10Section 3. Real Sector
3.1. Macrostructure of production
3.1.1. Influence of Internal and External Demand on GDP Dynamics and Structure
In 2008 a considerable slow-down replaced the growth of the Russian economy observed in the period of 2003-2007, when the average annual growth rates of the indices were the following: GDP - about 7%, investments in fixed assets - 14%, final consumption of households - 11%. According to the preliminary data for 2008, GDP increase was equal to 5.6%, approaching the figures of 2001-2002, which have been the minimum of the ten-year recovery period. The growth rates of investments in fixed assets slowing down to 9.1% in 2008 as compared with 21.7% in 2007, which was not compensated by the corresponding growth of the consumption of the population, accounted for the gradual decrease of the internal demand. The inflation increasing, the growth rates of the real incomes of the population slowing down to 2.7% versus 12.1% in 2007, real wages -to 9.7% versus 17.2%, the growth rates of the retail trade turnover made 113.0% and were 3.1% below the level of the previous year, while that of the paid services rendered to the population - 104.9% versus 107.9% a year ago. Slow-down of industrial production growth rates to 102.1% versus 106.3% in 2007 had a considerable influence on the internal market.
Table 1
Indices of the Basic Macroeconomic Indicators in 1999-2008, as a percentage versus the previous year
2001 2002 2003 2004 2005 2006 2007 2008 1 2008 by quarters 2 3 4
Gross Domestic Product 105.1 104.7 107.3 107.2 106.4 107.4 108.1 105.6 108.5 107.5 106.2 101.1
Real final consumption of 108.2 107.7 106.7 110.2 110.5 109.8 111.0 111.5 114.1 112.2 112.4 109.7
households
Investments in fixed assets 110 102.8 112.5 111.7 110.9 116.7 121.1 109.1 119.1 113.0 109.8 101.9
Commissioning of residential 104.6 106.7 107.7 112.6 106.1 116.1 119.4 105.3 108.1 99.1 105.7 105.1
building
Industrial production 102.9 103.1 108.9 108.0 105.1 106.3 106.3 102.1 106.2 105.5 104.7 93.9
Agriculture production 107.5 101.7 101.3 103 102.4 102.8 103.3 110.8 104.5 104.2 108.5 59.2
Freight turnover 103.2 105.8 108 106.5 102.7 102.5 102.2 100.6 105.1 102.9 101.5 93.0
Communication services 119.1 115.6 127.5 129 115.7 124.0 120.1
amount
Retail trade turnover 111 109.3 108.8 113.3 112.8 114.1 116.1 113.0 116.7 114.4 114.4 108.2
Paid services rendered to 101.6 103.7 106.6 108.4 106.3 107.6 107.9 104.9 107.7 105.6 105.3 102.0
population
Foreign trade turnover 103.8 108.1 126 132.4 131.5 127 120.8 132.2 148.8 147.9 149.3 95.4
Real disposable monetary 108.7 111.1 115 110.4 112.4 113.5 112.1 102.7 107.8 106.0 106.6 94.2
income
Real wages 119.9 116.2 110.9 110.6 112.6 113.3 117.2 109.7 113.4 112.5 112.2 102.5
Real amount of accrued pen- 121.4 116.3 104.5 105.5 109.6 105.1 104.8 118.1 119.0 113.7 122.7 116.9
sions Average number of those 100.7 100.9 100.6 100.6 100.6 100.6 101.3 100.6 100.8 101.2 100.8 99.7
employed in the economy
Number of officially regis- 89.1 97.9 92.3 101.6 90.2 96.0 84.9 104.3 96.5 94.2 105.6 123.0
tered unemployed
Consumer prices indices 118.6 115.1 112.0 111.7 110.9 109.0 111.9 113.3 104.8 103.8 101.7 102.5
Industrial producers' prices 108.3 117.7 112.5 128.8 113.4 110.4 125.1 93.0 103.0 113.6 100.5 79.1
indices
Source: Federal State Statistics Service.
In 2008 macroeconomic situation was characterized by highly unsteady dynamics of the main indices throughout the year (Table 1). GDP growth rates slowed down from 8.5% in the 1st quarter to 1.1% in the 4th quarter. The inertial growth of the first half of 2008 supported by the accumulated potential, favorable situation at the world market of raw materials, was replaced by the slow-down of the economic development in the second half, which was accounted for by a sudden worsening of the foreign economic situation and the crisis of the financial and crediting institutions. In October-December 2008 the situation was aggravated by the spread of the crisis phenomena throughout the economy. The most dramatic decrease in production was observed in construction, transport and industrial production. According to the data of the Federal State Statistics Service, in the 4th quarter 2008 the volume of the industrial production was 93.9%, the commercial freight turnover - 93.3% as on the level of the corresponding period of the previous year. The growth rates of the investments in fixed assets continued to slow-down for two quarters in a row, their volume in December 2008 being 2.3% below the volume of December 2007. The increase in gross accumulation of fixed capital in 2008 was estimated to be 110.3% as compared with 121.1% in 2007.
Starting with the second half of 2008 the trade has been occupying the leading positions in the national economy anew. The share of the wholesale and retail trade in the GDP produced was 21.7% in 2008. The dynamics of the consumer demand in 2008 was still determined by the consumption of households. The increase in household consumption is estimated to be 111.5% in 2008, as compared with 113.6% in 2007. In connection with the slowdown of labor remuneration growth in the 4th quarter of 2008, the growth rates of retail trade turnover and of the paid services rendered to the population have dropped. Although the growth rates of the retail trade turnover went down to 8.2% in the 4th quarter 2008 versus 16.2% in the corresponding period of the previous year, the investments in fixed assets - to 1.9% versus 20.6%, this enabled to support the positive dynamics of the GDP in October-December, though at the level which has been the minimum since 2001.
The situation was aggravated by a large-scale outflow of capital. Whereas in the first half of 2008 the trend for the inflow of the foreign capital at the amount of USD 18 billion sustained, in the second half 2008 the outflow of capital reached USD 147.9 billion.
Starting with the second half of 2008 the unsteady dynamics of the main macroindices, as well as sudden fluctuations of prices and demand at the world market of raw materials resulted in the international agency Standard&Poor's lowering the rating of Russia from "positive" to "stable" in September, and from "stable" to "negative" in October, leaving the rating itself unchanged. In December the agency lowered long-term and short-term foreign currency credit ratings of the Russian Federation: from "BBB+/A-2" to "BBB/A-3". Besides, the long-term sovereign local currency credit rating was lowered: from "A-" to "BBB+", retaining the short-term local currency rating at the level of "A-2".
The forecast "negative" for the sovereign credit rating of the Russian Federation reflected the possibility for further decrease in the ratings if the expenditures for the support of the financial system increase and the measures adopted for the prospects of long-term development exert bigger negative influence.
In January 2009 analytical agency Fitch lowered Russia's rating down to the level of BBB, which was due to both the decrease in prices for raw materials and the aggravation of the situation at the global markets of capital, as a result of which the Russian banks had difficulties with refinancing of the external debt. International reserves of the Russian Federation
had decreased down to USD 427.1 billion by the end of the year versus USD 597.5 billion at the beginning of August 2008.
Throughout 2008 the decrease in the economic growth rates was determined by the si-
rd
multaneous reduction in the external and internal demand (Fig. 1). Starting with the 3 quarter 2008, a sharp drop in the world prices for raw materials and contraction of the demand of the world market was accompanied with the reduction of export volumes both in physical and value terms. In the 4th quarter, according to preliminary estimations, the export of goods reduced by nearly 17%. However the dynamics of export being high in the first half, on the whole over 2008 the export of goods and services increased by 0.2% versus 6.4% growth in 2007. It should be noted that the anticipating growth of import as compared to export in terms of both the physical volume and value was a characteristic feature of 2006-2008, which in the end resulted in the absolute reduction of net export volume in the GDP.
The analysis of the formation of the resources of retail trade demonstrates that staring with 2005 the trend for the growth of the proportion of import supplies of both the foodstuffs and non-food goods. In 2008 the proportion of the import in the structure of retail trade commodity resources increased up to 47%, the growth of foodstuffs being 34.0% and of non-foods goods - 54.4%. A high proportion of the import goods secured the balance of supply and demand at the investment market as well. In January-September 2008 the expenditures for the purchase of the import equipment made 19.9% of the total volume of investments into machinery and equipment. Other conditions being equal, a dynamic growth of import contributed in the formation of the competitive environment, but a high proportion of import in the retail trade turnover and in the volume of investments in machinery, equipment and transport vehicles strengthened the dependence of the balance of the trading resources at the internal market on the changes in the external economic situation.
Source: Federal State Statistics Service
Fig. 1. Changes in GDP Dynamics As Broken by Components of Internal and External Demand in 2001-2008, As Percentage to Corresponding Quarter of Previous Year
In 2008 the slow-down of the dynamics of the investment and consumer demand occurred against the background of the considerable decrease in the volume of goods and ser-160
vices import. As a result of 2008 the growth of the physical volumes of goods and services import made 17.7% versus 26.6% a year ago, the growth of import being twice as intensive as the growth of the internal production.
In 2008 the combination of the internal factors regulating the level of the business activity did not compensate the influence of the contraction of the external demand on the economic growth rates. As a result of three quarters of 2008 the increase in internal demand made 11.1% versus 13.6% in 2007. Against the background of slow-down of the rates of the domestic production, the positive dynamics of the internal market was sustained by the increase in import supplies throughout the first half of the year. As a result, the proportion of the goods and services produced domestically in the structure of the internal demand coverage decreased steadily. Starting with August 2008 the situation changed radically. Under the influence of the contraction of the investment, production and consumer demand as a result of the credit crisis there was an absolute reduction in the volume of goods import in terms of value observed in the 4th quarter 2008. In such a situation the state of the internal market was supported by the increase of both the share of services, and the enhancement of the stocks of the material liquid funds due to the contraction of the internal demand. The turnover of the organizations of the wholesale trade started decreasing in the 4th quarter 2008 and made 93.7% as compared with the corresponding period of the previous year. The increase in the material liquid funds was 33.1% on the whole over 2008, their share in the GDP being at the level of 4.1%. Thus, in the 4th quarter 2008 the situation at the internal market was defined by a considerable excess of supply over demand for the first time since 1999 (Fig. 2).
35,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0
I Domestic production twwj Import ■
■ Internal market
Source: Federal State Statistic Service
Fig. 2. Changes in Internal Demand Growth Rates in 2001-2008, As Percentage to Corresponding Quarter of Previous year
In 2006-2008 the economic growth was in fact at the stage of the quantitative accumulation and was not supported by the structural changes in the investment activity, foreign trade, production, as well as by institutional reforms, securing favorable conditions for effective operation of economic agents. This defined the vulnerability of the Russian economy in the environment of global changes in the situation at the world market.
The means of the stabilization funds (Reserve Fund and Fund of National Welfare) were insufficient to damp the negative influence of the external factors. Use of accumulated funds and measures for the gradual change of the ruble exchange rate against the basket of currencies, decrease in tax burden on producers do not allow stopping negative trends in the investment sphere, goods and services production, in the sphere of employment and maintenance of life standard.
3.1.2. Final Consumption of Households and Changes in Parameters of Population's Life Standard
During January-September 2008 the share of expenditures in for final consumption in
rd
the structure of the use of the GDP decreased systematically and in he 3 quarter became equal to 61.6%, which is 1.8 per cent below the figure of the corresponding period of the previous year (Table 2). The decrease occurred mainly due to the contraction in the expenditures of households. The slow-down of the rates of household consumption was caused by a decrease in the incomes of the population, an increase in wages arrears, a contraction of the solvent demand of the population against the background of high inflation, an increase in the cost of credit funds. As a result of 2008 the share of labor remuneration in the structure of the incomes of the population made 68.5%, exceeding by 1.0 per cent the figure of 2007, and the share of social payments went up from 11.3% to 12.9%. At the same time it should be noted that the incomes from the property in monetary incomes of the population went down by 2.3 per cent and were equal to 6.6%. At the same time the anticipating growth of pensions and social payments in the first half of 2008 allowed to restrict the growth of the number of the population with the incomes below the subsistence level even in the environment of high inflation (Table 3).
Table 2
Structure of Use of Gross Domestic Product
2007 2008*
Annual quarters Annual quarters
1 2 3 4 1 2 3 4
GDP 100 100 100 100 100 100 100 100 100 100
expenditures for final 66.0 71.4 67.5 63.4 63.8 66.0 69.9 65.0 61.6 68.4
consumption
of households 48.2 50.1 48.4 46.4 47.5 48.5 48.7 46.6 45.2 48.9
of state management 17.2 20.7 18.6 16.6 15.8 16.9 20.6 17.9 16.0 14.1
Gross accumulation 24.3 18.7 22.8 28.7 26.3 26.2 19.1 24.5 30.3 20.1
Net export 8.6 10.1 8.9 7.3 8.9 8.9 12.5 10.5 9.1 4.0
* preliminary results, statistical deviation = 1.1 Source: Federal State Statistics Service
Table 3
Number of Population with Monetary Incomes below Subsistence Level
Million of people As percentage to the total number of the population
2005
1st quarter 34.9 24.5
1st half of the year 31.4 22.1
Annual 25.2 17.7
2006
1st quarter 31.7 22.4
1st half of the year 27.0 19.1
Annual 21.6 15.3
2007
1st quarter 25.8 18.3
1st half of the year 22.3 15.8
January-September 20.9 14.8
Annual 21.5 15.2
2008
1st quarter 23.0 16.3
1st half of the year 20.7 14.7
Annual 13.2
Source: Federal State Statistics Service
The investment market contracting dramatically, in 2008 the level of the consumer demand remained the main source of the economic growth despite the fact that in the 4th quarter the increase in the retail trade turnover made 8.2% as on the corresponding period of the pre-
rd
vious year versus 15.5% in the first half of the year and 14.5% in the 3 quarter. Against the background of the slow-down of the growth rates of the real incomes of the population in January-September and their decrease by 5.8% in the 4th quarter 2008 for the first time since 2000, the trend for the dynamics of the retail trade turnover being higher than the real incomes of the population testified that the inclination of the population to save decreased steadily. The dynamics of the savings of the population was considerably influenced by the acceleration of the inflation, periodic problems with the liquidity of the banks, ruble weakening and negative phenomena (slow-down of housing implementation, growth of interest rates for mortgages) at the real estate market. Massive outflow of savings was accompanied with the population being more active at the market of foreign currency (Fig. 3). In the 4th quarter 2008 the share of expenditures for purchase of the currency was equal to 13.4% of the incomes of the population, and in December of the same year - to 14.9% versus 4.8% in the corresponding period of 2007. As a result the share of expenditures for purchase of goods made 56.9% in the 4th quarter 2008 versus 59.2% in the 1st quarter.
The volume of credits given to the natural persons by banks increased by nearly 1.35 times over the first eleven months of 2008 and was equal to RUR 4054.8 billion at the beginning of December. The volume of credits given to natural persons by crediting institutions for purchase of accommodation (in rubles and in foreign currency) made RUR 614.5 billion in January-September 2008 versus RUR 424.1 billion in the analogous period of the previous year, including mortgage credits of, correspondingly, RUR 537.3 billion versus 362.8 billion. It should be noted that by October 1, 2008 the arrears of credits issued to natural persons went up to RUR 4004.1 billion as compared with RUR 2658.3 billion as on October 1, 2007.
As compared with October 2007, in October 2008 there was a decrease in the proportion of arrears of consumer credit in the total volume of arrears of credits of natural persons, the arrears of credits for the purchase of housing growing up to 28.7% versus 23.4% a year ago and for mortgage up to 24.3% versus 18.7%.
th
The share of the expenses of the population for the purchase of the real estate in the 4 quarter 2008 made 3.0% (6.0% on average over the year) versus 11.0% (9.6%) in the corresponding period of the previous year.
10 20 □ 2007
Source: Federal State Statistics Service
Fig. 3. Structure of Use of Monetary Incomes of Population in 2007-2008,
as percentage to total
ra 20,5
II I III 2008
Foodstuffs turnover Non-food goods turnover
■uiiiiiiiiiii Paid services to population Retail trade turnover
Source: Federal State Statistics Service Fig. 4. Dynamics of Retail Trade Turnover and Paid Services to Population in 2006-2008, As Percentage to Corresponding Quarter of Previous Year
21,1
20,2
17,6
10
S !
,4
0
5,9
6,1
III
IY
2007
The volume of sales of non-food goods continued to develop at higher rates than that of foodstuffs (Fig. 4). Starting with the beginning of the year prices for non-food goods went up by 8.0% and for foodstuffs - by 16.5%. The ratio of the growth rates of these indices, on one hand, indicates that the solvent demand of the population contracted and, on the other hand, reflects the formation of the pent-up demand for non-food goods.
3.1.3. Dynamics and Proportion of Gross Saving and Gross Accumulation in GDP
In 2003-2007 a favorable combination of factors of the domestic business activity and the price situation at the world market of raw materials accounted for the intensive increase in the scales of gross saving. In that period the growing incomes of the economy from the foreign economic activity obviously stimulated economic activity. It should be noted that starting with the 2nd quarter 2008 there was a strengthening of the influence of the investment component on the dynamics of the economic growth observed. The growth rates of the investments in fixed assets reached the maximum level of 121.1% in 2007 versus 113.7% in 2006 and 109.5% on average over the period of 2000-2005. However whereas in 2007 the volume of the GDP exceeded that of pre-reform 1991 by 10%, the investments in fixed assets were 1/3 below the corresponding figure. During the past seven years the proportion of gross saving was in the range from 31.1% to 38.7% of the GDP as compared with 24.0% in the pre-default 1997. In 2007 the proportion of the gross national saving made 34.0% and remained at that level in 2008. The investment demand was quick to react to the changes in export earnings and defined the characteristics features of the internal market functioning. The slow-down in the growth rates of the investments in fixed assets was accompanied by structural changes in the use of national saving throughout 2008. Although on the whole over 2008 the improvement in the characteristics of transformation of savings in investments and the increase in their share in the GDP can be noted (Table 4), the sharp decrease in the growth rates of investments, implementation of fixed assets and intensive growth of the volumes of unfinished construction in 2007-2008 had a negative impact on the nature of the economic growth by the end of 2008.
Table 4
Structure of GDP Use on Gross Saving and Accumulation in 2000-2008,
As Percentage to Total
2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP 100 100 100 100 100 100 100 100 100
Including:
Gross saving 38.7 34.2 31.1 31.9 33.1 33.8 34.2 34.0 34.0
Of which:
Gross accumulation 18.7 21.9 20.1 20.8 20.9 20.1 21.4 24.3 26.2
Gross accumulation of fixed capital 16.9 18.9 17.9 18.4 18.4 17.7 18.5 21.1 22.1
Changes in stocks of material liquid 1.8 3.1 2.1 2.4 2.5 2.3 2.9 3.2 4.1
funds
For reference:
Share of investments in GDP 15.9 16.8 16.3 16.5 16.8 16.7 17.6 20.0 20.7
Source: Federal State Statistics Service
3.1.4. Specific Features of Formation of GDP as Broken by Incomes
Dynamic growth of the incomes of the population was one of characteristic features for the development of the Russian economy in the past decade. The sustenance of the dynamics of the internal market was based on the growth of the real wages and was accompanied with the redistribution of incomes from enterprises to population. In the 4th quarter 2008 the growth rates of real wages made 102.5% and were the minimum since 2000. In 2008 the proportion of labor remuneration of employees in the GDP was somewhat below the figures of 2007. Comparative analysis of the formation of the GDP by incomes demonstrates that the proportion of the labor remuneration of the employees in the first and second quarters of 2008 roughly cor-
rd
responded to the figures of analogue periods of 2007, but in the 3 quarter the share decreased down to 42.1% (Table 5).
Table 5
Structure of GDP Formation by Incomes in 2006-2008, As Percentage to Total
2007 2008
annual quarters annual quarters
1 2 3 4 1 2 3 4
Gross domestic product 100 100 100 100 100 100 100 100 100 100
including:
labor remuneration of employees (in- 46.3 49.5 47.4 43.1 44 46.6 49.1 46.3 42.1 49.9
cluding hidden)
net taxes on production and import 18.7 19.5 19.2 18.1 19 20.4 19.7 21.0 20.5 20.1
gross profit of economy and gross 35.4 31 33.4 38.8 37 35.0 31.2 32.7 37.4 30.0
mixed incomes
Source: Federal State Statistics Service
Only 8% of the working population account for the persons that do not work for wages - these are employers hiring employees to work at their enterprises on the permanent basis and self-employed persons. Correspondingly, this defined the specific features of formation of incomes of the population and the GDP. About 70% of the incomes of the population was accounted for by the labor remuneration of the employees, the proportion of the incomes from entrepreneurial activity and property reducing.
Low efficiency of the use of production factors is one of the main reasons for the decrease of the competitive advantages of the Russian goods. The broadening of the gap between the labor productivity rates and wages for the benefit of the latter (see inset below) had a negative influence on the qualitative indices of the economic dynamics.
There sustained a high differentiation of the wages by kinds of economic activities. In the industry the degree of the differentiation in wages was defined by the increase in the gap of the labor remuneration rates between the extractive and processing branches of industry. The nominal accrues wages in minerals extraction was 1.9 times higher than the average level in the economy, and in the fossil fuels extraction was 2.3 times higher. In the processing industry the wages were 94% of the average in the economy and 43% of the figure for the extractive production. The exceeding of the average figure for the accrued wages in the economy by 2.2 and 2.1 times was observed in oil products production and transportation of fossil fuels, correspondingly. In education, health care the average wages were 65-75% of the average in the economy, in the state management and provision of military security - 119%, in financial activity - 240%. The specific feature of labor remuneration by kinds of economic activities had a substantial influence on the formation of the structure of incomes and expenditures of
the population, on the consumer demand of the population and on the distribution of the work resources in the economy.
The slow-down of the industrial growth rates defined the trend for the reduction of the average number of the industrial and production staff. According to the estimation of the Federal State Statistics Service, the number of economically active population was 75.8 million by the end of October 2008, or more than 53% of the total number of the population. Starting with July 2008 there has been a trend for the monthly growth of the unemployment observed. The total number of the unemployed in December 2008 was equal to 5.8 million of people or 7.7% of the economically active population and increased by 26.1% or by 1200 thousand of people as compared with the corresponding period of 2007.
The need for the employees claimed to the state employment services by the employers decreased by the end of 2008 as compared with the end of 2007 by 231.6 thousand of people, the number of vacancies at the end of December 2008 being 894.7 thousand of people. The tension coefficient (ratio of the unemployed citizens registered in the employment services per one vacancy) increased from 1.5 in December 2007 to 1.9 in December 2008.
Factors of Economic Growth, GDP and Added Value in the industrial Sector in 2005-2008
Below the results of the decomposition of the growth of the production index (GDP and added value) in 2005-2008, obtained in accordance with the methodology as stated in the IET work ("Factors of Economic Growth"1). The decomposition is based on the breaking the economic growth down to the extensive and intensive components, which enable estimating the quality of the growth and forecast further trends of the economic development. The presented results characterize the transformation of the structure of the economic growth enable highlighting the most important factors that define changes in the dynamics of output growth rates. The estimations are made in accordance with the differential form of the macroeco-nomic production function, which allows determining the contribution of the main factors (labor and capital) in the output growth and getting the residue that cannot be explained by the factors. This residue (usually interpreted as the TFE) includes the influence of the factors that were unaccounted for in the production function, most important of which are the fluctuations of the production efficiency and the changes in the price situation.
In concordance with the results of the decomposition (table 6) the reduction in GDP growth rates in 2008 is accounted for by the decrease in total factor efficiency against the background of negligible increase in the growth rates of the main factors.
In 2008 the influence of input of the main factors (accumulation of labor and capital taking into account the intensity of their use) on the GDP growth observed increased. Input of efficiency in GDP makes about 40% not taking into account prices for oil and after exclusion the estimation of the input of the price situation at the world markets of raw materials.
In 2008 on the whole throughout the economy the increase in the output was accounted for by the change in the volumes of the capital involved in the production by 49.4%. Despite the considerable level of deterioration of fixed assets sustained and reached 46.2% by the beginning of2008, the growth of the investments in fixed assets in recent years allowed increasing the rates of the fixed assets renewal. According to the preliminary estimations, in 2008
1 "Factory ekonomicheskogo rosta", seria Nauchnye trudy, No 70, IET, Moscow, 2003
input of this component in the dynamics of the growth made 27.8%. The intensity of the facilities utilization, in contrast, reduced, so the input in GDP growth rates defined by the change in the degree of the capital utilization, made only 21.6% in 2008, which is somewhat below the average figures for 2005-2007.
The increase in input of labor was also due to the change in "stocks", that is in the number of the employees: in 2008 the increase in the value of the index was
0.9%, which exceeds the average value of2005-2007. It should be noted that the growth of the number of the employed occurred mainly thanks to the sector of services, whereas in the sector producing goods the employment reduced. At the same time in 2008 hours of work of one employee per year increased but slightly , and the input of the change in the hours of work in GDP growth rates doe not exceed 1%.
In 2008 TFE growth rates made 2.37%, which is two times less than the level of 2007, when the corresponding figure was equal to 4.86%. Thus, on average over the period of 2005-2008 the annual reduction in TFE growth rates made 0.58per cent (in accordance with the linear trend the growth rates reduce annually by 0.38per cent)).
In 2008 the input of TFE in output growth rates decreased as well, making 42.4% as compared with 2007, when the value of the index was equal to 56.9%. The dependence on the value of the indices used for the estimation makes estimations of TFE as well dependent on the factors of the situation at the market, for instance, on prices for oil. According to the preliminary estimations, in 2008 there was an increase in the input of price component in the GDP growth rates observed, which made 66.5% despite a considerable decrease in prices for oil that started in September. At the same time the input of the intensive component of the growth became negative for the first time since 2000.
In contrast to the economy on the whole, in minerals extraction there was an increase of GAV growth rates observed in 2008 as compared with 2007. In 2005-2008 the kind of activity "minerals extraction" was the only in the industrial sector to demonstrate the reduction in GAV growth rates by 0.1 per cent (in concordance with the linear trend 0.02 per cent). In accordance with the results of decomposition input of labor in output growth rates of this kind of economic activity has been positive since 2006, which is determined by the increase in the hours of work of the employees at the extractive enterprises. The input of capital in this kind of economic activity is increasing which is mainly due to the increase in productive facilities against the background of considerable fluctuation in the intensity of their utilization.
The dynamics of GAV of the extractive sector is distressing: the extractive enterprises are the only in the industrial sector to demonstrate the negative efficiency growth rates, starting with 2005. On average over the period of2005-2008 the TEF growth rate of the extractive enterprises decreased by 0.61 per cent (by 1.52 per cent in accordance with the linear trend). At the same time in 2005-2007 there is an intensification of the trend for the decrease in the total efficiency of the main factors observed down to 12% in 2007. In 2008 the process of TEF decrease slowed down and the value of the index was 4.7%.
2 For estimation index of growth over January-November 2008 was used.
3 For calculations growth index over January-September 2008 was used. Taking into account the degree to which the crisis phenomena have spread at the labor market, the main instrument for whose adaptation to the changes in the market situation being the manipulation with the length of the hours of work, correction of 2008 decomposition taking into account the number of hours of work over the 4th quarter will result in the decrease in labor input in GDP growth rates.
Table 6
Decomposition of Annual Growth Rates of GDP and Gross Added Value of Industrial Production in 2005-20084
Including:
GDP
Input of factors
Including:
Including:
Labor
Number of employed
Hours of work*
Capital
Volume of fixed
assets**
Degree of facilities utilization***
TFE
Total throughout economy
6.40 7.70 8.10 5.60
2.29
4.48
3.49 3.23
0.02 0.37 0.40 0.46
0.22 0.21 0.33 0.41
-0.20 0.15 0.08 0.055
2.27 4.11 3.09 2.77
1.17 1.50 1.75 1.566
1.09 2.61 1.34 1.217
4.11 3.22 4.61 2.37
Minerals extraction
0.50 -3.30 -2.60 0.20
3.40 -0.22 10.13 4.94
-0.66 0.02 0.07 0.20
-0.66 -0.12 -0.08 0.088
0.14 0.14 0.13
4.06 -0.23 10.07 4.74
3.71 4.53 5.39 4.74
0.35 -4.76 4.68
-2.90 -3.08 -12.73 -4.749
Processing industries
6.00 7.30 7.80 0.90
5.17 5.71 6.02 2.46
-0.94 -0.23 0.30 -0.52
-0.94 -0.44 0.07 -0.49
0.21 0.23 -0.02
6.11 5.94 5.73 2.97
2.31 2.69 3.21 2.97
3.80 3.25 2.51
0.83 1.59 1.78 -1.56
Electricity, gas and water production and distribution
1.20 5.70 -0.70 1.20
0.67 0.87 0.11 0.18
0.30 0.41 -0.69 -0.98
0.30 0.28 -0.57 -1.39
0.13 -0.12 0.41
0.37 0.46 0.80 1.16
0.37 0.46 0.80 1.16
0.00 0.00 0.00
0.53 4.83 -0.81 1.02
* - per one employee
** - for 2005-2007 on the basis of the data for physical volumes offixed assets
*** - estimation for the change in the degree of the facilities utilization on the whole throughout the economy is based on the data of the consumed electric energy, and in industrial production - on the data of the level of utilization of average annual productive capacity of the enterprises producing definite kinds of goods
The dynamics of the TFE of the extractive sector depends on the price situation at the world markets of raw materials. It should be noted that the apportionment of the component determined by the growth of oil prices from the TFE of this kind of economic activity testifies that the technological efficiency of the sector started to decrease at higher rates since 2005. Against the background of the favorable price situation at the world market of raw materials
4 For each kind of the economic activities the decomposition of the growth for 2005 is represented in the first line, for 2006 - in the second line, for 2007 - in the third line, estimated for 2008 - in the fourth line. Deviation form the data published earlier are due to the change in the data submitted by the Federal Statistics Service.
5 Annual estimation is based on the data for January-September 2008.
6 Preliminary estimation of the growth of the physical volume of fixed assets in 2008 is based on the supposition that the coefficient of the fixed assets retirement and the share of the investments direct for their renewal being constant.
7 Preliminary estimation of the changes in the degree of facilities utilization is based on the supposition that the share of the electric energy consumed in the amount of the electric energy produced is constant. Preliminary estimation of the growth rates for the number of the employed is based on the data of the filled job vacancies in January-October 2008 on the supposition of the ratio of the employed by kinds of economic activi-
ties to the number of the vacant positions filled being constant.
9 The estimation of the TFE in industrial production in 2008 may be biased because of the on changes in the extent of the facilities utilization by the enterprises of these kinds of economic activities were not taken into account.
this indicated the worsening of technological characteristics of functioning of extractive enterprises, for instance with the implementation of fields characterized by lower efficiency, with the decrease in the quality of management in the environment of the changes in price situation. The drop of prices for oil at the end of 2008 was the cause for the decrease in the input of "price" factor in TFE of the extractive sector, and, as a consequence, the negative dynamics of the TFE "technological" component.
In 2008 the processing industries demonstrated the sharp slow-down of GAV growth rates: on average over the period 2005-2008 GAV growth rates of the sector decreased by 1.7 per cent (by 1.48 per cent in correspondence with the linear trend). In correspondence with the results of the decomposition for the whole period of2005-2008 (with the exclusion of 2007) the decrease in the number of the employed at the processing enterprises defines the negative input of labor in output growth rates in this kind of economic activity. The growth of physical volumes of fixed assets secures a steady positive input of capital stocks in output growth rates, which in combination with the increase in the intensity of productive efficiency utilization defined the dominating role of the capital input, as a factor of economic growth of processing industry in 2005-2007. In 2008 there are changes in the structure of the of the added value of this kind of economic activity: increase in output of the processing enterprises is completely defined by the changes in capital input, whereas input of labor and TFE lead to the slow-down of this growth (Fig. 5).
12 ! 10 -8 6
4 -
2 -0
-6 -8 --10 --12 -14
Electricity, gas and water production and distribution
□ TFE
S Extent of facilities utilization
■ Indices of the physical volume of fixed assets
□ Hours of work
□ Number of the employed
Note. In 2005 the break-down for the industrial production was carried out not taking into account the hours of work because of the absence of the data.
Fig. 5. Structure of Gross Added Value on the Whole Throughout Economy and in Industrial
Production in 2005-2008
As a result of 2008 it is the electricity, gas and water production and distribution that demonstrates the increase in GAV growth rates being equal to 3.1% versus 2007. It should be noted that in 2005-2006 the output growth rates of this kind of economic activity demonstrated the most successful dynamics characterized by the increase in growth rates. In 2008 against the background of the growth of the volume of fixed assets and the work hours by the employees small values of the main factors input growth rates are accounted for by the decrease in the number of the employed at the enterprises of this kind of economic activity, thus in 2008 input of the main factors in GAV growth rates of the enterprises on electricity, gas and water production and distribution does not exceed 15% and the increase in production is determined exclusively by the increase in TEF growth rates.
In the industrial sector the structure of TFE is uneven: as a continuation of the trend for the slow-down of the efficiency rates that outlined in 2005-2007, in 2008 the enterprises of the extractive and processing sector demonstrate the reduction of TFE; at the enterprises for electricity, gas and water production and distribution, in contrast, there is an increase in TFE growth rates observed, it acting as a dominating factor that defines the growth of this sector of industry.
3.1.5. Dynamics and Structure of production by Kinds of Economic Activities
There are two periods that can be distinguished in the development of the Russian economy throughout 2008 (Fig. 6). Thus, whereas in the first half of 2008 the situation was defined by the influence of the inertia factors and trends of the economic growth that had outlined in 2007-2006, starting with the second half of the year the nature of the development was more and more affected by the situation at the global financial markets and intensive decrease in the level of prices and demand at the world market of minerals, raw materials and commodities.
In 2008 the slow-down of the development rates was observed in nearly all kinds of economic activities. Macroeconomic situation was formed against the background of a sudden slow-down of the growth rates of the investments in fixed assets, workload in construction, output of industrial production, the retail trade turnover remaining at quite a high level. First, the slow-down of production rates was registered in the kinds of economic activities orientated at the export, and further it spread to processing industries, whose development had been characterized with higher growth rates in recent years.
The domestic production reacted to the reduction of the investment activity and the contraction of the internal and external demand by the decrease in the producers' prices by 20.9% in the 4th quarter as compared with the 3rd quarter 2008. Under the influence of the dramatic drop in the world prices for energy carriers and mineral products producers' prices in the sec-
rd
tor of minerals extraction reduced by 5.4% in the 3 quarter 2008 as compared with the preceding and quarter, and by 44.9% in the 4th quarter. On the whole over 2008 the decrease in prices in minerals extraction made 38.4%. In December 2008 producers' prices in fossil fuels extraction made 57.8% of the level of last December the prices growing by 1.58 times over the same period. A sharp decrease in prices was accompanied by the reduction in production's profitability and resulted in the consideration of the corporate investment programs, interruption of production and reduction in the number of employees. According to the estimation, in 2008 the growth of gross added value was 0.2% in minerals extraction, 0.9% in processing industries, 1.2% in electricity, gas and water production and distribution (Table 7).
Source: Federal State Statistics Service
Fig. 6. GDP, Investments in Fixed Assets, Retail Trade Turnover, Industrial Production Growth Rates in 2006-2008, As Percentage to Corresponding Quarter of Previous Year
Table 7
Dynamics of Physical Volumes of GDP and Gross Added Value As Broken By Kinds of Economic Activities in 2007-2008, As Percentage to Corresponding Period
of Previous Year
2007
2008
quarters
quarters
UlUlUill I II III IV UlUlUill I II III
Gross added value 108.1 107.4 108.1 107.3 109.5 105.6 108.5 107.5 106.2
including: 102.6 102.4 102.8 102.6 104.6 108.4 103.2 103.2 106.3
agriculture, hunting and
forestry
fishing and fish- 100.6 104.6 87.7 104.8 115.5 96.8 100.0 120.2 87.7
breeding
minerals extraction 97.4 102.4 97.4 98.7 103.0 100.2 101.5 99.0 99.6
processing industries 107.8 108.5 107.4 106.8 107.2 100.9 107.6 105.6 104.9
electricity, gas and wa- 99.3 90.1 99.6 101.4 103.4 101.2 105.3 101.7 104.0
ter production and dis-
tribution
construction 109.3 128.1 119.6 111.4 113.0 113.2 128.3 118.7 109.3
wholesale and retail 113.7 111.1 113.2 113.2 114.0 108.4 111.9 111.7 108.4
trade
hotels and restaurants 114.9 112.7 112.1 109.8 113.7 109.9 111.7 108.8 109.3
transportation and com- 103.4 108.7 108.4 107.1 106.6 106.9 109.8 109.4 106.5
munication
2007 2008
annual quarters annual quarters
I II III IV I II III
financial activity 112.5 111.1 111.5 111.4 111.8 106.6 109.7 109.7 107.9
operations with real 120.2 107.0 108.5 111.3 113.3 110.3 109.1 108.1 109.7
estate
state management, provi- 103.9 107.8 108.2 107.1 107.8 103.5 103.7 102.9 103.2
sion of military security,
compulsory social guaran-
tees
education 101.2 100.9 101.0 101.0 101.2 100.7 100.2 101.0 100.2
health care and social 102.7 103.3 103.1 102.3 102.6 100.5 101.1 100.7 101.6
services rendering
rendering of other utili- 107.4 110.6 111.4 111.2 107.9 103.8 105.9 106.5 103.1
ties, social and personal
services
Source: Federal State Statistics Service
On the whole over 2008 the growth rates of the industrial production remained in the field of positive values, being 100.2% in minerals extraction, 103.2% in processing industries, 101.4% in electricity, gas and water production and distribution (Fig. 7).
-10
□ Industry I Minerals extraction I Processing industries ^ Electricity, gas and w ater production and distribution
Source: Federal State Statistics Service
Fig. 7. Change in Production Growth Rates as Broken By Kinds of Economic Activities in 2007-2008, As Percentage to Corresponding Quarter of Previous Year
Extractive industries
It should be noted that the trend for the slow-down of the growth rates of the fossil fuels extraction lasting for a long time, even taking into account the extremely favorable situation at the world market, the results of the first half of 2008 demonstrated the stagnation of the output. Prices at the world market of hydrocarbons changing, since August 2008 there was a sharp drop in fossil fuels extraction rates observed in terms of both the value and physical volumes. Starting with autumn 2008 the situation in the extractive sector was aggravated by the contraction of the demand and the decrease in prices for raw materials for metallurgy and for its production at the world market, intensified contraction of the internal market under the influence of the drop of production in machine-building and construction complexes. The slow-down of growth rates has been observed since the second half of 2007, but, the investment activity remaining high, external economic situation being favorable, this did not cause serious grounds for negative forecasts.
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 as well as an objective worsening of conditions for oil and gas production, decrease in its production at "old" oil fields and the higher costs connected with the development of new ones, especially in the undeveloped regions lacking infrastructure had a determining influence on the position of the oil and gas sector in the Russian economy in 2008.
World prices in 2008 were at an exceptionally high level, exceeding USD 100 per barrel (table 8). In July 2008 average monthly prices for oil reached unprecedented maximum in both nominal and real terms. The main factors contributing in the growth of prices were increased demand for oil due to high world economy growth rates, in particular the economies of China, India and other Asian countries, conservative politics of OPEC concerning the increase in oil production by member countries, as well as low growth of oil production in the countries that are not OPEC members. The decrease in growth rates of oil production in Russia and the reduction of oil production in the oil fields of the North Sea has also had a considerable influence on the dynamics of oil production in recent years. Another serious factor contributing in the increase of oil process at the world market was the inflow of speculative capital at the trade exchanges. In September-December 2008 the slow-down of the economy growth, reduction of demand for oil in the developed countries and outflow of capital from he trade exchanges resulted in a considerable drop in the world prices for oil. According to the data of the OECD International energy agency, in the 4th quarter 2008 the reduction of the demand for oil in OECD countries reached 5.2% versus the corresponding period of the previous year (table 9).
Despite a considerable decrease in price over the last months of the year the average price for oil in 2008 (USD 97 per barrel for oil grade Brent) is exceptionally high not only for the period of the post-reform development of the Russian economy,bit also from the point of view of historic retrospective. The level of world prices for oil that can be compared with the present has only been observed in 1979-1980 since 1900, when the average annual price for oil grade Brent in real terms was equal to USD 90.7-93.1 per barrel (in prices of 2007), the prices in nominal terms being USD 31.6-36.8 per barrel. For reference it could be noted that in 1998 average annual price for oil grade Brent was USD 16.7 per barrel. In real terms in
2007 prices (USD 12.7 per barrel in nominal terms), and the average price for 1990-ies was USD 25.9 per barrel.
Table 8
World Prices for Oil in Nominal Terms in 2000-2008, as USD per barrel
2000 2001 2002 2003 2004 2005
Price for oil grade Brent, 28.5 24.4 25.0 28.8 38.2 54.4
Great Britain
Price for oil Urals, Russia 26.6 23.0 23.7 27.0 34.5 50.8
Price for oil basket of OPEC 27.6 23.1 24.3 28.1 36.1 50.6
member countries
Table 8 (continuation)
2006 2007 2008 1 quarter 2008 2 quarter 2008 3 quarter 2008 4 quarter 2008
Price for oil grade Brent, 65.2 72.5 96.9 121.4 114.8 54.9 97.0
Great Britain
Price for oil Urals, Russia 61.2 69.4 93.3 117.5 113.2 54.1 94.5
Price for oil basket of OPEC 61.1 69.1 92.7 117.6 113.5 52.5 94.1
member countries
Source: OECD International Energy Agency, OPEC.
Table 9
World Demand for Oil in 2008, as percentage to the corresponding period
of the previous tear
2008 2008 2008 2008 2008
1 quarter 2 quarter 3 quarter 4 quarter
Over the world, total 0,8 0,7 -0,6 -2,5 -0,4
OECD countries -1,7 -2,0 -4,6 -5,2 -3,4
including: Northern America -3,3 -3,5 -7,1 -5,2 -4,8
Europe 0,1 -0,2 -0,1 -2,9 -0,8
Asia-Pacific region -0,5 -0,7 -5,0 -9,2 -3,9
non-OECD countries 4,2 4,3 4,6 1,0 3,5
including: China 7,1 2,9 7,2 0,1 4,3
Source: OECD International Energy Agency.
Monthly dynamics of world prices for oil in 2008 was characterized by an unsteady growth till July 2008, when the maximum level of oil prices was reached and the following sharp decrease starting with August 2008. By the end of the year the price for Russian oil at the world market lowered to USD 39.9 per barrel, that is it dropped by more than two thirds as compared with the level of July. The data on the monthly dynamics of the world prices for oil in 2008 are presented in Table 10 and Fig. 8.
Table 10
World Prices for Oil in Nominal Terms in 2008, as USD per barrel
2008 2008 2008 2008 2008 2008
January February March April May June
Price for oil grade Brent, 92.0 95.0 103.7 109.0 122.7 132.4
Great Britain
Price for oil Urals, Russia 89.4 91.4 99.2 105.7 118.8 128.1
Table 10 (continuation)
2008 2008 2008 2008 2008 2008
July August September October November December
Price for oil grade Brent, 133.2 113.0 98.1 71.9 52.5 40.4
Great Britain
Price for oil Urals, Russia 130.1 111.9 97.5 70.8 51.5 39.9
Source: OECD International Energy Agency, OPEC.
In the environment of the sharp decrease in the world prices for oil the OPEC has adopted a number of resolutions on reduction of oil production by member countries in order to support prices for oil. In September 2008 the OPEC decided to adhere to the quota of September 2007 corrected taking into account the joining of Angola and Ecuador to the cartel but not including Iraq and Indonesia10, which decreased the volume of oil production by the member countries by 520 thousand of barrels as compared with July 2008. In October 2008 the OPEC adopted the resolution on reduction of the production by 1.5 million of barrels a day on the level of September 2008 starting with 1 November 2008. In December 2008 the decision on the reduction of oil production by 4.2 million of barrel per day as on the level of September starting with January, 1 2009.
These decisions did not, however, have any visible effect on the market. This is due to both the incomplete fulfillment of the liabilities taken by the OPEC member countries and the
10 Indonesia became netto exported of oil in 2008 and declared its withdrawal from OPEC. From 2009 Indonesia
is not a member of OPEC.
decrease in demand for oil in the developed countries in the environment of the started recession.
The increase in oil production in Russia of the first half of 2000-s (Table 11) was connected with the expansion of the opportunities for its export, in particular in connection with the creation of Baltic pipeline system and the use of railway transportation, intensification of exploitation of oil fields currently in operation and the broadening of investment opportunities for oil producing countries as a result of the growth of the world priced for oil. In recent years the oil production growth rates in Russia have decreased considerably. Whereas in 2004-2006 increase in oil production made 9-11% a year, in 2006-2007 the annual increase was equal only to 2.1%, and in 2008 there was a decrease in oil production observed for the first time (Table 12). This indicates the exhaustion of reserves for oil production at the expense of intensification of the exploitation of the oil fields in operation and testifies the necessity to develop new oil fields more actively.
Oil processing has been growing at higher rates than oil production in recent years, which was accounted for by the fast growth of oil products export. In 2005-2008 the growth rates of primary oil processing made 3.2-6.2%, oil production growing at the rate of 2.1-2.2% in 2005-2008 and decreasing by 0.7% in 2008. As a result the proportion of oil processing in its production has increased from 42.5% in 2004 to 48.4% in 2008, which is nevertheless below the level of 2000-2001, when more than a half of the oil produced was directed for processing.
At the same time the extent of oil processing has increased but little and was equal to only 72% in 2008, whereas in the leading industrial countries it reaches 90-95%. The efficiency of oil processing and quality of the oil products made in Russia remain substantially below the world level.
Table 11
Production and Processing of Oil and Production of Gas in Russian Federation in 2000-2008
2000 2001 2002 2003 2004 2005 2006 2007 2008
Oil production, gas condensate included, as million of tons 323.2 348.1 379.6 421.4 458.8 470.0 480.5 491.3 488.5
Primary oil processing, as million of tons 173 179 185 190 195 208 220 229.0 236.3
Proportion of oil processing in its production, as percentage 53.5 51.4 48.7 45.1 42.5 44.3 45.8 46.6 48.4
Extent of crude oil. processing, as percentage 71 71 70 70 71 71.6 71.9 71.7 72.0
Natural gas production, as 584.2 581.5 594.5 620.3 634.0 636.0 656.2 654.1 664.9
billion of cu m
Source: Federal State Statistics Service, Ministry for Power Industry of the Russian Federation
In 2002-2008 the natural gas production was characterized by slow growthwith the exception of 2007 when the decrease in its production was observed (0f 0.8% as compared with 2006). The main reason for the reduction in gas production in 2007 was the decrease in the external demand for it, and, correspondingly, its export under the influence of warm winters as well as the increase in prices for gas supplied in CIS countries.
Table 12
Oil, Oil Products and Natural Gas Production in 2002-2008, as percentage
on the previous year
2000 2001 2002 2003 2004 2005 2006 2007 2008
Oil, gas condensate in- 106.0 107.7 109.0 111.0 108.9 102.2 102.1 102.1 99.3
cluded
Primary oil processing 102.7 103.2 103.3 102.7 102.6 106.2 105.7 103.8 103.2
Car petrol 103.6 100.6 104.9 101.2 103.8 104.8 107.4 102.1 101.8
Diesel oil 104.9 102.0 104.7 102.0 102.7 108.5 107.0 103.4 104.1
Furnace oil 98.3 104.2 107.1 100.3 97.8 105.8 104.5 105.2 101.9
Natural gas 98.5 99.2 101.9 103.4 101.6 100.5 102.4 99.2 101.7
Source: Federal State Statistics Service
In 2008 the biggest amount of oil was produced by oil companies Rosneft, LUKOIL, TNK-BP, Surgutneftegas and Gazprom. The share of these 5 companies is 77.4% of the total oil production in the country. The share of the medium-scale companies (Tatneft, Slavneft, Russneft, Bashneft) accounted for 14.7% of the total oil production. Production share agreement operators produced 2.5% of the Russian oil in 2008. The share of other producers, to which more than 100 small scale oil producing enterprises belong, was only 4.9% of oil production in the country (Table 13)
Table 13
Oil Production By Different Oil Companies in 2006-2008
Oil produc- Share in the Oil produc- Share in the Oil produc- Share in the
tion in 2006, total produc- tion in 2007, total produc- tion in 2008, total produc-
mln of tons tion,% mln of tons tion,% mln of tons tion,%
Russia - total 480.5 100.0 491.3 100.0 488.5 100.0
Rosneft 81.7 17.0 110.7 22.5 113.8 23.3
LUKOIL 90.4 18.8 91.4 18.6 90.2 18.5
TNK-BP 72.4 15.1 69.4 14.1 68.8 14.1
Surgutneftegas 65.6 13.7 64.5 13.1 61.7 12.6
Gazprom+Gazpromneft 46.1 9.6 45.8 9.3 43.4 8.9
Of which:
Gazprom 13.4 2.8 13.2 2.7 12.7 2.6
Gazpromneft 32.7 6.8 32.6 6.6 30.7 6.3
Tatneft 25.4 5.3 25.7 5.2 26.1 5.3
Slav-neft 23.3 4.8 20.9 4.3 19.6 4.0
YUKOS 21.5 4.5 - - - -
RussNeft 14.8 3.1 14.2 2.9 14.2 2.9
Bashneft 11.7 2.4 11.6 2.4 11.7 2.4
NOVATEC 2.6 0.5 2.6 0.5 2.7 0.6
Operators of production share
agreements 5.1 1.1 13.8 2.8 12.0 2.5
Other producers 19.9 4.1 20.7 4.2 24.1 4.9
State-owned companies - total:
Rosneft+Gazprom+Gazpromneft 127.8 26.6 156.5 31.9 157.2 32.2
Source: Ministry for Industry and Power, author's calculations.
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 oil company Rosneft purchased Yuganskneftegas, the main oil producing enterprise of YUKOS, in 2005 Gazprom purchased oil company Sibneft. In 2006 Gazprom 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 federal property) in all-Russian oil production reached 32.2% in 2008. Taking into account companies controlled by the subjects of the Federation (Tatneft, Bashneft), the share of the state companies in oil production made 39.9%. For reference it could be noted that in 2003 the share of Rosneft and Gazprom in all-Russian oil production accounted for only 7.2%, and the total share of state companies, raking into account Tatneft and Bashneft, made 16.1%.
Gazprom, whose share in all-Russian production was equal to 83.2% in 2008, commands as usual the gas production (Table 14). The share of the oil companies in gas production remains quite low (8.2%). At the same time the share of NOVATEK company, production share agreement operators and other producers in gas production has increased.
Table 14
Gas Production By Various Producers in 2007-2008
Gas production in Share in the total Gas production in Share in the total
2007, production, 2008, production,
bln of cu m % bln of cu m %
Russia - total 654.1 100.0 664.9 100.0
Gazprom+Gazpromneft 551.9 84.4 553.1 83.2
Of which: Gazprom 550.1 84.1 550.9 82.9
Oil companies 56.9 8.7 54.8 8.2
NOVATEC 28.5 4.4 30.8 4.6
Operators of production share agreement 6.7 1.0 8.5 1.3
Other producers 10.1 1.5 17.6 2.6
State-owned companies - total: Rosneft+Gazprom+Gazpromneft 568.9 87.0 566.1 85.1
Source: Ministry for Industry and Power, author's calculations.
Data on oil production by oil companies demonstrate that increase in oil production in Russia even in 2007 was mainly due to a considerable growth of oil production by projects of production share agreement operators and primarily by the project Sakhalin-1. Not taking into account production share agreements projects the increase in oil production in Russia was equal only to 0.4% in 2007. In 2008 the production of oil demonstrated the negative dynamics: as compared with the previous year it reduced by 0.6%.
Decrease in oil production growth rates is primarily accounted for by the objective worsening of the conditions for its production. A considerable part of the oil fields currently in operation is at the stage of the decreasing production and new oil fields in most cases are characterized by worse mining and geological conditions, their development requiring higher capital, exploitation and transportation costs. At the same time the existing taxation system does not provide necessary decrease in the taxation load when developing new fields with higher costs, which limits the investments in new projects. As a result the investments made do not provide the increase in oil production that would compensate the decrease in its production at "old" oil fields.
The government expansion in the oil sector has obviously somewhat influenced the dynamics of the investments in recent years as well, contributing in the growth of apprehensions on further uptake of the private business and, as a result, the lowering of stimuli for long-term investments at oil companies. At the same time the state companies are limited in their investments amounts by the necessity to make huge repayments for credits attracted by them to purchase new assets.
It can be supposed that the instability of property relations having affected negatively the dynamics of investments in the branch was one of the factor for the decrease in oil production observed in the country (Fig. 9).
Fig. 9. Oil Production in Russia in 1986-2008, as million of tons
Against the background of production decrease in 2008, for the first time over the recent years there has occurred a reduction in physical volumes of oil export (Tables 15 and 16). Net oil and oil products export was equal to 358.1 million of tons in 2008 and decreased by 2.5% as compared with the previous year. The share of the net oil and oil products export in oil production was 73.3%. Net oil export in 2008 made 49.3% of its production. In 2008 the share of export in furnace fuel production was 83.0%, in diesel fuel production - 54.2%, in car petrol production - 12.5% (for reference: in 1999 the share of export in car petrol production was 7.2% in 1999, 18.5% in 2005, 18.3% in 2006, 17.1% in 2007).
In 2008 there was an increase in oil products import observed, though the share of import in the covering of the internal demand remained low. Thus, in 2008 the share of import in petrol resources was 0.7% (for reference: the share of import in petrol resources was 8.7% in the first half of 1998, 0.02-0.04% in 2005-2007). The same figure for diesel fuel and furnace fuel was 0.4-0.5%.
Table 15
Oil, Oil Products and Natural Gas Export from Russia in 2002-2008, As Percentage on the Previous Year
2002 2003 2004 2005 2006 2007 2008
Oil, total 113.9 117.8 115.0 98.4 98.0 104.0 94.0
including:
to non-CIS countries 109.9 118.9 116.3 99.1 98.0 104.8 92.6
to CIS countries 137.3 112.4 108.3 94.9 98.0 99.4 102.6
Oil products, total 118.5 103.6 105.5 117.9 106.3 108.0 105.0
including:
to non-CIS countries 119.1 102.6 104.9 119.1 104.5 107.6 102.0
to CIS countries 102.8 132.3 117.9 94.6 148.8 115.3 152.2
Gas, total 102.4 102.0 105.5 103.7 97.6 94.6 101.8
Source: Federal State Statistics Service
In the gas sector production was mainly orientated to the internal market. At the same time in 2008 some increase in gas export was observed (by 1.8% after is decrease by 5.4% in 2007). The proportion of the net export in gas production in 2008 made 28.3% (Table 16).
Table 16
Ratio of Energy Supplies Production, Consumption and Export in
2000-2008
2000 2001 2002 2003 2004 2005 2006 2007 2008
Oil, mln tons
Production 323.2 348.1 379.6 421.4 458.8 470.0 480.5 491.3 488.5
Export, total 144.5 159.7 187.5 223.5 257.4 252.5 248.4 258.4 243.1
Export to non-CIS countries 127.6 137.1 154.8 186.4 217.3 214.4 211.2 221.3 204.9
Export to CIS countries 16.9 22.7 32.7 37.1 40.1 38.0 37.3 37.1 38.2
Net export 138.7 154.7 181.3 213.4 253.2 250.1 246.1 255.7 240.6
Domestic consumption 123.0 122.9 123.5 129.8 124.2 123.1 131.2 124.1 130.4
Net export, as percentage to the 42.9 44.4 47.8 50.6 55.2 53.2 51.2 52.0 49.3
production
Oil products, mln tons
Export, total 61.9 70.8 75.0 78.4 82.1 97.0 103.5 111.8 117.9
Export to non-CIS countries 58.4 68.3 72.5 74.9 78.0 93.1 97.7 105.1 107.6
Export to CIS countries 3.5 2.5 2.6 3.5 4.1 3.9 5.8 6.7 10.3
Net export 61.5 70.5 74.8 78.2 81.4 96.8 103.2 111.5 117.5
Oil and oil products, mln tons
Oil and oil products net export 200.2 225.2 256.1 291.6 334.6 346.9 349.3 367.2 358.1
Oil and oil products net export, as 61.9 64.7 67.5 69.2 72.9 73.8 72.7 74.7 73.3
percentage of oil production
Natural gas, bln. cu. m
Production 584.2 581.5 594.5 620.3 634.0 636.0 656.2 654.1 664.9
Export, total 193.8 180.9 185.5 189.3 200.4 207.3 202.8 191.9 195.4
Export to non-CIS countries 133.8 131.9 134.2 142.0 145.3 159.8 161.8 154.4 158.4
Export to CIS countries 60.0 48.9 51.3 47.3 55.1 47.5 41.0 37.5 37.0
Net export 189.7 176.8 178.3 180.5 193.5 199.6 195.3 184.5 187.9
Domestic consumption 394.5 404.7 416.2 439.8 440.5 436.4 460.9 469.6 477.0
Net export, as percentage to the 32.5 30.4 30.0 29.1 30.5 31.4 29.8 28.2 28.3
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 67.2% 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 (84.3% of oil, 91.3% of oil products and 81.1% of gas) was exported beyond CIS countries.
As it is demonstrated by the analysis of the Russian oil export dynamics over the long period of time the increase of oil products share in oil export has been observed, growing from 18.2% in 1990 to 32.8% in 2008 (Table 17). In the environment of the sharp reduction of domestic oil consumption (according to our calculations it has decreased from 269.9 million tons in 1990 to 130.4 million tons in 2008, 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 73.3%.
Table 17
Net Export of Oil Products in 2002-2008
2002 2003 2004 2005 2006 2007 2008
Oil products net export, mln tons 74.8 The share of oil products in net 29.2 export of oil and oil products, as percentage 78.2 26.8 81.4 24.3 96.8 27.9 103.2 29.5 111.5 30.4 117.5 32.8
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. In recent years in the environment of fast economic growth the volumes of internal consumption of oil have been quite stable in the country, which gives evidence for the decrease in the oil capacity of the GDP in Russia.
Increase in world prices for oil determined considerable incomes growth in the oil sector of the economy (Fig. 10 and 11). In 2008 total earnings from oil and main kinds of oil products export (car petrol, diesel oil and furnace fuel oil) reached USD 228.9 billion., which exceeds the earnings from oil and oil products export in 2007 by 38.8% and is a record level over the whole post-reform period (Table 18). 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 billion.
Table 18
Oil and Oil Products Export Earnings in 2000-2007, USD bln
2000 2001 2002 2003 2004 2005 2006 2007 2008
Oil and main kinds of oil products export earnings 34.9 33.4 38.7 51.1 74.6 112.4 140.0 164.9 228.9
Source: calculated on the basis of the Federal State Statistics Service data
In 2008 the physical volumes of oil export decreasing by 6.0% as compare4d with the previous year, the export in value terms increased by 32.6% due to the growth of world prices for oil. As to the gas export in 2008, its value volume increased by 54.1% as compared with the previous year.
At the same time as a result of the drop of oil prices in the forth quarter of 2008 there was a considerable reduction in oil export earnings observed (Table 19).
Table 19
Oil and Oil Products Export Earnings in 2008, as USD billion
2008 2008 2008 2008
1 quarter 2 quarter 3 quarter 4 quarter
Earnings from the export of oil and main kinds of oil products 53.2 64.4 68.9 42.4
Source: calculated on the basis of Federal State Statistics Service
Under the influence of the increase in world prices for oil and gas the share of power and energy commodities in Russian export in 2008 reached 68.6%, of which crude oil accounted for 34.4% and natural gas - for 14.8%. (Table 20).
Table 20
Value and Share of Fuel and Power Commodities in 2005-2008
2005 2006 2007 2008
USD bln %* USD bln %* USD bln %* USD bln %*
Fuel and Power commodities, 154.7 64.1 196.9 65.4 225.6 64.0 321.1 68.6
total
of which: 83.8 34.7 102.3 34.0 121.4 34.4 161.2 34.4
oil
natural gas 31.4 13.0 43.9 14.6 44.8 12.7 69.1 14.8
* as percentage to the total volume of Russian export Source: Federal State Statistics Service
Source: calculated on the basis of the data by Federal State Statistics Service
Fig. 10. Average Prices for Oil and Furnace Oil (Mazut) Export in 2000-2008,
as USD per ton
Under the influence of world prices for oil during the biggest part of 2008 there was a considerable growth of prices observed at the internal market (Table 21, Fig. 12 and 13). In summer 2008 the producers' prices for oil, car petrol, diesel fuel and furnace fuel reached the figures that were the maximum for the whole post-reform period. In July 2008 the average internal prices for oil (producers' prices) reached USD 410.2 per ton, and the average price for car petrol - USD 810.3 per ton. Internal prices for natural gas have also increased. The gas producers' prices reached USD 20 per 1 thou. cu. m in June 2008. 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 97.4 per 1 thou. cu. m. In September-December 2008 under the influence of decrease in oil prices at the world market and the decrease in ruble exchange rate there has been observed a decrease in the internal prices for oil and oil products (producers' prices) in dollar terms.
100 95 90 85 + 80 75 70 + 65 60 -55 -50 45 + 40 35 30 + 25 20 15 10 5 + 0
26000 24000
/liNion of tons (left-hand axs) /liNion of USD (right-hand axs)
Source: calculated on the basis of the data by Federal State Statistics Service
Fig. 11. Oil and Oil products Export in Natural and Value Terms in 2000-2008,
million of tons, USD million
Table 21
Internal Prices for Oil, Oil Products and Natural Gas in Dollar Terms in 2000-2008 (average producers' prices as USD per ton)
2000 2001 2002 2003 2004 2005
December December December December December December
Oil 54.9 49.9 60.7 70.1 123.5 167.2
Car petrol 199.3 151.5 168.8 236.9 333.1 318.2
Diesel fuel 185.0 158.5 153.8 214.3 364.3 417.0
Furnace fuel 79.7 47.1 66.1 66.0 69.4 142.7
Gas, USD/1 thousand cu m 3.1 4.8 5.9 4.4 10.5 11.5
Table 21 (continuation)
2006 2007 2007 2008 2008 2008
December June December June July December
Oil 168.4 230.3 288.2 360.4 410.2 114.9
Car petrol 416.5 491.7 581.2 763.6 810.3 305.1
Diesel fuel 426.1 442.0 692.5 850.7 902.8 346.5
Furnace fuel 148.8 181.6 276.5 337.2 392.8 125.0
Gas, USD/1 thousand cu m 14.4 15.6 17.6 20.0 23.8 18.1
Source: calculated on the basis of the data of the Federal State Statistics Service
Internal prices for oil and gas in Russia still remain considerably below the world prices. The gap between world and internal prices is accounted for by the presence of export duty rate and additional transportation costs for export. The price for oil at independent internal market (segment of market at which the oil is sold not at transfer prices) in recent years is practically formed on the basis of its world price deduced by the export duty rate and expenditures for export. Internal prices for gas are still regulated by the state and established by the government.
In forthcoming years a gradual increase in internal prices for gas up to the level securing the equal profitability of its sales at the internal and external market is envisaged. The gap between the world and internal prices for gas in this case will reduce, but the internal prices will remain below the world ones (by the value of export duty rate and transportation costs).
Source: calculated on the basis of Federal State Statistics Service data
Fig. 12. Average Producers' Prices for Oil and Gas as USD in 1996-2008, as USD per ton, USD per thousand of cu m
In 2008 a number of serious decisions concerning the improvement of the taxation of the oil sector of the economy was adopted. System of oil industry taxation, which was introduced in 2002, is based on severance tax, which is levied on flat specific rate (Table 22) and did not take into account existing differences in oil production conditions because of mining and geological characteristics of oil field, their location, as well as the stage of exploitation. As a result, oil production economy at oil fields with higher costs has been worsening, selective choice of the most effective reserves and pre-term cessation of exhausted fields has been encouraged. At the same time putting new fields with higher costs in operation, especially in
the undeveloped regions with undeveloped or lacking infrastructure has been becoming more complicated.
CDCDCDI— I— COCOCOO)0)OOT— T— T— CNCNCOCOCO^T^TlOlOCDCDCDI— I— COCOCO 0)0)0)0)0)0)0)0)0)0)0000000000000000000000 T- CD T- O) CM h- CM ID O CO CO T- CD T- O) CM h- CM ID O CO CO T- CD T- O) CM h- CM OOT-OOOOT-OT-OOOOT-OOOOT-OT-OOOOT-OOOOT-
Source: calculated on the basis of Federal State Statistics Service data
Fig. 13. Average Producers' Prices for Car Petrol and Furnace Oil (Mazut) As USd in 196-2008, as USD per ton
Table 22
Severance Rate for Oil Production in 2002-2008
2002 2003 2004 2005 2006 2007 2008
Severance base rate, RUR per ton Coefficient, characterizing the oil world prices dynamics (Cp) 340 340 (P-8)xR/252 347 419 419 419 (P-9)xR/261 419
Key: P is the average price level for oil grade Urals in USD per barrel over the taxation period; R is the average over the taxation period value of USD to RUR rate exchange, which is fixed by the Central Bank of the Russian Federation
Source: tax Code of the Russian Federation, Federal Law No 151-FZ from July 27, 2006, Federal Law No. 33-FZ from May 7, 2004, Federal Law No. 126-FZ from August 8, 2001.
Imperfections of severance tax flat rate provoked the search of variants for differentiation of tax rate, taking into account real mining and geological, geographical differences in oil production conditions. In 2007 the system of oil production taxation was supplemented with new elements:
1. Step-down coefficient Ce to severance tax rate has been introduced for oil fields with exhaust of reserves of more than 80%. This coefficient is calculated according to some gen-
eral formula and lies in the range from 1 (level of exhaust is 0.8) to 0.3 (level of exhaust is 1 or more).
2. Tax vacations from severance tax are introduced for oil fields in East-Siberian oil and gas province in the Republic Sakha (Yakutia), Irkutsk oblast, Krasnoyarsk krai. The oil fields situated in the regions will be subject to zero severance tax rates till 25 mln tons of accumulated oil production volume on the subsoil area is achieved or when period of exploitation is less than 10 years, or for 10 years for the license to use subsoil with the aim of exploration and for 15 years in case of the license for simultaneous geological exploration and oil production from the moment of the state registration of the license.
The severance zero rate for the period before reaching of 25 million tons of accumulated oil production volume on the subsoil area or the period of exploitation of less than 10 years, calculated from 1 January 2007, is also applied to all oil fields of these region in the process of development, if the extent of exhaust does not exceed 0.05.
3. Zero severance tax rate is established for superviscous oil fields.
These amendments adopted are aimed at the stimulation of the development of exhausted and new oil fields. Severance rate differentiation with regard to reserves exhaust enables to prolong exhausted fields development periods and increase oil extraction extent. The extension of exhausted fields exploitation provides extra inpayments of severance (collected with the lowered rate) as well as other taxes (profit tax, export duties etc.). Severance rate reduction for new oil fields makes it possible to stimulate the development of East Siberia oil and gas province, create the basis for future income of the state budget.
At the same time passed amendments envisage that severance preferences for new and exhausted oil fields can only be received when applying a direct method of oil production quantity control at the subsoil area. As applied to exhausted oil fields, this regulation limits substantially the sphere of tax remissions application, for the majority of exhausted oil fields (licensed lots) have not got a direct control of oil production quantity. As a result, application of this privilege is rather limited, that is the task of stimulation and prolongation of exhausted fields exploitation is solved only partially and in limited scope.
The changes made did not solve also the task to stimulate by taxation new oil fields with higher costs development that are not a part of East-Siberian oil and gas province, that is located in other regions and on continental shelf. Higher capital, exploitation and transport costs lead to inefficiency of fulfillment of these oil fields development projects under general tax regime.
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. Start of such oil fields development is connected with higher costs, especially in the undeveloped regions with undeveloped or lacking infrastructure and requires improvement of the existing system of oil sector taxation, pursuing of special tax policy, which provides necessary incentives for investments in oil production.
In 2008 the amendments to the Tax Code of the Russian Federation aimed at the reduction of tax burden on oil sector of the economy, stimulation of new and exhausted oil fields development in undeveloped regions and on the continental shelf were elaborated and adopted. The amendments come into effect on 1 January 2009. The most important among them influencing the economy of oil production are the following:
1. In the formula used for calculation of Cp coefficient, which characterizes the world oil prices dynamics and applied to the severance tax basic rate, the price minimum not levied with the tax was increased from USD 9 to USD 15 per barrel, the formula now being:
Cp = (P - 15) x R / 261 ,
where P is average level of oil grade Urals price in USD per barrel, R - average exchange rate of Us dollar against ruble, established by the Central Bank of the Russian Federation.
As it is demonstrated by calculations, change in Cp calculation formula inflation will lead to considerable decrease in the applied rate of severance tax on oil production. Owing to these factors, under forecast conditions for 2009 the severance tax rate in real terms will decrease by more than 25% as on 2007.
Such a decrease in severance tax rate will reduce tax burden on oil sector, allow oil companies to have additional financial resources to use, increase profitability of investments into development of new oil fields, will stimulate deeper exploitation of exhausted oil fields.
2. The requirement for application a direct method of oil production quantity control at the subsoil area for the established severance tax privileges to be used at oil fields with high level of exhaustion and at oil fields in East-Siberian oil and gas province (in the territory of the Republic Sakha (Yakutia), Irkutsk oblast and Krasnoyarsk krai) is abolished.
The opportunities to apply the established privileges for severance tax and primarily the deflation coefficient to severance rates at exhausted fields were substantially limited by the requirement for the application of a direct control of oil production quantity. Since taking technical steps to secure direct control over oil production at such oil fields is economically ineffective in the majority of cases, this prevented using the severance privilege, established for them, which led to pre-term cessation of their exploitation and loss of oil in subsoil areas.
Application of severance tax privileges on the basis of the system of oil production control currently in use at some subsoil plots will allow application of privileges at all exhausted oil fields, which will secure the prolongation of the period of their exploitation, additional oil production and extra tax earnings.
This will also allow application of severance tax privilege (tax vacations) at new small oil fields of East-Siberian oil and gas province and other privileged regions. The organization of the direct method for oil production at such oil fields is economically ineffective and they will remain undeveloped unless there is a severance privilege.
At the same time it should be noted that upon application of the existing system for the control over the quantity of oil produced the oil producing companies get some incentive for manipulating when distributing the volumes of oil produced among the separate licensed plots. Therefore the government has to secure necessary control over the reliability of such accounts.
3. For oil fields on the continental shelf of the Russian Federation, situated to the north of the Arctic circle zero severance tax rate is established up to achievement of oil production of 35 million of tons or for the period of 10 years for licenses for subsoil exploitation for exploration or for 15 years for licenses for subsoil exploitation to simultaneous exploration and minerals extraction from the date of government registration of the corresponding license. For subsoil plots situated in these areas licenses for which are given before 1 January 2009 and the level of whose exhaust does not exceed 0.05 zero severance tax rate is in effect till 35 million tons of oil production is reached or during 10 years, starting with 1 January 2009.
4. For oil fields situated in Azov and Caspian seas zero severance tax rate is established for the period until accumulated volume of oil production of 10 million tons is reached at a subsoil plot or for 7 or 12 years from the date of government registration of the license depending on the kind of license for subsoil exploitation. For subsoil plots situated in these areas licenses for which are given before 1 January 2009 and the level of whose exhaust does not exceed 0.05 zero severance tax rate is in effect till 10 million tons of accumulated volume of oil production is reached or during 7 years, starting with 1 January 2009.
5. For oil fields situated in the territory of Nenets autonomous okrug (the north of Ti-mano-Pechor oil and gas province) and on the Yamal peninsula in Yamalo-Nenets autonomous okrug zero severance tax rate is established for the period until accumulated volume of oil production of 15 million tons is reached at a subsoil plot or for 7 or 12 years from the date of government registration of the license depending on the kind of license for subsoil exploitation. For subsoil plots situated in these areas licenses for which are given before 1 January 2009 and the level of whose exhaust does not exceed 0.05 zero severance tax rate is in effect till 15 million tons of accumulated volume of oil production is reached or during 7 years, starting with 1 January 2009.
The measures enumerated will stimulate deeper development of the exploited oil reservoirs and start of development of new oil fields.
Processing industry
Throughout three quarters of 2008 the growth of the industrial production was of inertia nature and over January-September the increase in production volumes of processing industries made 107.7%, extractive industry growing by 0.5% and electricity, gas and water production and distribution - by 4.3%.
The situation changed radically in November 2008, when the negative dynamics for nearly all microindices had been registered for the first time for last three years. In the 4th quarter the reduction in the output of processing industries reached 7.7%, electricity, gas and water production and distribution - 5.4%, minerals extraction - 1%.
The potential of the idle facilities having been exhausted, the increase of the volumes of investments in fixed assets became one of the main factors for acceleration of the industry's growth rates. As a result, it was kinds of activities focused on the production of the goods of the investment demand that had the biggest influence on the maintenance of the dynamics of the processing industries production.
The dynamics of the processing industries is quite substantially differentiated by kinds of economic activities, the biggest influence being exerted by the ratio of production rates of investment and consumer goods (Table 23). The fluctuations of growth rates by kinds of activities of processing industries being quite large, a dramatic drop in the output of machinebuilding production in November-December 2008 was the primary factor having a negative effect on the level of the business activity of adjacent industries of construction materials production and other kinds of goods of intermediate demand production. In the 4th quarter the production of machinery and equipment made 88% of the corresponding figure of the previous year, production of electric, electronic and optical equipment - 92.1% and transport vehicles and equipment production - 91.3%.
Table 23
Changes in Production Rates As Broken By Kinds of Activity of Processing Enterprises in 2007-2008, as percentage to the corresponding period of the previous year
2007 2008
quarters quarters
annual I II III IV annual I II III IV
109.3 112.8 110.2 107.8 107.8 103.2 110.7 108.1 106.4 92.3
106.1 109.8 105.4 104.1 105.9 101.1 106.4 103.9 101.7 93.7
99.7 102.5 98.7 95.6 98.3 95.5 102.6 101.8 97.9 83.8
99.9 109.9 107.1 94.1 90.7 101.7 106.6 108.5 105.1 92.9
106.2 104.2 103.5 104.1 113.2 101.4 115.6 110.9 102.4 83.6
109.0 109.5 107.1 109.4 110.4 100.8 107.8 106.0 101.2 88.9
102.7 106.1 103.0 102.0 100.8 102.7 105.0 101.6 102.9 101.2
106.1 108.3 105.3 106.6 104.3 95.8 103.7 103.1 101.8 78.5
123.0 113.2 114.8 125.2 131.7 112.5 130.4 116.5 119.0 101.0
110.8 123.3 110.0 107.8 105.6 99.1 108.6 109.1 100.2 86.4
102.0 107.3 101.7 99.5 100.3 99.8 108.6 101.1 100.5 94.7
119.3 126.0 125.6 116.2 111.5 104.0 116.4 105.4 111.6 88.0
112.8 117.1 121.2 101.7 109.7 92.1 93.3 91.3 98.9 87.0
115.9 117.0 113.3 119.1 112.7 109.5 114.4 119.1 116.4 91.3
105.0 105.6 106.7 102.3 106.1 104.6 118.6 116.2 106.6 106.1
Processing industries Foodstuffs production, beverages and tobacco included Textile and sewing production Leather, leather goods and footwear production Wood processing and production of goods thereof Pulp-and-paper industry; publishing and printing Coke and oil products production
Chemistry industry Rubber and plastic goods production
Other non-metal mineral commodities production Metallurgy industry, production of finished metal goods Machinery and equipment production
Electric, electronic and optic equipment production Transport vehicles and equipment production Other branches of industry
Source: Federal State Statistics Service
Import continued to exert a significant influence on the dynamics and the nature of the development of machine-building. This is also connected with many kinds of machinery and equipment being non-competitive with the import analogues with respect to "price to quality" ratio, as well as with there being no facilities for production of modern kinds of equipment, which considerably limited the market of the domestic machine-building.
Influence of import differs considerably in various sectors of economy and goods markets. At the market of the investment machine-building the increase in import supplies was one of the main factors for the fulfillment of the investment projects, modernization of production and implementation of technological innovations. At the same time there was an intensified competition with the import observed, for instance, in such machine-building productions as machine tools construction, agriculture engineering, road equipment construction, motor vehicles production. Characteristic for these productions are low investment activity, high level of the fixed assets deterioration, outdate technologies. It is the active implementation of the assemblage mechanisms and the transfer of foreign companies' activity into the territory of Russia that is one of the promising directions for their development. The anticipating growth of output at the enterprises with the participation of the foreign capital changed the competitive conditions and stimulated the activity of the traditional structures. However these enterprises turned out to be most vulnerable in the environment of the crisis since there had been no radical measures undertaken to develop the production of componentry at the domestic enterprises for a long time. Taking into account the ramified system of inter-branch connections in machine building, in particular, in motor vehicles construction, a sharp drop in the
production affected the adjacent productions, branches of infrastructure and had a painful effect on the level of the employment of the population.
In recent years the economic growth remained to be mainly of quantitative nature. This defined vulnerability of Russian economy in the environment of global changes of the prices and the situation at the world market.
3.2. Situation in Industry
The section is based on the data of surveys conducted among the managers of industrial enterprises. These surveys 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 panels' size is approximately 1100 enterprises, which employ more than 15% of those employed in the industry. The panel has a shift towards large-scale enterprises in each of the specified subindustries of the national economy. The return of questionnaires makes 65-70%.
These business surveys among the managers of enterprises represent a quick method for collecting the data concerning the state of affaires at their enterprise and the expected (planned) changes in the main indices of their performance. Business surveys are relatively new instrument when applied to economic analysis. The first survey was conducted by IFO Institute (Munich, Germany) in 1949. Before long this method came into practice in the UK, France and Italy. And since 1962 the EU has been working on harmonization of the surveys in different countries (making them comparable).
A questionnaire form applied in a business survey contains a limited number of questions, no more 15-20. The questions are of qualitative, not quantitative nature. A simple structure of questions and answers makes it possible for the respondents to fill in the questionnaire quickly and in short period of time without consulting any other employees or documentation. It is of exceptional importance for the respondent at each enterprise to hold an executive position of the highest level possible, having a full vision of the state of affaires at the enterprise and participating in management directly. In 2008 30% of the filled-in questionnaires were returned by the directors of enterprises, 375 - from the deputy directors and 23% - from the heads of the economic departments.
When analyzing the business surveys, we apply a specific derivative index, termed balance. The balances are calculated as the difference between the percentage of those who have replied "is growing" (or "above the norm") and the percentage of those having replied "is decreasing" (or "below the norm"). The result thus obtained makes it possible to picture the distribution of answers to each question by one digit with "+" or "-" sign.
The balance is interpreted as the first derivative or rate of the process. In case the balance of answers to the question on the expected change in prices has the sign "+", one can conclude that the average prices are going to rise in the nearest future (the enterprises reporting a forecast growth of prices hold a majority). The increase in balance from +10% to +17% over a month signifies that the average prices in industry will grow at faster rates, since the abundance of enterprises forecasting their growth has increased. A negative balance implies the decrease in the average prices (the enterprises intending to lower the prices prevail). A change in balance from -5% to -12% is interpreted as the growth of the intensity of price decline.
3.2.1. Beginning of Crisis: Chronicle 2008
Dynamics of Demand for Industrial Production
The beginning of 2008 was quite discouraging for the Russian industry. According to the estimation of the enterprises the drop in the demand growth rates in January was bigger than that in the previous year: -23 balance points (b.p. hereinafter) versus -7 b.p. before exclusion of the seasonality. In February the intensity of the solvent demand growth increased (though insignificantly). Upon exclusion of seasonality the demand growth rates made +7 points (which is by 2 per cent better than in January, a figure of the previous year being +15 points). In March the demand for the industrial goods went on growing, but the sales growth rates (upon the exclusion of seasonality) reduced as compared with February by 4 per cent, and as compared with March 2007 - by 18 per cent. In other words, in the first quarter of 2008
the demand growth rates obviously slowed down (see Fig. 14). %
30 20 10 0 -10 -20 -30 -40 -50
1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08
Fig. 14. Changes in Solvent Demand, Seasonality Excluded (balance =% growth -% decrease)
Such dynamics of demand caused the continuous dissatisfaction with the volumes of sales. In January 2008 65% of enterprises considered the demand for their production as normal, whereas the absolute maximum registered in August 2007 makes 72%. In February the dissatisfaction with the demand in the Russian Industry went up to 33%, which is the worst (maximum) result of the preceding 18 months. The share of such enterprises in the light industry is equal to 71%, in machine-building - to 39%, in the construction materials industry -to 36%. By the end of the quarter the enterprises had accustomed to low growth rates of demand. This is testified by the dynamics of the estimations of the volumes of demand. In March the share of the "normal" estimations ceased decreasing and stabilized at the level of 63%.
The second quarter of 2008 became critical in the dynamics of the Russian industry. In this period the demand for industrial production was growing, but less intensively (two times slower, to be precise) than in the first half of 2007. And at the end of the quarter the situation
changed suddenly for the worse. According to the estimations of the enterprises the growth rates of the demand upon exclusion of seasonality the demand growth rates made 7 balance points in May-June, which is three times as worse as figures of last May and two times as worse as those of June. The exclusion of seasonality demonstrated the growth of sales of approximately 2-3 points, which was the minimum over the preceding two and a half years.
Fig. 15. Dynamics of Main Estimations of Solvent Demand
Low growth rates of the demand resulted in the decrease of the satisfaction with the demand volumes down to the level that is extremely low for the past years (see fig. 15). In May-June 2008 only 61% of the Russian industrial enterprises regarded the demand for their goods as normal. This had been the worst result for the preceding 24 years.
The results of the monitoring in the third quarter completely confirmed the conclusion on the change in the trends in the dynamics of the Russian industry. According to all the figures (initial, upon exclusion of seasonality, upon exclusion of occasional fluctuations) the sales growth rates went down to 4 balance points, which had been the worst result since the end of 2005. In August the solvent demand for the industrial goods started decreasing in absolute terms. Initial data demonstrated the minimum growth of demand: the balance (growth intensity) was equal to +1 point. This was the worst figure of the whole post-default period of 1999-2008. Moreover the exclusion of seasonality indicated the decrease in sales. So far, however, of the minimal intensity (-2 balance points), but supported by the similar result on exclusion of occasional fluctuations as well. As a result the trend for the decrease in demand growth rates that first outlined in the second quarter of 2007 reached its logical conclusion.
Data of September put the end to the hopes that the Russian industry would escape the world financial crisis: demand for industrial goods started decreasing at higher rates. In September the initial (that is before the exclusion of seasonality and occasional fluctuations) decrease rates made -15 balance points. Over the past years such a difference between the answers "is growing" and "is decreasing" has been registered only in January, when the whole country has a holiday for the first ten days. There had never been the absolute decrease in demand after the default. The exclusion of seasonality did not change the demand decrease rates in essence: now its value was equal to -13 b.p. and had been the worst result since the middle
of 2002. That is starting from May 2002 the surveys had not registered such low growth rates (in this case decrease rates) of the demand. In that period the changes of the demand had always been better (a less intensive decrease or simply growth) than in September 2008.
At the beginning of the fourth quarter the intensity of the decrease in the demand for the industrial products reached the levels that had been unexampled in the post-default period. In October the balance dropped to -27 points. The exclusion of seasonal and occasional fluctuations corrected the figures but little and they remained record-breaking: there had not been such an intensive decrease in the demand since October 1998. But at that time the industry still (though unexpectedly) was coming out of the crisis, and this time the crisis in the industry had just started.
%
Fig. 16. Changes in Solvent Demand, Seasonality Excluded (balance =% growth -% decrease)
In November the rates of the decrease of the demand for the industrial products reached the values that earlier were registered only in the 90-ies (see Fig. 16). This figure dropped down to -59 balance points, whereas in August the value was +3, and in June - +14 points. In November two thirds of the enterprises reported the decrease in the sales of their production, the proportion of such answers in August being only 15%. The exclusion of seasonality corrected the rates of sales decrease but slightly: it became equal to -51 points and gave the way only to the results of 1994. Then the demand decreased with the intensity of -63.. .-58 points.
Fig. 17. Dynamics of Main Estimations for Solvent Demand
As a result, the estimations of the sales volumes changed sharply. In November only 26% of enterprises were satisfied by them and 71% regarded them as "below the norm" (see Fig. 17). In August 2007 the estimations were opposite: 72% of enterprises considered the demand as "normal", and 23% of enterprises - as "below the norm". At the worst times of the 90-ies the share of estimations "below the norm" exceeded 90%.
In December the intensity of the demand decrease did not change when compared with November. After the November drop of -59 balance points, which had been preceded by -30 points in October, the decrease down to -60 points seems negligible. This was testified by the exclusion of seasonal and calendar factors: in December the balance of the changes of the solvent demand remained at the previous level of -51 points. The absolute levels of December however look gloomy. The initial -60 points repeat the absolute record of the whole sixteen-year period of the demand dynamics monitoring: the demand decreased so intensively only in distant 1994. Upon exclusion of seasonality the demand is below only the figures of some months of 1996 and 194. Even in 1998 the demand did not decrease at such high rates as now, at the end of 2008. It would be good news if it was the turning point of the crisis, but, taking into account the macroeconomic situation, the beginning of the progress on the way out of the crisis in the imminent future seems unlikely.
The stabilization of the intensity of the decrease in demand did not put a stop for the decrease in the satisfaction with its volumes. In December only 21% of the enterprises could estimate the volumes of their sales as normal. Just four months before that there were three times as many of such estimations (63%). At the end of 2008 this figure went back to the level of the spring 1999, when the industry was coming out of the crisis.
Industrial Production and Stocks of Finished Goods
At the beginning of 2008 the dynamics of output demonstrated low growth rates as well. According to the data before the exclusion of seasonality the balance of changes in production
(growth rates) were equal to -23 balance points in January, whereas a year ago this figure was equal to -7 points. Upon the exclusion of the seasonal component the balance of changes in output (growth rates) in January 2008 remained at the level of December 2007, which had been the worst figure for the preceding 24 months without taking into account the drop in September 2007. In February the output growth rates upon exclusion of seasonality turned out to be some points below those of January and two times as bad as in February of the previous year. The production did not want (or was not able) to follow the demand or, rather, to anticipate it as usual. The results of the first quarter of 2008 demonstrated (see Fig. 18) that the slow-down of the demand growth rates did not enable the industry to increase production. According to the estimations of the enterprises' managers the output growth rates by the end of the quarter had become stable at the level of 17-19 per cent (seasonality excluded). In March 2007 the intensity of the output growth made 28 per cent.
-60 4—t—i—t—i—i—\—t—i—i—i—\—i—t—i—f
1 /93 1/95 1 /97 1/99 1/01 1/03 1/05 1/07
Fig. 18. Changes in Production, Seasonality Excluded (balance =% growth -% decrease)
By the end of the first quarter obvious and continuous decrease in demand growth rates had resulted in a considerable "negative" gap between the output dynamics and the sales dynamics (positive gap can be defined as a situation when the enterprises are behind the dynamics of the demand). In other words, the enterprises produced more than they were able to sell. In March the share of the producers whose output was ahead of the demand reached 28%, which had been uncharacteristic for the recent years. The opposite ratio (demand ahead of output) was registered at 7.4% of the enterprises. This figure was nearly the absolute minimum for the post-default period (the index going down to 6.6-6.2% in spring 2006). Another evidence for the negative gap is the dynamics of the estimations of the finished goods (see Fig. 19). In March the balance of these estimations (above-below the norm) reached +13 points, which had been the worst figure for the preceding two years. In the first months of 2008 the industry accumulated unusually large quantities of the finished goods at storehouses relative to the current demand and did not see the prospects for selling the accumulated stocks in the forthcoming months.
%
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. 19. Balance of Estimations of Finished Goods Stock (balance =%growth-%decrease)
At the beginning of the second quarter the growth of the industrial production remained at the level of the first quarter. All the indices calculated on the basis of surveys demonstrated stable output growth rates in February-April 2008. In 2007 the output growth rates were one and a half times as high. The stabilization of the industrial output occurred due to the stabilization of the demand for the industrial goods.
In June the intensity of the output growth went down by all the calculated induces, following the demand. The initial data demonstrated the slow-down of the growth by 6 points, upon exclusion of seasonality - by 4 points, and upon exclusion of occasional fluctuations as well - by 3 points. As a result all three indices demonstrated approximately the same result: in June the balance of output change was equal to 10 points. This value had been the worst in 2008 and was half of the result of June 2007. The deceleration of the output growth occurred in all branches of industry excluding foodstuffs production. The stocks of finished goods also gave evidence against the steady industrial growth. In June the balance of their estimations worsened by 6 points at once. It should be taken into account that the proportion of the responds "above the norm" went up to 25% and turned out to be the worst for the preceding 26 months.
The pressure of the demand made the enterprises restrict the growth of production even more severely. In July all the indices calculated on the basis of surveys' data demonstrated the deceleration of the demand down to 12 balance points. This had been the worst result for the previous two and half years, that is the production had not grown that slow since the beginning of 2006.
In August the output growth further decelerated. Then the initial figures for growth rate had been the worst for the period of 1999-2008. Even in August 2001-2002 and 2005 that were the most difficult years for the industry after the default the output increased one and half times as quick as in 2008. The exclusion of seasonality led to the figure that had been the worst for the past year and a half. Like the demand, the output growth in the Russian industry started decelerating in the second quarter 2007.
% 46
■60 -I—1—I—1—I—1—I—1—I—1—I—1—I—1—I— 1/1993 1/1995 1/1997 1/1999 1/2001 1/2003 1/2005 1/2007
Fig. 20. Changes in Production, Seasonality Excluded (balance =%growth -%decrease)
In September the absolute decrease in demand forced the enterprises to reduce the output volumes. This conclusion follows from the initial data of the surveys. The exclusion of seasonal and occasional factors demonstrated the full stop of the output growth (0 balance points - see Fig. 20 - upon exclusion of seasonality and +3 b.p. upon exclusion of occasional fluctuations as well). Such figures had not been registered in the Russian industry during the post-default period. Figures of October 2008 had been the worst since November 1998. The situation was most difficult in metallurgy. Other branches of industry either were on the verge of zero growth or had to reduce the output.
The dramatic drop of the demand in November forced the industry to reduce the output likewise (see Fig. 21). Whereas in October the intensity of the decrease in production was minimal, in November this figure dropped to -41 b.p. Higher output decrease rates were observed only in 1994. 61% of enterprises reported the reduction of the output in November, whereas in August there were only 17% of such responses. Such a reduction in output, however, proved to be insufficient, the estimation for the stocks of the finished goods in the industry started changing for worse. The proportion of the responses "normal" reduced from 61 to 47%, and the proportion of the responses "above the norm" went up from 23% to 35%. Over the month the balance (above - below the norm) worsened by 8 points and went to the level of +19 points, which actually is the maximum of the preceding five years.
In December the stabilization of the demand decrease rates enabled enterprises to stabilize the rates of the output decrease as well. In December this figure practically did not change. The balance upon exclusion of seasonality makes -41 points at the end of 2008, while in summer its value was +8, and in spring +15 points. A worse value (that is more intensive decrease in production) was registered only in the first half of 1994.
%
45
-45
-30
-15
30
15
0
-60
1/1993 1/1995 1/1997 1/1999 1/2001 1/2003 1/2005 1/2007 1/2009
Fig. 21. Changes in Production, Seasonality Excluded (balance =%growth-%decrease)
In December estimations of finished goods stocks were out of the range that had been traditional for the preceding years - the filling of storehouses with the excessive stock continued. In December the balance of estimations went up to +29 points and turned out to be the maximum of the previous thirteen years. The average value of the balance in 2007 was +5 points, and in 2006 it was +8 points.
Obstacles to Industrial Growth in 2008
The dynamics of the structure of the obstacles for the output growth in 2008 was an exact picture of the features of the economic development in the year.
Accelerated growth of prices that was registered by all the indices at the beginning of 2008 played a trick with the Russian industry: its production lost competitive advantages it had had above the import. Now it was the import that represents an obstacle for the production growth at 26% of the enterprises, whereas in the fourth quarter of 2007 the frequency of this obstacle citation was only 17%. There had never been such a sharp increase in the frequency of this obstacle citation in 1996-2008. But it was the shortage of staff that remains the most serious obstacle for the growth of output (see Fig. 22). This obstacle had held the first place in the rating of the obstacles by the second quarter in the row after the decrease in the frequency of its citation by 2 points at the beginning of 2008 and the growth in the frequency of other obstacles citation. The second place was held by the shortage of the liquid funds, the third -by the low demand, which went up by 4 p.p. over the last two quarters.
It was in the middle of 2007 when the Russian industry experienced the most acute deficit of staff that was connected with the expected changes in the demand. At that time 27% of enterprises believed they did not have enough staff to satisfy the expected growth against 6% of enterprises with the excessive employment. By the end of 2007 against the background of the slow-down of the production growth rates and the decrease in the optimism of their forecasts the deficit of specialists started to diminish and was registered at 23% of enterprises at
the beginning of 2008, while the excessive employment remained at the level of 6%. The deficit of production facilities, on the contrary, expanded. At the beginning of 2008 19% of enterprises reported the shortage of equipment as compared with 11% that had its excess. The total balance made -8 points, which had been the absolute minimum of 1993-2008. At the beginning of the year the problems of the banking sector also influenced the industry. The monitoring of the credits availability demonstrated the reduction in the proportion of "normal" estimations down to 71% in the first quarter of 2008, which had been the worst figure for the preceding eight quarters (see Fig. 23).
Note. 2Q08 -I quarter
Fig. 22. Obstacles for Production Growth (average annual data)
1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 Fig. 23. Characteristics for Credits' Availability
In the second quarter it was the insufficient demand that started to be cited more and more often as an obstacle for the growth of the output. Whereas in July 2007 26% of the enterprises regarded it as an obstacle, in April 2008 there were 31% of such (see Fig. 24). The growth certainly was not considerable, but obvious and continuous for three quarters in the row. The proportion of the enterprises that were prevented from the growth of the output by the lack of liquid funds was a bit bigger and made 36% of the enterprises. But it was still the lack of staff that remained the biggest problem for the industry. The frequency of its citations in April reached the total of 49% (versus 36% in January 2008 and 7% in April 1998), which means that nearly a half of the Russian enterprises was short of the staff. In machine-building and light industry there were 62% of enterprises that complained about the shortage of staff in the second quarter. The foodstuffs industry experienced the fewest problems with the staff (frequency of citation of 7%). Import the necessity of protection against which had been discussed for such a long time started in fact to hinder the growth of the output in the Russian industry. The frequency of its citation went up to 31% in April 2008 although the propaganda in this field remained at the same level, whereas in October 2007 it was reported only by 17% of enterprises. The figures nearly doubled. A quarter of the Russian enterprises lack the equipment to increase the production. This result was not so spectacular when compared with other obstacles, moreover in 2007 it reached the figure of 325 (absolute maximum for the frequency of the citation of this obstacle) but still quite worrying: one more resource inherited
from the socialistic economy had been exhausted.
%
Fig. 24. Obstacles for Growth of Production
It was the lack of liquid funds (69% of citations in 2008) that was and is considered as the main obstacle for the investment activity at the beginning of 2008. The beginning of the reduction in the limiting influence of this factor in 2004-2007 was aborted by the construction boom and the acceleration of the inflation (which resulted in the growth of prices for equipment and building and assembly jobs, the frequency of this obstacle citation going u to 46%), as well as recession in the banking sector (high interest rates and the difficulties associated with the obtaining of long-term credits were more often cited as obstacles). However, by the end of the second quarter of 2008 the situation with the credits availability had improved a bit.
The proportion of the enterprises with the normal availability of credits ceased decreasing (the trend that had been observed since the autumn 2007) and had even gone up by 2 points (see Fig. 19). As a result 72% of enterprises were satisfied with the credits availability in the second quarter. The credits were mainly attracted by the enterprises to fulfill the liquid funds (65%). The second place (see Table 24) was held, leaving the other reasons far behind, by the modernization of the production (47%), the third - by the expansion of the production (30%) and the fourth - by the payment of wages (19%).
Table 24
Directions of Credits Usage in Industry (as percentage to the number of respondents)
2003 2004 2005 2006 2007 2008
no credits 12 8 10 9 9 9
for R&D, know-how, licenses purchase 2 6 6 2 1 6
for production modernization 22 31 36 36 36 47
for expansion of production 13 23 24 25 27 30
for replenishment of liquid funds 66 68 70 62 57 65
for organization of sale 2 1 2 1 1 3
for payment of wages 27 27 22 26 19 19
for carrying out export contracts 8 7 11 12 7 6
for repayment of a debt to another bank 6 9 7 9 5 5
for repayment of debts to suppliers 14 9 11 13 9 11
As the crisis phenomena were evolving, the demand for the domestic goods was becoming ever bigger obstacle for the growth of production. In the third quarter the frequency of its citation as an obstacle reached 40%. This had been the maximum for the previous nine quarters and was the second biggest obstacle in the third quarter. However it was the lack of staff that had been the leading obstacle for the fourth quarter in the row. The frequency of its citation went up by 13 p.p. over the year, and by 6 p.p. over the second quarter, hindering 49% of enterprises (61% in machine-building, 58% in the light industry and 12% in foodstuffs production). The third place was held by competing import, which 32% of enterprises regarded as an obstacle, whereas a year ago the figure was only 21%.
The slow-down of the demand growth rates eliminated the deficit of the facilities in the Russian industry. The lack of equipment was first registered by surveys in the second quarter 2007 and reached -10 points by the beginning of 2008. However over three months of the second quarter the proportion of "insufficient" estimations lowered from 21% to 12%, while the proportion of "more than enough" responses went up from 11% to 17%, the balance becoming again positive. Thus, the demand ceased justifying the investments efforts of the Russian enterprises in recent years. This thesis was supported by the statistics of the obstacles for the output growth. Whereas a year ago the lack of equipment was an obstacle for the output growth at 32% of enterprises (holding the third place among 10 factors being monitored), in the third quarter 2008 it was cited only by 21% of enterprises (fifth place). In the third quarter no principle change concerning the credits' availability occurred. For 69% of producers it remained normal and equal to that of the first and the second quarters of 2008. A year ago the figure was higher by 10 points.
The deficit of staff is still a widespread phenomenon in the Russian industry despite the slow-down of the demand and output. A quarter of the Russian enterprises reported the shortages of qualified staff in connection with the expected changes in demand in the third quarter of 2008, which is only by 2 p.p. lower than the absolute maximum of this index registered a year before. The main cause of the staff shortage was considered to be the low wages that en-
terprises offer when hiring the employees. Only 49% of enterprises pay "normal" wages to their workers and engineers.
In the fourth quarter the structure of the obstacles for the output growth started to change (see Fig. 25). As it should have been expected it was the "internal solvent demand" that held the first place. It was considered as an obstacle by 45% of enterprises, growing by 9 points as compared with the third quarter and by 19 points as compared with the absolute minimum registered in the third quarter of 2007. The second place in the rating was held by the shortage of liquid funds. Since two thirds of enterprises use credits to replenish these funds the contraction in credit availability made this obstacle grow by 8 points over the quarter, and when compared with the absolute minimum (the first quarter of 2007) - by 12 points. As a result the provision of the enterprises with the stocks of raw materials dropped sharply by 13 points over the quarter: at the end of the year only 63% of the enterprises had normal stocks, which had been the worst figure for the preceding 11 quarters. The situation was aggravated by the amount of non-payments beginning to increase. The frequency of its citation in the industry nearly doubled over the quarter (from 12% to 21%). It should be noted however that by the end of the year this obstacle held only the fifth place, while at the beginning of 2008 it occupied 8th-9th places.
1/93 1/95 1/97 1/99 1/01 1/03 1,05 1^7
Fig. 25. Obstacles for Production Growth
The third place of the obstacle "lack of qualified staff" with 41% of responses seems soothing in the environment of the crisis. During the preceding seven quarters the factor mentioned took the first place five times and the second - two times. In other words the enterprises still regard the employees as quite a precious resource and understand that in the environment of the degradation of the vocational education and devaluation of the higher education even mass dismissals in other sectors of economy will not let them find qualified workers and engineers quickly in case of necessity. The pressure of the competing import,
non-payments and low export demand share the fifth place in the rating of obstacles, but the frequency of the citation of the former has lowered down to 21% in the processing industries after the absolute maximum of 31% registered in the third quarter. This is obviously a result of the decreased price ambitions of the Russian producers, evolving efforts to decrease the costs and changes in exchange rates.
3.2.2. Competition in Russian Industry
Peculiarities of Competition Formation
The monitoring of the competition formation at sales markets of Russian industrial enterprises that was started by the IET in 2000 demonstrated the peculiar features of this process taking into account a representative set of factors, most of which are described in the economic theory, but do not have adequate and regular statistical depiction. Four surveys with the interval of 23-26 months (that is in two-year cycle) were conducted. The last survey was made in February 2007. Taking into account the rising economic and social significance of the competition, the following estimation of the factors contributing to its formation was made not after 2 years but after 12 months - in February 2008. This review revealed specific features of competition formation at the final stage of the recovery growth and a new period of the development of the Russian industry that started.
As it is demonstrated by the analysis of new data, the input of the majority of factors forming competition in the Russian industry was not subjected to principle changes concerning either the resulting trend (increases - decreases) or their effect. Only input of two factors changes considerably: (a) presence/absence of potential competitors able to enter the sales markets and (b) possibility/impossibility for a new producer to find suppliers and consumers at new sales markets (see Fig. 26). In general, these two factors are interconnected and the changes in their influence on the competition demonstrated the specific features of the behavior of Russian enterprises at sales market in contemporary conditions.
According to the estimations of enterprises the influence of the presence/absence of potential competitors able to enter the market intensifying the competition lowered over the year, but remained positive, that is this factor is still making the competition stronger. However the change in the value of the influence of the factor under consideration on the competition turned out to be the biggest among all the factors monitored. In other words the level of the support for the competition at the sales markets by the possibility of potential competitors entering the market lowered to the greatest extent. If earlier (in 2002-2007) the influence of potential competitors held 1st-2nd places among the factors positively affecting the competition, now it lowered to the fifth place. It should be noted that the presence of this factor and its positive influence should not be attributed to the Russian Government efforts, it is just an incidental result of the complicated market reforms. The latter created a considerable excess of facilities and a smaller - of the staff, which were the main sources of the threat for such an intervention. It should be emphasized that these interventions could be very fast (large amounts of idle facilities created at the time of the USSR) and aggressive (non-payments, barter and other adventures of 90-ies taught the Russian enterprises to act directly). Thus, anti-monopoly service loses its most active assistant that helped form and support the competition. Another advantage of that assistant was that it was free of charge, at least for the service.
Fig. 26. Dynamics of Input of Main Factors in Competition
The threat of potential competitors (as a factor contributing in the increase of the competition) at sales market gives less support to most of the branches of Russian industry in 2008. Only the enterprises of timber processing and light industry consider their "neighbors" still having the wish and the opportunity to enter other sales markets and are seriously worried about such attacks. In the light industry such apprehensions are especially high. The most probable explanation for such spirits at the enterprises of light industry is connected with the fact that this branch of industry reached fewest successes even in the environment of the industrial growth that had began. In the first quarter of 2008 only 45% of its enterprises were satisfied with the demand for their production, whereas on the whole in the industry this index was equal to 64%. This makes the enterprises of the industry search new markets actively and this includes the exclusion of traditional producers from the sphere. Such apprehensions steadily and continuously prevail in the light industry. In the timber processing the balance of this factor influence reached 0.9 in 2008, whereas in 2007 it was equal to 0.32. As a result the biggest increase in the pressure of the threat of the potential competitors on the competition is observed in the timber processing complex.
In other branches of industry positive (supporting) influence of potential competitors on the competition lowered. The amount of the support decreased most dramatically in metallurgy: after a considerable positive influence on the competition in 2007 (balance of +0.67), in 2008 the amount of support nearly vanished (balance of +0.01). The amount of support of competition given by the potential competitors reduced by half in machine building (balance of support of +0.67 in 2007, and +0.32 in 2008). A drop of a similar value was registered in the foodstuffs production (+0.84 in 2007 and +0.52 in 2008). Chemistry enterprises reported the decrease by half (+0.48 in 2007 and +0.24 in 2008).
Such a change in the influence of the factor under consideration on the level of the competition lies within the logic of the contemporary economic development. By the beginning of 2008 the Russian industry had fully exhausted the reserves of its facilities and staff. Moreover,
the excess was replaced with the shortage, reaching considerable values. The industry simply does not have enough machinery and employees to satisfy the increasing growth. And at that time the demand really grew and satisfied two thirds of Russian enterprises. Thus, the majority of producers were satisfied (or even considered excessive) the traditional sales markets and did not need to enter other markets any more. Moreover, whereas the trend for the growth of the demand for the Russian enterprises sustains, the deficit of staff and facilities is not to be eliminated (or at least reduced), the necessity to expand to other markets will further reduce, and hence the support given by the threat of the competitors entering the market will also decrease.
Another factor (possibility/impossibility for a new producer to find suppliers and customers at new sales markets) experienced considerable changes in 2007, decreasing the competition level at the sales markets of the Russian industrial enterprises less intensively than before. At the beginning of 2008 its negative influence made the balance of -0.17. This is the maximum (that is the best) figure for this index; the minimum made -0.69 and was registered in 2000. In 2007 the balance was -0.47, that is the negative (limiting) influence of this factor on the competition lowered by 0.30 points over the year. Now the factor is no longer an obvious and permanent negative leader but holds the second place, giving the way (though by little yet) to the transportation costs.
The decrease in the negative influence of the difficulties connected with the search for suppliers and consumers has occurred in all the industries with the exception of the construction materials industry. In this branch the limiting influence of the factor under consideration doubled, which in the environment of the construction boom (though regional, not national yet) can be explained by unsuccessful attempts of the construction materials producers from the regions with low construction activity enter the markets of the regions characterized by larger scale of construction works. In other branches the situation has changed for the better. This is especially so for the timber processing complex, in which the balance of estimations became positive, which means that there are fewer difficulties when searching for counter-agents at new markets that the opportunities to solve this problem. Taking into account the fact that the threat of the producers from other regions entering the market was registered to be the highest in this branch of industry, it can be assumed that the producers of timber and goods thereof supported their aggressive plans with the serious marketing research. In chemistry and machine-building industries the difficulties connected with the search for suppliers and consumers lowered by 0.49 and 0.41 points, correspondingly. As a result the balance of positive and negative changes for the influence of this factor on the competition became nearly zero.
Such a positive shift can be explained by two circumstances. First, a large number of enterprises are now satisfied with the developed markets (for the details see above). Second, the lower want to enter new markets has reduced the necessity for the search for the counteragents there. The enterprises focus (with the aim master) on those markets only that are easier to access, because of the fact that they are better-studied as well.
Thus, the competition decreases to a lower extent under the influence of the difficulties for a new producer to find suppliers and consumers at new sales markets. This trend, in the opinion of the Federal Antimonopoly Service of the Russian Federation, is positive. However, in 2008 the factor still had a negative influence on the competition in the Russian industry, that is the majority of the enterprises held that the loyalty of the suppliers and consumers to the traditional producers was an obstacle for the entrance of new enterprises to the markets.
In the field of the formation of competition at the sales markets of Russian industrial enterprises there were other changes occurring, which were not as important as those mentioned above but worth mentioning.
By the positive effect on the level of competition the factor "difficulty of retreat from the market (impossibility to return the funds invested in the equipment and premises)" holds the first place. Its supporting effect on the competition is 0.48 points bigger than the influence of the factor "easiness of the retreat from the market (real possibility to return funds invested in the premises and equipment)", weakening the competition. The positive effect of the difficulties associated with the retreat from the market has been growing since 2002. Now this factor is the strongest in supporting the competition in the light industry, where the balance of the effect of this, though doubtful, factor, reached 2.32, which was the maximum for the branches of industry in 2008. It seems that the objective Russian difficulties in retreating from the markets are aggravated by the large number of such intentions in this unfortunate branch.
The positive influence of the absence of the administrative protection for the market on the competition is decreasing. On one hand, it could be explained by the loss of interest for the "other's" markets, when the capacity of own markets is sufficient. In such a situation any barriers for the entrance to the market become less important, that is they are not taken into account. On the other hand, the growth of own markets and the experience of their protection with the help of the administrative measures may make the enterprises use more elaborated methods for the protection of their "private mains" with the help from the local government. The positive influence of the absence of administrative barriers in the construction materials industry has disappeared altogether. In other words, whereas in 2007 the majority of the cement, bricks, panels etc. were of opinion that the absence of quotas, licensing, bans for import-export and other similar features makes the competition at their sales markets more intense, now the proportion of the opinions on their absence is equal to the proportion of the opinions on their presence. As a result the change for the worse in the influence of the factor under consideration on the competition in the construction materials industry turned out to be the biggest. It seems that it is in the production of construction materials where the most serious administrative barriers according to the estimations of producers appeared. It seems that the risk pays back. The competition is best supported by the absence of the barriers in the light industry and ferrous metallurgy.
While the enterprises succeed in reaching a compromise with the government and in getting additional protection for their markets, reaching agreement with other producers is becoming more and more complicated. The balance of the influence of the factor "having-not having the agreements among the producers on the division of the markets, price policy etc" is gradually increasing its positive influence on the competition, that is the absence of such agreements, in the opinion of the enterprises, stimulates the competition at the sales market of the Russian industry. However, as it is demonstrated by the analysis of the data for the branches of industry, the conclusion on the stimulating influence of the absence of agreements can be applied only to the construction materials industry. According to the estimations of the enterprises the extent of the refuse from the cooperation with the competitors was most serious. Moreover, there was a radical turn taking place in the construction materials industry. Whereas in 2007 the balance of the influence of the factor under consideration on the competition was negative (that is the competition rather decreased under the influence of the agreements between the producers), in 2008 the competition in the industry was strongly supported by the refusal of the producers from such negotiations. Again, this is probably the result of the
growing possibilities for large profit due to the construction boom. It is also likely that the profits in question are big enough for everybody without negotiations. In either case the anti-monopoly services may not bother about the harmful agreements in the branch. A positive trend was registered in the machine-building as well, where the absence of the agreements became prevailing as compared with the readiness to sign them. In other branches of industry the trends are negative: there the enterprises start searching for the ways to make agreements with competitors and not for the ways to struggle till final victory. The resulting balance nevertheless is positive for all branches: the competition is more often supported by the absence of collusions, not weakened by their presence.
The level of the concentration of the production (index traditionally monitored by the Federal Antimonopoly Service) does not have an appreciable influence on the competition in the opinion of enterprises. Its positive effect (low level of concentration) is nearly equal to the negative (high level of concentration) on the whole throughout the Russian industry. In most of the branches of industry the situation has become better over the year, that is the decrease in the level of concentration supported the competition better. This trend is most evident in metallurgy, construction materials industry and light industry. Negative changes (decrease in the level of the competition as a result of the growth in the concentration of production) were observed in chemistry and machine-building.
Influence of Competition on Prices
The unflagging struggle against the inflation forces the authorities to use all the measures, means and methods available. However the efficiency (the results) of the undertaken measures is not always or (and) immediately obvious, which can be deceitful both for the authors of the anti-inflation policy and for the society. In such a situation (which is however quite frequent in the economic policy due to the lack of the statistical data and, as a consequence, the use of not the figures that are needed but the figures that are available) the estimation of the influence of the competition on the price policy of the Russian enterprises can be a useful instrument. This is especially true when taking into account the fact that the competition itself is not easy to measure, especially regularly and comparably for its main kinds (internal Russian competition and the competition with non-CIS countries' producers). However the survey approach (surveys of the enterprises' managers) allows learning directly how two above-mentioned kinds of competition influence their sales prices and give correct estimation for the priorities.
It should be taken into account at the same time that the competitive penetration of import in the sales markets of Russian industrial producers is lower than the share of competitive markets with the internal Russian competition. The latter comprised 89% in 2007, whereas 67% of Russian enterprises experience the competition with the import. This conclusion is testified by the proportion of the enterprises that either had difficulties in estimating the influence of the competition on their price policy, or claimed that there was no such influence. In case of the internal Russian competition the sum of such responses makes 47%, in case of competition with import - 56%. The complement of these figures up to 100% shows the proportion of the enterprises whose price policy is vulnerable towards the competition. The branch most vulnerable towards the competition with the import is the machine-building, 58% of whose enterprises change prices, taking into account the import pressure (42% of enterprises being unaffected by the import - see Table 25). The second place by this index is held by the foodstuffs production, chemistry and petrochemistry industry (47-48% vulner-
able, 52-53% unaffected). The third place is held by the light industry (38% versus 62%). It seems logical that the industry of construction materials production is characterized by the minimal influence of competition with the import on prices.
Table 25
Proportion of Enterprises Unaffected by Different Kinds of Competition by Branches,
As Percentage
Internal Russian competition Competition with import
Ferrous metallurgy 47 81
Non-ferrous metallurgy 88 85
Chemistry and petrochemistry 19 53
Machine-building 44 42
Timber processing complex 48 65
Construction materials industry 38 91
Light industry 65 62
Foodstuffs production 32 52
Source: IET Survey, February 2008
Internal Russian competition has the most moderate influence on prices in non-ferrous metallurgy, 88% of enterprises of the branch holding that their prices do not depend on the competition with the counterparts within the country. Taking into account low influence of the competition with import on prices in this branch as well, the enterprises feel free when setting their sales prices. The second place in the list of the weak influence of internal Russian competition on prices is held by the light industry, 65% of enterprises not taking into account this factor in their price policy. Internal Russian competition has the biggest influence on prices of the enterprises of chemistry industry, 81% of enterprises having to take this factor into account. The last but one place in the rating is occupied by the foodstuffs production, of which 68% of enterprises experience the influence of competition and 32% - do not.
The figures for the branches given above estimate only the scale of influence of two types of competition on prices but not the direction of this influence. To calculate the influence of the competition on prices one can use a balance method which is traditional for the practice of IET surveys (and what is more important which is customary for our respondents), according to which the proportion of responses "towards the increase" is deduced by the proportion of responses "towards the decrease" (this is the way in which the enterprises are suggested to estimate the influence of the competition on their prices). Then the negative value of the balance is a sign of the decrease in prices under the pressure of the competition, while the positive - of the increase in prices.
As it is demonstrated by the latest (February 2008) metering of the influence of the competition on the price policy of the enterprises, the Russian producers decrease prices under its influence more often than increase them. This is especially true for the competition with import. The balance of the influence of the latter on the processing industry as a whole makes -24 p.p. That is there is a prevalence of 24 points of the proportion of the enterprises that reduce their prices under the pressure of the competition with the import (34%) over those that have to increase prices (for instance, as a result, of the increase in costs connected with the improvement of the goods quality, whose proportion is equal to 10%). The pressure of the in-
ternal Russian competition on the prices of the Russian enterprises on average in the processing industry is less intensive: -13 p.p. (33 versus 20%).
Table 26
Balance of Influence of Different Types of Competition on Enterprises by Branches,
As Percentage
Internal Russian Competition Competition with Import
Ferrous metallurgy 0 6
Non-ferrous metallurgy 5 -14
Chemistry and petrochemistry -18 -37
Machine-building -18 -28
Timber processing complex -9 -14
Construction materials industry -15 -6
Light industry -8 -24
Foodstuffs production -33 -37
Source: IET survey, February 2009
It is the enterprises of foodstuffs industry that experience the biggest influence of the competition on their prices (see Table 26), both types of the competition forcing the enterprises to decrease their prices to approximately the same extent (balances of -33 and -37 p.p., that is import if it is present presses a bit harder down on prices). Thus, the hopes to decrease the prices for the foodstuffs by stimulating the competition in this branch of industry are least likely to succeed: here the competition has already made the biggest contribution possible, and import, according to IET surveys, does not worry the foodstuffs producers.
The second place by the level of the positive influence of competition on prices is held by chemistry and petrochemistry, competition from the import having the same positive influence on prices as in foodstuffs production, but the internal competition being by far less influential. The third place of the rating is occupied by the machine-building, whose prices also are more prone to decrease under the import pressure (if there is such). Light industry experiences minimal positive influence from the internal Russian competition and quite strong one (the third place) - from the competition with import.
It is the ferrous metallurgy in which neither type of competition has a limiting influence on prices. Moreover, in this branch of industry the competition with import enables (or forces) raising the prices. The situation in non-ferrous metallurgy is similar, internal Russian competition enabling to increase the prices, limiting influence of import being low.
3.2.3. Competitiveness of Russian Industry
Competitive Advantages of Russian Enterprises
In 2008 the IET continued to monitor competitive advantages of the production made by the Russian enterprises, which was made for the first time in 2006. The results obtained picture the real situation in this field most accurately and comparably.
At the internal market it is long-lasting contacts with consumers that are traditionally regarded as the main competitive advantages of the goods the Russian enterprises produce (see Table 27). In 2008 61% of producers cite this factor, which is 10 points below the figure of the previous year. Nevertheless it remained the leader in the majority of branches of industry, giving the way to "better quality of the goods produced" only in the light industry and metal-
lurgy. As to the construction materials industry and the foodstuffs production, there the connections with consumers and the quality of production are cited with nearly equal frequency. Long-lasting contacts with consumers remain the leader among the competitive advantages of the Russian goods at the external markets as well.
Table 27
Competitive Advantages of Production by Russian Processing Industry at Different Kinds of Markets, As Percentage
Internal market External market
2006 2007 2008 2006 2007 2008
1) lower prices 31 28 32 59 52 41
2) better quality of production 42 55 43 26 38 37
3) quick shipping of goods 17 22 27 13 13 13
4) convenience of payments for production 14 17 17 9 9 12
5) service after sale 19 17 19 15 13 11
6) proximity to the consumers 22 19 17 5 8 3
7) fulfillment of nearly any orders of the customers 32 37 30 28 27 22
8) absence of similar production 21 21 22 8 11 12
9) reputation of the brand 43 44 37 33 41 28
10) long-lasting contacts with the customers 56 71 61 38 52 43
11) possessing license, patents, quotas 18 17 16 15 15 17
Sources: IET surveys January (2006), May (2007), August (2008)
The factor "better quality of the production made" remains in the second place. Over the year it has also lost 12 points at the internal marker and but the frequency of its citation when external markets are concerned remained the same. Better quality of production helps Russian machine-building enterprises less at the internal markets in competition, only 28% of enterprises counting on it now, whereas a year ago the figure was 50%. As a result the quality of production holds only the 7th place in the rating out of 11 positions of competitive ability factors for the machine-building. When it comes to competition with the import the production of domestic plants loses the competition. However, the same factor can be interpreted in a way that really high-quality goods are imported in the country, obviously surpassing the domestic production. At the external markets, of which the enterprises have a choice, the quality of Russian machine-building enterprises also is not an asset: it holds only the 5th place (21% of citation frequency). Russian goods are more likely to be promoted at the external markets thanks to lower prices (53%), long-lasting contacts with consumers (38%) and reputation of the brand (26%).
The light industry, however, seems to win a "quality competition". The factor mentioned maintained the frequency of its citation in the branch (68% after 75% in 2007) at the internal market and still holds the first place. The quality is an asset for the light industry at the external markets as well. This factor is used by 71% of producers at the external markets and holds there the first place. At the external markets of the branch the second place is held by "long-lasting contacts with the consumers" (35%), the third - by the "lower prices" (31%). This means that the frequency of "quality" citation is twice as high!
The reputation of the brand (trademark) is regarded as a competitive advantage by 37% of enterprises when the internal markets are concerned (the third place in the rating), and by 28% of enterprises when the external markets are concerned (the fourth place). Over the year the factor has become less frequently cited at all the markets, decreasing by only 1 point at the external markets, where the better quality started to be cited more often. The reputation is especially important for the machine-building at the external markets (2nd place in the rating for
rd
the branch with 43% of citations), construction materials industry (3 place, 50%) and food-
rd
stuffs production (3 place, 47%). However in the timber processing the factor holds only the 7th place (33% of citations), the same as in the light industry (22%). At the external market it is the Russian foodstuffs production that is the most reputed. This is the factor they count on most often (49% of cases), quality (47%) and contacts with consumers (41%) following. Thanks to the price the Russian producers of the foodstuffs can win the competition abroad only in 25% of cases.
On the whole in the Russian industry the argument of the price is used with the same frequency as in 2006-2007. Now 32% of enterprises regards it as their advantage. It is most widely used in timber processing (49% of citations, 2nd place in the rating for the branch) and
rd
machine-building (40%, 3 place). At the external markets our exporters make the use of prices less often. Whereas in 2006 59% of enterprises regarded lower prices as their competitive advantage, there are only 41% of such in 2008. This factor is used only by 53% of exporters of the machine-building production (1st place in the rating for the branch), and by 47% of those of construction materials industry (also 1st place). It is in chemistry and petrochemistry industry where this factor is used least often.
Tools and Obstacles for Formation of Competitive Ability
In the environment of the pressure from the import that evidently increased in 2008 the improvement of the competitive ability of the goods produced becomes not just a regular motto for the enterprises, but the barest necessity. The results of the long-term monitoring by the IET demonstrate which measures have been undertaken and are undertaken by the Russian enterprises (see Table 28).
Table 28
Spread of Measures to Increase Competitive Ability in Russian Industry, 1996-2008,
as percentage to number of respondents
1996 1997 1998 1999 2000 2002 2004 2006 2008
1) research of customers' requirements 71 65 63 57 60 56 54 45 52
2) decrease of costs 67 68 67 63 56 70 66 58 49
3) advertising 36 40 31 37 33 39 35 38 32
4) research of competitors 41 38 35 36 38 37 33 39 33
5) increase in the quality of goods produced 57 61 60 59 63 79 72 82 80
6) creation and production of new kinds of goods 24 58 57 65 57 60 56 61 51
7) equipment modernization 25 19 22 25 39 41 46 48
8) purchase of new equipment 21 16 23 31 39 38 44 54
Source: IET surveys 1996-2008
On the whole over all the period of the monitoring the enterprises paid the biggest attention to the increase of quality of the goods produces, which is quite logical. Admittedly, be-
rd
fore the default this measure held only the 3 place, giving the way to such actions as the decrease of costs or study of consumers' requirements. However, starting with 1999 the problem of quality of the goods has become an obvious leader (at least in the opinion of the respondents), and reached the frequency of citation which is 82% of enterprises in 2006 (80% in 2008). As a result, the enterprises consider the problem of the quality of the goods produced not the most important problem of their competitive ability (see Table 29).
Table 29
Factors Decreasing Competitive Ability of Russian Enterprises' Production, 2006-2007, (as percentage to number of respondents)
2006 2007
1) outdated equipment 48 57
2) insufficient qualification of employees 27 27
3) low quality of raw materials and components 23 20
4) lack of new products (technologies) 22 15
5) excessive ruble against dollar exchange rate 12 14
6) low quality of goods produced as compared with RUSSIAN analogues 3 3
7) low quality of goods produced as compared with IMPORT analogues 13 16
8) high prices for power resources 39 46
8) high transportation costs 31 32
10) high final costs 30 28
Source: IET surveys 2006-2007
The decrease of costs had lowered to the 5th place by 2008 and was used in the environment of higher inflation expectations by 49% of the enterprises. The figure is, however, rather high, but minimal for this factor. It was in 2002 when the decrease of costs was applied most actively as a factor for the competitive ability increase in the Russian industry. Research of consumers' requirements has also been becoming less popular: whereas in 1996 this measure was most popular (71%), in 2006 it holds the 5th place, the frequency of citation being 45%. In the environment of the increasing demand and the limited supply the enterprises seem to be less interested in the requirements of consumers.
In 2008 the second place was won by the purchase of the equipment. Whereas in 1998 this factor was used (or at least was considered as necessary to be used) by 16% enterprises in struggle for competitive ability, now there are 54% of such. The growth is considerable but not sufficient. The outdated equipment remains, in the opinion of the enterprises, the main obstacle for the increase in competitive ability of the goods produced. In 2007 57% of enterprises were of such opinion, in 2006 - 48%. The situation is aggravated by the shortage of facilities in the Russian industry that evolved in 2007 and became more acute in 2008. The main source for the increase of facilities, that is the launch of the idle ones, has been exhausted. Moreover, those that were launched earlier are to be replaced, since mainly it was created at the time of the USSR. That is why the modernization of the equipment is becoming ever wider spread as a measure to increase competitive ability in the Russian industry. Whereas in 1998 it was cited by 19% of enterprises, in 2008 there were 48% such.
It should be noted that the innovation way of increasing the competitive ability, that is creation and production of new kinds of goods, is becoming less popular in the Russian industry. In 2008 it was cited only by 51% versus 61% in 2006. This factor was less frequently cited only as long ago as 1996 (24%).
Competitive Ability: Price and Quality of Russian Production
In 2008 IET continued to monitor the competitive ability of the goods produced by the Russian processing industry basing on the direct estimations of price and quality of the goods produced by the managers of the enterprises as compared with the price and quality of the import present at the market and competing with them. For the first time such a survey was conducted in April 2007, and the same questions were asked to the enterprises in May 2008.
As it has been shown by both the surveys, a considerable part of the Russian industry is free from the competition with the import, and, consequently, from its influence. In 2007 there were 33% of such enterprises (not taking into account power and fuel industry), and in 2008 -only 26%. However there are obvious changes, whether positive or negative is a matter of separate consideration, having occurred.
The same trend is observed for all the branches of industry (according to Standard Industrial Classification). The dimension of changes, however, differ greatly (see Fig. 27).
Construction materials industry
Metallurgy
Chemistry petrochemistry
Timber processing
Light Industry
Machine-building
Foodstuffs production
0 10 20 30 40 50 60 70 80
Fig. 27. Share of Markets without Competition with Import as Broken According to Standard Industrial Classification, As Percentage
Import has had the biggest success at the markets of construction materials, where the share of enterprises non-competing with it has reduced from 74% to 34% over the year. As a result the construction materials industry gave the first place in the rating of the branches of industry free from the influence of import to the metallurgy. In these branches, like in many others, the import has also enhanced the extent of its presence but rather negligibly - by 3-6 points. The second place in the list of the industries in which the import presence has changed most is held by the light industry. In 2008 only 13% of enterprises of the branch do not compete with the import, whereas in 2007 there were 34% such. As to the foodstuffs production, there the import became wider-spread by 9 points.
While the Russian enterprises regard their production as comparable with the import goods present at their sales markets (and in this case import is competitive), the price and the quality of the Russian goods can either exceed those of import ones or yield to them.
About 53% of the Russian goods that come across import at sales markets is comparable to it (the markets where there is competing import are regarded as 100%). Results of 2007 were similar. That is the Russian industry on the whole was able to hold the quality parity with the import actively invading the markets. The balance (higher quality of import minus lower quality of import) even improved from 29 to 23 points.
As to the share of the production of the same quality it is the foodstuffs production that retained its leading positions (74% of the enterprises regarding their production as comparable with the import in terms of quality, the figure of 2007 being 87%). The second place is sustained by the metallurgy (66%, 64% in 2007), the third is occupied by chemistry and petrochemistry (57%, 36% in 2007). The proportion of the Russian enterprises regarding the quality of the goods produced as higher than that of the competing import enhanced up to 12% (versus 9% in 2007). The construction materials industry retained the leading position with regard to the qualitative superiority (46%), whereas the machine-building industry, in which only 5% of the plants ventured to estimate the quality of their production as better than that of the import, remained the outsider. Vice versa, 43% of the machine-building enterprises recognized the quality superiority of the import (42% in 2007). No other branch of industry had such a pessimistic estimation of the quality of the goods they produce. The situation in timber processing complex, 40% of enterprises recognizing the superior quality of the import, and chemistry and petrochemistry (34%) is a bit better.
In contrast to 2007, the import no more costs the same as the domestically produced goods on the whole at all the markets. A year ago, there was nearly parity at the markets of processing industries competing with import: at 37% of the markets the prices for the import were higher, and at 35% - lower than the prices of Russian goods. 28% of the Russian enterprises considered their prices as nearly equal to the prices of the competing import. In 2008 42% of the competing import is more expensive than domestically produced goods, and 27% -cheaper. 31% of the Russian enterprises hold that their production has the same price as the import production. The balance in the light industry and the construction materials industry is, however, unfavorable for the domestic producer: there the competing import is cheaper than the domestically produced goods, and quite often, it should be noted.
Combined analysis of the "quality to price" ratio demonstrated that over the year the Russian industry has not lost its competitive advantages, and, taking into account the ongoing invasion of the import (or, in other words, the frequency of encountering the import), has even strengthened them.
First, at 16% of the markets the import is non-competitive since its prices are higher or equal to the prices of the domestically produced goods, the quality of the import goods being the same or lower than that of the domestically produced. A year ago there were 10% of such markets. It is in the foodstuffs production where such markets have spread considerably (59% versus 17% in 2007). In other sectors the scale of change is much more moderate, but also positive for the domestic producer. Only the machine-building and timber processing remained at the same positions.
Constandon materials industry
Chemistry, petrochemistry
Foodstuffs production
Timber processing
Machine -building
Light industry
Metallurgy
54
■ 2007
□ 2008
0
10
20
30
40
50
60
Fig. 28. Proportion of Markets At Which Import Competes with Domestically Produced Goods "On Equal Terms", As Broken by Branches of Industry According to Standard
Industrial Classification, As Percentage
Second, the Russian industry succeeded in retaining the share of markets with the correct (adequate) ratio of price to quality of the goods produced domestically and those imported. That is higher quality of import is there combined with the higher price, equal quality - with equal price, lower quality - with lower price when compared with the Russian goods. At such markets the Russian goods compete with the import on equal terms by the ratio "price to quality". The same as a year ago there are 36% of such markets on the whole throughout the industry. However if in 2007 it was the foodstuffs production that held the leading positions when the equal competition was concerned, now it is the light industry that holds the first place (see Fig. 28). For the latter branch of industry this is an indisputable success, taking into account the large-scale invasion of the competing import.
Third, the scale of noncompetitiveness in the Russian industry on the whole remained practically the same. The same as a year ago, 22% of Russian enterprises admitted that the goods they produce are inferior to import goods in respect of the ratio "price to quality". The situation by sectors of industry is however less simple (see Fig. 29). Whereas the light industry, machine-building and metallurgy succeeded in maintaining the scale of their noncompeti-tiveness at the same level or even in lowering it, the timber processing industry, foodstuffs production and chemistry industry, as well as production of construction materials yielded to import. The construction materials industry experienced the most problems, noncompetitive-ness growing by 13 points over the year.
Fig. 29. Share of Markets by Branches of Industry, According to Standard Industrial Classification, In Which Domestic Production Is Noncompetitive, As Percentage
As a result, according to the estimations of the enterprises, there is still 78% of the goods produced by the Russian processing industry that are competitive with the import. This figure of 78% includes the markets with no import present at all, the markets at which the import is non-competitive because of the "price to quality" ratio and the markets where the competition with the import is going on equal terms. As broken by branches, the proportion of such markets vary from 67% in chemistry to 91% in metallurgy in 2008. The structure of the competitive ability (and consequently the extent of protection of the enterprises) is different by branches (see Fig. 30). The position of the Russian enterprises is best protected at the markets where the import is present but is non-competitive with the domestically produced goods by the ratio "price to quality". That is why it is the positions of the Russian foodstuffs production, where 59% of the enterprises are superior to the import, are most favorable. Other branches of industry are by far less protected (7-16%). The positions of the Russian enterprises are more vulnerable if they have to compete with the import on equal terms, since in future the import can receive the advantage. The equal competition, however, testifies that the Russian enterprises are ready to and are able to protect their positions. But it is the absence of competition with the import that is the most dangerous for the Russian industry. Such existence with no problems can soon come to the end, and it is unclear whether the enterprises that do not have the experience of the competition with the market will be able to hold the position at the competing market.
Fig. 30. Proportion of Markets As Broken by Branches of Industry, At Which There Is No Import Or Import Competes with Domestically Produced Goods On Equal Terms, Or Import is Non-competitive, 2008, As Percentage
3.2.4. Staff and Labor Productivity
Causes and Results of Staff Shortage in Russian Industry
Despite obvious slow-down of the demand and output growth rates, the Russian industry is still short of staff. In the third quarter of 2008 26% of enterprises reported the number of staff being insufficient taking into account the expected changes in the demand, and in the fourth quarter of 2008 there were 25% of such. It is in the light industry where the staff deficit was the most acute, 56% of enterprises not having enough staff. In other branches of industry the situation is better by far: in machine-building 28% of plants experience the lack of staff, in the construction materials industry - 27% and in foodstuffs production - 23%.
On the whole (on average) the situation with the provision with staff for the industrial growth has aggravated in 2008 (see Table 30). Nearly in all the branches of industry the proportion of the enterprises with the lack of the qualified staff increased. Only the construction materials industry and timber processing complex succeeded in preventing the staff deficit from becoming more acute. The situation in foodstuffs production and metallurgy appear to be relatively happy, but even there 2008 was the least favorable year over thirteen years of monitoring.
Table 30
Proportion of Enterprises with Insufficient Number of Staff By Branches of Industry (Average Annual Data, As Percentage to the Number of Those Responded)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Metallurgy 4 3 3 6 3 3 2 8 5 6 6 7 8
Chemistry and petrochemistry 2 4 7 5 10 10 6 10 6 10 7 10 13
Machine-building 13 9 6 12 25 22 17 18 19 18 21 27 32
Timber processing complex 6 4 4 6 9 8 7 8 7 9 10 20 18
Construction materials industry 6 5 4 10 13 12 14 14 18 13 18 32 31
Light industry 6 9 13 15 28 30 28 28 41 26 41 55 59
Foodstuffs production 2 2 2 4 7 5 2 7 7 4 6 8 11
Source: IET business surveys, 1996-2008
As it is demonstrated by IET monitoring, in 2008 the enterprises experience more difficulties in hiring new employees of three out of four main categories. Whereas in 2007 70% of enterprises did not have many problems when hiring unqualified workers, now there are 56% of such. Similar changes occurred in the category of qualified workers (in 2007 29% of enterprises did not have difficulties in finding them, in 2008 - 22%) and engineers and office workers (2007 - 40%, 2008 - 30%). The absence of difficulties when hiring managers remained at the same level of 30%. Thus, in 2008 the qualified workers were the category of staff most difficult to hire (see Table 31).
Seeing difficult situation with training and searching for qualified workers the enterprises like experienced generals start to increase their reserves. Whereas in 2007 9% of enterprises had such reserves, in 2008 there are 13% of such. It seems that we may once again get the effect of excessive employment, though now these employees are not the dead weight but a precious resource. The reserves of managers at enterprises have also increased. But since the deficit of this category of workers is by far less than the deficit of workers, there are no grounds of talking about the purposeful creation of the reserves by the enterprises.
Table 31
Obstacles for Hiring of Main Categories of Employees in Industry in 2007and 2008 (As Percentage to Those Responded)
_ Engineers and office Shop foremen, heads
Obstacles unqualified qualified workers of departments
2007 2008 2007 2008 2007 2008 2007 2008
no special obstacles 70 56 29 22 40 30 30 30
there is a reserve of necessary employees 7 6 9 13 25 23 32 36
necessary employees cannot be fired 4 3 1 1 8 8 2 2
lack of "idle hands" in the region 7 7 31 30 8 15 12 17
no graduates from educational institutions 1 1 30 32 19 18 12 8
no applications 1 1 5 6 4 2 6 3
low wages at enterprise 17 20 45 49 32 39 24 24
hard working conditions at the enterprise 12 15 13 13 5 1 4 1
not satisfied with applicants' experience, qualifica- 13 11 26 15 22 13 16 8
tion, age
taxation of the enterprise and taxation advantages of 2 1 5 1 4 1 3 1
other enterprises
other 0 2 3 0 1 0 1 1
Source: IET surveys in March 2007 and July 2008
Low wages, the same as a year ago, remain the main obstacle for employees hiring. The extent to which it is spread has increased over the year for three categories of employees out of four (only when hiring the managers, the obstacle remained at the same level as a year ago). When hiring qualified workers low wages are obstacle for half of enterprises already. This circumstance hinders especially the enterprises in machine-building and light industry (see Table 32). The third place is held by the chemistry industry, though there had been a considerable progress as compares with the preceding year. For other categories of workers this obstacle is cited less frequently by 10 points (engineers and office workers), by 25 points (shop foremen and heads of departments) and by 30 points (unqualified workers). However in all cases it is cited most frequently.
Table 32
Frequency of Citation of Low Wages As an Obstacle for Hiring of Qualified Workers and Specialists by Branches of Industry in 2007 and 2008 (as percentage to the number of those responded)
Branches of Industry Qualifies workers Engineers and office workers
2007 2008 2007 2008
Metallurgy 43 17 32 13
Chemistry industry 68 46 42 42
Machine-building 45 59 33 44
Timber processing complex 35 43 24 35
Construction materials industry 34 35 23 34
Light industry 44 49 36 44
Foodstuffs production 31 40 29 39
Source: IET surveys in March 2007 and July 2008
Insufficient number of the graduates from the secondary and higher educational institutions is considered as the second important obstacle for the hiring of the qualified staff. However over the year the frequency of its citation has not changed, which is certainly a plus for the growing economy with the ruined system of the secondary vocational education and devaluated system of higher education. The big role, however, was played by the fact that the requirements of the enterprises for the candidates have lowered. The obstacle "not satisfied with the qualification, experience, age of the applicants" was cited twice less frequently in the Russian industry. It is highly unlikely, however, that such changes occurred to the applicants visiting the personnel departments of factories.
The shortage of "idle hands" in the region holds the third place in the resulting rating. This is a somewhat demographic problem and is especially frequently cited for the category of the qualified workers. It is cited tow times less often for the engineers, office workers and managers.
Situation with the "dead weight" of the staff has not changed over the year in the industry. The same as before this circumstance hardly prevents the enterprises from hiring (or trying to hire) new employees. If any problems exist, they concern engineers and office workers, whom 8% of the enterprises still cannot discharge.
The Russian industry, as it is demonstrated by the results of thirteen-year monitoring, was first faced with the shortage of staff in 2000. All the years that followed the industry had
to take this obstacle into account. Such a long story of staff shortage let the enterprises work out strategies of behavior and estimate their consequences to the sufficient extent.
The most wide-spread consequence of the staff shortage in the Russian industry was the decrease in the quality of the goods produced. This was reported by a half of entrepreneurs (see Fig. 31). This phenomenon is especially wide-spread in the construction materials industry (65% of enterprises) and machine-building (59%). It is in the construction materials industry where the situation is most dramatic, the decrease in the quality of the goods produced being 3-4 times as widespread as other consequences of staff shortage. The second place in the branch rating is occupied by the increase on wages, but it is cited by only 19% of the directors of enterprises producing construction materials. It is in the foodstuffs production where the quality of the goods produced is least affected by the shortage of staff, only 23% of enterprises citing such a consequence. In this branch the enterprises are more prone to increase the wages than to decrease the quality of the goods produced. This fact is certainly quite comforting for the population. The problem of staff shortage in the branch is minimal (see Table 30).
The second place is held by the impossibility to increase the output even if there are orders present. Such a consequence of staff deficit was registered at more than two thirds of the enterprises. It is the machine-building that turned out to be an undisputable leader with respect to this consequence, the output being restricted at a half of the enterprises. The enterprises of light industry react a bit better, the growth of production being limited only at one third of the enterprises.
A quarter of the Russian industrial enterprises has to reduce the output volumes because of the shortage of staff. It should be noted that in this case it is a question of the reduction of the production, not of the impossibility to increase the production. This reaction to the staff shortage is equally spread in the branches with the exception of the light industry, where it is the most frequently cited (48%), exceeding even the decrease in the goods quality (45%).
Only 15% of enterprises can afford investments measures in response to the problem of staff shortage. They prefer purchasing more productive equipment. In machine-building industry such strategy is applied by 23% of enterprises, the figure for other industries being substantially below.
Thus, the major (most widely spread) consequence of staff deficit in the Russian industry is the decrease in the quality of the goods produced (49%) and no the limitation for the growth of the output (36%). However the staff shortage has even more serious negative effect on the production of the industrial goods: 26% of enterprises have to decrease the output because of it. As a result, not regarding repeat count, the shortage of staff has a negative effect on the dynamics of production at 53% of the enterprises.
As a result, not making repeat count, only 19% of the Russian industrial enterprises can afford active counteraction to the staff shortage (increase in labor productivity, modernization of the equipment, purchase of more productive equipment). Obviously the balance is not favorable for the creation of the competitive innovation economy.
Fig. 31. Estimation of Consequences of Staff Shortage in Russian Industry, as percentage to number of respondents
Labor Productivity
Addressing the State Duma of the Russian Federation on May 8, 2008 V.V. Putin referred to only one problem as a big one and mentioned it in the first place. This problem is the labor productivity. Such priorities of the new chairman of the Government, close attention of the experts and little progress in this field let us refer to the labor productivity as one of the most serious problem of contemporary Russia.
The slogans of authorities and the attention of the experts are but one aspect. Another aspect is the enterprises' opinion of the productivity, since they are the very organizations to increase it. But do they want to increase the labor productivity of the employees, do they need to? The answer to these questions may cast the light on the problem from quite a different angle.
Regular panel polls of the directors of the industrial enterprises allow receiving the picture of the attitude to the problem of labor productivity at the enterprises themselves. It should be noted that when some questions are concerned the information is provided by a relatively long (for the post-reform period of the Russian economy) monitoring taking into account the factors that could be registered only through the surveys.
In 2008 the labor productivity satisfies 68% of the enterprises in the Russian industry, and only 25%of the producers consider it as below the norm. Thus, only a quarter of enterprises in the Russian industry agree with the opinion of the external observers. The highest
degree of dissatisfaction is observed in the timber processing complex (35%) and machinebuilding (33%). The leaders of the ratings of the satisfaction with the demand are chemistry and petrochemistry (88%). The second place is shared by the foodstuffs production (73%), construction materials industry (72%) and metallurgy (70%). The last place is held by the light industry, but even in this branch more than a half of enterprises (53%) consider their labor productivity as normal (see Fig. 32). In such a situation one can hardly expect that the Russian enterprises will respond to the calls of the authorities to increase the labor productivity actively.
CHEMISTRY AND PETROCHEMISTRY FOODSTUFFS PRODUCTION CONSTRUCTION MATERIALS INDUSTRY METALLURGY TIMBER PROCESSING COMPLEX MACHINE -BUILDING LIGHT INDUSTRY
0 20 40 60 80 100
Fig. 32. Proportion of Enterprises with Normal Labor Productivity, by Branches,
in 2008, As Percentage
The question on the plans for the changes of the output and the plans for the changes in the number of those employed, which are included in the list of the European harmonized survey questionnaire and are asked to the IET panel respondents since 1993, enable estimating the intentions of the industrial enterprises in the field of labor productivity over 16 years of economic reforms. The results of the calculation basing on the complimentary matrixes provide two main characteristics of these intentions: the share of enterprises planning to increase the labor productivity in the forthcoming months and the share of enterprises intending to leave it unchanged.
The first results (see Fig. 33) testify that the majority of the Russian industrial enterprises prefer changing the output and the employment unilaterally, that is leaving the labor productivity unchanged. The share of such enterprises varied from 48 to 77% over the period of monitoring, and was on average equal to 60%.
This means that the majority of the Russian enterprises has always preferred not to plan the change in the labor productivity. Or to be more precise: the majority of the Russian enterprises planned such changes in output and employment that resulted in retaining the existing labor productivity. There were only three times when the quarterly monitoring of the enter-
prises' intentions indicated the decrease of the intentions to retain the productivity down to 48-50%, i.e. to the level at which there could be more intentions to increase the labor productivity in the Russian industry. However this did not happen. The intentions to increaser the productivity just reached their maximum levels at that time (45-46%).
Fig. 33. Proportion of Enterprise Intending to Change Labor Productivity,
1993-2008, as percentage
The intentions to change/retain the labor productivity in the Russian industry were characterized by certain dynamics. The first period that seems to have started with the beginning of the economic reforms came to the end at the beginning of 1998, a several months before the default. At first it was characterized by a high level of the desire to retain the existing labor productivity, and, correspondingly by low level of the desire to increase it. At the end of 1993-the beginning of 1994 the share of enterprises not intending to change the productivity reached 76%, and of those desiring to increase it was just 16-19%. However such a ratio of enterprises plans (not a favorable one) started to change gradually to the better and by the beginning of 1998 the share of such intentions was 46%. On average over 1998 the proportion of these plans made 40%. Both the results of 1998 are absolute record-breaking: the first for the quarterly dynamics, and the second - for the annual dynamics. Thus, before the default of 1998 there was the biggest number of the Russian enterprises observed which were ready to increase the labor productivity. The readiness was especially high in the metallurgy and the chemistry industry (see Fig. 34). The situation in the light industry and foodstuffs production was opposite in 1998, their readiness to increase the labor productivity being two times lower than the leader's.
METALLURGY
CHEMISTRY AND PETROCHEMISTRY
TIMBER PROCESSING COMPLEX
MACHINE -BUILDING
CONSTRUCTION MATERIALS INDUSTRY
LIGHT INDUSTRY
FOODSTUFFS PRODUCTION
0 10 20 30 40 50 60
Fig. 34. Proportion of Enterprises Intending to Increase Labor Productivity, As Broken By Branches, in 1998, As Percentage
Thus, the trying conditions of pre-default development for the Russian industry (severe limitations of the demand, non-payments, barter, largely advertized competition with the import and other features of the 90-ies now forgotten) still made the enterprises plan the increase in labor productivity. At least that was true before the 1st quarter of 1998. Two more metering of the enterprises' plans to increase labor productivity (April and June 1998), that were before the default, demonstrated the decrease in the intentions to increase the productivity down to 37%, the intentions to retain the productivity growing up to 50%. Though there were no obvious reasons for that: solvent demand and output continued to drop, their forecasts became worse and worse. There were no sudden changes in the economic situation in Russia envisaged.
It seems that the enterprises were ready to fight for the growth of productivity only before the 1st quarter 1998. Then such a desire disappeared, which is most probable due to the fact that they realized lack of prospects when applying such measures in the existing economic situation.
Thanks to the default the Russian industry came out of the crisis ... and the necessity to increase the labor productivity lowered at the Russian enterprises. The first (positive) consequences of the default were experienced by the Russian industry only in November-December 1998. Then the demand decrease rates slowed down and the forecasts for the changes in the indices became better. The general panic (ruble devaluation, crash of the banking system, drop in the level of life of the population) did not enable the industrial enterprises (and not only them) to appreciate the consequences of the default to the full extent. That is why there were no fundamental shifts in the plans for the changes in labor productivity at the end of 1998 -the beginning of 1999: the readiness to increase labor productivity remained in the range of 37-39% (the same as in three preceding quarters). However in the 2nd and the 3rd quarters
225
1999 the inclination to increase the productivity decreased down to 32%, and it reached 26%
rd
in the 3 quarter 2000, which has been the absolute minimum of the ten-year period (from January 1996 to July 2006). It is obvious that the reason for such a decline in the intentions to increase labor productivity was the fundamental change in the dynamics and the nature of the industrial growth after the default. By that time there were not only the changes in the development of the main indices occurring in the industry, but the attitude of the enterprises towards their position at the market had changed. They became sure in the steadiness of the trends for the industrial growth and in its normal (non-barter) nature. This change in the understanding is testified by the change in the policy for the management of the finished goods stocks by the Russian enterprises: whereas earlier the producers tried to minimize their stocks at any opportunity, in 2000 they transferred to the manageable maintenance of the excesses of finished goods, which enabled them to serve new customers quickly without putting additional strain on the production. Under such conditions the necessity to increase labor productivity decreased.
On the whole in 2000 in the industry this figure made only 30%, i. e. only 30% of enterprises planned such a change in output and employment that could provide the increase in labor productivity. 62% of enterprises preferred to leave it unchanged. In 2000 the readiness to increase labor productivity reduced in all the branches of the Russian industry. As a result
2000 was one of the worst years with the respect to the number of enterprises intending to increase labor productivity (see Fig. 35).
50
40
1993 1995 1997 1999 2001 2003 2005 2007
Fig. 35. Share of Enterprises, Expecting Labor Productivity to Grow, Average Annual Data, As Percentage
However in 2001-2001 the dynamics of demand and output made the enterprises concern the problem of labor productivity once again. in that period the sales and production growth rates lowered to the values that had been the worst in the post-default period. The extent to which the intentions to increase productivity had spread went up to 46% by the end of 226
2002 (the same as at the beginning of 1998). Average annual figures of 2002 demonstrated that 39% of Russian enterprises had plans to increase productivity, which was only 1 per cent below the figure of 1998 and was the record-breaking figure for the post-default period.
The period of 2003-2004 let the Russian enterprises "forget" about the necessity to increase labor productivity. Increase in sales and production growth rates together with good provision with finished goods reduced the extent to which the plans to increase the productivity were spread in the industry to 30-37%, average annual figure being 35%. 2005 was the last favorable year for the increase in labor productivity. The level of the intentions to increase it went up to 42-43% in the first half, average annual figure being 37%, 2005 holding the third place after 1998 and 2002 as a result.
Last years of 2007 and 2008 turned out to be most unfortunate for the plans for the increase in labor productivity. In 2007 the inclination of enterprises to increase it lowered down to 30% (the minimum figures of the post-default period), in 2008 it made 33% (the last but one place in the post-default period). The enterprises obviously do not have a need to increase labor productivity.
The analysis of the plans to increase labor productivity by branches has shown that it is the machine-building that has been the leading industry in this sphere most often (see Fig. 36). Only in 1996 this branch was considerably behind light industry and foodstuffs production. Now only 28% of enterprises are registered to have plans to increase labor productivity, whereas in 2002 this figure reached 41% (according to average annual. figures). The largest part of machine-building plants has always planned to change the output and employment in such a way so as to maintain the existing level of productivity. In the first half of 2008 71% of the enterprises in the branch had such intentions, which was the absolute maximum of fourteen-year monitoring. However same proportion of plans to preserve the situation (70%) was registered in 2008 in light industry and foodstuffs production. In these branches, however, the results are not record-breaking: foodstuffs production was mare conservative in 1993 (79%) and the light industry - in 1997 (76%).
As it is demonstrated by the calculations, the share of enterprises that do not have intention to change labor productivity is biggest in machine-building, light industry and foodstuffs production (see Fig. 37). The second place is held by timber processing complex and metallurgy (such plans are characteristic for 59% of enterprises), the third place - by construction materials industry and chemistry industry (49-50% of enterprises). Thus, the main branches of Russian processing industries (machine-building, light industry and foodstuffs production) are least ready to support the summons of the Government to increase labor productivity.
Fig. 36. Share of Enterprises Expecting Growth of Labor Productivity by Branches,
Average Annual Data, As Percentage
MACHINE-BUILDING
LIGHT INDUSTRY
FOODSTUFFS PRODUCTION
TIMBER PROCESSING METALLURGY
CONSTRUCTION MATERIALS PRODUCTION
CHEMISTRY AND PETROCHEMISTRY INDUSTRY
0 20 40 60 80
Fig. 37. Share of Enterprises Intending to Retain Labor Productivity by Branches
of Industry in 2008, As Percentage
The monitoring of the competition that was started by the IET in 1995 allows calculating the inclination to increase the labor productivity at enterprises operating under different 228
competitive conditions for two main kinds of competition: competition with Russian producers and competition with the producers from non-CIS countries.
As it is demonstrated by calculations the strongest and most widespread competition is that between the Russian enterprises. However the intensity of the internal Russian competition does not affect the readiness of enterprises to increase labor productivity (see Fig. 38).
Fig. 38. Readiness to Increase Labor Productivity Intensity of Internal Russian Competition Being Different, As Percentage
When it comes to the competition with the producers of non-CIS countires the situation is similar (see Fig. 39).
Fig. 39. Readiness to Increase Labor Productivity Intensity of Competition with Non-CIS countries Being Different, as percentage
3.3. Restrictions to economic growth in industry on the eve of the crisis
In September 2008, the IET's Department for Economic Situation Surveys conducted a poll among Russian industrial enterprises aimed at identifying the existing obstacles to successful economic development. Within the poll's framework the directors of enterprises were offered questions concerning their assessment of the influences of various factors on their enterprises' development. The factors potentially restrictive to development were subdivided into 3 groups: resource-linked restrictions, administrative restrictions and macroeconomic restrictions. These questions were fully or partly answered to by the directors of 545 enterprises. In this connections, the questions concerning the first group of restrictions were answered on the average by 97.7% of the respondents; those concerning the second group - by 96.7%; and those concerning the third group - by 97.4%.
It should be emphasized that the poll took place in September, i.e. during the period when the real sector of the national economy was still faced with only minimum negative effects produced by the global financial crisis. Evidently, as the crisis aggravated, the perception of obstacles to production development underwent rapid changes, and so towards the end of 2008 it, most probably, already became markedly different from that demonstrated by the poll's results. Nevertheless, the analysis of the "pre-crisis" answers of enterprises is still of significant interest, since it reflects the ways the obstacles to growth in industry were viewed at the end of the period of relatively successful economic development of 2000 - 2008, and also in a certain sense determines the structure of obstacles as it emerged in the framework of a certain specific development model (characterized by high prices of raw materials, relatively easy access to external financing, and the State's increasing participation in economic life).
The distribution of enterprises' answers by each factor group included in the poll is shown in Fig. 40 and in Table 33. Fig. 41 presents the balance (as%) of the answers relative to each group, i.e. the difference between the number of enterprises pointing to a given factor as a significant obstacle to the development of their production and the number of those not regarding that factor as an obstacle.
Fig. 40. Restrictions to production development, as% of the number of enterprises participating in the poll
Fig. 41. Balance of answers (difference between answers "significant obstacle" and "no obstacle") concerning the degree of seriousness of obstacles for the development
of enterprises by separate components, as%
Table 33
Results of the poll concerning restrictions to production development
% of enterprises that have answered this questions
Distribution of answers across groups, as% of sample:
How serious, at present, as obstacles for development of enterprise are:
significant obstacle
insignificant obstacle
no obstacle
difficult to estimate
Power supply and cost of en- 55.0 28.1 1 4.3 0.7 98.2
in c ergy resources
o o Quality and cost of transport 31.6 45.1 1 8.5 2.4 97.6
to £ services
Quality and cost of communi- 7.2 42.2 45.3 2.8 97.4
T3 <D cations services
Labor resources (availability, 59.1 24.6 1 3.4 1.8 98.9
<D qualification, remuneration)
O Complicated procedures of 28.6 31.7 24.4 1 2.1 96.9
O tn access to financial resources
<D CC Cost of attraction of financial resources 41.8 27.5 1 3.9 1 4.1 97.4
% of enter-
How serious at present as obstacles Distribution of answers across groups, as% of sample: prises that
have an-
for development of enterprise are: significant insignificant no obstacle difficult to swered this
obstacle obstacle estimate questions
Tax burden level 66.6 24.0 5.1 2.4 98.2
Supervision and audits by tax 28.1 47.9 1 7.8 4.0 97.8
agencies
Activity of judicial agencies 13.6 33.8 34.7 1 5.8 97.8
Activity of law enforcement 10.3 26.4 44.2 1 6.5 97.4
agencies
m e o Activity of customs agencies 12.8 32.7 40.9 11.2 97.6
o ■js m fù s— Labor legislation 6.4 30.5 57.1 3.3 97.2
Procedures of lease or acquisi- 21.5 22.8 42.4 1 0.6 97.2
tion of land plot
H Licensing procedures 24.0 33.2 30.5 1 0.3 98.0
'fi Procedures of registration and 7.2 1 6.5 46.1 25.7 95.4
S liquidation of enterprises
< Procedures for obtaining construction permits 22.6 1 6.5 30.6 24.2 93.9
Actions undertaken by other 23.5 1 9.6 22.2 30.1 95.4
enterprises in order to eliminate
competition
Necessity for and size of in- 1 0.8 24.2 26.2 33.2 94.5
formal deductions for benefit of
officials
Competition with cheap im- 45.3 22.4 21.7 8.4 97.8
o £ m o fi fi o ports
Ruble's exchange rate 19.4 32.8 27.3 1 6.1 95.8
O VP O o o 4= 5 o a ss Inflation (rapid growth of do- 73.4 20.2 2.2 3.1 98.9
mestic prices)
Unpredictability of government economic policies 53.2 25.0 5.0 1 4.1 97.2
On the whole, the economic environment in September 2008 can be described as moderately satisfactory. Among the 16 factors included in the poll, five were named as significant obstacles to production development by more than half of the enterprises participating in the poll. Another seven factors represent either significant or insignificant obstacles more than half of the enterprises across the sample. Only one factor out of 16 (prevailing labor legislation) is described as no obstacle to development by more than half of the sample. At the same time, the significance of the three different groups of factors is by no means similar: according to the respondents, resource-linked and macroeconomic restrictions were producing much stronger influence on the development of enterprises than administrative (institutional) restrictions did. This latter finding is rather unexpected. Traditionally, it has been believed that it is the institutional restrictions, linked to the State exercising its regulating and supervisory functions, that are the most restrictive to the development of the real sector of Russia's national
economy11.
Among the factors of the first group, which are associated with resource-linked restrictions, the majority represented significant obstacles to the development of enterprises. The
11 V.V. Dashkeev, L.M. Freinkman. Rossiia v 2007 godu: riski zamedleniia ekonomicheskogo rosta na fone sok-hraniaiushcheisia institutsional'noi stagnatsii. [Russia in 2007: risks of slowdown in economic growth against the background of persistent institutional stagnation.] Voprosy ekonomiki [Issues of Economics], 2008: 4: 75-93.
12
strongest concern of the directors of enterprises was the shortage of labor resources: 59.1% of the respondents named it as a 'significant obstacle' to growth; 24.6% - as an 'insignificant obstacle'; and only 13.4% of the respondents regarded it as no problem at all. Next in impor-
13
tance among the restrictions to growth, according to most of the enterprises, were problems with power supply and the cost of energy resources - in 55.0% and 28.1% respectively of all answers this factor was described as a 'significant' or 'insignificant obstacle', and only 14.3% of the enterprises has no problems with power supply. The quality and cost of transport services, the cost of attracted financial resources and difficult access to these resources were also restricting production development at a majority of the enterprises being surveyed, although with regard to these three factors the difference between the answers 'significant obstacle' and 'no obstacle' is smaller than in case of the first two factors. It is also noteworthy that a considerable portion of the respondents could not assess the effect on their production of the cost of attracted financial resources and difficult access to them (14.1% and 12.1% respectively). The only factor in the group of resource-linked restrictions that presented no obstacle for the development of a majority of the enterprises in September 2008 was the quality and cost of communications services.
In contrast to the first group, administrative restrictions are not regarded by the majority of the enterprises surveyed as a serious obstacle. The most important growth-restricting factors in this group were the size of the tax burden and the supervision and audits conducted by tax agencies. The shares of enterprises estimating the first of these factors as an obstacle - either a 'significant' or an 'insignificant' one - are 66.6% and 24.0% respectively, and only 5.1% respondents did not see any problems in their taxation level. Tax audits were regarded as a source of serious worries by a somewhat smaller number of enterprises - 28.1%; nevertheless, the fact that the estimation 'insignificant obstacles' constituted nearly half (47.9%) of all the answers to that question demonstrates that this factor was also restricting development to a significant degree. It is necessary to note that the much higher significance for enterprises of the obstacles associated with the actual level of tax burden, as compared to the problems of tax administration, was one of the unexpected findings resulting from that poll. This finding differs from the results of earlier polls among Russian enterprises and therefore, no doubt, requires further monitoring14. We think it rather unlikely that any dramatic improvements could have occurred lately in the quality of tax administration in the Russian economy.
The other administrative restrictions were not regarded by the majority of respondents as serious obstacles to the development of their enterprises. The most favorable, from this point of view, were the administrative procedures reflecting the situation with labor legislation and the procedures registration and liquidation of enterprises. A total of 6.4% and 7.2% of enter-
12 The statistical significance of the shares of respondents that gave certain specific answers to the questions concerning different factors is sufficiently high in all the cases, if not stated otherwise in the text. We applied the standard test for the difference between two population proportions.
13 It should be noted that the statistical significance of the differences between the shares of enterprises that gave the answers "significant obstacle" and "no obstacle" in regard to various pairs of factors is also sufficiently high in the majority of cases.
14 Thus, for example, in BEEPS survey (2005) the number of enterprises considering tax administration to be an obstacle to their business (60%) was higher than the number of those believing the levels of tax rates to be such an obstacle (54%) (see Table 38). The available comparable international data based on the 2006 estimates also point to the relatively favorable character of the Russian situation with regard to tax rates, while tax administration, by contrast, appears to be complex and cumbersome (Paying Taxes 2008. The Global Picture. The World Bank and PricewaterhouseCoopers. 2007).
prises respectively encountered serious problems caused by the effect of these factors; on the contrary, 57.1% and 46.1% of the respondents experienced no difficulties in these spheres. At the same time, it should be noted that an unexpectedly high percentage of directors of enterprises failed to offer any estimates of the influence on production of many administrative factors, such as the necessity to make informal deductions for the benefit of government officials (33.2% of answers), actions undertaken by other enterprises in order to eliminate competition (30.1%), the procedures of registration and liquidation of enterprises (25.7%), the obtaining of construction permits (24.2%), and the activity of law enforcement (16.5%) and judicial agencies (15.8%).
In the group of macroeconomic restrictions the first place, by its negative effect on the development of enterprises, is inflation: 73.4% of the respondents pointed to rapid growth of domestic prices as being a significant obstacle, and only 2.2% did not consider inflation to be a restricting factor. Second came the factor of "unpredictability of government economic policies" (53.2% u 5.0% respectively), and the third place was occupied by competition with cheap imports (45.3% and 21.7%). In this group only the ruble's exchange rate was named by the majority of respondents either as an insignificant obstacle to their development (32.8% of the answers) or as no obstacle at all (27.3%).
Also of interest are the differences between the answers offered by directors of enterprises depending on how they estimated their prospects for increasing output (Table 34). Significant15 differences are noted in the estimations of the effects of many of the factors in all the three groups of restrictions. On the whole, the optimistically-minded directors (i.e. those expecting an increase in their production) gave more positive estimations of their economic environment and noted less restricting factors with regard to their production development that their more pessimistic counterparts (i.e. those expecting a fall in output). The difference in the corresponding balances of answers was between 8 and 20 p. p.
Table 34
Distribution of answers depending on prospects of increasing output*
Significant obstacle, as% of sample
No obstacle, as% of sample
Balance of answers, as% of
sample
Significance of
differences
w serious, at present, as obstacles for development of enterprise, are: .¡g e s a et ä ■3 "3 S e s a et s. ^ ■3 "3 S e s a et ■3 "3 s ¿J ' - value
.13 3 to ep 2 s u o •S 3 to ep 2 s u o .13 3 to ep 2 s u o tta st
c e p e e p e c e p X e e p e c e p X e e p X e N
power supply and cost of energy re- 52.47 53.45 12.96 16.38 39.51 37.07 0.41 0.6808
sources
quality and cost of transport 27.16 37.07 22.22 18.97 4.94 18.10 -3.54 0.0005
services **
quality and cost of communications 8.02 10.34 49.38 45.69 -41.36 -35.34 -1.01 0.3113
services
labor resources (availability, qualifica- 61.73 51.72 11.73 15.52 50.00 36.21 2.28 0.0232
tion, remuneration),
complicated procedures of access to 28.40 33.62 21.60 24.14 6.79 9.48 -0.82 0.4129
financial resources
cost of attraction of financial resources 40.74 43.97 11.11 12.93 29.63 31.03 -0.25 0.8016
15 At significance level of 5%.
Significant obstacle, as% of sample
No obstacle, as% of sample
Balance of answers, as% of sample
Significance of differences
How serious, at present, as obstacles for in e in e in e
development of enterprise, are: s a et ^ 3 s a et ^ 3 s a et sci tsi e lu
u ft •S 3 to ep 2 s u o u ft •S 3 to ep 2 s u o u ft •S 3 to ep 2 s u o tta st val-
c e p e p X c e p e p X c e p e p N Oh
X e e X e e X e e
tax burden level 63.58 68.97 3.70 7.76 59.88 61.21 -0.22 0.8232
supervision and audits by tax agencies 24.69 30.17 14.20 18.10 10.49 12.07 -0.41 0.6811
activity of judicial agencies 11.73 12.93 32.72 39.66 -20.99 -26.72 1.11 0.2661
activity of law enforcement agencies 7.41 8.62 45.68 45.69 -38.27 -37.07 -0.20 0.8385
ns io activity of customs agencies 8.64 12.93 40.12 47.41 -31.48 -34.48 0.53 0.5994
cti irt labor legislation 8.02 6.03 53.09 60.34 -45.06 -54.31 1.52 0.1294
s e r procedures of lease or acquisition of 19.14 25.00 41.36 42.24 -22.22 -17.24 -1.02 0.3081
e iv land plot
ta rt licensing procedures 24.07 19.83 35.19 33.62 -11.11 -13.79 0.67 0.5015
nisi im procedures of registration and liquida- 6.17 6.90 47.53 50.00 -41.36 -43.10 0.29 0.7715
d tion of enterprises
< procedures for obtaining construction 22.22 26.72 32.10 28.45 -9.88 -1.72 -2.72 0.0069
permits
actions undertaken by other enterprises 17.28 25.00 28.40 16.38 -11.11 8.62 -5.39 0.0000
in order to eliminate competition
necessity for and size of informal deductions for benefit of officials 9.88 10.34 29.01 31.03 -19.14 -20.69 0.32 0.7487
competition with cheap imports 40.12 47.41 24.07 25.86 16.05 21.55 -1.17 0.2435
ic iom s n ruble's exchange rate 18.52 22.41 25.93 32.76 -7.41 -10.34 0.86 0.3906
n o c e o r c a io cti irt s e r inflation (rapid growth of domestic prices) 74.07 73.28 3.70 0.86 70.37 72.41 -0.37 0.7108
S unpredictability of government economic policies 49.38 62.93 6.17 3.45 43.21 59.48 -2.68 0.0079
* Answers were received from 162 enterprises expecting increase in their output and from 116 enterprises expecting drop in their output.
** Hereinafter the rows are marked where differences are significant for two groups of enterprises.
Thus, among the optimistic directors the balance of answers with regard to the factor 'quality and cost of transport services' was 4.9 p. p. whereas among the pessimistic ones -18.1 p. p. The optimistic directors also have noticeably less complaints concerning problems with obtaining construction permits (the balance answers: - 9.9 against - 1.7), with the actions undertaken by other enterprises in order to eliminate competition (- 11.1 against + 8.6), and with the unpredictability of government economic policies (43.2% against 59.5). Probably, these differences can be explained by the fact that pessimistically-minded directors are inclined to blame external factors for the intrinsic problem of their enterprises.
At the same time, the directors of enterprises expecting an increase in their output were confronted by a more acute shortage of labor resources: the balance of their answers with regard to that factor is 50.0 p. p., while the corresponding index of the pessimistically-minded ones is only 36.2 p. p.
Similar differences were also noted in the answers received from enterprises with different forms of ownership, of different size and belonging to different sectors (Tables 35, 36 and 37 respectively). Thus, state-owned companies complain less often than private companies of
the problems associated with power supply, transport and personnel, as well as with relations with tax, judicial and law enforcement agencies. Bigger enterprises, on the whole, complain less often than smaller ones (with the total number of staff less than 100 persons) of their economic environment. In particular, small-sized enterprises perceive as more problematic such issues as credit accessibility and ease in obtaining licenses and construction permits. Besides, small-sized enterprises believe more often than big ones that the development of their activity is suppressed by the unpredictability of government policy and competition with imported commodities. At the same time, small-sized enterprises voice far less complaints relating to the level of tax burden which, quite evidently, can be explained by their opportunities for applying simplified taxation regimes.
Table 35
Distribution of answers depending on enterprise's size*
Significant obstacle, as% of sample No obstacle, as% of sample Balance of answers, as% of sample Significance of differences
How serious, at present, as obstacles for development of enterprise are: State-owned compa- Private com- State-owned compa- Private companies State-owned com- Private compa Z -statistics P -value
nies panies nies panies nies
s Power supply and cost of energy re- 34.38 56.34 18.75 14.04 15.63 42.30 -2.98 0.0030
n io sources
cti irt Quality and cost of transport services 25.00 31.97 31.25 17.74 -6.25 14.23 -3.26 0.0012
s e r Quality and cost of communications 6.25 7.21 40.63 45.61 -34.38 -38.40 0.45 0.6494
d e services
in Labor resources (availability, qualifica- 46.88 59.84 18.75 12.87 28.13 46.98 -2.08 0.0383
e- tion, remuneration)
cr u Complicated procedures of access to 34.38 28.27 25.00 24.37 9.38 3.90 1.49 0.1355
o s e R financial resources
Cost of attraction of financial resources 37.50 42.11 15.63 13.84 21.88 28.27 -0.78 0.4345
Tax burden level 65.63 66.67 6.25 5.07 59.38 61.60 -0.25 0.8021
Supervision and audits by tax agencies 18.75 28.65 21.88 17.54 -3.13 11.11 -2.53 0.0116
Activity of judicial agencies 12.50 13.65 50.00 33.72 -37.50 -20.08 -2.34 0.0195
s Activity of law enforcement agencies 6.25 10.53 59.38 43.27 -53.13 -32.75 -2.36 0.0185
n io Activity of customs agencies 0.00 13.65 59.38 39.77 -59.38 -26.12 -4.06 0.0001
cti irts Labor legislation 0.00 6.82 75.00 55.75 -75.00 -48.93 -2.86 0.0044
se r Procedures of lease or acquisition of 12.50 22.03 56.25 41.33 -43.75 -19.30 -3.31 0.0010
e iv land plot
ta rt ts Licensing procedures 21.88 24.17 40.63 29.63 -18.75 -5.46 -3.02 0.0027
nii Procedures of registration and liquida- 9.38 7.02 37.50 46.59 -28.13 -39.57 1.29 0.1981
im d tion of enterprises
dA Procedures for obtaining construction 15.63 23.00 43.75 29.82 -28.13 -6.82 -4.29 0.0000
permits
Actions undertaken by other enterprises 25.00 23.39 25.00 22.03 0.00 1.36 -0.67 0.5063
in order to eliminate competition
Necessity for and size of informal de- 3.13 11.31 21.88 26.51 -18.75 -15.20 -0.54 0.5902
ductions for benefit of officials
ic Competition with cheap imports 46.88 45.03 34.38 20.86 12.50 24.17 -1.51 0.1313
ms ° S Ruble's exchange rate 18.75 19.49 25.00 27.49 -6.25 -7.99 0.35 0.7230
no O ¿2 cci Inflation (rapid growth of domestic 65.63 73.88 3.13 2.14 62.50 71.73 -1.12 0.2636
O rs o u prices)
ar Unpredictability of government eco- 34.38 54.19 9.38 4.68 25.00 49.51 -2.69 0.0073
nomic policies
: Answers were received from 32 state-owned and 513 private companies.
Table 36
Distribution of answers depending on enterprise's size*
Significant obstacle, as% of sample
No obstacle, as% of sample
Balance of answers, as% of
sample
Significance of differences
h s« h h s«
How serious, at present, as obstacles for be be be be be be s
development of enterprise, are: IS o — o IS o — o IS o — ® IS o — O IS o — CS IS o — CS M tta st N e S
o o o o o o Ph
h h h h h h
pe pe pe pe pe pe
m e Power supply and cost of energy resources 65.52 54.56 10.34 14.56 55.17 40.00 1.62 0.1063
13 Quality and cost of transport services 31.03 31.65 13.79 18.83 17.24 12.82 0.69 0.4915
m fù s- M o sO Quality and cost of communications services 10.34 6.99 37.93 45.83 -27.59 -38.83 1.21 0.2257
Labor resources (availability, qualification, remuneration) 48.28 59.81 17.24 13.01 31.03 46.80 -1.66 0.0981
Complicated procedures of access to financial resources 37.93 28.16 24.14 24.47 13.79 3.69 2.63 0.0088
& Cost of attraction of financial resources 37.93 42.14 13.79 13.98 24.14 28.16 -0.47 0.6392
Tax burden level 41.38 68.16 3.45 5.24 37.93 62.91 -2.69 0.0073
Supervision and audits by tax agencies 24.14 28.35 24.14 17.48 0.00 10.87 -1.87 0.0613
Activity of judicial agencies 17.24 13.40 34.48 34.76 -17.24 -21.36 0.53 0.5974
Activity of law enforcement agencies 13.79 10.10 37.93 44.66 -24.14 -34.56 1.15 0.2494
m C O Activity of customs agencies 10.34 13.01 44.83 40.78 -34.48 -27.77 -0.78 0.4342
o * Labor legislation 10.34 6.21 65.52 56.50 -55.17 -50.29 -0.51 0.6092
S> Procedures of lease or acquisition of land plot 20.69 21.55 37.93 42.52 -17.24 -20.97 0.48 0.6302
« Ja m Licensing procedures 37.93 23.30 24.14 30.68 13.79 -7.38 4.16 0.0000
e S Procedures of registration and liquidation of enterprises 10.34 6.99 44.83 46.21 -34.48 -39.22 0.51 0.6107
< Procedures for obtaining construction 27.59 22.33 24.14 31.07 3.45 -8.74 2.29 0.0221
Actions undertaken by other enter-
prises in order to eliminate competi- 20.69 23.69 17.24 22.52 3.45 1.17 1.06 0.2889
tion
Necessity for and size of informal deductions for benefit of officials 6.90 11.07 10.34 27.18 -3.45 -16.12 1.84 0.0668
Competition with cheap imports 65.52 44.08 3.45 22.72 62.07 21.36 5.03 0.0000
o £ m Ruble's exchange rate 10.34 20.00 13.79 28.16 -3.45 -8.16 0.91 0.3611
C O O VJ3 O o <D O <3 <u Inflation (rapid growth of domestic prices) 72.41 73.59 0.00 2.33 72.41 71.26 0.13 0.8939
s Unpredictability of government economic policies 72.41 52.04 0.00 5.24 72.41 46.80 2.69 0.0074
* Answers were received from 29 enterprises with personnel of no more than 100 persons and from 515 enterprises with personnel of more than 100 persons.
Table 37
Distribution of answers depending of enterprises' types of activity
Significant obstacle, as% of sample
No obstacle, as% of sample
Balance of answers, as% of
sample
Significance of differences
How serious, at present, as obstacles for development of enterprise, are: if st £ .s tc ytr st = ! M •S s ytr st a .s ff tc ytr st = ! M •S s ytr st £ .s ff tc ytr st S ! M .s s statistics ' - value
a tr s e c o a tr s e c o a tr s e c o N
e r p e r p e r p
m e o Power supply and cost of energy resources 52,63 55,45 15,79 14,34 36,84 41,11 -0,37 0,7104
o 'h Quality and cost of transport services 57,89 30,78 10,53 18,74 47,37 12,05 4,46 0,0000
m fù s- Quality and cost of communications services 21,05 6,50 26,32 46,27 -5,26 -39,77 3,04 0,0025
M Labor resources (availability, qualification, remuneration) 31,58 60,23 31,58 12,43 0,00 47,80 -4,11 0,0000
sO m Complicated procedures of access to financial resources 26,32 28,68 31,58 24,09 -5,26 4,59 -2,01 0,0448
Qi Cost of attraction of financial resources 31,58 42,26 21,05 13,77 10,53 28,49 -1,72 0,0868
Tax burden level 73,68 66,73 5,26 4,97 68,42 61,76 0,59 0,5570
Supervision and audits by tax agencies 26,32 28,11 21,05 17,59 5,26 10,52 -0,74 0,4602
Activity of judicial agencies 31,58 13,00 21,05 35,18 10,53 -22,18 3,39 0,0007
Activity of law enforcement agencies 21,05 9,94 21,05 44,93 0,00 -34,99 3,17 0,0016
e o Activity of customs agencies 10,53 13,00 36,84 40,92 -26,32 -27,92 0,15 0,8786
o 'C Labor legislation 15,79 6,12 47,37 57,36 -31,58 -51,24 1,68 0,0927
s^ Procedures of lease or acquisition of land plot 47,37 20,65 36,84 42,64 10,53 -21,99 3,38 0,0008
43 m Licensing procedures 31,58 23,71 15,79 30,98 15,79 -7,27 3,73 0,0002
S •a < Procedures of registration and liquidation of enterprises Procedures for obtaining construction permits 10,53 15,79 7,07 22,94 42,11 21,05 46,27 30,78 -31,58 -5,26 -39,20 -7,84 0,67 0,41 0,5038 0,6801
Actions undertaken by other enterprises in order to eliminate competition 15,79 23,90 42,11 21,41 -26,32 2,49 -6,88 0,0000
Necessity for and size of informal deductions for benefit of officials 10,53 10,71 10,53 26,77 0,00 -16,06 1,90 0,0579
m e o Competition with cheap imports 21,05 46,27 31,58 21,03 -10,53 25,24 -3,55 0,0004
■ g Ruble's exchange rate 21,05 19,50 21,05 27,53 0,00 -8,03 1,29 0,1990
. 2 Inflation (rapid growth of domestic 63,16 74,19 0,00 2,29 63,16 71,89 -0,83 0,4073
§ prices) n o
g Unpredictability of government eco- 57,89 52,77 0,00 5,16 57,89 47,61 0,88 0,3784
acr nomic policies
__________
* Answers were received from 19 enterprises in the extracting industiy and 523 enterprises in the processing industry.
There are also some differences with regard to several factors between enterprises belonging to the extracting and processing industries. However, in all these cases any interpretation of the obtained results must be done with caution, because the groups of enterprises vary considerably in number (the poll encompassed 32 state-owned and 513 private companies, 29 small-sized and 515 big enterprises, 19 enterprises in the extracting and 523 in the processing industries).
Of separate interest in the comparison of the results of the IET's poll with those of similar surveys conducted by the World Bank in 2002 and 200516 (Table 38). This comparison points to significant improvement of the economic conditions in industry: as compared to the years 2002 and 2005, in 2008 a number of factors were producing a far less marked negative influence on the development of Russian enterprises. These factors are: the quality and cost of communications services; difficult access to financial resources and the cost of their attraction; the functioning of tax, judicial and customs agencies; the actions undertaken by other enterprises in order to eliminate competition; too complicated licensing procedures; bribe-extolling by officials; and the unpredictability of the government's economic policy.
Table 38
Comparison of the results of the polls conducted by the IET and BEEPS
Percentage of enterprises considering factor to be 'significant obstacle'
BEEPS 2002 BEEPS 2002 BEEPS 2002
s Power supply and cost of energy resources 10.22 11.51 55.05
ion cti Quality and cost of transport services 12.00 12.46 31.56
irt ts e r Quality and cost of communications services 12.45 8.13 7.16
d e M in Labor resources (availability, qualification, remuneration) 32.24 37.37 59.08
c r u o Complicated procedures of access to financial resources 44.83 35.94 28.62
s e Re Cost of attraction of financial resources 43.39 45.42 41.83
Tax burden level 56.00 54.10 66.61
Supervision and audits by tax agencies 61.57 59.59 28.07
Activity of judicial agencies 26.62 30.41 13.58
Activity of law enforcement agencies - - 10.28
n e Activity of customs agencies 27.74 25.51 12.84
on ir vi n Labor legislation 9.92 17.06 6.42
e ic Procedures of lease or acquisition of land plot 28.43 24.40 21.47
m o n o Licensing procedures 31.85 34.04 24.04
c w Procedures of registration and liquidation of enterprises - - 7.16
Procedures for obtaining construction permits - - 22.57
Actions undertaken by other enterprises in order to elimi- 36.83 39.02 23.49
nate competition
Necessity for and size of informal deductions for benefit of 29.12 39.34 10.83
officials
Competition with cheap imports - - 45.32
o o
^ Ruble's exchange rate - - 19.45
o Inflation (rapid growth of domestic prices) - - 73.39
ec
o r c
•S Unpredictability of government economic policies 62.83 59.01 53.21
16 World Bank Business Environment and Enterprise Performance Survey - BEEPS. Additional information concerning BEEPS can be found, e. g., in: Raj M. Desai and Itzhak Goldberg, Eds. 2007. Enhancing Russia's Competitiveness and Innovative Capacity. The World Bank. Washington, DC. 240
On the contrary, if we take some resource-linked factor, there was a dramatic deterioration of the existing situation - in terms of the quality and cost of transport services, and the availability of labor resources and power supply. By comparison with 2005, the share of enterprises noting a growing number of obstacles represented by these factors increased by 19.1, 21.7 and 43.5 p. p. respectively.
Especially noteworthy is the fact that the IET's poll has revealed a significantly lower level of dissatisfaction on the part of enterprises with the existing administrative restrictions than that demonstrated by BEEPS' results. Thus, for example, the share of enterprises viewing as a serious obstacle to their development the factor represented by the supervision and auditing conducted by tax agencies decreased by 31.5 p.p. by comparison with 2005; the factor of bribes to officials - by 28.5 p.p.; the factor of the activity of judicial agencies - by 16.8 p.p., the factor of the actions undertaken by other enterprises in order to eliminate competition - by 15.5 p.p., and the factor of the activity of customs agencies - by 12.7 p.p. This is a rather unexpected finding, for which we can offer several mutually supplementing explanations.
Firstly, it should be recognized that in the past 4 or 5 years there were some evident improvements in the quality of economic environment. This, in particular, was demonstrated by the results of monitoring of the administrative barriers in the way of development of small
17
businesses conducted by the Center for Economic and Financial Research (CEFIR) . Some of these improvements were directly linked to the adoption, in 2002 - 2003, of federal laws on registration, licensing, inspections and simplified taxation. The slights improvements that took place after 2003 were explained by the CEFIR's researchers with better enforcement of these laws, with the resulting gradual reduction in direct violations of prevailing legislation - such as, for example, unlawful demands that enterprises should license their activity. Below we present more detailed comparisons between our results and those obtained by the CEFIR.
However, the improvements that actually occurred in economic environment are obviously insufficient. This is testified to by the following facts:
• the scale of improvements in Russia falls behind that characterizing the business climate in the majority of East European countries, which is confirmed by studies across countries. In the prestigious international rankings on the ease of doing business published by the World Bank, Russia ranks low, and does not seem to be able to change it in any marked degree (106th out of 178 countries in 2007)18;
• the improvement of economic conditions had varying effects on different groups of enterprises. The greatest benefit from the improvements was gained by bigger and well-established enterprises, which have for many years been operating on their relevant markets and learned how to effectively deal with the administrative problems they are now and then have been confronted with. The economic conditions for the functioning of small-sized enterprises, as follows from the poll's results, are noticeably less favorable. Besides, we assume than the terms for the entry on the market of new players are very hard, just as before. That is why we see so few newly emerging enterprises and such a low level of competition. However, this latter assumption cannot be verified on the basis of only the data obtained through our polls, because those failing to get through the "entry" barriers do not participate in them;
17 Monitoring administrativnykh bar'erov na puti razvitiia malogo biznesa v Rossii. [Monitoring of the administrative barriers in the way of small businesses' development in Russia.] Round 6. CEFIR. June 2007.
18 Doing Business 2008. World Bank. 2007
• in 2007-2008, Russian industrial enterprises were confronted with relatively new resource-linked restrictions to their growth (first of all, shortages of labor and energy resources). Against this background it appears rather natural that the estimations of traditional administrative restrictions became less prominent. The changes in the level of administrative obstacles to development might have actually been rather moderate, but in face of the new problems their significance for the enterprises noticeably diminished It seems that the results of the IET's poll have demonstrated only a relative, and not absolute (as compared to the effects produced by other factors) decrease in administrative barriers.
Secondly, the differences between the results obtained by the IET and BEEPS are also linked to the differences in the properties of relevant samples. The BEEPS' poll encompasses a greater number of small-sized enterprises (only 34% of them having their staff in excess of 50 persons), while the IET's sample displays a strong shift towards big enterprises (94% of enterprises with staff of more than 100 persons). Besides, all the 545 enterprises in the IET's panel are industrial ones, whereas in the BEEPS' 2005 poll only 40% were in industry. Therefore, the much lower level of complaints concerning administrative restrictions revealed by the IET can largely be explained by the fact that among the respondents there are too few small-sized enterprises, such restrictions being much more important for the latter category. This means that the scale of the actual reduction in administrative barriers in the Russian economy in the period of 2005 - 2008 was, most probably, markedly lower than that displayed in Table 38. In other words, the results of the IET's poll, because of the sample's structure, underestimate the problems relating to the still existing administrative restrictions.
Thirdly, as has been mentioned earlier, the unexpectedly high share of respondents in the IET's poll failed ("found it difficult") to answer the questions concerning the influence of administrative factors on the development of their enterprises. This has led us to the assumption that administrative restrictions actually represent a more serious problem in industry than it can be concluded on the basis of the poll's results, but in the present situation the directors of enterprises are by far not so ready to openly discuss it than they did back in 2002 or 2005. This, in our opinion, also attests to the fact that the poll's results indeed underestimate the scope of the problems associated with administrative restrictions.
Fourthly, the low level of concern displayed by the respondents with regard to administrative (institutional) restrictions can also be explained by the extremely favorable market situation in Russian industry in the period from 2006 to the first half-year 2008. The high growth rate, coupled with a comparatively low level of competition on the domestic market, provided the majority of enterprises with high and sufficiently stable profits. In that situation of stable and considerable financial improvements, institutional restrictions were treated by managers as a secondary problem, especially by comparison with the resource-linked factors which were acting as direct obstacles to production expansion in a situation of high economic demand. As a consequence, in view of such favorable conditions businesses were displaying only minimum demand for institutional reforms.
Within the framework of this latter explanation, enterprises are found to be more sensitive to the limitations of their institutional environment, when on the markets become tougher, and so even small excessive costs associated with superfluous administrative barriers may be of critical significance for their competitive capacity. If this interpretation can indeed accurately explain the prevailing sentiments among Russian industrial enterprises, it means that, as the financial crisis of 2008 - 2009 deepens, the relative importance of administrative restric-
tions will become higher. And thus the demand on the part of businesses for reforms aimed at strengthening the key market institutions will become much greater.
At the same time, this IET's poll addressing the problems faced by Russian businesses is by no means the first one where the answers of respondents pointed to a rather low level of concern with the scope of corruption in this country. Thus, for example, the surveys among small businesses conducted in 2005 and 2006 by "Buttress of Russia" and the All-Russian Center for Public Opinion Studies (VTslOM) have shown that, although corruption is a widespread phenomenon and represents a source of significant expenditures (on the average taking up between 8% and 10% of their aggregate proceeds), in that period it was not regarded by companies as a serious obstacle to development. In particular, in answer to the question as to the most important threats to the development of a business, only 16% of respondents classified corruption as being such a threat. By contrast, such factors as increasing taxes and rent payments were estimated at the level of 63 and 61% respectively19.
Also of some interest is the comparison between the results of the IET's poll and those of the CEFIR's monitoring. It is worth emphasizing that, with regard to a number of factors, there exist considerable discrepancies in the estimates as to the direction of the changes observed: the CEFIR's monitoring recorded an improvement in the situation over time (between 2004 and 2006), while the IET's poll (2008) points to an improvement by comparison with the BEEPS' results (2005). These factors are as follows:
- taxation level (the average estimate of negative effect in the CEFIR's monitoring decreased from 2.78 to 2.65 by five-point scale),
- lack of economic stability (from 2.89 to 2.54),
- tax administration (from 2.59 to 2.34),
- difficulties in attracting capital (from 2.42 to 2.25),
- formalization of lease of land (from 2.68 to 2.52),
- licensing (from 2,22 to 2,13).
Besides, the presence of considerable differences should also be noted in the results of the polls conducted by the IET and the CEFIR. In Fig. 42 the different factors applied in these two polls are ranged in accordance with the strength of their negative effect on the development of enterprises (in terms of per cent, 100% represents the most unfavorable factor). The important quality-linked similarities of the results of the two polls are as follows:
• tax issues are considerably more significant for the development of enterprises than the problems associated with corruption or licensing. The last two factors are not perceived by enterprises as significant restrictions to their development;
• the level of tax burden is perceived as more negative than the quality of tax administration;
• the factor of uncertainty (unpredictability of economic policy) appears to be very significant in both the polls.
At the same time, the estimations of the other three factors are fundamentally different. The complicated procedure of land acquisition and the character of competition with other enterprises appear to be very important for the participants of the CEFIR's poll, but are not
19 Usloviia i factory razvitiia malogo predprinimatel'stva v regionakh Rossii (The conditions and factors of the development of small businesses in Russia" Moscow: OPORA ROSSII and VTsIOM ("Buttress of Russia" and the All-Russian Center for Public Opinion Studies), 2006.
regarded as significant restrictions to growth in the IET's poll. A directly opposite picture emerges in respect of the factor 'terms for the attraction of financial resources'.
* 100% represents the most unfavorable factor.
Fig. 42. Ranging of restrictions in the polls conducted by the IET and CEFIR*
Just as in the case of the BEEPS' poll, certain departures from the results obtained by the CEFIR can be explained by differences between the samples studied. As mentioned earlier, in the IET's poll all respondents are industrial enterprises, and predominantly big ones. As for the CEFIR's poll, it encompasses only small-sized enterprises, mainly in the services sector (those producing industrial goods constitute only 9.9% of the sample).
Also of interest is the comparison between the results of two surveys of industrial enter-
20
prises conducted by the IET in 2007 and 2008. In the first one the heads of enterprises were offered the question as to how the situation with various restrictions to growth had changed in the last 7 years; in the 2008 survey the emphasis was placed on comparative estimations of the importance of different restrictions to growth existing at that moment. Thus, a comparison of the results of two surveys makes it possible to pool the estimations of current levels and dynamics of the quality of the economic environment.
On the whole, the 2007 survey demonstrated that Russian industrialists were not satisfied with the changes in the economic environment that had taken place in the previous years.
20 V. Dashkeev, L. Freinkman. 2008. Institutsional'nye i obshcheekonomicheskie ogranicheniia eko-nomicheskogo rosta (rezul'taty oprosa promyshlennykh predpriiatii) (The institutional and general-economic restrictions to economic growth (the results of a poll of industrial enterprises) // Ekonomiko - politicheskaia situatsiia v Rossii (The economic and political situation in Russia), IET, February, pp. 45-46. http://www.iet.ru/files/text/trends/02-08.pdf 244
An improved situation was noted with regard to only 2 (access to financial resources and labor legislation) out of the 13 components of economic environment included in the survey. The other 11 components were estimated to be negative. In this connection, a positive estimation of changes in the access to financial resources was typical only of big and medium-sized enterprises (the balance of answers is +26 p. p.), while no improvement was observed by the small-sized ones (the balance of answers is -7.9 p. p., indicative of worsening access). The most serious worsening of the economic environment was observed in the following spheres: shortage of labor resources (this was the most significant negative development; 50.4% of the respondents pointed to a deteriorating situation in this sphere, whereas only 8.0% noted its improvement); power supply (49.3% of the answers were indicative of a deteriorating situation, while only 12.0% - of its improvement); and the actions undertaken by other enterprises in order to eliminate competition (25.6% and 4.4% respectively). It is noteworthy that all the groups of enterprises, irrespective of their form of ownership, size or sectoral distribution pointed to the large-scale character of the negative changes occurring in these three spheres.
Besides, it was revealed that the more optimistic managers (those expecting increased output volumes) were less negative than the pessimists in their estimations of the changes in the main factors acting as restrictions to output - power supply and labor resources (the corresponding balances of answers being different by more than 30 p. p.). This finding is well correlated with the results of the 2008 survey mentioned above.
It should be noted that although, with regard to a number of administrative restrictions (the operation of judicial, customs and law enforcement agencies), the summary results of the 2007 survey are indeed negative, the scale of the observed deterioration is not large (the balances of answers being within the range of -10 p. p.). Nevertheless, this result, in our opinion, confirms the earlier conclusion that it is still too early to speak of a consistent lowering of the administrative barriers in the way of economic growth.
On the whole the results of the 2007 survey demonstrate a noticeable - from the point of view of the enterprises - deterioration of the conditions for their economic existence. The fact that the enterprises did not express any serious concerns about the existing administrative restrictions to development in the extremely favorable economic situation of mid-2008 should by no means be interpreted as lack of such concerns in view of the medium-term prospects for the development of the economic environment in the future.
The comparison of the results of the two surveys (Table 39) has demonstrated that fairly recently the only growth factor demonstrating significant improvement while simultaneously not posing as a significant restriction to development at the time of the 2008 survey was that of labor legislation (the difference between the answers 'the situation improved over 7 years' - 'the situation worsened over 7 years' being approximately +13 p. p.; more than 50% of the respondents believed that in September 2008 that factor was not restricting their development). Favorable changes were also noted in the factors relating to access to financial resources and the cost of their attraction (the balance of answers concerning the situation's dynamics amounting to approximately +20 p. p.). However their estimates received in mid-2008 are not unanimous: the cost of attraction of financial resources remained a serious problem (the balance of answers 'significant obstacle' - 'no obstacle' amounted to +27.9 p. p.), whereas the procedure of gaining access to them was found to be problematic by a far lesser number of enterprises (the corresponding - +4.2 p. p.). This leads to the conclusion that, despite the continuing decline in the cost of attraction of resources, the scale of that decline was still too small to satisfy the respondents.
Table 39
Current status (September 2008) and changes (over the period of 2000 - 2007) of each economic environment component, as estimated on the basis of the IET's 2007 and 2008 polls
Changes in 2000-2007
Improvement Deterioration
Not a significant obstacle Labor legislation -
A significant obstacle Cost of attraction of financial Tax burden level,
2008 resources Supervision and audits by tax agencies,
Power supply and cost of energy resources,
Availability of labor resources
* The table shows the factors for which the difference in the balances of answers stating their positive or negative influence (or either improvement or deterioration) amounts to more than 10 p. p.
And finally, several factors simultaneously demonstrated a deterioration of the existing situation by comparison with that of 2000 and the prevalence (at the time of the poll in September 2008) of the estimations 'significant restrictions to growth'. This was true of the availability of labor resources, tax burden level, supervision and audits by tax agencies, and power supply and cost of energy resources.
A A A
• The results of the IET's poll (September 2008) recorded the estimates offered by enterprises with regard to the existing restrictions to their development as of the moment of the onset of the financial crisis. Thus, these results represent a useful baseline for monitoring further development of the situation involving the barriers in the way of growth during the impending period of crisis.
• On the whole, the economic environment can be characterized as moderately satisfactory. The resource-linked (labor, energy) and macroeconomic (inflation, lack of policy stability) factors are perceived by enterprises as key restrictions to growth. Most of the administrative barriers (including corruption) are not regarded by enterprises as serious obstacles to their development.
• There are grounds to believe that, by comparison with the earlier half of this decade, the administrative obstacles to the development of enterprises have become weaker. At least, operating enterprise have by now learned how to effectively deal with them. However, this improvement does not apply equally to all the groups of enterprises. Small-sized enterprises have a higher level of complaints concerning their economic environment. Besides, the poll's results have provided no grounds for a statement that there are presently less barriers in the way of new enterprises' entry into business.
• A comparison between the results of polls conducted in 2007 and 2008 makes it possible to note that, although the enterprises did not perceive the majority of institutional restrictions to growth as significant, in the medium term they, nevertheless, note a certain deterioration of the situation associated with such restrictions.
• It can also be assumed that, when faced with a deepening financial crisis and deteriorating financial situation, enterprises will become to display a much less tolerant attitude towards the traditional limitations of the institutional environment - in contrast to their formerly rather relaxed treatment of such problems in the period of rapid growth and high rates of return. If this observation proves to be correct, in the next few months one may expect a noticeably increased demand for institutional reform on the part of the organized business community.
3.4. Investments in Real Sector of Economy
3.4.1. Internal Domestic Investments in Fixed Assets
The trend for the investments in fixed assets to grow at higher rates than the GDP has been observed in the Russian economy since 2002. In 2008 this ratio sustained, though, as compared with 2007, the growth rates of both the GDP and the investments in fixed assets have slowed down considerably. In 2008 the growth of the GDP made 5.6% versus 8.1% in 2007, while the investments in fixed assets went up by 9.8% versus 21.1% (Fig. 43).
Investments in fixed assets ^^^ Workload in construction
Housing implementation GDP
Source: Federal State Statistics Service
Fig. 43. GDP, Investments in Fixed Assets, Workload in Construction, Housing Implementation growth rates in 1999-2008, as percentage to the previous year
Slow-down of economic growth rates changed the situation in the investments sector. Throughout the whole 2008 there was a gradual slow-down of investments growth rates observed: from 123.6% in the 1dt quarter to 117.4% in the 2nd and 11.78% in the 3rd quarter. Over January-September investments in fixed assets went up by 13.1% versus the growth of 21.3% in the corresponding period of 2007. In the environment of the financial crisis in November 2008 the decrease of the investments in fixed assets of 0.9% was observed, while the decrease in December 2008 made 7.5% as compared with the corresponding months of 2007. As a result, in the 4th quarter 2008 for the first time since 2000 the investments growth rates turned negative and made 97.7% versus the corresponding period of the previous year.
The anticipating growth of construction of the production and infrastructure objects as compared with the sharp slow-down in the rates of housing implementation was characteristic for 2008. Over January-September 2008 the total volume of workload in construction growing by 14.5%, increase in housing implementation made 4.0% versus, correspondingly, 18.1% and 30.9% in the analogous period of the previous year. Slow-down of the growth rates of the workload in construction occurring in the 4th quarter 2008 to 103.8% versus 118.2% in the 4th quarter 2007 was accounted for by the stabilization of the volumes of housing implementation in November 2008 and the volumes of production construction in December 2008 at the level of the corresponding periods of 2007.
In 2008 the proportion of investments in housing construction in the structure of investments in fixed assets remained at the level of the previous year and made 7.5%, the expenditures for buildings and installations increasing by 2.2 per cent up to 52.4%. the trend for the decrease of the proportion of the expenditures for machinery and equipment strengthened: as a result of 2008 this proportion was equal to 33.0%, being 1.8 per cent below the figure of the previous year. It should be noted that the most significant changes in the structure of investments as broken by branches of industry occurred in the 4th quarter 2008 (Table 40).
Table 40
Structure of investments in Fixed Assets by Kinds of Key Assets in 2006-2008, as percentage to the total
2007 2008 including January-September October-December
Investments in fixed assets, total 100 100 100 100
including by kinds of key assets:
housing 7.5 7.5 7.6 7.3
buildings and installations 50.1 52.4 51.3 54.2
machinery, equipment, transport vehicles 34.8 33.0 33.6 32.0
other 7.6 7.1 7.5 6.5
* not including the subjects of small business and parameters for informal activity
Source: Federal State Statistics Service
Import supplies of machinery and equipment increased, while the domestic machine-building developed at moderate rates when compared with the dynamics of the investment expenditures and characteristics of fixed assets reproduction. In 2008 the investments for the purchase of import machinery, equipment, transport vehicles (not taking into account the subjects of small business and the parameters for informal activity) made RUR 414.1 billion, or 20.0% of the total amount of investments in machinery, equipment and transport vehicles versus 17.8% in 2007.
The growth rates of the economy slowing down, the change in the role of the budget funds among the sources of financing of the investments in fixed assets is observed (Table 41). In January-September 2008 RUR 658.2 billion was financed at the expense of budget funds, which made 16.8% of the total volume of investments in fixed assets on the whole throughout the economy, and 10.0% was financed at the expense of the federal budget. In October-December 2008 the total volume of investment decreasing in absolute terms the increase in the volume and share of the federal budget funds in the structure of sources of investments financing was one of the conditions for mitigation of negative aftermaths of the sharp limitations of enterprises' own funds. In the 4th quarter 2008 RUR 295.5 billion of investments in fixed assets was financed at the expense of the federal budget funds as compared with RUR 214.9 billion over the first 9 months of the same year.
Table 41
Structure of Investments in Fixed Assets As Broken By Financing Sources, as percentage to the total (not taking into account the subjects of small-scale enterprise and the parameters for informal activity)
_Including_
2007 2008 January- October-
September December*
100 100 100 100
40.4 40.0 42.8 35.8
19.4 18.6 20.1 16.1
59.6 60.0 57.2 64.7
10.4 11.1 11.0 11.0
1.7 2.4 1.7 3.7
7.1 6.5 6.8 6.1
21.5 21.0 16.8 28.1
8.3 8.1 5.5 12.6
11.7 10.4 10.0 13.7
20.1 21.1 22.3 19.1
3.7 3.3 3.5 2.9
1.5 1.5 1.7 1.0
4.3 4.6 5.2 3.7
Investments in fixed assets, total including by the sources of financing: own funds of which: profit
borrowed funds of which: banks credits
including by foreign banks borrowed funds from other organizations budget funds: federal budget
budgets of the subjects of the Russian Federation and
local budgets
other
of which funds received for the share participation in construction
of which means of the population Foreign investments in the total amount of the investments in fixed assets
Preliminary data
Source: Federal State Statistics Service
In 2008 the Federal Targeted Investment Program envisaged financing of 2801 construction sights, objects and measures, 1349 of which were envisaged for putting into commission in the same year. By January 1st, 2009 1075 were fully financed and 583 objects had the technical readiness from 51.0% to 99.9%.
As a result of 2008 371 objects was put into commission, 301 of which - at full capacity and 70 - at partial capacity.
Throughout 2008 some changes were made to the List of construction sights and objects, as a result the total volume of budget allocation envisaged for financing FTIP in 2008 made RUR 533.1 billion versus RUR 517.7 billion of the federal budget that was envisaged initially. In 2008 the volume of budget allocation envisaged for construction of capital construction objects of the state property of the Russian Federation increased by RUR 85.2 billion or 19.0% as compared with 2007. Nearly all the amount of the increase in the budget allotments mentioned was for the program part of FTIP21.
It should be noted that in 2008 the investments at the expense of the federal budget were directed only to the objects of capital construction of the state property of the Russian Federation, as well as to the open joint-stock companies. The objects of the property of the subjects of the Russian Federation and of the municipal property were not included in the List of construction sights and objects for 2008.
For the objects within the framework of federal targeted programs FTIP envisages RUR 289.5 billion, and for the non-program part objects - RUR 130.7 billion. The volume of funds
21 Data for financing and use of the federal budget funds for FTIP realization in 2008 are given taken into account the redistribution of budget allotments from 2008 to 2009 at the total sum of approximately RUR 39.6 billion or 9.4% of the total volume of FTIP in 2008.
envisaged for financing of special works included in the state defense order was equal to RUR 112.9 billion.
In 2008 FTIP financing not taking into account construction sights and objects included in the state defense order was equal to RUR 286.4 billion or 73.1% of the yearly limit. This figure is higher than the one of the previous year (70.1%), which is mainly due to the fact that the List of construction sights and objects was adopted one and a half month earlier than in 2007.
According to the account of the Federal State Statistics Service on the FTIP construction sights and objects, not taking into account construction sights and objects included in the state defense order, financing of the yearly limit of public investments was equal to RUR 286.4 billion, including RUR 49.7 billion at the expense of the budgets of the subjects of the Russian Federation and other sources of financing. In 2008 the state customers used RUR 285.9 billion of the state investments or 63.7% of the yearly limit of funds, envisaged for construction works. On average throughout Russia 85.1% of the total amount of financed funds at the expense of all sources of financing was used.
The year limit of state investments within the framework of the industrial (87.1%) and special (75.7%) complexes was financed to substantially higher extent than the average, whereas within social complex the financing was considerably below the average (57.1%) (table 42). The level of funds use by different complexes differs considerably. It should be noted that the level of funds use in special complex is substantially below the average, which is connected with the financing of a number of new objects included in the List of construction sights and objects in the fourth quarter 2008.
Table 42
Objects Envisaged By Targeted Investment Program for 2008
As units As RUR billion
Number of objects Put into commission in January-July 2008 Limit of state investments Financed from the federal budget Investments used at the expense of all sources of financing*
total including with the date of commissioning in 2008 to full capacity partially total including from the federal budget
Total 2801 1349 301 70 448.9 391.5 286.4 285.9
including:
transportation complex 418 129 31 5 152.9 149.2 131.4 123.7
agriculture complex 462 296 40 35 13.3 11.0 8.1 8.7
special complex 210 65 10 2 92.7 66.0 50.0 38.4
social complex 1611 811 209 27 179.9 156.9 89.5 107.0
other objects 100 48 11 1 10.1 8.4 7.4 8.0
*Not including investments allocated from the federal budget to purchase equipment and conduct design and survey works for construction sights and objects included in the Federal Targeted Investment Program for 2008 and being on the balance of the state customers (builders) that manage these investments
As to the territorial aspect, in 2008 the limit of funds for financing FTIP construction sights and objects was used at a considerably higher extent than the average in Southern, North-Western, Privolzhski and Siberian federal okrugs. The use of investments in Central, Ural and Far Eastern Federal Okrugs is substantially below the average (Table 43).
Table 43
Limit of State Investments and Their Actual Use At the Expense of All Sources
of Financing by Federal Okrugs
Federal okrug Limit of state investments allocated from the federal budget for 2008 Actually used at the expense of all sources of financing
as RUR billion as RUR billion as percentage of the yearly limit
Russian Federation - total 391.5 285.9 63.7
Central 151.6 76.8 47.3
North-Western 82.5 83.4 76.1
Southern 52.9 51.8 84.0
Privolzhski 20.6 17.5 81.4
Ural 20.1 11.6 53.7
Siberia 23.1 18.2 75.3
Far Eastern 40.7 26.5 55.5
The shift from the financing of the investments in fixed assets at the expense of the enterprises and organizations' own funds to the expansion of the participation of the borrowed funds was a fundamentally new feature in the economic growth of the recent five years. As a result of 2007 59.6% of the total amount of investments in fixed assets was accounted for the borrowed funds. As a result of 2008 the share of the borrowed funds in the structure of sources of investments financing made 60%, which corresponds well with the figure of the previous year.
The development of this process was accounted for by the increase in the activity of the banking sector, growth of the investments in housing building by the population and the intensive inflow of the foreign capital. Until recently low real value of credit resources contributed in increase in number of the borrowing organizations. Among the factors influencing the dynamics of the credits and other borrowed funds one can highlight the growth of the organized forms of population's savings. As a result of 2008 the share of funds directed to the share participation in the construction made 3.3% of the total amount of the investments in fixed assets, of which the means of the population were 1.5%.
Financial crisis defined the specific features of the investors' behavior at the market of housing construction. Whereas in January-September the share of funds received for the share participation in the construction made 3.5%, of which the funds of population accounted for 1.7%, in the fourth quarter these figures were equal t0 2.9% and 1.0%, correspondingly.
In 2008 the share of banks in the structure of investment resources made 11.0% against 10.4% in 2007 and 9.3% in 2006, however the trend for the increase of the insurance and investments companies', industrial and trading enterprises in the financing of the investment activity did not sustain.
Attention should be paid to the peculiar features of foreign banks' participation in the financing of investment activity. Increase in the share of foreign investments and the growth of foreign banks' participation in financing of the investments in fixed assets in the Russian economy has been observed since 2000. In January-September 2008 the share of foreign investments in the total volume of investments was 5.2%, and the share of credits issued by foreign banks increased up to 1.7% versus 1.1% in the corresponding period of the previous year. In the fourth quarter the volumes of direct foreign investments decreasing in absolute terms by 4.0% as compared with the corresponding period of the previous year, the share of foreign investments being 3.7% of the total volume of investments in the Russian economy.
In contrast to the preceding years in 2008 the net outflow of the capital and foreign investments is observed. According to the preliminary estimation of the Central Bank of the Russian Federation, in the 4th quarter 2008 net outflow of the of the private capital made USD 130.5 billion (table 44).
Table 44
Net Import/Export of private Capital, According to Data of Balance-of-payments,
as USD billion
including:
Net import/export of private capital, total Net export/import of capital by banks Net export/import of capital by non-financial enterprises and households
1999 -20.8 -4.3 -16.5
2000 -24.8 -2.1 -22.8
2001 -15.0 -1.3 -16.2
2002 -8.1 2.5 -10.6
2003 -1.9 10.3 -12.2
2004 -8.9 3.5 -12.4
2005 0.1 5.9 -5.8
2006 41.8 27.5 14.3
2007 83.1 45.8 37.3
I quarter 13.9 0.1 13.9
II quarter 54.5 36.9 17.6
III quarter -7.0 -3.5 -3.5
IV quarter 21.7 12.3 9.3
2008 -129.9 -57.5 -72.5
I quarter -23.1 -9.9 -13.2
II quarter 41.1 22.1 19.0
III quarter -17.4 -13.4 -4.0
IV quarter (estimation) -130.5 -56.2 -74.3
Source: Central Bank of the Russian Federation
Throughout 2008 quite considerable changes took place in the structure of investments in fixed assets by kinds of economic activities (Table 45). As a result of 2008 the growth rates of investments in the industry remained in the positive field, the increase in investments in fossil fuels extraction being 4.6%, in processing industries - 7.8%, in electricity, gas and water production and distribution - 11.3%. It should be noted at the same time that the increase in the concentration of the investments resources in industry up to 44.1% of the total volume of investments in the economy occurring in January-September 2008 was replaced by the reduction of the investment activity scale in extractive and processing industries, as well as in electricity, gas and water production and distribution in the fourth quarter 2008. As a result, the share of investments in industry in the total volume of investments in the fixed assets in the economy was equal to 38.4% over the period of October-December 2008.
As compared with 2007, there was reduction of investments observed in construction (by 8.3%), in trade (by 4.4%), in communication (by 4.9%). The investments in the transportation maintained quite high dynamics at the expense of railway transportation, making 112.4% on 2007.
Table 45
Structure of Investments in Fixed Assets by kinds of Economic Activity (Not taking into account the subject of small-scale business and the parameters
of informal activity)
including
2007 2008 January-September October-December
Total 100 100 100 100
including by kinds of economic activities:
agriculture, hunting and forestry 4.5 3.9 4.2 3.4
industry 40.7 42.0 44.1 38.4
minerals extraction 16.8 16.6 18.3 13.7
of which fossil fuels extraction 15.3 15.1 16.7 12.6
processing industries 15.6 16.5 17.5 14.8
electricity, gas and water production and distribution 8.3 8.9 8.3 9.9
Construction 2.7 2.4 2.7 2.0
Wholesale and retail trade; motor vehicles and motorcycles services; repair of 3.6 2.7 2.7 2.7
household appliances and items of private use
Transportation 18.9 21.9 20.4 24.2
Communication 4.7 4.1 4.1 4.1
Financial activity 1.4 1.2 1.2 1.2
Operations with real estate, rent and services rendering 12.8 11.7 11.9 11.3
Education 2.4 2.2 1.8 2.8
Public administration and military defense security; compulsory social security 2.1 2.0 1.6 2.7
Health care and social services rendering 2.8 2.6 2 3.5
Rendering of other utilities, social and personal services 2.8 2.9 2.8 3.4
*preliminary data
Source: Federal State Statistics Service
Low figures of investments activity in the fourth quarter of 2008, increase in the volumes of the unfinished construction, high interest rates and limited availability of credits account for the unfavorable environment for the economy development in 2009.
3.4.2. Foreign Investments
In 2008 the total of USD 103.8 bln of foreign investments was received by the Russian economy, which is 14.2% below the corresponding figure of 2007 (Table 46).
Table 46
Structure of Foreign Investments in Russian Economy
As USD billion_As percentage to the previous year
Total Direct Portfolio Other Total Direct Portfolio Other
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
2008 103 769 27 027 1 415 75 327 85.8 97.2 33.7 84.7
January- 75759 19201 1296 55295 86.2 97.7 83.7 82.8
September October- 27976 7826 119 20031 84.8 96.0 4.5 90.2
December
Note. Direct investments are investments in real assets, purchase of the controlling stock or holding of stock that gives the right to participate in management; portfolio investments are investments in securities with the sole purpose of getting profit; other investments are investments made on repayable basis (credits of international financial organizations, trade credits etc.) Source: Federal State Statistics Service.
According to the report on investments by UN Conference on Trade and Development published in October 2008, in 2007 Russia held the ninth place in the world by the volume of
253
direct investments attracted (in 2006 - 10th, in 2005 - 15th). The same as in the previous year Russia is the second among the developing countries, the first place being held by China (in 2005 - 3rd place)22.
In December international Rating Agency S&P lowered Russia's sovereign rating from BBB+ to BBB, the forecast for the rating being negative. In the opinion of the agency, "the lowering of ratings reflects the risks connected with the sharp decrease in foreign currency reserves and other investment flows that result in the increase of the costs and difficulties arising in saturation of the country with the external financing". Moody's agency did not follow the example of S&P lowering the Russia's rating, instead it confirmed the positive forecast for the Russian federation concerning its debt liabilities and deposits (in June 2008 Moody's agency increased the Russia's rating from Baa2 to Baa1, the forecast being positive).
As a result of 2008 the volume of the direct investments in the Russian economy has lowered by 2.8% as compared with 2007. The decrease was due to the component of credits received from the foreign co-owners of organizations that reduced by 16.3% over the period under consideration. In contrast, the payments to the authorized capital stock went up by 7.4% up to USD 15.9 billion. Thus, the proportion of credits received from the foreign co-owners of the companies in the structure of direct foreign investments in the Russian federation reduced from 42.0% in 2007 to 36.2% in 2007, whereas the share of the payments to the authorized capital stock went up from 53.2% to 58.8%.
80,0% 70,0% 60,0% 5 0,0% 40,0%
30,0% 20,0% 10,0% 0,0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Ш Direct investments 35,0 43,4 28,6 44,6 40,4 27,9 20,2 22,8 23,3 24,4 24,8 23,0 26,0
□ Portfolio investments 1,8% 5,5% 1,6% 0,3% 1,3% 3,2% 2,4% 1,4% 08% 0,8% 5,8% 3,5% 1,4%
■ Other investments 63,2 59,1 69,8 55,1 58,3 68.9 77,4 75,8 75,9 74,8 69,4 73,5 72,6
Source: Federal State Statistics Service Fig. 44. Structure of Foreign Investments in Russian economy in 1996-2008, as percentage
22 In accordance with the data presented in the report «World Investment Report», UNCTAD 2007, 2008. 254
In the total structure of the foreign investments received by the Russian economy in 2008 it was in the segment of portfolio investments where the most considerable decrease (of 66.3%) was observed, the majority of which are accounted for by the investments in shares and stocks (95.5% of the total portfolio investments in 2007, 79.6% in 2008).
In 2008 the amount of other investments lowered by 15.3% as compared with 2007. The proportion of trade credits in the structure of foreign investments went up from 12.7% in 2007 to 21.5% in 2008. As to the periods of funds attraction, the volume of credits for the period over 6 months decreased by 27.1%.
Thus, as compared with the previous year, in 2008 the structure of foreign investments in the Russian economy was subject to some changes (Fig. 47).
The same as in the previous year, the highest concentration of investments in trade and industry sustained. It should be noted that as a result of 2008 the foreign investments in industry did not change considerably as compared with 2007, and the investments in trade reduced by half. A considerable reduction in the investments in trade resulted in the decrease in its proportion in the structure of foreign investments as broken by branches of industry when compared with the previous year. The distribution of foreign investments by main branches of Russian economy is represented in Table 47.
Table 47
Structure of Foreign Investments in Russian Economy as Broken by Branches in 2006-2008
As USD million
Change as percentage on the
As percentage to the total
2006 2007 2008 2006 2007 2008 2006 2007 2008
Industry 24 607 50 163 49 704 101.2 203.9 99.1 44.7 41.5 47.9
Transport and communication 5 297 6 703 4 861 137.9 126.5 72.5 9.6 5.5 4.7
Wholesale and retail trade; motor-vehicle and motorcycles servicing; repair of household appliances and private items 13 089 47 310 23 905 64.0 361.4 50.5 23.8 39.1 23.0
Operations with real estate; rent and services rendering 5 998 8 414 15 378 230.1 140.3 182.8 10.9 7.0 14.8
Financial activity 4 698 4 450 4 977 259.1 94.7 111.8 8.5 3.7 4.8
Other branches 1 420 3 901 4 944 231.8 274.7 126.7 2.5 3.2 4.8
Source: Federal State Statistics Service
The decrease in the investments in minerals extraction of 28.7% was observed in the structure of foreign investments in industry as a result of 2008 (in 2007 there was a growth of 1.9 times). Foreign investments in processing industries went up by 6.2% (in 2007 the growth of investments in processing industries made 2.1 times). As to processing industry, the investments in foodstuffs production increased by 36.7%, in chemistry industry - by 53.8%, reaching the figure of USD 4.0 billion and USD 2.5 billion, correspondingly. Foreign investments in metallurgy decreased by 4.88% in 2008 as compared with the preceding year and made USD 14.5 billion.
Source: Federal State Statistics Service. There are no data available for investments in foodstuffs production in
2004-2005
Fig. 45. Structure of Foreign Investments in Russian Economy in 2004-2008
In 2008 direct and portfolio investments in the industry decreased by 27.3% and 64.5%, correspondingly, as compared with 2007. Other investments in industry, in contrast, went up by 22.8% versus the previous year. Thus, the proportion of direct and portfolio investments in the industry decreased from 36.3% and 8.5% in 2007 to 26.6% and 2.3% in 2008, the share of other investments increasing from 57.3% to 71.1% over the same period.
The changes were also observed in the structure of foreign investments by kinds of economic activities in the industry (Fig. 45). In the sphere of minerals extraction the direct investments reduced by 2.8 times, which resulted in the contraction of their proportion in the total investments in this sphere to 40.2% (80.1% in 2007). The share of other investments in extractive industries, whose growth is estimated to be 2.1 times as a result of 2008 (up to USD 7.3 billion), increased up to 59.0% (19.8% in 2007).
The same as in the previous year, in 2008 the biggest part of foreign investments in the processing industry was accounted for by other investments, which went up by 10.5% versus 2007, reaching the figure of 81.9% in the resulting figure for the investments in processing industry. Over the same period the direct foreign investments in processing industries went up by 44.3%. The proportion of the direct investments in the processing industry went up to 17.5% (12.8% in 2007).
Cyprus, the UK, the Netherlands, Germany and Luxemburg retained their leading positions when the geographic structure of the foreign investments received by the Russian economy in 2008 is considered. As a result of 2008 the biggest amount of the investments (USD 19.9 billion, 19.1% of the total volume of foreign investments received by the Russian economy over the period mentioned) was directed from the Cyprus, USD 14.9 billion (14.4%) was received from the UK and USD 14.5 billion (14.0%) - from the Netherlands (Fig. 46).
Source: Federal State Statistics Service
Fig. 46. Geographic Structure of Foreign Investments in Russian Economy in 2006-2008, as USD million
In 2008 it was the investments from Germany that grew at fastest rates, increasing by 2.1 times versus 2007. At the same time investments from Cyprus decreased by 3.9%, from France - by 8.0%, from the USA - by 2.3%. The investments that decreased most considerably were from Ireland - by 43.9%, from the UK - by 43.3%, from Luxembourg - by 38.6% and from the Netherlands - by 22.4%.
The differences in the investments' dynamics resulted in the changes in the geographic structure of the foreign investments in the Russian economy.
The same as in the previous year the Cyprus investors were mainly interested in operations with real estate, trade, financial activity and construction, investing in these spheres 30.9%, 21.5%, 8.4% and 6.0%, correspondingly, of the total investments from Cyprus into the Russian Federation. As a result of 2007 these spheres accounted for 19.0%, 45.5%, 7.1% and 4.7%, correspondingly, of investments from Cyprus.
The entrepreneurs of the UK continued to invest in trade, though in 2008 this sphere received 2.9 times less investment than in 2007. As a result of 2008 the trade accounted for 39.1% of the total investments of the UK in the Russian Federation (64.2% in 2007). The share of processing industries in the structure of UK investments increased from 27.7% in
2007 to 31.7% in 2008.
As to the structure of investments in the Russian Federation from the Netherlands, there the decrease of the proportion of the fossil fuels extraction from 67.1% in 2007 to 33.1% in
2008 occurred. Russian power industry accounted for 14.7% of investments directed from the Netherlands in the Russian Federation in 2008.
As on the end of 2008 the accumulated foreign capital not taking into account the institutions of monetary and credit regulation, commercial and savings banks, including ruble investments recalculated in US dollars made USD 264.6 billion, which is 19.9% above the corresponding figure of the beginning of the year.
It is the Cyprus, the Netherlands, Luxembourg, the UK and Germany that still hold the leading positions in the total volume of accumulated foreign investments, their share being 70.3% (72.0% in 2007). At the same time the share of the first five leading countries in the segment of direct and other investments reduced to 73.4% and 57.6% (77.0% and 67.85 in 2007), and in the structure of portfolio investments it went up to 75.3% (65.1% in 2007) (Table 48).
Table 48
Accumulated Foreign Investments as Broken by Main Investing Countries
Accumulated by 01.01.2009, USD million Change calculated on 01.01.2008, percentage
Total Direct Portfolio Other Total Direct Portfolio Other
USA 8 769 3 193 662 4 914 102.2 87.8 54.8 131.5
Germany 17 425 7 275 26 10 124 147.8 161.9 26.5 140.7
France 9 542 1 927 1 7 614 161.2 124.0 3.2 175.7
UK 30 811 4 647 2 339 23 825 105.4 135.2 101.1 101.5
Cyprus 56 902 40 732 1 728 1 442 114.7 115.0 101.6 11.6
Netherlands 46 346 35 931 41 10 374 118.6 101.9 78.8 275.8
Luxembourg 34 402 1 217 273 32 912 118.0 165.6 124.7 116.7
Other countries 60 402 27 470 557 45 375 127.8 148.3 50.3 164.3
Total 264 599 122 392 5 627 136 580 119.9 118.8 83.6 123.3
Source: Federal State Statistics Service
It is other investments that prevail in the structure of foreign investments accumulated by the end of 2008, their share being 51.6%. The corresponding figure for direct foreign investments was 46.3%.
In the environment of reduction in the amount of foreign investments in the Russian economy the volume of withdrawn capital in the form of profit of foreign investors transferred abroad as well as in the form of payments of interest for the use of credits and credits repayments went up by 16.4% in 2008 as compared with 2007, making USD 67.95 billion (65.5% of the foreign investments received in 2008). In 2007 48.3% of the received foreign investments was withdrawn.
3.5. Russian Agrifood Sector: Performance and Trends
3.5.1. Organizational structure of agriculture
The organizational structure of agriculture consists of corporate farms of different ownership types, individual private farms and household farms. Table 1 shows the number of these entities and their share in agricultural output. Over 95% of all agricultural entities are private. The dominating legal forms are limited liability companies (37.8%) and agricultural
production cooperatives (35.4%). In most entities joint stock, contributions or shares are dispersed among hundreds of participants.
Table 49
Number of agricultural entities as of January 1 (thousand) and their share
in gross agricultural output (%)
Types of agricultural entities 1990 2000 2008
number % of GAO number % of GAO number % of GAO
Corporate farms and institutions 29.4 73.4 27.6 43.4 24.0 43.4
incl. state farms and institutions, % 16.6* n.a. 4.9 n.a. 4.2 n.a.
Small entities n.a. n.a. 23.3 n.a.
Individual private farms 4.4 0 261.7 3 265.0 7
Individual entrepreneurs - - 92.2
Household farms, million** 16.3 26.6 16 53.6 22.7 49.6
* - including 13 thousand state farms.
** - the share in agricultural output is given for household farms in general irrespective of their type since their performance by types is not statistically recorded.
Source: Russian Agriculture. Russian Agrifood Sector, RF Ministry of Agriculture. Russian Statistical Yearbook.
According to data of the 2006 Agricultural Census the share of actually operating entities in the total number of registered entities of respective types equaled: corporate farms -68.6% (70.6% for large and medium farms and 63% for small ones), individual private farms
23
and individual entrepreneurs engaged in agricultural business - 51.7% .
Household farms formally are not regarded as small entrepreneurial entities although they produce about one half of agriculture's gross output and about one third of its commodity output. They are traditionally considered to be small entities.
In recent years the role of agroholdings in Russian agriculture was discussed. However,
24
their exact number is not known. According to estimates of V.Ya.Uzun about 21% of large and medium corporate farms are associated into such holdings. They produce 26.5% of the total output of this group of farms. 318 private holdings associate only 6.5% of the total number of large and medium corporate farms. Most efficient are the entities incorporated in agroholdings with foreign mother companies - their profitability was more than twice above the average for large and medium corporate farms.
3.5.2. Agricultural output and structure of farm production
In 2008 the gross agricultural output in Russia was below the pre-reform level. Still, the 2008 farm performance should be regarded as positive: the annual production growth was maximum over the whole examined period (Fig. 47).
Household farms continue to play quite an important role in agricultural production. Before the start of agrarian reform in 1990 they accounted for 26.6% of gross agricultural output. During the transition period this share sizably grew - up to 58.6% in 1998. In the following years it was reducing and by the end of 2007 fell down to 49.6% (as of January 1, 2008). There has also formed and is steadily developing the sector of individual private farms. Yet, its share in GAO is still relatively small - about 7%.
23 2006 All-Russian Agricultural Census, preliminary results. Vol.2, pp. 20-21.
24 Uzun V.Ya. Rating of large and medium corporate farms in Russia in 2004-2006. Moscow, All-Russian Institute of Agrarian Problems and Informatics named after A.A.Nikonov, 2007.
Source: Rosstat.
Fig. 47. Russia: percent change of annual gross agricultural output in 1995-2008
The role of small entities (small enterprises, individual private farms, household farms, individual entrepreneurs engaged in agriculture) differs greatly by RF regions. In 6 of them such entities account for over 90% of gross agricultural output, in 24 - for over 70%. They produce less than 30% of GAO only in Belgorod oblast where agroholdings are rapidly developing and in three northern regions where due to unfavourable climatic conditions population has actually stopped producing farm products while corporate farms subsidized from the budget still continue doing that (Murmansk oblast, Chukotsky and Nenetzky autonomous districts).
Despite their small share in gross agricultural output of the country at large, individual private farms play quite an important role in some RF regions. For instance, in Astrakhan and Magadan oblasts, Kalmyk, Kabardino-Balkarian and Yakutia republics they produce 23-29% of GAO. In 7 RF regions the share of individual private farms in gross agricultural output is larger than that of corporate farms of all organizational and legal types. The high share of household farms in agricultural production after 1990 is traditionally attributed to slower production decline as compared with corporate farms. However, that's not true. Output of household farms was growing (in 1994 it was 57% above the 1990 level in comparable prices)
25
while output of corporate farms was falling (by 37% over the same period ).
In 9 months 2008 index of agricultural production by all types of farm producers amounted to 106.5% (104% - livestock production and 109% - crop production), in January-October 2008 - 108.8% as compared with the respective period of 2007.
Crop output is prevailing in the structure of GAO - in the recent 6 years its share ranges from 52.8 to 55.4%.
25 Russian Agriculture. Official edition. Moscow, State Committee for Statistics. 1995, p.30. 260
Crop production
2008 is considered to be one of the most successful years as regards agricultural production starting from the early 1990s. Output of grain, sunflower seeds and vegetables exceeded all the preceding annual averages beginning from 1986-1990 (Table 50).
Table 50
Gross output of basic farm crops, million tons
Annual average 2005 2008
1986-1990 1991-1995 1996-2000
Grain (weight after primary processing) 104.3 87.9 65.2 78.2 108.1
Potatoes 35.9 36.8 34.5 37.3 28.9
Vegetables 11.2 10.2 11.4 15.2 13.0
Sunflower seeds 3.1 3.1 3.3 6.4 7.3
Sugar beets 33.2 21.7 14 21.4 29.0
Source: Rosstat.
Similarly to previous years, in 2008 corporate farms remained the basic producers of grains (78.2%), sugar beets (89.2%) and sunflower seeds (70.7%). Potatoes and vegetables continue to be traditionally grown in household farms - 83.5% and 70.7% respectively. Individual private farms already account for over 21% of the country's grain output and 28.9% of the total output of sunflower seeds.
Grain - Grain - _ Sunflower seeds - . Sunflower seeds -
® corporate individual corporate farms individual private farms
farms private farms
Source: Rosstat.
Fig. 48. Production of grain and sunflower seeds in corporate farms and individual
private farms (as % of the total)
The extreme lowering of prices received by farms in October-November 2008 (down to 4 rubles per kg for food grain and 2.5 rubles per kg for feed grain26) served the basis for forecasts predicting contraction of areas planted and consequently smaller gross grain output in 2009. However, the Rosstat data so far do not confirm these forecasts: areas planted in winter grains in autumn 2008 are 5% larger than in 2007. At the same time the area of autumn
26 http ://www. mcx. ru/dep_doc.html?he_id=949&doc_id=20253
ploughing reduced by 2% preconditioning smaller areas under spring crops. One can observe a trend towards minor shifting of grain and sunflower production from corporate farms to individual private farms (Fig. 48).
In 2005 the trend towards larger production of potatoes and vegetables in household farms observed since 1990 reversed - the share of corporate farms and individual private farms in their output started to grow. As compared with 2007 the share of household farms in output of potatoes fell by 2%, in that of vegetables - by 1.7% (Fig. 49).
—^—Potatoes - household _g_Potatoes -corporate _^_Vegetables - _x_Vegetables -
farms farms household farms corporate farms
Source: Rosstat.
Fig. 49. Production of potatoes and vegetables in corporate farms and household farms
(as % of the total)
Livestock production
In the pre-reform period over 75% of livestock output was produced in corporate farms. From the early 1990s to 2000 the share of corporate farms in livestock production fell down to
27
40%. Starting from 2001 it was gradually growing and in 2008 approached 49% .
Fig. 50 shows the aggregate average annual output of basic livestock products in all farms.
As compared with 2007 the total production of meat in all types of farms increased by 6.7%. The increase is primarily due to larger output of poultry meat (up 19% as compared with 2007) and pork (up 14%) meaning growing application of intensive technologies in meat
production. Although livestock sector is growing since 2001, the current output of meat ap-
28
proaches only the 1970 indicator, the output of milk - the indicator of 1958 . In 2008 the output of slaughter livestock equaled 81.3% of the respective 1991-1995 indicator, the output of milk - 71.4%, the output of eggs - 93.8%. Production of meat and milk is growing since 2006, production of eggs - since 1996.
27 Rosstat.
28 Russian Statistical Yearbook. Official edition. Moscow, 2006, p. 457. 262
1986- 1991- 1996- 2001 2002 2003 2004 2005 2006 2007 2008 1990 1995 2000
^ Livestock and poultry, million ^ Milk million tons A Eggs, million _tons slaughter weight_'_pieces_
Source: Rosstat.
Fig. 50. Output of basic livestock products
Since the start of land reform rural population has got better access to hay and pasture lands: in the early 1990s over 20 million hectares of former collective and state farms' agricultural lands were transferred into the jurisdiction of rural administrations. The privatization of these former farms' agricultural lands (about 124 million hectares) in favour of most part of rural residents has also contributed to production increase in household farms. This is due to the traditional practice when tenants (corporate farms and individual private farms) pay the rent to land owners / lessors in the form of grain used for feeding livestock and poultry in household farms rather than for food purposes. At the same time rural residents could exchange their shares in land transferred to them in the course of privatization from former collective and state farms for physical plots outside rural settlements to be used for extending household farming. The area of such plots can amount to dozens of hectares per rural family. They are also largely used for livestock production. This enables households to keep 47.5% of the total cattle inventories, 33.8% of pigs and 52.1% of sheep and goats. In 2008 production of pork shifted to corporate and individual private farms while the share of households fell by 3.8%.
At present livestock production in household farms is supported in the framework of State program for agricultural development and regulation of agricultural and food markets for the 2008-2012 period. However, one should admit that the share of budget funds allocated to the support of such farms is small and does not correspond with their share in commodity agricultural output. The situation in livestock production is traditionally worse than in crop production. This is primarily due to the fact that actually all livestock products need to be sold within 1-2 days. Producers of milk and meat are forced to agree to any terms set by the purchasers.
29
Awaiting the introduction of new technical regulation for milk dairy plants reduced purchase prices for whole milk down to 6.5-8 rubles per litre (September 2008). It's obvious that within the period till December 20, 2008 they hurriedly utilized stocks of dried milk. Such policies of dairy plants often incorporated in a limited number of dairy holdings are extremely harmful and undermine the opportunities for larger domestic production of farm products in the long term.
There are also problems with marketing of livestock products produced by domestic agriculture. The collection of non-dressed carcasses and the forming of homogeneous lots of primarily processed products for delivery to food producers or traders require larger transaction costs as compared with import of such products. Given that imported products remain attractive, importers won't re-orient towards buying domestic output and developing the system of work with small meat producers. This stimulates small producers of farm products to
30
self-organize and learn to protect their interests .
The dynamics of livestock inventories in 2000-2008 are shown at Fig. 51.
—■—cattle —*— pigs 0 sheep and goats
Source: Rosstat.
Fig. 51. Livestock inventories, million heads by the end of the period
By the end of October 2008 cattle inventories in farms of all types totaled 21.1 million heads (2.6% below the corresponding indicator of the previous year) including 9.2 million cows (down 1.3%), inventories of pigs - 16.3 million heads (up 1.2%), inventories of sheep and goats - 21.6 million heads (up 2.7%). The decrease of livestock and poultry inventories is accompanied by the improvement of their productivity - Table 51. However, the average annual milk production per cow despite being the highest ever in the history of Russian corpo-
29 The new technical regulation prohibits the use of name "milk" for products made out of dried milk.
30 Address of representatives of 422 rural settlements in Volgograd oblast to the RF President D.Medvedev about restriction of meat import in view of the growing production in household farms. 26.01.2007. Shelestovo rural settlement of the October district of Volgograd oblast.
rate farms (it's currently approaching 4 thousand kg) still remains far below the level of de-
31
veloped countries .
Table 51
Livestock and poultry productivity
1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2007 as % of 1990
Annual milk 2731 2007 2343 2553 2808 2979 3065 3280 3564 3758 137.6
production per
cow, kg
Annual egg pro- 236 212 264 273 279 285 292 301 302 301 127.5
duction per lay-
ing hen, pieces
Annual wool 3.9 2.7 3.2 3.1 3.1 3.2 3.1 2.8 2.7 2.7 69.2
production per
head, kg
Source: Russian agrifood sector in 2007, RF Ministry of Agriculture.
The quality dynamics are also positive: from 2004 to 2007 the share of highest-grade milk in the total milk sales grew by 20%; the share of marketed slaughter livestock and poultry of the best and first category finish is also expanding.
3.5.3. Agricultural labour
Since about one half of agricultural output in Russia is produced by household farms it's not easy to estimate labour resources engaged in farming. According to data of the Agricultural Census, as of July 1, 2006 there were 22.8 million household and other individual farms in the country of which 88.7% were engaged in agricultural activities. The Census also for the first time provided data about the distribution of household and other individual farms by the number of employed in farm works. Household farms are usually small and micro entities that over the year employ not more than 2 persons in such works (69%); the share of farms employing more than 4 persons therein does not exceed 4%. The number of employees in corporate farms totaled 2613.9 thousand, in peasant (individual private) and individual entrepreneurs' farms - 553.5 thousand; on the average one corporate farm employed 80 workers, one peasant or individual entrepreneur's farm - 4 workers. Beginning from 1995 agricultural employment is steadily shrinking both absolutely and relative to the total number of employed in the national economy. In 2007 the average annual number of employed in farming, hunting and forestry equaled 6756 thousand (10% of the total employment in the national economy).
For the third successive year wages in agriculture are growing at accelerated rates. In January-September 2008 they increased by 37.3% while in the economy at large - by 28.7%. During this period the average monthly wage in the sector equaled 7883 rubles, or 47.4% of the national economy's average. Such situation persists for quite a long time (Fig. 52). The average wage in agriculture continues to be one of the lowest as compared with other economic activities.
31 In 2007 the average annual milk production per cow in the US was about 9.2 thousand kg. http://www.census.gov/compendia/statab/tables/09s0831.xls
18000 16000 14000 12000 10000 8000 6000 4000 2000 0
2000
■ Economy at large □ Agriculture and hunting
2002
2003
2004
2005
2006
2007
2008, January -Sept.
Source: Federal Service of State Statistics.
Fig. 52. Average nominal monthly wages in agriculture, hunting and the economy at large, rubles
Meantime the actual average work time of workers on payroll in corporate farms is the longest among all kinds of economic activity (7.63 hours in January-September 2008). Notwithstanding, vacancies are few: in January-September they equaled 1.2% of the payroll by the end of the period; lower indicators were observed only in education and fishery. During October wage arrears in agriculture grew by 9.6% (in economy at large - by 33.6%); however, situation on the agricultural labour market gives no grounds for optimism since the employment rate in rural areas is still low - 59.3% in August 2008 (in urban areas - 66.3%). Many rural residents are forced out to the non-formal sector. In August 2008 the share of rural residents employed in non-formal sector amounted to 33% of the total rural employment while that of urban residents - to 16% respectively. The biggest number of employed in non-formal sector work in agriculture (30.3%) and trade (32.5%).
In August 2008 there were 1762 thousand unemployed rural residents, or 39.4% of the country's total. Out of them 0.7 million or 41.5% were unemployed stagnantly (looked for a job for 12 months and more).
As productivity grows able-bodied population is forced out from corporate farms to the sector of household farms, to the non-formal sector. Due to the lack of alternative employment opportunities wages of rural residents won't grow sizably implying difficulties in solving the housing problem (low wages preclude farm workers from getting a credit for buying dwellings that is envisaged by the State program). Therefore the creation of alternative employment opportunities in rural areas should be made a central point of rural development policies or the outflow of young people from these areas will continue.
3.5.4. Farm financial performance
From 1990 to 1998 the share of loss-making corporate farms grew from 3 to 88%, overdue debts were accruing. These developments necessitated the working out of a state program for restructuring farm debts. Such a program was adopted on July 9, 2002 in the form of Fed-
eral Law "On financial recovery of agricultural commodity producers" (No.83-FL). By the beginning of large-scale implementation of the state debt restructuring program almost 90% of corporate farms had overdue creditor indebtedness. The main creditor of corporate farms was the state through its tax bodies and non-budget state funds. The program of restructuring envisaged delay (for not less than 5 years) and spreading (for not less than 4 years) of the principal debt's repayment and the writing off of penalties and fines (both lump sum and as the principal debt is being repaid). The dynamics of corporate farms' enrolment in the state debt restructuring program is shown at Fig. 53.
♦ Share of corporate farms having overdue creditor indebtedness M Share of corporate farms-debtors participating in debt restructuring program Source: RF Ministry of Agriculture. http://www.mcx.ru/index.html?he_id=734
Fig. 53. Enrolment of corporate farms in the debt restructuring program, %
During the years of program's implementation the number and share of corporate farms with overdue creditor indebtedness have notably reduced. By the beginning of 2008 they accounted for 52% of the total number of corporate farms. More and more debtors get enrolled in the restructuring program: by the beginning of 2008 76.8% of farms with overdue creditor indebtedness (primarily to tax bodies) became its participants. As a result of its implementation they will have to repay 39.9 billion rubles while 43.8 billion rubles of penalties and fines will be written off. The necessary condition for joining the debt restructuring program is the debtors' obligation and ability to make current payments under their commitments. During the program's implementation (as of January 1, 2008) over 4.8 thousand entities lost the right to participate in it having failed to meet current payment commitments. Over 9.3 thousand corporate farms with overdue debts cannot participate in the program, one of the causes being ongoing bankruptcy proceedings.
In 2008 the process of bankrupting corporate farms slowed down that is probably due to the termination of earlier initiated proceedings. While in 2005 7.4 thousand bankruptcy proceedings were underway, in 2006 - 10 thousand, as of January 1, 2008 - only 4.2 thousand. There is no information about restoration of corporate farms' solvency as a result of bankruptcy proceedings (financial sanation and external management). Practice shows that the only effective proceeding is the one when an entity ceases to exist as a single property complex.
The enrollment in restructuring program enabled farms to exclude rescheduled debts from the list of outstanding ones and improved the entities' balance, making them more attrac-
267
tive for direct investments and trustworthy for granting credits. Selected indicators of the sector's financial performance are given in Table 52.
Table 52
Selected indicators of corporate farms' financial performance
2004 2005 2006 2007 2008 (est.)
Profitability including subsidies, % 10.5 7.8 9.9 17.2 7.2
Profitability less subsidies, % 5.3 2.1 2.6 8.1 -2
Share of profitable entities, % 63 58 65 75 81.8
Share of entities having overdue debts, % 87.8 77 69.9 61.1 51.9
Creditor indebtedness as % of receipts 89.6 89.1 105.8 112.7 n.a.
Source: RF Ministry of Agriculture.
In 2004-2005 subsidies from the state budget provided for about 5% of the corporate farms' profitability rate. In 2006-2007 this indicator already ranged from 7 to 9%.
The growth of creditor indebtedness is not a sign of negative trends. Taking into account bigger receipts and higher share of profitable entities, it evidences larger use of bank credits that has a positive effect on the sector's development. The amount of credits received by the agrifood sector in 9 months 2008 is 20 billion rubles above the previous year indicator and
32
totals almost 324 billion rubles . According to data of the RF Ministry of Agriculture at present the principal direct foreign investors in the Russian agrifood sector are Cargill, Nestle, Bunge, Coca-Cola, Craft, Mars, PepsiCo, Tetra Pak, British American Tobacco, Unilever. In 2005-2008 the amount of direct investments made by these companies in the launched or already implemented projects on the territory of the Russian Federation totaled over 1.8 billion US dollars including 649 million dollars in January-September 2008. Investments are made both in the construction of new technologically advanced enterprises and the extension and modernization of already existent production capacities. Such enterprises meet the highest modern ecological standards and quality requirements.
In 2008 the sector's production indicators were rather good while its financial performance deteriorated. The lowering of profits received and profitability rates of corporate farms was first of all due to the growth of prices for agricultural inputs. For instance, in 9 months 2008 prices for mineral fertilizers rose by 70% as compared with December 2007. In the sowing and harvesting periods prices for diesel fuel surged by over 30% as compared with the beginning of the year. At the same time prices for agricultural products on the whole grew by
33
only 1.6% and prices for livestock products even fell by 2.7% .
3.5.5. Production and availability of agricultural inputs
Despite a certain growth of agricultural inputs' production, the availability of some machinery for farm commodity producers decreases due to the accelerated retirement of outdated machines (Table 53).
As of October 15, 2008 (current departmental information) there were 493.35 thousand tractors, 146.9 thousand ploughs, 179.45 thousand cultivators and 222.4 thousand seeders in
32 Data of RF Ministry of Agriculture.
33 Data of RF Ministry of Agriculture. 268
the country. From the beginning of the year agricultural producers bought 19.6 thousand tractors, 8.4 thousand grain harvesters and 2.2 thousand fodder harvesters34.
From January 1, 2008 farms got 620 tractors, 14 harvesters, 327 trucks and 326 units of other agricultural machinery on leasing terms through the open joint-stock company "Rosagroleasing".
The technical and technological modernization of agriculture is a separate component of the State program for agricultural development in 2008-2012. Altogether the purchase of over 175 thousand tractors and 55 thousand grain harvesters is to be supported within this period. By 2012 the renewal of machinery taking into account its retirement will amount to 40% for tractors and 50% for grain harvesters (as compared with 2006). 38.1 billion rubles over the 5-year term are envisaged for these purposes in the federal budget and are to be used for partial subsidizing of expenditures on loan interest. In addition 6 billion rubles will be invested in the "Rosagroleasing's" authorized capital.
At present the demand of agricultural producers for tractors is primarily satisfied by import supplies although in 2008 their domestic production has largely grown. All the 8 operating tractor plants are currently united into "Agromachholding".
Production of grain and fodder harvesters has also expanded so that both domestic and export demand is satisfied. "Rostsel'mach" produces 80% of all harvesters in the country and meets 65% of the respective market demand while Krasnoyarsk plant (that was rather strong in Soviet times) has recently cut production to a great extent (in 2007 "Rostsel'mach" pro-
35
duced 5185 grain harvesters while the Krasnoyarsk plant - only 1626) .
Table 53
Production of selected farm inputs, thousand pieces
I-X 2008
1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 as % of I-X 2007
Tractors 214 21.2 19.2 14.2 9.2 8.1 8.4 9.6 11.0 13.4 178.8
Tractor ploughs 85.7 4.0 2.8 3.1 2.3 1.0 1.3 2.4 1.1 n.a. 146.1
Tractor seeders 51.1 1.6 5.2 6.4 5.3 4.2 5.7 6.5 5.2 n.a. 137.5
Tractor cultivators 101 2.0 4.7 5.6 6.6 6.2 8.3 8.8 6.6 n.a. 129.3
Grain harvesters 65.7 6.2 5.2 9.1 7.5 5.43 8.05 7.47 6.87 7.16 121.8
Mineral fertilizers, million tons 16.0 9.6 12.2 13.0 13.6 14.1 15.8 16.6 16.2 17.3 103.9
Source: Rosstat (1990-2002), RF Ministry of Agriculture (2003-2006), Soyuzagromach (2007).
As different from farm machinery sector production of mineral fertilizers grew as compared with 1990 since during all these years it was a stable source of export revenues (about 90% of output was exported). Exports of potash fertilizers increased 2.2 fold, of nitrogen fertilizers - by 80.3%. Domestic demand for mineral fertilizers grows insignificantly. As compared with the previous year production of herbicides and other agrochemicals decreased slightly - down to 86% (Rosstat data for January-October 2008).
34 The report of Agricultural Minister A.V.Gordeev at the State Duma session "On the implementation in 2008 of the State program for agricultural development and regulation of agricultural and food markets in 20082012 and the objectives for the future". Published on November 5, 2008.- www.mcx.ru
35 Data of Soyuzagromach.
3.5.6. Food industry performance and food security doctrine
In 2008 the index of food (including beverages and tobacco) production amounted to 101.1% as compared with 2007. In the first half of the year the sector developed more dynamically but due to the production decline in October (91.3% as compared with September 2008) the annual increase was insignificant (Fig. 54).
20 15 10 5 0 -5 -10 -15
Source: Rosstat.
Fig. 54. Percent change of food industry output in 1990-2008
The most dynamic sector of food industry is the production of meat and meat products and especially of poultry meat and products that are more affordable for all strata of population (the increase being 17.4%). The outputs of sausage, margarine and pasta products have reached the pre-reform level and those of granulated sugar and vegetable oils have even surpassed it almost twice (Table 54).
Table 54
Production of basic food products, thousand tons
I-X 2008 as
1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 % of I-X
2007
111.6 101.4 102.2 95.5
90.2 96.0
98.5 97.0 100.7
95.6
Source: Rosstat.
— ™ 1 1 m
II...........
<9o <9,
TO
v/o. V/o. v/o. v/o. V/o. v/o. v/o. v/o. ^
®
%
^ u6> u> u<9
Meat 6484
Sausage products 2283
Butter 833
Whole milk prod- 20.8 ucts in milk equivalent, million tons
Vegetable oils 1159
Granulated sugar 3758
Flour, million tons 20.7
Groats 2854
Pasta 1038
Margarine products 808
2370 1193 1284
1293 1052 1224
421 267 271
5.6 6.2 6.7
802 1375 1281
3155 6077 6590
14 12.1 12
1418 932 994
603 704 764
198 462 515
1456 1677 1698
1468 1700 1832
279 285 271
7.7 8.5 8.7
1197 1598 1867
6165 5841 4852
10.9 11.2 10.8
951 890 893
821 874 950
536 542 561
1827 2100 2561
1957 2010 2411
277 274 272
9.5 10 10.5
2206 2600 2735
5588 5800 6112
10.2 10.2 10.3
926 966 1113
982 1028 1014
630 677 752
In recent years the demand for food products grew faster than the average real incomes of population but due to the financial crisis this trend may discontinue. The first to drop will be the demand for highly income-elastic products of foreign origin - fruits, cheese and coffee. In 2008 the share of food products in the structure of retail trade turnover totaled 45.3%.
The deepening of the crisis and the surge of prices for food products revived concerns for food security issues in the RF Ministry of Agriculture. From the point of view of Agricultural Minister A.V.Gordeev "the food security of our state can be deemed guaranteed if in case of terminated food supplies from abroad the country doesn't plunge into a food crisis. It is assured by the high share of domestic agricultural and food products in consumption: 95% for potatoes, 90% for grain, milk and milk products, 85% for edible salt, 85% for meat and meat products, 80% for fish and fish products, sugar and vegetable oils"36.
It should be noted that fears about getting dependent on food supplies from abroad are not justified: the share of imported products in consumption exceeds 20% only for meat and meat products (Table 55). In 2007 this share fell as compared with 2006.
Table 55
Share of imports in the consumption of food products in 2007, thousand tons
Potatoes Vegetables and melons Meat and meat products Milk and milk products Eggs, million pieces
Imports 334 2391 3177 7134 856
Personal and industrial 35532 17801 8745 38647 38360
consumption
Exports 132 715 66 590 398
Imports minus exports 202 1676 3111 6544 458
Imports minus exports as 0.6 9.4 35.6 16.9 1.2
% of consumption_
Source: calculated using balances of commodity stocks of food products. Rosstat, 2007.
The Ministry of Agriculture submitted to the RF Council of Federation a draft Doctrine of food security that has rather a political than economic implication37. The document justly asserts that in order to provide food security one should first of all "assure economic afforda-bility of foodstuffs and for this purpose ... take measures for raising personal incomes, ensuring state support to low-income social groups and encouraging food quality improvement". At the same time it contains target indicators for "lowering the share of imports in the supply of meat and meat products from 34 to 12%, milk and milk products - from 17 to 12%, granulated sugar - from 39 to 20%".
3.5.7. Foreign trade
In 2008 the trend towards increasing the turnover of foreign trade in agricultural and food products preserved. In 9 months 2008 imports of respective items amounted to 27.7 billion USD - up 35.5%. On the contrary, exports of food commodities (less raw agricultural products) reduced, e.g. the sale of basic export item - grains - fell down to 7472 thousand tons (76.9% of the respective previous year indicator), the sale of sunflower seeds - down to 28.5 thousand tons (30.8%)38.
36 Speech of A.V.Gordeev in the RF Council of Federation "On the current food security of the Russian Federation and measures for guaranteeing it". October 28, 2008. www.mcx.ru
37 Doctrine of food security - draft. www.mcx.ru
38 Rosstat - www.gks.ru
Thanks to the government foreign trade policies targeted at the restriction of sugar import and accelerated development of domestic production of sugar beets (pursued during the 3 recent years), sugar supplies from abroad tend to decrease (Fig. 56).
Table 56
Imports of basic agricultural and food products in 2000-2007, thousand tons
2000 2001 2002 2003 2004 2005 2006 2007 I-IX 2008 as % of I-IX 2007
Beef 282.3 459.2 504.6 507.8 510.9 696.2 1411.3* 1489.4* 124.5
Pork 212.9 369.6 602 535.2 455.2 562.9
Poultry meat 687.2 1383.3 1375.2 1190 1101.3 1318.5 1282.4 1294.9 97.5
Milk 48.0** 85.4** 11.8** 26.5** 256.3 313.9 297.3 250.9 101.5c
Butter 45.4 81.4 94.1 114 70.3 66 164.8 129.4
Sunflower oil 149.5 182.8 175.7 200.8 161.2 131.5 100.0 132.0 99.4
Cereals 3333.5a 1123a 713.7a 850.2a 2898.5 1449 2313.4 1066.6 n.a.
Flour and groats - - - - 129.4 74.1 82.2 87.8 n.a.
Sugar 4818b 5553.5b 4604.2b 4263.1b 3209.7 3512.2 2981.9 3709.4 73.1d
• Meat less poultry meat.
** Condensed milk and cream (data of the RF Federal Customs Service). a Wheat and wheat/rye mix + corn. b Raw sugar + white sugar. c Milk and milk products. d Raw sugar. Source: Rosstat.
The aggregate imports of dairy products grew insignificantly while those of dried milk increased by 65.7%. Similarly to previous years import supplies of fresh and frozen meat and vegetables were also up. The increase of food imports in 2008 was conditioned by the growth of personal incomes that continued till September. The scope of the global financial crisis' slackening effect on this trend won't be clear till the middle of 2009.
Russia still retains its traditional status of net importer of food and agricultural commodities. The trend towards growing deficit of agrifood trade that originated in 2000 persists. In January-September 2008 the negative balance of trade in respective items amounted to 19.4 billion dollars.
3.5.8. Basic commodity markets Grain market
Market situation
The market of grain that is largely oriented towards export is the most affected by the global financial crisis. In 2008 the Russian grain market experienced excessive supply that was due to several reasons:
• record grain crop in 2008;
• factors hindering export;
• crisis in the banking sector that led to the shortage of funds for buying grain.
According to estimates the gross output of grains in 2008 is about 108 million tons, which is the record indicator over the last 15 years (Picture 9). It is conditioned by the sharp growth of production as compared with 2007: wheat - by 29% (up to 63.7 million tons), bar-
ley - by 48.5% (up to 23.1 million tons) and corn - by 76.3% (up to 6.6 million tons) (Fig. 55,56).
The principal increase was provided by regions oriented towards export of grain - the Central and Southern federal districts, while the gross output of grain in the Urals and Siberian regions reduced.
Under the pressure of large new crop supplies domestic prices for grain at the beginning of 2008/2009 MY started to fall (Fig. 57). Over 6 months (from April 2008 when prices hit the highest point, to November 2008) the price for food wheat #3 fell two fold - from 9150 rubles per ton to 4475 rubles per ton (EXW Northern Caucasus). The drop of prices for feed wheat and barley was most dramatic - 2.5 fold on the average.
86,6
50,6
67,2
34,1
45,4
47,7
45,0
108,1
78,1 78,2 78,6 81,8
63,7
49,4
120 100 80 60 40 20 0
2002 2003 2004 2005 2006 2007 2008 I I grain -wheat
Source: Rosstat, "Sovecon" Analytical Center.
Fig. 55. Russia: gross output of grain and wheat, million tons
Source: Rosstat, "Sovecon" Analytical Center.
Fig. 56. Russia: gross output of barley and corn, million tons
10000
2000
4000
6000
8000
0
Food wheat #3 —■—Food wheat #4 - - - - Feed wheat — — Feed barley
Source: "Sovecon" Analytical Center.
Fig. 57. Domestic prices for grains (EXW Northern Caucasus), rubles per ton
In the conditions of excessive grain supply and negative price dynamics the market could be supported by the increase of domestic consumption, exports and state purchases.
The financial crisis has largely limited opportunities of the domestic market. First, processors got short of funds and had to reduce purchases of domestic grain. As a result the marketing of grain with long-term delay of payment became a common practice.
Second, prospects for larger consumption of feeds in livestock production are questionable. In 2008 rates of pig inventories' growth were below those of the previous year. Smaller consumer demand for livestock products due to lower purchasing power of population in the crisis situation will also have a negative effect. According to estimates of "Sovecon" Analytical Center domestic consumption of grains in 2008/2009 MY won't change substantially as compared with 2007/2008 MY and will amount to 74 million tons versus 70 million tons respectively.
The prospects for increasing Russian grain exports are also not so bright. From the beginning of 2008/2009 MY the country exported large volumes of wheat and barley that were above the previous years' indicators. In July-October 2008 8.07 million tons of wheat and 974 thousand tons of barley were exported. But in October-November export supplies started to decrease due not only to the developments on foreign markets but also to the changing situation on the domestic market, i.e. the growth of state purchases of grain (Fig. 58,59).
Fig. 58. Cumulative wheat exports, thousand tons
Source: calculated using data of "Sovecon" Analytical Center.
Fig. 59. Cumulative barley exports, thousand tons
Large supplies of food wheat from Russia and Ukraine at the beginning of 2008/2009 MY resulted in saturation of markets in basic countries-importers of grain in the Black Sea region, first of all Egypt and Pakistan. Lower interest in purchase of cheap poor quality wheat from Russia and Ukraine may be accompanied by the shifting of demand towards non-expensive but higher quality food grain. In this situation the main competitor for the Black Sea-origin wheat on the Mediterranean markets will be Australia. The growing importance of the country on the world market is due to the restoration of its production capacities and a sharp drop of freight rates that raises the competitiveness of Australian grain in the Mediterra-
39
nean region. The world freight rates are lowering for all classes of vessels and for all routes .
39 Data of the International Grain Council.
From the price point of view Russian wheat still remains competitive. The average price offer for Russian grain at the GASC tender in November 2008 was about 175 dollars per ton, for French wheat - 185 dollars per ton40.
The global financial crisis that coincided with grain harvesting in major exporting countries led to the accelerated decline of the world prices for grain (Fig. 60). Prices for corn depend on the prices for oil: the lowering of oil prices pulls down prices for corn that is a raw input for producing biofuel. Such dynamics of the world market steadily undermine price advantages of the Russian grain.
The policies of state purchase of grain into the intervention fund can also result in the lowering of Russian grain export competitiveness (see below). As prices on the domestic market fell, the interest in sale of grain to the state started to grow. The prices at which the state buys food wheat are 30% above prices of the domestic market41. In September 2008 state purchases of grain amounted to 207 thousand tons, in October - to 403 thousand tons, in November - to 851 thousand tons. So, export flows may re-orient towards domestic market.
oooooooooooooooooooooooo
■t-CNCO-'iriOCOI^OOCOOT-CNT-CNcO-'iriOCOI^OOOiOT-CN OOOOOOOOOt-T-T-OOOOOOOOOT-T-T-
Source: International Grain Council.
Fig. 60. World prices for wheat, dollars per ton
State policies
In 2008 state policies on the domestic grain market were rather active. The volume of intervention purchases into the state fund in 2008/2009 will be quite large - 6-8 million tons. In the previous good crop years it never exceeded 2 million tons.
Given the current market situation this measure is rather contradictory. On the one hand, state intervention purchases are a key factor of domestic market support and slowing down of domestic price decline. On the other hand, they entail a conflict of interests between export supply and sale on the domestic market (into the intervention fund).
40 The State Egyptian company.
41 Data of "Sovecon" Analytical Center. 276
In the situation of financial crisis there is a need to relieve tension in the agrifood sector as regards crediting and normalization of payments and to encourage export that demonstrates slowing down.
A whole set of measures to support grain export is envisaged for 2009:
• subsidizing of export;
• reduction of infrastructure costs - railway and port transshipment rates;
• accelerated procedure of repaying export VAT;
• granting of bound credits to importers for purchasing Russian grain and flour. Market outlook
According to expert estimates in case weather conditions in 2009 will be close to the climatic average over the last few years, the gross output of grain will be large - over 90 mil-
42
lion tons . Combined with high ending stocks it may again cause oversupply of grain on the domestic market.
The competition on the world market will remain rather tough. Consumption of wheat in Asian and Central African countries is expected to fall - due to lower oil prices they reduce state support to grain importers. At the same time the International Grain Council forecasts a record consumption of wheat for feeding purposes in 2008/2009 MY - 119 million tons (30 million tons above the previous season indicator).
Efficient state policies will be needed to support the market, first of all as regards problems connected with transportation infrastructure. In the coming years the deficit of railway grain cars will get worse. While in 2008 it equaled 2033 units, in 2009 this indicator will grow up to 8781 units, in 2013 - to 20466 units or 35.9% of the total grain car fleet43. Given the current misbalance between export potential and the potential of grain export infrastructure the envisaged measures for encouraging grain export supplies won't bring the desired result. Besides, the Ministry for economic development and trade forecasts that by 2020 the output of grains in Russia will further grow - up to 120-125 million tons44 - and there won't be enough capacities for export.
Sugar market
Market situation
In 2008 the situation on sugar market was not as favourable as before: profitability of sugar beet production declined and areas planted in this crop contracted. The surge of grain production profitability in 2007 has shifted producers' interest from sugar beets to grains.
In 2007 areas under sugar beets were record over the last 15 years - 1065.4 thousand hectares. But while prices for grains and oilseeds in 2007/2008 grew, those for sugar beets remained actually the same. Just a minor rise is expected in 2008/2009 - up to 1.4 thousand rubles per ton from 1.3 thousand rubles per ton in 2007/200845. At the same time the growth of prices for fertilizers and fuels and oils raised production costs.
42 "Sovecon" Analytical Center's estimate.
43 Data of "RusAgroTrans".
44 Concept of long-term social and economic development of Russian Federation (of August 5, 2008).
45 Data of IKAR (Institute for Agricultural Market Studies).
Lower profitability combined with higher expenditures forced many producers to reduce areas planted in sugar beets. In 2008 they declined by 22% down to 819 thousand hectares. While several years ago the profitability of sugar beet production was around 30%, at present it fell to 10-15%. Only companies having long-term contracts with buyers or their own processing facilities still retain interest in sugar beet business.
Due to the intensification of production - higher yields and sugar content - the output of sugar in 2008 will reduce to a smaller extent than areas planted in sugar beets - by 11.7% (from 3.14 to 2.77 million tons)46.
Table 57
Production indicators of Russian sugar market
2001 2002 2003 2004 2005 2006 2007
Areas sown in sugar beets, thousand hectares 772.8 809 924.2 850.8 805.3 1002.9 1065.4
Yields of sugar beets, 100 kg per hectare 188.4 193.6 209.7 256.8 266 307.7 265
Gross output of sugar beets, million tons 14.5 15.6 19.3 21.8 21.4 30.8 28.2
Output of sugar out of sugar beets, million tons 1.6 1.6 1.9 2.2 2.4 3.2 3.1
2008 (estimate)
819.3
288 30.7 2.7
Source: Institute for Agricultural Market Studies (IKAR).
State policies
Sugar market in Russia is a subject of tight government regulation. The duty on white sugar import is 340 dollars per ton. The import of raw sugar is regulated by variable import duty that depends on the average monthly price for raw sugar at the New York Board of Trade. In 2008 the rate of domestic market protection against respective import amounted to 140 dollars per ton. Besides, for the second year running raw sugar import is subject to seasonal duties - 220-270 dollars per ton (depending on the exchange quotations) from December 1, 2008 to May 31, 2009.
A big problem for the market is sugar import from Ukraine. Till 2009 sugar was excluded from the free trade regime between Russia and Ukraine. This means that unless the problem is settled by the Government supplies of beet sugar from Ukraine after January 1, 2009 won't be subject to import duties. Experience shows that under the guise of beet sugar Ukraine can export to Russia cheap sugar made out of raw sugar free of duty. Ukraine has big stocks thereof and large sugar processing facilities.
It should be noted that the problem of minimizing risks from commodity import from Ukraine is one of the most acute since Ukraine has already joined WTO on more liberal terms than are offered to Russia. Unless measures are taken to regulate mutual trade between the two countries, Russia may face either import of goods from the third countries after minor repacking in Ukraine or larger supply of Ukrainian commodities for which the above goods will substitute in Ukraine.
46 Forecast of IKAR (Institute for Agricultural Market Studies). 278
Market outlook
Production of sugar turned out to be more sustainable to the crisis than, for instance, production of grain. In the situation of global financial crisis the world sugar markets do not demonstrate sharp drops. The slump in grain prices makes sugar beets more profitable as compared with other crops. Besides, the mechanism of regulating raw sugar market makes prices for sugar in Russia more predictable. Therefore in 2009 the situation on sugar market will look more promising than that on markets of other crops. Acreage under sugar beets is expected to stabilize or even grow. However, here too the financial crisis will have its effect and accelerate the following market processes:
- non-efficient farms will withdraw from the market;
- the share of independent beet producers will reduce while the number of vertically integrated structures will grow;
- processors will more actively invest in sugar beet production. According to expert estimates sugar producers currently own over half of areas planted in sugar beets in the coun-
47
try . In two years time processors will grow 80% of domestic sugar beets.
- small and non-profitable processing plants will close. According to data of "Soyuzrossa-har" there were 84 sugar processors in the country of which only 75 were operating in 2008. 6 operators ("Prodimex", "Euroservice", "Rusagro", Sucden, "Dominant" and
48
"Razguliay") control a large share of the market (over 60%) . Meat market
Market situation
In 2008 trends on the Russian meat market remained the same as in the previous years, i.e. positive dynamics in pig and poultry production preserved. According to preliminary data the output of poultry meat in farms of all types grew by 16% as compared with 2007 up to 2.2 million tons, the output of pork - by 8% up to 19.7 million tons (Fig. 61,62).
In recent years the average annual growth rates in poultry production range from 15 to 20%. The domestic output of chicken meat increases 20 fold faster than imports. In 2007 1.3 million tons of poultry meat were imported and the 2008 indicator will most likely be close to this level. The share of imported poultry on the Russian market is about 38%. According to estimates of the Russian Meat Union by 2010 it should fall down to 29%. Import of poultry meat (similarly to other kinds of meat) is regulated by tariff quotas. In 2009 this regime will be tightened with the view to create favourable conditions for further development of Russian poultry production.
47 Data of investment group "Capital".
48 Data of IKAR (Institute for Agricultural Market Studies).
Source: National Meat Association.
Fig. 61. Russia: poultry meat production, thousand tons (slaughter weight)
Source: National Meat Association.
Fig. 62. Russia: production of pork, thousand tons (slaughter weight)
First investments in the Russian pig breeding were made in 2005. In 2006 the trend was supported in the framework of the National Project "Development of agrifood sector". This resulted in a sharp growth of pig inventories in farms of all types - in 2006 they were up 17% as compared with 2005. After putting in operation several large pig breeding complexes the trend preserved in 2007 but as compared with the previous year growth rates slowed down noticeably (Fig. 63). As of January 1, 2008 pig inventories increased by only 4.3% as compared with January 1, 2007. Lower growth rates in pig breeding were conditioned by the 280
change of economic situation on the market. The drop of prices for pork in 2007 and the rise of prices for grain and fuels and oils resulted in the decline of sector's profitability from 2530% in 2006 to 15-20% in 200749.
In 2008 pig inventories stopped to increase. The reason is that most pig breeding complexes recently put in operation should have reached their full capacity in 2008-2009. But the financial crisis caused problems with additional financing of the approved plans. In this situation one can speak only of implementing the already launched projects rather than of expanding pork production.
In the context of current market developments the Government is preparing a branch target program for the development of pig breeding. According to the "Concept of pig production development in the Russian Federation till 2020" worked out by the Ministry of Agriculture the output of pork by 2020 should be increased 3 fold - up to 7.7 million tons (live weight).
Source: Rosstat.
Fig. 63. Inventories of pigs in farms of all types (as % of the previous year)
Table 58
Imports of meat to Russia, thousand tons
2002 2003 2004 2005 2006 2007 2008 (Jan-Oct.) thousand as % of Jan-Oct. tons 2007
Beef 330 320 405 687 695 726
1335.4 121.8
Pork 580 500 445 550 650 664
Poultry meat 1360 1145 1270 1303 1265 1308 978.8 94.6
Source: Rosstat.
49 Data of the National Meat Association.
State policies
Beginning from 2003 import of meat to Russia is constrained by tariff quotas: within the quota set by the Government imported meat is subject to lower customs duties while duties for meat supplied in excess of this quota are much higher. This restricting mechanism will continue to be applied in 2009 but out-of-quota tariffs on import of poultry meat and pork will be raised sharply (Table 59).
The previous years' experience showed that imported cheap frozen meat remained competitive on the Russian market even in case it was subject to high out-of-quota duty. For instance, about 25-30% of pork is imported in excess of the quota. In the context of projected growth in Russian pig and poultry production a more rigid limitation of import looks quite justified. But one should take into account that meat processors use mostly frozen imported meat. According to estimates of the Institute of Agrarian Marketing this meat is 15% cheaper than Russian meat. Its replacement with more expensive domestic meat can result in higher prices for processed products.
Table 59
Tariff quotas on import of meat to Russia
2006 2007 2008 2009
Beef, fresh or chilled
Quota, thousand tons 27.8 28.3 28.9 29.5
Within-quota tariff 15%, but not less 15%, but not less 15%, but not less 15%, but not less
that 0.2 EUR/kg that 0.2 EUR/kg that 0.2 EUR/kg that 0.2 EUR/kg
Out-of-quota tariff 40%, but not less 40%, but not less 30%, but not less 30%, but not less
than 0.4 EUR/kg than 0.4 EUR/kg than 0.3 EUR/kg than 0.3 EUR/kg
Beef, frozen
Quota, thousand tons 435 440 445 450
Within-quota tariff 15%, but not less 15%, but not less 15%, but not less 15%, but not less
than 0.15 EUR/kg than 0.15 EUR/kg than 0.15 EUR/kg than 0.15 EUR/kg
Out-of-quota tariff 40%, but not less 40%, but not less 30%, but not less 30%, but not less
than 0.4 EUR/kg than 0.4 EUR/kg than 0.3 EUR/kg than 0.3 EUR/kg
Pork including trimmings
Quota, thousand tons
pork 476.1 484.8 493.5 502.2
trimmings - 26.5 28 29.7
Within-quota tariff 15%, but not less 15%, but not less 15%, but not less 15%, but not less
than 0.25 EUR/kg than 0.25 EUR/kg than 0.25 EUR/kg than 0.25 EUR/kg
Out-of-quota tariff 60%, but not less 60%, but not less 60%, but not less 75%, but not less
than 1.0 EUR/kg than 1.0 EUR/kg than 1.0 EUR/kg than 1.5 EUR/kg
Poultry meat
Quota, thousand tons 1130.8 1171.2 1211.6 952
Within-quota tariff 25%, but not less 25%, but not less 25%, but not less 25%, but not less
than 0.2 EUR/kg than 0.2 EUR/kg than 0.2 EUR/kg than 0.2 EUR/kg
Out-of-quota tariff 60%, but not less 60%, but not less 60%, but not less 95%, but not less
than 0.48 EUR/kg than 0.48 EUR/kg than 0.48 EUR/kg than 0.8 EUR/kg
Source: RF customs legislation.
Market outlook
At present meat market in Russia is characterized by high fragmentation. The share of the 10 largest companies in domestic pork output is only 25.2%; in poultry production it's higher - 53.8% (Table 60). These are small producers who will be most affected by the current financial crisis. Due to that in 2009 the meat sector (and first of all pig breeding) is expected to actively consolidate. Small and medium producers will go bankrupt while large companies will find new opportunities for expanding their business by taking over entities unable to sustain competition. 282
Table 60
Russia: structure of poultry meat and pork production in 2007
Market of poultry meat (tons of slaughter weight) Market of pork (tons of live weight)
"Cherkizovo" group 12.1% Prodo Management 5.9%
"Prioskolie" 8.8% Agroholding 3.0%
Prodo Management 8.4% Agro-Belogorie 2.9%
"Belgrankorm" 5.3% "Cherkizovo" group 2.9%
"Kochetkov" 4.6% "Povolzhskoye" 2.5%
Sibirskaya guberniya 4.4% Miratorg 2.2%
Mossel'prom 3.9% Sibirskaya AG 1.9%
Resource 3.4% Exima 1.6%
Stavropolsky broiler 2.9% "Aleyskzernoproduct" 1.3%
Other 46.2% Other 74.8%
Source: Institute of Agrarian Marketing.
3.5.9. Agricultural land market
Land privatization in Russia primarily concerned farmlands included in the category of "lands of agricultural destination". As of January 1, 2008 both corporate farms and individual private farms based their land use on agricultural lands of which about 70% were owned not by the state but by individuals and legal bodies. Lands of other categories have actually kept on being the state property. The approaches applied to privatization of former collective and state farms' agricultural lands determined the emergence of a special type of ownership - the common share one. In place of a former collective or state farm one plot running to several thousand hectares was formed that consisted of hundreds of fields, perennial plantations, hay and pasture lands separated by natural or man-made boundaries. The title to this entire plot was transferred to hundreds of persons - employees and pensioners of former collective and state farms and workers of rural social sphere. Each of them became a co-owner of the plot and got a share in title to it - the so-called land share. Actually such a share-owned plot is either entirely used by a corporate farm - the legal successor of this former collective or state farm, or is divided to parts that are transferred to different corporate or individual private farms.
Table 61
Structure of ownership for agricultural lands used by different groups of farm producers (as of January 1, 2008)
Total, million incl. private, of them owned by user
ha million ha million ha % of the total % of the privately owned
Individuals not registered as individual private farmers 41.5 17.2 16.6 40.0 96.5
Individual private farms 20.5 12.7 6.6 32.2 52.0
Partnerships, companies, cooperatives 113.2 94.1 4.2 3.7 4.5
State institutions 10.7 0.7 0.0 0.0
Other institutions 4.6 1.4 0.2 4.3 14.3
Total 190.5 126.1 27.6 14.5 21.9
Source: Rosnedvizhimost.
Household farms use farmland plots with different types of permitted use (for household farming, vegetable gardening and horticulture, haying, pasturing, etc.) of which only 40% are
283
owned by individuals-users (Table 13). Members of individual (family) farms own only one third of the used agricultural land. 79% of farmlands used by agricultural partnerships, companies and cooperatives are in common share ownerships of individuals. All other agricultural lands remain in state ownership.
It's not clear how this active transfer of land from owners to users is effected - official statistics do not give an answer to this question. This is due to several reasons. First, different classifications are used when collecting statistical data about land transactions thus complicating the analysis. In one case the gathered information reflects transactions with plots of land of agricultural destination but doesn't specify how many of them are acquired by farm producers. In another case - transactions with plots acquired by corporate and individual private farms without indicating the category and type of lands. In the third case - transactions with plots for farming purposes without indicating the buyer. In the fourth case the number of transactions with agricultural plots includes transactions with plots for individual dwelling and summer suburban (dacha) construction that does not necessarily imply farming activities (Table 62).
Table 62
Transactions with agricultural land plots situated outside settlements
2004 2006 2007
Transactions, thousand Area, thousand ha Transactions, thousand Area, thousand ha Transactions, thousand Area, thousand ha
State and municipal lands:
Sale to individual private and 0.240 8.1 2.9 194.5 2.1 285.7
corporate farms
Sale to individuals for individ- 3.3 0.7 4.4 0.8 2.3 0.8
ual dwelling and summer subur-
ban construction, household
farming, vegetable gardening
and horticulture, etc.
Lease of lands of agricultural 92.8 54289.8 127.9 88569.5 102.8 97337.4
destination
Plots of individuals and legal
bodies:
Sale of plots to individuals and 1.4 49.1 7.7 180.2 8.3 368.2
legal bodies for farming pur-
poses
Sale of plots by individuals for 177.8 28.4 187.2 68.9 203.8 33.4
household farming, gardening
and livestock production
Total 275.5 54376.1 330.1 89013.9 319.3 98025.5
Source: Rosnedvizhimost.
Second, statistical recording is organized in such a way that only transactions with land plots are traced. In respect to farmlands this approach is unacceptable: the most part of them are a common share property of hundreds of co-owners and transactions with such plots are impossible since they would require a unanimous agreement of all the participants. In this case land titles are transferred not through the purchase and sale of plots but through the purchase and sale of land shares with further parceling out of physical plots that become objects of individual private ownership.
Till 2008 Rosnedvizhimost submitted information about the share of commonly owned lands that are leased out. Beginning from 2008 this data is not available. As of January 1, 2007 about 68% (i.e. about 60 million hectares) of lands being common share property were
leased out to corporate farms. But as can be seen from the Table such a widespread transaction is not subject to the federal state statistical recording.
In addition to all the above, information about transactions for the federal state statistical recording is collected through district departments of Rosnedvizhimost while transactions themselves are registered in the district departments of judicial bodies authorized to register real estate titles and transactions with them. The legal ambiguity in exchange of information entails non-transfer of information about transactions from the judicial bodies to Rosnedviz-himost agencies. As a result the error in data about land transactions averages 20%50.
The problem with gathering information about land transactions is obvious if one compares data of the above Tables: farm producers employ 162.9 million hectares of agricultural land belonging to outside owners while the recorded transactions embrace only 98 million hectares. So, the re-distribution of land ownership and use titles in agriculture is largely beyond statistical recording. One can estimate the scale of land re-distribution, prices for land purchase and lease only by carefully studying selected cases. Transaction costs connected with carrying out of land transactions and entering information about earlier acquired land titles in the Single State Register of Real Estate Titles and Transactions are extremely high51.
The issue of high costs of preparing information about plots for their registration in the State Real Estate Cadastre is more or less discussed in the society. At the same time the issue of extremely high costs of access to the system of registering land titles and transactions is beyond the government's concern. Only at the end of 2008 amendments to the RF Tax Code were introduced that reduced the amount of state fee for registering titles and encumbrances to land plots of agricultural destination. For instance, the state fee for registering a share in the common title to a land plot was cut 10 fold. Up to then each co-owner was charged the 500-ruble fee. As a result the fees received by the budget for registering two similar plots differed 50 fold in case one of them was an individual property and the other - the common property of 50 persons. One more problem is that the growth of transaction costs is determined by provisions of the acts that are not subject to broad discussion and are not to be approved by legislators. For instance, the surrender of title to a land plot that incorporated adjacent fields being common property of a group of individuals resulted in forming of dozens of plots each of them being a common share property of these individuals. This new provision was introduced by departmental directives, orders, letters and software applied in cadastre recording. As a result expenditures of each co-owner on registering his land titles increased as many fold as many plots were formed. The expenditures of a corporate farm leasing these plots also grew as many fold as many new plots commonly owned by a group of lessors became new objects of cadastral recording. High transaction costs create ample conditions for the mass transfer of land titles from the initial owners (who got their titles in the course of privatization) to the ones who can bear these costs.
Since farmlands are not protected against their withdrawal from agricultural produc-
52
tion there is a stimulus for the respective market's invasion by operators interested in nonag-
50 State (national) report "On the condition and use of lands in the Russian Federation in 2007". Moscow, Rosnedvizhimost, 2008, p.174.
51 Shagayda N.I. Market of lands of agricultural destination: the practice of limitations. - "Voprosy economiki", No.6, 2005, pp. 119-128.
52 Shagayda N.I. Protection of lands from withdrawal from agricultural production. - Eco, No.5, 2008, pp. 138147.
53
ricultural utilization of such lands . As a result the market of farmlands is distorted: it includes transactions with agricultural land plots priced as sites for construction development. Imperfection of institutions and documents proving land titles causes their large-scale taking away from the owners who acquired their property rights in the course of land reform54.
One of the specific features of agricultural land transactions is their conclusion not by direct agreement with the land owner but by agreement with the owner's trustee. Usually one person carries out transactions by procuration for and on behalf of dozens and hundreds of owners. This evidences that the seller doesn't know the price of the deal and that such deals are not transparent.
3.5.10. State program for agricultural development and regulation of agricultural and food markets in the RF constituent members for 2008-2012
Beginning from January 2008 the country's farm sector is financed in the framework of the State program for agricultural development and regulation of agricultural and food markets in the RF constituent members for 2008-2012 that was approved by RF Government Resolution No.446 of July 14, 2007 (hereinafter referred to as the State Program) (Fig. 64).
Development of priority sub-sectors 13%
Regulation of markets 1%
Creation of general conditions for farming 12%
Sustainable development of rural areas 20%
Attaining of
financial sustainabiltiy 54%
Fig. 64. Share of expenditures by components of the State Program for 2008-2012
53 Studies show that about 80% of owners sell their land shares in case there is a buyer.
54 One of the scenarios of taking away: new members enter the entity, shares are concentrated, land title is registered in the name of the entity although documents belong to individuals, land is sold. The technology is widely used in the Moscow region. In Russia at large the share of farmlands owned by agricultural partnerships, companies and cooperatives equals 4.5% of the lands used by them, in the Moscow region - 28%.
Among the Program's targets the first place belongs to the "sustainable development of rural areas, growth of employment and improvement of living standards of rural population". Such a positioning of rural development problems may be regarded as revolutionary for agricultural administrative bodies. The input supply section included in Part "Sustainable development of rural areas" contains no provisions pertaining to the employment rate: funds are envisaged for measures to improve housing conditions, to develop water supply and gasification and to support complex compact construction in rural settlements in the framework of pilot projects. The planned financing of sustainable rural development in the framework of the State Program in 2008 accounts for less than 10% of the total expenditures on its implementation. Though other Parts of the document also contain measures directly pertaining to sustainable development (e.g. consulting support of farm producers) this is rather an exception. The amount of funds for creating non-agricultural employment in rural areas is small (these are subsidies for compensating interest rate on credits and loans taken to develop folk handicrafts, gathering of mushrooms and berries, rural tourism, etc.) although higher employment rate in rural areas is declared to be the Program's main goal.
The most sizable component of the State Program (292.7 billion rubles over 5 years or 54% of the total funds) is the attaining of agriculture's financial sustainability. The envisaged measures include:
• subsidizing of interest rate on short-term and investment credits (loans in credit cooperatives) for agricultural commodity producers of all organizational and legal types;
• improvement of financial sustainability of small entities to be achieved through credit (loan) subsidizing and enlargement of "Rosselkhozbank's" authorized capital;
• technical and technological modernization of agriculture including subsidies for partial compensation of expenditures on interest rate and contribution to the authorized capital of "Rosagroleasing";
• lowering of risks in agriculture, i.e. partial compensation of insurance premiums from the budget funds.
The State Program sets quite ambitious plans for attracting credits to agriculture. To fully benefit from the funds envisaged for subsidizing, farm producers should get credits to the amount of 911 billion rubles over 5 years. Non-program agrifood sector activities require additional credit support of not less than 500 billion rubles, 70% of which should be long-term credits. In 9 months 2008 the amount of credits received by the Russian agrifood sector exceeded the corresponding 2007 indicator by 20 billion rubles and totaled almost 324 billion rubles55.
The main focus is made on and principal funds are allocated to the subsidizing of interest rate. Studies56 show that the mechanism of distributing budget funds in the framework of the National Project "Agrifood sector development" (2005-2006) was meant to support primarily large commodity farms and this practice gets continued in the State Program.
The distribution of funds by groups of farms is very uneven: 6% of corporate farms got over 50% of all subsidies and compensations. Farms of this group accounted for 29% of the total receipts and each of them on the average received 12 million rubles of budget funds
55 Operational information of the RF Ministry of Agriculture.
56 Uzun V.Ya., Gataulina A.A., Yanbykh R.G. et al. Methods of estimating the efficiency of state support to large and small business in the agrifood sector. All-Russian Institute of Agrarian Problems and Informatics, scientific report. 2008, p.92.
which was almost 89 fold above the average amount received by one farm in the fourth group and 525 fold above respective indicator in the fifth group. It should be also noted that far from all corporate farms of the first group were profitable, i.e. efficient. Of 926 corporate farms of this group 114 had balance losses to the amount of 1.6 billion rubles, i.e. the state actually covered their losses. Others received no subsidies even despite their successful performance.
In 2008 profits of corporate farms grew up to 117.5 billion rubles, i.e. by almost 10 billion rubles or 9% as compared with 2007. The share of profitable farms in the total number of corporate farms (23015) amounted to 82%, i.e. was up 1% as compared with the previous year.
Table 63
Share of corporate farms in the total amounts of subsidies and compensations
by groups in 2007, %
Groups of farms by the amount of received subsidies and compensations, thousand rubles Share in the total number of corporate farms Share in subsidies Share in balance profits Share in receipts Share in the total number of employed Share in farmland area
1. Over 5000 5.5 52.5 46.3 28.7 18.0 10.7
2. 4999-1000 20.5 34.8 38.5 32.3 32.2 30.6
3. 999-250 24.9 10.8 12.1 17.1 23.1 26.7
4. 249-50 16.0 1.7 0.9 7.0 10.4 12.9
5. 49-0.1 8.1 0.1 1.3 2.5 3.9 5.3
6. No subsidies received 24.9 0.0 0.9 12.4 12.3 13.8
Total 100.0 100.0 100.0 100.0 100.0 100.0
Source: Uzun V.Ya., Gataulina A.A., Yanbykh R.G. et al. Methods of estimating the efficiency of state support to large and small business in the agrifood sector. All-Russian Institute of Agrarian Problems and Informatics, scientific report. 2008.
The strict co-financing requirements set in the State Program may deprive farm producers in most deficit-budget regions of the federal support. The working out of regional programs and their coordination with the federal State Program should have coincided with amending budgets of the RF constituent members but it didn't happen. Besides, regions should have appraised the real need in funds and planned expenditures basing on these estimates and not only on available limits of federal financing. So, the situation is possible when RF regions won't fully utilize limits under some Program components due to the lacking demand while other components will suffer from a dramatic shortage of federal co-financing funds.
One more broadly advertised component of the State Program was the facilitation of small-scale farming that, however, was to receive only 7.9% of the total program funds (43.8 out of 551.3 billion rubles). Besides, one third of these allocations should be used for enlarg-
57
ing the authorized capital of "Rosselkhozbank" (Russian Agricultural Bank). Meantime the financing of such really efficient measures as subventions for the development of material and
57 The decision to enlarge authorized capital of "Rosselkhozbank" by 33.5 billion rubles taken at the end of 2008 envisages equal amounts to be used for subsidizing interest rate and replenishment of the bank's working capital. The decision is also taken to grant "Rosselkhozbank" subordinated credit to the amount of 25 billion rubles "for overcoming the deficit of credit resources". Besides, at the meeting in Odintsovo district of Moscow region in December 2008 the Prime-Minister V.V.Putin declared the RF Government's intention to allocate additional 45 billion rubles "for the replenishment of working capital" in the nearest time. 288
technical basis of agricultural cooperatives, replenishment of credit cooperatives' fund of mutual financial assistance, creation of security funds for granting guarantees to small business is not envisaged in the State Program. It should be noted however that about 10% of RF regions have still found funds for additional support to development of small rural business primarily through assisting agricultural cooperation.
The network of agricultural cooperatives continued to develop. According to RF regions' preliminary data, as of January 1, 2009 there were 5100 agricultural consumer cooperatives in the country including 912 processing, 2450 purchase, supply and marketing and 1738 credit cooperatives. According to estimates of the Ministry of Agriculture only 65% of them are actually working. Among credit cooperatives this indicator averages 71.5%, among processing ones - 57%, among purchase, supply and marketing cooperatives - 63.4%. Over the year the number of working cooperatives grew by 1137. Agricultural cooperation is most developed in Volgograd and Tjumen oblasts and Mordovia republic (over 100 stably operating cooperatives in each), republic Sakha (Yakutia) - 205 operating agricultural cooperatives. Also in the framework of the National Project many cooperatives were founded in Belgorod, Orenburg, Rostov, Penza, Irkutsk, Omsk, Chita oblasts, Buryat, Tatarstan, Kalmyk and Chuvash republics, Krasnodar and Krasnoyarsk regions.
According to data of the Ministry of Agriculture in 2007 out of agricultural consumer cooperatives that submitted annual reports 912 were making profit (to the amount of 104 million rubles) and 181 were making losses (to the amount of 11.1 million rubles). By the end of the year there were almost 110 thousand members in the system of agricultural cooperation; they got 76.5 thousand loans (over 60% - household farms).
However, the system of agricultural consumer cooperation faces some problems the basic of which are under-capitalization of credit cooperatives and impossibility to get a credit without sufficient mortgage, difficulties with marketing of output and low skills of cooperative managers. Besides, the getting of subsidies is arranged in such a way that it's easier to apply for a credit to "Rosselkhozbank" than to a credit cooperative. This also weakens the system of agricultural cooperation.
The role of small-scale entities is difficult to overestimate since they are often the only employment opportunity for rural residents. For instance, in Kurgan oblast over half of agricultural workers are employed outside corporate farms, over half of farmlands earlier cultivated by corporate farms currently belong to land share owners.
State support to small-scale entities creates favourable conditions for their development: the consolidated budget subsidizes their expenditures on paying interest rate on credits to the amount of 100% of discount rate. Individual private (family) farms have the same rights to
58
state support as corporate farms .
Still, the government efforts to support small-scale farming are obviously not sufficient. An overview of support measures financed from the regional budgets shows that the share of funds envisaged for smallholder entities is incomparable with their share in agricultural output. It usually ranges around 1% of the total budget of regional programs for supporting agri-
58 According to data of RF regions in 2008 the amount of credits and loans received in Russian credit institutions and credit consumer cooperatives for the development of small-scale farming amounted to 48.1 billion rubles while the target annual indicator was 30 billion rubles. So, the actual amount exceeded the target one 1.6 fold. Credits and loans received by small rural entities accounted for 11.3% of the total subsidized credits and loans to agriculture.
culture. Besides, even these funds are not allocated in full. The repayment of small entities' expenditures on interest rate is sometimes dragged out for a year.
A chronically unsettled problem is the inclusion of household farmers in the state insurance system through the simplified procedure of making installments from the declared income or through the system of patents. One more issue to be addressed is VAT paid by processors purchasing output of small farms that are not subject to VAT. The delay results in lower prices received by small entities. Otherwise processors have to increase their expenditures on VAT when selling their output since they cannot reduce them to the amount of VAT included in the cost of purchased agricultural products. One should also adjust the system of accounting for consumer cooperatives and relationships with their members in order to avoid double income taxation.
As of November 10, 2008 the State Program's financing amounted to 88.4% of the limit of allocated funds (Table 64).
Table 64
Financing of State Program's components, million rubles
Limit Allocations % of the limit
I. Sustainable development of rural areas 8 135.5 6 047.6 74.3
II. Creation of general conditions for farming 17 892.1 14 257.8 79.7
incl. subsidies for mineral fertilizers 10 300 8 597.8 83.3
III. Development of priority agricultural sub-sectors 15 228.5 12 263.5 80.5
IV. Attaining of agriculture's financial sustainability 77 245.2 71 616.0 92.7
incl. easier access to credits 34 349.8 28 765.1 83.7
V. Regulation of agricultural and food markets 580.0 320.4 55.2
In addition - subsidies for mixed feeds 10 000.0 8 398.0 84.0
TOTAL under the State Program 118 208.1 104 505.3 88.4
Source: Ministry of Agriculture.
In recent months the 2008 State Program's budget got additionally about 60 billion rubles, i.e. was increased by approximately %.
In particular, the decision was taken to allocate additional funds to the partial compensation of expenditures on purchase of mineral fertilizers (to the amount of 8 billion rubles) and mixed feeds for pig and poultry production (10 billion rubles) and to the compensation of farm producers' extra expenditures on diesel fuel.
In 2009 the percentage of subsidizing interest rate on credits will grow from 2/3 (66.7%) up to 80% of the Central Bank's discount rate and for livestock entities - up to 100% thereof. The amount of credits to the sector is supposed to reach 866 billion rubles (in 2008 it was over 700 billion rubles)59. However, the financial crisis and the expected sequestering of the 2009 budget will surely adjust all the planned indicators downwards.
59 The report of the First Vice-Premier V.Zubkov at the session of RF Government in January 2009. 290
3.6. Foreign Trade
3.6.1. Foreign Trade Turnover
The formation of the Russian foreign trade in 2008 proceeded under the effect of the following key factors: a considerable price rise for energy resources at the world market in the first eight months of the year and a sharp drop starting in September, slow down of the world industrial production, instability of the international financial flows, which is connected with crisis at the biggest world stock exchanges. The increase in the aggregate internal demand at the beginning of the year stimulated the import expansion, however the ruble depreciation and the decrease in the incomes of the population in recent months have resulted in the considerable reduction of import supplies.
Despite the slow-down of the world economy growth rates and the worsening of the situation at the world market in the second half of 2008 a considerable growth of the main indices allowed to reach high values as a result of the year.
Fig. 65. Russian Foreign Trade Turnover (as USD billion)
In 2008 indices characterizing Russia's foreign trade hit 18 year-high values. Russian foreign trade turnover calculated on the basis of the balance-of-payments methodology made USD 763.7 billion, exceeding the figure of 2007 by 32.2% (Fig. 65). it should be noted that in the 4th quarter the trade turnover was 4.6% below the corresponding figure of 2007. The export dropped by 10.4% and import went up by only 4.4% versus the 4th quarter 2007.
The share of export in the total amount of the turnover was 61.8% in 2008 (61.4% in 2007), while that of import - 38.2% (38.4%).
Due to the plummeting prices for oil and raw materials in the first 7 months of 2008 there was an anticipating growth of export observed as compared with the import. As a result the foreign trade balance in 2008 made USD 179.8 billion, exceeding by 37.3% as on the prior year. However the decrease of prices in September and the drop of prices for many raw materials and especially for oil in October that followed resulted in the correction of the foreign trade indices. The problem of contraction of the foreign trade balance again becomes acute in 2007 the prospect of the deficit balance looming in the nearest future.
The coefficient of trade balance disequilibrium (ratio of positive trade balance to foreign trade turnover) increased from 22.8% in 2007 to 23.5% in 2008.
3.6.2. Situation on the World Market
In the report of the International Monetary Fund60 on the state and prospects of the development of the world economy prepared in October 2008 it was noted that in 2008 the world economy entered the period of deep recession, which was caused by sharp worsening of the situation at the world market (the similar recession was noted in 1930ies). In the period from 2004 to the middle of 2007 the world economy was steadily on the rise. The world GDP went up by 5% a year on average (the highest figure since 1970ies), approximately three quarters of this growth were accounted for by the countries with the developing economy and countries with the transitional economy. The level of inflation remained comparatively low, though there was a trend for its increase observed.
In 2007 the world market was unfavorably influenced by the deepening crisis at the world financial market, downward trend at the housing market of many developed countries as well as plummeting prices for raw materials. The first evidence of the financial crisis evolved in August 2007 and by September 2008 the crisis had entered into a new stage characterized by sharp loss of creditability in financial institutions and markets. The growing ap-prehensiveness concerning the worsening of the situation at the financial market resulted in a number of bankruptcies, as well as merges of financial companies and the state intervention in the USA and Western European countries, which has led to a considerable change in the structure of the financial sector.
Negative trends at the financial market resulted in a considerable slow-down of the growth of the world economy. In the period from the 4th quarter 2007 to the 2nd quarter 2008 the GDP growth rates were on average only 1% whereas in the 1st-3rd quarter of 2007 they made 2.5%. It was the USA economy where the first evidence of recession appeared, however the slackening of the financial policy conducted by the Federal Reserve System of the USA as well as the packet of measures adopted by the American Government as well as the steady growth of export against the background of dollar slackening allowed to alleviate a negative effect of the financial crisis, but the growth rates of the American economy starting with the 4th quarter 2007 on average did not exceed 1.25%.
In 2008 the GDP of the USA went up by 1.3%, which is the lowest figure since 2001, when it was connected with the terroristic attacks in New York and other cities of the USA. It
60 http ://www. imf. org/external/russian/index. htm 292
should be noted that in the 4th quarter 2008 the GDP of the USD dropped by 3.8%. This is the lowest figure since 1982, which was the time the American economy suffered deep recession.
The business activity in the countries of Western Europe has slowed down considerably, which is due to a downward tendency on the housing market of a number of countries, stagnant economic situation in the USA and the appreciation of the euro exchange rate. According to the report of the European committee published in January 200961, the GDP of Eurozone increased only by 0.1% in 2008. At the same time the European Committee is forecasting that in 2009 the GDP of the Eurozone will drop by 1.9%, this being the first time the economy has fallen as a result of the year after the Euro was introduced in 1999. It is also mentioned in the report that the recession in the Eurozone started in the second quarter of 2008, when the GDP of the region dropped by 0.2% as compared with the previous quarter. In the fourth quarter the drop aggravated to 1.5%.
In 208 the economy of Japan officially entered the period of recession the GDP of the country having decreased by 3.0% and 0.5% in the second and the third quarter of the year, correspondingly. At the same time the volume of the GDP in Japan dropped by 12.1% at once in the fourth quarter, which has been the most dramatic fall since the first quarter of 1974 (then the GDP volume dropped by 13.1%). Earlier it had been expected that the GDP of Japan was to fall by 4.1% in the fourth quarter in year terms.
The developing countries and countries with transitional economy also were not able to avoid the economic recession. Average rates of GDP increase in them lowered from 8% in the first-third quarters of 2007 to 7.5% in the fourth quarter of 2007- 2nd quarter of 2008, the growth of net export and internal demand slowing down. The slow-down of the economic development was most considerable in the countries that have close trading relations with the USA and Western Europeans countries. The countries whose deficits of balance-of-payments are financed at the expense of the inflow of the foreign investments, which has reduced considerably due to the crisis, have also been hard hit.
During last months of 2008 the world volume of production and trade contracted considerably. The continuation of the financial crisis connected with the political elite being unable to eliminate uncertainty resulted in a dramatic decrease in price of assets in all the countries with the developed economy and the countries with the market in process of formation, which led to the decrease in the well-fare of the population, and, thus the contraction of the consumers' demand. Besides, the negative expectations of the population made the people to postpone the expenditure, decreasing the demand for the consumer and investment goods even further.
In January 2009 the International monetary fund reduced the forecast for the growth of the world economy in 200962 by 1.7 per cent versus its latest forecast published in November 2008 - from 2.2% to 0.5% (Table 65). According to the report of the International Monetary Fund, the growth of the economy this year will be the lowest since the Second World War. Despite the efforts of the Government of different countries, the paralytic situation in the financing and banking system cannot be overcome, which inevitably results in the slow-down of the development of the real sector of economy. In this connection, the IMF suggests devising new measures, which will enable clearing the market from the helpless institutions and non-liquid assets and reanimate the financial flows.
61 http ://ec.europa.eu/news/economy/
62 http://www.imf.org/external/russian/pubs/ft/weo/2009/update/01/pdf/0109r.pdf
According o the new version of the forecast the economies in nearly all the developed countries will reduce on average by 1.5-2.5% in 2009. Thus, the decrease in the GDP in the USA will make 1.6% as a result of the year, in Japan - 2.6%, in the UK - 2.8%. The GDP of Eurozone countries will drop by 2.0%. The smallest fall is forecast for Canada, where the reduction of the GDP will make only 1.2%.
As to the developing markets, they did not live up to the hopes of the economists regarding them as a force able to lead the world economy out of the recession, For instance, the forecast for the GDP in China for 2009 was corrected by 1.8 per cent down to the growth of 6.7%, and in India - by 1.2 per cent, down to 5.1%.
The IMF has also reduced the forecast for the growth of the Russian economy in 2009 by 4.2% as compared with its latest forecast published in November 2008. Now the fund expects that this year not only the GDP will not increase by 3.5%, but in contrast it will decrease by 0.7%. Moreover, the authors hold that the increase in the Russian economy by 2010 will make only 1.3% (instead of the growth of 4.5% that was forecast before).
The forecast for the economies of the CIS countries for 2009 was also reconsidered: from the growth of the total GDP by 3.2% to the decrease of the index by 0.4 per cent. It should be noted that the CIS countries will return to the growth by 2010, though it is now forecast to be at the level of 2.2% (not 4.5%).
Table 65
Dynamics of Global Gross Product and World Trade (as percentage to the previous year)
2004 2005 2006 2007 2008 1) 2009 2) 20102)
GDP
World, total 105.3 103.4 105.1 105.2 103.4 100.5 103.0
Industrially developed countries 103.2 102.6 103.0 102.7 101.0 98.0 101.1
USA 103.9 103.1 102.8 102.0 101.1 98.4 101.6
Countries of Eurozone 102.1 101.5 102.8 102.6 101.0 98.0 100.2
Japan 102.3 101.9 102.4 102.4 99.7 97.4 100.6
Other developed countries 104.6 103.9 104.5 104.6 101.9 97.6 102.2
Developing countries and countries with transitional econ- 107.7 106.8 107.9 108.3 106.3 103.3 105.0
omy
Countries of Central and Eastern Europe 106.5 105.6 106.7 105.4 103.2 99.6 102.5
CIS countries 108.4 106.6 108.2 108.6 106.0 99.6 102.2
Russia 107.2 106.4 107.4 108.6 106.2 99.3 101.3
Asian countries 108.8 109.2 109.9 110.6 107.8 105.5 106.9
China 10.1 110.4 111.6 113.0 109.0 106.7 108.0
World trade with goods and services 110.6 107.5 109.2 107.2 104.1 97.2 103.2
Import
Industrially developed countries 109.1 106.1 107.5 104.5 101.5 96.9 101.9
Developing countries and countries with transitional econ- 116.4 112.1 114.7 114.5 110.4 97.8 105.8
omy
Export
Industrially developed countries 108.8 105.8 108.4 105.9 103.1 96.3 102.1
Developing countries and countries with transitional econ- 14.6 111.1 111.0 109.6 105.6 99.2 105.4
omy
T)-2)-
; Estimation ; Forecast
Source: http://www.imf.org/external/russian/pubs/ft/weo/2009
According to the forecasts of the WTO the volume of the international trade will reduce by more than 2.1% in 2009, whereas in 2008 there was a growth of 6.2% registered. The number of antidumping investigations increased by 40% as compared with the corresponding figure of 2007. For the first time limitations of foreign trade introduced in order to fight the recession may in fact complicate finding the way out of the crisis for the world economy.
3.6.3. Situation at World Market
On the whole in 2008 the situation with prices for the main goods of the Russian export
rd
was favorable despite a drop of prices for oil and many other raw materials in the 3 and the 4th quarters (Table 66).
Throughout 2005-2007 there was a plummeting growth of prices for oil observed. At the beginning of 2008 the situation at the oil market was highly optimistic: prices for American stocks started to decrease at quite high rates, dollar continued weakening, developing markets also did not seem stable in case the world financial crisis had aggravated. Under such conditions the investors preferred placing funds in the instruments they understood best, namely, oil and gold.
As a result of high demand for energy carriers not only from the main consumers but also from the investors in March 2008 world prices for oil exceeded USD 100 per barrel.
The ascending accelerated when on May 2, 2008 the prices starting with the level of USD 110.5 per barrel went up to USD 125.5 per barrel in seven trading sessions. There was a number of factors that caused such increase. A bi oil company, Shell, had to additionally reduce the production in connection with the military campaign in Nigeria. Besides, the growing tension between Iran and Western countries also contributed into the increase in oil prices. The traders purchased oil more actively, expecting Iran to reduce its supplies.
On June 5, 2008 oil quotations rose from USD 121.75 to USD 137.5 per barrel. The renewal of the growth was caused by the proceeding weakening of US dollar, as well as by the aggravation of the situation with Iran. This was an incentive for aggressive purchase of oil. As a result of the growth that followed, on July 11, 2008 the price of oil grade Brent reached the unexampled maximum of USD 147.11 per barrel.
As a result of the decrease in consumption in the USA and the expectations of the Saudi Arabia increasing oil production over the period from July 15 to July 18 oil grade Brent became cheaper by more than 10%.
In the second half of 2008 a cautious growth of prices was observed only for a few times. On September 23, 2008 the long-lasting decreasing surge started, which brought the quotations back to the level of the beginning of 2005. The reasons for the drop for prices were the apprehensions connected with the world demand for oil, as well as the refusal of the investment funds to use borrowed funds. The participants of the market started to sell all the assets they had to get liquidity. Further drop was more of a collapse and up to the present has been defined by a number of the same factors: decrease in the real demand for oil from the USA and the developing countries, apprehensions about the slow-down of the world economy and further decrease in consumption.
This year the highest price for oil grade Urals was registered on July 11, being USD 139.87 per barrel, which was a new record-breaking level. The lowest price was observed on December 5, being USD 34.88 per barrel.
Following the oil, oil products started to go down in price as well. Petrol and diesel fuel
rd
cheapened by 4-6% on average in the 3 quarter. Prices for natural gas, furnace fuel (mazut) and coal continued to grow (becoming, correspondingly, 17.9, 12.8 and 17.4% more expensive than in the 2nd quarter).
In the 1st quarter 2008 at the markets of metals a moderate increase in the quotations was observed against the background of natural disasters (floods, earthquake in China), strikes becoming more frequent (Chile, Peru), moderate growth of the demand for metals, weakening
of the dollar and growing price for oil. All these factors supported the balance of the demand and supply of metals and forced the prices to grow.
In the 2nd quarter 2008 in connection with the increase of the influence of the contraction of the demand from the OECD countries on the market, the prices for basic metals started to decrease. Economic recession in the USA and at the key European markets connected with the collapse in the real estate sector had a negative influence on the demand for basic metals.
In the second half of 2008 the decrease in prices for metals was caused not only by the reduction of the demand but also by the strengthening of dollar, development of crisis phenomena, provoking the start of the recession in the developed and developing countries, and by the slump in the industrial sector. The stagnation in the economy of China, which is the main consumer of non-ferrous metals, and problems in the motor-vehicle industry of the USA and Europe had the biggest impact on the metal quotations.
In 2008 aluminum dropped in price by nearly 40% - from USD 2445.5 per ton (average monthly price in January) to USD 1490.4 per ton (average monthly price in December). At the beginning of July there was a sharp plummeting of the prices for aluminum observed, provoked by the decision of 20 leading producers of aluminum in China to reduce the output of the metal by 5-10% because of the shortages with the electric power. However in August 2008 against the background of the decrease in the demand for metal from the construction companies and motor-vehicles producing concerns there began a decrease in prices for aluminum.
In 2008 world prices for copper decreased by 43.5% - from USD 7061 per ton at the beginning of the year to USD 3071.98 per ton in December. Despite the fact that prices for oil demonstrated the increase in the first half of 2008, even then there were conditions created for the drop of quotations. As long ago as March the International Copper Study Group reported on the existing excesses of metal at the market of 17 thousand of tons, and on the total excess of 19 thousand of tons in the 1st quarter 2008 versus the deficit of 80 thousand of tons in 2007. At the same time in the middle of 2008 the quotations at the market of copper were supported by a large number of strikes, interruptions of the production, floods and terroristic attacks. The financial crisis that broke out provoked the drop in demand for copper and in copper quotations.
Over past few years the prices for nickel grew steadily. In 2007 the price for a ton of the metal reached the unexampled record value of USD 51650 per ton. However over the whole 2008 the prices for nickel kept decreasing due to the growth of excesses of the metal at the world market. On July 23 the price for nickel dropped below the level of USD 20000 per ton. On the whole over the year the decrease was equal to 35% - from USD 27689.5 per ton in January 2008 to USD 9686.43 per ton in December.
Prices for other raw materials of the Russian export (excluding wood and timber) were considerably higher than in January-September 2007.
In October the index of 19 major raw materials by Reuters/Jefferies CRB dropped by 53% from the peak in July due to the apprehensions that the world recession would undermine the demand for raw materials. Up to that moment, over the period from 2001 to December 31, 2007 the index nearly doubled its value. The rate at which the price for oil decreased was record-breaking, and prices for copper and gold decreased at the rates that were maximal for the past two decades.
Table 66
Average Annual Prices
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Oil (Brent), 14.1 15.9 28.19 24.843 25.022 28.83 37.4 54.38 65.15 72.32 99.53
USD/barrel
Natural gas, 2.5469 2.1876 4.3442 3.9764 3.3857 5.461 5.993 8.870 12.2 7.27 9.103
USD/1 mln
BTU
Petroleum, 0.511 0.529 0.887 0.7922 0.755 0.891 1.197 1.508 1.81 2.06 2.703
USD/gallon
Copper, 1775.3 1539.9 1863.9 1613.6 1592.9 1785.6 2808.2 3606 6851 7119 6970
USD/ton
Aluminum, 1413.5 1318.0 1550.0 1444.7 1350.7 1424.7 1693.2 1871 2619 2639 2576
USD/ton
Nickel, 5352.5 5239.5 8624.0 5966.0 6175.1 9580.8 13757 14692 22038 37230 21108
USD/ton_
Source: calculated on the basis of London Metal Exchange, Intercontinental Oil Exchange (London)
Prices for the main kinds of foodstuffs imported by Russia had a diverse dynamics at the world markets. Prices for crops, vegetable oils and animal fats decrease, those for meat and sugar - increased.
After a sharp increase in world prices for wheat, observed from June 2007 to March 2008, in April the trend for the decrease in prices prevailed, which was connected with the
rd
expectations of big harvest and was strengthened in the 3 quarter by the situation in the
rd
world economy. As compared with the previous quarter in the 3 quarter 2008 the American wheat became 8.3% cheaper, and Canadian wheat - 19.4% cheaper. Prices for corn and barley under the influence of the remaining high demand for these crops (including in the production of biofuel) continued to increase throughout all the first half of 2008.
rd
However in the 3 quarter the trend for the decrease of prices appeared at these markets as well: con started to go down in price in July, and barley - in August. As compared with the 2nd quarter of 2008 the prices for American corn decreased by 5.5% , and the prices for Canadian barley - by 9.4%. However despite the decrease the prices for crops in January-September 2008 were considerably higher than in the corresponding period of the previous year: American wheat went up in price by 58.5% (by 21.4% in January-September 2007 as compared with January-September 2006), Canadian wheat - by 90.1% (by 23.1%), American corn - by 49.5% (46.0%), Canadian barley - by 36.0% (54.1%). A sharp acceleration of growth of prices for rice in the 2nd quarter (by 1.8 times versus the preceding quarter) was caused by low harvest, decrease in stocks, restrictions for export by some countries and evolving deficit at the world market of rice. The expectations of good harvest and the general trend for the decrease in prices at the markets of raw materials contributed in the decrease in prices
rd
for rice as well (it cheapened by 17.8% in the 3 quarter).
As a result o nine months of 2008 the price for rice was 2.1 times higher than in the corresponding period of the previous year (by 4.7% in January-September 2007 as compared with January-September 2006).
The increase in prices for energy and for fodder as well as the enhancement of the world demand resulted in the growth of prices for meat. At the same time the expectations of good harvests of crops, decrease in prices for fuel and energy, slow-down of demand growth rates connected with the unfavorable situation in the economy of the leading countries, decrease of the world prices at the majority of the trading markets affected the dynamics of prices at the meat markets as well: beef started cheapening in August, pork and poultry - in September
rd
2008. However as a result of the 3 quarter of the previous year, as compared with the preceding quarter beef went up in price by 11.9%, pork - by 8.7%, poultry - by 5.4%. In January-September 2008 versus the corresponding period of the previous year the prices for beef went up by 26.3% (by 3.75 in January-September 2007 as compared with January-September
2006), prices for pork - by 0.3% (by 4.3%), prices for poultry - by 7.0% (13.1%).
After a considerable growth of prices at the world market of milk and dairy products in 2007, from the beginning of 2008 the prices at this market generally decreased, mainly due to the increase of these goods supplies to the world market.
rd
As a result in the 3rd quarter the average contract import price for milk decreased by 6.1% as compared with the preceding quarter. In January-September 2008 the average contract price for milk import in Russia went up by 12.8% as compared with the corresponding period of the previous year (by 47.8% in January-September 2008).
In the 2nd and 3rd quarters of 2008 the growth of prices for butter slowed down and made 4.2 and 0.4%, correspondingly (as compared with 27-28% in two preceding quarters). In January-September 2008 the butter at the world market was 1.9 times more expensive than in January-September of the previous year (by 8.7% in January-September 2007).
The growth of prices for sunflower seed oil in the first half of 2008 took place under the influence of the reduction in its production in two preceding agriculture years as well as the
rd
sharp decrease in its export from Argentina and Ukraine. In the 3 quarter the trend for the lowering of prices for oil outlined: as compared with the preceding quarter the prices for it decreased by 29.4%. However the level of prices for vegetable oils at the world market remained high in January-September 2008: as compared with the corresponding period of 2007 the sunflower seed oil was 1.9 times more expensive (by 1.4 times in January-September
2007).
At the world market of sugar the trend for the growth of prices was observed in January-September 2008. The steady growth of demand for sugar against the background of the reduction of its production in India and Europe in the first place, resulted in the decrease of its ex-
rd
port and the contraction of the world stocks of sugar. In the 3 quarter prices started to grow at higher rates and as compared with the preceding quarter: raw sugar went up in price by 13.9%, white sugar - by 13.4% (in the 2nd quarter went down in price by 11.0 and 1.4%, correspondingly). As a result of nine months of 2008 as compared with the same period of 2007 prices for raw sugar went up by 16.8%, for white sugar - by 13.6% (in January-September 2007 sugar cheapened by 40.7and 34.0%, correspondingly).
Table 67
Dynamics of Average World Prices for Some Agriculture Goods
2005 2006 2007 2008
August September October November
Wheat, USD/ton
Canadian, CWRS 197.6 216.8 300.4 400.8 369.1 316.4 324.7
American, HRW 152.4 192.0 255.2 329.3 295.6 237.4 226.8
American, SRW 135.7 159.0 159.0 255.4 223.8 185.9 183.0
Corn 98.7 122.0 163.0 235.0 233.8 183.1 163.8
American, USD/ton
Barley, USD/kilo 95.0 117.0 172.0 212.3 189.5 143.4 130.1
Soybeans, USD/kilo 274.4 268.4 384.0 556.0 509.0 394.0 379.0
Soy oil, USD/ton 545.1 598.6 881.0 1322.0 1226.0 928.0 813.0
Source: World Bank.
3.6.4. Dynamics of Main Russian Indices of Foreign Trade Export
In 2008 value volume of export increased by 33.1%, in 2004 the figure reached 34.8%, in 2005 - 33.1%, in 2006 - 24.5%, in 2007 - 16.8%. The basis for the high rates of export growth was the extremely favorable dynamics of world prices for oil and other energy carriers in the first half of the year. In 2008 export increased due to the growth of prices despite the decrease of physical volumes (Table 68).
Table 68
Dynamics of Russian Export
2000 2001 2002 2003 2004 2005 2006 2007 2008
Export, USD billion 105.0 101.9 107.2 135.4 183.2 245.3 303.9 355.2 471.8
Including:
non-CIS countries 90.8 86.6 91.0 113.9 152.9 211.6 260.6 301.5 400.7
Growth rates, as % to the previous year
Index of physical volume 110.2 104.2 115.0 109.5 110.7 104.7 105.8 105.0 96.8
Price index 128.2 93.8 86.0 113.4 122.7 126.9 119.7 110.9 137.4
Source: Central Bank of Russian Federation, Ministry for Economic Development
In 2008 monthly dynamics of export demonstrates that the increase in export volumes occurred mainly in the first half of the year: from USD 34.5 billion in January to USD 47.8 billion in July. However, starting with August in connection with the worsening of the foreign economic situation at the world trading markets and the decrease in the world prices for oil and oil products, value volumes of the Russian export decreased from USD 45.6 billion in August to USD 38.9 billion in October, USD 30.1 billion in November and USD 26.3 billion in December 2008.
At the same time the main positions of the goods hardly changed. The first place is still occupied by the export of goods of fuels and energy complex, whose share increased by 4.4 per cent as on the level of 2007 (Fig. 66 and 67).
500 450 400 350 300 250 200 150 100 50 0
1 3
S
V.
m
I
I
I
I I
I
■
1
1
1
§
2000 2001 2002 2003 2004 2005 2006 2007 2008
□ Oil Q Oil products DGas □ Others
Fig. 66. Russian Export (as USD billion)
The expansion of the proportion of fuel and energy commodities in the total volume of the Russian export (Table 69) was primarily defined by the growth of prices for oil by 1.4 times, the physical volumes of export reducing by 7%, and the export of oil products and natural gas increasing considerably both due to the increase in contract prices by 1.46 times and 1.53 times and due to the increase in physical volumes of supplies by 3.6% and 1.72%, correspondingly.
Table 69
Value Volumes of Russian Export of Oil, Oil Products and Gas (as USD million) and Their Share in Total Volume of Russian Export (as percentage)
Oil Oil products Gas
as USD million % as USD million % as USD million %
1992 6662 12.4 2202 4.1 6389 11.9
1993 8061 13.5 3061 5.1 6964 11.7
1994 8948 13.3 3398 5.0 7939 11.8
1995 12297 15.2 4108 5.1 13381 16.5
1996 15578 17.6 7442 8.4 14683 16.6
1997 14346 16.2 7145 8.1 16420 18.6
1998 10254 13.7 4262 5.7
1999 14101 18.8 4713 6.3
2000 25284 24.1 10938 10.6 16644 16.1
2001 24576 24.1 9402 9.4 18303 18.3
2002 28950 27.0 11227 10.5 15897 14.9
2003 38816 28.6 14064 10.5 19981 15.0
2004 55024 30.0 18998 10.5 20918 11.5
2005 79216 32.5 33650 13.6 30424.2 12.9
2006 96675 31.7 44217 14.5 42815 14.1
2007 114145.2 32.4 51470.4 14.6 42755.1 12.1
2008 151668.6 32.4 78 325 16.7 66 399.7 14.2
Source: Federal State Statistics Service data, Federal Customs Service data for 2008
The share of metals and goods thereof in the structure of the Russian export reduced considerably due to the fact that the export of this group of commodities grew at slower rates (111.7%) than the export in general (133%). The growth of the total value of metal and metallic goods supplies was mainly connected with the increase in the value volume of the ferrous metals export.
As compared with 2007 the increase in export of chemistry industry goods was substantially affected by the growth of prices for the largest group of goods, namely, fertilizers. As a result the value volume of the export of chemistry industry production increased by 45.5%.
Timber and pulp-and-paper goods export lowered by 5.7%, export of unprocessed and processed wood decreasing, correspondingly, by 15.6% and 13% due to the reduction in the physical volumes of supplies.
Export of machinery, equipment and transport vehicles went up in terms of value by 17% in 2008 as compared with 2007. Despite the increase in the export of some kinds of machine-building production, its share in the total volume of Russia's export continued to decrease.
Machinery, equipment and transport vehicles; 4,6
Metals and goods thereof; 11,6
Wood and pulp-and-paper goods; 2,5
Chemistry industyr production, rubber; 6,4
Foodstuffs and agriculture raw materials; 1,9
Fuel and energy commodities; 69,1
Source: Federal Customs Service of the Russian Federation
Fig. 67 Structure of Russian Export by Kinds of Commodities in 2008 (as percentage)
Favorable situation at the world market in the first half of 2008 secures a considerable growth in contract prices for the main goods of the Russian export (table 70).
Table 70
Average Contract Prices for Main Goods of Russian Export (supplies to non-CIS countries, as USD per ton)
2000 2001 2002 2003 2004 2005 2006 2007 2008
Crude oil 179.9 156.4 162.4 181.2 231.9 344.3 429.8 485.4 684.3
Oil products 171.9 145.2 147.9 180.2 230.3 340.6 430.1 464.1 678.7
Natural gas, thousand of cu. m 85.91 105.21 91.4 112.3 113.6 154.7 - 240.6 381.0
Ammonia 97.5 81.7 72.4 118.5 158.3 176.2 195.7 224.2 456.5
Nitrogenous fertilized 57.9 61.8 60.6 76.0 103.1 139.1 146.0 197.3 352.9
Potassium fertilizer 86.6 76.8 74.9 77.8 94.3 133.9 150.3 174.5 447.0
Roundwood, cu m 43.4 45.6 44.8 47.8 56.2 59.6 63.8 84.0 95.1
Pulp 352.2 293.4 300.0 321.7 371.9 386.1 436.7 545.6 569.8
Newsprint 386.6 421.7 332.2 338.3 387.9 455.3 498.6 527.0 599.2
Cast iron 80.7 86.2 91.1 126.8 242.7 274.4 244.4 313.6 483.6
Ferrous alloys 625.6 601.7 625.7 634.6 1097.8 1582.5 1492.3 1673.2 2487.2
Copper 1675 1465.3 1371.4 1564.9 2587.6 3389.8 6361.7 6657.8 6086.6
Nickel 8629 5730.9 6143.9 8584.0 12660.0 14242.5 22674.4 33852.1 19615.8
Aluminum 1296 1176.3 1036.9 1050.0 1162.1 1299.2 1633.5 1984.0 2178.1
Source: Federal Customs Service
However the decrease of prices at the world markets of fuel and raw materials affects the dynamics of the Russian export stronger and stronger. Whereas in August last year the decrease of prices was characteristic only for oil among the main goods of the Russian export, in September 2008 the decrease of prices affected a larger number of goods. Thus, according to the data of customs statistics, besides the decrease in export prices for oil by 13.2% in September on August, the decrease of prices was observed for oil products - by 9.8%, for natural gas - by 10.8%, for copper - by 9.4%, for aluminum - by 1.2%, for unprocessed wood - by 3%, for processed wood - by 3.6%, for ferrous metals - by 8.4%. In last months of 2008 the rates of decrease of contract prices for oil, oil products, non-ferrous metals accelerated.
The steady orientation of the export at non-CIS countries persists, their share in the total volume of Russia's export increasing from 84.7% in 2007 to 85% in 2008.
Import
Import of goods was characterized by a considerable growth, reaching in 2008 USD 291.97 billion, which is by 30.6% higher than the level of 2007. However whereas in the 1st-3rd quarters the growth versus the corresponding quarter of the preceding year made more than 40%, in the 4th quarter it was only 4.4% (Table 71).
In 2008 in the monthly dynamics of the Russian import there was an increase in terms of value observed from USD 15.6 billion in January to USD 29 billion in July. In August-October the value volumes of Russian import remained at practically the same level and were equal to approximately USD 27 billion. In November the value of the import goods reduced considerably and made USD 21.7 billion, in December - USD 23.9 billion, which is, correspondingly, 20.1% and 11.9% below the figures of October. Such dynamics was a consequence of the contraction of the investment and consumer demand as a result of credit crisis. Starting with November the biggest banks practically stopped issuing consumer credits and the volume of credits in the real sector increased but negligibly.
Table 71
Russian Import (as USD billion)
2000 2001 2002 2003 2004 2005 2006 2007 2008
Import, total 44,9 53,8 60,5 76,1 97,4 125,3 163,9 223,1 291,97
Including:
non-CIS countries 31,4 40,3 48,2 60,1 76,4 103,5 138,6 191,2 253,1
Growth rates, as % to the previous year
Index of physical volume 84,4 129,2 129,1 117,6 119,2 124,2 122,4 130,1 127,1 113,5
Price index 82,1 86,7 94,3 93,4 98,7 106,1 106,5 105,5 107,6 117,8
Source: Central Bank of the Russian Federation, Ministry for Economic Development
Physical volumes of supplies from decreased by 2.3%, the prices growing by 25.5%. Import from non-CIS countries increase at the expense of both the physical volume, and the prices by, correspondingly, 16.2% and 16.6%.
High import growth rates were accounted for mainly by the increase in machinery, equipment and transport vehicles import by 38.4%. The proportion of the goods of this group in the structure of the Russian import increase by 1.8 per cent in 2008. import of passenger cars and trucks went up by 41.8% and 39.5% in terms of value and by 24.7% and 10.5% in terms of physical volume, correspondingly. (Fig. 68).
As compared with 2007, in 2008 value volume of foodstuffs and agriculture raw materials import increased by 27.35 and mainly due to the increase in contract prices for the main kinds of foodstuffs. The value of import of fresh and frozen meat, poultry, cheese, curd, crops, butter, and sunflower seed oil increased to the highest extent. The value of import of wheat, wheat and rye mixture, barley, raw sugar and white sugar decreased.
The value indices for import of textile, textile goods and footwear increased by 34.9%. The supplies of leather clothes and footwear rose at especially high rates, their value volume growing by 1.5 and 1.3 times, correspondingly.
Import of the goods of chemistry industry increased in value by 27.4%. To a significant extent the growth was accounted for by the increase in medications supplies.
Machinery, equipment and transport vehicles; 53,2
Metals and goods thereof; 6,8
Textile, sewing goods and footwear; 4,2
Chemistry industry production and rubber; 13,3
Wood and pulp-and-paper goods ; 2,4
Source: Federal Customs Service of the Russian Federation
Fig. 68. Structure of Russian Import by Goods in 2008 (as percentage)
3.6.5. Geographic Structure of Foreign Trade
In 2008 the share of the EU in the structure of Russia's foreign trade turnover enhanced by 0.7 per cent. It is still Germany that remained the main trading partner of Russia, though its share decreased by 0.4 per cent down to 9.2%. The second place by the volume of the foreign trade turnover is occupied by the Netherlands, whose share decreased by 0.1 per cent and was equal to 8.4%. Italy was the third by the volume of the foreign trade with Russian among the countries of the European Union, its share being 7.2%, having increased by 0.2 per cent as compared with 2007. On the whole, in 2008 the countries of the European Union enhanced the volume of trade with Russia by 35% as compared with 2007, the volume of the Russian export growing by 35.6%, and import - by 33.6%.
The share of the countries of Asia-Pacific economic cooperation in the Russia's foreign trade turnover increased from 19.3% to 20.4%. The growth of import was 39.8% and of export - 40.9% as compared with 2007. The main Russia's trading partner in this group is China, whose share in the foreign trade turnover went up by 0.3 per cent, reaching 7.6%. the second place in this group is still occupied by the USA, whose share increased from 3.2% to 3.7% of the total Russia's foreign trade turnover. The share of Japan increased by 0.2 per cent and was equal to 3.95 as a result of the year.
The share of CIS countries in the Russia's foreign trade turnover reduced from 15.2% to 14.5%. The main trading partners in this group are Ukraine and Belorussia, whose shares are 5.4% and 4.7%, correspondingly. On the whole Russia's foreign trade turnover with the countries of this group increased by 29% as compared with 2007, import increasing by 22.5%, export - by 32.7% (Fig. 69).
100%-, 90%-80%-70% 60% 50% 40% 30% 20%-10%-0%
^ o is o
§ CM £Z
ro
1-r
678 000 000 222
EU □ EU candidate countries □ APEC □ CIS □ Other countries
Source: Federal Customs Service of the Russian Federation
Fig. 69. Geographic Structure of Russia's Foreign Trade
The trade balance with all the groups of countries, excluding APEC, is positive.
In 2008 Russia had negative trade balance with 24 countries, whose share in the total Russia's foreign trade turnover was 32.9%. It was China (-13.6 USD billion), Japan (-8.1 USD billion), Korea (-2.7 USD billion), Brazil (-2.6 USD billion), Malaysia (-1.5 USD billion) that made the most considerable contribution to the formation of the negative trade balance.
Among non-CIS countries it was Germany, the trade turnover with which was USD 67.3 billion (127,2% on 2007), the Netherlands - USD 61.8 billion (132.3%), China - 55.9 billion (138.6%), Italy - 52.9 billion (146.7%), Turkey - USD 33.8 billion (149.0%), Japan - 29.0 billion (142.4%), the USA - USD 27.3 billion (153.2%), Poland - USD 27.2 billion (151.8%), the UK - 22.5 billion (134.8%), Finland - USD 22.4 billion (142.1%) that were the main trading partners of the Russian Federation (Fig. 70).
Germany
Netherlands
I j
Belorussia
Ukraine
Turkey
China
Italy
USA
0
10000
20000
30000
40000
50000
60000
□ export □ import
Fig. 70. Major Trading Partners in 2008 (as USD million)
3.6.6. Regulation of Foreign Trade
In 2008 69 decrees on the changes in the customs duties rates were developed and adopted by the Government of the Russian Federation, most important of which are the following:
- from 11.03.08 No 159 "On approval of customs duty rates for some kinds of fertilizers exported outside the countries participating in the agreements on Customs Union"
The main purpose of the export duty rates for the fertilizers, mineral or chemical, nitrogenous complex fertilizers at the rate of 8.5% or for the potassium fertilizers at the rate of 5% of the customs value of the commodity is to decrease the prices for the fertilizers for the domestic agriculture producers;
- from 20.03.08 No191 "On approval of export duty rates for sulfur in all forms, except sublimed precipitated or colloid sulfur, as well as for the natural calcium phosphates, aluminum-calcium phosphates and phosphate chalk"
In connection with the steady trend for the increase in world prices for sulfur and apatite concentrate the export duty rates were increased from 0% to .5% of the customs value of commodity;
- from 29.03.08 No 225 "On approval of export duty rates for wheat, wheat and ray mixture and barley exported outside the countries participating in the agreements on Customs Un-
In order to increase the reserves of crops at the internal market and to prevent the increase in the internal prices the customs duty rate for wheat and ray and wheat mixture was increase by the decree up to 40%, but no less than Euro 0.105 per kilo;
- from 28.03.08 No 218 "On making changes to the decree of the Government of the Russian Federation from October 12, 2007 No 671 "On seasonal duties on raw cane-sugar and some kinds of sugar imported into the territory of the Russian Federation in 2007 and 2008"
This decree prolongs the period of action of the seasonal duty till the end of May 2008 by abolition of the reservation on the pre-term cancellation of the action of the seasonal duty rates in case average monthly price for raw sugar at New-York raw materials exchange exceeds USD 259.99 per ton;
- from 05.07. 2008 No 421 "On prolongation of the action of export duty rates on some kinds of vegetable oils"
By this decree the period of action of the reduced export duty rates (5%) for some kinds of vegetable oils was prolonged;
- from 04.06. 2008 No 428 "On temporary import duty rates on live chickens and some kinds of eggs of poultry"
In order to develop poultry production the import duty rates for incubatory eggs and pedigree chicks at zero rate;
- from 06.06.08 No 439 "On prolongation of the action of import duty rates on some kinds of tropical oils";
Duty-free import of tropical oils will allow to maintain the positive dynamics of the production of oil and fats, reduce expenses of enterprises connected with import, will contribute to limitation of the prices for the production form the vegetable oils, as well as for the production of adjacent branches of industry (bakery, confectionery, dairy industries), which will result in the increase of the competitiveness of the domestic foodstuffs production;
- from 16. 09. 2008 No 695 "On seasonal duties for raw cane sugar and some kinds of sugar imported in the territory of the Russian Federation in 2008 and in 2009"
This Decree envisages the prolongation of the effect of the seasonal duties for raw sugar for the period of December 1, 2008 to May 31, 2009 in the range of USD 220-270 per ton depending on the level of the world prices for cane raw sugar. The purpose of this measure is to equalize the economic conditions for the production and sale of sugar from raw sugar and beetroot, as well as to stimulate investments in domestic sugar production;
- from 11.09.2008 No 659 "On making changes to the customs tariff of the Russian Federation with respect to plasma module (screens) and devices on liquid crystals"
According to this decree import duty rates for the components for the production of plasma and liquid crystals television sets were nullified. Up to that moment only the companies working in the special economic zone of Kaliningrad enjoyed the preferences for their privileged import. The segment of the production of plasma and liquid crystals equipment was practically absent in Russia and the rate of 10% of customs duty was an additional obstacle for the development. Before the duties were abolished the production of television sets with these components was 25-30% more expensive in Russia than in Japan or China. Up to 60% of the cost of the finished goods is accounted for the plasma or liquid crystals modules. It is supposed that the abolition of duty rates will enable the Russian enterprises to become more competitive with regard to Asian and Eastern European producers. In those countries the duties for components were abolished several years ago.
- from 05.12 2008 No 903 "On making changes to customs tariffs on some kinds of motor-vehicles"
The Decree was adopted within the framework of the series of measures for the diminution of the crisis aftermaths for the domestic motor vehicles production. According to the introductions the import duty rates for passenger cars and trucks are increased, the period after which the passenger cars are regarded as used is changed from 7 to 5 years. Import duty rates for passenger cars with the period of exploitation from 1 to 5 years were increase on average from 25% to 30% of the customs value with the proportional increase of the specific rate, calculated in terms of Euro (per 1 cu. cm of the engine volume) (Table 72).
Table 72
Customs Duty Rates On Some Kinds of Motor Vehicles
Passenger cars
Engine volume less than 1000 cu. cm (8703 21)
New 30%, but no less than Euro 1.2 per 1 cu. cm of the engine volume
Used older than 5 years Euro 2.5 per 1 cu. cm of the engine volume
others 30%, but no less than Euro 1.2 per 1 cu. cm of the engine volume
Engine volume from 1000 ao 1500 cu. cm (8703 22)
New 30%, but no less than Euro 1.2 per 1 cu. cm of the engine volume
Used older than 5 years Euro 2.7 per 1 cu. cm of the engine volume
others 35%, but no less than Euro 1.45 per 1 cu. cm of the engine volume
Engine volume from 1500 to 3000 cu. cm (8703 23)
New engine volume from 1500 to 1800 cu. cm 30%, but no less than Euro 1.5 per 1 cu. cm of the engine volume
engine volume from 1800 to 2300 cu. cm 30%, but no less than Euro 2.15 per 1 cu. cm of the engine volume
Used older than 5 years and engine volume from Euro 2.9 per 1 cu. cm of the engine volume
1500 to 1800 cu. cm
others 35%, but no less than Euro 1.5 per 1 cu. cm of the engine volume
older than 5 years and engine volume from Euro 4 per 1 cu. cm of the engine volume
1800 to 2300 cu. cm
others 35%, but no less than Euro 2.15 per 1 cu. cm of the engine volume
Engine volume more than 3000 cu. cm (8703 24)
New 30%, but no less than Euro 2.8 per 1 cu. cm of the engine volume
Used older than 5 years Euro 5.8 per 1 cu. cm of the engine volume
others 30%, but no less than Euro 2.8 per 1 cu. cm of the engine volume
Engine volume less than 1500 cu. cm (8703 31)
New 30%, but no less than Euro 1.45 per 1 cu. cm of the engine volume
Used older than 5 years Euro 2.7 per 1 cu. cm of the engine volume
others 35%, but no less than Euro 1.45 per 1 cu. cm of the engine volume
Engine volume from 1500 to 2500 cu. cm (8703 32)
New 30%, but no less than Euro 2.15 per 1 cu. cm of the engine volume
Used older than 5 years Euro 4 per 1 cu. cm of the engine volume
others 35%, but no less than Euro 2.15 per 1 cu. cm of the engine volume
Engine volume more than 2500 cu. cm (8703 33)
New 30%, but no less than Euro 2.8 per 1 cu. cm of the engine volume
Used older than 5 years Euro 5.8 per 1 cu. cm of the engine volume
others 35%, but no less than Euro 2.8 per 1 cu. cm of the engine volume
Source: Decree of the Government of the Russian Federation from December 5, 2008 No 903 "On making changes to Customs Tariff of the Russian Federation with regard to some motor transport vehicles"
New duties came into effect on January 12, 2009 and will be in effect for 9 months, after which period the Government is to decide how it will continue the customs policy with regard to the import cars.
Thus, new cars assembled by the producers of motor-vehicles in Russia will become more competitive than their import analogues and the production of AvtoVAZ will be protected from the competition of used import cars. Mainly it is the producers that do not have plants in Russia that will suffer from the toughening of the rules for import of cars. Thus, the prices for Mitshubishi, Mazda, Nissan models, as well as the cars of premium class of Mercedes-Benz, BMW, Audi, Volvo will increase.
At the end of 2008 the growth of the Russian motor vehicles market slowed down sharply. Import of passenger cars in the Russian Federation from non-CIS countries increased by 31.1% in 2008, making 1.84 million of units. On the whole cars worth USD 30.3 billion were imported. The first half of 2008 was especially good, when the volumes of sales increased annually by 43-54%. However in November 2008 the volume of sales had decreased for the first time for last four years, which testifies the general worsening of the situation at the car market. The decrease of sales in November 2008 was equal to 15% as compared with the corresponding period of 2007. As compared with the previous month, the sales dropped by 19.5%. In October the sales of import cars went down by 5.75 as compared with September.
- from 8.12.2008 No 918 "On temporary import customs rates on some kinds of meat of cattle, pork and poultry and on making changes to the Decree of the Government of the Russian Federation from December 5, 2005 No 732"
According to the document, from January 1, 2009 rates for pork import are increased up to 75%, but no less than Euro 1.5 per kilo. Duty rates for poultry imported above the quota is increased up to 95%, but no less than Euro 0.8 per kilo. At the same time the duty rate for beef import was decreased don to 30% but no less than Euro 0.3 per kilo.
At present the duty rate for pork import into the territory of the Russian Federation is 60% of the customs value, but no less than Euro 1 per kilo, for poultry - also 60%, but no less than Eur0 0.48 per kilo.
Within the framework of the support for the Russian producers the Government considered the possibility to decrease the quotas for the import of pork and chicken. In 2009 only the quota for chicken was reduced - by 300 thousand of tons from 1.25 million of tons in the current year to 953 thousand of tons. For the USA the quota was reduced by 180 thousand of tons and for the European Union - by 60 thousand of tons.
The quota for pork import was somewhat increased by including trimming in it (earlier regarded as a separate position) - up to 532 thousand of tons, the quota of the USA increasing up to 100 thousand of tons from 50.7 thousand of tons.
In concordance with the article of the Law "On customs tariff' the Decrees from 14.01.2008 No 5, from 17.03.2008 No 173, from 22.05.2008 No 378, from 21.07.2008 No 547, from 19.09.2008 No 699 "On approval of export duty rates for crude oil and some kinds of commodities produced from oil exported from the territory of the Russian Federation outside the countries participating in the agreement on Customs Union" were adopted (Table 73).
On November 21, the State Duma of the Russian Federation and on November 26, 2008 the Council of Federation approved the Law "On making changes to article 3 of the Law "On customs tariff'. In order to provide quicker and more flexible application of the measures of customs and tariffs regulation and the government support of oil industry in connection
with the drop of world prices for oil the bill envisages that starting with October 15, 2003 the monitoring for the prices for crude oil grade Urals at the world markets of oil raw materials will be made starting with the 15th of each calendar month until the 14th of the next calendar month. The period for the effect of the export customs duty rates for oil is reduced from 2 to 1 calendar month. The decisions of the Government of the Russian Federation on the changes in the rates are to be published no later than 1 day before they come into effect (earlier - no later than 10 days before coming into effect).
Table 73
Export Duty Rates for Oil and Oil Products in 2008 (as USD per ton)
_Oil_Oil products_
February, 1 333.8 237.2 127.8 April, 1 340.1 241.4 130.1 June, 1 398.1 280.5 151.1 August, 1 495.9 346.4 186.6 October, 1 372.2 263.1 141.7 November, 1 287.3 205.9 110.9 December, 1_1921_141.8_76.4
Source: Decrees of the Government of the Russian Federation
In order to protect Russian producers of goods with the implementation of the mechanisms of trading protection - compensatory, antidumping and special protective measures -the following measures were used.
As a result of the investigations carried out earlier the following measures were introduced:
- special duty with regard to dry baking yeasts imported into the territory of the Russian Federation from March 22, 2005 for the period of 3 years;
- antidumping duty rate with regard to import channels of Ukrainian origin, from July 7, 2005 for the period of 3 years;
- antidumping duty rate with regard to three-phase asynchronous motors of Ukrainian origin, from October 15, 2005 for the period of 3 years;
- antidumping duty rate with regard to some kinds of steel pipes of Ukrainian origin, from January 31, 2006 for the period of 5 years;
- import quota for the import of incandescent lamps from March 3, 2006 for the period of 3 years;
- antidumping duty rate with regard to flat rolled metal containing nickel from EU countries, from March 20, 2007 for the period of 3 years;
- special duty rate with regard to the increased import of pipes of large diameter from December 21, 2006, for the period of 3 years;
- antidumping duty rate with regard to machine-building hardware of Ukrainian origin in the form of approval of voluntary price liabilities of JCS "Druzhkovskyi hardware plant" and in the form of antidumping duty at the rate of 21.8% for other Ukrainian producers from May 14, 2007 for the period of 5 years;
- special duty rate with regard to nets from glass fiber imported into the customs territory of the Russian Federation from December 10, 2007 for the period of 3 years;
- antidumping duty rate with regard to frictionless bearings (excluding needle-bearings) of Chinese origin, from January 21, 2008 for the period of 5 years.
The following investigations are being carried out:
- antidumping investigation with regard to polyamide technical fibers of Ukrainian origin imported into the customs territory of the Russian Federation;
- special protective investigation with regard to the increased import of the stainless pipes imported into the territory of the Russian Federation.
The following investigations have been started:
- special protective investigation with regard to the increased import of harvesters imported into the territory of the Russian Federation;
- antidumping investigation with regard to rolled metal with polymer coat originating in the People's Republic of China, the Republic of Korea, the Kingdom of Belgium, the Republic of Finland, the Republic of Kazakhstan;
- special protective investigation with regard to the increased import of the table settings imported into the territory of the Russian Federation.
In 2008 a big attention was paid to the issues of the provision of the free or at least nondiscriminatory access of the Russian goods and services to the external markets.
In 2008 100 restricting measures concerning Russian goods, which were applied by foreign countries in order to protect their internal markets, were registered, which included 42 antidumping measures, 7 special protective measures and 51 measures of non-tariff regulation of the trade, including measures of administrative regulation. Besides, there are 3 antidumping investigations and 5 reconsideration of the antidumping measures introduced earlier in process.
At the moment the most troublesome markets in which the Russian exporters are interested and at which the aggressive policy of the protection against the Russian export is pursued are the markets of the EU, Mexico, Australia, USA, Belorussia and Ukraine.
The antidumping measures are most actively used against Russian ferrous metals and goods thereof (more than a half of all the antidumping measures introduced). The second place is held by mineral fertilizers.
3.6.7. Negotiations on Accession to World Trade Organization
As on December 1, 2008 the bilateral negotiations on the conditions for the access to the markets of goods and services were concluded with all the member of the Working Party on Russia's accession to the WTO. In the 2nd quarter 2008 the protocols on conclusion of negotiations with the United Arab Emirates and Saudi Arabia were signed.
The Russian party expected to conclude multilateral negotiations on the system issues by the end of 2008, so as to become a member of the WTO in 2009. However a number of political and economic events, namely, the changes in the USA administration, Doha round of negotiations, aggravation of the situation in the Caucasus, as well the world financial and economic crisis, procrastinate the negotiation process. The Russian authorities have many times confirmed that the course to access the WTO remained.
The heads of APEC at a recent summit in Peru countries and the leaders of G20 at a meeting in Washington at the beginning of November called for the end of the Doha round of negotiation that had been going for many years. The main dispute at Doha round is between the developed and developing countries with the respect to the level of agriculture subsidies and tariff measures to protect the markets.
At the meeting in Geneva in November 2008 a regular reading of the report of the working party on Russia's accession to the WTO in new version approved in August 2008 took
place. This document consolidates the results of the negotiations starting with 2004 and upon its scan reading it can be discovered that there are very few questions.
There are three questions that remained unsolved: the level of export duty rate for wood, the conditions for the operation of the state-owned trading enterprises as well as subsidies to the agriculture. Russia continues to insist on the level of support for agriculture of USD 9.2 billion (currently less than USD 3 billion). The members of the WTO hold that USD 3 billion is enough.
European countries strive for Russia to cancel the increase of duty rates for roundwood, which increased from Euro 2.5 to 15 per 1 cu. m, and should have increased up to Euro 50 starting with January 1, 2009.
The prohibitive duties were considered to be the necessary requirement to secure inflow of large-scale investments in the wood processing complex. As additional stimulating measures the duties for the production even at the first stage of processing were nullified, and the wood processing concerns were suggested the privileges for the period of the construction of processing facilities. In the first half of 2008 the export of non-processed wood reduced by 23.8% down to 20.1 million of tons (according to the strategy of the development of the wood processing complex it should reduced to 5 million tons a year up to 2020). By the end of the summer 2008 the Ministry of Industry and Trade had more than 200 investment projects with the total sum of more than RUR 1.1 trillion.
The decrease in the volumes of the wood export destabilized the paper industry of the Scandinavian countries, placing it on the edge of bankruptcy. However the increase in duty rates resulted in the internal problems in Russia as well. The most difficult situation is observed at the timber enterprises of the regions where there are no pulp and paper mills or their number is insufficient. The ports and the transport enterprises were also the victims, since the
rd
wood transportation reduced by nearly half by the 3 quarter 2008.
After the meeting of Prime Ministers of Russia and Finland the Government of the Russian Federation promised to postpone the adoption of new customs duties for roundwood by 9-10 months, explaining this with the desire to help Finnish timber enterprises that were in the state of crisis. The increase was envisaged by the decree of the Government of the Russian Federation from February 5, 2007 No 75. However the introduction of new duties was postponed by a year. The corresponding decree of the Government of the Russian Federation was adopted on December 24, 2008 and came into effect on January 1, 2009.
In prospect the increase of the duties will take place as a measure to increase the processing in the country. But it is necessary to optimize the increase of export duty rates for roundwood connecting it with the growth of processing facilities in the country.
Within the framework of the negotiations in Geneva in November 2008 Russia conducted about ten bilateral consultations on system issues, including those with Ukraine and Saudi Arabia. Saudi Arabia, negotiations with which were concluded in the summer of 2008, insisted on Russia taking liabilities on equalizing export and internal prices for energy carriers as a member of the working party. Some time ago the European Union had the same requirements, but it abolished it as a result of the negotiations and they were not inserted in the protocol on the conclusion of bilateral negotiations. Later Saudi Arabia recalled its application on energy carriers.
At the meeting with the Ukrainian party in Geneva the issues concerning the report of the Working party were discussed. Ukraine became a WTO member in May 2008 and at the
same time it became a member of the working party on Russia's accession to the WTO, claiming that it reserves the right to start bilateral negotiations on the conditions for the accession of its goods and services to Russia's market.
At the meeting of the Working Party the representative of Georgia declared that he reserves the right to set new questions to Russia. These questions, however, have not been asked yet, and it is doubtful that the Georgian party has serious commercial interests since there is a duty-free regime of free trade between Russia and Georgia. It should be noted that when there have been cases when the countries were accepted to the WTO despite the objections of some members of the organization.
3.6.8. Project of External Economic Strategy of Russian Federation Up To 2020
Ministry for Economic Development of the Russian Federation has prepared the project for External Economic Strategy of the Russian Federation up to 2020, defining key priorities and parameters of the external economic policy of the country in connection with long-term goals and tasks of its internal policy.
This document is based on the statements of the Concept for Long-term Socio- Economic Development of the Russian Federation up to 2020 (further referred to as SLSED-2020), Main direction for Actions of the Government of the Russian Federation for the period up to 2012, Concept for Foreign Policy of the Russian Federation, long-term strategies and programs for the development of some branches of industry and regions, regulatory legislative acts etc.
The necessity to develop such a document arises from the fact that presently a fundamentally new situation evolves in the sphere of external economic links of the Russian Federation, which is accounted for by both the external and the internal factors. Internal factors can be seen, first of all, in the intensification of trading and political influence of foreign countries on the sphere of the international trade which requires the whole spectrum of the external economic instruments to be applied adequately in Russia. Internal reasons are connected primarily with the necessity for the country to transfer to innovation model of socio-economic development. These factors on the whole define the necessity for preparation and further fulfillment of the external economic strategy for long-term prospect.
At present the world economy suffers from the deep financial crisis. Not only the developed, but also developing countries are affected by the crisis. In the long run it is possible that the world economy growth will recover, but its dynamics will be subject to cyclic fluctuations in contrast to the pre-crisis period.
The scenario being favorable, average annual growth rates of the global GDP in 20102015 will be equal to 4.0-4.2%, in 2016-2020 - to 2.7%, versus 3.9% in 2001-2006 and 3.3% in 1991-2000. At the same time the nowadays crisis of the world economy may start the long period of the slowed development, characterized by the increased inflation and acute conflict between old and new international centers of power, countries exporting raw materials and post-industrial economies63.
External economic policy is the continuation of the internal economic and social policy of the state aimed at the strengthening of the economy and the improvement of the level of life
63 Concept for Long-term Socio- Economic Development of the Russian Federation up to 2020, P.200-201, site of the Ministry for Economic Development of the Russian Federation, October 16, 2008, www.economy.gov.ru 312
of the population. The document defines key priorities, goals and parameters of foreign economic activity of the Russian Federation taking into account long-term goals and tasks of the external economic policy of the Russian Federation at the stage of the transfer to innovation type of socio-economic development. In the course of its preparation the main trends of the development of the global economy and the present condition of the external economic links of the Russian Federation were taken into account.
The long-term goal for the external economic policy of the Russian Federation is the winning of the global leading position of the country as one of the leading economic powers of the 21st century. In this connection the External Economic Strategy is based on the key statements of the SLSED-2020, including section 6 "External Economic Policy", where the goals, principles, priority directions and geographic diversification of the Russia's external economic links are stated64.
The main target indices of the External Economic Strategy are the following:
- increase in the share of Russia in the world economy from 3.2% of the global GDP(by parity of purchase capacity) in 2007 to 3.8% in 2015, 4.3% in 2020;
- increase in Russian export from USD 354 billion in 2007 to USD 630-650 billion in 2015 and more than USD 9000 billion in 2020 (fluctuations of world prices for oil being in the range of USD 80-90 per barrel in prices of 2007);
- increase in the export of machine-building production by more than 6 times (up to USD 110-130 billion);
- increase in the export of transportation services by nearly 4 times (up to USD 45 billion) by 2020 as compared with 2007;
- the winning of 5-10% share at the markets of high-tech goods by 5-7 consolidated positions.
The external economic strategy is to contribute in the fulfillment of long-term initiatives and large projects made within the framework of the world economy. In this connection the following are the important tasks: complex support of the Russian enterprises by the Government in the sphere of export and investment in the foreign countries, creation of the system for identification and lift of the barriers for the entrance to the external markets, as well as application of fundamentally new external economic instruments.
The achievement of the strategic goal of the external economic policy is made through the realization of its priority directions, tight connection of actions on each of them with the internal tasks being solved and the needs and opportunities of the Russian economy:
- winning of leading positions at the world markets for high-tech goods and services by Russia in concordance with its specialization in the global scientific and technological sphere;
- help provided to export and achievement of the global competitiveness cof the processing industry and the sphere of services;
- integration of Russian in global transportation network and realization of the transit potential of the Russian economy;
- increase in the role played by Russia in the guaranteeing of the global energy security and strengthening of its positions at the market of hydrocarbons;
- integration of the Eurasia economic space with the center in Russia;
64 Concept for Long-term Socio- Economic Development of the Russian Federation up to 2020, P.200-201, site of the Ministry for Economic Development of the Russian Federation, October 16, 2008, www.economy.gov.ru P.165
- creation of the international financial center in Russia, conversion of ruble in the regional reserve currency;
- intensification of Russia's participation in the formation of the world economic system.
At the same time the achievement of the strategic goals envisages the fulfillment of the regional and country priorities of the Russia's external policy in middleOterm and long-term prospect. Geographic diversification and development of the external economic links will contribute into the decrease of the risks connected with the constant changes in the balance of power in the world and the transformation of the international economic system.
It is the countries of CIS, EU countries, China, USA as well as rapidly developing countries of Asia that are the most important partners of the Russian Federation in economic and political spheres. It is with these countries that Russia actively develop trade, investment and technological cooperation, which can be the basis for the improvement of the structure of the Russian export, entrance to new markets and realization of the transit transportation potential of the country.
At the same time India, countries of Latin America, as well as countries of Africa that are rich with the natural resources get ever bigger significance from the point of view of the development of Russia's external economic links. It is envisaged that the activity of the Russian Federation in economic organizations and regional groups (APEC, SCO) will become more intensive.
It is the necessity to affect international entrepreneurial activity of the domestic companies and to increase the role of the subjects and territories of the Russian Federation at the world markets that is the characteristic feature of the modern model for the management of the external economic activity in Russia.
The fulfillment of the external economic policy requires the creation of the system of institutions that secure the national interests of Russia in the world economy, increase of the competitiveness of the Russian enterprises at the world markets, flexibility and effectiveness of the Governmental regulation in the sphere of external economy, the possibility to react to external risks adequately and rapidly.
Such a system of institutions includes three big blocks: complex support for export and direct investments abroad, regulation of the access of the foreign goods and investments to the Russian markets, management support in the external economic sphere.
To follow the priority directions of the external economic policy under the conditions of the new model for the state regulation of the external economic activity, the introduction of new tools and documents for day-to-day management is envisaged:
- there will be short-term programs for the advancement of the industrial export prepared, defining key directions, taking into account the priority and specific features of the separate foreign markets and the requirements of the domestic exporters;
-bilateral plans for trade and economic cooperation will be developed for the key partner countries of the Russian Federation;
- the programs and plans mentioned will be fulfilled with the attraction of the potential and Russia's trading representatives abroad;
- "Main directions for customs and tariffs policy" will be approved annually;
- on the basis of the discovered opportunities and potential threats for the main branches of industry and the geographic directions of external economic activity necessary corrections to the external economic policy of the country will be made.
The adoption and the fulfillment of the External Economic Strategy of the Russian Federation by 2020 will enable: to define major directions of the external economic policy of the country in the long run; to single out the priorities for Russia's external economic policy with respect to some countries and regions of the world; to chose adequate instruments to pursue the external economic policy; to set vectors for the development of the institutes of external economic policy and of the regulation of external economic activity.
