13 Institute for the Economy in Transition RUSSIAN ECONOMY IN 2004 TRENDS AND OUTLOOKS (ISSUE 26) Moscow March 2005 UDC 33(470+571)2004 BBC 65.9(2Рос) R95 Agency CIP RSL Institute for the Economy in Transition (founded in 1992) Director:

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According to the tax>

The key reason for the reduction in federal budget revenues in 2005 against the ac tual revenues in 2004 is reduction in 2005 of the effective single social tax by nearly RUR280 billion or 1.5 percentage points of GDP, as well as reduction in the income from public and municipal property and from activity of public and municipal organizations by 0.8 percentage points of GDP.

RUSSIAN ECONOMY in trends and outlooks Table Revenues in Budget Laws and Execution of Federal Budget in 2003Ц2005 (RUR million) 2003 Executed 2004 Executed Budget Budget Law for 2003 Budget Law for Law* Tax Revenues** 1892363,7 2029566,5 2071384,5 2712122,7 2834120,Profit (income) tax, capital 179550,5 537303,4 164765,6 205991,49 259003,gains tax Taxes on products and services; Licensing and 1178971,2 1135752,3 1088389,6 1188151 1205557,incorporation duties VAT 946218,5 882063,5 988368,2 1069691,5 1120751,excise 231368,3 252531,3 98516,8 117205 84805,Aggregate income tax *** 8478,4 10074,9 150,8 167,22 - Single agricultural tax **** - 257,8 150,8 167,22 - Tax on securities transac 840,0 1663,3 824,0 121,26 - tion Payments of utilization of 183129,5 249507,7 279381,1 434252,61 483035,natural resources Taxes on foreign trade and foreign economic opera 335975,5 452789,2 532538,2 859736,84 867969,tions Other taxes, fees and du 5418,6 7069,4 5335,2 23702,36 285055,ties Non tax revenues 145721,8 176718,3 219194,4 221995,52 225420,Incomes from public and municipal property and 83158,8 112680,8 165612,1 169394,48 73004,from activity of public and municipal organizations Administrative fees and 1406,5 1383,1 1381,2 2395,308 1714,charges Penalties, compensation 1353,6 1975,1 1157,8 1683,37 1483,of damage Incomes from foreign eco 55932,7 52924,3 45205,2 38470,391 51124,nomic activity Other tax revenues 3870,0 7755,0 5827,2 10051,934 98093,Fund of the Ministry of Nuclear Power Energy 14066,3 14349,0 14061,5 14074,644 0,of the Russian Federa tion Single social tax 365640,0 364593,8 438210,0 442218,25 266500,Total revenues 2417791,8 2586191,2 2742850,4 3426334,2 3326041,* In the table above, unlike the established>

** Without consideration of single social tax.

*** From 2004, for the purpose of compensation for non receipt of revenues by the budgets of constituent en tities of the Russian Federation as a result of abolished sales tax, the federal part of tax revenues under special tax treatments of small businesses, aggregate income tax, is transferred to the budgets of the constituent enti ties of the Russian Federation.

**** Provides for coming into force, since January 1, 2004, of a revised chapter of the Tax Code regulating a special tax treatment as a single agricultural tax.

Section 2.

Monetary and budgetary spheres Table Revenues in Budget Laws and Execution of Federal Budget in 2003ЦBudget 2003 Exe 2004 Exe 2005 Law Budget cuted for Budget cuted for Budget against Law 2003 Law 2004 Law * Budget Law % of GDP % Tax Revenues** 14.2 15.3 13.5 16.2 15.1 112.Profit (income) tax, capital 1.4 4.0 1.1 1.2 1.4 128.gains tax Taxes on products and ser vices; Licensing and incorpora 8.9 8.6 7.1 7.1 6.4 90.tion duties VAT 7.1 6.6 6.5 6.4 6.0 92.excise 1.7 1.9 0.6 0.7 0.5 70.Aggregate income tax *** 0.1 0.1 0.0 0.0 - - Single agricultural tax **** 0.0 0.0 0.0 - - Tax on securities transaction 0.0 0.0 0.0 0.0 - - Payments of utilization of natu 1.4 1.9 1.8 2.6 2.6 141.ral resources Taxes on foreign trade and for 2.5 3.4 3.5 5.1 4.6 133.eign economic operations Other taxes, fees and duties 0.0 0.1 0.0 0.1 1.5 Non tax revenues 1.1 1.3 1.4 1.3 1.2 84.Incomes from public and mu nicipal property and from activ 0.6 0.9 1.1 1.0 0.4 36.ity of public and municipal or ganizations Administrative fees and 0.0 0.0 0.0 0.0 0.0 101.charges Penalties, compensation of 0.0 0.0 0.0 0.0 0.0 104.damage Incomes from foreign eco 0.4 0.4 0.3 0.2 0.3 92.nomic activity Other tax revenues 0.0 0.1 0.0 0.1 0.5 - Fund of the Ministry of Nu clear Power Energy of the 0.1 0.1 0.1 0.1 0.0 0.Russian Federation Single social tax 2.8 2.7 2.9 2.6 1.4 49.Total revenues 18.2 19.5 17.9 20.4 17.8 99.* In the table above, unlike the established>

** Without consideration of single social tax.

**** Provides for coming into force, since January 1, 2004, of a revised chapter of the Tax Code regulating a special tax treatment as a single agricultural tax.

Besides the reduction of the single social tах revenues, the same is true with the value added tax revenues in 2005. In this case, the reduction is caused by introduction on January 1, 2005 of a value added tax collection procedure on the Уcountry of destinationФ RUSSIAN ECONOMY in trends and outlooks basis for hydrocarbons exported to the CIS countries, as well as value added tax exemp tion on the goods exported to the Republic of Byelorussia.

In spite of the fact that in drafting the federal budget law for 2005, the forecasted Urals oil price is decreased down to $28 per barrel as compared to actual annual average price levels in 2004, the volume of payments for utilization of natural resources against GDP in 2005 will remain unchanged as compared to actual level of tax revenues in 2004.

This is due to an increase in the tax rate on oil production.

Eventually, due to changes in the tax law, tax revenues of the federal budget were re duced by RUR251,8 billion in 2005 and by 1.35% of GDP. At the same time, changes in standards for defining taxes by budgetary level enabled the federal budget revenues to grow by RUR102,1 billion or by 0.55% of GDP.

Table Expenditures in Budget Laws and Execution of Federal Budget in 1999Ц2004 (% of GDP) 1999 2000 2001 2002 2003 2004 Bud Bud Bud Bud Bud Bud Draft Exe Exe Exe Exe Exe Exe get get get get get get budg cu cu cu cu cu cu Law Law Law Law Law Law et tion tion tion tion tion tion * * * * * * Law * Public administra tion and local self 0.34 0.31 0.48 0.34 0.53 0.46 0.52 0.52 0.51 0.50 0.50 0.48 0.administration Judicial power 0.12 0.10 0.15 0.11 0.15 0.13 0.17 0.18 0.20 0.19 0.22 0.20 0.International activ 0.91 1.22 1.05 0.15 0.29 0.33 0.43 0.31 0.38 0.24 0.29 0.32 Ц0.ity National defense 2.34 2.40 2.63 2.62 2.77 2.73 2.58 2.72 2.65 2.68 2.69 2.56 2.Law enforcement and national secu 1.28 1.15 1.49 1.44 1.70 1.65 1.52 1.75 1.87 1.87 2.03 1.88 1.rity Fundamental sci entific research 0.29 0.23 0.30 0.24 0.29 0.26 0.27 0.29 0.31 0.31 0.30 0.28 0.and scientific pro gress promotion Industry, power energy and con 0.36 0.35 0.38 0.48 0.58 0.49 0.49 0.97 0.48 0.52 0.44 0.49 0.struction Agriculture and 0.23 0.18 0.22 0.18 0.27 0.26 0.20 0.26 0.23 0.24 0.19 0.21 0.fishery Environmental and natural resources protection, hydro 0.07 0.06 0.07 0.06 0.06 0.05 0.09 0.09 0.08 0.09 0.08 0.08 0.meteorology, mapping and ge odesy Transportation, communication 0.02 0.02 0.03 0.03 0.39 0.41 0.05 0.07 0.04 0.05 0.04 0.04 0.and informatics Market infrastruc 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - ture development Prevention and liquidation of con sequences of 0.18 0.16 0.17 0.13 0.08 0.08 0.08 0.08 0.16 0.18 0.17 0.16 0.emergency situa tions and natural disasters Education 0.52 0.43 0.60 0.52 0.63 0.60 0.71 0.75 0.75 0.75 0.77 0.72 0.Culture, arts and 0.08 0.06 0.09 0.07 0.08 0.07 0.09 0.09 0.11 0.11 0.11 0.10 0.cinematography Mass media 0.05 0.04 0.11 0.08 0.08 0.08 0.09 0.09 0.09 0.09 0.07 0.07 0.Section 2.

Monetary and budgetary spheres 1999 2000 2001 2002 2003 2004 Bud Bud Bud Bud Bud Bud Draft Exe Exe Exe Exe Exe Exe get get get get get get budg cu cu cu cu cu cu Law Law Law Law Law Law et tion tion tion tion tion tion * * * * * * Law * Health care and 0.26 0.21 0.30 0.23 0.29 0.26 0.28 0.29 0.30 0.30 0.31 0.29 0.sport Social policy 1.05 1.02 1.18 0.93 1.39 1.24 3.71 4.46 1.15 1.04 1.05 0.92 0.State debt service 4.17 3.38 4.11 3.53 3.09 2.56 2.65 2.11 2.13 1.66 1.88 1.22 - Building up gov ernment provisions 0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.01 0.16 0.16 0.13 0.12 0.and reserves Financial aid to budgets at other 1.09 1.30 1.29 1.39 2.41 2.54 2.24 2.93 5.45 5.99 5.31 5.39 5.levels Disposing and liquidation of mili tary weapons, including imple 0.04 0.07 0.04 0.05 0.08 0.07 0.09 0.10 0.08 0.08 0.07 0.07 - mentation of inter national agree ments Mobilizing prepa ration of the econ 0.01 0.01 0.01 0.01 0.01 0.01 0.00 0.01 0.00 0.00 0.01 0.01 0.omy Researches and 0.07 0.07 0.06 0.06 0.06 0.08 0.09 0.09 0.06 0.07 0.08 0.07 - use of space Military reform 0.00 0.00 0.00 0.00 0.05 0.06 0.15 0.13 0.11 0.12 0.05 0.04 - Other expendi Ц0.24 Ц0.13 0.09 0.09 Ц0.05 0.07 Ц0.03 0.11 Ц0.05 0.74 1.00 Ц0.01 1.tures Road network 0.00 0.00 0.00 0.00 0.00 0.00 0.50 0.36 0.61 0.34 0.52 0.29 - Targeted budget 1.10 1.17 1.13 1.34 0.18 0.16 0.13 0.14 0.11 0.11 0.09 0.08 3.funds Total expenditures 14.38 13.83 15.98 14.09 15.40 14.67 17.09 18.91 17.97 17.75 17.36 16.07 16.* In comparable>

Expenditures of the federal budget for 2005 are planned to reach RUR3 trillion 47,or 16.3% of GDP with GDP forecast amounting to RUR18 720 billion. Out of this amount, RUR 341,2 billion (11.19% of total expenditures) will constitute the funds allocated to the RF Pension Fund to pay basic labor pensions, RUR254,1 billion will constitute interest costs and RUR2 trillion 793,8 billion, non interest costs (8.33 and 91.66% correspond ingly).

Interest costs the budget 2005 will be reduced by 0.5 percentage points Of GDP (vir tually by 20% in comparable prices) as compared to the budget law of 2004.

Noteworthy are changes in functional>

Х reducing the number of sections and subsections of functional>

Х reflecting expenditures on management and applied scientific research in the corre sponding spheres of activity included into sections and subsections of functional clas sification ;

Х reflecting expenditures on capital investments included into economic>

Х strengthening the items of economic>

It can be noted that under the new functional>

ФApplied scientific research in the field of national defenseФ, more than RUR81 billion or 0.04% of GDP, is one of the most essential subsections of expenditures on national de fense. Expenditures reflected in ФNational security and law enforcementФ section will grow by 0.07 percentage points of GDP or by 1,17 times in comparable prices. Expenditures on УIntergovernmental transfersФ will grow in real terms by 1,06 times, while they will be de creased by 0.3 percentage points of GDP.

Table Comparison of Expenditures Items in the Federal Budget Law for with those of the Federal Budget Law for 2005 in comparable>

2.3. Interbudgetary relations and subnational finances In 2004, there were observed no radical changes in the system of interbugetary rela tions. The structure of tax revenues and tax powers of different levels of authorities re mained on the whole similar to that registered in the preceding year with the exception of several insignificant changes. At the federal level, there continued to function the channels of financial support of regional budgets set up within the last few years - interbudgetary Section 2.

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