Over the last years St. Petersburg has been demonstrating a steady growth of the budget revenues, which is a sign of the overall recovery and development of the regional economy. The preliminary estimates show that the revenues of St. Petersburg budget in 2001 made 49.4 bln roubles, exceeding the planned index by 3.6 %. As compared to the previous year, the revenue growth calculated in current prices made 32 %, calculated in comparable prices (taking into consideration the inflation) - 12 %, calculated in the dollar equivalent - 24 %.

The changes introduced into the taxation laws, that significantly reduced the taxation base, did not affect the tendency of the budget revenues growth, which proves its optimal and diversified structure.

Revenues and Expenditures of St. Petersburg Budget

	1997	1998	1999	2000	2001*	2002**
Budget Revenues	13611	17045	25899	37344	49440	57333
Budget Expenditures	14085	16975	26192	35805	47128	56267
Proficit (+) / Deficit (-)	474	71	293	1540	2312	1066

*Preliminary Data              ** Budget

Consolidated budget execution
in the  I half of 2002

	Budget Revenues	Budget Expenditures	Proficit
Jan-June 2001	30 458	25 751	4 707
Jan-June 2002	37 058	31 696	5 362

Similar to the previous years, the bulk of the budget revenues (68.1 %) came from taxes that increased up to 33.6 bln roubles or by 31 % as compared to 2000. A slight decline of tax proceeds in the revenue structure is caused by the changed tax legislation that since 2001 stipulates the transfer of 100% VAT receipts into the federal budget.

Nevertheless, a number of positive trends in 2001 compensated for the changed taxation base of the budget, namely:

• Growth of the industrial production volume, transportation services volume, retail trade and public catering turnover;
• Growth of investments into fixed capital, both at large and medium enterprises;
• A considerable growth of the balanced financial result (profits minus losses) of St. Petersburg organizations, and reduction of the share of unprofitable enterprises;
• Reduction of arrears on budget payments.

The major part of the tax proceeds into the budget of St. Petersburg in 2001 came from: profit tax - 20.41 %, income tax of physical entities - 22.99 %, excise tax - 8.51 %, property tax - 7.46 % and sales tax - 6.23 %.

Since 2001 RF introduced a unified rate for the income tax of physical entities - 13 %. Despite of the fact that in 2000 income was taxed according to a progressive scale, the growth rate of tax proceeds in 2001 was preserved and made 63.5 %. Partly it is explained by the increased share of the taxes transferred in 2001 into the budget of St. Petersburg (from 84 % to 99 %), and by simplifying of the tax system which became clearer and more plausible to the tax-payers. The share of the income taxes of physical entities in 2001 made 23 % of the budget revenues.

Proceeds from excise taxes and sales taxes are remaining stable - their growth in 2001 made 43.5 % and 14.8 % respectively. Proceeds from taxes on property of enterprises and organizations increased by 48.9 %.

Share of Receipts in Own Budget Revenues

Share of Tax Proceeds in Own Budget Revenues

The volume of non-tax proceeds, as compared to the previous year, grew by 43 %. Their share increased up to 14 % demonstrating the tendency for diversification of revenue sources of the budget. The major share (93 %) of non-tax proceeds is made of income coming from property belonging to the state.

A considerable contribution into the revenues of St. Petersburg is made by budget funds-in-trust. Their share in the revenues structure in 2001 made 12.9%, mainly constituted by the earnings of the Territorial Road Fund (TDF). These funds are allocated to construction and repair of roads and road structures, acquisition of road-repair machinery and other items.

In general, the budget revenues structure is remaining stable, with the tendency for diversification, which allows to maintain a balanced management of finances in the framework of the continued taxation reform.

Revenue Structure of St. Petersburg budget (%)

	1998	1999	2000	2001*	2002**
Profit Tax	15%	19%	19%	20%	21%
Income Tax	18%	18%	19%	23%	28%
Sales Tax	0%	9%	7%	6%	5%
VAT	13%	8%	8%	0%	0%
Property Tax	11%	8%	7%	7%	8%
Taxes that form Territorial Road Fund	12%	16%	12%	13%	9%
Excises	7%	6%	8%	9%	10%
Non-tax revenues	11%	11%	13%	14%	14%
Other	13%	6%	8%	8%	6%

*Preliminary Data              ** Budget

Revenue Structure of St. Petersburg budget in the I half of 2002

	mln RUR	% to total	Jan-Aug 2001, % to total
Total	56403	100	100
including:
VAT	16792	29,8	30,3
Profit Tax	12450	22,1	24,9
Tax for natural resources	295	0,5	0,5
Excises	3795	6,7	7,8
Sales Tax	2580	4,6	4,8
Others	20491	36,3	31,7
To the Federal Budget	22888	40,6	46,7

The main expenditure items of St. Petersburg budget in 2001 were the following: "Housing and Communal Services" - 9.6 bln roubles (20%), "Education" - 7.5 bln roubles (16%), "Social Security" - 5.5 bln roubles (12%), "Health Care and Physical Culture" - 4.9 bln roubles (10 %) and "Transport, Road Economy, Communications and Informatics" - 5.2 bln roubles (11%). According to preliminary data, the total expenditure of St. Petersburg budget in 2001 made 47.1 bln roubles, exceeding the planned index by 1.1 %. As compared to the previous year, the expenditure growth calculated in current prices made 32 %, calculated in comparable prices (taking into consideration the inflation) -11%, calculated in the dollar equivalent - 23 %

The revenues exceeded the expenditures by 2.3 bln roubles.

· The basic principle for the execution of St. Petersburg budget in 2001 was keeping its social directivity. The expenditures on social security increased by 2.6 bln roubles or by 87 %, as compared to the previous year, to make 5.5 bln roubles.

The tendency for reduction of expenditures on servicing the state debt, which became noticeable in the post-crisis period, was kept in 2001. On the one hand, it is the result of the reduced lending rates for St. Petersburg, and on the other hand it is explained by the improved management of the state debt. The total amount of expenditure on servicing the state debt made 1.9 bln roubles, reduced by 64 mln roubles (3.2 % as compared to 2000). Thus, the share of interest payments in the budget expenditure structure reduced to 4 %, which is considered a reasonably acceptable index vis-a-vis other sub-national European debtors.

The capital expenditures of St. Petersburg budget facilitate the innovation and investment activities, including the expenditure on extended reproduction, and spendings that lead to the creation or extending of the property of St. Petersburg.

The favourable situation with revenue receipts allowed to increase expenditure on investment activities. The volume of capital investments into fixed assets made 11.5 bln roubles or 24 % of the budget expenditure, having grown against the previous year by 4 bln roubles (56.9%). The index stipulated by the Law on Budget was exceeded by over 1 bln roubles.

Spending of the Territorial Road Fund made 5.8 bln roubles or 12.5 % of the budget expenditure, which is 18% more than in the previous year. Financing was allocated to the construction and repair of roads and road structures, and to the development of the production basis of road construction and road repair organizations.

Expenditure Structure of St. Petersburg Budget

	1998	1999	2000	2001*	2002**
Housing & Communal Economy	21%	17%	21%	20%	18%
Education	19%	17%	16%	16%	20%
Health Care & Physical Culture	11%	12%	13%	10%	12%
Social Policy	8%	8%	8%	12%	13%
Transport, Road economy	10%	13%	8%	11%	6%
Debt servicing	7.8%	7.8%	5.5%	4.1%	3%
Funds-in-trust	12%	15%	14%	12%	11%
Others	10%	11%	15%	14%	17%

*Preliminary Data              ** Budget

Expenditure Structure of St. Petersburg Budget in the I half of 2002

	mln RUR	% to total
Total	31696	100
including:
State & local self Government	1537	4,9
Law enforcement and security	729	2,3
Transport, Road economy, Communication and Informatisation	2522	8,0
Housing & Communal Economy	6400	20,2
Social Policy	14228	44,9
Debt servicing	970	3,1
Funds-in-trust	3224	10,2

The government securities of St. Petersburg are represented by the following types:

· Government Registered Bonds (GIO) of St. Petersburg;

· Government Saving Registered Bonds (GSO) of St. Petersburg;

· Medium-term Government Registered Bonds (SGO) of St. Petersburg;

· State Loan Currency Bonds of St. Petersburg (Eurobonds).

GIO of St. Petersburg have been circulating in the market since 23 March 1995. As of 1 January 2002, circulated were 43 issues of five types of bonds: discount bonds, fixed coupon bonds, floating coupon bonds with early presentation for sale right, fixed coupon bonds with issuer's early repayment right, and floating coupon bonds. The volume of securities circulated is 4.99 bln roubles evaluated by the face value. The term of circulation of GIO of St. Petersburg is from one year to four years. 32 auctions were held in 2001, with the returns of 1.88 bln roubles.

The St. Petersburg GIO market is demonstrating high liquidity and is favourable for the issuer in respect of the yield of the funds attracted. The aggregated average monthly market turnover made 850 mln roubles in 2001. The weighted average yield reduced by 1.4 times - from 28.05% down to 19.6%. The duration of the debt portfolio of St. Petersburg bonds increased by 1.3 times - from 607 up to 796 days.

GIOs of St. Petersburg make the basis for conducting transactions with derivative instruments: forward contracts and REPO deals. By the results of 2001, the volume of transactions carried out under forward contracts made 623 mln roubles, under REPO contracts - 5.4 bln roubles.

Auctions and secondary circulation of the bonds are carried out at two trading stations - St. Petersburg Currency Exchange and "St. Petersburg" Stock Exchange. The transactions are concluded via 49 professional participants of the stock market, who are appointed official dealers of the loan - banks and investment companies.

GSO of St. Petersburg have been placed since 22 December 1999. As of 1 January 2002, circulated were 3 issues of bonds with the total volume of 114 mln roubles. In 2001 one issue was made, for the amount of 50 mln roubles. The savings loan bonds can be owned exclusively by physical entities or institutional investors who were appointed general agents of the loan. The circulation term of the issues makes from one year to five years. The bonds are coupon-bearing, with the coupon rate defined on the basis of the current yield on the GIO market of St. Petersburg.

SGO of St. Petersburg were being issued since 1999 with the purpose of repayment of the accounts payable of the city budget and reduction of the arrears on the budget earnings. After the enforcement of the amendments into the RF Budget Code, the issuance of SGOs was terminated. At present the city is implementing a scheduled early redemption of the bonds. Over 2001 SGOs were repaid and retired for the amount of 98.6 mln roubles. As of 01.01.2002, the remaining circulation is 2.2 mln roubles.

Eurobonds of St. Petersburg were issued on 18 June 1997 for the amount of 300 mln USD, with coupon rate of 9.5 % annual, at the yield of 9.6 % annual. The eurobonds are circulated on the stock market and the OTC market abroad. The redemption date is 18 June 2002. To reduce the burden on the city budget in 2002, the planned repayment of eurobonds (started in 2000) was continued in 2001, for the amount of 110 mln USD. Thus, as of 01.01.2002, the remaining circulation is 108 mln USD, nearly one third of the initial volume.

By March 2002 the Government Registered Bonds of St. Petersburg have been in the market for 7 years. The bonds make a most important instrument for managing the city's internal debt.

Strict observance of the obligations, even during the period of the All-Russia financial crisis of 1998, allowed St. Petersburg already in 1999 to start issuance of the bonds with the circulation term of up to five years. The favourable situation on the internal market to a great extent facilitated the repayment of the city's external debt. At present St. Petersburg is borrowing funds on the bonds market at the rates that are minimal among all the subjects of the RF.

Over the period passed, the bonded debt of the city became an effective means of attracting funds into the budget, and the backbone of the whole of financial market of St. Petersburg. By providing the banks with a possibility of placing temporarily redundant reserves into reliable bonds, St. Petersburg prevents the capital outflow from the city, forming this way the preconditions for improved banking involvement into the active sector of the regional economy. Transactions with Government Registered Bonds of St. Petersburg make more than half of the stock turnover at the municipal stock market.

In 2001 the investors were re-estimating the risks of investments into GIOs of St. Petersburg. Yield requirements of the investors to bonds with the repayment term of over three years reduced from 30 to 20% annual, the rates for bonds with the circulation of up to one year were 4-5 interest points lower at the end of 2001 than the rates of the previous year.

Dynamics of Weighted Average Yield on GIO Market in 2001

Duration of GIO in 2001

The increased duration of loan terms has a positive effect on the financial stability of the city. Since the beginning of 2001 the duration of GIO market grew by nearly 30% - from 615 to 796 days. The market duration index may be considered as an average term before the repayment of the overall liabilities. In particular periods of 2001, this index reached 830 days in the GIO market of St. Petersburg. For reference: the GKO-OFZ market duration made 375 days at the end of 2001.

On the whole, the market was sufficiently active. GIO market of St. Petersburg is still exceeding the federal stock market by the reuse of the bonds. The ratio of the average daily trade turnover to the average annual balance of bonds on the dealers' accounts is 0.01 on the GIO St. Petersburg market, while the similar ratio for GKO-OFZ market is only 0.002.

The average daily turnover of secondary trades in 2001 made 33.44 mln roubles, the average daily number of deals - 217 mln roubles. The share of deals with discount bonds in the total volume of the secondary trades reduced from 65 to 33% as compared to 2000, while the similar index for fixed coupon bonds grew from 22 to 53%. In the second half of 2001, a regular rise of activities was observed in all segments of GIO market of St. Petersburg.

Based on the GIOs of Petersburg, the REPO market is operating as an alternative to the interbank loan market. REPO deals allow the participants of the market to provide short-term lending against the bonds of St. Petersburg. The terms of the REPO contracts vary from intraday to a few months. The whole range of GIOs of St. Petersburg can be used as guarantees. Thus, REPO transactions are a convenient instrument for managing the liquidity. On particular days the turnovers of the REPO deals exceed the volumes of the secondary trades in the base assets - GIOs of St. Petersburg. The REPO deals turnover grew in 2001 by 2.8 times to reach 5.4 bln roubles, which made 64% of the turnover of the secondary market of the city's bonds.

REPO Deals Parameters in 2001

Volume of GIO Market in 2001