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INSTITUTE OF THE ECONOMY IN TRANSITION 5, Gazentny pereulok, Moscow, 125993, Russian Federation Phone (495)629-6736, fax (495)697-88-16 Email: lopatina@iet.ru www. iet.ru RUSSIAN ECONOMY:


BASIC DEVELOPMENTS AND TRENDS 2 THE POLITICO-ECONOMIC RESULTS OF FEBRUARY 2009 (S.Zhavoronkov) 4 INFLATION AND MONETARY AND CREDIT POLICY (N.Luksha) 8 FINANCIAL MARKET (N.Burkova, E.Khudko) 12 THE BUDGETARY AND TAX POLICY (O.Kirillov, I.Sokolov) 21 REAL ECONOMY SECTOR: TRENDS AND FACTORS (O.Izryadnova) 24 RUSSIAN INDUSTRY IN MARCH 2009 (S.Tsukhlo) 29 INVESTMENTS IN REAL SECTOR OF ECONOMY (O.Izryadnova) 33 FOREIGN TRADE (N.Volovik) 37 FOREIGN INVESTMENTS (E.Ilukhina) 42 THE REAL ESTATE MARKET IN RF (G.Zadonsky) 49 PRIVATIZATION PROCESS: TRENDS AND PROSPECTS (A.Radygin, G.Malginov) 53 PENSION INSURANCE POLICY IN THE SITUATION OF FINANCIAL CRISIS (N.Nazarov) 57 OIL AND GAS SECTOR (Yu.Bobylev) 62 TECHNICAL REGULATION FOR MILK: ECONOMIC IMPLICATIONS FOR FARM PRODUCERS 68 AND POPULATION (N.Shagayda) THE RUSSIAN LABOUR MARKET (E.Kobzar) 72 EDUCATION IN RUSSIA: CRISIS HAS NOT INFLUENCED SECTOR YET (T.Klyachko) 77 MEETINGS OF THE GOVERNMENT OF THE RUSSIAN FEDERATION IN MARCH 2009 (M.Goldin) 80 REVIEW OF ECONOMIC LEGISLATION (I.Tolmacheva) 83 REVIEW OF REGULATORY DOCUMENTS CONCERNING TAXATION 85 OVER FEBRUARYMARCH 2009 (L.Anisimova) REVIEW OF BUDGETARY LEGISLATION (M.Goldin) 90 - - - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES BASIC DEVELOPMENTS AND TRENDS In March, there was the first single election day during the crisis. At the regional elections, the United Russia has won, though its average rating has been lowered from 65-70% to 50-55%. At the elections of the lower level of the Mayors and members of Municipal Assemblies, where independent candidates can participate, the United Russia has suffered a defeat in some regions. The Russian authorities have continued a dialogue with business on the conditions of public assistance allocation to the large businesses. The author of the key statements on the allocation of national funds is still the Prime Minister Vladimir Putin.

A significant impact on the domestic market was made by the reduction of investment in fixed capital by 14,7% as compared with the relevant period of the preceding year, as well as the decline of industrial production by 14,6%. The low indicators of investment activity in the last quarter of 2008, the growth in the scope of unfinished construction, high interest rates and limited credit opportunities provided an unfavorable impact over the economic development in 2009. In January-February 2009, the investments in fixed capital have reduced by 14.7% as compared with the relevant period of preceding year. In the current dynamics, as of the year results, the expected volume of investments will account to approximately 86% of the level in 2008.

The deterioration in the financial standing of the real economy sector enterprises, recorded since October 2008, was sustained. The high degree of businesses dependence on the bank financing, the lack of the businesses operating assets and the lack of credit resources have resulted in the failure of businesses to make payments to the contractors under the obligations for wages, loans and credits in the full scope and on time. Arrears under the wages on March 1, 2009 have amounted to RUR 8087 million and have grown by 16.1% as compared with February 1, 2009. The bulk of the debt was caused by the deficiency of the enterprises own funds.

The statistical records reflect the decline of real wages and increased unemployment.

However, it is too early to make assessments of the scale of the crisis effects on the labor market. As a rule, there are lags in the reaction of the labor market to the changes in production; the growth of unemployment rate and dismissals are started 2-3 months after the beginning of decline in production and demand for labor. Therefore, the state of the labor market, recorded in statistics, is insufficient yet to assert that the lowest crisis point has been overcome.

The updated information, obtained through the regular IET market survey, also indicates that there are no sufficient grounds for the growth of industrial output in Russia yet.

This forces the companies to refrain from a more intensive growth of prices, and further expand the practice of dismissals. However, in general, the companies do not plan further output decline.

Herewith, as of February results, the inflation in the RF has somewhat slowed down, accounting to 1.7% (against 2.4% in January). The volume of foreign currency reserves remained practically unchanged: the reduction was minimal in the preceding six months, USD 2.8 billion, or 0.7%. The net outflow of capital from the country has significantly decreased, accounting as of the month results to USD of 4.5 billion, nearly 6.5 times lower than in January. In February, the situation in the foreign exchange market has also stabilized, and the Bank of Russia for the first time in six months has carried out a net purchase of currency in the framework of foreign exchange interventions. The situation with liquidity AND TRENDS BASIC DEVELOPMENTS in the interbanking market has improved. The value of the two-currency basket has been virtually unchanged within the month, amounting to RUR 40.1.

Optimistic expectations in the external global markets due to the positive financial results of a number of international companies for the first two months of 2009, growth of the world oil prices and an upsurge in the global stock indices promoted an upgrading of the Russian financial market in March. All these factors encouraged growth in the value of all the most liquid shares in the Russian stock exchanges (up to 78%), and quotations growth of the major Russian stock indexes in MICEX to 30% as of the month result. For the corporate bond market, March became the period of relative stability. The upward trend in the number and volume of transactions in the secondary bond market was sustained, reflecting the growing interest of investors in this segment of the securities market. Adverse events were a decrease of the registered bond issues and still large number of defaults.

The indicators of the I quarter of 2009 show a deep recession in the real estate market, where the volume of arrears on mortgages continues to grow.

In March 2009, further amendments were made to the federal budget for 2009, focused at anti-crisis policy. In accordance with the adopted amendments, it is expected that the federal budget revenues will be decreased by almost one third, as compared with the previously estimated budget indicators. As opposed to that, the expenditure part will be increased and as a result of 2009, the federal budget for the first time since 2000 will be executed with a deficit.

At the end of March 2009 The program of anti-crisis measures to be taken by the Government of the Russian Federation in 2009 was published. The discussion was resumed on the need to replace the unified social tax with insurance contributions, on a sharp increase of the tax burden on labor market and a significant pensions upgrading to the level of subsistence minimum. On March 24, 2009, those issues were discussed at a meeting with the Prime Minister Vladimir Putin.

- - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES THE POLITICO-ECONOMIC RESULTS OF FEBRUARY S.Zhavoronkov In March 2009, the country has seen the first nationwide electoral day in the time of the crisis. While the United Russia was victorious with elections to regional legislatures, its average score plunged from the previous 65-70% to 50-55%. At the lower-level elections of mayors and municipal assemblies in which independent candidates can run, United Russia was defeated in a number of regions. The government continued the dialogue with large corporations on terms and conditions of release of aid to them. Some corporations (Rusal, for example) have found themselves under their creditors pressure, while others enjoyed an unconditional governmental support. It should be emphasized that it was Prime Minister V. Putin who authored key statements on earmarking the government aid. E. Skrynnik was appointed as the Minister of Agriculture and the scion of AFK Systema V. Savelyev was elected a new head of Aeroflot.

In March 2009, the country has seen the first nationwide electoral day in the time of the crisis. The elections drew much attention, despite the fact that the legislative procedure draconianly limits the number of pretenders, while the law enforcement practice drastically constrains the public control over the vote count. The outset of the campaign was marked by attempts to discard a strong list of the CPRF in Valdimir oblast and the one of the Patriots of Russia in the Republic of Khakassia1, while in some other regions the court of law had to decide which of the alternative conferences held by the Just Russia is a legitimate one.

In seven regions, the United Russia has surpassed the informally set minimal threshold of a half of votes. It carried Kabardino-Balkar Republic with 72.2% of vote, KarachayCherkess Republic with 69.3%, the Republic of Tatarsan 79.5%, Republic of Khakassia -57.3%, Arkhangelsk oblast 51.8%, Bryansk oblast 51.2%. In another two regions, it failed to match the above results in Volgograd oblast, it got 49.4% of vote and in Nenets AO 42.4%.

The CPRF won the second place in 6 out of 9 regional legislature elections (in Tatarstan, it collected 11% of vote, in Bryansk oblast 12.6%, in Vladimir oblast 27.7%, Volgograd oblast 23.5%, in Nenets AO 20.8%), and was No. 3 in Karachaevo-Cherkess Republic (10.4%), Kabardino-Balkar Republic (8.3%) and Arkhangelsk oblast (16.6%), while the second place in these regions, went to, accordingly the Patriots of Russia (11.2%) and Just Russia (12.2% and 17.8%).

The Patriots of Russia have also managed to be elected to the legislative assembly of Khakassia (7.2%), notwithstanding a vigorous counteraction by the newly elected governor.

In Volgograd oblast, the party ran, but failed to repeat its success in Khakassia.

The Just Russia also overcame the barrier in Khakassia (7.18%), Bryansk oblast (8.6%), Vladimir oblast (8.84%), Volgograd oblast (13.3%), Nenets AO (12.7%), but failed to do so in Tatarstan and Karachay-Cherkess Republic. LDPRs best performance was in Nenets AO (19.7%), but the party likewise stumbled in Tatarstan and Karachay-Cherkess Republic. In 1 While hardly known nationwide and not represented in the State Duma, this party is particularly strong in Khakassia. This can be explained by the fact that Mr. G. Semigin, its multiyear sponsor and Chairman was a State Duma deputy from the region. Plus, in the conditions of a drastic contraction of party brands an oppositional to the governor local elite can pick and brandish any regional-level party brand.

THE POLITICO-ECONOMIC RESULTS OF FEBRUARY Kabardino-Balkar Republic, LDPR got 7.02% of vote, in Khakassia 10.2%, Arkhangelsk oblast -10%, Bryansk oblast 10.3%, Vladimir oblast 8.85%, Volgograd oblast -9.8%.

The declared voter turnout varied substantially across regions: in Kabardino-Balkar Republic the turnout was 83.6%, in Tatarstan 78.4%, Karachaevo-Cherkess Republic 77%, while in Khakassia just 53%, Nenets AO- 48.8%, Bryansk oblast 48.2%, Volgograd oblast 42.1%, Arkhangelsk oblast 38%, while the lowest turnout rate (33.9%) was reported in Vladimir oblast.

The picture of regional elections would be incomplete without the concurrently held elections of mayors in large cities and elections by party lists to the respective city dumas.

It should be noted that as far as the mayoral elections are concerned, independents can run, while public organizations can participate in local duma elections. Mayoral elections were held in 10 regional capitals: Chita, Petrppavlovsk-Kamchatsky, Blagoveschensk, Murmansk, Novosibirsk, Smolensk, Tomsk, Chelyabinsk, Birobidzhan, and Anadyr. In some of them, there was no electoral campaign, as the incumbent mayors ran along with the so-called duplicating candidates (the most hilarious situation took place in Novosibirsk, with the CPRF supporting the United Russias candidate and refusing to take part in the election). But wherever the election was genuinely alternative, the United Russias candidates were challenged seriously. More specifically, they were defeated in Smolensk and Murmansk, while in Tomsk and Petropavlovsk there was a runoff, with the gap in Tomsk between the UR candidate and an oppositionist being a minimum one and the election results being disputed. It was only in Chelyabinsk that the incumbent mayor and an official representative of the United Russia enjoyed a convictive victory over his predecessor.

At municipal elections held by party lists, the United Russia was seriously defeated in Tver (29.4% vs. the CPRFs 49.2%). On the brink of defeat was its performance in Bryansk (36.5% vs. the communists 30.6%), which did not ensured even a simple majority, and in Togliatti (39.5% vs. 26% won by the opposition bloc December and another 15% - by the CPRF).

The elections outcomes can be regarded as a considerable fall of the URs results (by 1520 p.p. on average against the December 2007 elections and the March 2007 presidential election). Notably, the regions where its scores were high raise obvious doubts (for instance, in some districts in Tatarstan, United Russia collected 100% of vote). The authorities have judged the elections in a similar fashion by their results the Deputy Head of Department of Domestic Policy of the Administration of the RF President was ousted, and so was the Governor of Murmansk oblast who had his deputy ran (and win by a great margin) against the UR representative at the mayoral election in the regional capital. At the municipal elections in localities wherein elections were not restricted by party lists and independents were allowed to run, the URs performance was yet poorer.

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