14Section 2. Monetary and Budgetary Spheres
2.1. The Monetary and Credit Policy
The financial crisis was central to Russia's monetary and credit sphere in 2008. It exerted a significant influence on the national economy on the whole and the CBR's policy in particular. While over the first half-year the situation on the financial market was relatively calm, it sharply deteriorated between August and September. Below, we will consider in a greater detail causes for such developments and analyze inflationary processes, main tendencies and correlations on the national monetary market, and measures the CBR embarked upon in an effort to stabilize the situation on the financial markets.
2.1.1. The Monetary Market
Russia's foreign reserves have been rising substantially up to the early-August 2008 (Fig.1). Underpinning their rise were record-high prices for major Russian exports, primarily for oil, natural gas and metals. But the crisis developments on the global financial market, which were further aggravated by the military action in the Southern Ossettia triggered a sizeable capital outflow from the country. Plus, the slowdown of growth in the largest world economies engendered a substantial deterioration of trading conditions for Russia, because of which the inflow of foreign currency began to dry out sharply. As a result, the nation's foreign reserves started to shrink rapidly, as the CBR was compelled to spend them to maintain the Rb. exchange rate. In addition, the USD appreciated against the Euro on the global forex market, which caused a fall in the USD-equivalent value of the fraction of the foreign reserves denominated in Euro-.
So, by the end of the year the volume of the nation's foreign reserves accounted for USD 427.1bn (30.2% of GDP) against 478.7bn (35.5% of GDP) as of the beginning of 2008, while in August 2008 it accounted for the record-breaking USD 597.5bn. Hence, by the end of the year Russia's foreign reserves had dwindled at 28.5% against their peak value. Meanwhile, the volume of the reserves is still high by international parameters. More specifically, in the 4th quarter 2008, the reserves-to-imports ratio was 5.9, while a sufficient one is 1. But it should be understood that given a considerable capital flight (bolstered by the private sector repaying its debts in particular) and a sizeable negative balance of the trading account of the balance of payments, maintaining the Rb. exchange rate may coerce the Bank of Russia to spend a greater part of its reserves. Furthermore, had the monetary and credit authorities decided not to depreciate the national currency, they might have wasted all the reserves but had had to face the depreciation, nonetheless.
Source: the CBR.
Fig. 1. The Dynamic of the Monetary Base and Foreign Reserves in 2007-2008
The dynamic of money supply over the year of 2008 also went through two sub-periods. Let us consider it in a greater detail.
Over the year of 2008 the monetary base (in wide terms1) grew just by Rb. 65m and accounted for Rb. 5.6trln (+1.2%). As a reminder, by results of 2007 this index grew at 33.7%. As of January 1, 2008, the volume of monetary base in wide terms was Rb. 5.5trln (Table 1). As of January 1, 2009, the cash in turnover with account of credit institutions' cash balances accounted for some Rb. 4.4trln (+6.2% vs. January 1, 2008), the credit organizations' correspondent accounts with the Bank of Russia - Rb. 1,027.6bln (+28.1%), compulsory reserves -Rb. 29.9bn (-86.5%), the credit organizations' deposits with the Bank of Russia - Rb. 136.6bn (-49.5%), the value of the CBR's bonds held by credit organizations - Rb. 12.5bn (-87.6%).
A 6.2% growth in the volume of cash in circulation over the year, along with a drastic fall in the amount of compulsory reserves (-86.5%) resulted in a 2.9% expansion of the monetary base in narrow terms (cash + mandatory reserves)2.
1 According to the CBR methodology, the monetary base in wide terms characterizes the Bank of Russia's monetary and credit liabilities denominated in the national currency, which determine growth in money supply. The monetary base in wide terms comprises cash the CBR issued in circulation (with account of credit institutions' cash balances), balances of the compulsory reserves accounts which credit organizations deposit with the Bank of Russia, monies on correspondent accounts (including averaged balances of compulsory reserves) and deposit accounts the credit organizations have with the Bank of Russia, their investments in the Bank of Russia's bonds, backup funds by forex transactions deposited with the CBR, as well as the Bank of Russia's other liabilities by-with respect to operations with credit organizations in the currency of the Russian Federation.
2 By the CBR methodology, the monetary base in narrow terms is the monetary aggregate (one of characteristics of money supply) fully controlled by the CBR. The monetary base in narrow terms comprises cash the Bank of 30
01.01.2008 01.04.2008 01.07.2008 01.10.2008 01.01.2009
5513,3 4 871,4 5 422,9 5 317,8 5578,7
4118,6 3 794,4 4 077,2 4 285,3 4372,1
802,2 596,3 592,4 702,9 1027,6
221,6 339,3 360,3 152,1 29,9
270,3 122,7 369,3 154 136,6
100,7 18,8 23,7 23,5 12,5
A considerable fraction of inpouring export revenues continued being accumulated in the national reserve funds, that is, the Reserve Fund and the National Welfare Fund. As of January 1, 2009, their aggregate volume accounted for Rb. 6,612.1bn (USD 225.1bn, or 15.9% of GDP) - up at Rb. 2763bn vs. January 1, 2008, when the respective figures were Rb. 3849.1bn (USD 156.8bn, or 11.8% of GDP). So, the favorable state of affairs on international markets allowed replenishing the reserve funds during the whole 2008. But their considerable fraction will be spent in 2009 to support the economy and finance the government's anti-crisis measures.
Table 1
The Dynamic of the Monetary Base in Broad Terms in 2008 (as Rb. Bn.)
Monetary base (in broad terms) including:
Cash in circulation, with account of credit organizations' cash balances
Credit organizations' corresponding accounts with the CBR
Compulsory reserves
Credit organizations' deposits with the CBR The CBR bonds held by credit organizations Source: the CBR.
Let us note that the structure of the monetary base has undergone considerable changes in 2008. Underpinning these changes were crisis processes on the national financial market. First, despite problems with liquidity, in 2008, cash balances on the credit organizations' correspondent accounts with the CBR grew at nearly one-third. The trend is explained by the fact that with the crisis unfolding, the CBR provided banks with a sizeable volume of financing, particularly on the uncollaterilized basis. But, facing mounting risks, banks opted for scaling back volumes of lending and placing the funds with the CBR. Second, by results of the year the volume of credit organizations' compulsory reserves shrank dramatically, as the Bank of Russia had lowered the rates of their contributions to the compulsory reservation fund, to give credit institutions with additional liquidity.
The 2008 growth rate of the monetary base was very low, which can be attributed primarily to the crisis developments on the Russian financial market in the fall of the year. To pillar the Rb. exchange rate, which was under a strong pressure generated by capital outflow fueled by the deepening financial crisis, the Bank of Russia was selling foreign reserves to buy Rubles, thus reducing the monetary base. Interestingly, while the foreign reserves shrank to their October 2007 level, the value of the monetary base has grown over the year, nonetheless. An analysis of changes in the structure of assets in the CBR's balance sheet (see Table 2) reveals that between January and November 2009 it was credits and deposits provided to the national credit organizations that demonstrated the greatest growth rates (+Rb. 2.5trln, or 76% of the overall rise in the CBR's assets), while funds placed with non-residents posted just a Rb. 0.7trln growth (or 21% of the rise in the CBR's assets). In the respective period of 2007,
Russia issued in circulation (with account of credit organizations' cash balances) and balances on accounts of compulsory reserves by attracted by credit organizations resources in the national currency equivalent deposited with the Bank of Russia.
1 This item reflects change in the Bank of Russia's foreign reserves
the increment by these items was, accordingly, Rb. 24.5bn (a 0.6% rise in assets) and Rb. 3.4trln (a 85% rise in assets). In other words, in the crisis conditions, it is the CBR's operations on refinancing credit organizations which gradually become a major source of shaping the money supply - the practice long inherent in most developed economies. In such a situation, interest rates by the CBR's credits play a far greater role, as using them, the Bank of Russia can exercise a substantial influence on the situation in the monetary and credit sphere.
Table 2
The Balance Sheet of the Bank of Russia in 2008
01.01.2008 01.12.2008
Rb. bn. % assets/liabilities Rb. bn. % assets/liabilities
Funds placed with non-residents and foreign 11511,6 92,6 12222 77,6
issuers' papers
Credits and deposits 37,1 0,3 2540,8 16,1
Precious metals 346,5 2,8 388,6 2,5
Securities 441,9 3,6 490 3,1
Other assets 99,5 0,8 106,5 0,7
Assets, total 12436,7 100 15747,9 100
Cash in circulation 4124,3 33,2 4215,9 26,8
Cash on accounts with the Bank of Russia 7609 61,2 9841,5 62,5
Cash in settlements 20,8 0,2 68 0,4
Securities issued 0 0 23,7 0,2
Other liabilities 196 1,6 1125,1 7,1
Capital 462,1 3,7 473,8 3
Profit by the reported year 24,6 0,2 0 0
Liabilities, total 12436,7 100 15747,9 100
Source: the CBR.
In 2008, money supply M2 in national terms grew just by 1.7% and as of January 1, 2009, it accounted for Rb.1,3493.2bn, or 32.5% of GDP (as of January 1, 2008, monetary aggregate M2 was Rb. 1,3272.1bn (40.2% of GDP). So, over 2008 the monetization of GDP plunged considerably. Underpinning the slowdown of the money supply growth rates were basically the same factors as in the case of the monetary base. In addition, in late-2008 the money multiplier plummeted considerably vs. its respective values reported between late-2007 and early-2008 (Fig.2). The fall was caused primarily by an overwhelming deceleration of the banking system's rate of lending to the private sector. In all likelihood, the money multiplier will keep on falling until Russian banks sense a growing attractiveness of lending to the private sector.
Fig. 2. The Money Multiplier in RF in 2002-2008
2.1.2. Inflationary Processes
In early-2008, the inflationary pressure was still high compared with the respective period of the prior year (Fig. 3). The measures the RF government undertook in January to extend the October 2007 agreement on price freeze on some socially significant goods between largest producers and retailers proved to be fairly ineffective. Meanwhile, a rapid rise in money supply in late-2007 put an upward push on the price rise. But in the second half-year, because of the contraction of its foreign reserves the CBR was selling to maintain the Rb. exchange rate, money supply began to fall, while the price rise rate started to decelerate. In all, by results of the year CPI accounted for 13.3% vs. 11.9% reported in 2007. Let us consider the dynamic of inflationary processes over the year.
Fig. 3. The Dynamics of CPI of RF in 2007-2008
As evidenced by data of Table 3, prices in the group of food stuffs grew at 16.5% (15.6% in 2007). So, like in 2007, food stuffs made the greatest contribution to the CPI increment over the year. Between January and December 2008, it was the price rise for pasta (+33.8%), bread and bakery (+25.9%), grits and legumes (+25.8%), meat and poultry (+22.2%) and sunflower-seed oil that made a major contribution to the price rise for food stuffs. The paid services to the population surged at 15.9% over the year (13.3% in 2007). It was prices for overseas tourism services (+22.9%), passenger transportation services (+22.5%), sanatorium and rehabilitation services (+21.2%), physical culture and sport services (+21%), preschool education services (+20.7%), household services (+18.7%), housing and communal services (+16.4%) and medical services (+16.3%) that demonstrated the greatest price rise rates over the year. As concerns non-food merchandise, prices for this group of goods rose at 8% on average over the year (in 2007 - at 6.5%). The price rise was powered chiefly by prices for tobacco goods (+16.1%), medicines (+16%), cleaning and washing goods (+17.5%) and construction materials (+11.3%). The growth in the basic index of consumer prices in 2008 accounted for 13.6% (vs. 11% reported over the respective period of the prior year). Thus, the main causes behind a significant inflation rate in 2008 was a rapid price rise for food stuffs, construction materials and paid services.
As shown by Table 3, between 2005 and 2008 it was the rise in the housing and utilities tariffs, which soared more than two-fold over the period in question, that formed a pivotal element of inflation. They are followed by the price rise for passenger transportation services (+86.8%), services delivered by institutions of culture (+79.9%), sanatorium and rehabilitation services (+79.5%), and some food stuffs. It is worth noting that gasoline prices demonstrated an insignificant rise over the year, which can be attributed to a drastic downfall in oil prices in the fall 2008. At the same time, prices for numerous food stuffs were rising at a pace greater than that in the prior years.
Table 3
The Annual Price Rise Rates for Some Kinds of Goods and Services in 2005-2008 (as%)
2005 2006 2007 2008 2005 - 2008
CPI 10.9% 9.0% 11.9% 13.3% 53.3%
Food stuffs 9.6% 8.7% 15.6% 16.5% 60.4%
Sunflower-seed oil 2.1% -1.2% 52.3% 22.1% 87.6%
Cream butter 8.2% 6.8% 40.3% 10.5% 79.2%
Pasta 1.9% 4.7% 23.6% 33.8% 76.4%
Grits and legumes 0.2% 12.1% 24.7% 25.8% 76.2%
Bread and bakery 3.0% 11.1% 22.4% 25.9% 76.3%
Milk and dairy products 10.5% 8.7% 30.4% 12.2% 75.7%
Meat and poultry 18.6% 5.9% 8.4% 22.2% 66.4%
Fish and seafood 12.7% 7.8% 9.0% 15.1% 52.4%
Non-food goods 6.4% 6.0% 6.5% 8.0% 29.7%
Construction materials 9.1% 11.5% 16.2% 11.3% 57.3%
Gasoline 15.8% 10.9% 8.5% 1.2% 41.0%
Paid services to the population 21.0% 13.9% 13.3% 15.9% 81.0%
Preschool education services 32.1% 28.5% 11.8% 20.7% 129.1%
Housing and utilities 32.7% 17.9% 14.0% 16.4% 107.6%
Passenger transportation services 15.8% 14.2% 13.6% 22.5% 84.0%
Cultural institutions' services 17.7% 15.6% 14.5% 15.5% 79.9%
Sanatorium and rehabilitation services 11.2% 15.2% 15.6% 21.2% 79.5%
Source: Rosstat.
In conclusion, let us compare the consumer price rise rates in RF with those in the CIS
countries (Table 4).
Table 4
Consumer Price Indices in the CIS Countries in 2000- -2008, as%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Azerbajan 2 2 3 2 7 10 8 17 20,8
Armenia - 1 3 1 5 7 1 3 4 9
Belarus 169 61 43 28 18 10 7 8 14,8
Georgia 4 5 6 5 6 8 9 9 10
Kazakhstan 13 8 6 6 7 8 9 11 17
Kyrgyzstan 19 7 2 3 4 4 6 10 24,5
Moldova 31 10 5 12 12 12 13 12 12,7
Russia 20 19 15 12 12 11 9 12 13,3
Tajikistan 24 37 10 17 7 8 12 22 20,4
Ukraine 28 12 1 5 9 14 9 13 25,2
Source: The CIS Intergovernmental Statistics Committee (http://www.cisstat.com/).
Clearly, all the CIS nations saw inflation accelerate in 2008. At the same time, the global financial crisis that hit the world economy had a dual influence on inflationary processes in Russia and the other CIS countries. On the one hand, a sharp deceleration of growth rates of money supply in the second half-year leads to compression of the monetary inflation. Let us note that the compression of money supply took place despite the government's considerable anti-crisis spending, as economic agents opted for a mass conversion of their funds
35
into hard currency and the money multiplier was on decline. So, for the first time over the recent years Russia's economy once again experiences dollarization. The trend to decrease in money supply would continue in 2009, should the Bank of Russia further maintain the Rb. exchange rate at a level higher that the equilibrium one. If that happens, even a considerable budget deficit, which, as the government assumes, should in 2009 account for 8-10% of GDP, may not entail a serious expansion of money supply, but compensate its contraction, due to the above factors.
On the other hand, depreciation of the national currency engenders a price rise for imports and sparks inflationary expectations. Plus, the latter are on the rise along the growth of financial instability. Finally, a slowdown of economic activity gives rise to a lower demand for money, while economic agents loose confidence in the banking system and strive to convert their savings into foreign currency. In our view, in the conditions of Russian economy the Rb. depreciation will result in a mounting inflationary pressure and by results of 2009 CPI will prove to be greater than in 2008. Meanwhile, the pace of inflation acceleration is hard to estimate - it depends on numerous factors, including the volume of additional budget spending, the Bank of Russia's exchange rate management policy, and the magnitude of dollarization of the economy in particular.
According to the scenario-based forecast by the IET, in 2009 CPI should account for 1525%, depending on the state of the nation's balance of payments, the mgnitude of depreciation of the national currency, and the size of the budget deficit.
2.1.3. The State of the Balance of Payments4
In 2008, the sustainability of Russia's balance of payments was traditionally maintained thanks to exports, primarily, the fuel and energy sector's outputs. Despite a sharp downfall in prices for energy sources in the fall of 2008, thanks to a rapid rise in the prices over the first half of the year, the balance of trade ultimately posted a 34.9% growth, while that of balance of payments was up at 29.7%. Against the backdrop of high prices for energy sources Russian exports surged at 32%-plus, while imports showed a 30.9% rise. But the world financial crisis has so far resulted in a downfall in prices for major Russian exports and a massive capital flight out of the country. As a result, while by the end of the year the balance of payments seems fairly sustainable, a fast fall in exports and the private capital outflow noted in the 4th quarter have resulted in contraction of the nation's foreign reserves for the first time since 1998.
According to the CBR's preliminary evaluation of Russia's 2008 balance of payments, the positive balance of current account made up USD 98.9bn., i.e. at 29.7% up compared with 2007 (Table 5). More specifically, the positive balance of balance of trade soared at 34.9% (from USD 130.9bn to 176.6bn), with exports growing at 32.3% (from USD 354.4bn to 469bn) and imports surging at 30.9% (from USD 223.5bn to 292.5bn). The share of exported oil, petroleum derivatives and natural gas in the overall value of export accounted for 65.9% (in 2006- 62.8%, in 2007 - 61.7%) (Fig. 4). Thus, like in the prior years, the main factor that determined the value of the balance of current accounts was the balance of trade, whose balance in turn appeared to a significant degree dependent on dynamics on international markets of prices for energy sources and other major Russian exports. As evidenced by Fig. 4, the cor-
4 The analysis of the balance of payments was conducted on the basis of the CBR's preliminary data:
http://cbr.ru/statistics/credit_statistics/print.asp?file=bal_of_payments_est.htm
36
relation between world oil prices and Russia's balance of trade noted over 2002-2007 survived unchanged through 2008.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
I I Export ♦ Share of oil, oil products and natural gas in export
Source: the CBR.
Fig. 4. The Dynamic of Export of Merchandise and the Proportion of the Output of the Fuel and Energy Complex in 1999-2008
Deficit of the balance of services accounted for USD 25.8bn and posted a 30.5% growth vis-à-vis its 2007 index. Export of services was USD 50.8bn (+11.4bn, or 28.9% vs. the 2007 figures), while import of services soared at 29.4% and hit the level of USD 76.6bn.
The balance of labor compensations in 2008 continued to slide (to grow by module) and accounted for -14.5bn USD (vs. -7.9bn in 2007). The 2008 deficit of the balance of investment revenues surged at 45.5% vs. 2007 and accounted for USD 34.2bn. Driven by a substantial rise of the index in the banking sector (from USD 4.7bn to 7.4bn5) and across non-financial corporations (from USD 21.5bn to 26.4bn), investment gains due rose from USD 44.8bn to 53.3bn. Russia continued collecting sizeable investment earnings (USD 18.2bn) resulting from investing of a fraction of its foreign reserves. The rise of income receivable by non-financial corporations from USD 55.9bn to 71bn and that by banks from USD 9.9bn to 14.4bn was behind the growth in the overall income receivable from USD 68.3bn to 87.5bn.
The balance of current transfers6 in 2008 accounted for -3.2bn USD (down 8.8% compared with 2007).
5 Such a significant rise in earnings is attributed to the investing of a fraction of the nation's foreign reserves in other countries' bonds.
6 According to the CBR, the current transfers bolster the level of disposable income and consumption of the recipient's goods and services and decrease the donor's disposable income and possibilities for consumption, for instance, humanitarian aid in the form of consumer goods and services. The current transfers are reflected in current accounts. Transfers other than current are conceived of as capital ones. They lead to a change in the volume of the donor or recipient's assets or liabilities and are reflected in capital accounts. In the event the donor and the recipient are non-residents to each other, the capital transfer engenders changes in the level of national wealth of
Table ???5
Main Items of the Balance of Payments and the Dynamic of External Debt
in 2006-2008 (as USD bn.)
Статьи баланса
2006
2007
2008
I Q. II Q. III Q. IV Q. Year I Q. II Q. III Q. IV Q. Year I Q. II Q. III Q. IV Q. Year*
Current account 30.4 24.3 23.9 15.7 94.3 22.4 14.4 15.5 24 76.2 37.4 25.8 27.6 8.1 98.9
Capital and financial instruments account** -7 15.7 -14.8 9.5 3.4 1 4. 5 48.5 -3.6 26.5 85.9 -24.7 35.4 -9.4 -129.7 -128.4
Change in forex reserves
( «+» -"decline of reserves", «-» - growth -21.4 -40.9 -13.8 -31.3 -107.5 -32.9 -65.5 -7.9 -42.6 -148.9 -6.4 -64.2 -15 131 45.3
in reserves)
Net mistakes and omissions -1 0.9 4.8 6 9.7 -4 2.7 -3.9 -8 -13.2 -6.3 3.1 -3.2 -9.4 -15.8
Change in external debt
of RF ( «+» growth in debt, «-» - decrease of 16.0 15.6 -19.5 41.3 53.4 37.4 43.9 39.1 32.5 152.9 13.9 47.4 15.7 - -
debt)
Change in the external public debt of RF 4.0 -7.6 -24.5 -5.1 -33.2 3.6 -3.2 3.5 -6.1 -2.2 -5.4 -2.1 3.8 - -
Change in the external
debt of the private 12.1 22.7 5.1 46.9 86.8 34.0 47.1 35.5 38.7 155.3 19.2 49.5 11.9 - -
sector in RF
* Preliminary estimates. ** Less currency reserves. Source: The Bank of Russia.
Source: the CBR, IFS, the IET calculations.
Fig. 5. Russia's Balance of Trade and the World Oil Price Index in 2005-2008
So, it was high prices for major Russian exports that were behind a huge positive balance of current accounts of Russia's balance of payments between the 1st and the 3rd quarters 2008. Their downfall in turn triggered a fall of the positive balance of current accounts. Let us
the economies they represent. Examples of capital transfers are a free-of-cost transfer of property rights for capital assets or debt forgiveness. 38
note that at the background of a sharp decline in the balance of current accounts at the end of the year, a huge debt private sector had accumulated to that date (see Table 5) engendered growth in the negative balance of investment earnings, even despite sizeable investment revenues the monetary and credit regulatory agencies collected from investing the nation's international reserve assets. Hence, the private sector repaying its external debt should have a significant impact on the balance of payments in 2009-2010.
In 2008, the balance of capital accounts slid substantially and reached-128.4bn USD. That was determined by the financial turmoil on the world and national markets stirred by the downfall in prices for energy sources. The 2008 balance of capital transfers accounted for USD 6bn. So, without regard to capital transfers, the 2008 deficit of the financial account amounted to USD 129bn.
The rise in the Russian issuers' liabilities before foreign creditors by results of the year was USD 87.5bn, or down at 58.1% vs. 2007 (USD 208.9bn).
As in the prior year, the federal administrative bodies likewise became net payers in relation to non-residents. Their external liabilities slid at USD 7.4bn resulting from repayment of Russia's external public debt. The balance of external liabilities across the RF Subjects remained unchanged. The liabilities held by the monetary and credit authorities amounted to USD 4.7bn. The intensifying global financial crisis sharply diminished possibilities for Russian economic agents to attract (refinance) their overseas borrowings. Consequently, the increment of the banking sector's liabilities (+USD 9bn) plunged by 87.4% compared with the same period of 2007. Investments by foreign economic agents in Russia's real sector accounted for USD 90.6bn (in 2006 - 144.7bn). So, while in 2008 non-residents' investments in the non-financial sector were down compared with the 2007 figures, they nevertheless were in excess of their investments in the banking sector. Direct investments in the non-financial sector posted a 22.7% growth over the year and accounted for USD 58.7bn vs. 47.9bn reported in the prior year. As concerns portfolio investments, they were down at USD 10.8bn compared with the USD 6.5bn rise in 2007.
The residents' foreign assets (foreign economic agents' liabilities before Russian ones) grew over 2008 at USD 216.5bn (in 2007 - at 112.8bn), with the bulk of the increment being secured by the private sector's operations.
Foreign assets of the federal administrative bodies rose at USD 2.4bn, while those of the monetary and credit authorities remained practically unchanged.
Because of the turmoil on the national financial market coupled with the downfall in prices for major Russian exports and, consequently, expectations of a significant depreciation of the national currency, Russian banks in 2008 began vehemently accumulating foreign assets. More specifically, by results of the year the rise in the banks' foreign assets accounted for USD 66.4bn., while the respective 2007 indicator did not exceed 25.2bn.
Export of capital out of the sector for non-financial enterprises and households rose at 56.3% compared with 2007 and accounted for USD 145.6bn. The volume of "the export gains not received on time, goods and services not supplied against transfers of monetary resources under import contracts, and transfers by fictitious operations with securities" practically remained unchanged when compared with 2007 and made up USD 33.2bn. At this point, it must be noted that it was "cash in foreign currency equivalent" that underwent the most profound changes, which evidences that the 2008 import of foreign currency in RF accounted for USD 24.8bn. compared with its USD 15.7bn-worth export in 2007. In other words, once the Rb.
began to depreciate (both in nominal and real terms) against the bicurrency basket in the fall of 2008, the population and the non-financial sector once again began to vigorously buy foreign currency; that was noted for the first time since 1997.
Up to the end of the year growth in offer of foreign currency was fueled by its influx from overseas and its sales by the non-financial sector within the country. That resulted in a rising real effective exchange rate of the Rb - by results of the year it appreciated at 5.1% (see Fig. 6), primarily because of inflation rates in Russia being higher than in the countries that are Russia's major trading partners. Meanwhile, a massive fall of the balances of current accounts and capital account and financial instruments of the balance of payments in the 4th quarter resulted in a considerable excess of demand for foreign exchange over its offer. To maintain the Rb. exchange rate, the Bank of Russia was selling its foreign reserves. But in September, the Rb. began to gradually depreciate against the bicurrency basket - that was done in order not to waste all the CBR's foreign reserves. The pace of the Rb. depreciation was accelerating along with the downfall in prices for major Russian exports and with the acceleration of capital outflow. As a result, in December alone, the Rb. real effective exchange rate slid by 3.6%, while yet in October in November it was up at 2.7% and 2.5%, respectively. It was back in January 2000 when the index declined so dramatically. By results of 2008, the Rb plunged against the USD from 24.55 to 29.38 and against the Euro - from 35.93 to 41.44, while the bicurrency basket rose from 29.67 up to 34.81.
With the volume of the forex revenues inflow in the country drastically diminishing, it was possible to maintain the overvalued Rb. exchange rate by means of spending foreign reserves only over a limited time. Meanwhile, as the CBR was pursuing a gradual depreciation of the national currency, buying foreign exchange has become for economic agents a relatively low-risk and highly lucrative investment instrument, which led to an increasing demand for foreign exchange and the imperative for the CBR to spend more and more of its foreign reserves.
We believe that a single-step depreciation of the Rb. with a subsequent maintenance of a new announced level would become the most optimal move under such circumstances, as it would have enabled the CBR to save its reserves and lower depreciation expectations. The key factor that makes such a policy a success lies with the CBR's commitment to support a new exchange rate. Let us note that this commitment is in many ways determined by the Bank of Russia's ability to accurately estimate the equilibrium exchange rate. We presume that the level of support to the Rb. that would enable one to get demand and offer balanced on the forex market under the economic parameters of the early-2009 can be found within the range of 40-45 Rubles for the bicurrency basket. The problem is, in the conditions of the global financial crisis many factors are hard to estimate, which is why, should prices for energy sources decline further on, setting an equilibrium on the forex market may demand for a further depreciation of the Rb.
Let us also note that to ease its mission on supporting the Rb. exchange rate the CBR is able to undertake measures aimed at restriction of capital outflow from the country. In all likelihood, the set of such measures may include cutting volumes of liquidity provided to commercial banks, raising interest rates, as well as some administrative measures, such as a coercive reservation for legal entities a part of funds they are going to export and a compulsory sale by exporters of a part of their forex-denominated receipts.
45
40
35
£
30
25
20
----The official USD exchange rale, as of end-period
-The official Euro exchange rate, as of end end-period
—•—The value oflhe bicurrency basket
The index of the Rb. real effective exchange rate (the right scale)
Source: the CBR, the authors' calculations.
Fig. 6 Indicators of the Rb. Exchange Rate between January 2005 and December 2008
100
-100
-150
60% 40% 20% 0% -20% . -40% -60% -80% -100%
OC'O-C'O'O'O' ooooctooooo^oo > ~ = > = > - = >"- = >
2004 2005 2006
I 1 Net capital outflow {USD bn) —•— Net capital outflow/foreign trade turnover (%)
2007
2008
Source: the CBR; the IET calculations.
Fig. 7. The Dynamics of the Net Capital Outflow in 2004-2008
Addressing key tendencies in the dynamic of indicators of the 2008 balance of payments one should reference to contraction in the balance of current accounts of the balance of payments in the 4th quarter and a fairly sizeable net capital outflow from the non-financial sector which was worth a total of USD 130.2bn (in 2005-07, there was noted a capital inflow at the level of USD 2bn, 41.9bn and 82.8bn, respectively) (see Fig. 7).
By results of the 2nd quarter 2008, there was registered a USD 40.9bn-worth capital inflow. However, the overall result for the period between January through September equals just USD 0.3bn, because of the capital outflow in the 1st and 2nd quarters. Between October and December, steered by a sharp slowdown in economic activity, expectations of the Rb. depreciation against the bicurrency basket and growth in risks for foreign investors, the capital outflow from the country accounted for USD 130.5bn. Thus, the net 2008 capital outflow is USD 130.2bn, or 17.1% of the nation's foreign trade turnover.
Let us note that against the background of a drastic shrinkage of the balance of current accounts of Russia's balance of payments, the problem of sustainability of the latter is further complicated by a huge foreign debt accumulated by Russian corporations, including quasi-public ones (i.e. banks and non-financial companies in which the public administration bodies and monetary and credit regulators hold, directly or indirectly, over 50% of participation in capital or otherwise exercise control over them). According to the Bank of Russia, as of October 1, 2008, the quasi-public companies' aggregate debt amounted to USD 146.1bn, including 14.4bn in a short-term (up to 1 year) debt. The aggregate external debt the private sector had accumulated as of the date in question was USD 351.6bn, including USD 87.5bn in short-term liabilities. So, in 2009 the national corporations will have to repay their USD 136bn-worth external debts (including repayment of the body of the debt and interest payments). In all likelihood, with chances for attracting foreign investors' resources into Russia being low, that will give rise to a sizeable negative balance by capital accounts and those on financial instruments.
In 2008, the unofficial capital outflow (capital flight) out of the country (Fig. 8) remained practically unchanged when compared with 2007. We estimate its volume at the level of USD 49bn, or up just at 0.4bn compared with 2007. Accordingly, the year of 2008 evidenced a drop in the proportion of capital flight in the foreign trade turnover to 6.4% from 8.4% reported in 2006.
As concerns other peculiarities of the 2008 balance of payments, let us note that the proportion of revenues from export of energy sources in export of goods was still great. The downfall in prices for energy sources in late-2008 highlighted vulnerability of Russia's balance of payments. In 2009, the oil prices may stabilize at a low level or even demonstrate a further decline, which, given a stable exchange rate of the Rb., may lead to a further decrease in the balance of current accounts of the balance of payments. Hence, in the event a net capital flight from Russia continue, the balancing of the balance of payments may be secured by further depreciation of the Rb. exchange rate and, accordingly, decrease in import, as well as by the CBR selling its foreign reserves.
7 We calculate capital flight using the IMF methodology: accordingly, it constitutes the sum of "trade credits and forward payments", "export gains not received on time, goods and services not supplied against transfers of monetary resources under import contracts", and "net mistakes and omissions". 42
Source: the CBR; the IET calculations.
Fig. 8. The Dynamic of Capital Flight in 2004-2008
2.1.4. Main Measures in the Monetary and Credit Policy Area
1. On March 1, the RF Statistical Service posted on its Homepage on the Internet a personal inflation calculator. Using it, one can calculate an individual consumer price index proceeding from one's personal structure of consumer expenses. It is known that the CPI published in RF is computed on the basis of the average statistical structure of the consumer basket. This structure is revised fairly rarely, while the structure of consumer expenses of each individual consumer may differ significantly from the average statistical one, which may result in the personal inflation deviating greatly from the average nationwide one.
Let us note that such tools are available to residents in many developed countries. Their use allows their governments to bolster economic agents' confidence in inflation indicators published by government statistical agencies.
2.On May 14, the Bank of Russia modified procedures of exercise of currency interventions. In addition to carrying out spot operations aimed at maintaining the value of the bicur-rency basket, the CBR started to hold regular currency interventions depending on the state of affairs on the domestic and overseas financial markets. This move was launched in the frame of a gradual transition to the floating exchange rate mode. While the pressure on the Rb. was mounting in the fall of the year, the CBR once again became a leading player on the forex market by selling resources from its foreign reserves to maintain the Rb. exchange rate. As noted above, the 2008 gradual depreciation policy cost the CBR more than one-fourth of its foreign reserves. At the same time, we believe that, unlike the situation in the aftermath of
the1998 crisis, in the current conditions depreciation does not bear explicitly favorable consequences, both because of a smaller volume of idle production capacities that may be engaged in the import substitution process and due to a considerable amount of the national corporate sector's debt, which is on the rise because of the Rb. depreciation. Plus, by contrast with 1998, the current crisis has battered the developed economies, too, which has entailed contraction of demand worldwide and the absence of possibilities for a rapid renewal of the capital inflow in RF. At this juncture the monetary and credit authorities should estimate the Rb. exchange rate which would enable them to get the balance of trade balanced and protect an announced level from the bearish mood on the financial market.
3.Since July 1, 2008, the CBR modified its methodology of calculation of international reserve assets of RF. Since that date the bonds that are included in the composition of the reserves are accounted in the composition of the reserves at their market value. In the past, these instruments were included in reserves at their depreciation value, i.e. by their effective price plus interest accrued. Such an approach better matches the best international practices, and its employment allows a more adequate estimate of the current volume of reserves. At the same time, the new approach may lead to a greater volatility of the amount of foreign reserves.
4.In 2008, the CBR continued to publish reports on the structure and results of its foreign reserve management. This move is aimed at enhancement of transparency of the Bank of Russia's operations. But it should be noted that the respective data are published with a more than 6-month lag, which, in our view, goes well beyond reasonable limits. Plus, the report does not cite yields rates by all the investment instruments with a breakdown by kinds of currencies. If supplied, such information would allow a more complete assessment of the foreign reserve management outcomes.
The most interesting section of the reports is information on results of the foreign reserve management. According to the last report posted on the CBR's Homepage on the Internet in January 2009, between April 2007 and March 2008 the Bank's reserve assets soared by USD 167bn, including USD 28.5bn (15.4% of the overall rise) in interest earnings and revaluation of bonds. So, in the conditions of a sizable influx of foreign currency in the country, these earnings constituted a relatively insignificant factor of the dynamic of the nation's foreign reserves. But once the state of affairs in the foreign trade area aggravated and capital inflow began to dry out, the foreign reserve management outcomes undoubtedly started playing a greater role than before.
To evaluate the CBR performance with regard to its reserve management, the report suggests employing the so-called "normative portfolios", which essentially represent indices of markets whereinto the Bank carries out its interventions. In the composition of the CBR's assets denominated in reserve currencies, there are the operational portfolio and the investment one. In all likelihood, the operational portfolio is supposed to support a high level of liquidity of reserve assets the CBR needs to exercise its functions on pursuance of the monetary and credit, and currency policies. The investment portfolio, whose name speaks for itself, was established to invest respective funds in less liquid and more risky assets.
The yield rate of reserve assets management operations between April 2007 and march 2008 was 7.3% in USD equivalent, 4.5% in Euro equivalent, 7.9% in British pounds and 0.6% in Yen equivalent.
5. In 2008, the Bank of Russia continued to raise interest rates by instruments of attraction of credit organizations' funds. More specifically, interest rates by deposits on standard
terms "tom-next", "spot-next" and on-demand deposits were raised from 2.75% annualized to 6.75% annualized, while those by "one-week" and "spot-week" deposits were raised from 3.25% to 7.25% annualized. That was done for the sake of sterilizing the excessive liquidity in the summer and became possible thanks to changes in the domestic and external economic conditions. With the use of these measures the Bank of Russia continued its course towards a greater role played by interest rates in implementation of its monetary and credit policy. Meanwhile, because of the rise of liquidity shortages on the Russian market due to the financial turmoil on international markets, in 2008, the volume of commercial banks' deposits with the CBR did not exceed Rb. 300bn vis-à-vis 1.2trln reported in 2007.
6. In 2008, the Bank of Russia also vehemently employed such a monetary and credit policy measure as modification of the compulsory reservation rates. They were raised four times through September and ultimately reached 8.5% annualized by the Russian banks' debts before foreign credit organizations, 5.5% - by their Rb.-denominated liabilities to private individuals and 6% - by other liabilities. It is worth noting that it was the compulsory reservation rate by the banks' debts to non-residents that was growing at the greatest pace. Apparently, that was explained by the CBR's desire to decelerate the growth rate of the bank's external debts to bolster their financial sustainability in the event of aggravation of problems on the world financial markets.
With the domestic financial turmoil on the rise, the Bank of Russia ruled to drastically decrease rates of contributions to the CRF effective as of October 15. In the aftermath of a two-stage decrease across all kinds of reserved obligations the rates were set at the level of 0.5%, but only for a certain period of time - they should have been raised up to 1.5% since February 1, 2009 and further up to 2.5% since March 1, 2009. Bu in January 2009, the Board of Directors of the bank of Russia decided to shift the timelines for a stage-by-stage raising of the rates of contributions to the CRF. According to the new decision, the new dates were set for May 1, 2009, and June 1, 2009. In all likelihood, the CBR made this decision because of a complex situation in the national financial sector steered by the world financial downturn. The Russian credit organizations should shortly face a rapid growth in failures to repay loans they have earlier issued, which should derail their financial health. Withdrawal of liquidity in the form of deductions to the CRF in such conditions would fuel the rise of financial instability.
7. In 2008, the Bank of Russia for six times raised its refinancing rate, which ultimately has grown from 10 to 13% annualized. Let us note that it was done in parallel with the raising of rates by the credit organizations' deposits with the CBR and the acceleration of inflation in the country. But because of a rapidly mounting inflation pressure, the refinancing rate in real terms has remained negative practically over the whole year.
In the autumn of 2008, in the conditions of aggravation of the situation on the financial market, the commercial banks' demand for the Bank of Russia's credits grew sharply, which resulted in a higher value of the CBR's interest-rate policy, as its resources have formed a major source of formation of money supply (see above). The CBR employed maintenance of low interest rates in real terms to vigorously credit commercial banks. Meanwhile, in the fall of the year the Bank of Russia increase the momentum of raising the refinancing rate to counter the capital outflow that started because of the development of the world financial crisis and was fueled by downfall in prices for major Russian exports (Fig.9).
ooooooooooooooooooooo ooooooooooooooooooooo <N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N
OOOOOOOOOOOOOOOOOOOOO
<NO<N'—'OOO'—<N '—'—'<N<N<N<N'—O <N '—11—11—1
Source: The CBR, the Statistics Service of RF.
Fig. 9. The CBR's Refinancing Rate in 2000-2008, in Real Terms
8. Due to the outgrowth of the financial crisis in late-2008, the national financial intermediaries in Russia faced liquidity shortages, which compelled the Bank of Russia to embark on a series of emergency measures (apart from lowering interest rates by its credits and reducing the CRF deduction rates), aimed at preclusion from a spreading of instability in the national banking sector.
More specifically, on October 10, the State Duma passed an act that allowed the bank of Russia to disburse unsecured loans to Rusian credit organizations. Such loans became available to credit organizations whose credit rating is not below a set value, and they could be disbursed for the term up to 6 months. This measure was aimed at supporting the national banking sector that had found itself in a hard situation. Because of a large-scale outflow of private capital from the country, a sizeable external indebtedness accumulated over the previous years, and the crisis in the real sector. Prior to the promulgation of the act, The CBR had been able to disburse credits to the national commercial banks against securities, hard currency, receivables under credit agreements or against a credit organization's pledge. But because the banks' huge need in credit resources, they lacked assets that might serve as a collateral against a CBR's lending. In such a situation, granting the CBR the possibility to disburse unsecured loans enabled it to support Russian banks, albeit it has increased potential risks associated with the borrowers' inequitable conduct.
To support the banking sector in the conditions of the deepening financial crisis the CBR began entering in agreements with large Russian banks on compensation for a fraction of their possible losses in the interbanking lending operations. As well, the Bank of Russia has undertaken such measures as provision of the REPO financing on security of an extended list of assets, extension of the REPO financing term, disbursement of subordinated credits to the
so-called "backbone" banks, and adoption of the legislation on loan guarantees for corporations. Plus, the capitalization of the Deposit Insurance Agency was boosted for the sake of financial rehabilitation of the banking system.
Finally, on December 30, 2008, the Bank of Russia modified procedures of formation by credit organizations of reserves to withstand possible credit losses. According to the effective procedures, credit organizations are bound to form reserves to back possible credit losses, depending on credit risks assessments. The procedures also imply that this diminishes the volume of funds available for commercial banks to carry out their current operations.
In compliance with the above decisions, the credit institutions were granted the right not to increase their credit reserves until December 31, 2009, in the event:
• the duration of the overdue indebtedness by the loan principal or interest on loan extends for the term of not more than 30 calendar days relative to the effective timeline;
• the loan has been restructured (for instance, the currency in which the loan was denominated was changed, or the loan period (with regard to the loan principal and/or interest on loan), or a change of the interest rate) has been modified in the period since October 1, 2008);
• the loan received since October 1, 2008, has been used to repay the earlier extended loan.
So, this measure has de-facto stimulated banks to credit more risky borrowers. But it should be understood that an overly liberal approach to the credit risk assessment procedures may derail the financial stability. In other words, this measure should be conceived of as a solely temporary help to the national financial system. Furthermore, in the late-2008, there appeared information that the government authorities instructed the largest Russian banks to bolster their credit portfolios at a certain rate. With the financial instability on the rise, such an approach may just entail accumulation of "bad' debts on the banks' balance sheets and trigger further challenges facing the credit organizations.
The Russian banks are going to shortly face yet another major challenge, that is, the rise in the volume of overdue debts on earlier extended credits. We think that at this juncture the main tasks in the area of support of the banking system are development of approaches to the diminishing of the banks' "bad" assets, easing the M&A processes in the banking sector, refinancing the banks' external debts on the arm's length terms, and improving the regulation and oversight procedures in the sector. International experiences show that an increasingly popular measure that complements the provision of banks with additional capital has been redemption of their bad assets by a special agency. Such a structure might be established in Russia, too; however, to minimize risks associated with the banks' inequitable conduct, it should redeem only the debts on loans extended in the pre-crisis period.
In conclusion, let us note that key factors that fuel the rise in volumes of crediting the real sector are subsidence of depreciation expectations and clarification of the magnitude and intensity of the crisis, which would enable banks to more accurately assess credit risks.
2.2. The State Budget
2.2.1. The General Characteristic of the Budget System of the Russian Federation
The dynamic of main parameters of the budgetary system of the Russian Federation in 2008 appeared substantially different from trends prevailing over the prior year. While in 2007 revenues and expenditures of budgets of all levels were on the rise vis-à-vis their respective figures of 2006, in 2008, changes were differently directed (Table 1) - against the backdrop of the economic crisis the enlarged government's revenues fell fairly significantly to 38.5% of GDP (at 1.7 p.p. of GDP vs. 2007) and so did revenues to the federal budget (down to 22.3% of GDP, or at 1.3 p. p. of GDP). At the same time, revenues to consolidated budgets of the Subjects of the Federation posted a 0.2. p. p. growth - up to 14.9% of GDP.
In the second half 2008, the progressive deterioration of the economic agents' financial health has inevitably entailed a fall in the budget revenues and put into question financial stability of the national budgetary system as a whole. The fall in the enlarged government's revenues against the 2007 figures was determined primarily by the contraction of tax revenues8 (at 0.5% of GDP). It was the federal level where tax revenues slid most notably (at 0.1 p.p., down to 21.2% of GDP), while the fall of non-tax revenues (by 0.4 p.p. - to 1.1% of GDP) and uncompensated receipts form other budgets of the budgetary system (at 0.7 p.p. - to 0.03% of GDP9) have formed major factors behind the overall fall in the federal budget revenues in 2008. The growth in revenues to regional budgets is related solely to a 0.8 p.p rise in transfers from the federal budget - up to 2.7% of GDP (meanwhile, both tax revenues and non-tax ones were on decline).
Vectors of changes in the expenditure volume were also different across budgets of different levels. While the federal and regional budgetary expenditures rose at 0.1 p.p. and o.5 p.p. (up to 18.2% and 15.1% of GDP, respectively) vis-à-vis the 2007 figures, the enlarged government's budgetary expenditures, on the contrary, tumbled by 0.4 p.p. - to 33.7% of GDP. The point is the federal budget expenditures grew solely thanks to the rise in expenditures on interbudgetary transfers (at 0.7 p.p. - up to 6.4% of GDP). At the same time, a closer look at expenditures less this particular section of the functional classification allows noticing their fall at 0.6 p.p. of GDP. A similar situation is noted, as far as regional budgets are concerned. It was transfers to extrabudgetary funds that made growth in expenditures possible -they rose at 0.4 p.p. - up to 0.5% of GDP, while other sections on the whole were likewise on the rise, albeit at a more moderate rate (0.06% of GDP). So, the rise in the federal and regional budgetary expenditures in 2008 vs. the 2007 figures was fueled mostly by intebudgetary transfers and, accordingly, this rise cannot help but affect the enlarged government's volume of budgetary expenditures.
The rise in the federal budget expenditures vs. the 2007 figures took place against the background of plunging revenues, which resulted in a shrinking surplus of the federal budget (at 1.4 p.p. - down to 4.1% of GDP). Because of the advanced growth in expenditures of the
8 For the purposes of the present analysis tax revenues comprise insurance premiums to the compulsory medical insurance and revenues from foreign trade (in compliance with effective provisions of the effective variant of the Budget Code of RF, these categories of revenues are attributed to nontax ones)
9 This contraction is related to the fact that in 2007, this revenue item reflected the collection to the federal budget of additional revenues form YUKOS, while in 2008, there were no such transfers to the budget.
RF Subjects' budgets, the latter ran a minor deficit by results of 2008, which equaled to 0.1% of GDP. While the enlarged government's budgetary expenditures plunged in the shares of GDP equivalent, they did so to a far lesser degree than the revenues. That resulted in a substantial fall of the surplus at 1.3 p.p. - down to 4.8% of GDP.
Table 6
Execution of Revenues and Expenditures Across Budgets of All the levels of Government in 2000-2008 (as% of GDP)
2000 2001 2002 2003 2004 2005 2006 2007 2008
The federal budget
Revenues 15.5 17.8 20.3 19.5 20.1 23.7 23.3 23.6 22.3
Expenditures 14.2 14.8 18.9 17.8 15.8 16.3 15.9 18.1 18.2
Deficit (-) /Surplus (+) 1.4 3.0 1.4 1.7 4.3 7.4 7.4 5.5 4.1
Consolidated budgets of the RF Subjects
Revenues 14.1 14.5 15.1 14.6 14.1 13.9 14.1 14.7 14.9
Expenditures 13.4 14.5 15.5 14.9 13.9 13.6 13.6 14.6 15.1
Deficit (-) /Surplus (+) 0.7 0.0 -0.4 -0.3 0.2 0.3 0.5 0.1 -0.1
The budget of the enlarged government
Revenues 38.3 38.4 37.8 37.1 37.5 39.7 39.6 40.2 38.5
Expenditures 34.3 35.2 36.3 36.0 32.9 31.6 31.2 34.1 33.7
Deficit (-) /Surplus (+) 4.0 3.2 1.5 1.1 4.6 8.1 8.4 6.1 4.8
Source: The RF Ministry of Finance, the IET calculations.
A distinctive feature of the dynamic of budgetary revenues on all the levels over the period in question became an intensifying swing of monthly tax revenues with an explicitly subsiding trend (Fig.10).
An important factor of changes in the dynamic of tax revenues compared with the 2007 figures became the domestic VAT, which has been paid on the quarterly basis since the beginning of 2008. This factor was behind spikes in tax revenues noted in January, April, July and October, as well as the subsequent two-month periods when revenues were on decline compared with the respective time periods of 2007, as in the absence of revenues from VAT, the budget kept on reimbursing economic agents. But because of the crisis, the RF government ruled to grant them with payments of the domestic VAT over the third quarter in installments. Hence, a fairly visible contraction in tax revenues in October 2008.
As evidenced by Fig. 11, in 2008, the share of oil-and-gas revenues to the federal budget in GDP fluctuated within the range between 6.6 and 13.4%. Affected by the aggravating state of affairs on the world market for oil, the indicator declined steadily in the second half-year. However, it should be noted that despite some decline, the proportion of O&G revenues still is fairly high.
Meanwhile, the 2008 value of the non-oil-and-gas deficit of the federal budget was over 5% of GDP during nearly the whole year, except for the three months the budget was running a surplus. This evidences retention of serious market risks facing Russia's public finance system. One cannot help noticing a sharp rise in the non-oil-and-gas deficit of the federal budget by the end of the year, when it hit a record-breaking value ( 23.8% of GDP) ever observed
over the period between 2005 and 2008. The increase in expenditures in shares of GDP at the end of the year, that engendered such a deficit, is mostly related to the traditional unevenness of execution of expenditure obligations and the decline of the nominal GDP in December 2008 (tentatively at some 4.5% vs. December 2007).
70,0%
BG.0%
50,0%
B 40,0%
£
S 30,Ott
20,0% 10.0% 0,0%
är s
8-
I
ä S
I I
EZZZZ3 Nontax revenues I lax revenues.
-The average price level for Urals
s
GL Cl
S
î 3 o
Note: the monthly GDP was calculated on the basis of the Rosstat quarterly data and the RF Ministry of Finance's monthly data
Fig. 10. The Dynamic of Tax and Nontax Revenues to the Enlarged government's Budget
-O&G revenues
-Koii-oil-gas deficit (with sign "+")
Note: the monthly GDP was calculated on the basis of the Rosstat quarterly data and the RF Ministry of Finance's monthly data
Fig. 11. The average Values of the Oil-and-Gas Revenues and the non-Oil-and-Gas Deficit
of the Federal Budget in 2005-2008 (as% of GDP)
10
10 The non-oil-and-gas deficit is shown in the Figure with the sign "+" for a more demonstrative comparison with the volume of oil-and-gas revenues. Also, it must be noted that while calculating the non-oil-and-gas deficit, we 50
¡ 03.08 04.08 05.08 06.08 07.08 08.08 09.08 10.08 11.08 12.08 Total
1 371.2 328.9 345.4 368.0 391.4 454.6 432.4 435.8 411.8 303.1 4145.8
1 371.2 328.9 345.4 368.0 391.4 26.8 0.00 0.00 0.00 0.00 2135.0
0.00 0.00 0.00 0.00 0.00 420.6 0.00 0.00 0.00 0.00 420.6
0.00 0.00 0.00 0.00 0.00 7.2 432.4 435. 411.8 303.1 1590.2
Huge oil-and-gas revenues collected in the prior year allowed a substantial financial reserve in the form of a budget surplus, which made it possible for the government not only to fulfill its expenditure obligations, but also to replenish the Reserve Fund and the National Welfare Fund every month (see Table 7).
Table 7
Avenues of the Use of the Oil-and-Gas Revenues to the federal Budget in 2008, as Rb. Bn
Oil-and-gas revenues 303.4
Avenues of their use: On securing the oil-and-gas trans- 303.4 fer
Transfers to the Reserve Fund 0.00 Transfers to the National Welfare 0.00 Fund
Source: the RF Ministry of Finance.
The size of the 2008 oil-and-gas transfer11 was limited with a value equaling 6.1% of GDP. The O&G transfer had already been fully financed by August 2008. Since that moment the government started collecting O&G revenues to the Reserve Fund and the National Welfare Fund. As of the early-2009, the ultimate volume of resources accumulated in these two funds accounted for 9.7% and 6.2% of GDP in Rb. equivalent, respectively.
Furthermore, a rapid depreciation of the Rb. in January 2009 de-facto resulted in the Reserve Fund lacking just 0.7% of GDP to hit its threshold value set for early-February 2009. This means that because of the appreciation of the USD and Euro against the Rb., within a month the Reserve Fund rose just at more than Rb. 830bn, or some 2% of GDP.
The 2009 oil-and-gas transfer was set at the level of Rb. 2,531.1bn, while the January volume of collection of oil-and-gas revenues accounted just for Rb. 243.6bn, or 9.6% of the value of the oil-and-gas transfer. In other words, with this rate of replenishment of the budget, the transfer should be complete only in 10 months. That is why, should the effective prices for hydrocarbon minerals remain unchanged through the year, the nation should not hope for any additional revenues to the Reserve Fund.
In addition to a substantial fall of revenues from the mineral tax and customs duties to the federal budget, according to some moderate projections, the 2009 missing volume of budgetary revenues from other taxes may account for a. 2.9-3.3% of GDP. Hence, the bulk of the burden of execution of the undertaken expenditure obligations will be laid upon the Reserve Fund. Its resources undoubtedly appear sufficient to execute all the obligations stipulated in the 2009 Federal Budget Act. However, given the unforeseen expenditures (the anticrisis package of measures on stabilization of the financial market, support of individual sectors of the economy, and social protection of the population the RF Ministry of Finance introduced to the government on March 19, 2009, in the form of amendments to the 2009 federal budget), a long-standing nature of the crisis, unpredictability of exchange rate fluctuations, stability of the budgetary system in the medium term depends on changes of a general vector
did not take into account revenues from managing the Stabilization und of RF (since 2008 - the Reserve Fund and the National Welfare Fund, because the accurate monthly data on these indicators is hardly accessible
11 The oil-and-gas transfer is a fraction of the federal budget funds used to finance the oil-and-gas deficit of the federal budget at the expense of oil-and-gas revenues and resources of the Reserve Fund
of the budgetary policy towards restricting public expenditures and increasing requirements to their efficiency.
2.2.2. Analysis of execution of the federal budget of RF in 2008
In the initial draft of the bill on the 2009 federal budget, revenues to the federal budget were planned to make up Rb. 6,644.4bn, or at 4.6 p.p. down against the actual execution of the revenue part of the 2007 budget (Table 3). The planned for 2008 budget decrease of the share of revenues in GDP compared with the prior year was determined by extremely cautious projections of the 2008 values of Russia's main macroeconomic parameters and prices for minerals in particular. Meanwhile, the 2008 projection of the federal budget revenues, less contributions to the Stabilization Fund of RF (the Reserve Fund and the National Welfare Fund), was even increased at 0.5% of GDP compared with the level of the actual execution in 2007.
Despite a rapid downfall in oil prices since August 2008, their average annual values ultimately proved to be greater than those set in the 2008 budget. As in 2007, it likewise helped to outperform the plan with respect to revenues to the budgetary system. Accordingly, amendments to the Federal Budget Act implied an increase of its revenues up to Rb. 8,965.7bn and an increase of expenditures up to Rb. 7,773.8bn.
Table 8
Main Characteristics of the Federal Budget of RF in 2008
For reference: executed in 2007 2008 - the Act 2008 the amended Act 2008 - execution
Rb. bn % of GDP Rb. bn % of GDP Rb. bn % of GDP Rb. bn % of GDP
Revenues, including: 7 779.1 23.6% 6 644.4 19.0% 8 965.7 21.2% 9 274.1 22.3%
tax revenues 7042.0 21.3% - - - - 8817.6 21.2%
nontax revenues* 737.1 2.3% - - - - 456.5 1.1%
Contributions to the Reserve
Fund and the National Welfare 1 903.1 5.8% 248.1 0.7% 2 114.0 5.0% 2 342.6 5.6%
Fund (Stabilization Fund)
Revenues, less funds subject to
collection to the Reserve Fund 5 876.0 17.8% 6 396.3 18.3% 6 851.7 16.2% 6 931.5 16.7%
and the National Welfare Fund
Expenditures, including: 5 983.0 18.1% 6 570.3 18.8% 7 737.8 18.3% 7 566.6 18.2%
interest expenditures 143.1 0.4% 187.9 0.5% 157.4 0.4% 153.3 0.4%
non-interest expenditures 5 839.9 17.7% 6 382.4 18.2% 7 580.4 17.9% 7 413.3 17.8%
The federal budget surplus 1 796.1 5.5% 74.1 0.2% 1 227.9 2.9% 1 707.5 4.1%
Surplus /deficit (less funds sub-
ject to collection to the Reserve Fund and the National Welfare -107.0 -0.3% -174.0 -0.5% -886.1 -2.1% -635.1 -1.5%
Fund )
GDP (estimates) 32 987 35 000 42 240 41 540
* including uncompensated receipts.
Source: the RF Ministry of Finance, the IET calculations.
Fig. 3 presents the monthly dynamic of revenues to the federal budget in 2006-2008. It is worth noting a dramatic fall in the share of revenues in GDP over the last months of 2008 compared with the respective periods of 2006 and 2007. That was steered by the deteriorating situation in the foreign trade area and the unfolding of the financial crisis at the end of the year
(see Table 4). If not for a concomitant drop of the nominal GDP in December 2008, the fall in revenues in shares of GDP in December would have been yet more notable.
45%
40%
35%
30%
Q 25% O
° 20%
%
15% 10% 5% 0%
Fig. 12 The Federal Budget Revenues in 2006-2008 (as% of GDP)
Table 9
Oil Prices in 2005-2008 rr.12
The average level of Urals price, as USD/barrel 2005 2006 2007 2008
January 40.02 59.18 49.79 89.61
February 40.65 56.37 53.73 92.01
March 47.87 57.53 58.69 100.14
April 46.86 65.17 63.88 105.18
May 44.66 64.33 64.09 118.39
June 50.94 63.85 68.05 127.38
July 54.84 68.93 74.37 129.45
August 58.72 68.64 68.82 111.31
September 57.91 58.52 74.17 96.26
October 54.81 54.65 79.55 69.72
November 51.55 55.18 90.06 50.53
December 53.57 58.35 87.94 38.50
Averaged over the year 50.20 60.89 69.43 94.04
Source: the data of the Federal Tax Service of RF.
12 These prices are used for purposes of taxation.
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Intensification of the unevenness of the monthly dynamic of execution of the federal budget revenues in 2008 was to a significant extend determined by transition towards VAT collection on the quarterly basis (see above). Plus, the decline in business activity noted in the 4th quarter, due to the rise of crisis developments in the economy, manifested itself in falling volumes of revenues to the federal budget. To give a specific example, in the 4th quarter of the year the federal budget saw a considerable (at Rb. 665bn) fall in revenues vis-à-vis the prior quarter.
Against the background of the decline in budget revenues in shares of GDP equivalent against 2007, the softening of the budgetary policy was giving rise to a continuous growth of the expenditure part of the budget. Originally, the federal budgetary expenditures were set at the level of Rb. 6,570.3bn, or at 0.7 p.p. higher than in 2007 (see Table 8). Capitalizing on a favorable state of affairs in the foreign trade area has led to the approval of specified budgetary expenditures at a level being at Rb. 1,167.5bn greater than in the initial draft of the Federal Budget Act.
It should be noted that the allocation of budgetary funds in the late-2008 on financing the anti-crisis measures on support of the real sector and ensuring the banking sector's stability became possible thanks to the redistribution of the federal budgetary expenditures. Hence, by results of 2008, there was noted a notable rise in shares of GDP equivalent of expenditures on "The National Economy" item (at 0.4 p.p. against the 2007 figures), while expenditures on general government issues slid at 0.45 p.p. The traditional growth in interbudgetary transfers (at 0.7 p.p.) coincided in time with a 0.6 p.p. fall of expenditures on housing and utilities, which was related to the establishment in 2007 of a public corporation "The Fund for Assistance to the Housing and Utilities Complex Reform". The truth is, the federal budget expenditures on formation of the corporation's capital were inserted in a respective item under the "Housing and utilities Complex" section. That is why the year of 2007 saw a substantial rise in spending on the HUS as percentage of GDP (from 0.2% to 0.9% of GDP) against the 2006 figures. In the absence of such expenditures in 2008, the level of financing of this particular section was back to its normal level and accounted for some 0.3% of GDP.
The federal budgetary expenditures ultimately retained their stability - in 2008, they were executed at the level of 18.2% of GDP, or at 0.1% greater than in 2007.
The situation with the execution of expenditure obligations on the cash basis over the financial year still was unsatisfactory. While there were some minor positive shifts in this area compared with 2007 (by results of the first half-year the execution on the cash basis grew from 33.2% in 2007 to 38.7% in 2008), the tendency to expenditures growing by the end of the year has remained unchanged (Table 10).
It was the "Housing and utilities" item by which execution of expenditure obligations by the end of the year proved to be the worst one. By contrast, main directions of the social sphere were financed at the level of 99.7% on average. It should be particularly emphasized that execution of expenditures on the cash basis by the priority national projects improved notably - in 2008, it accounted for 94.5% vs. 82.1% in 2007 and 81.0% in 2006.
However, traditional causes for government agencies spending the budgetary funds unevenly, which manifested themselves in failures to meet timelines of conclusion of contracts on placement of orders on delivery of goods (works, services) for public needs, failures to meet contract timelines, the absence of documents needed for execution of the federal budget, etc. fall short of providing a comprehensive explanation of a record-breaking rise in
the share of expenditures in GDP in December 2008 ( see Fig. 13). We assume that the rise in the share of expenditures in GDP in November and December 2008 was to some extent fueled by the fall in the nominal GDP at the end of the year, due to the decline in business activity in the country, which was affected by the crisis developments in the national economy and worldwide.
Table 10
Execution of the Federal Budget on the Cash Basis in 2008 (as% to the Budget Estimate over the Year)
1st quarter 1st half-year 9 months Year
EXPENDITURES 17.2% 38.7% 59.4% 97.8%
General government issues 22.3% 40.4% 61.4% 91.6%
of which: the public debt servicing 33.8% 47.6% 83.2% 97.4%
National defense 16.9% 39.9% 59.3% 99.7%
National security and law enforcement 19.4% 43.0% 65.9% 99.9%
National economy 8.2% 26.3% 42.0% 96.3%
Housing and utilities 2.6% 11.2% 24.8% 93.6%
Environment 13.1% 36.8% 60.0% 98.8%
Education 13.4% 37.6% 58.4% 101.1%
Culture, cinematography and mass media 13.7% 40.6% 60.5% 100.5%
Health care and sport 12.3% 33.7% 56.9% 98.9%
Social policy 22.9% 44.8% 68.5% 98.4%
Interbudgetary transfers 19.8% 42.6% 64.6% 98,6%
Source: the RF Ministry of Finance, the IET calculations.
45% 40%
35% 30%
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec
Fig. 13. The Federal Budget Expenditures in 2006-2008 (as% of GDP)
Clearly, the negative external background and fall in revenue volumes from the domestic taxes necessitate pursuance of a more conservative budgetary policy. Such a policy should rest upon the seeking of a proper balance between obligations undertaken and possibilities for their financing. One of directions of scaling back the federal budget expenditures can be revision of volumes of financing of the priority national projects. The fact is, the absence of a systemic approach to shaping their contents has led to an annual extension of the list of directions and measures of the government support. Hence, additional budgetary expenditures (to finance new bottlenecks, such as, for instance, getting schools connected to the Internet subsequently required payments for the Internet traffic, while the respective costs had not been foreseen in municipal budgets).
The implementation of the national projects generates additional expenditure obligations for the regional governments, too. The problem is, the spheres picked as the national projects mostly fall within the regional governments' mandate. Intervening in the regional governments' area of competence, the national projects generate for them latent unfunded expenditure mandates, such as:
- in the frame of projects "Education" and "Healthcare", additional stimuli and pay rises for individual categories of the so-called "budgetary" employees take place against the background of retention of a planned rise in labor compensations across the educational and healthcare sectors on the whole. To keep the staff, the regional authorities' natural reaction was compulsory pay rises for the other categories of employees in these sectors;
- the national projects do not provide in full for financing expenditures on maintenance and repair of high-tech medical equipment and training of specialists who are supposed to operate it.
2.2.3. Analysis of collection of main taxes to the budgetary system of RF
In his 2008 Budgetary Address to the Federal Assembly, President enunciated continuation of the course to lowering dependence of the budgetary revenues on the world prices as one of key priorities of, and guides for the national fiscal and budgetary policy. The rapid aggravation of the state of affairs in the foreign trade area in the second half f 2008 generated prerequisites for a compulsory realization of the President's thesis - the crisis made the need for seeking ways to compensate for the falling oil-and-gas budgetary revenues a pressing challenge. By results of 2008, the contraction in the tax revenue collection to the enlarged government's budget accounted for some 1 p.p. of GDP. The government has managed to avoid a more dramatic decline in budgetary revenues only thanks to sky-high prices for energy sources on the world markets over the first half of the year.
Another guide of the recent Budgetary Address was easing the tax burden on the economy. Table 11 displays the dynamic of the tax burden on Russia's economy in 2001-2008 and proves that it has been fluctuating just insignificantly, being within the range between 35.3% -36.3% of GDP.
Table 11
The Dynamic of the Level of Tax Burden and Collection of Main Taxes to the Budget of the Enlarged Government of the Russian Federation in 2000-2008 (as% of GDP)
2001 2002 2003 2004 2005 2006 2007 2008
The level of tax burden (1+2+3) 36,17 36,29 35,28 35,82 36,30 35,94 36,06 35,58
Tax receipts (1), including: 31,96 29,80 28,21 27,47 25,65 24,44 25,74 23,95
Corporate profit tax 5,75 4,28 3,98 5,09 6,16 6,21 6,58 6,05
Personal income tax 2,86 3,31 3,44 3,37 3,27 3,46 3,84 4,01
Uniform Social Tax* 5,79 4,13 3,68 3,49 1,99 1,94 1,98 1,95
VAT 7,17 6,96 6,66 6,27 6,81 5,62 6,86 5,13
excises 2,72 2,44 2,59 1,43 1,17 1,01 0,95 0,84
Mineral tax** 0,74 2,55 2,50 2,99 4,20 4,07 3,63 4,11
Insurance premiums on the compulsory 0,00 2,76 2,94 2,80 2,88 2,93 3,05 3,00
pension insurance (2)
Revenues from foreign trade (3) 4,21 3,73 4,13 5,54 7,77 8,57 7,27 8,63
* without regard to insurance premiums on the compulsory pension insurance. ** for 2001- the value of mineral extraction fees instead of the mineral tax Source: the RF Ministry of Finance, Rosstat, the IET calculations
The 2008 volume of tax revenues to the budgetary system tumbled by 1.8 p.p. of GDP vs. the prior year's figures. The structure of tax revenues to the budget of the enlarged government is given in Fig. 14.
70,0%
60,0%
50,0% --
40,0%
30,0%
20,0%
10,0%
0,0%
i
1-Î 11
Tax revenues
CPT
PIT
UST
VAT
Excises
02005 □ 2006 02007 ■ 2008
Mineral tax
* without regard to insurance premiums on the compulsory pension insurance
Fig 14. The Proportion of the Tax Revenues in the Aggregate Revenues to the Budget of the Enlarged Government in 2005-2008, as%
The 2008 structure of tax revenues underwent notable changes. More specifically, revenues from VAT plunged below their 2006 level; also, revenues from the corporate profit tax were on decline. These were crucial factors behind a substantial fall in tax revenues to the budget of the enlarged government vs. the 2007 level. However, it should be noted that notwithstanding some expectations, the proportion of the mineral tax in GDP and the amount of revenues from foreign trade did not share the path of the 2007 indicators - on the contrary, budgetary revenues from these specific taxes were on the rise in 2008. It should also be noted that in the period of 2005-08 there were noted sustained trends to rise in the share of the personal income tax, fall in the share of excises, and stabilization of the proportion of UST in GDP.
In 2009, let alone an expected decline in oil-and-gas revenues, it is the corporate profit tax, VAT, personal income tax and UST the budgetary revenues from which are envisaged to fall most dramatically, as they would be affected by aggravation of the corporations' financial standing, contracting business activity, growth in the number of the unemployed, and a general fall in incomes from labor and entrepreneurship activities. It is going to be property-related taxes (the corporate property tax, the land tax, the transport tax, etc.) revenues from which should remain stable in the crisis conditions; however, should the crisis persist for long, these revenues should tumble, too.
The corporate profit tax
In 2008, revenues from the corporate profit tax plunged at 0.5 p.p. compared with the 2007 figures and accounted for 6.05% of GDP. The main causes behind the fall were the slump in business activity and the downfall in oil prices. All this resulted in the rise of the specific weight of loss-making corporations in the economy, while the net balanced financial result of enterprises and organizations' performance in shares of GDP reported in 2008 evidences the tax base contracting with respect to the corporate profit tax (see Fig. 15).
17,00% 15,00% 13,00% 11,00% 9,00% 7,00% 5,00% 3,00%
50,0%
45,0%
40,0%
35,0%
30,0%
25,0%
20,0%
15,0%
10,0%
5,0%
0,0%
2003 2004 2005 2006 2007* 2008*
Receipts from the corporate profit tax, as % to GDP
The balanced financial result of organizations' performance
The specific weight of loss-making organizations, as % of the overall number of enterprises (the right
* The values of the balanced financial result of organizations' performance and the specific weight of loss-making organizations are given by results of 11 months of 2007-2008
Fig. 15. The Dynamic of Revenue Collection from the Corporate Profit Tax to the Budgetary System of RF, the balanced Financial Result of organizations' Performance and the proportional Weight of Loss-Making Enterprises in 2003-2008
The following modifications of the tax law ensured some constraining impact on the dynamic of revenues from the corporate profit tax:
- the write-off of a debt before the state extrabudgetary funds is not recognized as proceeds (sp. 21 p.1. art. 251 of the tax Code of RF);
- it is allowed to apply zero rate of the corporate profit tax to incomes in the form of dividends, providing compliance with conditions stipulated in sp. 1. p.3. art. 284; the right is granted to apply to the basic depreciation rate a special coefficient, which should not be over 3 with regard to depreciated fixed assets utilized solely for the sake of R&D;
the timeline of effect of zero rate of the corporate profit tax for agrarian producers was extended for 2008;
- the marginal size of R&D expenses effected in the form of contributions to formation of the Russian Fund for Technological development and other sectoral and inter-sectoral funds registered in the order as per the Federal Act "On science and the public research and technical policy" recognized for the taxation purposes was increased from 0.5 up to 1.5% of the taxpayer's income (gross earnings).
The personal income tax
The trend to growth in the PIT revenues started in 2005 and continued through 2008, when the revenues in question broke a new record of 4.01% of GDP, or nearly at 0.2 p.p greater than in the prior year. Interestingly, the growth took place against the background of the population's monetary incomes, less social payments, falling at 2.7 p.p. of GDP (see Fig. 16).
4,80% 4,40% 4,00% 3,60% 3,20% 2,80% 2,40% 2,00%
57,7%
55,1%
50,5%
47,0%
3,31%
3,44%
3,37%
54,4% 3,46%
56,2% 3,84%
70,0%
-- 60,0%
2,86%
2,37%
3,27%
+
+
+
53,5% 4,01% -- 50,0%
-- 40,0%
-- 30,0%
-- 20,0%
-- 10,0%
+
0,0%
2000
2001 2002 2003 2004 2005
PIC revenues, as % to GDP (the left scale) ♦—The population's monetary incomes, less social payments, as % to GDP
2006 2007 2008
Fig. 16. The Dynamic of Revenue Collection from PIC to the Budgetary System of RF and the Population's Monetary Incomes Less Social Payments in 2000-2008
Contraction of the tax base of the personal income tax was caused particularly by changes in legislation effective as of January 1, 2008, in compliance with the following items were exempted from PIC:
- grants on support of science, education, culture and fine arts in the Russian Federation awarded to private individuals by Russian organizations, the list of which is subject to the RF government's approval;
- sums of nonrecurrent material aid provided to parents, adoptive persons, in loco parents against the birth (adoption) of a child within the limit of Rb. 50,000 per each child;
- the marginal amount of per diem up to 700 Rb. per every day of a business trip within the territory of the Russian Federation and up to Rb. 2,500 per every day of a business trip overseas.
The multidirectional dynamic of the population's real incomes, less social payments, and collection of the personal income tax under retention of the basic tax rates and some extension of tax remissions in the part of the tax collection presented by Fig. 16 gives an illustrative evidence of the improving tax administration. The uniform social tax
Despite the rise of the proportion of the labor compensations fund in GDP in 2008 against the 2007 figures (at 0.36 p.p. of GDP), revenues from UST and premiums on the compulsory medical insurance plunged at 0.08 p.p. of GDP. The fall is determined primarily by the regressivity of the UST scale and the absence of its indexation. This has entailed the situation in which a rise in salaries and wages in nominal terms lowers the effective UST rate.
In the conditions of economic growth, with the advanced rate of the population's incomes, the pace of growth of the UST base appeared greater than the pace of decline of its efficient rate. As a result, the respective revenues even posted growth in percentage to GDP. Such a situation was noted over 2006-2007. But in 2008 the rise in the tax base fell short of compensating for the decrease of the effective rate of UST and the revenues from this tax were on decline.
Table 12
Comparison of the Dynamic of Collection of Revenues from UST with the Dynamic of the Labor Compensations Fund in 2001-2008, as% to GDP
2001 2002 2003 2004 2005 2006 2007 2008
Revenues from UST (without regard to the CMI premiums) 5,79 4,13 3,68 3,49 1,99 1,94 1,98 1,95
Premiums on the compulsory medical insurance 0,00 2,76 2,94 2,80 2,88 2,93 3,05 3,00
Revenues from UST and the CMI premiums combined 5,79 6,89 6,61 6,29 4,87 4,86 5,03 4,95
Labor compensations fund* 43,03 46,77 47,05 46,02 43,81 44,55 46,27 46,63
*labor compensations to employees (including latent labor compensations and mixed incomes).
Source: the Federal Tax Service of RF, Rosstat Excise taxes
In 2008, the volume of tax revenues to the budgetary system from excises was Rb. 350bn in absolute terms vs. 314bn. The rise was powered by indexation of specific excise rates at a pace that outran the inflation rates and by the expansion of the tax base. However, in relative terms the revenues from excises tended to decline. The tendency had started back in 2004, and in 2008 the revenues from excises in relative terms accounted for 0.84% of GDP vs. 0.95% of GDP reported in 2007.
Back in 2007, the government promulgated Federal Act №75-FZ "On introducing amendments to article 22 of Part two of the Tax Code of the Russian Federation", which has set the formula of indexation of excise rates on excised merchandise for 2008-2010. The dynamics of indexation of excise rates on different groups of goods vary substantially. More specifically, while excise rates on oil products, tobacco and cigars remained unchanged, those on alcoholic beverages and passenger cars were raised at 7%, while excises for cigarettes were
13
up at more than 23% .
0,70%
0,60% 0,50% 0,40% 0,30% 0,20% 0,10% 0,00%
mini—Efrfr
Excises on alcoholic beverages
Excises on tobacco Excises on oil products Excises on passenger products cars and motorcycles
m 2005 B2006
□ 2007
□ 2008
Fig. 17. Collection of Excise Revenues by Groups of Excised Merchandise, as% of GDP
The general trend of the period between 2000 and 2008 became the growth rates of the tax base by all the excised commodity groups, except for alcoholic products, falling behind the dynamic of the real GDP, which in large measure explains contracting volumes of collection of excises to the national budgetary system.
The value added tax
The year of 2008 saw a permanent stability of the tax base of VAT levied on sales of goods (works, services) on the domestic market, as evidenced by the dynamic of final consumption cleared from VAT and fluctuating since 2004 within 1 p.p. of GDP (see Table 13) 14.
Import in 2008 likewise continued the earlier started upward trend and by results of the year accounted for 16.0% of GDP vs. 15.5% registered in 2007. So, despite some deceleration of economic growth in the 4th quarter of the prior year, the dynamics of main macroeconomic indicators were generating quite positive prerequisites for growth in revenues from VAT over the above period of time.
13 Thus, in 2008, the indexation of excise rates on cigarettes concerned both the specific part of the rate and the ad-valorem one. While in 2007 the excise rate on filter cigarettes was Rb. 100 per 1,000 pcs+ 5% of the estimated value, but not less than Rb. 115 per 1,000 pcs, the 2008 rate was Rb. 120 per per 1,000 pcs+ 5.5% of the estimated value, but not less than Rb. 142 per 1,000 pcs .
14 We believe that as far as a macroeconomic characteristic of the tax base of VAT is concerned, it would be more appropriate to employ the value estimate of final consumption in market prices, less the tax, rather than the whole value added or GDP. Such an approach is quite fair, as the value added tax is a tax on consumption and as such it is not used for the sake of levying investment activities (the sum of the tax by capital goods is subject to reimbursement (rebate)), whose results are also reflected in the nation's GDP.
Table 13
The Dynamics of Final Consumption, Import and Collection of VAT in the Budgetary
System of RF in 2000-2008 (as% of GDP)
2000 2001 2002 2003 2004 2005 2006 2007 2008
Revenues from VAT, less revenues from YUKOS 6.20 7.17 6.96 6.66 6.27 6.17 5.62 6.13 5.13
Final consumption (less computed by tax returns VAT) n/a 59.1 61.5 61.4 60.8 60.1 60.6 60.1 60.9*
Import** 13.0 13.7 13.4 13.3 12.8 12.9 13.9 15.5 16.0
• preliminary estimate
** The share of import in GDP was calculated as correlation between values of import according to the customs statistical data and GDP in USD equivalent computed on the basis of values of the average USD/Rb. nominal exchange rate in the respective year.
Source: Rosstat, the RF Ministry of Finance, the Federal Customs Service, the IET calculations.
However, against the background of an insignificant expansion of the tax base, there was no rise in revenues to budgets from VAT in relative terms in 2008. On the contrary, the share of VAT tumbled and accounted for 5.13% of GDP, or at 1 p.p. down vs. its respective value of 2007 (at the same time, from the volume of actual VAT-generated revenues was deducted a value equaling to the amount of repayment of YUKOS's tax arrears (some 0.7 p.p. of GDP).
The main factor underpinning such a failure by the budget to collect revenues from VAT is the transition to payment of the domestic VAT on the quarterly basis. Thus, when compared with 2007, the VAT revenues over the 4th quarter of 2008 were not collected within the same year. Plus, the VAT collection statistics in the last quarter was under an adverse effect of the growing liquidity shortages in the corporate sector and an accelerated reimbursement of VAT from the budget. More specifically, in the 4th quarter 2008, the revenues from the domestic VAT, which accounted for 1.84% of GDP, were not just substantially inferior to the respective index of the prior year's analogous period (4.87% of GDP), but dwindled notably vis-à-vis the preceding quarter of 2008 (3.13% of GDP).
The fall in collection of VAT-related revenues over the year found itself under a certain impact of growth in tax rebates and extension of the list of operations exempted from VAT. Specifically, since 2008 the following operations have been exempted from VAT:
• Sales of exclusive rights on inventions, useful models, industrial samples, software, databases, topologies of integral chips, now-how, and rights for the use of the said products of intellectual activity on the basis of a license agreement;
• Conduct of R&D and technological works pertaining to creation (improvement) of new products and technologies;
• Conduct of works (delivery of services) within territories of port economic zones by their residents.
Along with that, the government specified the list of cases in which sums of received forward payments are not included in the VAT tax base: against the upcoming shipping of goods (conduct of works, provision of services) the length of the production cycle of manufacture of which is over 6 months (providing compliance with the conditions stipulated in the Tax Code of RF); against delivery of goods (works, services) which are subject to 0 VAT rate
in compliance with p.1 art. 164 of the Tax Code of RF; and against delivery of goods (works, services) which are not subject to taxation (tax exempt).
The use of the 10% preferential rate of VAT is permitted in the event of sales (importation) of medicines designated for running clinical tests (pp. 4. p. 2 art 164 of the Tax Code of RF).
The mineral tax
In 2008, the revenues from this tax collected from oil companies accounted for 94% of the overall amount of the respective revenues. Accordingly, the dynamic of overall revenues from the MT to a critical extent is determined by factors that form tax revenues from the oil sector, that is, the volume of oil output, the level of the world oil prices, and the dynamic of the USD exchange rate. Though in the second half of 2008 oil prices tumbled more than 3fold, the average annual price level was notably greater than in 2007, nonetheless. That was the main cause behind the rise in the share of the MT in GDP up to 4.11% against the backdrop of stabilization of oil output and production of gas condensate, as well as the 2008 unchanged basic rate of the mineral tax (see Table 14).
Table 14
The Dynamic of Revenues from the Mineral Tax and Main Macroindicators in 2002-2008
2002 2003 2004 2005 2006 2007 2008
MT, as% to GDP 2.55 2.50 2.99 4.20 4.07 3.63 4.11
Oil output, including gas condensate, as m.t. 379.6 421.4 458.8 470.0 480.5 491.0 488.0
The average annual price level for URALS, USD/barrel 23.43 27.07 34.57 50.20 60.89 69.43 94.04
Source: Rosstat, the Federal Tax Service's data, the IET calculations.
In addition to the average annual rise in world prices for oil, it was depreciation of the Rb. that notably affected the level of collection of the mineral tax15 - in 2008, the Rb. plunged against the USD at 3.5Rb., or 14.5%, with the greatest rate of the depreciation falling on the 4th quarter of the year, thus somewhat compensating for a rapid fall in the MT rate due to the downfall of the world prices for oil.
2.2.4. Expenditures of the Budgetary System
Main characteristics of the expenditure part of the RF budgets of all the levels are given in Table 15.
The most considerable volumes of financing were earmarked in 2008 on sections "Social policy", "National economy", "Education", "Healthcare and sport". Their share combined in the overall amount of the enlarged government's expenditures surged to 64.8% vs. 62.3% reported in 2007.
In 2008, the expenditure structure of Russia's budgetary system underwent no fundamental modifications. By results of the year it was only two sections of the fundamental classification by which expenditures were increased. Those were "National economy" (up at 0.7p.p. of GDP) and "Social policy" ( 0.4 p.p. of GDP). Meanwhile, the following sections saw a fall in the respective expenditures in shares of GDP: "Housing and utilities" (down at
15 The USD/Rb/ exchange rate is used to calculate the oil price dynamic coefficient which is employed for the purpose of calculation of the MT rate with regard to oil production.
0.6 p.p.), "Healthcare and sport" (0.5 p.p.), "General government matters" (0.4 p.p.). All the other sections remained practically unchanged.
Table 15
Expenditures of the Enlarged Government in 2005-2008 (as% of GDP)
2005 2006 2007 2008 the 2008-to-2007 rise
EXPENDITURES 31.54 31.19 34.09 33.68 -0.41
General government matters 3.49 3.07 3.54 3.10 -0.44
of which: servicing the public debt 1.11 0.74 0.53 0.46 -0.07
National defense 2.69 2.54 2.53 2.51 -0.02
National security and law enforcement 2.71 2.66 2.62 2.63 0.01
National economy 3.53 3.53 4.73 5.42 0.69
Housing and utilities 2.18 2.35 3.34 2.77 -0.57
Environment 0.10 0.09 0.08 0.08 0.00
Education 3.71 3.84 4.07 4.01 -0.06
Culture, cinematography and mass media 0.71 0.70 0.75 0.75 0.00
Healthcare and sport 3.69 4.00 4.20 3.73 -0.47
Social policy 8.74 8.40 8.24 8.68 0.44
Interbudgetary transfers X X X X X
Source: the RF Ministry of Finance.
Like in the prior years, a positive development is contraction of the share of expenditures on servicing the public and municipal debts.
In all likelihood, in the conditions of a drastic fall in tax revenues and facing the need to tame inflationary processes and to lower risks of instability of public finance, the proportion of expenditures in the 2009 budget of the enlarged government will be shrinking, but the process should be coupled with compulsory modifications in reserves of financing in favor of anti-crisis expenditures.
Already today the anti-crisis nature of the 2009 budget has manifested itself in reallocation of federal expenditures (according to amendments to the 2009 federal budget considered at the government meeting on March 19, 2009, it was proposed to cut the earlier approved appropriations by Rb. 943.3bn) in favor of financing of priority avenues of the anti-crisis program approved by the RF government. Specifically, it is planned to spend Rb. 1.61trln on measures on stabilization of the financial market, support of certain sectors of the economy, and social support of the population. The banking system is going to receive an additional government support package worth a total of Rb. 300bn.; the agrarian sector is to receive Rb. 45bn via Rosselkhozbank and another 25bn via JSC "Rosagrolizing", and 17bn. in subisidies to regional budgets to reimburse for the agrarian producers' interest on loans; small businesses will receive Rb. 6.2bn; JSC Russian Railways - 50bn; automakers - 39bn; and the military and industrial complex - 70bn.
These measures have not come out of the blue - they were implemented to some degree over recent years. But in the present circumstances they formed the Schwerpunkt for the government. Hence, the attempt of a comprehensive remedy to the pressing challenges in the noted areas. But these measures are somewhat late already, and they are not preventive ones,
as the production slump and the fall in entrepreneurial activity have been already there. It is unlikely that the government would be able to reverse the trend, even by means of additional infusions of public funds, while there are no guarantees of their efficient use, but it is quite real to cushion the fall.
As concerns the social component of the anti-crisis package, it is intended to carry out pro-active employment policy measures (with Rb. 43.7bn allocated to this effect), raise unemployment benefits (Rb. 33.9bn), use the maternity capital to repay mortgage loans (Rb. 26.3bn). As a compensation for thus missing revenues, the state extrabudgetary funds should receive Rb. 388.5bn and the RF Subjects Rb. 150bn in additional interbudgetary transfers.
At the end of the day, the aggregate volume of the federal budget expenditures grew at Rb. 667.3bn. vis-à-vis the initially approved volume and now accounts for Rb. 9.69trln. There is a great probability that such an expenditure reallocation in favor of implementation of priority measures of support of the real sector and the population will be noted through the whole year of 2009 on the level of regional budgets, too. Hence, a question arises as to which expenditures will be axed down the road.
The comparative analysis of the functional structure of the enlarged government's expenditures in the OECD countries and RF presented in Table 16, allows noting that reserves for such an exercise should be looked for across such sections as "Housing and utilities" (in Russia, these expenditures are on average twice as high as in the OECD countries), "National defense" and "National security". It goes without saying, in the conditions of an objective deterioration of the criminogenic situation in the country, one should exercise a great deal of caution while scaling back expenditures on national security and law enforcement and be at pains to compensate for them by bolstering efficiency of the use of the remaining budgetary funds.
Table 16
Comparative Analysis of the Functional Structure of expenditures of the Enlarged Government in the OECD Countries and in RF, as% to GDP
Other OECD countries
RF OECD countries (averaged over the period of 2003-2007) (averaged over the period of 2003_2007)_
2005 2006 2007 2008 25 EU countries UK France Germany Bulgaria Czech Republic Romania Poland Hungary Canada Japan S. Korea USA
GDP per capita, USD .m. (2007) Expenditures, total 5.3 31.56 6.9 31.49 9.1 34.09 11.8 33.68 32.6 47.0 35.7 43.3 32.7 53.0 34.4 46.4 5.0 39.5 16.2 44.8 7.7 34.5 10.7 43.3 13.4 50.0 38.5 39.9 33.6 37.4 24.8 29.5 45.5 36.7
General government matters National defense 3.49 2.69 3.10 2.57 3.54 2.53 3.10 2.51 6.4 1.6 4.3 2.5 7.2 1.9 5.7 1.0 5.5 2.0 4.9 1.5 3.7 2.5 6.1 1.2 9.3 1.3 7.8 1.0 5.8 1.0 3.6 2.6 4.8 4.2
National security and law enforcement National economy 2.71 3.54 2.68 3.57 2.62 4.73 2.63 5.42 1.8 3.9 2.5 2.9 1.3 3.0 1.6 3.6 2.9 5.0 2.2 7.4 2.2 5.9 1.7 3.9 2.1 6.1 1.6 3.4 1.4 4.0 1.4 7.4 2.1 3.7
Environment 0.10 0.09 0.08 0.08 0.7 0.7 0.8 0.6 1.0 1.1 0.2 0.6 0.7 0.5 1.3 0.9 0.0
Housing and utilities 2.18 2.37 3.34 2.77 1.0 1.0 1.8 1.0 0.8 1.4 2.0 1.3 0.9 0.9 0.7 1.3 0.6
Healthcare 3.69 4.04 4.20 3.73 6.5 6.8 7.2 6.4 5.1 7.1 3.8 4.4 5.4 7.1 7.0 3.5 7.5
Culture, sport, leisure activities Education 0.71 3.71 0.71 3.88 0.75 4.07 0.75 4.01 1.1 5.3 1.0 6.0 1.5 6.1 0.7 4.0 0.8 4.1 1.3 4.9 0.7 3.8 1.0 5.9 1.6 5.8 0.9 7.2 0.2 3.9 0.8 4.8 0.3 6.3
Social policy 8.74 8.48 8.24 8.68 18.7 15.6 22.2 21.8 12.2 13.2 9.7 17.2 16.8 9.4 12.1 3.2 7.0
Source: data of the RF Ministry of Finance, Eurostat, OECD.
2.2.5. Assessment of Budget Parameters without Regard to the Contribution of the Oil-and-Gas Sector and the Impact of the World Oil Prices
To have their national budgets balanced, countries whose tax revenues to a significant degree depend on mineral exports and prices on the world markets for minerals, have found it fundamentally important to single out the structural component and the market component in the tax burden for the sake of assessing market risks facing the government budget and margins of lowering of the tax burden on their economies.
The market component comprises a fraction of tax revenues which is determined by a favorable state of affairs on external markets, while the structural component reflects the level of taxes collected to the budgetary system under average multiyear parameters of the situation in the foreign trade area.
There exist various approaches to identification of the structural and market components of the tax burden. Whereas the dynamic of the world oil prices constitutes one of key factors of the market component of the dynamics of Russia's GDP and tax revenues, accordingly, one of possible ways is to find the market component is singling out oil-and-gas revenues in the budget. The RF Ministry of Finance has employed this approach since 2007 In a nutshell, it rests upon the division of taxes into "structural" and "market" ones. In this particular case it is taxes that appear directly dependent on prices for oil and gas that are attributed to "market" ones. An undisputable advantage of this approach is simplicity and the methodological certainty of the necessary calculations. Meanwhile, the approach in question does not take into consideration an impact the situation in the foreign trade area has on volumes of collection of revenues from other taxes. For example, it is pretty clear that the profitability rate of the oil-and-gas sector depends on price levels for oil and gas, which in turn affects the level of collection of revenues from the corporate profit tax.
The aforementioned drawback is overcome by employing a fundamentally different approach towards singling out the structural and market components of the tax burden. The approach is based upon singling out the structural and market components in revenues across major taxes, rather than on singling out two groups of taxes. The approach implies econometric modeling of correlation between GDP and tax revenues, and major market factors16, such as:
- the domestic demand factors (real investments in fixed assets and the population's real disposable incomes),
16 The equilibrium employed to single out the structural and market components of GDP takes the following form Yt = a0 + a, Re Vt + a2 Inv, + a3 PQ1Lt + a4 REER, + £,
where Y - GDP; C - consumption; Rev - the population's real disposable incomes; Inv - investments in fixed assets;
POIL - the nominal price level for URALS (as USD/barrel); REER - the real effective exchange rate of the Rb. (basing on CPI); NEX - net export.
Variables Yt, Rev, u Inv, in real terms - in prices of the 4th quarter 1998 r., the deflator- CPI. As a result, we have got the following correlation: Yt = 239,75 +1,38 * Invt + 8,69 * POIll + 3,19 * REERt + wt (apparently the positive sign of the coefficient under variable REER is explained by the incomplete specification of the model).
The present analysis employed quarterly data of Rosstat and the International Financial Statistics database over the period between 1999 and 2008. 66
- external factors (the world price for oil),
- other factors (the Rb. real effective exchange rate, random factors that steer short-term fluctuations, etc.)
First we singled out the structural and market components of GDP. The structural GDP is a volume of GDP that might be obtained under average values of explanatory variables, while any biases from the average level constitute the market component of GDP. To estimate the structural component of GDP, we calculated smoothed value of explanatory variables of the model. Proceeding from the different nature of the respective variables, to smooth such factors as real investment in fixed assets and real effective exchange rate, we employed the Hodrick-Prescott filter. The average multiyear price for oil was calculated by the moving-average method over the period of 25 years.
On the basis of thus received coefficients we calculated shares of the market GDP explained by the aforemetioned different factors (see Table 17).
Table 17
The Dynamic of the Structural and Market GDP Estimated over the Period of 2000-2008
2000 2001 2002 2003 2004 2005 2006 2007 2008 (est'd)
Structural 98.5 97.1 97.1 96.2 90.3 86.1 83.5 81.0 78.6
GDP, as% of
GDP
Market GDP, 1.5 2.9 2.9 3.8 9.7 13.9 16.5 19.0 21.4
as% of GDP
Including factors affecting the market GDP dynamic:
Domestic de- 1.2 1.6 -0.9 -1.1 0.0 0.0 0.8 0.9 1.0
mand, as% of
GDP
Oil prices, as% 1.0 1.2 3.1 4.6 8.1 12.6 14.0 16.1 18.1
of GDP
Other factors, -0.7 0.1 0.4 0.4 1.6 1.3 1.7 2.0 2.3
as% of GDP
For reference: 7305.6 8943.6 10817.5 13243.2 17048.1 21625.4 26903.5 33113.5 41540.4
The nominal volume of GDP, as Rb. bn
The real vol- 110.0 105.1 104.7 107.3 107.2 106.4 107.7 108.1 105.6
ume of GDP, as% to the prior
year_
Source: Roststat, IMF (IFS database, CD-ROM edition, December 2008), the IET calculations.
Tax revenues to Russia's budgetary system were split into the structural component and the market one on the basis of earlier obtained proportions of the structural and market GDP, and with the use of the calculation of the share of revenues that depend on oil prices (in the frame of the building of pair regressions models of the respective tax receipts from nominal oil prices).
Table 18
The Dynamics of the Structural and Market Components of Tax Revenues to the Budgetary System of RF17, as Estimated over the Period of 2000-2008, as% to GDP
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 (est'd)
Tax revenues to the federal budget
Revenues, total 10.6 14.5 16.3 18.9 18.2 18.6 22.3 22.0 21.3 21.2
Structural component 10.9 10.6 10.9 15.0 14.0 11.8 12.3 12.2 13.7 14.4
Market component, including -0.3 3.9 5.5 3.9 4.2 6.8 10.0 10.0 7.6 6.8
domestic demand 0.0 0.2 0.3 -0.1 -0.3 0.0 0.0 0.2 0.1 0.1
oil prices 0.0 3.8 5.1 4.0 4.4 6.4 9.7 9.5 7.3 5.6
other factors -0.3 -0.1 0.0 0.1 0.1 0.4 0.3 0.4 0.2 0.1
Tax revenues to the budget of the enlarged government
Revenues, total 31.4 35.7 35.7 35.6 34.6 35.3 36.9 36.9 36.8 35.7
Structural component 32.0 30.2 29.9 32.6 31.0 28.2 26.3 25.9 28.2 29.0
Market component, including -0.6 5.5 5.8 3.0 3.6 7.1 10.6 11.0 8.6 6.7
domestic demand 0.0 0.4 0.6 -0.2 -0.4 0.0 0.0 0.3 0.2 0.1
oil prices 0.0 5.3 5.2 3.1 3.8 6.5 10.2 10.1 8.1 6.4
other factors -0.5 -0.3 0.1 0.2 0.1 0.6 0.5 0.6 0.4 0.2
Personal income tax
Revenues, total 2.4 2.4 2.9 3.3 3.4 3.4 3.3 3.5 3.8 4.0
Structural component 2.4 2.3 2.8 3.2 3.1 3.0 2.8 3.1 3.1 3.3
Market component, including 0.0 0.1 0.1 0.1 0.3 0.4 0.5 0.4 0.7 0.7
domestic demand 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1
oil prices 0.0 0.0 0.1 0.1 0.2 0.4 0.4 0.4 0.7 0.6
other factors 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.0 0.0 0.0
Uniform social tax 18
Revenues, total - - 5.8 7.0 6.6 6.3 2.0 2.0 2.0 1.9
Structural component - - 6.0 6.8 6.4 5.7 1.7 1.7 2.8 2.7
Market component, including - - 0.2 0.2 0.2 0.6 0.3 0.3 -0.8 -0.7
domestic demand - - 0.1 0.0 -0.1 0.0 0.0 0.0 0.0 0.0
oil prices - - 0.1 0.2 0.3 0.5 0.2 0.2 -0.7 -0.7
other factors - - 0.0 0.0 0.0 0.1 0.0 0.0 -0.1 0.0
Corporate profit tax
Revenues, total 4.6 5.4 5.7 4.3 4.0 5.1 6.2 6.2 6.6 6.0
Structural component 4.5 5.3 5.6 4.1 3.6 4.5 5.3 6.1 4.8 4.1
Market component, including 0.1 0.1 0.1 0.2 0.4 0.6 0.8 0.1 1.8 1.9
domestic demand 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.1 1.3 1.5
oil prices 0.1 0.1 0.1 0.2 0.3 0.6 0.7 0.1 1.3 1.5
other factors 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.0 -0.8 -0.7
Value added tax
Revenues, total 5.9 6.2 7.2 7.0 6.7 6.3 6.8 5.7 6.9 5.1
Structural component 5.8 6.1 7.0 6.7 6.1 5.5 6.0 5.6 7.2 5.3
Market component, including 0.1 0.1 0.2 0.3 0.6 0.8 0.9 0.1 -0.3 -0.2
domestic demand 0.1 0.1 0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0
oil prices 0.1 0.1 0.1 0.3 0.5 0.7 0.7 0.1 -0.3 -0.1
other factors -0.1 -0.1 0.0 0.0 0.1 0.1 0.1 0.0 0.0 -0.1
Note. «-» - UST was not levied.
Source: the RF Ministry of Finance, Rosstat, IMF (IFS database, CD-ROM edition, December 2008), the IET calculations.
The rising oil prices made a great contribution to the market component of tax revenues to the budget of the enlarged government (Table 18): in 2006, the market component secured revenues to the said budget at a level of 11.0% of GDP (including 10.1% of GDP secured by
17 For the purposes of our calculations we include in the tax revenues of the federal budget and the budget of the enlarged government over the period in question compulsory pension insurance contributions, revenues from foreign trade, and revenues of target extrabudgetary funds.
18 Since 2005 the data are given without regard to the compulsory pension insurance premiums. 68
oil prices alone) and 10.0% of GDP - to the federal budget (the contribution of oil prices equaling 9.5% of GDP). The market component has been on decline since 2007, which can be attributed to a gradual exhaustion of the role market factors played in the dynamic of aggregate revenues. Thus, in 2007, the market component of the enlarged government's revenues accounted for 8.6% of GDP and 7.6% of the federal budget, while the respective figures in 2008 were 6.8% and 6.7% of GDP.
Such logic of the post-component division is also applicable to the personal income tax. As demonstrated by Table 18, the 2006 proportion of the market component of PIT was 0.4% of GDP, while in 2007 and 2008 it was 0.7% of GDP. In all likelihood, such a dynamic is explained by growth in the population's incomes in the conditions of a favorable situation in the foreign trade area in 2007, on the one hand, and the impact of the global financial downturn in late-2008, on the other hand.
The market component of the revenues from the uniform social tax in 2006 was 0.3% of GDP (of which 0.2% were backed by a positive dynamic of oil prices); in 2007 and 2008, the sign of the component has become negative (-0.8 and -0.7% of GDP, respectively), which can be explained by the regressive scale of the tax (in other words, with salaries and wages rising, the effective rate of the tax declines), and, accordingly, the growing role the structural factors played in tax revenues from the UST (2.8 and 2.7% of GDP, respectively) over the period in question.
Let us note that the 2006 proportion of the market component of tax revenues from the corporate profit tax was not a huge one - it accounted for 0.1% of GDP, with the bulk of the revenues secured by rising oil prices and factors of the domestic demand. By 2008, in contrast, it had soared up to 1.9%, which can be attributed to oil price spikes between the second half of 2007 and the first half of 2008 (see Fig. 18).
A The price for BRENT in real terms (2007=100) B The price for BRENT in nominal terms
Source: IMF (IFS database, CD-ROM edition, October 2008), the authors' calculations.
Fig. 18. Dynamics of nominal and real (2007 prices) price on Brent crude oil (bar/dol) annualized, 1999-2008
Table 18 shows that as in the case of the UST, market factors had minor effect on VAT. More specifically, in 2006, the market component of revenues from this particular tax ac-
69
counted for a meager 0.1% of GDP, while in 2007 and 2008 its sign is negative (-0.3% and 0.2%, respectively). This can be explained by a greater role played by structural factors in the dynamic of VAT-based revenues - namely, the aforementioned recently promulgated modifications in the legislation that concern the tax in question.
Recapping on the analysis of the structural and market components of tax revenues to Russia's budgetary system over the period of 1999-2008 allows the following conclusions:
As evidenced by Table 18, the structural component of tax revenues had been mostly on the rise through 2002-2003. Post-2003, the favorable state of affairs in the foreign trade area exerted a positive influence on tax revenues and, accordingly, the structural component was on decline, while the market one was rising through 2006 when it hit its peak value. Then, fueled by an advancing growth in investment, the factors of the domestic economic activity resumed playing a greater role.
With account of the above, overall, between 2002 and 2008 the market component of tax revenues to the budget of the enlarged government rose from 3.0 go 6.7% of GDP, while that of tax revenues to the federal budget soared from 3.9 go 6.8% of GDP. Similarly, the market component of revenues from PIT increased from 0.1 up to 0.7% of GDP, while that of revenues from the corporate profit tax surged from 0.2 up to 1/9%. The favorable dynamic of the world prices for energy sources has had practically no effect on such taxes as UST and VAT, in respective revenues from which a more major role was played by structural factors, primarily modifications of the tax law and peculiarities of the functioning of these taxes.
In conclusion, it appears appropriate to once again focus on main trends of, and outlooks for the budgetary system of the Russian Federation.
1. Driven by the unfolding crisis developments in the national economy, the progressing decline of the economic agents' financial standing has inevitably engendered a fall in the budget revenues and called in question the financial stability of the national budgetary system as a whole. The revenues of the enlarged government tumbled at 1.7 p.p. of GDP vs. the 2007 figures. The fall was determined primarily by revenues from tax collection that were drying out (at 1.8 p.p. of GDP). The major factor of changes in the tax revenues dynamic vs. 2007 was the domestic VAT, the payments of which have become quarterly, effective as of the-early 2008. This factor was behind tax revenues spikes in January, April, July and October and the subsequent 2-month decline in revenues (when in the absence of the VAT-based revenues, the government continued to reimburse VAT to economic agents) compared with the respective period of 2007.
2. One should note the direction of the RF Ministry of Finance's 2008 policy, which is aimed at loosening the dependence of revenues to the national budgetary system on the world oil prices. More specifically, the debate between the RF Ministry of Finance and the RF Ministry of Economic Development in the summer of 2008 on the issue of lowering the rate of either VAT, or the corporate profit tax was won by the former agency, and the CPT rate was lowered to 20% since 2009. In the current conditions, with account of the existing trend to decrease of the structural component of revenues to the budgetary system (i.e. a component that does not depend on world oil prices), it is imperative to at least retain the quality of administration of base and rates of the taxes that to the least degree directly depend on the world oil prices.
3. In 2008, sky-high windfall revenues enabled the government to stock up a substantial financial reserve in the form of budgetary surplus. That in turn made it possible not only to
fulfill in full the government's expenditure obligations, but to replenish the Reserve Fund and the National Welfare Fund whose volume combined ultimately accounted, respectively, for 9.7% and 6.2% of GDP in Rb. equivalent, as of the early-2009.
4. While having plummeted in shares of GDP (at 0.4 p.p., down to 33.7% of GDP), expenditures of the enlarged government's budget, nonetheless, have decreased to a far less degree than its revenues. That has resulted in a substantial fall of the budgetary surplus at 1.3 p.p. - down to 4.8% of GDP. The situation with execution of expenditure obligations on the cash basis was still unsatisfactory over the financial year. While there was noted a slight progress in this area vs. the 2007 performance (by results of the first half- year the execution on the cash basis grew from 33.2% in 2007 r. to 38.7% in 2008), the tendency to growth in expenditures by the end of a year remained unchanged.
5. The negative backdrop in the foreign trade area and falling volumes of revenues from domestic taxes determine the need for pursuance a more conservative budgetary policy rested upon a reasonable balance between volumes of undertaken obligations and possibilities for their financing. The comparative analysis of the functional structures of the enlarged government in the OECD countries and RF allows noticing that reserves of cutbacks should be sought in such sections as "Housing and utilities" (in Russia, these expenditures are on average twice as high as in the OECD countries), "National defense" and "National security". It goes without saying, in the conditions of an objective deterioration of the criminogenic situation in the country, one should exercise a great deal of caution while scaling back expenditures on national security and law enforcement and be at pains to compensate for them by bolstering efficiency of the use of the remaining budgetary funds. Meanwhile, given that the crisis has already imposed certain budget constraints, a fully justified move would be to profoundly optimize military expenditures with a subsequent use of thus saved funds to finance the economy.
6. Notwithstanding the appropriateness of pursuance of a more conservative budgetary policy, the RF government proposed amendments to the 2009 Act on federal budget to bolster expenditure obligations as a means of financing anti-crisis measures.
When compared with the current version of the 2009 federal budget Act, the projected volume of revenues should fall from Rb. 10.93trln (21.23% of GDP) to Rb. 6.71trln. (16.6% of GDP). Over 60% of the decline in revenues fell on the contraction of revenues from MT and export customs duties that form the oil-and-gas revenues to the budget. In addition to the fall in the oil-and-gas revenues, it is the corporate profit tax, VAT, the personal income tax and UST, revenues from which should fall at most, which will be determined by the worsening state of Russian corporations, nose-diving business activity, rising unemployment and falling incomes from labor and entrepreneurial activities.
The anti-crisis nature of the budget manifests itself in the reallocation of expenditures (it was proposed to scale back the earlier approved appropriations at Rb. 943.3bn) in favor of financing the priority avenues of the anti-crisis program approved by the RF government. Specifically, it is planned to spend some Rb. 1.61trln on measures on stabilization of the financial market, support of industry branches, and on the social support of the population.
These measures have not come out of the blue - they were implemented to some degree over recent years. But in the present circumstances they formed the Schwerpunkt for the government. Hence, the attempt of a comprehensive remedy to the pressing challenges in the noted areas. But these measures are somewhat late already, and they are not preventive ones,
as the production slump and the fall in entrepreneurial activity have been already there. It is unlikely that the government would be able to reverse the trend, even by means of additional infusions of public funds, while there are no guarantees of their efficient use, but it is quite real to cushion the fall.
The overall volume of expenditures has ultimately increased at Rb. 667.3bn vs. the earlier approved volume and currently accounts for Rb. 9.69trln (24% of GDP). It is for the first time in the 2000s that the federal budget will run a deficit of Rb. 2.98trln. (7.4% of GDP). Because the deficit will be financed with the help of resources from the Reserve Fund, the inflationary pressure on the Rb. from the increase in expenditures will unlikely to be a significant one, as additional funds will be pouring in the economy against the background of the crisis in demand, when the value of cash grows significantly. Already now there is noted a downfall or stabilization of retail and producer prices across a number of group of goods, so an even spending of additional budgetary resources should not engender an explicit inflationary effect.
7. The government's refusal to continue the practice of drafting a three-year budget is particularly noteworthy. Under the present uncertainty, it is impossible of course to ensure a high quality of the three-year budgetary planning. But one should realize that a comeback to the annual budget planning constitutes a step back on the path towards development of the strategic budgetary planning, as it derails the public appreciation of the government's long-term budgetary and fiscal policy and does not allow transition to medium-term public contracts, nor it helps lay down the foundation for enhancement of transparency of financial fundamentals of the public investment expenditures.
2.3. Intergovernmental Relations and Subnational Finances
2.3.1. Major Trends in Relations between Budgets of Different Levels
Major trends in the relations between governments of different levels are reflected in the structure of revenues and expenditures of the RF consolidated budget. Table 19 presents the data, reflecting the share of tax revenues and expenditures of the Russian Federation Subjects in the relevant indicators of the Russian consolidated budget.
Table 19
The Share of Some Indicators of Budgets of the Federation Subjects in the Consolidated Budget of the Russian Federation in 1992-2008 (%)
Tax revenues 44.2 53.1 53.4 47.6 49.5 53.1 56.6 49.2 43.5 37.4 35.1 39.6 36.1 30.9 31.8 33.9 33.2 Expenditures 34.0 40.3 37.7 43.4 45.4 48.1 54.1 51.9 54.4 54.2 49.3 50.0 50.8 49.5 43.4 48.3 49.2
Source: Federal Treasury, IET estimates.
Reviewing the data of Table 19, one should note the following. During the period of 1999-2005, a significant centralization of tax revenues was observed, while the share of this type of revenue of the Russian Federation Subjects in the consolidated budget has decreased from 56.6% to 30.9%. At the same time, in 2006-2007 that indicator started to increase slightly, what reflected some adjustment of the trend towards centralization of tax revenues. It should be noted, that this adjustment was not due to the relocation of tax sources between the
levels of budgetary system, but rather due to the more rapid growth of tax revenues allocated to the regional budgets, as compared with tax revenues of the federal budget. In 2008, this share has somewhat decreased, but still remained at a significantly higher level than the indicator of 2005. Herewith, the share of regional expenditures in the consolidated budget of the Russian Federation continued its upward trend, approximating the indicators of 2002-2005.
There were no significant changes in the structure of tax revenues of the RF Subjects. As before, still more than half of tax revenues are obtained from two types of taxes: corporate profit tax (the share has decreased by 2.4%, to the amount of 40%) and personal income tax (its share in the total tax revenue, by contrast, has grown from 35% in 2007 up to 38% in 2008). The share of these taxes in tax revenue in the budgets of the Russian Federation Subjects has not changed and amounted to 78% (against 77.3% a year earlier). Analysis of the basic tax revenues in terms of GDP share allows to note the following (see Table. 20). Proceeds from personal income tax continued the trend of increasing, having reached 4.0% of GDP (3.8% in 2007). Corporate income tax revenue has demonstrated a slight decline from 4.6% to 4.2% of GDP. Regional budget revenues, generated by excise taxes, in the past year (as in a number of preceding years) have decreased and reached 0.46% of GDP (0.54% in 2007). Property tax share has somewhat decreased (from 1.25% to 1.19% of GDP). At the same time, the growth was recorded in regard to royalty on natural resources, from 0.23% to 0.25% of GDP and from small businesses taxation (from 0.37% to 0.39% of GDP).
Таблица 20
Tax Revenues in the Budgets of the RF Subjects in 2005-2008 (% in GDP)
2005 2006 2007 2008
Tax revenues, including: 10.32 10.24 10.97 10.56
Corporate profit tax 4.42 4.32 4.64 4.22
Personal income tax 3.27 3.46 3.84 4.01
Excise tax on goods, sold in the RF territory 0.68 0.60 0.54 0.46
Aggregate income tax 0.33 0.36 0.37 0.39
Property tax, including 1.17 1.16 1.25 1.19
Business property tax 0.70 0.75 0.80 0.78
Royalty 0.25 0.25 0.23 0.25
Source: Federal Treasury, authors' estimates.
In 2008 the trend to a reduction in the inter-regional irregularity in the tax revenues of the RF Subjects on a per capita basis was sustained. The corresponding coefficient of variation value has significantly decreased from 96.7% in 2007 to 89.1% in 2008. It is worth noting, that in 2006-2008 there were no major changes in the allocation of revenue sources between government levels. Therefore, the reduction of irregularity in the distribution of tax revenues was based on the natural economic processes. This can be explained as follows.
First, the share of personal income tax in the tax revenue of the RF Subjects has significantly increased, that tax base (as opposed to corporate income tax base) is fairly evenly distributed across the regions. Second, the data obtained confirm the hypothesis put forward in previous surveys. Under this hypothesis, there are two factors in the reduction of the interregional differentiation across the major socio-economic indicators: rapid economic growth in
the number of regions, that are currently getting considerable donations, and the migration of people from unpromising areas of the country to the rapidly developing economic centers. As a result of the interaction of those processes, the currently underdeveloped regions will either «catch up» with their economically developed neighbors, or will lose nearly all their population. In both cases, the variation coefficient of tax revenues per capita across the RF Subject should be reduced. And third, in the last months of 2008, the crisis in Russia was aggravating, which especially affected the most economically underdeveloped regions. As a result, tax revenues in economically developed Subjects, if not declined in nominal terms in 2008, have grown to a much lower level than could have been reached under the more favorable economic conditions. Apparently, this factor will be the determining one for the changes in interregional differentiation in 2009.
In real terms, tax revenues of the consolidated budgets of the RF Subjects have grown by 7%, significantly lower than the indicator of 2007 (17.4%). The maximum growth in tax revenues in the preceding year was recorded in 2008 in Chukotka Autonomous Okrug, the Republic of Dagestan and in Perm Region. At the same time, in six regions this type of revenue has reduced in real terms19. The maximum decline was recorded in the Republic of North Ossetia, Krasnoyarsk Krai and Murmansk Region. In 2008, two regions with the high budget level, Krasnoyarsk Region and Moscow have been enclosed in that group, which in 2007 demonstrated a substantial increase in tax revenues, and Moscow has been a leader in that indicator.
In the majority of regions, the decline in revenues is largely based on the decrease in payments of corporate income tax. Thus, the corporate income tax revenues have fallen in real terms in the Krasnoyarsk Krai by 21.1%, in the Murmansk Region by 24.5%, in Moscow by 14.7%. Herewith, in Krasnoyarsk Region and in Moscow the share of corporate income tax in the tax revenues of the consolidated budget of the Subject has significantly exceeded the average countrywide level (42.3%) and amounted to 56.6% and 61.3% accordingly.
In 2008, for the first time since 2003, there was recorded a cumulative deficit of consolidated budgets of the Federation Subjects, which amounted to 0.13% of GDP. This deficit resulted from faster growth in expenditures, as compared with an increase in income as a percentage of GDP. Therefore, at the level of regions, the trend of recent years to increase public expenditures at a rapid pace was sustained. It is also important to note that if in 2007 the number of the regions with the budget surplus has exceeded the number of regions with the budget deficit (48 and 36, respectively), whereas in 2008, the situation was different: 45 regions have completed the fiscal year with a deficit and only 39 with a surplus (see Table 21). Herewith, the Subjects with a high budget level, such as Moscow and St. Petersburg had the largest budget surplus in 2007, whereas in 2008, by contrast, they have been the leaders in terms of the deficit volume.
It should be noted, that the above annual dynamics of the major indicators in the regional budgets revenue sources do not fully reflect the situation at the end of 2008. To make more adequate assessment of the impact of economic crisis on the formation of budgets of the RF Subjects, it is necessary to review the changes of the last months of the year in more detail.
19 Moscow, Krasnoyarsk, Murmansk region, Republic of North Ossetia, Kamchatka Krai and the Republic of
Kalmykia.
Table 21
Russian Regions Grouped as per Budget Deficit/Surplus
2007 2008
No of regions RUR, bln No of regions RUR, bln
Deficit of the RF consolidated budget 36 87,6 45 135.4
Surplus of the RF consolidated budget 48 126,0 39 80.9
Source: Federal Treasury, IET estimates.
Since November 2008, the economic crisis began to significantly affect the revenues of regional budgets. Initially, the reduction of revenue has especially affected economically developed Subjects of the Russian Federation (Tyumen Oblast, Orenburg Oblast, Khanty-Mansiysk, Chelyabinsk Region, etc.), whose revenue is largely dependent on the financial standing of the large taxpayers, engaged in the metallurgical, oil, chemical and other industries (see Table 4). In November-December 2008, tax revenues of the consolidated budget of the Russian Federation have declined in nominal terms in 34 regions, as compared with the level of 2007. Herewith, a significant decline (over 10%) was observed in 14 regions.
Table 22
Regions, which Revenues Have Especially Decreased as a Result of the Economic Crisis at the End of 2008
r . Tax revenues decline in nominal terms in November_December 2008 in% against November-December 2007
Tyumen Region -33.1
Orenburg Region -25.5
Khanty-Mansiysk Autonomous Region -23.6
Chelyabinsk Region -22.0
Republic of Sakha (Yakutia) -21.9
Vologda Region -21.4
St. Petersburg -20.8
Republic of Tatarstan -20.1
Belgorod Region -17.3
Ulyanovsk Region -15.4
Sverdlovsk Region -15.3
Murmansk Region -14.6
Krasnoyarsk Region -11.5
Udmurt Republic -10.0
Source: Federal Treasury, IET estimates.
However, it can be assumed that as the economic crisis is expanding, its negative impact on sub-national budgets will involve more and more regions, with both, high and low economic development levels.
As in the analysis of annual trends, the above reduction in tax revenues was primarily based on the reduced revenue from corporate income tax proceeds, started at the end of the year. In November-December 2008, corporate income tax proceeds in the consolidated budget of the Russian Federation Subjects in nominal terms have decreased by 30.5%, as compared with the relevant period in 2007. the Downfall in revenues has affected virtually all Subjects of the Federation (65 regions).
Summarizing the analysis of revenues of regional budgets, it can be concluded, that the crisis provoked a substantial reduction in revenues of nearly all the Subjects of the Russian Federation. In some regions, receiving a permanent financial support from the federal budget, the situation is better. However, their situation is directly dependent on the sustainability of federal finances. It can be assumed that the execution of the Federal Subjects budget revenue will remain quite tense in January-April of 2009, until the refund of the over-paid corporate income tax in 2008. At the end of 2008, there aroused grounds for the softening of the RF Subjects revenues in the medium term. We are speaking of, first of all, of the «smooth devaluation», which is likely to positively affect the profits of exporting businesses. The weakening ruble rate and the end of the period of return of the overpaid corporate income tax will result in the stabilization of regional income, starting from May 2009. Moreover, in the absence of significant improvement of external economic conditions and a suspension of the crisis deepening in the economy, the proceeds of the Russian Federation will be substantially lower than the income in 2008 and within 2009-2010. Therefore, the majority of the Subjects of the Russian Federation will need to review their expenditure liabilities on the basis of the amended income.
Let us consider now the quantitative parameters of financial assistance to the regional budgets from the federal budget in 2008. As one can see from the presented in Table 5 data, in 2002-2006 there was observed a trend to a gradual reduction of the amount of federal financial resources, allocated to subnational budgets (from 3.03% to 2.17% of GDP). In 2007, this trend was suspended and the amount of intergovernmental transfers increased to 2.57% of GDP. In 2008, the growth in the share of funds, allocated from the federal budget for financial assistance to the regions was continued, and this indicator accounted to 2.64% of GDP.
A more detailed analysis of the structure of intergovernmental transfers allows to note the following. In 2008, donations to Regions for the adjustment of budget insufficiency from the Fund of Financial Support to the Regions (FFSR) in terms of GDP share remained at the level of 2007 (0.79% of GDP). Therefore, in 2007-2008 downgrading of FFSR volume as a share of GDP, observed in the period from 2002 to 2006 has stopped. Naturally, this fact should be assessed as positive. It seems that among all types of intergovernmental transfers, the FFSR should be given priority, as the allocation of its funds is performed in accordance with the relatively transparent procedures. Herewith, it should be noted, that the share of donations for the adjustment of the budgetary sufficiency in the total volume of transfers in 2008 has remained virtually unchanged as compared with 2007 and amounted to about 30%.
By the RF Government Decree № 593, dated August 12, 2008, some amendments have
been introduced to the new method of donations distribution from the Fund for Financial Sup-
20
port to the Regions , which have entered into force on January 1, 2008. It is worth reminding, that as a result of the new way of tax estimates procedure, introduced in 2008, fiscal capacity of many regions has undergone significant changes. To avoid abrupt negative variations in the amount of subsidies, allocated for the Subjects of the Russian Federation, the new method of grants distribution from FFSR provided for a mechanism of compensation. The scope of compensation to the region for losses during the transfer to the new method depends on the regions performance indicators in terms of arrears redemption and an increase in revenue to the budget of the Russian Federation Subject (this is one of three requirements, set forth in the
20 For details of the donations allocation from FFSR, effective from 2008, see the "Russian economy in 2007: Trends and Prospects". M., IET, 2008. PP. 164-167. 76
new methodology for the distribution of donations from the FFSR). It was proposed to allocate the donations for partial compensation to the Russian Federation Subjects for the reduced donations for their budget sufficiency adjustment as the level of 2007, basing on bringing the level of subsidies up to 100% in 2008 (95% in 2009, 90% in 2010, to 50% in 2011 and further years) on condition of performance of 2 or 3 requirements, to 90% (80% in 2009, 75% in 2010, in 2011 and subsequent years), on condition of performance one requirement and up to 85% (75% in 2009, 70% in 2010, 30% in 2011 and subsequent years) in case of failure to fulfill any requirements.
Amendments to the methodology, made in August 2008, first, have limited term of the said compensation mechanism (only through 2011), and second, have reduced the adjustment coefficients for 2009-2010. Since 2009, the amount of compensation is estimated on the basis of bringing the level of donations (as compared with 2007) to 90% in 2009 (80% in 2010 and 50% in 2011) under condition of performance of 2 or 3 requirements, up to 75% (to 60% in 2010, to 40% in 2011), under condition of fulfilling one requirement and to 70% (to 55% in 2010, to 30% in 2011) in case of failure to fulfill any requirements.
In 2008 the trend of recent years to increase funding from the Compensation Fund was
sustained. The total amount of subventions from this fund has been increased against 2007
21
from 0.43% to 0.51% of GDP . This trend is due to the distribution of authorities across the levels of the budgetary system and the tendency of the federal government to fund the federal challenges in full scope.
After an upsurge of the Fund for Co-financing of Social Expenditure growth from 0.04% of GDP in 2004 to 0,12% of GDP in 2005, urged by «benefits monetization» (a large share in the Fund expenditures made the subsidies for partial reimbursement of measures of social support to the veterans and other special categories of citizens), there occurred a gradual
decline in this type of transfers in 2006-2008. In 2008, the share of subsidies for co-financing
22
of social expenditures in GDP fell down by 0.01 p.p. as compared with 2007 and accounted to 0,09% of GDP. The amount of subsidies, allocated from the federal budget for the reform of regional and municipal finances has been unchanged and amounted to about 0.01% of GDP. The share of subsidies to regional budgets for the development of social and engineer-
23
ing infrastructure of the Russian Federation Subjects and municipalities remained at the level of 2007 and amounted to 0,02% of GDP.
Reduction of the share of donations for the measures to maintain the regional budgets sufficiency from 0.17% to 0.11% of GDP in 2008 should be regarded as a positive trend. Active usage of this funding mechanism aggravates the problem of «soft budget constraints». At the same time, a positive factor is the total rejection of such tool in the practice of intergovernmental fiscal relations as the transfer of funds under the terms of mutual-settlements. That tool in the inter-budgetary relations is one of the least transparent.
Reviewing the issues of financial relationship between the federal center and regions, one cannot fail to note the emergence of the new type of transfers in the Budget Code in 2008.
21 For the purposes of this survey (to ensure comparability of the data), the amount of funding from the Compensation Fund for 2008 includes not only the subventions, but also a number of intergovernmental transfers that, included in that Fund in 2007.
22 Before 2008, those subsidies have been merged into the Fund of social expenditures co-financing, since 2008, this Fund was not allocated.
23 Before 2008, those subsidies have been merged into the Fund financing for Regions development.
24
The issue under review is the Article 138.1 of the RF Budget Code , defining the concept of the federal budget subsidies from the budgets of the Russian Federation Subjects. This type of subsidy is defined as an intergovernmental transfer, addressed to the federal budget from the budget of the Russian Federation Subject for co-financing of expenditure obligations of the Russian Federation, emerging from performance of liabilities of the state authorities of the Russian Federation in cases, stipulated by federal laws.
Objectives and conditions for granting and disbursing these subsidies are set forth by agreements between the federal executive authority and the relevant supreme executive au-
25
thority of the Russian Federation Subject . The Ministry of Finance of Russia has stressed, that granting of such subsidies is the right, rather than the responsibility of regional authorities. The emergence of this type of transfer in the Budget Code should not be regarded as an attempt of «negative transfer» application at the federal level. It should be emphasized, that neither the provisions, stipulated in Article 138.1 of the RF Budget Code, nor the rules of the appropriate agreements between the Federal Center and regions, approved by the RF Government do not provide grounds for an analogy between this kind of subsidies and «negative transfers», applied at the regional level. These subsidies serve as a mechanism for increasing flexibility of the existing allocation of authority.
Since 2004, the attempts were made to increase the transparency of inter-budgetary relations. Currently, the Fund of Financial Support to the Regions and the Fund of Grants, allocated for the reform of regional and municipal finance, as well as the development of social and logistics infrastructure are allocated under the methodology, approved by the RF Government. Under the formalized method, the subsidies are estimated for social expenditures. Nevertheless, the share of intergovernmental transfers, distributed on a formalized basis, in 2008 amounted to only about 60% of the total amount of funds, transferred to the federal subjects of Russia. It should be noted, that this indicator is based on an analysis of the distribution methods of transfers from public sources26. Therefore, the assessment does not mean that the balance of the federal financial assistance to regions is allocated regardless methodological and financial feasibility studies. Thus, according to the Ministry of Russia estimates, over 95% of intergovernmental transfers are allocated on the basis of uniform methodologies, based on objective indicators, determining the need for financing. However, the methodological approaches to the allocation of transfers, provided in such cases, have not been stipulated in the open-access legal regulations.
In 2008, there continued the practice of revising the Law on the Federal Budget and Increasing the Estimated Amounts of Financial Assistance to Regions. The amount of additional (not foreseen at the beginning of the fiscal year) aid amounted to about RUR 168 billion. In GDP percentage, the amount of additional assistance in 2008 has grown twice as compared to 2007 - up to 0.4% of GDP. It should be noted, that a significant increase of the transfers could be linked to the need for adjustment due to changes in the key macroeconomic indicators ad-
24 Introduced by the Federal Law № 141-FZ, dated July 22, 2008 «On Amending Certain Legislative Acts of the Russian Federation to improve land relations».
25 Regulations on conclusion of such agreements are approved by the Government Order of the Russian Federation № 752 of October 13, 2008 «On approval of agreements provisions between the federal executive and the supreme executive authority of the state power of the Russian Federation to grant the federal budget funds from the budget of the Russian Federation».
26 «Consultant Plus» legal data base and official web-sites of Ministries and Government agencies. 78
justments. The first version of the Law «On the Federal Budget for 2008 and for the forecast for 2009 and 2010» was adopted back in July 24, 2007, and it laid the parameters (especially for GDP and inflation rate), later subjected to a significant adjustments. At the same time, it should be emphasized, that if amendments were made in regard to the macroeconomic forecast, the FFSR volume should have been amended, but it remained unchanged.
Examples of additional financial assistance are as follows:
1) donations for the balance of regional budgets have been increased during 2008 from RUR 31 billion to RUR 46 billion, i.e., by 48%;
2) subsidies to agricultural producers to recover the cost of interest on loans have been increased from RUR 27 billion to RUR 34 billion, i.e., by 25%;
3) subsidies to the Subjects of the Russian Federation for the land plots communal infrastructure support for the purpose of housing construction have been increased from RUR 5.9 billion to RUR 7.8 billion, i.e, by 33%;
4) subsidies to the Russian Federation Subjects for the measures to provide housing facilities to the categories of citizens on the basis of the decisions of the Government of the Russian Federation have been increased from RUR 328 million up to RUR 1.7 billion, i.e., by 509%.
Totally, the subsidies for the balance and additional funds under other financial assistance channels have amounted to about 18% of total inter-budgetary transfers from the federal budget, allocated to the regions in 2008. Such a large share of those two tools, that contribute to the effects of the «soft budget constraints» sources of the regional authorities is an important shortcoming of the currently effective distribution of financial assistance to regions.
Table 23
Financial Assistance, Provided to Consolidated Budgets of the RF Subjects from the Federal Budget in 1992-2008 (% of GDP)
1. Financial assistance to the budget of other levels 1.1. The federal targeted programs, as well as subsidies to the RF Subjects for the support of agriculture, water management, small business and rehabilitation of children
1.2.Social expenditures financing 1.3. Fund for Financial Support to the Regions: donations for adjustment of regional budget sufficiency government support to the "Nothern delivery"
2.3 2.5 1.6 1.18 1.43 1.79 2.2 1.94 1.7 1.65 1.52 1.79 1.89
0.05 0.15 0.39 0.54
0.15 0.11 0.04 0.12 0.11 0.10 0.09
0 0.36 1.17 1.04 1.22 1.12 0.99 0.96 1.14 1.36 1.3 1.05 0.88 0.94 0.79 0.79
0 0.36 0.86 0.68 0.86 1 0.99 0.96 1.14 1.36 1.3 1.05 0.88 0.94 0.79 0.79
0.06 0.08 0.08 0.07 - - - - -
0
0
transfers at the expense of VAT
1.4. Donations and subventions, including: donations for measures for adjustment of regional budget sufficiency
1.5. Assets of the Fund for regional finance reform
1.6. Other grants and non-recoverable transfers (subsidies and subventions)
1.7. Fund for financing Regions development
1.8. Funds, transferred under mutual settlements
1.9. Loans and budget credits less redemption of other levels of government management*
2. Compensation Fund
3. Other Intergovernmental transfers, including: Public support to road facilities** Total funds, transferred to the budgets of other government levels
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
0 0 0 0.31 0.36 0.36 0.12
0 0.02 0.09 0.06 0.09 0.13 0.1 0.06 0.15 0.54 0.28 0.29 0.27 0.36 0.21 0.31 0.22
0.11 0.24 0.16 0.17 0.11
0 0.01 0.01 0.01 0 0.01 0.01 0.01
0.01 0.01 0.01 0.01 0.08 0.17 0.19
0.03 0.05 0.1 0.1 0.15 0.01 0.01 0.02 0.02
0.61 1.95 2.54 0.42 0.81 0.43 0.36 0.14 0.28 0.05 0.2 0.14 0.12 0.01 0.05 0.02
0.09 0.03 0.02 0.04 0.23 0.64 -0.03 -0.1 -0.08 0.02 0.09 -0.01 -0.02 -0.03 -0.04 -0.01 0.03
1.49 2.7 3.4
2.3 2.5
0.37 0.38 0.36 0.34 0.17 0.30 0.43 0.51
0.18 0.11 0.4 0.45 0.54 0.35 0.33 0.34 0.36 0.27
0.18 0.11 0.27 0.27 0.31 0.22 0.13 0.15 0.17 0.08
1.6 1.36 1.54 2.56 3.03 2.84 2. 39 2.25 2.17 2.57 2.67
*Since 2005 - only budget credits.
**Currently the bulk of transfers for the support of road facilities is included in 1.1.
Source: Federal Treasury, IET estimates.
2.3.2. Measures, taken by the RF government to mitigate crisis impacts to the Regions
Trends observed in the sub-national finances in the last two months of past year, confirm the crisis expansion in the region's economy and, consequently, increase the tension in the area of regional finance. In view of these circumstances, the Ministry of Finance and the Government of Russia in late 2008 and early 2009 took a series of measures aimed at mitigating the impact of the crisis on the sub-national budgets.
27
On December 20, 2008, a letter was sent by the Ministry of Finance of the Russian Federation to all the RF Subjects with explanations of the priority measures to be taken by the Subjects in 2009 with the aim of preventing crisis in the financing of expenditure liabilities of regional authorities. In general, the recommendation of the Ministry of Finance were addressed primarily to the most conservative expenditure estimates for 2009 with regard to the reduction in estimates for the tax bases growth (first, corporate profits and payroll fund). Herewith, it was highlighted, that expenditures sequestering, when the budget is under execution is undesirable.
It should be noted that in the above-mentioned letter states, that «The Ministry of Economic Development of the Russian Federation is developing an updated forecast of the socioeconomic development of Russia for 2009-2011». Herewith, that forecast has not been approved neither at the end 2008, nor in the early 2009. Therefore, it is still unclear, on what basis the Regions should adjust their budget estimates. In our view, the Subjects of the Russian Federation, should have clear understanding, that the federal center expects them to take active measures to adapt to the new trends in economic development, including the development of regional socio-economic development estimates, based on local situation. This is primarily based on the fact, the macro-economic indicators, estimated at the federal level, in the period of high volatility in economic conditions can differ from the actual socio-economic development in specific regions. As a result, the awareness of regional authorities on the status of the largest taxpayers in the area can provide more adequate information for the budget indicators, than federal estimates.
The letter was also provided a number of specific recommendations to the Subjects of the Russian Federation. First, the need to address the surplus revenues, received in 2008, a reserve fund for 2009, rather than to finance expenditures of the current year (as it used to be done in all preceding years). Second, it was emphasized, that the decision to raise the salaries of the public sector employees should be implemented with due regard the capacity of regional budgets. Herewith, the salaries rate upgrading of the federal agencies offices should not be taken as a benchmark for similar solutions at the regional level. And third, the letter noted that the volume of the RF Subjects budgets deficits should be planned with regard to the available credit resources and opportunities for the debt securities placements.
Let us review the actual situation with the prospects for the formation of the financial reserves of the regional budgets. According to the RF Ministry of Regional Development, the untargeted balances, carried over to 2009, not addressed to cover the budget deficit in 2009, amounted to about RUR 273 billion. The largest balances are available in seven Subjects of the Russian Federation; their share exceeds 10% of the revenues, estimated for 2009 in the following regions: Lipetsk, Tver, Tyumen, Chelyabinsk, Sakhalin Region, Yamalo-Nenets and Chukotka Autonomous Region. Those regions have great potential to compensate for decreased revenues in 2009. However, the majority of Regions have no significant balances, carried over to 2009 and will be forced to significantly reduce their expenditures in the first quarter of 2009.
27 Letter of the Ministry of Finance of Russia № 06-03-07, dated of 20.10.2008 «On recommendations on the formation of budgets of the Subjects of the Russian Federation in 2009 and for the planed period up to 2010 and 2011 years».
There are three main reasons for the fact that at the end of 2008, despite the recommendations of the Ministry of Finance of Russia, in the majority of the Russian Federation Subjects were unable to accumulate significant financial reserves (see Table 24):
- objective slowdown in revenue growth of consolidated budget of the Russian Federation Subjects at the end of 2008. In November-December 2008, the total income of the Subjects of the Russian Federation has grown only by 5.7% against the same period in 2007. It is obvious, that at the beginning of fiscal year many Subjects of the Russian Federation hoped for greater revenue growth in 2008. Consequently, the majority of the RF Subjects have not obtained considerable surplus revenue as compared to the estimates of the late 2008;
- inertia of the budget process. The Subjects of the Russian Federation failed to dismiss many expenditure liabilities on time;
- intentional reluctance of regional authorities to reduce expenses and accumulate financial reserves. In the situation, when the federal center has not provided a clear macroeco-nomic forecast for 2009, as well as the criteria for provision the financial assistance to regions, some regions have intentionally refused significantly to cut down in late 2008 and, accordingly, have failed to form necessary financial reserves. In some regions this was done out due to the doubts, that the federal center will provide emergency financial assistance only to those Subjects of the Russian Federation, who have a cash gap (i.e., no financial reserves).
Table 24
Russian Regions, Grouped with Regard to Budget Balances of 2008 versus 2007
Number of Regions Total balance at the end of the year, RUR, bln
Balance increased 36 33
Balance reduced 58 101
As a result, if at the federal level the expenditures can be maintained in the volume of 2008 for 1-1,5 years at the expense of by the Reserve Fund, the majority of the regions will not have such opportunity even in a the first quarter of 2009. The majority of regions in 2008 failed extend their reserves (balances), but have reduced them as compared with 2007. The most notable exceptions to this rule were Tyumen Region (balance in 2008 was extended by 9%), Perm Region and Chelyabinsk Region (growth by 6%).
At the end of 2008 amendments were made to a number of articles of the Tax and
Budget Codes, related to revenue sources of regional budgets. First, amendments were made
28
to the Art. 284 on the Tax Code , regulating the corporate tax rate. The total rate is reduced from 24% to 20% since January 1, 2009. Herewith, the reduction is carried out exclusively at the expense of the federal budget. Moreover, 0.5% of the tax rate has been transferred to the budgets of the Russian Federation Subjects. Therefore, the amount of tax, assessed at the tax rate of 2%, is transferred to the federal budget (6.5% earlier), and the tax amount, assessed at the tax rate of 18% is addressed to the regional budgets (17.5% earlier). Herewith, the bottom threshold for the regional tax rate has remained unchanged - 13.5%, which has resulted in an upgrading the maximum level regional benefit for the tax on profit from 4% to 4.5%. A num-
28 Federal law № 305-FZ of December 30, 2008 «On amendments to Article 284 of Part Two of the Tax Code of the Russian Federation». 82
29
ber of amendments was made to the Budget Code as well. In particular, amendments were introduced to Art. 56, defining the tax revenues of the budgets of the Russian Federation Subjects. From January 1, 2009, revenues from excise taxes on motor gasoline, straight gasoline, diesel fuel, motor oil for diesel and carburetor (injector) motors shall be transferred to the regional budgets at the rate of 100% (60% earlier).
Also, the changes have affected part of the legal acts, relating the budget credits (Articles 93.2 and 93.3 the RF Budget Code). First, the terms, for which the budget credits are provided, is expended from one to three years. Second, the Subjects of the Russian Federation, located in the areas of the Far North and similar territories, where the term of cargo delivery is limited, up to January 1, 2011 are granted the right to provide budget credits (at the expense of regional budgets) to legal entities for the purchase and delivery of fuel to those Subjects. Earlier, the right to provide budget credits to legal entities (including foreign legal entities), was only in the authority of the Russian Federation, and even then only at the expense of targeted foreign credits (borrowings), even in the case of liabilities (debts) restructuring of legal entities for the earlier credits, provided form the budget and in cases, stipulated by Chapter 15 of the RF Budget Code («RF External Debt Claims»). In addition to amendments in the number of articles of the RF Budget Code, related to budget credits, it is planned to amend the rate on the total amount of budget credits from the federal budget in 2009. In the adopted Law «On the Federal Budget for 2009 and planning period 2010-2011» this rate is set at RUR 20 billion. The Ministry of Finance of the Russian Federation plans to increase this rate at least at RUR 100 billion. This indicator is assessed, basing on the fact that in 2008, according to the Ministry of Finance of Russia, regional budgets have attracted about RUR 150 billion of commercial credits. Herewith, the Ministry is pursuing the objective to partially compensate a significant reduction in the capacity of regions to attract credit resources in 2009. In the future, apparently, the limit on the total amount of budget credits will be further upgraded.
On December 31, 2008 the Resolution of the RF Government N 1089 «On subsidies from the federal budget to the budgets of the Russian Federation Subjects for implementation of additional measures, aimed at reducing tension in the labor markets of the RF Subjects». It is planned to allocate RUR 43.7 billion from federal budget for such subsidies in 2009.
Subsidies are provided for co-financing regional programs on implementation of the following additional measures on reducing the tension in the labor market of the RF Subjects:
a) advanced vocational training for employees in the event of a threat of mass dismissals (establishment of a part-time working day, temporary suspension of works, leaves without pay, arrangements for the release of employees);
b) public works, temporary employment, internships to gain experience for the unemployed citizens, job seekers, including graduates of educational institutions, as well as workers in the event of a threat of mass dismissals;
c) targeted support to citizens, including arrangement of their moving to another location of their new jobs, created in the framework of federal targeted programs and investment projects;
d) assistance to small business and self-employment development.
29 Federal law № 310-FZ of December 30, 2008 «On Amendments to the RF Budget Code and the Federal Law «On Amendments to the Budget Code in terms of the budget process management and bringing legislative acts of Russia in line with the budget legislation of the Russian Federation».
It should be noted that the allocation of subsidies on the fourth measure is partially duplicating another federal program on co-financing regional programs for the support of small and medium-sized businesses for which it is supposed to allocate RUR 10 billion from the federal budget.
The subsidy assessment is implemented on each of the four above measures in accordance with the formula, provided in the regulations on this type of subsidies.
It should be noted that along with the standard requirements (such as reasonable grounds for implementation of relevant measures, a list of beneficiaries, etc.), the regional program should include measures, aimed at reducing the number of foreign employees.
Review of regional programs is implemented by the Ministry of Health and Social Development of the Russian Federation with the participation of interested federal executive authorities. The Ministry of Health and Social Development of Russia within 10 days from the date of receipt of the regional program should develop an expert opinion and submit it to the Government of the Russian Federation. Selection of regional programs for subsidies allocation is implemented by the interdepartmental working group on monitoring the situation in the labor market.
The criteria for selection of the Russian Federation Subjects subsidies allocation are:
a) growth of unemployment level in the Russian Federation Subject;
b) increasing number of employees of the Russian Federation Subject under the threat of mass dismissals (or establishment of part-time, temporary suspension of works, provision of leaves without pay, arrangements for the release of employees);
c) presence or core businesses in the Subject of the Russian Federation.
Subsidies are provided in accordance with the decision of the interdepartmental working group on the basis of agreements, concluded by the Federal Service for Labor and Employment with the government authorities of the Russian Federation Subjects. The scope of co-financing of regional programs, aimed at reducing tension in the labor market, is set up at 95% to be allocated from the federal budget.
2.3.3. Federal budget draft for 2009 and until 2011 for the allocation of intergovernmental transfers to other levels of the budgetary system
The total amount of funds, planned to be transferred to the regional and local budgets in 2009 is about RUR 1228 billion. This is 1.12 times more than the funds actually allocated for this purpose from the federal budget in 2008. Herewith, the total expenditures of the federal budget will grow 1.19 times. As a result of slower growth of intergovernmental transfers to other levels of the budgetary system, their share in the federal budget expenditures will decrease as compared with 2008: from 14.5% to 13.6%. Given that in the late 1990-s only the share of donations from the Fund for Financial Support to the Regions was 14% of the federal budget, and the major revenue sources are currently concentrated in the federal budget, the reduction of the share of intergovernmental transfers, allocated to other levels of the budgetary system in the federal budget is challengeable.
It should also be noted, that the system of intergovernmental transfers is becoming increasingly complex and confusing. In developed countries with a federal form of government, as a rule, there are 1-3 major transfers from federal funds to the budgets of territories and 3-15 smaller transfers. In the Russian Federation, according to the draft budget for 2009 and until 2011 there are over 130 different transfers (6 donations, 90 sub-grants, including federal tar-
geted programs and sub-programs and 16 related to the category of other intergovernmental transfers). The question arises, whether such a system is effective. By analogy with taxation, the number of transfers should be acceptable for the effective administration. Under 58 ob-jecives, the funding is less than RUR 1 billion. This means that for an individual Subject of the Russian Federation the funding for several objectives can amount to tens or hundreds thousands rubles. It is obvious that with the targeted nature of the majority of subsidies (grants and subventions), expenses to assess the targeted utilization of those assets, not to mention the assessment of the effectiveness, can exceed the benefits from the allocated funds.
In our view, it is necessary to thoroughly review the allocation of powers between the federal center and regions, in order to delegate a number of powers to the regions, but some powers should be returned to the federal level. It should be noted, that the recently the revision powers delegation among the levels of budget system occurs nearly every year, what reduces the predictability of the basic parameters of the budgetary system for the regional and local authorities and adversely affects the quality of the state and municipal finances management.
In this regard, it would be inexpedient to make significant changes in the delegation of authorities on fiscal management during the three years of 2009-2011. This period should be used for monitoring and assessment of the existing system efficiency.
Starting from 2012, an opportunity should be provided to review the current system powers delegation in order to reduce the scope of authority, as well as to delegate to each level of government those powers, which can be most effectively accomplished by this level of power.
An additional way to address the problem of the large number of insignificant in volume targeted intergovernmental transfers, and to improve management of the allocated financial resources is their incorporation in block transfers. The main point of block transfers is that the financial resources, provided within a single intergovernmental transfer can be used in many ways. Herewith, the level of government, from which budget the block transfers is allocated, can establish the terms for distribution of those transfers, as well as the objectives of their disbursement. The level of authority, that receives a transfer block, can independently choose the scope of funds to be addressed to each objective.
This will improve the quality of public and municipal finance management with the best regard of local population preferences and national priorities. After 2010, it seems appropriate gradually to replace the majority of disparate regional subsidies by the intergovernmental block transfers. In view of a high degree of differentiation of the tax capacity and the cost of budgetary services to the regions of the Russian Federation, it looks appropriate to allocate block transfers from the federal level with regard to the regions' budget sufficiency. However, the scope of financing regional budgets adjustment should be lower the funding, allocated from the Fund for Financial Support to the Regions. It is proposed to allocate block transfers in proportion to the regional budgets deficiency against the fiscal sustainability of the richest region.
In the medium term, it seems appropriate to achieve the unification of subsidies preferably in one inter-industry block of transfers in order to ensure a real, rather than a declared independence of the regions in those assets management to achieve socially meaningful results. Industry-addressed subsidies do not provide such opportunities, further strengthening the authority of federal ministries over the region. An inter-industry approach is required, whereas:
- the volumes of the subsidies to the regions should be assessed by a uniform methodology that takes into account the budgetary sufficiency;
- each federal branch ministry within their competence should develop the terms for spending the assets according to their objectives;
- regional authorities should be given the right to choose independently the area (the industry), to which the funds will be spent.
The major channels of financial assistance to regional authorities are to the donations for the assistance for budget sufficiency adjustment from the Fund for Financial Support to the Regions, which will to grow by 13.8% (as compared with 2008) and reach RUR 374 billion. It should be noted, that in the initial budget estimates for the fiscal years of 2009-2011 an attempt was made to overcome the decline trend in the share of the fund in the intergovernmental budget transfers: according to the draft law on the federal budget for 2009 and until 2011, the FFSR share in the intergovernmental transfers to other levels of the budget system will grow to 30.0% in 2008, to 30.4% in 2009, to 32.8% in 2010 and to 35.3% in 2011. However, it should be noted that the initial draft budget is significantly different from its final execution. Branch ministries, as a rule, are able to lobby increasing subsidies and other intergovernmental transfers, while FFSR, estimated by the formula remains unchanged during the fiscal year. As a result, we put the trend, observed in the draft federal budget to increase the role of this channel of intergovernmental transfers, under doubt. There is a particularly high risk of reducing the role of FFSR in intergovernmental transfers during the financial crisis. Thus, the draft federal budget for 2008-2010 also provided for the FFSR growing share in intergovernmental transfers from 33.6% in 2007 to 35.6% in 2008, to 38.8% in 2009 and to 42.7% in 2010. However, due to the unplanned growth of subsidies volume there was no growth in the FFSR share, mentioned above, in 2007-2008. It seems that among all types of intergovernmental transfers, in the long run, the FFPR in particular should be given priority, as the organization of that fund is in line with the best international practice, and allocation of funds is carried out in accordance with the relatively transparent procedures. This conclusion can be slightly adjusted, since in the situation of the economic crisis there can be required to provide emergency assistance to the Subjects of the Russian Federation. However, the economic crisis should not serve as an incentive for inconsiderate changes in the most transparent and effective budget management tools.
It should also be noted that there is a barrier in achieving the primary objective of the allocation of grants from FFSR (to provide all regions relatively equal opportunity for fiscal services); it is an attempt to achieve other goals, initially not foreseen for the Fund: to improve financial discipline in the regional authorities, to avoid sharp volatility in the volume of subsidies, to encourage regional governments to accumulate their own tax potential. For all the importance of these secondary objectives, an attempt to address them all together with a single financial instrument can result a failure to reach any of those tasks.
Since 2005, the assets for financing all federal spending, set out in explicit legal form are accumulated in the Compensation Fund (hereafter CF). The draft federal budget for 2009 and until 2011 provides some stability in the FC share in the intergovernmental transfers to other levels of the budget system (18-20%). It should be noted that the share of subventions in the intergovernmental transfers to other levels of the budget system is still high. On the one hand, the desire of the federal government to finance their expenditure objectives is an abso-
lute advantage of the budget system in general. On the other hand, in the medium term, it is appropriate to verify the effectiveness of the existing delegation of authority and, if necessary:
a) to abandon delegation to the regions a number of federal powers by their funding transfer directly from the federal budget;
b) transfer a number of federal authority to the Federal Subjects in full scope with the corresponding increase of the non-targeted transfers and flexible terms of expenditure of funds received and/or expansion of revenues of regional budgets. For example, to transfer to the regions the authority to pay for housing and communal services to certain categories of citizens. Herewith, at the federal level, it I reasonable to take appropriate measures of social support to those categories of citizens in the form of increased pensions and social benefits, as well as increase funding from the Fund of Financial Support to the Regions. This will help to continue «monetization of benefits» in line with the social support, provided to those categories of citizens at the federal level and in creating opportunities for all regions for further support to those beneficiaries by increasing subsidies from FFSR.
c) consider delegation/centralization of some powers on a contractual basis, with clear, legally stipulated terms of such contracts. It is worth noting, that Russia has a substantial negative experience in terms of auhtorities delegation on a contract basis, though international experience often witnesses in favor of the effectiveness of this mechanism. Therefore, return to this issue can be useful in the long term and will require a thorough legal and economic development.
In terms of subsidies, a significant growth is planned in 2009 budget draft for 2009 and until 2011: the subsidies in 2009 will grow to 1.52-fold as compared with the planned in the federal budget draft for 2008 and for the period up to 2010 - up to RUR 482.3 billion. The basic areas of expenditure of these funds in 2009 are:
- federal targeted program «Modernization of transport system of Russia (2002-2010 years)» - 16,2% of total subsidies;
- subsidies for highways - 7.3% of the total amount of grants;
- to support agricultural production - 14,4% of the total amount of subsidies;
- subsidies to support agricultural production - 14,4% of the total amount of grants;
- social support - 7.2% of the total amount of subsidies.
Subsidies from the federal budget for road facilities and the Federal Target Program «Modernization of transport system of Russia (for 2002-2010)» have a high social value in order to maintain the unity of the national territorial and economic environment, the support of the population mobility. The commitments on the implementation of the major road projects are high enough and in many cases can not be financed solely by the regional (and local) budgets. In this context, it seems appropriate to maintain the existing mechanisms for the distribution of those subsidies, which in general conform to the requirements of such instruments.
Herewith, in view of the more effective planning and spending of these funds, at least two features of the allocation of subsidies for road facilities should be taken into account. First, it is necessary to strengthen matching of the projects objectives, funded from subsidies, with the general trends and priorities of regional development, federal and local roads in the region, as well as other mechanisms and the scope of allocated financial assistance (decision on the allocation of subsidies for the road facilities one should take into account the budget sufficiency and the scope of financial assistance, obtained by the region receives for other ob-
jectives). Second, it is necessary to tighten the project selection criteria in terms of social and economic efficiency in applications for subsidies with regard to the region co-financing opportunities.
With regard to subsidies for agricultural production, the situation is significantly different. Transfer to the regional level the authority in support of agricultural production has resulted in the situation, when the most active support is provided is not in the regions with the most favorable natural and climatic conditions, but in those, where the largest financial resources are required to implement such policy. The allocation of federal budget funds for agricultural production on the basis of co-financing can strengthen this trend, in particular, result in the support of the most financially strong regions in the «trade competition wars» for agricultural markets in the more financially weak regions. The effectiveness of such subsidies raises serious doubts. The solution of this issue is the centralization of the federal subsidies for the support of agricultural production, accompanied by minimization of regional expenditure for this objective. At the same time, the role of the Federation in co-financing of expenditures for social development of rural areas should be increased.
As to co-financing of social expenditures, some adjustments have to be made in this area. In particular, it is appropriate to gradually abandon the co-financing of social support to the Veterans of Labor, for example, through the transitional period of 5 years, upon which the co-financing in this field will be canceled. The title «Veterans of Labor» is continued to be provided in the Russian regions, though the criteria for its provision significantly differ from region to region. Thus, this aspect of social support is not objective and fair, so co-financing of such expenditures from the federal budget in the long term can not be considered appropriate. Herewith, to initiate the procedure of co-financing of social support to the Veterans of Labor rejection during the economic crisis seems socially dangerous. For example, social support to the rehabilitated persons and victims of political repressions, as well as Prodders of the Rear is advisable to be implemented from the federal level. Those categories of beneficiaries have emerged as a result of decisions, taken by the supreme leadership of the country, rather than regional or local authorities. Therefore, the provision of social assistance should be the power of the state authorities of the Russian Federation. However, under the existing authority allocation, social support for these categories of the population is within the competence of the Russian Federation, and in order to transfer those powers to the federal level, amendments
30
should be made to several federal laws30. However, during the economic crisis, the revision of authorities delegation in social policy seem to be socially dangerous, as there is a high probability of difficulties in the administration of those powers. In this regard, in the period of economic instability a palliative solution could be the concentration of financial and administrative resources of the federal and regional authorities in carrying out social obligations to the public.
As a general approach, the appropriateness of the allocation of small amounts of co-financing for those or other regional powers looks doubtful. Obviously, the minor scopes of co-financing do not allow to provide significant additional funding to the Federal Subjects.
30 Law of the Russian Soviet Federative Socialist Republic № 1107-1, dated April 26, 1991 «On the Rehabilitation of Repressed Peoples», Law of the Russian Federation № 1761-1, dated October 18, 1991 «On the Rehabilitation of the Victims of Political Repressions», federal law number 5-FZ of January 12, 1995 «On Veterans», № 184-FZ of October 6, 1999 «On the general principles of organization of legislative (representative) and executive bodies of state power of the Subjects of the Russian Federation». 88
During the economic crisis, this fact is aggravated by the procedure of subsidies allocation. In many cases regional authorities should actually make the expenditures in advance, and then the federal center will compensate for a part (in most cases 50%) of their such extenses. Dur-
31
ing the economic crisis, this approach should be changed . The level of co-financing the subsidies on the part of the Subject of the Federation in the period of crisis should be extremely low. Herewith, funding allocation should be made in accordance with the consolidated budget estimates, rather than after the expenses are made (in fact, currently the subsidies are made as compensations for prior expenditures).
In conclusion, it should be noted, that the economic crisis not only sets up certain risks for the system of intergovernmental fiscal relations, but opens opportunities for enhancing its effectiveness as well. The main risks to the system of intergovernmental fiscal relations are:
1) increase the role of discretionary intergovernmental transfers, allocated in the non-formalized manner, which create disincentives for the fiscal discipline of regional powers,
2) improper amendment the most transparent and effective budgetary management tools to adapt them to the changed conditions, 3) replenishment of the losses of the Subjects of the Russian Federation budget revenues at the expense of reducing the revenue base of local budgets (through the redistribution of income sources and increased use of negative transfers). The main opportunity for improving the efficiency of intergovernmental fiscal relations is a significant reduction in the number of the subsidies areas, addressed from the federal budget to the budgets of the Russian Federation Subjects, accompanied with an increase of the volume of other subsidies and their concentration at the solution of 3-4 most important priorities of the regions. The probability of making such decisions is increasing under conditions of reducing federal budget revenues and necessity to finance prioritized objectives of regional budgets.
2.4. Tax Policy in Crisis Situation
Defining the trends in the tax policy for the coming years, it is necessary to take into regard both, long-term objectives of economic development, and the problems, emerged in mid-2008 due to the expanding global economic crisis and the beginning of the crisis processes development in Russia. Herewith, one should disregard the existing objectives of the Russian tax system, which were set up, but not resolved in recent years.
The major developments in the tax reforms, achieved in the 2000-s, were the vividly improved structure of the tax system, design and procedure for the basic taxes charges. The implemented reforms enabled significantly to upgrade transparency, fairness and effectiveness of the tax system. It is, above all, the elimination of turnover taxes, the introduction of flat rates for income and regressive social tax, the elimination of benefits for corporate profit tax, while decreasing its rates, improved value added tax system. Herewith, there was implemented proper progressive taxation in view of the global markets of raw materials and energy sources by the mineral extraction tax and export duties.
However, many necessary measures of tax reform have not been implemented due to various reasons. There should be highlighted the transition to VAT flat rate, progressive growth of income taxation due to increasing the standard tax deduction rate, unified social tax index scale, the convergence of income and social tax bases, introduction of real estate tax,
31 Ref. A.G. Siluanov, Conference «Economy of Megapolises and Regions» http://www1.minfin.ru/ru/official/index.php?id4=6882
improvement of special tax regimes for small business and agricultural producers to provide benefits only to the clearly defined targeted groups of taxpayers.
Measures of tax administration improvement were not consistently implemented, among which there are changes in tax audit procedures in order to reduce administrative pressure on businesses, measures to ensure tax compliance, including the suspension of operations of the accounts and seizure of property of the taxpayer, which should not be routine, but very seldom used as a tool of tax administration. Such developed, but not implemented measures include the establishment of effective monitoring tools over transfer pricing, consolidated taxpayer and foreign companies corporate income tax.
The majority of the necessary, but so far unrealized measures is mentioned in the relevant section of the Concept of long-term development until 2020. However, in the long run, Russia will face the problems, the approaches to the solution of which is currently not developed yet and that require discussion and evaluation. Herewith, one should note at least two problems. First, demographic trends lead to a substantial population aging and the need for additional resources in the amount of about 4% of GDP to fund pensions at the socially acceptable level. Secondly, the restructuring of the Russian economy in the long run is closely correlated with the abolition of export duties, which means the support to domestic consumers of raw materials and energy in the form of subsidies. In addition to the above, it is clear that the expansion of the economic crisis in the Russian Federation has changed the schedule of tax reform: some measures are prioritized, and others should be postponed to the future.
2.4.1. International Experience in Tax Policy32
Expansion of the financial crisis, that has begun in the US in the 2008, to the other countries of the world, the impact of crises development in the real sector made many countries to apply or consider the application of anti-crisis programs, aimed at mitigating the adverse impact of the crisis. These programs complement to traditional anti-cyclic measures of fiscal policy, which have been launched more or less automatically.
1. Measures of fiscal policy seem to be the most frequent response to the crisis among the countries under consideration. Corporate income tax changes include:
- reduced tax rates and rejection of the tax rates upgrading (Canada, Hungary);
- accelerated depreciation, including one-time complete or partial allocation the cost of depreciable assets to expenses (Canada);
- some tax benefits for targeted investments and certain types of income (France, United Kingdom);
- discounts and credits for targeted investments and jobs formation (France, United Kingdom);
- extended opportunities for the losses for tax purposes (United States);
- restrictions in acceptance for tax purposes the expenses of the remuneration to the company management (USA);
- abolition of incentives for outsourcing (United States).
With regard to VAT, there are two tools:
- acceleration of VAT reform in regard to consumption tax (China, India);
32 Materials on the international experience in tax policy in the situation of the current financial crisis are provided by M.Alexeyev and R. Conrad. 90
- tax rate reduction (China, European Union, the United Kingdom).
It is clear that these measures are often used as opposed to targeted spending to promote specific companies or sectors of the economy. Accordingly, it looks that those changes are aimed at supporting those sectors o economy, which do not benefit directly from the targeted programs. Jobs creation or temporary reduction of dismissals is one of the obvious objectives to be regarded in the framework of tax credits and expansion of tax incentives.
2. Small business is an important sector in terms of jobs creation and investment growth. However, many tax benefits and incentive programs are aimed at large businesses in banking, finance and manufacturing sectors (for instance, automobile production). Therefore, programs designed specifically for small businesses became more prevalent as a response to the crisis in order to ensure wider support to the offer part in the economy.
There are four types of changes in regard to income tax, which were adopted in response to the crisis:
- reduction in tax rates and/or postponement of the taxes growth(Canada, United Kingdom);
- tax credits: small and medium-sized businesses can get the special tax credits on investment, for instance, such as the Canadian credit for certain types of scientific activity;
- accelerated depreciation and single write-off of depreciable assets as expenses(Canada, United States): those countries have recently increased the possibilities for a single writeoff of depreciable assets to the costs by small and medium-size businesses by increasing the applicable threshold. Moreover, in the United States, a 50% single write-off to expenses is introduced for certain assets, put into service after the crisis;
- mitigation of tax arrears treatment (United States, United Kingdom). Governments are responsible for the growth of tax arrears as a result of the crisis, the mitigation of approach to collection of tax arrears. This includes a reduction of fines, sometimes to zero, and penalties on tax arrears. These changes are designated for small and medium-size businesses, as large companies have formed the reserves for tax payment and should retain the opportunity to pay taxes in the ordinary way.
There are two basic types of changes in regard to VAT:
- tax rates reduction (China, United Kingdom): flat rate of VAT - a standard program for small businesses in the European Union - the rates have been reduced for both, agriculture, as well as for other sectors. In China, VAT rates were also reduced for small and medium-sized businesses;
- increase of thresholds: thresholds, above which tax return has to be filed, were applied to relieve small and medium enterprises from registration as VAT taxpayers. Among other countries, those thresholds have been upgraded in India (for indirect tax).
3. Changes in taxation of physical entities.
In the countries under review, incentives to enterprises were prevailing over changes in the taxation of individuals, or, probably, changes in taxation of physical entities were not as extensive as incentives of enterprises.
Changes in taxation of individuals are aimed at encouraging certain activities, such as acquisition of housing facilities, as well as the growth of after-tax income of consumers. Significant changes include the following:
- increased tax exemptions to individuals (Canada, United Kingdom);
- larger amounts, that can be allocated at the tax-exempt savings accounts (Canada, United States);
- reduction or cancellation charges made before to pension savings funds (Canada, United States);
- incentives to individuals for housing facilities acquisition (China, United Kingdom, United States);
- reduction of VAT rates on consumer durable goods (India);
- mitigation of enforced seizure in regard to retirement pension savings (USA);
- allocation of funds to lower levels of government, required to reduce the rate property tax growth (United States).
2.4.2. Some Theoretical Considerations in Regard to Effectiveness of Counter-Cyclic Tax Incentives in Economic Activity
An important question, which has to be answered in the process of anti-crisis measures development in the tax area, concerns the correlation of regulations and discretionary decisions.
Discretional fiscal policy in the period of the economic crisis, aimed at reducing tax rates and providing various kinds of benefits, as is known, is criticized for the fact, that its implementation will inevitably urge the lags in defining the right time to implement appropriate measures. The process of developing and adopting the necessary measures also requires extra time and, finally, there is a time lag between the adoption of measures and the impact of their implementation, based on the change in behavior of economic agents.
All those time lags provoke the situation, when tax benefits, designed to help economic agents in the period of recession, are coming into effect, when the need for them is no longer in place, i.e., in the period of recovery. As a result, the cyclic measures can turn into pro-cyclic ones. At the same time, political incentives often restrain the rejection of the measures, originally conceived as temporary, when the need for them is no longer in the effect.
Tax policy provisions, discussed in relation to the obvious drawbacks of discretionary solutions, constitute formal liabilities of the State to implement various fiscal measures under certain economic conditions. For example, in 2000, after the adoption of a medium-term socio-economic development program, the government has implemented a widely declared approach to reduce the non-oil tax budget revenue (as a structural component of tax revenue). It is obvious that this policy has been pro-cyclic and currently, when oil budget revenues have expressly declined, has created financial problems, caused by low levels of non-oil revenues in the budget structure at a high level of public expenditure commitments.
In addition to that approach, which should be applied in a counter-cyclic way, there should be stabilizers built in the Russian tax system. As noted above, the Russian tax system is dependent on the global oil price: under the high prices in the world market of raw materials and energy sources the effective tax rate is high, while under reducing world prices for raw materials and energy sources the efficient tax rate decreases. This is achieved through a legally approved tax regulations for raw materials and energy sources extraction, as well as by the nonlinear amendments of the profit tax and income tax base in the changing conditions of external trade. In addition, income tax, regardless its progressive character is an automatic stabilizer of economic dynamics, as it reduces the response of the production to the changes in aggregate demand, i.e., reduces the autonomous expenditure multiplier.
We know that a tax incentive policy, envisaging lower tax rates and tax benefits, under certain conditions should lead to an increase in aggregate demand, extended labor market,
lower costs of labor, increasing investment demand. However, tax rates decrease with unchanged public expenditures leads to an increase in the budget deficit, which has to be financed by increasing public debt. This can provoke growth of interest rates and, consequently, to reduce investments and impede economic growth. For the transition economies, particularly in the situation of instability of the global financial system, a significant growth of public debt is hardly acceptable, therefore, a significant reduction in tax rates can lead to the need for fi-
33
nancing budget deficits through the Central Bank emissions , that would cause, particularly after the exhaustion of foreign currency resources, high inflation, uncertainty of exchange rates dynamics, i.e., disruption of the long-term economic growth.
Accordingly, in development of tax incentive measures, the basic criteria should be taken into regard, that implementation of such measures would not cause a significant growth in the budget deficit, which is impossible to finance without an upsurge in interest rates and the emission of the Central Bank. Specific tax innovations should be agreed with the budget estimates, based on pessimistic macroeconomic forecasts, characterized by low world prices for raw materials and energy sources (oil price not exceeding USD 30 per barrel) and the low rates of the world economic growth in 2009-2010 (from zero to 1% per annum).
A conservative approach to budget planning should not (or should to a low extent) consider an opportunity of tax revenues growth with the introduction of tax benefits due to the new tax multiplier. The point is, that first, on the basis of theoretical considerations, the tax multiplier is lower than the multiplier of government expenditures, as the share of revenue from the reduced taxes is saved, while the government expenditures growth increases the aggregate demand, and second, the empirical assessment of the fiscal policy multiplier value are not reliable. Similarly to taking into regard the interrelation between the tax rates reduction and growth of aggregate demand in the budgetary planning, one should be extremely prudent with regard to the impact of tax policy on the level of production from the supply side.
Proponents of production encouragement by tax measures substantiate the effectiveness of such actions by Laffer curve mechanism, suggesting that reduced tax rates can urge growth of investment and labor supply. However, the mechanism, based on Laffer curve, finds no empirical evidence, which is explained, apparently, by the fact that tax rates are in fact, not so high as to be estimated by Laffer model, i.e., they are set in the range that their reduction does not lead to taxes growth.
Research of the fiscal policy, based on demand encouragement, also do not demonstrate expressed results, confirming its effectiveness. This is because the mechanism of aggregate demand multiplier requires a number of assumptions, which are not always available in practice.
Aggregate demand encouragement by income tax reduction implies, that the tax rate decrease urges an increase in personal consumption, which in turn causes production growth, based on increased demand. However, output growth at the background of increased demand
33 Financing of the budget deficit from the Reserve Fund in short term is similar to financing through the direct loans to the Government by the Central Bank. Herewith, the Central Bank can maintain its policy of quasi-fixed RUR rate and, consequently, sterilize the emission through foreign currency intervention, using the accumulated foreign currency reserves. In this case, the impact of budget deficit on inflation will be limited by the impact on inflation and devaluation expectations of economic agents, which will be growing, while foreign currency reserves will be getting decreased. An alternative policy Central Bank can be a floating exchange rate, when the Central Bank does not spend foreign exchange reserves. However, in this case, the financing of budget deficit will lead to increased inflation and a decline in the exchange rate.
can take place, only when coupled with the availability of relevant factors of production (free production facilities, extra labor force, unused natural resources), prices of those factors are not too high, and the factors are efficiently utilized. However, this assumption does not always work. As a result, investors can be pessimistic in the expectations of the prospects for economic conditions and the level of investment will remain low. Therefore, the growth in the aggregate demand might not urge the increased production, increased efficiency and growth of the productive capacity of the economy.
Major reasons, restricting the effectiveness of measures, addressed at upgrading the demand by lowering the income tax rates, are based on theoretical considerations that the distribution of income between consumption and savings are not determined by current income and short-term consumption capacity. The volume of consumption and savings can be based on the volume of permanent income, which is an average level of income over several years or even over the entire life cycle of an individual. Therefore, favorable tax regime may not lead to predictable results. At the same time, if the individual is unable to select the optimal level of consumption with the help of a credit, a temporary decrease in income tax rate can mitigate the liquidity restrictions and result in increased consumption.
Conclusions, arising from Ricardian equivalence of tax and debt financing of public expenditure, suggests that an individual might not respond to increase his income due to the tax reduction. This is because the individual assumes that in the future, to catch-up with the public debt level, caused by tax reduction, the government will increase the tax burden again. To compensate for this future growth of the individual tax burden, the individual has to save the income resulting from the current tax decline.
Temporary reduction of indirect taxes for aggregate demand encouragement (both, general taxes on consumption, and excise taxes on certain types of goods) can have greater impact on consumption than the temporary reduction of income tax. This is because the temporary decrease in income tax leads to a modest increase in permanent income or income over the life cycle consumption. Temporary reduction in indirect taxes is changing relative prices of present and future consumption, resulting not only the income effect, but the effect of substitution of future consumption by the current consumption.
However, the effectiveness of lowering indirect taxes during the economic slowdown is limited due to the fact that consumers change their behavior before the reduction and after the increase of the relevant tax. Demand for taxable goods gets decreases during the period from the point of awareness of the plans to introduce such measures until actual tax reduction, as well as in the period when the tax is increased, because the purchases are carried over to the period, when the tax get lower. Moreover, it should be taken into regard, that the effect of indirect taxes reduction depends on the ratio of demand and supply flexibility, as well as on competition. Thus, in a situation of flexible supply, when the sellers seek to dispose all their goods for the old prices, tax reduction will lead to the decline of prices for consumers and to the growth of production output and consumption. In the situation, when the demand is not flexible, the consumers will benefit, but the volume of goods production will not change after the tax reduction. In the intermediate situation, the benefits will be shared between consumers and producers.
Reduction of the corporate profit tax can also result in an increased consumer demand to the extent of the owners' profit growth (in case of profits distribution) or their wealth (due to undistributed profits growth) as a result of lower tax rates. However, for the owners of enter-
prises this effect should not be overestimated because of the effect of «corporate veil», distorting a realistic assessment of the changes in the financial position by business owners. This would affect the employees in case they would benefit from the tax burden reduction, but in the current situation, the wages increase due to the corporate income tax decrease is unlikely.
Encouragement of investments in the fiscal policy framework is implemented by such tools as investment tax credit, provided in the form of a decrease in the amount of tax liabilities by a percentage of the investments volume, accelerated depreciation, lowering the profit tax rates. Theoretically, such measures could help to increase the level of investments, scheduled by enterprises to be implemented under certain level of interest rates.
Application of the investment tax credit as a temporary pro-cyclic measure has the same negative effect, as the reduction of indirect taxes for encouragement consumer demand: it reduces the investment activity in anticipation of this measure and, after its abolition, provoking volatility of investments. The tool of accelerated depreciation works similarly to lowering the tax rate, if it is used as a temporary measure. In case the investment tax credit and accelerated depreciation are applied as permanent measures to encourage investments, it is important to understand that they are cyclical, when reducing the marginal corporate profit tax rate during investments upsurge and tax rate upgrading when investments get down. Therefore, in the crisis situation, the corporate profit of companies is subject to higher effective tax rates.
In assessing the effectiveness of reducing the corporate profit tax rate in terms of growth in investment activity it should be borne in mind, that the tax on business profit does not effect investment decisions, since the reduction of the tax rate relevantly decreases the marginal expenses and marginal revenue from investment projects. However, this is true only if there is an opportunity of financing the investments through loans, when the inflation is low and the terms of tax depreciation are consistent with the rules of economic depreciation. If the banks are rationing credits, what always happens in practice, and especially during crisis, the decline in corporate profit tax, mitigating the restriction in the liquidity, can contribute to investment growth. At the same time, fiscal measures, addressed at favorable taxation of corporate profit, affect those taxpayers who make profit, i.e., those who need assistance is less than others the crisis period.
It should be noted again, if the tax incentives for investment involve growth of government borrowing or emission financing, they will hardly be attractive to businesses. In the first case, increased government borrowing provokes higher interest rates and the corresponding higher cost of financial resources for enterprises (the effect of private investments replacement by government spending). In the second case, tax incentives for growth can provoke a breach of macroeconomic stability, to the collapse of credit system, the unpredictability of the interest rate dynamics, the exchange rate, relative prices of production factors and thereby, make it impossible to implement any long-term investment plans.
Encouragement of production development and unemployment reduction with the help of tax instruments can be implemented by lowering the cost of labor due to reducing the social tax. Apparently, such measure can be only temporary, since in the long term, due to the imbalance of the pension system, taxation of labor has to be increased (otherwise it will be necessary to increase the funding of pensions at the expense of other taxes, neglecting the principles of the pension insurance system). Nevertheless, in the short term, measures can be taken to a temporary reduction of social tax. Moreover, like in the case of measures aimed at increasing demand in the economy and, thereby, reducing unemployment, in the case of social tax reduc-
tion one can not be sure that the companies will use the benefit from decreased tax to expand production and employment rather than to pay dividends or reserves accumulation.
2.4.3. Necessary Measures of Tax Policy in the Russian Federation
Basing on the above, out of the entire range of tools of fiscal policy, which could be implemented currently to mitigate the crisis processes. It is advisable to implement those measures which, first, are suitable to be implemented in any economic situation, i.e, those that should not be cancelled at the stage of economic recovery (this refers to the tax incentives), and second, those which improve the tax system sustainability.
Individual Taxes Execution34
Items 1-3, provided below present incentive measures, that are not temporary and do not require cancellation at the beginning of economic recovery. The remaining Items include measures, that increase the level of neutrality, fairness and efficiency of the tax system.
1. The increase of non-taxable threshold for Income Tax. If the standard «universal» tax rate is raised from RUR 400 to RUR 4330 (the minimum wage rate as of January 1, 2009) with a simultaneous increase of the taxable income threshold from RUR 40 000 to RUR 52 000. Uncovered revenues of physical entities income tax about 7% of total revenue in 2009 (0.25% of GDP). If the «universal» standard tax rate is increase from RUR 400 to ^ of minimum wage (RUR 2165), while not changing the threshold of accrued income (RUR 40 000), then uncovered revenues of physical entities income tax in 2009 will reach approximately 2.5% of the total income (0.09% of GDP).
2. Introduction the tax-exempt threshold for the social or imposition of a reduced tax rate for income, close to the minimum wage. If the non-taxable threshold is introduced in regard to the unified social tax, similar to the standard tax rate on NDFL (tax on physical entities income) at RUR 4330 with the same threshold of wages (RUR 52 000), the loss of revenue will make about 0.5% of GDP. With the introduction of that threshold at the level 0f ^ of minimum wage and the threshold wage at the level of RUR 40 000, the losses will amount to 0.18% of GDP in terms of 2009.
3. Delegation to regional authorities the right to the dramatic increase in progressive scale in regard to tax on vehicles will result in the growth of the rates for powerful cars.
4. Introduction of VAT flat rate at the level, that would ensure the sustainability of budget revenues (at 16-17%). The transition to the flat rate will simplify tax administration, but will reduce progressiveness of the tax revenue to targeted groups (in case of tax liability transfer to the consumers), since namely for the low-income individuals the majority of expenditure in the consumer's basket is allocated for food, medicines, agriculture products, etc.
34 This Section presents proposals, repeatedly discussed in the IET works. Ref. A.Zolotarev, A. Kireeva, N. Korniyenko "Tax Administration. The main outcomes of the reform. Moscow: IET, 2008; E. Shkrebela. Taxation of small business in Russia: problems and prospects of solutions. Moscow: IET, 2008, L. Anisimova, T.Malinina, E. Shkrebela "Corporate profit tax: major issues and ways of improvement". Moscow: IET, 2008; S. Sinelnikov-Murylev, I. Sokolov, I. Trunin "Study of the major trends in the development of indirect taxation system in Russia within 2000-2007. Moscow: IET, 2008, L. Anisimova at al. " The reform of income taxation in Russia: results of 2000-2007. Moscow: IET, 2008. 96
The losses of such groups of population should be covered at the expense of relevant through appropriate budget expenditures.
5. Improving the efficiency of corporate income tax: enhancement of identification and recording of confirmed by documents necessary business expenses, transfer to the annual reporting period. It is reasonable to establish a beneficial taxation regime for non-profit organizations, including the budget ones, as well as special regimes enhancement.
6. Measures to improve the taxation of transactions with securities, the taxation of banks and interest income. These measures for legal entities include procedures for corporate income tax and value added tax on depository receipts, swaps and other financial instruments. They also include clear definition in the legislation of the securities market value in the event of their sale, through the international electronic systems among other methods; clarification tax procedures for transactions with securities and financial instruments, in particular, formation of reserves for impairment of securities, revaluation of the requirements and liabilities under fixed-term transactions, methods of securities disposal, clarification on taxation of REPO transactions and securities lending transactions, procedure for hedging some tax accounting.
For individuals it is necessary to resolve the issue of taxation of tangible benefits from the acquisition of property rights or futures financial instruments; expanding the list of futures financial transactions and a list of asset base of financial instruments, granting the right to individuals to transfer losses from securities, financial instruments, futures transactions and property rights for future periods, similar to the arrangements applicable to legal persons.
7. Enhancement of oil production taxation: expansion and improvement of tax holidays application for NDPI or the use of reduction factor to the tax rate (extraction at different sites the continental shelf, development of small oil fields); consideration of the threshold reduction rate for customs duty on crude oil, development and imposition of tax on surplus income on extraction of hydrocarbons in new fields.
8. Changing the tax system of natural gas extraction: application of NDPI rate for the extraction of natural gas, similar to NDPI on oil production with regard to gas prices in the domestic market and the presence of non-taxable threshold; differentiation of NDPI rates in view of production conditions - application of reduction factor to the rate of tax for gas fields with a high degree of stock depletion, tax holidays or reduction factors for new deposits in the undeveloped regions and on the continental shelf, transfer to the taxation of surplus income in the long term.
9. Formation of an efficient system of taxation of real estate, which includes creating an cadastre of the real estate objects in the short term, the development of methods of mass valuation of real estate based on the cadastre data and expansion of regional and local authorities powers in the area of real property taxation at the background of high non-taxable threshold during the crisis.
10. Avoidance to increase the tax burden on small businesses by maintaining the correction factors of the basic profitability index of imputed tax. Replacement of the simplified tax
35
rate reduction for tax refund paid by small business for the period (2007-2008) .
35 Actions taken to resolve the simplified tax rate reduction to 5% create the preconditions for withdrawal of the small businesses, using employees, in the shadow, as in this case the payment to employee wages in cash from the income of small entrepreneurs is more beneficial.
Tax Administration Enhancement
1. Reduction of fines and penalties in the period of crisis (for example, the 2009-2010).
2. Establishment an effective system for transfer pricing control to avoid the use of this tool to minimize tax liabilities. Draft laws on amendments to Articles 20 and 40 of the Tax Code should be introduced, in conjunction with the introduction of consolidated tax reporting of organizations.
3. Enhancement of VAT neutrality: improved procedures for the calculation and reimbursement of tax.
4. Pursue the activities on restriction the rights of supervising authorities in regard to audits by the following measures:
- clarification of the grounds and proceedings on administrative incompliance, such as inspection of premises of the taxpayer, objects and documents, located there in and seizure of documents. The measures should be applied by amending the Code of Criminal Procedure and Chapter 27 of the Administrative Code;
- reduction of the terms and frequency of tax audits of small businesses (up to 1 month and not more than 1 time per year) with the right to suspend or extend business operations, provided only to superior tax authorities;
- transfer to the planning of tax audits on the basis the system of tax evasion assessment, applicable regardless of the discretion of tax officials, with the reduction in the number of annually audited companies to no more than 5-10% of the total number;
- imposing a ban on the enforcement of decisions to bring the taxpayer responsible for committing a tax offense, in case the taxpayer files an appeal to the court (within the established term upon the decision the higher tax authority). The decision to bring the taxpayer responsible for committing a tax offense should be suspended before the court judgement entry into legal force;
- establishment of call-centers for entrepreneurs to distribute the updated information about their rights, the rights of government local authorities for audit procedures.
5. With respect to the tax administration for small businesses, there should be implemented the measures identified below, with simultaneous strengthening of control over the transactions between small businesses affiliated with each other or with large business, and monitoring to ensure that goods or services, provided to small businesses were not fictitious, or supplied under transfer prices. The procedures should be simplified for administration and payment of taxes and charges (fees) for enterprises that use the simplified taxation system and taxation system in the form of imputed tax, and eliminate the need for small businesses to visit any other authorities except for tax offices for the issues of registration, tax return filing and payment of taxes and levies (contributions) to extra-budgetary funds by the following means:
- abolishment of the need to the small businesses, hiring the employees to be registered in the extra-budgetary funds and the transfer of relevant information directly from the tax authorities;
- a unified declaration filing for a tax period results and the abolition of the need to file (for review) the details to the extra-budgetary funds;
- o unification of social contributions paid to the various funds in one payment, abolition of splitting of payments for obligatory pension insurance and the unified social tax (advance tax payments);
- o elimination of the need for payment of contributions for compulsory pension insurance and the subsequent set-off in the simplified tax or imputed tax and the introduction of direct contributions from the Federal Tax Service of Russia to the Pension Fund after the tax has been paid by an enterprise or an entrepreneur;
- o permit for an opportunity to pay value added tax by the small businesses, applying special tax regimes by introducing a system of voluntary registration for VAT (having foreseen the measures to counteract tax evasion), to avoid the loss of competitive advantage of small businesses, when purchasing products can not be accepted the VAT credit;
- o it is reasonable to introduce for small agricultural businesses a special tax regime for commodity personal subsidiary farms (through the use of patents in a single agricultural tax).
2.5. Russian financial markets
2.5.1. The government securities market
As is seen by the results of the year 2008, the volume of RF government domestic debt reflected in government securities increased by approximately 13.82% - from 1,248.85 to 1,421.44 bn rubles (as a share of GDP, government debt increased only slightly - from 3.79 to 4.05% of GDP) (Table 25).
Table 25
Volume of government securities on the domestic market, bn rubles (as% of GDP)
Types of securities as of 01.01.2008 as of 01.01.2009
GKO - -
OFZ-PK - -
OFZ-PD 288.42 (0.87) 328.17 (0.93)
OFZ-FK 51.43 (0.16) 33.83 (0.10)
OFZ-AD 807.59 (2.45) 882.03 (2.51)
GSO-PPS 10.42 (0.03) 45.41 (0.13)
GSO-FPS 91.00 (0.28) 132.00 (0.38)
Total: 1,248.86 (3.79) 1,421.44 (4.05)
Source: The RF Ministry of Finance.
In January - September 2008, the volume of RF government foreign debt (bodies of state authority and monetary regulation) decreased from 46.4 to 42.7 bn USD (according to data released by the RF Central Bank). Thus, the reduction in the absolute sum of foreign debt of the RF bodies of state authority amounted to 7.97%. At the same time, the private sector (banks and the other sectors) increased their debt to non-residents during the same period from 417.1 to 497.8 bn USD (or by 17,05%). Thus, the aggregate foreign debt of Russia, as demonstrated by the results of the first 6 months of 2008, increased from 463.5 to 540.5 bn USD (or by 16.61%).
The market of government securities traded on the domestic market
In 2008, the market of ruble-denominated government debt was characterized, on the whole, by an upward dynamics of the average weighted yield. Thus, as of the end of the trading session on 31 December 2008, the average weighted yield increased 1.5 times - to 9.46% per annum against 6.14% per annum as of the beginning of 2008 (Fig. 19). At the same time, right until September the situation on the market remained sufficiently stable, whereas in the last four months there was an upsurge in volatility. Whilst before September the average weighted yield had been fluctuating, on the average, between 5.96% and 6.87% per annum, and had been characterized by a gradual growth of the yields, in September - December the scope of fluctuations became much wider - 7.33 -13.72% per annum and was now demonstrating both dramatic falls and periods of rapid growth in yields.
A separate note should be made of the fact that investor activity in 2008 markedly declined as compared to that in 2007. Thus, the aggregate turnover volume of the GKO-OFZ market in 2008 was approximately 584.36 bn rubles against 1,405.13 bn rubles in 2007. So, the market over that period shrank by almost 2.5 times. At the same time, against the backdrop of a considerable reduction in the aggregate turnover, as seen by the results of the year 2008, there was also a marked drop in the average weekly indices, which now amounted to approximately 11.24 bn rubles against 27.55 bn rubles in 2007. The highest weekly turnover volume in 2008 was approximately 36.53 bn rubles (against approximately 278.73 bn rubles in 2007), the lowest - approximately 0.73 bn rubles (against approximately 2.15 million rubles in 2007). Thus, last year (2008) the market of ruble-denominated government bonds demonstrated a significant reduction in its turnover volume - by comparison with the previous year - which, among other things, was also reflected in the noticeable drop in the upper indices of turnover volume.
While analyzing the market dynamics in 2008, one can distinguish several periods during which the patterns of changes in quotations were becoming different. Over the first period (January - July), the average weighted yield of GKO-OFZ was demonstrating a slight upward trend with short-term fluctuations in both directions; while the average weighted yield remained within the limits of 6-6.7% per annum. This situation continued until the end of July, after which this trend on the market gave way to a confident rise in the overall dynamics of their yields, with occasional sharp drops. Thus, from mid-August through mid-December, the average weighted yield more than doubled (from 6.47% to 13.72% per annum), while by the year's end it dropped to 9.85% per annum. Now let us discuss in more detail the month-by-month dynamics of the government ruble-denominated debt market.
During the first month of 2008 there was mainly an insignificant gradual decline in the level of yields. The level of activity on the debt market also somewhat decreased, which was the result of the continuing negative situation on the foreign markets, including the effect of the data published in January concerning the financial losses of several of the biggest international banks. At the same time, the auctioning activity of the RF Ministry of Finance on the government securities market in January became significantly more extensive by comparison with December 2007 - in the course of a single month, four auctions took place on the primary market, their total volume being 31.9 bn rubles (against 4,3 bn rubles in December 2007). With due consideration for the existing rather high demand for government securities, a face-value volume of 21.5 bn rubles was placed, which amounted to approximately 67% of total supply.
40 000 35 000 30 000 25 000
20 000 15 000 10 000 5 000
I Volume of trades on GKO/OFZ (mln rubles) -Weighted-average return (annual rate) - right axis
■
r 14,0% 12,5% 11,0% 9,5%
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Source: IA "Finmarket"; the authors' estimations.
Fig. 19. Dynamics of the market of GKO-OFZ in 2008
In the period from February through April, further aggravation of the negative situation on the foreign market against the backdrop of decelerating economic growth in the USA and investors' concerns associated with future financial losses of a number of international financial companies, coupled with the forthcoming placements on the primary market, resulted in only a slight growth of government securities' yield and a lowering activity on the debt market. Also, a rather strained situation characterized the level of liquidity in the banking sector. However, despite all the efforts of the RF Ministry of Finance on the government securities market, the placements of OFZ were met with a rather low level of demand on the part of investors. Thus, in February there were seven auctions on the primary market, with the total volume of 56.4 bn rubles (against 31.9 bn rubles in January). Nevertheless, considering the demand for government securities, 30.9 bn rubles' worth of such securities was placed, which amounted to approximately half of the supply volume. A similar situation was observed in March, when the actual placement volume was approximately 34% (or 16,8 bn rubles) of the planned volume. At the same time, in April the placement of OFZ on the primary market was more successful - then, the placement of 81% (or 24.2 bn rubles) of the planned volume of 30 bn rubles was achieved.
In May, the market of ruble-denominated government debt displayed predominantly negative trends. The increasingly unfavorable inflation expectations, as well as the negative situation on the world's leading trading floors and the information published by some international companies concerning their writing-off of losses in Q first 2008, were all conducive to a moderately downward dynamics of the yield on ruble-denominated bonds and of the activity on the secondary market. However, by mid-month the decline in quotations had become less rapid - in part due to the RF CB having raised its rate of refinancing. Early in the third week
0
of May the market continued its downward trend following that displayed by US bonds and Russian Eurobonds; but towards the very end of the month the situation became stable, and the former quotations were in part restored.
Throughout the next two months the market of ruble-denominated government debt was displaying mostly positive trends due to the improved situation with liquidity; the antiinflation measures of the RF CB, which included an increase in volume of currency interventions and a rise in the rate of refinancing and in the overnight repo rate; and to the strengthening of the ruble against the dollar. In June the bulk of investor operations shifted towards the primary market, resulting from which the activity on the secondary market declined, while due to a substantial drop in the supply of government securities by comparison with May the demand for the securities being placed on the primary market outgrew their supply, thus encouraging the placement of their nearly entire volume (20.96 bn rubles from 21.0 bn rubles). However, in July, although the RF Ministry of Finance in respect of the auctioned OFZ issues granted a premium on their yield on the secondary market, investors were displaying far interest in the primary OFZ market, and so their placement volume amounted to a total of 15.34 bn rubles (or 43% of their initially planned issue volume (35.38 bn rubles)).
In August, the market of ruble-denominated bonds also demonstrated an upward dynamics of the yields, but the growth rate was now slightly higher, while the average daily turnover dropped by comparison with previous months against the backdrop of the negative foreign and domestic situations on the market on the one hand, and a declining rate of inflation in the RF, on the other. Thus, as seen by that month's results, the average weighted yield increased from 6.5% to 6.81% per annum. At the same time, the supply volume of government securities (40 bn rubles) remained at the previous month's level, and the level of its placement was approximately 25 bn rubles (or 60%).
In September, the situation on the Russian stock market worsened alongside the deepening world financial crisis. Quotations dropped dramatically in response to the pressure of external factors, while the level of ruble-denominated liquidity in the banking sector also declined, which had a negative impact on the activity of the participants in the primary market of domestic bonds. Because of lack of demand for government bonds at the offered rate of yield, several planned auctions of the RF Ministry of Finance were cancelled or deemed to have never been conducted. As a result, in September there was only one auction. With the average weighted rate of yield being at the level of 8.37% per annum, and also considering the premium on the secondary market, the placement volume was now more than 75% the planned volume. At the same time, the market of ruble-denominated government debt was characterized by a sharp upward dynamics of the yields, when the average weighted yield increased by almost 3 - to 9.72% per annum. Moreover, in order to ensure the necessary liquidity level, Russian banks were also striving to sell securities, which exerted an additional pressure on the market.
Over the first week in October the yields, within the framework of their adjustment, dropped to the level of 7.5% per annum. Beginning from the second week in October and until the month's end, Russian ruble-denominated bonds once again demonstrated a sharp upward dynamics of yields (up to 10.9% per annum) due to the declining demand on the government bonds market against the backdrop of the continuing collapse of the Russian share market in response to the negative foreign news, on the one hand, and the increasing liquidity crisis and solvency deficit, which happened in spite of a number of anti-crisis measures undertaken by
the government in order to support the banking sector and stock market on the other. At the same time, in October, just as it had happened a month earlier, there was only one auction for an additional placement of OFZ. Out of the total issue volume of bonds worth of 9.57 bn rubles, a total of 0.25 bn rubles worth of bongs was placed; there was a discount on the yields on the secondary market. Besides, in view of the fact that some auctions in September were cancelled, the RF Ministry of Finance decided to suspend until the end of the year 2008 any further auctions for the placement of OFZ.
Similar trends in the dynamics of yields were also observed on the ruble-denominated debt market in November. After the substantial increase in the yields in the previous month, over the first week of November the yields dropped by 2% within the framework of technical adjustment. Later on this trend once more gave way to a sharp rise, and so by the month's end the yield reached the level of 11% per annum. Throughout November there was a marked deficit of ruble-denominated liquidity, as well as negative trends in the inflation rate. In order to somewhat level down the situation, the RF CB increased the rate of refinancing, as well as suggested that money should be supplied to the banking sector by means of refinancing operations. No auctions for the placement of OFZ were held in November.
In December, Russian ruble-denominated bonds demonstrated a multi-vector yield dynamics in face of a negative foreign situation, the continuing high deficit of ruble-denominated banking liquidity, and the anti-crisis measures being implemented by the RF Government. However, the RF CB's currency policy, which was oriented towards weakening the ruble's exchange rate and increasing the key rates, was not conducive to greater investment attractiveness of government bonds, and so the liquidity of the government bonds market was low, while the turnover on the secondary OFZ market dropped nearly 3-fold. No auctions for the placement of OFZ were held in December, either.
Throughout the year 2008, the RF Ministry of Finance conducted 41 auctions for the placement of GKO-OFZ, their aggregate volume being approximately 336.3 bn rubles (in 2007, there had been 25 auctions, with a total volume of approximately 280.7 bn rubles). The actual placement volume was 185.3 bn rubles. or 55% of the planned volume (against 243.9 bn rubles, or 87% of the planned volume in 2007). The yields on the average weighted auction price varied between 6.22% and 8.37% per annum (in 2007, the yields fluctuations had been 5.93 - 7.06% per annum). It means that in 2008, in contrast to the previous year, the volume of government borrowings on the domestic market was shrinking alongside an increasing yields, while the volume of supply, on the contrary, was demonstrating significant rise on the year 2007. As of 31 December 2008, the volume of the GKO-OFZ market was 1,144.02 bn rubles in face value, and 1,032.59 bn rubles in market value. The duration of the GKO-OFZ market portfolio was 5.38 years, thus having diminished by 140.8 days by comparison with its index recorded as of the year's beginning - 5.77 years.
The market of government securities traded on the foreign market
The situation on the foreign-currency- denominated bonds market, as demonstrated by the majority of tradable securities, was characterized by a low volatility of yields during the first months 2008 - as compared to its level as of the year's beginning, and then by a somewhat higher volatility during September - December 2008 in face of the influence of the ag-
gravating global financial crisis (Fig. 20, 21). In particular, as of the end of December 2008,36 the yield on Tranche 7 of Minfin bonds was 4.65% per annum (5.20% as of the year's beginning). The dynamics of the yield on Tranche 5 of Minfin bonds had been displaying a marked downward trend until the moment of its redemption on 14 May 2008 by Vneshekonombank (which acts as a payment agent and depositary of the RF Ministry of Finance). Thus, after the redemption of Tranche 5, the securities of only one issue of Minfin bonds remained in circulation - Tranche 7 in the amount of 1.75 bn USD, with maturity on 14 May 2011. In its turn, the yields on RUS-30 over that year, on the contrary, increased from 5.49% to 9.90% per annum; that of RUS-28 - from 5.82% to 10.99% per annum; and that of RUS-10 - from 5.48% to 7.71% per annum. The yield to maturity on RUS-10 as of the end of December, on the contrary, went down and became negative (-1.65% per annum).
In 2008, one could point out several factors that were having the strongest impact in the behavior of the Russian Eurobonds market. Among those exerting a positive influence on quotations there were, firstly, the lowering of the discount rate by the US Federal Reserve System (FRS) several times over the year; the considerable growth of prices in the first half-year on the world oil and metals markets; and the RF Government's measures designed to support Russia's economy, in particular those dealing with the problem of liquidity in the banking sphere. The main negative factors influencing the market throughout the whole year were the dramatic worsening of the situation on the US debt market; the growing inflation rate in the US national economy; the slump on the world financial markets; the dramatic drop of oil prices on the international market in the second half-year (oil prices being one of the mainstays of the Russian economy); the downgrading of the ratings granted to the Russian Federation by the Standard&Poor's, Fitch Rating and Moody's international rating agencies; and the shortage of ruble-denominated liquidity.
When analyzing the behavior of Russian securities over the past year, one can distinguish several periods of relative change in the market situation. Thus, up to the end of August the yields on Eurobonds remained within the range of 5 - 6%, with the exception of the yield on RUS-10 Eurobonds. In the period from September through December, the yields were stably on the rise, the exception once again being the yield on RUS-10, which as of the year's end was negative. Now let us discuss in detail the main factors behind this particular pattern of changes displayed by the Russian Eurobonds market.
36 In December there were no sales of Minfin bonds (Tranche 7), except those on 9 December, whose yield to
maturity amounted to 4..5% per annum.
Ot-CNOT-CNOT-CNOT-CNT-CNOOCNOT-CNOOT-CNOT-CNOCNOT-T-CNCO
Source: IA "Finmarket".
Fig. 20. Minfin bonds' yield to maturity in 2008
The market of government Eurobonds in the first half-year was undergoing a period of stable dynamics of quotations - without any sharp changes - displayed by the majority of Russian Eurobonds, their yields being within the range of 5 - 6% per annum. In contrast to these, the yields on RUS-10 Eurobonds were demonstrating multidirectional changes over the whole of that period. Thus, in January there was a period of a slow decline of yields, while growth in February - August was sometimes disrupted by dramatic short-term drops in early February, late March and late May. At the same time, the overall dynamics of Minfin bonds was displaying a downward trend, with occasional short-term adjustment towards growth. This trend was most graphically observed in the behavior of Tranche 5, which from January through May (with maturity on 14 May) dropped from 4.89% to 1.97% per annum. With regard to the main factors that determined the market dynamics in the first half-year it should be noted that, as a result of the negative situation on the world's leading trading floors, the yields on Russian Eurobonds in January became somewhat lower. However, beginning from the end of that month, after the basic rate in the USA was lowered in January (to 3.5%), this trend gave way to a slowly rising one. During the period under consideration the market was responding to the information coming from the US debt market, the situation on the world's leading trading floors and the increasing inflation expectations. In June - July, Russian Eurobonds were demonstrating, on the whole, an upward trend in the rate of their yield - as a result of the Government's anti-inflation measures, including the raising (several times) of the rate of refinancing by the RF CB (to 11% per annum). An additional positive factor for Russian securities in
the first half-year was a considerable rise of oil prices on the world market - to 141 USD/barrel.
Similar trends were prevalent on the market until the end of August, when the trend of stability gave way to volatility - as a result of the aggravating global financial crisis.
Ot-CNOT-CNOT-CNOT-CNT-CNOOCNOT-CNOOT-CNOT-CNOT-CNOT-CNOT-CN
Source: IA "Finmarket".
Fig. 21. Yields to maturity of the Russian Eurobonds with maturity in 2010, 2018, 2028 and 2030 in 2008
In September, Russian Eurobonds were mainly demonstrating an upward dynamics of the yields due to the declining demand on the government bonds market; this happened against the backdrop of collapse of the Russian share market in response to negative external news, on the one hand, and the aggravating crisis of liquidity - all the measures being undertaken by the Government in order to control it notwithstanding (including the raised norm for compulsory reserve), on the other hand. The deepening world financial crisis alongside the increasingly threatening liquidity crisis and solvency deficit conduced to a sharp rise in the growth rate of yields to maturity of Russian Eurobonds in October. Thus, for example, the yields to maturity of RUS-28, as seen by the month's results, increased from 7.01% to 10.87% per annum (by 55%).
In November - December the market of government Eurobonds was displaying multidirectional dynamics of yields as a result of the negative foreign and domestic situations, dramatic drop of the oil prices on the world market, the increasing liquidity deficit and the anticrisis measures being implemented by the RF Government in order to support the banking sector and the stock market. At the same time, the raising of the key rates of the RF CB and the policy aimed at devaluation of the ruble's exchange rate resulted in a decreased investment attractiveness of government bonds, in connection with which the liquidity of the government bonds market was low. 106
2.5.2. The market for the Municipal and Subfederal Borrowing
The dynamic of development of the market
By results of 2008 the consolidated regional budget and budgets of the territorial government extrabudgetary funds ran a budget deficit of Rb. 48.7bn (0.12% of GDP). The deficit has aroused for the first time since 2003. Between 2004 and 2007 the territorial budgets ran a surplus (Table 1). For example, in 2007, the surplus of the territorial budgets and extrabudgetary funds accounted for Rb. 38.5bn (0.12% of GDP).
In 2008, budgets of the RF Subjects and those of the territorial government extrabudgetary funds ran a deficit of Rb. 38.2bn; budgets of urban districts - with a deficit of Rb. 13.2bn; budgets of intra-city municipal entities in the city of Moscow and St. Petersburg - with a surplus of Rb 0.1bn; budgets of municipal districts- with a deficit of Rb. 2.7bn; budgets of urban and rural settlements - with a surplus of Rb. 5.2bn.
In 2007, budgets of the RF Subjects and those of the territorial public extrabudgetary funds ran a surplus of nearly Rb. 25.2bn; budgets of urban districts - with a surplus of Rb. 12.0bn; budgets of intra-city municipal entities in the city of Moscow and St. Petersburg -with a surplus of Rb 0.4bn; budgets of municipal districts- with a deficit of Rb. 0.3bn; budgets of urban and rural settlements - with a surplus of Rb. 3.1bn.
Table 26
Territorial Budget Surplus (Deficit) to Budgetary Expenditures Ratio (as%)
Year_Consolidated regional budget_Regional budgets*_Minicipal budgets
2008 -0.7 - 0.7
2007 0.8 0.6
2006 3.7 4.4
2005 1.6 2.3 -0.8
2004 1.1 1.6 0.2
2003 -2.6 -2.3 -3.2
2002 -2.7 -3.0 -2.8
*With account of the government extrabudgetary funds.
Source: the IET calculations basing on the data of the RF Ministry of Finance.
Table 27
Net Borrowing by Regional and Local Budgets (as% of GDP)
budget.s of intra city mumciPal Budgets of urban Budgets of municipal Budgets of urban and
Year entities in the city ol Moscow and ,. , . , .... . ...
districts entities rural settlements _St. Petersburg___
2008 -1.47 1.09 -0.26 2.72
2007 5.34 1.23 -0.04 2.34
As of January 1, 2009, the consolidated budget was running a deficit in as many as 45
37
Russian regions (vs. 37 ones in 2007). The aggregate volume of the deficit accounted for Rb. 132.7bn, or 3.1% of the revenue part of the regions' budgets (in 2007 - Rb. 89.0bn, or -5.0%).
37 In the 2007 reports on execution of budgets of the RF Subjects published by the RF Ministry of Finance (the Federal Treasury) the data on the Evenk and Taymyr (Dolgan-Nenets) AOs are not singled out. In 2008, following the decisions to enlarge some Subjects of the Federation, their number slid to 84.
The median level of the budget deficit was 3.8% relative to revenues to the respective budget. The greatest budget deficit-to-the revenue part of the budget ratio was registered in Arkhangelsk oblast -6.9%, Ulyanovsk oblast -6.8%, and Kamchatka krai -6.7%. Roughly a half (45.0%) of the aggregate budget deficit fell on three Subjects of the Federation - namely, Moscow -19.5%, or Rb. 25.9bn, Moscow oblast -12.9%, or Rb. 17.1bn, and St. Petersburg -12.6%, or 16.7bn (Table 5).
By contrast, as many as 39 Subjects of the Federation (vs. 50 ones in 2007) ran their consolidated budgets with a surplus. The aggregate volume of budget surplus in these regions accounted for Rb. 84.0bn, or 3.9% of the amount of the revenue part of their budgets (in 2007 - Rb. 126.1bn, or 4.1%). The median value of the budget surplus made up 2.4% of the revenue part of the budget.
The greatest surplus-to-revenue level to the consolidated budget ratio was noted in the Republic of Ingoushetia - 30.5%, Sakhalin oblast - 14.1%, Perm krai - 13.3%, Yamal-Nenets AO - 8.5%, and the Republic of Bashkortostan - 7.6%. Some 40% (39.6%) of the aggregate surplus of the consolidated regional budget was secured by 3 Subjects of the Federation -namely, Perm krai - 18.2% or Rb. 15.2bn, the Republic of Bashkortostan - 11.1%, or Rb. 9.3bn, and Sakhalin oblast - 10.4%, or Rb. 8.7bn.
Change in the structure of the accumulated debt
The amount of the debt on current borrowings accumulated by the consolidated regional budget climbed over 2008 up to Rb. 118,049.2m, or 0.29% of GDP (Table 27). The external debt of the regional consolidated budgets shrank at Rb. 559.0m, while the domestic one surged at Rb. 118,608.2m.
Table 28
Net Borrowing by Regional and Local Budgets (as% of GDP)
Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Borrowing by subfederal 0.33 0.15 -0.29 -0.04 0.47 0.37 0.26 0.09 0.21 0.17 0,29
and local governments,
including:
Repayable loans from -0.09 -0.11 -0.03 0.04 0.12 -0.1 -0.02 -0.03 -0.04 -0.01 0,03
budgets of other levels
Subfederal (municipal) -0.01 -0.05 -0.27 -0.07 0.16 0.31 0.29 0.09 0.14 0.08 0,17
bonds
Other kinds of borrowing 0.43 0.31 0.01 -0.02 0.19 0.6 0.03 0.11 0.10 0,09
Source: the IET calculations basing on the data of the RF Ministry of Finance.
The structure of borrowings
The 2008 aggregate volume of borrowings by the regional consolidated budget accounted for Rb. 409,669.4m, of which external borrowings accounted for Rb. 591m. Like in 2007, the only region that became a recipient of external loans once again became the Republic of Bashkortostan.
The aggregate volume of regions and municipalities' domestic borrowings accounted for Rb. 409,078.4m. The biggest borrowers on the domestic market were: the city of Moscow -
Rb. 96.3bn, Moscow oblast - 91.7bn, Omsk oblast -34.6bn. Their share combined in the total volume of domestic borrowings was 54.4%. When compared with 2007, the volume of domestic borrowings in nominal terms grew at Rb. 146.8bn, or at 35.3%.
In the overall volume of domestic borrowings by the consolidated regional budget the security issuance accounted for 43.7%, loans from superior budgets - 5.0%, other kinds of borrowings (primarily, banking credits) - 51.4%.
The level of securitization of borrowings by the RF Subjects soared at more than 12 p.p. and accounted for 51.9% of borrowings. Meanwhile, the level of borrowings by municipal entities tumbled by 5 p.p. With the structure of borrowings by the consolidated regional budgets being dominated by borrowings by the Subjects of the Federation (Rb. 344bn vis-à-vis Rb. 651.bn borrowed by municipal entities), the level of securitization of the regional consolidated budget rose at more than 11 p.p. and reached 43.7% (Table 28).
Table 29
The Structure of Domestic Borrowings by Subnational Budgets ( as%)
2008 2007 2006
Regional consolidated budget Regional budgets Municipal budgets Regional consolidated budget Regional budgets Municipal budgets Regional consolidated budget Regional budgets Municipal budgets
Security issuance 43.7 51.9 1.9 32.1 39.5 7.1 29.4 37.1 9.7
Budgetary loans 5.0 5.9 0.2 3.8 4.9 0.1 4.4 6.0 0.3
Other borrowings 51.4 42.6 97.8 64.2 55.6 92.8 66.2 56.9 90.1
The greatest net borrowings-to-budget revenues ratio was noted in Moscow oblast -14.3%, Astrakhan oblast - 7.0%, Arkhangelsk oblast - 6.8%, Samara oblast -6.0% (Table 29).
The biggest net borrowers were: Moscow oblast - Rb. 45.1bn, the city of Moscow -25.4bn, Samara oblast -6.9bn.
The following regions were most successful in cutting their accumulated debt: St. Petersburg - at Rb. 4.5bn, Yamal-nenets AO - 2.3bn, Khanty-Mansy AO - 1.5bn, the Republic of Bashkortostan - 1.0bn, and Amur oblast - 1.0bn.
Table 30
Execution of Consolidated Budgets by the Subjects of the Russian Federation in 2008
Budget revenues (Rb.thos.)
Budget deficit (surplus) (Rb. thos.)
Attracted
Deficit (sur- borrowed Net borrow- Debt repay- .. , , ... j. j. j. Net borrowings
plus) to reve- capital to ing to reve- ment costs to , , „ ., ,
to deficit (surnues ratio, revenues nues ratio, revenues j
as% ratio, as as% ratio, as%
%
The Central Federal District
Belgorod oblast 59 605 666 692,13 2 261 412 178,80 3.79 2.86 2.28 -0.58 60.08
Bryansk oblast 28 643 626 844,21 1 612 131 254,83 5.63 15.61 4.65 -10.96 82.64
Vladimir oblast 39 844 180 435,23 -106 988 900,06 -0.27 0.51 0.36 -0.15 -134.50
Voronezh oblast 59 135 128 486,94 -1 013 124 661,15 -1.71 2.21 -0.49 -2.70 28.51
Ivanovo oblast 26 612 415 133,75 603 087 098,82 2.27 0.88 0.52 -0.37 22.73
Tver oblast 42 394 595 743,41 -453 583 216,79 -1.07 11.43 3.58 -7.85 -334.23
Kaluga oblast 34 208 587 262,77 -124 313 785,44 -0.36 8.65 1.48 -7.16 -407.58
Kostroma oblast 19 266 272 609,91 -782 714 596,04 -4.06 16.03 -3.64 -19.68 89.65
Kursk oblast 32 979 883 918,89 -1 304 723 336,12 -3.96 0.05 0.00 -0.05 -0.02
Budget revenues (Rb.thos.)
Budget deficit (surplus) (Rb. thos.)
Deficit (surplus) to reve nues ratio,
as%
Attracted borrowed capital to
revenues
ratio, as
%
Net borrowing to revenues ratio, as%
Debt repayment costs to revenues ratio, as%
Net borrowings to deficit (surplus), as%
Lipetsk oblast 41 629 358 926,63 -1 178 491 439,92 -2.83 3.61 3.59 -0.02 -126.85
Moscow oblast 314 210 333 197,46 17 071 053 286,66 5.43 29.17 14.34 -14.83 263.91
Orel oblast 20 837 663 203,70 -501 555 634,38 -2.41 0.73 -0.25 -0.98 10.48
Ryazan oblast 31 358 933 262,76 1 440 013 797,43 4.59 17.09 7.41 -9.68 161.40
Smolensk oblast 24 185 955 769,98 1 182 510 286,73 4.89 7.05 5.40 -1.65 110.45
Tambov oblast 26 767 964 721,70 1 146 643 713,62 4.28 9.64 5.35 -4.28 125.00
Tula oblast 44 759 353 751,18 -551 458 048,00 -1.23 7.76 -0.19 -7.95 15.82
Yaroslavl oblast 44 521 182 362,10 2 231 236 289,50 5.01 11.57 3.50 -8.06 69.94
City of Moscow 1 327 891 668 535,20 25 865 101 111,25 1.95 7.25 1.91 -5.34 98.25
Subtotal 2 218 852 770 857,95 47 396 235 399,74 2.14 10.22 3.72 -6.50 173.95
North-West Federal District
Republic of Karelia 29 165 736 571,00 210 756 249,16 0.72 13.87 3.69 -10.18 511.19
Komi Republic 46 467 800 137,91 315 437 050,16 0.68 0.76 0.07 -0.69 10.64
Arkhangelsk oblast 55 098 965 394,43 3 814 493 802,60 6.92 11.83 6.78 -5.04 98.01
Vologda oblast 53 064 759 110,49 -273 743 179,62 -0.52 0.40 -0.33 -0.73 63.66
Kaliningrad oblast 38 873 933 534,92 -798 163 297,56 -2.05 3.93 0.16 -3.76 -7.91
Leningrad oblast 66 523 934 056,64 -968 236 812,18 -1.46 0.14 0.05 -0.09 -3.48
Murmansk oblast 49 457 450 762,48 355 716 617,83 0.72 2.69 -0.13 -2.82 -17.77
Novgorod oblast 23 044 307 316,44 1 074 188 235,95 4.66 7.61 6.45 -1.16 138.37
Pskov oblast 19 201 078 481,33 -494 811 097,27 -2.58 0.00 -0.80 -0.80 31.06
St. Petersburg 355 797 167 696,96 16 743 467 952,88 4.71 0.59 -1.28 -1.86 -27.15
Nenets АО 9 640 274 648,83 565 616 105,64 5.87 0.00 -0.09 -0.09 -1.51
Subtotal 746 335 407 711,43 20 544 721 627,59 2.75 2.40 0.20 -2.20 7.23
Southern Federal District
Republic of Dagestan 57 589 326 554,02 -3 356 302 767,77 -5.83 0.87 0.87 0.00 -14.90
Kabardino-Balkar Republic Republic of Kalmykia Republic of North Ossetia- Alania 20 183 718 104,65 334 684 616,24 1.66 7.95 1.99 -5.96 120.05
9 033 515 222,95 -53 271 235,23 -0.59 11.66 2.57 -9.10 -435.44
21 022 948 827,44 -497 451 645,48 -2.37 13.51 5.63 -7.87 -238.13
Republic of In-goushetia 13 498 445 681,61 -4 120 201 314,27 -30.52 0.00 0.00 0.00 0.00
Krasnodar krai 148 004 550 650,20 4 255 620 890,24 2.88 1.09 0.56 -0.53 19.33
Stavropol krai 67 011 611 883,58 -1 966 135 002,56 -2.93 0.90 -1.16 -2.07 39.70
Astrakhan oblast 36 143 497 406,22 1 750 722 254,39 4.84 34.07 8.91 -25.16 184.01
Volgograd oblast 73 344 754 379,74 926 469 571,92 1.26 5.53 0.05 -5.48 4.35
Rostov oblast 111 595 132 888,08 -4 875 838 005,65 -4.37 0.00 0.00 0.00 0.10
Republic of Adygea 11 361 326 137,04 -755 150 394,79 -6.65 1.79 0.89 -0.90 -13.40
Karachai-Cherkes Republic 11 175 229 394,86 -507 861 610,39 -4.54 6.44 1.34 -5.11 -29.40
Chechen Republic 67 087 138 476,81 85 665 995,12 0.13 0.22 0.22 0.00 175.10
Subtotal 647 051 195 607,20 -8 779 048 648,23 -1.36 3.97 0.93 -3.04 -68.55
Volga Federal District
Republic of Bashkortostan 123 072 642 584,17 -9 312 236 581,01 -7.57 0.48 -0.83 -1.31 10.99
Republic of Mary-El 17 163 722 891,08 661 448 681,31 3.85 8.75 3.88 -4.87 100.67
Budget revenues (Rb.thos.)
Budget deficit (surplus) (Rb. thos.)
Attracted
Deficit (sur- borrowed Net borrow- Debt repay-plus) to reve- capital to ing to reve- ment costs to nues ratio, revenues nues ratio, revenues
as% ratio, as as% ratio, as%
%
Net borrowings to deficit (surplus), as%
Republic of Mordovia 26 206 955 732,41 1 680 267 109,56 6.41 3.85 3.38 -0.47 52.68
Republic of Tatarstan 145 308 110 344,38 7 706 603 301,66 5.30 6.47 1.95 -4.52 36.78
Republic of Udmurtia 45 256 120 527,73 675 420 153,58 1.49 6.25 0.39 -5.86 26.41
Republic of Chuvashia 36 612 658 685,67 2 098 649 254,12 5.73 5.89 5.33 -0.55 93.06
Nizhegordos-kayaoblast 112 740 897 435,93 1 022 289 057,80 0.91 2.77 0.99 -1.78 109.06
Kirov oblast 38 829 065 660,32 -615 692 364,82 -1.59 7.19 2.03 -5.16 -128.15
Samara oblast 115 752 878 458,58 2 311 995 187,60 2.00 7.63 5.99 -1.63 299.98
Orenburg oblast 69 341 414 926,82 -275 382 134,70 -0.40 0.01 -0.21 -0.22 54.10
Penza oblast 35 754 368 817,70 1 142 350 521,99 3.19 9.22 4.23 -4.98 132.50
Perm krai 114 628 150 619,70 -15 254 000 944,25 -13.31 0.96 0.87 -0.09 -6.57
Saratov oblast 66 328 492 714,86 3 594 714 443,49 5.42 9.76 5.37 -4.38 99.14
Ulyanovsk oblast 35 840 065 752,86 2 444 552 021,42 6.82 3.21 2.97 -0.24 43.47
Republic of Bashkortostan 123 072 642 584,17 -9 312 236 581,01 -7.57 0.48 -0.83 -1.31 10.99
Subtotal 982 835 545 152,21 -2 119 022 292,25 -0.22 4.50 2.17 -2.33 -1 006.39
Ural Federal District
Kurgan oblast 25 276 434 874,82 125 152,98 0.00 1.20 1.06 -0.14 213 471.71
Sverdlovsk oblast 164 961 774 284,81 346 456 942,93 0.21 0.32 -0.02 -0.34 -8.73
Tyumen oblast 166 856 227 159,26 -542 849 719,97 -0.33 0.00 0.00 0.00 0.79
Chelyabinsk oblast 111 369 588 083,92 5 408 567 194,37 4.86 0.62 0.20 -0.42 4.07
Khanty-Mansy AO 186 809 163 962,27 4 900 864 007,86 2.62 0.51 -0.82 -1.33 -31.32
Yamal-Nenets AO 91 166 535 590,70 -7 707 420 289,26 -8.45 0.35 -2.53 -2.88 29.94
Subtotal 746 439 723 955,78 2 405 743 288,91 0.32 0.37 -0.45 -0.83 -140.90
Siberian Federal District
Republic of Buryatia 36 564 399 592,71 -708 481 407,14 -1.94 10.93 2.42 -8.51 -125.03
Republic of Tyva 13 603 994 471,56 -288 378 978,56 -2.12 1.06 -1.04 -2.10 49.04
Altay krai 65 331 360 856,44 -1 742 822 124,80 -2.67 1.36 0.22 -1.14 -8.35
Krasnoyarsk krai 163 917 190 013,99 -2 775 929 202,08 -1.69 1.82 0.35 -1.47 -20.89
Irkutsk oblast 90 361 387 170,78 1 591 995 402,00 1.76 12.39 2.48 -9.91 140.84
Kemerovo oblast 123 214 523 412,25 -4 128 340 328,52 -3.35 1.68 -0.70 -2.38 20.86
Novosibirsk oblast 97 637 243 229,24 -1 158 824 148,85 -1.19 4.78 -0.21 -4.99 17.29
Omsk oblast 58 711 990 179,12 3 405 910 703,34 5.80 58.89 6.13 -52.75 105.73
Tomsk oblast 39 883 171 808,53 2 149 411 614,36 5.39 30.11 6.51 -23.60 120.80
Chita oblast 36 367 800 276,54 -707 308 168,21 -1.94 6.87 1.66 -5.22 -85.22
Altay Republic 10 478 432 188,47 230 062 379,30 2.20 4.93 2.52 -2.40 114.98
Republic of Khakassia 16 636 473 356,21 149 238 825,00 0.90 0.45 0.34 -0.11 37.45
Aginsky Buryatsky AO 5 537 192 445,71 173 731 200,08 3.14 0.07 0.00 -0.07 0.04
Subtotal 758 245 159 001,55 -3 809 734 234,08 -0.50 9.97 1.29 -8.69 -256.48
Far-East Federal District
Republic of Sakha (Yakutia) 82 699 931 032,12 3 684 411 149,22 4.46 5.07 1.32 -3.75 29.61
Budget revenues (Rb.thos.)
Budget deficit (surplus) (Rb. thos.)
Attracted
Deficit (sur- borrowed Net borrow- Debt repay-plus) to reve- capital to ing to reve- ment costs to nues ratio, revenues nues ratio, revenues
as% ratio, as as% ratio, as%
%
Net borrowings to deficit (surplus), as%
Primorsky krai 69 887 317 635,49 -2 803 314 985,87 -4.01 1.13 0.13 -1.00 -3.20
Khabarovsk krai 67 574 170 547,41 1 316 197 926,11 1.95 0.38 -0.91 -1.29 -46.60
Amur oblast 38 104 502 229,30 -1 361 458 518,06 -3.57 4.64 -2.57 -7.21 71.95
Kmachatka krai 30 620 270 460,90 2 059 644 371,36 6.73 19.56 3.91 -15.65 58.06
Magadan oblast 16 928 068 320,06 -192 418 059,20 -1.14 6.08 -1.18 -7.27 104.10
Sakhalin oblast 62 058 524 085,87 -8 728 913 069,47 -14.07 3.16 -0.02 -3.18 0.13
Jewish AO 7 909 464 756,10 101 185 604,97 1.28 0.38 -0.12 -0.50 -9.60
Chukotka AO 15 977 212 646,10 -998 314 058,10 -6.25 4.26 -1.08 -5.33 17.26
Subtotal 391 759 461 713,35 -6 922 979 639,04 -1.77 4.26 0.10 -4.16 -5.64
Federal districts, total 6 491 519 263 999,47 48 715 915 502,64 0.75 6.31 1.82 -4.49 242.32
Source: the IET calculations basing on the data of the RF Ministry of Finance.
Domestic bonded loans
In 2008, as many as 24 Subjects of the Federation and 7 municipal entities had their prospectuses for bond issues registered (vs. 27 regional bonded loans and 12 municipal ones in 2007).
The 2008 total volume of placed bonds accounted for Rb. 178.6bn vs. 84.2bn reported in 2007 (up at 94.4bn or 1.9 times in real terms). Over the year the volume of issuance of sub-federal and municipal bonds rose from 0.26% to 0.43% of GDP (Table 31).
Table 31
The Volume of Issuance of Subfederal and Municipal Securities (as% to GDP)
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Issuance 0.63 0.77 0.47 0.31 0.19 0.17 0.27 0.46 0.47 0.37 0.28 0.26 0.43
Redemption 0.47 0.56 0.48 0.36 0.46 0.23 0.10 0.15 0.19 0.28 0.14 0.18 0.26
Net financing 0.16 0.22 -0.01 -0.05 -0.27 -0.07 0.16 0.31 0.29 0.09 0.14 0.08 0.17
Source: the IET calculations basing on the data of the RF Ministry of Finance.
In 2008, the RF Ministry of Finance registered prospectuses for bond issues by the following Russian regions: Republic of Chuvashia, Republic of Sakha (Yakutia), Republic of Karelia, Komi Republic, republic of Udmurtia, Krasnoyarsk krai, Stavropol krai, the city of Moscow, St. Petersburg, Volgograd, Tomsk, Moscow, Yaroslavl, Lipetsk, Nizhegorodskaya, Tver, Samara, Kaluga, Penza, Ivanovo, Ulyanovsk, Belgorod, Kurganks oblasts, and cities of Tomsk, Lipetsk, Magadan, Krasnoyarsk, Volgograd, Bratsk, Novorossiysk.
The larges securities placements were made by the city of Moscow - Rb. 96.2bn, or 53.9% of the total volume of the territories' issuances, Moscow oblast -53.1bn (29.7%), Samara oblast - 8.3bn (4.6%), Tomsk oblast - 3.5bn. (2.0%). So, the proportion of the four largest issuers combined accounted for 90.2% of the overall volume of issuances of placed regional and municipal bonds.
As well, large volumes of issuance were placed by Tver oblast and the Republic of Sakha (Yakutia)- Rb. 2.5bn each, and St. Petersburg - 2.1bn (Table 32).
Table 32
Placement of Subfederal and Municipal Papers in 2008b
Subject of the Federation
Volume of issuance (Rb. thos)
The share of the issuer in the total volume of issuance (as%)
The volume of issuance -to-the domestic borrowings ratio (as%)
Central Federal District
Belgorod oblast
Tver oblast
Kaluga oblast
Kostroma oblast
Lipetsk oblast
Moscow oblast
Yaroslavl oblast
City of Moscow
North-West Federal District
Republic of Karelia
St. Petersburg
Southern Federal District
Republic of Kalmykia
Krasnodar krai
Volgograd oblast
Volga Federal District
Republic of Udmurtia
Republic of Chuvashia
Samara oblast
Siberian Federal District
Krasnoyarsk krai Novosibirsk oblast Tomsk oblast
Far-East Federal District
Republic of Sakha (Yakutia)
Amur oblast
Magadan oblast
Russian Federation, total:
596 200,0 2 500 000,0 414 449,8 657 007,6
1 500 000,0 53 084 905,7
65 002,7 96 233 498,7
800 000,0
2 082 111,4
278 759,0 267 321,0 1 452 147,0
1 000 000,0 1 000 000,0 8 300 000,0
34 037,0
1 819 250,0
3 491 048,0
2 500 000,0 9 993,6
480 000,0 178 565 731,4
0.3 1.4 0.2 0.4 0.8 29.7 0.0 53.9
0.4 1.2
0.2 0.1 0.8
0.6 0.6 4.6
0.0 1.0 2.0
1.4
0.3 100.0
35.0 51.6 14.0 21.3 99.9 57.9 1.3 99.9
19.8 100.0
26.5
16.6 35.8
35.3
46.4 94.0
1.1
39.0
29.1
59.6 0.6
46.6
43.7
Source: the IET calculations basing on the data of the RF Ministry of Finance.
Presently it has been mostly the largest issuers that posted a high level of securitization. More specifically, the respective figure for the city of Moscow is 99.9% and that for Samara oblast - 94.0%. Meanwhile, St. Petersburg and Lipetsk oblast borrowed solely in the form of security issuance.
The 2008 aggregate volume of net borrowings in the market for regional papers accounted for Rb. 73.0bn, thus posting a growth of 2.7 times vs. the 2007 figures (23.7bn) in real terms. At the same time, due to the three-fold fall in placement of papers by municipal entities, the volume of resources spent on redemption of municipal bonds was three-fold greater than the volume of the placed papers (Table 33).
Table 33
Volumes of Net Borrowing on the Market for the Domestic Subfederal and Municipal Papers, as Rb. Thos.
_Consolidated regional budget_Regional budgets_Municipal budgets_
2008
Net borrowing Attraction of capital Redemption of principal 2007
Net borrowing Attraction of capital Redemption of principal 2006
Net borrowing Attraction of capital Redemption of principal 2005
Net borrowing Attraction of capital Redemption of principal 2004
Net borrowing Attraction of capital Redemption of principal 2003
Net borrowing Attraction of capital Redemption of principal 2002
Net borrowing Attraction of capital Redemption of principal 2001
Net borrowing Attraction of capital Redemption of principal 2000
Net borrowing Attraction of capital Redemption of principal Source: The RF Ministry of Finance.
Most regions that regularly practice bonds issuing continued to do so in 2008, too. Specifically, St. Petersburg and the Republic of Chuvashia, Volgograd oblast have held annual bond issuances since 1999, Tomsk oblast - since 2000, Irkutsk oblast - since 2001 (Table 34).
Table 34
Registration of Prospectuses for Issues of the Subfederal and Municipal
Papers in 1999-2008
Issuer 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Subjects of federation
St. Petersburg Republic of Chuvashia Volgograd oblast Tomsk oblast Irkutsk oblast Moscow oblast Republic of sakha (Yakutia) Yaroslavl oblast Krasnoyarsk krai
114
68 851 271,9 178 565 731,4 -109 714 459,5
25 867 011 84 159 197 58 292 185
36 489 742 73 288 653 36 798 911
20 887 596 81 220 540
60 332 944
47 880 300 79 436 708 31 556 408
41 908 199
61 712 635 19 804 436
17 696 530 29 141 777 11 445 247
6 601 447 15 123 785 8 522 338
-1 877 328
13 042 220
14 919 548
72 984 947,8 177 324 359,3 104 339 411,5
23 691 970 79 889 761 56 197 791
35 161 627 66 524 832 31 363 205
16 939 894 75 016 756
58 076 863
44 470 128 74 995 965 30 525 837
40 043 511
59 012 901 18 969 390
17 153 760 28 169 158
11 015 398
6 667 592 14 226 931
7 559 339
-2 286 175 10 090 208
12 376 383
- 4 133 675,9
1 241 372,1 5 375 048,0
2 175 041
4 269 436
2 094 394
1 328 115 6 763 820
5 435 706
3 947 703
6 203 783
2 256 081
3 410 172
4 440 743 1 030 571
1 864 688
2 699 734 835 046
542 770 972 619 429 849
-66 145 896 854 962 999
408 847 2 952 012 2 543 165
* * * * * * * * * * * * *
Issuer 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Republic of Karelia * * * * *
Lipetsk oblast * * * * *
Nizhegorodskaya oblast * * * * *
Tver oblast * * * * * *
Samara oblast * * * * *
Kaluga oblast * * * *
Penza oblast * * *
Republic of Udmurtia * * *
Ulyanovsk oblast * *
City of Moscow * * * * * * * * *
Republic of Komi * * * * * * * *
Belgorod oblast * * * * *
Kurgan oblast * *
Stavropol krai * *
Republic of Bashkortostan * * * * * *
Voronezh oblast * * * *
Irkutsk oblast * *
Novosibirsk oblast * * * * *
Kostroma oblast * * * *
Krasnodar krai * *
Ivanovo oblast *
Republic of Kalmykia *
Tula oblast *
Khabarovsk krai * * * *
Kabardino-Balkar Republic * *
Leningrad oblast * * * *
Yamal-Nenets AO * *
Bryansk oblast *
Khanty-Mansy AO * *
Murmansk oblast * *
Republic of Mordovia *
Sakhalin oblast *
Kursk oblast *
Primorsky krai *
Municipalities
Tomsk * * * * *
Lipetsk * * *
Magadan * * *
Krasnoyarsk * * * * *
Volgograd * * * * * * * *
Bratsk *
Novorossiysk *
Ekaterinburg * * * * * * * *
Kazan * * *
Klins district, Moscow oblast * * *
Noginsk district, Moscow oblast * * *
Blagoveschensk * *
Cheboksary * * *
Electrostal, Moscow oblast *
Balashikha, Moscow oblast *
Novosibirsk * * * *
Odintsovo district, Moscow * *
oblast
Astrakhan *
Bryansk *
Voronezh *
Orekhovo-Zuevo, Moscow oblast *
Yaroslavl *
Yuzhno-Sakhalinsk * * * 115
Issuer 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Novocheboksarsk * * * *
Angarsk *
Vurnarsky district, Republic of *
Chuvashia
Shumerlya, Republic of *
Chuvashia
Ufa * * *
Barnaul *
Perm *
N. Novgorod *
Kostroma * *
Arkhangelsk *
Dzerzhinsky_*_
Source: The RF Ministry of Finance.
Credit rating
In the conditions of the global economic downturn, the international credit rating agencies downgraded Russia's credit rating by liabilities denominated in foreign currency to the level «BBB» (forecast negative) on the Standard&Poor's and Fitch scales vis-à-vis the BBB+ level (forecast positive) noted back in the first half 2008. Meanwhile, the Moody's has retained Russia's credit rating unchanged at the level Baal, which had been awarded in the first half 2008.
Accordingly, Standard&Poor's and Fitch downgraded credit ratings of the city of Moscow and St. Petersburg to the level of BBB, while keeping unchanged the Republic of Tatar-stan's BBB- rating, which was awarded by the Fitch in April 2008.
Due to the failure by Moscow oblast to honor its Rb. 5.2bn-worth offer on bonds issued by the Moscow Oblast Mortgage Agency, which is owned at 100% by the Moscow oblast government, Standard & Poor's downgraded the region's long-term credit ratings from «B-» to «SD», which reference to a selective default.
The default was engendered by the court of law's ruling to freeze all payments with regard to the issuance as a part of the investigation procedure against the third party - namely, the organizer of the issuance. Accordingly, the court of law ruled to freeze all the transactions pertaining to this particular issuance, including the respective repayments. According to Standard & Poor's, if the ban on the deal with Moscow Oblast Mortgage Agency is lifted and the region repays the debt, its rating «SD» might be revised (Table 35).
Table 35
International Credit rating by Standard&Poor's in the 1st quarter 2009
In foreign currency /
Name of issuer „, In the national currency / Forecast
forecast
Sovereign ratings
Russian Federation «BBB»/Negative/ «BBB+»/Negative/
Ratings of regional and local governments
Bashkortostan BB+/Stable/ BB+/Stable/
Bratsk B+/CreditWatch Negative/ B+/CreditWatch Negative/
Volgograd oblast BB-/Stable/ BB-/Stable/
Vologda oblast BB-/Stable/ BB-/Stable/
Urban district Balashikha B/Negative/ B/Negative/
Name of issuer In foreign currency / forecast In the national currency / Forecast
Dzerzhinsk B-/Stable/ B-/Stable/
Irkutsk oblast B+/CreditWatch Negative/ B+/CreditWatch Negative/
Krasnodar krai BB/Stable/ BB/Stable/
Krasnoyarsk krai BB+/Stable/ BB+/Stable/
Leningrad oblast BB/Stable/ BB/Stable/
City of Moscow BBB/Negative/ BBB/Negative/
Moscow oblast SD/--/ SD/-- /
N. Novgorod BB-/Stable/ BB-/Stable/
Novgorod oblast B/Stable/ B/Stable/
Novosibirsk BB-/Stable/ BB-/Stable/
Samara oblast BB+/Stable/ BB+/Stable/
St. Petersburg BBB/Negative/ BBB/Negative/
Sakha (Yakutia) BB-/Stable/ BB-/Stable/
Sverdlovsk oblast BB/Stable/ BB/Stable/
Stavropol krai B+/Stable/ B+/Stable/
Surgut BB-/Stable/ BB-/Stable/
Tatarstan BB/no3HTHBHhifi/ BB/no3HTHBHhifi/
Tver oblast B+/Negative/ B+/Negative/
Tomsk oblast B-/CreditWatch Negative/ B-/CreditWatch Negative/
Ufa BB-/Stable/ BB-/Stable/
Khanty-Mansy AO BBB-/Negative/ BBB-/Negative/
Yamal-Nenets AO BB+/Stable/ BB+/Stable/
Source: Standard&Poor's.
2.5.3. The corporate bond market
The beginning of the year 2008 was marked by the presence of some very positive trends on the domestic market of corporate bonds, especially in view of the crisis in mid-2007. Alongside capital inflow into this country, primary placements were being made, the yields of securities became stabilized at the level of approximately 8.5 - 9.0%, and the volume of trading on the secondary market testified to the high activity of investors. In the course of 2008, 310 bond issues were registered, their aggregate face value amounting to 1,191 bn rubles (for reference: in 2007, 360 issues were registered in the amount of 941.7 bn rubles). However, over that year only 158 issues of corporate bonds were actually placed, their total amount being 599.1 bn rubles (in 2007 - 204 issues worth of 468.9 bn rubles), the main bulk of which was placed in the first half-year. The biggest issues of securities were put in circulation by the following companies: Open-end Joint-stock Company "SIBUR Holding" (4 series of bonds in the amount of 120 bn rubles); Open-end Joint-stock Company "Rossiiskie zheleznye dorogi" ["Russian Railways''] (3 series of bonds in the amount of 50 bn rubles), Open-end Joint-stock Company "Mobil'nye TeleSistemy" ["Mobile Tele-Systems'']» (3 series of bonds in the amount of 30 bn rubles); Open-end Joint-stock Company "Rossiiskii sel'skokhoziastvennyi bank" [Russian Agricultural Bank'] (3 series of bonds in the amount of 20 bn rubles); Joint-Stock Commercial Bank "Bank Moskvy" ["Bank of Moscow"] (Open-end Joint-stock Company) (2 series of bonds in the amount of 20 bn rubles).
Among the main factors influencing the situation on the domestic debt market, two have been pointed out: the monetary policy of the RF Central Bank (in particular, the increased rate of refinancing) and the weakening of the national currency. As a result, the second half-year 2008 was a period of "large-scale placements by big issuers", whereas the securities of small and medium-sized businesses were gradually disappearing from the market as a result of the execution of their offering and redemption.
The volume of the domestic corporate bonds market (that is, the aggregate face value of securities in circulation) over the past year had been increasing, and then in December - at the peak of the financial crisis - it reached its historic high of the period under consideration (1,666.5 bn rubles). However, this trend - at a first glance a positive one - arose as a consequence of the activity on the debt market in the first half-year 2008, when a sufficiently large quantity of bond issues were registered and placed. The duration of a corporate bonds portfolio in Q IV had dramatically shrunk, and so in late December it was 587 days - in fact, it dropped to the 2004 level, while as late as the previous September this index had been approximately 1.5 times higher.
In Q IV of last year the index of the Russian corporate bonds market - IFX-Cbonds -dropped to its historic low since mid-2006, while the scope of reduction as such, in relative terms, became a record figure for the whole period since it had been estimated for the first time.
At the tender for determining the rate of coupon yield in January - February 2008, it was established at the level of 9 - 11% per annum, while in November - December it was already at least 13 - 14%. Over last year, the average weighted effective rate of coupon yield on the secondary market increased by more than 2.5 times, and so by late 2008 it had reached the level of more than 20%. Whilst in the first half-year bonds were traded at Close-end Joint-stock Company "FB MICEX" at the level of ± 1-2% of their face value, in Q IV the bonds of big issuers this index had dropped to approximately 80 - 90% of their face value, while the securities issued by small companies - to 20 - 40% of their face value, or even lower.
In last year's final months the idea of default became firmly rooted on the debt market. From mid-2007 onwards, the issuers had been declaring default (mainly on the payment of coupon yield or offering execution) on one or two issues every month, this rate increasing in Q IV 2008 to more than 10 defaults per month. Technical default (delay in fulfilling an obligation) was usually declared by several issuers every day. In this connection, the offerings presented to the holders of securities in the second half-year were, in fact, early redemptions of an entire issue.
The majority of issue annulments over last year happened in the period from September through December, due to failures to place even a single security (in the first half-year, no more than two issues of bonds per month were usually deemed to be ineffective and so were annulled by the RF Federal Financial Markets Service (FFMS), while in the second half-year this figure increased to more than five issues per month). Many issuers delayed the placement of their securities until 2009.
Over the year, 111 issuers redeemed 115 bond loans to the total value of 127.2 bn rubles, which is almost by 10% higher than the 2007 level, including the loan of Open-end Joint-stock Company "Federal'naia setevaia kompaniia Edinoi energeticheskoi sistemy" ["The Federal Network Company of the Single Energy Grid"] to the value of 7 bn rubles, and that placed by Open-end Joint-stock Company "Russkii aliuminii finansy" [Russian Alumi-
num Finances"] - to the value of 6 bn rubles. In 2009, the redemption of 206 issues of corporate bonds of the total volume of 302.6 bn rubles is expected.
The world financial crisis resulted in the introduction of certain amendments to Russian legislation on securities. In particular, on 30 December 2008, changes were introduced in Article 27.5.2. of Federal Law 22 April 96, No 39-FZ, "On the securities market", which addressed the specific features of issuing and circulation of exchange bonds. In accordance with these newly introduced changes, the range of issuers entitled to issue exchange bonds was considerable expanded: whilst previously the issuers of such bonds could only be open-end joint-stock companies whose shares were included in the quotation list of a stock exchange which could admit such bonds to trading, now this right has been extended to economic societies, state corporations or international financial institutions, if the quotation list of the stock exchange which admits such bonds to trading includes the shares and (or) bonds of the aforesaid issuers. It should be noted that at present the majority of issuers on the corporate bonds market are limited liability societies which, prior to the introduction of those changes in legislation, could not use exchange bonds as a debt instrument.
Also, the period of fulfillment of obligation against exchange bonds was extended from one to three years. Considering that the procedure of registering the issues of exchange bonds is much simpler by comparison with the registration of so-called non-exchange bonds, these new changes in legislation are aimed at lowering the barriers in the way of issuers' entry to the Russian domestic debt market. Thus, for example, even before the aforesaid amendments were made, in 2008 the volume registered exchange bonds amounted to 12.3% of the total face value of registered issues of Russian domestic corporate bonds. And, as approximately half of the issues of bonds presently in circulation have the period of circulation of approximately three years (Fig. 22), their share is going to significantly increase as a result of the extension of the period for the fulfillment of liabilities under exchange bonds.
2%
44
■ up to 2 years Elfrom 2 up to 3 years H from 3 up to 5 years □ from 5 years
Source: According to the data published by RusBonds' information portal.
Fig. 22. The structure of bond loans, depending on their period of circulation
2.5.4. The stock market The share market
During the year 2007 the Russian stock market, in contrast to the situation existing a year earlier, was demonstrating a multi-vector dynamics. Among the main factors that had determined the emergence of this trend on the Russian stock market, the following events were especially noteworthy: the negative situation on the US mortgage market; the world credit crisis; highly volatile prices on the international oil market; the bankruptcy of two biggest US investment banks and the takeover of the third one; partial nationalization of several biggest banks, insurance companies and mortgage agencies; as well as the weakening of USD exchange rate in the first half-year, followed by its strengthening in the second half-year; and a revival of investor activity in absence of negative external news. Besides, in 2008 there was a dramatic decline of liquidity in the banking sphere, and so the Central Bank of the Russian Federation had to implement certain measures that had a transient positive effect on the behavior of the Russian market. Additional support to international markets was provided by the decision of the US FRS, as well as of the central banks of some other countries, to lower the level of the key rates and to develop certain anti-crisis measures designed to sustain their national economies.
The domestic news was also highly important. Thus, the collapse of "Mechels" quotations in July, the abrupt slowdown in industrial production in the second half-year, the growing rate of inflation, the August events in South Osetia and Abkhazia, the frequent suspension of trading on the Russian exchanges - MICEX and RTS - by the RF Federal Financial Markets Service (FFMS) (from mid-September onwards), the recall of licenses of some credit institutions because of their inability to timely fulfill their obligations, and the dramatic weakening of the ruble against the USD and the euro in the last quarter of 2008 were all conducive to the decreasing attractiveness of the Russian stock market in the eyes of investors. Another factor which had a noticeable effect on the market was the lowered rating of some of the companies actively trading in shares.
At the same time, beginning from late August and September 2008, the negative trends on the Russian stock market began to be felt more strongly, against the background of the deepening financial crisis (for the main events that shaped the behavior of the Russian financial market in September - December 2008, see Annex 1).
Over the past year (2008), the Russian stock index (MICEX) suffered a record drop - by 1,287.33 points (from 1,906.86 to 619.53 points, or more than 3 times) from its value registered as of the closure of trading on 9 January 2008 (in 2007 its growth amounted to 20.16%). Thus, in 2008 the stock market, in contrast to the previous year, demonstrated an impressive rate of decline. The lowest value of the MICEX index in 2008 - 513.62 points - was recorded on 24 October (against 1,516.09 points a year earlier), and on 19 May it reached its historic high - 1,956.14 points (against 1,969.91 points in 2007). As for investor activity, in 2008 it also declined by comparison with the previous year. In particular, the volume of trade in the shares constituting the base of the MICEX index on the MICEX in 2008 amounted to approximately 1,1434.32 bn rubles, with the average daily trading being at the level of 45.74 bn rubles (in 2007, the aggregate trading volume had been approximately 13,611.71 bn rubles, with the average daily trading of 55.33 bn rubles). Thus, the trading volume in 2008 dropped by comparison with the corresponding index of 2007 by 16%.
The market dynamics throughout the year 2008 was characterized by a rather high volatility, and there were several periods of decline and rise of the MICEX index (Fig. 23). Thus, in January the MICEX index dropped 17%, with the simultaneously increased trading volume. In period from February through April, the MICEX index remained in the range of 1600 -1700 points, while the changes in the dynamics of quotations were displaying periodical multidirectional deviations, and the trading volume was demonstrating, on the whole, a downward trend. In May there was an upward trend displayed by both the quotations (by 11%) and the trading volume (by 30%). The next period (from June through October 2008) was characterized by a distinct downward trend in the MICEX index (by more than 3.5 times, as seen by the period's results). At the same time, in that period there were also occasional slight upward adjustments of the index. In late October - early November, the MICEX index rose by almost 45%, after which (in mid-November) it once again dropped (by 30%). In the last period (from late November through December) there were multi-vectored changes of the MICEX index in the range of 560 - 660 points. At the same time, from mid-September and until the end of December, the market demonstrated low trading volumes - less than half of the values recorded during the first eight months of 2008.
The total volume of trading (bln.rubles) MICEX Index
20 10
2 000,00 1 900,00 1 800,00 1 700,00 1 600,00 1 500,00 1 400,00 1 300,00 "
' C
1 200,00 °
1 100,00
1 000,00
900,00
800,00
700,00
600,00
500,00
Source: The Moscow Interbank Currency Exchange (MICEX).
Fig. 23. Dynamics of the MICEX Index and of the trading volume in 2008
While analyzing the month-to-month dynamics of the Russian stock market, we must take note of the fact that, with the onset of trading in January 2008, the share market demonstrated a marked decline caused by the negative information concerning the state of the US debt market and the resulting decreased trading volume on world exchanges. The FRS's decision to lower the discount rate to 3.5% per annum (by 0.75 percent points) was by no means conducive to any improvement of the situation. Thus, the trading volume decreased 13% by
comparison with December 2007, while the MICEX index dropped 17% (from 1,906.86 to 1,574.33 points). This decline of the index' value reflected the overall trend of devaluation displayed by the quotations of the shares issued by the most liquid Russian companies. The most resistant to these downward trends was the telecommunications sector (shares in "Rostelekom" dropped by mere 2%).
Throughout the next period (February - April) the factor determining the behavior of Russian shares was, as before, the situation on the world market, which was characterized both by a neutrally-negative news background and the appearance of a positive outlook on the part of investors. Among the main events that occurred during that period, we can note the information concerning the expectations of still more substantial financial losses of international financial companies, the collapse of one of the biggest international investment banks -Bear Stearns, and the weakening of the US dollar's positions in the USA. All this was reflected by the slight multidirectional changes in the MICEX index - mainly within the range of 1600 - 1700 points, and by the marginal downward trend in the trading volume, which occasionally gave way to short-term upward adjustments. The prices of Russian shares were also displaying some volatility. Thus, on the whole, in that period approximately half of Blue Chips on the Russian exchanges were demonstrating positive dynamics (by 1 - 18%), while at the same time the remaining part was displaying a negative trend (1 - 15%). In particular, as the shares of "LUKOIL" and "Rosneft" demonstrated a stable rise of their prices, those issued by "Rostelekom", on the contrary, were losing value.
The situation on international commodities markets, which was reflecting the continual growth of oil prices in May (up to their historic high of 135.09 USD/barrel in the month's second half), was the determining factor in the upward dynamics of the share market. It promoted growth in the value of the majority of shares on Russian exchanges (as demonstrated by the trading results in May), as well as an upshoot of the main Russian stock indices. Besides, on 19 May 2008 the RTS index reached a new historic high of 2,487.92 points. The trading volume also rose significantly (almost by 30%) by comparison with April, thus responding to the positive background. Among the securities that had a positive impact on quotations, one should note those issued by some companies in the oil sector ("TaTneft", "Gazprom Neft", "Surgutneftegaz", "Rosneft'" and "LUKOIL"), whose value significantly increased (by 17 - 19%) following the growth of oil prices on the international market.
June was the month during which the situation on the Russian share market worsened, in face of a slight growth of market volatility. The negative international situation that developed as a result of the continuing credit crisis in the USA and was sensitive to the writing-off of their new losses by some big financial companies resulted in decreased value of the majority of shares on Russian exchanges, as demonstrated by the trading results on June, as well as by the drop the main Russian stock indices. At the same time, some support to the quotations of the shares of Russian oil companies was provided by the rising of oil prices to their new historic high (more than 141 USD/barrel in the month's second half). Besides, among the significant events on the share market in June, one should note the rounding-up of the final stage of the reorganization of RAO "UES of Russia" on 30 June 2008.
The negative external background produced by the writing-off of their new financial losses by the biggest financial companies, the trends associated with the adjustments of oil prices, and the slowdown of economic growth in the USA caused further decline on the Russian financial market over the next month. The panicking activity on the Russian stock market
and its collapse (including the significant drop in the value of shares on Russian exchanges as demonstrated by the trading results in July (to 28%), the fall of the MICEX and RTS indices and the contraction of the trading volume (by more than 15%)) also resulted in part due to the domestic news: the collapse of "Mechel"'s quotations (by 38%) and the reduction overnight, by one-third, of the company's capitalization, caused by the criticism of it by Prime Minister V. Putin; the disappointing reporting documents of "Sberbank of Russia"; and Rosstat's information on the significant slowdown of industrial production in June.
In August, Russian shares also demonstrated a sharp decline. The main reason behind this severe market slump was the dramatic drop if oil prices, the military conflict between Russia and Georgia, the passive expectation on the part of investors as to how the situation with the company "Mechel" was going to be resolved, and the considerable weakening of the ruble against the US dollar. The "promotion" of the rating of the Russian banking system by Standard&Poor's from Group 8 into the more "reliable" Group 7 in early August had no significant effect on the market.
The rate of the Russian stock market's decline became even more rapid in September, in face of the deepening world financial crisis aggravated by the bankruptcy of one of the biggest US investment banks - The Lehman Brothers; by the takeover of Merrill Lynch by a commercial bank and the potentially similar fate of the two remaining biggest investment banks in the USA; by the nationalization of the two leading US mortgage agencies; and by the government bailout of AIG, the biggest US insurance company which had found itself on the verge of bankruptcy. The abrupt collapse of the Russian share market (including the plunging of the most liquid shares on Russian exchanges, as demonstrated by the September results, up to 40%, and of the MICEX and RTS indices- by more than 20%) in the wake of these events was the reason why the RF Federal Financial Markets Service had to resort to such unprecedented measure as the closure of the Russian exchanges - MICEX and RTS - on 17 and 18 September 2008. Besides, one of the negative consequences was the 10-15% fall, by the month's results, in the capitalization of biggest Russian companies.
In October, the meltdown of world financial and commodities markets, the increasingly negative investor expectations concerning the deepening financial crisis, and the panic on the Russian exchanges further deteriorated the situation on the Russian share market. Besides, the frequent application, during that month, by the RF Federal Financial Markets Service of such measures as suspension of trading on the MICEX and RTS, the emergence of the first victims of the financial crisis in Russia among credit institutions resulting from their failure to timely fulfill their obligations, the downgrading, on 23 October, of Russia's rating by Stan-dard&Poor's from "stable" to "negative" - against the backdrop of the unraveling liquidity crisis, and the diminishing trust in the RF financial system all resulted in a drop in the value of the most liquid shares on Russian exchanges, as seen by the trading results in October (to 70%), as well as of the quotations of MICEX and RTS indices (by more than 50%). The capitalization of biggest companies also displayed a continuing downward trend (on the average, by 15 - 20% by month's results).
The negative background created by foreign and domestic news, the drop in international oil prices, on the one hand, and the implementation by the governments of some countries, including the RF, of certain measures designed to stabilize their financial systems, on the other, produced the multidirectional trends on the Russian share market that could be observed in November - December 2008. Thus, whilst late October - early November was
marked by an increase in the main stock indices (the MICEX index rose by nearly 45%), in the second half of November this upward trend gave way to a downward one, and from the end of November and through December the market was demonstrating variable dynamics. The deterioration of the situation on the stock market during that period was contributed to by such factors as the recall of the licenses of several credit institutions because of their failure to timely fulfill their obligations, the considerable drop of the ruble against the US dollar and the euro as a result of the ruble depreciation policy pursued by the RF CB, the raising of the RF CB's refinancing rate to 13% per annum, as well as the downgrading of Russia's sovereign rating by Fitch Ratings and Standard & Poor's from "stable" to "negative". However, the actions undertaken by the RF Government to support Russia's financial market had, on the whole, a favorable effect on the mood of investors. Besides, any dramatic changes in investors' expectations were leveled down during that period by applying the already habitual method - suspending trading on the MICEX and RTS. All these factors resulted in the former trend's reversal and in the growing prices of the majority of the most liquid shares on Russian exchanges (as demonstrated by the results of trading in November (to 30%) and December (to 40%), as well as of the quotations of the MICEX and RTS indices (by more than 15%). At the same time, the capitalization of companies, by the November results, decreased on the average by 40 - 45%, and the results of December demonstrated a decline within the range of 10%.
In 2008, in contrast to the situation one year earlier, the value of the most liquid Russian shares dropped considerably (Fig. 24) due to the negative impact of the world financial crisis on the Russian stock market. Thus, last year the most unprofitable investments were in shares in "Mosenergo", "Sberbank", "Surgutneftegaz", and VTB Bank, which shed 83.98%, 77.45% and 73.47% of their value respectively. These were followed, in terms of rating, by securities of GMK "NorNikel'", "Gazprom" and "Ta-meft"', which over last year lost 69.04%, 68.50% and 62.67% of their value respectively. A relatively high rate of decline was demonstrated by "Gazprom Neft" securities, which dropped in 2008 by 59.2%, as well as those of "LUKOIL" (-53.31%) and "Rosneft'" (-52.14%). Somewhat smaller losses were associated with "Surgutneftegaz" shares - which dropped 43.90%, and with those of RAO "UES of Rus-
38
sia" (as of 6 June 2008). In 2008, the lowest rate of devaluation among all the Blue Chips was demonstrated by shares in Open-end Joint-stock Company "Rostelekom", which fell 8.18%.
On the MICEX, the most traded securities of the year 2008 were shares in "Gazprom", which accounted for approximately 35% of aggregate turnover on the MICEX share market. These were followed by shares in the Open-end Joint-stock Company "Sberbank of Russia', which constitute approximately 15% of the aggregate trading volume. Next came shares in Open-end Joint-stock Company "LUKOIL", whose index was at the level of approximately 13%. They were closely followed by shares in GMK "NorNikel'" and "Rosneft'", which ranked fourth and fifth with 12% and about 7% respectively. Thus, in 2008, the percentage of transactions with shares of these five issuers on the MICEX was approximately 82%, which is somewhat lower than this index' value of the previous year (approximately 90%). It should be noted that in 2008, by comparison with the situation a year earlier, the companies' rating with regard to their trading on the MICEX somewhat changed because of the reorganization of
38 On 6 June 2008, the shares of the RAO "UES of Russia" went out of circulation on the exchanges as a result of
the company's reorganization.
RAO "UES of Russia" and its ceasing to exist a juridical person as of 1 July 2008; so, the fifth place in the leaders' rating now belonged to another company - "Rosneft".
10,00% 0,00% -10,00% -20,00% -30,00% -40,00% -50,00% -60,00% -70,00% -80,00% -90,00%
Source: The Moscow Interbank Currency Exchange (MICEX).
Fig. 24. Dynamics of the Russian Blue Chips in 2008
According to data published by the MICEX, as of December 31 2008, the top five companies who were leaders by the scope of their capitalization as estimated on the basis of the average monthly indices could be described as follows: "Gazprom" - 2,359.07 bn rubles (against 7,448.4 bn rubles as of the end of 2007); "Rosneft'" - 955.40 bn rubles (against 2,269.9 bn rubles in 2007); Open-end Joint-stock Company "Lukoil" - 706.42 bn rubles (against 1,883.3 bn rubles in 2007), "Surgutneftegaz" - 562.54 bn rubles (1,085.4 bn rubles as of the end of 2007); and "Sberbank of Russia" - 539.24 bn rubles (against 2,160.9 bn rubles in 2007). Thus, as a result of the dramatic shrinkage of capitalization in 2008, the companies' rating by level of their capitalization in 2008, by comparison with that in 2007 had undergone certain changes: GMK "NorNikel" was surpassed by "Surgutneftegaz". Importantly, as seen by last year's results, four out of the five most highly capitalized companies in Russia are representatives of the oil and gas sector. Among the companies belonging to sectors other than the raw-materials one, the highest capitalization level, just as a year before, was demonstrated by "Sberbank of Russia".
I Change in price (%)
The futures market
Every year, turnover on the futures market had been demonstrating significant growth, and the year 2008 was no exception. Thus, according to last year's results, the aggregate turnover of trade in futures and options on this segment of Russia's financial market was approximately 11,157.24 bn rubles, against approximately 7,531.2 bn rubles in 2007. Thus, the turnover of the market for futures contracts, FORTS, in 2007 increased almost 50% on the previous year. The participants in trade concluded more than 28.7 million transactions and 239.8 million contracts (against approximately 11.7 million transactions and 145.1 million contracts in 2007). The average daily volume of open positions on standard contracts was in 2008 approximately 247.5 bn rubles and 6.2 million contracts, having increased by comparison with 2007 by 50% in rubles and by 47.6% in the number of contracts (in 2007: 164.9 bn rubles, 4.18 million contracts). During the year 2008 the volume of open positions reached its historic high of 466.96 bn rubles and 12.8 million contracts (on June 7), as well as its historic low - 29.05 bn rubles and 1.3 million contracts (on December 15). In the segment of futures contracts, in 2008 - similarly to the previous year - the bulk of transactions was constituted by those with futures, which accounted for approximately 84.2% of aggregate turnover, or 9,394.5 bn rubles (against 6,207.3 bn rubles in 2007), whereas with regard to options the number of concluded transactions was to the value of only 1,762.7 bn rubles ( against 1,323,9 bn rubles in 2007).
As for ratings, the most popular instrument among investors on the RTS futures market were RTS index futures, then the ruble/USD exchange rate, followed by contracts for shares in the open-end joint-stock companies "Gazprom" and "LUKOIL". The most popular options were those on RTS index futures and on shares in Open-end Joint-stock Company "Gazprom".
In 2008, several new instruments appeared on the FORTS market. One of them was the futures contract "Shares in Energy Industry Companies" launched on May 19 2008, with the execution date as of 15 December 2008, which was designed to support the liquidity of the shares of electric power companies after the termination, June 6, of RAO "UES of Russia"'s trading on the exchange market. In this connection, the basic asset of futures from 1 July onwards was the "basket" of 23 shares in the companies spinning off from RAO "UES of Russia", namely OGK - 1, OGK - 2, OGK - 3, OGK - 4, OGK - 6, TGK - 1, TGK - 2, TGK - 4, TGK - 6, YuGK TGK - 8, TGK - 9, TGK - 10, TGK - 11, TGK - 14, Volga TGK, the Yenisey TGK, Mosenergo, Kuzbassenergo, FSK, GidroOGK, INTER RAO YeES Holding, Holding MRSK, and RAO "Energeticheskie systemy Vostoka" [ "Energy Systems of the East" ].
In the changes occurring on the RTS futures market in 2008 one can single out several periods on the basis of certain typical features. Thus, while in January - August 2008 monthly turnover was in the range of 1000 - 1300 bn rubles, from September 17 and until the month's end there was a marked drop in investor market activity (the turnover volume was approximately 800 bn rubles by the results of September, or more than 20% less than previously) because of the dramatically rapid deterioration of the Russian financial market as a result of negative foreign events associated with the worsening of the world financial crisis. In October, the RTS futures market demonstrated an even more considerable drop in the volume of its monthly turnover (almost by 2.3 times) - to 380 bn rubles. In November, this downward trends continued, but the rate of decline decreased, dropping by 10% on the previous month (342 bn rubles). And, finally, in December the dynamics of the futures market, influenced by
the positive expectations of investors coupled with the anti-crisis measures adopted by the governments of some countries, changed its vector and began to climb. Thus, in December investor activity started to rise (by 11%) on the previous month; while turnover reached approximately 378 bn rubles
Somewhat different situation was observed in 2008 on the MICEX futures market. Thus, its turnover, as demonstrated by the February results, was declining, having dropped by almost 20% by comparison with January - to 216 bn rubles. Later on, this trend gave way first to moderate growth (by 3% in March), and then to dramatic growth - by more than 70% in April (to 380 bn rubles). In the next two months there was a downward trend - turnover shrank 4% in May and 45% in June (its volume by the results of June was approximately 200 bn rubles). After that, there was growth once again: turnover by the results of July rose by more than 35%, in August - by almost 50% (to 400 bn rubles), and in September - by 17% (to 460 bn rubles), which happened mainly due to the considerably increased turnover of trading in ruble/USD futures. Investor activity in October, because of the worsening situation on the Russian financial market, decreased by almost 15% by comparison with the previous month (turnover being approximately 398 bn rubles). But the most obvious impact of the global economic crisis on the MICEX futures market was observed in November, when the turnover volume dropped almost 8.5 times by comparison with the previous month - to a total of 47 bn rubles, as demonstrated by the month's results. In December the market was making an upward adjustment, in the course of which it climbed almost 67% - to 78.5 bn rubles.
On the whole, as seen by last year's results, the aggregate turnover of trading in futures on the MICEX futures market amounted to approximately 3,314.19 bn rubles; a total of more than 22.4 thousand transactions and 130.6 million contracts were concluded. In 2008, the average daily volume of open positions for standard contracts amounted to approximately 8.8 bn rubles and 340.3 thousand contracts. In this connection, the highest turnover volume in 2008 was achieved with regard to ruble/USD futures - 3,240.5 bn rubles (5.9 thousand transactions, 130.4 million contracts).
Factors determining the dynamics of the Russian stock market
The dynamics of the Russian stock market in 2008 was determined by a number of factors which, for the sake of convenience, can be subdivided into the following groups:
• the domestic political situation;
• relations with international financial institutions and organizations;
• the situation on international financial markets;
• the situation on international raw-materials markets (in particular, oil markets);
• the world economic crisis;
• corporate news.
Each of these groups of factors produced varying effects, throughout the year 2008, on the behavior of different segments of the Russian financial market. Most of them have already been mentioned when analyzing the dynamics of different segments of the Russian financial market.
Relations with international financial institutions and organizations
Over the past year, Russia's relations with international financial institutions were developing against the backdrop of this country's increasing foreign debt, dramatic decline of the international reserve volume from August 2008 onwards, and the deteriorating domestic financial situation in response to the world economic crisis, which was reflected by the lowered sovereign ratings of the Russian Federation.
Thus, on September 19 2008, the international Standard&Poor's rating agency downgraded the forecast of Russia's sovereign rating from "positive" to "stable" - as a result of the support of Russia's financial market with funding from the state budget, as well as of the lowered reserve norms in face of the deepening liquidity crisis. And on October 23, Standard&Poor's lowered the RF's rating even further - from "stable" to "negative", as a result of the implementation of anti-crisis measures by the RF Government, which were designed to continue the support of the banking sector with budget funding in order to counterbalance against the liquidity crisis and diminishing trust in the financial system. Besides, on December 8 2008 Standard&Poor's, in response to a dramatic shrinkage of international reserves and investment flows, lowered the RF's long- and short-term credit ratings on foreign-currency obligations: from "BBB+/A-2" to "BBB+/A-3"; the long-term sovereign credit rating on its national-currency obligations - from "A" to "BBB+"; and the short-term rating on Russia's national-currency obligations was confirmed to be at the level "A-2".
On November 10 2008, Fitch Ratings, the international rating agency, downgraded the forecast of Russia's sovereign rating from "positive" to "negative" - in view of the risks of deposit outflow and capital flight, as well as the systemic flaws in the banking system and the relatively high inflation rate.
On July 16, the Moody's agency upgraded the rating on Russia's foreign-currency debt obligations, as well as its ceiling for foreign-currency deposits from Baa2 to Baa1, and later, on 12 December, downgraded the forecast of Russia's rating from "positive" to "stable".
The situation on international financial markets
The past year - 2008 - saw a rapid deterioration of the situation on the world stock markets (see Table 36), as compared to the results of the previous year.
In particular, US stock indices, by the results of the year 2008, demonstrated a significant decline. Thus, US stock index Dow Jones Industrial dropped by 33.84% (or by 4,488.43 points); NASDAQ Composite index plunged even further - by 40.54% (or by 1,075.25 points) (see Fig. 25). One can distinguish, with regard to the changes in US stock indices, three main periods which are characterized by different trends (Fig. 25). Thus, whilst until the end of July the market was demonstrating, on the whole, multidirectional changes, later on, from August through October, this situation gave way to a sharp drop in the values of the world's main indices (especially as seen by the results of October 2008 - mainly by more than 25%). In November - December 2008 the. market once again began to demonstrate multidirectional changes, but at the same time the indices' values in the periods of growth did not exceed those registered as of the end of August 2008. Such trends were displayed by all the international stock indices.
Table 36
Behavior of world stock exchange indices in 2008
Data as of 31 December 2008 Code Index value Change from year's beginning
MICEX (Russia) MICEX index 619.53 -67.20
RTS (Russia) RTSI 631.89 -72.41
Dow Jones Industrial Average (USA) DJI 8 776.39 -33.84
NASDAQ Composite (USA) NASD 1 577.03 -40.54
S&P 500 (USA) SPX 903.25 -38.49
FTSE 100 (UK) FTSE 4 434.17 -31.33
DAX-30 (Germany) DAX 4 810.20 -40.37
CAC-40 (France) CAC 3 217.97 -42.68
Swiss Market (Switzerland) SSMI 5 534.53 -37.01
Nikkei-225 (Japan) NIKKEI 8 859.56 -42.12
Bovespa (Brazil) BUSP 37 550.31 -41.22
IPC (Mexico) IPC 22 380.32 -24.23
IPSA (Chile) IPSA 2 376.42 -22.13
Straits Times (Singapore) STI 1 761.56 -49.41
Seoul Composite (South Korea) KS11 1 124.47 -40.73
ISE National-100 (Turkey) XU100 26 864.07 -51.63
Morgan Stanley Emerging Markets Free Index EFM 457.64 -54.44
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Fig. 25. Dynamics of the main USA and Russian stock indexes in 2008 (January 9, 2008 = 100%)
So, if one looks at the stock markets of other developed countries, it will become obvious that these also declined, as shown by the results of 2008. Some stock indices of European countries dropped on the whole in the same degree as did US indices. Germany's DAX-30
dropped over last year by 40.37%, whereas France's CAC-40 - by 42.68% (Table 36). Japan's stock index Nikkei-225 also plunged 42.12% by comparison with the year's beginning.
The stock markets of developing countries demonstrated in 2008 a similar trend by shedding 20 - 50%. As a result, the decline of the aggregate stock index of developing countries, as estimated by Morgan Stanley on the basis of the annual results, amounted to approximately 55%.
While analyzing the main factors determining the indices' dynamics, one should note the following events in the period of January through July 2008: the negative situation on the US debt market which triggered the world economic crisis; negative macroeconomic and corporate news, the considerable growth of international oil prices from February onwards (to the level of 150 USD/barrel. in the first half of July 2008); the USD's weakening on the world market; the bankruptcy of one of the world's biggest investment banks, Bear Stearns (in March); and the repeated lowering of the US FRS's discount rate (to 2%). At the same time, in February, April and May investors began to display positive attitudes, and there was a revival of activity on the international stock exchanges, in particular in connection with growing oil prices, and positive macroeconomic reports and corporate news.
In August, the situation on the world financial markets worsened as a result of the news of the big losses suffered by two US leading mortgage agencies - Freddie Mac and Fannie Mae and the potential prospect of their nationalization; Lehman Brothers' search for investors who would be ready to buy part in this biggest investment bank's investment business; the negative macroeconomic statistics of the USA; the substantial drop in oil prices and the weakening of the ruble against the US dollar.
Among the main factors associated with the negative global situation that had their impact on the Russian market in September, it is worthwhile to note the dramatic decline of the US share market, followed by its European and Asian counterparts, as a result of the bankruptcy of one of the biggest investment banks in the USA - Lehman Brothers, and of the takeover of another one - Merrill Lynch - by the Bank of America, as well as the news of the forthcoming bankruptcy of the biggest US insurance company - AIG - and the nationalization of the mortgage agencies Freddie Mac and Fannie Mae, a slowdown of the growth rate of the world economy, and the continuing rapid decline of oil prices (below the level of 100 USD/barrel. All these factors resulted in the lowering of the main indices of developing countries by 3 - 12%, and those of the USA and Europe - by 3 - 10%, as demonstrated by the month's results.
In October the dynamics of world financial markets was developing against the background of the global liquidity crisis aggravated by a solvency crisis, negative macroeconomic statistics published in the USA, the slowdown of growth of the world economy, still further considerable drop of oil prices (below the level of 60 USD/barrel at the month's end), the consolidation of the US dollar's position, negative forecasts for the developing markets, and lowering demand for raw materials. The measures adopted by the governments of some countries in order to support the financial sector only confirmed the existing fears of further deepening of the financial crisis. All this resulted in the continuation of the downward trends displayed by the basic international stock indices, which dropped on the markets of developing countries by 15 - 40%, and on the markets of the USA and Europe - by 20 - 30%.
In November and December the situation on world financial markets was characterized not only by periods of dramatic decline against the background created by negative news, but
also by those of temporarily growing investor optimism as a result of the adoption, by the governments of some countries, of measures designed to ensure the stabilization of their financial systems. Among the main factors determining the negative global situation, we should note the following ones: the US Treasury Department's refusal to buy out from banks their non-liquid mortgage-related assets; the aggravation of the global liquidity crisis, the dwindling profits of US motor-car companies (General Motors, Ford ) and biggest banks (Citigroup, J.P.Morgan Chase&Co, Goldman Sachs and Morgan Stanley); considerable losses of the Swiss bank Credit Suisse and of the biggest French bank BNP Paribas; the purchase by the UK Government of 57.9% of shares in the country's biggest bank - the Royal Bank of Scotland; the negative macroeconomic news from the USA; the plummeting oil prices ( they dropped below 50 USD/barrel in November and then sunk under 35 USD/barrel by late December); and the strengthening of the US dollar against the euro on the international currency market. On the other hand, growth on world markets was promoted by: the US Treasury Department's decision to allocate financial aid to Citigroup in the amount of 20 bn USD; the lowering key rates of the US FRS, the European Central Bank (ECB), the Bank of England, and the Central Banks of Switzerland, Sweden and South Korea; the US Administration's decision to grant a government credit to US motor-car companies (General Motors Corp. and Chrysler Ltd.) in the amount of 17.4 bn USD; as well as the development, by some governments, of other measures designed to support the national economies of their countries. These factors created the multi-vector movements of the basic international stock indices in November - December 2008. Thus, in November the markets of developing countries displayed an increase of the main indices by 5 - 20%, the markets of the USA and Europe - both the rise of some indices by 2 - 8% and the decline of the other main indices, on the average, by 1%. In December, the stock indices of developing countries generally demonstrated an increase of 1 - 12%, while those of the markets of the USA and Europe were in the main declining (by 1 - 4%).
Corporate news
The changed credit ratings. The improved performance of some Russian corporations was reflected by their earning of relatively high long-term credit ratings or by the revision of their current rating status. At the same time, the world financial crisis inevitably resulted in some adjustment of these ratings.
Thus, on March 17 2008, the international rating agency Standard&Poor's (S&P) revised its forecast of the rating on the Open-end Joint-stock Company "Rostelekom" and then changed it from "stable" to "positive"; its long-term credit rating was confirmed to be at the level "BB-", while on December 16 its long-term credit rating was changed from "BB-" to "BB" - with a stable forecast, due to the improvement of the company's indices.
On April 1 2008, the rating agency Fitch Ratings upgraded its long-term ratings (foreign- and national-currency denominated) on the Open-end Joint-stock Company "Gazprom" from "BBB-" to "BBB", and its forecast of the company's ratings - from "positive" to "stable", since its financial indices had improved.
On July 11 2008, the agency Fitch Ratings upgraded its long-term foreign currency rating on the Open-end Joint-stock Company "TaTneft'" (denominated in foreign currencies) from level "B+" to "BB", and its rating forecast from "positive" to "stable", due to the improvement of company's corporate governance.
On July 16 2008, the international rating agency Moody's Investors Service upgraded its long-term rating on foreign-currency deposits of Sberbank of Russia from Baa2 to Baal (the highest rating ever granted to a Russian bank by Moody's Investors Service); the rating forecast was upgraded to "positive". Besides, the forecast of ratings on the issues of outstanding notes floated by Sberbank of Russia under MTN Program. was changed from "stable" to "positive".
On August 20, the international rating agency Standard&Poor's confirmed its BBB-credit rating for the Open-end Joint-stock Company "GMK "NorNikel'", after having analyzed its financial and operational indices and the shareholder structure; besides, it confirmed its forecast ("stable"). Standard&Poors also confirmed the BB long-term credit rating and the ruAA national scale rating on the Open-end Joint-stock Company "Mosenergo"; the forecast was "stable".
On October 24, the international rating agency Standard&Poor's downgraded its forecast of the rating on Open-end Joint-stock Company "Gazprom" from "stable" to "negative" BBB+/A-2 BBB+/A-2 (while confirming its BBB credit rating); the forecast of the rating on VTB Bank was also changed from "stable" to "negative", which coincides with the forecast of the Russian Federation's sovereign ratings; the bank's BBB+/A-2 long- and short-term credit ratings and its ruAAA national scale rating were confirmed. Also on 24 October, Stan-dard&Poor's confirmed its rating on Open-end Joint-stock Company "Gazprom Neft", its forecast being "stable".
On November 13, the international rating agency Standard & Poor's recognized Open-end Joint-stock Company "NK 'Rosneft''" one of the best in Russia in terms of its information openness (second place), while on 8 December it confirmed its "stable" forecast of the rating on the above company.
Besides, on December 10 2008 Standard&Poor's, in connection with the deteriorating conditions for the activity of the Russian oil sector downgraded its forecast of the rating on Open-end Joint-stock Company «LUKOIL» from "positive" to "stable"; it also confirmed the company's BBB long-term credit rating and its ruAAA+ national scale rating.
Results of financial activity. In October - December 2008, many companies published their financial results for the current year, among which the following information is noteworthy.
On October 28 2008, Open-end Joint-stock Company "Gazprom Neft" published its Q III 2008 results for Q III 2008: net profit increased by 11% - to 21.5 bn rubles, while the amount of net profit in the first 9 months of 2008 increased by 51% - to 83.4 bn rubles.
On November 10, Open-end Joint-stock Company "Rostelekom" published its financial results for the first 9 months of 2008 in accordance with the Russian accounting standards (RAS): its profit from sales rose by 8.1% - to 8,852.6 million rubles; its OIBDA-based rate of return amounted to 26.0%; proceeds - to 46,414.0 million rubles; and its net profit - to 6,929.5 million rubles (against 8,844.8 million rubles in the same period of 2007). And on December 8 Open-end Joint-stock Company "Rostelekom" published its non-audited consolidated results for the first half-year 2008 in accordance with the IAS: its net profit increased to 9.8 bn rubles (fourfold - by comparison with the same period of 2007); its OIBDA (operating profit before depreciation, devaluation of its non-operating assets; and the loss (profit) from withdrawal of fixed assets) - to 7.8 bn rubles (14% higher than in 2007); its OIBDA-based rate of return amounted to 25%.
On November 14, Open-end Joint-stock Company "Mosenergo" published its financial results for the first 9 months of 2008 in accordance with the Russian accounting standards: its net profit rose by 201.49 million rubles by comparison with the same period of 2007 - to 1,466.83 million rubles; profit from sales amounted to 1,740.31 million rubles, which is by 955.57 million rubles (or 121.8%) higher than in 2007; proceeds were as high as 66,078.16 million rubles, having increased by 12,914.03 million rubles (or by 24.3%) by comparison with the level of 2007. And on 25 December Open-end Joint-stock Company "Mosenergo" published its IAS-based non-audited consolidated intermediate financial report for Q III and the first 9 months of 2008: the proceeds of sales in the first 9 months of 2008 amounted to 66,079 million rubles (a 12,915 million rubles (or 24.29%)-rise on the same period of 2007); the proceeds in Q III 2008 increased by 5,678 million rubles (or by 46.03%).
On December 1, Open-end Joint-stock Company "NK «Rosneft" published its consolidated financial report based on US GAAP for Q III and the first 9 months of 2008: net profit in the first 9 months of 2008 amounted to 10.3 bn USD (by 139.0% more than the sum of 4.3 bn USD received in the first 9 months of 2007); EBITDA amounted to 17.08 bn USD (by 81.7% more than in the first 9 months of 2007). In Q III 2008, EBITDA amounted to 5.3 bn USD (31,4% higher than the sum of 4,1 bn USD in Q III 2007), and net profit - to 3.47 bn USD (by 79.9% higher by comparison with the sum of 1.93 bn USD received in 2007).
On December 11, Open-end Joint-stock Company "LUKOIL" published its consolidated financial report for the first 9 months of 2008 based on US GAAP: its net profit amounted to 10,765 million USD (by 70,9% more than that received in the first 9 months of 2007); EBITDA rose by 60.6% and amounted to 16,652 million USD; the proceeds of sales increased to 89,265 million USD, or by 56.3%.
On December 15, Open-end Joint-stock Company "Gazprom Neft" published its financial results based on US GAAP for Q III and the first 9 months of 2008: its net profit in Q III 2008 was 1,594 million USD (against 957 million USD in 2007); its profit before taxes and interest and depreciation charges (EBITDA) amounted to 2,642 million USD (against 1553 million USD in 2007); its proceeds amounted to 9,,638 million USD (against 5435 million USD in Q III 2007). Net profit in the first 9 months 2008 was 5,201 million USD (by 84.5% higher than in 2007); EBITDA amounted to 7,761 million USD (by 73% higher than the 2007 index); and proceeds - 27,315 million USD (by 86% higher than in 2007).
On 22 December, "Sberbank of Russia" published its financial results of the first 11 months of 2008 in accordance with the Russian accounting standards: profit before profits tax amounted to 146,0 bn rubles (against 148,9 bn rubles in the first 11 months of 2007), net profit - to 113,2 bn rubles (against 118,4 bn rubles in 2007).
Also on December 22, Open-end Joint-stock Company "TaTneft" published its non-audited consolidated intermediate abridged financial report, based on US GAAP, for the first 9 months 2008: its proceeds from sales amounted to 14,973 million USD (against 10,235 million USD in the same period of 2007); and its net profit - to 1,204 million USD (against 1,169 million USD in the same period of 2007).
On December 30, Open-end Joint-stock Company "Gazprom" presented its IAS-based consolidated intermediate shorter financial report for the first half-year 2008: the amount of its proceeds from sales (less excises, VAT and customs duties) increased by 52% - to 1,743 bn rubles; its operating expenses rose 30% to 1,026.6 bn rubles; and its profit amounted to 609,35 bn rubles ( 53% higher than in the same period of 2007).
Mergers, takeovers, partnerships, reorganizations. In 2008, some Russian companies continued to acquire new assets - including foreign ones, and to establish long-term contacts designed to expand and enlarge their businesses, and to improve their performance. Besides, some companies reorganized and restructured their businesses.
Open-end Joint-stock Company "Gazprom "
On February 21 2008, Open-end Joint-stock Company "Gazprom" signed, with Total and StatoilHydro an agreement on the creation of a special-purpose company, Shtokman Development AG, in order to implement the first stage of the development of the Shtockman deposit (in Shtokman Development AG's capital "Gazprom" holds 51%, Total - 25%, and StatoilHydro - 24%); the company is registered in Switzerland.
On March 18 2008, Open-end Joint-stock Company "Gazprom" and the Bolivian state-owned oil-and-gas company YPFB signed an Agreement on prospecting work in the territory of Bolivia (Sunchal, Acero and Carohuaicho).
On April 3, Open-end Joint-stock Company "Gazprom" and Siemens AG signed an Agreement on strategic partnership, which opened up new opportunities for their more extensive cooperation in the territory of Russia and other countries in the oil and gas sphere.
On May 23, OJSC "Gazprom" and the company Petrovietnam signed an Agreement on their further cooperation, which envisaged prospecting work and further development of four new blocks on Vietnam's continental shelf, as well as the establishment of a joint venture, "GazpromViet", designed to promote participation of these two companies in oil and gas projects in the territories of Russia and other countries.
On September 29, OJSC "Gazprom" and Kogas signed a Memorandum of Mutual Understanding for supply of natural gas from Russia to Korea, which envisaged the possibility of putting a pipeline for supplying natural gas to consumers in the Republic of Korea across the Korean Peninsula, as well as prospecting along this route.
And on October 2, OJSC "Gazprom" and the German company E.ON AG signed an Agreement on joint participation in a project for developing the South Russian oil and gas deposits, which envisaged an exchange of assets as a result of which E.ON AG was to receive 25% minus one ordinary registered share in the charter capital of OJSC "Severnefteegazprom", and thus to take part in the development of the South Russian oil and gas deposits. OJSC "Gazprom" was to receive 49% in Close-end Joint-stock Company "Gerosgas", the owner of 2.93% of shares in OJSC "Gazprom".
OJSC «Gazprom Neft»
On May 28, OJSC "Gazprom Neft" and OJSC "Moskovskaia neftegazovaia Kom-paniia" ["Moscow Oil-and-Gas Company"] (MNGK) registered a joint venture on the principle of parity (50% of its charter capital belongs to OJSC "Gazprom Neft", and 50% - to MNGK) for managing the company Moscow NPZ Holdings B.V.
On July 4, OJSC "Gazprom Neft" and Yokogawa Electric Corporation signed an agreement on strategic cooperation, whereby the cooperation of these two companies was envisaged in implementing the state-of-the-art systems for managing technological processes, measurement systems and information technologies manufactured by Yokogawa Electric Corporation at the enterpris incorporated in OJSC "Gazprom Neft".
On July 23, OJSC "Gazprom Neft" and OJSC "Aviatsionnaia kompaniia 'Transaero'" ["The 'Transaero' Airline"] signed an agreement on cooperation designed to further improve
the efficiency and stability of the fuel supply systems at St. Petersburg and in other regions of the Russian Federation.
OJSC «LUKOIL»
In February, OJSC "LUKOIL" and OJSC "Gazprom Neft" launched their joint business of fuelling aircraft at Pulkovo Airport. Besides, OJSC "LUKOIL" completed the deal whereby it acquired 100% of shares in Close-end Joint-stock Company "Assotsiatsiia sotsial'no-ekonomicheskogo, nauchnogo I delovogo sotrudnichestva "GRAND"" [Association for Socio-Economic, Scientific and Business Cooperation "GRAND"], as well as 100% of shares in "Mega-Oil M" Limited Liability Company, among whose assets there are 122 filling stations situated in Moscow City and Moscow Oblast, as well as 26 filling stations in Pskov, Kaluga, Novgorod and Rostov Oblasts. The volume of sales of these filling stations is estimated to be more than 300 thousand tons per annum.
In March, "LUKOIL Overseas" (a 100-% affiliated company of OJSC "LUKOIL") completed a deal to the value of approximately 580 million USD with Close-end Joint-stock Company "MGNK 'Soiuzneftegaz'" for the acquisition of 100% of shares in SNG Holdings Ltd. group, including the company "Soiuzneftegaz Vostok Limited", a party to the production-sharing agreement (PSA) with regard to the deposits in the Southwest Gissar and Ustyurt region in the Republic of Uzbekistan. The other party to this PSA, as the government's empowered agency, was the national holding company "Uzbekneftegaz".
On April 30, LUKOIL Europe Holdings B.V. (a 100-% affiliated company of OJSC "LUKOIL") closed the deal for the purchase of the Croatian company EUROPA-MIL. The number of assets thus acquired includes 9 filling stations in Zagreb and Split, 5 land plots for the construction of filling stations, and a sea/railway petroleum-product terminal with a capacity of 8,000 m . The average daily volumes of sales of petroleum products by the filling stations belonging to EUROPA-MIL amounts to 11 tons.
On June 23, OJSCC "LUKOIL" and the Italian company ERG S.p.A. signed an agreement for the creation of a joint venture for managing the oil-processing complex ISAB near Priolo (Sicily). In the new joint venture, OJSC "LUKOIL" will own 49%, ERG - 51%. The value of the deal was 1,347 bn euro, less the value of stocks of oil.
On July 22, OJSCC "LUKOIL" and PDVSA - the National Oil Company of Venezuela - signed an agreement on the joint exploration of Junin-3 block in the Orinoco heavy oil belt in Venezuela (for a fixed period of two years with the possibility of prolongation), in the course of which a joint study will be performed to evaluate the project of extracting extra-heavy oil, its further refining in the territory of Venezuela and subsequent export; the cost of exploration will be evenly shared between the two parties.
On November 24 2008, OJSC "LUKOIL" completed a deal whereby it acquired a big wholesale outlet in Turkey - 100% of shares in the Turkish company Akpet.
RAO «UES of Russia»
In 2008, the process of reorganizing RAO "UES of Russia" was continued.
On February 11, the sale of 49% of shares in OJSCC "Kostromskaia sbytovaia kom-paniia" ["Kostroma Sales Company"], formerly owned by RAO "UES of Russia", to the value of 150 million rubles, took place; the buyer was "TK Altai Limited Liability Company". On 28 February there was an open auction for the sale of a 14.17-% block of shares in OJSCC "Novosibirskenergo", owned by RAO "UES of Russia", for a sum of 3.4 bn rubles. On 17 March, a 450 million rubles deal for the sale of 49% of shares in OJSCC "Kolenergosbyt"
["Kola Electricity Selling Company"] (formerly owned by RAO "UES of Russia") was completed, with the shares having been sold through the ISTRA Trading and Information System.
On May 1, the reorganization of Close-end Joint-stock Company "Inter RAO UES", OJSCC "Severo-Zapadnaia TETs" ["North-West Power Stations"], and OJSCC "Ivanovskie PGU" ["Ivanovo Power Generating Stations"], in the form of their merger with OJSCC "Inter RAO UES" (its former name being OJSCC "Sochinskaia TETs" ["Sochi Power Stations"]) was completed. As a result of the merger, these companies acquired the status of branch companies of "Inter RAO UES" and thus were terminated as independent joint-stock societies.
On May 28, there was an open auction for the sale of a 50.9% block of shares in OJSC "Mosenergosbyt" ["Moscow Electricity Selling Company"] belonging to RAO "UES of Russia", and on 29 May - open auctions for the sale of shares in OJSC "Komi energosbytovaia kompaniia" ["Komi Electricity Selling-Supplying Company"] (50.11% of shares), OJSC "Stavropol'energosbyt" ["Stavropol Electricity Selling Company" (55.13%), OJSC "Brian-skaia sbytovaia kompaniia" ["Briansk Electricity Selling Company"], (49%) and OJSC "Ark-hangelskaia sbytovaia kompania" ["Archangelsk Electricity Selling Supplying Company"] (49%), which were owned by RAO "UES of Russia". On 17 June, there was an open auction for the sale of a 48,43-% block of shares in OJSC "Energosbyt Rostovenergo" ["Ros-rovenergo Elictricity Selling Company"] owned by RAO "UES of Russia"; on 18 June - an auction for the sale of a 100-% block of shares in OJSCC "Tiumenskaia energosbytovaia kompania" ["Tiumen Electricity Selling Company"]; and on 25 June, a deal was closed for the sale of 49% of shares in OJSC "Cheliabenergosbyt" [Cheliabinsk Electricity Selling Company] belonging to RAO "UES of Russia".
On June 6, the shares of RAO "UES of Russia" were no more circulated on the exchange. As a result of the final stage of its reorganization, from 1 July 28 holding companies were separated from RAO "UES of Russia". RAO "UES of Russia", simultaneously with the spinning-off of the holding companies, was merged with Federal Network Company and so was terminated as a juridical person.
"Sberbank of Russia"
On February 1, "Sberbank of Russia" and OJSC "Federal'naia gidrogeneriruiushchaia kompaniia" ["Federal Hydrogenerating Company"] (OJSC "GidroOGK") concluded a general agreement on cooperation in the sphere of developing electric power engineering.
On June 7, "Sberbank of Russia" and Deutsche Bank AG signed a Memorandum of Mutual Understanding, which envisaged further development of cooperation between the two banks in the part of providing their clients with efficient financial instruments and joint services on international capital markets; in the sphere of project financing and structured products; corporate, trade and export financing; was well as retail business. The parties are planning to work jointly on the financing of projects within the framework of preparation for and conduct of the 2014 Winter Olympic Games at Sochi.
Other companies
On May 20, the Ministry of Foreign Affairs of the Russian Federation and OJSC "GMK 'NorNikel'" signed an agreement on cooperation, which envisaged the Ministry's support of "GMK 'NorNikel'"'s foreign economic activity OJSC and the provision of relevant information and consulting, and on the other hand - the company's assistance to the Ministry, as well as their joint activity in the international sphere.
And on 4 July, a joint venture, of OJSC "TaTneft'" and Preiss-Daimler Group, for the production of fiber optic materials was launched in the Alabuga special economic zone.
Attraction of capital. In the past year, Russian company were rather actively pursuing the policy aimed at attracting additional investments, including on foreign financial markets, as well as were consolidating their position on world capital markets.
In February 2008, OJSC "NK «Rosneft" attracted a syndicated bank credit in the amount of 3 bn USD from a group of international banks for the period of 5 years at a rate of LIBOR + 0.95% (secured by export contracts for the sale of oil). By attracting this credit, as well as using its own monies, OJSC "NK 'Rosneft", on 14 March, redeemed in full the second tranche (5.2 bn USD) of the short-term credit attracted by this company in early 2007 in order to finance its newly acquired assets. And on 17 September OJSC "NK 'Rosneft" redeemed the third and final tranche (2.3 bn USD) of the bridge loan granted to it by ABNAMRO, Barclays, BNP Paribas, Calyon, Citibank, Goldman Sachs, J. P. Morgan Chase, and Morgan Stanley, in the amount of 22 bn USD, which had been attracted in early 2007.
On June 17, OJSC "GMK 'NorNikel" attracted a syndicated bank credit for the period of 3 years in the amount of 1.5 bn USD, these monies then being used for refinancing the short-term unsecured loan in the amount of 2.5 bn USD, granted to it by the banks BNP Paribas and Societe Générale Corporate&Investment Banking (SG CIB) for acquiring all the issued and circulating ordinary shares of the company LionOre Mining International Limited.
On June 20, OJSC "LUKOIL" attracted a syndicated bank credit in the amount of 1 bn USD, which was used to repay the residual debt of LUKOIL Finance Ltd. To a syndicate of international banks against the credit attracted in 2005 for financing the purchase of the company Nelson Resources.
In July, OJSC "Gazprom Neft" closed the deal of attracting a syndicated bank credit in the amount of 1 bn USD, which consisted of two tranches: a three-year tranche and a five-year tranche (with margins of 1.5% and 1.75% respectively). It is intended to use this credit for general corporate needs, as we'll as for the refinancing of the existing outstanding debt. Besides, on 15 December, OJSC "Gazprom Neft" and Vneshekonombank signed an agreement on the granting of a credit line with the limit of 750 million USD (five tranches, in the amount of 150 million USD each) for the refinancing, in part, of the payments earmarked for the redemption of the main debt against the syndicated bank credit in the amount of up to 2.2 bn USD, which had been granted to this company by a syndicate of foreign banks.
On October 3, "Sberbank of Russia" signed an agreement on a syndicated bank credit (to be used for general corporate needs) in the amount of 1.2 bn USD for the period of 3 years, at a rate of 0.85% per annum over LIBOR. The participants in the syndicate were 15 financial institutions in Europe, North America, and Japan. And on 18 December, "Sberbank of Russia" attracted a subordinated credit in the amount of 200 bn rubles from the Bank of Russia within the framework of the government strategy of recapitalization of system-forming banks during the period of financial instability.
On October 24, VTB Bank and Vneshekonombank signed an agreement on the attraction of a subordinated credit in the amount of 200 bn rubles for the period until the end of the year 2019 at a rate of 8% per annum (in accordance with Federal Law of 13 October 2008, No 173-FZ, "On Additional Measures Designed to Support the Financial System of the Russian Federation").
On November 25, OJSC "GMK NorNikel" and a group of western financial institutions signed a credit agreement for 10 years to be covered in the amount of 278 million euro (in USD equivalent) by Euler Hermes credit agency, for the purpose of refinancing NorNikel''s shipbuilding program.
Placement of capital. Within the framework of the government program designed to control the financial crisis, the most liquid Russian companies of the financial sector (VTB Bank and "Sberbank of Russia") began implementing, from August 2008 onward, a policy aimed at supporting Russian companies in the real sector.
Thus, on 11 August, VTB Bank and Landesbank Berlin AG organized a syndicated bank credit for OJSC "Binbank" in the amount of 27 million USD for the period of one year, the attracted monies to be used to finance the bank's clients' trade contracts.
On 26 August, the VTB Group signed an agreement on the granting of a syndicated bank credit in the amount of 150 million USD to the Russian cargo air carrier "Volga-Dnepr", the monies to be used for refinancing the bridge loan granted in July 2007 to the companies belonging to the "Volga-Dnepr" group in the amount of 80 million USD, as well as for refinancing part of the short-term outstanding debt against other bank loans; 7 banks became participants in this syndicate.
In late October and through November, within the framework of implementing the Government Program designed to support trade networks, VTB Bank started the financing of retail companies: the first tranche in the amount of 300 million rubles was received, on 27 October, by the Magnet Group; the lending limit in the amount of 7 bn rubles for the period of 1.5 years was established for the company X5 Retail Group; the lending limit in the amount of 3 bn rubles for the operating period of up to one year was established for Close-end Joint-stock Company "Corporation GRINN", which incorporates the hypermarket chain "LINIA". In November, within the framework of expanding its cooperation with enterprises belonging to the priority sectors of the Russian national economy, VTB Bank granted financing to OJSC "AV-TOVAZ" in the amount of 4 bn rubles for the period of 12 months, in order to replenish its operating assets.
Also, in order to expand its cooperation with enterprises belonging to the real sector of the economy, VTB Bank in November granted loans to the three Russian plants owned by "Trubnaia metallurgical company" (TMK) ["Pipe Metallurgical Company"] in the amount of 5.5 bn rubles for the period of one year; the financing to the enterprises belonging to Euras Group S. A. in the amount of 10 bn rubles; the financing to the three enterprises belonging to "UGMK-Holding" in the amount of 4.8 bn rubles; and it established for the Close-end Joint-stock Company "Transmashholding" a 6.5 bn rubles lending limit.
Besides, within the framework of expanding its cooperation with enterprises in the real sector, VTB Bank established, on 4 December, a 7 bn rubles documentary credit limit for OJSC "KAMAZ"; it granted credits to the motor plant belonging to the "SOLLERS" group in the amount of 4 bn rubles for the period of one year, besides, it opened credit lines for three enterprises belonging to the "Mechel" group in the amount of 15 bn rubles for the period of one year, in order to replenish their operating assets. On 10 December, VTB Bank granted credit to OJSC "Magnitogork Metallurgical Combine" in the amount of 4 bn rubles for the period of one year, also in order to replenish its operating assets. On 19 December, VTB Bank granted financing to JSC "ALROSA" in the amount of 44.2 bn rubles for the period of 600 days, designed to refinance its current short-term outstanding debt against the credits and
loans granted to it by Russian and foreign investors. On 24 December, VTB Bank granted financing to the regional mining subdivision of OJSC "Sibirskaia ugol'naia energeticheskaia kompania" ["Siberian Coal Energy Company"] (SUEK) in the amount of 2.5 bn rubles for the period of one year in order to provide financial backing for its current activity and for further development of its production capacity. Besides, on 25 December, VTB Bank granted financing to OJSC "NPO 'SATURN'" in the amount of 7.5 bn rubles, which was used to provide financial backing for its financial and economic activity, as well as for effectuating payments on its bonds and promissory notes.
And, on 30 December, "Sberbank of Russia" and OJSC "Magnitogork Metallurgical Combine" signed a credit agreement on the opening, for the aforesaid joint-stock company, of a non-renewable credit line in the amount of 3 bn rubles for the period of two years, earmarked for the financing of its current project of constructing a thick sheet mill.
Dividend policies. It is a well-known fact that one of the methods for increasing the attractiveness of shares is an efficient dividend policy.
On 21 May 2008, the annual general shareholder meeting of OJSC "Mosenergo" made the decision, with due regard for the fact of this joint-stock company having paid dividends on its ordinary shares, by the results of Q I 2007, in the amount of 296,290 thousand rubles, that no dividends be paid on its ordinary shares by the results of the year 2007.
On 5 June 2008, the annual general shareholder meeting of OJSC "NK 'Rosneft" made the decision to earmark, for the payment of dividends on its shares for the year 2007, the sum of 16.96 bn rubles, or 1.6 rubles per ordinary share (the payment of dividends is to be effectuated until 31 December 2008); this approved sum exceeds, by 20%, the dividends paid by the results of the year 2006.
On 9 June, the annual general shareholder meeting of OJSC "Rostelekom" approved the distribution of its profit, by the results of the year 2007, in the following way: 7,067.9 million rubles, or 75% of net profit, was earmarked for augmenting the company's own capital; and 2,356.0 million rubles (or 25% of net profit) was earmarked for the payment of dividends on its shares.
On 20 June, the annual general shareholder meeting of OJSC "Gazprom Neft" adopted the decision on the payment of dividends by the results of the year 2007 in the amount of 5.4 rubles per ordinary share (to be paid until 31 May 2009).
On 26 June, the annual general shareholder meeting of OJSC "LUKOIL" approved the payment of dividends, in the amount of 42 rubles per ordinary share (against 38 rubles by the results of 2006).
On 26 June, the annual general shareholder meeting of OJSC "TaTneft'" approved the payment of dividends, by the company's results in the year 2007, in the amount of 565% of face value per ordinary share, and 565% of face value per preference share (the period for the payment of dividend was established to be from 1 July through 31 December 2008).
On 27 June 2008, the annual general shareholder meeting of OJSC "Gazprom" made the decision concerning the distribution of its profit by the results of that financial year, including the payment of dividends per annum in the amount of 2.66 rubles per share (growth by 4.7% by comparison with that in 2006). The total sum to be earmarked for the payment of dividends by the results of 2007 was 62,971.5 million rubles, or 17.5% of net profit; the date established for the completion of the payment of dividends was 31 December 2008.
Judicial and tax disputes and proceedings. The year 2008 was also marked by several court hearings and tax disputes involving certain companies belonging to the category of Russian Blue Chips.
On 8 February 2008, Inter-regional Inspectorate of the RF FTS No 7 determined the amount of its claims against OJSC "Rostelekom" on the basis of the results of its activity in 2004 - 2006, which was 1.812 bn rubles. Of this amount, 1.412 bn rubles was constituted by taxes, and 0.4 bn rubles - by fines and penalties. OJSC "Rostelekom" disagrees with the resolutions adopted by Inter-regional Inspectorate of the RF FTS No 7, and so it is going assert its rights through judicial procedures - and, probably, through administrative procedures as well.
On 17 March 2008, OJSC "TaTneft'" announced the beginning of international arbitration proceedings against Ukraine in connection with the unlawful takeover, in October 2007, of Kremenchug NPZ (JSC "Ukrtatnaft"), the bulk of whose shares belongs to Tamneft' and the shareholders attached to it.
On 24 November there was a meeting of the RF Federal Antimonopoly Service, which considered an administrative case initiated against OJSC "Gazprom Neft" in connection with certain indicia of it having violated the antimonopoly law; in accordance with the meeting's resolution, a fine in the amount of more than 1.3 bn rubles was imposed on OJSC "Gazprom Neft".
Annex 1
Chronology of the main foreign and domestic events that have influenced the dynamics of the Russian financial market in September - December 2008
_Date_Main Events_
I September - low rates of deductions to the mandatory reserve fund from 1 September
II September - RF CB publishes the notification that from 29 August through 5 September the volume of gold and foreign ex-
change reserves decreased by 8.9 bn USD 1 - 14 September - a moderate decline, on the Russian share market, of the value of the majority of Blue Chips - by 2 - 4%, against the backdrop of lowering oil quotations and world stock markets' contraction
- the announcement of the bankruptcy of Lehman Brothers, one of the biggest US investment banks
- the takeover of another biggest investment bank in the USA - Merrill Lynch - by a commercial bank (Bank of America, for 44 bn USD)
- the news of the impending bankruptcy of biggest US insurance company - AUG
- the news of the possibility of purchase of the investment bank Morgan Stanley by another bank - Wachovia
- the refusal of the USA Federal Reserve Service (FRS) to change its basic discount rate
- a dramatic drop of rates on world exchanges, including the Russian stock market
- a drop of the main Russian indices to their three - year historic lows: MICEX index by 17.5% - to 881.17 points; RTS index - by 11.5% to 1,131.12 points; a drop of Blue Chips (by 10 - 20%)
- the FRS invests 70 bn USD in the national financial system, in order to bring down the discount rate on interbank credit
- a drop of Blue Chips (to 30%) and - as a result - RTS and MICEX indices; a collapse of the Russian share market, an outflow of investors from the Russian exchanges; the decision of the RF Federal Financial Markets Service (FFMS) to close down the MICEX and RTS for two days (on 17 and 18 September 2008)
- panic on the world financial markets; pessimistic expectations concerning the future prospects of Morgan Stanley investment bank, whose shares over the period of 15 - 17 September tumbled 42%
- FRS buys out 79.9% of shares in the biggest insurance company - AIG
- FRS grants to banks a credit in the amount of 55 bn USD
- the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss National Bank allocate 180 bn USD to support of financial markets
- the RF CB lowers the norms of deductions to the mandatory reserve fund by 4 p. p. (in this connection, it is envisaged that each of the established norms for mandatory reserves should be gradually increased - beginning from 1 February 2009 by 2 p. p., and then from 1 March 2009 - by another 2 p. p.)
- the RF CB lowers by 0.5 - 1 p.p. the interest rates on its credits granted to commercial banks
- the RF CB raises the adjustment coefficients applied for calculating the value of pledges for the credits granted against "non-marketable" assets
- the RF CB publishes the information that over the period from 5 through 12 September the volume of gold and foreign exchange reserves decreased by 13.3 bn USD
15 September
16 September
17 September
18 September
Date
Main Events
19 September
22 September
24 September
29 September
30 September
1 October 3 October 4-5 October
6 October
7 October
- a revival on the world stock markets in response to the announcement of the US Government's readiness to allocate 700 bn USD to buying out from banks their troubled assets, and to the ban imposed in the USA and the UK on short-term sales of shares issued by financial companies; also, support is promised to the share funds on the US money market; growth of the main world indices (by 3 - 8%); a sharp rise of the US share market where profiteering gains the upper hand (Morgan Stanley's shares jump 20.7%)
- reopening of trading on the Russian stock exchanges - the MICEX and RTS, a prevalence of profiteering inclinations (a rise of all Blue Chips by 8 -60%, led by those of VTB Bank and "Rosneft'"), a sharp rise of the exchange indices (growth of the MICEX index by 28.7% - to 1,098.95 points, of the RTS index - by 22.4% to 1,295.91 points; a suspension of trading on the MICEX and RTS for several hours, in order to bring down the market fever
- the decision of the RF government to allocate more than 3 trillion rubles from the state budget to support the domestic stock and financial markets
- the downgrading, by Standard&Poor's, of the forecast of Russia's sovereign rating from "positive" to "stable" in connection with "the growing uncertainty as to the economic policy" and "the lowering of the limits established by world banks for Russian borrowers"
- the news of the purchase of part of the business of the bankrupt Lehman Brothers bank by Barclays and Nomura
- the bankruptcy of the twelfth US bank (since the year's beginning) -Ameribank Inc.
- the announcement of a change in the status of the two remaining banks of the "big four" - the biggest independent investment banks in the USA (Goldman Sachs and Morgan Stanley), which became banking holding companies from 21 September; as a result of their changed status, these two banks began to enjoy the right to receive extraordinary credits from the FRS on a permanent basis
- the declaration of Mitsubishi UFJ Financial Group Inc. of its consent to acquire a 10 - 20% stake in Morgan Stanley
-the news of the planned upgrade of its inflation forecast by the RF Ministry of Economic Development and Trade and the introduction of a new mechanism for the payment of VAT within the framework of struggle against the liquidity crisis (the quarterly VAT can now be paid in three installments)
- an increase of oil quotations, a drop in the value of US shares
- a suspension of trading on the MICEX for one 1 hour, for technical reasons
- Warren Buffet 's decision to invest 5 bn USD in Goldman Sachs
- growth of oil prices
- a plan for the stabilization of the USA national economy is published, whereby it is envisaged that the US government would buy out the bad debts of US financial companies
- a sharp drop in the leading indices of the US share market in response to the refusal to adopt a draft law on the allocation of 700 bn USD to support the US financial market; growing fears of investors that the economic crisis in the USA in deepening; the key US indices fall 7 - 10%
- the announcement of the purchase of Warchovia's banking operations by Citigroup, with the US government acting as an intermediary, for 2.1 bn USD
- the nationalization, by the UK government, of the UK bank Bradford&Bingley
- the nationalization of Fortis, the biggest Belgian financial group
- a dramatic drop in oil prices (below 100 USD/barrel)
- the announcement of the acquisition, by Mitsubishi UFG Financial Group, of 21% in Morgan Stanley for 9 bn USD
- a suspension of trading on the MICEX and RTS, by order of the Federal Financial Markets Service, from 10.30 to 12.20, in connection with a record drop on the US market in response to the rejection of the draft law designed to provide support to the US financial market
- the coming into force of the RF CB's requirements concerning a mandatory notification, by banks, of their large-scale investments in securities and the granting of big loans
- a suspension of trading on the RTS - thrice during one day
- the approval by the US Congress of the 700 bn dollar bailout plan to prop up the US financial sector
- the adoption by the Government of Germany and a consortium of private banks of a plan to rescue Germany's biggest mortgage bank - Hypo Real Estate Holdings AG
- the French bank BNP Paribas takes the decision to purchase the financial group Fortis ( biggest in Belgium)
- the announcement, by the second biggest bank in Italy - UniCredit - of its plans to attract additional capital
- the decision to provide guarantees for all bank deposits in Germany
- South Korea's decision to allocate 240 bn USD from the government reserve to support the banking sector
- a ban imposed in the USA on the deal of merging Wachovia with Wells Fargo
- a suspension of trading on the MICEX - three times during one day - in response to the drop of the MICEX technical index by more than 5% by the onset of trading; a suspension of trading RTS twice during one day
- the issue of permission, by the RF Federal Antimonopoly Service, for the purchase, by Vneshekonombank, of OJSC "AKB 'Sviaz'-bank'"
- a drop of oil prices, by the day's results, to less than 90 USD/barrel; an increasing USD's exchange rate and a lowering euro's exchange rate
- a suspension of trading on the MICEX and RTS, by the FFMS' order, for 3 and 2.5 hours respectively
- the approval, by the USA FRS, of the deal of purchase, by the Japanese bank Mitsubishi UFG Financial Group, of up to 24.9% of shares in Morgan Stanley
- the nationalization of the second big bank in Iceland - Landsbanki, and the allocation, to Iceland's biggest bank, of credit in the amount of 500 million euro in order to sustain its necessary level of financing; the downgrading, by the Moody's rating agency, of Iceland's credit ratings to "negative"
Date
Main Events
8 October
9 October
10 October
12 October
13 October
14 October
15 October
16 October
17 October 22 October
23 October
24 October
27 October
142
- a suspension of trading on the MICEX until 10 October or until a special order of the FFMS, and on the RTS until a special order of the FFMS, because of their technical indices having dropped below the established threshold; Blue Chips ended trade 10% lower than their previous close.
- the cutting of interest rates by the central banks of the USA (to 1.5%), European Union (to 3.75%), the UK (to 4.5%), Canada (to 2.5%), Sweden (to 4,25%), Switzerland (to 2.5%) and China (to 6.93%)
- the price of the OPEC's oil basket, for the first time that year, dropped to 80 USD/barrel
- the RF CB announces that the RF international reserves have shrunk by 16.7 bn USD over the period from 26 September through October
- the announcement of the US FRS of the granting, by the US government, to the insurance company AIG of a new credit in the amount of up to 37.8 bn USD, against a pledge of securities
- the cutting of interest rates by the central banks of South Korea (to 5%), Hong Kong (to 2%) and Taiwan (to 3.25%)
- news of the nationalization of the biggest bank in Iceland - Kaupthing, designed to support the banking system
- the decision of Bank of America Corp. t buy back the previously sold preference shares to the aggregate value of 4.7 bn USD
- the recall of the banking license of the Close-end Joint-stock Company "MKB 'Eurasia-Center'", for its failure, among other things, to fulfill its obligations
- a suspension of the trading in shares on the MICEX and the RTS, with the exception of repo and targeted transactions
- the declaration, by Moody's rating agency, of the possibility of downgrading the credit rating on the bank Morgan Stanley
- the bankruptcy of the Japanese insurance company Yamato Life Insurance Co.
- the continuing strengthening of the USD on the world currency market
- the adoption, by the UK government, of a plan for rendering financial support to the banking sector
- the decision of the European Union governments to allocate more than 1.5 trillion euro to underwriting interbank credits
- the completion of the acquisition of 21% of shares in Morgan Stanley by the Japanese bank Mitsubishi UFG Financial Group for 9 bn USD
- a suspension of trading on the MICEX and RTS due to the initial growth and the subsequent decline of their technical indices below the established threshold
- the approval, by the government of Germany, of the plan envisaging the rendering of financial support to banks in the amount of 480 bn USD; the decision of the government of France to underwrite interbank credits in the amount of 320 bn euro
- the coming into force of the laws designed to ensure stabilization of the Russian financial market: on the granting to banks of the sum of up to 50 bn USD for the redemption of their foreign credits and loans (through Vnesheko-nombank) and on the granting, by the RF Central Bank, of unsecured credits to the banks whose ratings are not lower than the established level
- the coming into force of the alterations introduced in the RF Tax Code concerning the payment of VAT by installments ( on a monthly basis, for three months after the relevant tax period)
- the announcement of the plan to purchase, for 1.9 bn USD, of 75.65% of shares in the US company Sovereign Bancorp by the Spanish bank Banco Santander
- a temporary suspension of trading on the MICEX and RTS because of their technical indices having dropped below the established threshold; the majority of Blue Chips ended trade 10% lower than their previous close
- the purchase of Sobinbank by Gazenergoprombank for a symbolic sum
- the lowering, by the RF CB, of the mandatory reserve norms
- the RF CB announces that the RF international reserves have shrunk by 15.5 bn USD over the period from 3 through 10 October
- the purchase of the bank "Globeks" by Vneshekonombank for a symbolic sum as a result of the former's problems with liquidity
- the announcement of the losses suffered by the US bank Wachovia Corp. in Q III 2008 in the amount of 23.89 bn USD
- the announcement of the losses suffered by one of the biggest Swiss banks - Credit Suisse - in the amount of 1.46 bn euro in the first 9 months of 2008
- oil prices drop below 70 USD/barrel; the USD strengthens on the world currency market
- the purchase of OJSC "AKB Rossiiskii kapital" by the bank "OJSC 'Natsional'nyi reservnyi bank'" for a symbolic sum as a result of the latter's problems with liquidity
- the recall of the banking license of the bank "Russkii bankirskii dom", for its failure, among other things, to fulfill its obligations
- the RF CB announces that the RF international reserves have shrunk by 14.9 bn USD over the period from 10 through 17 October
- the downgrading of Russia's rating by Standard&Poor's rating agency from "stable" to "negative"
- a suspension of trading on the MICEX and RTS until 28 October or until a special order of the Federal Financial Markets Service because of their technical indices having dropped below the established threshold; Blue Chips ended trade more than 10% lower than their previous close
- the OPEC cuts oil production quotas to 1.5 million barrels per day from 1 November 2008
- oil prices drop to 62 USD/barrel
- the granting to the RF CB of the right to participate in trading on stock exchanges
Date
Main Events
30 October
4 November 6 November
7 November
10 November
11 November
12 November
- the adoption of a supplementary set of measures designed to prevent the bankruptcies of banks through special measures to be applied by the Deposit Insurance Agency (the execution of the functions of a temporary administration) and the RF CB
- a suspension of trading on the MICEX and RTS in the second half of the day because of their technical indices having dropped more than 10% by the opening of trading
- the RF CB announces that the RF international reserves have shrunk by 31 bn USD over the period from 17 through 24 October
- the decision is taken that Vneshekonombank will grant UC Rusal a credit in the amount of 4.5 bn USD against the pledge of 25% of shares in GMK "NorNikel'"
- a temporary suspension of trading on the MICEX and RTS because their technical indices have increased more than 10% by the opening of trading
-the US FRS cuts its rate of refinancing to 1%
- the price of oil climbs to 65 USD/barrel
- B. Obama wins the presidential election in the USA
- the RF CB announces that the RF international reserves have shrunk by 0.1 bn USD over the period from 24 through 31 October
- the conclusion, by the RF CB, of agreements with OJSC "MDM-Bank", the Close-end Joint-stock Company "Raf-faizenbank", and "Sberbank of Russia" on the compensation of part of their losses resulting from transactions on the interbank market
- oil prices drop below 60 USD/barrel; the USD strengthens on world currency markets
- the lowering of the discount rate of the European Central Bank (ERF CB) to 3.25%, of that of the Bank of England
- from 4.5% to 3%, and of that of the Central Bank of Switzerland - to 2%
- publication of US macroeconomic statistics indicating that the level of unemployment in the USA decreased in October to 6.5%
- the forecast of Russia's sovereign rating is downgraded by Fitch Ratings, the international rating agency, from "stable" to "negative"
-the RF CB expands the corridor for bi-currency basket fluctuation by 30 kopecks in both directions
- a temporary suspension of trading on the MICEX and RTS because of their technical indices having dropped by more than 5% by the opening of trading
- oil prices drop below 56 USD/barrel
- the RF CB cuts its rate of refinancing to 12% per annum
- the recall of the banking licenses from Close-end Joint-stock Company "MIRA-BANK" and Close-end Joint-stock Company "EKOHATSBANK", for their failure, among other things, to fulfill their obligations, as well as the annulment of the banking license of Joint-stock Commercial Bank "MSB" in connection with its decision to terminate its operation
- a suspension of trading on the MICEX for a whole day, and on RTS - for the second half of the day
- the announcement, by the US Department of the Treasury, of its refusal to buy out banks' non-liquid mortgage assets
- oil prices drop to 52 USD/barrel; the USD strengthens against the euro
- the RF CB announces that the RF international reserves have shrunk by 9.2 bn USD over the period from 31 October through 7 November
- a suspension of trading on the MICEX until 17 November because of its technical indices having dropped below the established threshold
- the recall of the banking license of Joint-stock Commercial Bank "Lefko-bank" for its failure, among other things, to fulfill its obligations
- the decision of the Government of Italy to allocate 80 bn euro to the stabilization of the country's national economy
- the bank J.P.Morgan Chase&Co makes public a 60-% decline in its net profit over the first 9 months of 2008; the announcement of large-scale dismissals of its personnel
- Citigroup's announcement that its personnel will be reduced
- announcement of the development of a draft law designed to render support to the US motor industry
- the RF CB announces that the RF international reserves have shrunk by 21.9 bn USD over the period from 7 through 14 November
- the recall of the banking licenses from OJSC Commercial Bank "Sibkontakt" and "Sochi" Limited Liability Company for their failure, among other things, to fulfill their obligations
- a substantial drop of the quotations of US biggest motor companies - General Motors and Ford Motor, as well as of shares in the three US biggest banks - Citigroup, the Bank of America and J.P.Morgan Chase & Co
- oil prices drop below 50 USD/barrel.
- the adoption of additional measures designed to render support to the RF real sector, in particular the cutting of the rate of profits tax to 20% from 1 January 2009 and the increasing of the amount of tax deduction
- the closure of three US banks - Downey Savings and Loan Association, PFF Bank & Trust, and The Community Bank
- the RF CB applies, in order to estimate the credit potential of credit institutions, the rating methodology developed by the national rating agencies "RusRating" and "Ekspert RA"
- the allocation, by the US Department of the Treasury, of 20 bn USD to Citigroup in order to stabilize its capital
- preparation of an additional package of measures designed to support the US national economy
13 November
14 November
16 November
17 November 20 November
21 November
24 November
Date
Main Events
27 November
28 November
1 December
2 December
3 December
4 December
- the imposition of a fine, by the RF Federal Antimonopoly Service, on TNK-BP (1.112 bn rubles) and "Gazprom Neft" (1.357 bn rubles) for their having violated antimonopoly legislation
- the RF CB announces that the RF international reserves have shrunk by 3.6 bn USD over the period from 14 through 21 November
- the recall of the banking licenses from OJSC Commercial Bank "INTEGRO" and Joint-stock Commercial Bank "Kurganprombank" Limited Liability Company for their failure, among other things, to fulfill their obligations
- the decision of the UK Government to purchase 57.9% of shares in one of the country's biggest banks - the Royal Bank of Scotland
- the RF CB expands the corridor for bi-currency basket fluctuation by 1%
- the RF CB cuts its rate of refinancing to 13% per annum
- the allocation, by the RF CB, of credit to the Deposit Insurance Agency in the amount of 65.9 bn rubles, for the clean-up of banks
- a temporary suspension of trading on the RTS because of its technical index having dropped by more than 5% by the opening of trading
- oil prices drop below 50 USD/barrel.
- the announcement of a merger of MDM Bank and "Ursa Bank"
- the recall of the banking licenses from OJSC "Tiumenenergobank" and OJSC Commercial Bank "Gazinvestbank" for their failure, among other things, to fulfill their obligations
- the RF CB announces that the RF international reserves have shrunk by 5 bn USD over the period from 21 through 28 November
- the cutting of the discount rate of the European Central Bank (ERF CB) to 2.5%, of that of the Bank of England -to 2%, and of that of the Central Bank of Sweden - to 2%
- it is announced that the Swiss bank Credit Suisse suffered new losses in November and that it is planning to further reduce its personnel (by 5.3 thousand)
- oil prices drop below 44 USD/barrel
- the emergence of market rumors about the possibility of bankruptcy of General Motors Corp. and Chrysler Lt. in connection with their operating losses and inability to repay to their credits
- publication of negative US macroeconomic statistics regarding, in particular, the continuing low demand for energy carriers in the USA, the growth of unemployment, and the reduction in the number of jobs and sales of new houses
- the decision of the government of China to implement a policy aimed at the national currency's depreciation
- the RF CB expands the corridor for bi-currency basket fluctuation by 30 kopecks in both directions -oil prices drop below 40 USD/barrel.
- Standard&Poor's rating agency downgrades the forecast of Russia' credit rating in connection with the rapid shrinkage of its international reserves and investment flows from "stable" to "negative", and the City of Moscow's long-term rating, also from "stable" to "negative"
- the emergence of information that a new anti-crisis plan designed to support US infrastructure and rehabilitation of the national economy is being developed
- the bankruptcy of a big US media company - Tribune Co
- oil prices rise to more than 43 USD/barrel.
- an increase of US budget deficit in November by 64.7% (by comparison with November 2007) to 164.4 bn USD
- the decision of the Government of Sweden to grant financial aid to the country's motor companies in the amount of 2.9 bn euro.
- the RF CB announces that the RF international reserves have shrunk by 17.9 bn USD over the period from 28 November through 5 December
-the Central Bank of South Korea cuts its discount rate (from 5.25 to 3%)
- the RF CB expands the corridor for bi-currency basket fluctuation by 30 kopecks in both directions
- a temporary suspension of trading on the MICEX and RTS because of their technical indices having dropped by more than 5% by the opening of trading
- a plans of US biggest bank - Bank of America Corp. - to reduce its personnel by up to 35,000 over the next three years
- Moody's rating agency downgrades the forecast of Russia's sovereign rating from "positive" to "stable"
- the RF CB again expands the corridor for bi-currency basket fluctuation
- the US FRS cuts its rate of refinancing to 0 - 0.25% per annum
- it is announced that the net profit of the US bank Goldman Sachs Group Inc. has shrunk over the 2007 - 2008 financial year by 80% (to 2.32 bn USD), and of that of Morgan Stanley - by 49% (to 1.58 bn USD)
- the RF CB expands the corridor for bi-currency basket fluctuation
- it is announced that the biggest French bank -BNP Paribas has lost 701 million euro in the first 11 months of 2008
-the RF CB announces that the RF international reserves have shrunk by 1.6 bn USD over the period from 5 through 12 December
- the RF CB expands the corridor for bi-currency basket fluctuation
- the decision of the US Government to grant credit to US motor car companies (GeneralMotors Corp. and Chrysler Ltd.) in the amount of 17.4 bn USD
the decision of the Government of Japan to allocate 54 bn USD within the framework of its plan designed to control the economic crisis
5 December 8 December
10 December
11 December
12 December
15 December
16 December
17 December
18 December
Date
Main Events
19 December - the recall of the banking licenses from OJSC "ZelAK-Bank", Joint-stock Bank "SETEVOI NEFTIANOI BANK"
(Close-end Joint-stock Company) and the commercial bank "Baltkredobank" (Close-end Joint-stock Company) for their failure, among other things, to fulfill their obligations 22 December - the RF CB expands the corridor for bi-currency basket fluctuation by more than 1%
- the decision to adopt measures designed to support the motor car industry of Russia, in particular to allocate approximately 200 bn rubles and to subsidize the interest rates on the credits granted for purchase of inexpensive cars
24 December - the RF CB expands the corridor for bi-currency basket fluctuation by nearly 40 kopecks
- oil prices drop below 35 USD/barrel.
25 December - the RF CB announces that the RF international reserves have shrunk by 15.4 bn USD over the period from 12
through 19 December
26 December - the recall of the banking licenses from Commercial Bank "Borovitskie vorota" Limited Liability Company, Com-
mercial Bank "Kapital Kredit" Limited Liability Company, and Commercial Bank "Elektronika" (OJSC) for their failure, among other things, to fulfill their obligations
- the RF CB expands the corridor for bi-currency basket fluctuation
29 December - the approval of the Strategy for the Development of RF Financial Market in the Period Until 2020
- oil prices climb to 40 USD/barrel.
30 December - the recall of the banking license of OJSC "Agrokhimbank" for its failure, among other things, to fulfill its obliga-
tions
- the decision of the US Government to purchase 5 billion worth of shares of GMAS, the financial arm of General Motors Corp., within the framework of the US government program designed to support the national motor car industry
31 December - the adoption of the decision that the RF Government's credit guarantees in the amount of 300 bn rubles should be
granted to Russia's key enterprises, and that 150 bn rubles should be allocated to support the labor market and the real sector of the national economy
- the US FRS announces its plan to buy out 500 bn USD worth of securities backed by housing mortgages
- the RF CB announces that the RF international reserves have shrunk by 12.6 bn USD over the period from 19 _through 26 December_
2.5.5. Investments of pension savings in the system of mandatory pension insurance in 2008
In the first three quarters of 2008 the value of assets in the funded component of the mandatory pension system, less the amount of insurance contributions to the Pension Fund of the Russian Federation (PFR), decreased by 0.3%. In particular, during the first half-year this index went up by 1.8% (from 402 to 409 billion rubles), as compared to growth by 2.6% in
39
the first half-year 2007, while in the third quarter it declined by 2.1% (see Table 37) .
Table 37
Value of assets in the funded component of the mandatory pension system, 2007 - 2008 (in billion rubles)
Date Value of assets in which pension savings transferred to asset managers were invested Pension savings accumulated in IPF** Total
subtotal including by GAM* including by PAM*
01.01.2007 276.2 267.1 9.2 9.96 286.2
01.04.2007 270 260.7 9.4 19.85 289.85
01.07.2007 274.5 265.1 9.4 19.25 293.75
01.10.2007 340.1 329 11.1 25.55 365.65
01.01.2008 375.1 362.9 12.2 26.8 401.9
01.04.2008 360.7 348.7 12.1 42.6 403.3
01.07.2008 366 353.7 12.3 43.1 409.1
01.10.2008 360.6 350.05 10.55 39.92 400.5
01.01.2009 no data 343.1 no data no data no data
Note. The estimations do not include the amount of contributions to the funded part of pension savings in the
PFR.
Hereinafter, the data published by the PFR and the Federal Service for Financial Markets (FSFM) are applied.
Source: * - value of net assets as estimated on the basis of data published on the PFR's website www.pfrf.ru. ** - based on the Summary Data on the activity of IPFs posted by the Federal Service for Financial Markets (FSFM) to its website www.fscm.ru.
The share of the government asset manager (GAM) in the asset value of the funded component of the mandatory pension system (less the amount of insurance contributions to the PFR) during the first three quarters decreased from 90.3% to 87.4%. This was mainly caused by switchovers of insured persons from the PFR into IPFs. In this connection, a relevant factor in the third quarter became the GAM's more conservative strategy. In conditions of crisis on financial markets its assets turned out to be better protected, and so the share of GAM in the aggregate assets constituting the funded component of the mandatory pension system increased by one percentage point.
The share of IPFs increased during the period under consideration from 6.7% to 10%. The share of private asset managers (PAM) declined from 3% to 2.6%, mainly due to the diminished market value of the assets in Q III (Table 38).
Table 38
The distribution of assets between asset managers and IPFs within the funded component of the mandatory pension system, 2006 - 2008 (%)
01.01.2006 01.01.2007 01.01.2008 01.07.2008 01.10.2008
Share of assets held by GAM* 95.9 93.3 90.3 86.5 87.4
Share of assets held by PAMs* 3.0 3.2 3.0 3.0 2.6
Share of assets held by IPFs** 1.1 3.5 6.7 10.5 10.0
Total 100 100 100 100 100
Including the share of PAMs and IPFs 4.1 6.7 9.7 13.5 12.6
Note. The estimations do not include the amount of contributions to the funded part of pension savings in the
PFR.
Source: * - value of net assets as estimated from the data published on the PFR's website www.pfrf.ru. ** -based on the Summary Data on the activity of IPFs posted by the Federal Financial Markets Service to its website www.fscm.ru.
More than half of the pension savings held by PAMs in trusteeship management under their agreements with the RF Pension Fund is concentrated at 5 companies (61% as of the end of Q II 2008). The two leaders - UK "Pensionnnyi reserv" and UK Rosbank - were holding 13.8% and 12.6% of the total pension savings managed by PAMs respectively. On the other hand, the 10 smallest investment portfolios add up to only 0.3% of the aggregate investment portfolio held by PAMs. The average size of the investment portfolio managed by PAMs amounted to 198 million rubles, whereas the market value of 13 out of 62 investment portfolios was less than 10 million rubles
As of mid-2008, 53% of all the operating IPFs had the right to engage in mandatory pension insurance. The number of the IPFs actually involved in the mandatory pension insurance market, if taken as a percentage of the number of those endowed with the right to engage in mandatory pension insurance, was as of the same date 81% (106 out of 130 IPFs operating as insurers under the mandatory pension insurance program had had savings by mid-2008).
The sum of pension savings per IPF in mid-2008 was 406 thousand rubles, this figure still being incomparably lower than the average value of the same index in the OECD countries. As of the end of 2007, the ratio of pension savings to the number of IPF operating under the mandatory pension insurance program amounted to $ 12 thousand. In 2007, the minimum value of thin index in developed countries was $ 3 million. 146
The five biggest IPFs (by the volume of attracted pension savings) by mid-2008 had accumulated between them. 56% of the total sum of pension savings transferred to IPFs.
Investment of pension savings by asset managers. The structure of investments made by the GAM and the aggregate investment portfolio of all the PAMs as of the end of 2007, as well as the figures recorded as of the end of the second and third quarters of 2008 are shown in Fig. 26-31.
Fig. 26. The structure of the investment portfolio of the GAM (Vneshekonombank),
as of the end of 2007
Investments by the GAM. In the first half-year 2008, the investment portfolio of the GAM (whose functions are performed by Vneshekonombank) was characterized by an increasing overall share of securities (from 88.6% to 96.6%) and a declining share of the funds held on accounts at credit institutions (from 9.9% to 1.4%). At the same time, the share of investments in government saving bonds (GSO)40 in the investment portfolio of GAM increased from 28% to 38%,
40 Government saving bonds (GSO) are the non-marketable securities issued by the RF Ministry of Finance for institutional investors. The investments in GSO were opened from mid-2007 onwards. There are no such securities in PAMs' portfolios.
rRF government securities,
Fig. 27. The structure of the investment portfolio of the GAM (Vneshekonombank),
as of mid-2008
RF government securities, Monies at credit institutions Other
Fig. 28. The structure of the investment portfolio of the GAM (Vneshekonombank),
as of end of Q III 2008.
The third quarter saw no significant changes in the structure of the GAM's investment portfolio. An increase in the amount of funds held on accounts at credit institutions (from 1.35% to 2.8%) can, however, be noted, although in the fourth quarter thin index declined to 0.9%.
Investments by PAMs. In the structure of investments made by PAMs in the first half-year 2008 the same trend (which first appeared in 2007) was observed, characterized by a decreasing share of RF government securities and the increasing one of corporate bonds. The share of federal debt liabilities diminished in 2007 from 10.4% to 4.4%, and in the first half-year 2008 it further declined to 2.7%. The share of subfederal debt liabilities changed only slightly - from 11.2% to 10.9%. Simultaneously, the share of corporate bonds in the PAMs' aggregate investment portfolio increased from 38.8% to 47.1%.
RF government securities 4.6 %
Municipal bonds 1.5 %
Monies on accounts at credit institutions 1.9 %
Deposits
Shares 30.2 %
Bonds of Russian economic societies 38.8 %
Fig. 29. The structure of the investment portfolio of private asset managers, as of the end of
2007.
In the short term the growth of the share of corporate bonds indeed could have been well-justified. As is seen from Fig. 32, the indices of corporate and government bonds were changing during the period under consideration according to rather similar patterns. In this connection, the OFZ index41 increased by 2.1%, while the index of corporate bonds - by 2.4%; however, in June 2008 the latter index began to decline, and in 12 trading days it fell by
42
more than 1% . During the second half-year the discrepancies demonstrated by the values of the two indices became even more noticeable.
41 The bonds of the federal loan.
42 The MICE corporate bonds index is not a sufficiently precise value to be applied in estimating the effectiveness of investments made by PAMs in corporate bonds, because its composition is much broader than the bonds included in the top-level quotation list and permitted for PAMs to invest pension savings in. However no estima-
RF government Monies on securities
accounts at 2.7 % Municipal bonds
47.1 %
Fig. 30. The structure of the investment portfolio of private asset managers,
as of end of Q II 2008.
Monies on accounts at credit
institutions 0.6
%
Deposits 10.1 %
RF government securities Other 2.5 % 6.9 % | cSubfederal
Municipal bonds 2.2 %
Shares 18.1 %
Russian economic societies 48.3 %
Fig. 31. The structure of the investment portfolio of private asset managers,
as of the end of Q III 2008.
tion was made of the index oriented to the investment portfolio of PAMs and based on the funded component of
the mandatory pension insurance system.
-^ooooooooo^^^ooooooooo^^^
<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N<N
1 - The ZENIT Bank's index of RF government bonds (ZETBI-OFZ).
2 - The MICE corporate bonds index (MICEX RCBI-TR). Sources: The MICE's and the ZENIT Bank's websites.
Fig. 32. The dynamics of OFZ and corporate bonds indices in 2007 - 2008.
The percentage of shares in the aggregate investment portfolio of PAMs over the first half-year 2008 decreased by 21.2% (from 30.2% as of the end of 2007 to 23.8% as of the end of Q II 2008). The MICE-10 index43, which in the first approximation yields a certain picture of the dynamics of prices of Russian 'blue chips', during the same period declined by only 8.85% (see Fig. 32). Such a ratio makes it possible to conclude that the percentage of shares in the aggregate investment portfolio of PAMs decreased not only due to the drop in their market value, but also because of the recent changes in their policy aimed at decreasing the percentages of assets with varying returns.
In Q III 2008 the drop on the share market amounted to 43%, as demonstrated by the MICE-10 index. The percentage of shares in the aggregate investment portfolio of PAMs during that period amounted to 5.7 percentage points. As of the end of Q III 2008, the aggregate investment portfolio of PAMs contained 18.1% of shares, which means that it began to acquire the features of a very conservative portfolio where more than 80% of its total asset value was represented by instruments with fixed return rates. In this connection, among the instruments with fixed return rates the highest growth was demonstrated by the percentage of 'other assets' (compare Fig. 30 u 31), their bulk being represented by monies on the accounts with brokers. Thus, the traditional 'retreat towards quality', typical of the situation of a developing crisis, took a rather peculiar form - if it was felt at all. The least risky assets, from the point of view of PAMs, were the monies on the accounts with brokers at credit institutions - and not
43 MICE-10 index, due to its composition, is better suited to reflect the changes in prices of those shares in which pension savings can be invested. Besides, in contrast to RTS index, it is estimated on the basis of ruble-denominated prices. However, not all of the companies encompassed by this index are included in the top quotations lists of Russian stock exchanges, and so some of them are not available for investing pension savings in.
government securities whose share, although increased by 1.2 percentage point, still remained twice as low as its marginal value established by legislation.
§§§§§§§§§§§§113313331131
« pi ™ «««««««pi rt pi n n pi n « « (H p| p| « P(
a * £ g s 3 si s s s g si s g 3 £ s s 3 si s s s g
-M [C E-10
RTS (DSD)
Source: MICE, RTS.
Fig. 33. RTS and MICE -10 indices in 2007 - 2008.
Rate of return on investments. The rate of return on the pension savings invested by the GAM, as seen by the results of the first half-year 2008, amounted to 4.85% and turned out to be better than the results of Q I but lower than interest rates on OFZ during the same period (see Fig. 34).
Note. The data on the rates of return achieved by Vneshekonombank are for the periods starting from each year's beginning, in per annum values. Source: RF CB, Vneshekonombank.
Fig. 34. Average weighted interest rates on the OFZ market and the GAM's rate
of return in 2007-2008.
In Q III the net asset value dropped by 1%, while the rate of return on the pension savings invested by the GAM in the first three quarters amounted to only 2% per annum.
The nominal value of the aggregate investment portfolio of PAMs in the first half-year 2008 amounted to - 6.2% per annum (relative to the average net asset value as estimated in accordance with the requirements stipulated in Article 16 of the Federal Law "On investing the funds to finance the funded part of labor pension in the Russian Federation"). The rates of return on some of the investment portfolios fluctuated between 7,2% and -21,3% per annum, positive rates being displayed by only 14 investment portfolios out of all those managed by PAMs. In this connection, there existed a rather high negative correlation between the percentage of shares in investment portfolios and the rates of return (- 73.7%). The results as of mid-2008, obtained by the holders of the biggest (in absolute values) investment portfolios, are shown in Table 39. It demonstrates that the difficult situation on the stock market indeed made an impact on the investments results displayed by all of them. Four out of five asset managers had negative rates of return in real terms, while if taken over a longer period (three years) their rates of return are higher than the average per annum rate of return on the investments made by the GAM during the same period (the latter index amounting to 7.3% as of mid-2008).
Table 39
Rates of return on investments of PAMs with the most substantial investment portfolios, as of mid-2008
Asset managers Portfolio's market value, million rubles Rate of return in first half-year 2008% per annum Rate of return in three previous years,% per annum
Pensionnyi reserv 1698.9 0.26 13.59
Posbank 1549.1 -5.15 8.4
Uralsib 1205.6 -12.81 15.22
Troika Dialog 1085.4 -21.3 18.14
Sopid Management 982.1 -10.56 13.84
Source: estimated on the basis of the data published at the PFR's website www.pfrf.ru.
According to the results of Q III, the investment portfolios of only three PAMs could remain 'on the positive side'. The losses sustained by the others varied between -2.8% and -45.5% per annum. The average index amounted to -17.6% per annum (relative to the average value of net assets as estimated in accordance with the requirements stipulated in Article 16 of the Federal Law "On investing the funds to finance the funded part of labor pension in the Russian Federation"). However, if taken over a three-year period, the bulk of the investment portfolio managed by the GAM demonstrated a positive rate of return in nominal terms.
The results of investments made by PAMs in Q IV 2008 have not yet been declared, but bearing in mind that the bulk of pension savings is held in trust management by the GAM, one can draw some preliminary conclusions. The assets managed by the GAM shrank over last year by 19,8 billion rubles, including by 6 billion rubles in Q III; at the same time, during the same period nearly 18 billion rubles was transferred to the PFR, to be transferred further to IPFs and PAMs, as a result of the exercise by insured persons of their right to make a choice
of an asset manager or an IPF; meanwhile, the transfer of new contributions from the PFR was
halted44.
The rate of return demonstrated by the GAM in 2008 was -0,46% in nominal terms, or -12,1% in real terms. If this index is compared to the results obtained by the pension funds of other countries in the first 10 months of 2008, it can be concluded that the GAM's losses so far have been lower than those suffered by the majority of the OECD members.
2.6. Scenarios of Development of Russian Economy in 2009
Below, we present a few possible scenarios of development of Russia's economy in 2009. The forecasts are built on the basis of a structural econometric model designed by the Institute for the Economy in Transition. In the current economic conditions, which are characterized by a drastic rise of uncertainty and the collapse of the entrenched trends, the accuracy of forecasting, including the one that rests on results of the econometric evaluation of dynamic correlations in the economy, lowers dramatically. That is why, in contrast to the previous years, we did not contemplate building medium-term (at least for the upcoming three years) forecasts, but present results just for the quarter-by-quarter forecasts through the end of 2009.
We will be considering four possible scenarios.
Scenario 1 (basic) was built in conformity with major prerequisites the RF Ministry of Economic Development and the RF Ministry of Finance employed to develop the 2009 forecast of Russia's socio-economic development, and with the specified 2009 draft of the federal budget. Thus, the average annual price level for oil (Urals) was assumed at the level of USD 41/barrel, while the capital outflow from the country (with account of the article "Omissions and mistakes" of the balance of payments) was set at the level of USD 80bn. The volume of the federal budget expenditures was assumed to amount to Rb. 9.69trln, with the federal budget deficit financed primarily from the Reserve Fund of RF. The Euro/USD exchange rate was assumed to remain stable at the level of USD 1.35/Euro.
In addition, in the framework of the scenario it is presumed that the problem of "bad'
rd
debts in the national banking sector should further aggravate in the 3 quarter of 2009. More specifically, we assume that the level of such debts can account for 10% of the overall volume of credits disbursed to the non-financial sector of the economy. Accordingly, we take into account the need for an additional supply of the banking system with liquidity by the Central Bank of RF (in a volume of up to Rb. 700bn) and a further decline of the lending activity in the economy and the fall of the money multiplier from 2.5 to 2.2 between the 3rd and the 4th quarters of 2009. Whereas the federal budget deficit should be funded from the Reserve Fund, i.e. effectively by means of monetization of deficit, in an effort to sterilize it, the Bank of Russia would not refinance the earlier disbursed and due to be repaid this year uncollateralized loans to Russian banks.
44 The financial crisis influenced the funded component of the pension system not only in terms of the negative rate of return on investments observed in 2008. Some problems also appeared in the functioning of the mechanism of transfer of the insurance contributions to the funded part of labor pension from the PFR to IPFs and into the trusteeship management by asset managers. As it was noted by the press, in 2008 the PFR failed to transfer insurance contributions to the funded part of labor pension both to IPFs and asset managers. As the main reason, they pointed to the negative dynamics of the prices of OFZ in which the contributions had been invested 154
Scenario 2 (the scenario of low prices) implies consideration of a situation in which the average annual oil price has plunged to USD 32/barrel. With account of a preliminary estimation of oil prices in the 1st quarter (USD 44/barrel), this conforms with the price downfall between the 2nd and the 4th quarters of 2009 to USD 28/barrel. Apart from this, all the other prerequisites appear analogous to the basic variant.
The 3rd scenario and the 4th one deal with various modifications of the basic scenario. Scenario 3 (the scenario of a crisis of the external debt) suggests an aggravation of the situation with repayment of the national corporations and banks' external debt. In the framework of this particular scenario we assessed consequences for the economy generated by a rise in capital outflow from the country in 2009 which matches the initial debt repayment timetable set for 2009 (by the CBR data), i.e. in a volume of some USD 120bn (including USD 117.1bn-worth repayment of the debt principal).
Scenario 4 (the budgetary expansion) matches the variant of an additional (against the draft federal budget as of March 19, 2009) increase of budgetary expenditures at 2.5% of GDP, .e. at Rb. 1.0 trln.
Results of the forecast of the dynamics of the basic indicators of Russia's socioeconomic development are presented in Table 40.
Table 40
The Forecast of the Dynamics of the Basic Indicators of Socio-Economic
development of RF
1st Q* 2nd Q 3rd Q. 4th Q 2009
Oil prices, Urals, as USD/barrel
Scenario 1, 3, 4 44 40 40 40 41
Scenario 2 44 28 28 28 32
Real GDP, as% to the respective period of the
prior year
Scenario 1 -4.8 -4.1 -2.8 -0.5 -3.1
Scenario 2 -4.8 -4.9 -3.2 -1.0 -3.5
Scenario 3 -4.8 -4.1 -2.9 -0.7 -3.2
Scenario 4 -4.8 -4.1 -2.9 -0.6 -3.2
The federal budget deficit (as% of GDP)
Scenario 1 0.8 10.1 9.1 8.2 7.0
Scenario 2 0.8 10.8 9.6 9.1 7.7
Scenario 3 0.8 9.3 8.1 7.3 6.5
Scenario 4 0.8 10.1 13.7 12.6 9.4
The CBR's international reserves (as USD bn. )
Scenario 1 396.5 396.5 395.6 395.0 395.0
Scenario 2 396.5 395.3 393.4 391.2 391.2
Scenario 3 396.5 388.1 382.9 380.9 380.9
Scenario 4 396.5 396.5 395.6 395.0 395.0
CPI,%
Scenario 1 5.2 2.7 1.0 1.9 11.2
Scenario 2 5.2 5.5 3.9 3.2 18.4
Scenario 3 5.2 7.1 2.6 2.4 18.4
Scenario 4 5.2 2.7 2.2 3.4 15.4
Rb/USD exchange rate
Scenario 1 35.26 35.3 35.3 35.4 35.32
Scenario 2 35.26 40.7 45.0 45.0 41.49
Scenario 3 35.26 46.2 46.5 46.5 43.62
Scenario 4 35.26 35.3 35.9 36.4 35.72
*Assessment of actual data over January or between January and February 2009
So, according to the basic scenario, in 2009, Russia's real GDP should fall at 3.1%, with the nominal volume of GDP accounting for Rb. 40,828bn. The decline of investment in fixed assets over the year would account for 5.8% on the whole, while the fall in the population's
real incomes makes up 3.8%. At the same time, some stabilization of the rate of decline of the population's real incomes is expected in the 4th quarter of the year.
According to our calculations, by results of the year the federal budget deficit should account for 7% of GDP, with the aggregate volume of revenues making up Rb. 6.82trln. (16.7% of GDP), which is slightly in excess of the RF Ministry of Finance's forecast (6.71trln).
In the frame of this particular scenario the situation with the nation's balance of payments is presumed to be fairly comfortable. Providing that the trend to the restructuring of the Russian private corporations and banks' debt is in place and the volume of the foreign debt repayment does not exceed USD 70-80bn, a positive balance of current accounts would enable the Russian monetary authorities to save their international reserves, without resorting to a further depreciation of the Rb. More specifically, according to our forecast, the 2009 volume of export should reach some USD 248bn (down at 47.5% against its 2008 level), while that of import - USD 136.0bn (-53.5% to the 2008 level). So, the positive balance of the balance of trade should account for not less than USD 112bn.
Accordingly, the Central Bank of RF would be capable to hold the declared band of fluctuations of the bicurrency basket, that is, at a level not higher than 41 Rb., through the end of the year, with its international reserves maintained at the level of USD 395.0bn. Thus, the contraction in the reserves over the year (some USD 32bn) would fall on the period between January and February.
Stabilization of the Rb. exchange rate and a fairly conservative monetary and credit policy (the Rb. emission sterilized between the autumn of 2008 and the winter 2009, capping the budgetary deficit at the level of 7% of GDP, and the CBR providing a limited support to the national banking system) would allow one to count on fairly low inflation rates (11.0-11.5% over the year). At the same time, nearly a half of the price rise (5.0-5.5%) would fall on the 1st quarter of the year. Overall, by results of the year the increment in the monetary base is envisaged to be within 10%, with money supply (M2) remaining roughly at the level reported as of the late-2008.
However, should oil prices further slide down to the average annual mark of USD 32/barrel (as suggested by Scenario2), the fall in GDP might reach 3.5% of GDP, the fall in real volumes of investment - 6.6%, the population's real incomes would be down at 4.7%. Meanwhile, due to the contraction of volumes of export (-USD 29bn vis-à-vis the basic scenario), the Bank of Russia would be compelled to once again depreciate the Rb. against the bicurrency basket - tentatively, to the level of 52 Rb. - by the end of the year (at 26% relative to the current upper margin). If this happens, the Rb/USD exchange rate would become Rb. 45/USD. Accordingly, inflation on the consumer market will accelerate up to 18.4%.
A higher inflation and the depreciating Rb. would bolster the nominal volume of GDP (up to Rb. 41.98trln), and engender a slight drop in the nominal revenues to the federal budget (Rb. 6.5trln). So, the federal budget deficit would grow just at 0.7 p.p. of GDP, i.e. up to 7.7%.
Equally dire for Russia's economy would become consequences from a renewal of the capital outflow from the country. It may restart, for example, in the event the Russian corporations and banks would no longer be able to successfully negotiate their external debt restructuring, as they have done in February-March 2009. According to Scenario 3, the decline in the real GDP would accelerate (up to 3.2%) and so would do the decline in real investment (6.7%). To secure stability of the nation's balance of payments, the Central Bank would be
compelled to depreciate the Rb. exchange rate against the bicurrency basket to R 53.554.0 Rb., equivalent to the Rb/USD exchange rate of Rb. 46.5/USD. As in the case of the scenario of low oil prices, inflation would likewise accelerate to 18.4%. A "positive" aspect of this particular scenario would become a 6.5% contraction of the federal budget deficit, due to growth in nominal volumes of GDP and revenues to the federal budget.
In the frame of Scenario 4 we estimated consequences of the budgetary expansion between the 3rd and the 4th quarters of 2009. Powered by growing budget expenditures (up to Rb. 10.7trln over the year), the deficit would surge up to 9.4% of GDP. An additional emission would fuel not only inflation (up to 15.4%), but a new round of the Rb. depreciation as well. The Central Bank would ultimately face a situation in which it would not be able to hold the declared upper marginal rate of the bicurrency basket without sacrificing its reserves. Should the policy of saving the reserves at the current level be pursued, the Rb. exchange rate should plunge roughly at 5% against the current level, i.e. down to Rb. 42.-42.5/bicurrency basket, equivalent to Rb.36.5/USD.
The above results of the scenario-based forecasting calculations of the dynamic of the basic macroeconomic indicators of RF evidence that it is the most probable scenario (the basic one) in the frame of which Russia has a chance to survive through the year with minimal mac-roeconomic shocks, which might form a favorable starting position for exiting from the crisis.
But the positive forecast is very unstable, and the range of fluctuations of exogenous parameters under which the situation is favorable appears an extremely narrow one. A further downfall in oil prices, an additional capital outflow and a new increase in budget expenditures would result in very dramatic dire consequences. More specifically, those may become a sharp acceleration of inflation and a new drastic depreciation of the national currency. In conjunction with this the Central Bank and the RF government should pursue a maximally conservative policy, so that to preclude a new wave of economic agents' negative expectations from rising.
