11Section 3. Real Sector
3.1. Macrostructure of Production
3.1.1. Trends and Factors of Final Demand Changes
Characteristic feature of 2006-2007 was economic growth acceleration rates along with positive effect of foreign economic situation factors and internal economic activity. Increase in business activity was based on anticipating growth of investments as compared with the dynamics of final consumption and had the most significant influence on the nature if structural shifts of the produced and used GDP. GDP increasing by 8.1% in 2007 real final consumption of households went up by 13.1% and investments in fixed assets - by 21.1%.
Table 1
Indices of the Basic Macroeconomic Indicators in 1999-2007, as a Percentage versus the Previous Year
1999 2000 2001 2002 2003 2004 2005 2006 2007
Gross Domestic Product 106.4 110 105.1 104.7 107.3 107.2 106.4 107.4 108.1
Households' real final consumption 97.1 107.3 109.5 108.5 107.6. 112.1 112.7 111.3 113.1
Investments in the fixed assets 105.3 117.4 110 102.8 112.5 111.7 110.7 113.7 121.1
Housing commissioning 94.6 104.6 106.7 107.7 112.6 106.1 116.1 119.4
Industrial production 111 108.7 102.9 103.1 108.9 108.3 104 103.9 106.3
Agriculture production 104.1 107.7 107.5 101.7 101.3 103 102.4 102.8 103.3
Freight turnover 105.8 105 103.2 105.8 108 106.5 102.7 102.5 102.2
Communication services amount 133.1 113.8 119.1 115.6 127.5 129 115.7 124.0 120.1
Retail trade turnover 93.9 109 111 109.3 108.8 113.3 112.8 113 115.2
Paid services rendered to population 107 104.7 101.6 103.7 106.6 108.4 106.8 107.9 107.1
Foreign trade turnover 86.7 130.2 103.8 108.1 126 132.4 131.5 127.0 123.4
Real disposable monetary income 87.7 112 108.7 111.1 115 110.4 111.1 110.2 110.4
Real wages 78 120.9 119.9 116.2 110.9 110.6 112.6 113.4 116.2
Real amount of accrued pensions 60.6 128 121.4 116.3 104.5 105.5 109.6 105.1 103.8
Average number of those employed in 100.6 100.3 100.7 100.9 100.6 100.6 100.6 100.3 102.4
the economy
Number of officially registered unem- 102.1 77 89.1 99.7 92.3 101.6 90.2 95.6 88.3
ployed
Consumer prices indices 120.2 118.6 115.1 112.0 111.7 110.9 109.0 111.9
Industrial producers' prices indices 131.9 108.3 117.7 112.5 128.8 113.4 110.4 125.1
Source: Federal State Statistics Service.
Simultaneous expansion of both internal and external markets was a factor of steady economic development. The ratio of external and internal demand over the period of 20012007 has varied considerably. Foreign economic situation being exceptionally favorable starting from 2nd quarter 2003 the deceleration of physical volumes of export growth rates has been observed and from the same period gradual strengthening of the internal demand influence on the dynamics of economic development has been registered. In 2005-2007 slowdown of foreign demand growth rates proceeded more acutely. Increase in external demand was on average equal to 12.1% in 2003-2004 as compared with 6.9% in 2005-2006, and it is estimated to be 7.4% in 2007.
Source: Federal State Statistics Service.
Fig. 1 Growth Rates of Internal and External Demand in 2001-2007, as Percentage versus the Corresponding Quarter of the Previous Year
Joint influence of internal factors that regulate the level of business activity was quite sufficient to make up for the weakening of external demand impact on the economic growth rates. In 2007 the increase in internal demand was equal to 17.0% as compared with 12.9% in 2006 and 10.5% in 2005.
Positive dynamics of the internal market was determined both by the growth of internal production and the expansion of import supplies' scale. After a short-term decrease of import as a result of 1998 devaluation, the import growth rates have been steadily positive since 4th quarter 1999. Whereas at the surge of devaluation the domestic production was characterized by anticipating growth which was partially due to import substitution process, starting from the beginning of 2000 the parameters of standard of living and population's demand restoring, investment activity becoming more lively, market balance was maintained by more intensive growth of import supplies as compared with the domestic production. The situation at the internal market in 2006-2007 was formed under the influence of gradual acceleration of domestic production growth rates. As a result of 2007 the increase in industrial production was 6.3% (as compared with 3.9% in the previous year), workload in construction - 18.2%, agriculture -3.3%. As a result increase in domestic goods production for consumption at the internal market has increased by 13.7% against 11.0% in 2006 and 8.9% in 2003-2005. This, however, did not change the trend for anticipating import growth in internal market resources formation, which outlined most distinctly in 2007. Increase in import supply of goods in 2007 was equal to 35.4%, exceeding by 4.1 p.p. the level of the previous year. It should be noted that anticipating (as compared with export) import growth both by physical and value volume, which, in
the end, led to absolute reduction in the net export proportion in the GDP was a characteristic feature of 2006-2007.
Fig. 2. Change in Growth Rates of Internal Demand by Components in 2001-2007, as Percentage versus the Corresponding Quarter of the Previous Year
Analysis of retail trade resources formation demonstrates that the trend for the growth of the import supplies of both foodstuffs and non-food goods has recovered in 2005-2007. In the structure of retail trade goods resources the share of import went up to 47%, increase in foodstuffs being 37% as compared with 34.8% in the previous year and non-food goods - up to 54.4% as compared with 51.7% in 2006. High proportion of import goods secured balance of demand and supply at the investment market as well. Expenditures for purchase of import equipment in January-September 2007 were equal to 18.6% of the volume of investments into machinery and equipment.
Other circumstances being equal the dynamic growth of import contributed into creation of the competitive environment, while high share of import in the retail trade turnover and in the volume of investments in machinery, equipment and transport vehicles strengthened the dependence of internal market trade resources balance on the change in foreign economic situation.
Starting from the second half-year of 2007 growing prices of the world market for crops, dairy and a number of other foodstuffs, reduction of import supplies of the goods of social significance were among the factors that contributed into inflation processes development in the Russian economy. Internal market reacted to the changes in demand and supply proportions and level of world prices for foodstuffs with the increase in prices for both import and domestic goods.
Agriculture goods producers' prices increased by 30.2% against 10.4% in 2006, prices for crops growing by 45.5%, for sunflower seeds - by 206% and for dairies - by 156%. Raw materials becoming more expensive, foodstuffs producers' prices have grown by 20.0% against 8.3% in 2006, main leap in prices occurring in 2nd half-year of 2007. Traditional seasonal decrease or slow-down of prices rates for foodstuffs in autumn that was observed start-
rd
ing form 2004, was succeeded by 1.8% increase in the 3 quarter of 2007. In October growth of prices reached the maximum level for the last three years and was equal to 3.3%, exceeding by 0.3 p.p. the level of February 2006 prices.
It should be noted that steps taken to restrict foodstuffs prices growth - that is import duties for milk, dairies and cheeses decrease, signing of agreements between foodstuffs producers and net trade companies on price freezing for some kinds of socially important goods, conduction of goods interventions to the crops markets - did not have considerable influence on present situation. As a result, prices for foodstuffs in 4th quarter 2007 went up by 7.0% and from the beginning of the year - by 15.6%, exceeding the figure of 2006 by 6.9 p.p.
Solution of fundamental problems of balance at the market of foodstuffs in concordance with the program of the Ministry for Trade and Economic Development involves implementation of such instruments as import duties decrease for some kinds of goods, oil, for instance, increase of export duties for crops, development of legal and regulatory measures aimed at agriculture goods production and supply growth, reduction of monopolism and development of competition in the field of production and goods sales. The first results of the declared scheme, however, will evolve only in thee first half-year of 2008.
It should be noted that change in price proportions has not reflected on the consumer market as a whole yet. Increase in retail trade turnover in 2007 was equal to 15.2% against 13.9% in the previous year and the volume of paid services rendered to the population - to 7.1%.
Comparatively low dynamics of prices for non-food goods, high quality goods and service remained the factor that partially made up for growth of prices for foodstuffs. In 2007 prices for non-food goods increased by 6.5% and paid services - by 13.3%.
Consumer market was maintained by acceleration of growth rates of real population's incomes and continuous expansion of consumer crediting. Increase in real population's monetary incomes in 2007 was equal to 10.4% as compared with 10.2% in the previous year, of real wages - to 16.2% as compared with 13.4% in 2006. In the structure of population's incomes the share of labor remuneration was only 70.3%, exceeding by 5.4 p.p. the figure of the previous year. Against the background of growing population's incomes it was observed that the population's inclination for savings has been declining more and more intensively. Over 2007 the share of savings in population's incomes has decreased by 1.4 p.p. and was equal to 8.9%. The dynamics of population's savings was considerably influenced by such factors as inflation acceleration, change in the situation at the real estate market and periodically evolving problems with banks liquidity.
Dynamics of Gross Saving and Gross Accumulation and Their Proportion in the GDP
Favorable combination of factors of domestic business activity and price situation at the world market of raw materials accounted for intensive growth of gross savings scale. The share of gross savings in the last seven years was in the range of 31.1-38.7% of the GDP against 24.0% in the pre-crisis 1997. In 2007 under the influence of export share reduction of
the GDP on the one hand, and increase in households expenditures on the other hand, growth of gross national saving was equal to 34.2%.
Table 2
Structure of GDP Use for Gross Savings and Accumulation in 2000-2007,
as Percentage to the Total
2000 2001 2002 2003 2004 2005 2006 2007
GDP 100 100 100 100 100 100 100 100
of which:
Gross savings 38.7 34.2 31.1 31.9 33.6 33.6 34.5 34.2
of which:
Gross accumulation 18.7 21.9 20.1 20.8 20.9 20.1 21.3 24.5
Gross accumulation of fixed assets 16.9 18.9 17.9 18.4 18.4 17.7 18.4 21.0
Change in the stocks of material circulating 1.8 3.1 2.1 2.4 2.5 2.3 2.9 3.5
assets
For reference:
The share of investments in the fixed assets in 15.9 16.8 16.3 16.5 16.8 16.7 17.0 17.3
the GDP
Source: Federal State Statistics Service.
As the experience of the last two years has demonstrated it is the ratio of investment demand and final consumption that reacted most vigorously to the change of export earning and defined peculiar features of the internal market operation. Sudden fluctuations of investment expenditures for reproduction of fixed assets were compensated by smooth change in the dynamics of final consumption. At the same time the strengthening of investment component impact on the dynamics of the economic growth has been observed from 2nd quarter 2006. The growth rates of the investments in the fixed assets reached the maximum level after the financial crisis of 1998 in 2007, being equal to 121.1% as compared with 113.7% in 2006 and 109.5% on average over 2000-2005. It should however be noted that whereas in 2007 the volume of the GDP exceeded the pre-reform level of 1991 by 10%, investments in the fixed assets were nearly by 1/3 lower than the corresponding index of the same year.
Households' Final Consumption and Change in Population Standard of Living Parameters
Positive dynamics of final consumption was one of the main factors for the development of internal market in 2001-2007, real population's income, real wage and real volume of accrued pensions starting to grow steadily. The growth of the scale of final consumption proceeded against the background of quite steady sustention of the ratio between the consumption of households and the amount of social transfers, received from the governmental institutions and non-commercial organizations. In 2007 the share of expenditures for final consumption in the structure of the GDP was equal to 65.8% in 2007, exceeding the figure of the corresponding period of the previous year by 0.1 p.p.
In 2000 expenditures for households' final consumption reached the level of pre-crisis 1997, and have doubled over seven years that followed. The growth of households' consumption was accounted for by steady increase in population's monetary incomes. Over 2001-2007 real population's incomes have grown by 2.1 times, real wages - by 2.5 times and real volume of accrued pensions - by 1.9 times.
Table 3
Structure of Gross Domestic Product Use in 2001-2007 as Percentage to the Total
2001 2002 2003 2004 2005 2006 2007
Gross domestic product 100 100 100 100 100 100 100
Of which
Expenditures for final consumption 65.8 68.9 68.1 66.9 66.2 65.6 65.8
Including:
Households 48.3 50 49.4 49.3 49.0 47.9 47.9
Governmental institutions 16.4 17.7 17.6 16.7 16.6 17.0 17.3
Gross accumulation 21.9 20.1 20.8 20.9 20.1 21.3 24.5
Net export of goods and services 12.7 10.8 11.3 12.2 13.7 12.7 8.5
Source: Federal State Statistics Service.
Anticipating growth of wages as compared with other sources of income had the primary influence on the population's incomes dynamics. Population's incomes increasing steadily, the reduction of poverty level has been observed. The proportion of people with monetary incomes lower than subsistence level decreased down to 21.5 mln of people in 2007, which was equal to 15.2% of the total number of population as compared with 25.2 mln of people (17.7%) in 2005 and 42.3 mln of people (29.0%) in 2000.
Table 4
Number of People with Monetary Incomes Lower Than Subsistence Level on the whole throughout the Russian Federation
Mln of people As percentage to the total number of population
2005
1st quarter 34.9 24.5
1st half-year 31.4 22.1
Yearly 25.2 17.7
2006
1st quarter 31.7 22.4
1st half-year 27.0 19.1
Yearly 21.6 15.3
2007
1st quarter 25.8 18.3
1st half-year 22.3 15.8
Yearly 21.5 15.2
Source: Federal State Statistics Service.
Structural shifts in population incomes formation were accompanied with the change of population distribution by the amount of average per capita incomes. In 2007 average per capita incomes increasing by 22.7% and nominal wages - by 26.7%, the share of the population with the average per capita incomes of more than RUR 12000 expanded by 9.1 p.p., and with the incomes below 6000 reduced by more than 8.8 p.p. However this did not relax the social and economic differentiation of the population by incomes. According to estimation, fund coefficient, which characterizes the ratio of the highest and lowest incomes of the corresponding decile groups of the population, was equal to 16.8 in 2007 against 16.0 in 2006, and Gini coefficient characterizing concentration of incomes increased up to 0.422 against 0.416 a year ago.
The specific character of incomes distribution also determined the distinctive features of the current expenses dynamics and the level of savings in the households sector. In 2007 the volume of population's monetary incomes was equal to RUR 21138.9 bln, having increased by 22.4% over the year. For goods purchase and payment for services the population spent RUR 14707.8 bln, which exceeds the level of 2006 by 23.5%, and savings were equal to RUR
2981.4 bln, which is by 0.5% higher than in the previous year. The factor that restricted use of savings for current consumption was high investment activity of the population at the housing market. At the expense of own and loaned funds the population has built by nearly 1/3 more housing floorspace than a year before.
Over the last seven years the change in the consumer spending was determined by the increase in the share of expenditures for non-food goods and services and reduction of the share of expenditures for foodstuffs. It is to be mentioned that the statistic monitoring observed gradual shift of sales assortment structure of foodstuffs towards more expensive and of non-food goods towards imported goods of better quality. The change in the population demand and the increase in the share of non-food durable goods and house furnishing goods stirred up the development of consumer crediting. The volume of credits given to individuals expanded by 1.52 times in comparison with the beginning of 2007.
3.1.2. Characteristic Features of GDP Formation by Incomes
The dynamic growth of the population incomes is one of the characteristic features of Russian economy's growth. The sustention of the domestic market dynamics was based on the growth of real wages and was accompanied by the redistribution of incomes from the enterprises to the population. In 2007 the share of the employees labor remuneration in the GDP was equal approximately to 44.8% and remained above the figures of 2005-2006. High differentiation of the average wages by kinds of economic activity was preserved. In the industry the level of wages differentiation was defined by the increase in the gap between the rates of the labor remuneration in extraction and processing industries. Nominal accrued wages in minerals extraction was 2.1 times higher than the average in the economy, including in fuel fossils extraction - by 2.5 times. In processing industries the wages were equal to 97% of the average in the economy and 42% of the figures of extraction industries. The exceeding of the average figure of accrued wages by 2.3 and 2.2 times, respectively, was observed in productions, connected with oil products processing and transportation of fuel fossils. In education and public health care the average wages were equal to 75-7% of the average in the economy, in government administration and military safety security - to 120% and in financial activity -to 260%. The characteristic features of labor remuneration by the kinds of economic activity had a substantial impact on the nature of employment and labor resources distribution in the economy.
Table 5
Structure of the GDP Formation by Incomes in 2001-2007, as Percentage to the Total
2001 2002 2003 2004 2005 2006 2007
Gross Domestic Product 100 100 100 100 100 100 100
Of which:
Employees labor remuneration (including hidden wages) 43.0 46.7 47.1 46.0 43.8 44.1 44.8
Net taxes for production and import 15.7 17.0 16.0 16.8 19.7 20.0 18.9
Gross profit of the economy and gross mixed incomes 41.3 36.3 36.9 37.2 36.5 35.9 36.3
Source: Federal State Statistics Service.
Only 8% in the structure of the employed population account for people who do not work for a wage; these are employers, who attract employees on a regular base to work for 222
their own companies, self-employed people. This defined, correspondingly, the nature of the population income structure and the GDP formation. More than 70% of population income accounted for the remuneration of labor of those, who work for wages, the share of the incomes from the entrepreneur's activity and property decreasing.
The level and the share of employers' wages in the structure of the GDP had a prevailing influence on the social profile, including labor market. The typical aspect of the period of 2001-2007 was the tendency for the growth in the demand for the labor force. Average annual number of the employed in the economy process in 2007, according to the preliminary data, was equal to 70.5 mln of people and increased by 2.4% as compared with the previous year. It is to be noted, that the change in labor force demand was determined by the shift of the employment to the kinds of activities that provide market services. The formation of this tendency at the initial stage of the economic growth restoration had a powerful effect on the life quality and gave a stimulus for service sphere development. In past four years the decrease in employment was observed in almost all branches of industry, the decrease in the number of workplaces being the most intensive in the processing industries. In 2006 as compared with 2004 the average annual number of those employed in processing industry reduced by 532 thousand of people, in extraction industries - by 52 thousand of people. This trend was formed against the background of weakening of the trend for labor efficiency in industry.
Table 6
The Dynamics of Labor Efficiency, as % to the Preceding year
2003 2004 2005 2006 2007*
Economy as a whole 107.0 106.5 105.5 106.0 106.0
Broken by kinds of economic activities:
Agriculture, hunting and forestry 106.0 103.6 102.4 104.1 105.0
Fishing and fish breeding 102.1 104.3 100.1 111.2 102.0
Minerals extraction 109.2 107.3 106.2 102.2 102.3
Manufacturing industries 108.8 106.3 107.1 105.5 109.1
Production and distribution of water, gas and elec- 103.7 100.4 103.7 102.3 100.0
tricity
Construction 105.3 106.9 105.9 113.3 114.7
Whole sale and retail trade; motor-vehicles, mo- 109.8 110.5 105.1 106.9 107.8
torcycles, household appliances and articles of
private use service
Hotels and restaurants 100.3 103.1 106.5 109.5 No data
Transport and communication 107.5 108.7 102.1 107.9 106.8
Operations with real estate, renting, provision of 102.5 101.3 112.7 104.8 No data
services_
* Preliminary data.
Source: Federal State Statistics Service.
The low efficiency in factors of production use is one of the main causes of the decrease in competitive advantages of Russian goods. The growth of discrepancy between the rate of labor productivity and wages in favor of the latter had the negative impact on the economic dynamics indices. However possibilities for further increase of costs for labor remuneration were limited due to the changes in competitive environment at the goods markets because of ruble appreciation and increase in import pressure.
Analysis of economic growth in 2004-2007 enables to highlight three factors that determined specific features and dynamics of this growth: first, the decrease of the employment
in industrial production, the employment in the economy on the whole increasing and the employed distributing towards the sector of services; second, labor efficiency rates deceleration in the industry; third, dynamic growth of investments in the fixed assets.
On the whole output growth in the economy due to the main factors input in 2007 is mainly (by 37.5%) was accounted for by the increase of investments and volume of the capital involved in production in contrast to other periods, when increase of capital input was determined mainly by involving in production. In 2007 this component defined 21.5% of the output growth rates, which was secured by investments growth rates acceleration (21.1% in 2007 as compared with 13.7% in 2006 and 10.9% in 2005) and, as a consequence, intensification of existing facilities renovation processes.
Increase of labor input is also due to the change in "stocks", that is the number of the employed. In 2007 the increase in the demand for labor force led to the exceeding of the average figure of the employment for the last 7 years. It should be noted that the growth of the number of the employed was mainly due to the sector of services, while in the sector of goods production the employment reduced. At the same time in 2007 the hours of work by one employee a year decreased, which had a negative impact on the GDP growth rates.
Decomposition of output figure (GDP and added value of the industrial production) demonstrates that economic development rates acceleration in 2007 is accounted for mainly by the increase in growth rates of total factor efficiency (TFE) against the background of differentiation of main factors growth rates intensifying. The basis for decomposition1 is breaking down of the economic growth to extensive and intensive components, which enable estimation growth quality, forecast of further trends for economic development.
TFE growth rates in 2007 was equal to 4.35%, which is three times bigger than the level of 2006, when the corresponding figure was equal to 1.31%, nearly reaching the level of 2004-2005 (4.4%). On average over 2004-2007 annual increase of TFE growth rates was equal to 0.05 p.p., though, according to the linear trend the growth rates decrease annually by 0.29 p.p. In 2007 contribution of TFE in the output growth rates increased as compared with 2006 by 53.8%, the figure being 19.6% then. The value nature of the indices used for estimation makes TFE estimations dependant on the situation factors and especially on oil prices. On exclusion of oil prices growth component from the TFE figure, efficiency growth free from the situation at the world markets changes but little. The contribution of technological component in GDP growth in 2007 was equal to 51.8%. The obtained value considerably exceeds the average figure of this factors' contribution into the GDP over the last years.
1 Decomposition of GDP output index growth and added value of industrial production is conducted in accordance with the method presented in the book: Factors of the economic growth, "Scientific work" series, No. 70, IET, 2003. TFE is referred to as remainder not accounted for by main factors, labor and capital, characterizing the influence of scientific and technological progress, innovations, increase of production organization efficiency, management quality, as well as change in price situation.
2 Under "technological" component we understand final remainder obtained after excluding from the productivity evaluation the component determined by the dynamics of the world oil prices.
Table 7
Decomposition of the GDP Annual Growth Rates and Gross Added Value by Kinds of Economic Activities in 2004-2007J
including:
Of which:
Of which:
GDP costs Labor Number of the employed Hours of work* Capital Fixed funds volume** Extent of facilities load*** TFE
7.2 2.99 1.03 0.43 0.60 1.96 0.54 1.42 4.21
6.4 1.82 0.02 0.22 -0.20 1.79 0.68 1.11 4.58
6.7 5.39 0.28 0.13 0.15 5.11 1.44 3.67 1.314
8.1 3.75 0.71 0.84 -0.145 3.04 1.746 1.307 4.35
8.60 2.34 -4.22 -4.22 - 6.56 3.60 2.96 6.26
0.90 3.40 -0.66 -0.66 - 4.06 3.71 0.35 -2.50
2.10 -0.49 -0.09 -0.23 0.14 -0.40 4.36 -4.76 2.59
0,3 2,04 -0.55 -0.61 0.06 2.59 2.59 - -1.748
6.7 0.27 -3.61 -3.61 - 3.88 1.95 1.92 6.43
5.7 5.17 -0.94 -0.94 - 6.11 2.31 3.80 0.53
4.9 5.53 -0.54 -0.75 0.21 6.07 2.82 3.25 -0.63
7,9 1.35 -0.52 -0.66 0.14 1.87 1.87 - 6.55
2 -3.63 -3.84 -3.84 - 0.21 0.21 0.00 5.63
1.3 0.67 0.30 0.30 - 0.37 0.37 0.00 0.63
2.6 0.62 0.26 0.13 0.13 0.36 0.36 0.00 1.98
-0,3 -1.32 -1.60 -0.85 -0.75 0.28 0.28 0.00 1.02
Total throughout the economy
Minerals extraction
Processing industries
Electricity, gas and water production and distribution
* Per one worker.
** For 2004-2006 on the basis of data on the physical volume of fixed assets.
*** The estimation of the change in facilities utilization throughout the whole economy is base don the data for electricity consumption, in industrial production - on the data for average annual manufacturing capacity of organization, producing different type of goods.
It should be noted that the dynamics of growth rates of technological component of the TFE is a retarded reflection of changes in the dynamics of investments growth rates. This fact characterizes the period necessary to implement and use the accumulated investments. Slowdown of TFE growth rates in 2004-2006 corresponds to the period of moderate investment activity in 2001-2003. At the same time intensification of investment processes that started in 2004 can be considered as one of the reasons for acceleration rates of technological component in 2007.
3 For each type of the economic activity the first line gives growth decomposition in 2004 r, second line - in 2005, third line - in 2006, fourth line - in 2007. The deviation from the data published earlier is due to the change of data supplied by the Federal State Statistics Service.
4 In 2006 the estimation of the TFE growth rates in the industrial production can be slightly underrated, for the shift upwards of the estimation of growth rates caused by the change in the extent of the facilities load which in its turn is due to the change in the methodology of consumed energy volume measuring.
5 The estimation for the year is based on the data for January-September 2006.
6Preliminary data - estimation of the fixed assets volume growth in 2007 is based on the assumption that the coefficient of fixed assets retirement and the share of investments in their renewal are constant.
7 The estimation of the extent of facilities load is based on the assumption that the share of energy consumed in the volume of the production output is constant.
8 In 2007 the estimation of the TFE growth rates in the industrial production can be slightly overrated, for the extent of the industrial facilities utilization was not taken into the account in the calculations.
■ Growth rates of TFE technological component —•—Investments growth rates (right-hand scale)
Fig. 3. Dynamics of "Technological" Component of TFE Growth Rates and Investments Growth Rates in 1996-2007
For the enterprises of the minerals extraction sector, in contrast to the economy as the whole, the decrease in gross added value (GAV) growth rates was observed in 2007 as compared with 2006: in 2004-2007 minerals extraction enterprises are characterized with the maximum deceleration of output growth rates in the industrial sector: on average over the period GAV growth rates decrease by 2.77 p.p., and according to the linear trend - by 2.37 p.p.
In accordance with decomposition results the contribution of the labor input to the output growth rates for this type of the economic activity remains negative over the whole period of 2004-2007, which is defined by the decrease in the number of those employed at the extraction industry. The capital input, in contrast, was increasing mainly due to the increase of the industrial facilities in the environment of considerable fluctuation of the extent of their utilization.
TFE of extracting sector dynamics is controversial: extracting enterprises demonstrate negative growth rates of productivity in 2005, in 2004 and 2006 the situation was the opposite - at that time output increase was due to the growth of total factors' efficiency against the background of their costs decrease. In 2007 TFE of this kind of economic activity again shifted to the field of negative values, which was the main reason for unsteady growth rates of added value. On average over the period TFE growth rates slowed down by 2.67 p.p. (according to the linear trend - by 1.89 p.p.).
The TFE dynamics of the extractive industries sector is more prone to the influence of the price situation at the world markets as compared with other industrial production. It should be noted that separation of the component defined by prices for oil growth from the TFE index demonstrates that technological effectiveness growth rates of the sector has been decreasing since 2005. Against the background of favorable price situation at the world markets of raw materials this testifies that technological characteristics of extraction enterprises functioning
have been worsening. This can be connected both with start of exploitation of oil fields with lower efficiency and with the decrease of management quality in the environment of considerable growth of prices. Slow-down of prices for oil growth rates in 2007 caused decrease of price factor input to the TFE of the extractive sector and, as a result, negative dynamics of the TFE, since "technological productivity" dynamics was also negative. In 2007, as well as in 2005-2006, it is the processing enterprises that are characterized with the biggest growth rates. According to the results of the decomposition over the whole period of 2004-2007 the decrease in the number of the employed at the manufacturing enterprises determines the negative contribution of the labor input to the output growth rates for this kind of economic activities, the absolute value of this input, however, decreasing. The growth in the physical volume of fixed assets accounts for steadily positive capital input contribution into output growth rates, which along with the increase in the intensity of industry capacities utilization defined the prevailing position of the capital as a factor of processing industries economic growth in 2005-2006. In 2007 the changes were registered in the structure of added value growth of this kind of economic activity: the share of output, accounted for by the changes on capital costs decreased down to 23.7%, and the most significant factor of processing enterprises' output growth was TFE, whose contribution, according to the preliminary estimations, is equal to 82.9%, though this estimation is likely to be overrated, since it does not take into account the changes in industrial facilities utilization.
4 20
05 2006 2007
□ Employment
Q Hours of work
■ Fixed assets
■ Facilities
utilization
□ Prices for oil
□ Remainder
Total throughout Minerals Processing Production and
the economy extraction industries distribution
of electricity, gas and water
Note: decomposition for the industrial production of 2004-2005 was made not taking into account work hours, the data being unavailable.
Fig. 4. Stricture of Gross Added Value in the Economy on the Whole and in the Industrial Production in 2004-2007
The only kind of economic activity where GAV decrease was observed in 2007 is electricity, gas and water production and distribution (GAV growth rates are equal to 99.7%). It should be noted that in 2004-2006 output growth rates of this kind of economic activity demonstrated the most successful dynamics, which is characterized by constant increase of growth rates. Reduction of added value of this industrial sector was mainly due to with the decrease in the main factors input. Against the background of slight growth of fixed assets volume, the negative dynamics of the main factors input was defined by the reduction of the number of those employed at the enterprises of this kind of economic activity and the hours worked by them, that is why labor input in 2007 was the main factor decreasing GAV growth rates at enterprises of electricity, gas and water production and distribution.
In 2007 the impact of main factors input (labor and capital accumulation taking into account the intensity of their usage) was practically equal to that of TFE on the observed GDP growth. The input of efficiency in GDP growth was about 54%, not taking into account world prices for oil, and 52%, when estimation of price situation at the markets of raw materials contribution is excluded.
Structure of TFE growth rates in the industrial sector is not an even one: as a continuation of the trend for efficiency growth rates deceleration that outlined in 2004-2006, in 2007 the enterprises of extractive sector demonstrate TFE decrease; TFE growth rates at the enterprises of electricity, gas and water production and distribution are reducing; at the processing enterprises, in contrast, TFE growth is observed, it being the prevailing factor that influenced the growth of this industrial sector.
The results presented characterize the transformation of economic growth structure and enable to single out the most significant factors that defined changes in the dynamics of the output growth rates.
As a result of January-September 2007 the economy's profitability was equal to 13.9% against 14.9% in the corresponding period of the previous year. The highest level of profitability is sustained in the industries connected with minerals extraction and processing. The existing differentiation of labor remuneration by kinds of economic activities influences the ratio of labor efficiency and wages growth rates considerably. Average accrued wages in the processing industries is by nearly 1.5 times lower than in extractive industries and its dynamic growth is the factor of attracting qualified labor force.
Disproportions in labor remuneration result in redistribution of decreasing labor resources to the sectors of economy characterized by high profitability, aggravate the deficit of specialists and qualified workers in the majority of processing industries, which is the factor that restricts processing industries development, economy's diversification and efficiency increase.
The profitability of sold goods and services throughout the economy as a whole was equal to, according to the preliminary estimation, 13.9% in 2007 against 14.9% in 2006. The analysis of profits formation by the kinds of activities demonstrates that balanced financial result was formed by 3/5 by economic activities connected with goods production and by 2/5 by services provision. However inside the sectors the industries can be distinguished that have a prevailing impact on the process of profit formation and use in the national economy.
The slowdown in industry financial results was initiated by the reserved dynamics of extractive industries productions. Balanced financial result of fuel fossils excavation in January-September 2007 decreased by 0.2% in comparison with the corresponding period of 2006.
Growth of prices for raw materials and investment goods led to the deceleration of the profit growth rates on the whole at processing enterprises, diversified tendencies for other kinds of activities sustaining.
Table 8
Profitability of Sold Goods, Production, Work, Services of Organizations by Kinds of Economic Activity in 2003-2007, %
January-
2003 2004 2005 2006 September
2006 2007
Total throughout the economy 10.2 13.2 13.5 13.2 14.9 13.9
Minerals extraction 19.2 32.5 35.6 30.6 35.3 27.9
Processing industries 12.4 14.9 15.3 16.6 16.8 18.5
Electricity, gas and water production and distribution 6.4 5.4 5.3 3.2 2.7 4.2
Construction 5.7 4.2 3.9 5.1 4.5 5.2
Wholesale and retail trade, motor vehicles ser-
vicing etc. 8.9 11.3 9.7 10.1 11.3 8.6
Transport and communication 15.3 13.4 14.4 15.1 16.4 17.7
Of which communication 35.8 32.7 33.6 33 36.9 41.4
Source: Federal State Statistics Service.
3.1.3. The Dynamics and the Structure of the Production by the Kinds of the Economic Activities
Main Trends and Factors of the Change of the Produced GDP
The development of the Russian economy in 2007 was formed under the influence of the following most significant factors: increase in domestic demand impact; advance growth of manufacturing industries in comparison with extraction industries, advance growth of investments in fixed assets in comparison with GDP and final demand dynamics; acceleration of final commodities import with regard to domestic production; intensive growth of the service sector; anticipating growth of wages in comparison with labor productivity, sustention of high customer demand and population inclination for savings; the acceleration of prices growth rates of manufacturing goods producers and service tariffs.
Comparative analysis of the Russian economy dynamics as broken by kinds of activities demonstrates, that the ratio of growth rates of the industry, construction and trade had the most significant impact on the nature and structure of development in 2002-2007.
Starting with the second half of 2005 with the increase of the investment activity in the national economy, the trade gave leading positions to the construction. The share of retail and wholesale trade is the biggest in the produced GDP and equal to 17.7% in 2007. It should be noted that the dynamic structural shifts were characteristic for the development of this kind of activity. The change in the demand at the world market determined anticipating growth and the increase of the foreign trade share in the structure of the trade turnover. Intensive growth of the wholesale trade was sustained due to the extension of the internal demand market for
material and technological resources. The volumes of wholesale trade exceeded the retail trade turnover by more than two times.
Table 9
The Structure of the GDP Produced as Broken by Kinds of Economic Activities in 2002-2007, as percentage in current prices
Section 2002 2003 2004 2005 2006 2007*
Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0
A Agriculture, hunting and forestry 5.7 5.5 5.0 4.5 4.1 3.9
B Fishing, fish-breeding 0.3 0.5 0.4 0.3 0.3 0.2
C Minerals extraction 6.0 5.9 8.4 9.6 9.5 9.0
D Processing industry 15.6 14.9 15.8 16.3 15.6 16.4
E Production and distribution of electricity, gas and 3.3 3.2 3.3 2.9 2.8 2.7
water
F Construction 4.8 5.4 5.1 4.8 4.5 5.1
Wholesale and retail trade; vehicles, motorcycles, 20.4 19.6 17.8 16.9 17.7 17.7
G household appliances and articles of private use service
H Hotels and restaurants 0.8 0.7 0.8 0.8 0.7 0.8
I Transport and communications 9.2 9.5 9.7 8.9 8.5 8.1
J Financial activity 2.8 3.0 3.0 3.5 3.9 4.1
K Real estate operations, rent and service provision 9.5 9.5 8.3 8.5 8.7 8.9
L Government administration and military safety 4.5 4.9 4.7 4.4 4.4 4.4
security; essential social security
M Education 2.6 2.4 2.4 2.3 2.3 2.4
N Public health service and social service provision 3.0 2.8 2.8 2.6 2.9 2.9
O Provision of other utilities, social and personal 1.7 1.7 1.6 1.5 1.6 1.7
services
Services of financial mediation, indirectly meas- -1.7 -1.6 -1.8 -2.0 -2.2 -2.3
ured
Total added value by kinds of economic activities 88.5 88.0 87.3 85.7 85.4 85.8
Net taxes for goods 11.5 12.0 12.7 14.3 14.6 14.2
* Preliminary data.
Source: Federal State Statistics Service.
The extension of the trade volumes in the country and at the international level determined to a great extent the growth of transportation operation. Commercial freight turnover increased by 2.2% over 2007 while the industrial output went up by 6.3%. The state of the transportation system of Russia is a barrier for economic growth, since its inefficiency leads to increased transport costs and the loss of profits from transit transportation.
Fig. 5. Change in the Production Dynamics by Kinds of Economic Activities in 2004-2007, as percentage to the corresponding period of the preceding year
Communication remains the most promising and dynamically developing among the kinds of economic activities. In 2007 the volume of communication services increased by 20.1%. The share of the main communication operators comprised 3/5 of the total volume of the communication services volume and more than a half of population communication services. The telephone communication provides 4/5 of the incomes, obtained from the industry services.
Industry: Production Rates and Structure
The analysis of industry production dynamics in the classification of kinds of economic activity allows estimating the impact of the extraction and manufacturing industries on the nature of the Russian economy growth nature. The comparison of the dynamics of industry indices demonstrates that whereas the Russian industry crisis was initiated by the slump in manufacturing industries in the environment of the reserved decrease of fuel fossils production, the economic growth was based on the increase in manufacturing industries production and the recovery of fossil fuels production in 2003 at the pre-reform level. Since that moment
the structure shifts in industry were determined by the anticipating growth of manufacturing industry in the Russian economy, the minerals extraction production dynamics being reserved. The main trends for the development of enterprises for minerals extraction were formed under the influence of such factors as the reduction of efficacious reserves facilities, low rates of exploration and putting into operation of new oil fields, limitations from transportation and exploration infrastructure. Underexploitation of extraction industries growth potential was also determined by reserved rates of minerals processing in metallurgy and petrochemistry. The existing structure of fixed assets being what it is the further increase of facilities load was accompanied by production capital intensity growth and the decrease in labor and financial resources efficiency use. This determined the significant impact of the output dynamics volume of the export-orientated industries complex on the structure of the industrial production and demand at the domestic market.
It should be noted that it was the slowdown in the fossil fuels extraction that had the biggest impact on the dynamics of the extraction industries in 2005-2007. The production indices in fossil fuels extraction slowed down to 102.5% in 2006 as compared with 107.5% in 2003, and in metal ores extraction - down to 101.8% against 108.5%.
Structural shifts in industry in 2007 were defined by anticipating growth of processing industries. Increase in industrial production in 2007 was equal to 6.3%, exceeding by 2.4 p.p. the level of the previous year. Increase in production volume of processing industries was 9.3%, extracting industries growing by 1.9% and electricity, gas and water production and distribution reducing by 0.2%. The potential of unused facilities being exhausted, one of the main factors of industry's growth rates acceleration was the growth of the scale of investments in the fixed assets. As a result they were kinds of activities oriented towards investment goods production - for instance machinery and equipment production (growth index 119.3%), electric, electronic and optical equipment production (112.8%), transport vehicles and equipment production (115.9%), non-metal mineral goods production (110.8%) - that had the most considerable influence on the sustention of steady dynamics of processing industries development.
Table 10
Indices of Industrial Production by Kinds of Economic Activities in 2000-2007,
as percentage to the previous year
2000 2001 2002 2003 2004 2005 2006 2007
Industry 108.7 102.9 103.1 108.9 108.3 104 103.9 106.3
Minerals extraction 106.4 106 106.8 108.7 106.8 101.3 102.3 101.9
Fossil fuels extraction 104.9 106.1 107.3 110.3 107.7 101.8 102.5 101.9
Minerals extraction excluding fossil fuels 118.2 96.2 99.1 102.5 108.5 96.8 101.8 101.6
Manufacturing industries 110.9 102 101.1 110.3 110.5 105.7 104.4 109.3
Electricity, gas and water production 104 101.4 104.8 103.3 101.3 101.2 104.2 99.8
and distribution_
Source: Federal State Statistics Service.
Oil and Gas Sector
Oil and gas sector is the basis for the Russian economy, playing a leading role in the formation of state budget earnings and trade balance of the country. The price situation at the world markets had a determining influence on the position of the oil and gas sector in the Russian economy in 2007. Since nearly 75% of the oil produced in the country is exported in crude or processed form, the level of world prices for oil is actually the main factor that determines incomes and financial situation of the Russian oil industry.
World prices in 2007 were at an exceptionally high level. In November 2007 the prices for oil reached unprecedented maximum in nominal terms. The average price for oil grade Brent was equal to USD 92.6 per barrel, Urals - to USD 90.0 per barrel. The main reasons for such a situation were world economy growth rates, which lead to high demand for oil, and conservative politics of OPEC concerning increase in oil production by member countries. The presence of quite considerable geopolitical risks in 2007 that contributed in sustention of high world prices for oil is also to be noted.
As a result, in 2007 the price for oil grade Brent was on average equal to USD 72.5 per barrel, the price of Russian oil Urals being USD 69.4 per barrel. The average price of the Russian oil at the world (European) market was 13.3% higher in 2007 than the average level of the previous year (Table 11).
Table 11
World Prices for Oil in 2000-2007, as USD per barrel
2000 2001 2002 2003 2004 2005
Price for oil grade Brent, Great Britain Price for oil Urals, Russia 28.50 26.63 24.44 22.97 25.02 23.73 28.83 27.04 38.21 34.45 54.38 50.75
Price for oil basket of OPEC member countries 27.60 23.12 24.34 28.13 36.05 50.64
Table 11 (continued)
2006 2007 Q I 2007 Q II 2007 Q III 2007 Q IV 2007
Price for oil grade Brent, Great Britain Price for oil Urals, Russia 65.16 61.24 57.75 54.30 68.76 65.16 74.87 72.19 88.69 85.91 72.52 69.39
Price for oil basket of OPEC member countries 61.08 54.65 64.97 71.59 85.18 69.10
Source: OECD International Energy Agency, OPEC.
The level of world prices for oil, which was observed in 2007, is exceptionally high not only for the period of post-reform development of the Russian economy but also from the point of view of historical retrospective. Over the period since 1900 higher level of world prices for oil in real terms was observed only in 1979-1981. For instance, in 1980 the average annual world price for oil in real terms (in 2006 prices) was equal to USD 90.5 per barrel, being in nominal terms USD 36.8 per barrel (fig. 8). For reference it can be noted that in 1998 the average annual price for the oil grade Brent in real terms (2006 prices) was only USD 16.2 per barrel (USD 12.7 per barrel in nominal terms), being on average in 1990ies USD 25.2 per barrel.
Data on monthly dynamics of world prices for oil in 2007 are presented in Table 12.
Prices for Oil Grades Brent and Urals in 2007, as USD per barrel Table 12
2007 January 2007 February 2007 March 2007 April 2007 May 2007 June
Price for oil grade Brent, Great Britain 53.68 57.43 62.15 67.51 67.23 71.54
Price for oil Urals, Russia 50.00 54.06 58.84 63.81 64.02 67.66
Table 12 (continued)
2007 July 2007 August 2007 September 2007 October 2007 November 2007 December
Price for oil grade Brent, Great Britain 77.01 70.73 76.87 82.50 92.61 90.97
Price for oil Urals, Russia 73.88 69.04 73.65 79.47 89.98 88.28
Source: OECD/IEA, OPEC.
The development of the gas and oil sector in the Russian economy in 2007 was characterized by the sustention of the tendency for oil, oil products and natural gas production growth. Oil production, gas condensate included, reached in 2007 491 mln tons. This figure is by 13.8% lower than pre-crisis maximum, reached in 1987, when oil production was equal to 569.4 mln tons and by 63% higher than the minimum level of 1996, when the production decreased down to 301.3 mln tons. The reasons for a considerable growth of oil production in recent years are the expansion of export opportunities, in particular due to the building of the Baltic pipeline system and extension of railway transportation use, as well as the growth in domestic demand and intensification of exploitation of oil fields in operation.
At the same time oil production growth rates in 2005-2007 decreased considerably. Whereas in 2002-2004 the increase in oil production, gas condensate included, reached 8.911% per year, in 2007 the increase in production was only 2.1% (Table 13). This is the indicator of exhaustion of reserves for fast increase of oil production in the country and the evidence of necessity of very active actions to develop new oil fields, in the Eastern part of the country, in particular.
The volume of primary oil processing increased by 3.8% in 2007, and the extent of oil processing decreased as compared to 2006 and was equal to 71.7% (in 2006 this index was equal to 72.0%).
The decrease in natural gas production - by 0.8% as compared with 2006 - has been observed for the first time over the recent years. The main reason for it is the drop in external demand for gas, and consequently, its export, because of warm winters and increase in prices for gas supplied to CIS-countries.
In 2007 the biggest amount of oil was produced by oil companies Rosneft, LUKOIL, TNK-BP, Surgutneftegas and Gasprom. The share of these 5 companies is 77.6% of the total oil production in the country. Production share agreement operators produced 2.8% of the Russian oil in 2007. The share of other producers, to which around 150 small scale oil producing enterprises belong, was 4.2% of oil production in the country (Table 14).
Table 13
Oil, Oil Products and Natural Gas Production during 2000-2007, as percentage to the preceding year
2000 2001 2002 2003 2004 2005 2006 2007
Oil, including gas condensate 106.0 107.7 109.0 111.0 108.9 102.2 102.1 102.1
Primary oil processing 102.7 103.2 103.3 102.7 102.6 106.2 105.7 103.8
Motor petrol 103.6 100.6 104.9 101.2 103.8 104.8 107.4 102.1
Diesel oil 104.9 102.0 104.7 102.0 102.7 108.5 107.0 103.4
Furnace fuel oil 98.3 104.2 107.1 100.3 97.8 105.8 104.5 105.2
Natural gas 98.5 99.2 101.9 103.4 101.6 100.5 102.4 99.2
Source: Federal State Statistics Service.
The increase in the state-owned companies influence in the oil sector was quite characteristic trend for the recent years. The positions of the state-owned companies strengthened considerably due to the purchase of private-owned companies assets (in 2004 of Yuganskneftegas, in 2005 - Sibneft). In December 2006 Gasprom purchased controlling stock in "Sakhalin-2" project, which is being fulfilled by foreign investors on conditions of production share agreement. In 2007 the share of state-owned companies at the market increased due to the purchase of the remaining oil producing and oil processing assets of YUKOS - enterprise was declared bankrupt in 2006 - by Rosneft.
As a result of such redistribution taking place Rosneft became the biggest oil company of the country and the share of state-owned companies in all-Russian oil production increased from 26.6% in 2006 to 31.9% in 2007.
Table 14
The Structure of Oil Production in 2006-2007*
Oil production in 2006, mln of tons Share in the total production, % Oil production in 2007, mln of tons Share in the total production, %
Russia - total 480.5 100.0 491.3 100.0
Rosneft 81.7 17.0 110.7 22.5
LUKOIL 90.4 18.8 91.4 18.6
TNK-BP 72.4 15.1 69.4 14.1
Surgutneftegas 65.6 13.7 64.5 13.1
Gasprom+Gaspromneft 46.1 9.6 45.8 9.3
Of which:
Gasprom 13.4 2.8 13.2 2.7
Gaspromneft 32.7 6.8 32.6 6.6
Tatneft 25.4 5.3 25.7 5.2
Slav-neft 23.3 4.8 20.9 4.3
YUKOS 21.5 4.5 - -
RussNeft 14.8 3.1 14.2 2.9
Bashneft 11.7 2.4 11.6 2.4
NOVATEC 2.6 0.5 2.6 0.5
Operators of production share 5.1 1.1 13.8 2.8
agreements
Other producers 19.9 4.1 20.7 4.2
State-owned companies -
total:
Rosneft+Gasprom + Gasprom- 127.8 26.6 156.5 31.9
neft
* According to the organization structure by 31.12.2007. Source: Ministry for Industry and Power, IET calculations.
Gasprom, whose share in all-Russian production was equal to 84.4% in 2007, commands as usual the gas production (Table 15). At the same time gas production by oil companies has increased. The share of the oil companies in gas production remains, however, quite low (8.7% in 2007). The biggest gas volumes production among oil companies is characteristic for Rosneft (2.6%), Surgutneftegas (2.2%) and LUKOIL (2.1%).
Table 15
Structure of Gas Production in 2007
Gas production, bln of cu m Share in the total production, %
Russia - total 654.1 100.0
Gasprom+Gaspromneft 551.9 84.4
Of which:
Gasprom 550.1 84.1
Oil companies 56.9 8.7
NOVATEC 28.5 4.4
Operators of production share agreement 6.7 1.0
Other producers 10.1 1.5
State-owned companies - total:
Rosneft+Gasprom+Gaspromneft 568.9 87.0
Source: Ministry for Industry and Power, IET calculations.
Data on oil production by oil companies demonstrate that increase in oil production in Russia in 2007 was mainly due to a considerable growth of oil production by projects of production share agreement operators (Sakhalin-1, Sakhalin-2, Khariyagin oil field). The total increase in oil production in 2007 was 10.8 mln of tons, increase in production share projects - 8.7 mln of tons or 80.6% of the total increase. Oil production in Russia not taking into account production share agreements projects increased only by 0.4% in 2007 (Table 16).
Table 16
Structure of Oil Production Increase in Russia in 2007 as Compared with 2006
2006, mln of tons 2007, mln of tons Increase, mln of tons Increase, %
Oil production in Russia - total 480.5 491.3 10.8 2.2
Oil production by production share agreement operators 5.1 13.8 8.7 170.6
Oil production in Russia, production share agreements operators excluded 475.4 477.5 2.1 0.4
Source: Ministry for Industry and Power, IET calculations.
A considerable decrease in new production facilities implementation in 2007 is also noticeable. Implementation of new oil wells in 2007 was equal to 2.7 thousands and was the lowest over the recent years, not taking 2005 into account. Considerable decrease of this figure in 2005 - by 29% as compared with the previous year - was accounted for by sharp decrease of investments in production by YUKOS and Sibneft: YUKOS was busy mainly with urgent payment of taxes imposed on it, and decrease in Sibneft's investments was due to its sale.
In contrast to 2005, in 2007 the drop in investment activity occurred world prices for oil being exceptionally high and there being no destabilizing events. In our opinion, this is an indicator of considerable decrease of incentives for investments in oil production that can be accounted for by two factors.
First in the environment of real worsening of oil production conditions and inflexibility of existing taxation system decrease in expected profitability of investments in the new projects occurred. New oil fields are usually characterized by worse mining, geological and geographical conditions their exploitation requiring increase in capital, operating and transportation costs. At the same time existing taxation system does not provide necessary decrease of tax burden while exploitation of new oil fields with high costs that limits investments in new projects.
Second, governmental expansion in oil sector and apprehensions as to further taking up of the private business considerably decrease willingness of private oil companies to invest in the long run.
As a result, excluding abnormal 2005 out of consideration, in 2007 despite exceptionally favorable situation at the world markets implementation of new oil wells was the lowest over the recent years (Table 17).
Table 17
Implementation of New Oil Wells in 2000-2007
2000 2001 2002 2003 2004 2005 2006 2007
Wells implementation, thousands 2.8 3.8 3.1 3.0 3.1 2.2 3.4 2.7
Source: Federal State Statistics Service.
Such dynamics of new production facilities implementation indicates unsteadiness even of the low oil production growth rates that are being observed at present. The result of the trends mentioned can be a decrease in oil production in the country in the forthcoming years.
Under the influence of oil world prices growth in 2007 a considerable growth in prices for oil and oil products at the domestic market was observed. The producer's prices for oil, car petrol, diesel fuel and furnace fuel oil (mazut) reached the maximum over the whole postreform period. In December 2007 the average internal price for oil (producers' price) in dollar terms reached USD 222.2 per ton, and average price for car petrol - USD 581.2 per ton, which is the maximum value for oil and car petrol prices over the whole post-reform period (Table 18).
Internal prices for natural gas have also increased. The gas producers' prices reached USD 19.2 per 1 thou. cu. m in September 2007. Average price for gas purchase in the industry, including both the gas production price and its transportation costs and trade and sales extra charge reached USD 75.6 per 1 thou. cu. m. in December 2007.
Table 18
Internal Prices for Oil, Oil products, Natural Gas in US Dollar Terms over 2000-2007 (average producers' prices, as USD per ton)
2000 December 2001 December 2002 December 2003 December 2004 December
Oil 54.9 49.9 60.7 70.1 123.5
Motor petrol 199.3 151.5 168.8 236.9 333.1
Diesel oil 185.0 158.5 153.8 214.3 364.3
Furnace fuel oil 79.7 47.1 66.1 66.0 69.4
Natural gas, as USD per thou. 3.1 4.8 5.9 4.4 10.5
cu. m
Table 18 (continued)
2005 December 2006 December 2007 June 2007 September 2007 December
Oil 167.2 168.4 230.3 240.9 288.2
Motor petrol 318.2 416.5 491.7 493.6 581.2
Diesel oil 417.0 426.1 442.0 467.1 692.5
Furnace fuel oil 142.7 148.8 181.6 210.1 276.5
Natural gas, as USD per thou. 11.5 14.4 15.6 19.2 17.6
cu. m
Source: calculated on the basis of Federal State Statistics Service's data.
In January-November 2007 as compared with the corresponding period of the previous year oil export in natural terms decreased by 4.3% while oil products export increased by 8.0% (Table 19). In January-November 2007 the share of export in furnace fuel oil (mazut) production was equal to 83.3%, diesel oil - to 55.7%, motor petrol - to 17.7% (for comparison: in 1999 export share in motor car petrol production was equal only to 7.2%, in 2005 - to 18.5%, in 2006 - to 18.3%). The volume of light oil products export being near the figure of the previous year, increase in their import was observed. In January-November 2007 import of motor petrol nearly doubled as compared with the corresponding period of the previous year, while the share of import in petrol resources was equal only to 0.04% (for reference: in the first half-year of 1998, i.e. before ruble devaluation, the share of the import in petrol resources was equal to just 8.7%, in 2005 - 0.03%, in 2006 - 0.02%). Gas export has reduced considerably as compared with the previous year.
Table 19
Oil, Oil Products and Natural Gas Export from Russia, as percentage
to the previous year
2002 2003 2004 2005 2006 2007 (11 months)*
Oil, total 113.9 117.8 115.0 98.4 98.0 104.3
including: to non-CIS countries 109.9 118.9 116.3 99.1 98.0 104.9
to CIS countries 137.3 112.4 108.3 94.9 98.0 100.5
Oil products, total 118.5 103.6 105.5 117.9 106.3 108.0
including: to non-CIS countries 119.1 102.6 104.9 119.1 104.5 107.4
to CIS countries 102.8 132.3 117.9 94.6 148.8 120.1
Gas, total 102.4 102.0 105.5 103.7 97.6 93.8
* As percentage to January-November 2006.
Source: Federal State Statistics Service.
In 2007 net oil and oil products export was equal to 367.7 mln tons, thus increasing by 18.4 mln tons as compared with the previous year. As a result, the share of net oil and oil products export in oil production reached 74.8%, net oil export being 53.3% of its production. The share of net export in gas production was equal to 28.1% in 2007 (Table 20).
Table 20
The Ratio of Energy Supplies Production, Consumption and Export in
2000-2007
2000 2001 2002 2003 2004 2005 2006 2007 (estima tion)
Oil, mln tons
Production 323.2 348.1 379.6 421.4 458.8 470.0 480.5 491.3
Export, total 144.5 159.7 187.5 223.5 257.4 252.5 248.4 259.1
Export to non-CIS countries 127.6 137.1 154.8 186.4 217.3 214.4 211.2 221.5
Export to CIS countries 16.9 22.7 32.7 37.1 40.1 38.0 37.3 37.6
Net export 138.7 154.7 181.3 213.4 253.2 250.1 246.1 256.3
Domestic consumption 123.0 122.9 123.5 129.8 124.2 123.1 131.2 123.6
Net export, as percentage to the 42.9 44.4 47.8 50.6 55.2 53.2 51.2 52.2
production
Oil products, mln tons
Export, total 61.9 70.8 75.0 78.4 82.1 97.0 103.5 111.8
Export to non-CIS countries 58.4 68.3 72.5 74.9 78.0 93.1 97.7 104.9
Export to CIS countries 3.5 2.5 2.6 3.5 4.1 3.9 5.8 6.9
Net export 61.5 70.5 74.8 78.2 81.4 96.8 103.2 111.4
Oil and oil products, mln tons
Oil and oil products net export 200.2 225.2 256.1 291.6 334.6 346.9 349.3 367.7
Oil and oil products net export, as 61.9 64.7 67.5 69.2 72.9 73.8 72.7 74.8
percentage of oil production
Natural gas, bln cu. m
Production 584.2 581.5 594.5 6,20.3 634.0 636.0 656.2 651.0
Export, total 193.8 180.9 185.5 1,89.3 200.4 207.3 202.8 190.2
Export to non-CIS countries 133.8 131.9 134.2 142.0 145.3 159.8 161.8 153.2
Export to CIS countries 60.0 48.9 51.3 47.3 55.1 47.5 41.0 37.0
Net export 189.7 176.8 178.3 180.5 193.5 199.6 195.3 182.7
Domestic consumption 394.5 404.7 416.2 439.8 440.5 436.4 460.9 468.3
Net export, as percentage to the 32.5 30.4 30.0 29.1 30.5 31.4 29.8 28.1
production_
Source: Federal State Statistics Service, Ministry for the Industry and Power, Federal Customs Service, IET calculations.
The share of oil products export having increased to some extent, the crude oil export, being about 70% of the total export volume, still prevailed in the structure of oil export. It was the furnace fuel oil, which is used as a primary product in Europe for further processing, and diesel oil that consisted the main part of the oil products export. The main part of the energy supplies (85% of oil, 95% of oil products and 81% of gas) was exported beyond CIS.
As it is demonstrated by the analysis of the Russian oil export dynamics over the long period of time in 2007 the total net export of oil and oil products reached unprecedented level and by 76.1 mln tons (26.1%) exceeded the level of 1988, which was characterized by a maximum oil export volumes (291.6 mln tons) before the crisis. At the same time the increase of oil products share in oil export was observed, their share increasing from 18.2% in 1990 to 30.3% in 2007 (Table 21). In the environment of the sharp reduction of domestic oil consumption (according to our calculations it has decreased from 269.9 mln tons in 1990 to 123.6 mln tons in 2007, that is more than by half) the share of oil and oil products net export in oil production increased over this period from 47.7% to 74.8%. In contrast to oil and oil products export the net gas export and its share in production do not exceed the level of 1990ies in recent years and the share of net gas export in its production is about that of the pre-reform period (28.1% in 2007 against 28% in 1990).
Table 21
Oil Products Net Export in 2002-2007
2002 2003 2004 2005 2006 2007 (estimation)
Oil products net export, mln. tons 74.8 78.2 81.4 96.8 103.3 111.4
The share of oil products 29.2 26.8 24.3 27.9 29.6 30.3
in net export of oil and oil products, as percentage
Source: Federal State Statistics Service, Federal Customs Service, IET calculations.
The given data testify that the export orientation of oil sector in comparison with the pre-reform period has considerably reinforced. It should be, however, taken into account that it is connected not only with the increase of the absolute export volumes, but also with a considerable decrease in the domestic oil consumption as a result of Russian economy market transformation.
High level of world prices for oil, which was observed in 2007, determined considerable incomes growth in the oil sector of the economy. In January-November 2007 total earnings from oil and main kinds of oil products export (car petrol, diesel oil and furnace fuel oil) reached USD 147.4 bln., which is a record level over the whole post-reform period (Table 22). For reference it can be noted that the minimum level of oil export earnings was observed in the environment of world oil prices fall in 1998, when the export profit was only USD 14 bln.
Table 22
Oil and Oil Products Export Earnings in 2000-2007, USD bln
2007
2000 2001 2002 2003 2004 2005 2006 (11 months)
Oil and main kinds of oil products export earnings 34.9 33.4 38.7 51.1 74.6 112.4 140.0 147.4
Source: calculated on the basis of the Federal State Statistics Service data.
The share of power and energy commodities in Russian export in 2006 was equal to 64%, of which crude oil accounted for 34.4%. The data on the structure of Russian export of energy suppliers are presented in Table 13.
Table 23
Value and Share of Fuel and Power Commodities in 2005-2007
2005 2006 2007
USD bln %* USD bln %* USD bln %*
Fuel and Power commodities, total 154.7 64.1 196.9 65.4 225.6 64.0
of which: oil 83.8 34.7 102.3 34.0 121.4 34.4
natural gas 31.4 13.0 43.9 14.6 44.8 12.7
* As percentage to the total volume of Russian export. Source: Federal State Statistics Service.
The dynamics of separate indices of oil and gas sector development is shown in fig. 6-9 (value indices are given in current prices).
Source: calculated on the basis of the Federal State Statistics Service data.
Fig. 6. Average Export Prices for Oil and Furnace Fuel Oil (mazut) in 1996-2006,
as USD per ton
80 75 70 65 + 60 55 50 45 40 35 -f 30 25 20 -15 4 10 5 + 0
CM CM CM CM
CMCMCMCMCMCMCMCMCMCM
-mln of tons (left-hand scale)
• USD mln (right-hand scale)
Source: calculated on the basis of the Federal State Statistics Service data.
Fig. 7. Oil and Oil Products Export in Natural and Monetary Terms in 1997-2007, mln tons, USD mln
Source: calculated on the basis of the Federal State Statistics Service data.
Fig. 8. Average Producers Prices for Oil and Gas in Dollar Terms in 1996-2007, as USD per ton and as USD per thou. cu. m, correspondingly
Source: calculated on the basis of the Federal State Statistics Service data.
Fig. 9. Average Producers' Prices for Motor Petrol and Furnace Fuel Oil in Dollar Terms
in 1996-2007, as USD per ton
A number of factors provide favorable demand and price prerequisites for further development of oil sector in Russia. The export opportunities of Russian oil to European countries will expand the demand for oil in the countries of Western and Eastern Europe increasing and oil production in the Northern Sea decreasing. At the same time the growth of demand for oil in the countries of Asian-Pacific Region, China in particular, as well as the predicted considerable aggravation of their dependence upon the import create favorable opportunities for Russia's access to the markets of this region's countries and for considerable growth of oil export in this direction.
New oil pipelines projects that are being carried out at present, for instance construction of oil pipeline East Siberia-Pacific Ocean with the branch for China, will enable necessary infrastructure creation to increase Russian oil supplies to the world market. At the same time opportunities for Russian oil export will be more and more limited by the possibilities of its production expansion, real worsening of production conditions.
Increase in oil production and export in the future is possible only on condition of new oil fields development, whose exploitation in many cases is characterized by high capital, exploitation and transportations costs. Start of such oil fields development requires improvement of the existing system of oil sector taxation, pursuing of special tax policy, which provides necessary incentives for investments in oil production.
Worsening of extraction conditions accounts for the necessity of tax load decrease while new oil fields with high costs are being developed, implementation of privileged or more flexible tax regimes. This will enable to start industrial production at such oil fields, which will provide additional oil production and tax earnings.
In order to stimulate development of new oil fields, territorial step-down coefficients for severance rates that are implemented for the whole period of new oil fields exploitation of the particular regions over the whole period of exploitation are preferable as compared with the tax vacations mechanism that was introduced for oil field of East Siberian oil and gas province in 2007, from our point of view. The values of such coefficients can be defined by calculation, based on the requirement to guarantee necessary profitability of the investment in oil fields development of the corresponding territory (shelf zone). Exploitation of oil fields of the continental shelf requires the lowest tax rates - down to zero rates - to be implemented.
Use of territorial step-down coefficients to the severance tax rates has a number of substantial advantages as compared with the scheme of the taxations vacations; it is better suited to protect governments' interest. In contrast to the scheme of taxation vacations such an approach does not induce speeding up of the oil production in the first years of oil field development in order to exempt the biggest amount of the oil produced from taxation, that is it does not have a distorting influence on the behavior of entrails users, production profile or oil extraction level. Severance payment on application of such an approach is made from the very beginning of oil production, and does not have a suspended character. The deeper exploitation of oil field is stimulated since the amount of severance tax is less at the later stages of production than in case of taxation vacation scheme implementation.
A more developed form of oil extraction taxation is taxation of net profit that is defined in some way. Such an approach can be fulfilled in different forms, for instance, on the basis of implementation of tax for additional income from hydrocarbons production, royalty or additional profit tax. As compared with severance tax scheme taxation of net profit is by far more complicated when tax administration is concerned.
Adoption of any decisions on investments in new oil fields development stimulation should correspond to the real opportunities of the government to administer new tax regimes. For the time being it is preferable to use simpler non-individualized tax regimes, for instance, implementation of territorial step-down coefficients to severance tax rate, which, in the environment of high world prices for oil and positive dynamics of oil extraction, is advisable to limit to the regions of Eastern Siberian oil and gas province and continental shelf zones.
In prospect, after necessary prerequisites having been fulfilled, it seems sensible to transfer to more developed forms of taxation of oil production, that are based on the figures of the incomes received and take into account real costs for particular oil fields' exploitation.
Manufacturing Industries
The steady economic growth due to the expansion of the internal market demand as well, gave additional stimulus for the development of the manufacturing industries. The dynamics of the manufacturing industries differentiates substantially by the kinds of the economic activity, the ratio of the rates of investment and consumer's goods production having the biggest influence. The growth fluctuations by the kinds of the economic activity being quite big, the anticipating growth of machine-building production output was the prevailing tendency of the recovery period, which positively affected the level of business activity of industries adjacent to construction materials production and other intermediate goods production. The ratio of growth rates of different kinds of economic activities in 2000-2007 demonstrates the gradual turn from the growth that was orientated towards natural and raw materials potential exploitation towards the formation of the resource system for the investments development. In the environment of the production growth the demand for domestic and imported equipment is growing dynamically.
Table 24
Change in the Rates of Production by Kinds of Manufacturing Industries Economic Activity in 2000-2007, as percentage to the previous year
2000 2001 2002 2003 2004 2005 2006 2007
Manufacturing industries 10.9 2 1.1 10.3 10.5 5.7 4.4 9.3
Foodstuffs, including tobacco and beverages 5.3 8 7.2 6.9 4.4 4.4 5.4 6.1
production
Textile and clothing industry 24.9 7.8 -2.5 1.2 -4 -1.5 7.3 -0.3
Leather, leather goods and footwear production 7.6 13.7 11.4 11.5 -0.6 -2.7 16.7 -0.1
Woodwork and wooden goods production 14.1 -2.5 4.2 9.7 8.7 4.5 0.5 6.2
Pulp-and-paper production, editing and printing 18 9.6 4.1 7.8 5.1 1.2 6.4 9.0
activity
Coke and oil products production 2.4 2.8 4.6 2.2 2.4 5.4 6.1 2.7
Chemistry industry 15.2 0.3 0.2 5.4 6.6 2.6 1.9 6.1
Rubber and plastic goods production 26.1 1.6 0.2 5.5 13.5 5.5 11.7 23.0
Other non-metal mineral goods production 10.6 3.8 1.2 7.3 8.4 3.5 10.8 10.8
Metallurgical production and finished metal 15.3 4.6 5.1 7.2 3.9 5.7 8.8 2.0
goods production
Machinery and equipment production 5.7 6.4 -8.8 19 21.1 -0.1 3.3 19.3
Electric, electronic and optical equipment pro- 25 8.4 -7.7 43.2 34.5 20.7 -5.5 12.8
duction
Transport vehicles and equipment production 10.7 -26.4 -1 14 11.5 6 3.3 15.9
Other productions 11.5 8.5 3.9 10.8 10.5 0.7 7.2 5.0
Source: Federal State Statistics Service.
The analysis of the dynamics of the investment goods market in recent years indicates that the level of the business activity depends considerably on the economy revenues from the foreign economic activity. The additional factor of machine-building industry growth was the improvement in trade of high-tech equipment produced domestically at the external markets as well as the positive changes in investment environment connected with the gradual reduction of the duties for imported components and equipment and the introduction of industrial assemblage regimes in motor-vehicles production. At the same time it should be noted that the production output in some branches of machine building is subjected to quite considerable fluctuations.
Domestic machinery and equipment production increased by 19.3% in January 2007. The dynamics of the machinery and equipment output was determined mainly by the extension of the demand for handling machinery, railway, power and agricultural machine building, instrument making, communication facilities production. Besides, over the last years the steady growth of the demand for the consumer's complex equipment sustained.
Anticipating import growth rates as compared with domestic production also had a considerable influence on the dynamics and nature of machine-building development. This is due to the fact that non-competitiveness of many kinds of machinery and equipment as compared with the import analogues by the criterion of price to quality ratio as well as absence of the facilities for production of the modern equipment limits considerably market for the domestic machine-building.
The influence of import is considerably differentiated by sectors of economy and goods markets. For instance, at the market of intermediate goods import of some kinds of primary products, components for household appliances, components for industrial assemblage within the framework of motor-vehicles assemblage projects has a positive impact on the processes of restructurization and the level of business activity of domestic producers. At the market of the goods of investment machine building increase of import was one of the main factors to fulfill investment projects, modernize production and implement technological innovations. At the same time the competition is observed to become more acute in such machine-building branches as tools making, agriculture machine building, construction and road equipment production, motor-vehicles production. Low investment activity, high level of fixed assets deterioration, outdated technologies were still characteristic for these kinds of production. One of the promising directions of such fields of activity development was active implementation of industrial assemblage mechanism and creation of the environment, which will stimulate foreign companies to transfer their activity into the territory of the Russian Federation. Anticipating growth of goods output at the enterprises with foreign capital participation changes the conditions of the competition and favors increase of efficiency at traditional structures.
Transition from predominantly extensive model of the Russian economy development to the intensive one, involves considerable structural changes, connected with the diversification of the investment activities directions, human resources development, and conduction of thorough institutional reforms that will provide favorable conditions for economic agencies activity.
3.2. The Situation in Industry
The section is based on the data of surveys among directors of industrial enterprises, which have been conducted by the IET according to the European harmonized methodology on a monthly basis since September 1992 and encompass the whole territory of the Russian Federation. The panel's size is approximately 1,100 enterprises, where work more than 15% of those employed in industry. The panel has a shift towards big enterprises by each of the specified subbranches of the national economy. The return of questionnaires is 65-70%.
These research surveys (RS) among directors of enterprises represent a quick method for collecting data concerning the state of affairs at their enterprises and the expected (or planned) changes in the main indices of their performance. RS is a relatively new instrument when applied to economic analysis. The first such survey was conducted by the Ifo Institute for Economic Research (Munich, Germany) in 1949. Before long, this method began to be applied in the UK, France and Italy. From 1962, the EU has been working at harmonizing (making compatible) the results of surveys being conducted in different countries of that continent.
The questionnaire form applied in a research survey contains a limited number of questions (no more than 15-20). These questions are of a qualitative, not quantitative, character. The simple structure of questions and answers makes it possible for the respondents to fill in the questionnaires in a short period of time and without consulting any other staff or documentation. It is of paramount importance that the respondent at each enterprise should be a CEO of the highest level, who has full vision of the enterprise's state of affairs and directly participates in its management. In 2007, 30% of the filled-in questionnaires were returned by the directors of enterprises, 35% - by deputy directors, and 24% - by heads of economic subdivisions.
In the analysis of the results of surveys, a specific derivative index - the so-called balance - is applied. Balances are computed as the difference between the percentage of those who have replied "is growing" (or "is above the norm") and the percentage of those who have replied "is decreasing" (or "is below the norm"). The result makes it possible to represent the distribution of answers to each question by simple digits with signs "+" or "-".
Balance is interpreted as the first derivative or process speed. If the balance of answers to the question concerning the expected change in prices has the sign "+", this means that average prices in the nearest future period are going to be on the rise (there is a prevalence of enterprises who have reported a forecasted growth of their prices). Growth of balance in a month from +10% to + 17% demonstrates that average prices in industry are going to display a more intensive growth, because the prevalence of enterprises forecasting growth has also increased. Negative balance implies that average prices will go down (a greater number of enterprises are going to lower their prices). A change in balance from -5% to -12% is interpreted as growth in intensity of price decline.
3.2.1. The Dynamics of Demand and Finished Stock in Russian Industry
The beginning of the year 2007 was rather favorable for Russian industry. The return of typical weather conditions and the already accumulated useful experience of leveling-out the negative effects of the long New Year holiday made it possible for the majority of Russian enterprises to achieve significant positive results in January. The demand for industrial products "slumped" in January very insignificantly. According to the initial data (that is, not cleared of the seasonal factor), the rate of demand's decline was only -7 balance points, while
in January 2006 this index was -24 b.p., and in January 2005 —26 b.p. After the elimination of seasonality, demand's dynamics displayed an impressive growth of +21 b.p., which represented an absolute historic high of the whole period of previous observations since 1993 (see Fig. 10). As a result, 68 % of Russian industrial enterprises estimated their sales volumes in January as being normal. Thus, the dynamics of demand, anomalously favorable for January, relieved industry of the necessity to dramatically curb its output.
(balance = % growth - % decrease)
In February, the demand dynamics displayed a more traditional pattern. The rate of sales growth (before being cleared of seasonality) became 15 b.p., which is by 1 point higher than the first half-year 2006's average, and by 2 point higher than the average per annum value. The clearance of seasonality did not result in either a changed growth rate of demand in February, or its correlation with last year's average indices. The estimations of demand (higher -lower than the norm) confirmed the slowdown in sales growth by comparison with January's indices and an improved dynamics against that of last year.
In March, the growth rate of demand became more intensive. The initial data (not cleared of seasonality) demonstrated a rise in demand of up to 38 b.p., which became yet another absolute historic high of the whole period of monitoring, and doubled on the results of March 2006. The elimination of the seasonal factor resulted in growth intensity of 24 b.p., which also is an absolute historic high, while being by 3 points above the previous record level registered in January 2007. Sales volumes began to satisfy two thirds of Russian industrial enterprises (see Fig. 11). The robust growth rate of demand and diminishing finished stocks allowed enterprises to maintain their high output rates.
100
%
20
80
60
40
0
1/941/95 1 /96 1/97 1/98 1/991/001/01 1/02 1/031/04 1/051/06 1/071/08
Fig. 11. Dynamics of Basic Indices of Effective Demand
The forecasts concerning changes in demand became more optimistic, as well. The expected rate of sales growth (cleared of seasonality) reached its historic high of the period 1992-2007. As a consequence, the plans for output changes in March were also upwardly revised. The planned growth rates of production were higher than those planned for February by 4 points, and reached their historic high of the last 15 years. Industry was clearly not going to apply the brake.
In April, the positive trends persisted in Russian industry, with some slight negative adjustments. The growth rate of demand for industrial product became slower. After the record levels registered in March, in April this index went down by 10 balance points. However, the decrease after clearance of seasonality was only by 3 b.p., while further clearance of accidental factors demonstrated the result being equal to the March level (historic high). Nevertheless, the slowdown in sales growth in no way disappointed producers - quite the contrary. The level of satisfaction with demand in Russian industry rose to 70%. Such a high level of answers "normal" has never once been registered during all the previous 179 surveys. The slowdown in demand growth did not influence the growth rate of output in April, either. Although the initial data on the dynamics of output demonstrated that growth intensity declined from 52 to 46 b.p., after the elimination of seasonality the growth rate was already seen as being slightly on the rise. The elimination of accidental fluctuations further confirmed this conclusion: indeed, in April industry continued to increase its production intensity.
The maintaining of high rates of output in face of a slowdown in demand growth made it possible for enterprises to somewhat replenish their finished stocks. In April the balance of estimations ("above - below norm") went up to +4 points, whereas in Q I 2007 it was +2.. .+3 points (see Fig. 12). However, the stocks in machine-building, non-ferrous metallurgy and the timber industrial complex were still insufficient - there, the balances had remained negative for some months (that is, enterprises with stocks "below norm" were prevalent).
%
75
-15
60
45
30
15
0
-30
1/1993 1/1995 1/1997 1/1999 1/2001 1/2003 1/2005 1/2007
Fig. 12. Balances of Estimates of Finished Stock (balance = % above - % below norm)
Although Rosstat's official data cited, in April, a considerable slowdown in production growth, the results of the May survey still reflected an optimistic view of the dynamics of Russian industry's basic economic indices. Firstly, a slowdown in output growth in May was demonstrated only by the "gross" data (before being cleared of seasonal and accidental fluctuations). The elimination of the seasonal factor resulted in a gradual rise in the rate of production growth. As a result, an eventual historic high was yet again achieved in May - 36 b.p., after 34 b.p. in April. Secondly, intensive industrial growth was based on a persistently increasing growing rate of effective demand. Satisfaction with sales volumes also continued to be on the rise. Thirdly, the dynamics of industrial output was also sustaining the necessity to replenish finished stocks. Between August 2006 and March 2007, the balances of estimations of stocks were in the interval between +2 and +5 b.p., which was extremely low by comparison with the level of +10 to +15 b.p. during the previous 12 months. In May this index rose to +9.
The official data later released by Rosstat, indeed, confirmed growth of industrial production in May (by 6.7% against that in May 2006; growth in April - 4.6%).
However, June saw no continuation of the relatively favorable May trend. In June, the enterprises experienced a slowdown in the growth of their sales of finished products. A fall in the growth rate of demand was displayed by all indices - initial, cleared of seasonality, and cleared of accidental fluctuations. As a result, the indices registered in June became the worst in the previous 12 months. Nevertheless, at that time this process did not acquire a critical importance for Russian enterprises. The adjustment of output dynamics followed that of sales. Slower growth was also demonstrated by all the production indices. As a result, the share of the "demand-following" enterprises reached the level of 69 %, whereas usually this index had been no higher than 63-65 %.
The rate of output growth could only be sustained by the necessity of replenishing finished stocks. In June, the balance of estimations of these stocks across industry as a whole once again reached its historic positive low (+2 balance points). It is noteworthy that in big
European countries the balances of stock estimations (displayed by the results of similar surveys) usually remain within the interval between +10 and +20 points.
July's dynamics of the basic economic indices in Russian industry displayed both negative and positive features. Firstly, no obvious further slowdown in industrial growth was observed in July, contrary to enterprises' previous forecasts. The initial data demonstrated a fall in the growth rate of output from 24 to 17 b.p.; when cleared of seasonality, this index displayed stability, which, however, disappeared after the elimination of accidental fluctuations. This situation was a demonstration of quite an adequate response to the dynamics of demand.
Secondly, the growth of demand in July also became slower according to the initial data; this slowdown disappeared after the index was cleared of seasonality, and reappeared after the additional elimination of accidental fluctuations. Although the growth rate of demand had become lower by some 10 b. p. in the previous 3 months; at that time, this did not influence the estimations of its volume by the scale "above - below norm". In July the share of the answers "normal" remained at its historic high.
Thirdly, in July there was growth in enterprises' endowment with finished stocks. The balance of estimations rose to +9 b.p., while the share of the answers "normal" increased to 67% the latter value being a historic high). The averages of these indices in the first half-year 2007 were +4 b.p. and 65%, respectively. The replenishment of finished stocks sustained the dynamics of output in July, since estimations showed a rise in the share of those enterprises whose output growth was ahead of the dynamics of sales, and a fall in the share of those the changes of whose output and demand coincided.
In August, the growth rate of sales of industrial products remained nearly the same as in July: initial data demonstrated the same rate, after clearance of seasonality it went down by 3 b.p., while the elimination of accidental fluctuations resulted in a decrease by 1 b.p. In other words, the growth rate of demand decreased very slightly, if at all. At the same time, the satisfaction of enterprises with their volumes of sales remained at its absolute historic high. The normal volumes of sales (as estimated by the enterprises) ensured that in 2007 their capacities were exploited at the level of 77%, while in the previous year this index amounted to 73%, and in 1999 - to only 59%. Due to insufficient ("below norm") demand, only 61% of Russian industry's capacities in 2007 were being exploited (in 2006 - 63%, and in 1999 - 44%).
The rate of output growth in August rose on that observed in July, as seen by all the indices: initial data demonstrated growth by 9 b.p., when cleared of seasonality - by 3 b.p., and when cleared of accidental fluctuations - by 2 b.p. As a result, production was growing at an accelerated rate, as compared to that of demand, at 30% of enterprises, while in the first half-year 2007 such a ratio between output and demand was registered, on the average, by 23% of enterprises, and in 2006 - by 22%.
However, the higher growth rate of output against that of demand did not produce a rising overstocking of finished products. On the contrary, any surplus stocks disappeared as a result of the share of answers "below norm" having increased to 16% (the historic high of the previous 10 months), and of the share of answers "above norm" having diminished to 15% (the absolute historic low of the previous surveys). This could result from producers' inability to regularly and reliably replenish their finished stocks and /or to achieve such volumes of sales that their further growth could no more be reliably backed (or covered) by output and available stocks.
September failed to inspire any optimism in Russian industrialists - quite the contrary. Firstly, the rate of growth in effective demand for industrial products continued to decline: by initial data, it lost another 4 points in September, in Q III - 8 points, and in the previous 6 months - 29 points. After clearance of seasonality, the growth rate of demand was shown to be at its August level - the lowest in the previous 18 months. The elimination of accidental fluctuations produced a fall, as compared to August, by 1 point - to the historic low of the previous 18 months. The period of relatively high and stable growth in demand, which had begun in Q II 2006, now ended.
Secondly, the estimations, by enterprises, of their demand indices confirmed the previous conclusion. In September the share of the answers "normal" decreased at once by 6 points, reaching its historic low in the previous 6 months. Only 66% of Russian industrial enterprises were satisfied with the level of demand for their product, while 28% considered it to be "below norm". During that month, 14% of the enterprises participating in both the August and September surveys reconsidered their estimations of demand with downward results ("above norm" ^ "normal", "normal" ^ "below norm").
The changes in output in October inspired more optimism, but only at a first glance. In October the growth rate of output increased by all its indices. Initial data displayed a growing balance (growth rate) from 8 to 21 b.p. According to the data cleared of seasonality, the growth rate rose from 15 to 25 points, while after the further elimination of accidental fluctuations the rate went up from 20 to 22 balance points.
However, in October the increased intensity of industrial production was not backed by a corresponding growth rate of demand. That month's initial data demonstrated a further decline in the growth rate of sales. As a result, in Q II and Q III 2007 this index went down from 36 to 4 b.p. The latter value represents (with the exception of the January data) the worst result since the beginning of the year 2006. When cleared of seasonality, the growth rate of demand in October amounted to 8 b.p. The same level was obtained after the further elimination of accidental fluctuations. Both figures turned out to be the worst of their kind since April 2006. As a consequence, the share of enterprises whose output dynamics coincided with the dynamics of sales was reduced to 66 % after having been 73% in September, while the share of enterprises with an accelerated growth of output against that of demand increased to 25%, after 15% in September. Evidently, in October industry took the risk of "forgetting about demand". However, demand provided no grounds for this kind of attitude. Its volumes, as before, failed to satisfy 29% of enterprises, which became this index' historic high since the beginning of Q II 2007. In August, dissatisfaction with demand in Russian industry was only 23% (the absolute historic low of the whole period of monitoring (1992-2007)).
Besides, demand could not be disregarded because of the presence of accumulated finished stocks. By comparison with September, their estimations became somewhat better (the share of enterprises with their normal volumes increased by 3 points, while that of enterprises with surplus stocks decreased by 1 point). Nevertheless, on the whole the estimations in October did not return to the levels prevalent in Russian industry prior to September, when the estimations of accumulated stocks had demonstrated a dramatic shift to the negative. However, the balance of the estimations of stocks at the time of the last survey was only 4 points. This provides grounds for the conclusion that certain factors were still actively preventing industrial enterprises from adequately increasing their output in response to the currently existing situation and replenishing their finished stocks to the traditional surplus level.
November confirmed the truth of the pessimistic October analysis. Firstly, the growth of effective demand for industrial products continued to slow down. According to initial data, in November the balance (or growth rate) amounted to only +1 balance point; when cleared of the seasonal factor, its value went up to +5, while the elimination of accidental fluctuations yielded +6 b.p. But all the obtained values were not only worse than those observed in October and September - they turned out to be the worst ever since early 2006.
Secondly, satisfaction with sales in industry remained the lowest in the preceding 9-month period. Only 68% of enterprises consider the demand for their product to be at a normal level. Dissatisfaction with demand increased in industry to 29%. In machine-building, already as many as 35% of plants are dissatisfied with their volumes of sales (although in August there were only 22%), in light industry - 43% (in April - 28%), in the food industry -25% (in July - 13%).
Thirdly, the slowdown in the growth of demand, nevertheless, urged enterprises to restrict the growth of their output. In November the balance (or growth rate) based on the initial data demonstrated a diminishing rate of growth from +20 to + 14 b.p. Clearance of seasonality yielded a rate of +20 b.p. (after having been + 23 b.p in October), and elimination of accidental fluctuations demonstrated + 21 b.p. (after +20 b.p. in October). These data provide enough grounds for the conclusion as to a slowing-down rate of output growth in November 2007.
Fourthly, demand "required" a more substantial adjustment of output volumes, because in November the dynamics of output significantly differed from that of demand. Coincidental changes in output and demand were registered in November by only 59% of enterprises. Such a low level of this index had not been observed for the past 2 years. And the share of enterprises whose output was ahead of demand, on the contrary, went up to 28%. This represents a historic high of the 5 previous months. The share of enterprises whose output was behind demand also increased - to 13%. As a result, 41% of enterprises displayed in November a pattern of output changes that differed from that of demand. Producers were clearly no more perceiving demand as the main target for their output.
Fifthly, the balance of estimations of finished stocks became substantially higher. Within one month, this index increased by 5 points and became the worst in the past 17 months. In other words, such a surplus of stocks had not been observed in Russian industry since July 2006. This is also a sign of an inadequate response of output to current demand. More goods were produced than it was feasible to sell, and the surplus was put in warehouses. As a result, the warehouse stocks turned out to be higher than it had been typical in the preceding months. In fact, in a normal situation warehouses are filled with surplus stock when demand is expected to grow in the next few months, and when enterprises are preparing to satisfy it without overloading their production capacities. However, in our situation the expected level of demand gave no reasons for replenishing finished stocks for subsequent intensive use in the following months.
The end of the year 2007 saw Russian industry being faced with rather gloomy prospects, as estimated by heads of enterprises. Firstly, the comparison of the December results observed in previous years demonstrated that the end of 2007 looked more bleak (from the point of view of demand patterns) than the outcomes of the three previous years. The growth rate of demand for industrial products (after the survey's results were cleared of seasonality) remained at its historic low since March 2006, while by comparison with March 2007 (the best result of last year) it decreased 4-fold. As a consequence, the satisfaction with the vol-
umes of sales was diminishing. At the time of the last survey, only 66% of enterprises believed that the demand for their products was normal.
Secondly, the dynamics of output did not make producers particularly joyous, either. According to heads of enterprises, the growth rate of output in industry continued to slow down. In December the growth rate of this index turned out to be the worst by comparison with those observed in the same month of each of the last 5 years. When cleared of seasonal-ity, it displayed nearly the lowest result of the year (being next only to that of September).
Thirdly, the changed estimations of finished stocks gave no grounds for optimism, considering the dynamics of the other economic indices. In December the balance of estimations increased to +14 points, after having amounted to +8 in November and +4 in October. As a result, the level of surplus warehouse stocks returned to the level registered by the surveys prior to mid-2006, when there were sufficient capacities and personnel available. In 2007, industry was experiencing shortages of both. This means that everything capable of yielding more or less competitive products was now being made use of. No one wanted to curb output and once again mothball these capacities. In such conditions, slower growing demand makes enterprises work for the warehouse, in hope of sales once again beginning to increase in a few months, and their warehouse stocks starting to "dissolve". However, forecasts as to the patterns of demand remained discouraging, thus urging enterprises to assess their stocks as excessive more often than as normal or insufficient.
3.2.2. The Obstacles to Growth of Industrial Production
In 2007, there emerged a new structure of obstacles to production growth in Russian industry (see Fig. 13).
At the beginning of last year, low effective demand was traditionally considered to be the main obstacle to output growth. The incidence of this obstacle across Russian industry in late 2006 - early 2007 became stabilized at the level of 37%. Shortage of current assets, which previously had been producing a similarly restricting effect, now was estimated as an obstacle by only 30% of enterprises. Nearly the same number of enterprises saw an obstacle in the shortage of qualified personnel, but early in the year this factor was mentioned by only 31% as against 36-37% in the second half-yeare 2006. Competitive import was seen as an obstacle by only 23% of enterprises, which became the historic low of the previous eight quarters.
The "personnel issue" by late 2006 had become more acute than ever since 1993. In 2006, on average, 1/3 of Russian industrial enterprises regarded it as an obstacle to output growth. All this occurred despite the fact that the dynamics of employment and the forecasts of its changes were more favorable than ever previously. During the first three quarters of 2006, enterprises were managing to increase the numbers of their personnel. The only exception was the year's beginning, when industry traditionally loses many workers who decide to go to a new employer with the start of a new calendar year. A similar situation developed in early 2007. The balance of answers concerning the actual employment changes once again became negative (that is, more personnel had quit than had been registered by enterprises as new employees), but the balance value (-3) looks negligible by comparison with the values observed in early 2006 (-19) or 2005 (-15). As a result, industry had managed to reduce its personnel deficit. The balance of estimations of personnel sufficiency, due to the expected changes in demand, increased from -13 b.p. in the second half-year 2006 to -5 b.p. in early
2007. In other words, in early 2007 industry was still in want of personnel, but to a lesser degree than it had been in the previous half-year period.
As shown by the analysis of estimations of product competitiveness, Russian manufacturing enterprises believe that approximately 78% of their products are competitive (in relation to import), including on those markets where imported goods are simply absent, those where imported goods are less than competitive in terms of value for money, and those where domestic and imported goods are equally competitive. When estimated by branch, in 2007 the share of such markets was 97% in the construction materials industry and up to 69% in light industry. Given such conditions, there is little surprise in the fact that competitive import is regarded by Russian industrial enterprises as by far not the strongest obstacle to output growth. In Q II 2007 competitive import was rated fifth by the frequency of being mentioned. The list was topped, for the first time, by shortage of qualified personnel, which was viewed as "normal" in a situation of high rates of demand and output growth. This factor now came first, pushing to the second and third places the two formerly most painful problems plaguing Russian industry: shortage of circulating assets and low domestic demand. The fourth place now belonged to shortage of production capacities. In Q II 2007, equipment shortages were already restricting production growth at 1/4 of enterprises (an absolute record of the period of 1993 - early 2007).
Recent developments have also given credence to the warnings of the ongoing increase in personnel shortage taking place against the backdrop of an intensive demand and output growth in the first half-year, and the changing estimations of the actual numbers of personnel in connection with the expected changes in sales. Early in Q II 2007, the shortage of personnel (in connection with the expected changes in demand) reached its historic high. Now, 23% of enterprises were in want of more employees (an absolute historic high), while surplus was reported by only 11% (a nearly absolute historic low). That is, the balance now amounted to -12
points, a worse result having been registered only in Q III 2006. Sufficient numbers of personnel were reported by 66% of enterprises - the lowest result of the previous 17 quarters.
In Q III 2007, insufficient demand (being now viewed as an obstacle by only 26% of enterprises) was in the fourth place among the other 10 obstacles. Shortage of circulating assets (40%), shortage of personnel (40%), and shortage of equipment (32%) were then being mentioned more frequently. The frequency of equipment shortages in 4 quarters nearly doubled (having been 17% in July 2006). Since it is extremely difficult to quickly find the necessary personnel and/or create new capacities within this country's economy (the reserves of personnel and idle capacities having already been exhausted), producers might have been feeling more comfortable in a situation of (nevertheless) growing demand and limited supply.
In late 2007, shortage of personnel was even more confidently topping the list of obstacles to output growth. In Q IV it was already mentioned, across industry as a whole, by 39% of enterprises. An especially strong want of personnel was experienced by enterprises in light industry (frequency - 67%), machine-building (49%) and the timber industrial complex (TIC) (47%). The second place belonged to shortage of circulating assets, which was viewed as a barrier in the way of output growth by 33% of producers (in the chemical and petrochemical industry - by 53%, in light industry - by 51%, and in the TIC - by 45%). The third place was shared by low demand (29%) and shortage of equipment (28%). Competitive import was rated fourth by Russian enterprises. At the time of the latest survey it was described as an obstacle to output growth by only 19% of producers, which represents the last 3 years' historic low. During the year 2007 this factor "lost", in the eyes of enterprises, 8 of its former points.
However, when recruiting new employees, enterprises do encounter considerable obstacles (see Table 25). The most difficult problem is where to find qualified workers. This category of labor can be found without too many difficulties on the labor market, should such a need arise, by only 29% of enterprises, while such reserves are possessed by only 9%. However, the situation as regards the attraction of workers becomes different when being investigated by branch. The least problems are experienced by enterprises in ferrous (where 58% point to absence of any problems when hiring workers) and non-ferrous metallurgy (46%), as well as in the food industry (40%). In the chemical and petrochemical industries and in light industry the situation is reverse: there, qualified workforce can be found by only 17% and 18% of enterprises, respectively. The same industries possess the lowest reserves of such employees - 7% and 4%.
As for other categories of personnel, the situation is fundamentally better (both by possibilities for recruitment and availability of reserves). Unqualified workers can be found without problems by 70% of enterprises, but their reserves in industry are minimal (which is probably normal). Heads of workshops and subdivisions can be attracted "from outside" by only 30% of enterprises; however, the reserves of such employees at enterprises are highest (being possessed by 32%). ETP and office staff can be found on the labor market by only 40% of enterprises, while vacancies can be filled by "inmates" at 25% of enterprises.
The main obstacle relating to the search for all the categories of employees remains the wage level. Nearly a half of all enterprises suffer from this problem when looking for qualified workers. The applicants for other types of vacancies are less frequently dissatisfied with the offered amount of remuneration, but this problem is still being pointed to more frequently than other reasons for dissatisfaction. But enterprises, for their part, are also choosy when recruiting new personnel. This especially applies to those categories of personnel which are not
difficult to find. The highest dissatisfaction is pointed to by enterprises in respect of the employment history, qualification and age of the ETP, office staff and medium-level executives applying for a job. Although such problems relating to the recruitment of qualified workers are mentioned no less frequently, here enterprises are more concerned with the shortage of "free hands" of this type in their regions and the insufficient scope of personnel output by specialized educational establishments.
Table 25
Obstacles to Recruitment of Basic Categories of Employees in Industry (as % of number of respondents)
Workers Engineering and
Obstacles technical personnel Heads of workshops
, , (ETP) and office and subdivisions
unqualified qualified staff
No specific obstacles 70 29 40 30
Enterprises possess reserve of needed personnel 7 9 25 32
Inability to cut redundant employees 4 1 8 2
Shortage of "free hands" in region 7 31 8 12
No output of specialists by secondary and 1 30 19 12
higher educational establishments
No job-seekers apply to our enterprise 1 5 4 6
Low wage at enterprise 17 45 32 24
Hard working conditions at enterprise 12 13 5 4
Enterprise dissatisfied with qualification, em- 13 26 22 16
ployment history, age of applicants
Taxation of enterprise and tax exemptions 2 5 4 3
enjoyed by its neighbors
Other 0 3 1 1
Source: March (2007) survey of the IET.
Now, redundant employees hardly ever represent an obstacle to enterprises in their personnel policy: only the redundancy of ETP and office staff is pointed to as a problem by 8% of producers, while the redundancy of other categories is no longer an obstacle. No problems are experienced by industrial enterprises in connection with their neighbors' non-competitive advantages in the sphere of taxation and organization of wage payments. Among the applicants for jobs, Russian industry seems to be in high demand. At least, enterprises are quite satisfied by the number of applications for jobs and do not regard themselves as being ignored by potential employees.
In a situation of a stable shortage of personnel and impossibility of large-scale personnel recruitment from the "shrinking" professional training system, enterprises may attempt to find employment reserves among immigrants, whose inflow into Russia is as strong as ever. However, it seems that even this source is not going to save domestic industry from want of personnel.
Firstly, immigrants mostly fill unqualified jobs (this recruitment policy was being practiced by 88% of enterprises in March 2006; in 2007 this question was not asked, but it is unlikely that any fundamental changes could have occurred in this area). Only 4% of enterprises reported that they were using immigrants as workers of medium-level qualification. The March 2007 survey demonstrated that no problems with the recruitment of unqualified workers were being experienced by 77% of enterprises. It is possible, however, that enterprises had indeed begun to "try" immigrants as qualified labor and were disappointed. The level of im-256
migrants' qualification at the time of the last survey did not satisfy 15% of employers (see Fig. 14), while a year earlier dissatisfaction with their abilities had amounted to only 7%. At the same time, Russian enterprises are displaying a sufficient level of political correctness, since only 1-2% of respondents point to "culture, way of thinking, working style" as obstacles to recruitment.
Fig. 14. Dissatisfaction with the Qualification of Immigrants when they are Available in a Region, 2007, in %
Secondly, enterprises are now less frequently "noticing" immigrants in their regions. In 2006, the absence of a considerable number of immigrants "in the vicinity" was described as an a obstacle to their recruitment by 27% of enterprises, whereas in 2007 this was done by 37%. The shortage of immigrants residing nearby is most acutely felt by the enterprises in the chemical and petrochemical industries (in 2006 - 52%, in 2007 - 62%), the timber industrial complex (39% and 38%, respectively), machine-building (28% and 32%), and light industry (24% and 59%). But nowadays immigrants apply for jobs at industrial enterprises slightly more frequently. In 2006, the lack of applicants from the immigrant labor force worried 23% of enterprises, in 2007 - 20%. Especially worried by the existing situation were machinebuilding (27% and 25%, respectively), the food industry (32% and 16%), and light industry (22% and 24%). If immigrants are "available" and apply to enterprises in search for a job, dissatisfaction with their qualification differs by branch as follows (see Fig. 14).
Thirdly, some enterprises avoid employing foreign workers as a matter of principle ("we prefer not to hire immigrants, irrespective of their quality"). In 2007 their share became as high as 10%. This standpoint is more typical for the TIC (15%), machine-building (14%) and the food industry (13%). These figures somewhat spoil the previously displayed politically correct image.
Fourthly, the importance of the formalities associated with the employment of immigrants did not change in any dramatic way. In 2006 this was described as an obstacle by 23%
257
of enterprises, whereas in 2007 - only by 19%. Comparatively more frequently this reason is pointed to in the construction materials industry (53% and 39%).
Fifthly, more than at 1/4 of all enterprises immigrants compete with locals when applying for jobs, and lose. A sufficient number of local applicants is available (and is viewed as an obstacle to the recruitment of immigrants) to 26-28% of enterprises. This index varies greatly from branch to branch (see Table 26).
Table 26
Share of Enterprises in Branches with Sufficient Numbers of Local Applicants
in 2006 and 2007, in %
Branches of industry 2006 2007
Chemical and petrochemical industry 27 16
Machine-building 23 35
TIC 8 20
Construction materials industry 22 39
Light industry 21 15
Food industry 38 50
Sources: March (2006 and 2007) surveys of the IET.
Wage level was not altogether an obstacle to the recruitment of immigrants by Russian enterprises: only 1% enterprises regarded the wage-related expectations of such employees to be too high. In 2006, 82% of heads of enterprises believed that wage should be equal for locals and immigrants of equal qualification levels.
The highest chances for an immigrant to find employment at a Russian industrial enterprise at the time of the latest survey existed in the construction materials industry (16% answered "no obstacles"), the TIC (14%) and light industry (11%). In machine-building only 2% were ready to receive them.
3.2.3. The Dynamics of Competition in Russian industry
This section addresses the dynamics of competition in Russian industry in 1995-2007. This period encompasses both the pre-1998 decline in industrial production (when import goods prevailed), and the 1998 default (with the ruble's depreciation and subsequent import substitution). The latest years of monitoring offer a picture based on enterprises' estimations of competition on their sales markets in a situation of industrial growth, the ruble's strengthening, and large-scale growth of imports.
The main indices describing competition can be found in the questionnaires' sections dealing with the levels of competition on sales markets: "What is your estimation of the level of competition on your enterprise's sales markets: a) with Russian enterprises, b) with enterprises from near abroad, c) with enterprises from far abroad?". It was suggested that the respondents should gauge their answers by the scale: "high - moderate - weak - none - difficult to estimate". These questions were offered to all the enterprises of the April and October panels. For purposes of statistical processing, the five variants of answers are rated 5, 4, 3, 2, and 1. Then these rates are weighted by the number of answers received, and the average rate across industry or by branch is calculated.
This gauged scale of answers makes it possible to introduce the notion of competitive markets. Markets are characterized as competitive when enterprises experience at least a minimum level of competition. The share of competitive markets is estimated as the ratio of 258
the sum of the answers "high", "moderate" and "weak" to the sum of all the answers. It should be noted that the share of competitive markets tells nothing about the intensity of competition on these markets - it simply indicates that enterprises do, indeed, experience there a certain level of competition.
Competitive Markets in Russian Industry
As demonstrated by the results of surveys, during the period when competition was monitored (1995-2007) the greatest number of competitive markets with domestic competition was registered in 2005. At that time, 94% of enterprises pointed to the existence of at least some competition with other Russian producers on their sales markets (see Fig. 15). The highest share of the markets displaying competition with far abroad was observed in 2006 and amounted to 73%.
40 4-1-1-1-1-1-1-1-1-1-1-1-1-
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Fig. 15. Dynamics of the Shares of Competitive Markets in Russian Industry,
by Types of Competition
From the year 2005 onward, the share of competitive markets with domestic competition in Russian industry had been displaying a downward trend. In 2006 this index went down by 2 p.p., in 2007 - by another 3 p.p., that is, in the past 2 years the cumulative loss amounted to as much as 5 points. It is possible that the formerly upward trend displayed by changes in the share of competitive markets in Russian industry, which, with slight deviations, persisted throughout the whole period of monitoring, by then had exhausted itself. In 2007, the average per annum share of such markets across all branches constituted 89%.
The share of competitive markets in 2007, when broken up by branch, varies rather narrowly (see Table 27). Only metallurgy stands out: there, the share of competitive markets fell in 2007 to 79%, which represents its annual historic low. It should be noted that metallurgy has almost always been at the bottom of the list of branches by its share of competitive markets, especially in the years following the 1998 default. By this index, the leader in 2007, just
100
60
ABROAD
as in the preceding year, was light industry, where competition is reported by enterprises to be present on 98% of their markets. This value is the branch's nearly absolute historic high (if one disregards the 100%-level observed in the chemical and petrochemical industries in 2005). However, given that the share of competitive markets in light industry has been stable and high in the last 6 years, this branch may be justifiably regarded as the leader in competition development. The share of competitive markets in the construction materials industry in the post-default years has also been at a high and stable level, this index never decreasing in those branches below 90%; in 2001 and 2005 it was as high as 95%, while lately has decreased to only 91%. This can probably be explained by the construction boom, which allows producers, without any obstacles created by their competitors, to sell their finished products almost at any price they ask.
Table 27
Average per Annum Share of Competitive Markets with Domestic Competition, by branch, in %
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Metallurgy 54 78 80 74 86 75 84 89 85 82 90 80 79
Chemical and 72 86 89 83 90 86 94 90 96 86 100 94 88
petrochemical
industries
Machine- 79 80 79 79 83 90 91 89 92 93 95 97 95
building
TIC 80 81 78 90 83 84 85 91 95 94 95 96 89
Construction 85 73 90 94 91 94 95 94 93 94 95 91 91
materials
industry
Light industry 72 75 81 85 84 87 85 96 94 97 96 97 98
Food industry 90 90 96 79 90 88 92 97 95 93 90 93 96
Source: computations based on the IET's surveys.
Much less homogeneous are the data on the share of competitive markets with competition with enterprises from far abroad (see Table 28). Thus, in 2007 the minimum level amounted to 38% and was observed in the construction materials industry. In metallurgy the same index last year was 75% - nearly twice as high. The enterprises belonging to the construction materials industry are more rarely than the enterprises in other branches faced with competitive products arriving from far abroad. On the average in that branch, in 1995-2007 only 25% of its sales markets were competitive (in respect of foreign competition). In 2000 and 2003 this index fell to 10%. But in 2006 it rose to 46% as a result of Russia's construction boom, which attracted to the market the highest possible (for that specific branch) number of foreign competitors. Second by the degree of protection from imports (or, more precisely, of its scarcity) is the food industry. Its enterprises, on the average throughout the period of monitoring, have been confronted by imports only at 49% of their markets. The highest share of competitive markets across the branch was registered in the pre-default year 1997. Slightly more often the competitors from far abroad are encountered by enterprises in the timber industrial complex. On the average, their markets were competitive by 51%. However, in the past 3 years the presence of competitive imports on branch sales markets has been on the rise and reached in 2006 the level of 81% - that year's historic high among branches.
Table 28
Average per Annum Share of Competitive Markets with Competition with Enterprises from far abroad, by branch, in %
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Metallurgy 18 48 54 70 65 59 76 61 63 59 84 79 75
Chemical and
petrochemical 50 68 65 68 65 72 78 68 58 55 81 75 64
industries
Machine-
building 51 57 63 60 60 61 63 65 70 67 73 79 71
TIC 55 58 50 55 31 42 32 37 44 47 61 81 68
Construction
materials 25 20 36 23 27 10 16 32 10 12 24 46 38
industry
Light industry 65 66 58 60 50 47 50 70 66 63 75 65 66
Food industry 60 58 64 45 43 43 37 32 41 43 56 49 62
Source: computations based on the IET's surveys.
The presence of competitive imports in the period of 1995-2007 was most strongly felt on the markets of the chemical and petrochemical industries. The average competitiveness level of such markets within the branch amounted to 67%, being in 2000-2007 as high as 69%. A historic high was registered in 2005 at the level of 81%. The second plane in the general (for the period of 1995-2007) competitiveness rating on the markets belongs to machinebuilding. The competitive import on the sales markets of the enterprises in that branch have been expanding their presence throughout the whole period of monitoring, having reached in
2006 the level of 79%; their only setback so far was the loss of 8 points last year, which resulted in their clash with domestic machine-building products to 71%. But even after this decline the machine-building markets still kept their second place by the value of this index. In
2007 the list of branches dealing with competitive imports was topped by metallurgy. But even this result in b 2007 was not the highest for this particular branch: the presence of imports has been diminishing there since 2005, when it had reached its absolute historic high of 84%. And only the food industry experienced in 2007 a more strongly felt presence of competitive imports than it did in the preceding years. Now imports are competing with domestic food products on 62% of markets. By comparison with other branches, this result is sufficiently low for the year 2007. But at the same time it should be remembered that the presence of competitive imports in that branch had increased nearly twofold since 2002 - from 32% to 62%. Previously (in 1997-2002) the presence of imports on the branch's markets fell exactly twofold (from 64% to 32%). No other branch of Russian industry has displayed such clearly observable trends.
Fig. 16. Dynamics of the share of competitive markets in light industry, with competition
The contact of the enterprises in light industry with competitive imports is not so extensive as it may seem on the basis of certain experts' estimations (see Fig. 16). In 2007 the enterprises of that branch were competing with imports only at 66% of their markets, 1/3 of the markets being free from competitive import - "white" as well as "grey", since enterprises, when offering their own estimations of competition, take into account all the goods imported and circulating on their sales markets, no matter what their status may be in terms of customs clearance. Slightly higher in light industry is the number of those competitive markets where domestic products compete with imports from near abroad - 65% in 2007. The declining share of markets with competition with imports (from both near and far abroad) by 11 and 10 p.p. in 2006 had been associated, most probably, with improved customs control and the diminished, as a result, imports' competitive advantages on the domestic market. And nearly all the sales markets in light industry are competitive with regard to other Russian producers: 98% of enterprises in light industry feel the presence of competition on the part of other domestic producers, this latter index being relatively stable (in the interval of 94-98%) since 2002.
Competition Intensity in Russian Industry
In 2007 the trend toward a decline in the intensity of the three types of competition, which had first appeared in 2006, became more prominent (see Table 29). The main competition indices monitored by the IET since 1995 have demonstrated a declining competitive struggle in all the three "directions" (domestic competition, competition with near abroad, and competition with far abroad). The most remarkable result has been the decrease of the annual index of domestic competition: last year it dropped by 0.15 points, in the past two years - by 0.24 points. The most noticeable change was registered in the first half-year 2007, when this index was only 3.88. This turned out to be the historic low of the period of 2003-2007. The more serious problems with sales in the second half-year led to more intense competition and elevated the index to 4.07. This later phenomenon prevented a more dramatic fall of the per 262
annum domestic competition index in 2007. The least prominent changes of the years 20052007 were registered as regards the competition with imports, the decline of this index being only by 0.07 points, and therefore it would be more correct to describe it as having a constant nature. Thus, competition intensity's historic high on the sales markets of Russian industrial enterprises in the thirteen years of monitoring was registered in 2005, when all the three indices reached their absolute maximum values.
Table 29
Per Annum Indices of Competition with Different Producers
Year Domestic From near abroad From far abroad General index
1995 3.39 2.65 2.79 2.94
1996 3.46 2.82 3.01 3.10
1997 3.55 2.81 3.02 3.13
1998 3.52 2.79 3.09 3.13
1999 3.61 2.73 2.87 3.07
2000 3.60 2.70 2.80 3.03
2001 3.73 2.89 2.90 3.17
2002 3.87 2.93 2.96 3.25
2003 3.95 2.92 3.08 3.32
2004 3.94 2.82 3.03 3.27
2005 4.21 3.27 3.49 3.66
2006 4.12 3.20 3.47 3.60
2007 3.97 3.14 3.42 3.51
Source: computations based on the IET's surveys.
The level of domestic competition declined in 2006-2007 nearly in all the branches of Russian industry. Especially dramatic was the fall of this index in metallurgy: the competition index there went down by 0.59 points and amounted in 2007 to only 3.51 points, thus getting halfway between the categories "moderate" and "weak". The value of this index in other branches of industry did not go below the "moderate" level. The least "loss" was displayed by domestic competition in light industry, where the competition index, after having reached its absolute historic high in 2006, in the next year went down by 0.01 points, that is, remained almost flat. As a result, the branch "strengthened" its leading position by the intensity of domestic competition, achieved a year before. Then, the domestic competition index in this branch had gone up, in one year, by 0.2 points and scored 4.47 points (out of a total of 5), that is, somewhere midway between "moderate" and "strong" (see Fig. 17). This is the peak competition value of the whole 13-year period of monitoring at the branch level.
STRONG 5
MODERATE 4
WEAK
NONE
FROM RUSSIA
_ /fROM FAR ^/K
ABROAD / . \ ^ /v. / * ^ // \
** - \ • V \ / * \ / J FROM NEAR ABROAD
/' -1-1-1-1— -1-H -1-1-1-1-1-1-
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
3
2
Fig. 17. Dynamics of the Levels of Competition with Different Manufacturers
in Light Industry
As for the competition with imports in that branch, after 2005 it became weaker. In 2006 it lost as much as 0.48 points, having later once again rebounded by 0.16 points. But the year 2005 still stands out as the period of the highest intensity of competition with imports, requiring not only a profound mobilization of enterprises' efforts in defending their positions on the market, but also certain actions on the part of the State aimed at "de-shadowing" imports. The results of this activity are still visible to the enterprises belonging to this branch.
The food industry, traditionally regarded as being most protected from imports from far abroad, in 2007 once again confirmed its reputation. Although the share of markets with competition with imports became nearly as high as its pre-default peak level, the level of competition inside the branch remained at the same extremely low level (see Fig. 18). The level of competition with imports was estimated in 2007 as amounting on the average to 2.92 points, that is, below the "weak" level. In 2002 the situation on sales markets in respect of the competition with imports was extremely comfortable for Russian foodstuffs producers, who were competing with imports on a minimum number of markets, while competition intensity was close to "none". Within 5 years, intensity increased by 0.77 - a rather modest growth for such a long period, and the result itself is far from being ideal. A lower competition level in 2007 was observed only in the construction materials industry. The competition of the food-producing enterprises with producers from near abroad has been becoming more and more intense in recent years, in an equal measure becoming stronger than the competition with imports from far abroad. However, even in this area the absolute competition levels surpassed the "weak" level but, having reached in 2006 the intensity index of 3.29 points, once more dropped in 2007 to 3.11 points. In other words, imports represent no threat to our food industry.
STRONG 5
MODERATE 4
WEAK
NONE
FROM FAR ABROAD
FROM RUSSIA
FROM NEAR ABROAD
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
3
2
Fig. 18. Dynamics of the Levels of Competition with Different Manufacturers
in the Food Industry
At the same time, domestic competition inside the branch is not only the most widespread, but also the most intense. The average competition indices in any given period of monitoring (1995-2007, either prior to or after the 1998 default) have made this branch the absolute leader among all the other branches. In 2007 its competition intensity level was second only to that of domestic competition in light industry. But while in the latter case it represents a virtual struggle for survival (where the weaklings are literally thrown out of the markets), the foodstuffs producers are simply fighting for a biggest possible share of the expenses on food in the population's market basket. In 2006 the branch reached its historic high of domestic competition intensity - 4.36 points, which means that this type of competition on the sales markets of food-producing enterprises is gradually shifting from "moderate" to "strong". But this is indeed a gradual process, since the branch's competition indices were in 1999 already stably above 4 points ("moderate"), and only in 2005-2006 there emerged a trend toward their "break-off'. In 2007 the level of domestic competition decreased, but only slightly.
The second place on the average intensity scale of domestic competition in 1995-2007 belongs to the construction materials industry. Its competition indices have nearly always been second to those of either the food branch or light industry, and in 2005 topped the list. In the same year the branch displayed its absolute historic high, followed by a gradual decline in the intensity of competition with other Russian producers (see Fig. 19). In 2007, by the intensity of its domestic competition, the construction materials industry was second only to light industry. However, the high level of domestic competition is compensated by a rather low competition with imports. In fact, it is quite normal for this branch to experience a low level of competition with imports, considering the specificity of its products. In the rating by this index, the construction materials industry has always been at the bottom of the list. The values of the index of competition with imports were fluctuating close to "none", sometimes going even lower ("difficult to estimate"). A relatively stable growth of competition with imports
began in 2004. However, the result proved to be modest: competition with imports from far abroad has never risen to the "weak" level, and in 2007 even slightly declined, while the competition with imports from near abroad managed to reach the "weak" level in 2006, after which once again fell below it.
Fig. 19. Dynamics of the Levels of Competition with Different Manufacturers in the Construction Materials Industry
Fig.20. Dynamics of the Levels of Competition with Different Manufacturers
in Machine-Building
In machine-building, the peak level of domestic competition, just as in the majority of other branches, occurred in 2005. Then, this index for the first time went above the "moderate" level, to 4.23 points. This was the outcome of a slow but persistent growth of competition within this branch during the previous 10 years (see Fig. 20). Later on, the index began to decline, and in 2007 amounted to 4.09 points, that is, almost returned to the previously observed moderate level. Similarly to all the other branches, domestic competition here remains the most intensive type of competition on the sales markets of Russian machine-building. Competition with imported products has always been much weaker than that with the "domestic enemy". Its peak was observed in 2006, but even then it was halfway between "weak" and "moderate". Prior to 2002, competition with imports from far abroad could not depart from the "weak" score, while competition with imports from near abroad succeeded in this only in 2005. Thus, in the pre-default period, traditionally regarded as that during which imported goods prevailed, machine-building was not suffering much from their presence. This branch was then more concerned with other, today already forgotten, problems, such as barter, nonpayments, low demand, and shortage of circulating assets. But even the currently observed level of competition with imports can hardly be regarded as critical - it is described as "strong" by 38% of machine-building plants, "moderate" - by 21 % and "weak" - by 12%. Its absence was declared by 16% of enterprises. The latter figure represents this index' historic high since 1998, that is, at the time of the last survey competition with producers from far abroad was absent for a higher number of machine-building plants than at the very beginning of this "sweet" period of the ruble's depreciation and total import-substitution. Presently, the rouble is stronger than ever, and imports are flooding the country like a torrent. However, domestic machine-builders regard this situation more calmly than some analysts and government officials.
Fig. 21. Dynamics of the Levels of Competition with Different Manufacturers in Metallurgy
Metallurgy is the only branch where competition with imports turned out to be stronger than domestic competition (see Fig. 21). Such a unique situation (for Russia's economy) de-
veloped here in 2007, having resulted from two oppositely directed processes. On the one hand, the level of domestic competition decreased very dramatically in 2006-2007: the competition index fell by 0.67 points and now is midway between being "weak" and "moderate". A similar "reshuffle" occurred in the competition with producers from near abroad. It seems that the processes of mergers and takeovers going on in this branch across the territory of the former USSR have done their part. On the other, it is much more difficult to successfully negotiate with metallurgists from far abroad - one has to be competitive. It should be noted in this connection that the level of competition with imports in this branch is not too high by comparison with similar indices observed in other branches. In 2007 it merely reached the level observed 2 years ago in light industry, which was also being approached at that time by the chemical and petrochemical industries. The really important phenomenon is the extremely low level of domestic competition in this branch in 2007. This index in metallurgy is really remarkable against the backdrop of the other branches.
3.2.4. The Creation of a Competitive Environment in Russian Industry
The realization of government competition-promoting policy in conditions of a transition economy is fraught with the objective difficulties associated with the relative shortness of the period within which a competitive environment has emerged, with the rapid development of economic processes, and the weakness of the traditional systems for monitoring competition. The price of a potential failure to properly determine the priorities of competition-promoting policy may become prohibitively high for Russia's newly developing market economy. In such a situation, studying the real conditions under which a competitive environment in Russian industry is being created may provide an important empirical backing for the elaboration of adequate measures to be incorporated into economic policy.
The issue as to which of the factors mentioned in economic theory can indeed ensure the formation of a truly competitive environment has hardly ever been appropriately studied. The reason is the lack of necessary statistical data describing both the competition level and the factors determining this level. In this connection it should be borne in mind that so far as certain factors are concerned, it would be difficult, in principle, to offer any adequately applicable (that is, direct and practicable) statistical measure, and so they can be described only in qualitative terms. At the same time, it is still important, for the sake of economic analysis, to provide answers to the question as to how the level of competition may be influenced by the existing agreements between producers concerning their pricing policies or the division of sales markets.
The contribution of various factors to the formation of an aggregate (cumulative) competition level in Russian industry can be studied on the basis of surveys of heads of enterprises. If such an approach is applied, then several fundamental methodological problems are removed, and it becomes possible to obtain quite new data capable of providing a basis for adjusting government policy in the sphere of competition promotion. By way of implementing this approach, from the year 2000, at the intervals of 23-26 months (that is, within a two-year cycle) the heads of industrial enterprises participating in the IET's regular surveys were offered questions as to in which direction and how strongly the major factors singled out by economic theory were influencing competition. The list of factors included in the questionnaires was as follows:
a) the level of production concentration,
b) the degree of demand satisfaction and the presence of surplus capacities,
c) agreements concerning pricing policies and the division of sales markets,
d) the size of transport costs,
e) the problem of a search of suppliers and consumers, as faced by a new producer,
f) administrative protection of markets,
g) the problem of withdrawal from markets,
h) the presence of potential competitors.
The majority of the factors being studied either cannot be determined by any adequate statistical indices, or have no reliable statistical base. It was suggested that the influence of each of these factors on enterprises' aggregate competition level should be estimated by the direction ('strengthens", "weakens") and strength of influence ("considerable", "moderate", "negligible", "none", "difficult to estimate"). In this connection it was assumed that each factor could both strengthen and weaken competition on specific sales markets. For example, administrative protection may occur on a small part of a producer's markets, and so have a relatively small influence. But on a great majority of that same producer's markets, such barriers would be absent, resulting in an unrestricted circulation of goods and services, thus inevitably strengthening competition. In the final analysis, we obtain the resulting influence of each specific factor on the aggregate competition level.
When the results of a survey are being statistically processed, each answer category ("considerable, "moderate", "negligible", "none", "difficult to estimate") is scored 5, 4, 3, 2, or 1, respectively, - these scores being then weighted by the share of each answer so as to generate the average answer determining that factor's average impact on the level of competition. The higher the average score of a given factor, the more intensive its influence on competition level. The presence in a questionnaire of an answer concerning both the strengthening and weakening influence of each of the factors makes it possible to obtain the resulting estimation of the factors' influence on the aggregate competition level. To compute such an estimation, it would be necessary to subtract the average value of weakening influence from that of positive influence. The positive value of this resulting index will determine the factors which, in the final analysis, will be positively (strengthening) or negatively (weakening) influencing the level of competition.
The Main Results of the Emergence of Competition in Russian Industry
Since it was suggested that the enterprises, in course of each of the 4 surveys, should estimate both the positive and negative influence of the same factor (or pairs of opposite vectors of each single factor), the estimation of the resulting average influence (for the whole period of monitoring) of these factors on the level of competition can reveal the average balance of the influences of each factor as the difference between the average estimations of positive and negative influences. The average balances (for the whole period) have demonstrated the resulting picture of competition's development in Russian industry in the period of 2000-2007 (see Fig. 22).
Potential competitors Administrative protection Agreements between producers Withdrawal from markets Rubles exchange rate Demand satisfaction Concentration
Transport costs
Suppliers and consumers
-0,50 -0,40 -0,30 -0,20 -0,10 0,00 0,10 0,20 0,30 0,40 0,50 STRENGTHING WEAKENING
Source: computations based on the IET's surveys.
Fig. 22. Average 2000-2007 Balances of Estimations of Competition Formation
in Russian Industry
Table 30
Resulting Influences of Different Factors on Competition Level
in 2000-2007
Factors 2000 2002 2004 2007
1. Production concentration level -0.11 0.04 0.14 -0.09
2. Degree of demand satisfaction 0.05 0.14 -0.01 0.20
3. Agreements on pricing policies and division of sales markets 0.38 0.50 0.13 0.40
4. Transport costs -0.28 -0.02 -0.30 -0.25
5. Search for suppliers and consumers -0.69 -0.31 -0.38 -0.47
6. Administrative protection of markets 0.31 0.41 0.48 0.41
7. Withdrawal from markets 0.30 0.29 0.30 0.45
8. Potential competitors 0.25 0.46 0.34 0.61
9. Ruble's exchange rate 0.22 0.13 0.34
Source: computations based on the IET's surveys.
The factors being monitored could be quite distinctly and permanently split into two groups. The first group (positive influence on competition) consisted of 6 factors: the degree of demand satisfaction and the presence of surplus capacities, the ruble's exchange rate, opportunities for withdrawal from markets, the agreements on pricing policies and division of sales markets, the administrative protection of markets, and the presence of potential competitors. The second group (negative influence) included 3 factors: the level of production concentration, the size of transport costs, and the problem of a search for suppliers and consumers as faced by a new producer. The degree of the resulting positive or negative influence of the studied factors on the level of competition in Russian industry was variable, with occasional changes in the sign applied to the influence value (see Table 30). The obtained results point to the priorities of the competition-promoting policy in Russian industry.
Obstacles to the Development of Competition in Russian Industry
Producers consider the problem of a search for suppliers and consumers to be the main obstacle to the development of competition (see Fig. 22). This factor has a resulting negative influence on competition in all the branches of industry. Especially strong is the ultimate (that is, incorporating both positive and negative influences) restricting influence of this factor in metallurgy, the timber industrial complex, the construction materials industry, and machinebuilding. The least problems of this type are experienced by the chemical and petrochemical industries, but even there this factor influences competition negatively, if the whole spectrum of estimations is taken into account. This situation may be the result of several phenomena. On the one hand, for objective reasons no well-developed information infrastructure enabling producers to investigate potential sales markets and to find and get into contact with new contractors can be created within the relatively short period of the market economy's emergence. On the other, Russian enterprises probably prefer to deal with their long-established suppliers and consumers, since the primitive "contractual culture" and long experience of non-payments have made them prejudiced against new partners - no matter how brilliant are the prospects they might offer. The government's goal in this sphere, quite obviously, must be to promote the formation of a sufficient information infrastructure on the markets and an adequate business culture (primarily in the sphere of their own obligations).
In the estimation of the initial negative influence, the factor "attachment of suppliers and consumers to traditional products" has always had the strongest influence on competition (see Table 31). In 2007, its influence on the average became as high as 3.70 points, which means that across industry as a whole it approached the "moderate" level. Serious problems have arisen in this connection in non-ferrous metallurgy, where the negative influence of the supplier - consumer tie-ups went up to 4.58 points, that is, came close to being "considerable", while the aggregate share of the answers "considerable" and "moderate" was already 87%. Next comes the food industry, where the negative influence of this factor amounted to only 3.89 points (e.i., below "moderate"). This is followed by the group of the other branches of industry (small and densely packed within a short interval). The lowest negative influence of the attachment of suppliers and consumers was observed in the construction materials industry (3.60). Thus, different branches of industry offer sufficiently high and rather similar estimations of the negative influence on the level of competition of their inability to find new suppliers and consumers.
Table 31
Relevant Factors and the Degree of Competition's Weakening on the Sales Markets of Russian Industrial Enterprises in 2000-2007, average rates
Factors 2000 2002 2004 2007
1. Concentration of main production at several enterprises 3.37 3.39 3.31 3.52
2. Dissatisfaction with effective demand and absence of surplus capacities 3.28 3.25 3.42 3.28
3. Informal agreements between producers on market division, 2.90 2.99 3.01 3.03
pricing policies, etc.
4. High transport costs 3.06 3.06 3.44 3.31
5. Attachment of suppliers and consumers to traditional products 3.45 3.36 3.50 3.70
6. Administrative protection of sales markets (quotas, licensing, bans on im- 2.72 2.86 3.09 3.02
ports and exports)
7. Easy withdrawal from markets (real opportunities for return of funds invested 2.40 2.34 2.72 2.51
in equipment and premises)
8. Absence of enterprises capable of rapid intrusion on your sales markets (that 3.27 3.15 3.46 3.35
is, potential competitors)
9. Ruble's too low exchange rate * 2.43 2.72 2.52
Note. * - In 2000 this question was omitted. Source: the IET's surveys.
This assumption has also been confirmed by the study of the competitive advantages of domestic enterprises. The main advantages of their products on the domestic market are described by Russian enterprises both in 2006 and in 2007 as their long-established connections with consumers (see Table 32). In one year the frequency of this factor being mentioned went up by 15 points. At the time of the latest survey it was referred to by more than 70% of enterprises, and it had become a nearly absolute leader at the branch level. Only in the food industry it amounted to 64%, being second to "product's superior quality" (71%) which, in fact, is not surprising given the fact that the lion's share of that branch's output is consumed by the population, and it is sometimes not easy to monitor the stability of connections with such consumers. So, only superior quality can ensure victory in a very tough competition (which has always been demonstrated by our monitoring of the competition level) - both with other Russian enterprises and with imports. However, this evident leadership of the factor "long-established connections with consumers of product" cannot be regarded as a positive phenomenon. As a matter of fact, it represents a serious obstacle to the entry on the markets of other producers, and thus restricts the development of competition in Russian industry.
The final sufficiently considerable obstacle to competition (that is, as the difference between the strengthening and weakening influences) is believed to be represented by high transport costs. The strongest final negative influence on competition is produced by the transport component of costs in the construction materials industry, ferrous metallurgy, timber, woodwork and pulp-and-paper industries. Since transport tariffs and the development of transport are largely controlled by the State, the diminishment of the negative influence of this factor depends on the government's activity in the sphere of tariffs and the development of transport infrastructure.
Table 32
Competitive Advantages of Russian Industry's Products on Different Markets, in %
. , , On domestic market On external market Advantages _
2006 2007 2006 2007
1. Lower prices 31 28 59 52
2. Superior quality of products 42 55 26 38
3. Rapidity of goods deliveries 17 22 13 13
4. Convenience of settlements for products 14 17 9 9
5. Maintenance services 19 17 15 13
6. Closeness to consumers in terms of transportation 22 19 5 8
7. Fulfillment of nearly every requirement of consumers 32 37 28 27
8. Absence of products similar to ours 21 21 8 11
9. Our label (or brand) is well-known 43 44 33 41
10. Long-established connections with consumers of our products 56 71 38 52
11. Possession of patents, licenses, quotas 18 17 15 15
Source: January (2006) and May (2007) surveys of the IET.
The most moderate final negative influence on the level of competition is exerted by production concentration. Although the average balance of influence across all the 4 surveys was found to be negative (see Fig. 22), its absolute value is very low, while the results of 2 surveys, at the same time, demonstrate that enterprises considered the influence of production concentration on the level of competition to be positive (see Table 30). Thus, industry on the whole displayed a zero balance of positive and negative factors in this sphere. It should be noted that the results of the 2007 survey pointed to a weakening influence of this factor on competition, whereas in the previous 2 surveys (in 2002 and 2004) the negative influence disappeared, while the positive was growing. Given the increasing intensity of the processes of mergers and takeovers in Russian industry, the influence of production concentration on the overall level of competition requires a more accurate monitoring and a detailed analysis.
As regards individual branches, the resulting production concentration in 2007 did not restrict competition in all the branches. In the construction materials, light and the food industries the degree of production concentration's influence on competition is positive rather than negative. An excessively high production concentration has a definitely negative influence on competition only in metallurgy and in the chemical and petrochemical industries. In machinebuilding and the TIC the two influence vectors are on the whole mutually balanced. This fact shows that, despite the State being traditionally attentive to this problem, the potential for activity in this direction is still substantial, and the monopolists' register still has not lost its importance.
The initial (that is, prior to the computation of the final balance) positive influence of the factor "presence of multiple producers whose individual outputs constitute only a small share in the total amount of marketed products" was stable over time: its average rate varied in the interval between 3.26 and 3.45, being definitely between "negligible" and "moderate". The last 3 surveys have demonstrated that the concentration's increasing influence was stabilized at the level of 3.43-3.45 points. The strongest positive influence of low production concentration was registered at the time of the last survey in the construction materials industry (the average rate is 3.86, the sum of answers "considerable" and "moderate" - is 74%), in the chemical and petrochemical industries (the average rate - 3,75, the sum of answers "considerable" and "moderate" - 68%), in the food industry (average rate - 3,58, the sum of answers "con-
siderable" and "moderate" - 51%), and in machine-building (the average rate - 3,50, the sum of answers "considerable" and "moderate" - 59%).
The influence of main production concentration at several enterprises is generally on the second place (across industry and in all the surveys) by its strength of the initial negative influence on competition. The level of this influence was relatively constant, fluctuating in the interval betwen 3.31 and 3.52 points (the latest - and highest - value was registered in 2007). The negative influence of this factor was especially high at the time of last survey in ferrous metallurgy, where the level of its influence was estimated by enterprises as amounting to 4.54 points, and the sum of "considerable" and "moderate" answers was 93%. In other branches the production concentration's negative influence on competition was found to be considerably lower (from 3.63 in non-ferrous metallurgy to 3.23 in the timber industrial complex), somewhere between "moderate" and "negligible".
What is Conducive to Competition's Growth in Russian Industry
As shown by our computations (see Table 33), the monitored factors' initial strengthening influence on competition level was not very considerable. The lowest value of the average influence was obtained for the factor "difficulty in withdrawing from markets (inability to return the funds invested in equipment and premises)" and amounted to 2.63 points, which corresponds to somewhere midway between the estimations "none" and "negligible".
The highest average estimation was obtained for the factor "presence of enterprises capable of rapid intervention on your sales markets (potential competitors)" in 2007 and amounted to 3.96 points, being nearly similar to the "moderate" level of influence. The average rates (for all the years of monitoring) belong to the interval between 2.79 (the ruble's excessively high exchange rate) and 3.72 points "presence of enterprises capable of rapid intervention on your sales markets (potential competitors)".
Table 33
Degree of Competition's Strengthening by the Main Factors Existing on the Sales Markets of Russian Industrial Enterprises in 2000-2007, average rate
Factors 2000 2002 2004 2007
1. Presence of multiple producers whose individual outputs constitute only a 3.26 3.43 3.45 3.43
small share in total product sold on market
2. High satisfaction of effective demand and presence of surplus capacities 3.33 3.39 3.41 3.48
3. Absence of agreements between producers on market division, pricing policy, 3.28 3.49 3.14 3.43
4. Negligible transport costs 2.78 3.04 3.14 3.06
5. Opportunities for a new producer to easily find new suppliers and consumers 2.76 3.05 3.12 3.23
6. Absence of administrative protection of markets (quotas, licensing, bans on 3.03 3.27 3.57 3.43
imports and exports)
7. Difficulty in withdrawing from markets (impossible to return funds invested in 2.70 2.63 3.02 2.96
equipment and premises)
8. Presence of enterprises capable of rapid intervention on your sales markets 3.52 3.61 3.80 3.96
(potential competitors)
9. Ruble's excessively high exchange rate * 2.65 2.85 2.86
Note. * - In 2000 this question was not asked.
Source: the IET's surveys. The "presence of enterprises capable of rapid intervention on attractive sales markets" topped the list of factors generating the resulting positive influence on competition in Russian industry (see Fig. 22). It is clear that the emergence and importance of this factor are associ-
ated with diminishing output in the post-Soviet period, low load on existing capacities and the presence of many enterprises on the lookout for sales markets. But by 2007 the "stocks" of surplus capacities in Russian industry had been "dissolved", while this factor's importance in strengthening competition was dramatically enhanced. This is demonstrative of the enterprises' changing strategy, when they undergo a switchover from passive exploitation of their traditional markets - through the use of their existing but idle capacities - to that based on investments and entry onto other markets. Such a strategy and the resulting strengthening of competition is most visible in light industry, followed with a big lag by the food industry and the construction materials industry.
In the list of factors which, in the opinion of heads of enterprises, produced an initial positive (strengthening) influence on competition, the "presence of potential competitors" in all the years of monitoring was the most important factor, whose influence was constantly growing. In 2007, 44% of enterprises across industry believed that this factor was considerably strengthening competition, while 30% estimated it as "moderate", which means that nearly 3/4 of enterprises are afraid of the intrusion of competitors on their markets. The most serious apprehensions are registered in light industry, where the sum of such estimations amounts to 87%, while the average rate - to 4.28 points (or reliably above "moderate"). Such apprehensions are also sufficiently strong in machine-building (78% of estimations and the average rate of 4.22 points), in the timber industrial complex (79% of estimations and the average rate of 4.6 points), and in the food branches (80% and the average rate of 4.11 points). In all these branches the average rate is above "moderate", and only 3-4% of enterprises there answered "difficult to estimate", which means that the probability of competitors' intervention is high and very definite.
But in some cases (on some markets) the factor "presence of potential competitors" (or, more exactly, its opposite - "absence of potential competitors") weakened competition and was on the 3rd or 4th places in the initial rating of restricting factors. Its negative influence was lowest in 2002 and reached its historic high in 2004. The absence of potential competitors in 2007 was significantly weakening competition in the timber industrial complex (3.84), light industry (3.57) and machine-building (3.54). And in metallurgy and the chemical and petrochemical industries the negative influence of the "load" of potential competitors was minimal ("negligible").
The absence (or low efficiency) of administrative protection of sales markets was, in the final analysis, on the third place by its strength of positive influence on the level of competition. This factor has a resulting positive influence on competition in all the branches. It can be assumed that the active struggle against markets' regionalization and Russia's traditional disrespect of the law have done their due: producers now have a single sales market where the circulation of commodities is restricted more by transport costs than by administrative barriers.
The initial positive effect (less all negative influence) of "absence of administrative protection of markets" was increasing from 2000 to 2004. During that time, the average positive influence also increased from 3.03 points ("negligible") to 3.53 points (midway between "negligible" and "moderate"). The last survey registered a slight (under 3.43 points) decline in the positive influence of this factor on competition. At the branch level the degree of the positive influence of the absence of administrative protection of markets in 2007 varied considerably. In non-ferrous metallurgy, 88% of enterprises believe that this factor "considerably" strength-
ens competition on their markets, 7% - "moderately". The resulting average level of this factor's positive influence amounted to 4.95 points (nearly equal to "considerable"). At the time of the last survey the second place, with a big lag, belonged to light industry. The degree of the influence on competition of "absence of administrative protection of markets in this branch is 4.00 points ("moderate"), while 76% of enterprises selected the answers "considerable" and "moderate". Slightly less, as compared to that in light industry, is the influence of this factor on competition in the food industry. In this industry, the average rate is 3.63 points, while the share of answers "considerable" and "moderate" is 63%. On the opposite pole is the construction materials industry, where the average rate amounts to 2.95 points (below "negligible"), and only 15% of enterprises believe that the absence of administrative protection of their markets is considerably conducive to competition growth.
The scale of "administrative protection of markets" slightly weakens competition: the average level of its influence in 2007 was "negligible". At the same time, the surveys registered a certain growth of its negative influence in the 2000-2007 period amounting to 0.30 points.
A sufficiently strong positive influence on the level of competition, in the final analysis, is exerted by the negligible number or low efficiency of agreements between producers on their pricing policies and the division of their sales markets. This factor is probably the most sensitive one among those relating to the issue under study. However, given the confidential nature of our relations with the respondents and the sufficiently neutral wording of the questionnaires, it can be assumed that their answers are close to being true. The transition period and the phase of primary capital accumulation do have their impact on the behavior of domestic producers, who so far have been preferring to oust a competitor instead of negotiating with him. The leaders in competition's strengthening, due to lack of desire to achieve compromise with the competitors, were ferrous metallurgy, the chemical and petrochemical industries, and the food industry. Most probably, the influence of the factor "absence of agreement" in those branches may diminish with time (that is, as civilized relations are developing).
The net initial positive effect (less all negative influence) of "absence of agreements" had an average influence on competition in 2000 and 2002 of 3.28 and 3.49 points, respectively. Later on, positive influence went down to 3.14, and then again increased, in 2007, to 3.43 points. The greatest positive influence of honest competition can be observed, according to producers, in non-ferrous metallurgy (the average rate - 3.96 points, the sum of answers "considerable" and "moderate" - 78%), in the chemical and petrochemical industries (the average rate - 3.71 points, the sum of answers "considerable" and "moderate" - 77%), and in the food industry (the average rate 3.70 points, the sum of answers "considerable" and "moderate" - 69%). Machine-building in 2007 was at the bottom of the rating: the positive effect of "absence of agreement" was estimated at 3.42 points (halfway between "negligible" and "moderate"), with 54% of "considerable" and "moderate" answers. The lowest positive effect of "absence of agreements" was registered in light industry, where the average influence was only 3.06 points ("negligible"), and the highest number of answers (33%) fell within 'none".
As for the initial negative contribution of the factor of "informal agreements between producers", its restricting influence was the most stable over time among all the factors being monitored, which means that enterprises noted no changes in this delicate sphere, which is probably the most tempting one for the State to supervise. Relatively more frequently the
negative influence of this factor is mentioned by the enterprises belonging to non-ferrous metallurgy, the construction materials industry, and the food industry.
"Difficulty in withdrawing from markets" (or of withdrawal of funds) in order to shift production to more attractive sectors is, in the final analysis, only on the fourth place by the strength of its positive influence on competition, and only slightly behind the preceding factor. However, this circumstance can hardly be estimated as a positive one. Enterprises believe that in the current situation it is difficult to liquidate non-competitive companies. They are forced to produce at a loss, thereby "littering" the market with unwanted products and mismanaging resources, whereas on other markets these same funds could have been used to manufacture normal products. This situation has two negative consequences. On those markets from which no funds can be withdrawn, producers are forced to eliminate the problem of sales by resorting to dumping, non-payments and other features of inefficient production. As a result, "normal" producers also begin to experience problems. They lose a part of their sales and profits and suffer from shortage of funds for developing their production and increasing the output of competitive products. On the markets inaccessible to capital, buyers have a more narrow choice of goods and manufacturers and are forced to pay higher prices than in a situation of free capital flows.
"High satisfaction of effective demand and presence of surplus capacities" is at the bottom of the list of factors that ultimately have a positive influence on competition. However, such a "moderate" result was produced by a combination of rather powerful initial estimations. In the positive influence rating, this factor is on the second place (as the average of all the surveys), which can be explained by its positive rate. Its value fluctuated throughout the whole period between 3.33 and 3.48 points. It occupied the second place in some surveys only in 2000 and 2007. However, the low changeability of this factor's influence on competition placed it ultimately ahead of all the other factors. In 2007 the high satisfaction of demand and the presence of surplus capacities reached the highest degree of their strengthening influence on competition. It was estimated as "considerable" by 24% of enterprises, and as "moderate" - by 27%. As a result, at the time of the last survey, 51% of producers believed that "high satisfaction of demand and presence of surplus capacities" prevented the emergence and relatively long existence of free market niches. However, such estimations apply, most probably, only to demand, since no surplus capacities have been left.
Since April 2007, Russian industry has been demonstrating an absolute shortage of capacities associated with the expected changes in demand. That is, the share of enterprises where production capacities are insufficient for the satisfaction of the expected demand volumes is higher than the share of those considering their capacities to be excessive in relation to their expected sales (see Fig. 23). It should be noted that Russian industry has for a long time already been suffering from shortages of personnel - and to a substantial degree. Thus, Russia's total surplus of capacities, until recently serving as a reserve for expanding production without investments, has been exhausted. As a result, in the next few years growing demand will not be satisfied fully and at a short notice, as it used to be previously.
In the initial rating of the competition-restricting factors, "low satisfaction of demand and absence of free competitive capacities" was on the 3rd and 4th places. At the time of the latest survey, this factor's weakening influence on competition was most prominent in non-ferrous metallurgy, where its average negative influence was 4.06 points ("moderate"), while 51% of enterprises believed its influence to be "considerable". In 2007, in the other branches
the negative influence of this factor, according to heads of enterprises, was lower, especially in machine-building (average rate - 3.16 points) and in the timber industrial complex (average rate - 3.21 points).
(balance = surplus - insufficient)
In the final analysis, given the economic realities of 2000-2007, the factors under study have indeed been exerting a positive influence on the level of competition across Russian industry as a whole. This provides certain grounds for recognizing that government policy in this sphere has been effective. The real competitive environment is being formed under the influence of both the factors that exist outside the sphere of competence (or responsibility zone) of the antimonopoly agency (potential competitors, opportunities for withdrawal from markets, the ruble's exchange rate, satisfaction of demand), and those that can be directly influenced by the State. At the same time, the absence of agreements between producers can hardly be recognized as a consequence of the antimonopoly agency's activity, since to establish the fact of such conspiracy is a rather difficult and time-consuming business. It seems that so far government agencies have had neither the time nor the experience necessary for successful investigation of such agreements, with the exception of some of the most obvious and crude violations, to which the ingenious Russian businesses are no more resorting now. The principal achievement of the antimonopoly agency and the government as a whole, recognized even by producers, has become the absence of administrative protection of markets. As for the negative influence of production concentration and transport costs on competition, there is little doubt that it must become the State's most important short-term priority.
3.3. Investments in Real Sector
3.3.1. Internal Domestic Investments in the Fixed Assets
The trend for anticipating growth of the investments in the fixed assets has been observed in the Russian economy since 2002. Over the period of 2003-2007 investments in the fixed assets have increased by 192%, GDP growing by 142%. The characteristic feature of 2007 was the expansion of the investments in the fixed assets share up to 19.7% of the GDP, which was the maximum value over the whole period of reforms. High growth of investment demand was supported by the growth in internal market significance in the formation of the economic dynamics. Over 2007 the volume of the investments in fixed assets has increased by 21.1% as compared with 13.7% in the previous year.
Fig. 24. GDP and Investments in Fixed Assets Growth Rates in 1991-2007, as percentage to the previous year
Growth of economy and business earnings defined dynamic expansion of the demand for investment goods. Recovery of the positive dynamics of fixed assets implementation observed from 1999 contributed into overcome of the fixed assets recession and improvement of reproduction structure indices. Fixed assets renovation coefficient has increased from 1.8% in 2001 to 3.4% in 2006, extent of deterioration decreasing to 44.4%, and the proportion of completely depreciated assets - to 13.3%.
Focus of the producers on production's modernization and reconstruction induced increase in demand for machinery and equipment in nearly all kinds of economic activities. The growth of expenditures for machinery, equipment and transport vehicles was observed in the structure of investments in the fixed assets by kinds of the fixed assets. Whereas in 2001 the share of investments in machinery, equipment and fixed assets was 35% of the total volume of the investments in the fixed assets, in 2006 their share was more than 37.7%.
Table 34
Structure of Investments in Fixed Assets by Kinds of Fixed Assets in 2000-2007,
as percentage to the total
2000 2001 2002 2003 2004 2005 2006 2006* 2007*
Investments in the fixed assets - total 100 100 100 100 100 100 100 100 100
Including by kinds of the fixed assets:
Dwellings 11.3 11.4 12.2 12.6 11.9 12.0 12.0 7.1 7.6
Buildings and constructions 43.1 41.8 41.0 43.5 41.9 40.4 42.7 48.4 49.6
Machinery, equipment and transport vehicles 36.6 35.0 37.7 37.1 40.4 41.1 37.7 36.7 35.4
Other 9.0 11.8 9.1 6.8 5.8 6.5 7.6 7.8 7.4
* Subjects of small business and informal activity parameters not included. Source: Federal State Statistics Service.
Under existing in 2000-2007 growth rates of the domestic machine-building, the dynamics of investment expenditures and characteristics of fixed assets reproduction at the domestic market the influence of machinery and equipment import supplies has strengthened. The dramatic increase in demand for import equipment was observed in 2000, since that time the trend for anticipating growth rated of machinery and equipment import as compared with the domestic machine-building development was steady and corresponds with the dynamics of investment activity. It is cheapening of import machinery and equipment due to ruble appreciation as well as implementation of zero duty rates for import equipment that is not produced at Russian enterprises (2005-2007) and implementation of industrial assemblage procedure according to which import duty rates for import components were decreased that had positive influence on the change of structure and aspectual structure of the investments in the fixed assets in middle-term and in the long run. Adoption of such measures induced machinery and equipment import growth rates acceleration.
Whereas over 2003-2006 the average annual investments in fixed assets growth rates were about 11.9% and domestic machine building production - about 8.7%, this figure for machinery, equipment and transport vehicles import was 32.2%. In 2007 investments in fixed assets growing by 21.1%, production of machinery and equipment - by 20.9%, of transport vehicles and equipment - by 15.7%, of electric equipment - by 14.8%, machinery and equipment import went up by 155%. Investments in import equipment purchase in the total amount of investments in machinery, equipment and transport vehicles were equal to RUR 308.5 bln or 17.8%.
Characteristic feature of 2007 was the change in the ratio of funds of federal budget and the budgets of subjects of the Federation that is directed towards the investments. In 2007 as compared with the corresponding period of the previous year the increase in the share of budget investments in the GDP is observed by 0.5 p.p. RUR 1042.4 bln was invested in the fixed assets at the expense of the budget funds, which makes up 21.2% of the total volume of investments in the fixed assets throughout the economy, including from the federal budget -8.4%. 280
In 2007 the volume of funds envisaged to be allocated to finance FTIP construction sights and objects was reconsidered three times, budget allotments having been increased both for program and for non-program part. Budget assignments for FTIP program part were equal to RUR 360.6 bln, for non-program part - to RUR 223.2 bln. The volume of the government defense order included in FTIP program and non-program parts was RUR 101.5 bln or 17.4% of the total limit.
Table 35
Structure of Investments in the Fixed Assets by the Sources of Financing,
as percentage to the total
2000 2001 2002 2003 2004 2005 2006* 200*7
Investments in the fixed assets - total 100 100 100 100 100 100 100 100
of which by sources of financing:
Own funds 47.5 49.4 45.0 45.2 45.4 44.5 42.1 41.5
of which:
Profit 23.4 24.0 19.1 17.8 19.2 20.3 19.9 19.9
Borrowed funds 52.5 50.6 55.0 54.8 54.6 55.5 57.9 58.5
of which:
Bank credits 2.9 4.4 5.9 6.4 7.9 8.1 9.6 9.4
Of which of foreign banks 0.6 0.9 0.9 1.2 1.1 1.0 1.6 1.1
Funds borrowed from other organizations 7.2 4.9 6.5 6.8 7.3 5.9 6.0 6.1
Budget funds from: 22.0 20.4 19.9 19.6 17.9 20.4 20.2 21.2
Federal budget 6.0 5.8 6.1 6.7 5.3 7.0 7.0 8.4
Budgets of the subjects of the Russian Federation 14.3 12.5 12.2 12.1 11.6 12.3 11.8 11.7
and local budgets
Investments from abroad in the total amount of the 4.7 4.5 4.1 4.7 5.0 4.8 6.9 4.6
investments in the fixed assets_
* Not including small business enterprises and parameters of informal business. Source: Federal State Statistics Service.
As a result, government investments for FTIP fulfillment increased by 58.9% in 2007 as compared with 2006 in the prices of the corresponding years. The proportion of the expenditures for FTIP financing in the GDP was equal to 1.77%, exceeding by 0.4 p.p. the level of the previous year.
Table 36
Proportion of Expenditures for the Federal Targeted Investment Program in 2004-2007, as percentage to the GDP
2004 2005 2006 2007*
FTIP- total 0.47 1.17 1.37 1.77
Program part 0.27 0.85 0.87 1.09
Non-program part 0.21 0.32 0.50 0.68
Source: calculated on the basis of Federal State Statistics Service and Ministry for Trade and Economic Development data.
In concordance with the priorities for the government investments the funds were directed to modernize and develop strategically important for the country objects of production infrastructure, to fulfill investment projects of application of modern technologies to produce competitive goods at the enterprises of the machine-building industry and to conduct works to secure safety of the power, transportation, forestry and water industry objects.
Government investments from the budget were carried out through Investment Fund, Federal Targeted Investment Program and Federal Target Programs (FTP). Investments for different social, economic and industrial programs, recognized as priority ones, were directed through FTPs. In 2007 the number of target programs and subprograms financed from the federal budget decreased. This allowed the budgets to be concentrated on the main directions of social and economic development of the country. Construction of individual objects both necessary for FTP fulfillment and non-program ones was financed through FTIP.
Over January-December 2007 the government customers spent RUR 401.8 bln of investments from all sources of financing, or 99.3% of the total volume of allocated funds by all sources of financing.
Table 37
Use of Investments from all the Sources to Finance Objects Envisaged by the Targeted Investment Program in 2007, as RUR millions
Government Investment Limit Investment from all the sources of financing used
total of which from total of which from
the federal budget the federal budget
Total 622.4 466.6 401.8 316.8
including:
Construction complex 0.4 0.4 0.4 0.3
Transportation complex 295.6 190.7 198.0 147.5
Agriculture complex 10.6 9.9 8.2 7.6
Special complex 44.4 29.6 24.0 21.6
Social complex 246.9 217.5 152.4 126.2
Other objects 24.4 18.6 18.7 13.6
Not taking into account construction sights and objects, included in the government defense order
Source: Federal State Statistics Service.
The financing from the yearly limit for government investments of FTIP construction sights and objects that are being monitored by the Federal State Statistics Service was RUR 316.8 bln or 67.9% of the yearly limit. The level of industrial complexes financing is within average figures. The yearly limit for government investments in the social complex was financed considerably less than in the construction sights and objects.
Nearly three quarters of investments volume in 2007 fall for Central, North-Western and Southern Federal Okrugs.
Table 38
Some Parameters of Federal Targeted Investment Program's Objects Financing in 2007 Broken by the Federal Okrugs, as RUR bln
Federal okrug Investments limit according to FTIP from all sources Government invest- Really used at the expense of all sources of financing
ments limit as percentage from the yearly limit
Central 249.6 157.9 115.4 46.2
North-Western 86.9 76.9 80.0 92.1
Southern 121.8 104.1 71.7 58.9
Privolzhski 55.2 43.2 49.3 89.3
Ural 19.0 14.2 15.1 79.3
Siberian 42.3 36.1 28.3 66.9
Far Eastern 47.8 34.2 42.1 88.1
Source: Federal State Statistics Service and Ministry for Trade and Economic Development. 282
Comparison of the level of the funds usage by construction sights and objects for federal government needs demonstrates that the figure above the average throughout Russia is registered in North-Western, Far Eastern, Privolzhski, Ural and Siberian federal okrugs, Central and Southern federal okrugs' figures being considerably less in 2007.
In accordance with the Federal Targeted Investment Program by the specified list of the Ministry for Trade and Economic Development of the Russian Federation it was envisaged to allocate funds for 6093 construction sights and objects in 2007. It was designed to put into commission 3696 objects, of which 1041 was actually put into commission, including 913 - at full capacity and 128 - partially. Besides, 100 objects (40 - at full capacity and 60 - partially) from those intended to be put in commission in the following years.
By 1 January 2008 4043 objects were fully financed. At the same time the level of financing of 1668 was below 50% and 1497 objects were not financed. Technical readiness of 51.0-99.9% was registered for 1509 objects or 24.7%.
Table 39
Objects Envisaged by the Targeted Investment Program
Number of objects for 20071'
Put in commission in January-October 20072)
total
Including those with the date for putting in commission in 2007
At full capacity
partially
Total including:
Construction complex Transportation complex Agriculture complex Special complex Social complex Other objects
6,093 3
1,003 1,142 269 3,307 369
3,696 3
512 967 180 1,785 249
953
188 292 18 394 61
188
26 52 9 93 8
1) including conduction of design and survey works, equipment purchase that is not included in constructions' estimates
2) number of construction sights and objects, put into commission according to the established procedure_
Source: Federal State Statistics Service.
Delays in financing of some FTPs in 2007 were caused by late approval of a number of FTPs that were adopted during the year. The traditional delay in financing of the FTIP at the beginning of the year, low executive discipline, and absence of firm control over the use of funds are the main factors contributing in the of systematic growth of a number of unfinished construction, the number of new construction sights and objects increasing every year.
According to amendments made to the Budget Code this situation should change in 2008. it is envisaged that no FTP be considered unless it is approved a month before the project is submitted to the State Duma - in other words all FTPs should be approved by 26 July. During next two years the procedure for the formation of the list of construction sights and objects financed from the federal budget that is approved by FTIP will be changed. Just one mentioning of the object in FTP or in the decree of the Government will be enough to make a decision on its financing over the whole period of construction. In such a case there will be no need in annual approval of the expenditures for each object and the discipline of FTP financing will be increased.
Fundamentally new moment feature of economic growth in 2003-2007 was shift from financing of investments in fixed assets from own funds to extension of borrowed funds participation. This was a distinct illustration for quality changes of investments development mechanism that is oriented to rationalize investment resources flows. As a result of 2007 the share of borrowed funds was 58.5% of the total amount of investments in the fixed assets.
The development of this process is accounted for by the increase in banking sector activity, growth of population's investments in housing construction and intensive inflow of foreign capital. Low real value of credit resources, average level of profitability in the economy being quite high, lead to the increase in the number of enterprises-borrowers. Other factors positively influencing the credits and other borrowed funds dynamics the following are the growth of organized forms of savings of the population. The share of funds directed to share holding in construction was 3.3% of the total volume of investments in the fixed assets, and population's - 1.0%.
The share of banks in crediting in the structure of the borrowed funds was 9.4% in the structure of investments resources, which corresponds to the level of the previous year. The trend for the increase in participation of insurance and investments companies, industrial and trade enterprises in financing of investment activity sustained.
The specific features of foreign banks participation in financing of investment activity are also of notice. In the Russian economy the increase of foreign investments share and the growth of foreign banks participation in financing of the investments in the fixed assets was observed from 2000. However in 2007 investments in the fixed assets from abroad were equal to 4.6% of the total volume of investments and decreased by 3.3 p.p. as compared with the previous yea, and the share of foreign banks' credits lowered down to 1.1% as compared with 1.6%. In the structure of use of funds from abroad in the form of foreign investments the increase of expenditures for securities purchase and banks' credits and loans repayment up to 27.4% against 7.0% in 2006 was of primary importance, investments infixed assets decreasing by 10 p.p. down to 13.1%.
The formation of the aforementioned proportions occurred against the background of intensive increase of net capital import and foreign investments. According to the preliminary estimation of the Central Bank of the Russian Federation in 2007 net capital import was USD 82.3 bln compared with USD 41.3 bln in 2006.
The change in investment structure by kinds of economic activities in 2007 was defined by the trends that were formed in the previous year.
Increase in investment activity in infrastructure branches and growth of demand for these kinds of activities services is an indicator of growth potential, especially since investment policy in this sector was mainly directed to the solution of promising problems. Over the period of 2002-2007 the share of transport, communication and trade has increased by 3.0 p.p. and was equal to 25.3% of the total volume of investments in the fixed assets. Over the years of reform the share of transport in the structure of investments in the real sector of economy has nearly doubled and was equal to 20.2% in 2007. Whereas in 1992 the share of investments in communication was less than 0.6% in the total amount of investments in the national economy, in 2007 it reached 5.3%.
In 2006-2007 the trend for investments in the fixed assets in trade and transport sustained the same is true for the kinds of activities oriented for social services rendering (education, health care). The characteristic feature of investment process in the field of transport in
2007 was the change in the structure of investments by kinds of economic activities. In 2006 reduction of investments in railway transport and communication was observed, for which the period of recovery growth in 1999-2005 was the period of high investment activity, while rates of pipeline transport accelerated and its share increased in the total amount o investments in the fixed assets up to 39.9%. In 2007 the decrease in the investments in pipeline transportation was the factor that contributed into rates deceleration of investments in transport development on the whole.
Against the background of steadily growing demand for trade services in 2006-2007 redistribution of investments by kinds of activities was observed material and technical base of retail trade and motor-vehicles trade expanding.
Note: not including small business enterprises and parameters of informal business. Source: Federal State Statistics Service.
Fig. 25. Changes of Investments in the Fixed Assets Growth Rates by Kinds of Economic
Activities and Services Rendered in 2005-2007, as percentage to the previous year
Structure of investments in goods production in 2006-2007 was defined by anticipating growth of investments in agriculture and minerals extraction.
Characteristic feature of structural shifts in goods production in 2006-2007 was overcoming of the trade of investments in minerals extraction reduction, which was observed since 2002. As a result of 2006 the increase in investments in fossil fuels extraction was equal to 25.1% against the drop of 2.6% last year. In 2007 the increase of investments in minerals extraction was 19.1%, including in fossil fuels extraction - 19.0% investments in processing production increasing by 10.8%. In electricity, gas and water production and distribution increase of investments in 2007 reached 30.0% and was accounted for by the increase in in-
vestment activity in electricity production and transmission by 1.51 times, dynamics of investments in production and distribution of gas fuel being negative.
Table 40
Structure of Investments in the Fixed Assets by Kinds of Economic Activities
2000 2001 2002 2003 2004 2005 2006 2006* 2007*
Total 100 100 100 100 100 100 100 100 100
Broken by kinds of economic activities:
Agriculture, hunting and forestry 3.0 4.0 4.6 4.1 4.1 3.9 4.9 4.0 4.3
Industry 40.4 40.4 38.6 38.2 38.7 37.1 37.2 40.7 41.7
Minerals extraction 18.1 19.0 16.9 16.0 15.4 13.9 15.3 17.0 17.3
Including fossil fuels extraction 16.7 17.5 15.5 14.5 14.0 12.4 13.9 15.5 15.8
Processing industry 16.3 15.9 15.9 15.6 16.4 16.4 15.8 16.1 15.7
Electricity, gas and water production and distribution 6.0 5.5 5.8 6.6 6.9 6.8 6.1 7.6 8.7
Construction 6.4 5.2 5.4 4.9 3.5 3.6 3.5 306 2.4
Wholesale and retail trade, motor-vehicles and motorcycles servicing, household appliances and items of the private use repair 2.7 2.9 3.6 3.5 3.5 3.6 3.4 3.1 2.9
Transport 18.5 19.2 15.1 17.5 17.3 19.1 18.8 20.2 20.2
Communication 2.7 3.0 3.4 4.8 5.4 5.4 4.7 5.3 5.1
Financial activity 0.8 0.8 1.0 1.2 1.4 1.4 1.2 1.1 1.4
Operations with real estate, rent, services rendering 15.2 14.7 18.1 17.7 17.3 16.8 16.4 12.0 12.0
Education 1.5 1.5 2.0 1.6 1.7 1.6 1.6 2.2 2.3
Government management, military safety security; compulsory social provision 1.3 1.5 1.5 1.4 1.8 1.9 2.2 2.1 2.0
Health care and social services rendering 2.6 2.4 2.0 2.0 2.5 2.6 2.7 2.7 2.6
Rendering of public utilities, other social and 3.9 3.5 3.8 2.6 2.4 2.5 2.9 2.8 2.7
personal services
* Subjects of small business and parameters of informal activities not included. Source: Federal State Statistics Service.
The share of processing industries in 2007 structure of investments in the fixed assets throughout the economy was 15.7%. Concentration of income in raw materials export-oriented industries being high, it is the small share of investments in machine-building that is characteristic for the Russian economy. Age, technological and reproduction structure of the fixed assets being as they are, low rates of investments in machine-building complex were the factor that restricted growth rates of enterprises for production of final and investment goods. Under existing structure of domestic production of the investment goods import remains one of the main sources for fixed assets renovation, production reconstruction and modernization.
3.3.2. Foreign Investment
The year of 2007 saw record-breaking growth rates in funds foreign agents invested in Russia's economy. In 2007, as much as USD 10.9 bn in foreign investment poured in the country, or 2.2 times greater than in 2006.
According to UNCTAD's World Investment Report 2007 released in October 2007, Russia holds the 10th place worldwide in terms of volume of attracted foreign direct investment (in 2005 the country was 15th in this respect). Meanwhile, Russia holds the 2nd position after China, so far as FDI in developing countries are concerned.
In December 2007, Moody's confirmed Baa2 rating of Russia's T-bonds denominated in Rb. and foreign exchange. Moody's believes that underpinning a significant rise of the country's economy in 2005-07 primarily were the production areas oriented towards the domestic market, such as the construction sector, services sector, finance, transport, and communication. Preceding Moddy's statement, S&P had also proved Russia's sovereign credit rating at the level of BBB+ and made a forecast "Stable".
Table 41
Foreign Investment in Russia's Economy9
As USDm. As % to the prior year
Total Direct Portfolio Others Total Direct Portfolio Others
2003 29,699 6,781 401 22,517 150.1 169.4 84.9 147.1
2004 40,509 9,420 333 30,756 136.4 138.9 83.0 136.6
2005 53,651 13,072 453 40,126 132.4 138.8 136.3 130.5
2006 55,109 13,678 3,182 38,249 102.7 104.6 700.0 95.3
2007 120,941 27,797 4,194 88,950 219.5 203.2 131.8 232.6
Source: Rosstat.
In 2007, the volume of FDI in Russian economy doubled vs. 2006. The rise was fueled primarily by growth in such components as contributions to corporations' authorized capital and loans received from their overseas owners. While the former component soared up to USD 14.8 bn (68.7% up vs. the respective value of 2006), the latter one tripled over the period in question and hit the level of USD 11.7 bn. So, the specific weight of loans received from the corporations' foreign owners in the structure of FDI in RF surged from 28.5% in 2006 to 42.0% in 2007.
As concerns the 2007aggregate structure of foreign investment in Russia's economy, the greatest increment was noted in the segment of "other" investment, as the proportion of trade credits in their structure plunged from 24.2% in 2006 to 15.8% in 2007.
Following the 2006 pattern, the 2007 growth rate of portfolio investment, the bulk of which is formed by those in stock and shares (2006 - 90.8% of the volume of portfolio investment, 2007 - 95.5%) once again remained on a high level (131.8% relative to 2006).
9 Direct investments are those by private individuals and legal entities that own in full or a given corporation or control at least 10% of its stock or its joint-stock capital.
Portfolio investments are formed by acquired stock, shares, obligations, promissory notes and other papers, which may account for less than 10% of the corporation's joint-stock capital.
In the event given investment fail to fall under the noted categories it is labeled as "other", such as, for example, trade credits, loans disbursed by overseas governments under the RF Government's guarantee, and other loans (such as from international financial organizations), and bank deposits.
Overall, when compared with the prior year, the 2007 structure of foreign investment in Russia's economy underwent no substantial changes.
Source: Rosstat.
Fig. 26. Structure of Foreign Investment in Russia's Economy in 1996-2007
As in the prior year, 2007 saw foreign investment likewise concentrate in the industrial and trade sectors. By the 2007 results, foreign investment in these sectors grew twice and 3.6 times, accordingly. The substantial growth in investment in trade has resulted in nearly a 1.6 growth in its specific weight in the sectoral structure of foreign investment vs. 2006. The distribution of foreign investment across basic sectors of Russia's economy is given in Table 42.
Table 42
Sectoral Structure of Foreign Investment in Russian Economy in 2005-07
As USDm Change to the prior year, as % As % to result
2005 2006 2007 2005 2006 2007 2005 2006 2007
Industrial sector 24,318 24,607 50,163 120.6 101.2 203.9 45.3 44.7 41.5
Transport and communica- 3,840 5,297 6,703 188.9 137.9 126.5 7.2 9.6 5.5
tion
Wholesale and retail trade; 20,461 13,089 47,310 156.9 64.0 361.4 38.1 23.8 39.1
maintenance and repair of
automobiles, motorcycles,
household items and per-
sonal use items
Real estate, leasing and 2,602 5,998 8,414 101.2 230.1 140.3 4.8 10.9 7.0
service delivery
Financial operations 1,813 4,698 4,450 181.1 259.1 94.7 3.4 8.5 3.7
Other sectors 617 1,420 3,901 36.4 231.8 274.7 1.2 2.5 3.2
Source: Rosstat.
It was the manufacturing industry branches that showed the greatest rise of investment in the industrial sector (210.9% vs. the unfortunate 2006, when they had dropped by 15.8% vs. 2005), while foreign investment in the mining sector grew 1.9 times (vs. the 52.5% growth posted in 2006). As concerns the manufacturing sector, investment in the metallurgical industry grew 4.1 times, in the food-processing industry - 2.1 times, and in the chemical industry -at 4.3%, hitting levels of USD 15.2 bn, 12.9 bn and 1.6 bn, respectively.
Other industries -25,8% (35,6%)
Mining sector- 34,7% (37,2%)
Food-processing -5,8% (5,7%)
Metallurgy - 30,4% (15,1%)
Chemicals - 3,3% (6,4%)
Source: Rosstat.
Fig. 27. Sectoral Structure of Foreign Investment in the Industrial Sector in 2007 (the 2006 data are given in parentheses)
The specific weight of direct investment in the industrial sector rose from 29.2% in 2006 up to 36.3% in 2007 while the proportion of "other" investment dropped from 66.7% to 57.3% over the period in question.
The structure of foreign investment, by kinds of economic activity within the industrial sector, also underwent certain changes. In the mineral sector, the proportion of direct investment grew 3.1 times vs. its respective 2006 index and reached 80.1% (vs. 49.4% reported in 2006). The proportion of "other" investment in the sector was down at 25.8% (estimated) and accounted for 19.8% (vs. 50.6% in 2006).
By contrast, the bulk of investments in the manufacturing sector was formed by "other" ones. They grew 2.2 times vs. 2006 and ultimately made up 78.7% of the total volume of investment in the sector (in 2006 the respective figure was 76.8%). Foreign direct investment in the sector rose at 57.6%, while the specific weight of direct investment in the manufacturing industries dropped to 12.8% (vs. 17.2% in 2006). The greatest growth rates in foreign investment in the industrial sector was demonstrated by portfolio investment (3-fold vs. 2006), which resulted in the rise in their proportion up to 8.5% (vs. 6.0% in 2006).
In terms of the 2007 geographic structure of foreign investment the leading position was held by Cyprus with 17.9% of the aggregate volume of foreign investment, followed by UK (12.7%). However, UK became an undisputable leader in terms of absolute volume of investment (USD 26.3 bn, or 21.8% of the aggregate volume of foreign investment), while Cyprus was the second biggest source of investment inflow with USD 20.7 bn, and the Netherlands -the third one (USD 18.8 bn, or 15.5%).
Fig. 28. Geographic Structure of Foreign Investment in Russian Economy in 2005-2007
The greatest rise in 2007 was demonstrated by investment from UK (3.7 times vs. 2006), Cyrpus (2-fold), France (2.2 times), the Netherlands (2.8 times), and Luxemburg (1.9 times), while German investment remained at the prior year's level.
Differences in the investment dynamics have resulted in the change of the geographic structure of foreign investment in Russia. While UK and the Netherlands posted a notable growth in this respect - from 12.0 and 12.7% in 2006 up to 15.5% and 21.8% in 2007, the US, Cyprus, Germany and Luxemburg's respective proportions shrunk, and that of France remained practically unchanged, sticking to the level of 5.5%.
In 2007, the top 10 nations that were biggest investors in the country was joined by Ireland whose investment in Russia totaled USD 5.2 bn, or 4.3% of the aggregate volume of foreign investment. The Shamrock Country's investors focused mostly on transport and communication, and it is a small wonder that their investment in this sector accounted for 53.7% of the island's overall volume of investment in Russia.
By contrast, UK investors centered on boosting trade and invested in the sector 4.6 times as high as in 2006, or 64.2% of the Kingdom's aggregate investment volume in Russia (vs. 52.1% in 2006). Plus, the proportion of the UK investment inflow in the manufacturing sector grew from 22.2% in 2006 up to 27.7% in 2007.
The Netherlands increased their investment in the mineral sector from 55.2% in 2006 to 67.1% in 2007.
For Cyprus the most attractive sectors in 2007 became trade, operations on the real estate market, and construction, which received 45.5%, 19.0% and 4.7% of the aggregate investment volume provided by the nation. In 2006, the situation was a bit different, with the manufacturing sector receiving 39.1% of the aggregate investment from Cyprus, while operations on the real estate market absorbed as much as 26.4% of the noted volume.
As of the late-December 2007, the volume of foreign capital accumulated in Russia's economy (less monetary and credit control agencies, commercial and savings banks, but including Rb-denominated investment in the USD equivalent) accounted for USD 220.6 bn, or up at 54.3% against the beginning of the year. 290
By the 2007 results the leading group in terms of the overall volume of accumulated foreign investment is still dominated by Cyprus, the Netherlands, UK, Luxemburg, and Germany, whose aggregate proportion stood at 72.0%. Meanwhile, the proportion held by the top five investor nations in the segment of direct investment rose up to 77.0% (vs. 71.9% in 2006), while the one in the structure of portfolio and "other" investment dropped to 65.1% (vs. 71.1% in 2006) and to 67.8% (vs. 71.8% in 2006), respectively.
Table 43
Accumulated Foreign Investment By Major Investor Nations
Accumulated as of October 1, 2007, as USDm Change to January 1, 2007, as %
Total Direct Portfolio Others Total Direct Portfolio Others
US 8,579 3,635 1,207 3,737 111.4 79.2 238.1 143.6
Germany 11,786 4,494 98 7,194 96.1 135.4 5.8 99.3
France 5,919 1,554 31 4,334 160.0 146.9 - 164.1
UK 29,235 3,438 2,314 23,483 247.7 118.3 1369.2 269.1
Cyprus 49,593 35,426 1,700 12,467 153.7 155.4 125.2 153.5
Netherlands 39,068 35,254 52 3,762 166.6 183.3 83.9 90.5
Luxemburg 29,161 735 219 28,207 127.5 125.2 107.9 127.7
Other nations 47,254 18,524 1,107 27,623 163.7 138.3 121.5 189.7
Total 220,595 103,060 6,728 110,807 154.3 151.8 137.3 158.0
Source: Rosstat.
The structure of foreign investment accumulated as of the late-December 2007 was dominated by "other" investment whose proportion accounted for 50.2% vs. their 2006 index that totaled 46.7%.
Against the background of a large-scale rise in foreign investment in Russia's economy the volume of capital withdrawn in the form of profit repatriation, as well as interest payments and loan repayment was on the rise in 2007 vs. 2006 (up at 54.3%) and totaled USD 58.4 bn (48.3% of the 2007 investment inflow volume), while in 2006 the respective index accounted for 68.7%.
3.4. Foreign Trade
3.4.1. Foreign Trade Turnover
In their report entitled "The Global Economic Outlook"10, the World Bank experts reckon that the year of 2007 saw the world economy growth rates plummet down to 3.6% vis-à-vis 3.9% reported in 2006. They expect the 2008 rise in the global economy at 3.3%, and it is going to be only in 2009 that the world GDP will bounce back to the level of 3.6%, which is envisaged to be attributed to the renewal of the US economy's growth rates.
In 2007, the GDP growth rates in Europe and the Central Asia accounted for 6.7% vs. 6.9% reported in the prior year. This is steered by some fall in the domestic, as well as exter-
10 http://www.worldbank.org/gep2008.
nal demand. By contrast, the CIS countries were advancing at a far greater pace - up to 8.2% in 2007 against 7.8% in 2006. This became possible thanks to a considerable rise in consumption and investment, and some growth in net export from the region. The oil-exporting nations (Azerbaijan, Kazakhstan, and Russia in particular) still cash up very handsome profits, while the construction boom in the housing, commercial and infrastructural sectors has contributed engendered the rise in non-oil sectors of their economies in question.
As all the developing world has displayed a steady demand for imports, it helped maintain the global economy's advancement and formed (along with a further depreciation of the US Dollar) a major factor underpinning a rapid growth in the US exports, thus helping the nation to cut down its current accounts deficit and allowing equalization of the global disproportions.
The trade has remained the global economy's major locomotive, with the rise in the world commodity trade over the past four years being twice as high vis-a-vis the rise in the global output. During the period of an intense economic growth, which started in 2001, the volume of the world flows of goods has been on the rise, thanks to the developed and the Eastern Asian nations, however, as evidenced by the 2007 estimates and the 2008 projections, the noted nations' import and export growth rates will fail to match the previously reported indices, and the trend is likely to persist further on.
Table 44
Dynamics of the Global GDP and the World Trade (as % to the prior year)
2004 2005 2006 2007* 2008**
GDP
The world 105.3 103.4 103.9 103.6 103.3
Industrially developed nations 103.2 102.6 102.9 102.6 102.2
The US 103.9 103.1 102.9 102.2 101.9
The EU countries 102.1 101.5 102.8 102.7 102.1
Japan 102.3 101.9 102.2 102.0 101.8
Other developed nations 104.6 103.9 104.4 104.3 103.8
Developing and transitional economies 107.7 106.8 107.5 107.4 107.1
Central and eastern European 106.5 105.6 106.3 105.8 105.2
CIS 108.4 106.6 107.7 107.8 107.0
Russia 107.2 106.4 107.4 108.1 106.5
Asian 108.8 109.2 109.8 109.8 108.8
China 10.1 110.4 111.1 111.3 110.8
The world trade in goods and services 110.6 107.5 109.2 106.6 106.7
Import 105.8 109.5 108.3 107.2
Industrially developed nations 109.1 106.1 107.4 104.3 105.0
Developing and transitional economies 116.4 112.1 114.9 112.5 111.3
Export 105.7 110.1 109.2 107.6
Industrially developed nations 108.8 105.8 108.2 105.4 105.3
Developing and transitional economies 14.6 111.1 111.0 109.2 109.0
* - Estimated. ** - Projected.
Source: Rosstat, BIKI No. 125, 2006, BIKI No. 143, 2007.
In 2007, Russia's foreign trade advanced under the effect of the following critical factors: a considerable price rise for energy resources on the world markets; instability of international financial flows due to the crisis on the biggest world stock exchanges; and soaring prices for crops. All these factors exercise different by its intensity effect on the dynamic of foreign trade flows.
In 2007, the indicators, which characterize Russia's foreign trade, continued their steady rise and hit 17 years-high values.
Calculated by the balance-of-payments methodology, the nation's 2007 foreign trade turnover made up USD 578.2 bn, thus outrunning at 23.4% the respective index of the prior year.
The share of export in the said amount stood at 61.4% (in 2006 it was 64.9%), while that of import - 38.6% (35.1%), which predetermined some deceleration of the nation's growth rates of goods turnover as a result of a substantial decline of growth rates of its export, which accounted for 116.9% vis-à-vis 124.7% reported in 2006.
In 2007, the major trend of Russia's foreign trade was a considerable disequilibrium between growth rates of import and those of export in favor of the former over the first 9 months of the year. The trend reversed only in the 4th quarter. Overall, the trend has resulted in contraction in the 2007 positive balance of foreign trade at 5.1% against the year of 2006 (USD 132.1 bn vs. 139.2 bn). Some experts foretell a far greater contraction rate, and it was just the price rise for oil at the end of the year that cushioned the envisaged process. In the 4th quarter 2007, the balance of foreign trade accounted for USD 39.9 bn, or at 42, 4% up against the respective index of the 4th quarter 2006 (USD 28.045 bn). Interestingly, the balance of Russia's trade with Far-Abroad countries dropped by 8.5%, while the balance of its trade with the CIS countries surged at 16.3%.
Fig. 29. Russia's Foreign Trade Turnover (USD bn)
The foreign trade turnover imbalance coefficient (the foreign trade balance to the foreign trade turnover) plunged from 29.7% in 2006 to 22.8% in 2007.
The proportion of import in GDP soared from 16.7% in 2006 to 17.5% in 2007. By contrast, the proportion of export in GDP shrank from 30.8% in 2006 to 27.4% in 2007.
3.4.2. Situation on the World Market
In 2007, the world prices for main Russian exports basically remained favorable - they were greater on average than in 2006, with the price rise for energy commodities accounting for 1.9% and that for non-energy ones - 8.2%.
The world oil market was extremely volatile in 2007. The warm winter in the US and other countries of the Northern Hemisphere, as well as some OPEC nations' loose observance with their obligations to cut back their oil output engendered a sharp rise in the world prices for oil in early 2007, but since February they have been on a gradual rise11.
The 2007 prices for goods of ferrous and non-ferrous metals were likewise on the rise.
In the 2nd and 3rd quarters 2007, there was some slight price rise for ferrous metals, but, overall, the 2007 prices for ferrous metals proved to be at 1.7% down on average vs. the 2006 ones.
The price rise on the world market for main non-ferrous metals in the 1st quarter and through mid-April was followed by some stabilization in May and June, and after that the prices began to sink.
After some fall in January and February, the world price for cooper at the London Metal Exchange has been soaring and remaining at a fairly high historical level. It ultimately proved to be at 4.1% higher than in 2006.
Behind a serious price rise for nickel had been long-standing shortages on the respective market. On May 9, 2007, the price for the metal hit all-time record value - that is, USD 53,000/t. It began to fall since June, but remained at a fairly high level. By results of 2007, it was at 68.5% greater than in 2006.
The world aluminum prices were also at a fairly high level, albeit falling short of hiiting their peak value in May 2006 - USD 2,861.5/t. The 2007 average price for aluminum ultimately was at 0.8% greater than in 2006.
Underlying the 2007 price rise for ferrous metals were such main factors as a high industrial demand for them (particularly China's), a low level of the nickel inventory, and contracted copper inventory.
Table 45
The Average World Prices
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Oil (Brent), 17.4 14.1 15.9 28.19 24.843 25.022 28.83 37.4 54.38 65.15 72.32
USD/brl.
Natural gas/1 m. 1.9642 2.5469 2.1876 4.3442 3.9764 3.3857 5.461 5.993 8.870 12.2 7.27
BTE
Gas USD/Gallon 0.615 0.511 0.529 0.887 0.7922 0.755 0.891 1.197 1.508 1.81 2.06
Copper USD/t 2,369.7 1,775.3 1,539.9 1,863.9 1,613.6 1,592.9 1,785.6 2,808.2 3,606 6,851 7,129
Aluminum USD/t 1,554.0 1,413.5 1,318.0 1,550.0 1,444.7 1,350.7 1,424.7 1,693.2 1,871 2,619 2,639
Nickel USD/t 7,312.4 5,352.5 5,239.5 8,624.0 5,966.0 6,175.1 9,580.8 13,757 14,692 22,038 37,134
Source: By the data of the London Metal Exchange and International Petroleum Exchange (London).
As the stock of raw materials was contracting, while demand was rising at an unusually great pace, which left the production expansion rates behind, and more and more volumes of crops have been used to produce biofuel, and the progress in production of freighters was being insufficient and values went up, the world market saw the price rise for food stuffs.
11 For greater details, see section 3.1. 294
Meanwhile, as many countries attempt to ensure a partial replacement of the mineral fuel with the biological one, the contemporary world agrarian production has fallen short of meeting suchthese requirements.
Table 46
The Dynamics of the Average World Prices for Some Agricultural Goods
2005 2006 2007
July August September October November December
Wheat, USD./t
Canadian, CWRS 197.6 216.8 277.7 294.9 357.7 386.3 391.0 473.2
US, HRW 152.4 192.0 238.4 259.7 326.5 335.1 321.8 368.6
US, SRW 135.7 159.0 225.6 253.9 325.7 325.5 307.7 345.4
US corn, USD./t 98.7 122.9 138.5 150.3 164.1 164.2 171.3 180.2
Barley, USD/kg 95.0 117.0 178.0 159.0 185.0 197.0 188.0 199.0
Soya beans, USD/kg 274.4 268.4 375.5 385.0 426.0 450.0 489.0 515.0
Soya oil, USD/t 545.1 598.6 885.4 909.0 959.0 1,012.0 1,138.0 1,155.0
Source: the World Bank.
The price rise for dairy products was fueled by a growing demand on the part of a number of developing Asian North African and Middle East economies, as well as their large consumers, that is, the EU and the US. According to OECD, in 2007-2008 and through 2016 prices for powder milk and other dairy products are going to stay high, and they will be under the impact of the world economy's health (particularly of rates of economic advancement of the Asian, African and South American countries), rather than short-term factors (unfavorable weather conditions, exchange rate fluctuations, and quantitative production constraints).
As for prices for other Russian natural exports (except for timber), in 2007 they were higher than in 2006.
3.4.3. Export
The persisting favorable state of affairs on the world markets has had a positive effect on the Russian export, which in 2007 became in excess of its annual values reported in the past 17 years. Nonetheless, its increment rates in 2007 were far lower than in recent years. Its value equivalent grew at 16.9%, while in 2004 it was 34.8%, in 2005 - 33.1% and 24.7% in 2006. The growth rates of the physical volumes of export of goods were smaller than the price rise growth rates for them.
Table 47
Dynamics of Russian Export
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Export, USD bn 89,7 86,9 74,4 75,6 105,0 101,9 107,2 135,4 183,2 245,3 303,9 355,2
Including:
Far Abroad 71,1 67,8 58,7 63,6 90,8 86,6 91,0 113,9 152,9 211,6 260,6 301,5
Growth rate, as % to the previous period
Index of physical volume 100,1 101,8 99,7 109,4 110,2 104,2 115,0 109,5 110,7 104,7 105,8 105,0
Price index 108,6 98,1 84,2 92,1 128,2 93,8 86,0 113,4 122,7 126,9 119,7 110,9
Source: CBR, the RF Ministry for Economic Development and Trade.
It was in the 4th quarter 2007 that export volumes reached their peak, with its value demonstrating a 37.2% growth vs. the respective period of the prior year.
Meanwhile, the group of main exports remained practically unchanged - it was still the export of produce of the fuel and energy complex that dominated in the group, albeit the share of the FEC exports in the overall volume of the nation's export continued shrinking. In 2007, it accounted for 64% vs. 65.4 reported in 2006. This can be explained largely by the declining physical volumes of gas export, which in 2007 accounted for 191 bn cub. m. (94.2% to 2006), with 153.67 bn cub. m. exported to the Far-Abroad and Baltic states (95% to 2006) and another 37.32 bn cub. m. exported to the CIS countries (97.7%).
□ Oil □ Petroleum products □ Natural gas □ Others
Fig. 30. Russian Export (as USD bn)
The growth in the value of overseas supplies of oil and petroleum derivatives slowed down dramatically when compared with 2006. That happened in the conditions of a loose rise in their physical volumes. In 2007, the country exported as much as 258.96 m t. of oil (104.2% to 2006), with 222.56 m t. supplied to the Far-Abroad and Baltic states (105.4% to 2006), while supplies to the CIS countries accounted for 36.4 m t. (97.7%). Notably, the Russian oil supplies to Ukraine and Belarus were scaled back against their increase to Kazakhstan.
In 2007, Russia exported metals and metal products worth a total of USD 49.9 bn (119.4% to 2006), including the USD 42.8 bn-worth supplies (117.3%) to the Far-Abroad countries) and 7.1 bn-worth (134.1%) supplies to the CIS countries.
The proportion of metals and metal products in Russia's export commodity structure accounted for 14.2% (13.7% in 2006), including 14.6% (14.1%) to the Far-Abroad countries and 13.9% (12.6%) to the CIS countries.
The 2007 volume of export of ferrous metals accounted for USD 22.5 bn (119.1% to 2006), including 18.7 bn (115.8%) - to the Far-Abroad countries and 3.8 bn (140.7%) - to the CIS countries.
Table 48
Value Volume of Russian Export of Oil, Petroleum Products, and Gas (in USD m) and Their Share in the Overall Volume of Russian Export (as %)
Oil Petroleum products Natural gas
USD m % USD m % USD m %
1992 6,662 12.4 2,202 4.1 6,389 11.9
1993 8,061 13.5 3,061 5.1 6,964 11.7
1994 8,948 13.3 3,398 5.0 7,939 11.8
1995 12,297 15.2 4,108 5.1 13,381 16.5
1996 15,578 17.6 7,442 8.4 14,683 16.6
1997 14,346 16.2 7,145 8.1 16,420 18.6
1998 10,254 13.7 4,262 5.7
1999 14,101 18.8 4,713 6.3
2000 25,284 24.1 10,938 10.6 16,644 16.1
2001 24,576 24.1 9,402 9.4 18,303 18.3
2002 28,950 27.0 11,227 10.5 15,897 14.9
2003 38,816 28.6 14,064 10.5 19,981 15.0
2004 55,024 30.0 18,998 10.5 20,918 11.5
2005 79,216 32.5 33,650 13.6 30,424.2 12.9
2006 96,675 31.7 44,217 14.5 42,815 14.1
2007 114,145.2 34.4 51,470.4 14.6 42,755.1 12.1
Source: data by Rosstat and the Federal Customs Service.
It was rolled items that dominated the structure of export of ferrous metals. The physical volume of rolled ferrous metals made up 26.8 m t. (94.6% to 2006), with 87% of the ferrous metal exports shipped to the Far-Abroad countries, while the remaining 13% - to the CIS countries.
The 2007 supplies of rolled items to the Far-Abroad countries (in physical equivalent) dropped at 7.9% to the 2006 level, including: sectional iron - at 16.6%, sheet products - at 17.9%. The contraction was caused by the fall of shipments to the Northern American countries (at 85%) and the Asian region (at 40%), while Russia boosted its supplies to the western and eastern Europe at 20% and to the Middle East - at 60%.
Export of steel pipes plummeted by 20% to the 2006 level, as the EU had undertaken measures to protect its domestic market.
The average export prices for semi-finished steel (to the Far-Abroad countries) grew by 25.2% to the 2006 level, those of sectional iron - by 42.6%, and sheet products - 20.4%.
Supplies of rolled items to the CIS countries (in physical equivalent) displayed a 16.1% growth, including those of sectional iron - at 3.2%, sheet products - 34.5%, steel pipes -2.5%.
The 2007 volume of export of main non-ferrous metals (raw aluminum, refined copper, and raw nickel, which account for 80% of all the non-ferrous metal exports) was worth a total
of USD 17.8 bn (122.8% to the 2006 level), including the one to the Far-Abroad countries -USD 17.6 bn (122.2%) and USD 180m (185.5% - to the CIS countries. Meanwhile, the physical volume of export of raw aluminum to the Far-Abroad countries soared by 10.5%, copper -2.3%, while supplies of nickel were down by 5.5%. The average export prices for aluminum rose by 17%, those for copper - at 10%, and nickel - at 48%.
In 2007, the share of chemicals in Russia's export was 5.9% (against 5.6% in 2006), with its main export items being mineral fertilizers (37%), collastic (8.8%), automobile tiers (5.8%), plastics and artificial resin (5.3%), paint materials (5.2%), and ammonia (4.7%).
The year of 2007 saw a considerable rise in export supplies of main chemical products. More specifically, export of carbinol rose at 20.1%, mineral fertilizers - 8.5% (including potash fertilizers - at 21.2%), collastic - 0.7%. Meanwhile, there was a fall in export of compound fertilizers (99.5%) and nitrogenous fertilizers (98.1%), as well as ammonia (86.1% to the 2006 level).
The proportion of timber and paper-and-pulp products in the 2007 overall export volume posted a 3.5% growth vs. the 3.2% indicator back in 2006. This occurred due to the price rise for timber, which was likewise noted across practically all the main commodities that fall under this group. For example, the average contractual price for exported plywood was 42.8% up, lumber - 32.3% up, wood pulp - 24.9%, round timber - 31.7% up.
A significant rise in food exports in the structure of Russia's export is worth a particular attention. In 2007, the displayed a 64.2% growth vis-à-vis the respective period of the prior year, while the proportion of food stuffs and agricultural raw material in the overall volume of Russia's export rose to 2.6% vs. 1.8% in 2006.
In the current agricultural year (between July 2007 and July 2008) Russia is going to boost its grain export up to 15m t. The country's 2007 corn crop totaled 87.1m t., which enables the nation both to meet the domestic needs and secure export supplies. In 2007 alone, Russia exported 11.85m t. of grain, and another 12. 5m t. was due to be supplied by January 29, 2008. Since that date a new, greater, wheat export duty came into effect. It makes up 40% of the respective customs value, but not less than Euro 105/t. The duty per se became a prohibitive one, as earlier it was 10% of the customs value, but not less than Euro 22/t.
High wheat prices boosted Russia's wheat, as well as rye exports. According to the national Corn Union, between July 1 and December 10, 2007, the country exported 63.3 Thos. t. of rye, while in 2006 as a whole - only 30,000 t. The greater export volumes of rye were fueled by a greater rye production in 2007 and high prices for rye on the world market. In 2007, Russia cropped 3.6-3.7 m t. of rye, which meets the nation's need and enables the country to refuse its importation. In 2006, the crop was 2.96 m t. and import accounted for 20,000 t. In Europe, the rye prices are 310-315 USD/t., while in Russia they are close to USD 230/t.
Timber and paper and pulp products 4%
Food stuffs and agricultural raw materials
Chemicals, rubber 6%
Machinery, equipment, transportation means 6%
Metals and metal products 14%
Others 4%
Fuel and energy commodities 63%
Source: FCS of RF.
Fig. 31. The 2007 Structure of Russia's Export (as %)
The machine-building export was growing at a far slower pace (13% vs. 2006), with the proportion of machinery, equipment and means of transportation in the overall volume of Russia's export falling from 5.8% reported in 2006 to 5.6% a year later.
Export in this group of goods was propelled chiefly thanks to sales of military equipment. In 2007, the overall amount of export supplies of the Russian military equipment via the state intermediary - Rosoboronexport - made up USD 6.1bn (vs. 5.3 bn in 2006). Behind the record-breaking sales was the renewal of large-scale export sales of Sukhoy-30 MK (52 units, including 16 interceptors and 8 units for the licensed assembly of Sukhoy-330 MKI to India, 6 Sukhoy-30 to Algeria, 10 Sukhoy-30 MKM to Malaysia, and 12 Sukhoy-30 MK2V to Venezuela). The overall value of all the aircraft, along with armament and spare parts, accounted for a half of Russia's overall machine-building export. The aircraft supplies should remain great in 2008, so there should not be a significant drop in the nation's machine-building export sales.
The favorable state of affairs on the world market secured a dramatic rise in contractual prices for Russia's main exports.
In 2007, the proportion of export in production proved to be lower than in 2006 by many major Russian exports.
Table 49
The Average Contractual Prices for Main Russian Exports (supplies to far abroad, as USD/t/)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Crude oil 118.5 74.4 110.9 179.9 156.4 162.4 181.2 231.9 344.3 429.8 485.4
Oil products 115.7 75.7 94.5 171.9 145.2 147.9 180.2 230.3 340.6 430.1 464.1
Natural gas, thos. cub.m. 88.6 72.2 55.31 85.91 105.21 91.4 112.3 113.6 154.7 - 240.6
Ammonia 113.0 83.1 53.0 97.5 81.7 72.4 118.5 158.3 176.2 195.7 224.2
Nitrogen fertilizers 90.3 58.3 36.8 57.9 61.8 60.6 76.0 103.1 139.1 146.0 197.3
Potash fertilizers 79.7 87.4 86.4 86.6 76.8 74.9 77.8 94.3 133.9 150.3 174.5
Round timber, cub.m. 57.5 46.9 43.5 43.4 45.6 44.8 47.8 56.2 59.6 63.8 84.0
Pulp 373.5 342.9 274.0 352.2 293.4 300.0 321.7 371.9 386.1 436.7 545.6
Commercial paper 383.4 394.0 349.5 386.6 421.7 332.2 338.3 387.9 455.3 498.6 527.0
Cast iron 124.2 104.3 66.8 80.7 86.2 91.1 126.8 242.7 274.4 244.4 313.6
Ferro alloys 819.2 740.8 548.2 625.6 601.7 625.7 634.6 1,097.8 1,582.5 1,492.3 1,673.2
Copper 2,099 1,655 1,495 1,675 1,465.3 1,371.4 1,564.9 2,587.6 3,389.8 6,361.7 6,657.8
Nickel 6,733 5,140 5,761 8,629 5,730.9 6,143.9 8,584.0 12,660.0 14,242.5 22,674.4 33,852.1
Aluminum 1,401 1,352 1,157 1,296 1,176.3 1,036.9 1,050.0 1,162.1 1,299.2 1,633.5 1,984.0
Source: the Federal Customs Service.
Table 50
The Share of Export in Production of Major Goods (as %)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Crude oil 41.7 41.6 45.2 44.2 44.8 46.5 49.7 53.1 56.1 54.0 57.0 52.8
Oil products 32.4 34.7 32.9 33.6 36.3 35.5 40.8 40.9 42.1 46.7 47.8 49.1
Natural gas. 33.1 35.2 34.5 34.6 33.2 31.2 31.2 32.7 33.9 34.2 31.3 28.9
Coal 15.8 14.5 15.7 16.7 25.7 22.2 23.8 30.8 52.9 51.8 53.8 40.4
Nitrogen fertilizers 85.9 80.6 86.5 83.2 82.9 81.8 78.1 76.1 78.5 74.5 62.7 63.2
Raw timber 23.2 29.3 34.1 40.1 42.4 53.4 51.0 46.1 49.6 60.1 61.2 57.2
Pulp 85.7 82.8 77.6 79.1 82.4 83.7 85.1 82.9 77.5 79.7 79.2 79.3
Commercial paper 72.2 70.1 74.6 70.6 69.0 67.4 68.6 66.0 65.6 61.2 57.3 60.9
Sheet iron and steel 59.7 58.6 63.5 60.6 55.3 43.0 50.5 47.1 46.1 48.4 39.7 41.2
Passenger cars 10.4 4.9 8.3 7.3 12.2 10.1 12.3 11.7 11.8 12.5 10.7 10.0
Trucks 17.4 10.7 9.6 8.3 7.0 12.3 20.8 19.3 23.0 22.8 20.6 27.3
Source: Rosstat, the Federal Customs Service.
In 2007, the growth rate in export to the CIS countries considerably outpaced those of export on the whole. Export to the Near-Abroad countries soared by 23.9%, while to the Far-Abroad ones - just by 15.7%. The value volumes of export chemical produce to the CIS countries surged at 25%, those of forestry and wood-working products - at 27%, ferrous metals -at 58%, products of the power machine building - 32%, electric machinery - 38%, means of ground transportation - at 29%.
This evidences that the CIS countries still form a critically important market for the Russian export of highly-processed produce, while the continuous advancement of the postSoviet economies allows one to extend the volumes of supplies therein.
3.4.4. Import
The year of 2007 saw a record-breaking volume of import, which has proved to be considerably greater than in the past 17 years. Russia imported goods worth a total of USD 223.1
bn, or at 35.4% more than in 2006. The non-CIS countries contributed with their USD 191.2 bn-worth supplies (up 35.4%), while the proportion of import from the CIS countries totaled USD 31.9 bn (up 29.6%). The share held by the non-CIS countries in the overall volume of the 2007 Russian import accounted for 85.7% (vs. 84.6% in 2006).
As in the previous year, the 2007 upsurge in import to Russia likewise became possible thanks to the growing physical volumes of import, whose growth rates were considerably greater than in 2006, while price rise growth rates were fairly moderate over the year. The role played by the price factor intensified in the second half of the year - more specifically, that was noted in the segment of food stuffs and agricultural raw materials.
Table 51
Russia's Import (in USDm)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Import, total 68.1 72.0 58.0 39.5 44.9 53.8 60.5 76.1 97.4 125.3 163.9 223.1
Including:
Far-Abroad countries 47.3 53.4 43.7 29.2 31.4 40.3 48.2 60.1 76.4 103.5 138.6 191.2
Growth rates, as % to the prior year
The physical volume 98.1 121.1 89.0 84.4 129.2 129.1 117.6 119.2 124.2 122.4 130.1 127.1
index
Price index 100.2 94.8 92.3 82.1 86.7 94.3 93.4 98.7 106.1 106.5 105.5 107.6
Source: CBR, MEDT.
Main factors behind the rising imports were high growth rates of the national economy and the population's incomes, plus the continuous appreciation of the Rb. The goods structure of Russia's import is dominated by machinery and equipment (49.1% of the overall volume of import vs. 47.7% reported in 2006). The value volume of import of machinery and equipment grew by 56.1%.
The share of chemical products accounted for 13.9% vs. 15.9% reported in 2006. The goods assortment of the chemical and petrochemical import is considerably broader than the nation's export supplies of analogous goods, and, while the latter are mostly formed by raw materials, imports largely are products of intense processing.
The specific weight of food stuffs and agricultural raw materials in 2007 accounted for 13.7% vis-à-vis 14.3% in 2006. Import flows were to some degree affected by the price rise for foods stuffs on the world markets. Thus, the import of wheat fell by 66.7% as compared with 2006, while that of corn - at 68.4%. At this point, it should be noted that other imported food items likewise grew at a rate slower than the average one.
The greatest growth rates in import supplies were noted in the following sectors: footwear (twofold), Apparel (at 90%), electric machinery and equipment (51%), ferrous metals and products (95%), means of ground transportation and spare parts (81%). Considered in terms of the proportion held in the value structure of import supplies, it is means of ground transportation and spare parts that clearly dominate (17.6%) therein. So one can draw a conclusion that one of the critical factors that propelled import flows in value equivalent in 2007 became the booming automobile production in the frame of industrial assembly agreements concluded between the RF Government and the largest international automakers.
As well, it is worth noting an impressive growth in the value flows of import of power production equipment units (up 47% vs. 2006). Given their great costs and weight in the ag-
gregate volume of the value import in Russia (17%), it can be assumed that large-scale investments in the Russian power-generation sector have also fueled the rise in import.
Other goods 7%
Machinery, equipment, and transport means 51%
Food stuffs and agricultural raw materials (less textiles) 14%
Chemicals, rubber resin 14%
Timber and paper and pulp produce 3%
Textile, textile goods and footwear 4%
Metals and metal items 7%
Source-. FCS of RF.
Fig. 32. Commodity Structure of Russia's Import in 2007 (as %)
Whereas the importation of spare parts for automakers operating in Russia's territory can be viewed as import of intermediate goods, while that of power-generation equipment - as investment import, it can be argued that in addition to consumer imports, these two sectors have begun playing a notable part in shaping import flows.
As concerns the situation with import of clothing, footwear, electric machinery and equipment, its analysis shows that the rise in the value volume of these goods to a significant extent can be explained by progress in the customs administration's operational standards and a consequent pulling transactions involving the goods in question out of the effect of the so-called "gray schemes". That said, one should expect a further substantial deceleration of the growth rates of value volumes of import across these groups of goods.
That the customs authorities' assault on the "grey import" has been a serious success can be proved by comparing the data by CBR and those by FCS. The former are prepared according to the balance-of-payments methodology and appear somewhat different from the FCS's ones. The CBR's statistical data accounts import without crossing the customs border (such as fuel purchases by Russian vessels from overseas ports, among other things), while, most importantly, the Bank of Russia adds the "gray import" volumes. Accordingly, FCS estimates the 2007 import at the level of USD 191bn, while CBR cites the figure of 223.06bn, so the approximate estimation of the "gray import" totals USD 23.4 bn (vs. 27.2 bn in 2006). It means that we witness a sustained reversal - in 2000-05 the "gray import" accounted for 302
21-24% of the aggregate volume of the nation's import, in 2006 - 20.1%, while in 2007 it shrank to 10.5%.
3.4.5. The Geographical Structure of Russia's Foreign Trade
The country's 2007 geographical structure of foreign trade was still dominated by the EU member states - the volume of the Russia-EU foreign trade turnover posted a 15.6% growth vis-à-vis the respective period of the prior year and made up USD 224.6 bn, with exports soaring at 6.1% and imports up at 42.8%. Notwithstanding the impressive indicators, the proportion of the EU countries in Russia's foreign trade turnover slid at 2.9 percentage points vs. 2006 and stood at 51%.
The EU member states left behind the second biggest group of countries, that is, the APEC member states. Their specific weight in Russia's foreign trade turnover in 2007 climbed up to 19.2% vs. 17.1% in 2006 and was worth a total of USD 83.6 bn. All the figures were up: 49% by the foreign trade turnover, 16.6% - by export, and 64.2% by import.
The CIS countries, which held a 14.9% share in Russia's foreign trade turnover, held the third position, with the trade volumes surging by 25.4%, export - by 20.3% and import - by 35.4%.
That the geographic structure of Russia's foreign trade underwent changes vs. 2006 can be attributed to a growing share of the Asian countries in its total volume of goods turnover: specifically, China's share grew from 6.4% to 7.3%, Japan's from 2.7 to 3.6% and the Republic of Korea's - from 2.2% to 2.7%.
Source: FCS RF.
Fig. 33. The Geographical Structure of Russia's Foreign Trade
Meanwhile, the alarm bell tolled for some European nations, as Germany, the Netherlands and Italy's shares in Russia's foreign trade turnover began to shrink from 9.7% to 9.5%, 9.1 to 8.5%, and 7.2% to 6.5%, respectively.
By contrast, some CIS countries boasted a greater trade turnover with Russia: Kazakhstan - from 2.9% to 3.1% and Belarus - from 4.6% to 4.7%, and that was propelled by growing imports, as well as exports.
Nonetheless, Germany has retained its position as a leading Russia's trade partner among the Far-Abroad countries, with the Russian-German goods turnover worth a total of USD 52.9 bn (123.0% up vs. 2006), followed by the Netherlands - 46.6 bn (120.9%), China -40.3 bn (140.6%), Italy - 36.1 bn (117.0%), Turkey - 22.5 bn (132.1%), Japan - 20.1 bn (164.1%), Poland - 17.9 bn (120.4%), USA - 17.5 bn (116.2%), UK - 16.7 bn (118.4%), and France - 16.4 bn (121.4%).
Germany
Netherlands
Italy China Ukraine
Belarus
Turkey
USA
0 5000 10000 15000 20000 25000 30000 35000 40000 45000
[□Export □ Import
Fig. 34. Major Trade Partners (in USDm)
Meanwhile, despite impressive figures, the number of the countries in trade with which Russia has negative balance between export and import has been on the rise in 2007 (24 vs. 19 in 2006).
The change in the correlation between export and import was most dramatic in Russia's trade with Germany, US, and China. In 2006, Russia enjoyed steadily positive trade balances with these countries, which in 2007 became negative.
The 2007 bilateral Russia-China's trade turnover hit a new record value of USD 48.61bn. and posted the 44.3% growth vs. 2006. This is the greatest value since 1992. It was China's import to Russia that displayed the greatest growth rates.
China's supplies of machinery and equipment have formed a key import group, whose growth rate in 2007 was close to 90%, or USD 8.7 bn in value equivalent. Import of vehicles was likewise on the rise and practically doubled over the year. The traditional Chinese exporters were equally happy with a 278% rise in their supplies.
Russian supplies to China grew by humble 12%, or USD 12.7bn, with oil, round timber and chemicals still dominating its export thereto.
The analysis of the current structure of the Russian-US trade exposes its asymmetry: while Russia's export is formed mostly by oil and petroleum products (52.3%) aluminum and aluminum goods (11.7%), ferrous metals (7.3%) and inorganic chemistry items (7%), its machinery, equipment and vehicles account for just 12%, followed by other major exports, such as uranium, platinum, nickel, as well as garments and seafood.
Traditionally, Russian imports from the US are dominated by various machinery and equipment (oil and gas equipment, aircraft, electric equipment, optical and measuring devices, and medical equipment), as well as grain and meat products. So, Russia's export to the US is dominated by raw materials, while the share of finished products is low, and Russia's imports from the US are formed by technologies and food stuffs.
The negative balance of Russia's trade with Germany appeared the most surprising phenomenon. Russia has been the biggest oil and gas exporter to Germany, and the negative balance of trade can to some extent be attributed to the downfall in oil prices in the beginning of 2007, while the last warm winter told on the volume of Russian supplies of natural gas. These factors aside, the major cause became a dramatic (at 44.5%) surge in import supplies from Germany, which were formed chiefly by production equipment and vehicles.
3.4.6. Foreign Trade Regulation General Regulation
In December 2006, the State Duma passed the Federal Act "On special economic measures", which took effect as of January 2007. Special economic measures are the prohibition to exercise certain activities with regard to a foreign state and (or) foreign organizations and citizens and (or) laying an obligation to exercise the noted activities, and other restrictions. Such measures can be aimed at: suspension of implementation of all or a part of economic and technical cooperation programs, as well as military collaboration programs; prohibition of financial transactions and imposition of restrictions on their exercise; prohibition of foreign trade operations or imposition of restrictions on their exercise; termination or suspension of the effect of international trade agreements or other international agreements in the area of foreign-trade connections the RF has entered into; prohibition or limitation of calls to the RF ports and usage of the RF air area or its certain areas; imposition of restrictions on exercise of tourist operations; prohibition of, or refusal from participation in international research and scientific programs and projects.
Special economic measures are of temporary nature, and they are applied independently of other measures that aimed at protection and securing the RF interests, as well as its citizens' rights and freedoms. They are employed in the event there arises integrity of circumstances that require an immediate reaction to an internationally unlawful act or a hostile act by a foreign state or its authorities that poses a threat to the RF's interests and security and (or)
violates its citizens' rights and freedoms, as well as in compliance with the UN Security Council's resolutions.
On January 11, 2007, the presidential Decree "On improvement of the state regulation of export and import of precious metals and precious stones" came in effect. The Decree lifts quantitative limitations on export of these items.
Export of the following precious metals and precious stones requires license: affined gold and silver, in the form of bars, powder, granules; affined platinum and other platinoids, in the form of bars, powder, granules; nuggets of precious stones not subjected to affinage; natural pearls, natural precious stones, both shone and unshone, unique amber substances; as well as, ashes, concentrates and semi-finished products of nonferrous metals, ores and concentrates of precious metals, scrap and waist of precious metals, and unprocessed precious metals.
Licenses are not required for export of items made of precious metals, items of production and technical nature of precious stones, those of precious stones, and coins of precious metals.
Private individuals are exempt from customs duty if they export precious metals and stones worth up to USD 10,000.
The RF President has banned export and transit of firearms and goods and technologies that can be used for production of ABC weapons. The ban also concerns transportation of the said goods by Russian vessels and aircraft, provisions of related services and training of the respective cadres, conduct of financial transactions with individuals who take part in creation of ABC weapons or support such activities, purchases of the said goods by Russian private individuals, visits of private individuals, who support or encourage creation of ABC weapons, to the Korean People's Democratic Republic (Decree No. 665 of May 27, 2007).
Export Regulation Non-Tariff Measures
The RF Government set procedures with regard to re-export of certain goods originated from the RF territory by other member states of the Eurasian Economic Community. Specifically, organizations from these countries may re-export such goods only if they have a due permit in writing issued by the RF MEDT. The Ministry grants such a permit providing an applicant consequently transfers to the RF budget an amount of export customs duty at a rate effective in RF as of the date of the customs clearance of the re-export operation (RF Government's Resolution No. 66 of February 3, 2007).
With his Decree No. 1083 of August 20, 2007, (effective as of November 24, 2007) the RF President approved the list of microbes, toxins, and equipment and technologies subject to export control. Tariff and Tax Measures
In 2007, export duty rates were modified across 63 items, save for oil and petroleum products. As for the latter (73 positions), duty rates were modified once in two months in compliance with the RF Act "On customs tariff".
Export customs duties with regard to crude and oil products produced of bituminous rock, as well as light and dark-oil products exported from RF to outside of the states that participate in the Customs Union, were modified as follows (see Table 52).
Table 52
Export Duty Rates on Oil and Oil Products in 2007 (as USD/t)
Oil Oil products
February 1 179.7 133.4 71.8
April 1 156.4 117.7 63.4
June 1 200.6 147.5 79.4
August 1 223.9 163.2 87.9
October 1 250.3 181 97.5
December 1 275.4 197.8 106.6
Source: Resolutions of the RF Government.
Keen to lower the export volumes of unprocessed timber, the RF Government radically changes its export policy with regard to wood-working produce. Presently, Russia holds 40% of the world market of raw coniferous timber, and it lags far behind the countries with the most advanced forestry sector, so far as the intensity of processing of raw timber is concerned. Given that, Russia nonetheless has lately retained a very liberal customs regime in respect to these goods. The export duty rate on round timber has was just 6.5% of its customs value, which was far lower than those applied by Brazil, Canada, US, and other exporters.
The raw timber export volume to the Far-Abroad countries tripled over the past 10 years. In 2005, it accounted for 47.4m. sq.m., in 2006 - 50.4m sq.m. It is worth noting, however, the 2006 export growth rate was 6.3% vs. 15.8% reported in 2005. The slowdown of the export growth rate can be partly explained by the increase of the specific component of the export duty from 2.5 Euro to 4 Euro/cub.m. effective since June 1, 2006.
Radical integration into the world market necessitates pursuance of a certain export policy strategy, which primarily concerns raw timber. In February 2007, the RF Government produced its Resolution No. 275. Its core issue is a three-stage increase in the level of export customs duties on individual kinds of raw timber, except for small merchantable birch wood, as well as finewood and hardwood - since June 1, 2007, the specific component of the export
3 3
customs duty was set at the level of Euro 10/1 m , since April 1, 2008 - Euro 15/1 m , since January 1, 2009 - Euro 50/1 m3. ■
The Government earlier undertaken measures to reduce export of raw timber and encourage the domestic wood working. Specifically, it zeroed import duties on main kinds of high technological equipment not produced in Russia (over 600 items) and abrogated export customs duties on over 300 kinds of forestry and paper products with a high value-added (slabs, plywood, commercial pulp, mass kinds of paper and cardboard). At the same time, the Government increased export customs duties on individual kinds of timber. To protect the domestic market, import customs duties on furniture were adjusted, while exporters received support in the form of a subsidized interest on export loans.
The Customs Code of RF was modified with regard to coniferous and hardwood (birch and asp) sawnwood, while the respective import customs duty rates remained unchanged. Meanwhile the export customs duty rate on converted (parallel to grain) wood (birch and asp) and coniferous sawnwood (in the form of molded strips) was set at the rate of 0% of their customs value (vs. the previous 10%), but no less than Euro 5/1 m . The RF Government Resolution on the subject took effect on June 14, 2007 (adopted on April 10, 2007, No. 15).
The RF Government set zero export customs duty rates on some kinds of 6mm-plus thick sawnwood since June 22, 2007, with the respective rate on sawnwood falling under position 4407 10 being 3% of its customs value, but not more than Euro 2.5/1 m , while those on
positions 4407 93, 4407 94 and 4407 99 - 10% of their customs value, but not more than Euro 5/1 m3 (the RF Government's Resolution No. 290 of May 15, 2007).
Since June 19, 2007, natural calcium phosphates and other complex mineral fertilizers containing azote and phosphorus became subject to zero export customs duty rates, while prior to that date they had accounted for 6.5% of the customs value of calcium phosphates and 3% - on the said mineral fertilizers (Government Resolution No. 291 of May 15, 2007).
Since July 16, 2007, the export customs duty rate on coal coke and coal char was lowered from 6.5% of their customs value to 0% (Government Resolution No. 369 of June 12, 2007).
The Government ruled to exempt from export customs duty the export of rapeseed and spring rape originated from the territory of the Special Economic Zone in Kaliningrad Oblast, which had previously accounted for 15% of their customs value, but not less than Euro 3/t. (Government Resolution No. 570 of September 10, 2007).
With its Resolution No. 660 of October 10, 2007, the RF Government set the export duty on wheat at the level of 10% of its customs value, but not less than Euro 0.022/kg, as well as on barley - at the level of 30%, but not less than Euro 0.07. The Resolution came in effect in 30 days upon its publication and will be effective through April 30, 2008. This is one of key measures the Government has undertaken in the frame of its fight against the price rise on the domestic market, for it has to strike a balance between interests of the domestic agrarian producers, the struggle for whose products, primarily, grain, has intensified on both domestic and international markets, and the domestic consumers. High grain prices on the world market have enabled the Russian agrarians, for the first time in many years, to collect profits and bolster their output. In 2007 to 2006, Russian wheat exports grew 2.6 times in value equivalent, with the wheat prices soaring at 77.5% and physical volumes - at 48.8%. Once introduced in November against the background of declining world prices, the export duties on grain lowered the export capacity and created surplus on the domestic market.
Import Regulation
Non-Tariff Measures
The Federal Customs Service has revised application of individual provisions of Federal Act No. 248-FZ of December 29, 2006 "On introducing amendments to the Federal Act "On state regulation of production and turnover of ethyl alcohol and alcoholic products". Since January 2007 one no longer needs to seek licenses to import alcoholic products packed into metal cans with a capacity not more than 450 ml; to import ethyl alcohol and alcoholic products for the official use by diplomatic or other official representations of foreign states; to import ethyl alcohol and alcoholic products designated for the displaying as samples at exhibitions or conduct of their certification in quantity of not more than 5 bottles or other tare (Letter by FCS of RF No. 01-06/3517 of February 1, 2007).
Since June 27, 2007, Bulgaria and Romania have been excluded from the list of countries eligible for the RF foreign trade preference scheme (Government Resolution No. 173 of March 22, 2007).
The Federal Service for Veterinary and Phytosantitary Supervision imposed restrictions on import of rice, sesame and peanut from India (Letter by FCS No. 06-73/17473 of May 10, 2007).
The Federal Service for Veterinary and Phytosantitary Supervision stated that rice originated from Thailand should be imported since May 2007 under submission of certificates of the Thai Ministry for Agriculture and Cooperatives (Letter by FCS No. 06-73/17961 of May 15, 2007).
Tariff and Tax Measures
In 2007, the Government modified customs import duty rates by 1,570 tariff positions, including 307 goods of the agricultural group. The 2007 average weighed import customs duty accounted for 11.25%.
In the late-2006, the RF Government amended the customs tariff with regard to automobile components imported for the sake of industrial assembly, as well as assembly parts and a series of raw materials required for production of aircraft engines. These goods were subjected to temporary (for the term of 9 months beginning January 2, 2007) customs import duty rates between 0 and 5% of their customs value vs. the previously applied 10-20% rates.
Once the said term was over, the decision was made not to extend it, but to make the duty-free import of the said goods permanent. With its Resolution of October 1, 2007, No. 628, the Government set, on a permanent basis, zero import customs duty rates with regard to automobile components imported for the purpose of industrial assembly and a series of raw materials for production of aircraft engines.
Thus, the RF Government is keen to bolster the domestic industrial assembly of foreign automobile brands and to give impetus to production of aircraft engines. As a reminder, import customs duties on imported cars are a. 25%, while assembly parts imported for the purpose other than industrial assembly are subject to the 15% customs duty.
As a reminder, the concept of "industrial assembly" should meet three criteria:
1. The period, in which the cycle of the welding, painting and assembly of automobile bodies should be arranged, should make up 18 months for an already operating production facility and 30 months - for a newly created one.
2. The latter production facility should have the annual capacity of not less than 25,000 units under the two-shift operational mode.
3. Volumes of imported components should be down at 10% within 24 months upon the welding/painting/assembly cycle is put in operation, at another 10% within 42 months, and at yet another 10% within 54 months from the start (i.e. at 30% in total within 10 years).
The agreements on industrial assembly have already attracted into Russia Ford, Renault, Kia, and Toyota, while Fiat and SsangYong have opted for a joint-venture and Volskwagen, Nissan, GM, Peugeot-Citroen and Suzuki expressed their interest in establishing automobile plants, as per respective agreements with Russian counterparts.
Since February 10, 2007, the RF authorities imposed temporary customs import duty rates effective for 9 months on toluene and isocyanate, PVC resins, polyethylene glycol with the hydroxyl number not more than 100 of 0% of their customs value and the 5% rate of the customs value - on foamed polystyrene. The permanent customs import duty rates on these chemicals were 5 and 5%, as well 10 and 10%, respectively (Government Resolution No. 13 of January 16, 2007).
Since February 19, 2007 through December 31, 2007) the effective customs duty rates on fresh and deep-frozen veal imported over the 2007 tariff quota were lowered from 40% of
the customs value, but not less than Euro 0.4/kg, to 30%, but not less than Euro 0.3/kg (Resolution No. 17 of January 17, 2007).
Since February 23, 2007, temporary customs import duty rates were set with regard to black and green tea supplied in packages over 3 kg. The permanent customs duty rate on these goods is 5% of their customs value (Resolution No. 2 of January 18, 2007). The term of effect of the temporary customs duties was 9 months, and they triggered positive changes and helped saturate the market. Thus, in the 9 months of 2007 the physical volume of import supplies of tea in RF grew at 9.4%.
On November 10, 2007, the Government ruled to set the permanent zero import duty on black and green tea, which does not originate from Russia, and some kinds of unprocessed skin. The latter measure is aimed at ensuring the domestic producers would have enough of stock of raw material to keep the leather production on the rise.
As well, the Government passed its Resolution on setting the temporary zero rate of import customs duties on individual kinds of nuts and seeds for the term of 9 months since February 26, 2007, including such products as shelled cashew, almond, hazelnut, and sesame seeds. The previously applied rate was 5% of the customs value (Government Resolution No. 41 of January 23, 2007). With its Resolution No. 756 of November 6, 2007, the RF Government introduced permanent zero customs import duty rates on the following kinds of nuts and seeds: shelled cashew, shelled and unshelled almond, shelled huzelnuts, and sesame seeds.
Also, the seasonal duty was introduced on imported rice and rice products - it totaled Euro 0.12/kg between March 13 and May 31, 2007 and between October 1 and December 31, 2007. The regular rate is Euro 0.07/kg (Resolution No. 85 of February 8, 2007).
Since July 26, 2007, a nine-month temporary import customs duty rate was set on some kinds of new agricultural combine harvesters. It amounted to 5% of their customs value. The permanent rate is 5% of the customs value, but not less than Euro 100 per kWatt of their engine capacity (Resolution No. 393 of June 20, 2007).
As well, the Government set zero temporary import customs duty rate on corrosion-resistant sheet steel rolled items that contain nickel. The duty was to be effective for 9 months beginning August 3, 2007. The earlier set permanent duty was 5% of the customs value of the said goods (Resolution No. 416 of June 29, 2007).
Temporary customs import duty rates were introduced on individual kinds of tropical oil for the term of 9 months, beginning September 12, 2007. Zero rate was introduced on technical or industrial-use oil, while the 5% rate was set on oil packed in boxes, canisters, barrels with the net weight of up to 200kg. The previous rates were 5 and 15% of the customs value of the said goods, but not less than Euro 12/kg. (Resolution No. 435 of July 9, 2007).
Vessels registered with the Russian International Ship Register became exempt from the import customs duty since July 26, 2007 (Resolution No. 448 of July 16, 2007).
Temporary customs import duty rates on individual kinds of rolled goods of aluminum alloys amounting to 10% of their customs value became effective as of September 16, 2007 (Resolution No. 506 of August 11, 2007).
Since September 16, 2007, the unalloyed aluminum became subject to zero customs import duty rate effective for 9 months, while this rate had earlier accounted for 10% of the customs value of such goods (Resolution No. 507 of August 11, 2007).
Since October 16, 2007, civil aircraft became subject to temporary customs import duty rates: the aircraft with the weight up to 20 t. and the number of seats up to 19 are subject to
the rate of 10% of their customs value, while other aircraft with the weight over 15 t are subject to the duty rate of 20%. The previously applied rate was 20% of the customs value of aircraft (Resolution No. 508 of August 11, 2007).
Individual kinds of garments from natural fur are subject to a temporary customs import duty rate. The rate is 10% of their customs value but not less than Euro 30/pc and it became effective as of September 18, 2007. Children's apparel from lambskin, rabbit or hare fur is subject to the 7.5% rate (of their customs value), but not less than Euro 10/pc. The permanent duty rate on these kinds of apparel had was 20% of their customs value, but not less than Euro 30/pc and 15% of their customs value, but not less than Euro 10/pc., respectively (Resolution No. 518 of August 15, 2007).
In the period between October 28, 2007 and July 27, 2008, the temporary customs import duty rate on module construction structures for medical purposes is in effect. The rate accounts for 5% of their customs value, while module construction structures for other purposes are still subject to the previous, 20%, duty rate (Government Resolution No. 532 of August 23, 2007).
The RF Government approved zero temporary import customs duty rate on digital cameras for the period between October 7, 2007 and July 6, 2008. The previous rate was 5% of their customs value (Government Resolution No. 552 of September 3, 2007).
The RF Government introduced a temporary customs import duty rate for the term of 9 months on videogames with the use of TV-receiver, effective as of October 11, 2007. The temporary rate is 10% of their customs value, while the earlier set permanent rate was 20% (Government Resolution No. 564 of September 7, 2007).
The temporary customs import duty rates that equal 10% of the customs value of the respective goods were set on hydride-nickel, lithium-ion and other electric accumulators, other parts for telephone units and digital integral monolith electronics. The rates were introduced for the term of 9 months, effective since mid-October 2007. The earlier set permanent rates on these goods were 5, 10, and 10% of their customs value, accordingly (Government Resolution No. 582 of September 11, 2007).
With its Resolution No. 674 of October 15, 2007, the RF Government lowered import duties on dairy products - from 15 to 5% of their customs value. The rate is effective for 6 months.
This change concerns milk, butter, and cottage cheese, while regular cheese, which, depending on the sort, to which differentiated rates (Euro 0.65-0.7/kg) had been applied, has become subject to a uniform rate of Euro 0.3/kg.
The world has presently faced shortages of dairy raw materials, which were fueled by a considerable growth in consumption of dairy products, which resulted in the price rise for them. And if it was not enough, the situation was aggravated by an intense drought in the producer countries and the price rise for feeders. Challenged by a drastic shortage of raw materials on the market and rising prices for powder milk, Russian producers had to raise their prices in order to compensate for their losses.
This has recently become a common trend on the market, and the noted cuts in duty rates will to some extent help bridge the gap between the domestic and international prices, rather than reverse the general trend to price rise for dairy products.
3.4.7. Accession to WTO
Russia has presently found itself at the final stage of negotiations on its accession to WTO. In 2007, there took place a series of multilateral consultations on agriculture and application of sanitary and phytosanitary measures, and several rounds of talks on systemic issues.
The country signed protocols on completion of bilateral negotiations on accession to Russia's market of goods with El Salvador, Costa Rica, Guatemala, Vietnam and Cambodia. So, Russia has successfully completed bilateral talks with 58 out of 60 members of the Task Force on Russia's accession to WTO.
As noted above, the talks are held both in the multilateral and bilateral formats. The country has to deal with multiple counterparts to negotiate two major issues: namely, duties on export of round timber and a maximal permissible degree of support of its agricultural sector. The most problematic remains the issue of subsidies to the agrarian sector. Plus, there has been no notable progress so far at the negotiations with EU on export duties on timber. As a reminder, the Russian party's fundamental stance is a limited access to Russian subsoil resources for foreign companies and the bolstering of the domestic wood-working sector, and the Russians will unlikely to compromise on these issues.
Bilateral meetings, too, engender problems. For instance, Saudi Arabia and the UAE are keen to get access to Russia's strategic oil and gas fields, while Georgia frowns at Russian customs posts in Abkhazia.
Meanwhile, Russia and Saudi Arabia are close to concrete agreements on goods in the frame of the process of Russia's accession to WTO, but so far as services are concerned, the negotiations are in full swing, for the Saudi insist on Russia's undertaking obligations on granting them access to its natural resources.
The negotiations with the UAE have progress farther than those with the Saudi, as their requirements are far narrower, and the parties have practically agreed on the services sector. However, the Russian received a new inquiry regarding the trade regime with regard to the following goods: aluminum, porcelain, ceramics, bricks, among others.
At a meeting with the Georgian delegation in Geneva on February 20, 2008, the parties have agreed on joint approaches to the Georgian' party's requests, particularly in respect to the border control checkpoints and control over the bilateral trade. The experts continue to seek conciliation on the remaining individual issues and are getting ready for the next round due in late March through early April 2008.
The RF Government forecasts possible timelines of completion of all the talks with much caution, as there may soon arise new participants and new issues. Once Ukraine joins WTO in 2008, it is most likely to set additional barriers for Russia. Once granted a legitimate membership in WTO, Ukraine will enjoy the right to immediately enter the Task Force on Russia's accession to WTO and to announce its intention to launch bilateral talks with Russia on accession to markets for goods and services, as well as on systemic issues, including pricing, customs procedures, protectionist measures in trade, etc.
Despite various statements on inappropriateness of such negotiations, one should proceed from the assumption that the Ukrainian party can put forward quite stringent requirements in respect to a broad array of problems associated with the bilateral trade and economic relations. Suffice it to say, presently Ukraine finds itself among the group of Russia's leading trade partners that raise the biggest number of trade disputes and effective restrictions. The Ukrainians, for their part, estimate the imbalance in the bilateral trade with Russia to make up
a. USD 6bn, and they claim that their losses from Russia's protectionist measures make up USD 3bn (Ukraine's 2007 export accounted for some USD 50 bn).
Ukraine has already declared its eagerness to resume talks on the problematic bilateral Free Trade Agreement (which had been signed in 1993, but since then never promulgated), numerous provisions of which the Russian party conceives of as unacceptable. Hence it is hard to foretell timelines and results of the bilateral negotiations.
It is worthwhile to note yet another critical aspect related to Ukraine's very liberal obligations in the area of access to the markets for goods and services: specifically, its average weighed import tariff on industrial goods will be under 5%, and that on agricultural products -10.7%. In the services sector, the country has assumed obligations on opening practically all the sectors to overseas suppliers. The volume of the annual support to the national agriculture in the frame of the "yellow" basket was fixed at the minimal permissible level, that is, 5% of the sector's gross output plus an additional amount of USD 613m.
As concerns the Task Force, its Report contains fundamentally new obligations that go far beyond the WTO's requirements and rules, including export duties, protection of intellectual property rights, public trade corporations' operations, etc.
So, Ukraine's joining WTO sets an unfavorable for Russia precedent that shapes defacto new standards of membership in the Organization basing on the "WTO+" provisions, which are expected to affect Russia's future rights and obligations as a WTO member.
The negotiations on Russia's accession to WTO have already been in progress for more than 13 years. Russian producers' concern has been that once Russia joins WTO, imports would supplant domestic goods from the national market. But import duties will be cut down just by 3% on average. Speaking of particular kinds of goods, the duties on industrial products will be cut from 11 down to 7.5% and those on agricultural products - from 22 to 18%, while import duties on the basic products, such as grain, meat, and milk, will remain unchanged. There are of course products the import duty on which will be cut back by more than 3%, but this implies a long transitional period. For instance, import duties on automobiles will be cut down from 20% to 15%, but only in seven years after Russia joins WTO. In such sectors as pharmaceuticals, footwear or textiles, cuts in the respective import duties on finished products will be synchronized with cuts in import duties on technological equipment used by these sectors, as well as on raw materials Russian producers are short of (for instance, some substances for the pharmaceutical sector). As for liberalization of the domestic market for services, it will be taking a fairly moderate pace. The government will be in a position to employ instruments that will help support domestic producers, and it will retain the right to introduce restrictions for foreign capital in the event of privatization of domestic corporations, while public services may remain the state monopolist's reign.
***
To asses the Russian economy's prospects, it is extremely important to answer the question as to for how long, given the current trends in export and import areas, it will be able to maintain positive balance of its foreign trade.
In the medium run, export may continue to dominate over import, providing observance with a series of conditions: first, the situation on the world commodity markets, as the continuous price rise for oil, metals, chemical raw material, and timber allows one to hope for
growth in the value volume of exported raw materials, regardless of the stagnation in the physical volume of export. Second, the CBR's exchange rate, which in many ways determines foreign trade flows. Third, depletion of the production and technological base the CIS countries inherited from the USSR creates preconditions for boosting supplies of the manufacturing sector's produce thereto. Finally, the process of fighting against various import schemes, primarily with regard to electronic goods, may form a cause for a slowdown in growth rates of value volume of import across these positions in 2008-2009.
3.5. Russian Agrifood Sector: Basic Trends in 2007
3.5.1. Agricultural Performance General Outline
In 2007 the growth of gross agricultural output (GAO) continued to slow down. Russian agriculture displays this trend throughout several recent years following the rapid recovery after the 1998 crisis (Fig. 35). It's far from having restored the pre-reform level. The key factors of agricultural growth in 1999-2001 wore off while new ones have not arrived on the scene despite favourable price situation during the year and state agrifood policy efforts.
Source: Federal Service of State Statistics.
Fig. 35. Russia: Percent Change of Annual Gross Agricultural Output in 1985-2007
Crop production still accounts for over half of the Russian farm output although its share is gradually shrinking. Agricultural growth at large is primarily driven by the upward trend in this sector (the respective indices being 107.5% in 2004, 103.7% in 2005 and 101.3% in 2006. A bigger increase is expected in 2007 - over 3%).
In addition to intra-sector factors, agricultural growth was strongly hindered by macro-economic trends. The rising prices for fuels and oils notably impaired profitability of grain production and eventually induced contraction of areas planted in grain and most other farm crops.
At the same time structural shifts are taking place that enable us to speak of positive developments in the sector. The process of producers' bifurcation is underway - some of them are actively developing, modernizing production and attracting investments while others become more and more marginal and go bankrupt. The latter segment of the agrifood sector pulls the average efficiency and growth indicators down.
The sector structure of agriculture is shaping as well: some sectors prove their competitive advantages on international and domestic markets while others are shrinking at a higher or lower pace. For instance, the output of sunflower seeds, vegetables and potatoes is growing and is now above the Soviet period level (Fig. 36).
The good grain crop in 2007 will hardly shape a long-term trend on this market and the growth is most likely to slow down: the domestic demand is constrained due to the extremely high prices while the recently acquired competitive advantages on external markets are jeopardized by the state foreign trade policies (the effective export restrictions and the possibility of total grain export ban in 2008).
Despite generally poor performance of the livestock sector, some segments therein demonstrate very high growth (Fig. 39). For instance, in January-November 2007 the poultry meat production and the intensive production of pork grew by more than 20%.
The situation in food industry is similar. Output of some products (e.g. vegetable oils and white sugar) has already surpassed the pre-reform level. Production of some food items has been nearly restored - e.g. sausages, pastas, margarine and some other products. Production of meat and milk products is constrained by population's purchasing power but is still growing (Table 56).
In January-November 2007 real personal incomes increased by 10.1%, retail food turnover - by 12.3%. It means that the overall elasticity of demand for food remains still rather high. This fact can also be one of the explanations of the speedy rise of prices for meat being one of the most income elastic products. The demand for cheese and fruits (items that are largely consumed by higher income groups) expanded at even higher rates - by 15% and 12.4% in January-September 2007, respectively. The consumption of sugar grew by 25%.
A positive development factor was a certain improvement in rural social sphere. For two years in succession wages in agriculture grew faster (by 31.6% in January-October 2007) than in mining and manufacturing (22.2 and 25.6%, respectively). Wages earned in farm production still constitute the basis of rural residents' well being. Unemployment in rural areas is largely stagnant: this was the case for 1 million (or 45.9%) out of 1.7 million rural unemployed. As compared with August 2006 stagnant rural unemployment in 2007 reduced by 9.6 percent points. The social sphere in countryside still largely lags behind that in urban areas but it's the progressive trend that is important combined with the long awaited shift of state agrarian policies towards its development.
Having transferred farm regulation competences to the regional level, the federal authorities concentrated on strategic administration of agricultural policy and revision of its elaboration procedure. The new principles of shaping farm policies (the National Project "Agrifood sector development", the Law on agricultural development and the 5-year-term
State program for supporting agriculture and regulating markets) as well as foreign trade policies will determine the sector's development in the coming years.
Crop Production
Crop production in Russia is very unstable and largely depends on weather conditions. At the same time some sectors demonstrate high competitive advantages both on domestic and world markets, rapidly restore production on a new technological basis while others are gradually shrinking. The outputs of sunflower seeds, sugar beets, vegetables and potatoes in the 2000s were growing at a high rate and are now above the Soviet period indicators (Fig. 36). But beginning from 2006 their growth is slowing down.
Source: Federal Service of State Statistics.
Fig. 36. Gross Output of Basic Farm Crops, million tons
Sunflower and grains compete for the same areas and in Russia there is quite an apparent negative correlation between their acreages (Fig. 37). In the last 5-6 years areas under potatoes slightly decreased while gross output of this crop steadily increases beginning from 2002. Although the most part of potatoes in the country is produced by household farms (91.4%), the share of large producers in the recent 5 years is getting larger implying expansion of intensive production in potato growing.
Grains remain the basis of Russian crop production, wheat being the dominant one. Structure of grain production varies a lot by years (Fig. 38) but an apparent trend is the shrinking of traditional production of rye and a certain expansion of corn production. One of the factors thereof is the situation on the world markets. The growth of demand for corn was most remarkable in the US due to the rapid development of ethanol production. The 2005 US Energy Policy Bill stipulates wider use of biological fuel (on the basis of grains) - up to 7.5 mil-
12
lion gallons by 2012 which is twice above the 2005 level . At the same time the domestic factor is also important - the growing interest of Russian livestock producers in corn as a fodder crop due to its much better nutrition value (as compared with wheat).
12 USDA (2006). USDA Agricultural Baseline Projections to 2015. Baseline Report OCE-2006-1. USDA. Washington, D.C. 316
2000 2001 2002 2003 2004 2005 2006 2007 (Jan.-
June)
♦ sunflower —B—sugar beets —A—potatoes —H—vegetables —©—grain crops
* - Grain crops - million hectares (right axis). Source: Federal Service of State Statistics.
Fig. 37. Areas Planted in Selected Farm Crops, thousand hectares*
80%
60%
40%
20%
0%
2001 2002 2003 2004 2005 2006
□ wheat Dbarley Drye Boats ■corn Dgrain legumes □ other
2007 (WJ forecast)
Source: Federal Service of State Statistics, WJ Interagro.
Fig. 38. Structure of Russian Grain Production: Gross Output of Selected Grain Crops as % of the total
Livestock Production
The situation in Russian livestock production is generally worse than in crop production. Livestock inventories continue falling; the output of basic livestock products is either slightly reducing or marginally and unsteadily growing. However, efforts targeted at the accelerated development of this sector that were made in 2006-2007 resulted in some improvements (Fig. 39).
1990 1995 1996 1997 1998 2000 2001 2002 2003 2004 2005 2006 Jan.-
Nov. 2007
—*—slaughter livestock and poultry —B—milk —•—eggs, billion pieces
* - Live weight.
Source: Federal Service of State Statistics.
Fig. 39. Gross Output of Basic Livestock Products, million tons*
Despite generally poor performance of the livestock sector, some sub-sectors therein are quite rapidly recovering. In particular, poultry meat production grew by an average 17% a year throughout the surveyed period (Fig. 40). Intensive feeding of hogs is growing as well; their inventories noticeably increase for the second year in succession. Thanks to the intensive feeding of poultry and hogs the total meat output in January-November 2007 was up 8.9% as compared with the same period last year (in recent years the share of households in the output of pork and in hog inventories is steadily falling meaning that production increase is provided by large farms applying intensive technologies).
The upsurge of pork production in 2006 resulted in the drop of purchase prices: they
13
lowered by 2% (in nominal terms) after rising by 1/3 in 2005. But despite this drop and high prices for feeds, in 2007 the pork production growth rates where higher than in 2006.
2400 2200 2000 1800 1600 1400 1200 1000 800 600
Farms of all types, slaughter weight Corporate farms, live weight
Source: Federal Service of State Statistics.
Fig. 40. Production of Poultry Meat in Russia, thousand tons
The country's averages of livestock productivity are steadily improving (Table 53); annual milk production per cow is already well above the pick figures of the Soviet period.
13 RF Ministry of Agriculture. 318
Table 53
Livestock and Poultry Productivity in Russia
2000 2001 2002 2003 2004 2005 2006 2007 (Jan.-Nov.)
Annual milk production per 1 cow, kg 2,343 2,553 2,808 2,979 3,070 3,292 3,105 3,498
Annual egg production per 1 laying hen, pieces 264 273 279 285 292 301 277 275
Source: Federal Service of State Statistics.
3.5.2. Financial Performance of Farm Producers
Since 1999 the financial performance of Russian agriculture is steadily improving. The share of profitable farms is growing as well as their profitability. This process was mainly determined by the after-effects of 1998 crisis. The only exception was 2002 when agriculture was affected by the sharp drop of prices received by farm producers. Besides, the sector benefited from much stronger government support and growing investments. The farm debt rescheduling campaigns also contributed to the improvement of performance indicators.
A qualitative leap in farm producers' financial performance took place in 2004: its positive balance remarkably grew and the share of profitable enterprises exceeded 50%. The number of farms having overdue debts and the size of these debts are steadily decreasing.
It's generally believed that the most important factor of better financial performance of farm producers is the implementation of farm debt rescheduling program effective since 2003. According to data of the territorial commissions on farm financial recovery by January 1, 2007 agreements on debt rescheduling were signed by 12501 agricultural producers (about 40.1% of their total number). From October 2005 the number of entities participating in the program is actually stagnant. Overall 80.8 billion rubles of participating farms' debts were restructured including 41.7 billion rubles of fines and penalties of which 29.6 billion rubles were written off. At the same time 12553 agricultural producers cannot participate in the financial recovery program: over 5 thousand enterprises go through the bankruptcy procedure, 4.2 thousand are unable to make current payments according to the rescheduling terms and the rest cannot join the program due to other reasons. Besides, 3.8 thousand agricultural producers lost the right to participate in the program having failed to meet current commitments; moreover, in almost 1 thousand enterprises rescheduling was suspended.
The process of bankrupting farm producers is rapidly intensifying: while in 2005 7,385 bankruptcy proceedings against agricultural entities were initiated, in 2006 10,051 bankruptcy cases were under examination. Together with restructuring of farm debts and favourable price situation it had a positive effect on the sector's average financial performance (Table 54). In 2007 the share of profitable entities in agriculture exceeded 70%. From 2000 the sector's general profitability increased three fold thus surpassing the economy's averages (13.9%), net profits - by almost 50% while overdue credit indebtedness fell by 2/3.
Apparently the improving financial performance of the sector at large is due to the increase of efficiency in the upper producer groups, their higher attractiveness for investors. Investments in fixed capital continued to grow: their amount in January-September 2007 exceeded the 2006 total. Beginning from 2002 foreign investments increase not only in food industry but also in primary agricultural production (Fig. 41, 42). This growth of investments in the sector proves the above formulated thesis about producer bifurcation, the shaping of efficient enterprises that apply intensive technologies and are attractive for investors.
So, it would be a mistake to think that the observed improvement of agricultural producers' financial performance is entirely due to the implementation of farm financial recovery law.
Table 54
Financial Performance of Agricultural Producers
2000 2001 2002 2003 2004 2005 2006 2007 Jan.-Sept.
Profitability of goods, works, services and assets sold, % 6.3 9.3 1 2.7 6.4 7.5 9.9 17.3
Profit less loss, billion rubles 16.1 25.6 -1 2.2 4.7 2.6 46.7 76.4
Share of profitable entities, % 47 44 42 49 2.2 9.6 67.7 70.4
Number of entities having overdue creditor indebtedness, % 23.9 23 21.8 18.9 16.5 13.3 10.3 8.1
Overdue creditor indebtedness, billion rubles 144.1 162.9 162.3 149.9 113.9 85 64.8 48.4
Source: Federal Service of State Statistics, www.gks.ru.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(Jan.-Sept.)
■ ■ agriculture ^^^"food industry
Source: Federal Service of State Statistics, www.gks.ru.
Fig. 41. Direct Investments in the Agrifood Sector, billion rubles (constant 1995 prices)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(Jan.-
^^^"Foreign investments in agriculture ■ ■ incl. FDI Sept )
Source: Federal Service of State Statistics, www.gks.ru.
Fig. 42. Foreign Investments in Russian Agriculture, million US dollars
3.5.3. Production of Agricultural Inputs
Farm machine building follows the trend of agriculture - after a short upsurge in the early 2000s its growth is slowing down (Table 55). Still, producers of grain harvesters managed to enlarge export supplies 5 fold as compared with 2000 thus supporting the upward trend in the sector. Exports of tractors remain insignificant and therefore shrinking domestic demand results in their smaller production. Currently annual domestic production of farm machinery amounts to about 1 billion dollars. Imports total about 2/3 of this amount, exports -10-12%14
Table 55
Production of Selected Farm Inputs, thousand pieces
1990 1995 2000 2001 2002 2003 2004 2005 2006 I-X 2007 as % of I-X 2006
Tractors 214 21.2 19.2 14.2 9.2 8.1 8.7 5.5 5.5 124.2
Tractor ploughs 85.7 4 2.8 3.1 2.3 1 1.2 1.8 1.1 128.7
Tractor seeders 51.1 1.6 5.2 6.4 5.3 4.2 5.7 6.5 5.2 131.6
Tractor cultivators 101 2 4.7 5.6 5.6 6.2 6.7 8.6 6 126.9
Grain harvesters 65.7 6.2 5.2 9.1 7.5 5.4 7.9 7.5 6.9 95.5
Mineral fertilizers, million tons 16.0 9.6 12.2 13.0 13.6 14.1 15.7 16.6 16.2 104.9
Source: Federal Service of State Statistics.
Production of mineral fertilizers is still export-oriented while domestic consumption grows at a low rate.
3.5.4. Food Industry
In the Russian food industry production grows at noticeably higher rates as compared with agriculture but here too the growth is slowing down versus 1999-2001 indicators (Fig. 43).
Similar to agriculture food industry displays very different dynamics by sub-sectors. Production of some food products, e.g. vegetable oils and sugar, has already exceeded the Soviet period indicators. Pre-reform production levels of some other products, e.g. sausages, pastas and margarine are nearly restored (Table 56). Growth in the milk and meat sub-sectors is strongly constrained by income trends in the lower income groups but is still continuing at a rather high pace.
The demand for food products grows faster than average real incomes. The demand for fruits and cheese (i.e. very income-elastic products) expands at the highest rate - in recent years their sales increase by over 10% annually. Sales of poultry meat also grow fast - faster than the overall meat sales implying change in the structure of meat consumption.
14 Data of "Soyuzagromach".
20 15 10 5 0 -5 -10 -15 -20
0 CO co 1 166 U 1
CO oo
1 1993 1
in CO m CD CO m U 99 oo 9 9 9 9 CO 0 0 0 01 0 2 0 0 3 0 0 0 0 5 0 0 CD 0 0 O s( O" u
11 1 2 2 2 2 2 2 2 O <1
1—' _ c ro C
r- 0 L £ a
0 0 2
Source: Federal Service of State Statistics.
Fig. 43. Russian Food Industry: Percent Change of Annual Output
Table 56
Production of basic food products, thousand tons
1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 I-X 2007 as % of IX 2006
Meat 6,484 2,370 1,900 1,510 1,315 1,113 1,193 1,284 1,456 1,677 1,698 1,827 2,100 120.9
Sausages 2,283 1,293 1,296 1,147 1,087 948 1,052 1,224 1,468 1,700 1,832 1,957 2,100 106.0
Butter 833 421 323 292 276 262 267 271 279 285 271 277 274 102.1
Dairy products*, million tons 20.8 5.6 5.3 5.2 5.6 5.6 6.2 6.7 7.7 8.5 8.7 9.5 10.0 100.8
Vegetable oils 1,159 802 879 687 782 881 1,375 1,281 1,197 1,598 1,867 2,206 2,600 99.1
Granulated sugar 3,758 3,155 3,294 3,778 4,745 6,808 6,077 6,590 6,165 5,841 4,852 5,588 5,800 108.9
Flour, million tons 20.7 14 11.8 12.2 12 12.7 12.1 12 10.9 11.2 10.8 10.2 10.2 96.3
Groats 2,854 1,418 988 992 1,085 899 932 994 951 890 893 926 966 103.3
Pasta 1,038 603 444 453 554 707 704 764 821 874 950 982 1,028 94.9
Margarine products 808 198 200 222 239 379 462 515 536 542 561 630 677 112.9
* - In liquid milk equivalent.
Source: Federal Service of State Statistics.
3.5.5. Foreign Trade in Agricultural and Food Products: Trends and Policies
In recent years the volume of foreign trade in agricultural and food products is steadily growing and 2007 is not an exception. This growth is due to the expansion of both imports and exports (Fig. 44). It's noteworthy that exports grow faster.
While in the first after-crisis years the enlargement of export supplies was primarily due to the ruble devaluation, at present the trend is supported by the strengthening of domestic agriculture's position on the world markets of some products. Imports continue to increase due
to the sustained growth of consumer demand in the situation of slowing down progress in the domestic agrifood sector.
Russia still retains its status of traditional net importer of agricultural and food commodities. The negative trend in the dynamics of agrifood foreign trade deficit that took a start in 2000 still continues (Fig. 44). In January-October 2007 the negative balance of trade in respective items exceeded 14 billion rubles.
*- Less trade with Belarus.
Source: calculated using data of RF Federal Customs Service.
Fig. 44. Foreign Trade in Agricultural and Food Products, million dollars*
The recovery growth that started in the domestic agrifood sector in 1999 revealed the basic segments where Russia has competitive advantages on external and home markets. This had an obvious impact on the commodity structure of foreign trade.
Grains became the principal item of Russian export having surpassed such a traditional item as fish and sea products. In 2007 wheat accounted for 42% of the total food exports. As compared with January-October 2006 the volume of food exports increased by 46.7%, their value - by 91.5%. The volume of export supplies of wheat grew by 59.6%, of barley - by 68.4%, of poultry meat - by 11.5%. Rye has also become an export item - the volume of its export is up from 29 tons in January-October 2006 to 85,813 tons in January-October 2007. At the same time exports of milk fell by 30.8%, of fresh and frozen fish - by 24%. The share of oilseeds in the food export structure remains small while that of sunflower oil increases.
The commodity structure of import has also changed in recent years. After the introduction of meat quotas in 2003 imports of meat (except beef) fell but already in 2005-2006 started to restore. It's noteworthy that import supplies of meat exceed the set quotas. Meat still remains the principal item of Russian agrifood import accounting for 20% thereof (Table 57).
Dynamics of sugar imports were also influenced by the government foreign trade policy. Despite its bottlenecks the mechanism of variable import duty on raw sugar enforced in 2003
resulted in smaller supplies from abroad (Table 57) thus encouraging rapid development of domestic sugar beet production. The trend became most apparent in 2006.
Table 57
Imports of Basic Agricultural and Food Products in 2000-2007, thousand tons*
2000 2001 2002 2003 2004 2005 2006 I-X 2007
Beef 282.3 459.2 504.6 507.8 510.9 696.2 1,411.0** 1,096.30**
Pork 212.9 369.6 602.0 535.2 455.2 562.9
Poultry meat 687.2 1,383.3 1,375.2 1,190.0 1,101.3 1,318.5 1,282.4 1,034.10
Condensed milk and 48.0 85.4 11.8 26.5 35.9 35.5 145.3 5.3
cream
Butter 45.4 81.4 94.1 114.0 70.3 66.0 164.8 62.3
Sunflower oil 149.5 182.8 175.7 200.8 160.4 131.2 100.0 112.5
Wheat and wheat/rye 2,631.3 916.2 264.8 640.7 1,364.1 577.1 1,397.5 440.9
mix
Corn 702.2 206.8 448.9 209.5 448.8 200.6 295.5 88.1
Meat products and 20.6 25.1 19.2 24.7 34.3 33.7 34.8 25.5
canned meat
Raw sugar 4,546.6 5,410.4 4,441.0 4,112.0 2,582.9 2,892.9 2,632.7 2,703.50
White sugar 271.4 143.1 163.2 151.1 200.1 144.9 349.7 104.4
Citrus fruits 472.2 562.1 701.3 781.1 858.4 952.6 1,187.4 865.5
Coffee 20.3 21.6 25.7 32.0 29.4 39.7 55.3 54.5
Tea 158.3 154.4 165.3 168.9 172.1 179.6 172.9 151.2
* - Less trade with Belarus.
** - Meat fresh and frozen less poultry meat.
Source: RF Federal Customs Service.
In January-October 2007 imports of fresh and frozen meat from the non-CIS countries grew by 8% as compared with January-October 2006: purchases of beef were up 10.7%, of pork - 6.7%. Imports of fresh and frozen fish grew by 26.0%, of condensed milk - by 30.3%, cheese - by 5.1%, citrus fruits - by 5.5%, coffee - by 26.5%, tea - by 7.3%, barley - by 87.7%, raw sugar - by 21.9%.
Stability of Russia's Grain Exporter Status Jeopardized by Government Policies
All pessimistic forecasts saying that Russia has traditionally been an importer of grain, has no export infrastructure and therefore cannot export more than 5 million tons of grain a year have been disproved by massive export shipments that started in 2002 (Fig. 45). They were encouraged by low prices on the domestic market and high prices on the world market. Having appraised the benefits of grain export, private business started to make large-scale investments in the construction of respective port facilities. The government also allocated funds from the federal budget for partial subsidizing of interest on long-term credits for construction of port elevators. Now it's obvious that Russia becomes a stable exporter of grain. It occupied its niche on the world market exporting annually from 5 to 10 million tons depending on the domestic market situation. In 2007 good crop and favourable world market situation (Fig. 46) conditioned growth of grain exports: in September 2007 they were 69% above the September 2006 indicators.
18000 16000 14000 12000 10000 8000 6000 4000 2000 0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007 July-
Dec.
□ exports □ imports
Source: WJ InterAgro.
Fig. 45. Exports of Grain from Russia, thousand tons
400 380 360 340 320 300 280
1 1 1
f V ij
f t T 1
J
i
r I
... ... ... ..J.
: A
r \ :
-1- - —i— —i—i— :
-1- : —i—i—i— — — - - —i— - - - - -1—
180 4 160 140 ■pn
ooooooooooooooooooooooooooooooo
t-t-t-t-t-
OOOOOOOOO'—i
(N^fNo-l^r ^H0;0;0;0;
poo (NcKK
ooo^
t-
o>o>o>o>o;oooo;o;
■ HRW 11 %
SRW
SRW - soft red winter wheat.
HRW 11.0 - hard red winter wheat, protein content 11% (moisture 12%). Source: WJ InterAgro.
Fig. 46. Prices for US Wheat, $/ton FOB Gulf
Export is not always encouraged by government policies. In 2004 Russian grain exports fell notably due not only to the poor 2003 crop but also to the introduction of temporary restrictions on export of rye, wheat and their mix. Grain interventions carried out in the country affect exporters' interests as well: they are supposed to raise domestic prices thus making ex-
port less profitable. In 2006 terms for Russian grain export deteriorated due to the rise of tariffs for transportation and port services. In 2007 railway tariffs were lifted once more.
The upsurge of grain prices on the world markets in the second half of 2007 (Fig. 46) had a serious effect on the situation on domestic market of grain where prices were also high. High domestic prices for grain mean high cost of purchased inputs for livestock production. Besides, the rise of prices for grain gave grounds to blame farm producers for higher prices for food. In order to support domestic livestock production and to prevent further rise of prices for bread and bakery products the RF government has taken a decision to restrict export of grain and to carry out commodity interventions on the grain market (Resolution No. 660 of October 10, 2007).
From November 2007 to April 2008 the main food export items will be subject to export duties that are in fact prohibitive: wheat and wheat-rye mix - 10% but not less than 0.022 EUR per kg, barley - 30% but not less than 0.07 EUR per kg. Besides, Resolution No. 877 of December 15, 2007 allowed to impose bans on export of grain. Such policy tools may be destructive for the position just acquired by Russian exporters on the world market. It's fraught with the loss of market niche and counterparts' confidence (grain is exported under long-term contracts) as well as with the general destabilization that can have negative effects on domestic market including reduction of areas planted in 2008 (Table 58).
Table 58
Position of Russia in the World Grain Trade
2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 (till December)
Share of Russia in the world 3 7 9 9 11
grain exports, % Place of Russia in the world 7 6 5 6 3
grain exports
Source: www.usda.gov.
Growing Exports of Oilseeds In recent years export shipments of sunflower oil are growing (Fig. 47). This trend originated in 2000 and was conditioned by expansion of processing facilities and larger domestic output of vegetable oils. As a result in 2005 Russia became a net exporter of sunflower oil while preserving its status of net exporter of sunflower seeds. However, in 2007 exports of sunflower seeds decreased.
In 2007 export of rapeseeds followed the upward trend that originated in 2006 (Fig. 48): in 2006/2007 MY its volume increased by 76% as compared with the previous year. In recent years the world market of this crop is intensely developing due to the expanding manufacturing of biological fuel out of it. Besides, the State program for agrifood sector development adopted in 2007 includes the program of supporting rapeseed production.
800 700 600 500 400 300 200 100 0
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
□ oilseeds □incl. sunflower seeds nrapeseeds □ vegetable oils
Source: WJ InterAgro.
Fig. 47. Exports of Oilseeds and Vegetable Oils from Russia, thousand tons
90 80 70 60 50 40 30 20 10 0
№
Qi
0 0 0 0 ¡T
.Q .Q .Q .Q ra ra
F s E E
0 o 0 0 ra —i .Q
CP 0 w O > o o 0 0 LL
z Q
CP <
m <
□ 2006-2007 □ 2005-2006
Source: WJ InterAgro.
Fig. 48. Exports of Rapeseeds from Russia in 2005/2006 and 2006/2007 MY, thousand tons
Regulation of Rice Import: Outcomes for Consumers
In January 2006 the import duty on rice was raised from 10% but not less than 0.03 EUR per kg to 0.07 EUR per kg. This measure resulted in some curtailment of imports and an upsurge of domestic prices beginning from 2006 (Fig. 49, 50). In December 2006 import of rice to Russia was banned completely entailing one more price leap (Fig. 50). From abolition of the ban till May 31, 2007 and from October 1 to December 31, 2007 seasonal duty of 0.12 EUR per kg was levied. Fig. 50 shows that introduction of the duties resulted in upsurges of price for rice.
Historically rice is grown in few regions of the country (primarily in Krasnodar kray) unable to meet market demand in full. Some quantities of rice have always been imported
327
from abroad but they have never been large enough to depress domestic production of this crop. So, state foreign trade policies caused losses for consumers while giving no considerable advantages to producers.
60
50 M 40 30 20
10 M 0
^ ^ J? . O^ ^ ^
rf- ^ ^ * y y y y y
^r CT J0 „C?
□ 2005 □ 2006 □ 2007
Source: WJ InterAgro.
Fig. 49. Imports of Rice to Russia, thousand tons
Source: WJ InterAgro.
Fig. 50. Average Prices for Rice No.1, rubles per ton EXW
Changes in Regulation of Foreign Trade in Sugar
In 2007 the rapid growth observed in sugar beet production since 2003 continued. It started after the revision of sugar trade regime: in 2003 a new regime of regulating foreign trade in sugar was adopted envisaging introduction of variable import duty. Variable duty is bound to the difference between price at the New York Board of Trade and the domestic support price. This regime resulted in larger acreage under and bigger outputs of sugar beets; besides, the share of beet sugar in the total domestic sugar output increased noticeably (from 26% in 2002 to 53% in 2007 - see Fig. 52) surpassing the pre-reform level. According to our estimates the rate of white sugar support grew from 29% in 2001 to 49% in 2004 (percent equivalent of producer support estimate - PSE). Yields of sugar beets were growing for seven years running; in 2006 the indicator was up almost 40% and averaged 298 metric centners per hectare. In 2007 it fell to 270 centners per hectare but the productivity in the sector remains still high.
In 2007 the upsurge of prices observed on the world market in 2006 gave place to their fall down to the 2005 level (Fig. 51) that is still rather high. In January-June 2007 exchange prices for raw sugar were well below the corresponding 2006 indicators. In the first half of the year they fluctuated in the interval determining the custom duty of 140 dollars per ton. According to data of the state customs statistics, imports of raw sugar in January-June 2007 grew by 20.8% as compared with the same period of 2006. However, so far larger imports have not become an obstacle for the expansion of domestic production of sugar beets.
Notwithstanding, the customs regime has been changed. In October the government adopted rates of seasonal duties on raw cane sugar15. Instead of the current 140 dollars per ton, from December 1, 2007 to May 31, 2008 the rate of import duty will range from 220 to 270 dollars per ton depending on the prices at NYBOT (Table 59). So, given the current world prices it will rise by almost 60%. Besides, the market expects further growth of prices since Brazil (the origin of 79% of Russian raw sugar imports in 2007) announced that more raw sugar would be used for domestic purposes, e.g. production of bio-fuel. All this can entail higher prices for sugar already at the beginning of 2008. At the same time market situation for domestic sugar beet production will remain favourable.
Table 59
Seasonal Import Duties on Raw Sugar
Average monthly price (p) at the New York Board of Trade (Contract 11), dollars per ton Rate of custom duty till December 2007, dollars per ton Rate of custom duty from December 1, 2007 to May 31, 2008, dollars per ton
p>=198.43 140 220
182.99<=p<= 198.42 164 235
99.22<=p<= 198.42 from 180 to 250 250
P<=99.22 270 270
Source: www.rg.ru.
15 RF Government Resolution No. 671 of October 12, 2007.
450 n 400 -
300 -250 -
150 -100 -50 0
January February March April May June July August September
— - -2005 ....... 2006 -2007
Source: www.mcx.ru,www.economy.gov.ru.
Fig. 51. Prices for Raw Sugar at the New York Board of Trade (Contract 11), dollars per ton
7000 6000 5000 4000 3000 2000 1000 0
# rö1, rS? rö* rS
V "C? "C? "C? v "C?
□ sugar beets Draw sugar
Source: Federal Service of State Statistics.
Fig. 52. Production of White Sugar out of Sugar Beets and Raw Sugar, thousand tons
Meat Market Regulation and Domestic Prices for Meat
In the first half of 2007 imports of red meat grew by 19% as compared with the corresponding period last year due to much larger deliveries of beef from Brazil. On the contrary, imports of meat from the CIS countries reduced as a result of curtailed supplies from Belarus. Imports of poultry meat fell by nearly 48 thousand tons or by approximately 5%.
Beginning from spring 2003 import quotas on meat are applied: the absolute quota on poultry (from 2006 - tariff quota) and tariff quotas on beef and pork (Table 60). However, their introduction has not curbed import of meat products to Russia (Fig. 53). They are applied only to import of meat from the non-CIS countries. Meat and meat products from the 330
CIS are not subject to quotas. As a result the structure of meat import shifted towards larger supplies from the CIS countries (in 2003) (Fig. 54) and bigger share of meat products (in 2003-2004). But beginning from 2005 meat imports regained growth. So, quotas have failed to reach their main goal - protection of domestic producers from competition with import. After their introduction domestic livestock production displays different trends by sub-sectors. Production of poultry continues growing at a rather high rate - 15-20% per annum. However, this growth has started before the enforcement of quotas on import of poultry. The intensification of hog production resulted in larger output of pork in 2007. Meanwhile production of beef is either falling or growing marginally. On the whole, despite all domestic (the National project) and foreign policy efforts Russian primary meat production has not yet shown any substantial growth.
Table 60
Meat Import Quotas Applied in Russia in 2003-2007
2003
2004
2005
2006
2007
since January
since June
Beef, fresh or chilled
TRQ, 1000
tons
Within-
quota tariff
Out-of-quota
tariff
11.5*
15%, but not less than 0.2 euro/kg 60%, but not less than 0.8 euro/kg
27.5
15%, but not less than 0.2 euro/kg 60%, but not less than 0.8 euro/kg
27.5
27.8
28.3
15%, but not less than 0.2 euro/kg 60%, but not less
15%, but not less than 0.2 euro/kg 40%, but not less
than 0.8 euro/kg than 0.53 euro/kg
15%, but not less than 15%, but not less 0.2 euro/kg than 0.2 euro/kg 55%, but not less than 50%, but not less _0.7 euro/kg_than 0.65 euro/kg
Beef, frozen
TRQ, 1000 tons Within-quota tariff
Out-of-quota tariff
TRQ, 1000
tons
Within-
quota tariff
Out-of-quota
tariff
315**
15%, but not less than 0.15 euro/kg
60%, but not less than 0.6 euro/kg
337.5**
15%, but not less than 0.25 euro/kg 80%, but not less than 1.06 euro/kg
420
15%, but not less than 0.15 euro/kg
60%, but not less than 0.6 euro/kg
450
15%, but not less than 0.25 euro/kg 80%, but not less than 1.06 euro/kg
430
435
440
15%, but not less 15%, but not less
than 0.15 euro/kg than 0.15 euro/kg
60%, but not less 40%, but not less that 55%, but not less that
than 0.6 euro/kg 0.4 euro/kg 0.55 euro/kg
15%, but not less than 15%, but not less 0.15 euro/kg than 0.15 euro/kg 52.5%, but not less that 0.53 euro/kg
Pork
467.4
476.1
484.4
15%, but not less than 0.25 euro/kg 80%, but not less than 1.06 euro/kg
15%, but not less than 0.25 euro/kg 80%, but not less than 1.06 euro/kg
15%, but not less than 15%, but not less 0.25 euro/kg than 0.25 euro/kg 60%, but not less than 60%, but not less _1.0 euro/kg_than 1.0 euro/kg
Poultry meat
744***
Quota, 1000 tons
Within- 25%, but not less
quota tariff than 0.2 euro/kg
Out-of-quota -
tariff -
1050
25%, but not less than 0.2 euro/kg
1050
1130.8
1171.2
25%, but not less than 0.2 euro/kg
25%, but not less than 0.2 euro/kg
25%, but not less than 25%, but not less 0.2 euro/kg than 0.2 euro/kg 60%, but not less than 60%, but not less 0.48 euro/kg than 0.48 euro/kg
* - Since August 1, 2003.
** - Since April 1, 2003.
*** - Since April 30, 2003. SOURCE: RF customs legislation.
900000 -, 800000 -700000 -600000 -500000 -400000 -300000 -200000 --
a
ü
0 0 2
0 0 2
I
>
0 0 2
>
344 000 000 22 2
> I
>
4 0 0 2
>
4 0 0 2
*
0 0 2
0 0 2
> I
>
0 0 2
>
0 0 2
a
6 0 0 2
6 0 0 2
> I
>
□ Total, tons □ Total, thous.dollars
Source: calculated using data of the RF Federal Customs Service.
Fig. 53. Imports of Beef, Pork, Poultry Meat and Meat Products to Russia
800000 700000 600000 500000 400000 300000 200000 100000
Source: calculated using data of the RF Federal Customs Service.
Fig. 54. Imports of Meat and Meat Products from the CIS and non-CIS Countries, tons
Meat quotas contributed to the rise of domestic prices. Beginning from 2004 prices for meat grew faster than CPI and prices for food products in general. First of all, this growth was due to larger imports from the CIS since average contract prices for meat imported from these countries are higher than those for meat from the non-CIS countries. At the same time prices for meat products from the CIS are lower due to qualitative differences.
Prices were also affected by sharp fluctuations of import supplies of meat to the domestic market due to quotas. Quotas are distributed at the beginning of a year and uncertainty makes suppliers limit their deliveries (Fig. 53). This decrease of supplies to the domestic market can cause growth of prices that is later reflected in the annual price index.
Despite its inefficiency, the quota mechanism of regulating meat import is supposed to be preserved at least till 2009. The size of quotas will be gradually increased. Contrary to the mechanism adopted in 2003, import duties on out-of-quota supplies were raised.
Conditioned by higher real personal incomes, the demand for meat and meat products continued to grow pushing prices upward.
The situation on the world grain market also had a serious effect on the level of meat prices (see the corresponding section).
However, the principal factor of domestic meat price growth was surely the upsurge of prices for beef on the world markets (due to the extremely high grain prices, a series of world cattle epizooties and consequent cattle slaughter and to the lowering of export subsidies in the EU) (Fig. 55).
4 000,00 -| 3 500,00 -3 000,00 -2 500,00 -2 000,00 - _ . 1 500,00 -1 000,00 -500,00 0,00
/\
----J
CD CD CD CD CD CD CD CD CD CD CD CD
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
CM CM CM CM CM CM <N <N CM CM CM <N CM CM CM CM CM CM <N <N CM
= = > > > > > >< x: >< >< = = > > > > > ><
---- Beef
-Poultry meat
* Beef - Argentine, frozen beef cuts, export unit value; poultry meat - USA, broiler cuts, export unit value. Source: www.fao.org.
Fig. 55. World Prices for Meat, dollars per ton*
In order to restrict growth of domestic consumer prices the rates of import duties on milk and milk products were temporarily (for 6 months) lowered from 15% to 5%.
3.5.6. Agrifood Policies
The Share of Regions in the Consolidated Budget Grows while their Autonomy in Shaping Policy Reduces
In 2004-2007 important changes have taken place in the mechanism of budget support to agriculture. In compliance with Federal Law No. 95 of July 4, 2003 and Federal Law No. 199 of December 29, 2004 the subsidizing of agriculture was transferred to the competence of Federation's members. As a result the share of federal budget in the consolidated budget expenditures on agriculture fell to a record low level: 14% in November 2007.
90 000 80 000 -70 000 60 000 -50 000 40 000 30 000 20 000 10 000
0
2001 2002 2003 2004 2005 2006 Jan.-Nov.
2007
in current prices - - 'in constant 1999 prices
Source: www.minfin.ru.
Fig. 56. Consolidated Budget Expenditures on Agriculture, million rubles
The vesting of regions with exclusive powers to regulate agriculture will have the most destructive effect on the sector. First, regions-donors able to finance support to agriculture on their territories are primarily located in the climatic zones that are the least fit for farming. So, the shifting of farm budget support's gravity center from the federal to regional level leads to the encouraging of agricultural production in these regions implying non-efficient public resource utilization.
Second, for already many years regional support results in "trade wars" between regions, attempts to oust neighbors from the market by means of direct subsidies to local producers, bans on agricultural and food products' transit, etc. And all this took place despite high share of federal funds. The transfer of agricultural financing authority to regions will support the trend. In other words, the Federal Law No. 95-FL brings in the domestic market all the negative effects of protectionism on the world agricultural markets that the WTO Agreement on Agriculture strives to eliminate (meanwhile Russia wants to join this organization with its anti-protectionism principles).
At the same time due to the finally realized need of federal participation in shaping regional agrifood policies or to the general centralization of state power in Russia, the regions' competences in defining these policies are merely formal and in fact regions are unable to implement them without coordination with federal authorities. Federal budget allocations on co-financing of regional subsidies contain all the basic parameters of subsidizing. In accordance with the State program described below all regions should adopt corresponding regional programs and each region should coordinate its program with the federal center.
National Project "Development of the Agrifood Sector"
The National Project "Development of the agrifood sector" is one of the four national projects implemented in Russia in 2006-2007 (beginning from 2008 the Project measures are included in the State program "Development of the agrifood sector and regulation of agricultural and food markets in 2008-2012" adopted in 2007).
In 2006-2007 the National Project's financing was to amount to nearly 47.5 billion rubles. This is quite a large sum - in 2006 funds allocated to the Project accounted for over 20% (18.9 billion rubles) of the total budget expenditures on agriculture. In 2008-2009 the planned expenditures on the National Project are almost 48 billion rubles.
Table 61
Financing of the National Project "Development of the Agrifood Sector",
billion rubles
2006 2007 Total
Accelerated development of livestock sector
Subsidizing of interest rate on credits 2.38 17.29 19.67
Enlargement of "Rosagroleasing's" authorized capital 4 4 8
Facilitation of small-scale farming
Subsidizing of interest rate on credits 0.91 5.04 5.95
Enlargement of "Rosselkhozbank's" authorized capital 8.1 0 8.1
including assigned to:
development of the network of consumer cooperatives engaged in procurement, input supply, marketing and processing of output produced by smallholder farms
development of rural credit cooperation
creation of crediting system based on land mortgage 1.3 0 1.3
Methodological and informational support 0.15 0.15 0.3
Subsidizing of construction (purchase) of dwellings for housing young specialists (or their families) in rural areas 2.0 2.0 4.0
TOTAL 18.84 28.48 47.32
Source: RF Ministry of Agriculture.
The priority National Project "Development of the agrifood sector" has three components: "Accelerated development of livestock sector", "Facilitation of small-scale farming" and "Providing of young specialists (or their families) with affordable dwellings in rural areas".
Beginning from 2007 additional tasks were included in the Project: state support of sheep and reindeer production, drove breeding of horses and industrial fish-farming; extending the availability of credit resources for purchasing pedigree livestock, machinery and equipment for livestock production (credits for term up to 5 years). The most part of these tasks (except fish farming and horse breeding) are not new directions of state support - they simply insert programs effective in recent years into the National Project. In this way these directions get larger funds - in 2007 expenditures on pedigree stockbreeding will double as compared with 2006, 2.5 billion rubles will be additionally allocated to medium (5-year) term credits and 8.3 billion rubles - to 8-year-term credits (versus 3.4 billion rubles in 2006 and the initially envisaged 3.18 billion rubles for 2007).
On the whole the National Project's implementation has expectedly failed to become a factor able to halt the slowing down of growth in the agrifood sector. It has just helped to arrest production decline in the meat and milk sectors. Notwithstanding, the inventories of cattle
and dairy cows continue falling although the Project is primarily targeted at growth in this particular livestock sub-sector. In November 2007 the number of cattle reduced by 0.4%, that of cows - by 1.4% as compared with November 2006. At the same time the number of hogs notably grew (by 6% as compared with November 2006). The output of milk in 2007 was slightly up as compared with the previous year (by 0.3%)16. The recovery in poultry production had started before the National Project was launched. So, the only sub-sector the situation wherein changed during the Project's implementation is hog production. Still, it's not unclouded either: the upsurge of pork production resulted in a price drop that affects the sector's development prospects.
Subsidizing of long-term (up to 8 years) investment credits for financing projects in the livestock sector continues in regions. In 2006 and 9 months 2007 2,040 livestock entities signed 2,191 credit agreements, under 1,911 of them loans were granted, including 1,339 - for cattle production, 366 - for hog production, 206 - for production of other livestock and poultry.
In the framework of the National Project "Rosagroleasing" supplied farm producers with 82.7 thousand heads of cattle and 12.3 thousand heads of pigs. Besides, it spent 1.5 billion rubles on purchasing equipment for livestock production and processing of respective output and plans to modernize 206.8 thousand stalls.
Thanks to the Project the turnover of this state corporation has grown enormously: in
2006 "Rosagroleasing" bought twice more pedigree animals than during all the preceding
17
years of its operation while in 2005 only 6 thousand animals were supplied on leasing terms . However, the overall purchase of livestock exceeded the previous year indicators just marginally - in 2005 farms bought 54 thousand heads of livestock. The average purchase price was slightly over 50 thousand rubles per one head or somewhat below the world market price (due to the purchase of pedigree livestock from domestic producers).
In 2007 the major banks-participants of the priority National Project were "Rosselkhoz-bank" (Russian Agricultural Bank - 57% of the total number of signed credit agreements and 32% of the total amount of credit resources) and Sberbank of Russia (Russian Savings Bank -31% and 41% correspondingly). Credit investments of "Rosselkhozbank" in the first half of
2007 were twice above the respective 2006 indicators and exceeded 106 billion rubles (3.4 billion rubles in 2005). The number of extended credits grew 2.3 fold as compared with the same period of 2006.
In 2007 the number of borrowers exceeded 130 thousand versus 2.5 thousand in 2006, household farms being the major contributors to this increase. Individuals engaged in household farming account for about 55% of credits extended in the framework of the National Project, individual private farmers - for 32% and agricultural consumer cooperatives - for the
rest18.
The crediting on land mortgage has started to develop. "Rosselkhozbank" granted 165 credits to the total amount of 4.6 billion rubles on the mortgage of about 260 thousand hectares of land. The credits were taken for construction and reconstruction of livestock complexes, purchase of farm machinery, equipment, spare parts, fuels and oils, seeds and seedlings, additional farmland plots and for development of smallholder farms.
16 Social and economic situation in Russia - 2007, www.gks.ru.
17 http://www.rosagroleasing.ru/docs/report20061124.pdf.
18 http ://www. mcx. ru/dep_doc.html?he_id=797&doc_id=11041. 336
In 2006 and 10 months 2007 smallholder farms and agricultural consumer cooperatives got over 404 thousand credits to the total amount of 79.2 billion rubles. 3474 agricultural consumer cooperatives were set up.
Assessment of the National Project
The system of subsidizing interest rate on credits to Russian agriculture has proved to bring good results. Several years ago long-term credits also became eligible for this program. The inclusion of this measure in the National Project in general does not raise any doubt. However, slightly over 3 billion rubles per annum are envisaged for this purpose while the corresponding 2006 Budget indicator is about 13 billion rubles. In other words, this component of the National Project does not seriously influence the level of state support in this field. At the same time, the National Project envisages subsidizing of large and long-term (up to 8 years) credits although its own term is only 2 years (and may be extended into the two following years). This means that investors joining the National Project on these terms get involved in very risky investment projects since there is no certainty about continuation of interest rate subsidizing after the National Project's term is over. There is a danger that regional authorities will use "administrative resource" to make large agribusiness companies participate in such projects, and the potential risk will become quite real for them.
The program of developing livestock production envisages rather large investments in import of pedigree livestock from abroad. There are plans to buy 100 thousand heads of livestock and to lease them to agricultural producers. (By the way, this is in fact an official admission of the domestic selection's complete failure). One should clearly understand that import of highly productive breeds from abroad per se does not guarantee high animal productivity in Russia since the latter is pre-conditioned by compliance with certain technological standards, reconstruction of premises, skilled management. Many Russian regions have already funded import of pedigree livestock from regional budgets but these efforts proved to be non-efficient. Certainly, there are private businesses that are capable to meet all the requirements but the prescribed implementation scheme leaves no hope for success of this particular project component. Indeed, it starts with allocating 8 billion rubles to limited liability company "Rosagroleasing" for the enlargement of its authorized capital. This state corporation is supposed to buy pedigree stock that will be distributed between agricultural producers on preferential terms. Life shows that our agrarian bureaucratic system knows no other way of distribution than the one by so called limits that are set for regions, districts and agricultural producers. This means that pedigree livestock will be supplied not to the farms (or not always to the farms) that are capable to use it properly. "Rosagroleasing" is not interested in the efficient use of received funds: the corporation gets allocations not specifically for leasing operations but for the enlargement of its authorized capital conditioned by conducting of leasing operations. The scope of these operations is expectedly not fixed in the documents.
Purchase of 100 thousand heads of pedigree livestock within 2 years is proclaimed. It's quite a large number for the respective world market. Experts say that the available supply is shorter. This means that in order to implement the project, livestock with worse quality parameters will be bought. Besides, an a priori announcement of such a sizeable purchase will inevitably result in higher world prices. In other words, not the best livestock will be bought at overstated prices.
The leasing of pedigree livestock should be preserved but its practice should be revised in order to improve the efficiency of respective agricultural policy. The monopoly of "Rosagroleasing" in this field should be abolished. One should subsidize expenditures of farm producers on purchase of pedigree livestock of a certain quality; the eligible number of purchased animals should equal the minimum sufficient for really efficient herd replacement. No additional enlargement of "Rosagroleasing's" authorized capital is required for this purpose.
The subsidizing of 95% of interest rate on credits granted to small producers actually means a negative interest on bank credits. Agricultural producers could enjoy similar super-beneficial credit terms in 1992 (then individual private farmers got credits at 8% per annum while average bank interests were as high as 120%). This resulted in an intense criminaliza-tion of the sector, mass abuses, dissipation of resources and finally - in the bankruptcy of Ag-roprombank. The advocates of this measure proceed from good intention to provide access to bank credit for small producers but disregard the fact that there are no barriers to prompt creation of small entities just in order to receive such a beneficial credit. To get the status of a household farm it's enough to buy a house in a village and to till 0.01 ha for planting potatoes.
Similar to its first part, the second part of the National project is also inconsistent. It envisages support to cooperatives marketing milk from households. The authorities still think that rural residents can earn money for decent living by selling milk of 1-2 cows. What's the logic then? On the one hand, we assist development of large-scale production by importing highly productive pedigree livestock for large commodity corporate farms and by facilitating their modernization, and, on the other hand, we support old women with their tiny milking business. But these are competing sectors. Supporting milk collecting cooperatives we create competitors for large commodity enterprises that will buy imported highly productive dairy cattle. Rural population urgently needs help in the form of providing alternative income sources (the more so in case the first part of the Project succeeds - then rural employment will further fall since handling of productive cows at farms with advanced technology requires 3-4 less workers than today) but why should it be solely household milk production?
As a result of all the named measures 130 thousand stalls will be created. Let's suppose that half of them will be created in dairy cattle production and the sector will attain the European level of 8 thousand liters of milk produced per cow annually. Even given this super good performance milk output will increase by slightly over 0.5 million tons per annum while currently the gross domestic output of milk exceeds 30 million tons. The outcome of all the planned measures will be the growth of milk output by 4.5% and meat output - by 7% within 2 years. Let's suppose that the profitability of milk production will become incredibly high -30%. If so, the profit from additionally produced milk will be about 5 billion rubles. Even in case milk production gets only one fourth of the National Project's funds, the efficiency of their use (the ratio of sector's increased receipts to used inputs) will be below 100%. The situation for meat is similar.
There is one more problem that can have long-term negative effects. The principal measure targeted at the development of cooperatives in the framework of the National Project is the enlargement of "Rosselkhozbank's" (Russian Agricultural Bank's) authorized capital by 9.4 billion rubles within 2 years. "Rosagroleasing's" authorized capital is also to be enlarged by 8 billion rubles in order to implement such measures as import of pedigree animals and renovation of fixed capital in livestock production. So, the implementation of the National Project is largely (56% of the envisaged expenditures) confined to the transfer of budget funds
to state corporations-monopolists. The intended monopolization of input and financial markets in agriculture hinders their normal development and affects farm producers' access to these resources. On the other hand, neither "Rosselkhozbank" nor "Rosagroleasing" needs enlargement of authorized capital to fulfill functions assigned by the Project. They could cope with their missions even if these funds were simply transferred to their management.
Besides, the initial stage of the Project's implementation revealed some other risks. In particular, the lack of standard designs of livestock farms may result in financing of technically deficient and too expensive projects.
Super-soft crediting of rural population also has negative outcomes. First, an opportunity for fraud, for reselling these credits appears on the credit market. Second, these credits are primarily used for consumer purposes (there is information about a rapid growth of consumer crediting in regions after the Project was launched) implying no sources for their reimbursement. Finally, low-interest money in countryside accompanied by higher prices for alcohol (due to the new regulation of alcohol market in the country) will inevitably bring about an upsurge of hard drinking and shadow turnover of home-brewed alcohol in rural areas.
One of the basic problems of agricultural and rural development in Russia is the exces-siveness of agricultural labour aggravating as productivity of this sector grows. Nowadays the commodity agricultural production accounts for only 1/3 of rural employment. The excessive able-bodied population is ousted to the sector of household farming that produces competing agricultural output with lower productivity. Such a dualism on the rural labour market cannot fail to result in lower incomes from agricultural employment. The opportunities for alternative employment in rural areas are still very scarce and include mainly gathering of wildly growing species, non-formal intra-village services and infant rural tourism. This employment is nonformal and non-regular. It primarily attracts marginal population ousted from principal employment. In this situation the country needs strong rural development policies oriented towards creation of adequate off-farm employment in rural areas. Regardless of this, in the framework of the National Project rural residents can get credits only on agricultural activities that will further aggravate the situation.
Finally, there is one more serious deficiency of the Project's logistics. The National Project does not comprehend all the agricultural policy issues. At the same time its implementation requires so much effort from the sector's administration that all other fields of work get simply halted.
The soft crediting of household farms in its current form should be abolished. Instead of it one needs a systematic and well balanced program of rural development targeted at the creation of alternative employment in countryside. A similar EU program (Pillar II of Common Agricultural Policy) can be taken as a pattern especially in the part where it applies to newly adopted countries of Central and Eastern Europe. The problem of housing qualified personnel in rural areas should also be solved in the framework of this program. The principal criterion for granting a housing subsidy should be the qualification but not the age of an applicant (which is the case in the effective version of the Project).
Moreover, the National Project complicates implementation of the programs for creating alternative employment already launched in regions. For instance, Perm kray succeeded in establishing municipal funds of rural crediting that for several years have been granting small and micro credits to rural population for any economic activities. Cooperatives created in the framework of the Project credit only farming. Therefore, not to lose a part of federal financing
parallel cooperatives need to be founded in the region. The support of cooperatives in rural areas is an important direction of agricultural policies. But in order to improve its efficiency one should eliminate the establishing monopoly of "Rosselkhozbank" on cooperative movement in countryside. Credit support can be provided by any commercial bank while the federal budget should partially subsidize the interest rate directly to a cooperative at the moment of credit repayment.
The "crediting on mortgage" component of state support is entirely entrusted to one bank - "Rosselkhozbank". In case such crediting becomes a commercially profitable project, this approach will engender unjustified monopoly of one bank on the respective market with all the associated monopoly costs for borrowers. If one supposes to develop crediting on mortgage as a social project this will inevitably result in bankruptcy of "Rosselkhozbank" which was already the case with its predecessor "Agroprombank" in 1994-1995 when it granted commercially disadvantageous credits to agriculture. Both scenarios contradict the goals of national agrifood sector development.
Basing on the results of pilot projects carried out by "Rosselkhozbank" normative acts should be adopted to extend the practice of crediting on mortgage. Further the monopoly of one bank on such credits should be abolished. The state will subsidize them in the same way it does with other long-term credits.
After 2007 such a type of state support to agriculture as a National Project will be discontinued since it will be incorporated in the "State program of support to agriculture and regulation of agricultural and food market in 2008-2012" adopted in 2007.
The State Program of Support to Agriculture
The State program of support to agriculture and regulation of agricultural and food markets in 2008-2012 was adopted by the RF Government on July 14, 2007. It was worked out in compliance with provisions of the Federal Law "On agricultural development" of December 29, 2006 (No. 264-FL).
The State program was developed by the RF Ministry of Agriculture in cooperation with representatives of producer unions and associations, scientific institutions and other Ministries of the RF Government. On the one hand, the involvement of a wide range of experts in the Program's elaboration ensured due regard to opinions of different interest groups; on the other hand, the compromise version of the Program diverges greatly from the initial concept underlying the Law "On agricultural development".
The State program was not supposed to revise the effective agricultural policies completely. To our mind, the complex arrangement and marginal correction of the currently applied policy tools on the federal level could be a good start for the new system of agrifood sector regulation in Russia.
Instead, the sector's high officials have made the State program an instrument of lobbying for a sharp increase of budget expenditures on agriculture. Meantime the growth of budget funding is not coupled with better transparency of its planning and execution as could be the case in the framework of sub-program scheme envisaged by the Law "On agricultural development".
In accordance with provisions of the Law "On agricultural development" each subprogram should incorporate designated goals and, respectively, indicators of their achieve-
ment, mechanisms of state regulation and the amount of funds to be allocated. Such a structure of the State program could give clear signals to agribusiness and other market operators as to the vectors of state policies and market regulation in the medium run. In fact only few sub-programs comply with this scheme. In most cases regulation tools are either not specified at all or are outlined just generally thus sending no signal to business; indicators of goals' achievement are not linked to the implemented measures and the amount of funds; the latter are not conditioned by the goals and mechanisms of their attaining but are set depending on the results of "bargaining" between the respective agencies and departments.
Besides, the program has failed to integrate all state policies and budget expenditures relating to agriculture. Regularly made investments in authorized capitals of state companies, some other measures of agrifood policies have not been included in the Program at all. Such an important component of state agricultural policies as foreign trade market regulation is absolutely missing in the Program. Without knowing basic parameters of foreign trade policies for the next 5 years (such as import duties, quotas, export restrictions, etc.) businesses cannot adequately plan their activities and estimate market prospects.
So, the State program has failed to ensure transition to program and goal-oriented planning in agricultural policies (still being a certain stage on the way to such transition) and to guarantee transparency and predictability of these policies for business - one of the key factors of long-term growth in the agrarian sector.
At the same time larger expenditures on agriculture allowed to incorporate new objects of regulation in the program including the ones long awaited in the sector.
First of all, it concerns the part of the program dealing with rural development. An important novelty is the placing of "Sustainable development of rural areas" section in the beginning of the Program, before market support measures. Such a positioning of the problem that until recently has not been regarded by the sector's administration as a priority one, is a signal of positive shifts in the agrifood policies as it is.
Measures included in the section "Sustainable development of rural areas" are on the one hand quite traditional - continuation of the federal special program "Rural social development till 2010", further carrying out of measures aimed at providing qualified personnel with affordable dwellings in rural areas. On the other hand, they are implemented in a new way, i.e. through supporting investment projects selected on a tender basis. However, only complex projects of construction and community development in rural settlements will be funded in such a way; meantime urgent rural development measures go far beyond these scopes.
The proposed measures are absolutely insufficient for achieving the goal of sustainable development of rural areas set in the Program. The state support of this program component remains declarative. Besides, the problem of developing off-farm employment in rural areas is not addressed at all although it's much spoken about in recent time and the initial versions of the Program contained measures for expanding alternative employment opportunities. This support should first of all base on the backing of small credits on non-agricultural purposes in rural areas. A certain part of grants from the special fund should be used for supporting alternative employment. To improve the efficiency of state support to sustainable rural development applying project funding mechanism, it seems rational to set a fund that would extend tender-based grants for projects in the following fields:
- improvement of the level and quality of engineer services in rural settlements;
- improvement of social and housing conditions of rural residents;
- improvement of rural social infrastructure and development of cultural and leisure opportunities for rural population including children and young people;
- improvement of rural residents' health by means of easier access to and better quality of primary medical service, development of physical culture and sports;
- improvement of educational standards in rural schools by means of their moderniza-tion, creation of conditions for inviting and settlement of qualified teachers including young specialists in rural areas;
- development of alternative employment in rural areas including rural tourism, timber production, gathering and processing of wild growing species, niche agriculture, etc.;
- development of social and engineer infrastructure in rural areas;
- development of market infrastructure for household farms and small business in rural areas.
The next section - "Ensuring general conditions for farming" - includes the already running program of soil fertility improvement and some earlier developed but not yet enforced programs for informational support, for development of extension and consulting services, for promotion of land mortgage. There is also a new program for involving producer unions and associations in the process of design, estimation and implementation of selected agrifood policy measures that should contribute to the efficiency and transparency of these policies.
Still, this section as well as the program at large does not define measures to be carried out in the framework of each of the named programs. There should be a clear description of measures targeted at soil fertility improvement (only 30% compensation of expenditures on mineral fertilizers is mentioned so far) or development of land mortgage.
Measures for providing agriculture with skilled labour should also be defined in the program. We find that an efficient tool for solving this problem could be the subsidized construction of residential dwellings for young families working and living in rural areas, since poles show that the lack of affordable housing is one of the key factors hindering the inflow of specialists to countryside.
Besides, the entire system of training personnel for agriculture and rural areas requires cardinal revision. The existing system does not meet the current labour market requirements and fails to ensure long-term competitiveness of Russian agriculture. The revision could start with establishing new centers for training highly skilled specialists of basic agricultural professions within the already existing agrarian universities and academies. The leading world experts in the field of agricultural science and education should be invited there to work out training courses, to organize studies and teach the first Russian graduates of such centers -specialists and teachers.
The involvement of producer associations in shaping and implementation of agricultural policies declared in the program remained just a good intention. Meanwhile, employment of both institutional and financial resources of associations could largely improve the efficiency of state agrifood markets' regulation and become a fruitful form of private-public partnership. We find that the involvement of associations in the process of agricultural policy making could be encouraged by compensating producer associations (the ones complying with requirements of FL "On agricultural development") for 50% of expenditures on developing technical regulations at their initiative, on establishing their own systems of market information gathering and dissemination (compatible with the United system of informational support
to the agrifood sector), on financing applied agricultural research that their members are interested in.
Deviation from the principle of program integrality is most serious in the section "Development of priority agricultural sub-sectors". For instance, the sub-program for livestock sector development does not include measures envisaged by the National Project "Development of the agrifood sector". It's absolutely unclear why regulation of agricultural and food markets is partitioned off and some measures targeted at the development of priority sub-sectors are placed in this separate section. Besides, tools of foreign trade regulation are not specified in the program which therefore fails to give a clear signal to market operators and to ensure predictability of state policies in this field. Rates of subsidizing pedigree stockbreeding and elite seed production are missing. Consequently, one raises a justified question: how were the amounts of respective allocations calculated? It's impossible to determine the need for funds if subsidy rates are not known. It's also impossible to determine the sub-program's final outcomes. This is the evidence of poor planning of the program measures and related expenditures.
The novelty of this section is the support of regional projects (selected on a tender basis) for developing complex special programs of support to some sectors.
To better meet requirements of market operators, the section on development of priority agricultural sub-sectors should include: 1) mechanisms of grain interventions and intervention prices; 2) all parameters of foreign trade regulation of livestock and crop products' markets. Otherwise, the risks of agrifood policy changing for market operators will remain as high as before the program's adoption.
The primary task of the State program as regards foreign trade regulation in the agrifood sector should be the setting of transparent rules for all market operators and the ensuring of this regulation's stability with the view to create conditions for growth of domestic production, on the one hand, and for supplying Russian consumers with affordable foodstuffs, on the other. Besides, in 2008-2012 Russian agrifood sector should be adapted to the new economic environment after the country joins WTO.
To prepare institutional conditions for agrifood sector's operation within WTO and to adapt the market to the expected membership in this organization, the first thing to do is to mutually recognize the results of product tests and the documents certifying the compliance of Russian agricultural and food products with international standards and to lower technical barriers to trade.
So, although the State program has become an important step towards transition to program goal-oriented medium-term budget planning in agriculture, it largely requires adjustments and supplements that could reduce market operators' risks and thus to stabilize market situation. In its turn, one of the results of such stabilization will be the prevention of price leaps in the future.
Table 62
Financing of State Program for Agrifood Sector Development in 2008-2012, billion rubles
Principal sections 2007 2008 2009 2010 2011 2012 Total 20082012 Ratio of 2012 to 2007
Sustainable development of rural areas 5.48 7.34 19.03 25.12 29.60 31.28 112.37 5.7 fold
Ensuring general conditions for farming 4.70 9.86 12.92 13.78 14.66 15.33 66.55 3.3 fold
Development of priority agricultural sub-sectors 8.50 13.73 15.41 14.11 14.37 15.04 72.66 1.8 fold
Ensuring financial sustainability of agriculture 45.43 44.00 51.28 65.62 64.94 66.85 292.69 1.5 fold
Regulation of agricultural and food markets 1.30 1.36 1.36 1.36 1.43 1.50 7.01 115 .4%
TOTAL: 65.41 76.3 100 120 125 130 551.3 2.0 fold
Source: RF Ministry of Agriculture.
Policies Targeted at Arresting Growth of Prices for Food Products
The upsurge of prices for foodstuffs in the second half of 2007 has drawn close attention of politicians and resulted in a set of measures targeted at arresting inflation in the food sector. The price index for food products amounted to 111.6% (October 2007 as % of December 2006) while consumer price index in the same period was 109.3%. Prices for bread and bakery products, milk and dairy products, butter and sunflower oil demonstrated the largest increase (Fig. 57).
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Source: www.gks.ru.
Fig. 57. Price Indices for Selected Food Products, %
Agriculture was blamed for the upsurge of food prices. Indeed, in recent months prices received by farm producers grew faster than prices for food products. The rapid increase of prices for meat was due to both more expensive feeds and the situation on the world market. However, the fast growth of prices for primary agricultural products was not the only factor of food prices' leap. Retail trade margin and prices for agricultural inputs (mineral fertilizers, electricity, fuels and oils) are growing as well. Raw agricultural produce accounts for slightly over one half of the respective food prices (Table 63). Margin between the prices received by farm producers and the wholesale prices for most agricultural products is quite large 344
(Table 64). Besides, processing costs also contribute a lot to the price for such items as bread, dairy products and sunflower oil. So, the existence of direct correlation between prices for agricultural products and respective food products is not always obvious. An evidence of that is the difference in price growth rates by these groups of products during 2007 (Fig. 58).
Table 63
Structure of Meat Products' Cost: the Growing Share of Trade Margin
(Commercial Expenses), %
2005 2006 2007
Raw meat 59.2 59.2 55.2
Inputs 12.7 10.9 10.9
Labour 12.3 12.6 15.1
Commercial expenses 5.2 6.9 7.8
Production costs 4.9 5.5 5.6
Administrative costs 5.6 4.9 5.5
Total cost 100 100 100
Source: AFE Centre estimates using data of Meat Union.
Table 64
Margin between the Price Received by Farm Producers and the Wholesale Price for Selected Agricultural Products in 2005-2007, %
Margin
Cereals 32-33
Sunflower seeds 258-259
Sugar 61
Pork 25-29
Beef 25-29
Poultry 3
Eggs_24_
Source: AFE Centre estimates using data of Meat Union, Grain Union, RF Ministry of Agriculture and RF Federal Service of State Statistics.
Interventions on the grain market and the planned ban on export of grain proceed from the assumption that these are the prices for grain that are to blame for more expensive bread. However, the cost of grain accounts for only about 20% of the price for bread. Besides, prices for grain grew not so much as prices for e.g. milk or sunflower seeds. Still, regulation is enforced on this particular market. During 13 days of interventions in 2007 325 thousand tons of wheat were sold: 5.9 thousand tons of wheat No.4 at 4700 rubles per ton and the rest - wheat No.3 at the average price 5,114.7 rubles per ton. This equals about 7% of grain exports in this season, i.e. is quite a large quantity for the market. At the same time interventions started when prices had begun to stabilize as it was. Interventions were carried out rather late since similar to previous years they required a long procedure of intra-government coordination. The cause is the aforementioned absence of definite state regulation parameters in the State program including parameters of automatic launching of interventions when prices reach a certain level.
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Source: www.gks.ru.
Fig. 58. Indices of Prices for Selected Agricultural and Food Products, as % of the previous month
The agreement of some large retailing companies with the RF Ministry of Agriculture to keep prices for basic food products at a certain fixed level won't ensure a long-term effect either. First, prices were fixed at the October 2007 level, i.e. already after their principal rise; second, retailers will compensate their losses from arresting prices for these products by faster raising of prices for other items, so the attempt to halt inflation will also fail. Third, after the restrictions are lifted (they will be in force only for some limited period of time) prices for those very products that were subject to them will grow at accelerated rates as has always been the case when applying administrative restraints on food markets (regional efforts to administrate prices in the post-reform period provide ample evidence).
At the same time the growth of prices for agricultural and food products is the reflection of objective situation on the respective world markets: prices for sunflower seeds, milk, grain and poultry show the largest increase (Fig. 46, 55, 59, 60). The upsurge of prices has already resulted in a spectacular improvement of agriculture's profitability that will have a positive effect on the sector's financial performance and investment prospects unless the contributing factors are eliminated by unpredictable government policies restraining consumer prices at the expense of agriculture, supporting import and restricting export. Certainly, parallel measures are needed to mitigate the negative effect of such price situation on the final food consumers. However, these measures should focus on eliminating supply restrictions instead of being carried out at the expense of farm producers since the government allocates quite large funds to long-term programs for their support (as a matter of fact, the effect of which is not always doubtless). It would be short-sighted, however, now to reverse the course from support to taxation of agriculture, either direct or indirect (e.g. export restrictions).
— -A — Butter-Dried milk
Source: www.fao.org.
Fig. 59. World Prices for Dairy Products (Oceania, Indicative Export Prices, f.o.b.), US dollars per ton
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* - North West European ports, f.o.b. ** - EU, c.i.f. Lower Rhine. Source: www.fao.org.
Fig. 60. World Prices for Sunflower Seeds and Sunflower Oil, US dollars per ton
Outlook for Russian Agrifood Sector's Performance and Government Policies in 2008
Outcomes of 2007 evidence that the process of farm producers' bifurcation continues in the sector. The segment of intensive, efficient and financially sustainable production is forming fostered by more active bankruptcy proceedings. However, mass bankrupting of agricultural entities makes the social problem in rural areas very acute. There is a danger that its solution may be put off due to the improving financial performance of farm producers
(conditioned by the favourable situation on agricultural markets) whereas the problem is a system one, its solution is a key factor of Russian agriculture's competitiveness and sustainable growth and is impossible without government participation. So, in 2008 the country's agri-food policy should concentrate on rural social development and alternative rural employment - the problems the importance of which was proclaimed in 2007 but got no support in concrete political actions.
One cannot fail to attribute the unprecedented improvement of farm producers' financial performance to higher prices on the food markets. The price growth was due to both the situation on the world markets (larger demand for crop output used for producing bio-fuel, smaller supply due to poor crops, livestock epidemics and revision of the EU policies) and the state policies resulting in shorter supply on domestic market, e.g. restriction of rice and meat import. Higher predictability of state policies for market operators, getting rid of the required inter-departmental coordination for operative market regulation, adequate liberalization of foreign trade regulation will help to mitigate the effect of high world prices on the domestic food markets.
One more turning point in the 2007 government policies is the switching from protection of Russia's interests on the world markets to restriction of export. Such state policy measures are fraught with the loss of Russian exporters' positions on the world markets the capturing of which cost them much labour, and the general destabilization that can affect domestic market as well and make the problem of high prices for grains even more serious.
