russian_economic_developments_eng.5_2014.pdf

RUSSIAN ECONOMIC DEVELOPMENTSNo.5 2014

POLITICO ECONOMIC RESULTS IN APRIL 2014 (S.Zhavoronkov) 2INFLATION AND MONETARY POLICY IN MARCH 2014 (A.Bozhechkova) 5FINANCIAL MARKETS IN MARCH 2014 (N.Andrievsky, E.Khudko) 9THE REAL SECTOR OF THE ECONOMY IN THE 1ST QUARTER OF 2014 (O.Izryadnova) 13THE RUSSIAN INDUSTRY IN MARCH 2014 (S.Tsukhlo) 16THE FOREIGN TRADE IN FEBRUARY 2014 (N.Volovik) 19THE STATE BUDGET IN JANUARY MARCH 2014 (T.Tischenko) 22RUSSIAN BANKS IN Q1 2014 (M.Khromov) 26MORTGAGE IN THE RUSSIAN FEDERATION IN JANUARY FEBRUARY 2014 (G.Zadonsky) 29THE PROGRESS OF PRIVATIZATION AND THE SITUATION IN REGARD OF OWNERSHIP RELATIONS IN 2013 (G.Malginov, A.Radygin) 33

ESTIMATE OF RUSSIA’S POTENTIAL FOR INCREASING GRAIN EXPORTS BY MEANS OF RECLAIMING ABANDONED LANDS (V.Saraykin, V.Uzun, R.Yanbykh) 38

THE 2013 RESULTS OF GLOBAL TRADE IN GOODS AND SERVICES (A.Makarov, A.Pakhomov) 41RUSSIAN DEFENSE SECTOR’S RESULTS IN 2013 (V.Zatsepin) 46THE REVIEW OF ECONOMIC LEGISLATION IN APRIL 2014 (I.Tolmacheva, Yu.Grunina) 49AN OVERVIEW OF NORMATIVE DOCUMENTS ON TAXATION ISSUES FOR MARCH APRIL 2014 (L.Anisimova) 51

© 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. 5, 2014

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POLITICO ECONOMIC RESULTS IN APRIL 2014S.Zhavoronkov

Further escala on of the crisis in Ukraine, the likely commencement of sweeping combat opera ons and subsequent imposi on of interna onal sanc ons against Russia made the headlines in April 2014. On April 5–6, opponents to the Kiev government seized the regional administra on buildings in Dontesk and Lugansk, a similar a empt failed in Kharkov. The po-lice and secret service in Dontesk and Lugansk ceased to perform their du es, and the insurgents also began to seize other buildings and build barricades around them, namely city halls, police sta ons and security service buildings, TV centers, etc. They are hea vily armed, and all the a empts to wrest ground from them within the month failed, although this is not to say that they are controlling the en re regions. They have proclaimed so called “people’s republics” which are supposed to be legalized through referendums scheduled on May 11, a week before the upcom-ing presiden al elec on in Ukraine. In fact, there are not many of them, just about 100 or 200 persons in each of the major ci es, however, most of them are combat-capable and highly mo vated. The situa on in the Crimea, where the idea of holding a referendum and being accessed to Russia was supported by the overwhelming majority of the local council members and representa ves of elite groups, diff ers from that in Dontesk and Lugansk where totally unknown persons have been put in charge of “people’s republics”, name-ly the Head of Dontesk People’s Republic, D. Pushilin, who made no secret of that he worked as team leader in a Ponzi scheme called MMM as early as the middle of March. The local elites represented by council mem-

The situa on in Ukraine ratcheted up sharply in April 2014 in the Dontesk and Lugansk Regions, where armed insurgents seized the regional administra on buildings. Nego a ons in Geneva between offi cials from Russia, Ukraine, the United States, and the European Union came to an agreement on April 17 on disarmament of the insurgents subject to their amnesty. However, not only did the insurgents defy the agreement, they also began to take hostages, OSCE diplomats. Russia keeps demanding to desist from the use of force against the insurgents, however it remains unclear what should be done under the circumstances. Again, Russia and Ukraine have found themselves on the verge of war, with Russia facing the threat of tougher individual and economic sanc ons by OECD member states. In Russia, a law regarding the collec on of signatures for elec ons at all levels (save for par es that have passed the 3% threshold at the federal elec on) was adopted on the second, most important, reading, as well as a law on the abolishment of direct vo ng for mayors and city council members passed the fi rst reading – the law, however, is going to be amended so that it retains the possibility of direct vo ng for mayors with the consent of a regional legisla ve body. Substan al adjustments were made to the adopted in the fi rst reading federal law On the Russian Ci zenship whereby the eligibility for the Russian ci zenship was toughened for dozens of millions of Central Asian na onals.

bers, businessmen, mayors have taken a two-faced po-si on. On the one hand, they claim that Ukraine must be united, on the other hand, they speak up for the need to undertake reforms, delegate more powers to the regions, fi nalize the Russian language status1, etc.

Quadripar te nego a ons on de-escala on of the situa on in Ukraine were held on April 17 in Geneva between offi cials from the United States, the Europe-an Union, Ukraine and Russia. The par es to the agree-ment formulated a fairly reasonable document focus-ing on the disarmament of all illegal armed groups and simultaneous adop on of an amnesty law, freeing the seized buildings, and commencement of a dialogue on undertaking a cons tu onal reform delega ng more powers to the regions. An OSCE mission was assigned to supervise the agreement. However, it turned out in-stantly that the insurgents recognized no agreements, i.e. they regarded themselves legi mate, whereas the Kiev government was illegi mate for them. Rus-sian diplomats began to ac vely support their stance, speaking about the need to disarm Right Sector and other armed groups. Furthermore, OSCE representa- ves were taken hostage in Slavyansk by the most ag-

gressive group of insurgents. Russia, on the one hand, speaks against using force against the insurgents, on the other hand, it either has no control over them or no inten on to give them any instruc ons whatso ever.

1 The Russian language is presently considered a regional lan-guage in 12 Ukrainian regions, which means it may be used at state government bodies, in legal proceedings, for record-keeping. How-ever, this status is established by an ordinary law and vulnerable to a simple majority decision in the parliament.

POLITICO-ECONOMIC RESULTS IN APRIL 2014

3

There is no secret about the possibility of sending Rus-sian troops to Ukraine. Under the circumstances, the United States has called for other states, above all, European countries, Japan, Canada, Australia, etc. to impose more sweeping sanc ons against Russia if the situa on remains the same.

Should Russian troops appear in the con nental Ukraine, such sanc ons are likely to be imposed, and it will be painful enough for the country with 3% of the global GDP facing sanc ons from the countries ac-coun ng for about 60% of the global GDP. What kind of sanc ons could be imposed? The simplest way is to extend the list of individual and visa sanc ons. How-ever, it should be noted that the EU member states have so far imposed limited sanc ons covering the persons who are holding no legal assets in the Europe-an Union. Sanc ons against certain companies, banks and enterprises (similar to Y. Kovalchuk’s Russia bank) controlled by President Pu n’s friends will be even more uncomfortable: such sanc ons will hit the en re Russian economy, not just a small number of persons. Third, restric ons are likely to be imposed on lending to Russian companies whose debt, mostly short-term, totals $650–700bn, according to diff erent es ma ons. As a ma er of fact, the recently downgraded Russia’s ranking by the key ranking agencies already means ap-precia on of credit resources. Finally, for all the impor-tance of Russia’s supplies of natural gas and crude oil to Europe, a part of them can be subs tuted: through curtailment on demand, replacement with renewable energy sources and coal, further li ing the sanc ons against Iran, li ing the ban on export of U.S. crude oil, further construc on of regasifi ca on terminals, etc. Sanc ons similar to those against Iran may be based on imposing limits through mathema cal calcula on of the quan ty of resources which can hardly be sub-s tuted (Japan and South Korea were en tled to buy a certain amount of Iranian crude oil even during the crackdown period).

Russian offi cials’ assessments of sanc ons diff er ver cally: for example, unlike President Vladimir Pu n and Prime Minister Dmitry Medvedev who sprightly say that Russia may well benefi t from sanc ons, for ex-ample, Director of Finance Ministry’s Long-Term Stra-tegic Planning Department Maxim Oreshkin es mates Rb 1 trillion of poten al losses for the federal budget in 2014, including revenues from priva za on, internal and external loans, profi t tax, etc., while the Ministry of Economic Development of Russia has downgraded by four mes, from 2.5% to 0.6%, its economic growth projec on.

Furthermore, it’s not quite clear what for Russia should sustain such losses. The groups of insurgents in eastern Ukraine are regarded as assaulters, not de-

fenders who need projec on, besides they defy ne-go a ons. Unlike the Crimea, the local government authori es (mayors, regional and municipal councils) don’t support them, and they are not legi mate. The idea of proclaiming “buff er” republics (this is what the insurgents have demanded so far, not accession to Russia) doesn’t look promising at all for the local popula on: since most of the products of steel works and coal mines are exported to the European Union, the respec ve revenues would be lost. And speaking of Russia’s subsidies, they have to be much bigger than in the Crimea: the Dontesk and Lugansk Regions alone have about 7 million popula on (against 2 million in the Crimea). Therefore, mee ng the Geneva agree-ments would be the best op on indeed. However, the situa on has been developing the other way round.

Amendments to the Federal Law On the Russian Ci zenship ini ated by the Russian Government early in March were fi nally made in April. As a reminder, the law originally provided for making any successor, a “Russian na ve speaker”, of those who lived not only in the U.S.S.R. but also the Russian Empire (!) eligible for the Russian ci zenship – the “na veness” itself was supposed to be simply iden fi ed during an inter-view rather than through a formal examina on. An essen al amendment narrowing the coverage of the law to the current borders of the Russian Federa on (i.e. including the Crimea) was made to the law prior to the key second reading, whereby the main threat was eliminated indeed – the eligibility for the Russian ci zenship was ghtened for dozens of millions of na- onals from the Central Asia.

Amendments to the Federal Law On Regional Elec- ons weren’t good enough too. As a reminder, a law

was adopted in March in the fi rst reading which re-quires the collec on of signatures from at least 0.5% of voters to be able to run for elec ons based on party lists and at least 3% of signatures to run for elec ons at single-mandate cons tuencies for all poli cal par- es but those who passed the 3% threshold during

the federal elec ons (i.e. the four parliamentary par- es and Yabloko) or have a fac on in at least a single

cons tuent en ty of the Russian Federa on (now, seven more par es). Previously, par es were en tled to nominate their candidates without having to collect signatures. Dras c adverse amendments were made to the law on the second reading – fi rst, par es col-lected more than 3% of votes retained the right to run for elec on across Russia, while par es represented in the legisla ve body of the cons tuent en es of Rus-sia may nominate candidates, without having to col-lect signatures, only in the cons tuent en ty they are represented, second, municipal elec ons are subject to the same regula ons – considering that many re-


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gions including Moscow or St. Petersburg never held local elec ons based on party lists, it appears that all but the four parliamentary par es plus Yabloko will have to collect signatures.

Furthermore, an explicitly repressive Federal Law On the Abolishment of Mayoral Elec ons and Direct Elec ons of Municipal Council Members submi ed by a group of State Duma members, most of which are members of the poli cal party United Russia, was adopted in the fi rst reading. Under the law, direct elec- ons must be abolished anywhere except rural set-

tlements and replaced with an unprecedented in the modern world framework of indirect elec on of council members: regional duma (council) members are fi rst to be elected, then they are to elect among themselves municipal council members who in turn select a mayor among themselves. Furthermore, the law establishes the unifi ed number of candidates from each district ir-respec ve of its popula on size, thereby a huge district with an electorate comprising hundreds of thousands persons may turn out to have a representa on similar to that of a small suburb area with 2,000 to 3,000 elec-torate. Addi onally, it is worth recalling that Vladimir Pu n promised in his February 2012 pre-elec on ar -cle to introduce na onwide direct mayoral elec ons, if he wins. Considering the opposi on’s recent success at the mayoral elec ons in Novosibirsk and Yekaterinburg,

the third and fourth largest ci es in Russia, the law can be regarded as pure mockery, especially in terms of the requirements for a “fede raliza on” in neighboring Ukraine. This me the law has been strongly opposed not only by minor poli cal par es, but also the Com-munist Party of Russia (KPRF) and Just Russia, because the law seriously undermines the concept of the ex-istence of their regional branches which could a ract resources from candidates at local elec ons. Head of Internal Policy Department of the Presiden al Execu- ve Offi ce Morozov O. stated in his report at a forum

of the All-Russia People’s Front (ARPF) that it would be reasonable to retain the possibility of direct elec ons. However, fi rst, this is le to the discre on of the regions themselves (governors have li le interest in direct elec- ons), second, a mandatory system of appoin ng city

managers is to be introduced, under which city manag-ers will exercise basic powers, not the elected mayor, if the mayoral elec on system remains intact. Moreover, a city manager is appointed by a governor: the governor de legates a half, not one third, of the contest commit-tee. In terms of electoral consequences, the law may play a nasty trick with its ini ators at federal rather than local elec ons, as was the case with the countrywide replacement of elected governors in 2008–2011 with unpopular appointees which had an adverse eff ect on the United Russia’s results.

INFLATION AND MONETARY POLICY IN MARCH 2014

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INFLATION AND MONETARY POLICY IN MARCH 2014A.Bozhechkova

In March, the infl a on rate in the Russian Federa- on visibly accelerated: the Consumer Price Index, as

seen by the month end’s results, rose to 1% (vs. 0.7% in February 2014), thus climbing 0.7 pp. above its year-earlier level. As a result, the infl a on rate in per-annum terms went up to 6.9% (Fig. 1). The core infl a on rate1 in March 2014 was 0.8%, which represented a 0.4 p.p. rise on March 2013.

During March, the prices of foodstuff s rose by 1.8% (Fig.2). By comparison with February 2014, the growth rates of prices for cereals and legumes, meat and poultry, milk and dairy products, fruit and vege-table products, alcoholic beverages, fresh eggs, and granulated sugar increased from 0.0% to 0.9%, from 0.1% to 0.4%, from 1.6% to 2.6%, from 5.1% to 5.3%, from 2.0% to 2.3%, from -7.4% to 2.9%, and from 1.7% to 7.8% respec vely. The growth rates of prices for bu er dropped from 2.2% in February to 1.8% in March.

The prices and tariff s established for commercial services rendered to the popula on increased by 0.4% in March a er rising by 0.4% in February. The growth rate of tariff s for housing and u li es services in November amounted to 0.2%, which represented a 0.1 p.p. rise on February. By comparison with Febru-ary, the growth rates of prices for outbound tourist services, services provided in the fi eld of physical cul-ture and sport, services rendered by cultural establish-ments, and recrea onal services increased from 2.4% to 2.7%, from 0.4% to 0.8%, from 0.7% to 1.2%, and from 0.1% to 0.6% respec vely. The growth rates of prices for medical services and preschool educa on services con nued to decline. By comparison with February, they dropped from 1.1% to 0.5%, and from 2.1% to 0.7% respec vely.

1 The core consumer price index refl ects the level of infl a on on the consumer market a er adjustment for the seasonal (prices of vegetable and fruit products) and administra ve (regulated tariff s for certain types of services, etc.) factors. This index is also calcu-lated by the RF Sta s cs Service (Rosstat).

In March 2014, the Consumer Price Index (CPI) amounted to 1% (vs. 0.3% in March 2013), which represents a 0.3 p.p. rise on February 2014. As a result, the infl a on rate in per annum terms, as seen by the results of the past 12 months, rose to about 6.9%. Over the period from 1 April through 21 April, the CPI climbed to 0.3%. On 3 March 2014, the Bank of Russia temporarily increased the key rate from 5.5% to 7% per annum. On 25 April 2014, Russia’s fi nancial regulator again increased the key rate, to 7.5% per annum, thus con nuing the toughe-ning of monetary policy.

Over the course of March, the growth rate of prices for non-food commodi es amounted to 0.7%, which represented a 0.3 pp. rise on February. In this commo-dity group, the steepest accelera on was recorded by the growth rates of prices for tobacco products (+3.5% in March vs. +1.7% in February), motor gasoline (+1.5% in March vs. +0.4% in February), pharmaceu cals (+1.1% in March vs. +0.7% in February), construc on materi-als (+0.5% in March vs. +0.2% in February, tex le and tex le products (+0.6% in March vs. +0.3% in February), and footwear (+0.5% in March vs. +0.2% in February).

During April, the rate of infl a on con nued its up-ward movement, mainly due to the seasonal rise in prices for fruit and vegetable products and the unfa-

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Fig. 2. Infl a on Factors, 2008–2014 (as a Percentage of the Previous Year’s Corresponding Month)


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vorable situa on on the dairy products market, pork market and gasoline market. Bearing in mind that im-ports make up a considerable share of total consump- on in Russia, it should be noted that Russian infl a on

might be pushed up, to some extent, by the weaker ruble. The Consumer Price Index for the fi rst 21 days of April amounted to 0.6% (vs. 0.4% for to the same period of 2013). At present, the main factors that are keeping infl a on at bay are the lack of signifi cant de-mand pressure on prices and the current drop in glo-bal prices for agricultural prices.

Over the course of March 2014, the broad mone-tary base increased by 1.2% to Rb 9,344.7bn (Fig. 3). Its increased components included the monies kept on commercial banks’ correspondent accounts with the RF Central Bank (growth by 16.1% to Rb 1,162.6bn), banks’ deposits (growth by 11.0% to Rb 118.7bn), and required reserves (growth by 6.5% to Rb 442.7bn). The volume of cash in circula on, including the cash balances of credit ins tu ons, dropped by 1.1%, to Rb 7,620.7bn.

The narrow monetary base (currency issued by the Bank of Russia plus required reserves) over March shrank by 0.7%, to Rb 8,062.4bn as of 1 April (Fig. 4).

During March 2014, the surplus reserves held by commercial banks1 dwindled by 15.6%, to Rb 1,281.3bn, while the amount of banks’ repo debt increased by 29.9%, to Rb 3.05 trillion. As of 25 April, banks’ repo debt amounted to Rb 3.2 trillion. The inter-est rate in the interbank market2 in March was on the average at the level of 7.9% (against 6.0% in February 2014). Over the period from 1 April through 25 April, the average interbank interest rate was 7.7% (Fig. 5). The sharp rise in the interbank interest rate was caused by the Bank of Russia’s decision, of 3 March 2014, that the key interest rate should be tempora-rily increased by 1.5 pp., from 5.5% to 7% per annum, and that the interest rates on liquidity provision and absorp on instruments should also go up because of the rapidly worsening situa on on fi nancial markets, brought about by the turmoil in Ukraine.

At the three-month REPO auc on for loans secured by non-marketable assets, held by the Bank of Russia on 6 March 2014, the cut-off rate was set at 7.41%, while total amount allo ed was Rb 200bn. In the course of another such auc on held on 14 April 2014, a total of Rb 700bn was allo ed, the cut-off rate being set at 7.26% per annum. It should be noted that, al-

1 The surplus reserves held by commercial banks at the RF CB are understood as the aggregate balance of their correspondent accounts, deposits with the RF CB, and the bonds issued by the RF CB and held by commercial banks.2 The interbank interest rate is the average monthly interest rate on overnight ruble-denominated interbank loans (Moscow Interbank Actual Credit Rate – MIACR).

though the terms of lending at such auc ons are very so (the Bank of Russia provides loans under fl oa ng interest rates), only big banks are capable of par cipat-ing in these REPO auc ons, because they alone pos-sess the assets to be pledged as collateral thereat.

As of 1 April 2014, the Bank of Russia’s interna- onal reserves volume amounted to $ 486.1bn, hav-

ing shrunk since the year’s beginning by 4.6% (Fig. 4). At the same me, over the course of November, the reserves backed by monetary gold declined by $ 1.2bn due to a downward adjustment of asset value. In the main, the dwindling of the Bank of Russia’s interna- onal reserves in the period January–March 2014 was

caused by the fi nancial regulator’s foreign exchange interven ons designed to support the ruble in a situ-a on characterized by the weakening of developing-country currencies and the geopoli cal consequences of the Ukrainian unrest.

As seen by the March 2014 end results, the Bank of Russia’s foreign exchange interven ons in the form of foreign exchange sales comprised $ 22.3bn and EUR 2.3bn (Fig. 6). In March, the fi nancial regulator purchased $290m for the purpose of replenishing or spending the monies held by the Federal Treasury as part of sovereign funds denominated in foreign cur-

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Fig. 3. The Movement of Commercial Banks’ Debt to the Bank of Russia in 2008–2014

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Fig. 4. Behavior of Russia’s Narrow Monetary Base and Gold & Foreign Currency (Interna onal) Reserves in 2007–2014

INFLATION AND MONETARY POLICY IN MARCH 2014

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rencies. It should be noted that the March 2014 inter-ven ons exceeded threefold the previous three-year high ($8.6bn in January 2014). Over the course of March, the fi nancial regulator eight mes revised the boundaries of the bi-currency basket’s fl oa ng corri-dor by 5 to 10 kopecks, thus pushing them up to the level of Rb 36.25 – 43.35. In the period from 1 April through 24 April, the fi nancial regulator twice revised the boundaries of the bi-currency basket’s fl oa ng corridor by 5 kopecks. As of 24 April, the boundaries of the bi-currency basket’s fl oa ng corridor were set at Rb 36.35–43.35. Over the period from 1 April through 24 April, the volume of foreign exchange sales by the Bank of Russia amounted to $ 2.4bn, while the scope of foreign exchange interven ons undertaken by the fi nancial regulator in order to replenish the monies held by the Federal Treasury as part of sovereign funds was $ 878bn. In April, the situa on on Russia’s foreign exchange market became rela vely stable, but in the short term-term perspec ve the behavior of the ruble will s ll be determined by geopoli cal factors.

According to the Bank of Russia’s preliminary es- mates, net capital ou low from Russia in Q1 2014

climbed to $ 50.6bn, which represented a 1.8-fold in-crease on the same period of 2013. It should be noted that over the whole year 2013, net capital ou low from Russia amounted to $ 59.7bn. Over the course of Q1 2014, net capital ou low from the banking sec-tor rose to $ 18.9bn, and that from all the other sec-tors – to $ 31.7bn. The main factor behind this huge capital ou low in Q1 2014 was the tense geopoli cal situa on.

During March, the ruble’s real eff ec ve exchange rate against the two major foreign currencies dwindled by 1.75% (vs. -3.9% in February 2014). On the whole, over the course of Q1 2014, the ruble’s real eff ec ve exchange rate against the USD and the EUR dropped by 4.6% on Q4 2013 and by 8.5% on Q1 2013 (Fig. 7).

During March, the exchange rate of the US dollar against the ruble dropped by 0.5% to Rb 33.0; the eu-ro’s exchange rate against the ruble dropped by 1.6% to Rb 38.4. The exchange rate of the Euro against the ruble shrank by 1.2% to Rb 49.1. In March, the aver-age exchange rate of the Euro against the USD was 1.38 USD per Euro. During that month, the value of the bi-currency basket declined by 1.4% to Rb 41.7. It should be noted that in March the value of the bi-currency basket hit its all- me high of Rb 43.1. As seen by the results of the fi rst 25 days of April, the exchange rate of the USD against the ruble went up by 0.2% to 35.7 rubles per USD, while the exchange rate of the Euro increased by 0.7% to 49.3 rubles per Euro. As a result, the value of the bi-currency basket grew by 0.5% to Rb 41.8. In April, the average exchange rate

of the Euro against the USD was 1.38 USD per Euro. It should be noted that the strengthening of the Euro is caused by both the Euro zone’s economy exi ng reces-sion and by the conserva ve monetary policy pursued by the European Central Bank. The weakening of the ruble against the USD in the period January–March 2014 was caused in the main by the considerable in-tensifi ca on of capital fl ight from Russia resul ng from the unstable geopoli cal situa on in Ukraine, op mis c forecasts for US and EU economic growth, and the ongoing slowdown in the growth rates of the

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2014

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 1 week

Fig. 5. The Bank of Russia’s Interest Rate Corridor and the Interbank Market’s Behavior in 2012–2014 (% per Annum)

-20000

-15000

-10000

-5000

0

5000

10000

Mar

10

Jun

10Se

p 10

Dec

10M

ar 1

1Ju

n 11

Sep

11De

c 11

Mar

12

Jun

12Se

p 12

Dec

12M

ar 1

3Ju

n 13

Sep

13De

c 13

Mar

14

0

10

20

30

40

50

mln

dol

l.

doll.

Currency interventions ("+" - net purchase, "-" - net sales)Official currecy basket / Rub (end of period)

Fig. 6. The Bank of Russia’s Currency Interven ons and the Ruble Exchange Rate against the

Bi-currency Basket in March 2010 – March 2014

0

50

100

150

200

20

30

40

50

60

jan

05ju

n 05

nov

05ap

r 06

sep

06fe

b 07

jul 0

7de

c 07

may

08

oct 0

8m

ar 0

9au

g 09

jan

10ju

n 10

nov

10ap

r 11

sep

11fe

b 12

jul 1

2de

c 12

may

13

oct 1

3m

ar 1

4

Official USD/RUR exchange rate (end of period)Official EUR/RUR exchange rate (end of period)Value of the two-currency basketReal effective exchange rate index (right scale)

Fig. 7. Behavior of the Ruble’s Exchange Rate Indicators in January 2005 – February 2014


8

Russian economy. The rela ve strengthening of the ru-ble in late March was caused by the fact that no s ff economic sanc ons had been imposed against Russia over the Crimea.

On 25 April 2014, the Bank of Russia’s Board of Di-rectors announced its decision that the key rate should be increased to 7.5% per annum. This measure was aimed at reducing the risk of a considerable rise in infl a on and at maintaining fi nancial sustainability in the current situa on characterized by the weakening of the ruble and growing poli cal tensions.

On the same day, the Bank of Russia announced that the key rate would not be decreased in the next few months. The fi nancial regulator explained that raising its key rate would slow annual infl a on to no more than 6% by the end of the year. We believe that, bearing in mind the current panic in fi nancial markets, the temporary increase in the key rate was the right decision. However, if the increased rate is kept for a long period of me, it will adversely aff ect Russia’s shrinking economic ac vity.

FINANCIAL MARKETS IN MARCH 2014

9

FINANCIAL MARKETS IN MARCH 2014N.Andrievsky, E.Khudko

The Movement of the Russian Stock Market’s Main Structural IndicesThe movement of the MICEX Index in April refl ected

the Russian stock market’s recovery a er its sharp fall in March. Over the period from 1 April through 23 April, the MICEX Index stood at an average of 1,350.17 points. It should be remembered that on 14 March the MICEX Index had plummeted to 1237.43 points.

shares traded on the Moscow Exchanged are con-cerned, the only shares that were losing in value in the second half of April were those issued by Sberbank – over the period from 27 March through 23 April, that company’s ordinary shares dropped 9.19%. It should be noted that the drop in Sberbank stock quotes was taking place in the absence of any nega ve reports on that company’s ac vity. At the same me, April saw a con nua on of the upward trend in the price of shares in Norilsk Nickel, which rose by 9.41% over the afore-said period. An upward trend was also demonstrated by shares in VTB, which gained 5.07% over the period from 27 March through 23 April.

As of 23 April, the annual yield on ordinary shares in Sberbank was nega ve, with the losses incurred by its investors since 23 April 2013 amoun ng to 21.7%. The annual yield on privileged shares in Sberbank and VTB was also nega ve, amoun ng to -15.1% and -15.6% respec vely. The leader in growth was shares in Norilsk Nickel, which gained more than 30% over the course of 12 months. One of the possible reasons for that price rise was the 35% climb in global nickel prices which took place during the aforesaid period. Over the course of 12 months, shares in Gazprom and Ros-ne climbed by 8.6% and 6% respec vely. The price of shares in LUKOIL remained prac cally unchanged.

In early April sectoral indices grew at moderate rates. The only excep on was the MICEX Index-Ma-chine Building, which displayed a sharp rise deter-

Having experienced a sharp drop in March, Russia’s stock market was steadily recovering throughout April. Over the period from 1 April through 23 April, the MICEX Index stood at an average of 1,350.17 points. The growth leader among highly liquid shares were Norilsk Nickel securi es – over the period from 27 March through 23 April they rose 9.41%, while the annual yield on that company’s shares rose to more than 30%. As of 23 April, the stock market’s capitaliza on amounted to Rb 21.6 trillion (or 33.3% of GDP), which represented a Rb 89bn fall (-0.4%) compared with 27 March. The situa on on the Russian domes c market of corporate bonds con nued to worsen due to the exacerba on of nega ve trends in the Russian economy. As a consequence, the key market indices – the Corporate Bond Market Index, the market’s size, the weighted average yield and the ac vity of issuers and investors – showed nega ve dynamics.

9095100105110115120

12001250130013501400145015001550

02.0

4.20

1314

.04.

2013

26.0

4.20

1308

.05.

2013

20.0

5.20

1301

.06.

2013

13.0

6.20

1325

.06.

2013

07.0

7.20

1319

.07.

2013

31.0

7.20

1312

.08.

2013

24.0

8.20

1305

.09.

2013

17.0

9.20

1329

.09.

2013

11.1

0.20

1323

.10.

2013

04.1

1.20

1316

.11.

2013

28.1

1.20

1310

.12.

2013

22.1

2.20

1303

.01.

2014

15.0

1.20

1427

.01.

2014

08.0

2.20

1420

.02.

2014

04.0

3.20

1416

.03.

2014

28.0

3.20

1409

.04.

2014

21.0

4.20

14

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

Source: Quote.rbc.ru. Fig.1. The Movement of the MICEX Index

and Brent Crude Oil Futures Prices in the Period from 4 February 2013 through 23 April 2014

Source: Quote Rbc.ru, the author’s calcula ons. Fig. 2. Growth Rate of the Quota ons of Highly

Liquid Stocks on the Moscow Exchange (Over the Period from 27 March through 23 April)

-10,0

-5,0

0,0

5,0

10,0

27.0

3.14

28.0

3.14

31.0

3.14

01.0

4.14

02.0

4.14

03.0

4.14

04.0

4.14

07.0

4.14

08.0

4.14

09.0

4.14

10.0

4.14

11.0

4.14

14.0

4.14

15.0

4.14

16.0

4.14

17.0

4.14

18.0

4.14

21.0

4.14

22.0

4.14

23.0

4.14

Sberbank LUKOIL Rosneft VTB

Sberbank prev Gazprom Norilsk Nickel

-21,7-15,1

8,6

-0,9

6,0

30,2

-15,6-30-20-10

010203040

Sber

bank

Sber

bank

pre

v

Gazp

rom

LUKO

IL

Rosn

eft

Nor

ilsk

Nic

kel

VTB

23/04/2013–23/04/2014

Source: Quote rbc.ru, the author’s calcula ons. Fig. 3. Growth Rates of the Prices of Highly Liquid Shares

Traded on Moscow Exchange Over the Period from 26 March through 26 March 2014


10

mined by the climb in shares issued by the Sollers com-pany manufacturing a number of foreign car brands in Russia. The leader in growth was the MICEX Consum-er Goods and Services Index – over the period from 27 March through 23 it gained 8.88%, mainly due to a signifi cant growth in the stock quotes of Farmstandard and M.Video.

In April, the average daily trading turnover of the Moscow Exchange amounted to Rb 39.7bn, which represented a 38.4% drop on March. Shares in Sber-bank accounted for 35.8% of the average daily trad-ing in common and privileged shares on the Moscow Exchange. In April, the second-best performer on the MICEX was shares in Gazprom, which accounted for 21% of the average daily trading turnover of the Mos-cow Exchange. Thus, these two biggest companies ac-counted for more than 57% of the Moscow Exchange’s trading turnover. Trailing behind them were fi ve com-panies whose combined volume of trade in shares on the MICEX accounted, on the average, for 23.5% of the daily trading turnover of the Moscow Exchange. It should be noted that those fi ve companies included Magnet, Russia’s biggest retailer. Eight best-perform-ers on the MICEX accounted, on the average, for 80.7% of the daily trading turnover of the Moscow Exchange.

According to Emerging Por olio Fund Research (EP-FR), over the period from 27 March through 19 April, funds oriented to the Russian market experienced net infl ows in the amount of $ 122m. As of 23 April, MICEX’s total capitaliza on amounted to Rb 21.6 trillion (or 33% of GDP), having fallen since 27 March by more than Rb 89bn (-0.4%). As far as the stock market’s capitaliza- on structure by type of economic ac vity is concerned,

in April the capitaliza on share of the companies be-longing to processing industries rose by 0.7 p.p., to 13.5%. The capitaliza on share of companies belonging to the fi nancial sector shrank by 0.5 p.p.

The Corporate Bond MarketIn April 2014, the volume of Russia’s domes c cor-

porate bond market (by the nominal value of ruble-denominated securi es in circula on, including those issued by RF non-residents) con nued to shrink. By 21 April, this index had shrunk to around Rb 5,237.6bn, which represented an almost 0.5% drop in the domes- c corporate bond market’s volume by comparison

with 25 March1. As before, 16 U.S dollar-denominated bond issues (with an aggregate face value of above $ 2.2bn) and one yen-denominated bond issue placed by Russian emi ers remained in circula on. The drop in the volume of the market was caused by a nota-ble reduc on in the number of issued bond loans (1,034 ruble-denominated corporate bond issues vs.

1 According to data released by the Rusbonds informa on agency.

1,044 issues as of the end of the previous month). At the same me, the number of emi ers represented in the debt segment remained almost unchanged (359 in April vs. 360 as of the end of March).

In April, investment ac vity on the secondary cor-porate bond market remained at a suffi ciently high level. Thus, in the period from 25 March through 21 April, the combined volume of exchange transac- ons carried out on the Moscow Exchange amounted

to Rb 109.7bn (for reference: over the period from 24 February through 24 March the trade turnover was

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

27.0

3.20

1428

.03.

2014

31.0

3.20

1401

.04.

2014

02.0

4.20

1403

.04.

2014

04.0

4.20

1407

.04.

2014

08.0

4.20

1409

.04.

2014

10.0

4.20

1411

.04.

2014

14.0

4.20

1415

.04.

2014

Financial and banking

Machine buildingcompanies

Oil and gas companies

Companies of electricalengineering industry

Metal and miningcompanies

Companies of consumer &retail sector

MICEX Innovation

Source: Quote rbc.com, the author’s calcula ons. Fig. 4. Growth rates of Diff erent Sectoral Indices

on the Moscow Exchange (Over the Period from 27 March through 23 April 2014)

0,0

10,0

20,0

30,0

40,0

50,0

60,0

27.0

3.20

14

28.0

3.20

14

31.0

3.20

14

01.0

4.20

14

02.0

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14

03.0

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14

04.0

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14

07.0

4.20

14

08.0

4.20

14

09.0

4.20

14

10.0

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14

11.0

4.20

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14.0

4.20

14

15.0

4.20

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16.0

4.20

14

17.0

4.20

14

18.0

4.20

14

21.0

4.20

14

22.0

4.20

14

23.0

4.20

14

SBER GAZP LKOH ROSN

GMKN VTBR MGNT Total turnover

Source: Quote rbc.com, the author’s calcula ons. Fig. 5. Structure of the Trading Turnover of the Moscow

Exchange (Over the Period 27 March through 26 April 2014)

Mining industry; 48,9

Processing industries; 13,5

Production and distribution of electric energy, gas and water;

4,3

Wholesale and retail trade;

repair services; 9,0

Transport & communications;

9,8

Financial sector; 13,5

Other types of economic

activity; 1,0

Source: the MICEX’s offi cial website; the authors’ calcula ons. Fig. 6. Structure of Capitaliza on of the MICEX

Stock Market, by Type of Economic Ac vity

FINANCIAL MARKETS IN MARCH 2014

11

Rb 108.7bn), while the number of transac ons carried out over the period under considera on rose to 28.4 thousand (vs. 26.0 thousand in the previous period)1. Such a behavior of the trade indices indicated that the said securi es con nued to be a rac ve to small in-vestors.

Having predictably fallen in March, the IFX-Cbonds index of the Russian corporate bond market made an a empt to rally back. By the end of April 2013, it had gone up 3.2 points (or 0.9%) from the end of the pre-vious month. The weighted average eff ec ve yield on corporate bonds dwindled from 9.35% at the end of March to 9.22% as of the end of April (Fig. 7)2. How-ever, as the current level of this index s ll remains too high, it is too early to say that the market has fi nally become stabilized. As of the end of April, the corporate bond por olio dura on index amounted to 580 days, which represented a 25-day drop on the end of the previous month. Taking into account the dwindling of the weighted average eff ec ve yield on corporate bonds, it can be confi dently said that this behavior of the dura on index was caused by a decrease in the du-ra on of bond circula on.

Unlike in the previous period, yields on the most liqui d bond issues all behaved diff erently and did not display a single trend. The fi nancial sector was the most vola le. Some mes, several bond issues of one and the same emi er (e.g. Vneshekonombank, Ros-selkhozbank and Credit Europe Bank) all behaved dif-ferently. A considerable drop in yields (by more than 1 p.p.) was experienced by securi es issued by the manufacturing and hi-tech companies OJSC JSOC Bash-ne , LLC EvrazHolding Finance, AFK OJSC Sistema and LLC SUEK Finance. It should be said that JSOC Bash-ne was one of the few Russian emi ers affi rmed by Fitch Ra ngs at ‘BB’ with a Posi ve Outlook. The ra ng upgrade for Bashne followed the recent acquisi on, by that company, of a Siberian oil producing asset. As a consequence, the number of transac ons in Bash-ne ’s securi es signifi cantly went up. On the whole, the highest drop in bond yield (by around 0.5 p.p.) was displayed by the manufacturing sector.

Due to the unfavorable situa on on the market, the ac vity of Russian emi ers whilst registering their new securi es issues considerably declined in April. Thus, over the period from 25 March through 21 April, 8 emi ers registered 19 bond issues with a total face value of Rb 58.6bn (for reference: over the period from 22 February through 24 March, a total of 35 bond issues were registered, with a total face value of Rb 140,5bn). More than half of the registered bond issues were exchange-traded bonds.

1 According to data released by the Finam company.2 According to data released by the Cbonds company.

The ac vity on the primary market also dwindled, with the number of primary placements dropping to its lowest since mid-2012. Thus, over the period from 25 March through 21 April, just three emi ers placed 7 bond loans with a total nominal value of Rb 24.6bn (for reference: over the period from 22 February through 24 March, a total of 11 bond loans with a to-tal nominal value of Rb 35.7bn were placed) (Fig. 8). Never theless, despite the plumme ng placement in-dices and the nega ve outlook on the Russian market, two mortgage agents managed to a ract fi nance in the form of 32-year loans.

As the Bank of Russia did not place any securi es at the MICEX in April, no bond issues were de-listed (for reference: In March, two bond issues were declared null and void and consequently de-listed)3.

In the period from 25 March through 21 April, 17 emi ers should have redeemed the face value of their bond loans with a total nominal value of Rb 40.9bn. However, one emi er declared a technical default (in the previous period, all emi ers observed

3 According to data released by the Bank of Russia.

Source: According to data released by the Cbonds company.Fig. 7. Behavior of the IFX-Cbonds Index of the Russian Corporate Bond Market

and the Dynamics of Its Weighted Average Eff ec ve Yield

Source: According to data released by the Rusbonds informa- on agency.

Fig. 8. Dynamics of the Primary Placements of Issues of Ruble-Denominated Corporate Bonds


12

their liabili es in due me). It is expected that, in May 2014, 13 corporate bond issues with a total face value of Rb 41.9bn will be redeemed1.

It should be noted that the period from 25 March through 21 April saw no real defaults on the payment


of the coupons, on the buyback off ers to the current holders of securi es before their maturity, and on the redemp on on a whole bond loan2. In this respect, the situa on remained unchanged from the previous few months.


THE REAL SECTOR OF THE ECONOMY IN THE 1ST QUARTER OF 2014

13

THE REAL SECTOR OF THE ECONOMY IN THE 1ST QUARTER OF 2014O.Izryadnova

According to the preliminary es mates of the Mi-nistry of Economic Development of the Russian Fe-dera on, in the 1st quarter of 2014 GDP growth rates amounted to 0.8%. In the 1st quarter of 2014, the na-ture of economic growth was determined by simulta-neous weakening of both external and domes c de-mand. The prevailing trend of reduc on of investment demand which trend was formed as early as the sec-ond half of 2012 and jus fi ed by the impact of struc-tural and ins tu onal limita ons had a rather adverse eff ect in that period on the economic dynamics. In ad-di on to the above, in 2014 the situa on in the invest-ment sector was made even worse due to higher risks related to geopoli cal factors.

According to the data of the Central Bank of Rus-sia, in the 1st quarter of 2014 the ou low of capital amounted to $50.6bn with the capital ou low index for the en re 2013 being equal to of $59.7bn. In Janu-ary–March 2014, the withdrawal of capital by the non-banking sector amounted to $31.7bn and exceeded by

200% the index of the respec ve period of the previ-ous year. With reduc on of par cipa on of the private sector and modest fi nancing of investments at the ex-pense of budget funds which is typical of the begin-ning of the year, on the basis of the results of Janu-ary–March 2014 investments in capital assets and the volume of jobs in building amounted to 95.2% and 96.9% of the respec ve indices of the same period of the previous year, respec vely. Infrastructure limita- ons in the investment area can be overcome with a

simultaneous eff ec ve u liza on of budget funds of development ins tutes affi liated with the state and private investors.

Early in 2014, slowdown of growth rates of con-sumer demand which began in the second half of 2012 con nued. In the 1st quarter of 2014, growth rates of the retail trade turnover amounted to 3.5% (7.0% in 2012 and 4.0% in 2013) on the respec ve period of the previous year. Prevalence of a high rate of infl a on and a drop in the growth rates of households’ real income

In the 1st quarter of 2014, economic dynamics was determined by growth in consumer demand and a drop in investment demand. On the basis of the results of the 1st quarter of 2014, investments in capital assets fell by 4.8% on the respec ve period of the previous year with simultaneous reduc on of volumes of jobs in building and produc on of capital goods. In the 1st quarter of 2014, growth rates of retail trade turnover amounted to 103.5%, which is 0.5 p.p. lower than the respec ve index of 2013. In January–March 2014, recovery of industrial growth thanks to a 2.4% increase in the output of manufacturing industries as compared to January–March 2013 had a posi ve eff ect on the economic situa on. As of the end of March 2014, offi ces of the state employment service registered 941,000 persons as unemployed which is 13.2% lower as compared to March 2013.

Table 1GROWTH RATES OF THE MAIN ECONOMIC INDICES IN THE 1ST QUARTER OF 2010 2014, AS % OF THE RESPECTIVE

PERIOD OF THE PREVIOUS YEAR 2010 2011 2012 2013 2014

GDP 103.5 103.5 104.8 100.8 100.8*Industry 108.4 105.0 104.5 98.8 101.1Produc on of primary products 104.9 101.4 102.0 99.7 100.8Manufacturing 111.5 109.7 106.7 98.6 102.4Investments in capital assets 95.2 99.2 116.5 100.1 95.2Retail trade turnover 102.2 105.0 107.9 104.0 103.5Households’ real disposable cash income 108.1 100.0 101.6 105.6 97.6Real wages and salaries 103.1 101.6 110.3 104.5 104.2Export 161.1 122.8 116.3 95.4 98.1**Import 118.8 142.4 112.1 103.7 92.9**The total number of the unemployed 96.3 85.7 85.3 96.2 95.2

* the ini al data of the Ministry of Economic Development. ** the ini al data of the Central Bank of Russia.Source: The Rosstat.


14

aff ected the consumer behavior. In March 2014, as compared to the same period of the previous year the consumer price index amounted to 106.9% (107.0% a year before). The 2013 trend of higher diversifi ca- on of households’ income, greater poverty and slow-

down of growth rates of social payments and house-holds’ income from property and business ac vi es had a serious impact on the dynamics of households’ real income. In the pa ern of households’ income, the unit weight of wages and salaries has grown. In March 2014, the indices of households’ real income and real wages and salaries amounted to 93.2% and 103.1% year on year, respec vely (in March 2013 they were equal to 109.1% and 105.1%, respec vely).

Households’ higher infl a on expecta ons have re-sulted in a reduc on of the volume and share of sav-ings in households’ income and ac ve conversion of households’ accumulated savings into a foreign cur-rency. In such a situa on, all other factors being equal the volume of poten al investment resources at the expense of households’ funds is decreasing and a pos-sibility to speed up the growth rates of consumer de-mand is ge ng smaller.

Throughout the second half of 2012 and the en re 2013, the Russian economy demonstrated a slowdown of growth rates of business ac vi es virtually by all the types of economic ac vi es. In February-March 2014, industrial growth recovered as compared to the 2013 index. On the basis of the results of the 1st quarter of 2014, industrial output came to the level of the re-spec ve period of 2012. In March 2014, recovery of growth rates year on year was registered by all the major types of ac vi es in industry: produc on of pri-mary products – 100.8% and manufacturing – 103.5%. Higher volumes of oil refi ning at domes c plants – it made up for a 5.0% reduc on of the export of Rus-

sian hydrocarbons as compared to the 1st quarter of 2013 – had a considerable eff ect on the dynamics of the primary sector.

A decrease in produc on of capital goods was de-termined by the downward trend of investment ac- vi es. In March 2014, as compared to the same pe-

riod of the previous year the index of produc on of machines and equipment amounted to 84.6%, while that of produc on of power and electronic and op cal equipment, to 93.4%. It is par cularly alarming taking into account the fact that output gap in the above sec-tors was observed throughout the en re 2013.

In the 3rd quarter, as compared to the previous year recovery of growth rates of produc on of means of transporta on and equipment was observed. In March 2014, the index of produc on of means of transporta- on amounted to 114.2% and 111.0% on that of March

2013 and January–March 2013, respec vely. It is to be noted that shipbuilding, aircra and spacecra build-ing and rolling-stock building accounted for the main por on of growth in that sector (126.8% on the index of the 1st quarter of 2013) with output gap in the auto-mo ve industry (92.4%). The dynamics of the automo- ve market is aff ected both by a drop in demand and a

decrease in produc on of cars in an industrial assembly mode due to higher costs of import parts and u li es.

The dynamics of the consumer complex of the in-dustry demonstrates output growth which situa on is probably related to some revitaliza on of import sub-s tu on processes as a result of deprecia on of the ruble exchange rate and a drop in import effi ciency. In March 2014, the index of tex le and sewing produc- on, that of produc on of leather, leather ar cles and

footwear and that of produc on of food amounted to 103.6%, 103.7% and 101.8%, respec vely, as com-pared to March 2013.

Source: The Rosstat.Fig. 1. Indices of produc on by the main types of manufacturing industries

in the 1st quarter of 2012–2014, as % of the respec ve period of the previous year

THE REAL SECTOR OF THE ECONOMY IN THE 1ST QUARTER OF 2014

15

In March 2014, as a year before in the intermediate goods segment growth in output year on year con nued.

In March, on the labor market of the Russian Fede-ra on growth in demand on workforce was registered. As compared to March 2013, the number of gain-fully employed popula on increased by 92,000 per-sons, while the number of the unemployed fell by 228,000 persons. According to the preliminary results

of the Rosstat’s employment survey, in March 2014 the total number of the unemployed was es mated at the level of 4.0m people or 5.4% of the gainfully oc-cupied popula on (in accordance with the methods of the Interna onal Labor Organiza on). As of the end of March 2014, offi ces of the state employment service registered 941,000 persons as unemployed which is 13.2% lower as compared to March 2013.


16

THE RUSSIAN INDUSTRY IN MARCH 2014S.Tsukhlo

Industrial op mism index1

The fi rst data of March showed a somewhat im-provement of the Russian industry’s mood thanks to which the index amounted only to the zero level (Fig. 1). The above factor fairly refl ects the situa on which was formed at enterprises long ago.

Demand on industrial produceBy enterprises’ es mates, in March the demand on

industrial produce kept recovering a er a tradi onal drop in January. The ini al balance of a change in the index (an analog of growth rates in tradi onal under-standing) gained another 4 points and entered the posi ve area. A year before, the balance of that index became posi ve as early as February. As a result, clear-ing of a seasonal factor showed con nued reduc on of demand at nearly the same (as in February) rate of intensity (Fig. 2).

However, such dynamics of demand did not disap-point enterprises at all – for the fi rst me from 2013 the share of “normal” es mates exceeded (though to the minimum extent) the share of “below the norm” es mates. The industry demonstrated again high ad-apta on to a complicated exis ng situa on and in-creased uncertainty of the forthcoming months due to the Ukrainian crisis.

The above factor aff ected the forecasts of the Rus-sian industry’s sales even in a situa on of deprecia on of the ruble exchange rate and import subs tu on ex-pected by experts and the authori es. A er the mo-dest February maximum, in March the balance of fore-casted changes in demand (that is its growth rates in tradi onal understanding) fell to +12 points, while in the previous post-crisis years it amounted to +18...+23 points. With the seasonal factor cleared, the balance

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%.

fell to nega ve values. Generally, in the 1st quarter of 2014 dynamics of forecasts is worse than the values of the index for the respec ve period of the previous year.

Stocks of fi nished productsIn March, the balance of es mates of stocks of

fi nished products (Fig. 3) decreased by 6 points and

According to the data of business surveys carried out by the Gaidar Ins tute1, the fi rst es mates of March did not iden fy any principal changes in the dynamics of demand, output, employment and investments of the Russian industry. However, enterprises’ prices have, probably, started to yield to the infl a onary pressure, while reserves, to growing uncertainty of forthcoming months.

Fig. 1

Fig. 2

THE RUSSIAN INDUSTRY IN MARCH 2014

17

amounted to the 18-month minimum. In other words, such modest surpluses of stocks of fi nished goods have not been registered by surveys since September 2012.

OutputAccording to the ini al data, in March the rate of

intensity of output growth gained another 12 points and as a result amounted to the value which is typi-cal of that month. A er clearing of the seasonal factor, the output growth rates (Fig. 4) returned to the zero level which situa on points to preserva on of hardly discernable rates of a change in output of the Russian industry and permit to gain the aggregate result with any sign as a result of applica on of methods of exclu-sion of seasonal and calendar factors which diff er a lit-tle from each other.

A similar situa on takes place in respect of the in-dustry’s output plans. A er clearing of the seasonal factor, that index returned to the limits within which it stayed from January 2013. So, hopes for moderate output growth s ll prevail in the Russian industry.

Prices of enterprisesIn March, the Russian industry con nued to main-

tain high intensity of growth in prices (Fig. 5) which was only two points below the January rate of a change in the index. During the past two years, by the end of the 1st quarter the balance would lose momentum and head for the zero level. In 2014, in a situa on of a high-er pressure on the ruble exchange rate and stronger infl a onary processes enterprises have to change their pricing policy even to the detriment of sales.

Also, enterprises’ pricing forecasts behave untypi-cally. Firstly, the pre-new year surge in the index was limited to one month (December), though in previous years enterprises smoothly increased their forecasts and/or kept them at the maximum level for a few months. At present, sales problems made enterprises behave diff erently. Secondly, a January reduc on in forecasts was not maintained, while in March the in-dex rose by several points. Enterprises started to take into account changes in the infl a onary situa on in the economy.

The actual dynamics and layoff plansExit of workers from the Russian industry con nues

(Fig. 6). A er a typical surge of layoff s in January, in March the balance of changes in the number of per-sonnel rose only to -10 and -8 points and came as a re-sult to the level of reduc on of the number of workers (the rate of intensity) which was typical of the second half of 2013. Forecasts of a change lost the January op mism. A er a 22 point surge to +7 points in the beginning of the year, as early as February the balance

Fig. 3

Fig. 4

Fig. 5


18

became zero and retained that value in March. The industry realized again that eff orts related to employ-ment of personnel lacked prospects. However, so far it does not create problems related to provision with personnel of industrial growth expected by enterprises. In the 1st quarter of 2014, the balance of es mates of the current number of workers became zero, that is, the share of the more than suffi cient answers became equal to that of the less than suffi cient answers with absolute dominance of the suffi cient answers (72%).

Enterprises’ investment plans The industry keeps maintain an investment pause

(Fig. 7). The balance of investment intensions remains in the nega ve area (that is, the number of answers about the expected decrease in investments was high-er than that about possible growth in investments) for ten months running. A nominal improvement of the index from -15 points in November-December 2013 to -8 points in March 2013 can be regarded as a scrap of hope in that gloomy investment situa on.

Fig. 6 Fig. 7

THE FOREIGN TRADE IN FEBRUARY 2014

19

THE FOREIGN TRADE IN FEBRUARY 2014N.Volovik

In the 2014 World Economic Outlook (WEO)1 re-leased by the IMF in April 2014, it is stated that the busi-ness ac vity is growing in the world. The IMF forecasts growth in the world economy from 3% in 2013 to 3.6% and 3.9% in 2014 and 2015, respec vely. In the 2014–2015 period, in developed countries economic growth rates will amount to about 2.25% which is almost 1 p.p. higher than in 2013. The highest economic growth rates – at the level of about 2.75% – are expected in the US. In the euro area, growth is forecasted as well, while in countries with emerging markets and develop-ing countries a gradual increase in GDP growth rates is expected from 4.7% in 2013 to about 5% and 5.25% in 2014 and 2015, respec vely. Growing external demand on the part of developed economies will contribute to growth, while toughening of fi nancial condi ons limits expansion of the domes c demand. In China, growth will remain at the level of about 7.5% in 2014 as the au-thori es will seek to restrain growth in domes c lending and carry out reforms aimed at a gradual switchover to more balanced and sustained growth.

It is stated in the WEO that despite be er prospects global growth is not stable so far and with prevailing old risks of economic slowdown new geopoli cal risks

1 h p://www.imf.org/external/pubs/ /weo/2014/01/pdf/text.pdf

In February 2014, the main indices of the Russian foreign trade dropped considerably. The European Union sub-mi ed to the Secretariat of the World Trade Organiza on a query as regards consulta ons with the Russian Fe-dera on as regards measures aff ec ng the import of live pigs, pork and pork products from the EU. The Eurasian Economic Commission started an an dumping inves ga on into deliveries of oil and gas steel pipes from China to markets of member-states of the Customs Union.

have emerged. So, the 2014 forecast as regards Russia was adjusted to 1.3% though as early as last autumn the IMF es mated Russia’s GDP growth rates at the level of 3%. The factor behind downward revision of the forecast was geopoli cal tensions in rela ons with Ukraine.

In February 2014, the Russian foreign trade turn-over calculated on the basis of the methods of the balance of payments amounted to $60.6bn which is 11.3% lower than the 2013 index. Such a drama c drop in Russia’s foreign trade turnover was not ob-served from October 2009. It is to be noted that there was a substan al drop in the monetary volume of both export (by 12.7% as compared to the respec ve index of 2013) and import ( 9.4%). In February 2014, as a re-sult of advanced decrease in export the trade balance surplus amounted to $12.4bn which is 18.9% lower than the respec ve index of the previous year.

In February 2014, prices on virtually all the com-modi es of the Russian export decreased on global markets as compared to February 2013.

In February 2014, prices on Brent oil fell by 6.6% to $108.8 a barrel as compared to February 2013. On February 3, the price fell to the month’s minimum le-vel of $106.55 a barrel due to China’s weak industrial indices in January 2014. China’s output growth slowed

0

10

20

30

40

50

60

Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

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 USD)


20

down to the minimum growth rates for six months due to weakening of both foreign and domes c demand. On February 19, prices on Brent oil appreciated to the maximum level of $ 110.37 a barrel due to geopoli cal risks related to hos li es in Libya and South Sudan, as well as protest rallies in Venezuela.

Late in February and early in March, another spot of tensions – Ukraine – emerged. A er the President of the Russian Federa on received on March 3, 2014 a permit from the Council of Federa on to use troops in Ukraine, prices on Brent oil rose to the level of $111.26 a barrel which was the maximum one in the 1st quarter of 2014. However, on March 4 Brent oil prices depreci-ated to $109.26 a barrel. Oil prices kept falling due to a release of the weak economic data on China and a seasonal drop in oil consump on.

Early in April 2014, rebels who controlled for eight months oil seaports in the east of Libya agreed to li a blockade of terminals. That news resulted in a drop in Brent oil prices to a fi ve-month minimum ($103.37 a barrel) on April 2. Probably, in the near future Brent oil will be traded in a broad range of $103 a barrel to $113 a barrel under the impact of geopoli cal risks on the one side and expecta ons of growth in oil deliver-ies from Libya, Iran and Iraq, on the other side.

In February 2014, prices on Urals oil fell by 6.1% as compared to February 2013 and amounted to $107.4 a barrel. Within the fi rst two months of 2014, prices on Urals oil fell by 5.5% to $106.9 a barrel as compared to the respec ve period of 2013.

According to the oil price monitoring, in the period of from March 15, 2014 ll April 14, 2014 the average Urals oil price amounted to $770.5 a ton. According to the informa on of April 16, 2014 of the Ministry of Economic Development of the Russian Federa- on on Possible Customs Du es on Oil and Individual

Categ ories of Goods Produced out of Oil in the Pe-riod of from May 1 ll May 31, 2014, in May the rate

of duty on crude oil will be reduced to $376.1 a ton against $387 a ton which was in eff ect a month ear-lier. A privileged rate is being reduced from $190.8 a ton to $182.4 a ton. The rate on superviscous oil will amount to $37.6 (against $38.7 in April). The rate on light and medium dis llates will be reduced from $255.4 a ton to $248.2 a ton. In May, the duty on the export of petrol will amount to $338.4 a ton ($348.3 a ton in April).

In February 2014, prices on aluminum, copper and nickel fell by 17.5%, 11.3% and 19.7%, respec vely, as compared to February 2013.

Under the impact of weather factors and higher demand, in February 2014 the FAO food price index showed the sharpest swing ever since the mid-2012: its average value amounted to 208.1 points which is 5.5 points higher than in the previous month. Such growth in index was jus fi ed by growth in prices of all the groups of primary commodi es on which basis the Index is formed; the excep on is meat which prices fell somewhat. From the day of publica on of the index for the previous month, the highest growth in prices was on sugar (+6.2%), oils (+4.9%), grain (+3.6%) and dairy products (+2.9%).

In February 2014, a reduc on of the Russian export as compared to February 2013 took place over the main posi ons of the expanded commodity nomencla-ture. There was a decrease in export of fuel and energy complex (14.5%), the chemical industry (10%), metals and metal products (16.7%) and machines, equipment and transporta on vehicles (28.4%). There was growth in export of food (35.6%), wood and pulp and paper products (15.2%), tex le and tex le products (39.8%) and precious stones and metals (43.7%).

There was a decrease in import purchases by all the posi ons of the expanded commodity nomencla-ture, except for food products and agricultural primary products whose import rose by 0.3%.

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

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Oil (Brent), USD/barrel 30.9 44.8 59.7 58.26 92.66 43.87 73.8 104.1 119.7 116.5 108.81

Natural gas*, USD/1m BTU 3.89 5.49 7.95 8.56 10.84 11.04 8.8 9.36 11.12 11.77 11.3

Copper, USD/ton 2759.0 3254 4982 5671.1 7887.7 3314.7 6899 9867.6 8441.5 8060.9 7149.2

Aluminum, USD/ton 1685.6 1883 2455 2759.14 2776.9 1330.2 2061 2508.2 2207.9 2053.6 1695.2

Nickel, USD/ton 15178.3 15350 14979 41154.5 27955.5 10409 19141 28252 20393.7 17690 14203.6

* The market of Europe, average contractual price, Franco-border.Source: calculated on the basis of the data of the London Metal Exchange (London, the UK) and the Intercon nental Oil Exchange

(London).

THE FOREIGN TRADE IN FEBRUARY 2014

21

On April 8, 2014, the European Union submi ed to the Secretariat of the World Trade Organiza on a query as regards consulta ons with the Russian Fe-dera on on measures aff ec ng the import of live pigs, pork and pork products from the EU.

It is to be reminded that the ban on import to the territory of the Russian Federa on of hog farming products from all the EU countries was introduced on January 30, 2014 due to the outbreak of African pig plague (APP) in the territory of the EU. From April 7, 2014, the ban on all the types of ready-made meat products from Poland and Lithuania became eff ec ve.

Such a ban has produced a serious impact the fi nan-cial posi on of the European hog farming. According to the data of the European Commission, in 2013 the volume of the export of live pigs and pork from the Eu-ropean Union to Russia amounted to euro 1.4bn. The Russian ban has resulted in a drama c surplus produc- on in Europe with oversupply on the market and de-

precia on of prices on pork. The EU believes that the complete ban on the export of pork from the EU to Russia is in confl ict with the WTO’s rules and a dispro-por onate one.

According to the WTO’s rules, par cipants in the dispute have 60 days for consulta ons on amicable se lement of the issue. If they fail to reach a consen-sus, the plain ff is given the right to ask for forma on of a special expert group on se lement of the dispute within the frameworks of the WTO.

At present, the WTO has received the EU’s claim to Russia as regards payment of the u liza on charge.

On March 31, 2014, the Eurasian Economic Com-mission (EEC) published the No fi ca on on the Start of An dumping Inves ga on into Supply of Oil and Gas Steel Pipes from China to the Territory of Member-States of the Customs Union (CU)1. The peak of import of Chinese oil and gas pipes to member-states of the CU fell on January-September 2013 when deliveries from China increased by 156% as compared to the re-spec ve period of 2012, while the share of the Chinese produce in the import virtually doubled and amounted to 55.4% against 28.2% in 2010. The main Chinese im-porters of oil and gas pipes to the CU member-states are TPCO company and Hengyang Valin company which – by calcula ons of the EEC – supplied products at the dumping margin of 20% and 22%, respec vely. In 2013, the above companies sold pipes to the EU member-states at prices which were 24.5% lower than the 2012 level which situa on, according to claimants, “resulted in aggrava on of price compe on”. Russian manufacturers’ cost-eff ec veness of sales of oil and gas pipes virtually decreased by threefold, while their profi t, by 62.8%.

The evidence provided by the claimants cons tuted grounds for passing of a decision on the start of an an- dumping inves ga on into supply of Chinese-made

seamless steel pipes (used in drilling and opera on of oil and gas wells) which are imported into the territory of the Customs Union.

1 h p://www.eurasiancommission.org/ru/act/trade/podm/no- ce/Lists/List/A achments/50/no ce_ini a on_octg.pdf


22

THE STATE BUDGET IN JANUARY MARCH 2014T.Tischenko

The Analysis of the Main Parameters of Execu on of the Federal Budget in the 1st Quarter of 2014In the 1st quarter of 2014, federal budget revenues

amounted to Rb 3,520.8bn or 21.6% of GDP which is 0.8 p.p. of GDP higher than the level of the respec ve period of the previous year (Table 1). The oil and gas revenues rose by 1.1 p.p. of GDP as compared to three months of 2013. In January–March 2014, budget ex-penditures amounted to Rb 3,410.8bn (20.9% of GDP), which is 0.4 p.p. of GDP lower than the level of expen-ditures for the same period of the previous year.

On the basis of three months of 2014, the federal budg-et surplus amounted to Rb 110.1bn (0.7% of GDP) which is 1.1 p.p. of GDP higher than the level of defi cit of the 1st quarter of the previous year when the federal budget was executed with a defi cit of 0.4% of GDP. On the basis of the results of January–March 2014, the oil and gas defi cit did not change as compared to the same period of the pre-vious year and amounted to 10.5% of GDP.

According to the data of the Federal Treasury, in January–March 2014 the federal budget revenues increased by 0.8 p.p. of GDP as compared to the same period of the previous year on account of growth of 1.1 p.p. of GDP in oil and gas revenues due to deprecia on of the ruble exchange rate against the US dollar. In the 1st quarter of 2014, federal budget expenditures fell by 0.4 p.p. of GDP as compared to the 1st quarter of 2013 and on the basis of the results of January-March 2014 the federal budget was executed with a surplus of 0.7% of GDP. However, the eff ect of unfavorable foreign poli cal and economic factors is ge ng stronger which situa on creates addi- onal risks for stability of the budget system of the Russian Federa on and may require adjustment of the main

parameters of the federal budget in the second half of 2014.

In the 1st quarter of 2014, profi t tax revenues to the revenues side of the federal budget remained at the level of January-March 2013, that is, 0.5% of GDP (Tab le 2). As regards other items of tax and non-tax re-venues, in the 1st quarter of 2014 growth in revenues in frac ons of GDP against three months of the previ-ous year was registered from domes c VAT (0.2 p.p. of GDP), domes c excises and import excises (0.1 p.p. of GDP and 0.01 p.p. of GDP, respec vely), severance tax (0.2 p.p. of GDP) and foreign economic ac vi es (0.6 p.p. of GDP). In January–March 2014, federal budget revenues from import VAT fell by 0.2 p.p. of GDP as compared to the same period of the previous year.

It is to be noted that in the 1st quarter of 2014 as com-pared to January–March 2013 a decrease in expendi-tures in frac ons of GDP was observed over 5 sec ons out of 14 sec ons (Table 3), including: Housing and U li es (a decrease of 0.14 p.p. of GDP), Educa on

Table 1THE MAIN PARAMETERS OF THE FEDERAL BUDGET OF THE RUSSIAN FEDERATION IN JANUARY MARCH

2013 2014

January–March 2014 January–March 2013 Devia ons, p.p. of GDPBillion Rb % GDP Billion Rb % GDP

Revenues, including:

3520.8 21.6 3105.6 20.8 0.8

Oil and gas revenues 1826.7 11.2 1508.2 10.1 1.1Expenditures,including:

3410.8 20.9 3167.8 21.3 -0.4

interest expenditures 132.9 0.8 120.4 0.8 0.0non-interest expenditures 3277.9 20.1 3047.4 20.5 0.4

Surplus (Defi cit) of the federal budget 110.1 0.7 -62.2 -0.4 1.1Non oil and gas defi cit -1716.6 10.5 -1570.4 10.5 0.0GDP es mate 16284 14 889

Source: The Ministry of Finance of the Russian Federa on, the Federal Treasury of the Russian Federa on and calcula ons of the Gaidar Ins tute.

THE STATE BUDGET IN JANUARY–MARCH 2014

23

(0.4 p.p. of GDP), Healthcare (0.2 p.p. of GDP), Social Policy (1.8 p.p. of GDP) and Physical Training and Sport (0.04 p.p. of GDP).

In the 1st quarter of 2014 as compared to the same period of the previous year, in the Social Policy sec- on the largest reduc on of federal budget expendi-

tures took place in the Pension Security item (1.4 p.p. of GDP) and the Social Security item (0.4 p.p. of GDP).

On the basis of the results of the 1st quarter of 2014, growth in federal budget revenues in frac ons of GDP against January–March 2013 took place in four sec- ons: Federal Issues (growth of 0.3 p.p. of GDP), Na- onal Defense (1.6 p.p. of GDP), Na onal Security and

Law Enforcement (0.1 p.p. of GDP) and Culture and Cinema (0.02 p.p. of GDP). As regards the Na onal De-

fense sec on, in the 1st quarter of 2014 expenditures on the item – the Armed Forces of the Russian Federa- on – increased considerably (1.4 p.p. of GDP) against

January–March 2013. In the 1st quarter of 2014, as regards other sec ons

federal budget expenditures remained at the level of January–March 2013. It is to be noted that despite the fact that expenditures related to servicing of the public debt in frac ons of GDP remained on the basis of the results of three months of 2014 at the level of Janu-ary–March 2013 in the volume of 0.8% of GDP, growth rates of cash execu on in respect of that item at the level of 31.1% exceeded somewhat the rates of deve-lopment of the expenditure side of the federal budget, that is, 24.4% of the approved volumes of expenditures

Table 2 MAIN TAX REVENUES TO THE FEDERAL BUDGET IN JANUARY MARCH 2013 2014

January–March 2014 January–March 2013 Devia on, p.p. of GDPBillion Rb % GDP Billion Rb % GDP

1. Tax revenues, including:Corporate profi t tax 81.7 0.5 73.7 0.5 0.0VAT on goods sold in the territory of the Russian Federa on

565.5 3.5 495.1 3.3 0.2

VAT on goods imported to the Russian Federa on 376.9 2.3 369.3 2.5 -0.2Excises on goods manufactured in the Russian Federa on

125.4 0.8 100.8 0.7 0.1

Excises on goods imported to the Russian Federa on 14.8 0.09 11.9 0.08 0.01Severance tax 713.2 4.4 623.4 4.2 0.2

2. Revenues from foreign economic ac vi es 1309.0 8.0 1108.5 7.4 0.6Source: The Ministry of Finance of the Russian Federa on, the Rosstat and calcula ons of the Gaidar Ins tute.

Table 3FEDERAL BUDGET EXPENDITURES IN JANUARY MARCH 2013 2014

January–March 2014 January–March 2013 Devia on, p.p. of GDPBillion Rb % of GDP Billion Rb % of GDP

Total expenditures 3410.8 20.9 3167.8 21.3 -0.4including

Federal issues 223.2 1.4 161.2 1.1 0.3Na onal defense 1019.3 6.2 689.3 4.6 1.6Na onal security and law-enforcement 438.1 2.7 383.5 2.6 0.1Na onal economy 355.9 2.2 334.7 2.2 0.0Housing and u li es 30.5 0.2 8.9 0.06 -0.14Protec on of environment 5.0 0.03 5.0 0.03 0.0Educa on 135.5 0.8 178.8 1.2 -0.4Culture and cinema 18.1 0.1 11.6 0.08 0.02Healthcare 112.5 0.7 142.1 0.9 -0.2Social policy 729.3 4.5 936.7 6.3 -1.8Physical training and sport 6.6 0.04 11.9 0.08 -0.04Mass media 17.4 0.1 15.5 0.1 0.0Servicing of state and municipal debts 132.9 0.8 120.4 0.8 0.0Intergovernmental transfers 186.6 1.1 168.1 1.1 0.0Source: The Ministry of Finance of the Russian Federa on, the Federal Treasury of the Russian Federa on and calcula ons of the

Gaidar Ins tute.


24

in 2014. Such a situa on jus fi ed by growth in the ex-change rate of a bi-currency basket against the ruble may result in an upwards adjustment of the approved volume of annual budget alloca ons in respect of the Servicing of the Public and Municipal Debts sec on.

For three months of 2014, as of April 1, 2014, the ag-gregate volume of funds of the Reserve Fund and the Na onal Welfare Fund in the ruble equivalent rose on ac-count of the exchange rate diff erence as a result of reval-ua on by Rb 261.6bn and Rb 221.9bn, respec vely and amounted to Rb 3,121.3bn and 3,122.5bn, respec vely.

Nega ve trends in the Russian economy which pre-vailed from the second half of 20121 and the growing pressure of economic sanc ons made it topical to re-vise income forecasts, prospects to increase expendi-tures and the defi cit of the federal budget and expedi-ence of adjustment of the budget rules.

According to the es mate of the Ministry of Fi n-ance of the Russian Federa on2, on the basis of the re-sults of 2014 federal budget revenues will be Rb 100bn short of the planned ones despite the fact that the volume of addi onal oil and gas revenues from depre-cia on of the ruble exchange rate are es mated at Rb 900bn. So, in 2014 the federal budget may receive over Rb 1 trillion less than it is due, including Rb 234bn and Rb 250 bn on foreign loans and domes c loans, respec- vely, for fi nancing the defi cit of the federal budget and

Rb 180bn from priva za on, as well as dividend income. As regards expenditures, the Ministry of Economic

Development of the Russian Federa on believes that the ideology of the budget rule permits to spend ad-di onal oil and gas revenues on infrastructure projects to ensure economic growth as they have nothing to do with market movement. However, according to the Ministry of Finance of the Russian Federa on the as-sessment of the Ministry of Economic Development of the Russian Federa on of the posi ve eff ect of addi- onal expenditures of the RF budget on the economic

growth rates is largely overes mated3 and in order to

1 The Ministry of Finance of the Russian Federa on believes that in the second half of 2014 the economy of the Russian Fed-era on may enter a technical recession when for two quarters run-ning GDP cleared of a seasonal factor decreases. It is to be noted that in the 2nd quarter and the 2rd quarter year on year growth in GDP of the Russian Federa on slowed down vir-tually to the zero level and it is not excluded that it may enter the nega ve area.2 Here and to the end of the sec on – source: h p://www.min-fi n.ru/ru/press/speech/index.php?id_4=215353 The Ministry of Economic Development of the Russian Fed-era on means growth of 0.5% a year in the defi cit with aggregate growth of 2% of GDP in the volume of expenditures within four years which situa on permits to increase GDP by 4.4% within the same period. The Ministry of Finance of the Russian Federa on be-lieves that the assessment of economic growth is overes mated, par cularly, in the mid-term and long-term prospects.

ensure stable economic growth rates the defi cit is to be increased every subsequent year by the same val-ue, that is, 0.5% of GDP.

So, the posi ons of the fi nancial agency and economic agency as regards a feasibility to increase expenditures and the defi cit of the federal budget are diff erent. De-spite the fact that in mid-April 2014 V. Pu n, President of the Russian Federa on called not to hurry with amend-ment of the budget rule4 and to take into account global and domes c economic risks, it can be expected that in the second half of the year, the debates on feasibility of relaxa on of the budget rule may renew.

Execu on of the Consolidated Budget of Cons tuent En es of the Russian Federa on in January–February 2014According to the data of the Federal Treasury, in

January–February 2014 the revenues of the consoli-dated budget of cons tuent en es of the Russian Fe dera on amounted to Rb 863.1bn or 8.2% of GDP which is 1.4 p.p. of GDP lower than the value in the same period of 2013 (Table 4).

Within two months of 2014, expenditures of the consolidated budget of cons tuent en es of the Rus-sian Federa on decreased by 0.2 p.p. of GDP as com-pared to the same period of the previous year and amounted to 9.6% of GDP or Rb 1,010.4bn. On the basis of the results of January–February 2014, budgets of cons tuent en es of the Russian Federa on were executed with a defi cit in the amount of Rb 147.3bn or 1.4 % of GDP which is 1.2 p.p. of GDP lower than the level of the respec ve period of the previous year.

Within two months of 2014, the main decrease of 1.0 p.p. of GDP in the revenues to consolidated budg-ets of cons tuent en es of the Russian Federa on took place in the Return of Balances of Subsidies, Sub-ven ons and Other Inter-Budgetary Transfers item against the respec ve period of 2013. In January–Feb-ruary 2014, tax revenues decreased inconsiderably in-cluding those from individual income tax (0.1 p.p. of GDP), domes c excises (0.1 p.p. of GDP) and aggregate income tax (0.1 p.p. of GDP) as compared to the fi rst two months of 2013. In January–February 2014, as re-gards other tax and non-tax re venues of the consoli-dated budget of the Russian Federa on the volume of revenues in frac ons of GDP remained at the level of the respec ve period of the previous year.

On the basis of the results of two months of 2014, expenditures of the consolidated budget of cons tu-ent en es of the Russian Federa on (Table 5) de-creased against the respec ve period of 2013 only in respect of the following two sec ons – Na onal Defense (0.001 p.p. of GDP) and Na onal Economy

4 h p://www.rbcdaily.ru/

THE STATE BUDGET IN JANUARY–MARCH 2014

25

(0.2 p.p. of GDP) – and increased by 0.02 p.p. of GDP in respect of the Mass Media sec on. On the basis of the results of two months of 2014, as regards most sec ons expenditures of budgets of cons tuent en - es of the Russian Federa on in frac ons of GDP re-

mained at the level of the respec ve period of 2013.

In March 2014, the volume of the state debt of con-s tuent en es of the Russian Federa on increased by Rb 13.4bn and as of April 1, 2014 amounted to Rb 1,754.0bn or 22.8% of the forecasted annual vo-lume of the revenues of the consolidated budget of cons tuent en es of the Russian Federa on.

Table 4THE MAIN PARAMETERS OF THE CONSOLIDATED BUDGET OF CONSTITUENT ENTITIES

OF THE RUSSIAN FEDERATION IN JANUARY FEBRUARY 2013 2014

January–February 2014 January–February 2013 Devia on p.p. of GDPBillion Rb % of GDP Billion Rb % of GDP

Revenues, including:

863.1 8.2 907.4 9.6 -1.4

corporate profi t tax 176.2 1.7 161.9 1.7 0.0individual income tax 335.8 3.2 313.5 3.3 -0.1domes c excises 75.4 0.7 74.4 0.8 -0.1aggregate income tax 35.8 0.3 37.9 0.4 -0.1property tax 64.1 0.6 60.2 0.6 0.0revenues from u liza on of property which is in state and municipal ownership

32.7 0.3 31.5 0.3 0.0

non-repayable revenues from other budgets of the budgetary system of the Russian Federa on

263.8 2.5 240.2 2.5 0.0

repayment of balances of subsidies, subven ons and other purpose inter-budgetary transfers of previous years

-188.7 -1.8 -74.4 -0.8 -1.0

Expenditures, including: 1010.4 9.6 923.7 9.8 -0.2Surplus (defi cit) of the consolidated budget of cons tuent en es

-147.3 -1.4 -16.3 -0.2 -1.2

GDP es mate 10503 9466Source: The Federal Treasury and calcula ons of the Gaidar Ins tute.

Table 5EXECUTION OF THE CONSOLIDATED BUDGET OF CONSTITUENT ENTITIES OF THE RUSSIAN FEDERATION

ON THE EXPENDITURE SIDE IN JANUARY FEBRUARY 2013 2014

January–February 2014 January–February 2013 Devia on, p.p. of GDPBillion Rb % of GDP Billion Rb % of GDP

Total expenditures, 1010.4 9.6 923.7 9.8 -0.2includingFederal issues 65.4 0.6 58.5 0.6 0.0Na onal defense 0.2 0.002 0.3 0.003 -0.001Na onal security and law-enforcement 9.9 0.09 8.2 0.09 0.0Na onal economy 123.5 1.2 131.4 1.4 -0.2Housing and u li es 74.1 0.7 63.3 0.7 0.0Protec on of environment 1.9 0.02 2.0 0.02 0.0Educa on 312.7 3.0 283.0 3.0 0.0Culture and cinema 36.9 0.3 33.4 0.3 0.0Healthcare 163.6 1.6 151.6 1.6 0.0Social policy 183.8 1.7 163.1 1.7 0.0Physical training and sport 18.4 0.2 16.1 0.2 0.0Mass media 5.1 0.05 3.1 0.03 0.02Servicing of state and municipal debts 14.8 0.1 9.5 0.1 0.0Intergovernmental transfers 0.06 0.0006 0.2 0.002 -0.0014

Source: The Federal Treasury and calcula ons of the Gaidar Ins tute.


26

RUSSIAN BANKS IN Q1 2014M.Khromov

More banks had their banking license revoked in March 2014. Forty banking licenses were revoked in the period of July 2013 thru February 2014, 5 licenses per month, 6 licenses were revoked in December 2013 and January 2014 each. In March 2014, 11 credit ins -tu ons lost their license, nine of which saw revoca on of their retail services license. In March 2014, assets of a license-revoked bank totaled a bit less than Rb 7bn while retail accounts and deposits totaled Rb 3,8bn. As of March 1, 2014, the assets of such banks totaled Rb 75,5bn or 0.13% of the banking sector’s total assets while their retail accounts and deposits totaled Rb 34bn or 0.2% of the total bank retail accounts and deposits. The State Agency for Deposit Insurance is to compen-sate Rb 29bn of retail deposits in these banks, i.e. more than 85% of the retail accounts and deposits held in the banks whose license was revoked in March 2014 are to be reimbursed from the deposit insurance fund. A total of 900 credit ins tu ons including 841 banks remained in business in Russia as of April 1, 2014.

The banking sector’s total assets increased 0.8%1 in March 2014 and 1.3% in Q1 2014, annual growth rates reached 15.5% (14.2% at 2013 year end).

The banking sector’s profi t dropped to Rb 64bn in March 2014, the lowest value in 2014 and much lower than the monthly average profi t in 2013 (Rb 83bn). Therefore, in March, the return on assets fell to 1.3% p.a., reaching a total 1.6% p.a. (1.9% in 2013) in Q1 2014. The return on banking sector’s equity stood at 11.9% p.a. in March and 14.7% p.a. in Q1 2014 rela- ve to a total of 16.8% in 2013.

Fundraising2 March 2014 saw a decline in retail accounts and

deposits in banks for the fi rst me since the fall of 2008 (exclusive of seasonal setbacks in January). They fell 1.7% or Rb 279bn during the month. In Q1 2014,

1 Hereina er, growth rates in balance-sheet indicators are pre-sented with adjustment for revalua on in foreign currency but with no adjustment for banks with revoked banking license, unless otherwise indicated. 2 Calculated according to balance-sheet accounts (form No. 101).

bank retail accounts and deposits lost a total of 4% or Rb 683bn. Annual growth rates in retail accounts and deposits denominated in foreign exchange fell to 9.3%, reaching the bo om line since the fall of 2009.

Ruble-denominated retail accounts contracted 2.2% during the month, whereas retail accounts denominat-ed in foreign exchange increased merely 0.4% in dollar terms. The share of retail accounts and deposits de-nominated in foreign exchange reached 20.4%, far less than the value recorded early in 2009 (33.6%). How-ever, the total amount of retail accounts and deposits denominated in foreign exchange in Russian hit a new record of $94,8bn rela ve to just $67,6bn, the highest in 2009.

Substan al ou low of retail deposits from the banking sector in Q1 2014 forced banks to increase their liability to the regulators – the Central Bank of Russia and the Ministry of Finance – reaching record values. The quality of the retail credit por olio keeps deteriora ng while the banking business facing decline in profi tability.

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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)

4950515253545556

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

Fig. 2. Dynamics of equity in state-run banks and other banks1 (trillions of rubles), and the share of state-

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

RUSSIAN BANKS IN Q1 2014

27

All the key groups of banks were aff ected by retail cash ou low in March 2014. Small and medium-sized banks and large private banks were hit most, 3.3% and 3.5% respec vely. Sberbank saw the slowest re-tail cash ou low of just 0.5%. Therefore, the share of state-run banks bounced back to the level recorded early in the year, accoun ng for 60.7% of the total re-tail bank deposits.

In March 2014, banks lost 0.4% of corporate ac-counts and deposits as ruble accounts and deposits kept being converted into foreign exchange. For exam-ple, ruble-denominated corporate accounts and de-posits contracted 2.2%, whereas those denominated in foreign exchange increased 4.9% in dollar terms, reaching a historical highest value of $106,6bn.

While the share of fi xed-term corporate deposits remained more than 50%, it declined from 54.9% to 51.3% rela ve to the beginning of the year. This was caused by an ongoing trend towards conver ng ruble-denominated fi xed-term deposits, which lost 10.7% (Rb 584bn) since the beginning of the year, into cur-rent accounts denominated in foreign exchange which increased 67.8% ($13,3bn) over the fi rst three months

of the year. Fixed-term deposits denominated in for-eign exchange saw a much more moderate increase of 18.6% ($5,1bn).

In March 2014, banks raised by Rb 820bn their debt to the monetary authori es including the Ministry of Finance of Russia (Rb 85bn) and the Bank of Russia (Rb 735bn). Banks owed more than Rb 5,1 trillion to the Bank of Russia and the Ministry of Finance, includ-

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

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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

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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)

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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 03.13 06.13 09.13 12.13 01.14 2.14 3.14Liabili es, billions of rubles 28022 29430 33805 41628 49510 49839 52744 54348 57423 58445 59137 59377Equity 14,1 19,3 18,7 16,9 16,2 16,7 16,3 16,5 16,0 16,1 16,0 16,0Loans from the Bank of Russia 12,0 4,8 1,0 2,9 5,4 4,5 4,4 5,8 7,7 7,4 6,7 7,9Interbank opera ons 4,4 4,8 5,5 5,7 5,6 5,4 5,2 5,1 5,1 5,2 5,0 4,7Foreign liabili es 16,4 12,1 11,8 11,1 10,8 10,4 10,8 10,1 9,9 10,3 10,7 10,6Retail accounts and deposits 21,5 25,9 29,6 29,1 28,9 29,6 29,6 29,3 29,4 28,7 28,5 27,8Corporate accounts and deposits 23,6 25,9 25,7 26,0 24 23,9 23,5 22,9 23,8 24,1 24.2 23,9

Accounts and deposits of government agencies and local government authori es

1,0 1,0 1,5 2,3 1,6 1,4 2,4 2,9 0,9 1,4 1,6 1,8

Outstanding securi es 4,1 4,1 4,0 3,7 4,9 5,2 5,1 4,7 4,5 4,5 4,2 4,2Source: Central Bank of Russia, Gaidar Ins tute’s es mates.


28

ing Rb 4,7 trillion owed to the Bank of Russia. Both in-dicators hit their historical highest as of 01.04.2014.

Monetary authori es’ funds reached 8.6% in total liabili es, of which 7.9% is owed to the Bank of Russia. It is state-run banks that are responsible for a major part of the debt owed to the Bank of Russia, account-ing for 70.7% of the total volume of refi nancing of the banking sector.

Loans issued The debt on retail bank loans increased 1.4%

(Rb 148bn) in March 2014, annual growth rates slowed down to 25.2%. The quality of the retail credit por o-lio remained unchanged in March 2014. The share of overdue debt remained at 4.9% of the total debt, while the ra o of loan loss provisions to total debt increased 0.1 p. p., reaching 8.0%. Therefore, March 2014 saw a slowdown in the deteriora on of the quality of retail loans. The share of overdue debt was the same as in the mid-2012 while the provisions-to-loans ra o was similar to that recorded at the end of 2011.

The corporate credit por olio gained 1.4% (Rb 298bn) in March 2014. Annual growth rates stood at 12.7%. The quality of corporate loans also remained unchanged. The share of overdue debt accounted for 4.2% of the total debt while the ra o of built up loan loss provisions to to-tal loan debt declined by 0.1 p. p., staying at 6.8%.

4748495051525354

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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)

55,056,057,058,059,060,0

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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 03.13 06.13 09.13 12.13 01.14 2.14 3.14Assets, billions of rubles 28022 29430 33805 41628 49510 49839 52744 54348 57423 58445 59137 59377Cash and precious metals 3,0 2,7 2,7 2,9 3,1 2,5 2,4 2,3 2,8 2,3 2,2 2,8Deposits with the Bank of Russia 7,5 6,9 7,1 4,2 4,4 3,3 3,3 3,5 3,9 3,0 2,7 3,5Interbank opera ons 5,2 5,4 6,5 6,4 6,8 6,4 6,0 5,8 5,7 6,1 5,8 5,3Foreign assets 13,8 14,1 13,4 14,3 13,0 14,5 15,1 13,6 13,3 14,7 15,5 14,4Retail sector 15,5 13,1 13,0 14,4 16,8 17,4 17,9 18,5 18,5 18,4 18,2 18,4Corporate sector 44,5 44,5 43,6 44,0 41,3 41,9 40,8 41,2 39,3 40,0 39,8 39,6State 2,0 4,2 5,1 5,0 3,2 3,2 3,2 2,9 3,1 3,3 3,7 3,0Property 1,9 2,7 2,6 2,3 2,2 2,2 2,2 2,1 2,0 2,0 1,9 1,9

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

MORTGAGE IN THE RUSSIAN FEDERATION IN JANUARY–FEBRUARY 2014

29

MORTGAGE IN THE RUSSIAN FEDERATION IN JANUARY FEBRUARY 2014G.Zadonsky

According to the data of the Central Bank of the Russian Federa on, in January–February 2014 123,913 housing loans (HL) were extended, including Rb 198,175bn worth of 117,797 MHL and Rb 6,554bn worth of 6,116 unsecured housing loans (UHL). The vol-ume of MHL extended in January-February 2014 exceed-ed by 40.26% and 49.0% the indices of January–Febru-ary 2013 as regards the number of loans and in money terms, respec vely. In February 2014, Rb 118,891bn worth of 70,078 MHL and Rb 4,034bn worth of 3,403 UHL were extended. As of March 1, 2014, Rb 197,194 worth of 117,656 MHL in rubles and Rb 0,981b worth of 141 MHL in foreign currency were extended (Fig. 1 and Fig. 2). The volume of MHL extended in February 2014 exceeded by 39.28% and 47.22% the volume of February 2013 as regards the number of loans and in money terms, respec vely. As of March 1, 2014, the outstanding debt on MHL amounted to Rb 2,745.72bn which is 33.73% higher than the respec ve debt as of March 1, 2013. As of March 1, 2014, the debt on MHL in rubles amounted to Rb 2627,747bn, having exceeded by 3.58% the value of the debt as of January 1, 2014 (Fig.1), while the debt on MHL in foreign currency in-creased within the same period by 5.34% and amount-ed to Rb 117,973bn (Fig.2).

As of March 1, 2014, the overdue debt on MHL (Rb 41,115bn) as percentage of the outstanding debt decreased by 0.55 p.p. and amounted 1.5%, while that on UHL (Rb 3,498bn) as percentage of the outstanding debt on UHL, to 3.04%. As of March 1, 2014, the over-due debt on MHL in rubles amounted to Rb 25,852bn (Fig. 1), which is 1.61% higher than the index as of January 1, 2014 (Rb 25,443bn). The share of the over-due debt in the outstanding debt has kept steadily de-creasing within a year and amounted to 0.98% as of March 1, 2014 which is 0.47 p.p. lower than the index of March 1, 2013. As of March 1, 2014, the overdue

In January-February 2014, Rb 198.175bn worth of 17,797 mortgage housing loans (MHL) were extended which is 1.4 mes and 1.5 mes more as regards the number of loans and in money terms, respec vely, as compared to the indices of January-February 2013. As of March 1, 2014, the outstanding debt on MHL amounted to Rb 2,746 tril-lion which is 33.73% more than the respec ve debt as of March 1, 2013. Throughout 2013, the overdue debt as percentage of the outstanding debt on MHL in rubles kept falling and as of March 1, 2014 amounted to 0.98%, while that on MHL in foreign currency rose and as of March 1, 2014 amounted to 12.94%. The debt on MHL with payments overdue for over 180 days decreases as well and amounted to 1.77% of the total debt as of March 1, 2014. The weighted average rate for a month on loans extended from the beginning of the year amounted to 12.3% as of March 1, 2014 against 12.4% for the en re 2013.

03006009001 2001 5001 8002 1002 4002 700

020406080

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2012 г. 2013 г. 2014 г.

Debt

, bln

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.

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rub.

The volume of MHL extended within a month, left-hand axis, billion RbThe overdue debt on MHL, left-hand axis, billion RbThe debt on MHL, right-hand axis, billion Rb

Source: the data of the Central Bank of the Russian Federa on Fig. 1. Dynamics of extension and debt on MHL in rubles.

020406080100120140160

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2012 г. 2013 г. 2014 г.

Debt

, bln

. rub

.

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The volume of MHL extended within a month, left-hand axis, billion RbThe overdue debt on MHL, left-hand axis, billion RbThe debt on MHL, right-hand axis, billion Rb

Source: the data of the Central bank of the Russian Federa on. Fig. 2. Dynamics of extension and debt

on MHL in foreign currency


30

debt on MHL in foreign currency increased by 7.43% as compared to January 1, 2014 and amounted to Rb 15,263bn (Fig. 2), while its share in the outstand-ing debt on mortgage loans in foreign currency in-creased by 1.27 p.p. as of March 1, 2014 as compared to March 1, 2013 and amounted to 12.94%.

According to the data of the Central Bank of the Rus-sian Federa on, as of March 1, 2014 the volume of the debt on defaulted MHL (with payments overdue for over 180 days) amounted to Rb 48,599bn which is 3.07% and 6.62% higher than that as of January 1, 2014 and March 1, 2013, respec vely. The share of the defaulted debt in the total debt on MHL kept steadily decreas-ing within a year and fell by 0.45 p.p. to 1.77% against March 1, 2013 (Table 1). Along with that, as of March 1, 2004 the share of the debt without overdue payments decreased by 0.86 p.p. against January 1, 2014.

In January–February 2014, the monthly weighted av-erage interest rate on MHL in rubles was the same and amounted to 12.3%, while in 2013 the weighted average rate on loans in foreign currency amounted to 12.4%. As of March 1, 2014, the weighted average rate on loans

Table 1GROUPING OF THE DEBT ON MORTGAGE HOUSING LOANS BY THE PERIOD OF DELAY IN PAYMENTS IN 2014

The total amount of the debt on MHL,

million Rb.

Including

Without overdue payments

With payments overdue from 1 day to 90 days

With payments overdue from 91

to 180 days

With payments overdue for over

180 daysMillion Rb % Million Rb % Million Rb % Million Rb %

01 Jan. 2648859 2544229 96.05 50593 1.91 6887 0.26 47150 1.7801 Feb. 2682169 2558789 95.40 67591 2.52 7778 0.29 48011 1.7901 Mar. 2745720 2613651 95.19 75507 2.75 7963 0.29 48599 1.77

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

in foreign currency extended from the beginning of the year amounted to 9.3% against 9.8% and 9.6% as of February 1, 2014 and in 2013, respec vely. According to the data of the Central Bank of the Russian Federa- on, in January 2014 the weighted average rate on ru-

ble loans refi nanced by AHML amounted to 10.92% (the data on the products: Standard, Novostroika, Molodye Uchitelya (Young Teachers), Molodye Uchitelya – Stan-dard (Young Teachers – Standard), Molodye Uchenye (Young Scien sts) and Voennaya Ipoteka (Military Mort-gage) against 12.3%.

According to the data of the Central Bank of the Russian Federa on, in February 2014 the weighted average period of lending as regards ruble MHL ex-tended within a month rose to 15.5 years with the average value being equal to 14.7 years in 2013. As of March 1, 2018, the weighted average period of len-ding (14.8 years) on loans in foreign currency extended from the beginning of the year rose by 1.17 years as compared to the average value of 2013.

In 2013, as regards the number of MHL in rubles ex-tended within a year per 1,000 persons the leaders were

Table 2THE BREAKDOWN OF FEDERAL DISTRICTS BY THE NUMBER OF MHL IN RUBLES EXTENDED

WITHIN A YEAR PER 1,000 PERSONS OF THE POPULATION

Federal District

January 1, 2014 January 1, 2013 The number of MHL per

1,000 persons

Average value of

MHL, rubles

Place of the federal

district

Number of MHL per

1,000 persons

Average value of MHL,

million Rb

Place of the federal

districtUrals 7.89 1,720 1 7.57 1,512 1Privolzhsky 7.09 1,247 2 6.60 1,039 2Siberian 6.86 1,415 3 6.06 1,256 3North-Western 6.03 1,799 4 5.05 1,679 6The Russian Federa on 5.73 1,626 5 5.17 1,447 5Far Eastern 5.36 1,922 6 5.32 1,676 4Central 4.84 2,089 7 4.03 2,039 7Southern 4.38 1,473 8 3.58 1,329 8North Caucasian 1.93 1,491 9 2.87 0,957 9

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

MORTGAGE IN THE RUSSIAN FEDERATION IN JANUARY–FEBRUARY 2014

31

s ll the Yamalo-Nenets Autonomous Region (11.55 MHL per 1,000 persons), the Tyumen Region (10.4), the Khanty-Mansiisk Autonomous Region (10.34), the Re-public of Udmurdia (9.62) and the Republic of Tatarstan (8.65). Among federal regions, the leader was s ll the Urals Federal District, while the North Caucasian Federal Districts was the last one (Table 2). As regards fi nancial volumes of the extended MHL, mortgage lending lead-ers, such as St. Petersburg (5.52), the Moscow Region (5.48) and Moscow (3.41) occupied the 46th place, the 49th place and the 82nd place, respec vely.

In 2013 as in 2012, Moscow had the largest volume of the overdue debt as percentage of the total debt (Table 3). At the same me, as regards the volume of funds collected from borrowers Moscow is behind most of the regions. In 2013, as compared to 2012 and 2011 the general trend – which is typical of federal re-gions – of reduc on of the share of the overdue debt in the outstanding debt prevailed, that is, the quality of regional mortgage por olios was upgraded. As regards the volume of early repaid loans as percentage of the volume of the received loans the leaders are Moscow, the Moscow Region and the Central Federal District, in general. The lowest index as regards the funds collect-ed from borrowers as a result of realiza on of mort-gaged property as percentage of the overdue debt was registered with the North Caucasian Federal District, while the highest one, with the Far Eastern Federal District (Table 3).

According to the data of the Central Bank of the Russian Federa on, the 2013 trend of reduc on of the

debt on MHL in foreign currency in the total debt con- nued in 2014. According to the data of the Central

Bank of the Russian Federa on, as of March 1, 2013 the share of the debt on MHL in foreign currency in the total debt amounted to 4.3%, having decreased by 1.53 p.p. and 0.13 p.p. as compared to March 1, 2013 and February 1, 2014, respec vely. Though as of March 1, 2014 the share of MHL in foreign currency in the volume of the extended loans increased by 0.1 p.p. as compared to February 1, 2014, it fell by 0.62 p.p. as compared to January 1, 2014 and amounted to 0.5%.

In the 1st quarter of 2013, the AHML refi nanced Rb 9,555bn worth of 6,257 mortgages which is 19.82% and 13.68% lower as regards the number of loans and in money terms, respec vely, than the result of the 1st quarter of the previous year. The share of loans as regards the Materinsky Kapital (Maternity Capital) program amounted to 10.36% of the total volume of refi nancing in money terms with the average value of a loan being equal to Rb 1.5bn, while that as regards the Voennaya Ipoteka (Military Mortgage) program, to 35.07% with the average value of a loan equal to Rb 2,113m. In March 2014, the AHML refi nanced Rb 4,311bn worth of 2732 mortgages which is 30.96% and 25.26% higher in money terms and as regards the number of loans, respec vely, than the result of Feb-ruary 2014. The share of loans refi nanced by AHML in the total number of MHL extended in February 2014 amounted to 3.0%, while that in January, to 3.2%. The average price of housing purchased by means of loans refi nanced by AHML in January 2014 was formed at

Table 3DYNAMICS OF INDICES CHARACTERIZING BORROWERS OF THE RUSSIAN FEDERATION

The overdue debt as % of the total debt

The volume of MHL early repaid within a year by

means of the borrower’s funds as % of the volume

of the received MHL

The volume of funds collected from borrowers as a result of realiza on of mortgaged property, % of the overdue debt

2013 2012 2013 2012 2013 2012Moscow 4.23 5.11 37.98 36.09 5.84 9.24The Moscow Region 3.40 4.65 26.75 25.84 6.01 5.72The Central Federal District 2.83 3.71 26.90 25.62 6.01 7.82The North Caucasian Federal District 1.60 2.58 11.74 14.62 2.87 3.33

The Russian Federa on 1.49 2.10 19.44 21.10 8.39 10.15St. Petersburg 1.33 2.17 24.90 27.91 15.89 18.34The Southern Federal District 1.27 1.83 12.76 15.65 4.05 4.96The Siberian Federal District 1.00 1.62 13.92 20.28 13.23 11.40The North-Western Federal District 0.98 1.68 19.00 21.84 12.52 15.89

The Privolzhsky Federal District 0.94 1.41 16.27 16.92 11.71 14.74The Urals Federal District 0.74 1.04 18.82 21.89 12.99 14.81The Far Eastern Federal District 0.41 0.56 16.87 19.05 24.44 20.55

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


32

the level of Rb 47,000 a sq. meter with the average fl oor space of housing purchased by means of a mort-gage being equal to 47.5 sq. m.

In April 2014, 100 bids worth over Rb 38bn were submi ed for OAO AHML’s corporate bonds with A30 series government guarantees and a par value of Rb 6bn.

In accordance with the December Message of the President of the Russian Federa on, the Ministry of Housing and Building prepared a dra of the Housing

for Russian Families program. According to the pro-gram, it is expected that private companies will build addi onally at their own account 25m sq. meters of economy class housing by 2017 at a price of maximum Rb 30,000 a sq. meter with the AHML compensat-ing at its own account expenses related to u lity in-frastructure and provision of land plots on favorable terms. By es mates, builders’ total costs will amount to Rb 750bn, including Rb 100bn worth of expenses on the u lity infrastructure.

THE PROGRESS OF PRIVATIZATION AND THE SITUATION IN REGARD OF OWNERSHIP RELATIONS IN 2013

33

THE PROGRESS OF PRIVATIZATION AND THE SITUATION IN REGARDOF OWNERSHIP RELATIONS IN 2013G.Malginov, A.Radygin

The year 2013 saw the sales of blocks of shares (or stakes in charter capital) in a total of 148 economic socie es (less two sales of shares with the aid of in-vestment consultants) (vs. 265 units in 2012); 33 fed-eral state unitary enterprises (FSUEs) were reorgan-ized into open-end joint-stock companies (OJSCs) (vs. 103 units in 2012).

On the whole, over the period of implementa- on of the fi rst three-year priva za on program, the

number of sold stakes in companies’ capital (or equity shares) (730 units) increased more than 1.8 mes on the crisis period 2008–2010. At the same me, that number turned out to be roughly equivalent to the aggregate index for the two pre-crisis years (2006–2007), while falling short of the corresponding indi-ces for the mid-2000s, when blocks of shares were being sold at a rate above 500 units per annum. The results achieved in the framework of the priva za on program with regard to unitary enterprises appear to be more modest: the number of FSUEs, in respect of which the RF Federal Agency for State Pro perty Management (Rosimushchestvo) over the period 2011–2013 issued regula ons concerning the terms of their priva za on via reorganiza on into open-end joint-stock companies (216 units, of which a to-tal of 182 OJSCs were registered: in 2011 – 46 units; in 2012 – 103 units; in 2013 – 33 units), amounts to approximately one-third of the corresponding index’s value for the period 2008–2010.

The dis nc ve feature of the priva za on deals that took place last year, as well as of all those com-pleted over the course of the three-year priva za- on program, was the sale of federal blocks of shares

through private sellers appointed by the government

The most important event of 2013 was the approval of the Forecast Plan (Program) of Federal Property Priva -za on and the Main Direc ons of Federal Property Priva za on for 2014–2016. Its most signifi cant dis nc ve feature, in which it diff ers from the previously issued document of the same type, was the introduc on of some serious altera ons to the priva za on plans for biggest companies. The list of assets earmarked for priva za- on remained essen ally the same as before. However, in contrast to the priva za on program for the period

of 2011–2013, the reduc on of state par cipa on in the capital of many biggest companies will by no means imply that the government is going to lose the right of corporate control, or at least the possibility to infl uence corporate governance procedures. The aggregate volume of federal budget revenue generated by priva za on (or sale) transac ons and use of state property in 2013 will drop on the previous year by nearly one-third, and by more than half when adjusted by the amount of revenue generated in 2012 by the RF Central Bank (the Bank of Russia) from the sale of a stake in Sberbank. Nevertheless, the revenue fi gure for 2012 in this budget item was the third highest since the early 2000s following the record high of 2012 and the 2011 indices.

(in the main investment banks) in accordance with the altera ons introduced to the exis ng priva za on law in the spring of 2010. Throughout the course of 2013, a total of 6 transac ons with shares in biggest joint-stock companies, to the total value of Rb 286bn, were completed with the aid of investment consultants in accordance with the RF Government’s decisions, whereas in the government program ‘Federal Property Management’, approved by the RF Government’s Re-gula on of 16 February 2013, No 191-r, it is stated that no less than 4 sales of big en es with high investment poten al should be completed every year via public off ers of shares; these en es are to be picked out from among those earmarked for sale in the course of that year on the basis of the RF President’s or the RF Government’s decisions (stock exchange transac ons and strategic sales).

The most signifi cant in their scope (to the value of more than Rb 100bn) were the following 2 quasi-pri-va za on deals:

– the sale of 5.66% of shares in OJSC ‘Oil Company Rosne ’, to the total value of Rb 148.1bn, in favor of BP in the framework of purchase of shares in TNK-BP, as a result of which the monies generated by the priva za on of shares in OJSC ‘Oil Company Rosne ’ were entered into the balance sheet of OJSC Rosnef-tegaz, whose sole founder is the Russian Federa on (the consultants in this transac on being Ci group, Bank of America Merill Lynch);

– the placement, through an open subscrip on, of an addi onal issue of shares in OJSC VTB Bank to the total value of Rb 102.5bn, as a result of which the government’s share in its capital shrank from 75.5% to 60.93% (the organizers of that transac on being Close-


34

end Joint-Stock Company (CJSC) VTB Capital, Ci group, J.P. Morgan, and Bank of America Merill Lynch).

The placement that deserves special men on is that of shares in Joint-stock Company Alrosa carried out by means of a public off er to a broad range of poten al investors in accordance with interna onal standards (the organizer of that transac on being Goldman Sachs, Inc.). In the course of trading on the MICEX, the off er included 7% of shares in JSC Alrosa (in federal ownership), 7% of shares owned by the Repub-lic of Sakha (Yaku a), and 2% of quasi-treasury shares controlled by the company itself (a total of 16%), to the total value of Rb 41.3bn, including Rb 18bn paid for the aliena on of federal right of ownership to the 7%-stake.

A more standard procedure was also applied to the sale of federal stakes in the following companies:

– OJSC Vanino Commercial Sea Port (55% in the com-pany’s charter capital, to the total value of Rb 15.5bn, the organizer of the transac on was CJSC VTB Capital, the buyer was LLC Mechel-Trans)1;

– OJSC Siberia Airlines (25.5% in the company’s charter capital, to the value of Rb 1,133bn, the organ-izer of the transac on was OJSC Alfa Bank, the buyer – CJSC С 7 Group);

– OJSC Territorial Genera ng Company No 5 (TGK-5) (25.1% in the company’s charter capital to the value of Rb 1,080bn, the organizer of the transac on was CJSC VTB Capital, the buyer – OJSC TGK-9).

By way of a general overview of the transac ons with stakes in biggest companies completed in 2013 it can be noted that, in contrast to the two previous years, their structure was dominated, in terms of vo-lume, by those deals that yielded nothing directly to the budget (an addi onal issue of shares in VTB; the sale of block of shares in Rosne as part of a deal with TNK-BP), whereas only one such deal out of a total of seven was concluded in 2011–2012 (an addi onal is-sue of shares in the United Grain Company (UGC) in 2012 to the value of Rb 5.951bn). The propor onal dis-tribu on of proceeds from priva za on deals had also changed. While in the period 2011–2012 only about 2% out of the total sum of Rb 299bn was yielded by deals that had no direct eff ect on the budget, in 2013 their share amounted to 87.5%. As a result, over the en re three-year period (2011–2013) deals of that type accounted for about 44% of the aggregate vo-lume of all the 13 deals with shares in biggest Russian companies with state par cipa on.

1 As a ma er of fact, the offi cial conclusion of that deal (which soon evolved into an open scandal because the buyer of the for-mer state stake – LLC Mechel-Trans – resold almost the en re stake to off shore companies) falls within the meframe of the calendar year 2013.

The process of sale of state-owned blocks of shares was joined, in 2013, by the OJSC ‘Auc on House of the Russian Federa on’ (OJSC RAD ) which, in accordance with the regula on of the RF Government of 31 Janu-ary 2013, No 101-r and in the framework of the agency agreement concluded with Rosimushchestvo performs the func ons of seller of stakes in 36 OJSCs listed in last year’s priva za on program. Of these, the RAH has successfully completed 15 sales, which will yield a total of Rb 1,967.8m in the form of federal budget re-venues – a sum comparable with the aggregate value of sales of blocking stakes in TGK-5 and OJSC Siberia Airlines (Rb 2,213.5m), concluded with the aid of in-vestment consultants. As for the use of tradi onal pri-va za on instruments, the biggest deal where these were applied was the auc on held by Rosimushchest-vo in order to sell the en re stake (100%) held by the State in JSC MOSKINAP to the total value of Rb 935m.

The aggregate volume of federal budget revenue generated by priva za on (or sale) and use of state property in 2013 shrank on the previous year by nearly third, and by more than half including the proceeds re-ceived in 2012 by the RF Central Bank from the sale of a stake in Sberbank (Table 1). Nevertheless, in absolute terms, this index (approximately Rb 209bn) was third highest since the early 2000s a er the record high of 2012 and the index for 2011.

The ra o between non-renewable and renewable sources in the structure of aggregate revenues gene-rated by priva za on (or sale) and use of state pro-perty in 2013 is roughly comparable with the corre-sponding indices for 2012, if the proceeds from sale of a stake in Sberbank are not taken into account.

However, if we look at the results of that deal, it will become evident that the share of non-renewable sources in the structure of aggregate revenues yielded by priva za on (or sale) and use of state property in 2013 nearly halved on 2012 (shrinking to 26.4%), thus reaching its 2001 level – which is s ll somewhat above the index for 2010. The share of revenues generated by the use of state property, on the contrary, increased from nearly 49% to 73.6% in 2012. In absolute terms this result falls short only of the yield of the year 2012, being 1.5 mes higher than the index for 2011, while the amount of revenues from property priva za on (or sale) turned out to be approximately 2.5 mes lower than in 2011, falling also below the indices for 2003–2004.

Beside priva za on, the ownership rela ons in this country were rather strongly infl uenced, over the course of last year, by the transac ons on the corpo-rate control market involving Rosne (the fi naliza on of the already men oned purchase of ТНК-BP; the takeover of the gas company Itera; the agreement on


35

the exchange of gas assets with Novatek), as well as the decisions pertaining to restructuring the aerospace in-dustry similarly to the scenarios previously applied in the aircra -building and shipbuilding industries – that is, by means of establishing the ‘United Aerospace Cor-pora on’. One notable development in the power en-gineering industry was the permission granted to OJSC ROSSETI, or Russian Grids1 to increase its charter capi-tal by means of an addi onal issue of shares; at the same me, the government corporate control thresh-old (which had been fi xed for that company because it is on the list of strategic joint-stock companies) was to be raised to 61.7% (previously – 54.5%). However, the size of the block of shares in OJSC Federal Grid Company of the Unifi ed Energy System (FSK UES) ear-marked for inclusion in the charter capital of Russian Grids was increased by only 0.09% (from 79.55% to 79.64%). Generally speaking, the forma on of ver cal-ly integrated structures (VIS) remained one of impor-tant direc ons of government policy in the sphere of ownership rela ons. Over the period 2011–2013, this aspect of the three-year priva za on program’s imple-menta on involved decisions with regard to the terms of priva za on of 148 FSUEs and stakes in 85 OJSCs;

1 Formerly the Interregional Distribu on Grid Companies Hold-ing (IDGC Holding).

and fi naliza on of the measures designed to establish 34 ver cally integrated structures (or more than 3/4 of the total number of those mapped in accordance with the government’s decisions).

Many ac vi es were under way in connec on with the implementa on of the Government Program Fe-deral Property Management, approved by regula on of the RF Government, of 16 February 2013, No 191-r.

Among notable developments rela ng to the pro-gram’s norma ve backing, we should point out the approval of the Methodological Recommenda ons for determining the targeted uses, by ins tu ons operat-ing under the jurisdic on of federal bodies of state authority, of federal property en es consolidated by right of economic jurisdic on or opera ve manage-ment to federal state unitary enterprises (FSUEs), fe-deral treasury enterprises (FTE), federal budget-fund-ed ins tu ons (FBI), federal treasury ins tu ons (FTI), federal autonomous ins tu ons (FAIs); the develop-ment of a Methodology for determining the specifi c categories of assets owned by state-owned companies depending on their core types of ac vity; the devel-opment of Methodological Recommenda ons for orga nizing the opera on of the board of directors of a joint-stock company with a state stake, as well as for organizing the audi ng ac vity of the audit (or revi-

Table 1THE STRUCTURE OF PROPERTY GENERATED FEDERAL BUDGET REVENUES FROM VARIOUS SOURCES, 2000 2013

Year

Aggregate revenue gener-ated by priva za on (or sale)

and use of state property

Priva za on-generated revenues (non-renewable sources)

Revenues generated by use of state property (renewable sources)

millions of rubles % of total millions

of rubles % of total millions of rubles % of total

2000 50,412.3 100.0 27,167.8 53.9 23,244.5 46.12001 39,549.8 100.0 10,307.9 26.1 29,241.9 73.92002 46,811.3 100.0 10,448.9 22.3 36,362.4 77.72003 135,338.7 100.0 94,077.6 69.5 41,261.1 30.52004 120,798.0 100.0 70,548.1 58.4 50,249.9 41.62005 97,357.4 100.0 41,254.2 42.4 56,103.2 57.62006 93,899.8 100.0 24,726.4 26.3 69,173.4 73.72007 105,761.25 100.0 25,429.4 24.0 80,331.85 76.02008 88,661.7 100.0 12,395.0 14.0 76,266.7 86.02009 36,393.7 100.0 4,544.1 12.5 31,849.6 87.52010 88,406.4 100.0 18,677.6 21.1 69,728.8 78.92011 240,964.1 100.0 136,660.1 56.7 104,304.0 43.3

2012 309,943.2/469,243.2* 100.0 80,978.7/

240,278.7*26.1/51.2* 228,964.5 73.9/

48.8*2013 208,974.05 100.0 55,198.5 26.4 153775.55 73.6* including the proceeds received by the RF Central Bank as a result of sale of a stake in Sberbank (Rb 159.3bn), which is probably an

overes ma on of the actual aggregate share of non-renewable sources, as the budget did not receive that sum in full but minus those sources’ balance sheet value and the costs of the sale of that stake. Consequently, the share of renewable sources is, on the contrary, somewhat underes mated.

Source: Laws on the federal budget execu on adopted in 2000–2012; Report on the Execu on of the Federal Budget As of 1 January 2014, www.roskazna.ru; authors’ calcula ons.


36

sion) commission of such a company. The Methodolog-ical instruc ons for state-owned companies as to how to apply the key performance indicators in es ma ng their opera on are s ll in the phase of elabora on. In the managerial bodies of joint-stock companies with state stakes, civil servants con nued to be replaced by professional managers. Thus, the number of this type of personnel in the boards of directors of the OJSC en-tered on the special list declined from 141 to 122.

According to data released by Rosimushchestvo, al-most all of the targets for 2013 set by the aforesaid Government Program had been met by the year’s end; and the results achieved with regard to the func ons of federal property en es as applied to FSUEs, eco-nomic socie es with state stakes, and treasury-owned en es were signifi cantly higher than the planned targets. The same is true of the indices describing achievements in the fi elds of informa on technolo-gies, record-keeping and monitoring. Thus, the share of government services rendered electronically surged to 40% vs. the target of 10% set for the year 2013; and the share of federal property en es entered in the State register (as a percentage of the total number of en es that have been iden fi ed as those to be en-tered in the register) rose above 96% vs. the target of 70%.

According to Rosimushchestvo, as of 15 April 2014 in the Government Program’s framework, a total of 1,618,067 property en es were entered into reg-isters, which represents a rise of 10% (or by 146.3 thousand) on 1 January 2013 (1,471,782 property en- es). State property owned at the federal level is rep-

resented by 2,049 economic socie es (OJSCs, CJSCs, LLCs) and 1,785 FSUEs (including treasury enterprises) vs. 2,337 JSCs and 1,795 unitary enterprises as of ear-ly2013, as stated in the new priva za on program for 2014–2016.

The approval of the Forecast Plan (Program) of Fe-deral Property Priva za on and the Main Direc ons of Federal Property Priva za on for 2014–2016 by the RF Government’s regula on No 1111-r of 1 July 2013 was one of last year’s most important events.

The most signifi cant feature in which the content of the current program diff ers from its predecessor is the fundamental change in the priva za on plans of biggest companies. The list of assets earmarked for priva za on has remained essen ally the same. It no longer contains OJSC Rosselkhozbank, OJSC Rosagro-leasing and OJSC FGC UES, and it has been augmented by OJSC Rosnano, Rosspirtprom, Rostelecom, the State Transport Leasing Company, and two Moscow airports. However, in contrast to the priva za on program for 2011–2013 as amended in 2012, the reduc on of the State’s par cipa on in the capital of many biggest

companies implies that the State will s ll retain the func on of corporate control, or at least the possibi-lity to infl uence the corporate governance procedures.

For JSC Alrosa, OJSC Aerofl ot – Russian Airlines, and Sovcomfl ot (Seaborne Energy Solu ons), the fl oor for state par cipa on is set at 25% + 1 share; for ‘Rus-gidro’, Bank VTB, Zarubezhne , the United Aircra -building Corpora on – at 50% + 1 share; for Russian Railways, Transne , Uralvagonzavod, the State Trans-port Leasing Company, and the United Shipbuilding Corpora on – at 75% + 1 share. In some cases, the period for reducing the size of state stakes to match these fl oor indices extends far beyond 2016.

It is planned that the par cipa on of OJSC Rosnef-tegaz in the charter capital of Rosne should be re-duced to 50% + 1 share by 2016. As for the possible shrinkage of the government’s stake in OJSC Bank VTB to less than 50% + 1 share, the program proclaims that this will be done in coordina on with the measures designed to likewise reduce the government’s stake in OJSC Sberbank of Russia, although the new head of the RF Central Bank, Elvira Nabiullina, later said that the Bank was not planning to reduce the State’s par- cipa on in the charter capital of Sberbank.

The government declared its plans to withdraw, in 2014–2016, from the capital of 7 companies (Rosspirt-prom, United Grain Company (UGC), Rosnano, Ros-telecom, Sheremetyevo Interna onal Airport, Vnuko-vo Airport, and Vnukovo Interna onal Airport). Such prospects are bound to raise some ques ons for every one of these companies. Ques ons will be even more likely because the priva za on program off ers no ba-sic quan ta ve targets for the proceeds from priva -za on of stakes in biggest companies with high invest-ment a rac veness indexes.

The previous priva za on program did contain an es mated target of Rb 1 trillion, to result from poten- al revenues generated in an event of sale of shares

in biggest companies by special decisions adopted by the RF Government. However, as evident from the budgetary documenta on for those three years whilst the priva za on program for 2011–2013 was being implemented, the total sum of federal budget revenue generated by sales of shares and other forms of par cipa on in companies’ capital turns out to be 2.7 mes less than the said planned target (approxi-mately Rb 371bn1). At the same me, this fi gure many mes over exceeds the revenue es mates put forth in

the programе for 2011–2013 (which did not include the main proceeds from priva za on of stakes in big-

1 Including the proceeds received by the RF Central Bank from the sale of shares in Sberbank in 2012. Naturally, when revenues from the sale of other assets (land and other property) are added to the priva za on revenues, their sum increases.


37

gest companies with high investment a rac veness indexes: Rb 6bn for 2011, Rb 5bn for 2012 and Rb 5bn for 2013, which yields a total of Rb 16bn. In the new priva za on program for 2014–2016 the target for this type of revenue is set at Rb 3bn per annum. The possibili es for its actual implementa on will strongly depend on the macroeconomic situa on in this coun-try (consider, for example, the threat of recession) and the situa on on the stock market, especially in view of the economic and poli cal background observed in Q1 2014.

Among prac cal solu ons, we may note the RF Gover nment’s decision, made in January 2014, to sell its stakes in OJSC Inter RAO EES (13.76% of shares) and OJSC Arkhangelsk Trawal Fleet (100% of shares) to the total value of more than Rb 21bn. The prepara-tory work for the eff ectua on of these deals was com-pleted in 2012–2013.

The buyer in the fi rst deal will be OJSC Rosne egaz which may, in accordance with the norms s pulated in the previous and current priva za on programs, un l 2015 act as an investor in those companies in the fuel and energy complex, whose blocks of shares have been earmarked for priva za on, on condi on that OJSC Rosne egaz supplied a proper program for the fi nancial backing of such transac ons provided by dividends paid on the shares in commercial companies held by OJSC Rosne egaz.

The second deal may serve as the fi rst example of a non-standard approach realized in the framework of the priva za on process in its contemporary phase. Its dis nc ve feature is the special format of interac- on between the new owner (LLC Virma) and regional

autho ri es on the basis of an agreement whereby a gra s transfer of 1 share into the ownership of Arkhan-

gelsk Oblast is envisaged. All key decisions, including the preserva on of exis ng jobs, the OJSC’s registra- on in the region’s territory in order to maintain the

infl ow of tax-generated revenues into the regional budget, are to be coordinated with the Archangelsk Oblast’s government, whose representa ve will be as-signed a seat in the OJSC’s board of directors.

The conclusion of a shareholder agreement bet-ween Arkhangelsk Oblast and LLC Virma is a unique example of the post-priva za on control mechanism in opera on, whereby it becomes possible, among other things, to ensure a proper balance of interests between the State represented by Arkhangelsk Oblast, on the one hand, and the new asset owner on the othe r, in the fi eld of social liabili es and business pro-mo on.

At the same me, the situa on has inevitably giv-en rise to ques ons as to the possible incompa bility of such instruments with the exis ng broader legal norms, in par cular with corporate legisla on (the role of the single share transferred to the oblast’s gov-ernment in comparison with the powers embodied in the special right to par cipate in a company’s manage-ment granted by ‘golden share’); or the suffi ciency of the exis ng agreement for avoiding possible confl icts in the future, for example in the event of resale, by LLC Virma, of its stake in Arkhangelsk Trawl Fleet, in full or in part to a third party; and also on how well the lessons from the nega ve experiences from the ca-lamitous investment tenders of the 1990s have been learned and incorporated in the agreement’s provi-sions. Same is true of the lessons from the commercial tenders with mandatory social orienta on held in ac-cordance with the exis ng priva za on law (third) in the 2000s.


38

ESTIMATE OF RUSSIA’S POTENTIAL FOR INCREASING GRAIN EXPORTSBY MEANS OF RECLAIMING ABANDONED LANDS

V.Saraykin, V.Uzun, R.Yanbykh

Being endowed with the largest area of fer le land in the world (according to the World Bank’s es mate – 55% of the world’s total, of them 25% – arable land) Russia can become one of the key actors in ensuring the global food security. Within 25 years that passed a er the break-up of the Soviet Union the country has evolved from an importer to one of the biggest export-ers of grain (Fig.1). Speaking at the economic forum in Davos, the Russian Prime Minister D.A. Medvedev gave his es mate of the poten al increase of na onal food exports – he declared that “Russia will feed the world”1. The Minister of Agriculture asserts that in the nearest 10–15 years the country intends to raise the output of grain up to 120–125 million tons per year ensuring stable export supplies to the amount of 30–40 million tons. According to es mates of the leading US agricul-tural economists2 Russia’s exports of wheat will surpass those from the United States as early as in 2019.

Does Russia really have a poten al for increasing grain exports and if so, by what means can it be ma-terialized? First of all, the country’s capability to boost produc on of food products bases upon the availability

1 h p://vz.ru/news/2013/1/24/617280.html2 Liefert W., Liefert O.,Vocke G.,Allen E. Former Soviet Union Region to Play Larger Role in Mee ng World Wheat Needs. ERS-USDA, Amber Waves, Volume 8, Issue 2, 2010.

From the largest importer of grain that the country used to be in the Soviet mes, Russia has evolved into its net exporter. The poten al for increasing grain exports by means of reclaiming abandoned lands is being examined. There are as well opportuni es for boos ng grain produc on by means of improving yields and applying modern technologies on already cul vated lands.

of extensive areas of non-used farmlands. Is it possible to bring the vast areas of land abandoned in the transi- on period back to produc on? Within this period that

lasted for more than 20 years the area of arable land in Russia shrank by 16.3 million hectares or by 12.4% as compared with 1990 (Table 1). The total sown area decreased by 41.3 million hectares, the area sown to grains – by almost 20 million hectares. However, while the share of sown area in the total area of arable land fell from 89.2% to 66.1%, that of area sown to grains in the total sown area grew from 53.6% to 58.2%.

-20-15-10

-505

1015202530

1991

/92

1993

/94

1995

/96

1997

/98

1999

/00

2001

/02

2002

/03

2005

/06

2007

/08

2009

/10

2011

/12

2013

/14*

Source: Rosstat, 1991–2012, *2013/14 – forecast.Fig. 1. Balance of Russia’s trade in grain, million tons

Table 1AREA OF ARABLE AND SOWN LAND IN RUSSIA

1990 1995 2000 2005 2010 20122012 as compared

with 1990million ha %

Area of arable land, million hectares 131.8 127.6 119.7 116.1 115.3 115.5 -16.3 87.6

Area of sown land, million hectares 117.6 102.5 85.4 77.5 75.2 76.3 -41.3 64.8

Share of sown land area in the arable land area, % 89.2 80.3 71.3 66.8 65.2 66.1

Area of land sown to grains, million hectares 63.0 54.7 45.6 43.4 43.2 44.4 -19.8 68.6

Share of area sown to grains in the total sown area, % 53.6 53.4 53.4 56.0 57.4 58.2

Source: Russian Sta s cal Yearbook. Offi cial edi on: 2006–2013, authors’ own calcula ons.

ESTIMATE OF RUSSIA’S POTENTIAL FOR INCREASING GRAIN EXPORTS

39

Areas sown to grains reduced in almost all subjects of the Russian Federa on but the rate of this reduc on was the highest in regions with hard natural and eco-nomic condi ons, poor bioclima c poten al, high lev-el of costs per ton of produce and low yields (Table 21).

Only in three subjects of the Southern Federal Dis-trict (Krasnodar Territory, Stavropol Territory and the Kabardino-Balkarian Republic) the area under grains has grown as compared with 1990. In all other regions grain acreage has shrunk, the decrease ranging from several percent to the complete elimina on of grain growing (the la er was more common for regions of the North-Western Federal District). Areas under grains are narrowing in the regions where yields are below 20 centners per hectare and the unit costs per 1 ton of grain are above Rb 3,429. The higher unit costs and lower sales margin, the more no ceable was the reduc on of areas sown to grains.

So, grain acreage has been primarily shrinking in re-gions where produc on of grains has always been and s ll remains economically unsound. But as the world grain prices grow, the situa on can change (at the mo-ment the export price for grain amounts to $ 286 per ton)2. The authors have made an a empt to es mate the poten al for increasing exports of grain taking into account not only the available areas but also costs of produc on in subjects of the Russian Federa on, costs of delivery to export terminals and the world prices.

The following algorithm was applied:The poten al for expanding areas under grains was

calculated as a diff erence between their values in 1990 and 2010 separately for each subject of the Russian Federa on.

1 In the framework of the interna onal project “Prospects of the farming sector and rural development in European countries in view of food security: The case of the Russian Federa on” h p://ipts.jrc.ec.europa.eu/publica ons/pub.cfm?id=71442 h p://www.gazeta.ru/business/2014/03/17/5953601.shtml

Table 2GROUPING OF SUBJECTS OF THE RUSSIAN FEDERATION BY THE DEGREE OF REDUCTION OF AREAS SOWN

TO GRAINS AS COMPARED WITH 1990

Groups by % of grain acre-age change

Number of RF subjects

Grain acreage change in 2010 as compared with 1990 Average grain

yields in 2008–2010

Corporate farms

1,000 ha % Unit cost per 1 ton of grain

Average sales mar-gin in 2008–2010

Above 0 3 550 14.0 40.0 3 429 32.0 -20 – 0 14 -1 361 -8.9 19.3 3 440 17.0

-40 – (-20) 16 -7 941 -30.6 15.3 3 639 11.5 -60 – (-40) 12 -4 295 -47.7 18.2 3 729 14.3 -80 – (-60) 15 -3 658 -70.9 15.4 4 544 10.0

-80 and below 11 -3 110 -86.5 13.2 4 909 1.5Total 71 -19 815 -31.5 19.5 3 566 17.6

Source: authors’ own calcula ons using data of the Russian Sta s cal Yearbook.

On the basis of data of corporate farms’ annual re-ports the regression rela onship between the increase of grain acreage and the actual average profi tability of marke ng grains in the three preceding years was es-tablished.

When calcula ng poten al profi tability for farms lo-cated in a par cular subject of the Russian Federa on, the diff erence between prices for grain at the port of shipment and in the region was supposed to equal the price of transporta on by railway.

The output of grain was calculated on the basis of average annual yields in 2008-2010, the volumes of ex-port – on the basis of share of commodity grain crops in the total sown area and the supposi on that all the surplus output would go exclusively to export.

Costs of reclaiming addi onal areas remained fi xed, i.e. the same as under the exis ng produc on scale.

Assessments were made for 11 variants of export grain prices at the port of shipment ranging from $200 to $400 per ton. The poten al for increase of grain acre-age was es mated for each value of export price and for each subject of the Russian Federa on in case grain produc on profi tability therein exceeded 40% taking into account transporta on costs. If the profi tability in a region was below 40%, the increase was supposed to be zero. The es mated increase of areas served the basis for calcula ng poten al increase of grain exports.

Let’s give a regional example. In Belgorod oblast crop acreage in 2010 was smaller than in 1990 by 338 thousand hectares. If we suppose that all of them will be reclaimed, the sown area will grow up to 1,586 thousand hectares. At the moment grains account for 49.2% of the total crop area, so the area sown to them can increase by 166 thousand hectares at the most (338 thousand hectares * 0.492). The expansion of grain acreage will depend on prices for grain and many other factors but it cannot exceed the assessed maximum.


40

In Leningrad oblast crop area dropped from 437 thousand hectares to 251 thousand hectares, i.e. by 186 thousand hectares. If all of them will be reclaimed, the area under grains can expand by only 23 thousand hectares as in this region the maximum share of grains in the total sown area is only 12.6% (186 thousand hectares x 0.126 = 23 thousand hec-tares).

The results of expert es mates for the country at large are presented in Fig. 2. They demonstrate that if, for instance, the price amounts to $380, the expansion of cul vated areas can provide for an increase of grain exports by 5.7 million tons within a year, by 17.5 mil-lion tons annually within 5 years and by 21.5 million tons annually within 10 years – i.e. by the volumes comparable with the total grain exports in recent years. Accordingly, by 2025 grain exports can reach over 40 million tons.

However, this way of increasing grain produc on and exports is rather high-cost (abandoned lands are less fer le than those used) and if the world grain prices remain at the current level, the role of Russia on the global market will hardly change much. It can be widely applied only in case of a notable growth of world prices for grain.

Besides, one will have to solve the problem of rela- vely low loading capacity of Russian port elevators

that now totals 28 million tons1 (Novorossiysk – 13 mil-lion tons annually; Tuapse and Taman’ – 2.5 million tons each; Azovsk, Yeysk, Taganrog, Rostov-on-Don – altogether 6 million tons; Saint-Petersburg and Kalinin-grad – 1 million tons each; Vladivostok, Nakhodka and other Far East ports – 2 million tons)2.

So, Russia has a poten al for increasing grain ex-ports by means of reclaiming earlier abandoned lands. However, we fi nd that the country has good opportu-ni es for boos ng produc on of grains by raising of their yields and applica on of modern technologies on lands that are already used for growing grain crops (the actual and projected dynamics of grain yields is

1 Not including ports in Crimea.2 Sobolev O.S. Analiz sel’skokhozyaystvennykh tsen v pervom polugodii 2013 goda. [Analysis of agricultural prices in the fi rst half of 2013]. // Ekonomika sel’skokhozyaystvennykh i pererabatyvay-ushchikh predpriya y [Economics of agricultural and processing enterprises]. No. 9, 2013. – P. 51.

shown in Fig. 3). The es mate of poten al increase bases upon supposi on that the sown areas and live-stock inventories remain at the level achieved in the reference period. Certainly, the growth of produc on is possible only in case there is demand for addi onal produce both on the domes c and the world market and Russian producers prove to be compe ve. 3

3 The forecast of grain yields was derived by approxima ng the data on moving average yields with the help of so ware package Sta s cs – 9. For more details about the methods of analysis see: V. Uzun, V. Saraykin, E. Gataulina, N. Shagayda, R. Yanbykh “Pros-pects of the farming sector and rural development in European countries in view of food security: The case of the Russian Federa- on” (being prepared for publishing, English version available at

h p://ipts.jrc.ec.europa.eu/publica ons/pub.cfm?id=7144).

0

5000

10000

15000

20000

25000

200 220 240 260 280 300 320 340 360 380 400

1000

tons

Within a year Within 5 years Within 10 years

Source: authors’ own calcula ons.Fig. 2. Increase of grain exports under diff erent

scenarios of export prices / me periods, 1,000 tons

Source: authors’ own calcula ons2.Fig. 3. Yields of grains and legumes, centners per hectare

THE 2013 RESULTS OF GLOBAL TRADE IN GOODS AND SERVICES

41

THE 2013 RESULTS OF GLOBAL TRADE IN GOODS AND SERVICESA.Makarov, A.Pakhomov

According to the es mates of the World Trade Or-ganiza on, in 2013 growth in the volume of global trade in real terms amounted to the mere 2.1% (2.5% according to the WTO forecast which was made six months ago), which is roughly equal to the respec ve index of the year before. In 2014, growth of 4.7% is expected though it is below the overall average for the past 20 years (5.3%).

In 2013, moderate growth rates of the global trade can be explained by low demand on import in deve-loped countries (0.2%) and moderate growth in im-port to countries with developing economy (4.4%). As regards export, in the above two groups of countries moderate growth of 1.5% and 3.3%, respec vely, was registered.

In the past 20 years (from 1993 ll 2013), except for the crisis 2009–2010 period the global export normally grew at a rate which was nearly twice as high than that of global GDP. However, the above gap in rates has al-most disappeared of late. The above fact points to in-variable correla on between global economic growth and the volumes of global export (Fig. 1).

“Within the past two years, there was slow growth in trade. In the long term, if GDP forecasts are true we can expect in 2014 a large-scale – but generally moderate – recovery of global trade volumes and fur-ther speed up of growth in 2015. In 2013, a number of factors, including a long recession in the EU … and uncertainly over scaling down of the US Federal Re-serve’s QE3 quan ta ve easing program contributed to weakening of trade and output. That uncertainty re-sulted in a fi nancial vola lity in developing economies in the second half of 2013” – said Roberto Azevedo, WTO General Director at presenta on of the review2.

According to the es mates of the Interna onal Monetary Fund (IMF), in the short-term prospect an increase in the global economic growth rates from 3% in 2013 to 3.6% and 3.9% in 2014 and 2015, respec-

1 World Trade 2013, Prospect for 2014. Modest trade growth an cipated for 2014 and 2015 following two year slump, WTO Sec-retariat, Geneva, PRESS/721, 14 April 2014, 29 p.2 Finmarket Informa on Agency, April 15, 2014.

vely, is expected. In the euro area, posi ve dynam-ics is forecasted, but with diff erences by country with taking into account the level of a country’s public debt and fi nancial instability as a factor behind restraint of domes c demand. On that basis, the IMF es mated interna onal trade growth at 3.0% in 2013 and ex-pects its further increase to 4.3% and 5.3% in 2014 and 2015, respec vely3.

Also, the World Bank forecasts a number of posi- ve trends in global trade. Strengthening of econo-

mies with a high income level will s mulate demand on export from developing countries, on the one side, while growth in interest rates weakens capital fl ow, on the other side. It is stated in the World Bank’s forecast that global trade growth rates will increase from 3.1% in 2013 to 4.6% and 5.1% in 2014 and 2015, respec- vely4.

Generally, minimum changes took place in the WTO ra ng of global exporters and importers (Table 1). So, according to the data of the WTO, on the basis of

3 Interna onal Monetary Fund, «World Economic Outlook. Re-covery Strengthens, Remains Uneven», Wash., April 2014, p. 16.4 World Bank report «Global Economic Prospects. World Eco-nomic Situa on and Prospects», Wash., 14 January 2014, р. 2.

In mid-April, the Secretariat of the World Trade Organiza on published an annual analy cal review – The Global Trade in 2013 and Forecasts for 2014. A er a Two-Year Recession, Moderate Growth in Trade is Expected in 2014 and 2015 – on development of the interna onal trade. Also, the above document includes the preliminary sta s- cal data on the 2013 results of the global trade in goods and services by country and region1.

Average Export growth (1993-2013)

Average GDP growth

(1993-2013) ExportGDP

Source: World Trade 2013, Prospect for 2014. Modest trade growth an cipated for 2014 and 2015 following two year slump, WTO Secretariat, Geneva, PRESS/721, 14 April 2014, Сhart 1: Growth in volume of world merchandise exports and GDP, 2005–15, p. 2.

Fig. 1. Dynamics of the volumes of global export and GDP in the 2005–2015 period, %


42

Table 1 LEADING EXPORTERS AND IMPORTERS IN THE WORLD TRADE IN GOODS IN 2013

Exporter-country Volume, bil-lion USD Share, % Change on

2012, % Importer-country Volume, bil-lion USD Share, % Change on

2012, %1 China 2210 11.8 8 1 The US 2331 12.4 02 The US 1579 8.4 2 2 China 1950 10.3 73 Germany 1453 7.7 3 3 Germany 1187 6.3 24 Japan 715 3.8 –10 4 Japan 833 4.4 –65 The Netherlands 664 3.5 1 5 France 681 3.6 16 France 580 3.1 2 6 The UK 654 3.5 –5

7 The Repub-lic of Korea 560 3.0 2 7 Hong Kong,

China 622 3.3 12

– import of domes c con-sump on

141 0.7 4

8 The UK 541 2.9 15 8 The Netherlands 590 3.1 0

9 Hong Kong, China 536 2.9 9 9 The Republic of Korea 516 2.7 –1

– export of goods of own produc on 20 0.1 –11

– re-export 516 2.7 10

10 The Russian Federa on 523 2.8 –1 10 Italy 477 2.5 –2

11 Italy 518 2.8 3 11 Canada1 474 2.5 012 Belgium 469 2.5 5 12 India 466 2.5 –513 Canada 458 2.4 1 13 Belgium 450 2.4 314 Singapore 410 2.2 14 Mexico 391 2.1 3

– export of goods of own produc on 219 1.2 –4

– re-export 191 1.0 615 Mexico 380 2.0 3 15 Singapore 373 2.0 –2

– import for domes c con-sump on2

182 1.0 –9

16 Saudi Arabia3 376 2.0 –3 16 The Russian Federa on1 344 1.8 3

17 The United Arab Emirates3 365 1.9 4 17 Spain 339 1.8 0

18 Spain 316 1.7 7 18 Taiwan, China 270 1.4 019 India 312 1.7 5 19 Turkey 252 1.3 620 Taiwan, China 305 1.6 1 20 Thailand 251 1.3 021 Australia 253 1.3 –1 21 Brazil 250 1.3 7

22 Brazil 242 1.3 0 22 The United Arab Emirates3 245 1.3 7

23 Switzerland 229 1.2 1 23 Australia 242 1.3 –724 Thailand 229 1.2 0 24 Malaysia 206 1.1 525 Malaysia 228 1.2 0 25 Poland 204 1.1 226 Poland 202 1.1 9 26 Switzerland 200 1.1 127 Indonesia 184 1.0 –3 27 Indonesia 187 1.0 –228 Austria 174 0.9 5 28 Austria 182 1.0 229 Sweden 167 0.9 –3 29 Saudi Arabia 164 0.9 530 The Czech Republic 161 0.9 3 30 Sweden 158 0.8 –3

Generally by 30 countries4 15339 81.7 – Generally by 30

countries4 15492 82.1 –

The world in general4 18784 100.0 2 The world in general4 18874 100.0 11Import at FOB price. 2 Import for domes c consump on of Singapore is determined as the aggregate import less re-export. 3 Es mate of the WTO Secretariate.4 Including considerable re-export or import for the purpose of re-export.Note. The data on EU member-states is presented by the Eurostat and prepared in accordance with the concept of the community, so,

it may diff er from the na onal sta s cs.Source: WTO Secretariat, Press release, PRESS/721, Geneva, April 14, 2014, p.21 (Appendix Table 3 “Merchandise Trade: Leading Ex-

porters and Importers, 2013”).


43

the results of 2013 China ($2,210bn worth of export volume and the share of 11.8% in the global export) has taken again as in previous years the top posi on among the largest exporters leaving behind the USA ($1,579bn and 8.4%) and Germany ($1,453bn and 7.7%).

In its turn, the US ($2,231bn worth of import and a share of 12.4% in the global import) has retained the top place in the list of leading importers with China ($1,818bn and 9.8%) and Germany ($1,167bn and

6.8%) taking the second and third places, respec vely. So, China has become the leader as regards the volu-me of sales turnover ($2.2bn).

The posi on of the Russian Federa on in the ra ng of global exporters has changed for the worse a li le as compared to the previous year (the 10th place and $523bn worth of export volume as compared to the 8th place and $529bn worth of export). The above situ-a on is jus fi ed primarily by nega ve dynamics of do-mes c export due to a worsening situa on on global

Table 2LEADING EXPORTERS AND IMPORTERS IN GLOBAL TRADE IN COMMERCIAL SERVICES IN 2013

Exporter-country Volume, billion USD Share, % Change on

2012, % Importer-country Volume, billion USD Share, % Change on

2012, %1 The US 662 14.3 5 1 The US 427 9.8 32 The UK 290 6.3 1 2 China 329 7.6 173 Germany 287 6.2 8 3 Germany 315 7.2 74 France 233 5.0 4 4 France 188 4.3 85 China 207 4.5 9 5 The UK 173 4.0 –16 India 153 3.3 5 6 Japan 161 3.7 –87 Spain 144 3.1 5 7 India 127 2.9 –1

8 Japan 144 3.1 1 8 The Russian Federa on 123 2.8 19

9 The Netherlands 142 3.1 8 9 Singapore 122 2.8 410 Hong Kong, China 135 2.9 7 10 The Netherlands 121 2.8 111 Ireland 124 2.7 7 11 Ireland 117 2.7 512 Singapore 117 2.5 4 12 Italy 107 2.5 3

13 The Republic of Korea 112 2.4 1 13 The Republic

of Korea 106 2.4 1

14 Italy 110 2.4 6 14 Canada 105 2.4 015 Belgium 101 2.2 2 15 Belgium 96 2.2 516 Switzerland 94 2.0 5 16 Spain 91 2.1 117 Luxemburg 79 1.7 10 17 Brazil 84 1.9 7

18 Canada 78 1.7 0 18 The United Arab Emirates 65 1.5 …

19 Sweden 75 1.6 6 19 Australia 62 1.4 –220 Denmark 69 1.5 6 20 Denmark 60 1.4 3

21 The Russian Federa on 66 1.4 13 21 Hong Kong, China 59 1.4 1

22 Austria 65 1.4 9 22 Sweden 57 1.3 623 Thailand 59 1.3 19 23 Thailand 55 1.3 424 Macao, China 53 1.1 16 24 Switzerland 52 1.2 1225 Australia 52 1.1 0 25 Saudi Arabia 50 1.2 126 Taiwan, China 51 1.1 5 26 Luxemburg 48 1.1 1427 Turkey 44 0.9 8 27 Austria 44 1.0 528 Poland 40 0.9 6 28 Malaysia 44 1.0 529 Malaysia 39 0.8 4 29 Norway 43 1.0 430 Norway 38 0.8 –2 30 Taiwan, China 42 1.0 –1

Generally by 30 countries 3862 83,5 – Generally by 30 countries 3474 80.0 –

The world in general 4625 100 6 The world in general 4340 100 10

Note. The preliminary data. The data on a number of countries and territories is based on es mates of the WTO Secretariat. Gaps in sequences of the data on a large number of countries, as well as limita on of feasibility of cross comparison of the data aff ect the values of annual growth rates and ra ngs.

Source: WTO and UNCTAD Secretariats, Press release, PRESS/721, Geneva, April 14, 2014, p.23 (Appendix Table 5 “Leading Exporters and Importers in world trade in commercial services, 2013”).


44

markets of ferrous and nonferrous metals and chemi-cal produce with some process stage. As a result, the share of Russia in the global export decreased from 2.9% to 2.8%.

As regards import, Russia retained the same 16th place ($344bn), while its unit weight remained at the level of 1.8%. Without taking into account the in-ternal regional trade in goods of the EU countries, Rus-sia took the world’s 7th place and 8th place as regards export and import, respec vely (the world’s 11th place and 9th place, respec vely).

In 2013, the global export of commercial services rose by 6% in nominal terms (with annual average growth of 8% in the 2005–2013 period) and amounted to $4.6bn. So, the share of supply of services in the global trade amounted to 20%. The export of insu-rance services and computer services rose at the high-est rate of 8%, while that of transporta on services and communica ons services, at the lowest rate of 2%.

As regards supply of commercial services, leaders did not change (Table. 2): the leading posi ons are held by the US ($662bn and the share of 14.3% in the global export), the UK ($290bn and 6.3%) and Germa-ny ($287bn and 6.2%).

As regards consumer services, the US is rated the fi rst ($427bn and the unit weight of 9.8% in the global import), China, the second ($327bn and 7.6%) and Germany, the third ($315bn and 7.2%). It is to be not-ed that in 2013 China moved one posi on upward and demonstrated growth of 17% on the previous year.

In 2013, in the ra ng of commercial services suppli-ers-countries the Russian Federa on is rated the 21st ($66bn and growth of 13%), while its share amount-ed to 1.4% (the 22nd place and the share of 1.3% in 2012). As regards the import of commercial services ($123bn and growth of 19%), Russia moved six posi- ons upward and took the 8th place in the world, while

its unit weight increased to 2.8% as compared to 2.5% in 2012. Without taking into account the internal re-gional trade of the EU countries in services, Russia is rated 11th and 6th in the world as regards export and import, respec vely (the 11th place and the 9th place, respec vely in 2012).

So, in 2013 as compared to the previous year the Russian Federa on’s posi on moved somewhat down-wards in the WTO ra ng as regards export of goods, but it rose considerably as regards import of commer-cial services (Table 3).

As seen from Fig. 3, in the past two years the month-ly dynamics of Russia’s export and import opera ons was highly vola le and unstable, which situa on points to exis ng problems not only in the country’s foreign economic sphere, but also in the economy in general.

Domina on of energy goods (74.5%) in the export with the minimum share of industrial produce (5.5%) s ll remains a deep-rooted problem. On the contrary, supplies of machines, equipment and means of trans-porta on (48.5%) prevail in the import. Russia’s export and import opera ons are tradi onally s ll aimed at markets of developed countries which situa on re-fl ects irra onal geographic diversifi ca on of the coun-try’s foreign trade.

So, in the geographic pa ern of Russia’s foreign trade the European Union occupies a special place as the largest economic partner of Russia. In 2013, the EU accounted for 49.4% of Russia’s trade (48.7% in 2012). In 2013, the unit weight of the CIS states kept de-creasing and amounted to 13.6% of the foreign trade volume (14.7% in 2012), including that of the mem-

ExportImport

apr 1

2m

ay 1

2ju

n 12

jul 1

2au

g 12

sep

12oc

t 12

nov

12de

c 12

jan

13fe

b 13

mar

13

apr 1

3m

ay 1

3ju

n 13

jul 1

3au

g 13

sep

13oc

t 13

nov

13de

c 13

jan

14

Table 3DYNAMICS OF POSITIONS OF RUSSIA IN THE WTO RATING AND ITS SHARE IN THE GLOBAL TRADE IN GOODS

AND COMMERCIAL SERVICES IN THE 2000 2013 PERIOD 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013Export of goods 17/1.7 13 / 2.4 13 / 2.5 12 / 2.5 9 / 2.9 13 / 2.4 12 / 2.6 9 / 2.9 8 / 2.9 10 / 2.8Import of goods 29 / 0.7 19 / 1.2 18 / 1.3 16 / 1.6 16 / 1.8 17 / 1.5 18 / 1.6 17 / 1.8 16 / 1.8 16 / 1.8Export of services 31 / 0.7 26 / 1.1 25 / 1.1 25 / 1.2 22 / 1.3 22 / 1.3 23 / 1.2 22 / 1.3 22 / 1.3 21 / 1.4Import of services 22 / 1.2 17 / 1.6 18 / 1.7 16 / 1.9 16 / 2.2 16 / 1.9 16 / 2.0 15 / 2.3 14 / 2.5 8 / 2.8

* The fi rst digit is the place in the ra ng, while the second one, the share, %.Source: calculated on the basis of the WTO sta s cs for respec ve years.

Source: The IMF interna onal fi nancial sta s cs, interna onal trade informa on: the database of the Interna onal Trade Atlas (GTA) and the na onal sta s cs.

Fig. 3.Monthly dynamics of export and import of goods to Russia, April 2012 – January 2014 (%, in current prices)


45

ber-states of the Customs Union (CU) – 7.1% (7.7%) – and the Eurasian Economic Community (EEC) – 7.5% (8.0%). On the contrary, the share of APEC countries increased somewhat to 24.7% (23.8%).

In 2013, Russia’s main trade partners among far-abroad states were China with which the trade turn-over amounted to $88.8bn (101.7% in 2012), the Netherlands – $76.0bn (91.7%), Germany – $75.0bn (102.2%), Italy – $53.9bn (117.8%), Japan – $33.2bn (106.6%), Turkey – $32.8bn (95.5%), Poland – $27.9bn (102.0%), the US – $27.7bn (98.4%), South Korea – $25.2bn (101.5%) and the UK – $24.6bn (105.8%)1.

Among countries of the near-abroad, Russia’s lead-ing counterpar es were Ukraine (39.6bn), Belarus (33.6bn), Kazakhstan (26.5bn) and Uzbekistan (4.1bn).

In 2013, in Russia a trend of slowdown of export and reduc on of import was observed which situa on was largely jus fi ed by stagna on of the na onal economy. The preliminary data of the Federal Customs Service for the 1st quarter of 2014 points to the above trends which have now become of a sustainable nature2.

At present, the Ministry of Economic Development of the Russian Federa on is preparing a new version of the mid-term forecast of the country’s social and eco-nomic development for 2014–2016 period. According to the preliminary es mates, in 2014 Russia’s posi ve

1 The data of the Federal Customs Service of the Russian Fe-dera on, February 14, 2014.2 According to the preliminary data of the customs sta s cs, in January–March 2014 the import and export of goods from far-abroad countries in money terms fell by 4.4% and 6.5%, respec- vely, against the same period of the previous year.

trade balance may amount to $183bn–$190bn, while current account posi ons, to $36bn–$48bn3.

The updated dra of the forecast was adjusted mainly due to a change in expecta ons of a decrease in import to Russia which was jus fi ed by the eff ect of deprecia on and a general slump in the economy. The Ministry of Economic Development of the Russian Federa on expects a drop of 3.2% to 5.1% in the im-port of goods to $328bn–$335bn in 2014 while earlier it forecasted growth in import to $350bn. The Ministry of Economic Development of the Russian Federa on forecasts that in 2014 Russian export may fall by 0.3% to $518bn; earlier the forecasted index was at the level of $505bn.

However, at present, in a situa on of a looming cri-sis in the country’s economy, as well as gradual intro-duc on of poli cal and, possibly, economic sanc ons against Russia development of export and import will take place in a principally new situa on. The above external challenges and internal limita ons are to be taken into account in implementa on and inevitable adjustment of the government’s plans4.

3 The forecast of last December envisaged in 2014 the surplus of the trade balance and the current account at the level of $155bn and $21bn, respec vely. Prime, April 9, 2014.4 See, for example: The State Program of the Russian Federa on “Development of Foreign Economic Ac vi es” approved by Reso-lu on No. 378-r of March 18, 2013 of the Government of the Rus-sian Federa on; New version of the road map: “Support of Access to Markets of Foreign States and Support of Export”. Instruc ons No.259-r of February 26, 2014 of the Government of the Russian Federa on and other.


46

RUSSIAN DEFENSE SECTOR’S RESULTS IN 2013V.Zatsepin

It wasn’t un l the fi nal decade of April 2014 that it became possible to evaluate the Russian defense sec-tor’s 2013 key results, when Russia’s Prime Minister Dmitry Medvedev stated, making the April 22, 2014 Russia’s Government report on its performance in 2013 at the State Duma of Russia, that the defense industry complex (DIC) saw a 13.5% growth in output and a record-breaking amount of $15,74bn of export of defense-oriented products (DOPs) as proof of the fi rst signs of payoff from the public fi nancial support to the defense industry complex which has been pro-vided over the recent years1.

Offi cial evalua on of the foregoing actual growth, beginning with just 10% on January 222 and reaching 10.5%3 by March 19, eventually increased by 3 p.p. over three months, failing to meet the target value of 15–17% which the government expected to reach during the past year4. And such op mis c expecta- ons of high-ranking poli cians could be easily ex-

plained, because as early as June Deputy Minister of

1 Отчет Правительства о результатах работы в 2013 году: Стенограмма. М., 22.04.2014. h p://government.ru/news/11875. [Government report on its performance in 2013: Shorthand report. M., 22.04.2014. URL: h p://government.ru/news/11875 (date of access: 22.04.2014).] 2 Стенограмма заседания Госдумы 22 января 2014. h p://old.minpromtorg.gov.ru/press/news/211/. [Shorthand report of the State Duma mee ng on January 22, 2014 (date of access: 31.01.2014).] 3 Совещание с членами Правительства. Ново-Огарево, 19 марта 2014. h p://www.kremlin.ru/news/20612. [A mee ng with Government members in Novo-Ogarevo, March 19, 2014. URL: h p://www.kremlin.ru/news/20612 (date of access: March 19, 2014).] 4 See: Рабочая встреча с Заместителем Председателя Правительства Дмитрием Рогозиным: Стенограмма. Ново-Огарево, 21 марта 2013. h p://www.kremlin.ru/news/17719 [A task mee ng with Deputy Prime Minister Dmitry Rogozin: Shorthand report. Novo-Ogarevo, March 21, 2013 (date of ac-cess: 21.03.2013)]; Стенограмма эфира программы «Арсенал» с Д. Рогозиным // Радиостанция «Эхо Москвы». 2013. 16 декабря. h p://www.echo.msk.ru/programs/arsenal/1218709-echo/#element-text [Shorthand report of the “Arsenal” radio pro-gram a ended by D. Rogozin // Echo of Moscow Radio sta on. December 16, 2013. URL: (date of access: 25.04.2014).]

Indicators of output growth in the defense sector have lagged far behind the target fi gures. Growth in public investment rates is overtaking growth in output, thereby causing abnormal growth in prices of defense industry products and upsurge in corrup on. Mee ng the President’s requirements on crea ng a transparent military economy, streamlining the governance and pricing in the defense industry complex is s ll facing major challenges.

Economic Development А. Klepach expected the de-fense industry complex to gain about 19% in output5.

Neither in general nor in par cular does the Prime Minister’s message about the fi rst signs of payoff in 2013 from growing investment in the DIC can sup-port the sta s cs on growth rates in output in the DIC and DOP export, as presented in Table. 1. Within the 12-year meframe under review, the 2013 results of overall growth in output are ranked 5th, i.e. quite a moderate score, growth in DOP export are ranked the lowest, i.e. a very poor but not disastrous score – 2013 saw no well acceptable reduc on in the interna onal arms trade. Lagging behind the target growth in out-put in 2013 may seem insignifi cant, however, within three years of 2011 thru 2013 actual growth in output stood at 28% instead of the target 52%.

The growth, as reported by Medvedev, in public investment in the defense industry complex reached an unprecedented scale in 2013: the volume of state defense order (SDO) “increased 1.6 mes rela ve to 2012”6, federal budget alloca ons under the Na o-nal Economy func on increased 1.3 mes7 while state guarantees to DIC en es so that they fulfi ll the Mini-stry of Defense’s SDO and implement the federal tar-geted program (FTP) The Development of the Russian Federa on Defense Industry Complex in 2011–2020 increased 1.7 mes.

The published data on the federal budget alloca- ons to the SDO covered only the period of 2003 t hru

2005, whereas no data on the SDO fulfi llment has been published to date. Truly, the values of these indi-cators are available in public, not documented though, statements of government offi cials. Furthermore, it

5 Оборонные гарантии России // Красная звезда. 2013. 29 июня (№ 112). h p://www.redstar.ru/index.php/newspa-per/item/9939-oboronnye-garan [Russia’s defense guarantees // Krasnaya Zvezda. June 29, 2013 (No. 112) (date of access: 25.04.2014).] 6 Government report on its performance in 2013.7 Contribu ons to the charter capital, subsidies to the defense industry complex’s en es (open and closed ones) in 2013 under the Federal Law of 03.12.2012, No. 216-FZ On the Federal Budget in 2013 and the Planning Period of 2014–2015.

RUSSIAN DEFENSE SECTOR’S RESULTS IN 2013

47

appears from Deputy Prime Minister Dmitry Rogozin’s December 2013 report at the State Duma that the en- re volume of the Ministry of Defense SDO was then

es mated Rb 895,6bn1, whereas Minister of Defense S. Shoigu men oned nearly Rb 1 trillion 295bn in his January 2014 report at the Board mee ng, of which about 62% (i.e. about Rb 803bn) were allocated to the arms procurement, except that the procurement plan was fulfi lled 93% (which makes Rb 747bn)2. In No-vember 2013, President Pu n stated that total budget alloca ons to SDO in 2013 amounted to more than Rb 1,3 trillion.3 Addi onally, the confi den al part of the federal budget alloca ons under the Na onal De-fense, a budget func on, most part of which is com-prised of SDO, was reduced from Rb 1 trillion 108bn to Rb 1 trillion 77bn (no data on The Russian Federa on Armed Forces func on has been published yet) as a result of two amendments which were made during the year to the Law on the Federal Budget4.

Contribu ons to the charter capital, subsidies and direct budget investment in DIC en es (open and closed ones) in 2013 may be evaluated Rb 134,4bn5.

The data on state guarantees provided to DIC en - es so that they fulfi ll the Ministry of Defense SDO and

implement The Development of the Russian Federa- on Defense Industry Complex in 2011–2020 federal

targeted program (FTP) over the past three years are shown in Fig. 1.

1 Стенограмма заседания Госдумы 11 декабря 2013 г. h p://transcript.duma.gov.ru/node/3973/ [Shorthand report of the State Duma mee ng on December 11, 2013 (date of access: 25.04.2014).]2 Отвечать вызовам времени // Красная звезда. 2014. 22 января (№ 9). С. 1. h p://www.redstar.ru/index.php/newspa-per/item/13827-otvechat-vyzovam-vremeni [Responding to chal-lenges of me // Krasnaya Zvezda. January 22, 2014 (No. 9). P. 1. (date of access: 25.04.2014).] 3 Представление офицеров, назначенных на высшие командные должности. М., 19 ноября 2013 h p://kremlin.ru/news/19645 [Представление офицеров, назначенных на высшие командные должности. М., November 19, 2013. (date of access: 25.04.2014).] 4 Federal Laws On the Federal Budget 2013 of 03.12.2012 No. 216-FZ and 02.12.2013 No. 348-FZ.5 Российская экономика в 2013 году. Тенденции и перспективы. (Выпуск 35) — М.: Институт Гайдара, 2014. — С.511 [Russian Economy in 2013. Trends and outlooks (Issue 35) – M. Gaidar Ins tute.]

In spite of that the Russian Defense Industry Com-plex managed to show only a 13.5% growth in out-put in response to the substan al growth in public investment, and most part of the diff erence between the respec ve gains was found to be absorbed, as re-ported by independent mass media, by growth in pri-ces of DOPs, reaching 30%6, Minister of Defense Ser-gei Shoigu managed to report to President Pu n at the Ministry of Defense Open Staff Board early in Decem-ber 10, 2013 that “the fulfi lled SDO-2013 has allowed the arms procurement to be enhanced by supplying cu ng edge weapons and military equipment and by the end of the year will reach 45% for the Strategic Missile Forces, 21% for the Land Force, 42% for the Air Force, 52% for the Navy, 62% for the Airspace Defense Forces”7, i.e. the target fi gures of the state arms pro-curement program which provides for reaching 30% of cu ng edge arms procurement by the end of 2015 at the earliest must be reached and substan ally li ed for all branches but the Land Force.

6 Право голоса: Вооруженная Россия // Телеканал ТВЦ. 2014. 20 марта. h p://www.tvc.ru/channel/brand/id/36/show/episodes/episode_id/30533/?page=3 [The Right to Vote: Armed Russia // TVC TV Channel. March 20, 2014 (date of access: 20.03.2014).]7 К новым рубежам // Красная звезда. 2014. 13 декабря (№ 230). С. 5. h p://www.redstar.ru/index.php/newspaper/item/13282-k-novym-rubezham [Towards new targets // Kras-naya Zvezda. December 13, 2014 (No. 230). P. 5. (date of access: 25.04.2014).]

Table 1GROWTH RATES IN INDUSTRIAL OUTPUT IN DEFENSE INDUSTRY COMPLEX AND GROWTH IN EXPORT OF DE

FENSE ORIENTED PRODUCTS IN 2002 2013, Y O Y2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

DIC’s overall output 16.5 16.3 3.3 3.8 12.2 15.4 5.1 4.3 14.2 5.8 6.4 13.5DOP export 28.0 12.5 7.0 6.0 5.5 16.9 10.6 5.7 17.4 27.3 14.8 3.8

Source: Ministry of Industry and Trade of the Russian Federa on (Minpromtorg); Federal Service for Military and Technical Coopera- on; Centre for Analysis of Strategies and Technologies; author’s es mates.

194,0 224,8

430,9

157,9 214,3

362,3

0

100

200

300

400

500

2011 2012 2013

Planned guaranteesProvided guarantees

Source: Federal Laws On the Federal Budget in 2011–2013; Russi an Government’s execu ve orders; author’s es mates.

Fig. 1. State guarantees on the loans obtained by DIC en es in 2011 thru 2013, billions of rubles


48

Judging by this, – the data provided by the Minis-try of Defense and declared at the Staff Board meet-ing in December were subsequently confi rmed in the January report on the performance of The Ministry of Defense Ac on Plan on the Fulfi llment of the Russian President’s Orders of May 7, 2012, No. 597, 601, 603, 604, 605”1 which was published late in June last year – the 2013 growth in public investment in the Russian defense sector was defi nitely redundant.

In his April 22, 2014 report at the State Duma of Russia Dmitry Medvedev made a point of that in 2013 the plans on arms procurement of the strategic forces, supplying equipment for airspace defense and ballis- c missiles2 were accomplished, thereby inexplicitly

challenging the fulfi llment of the plans on arms pro-curement of the Land Force, Air Force, and Navy. In the la er case, it is a well-known fact that the Navy SDO failed to be accomplished despite a 6.4% growth in output of shipbuilding products3 declared by the Ministry of Industry and Trade of Russia: “Stoiky” corve e (Project 20380), “Grad Sviyajsk” and “Ug-lich” fast a ack guided missile cra s (Porject 21631), “Ivan Kartsov” and “Denis Davydov” assault boats (Project 21820), a few support ships4 failed to enter service in the Navy while Borei-class ballis c missile submarines “Yury Dolgoruky” and “Alexander Nevsky” (Project 955) entered service without being equipped with R-30 “Bulava”, the main ballis c missile, which s ll remains to pass government tes ng, thereby chal-lenging the Prime Minister’s statement about both the fulfi llment of the strategic forces SDO on arms pro-curement and the solu on of the recurring problem of compliance with SDO schedules faced by the defense industry complex.

1 h p://mil.ru/mod_ac vity_plan.htm (date of access: 22.01.2014). 2 Government report on its performance in 2013.3 Основные результаты работы Министерства промыш лен-ности и торговли Российской Федерации в 2013 году. h p://government.ru/dep_news/11861 [The key performance results of the Ministry of Industry and Trade of the Russian Federa on in 2013 (date of access: 23.04.2014).] 4 Самсонов А. Ухудшенная копия Минсудпрома – часть I // Военно-промышленный курьер. 2014. 2 апреля (№ 12) h p://www.vpk-news.ru/ar cles/19727 [Samsonov A. A worsened copy of the Ministry of Shipbuilding Industry – Part I // Voenno-promyshlen-ny kuryer. April 2, 2014 (No. 12). (date of access: 02.04.2014).]

The fact that the shipbuilding industry is facing not only the skilled personnel training issue but also other problems was confirmed at a meeting at the Expert Council under the State Duma Industrial Com-mittee on April 3, 2014 where First Deputy Chairman of the Committee Gutenev V. made a statement that eight criminal charges were filled as a result of the latest audit at the United Shipbuilding Corporation (USBC) in the Arkhangelsk Region, nine in St. Peters-burg and the Leningrad Region, four in the Primorsk Territory, five in the Murmansk Region, three in the Kaliningrad Region, one in the Khabanovsk Territory, etc.5 The reason for the created situation is obvious: “a serene environment, when the industrial sector was growing, when the budget was growing, when the state defense order was financed at outstrip-ping growth rates, thereby putting the contractors at ease and creating an atmosphere of impunity and permissiveness”6. However, the wording of the Gov-ernment’s report is indicative of that the Govern-ment has no such task as combating corruption.

The only serious step towards streamlining the gov-ernance in the Russian Defense Industry Complex was made in February 2013 when the Ministry of Industry and Trade of Russia li ed the tradi onal “For Offi cial Use Only” label for the Consolidated Register of De-fense Industry Complex En es7. However, none of the so disclosed respec ve lists of DIC en es have been published to date, and they are currently available only for subscribers of commercial legal databases.

5 Строим долго, дорого, некачественно – часть I // Военно-промышленный курьер. 2014. 16 апреля (№ 14). h p://www.vpk-news.ru/ar cles/19727 [Never-ending, expensive, low-grade construc on – Part I // Voenno-promyshlenny kuryer. April 16, 2014 (No. 14) (date of access: 16.04.2014).] 6 Ibid. 7 The Order of the Ministry of Industry and Trade of Russia of 05.02.2013 No. 137 On the Approval of the List of Organiza ons Enlisted in the Consolidated Register of Defense Industry Complex En es (as amended and restated by the Order of the Ministry of Industry and Trade of 23.10.2013, No. 1703).

THE REVIEW OF ECONOMIC LEGISLATION IN APRIL 20141

49

THE REVIEW OF ECONOMIC LEGISLATION IN APRIL 20141

I.Tolmacheva, Yu.Grunina

I. Federal law of the Russian Federa on Federal Law No.56-FZ of April 2, 2014 on AMEND-

MENT OF THE LABOR CODE OF THE RUSSIAN FEDERA-TION AS REGARDS INTRODUCTION OF A LIMITATION ON THE SIZE OF SEVERANCE BENEFITS, COMPENSA-TIONS AND OTHER PAYMENTS DUE TO TERMINATION OF LABOR CONTRACTS FOR INDIVIDUAL CATEGORIES OF WORKERS.1

The Labor Code of the Russian Federa on was sup-plemented with new Ar cle 349.3 which is applied to execu ves, their depu es, chief accountants and members of collegial execu ve bodies of state cor-pora ons, state-run companies and en es with the government’s over 50% interest in the charter capi-tal, as well as execu ves, their depu es and chief ac-countants of state extra-budgetary funds and public and municipal en es and enterprises.

The amount of severance benefi ts, compensa ons and other payments in any form paid to the above categories of workers is limited by a threefold amount of their monthly average pay (it is to be noted that an accrued salary, compensa on of travel expenses, compensa on for carry-over voca on and other are not taken into account).

In termina on of labor rela ons, a ban is set on payment of severance benefi ts in case of dismissal, for example, on grounds related to disciplinary pe-nal es.

II. Resolu on of the Government of the Russian Federa on Resolu on No.267 of April 4, 2014 on APPROVAL

OF THE STATUTE ON DOCTORAL STUDIES The approved Statute on Doctoral Studies estab-

lishes the following:• requirements to research and educa onal

workers sent to doctoral studies; • requirements to en es on which base a the-

sis can be prepared for applying for an aca-demic degree of a doctor of science (a receiv-ing en ty);

1 The Review was prepared with assistance of the Konsultant-Plus legal system.

In April, the following amendments were introduced in the legisla on: the size of severance benefi ts which are paid to laid off execu ve offi cers was limited; a new statute on doctoral studies was developed.

• procedure for sending of research and educa- onal workers to doctoral studies;

• procedure for prepara on of a thesis during doctoral studies, including deadlines within which such a thesis is to be prepared;

• rights and responsibili es of doctoral students; • the size and procedure for making monthly

payments to doctoral students.Also, the new Statute on Doctoral Studies includes

a number of new addi ons as compared to one which was in eff ect before, including:

• decision on sending a worker to doctoral stu-dies is taken by the manager of the sending en ty (an organiza on engaging in educa onal ac vi es or research whose workers are sent to prepare a thesis) with taking into account the guidelines of the scien fi c (research and research and engineering) council of that or-ganiza on on the basis of the worker’s appli-ca on;

• a receiving en ty (an educa onal organiza on of higher educa on, educa onal establish-ment of addi onal voca onal training and re-search en ty in which prepara on of a thesis is done) carries out a compe ve selec on of persons for prepara on of theses and on the results of that selec on a conclusion is made on a possibility of prepara on of theses by persons who took part in that compe ve se-lec on;

• preparation of a thesis for seeking of an aca-demic degree of doctor of science at doctoral studies is carried out on the basis of an agree-ment between the sending entity, receiving entity and doctoral student or on the basis of the agreement between the sending entity and the doctoral student if preparation of a thesis for seeking of an academic degree of doctor of science at doctoral studies is carried out at the sending entity. The above agree-ment must include the subject of the thesis in research line, terms of the research to be carried out by the doctoral student, deadlines of preparation of a thesis, the parties’ finan-


50

cial liabilities, reasons and procedure for ter-mination of the agreement and other terms;

• the sending en ty makes monthly payments to the doctoral student in the amount which is equal to a single minimum wage; in case of

a lay-off of the worker from the sending en ty monthly payments are stopped.

The Statute provides for payment of educa onal grants to persons admi ed to doctoral studies before January 1, 2014 ll the end of their training at doc-toral studies (but not later than January 1, 2018).

AN OVERVIEW OF NORMATIVE DOCUMENTS ON TAXATION

51

AN OVERVIEW OF NORMATIVE DOCUMENTS ON TAXATIONISSUES FOR MARCH APRIL 2014L.Anisimova

1We believe that these measures alone will be insuf-fi cient for doing away with stagna on in Russia’s econ-omy. The core of the ma er is that the measures con-sidered to be necessary for overcoming the stagna on trend – no ma er what its actual cause has been in the fi rst place, a generally unfavorable economic situa on or some specifi c poli cal developments, – should be those aiming at reducing the tax burden on commo-dity producers, implemented in conjunc on with some provisional measures designed to bring down the level of government expenditure. As long as busi-nesses are properly func oning, they create demand for workforce and form an independent market, while the government, by cu ng its expenditures, reduces the demand for tax-generated revenues and, conse-quently, the tax burden. However, if the aggregate tax burden is not reduced, and government expenditures, instead of being reduced, undergo a simple change of their structure (a shi toward government invest-ment), the nega ve trend in economic development will, regre ully, by no means be reversed.

De-off shoriza on will not provide any adequate solu ons to the exis ng problems, either – given the con nuing decline of the economic development rate: if capital fl ees the country and is not going to return, Russian corporate tax agents will not be able to fi nd sources to compensate for their losses incurred as a result of toughening of their tax obliga ons, and so they will rapidly lose their investors and be forced to shut down.

1 A. Shtykina, Minfi n sostavil instruktsiiu po presecheniiu vy-voda pribyli v ofshory [The RF Ministry of Finance has elaborated instruc ons for preven ng profi t ou low to off shore zones]. See top.rbc.ru/economics/22/04/2014/919508.shtml;Plan-perekhvat nalogov. Rosfi nmonitoring gotovitsia proverit’ ben-efi tsiarov [The Tax Intercep on Plan. Rosfi nmonitoring [Federal Financial Monitoring Service] is preparing to check on the benefi -ciaries]. See kommersant.ru/doc/2444518.

The most noteworthy developments over the period under considera on, against the backdrop of ever growing economic sanc ons being imposed by the West and the resul ng capital ou low from Russia, are the asser- on, by Russian authori es, of lack of any inten on on their part to further increase the tax burden, as well as

the measures suggested by the RF Ministry of Finance for the purpose of further de-off shoriza on of Russia’s economy, as well as measures designed to increase the economic responsibility of Russian organiza ons ac ng as tax agents responsible for proper transfer of dividends and interest due to foreign investors on the basis of tax exemp on mechanism in those instances when the said foreign investors are not iden fi ed in accordance with Russian legisla on as genuine benefi ciaries (owners) of such incomes1.

It would be technically easier to cut government ex-penditures in condi ons of deprecia on of the na on-al currency, but the money thus saved will pro bably be spent on fulfi lling the RF President’s pre-elec on promises to raise pensions, salaries and increase other social expenditures; in fact, this means that the sa-vings created as a result of declining real incomes of some popula on groups will be used to cover the con-sumer spending by other groups, namely to support imports in order to improve the current consump on level of socially vulnerable popula on strata. In any event, Chairman of the RF Government Dmitry Med-vedev, when repor ng to the State Duma the results achieved by his government in 2013, spoke of the ne-cessity to fulfi ll all the previously assumed social obli-ga ons2. It should be added though, that the govern-ment’s chairman also men oned the plan to cut by 10% the number of Russian government offi cials both at the regional and federal levels, in addi on to the previously announced 20% cut. However, in reality this will hardly result in any true reduc on in the amount of government expenditures.

According to the RF Ministry of Finance, the main ways to sustain the revenue base of Russia’s budgets in the present situa onи will be to reduce the number of tax exemp ons (the Ministry es mates that the losses of the federal and regional budgets resul ng from tax exemp ons have amounted to Rb 2 trillion3, and so now it is prepared to grant to regional authori es the right to abolish the exemp ons from regional and local taxes introduced at the federal level), and also to switch over to cadastre-based valua on of the tax base for

2 Dmitry Medvedev promised that any drama c turna-rounds in the economy will be avoided. See top.rbc.ru/poli- cs/22/04/2014/919615.shtml.

3 A. Kiselev. Moratorii nuzhno vves ne tol’ko na l’goty, no i na vse drugie element naloga [A Moratorium Must Be Imposed Not Only on Tax Exemp ons, But Also on Other Components of the Tax]. See kommersant.ru/doc/2453151, 15 April 2014.


52

the tax on immovable property transferred to regional and local budgets (it should be men oned in this con-nec on that the RF Government has recommended to the regions that they must not forcibly speed up this process). Besides, the RF Ministry of Finance has also somewhat so ened (falling short of completely elimi-na ng them) the fi nancial risks created for the banking system by the economic sanc ons introduced against Russia. In connec on with the suspension, at the in-tergovernmental level, of the nego a ons concerning the Russian Federa on’s signing on to FATCA1, the RF Ministry of Finance developed altera ons to RF legisla- on whereby Russian banks will be allowed to directly

deal with US tax agencies (US IRS2) in the FATCA frame-work3. However, un l 1 January 2015 Russian banks will not be obliged to operate as tax agents for the IRS – that is, withhold and transfer to the US budget 30% of the monies received in the accounts of US resi-dents opened with those banks (so far, the banks will only be collec ng informa on on their clients). But if the issue as to recognizing Russian banks as enrolled tax agents by the US IRS is not properly regulated prior to the year-end of 2014, sanc ons may be imposed on Russian banks in the form of suspension of their opera ons or closure of their correspondent accounts with Western banks.

The worsening prospects for Russia’s economic de-velopment have also triggered a search in the busi-ness community for some mechanisms that can help prevent any further progress in the nega ve trends. According to President of the Russian Union of Indus-trialists and Entrepreneurs (RSPP) Alexander Shokhin, Russia is currently at a crossroads – ‘The mobiliza on model for the economy, or a radical improvement of the business climate’. He suggested that the business community should stand for the la er scenario at the

1 FATCA (Foreign Account Tax Compliance Act) is a US tax law whereby non-resident banks are required to submit to the US In-ternal Revenue Service informa on on the opera ons carried on in the accounts opened with those banks by US residents and the persons controlled by those US residents, and to act as tax agents with regard to opera ons involving the handling of income derived from sources in the USA, to the extent of closing the accounts of non-complying clients. 2 Internal Revenue Service.3 O. Shestopal, Minfi n nashel vkhod v FATCA. Rossiskim bankam propisali pravila raboty s SShA [The RF Ministry of Finance Has Found an Entrance to FATCA. Russian Banks Have Been Prescribed Rules for Working with the USA]. See kommersant.ru/doc/2449026 of 10 April 2014. ‘The altera ons to Russian legisla on have al-lowed banks not only to directly inform the IRS on the accounts and opera ons of US taxpayers in Russia without viola ng there-by Russian legisla on, but also to close the accounts of those of them who avoids disclosing that informa on. However, as before, Russian banks will not be able to act as tax agents before the IRS, which means that they s ll be faced with the related risks – those of their correspondent accounts abroad being closed’.

public reading of Business Ombudsman Boris Titov’s report at the Interna onal Economic Forum in St. Pe-tersburg in June4.

The well-known businessman and ex-leader of the Civic Pla orm party Mikhail Prokhorov put forth his own solu ons in the framework of his comprehensive program for Russia’s development 5. These solu ons are clearly oriented to the interests of big businesses, and so they should be treated with cau on. It is in-deed possible that free access to hydrocarbon extrac- on granted, as he suggests, to private entrepreneurs

may result in increasing output and lowering extrac- on costs. However, the demand on world raw materi-

als markets has for a long me already been regulated through the use of produc on and supply quotas, in order to maintain a stable level of world prices. In reality, free access of private capital to hydrocarbon extrac on may only result in replacement of the key players in that market segment, with li le eff ect to the na onal economy at large. As for the proposal that land should no longer be divided into categories in ac-cordance with its uses (agricultural land, land for hous-ing development projects) and instead be placed on the market for free and unlimited circula on, it must be remembered that land and subsoil alike are legisla- vely consolidated in joint ownership by the Federa- on and the Federa on’s subjects, and represent the

same type of natural monopoly as natural mineral re-sources. A free commercial turnover of land can hardly be possible under a federa ve mul -na onal state sys-tem. In this sphere, there will always be a hierarchy of rela onships at several levels: the Federa on and a Federa on’s subject; a Federa on’s subject and the owner of a land plot. Land resources, similar to other natural resources, are subject to physical limits – that is, they cons tute a state natural monopoly. A state natural monopoly is a special type of monopoly, it is based on every ci zen’s right to enjoy the welfare produced by such a monopoly, and the government’s role (or func on) – that is, the government’s service – consists in most effi ciently governing that natural monopoly for the benefi t of en re society. Natural monopoly, in our opinion, must be dis nguished from other types of state monopoly, the crea on of the lat-

4 V. Khamraev, Nas malo i nas vse men’she. Buzines-ombuds-man Boris Titov gotovit doklad dlia prezidenta [There are Few of Us, and We Are Becoming Fewer S ll. Business Ombudsman Boris Titov Is Preparing a Report for the President]. See kommersant.ru/doc/2453139 15 April 2014.5 NEP 2.0: ob oborone i nastuplenii [NEP 2.0: On Defense and Off ensive]. See kommersant.ru/doc/2453979. Mikhail Prokhorov: ‘First, to launch a wave of private housing construc on around big ci es. For this to be done, land use categories must be abolished, and a mass of new land plots must be thrown on the free market, in order to radically reduce prices’.


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ter o en mes being mo vated by factors other than economic and involving a ban of restric ons on certain ac vi es (for example, a ban imposed by local authori- es on free parking in a city center, or the numerous

types of mandatory licenses granted by government agencies for the right to render certain services1). An op miza on of the list of paid government services may indeed help in elimina ng these unnecessary state monopolies. But Prokhorov’s proposals envi sage li ing of any restric ons specifi cally on the natural monopolies market. But absence of restric ons on the circula on of natural resources may give rise to con-troversial consequences, and in any event it is unlikely that this measure may indeed promote innova on de-velopment of the economy.

The issues of economic stagna on in Russia and the need to put an end to it have also s rred a stronger interest in the comprehensive package of technical measures suggested by the Interna onal Monetary Fund (IMF) for dealing with the current fi nancial in-stability Ukraine in the framework of the preliminary arrangement, announced on 28 March 2014, for a $ 14–18bn stand-by loan agreement. The aim of the suggested measures: ‘to try to immediately eliminate two big disbalances: fi scal and external’2.

The ‘technology’ for exi ng the crisis suggested by the IMF to Ukraine relies in the main on elimina ng the external disbalance through deprecia on of the na onal currency. When a na onal currency loses its value against world currencies, imports shrink (and so less currency is spent), and the condi ons improve for exports (the equivalent of proceeds from exported product denominated in world currencies increased the amount of exporter profi t denominated in the na- onal currency, thus boos ng produc on effi ciency).

A similar policy is currently being pursued by the RF Central Bank – the ruble’s free fl oa ng coupled with a high key rate of refi nancing, to cut off specula ve market demand for ruble-denominated funds with the purpose of conver ng them into world currencies. All these measures are designed to ensure priority de-velopment of export-oriented non-raw-materials in-dustries. The IMF experts have pointed out in connec- on with the situa on in Ukraine that a country with

1 The author fi rmly dis nguishes between these licenses and the licenses issued, for example, by self-regulatory organiza ons in response to newly emerged market demand for professional ser-vices in a specifi c fi eld of economic ac vity, with due regard for both the ecological safety standards and consumer safety stand-ards established for a par cular commodity (or work or service), and for average marker price of that commodity, so as to prevent a producer from capturing the market and establishing a single-price monopoly as a sole provider of that commodity (or work or service). 2 N. Petrova, Sushite salo [Start Hoarding Lard]. See kommer-sant.ru/doc/2432559

a considerable defi cit in its foreign trade and current opera ons accounts must have defi nitely made some mistakes in planning its exchange rate policy. Evidently, this considera on is no news for Russian authori es, either. It is not a coincidence that the RF President, in his conversa ons during Direct Line with Vladimir Pu- n on 17 April 2014, confi rmed the RF government’s

intent to s ck to the budgetary rule, whereby the amount of oil proceeds gained in excess of planned budget oil price targets is earmarked for government reserve funds – even in face of a plumme ng growth rate in the Russian economy3. By doing so, Russian au-thori es are trying to eliminate the eff ects of the raw materials factor on the processes of alloca on of fun-ding to cover government expenditures. This should be regarded as the manifesta on of an effi cient eco-nomic policy, provided that, at the same me, some mechanisms will be created for an ac ve involvement of private businesses in structural changes in the na- onal economy. Ukraine and Russia are faced with

somewhat similar problems in their post-Soviet econo-mies, and so the methods applied in the a empts to improve the economic situa on in those two countries can be visibly correlated. Howe ver, there are also cer-tain diff erences. Ukraine’s na onal bank has imposed a ceiling on the amount of foreign currency sold to individuals (15 thousand hryvnas per day per bank). Besides, a levy of 0.5% is imposed on foreign currency purchases, earmarked for covering the Pension Fund of Ukraine’s defi cit. The goal of such measures is to bring down the demand for foreign currencies, while at the same me preven ng a complete isola on of Ukraine’s market from the world market. Obviously, these measures resemble those introduced in Cyprus at the me of the banking system’s crisis, or in Rus-sia in 1998; they are probably inevitable in a situa on when foreign currency ou low cannot be halted. Rus-sia possesses substan al foreign currency reserves ($ 481.1bn)4, which prevent the realiza on of such a scenario. However, mush will depend on government policy, because over the period from late November 2013 through April 2014, Russia’s gold and foreign cur-rency reserves shrank by $ 40bn, or by nearly 8%.

The IMF’s recommenda on that the number of mili-tary personnel and government offi cials should be re-duced in order to bring down budget expenditures is a

3 Pu n prizval ne speshit’ s izmeneniem biudzhetnogo pravila [Pu n Spoke against Any Hasty Altera ons to the Budgetary Rule]. See ria.ru/economy/20140417/ 1004331592 от 17 April 2014. ‘Con-sidering the risks in the world economy – not only those in our econ-omy, I would s ll not a empt to alter the budgetary rule in a hurry. But this is a decision in the competence of the RF Government’, said Pu n to mass media representa ves a er the broadcast of Direct Line with Vladimir Pu n on Channel One in April 2014. 4 See cbr.ru/hd_base/default.aspx?Pr d=mrrf_m


54

standard requirement at the me of economic decline. Russia has managed to tackle that problem rela vely painlessly, by freezing salaries at government budget-funded ins tu ons and allowing these ins tu ons (subordinated to certain ministries – the RF Ministry of Health Care, the RF Ministry of Educa on and Science, etc.), including the power structures (the RF Ministry of Internal Aff airs) to render commercial services to the popula on, while at the same me separa ng the budget-funded and off -budget components of their ac vity. Thus, a collapse of the budgetary system was prevented, and criminal racket as a means of market redistribu on was not allowed to fl ourish (the build-ings remained state property in spite of the bad fi nan-cial situa on faced by the management, while the go-vernment offi cials in charge of these ins tu ons could provide, on a paid basis, the government services that were in high demand on the market). This helped to curb the growth of government expenditures, while at the same me sa sfying society’s demand for govern-ment services. As a result, in 2012 Russia succeeded in implemen ng a very complex large-scale reform of budget-funded ins tu ons by reorganizing them into not-for-profi t organiza ons or joint-stock socie es without social upheavals. If Ukraine now simply carries out a one- me massive cut in the number of civil ser-vants and military personnel, it may soon have to deal with grave social problems. And this measure will by no means remove the problem associated with bud-get defi cit, as the newly unemployed and their families will have to be kept at the budget’s expense (unem-ployment benefi ts, the cost of budget-funded medical care), they will be faced social degrada on – a factor preven ng their successful adapta on to the market situa on.

Another controversial point in the economic trans-forma ons in Ukraine is the newly developed scheme for raising taxes. At present, taxes in Ukraine are com-parable to those in Russia (value added tax (VAT) at a rate of 20%, tax on profi t at a rate of 18%). The levying of VAT on grain and pharmaceu cal exports means that the export-oriented industries (the source of foreign currencies) will be deliberately destroyed, because these products will be made exempt from local VAT in the importer ерах countries, so the losses incurred by exporters will simply be increased by the amount of addi onal domes c VAT. The drama c growth of pro-duc on costs will diminish the compe ve capa city of these commodi es on the external market (with their already well-established market prices and profi t rates). We believe that VAT must not be levied on ex-ported market products. It is another ma er that VAT transferred as advance payments, to be subsequently set off (or refunded) a er the sale of foreign currency

received as proceeds (the mechanism that had been applied in Russia prior to the switchover to a system of bank guaranteed granted against advance payments of VAT on exports.

In spite of the announced RF Government’s deci-sion not to increase the tax burden un l the end of the current poli cal cycle – that is, un l 20181, it can be assumed that the tax burden in this connec on was not understood to include the so-called ‘infl a on’ tax, when fl uctua ons in the ruble’s exchange rate result in a redistribu on of fi nancial resources across society: the government obtains some addi onal ruble-denom-inated resources, while individual ruble-denominated savings and current salaries are depleted of their for-mer value. That is why the emergence of an addi onal sum of approximately Rb 1 trillion is regarded by RF authori es not as an addi on to the exis ng tax bur-den, but as a supplementary source of internal funding for the government (these addi onal funds, as stated by the RF Ministry of Economic Development, instead of covering running budget expenditures will replen-ish the Na onal Welfare Fund (NWF)2). Howe ver, RF authori es should be cau oned against any further at-tempts to generate such ‘addi onal resources denomi-nated in rubles’, resul ng from a specula ve decline of the Russian na onal currency’s exchange rate.

Any quan ta ve easing policy3 is always fraught with increased risks. But whilst the concentra on of fi -nancial resources in the US market results in price fl uc-tua ons in that country’s fi nancial markets (an equiva-lent of rising fi nancial risks), the upshot of quan ta ve easing in other economies will be somewhat diff erent. Capital that is not ready to accept the excessive specu-la ve fi nancial risks on US markets will inevitably fl ow back into those developing markets where investment in real assets will produce a yield comparable to the return on investment in the developed economies, but cleared of fi nancial risks. If Russia’s na onal currency’s exchange rate will con nue to plummet at an acce-lerated rate, a cheap US dollar will, most likely, cause further weakening of the ruble, or it will be altogether ousted – in other words, the result would be a hidden ‘dollariza on’ of all se lements in domes c economic

1 ‘Shuvalov: the tax burden will not be increased in the nearest future. The document “Main Direc ons of Tax Policy un l 2017” will be extended to the end of the current poli cal cycle – un l 2018’. See itar-tass.com/ekonomika/1105431 , 8 April 2014.2 P. Mileshkin, Ulyukaev predskazal ekonomike svetloe budush-chee. Oslableniie rublia pomozhet popolnit’ federal’nyi biudzhet na 900 milliardov [Ulyukaev Predicts a Bright Future for the Econ-omy. The Ruble’s Weakening Will Help to Replenish the Federal Budget by Rb 900bn]. See utro.ru/ar cles/2014/04/16/1189721.shtml3 This policy is understood by us as a policy aimed at sa sfying the economy’s demand for fi nancial resources by means of ‘liquid-ity injec on’.


55

transac ons, and the ruble will no longer be used as a currency for saving and capital accumula on1. Russia has already experienced the consequences of a refusal to make se lements in rubles – this was at the turn of last century. This problem cannot be solved by means of prohibitory legisla on alone. Russia is s ll impor ng the bulk of consumer commodi es in demand on her domes c market. In view of a declining ruble, infl a on-ary expecta ons will, most likely, be on the rise, thus pushing up the level of prices for imported consumer items. Similar problems will also be faced by those in-vestors who take loans denominated in foreign curren-cies on interna onal markets in order to buy hi-tech equipment and technologies. As a result, investment in the moderniza on of fi xed assets and development of the industrial produc on base will be shrinking.

At present, it is impera ve for Russia to pursue a very moderate labor remunera on policy in the state sphere and the spheres closely linked thereto, abstain-ing from the alloca on of ‘addi onal ruble-denominat-ed funds’ to social expenditure items and the upkeep of the government. The Na onal Welfare Fund is a government reserve, and so any money spent from it belongs to the category of government expenditure. We believe that, in a situa on characterized by short-age of aff ordable bank loans needed for revival of small and medium-sized businesses, it can be possible to re-channel some of the money earmarked for trans-fer to the Na onal Welfare Fund, for the fi nancing of commercial investment projects implemented under the joint control of representa ves of government agencies, state corpora ons and the business com-munity. Funding can be channeled through several public non-governmental investment funds by means of short-term (for a period under one year) returnable investment (not to be spent on fi nancial assets, or to be used as a business turnover loan, or to cover com-modity purchases, or to cover the costs of raw materi-als extrac on, etc.), the interest on which can be used by the investment funds to strengthen their fi nancial base.

The most important norma ve documents issued during the period under considera on are as follows:

1. The RF Ministry of Finance’s le er, of 9 April 2014, No 03-00-RZ/16236 off ers clarifi ca ons with regard to a number of issues concerning the exis ng double taxa on avoidance agreements (hereina er to be referred to as Agreements) in the part of benefi t applica on terms and tax agents’ liabili es towards the RF budget. This le er should be considered within

1 Situa ons when a stronger currency pushes out a weaker one have always been the rule rather than the excep on in modern fi nancial history.

the context of an -off shore measures being taken by the RF government.

The Ministry of Finance points out that for an en ty to be recognized the actual (benefi cial) owner of the income, the relevant en ty should not only be legally en tled to receive the income, but it should also be an immediate benefi ciary, i.e., be en tled to decide economically how and when to dispose of the income. Thus, the mere formal fact of ‘tax residency’ should not be deemed to be suffi cient for an en ty to be granted a tax benefi t. The case in point is some intermediate en es situated in the countries which have signed bi-lateral double taxa on avoidance agreements with Russia, but actually transfer the income received by Russian taxpayers to en es that are residents in some other state, which has not signed a bi-lateral double taxa on avoidance agreement with Russia. The RF Ministry of Finance explains that an intermediate en ty, for example a conduit company2, should not be deemed to be an en ty en tled to actual ownership of the received income and to the corresponding tax benefi ts if such a company, despite its formal status of income owner in a transac on with a person that is tax resident in the state where the source of that income is situated, has very limited authority over the said income, being in fact a trustee or manager ac ng in the name of other interested par es. The issue of requalifi ca on of the subject of an interna onal com-mercial agreement clearly falls outside the jurisdic on of the tax authori es and poses a very tough task even for the judicial authori es. At the same me, by Ruling of the Plenum of the RF Supreme Arbitra on Court, of 30 July 2013, No 57 it has been established that a tax agent should be responsible for correctly calcula ng the appropriate amount of the tax and for withholding it at the source (including the correctness of applica- on of the tax benefi ts (reduced rates and exemp ons)

envisaged by interna onal double taxa on avoidance agreements). As a result, all the risks for conduit com-panies will became apparent and taken into account in advance. However, in the event of systemic non-recog-ni on, by the tax authori es, of such companies’ right to tax benefi ts, coming hand in hand with hampering of their even most ordinary commercial transac ons and coupled with the addi onal administra ve de-mand that the ownership right, of a foreign resident, to the received income should be properly confi rmed,

2 A conduit company (from French conduit – a pipe) is a holding company formed in order to reduce the amount of tax burden in the course of interna onal transac on by serving as a pipeline for income from one country to another. Conduit companies are usu-ally established in countries (or territories) with so er tax regimes or in countries that have signed bilateral double taxa on avoid-ance agreements.


56

Russian organiza ons may easily lose their investors and, as a result, suff er considerable losses.

It should be added that all these observa ons and conclusions clearly point to the necessity, for Russia, to join the exis ng interna onal systems of automa c informa on exchange. However, it is likely that the current economic sanc ons can make the se lement of this issue in the nearest future all but impossible. In any case we believe that, in order to avoid a massive exodus of investors from the RF, any sanc ons against Russian organiza ons – tax agents should be imposed only a er it has been proved that those tax agents are indeed misusing the tax benefi ts granted to them un-der interna onal agreements1.

2. Federal Law, of 2 April 2014, No 52-FZ has intro-duced the following altera ons to the RF Tax Code (RF TC):

a) Taxpayers – physical persons paying property and transport taxes on the basis of tax no ces are now obliged to submit, to the relevant tax body, the afore-said tax no ces and copies of the documents estab-lishing (or cer fying) their ownership rights to the re-levant immovable property objects and (or) copies of the documents in confi rma on of State registra on of their motor vehicles. Such documents should be sub-mi ed to the relevant tax body in respect of each of the objects of taxa on once a year, before 31 Decem-ber of the year following the expired tax period. The failure (or delay) to submit the aforesaid informa on should entail tax liability: a fi ne at a rate of 20% of the unpaid amount of tax;

b) As a result of the recent change in the status of budget-funded ins tu ons, whereby these have been made subject to Russia’s legisla on on non-commer-cial organiza ons, those Federal Treasury’s bodies where the client accounts of budget-funded organiza- ons are operated, should be obliged to inform the tax

relevant authori es about the opening and closure of client accounts, as well as about any changes in the format of such accounts, exactly as it is done by the credit ins tu ons opera ng the client accounts of tax-payers;

c) The simplifi ed taxa on system, whereby exemp- ons are envisaged from the profi ts tax (except for the

profi ts from the dividends and interest on government securi es), from the property tax (except for the as-sets which are taxed at their cadastral value), from VAT

1 As follows from the clarifi ca ons provided by the Cons tu- onal Court of the Russian Federa on (RF CC), interna onal agree-

ments should be deemed to be an element of Russian Federa on’s domes c legisla on, and therefore must be observed by all gov-ernment ins tu ons on a regular basis, and not only in response to a court ruling.

(except for VAT on imports), and a 6% rate of tax is set for income, or a 15% rate for the diff erence between income and expenses, has now been made available to organiza ons established by budget-funded and autonomous ins tu ons for the purpose of materi-alizing the results of the intellectual ac vity of these budget-funded and autonomous ins tu ons in those cases when the exclusive rights to the results of the said intellectual ac vity are not only held by these (sci-en fi c) budget-funded and autonomous ins tu ons in full, but are also held jointly with third par es. The purpose of this decision is to give an impetus to said third par es to increase their coopera on with edu-ca onal and scien fi c ins tu ons in business ma ers and other joint ac vi es, as well as in implemen ng the results of joint intellectual projects.

3. The RF Ministry of Finance’s le er, of 27 January 2014, No 03-11-09/2884 and the Federal Tax Service of Russia’s le er, of 7 April 2014, No GD-4-3/6312@ contain a very important clarifi ca on concerning the procedure for issuance of licenses to individual entre-preneurs in 2014.

In accordance with the RF TC, the tax for the patent issued to an individual entrepreneur should be calcu-lated at 6% of the poten al annual income expected to be received thereby within the framework of one or other business ac vity. The amounts of poten al an-nual income should be established by the laws of the subjects of the Russian Federa on (clause 7 of Ar cle 346.43 of the RF TC) for all types of entrepreneurial ac- vi es in rela on to which the patent system of taxa- on can be applied. At the same me, the minimum

amount of the poten al annual income expected to be received by an individual entrepreneur cannot be less than Rb 100,000, while the maximum amount in the same instance cannot exceed Rb 1m. The mini-mum and maximum amounts of the poten al annual income expected to be received by an individual entre-preneur are eligible for indexa on by the defl ator coef-fi cient set for the corresponding calendar year (ibid, clause 9). By Order of the RF Ministry of Economic De-velopment, of 7 November 2013, No 652, the defl ator coeffi cient for 2014 is set at 1.067.

According to legisla on, a relevant tax body is obliged to issue a patent to an individual entrepreneur applying for it within 5 days since receiving the appli-ca on. Therefore the tax body does not have the right to reject this applica on on the ground that the law of the corresponding RF subject, whereby the amounts of poten al annual income expected to be received by individual entrepreneurs in the next calendar year is to be set, has not yet been adopted. Should this indeed be the case, then the cost of the patent is to be deter-


57

mined on the basis of the ‘old’ ini al data, to which the 2014 defl ator-coeffi cient should be applied.

As far as the status of individual entrepreneurs is concerned, the clarifi ca ons provided by Russia’s Mi-nistry of Finance and the Federal Tax Service (FTS) have, in fact, totally eliminated the danger of admin-istra ve procras na on that may result from delays in the passage, by one or other RF subject, of the relevant laws. In the event when the maximum and minimum amounts of poten al annual income for some types of entrepreneurial ac vi es, established by the relevant RF subject’s law for 2014, are increased (or decreased) in comparison with those being rested on by the tax body when issuing the patent, the tax body should is-sue to the taxpayer a new patent with the updated tax amount.

4. It should be noted that the RF Ministry of Finance con nues its frui ul ac vity aimed at removing all the other administra ve obstacles that are economically counterproduc ve for taxpayers. Thus, in the RF Mi-nistry of Finance’s le er, of 10 April 2014, No 03-03-RZ/16288 it is noted that any primary documents at-tes ng to the validity and nature of produc on costs, including the costs of hospitality, may serve as confi r-ma on of the fact of such costs having been incurred for profi ts tax purposes, including tax deduc on. In par cular, the document confi rming the validity of hospitality may be a summary report on expense ac-counts, approved by the head of the organiza on and confi rmed by relevant primary documents.

5. The RF FTS’s le er, of 7 April 2014, No GD-4-3/6391@ clarifi es the issue concerning the procedure for paying Mineral Resource Extrac on Tax (MRET).

In accordance with the RF TC, a MRET payer carry-ing out mineral extrac on at several sites situated in the territory of one subject of the Russian Federa on, has the right to be registered with the tax authori es of the territorial administra ve unit where one of the above sites is situated. As far as the fi lling up of a tax declara on is concerned, this means that the taxpayer should now enter, in sub-sec on 20 of the Declara- on’s Sec on ‘The Amount of Tax Payable to the Budg-

et’, the OKATO code of the municipal forma on where the said taxpayer is registered as a MRET payer. Bear-ing in mind that the RF Tax Code s pulates that ‘the tract of sub-soil granted to the taxpayer for use shall be recognized to be the territory of the subject of the Russian Federa on where the tract of sub-soil is situ-ated’ (clause 1, Ar cle 335 of the RF TC), the OKATO code of the tax body selected by the payer of MRET will by no means principally aff ect the iden fi ca on of the actual recipient of this income.

The procedure for entering MRET revenues into various budgets is regulated by the budgetary legis-la on of the Russian Federa on. The distribu on of MRET revenues among the budgets of Russia’s budget system is carried out on the basis of the aggregate amount of tax receipts under the relevant code of the RF budget classifi ca on.

6. The RF FTS’s le er, of 15 April 2014, No GD-4-3/7123@ states that the free of charge transfer of ownership rights to excisable goods from one person to another, carried out for promo onal purposes, should be deemed to be the sale of goods, and thus subject to excise duty. We believe that the tax authori es should have been provided with a more precise clarifi ca on in order to avoid any possible distor ons of exis ng legisla on in the future. Promo onal campaigns are designed to promote goods (or work, or services), and in this capacity they represent a form of adver zing. Therefore they should be en tled to the same benefi ts that are established for adver zing goods (or work, or services). In par cular, in accordance with the exis ng procedure for the transfer of excisable goods (or work, or services) carried out for promo onal purposes in the territory of the Russian Federa on, the transfer, for adver zing purposes, of goods (or work or servi-ces) should be made exempt from VAT, provided that the cost of acquiring (or crea ng) a unit of those goods (or work, or services) does not exceed 100 rubles (sub-clause 25, clause 3, Ar cle 149 of the RF TC). At the same me, in accordance with clause 16 of Ar cle 270 of the RF TC, expenses in the form of the value of as-sets (or work, or services), which are transferred free of charge, and expenses associated with such transfer, should not be taken into account when determining the tax base, and therefore should not be deemed to be tax-deduc ble.

7. Joint le er of the RF Ministry of Finance and the RF FTS, of 4 April 2014, No GD-4-3/6132 specifi es the situa ons where persons who are not payers of VAT should also be made exempt from the obliga on to submit VAT declara ons. According to the le er, this exemp on should be extended to: 1) those organi-za ons and individual entrepreneurs whose en re amount of income received from the sale of goods (or work, or services) generated over the course of three previous successive calendar months does not exceed Rb 2m before VAT; 2) the taxpayers using the simplifi ed system of taxa on (except for VAT on imports); 3) the payers of a single presump ve income tax – within the framework of their entrepreneurial ac vi es subject to this tax (except for VAT on imports); 4) the payers of a single agricultural tax (except for VAT on imports);


58

and 5) entrepreneurs who have switched over to the patent taxa on system.

8. Joint le er of the RF Ministry of Finance and the RF FTS, of 24 March 2014, No BS-4-11/5295 communi-cates to the tax authori es the procedure for reconcil-ing informa on on immovable property entered into the Unifi ed State Register of Immovable Property and Transac ons Therewith (EGPR) with informa on con-tained in the databases of regional authori es of the Federal Tax Service. The purpose of the said procedure is to make it possible for the tax authori es to mely compose and issue tax no ces to taxpayers, specifying

the amount of their immovable property tax. In order to coordinate the ac vi es of the RF FTS and the EG-PR, these federal ins tu ons have established a spe-cial interdepartmental task force. The RF FTS was to submit the ini al list of immovable property objects to the EGPR before 28 March 2014. The me limit for the EGPR to consider the said list was set at 30 days. For our part, we believe that such interdepartmental task forces should operate on a permanent basis, because otherwise it would be technically diffi cult to update on a mely basis the lists of real property objects con-tained in the databases of regional authori es of the Federal Tax Service.

russian_economic_developments_eng.5_2014.pdf

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