Section 5. Institutional Problems Текст научной статьи по специальности «Экономика и бизнес»

Section 5. Institutional Problems

5.1. The State of Property Relations, the Public Sector, and Privatization

5.1.1. The Property Policy of the State: Some General Outlooks

Last year, the sphere of property relations was characterized, on the whole, by the continuation of the tendencies of the past few years, although with a somewhat lesser intensity.

A general decrease in the number of federal state unitary enterprises (FSUE) and, to a lesser degree, of joint-stock companies (JSC) with federal stakes has been a sufficiently stable tendency of recent years. On the whole, in 2004-07, the total number of FSUEs dropped by 43%. Nevertheless, it is worth mentioning that the year 2007 was marked by a number of structural changes with regard to SCs with state stakes (Table 1).

Table 1

Joint-Stock Companies with RF Stakes, 2004-2008

JSCs' share in the total number of companies,

Size of RF's share in charter capital of company _as of 1 January of each year, %_

2004 2005 2006 2007 2008

100% 4 10 30 45 54

Between 50% and 100% - 1 share 15 13 12 10 7

Less than 50% 81 77 58 45 39

Source: Federal Agency for Federal Property Management (FAFPM).

As late as the beginning of 20071, the structure of the bulk of federal blocks of shares was as follows: blocks of shares of up to 25% of capital existed in approximately 25% of all JSCs with state stakes; blocking parcels of shares (between 25 and 50% of capital) - in approximately 20% of companies; while in 55% of all companies the state could exercise either majority or overall control. At the same time, the share of JSCs with a state stake of 100% was 4.5 times larger than of those JSCs in which the State, while being a majority shareholder, had less than 100% of shares (10%).

Last year, the trends toward changes in the structure of federal blocks of shares, which started to take hold during the previous period were gaining momentum. The major quantitative shift which took place in 2006-07 produced an increase in the proportion of JSCs with a federal stake of 100% by 24 percentage points, while the share of companies of all the other categories declined. In this respect, the share of JSCs with minority blocks of shares declined most radically. Also, over the 2004-07 period, the number of the JSCs with regard to which the Russian Federation is entitled to participating in their management under the special "golden share" right dropped twofold.

Thus, by the beginning of 2008, the aggregate share of JSCs over which the State, as a shareholder, can exercise sufficient corporate control through holding a control or a 100%

1 A detailed analysis is presented in the following sections. See also Mal'ginov, G.N., Radygin A.D. Gosu-darstvennyi sector rossiiskoi ekonomiki: dinamika kolichestvennykh kharakteristik i osnovnye tendentsii razvitiia [The public sector of Russsia's economy: the dynamics of quantitative characteristics and the main trends of development] // Ekonomiko - politicheskaia situatsiia v Rossii. June 2007 [The economic and political situation in Russia]. June 2007. Moscow: IEPP, 2007, pp. 43-48.

block of shares, had, for the first time since the late 1990s, exceeded one half of all economic societies with state participation (Table 1).

As in 2006, the aggregate actual results of 2007 with regard to the proceeds from privatization and the use of federal property turned out to be smaller than forecasted (see Table 2).

Table 2

The Dynamics of Proceeds from Privatization and the Use of Federal Property, million rubles

1. Non-renewable sources, total 1.1. Privatization 1.2. Disposal of FSUEs' and military property 1.3. Sales of land and intangible assets 2. Renewable sources, total 2.1. Dividends (number of enterprises) 2.2. Lease of property 2.3. Lease of land 2.4. FSUEs' Share of proceeds (number of enterprises) 2.5. SE "Vietsovpetro" Total

1999* 8,547.4 8,547.4 - - 8,720.5 848,1 (600) 2,191,4 - - 5,675,0 17261.,9

2000 31,367.1 31,367.1 - - 18,790.1 3,675,1 (1050) 3,427,2 - - 11,687,3 50157.2

2001 10,110.6 9,990.6 - 120,0 29,122.6 6,478,0 (782) 4,896,1 3,917 209,6 (131) 13,621,9 39233.2

2002 14,700.7 12,703.8 - 1,996,9 36,762.2 10,402,3 (747) 7,657,9 4,400 914,2 (809) 13,388,8 51462..9

2003 95,237.3 90,660** 585 3,992,3 41,143.2 12,395,2 9,573,9 197 3*** 2,387,6 16,200 136380.8

2004 65,777 61,856.8 662,7 3257,5 53,710.3 17,222,0 (319) 11,928,8 901,7 2,538,1 17,199,5 119487.2

2005 34,882 29079.2** 522 5280,8 54,404 18,610 14,170 1,748 2,386 17,490 89,286

2006 19,010 17,600 1410 No,data 67,363.6 23,000 16,800 No,data No,data No,data 86,373.6

2007 forecast 49,000 41,000 No, data 8,000 73,921.5,**** 24,080 17,600 4,000 15,425 12,816,5 Over 120,000

2007 actual No,less,than 19,300 19,300 No,data. No,data 81,400 No,data No,data No,data No,data No,data Over 100,700

* The dynamics for 1995-1998 is presented in: Rossiiskaia ekonomika v 2002 godu. Tendentsii i perspektivy (The Russian economy in 2002. Trends and outlooks]. Moscow: IET, 2003, p. 367.

** Proceeds from the sale, in 2002, of 74.95% of shares in the JSC "Slavneft" in the amount of 59,161.95 million rubles were entered in the revenues of 2003 (i.e., more than 60% of the received revenue). Proceeds from the sale, in 2004, of 17.8% of shares in the JSC "Magnitogorskii metallurgicheskii kombinat" [ the Magnitogorsk Integrated Iron-and-Steel Works] in the amount of 21,928.2 million rubles were entered in the revenues of 2005 (i.e., more than 60 % of the received revenue).

*** The lease payment for land in federal property, after the delimitation. In the following years, the item "Lease payments and the proceeds from selling the right to conclude lease contracts for land in federal property" was also taken into account.

**** Only those renewable sources which are directly related to management of state property (administered by the FAFPM) are taken into account here. In accordance with the Law "On the 2007 Federal Budget", the total expected income from the use of property should amount, in the year 2007, to 100 billion rubles, including, apart from the sources indicated in the Table, the revenues from the remainder of the funds on the federal budget's accounts, the interest on state credits, the revenues from transferring part of the RF Central Bank's profit, etc. Not included in the Table is yet another significant source, which accounts for a large share of the aggregate amount of revenues - "proceeds from the lease of the federally owned property being in the operative management of the federal bodies of state authority and the institutions created thereby, and in the economic management of federal state unitary enterprises" (16.6 billion rubles).

Source: the RF Ministry of Economic Development and Trade; the FAFPM; the Federal Law "On the 2007 Federal Budget"; the authors' estimates.

According to the preliminary data of the FAFPM, in the year 2007, the aggregate proceeds from privatization amounted to 19.3 billion rubles, or were approximately 2 times less than forecasted, which was close to the results of the year 2006. Judging from the estimates of the Russian Fund for Federal Property (RFFP), the reasons for this are as follows: the incomplete reorganization of work caused by the recent change in status; the side effects of administrative reform with regard to relations with the FAFPM; the low quality of the forecast plan of privatization which contains a large amount of objects not to be privatized (bankrupts, liquidated enterprises); and the low liquidity of a large mass of property being privatized . After the RFFP's autonomy was restricted at the very end of 2006, the reforming of the system of organizing the sales of federal property being privatized went on until July 2007, when the Joint Regulation, of 27 July, No. 2378-r/120, issued by the FAFPM and the RFFP, confirmed the Temporary Reglament for Cooperation between the FAFPM and the Fund for Implementing the Forecast Plans (or Programs) of Federal Property Privatization.

In the year 2007, there were no privatization transactions with regard to assets of national importance. If the revenues from the selling of shares in big and biggest joint-stock companies are not taken into account (when the revenue from a transaction exceeds 3 billion rubles), the dynamics of proceeds from privatization becomes positive: over the 2004-2007 period, the corresponding revenues increased by more than 2.5 times - from 7.8 billion rubles in 2004 to 19.2 billion rubles in 2007. To a certain degree it has to do with the application of some new procedures for price determination and mechanisms for selling minority blocks of shares. On the whole, in the year 2007, shares (or stakes in charter capital) in 377 economic societies were privatized, with more than one third of the said shares being in minority packages, and tenders for shares in another 523 economic societies, to take place in 2008, were announced.

In 2007, the federal budget's revenues from the use of property (dividends; part of the profit of unitary enterprises; rental income) amounted to 81.4 billion rubles. It should be noted that in contrast to proceeds from privatization (non-renewable), the forecasted indicators in this segment (including those envisaged by the Law "On the 2007 Federal Budget) were exceeded by 9%.

Among the most significant trends characterizing the activity of biggest state companies in 2007, we should traditionally single out the following ones:

- the continuation of the integration of state - owned assets into holding companies;

- the continuation of the activity of the already existing holding companies with state stakes, with the purpose of increasing the scope of their business and its diversification by way of takeovers and mergers, that is, by way of vertical and horizontal integration.

On the whole, in the year 2007, the FAFPM accomplished the formation of 29 integrated structures. The decisions concerning their creation were envisaging that shares in 132 joint-stock companies should be contributed to the charter capital of the head companies, that 117 unitary enterprises be transformed into open-end companies, and that 8 more unitary enterprises should be reorganized by way of affiliation. It should be mentioned that 28 integrated

2 Interview, given by Chairman of the FAFPM to the newspaper "Vedomostf, No. 9 (2031), 21 January 2008. 448

structures were created on the basis of 30 Edicts of the President of the Russian Federation, and 1 - on the basis of a separate decision of the Government of the Russian Federation .

Undoubtedly, the IPOs of the two largest banks with state stakes (Sberbank and Vneshtorgbank)4, and the creation of the foundations of a new structure of electrical power engineering as a result of reforming the RJSC "UES of Russia", whose final reorganization was approved at the meeting of the company's shareholders in autumn 2007, can be classed among the most important events which took place within the framework of the public sector of the Russian economy in 2007. The liquidation of the RJSC, planned for the summer 2008, should be followed by the transfer to the shareholders of shares in 23 big companies in the sphere of electrical power engineering (OGK, TGK, FSK, etc.). By contrast, no radical reorganization measures (such as split-up, etc.) are contemplated.

A principally new development in the property policy of the State was the emergence, in 2007, of 6 state corporations (see Section 5.2, 5.8), created by special federal laws. These corporations are as follows: Vneshekonombank, "Rosnanotech" (Russian nanotechnologies), the Fund for Promoting Reform of the Housing and Utilities Sector, "Olimpstroi" (Olympic construction) (construction of objects for the 2014 Olympic Games in the town of Sochi and its development into a mountain-climatic health resort), "Rostekhnologii" (Russian technologies), and "Rosatom". Their functional purposes and branch spectrums are very varied, including the implementation of individual projects and programs ("Olimpstroi" and the Fund for Promoting Reform in the Housing and Utilities Sector), the promotion of individual types of activity (Vneshekonombank and "Rosnanotech"), and the management of entire branches ("Rosatom") and groups of companies ("Rostekhnologii").

At the same time, RF First Vice-Premier D. A. Medvedev officially stated in January 2008 that the creation of state corporations did not mean that Russia was changing its course and rejecting the market way of development, and that state capitalism was a road to a dead-lock5. The formation of such structures is being justified by the necessity to support the priority directions, where Russia has begun to loose its previous leadership (the nuclear branch, shipbuilding and aircraft building). Nevertheless, the limits of "admittance" of private businesses are defined with sufficient clarity: while in the majority of cases their participation can be rather significant, the sphere of defense is to be under complete control of the State, and no alternatives will ever be contemplated.

However, the situation with state corporations' being a la mode in 2007 (this fashion has already been imitated at regional level) is fraught with considerably increased various economic and financial risks. First of all, it should be noted that the scheme for creating state corporations involves an individual approach, thus placing them beyond the general legal norms established in legislation for specific organizationa-legal forms by related laws (joint-stock companies, unitary enterprises, not-for-profit organizations). Among other things, it should be noted that there exist potential possibilities to obtain various preferences and to use one's monopolistic position, and that the efficiency of the control mechanisms, some of which have never been tested, and some have even not been created as yet, is still unclear.

3Otchet o privatizatsii federal'nogo imushchestva v 2007 godu [Report on the privatization of federal property in the year 2007]. Moscow: FAUFI [FAFPM], 2008.

4 For more details, see Rossiiskaia ekonomika v 2006 godu. Tendentsii i perspektivy [The Russian economy in the year 2006. Trends and outlooks]. Moscow: IEPP [IET], 2007.

5 "Gazprom" razdelion ne budet ["Gazprom" will not be divided] // Vesti.Ru. 17 January 2008.

On the whole, according to the existing quantitative estimates, the share of state -owned stocks in Russian companies amounted to 29.6% in 2006, and to 35.1% at the beginning of 20076. By early 2008, "the depth of property concentration" in the hands of the State within the framework of the base "Expert-400" amounted to approximately 40-45 %. If in the year 2004 the State controlled 81 companies out of 400 biggest ones (with the aggregate revenue of 145 billion USD), in the year 2006 their number rose to 103 (with the aggregate revenue of 283 billion USd)7 While in the year 2004 the State controlled 34.7% of the aggregate revenue of 400 biggest Russian companies, by the results of the year 2007 this percentage increased to approximately 40% .

In early 2008, a certain qualitative shift became evident in researchers' estimates - from statements of the fact of the State's increasing its direct participation to attempts to assess the quantitative parameters of the State's expansion. In our opinion, at present neither the above quantitative estimates of 2004-2007 (however conventional they might be) nor the new directions of the property-related activity of the State and the state economic structures which emerged in 2007, have provided enough grounds for making general conclusions as to any deceleration of the property expansion of the State.

For all this (all other factors, including political ones and those dealing with rents and corruption, being equal), the qualitative threshold of such expansion is sufficiently apparent: the bigger is the state sector, the more limited are the possibilities to ensure the controllability and efficient control. This is evidenced, in particular, by the whole experience of introduction (or attempts at introduction) of some or other mechanisms for management and control of unitary enterprises and joint-stock companies with state stakes, dating back to the second half of the late 1990s and the early 2000s. By analogy with the evolution of private Russian business groups in the second half of the 1990s and the early 2000s9, we should expect the emergence, in the medium term, of some or other reorganization procedures aimed at optimizing the structure of the obtained assets and at optimizing the organizational and managerial aspects of functioning of state companies (or groups). Time will show how efficient these procedures are going to be with regard to state companies, and what will be the driving motives for such a reorganization after March 2008.

5.1.2. The Size of the State Sector, its Constituents and Basic Characteristics

In the previous years (2003-06), a general quantitative overview of the state sector at the federal level was given in the forecast plans (programs) of federal property privatization, which were usually approved by government decrees issued at the very end of a summer. They contained data on the number of unitary enterprises in federal ownership (FSUEs) and joint-stock companies with RF stakes as of 1 June of each year. In 2007, "The forecast plan (pro-

6 Alfa-Bank's data (Grozovskii, B. Glavnyi sobstvennik strany [The top property owner of the country] // Vedo-mosti, 13 February 2007).

7 A block of shares not less than a blocking one, or the final phase of establishing control on the part of the State.

8 See Vin'kov, A. Gosudarstvo - eto ty! [The State is you] // Ekspert [The expert], 2008, No. 2, pp. 28-31.

9 See, e.g., Radygin, A. Evoliutsiia form integratsii i upravlencheskikh modelei: opyt krupnykh rossiiskikh korpo-ratsii i grupp [The evolution of the forms of integration and models of management: the experience of big Russian corporations and groups] // Rossiiskii zhurnal menedzhementa [The Russia Journal of Management], 2004, Vol. 2, No. 4, October-December, pp. 35-58.

gram) of privatization for the year 2008 and the main directions of federal property privatization for the years 2008-2010" were confirmed by the RF Government's Regulation of 29 April 2007, No. 543-r, containing the data on the number of unitary enterprises in federal ownership (FSUEs) and joint-stock companies with state stakes, as of 1 January 2007. Therefore, there is no sufficient information enabling one to objectively assess the dynamics of these constituents of the state sector precisely in the year 2007.

Let us consider in more detail the quantitative dynamics of the subjects of the said organizational-legal forms, by each of the sub-sectors of the state sector at the federal level, for the past few years.

Federal State Unitary Enterprises

Below (in Table 3) are the dynamics of development and the branch structure of FSUEs in 2003-06.

Table 3

The Number of Federal State Unitary Enterprises and their Branch Structure

in 2003-06

Branch As of 1 June 2003 As of 1 June 2004 As of 1 June 2005 As of 1 June 2006 As of 1 January 2007

units % units % units % units % units %

Non-production sphere 4,357 44.2 4,069 44.1 3,617 43.6 1,817 25.3 1,670 25.55

Industry Including: 2,224 22.6 2,064 22.4 1,870 22.55 1,624 22.6 1,539 23.55

Machine-building 908 9.2 827 8.95 734 8.85 660 9.2 634 9.7

Light industry 193 2.0 193 2.1 194 2.3 187 2.6 179 2.7

Construction materials industry 81 0.8 80 0.9 68 0.8 55 0.75 49 0.8

Food industry 60 0.6 61 0.65 55 0.7 55 0.75 51 0.8

Metallurgy 49 0.5 37 0.4 34 0.4 30 0.4 28 0.4

Chemistry 46 0.5 43 0.5 39 0.5 34 0.5 33 0.5

Other branches of industry 887 9.0 823 8.9 746 9.0 603 8.4 565 8.65

Agriculture 1,329 13.5 1,237 13.4 1,111 13.4 913 12.7 826 12.6

Construction 1,035 10.5 978 10.6 903 10.9 752 10.5 668 10.2

Transport and communications 851 8.6 809 8.8 725 8.75 612 8.55 536 8.2

Forestry 64 0.6 65 0.7 67 0.8 53 0.75 49 0.8

Other branches - - - - - - 1,407 19,6 1,245 19,1

Total 9,860 100.0 9,222 100.0 8,293 100.0 7,178 100.0 6,533 100.0

Source: The forecast plan (program) of federal property for the year 2004 and the main directions of federal property privatization until the year 2006; The forecast plan (program) of federal property for the year 2005; The forecast plan (program) of federal property for the year 2006 and the main directions of federal property privatization for the years 2007-2009; The forecast plan (program) of federal property for the year 2008 and the main directions of federal property privatization for the years 2008-2010; the authors' estimates.

As is clear from Table 3, over three and a half years (between 1 June 2003 and 1 January 2007), the overall number of FSUEs dropped by 3,327 units, or by nearly one third, including between 1 June 2006 and 1 January 2007 - by 9% (or by 645 units). Quite naturally, the changes which took place in the branch structure of FSUEs over this brief period were small. The greatest reduction was in the absolute number of FSUEs in the group of branches of the non-production sphere (by 146 units), and in the group "other branches" (by 162 units).

It seems more illustrative to compare the branch structures of the FSUEs' sub-sector as of the beginning of 2002 and 2007 (Table 4).

Table 4

The Number of Federal State Unitary Enterprises and their Branch Structure in 2002-06

As of 1 January 2002 As of 1 January 2007 Changes Branch _

units % units % units %

Industry 1,844 19.6 1539 23.6 -305 -16.5

Including:

Machine - building and metal processing (without industrial medical technologies) 879 9.4 634* 9.7 -245 -27.9

Light industry 153 1.6 179 2.7 +26 +17.0

Construction materials industry 83 0.9 49 0.8 -34 -41.0

Food industry 64 0.7 51 0.8 -13 -20.3

Metallurgy 43** 0.4 28 0.4 -15 -34.9

Chemical industry 42 0.4 33 0.5 -9 -21.4

Other branches of industry 580 6.2 565 8.6 887 9.0

Agriculture and forestry 1,368 14.6 875 13.4 -493 -36.0

Transport and communications 1,033 11.0 536 8.2 -497 -48.1

Construction 988 10.5 668 10.2 -320 -32.4

Other branches 4,161 44.3 2,915*** 44.6 -1,246 -30.0

Total 9,394 100.0 6,533 100.0 -2,861 -30.5

* Machine-building.

** Including ferrous (16 units) and non-ferrous (27 units) metallurgy. *** Including the group of branches of the non-production sphere.

Source: www.mgi.ru, The forecast plan (program) of federal property for the year 2008 and the main directions of federal property privatization for the years 2008-2010; the authors' estimates.

As regards the absolute decrease in the number of unitary enterprises over the period between 1 January 2002 and 1 January 2007, it was characterized by the following values: in transport and communications - 497 units, in agriculture and forestry - 493 units, in construction - 320 units, and in industry - 305 units.

When assessing the number of unitary enterprises, as of 1 January 2007, as a percentage of their number registered as of 1 January 2002, it can be stated that the most radical reduction (by almost one half) took place in transport and communications. In agriculture and forestry as well as in construction, the reduction in the number of FSUEs was also more considerable than in the sub-sector as a whole (by more than 30%). By contrast, the drop in the number of FSUEs in industry was almost half that much (only by 16.5%), although in the construction materials industry and metallurgy it was also more substantial than in the sub-sector as a whole. Against this background, the situation in light industry looks paradoxical, because the number of unitary enterprises there not only failed to decline by comparison with early 2002, but even went up by 17%. The main shift in the branch structure of FSUEs observed over the five-year period (2002-06) was an increase in the share of industry (by 3 p.p.), and a de-

crease in the share of transport and communications (by 2.8 p.p.), agriculture and forestry (by 1.2 p.p.), and construction (by 0.3 p.p.). The share of enterprises not belonging to the said branches changed insignificantly.

It should be emphasized that the dynamic analysis of changes in the number of FSUEs10 was carried out on the basis of their number as of a given date, which made it possible to assess only the most general trend - the trend toward decrease in the size of this sub-sector. The available statistics do not allow an assessment of either the scale of creation and liquidation of this category of economic subjects, or the scale of its reorganization into other organizational and legal forms, that is, an assessment of the actions determining the number of the said subjects at a specific point in time.

Joint-Stock Companies whose Shares are in Federal Ownership

Let us consider the by-branch dynamics of the number of joint-stock companies whose shares have been in federal ownership over the past few years (Table 5).

Table 5

The Number and the Branch Structure of Joint-Stock Companies whose Shares are in Federal Ownership, or with Regard to which the "Golden Share" Special Right is Applied, in 2003-2006

As of 1 June . „, T „„„ . As of 1 June As of 1 June As of 1 January

n . As of 1 June 2004 „„„^ „„„.,

Branch 2003 2005 2006 2007

units % units % units % units % units %

Non-production sphere 1,918 45.6 1,781 45.6 685 18.1 356 9.6 405 10.1

Industry 1,350 32.1 1,253 32.1 2,078 54.9 1,772 47.6 1,797 44.95

Including:

Machine - building 225 5.4 209 5.4 187 4.95 663 17.8 632 15.8

Food industry 43 1.0 40 1.0 54 1.4 141 3.8 127 3.2

Metallurgy 34 0.8 32 0.8 28 0.75 101 2.7 94 2.35

Construction materials 21 0.5 20 0.5 19 0.5 53 1.4 53 1.35

industry

Chemical industry 19 0.4 18 0.5 46 1.2 98 2.6 89 2.2

Light industry 16 0.4 15 0.4 9 0.2 27 0.7 29 0.7

Other branches of industry 992 23.6 919 23.5 1,735 45.9 689 18.5 773 19.35

Construction 492 11.7 457 11.7 287 7.6 380 10.2 404 10.1

Transport and communica- 383 9.1 356 9.1 459 12.1 396 10.6 353 8.9

tions

Agriculture 46 1.1 43 1.1 229 6.1 363 9.7 534 13.35

Forestry 16 0.4 15 0.4 45 1.2 99 2.7 88 2.2

Other branches - - - - - - 358 9,6 416 10,4

Total 4,205 100.0 3,905 100.0 3,783 100.0 3,724 100.0 3,997 100.0

Source: The forecast plan (program) of federal property for the year 2004 and the main directions of federal property privatization until the year 2006; The Forecast plan (program) of federal property for the year 2005; The forecast plan (program) of federal property for the year 2006 and the main directions of federal property privatization for the years 2006-2009; The forecast plan (program) of federal property for the year 2008 and the main directions of federal property privatization for the years 2008-2010; the authors' estimates.

It follows from Table 5 that, over the period between 1 June 2003 and 1 January 2007 the overall number of joint-stock companies whose shares were in federal ownership declined by 208 units, or by 5%. The distinctive feature of the period between 1 June 2006 and 1 Janu-

10 Same is true of the following analysis of the number of JSCs with federal blocks of shares.

ary 2007 was an increase of their number by 7.3% (or by 273 units), while during the rest of the periods the number was decreasing. The changes in the branch structure of JSCs with state stakes, which took place in the second half of 2006, were more significant by comparison with the shifts in the branch structure of FSUEs. Thus, while the share of industry declined by more than 2.6 p.p. (principally at the expense of machine-building) - to 45% , the share of agriculture noticeably increased from 9.7% to 13.4% (or by 3.7 p.p.).

In order to obtain the resultant estimates of the shifts which took place in the branch structure of the sub-sector of JSCs whose shares are in federal ownership, it should be necessary to compare the data as of early 2002 and early 2007 (Table 6).

Table 6

The Number and the Branch Structure of Joint-Stock Companies whose Shares are in Federal Ownership, or with Regard to which the "Golden Share" Special Right is Applied, in 2002-2006

As of 1 January 2002_As of 1 January 2007_Changes

IM ¡U1U1 units % units % units %

Industry 1,837 41.7 1,797 44.9 -40 - 2.2

Including:

Machine-building and metal proc- 778 17.7 632* 15.8 -146 -18.8

essing (without industrial medical technologies)

Food industry 214 4.85 127 3.2 -87 -40.7

Construction materials industry 100 2.3 53 1.3 -47 -47.0

Light industry 67 1.5 29 0.7 -38 -56.7

Chemical industry 66 1.5 89 2.2 +23 +34.8

Metallurgy 64** 1.4 94 2.35 +30 +46.9

Other branches of industry 548 12.45 773 19.35 +225 +41.0

Construction 622 14.1 404 10.1 -218 -35.0

Transport and communications 477 10.8 353 8.9 -124 -26.0

Agriculture and forestry 83 1.9 622 15.6 +539 7.5-times growth

Other branches 1,388 31.5 821*** 20.5 -567 -40.9

Total 4,407 100.0 3,997 100.0 -410 -9.3

* Machine-building.

** Including ferrous (26 units) and non-ferrous (38 units) metallurgy. *** Including the group of branches of the non-production sphere.

Source: www.mgi.ru, The forecast plan (program) of federal property for the year 2008 and the main directions of federal property privatization; the author's estimates.

First of all, it should be noted that, over the 2002-06 period, the overall number of JSCs whose shares are in federal ownership decreased by 9.3%, which was typical of the majority of branches. The decrease in the number of such JSCs in transport and communications (by 26%, or by 124 units), construction (by 35%, or by 218 units), and also in the branches not singled out in this classification (by 41%, or by 567 units), was much more substantial than in the sub-sector as a whole. There was a many-fold increase (by 7.5 times, or by 539 units) in the number of the agriculture- and forestry-related JSCs whose shares are in federal ownership. By contrast, their number in industry remained practically unchanged, having been reduced only by 2.2% (or by 40 units). As regards the dynamics of such companies in individual branches of industry, one could note a rather significant drop in their number (by 40-60%) in light industry, the food industry, and the construction materials industry, and a rise in their number in metallurgy, chemistry, and those branches of industry that are not singled out in this classification after 2003. 454

In general, as regards the changes in the branch structure of JSCs whose shares are in federal ownership, one could state that in early 2007 there was a sharp rise in the share of agriculture and forestry by comparison with early 2002 (from 1.9% to 15.6%). The share of all the other branches declined. In industry, the most significant change was an increase in the share of the branches not singled out in this classification after 2003 (from 12.5% to 19.4%).

Yet another important characteristic of the sub-sector comprising joint-stock companies with state stakes is the distribution of economic societies in accordance with the size of the state-owned share (Table 7).

Table 7

The Number and the Structure of Joint-Stock Companies with State Stakes in their Capital, as Assessed on the Basis of the Size of the State's Share, in 1999-2000 (Including the Application of the "Golden Share" Special Right)

Total

Up to 25 %

From 25 % to 50

%

From 50 % to 100

%

100%

"Golden share"

Date units % units % units % units % units % total With no shares

1999 3,316/ 100 863 26.0 1,601 48.3 470 14.2 382 11.5 580 **

3,896*

1 January 3,524* 100 1,746 49.55 1,211 34.4 506 14.35 61 1.7 No No

2001 ** data data.

August 2001 3,949 100 1,843 46.7 1,393 35.3 625 15.8 88 2.2 542**

****

1 January 4,407 100 2,270 51.5 1,401 31.8 646 14.65 90 2.05 750 **

2002

1 January 4,222 100 2,152 51.0 1,382 32.7 589 13.95 99 2.35 1076 118

2003 *****

1 June 2003 4,205 100 2,148 51.1 1,339 31.8 600 14.3 118 2.8 No No

data data.

1 October 4,035 100 2,051 50.8 1,308 32.4 552 13.7 124 3.1 640 148

2003

1 January 3,704 100 1,769 47.75 1,235 33.35 540 14.6 160 4.3 591 251

2004

1 June 2004 3,905 100 1,950 49.9 1,183 30.3 499 12.8 273 7.0 No No

data data

1 March 4,075/ 100 1,697 44.8 1,154 30.4 487 12.85 453 11.95 No 284

2005 3,791# data

1 June 2005 3,783/ 100 1,544 43.8 1,093 31.0 474 13.5 413 11.7 No 259

3,524## data

1 June 2006 3,724/ 100 1,063 30.5 885 25.4 397 11.4 1,136 32.6 No 243

3,481## data

1 January 3,997/ 100 932 24.4 814 21.3 368 9.6 1,702 44.6 No 181

2007 3,816## data

* The text of the 1999 Concept for the Management of State Property and Privatization refers to 3,896 economic societies (including 3,611 open-end JSCs, 251 closed JSCs, and 34 limited liability companies and limited liability societies) with the RF's participation in their capital. 3,316 units is an estimated figure obtained by adding up the number of the blocks of stocks (or shares, or stakes) of various size mentioned in the text of the Concept.

** The overall number of JSCs with the application of the "golden share" special right, without singling out the number of those companies where, despite this, the State does not own blocks of shares.

*** Joint-stock companies, without taking into account 48 shares and blocks of stocks in foreign companies. There are also some data indicating that Russia owns 119 shares, stakes, and blocks of stocks in foreign companies with the book value of 1.4 billion USD.

**** The data of the draft program of privatization for the year 2002 submitted to the RF Government by the RF Ministry of State Property. At the same time, according to the Register of the RF Ministry of State Property, 4,308 blocks of shares in JSCs were in state ownership as of 1 September 2001.

***** Only open-end joint-stock companies (OJSC), not counting the 118 OJSCs where the "golden share" special right was applied (with no shares being owned), the blocks of shares in 102 JSCs transferred into operative management to the FSUE "Rosspirtprom", the 75 closed joint-stock companies and the stakes in the authorized capital of limited liability societies transferred in pursuance of Regulation of the RF Government, of 2 April 2002, No. 454-r, "On the discontinuation of state participation in the authorized capital of credit institutions", or obtained by way of inheritance, or gift, or on other grounds.

# 3,791 units is the estimated number of the JSCs whose shares are in RF ownership, not counting the 284 JSCs where the "golden share" special right is applied (with no block of shares being owned). The share of a JSC with some or other stake in capital is calculated on the basis of this value, for comparison with the data for the previous dates. For reference: as of 1 January 2005, shares in 3,767 JSCs were in federal ownership, not counting the afore-said 284 JSCs with the "golden share" and the stakes in the authorized capital of 24 limited liability societies transferred to the Treasury in pursuance of Regulation of the RF Government, of 2 April 2002, No. 454-r, "On the discontinuation of state participation in the authorized capital of credit institutions". ## The estimated number of JSCs whose shares are in RF ownership, not counting the JSCs where the "golden share" special right is applied (with no block of shares being owned). The share of a JSC with some or other stake in capital is calculated on the basis of this value for the sake of comparison with the data for the previous dates.

Source: www.mgi.ru; Rossiiskaia ekonomika v 2001 godu. Tendentsii i perspektivy. [The Russian economy in the year 2001. Trends and prospects].'Vyp. 23. Vol. 2. Moscow: IEPP [IET], March 2002, p. 62; Braverman, A.A. O merakh po povysheniiu effektivnosti upravleniia federal'noi sobstvennost'iu i kriteriiakh ee otsenki (On the measures designed to increase the effectiveness of federal property management and on the criteria for its estimation) // Vestnik Minimushchestva Rossii [The Herald of Russia's Ministry of State Property], 2003, No. 1, pp. 13-14; Predpriiatiia s gosudarstvennym uchastiem. Institutsional'no-pravovye aspekty i ekonomicheskaia effektivnost' [Enterprises with state participation. The institutional and legal aspects and economic efficiency.] Series: "Nauchnye doklady: nezavisimyi ekonomicheskii analiz" [Scientific reports: independent economic analysis], No. 155, Moscow: Moskovskii obshchestvennyi nauchnyi fond; Assotsiatsiia issledovatelei ekonomiki obshchestvennogo sektora [The Moscow Public Research Foundation; The Association of Researchers of the Public Sector's Economy], 2004, p. 47; Programma privatizatsii federal'nogo imushchestva na 2004 g. (Prog-noznyi plan (programma) federal'nogo imushchestva na 2004 god i osnovnye napravleniia privatizatsii federal'nogo imushchestva do 2006 goda. [The program for federal property privatization in 2004. (The forecast plan (program) of federal property for the year 2004 and the main directions of federal property privatization until the year 2006)] // Vestnik Minimushchestva Rossii, 2003, No. 3, pp. 4-5; Kliuchevye problemy povysheniia effektivnosti upravleniia federal'noi sobstvennost'iu i osnovnye napravleniia dividendnoi politiki Rossiskoi Fed-eratsii [The key issues of increasing the effectiveness of federal property management and the main directions of the dividend policy of the Russian Federation] // Vestnik Minimushchestva Rossii, 2003, No. 4, p. 8; Andrianov V. Rossiia v global'noi ekonomike [Russia in the global economy] // Obshchestvo i ekonomika [Society and the economy], 2003, No 11, p. 84; Prognoznyi plan (programma) federal'nogo imushchestva na 2005 god. [The forecast plan (program) of federal property for the year 2005]; Materialy k zasedaniiu Pravitel'stva RF 17 marta 2005 g. "O merakh po povysheniiu effektivnosti upravleniia federal'noi sobstvennost'iu". [Materials for the RF Government's meeting on 17 March 2005 "On the measures designed to increase the effectiveness of federal property management"]; Prognoznyi plan (programma) federal'nogo imushchestva na 2006 god i osnovnye napravleniia privatizatsii federal'nogo imushchestva na 2006-2008 gody. [The forecast plan (program) of federal property for the year 2007 and the main directions of federal property privatization for the years 2007-2009]; Prognoznyi plan (programma) federal'nogo imushchestva na 2008 god i osnovnye napravleniia privatizatsii federal'nogo imushchestva na 2008-2010 gody. [The forecast plan (program) of federal property for the year 2008 and the main directions of federal property privatization for the years 2008-2010]; the authors' estimates.

As is apparent from Table 7, as of 1 January 2007 the structure of the main body of federal blocks of shares was as follows: the blocks of shares amounting to 25% of capital accounted for less than 1/4 of all the JSCs with state stakes; the controlling blocks of shares (from 25% to 50% of capital) - slightly more than 1/5; while in more than 54% of all companies the State could exercise majority or overall control. The share of the JSCs fully controlled by the State (with 100% of capital owned thereby) amounted to 44.6%, which was 4.5 times

more than the share of those JSCs where the State, while being a majority shareholder, owned less than 100% of shares (9.6%).

It should be reminded that a comparison between the structure of the federal blocks of shares which had come into being as early as by 1 June 2006, and the structure which the RF Ministry of State Property had expected to emerge on the implementation of the 2003 privatization program11, indicates that the objective set in advance has indeed been achieved, although with a more than two-year delay. This has put an end to the situation when the balance was clearly tipped in favor of the blocks of shares which did not provide the State with a proper degree of control over the companies, which was a survival from the period of money privatization of the late 1990s. This control was further consolidated by the changes which took place in the second half-year of 2006.

In the period between 1 June 2006 and 1 January 2007, the share of JSCs with 100% of stocks in federal ownership rose by 12 p.p. (from 32.6 to 44.6%), while the share of companies of all the other categories declined. The most radical decline (by 6 p.p.) was in the share of JSCs with minority federal blocks of stocks (from 30.5 to 24.4%). As a result, by the beginning of 2007, the aggregate share of JSCs where the State, as a stockholder, could exercise adequate corporate control due to owing the controlling block of stocks or the whole capital of a company, exceeded one half of all economic societies with its participation for the first time since the late 1990s.

Approximately the same picture emerges when comparing the structure of the whole bulk of federal blocks of stocks as of the beginning of 2007 and 1999 (according to the data of the Concept). The major new trend was a considerable (by 3.9 times) increase in the share of those JSCs where all capital belonged to the State, while the share of all other groups of blocks of stocks decreased. The maximum drop (by 2.3 times) was experienced by the share of the blocking parcels of stocks (between 25 to 50%); the share of the parcels of stocks sized 50-100% also declined, approximately by 4.6 p.p., while the share of minority parcels of stocks fell by 1.6 p.p. At the same time, it should be kept in mind that the data for the year 1999 are probably incomplete.

Nevertheless, it could be stated that the number of registered federal blocks of shares less than 25% in size as of 1 January 2007 (932 units) was by 8% larger than the corresponding index of 1999; it had reached its peak by the beginning of 2002 (2,270 units), and then steadily declined (except for the first half-year of 2004). In 2006, the number of federal blocks of shares 25 to 50% in size (814 units) was nearly two times lower than in 1999 (1,601 units). Their number at the beginning of 2002 (1,401 units) was higher than a year previously (1,211 units), and then steadily diminished. By the beginning of 2007, the number of the federal blocks of shares 50 to 100% in size (368 units) was by about 21% lower than in 1999 (470 units), although it fluctuated widely over the period under consideration, amounting to 646 at the beginning of 2002 and to 600 as of 1 June 2003, after which it steadily declined. By contrast, in 2006, the number of JSCs where 100% of shares were in federal ownership was by approximately 4.5 times higher than in 1999. Their minimum number was registered at the

11 It was expected that the number of blocks of shares in federal ownership would amount to 3,613. See Braverman A.A. O merakh po povysheniiu effektivnosti upravleniia federal'noi sobstvennost'iu i kriteriiakh ee otsenki [On the measures designed to increase the effectiveness of federal property management and on the criteria for its estimation] // Vestnik Minimushchestva Rossii [The Herald of Russia's Ministry of State Property], 2003, No. 1, p. 29.

beginning of 2001 (61 units). Later on, it was constantly rising, and in the period between 1 June 2005 and 1 January 2007 this rise took the form of a leap with the number of these JSCs increasing by 4.1 times (or by 1,289 units).

The scale of using the "golden share" special right demonstrated an unambiguous tendency toward decrease in the absolute number of such companies: 181 units by the beginning of 2007, against 243 units as of 1 June 2006 and 284 units as of 1 March 2005 (the maximum value for the whole 1999-2006 period).

The composition of the state sector is also monitored by the Russian Statistics Service (Rosstat). It will be recalled that according to Decree of the RF Government, of 4 January 1999, No 1, the state sector includes economic subjects of the three major types existing on the federal and regional levels:

- state unitary enterprises operating by right of economic jurisdiction and operative management (federal treasury enterprises);

- state institutions;

- economic societies with the authorized capital where more than 50% of stocks (or participatory shares) are in state ownership.

According to this document as amended by Decree of the RF Government, of 30 December 2002, No. 939, the state sector of the economy also includes the economic societies with the authorized capital where more than 50% of stocks (or participatory shares) are owned by economic societies belonging to the state sector.

This definition of the state sector has a number of drawbacks, including the following:

- it does not include into the state sector the commercial and not-for-profit organizations with the participation of federal and regional unitary enterprises, or at least those of them where the participatory share of unitary enterprises exceeds 50%;

- in actual practice, it is not always necessary to own more than 50% of stocks (or participatory shares) in order to exercise control over an economic society. It would be more correct to speak in terms of more than 50% of the voting shares, which is especially true of those enterprises where, in the course of mass privatization in 1992-94, one quarter of capital was transferred free of charge, in the form of preference shares, to the personnel (as under the first version of benefits during corporatization), and where, at the same time, the limitations on privatization caused by the branch specificity (for example, in defense industry) required that the controlling block of shares should remain in state ownership. As a result, the size of the block of shares consolidated to the State amounted to 38% of the authorized capital and to more than one half of the voting shares;

- not included in the state sector are those economic societies where the aggregate participatory share of the Treasury and the economic societies with more than 50% of stocks (or participatory shares) in state ownership exceeds one half of their capital, although the individual participatory shares of the Treasury and the economic societies with the prevalence of state capital amount to less than 50%;

- same is true of the situation with regard to those economic societies where, in the aggregate, more than one half of capital is owned by the Treasury, and those where more than 50% of the authorized capital in the form of stocks (or participatory shares) belongs to other economic societies related to the state sector, that is, by those societies where the State's share in the authorized capital exceeds 50% participation in their authorized capi-

12

tal, although their individual shares amount to less than 50% each ; and same is true of the situations when control over an economic society can be ensured by adding-up the participatory shares of the economic societies belonging to the state sector and the participatory shares of the economic societies controlled by them; - there is no transparency with regard to the affiliations ("daughter" companies) and dependent companies included in the business-groups formed on the fringes of the organizations belonging to the state sector, which are being controlled indirectly, via several levels ("granddaughters" "great granddaughters", etc.), or via less than 50% shareholding.

On the basis of Rosstat's data, the quantitative dynamics of economic subjects in the first half-year of 2007 was as follows (Table 8).

Table 8

The Number of Organizations of the State Sector of the Economy Registered by the Territorial Agencies of the FAFPM and by the State Property Management Bodies of RF Subjects in the year 2007, units

Economic societies where more than 50% of

SUEs includ- stocks (participatory shares) in authorized capi-

Date Total ing federal State institutions tal are owned

treasury enterprises by State by economic societies belonging to state sector of economy

As of 1 January 2007 82,410* 12,735 64,295 3,920 1,439

As of 1 July 2007 81,076 11,351 64,159 4,111 1,440

* Including the organizations whose constituent documents do not specify the concrete types of activity, which results in the overall number of organizations of the state sector exceeding that of SUEs, institutions, and economic societies, though exclusive of joint-stock companies with more than 50% of stocks (or participatory shares) in joint, state and foreign, ownership.

Source: O razvitii gosudarstvennogo sektora ekonomiki Rossiiskoi Federatsii v 2006 godu [On the development of the state sector of the economy of the Russian Federation in the year 2006]. Moscow: Rosstat, 2007, p. 111.

As is evident from Table 8, the first half-year of 2007 saw a rather considerable drop in the number of SUEs (almost by 11%, or by 1,384 units), an insignificant reduction in the number of state institutions (by 0.2%, or by 136 units), and a rise, by approximately 5% (or by 191 units), in the number of economic societies whose authorized capital in the form of stocks (or participatory shares) was more than 50% owned by the State. There were no changes in the number of economic societies whose authorized capital, in the form of stocks (or participatory shares), was more than 50% owned by economic societies belonging to the state sector of the economy.

At the same time, the information contained in Rosstat's data with regard to the number of organizations of the state sector being classed with federal and regional property, and those being classed with property under joint jurisdiction of the Russian Federation and its subjects, is not sufficiently subdivided into the said organizational and legal forms, which does not make it possible to separately analyze such changes by each of the forms of ownership.

The part played in the contemporary Russian economy by organizations of the state sector is also worthy of notice. Below are Rosstat's data on their share in the production of goods

12 This was more or less true of the structure of the capital of the OJSC "Gazprom" before the plan for increasing the state share to the controlling value began to be implemented, although the federal block of shares amounted to less than 50% (38.37%).

(or services, or work) during the past three years, in regard to the major indices and branches, with the most important positions being specified; also indicated is the share of those where the State's input was no less than 10% (Table 9).

Table 9

The State Sector's Share in the Production of Individual Types of Products and in Other Indices, in 2005-2007, in %

Index 2005 2006 First half-year 2007

1 2 3 4

Industrial production

Extraction of mineral resources * 5.5 6.0 12.4

- common salt (extraction) 16.0 15.0 18.4

- coal 5.1 4.7 5.0

- extracted oil, including lease condensate 1.2 0.8 0.7

- natural inflammable gas 0.3 0.2 0.1

Processing industries * 8.9 8.2 7.8

- soda ash, 100% 55.8 58.7 57.5

- freight cars (for main lines) 56.1 49.8 42.2

- ethyl alcohol distilled from edible raw materials 44.1 42.4 38.5

- timber sleepers for wide-gauge railroads 36.8 34.0 35.7

- metal-cutting machine tools 21.3 25.5 28.9

- washing machines 46.8 34.0 24.9

- tractor-driven sowers 36.9 22.1 22.7

- vodka and products of spirits-making 21.1 21.9 19.0

- civilian aircraft 21.4 16.7 -

- commercial timber 16.1 16.6 16.7

- polystyrene and styrene copolymers 21.1 15.9 14.1

- shaped timber 15.8 14.3 14.0

- trolleybuses - 8.4 12.4

- motor cultivators and power cultivators with detachable tools 24.1 10.9 12.3

- stop timbers for switches of wide-gauge 20.5 12.2 -

- pharmaceuticals 19.3 22.3 12.1

- civilian helicopters 19.6 11.0 11.8

- rolling equipment 10.5 12.6 -

- radio receivers 13.3 6.6 11.2

- non-ore building materials 13.2 11.0 10.2

- domestic refrigerators and freezers 10.4 10.6 9.6

- microbiological fodder protein (commodity product) 21.4 7.6 8.1

Production and distribution of electrical energy, gas and water * 13.7 10.7 11.2

- electrical energy, total 19.0 16.5 16.5

- electrical energy generated by nuclear power plants 100.0 100.0 100.0

- electrical energy generated by thermal power plants 4.7 0.9 0.9

- electrical energy generated by hydroelectric power plants 1.4 0.3 0.3

Table 9 (continued)

1 2 3 4

Agriculture andforestry

- eggs** 19.7 18.7 18.2

- vegetables** 15.3 15.0 -

- wool** 13.5 11.9 11.5

Reforestation work 99.9 99.9 -

Construction

- putting residential houses into operation 5.6 5.2 3.1

- work performed by organizations on their own 5.5 4.4 3.5

Transport

Volume of commercial freight carriage (or dispatch)*** 44.9 67.2 74.2

- by railroad transport (main lines) 100.0 100.0 100.0

- by air transport (transport aviation) 22.8 20.5 19.2

- by sea transport 14.8 10.9 13.6

- by internal waterways transport 9.2 9.8 12.0

Commercial freight turnover*** 41.8 93.9 94.0

- of railway transport 100.0 100.0 100.0

- of air transport (transport aviation) 15.0 12.9 12.9

- of internal waterways transport 8.5 10.6 10.8

Passenger turnover**** 68.7 68.5 66.9

- of railroad transport (main lines) 100.0 100.0 100.0

- of automobile transport 44.8 43.9 43.7

- of air transport (transport aviation) 33.1 31.3 26.2

- of sea transport 19.4 27.0 31.5

- of internal waterways transport 10.7 13.4 15.3

Volume of freigh-dispatching by pipeline transport (trunk pipelines) 0.4 0.5 0.1

Freight turnover of pipeline transport (trunk pipelines) 0.1 0.1 0.08

Internal costs of research and development 69.3 70.4 72.2

Paid services provided to population (VAT included) 18.5 17.2 16.6

- services of educational system 48.8 47.6 46.0

- transport services 34.7 33.2 34.7

- services of sanatoria and health resorts 23.8 25.7 26.2

- medical services 21.1 21.4 22.3

Investments in fixed assets 14.9/ 14.4/ 11.8/

19.1***** 18 1***** 15.4*****

Net proceeds of the sale of goods, products , and services (minus VAT, excises and other similar mandatory payments) 11.2 10.2 9.6

Average listed number of workers (regular staff) 25.6 26.0 25.2

* The volume of dispatched goods and of work and services performed with the executor's own efforts.

** Against the overall volume of production of agricultural organizations.

*** Less organizations of pipeline transport.

**** Less organizations of city passenger electric transport.

***** without taking into account small businesses.

Source: O razvitii gosudarstvennogo sektora ekonomiki Rossiiskoi Federatsii v 2005 godu. [On the development of the state sector of the economy of the Russian Federation in the year 2005]. Moscow: Rosstat, 2006, pp. 8, 1920, 61, 71, 84, 85, 89, 92, 93, 94, 103, 107, 111, 115, 119, 137, 139, 146, 167; O razvitii gosudarstvennogo sektora ekonomiki Rossiiskoi Federatsii v 2006 godu. [On the development of the state sector of the economy of the Russian Federation in the year 2006]. Moscow: Rosstat, 2007, pp. 8, 19-20, 58, 68, 81, 82, 86, 89, 90, 91, 100, 104, 108, 112, 116, 134, 136, 143, 164; O razvitii gosudarstvennogo sektora ekonomiki Rossiiskoi Federatsii v 1-m polugodii 2007 goda. [On the development of the state sector of the economy of the Russian Federation in the first half-year of 2007]. Moscow: Rosstat, 2007, pp. 8, 18-19, 57, 71, 75, 78, 79, 80, 91, 95, 99, 103, 107, 117, 119, 126, 147.

As is apparent from Table 9, the state sector monopolizes only a few types of activity (generation of electrical energy at nuclear power plants, reforestation, and freight and passenger railway carriage) or dominates therein (soda). In the majority of other cases its share is less than 20%, except for alcoholic products, sleepers, some types of machine-building production (freight cars, metal-cutting machines, washing machines, and tractor-drawn sowers), and all types of paid services, where the largest share of the state sector is registered in education (slightly less than 50%). A certain growth in the state sector's share is detectable only in freight and passenger carriage by internal waterways and sea transport, internal costs of research and development, services of sanatoria and health resorts, and medical services. However, a period of less than three years long is clearly too short to discern any definite trends.

Much more importantly, the classification used by Rosstat (or something else) has not made it possible to register, within the framework of the state sector, the volumes of production in such big companies with state participation as "Gazprom", RJSC "UES of Russia", "Rosneft", "Transneft", and "Transnefteprodukt", which becomes apparent when comparing the registered share of the state sector with the universally known facts concerning the leadership of the afore - said companies in the Russian economy, let alone the presence of the State in the financial sector. It seems plausible that the data shown in Table 9 are sketchy in yet another respect, and that defense industry is represented in them, for the most part, by its conversion segment (individual types of machinery, equipment, household appliances, and civilian-aviation technology).

In these conditions, it is vitally important to bring the system of statistical observation into correspondence with a company's belonging to some or other sector of the economy (first

13

of all, to the public one, which should be properly singled out ). However, it is evident that the determination of the poles of actual control, in contrast with the formal rights of ownership to some or other enterprise, is a very complicated task. Let us cite several examples concerning the power industry.

For example, the OJSC "Atomenergomash" (a 100% subsidiary of the JSC "TVEL") owns 50% plus 1 share in the plant "ZiO-Pdol'sk" and 96% of shares in the engineering company "Ziomar". At present, "Atomenergomash" is preparing to organize a joint venture for the production of steam-turbine equipment for nuclear power plants with the well-known French company "Alstom"14. It remains to be reminded that 100% of shares in the OJSC "TVEL" itself are in state ownership, that they should be contributed to the authorized capital of the holding company "Atomenergoprom" (AEP) being established by the State, and that the shares therein would be, in their turn, used for creating the state corporation "Rosatom". It

13 All the aforesaid is also true for the municipal level and the participation in the capital of economic societies owned by bodies of local self-government.

14 Malkova I. Rosatom vybral Alstom. [Rosatom has chosen Alstom]. // Vedomosti. 3 April 2007.

should also be mentioned that the OJSC "TVEL", together with the FSUE "Zarubezhato-menergostroi", owns a controlling block of shares in the CJSC "Atomenergostroi" engaged in construction of nuclear power plants abroad (in the past the controlling block of shares belonged to Gazprombank, which had bought it in 2004). The shareholders of the largest Russian operator in the sphere of export and import of electrical energy, the CJSC "Inter RJSC "UES", are the RJSC "UES of Russia" (60%) and the FSUE "Kontsern "Rosenergoatom" (40%)15. Thus, the only thing possible as yet is to estimate, by way of special applied research, the market shares of various business groups and companies, including those controlled by the State" in some specific markets of commodities and services.

5.1.3. Medium-Term Privatization Plans and Current State of Privatization

As already noted, in 2007, as in the previous years, no privatization transactions were implemented with regard to assets of national significance.

The most spoken about was the sale of blocks of shares in the companies "Yakutugol" (75% minus 1 share) and "El'gaugol" (68.8%) for 58.196 billion rubles, which makes it possible to characterize this transaction as one of the largest deals of 2001-05. By its scale it is quite comparable with the sale of federal blocks of shares in the oil companies "Slavneft" (74.95%) in 2002 and "LUKOIL" (7.59%) in 2004. However, the object of this transaction was not in federal ownership: the afore-said block of shares in "Yakutugol", and also 39.4% of shares in "El'gaugol", were in republican ownership, after having been contributed, in advance, into the authorized capital of "Respublikanskaia Investitsionnaia Kompaniia" [the Republican Investment Company"], while a further 29.5% of shares were owned by the OJSC "RZhD" (which was also the owner of the property complex being sold). True enough, in this transaction, as in the sale of numerous "Yukos"' assets, the seller was the Russian Fund for Federal Property (RFFP).

Apart from this, the large transactions (in the amount of more than 100 mn rubles each) handled by the RFFP over the past year include the sale, at auction, of the state-owned blocks of shares in the OJSC "The Siberian Agency for Oil-Well Construction" (SAOWC) (Yamal-Nenets AO, 100% of shares, 741 mn rubles), "Airport "Roshchino" (Tiumen, 100%, 610 mn rubles), "Stroipolimerkeramika" (Kaluga Oblast, 30.99%, 270.3 mn rubles), "The Omsk Institute for Projecting Enterprises of the Oil-Processing and Petrochemical Industries" (38%, 177 mn rubles), "347 Voenproekt" (Samara, 100%, 134.262 mn rubles), "Belgorod Oblast's Printing House" (100%, 137.262 mn rubles), and "The Novosibirsk Prospecting Expedition" (100%, 115 mn rubles). In the majority of these transactions, the selling price only slightly differed from the initial one. The only exception was the sale of shares in the OJSC "SAOWC", where the selling price exceeded the initial price by almost three times16.

Great progress was achieved with regard to realization of redundant military real estate. In 2007, the RFFP sold 262 such objects for the sum of 1,454 million rubles, or by almost 75% more than in the previous year. For comparison: in 2006, realization of such real estate

15 Kudriashov D. Stantsionnye smotriteli. [Stationmasters] // RBK daily, 18 May 2007, p. 6.

16 www.frpf.ru.

yielded 590.6 million rubles, in 2004 - 632 million rubles, and in 2004 - 590.6 million rubles.

17

The main bulk of redundant military real estate (94%) are buildings and constructions .

The 2006 transformation of the RFFP into a budget-funded enterprise was a catalyst, of sorts, for further weakening of its positions in the administrative hierarchy. Immediately afterwards, the Federal Bailiff Service (FBS) and the Customs put forth proposals to deprive the RFFP of its exclusive right to realize arrested property transferred into state ownership. The importance of this aspect is attested to by the fact that in the year 2007, the Fund received 16.3 billion rubles-worth of such property, and the proceeds from sales amounted to 6.4 billion rubles. The above proposals have not been materialized as yet, and the realization of redundant military property is going on. In accordance with the RF President's Commission, of 16 May 2007, No. Pr-817, the Russian Fund for Federal Property (RFFP) and the Central Administration for Material Resources and External Economic Relations of the RF Ministry of Defense signed, on 4 June 2007, an agreement concerning the realization of redundant military property. In accordance with this document, the RFFP could commission the Central Administration to sell objects of real estate, which makes it possible to increase the volumes of realization due to the emergence of yet another trading floor.

In these conditions, various quasi-privatization procedures are increasingly gaining in importance, as exemplified by the transfer into ownership to the city of St. Petersburg of RF-owned 100 % of shares in the OJSC "Airport Pulkovo" (St. Petersburg). The stated purpose of the transfer is to enable the government of St. Petersburg to attract investments in the amount of no less than 30 billion rubles into the comprehensive reconstruction and modernization of the air-transport infrastructure of the airport, which is to be done on the basis of a public-private partnership and in correspondence with a plan of measures concerning the reconstruction of the air-terminal complex the OJSC "Airport "Pulkovo", to be approved by the city government. Similar decisions are being prepared with regard to a number of other airports as well.

Yet another potential claimant to the objects of the 2008-2010 Privatization Program are the state corporations which came into being last year. Thus, at the beginning of the current year, it became known that the federal blocks of shares in "KamAZ" (which had been repeatedly included in the previous privatization plans) and in "Techpromeksport" (a large object planned for privatization in 2008) might be transferred to the corporation "Rostechnologii".

The latest "Forecast plan (program) of privatization for the year 2008 and the main directions of federal property privatization for the years 2008-2010" was confirmed by Regulation of the RF Government, of 29 April 2007, No. 543-r - that is, after an approximately four-months shorter interval than in the case of the previous similar documents. However, it does not differ much from its predecessors in any other respects.

In 2008-2010, it is planned to offer for sale blocks of shares in the joint stock companies created in the course of corporatization of state unitary enterprises, except for those JSCs included in the list of strategic ones, or taking part in the formation of integrated structures. The annual budget receipts from privatization in 2008-2010 should amount to approximately 12 billion rubles.

17 Interview given by Deputy Chairman of the RFFP S. Maksimov to the newspaper "Krasnaia Zvezda" [the Red

Statr], No. 14 (25017), 30 January 2008.

Among other objects to be offered for privatization in 2008, there are the following

ones:

- blocks of shares not exceeding 50% of the authorized capital of a given JSC, except for the blocks of shares in strategic JSCs or the JSCs taking part in the formation of integrated structures, and also the blocks of shares whose sale will be carried out so as to meet the needs of forming the federal budget's revenue in 2008 and for the period until 2010 in accordance with the long-term financial plan;

- blocks of shares in the JSCs of the fuel and energy complex, the electrical-power objects construction complex, the construction complex, external-economic organizations, civil aviation, healthcare, the chemical, petrochemical, and the printing industries, geology, fishing, poultry farming, the crop sector, the livestock sector, the woodwork and timber industry, the medical industry, and machine building, except for strategic JSCs (557 JSCs);

- FSUEs in the spheres of motor transport, the construction complex, civil aviation, geology, the oil-and-gas complex, the fuel industry, sea and river transport, the printing industry, healthcare, fishing, poultry farming, and animal husbandry (573 FSUEs);

- those properties of the RF Treasury which do not perform functions of state importance (101 objects), and shares in the authorized capital of limited responsibility societies (12 shares).

Of the big objects of federal property, it is planned to privatize, in 2008, federal shares in OJSCs "VO "Technopromeksport" and "Kinostudiia "Lenfilm" (the Film-Making Studio "Lenfilm").

In 2008-2010, the creation of integrated structures in the defense-industrial complex, and in the aviation, ship-building, nuclear, and space industries will continue. In 2009-2010, it is planned to privatize all the FSUEs not performing functions of state importance, as well as shares in the open-end JSCs created in the process of corporatization of the afore-said FSUEs.

5.1.4. The Activity of Big State Companies

By and large, the trends of the past few years essentially analyzed in the previous annual reports, were demonstrating in the year 2007 their growing strength and ability for further development18.

So far as the creation of integrated structures is concerned, it is necessary, first of all, to note the adoption of the decision to merge "Transneft" and "Transnefteproduct", with all 100% of shares therein to be contributed to the authorized capital of "Transneft" as a payment for the additional issue of shares. In addition to this, "Transneft" received blocks of shares (24% in each) in the two operator companies of the "Caspian Pipeline Consortium" situated in Russia and Kazakhstan, respectively. The said blocks of shares were transferred, without any contest, into trust management to "Transneft". It should be emphasized that this event was one of the examples, extremely rare in the 2000s, of transferring state-owned shares into trust management for the sake of their administering. And the transfer of the blocks of shares into

18 See Rossiiskaia ekonomika v 2005 godu. Tendentsii i perspectivy [The Russian economy in the year 2005. Trends and outlooks]. Vyp. [Issue] 27. Moscow: IET, pp. 423-467; Rossiiskaia ekonomika v 2006 godu. Tendentsii i perspektivy [The Russian economy in the year 2006. Trends and outlooks]. Vyp. [Issue] 28. Moscow: IEPP,pp. 606-645.

trust management to "Transneft" was carried out without resorting to a contest, in a blatant contradiction to the requirements of the normative-legal base adopted in the second half of the 1990s, however imperfect it might have been.

The situation with "Transneft" has found its virtual reenactment in the contribution of the federal block of shares in the OJSC "Novoship" (50.34%) to the authorized capital of the shipping company "Sovkomflot".

The creation of "The United Shipbuilding Corporation" (USC) (St. Petersburg), which was established in spring 2007, deserves to be described in more detail. By comparison with "The United Aircraft Building Corporation" (UABC), which had been created a year earlier, it has a more complex structure.

In parallel with the OSC proper, which is the head structure, the following entities are established as its subsidiaries: the JSC "The Westaren Center of shipbuilding" (St. Pet5ersburg), "The Northern Center of Shipbuilding Ship Repair" (Severodvinsk, Archangelsk Oblast), and "The Far-Eastern Center of Shipbuiding and Ship Repair" (Vladivostok). The State's contribution to the creation of these centers is 100% minus one share in the three JSCs, and the monetary means in the amount of 75 mn rubles for each center.

In the future, by way of repayment of the additional shares to be placed by these subsidiaries in connection with their authorized capital being increased, the following assets should be contributed thereto:

- 100 % minus one share in the 4 OJSCs to be transformed from the existing FSUEs, and blocks of shares in yet another 3 JSCs of different size (the first one - 51%, the second one - 33.53%, and the third - 20.96%) - to the authorized capital of the JSC "The Western Center of Shipbuilding";

- 100% minus one share in the 4 OJSCs transformed from the existing FSUEs (one of which should be preliminarily transformed by being joined by another 8 FSUEs) - to the authorized capital of the OJSC "The Northern Center of Shipbuilding and Ship Repair";

- 100% minus one share in the 7 JSCs transformed from the existing FSUEs, and blocks of shares in another 3 JSCs of different size (two - by 20% each, the third one - 10%) - to the authorized capital of the OJSC "The Far-Eastern Center of Shipbuilding and Ship Repair".

At the same time, the authorized capital of "The United Shipbuilding Corporation" is formed, from the very beginning, by the federal block of shares in one JSC (60%) and the monetary means in the amount of 25 mn rubles, as in the case of each of the three subsidiary JSCs19. Apart from this, because of the necessity to repay the additionally placed shares, the following assets should be contributed to its authorized capital: 100% minus 1 share in 6 JSCs transformed from the existing FSUEs, 2 minority federal blocks of shares (24% and 14.99% respectively), and, no later than the end of 2008, 100% minus 1 share in each of the three afore-said subsidiaries, on the completion of forming their authorized capital. The deadline for the formation of the USC is spring 2009.

So far as shipbuilding is concerned, apart from the creation of the USC, it is planned to reorganize 3 FSUEs into OJSCs with 100 % of shares therein to be in federal ownership. In the future, by way of repaying the additional placements of their shares, the following assets will be contributed by the RF to their authorized capital: blocks of shares in 2 JSC (38% and

19 The allocation of the corresponding funds was envisaged in the Law on the 2007 Federal Budget. 466

29.7%), 2 JSC (25.1% and 37.99%), and 1 JSC (38% plus 1 share), respectively. Yet another FSUE will be reorganized by annexing to it 2 FSUEs, after which it will be renamed as a state scientific center (SCC).

In the practical field, 7 unitary enterprises have already been reorganized by way of merger, and the authorities have taken the decisions as to privatizing another 8 FSUEs earmarked for inclusion in the USC.

As regards the USC, blocks of shares in 4 JSCs (only one of them is a controlling block) have been additionally contributed to its authorized capital).

An even more interesting example of the creation of integrated structures was the pooling of state and private assets of the 5 air companies comprising the alliance "Air Union", by way of creating a new air carrier - the OJSC "Airunion", third largest in the country". The State's contribution will be in the form of its blocks of shares in "The Krasnoyarsk Airlines" (51%), "The Domodedovo Airlines" (50.04%), and in "The Air Company "Samara" (46.5%). It should be noted that, in contrast to the majority of holding companies created in recent years, the State may not get a controlling block of shares in the structure being formed, and will limit its ambitions to obtaining just 45% of shares, although the final proportions in share-distribution should be determined later on. Such a structure of capital is fraught with a high risk of conflicts between the State and the rest of the shareholders, which became apparent almost immediately, in the beginning of the current year, when the constituent shareholders' meeting failed to come to any decision because of the disagreements in estimating the value of the assets being contributed.

In early 2007, the approval of a corresponding draft law opened way to the creation of a new big state-owned company on the basis of assets of the civilian part of the Russian nuclear industry. 100 % of shares in this company will belong to the State. Edict of the RF President, of 27 April 2007, No 556, initiated the creation of a holding company, the OJSC "The Nuclear Power Engineering Complex" (NPEC), with 100% of shares in federal ownership. To be contributed to its authorized capital are federal blocks of shares in 31 previously created OJSCs, and in another 55 OJSCs which should be created after the reorganization of FSUEs, as well as in 3 federal state educational establishments (FSE) in the sphere of additional professional training (or advanced training), related to the organizations of the nuclear power engineering complex. The united integrated company "The Nuclear Power Engineering Complex" (NPEC) will become a big corporation of the full cycle, including the extraction of uranium, the production of fuel for nuclear power plants, the construction of nuclear power plants in Russia and abroad, nuclear machine-building, planning and designing organizations, and research establishments. By the end of 2007, the first stage of creating the OJSC "The Nuclear Power Engineering Complex" had been fully completed in the part of contributing, to the authorized capital of the said company, of the federal shares in 31 JSCs and the property complexes of 3 FSUEs, and the corporatization of 20 FSUEs had also been completed.

In the second half of 2007, the authorities made public the plans for creating as many as 4 holding companies in the sphere of motor-building. The first step in this direction was the announced reorganization of the FSUE " The Moscow Motor-Building Production Plant "Salute", by way of annexing to it another FSUE, "The Omsk P. I. Baranov Motor-Building Corporation"; the authorized capital of the reorganized enterprises was additionally increased by the contribution of the federal blocks of shares in 4 JSCs (two blocks of 38% each, and another two of 25.5% each).

A beginning has been made to the long-expected formation of a holding company for armored vehicles production on the basis of the FSUE "The F. E. Dzershinsky Industrial Association "Uralvagonzavod" [The Urals car-building plant] (Niznii Tagil, Sverdlovsk Oblast), which is being transformed into a OJSC with 100% of shares in federal ownership. As in the case of "Salute", it is planned to increase its authorized capital by all the shares (minus one) in the JSCs created on the basis of transforming 7 FSUEs, and of the blocks of shares in 8 OJSCs (four of them of more than 50% of shares each). By the end of 2007, the decisions had been made as to the terms of privatization of 6 FSUEs for the purpose of contributing the corresponding JSCs' to the authorized capital of the OJSC "The Research and Production Corporation "Uralvagonzavod", including the creation of the head company of this integrated structure.

In 2007, the formation of several integrated structures was completed - mostly those in respect of which the decisions concerning their creation had been made earlier, namely: the OJSC "The Concern Sozvezdie" ["Constellation"]; "The Concern "Avionics" (whose authorized capital was formed by shares in 6 JSCs previously created by way of privatizing corresponding unitary enterprises); "Zarubezhneft" (foreign oil) (whose authorized capital was formed by shares in 2 JSCs); "The State Joint - Stock Company "Obronpromkomplex" (defense - industrial complex) (whose authorized capital was formed by shares in 9 JSCs); and "The Concern "Granite - Electron" (whose authorized capital was formed by shares in 3 JSCs).

Apart from this, the formation of a number of integrated structures, in regard of which the decisions concerning their creation had been made earlier, was going on unabated. The said structures are as follows: "The Corporation "Roskhimzashchita" (Russian gas defense) (1 FSUE was transformed into a corporation); and "The Russian Corporation of Aero-Space Instrument Making and Information Systems" (the decisions were made as to the terms of privatizing all the 7 FSUEs earmarked for the consequent contribution of shares in the newly created JSCs to the authorized capital of the corporation).

The authorized capital of the OJSC "The Corporation 'Tactical Missile Armament'" has been augmented by the federal blocks of shares in 11 JSCs, and yet another 4 FSUEs are being transformed into joint-stock companies. The authorized capital of the OJSC "The AntiAircraft -Defense Concern "Almaz - Antei" ties up shares in all the 4 FSUEs earmarked for joining the corporation. In the end of 2007, the decision was made that the additional issue of shares in this company should be repaid with the federal blocks of shares in yet another 31 OJSCs.

The first stage of development of the OJSC "Morinformsistema - Agate" (the naval information system "Agate") was brought to conclusion. The federal blocks of shares in 3 JSCs were contributed to its authorized capital, and the decisions were taken as to the terms of privatization of all the three FSUEs to be integrated within its framework. Blocks of shares in another 4 JSCs, created earlier by way of privatizing the corresponding unitary enterprises were contributed to the authorized capital of the OJSC "The Concern "Morinformsistema -Agate" in pursuance of the decisions made earlier. Similarly, the authorized capital of the OJSC "The Concern "Submarine Armament - Gidropribor" (hydraulic instruments) tied up the federal blocks of shares in 2 JSCs, earmarked for this purpose, and the decision was made as to the terms of privatization of 1 FSUE. The extension of the two latter structures, as well

as that of "The Concern "Granite - Electron", should be considered within the framework of the afore-mentioned measures concerning the integration of the shipbuilding industry.

Apart from this, so far as the creation of integrated structures is concerned, one could note the adoption of decisions on the terms of privatizing 4 FSUEs for the purpose of the subsequent contribution of shares in the corresponding joint-stock companies to the authorized capital of the OJSC "The Academician V. P. Makeev State Missile Center", and the corporatization of the FSUE "The Kumertau Aircraft Production Enterprise" (Bashkortostan) for the purpose of the subsequent contribution of its shares to the authorized capital of the OJSC "The United Industrial Corporation "Oboronprom" (defense industry), a holding company engaged in consolidating Russian helicopter construction.

The trend toward active property expansion on the part of natural monopolies ("Gazprom" and the RJSC "The UES of Russia"), which had been on the rise over the previous two years, manifested itself yet again in the RZhD's intention to obtain the blocking parcels of shares in the ports of Ust-Luga and Novorossiisk, which was made public in early 2007. As regards the former, the case in point is the potential purchase of 16.5% of shares in addition to the existing 8.5%; as regards the latter, the privately owned 16% of shares in the port of Novorossiisk were already transferred into trust management to the RZhD in February 2007.

Talks are under way with regard to purchasing shares in the ports of Vladivostok and Nak-

20

hodka . Similar conclusions can be made concerning the information on the reorganization of "Transmashholding" (the Transport Machinery Holding Company - TMHC) to be accompanied by the consolidation of the assets controlled by the holding companies and listed with its fixed assets. A blocking parcel of shares in the TMHC could be also sold to the RZhD. It should be recalled that the TMHC is the biggest Russian company in the sphere of railroad machine - building, which comprises such enterprises as "Metrovagonmash" and "The Kolomna Plant" (Moscow Oblast), "The October Electric-Car Repair Plant", "Penzadieselmash"

(the Penza Diesel Engine-Building Plant), the Briansk Machine-Building Plant, and "Bezhitsa

21

Steel" (Briansk Oblast) . In the past year, the authorized capital of the RZhD was increased by blocks of shares in 4 joint-stock companies, including the OJSC "Yakutia's Railroads" (50% of shares), "Transkreditbank" (75%), "Speedways" (87.4%) and "The Newspaper 'Gu-dok'" (100% minus 1 share).

The holding company "Russpetsstal" ["Russian Special Steel"], controlled by "Rosobo-roneksport" and oriented to production of special sorts of steel, is in the process of organization. It comprises the metallurgical plant "The Red October" (Volgograd), and the Stupino Metallurgical Company (Moscow Oblast). On the agenda is the purchase of a controlling parcel of shares in the enterprise "Ruspolimet" (Nizhnii Novgorod Oblast), and there was information as to the plans to acquire shares in such giants of ferrous metallurgy as the Magnitogorsk Metallurgical Integrated Works and "Mechel".

"Rosneft" was the major buyer of "Yukos"' numerous assets, which were put on sale in the course of bankruptcy proceedings. Although "Gazprom" was much less active in this respect, the gas monopoly did buy from the company TNK-BP 62.8% of shares in the company "RUSIA Petroleum", a licensee of the potentially lucrative Kovyktino gas field and the holder of 50% of shares in the East-Siberian Gas Company (ESGK), engaged in the regional gasifica-

20 Dagaeva, A. RZhD skupaet porty [The RZhD is buying up ports] // Vedomosti, 18 April 2007.

21 Kudriashov, D. "Transmashholding" sobiraet aktivy ["Transmashholding" is amassing assets] // RBK daily, 2 March 2007, p. 6.

tion project for Irkutsk Oblast. Also, "Gazprom" participated in the redemption of additional issues of shares (for example, in "Mosenergo") and in the acquisition of blocks of shares in energy companies in the course of reform of electric-power engineering industry, and made it clear that it was going to make investments in the coal industry (when implementing a number of projects in cooperation with the Siberian Coal Power-Engineering Company (SCPEC). It should also be mentioned that "Rosneftegaz" (created at the end of 2004 by way of tying-up, in its authorized capital, shares in "Rosneft" for the purpose of effecting a transaction aimed at increasing the state-owned block of shares in "Gazprom to a controlling size) is going to carry out an additional issue of shares, which would be paid for by the State with 90.6% of shares in "Kamchatgazprom".

Very important not only for the state sector, but also for the Russian economy as a whole was the completion of setting up the contour of the new structure of the powergenerating industry within the framework of reforming the RJSC "The UES of Russia".

It should be recalled that the process of transforming the regional JSCs-energo - the subsidiary companies of the energy monopoly, started as early as 2003 with the implementation of several pilot projects, including the reforming of the OJSC "Kalugaenergo", the OJSC "Orelenergo", the OJSC "Brianskenergo", and the OJSC "Tulenergo". Most actively, the structural changes were carried out in the year 2004. The process of reforming involved more than 30 companies. By April 2004, the procedure of reorganizing the first regional energy company, the OJSC "Kalugaenergo", had been completed, and by the end of that year 5 JSCs-energo had been subdivided by type of activity.

Also in 2004, new interregional companies began to be formed. In the final months of that year, the first 3 OGKs and 2 TGKs were created (received State registration). In October 2004, the board of directors of the RJSC "The UES of Russia" made the decision to establish 4 interregional power-distributing grid companies (MRSK). Also in that year, a new vertical of on-line supervisory control was practically set into place: the functions of regional supervisory departments were transferred (with some exceptions) from JSCs-energo to the System's Operator.

In 2005, the process of reforming embraced the majority of JSCs-energo, and many of them were split by the end of the year. Also in 2005, the majority of the remaining interregional companies were constituted: by March, the last of 7 wholesale power-generating companies (OGK) had been registered, and by August - 13 out of 14 territorial power - generating companies (TGK) had been entered into the register. And finally, 4 MRSK were created in that same year.

In 2006 - early 2007, the process of reforming the purpose-oriented companies was nearly completed. By early 2007, approval had been granted to the projects of reforming 70 out of 71 energy joint-stock companies (JSC-energo), and the formation of all 6 thermal whole-sale thermal-power generating companies (OGK) had been completed. By 1 March 2007, the formation of the purpose-oriented structure of TGK-3, TGK-4, TGK-5, TGK-6, TGK-9, TGK-13 ("The Yenisei TGK"), and TGK-14 had been completed; the purchase contracts for power-generating property had been signed by the parties in the persons of "Kuz-basenergo" (TDK-12) and "Altaienergo"; and the first phase of reorganization of TGK-1, TGK-2, TGK-8, and TGK-10 had been completed. By now, the process of the grid compa-

nies' spinning-off is practically completed. 55 out of the initially planned 56 main grid com-

22

panies have already been created on the basis of the reorganized JSCs-energo .

At the shareholder meeting on 26 October 2007, the final reorganization of the RJSC "The UES of Russia" received full support of the participants.

In autumn 2007, in the course of the first stage of reorganization, the OJSC "OGK-5" and the OJSC "TGK-5" span off from the RJSC "The UES of Russia". These companies were ready to function fully independently and to implement long-term investment projects. They have already carried out additional issues of shares, attracted strategic investors into their share capital, and attracted investments in development. At the same time, the State's share in the authorized capital of these companies will not diminish, because of their spinning-off from the RJSC "The UES of Russia", below 25% plus 1 share (the size of a blocking parcel of shares). As a result of the first reorganization, the shareholders of the RJSC "The UES of Russia" will receive, in addition to their shares therein, shares in the OJSC "OGK-5" and the OJSC "TGK-5" in proportion to their share in the authorized capital of the holding company. The number of shares in the RJSC "The UES of Russia", owned by them, remains unchanged.

The second phase (to be over by 1 July 2008) will see the completion of the structural reorganization of the holding company's assets: the spinning-off, from the OJSC "The UES of Russia", of all the purpose-oriented companies of the branch (FSK, OGK, TGK, etc), and the

23

discontinuation of the activity of the head company - the OJSC "The UES of Russia" .

5.1.5. State Corporations as a New Element of the State's Property Policy at the Present Stage

The year 2007 introduced new realities in the State's property policy with regard to state property management. The case in point is the creation of state corporations, which are now viewed as an integral part of development institutions alongside special economic zones and the Investment Fund.

As such, the term "corporation" has several meanings. In a most general sense, it denotes a body of persons who have joined together for achieving some goal and have formed a separate subject of law - a new juridical person. As a rule, a corporation as a form of a transacting business envisages shared liability of its participants and the participation of profes-

24

sional hired managers in its management . As regards the practice of countries with developed market economies (primarily the USA), the notion of "corporation" is frequently identified with joint-stock societies. Hence the notion of "corporatization", used in analysis of property reform in transition economies (including Russia) as a synonym of transforming the former state-owned enterprise into joint-stock companies in course of privatization. Accordingly, in Russian publications (both of popular scientific and journalistic character), state corporations were viewed, until recently, as big joint-stock companies, mostly created in course of privatization, where the State continued its equity participation and exercised, more or less

22

www.rao-ees.ru.

23

www.rao-ees.ru.

24 Finansovo-kreditnyi entsiklopedicheskii slovar' [The encyclopedic dictionary of financial and credit terms] / Collective authorship; A. G. Griaznova, Ed. Moscow: Finansy i statistika [Finances and Statistics], 2002, p. 435.

successfully, its shareholder rights (for example, the RJSC "The UES of Russia", "Gazprom",

25

"Rosneft" etc), which was not entirely correct .

However, so far as a large number of countries with market economies (in the main Western European) are concerned, the period of strengthening the regulating role of the State - starting from the second third of the 20th century - was characterized by large-scale state entrepreneurship, one type of whose institutions, alongside economic societies (mainly joint-stock ones), was the specially established state enterprises with juridical-person status. In some countries (for example, in the United Kingdom) they got the name of "state corporations". The main purpose of these enterprises was to dampen market collapses, such as those typical of the 1930s depression, to develop and regulate those branches of the economy where the actual capabilities of private capital were clearly insufficient for their modernization, and for successful competitive struggle on world markets. Political factors also played a rather prominent role.

In the Russian legal field, the first mentioning of state corporation as a separate organizational and legal form dates back to summer 1999, when Law of 12 January 1996, No. 7-FZ, "On Nonprofit Organizations" was amended by Article 7.1, which established that state corporation should be defined as a nonprofit organization, without membership, constituted by the Russian Federation on the basis of a property contribution and created for purposes of performing social, managerial, or other socially useful functions. A state corporation should be created on the basis of a federal law. The property transferred to a state corporation by the Russian Federation becomes the ownership of the state corporation. A state corporation is not liable for the obligations of the RF, and the RF is not liable for the obligations of a state corporation, unless provided otherwise by the law envisaging the creation of a state corporation.

Until recently, the only examples of functioning state corporations were the Agency for the Reconstruction of Credit Institutions (ARCI), created for the purpose of overcoming the consequences of the 1998 financial crisis in the banking sector26, and the Agency for the Insurance of Deposits (AID), created in 2004 for purposes of performing the functions concerning the mandatory insurance of the population's deposits.

It is true that there were several organizations, created in the first half of the 1990s, whose names included the term "corporation". However, in reality, they operated in the organizational-legal forms other than state corporation as a variety of nonprofit organization, as it was defined in the 1996 law.

Among such organizations, there were the federal contract corporations "Roskontrakt" and "Roskhleboprodukt", organized in 1992 as joint-stock societies for the purpose of carrying out government purchases; the State Investment Corporation ("Gosinkor") and the Russian Financial Corporation (RFC), created in 1993 with the status of state enterprises designed

25 Of course, the term "corporation" can have another meaning, and can be applied not only with regard to juridical persons. For example, it can denote a group of persons, a professional association (a physicians', or officers', or judges' corporation, etc). Apparently, it is this very meaning that have given rise to the use of the term "corporate state" with regard to the political regimes in a number of countries (for example, Spain and Portugal in the 1930s- 970s).

26 Initially registered as a non-crediting institution in the form of a JSC (with the RFFP being the founder), it obtained the status of a state corporation after the adoption of Federal Law "On the Restructuring of Credit Institutions" of 8 July 1999, No. 144-FZ, and after the corresponding alterations have been introduced in the Law on Nonprofit Organizations.

to stimulate investment activity; and the Federal Food Corporation (FFC), created in 1994 with the status of a federal enterprise designed to regulate the agro-food market.

The destinies of the afore-said organizations were different. "Roskontrakt" and "Rosk-hleboprodukt" chose the road of gradual privatization, which was to take many years to achieve. Suffice it to say that the last state-owned block of shares in "Roskontract" (20.95%) was included in the forecast plan (program) of federal property privatization for the year 2007. Somewhat earlier this was done with regard to "Roskhleboprodukt", whose last RF-owned share was included in the forecast plan (program) of federal property privatization for the year 2003, and in the summer 2005 the decision was taken that the RF's "golden share" special right to participate in its management should be discontinued. The Federal Food Corporation was liquidated in 1997, to be replaced with the SUE "The Federal Agency for the Regulation of the Food Market" under the RF Ministry of Agriculture and Food Production. The State Investment Corporation ("Gosinkor"), which had failed to play any considerable role in the investment process of this country, was liquidated in pursuance of Edict of the RF President of 6 February 2003, No 135, and all its property was transferred to the RF Ministry of State Property. In particular, the State, in the person of this body of state authority (and then of the Federal Agency for Federal Property Management), received the "Gosinkor"' share in the United Industrial Corporation "Oboronprom". The latter corporation, having the status of a JSC, has been engaged in the consolidation of helicopter building since 2005.

A new round in the use of state corporation, this time as a special organizational and legal form, started in 2006 when the authorities began to actively discuss the plans for creating a new state corporation, "The Bank for Development and for the External Economic Activity of the Russian Federation ("Vneshekonombank"). As a result, Federal Law "On the Bank for Development" of 17 May 2007, No. 82-FZ, established the legal status, the principles of organization and activity, and the procedure for the reorganization and liquidation of "Vneshekonombank". Its authorized capital, in the amount of no less than 70 billion rubles, was to be formed by the property of the Bank for the External Economic Activity of the USSR, the RF-owned shares in the OJSC "The Russian Bank for Development" and in the CJSC "The State Specialized Russian Export-Import Bank", and by other property, by decision of the RF Government.

Later on, the organizational-legal form of state corporation also emerged in the set-up for reorganizing the nuclear industry, which was ultimately determined with the adoption of Federal Law "On the Peculiarities of Managing and Disposing the Property of and the Shares in the Organizations Operating in the Sphere of Use of Atomic Energy, and on the Introduction of Alterations in Individual Legislative Acts of the Russian Federation", of 5 February 2007, No. 13-FZ; and by Edict of the RF President, of 27 April 2007, No. 556.

As is mentioned above, a holding company - the OJSC "The Nuclear Power-Generating and Industrial Complex" ("NIC"), with all its shares in federal ownership, was created in this branch as early as 2007. In its turn, the NIC itself, alongside the nuclear weapons complex, the nuclear and radiation security complexes, and the fundamental research complex, is to be managed and controlled by the corporation "Rosatom", which will be formed in 2008. Its status will be determined by the special Law "On the State Nuclear Energy Corporation "Rosatom", adopted at the end of 2007.

In the wake of these initiatives, which have been under consideration since mid-2007, there emerged other proposals concerning the creation of state corporations in a broad variety

of areas (machine-tool construction, motor-road construction and operation, fishing, provision with pharmaceuticals, etc.). Judging from this range of branches, it is clear that the State's presence in many of them is not justified. In principle, these branches can develop on their own by the sheer action of market mechanisms, provided that the State plays the all-important regulating role in the process (by determining the rules of the game, by organizing tenders, purchases, etc.), or even has a certain part in ownership and production - but only in individual situations which require special consideration.

Until now, the legislature has approved and enacted, in the form of federal laws, the proposals to create the following corporations (apart from "Vneshekonombank"): "Ros-nanotekh", of 19 July 2007, No. 139-FZ; "The Fund for Promoting Reform in the Housing and Utilities Sector", of 21 July 2007, No. 185-FZ; "Olimpstroi" (to be in engaged in the construction of objects for the 2014 Winter Olympic Games in Sochi, and in the development of that locality into a mountain health resort), of 30 October 2007, No. 238-FZ; "Rostekhnologii", of 23 November 2007, No. 2-FZ; and "Rosatom", of 1 December 2007, No. 317-FZ.

These corporations considerably differ from one another with regard to the character of their future activity. "Olimstroi" and "The Fund for the Promoting Reform in the Housing and Utilities Sector" are aimed at implementing specific projects within established timelines. "Rosnanotekh" will find its niche within the range of instruments for stimulating innovation activity, while Vneshekonombank is designed to participate in stimulating the export of products of the processing industry and in the launching of capital-intensive projects. "Rosatom" is an exclusively one-branch organization, while "Rostekhnologii" is a typical conglomerate, because this corporation is to receive 100% of shares in the FSUE "Rosoboroneksport" after the latter's corporatization in pursuance of Edict of the RF President of 26 November 2007, No. 1577, and the structure of "Rosoboroneksport" includes numerous enterprises from different branches (a helicopter-building holding company, "AvtoVAZ", "VSMPO-Avisma", "The Motovilikha Plants", etc.). "Rosoboroneksport"'s plans for the creation of the holding company "Russpetsstal", an engine-building holding company, and a holding company to be engaged in the production of explosives, are currently undergoing different phases of implementation.

The peculiarities of the organizational-legal form "state corporation" are analyzed in detail in the corresponding section of the present survey. In the main, this status, openly or otherwise, is characterized by features typical of various organizational-legal forms, and is fraught with the inevitable misunderstandings as to the use of the concept of "corporation".

In this connection, it should be mentioned that this term is present in the name "The State Corporation for the Control of Air Traffic", which is a federal state unitary enterprise, and in the names of the recently created "The United Aircraft-Building Corporation" (UABC) and "The United Shipbuilding Corporation" (USC), which are open-end joint-stock companies (OJS), and therefore are obliged (at least formally) to comply with the requirements of corporate legislation. This same status of an OJSC is accorded to a number of other enterprises which, by their goals and objectives, can be classed with the companies designed to tackle issues of structural and industrial policy, like the state corporations of the year 2007. These enterprises include: the Agency for the Mortgage Crediting of Housing (AMCH), established as early as 1996 with 100% of shares in state ownership (in 2004, it was included in the list of strategic JSCs); the company "Iliushin Finance Co" and "The Financial Leasing Com-

pany" (both companies were winners in a tender for the best investment project with regard to the leasing of Russian airliners), whose authorized capital was increased in 2002, in the process of which large shares in their capital passed into federal ownership at the expense of budget funds (in 2006-07 they were contributed to the authorized capital of the UABC); and the recently created "The Russian Venture Company" and "The Russian Investment Fund for Information-Communication Technologies", with all shares in federal ownership.

However, there remains one question yet unanswered: what will be the real mechanism for controlling the activity of such organizations, and how detailed its description is going to be in the applied documents establishing various rights, first of all from the point of view of preserving state property and public funds, and of guaranteeing that they would be used for the specified purposes, as well as from the viewpoint of the conformity of the corporations' actual activity with the objectives specified in their Charters?

So far, the status of newly created state corporations has remained unclear - even from the point of view of their being classed with one or other form of ownership, because, in contrast to unitary enterprises, the property transferred to a state corporation by the Russian Fed-

27

eration is deemed to be in ownership of the state corporation . And this, in its turn, is closely related to the difficult problem of accurately defining the boundaries of the state sector in the Russian economy as a whole.

5.1.6. Changes in the Normative-Legal Base Regulating the Functioning of the State Sector

In contrast to the year 2006, which was marked by the emergence of a number of innovations in the normative-legal base with regard to the activity of the state sector's economic subjects (the establishment of the procedure for increasing the authorized capital of the OJSC created in the process of privatization with 25 and more percent of shares in state or municipal ownership, the threshold values of the size of the state-owned block of shares being preserved; and the adoption of a special document concerning the approaches to dividend policy in companies with state stakes, and the termination of the Federal Fund for Federal Property Management's independence), the past year saw no changes of similar importance with respect to

28

unitary enterprises and economic societies with the State's participation .

The most important event in this sphere was the adoption of Decree of the RF Government of 15 December 2007, No. 872, "On the Creation of Federal Treasure Enterprises and on the Regulation of the Activity Thereof", which confirmed the Procedure for Regulating the Activity of Federal State Enterprises (FTE).

The aforesaid document establishes that economic subjects of this type can be created by three ways: 1) by way of establishment;

27 However imperfect the right of economic jurisdiction might be, existing legislation recognizes that the assets being subject to this legal regime should remain in state ownership (of a RF subject, or of a body of local self-government), while unitary enterprises have the right to dispose of such assets only within those limits that do not prevent them from carrying out their activity, the objectives, the subject, and the types of which are determined by their Charters. Any transactions concluded in violation of this requirement must be deemed to be null and void.

28 The emergence of a vast normative-legal base concerning state corporations is an issue in its own right, which is analyzed in detail in a separate section.

2) by way of reorganizing an existing unitary enterprise (through splitting, spinning-off, or merger);

3) by way of changing the type of a FSUE based on the right of economic jurisdiction.

When a FTE is being created, the federal executive body under whose jurisdiction the enterprise will be placed (the empowered body) should submit to the government: a draft of the deed of creation, and a whole package of specially prepared documents, including the fea-

29

sibility study justifying the creation of the enterprise ; drafts of its Charter and of the programs for the enterprise's activity in the next year and in the next planning period; the list of assets to be consolidated to the enterprise by right of operative management for the purpose of fulfilling the State's orders for manufacture of products (or for work, or services); and the report on valuating the assets to be consolidated to the enterprise by right of operative management, including the data on the market value of these assets. When an enterprise is being created by way of reorganizing an existing unitary enterprise or by way of changing the type thereof, the submitted documents should also include notarially attested copies of the constituent documents of the unitary enterprise, copies of its accounts as of the last reporting date and of its annual accounts for the 3 previous years (with a notation of a corresponding taxation body), the statement issued by the taxation body at the place of tax registration with regard to the unitary enterprise's position concerning the payment of taxes, charges, and contributions as of the last reporting date, a draft of the division balance sheet or of the transfer deed (in the event of the enterprise being created by way of reorganizing a unitary enterprise), and the list of assets consolidated to the unitary enterprise, authenticated by a corresponding territorial body of the federal executive body performing the functions of federal property management (The Federal Agency for Federal Property Management).

A FTE's relations with the supervisory body should be based on the following principles: the supervisory body should approve the enterprise's program of activity, its cost-benefit calculation (in accordance with the established forms), and the appointment of its head; the appointment of the enterprise' senior accountant should also be made by the supervisory body's consent. The head of the FTE should annually submit, to the said body, a draft of the FTE's program of activity, its cost-benefit calculations and the reports on implementing thereof, its annual accounts with the auditor's resolutions thereon, and proposals on the distribution of the net profit obtained by the enterprise by the results of a reporting year.

Apart from this, the said Regulations determine the financial mechanism of the FTC's functioning. The enterprise should carry out its activity in accordance with the program of activity and the cost-benefit calculation prepared on the basis of the program of activity, so as to determine the spending of the enterprise's revenues; both the program and the calculation should be approved by the empowered body in the established procedure.

In the event when, in the course of carrying out the enterprise's activity, there emerges an opportunity to obtain revenues, or a necessity to incur expenses, which have not been taken

29 A feasibility study should include a financial and economic analysis of the unitary enterprise's state of affairs, with the structure of its accounts payable and receivable being pointed out, and the explanation given as to the sources and conditions of their emergence. Also, it should specify the forecasted volume of production (or work, or services) produced under the State's order for the purpose of meeting the federal state needs, and offer justification for the production of individual types of products (or work, or services) within the framework of independent economic activity. And it should include a forecast of the enterprise's revenues and expenses in the forthcoming year and in the next planning period, as well as proposals concerning the organizational and personnel structure of the enterprise. 476

into account while forming the cost-benefit calculation, or when the actual expenses exceed the planned ones, the empowered body, on having received the information to this effect from the head of the enterprise, submitted in the established procedure, should introduce appropriate alterations into the cost-benefit calculation.

The financing of the activity of the enterprise should be carried out at the expense of the revenues from the enterprise's realizing, on its own, the products (or work, or services) produced by it, unless established otherwise by federal laws and other normative acts of the RF.

In the event of the enterprise's revenues being insufficient to cover the expenses envisaged in the cost-benefit calculation, the empowered body should carry out, on a quarterly basis, in the established procedure, the financing of the purpose-oriented expenses dealing with the functioning of the enterprise. The procedure for allocating the federal budget's funds to the enterprise is determined by budget legislation.

The enterprise has the right to resort to borrowing only on condition that the volume and the avenues of use of the borrowed means have been agreed upon with the empowered body, which should either give its consent to the planned borrowing, or respond with a motivated refusal to agree therewith; in both cases the response must be given within one week from the date of the enterprise's submitting its petition. Also, the empowered body should keep records of the enterprise's liabilities.

Based on the data contained in the accounts, in the report on the implementing the program of activity, in the cost-benefit calculation, and in the proposals on the distribution of the net profit obtained by the enterprise by the results of the reporting year, the empowered body should determine the amount of the enterprise's net profit to be transferred to the federal budget (with the understanding that no less than 1/4 of the acquired net profit should be transferred thereto), while the rest of the monetary means should be transferred to the reserve fund and other funds in accordance with the Charter of the enterprise, and also be spent for the purposes, including investment, to be agreed upon with the empowered body. The empowered body should submit, in the established procedure, to the Federal Fund for Federal Property Management the decision on the transfer of profit to the federal budget, and then should supervise its implementation.

With the adoption of this document, one could believe that the long-standing issue of renovating the normative-legal base, which regulates the functioning of treasury enterprises,

30

has at last been resolved, at least formally . The corresponding prior documents (Decree of the RF Government of 12 August 1994, No. 908, "On the Confirmation of the Standard Charter of a Treasury Plant (or a Treasury Factory, or a Treasury Enterprise), and Decree of the RF Government, of 6 October, No. 1138, "On the Procedure for Planning and Financing the Activity of Treasury Plants (or Treasury Factories, or Treasury Enterprises"), adopted before the entry into force of the RF Civil Code, were deemed to be null and void.

Also, mention may be made of the confirmation of the new Regulation on the Registration of Federal Property and on the Procedure for Its Registration (Decree of the RF Govern-

31

ment, of 16 July 2007, No. 447) , and of the simplification of the Procedure for the alienation of shares owned by the Russian Federation in the event of the emergence of a situation when

30 For example, it was mentioned in the Materials for the RF Government's meeting, of 17 March 2005, "On the Measures Designed to Increase the Efficiency of Federal Property Management", prepared by the RF Ministry of Economic Development and Trade.

31 Superseded a similar document dating back to 1998.

the Russian Federation has the right to demand that they be redeemed by the joint-stock society (Decree of the RF Government, of 21 March 2007, No. 170).

It should be recalled that the Law on Joint-Stock Societies (Article 75) permits to demand that the society should buy out, from the shareholders, all of the shares, or part of the shares owned by them, in the event of:

- the society's reorganization, or it handling a big transaction, the approval of which should be decided upon by the general meeting of shareholders, if they have voted against the adoption of the decision on its reorganization, or have not participated in voting on these issues;

- the introduction of alterations in and amendments to the Charter of the society, or the approval of a new version of the Charter of the society, which restrict their rights if they have voted against the adoption of the corresponding decision, or have not taken part in voting.

The Government Decree envisages that the State, as a shareholder, may exercise this right by decision of the Federal Agency for Federal Property Management, with the exception of (1) strategic JSCs, with regard to which the RF President's decision is necessary, and (2) the JSCs with regard to which the State's position is determined by the RF Government, or its Chairman, or Deputy Chairman. In these cases, draft decisions should be submitted by the Ministry of Economic Development and Trade on having coordinated the issue with the body of authority supervising the company in question.

The monetary means received from the redemption of shares by the joint-stock society should be transferred, in full, to the federal budget.

Apart from this, it should be pointed out that the list of strategic enterprises and joint -stock societies was also considerably changed. By the results of the year 2007, it underwent the introduction of 42 clarifications (for comparison: in 2004 - 3, in 2005 - 4, in 2006 - 12). As in the previous years, most of these alterations were concerned with the formations of integrated structures. As a result, 72 unitary enterprises and 129 OJSCs were excluded from the list, and only 17 unitary enterprises and 12 OJSCs (including several integrated structures the largest of which were the Nuclear Power-Engineering and Industrial Complex and the United Aircraft-Building Corporation) were added thereto.

5.2. Public Corporations as an Essential Element of Institutional Policy in 2007

A notable and quite surprising to many experts element of public policy in 2007 has been active establishment of public corporations at the federal level. In a relatively short period of time (May-December 2007) there were adopted federal laws on establishment of six public corporations. Those corporations are authorized with a wide range of functions and provided a significant share of public property (funds from the RF federal budget and Stabilization Fund in the amount of approximately RUR 760 billion in 2007; various production facilities and financial assets) for their operation in a long-term prospective. The process of creating public corporations has immediately inspired a lot of debates on efficiency of such activities of the government.

It is worth noting, that government was actively involved in the formation of large national companies in 2006 as well (in the form of open joint stock companies with 100 per cent of federal ownership), but at that time it did not attract so much attention and did not provoke

32

so extensive critical comments. However, the feed-back to formation of public corporations in 2007 arises concern and incredulity. In our view, it is largely explained by the following

33

distinctions of of those business structures:

- non-transparency of the projects on development and the lack of discussion on public corporations establishment;

- limited time frames for the discussion of draft laws on the establishment of public corporations;

- peculiar legal and structural business form (public corporation), indistinct (framework) legal basis;

- involvement of top political resources in public corporations;

- large volume of national property, allocated to public corporations;

- authorization of a wide and diversified range of powers to the corporations;

- poor arguments to the community for the grounds to public corporations establishment;

- uncertainty of strategic planing and operational policy of the corporations;

- a wide range of proposals from various sources on establishment of the new public corporations34.

There were discussed the risks of such negative effects, resulting from extensive establishment of public corporations, as:

- increased inexpedient government participation in national economy;

- inefficient utilization of national property use;

- non-transparent operation and low accountability (as well as supervision) of public corporations.

Nevertheless, the greatest concern is based on the risk offurther extension of the number of public corporations, in particular in the background of proposals to introduce legal framework for public corporations establishment at the level of the Russian Federation Subjects.

In evaluating public policy on the establishment of such corporations, two factors of great importance should be taken into regard: firstly, how justified is the purpose of the business entity and secondly, to what extent is the selection of the legal status of public corporation is justified and reasonable for the purpose of such business functioning (while there are other efficiently operating options, for instance, development and implementation of federal targeted programs, creation of joint-stock holdings, using national property). In our view, the basic concerns in regard to public corporations establishment were primarily related to the choice of the objectives to be achieved. Therefore, we will focus mainly the institutional aspects of public corporations establishment, as well on the assessment of prospective opportunities and accompanying risks.

32 Using the term "corporation" in the names of a number of the stock holdings, established by the government (OAO "United Aircraft Corporation", OAO "Joint Shipbuilding Corporation") sometimes goes beyond the meaning of the term "public corporation". Herewith, we are talking about public corporations in the narrow sense, in other words, "public corporation" as a legal entity.

33 Those distinctions are related to public corporations establishment in general, which are not obligatory to any public corporation (thus, the procedure of the Bank for Development formation has been rather time-consuming and involved a number of open debates and discussions).

34 In this regard, one could refer to proposals for the establishment of "Rosrybflot" and "Avtodor" public corporations, those ones on purchases of medicines, grain exports, housing construction, etc. It can be said that among the members of the executive and legislative authorities there are some illusions on public corporations capacity to address serious problems of social and economic development.

5.2.1. Distinctions in "Pubic Corporation" Legal Incorporation Form

Public corporation is a type of non-profit organization. The legal incorporation form of a "public corporation" was defined as early as in July 1999 by an amendment to Article 7.1 "Public Corporation" of the Federal Law No. 7 FZ "On non-profit organizations", adopted in January 1996.

The principal distinctions of this legal business form are as follows:

1) the corporation is created to perform social, management and other functions of public significance;

2) profit is not the basic objective of public corporation activities as a form of non-profit organizations; corporations may be engaged in business activities only to achieve the objectives of its incorporation;

3) each public corporation should be established in compliance with a special federal law;

4) the corporation should be incorporated on the basis of federal property, transferred in the ownership of public corporation by the Russian Federation;

5) documents of incorporation, specified in the Civil Code of the Russian Federation are not required for public corporation establishment;

6) the law "On Non-Profit Organizations" can be inapplicable to the Corporation, in case otherwise is specified by law, under which the corporation was established.

There is a number of other legal provisions, specified in various federal laws, directly related to the public corporations:

- in accordance with the Federal Law No. 178 "On privatization of public and municipal property", dated December 21, 2001, this law is not applicable to relationships that arise, when federal property is to be transferred to public corporations as contribution from the Russian Federation;

- in accordance with the RF Budget Code, subsidies in the form of property contribution to the public corporations can be specified in the federal law on the federal budget;

- in compliance with the RF Civil Code the public corporation can be recognized insolvent (bankrupt), in case otherwise specified in the federal law on incorporation thereof.

It has been repeatedly noted in regard to the public corporations, that there are significant failures in their legal incorporation form, namely:

- indistinct meaning of the notion " functions of public significance", and consequently, an opportunity of extensive interpretations to justify the need to use this wording;

- in fact, the government property is donated to a public corporation in the process of incorporation thereof;

- no clear guidelines are provided for the assets management, which provokes additional risks;

- the issues of transformation and liquidation of public corporations are not legally specified (even as a framework).

In general, the basic Law on Non-Profit Organizations provides only a limited and rather

35

formal list of issues , that should be defined in the laws on the establishment of public corpo-

35 In accordance with Section 3, Article 7.1 of the federal law "On Non-profit Organizations", which provides for the establishment of a public corporation, there should be specified its name, location, management of its operations (administration, the procedure of incorporation , management authorities appointment and dismissal), the procedure of the reorganization and liquidation of public corporations, utilization of government property in the event of their liquidation. 480

rations. Special risks arise from the possibility not to apply the law on non-profit organizations to public corporations, if this is foreseen in the law on corporation establishment (Section 3, Article 7.1 of the law "On Non-Profit Organizations"). In theory, this approach opens great opportunities to create an individual legal form for each new corporation, feeling free to go beyond the basic provisions of the law "On Non-profit Organizations" without any restrictions.

5.2.2. Incentives for "Public Corporations" Legal Incorporation Form Introduction to the Russian Legislation and its Distinctions before 2007

The background of this legal incorporation form introduction was largely explained on an urgent issue of the Russian banking system rescue upon 1998 financial crisis. First of all, to overcome this challenge, the RF Government, by the Order No. 1642, dated as of November 20, 1998 has established a non-banking credit organization "Agency for Credit Organizations Restructuring" in the form of OAO, though later (in the course of credit organizations restructuring), it became necessary to significantly expand its powers. As a result, the President has signed two laws on one and the same day (July 8, 1999): one law, defining a new type of additional non-profit organizations (public corporation)36, and another one, transforming OAO "Agency for Credit Organizations Restructuring" into public corporation "Agency for Credit

37

Organizations Restructuring" .

Apparently, it was assumed that the requirement to adopt a special federal law for each public corporation would limit the use of this legal form of incorporation. Herewith, in the legal framework of any public corporation the gaps in legislation can be abolished.

For quite a long time it was working: up to 2007, the government established public corporations only twice. First, as mentioned, simultaneously with the introduction of the "public corporation" legal form, when the "Agency for Credit Organizations Restructuring" was

38

established in 1999 , and the second time took place only in 2003, when the law was enacted

39

on establishment of the "Deposit Insurance Agency" public corporation39. Legal provisions, effective for public corporations were practically frozen, no amendments or revisions were made to them.

Therefore, prior to 2007, public corporations were created in exceptional cases in the sphere of finance at the junction point of the RF Government and the Central Bank of Russia powers. According to the relevant legislation, establishment of those corporations was em-

36 Federal law No. 140 "On Amendments to the Federal Law on Non-Commercial Organizations", according to which the law on non-profit organizations was supplemented with Art. 7.1 "Public corporation".

37 Part 4 of Art. 46 of the Federal Law No. 144-FZ "On Credit Organizations Restructuring".

38 It should be noted that on July 28, 2004 a law was passed providing for the liquidation of the "Agency for Credit Organizations Restructuring" public corporation and the transfer of assets as the Russian Federation property contribution to the "Deposit Insurance Agency" public corporation (Article 2, Sections 1,2 of the Federal Law No. 87-FZ "On recognition as null and void the Federal law on credit organizations restructuring and some provisions of the Russian Federation legislation, and establishment of the liquidation procedure for the "Agency for Credit Organizations Restructuring" public corporation).

39 Chapter 3 of the Federal Law No. 177-FZ as of December 23, 2003 "On insurance of individual deposits with the banks of the Russian Federation". Herewith, RUR 3 billion was supposed to be transferred by the "Agency for Credit Organizations Restructuring" public corporation as property contribution from the Russian Federation (Section. 1, Article 50).

bedded in the broader context of regulations in the relevant fields, and the corporations were positioned as an instrument, rather than an independent business subject40. Herewith, there were rather detailed definitions in the laws of the principles and rules of activities of those corporations, as well as regulations for the relevant fields, which to some extent was compensating to the excessive framework-based legal provisions on non-profit organizations.

5.2.3. Grounds for Expansion of Public Corporation Legal Form by the Government in 2007

The situation has drastically changed in 2007, when federal laws were adopted on establishment of six large public corporations with rather significant objectives of economic, social and political nature (see Table 10).

Table 10

Public Corporations, Established in 2007

Public corporation

Date of relevant law adoption

Objectives

1. Public Corporation "Bank for Development and Foreign Economic Affairs (Vnesheconom-bank)"

May 2007 Enhance the competitiveness of the Russian Federation economy, its diversi-

fication, encourage innovation through investments, foreign trade, insurance, consulting and other activities for the implementation of new projects in the Russian Federation and outside the country, including projects with the participation of foreign capital, addressed at infrastructure improvement, innovation, special economic zones development, environment protection, support of domestic export of goods, works, and services, as well as support to the small and medium businesses

2. Public Corporation "Russian Nanotechnology Corporation" (PC "Rosnanotech")

July 2007 Promotion of the government policy in the field of nanotechnologies, devel-

opment of the innovation environment in the area of nanotechnologies, implementation of the projects for prospective nanotechnologies and nano-industry

3. Foundation for Promotion of Housing and Public Utilities Reform

July 2007 Development of safe and favorable living conditions to the population, pro-

motion of housing and public utilities reform, development of effective mechanisms for the management of the housing resorces, introduction of energy-saving technologies with the financial support, provided by the Foundation

4. Public corporation on Olympics objects construction and Sochi city development as a mountain health resort (GK "Olympstroy")

5. "Rostechnologii", public corporation on the support in the development, production and export of high-tech industrial products ("Rostechnologii" public corporation)

6. "Rosatom", public corporation on nuclear power ("Rosatom")

October 2007

November 2007

December 2007

Support in management and other socially efficient functions, related to design, engineering, construction and renovation works, maintenance of housing utilities, required for XXII Olympics and 2014 Para-Olympic Games in Sochi, as well as the development of the city as a health resort

Support in the development, production and export of high-tech products through promotion of national designers and producers of high-tech commodities in domestic and external market, investments attraction to various industrial sectors, including national military defense

Support to government policy, legal regulatory activities, public services and national property management in nuclear power sector, development and support to the safe operation of nuclear power and nuclear weapons sectors of the Russian Federation, ensure nuclear and radiation safety, non-proliferation of nuclear resources and technologies. Assistance in development of nuclear science, technologies and professional training, international cooperation in this area

40 One can see there is no reference to "corporations" in the names of those laws. 482

Public corporations, established in 2007 are significantly distinguished in both, the background of incorporation and the objectives and functions thereof. Thus, while the Bank for Development and the Foundation for Promotion of Housing and Public Utilities Reform can be regarded as some elements of progress in "public corporation" legal form, other public corporations are set far apart from them and are much more related to the implementation of industrial (sectional) priorities, as well as to the administrative system enhancement.

Reviewing the basic incentives of such expressed growth of the government interest in public corporations establishment, one should highlight three major factors.

First. The long-term objectives to promote sustainable economic and social development came to the topside, the inefficiency of the existing tools for government policy implementation became clear. For example, the Federal Targeted Program (Federal Program) is a very mature and transparent tool. In recent years, significant efforts have been made to improve the efficiency and effectiveness of the Federal Programs implementation. However, that tool does not fully meet the new challenges in the development of public policy, as in the current administrative system it is ineffective for the resolution of inter-governmental problems. Moreover, it prevents capital investments in newly incorporated business entities and is restricted in supporting the long-term projects due to accountability within the budget cycle.

Second. Inadequate quality of the administrative system, its primary focus on the current challenges, problems in the development and implementation of national policy in terms of improvements in the new sectors of the economy have brought up the need to seek for the new agents of public policy (the government agencies, addressed at long-term challenges). The choice of the "public corporation" legal incorporation form was made in a number of cases due to their ability to provide relevant functions of government management outside the standard framework of the administrative system restructuring.

Third. A significant factor in the transfer of government attention to the public corporations is the factor of limited time frames of the elected government power before its reelection, in the pursuit of fixing some priorities in the national policy under such conditions, which have to be ensured by necessary priorities and financial grounds. It should be noted, that within 2006 - early 2007, the government was satisfied with OAO41 incorporation, a 100per cent of the shares of which were in federal ownership. Herewith, such important tasks were addressed as:

1) restructuring and consolidation of national assets, creation of large economic entities in the public sector of the economy, accelerated development of selected high-tech industries (such as OAO "Consolidated Aircraft Corporation", OAO "Consolidated Shipbuilding Corporation");

2) enhancement of effective performance of certain government functions through the transfer of powers to the level of economic entities, incorporated by the government, namely to the OAO "Special economic zone";

3) creation of Development Institution OAO "Russian Venture Company".

However, on the one hand, as early as in 2006, it became evident that the process of creating large government-owned structures in the form of OAO is excessively time-consuming

41 The objective of establishing public corporations at the highest political level was set forth in 2007: on April 26, the RF President in the message to the Federal Assembly of Russian Federation for the first time noted the need to establish two special corporations (for the development of nanotechnology and for the development of the nuclear industry).

and would sometimes take several years (this was largely dependent on the need to observe the legal regulations on privatization), but on the other hand, in early 2007, there was an experience in the design and discussion of the Russian draft law "On the Bank for Development" in the State Duma for the establishment of a public corporation.

Thus, in some cases, the use of public corporation legal form has helped to simplify necessary procedures, reduce the time frames and expand tentative trends of restructuring national assets in the industry, having transferred (due to establishment of corporations on the basis of special laws), the process of approval of the relevant decisions from the RF Government to the level of the RF Federal Assembly.

When there were some additional factors in the process of creating any public corporation, (sometimes quite specific and situational), providing a surplus impact over the selection of the legal form of incorporation. Let us consider those factors as per each existing corporation.

1. Public Corporation "Bank for Development and Foreign Economic Affairs"

The establishment of the corporation was aimed at building an efficient public financial development institution. The RF Government has approved on January 19, 2006, in particular, such measures as the development of the concept for public financial development institu-

42

tions, as well as preparation of the draft law on export-import bank . In late January 2006, at the top political level, the plans were announced on establishment of the Russian Bank for Development43. That objective could be achieved by several means. In particular, the following options were considered:

1) establishment of a public corporation on the basis of the USSR Vnesheconombank assets, including ZAO "Roseksimbank" shares, as well as the transfer of OAO "Russian Bank for Development", owned by federal government.

2) establishment of a corporation in the form of OAO, 100 per cent of whose shares is in federal ownership, with affiliated companies OAO "Russian Bank for Development" and ZAO "Roseximbank";

3) extension of OAO "Russian Bank for Development" capital.

However, along with the main challenge, there were set forth two more objectives: (1) reorganization procedure of the USSR Vnesheconombank, outlined in the "development strategy for the banking sector in the Russian Federation until 2008", definition of the bank status and (2) savings of national assets, allocated to support the activities of the newly incorporated financial institute for development. To implement the second and third options, substantial budgetary resources would be required for initial capitalization. Moreover, the second option looks complicated in terms of legal framework of relations with the USSR Vnesheko-nombank due to its special status, whereas the third option was restricted, as it did not include bank support to export-import operations.

Thus, the desire to resolve several different tasks has predetermined the option for the RF government to select the first option by the end of 2006, i.e., incorporation of a public cor-

42 At a press conference on January 31, 2006, the RF President has informed on the plans to incorporate the Russian Bank for Development with an authorized capital of USD 2.5 billion.

43 At a press conference on January 31, 2006 the RF President has notified on plans to establish the Russian Development Bank with an authorised capital of USD 2.5 billion.

poration44, although the tentative risks were noted, such as restrictions in independent resources attraction, imbalances and conflict of interest in the development of its structural elements, the lack of transparency of activities, excessive bureaucracy.

2. Public Corporation "Russian Nanotechnology Corporation"

Establishment of this public corporation was preceded by a sufficiently long period of public policy development in terms of nanotechnologies. The issues of nanotechnologies and nanoindustry development have been repeatedly discussed at the Russian Government meetings: on November 18, 2004 the Concept on development in the field of nanotechnology for the period until 2010 in the Russian Federation was approved, on August 25, 2006, the Program on coordination in the area of nanotechnologies and materials in the Russian Federation was adopted. However, the measures were not properly coordinated, the decision-making processes on a number of important measures were delayed (for example, the works on the Targeted Federal Program for the Development of Nanotechnology Infrastructure45, on formation of the Fund for Nanotechnologies Development for the direct capital investments in companies with high potential).

To a significant extent, this was the result of the absence of any industrial department, involved in nanotechnology development on a priority basis. Under these circumstances, for the purpose to promote the formation of an integral government policy in the development of nanotechnology, an "external" action was required in regard to the Government. The RF President has approved on April 24 2007 the Presidential Initiative "Nanotechnology Development Strategy", where the Russian Nanotechnology Corporation was defined as one of the key elements of the national nanotechnological network. Its objectives are organizational and financial support to innovation activities in the field of nanotechnology. On April 26, 2007 the RF President in the message to the Russian Federal Assembly Federation has appealed to finalize and adopt the law on the establishment of a special Russian Nanotechnology Corporation as soon as possible. The government should ahave llocated at least RUR 130 billion for the Corporation funding.

The choice of a public corporation legal status as a form of incorporation46,probably, was made due to the initial plans to authorize it with some government functions (in particular, to participate in the development of government policy in the area of nanotechnology and in drafting regulations, in placing orders for research and development in the area of Nanotechnology for national needs, in functioning as government representative in Targeted Federal Programs).

44 At the RF Government meeting on December 14, 2006, there was approved the draft of the federal law "On the Development Bank", outlining the provisions for "public corporation" legal form of incorporation.

45 In accordance with the Consolidated Plan of activities to implement the basic provisions of the President's of the Russian Federation Letter to the Federal Assembly of the Russian Federation in 2006 (Government of the Russian Federation (approved by the decision of the government on June 7, 2006), it was planned in October

2006 to approve the program of research, innovation and production infrastructure for nanotechnology for 20072009, but the adoption of an appropriate program was made with noticeable delay: Federal Program "Nanotech-nology infrastructure development in the Russian Federation for 2008-2010" was approved only on August 2,

2007 by the Resolution of the Government of the Russian Federation No. 498.

46 In this case, it is difficult to judge, what was the primary factor. Probably, after the decision at the top political level on the establishment of a public corporation, there was an intention to use the corporation (due to its status), in to execute some government functions.

3. Foundation for Promotion of Housing and Public Utilities Reform

Establishment of a corporation in this case has been basically a response to a marked slow-down in addressing the problems of housing and public utilities systems reform. At a meeting of the Russian Government on October 19, 2006 after discussion of the report, made by the Russian Ministry for Regional Development on the plan of measures to reform the housing and utilities system, the work of the Ministry in this area was found unsatisfactory.

The Government has returned again to the discussion of number of measures on the reform of housing and utilities system at its meeting on February 16, 2007. As a result, the projects with a number of measures for the reform of the housing and public utilities in the Russian Federation over 2007-2008 and the plan for development of relevant legal regulations on their implementation were accepted in general. However, in accordance with the adopted documents, the issues of repairs, to be made by the owners of dwelling premises and modernization of apartment buildings were based largely on the amendments, made to the Housing Code of the Russian Federation (on allocation supplementary budget funds, development of relevant regional programs, whereas it was planned to implement those measures only in 2008).

Probably, that fact has urged the government officials to focus on the more intensive measures to accelerate the modernization of housing utilities. On April 26, 2007 the RF President in the Letter to the Federal Assembly of the Russian Federation has stressed the need to create a special fund in the amount of minimum RUR 250 billion, for the repair or resettlement of people from emergency housing stock. The creation of such a fund in the form of a

47

public corporation47 was clearly motivated by the non-profit nature of the activities, as well as the need to ensure timely decision-making, flexibility in the funds utilization, including measures on co-financing for major repairs, regional co-financing of targeted programs.

4. Public Corporation on Olympics Objects Construction and Sochi City Development as a Health Resort

The establishment of the corporation, in our opinion, is more a consequence of "example" factor of other corporations and the desire to delegate to a an authorized unit the responsibility for the results of activities, to centralize and expand the capacity, ensure flexible and operational management of resources for the timely solution of the tasks. On June 8, 2006 the Resolution of the Government of the Russian Federation No. 357 has approved the Targeted Federal Program "Development of Sochi city as a mountain health resort (over 2006-2014)". In the process of this program development, two options were considered (dependent on the choice of the country for the Olympics), and the activities were planned with regard to both options. Given the quality requirements, tight time frames and complexity of the project management, it was decided, for the first time (in the framework of Targeted Federal Program) to establish of a joint Management Board in the form of public unitary enterprise, which was delegated the functions of construction (renovation), financing of public capital investments, as well as the responsibility for financing other Program activities.

47 It is worth noting, that the idea of "public corporation" as a legal form with regard to the reform of housing and public utilities was expressed as early as in September 2006, in the report of the Ministry for Regional Development of Russia to the Federal Council, when it was proposed to establish a public corporation for investments in housing utilities. 486

However, the approval of Sochi as the Olympics city and explicit problems in the plans

48

for the construction served as additional arguments in favor of GK "Olimpstroy" establishment as a single monitoring center for Olympic facilities construction, implementation of related management functions, and easier interaction with private investors. According to the federal law on the establishment of the corporation, the RF Government should approve the Program on Olympic construction sites and development of Sochi as the mountain health resort, as well as the transition to the Corporation all the rights and responsibilities under government contracts, signed on behalf of the Joint Management Board of the Targeted Federal Program "Development of Sochi as a mountain resort (2006-2014 years)"49.

5. Public Corporation on the Support in the Development, Production and Export of High-Tech Industrial Products of "Rostechnologii"

The basis for the establishment of the corporation was the federal state unitary enterprise "Rosoboronexport"50, a government agency on exports (imports) of armaments, and the holder of control packages in a number of large Russian companies, such as OAO "Oboron-prom", "Motovilikhinsk Factories", "Corporation VSMPO-Avisma" and"AvtoVAZ".

In early August 2007 the State Legal Department under the RF President has presented to the Russian government a draft law on the establishment of a public corporation "Rostech-nologii". Herewith, it was proposed to transform "Rosoboronexport" in a joint stock company and transfer the shares of OAO, created on its basis, to the public corporation as a property contribution of the Russian Federation. However, the draft law caused some doubts in the Russian government51.

Apparently, due to the firm commitment to approve that law in the shortest possible term, the draft law "On Public Corporation on The Support in the Development, Production and Export of High-Tech Industrial Products "Rostechnologii" was directly submitted to the State Duma by the RF President on September 25, 2007. According to the initial text of the draft law, corporation establishment presumed the accumulation of funds of its member companies, the formation of a number of integrated structures for exports in the industrial and military-industrial sectors.

The law has been adopted on November 23, 2007, and only three days later, on November 26, 2007, the RF President has signed an Order No. 1577 "On the open joint-stock company "Rosoboronexport", which specifies:

48 It should be noted that when the draft law on GK "Olimpstroy" establishment was discussed in the State Duma, some doubts were expressed about the feasibility of the establishment of public corporation, especially due to unlimited term of its activities.

49 Later, in approving the construction of the Olympic program objects, the Russian government also decided to complete the implementation of the Federal Program "Development of Sochi as a mountain resort (2006-2014 years)" ahead of time (from 1 January 2008) (Resolution of the Government of the Russian Federation No. 991, dated December 29, 2007 "On the construction of Olympic facilities and the development of the city as the mountain resort of Sochi").

50 "Rosoboronexport" has been created by merging the federal state unitary enterprises "State company Ros-vooruzhenie" and "Promexport" in accordance with the Presidential Decree No. 1834, dated November 4, 2000 "On establishment of a federal state unitary enterprise "Rosoboronexport".

51 In early September 2007 the Chairman of the RF Government M. Fradkov called to postpone for a while the establishment of the new public corporation based "Rosoboronexport", notifying that the proposed option of incorporation is not the only version of its formation.

• "FGUP Rosoboronexport", should be transformed in a joint-stock company "Rosoboron-export", and its shares are transferred to the Public Corporation OAO "Rostehnologii";

• OAO "Rosoboronexport" is the government agent for external trade activities with respect to military products;

• Public Corporation "Rostehnologii" shall exercise external trade activities with military

52

products in terms of advertising and marketing activities . Thus, the corporation directly or indirectly (through OAO "Rosoboronexport") took under control the important functions of external trade activities with respect to military products.

In our opinion, to a certain extent, the establishment of the corporation means forming one more (along with the current Federal Industry Agency) centre of decision-making in the policy for the development of military and industrial complexes, which can be regarded as strengthening competition among various government institutions and can provide both, positive and negative effects.

6. Public Corporation on Nuclear Power "Rosatom"

The development of the nuclear power generation complex is included in the priority areas of the Russian government policy, pursued in accordance with a number of strategic

53

documents . Since 2006, the development of the nuclear industry in general, and nuclear power generation complex in particular, is paid special attention. The government has approved the Targeted Federal Program "Development of Atomic Power Industrial Complex of Russia over 2007-2010 and for the prospective till 2015"54 There were also defined the objectives of public sector nuclear industry restructuring, corporatization of its state unitary enterprises, formation of a vertically-integrated structure (in February 2007 a special law was adopted for that purpose)55, and in April the RF President has signed a decree on establishment of OAO "Nuclear Power Generation Complex"56. Therefore, a vast-scale restructuring

52 Federal Law FZ-№ 271, dated November 26, 2007 (according to the Federal Law "On Amendments to Articles 9 and 12 of the Federal Law "On military-technical cooperation of the Russian Federation with other countries", the list of enterprises, authorized to participate in external trade activities with respect to military products, has been revised (Article 12). The list has included the public corporation "Rostehnologii", institutionally expanded the tentative list of "government agencies" or "special companies" (joint-stock companies, 100 per cent of the shares of which are federally owned or transferred to a non-profit organization in the form of a public corporation, are added to the list of state unitary enterprises).

53 Program of Atomic Energy Development of the Russian Federation for the years 1998-2005 and up to 2010, approved by the Decree of the Government of the Russian Federation No. 815 as of July 21, 1998; Strategy of atomic energy development in Russia for the first half of XXI Century, endorsed by the Government of the Russian Federation on May 25, 2000.

54 RF Government Resolution No. 605 dated October 6, 2006.

55 On November 2, 2006 the RF President has introduced a draft law to the State Duma and following its discussion on February 5, 2007, the Federal Law No. 13-FZ was adopted "On the specifics of management and utilization of property and shares of organizations, engaged in the field of atomic power and relevant amendments to the specified legal regulations of the Russian Federation". Organizational structural revisions in the atomic power sector are also specified.

56 Presidential Decree as of April 27, 2007 "On the restructuring of nuclear power generation complex of the Russian Federation" has approved establishment of OAO "Nuclear Power Generation Complex", the investment of OAO civil nuclear industry sector shares to its authorized capital before August 1, 2007; transfer some federal educational institutions of professional training to the OAO and installment of state unitary enterprises shares before December 1, 2007.

of public assets has been started in the civilian sector of the nuclear power industry through the creation of a large-scale share holding structure, incorporating enterprises of the complete production cycle: mining and uranium ore refinement, production and processing of nuclear fuel, design and construction of nuclear power plants.

At the same time, with measurable progress in addressing the energy complex, there remained unresolved issues on improving the nuclear weapons complex management, while the issues of unified investment strategy and technology policy in the entire nuclear industry are not resolved yet57.- In view of the above, the Federal Law No. 317, adopted on December 1, 2007 (Federal Law "On Public Corporation on Nuclear Power "Rosatom", specifying, among other things:

- development and implementation of the national policy by the Corporation for the operation and development of atomic power and nuclear weapons complexes, pursuance of national policy in terms of the nuclear industry, execution of national armament programs and government defense order;

- transfer of the functions and powers of the Federal Agency on Nuclear Energy;

- property contribution from the Russian Federation in the form of shares in OAO "Nuclear Power Generation Complex", shares of joint-stock companies of federal ownership, state unitary enterprises property, included in the list, approved by the President, as well as the property, that is in the operational management of the federal government agencies, as per the list, approved by the RF Government.

In this case, the choice of such legal form as the public corporation was determined probably by the requirement to combine in one entity the functions of government structure management and authority to perform a full-scale restructuring of nuclear industry property and to establish a consolidated system of government control over economic activity of the Corporation member companies.

***

For all the diversity of objectives of the public corporations establishment and incentives to the selection of this legal incorporation form, those factors can be summarized as follows:

• the establishment of each public corporation is a link of a very long "chain" of measures of government policy, implemented in a particular direction;

• public corporations are not so much an alternative to such mechanisms as targeted federal programs, joint-stock holdings, funded from national assets, but rather an additional organizational structure, supporting them at some stages of development;

• in some cases, the establishment of the corporation was the way to overcome a problem in the decision-making on some key issues in the government.

57 The RF President in the letter to the Federal Assembly of the Russian Federation on April 26, 2007 has indicated the need for significant changes in the structure of power engineering, in particular, by enlarged share of nuclear power generation, the construction of 26 nuclear power plants on the basis of modern technologies in the next 12 years. To this end, it was proposed to establish a special corporation that would incorporate the nuclear power generating and industrial enterprises, operate in both, domestic and external markets, and moreover, serve for the interests of national defense.

5.2.4. Distinctions in Discussion and Adoption of Laws on the Establishment of Public Corporations

It is worth paying particular attention to tightened time frames in establishment ofpublic corporations from the second half of 2007. After the discussion and adoption of the Law on Bank for Development, all subsequent draft laws on public corporations have presented either

58

by deputies, or by the RF President58. Those draft laws were adopted in the minimum time limits, within 1.5-2 months upon their submission, while only 1-1.5 months was allocated for their consideration by the State Duma (see Table 11).

Table 11

Time Frames for Adoption of the Draft Laws on the Establishment of Public Corporations in 2007

Laws on establishment of public corporations in 2007 Draft law initiator Date of presentation to the State Duma Date of the State Duma adoption in final reading Date of the RF President's signature

Federal law No. 82-FZ "On the Government 19.01.2007 20.04.2007 17.05.2007

Bank for Development"

Federal law No. 139-FZ "On Deputies 04.06.2007 04.07.2007 19.07.2007

the Russian Public Corporation

for Nanotechnologies"

Federal law No. 185-FZ " Deputies 04.06.2007 06.07.2007 21.07.2007

Foundation for Promotion of

Housing and Public Utilities

Reform"

Federal law No. 238-FZ «On Deputies 12.09.2007 18.10.2007 30.10.2007

Public corporation on Olym-

pics objects construction and

Sochi city development as a

mountain health resort"

Federal Law No. 270-FZ "On RF President 25.09.2007 9.11.2007 23.11.2007

"Rostechnologii" public corpo-

ration"

Federal law No. 317-FZ "On RF President 01.10.2007 13.11.2007 01.12.2007

"Rosatom", public corporation

on nuclear power"

As a rule, the debates on the draft laws for the establishment of public corporations in the State Duma were critical59. Most frequently critical remarks were expressed on the functions and powers of corporations, on the procedure of property transfer to their ownership, on various aspects of organization of their interaction with other economic entities in the framework of targeted activities, on management procedures within corporations and on government supervision over their performance. As a result60, quite a number of disputable provi-

58 This "transfer" of legislative initiative from the RF Government to the deputies and the RF President to present draft laws on public corporations establishment is largely explained by rather long term of the draft laws development and discussions in the RF government, particularly noticeable against the background of limited time frames.

59 This was reflected, in particular, in the final statements on the draft laws, prepared by individual Committees and Legal Department of the State Duma.

60 There are some examples. In accordance with the initial text of the draft law on the establishment of "Ros-nanoteh" public corporation, it was planned to provide the corporation a number of functions of government authorities (development and harmonization of legal regulations, functions of an agent for state-guaranteed orders), the right of corporations to use up to 10 per cent of their budget for the administrative management expenses. In the draft law on PC "Rostechnologii" establishment it was foreseen to authorize the corporation to determine the 490

sions have been abolished, including some redundant functions and powers. However, a number of notable remarks (both, applicable to individual corporations61, and more universal ones62) was not taken into account when finalizing the law drafts.

Finally, the dynamic process of adoption the laws on public corporations in 2007 has brought up a number of important issues, related to their current operation and "quality of legal definition" of that form of incorporation.

First, the framework nature of the passed laws on public corporations establishment is worth noting. Practically all laws provide insufficient details63 on the terms and principles of the corporations activities (with the exception of the Foundation for Promotion Housing and Public Utilities Reform), they require bylaws adoption and a number of regulations at the level of the corporations. There is no procedure of reorganization or liquidation for the majority of the established corporations in the adopted laws: there are only references to provisions of the corresponding federal law (the liquidation of a corporation determined only in relation to the Foundation for Promotion Housing and Public Utilities Reform, where the term of functioning is specified64).

Secondly, it is worth pointing to the low level of harmonization of provisions of the adopted laws on establishment of public corporations. There is no doubt, that the goals, objectives and activities of each corporation are individual, but even in the case of similar provisions there is a high diversity in their definition, including the details and wording65.

Thirdly, the negative effect on the development of basic law on non-profit organizations should be pointed out. Basically, one could expect that the wide application of provisions on public corporations, the adoption of appropriate laws could promote general practice development, clarify and supplement the provisions of the Law on Non-Profit Organizations. However, this did not happen; only in one case in 2007, simultaneously with the adoption of the Law "On the Bank for Development" to enable it to borrow funds, an amendment was made to Article 7.1 of the Law "On Non-Profit Organizations", defining the minimum limit of the

authorized capital and property of public corporation, that secures the interests of its credi-

66

tors .

procedure and amounts of regular and (or) non-recurrent contributions from organizations, the shares, which are owned by the corporation; in the draft law on PC "Olympstroy'" incorporation there was a provision, that the property of the corporation consists of property, allocated by the Russian Federation, by Krasnodar region and Sochi city.

61 For example, with regard to the draft law on PC "Olympstroy", there was a number og comments on the lack of rules, restricting the term of activities of the corporation (in view of the nature of the project objectives).

62 The comments of this nature include the low level of legislative regulation of corporations activities, the lack of rules and criteria for selecting projects for funding, insufficient regulations in regard to conflict of interest, the lack of procedures for government control over the activities of corporation.

63 For some public corporations (such as the PC "Rosnanotech", PERCENT "Olympstroy") provided insufficiently detailed legal base for their establishment, is balanced, to some extent, by strategy and programs of their development.

64 In accordance with Section 6, Article 3 of Federal Law "On the Fund for assistance to Housing and Public Utilities Reform", the Fund will be functioning till January 1, 2021.

65 It should be noted, that even the wording of the full names and abbreviations of corporations is different (such as PC "Rosnanoteh", Pub.Corporation "Rosatom", public corporation "Rostehnologii").

66 Article 3 of the Federal Law No. 83 FZ as of May 17, 2007 "On amendments to some legal regulations of the Russian Federation in view of the adoption of the Federal Law "On Bank for development".

Insufficiently detailed and poorly structured laws on the establishment of government corporations, the low level of legal regulations of corporations activities have also, in our view, brought up to the following issues.

1) Delay in the beginning of corporations ' performance on their basic objectives.

As of the end of February 2008, only to the Fund for promotion of housing and public utilities reform started full-scale functioning, whereas other corporations were in the process of formation and approval of various documents, regulating their practice.

2) Empowering shadow lobbying of various parties and aggravated risk of biased decision-making to the detriment of consistency and strategic planning.

The establishment of corporations leads to a substantial change in "correlation of force" in the system of public administration, the transition of decision-making authority to the level of corporations in the backgrouynd of insufficient regulations for corporations activities67, absence of legal provisions on identification and resolution of potential conflict of interests in their operation, incomplete provisions on interaction with public authorities significantly increases the relevant risks.

3) The fears in business environment (sometimes exaggerated) on the tentative risks from the activities of corporations.

The problem is largely based on the vague boundaries in authority and expansion of corporations' activities, the uncertainty of the procedure and criteria for the selection of entities to be supported, uncertainty in management principles and disposition of its assets, the vagueness of their plans on further development and approach to interaction with the business community.

4) Mistrust to public corporations on the part of civil society.

This problem is the result of the lack of procedural rules on government control over the activities of corporations and absence of effective tools of public control over their activities, inadequate requirements to their publicity and transparency.

At the same time, risks, related to the above issues can be significantly reduced through the adoption of corporate strategies, definitions and principles of transparency, procedural rules of corporations activities, combined government and civilian control over their activities, greater publicity, the practice of holding regular consultations with interested public organizations and business associations.

5.2.5. Public Corporations Potential and Related Problems

At this point it is quite obvious, that the potential of the established public corporations is dependent to a large extent on property contribution, made by the Russian Federation, empowering them with wide authority and responsibilities, flexibility in the use of financial resources, their administrative status, as well as their experience.

All corporations (perhaps, with the only exception of "Olympstroy") were provided a fairly large property contribution from the Russian Federation, although its structure (packages of shares, property, monetary assets, etc.) is different for each of the individual corpora-

67 Only in the Federal Law "On Public Corporation on Nuclear Power "Rosatom" there are provisions, that determine the need for procedural rules. In accordance with Art. 33 of the Law, procedural rules should be approved by the Government, that establishes the order and procedures of a corporation performance, its authority and functions, including the order of its interaction with public authorities, performance of the orders from the RF President and government. 492

tions: Foundation for Promotion of Housing and Public Utilities Reform and PC "Ros-nanoteh" have been primarily funded with monetary assets, which ensured their functioning for a the long term, whereas the contribution to "Rosatom" and "Rostechnologii" corporations were made with the shares of large manufacturing holdings (see Table 12).

Table 12

Property Contribution, Provided by the Russian Federation and Functions, Delegated to Public Corporations

Corporations' Property Authorities/ Functions

Bank for Development and Foreign

Economic Affairs

1 2 3

Property of the Bank for Foreign Economic Affairs of the USSR, shares in OAO "Russian Bank for Development", ZAO "Special Government Russian Export-Import Bank" of federal property;

Other property of the Russian Federation upon approval of the RF Government;

Voluntary contributions and donations of property

Funds from the federal budget in the amount of RUR 180 billion (November 2007); RF Stabilization Fund assets in the amount of RUR 180 billion (November 2007); Revenues from the activities of Vneshe-conombank

All the rights and responsibilities of the Bank for Foreign Economic Affairs of the (former) USSR

Voluntary contributions and donations of property, as well as other legitimate assets

Russian Nanotechnology Corporation

Funds from the federal budget in the amount of RUR 130 billion (November 2007); RF Stabilization Fund in the amount of RUR 30 billion (November 2007); Revenues, derived from the activities of the corporation

Foundation for Housing and Public Utilities Reform Promotion

Funds from the federal budget in the amount of RUR 240 billion (November 2007); Revenues from the sale of temporarily available assets

Public Corporation on Olympics Objects Construction and Sochi City Development as a Health Resort

Property, obtained from government contracts, awarded under the Federal Program "Development of Sochi as a mountain health resort (within 20062014)";

Other property of federal ownership, approved by the decision of the Russian Government; Donations

Funds in monetary form from the federal budget, as well as other budgetary allocations; Revenues from the activities of the corporation non-recurring income (contributions) from organizations, the shares, which are owned by corporations; Revenue derived from the use of the corporation of its assets and activities

All rights and obligations under government contracts, signed by the Federal Agency on Nuclear Power on behalf of the Russian Federation

Public Corporation on the Support in the Development, Production and Export of High-Tech Industrial Products "Rostechnologii"

100 per cent of shares of OAO, created The right for participation in foreign trade

through transformation of federal gov- activities with respect to military products

ernment unitary enterprise "Rosoboron-export";

Other property transferred to the corporation in the course of its work

2

Public Corporation on Nuclear Power "Rosatom"

1

Federally owned shares in OAO "Nuclear power complex";

Federally owned shares of open joint-stock companies, included in the list, approved by the RF President;

Capital assets of the federal government unitary enterprises, included in the list, approved by the RF Government;

Funds from the federal budget, allocated to the corporation to implement activities of the program of activities of the corporation for a long term;

Table 12 (continued)

3

The right to participate in the implementation of all foreign trade rights and obligations under government contracts (within three years);

Authority of the federal budget agent and administrator for Atomic Energy of the Russian Federation, acting on the obligations and rights of federal state unitary enterprises, which transferred property;

Revenues from the activities of the corporation and special reserve funds and corporate assets, created on their basis

Property in the operational management of federal government agencies, corporations, transferred to the corporations as per the list, approved by the RF Government;

"Rosatom" property in operational management upon the decision on "Rosatom" liquidation of in the prescribed manner;

Other federally owned property upon the decision of the RF Government;

Voluntary contributions and donations

Authority to implement on behalf of the Russian Federation the property rights in respect to subordinated federal government unitary enterprises and federal government agencies;

On behalf of the Russian Federation, represent the shareholder of open joint-stock companies to transfer their shares in the corporation as property contribution of the Russian Federation

Some of the corporations, to a certain extent, "replace" in a new quality the structures, existed before, such as Vnesheconombank, established on the basis of restructuring and capitalization of existing structures (Roseksimbank, Russian Bank for Development, USSR Vne-sheconombank). "Rosatom" public corporation during the transitional period should operate in the new capacity as a "replacement" to the Federal Agency on Nuclear Power, and PC "Olympstroy" in conjunction with the "Program of Olympic construction sites and development of the city as the mountain health resort of Sochi" "replaces", the Targeted Federal Program on "Sochi development as a mountain health resort (over 2006-2014 years)" and the Directorate of Targeted Federal Program.

In regard to the administrative status of corporations (see Table 13), one can note that it is rather high68: according to the relevant laws, the heads of those corporations (excluding Foundation for Promotion of Housing and Public Utilities Reform and PC "Olympstroy") should be appointed directly by the RF President, and the members of Supervisory Board should be either also appointed by the President, or some of them - under presentation of the RF President (with the exception of Vnesheconombank and "Olympstroy"). Moreover, the Supervisory Boards of such corporations as PC "Rosnanotech", the Foundation for Promotion of Housing and Public Utilities Reform, should be formed upon presenation of several branches of government (the RF President, the State Duma, the Government of the Russian Federation), what is one more confirmation of the nationwide priority of those structures.

68 In addition, some laws on public corporations directly prohibit the public authorities to interfere in the activities of public corporations, unless otherwise specified by federal laws. 494

Таблица 13

Requirements to the Structure and the Appointment of Public Corporations Management

Vnesheconombank PC "Rosnanotech" Foundation for promotion of housing and public utilities reform PC "Olympstroy" Public Corporation «Rostechnologii "Rosatom" Public Corporation

The order of Chairman is ap- Director General is Director General is Director General is Director General is Director General is

appointment of the pointed by the RF appointed by the appointed by the appointed by the appointed by the appointed by the

responsible execu- President RF President RF government RF government RF President RF President under

tive body presentation of the

RF government

Speaker

Management 8 Management 8 Management 8 Management 10 Management 11 Management Director General

Board structure Board members and Board members and Board members and Board members and Board members, and other Manage-

the Chairman of Director General Director General Corporation Presi- Director General ment Board mem-

Vnesheconombank dent and 5 his Deputies bers

The order of Members of the Members of the Members of the Members of the Members of the Members of the

appointment of Board are ap- Board are ap- Board are ap- Board are ap- Board (except for Board are ap-

management pointed by the pointed by the pointed by the pointed by the Deputies to Direc- pointed by the

board members supervisory board supervisory board supervisory board supervisory board tor General) are supervisory board

(except for the sole under presentation under presentation under presentation under presentation appointed by the under presentation

executive body) of Vnesheconom- of Director General of Director General of Director General supervisory board of Director General

bank Chairman under presentation

of Director Gen-

eral. for Deputies to

Director General

are appointed by

Director General

upon agreement

with supervisory

Board

Requirements for 9 non-staff mem- - 14 non-staff 16 non-staff mem- - 12 non-staff - 8 non-staff mem- - 8 non-staff mem-

the supervisory bers of Vneshe- members of the bers of the Founda- members of the bers are appointed bers are appointed

board structure conombank, ap- corporation, ap- tion are appointed corporation, ap- by the RF Presi- by the RF Presi-

and formation pointed by the RF pointed by the RF bby the RF gov- pointed by the RF dent, among them: dent;

Government; Government, ernment, among government; 4 representatives of - Director General

Vnesheconombank among them: them: - the Corporation the RF President, 4

Chairman is a 5 members re 6 members under Chairman is a representatives of

member of the appointed by the presentation of the member of the the RF government;

supervisory board RF President; RF President; supervisory board - Director General

2 members are 5 members under is a member of the

appointed by the presentation of the supervisory board

State Duma; RF government;

2 members are 4 members are

appointed under appointed under

presentation of the presentation of the

RF Federal Coun- RF Federal Coun-

cil; cil;

5 members are 2 members under

appointed under presentation of

presentation of the Public Chamber of

RF government; Russia

- Director General

is the member of

Supervising Board

Advisory body R&D Council R&D Council

With regard to contribution of relevant experience to corporations' potential, the evaluations of this kind are always rather subjective. It can be noted, that Vnesheconombank experience can be regarded as a long-term priority projects support to the Russian Bank for Development, as well as a pilot project of Roseksimbank to implement various schemes of export opeations. Rosatom Corporation can utilize the experience of the Federal Agency on Nuclear Power in management and strategy development in this sector, Rostehnologii corporation can

implement its experience in promoting high-tech products for export, while Rosoboronexport can contribute by implementation of foreign trade activities with respect to military products.

The major constraint in the implementation of public corporations potential can be regarded as generally insufficiently clearformulated objectives and principles of their activities, as well as the process of decision-making.

One of the potential benefits of all public corporations is significantly greater flexibility in expenditures, expanded capacities in utilization the funds. However, these advanced capabilities to reduce the risk of abuse, and (or) the risk of waste of resources should be "balanced" with detailed and transparent activities, including decision-making procedures to measure performance. This is particularly relevant in view of, on the one hand, internal functional contradictions in some established corporations (for example, the non-profit nature of corporations and commercial activities of the joint stock companies, managed by them). On the other hand, many corporations, in view of their large resource and capabilities, but with the lack of transparency in implementation of government policy and interaction with government authorities, uncertainty in strategy development became weak points for lobbying by various stakeholders.

It should be noted, that these problems can not be solved by simple direct strengthening of government control; on the contrary, if there is no clear definition to criteria for evaluation of the corporations performance and the no basic regulations on their activities, then the audits (because of the uncertainty as to assessment criteria of performance of the corporations) can become an instrument of pressure on the corporation and its leadership on the part of various interested groups.

Another problem also looks important: the laws on public corporations specify their management structure, but do not identify neither the areas, nor the measure of responsibility of the management bodies for their decisions and their accountability within the corporations and to the government. It is indicated in the laws on public corporations, what authorities can take decisions on cessation of responsibilities of supervisory board members and chairmen as their sole executive bodies, but the motives for such decisions are not provided even in general terms. It makes unclear the responsibilities and motivation of the management bodies for the performance of the corporations.

As it has been mentioned earlier, significant challenges in ensuring efficient operation of corporations are created by the inadequacy of the legal provisions, regulating different aspects of their activities.

At the same time, a number of corporations take very active measures in filling up the gaps, at least at the level of secondary legislation (regulations and orders of the RF Government), or at least at the level of documents, adopted by corporations, which determine the rules of their activities (see Table 14). The following important documents can be noted in this regard:

• "Vneshekonombank" - the RF Government has approved the Memorandum on Vneshe-conombank financial policies, as well as the order of preparation, content and validity term of the Memorandum.

• PC "Rosnanotech" - the Supervisory Board has adopted documents, regulating management activities and approved the concept of projects implementation and control, accepted financial plan for 200869.

• PC "Olympstroy" - the RF Government has approved the Program on construction of Olympic facilities and development of Sochi as the mountain health resort.

• Foundation for Promotion of Housing and Public Utilities Reform - the RF government has determined the procedure of allocation of temporarily uncommitted funds of the corporation.

Table 14

Follow-up Regulations for Public Corporations upon their Legal Incorporation

1. Bank for Development and Foreign Economic Affairs_

17.05.2007 - Federal law "On the Bank for Development" is adopted

07.06.2007 - The government of the Russian Federation has approved the acceptance act of reorganization of the Bank for

Foreign Economic Affairs of the USSR in the public corporation "Bank for Development of Foreign Economic Affairs (Vnesheconombank)"

18.06.2007 - The Chairman of the public corporation "Bank for Development of Foreign Economic Affairs (Vnesheconom-

bank)" is appointed by the order of the RF President

19.06.2007. - Members of Supervisory Board of the public corporation "Bank for Development of Foreign Economic Affairs

(Vnesheconombank)" is appointed by the order of the RF government

28.06.2007 - at their first meeting the members of Supervisory Board of the public corporation "Bank for Development For-

eign Economic Affairs (Vnesheconombank)" have approved the Board of Directors staff members

12.07.2007 - at the meeting the Supervisory Board of the public corporation "Bank for Development Foreign Economic Affairs

(Vnesheconombank)" Memorandum on financial policy of the public corporation was approved

27.07.2007 - The Regulations on the supervisory board of public corporation "Bank for Development of Foreign Economic

Affairs (Vnesheconombank)" was approved by the RF government

- The RF Government has issued an order on the preparation, content and validity term of the Memorandum on financial policies of the public corporation Vnesheconombank

- Memorandum on financial policies of the public corporation "Bank for Development Foreign Economic Affairs (Vnesheconombank)" was adopted by the RF government

27.11.2007 - The RF Government issued an order to transfer the funds from the RF Stabilization Fund in the form of property

contribution from the Russian Federation to the authorized capital of public corporation "Bank for Development of Foreign Economic Affairs (Vnesheconombank)" in the amount of RUR 180 billion

07.12.2007 - The RF Government issued an order to transfer the federal property of 100 per cent of the shares of OAO "Russian Bank for Development" and 5.226 per cent of the shares of ZAO "Targeted government Russian Export-Import Bank" to the authorized capital of the public corporation "Bank for Development of Foreign Economic Affairs (Vnesheconombank)"

19.02.2008 - the RF government has approved the Regulations for public corporation "Bank for Development of Foreign Economic Affairs (Vnesheconombank)" in export credits insurance against commercial and political risks

69 However, none of those documents had not been presented to the public, for example, at the website of the corporation (as of March 1, 2008), although the Supervisory Board meetings were held long ago, on December 11 and 27, 2007, and on January 31, 2008.

2. Russian Nanotechnology Corporation

19.07.2007 - Federal Law is adopted on "Russian Nanotechnology Corporation"

07.09.2007 - General Director of the public corporation "Russian Nanotechnology Corporation" nanotechnology is appointed by the RF President's decree - Members of Supervisory Board of the public corporation "Russian Nanotechnology Corporation" are appointed by the RF government

25.09.2007 - The first meeting of Supervisory Board of the public corporation "Russian Nanotechnology Corporation" took place

27.11.2007 - The RF government issued an order to transfer the federal property as a contribution from the Russian Federation to "Russian Nanotechnology Corporation" in the amount of RUR 130 billion, including RUR 30 billion from the RF Stabilization Fund and RUR 100 billion from the federal budget

11.12.2007 - Supervisory Board of public corporation "Russian Nanotechnology Corporation" has approved the documents, regulating the activities of the corporation management bodies: Regulations on the Supervisory Board, Regulations on the Board of Directors, as well as the Regulations on the Audit Committee

27.12.2007 - Supervisory Board of public corporation "Russian Nanotechnology Corporation" has approved Regulations on PC "Rosnanotech" R&D Council and the concept for development and control over the projects, implemented by the corporation

31.01.2008 - Supervisory Board of public corporation "Russian Nanotechnology Corporation" has approved the financial plan (budget) of the corporation for 2008, objectives of financing and the stuff of R&D Council

3. Foundation for Promotion of Housing and Public Utilities Reform

19.07.2007 - Federal Law is adopted on the "Foundation for Promotion of Housing and Public Utilities Reform"

29.10.2007 - General Director of the public corporation "Foundation for Promotion of Housing and Public Utilities Reform" is appointed by the RF government resolution

31.10.2007 - Members of Supervisory Board of the public corporation "Foundation for Promotion of Housing and Public Utilities Reform" are appointed by the RF government

22.11.2007 - At their first meeting members of the Supervisory Board of the public corporation "Foundation for Promotion of Housing and Public Utilities Reform" have discussed the Regulations for the Supervisory Board, Board of Directors and the Foundation structure

27.11.2007 - The RF government issued an order to transfer the federal property as a contribution from the Russian Federation to the public corporation "Foundation for Promotion of Housing and Public Utilities Reform" in the amount of RUR 240 billion from the federal budget

15.02.2008 - The RF government has issued a decision "On placement of temporary uncommitted funds of the public corporation "Foundation for Promotion of Housing and Public Utilities Reform"

4. Public Corporation on Olympics objects Construction and Sochi city Development as a Mountain Health Resort

30.10.2007 - Federal Law is adopted on the Public Corporation on Olympics objects Construction and Sochi city Development as a Mountain Health Resort

03.11.2007 - President of the public corporation on Olympics objects Construction and Sochi city Development as a Mountain Health Resort is appointed by the RF government decree

12.11.2007 - Members of Supervisory Board of the public corporation on Olympics objects Construction and Sochi City Development as a Mountain Health Resort are appointed by the RF government resolution

14.11.2007 - At their first meeting members of the Supervisory Board of the public corporation on Olympics objects Construction and Sochi city Development as a Mountain Health Resort have approved 8 of the 10 corporation Management Board members

498

Table 14 (continued)

01.12.2007 - the Supervisory Board of the public corporation on Olympics objects Construction and Sochi city Develop-

ment as a Mountain Health Resort has approved the Program for Olympic objects construction

29.12.2007 - The RF government resolution has approved the Program for Olympic objects construction and Sochi city

Development as a Mountain Health Resort and defined the amount of property contribution of the Russian Federation to the public corporation on Olympics objects Construction and Sochi city Development as a Mountain Health Resort for the Program financing over 2008-2014

5. Public Corporation for Assistance in Development, Production and Export of Hich-Tech Industrial Products "Rostechnologii"_

23.11.2007 - Federal Law is adopted on the Public Corporation for Assistance in Development, Production and Export of

High-Tech Industrial Products

26.11.2007 - General Director of the public corporation for Assistance in Development, Production and Export of High-

Tech Industrial Products "Rostechnologii" is appointed by the RF President decree

- Members of Supervisory Board of the public corporation for Assistance in Development, Production and Export of High-Tech Industrial Products "Rostechnologii" are appointed by the RF President resolution

- According to the Presidential Decree, FGUP "Rosoboronexport" is transformed in the open joint-stock company, 100 per cent shares of which are in federal ownership, with their further transfer to the public corporation for Assistance in Development, Production and Export of High-Tech Industrial Products "Rostechnologii"

19.12.2007 -At the first meeting of public corporation for Assistance in Development, Production and Export of High-Tech Industrial Products "Rostechnologii" Supervisory Board, the organizational structure was approved, Deputies to Director General were appointed, approaches to the formation of property installment of the Russian federation _to the corporations_

6. Public Corportation on Nuclear Power "Rosatom"_

01.12.2007 - Federal Law is adopted on the Public Corporation on Nuclear Power "Rosatom"

12.12.2007 - General Director of the public corporation on Nuclear Power "Rosatom" is appointed by the RF President de-

cree

- Members of Supervisory Board of the public corporation on Nuclear Power "Rosatom" are appointed by the RF President resolution

5.2.6. Types of the Established Public Corporations

As one can see, the public corporations differ significantly in terms of their background, objectives, functions, the type of property, contributed by the Russian Federation and by a number of other indicators (see Table 15). Let's try to differentiate various types of public corporations.

A. Public Institutions for Development

This type of corporations certainly includes Vnesheconombank, as well as (with certain assumptions) - PC Rosnanotech. The first corporation primary objective is compensation of the market "gaps". Its targets and focuses are clearly defined to prevent "intrusion" in areas with sufficient business initiative and to maintain fair competition. The second Corporation objective is to cover both, market and national gaps (in terms of administrative system failures).

Table 15

Conditional Classification of the Established Public Corporations by some Indicators

Public Corporations

Ap-

proved

strategy

(action Details

plans) in on prin-

the rele- ciples

vant area and ac-

of com- tivities,

petence defined

prior to at the

the law legal

on cor- level

poration

estab-

lishment

Consid-

erable

Defini- Shares of monetary

tion of Transfer a large assets,

strategy of some produc- provided

and prin- functions tion hold- as the

ciples of and pow- ing as contribu-

the cor- ers from property tion from

poration other contribu- the Rus-

upon the entities, tion from sian

adoption delega- the Rus- Federa-

of inco- tion of sian tion a

poration rights Federa- suffi-

law tion ciently

long

period of

activities

+ + +

+

+ +

+ +

+ +

+ +

The term of activities is defined

High administrative level

Vnesheconombank

PC "Rosnanotech"

Foundation for promotions Housing and Public Utilities Reform

PC "Olympstroy"

"Rosnanotechnologii" Public Corporation

"Rosatom" Public Corporation

+

+

+

+

+

+

Both corporations are indépendant to some extent and can focus on the long-term strategic objectives, because on the one hand, they have obtained considerable resources to enable them to carry out their activities regardless of the federal budget at least in the next 5-7 years, and on the other hand, their status in the system of public administration is fairly high.

B. RF Government Agents70, "Executors" of Certain Functions

To this type of corporations PC "Olympstroy" can be attributed, and also, to some extent, the Foundation for Promotion of Housing and Public Utilities Reform. Both corporations actually perform individual operational functions of public management. They have a preset term of operation, during which their targets have to be achieved. These corporations are less independent in their status than public institutions for development in terms of the system of public administration.

C. "Quasi-Ministries"

Without any doubt, "Rosatom" public corporation can be attributed to this type of structures, which has the functions of government agency, and in addition to that owns (will own) packages of shares and capital assets in the relevant industry. This group (like the group "Quazi-holdings") is characterized by the lack of a substantial "advanced" financial contribution and funding of the activities by the subsidies from federal budget.

70 The border between the institutions for development and government agents is rather conventional. In this case, the main distinctions of institution for development is delegation to them a range of public policy tasks (rather than functions), diversified in the forms of their decisions, as well as a significant degree of independence from government. 500

D. "Quazi-holdings"

To this group, we refer those corporations, whose capacity is determined primarily by control over production facilities (in various forms), while they are empowered with certain "soft" (mainly contributing) functions in the framework of government policy. The criterion of attributing a corporation to this type of companies is the ovelapping of some corporation

71

functions with the activities of its member companies (or affiliates) .

With certain assumptions, "Rostehnologii" could be included in this group of public corporations, which is largely focused on management of government-controlled companies and restructuring thereof, as well as the formation of integrated structures. While the corporation is a separate entity in implementation of government policy, it does not have a coherent range of significant functions of government management authorities.

There is no doubt, grouping of the corporations in one or another category is highly conditional, primarily due to similarity of "Institutes for Development" and "Government agents" types, as well as "Quazi-Ministries" and "Quazi-holdings". Thus, Vnesheconombank, along with the functions of an Institute for Development, acts also as a government

72

agent of the Russian Federation , the Foundation for Promotion of Housing and Public Utilities Reform can be related to a certain extent to the Institute for Development. Public corporation "Rosatom" certainly has the features of Quazi-holding, while public corporation "Rostechnologii" possesses some indicators of Quazi-Ministry.

In our view, the combination of specific characteristics of different types of corporations can create internal conflicts and ambiguity in their development, for instance, between the tasks and functions of "Institutions for development" and "Government agents" individual functions, between regulatory, law enforcement functions and responsibilities for the management of business entities. In the latter case, there are significant risks of different treatment of businesses on the part of "Quazi-Ministerstries" and "Quazi-holdings".

It is important not only to classify the established corporations, but also to assess the probability of their transfer to a different type of corporations. In this regard, the question arises: what are the potential trends of such transfers among the established corporations?

Common to all corporations is a potential trend to allocation (expansion) of their functions in public administration, that is, enhancement of their role as Quazi-Ministerstry or alternative "shadow" agencies. To a great extent, such a shift may be motivated by an absence or inadequacy of authorized capital. In this situation, the corporations may seek for replacement of funding the gaps with extended powers.

Those corporations, that were initially established as "Quasi-holdings" (or close to this type), might be willing to obtain additional production facilities from the government to expand participation in the equity of individual companies, including those with budgetary support.

71 In view of the above, we do not relate Vnesheconombank to the Quasi-holding type of corporations, as it incorporates some credit organizations, whereas its activity is not addressed to the support of credit organizations activities.

72 In accordance with the law on the Bank for Development, Vnesheconombank implements certain functions (for example, the service of the debt of the former Soviet Union and the Russian Federation, the functions of public management company for the trust management of pension savings) until the date, preset by the Government of the Russian Federation.

Finally, those corporations, that are needed in a certain period, may seek to expand the range of their activities to justify their existence. Herewith, there is a risk of the loss of "individual identity", distinguishing the corporations from each other and overlapping of the functions of all types of corporations, which brings up inevitable conflict of interests.

A A A

1. Established in 2007 public corporations are deeply diverse as in their background, as in objectives and functions. Each of public corporations is a tool, enabling to resolve contradictions between the national development priorities (diversification, transfer to innovative technologies) and the limited mechanisms, available in the State to settle that issue, as well as insufficient quality of administrative instruments and public administration, focused primarily on the current and standard issues.

The established public corporations can be regarded as new individual approaches to: (1) incorporation and expansion of activities of the institutions for development; (2) enhanced efficiency of the state programs implementation and government functions performance, and (3) transformation of some public authority structures in order to address the strategic objectives comprehensively, (4) expanding the range of authoritites, involved in the long-term public policy.

2. The Choice of a public corporation as the legal form of incorporation is determined to a large extent by the opportunities to: (1) simplify and accelerate the process of restructuring and consolidation of public ownership in some sectors of the economy, (2) enhance the flexibility of mechanisms for funding, identify potential areas for investment, to fund long-term programs, and (3) ensure "pin-point" adjustments in public administrative system.

Along with those challenging incentives, there took place an important factor of time constraints and the desire to overcome the slow-down in addressing a number of key issues. In view of that, the establishment of public corporations in 2007 has been largely a preliminary (framework) tool of setting up individual institutional priorities in the implementation of government policy and delegation of responsibilities for performance thereof. The performance is ensured by the legal status of each corporation and supported by significant monetary assets, provided to them for rather long-term perspective, and their high position in the administrative hierarchy.

3. It is extremely difficult to make a precise assessment of the overall effect from established public corporations at this opoint, in view of great diversity in their types, and with regard to the fact, that their principles and procedures of functioning are still being developed. However, in any cases, the creation of public corporations seems questionable: in some cases, significant doubts arise as to the need for incorporation as the new entity for public policy, in other cases the purpose of establishment in the form of public corporation seems unreasonable.

Along with the new opportunities, there are significant risks: expansion of the process of creating new public corporations, "blurring" of the RF government powers due to unclear allocation of powers, abused relationship between the corporations and business, using their status to gain extended authority and resources, non-transparent process of negotiating and adoption the important decisions in corporations, insufficient quality of management resources, in the background of inadequate accountability to the government and civil society. It

is worth noting, that the establishment of public corporations have set up a new, higher level for corporate and personal ambitions.

4. Accelerated adoption of laws on public corporations establishment in 2007, in particular due to involvement of the top political level, enables to form a kind of proactive range of authority and capacity (potential) to address a number of strategic objectives of socioeconomic development in Russia. However, at present time, a critical question arises how efficiently and expediently this potential will be realized: practically any corporation needs significantly extended political and administrative resources to ensure its effective functioning, accountability should be ensured in terms of implementation of the set tasks, the risks of "opportunistic" behavior of the corporations and negative impact on market economy development should be reduced.

In general, one could say that the high status and extensive resources of public corporations are not adequately compensated by comprehensive, clear and transparent institutional requirements to their activities. In this regard, the balance of strengths and weaknesses is more like negative: the problems are already visible, but the advantages are still expected to be seen.

5. In our view, to ensure positive results of public corporations activity and to reduce risks, it would be expedient:

- clearly define the role and authority of each corporation in the implementation of government policy, set up restritions in terms of irrational expansion of their responsibilities;

- develop individual strategies and programs of their development, evaluation procedures to assess their effectiveness and expediency;

- ensure the balance between flexibility in expenditures and transparency in decision-making process, procedures of government and public control, transparency of performance;

- implement the factor of personal responsibility of the corporations' managers for the results of their activities;

- in view of public nature of the corporations' objectives, expand the supervisory board with the popular and reputable representatives, who are not the staff members of any state power authorities or management structures of public companies;

- arrange regular public (independent) audit of the corporations performance results and submit relevant reports to the RF President, RF Federal Assembly and the RF government;

- provide more clearl definitions of the terms and objectives of the public corporations establishment at the level of federal law;

- prior to any corporation establishment, set up as a mandatory requirement to provide the strategy for its activities, justification of inability to meet the targets by other means, risk assessments and propose mechanisms of their reduction;

- basing on the best practice, substantially expand and introduce detailed provisions in the articles of the Law on Non-Profit Organizations, related to the public corporations, paying special attention to the issues of corporate decision-making, control functions over other business entities, interaction with public authorities, accountability and transparency of activities, corporations' management responsibility for performance results, procedures on reorganization and liquidation.

5.3. Seizure and Reserving of Land Plots by the State

73

The problem of compulsory seizure, by the State, of land plots from their owners, possessors and leasers - private persons is presently one of the most acute, in view of the growing number of big public and private projects requiring the attraction of additional resources, including land.

It is rather obvious that the necessary precondition for the State's successful activity in this sphere is the existence of an adequate balance between public and private interests, which can be achieved only in the presence of the following conditions:

- transparency of the State regulation of the grounds for and procedures of seizure;

- a limited list of grounds for seizure of land, and their concrete character;

- true opportunities for receiving, within a minimum period of time, of compensation for a seized land plot and the losses thus incurred, calculated on the basis of property's market value;

- true opportunities for recalling the unlawful decisions and provisions adopted by officials;

- efficient administrative control, with bringing the officials making decisions in the domain of seizures of land plots to responsibility for their violations and misdeeds.

Today there exists quite an impressive number of legal and other problems associated with seizures of land by the State, which hinder the realization of public interests with due regard for the rights and interests of private persons, as well as for the land market's development and its participants, while at the same time being conducive to an increasing number of violations in the domain of granting and seizing of land plots.

5.3.1. Vagueness of the Rights of the State and the Rights of Owners, Possessors and Leasers of Land Plots in the Domain of Seizures of Land Plots for State or Municipal Needs, and Reserving of Land

The practices of arbitration in respect of seizure of land for public or municipal needs cannot as yet be regarded as widespread. However, the high percentage of disputable legal relations arising in connection with this issue in Moscow is quite noteworthy, which has been largely associated with the high concentration of capital and high profits from the use of land there, as well as better developed land and urban development regulations and the availability of "shadow services market". Most of these factors are also operative in Sochi, where the preparations for the Olympic Games are currently under way.

The existing vagueness of law in the domain of seizure of land for state and municipal needs has been induced by several factors. The currently adopted version of the RF Land Code envisages a whole range of circumstances to serve as the grounds for seizure of land for state or municipal needs. These can be the land plots needed for the fulfillment of RF international obligations (Item 1 of Article 49 of the RF LC), for the construction of various objects: the federal power supply system, transport systems, municipal systems for the supply of electric energy, gas and water, motor roads, bridges and other transport engineering structures, etc.

73 Seizure of land in this case in understood as enforced termination of both property rights and the right of permanent (or in perpetuity) use of a land plot, the right of its inheritable possession for life, the right of lease, and the right of uncompensated fixed-term use of a land plot.

(Item 2 of Article 49 RF LC). It would be impossible to dispute the necessity of placing such objects and the associated seizure of land plots; however, in order to protect the rights of owners and possessors of land, it seems equally necessary that the responsibility of RF bodies of state authority and of those of RF subjects to publish no later than one year in advance their decisions and plans in respect of seizure of land should be legislatively consolidated. The owners and possessors of land plots should be endowed with the right to dispute such decisions not only in connection with their disagreement and the size of compensation to be paid, but also with the absence, in their opinion, of the necessity to adopt a specific decision resulting in the termination of the rights to a land plot. Such suits (or complaints) can be collective.

One should also note here the possibility to seize land in cases connected with "other circumstances" which, depending on land being federal or municipal property, or property of a RF subject, can be established by federal laws or laws of RF subjects (Item 3 of Article 49 of the RF LC). In fact, this means that the State has virtually unlimited opportunities for introducing any new grounds for seizure of land, if this decision is going to be consolidated by a federal law or a law of a RF subject. This situation is contrary to the conditions consolidated by those same lawmakers in Part 1 of Article 49 of the RF LC, which stipulates that seizure of a land plot for state or municipal needs represents an exception, that is, under a general rule such seizures should be avoided.

Similar legal norms, which envisage as the grounds for seizure of land "other cases envisaged by federal laws", are consolidated as the grounds for compulsory termination of the rights to land (Subitem 7 of Item 2 of Article 45 of the RF LC) and the termination of the rights of lease on a lessor's initiative (Subitem 7 of Item 2 of Article 46 of the RF LC), and have been introduced by Federal Law of 18 December 200, No 232-FZ. Thereby extremely comfortable conditions have been created for finding solutions to the problems faced by the State at different levels. However this vagueness, no doubt, is generally conducive to a lower degree of protection of the rights of owners, possessors and leasers of land plots, because it makes their position highly vulnerable and dependent on officials, who presently only rarely are brought to responsibility for violations committed in the domain of land's granting and seizure.

The grounds envisaged for seizure of lands for state or municipal needs, from May 2007 onward, have become identical to those for reserving land plots being owned or utilized by

74

physical or juridical persons . Federal Law No 69-FZ on reserving, adopted as of 10 May

75

2007 . does not contain any of the provisions regulating the order and procedure for reserving land plots, which were suggested by the RF Ministry of Economic Development and Trade. This Law simply stipulates the possibility, per se, of limiting some of the rights of owners, users, possessors, and leasers of land plots (the right to erect dwellings, production, cultural-domestic, and other buildings, as well as the right to conduct irrigation, drainage, crop-engineering, and other soil conservation work, construct ponds and other similar objects (Subitem 2.3 of Article 56.1, and Article 40 of the RF LC), and consolidates several fundamental provisions concerning the reserving of land. Thus, the reserving of a land plot can serve as the grounds for a refusal to grant land to the ownership of persons (Item 4 of Article

74 For the lands in state or municipal ownership, which are not used by any persons, a broader list of grounds for the reserving of lands and a longer period of reserving are envisaged.

75 Federal Law "On introducing changes into individual legislative acts of the RF in the part of establishing the procedure for reserving lands for state or municipal needs".

28 of the RF LC). The maximum period of reserving cannot exceed 7 years in respect of lands being in state or municipal ownership and not granted to citizens and juridical persons; in certain cases, the 20-year period of reserving is applied (Item 3 of Article 70.1 of the RF LC). Besides, the reserving of lands is allowed in the zones of planned placement of capital construction objects for state or municipal needs (Item 2 of Article 70.1 of the RF LC). For example, in Moscow the possibility of this type of reserving of land (including with subsequent seizure) with the purpose of placing capital construction objects has been introduced by the City Government's Decree from April 2007, in connection with acute shortage of construction sites76. The possessors of land plots will be offered a compensation; its size, however, will be determined by experts appointed by government officials.

The procedure itself for the reserving of lands for state or municipal needs must be determined by the government (Item 4 of Article 70.1 of the RF LC), and so far it has not been regulated in legislative terms. The approved legal norms, in contrast to those formulated in the draft law, envisage lesser limitations of rights as a result of reserving; however, it seems unjustified to have introduced reserving for purposes of "placement of capital construction objects". This has to do with the fact that, according to Director of the Federal Agency for Construction and Utilities S. Kruglik, the deficit of housing alone in Russia in 2006 was 1.6 billon

77

sq m, while the construction rate amounted to 43.5 million sq m per year . In order to provide solution to this problem, it is necessary to keep building millions of square meters of dwellings, in all the regions across the country, for several decades to come. If the solution is to be sought by means of seizure of the lands owned by persons, or granted to them for possession and use, this may become a mechanism for an administrative redistribution of the rights to land. Besides, the absence, in the law, of a mechanism for reserving has given rise to a high degree of vagueness in this sphere, which can be overcome only by consolidating, at the level of the RF Government, a coherent and transparent reserving procedure.

In June 2007, the period for presenting a suit for purchase of a land plot for state or municipal needs was extended from 2 to 3 years, to begin from the moment of sending to a land plot's owner a notification concerning the adopted decision with regard to the seizure of land (Article 282 of the RF Civil Code (CC))78. By the same law, the RF Civil Code was augmented by a norm prohibiting for the possessor of a land plot being held by right of its inheritable possession for life, to dispose that land plot, except in the event of the rights being passed as an inheritance (Article 267 of the RF CC).

In addition to the specified grounds for seizure of land as such, the very notion of "state and municipal needs" has become a problem that may give rise to numerous violations. In actual practice, as, for example, stipulated in a regulation issued by the Moscow City Government, state and municipal needs can be recognized as follows: the need to prepare the blueprints for and the construction of a mountain ski park; the need to prepare the blueprints for and the constriction of a trade and entertainment center by a private person; and the creation of other objects recognized as necessary for the implementation of the state target pro-

76 Decree of the Government of Moscow "On the interaction between bodies of executive authority of the City of Moscow in respect of issues relating to seizures of land plots", of 10 April 2007, No. 257-PP.

77 The deficit of housing in Russia at the present moment amounts to approximately 1.6 billon sq m // www.nevastroyka.ru, 13 March 2006.

78 Federal Law of 26 June 2007, No. 118-FZ, "On introducing changes into legislative acts of the RF in the part of bringing them in conformity with the RF Land Code".

grams adopted by the City of Moscow (Articles 4, 32 of the Law of the City of Moscow of 14 May 2003, No. 27, "On the Land Use and Urban Development in the City of Moscow".

Target programs have various goals, they can be adopted in any number and touch upon any rights and interests. The available sources cannot provide adequate information as to their exact total number. Consequently, due to the vagueness of the notion of "state and municipal needs", it can be interpreted broadly, and so RF subjects may adopt by-laws specifying more grounds than envisaged in the Land Code. If can be reasonably anticipated that in the nearest future the list of "municipal" needs necessitating seizure of lands will become much longer, as result of bodies of local self-government having been granted the rights to conclude contracts on the development of a built-over territory.

In this connection, a precise definition of the notion of "state and municipal needs", coupled with the abolition, in respect of seizure of land, of all the norms concerning "other circumstances" and "other cases" envisaged in federal laws, would be conducive to far lesser opportunities for officials to make arbitrary decisions in the domain of seizure of land, as well as better protection of the rights of owners, possessors and users of land.

5.3.2. Expansion of the Powers of State Bodies in the Domain of Land, in Absence of Efficient Mechanisms for Administrative Control

The newly introduced procedure for reserving of land envisages that, from May 2007 onward, the rights to reserving land belong both to federal bodies of state authority and the bodies of state authority of RF subjects, as well as to bodies of local self-government (Articles 9 - 11 of the RF LC, in the wording approved by Federal Law of 10 May 2007, No. 69-FZ79). In order to effectuate control over the activity of bodies of local self-government in the domain of seizure and reserving of land, federal authority has transferred to bodies of state authority of subjects of the Russian Federation the powers to control the compliance of bodies of local self-government with legislation on urban development (Item 1 of Article 6.1 of the RF Urban Development Code, in the wording approved by Federal Law of 18 December 2006, No. 232-FZ).

One of the mechanisms for controlling the activity of bodies of state authority and local self-government in this domain was to become, from 1 January 2008 onward, the responsibility to make decisions concerning seizures of land plots for state or municipal needs, as well as reserving of lands exclusively on the basis of territorial planning documentations approved by the RF Government (Item 4 of Article 9, and Article 11 of the RF Urban Development Code; Article 3 of Federal Law of 29 December 2004). Nevertheless, the entry into force of this provision, which was to be effectuated in May 2007, has been delayed until the approval of territorial planning documents, but no later than until 1 January 2010. Until that moment, the temporary procedure for coordinating the draft boundaries of the zones for planned placement of capital construction objects of federal, regional or local importance, envisaged in Article 3.1 of Federal Law of 10 May 2007, No. 69-FZ80, is to be complied with.

79 Federal Law "On introducing changes into individual acts of the RF in the part of establishing the procedure for reserving lands for state or municipal needs".

80 Federal Law "On introducing changes into individual acts of the RF in the part of establishing the procedure for reserving lands for state or municipal needs".

Beginning from January 2007, the bodies of local self-government have been granted the right to make decisions concerning the development of a built-over territory, which can be initiated by a body of state authority of a subject of the Russian Federation, by a body of local self-government, or by a physical or juridical person on the basis of an urban development regulation, as well as local norms for urban development projects (Item 2 of Article 46.1 of the RF Urban Development Code), with the concluding of a contract concerning the development of a built-over territory with the winner in an open auction.

Due to absence of a specified notion of "municipal needs", it can be stated with a high degree of probability that the land included in the contracts concerning the development of a built-over territory will, in fact, be seized, that is, the development of territories will actually be carried out by means of redistributing the existing rights of ownership, possession and use of land.

Besides, the State has attempted to transfer the rights of managing and disposing of federal lands (when they are not being used by citizens and juridical persons) to RF subjects, by

means of incorporating such agricultural lands into the boundaries of inhabited localities for

81

purposes of developing housing construction and building objects of social infrastructure . On the whole, this initiative should be estimated as positive; however, the period of one and a half years for executing such legal powers - from 1 May 2007 to 1 November 2008 - is, perhaps, acceptable for administrative purposes, but is clearly insufficient for implementing large-scale projects. The side effect of this innovation has been the implementation of those projects that require the clearing of neighboring land plots. Resulting has been the seizure of the land plots being used by private persons and situated along the boundaries of federal lands.

On the whole, the distribution of powers between state bodies of different levels in the domain of seizure of land, considering the fact that a considerable portion of lands are still not subdivided into those belonging to the federal level, the level of a RF subject, or the municipal level (which represents the grounds for the functioning of a given body), so far has not been adequate for efficient decision-making in respect of the State's goals of ensuring lawful and justified seizure of land. This can be explained both by the vagueness of the definitions of those land objects in respect of which such powers must be executed and by the lack of efficient mechanisms for administrative and judicial control over the legal acts being adopted by the bodies of authority of RF subjects and municipal entities, which quite often contrary violate the lawful rights and interests of the owners and possessors of land plots.

5.3.3. The Problems Faced by Owners, Possessors and Users of Land when Receiving Compensation for a Seized Land Plot, as well as for the Losses Incurred as a Result of Seizure of Land

Although the responsibility of the State to compensate in full for the losses resulting from the violation of rights of owners, possessors, users and leasers of land, including lost advantage, is consolidated by the Land Code (Item 1 of Article 62), and Article 63 the Land Code established guarantees of related rights in an event of seizure of land plots for state and

81 Article 3.2 of Federal Law of 25 October 2007, No. 137-FZ (as amended on 1 December 2007) "On the enactment of the RF Land Code".

82

municipal needs , in actual practice it is rather difficult to obtain the compensation for a seized land plot.

Quite often it happens so that the bodies of authority of RF subjects or municipal bodies of authority issue unlawful orders aimed at terminating the right of ownership, possession, or lease of land in an enforced procedure, in absence of the owner's consent and without complying with the conditions stipulated in the law.

Thus, for example, in the city of Moscow a decision was made to terminate the lease contract in respect of a land plot with a leaser who owned the building situated on that land plot, in order to grant the rights to the land plot to another person who was going to design and build a trade and entertainment center there. In this connection, the order of the Moscow Government contained a stipulation concerning the demolition of immovable property without granting to its owner a preliminary compensation of an adequate size, in violation of Articles 235, 239 of the RF CC, and of Article 35 of the RF Constitution. The representatives of the bodies of state authority, in substantiation of this order, pointed to the absence, in the document, of any stipulations as to an uncompensated seizure of land, while saying that the disputed resolution "regulates the preparation and making of the urban development documentation necessary for adopting the decision concerning construction, and points to the submission of the initial permitting documentation". In their opinion, from this it followed that no compliance with the requirements of the law in the part regulating the procedure for seizure of land was required. However, by decision of the Moscow Arbitration Court as of 20 February 2007 in respect of case No. A-40-75225/06-152-3 73, the Moscow Government's order was deemed to be null and void, and this decision was left without alterations by the appellate and cassational instances.

In December 2007 in Moscow, the City Urban Development Code was once again approved in the first reading. The Code is designed to unify several dozens of the existing city laws. Repeated declarations had been made as to the imminent adoption of the Urban Development Code; however, the rapid changes in federal legislation and the problems associated with the need to coordinate regional interests were hindering the smooth passing of the document.

Another "disguised" method of seizure of a land plot, which is being applied in actual practice, is the issuance by municipal bodies of an order envisaging the termination of the rightper se of permanent (or in perpetuity) use of a land plot. In this connection it often happens so that this issued legal act violates the compulsory procedure for terminating the right of use of land established by the RF Land Code( Article 45, 54). One example is the Decree of the FAC of the Far-Eastern Okrug of 6 November 2007 in respect of case No. F03-A51/07-1/4389.

82 Article 63 of the RF Land Code consolidates the following guarantees of the rights to land during the seizure of land plots for state or municipal needs:

- granting, prior to seizure (or purchase), in accordance with the desire of the persons from whom land plots are seized (including by purchase), of land plots of equal value;

- effectuation of seizure of land plot after compensation of the value of dwelling, production, and other buildings, structures, and installations situated on the land plots being seized, including lost advantage.

Besides, to the owner of a land plot being seized for state or municipal needs, together with these guarantees, the market value of that land plot must be compensated, unless a land plot of equal value was granted to him free of charge in ownership (Item 4 of Article 63 of the RF LC).

From February 2007 onward the losses incurred in connection with the issuance of an unlawful legal act in the domain of land relations are to be compensated not by the state body that had issued such an act, but by the RF Treasury (Article 61 of the RF LC, as amended by Federal Law No. 21-FZ of 28 February 2007).

One more difficulty in receiving compensation for a seized land plot, which may arise in some instances, is the contesting, by a state body, of the very fact of lawful possession of a land plot. In an event of the recognition of such a fact, an enterprise will be deprived of the right to receive any payments in connection with the seizure of land. Such a situation is associated with the existence of a considerable quantity of lands being used by enterprises and organizations by right of permanent (or in perpetuity) use, or of uncompensated fixed-term use. In order to confirm the fact of their lawful possession of land, the enterprises sometimes are forced to recall the "history of a land plot" from the 1960s and until the present time, and to prove numerous facts of legal succession (for example, Decree of the FAC of the Moscow Okrug of 19 October 2007, No. KG-A40/8939-07-1,2 in respect of case No. A40-68387/06-17-460). All this significantly complicates and lengthens the procedure for receiving compensation, and sometimes makes it altogether impossible, because any gaps and formal inconsistencies in the "history" may be used as grounds for recognizing the fact of unlawful possession of land and, as a consequence, the absence of any rights to receive compensation for its seizure.

Besides, the State has adopted norms designed to limit the rights of private persons in the domain of obtaining fair compensation in an event of seizure of a land plot. Thus, for example, from 1 January 2008, when lands are seized for state or municipal needs, their owners, possessors, users and leasers will receive no compensation for loss of agricultural production (Item 4 of Article 32 of the RF Land Code, in the wording approved by Federal Law of 18 December 2006, No. 232-FZ). The seizure of agricultural lands is currently being done rather actively, in connection with the expansion of the boundaries of cities and megapolises, the latter being very willing to develop the territories formerly belonging to collective and state farms.

The size of compensations for loss of agricultural produce, according to some estima-

83

tions, were considerable , and the procedure for obtaining them very difficult. This was conducive to efficient protection of agricultural lands from seizure for state needs. In Krasnodar Krai, the agroindustrial complex represents the foundation of the region's economic potential,

84

and in the region of Sochi there still exist agricultural zones . But in Moscow, for purposes of building social infrastructure objects, the land plots of former collective and state farms are being actively developed.

5.3.4. The Introduction of a Special Procedure for Seizure of Land Plots in Krasnodar Krai in Connection with the Conduct of the Olympic Games in the City of Sochi

Today, one of the most vital problems in the domain of land relations is represented by seizure of land in Krasnodar Krai in connection with the construction of sports facilities for

83 Kommentarii k st. 58 Zemel'nogo kodeksa RF. See: Kommentarii k Zemel'nomu kodeksu RF s postateinymi materialami i sudebnoi praktikoi. [Commentary to Article 58 of the RF Land Code. See: Commentary to the RF Land Code, with materials to each Article and judicial practices] / Ed. by S. A. Bogoliubov // www.garant.ru.

84 www.sochiadm.ru.

the Olympic Games in the city of Sochi. In December 2007, Federal Law of 1 December

85

2007, No. 310-FZ , was adopted, which determined, among other issues, also the special procedure for seizure of land. It is envisaged that, when lands are seized in order to build thereon the facitilities for the Olympic Games, the norms stipulated in the Land Code are applicable only when not otherwise determined by the Law on the organization and conduct of the Olympic Games.

The newly adopted law introduces in Krasnodar Krai, for the period from 1 January 2008 until 1 January 2012, a different procedure for seizure of land, which envisages the minimum periods for effectuating each phase of the procedure of seizure. Thus, the timeline for the notification of a seizure is 7 days from the moment of making the related decision (under the RF Land Code - 1 year); for the publication of the decision concerning reserving/seizure - 7 days from the moment of it being made (there is no corresponding norm in the RF Land Code); for concluding a contract with a valuer - 7 days from the day of making the decision concerning seizure; for preparing a draft agreement and acquainting with it the person from whom a land plot is being seized - 20 days from the day of receiving the resolution concerning evaluation (no such provisions concerning timelines exist in the Land Code, either) (Items 18-24 of Article 15 of Federal Law No. 310-FZ).

The evaluation of the land plot to be seized and the losses thus incurred is to be made by a valuer, the contract with whom will be concluded by the Administration of Krasnodar Krai and the State Corporation "Olimpstroi" (Item 21 of Article 15 of Federal Law No. 310-FZ). No timelines are established for the payment of compensation for a seized land plot, although the RF Land Code allows the seizure of a land plot for state needs only after the granting, at the wish of the persons from whom seizure of land plots is being made, including by purchase, of land plots of equal value, and the compensation of the value of dwelling, production, and other buildings, structures, and installations situated on the land plots being seized; and compensation of losses in full, including lost advantage (Item 1 of Article 63 of the RF LC). However, neither the preliminary granting of a land plot of equal value, nor the preliminary compensation of losses is envisaged in the "Olympic Law".

The only way for the owner and for some categories of possessors of land to avoid its seizure would be the financing and construction, on their own, of a facility intended for the Olympic Games on their land plots (Item 2 of Article 15, and Item 15 of Article 14 of Federal Law No. 310-FZ). The idea itself and conditions to be complied with in this connection appear to be bizarre, at the very least.

Besides, such decisions concerning the seizure of land in Krasnodar Krai are not subject to State registration by the agencies responsible for the registration of the rights to immovable property, which in the whole territory of the RF represents a compulsory condition for the transfer of rights to immovable objects and the transactions involving such objects.

In an event of disagreement of an owner or possessor of land with the proposed conditions of seizure, within two months from the day on which he was notified of the forthcoming seizure of land, the Administration of Krasnodar Krai or a body of local self-government have the right to appeal to a court of justice with a suit in respect of seizure of each of the land plots and (or) the immovable objects situated on them (Item 31 of Article 15 of Federal Law No.

85 "On the organization and conduct of the 22nd White Olympic Games and the 11th Paraolympic Games - 2014 in the city of Sochi, the development of the city of Sochi as a mountain climate health resort, and the introduction of changes into individual legislative acts of the RF".

310-FZ). In this connection, the judicial decision concerning the seizure of land plots and (or) the immovable property objects situated on them is subject to immediate execution (Item 33 of Article 15 of Federal Law No. 310-FZ). In other words, while the owner or possessor of a land plot is appealing for the recall or alteration of the judicial decision rendered, his land plot will be kept in the ownership of the federal authorities or the authorities of a RF subject and being used by them in accordance with the plan of preparations for the Olympic Games for building sports facilities. Given such circumstances, it would be naive to hope for a recall of the judicial decision and a reorganization of the seizure of the land plot on conditions differing from those that have been initially consolidated.

As for the effectuation proper of the payments of compensation for the land plots being seized, these will be made by either the State Corporation or by the organizations carrying out the construction of objects for the Olympic Games (Item 32 of Article 15 of Federal Law No. 310-FZ). The procedure for concluding agreements as envisaged in the law is such that both the State Corporation and the construction organizations may initiate the lowering of the value of purchase, while the owners and possessors of land have no such opportunities.

From all the aforesaid it follows that the necessary condition, on which the adequacy of the compensation for the land plots being seized and the associated losses is going to depend, will be efficient administrative control, to be effectuated by the Government alone. The law does not provide for any mechanisms to ensure the protection of the interests of owners and possessors of land, nor for any mechanisms to prevent violations on the part of the officials on whose decisions will depend the determining of the market value of land, the method of evaluation, the procedure for paying compensation, the procedure for granting another land plots in lieu of those being seized, or the settlement of some other issues. The legal regulation of the seizure of land in Krasnodar Krai is organized in such a way that the owners, possessors and leasers of land enjoy only minimum opportunities for influencing the situation in an event of any unjust (in their opinion) decision being made. The shortened periods for nearly all the phases of the procedure of seizure of land are not conducive to improving the situation, either. The powers to seize and reserve land plots in federal ownership have been granted to the Administration of Krasnodar Krai, thus making it possible, when necessary, to shift the political responsibility for possible violations of civil rights onto the authorities of a RF subject.

The necessity of making decision in an operative fashion in respect of the preparation for the Olympic Games has been the reason for adopting legal norms that ensure the priority of public interests, while ignoring private interests in the domain of seizure of land. According to First Vice Governor of Krasnodar Krai Alexandr Remezkov, a total of more than 3,000 land plots will be seized in order to place, in the city of Sochi, all the planned sports facilities for the 2014 Olympic Games86. As declared by General Director of the Sochi-2014 Organizing Committee D. Chernyshenko, the seizure of lands in the city of Sochi is a "concocted, purposely overblown problem, in order to serve some other interests". Besides, he noted that he expected few scandals in connection with seizures of lands, because "95% of the territories intended for construction belong to the State, and therefore, in principle, the field for conflict

86 Vstupil v silu osobyi poriadok iz"iatiia zemel' pod ob "ekty 0limpiady-2014. ["The special procedure for the seizure of lands for objects intended for the 2014 Olympic games has come into force"] //www.rosbaltsouth.ru, 01.01.2008. 512

87

is very small . It is noteworthy that the possession and/or use of the majority of land plots in Russia is based on the right of permanent (or in perpetuity) use of a land plot, the right of its inheritable possession for life, the right of lease, and the right of uncompensated fixed-term use and lease. In all these instances, the rights of ownership most often belong to the State. The right of ownership of land in this case cannot be applied as a valid criterion for determining the scope of potentially conflict-mongering legal relations in the domain of seizure of land plots. Besides, the following question would be quite logical to ask: if the share of deals potentially fraught with conflict is indeed as small as pointed out by the director of the Olympic Committee, why was it necessary to introduce in Krasnodar Krai such a tough administrative procedure for purchasing land, with no regard for the interests of its owners, possessors and leasers?

Such arguments on the part of the Sochi-2014 Organizing Committee's General Director are, most probably, associated with the fact that the State will be striving to purchase only

88

the land in private ownership . As for the lands in permanent (or in perpetuity) use, in inheritable possession for life, and in uncompensated fixed-term use and lease, these will be seized with the granting of other land plots, with their possessors and users being deprived of the right of choice of a land plot (Item 30 of Article 15 of Federal Law No. 310-FZ).

According to the data presented by Minister for Regional development D. Kozak, "it is planned to settle the issue of formalizing the land plots for the construction of 216 Olympic objects". As can be judged by the preliminary data, this will involve 4,200 hectares of land, of these more than 3,500 hectares being in state or municipal ownership, and 679 - in that of private persons and juridical entities. In February 2008 the Administration of Krasnodar Krai must conduct full inventory of lands. Besides, according to the Minister, everything will be done in order to ensure the protection of the rights of citizens, while the purchase of lands from citizens will be effectuated "at a fair market price", the control over this procedure being

89

executed by the State Corporation "Olimpstroi" .

In all probability, the special mechanisms for seizure of land envisaged in the aforesaid law will be very attractive for regional and municipal authorities. In March 2008 the Commission for Urban Development under the Moscow City Duma approved the draft amendments to Article 49 of the Land Code submitted by Moscow Mayor Yu. Luzhkov. The main purpose of this draft law is to extend the list of cases when the authorities will be allowed to seize land plots from their owners. At present such a seizure can be possible only when performing the tasks assigned to the federal level (the construction of power plants, national defense and security objects, transportation routes; the use of nuclear energy; and protection of the state border.). The amendments proposed by the Mayor of Moscow envisage more grounds for seizure of land: the necessity to construct "objects of social infrastructure", including multi-storied apartment buildings, while the construction will be funded from the federal budget, the budget

87 Chernyshenko: problema iz"iatiia zemel' v Sochi "nadumana". ['Chernyshenko: the problem of the seizure of lands in Sochi is a "concocted" one' // Ekho Moskvy [The Echo of Moscow] / www.gazeta.ru, 03.10.2007.

88 Thus, the law envisages that, in an event of concluding an agreement concerning seizure of land, the provision as to the buyout price of the land plot and/or of the immovable objects situated on it shall be compulsory only if "the land plots and (or) the objects of immovable property situated thereon are in private ownership" (Subitem 1 of Item 25 of Article 15, No. 310-FZ).

89 Kozak: vykupat' zemliu v Sochi budut "po spravedlivoi rynochnoi tsene. [Kozak: land in Sochi will be bought out "at a fair market price" //www.rosbalt.ru, 05.02.07.

of a RF subject, or local budget90. In fact, this means the creation of a "simplified" scheme for the seizure of a land plot as a general rule, including under an existing residential building and for new construction, including for commercial use. The possibilities for obtaining a fait market price and ensuring the judicial protection of the residents being evicted (the owners of dwellings) will thus become very slippery, while the status of a social dwelling can easily be

forfeited. Evidently, no more comments are needed.

* * *

Thus, some conclusions can be drawn. The latest changes introduced in state regulation in the domain of seizure and reserving of land are aimed at creating mechanisms for large-scale redistribution of ownership and other rights to land both between different levels of authority and between private persons and the State. In this connection, the powers in the domain of seizure and reserving of land have now been granted to state bodies of all levels, which corresponds to the scope of the problem. However, due to a variety of factors (lack of efficient mechanisms for judicial and administrative control in respect of seizures of land, corruption, and the limitations and gaps existing in state regulation), fertile ground has been provided for misdeeds and violation of the rights of private persons in favor of public interests, or interests disguised as such.

One of the reasons for the emergence of this situation have been the list of the grounds for seizure of land for state and municipal needs, as determined by the RF Land Code, which can be interpreted broadly and grants to the State and to RF subjects the right of unlimited extension of this list. Actually, no one is speaking any more of the minimum necessary violation of private rights by the State; the current legal regulation of this issue allows for the State to impinge on private rights and interests at the levels of federal and municipal authorities, as well as at the level of a RF subject, without any risk of being brought to responsibility for such actions. Given these conditions, operative economic issues will be settled to the detriment of the development of the institution of private property and other rights of possession and use, as well as to the detriment of the of the constitutional rights of the citizens of Russia.

Thus, the most important conditions for improving the efficiency of the State's activity in this sphere are as follows:

- the consolidation, in the RF Land Code, of a final list of grounds for seizure of land for state and municipal needs, with no possibility of its broader interpretation;

- the adoption, by the RF Government, of such a procedure for reserving of lands that will require the verification of the grounds for making such a decision at the federal level;

- strengthening of the supervision, by the federal government and procuratorship bodies, over the adoption, by RF subjects and municipal bodies, of legal acts concerning the reserving and seizure of land plots, and the introduction of measures aimed at their abolition or at bringing them in conformity with federal legislation;

- the introduction, into the RF Land Code and the RF Government's Decree concerning the reserving of lands, of norms envisaging preliminary publication of the plans for reserving and seizure of lands at the level of a RF subject or a municipality, as well as the consolida-

90 See Kommersant. 2008. 5 March. 514

tion of the possibility to appeal against the decisions concerning planned seizure and reserving;

- the introduction, into the Land Code, of the notion of "state and municipal needs", without any possibility of its broader interpretation;

- the adoption of measures aimed at preventing violations in the domain of seizure and granting of land plots, including misdemeanors in office;

- promotion of the process of delimitation of lands, as a factor conducive to the execution, by state bodies of different levels, of their powers in respect of land;

- the adoption, for purposes of it being applied by arbitration courts and courts of general jurisdiction, of an explanation of the procedure for establishing the fact of lawful possession of a land plot, which will recognize, as the sufficient and necessary proof of the possession and use of land, the acts adopted by bodies of state authority, contracts and other documents issued to persons in accordance with the law, say, after 1990; this will make it unnecessary, for persons, to recall and substantiate the lawfulness of their rights of possession and use of a land plot since the 1960s, thus limiting the opportunities for depriving, on formal grounds, the owners and possessors of land of compensation for seized land;

- the adoption of measures aimed at ensuring the purchase of land by municipalities and RF subjects;

- the adoption, at the federal level, of a decree consolidating the evaluation of lands in Krasnodar Krai on the basis of its market price, with ensuring adequate control over its implementation, as well as allocating the funds necessary for the payment of compensations.

5.4. Russia's Housing Market

In 2007, the national market for housing found itself affected by alternate factors of socio-economic development.

On the one hand, as in the past years, GDP was likewise growing at a high (8.1%) rate, while investment posted yet a greater (20%) growth rate, the budgetary system remained stable, foreign investment and capital continued to pour in, and the net value of the latter proved to be record-breaking. The population's welfare was on the rise, which was evidenced by growth in real disposable incomes (up 10.4%) and real salaries and wages due (up 16.2%). These favorable developments were propelled by the growing export proceeds in forex equivalent, as the price for Urals on the world market was soaring practically during the whole year, with short breaks in August and December.

On the other hand, however, financial stability was challenged by a clear acceleration of inflation rates on the consumer market, which became particularly notable between the late summer and early spring. As a result, it became evident by the end of the year that the annual inflation rates had accelerated for the first time since the late-1990s. In the late-2007 Russia's economy began to sense echo from crisis developments in the world economy, which manifested themselves in the decline of stock market indices and some tightening of the consumer loan and mortgage conditions for the population.

Meanwhile, the country held stability and a relative predictability on the domestic political arena, which helped maintain a generally favorable background for the economy on the whole, including, in particular, behavior of players on the real estate market.

5.4.1. Price Situation: Main Outcomes of 2007

The general characteristic of the situation on the housing market is reflected by the data of Table 16, which presents the value of the average specific offer price for apartments in Russian cities in the late 2004, 2005, 2006 and 2007 (in USD equivalent) calculated by data provided by the certified RRG real estate market analysts91.

Table 16

Dynamic of the Average Specific Apartments Offer Price in 2004-2007

USD/ sq.m_Index

City (region) December 2004 December 2005 December 2006 December 2007 December 2005 to December 2004 December 2006 to December 2005 December 2007 to December 2006 December 2007 December 2004

Moscow* 1,953 2,658 4,828 5,429 1.361 1.816 1.124 2.780

St. Petersburg* 1,083 1,180 2,593 3,200 1.089 2.197 1.234 2.955

Yekaterinburg 882 1,062 2,415 2,615 1.204 2.274 1.083 2.965

Moscow oblast** 908 1,121 2,522 2,536 1.235 2.250 1.006 2.793

Novosibirsk 748 1,012 1,658 2,350 1.353 1.638 1.417 3.142

Perm 680 882 1,430 2,258 1.297 1.621 1.579 3.321

Tyumen 864 1,600 2,192 1.852 1.370

Krasnodar* 720 790 1,370 2,088 1.097 1.734 1.524 2.900

Krasnoyarsk 763 842 1,115 2,016 1.104 1.324 1.808 2.642

Ufa 766 997 1,729 2,000 1.302 1.734 1.157 2.611

Yaroslavl 566 876 1,758 1,910 1.548 2.007 1.086 3.375

Kemerovo 1,369 1,883 1.375

Izhevsk 663 982 1,837 1,865 1.481 1.871 1.015 2.813

Tver 542 688 1,370 1,833 1.269 1.991 1.338 3.382

Rostov-on-Don 656 830 1,385 1,770 1.265 1.669 1.278 2.698

Ryazan 993

Penza 480 536 890 1.117 1.660

Ulyanovsk 405 486 859 1,243 1.200 1.767 1.447 3.069

Petropavlovsk* 595 711 952 1,128 1.195 1.339 1.185 1.896

Sterlitamak (Bashkor- 867 927 1.069

tostan)

Shakty (Rostov oblast) 480

* - Cities where prices are quoted in USD.

** - The average weighted specific offer price for apartments across 100 locations (cities and settlements), in USD equivalent.

91 The authors' calculations are based upon monthly data on the average specific housing offer prices in Russia's cities presented by certified by the Russian Realtor Guild analysts of the real estate market: Lutskov V.M, Kazimir L.M. (ACC of MIEL holding), Sternik S/G. (Sternik's Consulting Ltd.), independent analysts Beketov A.G., Sapozhnikov A.Yu. (all from the city of Moscow and Moscow oblast); Khorkov M.A., Antasyuk A.A., Tukhasvili G.T. (all - RITS-UPN, Yekaterinburg), Stepanova A.A. (SAN Expert, Ufa), Cheremnykh A.M. (UK Assa-Stroy, Izhevsk), Smelov P.L., Vysoskaya T.V. (Sibakademstroy Nedvizhimost), Ermolayeva E.A. (Rid Analitics) (all Novosibirsk), Troshina V.M. (CG LEX, Tyumen), Chumakov A.M. (Titul), Proskurin E.A. (Yugro) (all Rostov-on-Don), Davletshina R.M. (Perspektiva-Konsalting), Epishina E.D. (all Perm), Kaminsly V.N. (TITAN, Tver), Blinkov S.V.(IKPKG "Zhilye"), Kalinina E.V. (Megapolis-Nedvizhimost) (all Penza), Yarsina N.A. (Tsentr nedvizhimosti), Isaeva M.A. (Zolotoy Klyuch) (all Ulyanovsk), Eydlina G. Yu. (Rielti, city of Shakty, Rostov oblast), Reshetnikov M.A. (Agentstvo "Maximum", Tomsk), Trushnikov AV. (B.I.N.-Expert, Sterlitamak), as well as analysts who are currently undergoing the certification procedure: Zyryanova G.N. (Kuz-bassInveststroy, Kemerovo), Burmakina E.V., Churinova I.V. (AREVERA) (all Krasnoyarsk), Afanasyeva N.N. (Adalin-Expertiza nedvizhimosti, Yaroslavl). The analysts provided the data in the currency typical of their respective cities' markets. In addition, the authors employed official data on the average monthly USD rate, inflation, and other macroeconomic indicators published by CBR of RF. 516

So, according to the 2007 results, the greatest price rise rates for housing (over 1.5 times) were noted in Krasnoyarsk (at 81%), Perm (58%), Krasnodar (52%), followed by the group of cities where the price rise increment over the year was in the range between 30 and 45%: those were Ulyanovsk (at 45%), Novosibirsk (42%), Tyumen (42%), Kemerovo (7.5%), Tver (34%). All other cities of the sample (Table 16) posted the price rise under 30%, while in Moscow oblast's cities and Izhevsk price levels appeared just slightly different from that of December 2006. In 2007 to 2006 the price rise slowed down in most cities, except for Krasnoyarsk, while the slowdown in prices in Perm proved to be symbolic (58% in 2007 vs. 62% in 2006).

Meanwhile, it is worthwhile to note that despite the deceleration of the 2007 price rise rates for housing in most cities, in the city of Moscow prices exceeded USD 5,000/sq.m., in St. Petersburg - USD 3,000/sq.m., in a group of cities (Perm, Tyumen, Krasnoyarsk, Tyumen, Novosobirsk, Krasnodar) - 2,000/sq.m., and in Ulyanovsk and Petropavlovsk-Kamchatsky - 1,000 USD/sq.m. In Yekaterinburg, the price level for housing began to overrun the Moscow oblast ones, while the situation had been opposite in the past three years.

All the cities of the sample can be split into four groups by the nature of the price dynamics in USD equivalent:

1) cities where prices were stable from the early 2007, i.e. they fluctuated insignificantly relative to December of the prior year (or even declined), with a growth noted over recent months: the city of Moscow, Moscow oblast, Yekaterinburg, Izhevsk, Yaroslavl;

2) cities where prices were on the rise in the beginning of the year, followed by their stabilization: Ulyanovsk, Ufa, Sterlitamak, Tyumen, Petropavlovsk-Kamchatsky;

3) cities where prices were on the rise in the beginning of the year, followed by their stabilization and consequent growth renewal: St. Petersburg, Novosibirsk, Rostov-on-Don, Tver, Perm, Krasnodar;

4) cities that displayed a price rise: Krasnoyarsk (where prices posted an extraordinary rise).

In terms of the three year (2005-07) interval, prices more than tripled in Tver, Yarso-lavls, Perm and Novosibirsk; rose at 2.9-3 times - in Yekaterinburg, St. Petersburg, and Krasnodar; 2.8 times - in Izhevsk; 2.7-2.8 times in the city of Moscow and Moscow oblast; 2.6-2.7 times - in Rostov-on-Don, Krasnoyarsk, and Ufa; finally, less than doubled - in Petropavlovsk-Kamchatsky.

Whilst considering real (less inflation effects) housing prices, a particular attention should be paid to the dynamic of main macroeconomic indicators. Last year, consumer prices rose at 11.9%. The December 2007 average nominal USD/Rb. rate was 24.57 vis-à-vis 26.29 Rb. in December 2006. So, the 2007 USD/Rb. depreciation index accounted for 0.935, which means appreciation of the Rb. towards USD. Accordingly, the USD inflation index in Russia made up 1.197. The USD continued to depreciate in Russia, and its 2007 purchasing power sank roughly to the same degree as in 2006 (over 16%). On the three-year interval of 2005-07, the Rb /USD depreciation rate was 0.88, while the USD inflation index - 1.537, and the USD purchasing power dropped nearly at 35%.

As concerns the index of real (cleared from inflation of the both currencies) prices for housing (the IGS index92), its final values by 2005, 2006, 2007, as well as 2005-2007 relative to December 2004, across cities of the sample are given in Table 17.

City (region)

Table 17

Dynamics of the Average Specific Apartments Offer Price in 2004-2007

_Nominal price index_IGS index_

<Ü <Ü <Ü

° ° ° ^ „ o o o ^

74 74

3 ^ £ *Ti 3 v© 2 2 S * 3 *Ti £ 22

Ö O O OO Ä Ä Ä OO

£ ® ft® ft®

§<N g<N g<N i. i. g<N g<N g<N i. i.

Sfc Sfc Sfc ££ Sfc Sfc Sfc ££

Si.fi Sifi Sifi CS ^fi ^fi ^fi SS

« ^ cc cc

-as -as -as gg -as -as -as gg

ES ES ES ** ES ES ES **

^ ^ ^ QQ« « « OO

Li Li Li ^^ ^^ Li Li Li ^^ ^^

Moscow 1.361 1.816 1.124 2.780 1.265 1.520 0.939 1.809

St. Petersburg 1.089 2.197 1.234 2.955 1.013 1.838 1.031 1.923

Yekaterinburg 1.204 2.274 1.083 2.965 1.119 1.903 0.905 1.929

Moscow 1.235 2.250 1.006 2.793 1.148 1.882 0.840 1.817

oblast**

Novosibirsk 1.353 1.638 1.417 3.142 1.257 1.371 1.184 2.044

Perm 1.297 1.621 1.579 3.321 1.205 1.356 1.319 2.161

Tyumen 1.852 1.370 1.550 1.145

Krasnodar* 1.097 1.734 1.524 2.900 1.020 1.451 1.273 1.887

Krasnoyarsk 1.104 1.324 1.808 2.642 1.026 1.108 1.510 1.719

Ufa 1.302 1.734 1.157 2.611 1.210 1.451 0.967 1.699

Yaroslavl 1.548 2.007 1.086 3.375 1.439 1.679 0.907 2.196

Kemerovo 1.375 1.149

Izhevsk 1.481 1.871 1.015 2.813 1.376 1.566 0.848 1.830

Tver 1.269 1.991 1.338 3.382 1.179 1.666 1.118 2.200

Rostov-on-Don 1.265 1.669 1.278 2.698 1.176 1.396 1.068 1.755

Penza 1.117 1.660 1.038 1.389

Ulyanovsk 1.200 1.767 1.447 3.069 1.115 1.479 1.208 1.997

Petropavlovsk- 1.195 1.339 1.185 1.896 1.111 1.120 0.990 1.234

Kamchatsky

Sterlitamak 1.069 0.893

(Bash-

kortostan))

As evidenced by data of Table 17, the greatest real price rise rates for housing in 2007 were registered in Krasnoyarsk (over 1.5 times, followed by Perm (a. 32%), Krasnodar (over 27%), and Ulyanovsk (some 21%). The respective rates in Novosibirsk, Kemerovo, Tyumen, Tver, Rostov-on-Don, and St. Petersburg were under 20%, with St. Petersburg showing the most moderate price rise rate (3%). Meanwhile, there is a big group of cities whose real housing prices (inflation-adjusted) were on the decline - Moscow, Yekaterinburg, Ufa, Yaroslavl, Izhevsk, Petropavlovsk-Kamchatsky, and, finally, Moscow oblast where the IGS index value was the smallest one and roughly matched that of Izhevsk (0.84-0.85). Meanwhile, it should be noted that 2007 became the first calendar year out of the three-year interval of 2005-07 when the real housing prices were down.

92 The IGS index is calculated by the following formula: IGS=Itsr/Iir=Itsd/Iid, where Itsr - Rb. denominated housing price index, Iir - consumer price index, Itsd - USD denominated housing price index, Iid = Iir/ Idrd -index of the USD inflation in Russia (relative to the consumer price dynamics), Idrd - Rb. depreciation against USD index. 518

Overall, by results of the noted three years the peak values of IGS index (between 2 and 2.2) were noted in Tver, Yaroslavl, Perm, and Novosibirsk. They were a bit lower (between 1.9-2.0) in Ulyanovsk, Yekaterinburg and St. Petersburg, while in Krasnodar, Izhevsk, the city of Moscow and Moscow oblast they accounted for a. 1.8, and in Rostov-on-Don, Krasnoyarsk and Ufa - between 1.7 and 1.8. It was Petropavlovsk-Kamchatsky where the real housing price rise rate was the slowest one (just slightly over 1.2 times).

The process of appreciation of the Rb. over recent years has made it appropriate to reference the data on housing prices in Rb. equivalent and compare the dynamics of price rise indices in USD with those in Rb. equivalent (Table 18). As a reminder, out of all the cities presented in the sample it was only three of them (Moscow, St. Petersburg, and Krasnodar), and Moscow oblast (due to its immediate proximity to Russia's capital) that have still stuck to the USD price quotations.

Table 18

Comparative Dynamics of the Average Specific Apartments Offer Prices in USD and Rb. Equivalents in 2007

USD/sq.m. Rb/ sq.m.

City (region) December 2006 December 2007 December 2007/December 2006 December 2006 December 2007 December 2007/December 2006

Moscow 4,828 5,429 1.124 126.93 133.01 1.048

St. Petersburg 2,593 3,200 1.234 68.17 77.76 1.141

Yekaterinburg 2,415 2,615 1.083 63.51 64.06 1.010

Moscow oblast 2,522 2,536 1.006 66.3 62.13 0.937

Novosibirsk 1,658 2,350 1.417 43.59 55.0 1.262

Perm 1,430 2,258 1.579 36.61 54.87 1.499

Tyumen 1,600 2,192 1.370 42.00 53.72 1.279

Krasnodar 1,370 2,088 1.524 36.02 50.74 1.409

Krasnoyarsk 1,115 2,016 1.808 29.31 54.29 1.852

Ufa 1,729 2,000 1.157 45.85 49.00 1.069

Yaroslavl 1,758 1,910 1.086 46.22 46.83 1.013

Kemerovo 1,369 1,883 1.375 36.00 45.76 1.271

Izhevsk 1,837 1,865 1.015 49.00 45.70 0.933

Tver 1,370 1,833 1.338 36.02 44.91 1.247

Rostov-on-Don 1,385 1,770 1.278 36.41 41.00 1.126

Ulyanovsk 859 1,243 1.447 22.58 30.55 1.353

Sterlitamak (Bashkortostan 867 927 1.069 22.8 22.72 0.996

As in the case of IGS index, atop of the group of the leading cities in terms of the Redenominated price rise for housing were Krasnoyarsk (1.85 times), Perm (1.5 times), and Ulyanovsk (at 35%). In Tyumen, Kemerovo, Novosibirsk and Tver, the price rise was within the range between 24 and 28%, in St. Petersburg and Rostov-on-Don - 10 and 15%, while the value of the index in Ufa, the city of Moscow, Yaroslavl and Yekaterinburg was under 7%. Finally, in Moscow oblast, Izhevsk and Sterlitamak the housing prices were down in absolute terms.

The price dynamics in Rb. equivalent displayed dynamics slightly differing from those in forex equivalent:

1) the first group (the city of Moscow, Moscow oblast, Yekaterinburg, Izhevsk, Yaroslavl) was also joined by St. Petersburg, while the dynamic somewhat changed, that is, the prices were stable and even declined in absolute terms (in Moscow oblast and Izhevsk);

2) the second group (Petropavlovsk-Kamchatsky, Ufa, Tyumen, Ulyanovsk, Sterlitamak) was joined by Rostov-on-Don, and the level of price rise indices declined;

3) the third group (Novosibirsk, Tver, Perm, Krasnodar) lost St. Petersburg and Rostov-on-Don that had moved to the first and second group, respectively;

4) the fourth group remained unchanged (Krasnoyarsk).

The above data evidence that after a rapid price rise in 2006 the housing markets in Russia's cities have stabilized, by and large, in 2007: stabilization was noted in the beginning of the year in the city of Moscow, Moscow oblast, Yekaterinburg, Izhevsk, and Yaroslavl, while in other cities (except for Krasnodar and Krasnoyarsk) stabilization occurred between May and June. Meanwhile, the length of stabilization was between 3-4 months and 10 months (the city of Moscow) and even 12 months (Moscow oblast, Izhevsk, Yaroslavl). Some cities (Moscow, St. Petersburg, Perm, Novosibirsk, Tver, Rostov-on-Don), as well as Moscow oblast, underwent a new price rise in the autumn 2007.

The causes for stabilization were already partly considered in some papers published

back in 200693.

The main cause was that after prices had skyrocketed in the previous 2-3 years buyers, whose savings proved to be insufficient to purchase housing (particularly with a mortgage back-up), were ultimately off the market.

Main peculiarities of the 2007 housing price dynamics were as follows:

- some differences in the dynamic and amount of the price rise in Rb. and USD equivalent driven by the Rb. appreciation against USD (at 9.4% as of the end-year);

- an additional fall in the value of the real price increment (exclusive of inflation of the Rb. and USD) vis-à-vis nominal prices in conjunction with a sudden rise in consumer prices (at 12% as of the late-2007);

- substantial differences in terms of moments of the start and length of stabilization and, consequently, between final values of annual price increments across different cities.

While the first two causes are considered in every possible detail in the frame of the analysis of macroeconomic indicators and indices of real (exclusive of inflation) housing prices (Table 17), the last one can be explained while examining price dynamics in the medium- and long-term retrospective.

5.4.2. Regularities of the Advancement of the Housing Markets of Russia's Cities in the Medium Run

In 2005-07, the housing markets of Russia's cities witnessed a regular price rise cycle, which resulted in doubling and tripling offer prices (between 2.6 and 3.4 times). Considering results of the past three years, the sample of cities presented in Table 1 can be broken into two subgroups: (1) Tver, Yaroslvl, Perm, Novosibirsk, and Ulyanovsk where prices more than tri-

93 Sternik G.M. Tseny predlozheniya zhilya v gorodakh Rossii v 1990-2006 godakh: analiz i prognoz. -www.realtymarket.ru, January 2007. Malgynov G.N., Sternik G.M. Rynok zhilya//Rossiyskaya ekonomika v 2006 gody. Tendetsii I perspektivy (Issue 28). M., IET, 2007, p. 694-727. 520

pled; and (2) Yekaterinburg, St. Petersburg, Krasnodar, Izhevsk, the city of Moscow and Moscow oblast, Rostov-on-Don, Krasnoyarsk, and Ufa, where prices grew 2.6-3-fold94.

The price rise was noted in all these cities/ regions, albeit it appeared dysinchronous: during the first calendar year (2005) the increment rate varied from 9% (St. Petersburg) to 55% (Yaroslavl), while that over two years (2005-06) - between 46% (Krasnoyarsk) and 211% (Yaroslavl), and over three years (2005-07) - between 161% (Ufa) and 238% (Tver). Hence, the price dynamics over the three calendar years made it impossible to identify price rise regularities common for all the cities, thus necessitating an analysis of longer dynamic series.

The monitoring of housing conducted in Moscow since June 1990 and in other cities since 1992-99 provides an opportunity for an objective examination of the market's behavior on the basis of available dynamic series of the average monthly specific prices for apartments (Table 19).

Table 19

Stages of Advancement of the Housing Market in Capital Regions and Their Duration in 1990-2006

Name of the stage Moscow St. Petersburg Moscow oblast

1 2 3 4

Start and take-off June 1990 - December 1991 -

March 1995 May 1994

Stabilization April 1995 - June 1994 - December 1996 -

August 1998* October 1998** July 1998***

Crisis September 1998 - November 1998 - August 1998 -

June 2000 October 2000 December 1999

Post-crisis renewal July 2000 - November 2000 - January 2000 -

December 2001 January 2003 February 2002

Stabilization-2002 January 2002 - - March 2002 r -

August 2002 July 2002

Jubilee rise**** - February 2003 - -

August 2003

Oil-driven growth September 2002 - August 2003 - August 2002 -

June 2004 July 2004 September 2004

Stabilization-2004 July 2004 - July 2004 - October 2004 - September 2005

July 2005 July 2005***

Mortgage and oil- backed July 2005 - August 2005 - October 2005 -

growth June 2006 December 2006 September 2006

Transition to stabilization July 2006 - - September 2006 -

December 2006 December 2006

Stabilization-2007 December 2006 - December 2006 - December 2006 -

October 2007 March 2007 October 2007

94 Petropavlovsk-Kamchatsky is a particular case in this respect, as in 2005-07 the price rise rate there was under 1.9 times, which can be attributed to the fact that this city is located far from most of those presented in the sample.

Table 19 (continued)

1 2 3 4

Growth renewal October 2007 - March 2007 - October 2007 -

December 2007. December 2007. December 2007

Name of the stage Novosibirsk Yekaterinburg Tver

Start and take-off December 1991 - December 1991 -

June 1994 June 1994

Transition to stabilization July 1994 - -

July 1998

Stabilization-1997 December 1996 - - July 1994 -

July 1998 *** September 1998

Crisis July 1998 - August 1998 - October 1998 -

December 2000 June 2000 September 2000

Post-crisis renewal January 2001 - July 2000 - October 2000 -

December 2001 December 2001 April 2002

Stabilization-2002 December 2001 - January 2002 - May 2002 -

January 2003 August 2003 December 2003

Oil-driven growth January 2003 - September 2003 - January 2004 -

March 2005 December 2004 July 2004

Stabilization 2004-2005 March 2005 - January 2005 - August 2004 -

June 2005 March 2005 March 2005

Mortgage and oil- backed July 2005 - April 2005 - April 2005 -

growth June 2007 December 2006 December 2006

Transition to stabilization June 2007 - - -

September 2007

Stabilization-2007 - December 2006 - June 2007 -

December 2007 September 2007

Growth renewal September 2007 - - September 2007 -

December 2007 December 2007

Name of the stage Rostov-on-Don Perm Ulyanovsk

Stabilization-2002 December 2001 - December 2001 - December 2001 -

May 2003 November 2003 March 2003

Oil-driven growth June 2003 - December 2003 - March 2003 -

May 2004 February 2005 December 2004

Stabilization-2004-2005 June 2004 - February 2005 - December 2004 -

August 2005 August 2005 July 2006

Mortgage and oil- backed August 2005 - August 2005 - July 2006 -

growth March 2007 May 2007 April 2007

Stabilization-2007 March 2007 - May 2007 - April 2007 -

August 2007 August 2007 December 2007

Growth renewal August 2007 - August - -

December 2007 December 2007

Name of stage Izhevsk Yaroslavl Krasnodar

Stabilization-2002 December 2001 - December 2001 - October 2002 -

May 2004 December 2002 March 2004

Table 19 (continued)

1 2 3 4

Oil-driven growth May 2004 - December 2002 - March 2004 -

June 2005 July 2003 February 2005

Stabilization 2003-2005 June 2005 - July 2003 - February 2005 -

January 2006 December 2004 November 2005

Mortgage and oil- backed January-2006 - December-2004- November 2005 -

growth April 2007 December 2006 May 2007

Stabilization-2007 April 2007 - December 2006 - May 2007 -

December 2007 September 2007 July 2007

Growth renewal - September 2007 - July 2007 -

December 2007 December 2007

* - Fluctuating stabilization («with roll-back»). ** - Asymptotic stabilization («with crawl-up»). *** - Stabilization (with adjustment).

**** - The stage identified solely with regard to St. Petersburg, when during the period of preparation of celebration of the city's 300th anniversary the housing prices overshot expected values.

Data of Table 19 allow the conclusion that over 16 years of the contemporary history of the market clearly splits into two stages, so far as the housing price dynamics are concerned. The first stage (since June 1990 through June 2000) accounts for 10 years for Moscow and 89 years for other cities. The second stage has now been in progress in Moscow for more than 7 years already and over 6 years in other cities. The first decade of the legal estate market involved the market's start and take-off, transition to stabilization, which was followed by the 1998-99 crisis. In mid-2000, when the housing market hit the bottom in the wake of the August 1998 crisis, the first stage of the unstable, fluctuating advancement of the market was over. Over the next 7 years and until now the market has witnessed a constant price rise, with its rates fluctuating occasionally (up to a complete stabilization).

Meanwhile, like the city of Moscow and Moscow oblast, other cities also passed through roughly the same stages: the start and take-off of prices (until 1995), stabilization (though 1997), crisis (until 2000), post-crisis renewal (until 2001), stabilization-2002, the oil-driven growth, stabilization in 2004, mortgage and oil back-upped growth of 2005-06, transition to stabilization (the late 2006), stabilization of 2007, and the start of a new growth. All the cities displayed the following peculiarities:

- asynchronous beginnings and ends of individual stages;

- some peculiarities in the way individual stages developed.

Below we provide charts of price indices in the cities of the samples relative to December 2001 (Fig. 1). They show that over the first three years (2002-04) the price indices accounted for 2.0-2.3, while over six years (2001-2007) - 5.0-6.0.

Fig. 1. Housing Price Indices in Moscow and Russia's Cities by December 2001

The above curves allow one to identify a regularity in common for all the cities, that is, the price rise persisting since 2001.

Another regularity of the long-term development of the price situation on the regional markets is engendered by their asynchronous progress, namely, at the beginning of each stage of growth, as regions lag behind the capital locations in terms of the start of price rise, there occurs fractionation of price trends (divergence of the curves). The first case was noted for the periods of 1990-95, 1998-99 (under the price downfall) and is seen on the graph on the summer-to-autumn 2003, on the autumn 2005 and on the late-2007 intervals; the second case - in 1996-97, on the late 2000 - the early 2001, on the early 2005, and on the late 2006 intervals. During the periods of the greatest market fractionation, the value of correlation between the peak and minimum price rise indices accounted for: in June 2004 and October 2006 - 1.8-1.9, while in the periods of the greatest consolidation: in June 2005 and December 2007 - 1.2-1.3.

In the late-2007, there once again occurred consolidation of the trends, which testifies to the general start of a new stage of growth in the price rise rates for housing in Russia's cities. The data show that a long-term price rise on developing markets is wavelike, rather than sustained. It is accompanied by cyclic fluctuations of monthly growth rates between zero and 1012%, whose period accounts for 2.5-3 years. During a year prices begin to grow, pass the peak of their growth rates and once again stabilize, while over a given period prices grow 2.53.5 times.

Such a behavioral pattern is explained primarily by an intense backwardness of offer from the aggregate effective demand - a phenomenon characteristic of developing markets. Given that Russia's population needs housing badly, in the conditions of a sustained rise in effective demand it is possible to avoid next doubling and tripling of prices only under a considerable boost given to the volume of housing construction, placement of new housing in operation and a far greater offer on the market, which necessitates the government's targeted efforts.

5.4.3. Housing as the National Priority Program

The year of 2007 saw implementation of the national project entitled "Affordable and comfortable housing to the citizens of Russia" in progress. According to preliminary data, new 60.4m sq.m. of housing were put in operation in 2007, which is 19.4 up vs. 2006 (Table 20). These figures also overrun the 2005 increment of (16%). Overall, as many as 714 Thos.-plus apartments were built in 2007.

Table 20

Placement of New Housing in Operation in Russia in 1999-2007

Year

M. sq.m. of housing

Growth rate, %

To the prior year

To 2000

1999 32.0 104.2 105.6

2000 30.3 94.7 100.0

2001 31.7 104.6 104.6

2002 33.8 106.6 111.5

2003 36.4 107.7 120.1

2004 41.0 112.6 135.3

2005 43.6 106.3 143.9

2006 50.6 116.0 165.7

2007 60.4 119.4 199.3

Source: Rosstat, the authors' calculations.

In all, the 2007 housing sector's performance appears fairly impressive - more specifically, the annual growth rates of placement of new housing in operation have accelerated over the past two years; the actual output (56.3m sq.m.) overrun the planned results; the volume of housing placed in operation practically doubled vis-à-vis the 2000 bottom point and nearly hit the values of registered in 1990 (67.1m sq.m.)95. In contrast to 2006, individual developers posted an advanced growth rate (nearly 29%) of placement of new housing in operation, which enabled them to increase their share in the overall volume of placement of new housing in operation up to 42.6% vs. 39.5% reported in 2005-06. The implementation of the program of house building for the military jointly funded by the federal and regional budgets (each providing Rb. 15 bn. in targeted allotments) in Moscow, Moscow oblast, St. Petersburg, Leningrad and Kaliningrad oblasts has also been a success.

Given all the success in implementation of the national housing project, it should be emphasized that the pace of placement of new housing in operation slowed down in 2007: in the 1st quarter the volume of house construction grew over 1.5 times, by results of the 1st half year - by some 35%, between January and September - less than by one-third (all vs. the respective periods of 2006). The final 2007 increment fell short of hitting 20%, or proved to be roughly at 10% less than originally expected96.

Such a situation can be explained by two factors. On the one hand, happy with the 2007 results, government may be interested in having certain reserves that would ensure a positive dynamic in 2008. On the other hand, the 2007 stabilization of housing prices after their rapid

95 At this point, it should be noted that the 1990 values were not record-breaking, as in 1988 the respective result was 72.3 m. sq.m, and in 1989 - a. 71m sq.m.

96 In mid-January 2008, at a meeting in Tyumen on the national project implementation in Ural Federal Okrug D. Medvedev informed that the envisioned 2007 result in house-construction was to be 66 m sq.m.

rise in 2006 meant that the previous catalyst of house construction has been lost. That is why one is unlikely to expect a price downfall due to the slowdown of rates of growth in offer.

Production of construction materials progressed in 2007 across the overwhelming majority of items. Meanwhile, there still persist notable imbalances between the output of ceramic and sanitaryware items, which exceeded the 1990 level, on the one hand, and the output of other construction materials, which remained at a level lower than those of 1970 and 1975.

This can be exemplified by cement production. In 2007, its volumes grew at 9.4% and finally overrun that of 1970, but they still are far inferior to their 1980 and 1990 levels. Meanwhile, it was cement prices that were growing at an advanced rate last year. According to the Rosstat's official data, in December 2007 they grew at more than 70% vs. December 2006, thus setting a record compared to other construction materials. The same situation was

97

noted in 2006, but the price increment was under 25% .

Such price rise rates demand for adoption of a special sector development sub-program, which includes establishment of 50 new cement plants (construction of 14 of which is in progress already), allocation of raw materials sites, a free relocation of cement and specialized transport, and activation of private-public partnership mechanisms. The government, of course, is in possession of such standard market mechanisms as the customs and antitrust

98

regulation, which presently have proved to be clearly insufficient .

In addition to problems of provision of the house-building sector with resources and development of its material and technical base, the list of urgent problems includes allocation of sites for construction and making housing genuinely accessible for citizens. Only 8 regions voluntarily and in full honor their obligations with regard to allocations of sites under construction, while most construction projects are in progress on the sites developers had received prior to introduction of legal provisions that require their compulsory assignment by auctions' results.

As concerns accessibility of housing, in its recent report, the Duma Committee for industry, construction and science-intensive technologies argues that the 2005-2006 price rise for housing at 20% exceeded the growth rate in citizens' average incomes99. Huge groups of the population have found themselves in between high requirements to the current income level and financial sufficiency the mortgage procedures demand, on the one hand, and tightening requirements to the possibility for getting an apartment from the state under a typical queue for improvement of the housing conditions.

Plus, the official statistics report that the number of families (including the singles) that received housing and improved their housing conditions is on the decline. Thus, in 2006, i.e. after the start of implementation of the national projects, there were 139,000 of such families (or 4% of those considered to be in need for housing) against 151,000 in 2005 (in 2000, there were 253,000 of such families). In parallel with that, there was noted a drastic reduction in the

97 Sotsialno-ekonomicheskoye polozhenie Rossii, 2007 god. M., Rosstat, p. 176. Some experts even greater figures. Thus, while addressing the International Investment and Construction Forum, Mr. N. Koshman, President of the Association of Builders of Russia (ABR) maintained that cement prices grew at 140% and predicted in 2008 they would soar up to Rb. 10,000/t. see: A. Demin. Naraschivaem temp. In: Rvartirny ryad, 29 Nov. - 5 Dec. 2007, No. 48 (671), p. 10. The ABR head earlier referenced the price rise for 1 t. of cement from Rb. 1,139 in January 2006 up to 7,000 in the autumn 2007. see: Tsementnaya stradatelnaya. In: Kvartirny ryad, 4-10 Oocto-ber 2007, No. 40 (663), p.1.

98 Domnin S. A. "Evrocement" slushaet, da tseny povyshaet. In: Kvartirny ryad, 14-20 Feb. 2008, No. 5 (680), p.1.

99 Domnin S. Rano otbivat ladoshi. In: Kvartirny ryad, 4-10 Oct. 2007, No. 40 (663), p.10.

number of families listed in such queues, which can be attributed to the promulgation of the new Housing Code. In 2005, the respective figure fell by 19% and by another 8% - in 2006. In all fairness, it should be noted that this tendency appears characteristic of all the period of market reforms, but it had been smoother before100. More specifically, the contraction in the number of citizens lining up for the state-granted housing in 2005-06 proved to be greater than in the four prior years (2001-04).

As in the first year of the national project implementation, the attempt to ensure accessibility of housing for a broader array of citizens likewise implied bolstering the mortgage system. By the autumn 2007 the government had succeeded to slightly lower mortgage interest to 11-11.5% (vs. 12% reported in 2006)101 and to increase the loan term up to 16.3 year (vs. 13.8% in the late-2005). The mortgage program was granted the budgetary support totaled Rb. 260bn in 2006 and Rb. 206 bn. in the 1st half 2007102

But in the summer 2007 the mortgage crisis in the US regalvanized earlier cited great doubts of adequacy of this particular instrument to Russia's current realities. The US mortgagers' mass refusals to repay their loans triggered liquidity shortages in the US banking sector, which until then had been a major source of funding for mortgage loans in Russia, as it had disbursed loans to the Russian banks, who had gladly capitalized on the opportunity to compensate for the lack of a huge volume of long money in the country. As a result, the banks cracked down on mortgagers, including tightening their solvency procedures and suspending programs for those of them who fell in the bracket of highly risky ones. Many banks abandoned zero-purchase-money programs and slightly raised their interest rates.

At the end of 2007 experts voiced up preliminary losses the Russian mortgage system suffered due to the US subprime market crisis. Thus, Ms. T. Nikitina, Director General of the International Real Estate Mortgage Academy noted a 7-fold fall in the increment rate of mortgage contracts vs. 2006. According to Mr. A. Skomorokhin, Director General of KUI "Yamal", the system was running short of some USD 2bn, which axed the number of potential mortgagers at 50-100,000. Mr. V. Belov, Director General of "Fousborne Home" company, argued that the rise in interest rates or discontinuation of delivery of this kind of financial services affected banks that had been holding some 23% of the market, while average weighted interest rates soared by 0.2% in USD and 0.7% in Rb.

Given the above, the impact of the US subprime mortgage crisis on Russia's housing situation should not be overestimated, as the role the instrument plays in the country has been quite limited so far (the volume of mortgage loans in Russia accounts under 1% of GDP, while in the US it is over 50% of GDP). Most players have maintained that the US crisis would exert its adverse effect on Russia for no longer than 6-9 months. For example, Mr. A. Pechatnikov, VTB-24's Director for Mortgage Loans, believes that the 2008 growth of the market for mortgage loans should make up not less than 80%, while Mr. V. Gasyak, Deputy

103

Chairman of the Board of Home Credit bank trusts it should be not les than 50% . A survey conducted by Romir holding found that 3% of respondents were keen to seek a mortgage loan over next two years, while another 2.5% of them expressed this desire, but have not decided for sure as yet. So, the potential demand for mortgage loans is estimated at the level of 1.6-

100 Rossiysly statistichesky ezhegodnik. 2007: Stat.sb/Rosstat. M., 2007, p. 219.

101 The announced rates, as a rule, do not contain additional costs and commission fees.

102 Glan I. Nespetaya pesnya Minregiona. In: Kvartirny ryad, 4-10 Oct. 2007, No. 40 (663), p. 10.

103 Domnin S. Ne tak strashen chert.... In: Kvartirny ryad, 20-26 Dec. 2007, No. 51 (674), p. 1.

2.8 m pcs., while in 2007 alone banks disbursed just slightly over 400,000 mortgage loans104. Their estimated aggregate volume was some Rb. 538 bn (vs. 56 bn in 2005 and 263 bn in 2006105).

However, another view on the problem is cited more often, namely, the mortgage interest rate fails to help secure accessibility of housing, while mortgage formed one of the factors that contributed to the price rise for it. Housing prices can be to a far greater extent influenced by subsidies, stimulation of developers, lower costs for access to the engineering infrastructure, and, of course, the volume of market offer. There arises the problem of designing alternative to the classical mortgage mechanisms that would ensure access to housing, such as the social lease and saving-and-loan cooperatives and banks.

In contrast to the past years, the law that regulates the housing market did not see any novelties comparable, in terms of their effect, with Federal Act No. 214-FZ of December 30, 2004 "On participation in the shared construction of apartment houses and other real estate objects", though, naturally, there were individual amendments to the Urban Development Code, legislation on mortgage, registration of property rights, etc.

The notorious investors' honoring their obligations before private investors is no longer in the center of attention, as new challenges arose. According to the Moscow Town Hall, there were 3,371 deceived private investors in the city. Authorities expressed their intention to provide citizens suffered from the "construction pyramids" with apartments as early as in 2008, providing those who had invested in several apartments would be granted with just one106. The federal center did not do anything in this respect at all. Certain hopes to overcome negative effects from the Act on shared construction are laid upon Act No. 315-FZ of December 1, 2007 "On self-regulating organizations", albeit it is going to take a lot of time to restore confidence in such forms of investing.

As far as the regional aspect in house building is concerned, it should be emphasized that nearly all the regions reported greater volumes of placement of new housing in operation, except for Ivanovo and Murmansk oblasts, Chechnya, Kamchatka and Chukotsly Autonomous Okrug (AO). By contrast, kaluga, Yaroslavl, Samara and Irkutsk (including Ust-Ordynsky Buryatsly AO), as well as Adygeya, boast the respective index being over 1.5 times greater than in 2006.

Out of 17 regions presented in the sample given in Table 16 in 8 ones the 2007 rate of placement of new housing in operation was greater than the average nationwide figure (Krasnodar, Perm and Krasnoyarsk krais, Yaroslavl, Ulyanovsk, Rosotov, Sverdlovsk and Kemerovo oblasts). Meanwhile, in 8 other regions (Moscow, St. Petersburg, Moscow, Tver oblasts, Bashkortostan, Udmurtia, Tyumen and Novosibirsk oblasts) the respective figure sank below the average nationwide one. It was the city of Moscow that reported the smallest figure (1%), while in the other "capital regions" the situation was far more favorable - the index was 17% up in Moscow oblast and 11% up - in St. Petersburg. In Kamchatka, it plummeted well

107

below 50% of the prior year's index .

104 Narod k ipoteke ne gotov. In: Izvestiya, 29 Feb. 2008, p. 11.

105 The figures are cited from the address by Mr. D. Kozak, the RF Minister for Regional Development, at a meeting of the Council for the Priority National Projects Implementation of 28 Dec 2008. See: Kvartirny ryad, 612 Mar. 2008, No. 519 (684), p. 1.

106 Reshat problemy dolschikov. In: Kvartirny ryad, 1-7 Nov. 2007, No. 44 (667), p. 11.

107 Sotsialno-ekonomicheskoye polozheniye Rossii, 2007 god. Rosstat, p. 374-375.

Some deconcentration of house building in the capital region formed a distinguishing feature of 2007 (Table 21).

Table 21

Volumes of Placement of New Housing in Operation in Russia, the City of Moscow,

and Moscow Oblast in 1999-2007

Nationwide (Rosstat) Moscow (Rosstat) Moscow oblast (Rosstat) Total in Moscow and Moscow oblast

Year As % of the % от ввода As % of the

Thos. Sq.m Thos. Sq.m nationwide index Thos. Sq.m по России в целом Thos. Sq.m nationwide index

1999 32,017 3,052.5 9.55 2,728.6 8.5 5,781.1 18.05

2000 30,296 3,342.3 11.0 2,610.9 8.6 5,953.2 19.6

2001 31,703 3,690.6 11.65 2,827.8 8.9 6,518.4 20.55

2002 33,832 4,274.1 12.6 3,414.8 10.1 7,688.9 22.7

2003 36,449 4,443.0 12.2 4,114.8 11.3 8,557.8 23.5

2004 41,040 4,578.6 11.2 5,720.1 13.9 10,298.7 25.1

2005 43,560 4,648.5 10.7 5,296.5 12.2 9,945.0 22.8

2006 50,600 4,802.0 9.6 6,484.0 12.8 11,286.0 22.3

2007 60,350 4,827,7 8,0 7,586,6 12,6 12,414,3 20,6

Source: Rosstat, authors' calculations.

The city of Moscow's specific weight in the overall nationwide volume of house construction dropped by more than 1.5 p.p., to 8%, while the share of Moscow oblast remained practically unchanged. The 2007 aggregate specific weight of both regions ultimately made up 20.6%, while over the two previous years it was greater at 2 p.p. (for reference, in 2003-04 it was 23-25%).

Details of the dynamic of house construction in the city of Moscow and Moscow oblast are given in Table 22 below.

Table 22

Volumes of Placement of Housing in Operation in the City of Moscow and Moscow Oblast in 2000-2007

year By Moscow builders within the city of Moscow and outside it Moscow (Rosstat) Moscow (the city Town-hall's data) Moscow oblast (Rosstat)

Thos. Sq. % to the Thos. Sq. % to the Thos. Sq. % to the Thos. Sq. % to the

M. prior year M. prior year M. prior year M. prior year

2000 3,530.2 104.8 3,342.3 109.5 33,342.3 2,610.9 95.7

2001 3,821.5 108.3 3,690.6 110.4 3,706.1*# 110.9 2,827.8 108.3

2002 4,469.6 116.9 4,274.1 115.8 4,310.9* 116.3 3,414.8 120.7

2003 4,703.2 105.2 4,443.0 103.9 4,441.9* 103.0 4,114.8 120.5

2004 4,794.7 101.9 4,578.6 103.1 4,576.8* 103.0 5,720.1 139.0

2005 5,228.3 109.0 4,648.5 101.5 4,644.3 101.5 5,296.5 92.6

2006 5,318.4 101.8 4,802.0 103.3 4,804.5 103.4 6,484.0 122.4

2007 5,413.8 102.2 4,827.7 101.0 4,827.7 100.5 7,586.6 117.0

* - Built in the city of Moscow by local construction companies.

# - For 2001 there also is an estimation figure of 3,824.9 Thos. sq.m.; accordingly the growth rate vs. 2000 can be estimated at the level of 114.4%.

Source: Rosstat, authors' calculations.

As in the past three years, the 2007 showed that the volume of placement of housing in operation in Moscow oblast was greater than the capital city's respective indicator. The latter accounted just for 1%, or thrice as low as in 2006 and became the smallest figure since 2000.

529

It can be compared only with the 2005 results. At that time, as well as in 2007, construction companies headquartering in Moscow built a. 10% of housing outside the city. In Moscow oblast, the growth rate of house construction also proved to be smaller than in 2006 and 200204 and accounted for 17%.

Presently Moscow Mayor has set an ambitious goal to ensure a double reduction of the local queue for housing by 2010. During the past decade it accounted for some 180,00 families, many lining up for some 20 years. Given these figures, the task will inevitably demand for far greater volumes of housing needed for implementation of the city's housing programs. In 2008 alone, this volume should make up 2.5 m sq m., with the overall volume of placement of new housing in operation amounting to 5 m.sq.m. vs. 1.8 m sq.m. reported in 2006-2007. With the existing physical constraints facing the placement of new housing in operation in the city, an increasing role will be assigned to provision of housing under onerous conditions and through versatile beneficial arrangements, including housing purchases in Moscow oblast, among others.

5.4.4. Moscow City Mortgage Housing Market

An analysis of the emergence and advancement of the mortgage housing market (MHM) was conducted basing on the data of the respective operations by MIEL company on the Moscow city market108.

The volume of transactions involving apartment and the proportion of mortgage-based deals in their overall number formed the group of the MHM indicators. The general situation on MHM can be seen on Fig. 2.

Fig. 2. Dynamic of Mortgage Loan Parameters and Indicators of the Market for Mortgage Transactions of MIEL in 2002-2007

108 Sternik G.M., Korobkova M.V. et al. Rynok zhilya Moskovskogo regiona v 2005 g. Analiz i prognoz. -MIEL-Nedvizhimost, 2005; Sternik G.M., Korobkova M.V. Vliyaniye galopiruyuschego rynka zhilya na raz-vitiye ipoteki v Moskve. - Doklad na II Peterburgskom imptechnom forume 2 Mar. 2007. 530

As seen from the Fig. 2, MHM passed through the take-off stage (between 2002 and mid-2005), the stabilization stage (through mid-2006), and then entered the new stage of growth.

While the volume of the company's mortgage loan transactions grew 10-fold between 2003 and the 2nd quarter 2005), it consequently discontinued to grow and remained practically stagnant over the next four quarters. It renewed its growth in the 3rd-4th quarters 2006, and in the 4th quarter of the year overrun the level of the 1st quarter 2003 at 12.8 times.

The proportion of mortgage loan deals in the total volume of apartment sales also was on the rise until the 2nd quarter 2005 and reached 9%. Then it discontinued to grow for the next four quarters and even dropped slightly (to 6.9% in the 4th quarter 2005). It bounced back to its previous value in the 1st and 2nd quarters 2006, hit the level of 15.8% in the 3rd quarter and then 19% in the 4th quarter of the year.

MHM found itself affected by two groups of factors: on the one hand, those were conditions of the market for mortgage housing loans (MMHL) (banking interest rates, the amount of purchase money, loan term, and other peculiarities of banking mortgage programs); on the other hand, those were formed by the housing market (HM) per se, including price rise rates and dynamic, housing construction volumes, and volumes of offer of housing on the primary and secondary markets.

MMHL has recently advanced in the following manner.

In 2003, banks were keen to disburse serious money in loans and aggressively launched mortgage loan programs focusing on the population, but to no avail, as there was no radical growth in mortgage loan deals.

In 2004-2005, they continued to cut interest rates and to undertake other measures to improve borrowing conditions, and the population became increasingly keen to apply for the loans. Hence a greater volume of mortgage loan transactions and their greater proportion in the overall volume of apartment sales.

The situation nonetheless changed in the second half 2005: numerous banks argued that the number of actual mortgage deals in progress accounted just for 50-80% of the amount of approved loans, while the 2005 increment rate of newly registered loans was only 5.6%. In the circumstances banks significantly lowered their requirements to mortgagers, and some of them even zeroed the purchase money. However, no substantial changes took place on MHM until the autumn of 2006.

It should be noted that, concerned with the crisis on the US subprime market, since the summer 2007 Russian banks have finally tightened underwriting procedures, started raising the Rb.-denominated mortgage interest rates and even suspended disbursement of loans for a while. Thanks to CBR and the Mortgage Loans Agency's (MLA) vigorous actions on supporting the national banking system's liquidity, the US crisis had no contagion effect on Russia's mortgage system, and, together with the aforementioned negative consequences, has even exerted some positive influence on it.

The impact of factors associated with the situation on the housing market (HM) on MHM worth a good scrutiny.

As a reminder, during the phase of its emergence and development since June 1990 the Moscow city housing market passed through a number of stages: start and take-off (until the spring of 1995), fluctuation stabilization (through the autumn of 1998), crisis (until mid-2000), post-crisis renewal ((until the late-2001), stabilization (during most of 2002).

Between the autumn of 2002 and mid-2004 the market was being in the stage of the oil-driven growth. The average specific offer price for housing grew from USD 1,096/sq.m. in December 2002 up to 1,610 in December 2003 (47% up) and was climbing up hence for another half year (even after demand had begun to decline) and ultimately hit the level of USD 1,950/sq.m. At the time, the volume of mortgage sales was being practically stagnant through December 2003. It renewed only in the last two quarters, and the volume of the noted deals doubled over the half year.

The stabilization period had lasted for nearly a year - until mid 2005. During that period prices rose up to USD 2,142/sq.m. (at 10%), while volume of mortgage sales quintupled vs. the previous one. In mid-2005, there started a new stage of the HM's development, which can be tagged as the mortgage- and oil-driven growth. It was over in mid-2006, and by that time prices had surged up to USD 4,072/sq.m. (1.9 times), while the volume of mortgage sales was fluctuating around index 10.0 (to December 2002).

Research109 revealed that the deceleration of mortgage between the 3rd quarter 2005 and the 2nd quarter 2006 could be attributed primarily to a catastrophic scarcity of housing offer on the market and a consequent rapid price rise for housing. That resulted in sellers' refusing to deal with "mortgage" buyers and opting to conduct of a kind of auctions for buyers with cash at hand instead.

The situation further fueled the propelled price rise, which started in the summer 2005 (at a pace of 8-10% a month in the early 2006), which in turn formed yet a Chinese Wall to those who wished to apply for a mortgage loan: while they were dealing with a bank, a seller would raise the price, and a mortgage loan would fall short of securing purchase money.

The federal and regional tiers of the government, as well as operators on the house construction and sales markets, were at great pains to improve the situation on the market, and they ultimately succeeded, as the fall in offer of newly built housing had stopped by mid-2006. Meanwhile, there emerged factors that, since summer that year, began to fuel the volume of offer on the market - the slowdown of price rise rates on the secondary market compelled sellers to get back to the market, while investors decided to fix their profits, etc.

As a result, the pace of the price rise dropped from 8-10% in February and March to 6% in June and further down to 4% in July and August, 2% in October and 0% in December, while the volume of offer on Moscow's secondary market grew from 15-16,000 apartments in the period between June and July up to 23,000 in October and further up 30-31,000 in the period between November and December. By the late-2006 the market had entered the stabilization stage and prices had hit the level of USD4,828/sq.m. (up at 19%). Meanwhile, MHM saw the start of a new stage of growth, and the mortgage sales index soared to 12.5.

Thus the research demonstrated that the situation on a galloping real estate market has a substantial impact on the mortgage dynamic, volume and proportion of mortgage sales.

Fig. 4 shows that every stage of growth on the MHM market takes place during the stabilization stage on the housing market and, vice versa, at the beginning of the price rise stage the housing market sees discontinuation of growth in the number of mortgage sales.

109 Sternik G.M., Korobkova M.V. et al. Rynok zhilya Moskovskogo regiona v 2005 g. Analiz i prognoz. -

MIEL-Nedvizhimost, Moscow, 2005.

Fig. 3. Dynamics of the Volume of Offer and Prices on the Moscow Housing Market in 2004-07

Fig.4. The Apartment Offer Price Index in Moscow and the Index of Volume of Mortgage Sales (by the data of MIEL-Nedvizhimost) in 2002-2006

These processes, however, appear somewhat shifted in time: the start of growth in the volume of mortgage sales outpaces by 3-4 months the start of stability on the housing market.

That is why on Fig. 5 the curve of the volume of sales is biased forward for 3 months, and it is clear that the volume of mortgage sales changes in phase opposition to price changes on the housing market (the effect of some kind of "mortgage swing").

Fig. 5. The Apartment Offer Price Index in Moscow and the Index of Volume of Mortgage Sales (with a 3-month lag) in 2002-07

The study into statistical relation between monthly price increments on the housing market and monthly increments in the volume of mortgage sales allows one to build correlation as follows: in the period when the prices remain stable (monthly increment values account for +/-1%), the monthly increments in the volume of mortgage sales account for 5-10% on average (the dispersion of points being great - between -5% and 20%). When the pace of the price rise hits the level of 4-5% a month, the volume of mortgage sales discontinues to grow (the respective increment being in the range between -5% and 5%). Finally, under a price rise rate accounting for 7-8% and more, the volume of mortgage sales somewhat declines, with the monthly increment rates being within the range between 0 and -5%.

So, the main cause for MHM's behavior were changes in the situation on the housing market.

This regularity of the correlation between MHM and HM allows one to extrapolate forecasts of the price dynamics for housing calculated for Moscow since 1995 onto the mortgage sales market. The 2007-08 projection of the dynamic of housing prices in Moscow built in 2006 using the non-harmonic decomposition of the price trend110 implied stability of prices (with a possibility for a minor correction) in 2007 and transition towards a new stage of acceleration of the price rise rates in 2008. In conjunction with this, the analysts projected a rise in the volume of mortgage sales in 2007 and deceleration of their growth in 2008.

The year of 2007 showed that their projection was quite accurate for the first 10 months, with the renewal of the price rise noted only in the last 2-3 months of the year. As concerns accuracy of the forecast of the dynamic of MHM indicators, the results appeared ambiguous.

110 Sternik G/M/, Krasnopolskaya A.N. Metod negarmonicheskogo razlozheniya tsenovogo trenda-www. realty-

market.ru, July 2006.

The proportion of mortgage sales was on the rise, as predicted, but the total number of mortgage sales in 2007 displayedposted practically no rise, albeit the proportion of mortgage sales in the overall number of transactions continued to surge. These results require a more detailed examination.

As shown on Fig. 3, in March 2005, the total monthly offer volume of apartments in Moscow accounted for 36,000. That was the moment when demand began to grow, and by July 2005 the number of apartments plunged to 17,000, due to contraction in the time of exposition and "washing-out" of offer. The offer volume had held on this level (17,000-22,000 apartments) until August 2006, while falling down sometimes to 12-15,000. Then demand fell and the market saw the process of accumulation of unsold apartments, and by March 2007 the offer volume skyrocketed to an unprecedented level of 57,000. The offer prices were on the rise until the late-2006 and stabilized since then. Since April there was noted a gradual rise in demand and a new washing out of offer, because of which the offer volume plunged to 40,000 and, during the next two months when prices renewed their rise, further to 34-35,000 apartments.

So, the contraction in the volume of offer between mid-2005 and mid-2006, along with the acceleration of price rise rates, formed the main cause for the slowdown of growth in the number of mortgage sales. The consequent growth in the offer volume in the late-2006, even under the decline that started since the spring 2007, created conditions for an accelerated rise in the volume of mortgage sales. But such a such a rise did not take place in 2007.

Fig. 6 references data of the Moscow Division of the Federal Registration Service (DFRS) on the overall number of registered apartment sales on the local secondary market.

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Fig. 6. Dynamic of the Number of Registered Apartment Sales on the Moscow Secondary

Market for Housing in 2002-07

The data evidence that the volume of sales began to decline since 2005. More specifically, between October 2004 and September 2005 the average monthly volume was 6,680 deals, while over the next 12 months it made up 6,300 deals (down at 9.4%), and in the 12 months after that it plunged at another 9.2%. Underpinning the first fall (under a high demand) was scarcity (and even shortage) of offer, while demand dropped substantially in 2007, which fueled a further fall in the volume of sales. Now, basing on the same source, let us ex-

amine data on the volume of mortgage sales (Fig. 7). According to Moscow's DFRS, between the spring 2005 and the spring 2006 the number of registered (legitimate111) mortgage sales was being stable (some 500 a month). Since March 2006 it began to grow and climbed up to its peak (1,800) in September 2006, after which it was holding at the level of 1,000 to 1,100 until June 2007. The volume of mortgage sales had grown to 1,500 by September 2007. Such a dynamic can be easily explained by the already identified causes, namely, the shortage of offer between 2005 and the early 2006; the rise in the offer volume at the end of the year; a growing demand for mortgage in 2007, despite the overall fall in demand on the market.

Fig. 7. The Number of Registered Legitimate Mortgage Sales and Their Proportion in the Aggregate Number of Housing Sales in Moscow in 2005-07.

Because of the above, the proportion of mortgage sales in Moscow was on the rise: in 2005 it accounted for 5-10% a month, in 2006 - 15-17% (with the September peak of 33%), and in 2007 it hit the level of 18-24%.

So, the mortgage market's behavior appeared closely related to the situation on the market for housing as a whole, and the mortgage swing is a steady regularity of MHM: under stable prices and a significant volume of offer on the market, even providing the general demand declines, the volume of mortgage sales and their proportion in particular are on the rise, while a growing demand, lower offer volume and high price rise rates entail deceleration in the growth of the respective indices.

111 Meaning the genuine mortgage sales, which differ from the simple usage of apartment as collateral against a

loan, which can be spent on purposes other than a new apartment.

5.4.5. Forecast and Main Conclusions

Since 1995 the annual forecasting of price trends on the Moscow city and other cities'

112

markets for housing implied employment of economico-mathematical models . Until 2001 (including the post-crisis renewal stage) these models ensured a great accuracy of forecasting.

In the past 6-7 years all Russian cities witnessed a constant price rise for housing. At the beginning the fact was perceived only as an impediment to the building of economico-mathematical models in the conditions of absence of market fluctuations. Experts conducted their forecasting (not always successfully, though) on the basis of analysis of individual factors and their effect on pricing. But the models failed to predict a non-stop price rise on the second stage of development of Russia's housing market and the 2003 and 2005 explosive rise in particular, while we considered the consequences of the stages as prerequisites of the rise and collapse of a bubble on the Moscow city housing market. Interestingly, at the time, British analysts likewise discussed the bubble scenario as the most visible challenge facing the housing markets in UK, US, Canada, Australia, and some other countries worldwide.

In the summer 2006, Russian analysts laid a hypothesis that, trailing the general eco-

113

nomic growth in Russia, growth in the housing market became sustained .

Then they developed the non-harmonic price trend decomposition114, which enabled them to build, between December and January of the respective years, the medium-term forecast (for 2007 and 2008) of price dynamics in Moscow, Moscow oblast, and another 8 Russian cities115. They predicted that a price stabilization stage with possible price fluctuations at +/-5% should have started since the early-2007. It would be lasting at least until the early-2008, after which there should occur a new price rise stage.

The past 12 months allow us to compare the forecasts with the reality.

The final data on 2007 (Tables 16 and 23) show that as concerns the transition to stabilization of prices, the forecasts demonstrated a great deal of accuracy (albeit the half-year results across Perm, Novosibirsk, and St. Petersburg biased over 10%). As for Moscow, Moscow oblast, Yekaterinburg, and Tver, life was obediently following the forecasts, but just for the first 10 months of the year. However, the last 2-3 months of the year witnessed a new price rise, which overrun the forecasts, and this needs a further explanation.

The first, major cause for the new price rise lies in the political sphere: the country's leadership has managed to avoid a pre-election clash between power groupings, as well as a conflict between power and business, particularly, after nomination of the most acceptable for the society candidates for presidency and the position of the government head. That prevented a possible capital outflow and encouraged the population to realize their pent-up demand, which was back-upped by a substantial rise in their real incomes and savings (in 2007, the real salaries and wages were up at 16% vs. 13.4% reported in 2006).

The second, macroeconomic cause became a drastic rise in the world oil prices by the end of the year (hitting figures a. USD 100/barrel) in the autumn 2007, unseen before invest-

112 Sternik G.M. Statistichesky podkhod k prognozitovaniyu tsen na zhilye. Journal of RAS "Ekonomika i mate-maticheskiye metody", vol. 34, issue 1, 1998, p. 85-90.

113 Sternik G.M. Est li tsikly na rynke nedvizhimosti? - www.realtymarket.ru, June 2006.

114 Sternik G.M., Krasnopolskaya A.N. Negarmonicheskoye razlozheniye tsenovoy dinamiki rynka zhilya Moskvy. - www.realtymarket.ru, July 2006.

115 Sternik G.M. Tseny na rynke zhilya gorodov Rossii v 1990-2006 gjdakh: analiz i prognoz. - Analiticheskaya gruppa G. M. Sternika. - www. realtymarket.ru, January 2006.

ment inflow and capital inflow in the national economy (the net capital inflow renewed in the 4th quarter of the year, thus reversing the tendency that had been persisting a quarter earlier), with all their respective effects on the real estate market.

Hence the third cause, that is, the continuous depreciation of the US Dollar, some tightening of mortgage loan terms as a reaction to the US crisis on the subprime housing market, and the inflation hike in the fall of 2007 engendered a new wave of mistrust in the state of the national financial system, which formed an additional incentive for a higher-income-bracket strata to shop on the housing market.

As for other factors, they remained within the limits described in our 2006 paper116.

As a result, the stabilization stage in the city of Moscow and Moscow oblast proved to be at 3-4 months shorter than the forecasted one and accounted for 10 months vs. 4-8 months registered in other cities, and the respective ultimate increment by the end of the year proved to be somewhat greater (while the forecasts proved to be absolutely accurate, so far as the nature of the price dynamic is concerned).

The respective results allowed the analysts to employ the non-harmonic price trend decomposition to build forecasts of price dynamics in Moscow and Russian cities basing on a

117

mathematical forecast-model, which consists of a system of equations .

The price rise dynamics forecasts (in USD equivalent) for a number of cities for 200809 are given in Table 23.

Table 23

Forecast of Price Dynamics in Russian Cities in 2008-2009 (Ranked by Descending

Increments over the Three Years)

Price rise indices

City (region) _

2007/2006 2008/2007 2009/2008 2008/2006 2009/2006

Ulyanovsk 1.45 2.01 1.28 2.91 3.72

Novosibirsk 1.417 1.70 1.45 2.41 3.50

Perm 1.58 1.64 1.31 2.59 3.39

Tver 1.34 1.43 1.51 1.91 2.88

St. Petersburg 1.23 1.84 1.22 2.39 2.80

Yekaterinburg 1.083 1.80 1.30 1.95 2.53

Rostov-on-Don 1.28 1.69 1.17 2.17 2.53

Yaroslavl 1.09 1.79 1.17 1.65 1.94

Moscow 1.124 1.48 1.09 1.67 1.82

Izhevsk 1.015 1.64 1.05 1.66 1.74

Moscow oblast 1.006 1.68 1.001 1.69 1.69

According to the forecast, in 2008, the city of Moscow will see a continuous price rise and by December prices will have been in the interval between USD 7,500 and 8,500/sq.m. (45-50% up over the year, or 80-85% up vs. 2006). In Moscow oblast, they can climb up to

116 Malginov G.N., Sternik G.M. Rynok zhilya//Rossiyskaya ekonomika v 2006 godu. Tendetsii i perspektivy. (Issue 28). M., IET, 2007, p. 694-727.

117 Sternik G.M., Pechenkina A.V. Chto prosikhodit na rynke zhilya Moskvy. Makroekonomicheskiy podkhod (doklad na Analiticheskoy konferentsii Moskovskoy Assotsiatsii Rieltorov "Rynok nedvizhimosti: situatsiya, tendentsii, prognoz" 30 Aug 2007). - www.realtymarket.ru, Aug. 2007.

538

USD 4,000-5,000/sq.m. (65-70% up both over the year and vs. 2006). The dynamic of the first months of 2008 allows one to assume that this scenario is highly probable. For example,

in January 2008 alone, housing prices soared at 5% against a fall in the volume of offer of

118

apartments, which is a sign of demand being superior to offer on the market .

Forecasts for other regions show that the price situation will be advancing according to the same scenario, with the 2008 price increment rates making up: 40-45% in Tver, 60-70%-in Perm, Izhevsk, Rostov-on-Don, Novosibirsk, 80-85% - in Saint Petersburg, Yaroslavl, Yekaterinburg, and over 100% - in Ulyanovsk.

In three years (2007-09) housing prices will rise: in Moscow oblast, Izhevsk, Moscow, Yaroslavl - 1.7-1.9 times, in Yekaterinburg, Rostov-on-Don, St. Petersburg - 2.5-2.8 times, Perm and Novosibirsk - 3.4-3.5 times, and in Ulyanovsk - 3.7 times.

Beyond this time horizon (apparently, after 2010-2011) when volume of construction and offer of apartments have grown substantially, the forecasts suggest decline in the long-term price rise growth rates.

The forecasted price dynamics will be affected by many groups of factors, some of which boosting the price rise, while other inhibiting it. They can be ganged in two groups: factors external to the housing market (political, macroeconomic, factors of interaction with supplier/consumer markets); and internal factors (progress in implementation of the National Priority Project on Housing, the population's greater housing mobility rate, interaction with supplier/consumer segments of the real estate market (Table 24).

So, the balance of factors highlights a strong increasing trend in the dynamic of offer prices for housing in Russia's cities and proves accuracy of the mathematical modeling results.

Overall, the 2007 development of the housing market was characterized by a clear and nearly universal deceleration of the price rise growth rates. Given the impact of macroeco-nomic factors, there arose a group of cities where real (inflation-adjusted) prices even began to decline.

While fairly successful, the implementation of the national housing project complicated the problem of provision of the national construction complex with resources. As well, the social efficacy of the project can be questioned.

The mortgage loan mechanism, which was viewed as a main vehicle for making housing more affordable for the population, was subject to effects triggered by crisis phenomena in the US economy. Its prospects will be determined by the general situation in Russia's economy, including its ability to withstand negative external shocks. Meanwhile, the analysis of development of the market for mortgage sales over recent years showed that it has been to a greater degree determined by the overall situation on the housing market, rather than terms and conditions of a loan disbursement. Even if the overall demand declines, under stable prices and a considerable volume of offer on the market there occurs growth in the volume of mortgage sales and, particularly, in their proportion in the overall volume of sales. Should demand grow, while volume of offer declines and the pace of price rise is high, the growth in the volume and proportion of mortgage sales is down.

118 Ignatyeva Yu. Moskovskikh okon nedostupny svet. In: Izvestiya, 29 Feb. 2008, p. 1, 7

Table 24

Balance of Factors That Determine the Medium-Term Price Dynamic

for Housing in 2008

Categories of factors

Groups

of factors

Impact of factors on prices

Upwards

Downwards

Election campaigns: additional funding of the presidential race, rise in effective demand fueled by fees payable to political technologists, media, showbiz

Some risk of intensification of tensions in the society during the election campaign and because of change of governors in some regions, and formation of a new federal government

et

■A

Continuation (albeit at a more moderate rate (6-6.5% vs. 8.1% in 2007) of GDP growth, growth in budgetary expenditures and the level of the population's real disposable incomes. Continuation of growth of the capital inflow, primarily in the form of corporate borrowings (the net inflow for the first time became positive in 2005 - USD 0.1 bn, and it consequently soared up to 42.0bn in 2006 and 82.3 bn in 2007). Further price rise for energy sources (up to USD 200/barrel, according to some forecasts). The process of Russia's accession to WTO, as well as low political risks, which encourage capital inflow from overseas companies, banks and funds, particularly due to the possibility for recession in the US, continuation of appreciation of the Rb. and greater inflation rates

Decline in the GDP growth rates, which constraints the government's possibilities for tackling socio-economic challenges and holding growth rates of the population's incomes.

Continuation of the capital outflow for the sake of direct investment. Possible decline in the speculative capital inflow as it may be attracted by the US and European financial instruments, providing the respective countries have handled the mortgage and housing crisis

o * .2 <u

•Ö *

S S

= S

Fall of the world stock market indices and manifestations of a crisis on Russia' one, including capital repatriation via mutual funds which contributes to the channeling of investment flows to the real estate market an the respective price rise for real estate

Advancement of Russia's stock market, emergence of versatile high-yields financial instruments, which trigger the capital flow from the real estate market to related markets.

Continuation of the consumer boom, which reduces the volume of the population's savings spent on housing purchases.

The growing bad consumer debts and the consequent liquidity problems in the banking sector and deceleration of the pace of growth in the volume of mortgage loans

.2 E

: s= : <

Greater volumes of the government support and mortgage loans, primarily on the market for newly built housing.

Maintenance or even decline of the volume of offer of housing in Moscow (along with some rise in the volume of its placement in operation from 4.8m sq.m. in 2007 up to 5.0-5.3m sq.m. in 2008) at the expense of some half of the housing area will be assigned to the municipal programs

Growth in the volume of house building in regions (in 2007 - 60.4 sq. m. nationwide, in 2008 - not less than 72m sq.m.) and in the volume of offer of housing on the primary market.

Deceleration of the growth rates in the volume of mortgage sales and in the proportion of mortgage sales in the overall volume of apartment sales due to the start of an intense rise in demand and washing-out of offer, as well as because of a 1-2% rise in interest rates (while the Agency for Mortgage Loans is going to raise the volume of refinancing of mortgage loans up to Rb. 65 bn in 2008)

H « .s

The inflow of buyers from remote regions to those in the Urals, Volga, Center, North-West; from regions -to Moscow and Moscow oblast; from Moscow - to the less expensive Moscow oblast, which results in a greater effective demand in Moscow and other regions

The outflow of lower- and medium-income strata from Moscow to the market of the nearest and medium- distance Moscow oblast - hence a lower effective demand in Moscow.

Competitive housing opportunities for the higher-income stratum in St. Petersburg and Sochi, cities of the central and southern Europe - hence a lower effective demand in Moscow

Continuation of the advanced growth of investment in the retailing and construction of commercial real estate objects, transport and social infrastructure, which bolsters attractiveness of the housing market

The flow of investment into the market for commercial real estate (trade, office facilities, leisure and rehabilitation centers, logistical complex, technoparks, etc. under lower return rates demonstrated by the house building sector

ï £

Meanwhile, the longer-term forecast (for 10-15 years) maintains the price rise should be steady (in USD nominal prices) and its annual pace should account for 30-35%, with its monthly growth rates fluctuating between 0 and 8-12%.

5.5. Russia's Military Economy and Military Security

The development of the RF military economy in 2007 was mainly determined by the economic and political factors typical of the Russian economy as a whole and also by the necessity to carry on a struggle against terrorist bands. At the same time, the military economy was to a certain extent influenced (at least conceptually) by the military-political declarations and unfriendly intentions on the part of NATO and the USA, as well as by the requirements of military and military-technological cooperation.

5.5.1. The Socio-Economic Aspects of Military Personnel Policy

Among the military-political and socio-economic events which took place in Russia in the year 2007, the following three should be considered the most important:

- firstly, the beginning of transformations within the RF military establishment, reflected in the appointment of an authentically civilian person to the post of RF Minister of Defense, and in a number of far-reaching alterations of both the functions and the style of work of this ministry;

- secondly, the development and adoption of the federal budget, including that of RF military expenditures, for three consecutive years;

- thirdly, the completion of the Federal Target Program (FTP) "The switchover of a number of formations and military units to the system of manning by servicemen enlisted for military service under contracts, for the years 2004-2007".

While the military-economic consequences of the first two events will become clear only in the years to come, the results of the third one are already apparent, and thus can be summarized, starting with a brief reminder of why the FTP was needed, and how it was developed and implemented. In this connection, our analysis cannot be limited to the events of the year 2007 alone.

After the annihilation of the main rebel force in Chechnya and Dagestan in 1999-2000, the RF Security Council, on 11 August 2000, took the decision that the size of the army should be considerably reduced (in particular, the number of personnel enlisted for military service in the RF Armed Forces under contracts was reduced to 400 thousand), and then, on 9 November, it instructed the Government and the General Staff to initiate the development of "a program for the switchover of the military establishment of the State to being manned exclusively by servicemen enlisted for military service under contracts". It was planned that the Program would be ready by the autumn of 2001.

In this instruction, the word "exclusively" meant a radical approach to simultaneously resolving a number of other military and social problems. But such an approach, quite naturally, required heavy expenditures, at least at the initial stage. The 2001 budget absolutely lacked the necessary funds.

As a matter of fact, the consequences of the 1998 "default" effectively prevented any rapid and efficient transition to the absolutely voluntary principle of enlistment. Also, it was not safe to reduce the size of the army under conditions when military operations in the North Caucasus were far from being over, and when potential military threats were all too real. In

August 2002, the RF Security Council prepared, and the RF President approved, "The Fundamental Principles of the RF State Policy in the Sphere of Force Development for the Period Until the Year 2010". This document stipulated that a special FTP should be developed in 2003 with regard to the transition of the armed forces to the new system of staffing, and that the transition should begin with the military units of permanent readiness and those on continuous alert, and that the draft should be preserved for the period up to one year for the sole purpose of preparing the necessary mobilization resources.

However, in February 2003, the journal "Voennaia Mysl'" (Military Thought) published an article by the head of the General Staff's GOMU, where the guidelines set forth by the RF President were "clarified". It was no longer considered necessary that the FTP should be extended to military units on continuous alert. And in general, the only thing to expect was a "systematic increase in the numbers of servicemen enlisted for military service under contracts in the military units of permanent readiness, and in the future - in the other military units and in the military positions which determine their combat readiness (primarily in the NCO positions). It is planned that the rest of the military positions of soldiers, sailors, sergeants, and petty officers should be filled by servicemen drafted to military service". In other words, the General was sure that the regular armed forces should continue to be staffed by both the volunteers serving under contracts and the draftees. And that the draft would not be abolished in the foreseeable future. At the same time, the author of the article offers no answer to the question as to which positions do not determine the combat readiness of the troops, thus being secondary in importance, and if they are really secondary in importance, then why should there be any servicemen to occupy them.

Before long, in the spring of 2003, the President came up with a somewhat modified vision of the forthcoming transformations in the system of staffing the RF military establishment:

"In accordance with the approved plans, we will continue to form professionally based units of permanent readiness in the land and airborne forces, and in the marines. This work should be completed in 2007. Also, military service will be based on the principles of professionalism in the internal service troops and the frontier troops. In plain and clear words it means the following (apart from other things, but this is the major conclusion): only well-trained and professional units will be employed in the hot spots and local conflicts, if Russia -God forbid - will ever have to answer these challenges. I would also like to point it out that it is the sergeant cadre of our Armed Forces (AF) that will be most urgently transferred to the professional basis. From the year 2008 onwards, the duration of compulsory military service will be reduced to one year. During the first half-year, the draftees will be mastering their military professions at the units. After this, they will be offered an option - either to serve for half a year in line troops or to be transferred to professional service under contract. Those who have served under contract for three years will be entitled to a number of preferences including the guaranteed right to higher education at the State's expense".

On 25 August 2003, the program under the title "The switchover of a number of formations and military units to the system of manning by servicemen enlisted for military service under contracts" was approved, for the years 2004-2007, by the RF Government's resolution. The Ministry of Defense, which had been appointed state customer and coordinator of the Program, was instructed to submit, in the 4th Quarter of 2003, a "draft deferral law setting the duration of compulsory military service at one year".

Those public figures who had taken part in substantiating the FTP and resisted all attempts to emasculate it were prevented from handling the matter at the stage of the Program's implementation under the pretext of secrecy. Control over the implementation of the Program was entrusted to the Ministry of Defense. Thus, this agency plans all the FTP-related measures, implements them, and controls its own activities.

The analysis of the FTP's tasks and goals, as they were initially formulated, and, more importantly, the results of its implementation, is summarized below in Table 25. In the left-hand column of the Table we present the major provisions of the FTP taken from the final version of the main document, and also some comments made by RF top officials so as to clarify the idea of military reform, while the right-hand column contains the assessments obtained at the IET on the basis of the published data.

Table 25

Assessment of the Results of Implementation of the Federal Target Program

Demands of RF President and Government, as presented in FTP; official statements of RF high officials

Assessment of initially formulated FTP's tasks and goals, and of results of its implementation as of December 2007. Comments

Goals of the Program:

- to ensure the transition to a new system, whereby the military positions filled by soldiers, sailors, sergeants, and petty officers will be staffed by servicemen enlisted for military service under contracts, and

- to improve the combat readiness of the RF Armed Forces' military formations and units of permanent readiness, and of the military units of frontier troops and of the RF Ministry of Internal Affairs' internal service troops.

These formulations of the goals presented in the FTP should be considered in the light of the RF President's preliminary instructions. In particular, one should take into account the following provisions:

"One of the unquestionable priorities should be the continuation of military reform and the transition to a professional army, with the simultaneous reduction of the duration of compulsory military service".

The reform is necessary for society, but first of all - for the army itself".

"In accordance with the approved plans, we will continue the formation, on a professional basis, of units of permanent readiness in the land and airborne forces and in the marines. This work must be completed in the year 2007. Apart from this, service in internal-service and frontier troops will also be based on the principles of professionalism".

Some of the President's instructions were further developed by the RF Minister of Defense. In his interview to the newspaper "Kras-naia Zvezda" ["The Red Star"] as of 17. 09. 2004, S. Ivanov said the following: "A partial switchover of the Armed Forces to a contractual basis is not a political declaration and not the goal of development of Russia's Armed Forces. It is one of the avenues to increasing the combat efficiency of Russia's Armed Forces"

When formulated this way, the goals of the FTP take into account only the requirements of the RF military establishment - despite the directives of the Commander in Chief. The socially important goals (the reduction in the general number of citizens being drafted and in the duration of compulsory military service, and most importantly, the task of changing the aim of such service to simply training a person in a military occupation specialty; the improvement of conditions of compulsory military service and contracts, including the suppression of acts of harassment among servicemen and violations of human rights) were not included in the FTP. Therefore, there was no intention to achieve these goals. The results are apparent and could not be different.

Of all the military - political goals formulated in the FTP, the first goal has not been achieved in full measure, both with regard to the initially specified numbers of contractees and (even) with regard to their later revised and significantly reduced numbers.

The second goal has been achieved only fragmentarily: in the Frontier Service of the FSB, the quotas were exceeded (the draft was completely abandoned), while in the Internal-Service Troops of the Ministry of Internal Affairs the goals were achieved to a large measure. The major failure in implementing the FTP in full was observed in the units and formations of the RF Armed Forces. Most successfully the FTP was implemented in the units stationed in the North Caucasian Military District. In the Land Forces, 60 formations and units, with the overall strength of 100 thousand, were completely switched over to service under contracts. Although not mentioned in the FTP, submarine crews of the Navy were also made to serve under contracts. While considering the improvement of the combat efficiency of the RF military establishment's personnel to represent the achievement of the main military goal as expected by the Minister of Defense, it should be pointed out that this goal, as demonstrated by the estimates, has been achieved only with respect to the military units of permanent readiness; as regards Russia's Armed Forces on the whole, it has not been achieved by the end of 2007, and after the year 2008, their overall combat efficiency may even decline

Major tasks of the Program:

- to ensure the transition to a professional army based on the principle that the military positions filled by soldiers, sailors, sergeants, and petty officers should be held by servicemen enlisted for military service under contracts;

- to carry out the stage-by-stage transition of these formations and military units to a system when the military positions filled by soldiers, sailors, sergeants, and petty officers are held by servicemen enlisted for military service under contracts in accordance with the time schedule (Annex No. 1, classified);

- to ensure the corresponding adjustment of the system for the training and accumulation of mobilization human resources;

- to ensure the improvement of combat readiness of the afore-said formations and military units by heightening the level of military training and professional capabilities of the servicemen enlisted for military service under contracts.

In his interviews to the newspaper "Krasnaia Zvezda" of 6. November 2004 and 17 November 2004, Head of the General Staff Iu. Baluevskii stated that by the end of 2007, "the proportion of contractees holding the military positions to be filled by sergeants and soldiers will reach 50%", and, as a result, the RF Armed Forces will obtain a "rational system of mixed manning"

The formulated tasks of the FTP correspond to its goals, which means that they are practically unrelated to the concerns expressed by the citizens and society, although the FTP's certificate, when specifying the reason for introducing the Program, has clearly stated that it is "motivated by the military-political, economic, and social importance and the range of the tasks being solved by the Armed Forces and other troops, military formations and organs". As regards the time schedule of the military establishment's switchover to the new system of manning, it should be noted that the reason for its being classified is unclear, because when citizens were being attracted to volunteer military service under contracts, they unavoidably had to be informed on the names and addresses of military units and formations by various means, including the mass media. Thus, the whole list of military units of permanent readiness, as well as the places of their stationing and the time table for their switchover to the contractual system have become known to the RF citizens being invited to serve under contracts. Secondly, in the course of implementing the FTP, the federal authorities with troops at their disposal have been granted the right to introduce adjustments into the time schedule.

Nowadays, Minister of Defense A. Serdiukov states in his report concerning the results of the Ministry's activity in 2007 that the proportion of persons enlisted for military service under contracts in the positions reserved for privates and NCOs will reach 44%. And some top military commanders put to doubt the achievability of even this level of manning. This means that the system of manning which exists in our country is not rational, according to Baluevskii's definition. A similar conclusion could also be made on the basis of our calculations of indices of regular forces and on the ratio of their numbers and the size of mobilization resources

Major measures of the Program:

The Program's measures, designed to create the conditions ensuring a stable functioning of the system of manning the Armed Forces and other troops and military bodies by servicemen enlisted for military service under contracts, include:

- scientific backing for the Program;

- the improvement of the normative-legal base of military service under contract with regard to servicemen, in the military units being switched over to the new system of manning, who are holding military positions to be filled by soldiers and sergeants;

- the resolution of the organizational issues concerning the transition to the new system of manning whereby the military positions to be filled by soldiers and sergeants should be given, in the military units being switched over to the new system of manning, to servicemen enlisted for military service under contracts;

- the information support for the Program;

the creation of a stable and centralized system of manning the

Armed Forces, other troops, military formations and organs

A stable system of manning has failed to materialize. Evidence for this is the failure to abide by the time schedule, and the facts of coercion to conclude contracts and of corruption at military registration and enlistment offices, which forced the Minister of Defense to issue, in 2006, a corresponding anti-corruption order. However, according to the Office of Public Prosecutor, in the course of nearly one and a half year since this memorable date the situation has not notably changed to the better.

As regards scientific backing for the Program, it can only be said that expenditures under this item did go up (when the FTP was repeatedly adjusted), while the results, according to non- classified sources of information, including the military-theoretical journal "Voennaia Mysl'" [Military Thought] remained modest at best. If the results of this research are classified, the reasons for this should be clarified, because the case in point is a socially important reform. The normative-legal backing of the FTP contradicted its goals and the RF Government's instruction. The draft law on reducing the term of service was submitted with a delay and in one package with other draft laws, which resulted in it having been considered, behind closed doors, in haste and without a preliminary discussion by experts. Also, a number of drawbacks were revealed, including, in particular, the violation of the right of citizens who have completed one or two terms of service under contracts to labor pensions, which should have taken into account their money allowances during the period of service. The abolition of the draft in Chechnya , thus singled out from the rest of Russian regions, was implemented without having been duly substantiated by the adoption of a corresponding law, which can have negative consequences. From the legal point of view, the Regulation on Military Service does not eliminate the possibility of servicemen enlisted for compulsory military service being dispatched to the "hot spots".

The information support for the Program turned out to be of low efficiency. A number of publications contained disinformation, which inspired justified criticism on the part of citizens and human rights organizations

The Program's measures aimed at ensuring the attractiveness of military service under contract envisage the following:

- payment of differentiated bonuses for special conditions of combat training;

- payment of compensations, to the afore-noted servicemen with families, for renting a dwelling, in accordance with the norms stipulated by RF legislation;

- bringing the level of providing the afore-said servicemen with clothing and small stores into correspondence with the norms set by RF legislation;

- ensuring the following rights of the afore-said servicemen:

• to medical support, including the setting of compensations for sanatorium and spa treatment;

• to the payment of the cost of travel of a serviceman and members of his family to another place of service, including the compensation for the expenses for travel to the place of use of leave and back;

- the encouragement of fulfillment of battle tasks and military training tasks in special (field) conditions;

- granting the right to free higher education or secondary special education

The measures aimed at solving the housing problems of contractees envisage a

change in the billeting of servicemen enlisted for military service under contracts in the positions which should be filled ... (see above); to this end, it is planned to carry out:

- reconstruction (or refitting) of the existing barracks, in order to convert them into military hostels of a simplified type;

- construction of new military hostels;

- upgrading of objects in the barracks sphere, in order to bring them into line with the authorized standards;

- and development of the social and engineering infrastructure, in order to ensure the functioning of both the existing objects of the barracks sphere and those being put into commission

The Program's measures aimed at improving the combat training and the material and technical support for military units

envisage:

- the relief of servicemen, enlisted for military service under contracts in the military positions which should be filled by soldiers and sergeants in the military units being switched over to the new system of manning, from the fulfillment of duties unrelated to combat (or special) training and their official duties;

- the improvement of the educational-material and technical base for combat training;

- organization of combat training in accordance with the demands set by RF legislation;

- the ensuring of exploitation of objects constituting the educational-material and technical base for combat training, and of an increased number of objects of infrastructure;

- and the ensuring of the most sophisticated forms of combat training to be carried out

The 3,300 rubles / month bonus, calculated in late 2003, was too small, even at that time, for the contractees' money allowance to exceed the average national wage, which has always been the necessary precondition to creating a volunteer army. And it had become less than scanty by the end of the FTP, because it had not been adjusted for inflation, which shot up to more than 40% over this period.

The size of compensation for renting a dwelling also turned out to be insufficient and well below the minimum required level in the majority of RF regions.

The drawbacks in providing all the servicemen with clothing and small stores are forcing the new Defense Minister to start revising the norms and reconsidering the design of the uniform. The ensuring of the rights to medical support and the payment of the cost of travel had a positive effect, but these measures cannot compensate for the low level of money allowance. Unfortunately, the payment of "field" and "combat" bonuses lacked due control, which led to financial fraud and court proceedings. The right to free higher education or secondary special education is now envisaged by a corresponding law. This measure is useful. However, its efficiency has failed to duly manifest itself so far, due to the low initial educational level of the contractees being enrolled, and, first of all, due to the fact that many of them are disinterested in improving this level; in the future, the efficiency is expected to be low because it is planned to draft mainly graduates of higher educational establishments

As regards the construction component of the measures, it should be noted that expenditures on it were steadily growing during the period of implementing the FTP. Despite some undisputed achievements, even the Supreme Commander's assessment points to the fact that the results of construction are not totally adequate to the said expenditures. The housing problem was resolved most successfully in the military units and formations quartered in the North Caucasian Military District.

During the period of implementing the FTP, the authorities developed the Law on the Funded Mortgage System for Providing Servicemen with Housing. Also included in the system were those privates and noncommissioned officers serving under contracts who were going to sign a second contract for continuation of military service. However, this incentive not only formally exceeds the bounds of the FTP, but also has failed to become an operative factor, because the new system has not been put into operation as yet

As regards the attainment of the normative level of combat training and of the material and technical support for military units and formations of permanent readiness, it should be noted that these measures, in fact, have little to do with the principle of manning, as it was repeatedly pointed out already during the period of feasibility studies for the FTP. It is not very rational, irrespective of the type of a system of manning, to continue the upkeep of the military units not engaged in combat training. This problem should be approached with regard to all regular forces. Otherwise, it would be unclear why they should be kept at all

The Program's measures aimed at ensuring that military units are adequately equipped with technological means envisage: the maintenance of weapons and military equipment in good repair (the current maintenance and repair of weapons and military equipment, made necessary by an increased intensity of exploitation in the course of combat training);

maintenance of the objects of infrastructure of military units at a level ensuring the strengthening of combat readiness and the conduct of combat training

The Program's measures, aimed at creating the conditions ensuring the strengthening of combat and mobilization readiness of

the Armed Forces, border troops and Interior troops during the military units' switchover to the new system of manning, envisage the following:

- ensuring the purchasing and assembly of additional security and alarm systems;

- the preliminary training at training centers and units, of the servicemen enlisted for military service under contracts in the military positions which should be filled by soldiers and sergeants in the military units being switched over to the new system of manning.

- ensuring that the afore-said formations and military units are adequately equipped with technological means

Financing:

The funds to be allocated to the implementation of the Program amount to 98,913.31 million rubles (in 2003 prices) (as written in the version of the RF Government's Decree, of 07 September 2006, No. 549).

Initially, it was planned to allocate 79,091.65 million rubles. The share of capital investments in the total volume of expenditures in the years 2004-07 amounts to 44 percent (43,577.52 million rubles).

In the first version of the FTP, their share was 34 percent (27,178.28 million rubles).

The volume and structure of the budget financing of the Program's measures is subject to annual adjustment in accordance with the actual capacity of the federal budget and the degree of actual implementation of the Program's measures

The relief of servicemen from the fulfillment of duties unrelated to combat (or special) training and to their official duties is being successfully practiced in a number of military units by way of attracting, wherever possible, services from the outside, which are provided by commercial organizations at the localities where these military units are quartered. At the same time, human rights activists have exposed, and offices of military prosecutors have confirmed numerous instances of illegal employment of servicemen for performing work unrelated to their official duties, in commercial and other structures, outside their military units. In order to put an end to such violations, a special order of the Minister of Defense was issued, which, according to human rights activists, has failed to produce any palpable changes to the better as yet

The High Command of the Land Forces has developed a number of combat-training programs for the formations and units manned by servicemen enlisted for military service under contracts; from the academic year 2008 onward, the subunits are switched over to the one-year cycle of training.

The implementation of the FTP's measures has made it possible for the majority of objects of the educational material and technical base to be put in line with the demands stipulated in the guiding documents, and for the educational base to be in due time prepared for the beginning of a full-scale one - year combat training cycle. According to the army mass media, the measures are being implemented without any visible violations that could have caused public concern.

A number of publications in the army mass media have confirmed that these measures are indeed being implemented. It is worth mentioning that state-of-the art security and alarm systems, as well as other means of automation and mechanization, are being successfully applied, especially in the RF frontier service. The equipment of a number of training centers and the quality of training have been improved. A number of simulators and technical means of education have been developed and purchased

In spite of the fact that in the feasibility study concerning the FTP (and also that regarding its subsequent adjustments) the 2003 prices were applied, in the course of the FTP's actual implementation the expenditures were initially not adjusted by the inflation growth index, and later on were adjusted only with delays. The distribution of the aggregate amount of the funds was adjusted mainly in terms of increasing capital expenditures. Out of the total amount of the expenditures' increase (about 20 billion rubles in 2003 prices), virtually nothing was allocated to increasing the money allowance's special increment, introduced in order to increase the attractiveness of service under contract, which significantly hampered the initiative of manning the Armed Forces on the voluntary basis.

Judging from the numerous limitations producing a negative effect on the FTP's ultimate results, any increases in expenditures on research appear to be unmotivated and groundless

Table 26 presents a comparison of the expected results of the FTP to the estimations based on its actual preliminary results of the Program.

Table 26

Comparison between the Expected and Actual Results of the FTP

Expected results, according to FTP certificate

1) the creation of adequate conditions for switching over to the system of manning the armed forces with volunteers enlisted for military service under contracts in the military positions which should be filled by soldiers, sailors, sergeants, and petty officers

2) the regular filling, in these formations and military units, of the military positions which should be filled by soldiers, sailors, sergeants, and petty officers by servicemen enlisted for military service under contracts

(primarily in the military units fulfilling missions in the "hot spots" and (or) located therein).

The RF President's considerations concerning the sequence of introduction of the new system of manning are formulated differently than in his 2003 Message: "I should also like to note that the NCO component of our Armed Forces will be switched over to the professional basis at priority rates"

3) the creation of appropriate conditions for the first contracts to be concluded by citizens being enlisted for military service under contracts in the military positions which should be filled by soldiers, sailors, sergeants, and petty officers in the afore-said formations and military units

4) the increase of the number of servicemen enlisted for military service under contracts in these positions from 22,1 thousand to 138,722 thousand;

in the initial version - to 147,578

Estimation of preliminary results

According to the actual data and the public statements made by a number of high-rank officers, the conditions necessary for the successful manning of military units on the contractual basis have not been created, which became the main obstacle to achieving success

The filling of a smaller number of positions at a higher cost does not attest to the successfulness of the FTP. Also, this process can hardly be characterized as regular, because the plans were adjusted towards weakening the demands. The exception is the Frontier Service of the FSB. The undisputed achievement, very important for RF citizens, is that RF servicemen (according to the assurances given by high -rank officers) are no longer taking part in combat actions in the "hot spots". However, some of the mass media affirm that, according to the servicemen themselves, this practice still survives. Moreover, the legal substantiation for such practice has not been abolished.

In fact, the NCO component of the Armed Forces was not switched over to the contractual system of manning at priority rates. Such a switchover (for all military units) is now included in the new FTP

Although formal conditions have indeed been created, they are totally unattractive.

As a result, by the end of the FTP's period, it had become problematic to induce a serviceman not only to conclude a first contract, but also to prolong it (arrange the conclusion of a second contract)

The increase of the number of these servicemen has been adjusted downwards without reducing the expenditures on the FTP; on the contrary, these expenditures have been increased.

At the same time, contractees enlisted for military service in the units not included in the category of permanent readiness have not received even the tiny increment to money allowance which was introduced for the units of permanent readiness. As a result, the growing number of contractees in the units of permanent readiness was accompanied by an outflow of contractees from other military units, which means that the number of citizens who would be drafted after the year 2007 have reduced to a lesser degree (by almost 20 thousand) than it was expected at the time of substantiating the FTP

5) the reduction of society's dissatisfaction with the existing system of manning the RF Armed Forces and other troops, military formations and organs, and with these servicemen being dispatched for military service in the "hot spots"

Owing to these circumstances, society's dissatisfaction will not be diminished, contrary to expectations. Instead, it will become even greater, because of the cancellation of deferments, primarily for young fathers and graduates of higher educational establishments. Besides, this dissatisfaction will grow as a result of the already appearing upward trends in the size of bribes and in the price of other "services" in the sphere of illegal draft evasion. Officers not serving in the units of permanent readiness are now also dissatisfied even more, because the level of their money allowance has become relatively lower

6) the creation of preconditions for reducing, from the year 2008, the term of compulsory military service to one year

As a result of the FTP having been implemented in such a manner, the preconditions which appeared so promising to the developers of the FTP will, in effect, produce only slight improvements, while the growth of dissatisfaction caused by the cancellation of deferrals can produce an opposite effect, in the form of proposals to return to the two - year term of service, without reintroducing the deferrals_

A more detailed quantitative analysis of the FTP's results can be performed on the basis of the data presented in Table 27, which contains the FTP's target indicators and indices of effectiveness. This table was added to the initial text of the FTP in accordance with the RF Government's Decree, of 07. 09. 2006, No. 549, in connection with the switchover to the principles of performance-based budgeting (PBB).

Table 27

The Target Indicators and the Indices of Effectiveness of the Program

Financ- _Including

Indicator ing of federal executive bodies 2004-2007, Comments on the results of

total 2004 2005 2006 2007 FTP

1. The number of ser- Ministry 125,359 18,215 40,842 24,405 41,897 In the interests of society,

vicemen enlisted for of De- where the desire to minimize

military service under fense the scope of the draft and the

contracts in the military Ministry 9,729 3,880 3,881 992 976 economic costs shouldered by

units being switched of the families and the civil

over to the new system Internal economy of the country is

of manning Affairs rather widespread, this indi-

FSB 3,634 - - 990 2,644 cator should have been augmented by stating the number of servicemen enlisted for

Total 138,722 22,095 44,723 26,387 45,517 military service under contracts and those drafted to the ranks

2. Number of places for Ministry 115,636 22,004 27,267 26,390 45,517 From the point of view of

housing servicemen of De- citizens and society, it is no

enlisted for military fense less important to know the

service under contracts number of servicemen, espe-

in hostels with housing Ministry 9,764 2,048 2,582 3,871 1,263 cially of those with families,

cells of simplified type of Internal Affairs who are not provided with housing, and to be informed on the methods and the time-

FSB 1,180 - - 660 520 lines for their housing prob-

Total 126,580 24,052 29,849 30,921 41,758 lems to be solved

3. Number of places Ministry 25,478 502 2,562 4,377 18,037 In the interests of society it

reserved for training of De- would be no less important to

servicemen enlisted for fense know that all the servicemen

military service under (both drafted and enlisted for

contracts Ministry of Internal Affairs 860 763 97 military service under contracts) are actually provided, at the places of their service, with adequate facilities for

FSB 571 - - 200 371 combat training and for the fulfillment of their duties, and

Total 26,909 502 2,562 5,340 18,505 that all the prescribed safety measures are duly observed in the process

From the table it follows that there are no indices of effectiveness as such. At the same time, there indeed exist certain methods for assessing the combat ability of armed forces as an indicator of the FTP's military effectiveness119.

If one makes use of these methods, it would become clear that the fighting efficiency of military units of permanent readiness grows in parallel with its decline in all the other military

119 Tsymbal V., Kardashevskii N. Mnogourovnevyi analiz problem prizyva na voennuiu sluzhbu v Rossii ( A multi-level analysis of the problems related to military draft in Russia) // Voprosy Ekonomiki (Issues of Economics). 2006. No. 1. Pp.70-85. 548

units, because they have already been remanned with citizens drafted not for 2 years but for 1.5 year, and from the year 2008 onward they will be remanned with those drafted for 1 year. The fighting efficiency of this category of regular forces will diminish, due to the insufficient

level of training received by the servicemen, as well as the absence of incentives to serve effi-

120

ciently, to master modern weaponry and to take care of it. It is estimated that the fighting efficiency of the RF contingent of privates and noncommissioned officers as a whole will also decrease.

Thus, the implementation of the FTP appears to be distorted not only with regard to the needs of society and its citizens, but also to the military-political guidelines formulated by the President. The lowering (by comparison with the plan) of the number of contractees, whereas the total number of positions which should be filled by privates and NCOs remains unchanged, will lead to an increase in the number of persons being drafted, while the simultaneously introduced cancellation of deferrals will increase the number of citizens who are eager to pay the "ransom" and have the means to do this, because from now on the persons to be drafted will be, in the main, graduates of higher educational establishments who have acquired professions in demand on the labor market. Such a completion of the FTP will be profitable only to corrupt officials.

As regards the other aspects of the military personnel policy, several acts aimed at actually improving the situation were adopted last year. The RF President's Edict No. 1495, of 10. November 2007, has approved and put into force the new standard regulations of the RF Armed Forces: the Disciplinary Regulations; the Routine Duty Regulations; and the Garrison and Guard Duty Regulations. The following decisions were adopted: on accelerating the increase, in 2008, of the money allowance of servicemen; on repaying the arrears, dating back to 1995, to military pensioners; and on the cancellation of the drafting to officers' positions of graduates of higher educational establishments with military chairs. There are some evident successes in the provision of housing to those servicemen who have received the right to the ownership of housing, and to those who are in need of service housing.

However, so far as the contingent of privates and sergeants is concerned, the planned increase of their pay will not raise their money allowance above the average national wage level, and therefore will not enhance the attractiveness of military service under contracts. The new additional payments introduced by the Minister of Defense's Order, of 01. 11. 2007, No. 450 will merely increase the money allowance of servicemen who serve in the central apparatus of the Ministry of Defense, and not of those who are in the greatest need of this.

5.5.2. The Provision of Technical Equipment and the Ensuring of Functioning of the RF Military Organization

Russia's arms policy was expressed in the classified State Weapons Program (SWP) for the period until the year 2015.

According to the unclassified materials of the year 2007, one could only surmise that the implementation of the Program is snagged by the already well-known problems: the higher is the degree of monopolization (vertical integration being fraught precisely with this), and the

120 Vorob 'ev E., Tsymbal V. Sistema komplektovaniia voennoi organizatsii gosudarstva (The system of manning the military establishment of a State) // Mirovaia ekonomika i mezhdunarodnye otnosheniia (The world economy and international relations). 2007. No. 3. Pp. 85-93.

weaker is competition, the more costly is production. The system of orders for weapons and for war and special equipment (WWSE), as well as the operation of enterprises in the defense-industrial complex have offered numerous examples in proof of this rule. Here are some of them. During the past three years, the cost of the strategic ballistic missile (BM) "Topol' - M" increased more than two-fold, or well above the general level of inflation. Therefore, the rise in expenses on purchasing the BM will not increase the volumes of purchases. The actual rate of innovating the land-based offensive strategic means will remain at the same level of 7 missile complexes per year, which does not correspond to the existing agreements with the USA concerning the levels of strategic weapons. The transmission of the order for the development of the sea-based BM "Bulava" to the traditional developer of land-based BMs resulted not in the promised economy of the funds (due to unification), but in their being overspent, and in a failure to timely commission new naval missile-carriers.

The second military-economic thesis, repeatedly mentioned in the programs of modernization of the DIC, that the DIC is the "locomotive" that will virtually haul the kindred sectors of civilian machine-building to the world level of high technologies, is by no means absolutely correct, either. For this "locomotive" to be operable, it would be necessary for the rules of competition to be observed and for independent civil control to be implemented; also, the thesis needs a scientific substantiation.

In conclusion of this sub-section, we should like to note that the problems of military production development have been aggravated by the deficiencies of military personnel policy, referred to in the previous sub-section. At a special conference, which took place under the chairmanship of First Vice-Premier D. Medvedev, Head of the State Corporation "Russian Technologies" S. Chemezov presented a very grim picture of Russia's defense industry. According to him, the rise in sales of Russian weapons on the external market (by the results of 2007 - 8 billion USD), and in sales within the framework of state defense order, has revealed one of the most acute problems - the lack of regular work force. Today, the average age of a worker is 45 years, while that of a highly qualified worker - 53 years. Despite having enormous funds at their disposal, enterprises simply cannot cope, in a timely and adequate manner, with the tasks assigned to them. For example, the Severodvinsk Machine-Building Enterprise has failed to fulfill India's order for the re-equipment of the aircraft carrier "Admiral Gorshkov". The reason was trivial - the plant did not have enough welders.

In order to improve the situation, it is suggested that the system of vocational training schools and specialized secondary schools should be resurrected under the aegis of the State; besides, incentives should be created for graduates of technological higher educational establishments to go to work, at the DIC's enterprises. Their attractiveness could be achieved, for example, by the provision of these graduates with housing by the employer. But there are other suggestions as well: either to restore the deferral for DIC's workers, or to equate work at these enterprises with alternative civilian service (ACS). The State Duma of the new convocation will consider the corresponding draft law as early as spring 2008121.

121 Litovkin D. Opiat' tebe broniu daet rodnoi zavod "Kompressor"! Kvalifitsirovvanykh rabochikh budut os-vobozhdat' ot armii (And once again our dear plant "Compressor" gives you a draft deferral! Skilled workers will be exempted from military service) // Izvestiia. 12 July 2007.

5.5.3. The Military Expenditures of the Federal Budget

122

The 2007 federal budget envisaged the spending of 822,036 million rubles, which amounted to 2.63% of GDP, or 15% of the federal budget's expenditure under Section 02

123

"National Defense". Although it seemed that the May adjustment of the federal budget did not openly interfere with military expenditures, as early as February the reports of the Federal

124

Treasury began to assert that the allocations under this sections had been set, by the Law, in the amount of 825,169 million rubles; by November, they had grown, without the Law having been formally altered, to 833,978 million rubles. After the 2007 federal budget's acquiring its

125

final shape in November , with the expenditures under Section 02 being fixed at the level of 839,103 million rubles, the discretionary growth of expenditures, nevertheless, continued. Thus, the Government's adjusted budget revenue and expenditure126 authorized the spending, under this section, of as much as 840,623 million rubles in November, and of 843,222 million rubles in December.

In the final version of the federal budget, expenditure rose from 5,463 billion rubles to 6,531 billion rubles, or by 19.6% by comparison with the version dated as of the end of 2006. At the same time, the expenditures under Section 02 "National Defense" grew by 2.1% to 839,103 million rubles, or 2.61% of GDP, or 12.9% of the federal budget's expenditure. It should be noted that the expenditures under the other sections of the budget increased more considerably (with the exception of Section 03 "National Security and Law-Enforcement Activity", where the rise in expenditures amounted to 1.8%).

Due to a more significant growth of expenditures under the unclassified sections of the final version of the federal budget, there was a certain decrease in the degree of its general se-cretiveness, by comparison with both the initial version (from 12.2% to 10.3%) and the two previous federal budgets (see Table 28). However, the secret expenditures of the 2007 federal budget did increase in absolute terms from 669,025 million rubles in the initial version to 674,747 million rubles in the final version.

The 2007 federal budget was the first one where some of the allocations were classified, namely those under Section 11 "Interbudgetary Transfers" and Sub-section 0410 "Applied Scientific Research in the Sphere of the National Economy" of the functional classification of the federal budget's expenditures. And although it is very tempting to believe that the declassification, in 2007, of the allocations under subsection 0806 "Other Issues in the Sphere of Culture, Cinematography and Mass Media" would set a good example for all the developers of the Russian federal budgets, an analysis of the federal budget for the year 2008 and for the

127

2009-2010 planning period 2008 indicates that the tendency toward a steady decrease in the transparency of the main financial document of this country is very much alive.

122 Federal Law "On the 2007 Federal Budget", No. 238-FZ.

123 Federal Law "On the Introduction of Alterations in the Federal Law "On the 2007 Federal Budget", No. 74-FZ, of 15. 05. 2007.

124 Reports on the implementation of the Federal Budget (see http://www.roskazna.ru/reports/fb.html).

125 Federal Law "On the Introduction of Alterations in the 2007 Federal Budget", No. 267-FZ, of 23. 11. 2007.

126 See the Federal Treasury's data on the implementation of the Federal Budget.

127 See Ekonomiko-politicheskaia situatsiia v Rossii. 2007. August. (The economical and political situation in Russia. 2007. August). Pp. 44-48.

Table 28

The Share of the Classified Expenditures of the 2003-2007 Federal Budgets, in %

Code and name of item (or sub-item) that contains classified expenditures 2003 2004 2005 2006 2007

Total expenditure of federal budget 9.73 9.83 11.33 11.80 10.33

01 ISSUES OF NATIONAL IMPORTANCE No data 128 No data 3.67 6.28 5.52

0108 International relations and international cooperation 31.88 18.04 - 0.01 < 0.01

0110 State material reserve 97.73 93.33 82.86 89.23 92.18

0111 Fundamental research - - 2.13 1.22 1.12

0115 Other issues of national importance No data No data 0.05 0.72 0.28

02 NATIONAL DEFENSE 37.22 38.40 42.06 42.77 45.33

0201 Armed Forces of Russian Federation 35.39 36.11 33.07 35.59 37.11

0203 Preparation of economy for mobilization 100.0 100.0 100.0 100.0 100.0

0204 Preparation for and participation in ensuring collective security and peace-keeping activity - - 100.0 100.0 100.0

0205 Nuclear weapons complex 100.0 100.0 100.0 100.0 100.0

0206 Implementation of international obligations in sphere of national defense 100.0 41.05 45.22 46.90 50.65

0207 Applied scientific research in sphere of national defense No data No data 98.37 93.94 93.69

0208 Other issues in sphere of national defense No data No data 2.49 8.79 24.38

03 NATIONAL SECURITY AND LAW-ENFORCEMENT ACTIVITY 23.33 20.79 28.52 31.64 31.07

0302 Internal security agencies 3.40 3.01 4.76 6.31 5.16

0303 Internal service troops 13.21 11.10 11.76 10.31 9.80

0306 Security agencies 100.00 98.91 97.80 95.49 97.31

0307 Frontier service agencies 19.73 22.88 100.00 98.97 97.62

0309 Prevention and liquidation of consequences of emergency situations and natural disasters, civil defense 43.69 41.74 59.02 62.39 50.65

0311 Applied scientific research in sphere of national security and law-enforcement activity No data No data 73.95 66.41 64.43

0313 Other issues in sphere of national security and law-enforcement activity No data No data 8.26 50.71 39.95

04 NATIONAL ECONOMY No data No data 0.05 0.02 0.44

0402 Fuel and power engineering No data No data - - 5.23

0411 Other issues in sphere of national economy No data No data 0.12 0.06 < 0.01

05 HOUSING AND UTILITIES SECTOR No data No data - 3.42 0.85

0501 Housing sector No data No data - 4.22 5.69

07 EDUCATION - - 2.76 2.69 2.39

0701 Pre-school education - - 2.03 2.17 2.44

0702 General education - - 1.51 1.91 2.14

0704 Secondary vocational education - - 1.06 1.03 1.02

0705 Retraining and advanced training - - 16.85 15.78 17.22

0706 Higher vocational education - - 3.15 2.93 2.53

0709 Other issues in sphere of education - - 0.30 0.33 0.28

08 CULTURE, CINEMATOGRAPHY AND MASS MEDIA - - 0.17 0.17 0.21

0801 Culture - - 0.14 0.10 0.16

0804 Periodical press and publishing houses - - 13.46 7.45 2.57

0806 Other issues in sphere of culture, cinematography and means of mass communication - - 0.02 0.15 -

09 PUBLIC HEALTH CARE AND SPORT - - 4.30 3.99 2.57

0901 Public health care - - 5.61 4.66 2.94

0902 Sport and physical culture - - 0.28 0.26 0.24

Total expenditure of federal budget - - - - 0.16

01 ISSUES OF NATIONAL IMPORTANCE - - - - 0.50

Source: IET estimates based on the data of the 2003-07 federal budgets (the data for the years 2003-04 are presented under the corresponding items and subitems of the existing budget classification).

The absolute and relative values of the major components of the RF's military expenditures, and their change by comparison with the year 2006 in accordance with the final version of the 2007 federal budget, are shown in Table 29 (recalculation into 2006 prices has been

128 Can not be applied due to changes in the budget classification's structure. 552

performed on the basis of Rosstat's first estimation of the GDP deflator index for the year 2007129).

Table 29

Direct Military Expenditures of the Federal Budget under the Section

"National Defense"

Sections and subsections 2007 million rubles / same in 2006 prices Change in 2007, by comparison with 2006, million rubles / growth in % Share of 2007 budget expenditures, in % / change by comparison with 2006, in p.p. Expenditures as percentage of GDP / change by comparison with 2006, in p.p. of GDP

NATIONAL DEFENSE 839,103 53,149 12.85 2.54

739,297 7.75 -2.64 -0.01

Armed Forces of Russian Federation 606,163 18,701 9.28 1.84

534,064 3.63 -2.35 -0.08

Mobilization-related and military train- 4,157 146 0.06 0.01

ing for civilians 3,662 4.14 -0.02 -

Preparation of economy for mobiliza- 4,736 672 0.07 0.01

tion 4,172 19.21 -0.01 -

Preparation of and participation in en- 117 43 0.00 0.00

suring collective security and peace- 103 71.,92 - -

keeping activity

Nuclear weapons complex 12,099 -,770 0.19 0.04

10,659 -6.74 -0.07 -

Implementation of international obliga- 6,665 -71 0.10 0.02

tions in sphere of military-technological 5,872 -1.20 -0.03 -

cooperation

Applied research in sphere of national 122,759 14,887 1.88 0.37

defense 108,158 15.96 -0.23 0.03

Other items in sphere of national de- 82,408 19,542 1.26 0.26

fense 72,606 36.83 0.06 0.05

Source: IET estimates based on the data of Federal Laws No. 238-FZ, of 19 December 2006, and No. 267-FZ, of 23 November 2007.

One further part of military expenditures incurred at the expense of other sections of the Russian federal budget is presented in Table 30. In contrast to previous years, it now includes the estimates of the low bound of the military establishment's expenditures incurred under such traditionally civilian budget sections as 04 " The National Economy", 05 "The Housing and Utilities Sector", 07 "Education", 08 "Culture, Cinematography, and Mass Media", 09 "Healthcare and Sports", and 11 "Interbudgetary Transfers".

The indirect military expenditures related to previous defense activity are presented in Table 31, while the aggregate indices of the RF's military expenditures in the year 2007 are presented in Table 32. The observed unprecedented rise in expenditures on pensions was

130

caused by the October decision to repay the State's liabilities, dating back to 1995-98, to pensioners of the Ministry of Defense and of the Frontier Service. The corresponding funds in the amount of 42.615 billion rubles were allocated, in due course, to the RF Ministry of Finance. Without taking this sum into consideration, the Ministry of Defense's pension expenditures in 2007 declined by 2% in real terms.

129 Sotsial'no-ekonomicheskoe polozhenie Rossii: Doklad. (The socio-economic situation in Russia: a report). Moscow: Rosstat, 8 February 2008.

130 Edict of the RF President of 18.10.2007, No. 1373s "On some measures designed to guarantee the social protection of individual categories of pensioners".

Table 30

Direct and Indirect Military Expenditures under Other Items of the Federal Budget

„ , , 2007, million ru-Sections and subsections, or charac- ,, , . ,„„, bles / same in 2006 ter of expenditures prices Change in 2007, by comparison with 2006, million rubles / growth in % Share of 2007 budget expenditure, in % / change by comparison with 2006, in p.p. Expenditures as percentage of GDP / change by comparison with 2006, in p.p. of GDP

Expenditures on military establishment under Section "National security and Law-Enforcement Activity"

Internal service troops 46,394 40,876 Security agencies 115,955 102,163 Frontier-service agencies 56,927 50,156 Units of Ministry for Emergency 24,457 Situations' forces, and civil defense 21,548 2,451 6.38 9,345 10.07 -682 -1.34 -421 -1.92 0.71 -0.16 1.78 -0.32 0.87 -0.28 0.37 -0.12 0.14 0.35 0.01 0.17 -0.02 0.07 -0.01

Expenditures on military establishment under Section "National Economy"

Military types 131 of expenditures 10,410 9,172 Classified expenditures 3,187 2,808 4,134 82.07 2,753 5,004.34 0.16 0.05 0.05 0.05 0.03 0.01 0.01 0.01

Expenditures on military establishment under Section "Housing and Utilities Sector"

Military types of expenditures 15,452 -7,591 0.24 13,614 -35.80 -0.24 Classified expenditures 2,511 353 0.04 2,213 18.99 0.01 Expenditures on military establishment under Section "Education" Expenditures of Ministry of Defense 27,971 -5,131 0.43 24,644 -17.23 -0.24 Classified expenditures 6,862 336 0.11 6,045 5.89 -0.02 0.05 -0.03 0.01 0.08 -0.03 0.02

Expenditures on military establishment under Section "Culture, Cinematography, and Mass Media"

Expenditures of Ministry of Defense 2,429 2,140 Classified expenditures 148 131 376 21.34 37 39.05 0.04 0.00 0.01 0.00

Expenditures on military establishment under Section "Healthcare and Sports"

Expenditures of Ministry of Defense 21,434 18,884 Classified expenditures 7,112 6,266 -2,414 -11.33 -125 -1.,97 0.33 -0.15 0.11 -0.04 0.06 -0.01 0.02

Expenditures on military establishment under Section "Interbudgetary Transfers"

Federal subsidies, subventions and interbudgetary transfers to closed 19,842 administrative and territorial units 17,482 1,645 10.39 0.30 -0.05 0.06

Subventions to budgets to finance the 1189 exercise of powers with regard to 1 048 initial registration for military service ' 48 4.79 0.02 0.00

Source: IET estimates based on the data of Federal Laws No. 238-FZ, of 19 December 2006, and No. 267-FZ, of 23 November 2007.

131 Items 145, 215, 220-252, 256 and 472 of the current budget classification. 554

Table 31

The Indirect Military Expenditures Related to Previous Defense Activity

Sections (subsections) or items 2007, million rubles / same in 2006 prices Change in 2007 by comparison with 2006, million rubles / growth in % Share of 2007 budget expenditure, in % / change by comparison with 2006, in p.p. Expenditures as percentage of GDP / change by comparison with 2006, in p.p. of GDP

Pension provision (Ministry of 129,967 36,025 1.99 0.39

Defense) 114,509 31.46 0.22 0.10

Material support for employees of 1,845 208 0.03 0.01

nuclear weapons complex 1,625 12.79 - -

Housing subsidies for servicemen 29,381 9,908 0.45 0.09

already discharged or being dis- 25,886 38.28 0.09 0.03

charged from service

Source: IET estimates based on the data of Federal Laws No. 238-FZ, of 19. 12. 2006, and No. 267-FZ, of 23. 11. 2007.

Table 32

The Aggregate Indices of Military and Associated Expenditures

Type of expenditures

Total expenditure, million rubles

Share of 2007 budget expenditure, in % / change by comparison with 2006, in p.p.

Expenditure as percentage of GDP / change by comparison with 2006, in p.p. of GDP

Aggregate direct military expenditures 1,201,383 18.39 3.64

-4.18 0.08

Aggregate direct and indirect military expenditures 1,362,576 20.86 4.13

related to current and previous defense activity -3.87 0.05

Total expenditure on national defense, law - enforce- 1,513,893 23.18 4.59

ment activity, and state security -4.86 -0.03

Total direct and indirect federal expenditure related to 1,842,542 28.21 5.59

current and previous defense, law - enforcement activ- -5.39 0.05 ity, and state security

Source: IET estimates based on the data of Federal Laws No. 238-FZ, of 19. 12. 2006, and No. 267-FZ, of 23. 11. 2007.

The data on the month-by-month implementation of the 2007 federal budget's military and associated expenditures are presented in Table 33.

The results of a comparison, by means of Figures 8-10, of the implementation of federal budget expenditures, by each of the major components of direct military expenditures listed in Section 02 "National Defense", have provided no grounds to suggest that the change of the Ministry of Defense's leadership in February 2007 have indeed had any impact on the implementation of expenditures.

On the whole, the dynamics of Russia's military expenditures in the post-crisis period of

132

1999-2007, reflected in Table 34, lend credence to the views of those who eight years ago were warning us about the futility of increasing military expenditures without reforming the institutions inherited by Russia from its Soviet past.

132 Shlykov, V. Neizbyvnyi kompleks (The indelible complex) // L-Vlast', 5 May 2000 (№ 19).

Implementation of Military and Associated Expenditures of the Federal Budget 2007, by month, billion rubles

Table 33

Expenditure items

03

n

n

w

dn

I

03

hl

S 'S ar pr

5! <

y

n

bm

dn

omy

o n o

u

w

National defense 822.0 839.1 22.5 61.1 66.5 72.6 68.5 65.9 67.4 52.9 50.1 60.9 63.8 181.7 7.2

RF Armed Forces 549.9 606.2 20.0 46.2 47.8 55.7 50.2 49.6 46.5 40.6 38.4 45.8 46.4 116.0 4.0

Mobilization-related and mili- 5.9 4.2 0.0 0.1 0.4 0.2 0.2 0.8 0.2 0.2 0.2 0.2 0.4 tary training for civilians

Preparation of economy for 3.5 4.7 0.0 0.1 0.1 0.6 0.4 0.4 0.6 0.3 1.5 0.5 0.9 mobilization

Preparation of and participation 0.1 0.1 in ensuring collective security and peace-keeping activity

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Nuclear weapons complex 12.1 12.1 0.8 3.3 1.5 0.6 1.1 0.4 0.7 0.6 0.8 0.9 0.9

Implementation of international 6.0 6.7 0.8 0.1 0.2 0.8 0.0 0.2 0.8 0.1 0.1 0.7 1.4 obligations in sphere of military-technological cooperation

Applied research in sphere of 120.5 122.8 0.6 10.8 13.1 7.3 10.9 6.5 13.1 5.5 4.3 6.0 4.9 national defense

Other items in sphere of national 79.1 82.4 0.2 0.6 3.4 7.4 5.6 8.1 5.6 5.5 4.9 6.8 8.8 defense

1.0 0.3

0.3 (0.9)

0.0

1.2 -

0.6 0.3

38.5 1.9

24.1 1.7

National security and Law- 662.9 674.8 27.9 42.7 48.4 53.0 49.1 55.7 50.2 51.2 52.6 55.0 60.9 116.5 7.8 Enforcement Activity

Internal service troops 45.9 46.4 1.3 2.5 2.9 3.8 3.8 3.6 3.8 3.8 3.8 3.7 5.0 8.3 (0.4)

Security agencies 113.2 116.0 5.1 6.9 7.8 10.3 7.7 9.1 9.8 9.8 9.3 9.2 9.6 21.5 (0.9)

Frontier-service agencies 55.3 56.9 1.7 3.2 3.1 4.0 3.6 4.1 4.6 4.2 4.1 4.5 5.5 10.1 3.1

Prevention and liquidation of 40.3 42.0 1.6 3.8 4.0 3.8 2.8 3.2 2.6 2.8 2.5 5.2 3.3 6.2 (0.4) consequences of emergency situations and natural disasters, civil defense

Applied research in sphere of 4.7 5.1 0.2 0.3 0.3 0.3 0.3 0.5 0.3 0.3 0.4 0.3 0.5 1.3 0.1 national security and law-enforcement activity

Other issues in sphere of na- 11.2 5.92 0.2 0.5 0.2 0.5 0.2 0.1 0.4 0.2 0.2 0.3 0.2 0.5 2.4 tional security and law-enforcement activity

Source: IET estimates based on the data of the Federal Treasury.

Source: IET estimates based on the data of the Federal Treasury.

Fig. 8. The Implementation of the Federal Budget's Expenditures under Subsection 0201 "The Armed Forces of the Russian Federation" in the Years 2005-07

Source: IET estimates based on the data of the Federal Treasury.

Fig. 9. The Implementation of the Federal Budget's Expenditures under Subsection 0207 "Applied Scientific Research in the Sphere of National Defense" in the Years 2005-07

w 35% £

,-i 30% ■o

c «

Si UJ

25% 20% 15% 10% 5%

O c

<3

ra

c o

E

CP

J= 0%

EL HI

r

a

1

□ 2005

□ 2006 □ 2007

fltitltl

L

1

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___

^ í

L

rv

E ;

to

^ ^ ^ ^ / > J J J ^

^ ^ * * * ^ J? o09 X y

Months

Source: IET estimates based on the data of the Federal Treasury.

Fig. 10. The Implementation of the Federal Budget's Expenditures under Subsection 0208 "Other Issues in the Sphere of National Defense" in the Years 2005-07

Table 34

The Basic Indicators of the Russian Federation's Military Expenditures

in 1999-2007

1999 2000 2001 2002 2003 2004 2005 2006 2007

1 2 3 4 5 6 7 8 9 10

1. In nominal terms (current prices), billion rubles

Execution of FB's expenditures under Section "National Defense", in current budget classification2 115.6 191.7 247.7 295.4 355.7 430.0 581.1 681.8 831.9

FB's allocations under Section "National Defense": in current budget classification 93.7 209.4 214.7 284.2 354.9 427.4 578.4 686.1 839.1

withdrawn to other sections of budget classificationb - - - - - - 44.3 77.7 91.3

in a comparable budget classification 93.7 209.4 214.7 284.2 354.9 427.4 622.6 763.9 930.4

Military expenditures, according to UNOc - 202.6 294.4 325.9 447.0 499.0 665.0 822.1 -

Overall direct military expenditures'1 128.9 270.4 283.4 353.1 456.5 544.5 759.6 992.5 1,201.4

Overall direct and indirect military expenditures related to current and previous military activitiese 144.0 304.6 329.6 455.6 594.6 630.7 844.4 1,079.0 1,362.6

Table 34 (continued)

5 6 7 8 9 10

2. In real terms (in the 2007 prices)', billion rubles

Execution of FB's expenditures under Section 926.8 1,109.9 "National Defense" in current budget classification

933.5

828.3 786.0 797.1 900.0 854.3 831.9

FB's allocations under Section "National Defense":

in current budget classification

withdrawn to other sections of budget classification

In comparable budget classification

Military expenditures, according to UNO

Direct military expenditures

Overall direct and indirect military expenditures related to current and previous military activities

751.3 1,212.4 809.1 796.8 784.2 792.3 895.7 859.7 839.1

68.6 97.4 91.3

751.3 1,212.4

- 1,173.1

1,033.5 1,565.5

1,154.7 1,763.5

809.1 796.8 784.2 792.3 964.2 957.1 930.4

1,109.6 913.9 987.8 925.0 1,029.8 1,030.1 -

1,068.1 990.2 1,008.8 1,009.3 1,176.4 1,243.6 1,201.4

1,242.1 1,277.7 1,313.9 1,169.1 1,307.8 1,352.0 1,362.6

3. In real terms (in 1999 prices), billion rubles

Execution of FB's expenditures under Section 115.6 124.8 120.0 "National Defense" in current budget classification

FB's allocations under Section "National 93.7 136.4 104.0 Defense":

in current budget classification

withdrawn to other sections of budget - - -classification

in comparable budget classification 93.7 136.4 104.0

Military expenditures, according to UNO - 131.9 142.6

Overall direct military expenditures 128.9 176.1 137.3

Overall direct and indirect military expendi- 144.0 198.3 159.6

tures related to current and previous military

activities

112.8 113.9 115.0 125.

117.8 114.7

108.5 113.7 114.3 125.2 118.5 115.7

9.6

13.4 12.6

108.5 113.7 114.3 134.8 132.0 128.3

124.4 143.1 133.5 143.9 142.0 -

134.8 146.2 145.7 164.4 171.5 165.6

173.9 190.4 168.7 182.8 186.4 187.9

4. Military burden borne by national economy, as % o' GDP

Execution of FB's expenditures under Section 2.40 2.62 2.77 "National Defense" in current budget classification

FB's allocations under Section "National 1.94 2.87 2.40 Defense"

in current budget classification

withdrawn to other sections of budget - - -

classification

in a comparable budget classification 1.94 2.87 2.40

Military expenditures, according to UNO - 2.77 3.29

2.73 2.69 2.52 2.69 2.54 2.52

2.62 2.68 2.51 2.67 2.55 2.54

- - - 0.20 0.29 0.28

2.62 2.68 2.51 2.88 2.84 2.82

3.01 3.38 2.93 3.08 3.06 -

1

2

3

4

Table 34 (continued)

1 2 3 4 5 6 7 8 9 10

Overall direct military expenditures 2.67 3.70 3.17 3.26 3.45 3.19 3.51 3.69 3.64

Overall direct and indirect military expenditures related to current and previous military activities 2.99 4.17 3.69 4.21 4.49 3.70 3.91 4.01 4.13

5. By parity of purchasing capacity (current prices), billion USD

Execution of FB's expenditures under Section "National Defense" in current budget classification 21.9 26.8 30.2 31.9 34.2 36.2 44.4 47.5 53.4

FB's allocations under Section "National Defense" in current budget classification 17.7 29.3 26.2 30.7 34.1 35.9 44.2 47.9 53.8

withdrawn to other sections of budget classification - - - - - - 3.4 5.4 5.9

in comparable budget classification 17.7 29.3 26.2 30.7 34.1 35.9 47.6 53.3 59.7

Military expenditures, according to UNO - 28.3 35.9 35.2 42.9 42.0 50.8 57.3 -

Overall direct military expenditures 24.4 37.8 34.6 38.1 43.9 45.8 58.0 69.2 77.0

Overall direct and indirect military expenditures related to current and previous military activities 27.2 42.6 40.2 49.2 57.1 53.0 64.5 75.2 87.4

For reference

Deflator of GDP, as % of a previous year 172.5 137.6 116.5 115.5 114.0 120.1 119.2 115.7 113.5

Deflator of expenditures on final consumption of state administrationg as % of previous year 138.5 153.6 134.4 126.9 119.2 119.7 123.6 125.3 125.3

Parity of purchasing capacity11, rub / USD 5.29 7.15 8.19 9.27 10.41 11.89 13.09 14.34 15.59

a For 2006-2007 - the preliminary data on the execution of federal budgets, released by the Federal Treasury. b The aggregate expenditures of the Ministry of Defense plus the classified expenditures under sections 04-09 and 11 of the 2005-07 federal budgets.

c The data for 1999 were not submitted by the RF Government to the UNO; the data for 2007 will be submitted in 2008, including the expenditures on the upkeep of the Internal Service Forces, frontier guards and civil defense.

d Including on the upkeep of Internal Service Forces, frontier guards, civil defense, and other elements of the military organization.

e Including pensions paid to ex-servicemen.

f Deflated by applying final consumption deflator to state administration expenditures. g For 2007 - the IET's estimates.

h For 2005-2007 - the linear trend of values for previous years (the IET's estimates).

Sources: The Federal Laws on the 1999-2007 Federal Budgets and on the execution of the 1999-2005 Federal Budgets; Natsional'nye shcheta Rossii v 1997-2006 godakh. Statisticheskii sbornik. [Russia's national accounts in 1997-2006. Collection of Essays on Statistics]. Moscow: Rosstat, 2005-2007; Ob''ektivnaia informatsiia po voennym voprosam, vkliuchaia transparentnost' voennykh raskhodov. Doklady General'nogo sekretaria OON 2001-2007 [Objective information on military issues including the transparency of military expenditures. The reports of the UNO Secretary General, 2001-2007]; Rosstat; the Federal Treasury.

5.5.4. The Trends and Outlooks of Development of Russia's Military Economy

Although the implementation of the FTP "The Switchover of a Number of Formations and Military Units to the System of Manning by Servicemen Enlisted for Military Service under Contracts", adopted in 2003, was formally completed in December 2007, in fact, the plan for its implementation has been foiled. From time to time the mass media publish informa-

133

tion133 that the Program should be "supplementarily" implemented in 2008, after which it would become possible to initiate, in 2009, a new FTP aimed at the switchover of the whole NCO component of the RF military organization to the system of manning by volunteers enlisted for military service under contracts.

The undisputed successes achieved in recent years have confirmed once again, especially in the struggle against terrorists and armed bands in the North Caucasus, that the military security of this country should be ensured by professionals. The most successful changes have taken place in the Border Service of the FSB, where the draft was completely discarded, while some lesser, although still very substantial, changes occurred in the Interior troops of the Ministry of Internal Affairs. The worst situation is observed in the RF Armed Forces.

However, due to the outflow of contractees from the military units not included in the list of military units of permanent readiness and their replacement with draftees, the overall capability of the RF Armed Forces will decline, this being the result of the lower combat efficiency of the present-day draftees, and especially of those draftees who will serve one year only.

The attractiveness of military service under contracts will not increase either, as proved by the attitude towards it displayed by the Ministry of Defense's leadership during the FTP's implementation. Over that period, the program was adjusted four times. The expenditures on the FTP rose by almost 20 billion rubles in the 2003 prices. The number of positions to be filled by contractees diminished by almost 9 thousand. Not a single penny of the additional (with respect to the initial plan) allocations was spent on increasing the increment to money allowance, although it is this increment that largely determines the attractiveness of military service under contracts. Despite the fact that the overall rise in expenditure amounted to 20%, the expenditures on capital construction and repairs grew by 44% against the initially set amount; the expenditures on scientific research increased by 15%; and the other expenditures - by 7%, the increment to money allowance introduced in order to increase the attractiveness of military service under contracts has not been indexed since 2003. As inflation rose to more than 46% over the past four years, this increment has by now been depreciated by almost 75%. Neither the 15% rise in payments from 1 December 2007, nor their increase in 2008 promised by the President will be able to change the situation.

The socially significant results expected from the FTP, which are more important for society than for the army, cannot be considered to have been fully implemented either. The case in point is the following task of the FTP, declared in its certificate: "the reduction of society's dissatisfaction with the existing system of manning the RF Armed Forces and other troops, military formations and organs, and with these servicemen being dispatched for military service in the "hot spots". The cancellation of the socially significant draft deferrals (car-

133 See Iuzbashev, V. Intellekt staviat pod ruzh'e. [Intellect under arms] // Nezavisimoe voennoe obozrenie [The independent military review], 2007, 21-27 December (No. 45), p. 3.

ried out simultaneously with the reduction of the term of service") will produce a reverse effect - the growth of society's dissatisfaction; or, to be more specific, it will result:

- in undermining the tentative achievements in the State's demographic policy (because of the drafting of young fathers), as it is absolutely clear to everybody that a compensation in the amount of 6 thousand rubles / month per every child whose father will be drafted cannot be considered as adequate, bearing in mind that the average wage in the country approaches 14 thousand rubles per month;

- in reducing the personnel potential of defense industry (because of the drafting of the young workers with the most sought after specialties, who used to be granted deferrals, and the drafting of young engineers who have oriented themselves to work in the DIC;

- in increasing the intensity of the "brain drain" (because of the drafting of the majority of graduates from higher educational establishments irrespective of their specialties, who are afraid of army service as such, in addition to the potential resulting loss of qualification and career prospects).

There is one real achievement among the socially significant results of the FTP: according to the assurances of high-rank officers, no draftees are serving in Chechnya. However, the legal possibility of servicemen enlisted for compulsory military service being used in combat action in time of peace had not been eliminated. At least in the existing Military Service, Item 3 of its Article 2 still reads: "Servicemen enlisted for compulsory military service can be dispatched (including within a subunit, unit, or formation) to perform tasks in conditions of armed conflicts (or for taking part in combat action) after their having served for no less than six months and after their having been trained in military occupation specialties".

A similar situation exists with regard to many other factors determining society's dissatisfaction not only with the current system of manning, but also with the general state of affairs in military units. The reasons for citizens' discontent and the facts of violation of their rights are as numerous as ever. It is typical that in the period after the year 1999, the number of servicemen who perished outside of the zones of combat activity ("non-combat casualties") was approximately equal to that of combat casualties.

Thus, the military personnel policy, already demonstrated in the period of the FTP's implementation, could be beneficial only to criminal structures who profit on the deficiencies of the system of manning the army and on the citizens' fear of military service.

After the year 2007, it could lead the country to a social explosion.

There is no need for any new recommendations to be invented in this connection. One has simply to recall some of the existing ones:

1. To discuss the results of the FTP at an open joint meeting of the Interdepartmental Commission, created to analyze the FTP's progress, and representatives of all nongovernmental organizations who capable of presenting independent estimates of the FTP's results and of the state of affairs in regard to compulsory and contractual military service. It is important that the participants should be on a timely basis provided with complete financial and economic information on the FTP and its previous substantiation. Only after all the deficiencies of the previous FTP are taken into consideration, a new one can be initiated.

2. To urgently increase the level of money allowance of all contractees, from soldier and sailor upwards (and not only in military units of permanent readiness), to a level by 20% higher than the average wage in the country. This level should be then sustained on the annual basis. It should be noted that the afore-said level has remained stable since the 2001 survey

conducted by the All-Russian Center for Public Opinion Studies and referred to in the IET's previous publications. The results of surveys carried out by the Russian State Insurance Company have confirmed this conclusion134. The size of a "just" wage for workers of budget-funded institutions is estimated in accordance with the age and the level of well-being of the respondents. Young people aged up to 26 years are sure that private contractees should get the highest wages (23,400 rubles). Female respondents also "voted" for contractees (26,300 rubles). The most generous wages were suggested by Muscovites (up to 35,000 rubles), while the lowest (from 13,000 rubles upwards) ones - by residents of small towns.

The money allowance of officers, warrant officers and midshipmen should also be accordingly increased. It should be necessary to simultaneously reduce the number of troops, mainly in those military units that are not included in the category of "permanent readiness" or are not on stand-by duty.

3. It is necessary to urgently revise (in cooperation with non-governmental organizations, which is absolutely essential) the legislative base of military service, and to eradicate its defects concerning the draft procedure and the procedure for the enrollment of contractees, as well as the terms of contractual and compulsory military service. It should be laid down in a law that the only purpose of military service in time of peace should be the acquisition, by a serviceman or woman, of a military occupation specialty necessary for his or her further service in regular forces and for his or her being included in military-trained manpower resources (or reserve), if the military-political situation in the world would require it to be sustained at a corresponding level.

4. It is equally crucial to lose no time in initiating an open discussion of the main directions of RF military-technological policy in the part concerning the rational use of know-how and dual-purpose technologies in the interests of the development of the civil economy and for the sake of achieving all types of beneficial economic effects, including the military, economic, and commercial ones.

5. The recommendations regarding the problems faced by the military budget also remain unchanged.

It is high time to coordinate the RF budget classification with the mission, objectives and tasks of the RF military organization's activity, and to establish a strict correlation between the indices characterizing this activity and the amounts being spent on their implementation. Without this, as far as the prospects for the future are concerned, RF military expenditures will be implemented without any control - at least during the period until the year 2010.

RF military expenditures will continue to be overclassified in excess of any reasonable norms and, most importantly, this will be done with violation of the federal law on State secrets. This corruption-generating defect of Russian budgetary system will surely exert a very negative influence not only of the military economy of the Russian Federation, but also on its national economy as a whole.

Of course, the actual military expenditures of the RF, if estimated by the international standards of military expenditures of states (it is not without interest that they are acknowledged by Russia), indeed exceed the level, in percentage points, of GDP as shown in the budget and as declared by the military-political leadership of the RF. This situation by no means improves the image of the State in anybody's eyes.

134 Vedomosti. 2007. 19 December (No. 240).

So far as the issue of manning is concerned, equally detrimental is the fact that among all G-8 countries, compulsory military service is preserved only in the RF and Germany, although the term of service in Germany is only 9 months, while the level of support for every serviceman, including those who are enlisted for compulsory military service, is better than that enjoyed by the Russian contractee. The same is true of the conditions of military service.

As regards the declared advantages of the three-year planning of the budget, especially that established for the military organization, the results already visible at end of 2007 (after the final approval and the subsequent publication of the budget) has shown that the budget needed adjustment even for 2008, the first of the three years under consideration. And this indeed happened in early 2008 with regard to the expenditures on combat training, the money allowance of servicemen, and, correspondingly, the pensions of former servicemen.

5.6. Municipal Reform: Accumulation of Problems and Search for Solutions

5.6.1. Changes in the Federal Legislation in 2007

In 2007, the process of revision of the federal legislation on local self-government continued. In sum, there were adopted 9 federal laws, which introduced amendments to Federal law No. 131 FZ of October 6, 2003, "On the general principles of the organization of local self-government in the Russian Federation" and to certain articles of sector specific laws regulating the powers vested in the bodies of local self-government. At the same time, it should be noted that the majority of amendments aimed at the division of powers between different levels of government was adopted in the last quarter of 2007. This development was in line with the tradition, in accordance with which the most significant amendments pertaining to this sphere were adopted at the very end of each year, already after the budgets had been approved, thus creating substantial difficulties for regions and municipal entities as concerned their plans pertaining to the financing of powers newly vested in them.

The major avenues of development of the federal legislation concerning local self-government in 2007 were the following:

- The settlement of the issues pertaining to the division of powers and

- Introduction of changes in the economic and financial principles of local self-government.

Besides, some updates were made to the territorial and organizational principles of local self-government, as well as the laws regulating the functioning of local self-government in the territories with special status.

In the sphere of division of powers, the most significant changes and updates were aimed, on the one hand, at a more precise determination of powers vested in the bodies of local self-government and related to the settlement of issues of local importance already vested in municipal entities, and, on the other hand, at the expansion of the sphere of competence of municipal authorities.

There were more precisely determined the powers of local governments relating to four issues of local importance vested in the municipal tier by law No. 131-FZ, i. e. the following issues:

135

- Organization of delivery of health care to the population ;

- Implementation of primary measures aimed at fire protection of the population centers being parts of settlements and city okrugs136;

137

- Creation of conditions facilitating development of small and medium sized businesses ;

138

- Carrying out of road related activities as concerns motor roads of local importance .

The sphere of competence of municipal entities was enhanced via the introduction of additional rights and powers of the bodies of local self-government. For instance, in the sphere of public health care bodies of local self-government were granted the right to create emergency medical services with the structure of health care institutions at the expense of the revenues flowing in local budgets. Besides, there was introduced the power of the bodies of local self-government to organize training, retraining, and professional development of elected officials of local self-government, members of elected bodies of local self-government, deputies of representative bodies of municipal entities, as well as municipal officers and municipal

139

employees . There were also enhanced the possibilities to delegate state powers to the municipal level.

In the sphere of territorial principles of local self-government, there were elaborated certain issues, which previously had not been regulated by federal laws. For instance, there were envisaged certain procedures governing the alteration of limits of city okrugs by the way of inclusion into them of urban and rural settlements, as well as the procedures related to the liquidation of municipal entities in the territories characterized by low density of the population and hard to reach areas. In the process of settlement of the issues related to the inclusion of settlements in the composition of city okrugs there was streamlined the procedure permitting to take into account public opinion: it was manifested via decisions of representative bodies, whereas with respect to the majority of other types of transformations concerning settlements and the limits thereof public opinion should be manifested via voting or at the meetings of citizens.

In the sphere of organizational principles, the amendments, introduced in 2007, limited the opportunities of the heads of local administrations, deputies, exercising their powers on an ongoing basis, members of elected bodies of local self-government, and elected officials to engage in paid activities140.

135 The amendments to the sector specific laws were introduced by article 6 of federal law No. 230-FZ of October 18, 2007, "On the introduction of amendments to certain legislative acts of the Russian Federation in relation to the improvement of division of powers" (hereinafter referred to as law No. 230-FZ).

136 The amendments to the sector specific laws were introduced by article 7 of law No. 230-FZ.

137 The list of powers vested in the bodies of local importance was set by federal law No. 209-FZ of July 24, 2007, "On development of small and medium sized businesses in the Russian Federation" (entered into force on January 1, 2008).

138 The list of powers vested in the bodies of local self-government was set by federal law No. 257-FZ of November 8, 2007, "On motor roads and road related activities in the Russian Federation and the introduction of amendments to certain legislative acts of the Russian Federation." The same law has changed the definition of the issue of local importance, which had been earlier defined as "the maintenance and construction of motor roads for public access, bridges and other transport engineering facilities within the limits of populated centers of the settlement...".

139 The amendments to article 17 of federal law No. 131-FZ introduced by article 26 of law No. 230-FZ.

140 Federal law No. 24-FZ of March 2, 2007, "On the introduction of amendments to certain legislative acts of the Russian Federation as concerns the elaboration of requirements to the persons holding state or municipal offices, as well as state or municipal public servants".

Besides, the federal legislation determined the requirements to the activities of representative bodies of local self-government and penalties for the failure to meet these requirements, including the dissolution of respective representative bodies by decisions of subjects of the Russian Federation141. It should be noted that control over the activities of representative bodies of local self-government was introduced not only at the municipal, but also at the regional level.

The reforming of financial and economic principles of local self-government was also carried out across several avenues. In the sphere of property relations there were adopted amendments aimed at the expansion of the list of permitted types of properties for municipal

142

entities . Municipalities of all types may now have the property designated for the development of small and medium sized businesses. There was also elaborated the issue related to the ownership of objects created at the expense of government investments and aimed at the development of the social and engineering infrastructure of municipal entities, which, since that moment, should, on compulsory basis, be transferred in the municipal ownership143.

In 2007, there was significantly altered the budgetary legislation. Federal law No. 63-FZ144 introduced significant amendments to the RF Budget Code, such as:

• Alteration of the requirement criteria pertaining to the distribution of revenues generated by lease and sale of the plots of lands, the state ownership of which was not divided, among municipal budgets. More specifically, 50 per cent of revenues derived from the use of the plots of land were transferred to the budgets of municipal districts in stead of the budgets of settlements, as it had been the case earlier;

• More precise determination of the sources of non-tax revenues of local budgets;

• Introduction of tighter control measures with respect to the activities of the bodies of local self-government in recipient municipal entities;

• Alteration of the mechanisms, governing the provision of targeted transfers aimed at the resolution of the issues of local importance, more specifically, the merger of the funds of municipal development and co-financing of social expenditures into the regional fund of co-financing of expenditures;

• Introduction of an opportunity to provide grants from the regional funds of financial support of settlements proceeding not only from the number of residents, but also fiscal capacity of the settlement145;

141 Federal law No. 101-FZ of June 18, 2007, "On the introduction of amendments to certain legislative acts of the Russian Federation as concerns the issue of activities carried out by legislative (representative) bodies of state power of the subjects of the Russian Federation and representative bodies of municipal entities".

142 Item 20 of article 26 of law No. 230-FZ.

143 Article 19 of law No. 230-FZ.

144 Federal law No. 63-FZ of April 26, "On the introduction of amendments to the Budget Code of the Russian Federation as concerns the regulation of the budgetary process and harmonization of certain legislative acts of the Russian Federation with the budgetary legislation of the Russian Federation".

145 It should be noted that the amendments permitting to equalize the fiscal capacity of settlements were introduced only to the first part of article 137. In the third part of the analyzed article there was retained the stipulation of the law being previously in force that "the amount of the said grant should be determined for each subject of the Russian Federation eligible for the reception of the grant proceeding from the number of residents of the settlement on per capita basis". As a result, the issue, which of the two provisions of the law should use regions determining their policies towards settlements, remained unregulated.

• Granting of the right to delegate certain budgetary powers of the financial bodies of settlements to the financial body of the municipal district on the basis of agreements;

• Change of the official term for the "negative transfer" from "subvention" to "subsidy."

Among other changes introduced to the federal legislation concerning local self-government there should be also noted the resolving of the issues related to the organization of local self-government in the territories with special status. In particular, there was expanded the list of territories, for which there were established specific features of organization of local self-government. Such a status was granted to the territories situated in the areas of the Far North and the territories with the similar status characterized by limited time of delivery of goods (products). For such territories, it was established that the powers related to the ensuring of deliveries of certain goods (fuel and energy resources, food products and goods for production and technical purposes), which should be delivered on the centralized basis, should be exercised by the executive authorities of the RF subjects146. Significant changes were also made with respect to federal law No. 3297-1 of July 14, 1992, "On the closed administrative

147

and territorial entity ".

The introduction of article 18.1 on the assessment of the effectiveness of activities of the bodies of local self-government, which envisaged that at the expense of the financial resources of the subject of the Russian Federation to municipal entities there should be provided grants aimed at the facilitation and (or) encouragement of attainment of the best values of the indicators of efficiency, in law No. 131-FZ, may be seen as the continuation of the trend towards the centralization of power. It should be noted that the list of indicators is approved in accordance with the procedures determined by the President of the Russian Federation. In fact, this article envisaged that the federal and regional authorities should assess the activities of municipal authorities, which, in accordance with the RF Constitution, are separated from the system of state authorities in the Russian Federation.

5.6.2. Changes in the Regional Legislation

In accordance with federal law No. 129-FZ of October 12, 2005, the deadline for the full scale implementation of the municipal reform was put off until January 1 of 2009. Prior to that date there should be in force a transition period, during which regions should annually adopt laws setting the procedures governing the resolution of local issues by newly created settlements, including the amount of powers vested in such settlements, organization of funding of resolution of local issues, and so on.

An analysis of the regional legislation in this sphere in 2006 based on the rates and scale of implementation of the municipal reform permitted to identify four groups of regions:

• Those, where, in accordance with the regional legislation, the municipal reform should be implemented in full since January of 2006. According to the official data presented by the RF Ministry of Regional Development, in 2006 47 regions implemented the municipal reform in full; however, basing on the research carried out by IET, it may be concluded that

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the number of such regions was somewhat less and amounted to 45 ;

146 Item 21 of article 26 of law No. 230-FZ.

147 Article 36 of law No. 230-FZ.

148 According to the data obtained in the course of a study conducted by IET, in 2006 such regions as Moscow, St. Petersburg, the Tyumen oblast and the Sakhalin oblast were removed from, while the Astrakhan oblast and the Leningrad oblast were added to the list of the RF Ministry of Regional Development, since the latter introduced

• Those, in which some issues of local importance in all newly created settlements, were assigned to municipal districts. This group included 26 regions. It should be noted that in 2006 from 3 to 24 issues of local importance were transferred to newly created settlements;

• Those, which had set different rates of implementation of the municipal reform for different groups of newly created settlements. This group included 9 regions;

• Those, which in fact failed to start the implementation of the municipal reform in 2006 and delegated all issues of local importance to the level of municipal districts. Such a policy was pursued by 3 regions.

In 2007, the regional legislation concerning this issue changed rather significantly. Among major changes, there should be noted the following:

1) The number of regions, where the municipal reform was implemented in full, has increased;

2) As concerns the regions, where the municipal reform had not yet been fully implemented, a typical feature of such regions was an expanded list of local issues delegated to the level of settlements;

3) In the regions failing to fully implement the municipal reform there was observed a trend towards singling out of certain territories, where the municipal reform is implemented in full as an experiment;

4) Regional laws on the procedures governing the resolution of local issues paid more attention to the problems of distribution of municipal property between municipal districts and settlements.

The distribution of regions across the four groups as registered in 2006 changed as follows.

According to the information presented by the RF Ministry of Regional Development, in 2007 the number of regions comprising the first group, i.e. the regions, where the municipal reform was implemented in full, made 57 subjects of the Russian Federation. In comparison with the data for year 2006, 11 regions were added to the list and the Sakhalin oblast was removed from it. Taking into account the merger of the Taimyr (Dolgano-Nenets) and the Evenk autonomous okrugs with the Krasnoyarsk krai, it may be said that the group of regions, where the municipal reform was implemented in full, amounted to 55 regions. The authors deem that this group consists of 55 regions (taking into account the territorial transformations in the Krasnoyarsk krai this group is comprised of 53 regions); it should be noted that some of them were included in this group with certain reservations149. The authors of the survey be-

limitations on the independence of an insignificant number of newly created settlements. The factors behind the differences in the list of regions, which implemented the municipal reform in full, are described in detail in "Mu-nitsipalnaya reforma v 2007 g.: osobennosti realizatsii" [Municipal reform in 2007: the specifics of implementation] (to be published). However, on the whole it may be said that the RF Ministry of Regional Development primarily oriented towards the "letter" of the law, whereas the authors proceeded from the "spirit" of the law.

149 The authors still insist that the cities of Moscow and St. Petersburg, as well as the Tyumen oblast, should not be included in the first group and can not agree with the inclusion of the Republic of Karelia, where the regional legislation delegated 2 key issues of local importance to the district level, in the first group. At the same time, the Leningrad and Tomsk oblasts are viewed as those, where the municipal reform was implemented in full, on the basis of the fact that there limitations on the independence were imposed on only an insignificant number of newly created settlements. It should be also noted that the inclusion of the Republic of Komi, where some tax and

lieve that the number of regions belonging to this group increased by 10 in comparison with the data for year 2006. It should be noted that 4 regions of the second group and 6 regions of the third groups joined the first group.

In 2007, the second group of regions, where some local issues to be resolved by newly created settlements were vested in municipal districts, comprised 19 regions. Since 2006, this group has diminished by four regions, which were entered in the first group, and by six regions now being in the third group; however, two regions from the fourth group were entered in the first group that year (the Yaroslavl and Magadan oblasts). In 2007, the settlements newly created in the regions of this group were vested with the resolution of 3 to 32 local issues. A significant number of regions have substantially expanded the list of local issues vested in the newly created settlements. Such regions included, among other subjects of the Russian Federation, the Nizhny Novgorod, Novgorod, Pskov, and Ryazan oblasts, the Republic of Karelia, the Republic of Khakassia, and the Udmurt Republic.

At the same time, the fact that although the list of local issues assigned to settlements expands, the ratio between the regions, which finance newly created settlements on the basis of budgets and financial estimates remains practically the same, gives rise to serious concerns. In 2007, only 9 out of 19 regions comprising the second group transferred budget powers to the newly created settlements. It should be noted that in the Samara and Yaroslavl oblasts it was done only partially: the powers concerning the approval of budgets and control over the administration thereof, whereas the municipal district were vested with the powers related to the formation and administration of budgets. In the Republic of Bashkortostan it was legislatively established that settlements should exercise tax and budgetary powers in the full amount. At the same time, the legislation envisaged that bodies of local self-government of settlements should have the right to delegate these powers to municipal districts on the basis of agreements.

As concerns the third group of regions, which set different rates of implementation of the municipal reform for different groups of newly created settlements, 6 regions of this group moved to the first group. At the same time, this group grew by 5 regions at the expense of the second group of regions (the Kemerovo, Murmansk, Saratov, Tver oblasts and the Khanty-Mansi autonomous okrug (KhMAO). Therefore, in 2007 this group comprised 8 regions.

The most typical trend observed in the third group of regions was the setting of pilot sites, where the provisions of federal law No. 131-FZ were implemented in full as an experiment. Thus, in the Kemerovo oblast it was envisaged to fully introduce the municipal reform in nine municipal districts, in the Tver and Saratov oblasts - in two municipal districts, whereas in the Khanty Mansi Autonomous Okrug it was planned to implement the municipal reform in full in 11 settlements of three districts. It is of interest to analyze the terms of such an experiment conducted in the Tver oblast, where, according to the available information, in the pilot territories the practice of delegation of powers from settlements to municipal districts on the basis of respective agreements had been significantly limited and the municipal reform was implemented in its "pure form". In the regions belonging to this group, where test sites were organized, different rates of transition to the full scale implementation of the municipal reform were set depending on the status of the settlement - was it urban or rural one (the Vladimir oblast), or was in the jurisdiction of a certain municipal district (the Novgorod

budgetary powers were retained at the level of municipal districts, in the list of regions, which had fully implemented the municipal reform, is also open to questions.

oblast). In certain regions belonging to this group the division of powers was carried out taking into account the individual specifics of settlements, their economic and human resources capacities.

At last, in 2007 only the Sakhalin oblast could be defined as a region belonging to the fourth group of regions, i.e. of those, which failed even to launch the implementation of the municipal reform. The Sakhalin oblast chose to create urban okrugs on the basis of rural districts, and at the moment in its territory there exist only three urban and three rural settlements. All local issues in these settlements were delegated to municipal districts.

The analysis of the regional legislation on the procedures governing the resolution of local issues in newly created settlements, which were used in 2007, permitted to arrive to the conclusion that there was achieved a certain progress as concerns the scale of implementation of the municipal reform in the territory of the Russian Federation as compared with 2006; however, it should be taken into account that the real depth of the transformations depended not only on the stipulations of the regional legislation. There was sufficient number of tools, both within and outside the legal framework, which permitted to impose limitations on the independence of municipal entities even in the case all rights and powers envisaged by the federal legislation were assigned to them.

5.6.3. Need to Change Approaches to the Territorial Organization of Local Self-Government

General Description

A component of the implementation of the municipal reform in the Russian Federation was significant transformation of the territorial organization of local self-government. The base concept of the reform in this sphere was the mass transition to a two tier model - it was envisaged that across the whole territory of the country with the exception of large cities and sparsely populated territories local self-government should exist both at the level of municipal districts and rural and urban settlements. The practical implementation of this approach resulted in the fact that the number of municipal entities increased almost twofold150; it should be noted that rural settlements accounted for the bulk of the total growth. In the course of implementation of the reform of the territorial organization, the legislation on local self-government failed to take into account the financial capacities of newly created municipal entities, as well as existing engineering and social infrastructure. As a result, the majority of rural settlements were being organized within the limits, where there had previously existed rural councils; it should be also noted that there was not taken into account the existence of prerequisites necessary to resolve the issues of local importance as it was envisaged by federal law No. 131-FZ "On the general principles of the organization of local self-government in the Russian Federation"151. Such an approach was inevitably fraught with inevitable problems and conflicts, what was indeed observed in the course of the practical implementation of the municipal reform.

150 According to the data presented by the RF Ministry of Regional Development, as on January 1, 2007, in the Russian Federation there existed 24.2 thousand municipal entities, whereas prior to the launch of the reform this number made 12.6 thousand.

151 In a number of regions, for instance, in the Tver and Vologda oblasts, as well as in the Khabarovsk krai, in the course of transformation of the territorial structure there were adopted more balanced approaches.

The start of the practical implementation of the municipal reform revealed a need to introduce changes in the approaches to the territorial organization of local self-government. In 2007, these processes affected many regions and were implemented along different avenues. It should be noted that there were observed the following changes in the territorial organization:

- Attempts to merge rural settlements, envisaging first of all incorporation of financially un-viable municipal entities into those with more developed economic base;

- Continuation of the processes facilitating the withdrawal of the status of city okrugs from towns and incorporation thereof in the composition of municipal districts;

- A tendency towards creation of city okrugs on the basis of municipal districts;

- Registration of precedents of initiatives aimed at the division of artificially formed city okrugs and recreation of the two tier system of local government in the respective territories;

- The beginning of processes of enlargement of municipal districts;

- A search for mechanisms of administration of city agglomerations.

The intensification of processes of the territorial transformations revealed the following inconsistencies and problems related to these reforms:

• High proneness to conflicts of the processes of transformation of the territorial organization of local self-government;

• Lack of regulation of many avenues of territorial transformations in the legislation resulting in the fact that they fully or partially developed outside the legal framework;

• Public consciousness (including the consciousness of regional legislators) was dominated by the concept of legitimate nature of any decision adopted by referendum regardless of the fact if the respective issue was in the terms of reference of the respective tier of government and if an expression of the popular will was envisaged as a mechanism governing the resolution of this issue.

Such a situation resulted in a significant differentiation of approaches to the implementation of the territorial transformations in different regions and different interpretations of the federal legislation and its adaptation to local needs, as well as significant difficulties concerning the transformation of the territorial organization of local self-government in different subjects of the Russian Federation.

Enlargement of Settlements and Municipal Districts

In different regions, the processes of amalgamation of settlements developed with the different degrees of success. According to the information presented by the RF Ministry of Regional Development, a rather large scale enlargement of rural settlements was registered in the Kirov oblast, where this process affected 12 municipal districts, whereas the number of

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rural settlements in the oblast declined by 33 settlements . At the same time, in a number of other regions large scale initiatives in this sphere remained unimplemented.

In this respect, an illustrious example was the situation observed in the Chelyabinsk oblast, where there was advanced one of the most large scale initiative aimed at the transfor-

152 Itogi realizatsii Federalnogo zakona ot 6 oktyabrya 2003 g. No. 131-FZ "Ob obshchickh printsipakh organi-zatsii mestnogo samoupravleniya v Rossiyskoi Federatsii v 2007 g. [The results of implementation of federal law No. 131-FZ of October 6, 2003, "On the general principles of the organization of local self-government in the Russian Federation" in 2007] / D. R. Khromov, Ed. - M.: ID "Yurisprudentsiya", 2007. - p. 24.

mation of the territorial organization of local self-government. In the summer of 2007, the oblast administration made a list of 67 settlements to be liquidated due to their financial de-

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pendence by the way of merging them with more financially independent territories . As a criterion, there was used the amount of tax and non-tax revenues, which in the settlements planned for liquidation was below 200 thousand rubles a year, what was insufficient even to maintain their administrative staffs. This initiative encountered an active opposition on the part of the municipal community of the oblast. On August 14, 2007, in Chelyabinsk in order to discuss this issue there was held a round table organized by the Association of rural settlements of the Russian Federation and the Association of rural municipal entities of the Chelyabinsk oblast154. In the course of the meeting, the heads of settlements and the associations representing them voiced their resentment of the idea of amalgamation stating that too little time had passed since the moment of the launch of the reform for the local self-government could realize its potential and defended the right for the equalization of fiscal capacities at the level of the subject of the Russian Federation, what should ensure that each settlement could resolve the issues of local importance.

After the encounter with the resentment of the ideas they advanced, the regional authorities did not insist on the planned large scale amalgamation. Already by the time of organization of the round table the number of settlements entered in the list was reduced to about two dozens. Later, by the date of the vote timed to coincide with the date of elections to the RF State Duma on December 2, 2007, only 8 projects of amalgamation of settlements remained on the list155. In the course of the voting, such projects were rejected in the overwhelming majority of settlements. It should be noted that the turnout of the voters made from 66 per cent to almost 75 per cent, i. e. this ballot reflected the real will of the population. Only in one case the population voted for enlargement: residents of the Babarykinsky and Spassky rural settlements situated in the territory of the Verkhneuralsk district supported the initiative aimed at the merger of settlements. The turnout in these settlements amounted to 83 per cent and 66 per cent and 52 per cent and 82 per cent of the citizens participating in the ballot cast their votes for the enlargement. However, on the whole it may be acknowledged that the initiative of the regional authorities aimed at the enlargement of settlements has failed, at least for now156.

A similar situation was also observed in the Amur oblast. In this region, the voting on the issue of amalgamation of municipal settlements was held in 23 settlements. Similarly to the situation in the Chelyabinsk oblast, the turnout of voters was rather high. However, the decision on enlargement was taken only in two cases. It should be noted that against this decision voted mostly the residents of economically weak municipal entities to be included in other municipalities.

153 In total, there were 274 settlements in the territory of the Chelyabinsk oblast.

154 As concerns the range of problems relating to the municipal entities lacking the sufficient tax base and recommended to be merged with other municipal entities, see the verbatim report of the round table "Mestnoye samoupravleniye kak resurs razvitiya strany" [Local self-government as a resource for the development of the country], Chelyabinsk, August 14, 2007.

155 The information on the results of the voting is presented as published by the local press. See, for instance, Alexander Polozov, Alexander Panan, "URA.Ru", August 7, 2007, an interview of a deputy of the Governor of the Chelyabinsk oblast, "Guberniya", September 5-11, 2007.

156 However, attempts to merge settlements continue - a new stage of the voting on this issue is to be held on March 2, 2008.

As concerns the processes of enlargement of municipal districts, at present this issue in the majority of regions is less urgent than the problem of amalgamation of settlements. Nevertheless, in certain subjects of the Russian Federation the regional authorities are planning large scale reforms along this avenue justifying them, in particular, by the need to create favorable conditions for the implementation of regional strategies.

The Change of the Status of Municipal Entities

The legal framework concerning local self-government contains only one variant of changes as concerns the change of the status of urban settlements in connection to the granting to it of the status of a city okrug or withdrawal of the status of a city okrug. In 2007, transformations of this kind were a characteristic feature, for instance, in the Krasnodar krai. In this krai, there were underway the process of withdrawal of status of city okrug from towns and inclusion of them into the composition of municipal districts. Thus, law No. 1254-KZ the town of Yeisk was deprived of the status of a city okrug and granted the status of an urban settlement included in the composition of the Yeisk municipal district. Similar procedures were launched with respect to the city okrugs Tikhoretsk and Tuapse.

Along with the legitimate (although not always positive) processes of change of the status of the city okrug, in 2007 the transformations of this type were characterized by two other processes, none of which was regulated by the federal legislation. On the one hand, in a number of regions there began apparent the tendency to grant the status of city okrugs to municipal districts. On the other hand, there were observed precedents of the advancing of initiatives aimed at the division of artificially created city okrugs and recreation of the two tier system of local self-governance in the respective territories.

Since the legislation did not directly envisage the process of creation of city okrugs on the base of municipal districts, in this case there were used the mechanisms permitting to achieve such results by making a certain series of steps aimed at the transformation of municipal entities. It should be noted that different algorithms were used in different regions.

Thus, in the Belgorod oblast, for instance, on the base of municipal entities there were created two city okrugs - Gubkin and Stary Oskol. The process of transformation was implemented on the base of the following steps: 1) development and approval of the general plan of an urban settlement - a district center embracing the whole territory of the district; 2) organization of the voting of the population on the issue of agreement to amalgamate all settlements situated in the territory of the municipal district thus creating a new municipal entity, which should be granted the status of a city okrug and in which the territories of settlements should be granted the status of administrative entities of the city okrug; 3) adoption of a regional law on the change of the territorial organization of local self-government.

A different variant was envisaged as concerned the amalgamation of the Odintsovo district of the Moscow oblast initiated by the head of the district. In this case, the proposed transformation clearly was politically motivated and was aimed at the retaining of the right to dispose of land and other valuable resources in this territory by the municipal district. The initiative on this transformation include neither the working out of an integrated general plan of development of the territory as an urban settlement, neither a program of development of the territory of the district as a single urban territory. It should be also noted that in the territory of the district there were situated independent city okrugs, the destiny of which in the course of the transformation was also not determined.

The algorithm of the transformation planned in this case included the following stages: 1) organization of local referendums on the change of the administrative and territorial structure of the district aimed at the transformation of six towns and urban type settlements into rural settlements; 2) amalgamation of new rural settlements with the urban settlement Odintsovo resulting in the creation of a single urban settlement; 3) granting of the status of a city okrug to the urban settlement created within the extended boundaries.

In the course of this process there emerged numerous scandals and conflicts. In spite of an unprecedented administrative pressure, in one of the urban settlements the local referendum held on December 2, 2007, rejected the transformation. At present, the combination of the high proneness to conflicts of the processes of transformation, an active opposition on the part of the expert community and the interest of international organizations in the outcome of the confrontation resulted in the halt of the implementation of plans aimed at the amalgamation of the Oditsovo district.

Even more complicated situation develops in the case the regional authorities attempt to liquidate the distortions of the federal legislation and recreate the two tier model of local self-government in the territories of the artificially created city okrugs. For instance, such a problem was encountered by the authorities of the Kaliningrad oblast. The first step towards the resolution of this problem was the claims submitted by the Governor of the oblast to the regional Charter Court; with respect to these claims the court passed the judgment that a number of laws on the territorial organization of local self-government in the Kaliningrad oblast was not in conformity with the Charter of the Kaliningrad oblast. In the autumn of 2007, there was adopted a number of legislative acts of the Kaliningrad oblast aimed at the change of the territorial organization of local self-government. Primarily, these acts concerned the Baltiysk and Svetlogorsk city okrugs.

However, the laws concerning the transformation of the Baltiysk city okrug were disputed in the regional court on the basis that they were adopted without taking into account the opinion of its residents. The RF Supreme Court upheld the ruling of the Kaliningrad oblast

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court . At present, the legislation of the Kaliningrad oblast concerning the territorial transformation of the Baltiysk city okrug is reviewed by the RF Constitutional Court. The ruling of the RF Constitutional Court concerning this case will be of the principal importance for further reforms both in the Kaliningrad oblast and other regions of Russia.

Urban Agglomerations

Quite new processes of the transformation of the territorial organization of local self-government were related to the creation of urban agglomerations. The legal framework of the Russian Federation contains no definition of agglomeration. However, since the spring of 2007 this problem was more actively discussed. By all appearances, this problem had attracted attention due to the implementation of the project "Affordable Housing". However, the immediate impulse to such a discussion came from the RF Ministry of Regional Development, which announced the creation of urban agglomeration centers with multimillion populations as one of the strategic avenues of spatial development of Russian territories permitting to create the basic structure of the system of administration and modernization of the national econ-

157 See: http://www.regnum.ru/news/923610.html report of November 29, 2007, "Verkhovny sud otkazalsya uprazdnyat Baltiysky gorodskoi okrug v Kaliningradskoi oblasti" [The Supreme Court refused to liquidate the Baltiysk city okrug in the Kaliningrad oblast]. 574

omy. As a priorities there are reviewed projects "Greater Rostov" (the amalgamation of Rostov-On-Don, Novocherkassk, Taganrog, Aksai, Bataisk, Azov), agglomeration "Irkutsk -Angarsk - Shelekhov", "Vladivostok - Nakhodka - Ussuriysk - Artem", "Samara -Togliatti", "Tomsk - Seversk" and some others.

In 2007, the major processes related to the formation of urban agglomerations developed along two avenues.

On the one hand, there was started the elaboration of a number of projects envisaging the creation of polycentric agglomerations with several city nucleuses on the basis of the ideology developed by the RF Ministry of Regional Development. As concerns these projects, the most intensively there develops the situation around the project "Irkutsk - Angarsk -Shelekhov." With the help of experts, there were determined the limits of the agglomeration. There was started the elaboration of specific projects permitting to ensure a dynamic development of the agglomeration in such spheres as transport, water supply, utilization of solid household waste, and so on. There were discussed the variants of specialization of territories within agglomerations, as well as projects of creation of new development centers (for instance, the move of the administrative center outside the limits of the city of Irkutsk). In the structure of administration of the Irkutsk oblast there was established the office of a deputy of the Governor responsible for the creation of a free economic zone of recreational nature at the Baikal and formation of the Irkutsk urban agglomeration.

However, the example of the Irkutsk agglomeration helps to understand the conflicts inevitably related to the processes of amalgamation. While the authorities of the towns of Angarsk and Shelekhov actively supported this process since they hoped to benefit because of it both in economic and political aspects, the authorities of Irkutsk oppose such an initiative. The major concerns related to the political consequences of this process are also clear - the creation of the agglomeration may result in the continuation of centralization of political power at the regional level and formation of a mechanism permitting to further limit rights and powers of the bodies of local self-government.

The processes of agglomeration also intensified in the Chuvash Republic. In this region there were in fact made first steps towards the reformation of the Cheboksary agglomeration on the base of amalgamation of the cities of Cheboksary and Novocherkassk situated 15 kilometers from each other and a part of the Cheboksary district. It should be noted that in this case there was chosen the toughest form of amalgamation - the full merger of different municipal entities. Such an approach, in the case it is used, would result in rather serious problems relating to the ensuring of manageability of new municipal entities, which, as the international experience demonstrates, require significant efforts to be resolved.

On the other hand, there develop natural processes of formation of monocentric agglomerations around large cities reflecting the intensification of interrelations of the city nucleus with surrounding territories on the basis of push pull migrations, economic ties, processes of suburbanization, and so on. In this case, the inter-municipal cooperation in different forms is an organizational mechanism of agglomeration. A certain experience of such activities was obtained in the city of Tver, where there was organized cooperation with the bodies of local self-government of the Kalininsky and Rameshkovsky districts. In order to ensure the implementation of the agreement on cooperation between the administrations of the city of Tver, the Kalininsky and Rameshkovsky districts, the Tver City Duma had approved the city targeted program "Inter-municipal cooperation in 2006 through 2008". Similar programs aimed

at the fulfillment of common tasks of inter-municipal cooperation were adopted also in both suburban districts.

Similar processes were observed in the framework of the Chelyabinsk agglomeration. There was organized cooperation between the city and suburban municipalities as concerns the issues relating to production and sale of agricultural produce. There were also elaborated the opportunities of cooperation along some other avenues, for instance, water supply and utilization of solid household waste. There had started to function a working group consisting of chief architects of the municipalities comprising the agglomeration of municipalities and deputies of the heads of municipal entities responsible for economic issues. The work carried out by this group was aimed at the coordination of general plans of development of municipal entities. There was underway the preparation for the creation of the Agglomeration Council.

Since urban agglomerations are a new and actively developing element of the territorial structure, special attention should be paid to the experience relating to the organization of cooperation among municipal entities and within them.

5.6.4. Ways of Efficient Resolution of Issues of Local Importance of Settlements

Traditionally, the discussion on the ways of resolution of local issues at the level of settlements has been focused on the question if settlements have sufficient resources to exercise the powers vested in them. This survey focuses on the issues, what factors determine the efficiency of the resolution of local issues at the level of settlements (and, therefore, the amount of necessary resources), and to what extent settlement use the resources available for the enhancement of efficiency.

Creation of numerous small municipal entities has made more urgent the problem of losses resulting from the insufficient scale as concerned the resolution of issues of local importance. However, in the course of the reform it was expected that such losses could be compensated as a result of:

• The powers related to the organization of provision of services ensuring the maximum economy of scale will be concentrated at the level of municipal districts;

• At the level of settlements, there will be introduced additional mechanisms of mobilization of the potential of local communities permitting to compensate losses;

• Settlements will use the mechanisms of inter-municipal cooperation in order to enhance the efficiency of their activities.

The two year experience of implementation of the municipal reform permits to arrive to some preliminary conclusions on the extent to which these expectations were fulfilled. A research concerning the current situation permitted to reveal the following specific features of the resolution of issues of local importance at the level of settlements.

First, it has turned out that the division of issues of local importance between municipal districts and settlements failed to fully prevent losses resulting from insufficient scale of activities. It was caused not only by mistakes in the division of powers between the two tiers of the local self-government, but also the underestimation of such a factor that the uniform division of the jurisdictions of the bodies of local self-government notwithstanding the density and dispersion of the population, as well as the prevalence of urban or rural territories in any case results in inevitable losses. At present, this problem is especially apparent in the sphere of collection, removal and utilization of household waste. The legal framework of local self-

government assigns the issues related to collection and removal of waste to settlements, whereas the issues of utilization of waste were assigned to municipal districts. In the case the density of the population is high, settlements are not far from each other, and the road network is developed, it is really more feasible to concentrate utilization and processing of household waste at higher tiers of municipal administration both in economic and social terms. However, as concerns territories characterized by low density of the population and significant territorial dispersion of settlements all these positive effects are brought to naught. In the situation, where a transport haul to the solid waste landfill makes several dozens kilometers, it turns out that transportation of waste to the official landfills is economically unjustified. At the same time, the bodies of local self-government of a municipal district have no incentives to take

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into account the interests of settlements as concerns this issue . As a result, in the best case settlements organize own landfills without any official supervision, and in the worst case the waste is unloaded outside special landfills: in forests, on the sides of motor roads, and so on. It has significant harmful environmental consequences and negatively affects the attractiveness of territories, particularly their recreational capacities.

Second, there became apparent the major avenues of the use of internal reserves becoming available due to the fact that authorities draw nearer to the population. Among the respective positive effects of the reform are the following.

1) The bodies of local self-government of settlements get incentives to mobilize the revenues generated by local taxes. At the level of settlements there is carried out the work aimed at the inventory of properties subject to taxation; work on the issues of registration of properties and prompt paying of taxes as concerns the population; delivery of tax demand notifications to tax payers; work with tax evaders. However, the current legal, normative and organizational system of tax administration fails to create adequate conditions for participation of settlement administrations in this process. As a result, activities carried out by different authorities overlap; spheres of responsibility of participants of this process and sanctions imposed in the case of the failure to exercise their functions are not clearly determined; there are not also organized information flows. Municipal entities lack the data needed to mobilize own revenues, as a result they are forced to keep their own registers of taxpayers, gather information on tax arrears and so on, in other words, they have in fact to carry out same activities as the tax authorities, which poorly cope with the administration of local taxes. At the same time, the tax authorities actually force upon local administration the exercise of some of their functions, for instance, the delivery of tax demand notifications.

2) Possibility to concentrate resources for the priority avenues of municipal development in the situation of the switch over from the estimate based financing to the budget based financing. A study of the budgets at the level of settlements reveals that the structure of expenditures significantly differs; it should be noted that whereas in some cases the priority is provision of urban amenities, in other cases it is culture. However, in the situation of a significant limitation of the independence of settlements in the budgetary sphere, the source of implementation of priorities is mainly the above-plan revenues generated primarily by local taxes, as well as better outreach with respect to land holders.

3) Possibility to use the potential of mobilization of resources being at the disposal of the local community for the resolution of issues of local importance. The use of these possi-

158 It should be noted that by no means all municipal districts have official landfills at all; however, it is a different problem not discussed in this study.

bilities is affected both by objective and subjective factors. The subjective factors relate to the strategies of administration implemented in municipal entities. Basing on the results of the study, from this standpoint all municipal entities may be classified into four groups:

• Settlements trying to copy the methods of organization of administration characteristic of much larger structures: municipal districts, regions, and so on. It means the introduction of the administrative machinery, in the framework of which the activities of each municipal officer should be clearly specialized; there should be provided the full funding of the resolution of local issues from the budget of the settlement; in each settlement there should be organized own municipal enterprises, and so on. Apparently, such a system should inevitably bear significant losses resulting from insufficient scale of activities and experience permanent deficit of budget resources allocated for the resolution of issues of local importance, as well as bear a significant burden of administrative costs and other negative consequences.

• Settlements oriented towards the minimization of own powers and responsibilities to the population, as well as delegation of the overwhelming number of powers to the level of municipal districts.

• Settlements, carrying out primarily politically motivated mobilization of the local communities. The main goal is to struggle with district authorities, obtain the maximum amount of powers, properties, and financial resources, often notwithstanding the fact if the settlement is actually able to resolve all issues of local importance and if it is economically feasible.

• Settlements, where mobilization of the local communities is primarily carried out in order to ensure the resolution of issues of local importance and improvement of living standards in the settlements. Although political motives are also present, they are primarily related to the need to create conditions facilitating the improvement of living standards. By all appearances, this group of settlements is the least numerous one. It should be noted that this model of self-government could result only from a combination of rather unique conditions, for instance such as:

- Existence of a charismatic municipal leader;

- High level of education of the settlement administration;

- Existence of the economic basis and prospects of the economic growth;

- Existence of a structured local community comprising different groups of interests.

As concerns the objective conditions, they are determined by the existence of legislative

prerequisites enabling municipal authorities to use the resources of local communities. It should be noted that such conditions are not favorable for municipal entities. The federal legislation either does not envisage certain mechanisms of mobilization of such resources at all (for instance, the involvement of businesspersons in the resolution of issues important for local communities), or over-regulates such mechanisms, what results in the fact that to be used in practice they require significant time and financial expenditures (for instance, self-taxation and labor duty). As a consequence, such mechanisms do not disappear, but used in non-legal forms. Thus, in spite of the absence of local taxes on businesses, in practice businesspersons have to finance vital activities of local communities; however, this financing is outside the legal framework and may acquire the form of "municipal racket", what has a significant negative effect on business interests. Such a method as self-taxation is still used, but rather in the

traditional, customary for local communities forms than in the forms envisaged by the legisla-

tion159.

Therefore, there may be drawn the conclusion that the municipal reform resulted in certain positive consequences as concerns the organization of resolution of issues of local importance at the level of settlements. However, these consequences could manifest themselves only partially and in a limited number of municipal entities. The main factors limiting the positive effect of the reforms may be reduced to the following:

- Financially stable settlements disposing of economic bases and organizational capacities, primarily created prior to the launch of the municipal reform, are the main source of best practices;

- The share of such settlements is rather low, whereas the mechanisms governing the dissimilation of best practices practically do not work due both to the lack of sufficiently favorable conditions facilitating better awareness thereof, and the absence of the institutional framework of this process;

- The federal legislation fails to create favorable conditions for the implementation of best practices; moreover, they are rather often implemented in the forms not fully answering the provisions of the law.

Third, as concerns the inter-municipal cooperation with respect to the resolution of issues of local importance, these tools remained underdeveloped. It is not surprising in the situation, where the mechanisms aimed to ensure contract enforcement in the country are not sufficiently efficient and the risks of inability to resolve issues of local importance arising as a result of a failure to fulfill obligations on the part of a side of an agreement of inter-municipal cooperation are rather high.

AAA

Our study revealed that in 2007, as compared with the situation observed in 2006, both positive and negative processes relating to the implementation of the municipal reform were more apparent.

As positive trends, there may be indicated the following:

• A greater number of regions implement the reform in full or show progress as concerns its implementation;

• There have begun to manifest themselves positive consequences of enhanced independence of settlements; as the major effects there may be listed the tendency of settlements to mobilize revenues generated by local taxes, use the possibilities to implement the priorities of municipal policies as a result of switching from the estimate based financing to the budget based financing, and attract of resources available to local communities for resolution of issues of local importance;

159 In this situation it is apparent that the amount and the structure of local budgets not always adequately reflect the actual amounts of financial resources used for the resolution of issues of local importance. It should be noted that without carrying out a special study, it is impossible to determine the size of discrepancies: according to the results of the study it may make from 20 per cent to 25 per cent. Such a situation is characteristic exactly for the relations with the business community, which may be characterized as "municipal racket", i. e. the expenditures related to provision of amenities in the territories of settlements, as well as a significant amount of investments in the infrastructure, social and cultural facilities and so on are shifted on local businesses.

• Urban problems have begun to play a more active (although clearly not sufficient) role in the sphere of municipal policies; there have started processes of formation of urban agglomerations of both monocentric and polycentric nature; the issues related to the ensuring of competitive capacities of urbanized territories both domestically and in the international arena gather in importance.

At the same time, the problems emerged due to the launch of the municipal reform or becoming more urgent in the process of its implementation manifest themselves more actively. As concerns this issue, there may be pointed out the following negative effects:

• In the course of the reform of the territorial organization of local self-government insufficient attention was paid to the objective processes underway in the system of population patterns in the territory of the Russian Federation, what resulted in the creation in the territory of the country of numerous unviable settlements, the potential of which does not permit to ensure the resolution of issues of local importance. In all probability, it may be assumed that over time this problem will rather become more urgent than mitigate.

• In the course of implementation of the reform there was registered the impact of certain factors resulting in economic losses in the process of resolution of local issues due to the impossibility to ensure the economies of scale at the level of settlements on the one hand and the underestimation of the transport factor as concerns the organization of provision of municipal services on the other hand. The uniform division of issues of local importance between municipal districts and settlements notwithstanding the density and pattern of the population results in inevitable losses. This trend intensifies even more due to the fact that many settlements try to copy the methods of organization of administration characteristic of much larger administrative units and are applied at the level of municipal districts or city orkugs. At the same time, possible compensation mechanisms relating to the development of inter-municipal cooperation and utilization of the capacities of local communities are underdeveloped and not always function efficiently.

• Many processes, the necessity of which is felt in the course of implementation of the municipal reform, have no adequate legal mechanisms of actualization. In particular, it concerns changes in the territorial organization of local self-government. As a result, the processes not clearly formalized in legal terms are implemented with apparent infringements on the legislation currently in force, and the common law begins to play a more important role in this sphere. Thus, the decisions approved by the population at referendums are assumed to be legitimate regardless of the fact if they were in compliance with the law and if an expression of the popular will was in principle envisaged as a mechanism governing the resolution of the respective issue. Due to the absence of local taxes on businesses, the participation of businesspersons in the resolution of issues of local importance in the territories of municipal entities is also to a significant degree carried out outside the legal framework and in many places acquires the form of "municipal racket", what has a significant negative impact on business interests.

Certain barriers on the way of more efficient implementation of the municipal reform can be overcome in the framework of the current adjustment of the existing federal legislation. These problems have been many times discussed in the municipal expert community; however, the respective amendments have been never introduced. Among these amendments are, in particular, the following:

- Simplification of the mechanisms of self-taxation of the population;

- Extension of the legislative mechanism governing the distribution of municipal property between newly created settlements and municipal districts the municipal entities, which existed prior to the launch of the municipal reform;

- Introduction of the possibility to assign to municipal entities individual standards of tax rates at the expense of grants, which would be fixed for the medium term period, and without limitations on the composition of taxes160;

- A tighter regulation with respect to the provision of transfers from the budgets of municipal districts to the budgets of settlements or exclusion of such issue as the "equalization of the levels of fiscal capacities of the settlements being in the composition of the municipal district at the expense of the financial resources of the budget of the municipal district" from the list of issues of local importance for municipal districts;

- The return of the full amount of powers relating to the disposal of land and revenues generated by the lease of land to the level of settlements.

Other problems require a rather serious adjustment of the current approaches to the organization of functioning of local authorities and introduction of significant changes in the legislation, what should be a subject of a serious and comprehensive discussion. Among such problems there may be indicated the following:

- Organization of administration of local taxes;

- Determination of the composition of local taxes and the extent of independence of municipal entities as concerns the imposition thereof.

At the same time, there is a number of problems, the mechanisms of settlement of which are in principle not apparent, since such problems are originated by the conceptual approaches to the transformations in the sphere of local self-government, for instance:

- Significant differentiation of the economic situation, financial and human resources capacities, and the prospects of development of settlements in the situation they are assigned the single list of issues of local importance;

- Impossibility to ensure the division of issues of local importance between municipal districts and settlements, which would be efficient regardless of the conditions, under which this division would exist (density and pattern of the population, types of buildings and so on);

- Inevitable losses relating to the insufficient scale as concerns the resolution of issues of local importance at the level of settlements in the framework of the exiting system of population patterns, and the further deterioration of the quality and affordability of municipal services in the case it is attempted to administratively limit the expenditures for these purposes.

160 The limitation of tax revenues to the income tax exclusively was removed for the transition period until January 1, 2009; however, it remained in force for the period of full implementation of the municipal reform. The setting of tax rates for the medium term outlook is possible in the framework of the three year budget; however, it is not apparent that these rates will not be differentiated across years, what, from the standpoint of creation of incentives for mobilization of taxes, is undesirable.

5.7. Legal Aspects of the Functioning of Development Institutions

The year 2007 became a key period in the development of the financial and normativelegal base of development institutions, since it is then that they began to receive substantial financing. Besides, that year a number of fundamental federal laws were adopted, which were designed to regulate the procedure for their formation and functioning. Among these new laws, the following are noteworthy:

• Federal Law of 17 May 2007 No. 82-FZ "On the Bank for Development";

• Federal Law of 19 July 2007 No. 139-FZ "On the Russian nanotechnologies corporation";

• Federal Law of 23 November 2007 No. 270-FZ "On the public corporation "Rostekhnolo-gia"; and other normative legal acts regulating the operation of such organizations;

• Article 179.2 of the RF Budget Code (BC) "The Investment Fund of the Russian Federation", which augmented the RF BC on the basis of Federal Law of 26 April 2007, No. 63-FZ, "On the introduction of changes into the Budget Code of the Russian Federation in the part of budgeting process regulation, and on bringing individual legislative acts of the Russian Federation in conformity with budgetary legislation of the Russian Federation".

Although the notion itself of "development institutions" received no legislative definition, this term has been widely applied in literature on economics and law161. It seems that, as the distinctive features of development institutions, the following specific attributes of their operation should be pointed out:

- Investment-oriented activity;

- performance-based results of their operation;

- an institution's functioning in the form of a juridical person;

- an institution's activity related to the socioeconomic policy of the Russian Federation;

- part of their funding being received from the federal budget of the Russian Federation;

- absence of the status of a budget-funded institutions, and operation on a basis other than budget.

These criteria are fully complied with by the following entities:

• the Bank for Development (Vneshekonombank - VEB);

• the RF Investment Fund;

• the Russian Venture Company (RVC);

• the Russian Nanotechnologies Corporation (Rosnanotekh);

• the Public Corporation "Rostekhnologia";

• the Agency for Housing Mortgage Crediting (AHMC).

The afore-listed development institutions should be distinguished from those development instruments that include various forms of direct financing and financial support of investment projects, which can be described as follows:

- federal and departmental target programs;

- a targeted investment program;

- concession agreements;

- non-program budget investments; and other instruments.

161 See, e.g., the approach to the term's definition applied by the Center for Strategic Research http://www.csr.ru/document/original_452.stm; Kudrin: 640 billion rubles will be allocated to development institutions. http://business.restate.ru/news/35607.html. 582

Special economic zones (SEZ), from the point of view of law, are also an instrument rather than an institution for development, since they create conditions for improving investment climate. However, they do not act in their own name as public investors.

These development instruments can be used by applying the following forms of budget support for investment projects:

- subsidies;

- credits;

- guarantees;

- participation in the capital of juridical persons (investors), etc.

Below we are going to discuss briefly the main peculiarities and problems inherent in the functioning of each of these development institutions, established in 2007.

The Bank for Developmental (Vneshekonombank). At present, the main issues of the Bank's functioning are regulated by the following normative acts:

1. Federal Law of 17 May 2007 No. 82-FZ "On the Bank for Development";

2. The memorandum on the financial policy of the public corporation "The Bank for Development and Foreign Economic Activity (Vneshekonombank)", approved by Regulation of the Government of the Russian Federation as of 27 July 2007, No. 1007-r;

3. The provision on the Supervisory Board of the public corporation "The Bank for Development and Foreign Economic Activity (Vneshekonombank)".

As the Federal Law "On the Bank for Development" was adopted only as late as May 2007, the normative base for its operation is still being elaborated and therefore does not contain all the necessary normative and local acts.

With the enactment of the new law, Vneshekonombank changed both its organizational-legal form and the directions of its activity. While previously it had had the status of an ordinary credit institution, from the year 2007 onward it acquires that of a public corporation, while its operation was, in fact, placed outside of the sphere of control of the RF Central Bank. In particular, now its activity is not subject to regulation by legislation on banks and banking activity, which established the following procedures:

1. state registration of credit institutions;

2. licensing of banking operations;

3. liquidation and reorganization of credit institutions;

4. disclosure of information concerning the activity of credit institutions;

5. compliance with the requirements to stability and financial reliability of credit institutions, as well as compliance with other mandatory requirements and normative standards.

Besides, the activity of Vneshekonombank, after it acquired the status of a not-for-profit organization (NPO), is no more subject to the provisions regulating the procedure for effectuating control over the operation of NPO stipulated in Items 3, 5, 7, 10, and 14 of Article 32 of Federal Law of 12 January 1996, No. 7-FZ, "On Not-For-Profit Organizations".

Thus, Vneshekonombank is not subordinated directly to the Central Bank and financial control agencies, and its activity is controlled only by the RF President and the Government of the Russian Federation. And, since neither legislation on banks, nor legislation on the securities market, let alone budget legislation, apply in full to the Bank for Development's activity, each of the Bank's powers listed in the Law and Memorandum require, in fact, some additional regulation to be introduced. Thus, further elaboration is needed for:

- the mechanisms for internal and external control over Vneshekonombank's activity;

- the procedure for its interaction with federal and regional bodies of state authority, and with bodies of local self-government;

- the mechanisms for its interaction with other development institutions, credit institutions, and insurance organizations;

- the procedure for opening its affiliations in the territory of the Russian Federation and abroad, as well as other directions of its activity.

Besides, no distinct definition has been offered for the terms of which the projects to be granted financial support from Vneshekonombank are to be selected, or for the guarantees of "absence of competition" on the part of Vneshekonombank in respect of credit institutions162. From a comprehensive interpretation of the Law's and Memorandum's texts it follows that the projects receiving such support must be, on the one hand, profitable, and on the other, no other banks must aspire to be the source of their financing (the no competition principle). It is unclear, however, how these two conditions are expected to be complied with.

One more task requiring lawmakers' attention is that of delineating more distinctly the areas of the Bank for Development's activity and those of the other development institutions functioning in the Russian Federation; of mapping the prospects for their interaction; and of finding a solution to the issue as to which directions of the national economy's by branch development may be allocated support backed by the Bank's resources (innovative only, or any). In accordance with Item 7 of the Memorandum, "the main branch priorities of the Bank for Development's activity in the years 2007-2010" are as follows:

a) rocketry and space-systems complex;

b) shipbuilding;

c) electronics industry;

d) nuclear power industry, including nuclear power engineering;

e) machine-building for transport, special purposes and power engineering;

f) metallurgy (production of steels for special purposes);

g) woodwork industry;

h) the defense-industrial complex.

In this connection, it is not quite clear as to which individual branch development projects being implemented in the afore-listed areas can be covered by VEB's activity: only those involving support of innovative research and development, or the financial support of projects aimed at promoting a given branch as such.

The Public Nanotechnologies Corporation (Rosnanotekh). The procedure for the Corporation's functioning is determined by:

1. Federal Law of 19 July 2007, No. 139-FZ, "On the Russian Nanotechnologies Corporation";

2. Decree of the RF Government of 2 August 2007, No. 498, "On the Federal Target Program "Development of infrastructure for the nanoindustry in the Russian Federation for the years 2008-2010";

162 A comprehensive interpretation of the norms stipulated in the Law and Memorandum has led to the conclusion that the granting of financial support from the Bank for Development's resources should be based on the results of a contest between projects and organizations. However, no terms of such a contest have been clearly defines for any of the areas to be supported. 584

3. Regulation of the RF Government of 25 August 2006, No. 1188-r, "On the program for coordinating works in the field of nanotechnologies and nanometarials in the Russian Federation";

4. Regulation of the RF Government of 07 September 2007, No. 1175-r, "On the composition of the Supervisory Board of the Russian Nanotechnologies Corporation";

5. Order of the RF Chief State Sanitary Physician of 23 July 2007, No. 54, "On the supervision over the products obtained with the use of nanotechnologies and containing nanoma-terials".

The Corporation, similarly to the other development institutions, has been created in order to support and promote primarily innovative infrastructures. However, in contrast to VEB, the Investment Fund and the SC "Rostekhnologia", the Corporation, just as the RVC, has been assigned a relatively "narrow" field for investing in science and technologies - the sphere of nanotechnologies.

On the whole, the Corporation's organizational form and the forms of its activity resemble those of the other development institutions established in the form of a public corporation. Similarly to the other development institutions, with the exception of the Investment Fund, the Corporation enjoys a broad range of rights and a high degree of independence in dealing with its day-to-day issues, including those relating to the investment of its funds163.

In particular, the Corporation may engage in entrepreneurial activity, since in Article 5 of Law No. 139-FZ it is stipulated that the Corporation's property "shall be formed by a contribution of property by the Russian Federation, incomes received from the Corporation's activity; voluntary contributions and donations, and by other legal receipts, and shall be owned by the Corporation". Besides, the Corporation has the right, at the expense of its property, "to create other not-for-profit organizations and enter in associations and unions on conditions determined by the Supervisory Board of the Corporation". As for not-for-profit organizations, these are not, in fact, in any way restricted by existing legislation in their right to engage in commercial activity, either.

In addition, Law No. 139-FZ establishes the Corporation's right "to form target funds" (that is, to create target capital for achieving the goals of its activity in the procedure envisaged by Federal Law of 30 December 2006, No. 275-FZ, "On the procedure for forming and using target capital by not-for-profit organizations").

In this connection, some of the norms stipulated in Law No. 275-FZ may be regarded as contradictory to Law No. 139-FZ. The essence of the problem is that Law No. 275-FZ imposes rigid restrictions on the range of NPOs empowered to create their target capital. In accordance with this Law, target capital may be formed exclusively by the following entities:

- funds;

- autonomous not-for-profit organizations;

- nongovernmental organizations;

- nongovernmental funds;

163 Its property is to be formed by a contribution from the Russian Federation; incomes from the Corporation's activity; voluntary contributions and donations; and by other legal receipts. The Corporation is the owner of this property.

- religious organizations164.

A "public corporation", while being a form of an NPO, does not belong to the category of organizations with the right to create target capital. And, since the Law "On the Russian Nanotechnologies Corporation" does not elaborate on the procedure for applying the norms stipulated in Federal Law No. 275-FZ to the Corporation's activity, this may be interpreted as a ban on the formation of target capital by the Nanotechnologies Corporation.

The procedure and terms for its formation by the Corporation have been, in fact, left largely unregulated. Even if it is assumed that the Corporation, with time, will indeed become able to create own target funds, it will still be necessary to solve the problem of selection of asset managers to be assigned with the task of trust management of the Nanotechnologies Corporation's funds, since it is envisaged in the Law "On the procedure for forming and using the target capital of not-for-profit organizations" that an external manager must be attracted for carrying out the operations with target capital.

In accordance with Article 2 of the Law, the target capital of a not-for-profit organization represents "part of property of a not-for-profit organization" formed "by the donations contributed by donor(s) in the form of monies, transferred by the not-for-profit organization into trust management to an asset manager in order to generate income to be used for financing the charter activity of the not-for-profit organization, or of other not-for-profit organizations, in the procedure envisaged by the Federal Law".

No special norms designed to regulate the terms for selecting companies to be entrusted with the management of the Corporation's target funds could be found either in Law No. 139-FZ or in the normative acts adopted as by-laws. By way of comparison, it should be noted that the other development institutions transfer public funds to assets managers on a more transparent basis. Thus, the criteria for selecting venture companies to act as asset managers, at least in a general form, have indeed been established by the Russian Venture Company (RVC).

As a result, it can be concluded that if the norms stipulated in the Law "On the procedure for forming and using the target capital of not-for-profit organizations" will be applied to the Corporation's target funds without any reservations, there will be only limited areas for investing its target capital.

Besides, the Corporation's activity in some respects differs from that of other development institutions. In addition to a more "narrow" sphere for investing resources, lawmakers have also specified some conditions for their placement. Thus, while Vneshekonombank and RVC are orientated towards ensuring at least a minimum level of profitability of the projects they choose to finance, the Corporation is orientated more toward subsidizing innovative developments, while not being required to ensure their profitability.

It should be noted that at least in the sphere of subsidizing nanotechnologies the Corporation is not competing with other development institutions, while its activity, from the point of view of goals, is to a large extent duplicated by that of the bodies of state authority engaged in the implementation of the Federal Target Program "Development of infrastructure for the nanoindustry in the Russian Federation for the years 2008-2010"165. Among the state agencies

164 In accordance with Article 2 of Law No. 275-FZ, the target capital's owner may be only a not-for-profit organization created in the organizational-legal form of a fund, an autonomous not-for-profit organization, a nongovernmental organization, a nongovernmental fund, or a religions organization.

165See the RF Government's decree of 2 August 2007, No. 498. 586

acting as the Program's customers, the following have been designated: the Federal Agency for Science and Innovations, the Federal Agency for Public Education, the Federal Agency for Nuclear Power, the Federal Outer Space Agency, the Federal Agency for Industry, the Federal Agency for Technical Regulation and Metrology, and the Federal Service for Technical and Expert's Control. The role of customer and coordinator has been assigned to the Ministry of Public Education and Science of the Russian Federation.

It is also noteworthy that the Russian Nanotechnologies Corporation is not mentioned among the recipients of budget funding under the Target Program, and therefore it is unclear how it interacts with the state customers for the Program.

The funding channeled through the Program, similarly to Rosnanotekh's funding, is allocated to the elaboration and marketing of nanotechnologies.

The Public Corporation "Rostekhnologia". In November 2007 Federal law of 23 November 2007, No. 270-FZ, "On the Public Corporation "Rostekhnologia" was adopted, which provided the basis for creating yet another state structure, to be allocated substantial funding from the federal budget for the promotion of innovations and hi-tech industries.

In accordance with Article 3 of this Law, the goal of the Public Corporation "Rostekhnologia" is to "promote the development, manufacture and export of hi-tech industrial products through providing support, on the domestic and foreign markets, to Russian organizations - developers and manufacturers of hi-tech industrial products, attracting investments to organizations belonging to different branches of industry, including the defense-industrial complex".

Thus, the new corporation's activity, in addition to "civilian" innovations, also encompasses the commercialization of military and dual-purpose products. It should be noted that the Corporation's creation at the stage of developing the law designed to regulate its activity166 was substantiated not so much by the need to make the trade in military hi-tech products more profitable, but by the general necessity to develop the hi-tech sector of exports as such. The establishment of the SC "Rostekhnologia" was preceded by a comprehensive analysis of Russia's position on the international hi-tech market167, which pointed to its very low market share (no more than 0.5%), as well as to the problems faced by the export of civil machinebuilding. However, as a result, the Law on the SC "Rostekhnologia" was adjusted in the main to regulate the defense-industrial sector. The SC "Rostekhnologia"'s operation, in its currently existing form, can hardly be conducive, in our opinion, to improving the situation in the sphere of civil machine-building and export of non-military technologies, since nothing is said either in Law No. 270-FZ or in any official plans and programs about investments in this sphere to be channeled through "Rostekhnologia".

The directions of the Corporation's activity are in many ways overlapping with those of Vneshekonombank, RVC and the Nanotechnologies Corporation. Thus, the purpose of "Rostekhnologia", as well as of other development institutions, is to promote the export of hitech products; both "Rostekhnologia" and Vneshekonombank enjoy the right to carry out "works associated with the use of information classified as State secret". As a consequence, the Bank for Development, alongside "Rostekhnologia", can participate in projects implemented in the defense - industrial branch.

166 See, e.g., http://www.gosrf.ru/print_1486.htm.

167 Ibid.

However, as compared to other development institutions, the activity of "Rostekhnolo-gia" is the least transparent. Thus, the directions of activity assigned to Vneshekonombank, RVC, and even to the Nanotechnologies Corporation are formulated with greater precision than those assigned to the SC "Rostekhnologia".

For example, its basic functions are described in Law No. 270-FZ as follows: "aid to organizations belonging to different branches of industry, including the defense-industrial complex, in the development and production of hi-tech industrial products"; "ensuring the promotion on the domestic and foreign markets and the realization on the domestic and foreign markets of hi-tech industrial products, as well as the commodities associated with the creation of these products and the results of intellectual activity", etc. In this connection, it is totally unclear what was meant by lawmakers as "aid to" and "participation in the implementation of state policy". Thus the question arises as to whether the performance of these functions of the Corporation could be ensured through granting not-for-profit subsidies? Or by granting credits, guarantees, or by participating in concession agreements, etc.?

Thus, the principal problem associated with "Rostekhnologia"'s operation is presented by its very broad powers, coupled with extremely vague goals, tasks and actual procedures envisaged for it. The problem is further aggravated by the fact that, in contrast to other development institutions, "Rostekhnologia" deals with military and dual-purpose technologies,

which, due to secrecy, makes the task of "external" control even more difficult.

* * *

While summing up the analysis of the legal base for the functioning of some of the development institutions created in 2007, it should be said that they all are characterized by certain common problems. The most important, in our opinion, is the insufficiently developed legal base of their activity.

The Laws adopted in 2007 - "On the Bank for Development", "On the Russian Nanotechnologies Corporation", and "On the Public Corporation "Rostekhnologia" - are designed to regulate the financial activity of development institutions only in most general terms, granting to the leadership of the newly established public corporations broad opportunities for spending budget funds, without creating any adequate system of control over the efficiency of their spending.

Thus, the common problem of these development institutions is that they are independent of the specialized agencies for financial control. For example, the financial operations of Vneshekonombank, after it has traded its status of a credit institution for that of a public corporation, are now beyond the sphere of financial control exercised by the RF Central Bank.

The activity of all the other newly created corporations cannot, in any practical terms, be controlled by state agencies like Rosfinnadzor and the Federal Treasury, because they are not recipients and executors of budget funds, since the allocations from the federal budget were transferred to them not as regular budget financing but as contributions to their charter capital, or in other forms which are not subject to control over targeted use of financial resources.

For this purpose, even parliamentary control exercised in the process of consideration and approval of a law on the federal budget does not apply to the activity of such corporations.

In this connection, the direct reporting by these development institutions to the RF President and Government cannot, in our opinion, ensure the necessary level of transparency

of their financial operations, since neither the President and nor the Government, as bodies of state authority, possess an apparatus adequate to effectuating detailed financial audits.

Control over the activity of such development institutions could be in part ensured by annual auditor's control, which is mandatory for Vneshekonombank, as well as for "Rostekhnologia" and Rosnanotekh.

However, in all the three cases it is the leadership of a corporation, and not any "external" agencies, who is authorized to select the auditors. In this connection, the experience of audits conducted in respect of such big clients (e.g., the audits of "Yukos") has demonstrated that auditors are not always prepared to generate objective conclusions, which can be contrary to their clients' interests. Thus, problem of transparent functioning of the newly created development institutions remains open.

Equally common for all the development institutions created in 2007 has been the problem presented by overlapping areas of activity. The laws determining the range of projects to be supported by other development institutions have, in fact, duplicated one another by pointing out that the highest priority is assigned to the sphere of "innovations".

Firstly, nowhere have the lawmakers specified what exactly is understood by "innovations' for purposes of allocating budget support (all the attempts made so far to offer a clear definition of this sphere have not been very successful).

Secondly, no clearly defined procedure has been established, in respect of the selection of projects to be implemented with the participation of development institutions, for expert's estimation aimed at determining their "novelty" and "prospects" as a commodity tradable on the domestic and international markets, which is also fraught with certain risks.

Thirdly, the overlapping goals and areas of activity of some development institutions gives rise to a kind of competition for supporting high-tech products in the phase of their completion. This problem, despite being quite predictable, has proved to be unexpected by the State. Thus, according to Deputy Director of Rosnauka's Administration for Innovative Development and Infrastructure G. V. Shepelev168, in the last 20 years, due to shortages in the financing of research and development projects, the number of those actually reaching the phase of practical implementation has dramatically diminished. There are no business plans, estimations of potential markets for trading high-tech products, or other necessary documentation even for the developed products. Most of the Russian innovative products, which potentially can be funded by development institutions, have not yet undergone the phase of testing. As a result, the newly created development institutions and innovative funds quite often are unable to put together the needed "package" of large-scale hi-tech projects, while those projects that are relatively ready for implementation are becoming considerably more expensive because of competition among investors. This results in lower efficiency of spending budget resources allocated to the support of the sphere of innovations.

168 The related materials were presented in a report delivered at the MPTI's conference in 2007.