Russian economic developments_eng_6_2014

RUSSIAN ECONOMIC DEVELOPMENTSNo.6 2014

POLITICO ECONOMIC RESULTS IN MAY 2014 (S.Zhavoronkov) 2INFLATION AND MONETARY POLICY IN APRIL 2014 (A.Bozhechkova) 5FINANCIAL MARKETS IN MAY 2014 (N.Andrievsky. E.Khudko) 9THE REAL SECTOR OF THE ECONOMY IN APRIL 2014: FACTORS & TRENDS (O.Izryadnova) 13THE RUSSIAN INDUSTRY IN APRIL 2014 (S.Tshukhlo) 17DEVELOPMENT TRENDS IN RUSSIA’S OIL & GAS SECTOR (Y.Bobylev) 19THE FOREIGN TRADE IN MARCH 2014 (N.Volovik) 24THE STATE BUDGET IN JANUARY APRIL 2014 (T.Tischenko) 27THE RUSSIAN BANKING SECTOR IN APRIL 2014 (M.Khromov) 31THE MORTGAGE IN THE RUSSIAN FEDERATION IN Q1 2014 (G.Zadonsky) 35THE LIVING STANDARDS OF THE POPULATION OF THE RF IN JANUARY APRIL 2014 (S.Misikhina) 38DEVELOPMENT OF A PERFORMANCE ASSESSMENT SYSTEM FOR SCIENTIFIC RESEARCH ORGANISATIONS, AS A PART OF THE ONGOING RAPID REFORM (I.Dezhina) 41

ADMINISTERING OR GOVERNING: THAT IS THE QUESTION (I.Starodubrovskaya, K.Kazenin) 44THE REVIEW OF ECONOMIC LEGISLATION IN APRIL 2014 (I.Tolmacheva, Y.Grunina) 47AN OVERVIEW OF NORMATIVE DOCUMENTS ON TAXATION ISSUES FOR APRIL MAY 2014 (L.Anisimova) 49

© 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. 6, 2014

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POLITICO ECONOMIC RESULTS IN MAY 2014S.Zhavoronkov

According to the data available on Ukraine, a mili-tary parity was established in May 2014 between Ukrainian military forces loyal to the Kiev government and federaliza on supporters who control most of the territory in Donetsk and Lugansk regions. None of them can progress substan ally despite regular clashes using heavy weapons. Russia le without response the federaliza on supporters’ appeals for sending Russian troops to Donetsk and Lugansk re-gions, however, the federaliza on supporters them-selves admit that the bulk of their armed groups consists of volunteers from Russia, in par cular from Chechnya and Osse a. At the same me, President Pu n stated on May 7 that the upcoming May 25 presiden al elec on in Ukraine is “a step in the right direc on” and he is “ready to work” with those who will take offi ce in the Ukrainian government a er the elec on. Entrepreneur P. Poroshenko was elected Ukraine’s President in the fi rst round (53% of votes). His Russian assets, a confec onery works in Lipetsk, have been frozen for several months, and Russia’s ban on supplies to Russia of products manufactured in his Ukrainian plants has been in force for almost a year. Kremlin hasn’t yet sent an offi cial message of congratula ons to recently elected President Poroshenko, but there is an indirect evidence of Russia’s readiness to deal with him, i.e. there was a message of congratula ons from Patriarch Kirill, Head of the Russian Orthodox Church, plus Russian TV channels have stopped covering the topic of “le-gi mate” President Yanukovich”. The United States, Canada, European Union, Australia, and other coun-tries which previously imposed sanc ons against Russia, have actually given up new sanc ons, saying

Tensions in the eastern Ukraine were eased a bit in May 2014, although the causes of the confl ict s ll remain to be resolved. There is a fragile balance today between the Ukrainian military forces and the armed groups of supporters of federalism in Donetsk and Lugansk regions. In the circumstances, Russian leaders made a few con-ciliatory statements, making it clear that Russia is ready for a dialogue with Ukrainian President P. Poroshenko elected on May 25, 2014. Beside the military issues, there is a serious Russia-Ukraine confl ict over payments for Russia’s natural gas supplies to Ukraine. Russia entered into a contract with China on large supplies of natural gas in the long-run perspec ve. The profi tability of the contract remains ques onable due to the need to build from scratch a new pipeline, however, Russia seems to be seriously interested in China’s poten al to fi nance, even now, the Russian economy. The an cipated Treaty on the Establishment of the Eurasian Economic Community covering Russia, Kazakhstan and Belarus was signed, without causing any sensa ons. Russia made minor conces-sions but gained its principal point on the impropriety of nulling export du es on hydrocarbons in trade rela ons between the countries.

that they can be imposed in case of Russian military incursion into the eastern Ukraine.

The exis ng balance is very delicate. It is absolutely unclear what Russia would do if the self-proclaimed Donetsk and Lugansk People’s Republics fi nd them-selves to be on the brick of a military defeat and liqui-da on. Truly, as long as they control their territories, they cons tute a more acceptable legal form than di-rect annexa on of these territories by Russian military forces. Apart from the s ll exis ng threat of new sanc- ons against Russia, the country is facing new mul -

direc onal threats – from ques onable usefulness of ac ons such as military coup (if a coup is possible in Donetsk, why it may not be possible in Moscow?) to damages to Russia’s image in case of liquida on of the self-proclaimed republics – their supporters would ac-cuse Russia of betrayal, and it would be diffi cult to de-feat such accusa ons given the tone of news reports in Russian offi cial mass media. Furthermore, there is a very serious gas confl ict between Russia and Ukraine. As a reminder, Ukraine is not only a consumer of Rus-sian natural gas (about 25 billion cubic meters at 2013 year-end), but it is also the largest transit country of Russian gas, therefore without using the Ukrainian ca-paci es Russia will not be able to meet its obliga ons on gas supplies to Europe. Under the Russia-Ukraine gas contract signed as early as 2009, whose terms are very unfavorable for the Ukrainian party, the price of gas is much higher than $400 per 1000 cubic me-ters1 but reduced to a 30% (but not more than $100 per 1000 cubic meters) as discount for the deploy-ment of Russia’s Black Sea Fleet in the Crimea under

1 The exact price was calculated on a quarterly basis and was, for example, about $400 USD in 2013.

POLITICO-ECONOMIC RESULTS IN MAY 2014

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the agreement of 2010. The Russian leaders believe that the discount has ceased to be in force due to the Crimea’s accession to the Russian Federa on, whereas the Ukrainian leaders consider the Crimea as Ukrai-nian territory occupied by Russia, and the discount is therefore s ll in force. The par es also disagree con-siderably on proposals of how to address the situa on: Russia suggests that Ukraine should redeem at least a part of its outstanding debt owed to Russia, and Rus-sia is ready to discuss further discounts only a er the payment is made, whereas Ukraine is not ready to re-deem its debt un l a new gas supply contract is signed to se le all the disputed issues, Ukraine can pay with the resources received recently as fi nancial aid from the IMF, the World Bank, the United States, and the European Union. The European authori es, on their part, suggest that Russia and Ukraine should switch to direct payment for contracted volumes of gas, so that they can resolve the Russian-Ukrainian dispute. Rus-sia has given no answer yet, threatening to reduce gas supplies to Ukraine if no payment is aff ected soon.

Therefore, the poli cal component of the confl ict has been supplemented with a very signifi cant eco-nomic component, and very poor condi ons of the Ukrainian armed forces revealed during the clashes with the federaliza on supporters s ll may en ce Russia to resolve all the problems at once, i.e. by a military incursion. However, the likelihood of tough-er sanc ons (Russian GDP accounts for mere 3% of the global GDP versus 60% of the countries imposing sanc ons), on the one hand, and material fi nancial losses that Russia might sustain in case of assum-ing responsibility to fi nance the heavily populated eastern Ukraine (about 7 million in Donetsk and Lu-gansk regions alone, compared to 2 million or less in the Crimea) and the guerrilla warfare, on the other hand, is what prevents hotheads from doing it. A reasonable op on of compromise could become a comprehensive agreement on supplies of not only natural gas but also water, electric power and other commodi es, as well as railway transporta on to the Crimea, according to the se lement prices which existed prior to the Ukrainian crisis, while poli cally Ukraine should commit itself to extend the rights of local self-government in Ukraine and provide cons -tu onal guarantees of the Russian language status in the regions where a considerable part of the popu-la on speak Russian. As a ma er of fact, the selec- on of terminology isn’t so important here. However,

this implies inevitable liquida on of the armed fed-eraliza on supporters for whom this scenario is un-acceptable. It appears that Russia, not ruling out a compromise in the economic area, wants to fi x the status quo in Ukraine’s east regions, i.e. support the

supporters of federaliza on so that they can survive, while the form of support would be unoffi cial.

The Treaty on the Establishment of the Eurasian Economic Community covering Russia, Belarus and Kazakhstan was signed on May 29, 2014. Prepara- on of the Treaty faced diffi cul es, because Belarus

demanded substan al preferences for itself, in par- cular the introduc on of a free trade regime for hy-

drocarbons, which would mean heavy losses for the Russian federal budget from abolished export du es, while Kazakhstan was against Russia’s plans to speed up the accession of Armenia and Kyrgyzstan, especially the la er, to the Community, which would mean li ing barriers to labor force movement in this poor country. Eventually, the status quo was actually fi xed: the issue of Armenia and Kyrgyzstan accession were set aside, Belarus increased 20% its quota on duty-free crude oil supplies and received a new loan from Russia, while the issue of abolishing the exclusion of hydrocarbons from free trade was set aside too.

President Pu n paid a visit to China on May 20–21, 2014. A few agreements were signed during the visit, in par cular a gas supply contract (the respec- ve protocol of intent was signed as early as 2006,

but the par es thereto failed to agree on the price) which has been stalled for almost 10 years. The con-tract covers annual supplies, in the long run, of 38 bil-lion cubic meters of gas at a price near $350 USD per 1000 cubic meters1. Neither the volumes nor the price are big. European prices are about $400 USD, plus there are high-yield markets like in Japan where the price is more than $500 USD. Russia exported a bit more than 200 billion cubic meters at 2013 year-end. It is important to understand that Russia has failed in a emp ng to use the so-called “western” corridor via Altai2 whereby the exis ng gas pipeline system could have been used subject to minor adjustments. However, a new gas pipeline to the Kovytkinskoye and Yakut fi elds has to be build. This means that this contract cannot be a physical alterna ve to gas sup-plies to Europe, because in any case it is other gas and other pipeline, but it can, to some extent, be a fi nancial alterna ve in case Europe reduces purchases of Russian natural gas. Regre ully, many parameters of the contract are confi den al; it will take long un l it is included into Gazprom’s fi nancial statements; its price, according to most experts, is balancing on the brink of profi tability; the Russia’s federal budget will see no revenues from the mineral extrac on tax from

1 Prices in contracts are normally pegged to crude oil prices or other fuel equivalents, which means that the price is not fi nal. 2 China’s north-west provinces are underpopulated, industrially undeveloped, and China sees no benefi ts in building at its own cost a pipeline to eastern China.


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which these volumes of gas supplies will be exempted, as was previously announced (Gazprom is very likely to succeed in its a empts to obtain exemp on from export du es). While considering eastern sales mar-kets for gas supplies, it would be appropriate to look at more profi table markets of Japan or South Korea, especially because Russia in any case plans to build a LNG terminal in Vladivostok. Beside the gas contract, Russia signed a few other contracts with China, in par- cular a curious contract on the co-development of a

long-haul passenger aircra , although China shows no technological leadership in this area. A few contracts on the co-development of coal deposits in Russia, sup-plies of equipment, etc. seem to be quite reasonable. However, few people pay a en on a $500bn loan to Russian corpora on Vnesheconombank which is fac-ing refi nancing issues a er its par cipa on in various Olympic construc on projects of the century, and the informa on on that China may fi nance the construc- on of a pipeline. In the mean me, this gives answers

to many ques ons – the Russian economy has been overcredited and, having no good access to western credit resources, Russia has to agree on less benefi cial terms of trade with China.

Tradi onal St. Petersburg Interna onal Economic Forum (SPIEF 2014), the largest business forum in Rus-sia, was held in in May 2014. As usual, the Forum be-came not only a place for the announcement about major contracts, but also for discussions. This acquired a special meaning, because it was actually the fi rst fo-rum of this kind to be held amid a new interna onal situa on. In par cular, announcement was made about a contract between Total and LUKOIL on the es-tablishment of a joint venture for the development of the so-called Bazhenov Forma on1 in the West Siberia,

1 Bazhenov Forma on is a stratum (set) of rocks discovered in the West Siberian Basin at a depth of more than two kilometers and a territory covering more than 1 million square kilometers. It is heavy satura on with a high-quality crude oil (like Brent oil) that makes it unique and economically valuable.

a gas supply contract between Rosne and Fortum, a contract between Summa Group and Veliola on the establishment of an operator in the u li es market. Overall, concerns over large businesses’ total refusal to cooperate with Russia were not confi rmed despite the absence of a few corporate chief execu ves. The confl ict between Russia and Visa and Mastercard which threatened to leave the Russian market because of adopted laws under which they must pay a security deposit much bigger than the profi t they generate in Russia was reconciled. There were anxious moments too, e.g. President Pu n stated that the Central Bank of Russia will invest in the Russian economy, which ba-sically contradicts the applicable laws and regula ons (despite the fact that the Central Bank refi nances com-mercial banks). However, it remains to be seen whe-ther these statements will come into force.

There were a number of shakeups among high-ranking offi cials in Russia. First of all, resigna on of powerful V. Kozhin, former Head of the Presiden al Execu ve Offi ce embracing hundreds of governmental units, and his appointment as assistant to the Presi-dent, an honorary but symbolic post. He was replaced with li le known general A. Kolpakov who previously headed one of the state residencies. N. Rogozhkin ap-pointed the Presiden al Plenipoten ary Envoy to the Siberian Federal District, was replaced by Commander-in-Chief of Interior Ministry Troops V. Zolotov who pre-viously headed for a long me the Russian President’s Security Service. A. Khloponin was removed from the Presiden al Plenipoten ary Envoy to the North Cau-casian Federal District but remained in the seat of just a Deputy Prime Minister in the Russian Government, however, close to him L. Kuznetsov, the former Gover-nor of the Krasnoyarsk Territory (Krai), was appointed head of a new Ministry for the Development of the North Caucasus, while Commander-in-Chief of Interior Ministry Troops in the North Caucasus Federal District S. Melikov was appointed presiden al plenipoten ary envoy, a less important posi on, taking account of the establishment of the foregoing Ministry.

INFLATION AND MONETARY POLICY IN APRIL 2014

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INFLATION AND MONETARY POLICY IN APRIL 2014A.Bozhechkova

Infl a on in the Russian Federa on remained at a high level in April 2014: the consumer price index stood at 0.9% at the month’s end (compared to 1% in March of the same year), showing an increase of 0.4 p.p. over the value observed in 2013. Therefore, infl a on reached 7.3% on an annualized basis (Fig. 1). Core infl a on1 stood at 0.9% in April 2014, also higher, up 0.5 p.p., than the value observed in the previous year.

In April 2014, prices of food products increased 1.3% compared to March 2014 (Fig. 2). Prices of the follow-ing food products saw higher growth rates: grains and beans (from 0.9% in March to 1.4% in April), red meat and poultry (from 0.4% in March to 1.5% in April), pas-ta products (from 0.0% in March to 0.3% in April). Pri-ces of the following food products saw slower growth rates: granulated sugar (from 7.8% in March to 3.0% in April), fruits and vegetables (from 5.3% in March to 2.3% in April), eggs (from 2.9% in March to -2.3% in April), milk and dairy products (from 2.6% in March to 1.8% in April), alcoholic beverages (from 2.3% in March to 1.2% in April), fi sh and seafood (from 1.4% in March to 1.0% in April), bu er (from 1.8% in March to 1.4% in April).

In April, prices and tariff s of retail paid services in-creased 0.7%, while in March they increased 0.5%. Overall, tariff s of public u li es remained unchanged in April, while in March they grew up at a rate of 0.2%. Prices of the following services increased in April: pas-senger transport services (from 0.2% in March to 2.4% in April), medical services (from 0.5% in March to 1.4% in April), and insurance services (from 0.3% in March to 2.2% in April). Prices of the following services fell in April: interna onal travel services (from 2.7% in March to 2.3% in April), services rendered in the physical cul-ture and sports sector (from 0.8% in March to 0.2%

1 The baseline consumer price index is an indicator which describes the level of infl a on in the consumer market, net of seasonal factors (prices of fruit and vegetable products) and administra ve factors (tariff s of regulated types of ser-vice, etc.). The index is also calculated by the Federal State Sta s c Service of Russia (Rosstat).

In April 2014, the consumer price index stood at 0.9% (0.5% in April 2013), 0.1 p.p. down the value observed in March 2014. Therefore, infl a on stood at 7.3% at the end of 12-month period. The consumer price index reached 0.5% for the fi rst 19 days in May 2014. The regulator further ghtened the monetary policy by increasing the key interest rate to 7.5% p.a. on April 25, 2014.

in April), services rendered by culture organiza ons (from 1.2% in March to 0.6% in April).

In April, growth rate of prices of non-food pro ducts slowed down by 0.1 p.p. compared to March and stood at 0.6%. Prices of the following non-food prod-ucts saw the fastest growth rate: tobacco products by 4.6% (+3.5% in March), motor gasoline by 1.5% (+0.4% in February). Prices of the following non-food products saw a decline: motor gasoline (from 1.5% in March to 0.8% in April), knit goods (from 0.6% in March to 0.3% in April).

In May 2014, inflation kept growing due to growth in prices of certain categories of fruit and vegetable products, red meat and poultry, millet. It’s worth not-ing that a deprecia on of the ruble exchange rate

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

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


6

made a major contribu on to the accelera on of infl a- on having regard to a great share of imported goods

in the consump on of economic agents in the Russian Federa on. There were more nonmonetary factors that pushed up infl a on in January–May 2014: the re-stric ons imposed by the Rosselkhoznadzor (Federal Service for Veterinary and Phytosanitary Surveillance) on import of meat from the EU countries and the Unit-ed States early in the year, livestock reduc on due to a fodder shortage, adverse weather condi ons in certain countries, as well as decline in shipments of certain categories of agricultural products from Ukraine. The consumer price index stood at 0.5% at the end of the fi rst 19 days in May (0.4% in the same period of 2013). The lack of pronounced demand-driven pressure on prices, as well as the Bank of Russia’s mea sures aimed at ghtening the monetary policy remain the key fac-tors constraining infl a on.

In April 2014 the monetary base (broad defi ni on) increased 0.9% to Rb 9427.9bn (Fig. 3). The volume of cash in circula on including cash balances in credit ins tu ons increased 3.4% to Rb 7881.2bn. The fol-lowing components of the broad monetary base saw contrac on: banks’ correspondent accounts (a decline of 12.6% to Rb 1016.4bn), bank deposits (a decline of 17.0% to Rb 98.5bn), obligatory reserves (a decline of 2.5% to Rb 431.8bn).

In April 2014, the monetary base (narrow defi ni- on) (cash plus obligatory reserves) advanced 3.2% to

Rb 8168.4bn (Fig. 4). In April, the volume of excessive reserves at com-

mercial banks amounted to Rb 1315.2bn, with man-datory reserves on a special account amoun ng to Rb 431.8bn, while the average value of reserves in the period of 10.04.2014 thru 10.05.2014 amounted to Rb 883.4bn. As of May 1, 2014, banks’ debt owed to the regulator was Rb 5.05 trillion, an increase of 7.4% since the beginning of April. Bank’s debt on REPO trans-ac ons increased 10% to Rb 3.3 trillion, the amount of debt on loans secured by non-market assets amount-ed to Rb 1.7 trillion, a growth of 10%. According to the data as of May 27, 2014, banks’ debt on REPO transac- ons saw a decline to Rb 3.1 trillion, while the debt

on other loans increased to Rb 2 trillion. It should be noted that the Bank of Russia used REPO opera ons at a fl at rate, in par cular, an average of Rb 24.9bn and Rb 11.1bn were provided daily in April and May respec- vely (On April 25, 28, 29, 30 the MIACR fell beyond

of the interest rate cap. On the foregoing dates the volume of REPO opera ons at the fl at rate amounted to Rb 23.1bn; Rb 1.6bn; Rb 6.3bn; Rb 38.4bn respec- vely). The interbank interest rate1 in April stood at

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

7.9% on average (7.9% in March 2014). In the period of May 1 thru May 23 the average interbank interest rate stood at 8.23% (Fig. 5). The average interbank interest rate increased in May 2014 in response to the Bank of Russia’s April 25, 2014 decision to li the key inter-est rate, as well as interest rates on liquidity provision and absorp on instruments, from 7.0% to 7.5% p.a., in order to mi gate risks of accelera ng infl a on and ensure fi nancial stability.

The Bank of Russia provided banks with Rb 700bn at a cut-off rate of 7.26% p.a. as part of a 3-month repo auc on secured by non-market assets held on April 14, 2014. During a similar auc on held on May 12, the Bank of Russia provided at total of Rb 485.8bn at a rate of 7.77% p.a. However, only large banks which have the required collateral base can aff ord such ac- ons despite very benefi cial terms of lending at a fl oat-

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

reserves totaled $472.3bn, shrinking by 7.3% year to date (Fig. 4). At the same me, the monetary gold re-serves shrank $0.2bn in April due to a nega ve revalu-a on of assets. The contrac on of the interna onal re-

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

reserves of the Russian Federa on in 2007 to 2014

INFLATION AND MONETARY POLICY IN APRIL 2014

7

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

Bank of Russia’s foreign currency interven on-sthrough selling foreign exchange amounted to $2401.9m and 247.9m euro by the end of April 2014 (Fig. 6). In April, the regulator’s opera ons on the pur-chase of foreign currency with regard to the Federal Treasury replenishing or spending foreign currency re-sources of sovereign funds amounted to $1268m. In April, the borders of the dual-currency trading band were extended three mes within a range of 5 kopeks and reached Rb 36.35–43.35. In the period of May 1 thru May 26, 2014, the regulator repeatedly shi ed the dual-currency trading band within a range of 5 ko-peks. As of May 26, 2014, the dual-currency trading band was maintained within a range of Rb 36.4–43.4. In the period of May 1 thru May 26, 2014, the Bank of Russia sold $0.5bn or less of foreign currency, while foreign currency interven ons with regard to the Fe-deral Treasury replenishing or spending foreign cur-rency resources of sovereign funds totaled $1492m.

According to the Bank of Russia’s preliminary es -mates, net capital ou low from the country reached $50.6bn Q1 2014, 1.8 mes more than in the same pe-riod of 2013. Capital ou low from Russia amounted to $59.7bn over 12 months of 2013. In Q1 2014, net capital exports by the banking sector and other sectors reached $18.9bn and $31.7bn respec vely. A substan- al capital ou low from Russia in Q1 2014 was deter-

mined by economic slowdown in the country as well as geopoli cal turmoil.

In April 2014, the real eff ec ve exchange rate of the ruble gained 2.8% against foreign currencies (-1.7% in March 2014). Overall, in Q1 2014, the real eff ec ve ex-change rate fell 4.6% as compared to Q4 2013 and 8.5% as compared to the same period of 2013 (Fig. 7).

In April, the dollar-ruble exchange rate increased 0.3% to Rb 35.7. The euro-ruble exchange rate grew up 0.7% (Rub 49.3) in the same period. In April, the euro-dollar exchange rate averaged 1.38. The value of the dual currency basket increased 0.5% to Rb 41.8 in the same month. At the end of 28 days in May 2014 the dollar-ruble exchange rate fell 4.1% to Rb 34.3 while the euro-ruble exchange rate dropped 5.2% to Rb 46.8, eventually decreasing the value of the dual currency basket by 4.7% to Rb 39.9. The euro-dollar exchange rate in May was equal to 1.38 on average. The ruble weakened against the dollar in January–April 2014 ba-sically in response to a more intensive capital ou low

from the country due to unstable geopoli cal situa- on in Ukraine, op mis c projec ons about economic

growth in the United States and European Union, eco-nomic slowdown in the Russian Federa on. The ruble appreciated in May in response to the Bank of Russia’s

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1218

.04.

2012

23.0

5.20

1226

.06.

2012

27.0

7.20

1229

.08.

2012

01.1

0.20

1201

.11.

2012

05.1

2.20

1215

.01.

2013

15.0

2.20

1321

.03.

2013

23.0

4.20

1331

.05.

2013

04.0

7.20

1306

.08.

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06.0

9.20

1309

.10.

2013

12.1

1.20

1313

.12.

2013

23.0

1.20

1425

.02.

2014

31.0

3.20

1405

.05.

2014

MIACR rate on ruble loans for 1 day in the interbank market

Minimum REPO rate at Auction for One Day and for One Week

Deposit Rate for One Day

The Fixed Rate on Operatons to Provide Liquidity

Overnight Rate

Maximum rate at Deposit Auction for One Week

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

-20000-15000-10000

-50000

50001000015000200002500030000

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

051015202530354045

Bln

rub

Rub

Currency interventions ("+" - net purchase, "-" - net sales)

Official currecy basket / Rub (end of period)

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

basket in March 2010 to April 2014

0

50

100

150

200

2025303540455055

jan

05ju

l 05

jan

06ju

l 06

jan

07ju

l 07

jan

08ju

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jan

09ju

l 09

jan

10ju

l 10

jan

11ju

l 11

jan

12ju

l 12

jan

13ju

l 13

jan

14

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. Ruble exchange rate indicators in January 2005 to April 2014


8

policy aimed at li ing the key interest rate, mi gat-ing panic investor sen ments about the likelihood of Russia’s interven on into the poli cal situa on in Ukraine, as well as the lack of severe economic sanc- ons against Russia over the Crimea’s accession to the

Russian Federa on. We an cipate the ruble exchange rate to further

stabilize under the infl uence of the basic factors. In par cular, the downtrend in capital ou low, observed since April 2014, due to a rise of foreign investor inter-est in the Russian economy, as well as growth in cur-rent opera ons accounts in Q1 2014 (+13.6% as com-pared to the same period of 2013) may create terms and condi ons required for stabiliza on of the ruble exchange rate amid de-escala on of the geopoli cal turmoil in Ukraine.

The Central Bank of Russia’s Board of Directors made a decision on April 25, 2014 to li the key interest rate to 7.5% p.a. The decision was intended to prevent the occurrence of risks for infl a on and fi nancial stability related to devalua on of the ruble amid moun ng po-li cal tension. According to the regulator’s es mates,

the li of the key interest rate will help slow down in-fl a on to a level of 6% or less. In our opinion, a tem-poral li of the interest rate amid the panic in fi nancial markets was the right measure, however maintaining this interest rate for a long period may have an adverse eff ect on the economic ac vity.

At the same day the Bank of Russia made a decision to introduce a New Mechanism for Credit Ins tu on Refi nancing whereby the regulator will issue loans to banks for up to and including three years at a rate of 6.5% p.a. This refi nancing mechanism allows the banks to use as a security the rights of claim on loans to fi nance investment projects which are guaranteed by the state. At its ini al stage, the new mechanism will be accessible to large banks whose equity capital exceeds Rb 50bn. The introduc on of the new mechanism may in the long run expand banks’ capabili es to borrow long money and resolve to a certain degree the liquidity shortage issue if the borrowing base is exhausted. However, the ques on will arise in the mid-run perspec ve of the de-mand for this instrument amid substan ally low invest-ment ac vity in the Russian economy.

FINANCIAL MARKETS IN MAY 2014

9

FINANCIAL MARKETS IN MAY 2014N.Andrievsky. E.Khudko

The Movement of the Russian Stock Market’s Main Structural IndicesThe movement of the MICEX Index in May 2014 re-

fl ected the Russian stock market’s rapid recovery. That index’s growth was especially robust in the fi rst few days a er the May Day holidays – for example, over the course of one day, 7 May, it went up by 3.41%. Over the period from 2 May through 27 May 2014, the MICEX Index stood at an average of 1,388.0 points.

In May 2014, the highly liquid shares traded on the Moscow Exchange were gaining in value: over the pe-riod from 2 May through 26 May, shares in Sberbank, VTB and Gazprom went up by 20.29%, 24.5%, and 14.8% respec vely. It should be noted that some of the blue chip stocks showed much lower growth rates. Thus, over the period from 2 May through 21 May, shares in LUKOIL went up by 5.89%. Having reached their peak value of Rb 6,784 per share on 8 May, shares in Norilsk Nickel had dropped by 3.69% by 27 May.

In May 2014, Russia’s stock market con nued its steady recovery. As of 26 May, the MICEX Index stood at 1,449.3 points, having grown since the beginning of that month by more than 11%. The growth leader among highly liquid shares were VTB Bank’s securi es – over the period from 2 May through 26 May they rose 24.25%. However, the highest annual yield on shares – more than 40% per annum – was shown by Norilsk Nickel. As of 26 May, the stock market’s capitaliza on amounted to Rb 22.9 trillion (or 35.3% of GDP). The situa on on the Russian domes c market of corporate bonds remained unfavorable (although without any signs of radical deteriora on). Pushed down mainly by seasonal factors, investment ac vity and the weighted average ef-fec ve yield on corporate bonds declined against April (especially in the fi nancial market). At the same me, the Corporate Bond Market Index, the market’s size and the ac vity of issuers displayed moderately posi ve trends. The growth rates of those indices were apparently slowed down by the emerging diffi cul es in at-trac ng fi nancing from interna onal capital markets. Russia’s bond issuers were able to meet their fi nancial liabili es pertaining to the bonds.

90

95

100

105

110

115

120

1200

1250

1300

1350

1400

1450

1500

1550

02.0

4.20

13

02.0

5.20

13

02.0

6.20

13

02.0

7.20

13

02.0

8.20

13

02.0

9.20

13

02.1

0.20

13

02.1

1.20

13

02.1

2.20

13

02.0

1.20

14

02.0

2.20

14

02.0

3.20

14

02.0

4.20

14

02.0

5.20

14MICEX Index Brent crude prices (right-hand side scale)

The high growth rate shown by shares in Sber-bank in May 2014 had no eff ect on the annual yield on these securi es. It should be reminded that, on 23

Source: Quote.rbc.ru. Fig.1. The Movement of the MICEX Index and Brent Crude Oil Futures Prices in the Period

from 2 April 2013 through 27 May 2014

-2,0

3,0

8,0

13,0

18,0

23,0

02.0

5.14

05.0

5.14

06.0

5.14

07.0

5.14

08.0

5.14

12.0

5.14

13.0

5.14

14.0

5.14

15.0

5.14

16.0

5.14

19.0

5.14

20.0

5.14

21.0

5.14

22.0

5.14

23.0

5.14

26.0

5.14

27.0

5.14

Sberbank Sberbank prev LUKOIL Rosneft Gazprom Norilsk Nickel VTB

Source: Quote Rbc.ru, the author’s calcula ons. Fig. 2. Growth Rates of the Quota ons of Highly Liquid Stocks on the Moscow

Exchange (Over the Period from 2 May through 27 May 2014)


10

May 2013, shares in that bank went up to their histor-ic high of Rb 110.7 per share. At the same me, over the course of 12 months (from 27 May 2013 through 27 May 2014), the annual percentage yield on Sber-bank’s ordinary shares amounted to 18%. During the same period, the price of shares in Norilsk Nickel in-creased by 41.5%. The annual percentage yield on shares in Gazprom was 19%, a very impressive result indeed. It should be said that the high growth rate shown by shares in VTB made it possible for them to return to their peak value registered on 27 May 2013.

As far as the sectoral indices are concerned, the highest growth rate was shown in May 2014 by the MICEX Financials Index, which went up 18.17% over the period from 1 May and 26 May. The MICEX Power Index grew by 12.67%. Over the course of May 2014, the other indices grew on average by 7.22%.

Over the course of the period from 1 May through 27 May 2014, the average daily trading turnover of the Moscow Exchange amounted to Rb 39.7bn. The most ac ve trading days of that period were those between the May holidays 2014, when the daily trading turno-ver of the Moscow Exchange climbed to Rb 60.0bn, and some of the last ten days of May. Trading in or-dinary and privileged shares in Sberbank accounted for 44.0% of the average daily trading turnover of the Moscow Exchange. In May, the second-best performer on the MICEX was shares in Gazprom, which account-ed for 19.4% of the average daily trading turnover of the Moscow Exchange. On 21 May, their share of the daily trading turnover climbed to 35.5%. Thus, these two biggest companies accounted for more than 63% of the Moscow Exchange’s trading turnover. Trailing behind them were fi ve companies whose combined volume of trade in shares on the MICEX accounted, on average, for 24.1% of the daily trading turnover of the Moscow Exchange.

According to Emerging Por olio Fund Research (EPFR), over the period from 24 April through 7 May 2014, funds oriented to the Russian market experienced net infl ows in the amount of $ 47m. As of 27 May, MICEX’s total capitaliza on amounted to Rb 22.9 trillion (or 35.3% of GDP), having increased since 2 May by more than Rb 1.53 trillion, which represented a 7.2% rise on the beginning of that month. As far as the stock mar-ket’s capitaliza on structure by type of economic ac- vity is concerned, in May the capitaliza on share of fi nancial companies increased by more than 0.76%, to 14.6%. The capitaliza on share of companies belong-ing to the consumer and retail sector grew by 0.32%. The capitaliza on shares of these sectors increased at the expense of the capitaliza on shares of the min-eral extrac on sector and processing industries which dropped in May by 0.66% and 0.45% respec vely.

-18,0

-8,8

19,0

-3,1

8,3

41,5

0,5

-20

-10

0

10

20

30

40

Sber

bank

Sber

bank

pre

v

Gazp

rom

LUKO

IL

Rosn

eft

Nor

ilsk

nick

el

VTB

27/05/2013–27/05/2014

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 27 May 2013 through 27 May 2014

-2,0

2,0

6,0

10,0

14,0

18,0

02.0

5.20

14

05.0

5.20

14

06.0

5.20

14

07.0

5.20

14

08.0

5.20

14

12.0

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14

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5.20

14

14.0

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14

15.0

5.20

14

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14

19.0

5.20

14

20.0

5.20

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14

22.0

5.20

14

23.0

5.20

14

26.0

5.20

14

27.0

5.20

14

Companies of financial & banking sectorMachine building companiesOil and gas companiesCompanies of electrical engineering industryMetal and mining companiesMICEX Consumer Goods and Services IndexMICEX Innovation Index

Source: Quote.rbc.ru, the author’s calcula ons. Fig. 4. Growth rates of Various Sectoral Indices on the Moscow Exchange (Over the Period from 2 May through 27 May 2014)

0,010,020,030,040,050,060,070,0

02.0

5.20

14

05.0

5.20

14

06.0

5.20

14

07.0

5.20

14

08.0

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14

12.0

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14

13.0

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14

14.0

5.20

14

15.0

5.20

14

16.0

5.20

14

19.0

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14

20.0

5.20

14

21.0

5.20

14

22.0

5.20

14

23.0

5.20

14

26.0

5.20

14

27.0

5.20

14Sberbank common+prev LUKOIL Norilsk nickel

VTB Magnit Gazprom

Rosneft Combined turnover

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

Exchange (Over the Period from 2 May through 23 May 2014)

Mining industry; 48,0

Processing industries; 13,1

Production and distribution of

electric energy, gas and water; 4,4

Wholesale and retail trade; repair

services; 9,2

Transport & communications;

9,7

Financial sector; 14,6

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 MAY 2014

11

The Corporate Bond MarketIn May 2014, the decline in the volume of Russia’s

domes c corporate bond market (by the nominal va-lue of ruble-denominated securi es in circula on, in-cluding those issued by RF non-residents) stopped in its tracks. By the end of May, the volume of that mar-ket had climbed to Rb. 5,249.1bn, which represented a 0.2% rise on late April1. The achieved stabiliza on of the domes c corporate market’s volume was caused by absence of any changes in the number of issued bond loans (1,034 ruble-denominated corporate bond issues). At the same me, the number of emi ers rep-resented in the debt segment slightly decreased (353 in May vs. 359 as of the end of April). The number of US dollar-denominated bond issues placed by Rus-sian emi ers on the MICEX and circula ng thereon in-creased from 16 to 17 (with an aggregate face value of above $ 2.2bn). As before, one yen-denominated bond issue placed by Russian emi ers remained in circula- on.

In May, investment ac vity on the secondary corpo-rate bond market signifi cantly declined, having been pushed down in the main by seasonal factors. Thus, in the period from 22 April through 21 May 2014, the combined volume of exchange transac ons car-ried out on the Moscow Exchange amounted to just Rb 76.3bn (for reference: over the period from 24 Feb-ruary through 24 March, the monthly trade turnover was about Rb 109bn), while the number of transac- ons carried out over the period under considera on

dropped to 23.8 thousand (vs. 28.4 thousand in the previous period)2.

Having dwindled in March, later on the IFX-Cbonds index of the Russian corporate bond market began to grow. By the end of May it had increased by 1.6 points (or 0.4%) on late April. Having experienced a slight drop in early May, the weighted average eff ec ve yield on corporate bonds nevertheless went up from 9.22% in late April to 9.43% as of the end of May (Fig. 7)3. The corporate bond por olio dura on index con nues to display a nega ve trend. As of the end of May, that index amounted to 554 days, which represented a 26-day drop on late April. This nega ve trend was caused not only by the aforesaid decrease in the dura on of bond circula on, but also by the rise in the eff ec ve yield on corporate bonds.

For a third month in a row, Russia’s fi nancial market had been under nega ve pressure caused by an un-fortunate sequence of economic and poli cal events, which resulted in the emergence of unfavorable mar-ket trends.

1 According to data released by the Rusbonds informa on agency.2 According to data released by the Finam investment company.3 According to data released by the Cbonds informa on agency.

Firstly, investor behavior on Russia’s domes c bond market was to a certain extent infl uenced by this coun-try’s sovereign debt ra ng being downgraded by the Standard & Poor’s credit ra ngs agency (from BBB to BBB- with a nega ve outlook). That fact, in its turn, made it more diffi cult for companies to a ract foreign fi nancing and increased capital ou lows from Rus-sia4. Secondly, high infl a on expecta ons signifi cantly boosted the infl a on rate. In order to control infl a- on, the RF Central Bank unexpectedly raised its key

interest rate from 7.0% to 7.5%, thus pushing up the interest rate on bonds circula ng on Russia’s domes- c bond market. Thirdly, in late April and May 2014,

the RF CB withdrew licenses from many banks (OJ-SC Na onal Business Development Bank, the commercial bank Mestny Kredit, Atlas Bank, First Republican Bank, the bank Navigator, and the bank Moscow Lights).

Moreover, there were plenty of disconcer ng sta- s cs poin ng to the poor performance of Russian

companies during the spring 2014. Thus, their profi ts signifi cantly declined on the same period of last year5.

The most liquid corporate bonds con nued to dis-play a variety of trends with regard to their yields. Some individual bond issues of companies belonging to the manufacturing sector had the highest upward and downward vola lity (in April, the highest vola lity was displayed by some bond issues of fi nancial compa-nies). Thus, the most signifi cant yield increase (above 1 pp.) was demonstrated by the securi es of OJ-SC Joint-Stock Oil Company Bashne , while the most sig-nifi cant yield loss (by more than 1 pp.) was displayed by the securi es of OJ-SC Joint-Stock Oil Company Ros-ne and OJ-SC Holding Company Metalloinvest. Also, a substan al yield increase was demonstrated by the bonds issued by OJ-SC Gazprombank. At the same me, it should be noted that the sales and purchases

of the aforesaid securi es on the secondary corporate

4 According to data released by the Cbonds informa on agency.5 According to data released by the Cbonds informa on agency.

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


12

bond market were not happening at a hec c pace, which characterized the sales and purchases of securi- es issued by fi nancial companies (for example, over

the course of the period under considera on, the ag-gregate volume of transac ons with some of the bond issues of Vneshekonombank, Zenit Bank and the Agen-cy for Housing Mortgage Lending amounted to more than Rb 1bn). However, on the average, neither com-panies belonging to the manufacturing sector nor hi-tech companies had high interest rate vola lity. At the same me, an upward trend in yields on bonds was demonstrated by bonds issued by companies belong-ing to the fi nancial sector (above 0.3 pp.). Corporate bonds issued by companies belonging to the energy sector displayed opposite trends. It should be noted that demand for such securi es was very low1.

In spite of the unfavorable market situa on and the tradi onal decline in the ac vity of market par- cipants in the fi rst half of May, the indices of regis-

tra on of new bond issues hit a three-month high. Thus, over the period from 22 April through 21 May 2014, 12 emi ers registered 61 bond issues with a to-tal face value of Rb 304.4bn (for reference: over the period from 25 March through 21 April 2014, a total of 25 bond issues were registered, with a total face value of Rb 58.6bn). One of the causes of this surge in emi er ac vity was a sharp decrease in the availability of foreign fi nancing. Big bond issues were registered by CJ-SC UniCredit Bank (with a total face value of Rb 110bn), OJ-SC Russian Grids (with a total face value of Rb 100bn), and OJ-SC NOMOS-BANK (with a total face value of Rb 22bn)2. Almost all newly registered bond issues were exchange-traded bonds.

The ac vity on the primary market also became more robust in comparison with the previous period, when trade indices hit their two-year low. Neverthe-less, the indices of ac vity on the primary market remain very low. Thus, over the period from 22 April through 21 May 2014, 10 emi ers placed 15 bond loans with a total nominal value of Rb 513.85bn (for reference: in the period from 25 March through 21 April 2014, a total of only 7 bond loans with a to-tal nominal value of Rb 24.6bn were placed) (Fig. 8).

1 According to data released by the Finam investment company.2 According to data released by the Rusbonds informa on agency.

Source: According to data released by the Rusbonds company.Рис. 8. Dynamics of the Primary Placements

of Issues of Ruble-Denominated Corporate Bonds

Most of the placed bond loans were exchange-traded bonds. In spite of the adverse market situa on, OJ-SC AIZhK managed to a ract fi nance in the form of 15-to-19-year loans, while another four issuers managed to a ract it in the form of 10-year loans.

In May, the Bank of Russia annulled 8 bond issues due to failure to place even a single security (for refe-rence: in April 2014, not a single bond issue was an-nulled for that reason)3. As a result, two big emi ers, Gazprom Ne and RESO-Garan a, revised their plans to borrow on the bond market.

Over the period from 22 April through 21 May 2014, all 18 emi ers redeemed their bond issues with a total face value of Rb 66.2bn in due me (for reference: in the previous period, one emi er was unable to meet his obliga ons under the bonds, and therefore de-clared a technical default). In June 2014, the redemp- on of 23 issues of corporate bonds with a total face

value of Rb 56.8bn is expected4. It should be noted that the period from 22 April

through 21 May 2014 saw no real defaults on the pay-ment of the coupons, on the buyback off ers to the cur-rent holders of securi es before their maturity, and on the redemp on of a whole bond loan5. In this respect, the situa on remained unchanged from the previous few months.

3 According to data released by the Bank of Russia.4 According to data released by the Rusbonds informa on agency.5 According to data released by the Rusbonds informa on agency.

THE REAL SECTOR OF THE ECONOMY IN APRIL 2014: FACTORS & TRENDS

13

THE REAL SECTOR OF THE ECONOMY IN APRIL 2014:FACTORS & TRENDSO.Izryadnova

According to the Rosstat’s preliminary es mate, in the 1st quarter of 2014 GDP growth rates amounted to 0.9% against the 1st quarter of 2013 which value is al-most equal to the index of the same period of the pre-vious year. Sluggish economic growth was determined by slowdown of demand on the domes c market and a decrease in export volumes both in physical and mon-etary terms. A trend of reduc on of investments in capi-tal assets had a serious eff ect on the domes c market: the volume of investments in April and in Janu ary–April amounted to 97.3% and 95.7%, respec vely, against the respec ve indices of the previous year.

In the 1st quarter of 2014, a trend of reduc on of state capital investments – which trend existed throughout 2012–2013 – s ll prevailed. A drop in state investments was supplemented by a decrease in ac -vi es by large infrastructure companies due to a com-ple on of a number of investment projects and adjust-ment of future plans with the expected changes in the market situa on taken into account. In addi on to the above, growth in lending rates to industries and higher geopoli cal risks had a nega ve eff ect on the beha-vior of the private business. The unstable dynamics of the economic development determined a decrease in enterprises’ revenues and consolidated the trend of a drop in investments in capital assets in January–April 2014. In the 1st quarter of 2014, the balanced fi nan-cial result amounted to 82.3% of the respec ve index of 2013, including 25.0% in manufacturing, 49.9% in building and 66.0% in transport and communica ons.

In the 1st quarter, growth in capital ou low to $50.6bn against $27.5bn in the same period of the previous year had a nega ve eff ect on the state and prospects of business ac vi es in the investment sec-tor. As in 2014 – unlike the 1st quarter of 2013 – capital ou low was virtually completely jus fi ed by the export

In April 2014, the economic situa on was determined both by slowdown of growth rates of consumer demand and a drop in investment demand. Investments in capital assets in April 2014 and January–April amounted to 97.3% and 95.7%, respec vely, against the respec ve indices of the previous year. A decrease in growth rates of retail trade sales volumes year on year to 2.6% was determined by drama c slowdown of households’ real in-come and real wages and salaries. A er a drop in January, year on year indices of industry demonstrated growth in February–April 2014. In April 2014, year on year growth rates of industrial produc on amounted to 2.4%, while in manufacturing and produc on of primary products, to 3.9% and 1.7%, respec vely. However, despite the fact that the situa on has improved to some extent the expected growth in industry in 2014 will amount by the es mate of the Ministry of Economic Development of the Russian Federa on to 1.0%, which is jus fi ed by the expected 2.4% drop in investment ac vi es in 2014.

of capital by the non-banking sector, corporate private business en es had fewer resources to fi nance in-vestments in Russian capital assets.

A trend of slowdown of consumer demand s ll pre-vails. In April 2014, annual growth rates of the retail trade volume amounted to 2.6% against 4.3% in April 2013, while the volume of paid services to households decreased by 0.2% with the growth rates of the previ-ous year being at the level of 2.6%. It is to be noted that both the high level of the infl a on rate and slow-down of households’ real income aff ect the consumer behavior. In April 2014, the year on year consumer price index amounted to 107.3% having exceeded by 0.1 p.p. the same index of April 2013. The growth rates of real wages and salaries from 108.5% in April 2013 against the respec ve period of the previous year slowed down to 100.8% in the same period of 2014. Despite indexa on of pensions and other types of social payments, in April 2014 real disposable cash income increased by the mere 1.9% (year on year) against 8.1% a year before which situa on aff ected as well the dynamics of the solvent demand and the pat-tern of households’ cash expenditures.

In 2014, the dynamics of industrial output is char-acterized by instability. In January 2014, a 0.2% drop year on year in industrial output against the respec- ve index of 2013 changed for recovery of growth in

industry in the following three months which situa on resulted in a 2.4% output growth year on year in April 2014. The main driver of growth in industry was manu-facturing. In April 2014, the year on year growth rates1 of manufacturing, produc on of primary products and produc on and distribu on of power, gas and water amounted to 103.9%, 101.1% and 98.1%, respec vely.

1 In evalua on of the dynamics of manufacturing, it is impor-tant to take into account the low base of the previous year.


14

A drop in output of the engineering complex as compared to the same period of the previous year – the index of produc on of machines and equipment and that of produc on of electric, electronic and op- cal equipment amounted to 87.2% and 92.7%, re-

spec vely – had a nega ve eff ect on the dynamics of manufacturing industries in January–April 2014. In the above types of business ac vi es, a decrease in out-put has been observed during the past two years.

In April 2014, produc on of means of transporta- on and equipment increased by 19.6% year on year

which situa on can be explained in full by a 39.4% growth in produc on of ships, aircra and space de-vices and means of transporta on with a decrease of 3.8% in automo ve vehicles.

Posi ve dynamics is observed in the segment of produc on of intermediary products which situa on is par ally related to the low base of the previous year. In March–April 2014, in the iron and steel industry the rates of change in output demonstrated growth a er a drop in output in the previous fi ve months. In April 2014, produc on of oil products retained the lead-ing posi ons as regards the year on year growth rates (111.4%) which situa on is related to drama c growth of 108.5% in the volumes of oil delivered to oil refi ne-ries. It is to be noted that in the pa ern of produc on the output of diesel fuel and residual oil grew at a pri-ority rate with the output of motor petrol reduced.

In May, the Ministry of Economic Development of the Russian Federa on presented an updated fore-cast and scenario condi ons of social and economic development in the 2015–2017 period, as well as the expected es mates of performance of the Russian economy in 20141 developed on the altera ve basis with the same assump on of external condi ons and diff erent instruments of the state policy and behavior of private business.

The baseline scenario (1) is the main one for devel-opment of the budget and suggests preserva on of in-er al trends, conserva ve investment policy of private companies and limited expenditures on development of companies of the infrastructure sector with stagna- on of state demand. The moderate op mis c scena-

rio (2) suggests reduc on of nega ve consequences of geopoli cal tensions, securing of a greater confi dence of the private business, u liza on of addi onal sour-ces of funding of new infrastructure projects, promo-

1 The main condi ons and the main parameters of the forecast of the social and economic development of the Russian Federa on and the ul mate levels of prices (tariff s) on services of companies of the infrastructure sector in 2015 and the planned periods of 2016 and 2017. The Ministry of Economic Development of the Rus-sian Federa on, Moscow, May 2014. h p://www.economy.gov.ru/wps/wcm/connect/economylib4/mer/ac vity/sec ons/macro/prognoz/201405207

on of lending to the most vulnerable sectors of the economy and alloca on of more funds for develop-ment of human capital.

In 2014, Russian GDP growth rates are es mated at the level of 100.5% against the previous year (-1.5% as compared to the forecast published in September 2013). The main factor behind slowdown of the dy-namics of economic growth was the expected change in the path of the investment demand under the ef-fect of higher geopoli cal risks. According to the up-dated es mates, in 2014 a 2.4% drop in investments as compared to 2013 is expected (in the previous sce-nario a 103.9% growth in the investment demand was expected). Revalua on of the level and dynamics of investments in capital assets was jus fi ed by the un-deres mate of the eff ect of nega ve trends in the in-vestment demand (which trends were formed in the infrastructure sector in 2013) in the previous scenario of the forecast, as well as changes in the behavior of private companies: with higher risks a 2.6% decrease in private investments is expected (according to the September version there was growth of 5.0%). In such a case, the share of investments in GDP will amount to 18.9% which is 1 p.p. lower than the index of the previous year.

With the expected slowdown of the dynamics of de-velopment of the economy, a drop both in profi tability and the share of enterprises’ and en es’ profi t in GDP can be expected; due to such a situa on investments at the expense of own funds will be limited. In addi- on to the above, access to borrowed funds on the

external and domes c markets is expected to be more complicated. Growth in loans to non-fi nancial en es is es mated at the level of 110.6% as compared to the index of 2013 (-5.4 p.p. as compared to the Septem-ber version). With drama c growth in capital ou low in the 1st quarter of 2014 taken into account, on the basis of the results of the year that index is es mated at the level of $90bn which is nearly $40bn more than the 2013 index.

With prevalence of trends which were formed in 2013 and the 1st quarter of 2014, reduc on of indus-trial and business reserves will have a nega ve eff ect on the dynamics of gross savings.

According to the forecast, the net export volume will make a posi ve contribu on to the GDP dynamics. On the basis of the results of the 1st quarter of 2014, export and import decreased by 1.8% and 6.8%, re-spec vely, against the relevant indices of 2013. With growth in the forecasted price on oil on the basis of the results of 2014, the monetary volume and the physical volume of the export will amount to 98.9% and 99.7%, respec vely, against the relevant indi-ces of 2013. According to the data of the forecast, in

THE REAL SECTOR OF THE ECONOMY IN APRIL 2014: FACTORS & TRENDS

15

2014 the import will fall at an advanced rate than ex-port and consumer and investment demand. In 2014, the import decreased by 3.2% and 2.7% in monetary terms and in physical terms, respec vely, as compared to the previous year.

In the forecast of the Ministry of Economic Deve-lopment of the Russian Federa on, slowdown of con-sumer income is adjusted. It is related to the fact that in the 1st quarter of 2014 growth in the retail trade volume was virtually completely fi nanced by means of a drop in households’ savings to 5.4% in households’ income; the above value became the minimum one in the en re period of observa on. Growth in house-holds’ real disposable income has stopped completely: in the 1st quarter of 2014 real disposable income fell by 2.4%, while in 2014 in general its growth is es mated at the level of 0.5% (-2.8 p.p. as compared to the Sep-tember forecast). In addi on to the above, in 2014 a 6.7% growth in consumer prices as compared to the previous year is expected, while in the September ver-sion of the forecast the average annual level of the in-fl a on rate was es mated at the level of 5.6%.

In the forecast, the rate of unemployment was raised to 6.2% against 5.7% last year which situa on resulted in a reduc on of the es mate of the average annual growth rate of real wages to 1.4% against 5.3%

in 2013. As a result, the level of poverty (the number of the popula on with income below the minimum subsistence level) will remain at the level of 2013 and amount to 11.0%.

Simultaneous weakening of the consumer market and shrinking of the investment market had a nega- ve eff ect on the dynamics of domes c demand. Tak-

ing into account the extent and dynamics of reduc on of import, accelera on of growth in domes c produc- on of goods and services is inpu ed in the forecast.

In 2014, the industrial produc on index and the index of agricultural products will amount to 101.0% and 101.6%, respec vely, against the level of 2013. It is to be noted that preserva on of the trend of advanced growth in manufacturing industries as compared to that in produc on of fuel and energy resources is ex-pected.

In prospect, in accordance with the baseline sce-nario accelera on of the dynamics of the economic development is expected. In 2017, GDP will increase by 8.5%, while investments in capital assets and the volume of the retail trade, by 6.3% and 11.1%, respec- vely, against the relevant indices of 2013. With the

forecasted growth rates of industry and agriculture, the equilibrium of the domes c market resources will be maintained by accelera on of import. Fulfi llment

Table 1DYNAMICS OF UTILIZATION OF GDP THE BASELINE SCENARIO 1 IN PRICES OF THE PREVIOUS YEAR

AS % OF THE YEAR BEFORE2013 2014 2015 2016 2017

GDP u lized 1.3 0.5 2.0 2.5 3.3Total ul mate consump on, 3.5 1.3 1.5 2.1 3.1Including that by households 4.7 1.8 2.0 2.8 3.5Gross savings -6.1 -5.9 5.9 4.6 6.4Gross savings of capital assets -0.1 -2.5 2.4 1.7 4.7Domes c demand 1.0 -0.2 2.5 2.7 3.9Net export of goods and services 5.6 11.3 -5.3 -1.1 -8.4Export 4.2 0.2 0.6 1.8 2.1Import 3.7 -2.7 2.2 2.4 4.1

Source: The Ministry of Economic Development of the Russian Federa on.

Table 2DYNAMICS OF THE MAIN MACROECONOMIC INDICES IN THE 2013 2017 PERIOD IN ACCORDANCE

WITH THE BASELINE SCENARIO 1 AS % OF THE PREVIOUS YEAR2013 2014 2015 2016 2017

GDP 101.3 100.5 102.0 102.5 103.3Industrial produc on 100.4 101.0 101.7 101.6 102.0Agricultural produc on 106.2 101.6 102.9 102.4 102.9Investments in capital assets 99.8 97.6 102.4 101.6 104.7Retail trade volume 103.9 101.9 102.1 103.0 103.6Real wages 105.3 101.4 101.9 102.9 103.9Labor effi ciency 101.6 101.1 102.1 102.4 103.3

Source: The Ministry of Economic Development of the Russian Federa on.


16

of social guarantees will determine advanced growth in wages and salaries as compared to labor effi ciency and limit feasibility of structural transforma ons. At the same me, it is important to take into account the

fact that the investment pause of 2012–2014 does not provide grounds for op mis c es mates – inpu ed in the forecast – of labor effi ciency growth in the 2015–2017 period.

THE RUSSIAN INDUSTRY IN APRIL 2014

17

THE RUSSIAN INDUSTRY IN APRIL 2014S.Tshukhlo

Demand on industrial produce1

In the beginning of the 2nd quarter, the dynamics of demand on industrial produce remained a nega ve one, while the rate of reduc on thereof increased. The ini al data showed absolute growth in demand only in March, but it was rather weak. So, the April de-crease in sales pushed the ini al balance downwards to -5 points, while clearing of a seasonal factor, to -12 points which was the worst index since the begin-ning of 2013 (Fig. 1).

Such dynamics of demand suits fewer enterprises in the Russian industry. In April, the share of unsa sfac-tory es mates of sales rose to 54%, while the balance of es mates fell to -9 points. Those values have be-come the worst ones since 2013.

The forecasts of sales do not promise any improve-ment of the situa on in the 2nd quarter of 2014. En-terprises’ expecta ons fell almost to the zero level, though in the previous post-crisis years they remained in April at the level of 10–17 points a er a surge in January. With a seasonal factor cleared, the index fell to the post-crisis minimum (-4 points) which was regis-tered only in the mid-2012.

Stocks of fi nished productsDespite the nega ve sales dynamics, the industry

manages to control successfully its stocks of fi nished products, at least, at the level of es mates. From Ju-ly 2013, the balance of es mates has been within a rela vely narrow band of a small redundancy which is, however, admissible for the stage of stagna on (Fig. 2). The main por on of enterprises believes that their stocks are “normal”; it is to be noted that in April the share of such es mates amounted to the record-

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%.

According to enterprises’ es mates obtained as a result of business surveys of the Gaidar Ins tute1, in April actual changes in demand and output had nega ve dynamics, while forecasts did not promise any improvement of the situa on. It is to be noted that industry had to switch over to more intense growth in prices which situa on is unlikely to s mulate demand and increase capacity u liza on which failed to recover in April. Enterprises’ invest-ment plans remain in the nega ve zone.

high maximum (1992–2014). With such es mates (not physical volumes), the la er can hardly be a driver of output growth and a factor behind slowdown of indus-trial output.

OutputIn April, the rate of output growth started to slow-

down which is typical of that month. A er achieving the year’s modest maximum of 22 points, the ini al balance (in the previous years it exceeded 30 points) fell to +4

Fig. 1

Fig. 2


18

points and amounted a er the seasonal factor cleared to -3 points (Fig. 3). Output growth registered in March may discon nue in the next report of the Rosstat.

Further dynamics of output does not suggest op- mism to enterprises, either. In March–April, the ini- al balance of output plans lost 30 points, while that

cleared of a seasonal factor, 6 points and fell to the year and a half minimum. The Ukrainian crises did not aff ect seriously output volumes of the Russian industry so far. In April, only 4% of enterprises reported about a drop in their output due to that factor.

Prices of enterprisesThe pricing policy of enterprises is probably enter-

ing a new stage. In the previous post-crisis years, the January surge of growth in selling prices used to sub-side by March, while in April it was close to the zero level. In 2014, in new macroeconomic condi ons cre-ated by responsible ac ons by monetary authori es, as well as compulsory measures of the country’s poli -cal leadership, the industry had to change the dynam-ics of its prices. Firstly, prices growth in January did not subside by March 2014 – its rate remained at the pre-vious level, though in the 4th quarter of 2013 growth in enterprises’ prices was a zero one, that is, within the frameworks of the dynamics which was typical of the past few years and which permi ed the authori es to keep revising downward their infl a on rate forecasts. Secondly, enterprises’ price forecasts which normally fell in January a er a surge in December failed to pro-mote that path further, consolidated at the achieved level, while in March–April grew a li le. Thirdly, the most unpleasant thing is that in April the industry re-ported about a 100% growth in their prices as com-pared to the results of the 1st quarter of 2014.

The actual dynamics and layoff plansThe number of workers in the Russian industry

keeps falling. A er a tradi onal surge of lay-off s in Jan-uary, that process returned to the normal rate of lay-off s which is typical of the past few years. So, for two years the industry has failed to overcome the nega ve trend of workers’ exit from the industry (Fig. 4).

Enterprises’ investment plans For 11 months running, enterprises’ investment

plans remain in the nega ve zone. However, from the beginning of 2014 pessimism of such inten ons has been decreasing, but too slowly and unwillingly and without par cular hopes for revival of growth in in-vestments. Within four months of 2014, the balance grew only from -14 points to -6 (Fig. 5), that is, plans of reduc on of investments s ll prevail in the Russian industry over those to increase them.

Fig. 3

Fig. 4

Fig. 5

DEVELOPMENT TRENDS IN RUSSIA’S OIL & GAS SECTOR

19

DEVELOPMENT TRENDS IN RUSSIA’S OIL & GAS SECTORY.Bobylev

Global market prices of crude oil and natural gas have been steadily high over the last few years. In 2013 and Q1 2014, the price of Russia’s Urals crude oil in the European market averaged $107.7 and $106.5 per barrel respec vely (Table 1). High prices have been determined by certain key factors, such as higher demand for crude oil driven by economic growth globally, fi rst of all in China and other Asian economies, OPEC’s conserva ve policy towards oil produc on growth in the OPEC member countries, as well as geopoli cal risks. In 2013, the global demand for crude oil increased 1.4% while the demand for crude oil in the North America went up 1.6%, 3.0% in China. On the supply side there has been marked increase in oil produc on in non-OPEC countries (by 2.5% in 2013) driven primarily by higher volumes of oil produc on in the United States and Canada as a result of the development of nontradi onal oil reserves. At the same me, oil development in the OPEC countries has recently been staying at the level close to the total quota (30 million barrels daily) they set in late 2011. Therefore, the global oil market remains balanced.

Since global prices of natural gas supplied under long-term contracts are determined on the basis of prices of refi ned products (gas oil, diesel fuel, and fuel

In 2013, oil produc on in Russia reached its highest level since 1990 while exports of crude oil and refi ned pro-ducts reached its highest-ever level in response to high prices of crude oil in global markets. However, a trend towards slower growth rates and worsening of oil and gas produc on condi ons was observed. The recently adopted laws and regula ons concerning tax incen ves for the development of new oil and gas fi elds and hard-to-recover reserves, liberaliza on of export of liquefi ed natural gas, as well as a long-term gas contract with China, create condi ons for further development of the Russian oil and gas sector.

oil) alterna ve to gas, these prices follow with a certain lag the global prices of crude oil. However, changes in the European gas market, namely increased supply of gas from other gas producing countries and decreased level of spot prices of gas versus prices of Gazprom long-term contracts have had a downtrend eff ect on prices of Russia’s natural gas over the last few years.

Oil produc on in Russia reached 523.3 million tons in 2013 amid high global prices, the highest level since 1990 (Table 2). The recent pu ng under produc on of a few large new oil fi elds on situated in the Eastern Si-beria (Vankorskoye, Talakanskoye, Verkhnechonskoye, Tas-Yuryakhsloye oil fi elds) and in the north of the European Russia (Uzhno-Khilchuiskoye oil fi eld, Trebs and Titov oil fi elds), as well as taxa on amendments have had a posi ve eff ect on the dynamics of oil pro-duc on. The Prirazlomnoye oil fi eld in the Pechora Sea was put under produc on in late 2013, the fi rst ever producing oil fi eld in Russia’s Arc c con nental shelf.

At the same me, growth rates in oil produc on have been markedly slowing down over the last few years (Table 3), which can be explained fi rst of all by objec ve worsening of oil produc on condi ons. A major part of the producing oil fi elds have entered the brown-fi eld stage, whereas new oil fi elds are in most

Table 1 GLOBAL PRICES OF CRUDE OIL AND NATURAL GAS IN 2005 2014, $/BARREL

2005 2006 2007 2008 2009Brent oil price, Great Britain 54.4 65.2 72.5 97.7 61.9Urals oil price, Russia 50.8 61.2 69.4 94.5 61.0Price of Russia’s natural gas in the Euro-pean market, $/thousand cubic meters 212.9 295.7 293.1 473.0 318.8

2010 2011 2012 2013 Q1 2014 Brent oil price, Great Britain 79.6 111.0 112.0 108.8 107.9Urals oil price, Russia 78.3 109.1 110.3 107.7 106.5Price of Russia’s natural gas in the Euro-pean market, $/thousand cubic meters

296.0 381.5 431.3 402.0 390.2

Source: IMF, OECD/IEA, Federal State Sta s cs Service.


20

cases characterized by worse geologic and produc on condi ons and geographic parameters, and their de-velopment requires extra capital, opera on and trans-porta on costs.

To date, the Russian oil produc on sector has ap-proached its maximum produc on capability. To com-pensate for declined oil produc on on the producing oil fi elds, it is important to develop both new oil fi elds in the regions with poor or no infrastructure and infe-rior quality reserves on the mature oil fi elds not yet involved in the development.

At the same me, growth in oil refi ning has been progressing at a higher rate than that in oil produc on basically due to faster growth in exports of refi ned products encouraged by lower export du es on such products versus the export duty on crude oil. As a re-sult of higher growth rates in crude oil dis lla on the share of oil refi ning in oil produc on increased from 42.5% in 2004 to 53.1% in 2013. However, depth of oil refi ning saw no actual increase during that period and amounted to only 71.4% in 2013, being equal to the level of 2005. The indicator of depth of oil refi ning is actually remaining close to the pre-reform level (depth of oil refi ning in Russia stood at 67% in 1990) and s ll lagging a way behind the level observed in developed countries where depth of oil refi ning reaches 90–95%. Therefore, the objec ve of increasing the technologi-cal level in the oil refi ning industry s ll remains a prio-rity for the development of the oil sector in the Rus-sian economy.

Such companies as Rosne , LUKOIL, Surgutne e-gaz, and Gazprom produce the biggest volumes of oil. In 2013, oil produc on in these four companies accounted for 74.4% of total oil produc on in the country (Table 4). Furthermore, a er the acquisi- on of TNK-BP oil company in 2013 state-run Rosne

strengthened considerably its posi on in the Russian oil sector to became one of the largest oil companies in the world. In 2013, Rosne ’s oil produc on, inclu-sive of its shares in oil produc on of other en es, amounted to 202.4 million tons, or 38.7% of all Rus-sia’s oil produc on. Overall, the share of state-run companies in all Russia’s oil produc on, including their shares in oil produc on of other en es in 2013 reached 50.6%.

Gazprom keeps domina ng in natural gas produc- on in Russia. At the same me, its share in all Russia’s

natural gas produc on has shrunk visibly from 83.2% in 2008 to 71.5% in 2013 over the last few years. More-over, other producers’ share in gas produc on has in-creased too: oil companies, NOVATEK, PSA operators, and other producers. Overall , the share of independ-ent gas producers in 2013 reached 28.5%, including NOVATEK as largest independent producer of natural gas (7.7%). In 2013, state-run companies accounted for 80.8% of all Russia’s natural gas produc on.

Steady growth in crude oil exports is observed at the backdrop of growth in oil produc on (Table 5). In 2013, net export of crude oil and refi ned products reached 385.8 million tons, reaching its highest ever

Table 3PRODUCTION OF CRUDE OIL, REFINED PRODUCTS AND NATURAL GAS IN 2005 2014, % Y O Y

2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 2014

Crude oil, includ-ing gas condensate 102.2 102.1 102.1 99.3 101.2 102.1 100.8 101.3 100.9 102.2

Crude oil dis lla on 106.2 105.7 103.8 103.2 99.6 105.5 103.3 104.9 102.7 105.1Motor gasoline 104.8 107.4 102.1 101.8 100.5 100.5 102.0 104.3 101.3 99.3Disel fuel 108.5 107.0 103.4 104.1 97.7 104.2 100.3 98.7 103.1 108.4Furnace oil 105.8 104.5 105.2 101.9 100.8 108.5 104.6 101.6 103.3 106.3Natural gas 100.5 102.4 99.2 101.7 87.9 111.4 102.9 97.7 102.1 98.6

Source: Federal State Sta s cs Service, Ministry of Energy of Russia.

Table 2 CRUDE OIL PRODUCTION AND REFINING IN THE RUSSIAN FEDERATION IN 2005 2013

2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 2014

Oil produc on, including gas condensate, million tons 470.0 480.5 491.3 488.5 494.2 505.1 511.4 518.0 523.3 129.6

Crude oil dis lla on, million tons 208.0 220.0 229.0 236.3 236.0 249.3 258.0 270.0 278.0 71.6The share of oil refi n-ing in oil produc on, % 44.3 45.8 46.6 48.4 47.8 49.4 50.4 52.1 53.1 55.2

Depth of feedstock refi ning, % 71.6 71.9 71.7 72.0 71.9 71.1 70.8 71.5 71.4 70.4Source: Federal State Sta s cs Service, Ministry of Energy of Russia.


21

level. The share of net export of crude oil and refi ned products in oil produc on stood at 73.7%. Further-more, crude oil exports have increased over the last few years in response to growth in export of refi ned products, whereas export of crude oil has declined. The share of net export of crude oil in oil produc on shrank to 45.1% in 2013. At the same me, the share of exports in the produc on of fuel oil in 2013 stood at more than 90%, diesel fuel at 58.9%. The share of export of motor gasoline in its produc on increased in 2013 to 11.2% (to compare: the share of exports in the produc on of motor gasoline stood at 8.2% in 2010, 10.6% in 2011, 8.4% in 2012).

Over the last few years, the decline in export of gas has been driven primarily by a decline in gas supplies to the European market where the share of gas sup-plies from other gas producing countries has increased visibly. As a result, in 2012 – unlike 2006 when Rus-sia’s natural gas supplies to Europe reached the maxi-mum volume – export of Russia’s natural gas to non-CIS countries declined by 30.4% while the share of net exports in gas produc on declined from 31.4% in 2005 to 25.6% in 2012. In 2013, export of Russia’s natural gas increased markedly, approaching the level of 2006, as a result of declined gas produc on in Europe and gas supplies from the North Africa, while the share of Russia’s natural gas in the European market, including Turkey, increased from 26% in 2012 to 30.1% in 2013, according to the Gazprom’s es mates.

For the purpose of expanding far-reaching export prospects for Russia’s natural gas in 2013, a provi-sion was made under the Federal Law of 30.11.2013 №318-FZ ‘On the Amendments to Ar cles 13 and 14 of the Federal Law ‘On the Principles of State Regu-la on of External Trade Ac vity’ and Ar cles 1 and 3 of the Federal Law ‘On Gas Exports’ to liberalize ex-port of liquefi ed natural gas (LNG) whereby not only Gazprom but also other Russian producers will be able to export LNG. NOVATEK (the Yamal LNG Project) and Rosne have plans to construct LNG produc on facili- es. There is a provision for increasing considerably

Russia’s LNG produc on and export to global markets in the long run perspec ve.

A large-scale long-term gas supply contract with China was signed in May 2014. The contract is cri -cal in the context of enhancing the capacity to expand export of Russia’s natural gas. The contract covers the development of large natural gas fi elds in the Eastern Siberia and 30-year gas supplies to China via a pipe-line, thereby increasing considerably gas exports, as well as diversifying gas supplies by enhancing exports eastwards.

Analysis of the long dynamics of Russia’s oil exports in the long run shows a substan al strengthening of exports in the oil sector, compared to the pre-reform period. The share of net export of crude oil and refi ned products in oil produc on increased from 47.7% in 1990 to 73.7% in 2013. However, it should be remem-

Table 4 OIL PRODUCTION STRUCTURE IN 2008 2013

Oil pro-duc on, in 2008, million

tons

As per-centage of total pro-duc on,%


tons

As per-centage of total pro-duc on,

%


tons


%


tons


% Russia, total 488.5 100.0 505.1 100.0 518.0 100.0 523.3 100.0Rosne 113.8 23.3 112.4 22.3 117.5 22.7 192.6 36.8LUKOIL 90.2 18.5 90.1 17.8 84.6 16.3 86.7 16.6TNK-BP 68.8 14.1 71.7 14.2 72.5 14.0 - -Surgutne egaz 61.7 12.6 59.5 11.8 61.4 11.9 61.5 11.8Gazprom, includ-ing Gazprom Ne 43.4 8.9 43.3 8.6 46.1 8.9 48.5 9.3 including: Gazprom 12.7 2.6 13.5 2.7 14.5 2.8 16.3 3.1 Gazprom Ne 30.7 6.3 29.8 5.9 31.6 6.1 32.2 6.2Tatne 26.1 5.3 26.1 5.2 26.3 5.1 26.4 5.0Slavne 19.6 4.0 18.4 3.6 17.9 3.5 16.8 3.2Bashne 11.7 2.4 14.1 2.8 15.4 3.0 16.1 3.1RussNe 14.2 2.9 13.0 2.6 13.9 2.7 8.8 1.7NOVATEK 2.7 0.6 3.8 0.8 4.2 0.8 4.3 0.8PSA operators 12.0 2.5 14.4 2.9 14.1 2.7 14.0 2.7Other producers 24.1 4.9 38.2 7.6 44.1 8.5 47.6 9.1

Source: Ministry of Energy of Russia, the author’s es mates.


22

bered that this is associated not only with increasing absolute volumes of exports, but also reducing con-siderably domes c consump on of crude oil because of the market transforma on of the Russian economy and subs tu on of furnace oil with natural gas. Fur-thermore, it is worth no ng that increase in crude oil exports An increase in the share of refi ned products in oil exports can be noted, an increase from 18.2% to 1990 to 38.9% in 2013. However, it should be borne in mind that because of low depth of oil refi ning most of Russia’s export of refi ned products accounts for fuel oil which in Europe is used as feedstock for further refi n-ing to produce light refi ned products.

In response to growth in export of refi ned products and natural gas the share of fuel and energy commodi- es in Russia’s export reached 70.6% in 2013 while the

share of crude oil was 33.0%, natural gas was 12.8%. Amendments to the tax regula on which ease the

tax burden and enhance taxa on fl exibility have played an important role in the development of the Russian oil sector over the last few years, of which the following key policies are worth men oning: the introduc on of a tax holiday mechanism for the mineral extrac on tax

(MET) in undeveloped regions which lack the respec- ve infrastructure; the applica on of a decreasing co-

effi cient to the MET rate for oil fi elds with high degree of reserve deple on; the applica on of a decreasing coeffi cient to the MET rate for minor oil fi elds; and the applica on of the reduced export duty rate on crude oil for oil fi elds in new development areas.

A few new federal laws took eff ect in 2014. The laws are intended to create the condi ons required for the development of the oil and gas sector. The Federal Law of 23.07.2013 №213-FZ ‘On the Amendments to Chapters 25 and 26, Part 2 of the Tax Code of the Rus-sian Federa on and Ar cle 3.1 of the Russian Federa- on Law ‘On the Customs Tariff ’ introduced measures

aimed at s mula ng the development of hard-to-re-cover oil reserves. The law establishes the MET rate is to diff er according to reservoir permeability, the size of oil-fi lled forma on and the degree of fi eld deple- on. The law introduces the applica on of a special

decreasing coeffi cient to the MET rate which is cha-racterized by the degree of oil produc on complexity.

A provision is made in 2014–2016 for increasing the MET rate in oil produc on with simultaneous reduc-

Table 5 THE RATIO OF PRODUCTION, CONSUMPTION AND EXPORT OF CRUDE OIL AND NATURAL GAS IN 2005 2013

2005 2006 2007 2008 2009 2010 2011 2012 2013Crude oil, million tons

Produc on 470.0 480.5 491.3 488.5 494.2 505.1 511.4 518.0 523.3Exports, total 252.5 248.4 258.4 243.1 247.4 250.4 244.6 239.9 236.6Exports to non-CIS countries 214.4 211.2 221.3 204.9 210.9 223.9 214.4 211.6 208.0Exports to CIS countries 38.0 37.3 37.1 38.2 36.5 26.5 30.2 28.4 28.7Net exports 250.1 246.1 255.7 240.6 245.6 249.3 243.5 239.1 235.8Domes c consump on 123.1 131.2 124.1 130.4 125.3 125.9 140.7 142.1 137.5Net exports as % of produc on 53.2 51.2 52.0 49.3 49.7 49.4 47.6 46.2 45.1

Refi ned products, million tons Exports, total 97.0 103.5 111.8 117.9 124.4 132.2 130.6 138.1 151.4Exports to non-CIS countries 93.1 97.7 105.1 107.6 115.4 126.6 120.0 121.2 141.1Exports to CIS countries 3.9 5.8 6.7 10.3 9.0 5.6 10.6 16.9 10.3Net exports 96.8 103.2 111.5 117.5 123.3 129.9 127.2 136.8 150.0

Crude oil and refi ned products, million tons Net exports of crude oil and refi ned products 346.9 349.3 367.2 358.1 368.9 379.2 370.7 375.9 385.8

Net exports of crude oil and refi ned products as % of oil produc on 73.8 72.7 74.7 73.3 74.6 75.1 72.5 72.6 73.7

Natural gas, billion cub. meters Produc on 636.0 656.2 654.1 664.9 596.4 665.5 687.5 671.5 684.0Exports, total 207.3 202.8 191.9 195.4 168.4 177.8 184.9 178.7 196.4Exports to non-CIS countries 159.8 161.8 154.4 158.4 120.5 107.4 117.0 112.6 138.0Exports to CIS countries 47.5 41.0 37.5 37.0 47.9 70.4 67.9 66.0 58.4Net exports 199.6 195.3 184.5 187.5 160.1 173.5 179.2 171.6 189.3Domes c consump on 436.4 460.9 469.6 477.4 436.3 492.0 508.3 499.9 494.7Net exports as % of produc on 31.4 29.8 28.2 28.2 26.8 26.1 26.1 25.6 27.7

Source: Federal State Sta s cs Service, Ministry of Energy of Russia, Federal Customs Service, the author’s es mates.


23

on of the export duty rate on crude oil. The Federal Law of 30.09.2013 No. 263-FZ ‘On the Amendments to Chapter 26, Part 2 of the Tax Code of the Russian Federa on and Ar cle 3.1 of the Russian Federa on Law ‘On the Customs Tariff ’ provides for increasing the MET baseline rate in oil produc on from Rb 470 per ton in 2013 to Rb 559 per ton in 2016, with decreas-ing the coeffi cient in the formula designed to calculate a rate of the export customs duty on oil from 0.60 to 0.55 (Table 6).

Table 6 TAX RATES IN OIL SECTOR IN 2013 2016

2013 2014 2015 2016MET in oil produc on: Baseline rate, Rub./ton 470 493 530 559Export du es: Crude oil* 0.60 0.59 0.57 0.55Commercial gasoline, straight-run gasoline** 0.90 0.90 0.90 0.90

Diesel fuel** 0.66 0.65 0.63 0.61Light dis llates, me-dium dis llates** 0.66 0.66 0.66 0.66

Fuel oil, lubricants, bitumen** 0.66 0.66 1 1

* Coeffi cient in the formula designed to calculate an export duty rate on crude oil.

** Coeffi cient to the rate of the export duty on crude oil. Source: Federal Law of 30.09.2013 No. 263-FZ, Regula ons

of the Russian Government of 26.08.2011 No. 716, 29.03.2013 No. 276, 03.01.2014 No. 2.

For the purpose of promo ng moderniza on of the Russian oil produc on industry and enhancing the depth of oil refi ning, the Russian Government has made a few decisions over the last few years on gradual li ing of the export duty rate on fuel oil from 39% (the average in the period of 2006–2010) to 66% of the export duty rate on crude oil. However, such an increase in the export duty rate on fuel oil has had no real eff ect on the situa on. At the same me, the an-nounced by the Government increase from 2015 of the export duty rate on fuel oil up to the level of ex-port duty rate on crude oil has mo vated oil compa-

nies to launch moderniza on of their oil refi ning ca-paci es. They are currently implemen ng approved by the federal government bodies special programs of moderniza on of their oil refi nery plants, which are intended to signifi cantly increase the technologi-cal level of the oil refi ning sector and depth of oil re-fi ning.

The Federal Law of 30.09.2013 No. 263-FZ ‘On the Amendments to Chapter 26, Part 2 of the Tax Code of the Russian Federa on and Ar cle 3.1 of the Russian Federa on Law ‘On the Customs Tariff ’ made material amendments to the system of taxa on in the gas sec-tor. This law established a new procedure for defi ning MET rates for natural gas produc on on the basis of applying special formulae and coeffi cients considering various factors that have an eff ect on gas produc on yield and gas sales. The new procedure for determin-ing a MET rate on natural gas will increase substan- ally the eff ec veness of the system of taxa on in the

gas sector, ensure the required diff eren a on of the tax burden depending on specifi c fi eld development condi ons.

Moreover, the adop on of the Federal Law of 30.09.2013 No. 268-FZ ‘On the Amendments to Parts 1 and 2 of the Tax Code of the Russian Federa on and Certain Legal Acts the Russian Federa on’ is very im-portant as regards to undertaking polices of tax and customs-tariff s mula on of produc on of hydro-carbons on the Con nental Shelf of the Russian Fed-era on. This law established a special preferen al tax treatment for the development of new off shore fi elds which is based on the reduced MET add-value rate dif-feren ated by shelf zones, and the standard profi t tax; but neither export duty nor property tax will be levied as part of shelf (off shore) projects.

The recently adopted laws and regula ons con-cerning tax incen ves for the development of new oil and gas fi elds and hard-to-recover reserves, liberali-za on of export of liquefi ed natural gas, as well as a long-term gas contract with China, create condi ons for further development of the Russian oil and gas sector.


24

THE FOREIGN TRADE IN MARCH 2014N.Volovik

In March 2014, Russia’s foreign trade turnover cal-culated on the basis of the methods of the balance of payments amounted to $74bn which is 1.1% higher than the respec ve index of 2013. Growth took place due to a 5.4% increase in the Russian export of goods to $46.9bn as compared to March 2013 with a 5.7% reduc on in the import of goods to the Russian Fe-dera on to $27.1bn. Such dynamics of export and im-port jus fi ed growth in the foreign trade surplus which grew by 25% in March 2014 as compared to the same period of 2013 (from $15.8bn to $19.7bn).

In the 1st quarter of 2014, the situa on on global commodity markets was worse than a year ago which was jus fi ed by weak economic growth rates of deve-loped countries, as well as worsening of China’s eco-nomic indices.

In March 2014, the range of fl uctua ons on the global oil market was insignifi cant: on March 3, 2014 the Brent oil prices exceeded for the fi rst me since the beginning of the year the level of $111 a barrel as a reac on to uncertainty about developments in Ukraine: there were concerns that in case of introduc- on of troop in Ukraine oil supplies from Russia to Eu-

rope may be disrupted or suspended. On March 20, af-

ter the report of the US Federal Reserve on reduc on of the assets buy-out volume from $65bn to $55bn a month the Brent oil price fell to the month’s minimum value of $105.73 a barrel. The monthly average price was formed at the level of $107.4 a barrel which is 1.7% lower than the index of March 2013.

On April 2, 2014, the Brent oil price fell to the fi ve-month minimum of $103.37 a barrel due to a report that Libyan rebels agreed to li a blockade of Libyan oil terminals and the market expected opening of Libya’s largest oil ports in a ma er of days. However, elec on of the new president prevented further talks on return of oil terminals in the East of the country. The leader of Libyan rebels which took hold of oil ports declared that they did not recognize the new government and the agreement which was reached earlier on renewal of opera on of seaports could be annulled. So, substan- al growth in oil deliveries from Libya is postponed for

an indefi nite period of me.So, con nued hos li es in Ukraine and a standoff in

Libya support oil prices: a er April 8 the Brent oil price has not fallen below $106 a barrel.

In March 2014, the Urals oil price fell by 0.7% as compared to the previous month and amounted to

In March 2014, Russia’s foreign trade turnover calculated on the basis of methods of the balance of payments amounted to $74bn which is 1.1% higher than the 2013 index. However, in general in the 1st quarter of 2014 the last year’s trend of reduc on of the Russian foreign trade turnover prevailed. The export has fallen due to a drop in contract prices with insignifi cant growth in physical volumes. On the contrary, the import has decreased due to reduc on of physical volumes with weak growth in contract prices. It is to be noted that an advanced reduc- on of import is observed and as a result there is growth in the trade balance surplus. The European Union has

started a new trade dispute with the Russian Federa on within the frameworks of the World Trade Organiza on calling for a cancella on of the an dumping du es – introduced in 2013 – on import of German and Italian light commercial vehicles.

0

10

20

30

40

50

60

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

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

Balance Export Import

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

THE FOREIGN TRADE IN MARCH 2014

25

$106.7 a barrel, that is, remained at the level of March 2013. In the 1st quarter of 2013, the Urals oil price amounted to $106.8 a barrel or 96.3% against the re-spec ve period of the previous year.

In April and May 2014, growth in oil prices is ob-served. On the basis of the results of monitoring of oil prices in the period from April 15, 2014 ll May 14, 2014 the Urals oil price amounted to $785.6 a ton ($107.62 a barrel). As a result, in June 2014, export du- es on oil and oil products will increase. The rate of

duty on crude oil will increase to $385 a ton ($376.1 a ton in May 2014). The reduced rate is to be increased from $182.4 a ton to $189.2 a ton. The rate on light and medium dis llates grows from $248.2 a ton to $254.1 a ton. The rate on diesel fuel will amount to $250.2 a ton ($244.4 in May). In June, the export of petrol is charged at the rate of $346.5 a ton ($338.4 in May).

In the past two months, the situa on on the global market of nonferrous metals has not changed much. An excep on is nickel whose prices appreciated both in March and April. It is to be noted that if in March prices on nickel rose by 0.73% on February, in April they increased by 10.4% as compared to March. Ear-lier, nickel prices depreciated more than other indus-trial metals.

However, according to the data of the London Metal Exchange in March 2014 as compared to March 2013 prices on all the nonferrous metals fell: aluminum (de-precia on of 10.7%), copper (13%) and nickel (6.3%). In the 1st quarter of 2014 as compared to the same period of 2014, aluminum, copper and nickel were traded 14.7%, 11.2% and 15.4% cheaper.

In March 2014, the average value of the FAO food price index amounted to 212.8 points which is the highest level since May 2013. The factors behind the most substan al growth in prices in the past ten months were unfavorable weather condi ons for

some crops in the US and Brazil, as well as tensions in the Black Sea region. Prices demonstrated growth as regards all the commodity groups, except for dairy products which depreciated by 2.5% for the fi rst me in the past four months. The highest apprecia on of prices was on sugar (7.9%) and grain (5.2%).

According to the data of the Central Bank of the Russian Federa on, in the 1st quarter of 2014 Russia’s foreign trade turnover amounted to $194.7bn which is 3.7% lower than in the 1st quarter of 2013.

The export of goods fell by 1.8% and amounted to $122.9bn. Reduc on of the export volume took place due to a drop in average contract prices with growth in physical volumes of imported goods.

The nega ve dynamics of the Russian export took place due to a reduc on of the monetary volume of export of fuel and energy commodi es (by 3.4%), chemical produce (5.6%), metals and metal ar cles (5.1%) and machines, equipment and means of trans-porta on (20.3%).

In the 1st quarter of 2014, fuel and energy com-modi es accounted for 72.4% of the Russian export. The physical volume of crude oil supplies abroad fell by 8.3% with average contract prices falling by 2.1%. The export of oil products in physical terms and the natural gas rose by 8.4% and 3.5%, respec vely. How-ever, contract prices on the above commodi es fell as follows: oil products and natural gas were traded 1.9% and 3.7% cheaper, respec vely as compared to the 1st quarter of 2013.

Export growth was observed in commodity sub-groups Wood and Pulp and Paper Ar cles (18.3%) and Food Products and Agricultural Primary Products (31.1%). Export of food products grew due to a 5.5 fold increase in the export of wheat and meslin.

In the 1st quarter of 2014, the import of goods amounted to $71.9bn which is 6.8% lower than the relevant index of the previous year. A drop in import

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

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Oil (Brent), USD/a ton 24.1 29.1 33.6 53.7 60.9 62.05 102.3 47.42 79.8 114.44 124.93 109.2 107.4

Natural gas*, USD/thou-sand m3

2.97 3.74 3.86 5.52 7.99 8.37 11.04 10.9 8.93 9.37 11.97 11.87 10.88

Copper, USD/a ton 1605 1681.6 3018.0 3254.4 5103 6452.5 8421.9 3749.8 7462.8 9530.7 8470.8 7645.6 6650

Aluminum, USD/a ton 1403.2 1393.1 1660.0 1988.6 2429 2761.7 2986.8 1335.8 2205.6 2552.6 2184.2 1909.6 1705.4

Nickel, USD/a ton 6503.3 8402.4 13730 16190 14897 46324.8 31005.7 9696.4 22461.3 26811.7 18660.8 16724.9 15678

* Market of Europe, average contract 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).


26

took place virtually over the en re expanded nomen-clature of goods, except for food products – whose import rose by 1.1% due to growth in prices with a decrease in physical volumes – and mineral products (growth of 0.4%).

In the 1st quarter of 2014, Russia’s foreign trade sur-plus amounted to $51bn which is 5.6% higher than the respec ve index of 2013.

In the 1st quarter of 2014, in the geographic pa ern of the Russian foreign trade the share of the EU coun-tries fell to 49.7% against 49.9% in the 1st quarter of 2013. The share of APEC countries rose from 24.3% to 25.6%. It is to be noted that the share of CIS countries keeps falling: in the 1st quarter of 2014 it amounted to the mere 12.7% against 13.4% in the 1st quarter of 2013.

On May 21, 2014, the European Union submi ed to the WTO Secretariat a request to hold consulta ons with the Russian Federa on as regards an dumping du es introduced by the Eurasian Economic Commis-sion on small-tonnage trucks from Germany and Italy.

It is to be reminded that on May 14, 2013 on the ba-sis of the outputs of the an dumping inves ga on the Eurasian Economic Commission made a decision to in-troduce for the period of fi ve years an dumping du es on light commercial vehicles from Germany, Italy and Turkey imported to the territory of the Customs Union. The decision became eff ec ve on June 16, 2013. The an dumping duty for all the German manufacturers

amounts to 29.6% of the customs duty, while that for Italian and Turkish manufacturers, to 23% and 11.1%, respec vely. The an dumping duty is added to the current 10% rate of the customs duty.

The EU claims that the above measures are incom-pa ble with Russia’s obliga ons under the WTO Agree-ment as regards applica on of Ar cle VI of GATT 1994 (the An dumping Code). As stated in the press-release of the European Commission1, an dumping du es “se-riously impede access to the Russian market” and “the export of light commercial vehicles from Germany and Italy did not benefi t from concessions made by Russia due to its accession to the WTO in 2012”.

The Russian Federa on believes that the EU’s claims as regards an dumping du es on import of light com-mercial vehicles to the territory of the Customs Union are unjus fi ed. In accordance with the WTO rules, an an dumping inves ga on was carried out and it re-vealed the existence of dumping import – which infl icts material damage to the industry of member-states of the Customs Union – from Germany, Italy and Turkey.

Russia is prepared to hold consulta ons which pro-vide an opportunity for the par es involved to discuss that issue and fi nd within 60 days an acceptable solu- on without further li ga ons. If consulta ons fail to

resolve the dispute, the European Union may send a request for establishment of an arbitral group.

1 h p://trade.ec.europa.eu/doclib/press/index.cfm?id=1083

THE STATE BUDGET IN JANUARY–APRIL 2014

27

THE STATE BUDGET IN JANUARY APRIL 2014T.Tischenko

The Analysis of the Main Parameters of Execu on of the Federal Budget in January–April 2014In January–April 2014, the federal budget revenues

amounted to Rb 4,753.7bn or 21.8% of GDP which is 0.9 p.p. of GDP higher than in the respec ve period of the previous year (Table 1). Oil and gas revenues rose to 11.5% of GDP or by 1.2 p.p. of GDP against the four months of 2013. In January–April 2014, budget expen-ditures amounted to Rb 4,685.8bn (21.4% of GDP), which is 0.2 p.p. of GDP higher as compared to the same period of the previous year.

On the basis of the results of four months of 2014, the federal budget is executed with surplus of 0.3% of GDP which is 0.7% of GDP higher than the nega ve balance of execu on of the federal budget in January–April 2013. The volume of non-oil and gas defi cit rose by 0.5 p.p. of GDP (11.2% of GDP) against the level of the respec ve period of the previous year which

situa on points to greater dependence of the federal budget on global oil prices and higher risks related to its equilibrium in the mid-term prospect.

Within four months of 2014, there was growth in federal budget revenues from the profi t tax (0.1 p.p. of GDP), domes c VAT (0.4 p.p. of GDP), severance tax (0.3 p.p. of GDP) and foreign economic ac vi es (0.4 p.p. of GDP) as compared to the same period of 2013 (Table 2). In January–April 2014, revenues from import VAT fell by 0.1 p.p. of GDP as compared to the same period of 2013. Within four months of 2014, fed-eral budget revenues in frac ons of GDP from domes- c and import excises remained at the level of Janu-

ary–April 2013 (0.7% and 0.09% of GDP, respec vely). On the basis of the results of four months of 2014

against January–April 2013, there was growth in feder-al budget expenditures in frac ons of GDP (Table 3) as regards the following items: Federal Issues (0.2 p.p. of

According to the data of the Federal Treasury, in January–April 2014 the federal budget revenues rose by 0.9 p.p. of GDP as compared to the respec ve period of the previous year due to accelerated growth of 1.2 p.p. of GDP in oil and gas revenues. In January–March 2014, revenues of the consolidated budget of cons tuent en es of the Russian Federa on fell by 0.7 p.p. of GDP against the fi rst months of 2013. On the basis of the results of January-April 2014, the federal budget is executed with surplus of 0.3% of GDP; there was surplus of 0.7% of GDP on the basis of the results of execu on of the consolidated budget of cons tuent en es of the Russian Federa on in January–March 2014, too. In May, a regular cycle of budget planning begins; within the frameworks of the above cycle the Government of the Russian Federa on announced the fi rst es mates of execu on of the federal budget in 2014 and forecast scenarios for forma on of the main parameters the 2015–2017 federal budget. According to the assessment of the Ministry of Economic Development of the Russian Federa on, in 2014 the surplus of the federal budget at the level of 0.5% of GDP is expected, while in 2015–2016 and 2017 a defi cit of 0.4–1% of GDP and 0.8–1.8% of GDP, respec vely, depending on a scenario op on of the forecast.

Table 1THE MAIN PARAMETERS OF THE FEDERAL BUDGET OF THE RUSSIAN FEDERATION IN JANUARY APRIL 2013 2014

January–April 2014 January–April 2013 Deviaion, p.p. of GDPBillion RB % of GDP Billion Rb % of GDP

Revenues, including: 4753.7 21.8 4 223.4 20.9 0.9Oil and gas revenues 2516.6 11.5 2 087.6 10.3 1.2Non-oil and gas revenues 2237.1 10.3 2135.8 10.6 -0.3Expenditures, including: 4685.8 21.4 4 298.2 21.2 0.2Interest expenditures 155.4 0.7 140.5 0.7 0.0Non-interest expenditures 4530.4 20.7 4157.7 20.5 0.2Surplus (defi cit) of the federal budget 67.9 0.3 -74.8 -0.4 0.7Non-oil and gas defi cit -2448.7 -11.2 -2162.4 -10.7 -0.5 GDP es mate 21843 20220

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.


28

GDP), Na onal Defense (1.0 p.p. of GDP), Housing and Public U li es (0.05 p.p. of GDP) and Inter-Budgetary Transfers (0,3 p.p. of GDP).

A decrease in the federal budget expenditures in frac ons of GDP within four months of 2014 as com-pared to January–April 2013 took place as regards the following 4 items: Healthcare and Educa on (0.2 p.p. of GDP each ), Social Policy (0.1 p.p. of GDP) and Physi-cal Culture and Sport (0.04 p.p.). As regards other items, within four months of 2014 federal budget ex-penditures in frac ons of GDP remained at the level of January–April 2013.

As of may 1, 2014, the volume of the Reserve Fund and the Na onal Welfare Fund amounted

to Rb 3,139.5bn (+Rb 18.2bn in April 2014) and Rb 3,127.9bn, respec vely (+Rb 5.4bn in April 2014).

U liza on of the consolidated budget of cons tuent en es of the Russian Federa on in January–March 2014According to the data of the Federal Treasury, in

January–March 2014 the revenues of the consolidated budget of cons tuent en es of the Russian Federa- on amounted to Rb 1,790.6bn or 11.0% of GDP which

is 0.7 p.p. of GDP lower than that in the respec ve pe-riod of 2013 (Table 4).

Within three months of 2014, expenditures of the consolidated budget fell by 0.1 p.p. of GDP against the

Table 2DYNAMICS OF REVENUES FROM THE MAIN TAXES TO THE FEDERAL BUDGET

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

Total tax revenues, including. 4398.2 20.1 3847.5 19.0 1.1Corporate profi t tax 135.5 0.6 112.2 0.5 0.1VAT on goods sold in the terri-tory of the Russian Federa on 771.3 3.5 636.7 3.1 0.4

VAT on goods imported to the Russian Federa on 529.3 2.4 520.1 2.5 -0.1

Excises on goods produced in the Russian Federa on 160.2 0.7 136.1 0.7 0.0

Excises on goods imported to the Russian Federa on 21.5 0.09 17.4 0.09 0.0

Severance tax 971.3 4.4 832.2 4.1 0.3 Revenues from foreign eco-nomic ac vi es 1809.1 8.3 1592.8 7.9 0.4

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

Table 3FEDERAL BUDGET EXPENDITURES

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

Total expenditures 4685.8 21.4 4298.2 21.2 0.2includingFederal issues 305.6 1.4 252.9 1.2 0.2Na onal defense 1214.0 5.5 901.9 4.5 1.0Na onal security and law enforcement 600.7 2.7 552.6 2.7 0.0Na onal economy 507.2 2.3 461.2 2.3 0.0Housing and public u li es 34.9 0.1 10.7 0.05 0.05Protec on of environment 10.2 0.04 9.1 0.04 0.0Educa on 249.9 1.1 268.5 1.3 -0.2Culture and cinema 26.8 0.1 21.7 0.1 0.0Healthcare 156.0 0.7 191.6 0.9 -0.2Social policy 1107.1 5.0 1226.9 6.1 -1.1 Physical culture and sport 10.7 0.04 16.4 0.08 -0.04Mass media 30.3 0.1 30.6 0.1 0.0Servicing of the state debt 155.4 0.7 140.6 0.7 0.0Inter-budgetary transfers 276.8 1.3 213.3 1.0 0.3

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

THE STATE BUDGET IN JANUARY–APRIL 2014

29

respec ve period of 2013 and amounted to 10.3% of GDP or Rb 1,683.2bn. On the basis of the results of January–March 2014, consolidated budgets of cons t-uent en es of the Russian Federa on were executed with surplus of Rb 107.4bn or 0.7% of GDP which is 0.6 p.p. of GDP lower than the level of the respec ve period of 2013.

Within three months of 2014, as compared to the respec ve period of 2013 reduc on of the volume of revenues to consolidated budgets of cons tuent en- es of the Russian Federa on took place as regards

the profi t tax (0.2 p.p. of GDP), individual income tax (0.1 p.p. of GDP) and non-repayable receipts from other budgets of the budgetary system of the Russian Federa on (0.3 p.p.). On the basis of three months of 2014, there was growth in revenues only from proper-ty taxes (0.2 p.p. of GDP as compared to three months of 2013). In January–March 2014, revenues of the con-solidated budget of cons tuent en es of the Russian Federa on in frac ons of GDP from domes c excises and aggregate income taxes remained at the level of the respec ve period of the previous year.

Table 4The main parameters of the consolidated budget of cons tuent en es of the Russian Federa on

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

Revenues, including: 1790.6 11.0 1736.8 11.7 -0.7corporate profi t tax 497.9 3.0 474.7 3.2 -0.2individual income tax 546.8 3.3 506.8 3.4 -0.1domes c excises 113.7 0.7 109.1 0.7 0.0taxes on the aggregate income 69.4 0.4 66.5 0.4 0.0property taxes 159.2 1.0 127.3 0.8 0.2non-repayable receipts from other budgets of the budgetary sys-tem of the Russian Federa on

373.2 2.3 383.5 2.6 -0.3

Expenditures, including: 1683.2 10.3 1543.0 10.4 -0.1Surplus (defi cit) of the consolidated budget of cons tuent en es 107.4 0.7 193.8 1.3 -0.6

GDP es mate 16284 14 889

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

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

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

Total expenditures, 1683.2 10.3 1543.0 10.4 -0.1includingFederal issues 108.2 0.7 98.5 0.7 0.0Na onal defense and law enforcement 16.4 0.1 14.6 0.1 0.0Na onal economy 239.4 1.5 223.4 1.5 0.0Housing and public u li es 127.7 0.8 111.4 0.7 0.1Protec on of the environment 3.4 0.02 3.6 0.02 0.0Educa on 499.2 3.1 475.5 3.2 -0.1Culture and cinema 58.0 0.3 51.5 0.3 0.0Healthcare 264.0 1.6 240.8 1.6 0.0Social policy 301.9 1.8 271.3 1.8 0.0Physical culture and sport 31.0 0.2 26.6 0.2 0.0Mass media 8.7 0.05 8.0 0.05 0.0Servicing of state and municipal debt 24.5 0.1 16.7 0.1 0.0

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


30

On the basis of three months of 2014, consolidated budget expenditures of cons tuent en es of the Rus-sian Federa on (Table 5) in frac ons of GDP as regards most items remained at the level of January–March 2013. In January–March 2014, consolidated budget expenditures of cons tuent en es of the Russian Federa on decreased insignifi cantly as regards the Ed-uca on item (0.1% p.p. of GDP), while increased only as regards the Housing and Public U li es item (0.1 p.p. of GDP as compared to January–March 2013).

As of April 1, 2014, the volume of the state debt of cons tuent en es of the Russian Federa on amount-ed to Rb 1,754.0bn1 (+Rb16.5bn within three months of 2014).

In the last ten days of May, the Government of the Russian Federa on returned to considera on of mea-sures aimed at securing of equilibrium of consolidated budgets of cons tuent en es of the Russian Feder-a on2. On the basis of the results of 2013, the defi -cit of regional budgets increased nearly two-folds to Rb 650bn (0.9% of GDP) as compared to the previous year, while the volume of the state debt of cons tu-ent en es of the Russian Federa on, by over 25% from Rb 1,355.0bn as of the beginning of 2013 to Rb 1,737.5bn as of the beginning of 2014.

In 2013, it can be stated that among factors behind growth in imbalances of regional budgets was the need to fulfi ll the May Decrees of the President (primarily, as regards growth in labor remunera on in the social sphere) and reduc on of federal transfers in a situa on of a decrease in tax and non-tax revenues of budgets of cons tuent en es of the Russian Federa on. Also, a disturbing factor is a reduc on of investment expendi-tures of regional budgets during the 2012–2013 period. However, ineffi ciency of regional authori es as regards improvement of the investment climate, their own tax

1 h p://www.minfi n.ru/ru/public_debt/subdbt/index.php2 h p://government.ru/news/

poten al, quality of budget/debt planning and property management should not be underes mated. In a num-ber of cons tuent en es of the Russian Federa on, in a situa on of budget problems federal law enforcement agencies are s ll fi nanced by regions though it is not within their competence3.

The problem of imbalances on the regional level is expected to be solved by means of fi nancial support measures, in par cular, through alloca on of addi- onal Rb 25bn to secure equilibrium of budgets and

growth of Rb 100bn4 in the volume of budget lending for replacement (refi nancing) of expensive commercial loans with less expensive budget loans5. For commer-cial banks which extend loans to cons tuent en es of the Russian Federa on, it is proposed to set a ceiling of the interest rate at the level of the refi nancing rate plus 1.25% provided that such loans are refi nanced by means of budget loans.

The proposed measures aimed at securing of equi-librium and reduc on of a debt burden on consoli-dated budgets of cons tuent en es of the Russian Federa on do not mo vate regional authori es to up-grade the quality of public administra on and create an addi onal burden on the expenditure side of the federal budget which experienced a certain defi cit of funds in 2013 (a shor all of non-oil and gas revenues was actually compensated by means of oil and gas re-venues due to which situa on the mere Rb 212bn was transferred to the Reserve Fund instead of Rb 1 tril-lion).

3 h p://большоеправительство.рф/events/5510136/4 Values can be adjusted in considera on of the dra law at the State Duma and the Council of Federa on and with taking into account the posi on of senators who have been pressing for the past few years the Ministry of Finance with requests to write off regions’ debts to the federal budget. 5 At present, it amounts to one third of the rate of refi nancing; the Ministry of Finance of the Russian Federa on suggests that it should be less than 1%.

THE RUSSIAN BANKING SECTOR IN APRIL 2014

31

THE RUSSIAN BANKING SECTOR IN APRIL 2014M.Khromov

In April 2014, the Bank of Russia withdrew licenses from 5 lending organiza ons, three of which had been a rac ng private fi nance. As of early April, their assets and private customer deposits amounted to Rb 54bn and Rb 31bn respec vely. The Deposit Insurance Agency’s to-tal liabili es to the depositor against the deposits held at those banks amounted to Rb 28bn. On the whole, from January through April 2014, licenses were withdrawn from 27 lending organiza ons, including 20 lending or-ganiza ons a rac ng private fi nance. As of 1 May 2014, in the a ermath of this culling, Russia’s banking sector comprised 894 lending organiza ons, 742 of which were par cipants in the Deposit Insurance System.

During April, the size of the banking sector’s assets increased by 1.3%. Over the course of May 2013 – April 2014, the banking sector’s assets grew by 15.1%. Over the course of April 2014, the assets of state-owned banks increased by 1.6%, while their share in the ag-gregate volume of assets climbed to 57.0%, thus hit- ng a record high.

In April 2014, the banking sector’s profi t amounted to Rb 58bn, which represents its record low since Octo-ber 2011. The main reason for this drop in profi t was a Rb 79bn growth in reserves against possible loan losses over the course of April 2014 (in Q1 2014, the average monthly alloca on to reserves against possible loan los-ses amounted to Rb 74bn, while in Q1 2013 it amounted to Rb 34bn). As a consequence, the profi tability of the banking sector’s equity dwindled in April to a puny 10% per annum, the lowest monthly result since July 2010. During the period since the beginning of 2014, the pro-fi tability of the banking sector’s equity amounted to 13.7% per annum. Over the course of the period May 2013 – April 2014, it amounted to 15.7% per annum.

A racted Funds1

In April 2014, the bank accounts and deposits of the popula on resumed their growth, increasing by 1.6%

1 Calculated on the basis of balance-sheet accounts (Form No 101).

In April 2014, Russia’s banking sector witnessed a con nua on of the trends observed over the several previous months: the share of state-owned banks con nued to increase in all major segments of the banking services mar-ket; the growth rate of retail lending remained on the decline, while the quality of this type of lending con nued to deteriorate – moreover, it grew increasingly dependent on alloca ons from money market regulators. The only posi ve factor worth men oning was the discon nua on of private-customer deposit ou lows. However, in spite of this posi ve development, the annual growth rate of the deposit base con nued to decline.

or Rb 359m on the previous month. However, their an-nual growth-rate con nued to decline: over the period May 2013 – April 2014, the bank accounts and depo-sits of the popula on increased by a mere 7.7%. Thus, their growth rate slumped close to its lowest level re-gistered at the height of the crisis, in the period Sep-tember 2008 – August 2009 (6.1%).

In April, for the fi rst me since the beginning of the year, the ruble-denominated accounts of the popula- on grew faster than its accounts denominated in fo-

reign currencies. Thus, during April 2014, the former increased by 2.2%, while the la er, recalculated in

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State-owned banksPrivate banksShare of state-owned banks in banking system

Fig. 1. The Movement of Bank Assets (State-owned Banks vs. Other Banks, Trillion Rb) and State-owned Banks’ Share in Aggregate Assets (%, Right-hand Side Scale)

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Fig. 2. The Movement of Equity1 of State-owned and Other Banks (Trillion Rb), and State-owned Banks’

Share in Equity (%, Right-hand Side Scale)


32

USD, dwindled by 0.8%. It can therefore be concluded that, at long last, both the fl ight of depositors and the process of personal savings dollariza on took a pause.

However, April saw a con nua on of the ou low of private customer deposits from private banks to state-owned banks. Over the course of that month, the ag-gregate amount of money kept by private customers at state-owned banks increased by 2.1%, while the share of state-owned banks in the private deposit market grew to 61.1%, which represents its all- me high.

During April 2014, the volume of monies kept in the bank accounts of corporate clients declined by Rb 191bn (-1.3%). As of 1 May 2014, its growth rate in annual terms amounted to 14.5%.

Over the course of April, the ruble-denominated monetary assets of non-banking organiza ons were de-clining at almost the same rate as their monetary assets denominated in foreign currencies and recalculated in USD. They dwindled by 1.3% and 1.6% respec vely.

The decline in the monetary assets of corporate cli-ents was caused by the ou low of monies from their current and se lement accounts, which contracted

by 3.7% over the course of April, while the volume of fi xed date deposits, on the contrary, rose by 2.2%. As a consequence, the share of fi xed date deposits in the aggregate funds of corporate clients increased from 51.3% as of 1 April 2014 to 54.43% as of 1 May 2014, thus nearly hi ng its record high achieved one year earlier (55.5% as of 1 May 2013).

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State-owned banksPrivate banksShare of state-owned banks in banking system

Fig. 3. The Movement of Individual Deposits with State-owned and Other Banks (Trillion Rb), and State-owned Banks’ Share

in the Private Deposit Market (%, Right-hand Side Scale)

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State-owned banksOther banksShare of state-owned banks in banking system

Fig. 4. The Movement of Corporate Clients’ Deposits with State-owned and Other Banks (Trillion Rb), and

State-owned Banks’ Share in the Market for Corporate Clients’ Accounts (%, Right-hand Side Scale)

Fig. 5. The Movement of the Bank of Russia’s Loans to State-owned and Other Banks (Trillion Rb),

and State-owned Banks’ Share in the Loans Issued by the Bank of Russia (%, Right-hand Side Scale)

5060708090100

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State-owned banks

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Table 1THE STRUCTURE OF RUSSIA’S BANKING SYSTEM’S LIABILITIES AS OF MONTH’S END , AS % OF TOTAL

12.08 12.09 12.10 12.11 12.12 03.13 06.13 09.13 12.13 01.14 2.14 3.14 04.14Liabili es, bn Rb 28022 29430 33805 41628 49510 49839 52744 54348 57423 58445 59137 59377 60208Equity 14.1 19.3 18.7 16.9 16.2 16.7 16.3 16.5 16.0 16.1 16.0 16.0 15.9Credits allo ed by 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 7.9 8.4

Interbank opera ons 4.4 4.8 5.5 5.7 5.6 5.4 5.2 5.1 5.1 5.2 5.0 4.7 4.8Foreign liabili es 16.4 12.1 11.8 11.1 10.8 10.4 10.8 10.1 9.9 10.3 10.7 10.6 10.3Physical persons’ monies 21.5 25.9 29.6 29.1 28.9 29.6 29.6 29.3 29.4 28.7 28.5 27.8 27.9Enterprises and or-ganiza ons’ monies 23.6 25.9 25.7 26.0 24 23.9 23.5 22.9 23.8 24.1 24.2 23.9 23.3

Accounts and deposits of state administra- ve bodies and lo-

cal governments

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

Securi es issued 4.1 4.1 4.0 3.7 4.9 5.2 5.1 4.7 4.5 4.5 4.2 4.2 4.1Source: RF Central Bank; the IEP’s es mates.

THE RUSSIAN BANKING SECTOR IN APRIL 2014

33

The April 2014 ou low of corporate clients’ mo-netary assets was totally accounted for by non-state-owned banks. While the volume of such assets kept at state-owned banks remained prac cally unchanged (+0.1% over the course of April), the volume of corpo-rate clients’ monetary assets kept at big foreign banks and big private banks declined by 5.0% and 1.3% re-spec vely, while that of the assets kept at small and medium-size banks dropped by 3.4%.

In April 2014, the banking sector’s dependence on assistance from Russia’s monetary authori es con -nued to be on the rise. Over the course of that month, the banking sector’s debt to the Bank of Russia and the RF Ministry of Finance grew by Rb 348bn and Rb 101bn respec vely. As of the end of April 2014, the banking sector’s aggregate debt to the monetary regulators climbed to yet another record high of Rb 5,557bn, or 9.2% of the banking sector’s aggregate liabili es. State-owned banks accounted for 80% of the April 2014 rise in the banking sector’s debt to the Bank of Russia, while their share in the banking sector’s aggre-gate debt thereto amounted to 71.4%.

Invested Monies In April 2014, the retail credit por olio of Russia’s

banking sector increased by Rb 191bn (1.8%). As seen by the results of April, its growth rate in annual terms declined to 23.5%. The quality of retail credits con n-ued to worsen. As of 1 May 2014, the share of credits with repayment in arrears amounted to 5.1%, having increased over the course of April by 0.2 p.p. and by 0.6 p.p. since the beginning of the year. The ra o of reserves against poten al losses to the popula on’s aggregate accounts payable climbed to 7.9%, which represents a 0.1 p.p. rise on March 2014 and a 0.8 p.p. rise on the beginning of the year.

The growth-rate of the retail credit por olio of small and medium-size banks dropped almost to zero. While physical persons’ payables to state-owned and

big private banks increased in April by 2.6% and 2.0% respec vely, such payables to small and medium-size banks grew by a rickety 0.1%. The share of state-owned banks in this segment of the credit market climbed to a new record high of 53%.

In April 2014, the volume of corporate debt against bank loans increased by Rb 353bn (1.6%). The growth-rate of corporate debt against bank loans con nued to hover around 12.7%. The formal indicators of credit por olio quality in the market’s corporate segment displayed opposite trends. The volume of outstanding

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Share of state-owned banks in banking system

Fig. 6. The Movement of Retail Loans Issued by State-owned and Other Banks (Trillion Rb), and State-owned

Banks’ Share in Retail Lending (%, Right-hand Side Scale)

5455565758596061

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State-owned banksOther banksShare of state-owned banks in banking system

Fig. 7. The Movement of Loans Issued to Enterprises and Organiza ons by State-owned and Other Banks (Trillion Rb),

and State-owned Banks’ Share in the Market for Loans to Enterprises and Organiza ons (%, Right-hand Side Scale)

Table 2STRUCTURE OF RUSSIA’S BANKING SYSTEM’S ASSETS AS OF MONTH’S END , AS % OF TOTAL

12.08 12.09 12.10 12.11 12.12 03.13 06.13 09.13 12.13 01.14 2.14 3.14 04.14Assets, bn Rb 28022 29430 33805 41628 49510 49839 52744 54348 57423 58445 59137 59377 60208Cash 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 2.8 2.7Monies placed with 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 3.5 3.4

Interbank opera ons 5.2 5.4 6.5 6.4 6.8 6.4 6.0 5.8 5.7 6.1 5.8 5.3 5.7Foreign assets 13.8 14.1 13.4 14.3 13.0 14.5 15.1 13.6 13.3 14.7 15.5 14.4 15.1Popula on 15.5 13.1 13.0 14.4 16.8 17.4 17.9 18.5 18.5 18.4 18.2 18.4 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 39.6 39.0State 2.0 4.2 5.1 5.0 3.2 3.2 3.2 2.9 3.1 3.3 3.7 3.0 2.7Property 1.9 2.7 2.6 2.3 2.2 2.2 2.2 2.1 2.0 2.0 1.9 1.9 1.9

Source: RF Central Bank; the IEP’s es mates.


34

debt increased by 0.1 p.p. to 4.3%, while the ra o of reserves to the size of credit por olio, on the contrary, dropped, declining by 0.1 p.p. to 6.6%.

In April 2014, the highest growth rate of corporate debt against bank loans was registered at state-owned banks (2.4%, while the RF Savings Bank displayed an even higher corporate debt growth rate, of 2.9%). At

the same me, the growth-rates of corporate debt against bank loans recorded at big private banks amounted to a mere 0.1%, while corporate debt to small and medium-size banks increased by 0.5%. As of 1 May 2014, the share of state-owned banks in the total volume of loans issued to non-banking borrowers amounted to 59.8%.

THE MORTGAGE IN THE RUSSIAN FEDERATION IN Q1 2014

35

THE MORTGAGE IN THE RUSSIAN FEDERATION IN Q1 2014G.Zadonsky

According to the data of the Central Bank of the Russian Federa on, in the 1st quarter of 2014 credit ins tu ons extended 208607 housing loans (HL), in-cluding Rb 334.73bn worth of 198,082 mortgage hou-sing loans and Rb 11.65bn worth of 10,525 unsecured housing loans (UHL), that is, the diff erence between HL and MHL (Fig.1). In the 1st quarter 2014, the total vo-lume of MHL in monetary terms exceeded by 47.43% the volume of loans extended in the same period of 2013 (Fig.1). As of April 1, 2014, the outstanding debt on MHL rose by 34.11% as compared to April 1, 2013 and amounted to Rb 2.81 trillion. In the 1st quarter of 2014, the share of MHL in foreign currency in mo-netary terms as a percentage of the total volume of mortgage lending decreased by 0.73 p.p. as compared to the share in the 1st quarter of 2013 and amounted to 0.51%.

In the 1st quarter of 2014, the share of UHL in the volume of HL as compared to the 1st quarter of 2013 decreased by 0.73 p.p. as regards the number of loans and increased by 0.09 p.p. in monetary terms to amount to 3.36% (Fig. 2). In the 1st quarter of 2014, the share of HL in the volume of consumer loans (CL) amounted to 17.96% which is 4.63 p.p. higher than in the 1st quarter of 2013.

According to the data of the Central Bank of the Russian Federa on, as of April 1, 2014, the overdue debt on MHL amounted to Rb 40.60bn, including Rb 25.76bn and Rb 14.84bn as regards loans in rubles and foreign currency, respec vely (Fig. 3). As of the end of the 1st quarter of 2014, the total overdue debt was 2.4% higher than that as of January 1, 2014, while in shares of the outstanding debt (1.45%) within the same period it was 0.5 p.p. lower. It is to be noted that the overdue debt on MHL in rubles increased as com-pared to the end of the 4th quarter of 2013 in mo netary terms and fell as a percentage of the outstanding debt, specifi cally, from 1.0% as of January 1, 2014 to 0.96% as of April 1, 2014. Within the same period, the over-

In the 1st quarter of 2014, the total volume of the extended MHL exceeded by 47.43% the volume of loans ex-tended in the 1st quarter of 2013. It is to be noted that within a quarter Rb 334.73bn worth of 198,082 loans was extended. A decrease in the share of the overdue debt on MHL points to con nued upgrading of quality of mortgage lending. However, as of April 1, 2014 the total debt on loans with payments overdue for over 180 days increased by 0.11 p.p. as compared to March 1, 2014 and amounted to 1.88%. In 2014, the weighted average rate on MHL in rubles extended from the beginning of the year keeps falling. As of April 1, 2014, it amounted to 12.2%. In March 2014, the weighted average rate on MHL in rubles extended within a month amounted to 12.0%.

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Fig. 1. Dynamics of lending by the quarter

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

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36

due debt on MHL in foreign currency increased both in volume and as a percentage of the outstanding debt, that is, from 12.69% to 13.22% (Fig. 3).

According to the data of the Central Bank of the Russian Federa on, in 2014 the amount of the debt on MHL without overdue payments increased from Rb 2,613.63bn as of March 1 to Rb 2,675.99 as of April 1, while the share of that debt as percentage of the to-tal debt increased within the same period by 0.06 p.p. to 96.25% (Table 1). Within the same period, the vol-ume of debt on defaulted MHL (loans with payments overdue for over 180 days) increased to Rb 52.82 bn, while its share in the total debt grew by 0.11 p.p. to 1.88% (Table 1).

According to the data of the Central Bank of the Russian Federa on, in the 1st quarter of 2014 the 2013 trend of reduc on of the weighted average rate on MHL in rubles extended from the beginning of the year prevailed. As of April 1, 2014, the rate amounted to 12.2% which is 0.6 p.p. lower than that as of the same date of 2013 (Fig. 4). In March 2014, the weighted a verage monthly rate on MHL in rubles fell by 0.7 p.p. as compared to March 2013 and amounted to 12.0%. In 2014, the weighted average rate on MHL in foreign currency extended from the beginning of the year amounted to 9.3% (Fig. 4). In the 1st quarter of 2014, the weighted average period of lending as regards MHL in rubles extended from the beginning of the year amounted to 15.33 years, while that as regards loans in foreign currency, to 13.83 years (Fig. 4).

As of April 1, 2014, the average value of MHL in rubles extended from the beginning of the year rose everywhere as compared to that as of January 1, 2014, except for Moscow, the Moscow Region and St. Pe-tersburg. The average value of the loan in the Russian Federa on amounted to Rb 1.68m having increased by 3.48% as compared to January 1, 2014. As of April 1, 2014, the largest average value of a loan (Rb 3.54m) was registered in Moscow, while the lowest one, in the Privolzhsky Federal District (Rb 1.31m). In the 1st quarter, the interest rate on MHL in rubles fell by 0.2–

0.5 p.p. in all the regions, except for the South Federal District where its growth amounted to 0.2 p.p. As of April 1, 2014, the minimum rate (12.0%) on MHL was registered in the Privolzhsky Federal District (Fig. 5).

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%

Bln

Rb.

The overdue debt on MHL in rubles. left-hand axis, billion Rb.

The overdue debt on MHL in foreign currency, left-hand axis, billion Rb

The overdue debt on MHL in rubles as % of the outstanding debt, right-hand axisThe overdue debt on MHL in foreign currency as % of the outstanding debt,right-hand axis


Fig. 3. The overdue debt on mortgage housing loans as of the end of the quarter

Table 1GROUPING OF DEBTS ON MHL BY THE PERIOD OF DELAY IN PAYMENTS IN 2014

The total amount of the debt on MHL

Including

Without over-due payments

With payments overdue from 1 day to 90 days

With payments overdue from 91 days to 180 days

With payments over-due for over 180 days

Million Rb %* Million Rb %** Million Rb %* Million Rb %*01.Jan. 2 648 859 2 544 229 96.05 50 593 1.91 6 887 0.26 47 150 1.7801.Feb. 2 682 172 2 558 792 95.40 67 591 2.52 7 778 0.29 48 011 1.7901.Mar. 2 745 693 2 613 625 95.19 75 506 2.75 7 963 0.29 48 599 1.7701.Apr. 2 809 432 2 675 985 95.25 72 202 2.57 8 428 0.30 52 817 1.88

* percentage of the total amount of the debt.Source: the data of the Central Bank of the Russian Federa on.

8

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The weighted average period of lending on MHL in rubles from thebeginning of the year, right-hand axis, yearsThe weighted average period of lending on MHL in foreign currency fromthe beginning of the year, right-hand axis, yearsThe weighted average rate on MHL in rubles from the beginning of theyear, left-hand axis, %The weighted average rate on MHL in foreign currency from the beginningof the year, left-hand axis, %


Fig. 4. The rate and period of lending

THE MORTGAGE IN THE RUSSIAN FEDERATION IN Q1 2014

37

Except for the Southern Federal District, the North-Caucasian Federal District, the Urals Federal District and the Siberian Federal District, in other districts the average value of a loan in foreign currency extended from the beginning of the year decreased as of April 1, 2014 as compared to January 1, 2014. The average val-ue of a loan in foreign currency in the Russian Federa- on as a whole amounted to Rb 7.89m. As of April 1,

2014, the largest average value of a loan (Rb 13.62m) was registered in Moscow, while the lowest one, in the Privilzhsky Federal District (Rb 2.53m). As of April 1, 2014, the minimum rate (8.0%) on MHL in foreign cur-rency was registered in the Siberian Federal District, while the maximum one (10.4%) in the Ural Federal District (Fig. 6).

In the 1st quarter of 2014, the share of mortgaged housing deals in the total number of housing deals ex-ceeded by 3.1 p.p. the respec ve index of the 1st quar-ter of 2013 and amounted to 25.8% (Fig. 7).

In a situa on of deprecia on of the ruble exchange rate against the US dollar and euro, growth in the volume of MHL points, sooner, to the investment na-ture of that growth. In par cular, in the 1st quarter of 2014 the volume of mortgage loans extended by the Sberbank rose by 87% against the same period of the previous year, while that extended by VTB24, by 63.3% as compared to the same period of 2013. At the same me, in January–April 2014 the Agen-cy for Housing Mortgage Lending (ОАО AHML) refi -nanced Rb 13.60bn worth of 8,923 mortgages which

is 14.23% and 8.42% lower in quan ta ve terms and monetary terms, respec vely, as compared to the re-spec ve period of 2013. Prior to December 31, 2014, the Bank for Foreign Economic Aff airs (VEB) intends to buy at a par value bonds of seven banks and the OAO AHML issued by them within the frameworks of the VEB’s Rb 92.14bn worth of investments in deve-lopment of aff ordable housing projects and mortgage in the 2010–2013 period. At the same me, from May 1, 2014 the Raiff aeisenbank suspended issuing mortgages in US dollars and euros which fact can be explained by higher risks related to long-term lending in foreign currency.

11,811,912,012,112,212,312,412,512,6

1,01,52,02,53,03,54,04,5

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01.04.2014. The average value of MHL, left-hand axis, million Rb01.01.2014. The average value of MHL, left-hand axis, million Rb01.04.2014. The weighted average rate on MHL, right-hand axis, %01.01.2014. The weighted average rate on MHL, right-hand axis, %

Source: on the basis of the data of the Central bank of the Rus-sian Federa on.

Fig. 5. The value of and rate on ruble MHL extended from the beginning of the year by the federal district

7,88,28,69,09,49,810,210,6

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Bln

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01.04.2014. The average value of MHL, left-hand axis, million Rb

01.01.2014. The average value of MHL, left-hand axis, million Rb

01.04.2014. The weighted average rate on MHL, right-hand axis, %

01.01.2014. The weighted average rate on MHL, right-hand axis, %


Fig. 6. The value and rate on MHL in foreign currency extended from the beginning of the year by the

federal district Source: on the basis of the data of the Central Bank of the Russian Federa on

0481216202428

400600800

10001200140016001800

I II III IV I II III IV I II III IV I II III IV 1 кв

2010 2011 2012 2013 2014

%

thou

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The number of real property units registered in housing deals, thousandunitsThe share of mortgaged real property in the total number of real propertyregistered in housing deals, %

Source: The Rosreestr and calcula ons of the ОАО AHML.Fig. 7. Dynamics of the number of mortgaged

real property units in housing deals


38

THE LIVING STANDARDS OF THE POPULATION OF THE RFIN JANUARY APRIL 2014

S.Misikhina

The RF popula on’s incomes. The nominal per capita index of the popula on’s money income in April 2014 amounted to Rb 28,320, which represented a 8.9% rise on April 2013. The nominal per capita money income increased on March 2014 by 15.8%.

The popula on’s real disposable money income1 in April 2014 increased by 1.9% on April 2013, and by 16.3% on March 2014.

In Q1 2014, the RF popula on’s real disposable money income dropped by 2.5% vis-à-vis Q1 2013. Although April saw a rise in this type of income, its growth did not reverse the general situa on, which meant that in the period January–April 2014 the RF popula on’s real disposable money income amount-ed to 98.8% of its level in the same period of 2013. It should be noted that, in the period January–April 2013, the RF popula on’s real disposable money in-come showed a 6.3% rise on the same period of 2012.

The average monthly charged wage in April 2014 amounted to Rb 32,115, or 108.2% of its April 2013 in-dex (or 102% of its March 2014 index). During the pe-riod January–April 2014, the average monthly charged wage increased by 10.3% on the same period of 2013.

In April 2014, the real average monthly charged wage rose by 1.1% vis-à-vis March 2014. In comparison to the same period of 2013, the real average monthly charged wage increased by 0.8%. During the period January–April 2014, the real average monthly charged wage increased by 3.4% on the same period of the previous year.

The salary raise in the budget-funded sphere result-ed in a situa on where, in 2013, the salary index in the public educa on and healthcare sectors was growing at an accelerated rate by comparison with its counter-parts in other sectors. In comparison to Q1 2013, the overall increase, in Q1 2014, of the average monthly charged wage index (less social benefi ts) amounted to 115.5% in the public educa on sector and to 121% in the public healthcare and social welfare sectors.

1 The amount of income cleared of mandatory payments and deduc ons and adjusted by the Consumer Price Index.

In the period January–April 2014, the RF popula on’s real disposable income amounted to 98.8% vis-à-vis the same period of 2013. Due to the implementa on of measures designed to raise the salary level in the budget-funded sphere in accordance with the President of the Russian Federa on’s Execu ve Order of 7 May 2012, No 597 ‘On Measures Aimed at the Implementa on of Government Social Policy’, the highest growth rate con- nued to be displayed by salaries in the spheres of educa on, healthcare and social services. In Q1 2014 Russia’s

income inequality index dropped slightly on Q1 2013.

Table 1CHANGES IN THE REAL DISPOSABLE MONEY INCOME, %

As percentage ofcorresponding peri-od of previous year

previous period

2013 January 100.4 49.2February 105.7 132.1March 109.6 103.7Q1 105.6 76.1April 108.1 106.2January–April 106.3Q2 103.2 113.2May 99.7 86.9June 101.8 115.51st half-year 104.3July 104.1 95.0August 103.6 101.9September 99.9 96.0Q3 102.5 99.4January–September 103.7October 105.1 105.3November 101.0 103.2December 102.1 141.0Q 4 102.6 119.9Year 103.2

2014 January 99.5 48.1February 100.5 133.6March 93.0 96.0Q1 97.5 72.6April 101.9 116.3January–April 98.8

Source: data released by Rosstat.

In March 2014, the con nuing rapid growth of these indexes pushed up the sectoral-to-na onal salary ra o in the following three sectors:

• in the public educa on sector – to 79%,

THE LIVING STANDARDS OF THE POPULATION OF THE RF IN JANUARY–APRIL 2014

39

• in the public healthcare and social welfare sec-tors – to 84%.

As of the end of Q1 2014, the salary levels of those categories of employees in the budget-funded sphere, the targets for which were set by the RF President’s Execu ve Order of 7 May 2012, No 597 ‘On Measures Aimed at the Implementa on of Government Social Policy’ were geared as follows to the average monthly wage index in a RF subject:

in the public educa on sector: 76.8% for tutors employed at educa onal establishments providing ex-tracurricular educa on to children,1 92.8% for tutors employed at pre-school educa onal establishments2, 99.1% for teachers employed at secondary schools and

1 As a percentage of the average monthly salary of secondary school teachers in a RF subject.2 As a percentage of the average monthly salary in the general educa on sphere in a RF subject.

other general-educa on establishments, and 127.1% for the faculty members of a higher (professional) edu-ca onal establishment;

in the public healthcare sector: 49.5% for nursing staff , 141.2% for physicians and other healthcare prac- oners with higher educa on diplomas, employed at

medical ins tu ons and providing medical care ser-vices to the popula on.

By the RF President’s Execu ve Order of 7 May 2012, No 597 ‘On Measures Aimed at the Implemen-ta on of Government Social Policy’ for 2012 it is estab-lished that in that year the average salary level of sec-ondary school teachers and the tutorial staff of other general-educa on establishments should be raised to match the average salary for a given region’s economy. In Q1 2014, this aim was almost achieved (the salary level of this category of employees amounted to 99.1% of the average monthly wage index in a RF subject).

Table 2CHANGES IN THE AVERAGE MONTHLY CHARGED WAGE, %

Average monthly charged wage per worker Nominal Real

on corresponding pe-riod of previous year

on previous period on corresponding pe-riod of previous year

on previous period

2013 January 112.9 73.4 105.4 72.7February 110.8 99.6 103.3 99.0March 112.5 107.9 105.1 107.5Q 1 111.9 90.4 104.5 88.7April 116.4 104.7 108.5 104.2January–April 113.0 105.5May 112.4 99.0 104.7 98.4June 112.6 104.3 105.3 103.9Q 2 113.8 110.6 106.2 109.01st half-year 112.9 105.4July 113.3 97.6 106.4 96.8August 113.7 96.9 106.8 96.8September 112.8 100.4 106.3 100.2Q 3 113.2 97.8 106.4 96.4January–September 113.0 105.7October 112.0 102.5 105.4 101.9November 110.9 101.4 104.1 100.8December 109.3 130.9 102.7 130.2Q 4 110.6 113.2 103.9 111.7Year 112.4 105.3

2014 January 111.6 74.7 105.2 74.3February 111.1 99.1 104.6 98.4March 111.0 108.0 103.8 106.9Q 1 111.1 90.3 104.4 88.6April 108.2 102.0 100.8 101.1January–April 110.3 103.4

Source: data released by Rosstat.


40

However, it should be said that the target set by the President was reached solely due to the fact that the average sa lary of teachers employed at federal and re-gional gene ral-educa on establishments amounted to 153.2% and 143.5%, respec vely, of the average wage in a RF subject, while the average salary of teahers employed at municipal educa onal establishments re-mained well below the average wage in a RF subject, amoun ng to 89.5% of the la er.

By the RF President’s Execu ve Order of 7 May 2012, No 597 ‘On Measures Aimed at the Implementa on of Government Social Policy’ it was established that in the year 2013 the average salary of tutors employed at pre-school educa onal establishments should be raised to match the average salary level in the general educa on sphere of each region. This target set by the President was almost reached by the end of 2013: in 2013, the average salary of tutors employed at pre-school educa onal establishments amounted to 94.9% of the average salary level in the general educa on sphere of each given region. However, in Q1 2014 the situa on worsened – in Q1 2014 the average salary of tutors employed at pre-school educa onal establish-ments amounted to just 92.8% of the average salary level in the general educa on sphere of each region.

From 1 February 2014, labor pension indexa on was carried out in order to adjust the pension size to the infl a on rate. Labor pensions were increased by 6.5%. From 1 April 2014 onwards social pensions of more that 2.9 million pensioners were increased by 17.1%. Also from 1 April 2014 onwards, monthly payments to some categories of RF ci zens1 were increased by 5%.

1 Veterans, disabled persons, persons suff ering from the eff ects of nuclear radia on, Heroes of the Soviet Union, Heroes of Socia-list Labor, etc.

This increase in payments was applied to 16.2 million persons.

As a consequence of the aforesaid rise in social pen-sions, the following payments increased with eff ect from 1 April 2014 onwards: pensions provided under the State Pension Security law, addi onal monthly ma-terial support and the other social payments based on the amount of a social pension.

From 1 April 2014, labor pensions were adjusted upward by 1.7% per pensioner. This increase in pen-sions was made possible by the corresponding rise in the RF Pension Fund’s revenues in 2013.

According to the Pension Fund of the Russian Fe-dera on, as a result of the aforemen oned measures, from 1 April 2014 onwards, the average old-age labor pension should amount to Rb 11,600, while the ave-rage social pension should amount to about Rb 7,500.

Socioeconomic diff eren a on. According to pre-liminary data, over the course of Q1 2014, Russia’s in-come inequality indices slightly dropped on the same period of 2013:

• the Gini coeffi cient dwindled from 0.404 to 0.401;

• the ra o of the average income of the richest 10% to the poorest 10% (R/P 10%) declined from 14.7 to 15.4.

The decline in the income inequality indices was caused by the 0.2 p.p. drop in the share of the fi h quin le (highest incomes) and the growth in the shares of the fi rst and third quin les in the aggregate volume of the RF popula on’s money income.

In Q1 2014, the share of the richest 10% declined to 29.5% of the aggregate volume of the RF popula on’s money income (vs. 29.7% in Q1 2013). The share of the poorest 10% rose to 2.1% of the aggregate volume of the RF popula on’s money income (vs. 2.0% in Q1 2013).

DEVELOPMENT OF A PERFORMANCE ASSESSMENT SYSTEM FOR SCIENTIFIC RESEARCH

41

DEVELOPMENT OF A PERFORMANCE ASSESSMENT SYSTEM FORSCIENTIFIC RESEARCH ORGANISATIONS, AS A PART OF THE ONGOINGRAPID REFORMI.Dezhina

The period April–May 2014 saw intensifi ca on of the eff orts aimed at determining the principles and proce-dures for assessing the performance of scien fi c research organiza ons. The necessity of such an assessment and the main rules for its conduct are outlined in the RF Gov-ernment’s Decree No 979, of 1 November 2013, ‘On Introducing Altera ons into Decree of the Government of the Russian Federa on of 8 April 2009, No 312’1. The principles on which the assessment should be based, in accordance with the Decree, are as follows:

• the assessment should be conducted by inde-pendent organiza ons;

• scien fi c research organiza ons should be ar-ranged into reference groups irrespec ve of their departmental subordina on, with due regard for their specifi c fi eld and the types of scien fi c research conducted by them;

• the assessment should rely on the same indi-cators as are applied for assessing the perfor-mance of scien fi c research organiza ons in the developed countries2.

In early 2014, it was planned that the assessment procedures would be further adjusted with due regard for the opinions expressed by the scien fi c research community, and in par cular the directors of ins tutes subordinated to the Russian Academy of Sciences (RAS). Since then, scien sts, on their own ini a ve, have been pu ng forth proposals concerning pos-sible altera ons to the assessment procedures. How-ever, it was only at the second conference of repre-senta ves of scien fi c research personnel of the RAS on 25 March 2014 that head of the Federal Agency for Research Organiza ons (FARO) Mikhail Ko ukov fi nally confi rmed that RAS personnel would indeed

1 h p://pravo.gov.ru:8080/page.aspx?670472 For more details concerning these parameters, see Situa on in Russian Science and Innova on Sector // Russian Economy in 2013. Trends and Outlooks. (Issue 35) – M.: Gaidar Ins tute 2014. P. 367–369.

The performance assessment system for scien fi c research organiza ons, which is currently being developed in Russia, has become an integral part of the ongoing reform in this country’s scien fi c research complex The as-sessment principles and criteria are determined by the RF Government’s Decree issued in November 2013; the opinion poll among the directors of research ins tutes was conducted by the Federal Agency for Research Organi-za ons in April and May 2014. This gave rise to a new wave of debate concerning the parameters to be applied in the assessment. An analysis of the main trends in this debate shows that the issue as to the purposes of the assessment has been overlooked.

be involved in deve loping the proposed performance assessment system for scien fi c research organiza- ons3. Later, on 16 April 2014, the FARO sent a le er

to directors of scien fi c research organiza ons, asking them to submit, by 25 April, their comments on vari-ous assessment parameters – that is, eff ec vely within 10 days. This caused another surge of cri cism aimed at the government. Such a response originated by no means only from the fact that too li le me was al-lo ed for the discussion of such serious an issue. The FARO’s le er asked for comment not only on the as-sessment parameters or procedures – it addressed, in fact, the fundamental principles on which the assess-ment was to be based. Thus, it looked as if the FARO had decided to launch the en re project anew and complete it within a record short me. The Agency was interested, among other things, in answers to the following ques ons:

• frequency of performance assessments;• the reliance on only quan ta ve data, or the

necessity to back them up with experts’ es ma- on assessment;

• the feasibility of assessing the performance not only of scien fi c research organiza ons, but sci-en fi c research groups;

• the principles for enrolling members in the ex-perts’ boards4.

In accordance with the approved government plan, the development of assessment procedures should be fi nalized by 1 July 20145, which means that even the

3 FANO privlechet sotrudnikov RAN k razrabotke sistemy ot-senki eff ek vnos ins tutov [The FARO Will Involve the RAS Per-sonnel in the Development of the System for Assessing the Per-formance of Ins tutes. RIA Novos , 25 March 2014. h p://ria.ru/science/20140325/1000989328.html4 Le er of the FARO of Russia to directors of scien fi c research organiza ons, 10 April 2014, No 007-181-07.5 Second le er by Academician Alexey Parshin on experts’ as-sessment of scien fi c research orgaiza ons to the FARO on 27 April 2014. See h p://www.saveras.ru/archives/9059


42

FARO will have too li le me at its disposal for pooling and processing the submi ed proposals, and for making the fi nal decision – given the fact that even ins tutes that share the same fi eld of study may off er diff erent points of view. The short melines for decision-making in this case remind us of the way the reorganiza on of three state academies was carried out – swi ly, without a discussion, and without assessing its possible conse-quences. This me, the same administra ve approach is applied in developing the performance assessment procedures for research ins tutes.

The main target for the cri cism voiced by the scien- fi c research community against the government per-

formance assessment project was the choice of the level of an organiza on and not that of a laboratory, based on the principle of division of the organiza ons into re-ference groups, as well as the reliance on bibliometric data – whose limita ons are very well known. Scien sts are almost en rely unanimous in their opinion that an assessment at the ins tute level will result in data dis-tor ons, especially because there are many mul disci-plinary research ins tutes in this country, as well as in-s tutes with unique specializa on, whose performance it will be nearly impossible to assess in the framework of such an approach. The procedures for conduc ng the as-sessment and selec ng the experts were also discussed, including the possibility of a rac ng interna onal ex-perts. Opinions diff er – with a slight prevalence of those against the involvement of foreign experts.

There was no single opinion concerning reference groups, either. Some believed that reference groups represent an approach that provides formal grounds for closure of research ins tutes – and these would be by no means always poorly performing ones. Others considered reference groups to be important, but only as a basis for comparing laboratories, and not en re ins tutes. According to many of the par cipants in the discussion, ins tute branches must not be closed down – instead, the assessment results may show the ways to upgrade and support the weak ‘links’. How-ever, even a comparison made on the basis of biblio-metric data at the laboratory level may be biased to-wards those who work in more popular fi elds, where cita ons can be noted more o en.

The argumenta on against preferen al reliance on bibliometric data was supported by references to for-eign experiences. The most popular in this connec on has become the recent experience of the UK, where the government introduced a new achievement as-sessment methodology in the fi eld of science (Re-search Excellence Framework)1. Indeed, this ini a ve

1 Research Excellence Framework 2014. Panel Criteria and Working Methods. h p://www.ref.ac.uk/media/ref/content/pub/panelcriteriaandworkingmethods/01_12.pdf

had been discussed for several years before fi nally be-ing implemented, it is well-grounded, and each fi eld applies its own measurement criteria and assessment procedures. The key elements of this system are as-sessments at the level of departments and laborato-ries, and the use of bibliometric data only as a second-ary tool. Moreover, the journal impact factors – as well as the overall number of works published by a given scien fi c research group – are not taken into consid-era on. Bibliometric data may be applied only for the purpose of suppor ng and adjus ng experts’ es ma- ons. Experts, in their turn, assess the quality of pub-

lica ons of each research laboratory (or group) on the basis of four best publica ons over the last 5 years. The number of cita ons and other types of bibliometric analysis are not applied in the assessment of research results in social studies in humani es. In the fi eld of economics and econometrics, available cita on data are taken into considera on whenever they are neces-sary as supplementary informa on, and the absence of cita ons from a given study does not infl uence the results of its assessment. And fi nally, one more impor-tant considera on is the purpose of introducing such a system: the assessment results are used as a basis for redistribu ng the fi nancing fl ows between admin-istra ve structures and for determining the number of addi onal jobs that can be created in one or other de-partment of a given ins tute.

The UK experience appears to be convincing, it has already been tested in a pilot mode, and so the Russian government – who have proclaimed their reliance on methods for assessing ‘the performance level of sci-en fi c research organiza ons in the developed coun-tries’ – can take it into considera on. This experience becomes even more relevant if we point out the fact that, in contrast to the UK – where no reforming takes place in the fi eld of science, and so the discussions as to its possible improvement may be lengthy – in Russia the situa on is such that we cannot aff ord to spend years on the discussion of government plans.

The consolidated opinion of ac ve representa ves of the scien fi c research community is refl ected in the le er of the Council of the Society of Researchers to the Chairman of the RF Government ‘On the Performance Assessment of Scien fi c Research Organiza ons’2. The le er states that ‘the core assessment target must be-come laboratories and research groups, and not en re ins tutes. And the assessment must essen ally rely on expert opinions, and not simply on quan ta ve perfor-mance indicators. The subdivision of all scien fi c re-

2 Le er of the Council of the Society of Researchers to the Chairman of the RF Government ‘On the Performance Assessment of Scien fi c Research Organiza ons’ of 28 April 2014. See h p://www.saveras.ru/archives/9102

DEVELOPMENT OF A PERFORMANCE ASSESSMENT SYSTEM FOR SCIENTIFIC RESEARCH

43

search organiza ons into three categories (the leaders, the stable ones, and those with no prospects for deve-lopment) on the basis of their quan ta ve parameters cannot be recognized as acceptable’. In this connec on, ‘it is necessary to adjust Decree No 979 without delay’. Thus, the main message of the le er is that the proposed key approaches must be rethought once again without haste, because the more rapid procedures envisaged by the FARO may result in irreparable mistakes.

On 22 May 2014, an expert session took place, where the directors of ins tutes formerly enjoying an ‘academ-ic’ status a empted to develop a common viewpoint. The outcome of this mee ng is yet another confi rma- on of the fact that it is not easy to achieve a consensus

even inside the scien fi c research community. In fact, no majority-approved decisions with regard to such is-sues as the feasibility of crea ng reference groups, as well as the status of experts and the methods of their selec on were made at the caucus. Among the posi ve results, we may point to the inclusion in the dra reso-lu on of the provisions s pula ng that an assessment should be based on experts’ es ma ons (with due re-gard for quan ta ve data), and that ins tutes must in-dependently select the data that will be then submi ed for the considera on by experts.

At the same me, the government has not re-leased any statements – and this aspect remained prac cally unmen oned – as to what specifi c purpose an assessment should be tailored to. The purposes may be di ff erent, and they will ul mately determine the assessment principles. Thus, for example, an as-sessment may have the purpose of determining the number of personnel, organiza ons and ins tutes, in order to make proper cuts. In this case, some targets must be off ered for the planned reduc on. For exam-ple, the targets were clearly set when the PRND sys-tem (performance indices for scien fi c research) was introduced for a three-year period in the RAS. All the ins tutes were told to reduce the number of their re-search personnel by 20% within three years, without any considera on for the actual performance level of each ins tute. The results were monitored, some op- miza on was achieved, the salary level somewhat

increased, and so the clearly stated purpose was

achieved (this is not the place to discuss whether that purpose was reasonable). Thus, if the goal is to op- mize the exis ng network of scien fi c research or-

ganiza ons subordinated to the FARO, some targets – are least approximate – must be off ered, for instance ‘reduc on of the scien fi c research personnel by no more (or no less) than by x%’.

In order to achieve this goal, an ini al assessment would be advisable, with some modest targets, so as to understand the actual scale of the forthcoming personnel cuts. For example, it can be es mated how many specialists, in the last 5 years, published less than 5 ar cles in the journals entered in the Higher At-testa on Commission’s list. This could serve as a sort of ini al, rough baseline.

However, if the goal is to more effi ciently distribute available funding, and so, to merge ins tutes working in the same fi eld and undertake some similar mea-sures, – another approach will be necessary, with re-liance on assessments at the level of laboratories, in the framework of each specifi c fi eld of research. The fi rst step can be a preliminary discussion, on the ba-sis of groups consis ng of representa ves of ins tutes o pera ng in adjacent fi elds of research, aimed at elabora ng a consolidated opinion on the assessment principles to be applied in each given fi eld of research. It must be emphasized that the unit to be assessed must be a fi eld of research, and not an ins tute or its structural subdivision.

The degree of specifi city of each fi eld can be diff e-rent. Thus, for example, if the approximate number of redundant workforce is to be assessed, a more general division into fi elds of science may be possible. How-ever, if the goal is to op mize the performance of the exis ng system without necessarily reducing the num-ber of ins tutes, the by-fi eld subdivision must be more detailed, and give considera on also to the new areas of research.

And fi nally, as the year-long moratorium on trans-ac ons involving the Academies’ property and altera- on to the personnel structure is to be over by the

year-end 2014, the remaining months can be used for preparing for fi nal approval the proposals concerning assessment procedures.


44

The past few months have seen a fl are-up in the discussion on the future of the North Caucasus Fe-deral District, focused on whether or not it would be abolished a er the conclusion of the Sochi 2014 Win-ter Olympics, and also on whether or not it would be merged with the Southern Federal District. The an-swers to these ques ons were given in mid-May. In spite of widespread expecta ons that an enlarged ad-ministra ve structure would be established to replace the two exis ng federal districts, the status quo was preserved. Moreover, the Russian authori es resorted to the same tac cs they had already used with regard to the Far East and the Crimea, and so created a new ministry – the North Caucasus Development Ministry, to coexist with the offi ce of Presiden al Plenipoten- ary for the North Caucasus. Furthermore, according

to media reports, Alexander Khloponin – who has re-cently been deprived of the post of Presiden al Pleni-poten ary for the North Caucasus, but has kept his po-si on as Vice Prime Minister of the RF Government – is expected to retain some control func ons with regard to the North Caucasus.

Can it really be said that these changes in the North Caucasus administra ve structure have refl ected the objec ve needs of the North Caucasus Federal Dis-trict, which have become apparent over the course of its four-year history? It is common knowledge that an administra ve system does not represent an in-dependent element of any governance system. An administra ve system should be designed in accord-ance with strategic aims set within one or other fi eld. In the fi eld under considera on, such aims are set in

ADMINISTERING OR GOVERNING: THAT IS THE QUESTIONI.Starodubrovskaya, K.Kazenin

In mid-May, Russia’s authori es created a new bureaucra c structure – the North Caucasus Development Mi-nistry. The move came as no surprise: whenever a centralized system of governance is unable to resolve one or other issue, it resorts to crea ng a new administra ve body vested with the responsibility to tackle it. How-ever, in actual prac ce, such decisions o en produce an eff ect diametrically opposite to the designers’ inten- ons – some mes a new body begins a struggle for its place under the sun and embarks on a tug of war with

earlier-established administra ve structures in an eff ort to appropriate their func ons, and to compete with them for resources. Thus, instead of improving the quality of governance and administra on, the crea on of new administra ve and governance bodies frequently results only in their worsening. It seems that in the case in point we are faced with the same erroneous logic, which is des ned to produce the same lamentable results. The number of ‘players’ involved in the processes of governing and administering the North Caucasus Federal District has signifi cantly increased. Moreover, it should be noted that the issue of alloca on and distribu on of resources, powers and status, as well as the issue of reconciling the various interests of the ‘players’, have so far both remained unresolved.

the Strategy of Socioeconomic Development of the North Caucasus Federal District un l 2025, adopted in September 2010. The Strategy envisages that, as far as the socioeconomic development of this federal district is concerned, top priority should be given to the task of implemen ng major investment projects gua ranteed by the State. The Strategy has been repea-tedly cri cized in some quarters for se ng unrealis c goals and underes ma ng the North Caucasus’ own poten al for development, as well as for the failure to set clearly defi ned targets for law enforcement. The past few years have shown that the Strategy is totally inadequate for achieving a breakthrough in the socio-economic development of the North Caucasus Federal District. And yet, In spite of the Strategy’s gla ring short-comings, Russia’s authori es have decided, instead of seriously reworking this strategic document with the help of civil society and expert communi es, to sim-ply introduce some transforma ons into the e xis ng administra ve structures. What was the reasoning be-hind that decision?

As a ma er of fact, any governance system based on the principles of rigid centraliza on has its own internal logic, which is not necessarily conducive to maximum success in achieving the its proclaimed aims and objec ves. And it was long ago, in the late Soviet period, that the following ‘rule of bureaucracy’ was formulated: in a centralized system, the authori es’ fi rst response to a failure in resolving one or other is-sue should be to create a new administra ve body and vest it with responsibility to tackle it. However, in ac-tual prac ce, such decisions o en produce an eff ect

ADMINISTERING OR GOVERNING: THAT IS THE QUESTION

45

diametrically opposite to the designers’ inten ons – some mes a new body begins instead to struggle for its place under the sun, and so embarks on a tug of war with the earlier-established administra ve struc-tures in an eff ort to appropriate their func ons, and to compete with them for resources. Thus, the crea- on of new administra ve and governance bodies fre-

quently results not in an improvement of governance and administra on, but in their worsening.

It seems that, in the case in point, we are faced with the same erroneous logic that is likely to produce the same lamentable results. The number of ‘players’ in-volved in the processes of governing and administering the North Caucasus Federal District has signifi cantly in-creased. Moreover, it should be noted that the issue of alloca on and distribu on of resources, powers and status, as well as the issue of reconciling the various interests of the ‘players’ have so far remained unre-solved. Besides, it is expected that the ongoing compe- on between the administra ve structures directly in

charge of aff airs in the North Caucasus Federal District will be further exacerbated by inter-regional compe - on between the North Caucasus and the Crimea, for

tourism development resources, etc. The new governance system has given skep cs yet

another reason to doubt its effi ciency: the North Cauca-sus Development Ministry is vested with responsibility for discharging economic func ons, while the Offi ce of the Presiden al Plenipoten ary for the North Cauca-sus – with that for discharging law enforcement func- ons. Most unfortunately, it can hardly be expected that

this tandem will work smoothly and eff ec vely, because in the North Caucasus economic and law-enforcement issues are closely intertwined and therefore cannot be treated separately. In order to be implemented, the task of a rac ng investors (especially into the recrea onal sector) and the subsequent task of a rac ng tourists, in order to be accomplished, do not require either large-scale law enforcement opera ons or an increase in the RF military presence in the North Caucasus. The only thing that ma ers is to create eff ec ve mechanisms for achieving civil peace and to organize dialogue b etween the social forces currently at loggerheads with each other. It is far from clear what ins tu on within the new system will be able to perform this func on – for the simple reason that it cannot be classed with either ‘economic’ or ‘law-enforcement’ func ons. Unless clear responsibility for performing this func on is defi nitely allocated to one or other ins tu on, no serious pro-gress will likely be achieved in either direc on, and eve-rything will end up in mutual recrimina ons about the failure to achieve the desired results.

It is reasonable to assume that the North Caucasus is suff ering not from a lack of centralized administra-

ve structures, but from a lack of eff ec ve ins tu ons capable of organizing dialogue and ensuring the reso-lu on of confl icts, including those arising from munici-pal boundary disputes. It is noteworthy that in recent months, the authori es have abjectly failed to resolve or alleviate any major municipal boundary confl icts. Moreover, the authori es do not have any ‘roadmaps’ for resolving these confl icts, and it is not clear whether or not such maps, taking into account the views of all confl ic ng par es, can be developed in the foresee-able future. At the same me, in the spring of 2014, representa ves of the various regional authori es of the North Caucasus made a number of statements concerning the confl ict situa ons in their republics. They promised to rapidly resolve those confl icts but failed to specify the means for achieving that goal.

The current situa on can be illustrated by the issue of restoring the Aukhovsky raion of Dagestan. Popu-lated by the Akins (Dagestan Chechens), the raion was liquidated in 1944 when its Chechen popula on was deported. The territory of the former Aukhowsky raion was repopulated by the Laks, forcibly rese led for that purpose from their mountain villages. The raion was renamed Novolaksky (New Lak). In June 1991, the 3rd Congress of Dagestan People Depu es passed a resolu on that the Laks should be rese led from No-volaksky raion in a region north of Makhachkala and Aukhovsky raion be restored as a territorial unit with a predominantly Chechen popula on. The rese lement of the Laks has not been completed (because of con- nuous delays in providing them with housing at their

new place of se lement). As a consequence, the reset-tlement of the Chechens has never been completed, either, and so Aukhovsky raion is not restored. The Dagestan authori es repeatedly gave new deadlines for the rese lement of the Laks and for the restora- on of Aukhovsky raion. All those deadlines came and

went, and nothing happened. In March 2014, Head of Dagestan Ramazan Abdula pov announced that A ukhovsky raion would be restored within the next three years, thus making 2017 the eff ec ve date for comple ng the whole rese lement process1.

However, as far as the restora on of Aukhovsky raion is concerned, its ming is by no means the only headache for the Dagestan authori es. The second headache is the issue as to the raion’s boundaries. There are two villages, Leninaul and Kalininaul (with an aggregate popula on of about 12 thousand) which, prior to 1944, were part of Aukhovsky raion. Whether or not they should be incorporated into that raion once

1 Glava Dagestana obsudil s chechentsami-Akintsami voprosy vosstanovleniia Aukhovskogo raiona [The Head of Dagestan and Akin Chechens Representa ves Discuss the Issues of Restoring Auk-hovsky Raion]. 5 May 2014. h p://www.yuga.ru/news/324576/


46

again causes a lot of controversy. In 1944, these two villages were included not in Novolaksky raion, but in the neighboring Kazbek raion, and have remained in-corporated in it ever since. Having returned from the place of their deporta on, the Chechens immediately se led in Leninaul and Kalininaul, and therefore the current problem of Chechen rese lement faced by No-volaksky raion does not extend to these two villa ges. The fl y in the ointment is that the Chechens’ neigh-bors in Leninaul and Kalininaul are not Laks but Avars, who rese led there in 1944 from nearby villages. At present, the two ethnic communi es represented in Leninaul and Kalininaul are at loggerheads with one another concerning the future of their villages: the Avars want them to remain part of Kazbek raion, while the Chechens insist that the villages should be handed over to Auksky raion.

The most disturbing feature of this confl ict is the almost total absence of any dialogue mechanisms ca-pable of helping the two ethic communi es to reach a compromise solu on. The latest a empt of the Da-gestan authori es to organize some sort of discus-sion between representa ves of the two communi- es dates back to March 2012 (when the former head

of Dagestan, Magomedsalam Magomedov, was s ll in power)1. At present, the issue of organizing such a dialogue belongs to the competence of the Reconcili-a on and Peacebuilding Commission of the Republic of Dagestan, created in 2013 by the head of the re-public, Ramazan Abdula pov, for the purpose of re-solving such disputes. However, according to residents of Le ninaul and Kalininaul, the Commission has been totally inac ve with regard to the controversy fl aring up in these two villages. Although ac vists from both ethnic groups can freely express their preferences re-garding the administra ve future of their villages (for example, at mass rallies, in the press, etc.), they do not have a venue for discussing and reconciling their disa-greements. As a result, incessant and vociferous repe- on of the same mantra only exacerbates the already

tense situa on in the villages. It should be noted that the aforesaid situa on can-

not be explained solely by the uniqueness of inter-communal rela ons in these two villages. To a large

1 Ne vspukhnet li novyi meznatsional’nyi konfl ikt? [Is There a Danger of a New Ethnic Confl ict Flaring Up?]. Novoe Delo [The New Cause]. 14 April 2012. h p://www.arhiv.ndelo.ru/one_stat.php?id=6740.

extent, the current impasse is caused by the absence of dialogue mechanisms at the regional level, as the following circumstances clearly indicate.

1. The residents of the two villages, when inter-viewed by us, emphasized that in any subsequent debate as to the future of those villages, not only the members of their ethnic communi es, but also repre-senta ves of regional self-government bodies and the Dagestan Republic’s administra ve structures must necessarily take part. At the same me, regional and municipal offi cials – who have hitherto stood aloof from the aforesaid confl ict – are displaying no signs that they indeed may be willing to become modera-tors-mediators in such debates, or even to par cipate in them;

2. The region is also plagued by a number of inter-village and even inter-raion confl icts, which center around municipal boundaries and land-use rights. Such disputes are best exemplifi ed by the confl ict over the expensive agricultural lands in the Karaman area in the northern suburb of Makhachkala, raging between a group of Kumyck ac vists and the Laks being reset-tled to this area from Novolaksky raion. This confl ict, which has never been an ‘intra-village’ one, can be resolved only with the par cipa on of the republic’s authori es, because some of the contested land is owned by the Dagestan Republic. However, nothing is being done in order to resolve the confl ict by means of nego a ons. Moreover, in the fi rst half-year of 2014, Dagestan’s law enforcers visibly increased pressure on the leaders of Kumyck protesters, going as far as ar-res ng some of them2.

As indicated by the course of events in the North Caucasus during recent months, confl icts concerning land-use rights and administra ve-territorial division demonstrate a trend toward long-las ng confronta- on. It is unlikely that the authori es are willingly

‘freezing’ such confl icts by conscien ously postpon-ing their resolu on. Much more likely, the offi cials responsible for the republic’s policy concerning these confl icts are simply not competent enough to orga-nize a fully-fl edged dialogue on the aforesaid contro-versies. Therefore we believe that the number one priority for the North Caucasus in the next few years will be radical improvement of the competence of its offi cialdom.

2 h p://regnum.ru/news/1802990.html;h p://regnum.ru/news/1774372.html

THE REVIEW OF ECONOMIC LEGISLATION IN APRIL 2014

47

THE REVIEW OF ECONOMIC LEGISLATION IN APRIL 2014I.Tolmacheva, Y.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, COMPENSATIONS AND OTHER PAYMENTS DUE TO TERMINATION OF LABOR CONTRACTS FOR INDIVIDUAL CATEGORIES OF WORKERS

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 capital, as well as execu ves, their depu es and chief accoun-tants 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 cat-egories 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, com-pensa 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 penal 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 thesis can be prepared for applying for an academic de-gree of a doctor of science (a receiving en ty);

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

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 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 pay-

ments 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;

• prepara on of a thesis for seeking of an acade-mic degree of doctor of science at doctoral stud-ies is carried out on the basis of an agreement between the sending en ty, receiving en ty and doctoral student or on the basis of the agree-ment between the sending en ty and the doc-toral student if prepara on of a thesis for seek-ing of an academic degree of doctor of science at doctoral studies is carried out at the sending en- ty. The above agreement must include the sub-

ject of the thesis in research line, terms of the re-search to be carried out by the doctoral student, deadlines of prepara on of a thesis, the par es’ fi nancial liabili es, reasons and procedure for termina on of the agreement and other terms;


48

• 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 educational grants to persons admitted to doctoral studies be-fore January 1, 2014 till the end of their training at doctoral studies (but not later than January 1, 2018).

AN OVERVIEW OF NORMATIVE DOCUMENTS ON TAXATION

49

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

At the recent SPIEF, as part of the principal mea-sures designed to alter the exis ng tax policy, RF Presi-dent Vladimir Pu n put forth a proposal concerning the introduc on of a combina on of mechanisms for rendering support to those enterprises that were im-plemen ng best available ecologically safe technolo-gies with methods based on tax incen ves aimed at ous ng outdated and environmentally harmful equip-ment (by way of imposing an increased tax burden on outdated equipment). The President explained that in 2015, a revalua on of all produc on assets will take place, and in 2015–2016 – a specially targeted es -ma on of workplaces at the enterprises opera ng in industry, transport and communica ons in order ‘to iden fy facili es that use outdated equipment, have dangerous or unsafe working condi ons, or pose poten al environmental hazards and risks. We will impose addi onal taxes on outdated produc on fa-cili es’1. By way of rendering support to newly estab-lished enterprises, it is suggested that they must be granted tax exemp ons within the sum of capital in-vestment made by these new enterprises at the me of their crea on’2. Vladimir Pu n then said that by the year-end 2014 it is planned to submit to the State

1 See itar-tass.com/ekonomika/1210245 as of 23 May 2014.2 See itar-tass.com/ekonomika/1210228 as of 23 May 2014.

Over the period under considera on it became evident that the already exis ng economic problems created by the nega ve eff ects, in the sphere of foreign poli cs, of the Crimea’s incorpora on into the Russian Federa on have been further aggravated by the deteriora on of Russia’s domes c economic situa onи. While it had been offi cially declared that no further steps would be taken to increase the tax burden, the period under considera on saw a con nua on of the prac ce of introducing new bans and constraints for individuals and legal en es alike, as well as legisla ve consolida on of some addi onal responsibili es to perform work and render services for the benefi t of the power structures. We believe that this prac ce gives rise to an addi onal economic burden on ci zens and commodity producers, and so it can be regarded as a hidden form of mandatory payments to the power structures. As far as the sphere of interbudgetary rela ons is concerned, the RF Government intends, instead of reinsta ng the regions’ revenue base, to replace their debt to banks by loans granted from the federal budget, thus maintain-ing their complete economic dependence on the federal center and enabling the la er to con nually infl uence the poli cal situa on in regions by managing their debt burden and imposing sanc ons for accumulated debt. If can hardly be possible to reverse the nega ve trend in Russia’s economic development without altering the current government policy; besides, that policy has given rise to some new economic risks at the level of inter-regional rela ons.During his mee ng with the heads of biggest Russian and foreign companie s and business associa ons in the framework of the St. Petersburg Interna onal Economic Forum (SPIEF) (which took place from 22nd to 24th May 2014), RF President Vladimir Pu n put forth a number of new ideas aimed at business promo on, as well as some proposals concerning changes to be introduced in the taxa on system. It is planned that the core package designed to improve the business climate in Russia will be prepared by the end of 2014.

Duma a package of dra laws prepared within the framework of roadmaps for implemen ng the na onal entrepreneurial ini a ve3. The melines for preparing these dra laws have been drama cally shortened – previously, this task was to be completed only by 2018. The package was to consist of some 160 dra laws de-signed to improve the business climate in Russia.

At the same me, we believe that li le success can be achieved in promo ng business development in Rus-sia if the methods applied in accomplishing this task should envisage only the crea on of proper incen ves. Russia currently off ers very complicated condi ons for businesses where any independent compe ve entre-preneurial ac vity is diffi cult. So, if the situa on is in no way changed, it will become unprofi table to operate in RF territory, investment ou low will be on the rise.

Over the period under considera on, in response to the introduc on of interna onal sanc ons against the Russian Federa on, the power structures in Rus-sia began to increasingly interfere with the economic policy issues: there were proposals to cancel the sales of rocket engines to the USA, for Russia to withdraw from interna onal space explora on projects, or to

3 See itar-tass.com/ekonomika/1210300. The list of roadmaps is established by Regula on of the RF Government of 6 September 2012, No 1613-r (as amended on 10 May 2014, No 789-r).


50

close down the GPS sta ons in RF territory. Ambi ons are also beginning to prevail over common sense in the Federal Assembly during the approval of new eco-nomic laws: a dis nct bias has become visible towards legisla ve acts designed to impose some new bans and constraints on the economic ac vi es of certain foreign organiza ons opera ng in RF territory, as well as to envisage sanc ons for their viola on1; the depu- es are refusing to pass the law on the interac on be-

tween Russian banks and the IRS2 in the framework of FATCA3, which has already been approved by Russia’s top economic government departments (the RF Mini-stry of Finance and the RF Central Bank), explaining their decision by the necessity to introduce ‘adequate’ measures in regard of foreign banks4, while at the

1 It should be remembered that the legisla vely established requirement that the interna onal payment systems Visa and MasterCard must create mandatory reserves equal to the amount of their money transfers into the RF within 2 days, with manda-tory fi nes in the amount of 10% of the contribu on for each day of delay (see T. Romanova, Bitaya karta [A Trashed Card], lenta.ru/ar cles/2014/04/30/ as of 30 April 2014) only resulted in an announcement, by these systems, that the prospects for their op-era on in RF territory looked unpromising, and that the possibility was high that they would withdraw from Russia. In the end, the a tude displayed by the interna onal payment systems urged the lawmakers to introduce new amendments to legisla on whereby the right to impose fi nes and set the amount of their contribu- ons was to be delegated to the RF Government or the RF Cen-

tral Bank (see Gosduma uberet trebovaniia k Visa i MasterCard iz zakona [The State Dume Will Remove the Requirements for Visa and MasterCard from the Law] at lenta.ru/news/2014/05/22/visa, 22 May 2014). The standpoint of the RF Government on that issue was explained by Alexey Moiseev, RF Deputy Minister of Finance in his interview with Olga Bychkova, a radio host from Ekho Moskvy [Echo of Moscow] radio sta on. See the interview at echo.msk.ru/programs/beseda/1325288 as of 22 May 2014: ‘On 5 May, the RF President signed Federal Law No 112, whereby it is envisaged that all the se lement opera ons conducted via plas c cards should use the infrastructures situated in RF territory. We are now prepar-ing some logical amendments with regard to se lements between banks…. We must ensure that the physical infrastructure should be situated in RF territory. Nothing more than that. No na onaliza- on, no bans … and no self-isola on ... We are – and have always

been – for Russia to remain an integral part of the world economy and the world fi nancial system’.2 Internal Revenue Service is the US supreme tax administra on.3 Foreign Account Tax Compliance Act.4 ‘The State Duma is threatening banks with imprisonment for their coopera on with the USA. In the nearest future, the job of a department head in a bank who is responsible for data transfer under FATCA will become a dangerous occupa on’, see izves a.ru/news/571205 of 22 May 2014. The depu es have warned about sanc ons to be imposed on those bank offi cials who will make data on US taxpayers available to the US tax agency without that right being fi rst consolidated by Russian laws. As the Izves a newspaper has found out, Chairperson of the State Duma Commi ee on Fi-nancial Markets Natalia Burykina said that ‘sanc ons will be intro-duced against those bank personnel for viola ons of bank secrecy legisla on — in accordance with the RF Criminal Code. She also noted that if the USA should choose to impose sanc ons to Rus-sian banks for their failure to comply with the provisions of FATCA

same me ignoring the fact that a refusal to interact in the FATCA framework will result in the correspon dent accounts of Russian bank kept with the Old World’s biggest banks being liquidated. In other words, the rou ne conduct of any standard se lements and pay-ments by Russian organiza ons in the framework of their interna onal trade and interna onal rela ons will be rendered absolutely impossible (the scale of Russian and US banking systems being incomparable).

In our opinion, the personal emo ons of govern-ment offi cials and lawmakers must not infl uence the real economic policy – as any ‘adequate’ responses to the imposed sanc ons in the form of ‘ejec on’ from the Russian market of its foreign par cipants, market ‘closure’, or Russia’s economic self-isola on will be ex-tremely harmful in the present situa on.

Any a empts to ‘respond’ to the externally im-posed sanc ons by means of a voluntary refusal to sell our compe ve commodi es (or work, or services) on the world market can, in reality, result only in Russian producers being ousted from their already secured po-si ons, and so such a decision, in terms of economics, can be described as a fundamental error.

One more factor complica ng the current situa on in the Russian economy is the debt issue. A debt-based economy off ers no opportuni es for earning money, because everything is being snatched away either for the purpose of debt redemp on, or by way of sanc ons imposed for failure to properly redeem debt. A situa- on where market agents may shi their debts onto the

government (when the la er buys out corporate liabili- es at the expense of government funds), whereupon

these debts are wri en off (‘redeemed’), among other things, by way of money emission (‘quan ta ve easing’) can only be possible in the phase of economic growth. In face of a downward trend, money will simply fl ow away, towards other jurisdic ons where economies are on the rise – that is, where ‘money can be earned’.

The majority of regional budgets across RF terri-tory are burdened with debt. These are, in the main, ruble-denominated loans taken from banks with state par cipa on. And the banks with state par cipa on (state corpora ons) have been issuing bonds – includ-ing bonds denominated in world currencies – in order to keep their current ra o at an acceptable level. And in an event of a default, these bonds issued by banks with state par cipa on will be redeemed at the ex-pense of RF property, including the RF Central Bank’s gold and foreign currency reserves. So, the RF Minis-try of Finance’s a empt to ‘manage’ regional budgets through the mechanism of debts and penal es may re-

(in the form of 30% withheld from the sum of payments made by US ci zens), Russia would ‘mirror’ these measures and impose similar sanc ons against US banks.


51

sult in direct losses for the treasury. The majority of re-gions will not be able to repay their debts, while their current tax-generated revenues are being ‘pumped’ out of their budgets in the form of interest and pe-nal es paid against their debts to various creditors. As we have already noted many mes, one of Rus-sia’s present-day key goals is the liquida on of defi cit in regional budgets and reinstatement of their own revenue base. However, the federal authori es are in no hurry to endow the regions with their independent revenue base, because this will bring down the level of regions’ manageability from the federal center.

Meanwhile, the accumulated debt issue under-mines the rela ons between RF regions. Thus, Mos-cow’s a empts to invite organiza ons to operate in its territory, by means of off ering them a reduced rate of the profi ts tax (13% vs. 18%) – in addi on to the already exis ng infl ow into its budget of person-al income tax (PIT) paid by Moscow enterprises for their employees residing or having a permanent resi-dence registra on in other RF regions – have given rise to very nega ve a tudes, because many of the regions burdened with social obliga ons are forced to borrow money in order to fulfi ll these obliga ons, thus running out of proper source for funding their own economic development. This fact, among other things, was pointed out by President Vladimir Pu n, who noted that it was an unacceptable policy to de-legate obliga ons to regions and local governments without providing them with the funds needed for fulfi lling such obliga ons.

Another manifesta on of the regions’ unprepar-edness to put up with their diff eren a on in terms of their ability to independently dispose of their own resources was their a tude to the preferen al econo-mic treatment granted to the Crimea in the fi eld of tax-a on. Kaliningrad Oblast asked to be granted similar treatment1. Any a empts to so en the fi nancial prob-lems posed to regional budgets by the necessity to ful-fi ll their social obliga ons, as outlines in the RF Presi-dent’s May 2012 edicts, by means of replacing bank loans as the sources for covering their budget defi cit by loans granted from the federal budget will improve nothing from the point of view of the real situa on, if these debts are not simply wri en off later on2.

1 P. Netreba. L’goty navsegda. Kaliningrad Oblast khochet krym-skikh preferentsii. [Privileges Are Forever. Kaliningrad Oblast Wants to Be Granted the Same Preferen al Treatment as the Crimea]. See kommersant.ru/doc/2469716 of 14 May 20142 It should be reminded that the Russian Federa on, quite re-cently, wrote off the huge debts, denominated in world currencies, owed to her by Afghanistan, Cuba and the Democra c People’s Republic of Korea (DPRK), and so it appears strange that the RF government has chosen to keep the ‘debt noose’ on the neck of RF regions.

The recent developments in Vologda Oblast have also taken a non-standard course. That region’s gov-ernment refused to fulfi ll its guarantees issued to ag-ricultural producers against loans granted to them by VTB Bank3. According to representa ves of the gover-nment of Vologda Oblast, VTB Bank made formal er-rors when presen ng its request for the transfer of guaranteed payments. President of the Associa on of Russian Banks Garegin Tosunyan believes that the con-fl ict between the region’s current government and its previous leaders, which has taken the form of a refusal to recognize the previous government’s guarantees and ini a on of judicial proceedings, creates an unde-sirable precedent for the market. Such a situa on may repeatedly reproduce itself in the future, thus giving rise to problems with bank loan repayment.

Government offi cials, while seemingly speaking in favor of market development, at the same me intro-duce new bans and responsibili es for individuals and legal en es under the pretext of struggling against terrorism, and impose fi nes for failures to comply with the new rules4. In our opinion, the legisla ve norms

3 VTB demands half-a-billion rubles from Vologda authori- es. Experts say that the refusal of regional authori es to pay

under their own guarantees is unprecedented. See izves a.ru/news/571060 of 20 May 2014.4 See, for example, Federal Law No 110-FZ of 5 May 2014, where-by more altera ons are introduced in the rather notorious Federal Law of 7 August 2001, No 115-FZ ‘On Preven ng Legaliza on (Laun-dering) of Incomes Received by Criminal Methods, and Financing of Terrorism’, including some new sanc ons and fi nes.See Federal Law of 5 May 2014, No 97-FZ ‘On Introducing Altera- ons into Federal Law of 27 July 2006, No 149-FZ “On Informa on,

Informa on technologies and Informa on Protec on” and Some Legisla ve Acts of the Russian Federa on on Issues Regula ng Infor-ma on Exchange with the Use of Informa on and Telecommunica- ons Networks’. This Law established that popular bloggers (whose

websites register 3,000 or more visits per day) should be treated as mass media companies and obliged then to store in RF territory, for a period of 6 months, informa on on the facts of receipt, transmis-sion, delivery and (or) processing of voice informa on, wri en text, images, sound or other electronic messages from Internet users, and also informa on on those Internet users, and to make that infor-ma on available to the empowered government bodies involved in inves ga on ac vity or safeguarding the Russian Federa on’s state security. A failure to comply with the rules will entail the imposi on of fi nes and other sanc ons.See Federal Law of 5 May 2014, No 130-FZ ‘On Introducing Alter-a ons into Federal Law of 3 April 1995, No 40-FZ ‘On the Federal Security Service’, whereby the rights of the Federal Security Service were expanded, the responsibility for terrorist ac vi es and special training for the purpose of engaging in terrorist ac vi es toughened, and some new penal es and sanc ons introduced. Thus, in par cu-lar, administra ve responsibility is established for rendering fi nan-cial support to terrorism (Ar cle 15.27.1 of the Russian Federa on Code of Administra ve Off ences), the amount of fi ne being from Rb 10m to Rb 60m for legal en es; fi nes were also introduced for failures to failure to comply with the decision of the collegial body coordina ng and organizing the an -terrorist ac vity. See also some other laws adopted in the period under considera on.


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envisaging the provision of mandatory work and ser-vices to the government power structures and budget-funded organiza ons by individuals and legal en es represents a form of addi onal mandatory payments in unspecifi ed amounts, which are not s pulated in the RF Cons tu on. In fact, this has given rise to a situ-a on where market subjects must collect and process opera ve data, spend their own money on it, employ addi onal staff and pay their salaries, and if they fail to comply with the newly introduced burdensome re-quirements and do not provide gra s work and ser-vices, they will be faced with high-ceilinged penal es (a scheme which, according to the RF Cons tu onal Court, contradicts the RF Cons tu on) and resul ng elevated fi nancial risks.

Thus, the addi onal legisla ve constraints and obli-ga ons imposed on market subjects boost the amount of unjus fi ed costs for commodity producers, with the simultaneous growth of fi nancial risks associated with opera on in RF territory. All this undermines the com-pe ve poten al of Russia’s economy and has a de-struc ve eff ect on the investment climate. We believe that Russia at present is faced with a fundamentally dif-ferent task – that of securing broad support from the in-terna onal and domes c business communi es, as on-ly these two forces, when ac ng in conjunc on, can be capable of so ening the sanc ons and fi nding accept-able ways for boos ng growth in the Russian economy.

The declining compe ve capacity of the RF econo-my in the world market also manifests itself in the in-creasing pressure on Russia’s domes c economic poli-cy being exerted by the other members of the Customs Union (CU). Thus, Belarus is more strongly expressing her opinion that the export customs duty on oil (when it is exported beyond the territory of the Customs Un-ion) should not be linked to the country of origin of a given natural resource. If Belarus, a er buying crude oil from Russia without an export duty, exports it to countries outside of the Customs Union, the relevant amount of export duty must them be transferred the RF budget. So, Belarus insists that the export duty should be li ed, and the rate of tax on mineral resour-ces extrac on raised as early as 2015 (previously, thus measure was planned to be introduced much later). In such a situa on, Belarusian tax residents will be able to buy oil at Russia’s domes c market price, while the relevant export duty in the event of its sale elsewhere will remain in в Belarus’s budget. The unifi ca on of export duty, which envisages a reduc on of Russia’s export duty approximately to Kazakhstan’s level – by 4.7 mes to 80 USD/ton, coupled with cancella on of the claims to Belarus that she should transfer the relevant export revenues to the Russian budget, will translate itself into a loss of approximately $ 33bn per

annum for Russia’s treasury, according to RF Deputy Minister of Finance Sergey Shatalov1. He believes that such a ‘maneuver’ will result in a surge of oil and gaso-line prices in Russia’s domes c market. However, the government maintains that the integra on with Bela-rus into a single market space will ensure for Russia some economic gains on another level.

The con nuing step-by-step transforma on of civil legisla on creates gaps in the law enforcement sys-tem, where sectoral laws have not been brought in conformity with the RF Civil Code (RF CC). In such a case, law enforcement prac ce in the fi eld of taxa on should be based on explanatory notes issued by the RF Ministry of Finance and the RF Federal Tax Service (RF FTS) as well as on corresponding judicial deci-sions. Thus, by Federal Law of 5 May 2014, No 99-FZ, amendments were made to the RF Civil Code whereby a new defi ni on of the term ‘juridical person’ was es-tablished, and the no ons of corpora on, commercial corporate organiza on, corporate agreement, public and non-public socie es, produc on coopera ves, non-commercial corporate organiza on, etc. were in-troduced. So, the specifi c features of taxa on of these new legal forms of entrepreneurial ac vity will need to be explained.

By altera ons introduced into the RF Labor Code (RF LC) by Federal Law of 5 May 2014, No 116-FZ em-ployees are allowed to ‘lend’ their employees on a temporary basis to other individual or legal en es under special agreements established for this form of ‘lending’, and the format of entrepreneurial ac- vity in this sphere is described. So far, only some

general amendments have been introduced in this connec on into the RF Tax Code (RF TC): the appoint-ment of personnel by a foreign organiza on to work at ano ther organiza on is not to be considered an establishment of a standing representa ve offi ce of the former, if that personnel acts exclusively on be-half and in the interests of the la er2. Evidently, later on the specifi c regula ons will be issued in regard to managing the revenues and expenditures, tax base and the mechanism for paying tax on the opera ons carried on during a temporary period of an organi-za on’s employees’ work for the benefi t of a third party, because this is an en rely new system of eco-

1 D . Kop ubenko. Rossiia nachinaet nalogoviy manevr v ‘nef- anke’ radi Lukashenko [Russia to Launch a Tax Maneuver in

the Oil Sector for the Sake of Lukashenko]. See rbc.ru/econom-ics/11/05/2014/922974 of 11 May 2014. 2 The excep ons from this rule are determined in Item 2 of Ar cle 306 of the RF Tax Code and are to be applied to ac vi es involving the use of mineral and natural resources, construc on, assembly, servicing, maintenance and exploita on of equipment, and sale of goods from warehouses situated in RF territory.


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nomic rela ons for the Russian Federa on, with no history of its legal applica on.

Auditors have iden fi ed one very interes ng new problem. Thus, in the dra of Item 6 of Ar cle 66 the RF Civil Code it is envisaged that ‘government bodies and local self-government bodies have no right to par- cipate in their own name in economic associa ons

and socie es’. This innova on will make it diffi cult to apply the norms s pulated in Ar cle 80 of the RF Budget Code (RF BC), whereby it is established that ‘gran ng of budget-funded investment to juridical per-sons other than government or municipal ins tu ons and government or municipal unitary enterprises shall give rise to the right of government or municipal ow-nership to an equivalent part of the charter (or share) capital of the said juridical persons, to be formalized as the par cipa on of the Russian Federa on, subjects of the Russian Federa on, and municipal forma ons in the charter (or share) capital of such juridical persons’ ‘gran ng budgetary investments to legal en es that are not state or municipal ins tu ons or state or mu-nicipal unitary enterprises involves the emergence of the right of state or municipal ownership of the equi-valent part of the authorized (pooled) capital of the said legal en es to be legalized by the par cipa on of the Russian Federa on, its cons tuent en es and municipal en es in the authorized (pooled) capital of such legal en es’1. In actual prac ce, the par ci-patory share of the State in charter capital was by no means always legally formalized, which was a viola on of Ar cle 80 of the RF Budget Code. In this connec on, while such organiza ons obtained some funds on a gra- s basis (as their charter capital remained unchanged,

and the amount of the state stake was not specifi ed), they did not pay the profi ts tax on these funds, and the unlawfulness of such acts is confi rmed by Ruling of the Supreme Arbitra on Court of the Russian Federa- on (RF SAC) of 30 July 2013, No 3290/13. Evidently,

it will be the task of the Federal Financial Monitoring Service (Rosmonitoring) to inves gate the instances of improper use of budget funds, and to iden fy the facts and causes of viola ons of Ar cle 80 of the RF Budget Code, as well as to elaborate measures designed to properly regulate the current situa on.

Some newly adopted laws point to the fact that, so far, no technically perfect solu on has been pro-vided in regard to the issue of combined applica on of budgetary and tax legisla on in those cases when the right to spend budget alloca ons (not subsidies,

1 A. Korotkov, auditor. Nezakonnoe fi nansirovanie gosudarst-vom kommercheskinh organizatsii na sotri milliony rublei [Un-lawful Financing, by the State, of Commercial Organiza ons to the Value of Hundreds of Billions Rubles]. See echo.msk.ru/blog/korotkov58/1310048-echo of 29 April 2014.

but budget funds allocated in the framework of gov-ernment target programs) is delegated by a branch mi-nistry to non-commercial organiza ons (NCO), which eff ec vely begin to perform the func ons of manager of budget-funded investment ac ng in its own name.

Thus, by Federal Law No 108-FZ of 5 May 2014, No 108-FZ, a new exemp on is introduced from the profi ts tax. The edited version of the amended text is rather tricky. Obviously, it has been planned to create yet another non-commercial organiza on in support of Russian na onal cinematography and its compe ve poten al. This new organiza on will receive funding, which will enable it to act as a share partner in the pro-duc on of movies shot on RF territory, or to cover the costs incurred in their crea on. In this connec on, this non-commercial organiza on will evidently secure a sort of ‘reward’ or benefi t (the law applies the term ‘de-duc ons’) when transferring the relevant sum of money to the recipient of funding (fi lm producer). This amount will be entered in the non-commercial organiza on’s re-cords as targeted funding, and it will be made exempt from profi ts tax if its source is a budget alloca on.

In accordance with the RF Budget Code, non-com-mercial organiza on func oning in the form of budget-funded or autonomous ins tu ons are granted subsi-dies from the budget to the conduct of their charter ac vity (fulfi llment of government assignments). They receive budget-funded investment (budget alloca ons) only to cover the cost of newly established govern-ment property, and not a kopeck of that funding may be spent by a budget-funded ins tu on on its own up-keep. Budget-funded investment, in terms of econo-mics, is essen ally not a subsidy granted to a budget-funded (or autonomous) ins tu on so that it would be able to pursue its ac vi es. If fi lm produc on is quali-fi ed as budget-funded investment, what sort of ‘deduc- ons’ from it can actually be made for the benefi t of a

non-commercial organiza on? And who will be giving permission for such ‘deduc ons’ from budget-funded investment? From whose balance sheet will these be wri en off ? The RF Budget Code off ers no such mecha-nism for distribu ng budget alloca ons. If subsidies are meant, to cover the costs of the non-commercial orga-niza on’s ac vity, why then the term ‘deduc ons’ is ap-plied? In this connec on, we believe that this law needs further elabora on in order to improve its quality. The non-commercial organiza on in ques on will probably not be able to take advantage of this exemp on un l the issue is properly clarifi ed by judicial bodies.

In addi on to the aforesaid norma ve documents, the period under considera on also saw the issuance of the following ones.

In connec on with the ra fi ca on, by Federal Law of 5 May 2014, No 86-FZ of the UNIDROIT Conven on


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on Interna onal Factоring1 of 28 May 1988, the Russian Federa on assumed the obliga on to recognize factor-ing opera ons. Therefore, corresponding amendments should be introduced to Russia’s tax legisla on. Factоring is a trade transac on involving purchase by a bank (or company) of a producer’s receivable assets, the former thus becoming the la er’s factor. This scheme protects the producer, who has delivered commodi es, ceded the rights under a factoring agreement to a bank (or company) – the factor – and paid a certain commission, a er which the producer prac cally instantly restored the working capital turnover needed for further ac v-ity. The factor either waits un l the contract is fulfi lled, or sells it on the market at a discount that is less than the amount of commission received from the supplier, and so gains on it. The buyer gains if he ma nages to buy out this contract on the market at a discount from the contractual price, if the factor actually sells the contract. This usually becomes possible if a contract is bought out prior to its expiry date. The economic interests of all the par cipants are evident. The purpose is to legally bring down the price of a commodity without altering the contract value, by means of maximum accelera on of the process of se lements. The problem here is how to convince the taxmen that the contract buyout price paid to the factor prior to the contract’s expiry is the real market price of the commodity as of the date of contract buyout, which should serve as a base for calcu-la ng VAT liabili es and the amount of profi t. The price s pulated in the contract is also a market price, but set as of the date of its fulfi llment – that is, at a much later date. As we have predicted, soon the system of clearing rela ons will also be augmented by contracts on com-modi es. This is an important step towards further de-velopment of the fi nancial and commodity markets in the RF. At the same me, the necessary amendments must also be made to the RF Tax Code.

2. The Bank of Russia released Informa on Le er, of 29 April 2014, ‘Answers and Explana ons Concerning Some Issues Rela ng to the Bank of Russia’s Provision of 25 November 2013, No 409-P “On the Accoun ng Procedure to Be Applied to Carry-forward of Tax Li-abili es and Carry-forward of Tax Assets”’.

It is strange that this explana on is not coordinated with the RF Ministry of Finance and the federal Tax Service. The Bank of Russia compares the accoun ng

1 UNIDROIT (Ins tut interna onal pour l’unifi ca on du droit privé – the Interna onal Ins tute for the Unifi ca on of Private Law) is an independent intergovernmental organiza on with its seat in the Villa Aldobrandini in Rome, established in 1926. Its pur-pose is to study needs and methods for modernizing, harmoniz-ing and coordina ng private and in par cular commercial law as between States and groups of States and to formulate uniform law instruments, principles and rules to achieve those objec ves.

rules with tax accoun ng rules. In par cular, the Bank explains when and in which procedure tax liabili es carried forward and tax assets carried forward must be adjusted, how the tax lags should be calculated and how they should be treated when determining the tax base, and so on. We believe that the empowered fi -nancial department and supreme judicial bodies must issue a public explana on to the eff ect that banks are not uncondi onally obliged to be guided by this in-forma on le er released by a licensing body. No re-ferences to that le er will be taken into account as a proper excuse when determining the fact of a tax vio-la on, because the Bank of Russia is not authorized to interpret tax legisla on.

By Le er of the RF Ministry of Finance of 14 May 2014, No 03-08-13/22654 the issue of how to apply the new procedure for paying tax on dividends is ex-plained, in connec on with the altera ons introduced by Federal Law of 29 December 2012, No 282-FZ into legisla on on joint-stock companies and the securi es market in regard to the dividend payment procedure.

The RF Ministry of Finance explained that, in ac-cordance with Item 1 of Ar cle 8.7 of Federal Law No 39-FZ ‘On the Securi es Market’, shareholders and other persons – holders of securi es in accordance with federal laws may receive dividends in money on their shares through their depository. As in accordance with the new version of Federal Law No 39-FZ a de-pository is not obliged to disclose to the issuer of secu-ri es the relevant informa on on holders of securi es as of the date of dividend payment, the issuer has no informa on as to who holds the right to securi es and receives income in the form of dividends – a Russian or foreign organiza on. In this connec on, the issuer can-not act as a tax agent when dividends are transferred to the depository. As the RF budget targets (which in Russia are established by a special budget law) cannot depend on the content of sectoral laws, while the duty to pay taxes is s pulated in the RF Cons tu on, the RF Ministry of Finance, on the basis of a systemic interpre-ta on of legisla ve norms, has explained that, in such a situa on, a depository is to be recognized to be a tax agent. If the judicial bodies happen to be of a diff erent opinion, once a ruling is issued by judicial bodies to the eff ect that this norma ve act should be abolished, the RF Ministry of Finance (by Le er 14 May 2014, No 03-08-13/22654) will have to abide by the judicial ruling. Thus, we can see that the RF Ministry of Finance has found a rather elegant way out of a very complicated situa on, which confi rms its capability, as a federal ministry, to effi ciently protect the budget’s interests, while at the same me remaining strictly within the framework of prevailing law.

Russian economic developments_eng_6_2014

Economy & Finance

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