Васk

Up to list

Unemployment is relatively low (6% estimated for 1997) in comparison to Russia as a whole (9% in 1997) but continues to grow. In addition, there exists hidden unemployment, that is employed people on unpaid leave.

Up to list
 

• Moscow has the right to decide on its own budget priorities without interference from the Russian Federation, within the scope of its responsibilities according to the Russian Constitution and other federal and regional legislation.
• Moscow has ample and direct access to tax revenues. The City is entitled to receive shares of profit taxes, personal income taxes, and indirect sales taxes (VAT). Tax revenues provided around 87% of total budget revenues.
• Moscow suffered less from the decline in GDP than the Russian Federation as a whole. The City’s economy is strongly supported by the growth in the service sector. Income levels are 30% above the rest of the Federation. Moscow is by far the favorite location for foreign investment in Russia.
• Moscow does not allow itself to have budget deficits. The 1995, 1996 and 1997 executed budgets show no deficit. Some deficits, however, occur in the non-budgetary funds, but are very small in relative terms. The deficits are mainly due to overruns in the non-budgetary investment funds which relate to the City’s construction projects.
• Moscow’s government has demonstrated in recent years that it has both the capacity and determination to keep expenditure under control. If actual revenues end up lower than the level of budgeted expenditures, non-protected budget expenditure items are reduced. Revenue checks are carried out quarterly by the Accounting and Control Chamber, which reports to the Mayor and the City Duma (Parliament).
• Debt as a percentage of total revenues in 1996 amounted to less than 5%. In 1997 it reached 24%. The absolute amount of new borrowing needs to be approved by the City Duma every year.
• Total estimated value of non-residential space owned by the City within the central administration region is considerable. In addition, Moscow holds stakes in 182 joint-stock companies and in 101 enterprises with foreign investors.

• The City continues assist weak industrial companies. At year-end 1996, the city borrowed funds to restructure the truck manufacture ZIL. More of such rescue missions could possibly occur in the future, as political decisions may overweight profitability criteria. Funds from the various budgets may get derived to this type of expenditure away from other regular expenditure needs.
• The City continues to receive new responsibilities for which resources should be made available. However funds are not always sufficiently large to cover actual costs. Disputes over this issue between Moscow and the Federation exist but are no major problem so far.

The City is strongly depended on profit tax and personal income tax as sources of revenue. If industrial production continuos to decline and services activities should decelerate, revenues would suffer.

The constitution of the Russian Federation and the Charter of the City of Moscow define the status of the City’s administrative bodies, their operations, interaction, authority and responsibilities. Some areas affecting the City are under joint jurisdiction with the Federation: division of state property; problems of ownership, usage and disposal of land (so far land is leased not sold), water and other natural resources; operation of general principals of taxation, etc.

The main responsibilities of the City are very significant when compared to those of any city in Western Europe. They include: education, health, transport/infrastructural projects and social services including housing. Some of these are shared with the Federation if the service has a wider scope than just providing a local service to Muscovites (specialist hospitals, schools etc., as well as investments in the Moscow metro system). Existing responsibilities are not cast in stone and more of them are expected to be taken on in the future by the City. However new responsibilities do not always mean that corresponding funding will be made available, and if so they are likely to put more pressure on future budgets.

Up to list
 

Moscow has an elected representative and legal body called Duma (Parliament). The Duma consists of 35 deputies and its main areas of responsibility are the following: approval of the City’s legislative acts and of its budget; establishment and repeal of taxes and duties; carrying out the control function. Deputies of the Moscow Duma are organized into seven permanent committees responsible for drafting laws and other legal documents, as well as considering the documents and proposals submitted to the Duma.

The executive body in charge of governing the City is the Mayor’s Office, headed by the Mayor, who is directly elected by Moscow’s citizens. At the last election in 1996, Yuri Luzhkov was elected for the four-year term with an overwhelming majority. Other organs of the executive include certain branch and functional bodies of the City administration and also the prefects (responsible for the administration of the various City districts).

Up to list
 

Gross City Product

Although large industries remain an important component of Moscow’s Gross City Product (“GCP”) the service sector has grown significantly in recent years. The following table sets forth the amount of Moscow’s GCP at current prices by sector for the periods indicated.
 

The decline in manufacturing reflected, among other things, a general economic decline in the Federation, including a significant decline in the volume of production by State Enterprises (See “Employment”) which accounted for 16.7% of total industrial production in 1996 as compared with 79.8% in 1992. Nevertheless, manufacturing in the City accounted for 5% of the industrial and 10% of the consumer goods produced in the Federation in 1996, and continues to employ approximately 19% of the employed labor force in Moscow. Manufacturing is distributed among a large number of enterprises in the City with approximately 837 of the largest enterprises in the City employing an estimated 530 thousand people, or approximately 10.6% of the City’s employed labor force as at 31^st December, 1997.

Construction as a percentage of GCP declined from 13.0% during 1995 to 9.0% during 1996 and to 8.1% during 1997. The decline in construction as a percentage of GCP since 1995 reflects a significant reduction in Federal expenditure on construction projects as well as a decline in the amount of construction by private sector entities.

As at 31^st December 1997, approximately 55% of all investment in construction, including the construction of new buildings and the renovation of existing buildings, was financed by joint development projects among private enterprises and City and Federal entities. City and Federal entities also funded a further 28% of all construction projects while 17% of investment in construction projects came from private companies. As at 31^st December, 1997, approximately 30% of total investment was used to finance construction of industrial buildings and approximately 70% to finance residential and other buildings.

Service sector

Service sector grew from 53.6% of GCP in 1995 to 58.9% of GCP in 1996 and to 60.9% in 1997. The significant growth in this sector in 1995/1996 was primary a result of growth in services related to real estate transaction, including financial and legal services related to those transactions, which increased from 3.5% of GCP in 1995 to 4.8% of GCP in 1996, housing and utilities, which increased from 4.0% to 5.7% over the same period.

The total market services sector, as a percentage of GCP, grew from 49.4% during 1995 to 52.6% during 1996 and to 53.8% during 1997.

Inflation

The levels of consumer and producer prices in the City were close to those in the Russian Federation as a whole in 1995/1996. Estimated annual consumer and producer price indexes in 1997 were about 15% and 9%, correspondingly. Price stabilization in Moscow reflects a corresponding process in Russia.

The following table sets forth the average consumer and producer price indexes for both Moscow and Russia as a whole for the periods indicated.

Fixed investment

Moscow suffered less from the decline in fixed investment than Russian Federation as a whole. That can be explained by the fact that the largest decline in Russia occurred in agriculture (approximately 95% decrease during the last five years). Additionally, the City benefited a lot from the investment boom in construction in the middle nineties.

The following table sets forth the nominal volumes and the real growth rates in fixed investment in both Moscow and Russia as a whole for the periods indicated.

Foreign investment

In 1997, new foreign investment in the non-financial sector in Moscow amounted to $7.1 billion some 1.7 times greater than in 1996. This investment accounted for 67% of new foreign investment in the Russian Federation in 1997. New foreign investment grew significantly in the construction sector as well as services sector, including in the areas of finance, insurance, pension services and market infrastructure.

New foreign direct investment amounted to $3.1 billion in 1997, representing approximately 44% of all new foreign investment. Direct investment was primary directed to the construction sector. Portfolio investment amounted to $294 million in 1997 or approximately 4% of total foreign investment.

In 1996, foreign investment in Moscow amounted to approximately $4.3 billion. This investment has been attracted by relatively high real estate values and rental charges.

Employment

Employment levels in the City remained relatively stable in recent years. As at 1st January 1997, approximately 5 million people (58% of Moscow’s total population) were employed in the City. Approximately 2 million people were employed either directly by the City Administration or directly by enterprises wholly owned and controlled by the City (“State Enterprises”). The private sector employed approximately 3 million people in enterprises in which the City maintains a controlling interest as well as those private enterprises whose services to the City represents the majority of such enterprise’s annual revenue and other private enterprises.

The following table sets forth the total number of people employed in the public and private sector for the years indicated.

In 1997, the average wage in Moscow exceeded the average wage in the Russian Federation as a whole by approximately 40%. The average monthly wage in Moscow in 1997 was approximately 1.4 million rubles (approximately $245 at the average exchange rate). Since 1995, there have been significant differences in growth in real wages between job categories. Salaries in industry, science and education have decreased in real terms whereas salaries in the services sector have increased.

During the last years employment levels have declined in the industrial sectors and have slightly increased in the fields of construction, transport, banking and financial services.

The officially registered rate of unemployment in 1997 was 0.7% (the official unemployment rate in Russia as a whole was 3%). However, the actual rate is higher because a significant number of unemployed persons do not register. In addition, in Moscow there is a certain amount of hidden unemployment (for example those who are formally employed but who are actually not paid). The rate of unemployment in the City, calculated according to International Labor Union methodology, was approximately 7% in 1997.

Privatization

Privatization process Moscow like in Russia as a whole can be divided into two basic stages. During the first stage, between 1992 and 1994, the main objective was to boost private ownership as quickly as practicable with the broad participation of the population. The second stage, from the second part of 1994, has sought to reduce the remaining stakes held by the state, but has shifted its focus to privatizing individual enterprises, increasing privatization proceeds, finding long-term investors and enhancing the governance and management of enterprises.

The State Committee for the Management of State Property (the “GKI”) was formed in 1991, with responsibility for drafting, coordinating and supervising the privatization program and associated legislation. Corresponding organization has been established in Moscow, namely the Moscow Committee on Property (“MKI”). The privatization program was undertaken at local, regional and Federal levels. Local state authorities within the Subjects were risponsible for the privatization of small-scale and medium-sized enterprises that were not in the strategic sectors such as defense, the nuclear industry and aerospace. The GKI was responsible for the privatization of large-scale enterprises and those in stratigic sectors.

The Moscow privatization program comprises the distribution to employees of ownership of interests in or outright sale of various enterprises, real estate interests, housing assets uncompleted construction projects and buildings requiring repair. Privatization procedures have taken various forms, including sales through the voucher scheme, auctions and open investment tenders.

In 1997 the City privatized 175 enterprises (1103 enterprises in 1996) including 29 industrial and 49 commerce enterprises. Moscow received approximately 944 billion rubles in 1997 (681 billion rubles in 1996) that accounted for approximately 32% of the aggregate proceeds from privatization in the subjects of the Russian Federation (excluding the privatization proceeds from sales of the Federal property).

Currently more than 1,000 large scale City enterprises have been privatized. Some joint stock companies incorporated in the privatization process have not completed the distribution of their shares and the City has decided to retain a significant shareholding in some of those companies. The City sold a number of uncompleted construction projects in order to finance new construction and to attract investment to complete such projects.

Approximately 90% of small businesses in the City were privatized in 1992. The results of the privatization of small enterprises have primary been the increase in trade and turnover throughout the City as a result of the greater numbers of trading entities in the City and an improvement in the supply of products and goods.

Up to list

 

Overview

The City of Moscow has a complex budget structure. In addition to the “normal” budget which is approved for expenditures - like education, health, law and order, housing and transport subsidies, social and related capital expenditure - new activities were added to over the past few years, which can not be fitted under the existing classification. Hence the City introduced additional budgets, called non-budgetary funds (“NBFs”), to accommodate these items. There are four such funds: the Non-Budgetary Investment Fund, the Non-Budgetary Funds for local Prefectures, the Hard Currency Fund, and the Road Fund.

The main City budget has to be balanced according to City Law. The Accounting and Control Chamber monitors the budget, carrying out checks quarterly on how revenues and expenditure perform against budget. If there are any revenue short-falls or expense overruns, expenditures are curbed during the budget year. Moscow’s budget is classified into protected and non-protected expense items. Protected items are wages, social aid, free food for schools, etc. If the Accounting and Control Chamber detected any problems, non-protected items are reduced.

The major expenditure items are housing (including running expenditures and energy subsidies) roads, education and health. Housing and infrastructural projects are expected to continue to play a major role in future years and will require substantial amounts of funding.

Revenue and Tax Policy

Tax System

The tax system in the Russian Federation has evolved in recent years as a result of market reform. Under the current tax system of the Federation there are three levels of taxation: Federal taxes, including corporate profit tax, value added tax and personal income tax; regional taxes, including corporate property tax, water fees payable by industrial enterprises and education fees payable out of payroll taxes; and local taxes, including persona; property tax, revenues from certain, land tax, advertisement tax and other taxes and fees. Federal law requires that a specified percentage of revenues from certain Federal taxes collected in the jurisdiction of a Subject are transferred to the relevant Subject. Subjects may grant exemptions to certain classes of taxpayers within their jurisdiction with respect to that portion of Federal taxes transferred to the Subject. Regional tax rates are determined by Federal law but are collected by and constitute revenue to the relevant Subject. Federal law determines what local taxes may be collected and the maximum rates, which can be imposed for such taxes.

The table below sets the allocation between the Federal Budget and the City Budget of various taxes levied on Moscow taxpayers as set forth in the Federal budget for 1997 and the 1997 City Budget as amended to reflect the Federal budget.

Revenue of the City Budget

The City receives revenue from: (I) tax revenues; (ii) non-tax revenues; and (iii) grants from the Federal Government. Certain amount of the City’s gross revenue are allocated to the City’s NBF and, consequently, the City Budget reflects net revenues after contribution to the NBFs. Revenues received by and expenditures of NBFs generally do not pass through the City Budget. See (“Non-Budgetary Funds”). The City does not conduct any independent audit of its revenue receipts, although each revenue receiving department within the City Administration has finance officers to monitor and record such revenues.

The following table sets forth the information regarding revenues of the City Budget for the periods indicated.

Tax revenues of the City Budget increased during the period from 1995 to 1997 from 84.6% to 88.7% of the revenue of the City Budget, correspondingly. In 1995 tax revenues grew by approximately 129% from 12,404 billion rubles in 1994 to 28,366 billion rubles in 1995. This increase was primary due to the effects of inflation during the period as well as the relative improvement in economic condition in Moscow as compared to the Federation as a whole and an increase in the overall tax base. The substantially lower rate of growth (by 26% in nominal terms) in tax revenues in 1996 was due primarily to the low rate of inflation as well as lower levels of tax collection during this period. In 1997 tax revenues increased by 38% mainly due to improvement in tax collection (in view of low inflation).

The relationship between direct (including profit tax, personal income tax, and property tax) and indirect tax revenue has not significantly changed in 1995-1997. However, the tendency of declining of the direct tax share can be recognized during this period. This decrease was primary due to a decrease in profit tax revenues.

The Federal tax on individual income is levied as at progressive rates between 12% and 35% depending on income. There are a series of tax reliefs and exemptions which apply to different categories of individuals. Revenues from income tax have increased by 106% in 1995, by 67% in 1996 and by 55% in 1997. The increase in income tax revenues in 1995 was a result of inflation. During 1996-1997 income tax receipts increased primary due to increases in real wages and salaries. Adjusting to the consumer price inflation rate in corresponding years the real growth in income tax receipts in 1996 and 1997 was approximately 44%.

The rate of VAT is established by Federal law, generally at the rate of 20% of the cost of goods and services, but subject to exemptions reducing the rate to 10% in certain cases and in others exempting goods and services from VAT altogether. The City is permitted to retain 25% of VAT revenues in the City Budget, with the remaining 75% being credited to the Federal Budget. The City’s share of VAT revenues increased in 1995 by125% in 1995, by 51% in 1996 and by 43% in 1997. The increase in VAT over these periods was primary due to the effects of inflation which increased prices. In addition, in 1996 a number of VAT exemptions were abolished.

The rate of property tax is established by Federal law although all corporate property tax revenues are allocated to the Subject. The corporate property tax rate is currently 2% of the full balance sheet value (cost of acquisition less depreciation) of the property of enterprises. In addition, property tax includes taxes on the property of individuals, inherited or granted property and on the value of certain transaction in securities. The principal component of revenue from property tax is the tax on assessed value of the property of enterprises. In 1995, the City’s revenues from property tax increased by 204%, in 1996 by 135% and in 1997 by 51%. Besides the inflation the increase in property tax receipts was the result of the rapid increase in the value of enterprise property between 1995 and 1996.

Federal law imposes a number of payroll taxes which are paid by employers based on the level of their employees’ monthly salaries. These payroll tax revenues are used to fund various Federal non-budget funds such as the Federal Pension Fund and the Federal Social Protection Fund. Nevertheless, the Moscow branch of the Medical Insurance Fund receives payroll tax revenues from City employers equal to 3.4% of employees’ salaries (an additional 0.2% of employees’ salaries is paid to the Federal level of the Medical Insurance Fund). Moreover, the City imposes additional payroll taxes on City employers equal to 1% of employees’ salaries for each of transportation and education. Revenues from the transportation and education payroll taxes increased by 136% in 1995, by 66% in 1996 and by 29% in 1997.

In accordance with Federal law, the City categorizes various fees and levies (payments for the use of natural resources), including land tax, fees for environment permits, payments for water supplies to industrial enterprises and fees to the right to lease non-agricultural land as a source of tax revenue. The City also receives 30% of the revenue from Federal fees for the right to lease Federal non-agricultural land within the City’s jurisdiction. Revenues from these payments increased by 116% in1995, by 69% in 1996 and by 60% in 1997.

The City imposes a tax of 1.5% of total after tax sales revenues of legal entities to finance the support of its housing funds and social and cultural institutions. In accordance with the Budget Procedures Law, this tax is classified under “Other Taxes” in the City Budget. Revenues from this tax have increased by 252% in 1995, by 28% in 1996 and by 38% in 1997. The increase in receipts from this tax reflects increased business activity within the City which had resulted in increased sales volumes for commercial enterprises.

The following table sets out the structure of the total revenue of the City Budget for the periods indicated.

Non-tax revenues are an additional major source of funds. Over the past five years the City has undertaken a large privatization program involving the sales of leases on buildings and land.

In 1997, non-tax revenues accounted for approximately 7% of total revenue of the City (after contributions to the City’s NBFs). Non-tax revenues are primary comprised of lease payments for the use of City property, dividends from City’s interests in various joint stock companies and Privatized City Enterprises, income from the sale of City property and fines. Total non-tax revenues of the City increased by 118% in 1995. However, in 1996 non-tax revenues increased by only 4%, significantly below the rate of inflation. In 1997 non-tax receipts increased by 22%.

Revenues from City property or activities include income from the lease of City property, dividend and other returns from participation in the charter capital of enterprises and rental income. Revenues in this category increased by 257% in 1995, by 128% in 1996. In 1997, the City’s assets generated revenues of 980 billion rubles, a 20% decrease as compared with 1,223 billion rubles in 1996 largely as a result of reduction in lease payment due to the sale by the City of residential and other real estate. Correspondingly, the share of receipts from City property or activities as a portion of total non-tax revenues amounted to 40% in 1996 and only 26% in 1997. The City expects that revenue from lease payments will continue to decline as a result of the continued sale of such real estate.

Income from property sales increased by almost 200% in 1996 and by 31% in 1997. Non-tax revenues in 1997 reflect lower volumes of City property as a result of substantial completion of the City’s privatization program including the fact that the City has completed the sale of a majority of the uncompleted construction sites within Moscow. For 1997 the share of income from property sales as a portion of total non-tax revenue of the City comprised 25%.

In accordance with the City’s intention to standardize its budgetary accounting procedures, the City should receive funds transferred to the City Budget from the Investment NBF for the construction of housing transferred under the Free Housing program as non-tax revenue by the 1997 Budget law. 1997 was the first year in which transfers to the City Budget from the Investment NBF were accounted as a separate line item. The City received 1 trillion rubles in cash form this fund in 1997.

Grants

Pursuant to the Federal Capital Law, the City receives grants from the Federal government to meet a portion of the costs associated with its role as the capital of the Russian Federation. Grants to the City should cover expenditures (in both rubles and foreign currency) with the provision of City services to administrative bodies of the Federal government and embassies of foreign countries and other Subjects located in the City.

The City believes that the amount of grants from the Federation is less than the costs associated with its role as the capital. Consequently, in the past the City has allocated funds received from Federal grants to its general investment programs and has met the costs associated with its role as the capital of the Russian Federation from its tax and non-tax revenues. Revenues from this category decreased by 31% in 1995, increased by 15% in 1996 and decreased by 6% in 1997. Such dynamics represents a continued decrease in the real amount of grants from the Federation after taking account of the effect of inflation. The share of grants as a portion of total City Budget revenues decreased from 6.9% in 1995 to 4.5% in 1997.

Expenditures of the City Budget

Total expenditure from the City Budget increased by 99% in 1995, by 21% in 1996 and by 31% in 1997 (without adjusting for the effects of inflation). Real expenditure increased only in 1997. This growth reflects a real increase in total revenue in 1997, therefore an increase in funds available for expenditure. In 1995 total expenditure was around 26% of GCP, but in 1996 this share decreased up to 19%.

In the City Budget there is a list of “protected” expenditures which on the whole correspond to the similar list in the Federal budget. These include expenditures on salaries, subsidies and social payments, expenditures on food and medicine and debt service (beginning with 1998 budget).

The City’s primary function is to provide basic services to the residents of the City. In 1997, approximately 85% of total expenditure of the City Budget was spent on seven primary activities: housing and community affairs, health and physical culture, education, social services, transport and communication, public order and environmental protection.

These services are provided directly by the City as well as by various enterprises, which are either controlled by the City or independent, at prices subsidized by the City. While the City intends to reduce expenditure on these services where possible, the increasing of age of the City’s population as well as other social concerns will limit its ability to significantly reduce these expenditures in the near future.

The following table sets out the total expenditure of the City Budget for certain categories of expenditure for the period indicated.

Housing and community affairs expenditure represented approximately 37% of total expenditure. This expenditure primary represents the cost of renovation and repair of housing and subsidies for utilities charges. The City subsidizes the cost of utilities such as heat and water, and service such as building maintenance and waste collection to Moscow residents. The City does not subsidize the cost of electricity to Moscow residents, although industrial and commercial consumers pay substantially higher tariffs for electricity than the general population. Expenditure on housing and community affairs in the City Budget increased by 101% in 1995, by 12% in 1996, and by 14% in 1997. However, the share of this expenditure in total expenditure decreased permanently in 1995, 1996 and 1997 and amounted to 47%, 43%, and 37%, respectively.

Healthcare Expenditure

Medical institutions in the City receive approximately 54% of their total funding from the City. Of the remainder, 36% are met out of contributions from the Moscow branch of the Medical Insurance Fund, 4% from fees paid by recipients of medical care and 2% from Federal programs and other sources. Health and physical culture expenditure accounted for 15% of the total expenditure of the City Budget in 1997. Expenditure on health and physical culture grew by 101% in 1995, by 32% in 1996, and by 29% in 1997. The primary component of healthcare expenditure by the City is represented by the costs of providing healthcare to non-working residents of the City who do not contribute the payroll tax to the Medical Insurance Fund. The remainder of the City’s healthcare expenditures is subsidies to the municipal hospitals and other medical institutions within the City as well as growth in capital expenditures in connection with restructuring of the City’s ambulance service and the construction of ambulance substations, polyclinics and hospitals.

Education Expenditure

The share of education expenditure as a portion of total expenditure increased from 12.5% in 1995 to 14.0% in 1997. Expenditure on education in the City Budget grew by 84% in 1995, by 28% in 1996, and by 39% in 1997. The primary component of education expenditure of the City is represented by the costs of overhaul, maintenance and reconstruction of educational institutions in the City as well as capital investment.

Social Policy Expenditure

Expenditure on social services accounted for approximately 7% of the total City Budget expenditure. This expenditure grew by approximately 156% in 1995, by 111% in 1996, and by 35% in 1997. The primary components of social policy expenditure were the provision for children of lower income families and pensioners.

Transport and Communications Expenditure

Expenditure on transport and communication has been relatively stable from 1995 to 1997. The share of this expenditure in total City’s expenditure was about 7%. Expenditure on transport and communication grew by 131% in 1995, by 20% in 1996, and by 34% in 1997. The main component of this expenditure was subsidies paid to the various State Enterprises which operate the Metro and ground transport system. The City made also capital expenditures primary to purchase buses, bus station facilities and construction of telephone switching facilities.

Public Order Expenditures

The City’s share of expenditure on the Chief Directorate of Internal Affairs as well as air, water and railway transport police departments rose by 45% in 1995, by 91% in 1996 and by approximately 24% in 1997. The significant increase in 1996 was due to the increased focus which the City authorities have placed on combating crimes in urban Moscow. The share of public order expenditure in the total City’s expenditure amounted to 2.6% in 1997.

Agriculture and Fishery

This category of expenditure primarily relates to the provision of food resources. In 1993 the City formed a food fund which provided loans to food wholesalers in order to regulate the price of certain staple foodstuffs (initially bread and grain). In the same way the Federal authorities also attempted to regulate prices by provision of loans to food wholesalers. Also included in this line item are expenses in relation to land-tenure measures, veterinary services and related capital investments. Expenditures in this category increased 6 times in 1995, decreased by 75% in 1996, and increased again by 183% in 1997.

The following table sets out the structure of the total expenditure of the City Budget for the periods indicated.

Budgets and actual results can vary widely. Significant differentials were in the 1996 City Budget. The main reason appears to be an extremely optimistic projection of corporate tax revenues. Profit tax receipts accounted for only 66% of initially planed revenues. Another reason was that in 1996 Moscow (like other territorial governments in Russia) was bedeviled by arrears in tax revenues, mainly from companies. Expectations had to be scaled back during the course of 1996 and several expenditure items had to be cut. The largest reductions were made in energy subsidies, housing repair, and healthcare capital expenditure. With these cuts the City expected to end the year in balance. Total revenue of the City Budget was fulfilled by 85%. Consequently, total expenditure was 83% of the planed expenditure.

The 1995 approved and actual budgets saw more moderate deviations. Tax revenues fell also short of budgeted amounts, triggering cuts in social benefits and capital expenditure on science as well as industry, energy and construction. Nevertheless, expenditures on housing and community affairs have dramatically exceeded planned level. In 1997, tax revenue was by 33% higher than planned. In fact, almost all budget items were based on actual revenues in 1996. Consequently, good budget execution in 1997 was primary due to poor budget execution in 1996.

Comparing budgets to actual performance, we can see that the mechanism to balance budgets is being applied when necessary. It also provides evidence that the City monitors budget revenue and expenditure developments and takes timely action.

Moscow has shown no City Budget deficit in recent years. Moreover, the surplus of the City Budget has steadily increased. This reflects the effective City policy of monitoring revenues during the fiscal year and the ability of taking timely actions to reduce non-protected budget revenues.

The following table sets forth the planned revenues and expenditures according to the 1998 City Budget law.

Expenditure is planned at 48.1 billion rubles. Approximately one third of expenditure, or approximately 15.1 billion rubles, is accounted for by housing and community affairs. The share of expenditure on housing and community affairs as a portion of total expenditure in 1998 will decrease by 15.6% compared to 1997. Expenditure on healthcare accounts for 7.3 billion rubles, or 15.2% of total expenditure. Expenditure on education is planned at 6.6 billion rubles, or 13.6% of total expenditure. The shares of healthcare and education expenditures will not change a lot in 1998 compared to 1997. Fixed investment constitutes around 2.4 billion rubles, or 5.1% of total City Budget expenditure.

For the first time, the 1998 City Budget contains an expenditure item on debt service. Debt service accounts for 3.8 billion rubles, or 8% of total expenditure, including interest expenditure on municipal bonds of 2.0 billion rubles, or 4.3% of total expenditure.

The 1998 City Budget law envisages a zero budget deficit.

Non-Budgetary Funds

The City operates several non-budgetary funds which are accounted for outside the City Budget. Funds in each NBF are used to finance ordinary expenditure, investment programs and to provide funding for capital expenditure in connection with the development of the City’s infrastructure that cannot otherwise be financed out of the current City Budget. NBFs are administered by the relevant City departments or Administrative Regions. NBFs are not separate legal entities and, in accordance with their function as accounts for funds to be applied towards specific City purposes, generally have incurred debt. Any funding required by the relevant City department or Administrative Region to meet expenditures in excess of revenue available to them from he relevant NBF must be otherwise met out of the resources of the City department or Administrative Region. The City allocates tax and other revenues to its NBFs from its gross revenues and, therefore, such funds are not included as revenue in the City.

The administration and activities of the City’s NBF are overseen by the Mayor’s Office and are subject to the annual review and approval of the City Duma. The principal NBFs of the City are the Housing and Construction Investment NBF (the “Investment NBF”), the Administrative Regions NBF, the Hard Currency NBF, and the Road NBF.

The table below sets forth the revenue and expenditure of the City’s principal NBFs for the periods indicated.

Non-Budgetary Investment Fund: The main function of the fund is the construction of municipal housing. The main source of the Fund is non-tax revenue from the sale of property/housing, sale of land leases and the sale of housing bonds. The fund is an attempt by the City to develop profitable commercial and non-commercial real estate for sale, and use the profits to finance social housing projects.

Hard Currency Fund: The Hard Currency fund is used to purchase equipment and materials in hard currency as well as for financing capital investment in certain sectors of the City’s economy. The Fund was also used to service foreign currency debt (related to the purchase of an equity stake in ZIL) and to back up guarantees. The revenues of the fund stem from foreign currency tax revenues as well as earnings from exports.

Administrative Regions Fund: The fund is used to support smaller housing and infrastructural projects administered by the prefects. Revenues of the Fund originate from allocations from enterprises and organization registered in Moscow.

Road Fund: The road fund is mainly financed through taxes specially allocated to the Road Fund. In 1997 the major sources of expenditure by the Road Fund was the reconstruction of the Moscow ring road. Reconstruction of the Moscow ring road is expected to be completed in 1998.

Indebtedness

The Ministry of Finance of Russian Federation (“Ministry of Finance”) is the Federal body supervising the borrowing activities of the Subjects. The primary function of the Ministry of Finance is to review and register issues of debt by Subjects and to ensure that all applicable requirements with respect to such borrowings are fulfilled. Currently, decisions as to borrowings are within the jurisdiction of the Subjects.

Russia’s current administration has in general encouraged economically stronger regions to access debt markets directly, as an alternative to relying on funding from the federal budget. On the other hand, the Ministry of Finance’s existing rules for international debt issuance will probably not allow a large number of economically weaker regions to issue foreign-currency debt for the time being. These rules set specific financial ceilings to debt issuance (limits for new borrowings and debt service as a percentage of the budget), and also demand international credit ratings. The Ministry of Finance demanded regions wishing to issue international debt to comply with the following financial criteria:
 

• annual borrowings cannot exceed 30% of annual revenues; and
• debt service (including interest repayments) cannot exceed 15% of annual revenues.

The absolute amount of debt of the City amounted to 8.1 million new rubles (approximately $1.4 million) at December 31, 1997, which is equivalent to 15% of the City’s revenues in 1997. The ratio is expected t climb during 1998 due to the additions of the proposed foreign debt issue and further domestic issues. Moscow’s debt/revenue ratio for the City Budget could rise to an estimated maximum of 25%.

The table below sets forth information with respect to the City indebtedness for the period indicated.

The Committee of Municipal Debt, Securities and Capital Market Development of the City Government of Moscow (the “Municipal Debt Committee”) was established in July 1996.

The City, through the Municipal Debt Committee and with the arrangement of the Federal authorities, is embarking upon the extensive debt financing program which is intended to provide funds for the City to invest, by way of loans, in certain selected investment projects.

Debt securities issued by the Municipal Debt Committee include eurobonds, municipal and savings bonds.

In 1997, the City issued $500 million in respect of international bond issues (eurobonds due 2000). The issue price of the notes was 99.8% of their principal amount with a 9.5% semi-annually coupon payments.

The municipal and savings bonds are primarily short-term in maturity with municipal bonds having a maturity of between approximately six months to one year and savings bonds having a maturity of approximately one-year. As at 31^st December 1997, the Municipal Debt Committee had placed 1.7 billion new rubles of six-month municipal bonds. As at 31^st December 1997, the Municipal Debt Committee had placed 164.6 billion new rubles.

Bank credits

The foreign currency borrowings of the City from banks were about $211 million. These borrowings consist primarily of a $200 million aggregate principal amount syndicated loan facility acquired in 1997 for a period of three years. The City also has an outstanding loan in the amount of $11.25 million relating to a %33.05 million line of credit extended by Unexim Bank relating to the debts of AMO ZIL. The outstanding amount under this line of credit is repayable in December 1998.

In addition, the City financed the activities of the Development Complex. The Development Complex is responsible for debt incurred to fund a portion of the City’s housing construction program amounting to approximately 1.6 billion rubles as at December 1997. The debt was incurred because proceeds from sales of flats by the Investment NBF in new housing blocks have been insufficient to meet the costs of construction. Loans from banks are applied to finance construction of housing blocks in which flats are subsequently sol in the free market and are secured by the relevant housing block under construction.

Housing bonds

In September 1996 the Moscow Committee for Municipal Housing issued 9.9 million new rubles of municipal housing bonds. These bonds are zero-coupon securities with a 10-year maturity and may be redeemed either for cash or municipal housing. The par value of the municipal housing bonds is determined with reference to the market value of 0.1 square meters of floor space. The municipal housing bonds may only be sold to private individuals.

Guarantees

The City Government guarantees loans from Russian and foreign banks to various City contractors to finance projects which the City considers to be a priority and in which the City has an interest. As at 31^st December 1997, guarantees amounted to an estimated 2.8 billion rubles, or 5% of Moscow’s total revenues.

City Assets

The City owns several large companies, mainly utilities (Mosvodokanal, Moscow Metro). In addition, Moscow has equity states in a range of enterprises (182 joint-stock companies and 101 enterprises with foreign investments). In case of default of any of these companies, creditors will have a claim solely against the company. The City considers itself liable only if it has guaranteed such debt. However, it is possible that for various reasons the City of Moscow could at times step in and rescue a company it owns which is in trouble. No debt numbers are available for City enterprises. For municipal companies (water, transport) debt tends to be in the form of payable to trade creditors.

Property holding

Moscow has approximately 66.9 million square meters of non-residential real estate plus an additional 14 million square meters of non-residential space in residential blocks. Of that total 37.6% is owned by the Federation, 52% is owned by the City and 10.4% is owned by private entities and joint ventures. The Moscow State Property Committee acts as the owner and landlord of City property and the Property Fund acts as the seller thereof.

Shares in joint ventures and privatized companies

In the Russian Bistro restaurant franchise, and its ownership interest in certain hotels including the Metropol Hotel (30%), the National Hotel (24%) and the Olympic Penta Hotel (51%).

On average the interest of the City in the charter capital of joint-stock companies and enterprises with foreign investment interests is approximately 14%. The City participates in the management of these companies.

1998 City Investment Program

In connection with the insufficiency of budgetary resources that can be allotted by the city for the accomplishment of investment tasks, budgetary resources must be allotted mostly for the development of the social sphere and provision of municipal housing.

Construction of non-expensive housing for the social use must be carried out with even distribution of new housing by districts. Implementation of the program of liquidation of many-family apartments must begin. In order to make housing affordable to Muscovites with medium-level incomes, measures aimed at reducing costs of construction of municipal housing through placement of orders and investment projects on a competitive basis must be implemented. A system of borrowing by the city, mortgage lending and purpose-oriented savings accounts must be envisaged.
 

• Construction and reconstruction of housing - 3.4 million square meters
• Subsidies to people waiting for new hosing to enable them built or purchase housing - 281 million rubles
• 14 children’s pre-school institutions for 2895 children
• 20 schools and 5 primary-education institutions for 14575 children
• 7 polyclinics for 3680 visits per shift
• 4 first-aid stations
• 2 automatic telephone exchanges, 2 militia stations, 1 fire station.

Taking into account a significant reduction of centralized capital investments provided to the city from the federal budget to develop Moscow’s metro, construction of the line in Butovo must be continued and measures ensuring operation of other incomplete lines without accidents must be implemented. Operation of the new-generation Yauza train must begin in 1998. The transition to magnetic tickets and cards for payment of Metro fares must be ensured.

Construction of bus complexes in Chertanovo and Zelenograd and trolley-bus complexes in Novo-Kosino and Mitino must continue. The terminus on the Sirenevy Boulevard must be built. The number of modern parking lots must increase to accommodate 80,000 cars, while the number of gas stations must increase to 100-120.

Up to list

 

Only Moscow now uses this approach. However, it should be mentioned that other regions and cities, though not separately but together with Moscow, have already begun to use this approach within a common, single system.

The essence of this approach is that a single mechanism is created. This mechanism, on one hand, constantly attracts funds and ensures the issuer’s constant presence on the bond market, and, on the other hand, ensures constant selection, preparation and implementation of new investment projects.

Investment Sources

At present, this organizational and technical complex - Moscow’s investment and borrowing system - makes it possible for the city:
 

• to float several types of loans simultaneously;
• to attract the needed amount of funds from both domestic and international markets;
• to use attracted funds for financing the city’s investment projects;
• to prepare and implement investment projects;
• to ensure control over the purpose-oriented use and return of funds.

The principles of the investment and borrowing system, which makes it possible to maintain volumes of borrowing for Moscow’s investment purposes, were approved by Resolution of the Moscow City Government # 691 of August 13, 1996, On the System of Borrowing by the City of Moscow.

At present, Moscow floats the following three loans:
 

• the city’s (internal) loan worth 6 billion rubles (in denominated rubles);
• the city’s savings loan worth 2 billion rubles;
• the city’s foreign currency loan worth $500 million.

Organizational Principles

The main organizational principles of the system of borrowing include the following:

First, the reliance on the administration bodies of the Moscow city government. At the same time, professional securities market participants and banks are attracted to perform functions associated with the placement of securities, depository services, etc.

Second, the presence of a single coordination body represented by the Committee for Municipal Loans, which is responsible for organizational work associated with the floating of loans.

Third, the existence of an infrastructure encompassing trading systems, depository accounting system and other elements ensuring the floating and servicing of loans, which conform to uniform standards of quality of financial services provided to investors.

Investment Policy

An effective investment policy providing for a considered system of investments in investment projects is a major precondition for successful implementation of the idea of municipal borrowing.

The development strategy for Moscow’s investment and borrowing system provides for the following three major phases.

At the initial phase (1997), projects that are already well-prepared and have project cycles not longer than 1 - 1.5 years were selected (and are now implemented) for financing. This was done in order to reduce risks and project preparation time and to use ready project implementation systems.

The strategy of the second phase (1998 - 1999), which was included in the plan for 1998, provides for a more complex investment policy that will be based on a special system of preparation and implementation of investment projects. An opportunity to go over from “pointed” investments to complex projects will evolve during this phase. Simultaneously, an emphasis will be placed on the rapid development of infrastructure for investment activities, improvement of the investment climate and resuscitation and normalization of Moscow’s stock market.

During the third phase (2000 and the following years), the amount of funds for financing investment projects raised through floating loans will be 1.5 times the amount of investments provided from the budget. Complex social and economic development programs will become major objects of investment. The investment portfolio will include projects that have low profitability or no profitability at all but have much social importance.

Investment Allocation

The Committee for Municipal Loans and Attraction of Investment Resources has included the following in its plan for financing city projects and attraction of investment resources in 1998: 3,636.2 million rubles that will be used to finance commercial investment projects will be received from investment projects financed in 1997, while 3274.3 million rubles will be raised through floating new loans (In all, 6,910.5 million rubles will be used for the purpose). The Moscow Investment and Economic Council’s commissions have already approved the use of 3,432 million rubles for project financing.

Thus, the return of funds will become a major source of project financing in 1998. It will be comparable only to investments financed through new borrowing.

According to the plan, 2736.5 million rubles will be used for servicing and redemption of the loan. Of this amount, 233.5 million rubles will be used for servicing (interest payment) loans floated in 1997, 1938 million rubles will be used for servicing loans floated in 1998 and 1465 million rubles will be used for loan redemption.

The incoming of investment resources, including those received from the placement of the city’s bonds, will amount to 20860.3 million rubles in 1998. This amount will include the following:
 

• Placement of the city’s discount bonds - up to 2200.0 million rubles;
• Placement of the city’s coupon bonds - up to 3450.0 million rubles;
• Placement of the city’s savings bonds - up to 1000.0 million rubles;
• Placement of the city’s hard currency denominated bonds - up to 7350.0 million rubles;

Other sources - up to 6860.3 million rubles, including 3636.2 million rubles in revenues from investment projects.

Guarantees given by the Moscow city government to secure third persons’ liabilities on behalf of the city of Moscow are debts of the city of Moscow (Law on Debts of the City of Moscow) which are backed by assets and property of Moscow.

Decisions to give guarantees are taken by Moscow’s Mayor or the Moscow City government and have the form of an order.

The maximum amount of the city’s debts, as well as the maximum amounts to be allotted for debt servicing in a particular financial year, must be approved by the Moscow City Duma and fixed in Moscow’s budget for that financial year and in balance-sheets of the city’s extra-budgetary funds. The maximum amount of Moscow’s debts must not exceed 15% of revenues of the Moscow City government and the city’s extra-budgetary funds in a corresponding financial year (Borrowed funds are excluded). Debt agreements that can be implemented only if the maximum amount of the debt approved by the Law on Moscow’s Budget is increased can be concluded only after respective amendments are introduced in the Law on Moscow’s Budget.

In the spring of 1997, the Russian government submitted a draft of the Law on Peculiarities of the Issuance and Circulation of Government and Municipal Securities to the State Duma for consideration. According to this draft, when approving their budgets, subjects of the Russian Federation must approve the following amounts: the amount of local borrowing, the amount of funds to be used for financing budget deficit and the amount of funds to be used for debt servicing. The following restrictions are imposed:
 

• The amount of funds to be used for financing budget deficit must not exceed 30% of budget revenues;
• The amount of funds to be used for debt servicing must not exceed 15% of budget revenues.

The Moscow city government’s agreement on the provision of guarantees must specify a liability it covers and how Moscow’s expenses will be reimbursed if Moscow repays liabilities of the loan receiver. In accordance with the current civil legislation, the Moscow city government’s decisions to provide guarantees and guarantee agreements must specify the following in addition to other obligatory provisions:
 

• A liability covered by the guarantee;
• Name of an agency or an official entrusted with issuing guarantees on behalf of the Moscow city government;
• Guarantee amount;
• The debtor’s liability to the Moscow city government arising in the event of the debtor’s failure to meet liabilities covered by the guarantee;
• Form of securing guarantees given on behalf of third persons by the Moscow city government.

A uniform system of accounting for and registration of debts is currently in effect in Moscow. It provides for control over the observance of the maximum amounts of domestic and foreign debts and maximum amounts to be allotted for their repayment and servicing. Accounting for and control over the status of Moscow’s debts is carried out by the Financial Department, which maintains the Single Register of Moscow’s Debts.

The Register of Moscow’s Debts contains information about the volume and forms of debts, dates of debt creation, terms and conditions of debt repayment and the status of debts as of particular dates, as well as other information defined by the Moscow city government. Information about debts and their repayment must be entered into the Single Register within three days from the moment of a transaction. The information contained in the Single Register is a basis for a report on all liabilities of the city of Moscow. This report is submitted to the Moscow City Duma together with other documents concerning the execution of Moscow’s budget for a corresponding financial year.

The information contained in the Single Register is confidential. The Moscow city government defines the volume and character of information to be published. Every year, no later than in May, the Moscow City government publishes information about the status of Moscow’s debts in the previous financial year. This report must specify the total amount of domestic and foreign debts.

The maximum amount of borrowing by the city of Moscow in 1998 is fixed at 14 billion rubles, including 10.4 billion rubles to be borrowed in order to finance the city’s investment program (Planned budget allocations for financing this program amount to 2.4 billion rubles). The Department of the Economic Policy of the City of Moscow is ordered to define a list of projects and expenditures that will be financed through borrowing.