3Section 2. The Monetary and Budget Spheres
2.1. The Monetary Policy
In 2012, the RF Central Bank continued to bring down the scale of its interference in the foreign-exchange market's functioning: the volume of its currency interventions carried out over the course of that year hit a ten-year low. Besides, the monetary policy's key feature in 2012 was that the Bank of Russia completed its switchover to the practice of money supply formation through the issuance of loans to commercial banks. As seen by the year-end results, the amount of debt owed by banks to the RF Central Bank had exceeded the level of late 2008 - early 2009. However, in contrast to the crisis period, the bulk of debt growth was produced by repo operations (and not by unsecured loans), which means that the credit portfolio's quality had improved.
In accordance with the new monetary policy mode the main target indicator for the RF Central Bank is the inflation rate, which by the year's end had exceeded its 2011 level, thus getting beyond the target interval of 5-6% outlined in the main directions of the RF Central Bank's monetary policy for the period of 2012-2014. Most probably, a key role in speeding up the inflation rate was also played by some non-monetary factors, including the growth of food prices at a rate faster than that predicted by the Bank of Russia. However, the surge of inflation so far above its targeted value is a phenomenon that requires an in-depth analysis of the current policy, the instruments applied by the monetary regulation agencies in building their forecasts, and the mechanisms of response to negative price shocks.
Below we discuss in more detail the processes that have been occurring in the monetary sphere as part of Russia's national economy.
2.1.1. The Money Market
In 2012, the volume of net purchases of foreign currency on the market by the RF Central Bank dropped to $ 6.8bn from $ 10.5bn in 2011. As a result, towards the year's end the volume of international assets held by the RF Central Bank as reserves had changed only slightly: from $ 498.6bn as of 1 January 2012 to $ 537.6bn as of 1 January 2013 (see Fig. 1 and 2).
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11 Narrow monetary base (bn Rb) ^^"Gold and foreign currency reserves (bn USD)
Source: RF Central Bank.
Fig. 1. The Behavior of the Narrow Monetary Base1 and the International Reserves Held by the RF Central Bank in 2008-2012
30000 20000 10000 0
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-40000
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-60000
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Source: RF Central Bank.
Fig. 2. The Bank of Russia's Currency Interventions (Net Currency Purchases)
in 2008-2012
1 The monetary base (narrow definition) consists of the currency issued by the Bank of Russia (including cash in vaults of credit institutions) and required reserves balances on ruble deposits with the Bank of Russia.
As a result, in 2012 - just as it had been a year earlier - the currency interventions undertaken by the RF Central Bank had practically no influence on the monetary base's behavior (see Fig. 3). Nearly throughout the entire last year's period, the broad monetary base1 was on the decline: over January-November its value dropped by 4.5% to Rb 8.257bn. It should be noted that in the second half-year the monetary base was shrinking at a slower rate than it had done in the first half-year. In Q4, however, the broad monetary base began to increase in response to the traditional upsurge of government expenditure at a year's end. The shrinkage in the monetary base was caused, on the one hand, by the markedly reduced volume of the regulator's currency interventions in 2012 (the year's highest level of currency interventions achieved in March ($ 4.3bn) dropped 180-fold to $ 23.6m in October, and on the other, by the accumulating budget surplus on the government's accounts with the RF Central Bank (see Table 1). At the same time, the principal source of the monetary base's growth, as before, were the resources of Bank of Russia - the latter having increased the volume of its credits issued to commercial banks.
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Source: RF Central Bank; the IEP's calculations.
Fig. 3. The Principal Factors Influencing the Behavior of the Monetary Base (Broad Definition) in 2008-2012 2
1 The broad monetary base describes the Bank of Russia's monetary liabilities denominated in the national currency that determine money mass growth. The monetary base (broad definition) consists of the currency issued by the Bank of Russia (including cash in vaults of credit institutions), the balances in the required reserve accounts deposited by credit institutions with the Bank of Russia, the correspondent account balances (including averaged amount of the required reserves) and the balances on the deposit accounts of credit institutions with the Bank of Russia, the Bank of Russia bonds (OBRs) held by credit institutions, the balances on the required reserve accounts deposited by credit institutions with the Bank of Russia against their attracted funds in foreign currency, and other liabilities of the Bank of Russia against its operations with credit institutions in the currency of the Russian Federation.
2 The period under consideration in 2008 and 2012 is determined by the availability, during the preparation of this overview, of data released by the RF Central Bank on its currency interventions and its balance sheets.
Table 1
The Bank of Russia's Balance Sheet in 2011-2012
1 January 2011 1 January 2012 1 November 2012
Bn Rb % of assets/ liabilities Bn Rb % of assets/ liabilities Bn Rb % of assets/ liabilities
Funds placed with nonresidents and securities issued by nonresidents 13,272 85.5 14,245.3 76.7 14,575.7 68.7
Credits and deposits 514 3.3 1,663.3 9.0 3,404.6 16.0
Precious metals 1, 201 7.7 1,527.5 8.2 1,720.8 8.1
Securities 441 2.8 426.2 2.3 453.6 2.1
Other assets 99 0.6 97.9 0.5 1,066.0 5.0
Total assets 15,526 100 18,562.7 100 21,220.7 100.0
Cash in circulation 5,792 37.3 6,896.1 37.2 6,872.0 32.4
Funds in accounts with the Bank of Russia 6,431 41.4 7,742.2 41.7 10,131.7 47.7
Of which: Russian government funds 3,270 21.1 4,443.5 23.9 6,196.7 29.2
funds of resident credit institutions 1,817 11.7 1,748.4 9.4 1,387.2 6.5
Float 7 0.0 36.2 0.2 22.3 0.1
Bank of Russia bonds 589 3.8 0 0 0.0 0.0
Liabilities to the IMF - - 472.3 2.5 458.2 2.2
Other liabilities 145 0.9 158.6 0.9 496.4 2.3
Capital 2,359 15.2 3,235.4 17.4 3,240.1 15.3
Profit of a fiscal year 204 1.3 21.9 0.1 0.0 0.0
Total liabilities 15,526 100 18,562.7 100 21,220.7 100.0
Source: RF Central Bank.
As seen from Fig. 4, the amount of debt owed by commercial banks to the RF Central Bank began to grow rapidly in late 2011. In 2012 its level practically reached its record high observed over the period of 2008-2009. Thus, at present it so happens that the monetary base is mainly formed by credits issued by the RF Central Bank. However, it should be noted that, in contrast to the situation typical of the crisis period, the size of debt is now increasing mainly as a result of the expansion of repo operations instead of unsecured credits, and thus the quality of the RF Central Bank's credit portfolio is improving. The high degree of dependence of commercial banks on the monies loaned by the RF Central Bank enables the latter to exert a stronger influence on market interest rates by regulating the interest rates on its loans through the application of liquidity provision and absorption instruments.
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■ Debt incurred under direct repo transactions
■ Lombard credits, overnight credits and credits secured with gold □ Other loans
Q Unsecured loans
Source: RF Central Bank.
Fig. 4. Outstanding Debt of Credit Institutions against Loans Issued by the Bank of Russia in 2008-2012
Let us have a closer look at the structure of monetary base (broad definition) (see Table 2).
Table 2
Behavior of Monetary Base (Broad Definition) in 2012 (bn Rb)
1 January 2012 1 April 2012 1 July 2012 1 October 2012 1 January 2013
Monetary base (broad definition) 8,644.1 7,787.8 8,129.3 8,082.8 9,852.8
- cash in circulation, including 6,895.8 6,450.8 6,809.7 6,826.8 7,667.7
cash in vaults of credit institutions
- correspondent account balances 981.6 812.5 790.7 753.7 1,356.3
of credit institutions with the Bank
of Russia
- required reserves 378.4 385.2 393.1 411.5 425.6
- deposit account balances of cred- 388.3 139.3 135.8 90.8 403.3
it institutions with the Bank of
Russia
- Bank of Russia bonds (OBRs) 0 0 0 0 0
held by credit institutions
Source: RF Central Bank.
Over the course of 2012, the cash in circulation volume increased by 11.2%, amounting as of the year's end to Rb 7,667.7bn. The amount of required reserves rose from Rb 378.4bn to Rb 425.6bn. The money market ran a ruble liquidity deficit practically throughout the whole year. From January through November 2012 were on the decline: the correspondent account balances of commercial banks with the Bank of Russia dropped by Rb 154.2bn, the deposit account balances of credit institutions with the RF Central Bank dwindled by Rb 250bn, while
the amount of their investment in the Bank of Russia bonds remained at zero. However, the sharp rise in government expenditures in December resulted in a growth of excess reserves: on the whole, over the course of 2012, the correspondent accounts balances increased by 38.2%, to Rb 1.4 trillion, while the deposit account balances rose by 3.9%, to Rb 403.3bn.
While in Q1 2012 the annual growth rate of the M2 ruble money supply was relatively stable (approximately 21-22% in per annum terms), it continually decreased from Q2 2012 onwards, to 11.9% as of 1 January 2013. The decline in the growth rate of the money supply will apparently have a restraining effect on inflation in early 2013.
In 2012, the money multiplier's value (ratio of M2 to monetary base) remained practically unchanged - at a level of 3. This value of a money multiplier represents a typical average for a developing economy, while in developed economies it is usually higher - somewhere in the 5 to 8 interval.
2.1.2. Inflation Processes
In 2012, the year-over-year growth rate of consumer prices was higher than in 2011, when it hit a record low for the entire post-Soviet period of Russian history (+6.1%) (see Fig. 5).
Source: Rosstat; the IEP's calculations.
Fig. 5. The Growth Rates of Consumer Prices in the Russian Federation in 2011 and 2012 (in Annual Terms)
In the first half-year of 2012, the main factors behind the drop in inflation were the shifting of the regular date of the annual indexation of the state-regulated prices and tariffs for paid services provided to the population from 1 January to 1 July, and the decline in the growth rate of the money supply in 2011. Also, the decline in inflationary pressures was contributed to by the moderate growth in producer prices (in the first half-year of 2012, the Industrial Producer Price Index rose by 6.1% on the first half-year of 2011 vs. a 19% rise in the first
half-year of 2011 on the corresponding period of 2010), and by rather moderate global food prices1.
However, in the summer of 2012, the growth rate of consumer prices began to steadily increase. It should be noted, that both the deceleration of inflation in the first half-year 2012 and its acceleration in the second half-year 2012 were largely caused by non-monetary factors. The rise in the growth rate of food prices, greatly contributed to by the poor cereal harvests in a number of Russian regions and around the world, was a major inflation factor. Food prices in Russia were also boosted by the worsening state of the global agricultural market. Furthermore, the rise in consumer prices in the second half-year of 2012 was caused by significant increases in administratively regulated tariffs.
Over the course of October-December 2012, inflation stabilized around 6.5% per year. This drop in inflation was caused by a combination of several factors, including the reduction in the negative impact of the failed harvest, the decline in base inflation, and the deceleration in economic activity.
As shown in Table 3 below, over the course of 2012, the prices of food products were rising at a rate 1.7 times higher than that in 2011. Alcoholic beverages, whose prices rose by 12.1% owing to an increase in excise taxes, were among the main contributors to inflation. Adverse weather conditions pushed up the prices of fruit and vegetable products (+11%), bread and bakery products (+12%), and meat and poultry (+8,3%), whose prices usually grow after a rise in grain prices.
In 2012, the lowest increase in prices was registered for non-food products (+5,2%). Nevertheless, the prices of tobacco products rose by an unprecedented 22.6%, which represented the highest price increase recorded by any category of consumer goods and services. This sharp rise in the prices of tobacco products was caused, in the main, by a considerable increase in excise taxes. The growth rate of motor gasoline fell from 14.9% in 2011 to 6.8% in 2012. This drop resulted from the retail prices of fuel being frozen in January-March 2012 at 2011 levels.
In 2012, the prices of paid services provided to the population increased by 7.7% on 2011. It should be noted that the growth rate of prices for most categories of services registered a decline.
Table 3
The Annual Growth Rate of Prices for Individual Categories of Goods and Services in 2010-2012 (as a Percentage of December of the Previous Year)
2010 2011 2012 2010-20122
1 2 3 4 5
CPI 8.8 6.1 6.6 23.1
Food Products 12.9 3.9 7.5 26.1
Grains and Pulses 58.8 -8.0 -7.0 35.9
Butter 23.3 6.6 3.0 35.4
Sunflower Oil 27.6 4.6 3.4 38.0
Pasta 4.7 3.4 7.6 16.5
Milk and Dairy Products 16.7 6.3 4.4 29.5
Bread and Bakery Products 7.6 8.9 12.0 31.2
Meat and Poultry 5.3 9.2 8.3 24.5
1 http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/ru/
2 The cumulative inflation rate over three years.
cont'd
1 2 3 4 5
Fish and Seafood Products 4.8 10.3 1.9 17.8
Fruit and Vegetable Products 45.6 -24.7 11.0 21.7
Alcoholic Beverages 8.3 8.4 12.1 31.6
Non-food Products 5.0 6.7 5.2 17.9
Building Materials 4.6 7.9 5.1 18.6
Motor Gasoline 6.5 14.9 6.8 30.7
Tobacco Products 19.5 21.1 22.6 77.4
Services 8.1 8.7 7.3 26.1
Housing and Utilities Services 13.0 11.7 9.4 38.1
Pre-school Education Services 7.7 11.3 6.4 27.5
Sanatorium and Health Recovery Services 5.4 9.0 5.9 21.7
Passenger Transport Services 8.7 9.1 6.9 26.8
Cultural Institutions' Services 8.6 11.3 8.8 31.5
Source: Rosstat.
In conclusion of this section of our paper, let us compare the growth rates of consumer prices in Russia and the other CIS countries (Table 4).
Table 4
The Movement of Consumer Price Indices in the CIS Countries in 2010-2012,
% Per Annum
2010 2011 2012* 2010-2012*1
Azerbaijan 6 8 -2.7 11
Armenia 8 8 -1.5 15
Belarus 8 53 16.1 92
Kazakhstan 7 8 3.9 20
Kyrgyzstan 8 17 3.1 30
Moldova 7 8 2.4 18
Russia2 7 8 5.2 22
Tajikistan 6 13 5.6 26
Ukraine 9 8 -0.3 17
*Data for January-September.
Source: Interstate Statistical Committee of the CIS (http://www.cisstat.com/).
By the end of the first three quarters of 2012 (see Table 4), Russia ranked 3rd place among the CIS countries, below Belarus and Tajikistan, in growth rate of consumer prices. It should be noted that a number of countries in that region faced deflation. Those countries were as follows: Azerbaijan (-2.7%), Armenia (-1.5%) and Ukraine (-0.3%). Thus, Russian inflation remained to be high not only in comparison with developed countries, but also with the other countries of that region.
In early 2013, inflation will be restrained by a number of factors, including the stabilization of food prices, which began in late 2012; the slow-down of economic activity; and the moderate growth of the money supply. As a result, it can be expected that by mid-year 2013 the rate of consumer inflation will drop to around 6%. At the same time, the further movement of inflation in Russia will be determined by both the situation in the global economy, including in
1 The cumulative inflation rate for 2010 - September 2012.
2 It should be noted that Russia's annual inflation rates presented in Table 4 differ from official Rosstat data, which results from the peculiarities of the calculation methodology adopted by the Interstate Statistical Committee of the CIS. Nevertheless, we have decided to present here the Committee's data in order to make it possible to compare the annual inflation rates of different countries.
the global food market, and by Russia's domestic trends in the field of tariff regulation of housing and municipal utilities services as well as in her anti-monopoly and tax policies.
2.1.3. The Main Developments in the Field of Monetary Policy
Over the course of 2012, the RF Central Bank changed the refinancing rate only once, on 14 September, when it was increased by 0.25 pp., from 8 to 8.25% per annum. Simultaneously, the RF Central Bank increased by 0.25 pp. the interest rates on liquidity provision and absorption operations. In effect, this measure was the RF Central Bank's response to Russia's rising inflation. It should be mentioned that consumer inflation, after dropping in April and May 2012 to around 3.7% in annual terms, then started to creep up once again: in August Russia's CPI rose to an impressive 6% on a year-on-year basis, while the inflation target established by the Government for 2012 also amounted to 6%.
As we have already pointed out, the main causes of the rapid acceleration of inflation in the second half-year of 2012 were the growth in tariffs for consumer services and the rise in the global prices of food products, which resulted from the adverse weather conditions in a number of agricultural producing countries. Formally, these factors do not depend on the monetary policy of the RF Central Bank. However, base inflation was also on the rise, which set the stage for a rise in interest rates, given the situation created by the policy of inflation targeting declared by the Bank of Russia. We believe that this policy of the RF Central Bank was absolutely justified from the point of view of the current goals of Russia's monetary policy; in fact, it could be regarded as a signal to economic agents that the top priority goal of monetary policy should be to restrain inflation. At the same time, bearing in mind Russia's lackluster economic growth, and the largely exogenous character of Russian inflation, it should be admitted that the potential for a further significant rise in interest rates is rather limited.
Apart from changing the refinancing rate, the Bank of Russia undertook a number of measures designed to increase the effectiveness of its policy on interest rates. Thus, on 29 March 2012, the RF Central Bank announced that it would resume auction-based allocation of Lombard credits and direct repo auctions for a term of 12 months. It should be reminded that as the Russian economy recovered from the 2008-2009 economic crisis, the Bank of Russia gradually rolled back its anti-crisis measures aimed at propping up Russia's banking system. This bank bailout policy included the suspension, by the Bank of Russia, of direct re-po auctions and Lombard credit auctions for a term of 12 months, put into effect in April 2010. However, the reduction in the RF Central Bank's interference in the functioning of the foreign-exchange market and the resulting decline in the Bank's foreign currency interventions caused a considerable shrinkage of its influence on the money base of the monetiza-tion channel of Russia's balance of payments. In due course, this development gave rise to the issue of bank refinancing extension, on the part of the RF Central Bank, for the purpose of maintaining the money supply at an adequate level. One of the methods for solving this issue is to increase the periods of the Bank of Russia's credits extended to banks. Thus, the RF Central Bank's decision can be considered justified. At the same time we cannot support the demand put forth by a number of Russia's biggest banks that the RF Central Bank should either provide long-term unsecured credits to commercial banks or considerably mitigate its collateral security requirements towards credits. In our view, in order to prevent the emergence of 'bubbles' and to exercise control over risks, the RF Central Bank should predominantly grant secured credits.
On 9 April 2012, the Bank of Russia introduced a new monetary policy instrument - a one-week deposit auction facility with a maximum interest rate of 4.75%. On Tuesdays, starting from 17 April, the Bank of Russia regularly held auctions for a term of one week either designed to provide funds to banks (a direct repo auction and a Lombard loan auction) or designed to absorb liquidity (deposit auctions introduced from 10 April 2012).
According to representatives of the RF Central Bank, the implementation of these decisions would contribute to the reduction of money market interest rates volatility and would enhance the effectiveness of the interest rate policy pursued by the Bank of Russia. In our view, the newly introduced measure conforms to the Bank of Russia's strategy aimed at increasing the role of the RF Central Bank's interest rates in Russian monetary policy. Under the adopted scenario, deposit auction interest rates are used as a tool to influence the setting of the minimum interest rate at the interbank loan market, while interest rates on liquidity-provision operations (direct repo and Lombard loans) - as a tool to influence the setting of the maximum interest rate at that market.
On 22 May 2012, the RF Central Bank announced its decision to resume direct repo operations with banks, collateralized by shares included in the Lombard list of the RF Central Bank. This step was taken to offset the liquidity concerns of Russia's banking system, which has become increasingly dependents on the provision of funds by monetary regulatory bodies. It should be reminded that in the post-crisis period the funds provided by the RF Central Bank to commercial banks became the main source of money supply formation in the Russian Federation. It was in response to this situation and the growing instability of global financial markets that the RF Central Bank made the decision to resume the extension of credits to banks against the security of shares. At the same time, it should be noted that the rapid growth in the RF Central Bank's credit lending to banks taking place against the background of a relatively slow growth of the deposit base sets the stage for future financial instability - if there happens to be a slowdown in such credit lending. Bearing this in mind, the RF Central Bank should take a more cautious approach to the issue of refinancing credit institutions and strictly control the risks faced by banks.
On 11 December 2012, the RF Central Bank once again narrowed the spread between the interest rates on some of its liquidity providing and absorbing operations. At the same time, the Bank of Russia reduced the interest rate on the ruble leg of its currency swap transactions from 6.75 to 6.5% per annum. Also, the RF Central Bank decided to raise - effective from 11 December 2012 - the interest rates on the Bank of Russia's fixed-term deposit operations by 0.25 percentage points, to 4.5% per annum.
It should be noted that, over the course of 2012, the Bank of Russia discontinued the use of some of its less effective and not popular instruments. The RF Central Bank suspended, from 17 April 2012, fixed-rate deposit operations conducted on standard conditions and Lombard loans for a term of one week. Also, the RF Central Bank suspended, from Q3 2012, deposit auctions for a term of one month - and replaced them with deposit operations at fixed interest rates.
Thus, as shown in Fig. 6, over the course of 2012 the Bank of Russia continued to narrow the spread between the interest rates on its liquidity providing and absorbing operations with banks. However, it should be noted that in 2012 interest rates in the interbank loan market systematically exceeded the upper limit of the interest rate corridor established by the RF Central Bank for auction-based operations. This trend reflects credit institutions' high demand for funds in a situation characterized by tight liquidity conditions in the money market and the
limited possibilities of attracting money from foreign sources. At the same time many banks are simply incapable of attracting funds from the RF Central Bank PO because of the insufficiency of their borrowing bases.
.
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■«■.......................... II 1 .it ».
vi : . . i j ¡L-V^Ä-------
<N
H
<N
H
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H
— — Rate on deposits for a term of 1 day
-------Monthly average rate MIACR on overnight interbank ruble credits
Minimum one-day repo auction rate • Rate on deposits for a term of 1 day
Source: RF Central Bank.
Fig. 6. The RF Central Bank's Interest Rates on Liquidity Providing and Absorbing Operations, and the Rate on the Interbank Loan Market,
in 2010 - December 2012
However, on the whole, this country's money market is being strongly influenced by the Bank of Russia's current interest rate policy - which represents an important condition for a successful switchover to the inflation targeting regime. Another aspect of that switchover is the foreign exchange policy of the RF Central Bank. In 2012, it continued to pursue the top-priority goal of that policy - to scale down its direct interference with setting the exchange rate on the domestic foreign-exchange market, thus making possible significant fluctuations of the ruble's nominal exchange rate.
On 24 July 2012, the Bank of Russia widened from 6 to 7 rubles the bi-currency basket floating operational band and decreased the cumulative interventions threshold for shifting the boundaries of the operational band by 5 kopecks from $ 500m to $ 450m. It should be reminded that, from 27 December 2011, the bi-currency basket floating operational band had already been widened from 5 to 6 rubles, and the cumulative interventions threshold brought down from $ 600m to $ 500m.
The decision to decrease the cumulative interventions threshold influencing the bi-currency basket floating operational band is indicative of the increasing flexibility of the RF Central Bank's exchange rate policy. The measures undertaken by the Bank of Russia point to a gradual abandonment of its policy of regulating the exchange rate and the beginning of a switchover to inflation targeting. During the period of instability on the foreign exchange market in the autumn of 2011 and the spring of 2012, the Bank of Russia demonstrated its preparedness to minimize its interference with the operation of the foreign exchange market and to allow some noticeable fluctuations in the ruble's nominal exchange rate. Such a policy results in a
lower volume of speculations in the foreign exchange market, because the exchange rate's movement becomes less predictable.
In accordance with one of the priority goals of its monetary policy - to promote information openness - the Bank of Russia, from 7 August 2012 onwards, began to publish on its official website the information on the volume and structure of money supply M2 (national definition). From 1 January 2011, the data on money aggregates are to be broken down by level of liquidity (where M0, M1 and M2 are shown separately); another new feature is the by-sector distribution of deposits, where the funds of non-financial and financial institutions (with the exception of credit institutions) are presented separately from the population's funds.
From 4 December 2012, the Bank of Russia began to publish its forecast of factors underlying the formation of banking sector liquidity. The forecast highlights the following four key factors: changes in the volume of cash in circulation (outside the Bank of Russia); changes in balances of the general government's accounts with the Bank of Russia, and other operations; the Bank of Russia's regulation of the size of credit institutions' required reserves; and the balance of the Bank of Russia's liquidity providing and absorbing operations. On the whole, the appearance of such a forecast is a welcome development because, in addition to greater openness of the RF Central Bank's information sources, it will also conduce to a higher transparency of its monetary policy, and so increase the confidence of economic agents in the RF Central Bank's policies.
On 4 November, 2012 the Bank of Russia published on its official website the draft of Guidelines for the Single State Monetary Policy in 2013 and for 2014 and 2015 (hereinafter referred to as the Draft). As stipulated in the Draft, by 2015 the RF Central Bank is planning to complete the switchover to inflation targeting. We believe that the Draft should be analyzed, in the main, from the point of view of that principal goal set by the Bank of Russia for its monetary policy in the medium-term perspective. Thus, this document has given rise to a number of serious questions.
Within the framework of the strategy of continual reduction in the growth rate of prices, it envisaged that, by 2014, the inflation rate must drop to 4-5% per annum. In this connection, the inflation target range for 2013 is set at 5-6%. It should be reminded that the inflation target range for 2012 was also set at 5-6%, but the Draft's authors admit that it might be possible for actual inflation indicators to move above the upper margin of that range. However, in the document it is simply stated that such a risk has indeed emerged as a result of rapid growth of food prices.
It must be noted in this connection that a detailed analysis of the ongoing inflation processes and the measures applied by the regulatory monetary authorities in order to keep the inflation rate within the established target range is a key component of an inflation targeting regime. The international experience in the sphere of inflation targeting by central banks point to the necessity to analyze very carefully the causes of the inflation rate slipping beyond the established target range. As noted earlier, the factors that have determined the surge of the inflation rate above the forecast level are largely beyond the RF Central Bank's control. Nevertheless, judging by the specific features of the current situation, it can be concluded that the RF Central Bank still failed to thoroughly analyze and take into account the existing inflation risks.
It is a noticeable fact that, in recent years, the rate of inflation has been declining in response to external factors rather than to the policies pursued by the RF Central Bank. Besides,
as the Bank of Russia has rarely achieved its proclaimed inflation targets, the trust of economic agents in its forecasts must evidently be rather low. In such a situation, it will be very important to accurately explain the meaning of the planned anti-inflation measures, as well as the reasons why the inflation rate is moving beyond the target range. However, judging by the Draft's content, the RF Central Bank holds a different opinion.
The main goal of its exchange rate policy is perceived by the Bank of Russia as that of reducing its direct interference with its level and creating appropriate conditions for a switchover to a floating exchange rate mode (by 2015). The Draft puts forth the idea that, as such interference with the foreign exchange market on the part of the RF Central Bank becomes lesser, the policy aiming at the regulation of interest rates through liquidity provision and absorption operations will become a key component of the process of monetary regulation.
However, it must be borne in mind that the RF Central Bank's interest rates began to significantly influence the money market only after the 2008-2009 crisis, when the RF Central Bank's funds became an important component of commercial banks' liabilities. Indeed, in recent years the Bank of Russia has minimized its monetary interventions in the market, with the result that its refinancing operations are now the main channel for money supply growth. In the Draft it is assumed that if the average annual price of Urals increases to the level of $ 121 per barrel, the growth of the RF Central Bank's international reserves in 2013 will exceed $ 90bn. However, this will, in fact, mean a reversal to the pre-crisis monetary policy model, when the Bank of Russia suppressed the ruble's strengthening in nominal terms through foreign exchange purchases on the market. If such a policy is indeed resorted to, the monetary base will once again be formed in the main by monetary interventions undertaken by the RF Central Bank, and the role of interest rates will be waning. A considerable increase in net credit extended to banks is planned only in the event of a considerable worsening of the economic situation and a decline of prices for top Russian exports.
Besides, the Bank of Russia sets the following important medium-term goals:
• maintenance of financial stability (in order to achieve this goal the activity of the Bank of Russia will based on international best practices in the field of risk-oriented supervision; maintenance of the transparency of credit institutions' activity; and differentiated supervision over financial institutions depending on their systemic importance). We believe that in order to achieve this goal, special emphasis should be placed on analyzing the banking system's resilience to shocks with taking into account their strong dependence on government-sponsored refinancing;
• development of the infrastructure of Russia's financial markets and the enhancement of their capacity. As the switchover to inflation targeting gathers pace, the derivatives market assumes special importance for hedging foreign exchange risks that will progressively increase due to the growing volatility of the exchange rate of the ruble;
• ensuring coordination between the monetary policy of the RF Central Bank and the budget and tax policies of the RF Government. The importance of such coordination in Given the considerable impact of government-regulated tariffs on inflation and the influence of fiscal policy on the money supply in the Russian Federation, the importance of such coordination is difficult to overestimate. It is absolutely clear that a balanced budgetary policy aimed at reducing the budget deficit and Russia's sovereign risk would be conductive to the achievement of the RF Central Bank's inflation target. However, it should be noted that the RF Central Bank's possibilities to influence the government's fiscal policy are extremely small;
• increasing the transparency of the Bank of Russia's policy in the field of monetary policy. In recent years, the RF Central Bank has achieved some progress in enhancing the transparency of its policy and almost reached international best practice standards. At the same time, the Bank still has plenty of room to improve the quality of its analytical output, including macroeconomic situation analysis, and to furnish economic agents with more-detailed explanations of the causes and consequences of its decisions.
On the whole, it can be said that so far the Draft has not been sufficiently adapted to the changing priorities of Russia's monetary policy. It seems that the principles of composing such documents have not been updated for many years for they do not take into account the latest shifts in the RF Central Bank's priorities and, first of all, the change of the monetary policy regime. This is deplorable, because if the RF Central Bank wants to increase economic agents' trust in its policy, it should offer them a thorough explanation thereof, which the Draft clearly fails to do. In its current form the Draft is simply not substantive enough and thus cannot be used as an independent tool for forming expectations.
2.1.4. The Balance of Payments1 u and the Exchange Rate of the Ruble
In 2012, the Bank of Russia switched over to disseminating RF balance of payments data on the basis of the methodology set out in the 6th edition of the Balance of Payments and Investment Position Manual (BPM6). Conceptually, BPM6 maintains the overall framework of the methodology of the previous edition of the Manual (BPM5).
The main changes in the accounts of the balance of payments include the following: within balance on trade in goods - goods for and after processing are excluded and net exports of goods under merchanting are included; within balance on trade in services - manufacturing services on physical imports owned by the others and financial intermediation services indirectly measured are added; within balance on income - rent is included; within capital account - migrants' transfers are excluded; within financial account - transactions of other sectors are further broken down into other financial institutions and nonfinancial enterprises, households and nonprofit organizations servicing households. The balance on income and balance on current transfers accounts have been respectively renamed as the primary income and secondary income accounts.
According to the RF Central Bank2, earlier balance of payments statistics compiled in accordance with BPM5 recommendations remain overall relevant for comparisons with the aggregates compiled under the new methodology. As the Bank of Russia has so far failed to publish the revised time series of all external sector statistics for the period from 1992 through 2011, recalculated under the new methodology, we will compare, in our overview, the data for 2012 (compiled under the new methodology) with data for previous years (compiled under the old methodology).
In 2012, the leading world economies continued to pursue soft monetary policies, which encouraged raw material prices to stay high. As a result, the balance on the current account of Russia's balance of payments remained solidly positive. As noted above, in 2012, the RF Central Bank practically abstained from interfering in the functioning of the foreign exchange market. Given the stability of the exchange rate of the ruble over the course of 2012, that
1 The analysis of the balance of payments is based on preliminary data released by the RF Central Bank: http://cbr.ru/statistics/print.aspx?file=credit_statistics/bal_of_payments_est_new.htm&pid=svs&sid=itm_45297
2 See http://cbr.ru/press/Plugins/Archive_get_blob.aspx?doc_id=120627_180506intern1.htm
meant that both the demand and supply of foreign currencies were well balanced. At the same time, net private capital outflow from Russia over the course of 2012 significantly exceeded its values predicted in the forecasts of the RF Government and the Bank of Russia, which once again emphasized the fact that investing in the Russian economy can be fraught with serious risks. As a result, although Russia's 2012 balance of payments looks healthy enough, it is clear that in the medium-term perspective the RF balance of payments will be vulnerable to changes that may occur in the international market situation.
According to the Bank of Russia' preliminary estimate of the RF balance of payments for 2012, the current account surplus amounted to $ 81.2bn, which represents a 17.8% drop on 2011 (Table 4). The balance of trade surplus dwindled by 1.4% (from $ 198.2bn to $ 195.4bn), while commodity exports increased by 1.7% (from $ 522bn to $ 530.8bn), and commodity imports rose by 3.6% (from $ 323.8bn to $ 335.4bn). The share of oil, petroleum products and natural gas in total exports amounted to 65.4%, which represents a 0.1 pp. drop on 2011 (Fig. 7). It should be noted that, in 2012, both exports and imports rose to post-Soviet record highs.
Thus, as in previous years, the main factor determining the size of Russia's current account surplus is the trade balance whose size largely depends on the price behavior of energy carriers and other top Russian exports on global markets. Fig. 8 shows that the equilibrium relationship between global oil prices and the size of Russia's trade surplus observed in 2011— 2011 was continuing over the course of 2012.
600 n
500 -s
js
I 400 S
£
^ 300 s no
a 200
100 --
0
ri.nn.n.nn
r 70 60 50 40 30 20
10
0
c^c^c^c^c^c^oooooooooo^^^ c^c^c^c^c^c^ooooooooooooo
] Exports
Share of energy carriers in total exports
Source: RF Central Bank.
Fig. 7. The Movement of Commodity Exports and the Dynamics of the Share of Energy Carriers in Total Exports, 1994-2012
40000
20000
Balance of trade
Index of oil prices (Ql 1995 - 100%, on right-hand a*is)
*
*
*
2006
♦
Rl
/
w
> _
o1 a
♦
2007
2008
2009
/
2010
Nq
2011
2012
Source: RF Central Bank; EIA; the IEP's calculations.
Fig. 8. The RF Trade Balance and the World Crude Oil Price Index in 2006-2012
The deficit on the services account (reflecting the trade in services) rose to $ 44.8bn, or by 24% in absolute terms compared with 2011. The export of services amounted to $ 63.2bn, having increased by $ 9.2bn (+ 16.9%) from the previous year. Over the course of 2012, the import of services rose by 19.9%, to $ 107.9bn.
The balance on the compensation of employees account in 2012 increased in absolute terms, thus amounting to $ -12/3bn (in 2011 it was $ -9.5bn). The deficit demonstrated by the investment income balance in 2012 increased on 2011 by 5.1% and reached the level of $ 53.3bn. Investment income receivable increased from $ 38.5bn to $ 41.8bn. The growth in the amount of investment income payable for 'other sectors' from $ 75.4bn to $ 78.8bn, and for banks - from $ 11.7bn to $ 14.1bn determined growth of total income payable from $ 89.2bn to $ 95.1bn.
The balance on the rent account1 for 2012 amounted to $ +1bn. (the data on this index is published from 2012).
The balance on the secondary income account (previously referred to as the balance on the current transfers account)2 in 2012 amounted to $ -4.7bn (in 2011 - to $ -3.2bn), and the bal-
1 Rent covers income receivable for putting natural resources at the disposal of another institutional unit. Examples of rent include amounts payable for the use of land, extraction of mineral resources and other subsoil assets, and for fishing, forestry and grazing rights.
2 According to the RF Central Bank, current transfers, for instance, humanitarian aid in the form of consumer goods and services, increase the receiver's level of disposable income and consumption opportunities and decrease the disposable income and potential consumption opportunities of the donor. Current transfers are recorded in the current account. Transfers which are not current by definition are capital ones. If the donor and the recipient are residents of different countries a capital transfer results in a change in the level of national wealth of
ance on the capital account - to $ -5.1bn (in 2011 - to $ -0.1bn). The substantial deficit demonstrated by the capital account in 2012 is caused by the writing off of outstanding debt against the government loans issued by the former USSR.
Table 5
The Main Items of the Balance of Payments and the Dynamics of Russia's External Debt in 2010-2012 (bn USD)
2010 2011 2012
Index
Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4* Year*
Balance from 33.9 18.4 5.6 13.3 71.2 30.8 21.9 17.8 28.3 98.7 34.3 18.2 6.4 17.3 76.2
current and
capital account
Financial account -11.8 9.1 -6.8 -16.6 -26.1 -16.0 -8.9 -20.2 -31.0 -76.1 -24.7 -1.4 -6.7 -3.0 -35.8
(excluding re-
serve assets)**
Change in reserve -16.6 -26.1 -2.7 8.6 -36.8 -10.1 -12.9 1.8 8.6 -12.6 -4.6 -15.0 -1.5 -8.9 -30.0
assets ('+"- de-
crease,'-' - in-
crease)
Net errors and -5.5 -1.4 3.9 -5.3 -8.3 -4.7 -0.1 0.6 -5.8 -10.0 -5.0 -1.8 1.8 -5.4 -10.4
omissions
External debt of -3.8 -6.0 19.2 12.3 21.7 20.7 29.2 -11.1 17.4 56.2 19.2 11.0 23.9 29.3 83.4
the Russian
Federation ('+"-
decrease,'-' -
increase)
RF government -2.4 3.8 -0.3 -0.5 0.6 1.3 0.0 -2.7 -0.8 -2.1 2.2 4.6 2.7 3.8 13.3
external debt
External debt of -1.5 -9.8 19.5 12.8 21.1 19.4 29.2 -8.4 18.1 58.4 17.0 6.3 21.3 25.5 70.1
the RF private
sector
* - preliminary estimate; ** - foreign exchange reserves are not included.
Source: RF Central Bank.
Thus it can be concluded that, in 2012, the main factor that determined the continuing positive current account balance (at a substantial level) in the RF balance of payments were the high prices for top Russian exports - just as it happened in previous years. For example, the average per annum price of Brent crude oil remained practically unchanged, amounting to $ 111.6 per barrel. It should be noted that the year 2012 also saw a continually increasing growth rate of the Russian private sector's external debt (see Table 5). If over the year 2010 the size of external debt owed by banks and the non-financial sector increased by $ 21.1bn, in the next year (2011) the growth of that category of debt amounted to $ 58.4bn, and in 2012 -to 70.1bn. As for RF government external debt, over last year it also increased by $ 13.3bn. Owing to the favorable situation in the energy carriers market, it became possible, towards the year's end, to form a practically deficit-free state budget - and to increase the size of the RF Reserve Fund by approximately Rb 700bn. However, the government still resorted to borrowing on the external market. This measure was necessitated by the fact that government borrowing sets some target values that can be applied by the companies in the private sector in their own borrowing activity - which is carried out by them on a large scale. In the medium term one may expect the size of external debt to continue its growth - both in the private and public sectors of the national economy, which can be explained by the shortage - and the resulting high cost - of domestic financial resources, as well as by the possibility that foreign trade conjuncture may worsen because of the RF Government's ambitious plans to further increase budget expenditure.
the economies they represent. Examples of capital transfers are debt forgiveness and a free of charge transfer of the title of capital assets.
In 2012, the deficit of the financial account amounted to $ 35.8bn. The size of liabilities of Russian economic agents to foreign economic agents increased over that year by $ 80.4bn, which represents a17.1% increase on the previous year ($ 68.7bn).
Over the course of 2012, the size of the federal government's external liabilities increased by $ 9.6bn. As far as RF subjects are concerned, their external debt shrank by $ 0.4bn. In 2012, the size of liabilities of the monetary authorities increased by no more than $ 2.9bn.
The banking sector's liabilities to non-residents over the course of 2012 increased by $ 39.6bn, whereas in 2011 the growth of banks' liabilities did not exceed $ 7.9bn. Given Russian banks' high demand for funds provided by the RF Central Bank, this movement pattern displayed by their liabilities may be indicative of the difficulties experienced by Russian banks in their attempts to attract funding from the domestic private sector.
The liabilities of 'other sectors' to non-residents over 2012 increased by $ 28.9bn (against by $ 62.2bn in 2011); the amount of direct investment in 'other sectors' was $ 38.9bn (against $ 47.3bn in 2011). There was an outflow of portfolio investment in the amount of $ 8bn (against $ 6.4bn one year earlier). The shrinkage of direct investment in Russia's non-financial sector points to its insufficient attractiveness in the eyes of investors from the point of view of the risk to yield ratio. However, the main reason for the slower capital inflow (by comparison with 2011) in the non-financial sector was the movement of liabilities to nonresidents, the size of which in 2012 increased by only $ 2.7bn vs. by $ 21.4bn in 2011.
Thus, in spite of the increasing liabilities of RF residents to foreign economic agents, the structure of borrowed funds may be regarded as rather alarming because, in contrast to the situation in previous years, the size of borrowings made by banks has for the first time exceeded that made by the non-financial sector, while foreign liabilities of the latter have turned out to be much lower than in 2011.
The size of foreign assets held by residents (the liabilities of foreign economic agents to Russian economic agents) in 2012 increased by $ 116.2bn (vs. by $ 144.7bn in 2011). At the same time, the size of foreign assets held by the monetary authorities and federal government bodies remained practically unchanged.
The foreign assets held by the banking sector in 2012 increased by $ 15.9bn (vs. by $ 32bn in 2011). Capital outflows from 'other sectors' dropped on 2011 by 9%, and thus amounted to $ 100.3bn. The share of direct and portfolio investment abroad amounted to $ 45.4bn ($ 26bn less than in 2011). The population and the non-financial sector increased their investment in foreign cash, and so its inflow amounted to $ 2.5bn.
The situation on the RF foreign-exchange market in 2012 was determined by the inflow of foreign currency via the current account channel coupled with its outflow via the capital and financial account (reflecting operations with capital and financial instruments). As noted earlier, the RF Central Bank has markedly reduced its involvement in the foreign-exchange market's functioning, and so the ruble's exchanged rate was being determined in the main by market factors, while the regulator only smoothed over its most pronounced and consistent fluctuations. As a result, while the prices for top Russian exports stayed at a sufficiently high level, and the rate of inflation in the RF remained moderate, the ruble's real effective exchange rate over the period of January - December 2012 increased by 5.5% (over the course of 2011 - by +1.6%), but towards the year's end it still remained at a level lower than in mid-2011 (see Fig. 9). Over the course of 2012, the official USD-to-ruble exchange rate declined by Rb 1.83: by the end of December 2012, it was Rb 30.37 per USD against Rb 32.20 per USD as of 31 December 2011. At the same time, the ruble strengthened against the bi-
currency basket1: over the period under consideration, the value of the bi-currency basket declined by Rb 1.65, from Rb 36.46 to Rb 36.81. As a result, the ruble-to-euro exchange rate as of the end of December 2012 amounted to Rb 40.23, having increased since the year's beginning by Rb 1.44.
---Official USD/RUR exchange rate (end of period)
-Official EUR/RUR exchange rate (end of period)
—•— Value of the two-currency basket
Real effective exchange rate index (right scale) Source: RF Central Bank; the IEP's calculations.
Fig. 9. The Movement of the Ruble's Exchange Rate in January 2005 - December 2012
Thus, in 2012, the situation with the balance of payments was such that, by the year's end, the ruble's exchange rate slightly increased both in nominal and real terms - practically without any interference of the RF Central Bank in the foreign-exchange market. In other words, the market situation was developing rather favorably for the Bank of Russia, enabling it to switch over to the inflation targeting regime in absence of any fundamental changes in the ruble's exchange rate.
One of the major trends displayed by the balance of payments in 2012 was the behavior of net capital outflow from the non-financial sector, which by the year's end rose to $ 56.8bn (in 2011 - $ 80.5bn) (see Fig. 10). Capital outflow continued nearly throughout the entire year's period - with the exception of June, when the amount of net capital inflow in the private sector was $ 4.3bn.
It should be reminded that, until August 2012, the annual capital outflow was forecast by the RF Ministry of Economic to be as low as $ 15-25bn, with several subsequent upward adjustments. Interestingly, a similar situation has already been observed for a few years in a row, when at a year's beginning the authorities released their highly optimistic estimate of potential capital outflow. Meanwhile, it is evident that while the world economic situation
1 The bi-currency basket serves as a target for the RF Central Bank in its monetary policy. At present, the share of euro in the basket is 45%, that of US dollar - 55%.
remains unstable, Russia's economy heavily depends on the export of energy carriers, and the institutional environment's quality is poor, it will be very difficult to make nonresidents increase the amount of their investment in the RF - or to prevent residents from moving their assets abroad.
However, it should also be noted that an important factor that in recent years has been pushing up the level of capital outflow is the RF Central Bank's orientation towards minimizing its interference with the foreign-exchange market. In such a situation a positive balance on the current account of Russia's balance of payments is neutralized by a negative balance on the capital and financial account. Evidently, if the balance of international reserves is constant, capital outflow will correlate with foreign cash inflow as a result of foreign trade. In this connection, the relatively stable nominal exchange rate of the ruble points to an equilibrium of demand and supply on the foreign-exchange market.
cziNel capital outflow (in billions ol'US dollars) ^^Nel capital outflow / foreign irade turnover (%)
Source: RF Central Bank; the IEP's calculations.
Fig. 10. The Movement of Net Capital Outflow in 2005-2012
One more fact confirming the unfavorable situation with capital inflow is the increasing prominence, over the course of 2012, of the phenomenon termed capital flight 1. As of the end of 2012, according to our estimations, capital flight (Fig. 11) amounted to $ 52.6bn, which is by $ 6.6bn more than in 2011.
1 We calculate capital flight in accordance with the IMF's methodology, where capital flight represents the sum of trade credits and advances, export proceeds in arrears and financial claims relating to the delivery of goods or services where payment has not taken place under import contracts, and net errors and omissions.
I 1 Capital flight (in billions of US dollars) —*—Capital flight / foreign trade turnover {%)
Source: RF Central Bank; the IEP's calculations.
Fig. 11. The Dynamics of Capital Flight in 2005-2012
By way of summing up our analysis of Russia's balance of payments, we should like to note that the fact of it having only a small surplus is beneficial for the Russian economy because it increases the stability of the foreign-exchange market and conduces to sustainable development of the financial system. At the same time, due to the high dependence of the current account of the RF balance of payments on a limited number of top exports, the existing situation can hardly be estimated as being sustainable in the long run, as the movement of prices for energy carriers is unpredictable and, consequently, so is the situation in Russia's foreign trade. As for the balance on the account of operations with capital and financial instruments, it can be expected that capital flow in and from Russia will, most probably, remain sufficiently volatile - among other things, because of the uncertain prospects for further development of the world economy. However, all other conditions being equal (first of all, if prices of energy carriers should remain stable), if the RF Government makes no efforts to reduce the risks for foreign investment in the Russian Federation, Russia may hardly expect to receive any private capital inflows by the end of the year 2013.
2.2. State budget
In 2012 the Russian budget system, despite emergence of some risk factors, remained stable. In H2 of the year there were serious concerns of the second wave of crisis or a long-term recession in the global and domestic economy, as well as potential significant depreciation of the European currency and high volatility of the global oil prices, which required for the purpose of the stability of the Russian budget not only to adjust the macroeconomic parameters forecast, but also to develop new fiscal rules that define the limits of the federal budget and the amount of federal budget and its deficit1.
1 See "Prospects of Fiscal Policy" for details.
In the second half of the year, with some stabilization of the global economy and the rise in oil prices to the level that ensured a balanced budget system, the key internal risk factor, particularly for regional budgets, was a slowed growth rate of the Russian economy. In particular, as of the results of eight months in 2012, the consolidated budget of the Subjects of the Russian Federation has decreased by 0.5 p.p. of GDP against the eight months of 2011
As of the results of 2012, the extended government budget revenues have decreased to 37.7% of GDP, which is by 0.5 p.p. of GDP lower than the revenue of the budget system in 2011. Nevertheless, due to the tightening of control over the growth of expenditures in 2012, the extended government budget was executed with some surplus (0.4% of GDP).
However, defining the prospects of further fiscal policy, one should take into account the following:
- IMF1 recommends to cut down expenditures at a moderate pace, and for countries with a balanced budget and enjoying lenders' trust, in the situation of economic growth deceleration, a policy of the budget deficit increasing should be pursued, rather than expenditures reduction;
- on average, budget expenditures expansion approximately by 3-4 p.p. was typical for the OECD countries in 2009-2010. approximately 3-4 p.p. of GDP due to the expansion of government support in the period of crisis, and then, in the framework of the policy of budget deficit and public debt reduction, the reduction and fixation of expenditures at a slightly higher level than before the crisis.
At the beginning of 2012 the position of Russia in comparison with other countries in terms of deficit and public debt indicators was estimated as favorable: budget deficit in Eurozone countries (in general 6.2% of GDP), in the USA (9.6% of GDP) and in Japan (10.3% of GDP) and of a huge public debt (more than 80% of GDP in the Eurozone, 69% of GDP in the USA and 208% of GDP in Japan), but in terms of GDP growth, in regard to the BRIC countries, Russia falls behind other countries as of 2012 results (Brazil - 4.0%, China - 7.5%, India -4.5%, Russia - 3.4%). Thus, fiscal policy in the medium term should be built on the basis of a compromise between promoting economic growth and providing a framework of financial stability in the country.
2.2.1. General characteristics of the budget system of the Russian Federation
In 2012, the dynamics of revenue and expenditure of the extended government budget has changed against the trends of preceding two years. If in 2010 revenues increased by 0.5 p.p. of GDP and in 2011 a further by 2.7 p.p. of GDP against the previous year, in 2012 they were reduced to 37.7% of GDP, which is by 0.5 p.p. of GDP below the level of 2011 (See Table 6). At the same time, the extended government budget expenditures in 2012 have increased versus the preceding year by 0.7 p.p. of GDP after two years of decline.
In the context of the budgetary system revenue and expenditure dynamics is also volatile. If the federal budget revenues in 2012 continued to grow in absolute terms and in GDP percentage, the consolidated budget revenue of the Subjects of the Russian Federation in 2012 once again declined in terms of GDP share, which is a further evidence of the unbalanced distribution of taxes between the different levels of the budgetary system (the major taxes assigned to the federal budget). The centralization of revenues has been intensified by the year-
1 www.elibrary.imf.org 48
end results: the share of federal budget in the extended government total revenues in 2012 has increased to 55.7%. (against 54.4% in 2011), while the share of intergovernmental transfers in the total income of consolidated regional budgets has declined from 21.4% in 2011 to 19.6% in 2012.
Table 6
Revenue and Expenditures of Budgets in 2008-2012
2012 2011 2010 2009 2008 Change, p.p. of GDP, 2012 vs. 2011
Rb bn GDP, % Rb bn GDP, % Rb bn GDP, % Rb bn GDP, % Rb bn GDP, %
Federal Budget
Revenue 12 853.7 21.0 11 366.0 20.8 8 305.4 18.4 7 337.7 18.9 9 275.9 22.5 0.2
Expenditures 12 890.7 21.1 10 935.2 20.0 10117.5 22.4 9 660.9 24.9 7 570.8 18.3 1.1
Deficit (-) / Surplus (+) -37.0 -0.06 430.8 0.8 -1 812.1 -4.0 -2 322.3 -6.0 1705.0 +4.1 -0.9
Consolidated Budget of the RF Subjects
Revenue 8 064.3 13.2 7 643.9 14.0 6537.3 14.5 5926.6 15.3 6253.1 15.1 -0.8
Including intergovernmental transfers 1 623.9 2.6 1 644.0 3.0 1398.9 3.1 1487.4 3.8 1132.6 2.7 -0.4
Expenditures 8342.7 13.6 7 679.3 14.0 6636.9 14.7 6255.7 16.1 6253.5 15.1 -0.4
Deficit (-) / Surplus (+) -278.4 -0.45 -35.4 -0.06 -99.6 -0.2 -329.0 -0.8 -54.4 -0.1 -0.4
Budget of the extended government
Revenue 23 088.7 37.7 20 853.7 38.2 16031. 9 35.5 13599.7 35.0 16169.0 39.2 -0.5
Expenditures 22 825.8 37.3 20 004.8 36.6 17616.6 39.0 16048.3 41.3 14157.0 34.3 0.7
Deficit (-) / Surplus (+) 262.9 0.4 848.9 1.6 -1584.7 -3.5 -2448.6 -6.3 +2012.0 +4.9 -1.2
Source: Russian Statistical Service, RF Ministry of Finance.
Expenditures of the federal budget in 2012 have increased to 21.1 of % of GDP, which is by 1.1 p.p. of GDP higher than in 2011. At the same time, expenditures of consolidated regional budgets demonstrate a strong tendency to reduction from 14.7% of GDP in 2010 to 13.6% of GDP. In 2012 the share of expenditures of the federal budget in the total expenditures of the extended government has increased to 56.6% (against 54.6% in 2011).
As compared with the previous year, the situation with cash execution of the federal budget in 2012 has improved (See Table 7): the budget is executed in terms of expenditures for 98.9% (against 98.3%in 2011). However, the problem of regular budget execution is still remained: in the last months of 2012 there were spent 17.7% (Rb 2,255.9 bn)1 of the annual budget allocations. The RF Subjects consolidated budget execution in cash terms has decreased from 91.4% in 2011 to 90.4% in 2012. In terms of budget expenditure lines, the most critical situation is with the execution of expenditures in 2012 under the section "Housing and Public Utilities" for 85.0%, "Physical Culture and Sports" for 85.7%, "National Economy" for 86.1%.
1 For comparison, in December 2011there were executed about 20% of the total federal budget expenditures.
Table 7
Cash Execution of the federal budget and the RF Subjects Consolidated
Budget in 2011-2012
Federal Budget Consolidated Budget of the RF Subjects
2012 2011 2012 2011
Approved, Rb bn Cash execution, % Approved, Rb bn Cash execution, % Approved, Rb bn Cash execution, % Approved, Rb bn Cash execution, %
Expenditures, total 13035.3 98.9 11126.0 98.3 9182.9 90.8 8400.7 91.4
including
Federal issues 816.4 98.6 815.0 96.6 569.8 89.5 510.8 9170
National defense 1832.2 98.9 1524.4 99.5 4.1 97.6 3.6 94.4
National defense and law enforcement 1820.9 101.2 1258.1 100.0 104.7 90.3 291.3 96.9
National Economy 2051.9 95.9 1861.7 96.2 1864.6 86.1 1485.5 88.6
Housing and public utilities 239.8 95.4 282.9 98.9 1036.8 85.0 1135.8 85.2
Environmental protection 22.8 98.8 17.8 98.9 24.6 88.8 24.0 90.6
Education 608.9 99.2 556.0 99.5 2137.1 95.8 1791.3 96.4
Culture and cinematography 92.8 96.8 86.9 96.3 270.7 94.8 248.0 94.3
Healthcare 626.7 97.8 513.0 97.4 1479.0 91.8 1333.2 89.4
Social policy 3866.8 99.8 3185.9 98.2 1363.0 93.3 1273.8 93.5
Physical training and sports 46.0 99.3 45.0 98.2 182.4 85.7 168.5 85.8
Mass media 77.6 99.9 61.2 99.9 39.0 98.2 35.0 98.0
Source: Ministry of Finance.
As of the end of 2012 extended government budget was executed with a surplus of Rb 262.9bn (0.4% of GDP). Deficit of the federal budget amounted to Rb 37.0 bn, or 0.06 % of GDP. Deficit of the consolidated budget of the RF Subjects increased in 2012 by 0.4 p.p. of GDP from the previous year and amounted to Rb 278.4 bn; herewith, if in 2011 the budget deficit of was noted in 40 regions of the Russian Federation, in 2012 the consolidated budget expenditures have exceeded revenues in 68 regions. The deficit amount is on average 3.4% of revenues from the RF Subjects consolidated budget, but in some regions the level of deficit is greater. For example, in the Chukotka Autonomous Okrug the deficit made 28.7% of revenues in 2012, in the Yamal-Nenets Autonomous District - 16.2%, in the Krasnoyarsk Region - 13.0%, in the Republic of Udmurtia -11.3%, in the Amur Region - 11.4%.
According to the Ministry of Finance, the amount of external public debt over 2012 has increased by nearly $15.0bn and made $50.8bn, while the basic growth was due to the state guarantees of the Russian Federation denominated in foreign currency from $1.0bn to $11.4bn. Herewith, in the initial version of the law on the federal budget for 2012, the upper limit of the external public debt of the Russian Federation was set at $ 48.4bn. Since the principal objective of providing state guarantees is the external support to the industrial exports of JSC "Roseximbank", involved, among other international financial institutions, in supporting the export of industrial goods (works, services), one can expect that this growth of government guarantees in foreign currency in the long term will lead to the growth of high-tech exports.
According to the Ministry of Finance, the amount of domestic government debt (including guarantees issued by the government) by the end of 2012 amounted to Rb 4,977.9 bn or 8.1% of GDP (in 2011 - Rb 4,003.3 bn or 7.3 % of GDP). in 2012 the share of government guarantees in the total domestic debt has increased: if by the results of 2011 the volume of state guarantees amounted to Rb 459.3 bn or 11.5% in the total domestic debt, in 2012 the volume
of government guarantees almost doubled Rb to 906.6 bn and reached 18.2% in the total volume of domestic government debt. Public debt of the RF Subjects in late 2012 has somewhat decreased to Rb 13.6 bn in comparison with the previous year, amounting to Rb 1,137.9 bn.
Despite the decline in the public debt of the Russian Federation Subjects in 2012, disparities in the level of fiscal capacity of regions is likely to be increasing. The Head of the Chamber of Accounts1 has highlighted the problem of the substantial increase in the consolidated budgets deficit, including the additional liabilities on wages, back in the fall of 2012 and supported the initiative of the Federation Council, disapproved by the Ministry of Finance Russia, the debt write-off regions on budgetary credits provided earlier by the Ministry of Finance of Russia. According to the Ministry of Finance, on August 1, 2012 in the structure of the public debt of the RF Subjects there dominated the debts liabilities under budget loans -37.1% (or Rb 412.6 bn). Privolzhsk Region is the leader in the debt liabilities under the budget loans (Rb 133 bn), followed by and the Central Federal Regions (Rb 114.1 bn).
Meanwhile, in the position of the Federation Council in reducing the debt burden on regional budgets, there prevailing a populist position, since the debt situation of regional budgets is not so critical. For the most regions the cost of servicing of the public debt makes less than 1% of the revenues of the RF Subjects. In 2012 the revenue of the RF Subjects in the consolidated budget made Rb 40.9bn from the allocated budget funds. In 2013 it is expected to increase the revenue of the RF Subjects consolidated budget in excise taxes in view of changed standard for the distribution of income between the budgets of the Russian budgetary system in the direction of increasing the share of income allocated to the budgets of the Subjects of the Russian Federation2. Thus, it is recognized in the document, that the Ministry of Finance had enough valid arguments to reject proposals on writing-off the debts of the regions on budgetary loans.
However, some solutions on reducing deficit of the regional budgets, especially for the RF Subjects, which are incapable to increase their revenue or significantly reduce expenditures, should be developed at the federal level of the Ministry of Finance of Russia, involving both, the Deputies and the Accounting Chamber as independent experts. The problem of regional development disparities has been reflected in the Report of Fitch3 rating agency on the development of the institutional framework, presented in April 2012. It was reflected in the Report, that Russia's regional policy provides opportunities for the development only to the capital city and a few regions, selected by the government.
2.2.2. Analysis of the Basic Tax Revenues to the Budget System of the Russian Federation
In 2012, as compared with 2011, the tax burden was reduced by 0.6 p.p. of GDP and has grown by 1.8% in prices of 2012 (See Table 8), which is an evidence of the backlog of tax revenue growth from GDP growth.
It is clear from the above data, that there was a decline in the majority of taxes in terms of GDP revenue. Thus, revenues from income tax were lower than in 2011, revenue from the individual income tax remained at the level of the previous year and that from VAT and insurance contributions have reduced by 0.1 p.p. of GDP. The exceptions were revenues from
1 http://www.rbc.ru/digest/index.shtmI7izvestia/2012.
2 At the ratio of 28% to the federal budget and 72% to the budgets of the RF Subjects.
3 www.fitchratings.com.
MET (4.0% of GDP in 2012 against 3.7% of GDP in 2011) and excise duties (1.3% of GDP in 2012 against 1.2 % of GDP in 2011).
Table 8
Revenue from the Basic Taxes to the Budget of Extended Government of the Russian Federation in 2007-2012, GDP, %
2007 2008 2009 2010 2011 2012 Change in 2012 against 2011
In % of GDP In prices of 2012, %
Tax burden level 36.1 35.7 30.8 31.9 34.8 34.3 -0.5 1.8
Corporate profit tax 6.6 6.1 3.3 3.8 4.1 3.8 -0.3 -3.9
Individual income tax 3.8 4.0 4.3 4.0 3.6 3.6 0.0 4.9
Unified social tax /social security contributions * 5.1 5.1 5.5 5.0 6.3 6.2 -0.1 1.5
VAT 6.9 5.1 5.3 5.5 5.8 5.7 -0.1 1.0
Excise duties 1 0.8 0.9 1.0 1.2 1.3 +0.1 19.1
MET 3.6 4.1 2.7 3.1 3.7 4.0 +0.3 10.1
Customs duties and levies 7.3 8.6 6.8 7.0 8.3 8.0 -0.3 -0.9
* From 2010, there was a transfer from the unified social tax to the social insurance contributions, credited directly to the extra-budgetary funds. Source: RF Ministry of Finance, Russian Statistical Service.
The structure of tax revenues of the extended government budget is shown in Fig. 12. One can note two trends developed over recent years in the restructuring of tax revenue to the budget of extended government. First, the increased revenues from excise duties, whereas the share of excise duties is relatively low in the structure of budget revenues. Second, the enhanced role of MET in the total tax revenue to the budget of extended government. In 2012, revenue from MET has reached 4% of GDP for the first time since 2008, which unfortunately, confirms the sustained or even somewhat increased significance of sectoral factors in the Russian budget.
75,0
Tax revenue Corporate profit tax Individual income tax Personal income VAT Excise duties MET
tax/social security contributions
Source: the RF Tax Service.
Fig. 12. The Share of Tax Revenues in the Total Budget Revenues of the Extended
Government in 2007-2012, %
The main change in tax legislation of 2012 was the reduction the base rate1 of insurance contribution from 34% to 30%. This measure was urged by the negative reaction of employers to the increase of the base rate in 2011 from 26% to 34%, which provoked, in particular, the rejection of the previously planned salary raises and the transition to the gray schemes of payment. As shown in Fig. 13, as a result, the share of the labor compensation fund regardless social contributions in GDP in 2011 has declined by almost 4 p.p. of GDP. Reduction of the base rate in 2012 was a kind of concession in connection with those negative trends. In the end, the base rate reduction did not lead to a serious reduction of insurance contributions to GDP (only by 0.1 p.p. of GDP), and in terms of 2012 prices, even to a rise by 1.5%. This result can be attributed to the partial rejection of gray schemes in salaries payment.
7,00
6,00
5,00
4,00
3,00
2,00
1,00
0,00
2007
2008
2009
2010
2011
2012
Labor compensation fund regardless social contributions Individual income tax/social security contributions (right scale) Personal income tax (right scale)
Source: RF Tax Service, Russian Statistical Service.
Fig. 13. A comparison of the Individual Income Tax/Social Security Contributions and Personal Income Tax Dynamics with the Dynamics of the Labor Compensation Fund regardless Social Contributions in 2007-2012, GDP, %
As for the oil and gas revenues, as compared to the 2011, the level in revenues has somewhat increased (See Table 9). In particular, the increase in tax revenue from MET by 0.3 p.p. of GDP was due in part to the increased production of energy resources (516.8 million tons of
1 In 2012, the rate of wages did not exceed Rb 512,000.
oil, including gas condensate in 2012 against 509.4 in 2011). The second factor contributing to the higher revenues from MET was some reduction of ruble rate1.
Table 9
Revenues from Gas and MET in 2008-2012
2008 2009 2010 2011 2012
Oil and gas revenue, % in GDP 10.6 7.7 8.3 10.1 10.5
MET, % in GDP 4.1 2.7 3.0 3.7 4.0
Oil production, including gas condensate, m tons 488 494 507.2 509.4 516.8
The annual average price level of Urals, for the year, $/barrel 94.0 60.7 78.1 109.6 110.7
Annual average official exchange rate of the Central Bank, RB/$2. 24.78 31.90 30.37 29.31 31.05
Source: Russian Statistical Service; RF Tax Service data; IEP estimates.
The level of proceeds from the second component of oil and gas revenues, i.e., export duties on energy resources, remained unchanged as compared with 2011 (about 6.5% of GD in 2011 and in 2012). The reason is that the natural values of exports of each category of energy resources in 2012 remained at the level of 2011. Thus, according to the Russian Statistical Service, oil exports volume in natural terms made 99.5% as compared with 2011, those of natural gas - 98.2%. Changes in the cost structure of exports of energy resources were also insignificant. A decline in revenues from oil exports duties were leveled by increased fees from exported oil (See Table 10). At the same time, the total reduction of import and export volumes in terms of GDP share in 2012 provided a negative impact on the amount of proceeds from customs duties and charges not related to energy resources.
Table 10
Proceeds from customs duties in 2008-2012, GDP, %
2008 2009 2010 2011 2012
Export duties for:
- crude oil 4.3 3.1 3.6 4.2 4.0
- natural gas 1.2 1.1 0.4 0.7 0.7
- oil products 1.3 1.0 1.3 1.7 1.8
Customs duties and charges, total 8.6 6.8 7.0 8.4 8.0
Source: Russian Statistical Service; Russian Federal Treasury data.
Revenues from income tax have returned back to the level of 2010 (See Fig. 14). Despite the drop in the share of unprofitable enterprises in the Russian economy, the net balanced financial performance of enterprises and organizations (except for small businesses) in terms of GDP share continued to decline in 2012, having reached 12.4% of GDP, which suggests maintaining the downward trend in business activity.
1 The tax rate on MET includes a coefficient reflecting the dynamics of global oil prices, tailored to the average dollar exchange rate for the tax period.
2 Estimated as the average chronological indicator of monthly data of the RF Central Bank.
2007
2010
2011
2008 2009
Corporate profit tax
Balanced financial performance of organizations* ^^Share of unprofitable enterprises (right scale)
2012
* Tentative estimates of the Russian Statistical Service. Source: Russian Federal Tax Service, Russian Statistical Service.
Fig. 14. Dynamics of corporate income tax revenue in the budget system of the Russian
Federation, net financial performance of the organizations and the share of unprofitable
enterprises in 2007-2012, GDP, %
The above-mentioned decline in imports in terms of the GDP share, however, did not affect the level of VAT revenues on imported goods (2.7% of GDP, as in 2011). The drop in revenues from VAT is entirely accounted to the VAT on goods sold in the territory of Russia (See Table 11). Such dynamics suggests that the quality of the VAT administration in Russia is higher in regard to the imported goods. In general, the rate of VAT collection1 in 2012 got deteriorated by 5 p.p. as compared with 2011, which may be partly explained by the increased deductions on investment objects being implemented in Russia.
Table 11
Revenue from VAT to the RF Budget System in 2007-2012, GDP, %
2007 2008 2009 2010 2011 2012
VAT 6.1 5.2 5.3 5.4 5.8 5.7
VAT on goods sold in the RF territory 3.5 2.4 3.0 2.9 3.1 3.0
VAT on goods imported to the RF territory 2.6 2.8 2.3 2.5 2.7 2.7
Rate of VAT collection, % 56.7 46.6 42.3 45.8 51.6 46.5
Imports* 15.3 16.1 13.7 15.0 16.1 15.6
* The share of imports in the GDP share is estimated as the ratio of imports estimated on the Customs Statistics and GDP, denominated in dollars, based on the values of the average nominal exchange rate of the dollar against the ruble for the relevant year.
Source: Russian Statistical Service; Ministry of Finance of Russia.
In 2012 excise duties, along with the MET, have demonstrated an increase in revenue share of GDP. As seen in Fig. 4, the main drivers of growth were the excise duties on petroleum products (from 0.5% in 2011 to 0.6% of GDP in 2012). In 2012 there was a positive dynamics in charges for alcohol in relative terms (from 0.36% in 2011 to 0.4 % of GDP in 2012). Pro-
1This indicator is estimated by the formula
Revenue from VAT VAT rate x (Final Consumption)
ceeds from taxation of tobacco products have also increased (from 0.25% to 0.29 % of GDP) and from excise revenue from the sale of cars and motorcycles the tax burden has stabilized at 0.05 % of GDP.
0,70% 0,60% 0,50% 0,40% 0,30% 0,20% 0,10% 0,00%
1
Ü
I
1
I
E3
□□H
Excise duties for alcohol Excise duties for tobacco Excise duties for oil Excise duties for cars and
products motorcycles
□ 2007 E2008 B2009 D2010 D2011 H2012
Source: Russian Federal Tax Service.
Fig. 15. Excise Revenues over 2007-2012 by Groups of Excisable Goods, GDP, %
Revenue growth from the excise tax is the result of indexation of their rate above inflation rate, while maintaining a relatively low flexibility of demand for excisable goods in terms of the price. Thus, according to the Russian Statistical Service, the sales of gasoline has increased from 36.6 to 36.8 million tons, for diesel fuel it has decreased from 70.2 to 68.3 million tons in 2012, while the excise rates were increased, respectively, from Rb 5,995 to Rb 7,725 per ton of gasoline and from Rb 2,753 to Rb 4,098 per ton for diesel fuel.
The value of indexation of tobacco products rates ranged on average from 20% to 35%; for alcoholic beverages - from 10% to 20%. In 2012 the consumption of all types of alcoholic products changed slightly, while the consumption of tobacco products has decreased (See Table 12). The growth rate of excise duties for these products was compensated by the decline in consumption thereof.
Table 12
Consumption of Alcohol and Tobacco Products in Russia in 2007-2012
Products | 2007 | 2008 | 2009 | 2010 | 2011 | 2012
Alcoholic products, m decaliters
vodka and alcoholic beverages 184.6 177.2 166.1 157.8 159.0 159.8
grape and fruit wines 94.9 102.9 102.5 103.4 103.0 95.6
cognac 8.9 10.8 10.6 11.1 12.0 12.5
champagnes and sparkling wines 24.1 26.0 25.5 27.3 29.8 30.1
beer 1155.3 1138.2 1024.7 1004.0 1077.5 1055.7
Cigarettes and whitefish-portraits, billion units 398.2 393.6 394.3 370.6 366.1 361.0*
* Assessment.
Source: Russian Statistical Service.
2.2.3. Expenditures of the Budget System
With the total cost increase of the budget system in 2012 by 0.7 p.p. of GDP as compared with the previous year, the dynamics of expenditures by categories thereof was volatile. The growth of expenditures in 2012 against 2011 was observed in the most budget lines, including the sections "National Security and Law Enforcement" by 0.3 p.p. of GDP, "National Defense", "National Economy" and "Healthcare & Sports" by 0.2 p.p. of GDP each, for "Education" and "Social Policy" by 0,1 p.p. of GDP. At the same time, for two sections of the extended government budget in 2012 expenditures were reduced, namely for "Federal Issues» by 0.2 p.p. of GDP and for "Housing and Public Utilities" by 0.5 p.p. of GDP against the previous year (See Table 13).
Table 13
Expenditures of the Extended Government Budget in 2008-2012, GDP, %
2012 2011 2010 2009 2008 Change in 2012 vs. 2011, p.p. of GDP
EXPENDITURES 37.3 36.6 39.0 41.3 34.3 0.7
Federal issues * 2.3 2.5 2.6 2.8 2.7 -0.2
National defense 3.0 2.8 2.8 3.0 2.5 0.2
National defense and law enforcement 3.1 2.8 3.0 3.2 2.6 0.3
National Economy 5.3 5.1 5.1 7.1 5.5 0.2
Housing and public utilities 1.7 2.2 2.4 2.6 2.8 -0.5
Environmental protection 0.1 0.1 0.1 0.1 0.1 0.0
Education 4.2 4.1 4.2 4.6 4.0 0.1
Culture, cinematography and mass media 0.7 0.7 0.8 0.8 0.7 0.0
Healthcare and sport 4.0 3.8 3.8 4.3 3.7 0.2
Social policy 12.1 12.0 13.7 12.1 9.1 0.1
Public debt servicing 0.6 0.6 0.6 0.6 0.5 0.0
* With the exception of public and municipal debt servicing. Source: Ministry of Finance of Russia.
Expenditures under the budget lines "Environmental protection", "Culture, Cinematography and Mass Media" and "Public Debt Servicing» in 2012 in terms of GDP shares did not change as compared with 2011.
There were the following changes in the structure of extended government budget in 20092012:
- increased share of expenditures for national security and defense in total expenditures from 15.0% in 2009 to 16.3% in 2012;
- decreased share of expenditures for the national economy from 17.2% in 2009 to 13.1% in 2010 and a slight increase in the next 2 years to 14.2% of the total budget expenditures of the extended government in 2012;
- decline in the share of expenditures under the budget line "Housing and Public Utilities" from 6.3% in 2009 to 4.5% in 2012;
- increased share of expenditure under the budget line "Social Policy" from 29.3% in 2009 to 35.1% in 2010 and a decline to 32.4% in 2012.
There were insignificant changes in the other sections of the budget system expenditure structure in 2012 against previous years.
In terms of specific areas of the budget expenditures in 2012 against 2011, there is a trend of significant increase in the absolute value of expenditures under the budget line "National Defense", under "Implementation of International Liabilities in the Sphere of MilitaryTechnical Cooperation" by 72.8% and "Other Issues in the Field of National Defense" by 31.7%. Expenditures are increased in absolute terms under the budget lines "Law Enforce-
ment Agencies" by 49.4% and "Internal Military Forces" of the section "National Security and Law Enforcement" by 61.7%.
Under the section "National Economy" the largest increase in expenditures in 2012 as compared with the previous year occurred in "Fuel-Energy Complex" by 2.4 times and the section "Exploration and Use of Outer Space" by 44.4% at the expense of the federal budget. Also noticeable growth of expenditures in absolute terms in this section was noted for "Water Systems" and "Road Facilities" by 38.8% and by 38.6%, accordingly.
With the total cost reduction of the extended government in 2012 under the budget line "Housing and Public Utilities" against the previous year by 10.0% in absolute terms, the volume of expenditures under "Housing Utilities" and "Public Utilities" in 2012 remained at the level of the previous year due to the increased expenses of regional budgets. At the same time, expenditures of the budgetary system in 2012 for the improvement and applied research in the field of public utilities have been significantly reduced.
In the section "Education" a significant increase in the expenses of regional budgets is noted for "Preschool Education" - by 18.9% in absolute terms in comparison with 2011 and the federal and the RF Subjects consolidated budget for "General Education" by 19.6%. At the same time, expenditures of the extended government budget for "Applied Research in Education" in 2012 have decreased by 32.5%.
Expenditures of the budget system in 2012 under the section "Healthcare" have been increased in absolute terms as compared with the previous year by 18.1%, including grown expenses for increases to inpatient and emergency care, and reduced allocations for "Healthcare in Day Patient Facilities of All Types" by 24.5% and "Applied Research in the Field of Healthcare" by 14.5%.
The data on the outcome of the extended government budget execution in regard to the sector of government management in 2012 demonstrates the increasing government involvement in the economy through the subsidies to organizations of commercial sector or contributions in the authorized capital. Expenditures of the budget system to increase the value of shares and other forms of participation in the capital in 2012 amounted to Rb 724.8bn (against Rb 583.7bn in 2011), including the funds of the federal budget in the amount of Rb 505.1 bn (vs. Rb 409.8bn in 2011). Expenditures of the budget system for granted for free transfers to organizations, except for those to the state and municipal agencies, were increased by Rb 92.8bn versus the previous year and accounted in 2012 for Rb 1,078.6bn, including the funds of the federal budget transfers granted for free, having grown from Rb 41.8bn to Rb 526.1bn. The problem of subsidizing such enterprises is usually associated with the lack of control over the proper use of the funds by a recipients1 and cost effectiveness thereof, as the state is funding the activity, rather than the result, as in the case of public purchases.
Due to the changes in the procedure of government financing of the public and municipal institutions, there was noted a significant growth in expenditures of the RF Subjects consolidated budget under the section "Gratuitous Transfers to the Public and Municipal Institutions" from Rb 557.0bn in 2011 to Rb 2,764.8bn in 2012. Expenditures under the section "Remuneration of Labor and Charges on the Payment of Wages» in the budgets of the RF Subjects have been reduced from Rb 2,098.9bn in 2011 to Rb 861.3bn in 2012.
1 Analysis of the activities of such companies has shown that most of the recipients of budget funds placed on deposit, will receive additional income not related to the core business. A number of businesses receiving subsidies do not publish financial statements.
In general, the structure and dynamics of the expenditure of the extended government budget in 2012 reflect the priorities of the national policy, with a strong focus on financing of social commitments and security.
2.2.4. Analysis of the RF Federal Budget Key Indicators in 2012 and for the Period of 2013-201 5
The law on the budget implies to reduce revenue of the federal budget in the medium term (See Table 14) in 2013 by 0.7 p.p. of GDP, in 2014 by 0.3 p.p. of GDP and in 2015 by 0.2 p.p. of GDP from the previous year. A gradual decline of oil and gas revenues is planned from 10.5% of GDP in 2012 to 8.3% of GDP in 2015. The reduction of the forecast revenues from oil and gas sector in terms of GDP share in 2013-2015 against 2012 is due to the introduction of the new budget rules, as well as to the lower indicators of exchange rate of the ruble in regard to the GDP growth.
Table 14
Key indicators of the federal budget in 2008-2015, GDP, %
Actual indicators Budget law indicators
2008 2009 2010 2011 2012 2013 2014 2015
Revenue 22.5 18.9 18.4 20.8 21.0 19.3 19.0 18.8
Including oil and gas 10.6 7.7 8.5 10.2 10.5 8.9 8.5 8.3
Expenditures 18.3 24.9 22.4 20.0 21.1 20.1 19.2 18.8
Deficit (-) /Surplus (+) +4.1 -6.0 -4.0 +0.8 -0.06 -0.8 -0.2 0.0
Non-oil deficit -6.4 -13.7 -12.5 -9.4 -10.6 -9.7 -8.7 -8.3
Source: Ministry of Finance of Russia.
Expenditures of the federal budget are to be cut down in 2013 by 1.0 p.p. of GDP from the previous year to 20.1% of GDP, with further decline in 2015 to 18.8% of GDP, which is by 2.3 p.p. of GDP below the level of 2012. It should be noted that, when the main parameters of the federal budget were formed for 2013-2015, there was used a moderately conservative forecast of macroeconomic indicators, for instance, the pace of economic growth in 2013 by 3.7% of GDP, in 2014 - by 4.3%, in 2015 - by 4.5%.
There are insignificant changes from year to year in the income and expenditures of the federal budget for the next three years, estimated in the prices of 2008 (See Fig. 16).
As one can see in the Picture, revenues in the medium term remain at a rather high level, varying around the indicator of 2012, and reaching the pre-crisis level in 2015. Herewith, expenditures, planned for 2013-2015, remain virtually at the 2010 level, when funding of the anti-crisis measures, started in 2009 were still made from the budget, i.e., the 2010 budget had extremely high expenditure commitments. In other words, in the law on the federal budget under review, revenue is planned on the basis of expectations of the sustained favorable external economic situation at the current level, while expenditures have not been decreased after the anti-crisis pumping of the Russian economy with public finances made in 2009-2010. The budget balancing with relatively high prices for mineral resources challenges the sustain-ability of the state budget, bringing it in the sphere of exclusive effect of external factors on the national economy.
10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0
2000 -- 1500 -- 1000 500 -- 0 -- -500 -- -1000 -1500 -2000 -2500
2008 2009
'"""'Revenue
2010 2011 2012 11 ■■' ■■'1 Expenditures
2013 2014 2015 ^^"FB balance (right axis)
Source: Ministry of Finance of Russia, IEP estimates.
Fig. 16. Dynamics of Federal Budget Revenue, Expenditures and Deficit of the Federal Budget in Fixed Prices of 2008, Rb bn
The main sources of the federal budget in the medium term remain revenue from indirect taxes, customs duties and MET (See Table 15).
Table 15
Actual and Expected Revenue from Major Taxes to the Federal Budget of the Russian Federation in 2010-2015 (GDP, %)
Actual indicators Budget law indicators
2010 2011 2012 2013 2014 2015
Corporate income tax 0.6 0.6 0.6 0.6 0.6 0.6
VAT, total: 5.5 6.0 5.7 6.3 6.4 6.5
domestic production 2.9 3.2 3.0 3.2 3.2 3.2
imports 2.6 2.7 2.7 3.1 3.2 3.3
Excise duties, total: 0.6 0.5 0.6 0.7 0.9 1.0
domestic production 0.5 0.4 0.5 0.6 0.8 0.9
imports 0.1 0.1 0.1 0.1 0.1 0.1
MET 3.0 3.8 4.0 3.6 3.4 3.3
Customs duties, total: 6.8 8.2 8.0 7.4 6.8 6.7
Imports 1.2 1.4 1.4 1.4 1.4 1.4
Exports 5.6 6.8 6.6 6.0 5.4 5.3
The share of the above taxes and duties in the revenue of the federal budget, % 89.6 91.4 90.0 89.4 92.3 93.3
Source: RF Ministry of Finance.
In terms of foreign trade income, it is planned to reduce the weighted average rates of import customs duties in view of the accession of Russia to the WTO. However, in terms of GDP share, the revenue of the federal budget from the import customs duties remains at the three-year period indicator at the level of 1.4% of GDP.
The growth of non-oil revenues of the federal budget in terms of GDP volume in 20132015 is largely due to a projected increase in revenues from value-added tax in 2013 by 0.6 p.p. of GDP, in 2014 by 0.1 p.p. of GDP and in 2015 by 0.1 p.p. of GDP against the previous year, and from excise taxes in 2013 by 0.1 p.p. of GDP, in 2014 by 0.2 p.p. of GDP and in 2015 by 0.1 p.p. of GDP as compared with the previous year. In 2013-2015 there is planned an annual growth of excise duties by 0.1-0.2 p.p. of GDP against the previous year due to the indexation and redistribution of revenue from excise taxes between the federal and
regional budgets. The revenues from excise taxes on imported goods to the federal budget in 2013-2015 will remain at the level of previous years (0.1% of GDP).
Revenue from corporate income tax in GDP share is sustained at the level of 2012.
Forecast on revenues of the federal budget from the non-oil revenue for 2013 was made in mid-2012, when the trend of an economic slowdown was not demonstrated in full scope yet. Thus, the risks of reduction of the federal budget revenue from the import customs duties, VAT and corporate income tax are rather high in H1 2013.
The following revenues from the use of the state-owned property are expected in for 2013: revenue from placing funds of the federal budget in the amount of Rb 83.2bn, revenue from the management of the Reserve Fund in the amount of Rb 15.1bn and from management of the National Welfare Fund in the amount of Rb 47.9bn, and the revenue obtained in the form of interest earned from the provision of domestic loans from the federal budget is planned in 2013 in the amount of Rb 12.2bn.
The dynamics of the federal budget expenditures in 2010-2015 in terms of functional classification is presented in Table 16.
Table 16
Expenditure Liabilities of the Federal Budget in 2010-2015, GDP, %
Budget line Actual indicators Budget law indicators
2010 2011 2012 2013 2014 2015
TOTAL 22.4 20.0 21.1 20.1 19.2 18.8
Federal issues* 1.5 1.3 1.3 1.4 1.2 1.1
National defense 2.8 2.7 3.0 3.2 3.4 3.7
National defense and law enforcement 2.4 2.2 3.0 3.1 2.9 2.6
National Economy 2.7 3.2 3.2 2.6 2.4 2.1
Housing and public utilities 0.5 0.5 0.4 0.2 0.2 0.1
Environmental protection 0.0 0.03 0.03 0.04 0.04 0.03
Education 1.0 1.0 1.0 0.9 0.8 0.7
Culture, cinematography* * 0.2 0.1 0.1 0.1 0.1 0.1
Healthcare *** 0.8 0.9 1.0 0.8 0.6 0.4
Social policy **** 0.8 5.6 6.3 6.0 5.6 5.5
Physical training and sports 0.08 0.07 0.1 0.04 0.04
Mass media 0.1 0.1 0.1 0.1 0.06
Public and municipal debt servicing 0.4 0.5 0.5 0.6 0.6 0.6
Intergovernmental transfers 9.2 1.2 1.0 1.0 0.8 0.7
Tentatively approved - - - - 0.5 0.9
* in 2010 regardless public debt servicing.
** in 2010 with regard expenditures for mass media.
*** in 2010 with regard to physical training and sports.
****In 2011 further on this budget lines includes targeted intergovernmental transfers, including those to extra-budgetary funds.
Source: Ministry of Finance of Russia.
Expenditures of the federal budget in the three-year period of fiscal planning have a strong tendency to decrease from 21.1% of GD in 2012 to 18.8% of GDP in 2015.
Increased expenditures in 2013 under the budget line "Federal Issues" is based on the increased budget allocations for wages versus to 2012 virtually to all the public authorities, which are funded in this sector. For example, it is planned to increase expenditures for the payment of the President's authorized representatives and his office staff in the federal districts by 77.8%, i.e., from Rb 0.9bn in 2012 to Rb 1.6bn in 2013, and in 2014-2015 expenditures for the payment to civil servants in general are maintained at the level of 2013.
There is noted a significant growth in budget allocations addressed to the international cooperation under the section "Federal Issues" in 2013 as compared with the previous year by
Rb 10.1bn to Rb 122.4bn, with further declining to Rb 108-109bn in 2014-2015. It is expected to increase spending under this section for the provision of financial assistance to socio-economic development of the Republic of South Ossetia from Rb 2.5bn, allocated in 2012, to Rb 2.8bn in 2013. Expenditures of the federal budget to provide financial assistance to the Republic of Abkhazia in 2013 in absolute terms remain at the level of 2012. In 2013 expenditures of the federal budget for the construction of facilities outside Russia are increased more than 2.5 times to Rb 5.1bn. In 2014-2015 expenditures for the assistance to Abkhazia and South Ossetia Republics, as well as to the construction of facilities abroad are planned in absolute terms at the level of 2013.
Under the budget line "National Defense" major growth of expenditures is planned in 2013 against the previous year in the section "Military Forces" by 17.3% to Rb 1.63 trillion and "Applied Research in the Field of National Defense" by 16.1% to Rb 198.3bn, which is about one third of total expenditures of the federal budget for research and development in the total public expenditures. In 2013 under the section "National Defense" about 25% are addressed to providing the service (labor) contracts.
It should be noted, that such a significant growth of expenditures for the national defense in terms of GDP, from 3.0% of GDP in 2012 to 3.7% of GDP in 2015 demonstrates the rapid growth in spending on military reform with respect to the GDP growth, while their share in the total expenditure of the federal budget is increasing. Without going in the criticism of the leaders of the country for the expenditures on defense, one should admit, that against this background we should recognize that the issue of control over the use of budget funds and state property turnover in not transparent agencies, as well as all levels of government authorities gets more actualized. In particular, during 2011-2012 there was discussed the issue of unsatisfactory state of the objects of property transferred by the Ministry of Defense1, military settlements and social infrastructure to the management of regional and local authorities, and the inability thereof to carry out major repairs of those facilities without additional funding from of the federal budget. Already in the decision of the Federation Council2 it was proposed to provide compensation for surplus expenditures for regions and municipalities, arising in connection with the transfer of ownership to them the military real estate, as well as the use of the Fund of Assistance to Reforming Housing and Communal Services for the funding for the resettlement of people from premises in apartment homes located in the territories of military settlements and recognized as emergency stock after January 1, 2012. The major increase in spending in 2013 by 0.1 p.p. of GDP versus 2012 under the section "National Security and Law Enforcement" pertains to the payments and social security for personnel. The increase in expenses is also associated with the implementation of the new program "Creation of the System for Calling Emergency Services by a Single Number 112", which relevance and importance for the Russian citizens arises no doubt.
Under the budget line "National Economy» in 2015 against 2012 expenditures in absolute terms will be increased by the sections: the Exploration and Use of Outer Space by 16.2%, the Reproduction of Mineral Resource Base by 18.8%, the Road Facilities (Road Funds) by 8.7 %. In absolute terms, the greatest reduction in expenditures of the federal budget will be
1 In accordance with the Federal Law of December 8, 2011 No. 423-FZ "On the order of donation of military non-movable property in the possession of the Russian Federation - the municipal property of federal cities of Moscow and St. Petersburg and the amendments to some legislative acts of the Russian Federation".
2 "On the proposals of the Council of Federation of the Federal Assembly of the Russian Federation on the implementation of the Federal Law "On the Federal Budget for 2013 and the planning period of 2014 and 2015".
made for the fuel and energy sector from Rb 46.3bn in 2012 to Rb 24.7bn in 2013 (by 46.6%), to Rb 4.9bn and Rb 4.3bn in 2014 and 2015 respectively mainly due to reduction of contributions to the authorized capital, the expenses for purchasing additional shares and property installments in the energy sector companies.
In the medium term there are planned increased budget allocations for the development of transport infrastructure:
- in the form of subsidies from the state company Rosavtodor from Rb12.8bn in 2012 to Rb 19.9 bn in 2014 (+58.4%) in the framework of the Federal Program "Development of the Transport System";
- for the implementation of measures of the subprogram "Automotive Systems" of the Federal Program "Development of Transport System" by 13.0% in 2015 as compared with 2012;
- for overhaul, repair and maintenance of roads in 2015 in comparison with 2012 almost twice to Rb 220.2bn.
Under the line of the federal budget "General Economic Issues" expenditures in 2013-2015 are volatile: in 2013 there will be a slight increase with respect to 2012 by 6.6%, and a reduction in 2014-2015 to 13.2% and 2.7% respectively against the preceding year.
In 2013-2015 a modest increase in expenditure of the federal budget for the support of the agricultural sector is noted. In the section "Agriculture and Fishing" expenditures are increased from Rb 149.5bn in 2012 to Rb 165.6bn in 2015 (+10.0%). At the same time, expenditures for the implementation of the State program of agricultural development and regulation of agricultural products, raw materials and food in 2013-2015 will be increased by 14.7% as compared with 2012 in connection with the implementation of new mechanisms of state support to agricultural producers in the use of fuel lubricants and fertilizers, credits, exports.
Significant reduction of budgetary allocations in the medium term is planned for the projects implemented in the framework of the Russian Investment Fund (IF), from Rb 65.5bn in 2012 to Rb 18.3bn in 2013 (by 72.3%) and to Rb 13 5bn in 2015 (by 80.0% as compared with 2012). It may be noted that Investment Fund did not become a real mechanism for implementation of large-scale projects based on public-private partnerships. As of October 1, 2012 in the register of IF projects included 49 projects (among which 2 projects meaningful were regarded as completed), that were approved before January 1, 2012. Most of the projects implemented by IF have the status of regional projects, while the projects of national significance, for which IP was created, account only for 12 units, which have been started back in 2006. Payment discipline of execution the obligations for those projects by private investors and the RF Subjects still remains a problem.
Subsidies to the state companies in 2013 remain at the 2012 level in the volume of about Rb 100bn. In 2014 budget allocations for subsidies were reduced by 20.2% as compared with the previous two years, including through the reduction of the cost of assets contributed to the state company Olympstroy twice as compared with 2013. In 2015 expenditures have been somewhat increased (by 6.4%) against the previous year due to the extended budgetary allocations from SC Rosatom.
In our opinion, expenditures of the budget for the national economy in the first place should provide the necessary institutional and infrastructural conditions for the restructuring of the real sector, rather than replace private financing of business. When providing direct budget support to the systemically and strategically important businesses, there occur the risks
of conservation for technological backwardness of production and preservation of inefficient management.
Expenditures reduction in 2013-2015 is planned for all social sections of the federal budget.
Under the budget line "Education" the greatest expenditures reduction in the absolute terms in 2013 are scheduled against the previous year for the section " Secondary Vocational Education" by 63.9%, and about half of them are addressed at ensuring the functions of government institutions of secondary vocational education, subordinated to the federal bodies of executive "force power" block, as well as under the Ministry of Labor in Russia, providing education to persons with disabilities. Thus, the Government has rejected to support the regions in the field of vocational education despite the aggravated problems of qualified personnel in blue-collar jobs. The lack of personnel deficiency was repeatedly raised at meetings of government representatives of the regions and businesses. The problem is not only in the fact that most regions have no their own funds for the development of vocational education, but also in the fact that well-trained personnel not always works in the region, but prefers to leave the region. In addition, we should realize that the development of modern education and training programs of teachers and trainers there also needed considerable expenditures, which might be funded from the federal budget. Expenditures under the section "Higher and Postgraduate Professional Education" remain virtually unchanged in absolute terms for the next three years.
With the total spending cuts under the budget line "Healthcare" related among other things to the redistribution of the budget for the project of modernization of the sector from the budget of the Ministry of Healthcare, addressed to the Fund of Mandatory Healthcare Insurance, we note an increase by 2.5 times in the expenditures in 2013 against the preceding year under the section "Applied Research in the Field of Healthcare" up to Rb 22.8bn, 96.4% of which is allocated from the system of public procurement and will be addressed in the form of subsidies to the federal budget, independent agencies and other nonprofit organizations, and the balance 4.6% are budgetary investments, not included in the Federal Special Purpose Program. This approach is somewhat contrary to the principles of budget funds efficiency, as the activities, rather than the results of subordinate institutions are funded.
In other functional areas of expenditure of the federal budget, the main factor affecting in the change in expenditures volume are budgetary allocations made for the implementation of the federal program and the non-program federal funding. The allocations of the federal budget for the implementation of the Federal Special Purpose Programs in 2015 has been decreased by 24.3% in real terms against 2012 for all groups of the Federal Special Purpose Program (See Table 17), while funding for the "Far East" program package in 2015 is being terminated.
The structure of the federal budget expenditures by the Federal Special Purpose Program sections in the medium term remained at the 2012 level: the largest share of expenditure (about 40%) in the next three years accounts for the section "Transport Infrastructure", in which only one federal program "Development of Transport" is implemented.
In 2013-2015 the share of expenditures is increased from 27.2% in 2012 to 33.7% for the section "High-tech Development» in the total cost of the Federal Program, which is consistent with the objectives set by the President of Russia to ensure rapid technological development. The expenditure for this section is increased by 12.6% in 2015 against 2012 in nominal terms mainly due to the increased budget allocations to the Federal Program "Maintenance, Development and Use of the GLONASS" by Rb 20.5bn in 2012 to Rb 50.3bn in 2015. In the
framework of the GLONASS program expenditures are increased for research and use of outer space by more than Rb 10bn in 2015 as compared with 2014.
Table 17
Dynamics of the Federal Budget Expenditures Planned for the Federal Special Purpose Program Implementation in 2012-2015, in Rb bn
2012 2013 2014 2015 Change of 2015 vs. 2012, % in real terms
FSPP funding 1027,9 1 011,7 918,4 932,6 -24,3
Funding by FSPP sections
1. High-tech development 279.3 324.7 301.0 314.1 -6.2
2. Housing facilities 58.6 41.9 40.9 41.1 -41.5
3.Transport infrastructure 353.5 353.2 362.6 366.5 -13.5
4. Far East 67.9 53.9 14.0 0 -100.0
5. Rural areas development 20.4 16.1 16.2 17.8 -27.2
6.Social infrastructure 112.1 93.8 57.1 66.7 -50.4
7. Security 99.9 105.2 84.4 83.4 -30.4
8. Regional development 40.1 21.9 13.4 12.1 -74.8
9. Public institutions development 4.3 4.1 4.1 4.4 -14.6
Source: Ministry of Finance, Ministry of Economic development, IEP estimates.
Expenditures of the federal budget are cut sown for the program sections "Housing Facilities" by 29.4% in nominal terms, for the section "Rural Areas Development" by 12.8% and for the section "Social Infrastructure" by 41.1% in 2015 as compared with 2012. For the section "Housing facilities" expenditures are reduced for the federal program for:
- housing facilities for the young families from Rb 5.0bn in 2012 to Rb 3.5bn in 2015;
- housing programs of the RF Subjects promotion from Rb 2.4bn in 2012 to Rb 1.0bn in 2015;
- upgrading of municipal infrastructure objects from Rb 3.9bn in 2012 to Rb 2.7bn in 2015;
- measures to provide housing facilities for certain categories of citizens from Rb 11.5bn in 2012 to Rb 8.1bn in 2015.
Under the package of programs "Rural Areas Development" reduction of the federal budget expenditures is planned in connection with the termination of the program implementation term in 2012-2013 and the redistribution of funds of the federal budget for the implementation of new programs, such as "Sustainable Development of Rural Areas for 2014-2017 and for the Period up to 2020".
For the package of program "Social Infrastructure" one should note completion of the program "Prevention and Control of Socially Significant Diseases (2007-2012), the amount of funding for which in 2012 amounted to Rb 10.8bn in 2014-2015; budget financing of the "successor" of that program is not provided. At the same time, expenditures for the federal target program "Development of Education for 2011-2015" are increased from Rb 11.7bn in 2012 to Rb 17.7bn by increasing public investment in the state property objects in the federal public institutions of higher and postgraduate education and housing and utilities services.
The utmost reduction of the federal budget expenditures is planned under the package of programs "Far East" in view of termination of the federal program "Economic and Social Development of the Far East and Transbaikal Region for the Period to 2013" in 2012. The amount of funding for this federal program was Rb 67.9bn, including expenditures on development of Vladivostok in the amount of Rb 12.9bn, and budgetary allocations for contributions in the authorized capital of share-holding companies in the amount of Rb 25.0bn. Although the validity term of the program is developed up to 2013, funding of the program in the
federal budget is planned in the amount of Rb 14.0bn in the form of subsidies for the financing of capital construction of the state-owned property in 2014.
Funding is reduced for the program package "Regional Development» in 2015 against 2012 by 70% in connection with the termination of the federal program "Socio-Economic Development of the Chechen Republic for 2008-2012", the amount of funding of which in 2012 amounted to Rb 12.2bn, and the federal program "South of Russia" (2008-2013) with the funding in 2012 of Rb 12.9bn. The budget is reduced for implementation of the measures of the federal program "Social and Economic Development of the Kuril Islands in 2007-2015" from Rb 4.0bn in 2012 to Rb 0.6bn in 2015.
Under the package of "Safety" measures, the budget allocation was reduced by 16.2% in 2015 against 2012 due to the end of a series of FTPs, in the first place "Fire safety in Russia up to 2012". Under a number of programs it is planned to increase funding, including the Federal Program "Development of the Penitentiary System" from Rb 5.6bn in 2012 to Rb 13.8bn in 2015.
In general, there should be noted a negative trend of reduction in expenditures for federal programs in the total expenditures of the federal budget in the next three years from 8.1% in 2012 to 7.6%, 6.5% and 6.0% in 2013-2015, respectively. Currently, before the introduction of the program budget, federal targeted programs are the most effective tools for the targeted budget management and the reduction of the share of expenditures allocated for the federal programs can be considered inappropriate in terms of increasing the efficiency of budget expenditures.
Expenditures for public debt servicing in 2013 as compared with the previous year will increase by 0.1 p.p. of GDP in 2015 and in percentage of GDP will remain at 0.6 of GDP. In 2012 the volume of balances in the Reserve Fund has increased from Rb 811.5bn to Rb 1,885.7bn, and in January 2013 there were allocated additional amount about Rb 704bn as per results of 2012. Thus, at this time the Reserve Fund makes about 3. 9% of GDP. On the contrary, the amount of the National Welfare Fund over 2012 has decreased by Rb 103.8bn due to the exchange rate differences and on 01.01.2013 it makes Rb 2690.6 bn, which is equivalent to 4.4% of GDP. In 2013-2015 it is expected to maintain the growth of the Reserve Fund with oil and gas revenues. Herewith, the balance of the federal budget most likely will be either unchanged or reduced with regard to the decisions made on the pension reform.
Deficit of the federal budget in 2013-2015 will be covered, as before, by government borrowing and funds from the privatization of federal property. In 2013 the amount of involvement of government securities in the domestic market is planned to be in the amount of Rb 1,213.2bn, in 2014-2015 in the amount of Rb 842.2bn and Rb 1,114.8bn respectively. The amount of public external debt in foreign currency in 2013 will amount to $7.27bn, in 20142015 - to $7.19bn and $717bn, respectively.
Dynamics of the main parameters of the federal budget in 2013-2015 gives grounds to say that the objective of the federal budget balancing is a priority.
2.2.5. Fiscal Policy Outlooks
There were two components of fiscal policy identified in the Guidelines of fiscal policy for 2012 and the planning period of 2013-2014:
- financial component, focused on reducing the deficit and increasing efficacy and transparency of public administration;
- economic component, which is to address the issues of sustainable post-crisis development, reduction of revenues depending on the current economic situation and creating conditions for the development and modernization of the economy, improving the level and quality of life.
Despite the fact that it is hardly possible to solve the problem of reducing the budget deficit with unconditional implementation of the commitments in the long term without the solution of the economic problems in the medium term, the objective of budget deficit reduction and capital accumulation was clearly dominating over objectives of priming of economy in fiscal policy in 2012.
Adjusted in 2012 fiscal rules include:
- addressing of a share of oil and gas revenues of the federal budget recognized as additional revenue, to the Reserve Fund up to the amount of the normative value in 7% of GDP;
- a new approach to the definition of the main parameters of the federal budget on the basis of the average price of oil. Revenue of the federal budget in 2013 is calculated on the basis of the average 5-year Urals crude oil prices with regard to increasing period of calculations every 1 year to 10 years. Total expenditures of the federal budget are limited to the amount of revenue of the federal budget without additional oil and gas revenue. With reaching the nominal value of the Reserve Fund the total expenditures of the federal budget can be increased up to 50% of additional oil and gas revenue, and addressing thereof to the financial security of infrastructure and other priority projects with a limited term of their implementation;
- limitation of the federal budget deficit at the level of 1% of GDP.
The new rules were declared by the government as a tool to reduce dependence of the federal budget from fluctuations in global prices for hydrocarbons and a "safety cushion» in the crisis situation.
At the same time, new approaches to the definition of the federal budget basic parameters can provoke reduction of the budget 'expenditure which is not always appropriate in terms of slowing economic growth. It should be noted that, despite the many years of experience of implementing the principles of performance-based management and budgeting by results, the formation of an effective and transparent system of public expenditure management is still far from being completed. The approaches to sequestering the budget basing on the priorities in the framework of a single section and by type of expenditure are still undeveloped. There is no break-down of expenditures by the mandate and discretionary ones, which results in subjectivism and protectionism in making decisions on increasing or reducing thereof. Priorities of investment activities of the state are undeveloped.
It may be admitted that the strategy of accumulating funds for the future is the most simple, not requiring any complicated calculations and skills, way manage finances, but not the most-effective way, since confiscated through taxes budgetary funds should be invested back in the economy and provide the required returns, the level of which may vary according to the basic terms and conditions of funding thereof.
It should also be recalled that the forecast of the budget funds needed for the financial system stabilization and the support the real sector of economy in case of occurrence of a new wave of crisis or a prolonged recession, is achieved as yet. Therefore, it is impossible to estimate the safety margin of "safety cushion" in the form of accumulated funds of stabilization funds. The Ministry of Finance has internal reserves to balance the budget by partial freezing
of budgetary allocations, such as Housing Utilities Fund (about Rb 100bn) and non-donation transfers to the regions.
Introduction of fiscal rules may place in doubt the possibility of realization of certain projects. For example, in late 2011 a proposal was expressed for the establishment of a special fund of regional investments from January 1, 2012. In anticipation of further reductions in income of consolidated regional budgets, the investment fund could compensate for the loss of revenue by increasing the tax potential of the regions. It was planned that the source of funds generated by the Federal Fund for Support of Investment (FFSR) will become unallocated revenues of the federal budget, but with the introduction of new fiscal rules creation of the Fund under such conditions is unlikely.
With the introduction of fiscal rules a part of oil and gas revenues will not be reflected in the budget, so the share of non-oil revenues in the structure of revenues of the federal budget will grow, and the value of non-oil deficit will decrease. With a moderate growth of oil prices up to 2020 (average annual oil price is about $100 per barrel in 2011 prices), the non-oil deficit will decrease from 10.6 % of GDP to 7.8% of GDP. Such "positive" changes in the structure of budget revenues in the short term will be due solely to the calculation technique, rather than a result of systematic work on the restructuring of the economy.
Meanwhile, the adoption of the new fiscal rules and formation of reserves is a necessary condition for the stability of the budget of the Russian Federation, as for many other countries with undiversified economies and limited capacity for borrowing in the time of crisis. In addition, the creation of reserves for "future expenditure" will ensure the unconditional fulfillment of the Russian government commitment in funding of the Olympics - 2014, 2018 World Cup, as well as the development of the innovation center "Skolkovo".
Thus, it is difficult to give a clear assessment to the implications of the new fiscal rules; the 2013 is likely to add much clarity to the assessments.
It should also be said about the need for revision in management policy of state-government guarantees. In the last three years there has been a significant growth in the volume of state guarantees and their share in the total volume of domestic government debt. At the beginning of 2010 the volume of government guarantees amounted to Rb 251.4bn, and 12.0% in the total volume of domestic government debt, at the end of 2012 the volume of state guarantees rose to Rb 909.1bn and accounted to 18.2% of GDP. According to the normative and legal documents of different levels, government guarantees are provided to:
- backbone enterprises, included in the list1 approved by the Government Commission2 on Sustainable Development of the Russian economy in 2008 in the framework of anti-crisis measures of the government policy to ensure continuous monitoring of financial, economic and social situation;
- enterprises of the military-industrial complex (MIC);
- commercial investment projects.
It should be noted that most of the companies included in the list of backbone enterprises that receive government guarantees are the joint stock companies, in which the government is in the best case the minority shareholder, and other main shareholders may be offshore companies. In terms of such way to support the military-industrial companies, the government guarantees are not the major, but additional tool of support, along with budget subsidies and
1 The initial list included 304 enterprises.
2 Decree of the Russian Federation Government N 957 of December 15, 2008 "On the Government Commission on Sustainable Development of the Russian Economy".
contributions in the authorized capital, being less focused on improving the performance of these companies.
First of all, it is needed to review the list of the backbone enterprises, among other reasons, including the liquidation of the Committee, which approved the list, and the introduction of more stringent standards of the criteria for inclusion the enterprises in the backbone ones, for example, the inclusion of the requirement on the absence of the offshore companies among the founders. Second, we must implement individualized approach to provide guarantees to the backbone enterprises, MIC companies and investment projects, and, if possible, to change the instruments of support and replace them with such instruments as budgetary credits, interest rate subsidies, government purchase contracts.
The national debt policy needs to be improved as well. With the introduction of the new fiscal rules and with the growth of the Reserve Fund there raises a question of the relevance of continuing the practice of raising government borrowing, dictated solely by the current favorable conditions in the capital markets, especially in the situation when expenditures for servicing the funds raised exceed the proceeds of the placing thereof on deposits. Under these circumstances it seems reasonable to limit the amount of government borrowing only to the long-term targeted financing of investment projects of high socio-economic significance.
2.3. Intergovernmental Relations and Subnational Finance
2.3.1. Subnational budgets in 2012
Major trends in the relationships between different levels of government are reflected in the structure of the revenues and expenditures of the consolidated budget of the Russian Federation. Table 17 presents data showing the share of tax revenues and expenses of the subjects of the Russian Federation in the relevant indices of the consolidated budget of Russia1. It is obvious that the trend to reduce the share of subnational tax revenues, set in 2011 in the consolidated budget of Russia, continued in 2012. This trend is associated with a combination of high energy prices, determining the increased income of the federal budget and low economic growth rates which adversely affect the amount of income tax and personal income tax (the main revenue sources of subnational budgets).
Table 18
The share of particular indicators of subnational budgets in the consolidated budget of Russia between 1997-2012, in % terms
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Tax revenues 53.1 56.6 49.2 43.5 37.4 35.1 39.6 36.1 30.9 31.8 33.9 33.2 36.6 37.2 33.1 32.9
Tax revenues excluding resource payments and customs duties 59.5 59.9 55.0 49.0 42.6 40.1 41.9 47.5 49.1 52.0 50.5 53.7 54.8 57.1 56.0 55.7
Expenditures 48.1 54.1 51.9 54.4 51.2 49.3 50 50.8 49.5 43.4 48.3 49.2 43.4 43.2 46.5 49.3
Source: Federal Treasury, estimates of the Gaidar Institute for Economic Policy.
1 The detailed analysis of the structure of some indicators of subnational budgets in the consolidated budget of Russia in 1996-2011 see in "The Russian economy in 2011. Trends and Prospects" (Issue 33) - Moscow: Gaidar Institute, 2012, pp. 71-73.
The decreased share of tax revenues in the subnational budgets is mainly determined by the very low income tax growth rate (as a result, there was even a decrease of 3.7% in real terms, see below) due to the deceleration of Russian economic growth (real GDP growth declined from 4.3% in 2011 to 3.4% in 2012). At the same time, the share of expenditures of subnational budgets in the consolidated budget expenditure of the Russian Federation continued to increase from 46.5% in 2011 to 49.3% in 2012, which was slightly higher than the corresponding pre-crisis indicator value (by 0.1 percentage point as compared to 2008). As a result, the vertical imbalance which had markedly declined in 2009 - 2010 was increasing during 2011 - 2012 with the simultaneous decrease of the oil and gas revenues of the federal budget and a rising scale of anti-recessionary expenditure at the federal level. Thus, we can say that by the end of 2012, the relations between the basic parameters of the federal and subnational budgets had returned to pre-crisis values. However, the sharp deceleration in the growth of income tax revenues in 2012 raises serious concerns and may lead to a continued fall in the share of tax revenues in the subnational budgets in the consolidated budget of Russia in the future.
Below we consider the situation for the income part of the subnational budgets in more detail. The performance of the main components of the consolidated revenues of the RF subjects is shown in Table 19.
Table 19
Performance of the consolidated revenues of RF subjects
in 2008-2012
Revenues (in nominal terms), RUR billion Real increase, %
2008 2009 2010 2011 2012 2009/ 2008 2010/ 2009 2011/ 2010 2012/ 2011 2012/ 2008
Total revenues 6,196 5,924 6,537 7,644 8,064 -12.1 1.4 10.2 -1.0 -2.8
Tax and non-tax revenues 4,912 4,243 4,980 5,827 6,385 -20.6 7.9 10.3 2.8 -2.9
Incl. tax revenues 4,384 3,792 4,520 5,273 5,800 -20.5 9.6 10.0 3.2 -1.2
Income tax 1,752 1,069 1,520 1,928 1,980 -43.9 30.6 19.6 -3.7 -15.6
Personal income tax 1,666 1,665 1,790 1,996 2,261 -8.1 -1.2 5.1 6.3 1.4
Lump sum taxes 161 152 179 215 272 -13.6 8.5 13.4 18.4 25.9
Property taxes 493 570 628 678 785 6.1 1.4 1.7 8.7 18.9
Excise taxes 189 246 327 372 442 19.2 22.5 7.1 11.4 74.2
Transfers 1,131 1,486 1,398 1,644 1,624 20.7 -13.5 10.8 -7.3 7.2
Other revenues 153 195 159 173 56 17.4 -25.1 2.5 -69.7 -72.7
Source: Federal Treasury, estimates of the Gaidar Institute for Economic Policy
In general, in 2012 revenues of the consolidated budgets of the subjects of the Russian Federation increased by 5.5% to the level of 2011 in nominal terms. However, if we consider the subnational budgetary income in real terms, the data in Table 19 shows that in 2012 (for the first time since 2009) total revenues reduced by 1%, while the tax and non-tax revenues increased by 2.8%. The main reason for the reduction of total revenues was the reduced amount of federal transfers. Thus, while in 2011 the amount of allocated inter-budget transfers was RUR 1,644 billion, in 2012 it reduced by RUR 20 billion and amounted to RUR 1,624 billion. (see the next section for details).
Analysing the tax revenues separately, it should be noted that they grew by 3.2% in real terms (in 2012 as compared to 2011). However, the performance of the two main taxes - income tax and personal income tax (68.5% of tax revenues) has been mixed. While personal income tax revenues for the period in question increased by 6.3% in real terms, income tax, by contrast, decreased by 3.7%. Accordingly, there have been significant changes in the struc-
ture of the tax revenues of subnational budgets: in 2011 the share of personal income tax accounted for 37.8% of total tax revenues, while income tax accounted for 36.6%; in 2012, the amounts were 43.2% and 25.3%, respectively. It should be noted that only income tax revenues did not reach the pre-crisis level: the 2012 decline compared to 2008 was 15.6% in real terms (though the regions have additionally received 0.5 percentage points of the income tax rate since 2009). As a result, the significant reduction in income tax revenues did not allow the subnational budgetary tax revenues for 2012 to reach the 2008 pre-crisis level (a decrease of 1.2% in real terms). The performance of the other tax revenues of the subnational budgets has been more favourable. The highest increase in 2008 - 2012 was recorded in excise revenues - up by 74.2% in real terms, which was mainly associated with the rate indexation. Income taxes on total income and property taxes significantly increased (by 25.9% and 18.9%, respectively).
It is also interesting to consider the revenue pattern of the major types of income payable to the consolidated budget of the Russian regions in terms of GDP (see Table 20).
Table 20
Major income revenues of the consolidated budget of Russian regions
in 2008 - 2012 (% of GDP)
2008 2009 2010 2011 2012
Tax revenues, total 10.62 9.77 9.76 9.45 9.30
Including:
Corporate income tax 4.24 2.75 3.28 3.46 3.18
Personal income tax 4.04 4.29 3.87 3.58 3.63
Excise taxes on goods sold in Russia 0.46 0.63 0.71 0.67 0.71
Lump sum taxes 0.39 0.39 0.39 0.39 0.44
Property taxes 1.20 1.47 1.36 1.22 1.26
Taxes, fees and regular payments for the use of natural resources 0.25 0.19 0.07 0.07 0.07
Non-tax revenues 1.28 1.16 0.99 0.99 0.94
Non-repayable receipts 2.92 4.17 3.26 3.17 2.69
For reference: GDP, RUR billion 41,277 38,807 46,322 55,799 62,357
Source: Federal Treasury, estimates of the Gaidar Institute for Economic Policy.
Comparison of the data in Tables 19 and 20 reveals the differences in performance of individual indicators in real terms and as a share of GDP in 2010 - 2012. Thus, while in real terms, there was an increase of tax revenues in 2010 - 2012 (though very low in 2012), their proportion of GDP showed a steady decline. It is also important to note that despite the increase in personal income revenues in real terms (in 2012 as compared to 2008), the corresponding indicator in terms of GDP is markedly below the pre-crisis value (3.63% and 4.04%). In general, the performance of income tax in terms of GDP corresponds to its performance in real terms, and further underscores the unfavourable situation with these tax revenues (4.24% of GDP in 2008 and 3.18% of GDP in 2012).
Above, we considered the performance of tax revenues at a subnational level in general. Next we shall consider the situation with tax revenues in the Russian regions. Table 21 shows a grouping of the Russian regions on the basis of changes in tax revenues in general, as well as the income tax and personal income tax revenues in 2012 compared to 2011.
In 2012, sixty eight of the eighty two Russian regions recorded increased tax revenues in their consolidated regional budgets in real terms above the 2011 level. The leaders in terms of growth rates were the Kaluga region (18.8%), the Arkhangelsk region (16.4%), the Republic of Kalmykia (67.5%), the Astrakhan region (23.0%), the Magadan region (16.9%) and the Sakhalin region (19.4%). It should be noted that the particularly high growth rate of tax reve-
nues in the Republic of Kalmykia was provided by an increase in personal income tax (from RUR 1,347 billion in 2011 to RUR 3,775 billion). This significant growth was only determined by the tax payments of a major taxpayer amounting to RUR 2,229 billion. In 2012, the situation with the tax revenues of the subnational budgets in many Russian regions appears to be relatively benign. However, in a number of Russian regions the performance of tax revenues raises some concerns. Among them we should particularly note the Chukotka Autonomous District, where the fall amounted to 4.1% in nominal terms, which (along with the reduction of federal transfers) led to a reduction in total income of 15.7% (transfers and decreases in tax revenues contributed approximately equally to the reduction in total income).
Table 21
Grouping of Russian regions on the basis of changes in the consolidated
budget revenues of the region
The number of regions in which the change of tax revenues
Increased by more than 25% Increased from 10 to 25% Increased by less than 10% Decreased by less than 10% Decreased from 10 to 25% Decreased by more than 25%
In nominal terms
Total revenues 4 28 35 14 1 0
Tax revenues 4 54 18 5 1 0
Income tax 17 27 11 14 7 6
Personal income tax 5 69 8 0 0 0
In real terms
Total revenues 2 5 39 27 9 0
Tax revenues 2 18 48 10 4 0
Income tax 6 21 23 12 11 9
Personal income tax 3 12 66 1 0 0
Note: Arkhangelsk Region and Nenets Autonomous District are shown in the calculations as a single entity.
Source: Federal Treasury.
Nominal decreases in tax revenues were also observed in the Krasnoyarsk Territory, Murmansk, Belgorod and Kemerovo Regions (within 6%). In all the above regions the share of tax revenue is 60% and it exceeds their total income, so the situation in the public sector in these regions is sensitive to the performance of tax revenues. In contrast, in the Republic of Ingushetia (despite a nominal decrease in tax revenues by 2.2%) it is in the range of 14-16% of the total income of the region making the republican budget dependent not on its own tax revenues, but on the changes in the amount of federal financial support.
In real terms, a fall of tax revenues in 2012 has been recorded in 14 regions already. In addition to the previously mentioned regions of the Russian Federation, this group also includes: the Lipetsk region (-0.7%), Moscow (-1.6%), the Republic of Karelia (-2.6%), St. Petersburg (-4.1%), the Tyumen region (-4.6%), the Khanty-Mansiysk Autonomous District (-2.4%), the Yamal-Nenets Autonomous District (-0.6%) and the Republic of Khakassia (-0.2%)1. It should be noted that many of the aforementioned regions are ones with higher or average fiscal capacity.
Stable tax revenues are provided by personal income tax with increased related revenues in real terms in all regions, except in the Vladimir region (-0.9%, while the share of personal income tax in the total income of the region is high enough at about 28%). At the same time, income tax revenues for the period decreased in 21 regions in nominal terms, and in 32 regions of the Russian Federation in real terms. The largest nominal decreases in this tax were
1 The lowest share of tax revenues in total revenues in this group was 57% in the Republic of Karelia (in 2011). In the Republic of Khakassia the indicator was 68.3%, and in other regions it exceeded 70%.
observed in the following regions where the share of income tax in their total income exceeds 25%: the Murmansk region (a decrease of 32.7%), the Kemerovo region (-31.6%), the Chu-kotka Autonomous District (-30.7 %), the Belgorod region (-25.0%), Krasnoyarsk Territory (23.8%), St. Petersburg (-18.0%) and the Lipetsk region (-13.1%).
The performance of income tax revenues both in the whole of Russia and at a regional level, and the reduction of the tax revenues of a number of Russian regions in real terms, including regions with a relatively high fiscal capacity (due largely to the performance of income taxes) is quite worrying, revealing the instability of the recovery of growth in the Russian economy. It is also difficult to suppose the possibility of sustained growth of the revenue base of the regional budgets in the short to medium term. Furthermore, an important negative signal is the reduced income of subnational budgets in general. So, 36 regions out of 82 subjects of the Russian Federation recorded a reduced income in real terms and in 9 of them this reduction was between 10% - 25%.
Now let us consider the changes that have occurred in the expenditure component of the consolidated regional budgets of the Russian Federation (see Table 22). The total expenditure increased by 8.6% in nominal terms compared to the same period of 2011. However, in real terms, the increase was only 1.9%, and in GDP terms there was a decrease of 0.38 percentage points. The structure of the consolidated budget of the Russian Federation regions has undergone some changes.
Table 22
Expenditures of the consolidated budget of Russian regions in 2011-2012
% of the total % of GDP 2012/2011
Increase in nominal terms Increase in real terms
2011 2012 2011 2012 2011 2012
National Issues 6.1 6.1 0.84 0.82 8.9 2.1
National Security and Law Enforcement 3.7 1.1 0.51 0.15 -66.5 -68.5
National economy, incl. : 17.1 19.2 2.36 2.58 22.0 14.4
Agriculture and fisheries 3.0 2.9 0.41 0.39 4.0 -2.5
Transportation 2.8 3.5 0.38 0.47 39.0 30.4
Roads (road funds) 5.5 7.7 0.76 1.04 52.2 42.8
Other aspects of the national economy 3.6 2.9 0.50 0.39 -11.9 -17.3
Housing and utilities 12.6 10.6 1.74 1.41 -9.0 -14.7
Environmental protection 0.3 0.3 0.04 0.03 -0.3 -6.5
Education, incl.: 22.5 24.5 3.10 3.28 18.4 11.1
Pre-school education 5.1 5.6 0.70 0.74 19.0 11.6
General education 12.8 14.1 1.76 1.89 20.0 12.6
Vocational education 1.1 1.5 0.14 0.20 56.3 46.7
Other aspects of education 1.8 1.7 0.25 0.22 -0.1 -6.3
Culture and film-making 3.1 3.1 0.42 0.41 9.5 2.7
Public health 15.5 16.3 2.14 2.18 13.9 6.8
Social policy 15.5 15.3 2.14 2.04 6.9 0.3
Physical education and sports 1.9 1.9 0.26 0.25 8.0 1.3
Mass media 0.4 0.5 0.06 0.06 11.6 4.7
Servicing of the state and municipal debt 1.0 0.9 0.14 0.12 -1.5 -7.6
Total expenditure 100.0 100.0 13.76 13.38 8.6 1.9
Source: Federal Treasury.
By analysing the changes in regional budget expenditures in some areas, we can note the following. The greatest decrease in expenditures in 2012 was observed in the section "National Security and Law Enforcement" (-66.5%), which led to a decline in the share of expenditures on this section in the total expenditure from 3.7 to 1.1%. This performance is associated with the transfer of powers on the financial support of the police to Federation level in 2012. A nominal decline was also recorded in one of the major sections "Housing and Utilities"
(-9.0%) with its share reduced from 12.6% to 10.6%. It is also important to note a decrease in expenditure on servicing the state and municipal debt by 1.5% in nominal terms against the increase in borrowings in 2012. The lack of growth and even the decrease in expenditure on debt servicing is largely due to the fact that a sharp increase in the growth of borrowing was observed in December, which should result in increased expenditure to be considered in 2013 (for more details on the debt policy see below).
At the same time, a number of major sections showed an increase in expenditure: the "National Economy" (an increase of 14.4% in real terms), "Education" (11.1%) and "Public Health" (6.8%). In another major section, "Social Policy", the expenditure in real terms has not changed (it increased by only 0.3%).
Particular attention should be paid to the "National Economy" section. The share of expenditure in this area has increased from 17.1% to 19.2% (an increase from 2.36% to 2.58% in GDP terms). It is important to consider the performance not only of the entire section, but also of its separate subsections, as this area of expenditure is quite heterogeneous in contrast to most other areas. Thus, the expenditure on agriculture decreased by 2.5% in real terms, which resulted in some reduction in the share of this expenditure (from 3.0% to 2.9%) of the total expenditure. At the same time such major sub-sections as "Transport" and "Traffic Management" have shown significant growth in real terms, in 2012, these two sections were responsible for 58.6% of the total expenditure of the national economy.
In 2012, expenditures on the "Traffic management" subsection increased by 42.8% in real terms compared to 2011. As a result, the share of this section in the total expenditure increased from 5.5 to 7.7%. The increase in expenditure was associated with the road funds of the RF regions established back in 2011 and replenished primarily by the excise tax on oil products produced in the Russian Federation (increase by 43.5%) and transport tax (increase by 8.3%). As a result, the increased revenues allocated to the road funds of the regions of the Russian Federation led to an increase in maintenance expenditure (from RUR 143.1 billion to RUR 278.5 billion), and to expenditure on the construction of new roads (from RUR 217.3 billion to RUR 262.5 billion). It is also necessary to take into account the increase in federal subsidies for roads from RUR 57.6 billion in 2011 to RUR 98.2 billion in 2012 (for more details on federal transfers see the next section).
Expenditure under the "Transport" subsection in 2012 increased by 30.4% in real terms compared to 2011. The share of this section in the total expenditure increased from 2.8 to 3.5%. However, this increase is largely associated with an increase in Moscow expenditure. In 2012, the regional authorities' contributions to the authorised capitals of enterprises amounted to RUR 86.8 billion, accounting for 30.4% of the total expenditure on transport in the whole country. These contributions were made at early stages of the implementation of the Programme of infrastructure development for passenger traffic at the Moscow railway junction in 2012-20201.
Another significant part of subnational expenditure, "Education", increased by 11.1% in 2012 in nominal terms compared to the previous year. The proportion of expenditure in this area increased from 22.5% to 24.5% of the expenditure of the consolidated budget of the regions of the Russian Federation. This increase was primarily associated with an increase in
1 In addition, in accordance with the Decree of the Government of the Russian Federation No. 2427-r dated 19.12.2012 (On the increase in the authorised capital of Russian Railways OJSC) the authorised capital of Russian Railways OJSC has been increased by RUR 25.9 billion at the expense of the federal budget in order to implement measures for the development of the transport infrastructure of the Moscow region.
expenditure on general and pre-school education (by 12.6% and 11.6%, respectively). However, we can hardly but note a significant increase in expenditure on the subsection "Vocational Education" - by 46.7% compared to 2011, which led to an increase in the share of this expenditure from 1.1% to 1.5% of the total regional expenditure. This performance was determined by the fact that, in accordance with the order of the Russian Government No. 2413-r dated 29 December 2011, the titles to 706 VE institutions located in 73 regions of Russia were transferred to the regions.
In general, in 2012, the consolidated regional budget was reconciled with a deficit of RUR 278 billion, which is RUR 243 billion greater than that for 2011. The total deficit was 3.34% of the total expenditure, which is less than the same indicator in 2009 (5.26%), but higher than in 2010 (1.51%) and 2011 (0.46%). The situation at a regional level is presented in Table 23.
Table 23
The result of implementation (deficit/surplus) of consolidated budgets for the regions of the Russian Federation in 2008-2012
The number of regions of the Russian Federation which implemented the budget with
Deficit Surplus
2008 45 39
2009 62 21
2010 63 20
2011 57 26
2012 67 16
Source: Federal Treasury.
The data in Table 23 suggest that the situation with the deficit of the consolidated budgets of the regions of the Russian Federation in 2012 was worse than in 2011. Whilst in 2011 only 57 subjects reconciled their budgets with deficits, in 2012 their number increased to 67 regions, even more than in 2009 - 2010. It should be noted that in 2012 twenty regions, which had been in surplus in 2011, reconciled their budgets with deficits. Ten of the twenty regions in question showed an increase in expenditure at a rate exceeding the national average (8.7% in nominal terms) due to increases in their total revenues at rates which also exceeded the national average (5.5%). In another 4 regions the expenditure growth rates sufficiently exceeded the national average against a slight increase or decrease in income. At the same time, in 2012 as opposed to 2011, nine regions, by contrast, have reconciled their budgets with a surplus. Thus, we can say that the substantial increase in the number of Russian Federation regions which implemented their budgets with deficits in 2012 is largely determined, not by a significant deterioration of the situation in subnational finance, but rather by a lack of sufficient budgetary discipline by the regional authorities in soft budget constraints specific to the Russian model of federalism.
Based on 2012 results, in ten regions of the RF the consolidated budget deficit exceeded 15% of the tax and non-tax revenues, with the highest value being observed in the Chukotka Autonomous District (46.8%). If we consider the regional budgets (only at a regional level), then the situation is as follows: In twenty of the eighty two regions the deficit exceeded 10% of their revenues, excluding reimbursable transfers. The highest values of this index were recorded in the following regions of Russia: Chukotka Autonomous District (45.7%), Amur Re-
gion (20.6%), Krasnodar Territory (18.6%), Pskov Region (18.7), Orel Region (16.5%) and the Yamal-Nenets Autonomous District (16.4%)1.
The increase in the number of "deficient" regions and the increase the amounts of budget deficits have led to increased subnational debt borrowings in 2012. The data on the performance of the public debt of the RF regions and municipal debt in 2011 - 2012 are presented in Table 24.
Table 24
The amount of state and municipal debt of subnational budgets
in 2011-2012
As at 01.01.11 As at 01.01.12 As at 01.01.13
RUR Billion RUR Billion Annual increase (%) RUR Billion Annual increase (%)
Total for regional budgets 1 096.0 1 171.8 6,9 1 355.0 15.6
Total for regional budgets (excluding Moscow and the Moscow Region) 649.9 831.6 28.0 1 068.7 28.5
Total for municipal budgets 169.8 215.5 26.9 245.3 13.8
Source: The Ministry of Finance of the Russian Federation.
The table shows that the situation with the amount of debt of the regional and municipal budgets for 2012 generally deteriorated. A significant increase in state and municipal debt was seen in December 2012. Thus, during just one month the national debt increased by 16.4% (by RUR 190.7 billion, from RUR 1,164.2 billion to RUR 1,355.0 billion), and the municipal debt increased by 14.8% (by RUR 31.7 billion, from RUR 213.2 billion to RUR 245.3 billion). During the same period, the amount of loans allocated from the federal budget to regions increased from RUR 88.3 billion to RUR 129.5 billion, while the balance of the budget loans granted to and repaid by the RF regions increased from RUR -12.4 billion only up to RUR +5.2 billion. Thus, the increasing amount of loans is not generally associated with the budgetary borrowings.
As a result, in 2012 the amount of the regional budgetary debt increased by 15.6% (in nominal terms), and, excluding the City of Moscow and the Moscow Region, by 28.5%. Moreover, whilst as at 1 January 2011 the amount of debt in these 2 regions was 40.7% of the total debt of the regional budgets, at 1 January 2012 it amounted to 29.0% and 21.1% at 1 January 2013. In 2012, the debt of Moscow and the Moscow Region decreased by 15.9%. We can say that in 2011 - 2012 the main reduction in public debt was accounted for by Moscow and the Moscow Region whilst the rest of the regions mostly built it up, except for certain periods of decreases in borrowings. Note, however, that the Moscow region, as well as many other regions, increased the amount of its public debt in December 2012 (21.1%), which put the region back from third to second place in terms of debt, trailing only Moscow.
The increase of the debt burdens of the regional budgets is also revealed in the data by regions (see Table 25).
1 Prior to January 1, 2017 the budget deficit may exceed the RF regional limits set in Cl. 2, Art. 92.1 of the Budget Code of the Russian Federation (15% or 10% of revenues excluding non-repayable transfers - depending on the level of subsidisation of the region) within the difference between the received and repaid budget borrowings (Federal Law No. 58-FZ dated 09.04.2009 (as amended on 30.11.2011)).
Table 25
The performance of the amount if public debt in the regional budgets
in 2008-2012
The performance of the amount if public debt in the regional budgets for corresponding periods
(in nominal terms)
Increase of Increase Increase of Decrease of Decrease Decrease of
more than from 10% less than No changes more than from 10% to more than
50% to 50% 10% 10% 50% 50%
The number of regions in
2008 21 26 4 0 5 13 9
2009 37 20 9 0 4 6 2
2010 29 28 4 2 7 9 0
2011 23 33 6 2 12 6 0
2012 18 36 9 0 6 12 1
Source: The Ministry of Finance of the Russian Federation.
In 2012, the amount of public debt amount in 63 of the 82 regions of the RF increased, with substantial increases in that amount (over 10%) observed in 54 regions. In 2011, the situation was similar, the public debt during this period increased in 62 regions, and in 56 of those it increased by more than 10%. It should be noted that in 2012 a rate of increase in public debt by more than 50% was observed in 18 regions: Republic of Ingushetia (by 15 times), Yamal-Nenets Autonomous District (by 566.7%), Republic of Tyva (238.1% ), Saint Petersburg (149.8%), Murmansk Region (131.8%), Chukotka Autonomous District (111.1%), Ka-bardino-Balkar Republic (104.4%), in the remaining 11 of the 18 regions the public debt amount for the year increased by between 50% to 100%.
However, of particular concern are the regions of the Russian Federation, which not only significantly increased their amount of debt in 2012, but also significantly increased their debt burden, which is the ratio of the public debt and the level of tax and non-tax revenues of the region of the RF (see Fig. 17)1. In 2012, the average debt burden of the Russian regions was 26.1%, which is 1% higher than in 2011.
As the figure shows, 37 of the 82 regions of the Russian Federation were in the "troubled sector": the increase in their public debt and their general debt burden was higher than the Russian average. Thus, the public debt of the Belgorod Region during one year only increased by 76.7% providing an 84.2% debt burden. We can also select other regions based on these indicators: Tver Region (21.4% and 74.1%, respectively), Ryazan Region (39.8% and 91.1%), Kaliningrad Region (45.4% and 75.7 %), Nizhny Novgorod Region (20.6% and 58.0%), Kemerovo Region (31.3% and 38.4%), Tomsk Region (49.1% and 32.2%), Omsk Region (30.3% and 52.2%). It should be noted that, based on the results of 2012, in two regions the level of debt burden exceeded the amount of tax and non-tax revenues. These are the Republic of North Ossetia-Alania (by 8%) and the Republic of Mordovia (by 79.7%). Whilst in North Ossetia the amount of additional debt granted was 4.6% higher, Mordovia showed a 22.4% increase, which is 6.7 percentage points higher than the national average (15.6%).
In general, we can say that the situation in the field of regional and municipal debts is worsening somewhat, but at the same time most of the regions which are actively increasing the amount of their borrowings are, as yet, far enough from critical values of debt burden. At
1 Prior to January 1, 2017 the maximum amount of regional debt (municipal debt) may exceed the limit set in Cl. 2 and 3, Art. 107 of the Budget Code of the Russian Federation (100% of budget revenues, excluding nonrepayable payments) within the scope of the regional public debt (municipal debt) in the form of budget borrowings (Federal Law No. 58-FZ dated 09.04.2009 (as amended on 30.11.2011)).
the same time, there are a few regions where the public debt situation is quite tense. To resolve the situation in a number of regions it will be necessary to reduce the debt. Thus, to limit the debt of five regions, the Russian Ministry of Finance has entered into special agreements, providing for debt reduction over the next three years1.
<N
u
fl o
M £ ^
600% • 10
500%
400%
300%
200% 9
100%
6 8
7
4
2
0% 60% 80% 100% 12120% 140% 160% 180% 200%
14
-100%
3
5
The ratio of the regional debt to tax and non-tax revenues in 2012, as a %
Note: 1 - Russia (The intersection of the axes occurs at the point where the debt load and the increase in the amount of debt of the RF regions for 2012 represent the national average values (26.1% and 15.6%, respectively)), 2 - Republic of Mordovia, 3 - Tuva Republic, 4 - Belgorod Region, 5 - Murmansk Region, 6 - Kabardino-Balkar Republic, 7 - Krasnodar Territory, 8 - Chukotka Autonomous District, 10 - Yamal-Nenets Autonomous District, 11 - Republic of Ingushetia, 12 - Republic of North Ossetia - Alania, 13 - Ryazan Region, 14 - Khanty-Mansiysk Autonomous District.
Source: Federal Treasury, The Ministry of Finance of the Russian Federation, estimates of the Gaidar Institute for Economic Policy.
Fig. 17. Debt load and changes in the amount of regional public debt in 2012 (in %)
In general, summing up the results of the analysis of the main characteristics of the subnational budgets in 2012, the following should be noted. The situation in the field of regional and municipal finance has become more tense: the number of regions that have ended the fiscal year with a deficit has increased; at the end of the year the amount of the borrowings significantly increased. In part, these trends are related to the performance of tax revenues and mainly to the income tax revenues, which decreased in 2012 in real terms. However, as shown above, the regions that have become "unprofitable" in 2012 were the ones which adhered to quite irresponsible budgetary policies, increasing the amount of expenditure at a rate exceeding (and in some cases much higher than) the national average level.
1 http://www.minfin.ru/ru/press/speech/index.php?pg56=32&id4=18253 - A.G. Siluanov's statement made during an interview for "Russia 24" on 29.12.2012
2.3.2. Financial aid from the federal budget
The total amount of funds allocated from the federal budget to subnational budgets in 2012 decreased by 0.4% in nominal terms. However, in real terms, the decrease was already 6.5%. It is possible to speak about a continuing downward trend in the amount of transfers in real terms. Thus, the decrease was 1.2% in 2011 as compared to 2010 and 14.4% in 2010 as compared to 2009. In terms of GDP, the performance was as follows: after a sharp increase in 2009 compared to 2008 (from 2.71% to 3.81% of GDP) during the next three years the total amount of transfers to the regions was gradually decreasing: in 2010 it was 3.0% of GDP, in 2011 it was 2.59% of GDP, in 2012 was 2.31% of GDP.
The surplus of granted and repaid budgetary loans decreased in 2012 to RUR 4.9 billion (from RUR 79.8 billion in 2011). It should be noted that the amount of the federal budget loans allocated in 2012 to the regions slightly increased by RUR 1.2 billion to RUR 129.5 billion. The dramatic decline in the balance was associated with a substantial increase in the amount of budget loans repaid by regions - from RUR 48.6 billion in 2011 to RUR 124.5 billion in 2012.
Let us consider the performance of certain types of federal transfers in more detail (see Fig. 18).
1 600 -r
1 400 1 200
o 1 000
Pi
800 ---
600 400 200 0
2008 2009 2010 2011 2012 2013 2014 2015
■ 1 Grants Subsidies
■ 1 Subventions ........Other inter-budget transfers
^^^"Grants to equalise the fiscal capacity
Source: Federal Treasury, Federal Law No. 216-FZ dated 3 December 2012 On the Federal Budget for 2013 and the planning period to 2014 and 2015", estimates of the Gaidar Institute for Economic Policy.
Fig. 18. Transfers to regions from the federal budget in 2008-2015 (in 2008 prices)
In real terms, the amount of subsidies, subventions and other inter-budget transfers (other IBT) decreased in 2012 as compared to 2011. Subventions were reduced the most - by 21.0%, the amount of subsidies decreased by 12.8% and other IBTs by 9.6%. However, if we com-
pare the amounts of these types of transfers in 2012 with their amounts in 2008 (the pre-crisis level), it can be noted that in real terms the subventions increased by 38.6%, subsidies - by
0.3% and other IBTs decreased by 60.4%. In 2012, subsidies increased by 11.3% as compared to 2011 (but the attained level is by 2.2% less than the corresponding value of 2008). It should be noted that in general the 2012 performance was similar to the previous performance in 2011, when there were also reduced subventions and other IBTs and increased subsidies, as compared to 2010. Analysing the Budget Law for 2013 and the planning period 2014-2015, it can be noted that the trend to decrease the amount of transfers will continue. As a result, in 2015 the amount of transfers should be reduced by 31.5% compared to 2008. The proposed amount of grants will be reduced by 3.5%, subsidies by 58%, other IBTs by 76.7%, while subventions will be increased by 6.7% (for more details see Section 2.3.4).
In analysing the process of the allocation of federal budget transfers to regions, it is important to consider the effect of federal aid on the differentiation of the income of the regions,
1.e. to assess the levelling properties of financial aid from the federal budget (see Table 26).
Table 26
The variation coefficient of revenues of consolidated regional budgets (per capita based on the IBE*) in 2008 - 2012, %
Year Tax revenues Tax revenues and grants to equalise the fiscal capacity Tax revenues and the total amount of transfers from the federal budget
2008 90.6 80.4 68.2
2009 78.0 66.5 51.6
2010 74.2 63.9 53.6
2011 77.8 68.4 58.0
2012 72.7 64.3 55.5
* Index of budget expenditures used by the Russian Ministry of Finance upon the allocation of grants to equalise the fiscal capacity of regions.
Source: Federal Treasury, estimates of the Gaidar Institute for Economic Policy.
The data in Table 26 show that, in 2012, the allocation of subsidies to equalise the fiscal capacity continued to affect the reduction of the inequality in subnational budget income. Note, however, that the extent of this effect has been gradually reducing since 2010. This has largely resulted from the decrease in the share of grants in the total transfers allocated from the federal budget for equalising the fiscal capacity. Whilst in 2008 the share of this type of grants was 30.1%, in 2011 - 2012 it was already 27.6%. One can also note a significant decrease in grants for equalising, from 0.86% in 2010 to 0.64% in 2012 in terms of GDP (0.80% in 2008). The amount of tax revenues in the consolidated budgets of the regions in GDP terms was also decreasing during this period, but at a much slower rate: from 9.76% to 9.30% of GDP (10.62 % in 2008). As a result, in 2012, the variation coefficient of regional revenues, after the allocation of equalising subsidies, decreased by only 8.4 percentage points, whilst in 2008 - 2010 this rate consistently exceeded 10 percentage points. While 27.6% of inter-budget transfers (equalising subsidies) provide exactly the same decrease of the variation coefficient considered as the remaining 72.4% of inter-budget transfers, this indicates the low progressiv-ity of all inter-budget grants, except for the equalising subsidies. Thus, we can speak of the need to increase the share of equalising subsidies in the total alignment of inter-budget transfers.
The above performance of inter-budget transfers allocated from the federal budget has led to certain changes in the structure of transfers in 2008 - 2012 (see Table 27).
Table 27
Transfers to Russian regions from the federal budget in 2008 - 2012
2008 2009 2010 2011 2012
RUR billion % of the total RUR billion % of the total RUR billion % of the total RUR billion % of the total RUR billion % of the total
Transfers to regions, total 1 094.7 100.0 1 480.3 100.0 1 378.3 100.0 1 445.6 100.0 1 440.2 100.0
Subsidies 390.4 35.7 578.3 39.1 522.7 37.9 563.5 39.0 524.0 36.4
Including:
Grants to equalise the fiscal capacity 328.6 30.0 374.0 25.3 397.0 28.8 397.0 27.5 397.0 27.6
Grants to support measures to balance the budgets 46 4.2 191.9 13.0 105.9 7.7 154.3 10.7 117.2 8.1
Subsidies 435.9 39.8 530.0 35.8 411.4 29.8 481.3 33.3 570.9 39.6
Including:
Subsidies on roads 34.5 3.2 21.9 1.5 24.4 1.8 57.6 4.0 98.2 6.8
Agricultural subsidies 58.4 5.3 92.5 6.2 94.8 6.9 98.5 6.8 112.8 7.8
Subventions 153.2 14.0 284.4 19.2 378.6 27.5 337.5 23.3 284.2 19.7
Other interbudget transfers 115.2 10.5 87.6 5.9 65.6 4.8 63.4 4.4 61.1 4.2
Source: Federal Treasury, estimates of the Gaidar Institute for Economic Policy.
As data Table 27 shows, the amount of grants in 2012 decreased as compared to 2011 primarily due to a decrease in the amount of grants to support measures to maintain the budget balance (from RUR 154.3 billion to RUR 117.2 billion). As a result, the share of equalising grants in the total amount of transfers decreased from 10.7% to 8.1%. The share of grants to equalise fiscal capacity has slightly changed (increased by 0.01 percentage points). The total amount of grants in 2012 was 36.4% of the total amount of inter-budget transfers, less than in 2011 by 2.6 percentage points. In general, these changes cannot be unambiguously assessed. On the one hand, the positive effect is the reduction of equalising grants (which are distributed according to the least transparent procedures and criteria), while on the other hand, the equalising grants remained the same during the three consecutive years - RUR 397 billion (the effects of this on performance of the equalising process are mentioned above).
The share of subventions in the total transfers decreased from 23.3% in 2011 to 19.7% in 2012. This decrease in subventions was largely associated with the reduction of subventions to exercise authority in the field of employment (reduced by RUR 29.3 billion), the reduction which appeared in 2009 (RUR 7.4 billion), in the subvention to provide housing to veterans of WWII, to commemorate the 65th anniversary of the Victory in the Great Patriotic War, as well as the reduction in the subvention for the purchase of housing by citizens discharged from military service or equivalent persons (reduced by RUR 15.7 billion). The reduction of subventions in the field of employment is associated with the improvement in this area against the continued (albeit slow) growth of the Russian economy. The reduction of two other types of subventions is explained by the gradual implementation of measures to provide housing for the population categories concerned.
By contrast, the share of subsidies in the total amount of transfers in 2012, increased by 6.3 percentage points compared to 2011 (from 33.3% to 39.6%). It should be noted that, in general, after the reduction of the share of subsidies in 2009 - 2010, there has been an increase since 2011. So, whilst in 2008 the share of subsidies in the total federal transfers amounted to
39.0%, in 2010 it was 29.8% and in 2012 there was an increase of 0.6 percentage points from the 2008 level to 39.6%.
The main areas of co-financing of the expenditures of subnational budgets in 2012 were:
- The construction and upgrading of roads (17.2% of the total subsidies)1;
- Improvement of the regional general education programmes (10.6%);
- State programme for agricultural development and the regulation of agricultural products, raw materials and food markets (9.8%);
- Financial support for additional health care provided by district doctors and paediatricians and general practitioners (family doctors) (3.7%).
The share of other IBTs in the total federal transfers continues the downward trend established in 2008. Whilst in 2008 the share of this type of transfer was 10.5%, in 2009 it was 5.9%, in 2010, 4.8%, 2011, 4.4% and in 2012 it was 4.2%.
In general, speaking of the main features of the provision of financial aid to regions from the federal budget in 2012, we can note the following. With some reduction in the total amount of transfers (even in nominal terms), their structure has undergone negative changes. Subsidies came top in the share of the total, amounting to nearly 40%. It is necessary to consider that this type of transfer is still allocated as numerous disparate subsidies, and the process of consolidation is clearly inhibited (for details see Section 2.3.4). At the same time, the share of equalising grants (the most transparent and efficient type of transfer) does not change whilst their amount is maintained at the level of the previous year, resulting in a decrease in the scale of reduction of the of regional per capita income differentiation after the allocation of these grants. As a result of the above trends, the transparency of inter-budget relations is reduced and regional governments have less ability to forecast the amount of federal financial aid (as subsidies, along with equalising grants, are the most unpredictable types of transfer).
2.3.3. Performance assessment of the executive authorities of the Russian Federation
In 2012, the practice of allocating financial resources from the federal budget to the regions of the Russian Federation depending on their results in the field of economy and finance continued2. As compared to previous years, it has undergone some changes.
In 2012, the Presidential Decree No. 825 dated June 28, 2007 (On the performance assessment of the executive authorities of the Russian Federation) was repealed. During the few years of its existence the assessment methodology itself had been amended several times. On the one hand, the purpose of regular amendments was to take into account all features of the assessment subject (actions of the public authorities) within one methodology, on the other hand, in practice, this led to an increased number of indicators being used, making it congested, confusing and opaque. In the last edition of this Decree 329 different indicators were in use. The granted amount depended on the size of the integrated assessment and ranged from RUR 70 million to RUR160 million. Only 10 regions with the best assessment results could qualify.
Replacing the old Presidential Decree, the new one, No. 1199, with the same name (On the performance assessment of the executive authorities of the Russian Federation) was adopted on 21 August 2012. In accordance with this Decree the Resolution of the Government of the
1 The amounts of these subsidies includes the corresponding expenditures under all federal target programmes.
2 For more details of the practice of the provision of financial resources depending on the region's results prior to 2012 see Russian Economy in 2011. Trends and prospects. (Issue 33) - Moscow: Gaidar Institute, 2012, pp. 84-88.
Russian Federation No. 1142 dated 3 November 2012 (On measures to implement the Decree of the President of the Russian Federation No. 1199 dated 21 August 2012) was also adopted. It sets the rules on the provision of grants and the executive authorities' assessment methodology. In accordance with the Resolution, a grant from the federal budget can be allocated to the 20 regions that have received the highest ranks under the adjusted comprehensive performance assessment of the executive bodies of the Russian Federation. The performance of regional officials acting in the field of economy, the investment attractiveness of the region, the state and municipal government, and health, education and housing will be assessed. Compared to the previous method in 2007, the new method has significantly reduced the number of indicators used (from 329 to 53) 1. The assessment will be conducted in two phases. In the first stage a comprehensive assessment is made, taking into account only 12 indicators: life expectancy at birth; population size; the amount of investment in fixed assets (excluding budgetary funds); sales of goods (services) produced by small enterprises, including micro-enterprises and individual entrepreneurs; the amount of tax and non-tax revenues of the consolidated budget of the Russian Federation region, the average annual unemployment rate; the real disposable incomes of the population, the proportion of the total housing floor area commissioned in relation to the total housing floor area; the proportion of graduates of public (municipal), educational institutions who did not pass the unified state exam out of the total number of graduates of public (municipal) educational institutions; mortality (excluding mortality from external causes); an assessment of the activities of the executive authorities of the Russian Federation region by its population; the proportion of children without parental care, including those transferred to non-relatives (to foster care, adoption, under guardianship (custody), foster homes and foster families), or living in any type of state (municipal) institution2.
In the second stage the so-called individual performance indicators of the executive authorities of the Russian Federation regions are calculated, and these are used to adjust the estimates of the above 12 indicators. The result is the adjusted comprehensive performance assessment. It is important to note that not all the individual indicators (from the total of 41) are used in the calculations for each region. At this stage, an expert group consisting only of representatives of the federal departments and agencies selects 2 individual targets for each region, to reflect the existing particular problems of the region and the ability to solve them. In 2013, the amount of the grants to the regions (other than inter-budget transfers to promote the best values of the indicators of the performance of the executive authorities) is set at the 2012 level (RUR 1 billion).
In addition to the above changes, in 2012, the practice of financing the subnational budgets depending on their results was amended to change another incentive mechanism for the RF regions, which managed to achieve the best results in economic development fund-raising3.
Additional grants to regions which achieved the best results on increasing the regional tax capacity were first allocated in 2011: Twenty regions of the Russian Federation received grants in support of measures to balance their budgets, in the amount of RUR 10 billion. Each of the 20 regions has received between RUR 206.8 million to RUR 2 billion of additional un-
1 In the original version the new method included 47 indicators. Later, the Physical Culture and Sports Section was added, which contains a number of new indicators.
2 This indicator was introduced additionally under the RF Government Decree No. 168 dated 28.02.2013.
3 Government Decree No. 798 dated 27.09.2011 (as amended on 12.12.2012) "On the distribution of subsidies to support measures to balance the budgets to the Russian regions achieved the best results in the increase of the regional tax capacity".
designated transfers. In 2012, compared to 2011, there were 2 changes introduced in the incentive mechanism for regional authorities. Firstly, the list of grant-receiving regions was extended from 20 to 25. Secondly, changes were made to the assessment methodology by increasing the number of indicators. So, the six existing indicators were supplemented by two money income indicators calculated from the dynamics (growth rate for the last three years) and static (amount per capita). Thirdly, a standard was introduced, which stipulates that the grants to territories and provinces of the regions which include autonomous districts are calculated for the consolidated budget of the territory and the region, including the budgets of the autonomous districts, and credited to the budget of the respective territory or region.
In 2012, despite the increase in the number of regions to 5, there were no increases in the amount of funding. As in 2011, it amounted to RUR 10 billion. As a result, the regions received from RUR 233.6 million to RUR 794.3 million. It is important to note that in 2012 the list included 13 Russian regions, which were already receiving the incentive grants in 2011. For the second consecutive year, the list of regions that have achieved the best results in increasing their regional tax capacity includes: the Republic of Tatarstan (RUR 1,085.0 million as the total amount of grants for two years), Primorsky Territory (RUR 1,001.1 million), Voronezh Region (RUR 683.3 million), Kaluga Region (RUR 2,649.9 million), Leningrad Region (RUR 1,643.9 million), Moscow Region (RUR 627.9 million), Novgorod region (RUR 855.3 million) Omsk Region (RUR 528.3 million), Tula Region (RUR 573.7 million), Tyumen Region (RUR 2,562.9 million), Ulyanovsk Region (RUR 477.6 million), Yaroslavl Region (RUR 487.4 million) and the St. Petersburg (RUR 707.4 million). It should also be noted that in 2012 all those regions with the highest level of fiscal capacity in the country received this type of financial aid, namely the Tyumen Region (RUR 649.9 million), St. Petersburg (RUR 388.5 million) and Moscow (RUR 435.9 million). This seems to be rather a contested decision, especially considering that these amounts represent a small share of the budget of the mentioned regions (for example, in the Tyumen Region and its associated ADs it was 0.12% of the total consolidated budget revenues).
In addition to the mechanisms discussed above for allocating financial resources to regions from the federal budget, depending on their results, in 2012, the Presidential Decree No. 1276 dated 10 September 2012 (On the performance assessment of the heads of federal executive agencies and chief executives (heads of supreme state executive authorities) of the Russian Federation, intended to create a favourable business environment) was also issued. This Decree should be aimed at assessing the performance of the heads of the federal authorities and regions in the relevant field. It should be noted that the public authorities are also assessed under the Presidential Decree No. 579 dated 13 May 2010 (as amended on 14 October 2012) "On the performance assessment of the executive authorities of the Russian regions, city and municipal districts, local self-government authorities in the field of energy conservation and the improvement of energy efficiency" and Presidential Decree No. 607 dated 28 April 2008 (as amended on 14 October 2012) "On the performance assessment of local self-governing authorities of city and municipal districts".
It must be stressed that the mechanism for funding the regional authorities depending on their results, has a number of inherent disadvantages1. Firstly, such estimates can not reflect the current state of regional economic policy, as either the results of resolutions adopted by the authorities are long-term (e.g., the results of on-going large investments can be seen only
1 For more details see Russian Economy in 2011. Trends and prospects. (Issue 33) - Moscow: Gaidar Institute, 2012, pp. 87-88.
after a number of years) or the assessed economic indicators depend very little on the resolutions made by public authorities. Secondly, the promotion, through the mechanism, of the allocation of grants to the financially successful RF regions, can hardly be effective, given the small amount of funds allocated to the relatively large number of regions entitled to premiums. As a result, this mechanism cannot have a significant influence on the priorities of the regional authorities, and only leads to the dissipation of the budget funds. Thirdly, the federal government's commitment to improving the individual methodology will lead to constant changes to it, which will not allow the regions to correctly determine their long-term priorities.
In this sense, 2012 has shown that there is a regular extension of the system of indicators in order to obtain a more objective performance assessment of the government. Thus, already in 2012, the methodology for assessing the fiscal capacity had existed for only for one year before it was changed to increase the number of indicators (from 6 to 8). However, increasing the number of indicators by this method will also lead to a distortion of the real goal-setting system on the part of the regional authorities of the Russian Federation, replacing results-oriented work with index-oriented work. As a result, the regional authorities will seek to achieve current high indices (higher than in the previous period) without carrying out the actual work under the long-term strategic development plans. Expansion of the system of indicators makes the assessment complex and confusing, and, as a result, the regional leaders do not understand how they should organise their work to meet the federal government-proposed evaluation system and actually improve the socio-economic situation of their region. The result is the rejection of sophisticated methodologies for assessing all aspects of life in the region (as in the methodology proposed by the Ministry of Regional Development, based on 329 indicators) and the transition to a simpler mechanism, as has happened in 2012 (the decrease in indicators to 14 (12 core and 2 individual ones for each region)). It should be noted that originally (in 2007) the methodology of the Ministry of Regional Development also included dozens of indicators, but over a few years their list has increased by several times, and the methodology dated 3 November 2012 has been increased by six indicators. So, in the future, we can expect its increased complexity, which ultimately will lead, perhaps, to its abolition.
It is important to understand that the above effects are similar to those that result from attempts to introduce different systems of Performance Budgeting in the public sector at the level of government, in general and for individual departments and agencies1. In order to reduce the likelihood of the problems described above, we must reject the funding of the RF regions depending on their results, but to improve the assessment systems. The assessment system is required to create a knowledge base for identifying the processes taking place in the region, based on various aspects of regional development. This will enable the identification of the spread and application of regional best practice in other regions of the Russian Federation. It is also important to note that the real renaissance of the institution of the direct election of governors and the possibility of early termination of their powers may be the best incentive and the best performance indicator of the regional authorities.
1 For more details see, for example, H. de Bruijn. Management in the public sector. Moscow: Institute for Complex Strategic Studies, 2005.
2.3.4. Federal law of 3 December 2012 No. 216-FZ "On the Federal Budget for 2013 and the planning period to 2014 and 2015" for the allocation of intergovernmental transfers to other levels of the budgetary system
The Federal Law No. 216-FZ dated 3 December 2012 "On the Federal Budget for 2013 and the 2014 and 2015 planning period" implies a gradual reduction of the total amount of transfers allocated to regional budgets from the federal budget in nominal terms as compared to 2012. The overall decrease in the amount of transfers in nominal terms is expected to be 9.8%. First of all, the reduction of the total amount of transfers is related to a reduction of subsidies (by 32.8% in nominal terms in 2013 as compared to 2012).
The planned performance of certain types of inter-budget transfers differs substantially. The budget projections provide for a noticeable growth in grants allocated from the federal budget to regions, from RUR 524.0 billion in 2012 to RUR 602.9 billion in 2013 (increased by 15.1% in nominal terms and by 9.0% in real terms). Then, in 2014 - 2015, it is planned to reduce their volumes by 1.6 - 1.7% annually. Note, however, that the marked increase in the amount of grants is primarily achieved by increasing the amount of grants to support measures to balance the budgets of the Russian regions. The growth of this type of transfer is planned at a level of 45.7% in nominal terms and 38.0% in real terms in 2013.
The additional increase in financial aid to Russian regions, by RUR 100.0 billion annually, in the form of grants to support measures to balance their budgets in 2013 - 2015 is associated with the increased expenditure commitments of subnational budgets in the process of implementation of the Presidential Decrees dated 7 May 2012. In addition, the Law provides for the distribution of RUR 60 billion in grants for partial compensation of the additional costs of increasing the wages of public sector employees. It should be noted that the increase in expenditure commitments on wages of public sector employees at a rate exceeding the increased rate of tax and non-tax revenues of the regional budgets introduces risks for the balance of the budget system as a whole, in the face of the uncertainty in the global economy, given that such current expenditure commitments are extremely difficult to reduce. In the case of deterioration of the global conditions, the subnational budget deficits could increase substantially, and this would require a significantly greater amount of additional financial aid to the regions to be provided by the federal government (given that during the crisis market borrowing opportunity would be sharply reduced). It should be borne in mind that the current budget projections for 2013 already include an increase in the federal budget deficit from 0.06% of GDP in 2012 to 0.78% of GDP in 2013. Thus, we can say that the federal government resolutions have created additional expenditure commitments for subnational budgets which result both a deterioration of condition of the regional budgets in terms of their expenditures and total tax and non-tax revenue proportions, and to increases in the overall risk for the budget system of the Russian Federation.
Examples of opaque mechanisms for providing the equalising grants include the following amounts from the Law on the Federal Budget for 2013 - 2015 to be allocated to a number of regions, which are reflected as a separate line, in fact beyond any methodological framework of distribution of the remaining amounts of equalising grants:
• Grants to support measures to balance the budget of the Chechen Republic in 2013 amounting to RUR 23,555.2 million,
• The grant to the Omsk Region budget to balance the budget in the amount of RUR 1,000.0 million annually during 2013 - 2014,
• Grants to the budget of St. Petersburg to increase the authorised capital of Western HighSpeed Diameter JSC, in the amount of RUR 20,000.0 million in 2013 and RUR 10,709.7 million in 2014.
The latter amount allocated to the budget of St. Petersburg raises additional questions. Based on the name of the transfer, it obviously has a special purpose, yet it has been granted in the form of a non-purpose transfer (grant).
The Law we are investigating also provides for some indexation of grants to equalise fiscal capacity (allocated from the Fund for Financial Support of the Regions (FFSR)) in 2013 -2015 relative to the level of 2012. In 2011 - 2012, the FFSR amount remained at the 2010 level, so the proposed indexation of its amount can be positively evaluated. But the amount of this indexation is ambiguous. An increase in equalising grants is provided only for 2013, at 5.5%, i.e. at the projected rate of inflation. Then, in 2014 - 2015 the FFSR amount will be maintained at the 2013 level. As a result the FFSR amount in 2013 in real terms is 11.1% less when compared to 2010. In 2014 - 2015, if there is no further indexation, the decline in real terms will continue. In this case, the need for financial resources to equalise the fiscal capacity of the RF regions at least does not decrease. Perhaps, in 2013, under the new draft federal budget for 2014 - 2016 the new increased FFSR amount will be determined (again the same for all three years).
In general, the trend to increase the amount of grants and their share in the total amount of inter-budget transfers (it is planned to increase this share from 36.4% in 2012 to 50% in 2014 -2015) should be appreciated, however, as noted above, this increase is achieved primarily through equalising grants. As a result, it does not lead to a significant increase in the level of transparency of intergovernmental fiscal relations between the federal centre and the regions and does not allow them significantly to improve their financial autonomy (as the distribution of balancing grants is much less transparent, predictable and methodologically sound than the distribution of grants to equalise the fiscal capacity). From this point of view, it would be logical to increase the FFSR by comparable amounts.
In 2013 - 2015 it is planned significantly to reduce the subsidies: by 32.8% in nominal terms in 2013 (as compared to the previous year), by 21.3% in 2014 and by 4.3% in 2015. As a result, their share in the total amount of inter-budget transfers should be reduced from 39.6% in 2012 to 24.6% in 2015. It is proposed to reduce the amount of subsidies from the federal budget in the following areas: housing and utilities (75.0%), public health (54.4%), physical education and sports (33.8%) and the national economy (29.7%). At the same time, it is planned to increase the subsidies for national security and law enforcement (81.1%), environmental protection (374.3%) and social policy (17.0%). Budget estimates provide for the reduction of subsidies from 104 in 2012 to 93 then 81 and 70 types for the years 2013 - 2015 respectively. In general, the trend to decrease the number of grants and their share in the total federal transfers should be assessed as positive. The current system of a large number of separate subsidies, where the total amount in some areas does not exceed (or is barely above) RUR 1 billion significantly reduces the efficiency and transparency of the Russian system of inter-budget relations, mainly in terms of excessive restrictions as regards free decisionmaking by regional authorities against the discrepancies of federal and regional priorities in some cases (i.e. the federation can not correctly identify what people really need in this or that region). However, the proposed reduction of subsidies is obviously insufficient.
It is important to note that the "Main targets of the budgetary policy for 2013 and the planning period of 2014 and 2015" is to propose "to consolidate the currently applicable subsidies
into single ones under the relevant state programmes for each chief administrator of the federal budget." The Order of the Federal Government No. 1950-r dated 11 November 2010 approves a list of 41 state programmes of the Russian Federation (as amended). In this case, each programme provides for one responsible person (federal ministry or agency) and collaborators (federal ministries or agencies). Comparing the number of government programmes and the expected number of subsidies allows us to draw the clear conclusion that more than one subsidy will be allocated under at least some state programmes, which seems to be unnecessary and to over-complicate the system of inter-budget transfers. It should also be borne in mind that not every programme provides for the co-financing of regional expenditures from the federal budget, just because the relevant authority is exclusively assigned to the federation. By this we mean such programmes as "Russia's space activities", "The development of the nuclear power industry," "Ensuring the defence capability, "Foreign policy activities", etc. Thus, we can say that the number of subsidies planned by 2015 exceeds more than 2 times the number of state programmes. It is important to note that the law on the federal budget for 2012 - 2014 provided for a reduction in the number of subsidies down to 70 in 2013 and 62 in 2014, i.e. the plans have been significantly adjusted to increase the number of subsidies. Thus, there is obviously a clear inhibition of the reforming process for the mechanism for allocation of subsidies from the federal budget, which may significantly affect the transparency and efficiency of inter-budgetary relations between the federation and the regions.
In 2013, it is also planned to decrease the amount of subventions (by 9.5% in 2013 as compared to 2012) and reduce other IBTs (by 9.2% in 2013 as compared to the previous year). Despite the decrease in the total of other IBTs, in 2013 it is planned to allocate significant funds to finance the purchase of diagnostic tools and antiviral drugs for the prevention, detection, monitoring and treatment of persons infected with the human immunodeficiency virus and hepatitis B and C, in the amount of RUR 14 billion (25.2% of the total amount of other inter-budget transfers), as well as other IBTs related to the implementation of activities on the preparation and holding of the 2018 World Cup in the Russian Federation (for the design and construction or renovation of stadia in the amount of RUR 4.9 billion). The latter amounts are lump sums and more related to solving the current economic and social problems, so after 2014 it is proposed to decrease other inter-budget transfers by 17.8% as compared to 2013. In addition, after 2014, the grants and inter-budget transfers for the development and support of the social and physical infrastructure allocated by the federation to the Closed Administrative-Territorial Entities will be consolidated into a single inter-budget transfer in the form of a grant. Thus, a part of the amount of other inter-budget transfers will be redistributed in favour of grants to Closed Administrative-Territorial Entities. As a result, in 2014 - 2015 it is planned to reduce the share of this type of transfer from 4.3% in 2013 to 3.6% in 2015. However, given the budget plan for 2012 and the actual amount of other IBTs for the year, we can forecast that this type of transfer can be significantly changed during the year. Thus, the amount of other IBTs allocated in 2012 was 67.3% higher than had been initially planned.
In general, it should be noted that the parameters of the Federal Law "On the Federal Budget for 2013 and the planning period of 2014 and 2015" raises a number of serious issues in terms of inter-budgetary relations with the Russian regions as regards the improvement of the efficiency of the Russian system of federalism. Firstly, insufficient indexation of balancing grants with a significant increase in the balancing grants themselves does not allow for enhancement of the transparency and predictability of the process of allocation of federal
transfers to the regions. Secondly, there is an apparent inhibition of reforming the mechanism of co-financing regional expenditures through the mechanism of allocating subsidies against the adjustment of plans, to reduce their number significantly. In this case, it is unclear how much subsidy will eventually be allocated in 2013 and whether there is a planned significant decrease in the amounts of these transfers.
