Yury Adno

W

hile reflecting recent changes in the social and economic system of Russia, the 2005 Federal Budget proposed by the RF Government and adopted by the RF State Duma is based on key provisions of a macroeconomic development strategy (a so-called optimistic scenario) put forward by the RF Ministry of Economic Development and Trade (see Table 1) for the next three years.
With the projected income of 3,325. bln. Russian Rubles (c. $ 111 bln. USD), the budget surplus will exceed 278 bln. Russian Rubles ($ 9.3 bln. USD).

As to state expenditures, it has been decided to shift from simple indexation thereof to projecting results of activities of the ministries, which seek to get state financing with their compulsorily reporting on effectiveness of the expenditures made. Though, it relates to civil spheres only.

The new budget features, first of all, its pronounced "antiterrorist" character. According to the new budget expenditures for national defense purposes will increase by 27. 6% to exceed 528 bln. Russian Rubles ($ 17.6 bln. USD), those for national security and law enforcement by 26% to reach 398 bln. Russian Rubles ($ 13.2 bln. USD) (fig. 1). Taken together the expenditures total more than 29% of the expenditure budget.

For the first time the Russian federal budget has been adopted under conditions of a relative surplus of financial resources in the country. Today Russian government has at their disposal more than $ 90 bln. USD in gold and foreign exchange reserves and about 700 bln. Russian Rubles ($ 23 bln. USD) accumulated in the stabilization fund to be used in case of a drop in oil prices. All this permits easy manipulation of resources and redemption of external debt for which purpose it is planned to allot $ 11.5 bln. USD in 2005, that is $ 2.5 bln. USD more compared to the current year. Moreover, a part of the stabilization fund resources are supposed to be spent to compensate losses suffered by the pension fund due to reducing the uniform social tax rate from 36% down to 26%.

In some experts` opinion dependence of the Russian economy on the world prices for oil will be gradually weakening with the consumer spending and capital accumulation being the key stimulus to economic growth. According to Andrew Klepatch, the head of a department of the RF Ministry of Economic Development and Trade, an increase in Urals price up to $ 29-30 USD/barrel will add to GDP growth rate no more than 0.1%- 0.2 %. At the same time to double GDP by 2012, as per target forecast of the government, the Russian economy should annually grow by 7.3% and by 9% to meet President Putin` s desire to double GDP by 2010.

Yet, there is a weak point in the new budget: it misses a clear program for restructuring economy, state of which is still determined by export of raw materials. The government will try to solve the problem through imposing higher taxes on companies associated with the fuel and energy complex. Moreover, the government has an intention to support the military industrial complex and so-called "dual purpose" industries (e.g. civil aviation) through placing with them state defense orders. In the mean time, financial resources accumulated owing to excessive incomes from exports now allow to focus on structural modernization e.g. to reform housing and utilities economy.

Arcady Dvorkovitch, the head of the analytical board under the RF president, believes that an actual shift to the new budget policy can happen as soon as in 2006-2007. In his opinion after the 1998 default the budget would be devised with the only aim "to reach a positive macroeconomic performance and provide for funds required to repay debts". According to the expert starting from 2006 budget funds will be used mainly for development purposes to support such sectors as "fundamental science, infrastructure improvement projects, reforms in education, public health and army".

Considering Russia along with China, India and Brazil a most attractive country for major international investors, the World Bank outlines a number of competitive advantages Russia has now, including quantity and quality of its mineral resources and labor force, a relatively low level of limitation in its financial system for business and a generally favorable tax environment. At the same time there are obstacles which handicap large–scale investments into processing branches of the Russian economy. Limited opportunities for funneling excessive funds from mining and raw material production industries just facilitate capital exports from Russia.

Market operators` stances are evidenced by the results of a survey of Russian managers` opinions kept by Canadian Fraser Institute. According to the survey 42% of respondents outlined «uncertainty in the field of management as well as in interpretation and application of business regulation standards and rules" with other 41% referring to omissions and discrepancies in the standards and rules themselves. Corruptions at all the levels of power, low political stability and unsatisfied state of the infrastructure were also attributed to the key limitation factors.

All in all the 2005 budget is an attempt to combine ideas of liberal reformers from the government` s economic block with the recent "jawbone" tendencies that reflects pretty well the current political situation in the country.

Table 1
Basic Assumptions of the Russian Economy Development Forecast for 2005 – 2007.
Key Performance Estimation Forecast
2004 2005 2006 2007
World Urals Prices for Oil, USD/barrel 31,2 28 28 28
World Economy Growth Rate, % 4,6 4,4 4,3 4,3
Average Annual USD Exchange Rate,
in Rbl for USD. 29,1 30 30,5 30,6
Direct Foreign Investments, bln. USD 13,5 12,6 14,6 16
GDP growth rate in % compared
to the previous year 106,9 106,3 106,1 106,5
Investments in Fixed Assets,
in % compared to the previous year 111,5 109,8 109,7 110,6
Retail Trade Turnover,
in % compared to the previous year 110,2 108,5 109,7 107,4
Export, bln. USD 160,7 163,2 172,5 181,9
Import, bln. USD 93 104,7 116,1 130
_________________________________________________________________
Source: the RF Ministry of Economic Development and Trade

Fig.1.
Key Expenditures of the Federal Budget in 2004 and 2005.

Bln. Russian Rubles*
1000
900
800
700
600
500
400
300
200
100

State General Issues
State Defense
National Security and Law-Enforcement Activity
National Economy

Municipal housing economy
Environment Protection
Education
Public Culture, Cinema, Mass Media
Public Health and Sport
Social Policy
Inter-Budget Funds

458.7 490.0 413.7 528.1 316.3 398.4 213.5 234.0 9.0 7.0 5.0 4.6 156.4 154.5 32.8 38.5 75.5 82.5 161.7 172.1 816.7 938.2

2004
2005
____________________
Source: the RF Ministry of Economic Development and Trade

* Average Annual Exchange Rate for USD: 29.1 Rbl. for 1 USD in 2004, 30 Rbl. in 2005.