**Arrears against regional (nonconsolidated) budget revenues as of November 1, 2003.
Source: IET’s estimates based on the data from the RF Ministry of Finance.
Regulation of Regional and Municipal Borrowings
A set of regulations was adopted in 2003, which can promote development of market subfederal and municipal borrowings.
1. Amendments to the Law «On Taxation of Securities Transactions» came into force since January 2004, which reduced the tax rate payable during registration of prospectus for issue to 0,2 % of the nominal amount of issue, but not more than 100 000 rubles.
The amendments are expected to promote securitization of borrowings and growth in issuing of subfederal, municipal and corporate bonds. The previous tax rate hampered considerably the issuing activity of borrowers.
2. A Federal Law «On General Principles of Local Self-Government at the Russian Federation» and amendments to the Federal Law «On General Principles in Organization of Legislative (Representative) and Executive Agencies of State Power at the Constituent Entities of the Russian Federation» were adopted in 2003.
The laws introduced a set of new regulations associated with regulation of territorial government agencies in the cases of arrears and/or regional and municipal budget debt, as well as they provided a positive impact by a well-defined differentiation between revenue and expenditure authorities of territorial government agencies at different levels aimed at increasing their budget stability.
In the event of decisions, actions (no actions) of local government agencies that have resulted in arrears and/or budget arrears of municipalities, some of their authorities can be delegated to government agencies at constituent entities of the Russian Federation with introduction of a temporal financial administration, pursuant to Article 75 of the Federal Law «On General Principles of Local Self-Government at the Russian Federation».
The temporal financial administration can be introduced provided that arrears do not exceed 30 % of budget revenues of municipalities and/or 40 % of budget allocations in the financial year under review. Fulfillment of liabilities of the federal budget and budgets of constituent entities of the Russian Federation to the budgets of the foregoing municipalities is required for introduction of the temporal financial administration.
The temporal financial administration is introduced on application of a top executive person of a constituent entity of the Russian Federation (chief of a superior government agency of a constituent entity of the Russian Federation) and/or by the representative agency of a municipality, head of a municipality, according to a decision of the court of arbitration of the constituent entity of the Russian Federation.
The temporal financial administration may remain in force within a period of one year. The temporal financial administration can not be introduced on application of a top executive of a constituent entity of the Russian Federation within a period of one year from the date of empowerment of a municipal representative.
The temporal financial administration is authorized to restore the capacity of a municipality to pay debt pursuant to the Federal Law. The temporal financial administration is intended to:
take actions aimed at restructuring arrears of a municipality;
develop amendments to a municipal budget for the current financial year and draw up a municipal budget draft for the current financial year;
submit the foregoing documents to a representative municipal agency for consideration and approval and for approval under the law of a constituent entity of the Russian Federation in the cases provided for in the Federal Law;
monitor utilization of a municipal budget and undertake other authorities under the existing Federal Law.
A similar procedure is applicable in introducing the temporal financial administration at a constituent entity of the Russian Federation in accordance with Article 26.9 of a new edition of the Law «On General Principles in Organization of Legislative (Representative) and Government Executive Agencies at the Constituent Entities of the Russian Federation». The temporal financial administration is introduced in the event of arrears and/or budget arrears (due to the fault of government agencies at a constituent entity of the Russian Federation) to the amount not exceeding 30 % of budget revenues of the latest accounting year.
The temporal financial administration is introduced according to a decision of the Supreme Court of Arbitration of the Russian Federation for a period within one year on application of the Government of the Russian Federation. The temporal financial administration can not be introduced within a period of one year from the date of empowerment of a legislative (representative) government agency of a constituent entity of the Russian Federation. The functions of the temporal financial administration at a constituent entity of the Russian Federation are similar to those established for a municipal temporal financial administration.
The provision on temporal financial administration is to come into force on January 1, 2006 at municipalities and on January 1, 2007 at the constituent entities of the Russian Federation. Introduction of the temporal financing administration increases the probability of a relatively quick budget recovery at the territories facing financial crisis, thereby promoting creditability of Russian municipalities and regions.
3. In 2003, the RF Ministry of Finance published «Provisional Methodological Recommendations on Management of State and Municipal Debts for Constituent Entities and Municipalities of the Russian Federation». The document is permissive and subject to revision as the Federal Law is amended and practical experience gained.
The key role of management of debt mechanisms and conditional liabilities2 of a constituent entity of the Russian Federation (municipality) proposed in the recommendations is to «enlarge the list of objects governed by these mechanisms versus the list of debt obligations specified in the Budget Code of the Russian Federation».
The recommendations provide for introduction of a concept of funded debt, which, among direct liabilities (liabilities on loans and credits, and payables in arrears), includes:
debt of state unitary enterprises of a constituent entity of the Russian Federation (municipal state-owned enterprises);
debt of the enterprises in which a constituent entity of the Russian Federation (municipality) owns over 25 % of the voting shares in the authorized capital3;
funded debt of municipalities integrated in a constituent entity of the Russian Federation (this makes sense only with regard to constituent entities of the Russian Federation).
Implementation of the proposed mechanisms should allow regions and municipalities to reduce budget risks and hence increase their creditability.
2.4.3. Stock Market
In 2003, growth trends dominated again at the Russian stock market. This was basically governed by high macroeconomic figures demonstrating a stabilized economy, favorable situation with liquidity at the banking sector due to high oil prices at world’s markets, the RF Central Bank’s activity aimed at stabilizing the national exchange, and the upgraded investment rating on Russia. However, though macroeconomic risks were lessened, the events that took place in 2003 revealed higher political risks associated with investment in Russian assets. This was evident primarily due to the conflict between the government and YUKOS oil company, as well as the parliamentary elections at which Russian democrats failed to pass the voting minimum to be elected to the State Duma.
RTS Index and Transfer Quantity Movements in 2003
Source: RTS Stock Market.
The Russian RTS stock index grew by 206,46 points in 2003, which corresponds to a 57,22 % growth (in 2002 the RTS index grew by 101.1 points or by 38,88 %). The total turnover at the>
Sever typical periods in market movement are distinguished. A slight decrease in quotes was registered early in the year, and the index reached its maximum, 336,08 points, by January 27.
This was followed by a sustained market growth. From January 27 the RTS index grew by 61,39 points by March 6 and hence by 18,27 %. A certain correction was noted at the market the following month, which gave way to a sustained growth period. Since April 1 the Russian stock indicator reached its postcrisis maximum of 518,07 points, and hence grew by 120,6 points (30,34 %) against the figures of March 6. The volume of transactions varied significantly during these four months. In March the total transactions volume amounted to $300 ml US dollars, in April it was almost doubled (about $601 ml US dollars), while in May and June it was stabilized within $450 ml US dollars. It should be noted that in April the daily turnover reached its annual maximum, 82,45 ml US dollars. This was followed by a decline – the RTS index was 427,64 points at closing on July 17, hence it dropped by 90,4 points (–17,46 %) over two weeks. The decline was mainly associated with the YUKOS case, a major shareholder P. Lebedev was arrested, which had a negative impact on the investors.
The second half of summer and first half of autumn were featured by an unprecedented growth at the stock market: on October 20 the RTS index reached its historic maximum, 643,30 points. Thus, the index grew by 215,66 points (50,43 %) over the three months. It should be especially noted that the RTS transaction volume in October amounted to over 876 ml US dollars and hit the maximum in 2003. However, such a favorable situation lived short. The market saw a sharp decline the following month which went far beyond the growth in August-October. It took the RTS index only three months (at closing on November 19) to drop by 162,65 points, which accounted for 25,28 % against closing figures on October 20. The collapse was caused by an aggravating YUKOS case, mainly by the arrest of the President of NK YUKOS M. Khodorkovsky. A slight correction was noted at the market by late in October. The RTS index stopped at the point of 515,75 on November 24. It is noteworthy that the market dropped as investors became notably less active: transactions turnover at the RTS exceeded slightly 286 ml US dollars over the three weeks in November. Obviously, market growth was also limited by an uncertainty associated with the upcoming parliamentary elections.
The market grew late in the year. In spite of unfavorable corporate news (Sibneft shareholders tended to cancel the merging deal with NK YUKOS, and extended detention of M. Khodorkovsky), the market grew due to a victory of the propresident political party at the elections, favorable macroeconomic figures and high oil prices.