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INSTITUTE FOR THE ECONOMY IN TRANSITION

RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES

APRIL` 1996

MONTHLY BULLETIN

Moscow

1996

© Institute for the Economy in Transition, 1996. Licence, 021018 of 09.11.95

5 Gazetny pereulok, Moscow 103918, Russian Federation

Phone: (095) 203-88-16 Fax: (095) 202-42-24 E- Mail: iet@online.ru


Elections and Economic Stabilization 3

Budgetary policy 4

Monetary policy 7

The Trends in forming The Structure of The Privatized Enterprises Share Ownersip 10

Foreign Investment Promotion In Tatarstan 12

Social Policy 13

Industry Business Conditions 13

Situation In Agro- Industries 15

Labour Market: Development Trends 17

Insured Medicine: Prospects For Development 18

Most Important Business Regulations 19

Elections and Economic Stabilization

Two principal features of today's political situation in Russia affect the logistics of the Government's economic policy and the political struggle which is going on around this set of problems.

First of all, stabilization processes in the country are nearing completion, and a search for new mechanisms of further economic development has been started. This, however, does not mean that the stabilization has already become irreversible. Far from it, the situation is sufficiently unstable, and the existing trend towards the slowing down of inflation and monetization of economy can be easily overruled by decisions which are predominantly political. Still, if this trend is to continue, the Government ought to come out with a program of post-stabilization economic development as soon as possible.

In the second place, the presidential election campaign is in full swing. It imposes its own laws which immediately affect the existing economic environment and its perspectives. There is growing danger from the people who surround the President of giving populist promises. The result from these promises would be evident in the second half of the year. The opposition and the candidate from the CPRF pave their way to the Presidency by giving more promises, and because we do not represent the West (as the patriots like to say), there is danger that the new President may really try to carry out his promises.

Obviously, both factors are more reflected in the activity of the President and not in the actions of his opponents. It is very noticeable from the documents he is adopting.

First of all one should pay attention to the fact that in the course of last month President Yeltsin has signed a kind of programmatic decree, On the Conception of Russia's Transition to Steady Economic Development, as well as a whole series of documents intended to promote the support of different industries and sectors of material production. There was practically nothing about the finance. Small wonder: stabilization has become more or less self-propelled, and the Government can now concentrate on the problems of economic growth.

Yet the main problem is the quality of such concentration. The pre-election scuffle is not particularly conducive to this process, it engenders and amplifies the danger that various kinds of populist decisions might be adopted, and even implemented, which is worse. Therefore special attention is necessary as we analyze the documents relative to the situation in the real sector, because it is these documents that might become the main source of dangerous economic populism.

Special attention is merited by decrees on promoting the finance and industry groups (FIGs), on the reforms in the agro-industrial complex, and by the Government's decision to reduce customs dues on imported equipment, and also by a number of documents intended to support production at specified enterprises and in provinces.

Let us enumerate some of them:

- On the Program of gasification of the Central Chernozyom Region of the Russian Federation in 1996-2000 (in the decree are interested both important provinces which comprise the Central Chernozyom Region and the well known GAZPROM);

- On urgent state measures of support of the small businesses in the RF

- On granting investment tax credits to the defense factories of the Sverdlovsk province;

- On measures of securing effective state control over the privatization of enterprises and organization belonging to the military complex, etc.

These documents must not be evaluated on their face value. Their principal merit is that, while indicating the milestones of the national post-stabilization policy, they largely postpone into the future the promised financial injections. This is perfectly justified, considering the present-day overstretched budget and the still high level of inflation. The same is true of the blatantly populist decree, "On Measures for the Restitution of Savings of the Citizens of the Russian Federation."

The pre-election discussion about restoring the USSR in some or other form was started by the leftist nationalist opposition, and resulted in the signing of two agreements on expanding co-operation (between Russia, Byelorussia, Kazakhstan and Kirghizia), and on setting up a closer community (between Russia and Byelorussia) The second document is more important, it examines the perspectives of creating a united state, yet even this document gives no clear understanding of the mechanisms for such rapprochement. Certain understandable and justifiable concepts like forming a customs union etc. alternate with proposals that sound like "jointly developed balance of production capacities", which raises questions about market perspectives of the Community to be thus created.

Gennady Ziuganov, so far the leader in the presidential election campaign, still declines to make his economic program public. He is probably conscious of the danger that his main slogans might be appropriated by Boris Yeltsin. However, it is most likely that the heart of the matter lies in the severe struggle between different wings within CPRF itself. Some idea about the outlines of the Communists' economic policy has been given by the readings about the perspectives of Russia's social and economic development held on the 9th April. The readings were organized by the State Duma Committee on Economic Reform whose chairman, Yu. Maslyukov, was formerly a Politburo member of the CPSU Central Committee and the Chairman of Gosplan, and is now one of the leaders of the CPRF. Naturally, the readings reflected only the point of view of the Communists and their allies. The demands voiced at these readings could be mainly reduced to the revision of the most important results of privatization (many spoke openly about the necessity for a large-scale nationalization, for a drastic increase in the state's investment activity, because they thought it was unrealistic to rely on private investments); the participants urged the enforced concentration of the people's savings within a state banking system and recommended a large-scale emission as especially beneficent for the financing of the national economy.

Finally, an important element in the pre-election economic and political landscape may prove to be the position of the so-called third force, that has been taking shape in the course of March and April, and that consists of the second-row Presidential candidates: Gregory Yavlinsky, Alexander Lebed and Sviatoslav Fedorov. In addition to a quite illusory target of winning the elections (if successful then only for one of the members of this block), participants of the third force may count on more profitable dividends from selling their votes to one of the elections favorites. The possibility to form a union with them could be very important for both principal candidates. It looks like the negotiations about this have already started behind the wings.

by V. Mau

Budgetary policy

The results of the federal budget execution for the first quarter of the current year figure as the main subject for the heated debates in mass media, administrative bodies and in society as a whole. The reasons for that are: exceptionally low levels of budget execution related to revenue and expenditure parts (See Table 1) and special pre-election political situation in the country. The opposition to the present administration tries to take advantage of this situation and to demonstrate inability of the President’s men to lead the country out of the crisis. At the same time, the President is trying to improve the situation both by selecting main budgetary financing priorities (paying off wage arrears in the state sector before April 1 and settle pension arrears before May 1, etc.), by sequestering expenditure categories and by introducing measures which will increase budget revenue procurement from taxation (drafting of a number of presidential decrees, see below, improvement in the work of State Tax Service in exacting taxes, etc.).

According to the preliminary data related to the execution of the federal budget in the first quarter of 1996, the volume of tax returns in March practically did not changes, making up less than 56 percent of the amount envisioned in the plan for three months. The volume of the incomings for certain type of taxes in the first quarter have remained at the level of January-February 1996, i.e., their procurement was 1.5-2 times less than in the same period of the preceding year. The collection of nontax revenues went up by an estimated 11 percent over and above the amount envisioned in the plan for a quarter. That have somewhat offset the low level of the revenue from taxation. Budget deficit amounted to more than 4 percent of GDP which is by 1 percent of GDP more than in the first quarter of the preceding year (See Figure 1).

We suppose that there are several factors which negatively influence the amount of tax returns.

First factor--an increase in the scale of tax evasion by using different loopholes and what is very important by using black cash in dealings.

Second factor--growth in the amount of debtor indebtedness and as a result, decrease in the taxation base for the profit tax and VAT (fig.2).

Table 1. Execution of Russias Rederal budget in January-March 1996 (in % of GDP)

January

Jan-Feb.

January-March

Overall taxes and payments

14.51/17.08*

15.26/17.73*

18.38*

Nontax revenue

2.08

2.83

Overall revenue

16.6

18.09

Overall outlays and credits minus repayments

18.82

21.81

Budget deficit

-2.22

-3.72

*State Tax Service.

And, finally, the main factor-- growth in tax arrears. According to our calculations, the amount of calculated taxes (budget returns together with an increment in arrears, i.e., taxes which were calculated but were not transferred to the budget) remains in 1996 approximately at the same level as in the preceding year. One may suppose that the state of tax collection would not have been much worse than in the previous year (9 percent of GDP) had there been no dramatic growth in tax arrears.

To a considerable extent, we suppose that the growth of tax arrears was influenced by the poorly elaborated procedure of granting deferment in paying taxes according to the Presidential decree dated 19 January 1996. The following fact is of great importance: enterprises have the right to increase their arrears to the budget for the first quarter 1996 without running the risk of loosing deferment for the payment of arrears accumulated before 1 January 1996.

The scale of tax evasion continues increasing up to the present moment. Different loopholes and methods are being used for that purpose. An important method consists in carrying out dealings in cash which are not registered in accounting books. The reduction in taxation base of profit tax and VAT was due to a considerable growth of debtor indebtedness. As can be seen from Table 1, the volume of debtor indebtedness in January-February 1995 dramatically increased. According to surveys carried out by the Institute, the increase in debtor indebtedness was due to a ban on cutting electricity supplies to consumers in case of nonpayments to electricity suppliers by the latter.

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