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The RF Ministry of FinanceТs preliminary data on financing of the RF federal budget expenditures in the period between January and April 2005 are shown in Table 2.

It should be noted that at the end of May a share of federal budget expenditures accounted for 21.59% of GDP, which is markedly below the similar parameter at the end of April 2005. Intergovernmental transfers ( 7.49% of GDP ), national defense ( 3.66% of GDP ), nationwide issues ( 3.21% of GDP ), including central government and municipal debt service ( 1.52% ), and national security and law enforcement ( 2.71% of GDP ) received biggest volume of financing. Other expenditure items accounted for nearly 4.51% of GDP in total.

Revenue and expenditure items of the RF consolidated budget were not analyzed due to changes in>

Table 2.

Financing of the RF Federal Budget Expenditures in the Period Between January and May 2005 ( as % of GDP ) Financing of expenditures March April May Nationwide issues, 3.72 % 3.92 % 3.21 % of which central government and municipal debt service 1.99 % 1.94 % 1.52 % National defense 3.58 % 4.43 % 3.66 % National security and law enforcement 2.55 % 3.23 % 2.71 % National economy 1.22 % 1.50 % 1.32 % Municipal housing economy 0.04 % 0.05 % 0.04 % Environmental protection 0.03 % 0.04 % 0.03 % Education 0.94 % 1.18 % 1.17 % Culture, cinematography and mass media 0.23 % 0.27 % 0.26 % Health care and sport 0.53 % 0.62 % 0.54 % Social policy 1.00 % 1.35 % 1.15 % Intergovernmental transfers 6.27 % 9.47 % 7.49 % Total Expenditures 20.10 % 26.06 % 21.59 % Table 3.

Execution of the RF Consolidated Budget in the Period Between January and April 2005 ( as % of GDP ) I II III IV V VI VII VIII IX X XI XII Taxes* 28.7 % 23.6 % 24.3 % 26.5 % 26.6 % 25.9 % 26.4 % 25.9 % 25.2 % 25.4 % 25.4 % 25.5 % Revenues 32.9 % 31.3 % 31.4 % 33.6 % 33.6 % 32.7 % 33.3 % 32.5 % 31.7 % 32.0 % 32.1 % 32.1 % Expenditures 18.3% 23.7 % 26.0 % 28.4 % 28.4 % 28.8 % 29.1 % 28.9 % 28.4 % 29.3 % 29.7 % 31.1 % Deficit / 7.7 % 5.4 % 5.3 % 5.2 % 3.8 % 4.2 % 3.7 % 3.3 % 2.7 % 2.4 % 1.0 % 14.6 % Surplus I II III IV V VI VII VIII IX X XI XII Taxes* 25.6 % 24.4 % 25.6 % 27.4 % 27.1 % 26.0 % 26.1 % 25.7 % 25.0 % 25.0 % 25.1 % 25.2 % Revenues 32.0 % 30.3 % 31.5 % 33.4 % 33.6 % 32.2 % 32.2 % 31.6 % 30.9 % 30.8 % 30.7 % 31.1 % Expenditures 20.7 % 25.3 % 27.7 % 28.8 % 28.8 % 28.6 % 28.7 % 28.5 % 28.2 % 27.8 % 27.9 % 29.7 % Deficit / 11.3 % 5.0 % 3.8 % 4.5 % 4.7 % 3.5 % 3.6 % 3.1 % 2.7 % 3.0 % 2.8 % 1.4 % Surplus I II III IV V VI VII VIII IX X XI XII Taxes* 6.1 % 21.8 % 27.4 % 27.4 % 26.6 % 27.2 % 27.1 % 26.4 % 26.5 % 26.9 % 26.8 % Revenues 30.6 % 28.2 % 29.8 % 32.9 % 32.9 % 32.5 % 33.1 % 32.9 % 31.9 % 32.0 % 32.3 % 32.3 % Expenditures 18.5 % 22.8 % 25.4 % 27.3 % 26.9 % 27.0 % 27.0 % 26.9 % 26.0 % 25.9 % 26.1 % 27.8 % Deficit / 12.1 % 5.4 % 4.4 % 5.6 % 6.0 % 5.5 % 6.1 % 6.0 % 5.9 % 6.1 % 6.2 % 4.5 % Surplus I II III IV V VI VII VIII IX X XI XII Revenues 48.8 % 40.3 % 40.3 % 40.8 % Expenditures 22.2 % 23.3 % 24.9 % 27.1 % Deficit / 26.5 % 17.0 % 15.4 % 13.7 % Surplus At the end of the period between January and April 2005, the RF consolidated budget revenues accounted for 40.8% of GDP against 32.9% of GDP over the similar period in 2004. The RF consolidated budget expenditures declined slightly as compared to the similar parameter in 2004 ( 27.3% ) and accounted for 27.1% of GDP. Surplus of the RF consolidated budget accounted for 13.7% of GDP in the period between January and April 2005, which is twice as much as the similar parameter in 2004 ( 5.6% ). Hence there was a marked growth in the RF consolidated budget revenues in 2005 at the backgrounds of almost unchanged expenditures, which resulted in such a considerable growth in the budget surplus.

As of June 1, 2005, the value of the RF Stabilization Fund reached 954,5 bln rubles. It means that the RF Stabilization Fund received 96,5 bln rubles in April.

Basic Budgetary Events In June, the RF Ministry of Finance made some comments through its representatives on the issue of VAT administration and prospects of reducing the VAT rate. On June 1, Deputy Minister of Finance S. Shatalov stated that the RF Ministry of Finance is ready to resolve the issue of VAT refund in the period between 2006 and 2007, in particular it is going to eliminate the obstacles interfering with VAT refund during capital investments, export operations and advanced payments. According to the Deputy Minister of Finance, the issues of reducing the VAT rate and VAT administration also remain in the agenda of the Ministry. The Ministry of Finance plans to replace the currently applicable cash method with the accrual method, as well as introduce deductions on this tax for organizations which undergo restructuring.

In addition, one of the top priority tasks of the RF Ministry of Finance is to resolve the issue of transfer pricing and improve the profit tax. It was reported that the RF Ministry of Finances had already prepared a draft law reducing tax burden in relation to the profit tax. The case in point is to carry forward losses and accredit expenses on research and development works and so called amortization premium to expenditures. According to S. Shatalov, these changes would not allow the consolidated budget 2006 to receive nearly 220 bln rubles that would stay with the business and could be invested in the economy.

In June, the RF Government acknowledged and approved a report on execution of the RF federal budget for Q1 of 2005. The RF Minister of Finance А. Kudrin stated at a meeting of the RF Government that expenditure liabilities of the RF federal budget 2005 would be increased by 328,7 bln rubles, of which 348,3 bln rubles would cover the budget expenditure items, while 34,4 bln rubles would be kept in reserve to support the constituent entities of the Russian Federation in 2006. А.

Kudrin also named basic targets of budget expenditures which are scheduled to receive additional financing, namely wage indexation, donations to regions to balance their budgets, as well as investment expenditure.

On June 16, А. Kudrin said at a press conference dedicated to the results of a Meeting of the RF Government, that in 2006 the RF federal budget provides for 4431,2 bln rubles of budget revenues, 3931,0 bln rubles of budget expenditures, and 3726,7 bln rubles of non-interest expenditures. Hence budget revenues would account for nearly 19% of GDP, while budget expenditures would account for 16.8% of GDP, and non-interest expenditures would be 15.8% of GDP. In addition, according to the Minister, the three-year financial plan would be approved by the RF Government on an annual basis.

D.Polevoi Monetary Policy in the Russian Federation Growth rates of consumer prices continued to slow down in May 2005: the consumer price index was no more than 0.8% in May. In general, however, inflation this year still remains above the level of the preceding year. The money supply and the RF gold and foreign exchange reserves continued to grow in May. The RF Central Bank announced that it was likely to enlarge the list of securities that could be used as security in refinancing.

The consumer price index accounted for 0.8% ( as opposed to 0.7% in May 2004 ( see Figure 1 )) in May 2005. The reference consumer price index2 grew by 0.6% in May 2005 ( 0.6% in the same period of the previous year ). It is the growing prices of food products that had the biggest share of price growth in May, similar to the period between March and April 2005: prices of food products grew by 1.1% ( 0.4% in May 2004 ). Prices of fruits and vegetables ( + 4.1% ), meat products and The reference consumer price index is an indicator which reflects inflation level in the consumer market without consideration of a seasonal ( prices of food products ) and administrative ( tariffs of regulated types of services, etc. ) factors. The reference consumer price index is normally calculated by the Statistical Service of the Russian Federation.

poultry meat ( + 2.6% ) and fish and sea food ( + 1.1% ) showed the highest growth against other food products. Such product groups as cereals and legumes products ( - 0.3% ), milk and dairy products ( - 0.3% ), and milk butter ( - 0.2% ) showed a decline in prices. Thus, the prices of food products was mainly affected by the price growth of fruits and vegetables in May.

The CPI growth in May was mainly caused by a price growth of fee-based services for the general public which accounted for 0.8% ( as opposed to 1.4% in May 2004 ). It should be noted that price growth of fee-based services slowed down each month of the quarter 1, and prices of fee-based services grew at a slower rate in the period between April and May as compared to the previous year.

The highest price growth in May was recorded in the field of preschool education services ( + 2.1% ) and personal services ( + 1.4% ). It should be noted that price growth of services rendered by the municipal housing economy didnТt grew more than by 0.6%.

Prices of non-food products grew by the average of 0.4% ( in May 2004, incremental growth accounted for + 0.8% ). The highest price growth was recorded of motor gasoline ( + 1.2% ) and textile products ( + 0.6% ).

According to the preliminary estimates, the CPI in June accounted for between 0.4 and 0.6%.

The Growth Rate of the CPI in 2002 - 2004 (% per month).

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% In May 2005, the wide monetary base3 grew by 25,6 bln rubles to account for 2,27 trillion rubles ( + 1.1% ) and exceeded slightly the level that was recorded early in March this year. The volume of wide monetary base accounted for 2,24 trillion rubles as of May 1, 2005. Let us consider the movement of wide monetary base by component.

As of June 1, 2005, active cash money including cash balances at credit organizations accounted for 1,69 trillion rubles ( + 0.9% as compared to May 1, 2005 ). Correspondent accounts of credit organizations with the Bank of Russia accounted for 272.1 bln rubles ( + 7.1% ). Compulsory reserves amounted to 135.1 bln rubles ( + 0.5% ). BanksТ deposits with the Bank of Russia were 80.2 bln rubles ( - 14% ). The value of the bonds of the Bank of Russia at credit organizations was 86.7 bln rubles ( + 4.3% ). The RF Central BankТs obligations for repurchasing of securities amounted to 2.1 bln rubles ( no changes ), and currency transactions reserves deposited with the Bank of Russia amounted to 7.2 bln rubles ( + 41.2% ).

The wide monetary base of the Russian Federation includes correspondent account balances deposited by credit organizations and banks with the Bank of Russia as well as active cash money issued by the Bank of Russia and account balances of compulsory reserves deposited with the Bank of Russia by credit organizations in borrowing funds in national currency.

Jul Jul Jul Jan Jan Jan Jan Sep Sep Sep Mar Mar Mar Mar Nov Nov Nov May May May May The growth in the volume of active cash money ( + 0.9% ) and compulsory reserves ( + 0.5% ) in May this year resulted in that the monetary base ( cash money + compulsory reserves )4 widened by 3%5 ( see Figure 2 ). In addition, in May, the RF gold and foreign exchange reserves of the RF Central Bank continued to grow ( + 4.1% ) and reached 147.4 bln US dollars as of June 1. This was accompanied by a simultaneous sterilization of issue of money on the basis of the stabilization fund which accounted for 954.5 bln rubles in volume as of June 1, 2005. The RF gold and foreign exchange reserves shrank by 0.1%, while the monetary base grew by 3.3% over three weeks in April 2005.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2003 - 2004.

1870 1450 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) According to the data provided by the RF Ministry of Finance, in May 2005 the Russian Federation made payments relating to its foreign debt to the amount of 242.1 ml US dollars. The volume of foreign debt service payments were equal to 189.1 ml US dollars, while the principal amount of foreign debt was 53 ml US dollars.

In May, the RF Central Bank made a statement that soon it would likely to start to provide refinancing to banks on security of Уnon-standard assetsФ which could be represented by issuersТ liabilities without consideration of creditability rating and stock market quotations. This measure fully complies with the recent measures of the RF Central Bank aimed at по facilitating refinancing of commercial banks. Previously, the secured credit list was enlarged with liabilities of the Agency for Housing Mortgage Lending and the Moscow Mortgage Lending Agency. The banking society, however, considered this measures insufficient. It is suggested that a special regulation would be issued to regulate financing on security of non-standard assets. Should the plans of the RF Central Bank be implemented in practice, such event could receive a positive consideration, since facilitated refinancing would be able to prevent a crisis similar to that occurred last summer.

In May, the President of Russia sighed a Law on amendments to the УLaw of the RF Central BankФ, which stipulates a special procedure of short-term bond issuance by the Bank of Russia. Previously, the RF Government obliged the RF Central Bank to register prospectuses with the Federal Commission for Securities Market ( FC of RF Central Bank ) and the RF Ministry of Justice. The new law specifies that the Bank of Russia shall issue bonds without public registration, without prospectus It will be recalled that wide monetary base represents national currency liabilities of the Bank of Russia rather than a monetary aggregate. The monetary base is a monetary aggregate ( one of the parameters representing money supply volume ) which is fully controlled by the RF Central Bank.

The mismatch of the by-component data relating to the wide monetary base and the monetary base results from the fact that the data on wide monetary base are normally published as of the first date of month, while the data on monetary base are published weekly without being bound to a certain date of month.

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