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March saw some significant events in the electricity sector. The RAO UES board of directors approved yet another draft of the company's reform. This time it is nearer to the initial draft and tries to take into account shareholders' interests (which have already been considerably affected by the additional issues of shares of wholesale generation companies (OGK) and territorial generation companies (TGK)). The government will not itself be selling TGK and OGK shares. As a result, in the majority of TGKs OGKs, stateowned blocks of shares will end up belonging to the FSK federal grid company and the HydroOGK federal hydrogeneration company; thus the state's share in the former will exceed 75 per cent and in the latter, 50 per cent. Then FSK HydroOGK will assist in raising investment by selling TGK and OGK shares. The spinoff of the system operator Inter RAO, OGK-5 and TGK-5 will be carried out following the basic mechanism, i.e. all shareholders, including the state, will receive their blocks of shares directly. In parallel, an additional issue of OGK-3 was conducted. Most minority shareholders did not want to preserve their share in the company, thus Norilsk Nickel became OGK-3's largest shareholder (over 45 per cent). We shall see how successful its experience will be against the reality of the state regulation of prices. At the same time political influence on energy companies in the interests of the Gazprom management is increasing. RAO UES was forced to agree to purchase over one-third of its gas at market prices (the rest Gazprom will deliver on longterm contracts).

The general meeting of the Russian Academy of Sciences has turned out to be one of the few public institutions that had courage enough to oppose the Russian government. The scientists approved the academy's charter in which they refused to create a supervisory board comprised of representatives of the bodies of power and which was meant to assume the academy's administrative and financial functions3. Their quite plausible reasons for that were that the handover of the right to run the academy's considerable real estate assets to government officials threatened academicians' interests and did nothing to further the state of academic science. At the same time however, they refused to set in the charter the project (grant-based) principle of funding the academy, which can be seen as a clear sign of a struggle for the existing and not always justified system of privileges S. Zhavoronkov Budget and tax policies By the results of preliminary execution, in January - February 2007 the revenue level of the RF federal budget amounted to 21.2 % of GDP, the expenditure level of the RF federal budget - to 13.1% of GDP, while budget surplus was 8.2 % of GDP. By the results of January - February 2007, the revenues of the RF consolidated budget amounted to 31.5 % of GDP, consolidated budget expenditures to 14.5 % of GDP, and budget surplus to 17.0 % of GDP. As of 1 March 2007, the amount of the RF Stabilization Fund was 2, 708.8 billion roubles, as compared to 2, 647.2 billion roubles as of 1 February 2007, which constitutes 10.8 % of GDP and 11.0 % of GDP, respectively, against annual GDP and accumulated GDP.

The status of the state budget In Table 1, the dynamics of the main parameters of the RF federal budget in 2004 2007 is displayed. In accordance with the preliminary estimates made by the RF Ministry of Finance concerning the budgets execution in cash terms in January - February 2007, the federal budget was executed in respect to its revenues in the amount of 888.68 billion roubles (or 21.2 % of GDP), and in respect to its expenditures - in the amount of 547.64 billion roubles (or 13.1 % of GDP). Federal budget surplus amounted to 341.04 billion roubles (or 8.2 % of GDP).

The Russian Education Ministry has already promised that the government will reject the document, although until it is adopted everything remains as it used do be, so academicians are not concerned by the delay.

In absolute terms the federal budget revenues in February of this year were found to be somewhat higher than the corresponding index of last year (875.83 billion roubles), while as a percentage of GDP they were lower (26.2 % of GDP in 2006). The federal budget expenditure in January - February 2007 was also somewhat higher than the corresponding index of 2006 (825.59 billion roubles), but at the same time lower as a percentage of GDP (14.5 % of GDP in 2006). Such a dynamic of revenue and expenditure of the federal budget resulted in a decrease of the budget surplus both in absolute terms and as percentage of GDP against the corresponding indices of last year (390.84 billion roubles, or 11.7 % of GDP).

If we compare the dynamic of federal budget revenue and expenditure during the first two months of the current year with the corresponding indices of the previous years, it can be seen that revenue became slightly higher than in 2004, while expenditure went down to its historic low of the whole period under consideration.

Table 1.

The main parameters of the RF federal budget (in % of GDP) 2004 2005 Feb. 2006 2006 Feb. Revenue 20.1% 23.7% 26.2% 23.5% 21.2% Expenditure 15.8% 16.2% 14.5% 16.2% 13.1% Deficit ()/ Surplus (+) 4.3% 7.5% 11.7% 7.4% 8.2% The structure of revenues in the period under consideration is shown in Table 2.

Table 2.

The RF federal budget revenues (in % of GDP, budget execution in cash terms) Feb.

2005 2006 Feb. Taxes and other payments administered 12.33 11.13.97% 10.08% by Federal Tax Service % % Taxes and other payments administered 10.9.73% 11.14% 10.25% by Federal Customs Service % Revenues administered by Federal Agency for Management of State Prop- 0.27% 0.24% 0.26% 0.13% erty Revenues of federal budget adminis1.35% 0.86% 1.25% 0.76% tered by other federal bodies Total revenues 23.23.7% 26.21% 21.22% % As can be seen from this table, the structure of tax revenues and other types of revenue, by department, in January - February 2007 somewhat changed against the indices registered during the previous periods. Thus, as of the end of February of the current year, the shares of taxes and other payments administered by the Federal Tax Service and by the Federal Customs Service became nearly similar (10.08 % of GDP and 10.% of GDP, respectively), but at the same much lower as compared both to the same indices of last year and to the actual execution of the federal budget in 2006. The customs revenue for the first time became higher than the revenues from taxes and payments. It is this substantial fall in tax revenues that became one of the key reasons for the declining aggregate federal budget revenue. The volume of revenues administered by the Federal Agency for the Management of State Property in February 2007 became nearly two times lower that the same index in 2006 (0.24% of GDP) and amounted to 0.13 % of GDP. And finally, the volume of the federal budget revenues administered by other federal bodies, by the results of the first two months of 2007, was seen to have also become somewhat lower than last years indices (0.86 % of GDP), and amounted to 0.76 % of GDP.

The preliminary data on the financing of federal budget expenditures in January - February 2007, submitted by the RF Ministry of Finance, are presented in Table 3.

It can be noticed that the aggregate value of financed expenditures demonstrated rather substantial fluctuations, depending on a period under consideration. Thus, while as of the end of 2006 it was approximately 16.4 % of GDP, by the results of January - February it went up to 23.69 % of GDP. At the same time, against last years index, financed expenditures became noticeably lower (27.25 % of GDP as of the end of February 2006).

The rise in expenditures against the resulting indices of the year 2006 was caused by the increased amounts of federal budget expenditures under many items of the functional classification. The highest growth rate was seen under sections General State Isues (from 2.19 % to 3.49 % of GDP), largely due to the increased cost of government debt servicing (from 0.65 % to 1.18 % of GDP), National Defense (from 2.57 % to 3.32 %), National Security and Law-Enforcement Activity (from 2.08 % to 3.42 % of GDP), and Interbudgetary Transfers (from 5.68 % to 9.37 % of GDP). At the same time, some other expenditure sections demonstrated a decrease of their share in GDP.

Table 3.

The volumes of financing of the RF federal budget expenditures (in % of GDP) 2005 Feb. 2006 2006 Feb. General state issues 2.58% 4.32% 2.19% 3.49% of these, servicing of state and municipal debts 1.06% 2.02% 0.65% 1.18% National defense 2.71% 4.96% 2.57% 3.32% National security and lawenforcement activity 2.05% 3.59% 2.08% 3.42% National economy 1.17% 0.94% 1.31% 0.94% Housing and utilities system 0.04% 0.01% 0.20% 0.16% Environment protection 0.02% 0.04% 0.03% 0.03% Education 0.73% 1.00% 0.78% 0.95% Culture, cinematography and mass media 0.22% 0.22% 0.21% 0.12% Public health care and sports 0.42% 0.69% 0.56% 0.82% Social policy 0.88% 1.50% 0.81% 1.07% Interbudgetary transfers 5.77% 9.98% 5.68% 9.37% Total expenditures 16.58% 27.25% 16.40% 23.69% Table 4.

The execution of the RF consolidated federal budget in 2003 - 2007 (in % of GDP) I II III IV V VI VII VIII IX X XI XII Taxes* 25.6% 24.4% 25.6% 27.4% 27.1% 26.0% 26.1% 25.7%25.0% 25.0% 25.1% 25.2% Revenues 32.0% 30.3% 31.5% 33.4% 33.6% 32.2% 32.2% 31.6%30.9% 30.8% 30.7% 31.1% Expenditures 20.7% 25.3% 27.7% 28.8% 28.8% 28.6% 28.7% 28.5%28.2% 27.8% 27.9% 29.7% Deficit / 11.3% 5.0% 3.8% 4.5% 4.7% 3.5% 3.6% 3.1% 2.7% 3.0% 2.8% 1.4% Surplus I II III IV V VI VII VIII IX X XI XII Taxes* 6.1% 21.8% 27.4% 27.4% 26.6% 27.2% 27.1% 26.4% 26.5% 26.9% 26.8% Revenues 30.6% 28.2% 29.8% 32.9% 32.9% 32.5% 33.1% 32.9% 31.9% 32.0% 32.3% 32.3% Expenditures 18.5% 22.8% 25.4% 27.3% 26.9% 27.0% 27.0% 26.9% 26.0% 25.9% 26.1% 27.8% Deficit / 12.1% 5.4% 4.4% 5.6% 6.0% 5.5% 6.1% 6.0% 5.9% 6.1% 6.2% 4.5% Surplus I II III IV V VI VII VIII IX X XI XII Revenues 48.8% 40.3% 40.3% 40.8% 38.8% 38.2% 37.6% 37.0% 36.0% 35.9% 35.8% 36.1% Expenditures 22.2% 23.3% 24.9% 27.1% 26.5% 26.6% 26.7% 26.6% 27.2% 26.1% 25.9% 28.1% Deficit / 10.0% 26.5% 17.0% 15.4% 13.7% 12.3% 11.6% 11.0% 10.5% 8.8% 9.8% 7.9% Surplus I II III IV V VI VII VIII IX X XI XII Revenues 36.2% 34.4% 37.9% 37.1% 37.2% 36.8% 36.6% 36.5% 35.4% 35.1% 34.8% 35.5% Expenditures 17.6% 21.0% 24.2% 25.4% 24.7% 25.5% 25.3% 25.1% 24.8% 24.7% 25.1% 27.8% Deficit / 18.7% 13.4% 13.6% 11.7% 12.5% 11.3% 11.3% 11.4% 10.6% 10.4% 10.7% 7.7% Surplus I II III IV V VI VII VIII IX X XI XII Revenues 31.5% Expenditures 14.5% Deficit / 17.0% Surplus * without the single social tax However, if one analyses these changes by comparison with the indices of February 2006, it can be seen that expenditures have increased under some sections, while other sections are demonstrating a downward trend. Thus, growth was seen under sections Housing and Utilities (from 0.01 % to 0.16 % of GDP) and Public Health Care and Sport (from 0.69 % to 0.82 % of GDP). On the contrary, expenditures became lower under the section General State Issues - from 4.32 % to 3.49 % of GDP; under the section National Defense from 4.96 % to 3.32 % of GDP; Culture, Cinematography and Mass Media from 0.22 % to 0.12 % of GDP; Social Policy from 1.50 % to 1.07 % of GDP; and Interbudgetary Transfers - from 9.98 % to 9.37 % of GDP. The expenditures under other items of expenditure were negligible.

By the results of January 2007, the RF consolidated budgets revenue amounted to 31.5 % of GDP, as compared to 36.2 % of GDP in January 2005. Consolidated budget expenditure also noticeably decreased, as compared to the same period of 2006, and amounted to 14.5 % of GDP (17.6 % of GDP in 2006). The consolidated budget surplus in January 2007 was 17.0 % of GDP, or somewhat lower than the index of (18.7 %). Thus, as seen by the results of January 2007, there was a decrease of both the revenue and expenditure of the RF consolidated budget in % of GDP, against the corresponding indices of 2006, which resulted in the RF consolidated budget surplus also becoming lower. Besides, in March the Federal Treasury published the information concerning the execution of the RF general governments budget in January 2007.

According to this information, the revenue of the general government, by the current years first months results, amounted to 34.8 % of GDP, the expenditure to 16.4 % of GDP, while budget surplus - to 18.5% of GDP.

As of 1 March 2007, the amount of the RF Stabilization Fund was equal to 2, 708.8 billion roubles, as compared to 2, 647.2 billion roubles as of 1 February 2007, which against annual GDP constitutes 10.8 % of GDP and 11.0 % of GDP, respectively.

The main developments in the budget sphere According to the information published by the RF Ministry of Finance, from the year 2008 onward the state budget will be formed with due regard for balance unrelated to the prices of oil and gas. According to RF Minister of Finance A. S. Kudrin, the introduction of amendments to this effect into the Budget Code will make it possible, from 2008, to divide revenues into those from oil and gas and those not dependent on the prices in the oil and gas sector, as well as to determine the amount of transfer that will become a fixed figure in respect to GDP in the long-term perspective. It was noted that, by the results of 2006, the oil and gas revenues of the RF federal budget amounted to 11.6 % of GDP, while the other revenues to 12 % of GDP. It is forecasted that by the results of 2007 the oil and gas revenues will go down to 8.5 % of GDP, although this decrease will mostly influence the amounts of deductions to the Stabilization Fund. According to the plans of the RF Ministry of Finance, all revenues generated by oil and gas will be transferred to a single account and then divided into three parts: current transfer, replenishment of the reserve fund and replenishment of the future generations fund. In this connection, the amount of the current transfer to the federal budget can constitute approximately 4 % of GDP, while it is planned that the size of the reserve fund should be at the level of 10 % - 13.5 % of GDP. It is intended that the monies from the reserve fund should be invested in assets with higher liquidity, which thus will produce lower yields, but can be sold whenever necessary. On the contrary, the resources of the future generations fund can be invested in relatively more risky assets, i.e., corporate bonds of high credit quality, which will result in a higher yield in a longer term.

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