 3,3% 3,1% 2,4% 2,1% 1,4% 8,2% 3,8% Other taxes, duties and payments -4,6% -2,7% -2,0% -1,8% -1,6% -1,8% -1,3% -1,2% -0,5% -0,2% 0,6% -6,8% -1,4% 11,2% Total- taxes and charges -0,4% -1,6% -2,1% -2,3% -1,9% -1,8% -1,9% -1,9% -1,9% -1,9% -1,9% -2,0% -1,5% -2,5% Non- tax revenues -6,2% -4,8% -4,3% -3,8% -3,4% -3,7% -3,3% -3,1% -2,4% -2,1% -1,4% -8,2% -3,8% 11,5% * % ; ** As compared with the figures registered in January of 2002, the budget revenues decreased by 1.2 p.p., while expenditures declined by 2.1 p.p. and budget surplus decreased by 3.3 p.p. At the same time, without SST the budgetary revenues increased by almost 1.3 p.p. of GDP and made 18.8 % of GDP, while expenditures (without taking into account the transfer to the RF Pension Fund at the expense of SST) grew by almost 1.5 p.p. of GDP and made 10.0 % of GDP.

In January of 2002, VAT accounted for the major share of federal tax revenues 45 % of the total tax revenues what is practically at the level observed in the respective period of 2002.

According to preliminary estimates, the cash execution of federal budget revenues made 21.2 % of GDP in January through February of 2003, what is at the respective level observed in January through February of 2002. At the same time the cash execution of expenditures made 17.3 % of GDP (15 % of GDP in 2002);

therefore, the surplus made 3.8 % of GDP (6.2 % of GDP in 2002).

According to the preliminary estimates of the Finance Ministry, in terms of fulfilled funding2 the expenditures of the federal budget in January through February of 2003 made 21.1 % of GDP (see Table 2), Because of the estimated data on GDP, the indices may be subject to revision.

The execution of the budget in terms of fulfilled (actual) financing is equal to the sum of the funds transferred to managers of budget funds, while the cash execution of the budget is equal to the sum of funds spent by managers of funds (i.e. without account of funds remained on their accounts).

while on March 1 of 2002 this indicator was at 18.7 % of GDP. As a result, the surplus of the federal budget in terms of fulfilled funding in the first two months of 2003 has also decreased by 2.2 p.p. in comparison with the figures registered in the respective period of 2002 and made 0.1 % of GDP.

Table The monthly execution of the federal budget of the Russian Federation (in % GDP, fulfilled funding).

I`02 II`02 III`02 IV`02 V`02 VI`02 VII`02 VIII`02 IX`02 XII`02 I`03 II`Total 22,2% 21,0% 20,9% 21,2% 20,8% 20,5% 20,5% 20,5% 20,0% 20,1% 21,4% 21,2% Public administration 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,6% National defense 1,7% 2,4% 2,4% 2,7% 2,7% 2,7% 2,7% 2,7% 2,6% 2,6% 2,5% 3,2% International activities 0,4% 0,2% 0,4% 0,5% 0,4% 0,4% 0,4% 0,3% 0,3% 0,3% -0,4% 0,1% Judicial power 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% Law enforcement and 1,6% 1,4% 1,4% 1,5% 1,5% 1,6% 1,9% 1,6% 1,6% 1,7% 1,9% 2,3% security activities Fundamental research 0,3% 0,3% 0,2% 0,3% 0,3% 0,3% 0,2% 0,3% 0,3% 0,3% 0,3% 0,3% Services provided for 0,3% 0,6% 0,8% 0,9% 1,0% 1,0% 1,1% 1,1% 1,0% 1,5% 0,6% 0,8% the national economy Social services 5,0% 5,7% 5,3% 5,9% 5,7% 5,5% 5,6% 5,4% 5,2% 5,7% 2,6% 2,8% Servicing of public 1,9% 3,4% 3,4% 2,7% 2,5% 2,4% 2,6% 2,4% 2,4% 2,0% 1,7% 3,0% debt Other expenditure 3,5% 4,0% 3,9% 4,0% 4,6% 4,2% 4,0% 4,0% 4,0% 3,8% 7,0% 7,8% Total expenditure 15,5% 18,7% 18,6% 19,1% 19,4% 18,9% 19,1% 18,6% 18,2% 18,7% 16,9% 21,1% (+) / 6,8% 2,3% 2,3% 2,1% 1,4% 1,6% 1,4% 1,8% 1,7% 1,4% 4,5% 0,1% (-) According to the estimates of the Revenue Ministry, in February of 2003 tax revenues of the federal budget made Rb. 98.5 billion (without the single social tax). In real terms the revenues made 229.2 % of the level registered in January of 1999, while the respective indicator was at 187.1 % in 2002 and 198.4 % in 2001 (see Table 3).

Table Actual tax revenues to the federal budget, according to the data of the MTC (in % of the data for January of 1999)3.

I II III IV V VI VII VIII IX X XI XII 100,0% 115,1% 122,0% 122,1% 104,5% 112,9% 127,0% 127,5% 124,3% 141,4% 160,8% 213,1% I II III IV V VI VII VIII IX X XI XII 149,3% 160,5% 181,3% 205,8% 233,1% 186,9% 181,0% 186,4% 173,1% 181,1% 201,7% 254,1% I II III IV V VI VII VIII IX X XI XII 204,4% 198,4% 227,6% 267,5% 252,2% 233,3% 231,9% 235,6% 219,4% 237,5% 247,3% 360,6% 2002* I II III IV V VI VII VIII IX X XI XII 218,7% 187,1% 234,8% 277,8% 239,6% 218,0% 284,4% 246,5% 254,8% 299,7% 241,0% 250,2% 2003* I II 230,0% 229,2% * .

It was decided to choose January of 1999 as the benchmark in order to render the comparison more reliable. January of 1999 is not a remarkable date in terms of tax revenues.

200% 180% Profit tax VAT 160% 140% 120% 100% 80% Fig. 1. Rate of growth of the real tax arrears to the federal budget (in % to June of 1999) The debts related to the payments due to the federal budget made for VAT Rb. 243.6 billion as on March 1, 2003, the arrears of the profit tax made Rb. 33.4 billion. The dynamics of real arrears relating to major debts since June of 1999 is presented in Fig. 1. On the whole, the dynamics and the latest data demonstrate a gradual decrease in the level of accumulated arrears as concerns the profit tax and a certain trend towards a decline in VAT arrears.

Table Execution of the RF consolidated budget (in % of GDP) I II III IV V VI VII VIII IX X XI XII 16,2% 17,4% 18,1% 19,3% 19,7% 19,8% 19,8% 19,4% 18,8% 18,5% 18,6% 19,6% Taxes Revenues 18,8% 20,1% 21,2% 22,4% 23,0% 23,2% 23,2% 22,9% 22,3% 22,0% 22,0% 24,5% Expenditures 25,3% 23,8% 27,0% 28,1% 28,6% 29,5% 29,4% 28,6% 27,4% 26,9% 27,1% 29,5% Deficit -6,5% -3,7% -5,8% -5,7% -5,7% -6,3% -6,2% -5,7% -5,2% -5,0% -5,0% -5,1% I II III IV V VI VII VIII IX X XI XII 16,8% 16,6% 18,1% 19,9% 20,1% 20,5% 20,8% 20,8% 20,3% 20,2% 20,9% 22,1% Taxes Revenues 19,2% 18,9% 20,6% 22,7% 23,2% 23,9% 24,3% 24,5% 24,1% 24,0% 24,8% 26,3% Expenditures 18,6% 20,3% 23,6% 25,6% 26,6% 27,3% 27,4% 27,4% 26,7% 26,3% 26,7% 29,2% Deficit 0,6% -1,5% -3,1% -3,0% -3,4% -3,4% -3,1% -2,9% -2,7% -2,3% -1,9% -2,9% I II III IV V VI VII VIII I X XI XII 20,8% 21,4% 22,6% 24,2% 25,5% 25,4% 24,9% 24,8% 24,1% 23,7% 24,0% 24,6% Taxes Revenues 24,4% 24,8% 26,4% 28,2% 29,7% 29,7% 29,3% 29,2% 28,4% 28,0% 28,6% 30,0% Expenditures 19,6% 21,1% 23,8% 24,8% 25,2% 25,5% 22,3% 25,1% 24,5% 24,2% 24,6% 27,0% Deficit 4,7% 3,7% 2,6% 3,4% 4,5% 4,3% 7,0% 4,1% 3,9% 3,8% 4,0% 3,0% I II III IV V VI VII VIII I XI XII 22,7% 23,6% 23,9% 25,4% 26,4% 26,0% 26,1% 25,9% 25,0% 24,8% 25,4% 27,1% Taxes Revenues 25,9% 27,1% 27,4% 29,3% 30,5% 29,8% 29,9% 29,7% 28,3% 28,2% 28,8% 29,5% Expenditures 16,8% 22,8% 23,7% 24,7% 25,1% 25,3% 25,5% 25,6% 24,9% 24,7% 25,0% 25,6% Deficit 9,1% 4,2% 3,7% 4,7% 5,4% 4,4% 4,4% 4,1% 3,5% 3,5% 3,8% 3,9% June August October December February April June August October December February April June August October December February April June August October December I II III IV V VI VII VIII IX X XI XII 28,7% 23,6% 24,3% 26,5% 26,6% Taxes 25,9% 26,4% 25,9% 25,2% 25,4% 25,4% 25,5% Revenues 32,9% 31,3% 31,4% 33,6% 33,6% 32,7% 33,3% 32,5% 31,7% 32,0% 32,1% 32,1% Expenditures 18,3% 23,7% 26,0% 28,4% 28,4% 28,8% 29,1% 28,9% 28,4% 29,3% 29,7% 31,1% Deficit 14,6% 7,7% 5,4% 5,3% 5,2% 3,8% 4,2% 3,7% 3,3% 2,7% 2,4% 1,0% I 25,6% Taxes 32,0% Revenues Expenditures 20,7% Deficit 11,3% * The revenues of the consolidated budget in January of 2003 made 32.0 % of GDP, including tax revenues (without SST) at 25.6 % of GDP (see Table 4). Expenditures of the consolidated budget increased by 2.4 p.p.

in comparison with the figures registered in January of 2002 and made 20.7 % of GDP. The surplus of the consolidated budget in January of 2003 made 11.3 % of GDP, what is below the level observed in January of 2002 (14.6 % of GDP).

S. Batkibekov Monetary Policy In February the rate of inflation decreased. Despite considerable external debt payments, foreign reserves of the CB RF continued to grow throughout Quarter One.

In February 2003 the CPI growth was 1.6 percent, a considerable decrease after the January value of 2.percent (see Fig. 1). Thus, the dynamics of consumer prices demonstrated traditional month-on-month growth rate fluctuations (in 2002 the January CPI was 3.1 percent and in February it fell to 1.2 percent). In February prices for fruit and vegetables continued to grow, but t at slower rates. E.g., prices for foodstuffs grew 1.2 percent, while the price growth without account for fruits and vegetables was only 0.8 percent.

Prices for payable services to the population quickly grew to 4.2 percent in February, the greatest pricegrowth factor in that month. In particular, housing and communal services grew in price 7.3 percent. Prices for non-foods grew 0.9 percent.

CPI Gro wth Rate in 200 2 - 2003 (% pe r mo nth) 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Fig. Thus, during the first two months of 2003 consumer prices grew 4.1 percent (CPI growth in the corresponding period of 2002: 4.3 percent). According to preliminary estimates, in March the consumer price index grew 1.2 to 1.3 percent.

In February - March foreign reserves continued to grow (See Fig. 2). At March 1, 2003, they amounted to US$ 53.061 billion, or 7.7 percent more than at the end of January 2003 (in January the increase in foreign reserves was only 3.1 percent). During the first three weeks of March foreign reserves grew US$ 1.5 billion more. The considerable growth in reserves became possible owing to the remaining high oil prices and weakening demand for currency on the part of commercial banks. This makes the Bank of Russia buy currency on the market to avoid an even greater jump in the Rouble's nominal rate.

In February the money supply (in its broad definition) grew from RUR 1140.1 billion up to RUR 1240.billion (+8.8 percent). This may be explained above all by the significant growth of the Central Bank's foreign reserves. Considering the January contraction of the money supply, it total growth during two months was 0.7 percent.

Dynamics of Money Supply and Foreign Reserves in the Second Half of 2002 - 940 30.

27. 24.

21- 18- 16- 12.

13- 10- 1015- 29. 26.

12- 23- 7- 49- 2- 02- 01- 021- 7- 18.

27. 24. 22. 19. 16. 16.

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