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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES March 2007 MONTHLY BULLETIN Moscow 2007 Institute for the Economy in Transition, 1996.

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (495) 203-88-16 Fax: (495) 202-42-24 E- Mail: todorov@iet.ru 1 Political and economic results of March 2007.............................................................................................. 3 Budget and tax policies................................................................................................................................ 5 Monetary policy.......................................................................................................................................... 9 Financial markets....................................................................................................................................... 12 Investments in the Real Sector of the Economy.......................................................................................... 22 Foreign Investments................................................................................................................................... 27 Real Economy Sector: Trends and Factors................................................................................................. 30 Business Survey in March 2007................................................................................................................. 33 Foreign Trade............................................................................................................................................ 35 Comments on the RF Draft Federal Law On the Bank for Development................................................. 38 The institutional and structural disproportions of the stock market............................................................. 39 On the provision with pharmaceuticals of certain categories of citizens with the right to state social support........................................................................................................... Introduction of a two-stage system of higher professional education.......................................................... New trends in Russia's migration policy..................................................................................................... Issues considered at Russian government sessions in March 2007.............................................................. A review of economic legislation for March 2007...................................................................................... Summary of taxation regulations adopted in February March 2007.......................................................... Federal legislation..................................................................................................................................... Political and economic results of March One of the main outcomes of March 2007 were the regional parliamentary elections, including in Russia's second and third largest constituent entities Moscow Region and St Petersburg. The less time remains till the 2007-2008 federal elections, the more reason there is to consider regional elections as a rehearsal for those (with the exception of turnout figures, which at regional elections are usually half of those at federal polls).

The main outcome of the elections is the unprecedented level of vote rigging and machinations committed by the authorities. For example in Dagestan, the top candidate on the party list of candidates for Patriots of Russia was attacked and seriously wounded, while one of the people at the top of the SPS (Union of Right Forces) list of candidates went missing. There was a mass desertion of candidates from the Communist Party and the SPS lists of candidates (in the end SPS was banned from the race because the local legislation requires it that a party is removed from an election race if members of the same district branch leave its list of candidates). As votes were being counted, the turnout was announced at 80 per cent (! an unheard-of figure, even for a presidential election), with 65 per cent of the vote won by United Russia. Interestingly, according to preliminary estimates, the Communist Party of the Russian Federation, which throughout the 1990s was a political leader in the republic, failed to overcome the threshold altogether.

Similar cases were registered in other regions, too. For example in St Petersburg, the only party that opposed Valentina Matviyenko's re-appointment as the governor, Yabloko, was banned from running in the election on the grounds of an alleged excess of unverified signatures submitted in its support. As a result the St Petersburg and the central electoral commissions refused to register Yabloko for the election, although the party had provided notarized statements from signatories and some of the latter even presented themselves at the commission in person. The Russian Supreme Court humiliated Yabloko by refusing to contest that ruling, alleging that the latter was outside its jurisdiction (curiously, on other occasions the Supreme Court considered that cases of other parties' removal from election races were under court jurisdiction). In Moscow Region1 data was were entered in the GAS-Vybory electronic vote counting system significantly differed from those recorded in observers' protocols and the SPS list of candidates that was disagreeable to the region's governor Boris Gromov got an improbable 6.9 per cent.

The above suggests a simple conclusion: even registered parties in Russia are no longer guaranteed either access to running in elections or a relatively fair vote counting. One has to fight to achieve those: to be able to arrange for pressure on the Russian authorities both abroad and inside the country, primarily by way of mass protests. In that respect both SPS and Yabloko, putting it mildly, were less than impressive: the SPS rally to protest against vote-rigging in Moscow Region gathered not more than several dozen people, while the Yabloko leader did not do anything at all, not even issued a statement. The form of protest proposed by the St Petersburg branch of Yabloko spoiling ballot papers by ticking all the parties was supported by only 3 per cent of voters. Although it is worth noting that in its hope for a favourable ruling of the Supreme Court, the party did not spend much on publicizing the protest.

In terms of the breakdown of votes, the results shown by the parliamentary parties A Just Russia and SPS are of most interest. United Russia got more than 50 per cent of votes in Dagestan, Omsk and Tyumen regions and nearly reached this threshold in Moscow Region. At the same time in those regions where the party was in steep competition with part of the regional elite which had joined the other party of Putin's supporters A Just Russia United Russia's results were far less impressive: in St Petersburg it got 37 per cent, in Leningrad Region 35 per cent, in Komi 36 per cent, in Samara Region 33 per cent, while in Stavropol Territory, where the party's branch is led by a Communist Party defector, governor Aleksandr Chernogorov, United Russia lost the election to A Just Russia, led by Stavropol mayor Dmitriy Kuzmin, 23.9 to 37.6 per cent. In addition, United Russia lost the by-election in single-seat constituencies in the Republic of Tyva, where even arbitrariness of the courts hasn't ensured it a majority in the regional parliament.

The results of A Just Russia, which has the ambition of becoming the alternative party of power, are rather controversial. On the one hand, the Stavropol triumph and successful performance in other regions show the party's high potential in those regions where its list of candidates is led by well-known regional opposition figures opposing the governor. The party's results in St Petersburg (21 per cent), where - in Yabloko's absence - the party positioned itself as an opposition one, were also quite good, although that was also where substantial finance resources were focused. At the same time, the party's human resources and financial re As well as in Leningrad and Orel regions.

sources are clearly not enough. Thus, having put forward in Moscow Region2 a list of candidates comprised of absolutely unknown people and not having spent enough funds or proposed any intelligible election manifesto, the party hardly overcame the 7-per-cent threshold (8.7 per cent). In Omsk Region the party failed to overcome the threshold altogether. Incidentally, with time the newcomer effect will evaporate, whereas questions of why, for example, the party, even having won the election, cannot remove an unfriendly governor from their post and what its opposition consists in will only become more and more acute. In addition, it is A Just Russia (as well as the Communist Party and SPS) that can suffer from a possible campaign by opposition organisations for a boycott of elections. On the other hand, one cannot rule out the possibility that the process of consolidation of regional elites under this brand that cannot be removed from elections and their radicalization will increase, thus adding their own valuable contribution to Sergey Mironov's election successes.

The Communist Party achieved a passable outcome of 12-18 per cent (in Dagestan and Tyumen Region it got only 8 per cent, while the party's best results were in those regions where the Communist Party positioned itself as the governor's main opponent: in Omsk and Orel regions, with 22.4 and 23.8 per cent, respectively), which shows that it still retains the 2003 potential.

United Russia's main ally Liberal Democratic Party leader Vladimir Zhirinovskiy overcame the threshold almost in all regions (with the exception of Moscow and Omsk regions), having received about per cent of votes.

SPS, which used the election technology of a mass recruitment of canvassers and rather dodgy slogans, in some regions (Komi, Stavropol, Tomsk, Samara) managed to overcome the threshold, thus showing that the brand is not quite hopeless yet. At the same time, on the whole its result could be described as a bitter defeat.

The party that previously used to position itself as a party of intellectuals, came last, with 5.2 per cent, in St Petersburg (where it had the most financial resource and enjoyed a tolerant approach from the city authorities). Thus the fundamental truth of political technologies that the technology of mass recruitment of canvassers does not work in large cities has once again been substantiated. The last nail in the coffin of the SPS list of candidates in St Petesburg came in Yabloko's appeal not to vote for SPS because it had become a pro-government party and the local branch leaders' too eager readiness to ingratiate themselves with governor Valentina Matviyenko. In Moscow Region, Boris Gromov's administration openly falsified the party's results, which coupled with the party's ban from running in Pskov Region, Dagestan and Vologda Region contradicts the hope that the Kremlin is allegedly interested in allowing liberals to enter parliament. It is worth bearing in mind that if a fifth party makes it to the State Duma, United Russia risks not securing a simple majority of votes, which may result in a sharp rise in the costs of coalition politics.

As a result of the election results, the head of the Central Electoral Commission (CEC), Aleksandr Veshnyakov, lost his post. President Putin did not include Veshnyakov in the presidential list of CEC candidates, which the latter had hoped for till the very last. Liberal Democratic Party's Vladimir Churov became the new CEC chairman. He does not have a law degree but instead has experience of having worked in the St Petersburg mayor's office. One is least of all tempted to exonerate Veshnyakov, but in the last year he showed that his behaviour had some boundaries at least, which the new CEC leadership are unlikely to have.

In March the situation surrounding Health and Social Development Minister Mikhail Zurabov became tense again. Arrests of his subordinates on corruption charges as well as a crisis in the system of additional medicine supplies (suspension on a massive scale of the process of supplying free prescription medicine to benefit recipients in the second half of 2006 and the accrual of a budget debt to suppliers of the system of additional medicine supplies to the amount of up to 30bn roubles) provoked United Russia to voice public criticism of Zurabov and raise the issue of his resignation. The idea of Zurabov's resignation was supported by Sergey Mironov and the Communists; it began to be debated on state TV channels. However, after Zurabov's meeting with United Russia MPs and State Duma speaker Boris Gryzlov it became clear that United Russia's declarations were not more than a farce. Zurabov is under no threat of dismissal for two reasons: first, he reports not to parliament or some benefit recipients but to Putin himself and second, even if for electoral purposes - the ruling gang decides to give him up, that needs to be done right before the election.

In March Yukos assets began to be auctioned off. Rosneft, already in considerable debt, borrowed 22bn dollars from a consortium of Western banks (ABN Amro, Barclays, BNP Paribas, Calyon, Citibank, Goldman Sachs, J. P. Morgan Chase and Morgan Stanley, some of which have close links to Rosneft manage In terms of its structure, we believe Moscow Region to be very close to average Russian figures: the 2003 election results there hardly differed from the federal ones.

ment). The first auction was held on 27 March, at which 9.44 per cent of Rosneft shares and Yuganskneftegaz promissory notes were bought out by Rosneft at 7.6bn dollars, that is almost at the starting price. One can expect that Rosneft will buy (otherwise what was the point of taking out such a large loan) Yukos's remaining production and distribution assets (Tomskneft, Samaraneftegaz and others), while Gazprom will end up with only 20 per cent of Gazpromneft and minor gas assets Arktikgaz, Urengoil Inc. The auctions are of course set in such a way so as to make sure that Rosneft and Gazprom obtain the assets with minimum competition and as cheaply as possible (huge lots, high deposit and so on). The above deals testify to a further strengthening of the positions of Rosneft and its owners, especially Igor Sechin. In effect, there is a trend to make Rosneft as powerful as the gas monopoly.

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