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The following item is a Memorandum of Economic and Financial Stabilization Policies of the government of Russia, which describes the policies that Russia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Russia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Memorandum of the Government of the Russian Federation
and the Central Bank of the Russian Federation
on Economic and Financial Stabilization Policies


July 16, 1998

Table 1    Supplement

I. Introduction

1. Since late last year, Russia's financial markets have been in turmoil. Despite the adjustment policies implemented by the new government since it was appointed earlier this year, market confidence has not been restored, and capital flows have remained volatile. Against this background the government has recognized the need for a further strengthening of policies. The government's strategy in addressing the present emergency contains three main elements: (i) a radical tightening of the federal budget, which intends to solve once and for all persistent fiscal imbalances; (ii) the bolstering of international reserves of the Central Bank of Russia (CBR) through the access to substantial foreign financing; and (iii) the lengthening of debt maturity to reduce the vulnerability arising from the short-term structure of domestic debt. In addition, the current emergency underscores the need to accelerate structural reform with an emphasis on resolving the nonpayments problem that has dogged Russia since 1992. This statement describes the policy package underpinning the government's strategy to restore market confidence. The package builds on the policies outlined in the Statement of Economic Policies for 1998 under Russia's existing EFF arrangement, to which the government remains fully committed.

2. The financial market turmoil has been caused by several factors. Weaknesses in public finances have, over time, made Russia increasingly vulnerable to changes in financial market sentiment, in particular as the continuing fiscal deficits have led to a rapid build-up of short-term government debt. A succession of destabilizing events in late 1997 and early 1998 contributed to the recent financial market pressures, including the ripple effects of the financial crisis in Asia, the drop in world commodity prices, the change in government, and social unrest.

3. Financial instability has altered the macroeconomic outlook for the near term. Real GDP declined by 0.2 percent in January-May 1998, when compared with the same period in 1997, and is likely to decline on an annual basis this year. Even with the restoration of market confidence, it is expected that some negative impact on economic growth will be felt also in 1999.


II. Policy Implementation Under The Eff-Supported Program

4. The information necessary to assess all the outcomes vis--vis the end-June performance criteria set under the Extended Arrangement is not yet available. Preliminary data indicates that the target for net domestic assets of the monetary authority and those for credit to the enlarged government and federal government were met. The target for the net international reserves of the monetary authorities was missed. Preliminary information also indicates that the federal government revenue target was missed.

5. Further progress has been made in implementing the broad structural reform agenda for 1998. In particular, we have established electricity dispatching guidelines, raised the wholesale price of gas for household use, reduced the list of strategic enterprises that are excluded from privatization, and introduced consolidated reporting for large banks. Despite our efforts, however, reforms did not advance as fast as we had envisaged. Cash collection in electricity and gas could not be raised to the targeted end-June level, and a further move of electricity tariffs for households toward cost recovery levels has only been effected in some regions. We will vigorously pursue implementation of these measures in the coming weeks.


III. The Enhanced Economic Policy Package

6. The economic policy package contains a number of up-front actions with a focus on correcting the fiscal situation and accelerating structural reforms, thus restoring financial market confidence and the prospects for sustained economic growth. At the same time, the government views current problems as providing an opportunity to gather political consensus for the economic policies needed and signal political commitment to deal with long-standing problems.

7. To this end, the president has issued a decree on July 16, 1998 instructing the government to prepare a 1999 budget with a deficit consistent with this program. In addition, this decree instructed the government to restore balance to the Pension Fund from August 1, 1998 and reach agreement with the Duma on Part I of the Tax Code. Finally, the decree stipulated that the government and the CBR will submit a proposal for transferring the function of fiscal agent vis--vis the Fund from the Ministry of Finance to the CBR.

8. During the sessions of the chambers of the federal parliament on July 15-18, the government will attempt to ensure passage of key tax legislation, including a 5 percent sales tax, having 20 percent of the personal income tax revenue accrue to the federal government, and other components of the anti-crisis package. In any case, the government will ensure passage of these measures by appropriate legal acts prior to Executive Board consideration of this program. Finally, during the session the government will amend Part I of the Tax Code as described below.

9. On July 17, 1998, the president will make an address on the details of the 1999 budget. This address will act as the basis for many of the key fiscal reforms that are included in the government's policy package. In addition to a number of measures to be implemented ahead of the Board meeting, the address will instruct the government to introduce a number of further measures for the remainder of 1998 that, because of their nature, will take some time to put in place.

A. Fiscal Policy

10. The enhanced policy package includes measures to ensure the achievement of the existing EFF fiscal targets for 1998 and to radically improve the fiscal situation in 1999. Much of the fiscal adjustment in 1999 will be carried out through improvements in revenue collection. A key element of improving revenue collection will be full establishment of the large tax payer units, with increased monitoring and control of large taxpayers' payment of their current tax liabilities. Collection of arrears from large tax debtors--based on the strategy adopted under the EFF program--will continue to be an important elements of the revenue collection strategy. Furthermore, the policies will build on the ongoing efforts to establish firm expenditure control through comprehensive treasury management and the cutting of federal expenditure commitments. To ensure the necessary political support for a 1999 budget comprising the revenue and expenditure parameters outlined below, we will make every effort to have the Duma pass the budget in the first reading by end-October 1998, incorporating the broad parameters of the budget as outlined in the presidential address on the budget.

Debt conversion

11. An important element of the government's comprehensive strategy to address the present emergency is to lengthen the maturity of its domestic debt. As part of this strategy the Ministry of Finance will offer holders of GKOs the opportunity to exchange them for foreign currency Eurobonds with long maturities at market rates. No GKO holder will be required to participate in this exchange and all GKOs held to maturity will be honored in full. The exchange has two main objectives: (i) to reduce the interest burden of the budget in 1998 and 1999; and (ii) by reducing short-term debt, to sharply reduce Russia's exposure to shifts in market sentiment. In addition, to underpin this strategy, the government will undertake a policy of not issuing new debt of maturity of less than one year.

Fiscal targets

12. In 1999, the federal government budget will target a primary surplus of at least
Rub 84 billion, or about 3 percent of GDP, compared with a small primary deficit expected in 1998. On the strength of the tax policy measures put into effect as part of the program, revenue will increase to Rub 376 billion (13 percent of GDP). Consistent with these targets, noninterest expenditures will be further reduced to Rub 292 billion (10 percent of GDP). With a gradual but marked reduction in interest rates, interest expenditures in 1999 are expected to amount to Rub 164 billion (3/4 percent of GDP), implying an overall deficit of Rub 80 billion (3/4 percent of GDP). Based on financial market developments in the next few months, the interest cost projection for 1999 will be re assessed as part of the ninth quarterly review. In the event that projected interest costs exceed Rub 164 billion, the federal government will take compensating revenue measures to preserve the overall deficit target.

13. On a cash basis, federal revenue collection is foreseen to increase by 1/2 percent of GDP in 1998 compared with 1997. In 1999, the bulk of the fiscal adjustment will be on the revenue side with a concerted effort in both tax policy and tax administration geared toward raising 1999 revenue by 2 percent of GDP. At the same time, the government's program of expenditure reduction is expected to reduce budgetary commitments by a sizeable amount in 1998. A further reduction is expected in 1999 as some of the expenditure measures initiated in 1998 take their full effect next year. This will be partly effected through better targeting of the federal transfers to regions through the Federal Fund for Financial Support of Member Territories, allowing the fund to be cut from 14 to 11 percent of tax revenues excluding customs duties.

Revenue measures

14. The strategy to improve the revenue situation is two-fold. First, strong measures will be taken against large tax debtors in order to signal the government's commitment to enforce the law and make taxpayers meet their statutory obligations. Second, the government will put into effect key revenue measures that will increase statutory tax liabilities while streamlining collections by removing exemptions and tax preferences.

15. To improve tax administration, Part I of the Tax Code will be signed into law by July 20, 1998 and the government will commit to amending some key deficiencies in the current draft by January 1, 1999. This amended version will give the tax authorities broad powers to collect both tax principal and interest and fines without recourse to the court system, eliminate deferrals for tax payers with arrears from the budget, and permit the tax authorities to issue broad instructions to enforce tax laws without having detailed tax administration provisions codified in the law. The amended Code will also contain improvements in tax administration such as making tax agents who fail to transfer withheld taxes to the budget subject to criminal liabilities and giving the tax authorities the ability to issue liens on the bank accounts of tax delinquents. With regard to the current draft law, provisions on offsets, and the articles capping interest will be stricken from the Tax Code in the third reading of the law on July 15, 1998. The government will continue to pursue an expeditious passage of Part II of the Tax Code. The detailed provisions of Part II of the Code will be discussed in the context of the next review. In addition, the government will ensure that the Code is consistent with legislation on production sharing arrangements.

16. In order to further streamline tax administration, by July 17, 1998, the Federal Agency for Foreign Currency and Export Control and the Tax Police will be made subordinate to the Minister Head of the STS. By September 1, 1998, the government will take a decision concerning the appropriate responsibilities of the Federal Agency for Foreign Currency and Export Control with a view to eliminate duplicate functions and redundant activities.

17. On tax policy several changes in the tax legislation will be adopted by appropriate legislation by July 20, 1998, including: (i) unifying the VAT rates at 20 percent except for bread, milk and baby food for which VAT will remain at 10 percent; (ii) moving the VAT to an accruals basis; (iii) removing tax exemptions for closed territories; (iv) shifting 20 percent of the personal income tax revenue from the regional to the federal budget; (v) simplifying the personal income tax rate structure; (vi) moving gas excises to an accrual basis; (vii) introducing a 5 percent sales tax at the subnational level; (viii) increasing rates for the land tax; and (ix) eliminating VAT and profit tax exemptions and preferences. In addition to these legal acts, the government will: (i) establish a uniform, temporary (until end-1999) 3 percent import duty surcharge; (ii) increase the tax on gambling; (iii) eliminate existing tax deferrals; and (iv) widen the excise tax on gas (at the current rate) to existing gas supply networks which are not part of RAO Gazprom; specifically Norilskgazprom, Yakutskgazprom, and Sakhalinmorneftegaz. Moreover, the government will make best efforts to make the Duma pass the expansion of the personal income tax base to include all forms of wage and nonwage income.

Budget funds

18. In order to achieve the necessary adjustment in federal expenditures and meet the 1999 fiscal targets, the presidential address of July 17, 1998 on the principles of the 1999 budget will instruct the government to remove the earmarked status of the various budget funds (including the Road Fund and Customs System Development Fund), with their revenue sources accruing to the general revenue of the federal budget. The expenditures of the Road Fund will be closely scrutinized with a view to reducing their outlays by 30 percent in 1999. The decree will instruct the government to bring the expenditures of the Road Fund under federal treasury control and its expenditure commitments will be subject to the same contract preapproval as other budget spending.

Expenditure management and control

19. To control cash spending and improve expenditure management the government will adopt, by executive order, a revised timetable by July 17, 1998 to complete moving all federal agencies fully into the federal treasury by January 1, 1999. This will include all budget recipients of the Ministry of Defense, the operations of all the earmarked budget funds (including the Road Fund and Customs System Development Fund), and all foreign exchange accounts of the STS and State Customs Committee. The government will, by September 1, 1998, close all off-budget accounts that are of a budgetary nature and have their flows intermediated by the federal treasury.

20. In addition to the control over cash spending afforded by the federal treasury, the Ministry of Finance will implement a system of contract preregistration in order to get control over budget commitments. A law will be submitted by September 1, 1998 allowing the federal treasury to pre-approve contracts that are to be financed from federal budget funds. This law specifies that contracts that are not registered will not be the legal obligation of the federal government, and that only contracts within the financial ceilings established by the federal budget will be registered. In addition, the federal treasury will put in place a reporting system allowing the amount of registered contracts to be monitored against budget limits on an ongoing basis.


B. Enlarged Government Reforms

21. Recognizing the serious fiscal situation of the enlarged government, the policy package aims to improve significantly the financial situation of the Pension Fund, to bring the Employment Fund under budgetary, STS, and treasury control and to give the federal government greater leverage over regional budgets (particularly those that rely heavily on federal budget resources).

Pension Fund

22. In order to restore the solvency of the Pension Fund, the government will recalculate individual-coefficient-related benefits on the basis of the average wage in the second quarter of 1998. To this end, a resolution setting the average wage for pension calculation purposes will be issued by July 17, 1998. Any indexation of pension benefits will be applied only to the minimum pension until all pension arrears are cleared. In the event of a serious deterioration in Pension Fund revenues (including from any reduction in contribution or collection rates), a new average wage for calculation of individual coefficients will be introduced with a view to containing Pension Fund imbalances. Further efforts will be made to reduce the administrative costs of the Pension Fund and legal acts will be adopted by July 17, 1998, to expand the tax base for employee contributions to include both wage and nonwage incomes. In order to ensure budget organizations comply with their obligations to the Pension Fund, from September 1, 1998, the federal treasury will transfer directly to the Pension Fund federal allocations for payroll tax payments on budgetary employees' wages.

Extrabudgetary funds

23. The budget address of July 17, 1998 will instruct the government to ensure the reduction of the payroll tax earmarked for the Social Insurance Fund to 4.9 percent (from 5.4 percent) and, at the same time, the government will elaborate measures to reduce the overall expenditures of the Social Insurance Fund by 25 percent in 1999. This will involve eliminating all expenditures that are not directly related to providing insurance related benefits (e.g., sick leave or maternity benefits). Any resulting surplus in the Social Insurance Fund will be transferred to the Pension Fund for payment of pension benefits. The presidential address on the principles of the 1999 budget of July 17, 1998 will instruct the government to bring the Employment Fund on budget as of January 1, 1999 and to have its revenues collected by the STS. The Employment Fund will be subjected to treasury control from October 1, 1998.

Intergovernmental relations

24. Given the critical financial position of the subnational budgets, the government will intensify its efforts to improve budget management, cut expenditures, and reduce tax and budget arrears at the regional level. The Ministry of Finance has already signed agreements with most of the member territories that are scheduled to repay budgetary loans made to clear local wage arrears. These agreements allow the territorial budgets to not repay these debts provided they ban the use of offsets, have no wage arrears, conduct a survey of budget-funded institutions (including a comprehensive civil service census), reduce budgetary obligations and the number of budget financed entities, bring local government pay scales in line with those of the federal government, bring tariffs for housing and utilities in line with federal standards, establish energy consumption limits for budget-financed entities, and clear child benefit arrears. Regions that do not comply with these conditions will have their allocations from the Federal Fund for Financial Support of Member Territories reduced by the size of the scheduled loan repayment.

25. The presidential address of July 17, 1998 will instruct the government to submit a draft 1999 budget law to the Duma which gives the federal budget greater control over the activities of financially dependent regional budgets. From January 1, 1999 the Ministry of Finance will require, as a condition for regions to receive full transfers from the Federal Fund for Financial Support of Member Territories or loans and grants from the federal budget, a commitment by the regional governments to meet the following conditions: (i) to maintain accounts payable to infrastructure monopolies of 45 days or less of sales equivalent (in regard of services provided after September 30, 1998) and to reduce their stock of arrears; (ii) to eliminate all regional government wage and payroll tax arrears; (iii) to prohibit all noncash arrangements in regional budgets; (iv) to meet federal targets for recovery on housing and communal services; and (v) to apply conditions (i) to (iv) in respect of regional government transfers, grants, or loans to local governments. The address will also require regions to intermediate all their expenditure and revenue through the federal treasury by January 1, 2000.

26. The budget address of July 17, 1998 will require regions that are highly dependent on the federal budget (i.e., regions where federal transfers exceed 50 percent of all revenues) to be subject to a stricter financial control regime. Specifically, as a condition for these transfers, the regions will voluntarily sign agreements to have all of their government expenditure administered by the federal treasury and their budget parameters reported to the Ministry of Finance for approval.

27. A presidential decree will be issued by September 1, 1998, calling for further increases in cost recovery on housing and communal services by 15 percentage points per year until full recovery is reached, from 50 percent foreseen by end-1998.

28. The government will strengthen sovereign and sub-national debt monitoring to significantly improve the coordination and management of external and domestic debt, at both federal and sub-national levels, within the Ministry of Finance. To this end, the government will initiate an integrated public debt monitoring system in the Ministry of Finance by January 1, 1999, which shall cover both sovereign and sub-national debt, including all obligations of federal and sub-national authorities. In particular, the debt management system will cover all public debt including budget arrears, guarantees, and other public contingent liabilities or conditional obligations. Any necessary decision to implement this expanded definition of public debt will be adopted before September 1, 1998.


C. Monetary and Exchange Rate Policy

29. Monetary and exchange rate policies will remain unchanged. The monetary authorities will gear interest rate policy toward maintaining a stable exchange rate and increasing the level of international reserves. The CBR will refrain from offsetting the domestic liquidity impact of sales of foreign exchange that it might undertake to support the exchange rate. At the same time, the CBR will refrain from intervening in the treasury bill market to influence rates and will adjust the interest rates on its own operations in line with market conditions.

30. Recent developments have introduced an increased level of uncertainty and volatility with regard to the demand for ruble assets. Projections for monetary aggregates for the third and fourth quarters of 1998 have, therefore, been retained for the time being. Targets for the monetary authorities' net credit to the federal and enlarged government, net domestic assets, and net international reserves have, however, been revised to incorporate the increased use of ruble counterpart of NIR resources for end-September and end-December 1998. The revised targets are as indicated in the attached Table 1. The CBR will, however, monitor liquidity conditions carefully and will tighten domestic credit as necessary to achieve the programmed build-up of the international reserves of the monetary authorities. The CBR will continue to consult with Fund staff in the event of large changes in international reserves. Monetary projections will be reassessed in the context of the next review of the program on the basis of market developments following implementation of the stabilization package.

D. Structural Reforms

31. The economic policy package contains a number of up-front actions to address the problems of nonpayments and in-kind settlements. It also contains actions to bolster the structural agenda for the remainder of 1998, including measures designed to make the labor markets function more effectively, further the privatization process, strengthen shareholder rights, improve transparency in the operations of infrastructure monopolies, and streamline the banking system.

Measures to address the nonpayments problem

32. The following actions will be undertaken in order to reduce and, subsequently, eliminate noncash payments in infrastructure monopoly sectors: (i) by July 17, 1998, a legal act will be adopted requiring that VAT be calculated and collected on an accrual basis; (ii) by July 17, 1998, the government will pass a resolution simplifying the procedures for termination or limitation of electricity, heat, and gas supplies to organizations and consumers in the event of failure to pay for fuel and energy resources supplied; (iii) by August 1, 1998, the government will pass a resolution giving the right to the suppliers of products and services to apply these procedures in (ii) above to any consumer/purchaser that accumulates accounts payable of 45 days or more of sales equivalent for purchases made after July 1, 1998 and/or fails to comply with a mutually agreed schedule for the liquidation of arrears relating to products and services provided prior to July 1, 1998; and (iv) by August 1, 1998, the Federal Energy Commission will develop and announce a new procedure governing settlements by nonbudget sector organizations for purchases of gas, heat and electricity. This procedure will be applicable effective September 1, 1998 to any such organization that has accounts payable of 30 days or more of sales equivalent. It would give the right to any participant in the supply chain to require that such an organization establish and maintain unconditional letters of credit to cover payments for 30 days worth of purchases. This requirement will remain in effect for a reasonable time period (to be defined within the procedure). These measures will be supported by the introduction of limits on the accounts payable for local governments to public utilities as a condition for receiving federal transfers. The government will implement additional measures, as necessary, to ensure that cash collection by end-December 1998 will reach 60 percent of revenue for the railways, 30 percent for electricity and 20 percent for domestic sales of gas.

33. The role of banks in enforcing tax collection through the banking system needs to be revamped as the current system has negatively affected financial intermediation through the banking system. By September 1, 1998, the government will establish a plan to remove tax administration functions from the banking system. In particular, legislation will be passed defining procedures for the STS to issue liens on any bank account and resources held in the banking system in line with international practice. A major goal of this plan will be to eliminate the use of settlement accounts by the tax authorities by January 1, 1999. In line with international practice, the STS will begin seizure of real assets or initiate bankruptcy proceedings against any enterprise for which there has been a lien on bank accounts for 60 days or more.

34. The government will implement measures to eliminate the bias in the bankruptcy law toward reorganization rather than liquidation of enterprises. To this end, by September 1, 1998, a draft law will be submitted to the Duma in the form of amendments to: (i) the Bankruptcy Law that eliminate court discretion in overruling the creditors' decision to liquidate the debtor enterprise; and (ii) the Civil Code to strengthen the rights of secured creditors. In addition, the government will take all necessary steps to implement the new laws on enforcement of court judgements, including by fully staffing the court officers' corps by December 31, 1998.

Labor market reform

35. Constraints on dissolving labor contracts have hampered the efficient restructuring of enterprises and the allocation of labor in the economy. By November 1, 1998, the government will submit a new draft Labor Code that will bring the labor laws in compliance with the requirements of a market economy. The Code will establish a realistic minimum of social guarantees, enhance the role of individual labor agreements, including a more simplified procedure for dissolving individual labor agreements (such as excluding the need for consent of trade unions and the requirement of finding alternative employment) and expand the ability to enter into fixed term and multiple work contracts. The Code will also contain provisions which ensure that social partnership be targeted toward forming and implementing collective agreements at the level of individual enterprises. It will also encourage the establishment of efficient institutions which will ensure the implementation of individual and collective agreements, settlement of collective disputes, and compliance with the requirements of labor legislation.

Private sector development

36. The 1998-99 privatization program will expand and accelerate significantly the process of transparent and competitive privatization of Russian enterprises. This will be accomplished through case-by-case privatization of the largest enterprises in accordance with Government Resolutions 363 and 564 of 1997, and through the significant reduction in the number of firms currently denoted as "strategic" and their privatization. To this end, a special policy statement will be issued and made public by July 17, 1998, by the Chairman of the government of the Russian Federation announcing these initiatives. The policy statement will be published widely in the international media.

37. By September 1, 1998, the Ministry of State Property and the State Property Fund will hold competitive bids and select 9 to 11 independent financial advisors among experienced and internationally reputable investment institutions. These advisors will be engaged to: (i) carry out pre-sale preparation of the largest Russian enterprises, including but not limited to those denoted in the draft 1998 Privatization Program; and (ii) place shares of these enterprises on world markets in accordance with Government Resolutions 363 and 564 of 1997. These advisors will, inter alia, audit and appraise the enterprises; suggest the likely market price of the transaction; recommend any required organizational/managerial restructuring prior to sale; work out the optimal privatization scheme; and ensure that bids be welcomed from all physical and legal persons and foreign investors eligible under Russian law.

38. As a high priority, the government will take steps to protect shareholders' rights. By September 30, 1998, the government will submit legislation to the State Duma that amends the Federal Law on Joint-Stock Companies stipulating, in particular, protection of minority shareholders rights, including protection from transfer of assets to parent (affiliate) companies by enhancing the penalties for violating investors' rights. To improve disclosure of information of enterprises, by September 1, 1998, the Federal Securities Commission of Russia will adopt and implement a resolution on the procedure governing compilation and submission by issuers of securities of quarterly reports, with a special focus on information disclosure by enterprises quoted on public exchanges. By July 17, 1998, the government will adopt and initiate implementation of the State Program for the Protection of Shareholder Rights, which will spell out further key tasks and measures to be undertaken in 1998 and 1999. The government will also ensure that the Federal Securities Commission will be provided sufficient resources to enforce investors' rights. This will be achieved by assigning a share of fee revenue from licensing of securities' market participants to the Federal Securities Commission.

39. The State Antimonopoly Committee, in collaboration with other federal organs, will implement by September 30, 1998 new measures to remove administrative and policy-induced barriers at the federal and sub-federal levels to the free movement of goods and services throughout the Russian Federation. The measures will, inter alia, provide for stronger administrative sanctions than presently exist. To introduce at the federal and sub-federal levels new rule-based, streamlined business licensing procedures and fee structures, the Law on Licensing will be enacted by December 31, 1998.

Infrastructure monopolies

40. By July 17, 1998, a government resolution will be issued requiring that, starting with the accounts for 1998, the consolidated IAS financial accounts of RAO Gazprom, RAO UES Rossii, and Transneft be audited in accordance with international auditing standards by independent qualified auditors and published annually by June 30 of the following year. For the Railways, the resolution will set out that this requirement will start with the accounts for 1999.

41. To facilitate effective regulation and support customers' access to lower-cost gas supplies, the government will, by July 17, 1998, instruct the Board of State Representatives of RAO Gazprom to seek to reorganize, by December 31, 1998, the existing regional transmission operations of RAO Gazprom into a single transmission enterprise or a number of enterprises, based on major transmission corridors, and in compliance with the Civil Code. By August 1, 1998, the government will instruct the Board of State Representatives of RAO Gazprom to seek that the company's producing operations, supply operations, transmission operations, and distribution operations operate as separate cost/profit centers with independent management teams and their own accounts based on international accounting and audit standards. The transmission enterprises will only provide gas transmission services, with tariffs regulated by the Federal Energy Commission.

42. By August 1, 1998, RAO UES will publicly announce its intention of increasing private sector participation in the local electricity companies (Energos) in which UES has an equity stake. A list of Energos that will be available for consideration, along with a package of relevant technical and financial information, will be issued by October 1, 1998. By October 1, 1998, RAO UES will solicit offers from the private sector for participation in Energos in which it has an ownership stake. The bidders would be permitted to make a variety of offers, including, but not limited to equity investments, management contracts, concession or leasing arrangements. Offers would be made to RAO UES by December 31, 1998.

43. By December 1, 1998, rail freight tariffs will be adjusted to eliminate any discrimination between domestic and export rates. By June 30, 1999, rail freight tariffs will be determined uniformly on a cost-basis for all commodities. By September 1, 1998, separate cost accounting will be introduced and separate income statements and balance sheets prepared for long distance passenger traffic, commuter rail traffic and freight traffic within the Ministry of Railways.

Banking sector

44. A comprehensive approach will be taken to address problems in the banking system. This will be aimed not only at resolving problems of weak and insolvent banks, but also at improving the accounting, legal, and regulatory framework, strengthening supervision and compliance, and formulating a longer-term strategy for developing competition in the banking system.

45. More stringent prudential rules, especially with regard to banks' foreign exchange operations and positions, will be adopted. The requirement to provide consolidated reports beginning on January 1, 1999 will be extended to nonbank financial institutions. The government and the CBR will make every effort to ensure that amendments to the Central Bank Law to expand consolidated reporting to nonbank subsidiaries of commercial banks will be adopted by January 1, 1999, sufficiently prior to the implementation of such reporting from July 1, 1999. Prudential norms on banks' off-balance sheet foreign currency exposure will be strengthened, by September 30, 1998, through the imposition of limits on single party and connected party exposure, and out-of-money options will no longer be considered adequate for covering on-balance sheet exposure.

46. By September 30, 1998, the CBR will adopt a timetable to introduce accrual accounting for banks, with a view to introduce such accounting on January 1, 1999 if the Tax Code is in effect at that time. By January 1, 1999, and in tandem with the Tax Code, the CBR will bring the Russian accounting standards in full conformity with the main principles of the International Accounting Standards (IAS). The appropriateness of the introduction, by January 1, 1999, of 100 percent pre-tax provisioning for bad loans of commercial banks will be assessed in the context of the eighth review under the EFF.

47. The CBR will begin developing a strategy for fostering competition and a strong and efficient banking sector in the long run. A draft of such a strategy will be prepared by end-1998. Over the short to medium term, the CBR will continue withdrawing licenses of weak and insolvent banks and streamlining the banking sector. The liquidation of small insolvent banks (with capital of less than ECU 1 million) will be stepped-up and their licenses will be revoked by January 1, 2000 should they not reach the new minimum requirement. With regard to medium and large banks, the CBR and the government will devise a comprehensive approach for addressing problem banks which will include: (i) diagnosis; (ii) corrective action; (iii) bank restructuring; and (iv) bank liquidation. Such a strategy will be reflected in a bank restructuring framework to be prepared by October 31, 1998. The framework will be formulated on the basis of a full diagnosis of the size and nature of the problem and will involve setting out uniform rules and procedures to be followed.

48. The government and the CBR will make every effort to have the Bank Bankruptcy Law and the laws amending the CBR Law and the Law on Banks and Banking Activities enacted by end-1998 to improve the CBR's supervisory powers and to provide an adequate legal basis for the bank restructuring framework. These laws will include adequate provisions to strengthen the regulatory powers of the CBR, including revoking licenses, effectively liquidating insolvent banks, and imposing further liability on banks' shareholders.

E. Data Transparency

49. The CBR will continue to increase the transparency of its own operations and will put in place requirements to increase transparency for commercial banks. The policy of announcing weekly data on external reserves, begun in June, will be expanded to include the announcement of base money. The CBR will publish summary information on the financial situation of the 30 largest banks on a monthly basis and a requirement will be introduced for banks to provide quarterly disclosure of key information. The standards for disclosure by banks holding more than 10 percent of household deposits in the banking system will be significantly expanded. By August 1, 1998, the ten largest banks will be required to publish quarterly accounts, have annual accounts prepared and audited by a reputable qualified firm, and make the results public.

IV. Prior Actions

50. A number of prior actions, to be completed before Executive Board consideration of the program, have been established, to ensure the momentum and political support for the policy package.


/s/
/s/
Sergei Kiriyenko
Prime Minister
Government of the Russian Federation
Sergei Dubinin
Chairman
Central Bank of the Russian Federation

See also:
Table 1
Supplement