russian economic developments_eng.7_2014 (1)

RUSSIAN ECONOMIC DEVELOPMENTSNo.7 2014

POLITICO ECONOMIC RESULTS IN JUNE 2014 (S.Zhavoronkov) 2INFLATION AND MONETARY POLICY IN MAY 2014 (A.Bozhechkova) 6FINANCIAL MARKETS IN JUNE 2014 (N.Andriyevsky, E.Khudko) 10THE REAL SECTOR OF ECONOMY IN JANUARY MAY 2014: FACTORS AND TRENDS (O.Izryadnova) 14RUSSIAN INDUSTRY IN MAY 2014 (S.Tsukhlo) 17INVESTMENTS IN CAPITAL ASSETS IN JANUARY MAY 2014 (O.Izryadnova) 20FOREIGN TRADE IN APRIL 2014 (N.Volovik) 24STATE BUDGET IN JANUARY MAY 2014 (T.Tischenko) 27BANKING SECTOR IN MAY 2014 (M.Khromov) 31REAL ESTATE MARKET IN THE RF IN JANUARY APRIL 2014 (G.Zadonsky) 34MIGRATION IN RUSSIA IN JANUARY APRIL 2014 (L.Karachurina) 38REVIEW OF THE ECONOMIC LEGISLATION IN JUNE 2014 (I.Tolmacheva, Yu.Grunina) 42REVIEW OF TAXATION REGULATORY DOCUMENTS ISSUED IN THE PERIOD OF MAY JUNE 2014 (L.Anisimova) 43

© GAIDAR INSTITUTE FOR ECONOMIC POLICY3 – 5, Gazetny pereulok, Moscow, 125 993, Russian Federa onPhone (495)629 – 67 – 36, fax (495)697 – 88 – 16, Email: lopa [email protected]

RUSSIAN ECONOMIC DEVELOPMENTS No. 7, 2014

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POLITICO ECONOMIC RESULTS IN JUNE 2014S.Zhavoronkov

In June 2014 the Russian government authori es made some changes to their viewing the events in Ukraine. The interstate rela ons between Moscow and Kiev warmed up a bit. For example, Russia’s Am-bassador in Ukraine M. Zurabov, who was recalled in February 2014 a er President Victor Yanukovich was ousted, returned to Ukraine and a ended the inaugu-ra on of the new President of Ukraine, which actually implies that Zurabov was diploma cally recognized by Ukraine. However, intensive military clashes us-ing heavy weapons con nued in the Donetsk and Lu-gansk regions between Ukrainian government troops, including the Air Force, and the armed groups from the self-proclaimed republics throughout the major part of the month. Ukrainian government troops re-captured the ini a ve, succeeding in bringing back under government control the city of Mariupol, an industrial center and seaport, as well as severed lines of communica ons leading to the Russian border from where the self-proclaimed republics received various types of assistance. At the same me, the Ukrainian government has no control over a vast territory of the Donetsk and Lugansk regions. It is against this back-ground that newly elected Ukrainian President Po-roshenko announced on June 20 a unilateral ceasefi re for humanitarian purposes, as well as stated that he has his own peace plan which basically boils down to off ering an amnesty for those who lay down the wea-pons and did not commit serious crimes; providing a corridor via which volunteers from Russia can leave Ukraine; conduc ng an early local government elec- on; and providing guarantees to use the Russian lan-

guage in business prac ce (a bit later he made public a dra of a new Cons tu on of Ukraine which provides,

The situa on in eastern Ukraine and Russian-Ukrainian interstate rela ons saw a certain de-escala on in June 2014. In par cular, Russia recognized new Ukrainian President P. Poroshenko. However, the situa on re-mains to be tense. The east Ukrainian armed groups cannot see how they may exist within a unifi ed state while the government in Kiev cannot allow a secession of these regions. The Russian government authori es are look-ing for a way out of the crisis, without losing face, but it hasn’t been found yet. At the same me, gas price nego- a ons between Russia and Ukraine reached no agreement. Russia announced transi oning to prepayment for

natural gas supplies to Ukraine. Considering gas volumes accumulated by Ukraine, nego a ons on this subject-ma er are likely to become more relevant in the upcoming fall. Ukraine cannot be excluded from Russia’s natural gas transit, at the same me it won’t be able to strike its fuel balance alone, without Russia. A fi erce dispute on what should be done with the 2014 pension accruals, virtually pension savings as such, began in the Russian Government. The standards of poten al infrastructural costs of the Na onal Wealth Fund (NWF) were increased, however, new costs s ll remain to be agreed.

among other things, for governor elec ons). A few days later a er this the leaders of the self-proclaimed republics announced a ceasefi re, and slow nego a- ons were opened (during which mutual exchange of fi re con nued but less intensively) between them and representa ves of the Ukrainian government, with the par cipa on of representa ves from Russia and the Organiza on for Security and Coopera on in Europe (OSCE). Yet there is no visible subject-ma er to nego -ate – the militants insist on independence of the self-proclaimed republics from Ukraine, which the la er cannot accept. President Pu n stated on June 25 that he submi ed a proposal to the Federal Council (Rus-sia’s upper house) to withdraw the approval for send-ing Russian troops to Ukraine, which the upper house gave to him on March 1, 2014. Russian TV channels have lowered substan ally the degree of cri cism and coverage of the Ukrainian government. At the same me, a new trend has emerged, explaining that send-

ing Russian troops to eastern Ukraine is extremely dis-advantageous, it is a trap which Russia is being lured into by its western enemies.

It is hard to disagree with Russia’s offi cial TV chan-nels as far as a military incursion is concerned, when they talk about disadvantages Russia might face in case of incursion to eastern Ukraine. Indeed, it would result in even tougher sanc ons against Russia. In fact, developed countries may try to physically replace any Russia’s export to the extent to which a replacement may be found, as well as block Russia’s access to capi-tal markets. It doesn’t mean that Russia would col-lapse instantly upon such measures, but they would be very painful for the country whose major revenues are generated in one way or another from foreign

POLITICO-ECONOMIC RESULTS IN JUNE 2014

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trade, given that the Russian economy isn’t in good shape as it is, whether sanc ons are imposed or not. However, the Russian federal government has put it-self in a unfortunate situa on which it cannot escape from just like that. Blocking the border with Ukraine whereby the self-proclaimed republics will face a mili-tary defeat from Ukrainian government troops would cause a serious damage to Russia’s image domes cal-ly. Keeping intact the situa on under which weapons and military personnel are “leaking” through the bor-der, allowing the self-proclaimed republics to preserve a status quo, has started to cause damage to Russia’s image too – death toll, damage assessment, and refu-gees to Russia will keep growing. The topical ques on to be answered today: what is the point of the con-fl ict for Russia?, what do the Russian authori es want to achieve?, what are people supposed to die for? “Controlled chaos” theories are very popular among military strategists, however none of them is likely to confess that controlled chaos is what Russia is seeking both on its own border and the territory where ethni-cally close people live. A breakup among the militants and readiness of a separated moderate group of them to sign poli cal arrangements with Kiev might be most realis c op on. Such an agreement could be a repre-senta on of ra onal tradeoff given the current situa- on.

Gas nego a ons with Ukraine have reached no agreement. As a reminder, discrepancies between the par es boiled down to the following issues: redemp- on of the outstanding amount owned by Ukraine;

whether there are discounts under the 2010 agree-ment on the Black Sea Fleet in the Crimea signed by V. Yanukovich (because Russia considers the Crimea a Russian territory while Ukraine doesn’t); the need to enter into a new contract (this is what the Ukrainian party is seeking) or respec ve sub-agreements to the exis ng contract of 2009 which was signed by the go-vernment chaired by Y. Timoshenko. The par es ma-naged to bring together their posi ons, but failed to reach an agreement – Ukraine redeemed a part of the outstanding amount at the end of the previous month, but refused to redeem the remainder un l a full agreement is reached. Ukraine suggested $326 for 1000 cubic meters of gas, Russia off ered $385 for 1000 cubic meters. Finally, on June 16, Russia announced transi oning to prepayment for gas, hal ng gas sup-plies to Ukraine while transi ng via Ukraine the gas desi gnated for Europe only. Furthermore, both par- es fi led lawsuits against each other to the Stockholm

Court of Arbitra on. They s ll have some me to be able to reach an agreement, because Ukraine accumu-lated 15 million cubic meters of gas in its gas under-ground storages, which should help Ukraine out un l

approximately the upcoming new year. However, the par es will have to come to an agreement when these dates get closer: although both Russia and Ukraine are seeking to reduce as much as possible their depend-ence on the Ukrainian transit of Russian gas, almost half of the gas consumed in Ukraine is supplied from Russia, as well as half of the gas designated Europe is transited via Ukraine. Mathema cally, the current dif-ference in prices can be easily averaged to about $350 for 1000 cubic meters of gas.

In June 2014, Russia con nued its complicated ne-go a ons with the European Union about The South Stream gas pipeline project. As a reminder, the Euro-pean Commission considers that the project fails to meet the standards of the so-called “third energy package”1 adopted in 2009 and eff ec ve since 2011, under which the gas seller must either hold no control-ling interest in its transiter (Gazprom holds 50% in The South Stream gas pipeline project) or allow various le-gal schemes under which transiter’s ac ons will have to be approved by supervisory bodies established by the European Union. Russia believes that The South Stream gas pipeline project, fi rst, legally exists before the European Commission made the respec ve deci-sions (its operator was established in 2008), second, the third energy package as such contradicts various agreements concluded between Russia and the Euro-pean Union, in which no deteriora on of economic con-di ons of coopera on is s pulated. The fi nal construc- on of the gas pipeline – via the Black Sea to Bulgaria

and Serbia – ends in Austria (it was decided not to lay the pipeline further to Italy via Slovenia, because the demand for natural gas remains weak while the mar-ket is compe ve in the South European Countries). Russia signed interstate agreements with all these countries, and construc on has been commenced this year. However, Bulgaria announced its suspension in June 2014. Bulgaria, one of the poorest countries in the European Union, will receive more than 15bn euro of fi nancial aid from Brussels in the period of 2014 to 2020. The said amount is much bigger than a profi t worth a few billions of euro from The South Stream gas pipeline. There are more circumstances though: Russia is Bulgaria’s major trade partner, and Bulgaria depends largely, even more than Ukraine does, on imported Russia’s natural gas (85%). Austria and Serbia s ll de-clare planned construc on. During his visit to Austria President Pu n accused the United States of the prob-lems faced by The South Stream gas pipeline project: “…They are making every eff ort so that the contract is not signed, for the purpose of supplying their own liq-uefi ed natural gas”. Indeed, the gas pipeline isn’t quite

1 The conven onal name of a big package of energy direc ves issued by the European Commission.


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feasible economically, aside from substan al construc- on costs (at least 15bn euro) via the deep Black Sea

and its transit costs which are well-known to be higher than transit costs via Ukraine, but the ra onale is to create an opportunity to substan ally replace gas tran-sit via Ukraine (The South Stream gas pipeline project is expected to have a capacity of 68 million cubic me-ters, whereas the capacity of Ukrainian transit in 2013 was 86 billion cubic meters) whereby the Russian au-thori es will have the freedom of poli co-economical maneuvering. On the contrary, neither the United States, nor many European countries would like to see Russia enjoy such a freedom.

Late in June, Finance Minister Anton Siluanov and Minister of Economic Development Alexei Ulyukayev happened to have a bi er dispute on what should be done with the 2014 pension accruals. As a reminder, no new contribu ons have been made to the funded pension scheme since H2 2013 upon the pretext of “going public”, “providing guarantees”, etc., undertak-ing reforms in pension funds. However, experts noted at that me that the government’s policies resembled a “creeping na onaliza on” of the money. In his in-terview to Vedomis newspaper Mr. Ulyukayev stated that he would suggest that the Russian Government should return the pension accruals to their owners. Mr. Siluanov stated expressly that the money had been confi scated to support the Crimea and the city of Sev-astopol: “……There are no sources for this, there is no way the money can be returned, because it has been spent on the Crimea, counter recession measures. This resource s ll exists and is most likely to be spent to sup-port the socio-economic development program in the Crimea and the city of Sevastopol. Saying so easily that we will return the money is an ill-es mated proposal which wasn’t discussed. The author should be asked at the cost of what it can be done”. The Russian govern-ment authori es have an overwhelming tempta on to confi scate the money from the funded pension com-ponent – it is much easier than cut off budget expen-ditures, besides, there are also hopes that individuals won’t resent it, because the pension accruals are “vir-tual”, they cannot be put in a pocket instantly. How-ever, such hopes have no solid grounds – the intensity of transfers of pension accruals from Vnesheconom-bank (VEB) (6 million applica ons for money transfer from VEB were submi ed at 2013 year-end alone, and a total of 25 million persons have transferred their money from VEB to date) is indica ve of individuals being aware of the problem. It is also important that many en es among owners of non-government pen-sion funds (NGPF) are related to powerful state-run companies (such as OJSC Russian Railways, Sberbank, VTB) and major businessmen (for example, Gazfund is

affi liated with Y. Kovalchuk), and they don’t yarn for the money to be spent in favor of the Crimea or the state budget as such – in this context, public monopo-lies and oligarchs are paradoxically ac ng as allies of ordinary ci zens. One may hope that the pension ac-cruals will stay intact, otherwise it cannot radically re-solve the budget-related problems faced by this coun-try (they amounted to a bit more than Rb 1 trillion at 2013 year-end), rather it will seriously discourage legal labor and encourage “backdoor” incomes and tax eva-sion and reduce social security contribu ons.

In June 2014, Prime Minister Dmitry Medvedev signed an execu ve order which changed the proce-dure for the management of assets of the Na onal Wealth Fund (NWF). For now 40% of NWF’s resources can be invested in any infrastructural projects or de-posits in VEB which in its turn provides funding of in-frastructural, and not always jus fi ed, costs, as is the case with the venues and facili es constructed for the Olympic Games in Sochi, projects, another 10% in projects in which the Russian Direct Investment Fund (RDIF) is par cipa ng, another 10% in Rosatom (The State Atomic Energy Corpora on) projects, therefore making up 60% or less. At a fi rst glance, non-conser-va ve instruments in investment have increased sub-stan ally (from 40 to 60%), however, this has been an “on-paper” increase so far. For example, the RDIF is unlikely to choose its limit simply by virtue of its own rules which require foreign co-funding. The rest of the costs will be approved on a case-by-case basis, same as before. In general, however, another formal obstacle to large-scale spending of the NWF resources will be removed. These resources were equitably meant to be a stabiliza on instrument for the pension system, not a development ins tu on. It was already announced about the alloca on of resources to extend The Bai-kal-Amur Mainline (BAM Railway) and Trans-Siberian Railway, construct the Central Ring Motor Road. Under discussion is alloca on of resources for the construc- on of nuclear power sta ons in Turkey and Finland,

expansion of the capaci es of the Moscow air hub, the Moscow-Kazan High-Speed Railway, construc on of a gas pipeline to China, etc. The common problem re-mains the same: all the projects formally declare pay-back, although it is not just unobvious, but rather un-likely to happen for many of them, as is the case with the Moscow-Kazan High-Speed Railway which have no new passenger traffi c, not to men on a new cargo traf-fi c. A similar situa on is being faced by the BAM Rail-way which currently, prior to any expansion, isn’t ope-ra ng at full capacity, and goes via desert areas where a hypothe cal emergence of industrial clusters is s ll hypothe cal, as it used to be in the Soviet era. It would be reasonable to focus on projects which replace ca-

POLITICO-ECONOMIC RESULTS IN JUNE 2014

5

paci es that are visibly falling short (a good example of this is the Moscow air hub whose capaci es are seri-ously falling short, and profi t from its expansion can be more or less visible), but it actually is referred to a non-transparent struggle between lobbyists, the economy of the projects remains unpublished and undiscussed.

In June 2014, the fact that The Inves ga ng Com-mi ee of the Russian Federa on was empowered to ini ate at its own discre on criminal cases on tax eva-sion, without having to obtain approval of the Federal Tax Service of Russia (FTS of Russia), had an adverse eff ect on the business community. The former pro-cedure which was introduced in 2011, relieved dras- cally the pressure from businesses – the number of

criminal cases was reduced by six mes (!), however, representa ves of security and law enforcement agen-cies were not happy at all. In 2013, President Pu n supported the ini a ve of A. Bastrykin, Head of The Inves ga ng Commi ee of the Russian Federa on, on empowering inves ga on offi cers to ini ate criminal cases at their own discre on. A respec ve dra law was adopted in the fi rst reading, but a hope remained that it might be changed in the second reading. How-ever, no improvement was achieved as a result of con-sulta ons between the Inves ga ng Commi ee and the FTS of Russia. For now inves ga on offi cers in the

FTS of Russia will request a “cer fi cate” and then they can do what they want to do, no ma er what is wri en in the cer fi cate, even though no criminal off ence has been commi ed according to the FTS of Russia. How-ever, they say that damage, if established, must be as-sessed using the method of the FTS of Russia, thereby making it less possible for an arbitrary interpreta on to happen.

Deputy Minister of Industry and Trade of Rus-sia A. Rakhmanov was appointed CEO of the United Shipbuilding (USBC), the fourth CEO over the last few years; former CEO V. Shmakov – from UralVagonZa-vod – held the offi ce as li le as one year and fell afoul of the core department. Running short of either public or interna onal contracts, the shipbuilding industry has found itself in a vicious circle – fi nancial problems are interfering with the performance of the exis ng contracts, while failure to honor some contracts has resulted in losing a few customers that have le – as was the case with India, a er a years-long delay in the performance of an aircra carrier contract. As far as it can be understood, Shmakov had an objec ve to reori-ent the shipbuilding industry to meet the needs of the Fuel and Energy Complex, in par cular the produc on and transporta on of off shore hydrocarbons. The ob-jec ve s ll remains to be fulfi lled though.


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INFLATION AND MONETARY POLICY IN MAY 2014A.Bozhechkova

Infl a on in the Russian Federa on remained at a high level in May 2014: the consumer price index stood at 0.9% at the month’s end (compared to that in April 2014 – 0.9%), showing an increase of 0.2 p.p. over the value observed in 2013. Therefore, infl a on reached 7.6% on an annualized basis (Fig. 1). Core infl a on1 in May 2014 stood at 0.9%, also higher, up 0.6 p.p., than the value observed in the previous year.

In May 2014, prices of food products increased 1.5% compared to April 2014 (Fig. 2). Prices of the following food products saw higher growth rates: (from 2.3% in April to 2.4% in May 2014), pasta products (from 0.3% in April to 0.8% in May 2014), meat and poultry (from 1.5% in April to 4.4% in May 2014). Prices of the fol-lowing food products saw slower growth rates: grains and beans (from 1.4% in April to 1.0% in May 2014), bu er (from 1.4% in April to 1.0% in May 2014), milk and dairy products (from 1.8% in April to 0.9% in May 2014), granulated sugar (from 3.0% in April to 1.5% in May 2014), prices of eggs kept declining (-2.3% in April, -11.7% in May 2014).

In May, prices and tariff s of retail paid services in-creased 0.8%, while in April 2014 they increased 0.7%. Overall, tariff s of public u li es in May increased 0.8%, while in April 2014 they remained unchanged. Prices of the following services increased in May: insurance services (from 2.2% in April to 3.2% in May 2014), ser-vices rendered in the physical culture and sports sec-tor (from 0.2% in April to 0.3% in May 2014). Prices of the following services fell in May: interna onal travel services (from 2.3% in April to 1.6% in May 2014), pas-senger transport services (from 2.4% in April to 1.2% in May 2014), medical services (from 1.4% in April to 0.6% in May 2014), early childhood educa on services (from 0.8% in April to 0.4% in May 2014).

1 The baseline consumer price index is an indicator which de-scribes the level of infl a on in the consumer market, net of sea-sonal factors (prices of fruit and vegetable products) and adminis-tra ve factors (tariff s of regulated types of service, etc.). The index is also calculated by the Federal State Sta s c Service of Russia (Rosstat).

In May 2014, the consumer price index stood at 0.9% (0.7% in May 2013), being equal to the value observed in the previous month. Therefore, infl a on stood at 7.6% at the end of the 12-month period. The consumer price index reached 0.4% within 23 days in June 2014. as of June 1, 2014 banks’ debt owed to the regulator amounted to Rb 5.02 trillion. In May 2014, the value of the dual-currency basket contracted by 3% to Rb 40.4 and further declined by 3.2% to Rb 39.3 at the end of 27 days in June 2014.

In May, growth rate of prices of non-food pro-ducts slowed down by 0.1 p.p. rela ve to April 2014 and stood at 0.5%. Prices of the following non-food products saw faster growth rate: washing and clean-ing products (from 0.5% in April to 1.1% in May 2014). Growth rate of prices of the following non-food pro-ducts slowed down: tobacco products (from 4.6% in April to 3.3% in May 2014), motor gasoline (from 0.8% in April to 0.5% in May 2014), electrical products and household appliances (from 0.5% in April to 0.3% in May 2014), footwear (from 0.6% in April to 0.4% in May 2014).

In June 2014, infl a on kept growing due to growth in prices of certain categories of fruit and vegetable products, red meat and poultry, millet. It’s worth not-ing that a deprecia on of the ruble exchange rate made a major contribu on to the accelera on of infl a- on having regard to a great share of imported goods

in the consump on of economic agents in the Russian Federa on. There were more nonmonetary factors that pushed up infl a on in January-June 2014: the re-stric ons imposed by the Rosselkhoznadzor (Federal Service for Veterinary and Phytosanitary Surveillance) on import of meat from the EU countries and the Unit-ed States early in the year, livestock reduc on due to a fodder shortage, adverse weather condi ons in cer-tain countries, as well as decline in shipments of cer-tain categories of agricultural products from Ukraine.

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Source: The Federal State Sta s c Service of Russia (Rosstat). Fig. 1. CPI growth rate in 2011 to 2014 (% year over year)

INFLATION AND MONETARY POLICY IN MAY 2014

7

The consumer price index stood at 0.4% within 23 days in June 2014 (0.4% in the same period of 2013). The lack of pronounced demand-driven pressure on prices, as well as the Bank of Russia’s policies aimed at ght-ening the monetary policy remain the key factors con-straining infl a on.

In May 2014 the monetary base (broad defi ni on) contracted by 1.1% to Rb 9326.1bn (Fig. 3). The vol-ume of cash in circula on including cash balances in credit ins tu ons declined 1.6% to Rb 7752.9bn, banks’ deposits shrank 10.6% to Rb 88.1bn. The fol-lowing components of the broad monetary base saw an increase: banks’ correspondent accounts (growth of 3.3% to Rb 1050.3bn), obligatory reserves (a growth of 0.7% to Rb 434.8bn).

In May 2014, the monetary base (narrow defi ni- on) (cash plus obligatory reserves) shrank 1.5% to

Rb 8187.7bn (Fig. 4). In May, the volume of excessive reserves at com-

mercial banks amounted to Rb 1329.4bn, with manda-tory reserves on special accounts with the Central Bank amoun ng to Rb 434.8bn, while the average value of reserves in the period of 10.05.2014 to 10.06.2014 amounted to Rb 894.6bn. As of June 1, 2014, banks owed Rb 5.02 trillion to the regulator, seeing a mi d decline of 0.7% since the beginning of May 2014. Bank’s debt on REPO transac ons declined 12.3% to Rb 2.8 trillion, the debt on loans secured by non-market assets amounted to Rb 2.1 trillion, an in-crease of 21.3%. According to the data available as June 26, 2014, banks’ debt on REPO transac ons saw a decline to Rb 2.6 trillion, while the debt on other loans increased to Rb 2.4 trillion. It should be noted that the Bank of Russia used REPO opera ons at a fl at rate, in par cular, an average of Rb 12,1bn were provided dai-ly in May and June 2014 respec vely. Furthermore, on May 20 and 21, 2014 the interest rate approximated very close to the interest rate cap. On the foregoing dates the volume of REPO opera ons at the fl at rate amounted to Rb 15.9bn and Rb 11.8bn respec vely. The interbank interest rate 1 in May stood at 8.2% on average (7.9% in April 2014). In the period of June 1 thru June 25 the average interbank interest rate stood at 8.2% (Fig. 5). The average interbank interest rate in-creased in May 2014 in response to the Bank of Rus-sia’s April 25, 2014 decision to li the key interest rate, as well as interest rates on liquidity provision and ab-sorp on instruments, from 7.0% to 7.5% p.a., in order to mi gate risks of accelera ng infl a on and ensure fi nancial stability.

The Bank of Russia provided banks with Rb 485.8bn at a cut-off rate of 7.77% p.a. as part of a 3-month

1 Interbank interest rate is the monthly average MIACR, an inte-rest rate on ruble-denominated overnight interbank loans.

repo auc on secured by non-market assets held on May 12, 2014. During a similar auc on held on May 12, the Bank of Russia provided at total of Rb 485.8bn at a rate of 7.77% p.a. However, only large banks which have the required collateral base can aff ord such ac- ons despite very benefi cial terms of lending at a fl oat-

ing interest rate. As of June 1, 2014, the Central Bank’s interna onal

reserves totaled $467.2bn, shrinking by 8.3% year to date (Fig. 4). At the same me, the monetary gold re-serves shrank $1.2bn in May 2014 due to a nega ve

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Fig. 2. Infl a on factors in 2008 to 2014 (%, rela ve to the same month of the previous year)

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Fig. 3. Commercial banks’ debt owed to the Bank of Russia in 2008 to 2014

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les

Monetary base (billion rubles)Gold and Foreign Currency Reserves (billion dollars)

Fig. 4. Dynamics of the monetary base (narrow defi ni on) and gold and foreign currency (interna onal)

reserves of the Russian Federa on in 2007 to 2014


8

revalua on of assets. The contrac on of the interna- onal reserves in the period of January 2014 to April

2014 was basically caused by the regulator’s foreign currency interven ons aimed not only at fl a ening vola lity of the ruble exchange rate, but also its retain-ing against in the face of the observed deprecia on of developing countries’ na onal currency exchange rate and unstable geopoli cal situa on in Ukraine.

Bank of Russia’s foreign currency interven ons through net purchases of foreign exchange amounted to $1072.0m and 95.0m euro by the end of May 2014 (Fig. 6). In May, the regulator’s opera ons on the pur-chase of foreign currency with regard to the Federal Treasury replenishing or spending foreign currency resources of sovereign funds amounted to $1268m. In the same month the borders of the dual-currency trading band were extended and maintained within a range of Rb 36.40–43.40. In the period of June 1 t hru June 26, 2014, the dual-currency trading band re-mained unchanged as well. At the same period, Bank of Russia’s foreign currency interven ons with regard to the Federal Treasury replenishing or spending fo-reign currency resources of sovereign funds totaled $1510m.

According to the Bank of Russia’s preliminary es -mates, net capital ou low from the country reached достиг $50.6bn in Q1 2014, 1.8 mes more than in the same period of 2013. Capital ou low from Rus-sia amounted to $59.7bn within 12 months in 2013. In Q1 2014, net capital exports by the banking sector and other sectors reached $18.9bn and $31.7bn re-spec vely. A substan al capital ou low from Russia in Q1 2014 was determined by economic slowdown in the country as well as geopoli cal turmoil.

In May 2014, the real eff ec ve exchange rate of the ruble gained 2.6% (2.7% in April 2014). Overall, in the period of January to May 2014 he real eff ec ve ex-change rate fell 7.7% as compared to the correspond-ing period in 2013 (Fig. 7).

In May, the dollar-ruble exchange rate lost 2.3% to Rb 34.74, while the euro-ruble exchange rate lost 3.6% (Rb 47.3). In May, the euro-dollar exchange rate ave raged 1.37. The value of the dual currency basket declined 3% to Rb 40.4 during the same month. At the end of 27 days in June 2014, the dollar-ruble exchange rate fell 3.3% to Rb 33.75, while euro-dollar exchange rate declined 3.2% to Rb 46.02, resul ng in a decline of 3.2% (to Rb 39.3) in the value of the dual currency basket. The euro-dollar exchange rate in June 2014 was equal to 1.36. It should be noted that the ruble weakened against the dollar in January–April 2014 ba-sically in response to a more intensive capital ou low from the country due to unstable geopoli cal situa- on in Ukraine, op mis c projec ons about economic

growth in the United States and European Union, economic slowdown in the Russian Federa on. The ruble appreciated in the period of May to June 2014 in response to the Bank of Russia’s policy aimed at li ing the key interest rate, mi ga ng panic investor sen ments about the likelihood of Russia’s interven- on into the poli cal situa on in Ukraine, as well as

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MIACR rate on ruble loans for 1 day in the interbank marketMinimum REPO rate at Auction for One Day and for One WeekDeposit Rate for One DayThe Fixed Rate on Operatons to Provide LiquidityOvernight RateMaximum rate at Deposit Auction for One Week

Fig. 5. Bank of Russia’s interest rates band and dynamics of the interbank lending market in 2012 to 2014 (% p.a.)

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Fig. 6. Bank of Russia’s currency interven ons and ruble exchange rate vs. the currency

basket in March 2010 to May 2014

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Fig. 7. Ruble exchange rate indicators in January 2005 to May 2014

INFLATION AND MONETARY POLICY IN MAY 2014

9

the lack of severe economic sanc ons against Russia over the Crimea’s accession to the Russian Federa on, as well as growth in prices of crude oil in response to unfavorable development of the geopoli cal situa on in the Middle East countries. The dollar slightly appre-

ciated against the euro a er the ECB lowered the key interest rate by 0.1 p.p. from 0.25% to 0.15% p.a., as well as the overnight deposit rate from 0 to -0.1% p.a. and the lending rate from 0.75 to 0.4% p.a. aimed at s mula ng investment ac vity in the Eurozone.


10

FINANCIAL MARKETS IN JUNE 2014N.Andriyevsky, E.Khudko

Dynamics of the Russian stock market basic structural indices The MICEX Index in June 2014 went up to the le-

vel observed at the end of February 2014. The Index monthly average was 1486.0 points in the period be-tween June 2 and 26, 2014.

The fi rst week in June 2014 saw steady growth in most liquid stocks. By June 11, they gained an ave rage of 5.0%, except for VTB’s shares which didn’t grow during the same period. As a reminder, VTB’s shares were growing within a period of three months since the beginning of March, reaching maximum of 5.1 ko-peks per share on June 4, 2014. However no news that might have had an impact on the dynamics of VTB’s stock could be found. At the second decade of June dy-namics of the most liquid stocks saw various chan ges: growth rates in Sberbank’s shares dropped to zero, whereas growth rates of LUKOIL’s and Rosne ’s shares increased by more than 7.5% since the beginning of the month. However, LUKOIL’s shares began to lose in value by the end of the month, and neither purchase of shares by the LUKOIL managers, nor distribu on of 2013 dividends, 22% more than in 2012, could pro-mote any growth. At the same me, growth rates of Rosne ’s shares remained at 10% since the beginning of the month.

Sberbank’s shares showed a nega ve annual yield by June 26, 2014, with annual loss on common and preferred shares reaching 9.8% and more than 0.5% respec vely since June 27, 2013. VTB Bank’s shares sustained a loss of 9.7% since June 27, 2013. No-rilsk Nickel’s and Gazprom’s shares gained most dur-ing the year. The iron-and-steel works gained 43.2% while Gazprom gained 37.0% in the period between June 27, 2013 and June 26, 2014. Distribu on of 2013 dividends varied within a range of 2.34% of VTB Bank’s shares on June 26, 2014 and 6.98% of Norilsk Nickel’s shares closing value on the same date.

In June 2014, the MICEX Index fully recovered the loss sustained in May, the monthly average index reached 1486.0 points. VTB Bank’s shares stopped growing in value in June, losing more than 10.6% in the period be-tween May 30, 2014 and June 26, 2014. The Moscow Exchange trading volume reached Rb 620.5bn in the period between June 2 and 26, 2014. The stock exchange capitaliza on amounted to Rb 23.63 trillion (36.4% of GDP) as of June 26, 2014. The key corporate bond market indicators, such as market volume and index, ac vity of issuers and investors improved in June 2014. At the same me, stabiliza on at high level of bond issue yield and reduc on in dura- on cons tute an adverse factor in the bond market.

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MICEX Index Brent crude oil prices (right-hand scale)

Source: RBK Quote. Fig. 1. Dynamics of the MICEX Index and

futures prices of Brent crude oil in the period between April 2, 2013 and June 26, 2014

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Sberbank Sberbank prev Gazprom Norilsk nickel

LUKOIL Rosneft VTB

Source: RBK Quote, author’s es mates. Fig. 2. Growth rates of most liquid Russian

stocks in the Moscow Exchange in June 2014 (within a period since May 30, 2014)

Source: RBK Quote, author’s es mates. Fig. 3. Growth rates of most liquid

Russian stocks in the Moscow Exchange in the period between June 27, 2013 and June 26, 2014

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IL

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27.06.2013–26.06.2014

FINANCIAL MARKETS IN JUNE 2014

11

The oil and gas sector index went up 5.85% in the period between May 30, 2014 and June 26, 2014, gaining most among the sector indices in June 2014 in response to growth in prices of raw materials. The consumer sector index increased 5.09% since the be-ginning of June, in response to higher value of pharma-ceu cal companies Pharmstandard and Veropharm. Other sector indices increased more than 2% since the beginning of the month, except for dynamics of the MICEX-innova on index which lost 4% during the fi rst half of the month. It was not un l June 24, 2014 that this index managed to recover to the level observed at the beginning of the same month. It is worth not-ing that the fi nance and banking sector index lost 2% in growth during the period between June 24 and June 26, 2014, reaching a total loss of 1.35% since the beginning of the month.

Trading turnover in the Moscow Exchange in the period between June 2 and 26, 2014 reached Rb 620.5bn, a growth of 6.34% over the correspond-ing period in May 2014. Sberbank contributed an ave-rage 28.8% to the stock exchange turnover on a total of common and preferred stocks. It is only Gazprom, accoun ng for an average of 15.4% of the Moscow Exchange turnover in June 2014, that was able to compete with Sberbank. Therefore, the two ma-jor companies accounted for more than 47% of the trading turnover in the Moscow Exchange, whereas the next top-5 companies contributed an average of 28.0%. the eight most traded shares accounted for an average of 75.7% of the Moscow Exchange daily trading turnover.

According to the Emerging Por olio Fund Research (EPFR), founda ons inves ng in Russian shares saw $108m of capital ou low in the period between May 29, 2014 and June 25, 2014. Moscow Interbank Currency Exchange (MICEX) capitaliza on amounted to Rb 23.6 trillion (36.4% of GDP) as of June 26, 2014, an increase of more than Rb 588bn (2.55%) in the pe-riod since May 30. In June 2014, the share of mineral produc on companies increased 1.37% to 48.9% in the

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Financial and banking companies Machine building companies

Oil and gas companies Energy companies

Metal & mining companies Consumer sector companies

ММВБ - инновации

MICEX capitaliza on structure. At the same me, the share of fi nancial companies shrank by 1.5% to 13.0%.

Corporate bond market The Russian domes c corporate bond market vo-

lume (measured by the par value of outstanding se-curi es denominated in the na onal currency, includ-ing those issued by non-residents) increased a bit in June 2014 a er a decline in the period of March to April 2014. By the end of June this indicator increased up to Rb 5 273.7bn, a growth of 0.5% over the value

Source: RBK Quote, author’s es mates. Fig. 4. Growth rates in various sector stock indices in the Moscow Exchange (within a period since March 27, 2014)

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Sberabank (common+ privilege shares) Gazprom LUKOIL Rosneft Norilsk nickel VTB Magnit Total

Source: RBK Quote, author’s es mates. Fig. 6. Trading turnover structure in the Moscow Exchange (in the period between May 30, 2014 and June 26, 2014)

Mineral extraction

industry; 48,9

Manufacturing industry; 12,7

Production and distribution of electric power, gas, and water;

4,5

Wholesale and retail industry; repair services;

9,8

Transport and communications;

10,0

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Other types of activity; 1,0

Source: The Moscow Exchange’s offi cial website, authors’ es- mates.

Fig. 5. Stock market capitaliza on structure by type of economic ac vity


12

observed at the end of May1. It should be noted that the number of issues decreased insignifi cantly over the elapsed period (1030 corporate bond issues re-gistered in the na onal currency against 1034 issues at the preceding month end). The number of issuers in the debt segment decreased too (345 issuers against 353 companies in the preceding month). There were 17 outstanding issues of USD-denominated bond is-sues of Russian issuers (a total of more than $2,7bn) and an outstanding JPY-denominated bond issue.

Investment ac vity in the secondary corporate bond market in June 2014, resumed, a er a seasonal down-trend in May, to its average level observed over the last few months. For instance, in the period between May 22, 2014 and June 23, 2014 the total volume of transac ons in the Moscow Exchange amounted to Rb 108.9bn (to compare, trading volume amounted to Rb 76,3bn in the period between April 22, 2014 and May 21, 2014), while the number of transac ons in the period under review increased up to 25,200 (the num-ber of transac ons in the previous period amounted to 23,800)2.

The Russian corporate bond market index IFX-Cbonds kept growing, its value gained 3.8 points (or 1.0%) by the end of June over the value observed in at end of the preceding month. However, the bond average weighted yield increased insignifi cantly again, from 9.43% at the end of May to 9.48% by the end of June (Fig. 7)3. Furthermore, nega ve dynamics of the dura on of the corporate bond por olio increased: dura on was 472 days as of the end of June, 82 less than the value observed as of the end of previous month. In this case, the dynamics can be explained by both shortening of the maturity of bonds and a mid gain in the market yield.

The most liquid segment of the corporate bond market saw diff erent trends towards the yield of bond issues. Some issues of companies opera ng in the pro-duc on and fi nancial sectors showed highest vola lity. For instance, OJSC METALLOINVEST, OJSC ALFA-BANK, OJSC Norisk Nickel saw a substan al decline (more than 1 p.p.) in the yield on their securi es. OJSC Gazprom-ne and OJSC Federal Grid Company of United En-ergy System saw a growth in the yield. Furthermore, it should be noted that higher than normal vola lity in interest rates was observed along with increase in trading ac vity (volume of transac ons on certain is-sues of the foregoing issuers increased Rb 0.5bn over the period under review). At the same me, produc-ing companies lost an average loss of 0.36 p.p. in the yield of their securi es. Moreover, fi nancial companies

1 According to Rusbonds informa on agency.2 According to Finam Investment Company.3 According to Cbonds Informa on Agency.

also saw a decline, not nearly as substan al as that of producing companies though, in the yield of their se-curi es.

The indicators of registra on of new bond issues again made new records over the last few months. For example, 15 issuers registered 70 bond issues at an ag-gregate par value of Rb 489.6bn in the period between May 22, 2014 and June 23, 2014 (to compare, 61 bond issues at Rb 304.4bn were registered in the period be-tween April 22, 2014 and May 21, 2014), which can be explained by reduced access to foreign funding. Ma-jor bond issues were registered by State Corpora on ‘Bank for Development and Foreign Economic Aff airs (Vnesheconombank) (a bond issue at Rb 212.6bn), LLC VTB Capital Finance (26 bond issues at a total of Rb 110bn), LLC VTB Leasing Finance (eight issues of ex-change bonds at Rb 68bn), OJSC Otkry ye Holding (six issues of exchange bonds at Rb 31.5bn)4. It is worth no ng with regard Vnesheconombank that it was a private off ering, and the securi es are to be purchased by the Central Bank of Russia. Exchange traded bonds accounted for only one third of all the bond issues that were registered, but there were a few debut issues among the registered bond issues.

Twenty one issuers issued 24 bond issues at an aggregate par value of Rb 82.9bn in the period be-tween May 22, 2014 and June 23, 2014 (to compare, 15 series of bonds at a par value of Rb 51.38bn were issued in the period between April 22, 2014 and May 21, 2014) (Fig. 8). The largest bond issues were issued by ОАО Bashne Joint-Stock Company (a series of exchange traded bonds at Rb 10bn), ОАО Gazprom-bank (a series of exchange traded bonds at Rb 10bn), and CJSC Unicredit Bank (a series of exchange traded bonds at Rb 10bn). Exchange traded bonds accounted for more than a half of the issues. Despite the remai-ning risks and capital ou low from Russian assets, two mortgage agents managed to raised funds for a period

4 According to Rusbonds informa on agency.

Source: According to Cbonds Informa on Agency .Fig. 7. Dynamics of the Russian corporate bond

market index and average weighted yield

FINANCIAL MARKETS IN JUNE 2014

13

of 32 and 25 years while another three issuers ma-naged to borrow for a period of 10 years.

In June 2014, seven bond issues of LLC VTB Capi-tal Finance, one of the major bond issuers, were de-clared void and cancelled for registra on by the Bank of Russia for non-placement of a single bond (eight bond issues were declared void on the same grounds in the preceding month)1. Considering that in June 2014 the said company registered 26 issues more, one can say the issuer itself changed me limits of the fundraising program.

Twenty issuers were to redeem their bonds at an aggregate value of Rb 52.3bn in the period between May 23, 2014 and June 23, 2014, however one of them failed to honor its obliga ons and declared a technical default (all issuers redeemed their bonds in the preceding period). Twenty four corporate bond issues at a total of Rb 89.4bn are to be redeemed in Julyl 20142

Addi onally, technical defaults on the coupon yield and on the put date were declared in the pe-riod between May 23, 2014 and June 23, 2014. How-

1 According to the Bank of Russia. 2 According to Rusbonds company.

ever, no real defaults3 on coupon yield payment and early redemp on of securi es on the put date and full repayment4 were reported, like in the previous months.

3 I.e. situa ons when the issuer is unable to pay to bondholders even within a “grace period”. 4 According to Rusbonds company.

Source: According to Rusbonds informa on agency. Fig. 8. Dynamics of ini al public off erings of corporate

bonds denominated in the na onal currency


14

THE REAL SECTOR OF ECONOMY IN JANUARY MAY 2014: FACTORS AND TRENDS

O.Izryadnova

In the beginning of 2014, the economic and poli -cal uncertainty in the country intensifi ed the drop in investment demand. In Q1 2014, the eff ect of that pro-cess was reduced because of a fairly high consumer demand which was jus fi ed by growth in infl a onary expecta ons due to deprecia on of the ruble. Within the same period, another factor which underpinned GDP growth rates at the level which was not lower than the index of the previous year was growth in con-tribu on of the net export which situa on is related to higher rates of reduc on of the import against the dynamics of deliveries of Russian goods to foreign markets. The analysis of the dynamics and the pa ern of GDP in Q1 2014 shows that the dynamics of eco-nomic growth was nega vely aff ected by reduc on of the rates of produc on of the gross added value (GAV) in mining, u li es (electricity, water and gas), building industry and agriculture with posi ve growth in GAV in manufacturing. A contribu on by such industries

In the fi rst fi ve months of 2014, the economic situa on was determined by slowdown of growth rates of con-sumer demand and a drop in investments. In January–May 2014, investments in capital assets decreased by 3.8% against the index of the respec ve period of the previous year. In January–May 2014, the retail trade volume increased by 3.1% against 3.9% a year earlier. A posi ve contribu on to the dynamics of the economic develop-ment is made by recovery of output growth in manufacturing. In January–May 2014, manufacturing output index amounted to 103.2% against 98.9% a year before with a high diff eren a on of produc on rates in diff erent sec-tors which situa on is primarily jus fi ed by prevalence of nega ve trends in produc on of capital goods.

as trade and transport to the dynamics of economic growth decreased, too. Indices of the fi nancial sector and real-estate opera ons, as well as such socially im-portant types of ac vi es as educa on and healthcare grew at an advanced rate against GDP.

A er a drop in January, in February–May 2014 the industry indices demonstrated growth year on year. In May 2014, year on year growth rates of industrial produc on, manufacturing and mining amounted to 2.8%, 4.4% and 0.9%, respec vely.

In February–May, industries oriented at the con-sumer demand grew at a faster rate than manufactur-ing in general. In May, produc on of food pro ducts and tex le and sewing industry rose by 7.2% and 18.3% year on year, respec vely. Despite the fact that in May produc on of leather and footwear amounted to 99.3% year on year against the index of 2013, gene-rally in January–May 2014 the output in that segment of business ac vi es increased by 3.2% as compared

94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113

GDPAgriculture

Fishing and fish-farmingMining

ManufacturingUtilities (electricity, water and gas)

BuildingRetail and wholesale trade

Hotels and restaurantsTransport and communications

Financial sectorReal-estate operations

State governance and militaryEducation

Healthcare and provisionProvision of other utilities…

Households’ activitiesNet taxes on food

2014 2013

Source:The RosstatFig. 1. Indices of the physical volume of the produced GDP and the gross added value by the type

of economic ac vi es in Q1 2013–2014 as % of the respec ve period of the previous year

THE REAL SECTOR OF ECONOMY IN JANUARY–MAY 2014: FACTORS AND TRENDS

15

to the respec ve period of 2013. It can be supposed that in the above types of business the economic ac- vity was supported by means of u liza on of the im-

port subs tu on poten al. In the pa ern of commo-dity resources of the retail trade turnover, in Q1 2014 the share of domes c products amounted to 57.0%, including food products (35.0%), though in the pat-tern of import in Q1 2014 the unit weight of the im-port of consumer goods in the total volume of import amounted to 38.4% and remained virtually at the level of the index of 2013.

To apprecia on of prices as a result of deprecia on of the ruble, a complex of intermediate demand indus-tries with a high share of export-oriented industries re-acted by growth in output. If in May 2013 the price index in manufacturing amounted to 102.4% year on year, in May 2014 it was equal to 105.9%. In Janu-ary–May 2014, there was growth in output of petro-leum (7.2%), the pulp and paper industry (7.7%), the chemical industry (3.6%) and the iron and steel indus-try (2.0%). It is to be noted that with a rela vely small share of the import in the cost of produc on in the above types of ac vi es, profi tability of produc on did not change much. In the pulp and pare industry and the iron and steel industry, the profi tability of the sold goods increased as compared to the same period of 2013, while in produc on of petroleum and the che-mical industry, decreased by 1 p.p.

Growth in the output of intermediary demand goods resulted in structural changes in import: in Q1 2014 the unit weight of intermediary goods in the total volume of import fell to 37.4% against the 38.2% in 2013.

There was a drama c reac on to changes in the pricing situa on on the part of investment complex industries due to apprecia on of prices on imported products of intermediate and ul mate consump on. In May 2014, the index of produc on of machinery and equipment amounted to 94.7% year on year, while that of produc on of electric, electronic and op cal

equipment, to 97.1% as compared to May 2013. The situa on in the above areas is made even worse due to a drop of 6.0% in the volume of import of high-tech products, including electronic and communica on equipment (15.7%) and offi ce computer equipment (11.7%) as compared to Q1 2013.

In May 2014, transport equipment manufactur-ing increased by 18.3% year on year which can be ex-plained by growth of 31.5% in manufacturing of ships, aircra , spacecra and other transporta on vehicles, while automo ve equipment produc on fell by 6.0%. The military-industrial complex and the nuclear power industry produce goods which are tradi onally in high demand on the global market, however, in Q1 2014 the export of goods of the aerospace industry amounted to just over 50% of the index of the previous year with dynamic growth in import which exceeded by 100% the volume of the domes c produc on.

The main component which underpins economic growth is households’ consump on. In May 2014, the real disposable cash income increased by 5.8% year on year with a drop of 0.3% a year before. Growth rates of real wages and salaries increased from 104.7% in May 2013 to 105.0% in May 2014. In January–April, the real amount of the granted pensions rose by 2.5% as com-pared to the respec ve period of 2013.

However, the dynamics of consumer demand is characterized by gradual slowdown. In May 2014, the growth rates of the retail trade volume and the volume of paid services to households amounted to 2.1% year on year and 0.6%, respec vely (3.4% and 0.9%, respec- vely, a year ago). Slowdown of retail trade growth

rates is jus fi ed by a year on year decrease of 0.3% in demand on food in May with a 4.0% increase in growth rates of the market of nonfood products. It can be jus -fi ed by growth in prices on food products in May by 6.9% from the beginning of the year (4.7% in December–May 2013) with moderate growth in prices on nonfood prod-ucts and services: 2.5% and 2.9%, respec vely. In May 2014, the consumer price index amounted to 107.6%

Table 1EXPORT AND IMPORT OF HIGH TECH PRODUCTS IN Q1 2014

Export ImportMillion

USD % of the respec ve period

of the previous yearMillion

USD% of the respec ve period

of the previous yearHigh-tech products 2950 59.8 8468 94.0 including:aerospace industry goods 1107 53.9 2001 155.2

Offi ce computer equipment 124 182.4 1320 88.3Electronic and telecommunica ons equipment 215 94.3 2428 84.7

pharmaceu cals 52.2 96.1 697 74.6Scien fi c instruments 301 152.2 883 69.0

Source: The Rosstat.


16

year on year and exceeded by 0.2 p.p. the index of the previous year. In January–May 2014, weak economic dy-namics was mainly jus fi ed by structural factors. It is to be noted that a long-term reduc on of the volumes of investments in capital assets is the main factor behind slowdown of growth in the short-term prospect. In May 2014, investments in capital assets decreased by 2.6% as compared to the respec ve period of 2013. In 2014, a drop in investments in capital assets was jus fi ed by a higher economic uncertainty, worsening of the fi nancial posi on of real sector companies, tougher condi ons of bank lending and higher capital fl ight from the country.

In May 2014, the rate of unemployment kept fall-ing to 4.9% with the average index of 5.4% in January–April (on the basis of the ILO methods). The labor mar-

ket indicators point to growth in labor shortages: both the number of the offi cially registered unemployed per one vacant job and the share of the unemployed receiving unemployment benefi ts decreased. The low rate of unemployment in a situa on of slowdown of economic growth rates is the result of low labor effi -ciency.

With the exis ng level and effi ciency of u liza on of the main factors of produc on, the Ministry of Eco-nomic Development of the Russian Federa on and the world’s leading agencies expect slowdown of 100.4% to 100.6% of Russian GDP growth rates in Q2 2014 as compared to the respec ve period of the previous year with the spread of annual es mates in the range of 99.0–101.0%.

RUSSIAN INDUSTRY IN MAY 2014

17

RUSSIAN INDUSTRY IN MAY 2014S.Tsukhlo

The Industrial Op mism Index1

The aggregate index of industrial op mism showed improvement in sen ments of the Russian industry (Fig. 1); it is based on three components out of four ones2.

Demand on Industrial ProductsIn May, the ini al data on demand did not show a

tradi onal holiday decrease in sales as compared to April (as it was last year). As a result, clearing of the seasonal factor showed improvement in the dynamics of demand, but le the balance in the nega ve zone (Fig. 2). However, even that situa on started to suit a slightly larger share of enterprises than before: the share of “normal” answers in evalua on of the de-mand rose to 50% and became equal to that of “below the norm” answers.

As a year ago, the forecasts of the demand in-creased by 7 points, however, with the seasonal factor cleared the total balance failed to enter the posi ve zone. However, minimum changes in the index jus fy a conclusion about its stability around the zero level, rather than any serious fl uctua ons from the begin-ning of the year.

1 Surveys of managers of industrial enterprises are carried out by the Gaidar Ins tute in accordance with the European harmo-nized methods on a monthly basis from September 1992 and cover the en re territory of the Russian Federa on. The size of the panel includes about 1,100 enterprises with workforce exceeding 15% of workers employed in industry. The panel is shi ed towards large enterprises by each sub-industry. The return of queries amounts to 65–70%.2 The index is based on the arithme c mean value of balan-ces (diff erent answers) of four ques ons from the IEP’s monthly survey ques onnaire: 1. Actual changes in demand, balance = %growth - %decrease; 2. Evalua on of demand, the diff erence of evalua ons = % above the norm + % norm - % below the norm; 3. Evalua on of stocks of fi nished products, balance = % above the norm - % below the norm, the opposite sign; 4. Plans to change output; balance = %growth - %decrease. The index may vary from -100 points to +100 points. Posi ve values of the index mean that posi ve evalua ons prevail. Nega ve values of the index mean that nega ve evalua ons prevail. A decrease in the index value means worsening of the situa on, while growth in the index value, improvement in the situa on.

Stocks of Finished ProductsThe balance of stocks of fi nished products rose

(that is, got worse) by 5 points in May, but did not go beyond the band within which it stayed from July 2013 (Fig. 3). So, for 11 months running, industry demon-strated fairly successful management of stocks of fi n-ished products even in a situa on of growing uncer-tainty and higher geopoli cal risks. It is to be noted

According to business surveys of the Gaidar Ins tute1 carried out in May, the situa on in the Russian industry changed for the be er. Forecasts of changes in demand, output and employment demonstrate posi ve dynamics. The stocks of fi nished products are successfully controlled by enterprises. The rate of employment keeps decreas-ing, but it is not excluded that addi onal workforce may be required.

THE IEP INDUSTRIAL OPTIMISM INDEX. 2005-2014

Fig. 1

SOLVENT DEMAND CHANGES CLEARED OF A SEASONAL FACTOR (BALANCE=%GROWTH-%DECREASE)

EXPECTED

ACTUAL

Fig. 2


18

that the share of the “normal” answers amounts at present to 69% and is close to the historic maximum level.

The OutputIn May 2014, the output did not undergo downward

changes which were typical of that month. The ini al data of the survey showed that the output remained at the level of April, while the data cleared of the sea-sonal factor demonstrated growth whose rate was un-typical of the past two years (Fig. 4). It seems the in-dustry does not experience at all either the recession which was predicted, or sanc ons on the part of Rus-sia’s Western “partners”. The latest developments on Russia’ South-Western border sooner contributed to growth in output of the Russian industry due to both exit by Ukrainian compe tors (for objec ve reasons) from Russian sales markets and markets of primary materials and subjec ve growth in military-poli cal patrio sm in new geopoli cal condi ons. Probably, it is an excessive one as pointed to by a small worsening of es mates of stocks of fi nished products.

In industry forecasts, growth in op mism was regis-tered as well: growth of 12 points and 9 points as re-gards the ini al data and that cleared of the seasonal factor, respec vely. As a result, in March–April all the losses of that index were recovered and the balance of output plans returned to the level which was typical of that of expecta ons of the previous months, that is, a moderate one by standards of the pre-crisis years and fi rst post-crisis years, but quite a good one with the prospect of the predicted recession taken into ac-count.

Prices of EnterprisesIn May, the industry returned to intense growth in

prices it demonstrated in Q1 2014. So, a surge in their growth rates in April due to joint eff orts by the Rus-sian Central Bank and Russia’ Western partners was stopped by reverse ac ons by one authori es and in-decisiveness by the other. However, the levels of the index of the beginning of 2014 and May 2014 exceed the respec ve values of 2013 and so far no decrease in that index is observed by the end of H1 as it used to be before.

A similar situa on is observed with enterprises’ pricing forecasts. In May, they managed to return to the level of the beginning of the year a er an unusual surge in March–April (Fig. 5).

Actual Dynamics and Lay-off Plans In May, the industry demonstrated unexpectedly

preserva on of the former rates of change in the number of workers. As a rule, in that period the index

BALANCE OF ESTIMATES OF STOCKS OF FINISHED PRODUCTS (BALANCE=%ABOVE THE NORM - %BELOW THE NORM

BALANCE

THE SHARE OF NORMAL ESTIMATES

Fig. 3

EXPECTED

ACTUAL

CHANGES IN OUTPUT VOLUMES CLEARED OF A SEASONAL FACTOR (BALANCE =%GROWTH-%DECREASE)

Fig. 4

CHANGES IN SELLING PRICES(BALANCE=%GROWTH-%DECREASE)

EXPECTED

ACTUAL

Fig. 5

RUSSIAN INDUSTRY IN MAY 2014

19

normally changes for the worse as compared to the previous months. At present, it remains in the nega- ve zone which fact points to con nued reduc on of

the number of workers in the Russian industry. Ac-cording to surveys, that process began in mid-2012 and since then enterprise have never succeeded in achieving the excess of the number of the employed over that of laid off .

Improvement in employment forecasts can be at-tributed to surprises of May 2014. Those forecasts rose by several points and entered the posi ve zone, though judging by the experience of the past few years they should have been nega ve ones. It seems the in-dustry is seeking to realize its opera ng plans based on its output forecasts with employment of addi onal workforce (Fig. 6).

CHANGES IN EMPLOYMENT(BALANCE=%GROWTH-%DECREASE)

EXPECTED

ACTUAL

Fig. 6


20

INVESTMENTS IN CAPITAL ASSETS IN JANUARY MAY 2014O.Izryadnova

In the fi rst fi ve months of 2014, a trend of reduc on of investment demand prevailed: in May 2014 capital investments amounted to 97.4% on May 2013, while in January–May 2014, to 96.2% against the respec ve period of 2013.

In 2014, the situa on in the investment sector of the economy is determined by a slowdown of busi-ness ac vi es as early as H2 2012. Throughout 2013, low investment ac vi es and a lack of the required reserves in the building industry jus fi ed a drop in in-vestments in 2014. In Q1 2014, the share of capital in-vestments amounted to 11.5% of GDP and was 1.1 p.p. lower than the level of the respec ve period of 2013, while the contribu on of the building industry to GDP decreased to 4.6% against 5.1%. In Q1 2014 and January–May 2014, capital investments in real terms amounted to 95.2% and 92.6%, respec vely against the respec ve periods of 2013. It is to be noted that in January–May 2013, investment ac vi es were already in the state of stagna on.

The dynamics of capital investments is diversifi ed by the economic agent. In Q1 2014, in the segment of large and mid-sized enterprises a drop of capital in-

In January–May 2014, capital investments in real terms amounted to 96.2% on the respec ve index of the pre-vious year. In the pa ern of sources of investment funding, the share of own funds and banks’ par cipa on increased with a reduc on of investment of federal budget funds. In Q1 2014, in the segment of large and mid-sized enterprises a drop in capital investments stopped and they increased by 1,8% as compared to the respec ve period of the previous year. In Q1 2014, a posi ve eff ect on the dynamics of investments by large enterprises was produced by growth in investments in the primary sector (5.4%), manufacturing (2.6%), oil refi ning (35.1%) and transport and communica ons (10.5%).

vestments stopped. If in Q1 2013 investments of large enterprises amounted to 95% as compared to the in-dex of the previous year, in Q1 2014 they increased by 1.8%. However, a 20% decrease in investments by small enterprises in the beginning of the year inten-sifi ed a drop in capital investments in the economy

-0,8

5

8,2

13,616,5

10,5

5,3 2,1

0,1 -1,2 -0,3

0,4

-4,8-5

0

5

10

15

20

I II III IV I II III IV I II III IV I

2011 2012 2013 2014

The volume of jobs in building Investments in capital assetsGDP

Source: the Rosstat.Fig. 1. Dynamics of capital investments in the 2011–2014 period as % of the respec ve quarter of the previous year

Table 1THE VOLUME AND PATTERN OF CAPITAL INVESTMENTS BY THE TYPE OF CAPITAL ASSETS IN Q1 2011 2014

WITHOUT SMALL BUSINESS AGENTS AND PARAMETERS OF INFORMAL ACTIVITIESBillion Rb % of the result

2011 2012 2013 2014 2011 2012 2013 2014Investments in capital assets 956.8 1211.0 1310.2 1429.7 100 100 100 100including:housing 47.6 48.4 63.9 81.7 5.0 4.0 4.9 5.7buildings (except for residen- al ones) and construc ons 499.2 604.6 609.4 710.6 52.2 49.9 46.5 49.7

machines, equipment and means of transporta on 326.1 441.1 506.5 481.7 34.1 36.4 38.6 33.7

Including: purchasing of import machines, equipment and means of transporta on 63.6 71.4 89.9 n.a 6.6 5.9 6.9 n.a

other 83.9 116.9 130.4 155.7 8.7 9.7 10.0 10.9Source: Rosstat.

INVESTMENTS IN CAPITAL ASSETS IN JANUARY–MAY 2014

21

general. It is to be reminded that in Q1 2013 growth in investments in the segment of small enterprises amounted to 7.1% and contributed to stabiliza on of the situa on in the investment and building complex at the level of the indices of Q1 2012.

In Q1 2014, as in the previous two years in the pat-tern of capital investments growth in the volumes and the share of investments in building of housing was registered.

The posi ve dynamics of commissioning of housing was registered from H2 2012 which situa on was jus -fi ed by some improvements in fi nancing. In Q1 2014, en es of all the forms of incorpora on built 231,100 apartments with the total fl oorspace of 13.6m sq. me-ters which is 31% more than in the respec ve period of the previous year. Individual developers built 6.4m sq. meters of housing or 46.7% of the total fl oorspace of housing commissioned in Q1 2014.

In the pa ern of sources of funding of investments in building of housing in the 2011–2014 period, the volume and the share of households’ funds rose in the equity construc on of housing with a reduc on of the share of legal en es’ funds. In Q1 2014, the funds re-ceived for equity construc on of housing increased by Rb 10.6bn, including households’ funds (by Rb 9.7bn) as compared to Q1 2013. Growth in households’ in-vestment ac vi es was underpinned by expansion

of lending. On the basis of the results of Q1 2014, Rb 333.0bn worth of mortgage loans was extended, that is, a 48% increase on the index of 2013.

In Q1 2014, the structural specifi cs was growth in quan ta ve parameters of investments in building of non-residen al facili es and premises with a reduc on of investment expenditures on machinery and means of transporta on. The share of investments in build-ing of industrial and social projects rose by 3.2 p.p. as compared to the respec ve period of 2013. The total building volume of non-residen al facili es commis-sioned in Q1 2014 amounted to 28.0m sq. meters and increased by 27% as compared to Q1 2013, including industrial projects (126%), educa onal buildings (45%) and healthcare buildings (69%). According to the sta- s cal data of commissioning of social and cultural

projects, indices of Q1 2014 are s ll lower than those of the previous year.

In Q1 2014, the share of machinery and equipment in capital investments decreased by 4.9 p.p. as com-pared to the respec ve period of 2013 which situa on is probably related to insuffi cient volume of reserves for installa on and incomplete construc on. The situ-a on with provision of machinery and equipment for fulfi llment of building and installa on jobs is made complicated due to a drop in the output of domes c equipment. On the basis of the results of Q1 2014,

Table 2INVESTMENTS IN CAPITAL ASSETS WITHOUT SMALL BUSINESS AGENTS AND THE VOLUME OF INVESTMENTS

WHICH IS NOT DISCERNIBLE TO DIRECT STATISTICAL METHODS BY THE TYPE OF ECONOMIC ACTIVITIES IN Q1 OF THE 2011 2014 PERIOD

% of the respec ve period of the previous year % of the result

2011 2012 2013 2014 2011 2012 2013 2014Total 101.9 116.8 95.0 101.8 100 100 100 200 Agriculture, hun ng and forestry 107.8 116.7 102.5 98.8 3.0 3.2 3.3 3.1 Fishing and fi sh-farming 194.4 161.4 46.4 82.5 0.1 0.1 0.1 0.1 Industry 102.0 129.0 94.8 103.3 49.6 53.8 53.8 53.2 Mining 107.5 132.2 88.6 105.4 22.1 25.0 24.1 24.6 Manufacturing 104.7 128.9 108.0 102.6 17.9 18.5 20.2 19.6 U li es (electricity, water and gas) 87.2 121.9 86.1 99.7 9.6 10.3 9.5 9.0 Building 96.7 134.5 106.5 153.2 2.3 2.6 2.6 4.2 Wholesale and retail trade 129.7 91.8 119.1 129.4 2.7 2.2 3.0 3.5 Hotels and restaurants 94.7 40.3 135.4 64.1 0.5 0.2 0.7 0.4 Transport and communica ons 113.0 106.2 80.9 110.5 26.3 24.0 19.5 19.8 Railway transport 87.8 82.1 94.0 90.0 5.3 3.7 3.3 2.8Pipeline transporta on 125.8 107.3 60.8 113.7 11.1 10.4 6.6 6.1 Communica ons 107.9 129.0 104.1 87.3 3.0 3.2 3.2 2.8 Financial sector 129.6 140.6 99.8 108.5 1.3 1.4 1.6 1.3 Real-estate opera ons 87.5 97.9 115.4 108.5 7.4 6.3 9.2 9.6 State governance 85.7 121.3 80.0 121.6 0.8 0.8 0.7 0.9 Educa on 124.3 88.7 116.1 89.7 1.5 1.2 1.2 1.0 Healthcare and social services 115.8 125.7 102.9 66.4 1.6 1.6 1.6 1.0

Source: Rosstat.


22

the output of machinery and equipment amounted to 85.5% of the respec ve index of the previous year. So far, that situa on is overcome by the prevailing trend of growth in the share of import of investment goods in the total volume of the Russian import to 24.5% in January–March 2014 against 23.5% a year earlier.

On the basis of Q1 2014, the volume of investments in capital assets (without small business agents and volumes of investments which are not discernible to direct sta s cal methods) amounted to Rb 1,429.7bn. In the pa ern of capital investments by the type of economic ac vi es in the 2013–2014 period, substan- al changes took place.

In Q1 2014, investment growth recovered in min-ing, growth rates of capital investments decreased in manufacturing and investment demand in u li es (electricity, water and gas) kept falling. As a result, on the basis of the results of Q1 2014 growth in invest-ments in industry as a whole amounted to 3.3% as compared to the index of Q1 2013, however, that situ-a on did not permit to eliminate the nega ve eff ect of a drop in investments in industry in Q1 2013. In manu-facturing, ac ve growth in capital investments was ob-

served in produc on of petroleum (135.1% in Q1 2014 against Q1 2013), transport equipment manufacturing (128.8%) and the tex le sewing industry (200.0%).

A nega ve contribu on to the dynamics of invest-ments in manufacturing was made by such indus-tries as the woodworking industry and produc on of wood products (72.82% in Q1 2014 against Q1 2013), the chemical industry (84.7%), the pulp and paper industry (51.9%), produc on of rubber and plas c goods (59.0%) and produc on of building ma-terials (77.8%).

Early in 2014, expansion of investment demand in the transport industry was related to growth in the volume of jobs related to development of pipeline transporta on.

In funding of investments, u liza on of own funds increased. In Q1 2014, the share of investments made by means of en es’ own funds amounted to 54.3% and exceeded by 1.3 p.p. the index of Q1 2013. In Q1 2014, growth in the share of investments fi nanced out of en es’ profi t was related to a 0.3 p.p. growth in profi tability in the economy in general to 8.7% as com-pared to the respec ve period of 2013.

Table 3THE VOLUME AND PATTERN OF INVESTMENTS IN CAPITAL ASSETS IN Q1 OF THE 2011 2014 PERIOD

WITHOUT SMALL BUSINESS AGENTS AND PARAMETERS OF INFORMAL ACTIVITIESBillion Rb % of the result

2011 2012 2013 2014 2011 2012 2013 2014Investments in capital assets 956.8 1211.0 1310.2 1429.7 100 100 100 100Including by the source of funding:own funds 464.8 613.3 693.9 776.5 48.6 50.6 53.0 54.3

A racted funds 474.7 571.8 583.8 653.2 49.6 47.2 44.6 45.7including:bank loans 66.5 97.6 130.3 140.5 7.0 8.1 9.9 9.8

including foreign banks’ loans 17.4 23.2 15.9 18.2 1.8 1.9 1.2 1.3

Russian banks’ loans 49.1 74.4 114.4 122.3 5.2 9.2 8.7 8.5Other en es’ borrowed funds 47.0 64.4 94 87.5 4.9 5.3 7.2 6.1Budget funds 127.6 133.4 148.4 137.5 13.3 11.0 11.3 9.6including:federal budget funds 51.9 57.0 70.4 58.6 5.4 4.7 5.4 4.1

Funds of budgets of cons tuent en - es of the Russian Federa on 69.0 67.8 67.6 67.2 7.2 5.6 5.2 4.7

Extra-budgetary funds 3.4 2.9 6.1 2.7 0.3 9.2 0.5 0.2other 230.2 273.5 204.9 232.5 24.1 22.6 15.6 16.3including: funds of superior bodies 200.7 237.4 135.8 168.5 21.0 19.6 10.4 11.8

Funds received from corporate bond issues n.a n.a. 0.4 4.0 - - 0.03 0.3Funds from equity issuing 10 13.6 15.4 41.5 1.0 1.1 1.2 2.9Funds received for equity construc on of housing (en es and households) 17.3 25.9 32.5 43.1 1.8 2.1 2.5 3.0

Including households’ funds 10.6 16.6 25.4 35.1 1.1 1.4 1.9 2.5Of the total volume of investments in capital assets – investments from abroad 36.4 40.3 36.6 9.4 3.8 3.3 2.8 0.7

Source: The Rosstat.

INVESTMENTS IN CAPITAL ASSETS IN JANUARY–MAY 2014

23

In Q1 2014, the share of bank loans in the pat-tern of sources of funding amounted to 9.8% and was 0.1 p.p. lower than the index of the respec ve period of the previous year. In the past three years, changes in the pa ern of bank lending have been determined by growth in the volume and share of Russian banks’ loans which replace foreign banks’ loans. As com-pared to Q1 2013, Russian banks’ loans increased by Rb 7.9bn, while those of foreign banks, by Rb 1.3bn.

In Q1 2014, at the level of par cipa on of banks in fi nancing of investment programs the prevailing trend of capital fl ight had a nega ve impact on the situa on. According to the preliminary es mates of the Central Bank of Russia, in January–March 2014 the net capital ou low from the private sector amounted to $50.8bn, including $18.9bn from the banking sector. In addi on to the above, in Q1 2014 the volume of foreign invest-ments in capital assets decreased; their share in the total volume of investments in the Russian economy fell to 0.7% against 2.8% a year before.

In the pa ern of the funds a racted for fi nancing capital investments, a change in the role of budget funds was observed. In Q1 2014, budget funds per-mi ed to fi nance Rb 137.5bn worth of investments in capital assets (9.6% of the total volume of invest-ments in the economy). As compared to Q1 2013, the scale of funding of investments by means of federal budget funds and budget funds of cons tuent en es of the Russian Federa on decreased by Rb 11.8bn and Rb 0.4bn, respec vely, with growth of Rb 5.6bn in par- cipa on of local budget funds.

In 2014, the Federal Target Investment Program (FTIP) provides for alloca on of federal budget funds in the amount of Rb 834.6bn. It is planned to spend the above funds on development of the industrial in-frastructure, including transport, pipeline transporta- on and informa on and communica ons infrastruc-

ture (Rb 301.2bn), crea on of condi ons to speed up social development of the country, including health-care, educa on, culture, housing and demographic situa on (Rb 166.4bn) and implementa on of mea-sures which facilitate a switchover of the economy to the innova on way of development, establishment of

the na onal innova on system and development of science and high technologies (Rb 79.7bn).

Budget investments and subsidies on fi nancing of property which are in the ownership of the Russian Federa on and budget investments to open-end joint-stock companies amount to Rb 739.1bn. Subsidies to units which are in the regional (municipal) ownership are equal to Rb 95.5bn.

Table 4THE VOLUMES OF FUNDING OF THE FEDERAL TARGET

INVESTMENT PROGRAM IN 2014, BILLION RB

FTIPIncluding

Program por on

Non-program por on

Total funding 834.6 523.6 311.0including State property and property of open-end joint-stock companies

739.1 434.7 304.4

regional (munici-pal) property 95.5 88.9 6.6

Source: Ministry of Economic Development of the Russian Federa on

In accordance with the FTIP approved by the Mi-nistry of Economic Development of the Russian Fede-ra on for the year 2014 (as updated as May 1, 2014), Rb 541.2bn was allocated, including Rb 525.9bn out of the federal budget on building of 2112 capital de-velopment projects, purchasing of real property units and implementa on of measures (large investment projects), including 495 projects in respect of which only design and survey jobs were planned. Out of 742 projects which are expected to be commissioned in 2014 three projects were put into opera on: two projects to full capacity and one project to a par al capacity.

According to the data of the Rosstat, in January–April 2014 Rb 152.9bn of federal funds was used to fi nance FTIP projects (without taking into account special jobs included in the state defense order), that is, 29.1% of the envisaged limit set for the year. As of May 1, 2014, 625 projects were fi nanced in full.


24

FOREIGN TRADE IN APRIL 2014N.Volovik

In April 2014, the foreign trade turnover calculated on the basis of the methods of the balance of payments amounted to $75.1bn and exceeded by 0.5% the index of April 2013. Growth took place because export deliv-eries increased. In April 2014, $47.5bn worth of goods was exported from the country which fi gure was 6.7% higher than the respec ve index of 2013. As compared to April 2013, import decreased by 8.7% and amount-ed to $27.6bn. As a result, the foreign trade surplus increased and amounted to $19.8bn which was 39% higher than the index of April 2013.

In April 2014, in the global commodi es market dif-ferently direc onal dynamics of prices was observed. As compared to April 2013 prices on coal, natural gas, iron ore, aluminum and copper decreased, while those on oil, nickel, zinc and lead appreciated.

In April 2014, prices on Brent oil appreciated by 4.8% as compared to April 2013. On April 2, hav-ing a ained the minimum value of $103.34 a barrel within a month, a er April 8 Brent oil prices did not go down below $106 a barrel. In May 2014, the Brent oil prices fl uctuated within the range of $108-$111 a barrel. In mid-June, prices started to grow due to ten-sions caused by a acks by Sunni fi ghters in Iraq which is rated the second among the OPEC countries as re-gards produc on of oil. On June 23, the nine-month maximum of oil prices – $115 a barrel – was achieved.

In April 2014, diff erently directed dynamics of export and import was observed and, as a result, the trade balance surplus increased. In the foreign trade turnover of the Russian Federa on, the share of CIS countries has kept decreasing. G-20 countries con nue to apply protec onist measures on their domes c markets.

In April 2014, Urals oil prices amounted to $106.6 a barrel which is 5.4% higher than in April 2013. With-in four months of 2014, Ural oil prices decreased by 1.6% as compared to the respec ve period of 2013 to $106.8 a barrel.

In May 2014, the average Urals oil price amounted to $107.7 a barrel. In May 2013, the price was at the level of $102.27 a barrel.

According to the data of the Ministry of Economic Development of the Russian Federa on, in the period from May 15 ll June 14, 2014 the average price of crude Urals oil was equal to $785.9 a ton ($107.66 a barrel). As a result, from July 1, 2014 the export oil du-ty in the Russian Federa on will slightly increase and amount to $385.2 a ton. From July 1, the reduced rate of duty on oil of the Eastern Siberia, Caspian deposits and Prirazlomnoe deposit will amount to $189.4 a ton ($189.2 from June 1). The duty on high-viscosity oil will not change and be at the level of $38.5 a ton. In July, the duty on light and dark oil products which was set in the amount of 66% of the oil duty will amount to $254.2 a ton (from June 1 it was set at $254.1 a ton). On the basis of the ra o of 0.9, the duty on export of petrol will increase to $346.6 a ton from $346.5 a ton. The duty on condensed gas will increase to $89.6 a ton from $86 a ton. From July 1, the duty on diesel fuel with the ra o of 0.65 of the oil duty will amount to

0

10

20

30

40

50

60

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Balance Export Import

Source: The Central Bank of the Russian Federa on.Fig. 1. The main indices of the Russian foreign trade (billion Rb)

FOREIGN TRADE IN APRIL 2014

25

$250.3 a ton as compared to $250.2 a ton which is in eff ect from June 1.

In the past two months, the situa on on the global market of nonferrous metals did not change much. An excep on is only nickel which prices appreciated in March and April due to both limita on of its supplies on the global market and the fact that earlier it used to depreciate faster as compared to other industrial metals.

According to the data of the London Metal Ex-change, in April 2014 as compared to March 2014 there was growth in prices on nickel (11.0%) and aluminum (6.2%), while copper prices remained at the level of the previous month. As compared to April 2013, there was a decrease in prices on aluminum (2.5%) and cop-per (7.4%) while nickel prices appreciated by 10.9%. In January–April 2014, as compared to the respec ve pe-riod of 2013 aluminum, copper and nickel were traded 11.8%, 10.3% and 9.3% lower, respec vely.

A er in March 2014 the average value of the FAO food price index amounted to the maximum level – 213 points – in the past ten months, in April it fell to 210.3 points. The decrease mainly took place due to a sudden drop in prices on dairy products and some de-precia on of prices on sugar and vegetable oils. Prices on grain and meat products slightly increased.

In April 2014, there was a drama c deprecia on of prices on dairy products on the global market. In April, the average value of the FAO index of dairy food price amounted to 251.5 points having fallen by 17 points within a month. Prices depreciated on virtually all the types of dairy products, primarily, bu er and dry milk. The world’s main exporter of dry fat-free milk is the US where at present the milk yield is at the season-high level. According to the data of the USDA (United States Department of Agriculture), in March 2014 pro-duc on of milk in the US grew by 0.9% as compared to the respec ve period of the previous year to 8.09m tons. From the beginning of the year, 23.2m tons of milk was produced which was 1% higher than in the

same period of the previous year. It is to be noted that global dairy prices are also under the pressure of the EU countries which keep producing a record-high milk yield.

According to the data of the Central Bank of Russia, in January–April 2014 the Russian foreign trade turn-over amounted to $269.8bn (which is 2.5% less than in January–April 2013), including $170.3bn worth of export (growth of 0.5%) and $99.5bn worth of import (a decrease of 7.1%). Diff erently directed dynamics of export and import resulted in growth in the trade bal-ance surplus to $70.8bn which is 13.2% more than in january–april 2013.

Within four months of 2014, in the export pa ern the share of food products and agricultural primary products rose to 3.4% against 2.5% in January–April 2013. The monetary volume of the export of that commodity group increased by 36.3% due to a 260% growth in grain deliveries abroad.

Due to growth in physical volumes, the export of wood and pulp and paper products increased: as compared to January–April 2013 there was growth of 14.4%.

The export of fuel and energy commodi es rose by 0.3%. According to the data of the Federal Customs Service, in January–April 2014 73.7m tons of oil was exported from the country which value is 5.9% lower than in the same period of 2013. It is to be noted that 65.8m tons of oil was exported to the far abroad coun-tries (95.9% against the respec ve period of 2013) and 7.9m tons of oil, to the CIS states (81.3%).

In January–April 2014, the export of gas amounted to 70.4bn cubic meters which value is 6.5% more than in January–April 2013. It is to be noted that supplies increased both to far abroad countries (9.5%) and the CIS states (0.5%).

Within the fi rst four months of 2014, as regards other commodity groups of the expanded nomencla-ture there was a drop in export as compared to the respec ve period of 2013. Export of chemical products

Table 1MONTHLY AVERAGE GLOBAL PRICES IN APRIL OF THE RESPECTIVE YEAR

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Oil (Brent), USD/a barrel 24.79 33.5 50.6 68 68.32 108.26 50.85 84.98 123.07 120.46 102.9 104.8

Natural gas*, USD/1 m BTU 4.03 3.92 5.86 8.24 8.00 12.19 8.51 7.52 10.36 11.42 12.88 10.73

Copper, USD/ a ton 1598.5 2950 3395 6370 7766.5 8684.9 4406.6 7745.1 9483.3 8289.5 7234.3 6673.6

Aluminum, USD/a ton 1332.8 1734 1894 2620 2814.8 2959.3 1420.9 2316.7 2662.6 2049.7 1861.7 1810.7

Nickel, USD/ a ton 7915.3 12872 16142 17935 50267 28763 11166 26031 26329 17939.8 15673 17373

* The market of Europe, average contract price, Franco-border.Source: The World Bank.


26

fell by 6.5% mainly due to a drop in contract prices on fer lizers. The export of metals and fabricated metals fell by 6.8% due to a drop both in physical volumes and prices on the global market. A record drop was registered with the machinery and transport vehicles group: as compared to January–April 2013 in January–April 2014 there was a decrease of 14.8% in the export of products of that group.

As regards import, there was a decrease with all the commodity groups of the expanded nomenclature: the import of food and agricultural primary products (a decrease of 1.4%), chemical products (8%), tex le and footwear (8.6%) and machinery and transport ve-hicles (7.2%). The most drama c drop in the import took place in the metals and fabricated metals group (17%).

Russia’s trade volume with the CIS states keeps fall-ing. Within the fi rst four months of 2014, the Russian export and import to those countries fell by 1.6% and 20.6%, respec vely. The share of the CIS states in the foreign trade volume of the Russian Federa on fell from 14.4% in January–April 2013 to 13.5% in Janu-ary–April 2014.

Russia’s volume of trade with member-states of the Customs Union fell as well: during the fi rst four months of 2014, it amounted to $16.5bn which was 14.3% lower as compared to the respec ve period of 2013. The share of member-states of the Customs Uni-on in the foreign trade volume of the Russian Federa- on fell from 7.1% to 6.3%.

On June 16, 2014, a report by the UNCTAD, the OECD and the WTO on trade and investment measures taken by G-20 countries in the period from Novem-ber 2013 ll May 2014 was published1. In the above period, G-20 countries introduced 112 protec onist trade measures which had an eff ect on 0.3% of im-

1 h p://www.wto.org/english/news_e/news14_e/g20_wto_re-port_jun14_e.pdf

port of those countries (0.2% оf the aggregate index of the global import of goods). Pharmaceu cals, electric machinery, ferrous metals and ground transporta on means were the worst hit due to the above restric ve measures.

Most trade restric ons introduced by G-20 coun-tries from the beginning of the world economic crisis are s ll in force. So, only 251 protec onist measures were canceled out of 1185 ones introduced from Oc-tober 2008. Star ng from 2008, protec onist meas-ures aff ected about 4.1% of the global trade.

In May 2014, the report of the Eurasian Economic Commission (EEC) on protec onist measures applied to goods from the Customs Union of Russia, Belarus and Kazakhstan was published2.

On the basis of the results of the foreign trade mo-nitoring of the EEC in Q1 2014, 104 measures limi ng the access to markets for goods from the member-states of the Customs Union were iden fi ed. Most trade barriers were an dumping measures: 50 mea-sures, including 5 an dumping inves ga ons are car-ried out at present. Also applied are four discrimina- ng excises, two bans on import, six quan ta ve

limita ons, including two tariff quotas, nine other non-tariff barriers, one limita on of the import by the nomenclature, two charges, nine special protec on-ist measures, including 5 inves ga ons which are un-derway, fi ve sanitary and phytosanitary measures and nine technical barriers, including two threats of such barriers being introduced.

In respect of goods from the member-states of the Customs Union, the European Union and the US ap-ply 20 and 13 protec onist measures, respec vely. CIS states apply 35 protec onist measures with Ukraine and Uzbekistan accoun ng for most of them (16 and 8 protec onist measures, respec vely).

2 h p://www.eurasiancommission.org/ru/act/trade/dotp/Site-Assets/dostup/doklad_2014.pdf

STATE BUDGET IN JANUARY–MAY 2014

27

STATE BUDGET IN JANUARY MAY 2014T.Tischenko

Analysis of the basic execu on parameters of the federal budget in January to May 20141 In the period of January to May 2014 federal budget

revenues amounted to Rb 5881.8bn or 21.2% of GDP, a growth of 1.2 p.p. of GDP rela ve to the correspond-ing period of the previous year (Table 1). Oil and gas re-venues increased to 11.4% of GDP or by 1.2 p.p. of GDP rela ve to the fi rst fi ve months in 2013, while by the end of the fi rst fi ve months in 2014 revenues (other than oil and gas revenues) remained unchanged as percentage of GDP (9.8% of GDP) compared to the corresponding period of the previous year.

Budget expenditures in the period of January to May 2014 amounted to Rb 5486.8bn (19.8% of GDP), gaining 0.3 p.p. of GDP over the corresponding period of the previous year. By the end of the fi rst fi ve months in 2014 the federal budget ran a surplus of 1.4% of GDP, being 0.9 p.p. of GDP higher than the balance of execu on of the federal budget in the period of Janu-ary to May 2013. However, this took place when the volume of oil and gas defi cit increased 0.3 p.p. of GDP (10.0% of GDP ) against the level observed in the cor-responding period of the previous year.

During the fi rst fi ve months of the current year federal budget revenues from profi t tax increased Rb 27.6bn or 0.1 p.p. of GDP compared to the corre-

1 The Dra Law No. 532291-6 ‘On the Amendments to the Fed-eral Law ‘On the Federal Budget of 2014 and the Planning Period of 2015 and 2016’ was submi ed to the State Duma on 27.05.14.

sponding period in 2013 (Table 2), through a growth of revenues:

• by Rb 10.3bn on the corporate profi t tax cred-ited to the federal budget at a base rate;

• by Rb 11.3bn on the profi t tax in execu ng pro-duc on sharing agreements2;

• by Rb 1.9bn and Rb 1.8bn on income received as dividends by foreign organiza ons from Rus-sian organiza ons and on income received as dividends by foreign organiza ons from Russian organiza ons respec vely.

“Internal” VAT revenues increased 0.4 p.p. of GDP in the period of January to May 2014 rela ve to the fi rst fi ve months of the previous year. “Import” VAT revenues saw a reduc on of 0.1 p.p. of GDP during the same period compared to the corresponding period in 2013. During the fi rst fi ve months of the current year federal budget revenues from “internal” excises as per-centage of GDP remained at the level observed in the period of January to May 2013 (0.7% of GDP ) while those from “import” excises saw a small increase of 0.01 p.p. of GDP to 0.1% of GDP .

2 Profi t tax on organiza ons in execu ng produc on sharing agreements which were concluded prior to the eff ec ve date of the Federal Law ‘On Produc on Sharing Agreements’ and made no provision for special taxa on rates for credi ng the foregoing tax to the federal budget and the budget of the cons tuent territories of the Russian Federa on in accordance to 10101020010000110 code.

According to the data provided by the Federal Treasury of Russia, federal budget revenues increased 1.2 p.p. of GDP in the period of January to May 2014 compared to the corresponding period of the previous year. Consoli-dated budget revenues of the cons tuent territories of the Russian Federa on in January to April 2014 contracted by 0.2 p.p. of GDP rela ve to the four months in 2013. At the end of the period of January–May of the current year the federal budget ran a surplus of 1.4% of GDP; in addi on, a posi ve balance was reached as a result of the execu on of the consolidated budget of the cons tuent territories of the Russian Federa on as 1.6% of GDP. Late in May 2014 the Government of Russia submi ed to the State Duma a dra law1 providing for the adjust-ment of the key parameters of the 2014 federal budget. In par cular, the forecast of GDP volume was downgrad-ed from Rb 73,315bn to Rb 71.493bn (-Rb 1. 822bn) due to the weakening of the investment demand, reduc on in inventories at enterprises, slowdown in the consumer spending and export. Nevertheless, accelerated growth in oil and gas revenues whose volume in the federal budget revenues within the fi rst fi ve months of the current year accounted for 48.2% of the projected annual volumes, allowed the forecast of the federal budget revenues to be upgraded from Rb 13570.5bn (18.5% of GDP ) to Rb 14238.8bn (19.9% of GDP) (+Rb 668.2bn or 1.4% of GDP). At the end of the current year oil and gas revenues are expected to amount to Rb 7480.2bn (+Rb 952.1bn or 10.5% of GDP), and other than oil and gas revenues are projected to see a reduc on of Rb 283.9bn to Rb 6758.6bn (9.5% of GDP) rela ve to the ini ally forecasted volume. The volume of federal budget expenditures was not revised, and the federal budget is expected to run a surplus of 0.4% of GDP in 2014.


28

Table 1 RUSSIA’S FEDERAL BUDGET BASIC PARAMETERS IN THE PERIOD OF JANUARY TO MAY IN 2013 AND 2014

January to May 2014 January to May 2013 Devia ons, as p.p. of GDP billions of rubles as % of GDP billions of rubles as % of GDP

Revenues, including: 5881.8 21.2 5114.6 20.0 1.2 Oil and gas revenues 3148.7 11.4 2611.4 10.2 1.2Revenues (other than oil and gas revenues) 2733.1 9.8 2503.2 9.8 0.0

Expenditures, including: 5486.8 19.8 4985.5 19.5 0.3interest expense 165.0 0.6 143.0 0.5 0.1non-interest expense 5321.8 19.2 4842.5 19.0 0.2Federal budget surplus (defi cit) 395.0 1.4 129.1 0.5 0.9Defi cit (other than oil and gas defi cit) -2753.7 -10.0 -2482.3 -9.7 -0.3

GDP evalua on 27728 25590Source: Ministry of Finance of Russia, Federal Treasury of the Russian Federa on, Gaidar Ins tute’s.

Table 2 DYNAMICS OF FEDERAL BUDGET BASIC TAX REVENUES IN THE PERIOD OF JANUARY TO MAY IN 2013 AND 2014

January to May2014

January to May2013 Devia on as

p.p. of GDPbillions of rubles as % of GDP billions of rubles as % of GDP 1. Tax revenues, including: 5420.2 19.5 4682.9 18.3 1.2corporate profi t tax 162.5 0.6 134.9 0.5 0.1VAT on goods sold on the terri-tory of the Russian Federa on 901.8 3.2 730.8 2.8 0.4

VAT on goods imported to the Russian Federa on 667.4 2.4 635.4 2.5 -0.1

excises on goods manufac-tured on the territory of the Russian Federa on

200.0 0.7 171.5 0.7 0.0

excises on goods imported to the Russian Federa on 27.3 0.1 22.4 0.09 0.01

Mineral extrac on tax 1214.5 4.4 1025.3 4.0 0.4 Foreign trade revenues 2246,7 8,1 1962,6 7,7 0,4

Source: Federal Treasury of the Russian Federa on, Gaidar Ins tute’s es mates.Table 3

FEDERAL BUDGET EXPENDITURES IN THE PERIOD OF JANUARY TO MAY IN 2013 AND 2014 January to May 2014 January to May 2013 Devia on as

p.p. of GDP billions of rubles as % of GDP billions of rubles as % of GDPExpenditures, total 5486.8 19.8 4985.5 19.5 0.3 Including Na onwide Issues 362.8 1.3 306.0 1.2 0.1 Na onal Defense 1343.7 4.8 1006.5 3.9 0.9 Na onal Security and Law Enforcement 751.3 2.7 693.7 2.7 0.0

Na onal Economy 608.0 2.2 527.7 2.1 0.1 Public U li es Sector 38.5 0.1 24.1 0.09 0.01 Environmental Protec on 16.5 0.06 10.1 0.04 0.02 Educa on 273.7 1.0 285.8 1.1 -0.1 Culture and Cinematography 29.0 0.1 27.7 0.1 0.0 Healthcare 177.6 0.6 207.9 0.8 -0.2 Social Policy 1341.5 4.8 1443.9 5.6 -0.8 Physical Culture and Sports 13.3 0.05 17.4 0.07 -0.02 Mass Media 30.8 0.1 30.9 0.1 0.0 Sovereign Debt Servicing 165.0 0.6 143.0 0.5 0.1 Inter-budget Transfers 335.0 1.2 260.8 1.0 0.2

Source: Federal Treasury of the Russian Federa on, Gaidar Ins tute’s es mates.

STATE BUDGET IN JANUARY–MAY 2014

29

During the fi rst fi ve months of the current year fed-eral budget revenues from the mineral extrac on tax and foreign trade increased 0.4 p.p. of GDP compared to the corresponding period in 2013, up to 4.4 and 8.1% of GDP respec vely.

Within the fi rst fi ve months of the current year fe-deral budget revenues (Table 3) increased as percentage of GDP rela ve to the period of January to May 2013 on the following sec ons: ‘Na onwide Issues’ by 0.1 p.p. of GDP, ‘Na onal Defense’ by 0.9 p.p. of GDP, ‘Na onal Economy ‘ by 0.1 p.p. of GDP, ‘Public U li es Sector’ by 0.01 p.p. of GDP, ‘Environmental Protec on’ by 0.02 p.p. of GDP, ‘Sovereign Debt Servicing’ by 0.1 p.p. of GDP, ‘Inter-budget Transfers ‘ by 0.2 p.p. of GDP.

Federal budget expenditures declined on the fol-lowing four sec ons during the fi rst fi ve months of the current year rela ve to the period of January to May 2013 as percentage of GDP – ‘Educa on’ by 0.1 p.p. of GDP, ‘Healthcare’ by 0.2 p.p. of GDP, ‘Social Policy’ by 0.8 p.p. of GDP, and ‘Physical Culture and Sports’ by 0.02 p.p. of GDP.

Within the fi rst fi ve months of 2014 the other sec- ons of federal budget revenues as percentage of GDP

remained at the level observed in the period of Janu-ary to May 2013.

In May 2014, the volume of the Reserve Fund and the Na onal Wealth Fund contracted by Rb 113.1bn and Rb 94.7bn because of the foreign exchange dif-ference, and as of 01.06.2014 they amounted to Rb 3026.3bn and Rb 3033.2bn respec vely.

In the middle of June of the current year the Go-vernment of Russia supplemented the list of self-fund-ing infrastructural projects implemented by legal en - es whose fi nancial assets include resources invested

from the Na onal Wealth Fund1 on a repayable basis2, in par cular:

• the project Construc on of the Elegest – Kyzyl – Kuragino Railway and the Coal Marine Terminal in the Far East as part of the development of the mineral base in the Republic of Tyva’, Rb 86.86bn;

• the projects Construc on of Intellectual Net-works, Digital Inequality Liquida on in Under-populated Areas of Russia implemented jointly with “Russian Direct Investment Fund “Manage-ment Company”“ LLC, Rb 1.1bn and Rb 27.0bn respec vely.

1 The Execu ve Order of June 16, 2014 No. 1059-r. The Dra Execu ve Order ‘On the Amendments to the Execu ve Order of the Government of the Russian Federa on of November 5, 2013, No. 2044-r’ was prepared by the Ministry of Economic Develop-ment of Russia in compliance with the orders of the President and the Government of the Russian Federa on.2 Minimum return on investment of the Na onal Wealth Fund’s resources on projects is determined at an infl a on rate increased by 1 percentage point.

Execu on of the consolidated budget of the cons tuent territories of the RFin the period of January to April 2014 According to the data provided by the Federal

Treasury of Russia, consolidated budget revenues of the cons tuent territories of the Russian Federa on in the period of January to April 2014 amounted to Rb 2840.5bn or 13.0% of GDP, a decline of 0.2 p.p. of GDP rela ve to the value observed during the corre-sponding period in 2013 (Table 4).

Within the fi rst four months of the current year consolidated budget expenditures of the cons tu-ent territories of the Russian Federa on declined 0.2 p.p. of GDP rela ve to the corresponding period of the previous year and accounted for 11.4% of GDP or Rb 2501.7bn. At t the January–April 2014 period end, the cons tuent territories of the Russian Federa- on ran their consolidated budget with a surplus of

Rb 338.8bn or 1.6% of GDP, corresponding to the level observed within the fi rst four months of 2013.

During the four months in 2014 the cons tuent ter-ritories of the Russian Federa on received less consoli-dated budget revenues, compared to the corresponding period in 2013, on the personal income tax and non-re-payable receipts from other budgets by 0.1 p.p. of GDP for each type of income. At the end of January–April of the current year consolidated budget revenues from the profi t tax of the cons tuent en es of the Russian Feder-a on increased by 0.2 p.p. of GDP rela ve to the fi rst four months in 2013. In the period of January to April 2014 consolidated budget revenues of the cons tuent territo-ries of the Russian Federa on from internal excises, the aggregate income tax and property tax as percentage of GDP remained at the level observed during the corre-sponding period of the previous year. Non-tax revenues increased in the period of January to April of the current year, including revenues on income generated from the use of assets owned by the state and municipali es, re-ceivables from penal es. Within the fi rst four months of the current year consolidated budget expenditures of the cons tuent territories of the Russian Federa on (Table 5) on most of the sec ons as percentage of GDP remained at the level observed in the period of January to April of the previous year. In January–April 2014 consolidated budget expenditures of the cons tuent territories of the Russian Federa on as percentage of GDP declined insig-nifi cantly on the three sec ons, namely ‘Environmental Protec on’ by 0.01 p.p. of GDP, ‘Educa on’ by 0.1 p.p. of GDP, ‘Healthcare’ by 0.1 p.p. of GDP. Within the fi rst four months in 2014 expenditures on other sec ons of consolidated budget expenditures of the cons tuent territories of the Russian Federa on rela ve to GDP re-mained unchanged compared to the period of January to April 2013.


30

Table 4 BASIC PARAMETERS OF THE CONSOLIDATED BUDGET OF THE CONSTITUENT TERRITORIES

OF THE RUSSIAN FEDERATION IN THE PERIOD OF JANUARY TO APRIL IN 2013 AND 2014 January to April 2014 January to April 2013 Devia on

billions of rubles as % of GDP billions of rubles as % of GDP as p.p. of GDP Revenues including: 2840.5 13.0 2663.1 13.2 -0.2

- corporate profi t tax 763.4 3.5 678.0 3.3 0.2 - personal income tax 776.1 3.5 725.9 3.6 -0.1 - internal excises 152.4 0.7 152.5 0.7 0.0 - aggregate income tax 144.3 0.7 135.5 0.7 0.0 - property tax 321.5 1.5 301.3 1.5 0.0 - non-repayable receipts from other budgets of the Rus-sian budgetary system

528.4 2.4 510.2 2.5 -0.1

Expenditures. including: 2501.7 11.4 2346.0 11.6 -0.2Surplus (defi cit) of the consolidat-ed budget of the cons tuent ter-ritories of the Russian Federa on

338.8 1.6 317.1 1.6 0.0

GDP evalua on 21843 20220 Source: Federal Treasury of the Russian Federa on, Gaidar Ins tute’s es mates.

Table 5 CONSOLIDATED BUDGET EXPENDITURES OF THE CONSTITUENT TERRITORIES OF THE RUSSIAN FEDERATION IN

THE PERIOD OF JANUARY TO APRIL IN 2013 AND 2014 January to April 2014 January to April 2013 Devia on

as p.p. of GDP billions of rubles as % of GDP billions of rubles as % of GDP Expenditures, total Including 2501.7 11.4 2346.0 11.6 -0.2

Na onwide Issues 162.9 0.7 153.1 0.7 0.0 Na onal Security and Law Enforcement 25.3 0.1 23.3 0.1 0.0

Na onal Economy 366.8 1.7 351.7 1.7 0.0 Public U li es Sector 192.6 0.9 176.8 0.9 0.0 Environmental Protec on 5.3 0.02 5.4 0.03 -0.01 Educa on 742.5 3.4 705.8 3.5 -0.1 Culture and Cinematography 88.5 0.4 81.6 0.4 0.0 Healthcare 372.4 1.7 362.1 1.8 -0.1 Social Policy 448.0 2.0 405.7 2.0 0.0 Physical Culture and Sports 47.7 0.2 42.0 0.2 0.0 Mass Media 12.4 0.06 12.0 0.06 0.0 Public and municipal debt servicing 33.1 0.1 22.0 0.1 0.0

Source: Federal Treasury of the Russian Federa on, Gaidar Ins tute’s es mates.

BANKING SECTOR IN MAY 2014

31

BANKING SECTOR IN MAY 2014M.Khromov

More banks had their banking license revoked in May 2014. The banking license of six organiza ons was revoked, three of which had been eligible to raise funds of retail customers. As of the beginning of May 2014, the assets of these banks amounted to more than Rb 60bn and retail deposits more than Rb 40bn. Therefore, within fi ve months since the be-ginning of the year the regulator drove 36 organiza- ons out of the market, of which 26 banks had been

involved in raising funds of retail customers. The banking sector’s total assets increased 2.3%

during the month. Annual growth rate in assets reached 16.4% at the month end. The share of state-run banks in total assets shrank from 57.0 to 56.6% in response to a more slower growth in Sberbank’s assets whose volume increased only 1.3%.

The banking sector’s profi t dropped to Rb 46bn in May 2014, the lowest value in absolute terms since Sep-tember 2012. Banks’ profi t shank basically because of an increase of Rb 95bn in provisions for poten al losses during the month. Banks earned even a bit more than in April 2014 (Rb 141bn against Rb 137bn during the pre-ceding month) before they had to built up provisions for losses. As a result, the return on banking sector’s equity kept declining, being only 8.5% p.a. in May 2014. The re-turn on banking sector’s equity stood at 12.7% p.a. dur-ing the period since the beginning of the current year and 15.2% p.a. during 12 months since June 2013.

Fundraising In May 2014, the amount of money on bank accounts

and deposits remained almost unchanged, seeing a m-id growth of 0.1%. However, this is more likely to be the result of a seasonal factors than a renewed lack of con-fi dence of retail bank depositors in banks. In May 2013, retail bank accounts and deposits contracted 0.3%. An-nual rates of growth in bank accounts and deposits saw some increase to 8.0% at the month end, however their level was an extremely low.

The share of retail accounts and deposits denomi-nated in foreign exchange shrank from 20.0% to 19.5% during the month due to apprecia on of the ruble

The trends towards slower growth rate and deteriora on of the quality the retail credit por olio con nued in May 2014. Addi onally, state-run banks kept strengthening their posi on in this segment of the banking service market. The banking business’s profi tability kept declining. Furthermore, the degree of banking sector’s depen-dence on regulators’ resources stabilized, and annual growth rates in retail deposits stopped slowing down.

exchange rate. Foreign currency accounts in terms of dollars contracted 0.2% during the month, whereas the na onal currency gained almost 3%. The volume of ruble accounts also saw insignifi cant changes, in-creasing by 0.1%.1

The share of state-run banks in the deposit market shrank during the month thereby termina ng the up-trend prevailing over the last few months. It was state-run banks that fi rst of all were aff ected by a seasonal slowdown in household savings. The volume of deposits in Sberbank and other state-run banks shrank by 0.5% and 0.4% respec vely during the month.

1 Calculated according to balance-sheet accounts (form No. 101).

50

52

54

56

58

0

10

20

30

40

01.0

1.20

10

01.0

4.20

10

01.0

7.20

10

01.1

0.20

10

01.0

1.20

11

01.0

4.20

11

01.0

7.20

11

01.1

0.20

11

01.0

1.20

12

01.0

4.20

12

01.0

7.20

12

01.1

0.20

12

01.0

1.20

13

01.0

4.20

13

01.0

7.20

13

01.1

0.20

13

01.0

1.20

14

01.0

4.20

14

State-run banksPrivate banksThe share of state-run banks in the Russian banking system

Fig. 1. Dynamics of assets in state-run banks and other banks (trillions of rubles), and the share of state-

run banks in the assets (%, right-hand scale)

Fig. 2. Dynamics of equity1 in state-run banks and other banks (trillions of rubles), and the share of state-

run banks in the capital (%, right-hand scale)

49

51

53

55

57

0,0

1,0

2,0

3,0

4,0

01.0

1.20

10

01.0

4.20

10

01.0

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10

01.1

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10

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11

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01.1

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12

01.1

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14

01.0

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14

State-run banksOther banksThe share of state-run banks in the Russian banking system


32

During May 2014 corporate customers increased 2.9% the balance of their bank accounts and deposits. This type of bank assets gained 15.8% during 12 months at the month end. The share of corporate customers’ funds denominated in foreign currenceis increased from 26.7 to 27.0% during May 2014. At the same me, ru-ble accounts and deposits increased 1.8%, and a dollar equivalent of accounts denominated in foreign currency increased 6.2%. Total amount of enterprises’ and or-ganiza ons’ funds denonominated in foreign currency reached a new maximum of $111bn.

In May 2014, banks’ outstanding debt to the mo-netary authori es saw a substan al slowdown. Banks’ debt to the Bank of Russia was reduced by Rb 33bn, and deposits of the Ministry of Finance of Russia in banks increased by Rb 110bn. Therefore, total amount of monetary authori es’ funds increased by Rb 77bn to Rb 5.638bn. The share of these resources in total liabili es remained unchanged, at a level of 9.2%.

Loans issued The debt on retail bank loans increased 1.1%з in

May 2014. Annual growth rate stood at 21.7%, the lowest since April 2011.

Slowing down growth in retail lending was accom-panied by a deteriora on in the quality of the credit por olio. For instance, in May 2014 the share of over-due loans increased from 5.1% to 5.3%. Total amount of households’ overdue debt amounted to Rb 598bn. The volume of built up provisions for losses from retail loans increased up to Rb 915bn, accoun ng for 8.2% of the credit por olio size compared to 7.9% in the preceding month. Since the beginning of the year the share of overdue debt increased almost 1 p.p. (from

56,057,058,059,060,061,062,0

02468

1012

01.0

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10

01.0

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10

01.0

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10

01.1

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13

01.1

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13

01.0

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14

01.0

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14

State-run banksPrivate banksThe share of state-run banks in the Russian banking system

Fig. 3. Dynamics of retail deposits in state-run banks and other banks (trillions of rubles), and the share of state-run

banks in the retail deposit market (%, right-hand scale)

4446485052545658

0

2

4

6

8

10

01.0

1.20

10

01.0

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13

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14

01.0

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14


Fig. 4. Dynamics of corporate accounts with state-run banks and other banks (trillions of rubles), and the share of state-run

banks in the corporate account market (%, right-hand scale)

50

60

70

80

90

100

0,0

1,0

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14


Fig. 5. Dynamics of Bank of Russia’s loans extended to state-run banks and other banks (trillions of rubles), and the share of state-run banks in Bank of Russia’s loans (%, right-hand scale)

Table 1 RUSSIAN BANKING SYSTEM’S STRUCTURE OF LIABILITIES AT MONTH END , AS PERCENTAGE OF TOTAL

12.08 12.09 12.10 12.11 12.12 06.13 09.13 12.13 01.14 2.14 3.14 04.14 05.14Liabili es, billions of rubles 28022 29430 33805 41628 49510 52744 54348 57423 58445 59137 59377 60208 61196 Equity 14.1 19.3 18.7 16.9 16.2 16.3 16.5 16.0 16.1 16.0 16.0 15.9 15.9 Loans from the Bank of Russia 12.0 4.8 1.0 2.9 5.4 4.4 5.8 7.7 7.4 6.7 7.9 8.4 8.2

Interbank opera ons 4.4 4.8 5.5 5.7 5.6 5.2 5.1 5.1 5.2 5.0 4.7 4.8 5.6 Foreign liabili es 16.4 12.1 11.8 11.1 10.8 10.8 10.1 9.9 10.3 10.7 10.6 10.3 9.8 Retail accounts and deposits 21.5 25.9 29.6 29.1 28.9 29.6 29.3 29.4 28.7 28.5 27.8 27.9 27.3 Corporate accounts and deposits 23.6 25.9 25.7 26.0 24 23.5 22.9 23.8 24.1 24.2 23.9 23.3 23.4

Accounts and deposits of government agencies and local government authori es

1.0 1.0 1.5 2.3 1.6 2.4 2.9 0.9 1.4 1.6 1.8 2.2 2.5

Outstanding securi es 4.1 4.1 4.0 3.7 4.9 5.1 4.7 4.5 4.5 4.2 4.2 4.1 4.0

Source: Central Bank of Russia, Gaidar Ins tute’s es mates.

BANKING SECTOR IN MAY 2014

33

4.5% as of 1.01.2014), while the provisions-to-loans ra o was up to more than 1 p.p. (from 7.1% as of 01.01.2014).

The volume of debt on corporate loans in May 2014 and during 12 months since June 2013 in-creased by 1.2% and 13.5% respec vely. Annual growth rate of has become the maximal in the cur-rent year, being indica ve of a faster growth rate in

the loan debt compared to the corresponding period in 2014.

The key indicators of the quality of loans to corpo-rate borrowers deteriorated insignifi cantly. The share of overdue debt increased from 4.3 to 4.4% while the ra o of provisions for losses to total volume of loans from 6.6 to 6.7%, resuming the level observed early in the year.

46474849505152535455

0,01,02,03,04,05,06,07,0

01.0

1.20

10

01.0

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10

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10

01.1

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13

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13

01.0

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14

01.0

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14


Fig. 6. Dynamics of retail loans issued by state-run banks and other banks (trillions of rubles), and the share of state-

run banks in the retail loan market (%, right-hand scale)

54,055,056,057,058,059,060,061,0

02468

101214

01.0

1.20

10

01.0

4.20

10

01.0

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10

01.1

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13

01.0

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13

01.1

0.20

13

01.0

1.20

14

01.0

4.20

14


Fig. 7. Dynamics of corporate loans issued by state-run banks and other banks (trillions of rubles), and the share of state-

run banks in the corporate loan market (%, right-hand scale)

Table 2 RUSSIAN BANKING SYSTEM’S STRUCTURE OF ASSETS AT MONTH END , AS PERCENTAGE OF TOTAL

12.08 12.09 12.10 12.11 12.12 06.13 09.13 12.13 01.14 2.14 3.14 04.14 05.14

Assets, billions of rubles 28022 29430 33805 41628 49510 52744 54348 57423 58445 59137 59377 60208 61196Cash and precious metals 3.0 2.7 2.7 2.9 3.1 2.4 2.3 2.8 2.3 2.2 2.8 2.7 2.4 Deposits with the Bank of Russia 7.5 6.9 7.1 4.2 4.4 3.3 3.5 3.9 3.0 2.7 3.5 3.4 2.9

Interbank opera ons 5.2 5.4 6.5 6.4 6.8 6.0 5.8 5.7 6.1 5.8 5.3 5.7 6.5 Foreign assets 13.8 14.1 13.4 14.3 13.0 15.1 13.6 13.3 14.7 15.5 14.4 15.1 14.6 Retail sector 15.5 13.1 13.0 14.4 16.8 17.9 18.5 18.5 18.4 18.2 18.4 18.4 18.3 Corporate sector 44.5 44.5 43.6 44.0 41.3 40.8 41.2 39.3 40.0 39.8 39.6 39.0 38.8 State 2.0 4.2 5.1 5.0 3.2 3.2 2.9 3.1 3.3 3.7 3.0 2.7 3.2 Property 1.9 2.7 2.6 2.3 2.2 2.2 2.1 2.0 2.0 1.9 1.9 1.9 1.9

Source: Central Bank of Russia, Gaidar Ins tute’s es mates.


34

REAL ESTATE MARKET IN THE RF IN JANUARY APRIL 2014G.Zadonsky

In January–April 2014, the en es of all the forms of incorpora on built 231,100 apartments with fl oor-space of 17.9m sq. meters which is equal to 127% on the respec ve period of 2013. It is to be noted that in April 2014 of the above number of apartments 53,100 new apartments with fl oorspace of 4.3m sq. meters which is equal to 115.8% as compared to April 2013 were built. Individual developers built 8.7m sq. meters of residen al housing or 48.6% of the volume of hous-ing commissioned in January–April 2014 (Fig. 1).

In Q1 2014, the average actual cost of building of 1 sq. meter of housing amounted to Rb 39,290 (Fig. 2) having increased by 12.52% as compared to Q1 2013 (Rb 34,920). In Q1 2014, the average price of 1 sq. m of housing on the primary housing market (Rb 49,939) rose by 2.34% as compared to Q1 2013 with the infl a- on rate of 6.5% and 7.6% in 2013 and H1 2014, re-

spec vely, remaining below the average price of 1 sq. meter of housing on the secondary housing market (Rb 55,930) which price appreciated too as compared to Q1 2013. It is to be noted that in Q1 2014 the ra o between the price of 1 sq. meter of housing on the pri-mary market as a percentage of the cost of building of 1 sq. meter of housing decreased by 12.64 p,p, as com-pared to Q1 2013 and amounted to 127.09% (Fig. 2).

According to the Rosstat’s data, in Q1 2014 the highest cost of building which exceeded by 50% and more the average na onwide level was observed in the Yamal-Nenets Autonomous Region (Rb 58,295). In 61 cons tuent en es of the Russian Federa on, that cost was lower than the average na onwide level; the lowest one was registered in the Republic of Dagestan (Rb 20,104), the Republic of Kalmykia (Rb 21,294) and the Saratov Region (Rb 22,418).

According to the data of the Rosreestr, in Q1 2014 the number of registered tles of individuals to hous-ing (2,065,982 cer fi cates) decreased by 4.33% as

In January–April 2014, 231,100 apartments with fl oorspace of 17.9m sq. meters which amounts to 127% on the respec ve period of 2013. In Q1 2014, the average actual cost of building of 1 sq. meter of residen al housing rose by 12.52% as compared to Q1 2013 and amounted to Rb 39,290. The ra o between the price of 1 sq. meter of housing on the primary market and the cost of building of 1 sq meter of housing decreased within the same period by 12.64 p.p. and amounted to 127.09%. In Q 1 2014, the volume of registra on of tles of individuals to land plots (1.26m cer fi cates) rose by 0.87% as compared to Q1 2013. In January–April 2014, Rb 496.2bn worth of 291824 mortgage housing loans (MHL) was extended which values exceeded the number and the monetary value of MHL extended in the respec ve period of 2013 by 37.92% and 45.47%, respec vely. A drop in the month-ly average rate on MHL in rubles in March 2014 changed for a 0.3 p.p. increase to 12.3% in April.

35557595115135

048

121620

jan jan–feb jan–mar jan–apr

%

Mill

ion

sq. m

eter

s

Housing commissioned from the beginning of the year, million sq. meters

Housing commissioned as % of the respective period of the previous year

Housing commissioned by individual developers as % of the total volumefrom the beginning of the year

Source: on the basis of the data of the Rosstat.Fig. 1. Dynamics of commissioning of housing on

an accrual basis from the beginning of 2014

50%80%110%140%170%200%230%

0102030405060

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

IQ 2

013

IIQ 2

013

IIIQ

201

3IV

Q 2

013

IQ 2

014Th

ousa

nd ru

bles

The average actual cost of building of 1 sq. meter of housing *, thousandrubles

The average price of 1 sq. meter of housing on the primary market, thousandrubles

The average price of 1 sq. meter of housing on the secondary market,thousand rubles**

The average price of building of 1 sq. meter of housing on the primaryhousing market as % of the average actual cost of building of 1 sq. meter ofhousing.

* average actual cost of building of 1 sq. meter of housing of detached houses (all the apartments) without adjacent accommo-da on, overstory and in-built premises in the Russian Federa on (without taking into account those built by households at the ex-pense of own and borrowed funds);

** all the apartments.Source: on the basis of the data of Rosstat.Fig. 2. Dynamics of the cost of building of 1 sq. meter of

housing and the price of 1 sq. meter of housing on the primary and secondary housing markets in the Russian Federa on

REAL ESTATE MARKET IN THE RF IN JANUARY–APRIL 2014

35

compared to Q1 2013 (Fig. 3), while the number of regi stered tles of legal en es to housing (46,540 cer- fi cates) increased by 9.52%.

According to the data of the Rosreestr, in Q1 2014 the volume of registra on of individuals’ tles to land plots (1,254,679 cer fi cates) increased by 0.87% as compared to Q1 2013 (Fig. 4). The number of the reg-istered tles of legal en es to land plots decreased by 5.7% to amount to 56,717 cer fi cates in Q1 2014. In Q1 2014, leasehold of land plots by individuals (16,237 cer fi cates) fell by 0.52% as compared to Q1 2013, while that by legal en es (17,019 cer fi cates), by 59.47%.

According to the data of the Rosreestr, the volume of state registra on in accordance with a simplifi ed procedure – that is, the summer co age amnesty – of individuals’ tles to real property units the main por on of which is a land plot provided (prior to ap-proval of the Land Code of the Russian Federa on) for personal subsidiary husbandry, suburban husbandry, hor culture, gardening and individual housing deve-lopment tends to decline (Fig. 4). In Q1 2014, the vo-lume of registra on of tles to real property units in accordance with the simplifi ed procedure amounted to 164,064 cer fi cates which is 21.98% lower than in Q1 2013. The simplifi ed registra on of land plots out of that number amounted to 69,921 cer fi cates which is 34.61% lower than in Q1 2013.

As compared to Q1 2013, in Q 1 2014 the number of registered mortgages of land plots for individuals (146,862 cer fi cates) rose by 53.46%, while that for legal en es (31,233 cer fi cates) decreased by 5.45%.

In Q1 2014, the number of housing mortgages in-creased by 23.05% (289,521 cer fi cates) as compared to Q1 2013. It is to be noted that in Q1 2014 the number of mortgages of residen al premises owned by individuals and bought (built) by means of bor-rowed funds or a purpose loan (226,080 mortgages) increased by 33.78% as compared to Q1 2013 (Fig. 5).

According to the data of the Central Bank of the Rus-sian Federa on, in January–April 2014 Rb 513,02bn worth of 307,352 housing loans (HL) was extended, including Rb 496.2bn worth of 29,1824 MHL which value exceeded by 37.92% and 45.47% the volume of MHL extended in January–April 2013 in terms of the number of loans and the monetary value, respec- vely.

In April 2014, Rb 160.46bn worth of 93,659 MHL in rubles (35.97% and 43.32% higher than in April 2013 as regards the number of loans and the monetary val-ue, respec vely) (Fig. 6) and Rb 1.02bn worth of MHL in foreign currency (51.55% lower than in April 2013) (Fig. 7) were extended. In April 2014, the outstanding debt on MHL in rubles rose by 3.61% to Rb 2.80 trillion,

while that on loans in foreign currency decreased by 1.71% to Rb 110.3bn.

From April 2013, the average monthly value of MHL in rubles rose by 5.4% and amounted in April 2014 to Rb 1,713m. (Fig. 6). In April 2014, the monthly aver-age value of MHL in foreign currency amounted to Rb 13,051m which is 2.7 mes higher than in Decem-ber 2013 (Fig. 7).

0,51,01,52,02,53,03,54,0

0,01,53,04,56,07,59,0

10,5

I II III IV I II III IV I II III IV I II III IV I

2010 2011 2012 2013 2014

%

Mill

ion

units

The volume of registration of individuals’ titles to property, million units

The volume of registration of legal entities’ titles as % of the volume of registration of individuals’ titles

Source: on the basis of the data of the Rosreestr.Fig. 3. Dynamics of state registra on of tles to housing

-4

4

12

20

28

0

2000

4000

6000

8000


2010 2011 2012 2013 2014

%

Thou

sand

uni

ts

Registration of individuals’ titles to land plots (total), thousand units

Registration of individuals’ titles to individual real property units in accordance with a simplified procedure (total), thousand unitsRegistration of individuals’ titles to land plots in accordance with the adopted procedure, thousand unitsRegistration of individual titles’ to land plots in accordance with a simplified procedure as % of registration of individuals’ titles to land plots (total)

Source: on the basis of the data of the Rosreestr.Fig. 4. Dynamics of state registra on

of individuals’ tles to land plots

0%

50%

100%

150%

200%

0250500750

1 000


2010 2011 2012 2013 2014

Thou

sand

uni

ts

Individuals’ mortgages (total), thousand units

Mortgage of residential housing bought (built) by individuals by means ofborrowed funds and purpose loans, thousand units

Mortgages of residential housing bought (built) by individuals by means ofborrowed funds and purpose loans as % of the respective period of theprevious year

Source: on the basis of the data of Rosreestr.Fig. 5. Dynamics of state registra on of housing mortgages


36

The share of MHL in foreign currency has kept de-creasing. As regards the number of loans extended on an accrual basis as of May 1, 2014, it amounted to 0.1% and 0.55% of the total number of loans (0.2 p.p. less than in the respec ve period of 2013) and in monetary terms (0.89 p.p. less than in the respec ve period of 2013), respec vely.

As of May 2014, overdue payments on MHL amount-ed to Rb 40.88bn – Rb 26,069bn as regards loans in rubles (Fig.6) and Rb 14,815bn as regards loans in for-eign currency (Fig.7) – which is 3.35% lower than as of May 1, 2013. Despite low volumes of lending in foreign currency, as of May 1, 2014 the overdue debt on MHL accounted for a larger por on of the total overdue debt (36.24%) with the outstanding debt in foreign currency being equal to 3.8% of the total debt.

According to the data of the Central Bank of the Russian Federa on, as of May 2014 the debt on de-faulted MHL (with a period of delay of over 180 days) amounted to Rb 52.29bn and is equal to 1.80% of the total debt, that is, 0.08 p.p. lower than in the previous month (Table 1). As of May 1, 2014, the share of the debt on MHL without overdue payments increased by 0.04 p.p. as compared to April 1, 2014 and amounted to 95.29% (Table 1).

In April 2014, the weighted average rates on MHL and HL extended within a month increased simultane-ously by 0.3 p.p. to 12.3% (Fig.8). In April, the weight-ed average rates on HL and MHL extended from the beginning of the year in foreign currency increased by 0.2 p.p. to 9.6% and 9.5% on HL and MHL, respec vely.

1,25

1,35

1,45

1,55

1,65

1,75

0306090

120150180

jan

mar

may ju

l

sep

nov

jan

mar

may ju

l

sep

nov

jan

mar

2012 2013 2014

Mill

ion

Rb

Billi

on R

b

The volume of the extended MHL, left-hand axis, billion Rb

Overdue payments on MHL, left-hand axis, billion Rb

The monthly average value of MHL, right-hand axis, million Rb

Source: on the basis of the data of the Central Bank of the Russian Federa on.

Fig. 6. Dynamics of mortgage housing lending in rubles

0

3

6

9

12

15

0

5

10

15

20

25

jan

feb

mar ap

rm

ay jun jul

aug

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ay jun jul

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2012 2013 2014

Mill

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Billi

on R

b

The volume of the extended MHL, left-hand axis, billion RbOverdue payments on MHL, left-hand axis, billion RbThe monthly average value of MHL, right-hand axis, million Rb


Fig.7. Dynamics of mortgage housing lending in foreign currency

10,610,911,211,511,812,112,412,713,0

12,513,013,514,014,515,015,516,016,5

jan

apr

jul

oct

jan

apr

jul

oct

jan

apr

jul

oct

jan

apr

2011 2012 2013 2014

%

year

s

The weighted average period of lending as regards MHL extended withina month, yearsThe weighted average period of lending as regards HL extended within amonth, yearsThe weight average rate on MHL extended within a month, %

The weight average rate on HL extended within a month, %


Fig. 8. The weighted average periods of lending and the weighted average interest rates on

loans in rubles extended within a month

Table 1GROUPING OF THE DEBT ON MORTGAGE HOUSING LOANS BY THE PERIOD OF DELAY IN PAYMENTS

2014

The total amount of the debt on MHL

Including

Without over-due payments

With overdue paymentsFrom 1 day to 90 days

From 91 days to 180 days Over 180 days

Million Rb Million Rb %* Million Rb %* Million Rb %* Million Rb %*01.01 2 648 859 2 544 229 96.05 50 593 1.91 6 887 0.26 47 150 1.7801.02 2 682 172 2 558 792 95.40 67 591 2.52 7 778 0.29 48 011 1.7901.03 2 745 744 2 613 673 95.19 75 508 2.75 7 963 0.29 48 600 1.7701.04 2 809 483 2 676 033 95.25 72 204 2.57 8 428 0.30 52 818 1.8801.05 2 904 929 2 768 106 95.29 76 110 2.62 8 424 0.29 52 289 1.80* of the total amount of the debtSource: the data of the Central Bank of Russia.

REAL ESTATE MARKET IN THE RF IN JANUARY–APRIL 2014

37

According to the es mates of the AHML, the lower than normal value of the monthly interest rate in No-vember 2013 (Fig. 8) was due to inaccuracies made by some banks in fi lling in forms of repor ng and round-ing off s, while the actual interest rate amounted to about 12.1–12.2%.

In April 2014, the weighted average periods of lend-ing as regards loans in rubles extended within a month decreased considerably as compared to March: by 17.26% to 12.8 years and 17.56% to 12.9 years as re-gards MHL and HL, respec vely (Fig.8). In April 2014, the weighted average periods of lending as regards loans in foreign currency extended from the beginning of the year decreased as well against that in January 2014: by 23.2% to 12.4 years and 25.2% to 10.7 years as regards MHL and HL, respec vely.

In 2014, as in 2013 the share of MHL in foreign cur-rency in the outstanding debt kept decreasing and as of May 1, 2014 amounted to 3.8% which is 1.71 p.p. lower than as of May 1, 2013. As of May 1, 2014, the share of MHL in foreign currency in the volume of MHL extended from the beginning of the year amounted to 0.55% and the mere 0.1% in monetary terms (which is 0.89 p.p. lower than the index as of May 1, 2013) and in quan ta ve terms, respec vely. In April 2014, the average monthly value of MHL in foreign currency (Rb 13.05m) exceeded 7.6 mes over the average val-ue of MHL in rubles.

According to the data of the ОАО Agency for Hous-ing Mortgage Lending (AHML), as of May 1, 2014 the Agency refi nanced 8,923 MHL in rubles for the amount of Rb 13.60bn, which amounts to 3.06% and 2.76% in quan ta ve and monetary terms, respec vely, of the volume of mortgage loans extended from the begin-ning of the year (Fig.9). As compared to the respec ve period of 2013, the volume of refi nancing was 14.23%

and 8.42% lower in quan ta ve and monetary terms, respec vely. As of June 1, 2014, the AHML refi nanced 11,318 loans for the amount of Rb 17,183bn.

According to the data of the Central Bank of Russia, in March 2014, the weighted average rate on loans re-fi nanced by AHML amounted to 10.98% against 12.0% in March 2013.

The demand on the OAO AHML’s corporate bonds placement in April with A30 series state guarantees has considerably exceeded the par value of bonds (Rb 6bn) and amounted to Rb 38bn.

According to the data of the Rusipoteka analy -cal center, in 2013 the Sberbank extended MHL for the amount of Rb 629.8bn, the VTB24 – Rb 243.3bn, the Gasprombank – Rb 78.2bn, the Deltacredit – Rb 28.1bn, the Svyaz-Bank – Rb 17.9bn, the Rosbank – Rb 17.6bn and the Raiff eisenbank – Rb 17.2bn.

2,03,55,06,58,09,511,012,5

010203040506070

jan

mar

may ju

lse

pno

vja

nm

arm

ay jul

sep

nov

jan

mar

may ju

lse

pno

vja

nm

ar

2011 2012 2013 2014

%

Billi

on R

b, th

ousa

nd u

nits

The volume of mortgage loans refinanced by the AHML on an accrual basisfrom the beginning of the year, billion RbThe number of mortgage loans refinanced by the AHML on an accrual basisfrom the beginning of the year, thousand units.The share of the AHML on the market in monetary terms on an accrualbasis from the beginning of the year, %The share of the AHML on the market in quantitative terms on an accrualbasis from the beginning of the year, %

Source: The ОАО AHML.Fig. 9. Dynamics of refi nancing by the

OAO AHML of mortgage loans in rubles


38

MIGRATION IN RUSSIA IN JANUARY APRIL 2014L.Karachurina

Territorial changes in Russia in March 2014 have resulted, among other things, in overnight increase in its popula on which totaled 146,0 million as of May 1, 2014, of which 2.3 million persons reside in a newly established Crimean Federal District. Therefore, beginning with 2014 the Crimean popula on will be included into the balance of popula on in this country governed by natural popula on growth (decline) and migra on gain (loss). All other calcula ons and analy-sis will therefore rely upon this fact.

Migra on gain in the country totaled 67,100 per-sons in the period of January to April 2014, including 64,000 persons with CIS countries. Therefore, irrespec- ve of the poli cal events taking place within the terri-

tory of the former U. S. S. R., no increase in volumes of the so-called long-term migra on has been recorded in the Russian sta s cs, as supported by comparing the data available on the current year with that on the cor-responding period in 2013 (Fig. 1). The lack of uptrend in migra on gain may be associated primarily with the applicable procedure for registra on of those who ar-rive to and move out of the country (since 2011 the procedure covers all persons newly registered at the place of residence and at the place of stay for a period of nine months and beyond, persons are automa cally deemed to be moved out upon the expira on of the registra on period1), which has led to overall increase in sta s cally recognized migra on. Furthermore, it is important that the main events in Ukraine which had migra on eff ects, took place in May and June 2014, therefore they couldn’t be refl ected in the analyzed sta s cal data within the period under review.

The fact that the long-term migra on sta s cs now may show a certain number of temporary migrants is evidenced by almost double growth in those who move out to CIS countries, throughout the en re 2000s un- l the migra on registra on procedure was changed,

remaining at a similar low level. In 2013, the share of those who moved out to CIS countries (to their pre-vious place of residence) from the territories of their temporary stay (in Russia) upon the expira on of ter-mina on of period of stay was 87%. The foregoing im-

1 Regardless of whether a person has moved out for real or not.

This review covers long-term migra on trends in Russia in the fi rst half of 2014 and the latest changes in the Russian migra on rules and regula ons regarding the implementa on of the Na onal Migra on Policy Concept in the Russian Federa on through 2025 and the response to certain foreign policy events (the crisis in Ukraine).

plies that we are facing the situa on when the defi -ni on of “migra on gain” undergoes changes, which from this point of view is to a far more less degree as-sociated with the forma on of the standard residen al popula on in the country. However, the data obtained from labor migrant surveys showed repeatedly that a certain share of them (25 to 30%) stay in Russia for a long me, following a model of almost permanent stay in the country and therefore having direct rela onship with the standard residen al popula on of the coun-try.

Russia’s mutual migra on fl ows (both those who ar-rive in and move out from the country) have become more intensive with all CIS countries, except Belarus (Fig. 2). Migra on to Belarus didn’t decline rela ve to the corresponding period of 2013, and throughout the en re period of the 1990s to 2000s the scale of migra- on from Russia to Belarus was quite steady compared

to the number of migrants to all other republics of the former Soviet Union (U.S.S.R.). This fact also goes to prove that regardless the eff orts made to enhance migra on sta s cs, other components – modifi ca on of the “design” of migra on fl ows (transforma on of migra on models, departure from simple migra on schemes – “for good” or “for a season” alone, as it was the case with the post-Soviet period, towards various op ons), forma on of “migrant” sectors of the eco-

0 100

Moved in, totalMoved in from CIS countries

Moved in from non-CIS countries*Moved out, total

Moved out to CIS countriesMoved out to non-CIS countries*

Migration gain, totalMigration gain with CIS countries

Migration gain with non-CIS countries*

jan–apr 2014 jan–apr 2013

*Non-CIS coun es are countries other than CIS countries in-cluding Georgia and Bal c states.

Source: Демография в январе-апреле 2014 года //Росстат, 2014 [Demography in January–April 2014 // Rosstat].

Fig. 1. Overall migra on of Russia’s popula on in January to April in 2013 and 2014, thousand persons

MIGRATION IN RUSSIA IN JANUARY–APRIL 2014

39

nomy, etc. – makes the migra on picture even more complicated. This trend has been seen worldwide. It is not the Russia’s unique character but its heterogene-ous territory, open fron ers and retaining the commu-nity with the former Soviet republics, as well as regu-lar changes in the migra on rules and regula ons that strengthen the trend in Russia.

The beginning of 2014 is described as a new wave of changes in the migra on rules and regula ons re-garding the implementa on of the Na onal Migra on Policy Concept through 2014, as well as the current poli cal situa on. By the end of June 2014 a part of new provisions were already adopted while others were under discussion.

Federal Law on Gran ng of the Russian Federa on Ci zenship to Foreign Na onals – speakers of the Rus-sian language was adopted in April 2014. The idea of adop ng the law emerged a er the onset of the events in Ukraine1. The Law provides for a simplifi ed procedure for acquiring the Russian Federa on ci -zenship, the term of considera on of applica ons for the ci zenship (between six to three months), a proce-dure for entering the territory of Russia, acquiring the residence permit. A specially established commission may recognize foreign na onals or stateless persons as na ve speakers of the Russian language, provided that they use the Russian language in their “social, family, and cultural life, provided that these persons or their lineal ancestors permanently reside or previously re-sided on the territory of the Russian Federa on or a territory situated within the Russian Empire or the So-viet Union, within the Russian Federa on border”. To prevent any inappropriate usage, the residence permit

1 The Federal Law of the Russian Federa on of April 20, 2014, No. 71-FZ ‘On the Amendments to the Federal Law ‘On the Russian Federa on Ci zenship’ and Certain Legal Acts of the Russian Fe-dera on’.

will be cancelled if persons obtained it will fail to sub-mit an applica on for the Russian Federa on ci zen-ship upon the expira on of two years.

Addi onally, renuncia on of any other ci zenship is a condi on for acquiring the Russian Federa on ci -zenship. According to some experts, e.g. Director of CIS Countries Ins tute K. Zatulin, this restric on may have a serious adverse impact on those na onals from CIS countries who thought about acquiring the Russian Federa on ci zenship2. As a reminder, the number of persons who acquired the Russian Federa on ci zen-ship dropped by three mes a er the former proce-dure for simplifi ca on was abolished (since 2010)3. According to the data provided by the FMS of Russia, almost 135,800 persons acquired the Russian Federa- on ci zenship in 2013. Within the fi rst fi ve months

of 2014 59,700 persons acquired the Russian Federa- on ci zenship, a growth of only 11 p.p. over the cor-

responding period in 2013. About 27% of persons who moved in Russia from

other countries in 2013 were ci zens of the Russian Federa on. Kyrgyzstan, Kazakhstan and Moldova con-tributed most in the share of such persons (Fig. 3). Al-most the same propor ons remain in migra on fl ows out of Russia to these countries.

A visible growth (by 2.3 mes) was observed through the par cipa on in the State Program to Assist Volun-

2 Нагорных И., Кузьмина З. Правительство внесло в Госдуму законопроект о гражданстве // Коммерсантъ. 13 марта 2014 года. [Nagornykh I. Kuzmina Z. The Government has submit-ted a dra law on ci zenship to the State Duma // Kommersant. March 13, 2014.] 3 For more details see Карачурина Л.Б. Миграционные процессы // Российская экономика в 2011 году. Тенденции и перспективы (Выпуск 33). –М.: ИЭПП, 2012. Раздел 5.2. с. 344–360 [Karachurina L.B. Migra on Processes // Rossyiskaya Ekonomi-ka in 2011. Trends and prospects (Issue 33). M: IET, 2012. Sec on 5.2. pp. 344–360. ]

0 5 10 15 20 25 30 35 40 45

AzerbaijanArmeniaBelarus

KazakhstanKyrgyzstan

Republic of Moldova Tajilistan

TurkmenistanUzbekistan

UkraineNon-CIS countries*

Jan–Apr 2013, number of persons who moved in

Jan–Apr 2014, number of persons who moved in

0 5 10 15 20 25 30 35

AzerbaijanArmeniaBelarus


Republic of Moldova Tajilistan


UkraineNon-CIS countries*

Jan–Apr 2013, number of persons who moved outJan–Apr 2014, number of persons who moved out

*Non-CIS coun es are countries other than CIS countries including Georgia and Bal c states.Source: Демография в январе–апреле 2014 года //Росстат, 2014 [Demography in January–April 2014 // Rosstat].

Fig. 2. Migra on rela ons between Russia, CIS countries and non-CIS countries in January to April in 2013 and 2014, thousand persons


40

tary Rese lement of Compatriots Living Abroad to the Russian Federa on as another “channel” of simpli-fi ed acquisi on of the Russian Federa on ci zenship. Therefore, almost 27,700 compatriots (together with their family members) were registered with FMS ter-ritorial branches within the fi rst fi ve months of 2014. At its mee ng in June 2014 the Intergovernmental Commission for the Implementa on of the State Pro-gram of Rese lement recommended to submit to the Government of Russia a dra Decree of the President of Russia which was prepared by the FMS and allows compatriots who have been granted a temporary asy-lum in Russia to apply to FMS territorial branches for the par cipa on in the said rese lement program1.

Another Decree of the President of Russia was sighed on June 23, 2014, which expands the list of foreign na onals and stateless persons who may be en tled to acquire the Russian Federa on ci zenship through a simplifi ed procedure (i.e. without having to observe the terms of residence)2. These are:

• self-employed entrepreneurs running their business in Russia for a period of at least three years, with annual earnings being equal to at least Rb 10m;

• qualifi ed specialists (according to the list of oc-cupa ons, special es, posi ons) employed in the country for a period of at least three years;

• persons who co-own a 10% interest in the char-ter capital of a Russian company, provided that the company’s assets total at least Rb 100m and it has paid at least Rb 6m annually to the Rus-sian budget system within the last three years (i.e. companies that can be a ributed to me-dium-sized and small business) – the so-called “investment-based ci zenship” (following the example of certain European countries).

Addi onally, foreign students will have an opportuni-ty to acquire the Russian Federa on ci zenship through a simplifi ed procedure, who beginning with July 1, 2002 received a Russian voca onal educa on and have been legally employed in Russia for at least years before the date of applica on for the ci zenship3. Such persons previously could become Russia’s ci zens using a sim-

1 For more details see ФМС России. Заседание Межведом-ственной комиссии по реализации Государственной програм-мы переселения. [FMS of Russia. A mee ng of the interdepart-mental commission on the implementa on of the State Reloca- on Program. ] h p://www.fms.gov.ru/press/news/news_detail.

php?ID=931972 The Federal Law of June 23, 2014, No. 157-FZ ‘On the Amend-ments to the Federal Law ‘On the Russian Federa on Ci zenship’.3 According to Rosstat’s data, the number of students from CIS countries who studied under higher voca onal educa on programs in Russia’s educa onal ins tu ons totaled 133,800 at the begin-ning of the 2013-2014 academic year [Россия и страны СНГ-2013. Росстат, 2014 [Russia and CIS countries-2013. Rosstat, 2014. ]

plifi ed procedure, provided that they were na onals of one of the ex-U. S. S. R. member-states. Furthermore, the issue of simplifi ed acquisi on of the Russian Federa- on ci zenship for foreign na onals who have bought

a real estate at a specifi ed price (at least a 10% interest in a condominium worth $300,000 or more4) – such a policy is applicable in certain European countries, was discussed but not recognized in the Decree.

The situa on in Ukraine has intensifi ed migra on processes with this country. According to the latest informa on received from the authori es of a few Russia’s regions bordering with Ukraine, the processes have become even more on-way comparing to the pre-vious years. At the same me, according to the Ukrain-ian data, migra on fl ows of long-term migra on have ceased to be unilateral over the past few years. In par- cular, according to the Russian sta s cs on perma-

nent migra on in the period of 2012 to 2013, 3–4 per-sons moved out from Ukraine to Russia accrued to one person moved out from Russia to Ukraine, however “the Ukrainian sta s cs shows a posi ve balance of migra on with Russia” (rela ve to the period of 2011 to 2012)5.

Refugees from Ukraine have appeared and a net-work of temporary accommoda on facili es (points) has been established for the fi rst me since the col-lapse of the Soviet Union. There is no proof however

4 Туманов Г., Бутрин Д. С чего наживается Родина //Коммерсантъ. 12 февраля 2014 года [Tumanov G., Butrin D. From where the motherland originates // Kommersant. February 12, 2014. ] 5 Малиновская Е.А. Внешние миграции населения Украины периода независимости //Демоскоп Weekly. 2013. № 563–564. 19 августа – 1 сентября. [Malinovskaya E.A. External migra on of the Ukrainian popula on in the period of independence // Dem-oscope Weekly 2013. No. 563–564. August 19 – September 1.] h p://demoscope.ru/weekly/2013/0563/tema02.php

0% 25% 50% 75% 100%

CIS countriesAzerbaijan

ArmeniaBelarus


Republic of MoldovaTajikistan


UkraineCIS countries

Foreign nationals and stateless personsRussia’s nationals No citizenship specified

Source: data provided by Rosstat (Federal State Sta s cs Servic e of Russia).

Fig. 3. Breakdown of persons moved in Russia, by country and ci zenship, 2013, %

MIGRATION IN RUSSIA IN JANUARY–APRIL 2014

41

that the number of refugees has become “astronomi-cal”, “approximated to million” etc. Seven thousand 7,000 persons applied for asylum and refugee status as of June 20, 2014, according to the FMS (Federal Migra- on Service of Russia). A total of 90 thousand persons

have applied to the FMS of Russia for the recogni on of their legal status (temporary residence permit, work permit, patent).1 In the same way as before, Ukraine’s na onals may stay in Russia within 90 days without having to get registered with migra on authori es, therefore some of them are trying to “wait out the sit-ua on” staying with their rela ves or friends residing in Russia and reluctant to apply for the refugee status or temporary asylum. At the same me, it cannot be ruled out that some of those who have recently ap-plied to FMS territorial branches for the recogni on of their legal status have long been staying and employed in Russia, but previously had no opportuni es to ob-tain the legal status.

The situa on in Ukraine has triggered the transfor-ma on of a series of regula ons. In par cular, a dra Execu ve Order of the Russian Government on that the temporary residence permit (TRP) quota may be adjusted within a year on the basis of a “substan -

1 Пресс-служба ФМС России. 20 июня 2014 г. [Press Service of the FMS of Russia. June 20, 2014] h p://www.fms.gov.ru/press/news/news_detail.php?ID=93195

ated applica on submi ed by a regional governor”2 is being under public discussion so that in case of unforeseen situa ons (emergencies) government au-thori es have opportuni es for maneuver.

Under the rules applicable since 2003, the TRP quo-ta must be determined once a year based on the pro-posals of regional government authori es made on the basis of the demographic situa on and the ability of a cons tuent en ty of Russia to provide the necessary facili es and condi ons to foreign na onals, and the decision on the quota, and is not subject to revision, being binding. In prac ce, however, the temporary residence quota turns out to exhaust at the beginning of a year, and migrants who are not en tled to social benefi ts (these benefi ts are provided for those who migrate under the program of voluntary rese lement of compatriots, start a family in Russia, have old-aged parents and some other categories of persons perma-nently residing in Russia) have to wait for all the year to have an opportunity to be covered by the quota. Not all of them have success though.

The next volume of the journal will contain an ar -cle with analy cal review of labor migra on in Russia in the fi rst half of 2014.

2 Грицюк М. Квота открывает двери //Российская газета. 16 июня 2014 года [Gritsuk M. The quota opens the doors // Rossyiskaya Gazeta. June 16, 2014. ]


42

REVIEW OF THE ECONOMIC LEGISLATION IN JUNE 2014I.Tolmacheva, Yu.Grunina

Federal Laws of the Russian Federa on 1. Federal Law No.147-FZ of June 04, 2014 on

AMENDMENT OF ARTICLE 32 OF THE FEDERAL LAW ON NON-PROFIT ORGANIZATIONS

The amendments concern non-profi t organiza ons which perform func ons of a foreign agent.

It is established that grounds for extraordinary in-spec on of a non-profi t organiza on will be receipt by the authorized body of the informa on from state authori es, local government authori es, individuals and en es on fulfi llment by that non-profi t organiza- on of ac vi es as a non-profi t organiza on carrying

out func ons of a foreign agent which failed to apply for its entry to be made into the register of non-profi t organiza ons performing func ons of a foreign agent.

In case of iden fi ca on of such an instance, the authorized body which carried out the inspec on will enter than non-profi t organiza on into the above re-gister.

Decision on inclusion of such a non-profi t organiza- on into the register of non-profi t organiza ons carry-

ing out func ons of a foreign agent may be appealed against judicially.

The above amendments become eff ec ve from the day of offi cial publica on of the Law.

2. Federal Law No. 149-FZ of June 04, 2014 ON AMENDMENT THE LAW OF THE RUSSIAN FEDERATION ON ORGANIZATION OF INSURANCE BUSINESS IN THE RUSSIAN FEDERATION

The amendments introduced deal with the specifi cs of the electronic exchange of informa on between the insurant and the insurer.

The rules of insurance with use of the insurer’s of-fi cial Internet site have been specifi ed.

The insurant creates and sends to the insurer the informa on in an electronic format of such docu-

In June, the following amendments were introduced into the legisla on: the list of grounds for carrying out ex-traordinary inspec on of non-profi t organiza ons; amendments aimed at expansion of the methods of provision of insurance services by means of electronic sales by individual types of insurance.

ments as an applica on for entering into the insurance contract, no fi ca on on occurrence of the insurance event, applica on for insurance compensa on and other documents. The insurant may have an access to the insurer’s offi cial site with use means of iden fi ca- on and authen ca on.

In carrying out of the voluntary insurance of an in-dividual, the informa on in an electronic format sent to the insurer and signed by a simple e-signature is deemed an electronic document which is equal to a hard copy document signed by that individual.

In case of sending by the insurer to the insurant (an individual) on the basis of the la er’s applica on in a wri en or oral form of an insurance policy (cer fi -cate, document and receipt) signed by an e-signature of the insurer, the voluntary insurance contract made up as an electronic document is deemed concluded by the insurant on the off ered terms from the day of payment by the insurant of the insurance premium (insurance contribu on). In his/her turn, the insurant pays the insurance premium (insurance contribu on) a er ge ng acquainted with the terms of the volun-tary insurance contract, thus confi rming his/her con-sent to enter into the agreement on terms off ered by the insurer.

The ac vi es of insurance agents and brokers re-lated to conclusion of insurance contracts in an elec-tronic format are not allowed.

Also, it is provided for that an insurance contract cannot be concluded in an electronic format if insur-ance rules include a provision that an inspec on of the insurant’s property and condi on is required before entering into an insurance contract.

In mandatory insurance, applica on of an e-signa-ture and u liza on of documents in an electronic for-mat is determined by federal laws on specifi c types of mandatory insurance.

REVIEW OF TAXATION REGULATORY DOCUMENTS

43

REVIEW OF TAXATION REGULATORY DOCUMENTSISSUED IN THE PERIOD OF MAY JUNE 2014L.Anisimova

Russia’s imposi on of the prepayment regime on gas supplies to Ukraine and the establishment of the EAEU are poli cally driven decisions, but their eco-nomic impacts seem to be controversial in the short run and unpredictable in the long run. On the one hand, Russia expands the market which is however not quite a free market (we are seeing a few countries with the par cipa on of Russia construc ng a stand-alone “market” inside the common market of the World Trade Organiza on (WTO)). Russia will enjoy basically poli cal bonuses from such an agreement, while the other par es thereto may enjoy the opportunity to buy Russian hydrocarbons at Russia’s domes c mar-ket prices and impose a tax on export of hydrocarbons outside the Union. This restricts the fi nancial base of the Russia’s budget.

On the contrary, the fact that Ukraine will have to pay for Russian natural gas on the basis of world mar-ket prices (irrespec ve of whether or not it is going to be done under the exis ng agreement or a new agreement which will se le the issue of debts ac-crued under the exis ng agreement) is a posi ve step, notwithstanding the mo ves behind. Russia deserves overall support in situa ons when it se les confl icts in accordance with the WTO rules and regula ons.

The Russian Government s ll remains to be focused on increasing supplies of hydrocarbons to Asian and European countries, not least because crude oil pric-es went up 10% during the last month (according to experts, mineral products accounted for about 43% of Russia’s exports 20 years ago and more than 70% in 2011)1. On the contrary, fi xed asset investment in other countries have long been tending to decrease. Investment declined 3.8% since the beginning of the current year compared to that in the period of January to May 2013. This is indica ve of investors ge ng in-

1 Исчезающий несырьевой экспорт России, сайт ng.ru/editorial/2014-06-18 от 18.06.2014 г. [Vanishing non-mineral ex-port in Russia. The full text is available in Russian at: ng.ru/edito-rial/2014-06-18 dd. 18.06.2014.]

The period under review saw events that will have a signifi cant eff ect on Russia’s economic policies in the near term: Russia imposed a prepayment regime on natural gas supplies to Ukraine and signed an agreement on the establishment of Eurasian Economic Union (EAEU) embracing Russia, Belarus and Kazakhstan. The discussion on dividend taxa on ini ated by the Ministry of Finance of Russia con nued, as well as the discussion on restora on of the right of the Inves ga ve Commi ee of the Russian Federa on (IC of Russia) to ini ate at its own discre on criminal cases related to viola ons of the tax legisla on was resumed.

creasingly skep cal as to the prospects of the Russian economy2.

As investment ac vity declines, the business envi-ronment in Russia gets tougher thereby accelera ng capital fl eeing the country, which, in turn, entails even more administra ve restric ons in the internal mar-ket.

The recent policies aimed at raising liability for vio-la ons of the tax legisla on seem to be quite contro-versial. The trade-off between the stance of the IC of Russia and the Federal Tax Service (FTS) of Russia on interac on of these departments in detec ng viola- ons of the tax legisla on which is set forth in a dra

amendments to the applicable legisla on, has been cri cized by experts and the business community3. The problem is that pursuant to the proposed procedure, managers of an organiza on will be held criminally li-able (as defi ned by the Criminal Code of the Russian Federa on (CC of Russia)) even when the viola ons commi ed by the organiza on as taxpayer itself (as defi ned by the Tax Code of the Russian Federa on (TC of Russia)) have been totally se led (the outstanding amount, penal es, and fi nes have been paid). In other words, there is no formal ma er of viola on under the TC of Russia, but the manager may be held criminal-ly liable according to the the CC of Russia. And what about the situa on when the money from the buyer wasn’t received in me which was the reason for the failure to pay tax in the due me? What is the reason for the director (general manager) of an organiza on being subject to criminal prosecu on? The problem, in our opinion, is that the tax and criminal laws and

2 Павел Сморщиков, «Инвестиционная фикция», Газета.Ru, сайт news.ru.msn.com/economy/ от 23.06.2014 г. [Pavel Smors-chikov. “Investment Fic on”, Gazeta.ru. The full text is available in Russian at: news.ru.msn.com/economy/ dd. 23.06.2014.] 3 Бизнесмены попросили Путина сохранить порядок возбуждения налоговых дел lenta.ru/news/2014/06/24/pu n-tax/ [Businessmen asked Pu n to keep intact the procedure for ini- a ng criminal cases. The full text is available in Russian at: lenta.

ru/news/2014/06/24/pu ntax/]


44

regula ons seem to exist collaterally to each other. A confl ict of interests and competences arises between respec ve ministries and departments. The confl ict s ll remains to be se led. In our opinion, the Cons -tu onal Court of the Russian Federa on (CC of Rus-sia) should thrash out the stance of the IC of Russia. A possibility of cons tu onal implementa on of the legal framework being designed by the IC of Russia, which provides for the applica on of criminal punish-ment against the general manager of an organiza on for viola ons of the tax legisla on in cases when basic viola ons commi ed by the organiza on as taxpayer have been rec fi ed according to the rules of the crimi-nal law, should be studied.

There is another issue that needs follow-up study. Gradual closure of external markets for Russian ma-nufacturers in response to the economic sanc ons im-posed against Russia in 2014 by a few developed coun-tries has forced Russia to look for new partners and new rela onship schemes in the global market. There have been more and more proposals (even among a few Rus-sian economists) on the advisability of replacing the US dollar with the currency of the countries with whom Russia has commercial and economic se lements. In our opinion, economic feasibi lity shouldn’t be sacrifi ced for patrio c feelings. The US dollar has a unques onable ad-vantage over many other currencies – the United States cannot infl uence the amount of the na onal currency to be issued, money issue centers are business enterprises which don’t report to the state. This is what allows the US Federal Reserve System (FRS) to conduct a formally indepen dent currency policy and provide sustained con-trol over the exchange rate of the na onal currency.

Regre ully, the Central Bank in Russia has increas-ingly been tuning into a ministry of monetary policy. This is evident from, for example, the contents of the Execu ve Order of the Russian Government of 21.05.2014 No. 476 ‘On the Consent of the Assign-ment of Receivables’, under which the Central Bank of Russia issues bank loans guaranteed by the Govern-ment of Russia (these are basically loans issued to de-fense enterprises)1. Furthermore, sugges ons to use the Central Bank’s interna onal reserves for funding investment programs and projects were repeatedly made by Duma members and even the President of Russia (in par cular, when JOSC Gazprom follow-on capitaliza on was discussed). It is unlikely that the Russian Government will agree to receive as payment for supplied goods with the absolute value in use (hy-drocarbons) na onal currencies which are likely to be issued by order of a lead poli cal party or foreign government especially for se lements under a specifi c agreement (agreements). To avoid country risks, the

1 See further as the text goes.

current exchange rate of such currencies against the ruble will be evaluated through the cross rate of these currencies and the ruble against the standard reserve currencies (the US dollar and the Euro).

Another very controversial proposal, being dis-cussed among economists, is a Ministry of Finance’s proposal to pay dividends from the profi t before taxa- on rather than net profi t2. The Ministry of Finance of

Russia explains this by saying that taxable profi t can be easily reduced through “paper” losses. However, the term “paper” losses has no economic sense. Let’s pro-vide an example. The introduc on of a consolidated group of taxpayers, formal legal en es, made it possi-ble for loss-making en es to “trade” their losses. This is a privilege. Should this privilege have resulted in loss of regional budget revenues, it should be cancelled. But then the Ministry of Finance of Russia didn’t par- cipated in making the decision on tax base consoli-

da on. If the tax base is calculated according to the rules set forth in the TC of Russia (at market prices) or in accordance with the Interna onal Accoun ng Standards (IAS) (at market prices), then tax base ero-sion has nothing to do with “paper” losses and should be accepted as objec ve reality. The market is subject to fl uctua ons. Exchange rates are subject to fl uctu-a ons, the value of assets is subject to fl uctua ons, thereby leading to a natural erosion or reduc on of the tax base. Budget revenues can be unreasonably lost in a free-market environment only due to the pro-vision of privileges or because of viola ons of the tax legisla on. Failure of the Ministry of Finance of Rus-sia to oppose those who lobby tax allowances and ex-emp ons shouldn’t be a reason for giving up the basic concept of profi t and dividends. The profi t tax must be paid to the federal budget. This tax is paid by an organiza on as taxpayer, because it owns the profi t, and it is only the organiza on that may decide how to further distribute these resources. Dividends are distributed in favor of third par es, appropriated by their recipients and, not un l then, become the assets owned by these third par es and are subject to taxa- on. Recipients of dividends also pay the property tax.

If a decision has been made to credit the amount of paid dividends for the reduc on of the profi t tax base, it is a methodologists’ mistake which might have re-

2 «Минэкономразвития против выплаты дивидендов до налогообложения. Минэкономразвития раскритиковало законопроект Минфина об отмене ограничения на выплату дивидендов только за счет чистой прибыли», сайт izves a.ru/news/572264, июнь 2014 г. [“The Ministry of Economic Develop-ment against payment of dividends before taxa on. The Ministry of Economic Development of Russia has cri cized Minifi n’s dra law on the removal of limit on payment of dividends exclusively through net profi t”. The full text is available in Russian at in Russian at: izves a.ru/news/572264, June 2014. ]

REVIEW OF TAXATION REGULATORY DOCUMENTS

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sulted in the problems which the Ministry of Finance of Russia is trying to resolve1. Indeed, a situa on in which the mount of profi t was less than the amount of dividends seems to be unreal. Ministry of Finance’s proposal to tax dividends only and give up profi t taxa- on is extremely risky, as we noted in our previous

reviews, because under all interna onal agreements dividends are subject to taxa on at recipient’s place of residence. The Ministry of Finance of Russia actually suggests to implement a colonial taxa on scheme in the Russian Federa on, under which returns on capital investment are sourced tax-free at capitalist’s place of tax residence, and earning of labor are taxable at em-ployee’s place of tax residence.

The following documents issued in May-June 2014 are especially noteworthy:

1. The Eurasian Economic Union (EAEU) Agreement between the Republic of Belarus, the Republic of Ka-zakhstan and the Russian Federa on was signed on May 29, 2014. The Agreement specifi es that it recog-nizes the WTO regula ons, rules and principles. The EAEU provides for free movement of goods, services, capital and labor force, conduc ng a coordinated, mu-tually agreed or single policy with regard to the indus-tries specifi ed therein and in interna onal agreements as part of the Union. The Union is an interna onal organiza on endowed with interna onal personality. The func oning of the Unit will rely upon the key prin-ciples such as market-driven economy and bona fi de compe on, func onal customs union without excep- ons and restric ons upon the expira on of transi on

periods (EAEU unifi ed customs tariff has been intro-duced, movement of commodi es inside the EAEU is free of customs clearance, except certain types of goods (works, services)).

The Agreement provides for an -dumping meas-ures, countervailing measures aimed at protec ng the EAEU internal market. All disputes will be se led in the Union Court, a permanent judicial body.

An adverse factor for the Russian economy is a high threshold of na onal debt (50% of GDP)2 agreed within the EAEU, which can be considered a hidden stepwise increase in the na onal debt threshold in the member countries, including the Russian Federa on3. Annual consolidated budget defi cit of the EAEU state admin-istra on sector must not exceed 3%, as s pulated by the Agreement.

1 This is only case when the taxable profi t may turn out to be less than the amount of dividends. 2 See Ar cle 63 thereof. 3 Which is currently established under the Russian legisla on within a range of 10–12% of GDP, as the IMF recommended to Rus-sia.

There are noteworthy posi ve eff ects such as the VAT payment treatment established by the Russian legisla on for import and export of goods (works, services)4 is applied while goods move within the EAEU territory. Approxima on of the member countries’ sys-tems of taxa on is scheduled in the near future, name-ly harmoniza on of rates of excise duty “on the basis of most sensi ve excised commodi es”, more exten-sive applica on of informa on technologies in paying taxes, etc.

2. The Ruling of the CC of Russia of June 3, 2014 No. 17-P gives explana ons on the payment of value added tax (VAT) by en es which are subject to the unifi ed tax on imputed income (UTOII) and apply the general system of taxa on, assessing the tax by the rules of this general VAT framework and declare op-era ons subject to VAT and amounts of the assessed tax. Detec ng viola ons by such taxpayers under the two systems of taxa on, tax authori es o en tend to hold violators liable for viola on of the tax legisla on, charging the outstanding amount of tax payable both under the UTOII and VAT. The situa on gets worse, because VAT taxpayers must issue invoices and retail-ers covered by the UTOII issue sales slips to their cus-tomers in which no VAT is outlined. In the la er case, retailers calculate VAT by themselves and report it in their tax return.

Following this scheme, ООО Torgovy Dom Kamsnab fi led a lawsuit on ruling as uncons tu onal Clauses 6 and 7, Ar cle 168 of the TC of Russia and Clause п. Ar -cle 173 of the TC of Russia, because the arisen dispute was se led in diff erent ways in commercial courts at various instances.

Having considered the case on its merits, the CC of Russia made it clear that the foregoing clau-ses of the TC of Russia don’t contradict the Cons tu- on of the Russian Federa on, because within the

exis ng legal and regulatory framework they neither cons tu onally nor legally make a person engaged in retail trade, without issuing invoices to customers, be obliged to pay VAT to the budget, if the person falls under the UTOII category of taxpayers according to the type of his entrepreneurial ac vity. As a conclusion, the CC of Russia suggested that judicial and tax au-thori es should revise the law enforcement prac ce.

The Ruling of the CC of Russia under review is wor-thy of special a en on, because it contains explana- ons of the stance of the CC of Russia on many issues

related to taxa on principles.

3. Due to reorganiza on of the system of com-mercial courts and their integra on in the system of

4 See Ar cle 72 thereof.


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judicial bodies of the Supreme Court of the Russian Federa on, Federal Cons tu onal Law No. 8-FKZ of 04.06.2014 established that the explana ons on court prac ce provided by the Plenum of the Supreme Com-mercial Court of the Russian Federa on (SCC of Russia) will remain in force un l the Plenum of the Supreme Court of the Russian Federa on makes respec ve de-cisions. This is an important decision preven ng the law enforcement prac ce of commercial courts from collapsing.

4. Federal Law of 04.06.2014 No. 143-FZ withdraws the en re category of li ga on from the jurisdic on of commercial courts (e.g. cases on challenging the results of cadastral valua on; on challenging laws and regula ons concerning appraisal ac vity; on the princi-ples of regula on of tariff s of public u lity en es; on the protec on of compe on; on the considera on of laws and regula ons concerning customs regula on, etc.). Enabling the Supreme Court of the Russian Fed-era on to revise commercial courts’ rulings that have come into legal force with regard to cases on adminis-tra ve off ences, without making reserva on that such a review may be possible as long as it doesn’t worsen the taxpayer’s situa on, is a very controversial and ambiguous decision which makes business func oning less sustainable.

5. The Execu ve Order of the Government of Rus-sia of 21.05.2014 No. 476 can be qualifi ed as sort of a decision on “quan ta ve easing” (actual acceptance of money issue) conducted by the Bank of Russia. The la er is en tled to redeem Russian banks’ loans issued against the guarantee of the Government of Russia (these are basically loans issued to defense enterpris-es). In fact, the money has long been in circula on and spent by the borrowers (including payment of wages, the amount of which the managers of state corpora-

ons refused to publish this year), however lending banks seem to be unable to write off the outstanding loans at the cost of the profi t-based reserves. The state stops short of declaring bankrupt such banks and state corpora ons (for example, Vnesheconombank State Corpora on). This is why the Central Bank of Russia will compensate the lending banks for the outstanding loans (apparently, this includes the accrued interest and interest receivable on overdue loans, covering the en re outstanding period), thereby legalizing a money issue. The ques on is whether the budget provided for provisions for state guarantees? Should the answer be nega ve, a direct money issue would be the source of payment. A second noteworthy aspect is that the Exe-cu ve Order allows the Bank of Russia to resale the redeemed loans to new creditors. However, the docu-ment prescribes no procedure for determining a resale price of a given asset.

6. The La er of the Ministry of Finance of Russia of June 2, 2014 No. 03-05-05-01/26195 explained that the former privilege – under which en es ap-plying the UTOII were exempted from the corporate property tax with regard to the property used for conduc ng an entrepreneurial ac vity subject to the UTOII – ceased to be in force a er the eff ec ve date of Federal Law of 02.04.2014 No. 52-FZ ‘On Amend-ments to Part 1 and 2 of the Tax Code of the Rus-sian Federa on and Certain Legal Acts of the Russian Federa on’. Now Clause 4, Ar cle 346.26 of the TC of Russia establishes such an obliga on with regard to real estate property items whose tax base is de-termined as their cadastral value. En es may deter-mine specifi cs of tax base assessment (in fact, they may grant privileges) only if a cons tuent en ty of the Russian Federa on has duly approved the results of cadastral valua on of real estate property items located on the territory of its region.

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Economy & Finance