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2) pension system deficit is partially based on the fact that a significant share of resources in invested in the formation of a accumulated pension share. Starting from 2042, virtually all retiring citizens will be related to the category of pensioners, from whose salaries contributions were paid to the accumulative pension share throughout their working experience. Therefore, for this category of pensioners payments to accumulated pensions share will be irrelevant. Consequently, financing of the deficit in the pension system at the expense of national assets would be temporary, serving as a stock exchange for a stock, which is quite reasonable from an economic point of view;

3) vast-scale transfer of public assets to the pension system and their further gradual disposal for the purpose of pensions financing represents a fundamentally new fair and probably popular privatization model, favorable for the vast majority of the population.

Such strategy could support confidence in the institutions of private property in Russia.

If the revenues from oil-gas sector and from privatization of the national property is insufficient to finance the deficit in the pension system, it would be reasonable to increase - - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES VAT as a source of financing the pension system, rather than increasing the UST. This choice is based on the following reasons:

- first, the VAT base is significantly larger than the UST base. Therefore, increasing the VAT is less damaging to the economy than UST upgrading (this is especially relevant to the labor market);

- second, the VAT growth will be able to solve the problem of imbalance in the pension system in the event of reduction of energy sources prices far better than the increase of UST. The share of the market indicator (depending on the oil prices volatility) in the budget proceeds from VAT is less than the UST proceeds;

- third, the VAT increase, as opposed to the UST growth, does not affect the competitiveness of the Russian economy. UST is a tax on wages, which in partially included in the price of goods. Therefore, the UST upgrading has a negative impact on the competitiveness of domestic exporters, especially in the labor-intensive industries. As opposed to that, VAT is a tax on consumption, including import, whereas it is refunded to the exporters.

The logic of the choice between the VAT or UST upgrading for the financing of the pension system can be demonstrated on the experience of Germany, where decreased rates of corporate income tax with concurrent raising of social tax and value-added tax from 16 to 19 per cent1 were applied. These measures were designed to enhance the competitiveness of the German economy. Having lowered taxes on labor and capital, the Government of Germany was seeking to attract investment (or at least suspend the outflow of investment to the Eastern Europe countries) and to extend employment. Having chosen the VAT upgrading as a way of compensation for the decreased revenues, the German authorities impose higher taxes, including imports. Therefore, the German exporters have lower taxes on labor and capital, and the increased VAT does not affect them(VAT on exports is refundable). With the help of the proposed measures the authorities also make an attempt to improve the balance of payments.

It should also be noted that currently in Russia there is a certain reserve to raise the VAT rate (as opposed to the UST, which base rate is high enough). First, there is preferential 10percent VAT rate, which could be abolished not only to raise revenue, but also to improve the balance of the tax system. Second, many transactions are currently exempt from VAT.

And third, even the basic VAT rate in Russia (18 per cent) is rather low as compared with many EU countries.

Third, to accelerate the transition to the funded pension system. The issue under review is using the world commodity markets high energy sources of oil and gas revenues and revenues from privatization of the national property, primarily for the development of the funded pension system or the establishment of reserves to ensure that the pension system liabilities (and not spending those funds for food only through arbitrary pensions upgrading or other national budget spending). It is necessary to take measures to improve the efficiency of investments and pension savings, or reserves of the pension system.

Fourth, to increase the retirement age. With regard to the political sensitivity of the issue, it should be noted that raising the retirement age is the only solution to balance the pension system in the long run, which would lead to an increase rate of replacement.

In order to minimize the political costs of increasing the retirement age, it should be made gradually, and refer to only relatively young men. The best way is a gradual increase of the retirement age for the men younger than 50 years and for the women younger than 45 years (that is, for those categories of citizens, who are still at least 10 years younger than the standard retirement age in accordance with the effective legislation). Herewith, 1 http://www.imf.org/external/pubs/ft/wp/2007/wp0746.pdf PENSION INSURANCE POLICY IN THE SITUATION...

the average retirement age should be gradually increased (for example, by 3 months per year for men, at, 6 months per year for women).

The effect of this reform on the fiscal system will be seen in 10 years - in 2020 and will grow to 2040, when the retirement age for men and women reaches 65 years. According to our estimates, the period of 2020-2030 will be the most difficult for the pension system, as the demographic situation (the ratio of recipients of payments to contributors) will get continuously deteriorated1, while the value of the funded share of pension payments in that period will be still insignificant for the maintenance of the replacement rate at a socially acceptable level.

Razing the retirement age is able to solve the problem of 2020-2030. However, this decision has to be taken immediately, so that the citizens and the national pension system could have time to get adapted to the new situation. Currently, raising the retirement age to 65 for those younger than 30 is quite painless in political terms, as increasing the retirement age later, when this generation will be about 50, could provoke a serious political crisis.

An additional measure is to encourage voluntary delayed retirement, primarily for those age groups, which are not affected by the mandatory raising of retirement age. For this category of citizens there can be ensured a significant increase in pensions in exchange for retirement at the older age. This should be accompanied by a number of measures on creation special jobs for the retired people and those of pre-retirement age.

1 Herewith, life expectancy will rise by 2020 from the current 67 years to 72-75 years according to the concept of the long-term socio-economic development of Russia, developed by the Ministry of Economic Development of Russia.

- - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES OIL AND GAS SECTOR Yu.Bobylev In the 1st quarter 2009 the situation in the oil and gas sector of the Russian economy was characterized by the world prices for oil stabilizing at a comparatively low level and by the decrease in oil and natural gas production and export. At the same time the reduction in ruble exchange rate, lower export duty rate for oil and a number of amendments in the Tax Code of the Russian Federation coming into effect considerably improved the financial situation in the oil and gas sector as compared with the last quarter of the previous year.

In the 1st quarter 2009 the decrease in demand for oil in the developed countries as a result of the global financial and economic crisis was compensated by the decrease in oil production by OPEC countries and its reduction in other oil producing countries (Russia, Norway, the UK, Mexico), the result being that world prices for oil stabilized at the level of USD 40-45 per barrel, and in the second part of March increased up to USD 50-52 per barrel (table 1,2). At the OPEC conference taking place in the second half of the month, the decision to sustain the quotas for oil production at the level as of January 1, 2009 unchanged, and aiming at additional decrease in production by all the organization members meeting the quotas. In December 2008 OPEC decided to reduce oil production by 4.2 million of tons starting from January 1, 2009 as on the level of September 2008, real fulfillment off these decisions by the middle of March made 80%.

Table WORLD PRICES FOR OIL IN 20072009, AS USD PER BARREL 2008 2008 2008 2007 1stQ 1stQ 2ndQ 3rdQ 4thQ (estd) Price for oil grade Brent, 72.5 96.9 121.4 114.8 54.9 97.0 44.Great Britain Price for oil Urals, Russia 69.4 93.3 117.5 113.2 54.1 94.5 43.Price for oil basket of OPEC 69.1 92.7 117.6 113.5 52.5 94.1 43.member countries Source: OECD International Energy Agency, OPEC.

Table AVERAGE MONTHLY PRICES FOR OIL IN 20082009, AS USD PER BARREL 2008 2008 2008 2008 2009 1-July Oct Nov Dec Jan Feb March Price for oil grade Brent, 133.2 71.9 52.5 40.4 43.6 43.1 45.Great Britain Price for oil Urals, Russia 130.1 70.8 51.5 39.9 43.2 42.5 44.Source: OECD International Energy Agency, OPEC.

The growth in oil production in Russia that was observed earlier and accounted for by the expansion of its export possibilities, intensification of the development of new oil OIL AND GAS SECTOR fi elds and expansion of investment opportunities for oil companies as a result of high world prices for oil, was substituted by the decrease in 2008, which continued in the first months of the current year (table 3). The volume of oil processing has also reduced.

At the same time the gas production also decreased sharply (by 12.2% as compared with the corresponding period of the previous year), which was the result of the decrease in internal and external demand for gas (as a result of economic recession and relatively warm weather conditions), as well as the forced contraction of its supplies to Europe at the beginning of 2009 as a result of disagreements with the Ukraine. According to the preliminary data of the Ministry for Power Industry of the Russian Federation, in January-February 2009 the consumption of gas in Russia reduced by 8.5% and the gas export by 43.6% as compared with the corresponding period of the previous year.

Table OIL, OIL PRODUCTS AND NATURAL GAS PRODUCTION IN 2002-2009, AS PERCENTAGE ON THE PREVIOUS YEAR 2002 2003 2004 2005 2006 2007 2008 JanFeb* Oil, including gas 109.0 111.0 108.9 102.2 102.1 102.1 99.3 97.condensate Primary oil processing 103.3 102.7 102.6 106.2 105.7 103.8 103.2 96.Car petrol 104.9 101.2 103.8 104.8 107.4 102.1 101.8 100.Diesel fuel 104.7 102.0 102.7 108.5 107.0 103.4 104.1 97.Furnace fuel (mazut) 107.1 100.3 97.8 105.8 104.5 105.2 101.9 96.Natural gas 101.9 103.4 101.6 100.5 102.4 99.2 101.7 87.* As percentage to January-February Source: Federal State Statistics Service Decrease in oil production growth rates is primarily accounted for by the objective worsening of the conditions for its production. A considerable part of the oil fields currently in operation is at the stage of the decreasing production and new oil fields in most cases are characterized by worse mining and geological conditions, their development requiring higher capital, exploitation and transportation costs. At the same time the existing taxation system did not provide necessary decrease in the taxation load when developing new fields with higher costs, which limited the investments in new projects. As a result the investments made do not provide the increase in oil production that would compensate the decrease in its production at old oil fields.

The government expansion in the oil sector has obviously somewhat influenced the dynamics of the investments in recent years as well, contributing in the growth of apprehensions on further uptake of the private business and, as a result, the lowering of stimuli for long-term investments at oil companies. At the same time the state companies are limited in their investments amounts by the necessity to make huge repayments for credits attracted by them to purchase new assets.

Against the background of production decrease in 2008 and the beginning of 2009, there has occurred a reduction in physical volumes of oil export. Net oil and oil products export was equal to 358.1 mln of tons in 2008 and decreased by 2.5% as compared with the previous year. The share of the net oil and oil products export in oil production was 73.3%. Net oil export in 2008 made 49.3% of its production. In 2008 the share of export in furnace fuel production was 83.0%, in diesel fuel production 54.2%, in car petrol production 12.5%. In the gas sector production is mainly orientated to the internal market. The proportion of the net export in gas production in 2008 made 28.3% (table 4).

- - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES Table RATIO OF OIL AND GAS PRODUCTION, CONSUMPTION AND EXPORT IN 20022002 2003 2004 2005 2006 2007 Oil, mln of tons Production 379.6 421.4 458.8 470.0 480.5 491.3 488.Net export 181.3 213.4 253.2 250.1 246.1 255.7 240.Internal consumption 123.5 129.8 124.2 123.1 131.2 124.1 130.Net export, as percentage to the 47.8 50.6 55.2 53.2 51.2 52.0 49.production Oil products, mln of tons Net export 74.8 78.2 81.4 96.8 103.2 111.5 117.Oil and oil products, mln tons Oil and oil products net export 256.1 291.6 334.6 346.9 349.3 367.2 358.Oil and oil products net export, as 67.5 69.2 72.9 73.8 72.7 74.7 73.percentage of oil production Natural gas, bln. cu. m Production 594.5 620.3 634.0 636.0 656.2 654.1 664.Net export 178.3 180.5 193.5 199.6 195.3 184.5 187.Internal consumption 416.2 439.8 440.5 436.4 460.9 469.6 477.Net export, as percentage to the 30.0 29.1 30.5 31.4 29.8 28.2 28.production Source: Federal State Statistics Service, Ministry for the Industry and Power, Federal Customs Service, authors calculations.

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