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- - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES As to the prospects for of continued privatization with the inclusion in the relevant national program on the major assets, comparable in importance with those privatized before (for instance, privatization of public equity stake in Svyazinvest telecommunications company, the sale of which in previous years has been postponed several times), they are under a big question. In this regard, it is sufficient to remind, that the financial crisis of 1997-1998 has minimized the privatization procedure due to the repeated devaluation of assets, withdrawal of many potential investors from the Russian market, as well as political uncertainty, although at that time the crisis had affected only a few emerging markets (in South-East Asia and Latin America).

Also in the context of the crisis one can not count on the steady budget revenue from the renewable sources, primarily in view of the deteriorating financial and economic standing of the companies with the state participation, and reduced business activity.

By some estimates, there is a number of innovations in public sector management, that have been discussed or have already begun to be implemented in 2008, that could be regarded as a starting point of the new phase of the vast-scale privatization. First of all, this the appointment since of the Independent Directors in the large mixed companies (i.e., the image incentive to improve the quality of corporate management prior to public shares placement) from summer of 2008, the possibility to extend the term of the privatization plan from 1 to 3 years (which allows to pass the entire cycle of preparation for the sale of shares) without haste, corporatization (in the true sense of the word) of public corporations, established in 2007-2008.

Even at the level of the official comments, the new plans for selling the state property are related to the period after 2010. Estimates of the crisis duration in the Russian economy for the 2009-2010, apparently, leave the issue open for a longer period (with regard to only the economic factors, regardless the trend of public expansion). Nevertheless, even now there are two extreme scenarios, evident for the medium term.

The first scenario is based on the forced return to the implementation of privatization tools for budget deficit financing (as is happened in the 90-s.), regardless the low cost of the sold assets. Such a scenario has all chances for implementation at the peak of the crisis, at the background of low oil prices, depletion of financial (gold) reserves and growing budget deficit. In fact, we mean the sale of public assets for dumping prices, but the internal incentives can be rather different - from the short-term (due to restricted source) support of social commitments, made earlier, to the undisclosed allocation of the assets, privatized for trifling sum in a narrow range of objects. There is a possibility of combination thereof, but in the first case one can speak about a misguided economic policy, while in the second case - on the future conservation of the privatization of profits, nationalization of losses model.

The second, the more optimistic scenario is based on the supposition of the soft outcome of the crisis after 2010, gradual restoration of the stock market capitalization (the value of assets) and gradual restoration of sales at the wave of economic recovery. Herewith, the vast-scale privatization should not be addressed primarily to solve the problem of quantitative optimization of the public sector and the state negligence of its responsibilities for the management of inappropriate economic agents, rather than focusing on the replenishment of the budget.

There remains in force an alternative to both those scenarios, i.e., further expansion of the public sector (direct and indirect participation) in the anti-crisis monitoring, followed by the preservation of public property objects for an unlimited term. With regard to the nature of anti-crisis measures of the beginning of 2009, one can nevertheless expect, that the indirect measures will be dominating, what makes both privatization scenarios possible.

PENSION INSURANCE POLICY IN THE SITUATION...

PENSION INSURANCE POLICY IN THE SITUATION OF FINANCIAL CRISIS N.Nazarov Currently 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 and on so-called valorization of pensions. On March 24, 2009, those issues were discussed at a meeting with the Prime Minister Vladimir Putin.

Brief description of the measures proposed by the Ministry of Health and Social Development of Russia On October 1, 2008 at a meeting of the Russian Government it has been decided to undertake in 2010 an extensive reform of the unified social tax. The main provisions of the newly proposed pension reform and reform of UST, proposed by the Ministry of Health and Social Development of Russia are as follows.

1) The source of financing for the insurance and the basic pension portions becomes the insurance contribution(currently the deficit in the payment of basic pension portion is covered from the federal budget). With, the basic old-age pension has become an integral part of the pension insurance and in future, it is subject to indexation in relation to the growing income of the Pension Fund of Russia, but not exceeding the growth of average wages1. To finance the basic and insurance parts of the labor pension with the help of the insurance contribution, the value of the tariff of the premium has to be drastically increased. The base rate has to be increased from 26 per cent to 34 per cent, 26 per cent of which should be addressed to finance pensions (as compared with current 20 per cent).

2) Despite the increase of the tax burden, the tariff for mandatory pension insurance in the amount of 26 per cent for all insurers is insufficient to finance the basic and insurance parts of pensions in the long run. Therefore, the Ministry of Health and Social Development of Russia proposes to increase the insurance rate according to the funding requirements (Table 1).

3) The proposed program of valorizations of the older generations rights should specially mentioned. The monetary valuation of the rights as of 01.01.2002 is increased by 10 per cent + 1 per cent for each year of work record prior to January 1, 1991. The measures are to be realized at the expense of the federal budget (RUR 484.5 billion in 2010).

1 Currently the basic pension part is a kind of the state guaranteed minimum and does not depend on the work record term and the paid contributions (there is only a requirement for a minimum employment term, providing the right for a labor pension. In case there is no such right, another type of pension shall be provided). The basic part of pension is set up in absolute amount and is subject to indexation with regard to inflation. The insurance portion of the pension depends on the contributions, paid under the terms of mandatory pension insurance. Indexation of the pension insurance is performed either as per the inflation rate, or as per the rate of the UST growth (if that rate is higher than the inflation rate), assessed per pensioner. The value of the accumulated pension share depends not only on the amount of contributions, but also on the profitability of the pension fund, where the funds are allocated.

- - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES Table INSURANCE RATE, PROPOSED BY THE MINISTRY OF HEALTH AND SOCIAL DEVELOPMENT OF RUSSIA, % Insurance rate 2010 2015 2018 2025 2030 2039 TOTAL, including: 26 27 29 30 31 33 - consolidated tariff 10 11 13 14 15 17 - rates, recorded on the individual 16 16 16 16 16 16 personal accounts For reference:

Gross tariff for pension, medical 34 35 37 38 39 41 and social insurance* * The tariff is assessed on assumption, that in 20102047 the rates for mandatory medical and social insurance will be sustained and make 8 per cent.

Impermissibility of the tax burden on the labor market during the economic crisis During the economic crisis the counter-cycle fiscal policy includes measures on reduction the tax burden and enhancement of public expenditures role in the economy. In Russia the counter-cycle fiscal policy is ensured by a progressive royalty and export duties for energy prices at the level of global oil prices, as well as by the opportunity to use the Reserve Fund resources, accumulated during the favorable economic situation, in the downgrading period. Income tax provides for additional counter-cycle process, which proceeds are obtained faster than GDP proceeds.

Measures, proposed by the Ministry of Health and Social Development of Russia are aimed at balancing the pension system, by contrast, provoke an increase of fiscal burden on the economy (about 1.6 per cent of GDP) and, in our view, at least, should be deferred until the regain of sustained economic growth. Herewith, the current crisis became a kind of stress-test for the proposals of the Ministry of Health and Social Development of Russia to a substantial increase of the insurance rate. With growing unemployment problems, one cannot increase the fiscal burden on wages of the poorest segments of the population from the current 26 per cent to 34 per cent. Such a high rate of insurance rate cannot be sustained in the long run, as well as during periods of economic recession, it has to be significantly reduced. the Ministry of Health and Social Development of Russia, by contrast, provides a steady growth of the insurance rate to 42 per cent in 2047, what would undermine Russia economy competitiveness in the long term.

In this regard, it is necessary not only to renounce any UST reforms, increasing the tax burden on the labor market in the 2010-2011, but also to revise the approach, under which the balance of the pension system is achieved only by increasing the fiscal burden on the labor market.

The need to address the financial resources to bringing the basic pension to the subsistence minimum Since the possibility of pension system state funding in the coming years will be rather limited, it is necessary to focus the resources of the fiscal system on the most important direction. The priority in the field of pensions funding in the coming years is the elimination of poverty among pensioners, that is, bringing the rate of basic pension to the pensioners subsistence minimum level. Due to rapid indexing of the basic pensions as a result of bringing its rate up to the minimum subsistence level for pensioners and due to the slowing down of wages growth in 2009, the ratio of the average labor pension versus the average wage in the country will be significantly increased - from 22.8 per cent in 2007 up to 27 per cent in 2009-2010.

PENSION INSURANCE POLICY IN THE SITUATION...

Bringing up the basic pension to the subsistence minimum and the subsequent indexing of the basic pension in accordance with the rate of consumer prices growth will ensure the stability of the real income of pensioners and reduce the risks of poverty among the elderly population.

Herewith, the task of bringing the basic pension up to the subsistence minimum and maintaining it at this level will require substantial financial resources (about 0,43 per cent of GDP in 2010), as a result of which, in our opinion, in the coming years it is necessary to abandon other measures to improve pension insurance. First of all, we are speaking about the rejection of the revaluation of rights, acquired by the beginning of the pension reform.

Non-recurrent increase of the insurance part of labor pensions in early 2010, totaling to per cent can cause an upsurge in inflation. Valorization of pensions will require additional funding from the federal budget in the amount of 0.99 per cent of GDP.

Priority measures of pension reform First, set up the indexing rate of UST without an upsurge of the tax burden (there are various tentative options of the UST rate, including the two-level one). However, it should be understood that the mere amendment of the UST rate can not ensure the balance in the pension system. Even with a very high rate of contributions to compulsory pension insurance, as proposed by the Ministry of Health and Social Development of Russia, the balance in the pension system can not be achieved. Consequently, when reforming the UST rate, one should be guided by the following considerations: to maximize the amount of tax revenue while minimizing inconsistencies in the economy. Such approach imposes severe restrictions on increasing the UST rate.

Second, to attract financial resources to the pension system apart from the insurance premiums for the mandatory pension insurance and UST funds. In addition to the tentative involvement of reserve funds for this purpose, one can regard also the results of the state property privatization. After 2009, it would be preferable to use the proceeds from the privatization of state property to finance the deficit in the pension system. This approach has a number of social and economic benefits:

1) gradual privatization and involvement of national assets, not directly related to the performance of key government functions in the market turnover is economically justified measure, that will result in the overall economic efficiency upgrading. The transfer of assets to the public pension system will, in particular, successfully resolve the problem of gradual privatization of banks and non-commercial companies, which will be forced to come under by the government control in the situation of the financial and economic crisis;

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