INSTITUTE  FOR  THE  ECONOMY   IN  TRANSITION

   A meeting of experts on problems of the investment climate in Russia was held at the headquarters of the Organization for Economic Cooperation and Development (OECD) on May 18, 2000. The meeting took place in the framework of a regular session of the OECD Committee on International Investments and Multinational Enterprises. The International Investments Unit invited IET Deputy Director Dr. S. Sinelnikov-Murylev and IET Board of Directors Member Dr. A. Radygin to participate in the meeting of experts.

   Dr. S. Sinelnikov-Murylev spoke on the main problems faced by the Russian tax system in the context of tasks pertaining to the formation of a favorable tax regime for domestic and foreign investors. The speaker analyzed the structure of the RF tax system and its differences from the observed proportions of tax systems in OECD member countries. There were revealed the most substantial shortcomings of the Russian tax system, among which of a special importance is a low level of tax administration resulting in widespread tax evasion processes and, accordingly, in the unfairness of the tax system, the existence of turnover taxes characterized by the cascade effect, a sharp disparity between the profit tax base and the economic profit of enterprises, etc. The presentation also contained the most principal recommendations concerning the reform of the existing tax system in short outlook and its further prospects. In conclusion there were analyzed the prospects of the RF Tax Code passing the State Duma and the conformity of basic amendments under consideration with the goals of the tax system rationalization.

   Dr. A. Radygin made a presentation on the problems of reorganizing the privatization process concerning the main stages of the Russian privatization in the 1990s and analyzing its most important achievements and flaws.

   In 2000 privatization as an element of the economic reform becomes less and less actual. It concerns both its systemic role (actual in the first half of 1990s), and the budgetary orientation of privatization sales (with varying success dominating the second half of 1990s). This process of the falling role played by privatization in the development of the economy in transition was reflected in particular by the increasing activity of critics of the applied models (not only the Russian model of mass privatization, but also the Czech coupon scheme, once being the best model from the Western viewpoint).

   From the point of view of further systemic transformation privatization apparently lost in importance in comparison to the problems of corporate governance and restructuring of privatized enterprises. From the point of view of increasing budgetary revenues (from 1999 – the financing of the budgetary deficit) the tasks of the rationalization of the use and the effective management of the state property move to the forefront. Finally, the investment component of privatization transactions traditionally remains close to zero. Moreover, many transactions including privatization conditions were due to various reasons subjected to investigations aimed at the return of shares in the state ownership in 1999 and 2000.

   The slowdown of the privatization process is related to many objective and subjective factors. The most important factor is the lacking demand for the majority of “residual” shares on sale (due to the principal lack of interest in these economic objects, or due to already established at these enterprises formal and/or informal poles of corporate control). The objective dominant of continuing privatization sales are the motives of establishing (completing the consolidation) of control typical for the post-privatization period across all transition economies. The unsettled problem with land plots, non-commissioned objects, mobilization capacities, existence of a large number of shares in the state ownership (practically outside control), resulted in additional slowdown of the privatization process and lesser amounts of conducted transactions.

   It shall be also noted that there are two trends slowing down the privatization process in regions: on the one hand, failures to implement privatization decisions taken over last years, on the other hand, regional authorities seek to establish their control over a maximum number of regional enterprises, including those in the federal ownership. The development of the crisis on the financial markets in 1997 and 1998 was an objective negative factor also resulting in deteriorating effectiveness of privatization transactions, which were most important for the budget.

   The most important prerequisite for determining the further aims of privatization is the understanding of the fact that now in Russia there are no objects for any new integral privatization model. Accordingly, it may be only the matter of the forming of a new privatization concept oriented to maximally embrace various aspects (settlement of problems) of the functioning of enterprises, most of them having been incorporated and privatized (completely or partially). It also means that due to highly differentiated massive of available objects during privatization per se very different approaches (or their combinations), the majority of which are already exist in the RF legislation shall be applied.

   The presentation dwelled on the appraisal of the Governmental plans for years 2000 and 2001 and the problems of the systemic legal reform in the area of ownership relations, first of all from the viewpoint of the tasks of ensuring an effective ownership rights protection system in Russia.

	ABOUT IET

The Institute was established in 1990 as an independent non-profit organization.

The founders of the Institute are the Academy of the National Economy under the Government of the Russian Federation, the fund "Center for Social and-Economic Studies" ("CASE") (Poland), and Observatoire Francais Des Conjonctures Economiques (OFCE)(France).

The Institute comprises 10 laboratories incorporated in four principal research departments:

· Macroeconomics Research

· Social and Economic Studies

· Real Sector

· Political Economy

There is a post graduate department at the Institute for full time and correspondence education specializing in "Political Economy" and "Economics and National Economy Management".

The Scientific Council is the supreme governing body of the Institute.

The Director of the Institute is Yegor T. Gaidar

Studies, Evaluation, and Practice

The Institute employs 60 scientists including 11 Doctors of Science and 26 Masters of Science who carry out studies in various fields of the present day economics.

Some of these researchers are:

Doctor of Economics, Professor Ye. T. Gaidar (macroeconomics); 

Doctor of Economics, Academician of the Russian Academy of Science, Professor R. M. Entov (macroeconomics and finance); 

Doctor of Economics, V. A. Mau (political economy); 

Doctor of Economics, S.G. Sinelnikov-Murylev (public finance and tax policy); 

Doctor of Economics, A. V. Uliukaev (social economy); 

Doctor of Economics, Professor Ye. V. Serova (agricultural economics); 

Doctor of Economics, A. D. Radygin (problems of property and corporate management); 

Doctor of Economics, I. A. Rozhdestvenskaya (problems of public health service); 

Doctor of Economics, S. V. Shishkin (problems of education and culture); 

Doctor of History, Professor L. S. Vasilyev (political economy); 

Master of Economics, I. V. Kolosnitsyn (economy of social sphere);

 Master of Economics, S. V. Prikhodko (foreign trade); 

Master of Economics, G. Yu. Trofimov (monetary policy); 

Master of Economics, O. I. Izryadnova (structural problems of Russian economy); 

Master of Economics, S. V. Tsukhlo (development problems of the real sector); 

Master of Economics, Yu. N. Bobylev (industrial economy); 

Master of Economics, V. Ye. Tsapelik (antitrust policy)

   The Scientific and research activity of the IET’s staff goes hand in hand with the basic mission of the Institute – the development of the theoretical foundation and practical implementation of the liberal economic policy, analysis and consultations on these issues.

   From the outset of the economic reforms many researchers of the Institute have held various posts at the executive and legislative branches of the Russian Federation, and were instrumental in implementing the economic policy.

   The Institute’s studies and findings are of practical importance. In the eight years of its activity the Institute has attracted a variety of customers: the Russian Government and Administration of the President, the State Duma and the Council of Federation, numerous federal ministries, including the Ministries of Finance and Economics, RF Central Bank, the administrations of the Subjects of Federation etc. The Institute also enjoys good relations with a number of international organizations – the World Bank, the International Monetary Fund, the Organization of Economic Cooperation and Development. Thus, in the past four years the Institute has provided them with more that 400 scientific reports, analytical memos, proposals, draft documents, expert appraisals, references, reviews, and comments on the current and perspective economic policy.

   In the past few years the Institute has carried out a number of regional study projects in Vologodsky, Kaliningradsky, Nizhegorodsky, Tverskoy, Yaroslavsky and other oblasts of the Russian Federation, and in the Republics of Altai, Dagestan, Kabardino-Balkariya, Komi, and Tyva.

   The Institute renders consulting services to major Russian businesses and financial institutes, including Moscow Interbank Stock Exchange, RAO Norilsk Nickel, JSC "Uralmash", JSC "Exportles", "AGROprodintorg", JSC "Machinostroitelny Zavod" (Electrostal), PO "Polyot" (Omsk), Verkhnesaldinsky Metallurgical Production Association ((Verkhnyay Salda), Corporation "Energiya", JSC "Russky Sakhar), and many others.

	RESEARCH PROJECTS

   In June of 2000 there was completed the second stage of research financed by a US AID grant. The Institute presented the results of its work as reports being both of theoretical and practical importance. In the course of the second stage IET experts prepared amendments to the second section of the Tax Code, elaborated the draft Land Code, carried out fundamental researches.

   At this stage the work was focused on the amendments to the Tax Code, since the RF Government intended to seek their approval by the State Duma aiming to carry out the tax reform in the country. Below are presented synopses of reports prepared in the framework of studies conducted at the second stage of cooperation.

   Tax Administration. Tax legal relations, simultaneously concerning the interests of the state, all its citizens, and economic agents, are among the most difficult and delicate objects of the legal regulation. It may explain the fact that the work on the general section of the Tax Code has been carried out for several years and could have been continued still but for the critical necessity to modify the tax legislation, which became extremely obsolete by the moment of the Tax Code approval. Yet at the moment the Tax Code was approved it was obvious that many of its stipulations need further elaboration. The practical application of the Code confirmed these conclusions. At present, when the most obvious gaps in the regulation of tax relations are eliminated, the further elaboration of the general section of the Tax Code becomes more actual than ever.

   While preparing the new version of the general section of the Tax Code, the authors based on its version currently in force. The main task faced by the authors while elaborating the presented version was to provide for a more feasible balance between the rights of taxpayers and the authority of tax agencies that being the chief prerequisite of an effective functioning of the fiscal system. The search for a reasonable balance between the rights of taxpayers and the authority of tax agencies presupposes the necessity to limit the enforcement measures applied to taxpayers to the boundaries necessary for ensuring of the fact that the state is able to carry out its functions. In this sense the majority of projected changes is aimed at the improvement of the situation of taxpayers.

   At the same time, a number of suggested amendments were aimed to diminish the scope of tax evasion by avoiding tax registration via creation of ephemerid firms, fictitious deals aimed to cash payments transferred through banks, etc. These amendments seem to be unpopular only at the first glance. In reality, a stricter overall tax discipline benefits the law-abiding taxpayers, since at the present scope of tax evasion they are in unequal competition conditions as compared with tax evaders.

  Excises. The authors set the following principles on which the Russian excise taxation system shall be reformed.

   First, to improve the mechanisms of control over proper and timely payment of excises, especially those imposed on tobacco products and alcoholic beverages by introducing the system of guaranteed tax warehouses, transport and export guarantees; second, to set specific excise rates for all excisable goods.

   In this connection the authors proposed to make the following amendments to the text of 28 chapter of the Tax Code:

   To amend the list of excisable goods by excluding the oil pipeline delivery services and including all motor vehicles notwithstanding the motor capacity;

   To introduce new articles setting regimes of tax warehouse, transport and export guarantees;

   To set the cost of an excise stamp at the amount of the tax on a unit of merchandise being stamped;

   To stipulate that 10 per cent of the amount of the tax shall be paid at the purchase of an excise stamp, the rest amount of the tax being payable in terms set for other excisable goods;

   To set differentiated rates of excises on cars depending on the engine horsepower starting with Rub. 0 for cars with up to 90 horsepower engines.

   Taxation of Real Estate. It was noted in the report that the fusion of land rent and taxes on real estate will be a positive factor facilitating a considerable reduction in tax administration costs. A most important stage of the real estate taxation reform is the creation of a unified real estate tax register. An important factor is also the elaboration of methods applicable to the real estate evaluation for the purposes of taxation based on the market value of real estate objects. For instance, it was suggested to introduce the definition of the “unified property complex” and to include governmental bodies in the number of taxpayers.

   Therefore, the authors introduced the following amendments to Chapter 45 of the Tax Code:

   It is set that the title owners of real estate objects shall be the payers of this tax;

   At the regional authorities discretion either separate objects (land plots, houses, buildings, structures), or the complete property complex (a single taxation object) shall be the object of taxation;

   Real estate tax privileges, among them the differentiation of tax rates depending on the taxpayer category, shall be abolished.

   Income and Social Taxes. The report stresses that the basic principles of the concept of the reform of the income tax and payments to extra-budgetary funds are:

   The schedule system of taxation of individuals’ incomes, i.e. the taxation of all incomes (interest, dividends, wages and salaries) at the source, at the same time double taxation of dividends shall be abolished; there shall be set a flat unified scale of income tax; there shall be set a tax exempted minimum (standard exemption) at the amount of Rub. 6,000.00 a year; a considerable reduction of tax refunds and privileges, in particular, the abolition of all exemptions granted on the category principle excluding child tax exemption; the adjustment of the aggregate income tax rate and fees to extra-budgetary funds paid by employers for their employees and by self-employed, the introduction of a personified registration of payments to the state extra-budgetary funds.

   Therefore, the amendments to Chapters 32 and 33 of the Tax Code are:

   Introduction of a flat income tax scale at 12 per cent;

   Elimination of double taxation of dividends by offsetting income tax liabilities against the previously paid profit tax; the difference between the paid profit tax and income tax amounts shall not be refunded;

   Introduction of an indexed tax rate pertaining to interest incomes in order to avoid excessive taxation of such incomes occurring in the situation of inflation;

   Introduction of a large tax exempted minimum (Rub. 6,000.00 a year);

   Elimination of category-based standard exemptions, excluding child tax exemptions, as a result, there shall remain only such standard exemptions as the exemption applicable to all taxpayers (Rub. 6,000.00 a year) and child tax exemptions (Rub. 200 a month);

   Exclusion of foreign currency denominated wages and salaries paid to public sector employees when on an official business trip abroad from the category of “tax exempted income”;

   Introduction of a personified registration of payments to the state extra-budgetary funds;

   Introduction of an adjusted rate of fees to the state extra-budgetary funds for employers making payments for their employees.

   Taxation of Small Businesses. This work contains practical suggestions on the reform of the taxation of small businesses elaborated on the basis of the study “Improving the Taxation of Small Businesses” carried out by the Institute for the Economy in Transition in 1998 through 1999. Alongside with the results of this study recommendations offered by experts in theory and practice of taxation were used while elaborating these suggestions. The suggestions were presented as new versions of Chapter 56 “Taxation under the Simplified Accounting and Reporting System” and Chapter 57 “Relations with the Budget Concerning a Uniform Tax Payment in the Form of Imputed Tax” for the draft Special Part of the Tax Code of the Russian Federation.

   The method of singling out three groups of enterprises (defined as large, small, and mini- businesses for the purposes of this work) is offered. The mini-businesses are the enterprises permitted to operate outside the VAT taxation regime basing on the criteria of sales returns. It is suggested that mini-businesses shall be subjected only to imputed taxation methods (a fixed tax payment over a certain period, license analog differentiated by types of activities, and dependent on a number of physical indicators shown by a concrete enterprise). It is suggested that only general recommendations on the methods applied to the calculation of the imputed tax on mini-businesses shall be elaborated at the federal level, while the concrete details of taxation shall be determined at the discretion of regional and local authorities.

   Enterprises shall be defined as mini-businesses depending on their sales returns. It is recommended that the taxation of financial flows of mini-businesses allowed them to write off their fixed assets at the moment of purchase without deducting interest from the tax base. At the same time, both small and mini-businesses shall have the right to be subjected to the usual tax regime.

   The proposed list of limitations includes the condition limiting the participation of legal entities in the enterprise capital, limitations concerning certain types of operations, and limitations in cases there exist barriers hindering the access to a sector. Such limitations exist in different countries and are aimed to hinder non-eligible taxpayers to use the simplified accounting.

   It shall be noted that allowances and lower tax rates are not the only methods to lighten the tax burden and tax costs of a taxpayer. Both small businesses and tax agencies may prefer the lifting of a number of limitations concerning the deduction of enterprise costs from the tax base, since in this case an allowance is granted simultaneously with simplifying accounting and reducing costs of tax control. At the same time, there will be no considerable decrease in total tax revenues due to the fact that the limitations shall be lifted only for enterprises with small amount of returns (or small added value).

   The introduction of the imputed tax on financial flows permits to considerably simplify the accounting at enterprises. The immediate write-off of expenses for the purchase of fixed assets may be especially important for enterprises lacking the potential for making substantial borrowings (small businesses face the borrowing problem not only in Russia, but in all other countries). At the same time, the immediate write-off of all expenses coupled with non-deductibility of interest is similar to the taxation of enterprises’ net profits in terms of current value (it shall be noted that in this case there is no difference between the tax consequences of the financing from internal funds or at the expense of borrowings).

   The simplified taxation system is based on the cash basis method of accounting, which offers a simple and easily controlled way to calculate tax liabilities on the base of the data entered in the ledger registering receipts and expenditure of funds. Since payment documents include a special entry fixing VAT amounts the taxation is applied to receipts and expenditure of funds less VAT. It does not create additional problems, moreover, the suggested system for registering and calculating tax liabilities does not hinder to collect VAT by the accrual method, since it requires the data entered in invoices.

   A profound flaw of previously offered regimes of taxation of small businesses was the lack of a comprehensive procedure governing the return to the generally accepted system of accounting and taxation. In this case the problems arising while transiting to the generally accepted system include the switching from the cash basis method of accounting to the accrual method and possible existence of liabilities to pay interest, while the switching to the simplified accounting involves the problem of switching from the accrual method to the cash method, the existence of residual value of the amortized assets and liabilities to pay interest on previous borrowings. This work offers some transitional regulations.

   Improving the RF Value Added Tax. The report contains the suggested amendments to the draft Special Section of the RF Tax Code as approved by the State Duma in the first reading. These amendments were elaborated on the basis of results obtained at the first stage of the research.

   It was suggested that the draft Special Section of the RF Tax Code shall be amended as follows.

   Exempting a Taxpayer from VAT. The authors offered changes concerning the criteria of exempting taxpayers from value added tax. The draft Code under the consideration stipulates that only self-employed entrepreneurs shall be relieved of the value added tax basing on the criteria of quarterly returns of the enterprise. The amendments to this article offered by the authors shall eliminate the discrimination of other types of small businesses by stipulating that any economic agent meeting the above mentioned criterion of quarterly returns shall be exempted from VAT independently of its legal or organizational form. From our point of view, such formulation of the criterion permits to integrate regimes of VAT exemptions and the special taxation regime applicable to small businesses more closely.

   Realization of Goods (Works, Services) Exempted from Taxation. Purposing to increase the level of neutrality of the tax and make the tax system more fair on the basis of considerations thoroughly reviewed in the report “The Problems of Improving Value Added Tax in the Russian Federation” the authors proposed to substantially amend the respective chapter of the draft Tax Code aiming to reduce the list of goods and services exempted from VAT. Among the most important amendments the following shall be singled out:

   1) Concerning the exemption of medical products we propose to temporarily maintain only allowances for the realization of prosthesis and orthopedic products and technical means used for rehabilitation of disabled persons (according to the list approved by the RF Government) with a further abolition of this allowance.

   2) We propose to abolish privileges concerning products manufactured and services rendered by organizations of disabled persons.

   3) The draft Tax Code under consideration stipulates that land lease services shall be fully exempted from VAT. According to theoretical considerations and the international experience land lease services shall be exempted from VAT only in case leaseholders is an individual (economic agent) not registered as VAT payer. This point of view is reflected in the amendment we offer.

   4) We offer to exclude from the list of privileges services pertaining to mass transit and sales of precious metal ores for further processing, goods and resources transferred in the framework of production sharing agreements, guarantee repairs of household appliances, restoration and preservation of historical and cultural landmarks.

   5) Taking into account the current active transfer of housing from enterprises and organizations in municipal ownership we propose to include in the list of operations exempted from VAT the value of social, cultural, housing, and public utilities objects transferred to the central and local governments on the gratis basis.

   Tax Exempted Goods Imported to the Customs Territory of the Russian Federation. Similarly to the article regulating tax exemptions for goods (works, services) realized in the country, the authors propose to considerably reduce the list of VAT privileges concerning the goods imported in Russia, at the same time including in the list of privileged goods all goods and services listed in Article 221.

   It was also proposed to stipulate that taxpayers have the right to refuse tax exemptions. From our point of view it will permit to render the tax system more fair.

   Tax Rates. Proceeding from considerations thoroughly reviewed in “The Problems of Improving Value Added Tax in the Russian Federation” the authors propose to abolish the 10 per cent preferential VAT rate the draft Special Section of the Tax Code envisages for certain goods.

   In coordination with the RF Finance Ministry it was proposed to amend the respective article concerning the extension of the list of services subject to taxation at the zero rate. It was first of all related to the services pertaining to international communications as concerns such services rendered outside of the Russian territory, the servicing of foreign vessels in Russian territorial and internal waters, and direct services rendered at Russian airports and in the Russian air space to foreign airplanes.

   Determination of Tax Amount. This article was amended with the purpose to elaborate the calculation of the tax amounts due to collection and to provide that in case the taxpayer’s accounting is lacking or flawed tax agencies shall have the right to determine the tax amount by calculating it on the basis of data pertaining to similar taxpayers.

   Tax Amount Presented by Seller to Buyer. The authors propose to amend this article so that it will envisage that the form of invoices, the order of entries in invoice registration books, purchase and sale registers shall be approved by the Government of the Russian Federation and not by the Revenue Ministry as is stipulated by the draft Tax Code. According to the amendments taxpayers shall issue invoices not only before the day of the shipment of goods (performance of service), but not later than after five days after receiving the payment for goods (services, works) depending on what above mentioned event occurred earlier.

   In coordination with the Government the authors extended the list of mandatory information entered in invoices: it was proposed that in order to improve the control over customs duties payment invoices shall include the indication of the country of origin of goods and the registration number of customs declaration.

   Invoices for Goods (Works, Services) Transferred within Organizations Having Separate Business Units. The authors believe that “non-fiscal” invoices shall be used as an instrument controlling VAT payment, i.e. for the monitoring of the transfer of goods between business units of the taxpaying organization located in different regions. The authors consider “non-fiscal” invoices to be an effective instrument for the sharing of VAT tax revenues between the main office and/or separate business units according to actually produced added value. “Non-fiscal” invoices shall be made for goods, works and services transferred within organizations.

   New article 2351 of Chapter 27 of the draft Tax Code proposed by the authors stipulates the responsibility of Russian taxpayers’ main offices and separate business units for issuing “non-fiscal” invoices with respect to operations carried out between them. These invoices shall be of the same form and of content similar to ordinary invoices with the exception that in stead of the cost of goods, works or services the “non-fiscal” invoices shall present their prime cost and not the selling price for third parties. In other words, in case the main office of a Russian organization transfers some goods to a separate business unit of the same organization the “non-fiscal” invoice shall reflect the prime cost of these goods for the main office. Notwithstanding the fact that such approach results in some inaccuracy in the distribution of the VAT tax base, the authors believe that the discrepancy is small enough to permit to use prime cost indicators in stead of the “selling price” since the use of the latter indicator involves additional calculations and procedures.

   “Non-fiscal” invoices shall not be used with respect to goods, works and services consumed within the organization, such as accounting services rendered by the main office to separate business units. The authors think that such services shall be excluded from the general regime in order to avoid additional calculations and over-complicated tax administration.

   The mechanism of sharing the VAT tax base between the main office and/or separate business units of a Russian organization is set in proposed new article 2351. This mechanism works as follows:

   The main office and each separate business unit of a Russian organization having separate business units calculate its VAT liabilities as if it were an independent VAT payer. However, in formal terms the main office and the separate business units are not separate taxpayers assigned individual taxpayer identification numbers.

   The main office calculate its VAT liabilities by deducting the amounts of VAT paid as the main office purchased goods, works and services from the amount of VAT due to be paid with respect of the realized by it goods, works and services. The main office also shall pay VAT with respect to goods, works and services transferred to it by separate business units of the organization (according to “non-fiscal” invoices) and has the right to deduct VAT payments with respect to goods, works and services transferred to it by the separate business units (also according to “non-fiscal” invoices). Each separate business unit shall calculate its VAT liabilities in the same way.

   Transitional Provisions Applicable during the Enactment of the RF Tax Code Article on Value Added Tax. At the time of the enactment of the Special Section of the RF Tax Code there arises the necessity for transitional provisions with respect to the value added tax aimed to moderate the negative consequences faced by VAT paying enterprises and to regulate some issues of tax administration related to the enactment of some provisions of the tax legislation.

   Among the issues pertaining to the tax administration there is the order of the settlement of VAT debts of enterprises, which shall not be compulsory registered as VAT payers according to the new legislation. For such enterprises there shall be set a deadline for the settlement of their VAT liabilities arisen before the enactment of the Special Section of the Tax Code. This deadline may be set as, for instance, 3 to 4 months after the enactment of the abolishment of the compulsory registration as VAT payers for these enterprises.

   The second problem requiring the introduction of transitional provisions moderating the impact of switching to the determination of the moment tax liabilities arise according to the accrual method. It is possible that tax liabilities of enterprises may increase considerably in the first months after the new regime comes into force. This problem will be faced mostly by taxpayers permitting a gap between issuing an invoice (receipt of goods) and the payment, and the amount of “extra tax burden” is directly proportional to the length of the indicated interval.

   While switching to the accrual method of determining VAT liabilities, enterprises shall also bear liabilities, which have arisen from payments for goods and services shipped/received prior to the enactment of the new legislation. Since this additional tax burden results from the actions of the government taxpayers shall be permitted to moderate the negative financial consequences of these actions. An optional transitional provision with respect to this situation may include the depreciation, or a linear-rate depreciation of previously arisen tax liabilities over the calendar year.

   While discussing the transitional provisions compensating for the losses enterprises suffer due to the introduction of the new tax calculation method on the accrual basis, it shall be noted that a mechanism preventing enterprises to postpone the payment for goods, works and services to the period after the new method is enacted in order to pay the tax in installments over the next calendar year shall be created. This mechanism may include the limitation of the amount of “additional” tax liabilities.

   It shall also be noted that the legislation shall stipulate that enterprises may repay the “additional” tax liabilities over the year on the voluntary basis. At the same time, it shall be stipulated that enterprises voluntary refusing to use the deferral of accrued tax payments shall also refuse from tax credits.

   In order to avoid over-complicated accounting for enterprises implementing their right for the deferral of “additional” tax liabilities, after the enactment of the accrual method the federal authorities may announce a write-off of the enterprises’ debts on these payments on the condition these enterprises would properly repay the deferred amounts over first six months after the new method came in force. This measure will permit to reduce costs of the tax administration; however, it shall not be discussed before applications for the deferral are submitted to the tax agencies.

   The Banking Crisis in Russia and Its Consequences, the Measures Towards Overcoming the Banking Crisis. The Problems of Post-Crisis Adaptation of the Banking System. This study analyzes the behavior of bank balance indicators and the shifts in their structure at the acute phase of the financial and banking crisis (August through December of 1998), and the initial stage of the adaptation of banks to the destabilization of the macroeconomic situation.

   The authors applied methods of group analysis in order to find out the banking services market niches less vulnerable to crises. Banks were grouped according to several indicators of absolute and relative value. A special attention was paid to the analysis of banks purchasing government bonds, the structure of their credit portfolios and foreign currency position prior to the crisis and at its initial stage. The authors analyze the banking crisis from the angle of the amount of non-performing assets and their dynamics. According to the authors’ estimates, the share of non-performing assets in the assets of commercial banks made about 20 per cent as on October 1, 1998. The share of government bonds in the total amount of non-performing assets was 38 per cent (with Sberbank) and 23 per cent (without Sberbank of Russia).

   The study continued the research into the problems of establishing a system ensuring the guaranteeing of deposits. In the course of the study the international experience of organizing such systems and trends of changes in their form were reviewed. There were made calculations of losses suffered by depositors at the acute phase of the crisis of 1998 as a result of the partial compensation carried out by Sberbank and CBR expenditure for this action. Various aspects of the draft law “On Guaranteeing Citizens’ Deposits with Banks” from the viewpoint of the burden on banks and the state budget were analyzed.

   An Analysis of Macroeconomic and Institutional Problems of the Financial Crisis in Russia. Interaction of Financial Indicators and Some Characteristics of the Real Sector. Elaboration of an Action Program to Overcome the Crisis and Facilitate Financial Stabilization. This study was purposed to continue the research of the main causes and factors of the Russian financial crisis started in the framework of the first stage of the joint IET - US AID project and to analyze the specifics of the post-crisis developments in the financial and real sectors of the Russian economy.

   The authors elaborated their first generation stochastic model of the currency crisis eliminating a number of points at issue, and presented the dynamics of key macroeconomic indicators in the period prior and following the crisis in comparison to other developing countries. Besides, they presented an analysis of the situation of the banking sector in 1995 through 1999 at the level of the aggregate balance of the banking system and evaluations of a regression model describing the probability of 26 largest Russian commercial banks facing problems in 1997 through 1998.

   The main section of the report analyzes the developments in the Russian economy in the post-crisis period characterized by enhancing interrelations between the processes observed in the financial and the real sectors of the economy. Ruble devaluation and “freezing” of financial markets not only created incentives for import-replacing growth, but also made Russian commercial banks to work in a closer cooperation with enterprises of the real sector. Growing profitability of domestic exporting enterprises, favorable changes in trade (increasing prices of oil and non-ferrous metals) facilitated a higher liquidity of the real sector, growing share of money payments. As a result of this process the real amounts of current and accrued payment arrears of enterprises diminished and the share of tax payments in money form increased. At the same time, the transition from the spontaneous import-replacing growth to a sustainable growth becomes the most acute problem.

   The study notes that key sectors were recovering over 1999. Regular operations with GKO-OFZ were re-launched in February – March of 1999, while investors demonstrated growing interest in bonds issued in the framework of novation of the RF public internal debt. In 1999 the majority of markets trading in sub-federal securities continued to operate. The stock market was among the most profitable markets in the developing countries and transitional economies. However, its liquidity remained at an extremely low level and by the end-year quotations were at the levels fixed before August 17, 1998. The specifics of the operation of the foreign currency market in 1999 were two trading sessions differing by legal limitations imposed on the operators. This model of the Russian foreign currency market was basing on the assumption that participants of different trading sessions pursued different goals.

   In order to analyze the import-replacing processes observed in the Russian economy in 1999 the authors presented a game model of import replacing on the Russian consumer market basing on the qualitative differentiation of goods and customers’ preferences. Econometric evaluations of factors determining the dynamics of imports and changes in the share of individual product groups on the market after the crisis of 1998 are in agreement with conclusions made on the basis of the analysis of the theoretical game model.

   The results of the analysis of the developments in the real and financial sectors of the Russian economy over the post-crisis period presented in the report demonstrate that the following key trends and problems exist in the economy:

   At the initial stage of the post-crisis period (end-1998) the potential of import-replacing growth of the domestic industry was seriously underestimated;

   The game model of import replacing based on the qualitative differentiation of goods and customers’ preferences demonstrated the specifics of this process in Russia, the conclusions based on the model are not rejected by econometric evaluation of the observed data;

   Over 1999 the moderately tough monetary policy was pursued (deviations were observed only over separate short periods) that permitting to maintain control over inflation and Ruble exchange rate;

   The growth observed in the real sector in 1999 was indicative of serious structural shifts in the economy and a potential trajectory of sustained economic growth in Russia;

   The favorable situation on foreign market, considerable price movements on the internal market and the “freezing” of financial markets facilitated an increase in the profitability of Russian enterprises, growing share of inter-enterprise payments in money form and therefore a decrease in the real burden of payment arrears;

   Higher liquidity and recovery of production in the real sector became the basis for improving budgets at all levels. In 1999 there was observed a primary surplus of the RF federal budget that permitting to carry out repayments of the foreign debt targeted by the law on budget and to finance in full the key budget non-interest entries;

   The financial sphere of the Russian economy did not stabilize until end-1999. The key financial market (government bond market, stock market) demonstrated low liquidity, some trends toward the stabilization and growing interest of investors in these markets became visible only in the last quarter of 1999;

   The Russian banking system has on the whole overcome the crisis developments of the autumn of 1999, although practically all major Russian commercial banks collapsed as a result of the crisis. At the same time, the behavior of surviving banks does not indicate a change in the prevailing strategy of development of Russian commercial banks: the lending to the real sector is still limited;

   The appraisal of the prospects of the economic development in short and medium-term outlook is based on an analysis of variants of Ruble exchange rate dynamics. It shall be stressed that the persistence of low real Ruble exchange rate is, seemingly, an optimal policy for CBR, in this situation the problem of controlling capital flows, in particular, the limitation of capital inflow in the country, gathers in importance.

   The results of econometric evaluations are in agreement with the authors’ hypothesis about the factors behind the development of the currency and banking crisis in Russia. The analysis of factors behind problems encountered by the largest Russian commercial banks clearly demonstrated differences in the sets of factors determining the stability of surviving banks and banks went bankrupt in the autumn of 1998.

   An econometric model of two-session foreign currency market did not reject the hypothesis about possible arbitration between the sessions, although the basic trends in the rate dynamics were determined by different target functions pursued by their major operators.

   Structural Shifts in the Russian Economy. This study researches into transformational structural shifts in the Russian industry. The actuality of this study is determined by the fact that the laws governing the functioning of economies in transition have been studied to a considerably less degree than the characteristics of developed market economies.

   The Russian economy undergo a period of profound structural transformations related to the formation of a principally new economic model. Undoubtedly, the successful continuation of reforms is linked with profound qualitative changes in the sectoral and technological structures of production initiating adequate transformations in the investment and labor potential of the Russian society.

   This study was purposed to thoroughly analyze the changes in the proportions of GDP production and industrial production and to reveal general and specific features of the functioning of the Russian economy in the period of transition.

   An analysis of the dynamics of general economic indicators in Russia over the last decade was the starting point of this study. Basing on the generalization of statistical data and the results of reviewing literature on the question structural shifts in GDP and industrial production were studied.

   This work consists of two sections. The first section researches into the general trends of the development of the real sector of the Russian economy in transition. Beside discussing some economic problems in general it presents some tables of statistical data and graphs illustrating the progress of reforms and impact of certain factors. An analysis of structural shifts in the GDP and industrial production is supplemented with a research into trends of changes in inter-sectoral proportions. The inclusion of inter-sectoral tables permits to make the conclusions more precise and to evaluate the impact of changes in proportions of intermediate and final demand on the dynamics and the structure of production.

   The second section of the work analyzes the transformational structural shifts in the Russian industrial production. The section focuses on the problems of constructing a system of indicators of output volumes, structural shifts and their changes. In terms of the methods applied, this research is close to studies focusing on the problems of price growth and transformations of price proportions. In a transition period the evaluation of the structural changes shall be treated very carefully since this process is characterized by sharp changes in relative prices.

   The construction of a set of indicators permitted to analyze the structural shifts in the industrial production. The study permitted to reveal some principles and to describe a number of new transformational effects.

   Agrarian Reforms in Transitional Economies. The study stresses the fact that the agrarian reforms were a component of economic transformations in all post-socialist countries, the reforms being aimed to liberalize the market, implement land reform, reorganize agrarian structures, privataze I and III spheres of the agro-industrial complex (AIC), create a system of agrarian credit, implement institutional transformations. Although these reforms pursued similar goals and processes observed in all post-socialist countries in the course of the agrarian reform were of the universal nature, the pace of the change differed considerably across countries.

   In terms of the pace of the reform Russia is apparently lagging behind the majority of CEE (Central and East Europe) countries that being determined by a number of economic and socio- psychological factors. Radical agrarian reforms of early 1990s started at a rather unfavorable macroeconomic situation. On the one hand, price liberalization determined the abolition of food subsidizing making 60 to 80 per cent of retail prices of major foodstuffs and up to one third of the national budgetary expenditure. Coupled with falling real household incomes it resulted in a sharp reduction of demand for foods. On the other hand, the growing price disparity became a natural factor of development of the agri-food sector in the situation of price liberalization. As a result, the impact of these two trends on the agriculture resulted in the fact that it lost its floating assets practically in one year. The problem was aggravated due to the lack of available agricultural crediting.

   The authors stress that the third factor behind the downfall in the agrarian sector was underdeveloped market infrastructure. In the situation the liberalized foreign trade the gap between the demand and the supply was filled in by imported foods.

   At last, the agrarian reform in Russia was implemented without the society reaching a consensus with respect to this reform, it was braked due to the mental prejudices accumulated over the years of Soviet rule, and all this hindered the development of entrepreneurship in rural areas.

   However, over the years of reform the agrarian sector underwent profound transformations. The structure of agricultural production changed, the economic behavior of agrarian producers evolved. The liberalization of the economy immediately forced them to react to market signals in spite of the fact that market remained underdeveloped and non-transparent. In the course of the reform the agrarian sector formed a new market infrastructure embracing all key components of the food chain. The role of the state as a direct agent distributing agri-food produce fell dramatically, especially at the federal level. New types of agents appeared on the market. The development of the system of agricultural crediting forced agrarian managers to learn the financial discipline, although this process was interrupted by the crisis of 1998.

   The study stresses the fact that over the decade of transformations there was created a new institutional structure of the sector, which to a certain extent was ready to enter the market. A fast reaction to the Ruble devaluation in 1998 through 1999 demonstrated this readiness. However, the pace of the reform was slowed down by a number of factors including the macroeconomic instability facilitated by the recent financial crisis; the lack of societal consensus concerning the concept of reforms; lagging development of markets and market institutions; the quality of rural population, the size of the country.

   The authors stress that the modern agri-food policy in Russia shall be aimed at the support of the growth, which became perceptible in this sector of economy. The key guidelines of such a policy shall be the following: state-sponsored incentives for expanding supply markets of agricultural produce; the improvement of competitive environment on agricultural markets; better legal guarantees for the operations of agricultural market operators permitting to decrease high risk market operations; support and incentives for investment activity in the agri-food sector; the reform of taxation of the agrarian sector by excluding double taxation of cooperatives, temporary introduction of an integral agricultural tax; the implementation of a program for social development in rural areas, which would include incentives for alternative employment in rural areas; the development of territories.

   In summer of 2000 the “Regional Financial Project” the Institute of Economy in Transition works on in collaboration with British consulting company Panell Kerr Forster with the assistance of Know-how Fund reached its final stage.

   The reports on budgetary legislation and inter-budgetary relations in the Perm Region and the Republic of Altai have been prepared. Alongside with a detailed analysis of the budgetary legislation in these regions, the inter-budgetary relations in the extra-budgetary sphere were studied, the degree of transparency of the regional and Republican budgets and the level of the Parliamentary control over their execution were evaluated. Some urgent measures towards bringing the budgetary legislation of these regions in compliance with the RF Budgetary Code were recommended, among them: to ensure the transition of regional budgets in the Treasury system; to reorganize existing extra-budgetary funds into target budgetary funds, etc.

   The section analyzing tax revenues of the Perm Region and the Republic of Altai evaluates the tax potential of regions and analyzes the adequacy of actual tax revenues (liabilities) to the evaluated tax potential. The tax potential is understood as tax revenues (liabilities) the region could collect with average tax efforts in terms of tax rate differentiation, tax privileges, and the struggle against tax evasion. The level of regional revenues depends also on fiscal efforts of local authorities, what renders these indicators less reliable. In relation to this consideration it becomes necessary to evaluate regional tax potentials independently of authorities’ tax efforts thus facilitating economic policies directed toward the enhancement of incentives to tax collection.

   In order to evaluate the tax potential the modeling of a representative tax system applying regression analysis methods were used. Tax potential models are basing on the hypothesis about an interrelation between the added value produced in the region (gross regional product, GRP) and the tax revenues.

   A considerable part of the project is dedicated to the problems of the distribution of and control over the social expenditure of the budget, and to the problems of the introduction of paid services, to an analysis of the Russian experience in this sphere and the specifics of the situation in these regions. The legislative aspects of increasing the share of paid services in public health and education were examined in detail, and a survey of theoretical issues related to the regulation and subsidizing of urban transport enterprises was made.

   A special section deals with the problems of relations between commercial enterprises and the regional authorities; it determines the approaches to the settlement of post-privatization problems and suitable policies in the area of ownership relations and their reforming, in particular, possible ways to overcome the investment crisis.

   All researches have apparent practical orientation. Some concrete proposals taking into account international practices concerning the structure and the formation of the budget, the settlement of budgetary debts, the improvement of budgetary legislation were made. Besides, there were elaborated guidelines for the optimization of the expenditures of regional budgets for such basic items as housing and public utilities, social safety net for the poor, etc.

   The execution of this project will facilitate a considerable improvement of the fiscal policy in certain regions thus removing large obstacles on the way of the financial reforms in Russia on the whole.

   In the framework of the project on the problems of regional finances two groups of representatives of the Perm Region and the Republic of Altai, and IET experts visited Great Britain in June of 2000.

   The British partners of IET organized meetings and seminars on the project topics attended by officials of the British Treasury, the Audit Commission, the Ministry of Environment, Transport and the Regions, national and local tax offices, experts of largest private auditing firms (Pannel Kerr Forster, Robson Rhodes, PTI). In the course of the visits the regional aspects of taxation in Great Britain; the role played by the Treasury and the Audit Commission in improving the effectiveness of utilization of centralized finances in regions and their relations with local governments; the formation of regional budgets were examined most thoroughly.

   The Russian representatives were most impressed by the information gathered in Scotland, where the local taxation system was studied in detail (in particular, the income tax collection basing on varying rate, corporate profit tax, tax on profits derived from sales of oil and oil products, etc.). Besides, taking into account some resemblance between national natural conditions, the representatives of the Republic of Altai were interested in the information on the development and taxation of mountain tourism, as well as on the support and tax privileges of small businesses.

   In conclusion it shall be noted that the study of managing regional finances in Great Britain certainly deserves a positive appraisal, and some elements of the British system may be successfully introduced in practices of Russian regions.

IET Work ON THE GOVERNMENTAL PROGRAM

   The Government approved program “The Concept of the RF Development until Year 2010” at its meeting taking place on June 29. This program is based on the work carried out by the Center for Strategic Developments headed by G. Gref for six months. The IET experts took an active part in the preparation of its economic and social sections. Thus, the persons responsible for respective subsections of this part of the program were A. Uliukaev (IET) – macroeconomics and the institutional reform, S. Sinelnikov (IET) – tax policy, O. Vyugin (Troika-Dialog) – finance, M. Dmitriev (Carnegie Endowment) – social sphere. Among the experts who prepared proposals and substantiation of measures toward the implementation of the program V. Mau (deregulation, Transportation Ministry reform), A. Radygin (corporate governance), S. Prikhodko (customs policy), Ye. Serova (reforms in the agrarian sector), S. Shishkin (bloc of social problems), S. Drobyshevski (qualitative evaluation), A. Zolotareva, A. Shadrin, I. Dezhina shall be noted. So, the IET experts prepared the Program sections dealing with the tax and customs policies, protection of ownership rights, deregulation of economy, reform of natural monopolies, innovation policy of the state, etc.

   Upon the discussion and adjustment of materials prepared by the Center for Strategic Developments the document was discussed at ministries and agencies in May through June, it shall be noted that in the course of these consultations the text and the concept of the Program did not undergo substantial changes. As a result, the Government approved the internally consistent Program for the intensification of liberal reforms.

   The implementation of the Program’s most important sections concerning the tax reform and the reform of the government began at practically the same time as it was elaborated and adjusted. These measures concerned the approval of the package of tax legislation (the second part of the Tax Code and draft legislation on the organization of the Federation Council) by the Federal Assembly. The concept of draft laws on income, social taxes, VAT, excises will be briefly described below. For a detailed substantiation of the concepts behind the respective legislation see IET web-site http://www.iet.ru/.

THE MEMORANDUM ON THE RESULTS OF THE DISCUSSION OF THE TAX LAWS PACKAGE BY THE STATE DUMA

    By the end of the State Duma’s spring session four chapters of the second (special) section of the Tax Code and the Law on the Enactment of the Special Section of the Tax Code currently including four chapters were approved at the third reading. This concerns the chapters on income tax, social tax, VAT, and excises. The introductory law envisages that the tax on maintenance of housing stock and objects of social and cultural sphere, tax on purchase of motor vehicles, tax on sale of fuels and lubricants will be abolished, and the road user tax rate will be reduced. The budgetary revenues decreasing due to the abolished turnover taxes shall be compensated by a municipal profit tax set by local governments at the rate below 5 per cent.

   On the whole the approved legislation is in compliance with major guidelines of the tax reform formulated by the Government in its Program “The Concept of the RF Development until Year 2010” approved on June 29. The initial draft laws advocated by the Government did not undergo substantial amendments in the process of passing the tax and budgetary committees and of the plenary session of the State Duma. The conceptual goals of the tax reform (a lesser tax burden, simplified and more fair tax system) were achieved to a considerable degree. Deputies and the Government disagreed rather on implementation rates than the necessity of transformations.

   As a result, the draft laws secure the most serious changes in the Russian tax system. Starting from the next year the income taxation will change dramatically. A flat tax scale at the 13 per cent rate shall be introduced. A whole range of unjustified tax privileges will be abolished. Payments to extra-budgetary funds targeted for social aims shall be consolidated in the uniform social tax the collection of which will be controlled by tax agencies. At the same time, the taxation rate on the wage fund will be reduced from 38.5 per cent to 35.6 per cent. A regressive scale of the social tax shall be introduced. The privileges in the sphere of VAT taxation will be regulated and the transition to the common rules of territoriality of VAT payment for trade with CIS countries will be carried out. The tax on maintenance of housing stock and objects of social and cultural sphere, currently collected at the rate of 1.5 per cent of enterprises’ turnover shall be abolished. The maximum rate of the tax on road users will be decreased from 3.5 per cent to 1 per cent, later this tax shall be abolished. Simultaneously, the tax on sales of fuels and lubricants shall be abolished too. Some increase in gasoline excises is envisaged as a compensatory measure.

   1. Income Tax

   According to the chapter of the Tax Code embracing the tax on individuals’ incomes (income tax), which has been approved in the third reading, the tax is set at the uniform 13 per cent rate that being a key element in creating incentives for the legalization of incomes. At the same time, the incomes often used to conceal wages and salaries (in order to avoid payments to extra-budgetary funds) shall be taxed at the higher 35 per cent rate. These incomes include lottery, contest, game, and other promotional event winnings, insurance payments in cases such payments exceed the amount of paid insurance premiums adjusted for inflation (for personal insurance contracts), or the amount of damage of the insured property (for property insurance contracts), interest on bank deposits exceeding ¾ of the current CBR discount rate or 9 per cent annualized interest for deposits denominated in foreign currency, amounts economized as taxpayers borrow funds at a rate below ¾ of the CBR rate.

   The double taxation of dividends is eliminated by offsetting previously paid profit tax amounts against income tax liabilities.

   The non-taxable minimum is considerably increased (up to Rub. 400 a month until the yearly income amount is at Rub. 20,000.00), while the so called child exemption is increased up to Rub. 300 a month.

   A number of social benefits is introduced. For instance, the expenses for education (of the taxpayer or his/her child) in amount up to Rub. 25,000.00 shall be exempted from the taxpayer’s tax base. The similar privilege is set for medical care expenses, excluding expenses for high-priced types of medical care set in a list approved by the Government, exempted from the tax base in actually incurred amounts.

   The amount of property exempt for sales of real estate is set at Rub. 1,000,000.00, the sale of other properties is fixed at Rub. 125,000,00, and for purchase or construction of new housing – at Rub. 600,000.00. At the same time, the total amount of proceeds from the sale of real estate the taxpayer owned for 5 years, and other properties the taxpayer owned for 3 years shall be exempted from taxation.

   2. Uniform Social Tax

   All insurance tariffs pertaining to payments to various state extra-budgetary funds are replaced by the uniform social tax collected by the Revenue Ministry. At the same time, according to the draft law on the enactment of the second section of the Tax Code all agreements on deferments (payment by installments) and restructuring of delayed insurance premiums made between the state extra-budgetary funds and taxpayers remain in force.

   The uniform social tax is divided into three parts: the largest share is due to the Pension Fund, two other parts are due to the Social Insurance Fund and Compulsory Medical Insurance Funds. The State Employment Fund is consolidated with the Federal budget.

   The social tax is regressed according to the following scale: 35.6 per cent at Rub. 100 thousand a year per employee; 20 per cent at Rub. 100 thousand to Rub. 300 thousand a year per employee; 10 per cent at Rub. 300 thousand to Rub. 600 thousand a year per employee; and, at last, 2 per cent at over Rub. 600 thousand. However, according to the draft law on the enactment of the special section of the Tax Code the minimum taxation rate (for incomes over Rub. 600,000.00) makes 5 per cent.

   The following conditions are set for the regression to come into effect: average per employee wage excluding 20 per cent of the employees receiving highest wages shall be above Rub. 50,000.00 a year.

   The tax base and the list of incomes not subjected to the social tax are adjusted to the tax base for the income tax on individuals.

   The approval of the social tax as described above has a number of positive consequences. These consequences are: first, a decrease in the aggregate rate of contributions to social extra-budgetary funds from current 38.5 per cent rate paid by employers and 1 per cent paid by employees to 35.6 per cent for the first schedule of the social tax scale. It shall considerably diminish the total tax burden on the wage fund. While currently the aggregate rate of taxation of the wage fund (including the income tax and contributions to the social extra-budgetary funds) makes from 37.2 per cent to 50 per cent depending on the applied income tax rate, the taxation rate of the wage fund will be reduced to 35.8 per cent according to the draft laws on the income and social taxes.

   The aggregation of social payments into a unified tax permits, first, to abolish separate procedures regulating the registration as a taxpayer and as an insurance premium payer to each extra-budgetary fund yet in force, what made possible registration avoidance. Second, this improves the tax administration level as the extra-budgetary funds are less experienced and have less organizational and technical capacities to control the receipts of compulsory payments as compared to the State Tax Service agencies (this explains the fact that the Compulsory Medical Insurance Fund collects up to 60 per cent of payments in the non-monetary form, the Pension Fund – above 10 per cent), while non-uniform procedures for paying taxes and insurance premiums set by different extra-budgetary funds creates difficulties for taxpayers. Third, the fusion of five coexisting agencies carrying out fiscal functions independently of each other shall considerably reduce administrative costs and improve the taxpayers’ situation.

   Introduction of a regressive social tax entails a number of additional advantages, among them the incentives urging taxpayers to legalize large “shadow” incomes. The fact shall be also taken into account that since the rate of social tax begins to diminish starting from the level exceeding the current average wage, there will be no considerable decrease in the amount of contributions to social funds. Similarly, due to limitations set for applying regression to the social tax, no serious decrease in the profit tax is expected. The regressive social tax scale permits to enhance the fairness of the social security net at the expense of the elimination of excessive taxation of high incomes, which coexists with the limitations for the maximum amount of aid received from the social funds.

   3. Value Added Tax

   An important problem is the territoriality rules governing VAT payment, including that imposed on exports from and imports to CIS countries. Other CIS countries (first of all Ukraine and Byelorussia) put a constant pressure on the Russian Federation aiming to force the RF to introduce the principle of the country of destination in the mutual trade (VAT collected in the importing country instead of the exporting country). The draft law on the enactment of the second section of the Tax Code envisages a gradual transition form collecting VAT on the principle of the country of origin to the principle of the country of destination. This transition will incur some losses of the Russian budget due to an active balance of trade with these states and the badly organized Russian customs (that creating ample opportunities for abuses related to shadow export schemes); however, the transition to this regime is expedient for the unification of the tax regime, what is more, under the current regime the problem of shadow import schemes is no less actual. The most important condition for this shall become the improvement of fiscal borders inside the CIS. Nevertheless, until interstate agreements with CIS countries come into effect the payment of VAT on exports and imports to CIS countries shall continue according to the current regime.

   The draft law regulates the list of VAT privileges. For instance, privileges concerning medical products shall be granted in accordance with the list approved by the Government.

   4. Excises

   As compared with the legislation currently in force, excises underwent changes, which on the whole are in the spirit of the tax reforms initiated by the Government aiming to lessen the tax burden on the economy. For instance, tax rates on alcoholic beverages were indexed below inflation rates estimated for year 2001, what taking into account the specifics of excises shall considerably lighten the tax burden on the payers of excises. Besides, it was decided that the payment of excises on alcoholic beverages shall be shared by their producers and wholesale vendors. As a compromise, the deputies agreed to approve the amendment introducing the regime of tax warehouse providing for a stricter control over the sales of alcoholic beverages as compared to the regulations currently in force, which was submitted by the Union of the Right Wing Forces. There were introduced excises on diesel fuel and motor oils, while gasoline excise rates were increased as compared with the current rates by about three times on the average in the framework of compensating the abolished tax on the sale of fuels and lubricants and the diminished tax on road users collected depending on enterprises’ turnover. While the current rates of excises on cars are set depending on the engine capacity, the draft chapter on excises envisages charges depending on the engine power.

   5. The Draft Law on the Enactment of the Second Section of the RF Tax Code

   Besides the stipulations of this draft law mentioned above and concerning the abolition of some types of taxes being the source of road funds and a temporary rate of social tax on incomes over Rub. 600 thousand a year, the draft law also envisages:

   - The final abolition of the tax on road users and the tax on owners of motor vehicles since January 1, 2003;;

   - The transition to the determination of the volume of realization of products (works, services) with the purpose of VAT collection at the stage invoices are made out (according to the entry method) since January 1, 2002.

	CONFERENCES AND SEMINARS

   In the framework of the research project financed by an USAID grant a seminar on the problem of the banking system restructuring was held at the IET on June 8. Mr. L. Mikhailov, Head of IET Laboratory of Financial Analysis, presented a report. In the beginning Mr. Mikhailov stressed that the systemic banking crisis, which broke out in Russia in 1998, was the first in the country’s transition to market economy. The study of the factors behind the crisis is a necessary condition for creating a sound banking system. After an unprecedented banking boom and upon a considerable number of banks (including regional ones) having gotten access to the international financial market Russia for the first time faced a pressing problem of an unprofitable banking system, and public expense for its reorganization and compensation of bank clients’ losses.

   A strategy aimed to overcome a crisis usually includes the recapitalization and restructuring of the banking system on the whole, or a number of banks, the creation of incentives and possibilities enabling key groups (managers and owners; bank creditors, including depositors; and bank supervision agencies) to monitor banking operations more thoroughly in order to increase the efficiency and responsibility of managers. Later on the author put forward the basic principles of bank restructuring derived from international experience:

   1. Banks shall be restructured fast and thoroughly in order to enable financial markets to perform the function of financial intermediaries again as soon as possible

   2. The burden on taxpayers shall be kept at an absolute minimum

   3. In order to avoid problems of moral risk nature arising when helping a problem bank its shareholders, employees and managers shall share the responsibility for its fate

   4. Bank restructuring shall be transparent and in compliance with objective criteria in order to exclude future trials

   Accordingly, the restructuring embraces two basic lines: financial and operational. The former line is aimed to recover the solvency of the banking system. The latter shall recover the positive flow of revenue.

   Mr. Mikhailov stressed that in formal terms the Russian banking system demonstrated rather high indicators of capital adequacy before the crisis. Currently only few banks have to urgently settle the recapitalization problem, and while CBR is right to believe that the recovery of capital progresses successfully it is harder to agree that it requires a minimum involvement of the state and of budgetary funds. The share of the state in the authorized capital of the banking system increased from 12 to 22 per cent over eighteen months and made Rub. 32 billion out of Rub. 142 billion. The share of the state participation grew by almost 400 per cent at the background of the total increase in authorized capital by 160 per cent. In absolute terms the state investment in bank capitals made over Rub. 25 billion, including less than 3 per cent from the specially created ARCO. The overwhelming part of the total amount was invested in one bank – RF Vneshtorgbank, what resulted in the fact that this bank accumulated almost 70 per cent of all funds invested by the state in banks’ authorized capitals.

   A key problem of overcoming banking crises is the settlement of the problem of non-performing assets. Many countries has created assets managing companies (AMC) of various forms in the framework of overcoming systemic banking crises. The work with non-performing assets, first of all, with credits, presupposes the following procedures:

   1. Verification and mutual recognition of liabilities; their arrangement by tied borrowers, by kinds; write-offs of bad credits.

   2. Coming into possession of collateral for credits.

   3. Searching for borrowers’ assets subject to sale

   4. Working with borrowers in order to find out the reasons behind defaults and possible ways of restructuring

   5. Creating saleable mass of collateral and found assets, servicing their safe keeping and sale (including pre-sale preparation))

   6. Determining shares of profits derived from the sale of the accumulated mass

   7. Creating incentives for correct completion of the procedure taking into account adequate remuneration of employees (successful international practices envisage a bonus system), what ensures the maximum efficiency of the whole procedure.

   The author stressed the point that in fact no approach to the work with assets in need of rehabilitation had been formulated in Russia. The usual practices of bank rehabilitation employed in Russia (transfers of good assets from problem banks to “back up” banks) had been widely and justly criticized; however, nothing had been done to introduce the internationally accepted principles. As the international experience demonstrates, the lack of active management of non-performing assets, as well as the management of remaining good assets of bankrupt banks increases total costs of the systemic restructuring, creates unequal distribution of losses in favor of default borrowers, suppresses incentives to proper servicing of credits.

   The dynamics of a number of banking indicators (overdue credits, assets, revenues and expenses, reserves for credits) demonstrates that since spring of 1999 the intensification of crisis in the banking sector has stopped and by the end-year some positive changes became noticeable. Therefore the issue of state interference in the functioning of the banking sector is now rather related to its reforming in order to make its development sustained, the improvement of the competitive environment, the creation of safety mechanisms, which even if unable to prevent future banking crises will permit to diminish their acuteness and scope, than to urgent measures for its rescue. Without such measures the banking sector will continue to spontaneously overcome the crisis in case the macroeconomic background remains at least at the same “favorable level” as in the previous year; however, the threat of a new collapse will persist.

   In such situation the main problem braking the recovery of the banking system’s stability is the lack of transparent procedures governing the return of money to banks and by banks in the framework of executing the concluded contracts. As a result, money concentrate within the banking sector and in securities issued by the central government. At the same time considerable amounts are deposited in non-resident banks only formally remaining entered in the balance sheets of Russian banks.

   The persisting instability of the banking system is facilitated by the following circumstances forming a vicious circle:

   - mutual non-performance of contracts is flourishing, for banks this problem is aggravated due to their relatively small size as compared to enterprises in the non-banking sector;

   - banks have no levers ensuring payment of credits granted earlier; therefore they are cautious to grant new credits;

   - banks have no resources to repay creditors;

   - creditors, first of all households, hold back on depositing their disposable funds at banks;

   - connections between the banking and real sectors remain weak.

   This circle is a part of a more general problem, i.e. the lack of the national experience to optimize business basing on the public recognition of the fact that the government lives on taxes paid by successful businesses and the government shall help businesses to become successful to support the prosperity of the country.

   Mr. Mikhailov stressed that the measures towards the restructuring of the banking system aimed at building a stable banking system shall include other guidelines alongside with expenses for its recapitalization. The following list includes some basic elements of this approach:

   - tying the reform of the banking system with structural reforms of the real sector;

   - transition to consolidated financial accounting of industrial, financial, banking groups and holdings basing on international accounting standards;

   - state participation in the reform of the banking system shall not be limited to recapitalization measures. In its turn, the recapitalization of problem banks shall be tied to the evaluation of their business prospects in medium-term outlook and restructuring of the debts of banks to their creditors, as well as restructuring of the debts of the real sector to banks;

   - creating incentives for integration of crediting organizations by their amalgamation and merger. However, such measures shall be implemented taking into account a minimal task of supporting the competitive environment in the banking sector, including that on local markets. The achievement of this goal might be facilitated by the introduction of an easier regime governing the increase in authorized capital of sound banks having stock capitals over Euro 1 million, encouragement of specialization on markets of financial services that permitting to make less acute the problem of small crediting organizations unable to provide the complex of services appropriate for the concept of a universal bank, elimination of obstacles hindering banks with foreign capital to increase their capitalization;

   - to organize a company for managing non-performing bank assets (a sanitary bank), to introduce a system of deposit insurance as necessary elements of indirect regulating measures for the banking system;

   - special attention shall be paid to defaulted liabilities of Russian banks (including those with withdrawn licenses) to their foreign partners.

	REPORTS

Dr. Serova Makes a Presentation at the Forum on Agricultural Policies in Non-Member Countries

   An OECD Forum on Agricultural Policies in Non-Member Countries took place in Paris (France) from April 26 through April 28 of 2000. The Forum considered the issues of foreign trade liberalization and the problems of internal support in the agrarian sector of developing and transitional economies. Dr. Ye. Serova presented a report on the situation of the Russian agri-food sector among other authors describing the agrarian policies in China, Estonia, Romania, Slovakia, Latvia, and Croatia.

   Dr. Serova noted that the situation of the agri-food sector in 1999 was determined by the development of the crisis of August of 1998 and unfavorable conditions in previous agricultural year.

   The Ruble devaluation, on the one hand, created good incentives for expanding the market for domestic agricultural producers; however, on the other hand, it caused a downfall of real incomes, what decreased household demand for products elastic to incomes, first of all, for the produce of the livestock sector. The shrinking opportunity window for speculations on the financial market and restrictions on the export of capital to a certain extent enhanced the trend toward to invest in sectors with short investment cycles including the food industry.

   The report reveals two specific trends of the previous year. First, output of the majority of foodstuffs grew, while the overall dynamics of the agriculture persists. Besides the author noted dramatic changes in the agrarian production. First, growing demand improved the financial standing of agricultural producers. Second, growing revenues of the agricultural sector facilitated demand for the means of production and the consumption of mineral fertilizers in the plant-rising sector. Third, the productivity increased in a number of the livestock sectors.

   The author noted that the second perceptible six-month trend was growing household agricultural production. It was related to the fact that falling household incomes, growing unemployment, rampant inflation and the social instability facilitated a decrease in the alternative labor cost.

   The report also reviewed changes in regional policies in the agri-food sector. Some regions pursued the policy of price regulation mainly concerning bread and some other “social” products. Besides, the majority of regions being net exporters of agricultural produce intensified the control over their exports. The author believes that such policy of regional authorities resulted in bread deficit in some grain-importing regions.

	PUBLICATIONS

   A large team of IET scholars dedicated its monograph Problems of the Russian Tax System: Theory, Experience, Reform (Working Papers No. 19R, Moscow, The Institute for the Economy in Transition, 1106 pp., Vol. 1 - 2) to the study of the problems concerning the reforming of the Russian tax system. The irrational tax system alongside with many institutional and macroeconomic problems underlie the present crisis situation of the Russian economy. Therefore it is not by chance that a considerable part of IET studies concerns fiscal policies.

   The monograph’s authors aimed to elaborate recommendations on the improvement of the tax system making it more fair and neutral thus facilitating some increase in the budgetary effectiveness of the tax system. Authors could test by econometric methods a number of hypotheses underlying the recommendations offered for discussion.

   The work under review focuses on some problems of tax administration and the following main blocs of the Russian tax system: profit tax, VAT, income tax, excises, real estate tax, tax on excess profits derived from hydrocarbon raw material extraction, integral agricultural tax, tax on small businesses.

   The sections dealing with these problems contain a theoretical substantiation of respective taxes, discuss international and Russian practices of their application, and offer recommendations on how to reform them. One of the sections describes the modeling dynamics of tax liabilities and evaluation of territorial tax potentials.

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   A team of authors prepared a book entitled Some Actual Problems of the Russian Agricultural Policy (Working Papers No. 20R, Moscow, The Institute for the Economy in Transition, The Analytical Center for Agri-Food Economy, 242 pp.) A central task of agrarian reforms in transition economies is the formation of a new agricultural policy. The first section of the book reviews the evolution of this formation in countries of Central and East Europe (CEE) and in Russia, and describes the stages of development of the new agrarian protectionism. The analysis permits to draw a conclusion that Russia goes through the same stages as other European countries. However, at the background of lagging behind in achieving the macroeconomic stabilization and incomplete agrarian transformation the growing protectionism leads to more negative results than in CEE countries. Besides, a conclusion is drawn about different type and outcomes of agrarian transformations in countries with mainly industrial economies and in countries with mainly agricultural economies.

   The second section reviews the problem of taxation in agriculture. The section analyzes the specifics of taxation of agricultural producers in developed countries and the system existing in Russia. On this basis some recommendations on the improvement of the tax system in this country are made, and the authors insist that so called single agricultural tax shall not be applied.

   The third section aims to analyze the specifics of land laws in the subjects of the Russian Federation. According to the RF Constitution the regulation of land relations shall be shared by the federal and regional authorities. On the other hand, the current federal land laws does not provide a full-scale legal base for regulating land relations. As a result, a number of regions adopts their own land laws, often contradicting the federal law. Regions are grouped by the type of their land law basing on a survey of the RF subjects and several regions with specific land legislation are analyzed in more detail.

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   L. Mikhailov, L. Sycheva, and E. Timofeeva in The Banking Crisis of 1998 in Russia and Its Consequences (Working Papers No. 21R, Moscow, The Institute for the Economy in Transition, 160 pp.) analyze the behavior of banking balance indicators and shifts in their structure over the period of the acute financial and banking crisis (in August through December of 1998), and study the initial phase of banks adapting to the situation of destabilized macroeconomic environment.

   At the initial stage the crisis was revealed first of all through the outflow of depositors and the suspension of current payments. It determined the systemic nature of the crisis, since the banking system lost the ability to perform one of its main functions – to carry out non-cash payments..

   The work aims to reveal the banking niches most and less vulnerable to the crisis by applying methods of group analysis. Banks were grouped according to several indicators of absolute and relative values. The sample embraced 1728 banks.

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   Andrew Dobson’s book The Debt and Investments for Subjects of the Russian Federation (Working Papers No. 22R, Moscow, The Institute for the Economy in Transition, 205 pp.) is addressed first of all to regional authorities of the Russian Federation and shall assist them in taking investment decisions. The investment strategy (priorities, choice of individual projects, financing of investment, how to make sure that actions bring real results) is a most important problem faced by regional, municipal, and local authorities of the Russian Federation at the moment. In case the investment process is not boosted the infrastructure will continue to deteriorate, while the potential of rendering municipal services will shrink catastrophically.

   The work reviews best international practices of administrating the debt and elaborating investment strategies, offers ways and practical tools to use these practices under specific conditions of Russia in transition.

   The author hopes that the book will help Russian regional, municipal, and local administrations to elaborate more integral and successful variants of strategy for administrating investments and debts in order to improve the effectiveness of the use of their limited resources.

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   M. Matovnikov’s study The Functioning of the Russian Banking System in the Situation of Macroeconomic Instability (Working Papers No. 23R, Moscow, The Institute for the Economy in Transition, 220 pp.) consists of two sections. The first section analyzes aims of the state policy concerning the banking sector. The microeconomic approach from the viewpoint of profitability and financial stability dominates in the period of banking crisis; however, the macroeconomic effectiveness is important from the point of view of the economy at large, and state policies shall be first of all oriented towards the improvement of this effectiveness. The section elaborates the approaches to the analysis of the banking system from this viewpoint and presents a general assessment of the effectiveness of the financial mediation in Russia in pre- and post-crisis periods.

   The second section studies the mechanism, via which macroeconomic policies influence the functioning of the banking system, analyzes specific processes originating in transition from one to another type of policy, for instance, the scenarios embracing situations, in which originate banking crises or unsubstantiated booms on financial markets. The understanding of these processes is very important when elaborating an integrated state strategy on the financial market and in the area of monetary policy in order to exploit or moderate objective development trends. Besides, the section reviews the prospects of the development of the Russian banking system taking into account the revealed principles and formulates recommendations in the area of regulation of the banking system and monetary policy in the post-crisis period.

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   Collection of articles The Improvement of Inter-budgetary Relations in Russia (Working Papers No. 24R, Moscow, The Institute for the Economy in Transition, 409 pp.). The problem of the effectiveness of the Russian federalism has recently become especially actual due to a number of reasons. Until recently some decisions taken by the Federal Center shattered internal interrelationships in the Russian Federation. The Center basing its relations with regions on bilateral arrangements introduced asymmetry and inequality in federative relations, while delegating too much authority to regional administrations in exchange for their support in questions of internal policy braked the development of the local government system in Russia.

   All above mentioned problems were reflected in the sphere of inter-budgetary relations between different levels of state authorities. Thus, the imbalance of revenue authority and expenditure liabilities of regional budgets coupled with the principle of individual dealings between the Center and regions resulted in an ineffective distribution of Federal funds, while the asymmetrical sharing of expenditure liabilities and revenue authority between the regional and local administrations in fact facilitated the loss of local governments’ independence for taking financial decisions.

   Many exerts in the area of fiscal federalism note that as a result a factor behind the fact that the Russian Federation is lagging behind other transitional economies in terms of rates of economic development may be the ineffective system of inter-budgetary relations needing a serious reform both at the federal and regional levels.

   The collection presents articles reflecting the views of experts in the sphere of fiscal federalism about possible ways to improve the budgetary system and inter-budgetary relations in the Russian Federation. A. Lavrov, Deputy Head of the Department of Inter-Budgetary Relations of the RF Finance Ministry presented his views on the strategy and general guidelines of the reform of inter-budgetary relations; articles written by a group of IET experts (S. Batibekov, P. Kadochnikov, O. Lugovoi, S. Sinelnikov, I. Trunin) dwell on the problems of determining criteria necessary to facilitate fair distribution of financial aid from the federal budget across regions, while G. Kurlyandski, Head of the Moscow office of the University of Georgia (USA) stated his views on the problems of the building of the Russian budgetary system at the level of RF subjects.

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   There appeared the next issue of IET monthly bulletin Russian Economy in 1999. Trends and Perspectives (# 21, 744 pp.). presenting a broad and detailed analysis of all aspects of the socioeconomic, economic, and political life of the country in 1999. Since the authors expressed the view that the events occurred in August of 1998 determined the development of the Russian economy in 1999, it required the necessity of a brief analysis of the economic situation existing by end-1998. The authors reviewed the possible scenarios of developments in 1999. There were enough grounds to presume an inflationary scenario; however, the results of the previous year had been better than could be expected. The review contains a detailed analysis of causes and factors behind these developments, including:

   - the state and mutual influence of the country’s balance of payments, monetary policy and the real Ruble exchange rate;

   - dynamics of development of individual branches of the real sector as a reaction to, first of all, Ruble depreciation;

   - profitability of production and its impact on changes in GDP revenue formation;

   - decreasing payment arrears and non-monetary payments as a factor determining the financial standing of enterprises;

   - execution of the federal and consolidated budgets across individual indicators;

   - the situation on financial markets;

   - macro- and microeconomic characteristics of the Russian banking system in the context of the financial crisis of 1998;

   - social consequences of the stabilization policy;

   - scenario-based macroeconomic forecast for 2000.

   This list by no means exhausts the topics and problems analyzed in the bulletin. Ýòî äàëåêî íåïîëíûé ïåðå÷åíü òåì è ïðîáëåì, êîòîðûå íàøëè îòðàæåíèå â ðàáîòå.

   The budgetary equilibrium achieved in the country became the main result of 1999. For the first time in the last decade the budget has been executed with primary surplus. The basic components of the macroeconomic stability (tough monetary policy and balanced budget) were ensured. Exactly this macroeconomic result was responsible for a fast stabilization of key financial parameters and improving situation of the real sector of the economy.

   The conclusions made by the authors base on the analysis of a large array of statistical information. The work is extensively illustrated with graphs and diagrams.

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   The IET Web-site presents a summary report of the study Strategies of Russian Towns’ Economic Development conducted in the framework of the TACIS program of EU. The project was carried out by an expert team which comprised both foreign and Russian researchers headed by ERES (UK) with the contribution of Gaulhoffer and Partner (Austria) and IET (Moscow). The task was to comprehend in what way the efforts of both Federal and regional authorities could encourage economic development in the cities sized between 1/4 to 1/2 mil. of population throughout the whole territory of the Russian Federation. Three very different towns within the above mentioned parameters were chosen as the study’s objects: Kaliningrad, Sochi, and Vologda.

   The report contains Recommendations for the Russian authorities of different levels on how to stimulate the development in medium-sized Russian towns, and the Manual on how to prepare economic development strategies for small Russian towns. Besides the report contains the following documents: the strategy of economic development of the town of Kaliningrad for 15 years, the strategy of economic development of the town of Vologda for 15 years, the strategy of economic development of the town of Sochi for 15 years.

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