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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES March 2004 MONTHLY BULLETIN Moscow 2004 Institute for the Economy in Transition, 1996. Licence, 02079 19 2000 .

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (095) 203-88-16 Fax: (095) 202-42-24 E- Mail: todorov@iet.ru March of 2004: Political and economic outcomes............................................................................................. 3 On the progress of reforms in March of 2004.................................................................................................... 5 The State of the Federal Budget......................................................................................................................... 6 Monetary Policy................................................................................................................................................. 9 Financial Markets............................................................................................................................................ 11 Investment in fixed assets................................................................................................................................ 20 Foreign investment in the Russia's economy................................................................................................... 22 The Real Sector: Factors and Trends............................................................................................................... 25 Oil and natural gas sector................................................................................................................................. 27 IET Business Survey: Industry in March of 2004............................................................................................ 30 Foreign Trade................................................................................................................................................... Mergers and takeovers in 2003........................................................................................................................ The cumulative mortgage system as a new tool aimed to settle the housing problems of military personnel........................................................................................................................................ A forecast of certain macroeconomic indicators.............................................................................................. Issues discussed at the meetings held by the Government of the Russian Federation on March 18 and March 25 of 2004........................................................................................................................................................ Review of economic legislation: March of 2004............................................................................................. March of 2004: Political and economic outcomes The major outcomes in March of 2004 include, alongside with the expected results of the Presidential elections and the first round of the regional elections held in 2004, the reshuffling of the RF Government.

According to the data presented by the RF Central Election Commission, the election turn-out was registered at 64.3 per cent, what is by almost 10 per cent above the respective figures observed in the course of the December Parliamentary elections, when the turn-out was close to the critical threshold of 50 per cent. V.

Putin received 71.3 per cent of the vote, i.e. by almost 20 per cent more than in 2000. N. Kharitonov was the second with 13.6 per cent of the vote, while S. Glazyev and I. Khakamada lagged behind with 4.1 per cent and 3.8 per cent, 3.4 per cent of the vote was cast against all candidates, while the LDPR candidate O. Malyshkin received 2.2 per cent and S. Mironov, the Speaker of the Federation Council who in fact supported V. Putin got less than 1 per cent of the vote. At the end of March, I. Rybkin announced about the withdrawal of his candidacy. His appeal to boycott the elections was heard only by a narrow group of political scientists, since this candidate did not carry out his election campaign.

The few complaints made by international organizations monitoring the election campaign and the elections were reduced to the disproportional coverage of candidates on the part of state owned, primarily electronic, mass media. OECD observers assessed the Presidential elections as well organized, but failing to comply with the European standards. No complaints were voiced by the candidates. Nevertheless, the indicators of the turn-out and support of the incumbent President in certain North Caucasus Republics and in the Republic of Bashkortostan incompatible with common sense, naturally, aroused suspicion. It is impossible to verify these results, since all alternative candidates running for the office of the RF President have delegated no observers to polling stations.

As concerns the party and political spectrum, Communists could hold their ground, while Glazyev, who had lost his sponsors and was cut off the television, suffered a crushing defeat and Khakamada, who expected to attract additional democratic vote, received less votes than obtained by her party at the Parliamentary elections. However, serious comments on the actions of the candidates running against the incumbent President would not make sense, since they disposed of negligible resources and could not inform the voters about their positions.

In this context, the results of elections to regional and municipal legislatures, where half of delegates are elected on the basis of party tickets, are of a special interest (Tatarstan, Karachayevo Cherkess Republic, Sverdlovsk and Yaroslavl oblasts, Altai krai, city of Krasnoyarsk). The results demonstrated by the party of power in these regions differ dramatically from more than 70 per cent of the vote in Tatarstan to only second place in the Altai krai (the Altai elections were won by the bloc of left wing parties headed by the KPRF), and the city of Krasnoyarsk, while in the Yaroslavl oblast the United Russia could get only a few more votes than the Rodina election bloc (25 per cent and 20 per cent respectively). Communists are represented in all legislatures, LDPR and Rodina in three and two legislative assemblies respectively. Opposition blocs not related to any concrete federal parties also obtained seats in some legislatures. Therefore, at the regional level there still exist prerequisites for political competition. In the regions, where opponents of the United Russia organized well designed election campaigns, they could have won.

As concerns parties and politicians, March witnessed the final collapse of the Rodina deputy association, which voted to remove S. Glazyev from his post of the deputy association leader (22 votes out of 38). The Rodina deputies elected D. Rogozin, whose nomination was supported by such Rodina sponsors as A. Babakov, V. Geraschenko, V. Yuzhilin, V. Shestakov, etc. Since no ideological changes on the part of the Rodina leadership have been observed since the completion of the State Duma election campaign, it may be noted that the only ground for the dismissal of S. Glazyev was his nomination for the office of the RF President and critical remarks concerning V. Putin. As yet, S. Glazyev has made no clear statement about his future political plans. At the same time, it is clear that the majority of the Rodina deputies support the present authorities from positions of social demagogy and nationalism and strive to play a more important role in the spectrum earlier represented by G. Raikov, S. Mironov, G. Seleznev, etc.

As concerns other segments of the civil society, in March there have not been observed any noteworthy events.

In March, there was formed the backbone of the RF Government and the Presidential Administration, although some offices still remained vacant. Mikhail Fradkov, the former Presidential envoy to the European Union, the former head of the tax police and deputy Minister of Foreign Economic Relations, was appointed as the Prime Minister. The new Prime Minister has held various top posts practically since the start of reforms and worked under many administrations. There are expressed mixed opinions about the practices of the tax police in the brief period it was headed by Fradkov (from March of 2001 till July of 2003). While skeptics point out that at that time there were issued several guidelines broadly interpreting the powers vested with tax police officers and that the tax police under Fradkov could detect a negligible number of violations in comparison with other security agencies, optimists assert that exactly in that period tax police abandoned the practices of armed raids of masked police officers widespread under the Fradkovs predecessor V. Soltaganov.

The State Duma readily approved Fradkovs appointment. The forecasts that the United Russia deputy association, which dominates the Parliament, would play a more independent role turned out to be wrong. The Parliamentary majority failed to influence the countrys leadership as concerns ideological or personnel decisions. Thus, in spite of the fact that Alexander Zhukov, the State Duma deputy from Moscow, the former head of the Duma Budget Committee, was appointed as the only Vice Premier, the United Russia party representatives failed to obtain any other appointments with the exception of an insignificant office of the Head of the Construction, Housing, and Communal Services Agency. A. Kudrin, G. Gref, and V. Khristenko, whose names are associated with liberal economic reforms, were appointed to run such key Ministries as the Finance Ministry, the Ministry of Economic Development and Trade, and the Ministry of Industry and Power Engineering. Nevertheless, certain persons, whose activities had been dispraised earlier, were also appointed to the Government. Some appointees (for instance, heads of the Ministry of Natural Resources and the Agency for Fishery) have absolutely no previous experience in the respective spheres.

There was signed Presidential decree No. 314 of March 9, 2004, setting forth the new system and structure of the executive authorities. The decree is based on the concept of departmental specialization: Ministries determine state interests, services are vested with supervisory functions, while agencies render services on behalf of the state, manage property, and keep registers. Therefore, the new three tier system is focusing to eliminate the conflict of interests triggered in the case the same body carries out rule-making, enforcement, and supervisory functions, i.e. works out the regulations, renders services in accordance with these regulations, and enforces compliance. The number of Ministries was reduced, at the same time, it should be noted that the right to appoint heads of agencies and services is vested not with the respective Ministers, but with the Prime Minister.

Nevertheless, the total number of federal bureaucratic structures will increase more than 1.5 times, from 54 (including the governmental staff) to 73. Although the number of Ministries is reduced from 23 to 14, departments are replaced with 58 structures (29 services and 29 agencies). It is doubtful that agencies and services will function independently. Federal Ministers will have the right to approve their annual action plans and performance indicators, work out regulations concerning services and agencies, determine the respective amounts of financing, etc. Ministers will nominate candidacy of the directors of services and agencies, which should be approved by the Government. The apparent flaw of the reform is that it is too hurriedly implemented. The Ministers were given time until March 25 to work out respective Regulations1, and it is not surprising that this deadline was not met. The quality of these decisions was so poor, that for the first time the published (!) Presidential decree had to be redrafted under the pretext of elimination of technical errors. Besides, the reform of the Government should have addressed not only the issues of the conflict of interests and overlapping functions, but, more importantly, the powers vested with the governmental structures (for instance, the Interior Ministry, Federal Security Service, the former Revenue Ministry, the State Customs Committee, the Procurators office), which can in fact suspend operations of any economic agent without turning to courts. It should be noted that the redistribution of powers among the governmental structures did not affect the Interior Ministry, which is often indicated as a major source of administrative pressure on business and civil society.

Similarly to the previous Cabinet, the administrative reform, which was declared as a priority, has no single responsible supervisor. There were given no explanations concerning the dismissal of B. Aleshin, who had for a long time worked on the design of the administrative reform.

In the framework of the preceding Government, there were found out over 5 thousand of functions performed by Ministries.

As concerns the Presidential Administration, there was no expected radical reshuffling. However, similarly to the Government reform, the status of many officials was reduced (from Deputy Head of the Administration to the Assistant to President, etc.).

In March, there were still discussed certain controversial aspects of the economic policy, which had not been agreed upon earlier. For instance, it concerns the rise in and possible differentiation of the mineral extraction tax, introduction of special VAT accounts, the issue of acquisition of shares in the wholesale generating companies (WGC) in the framework of the RAO UES reform via special cash auctions, Gazprom reform. It is not surprising, that the settlement of these problems has been in fact delayed.

S. Zhavoronkov On the progress of reforms in March of In formal terms, March proved to be absolutely uneventful as concerns the implementation of economic reforms over the month, the RF Government approved no significant documents relating to the sphere of economic policy. All materials submitted by Ministries in compliance with the Governmental Action plan for 2004 were rejected under vain pretexts. At the same time, certain important decisions entailing significant consequences were taken at the Presidential level.

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