11Section 3. The real sector
3.1. Macrostructure of Production
3.1.1. Trends and Factors of Changing Final Demand
Influence of internal and external demand on the GNP dynamics and structure
In the period of 1999-2005, the Russian economy could be defined as dynamically developing in practically all kinds of economic activities. This economic growth was taking place in the context of quite favourable foreign economic situation and internal social and political stability (Table 1). Specific for the functioning and structural changes was the internal market expansion in terms of dynamic growth of both the consumer and investment demand. Greater business activity rested on outstripping growth of investments with regard to the dynamics of end-consumption, having thus exerted most significant influence on the nature of structural shifts in the GDP produced and employed. With 57.5 % GDP increase during the last seven years, the actual household end-consumption grew by 65.0 % and fixed capital investments - by 90.1 %. Both development specifics and transformational shifts in the internal market were significantly influenced by positive dynamics of commodities and services production. In 2005, as compared against 1998, output of industrial production went up by 62.8 %, agriculture - by 28.9 %. Growth of commodity production is supported through the servicing market infrastructure sufficiently developed during the reforms period. The commercial transport turnover, as compared against 1998, grew by 41.7 %, the communications services - by 296.8 %, the retail trading - by 68.5 %.
Table 1
Indices of the Basic Macroeconomic Indicators in 1999-2005, in % as against the Preceding Year
1999 2000 2001 2002 2003 2004 2005
Gross domestic product 106.4 110.0 105.1 104.7 107.3 107.2 106.4
Actual household end consumption 97.1 107.3 109.5 108.5 107.5 111.6 111.1
Fixed capital investments 105.3 117.4 108.7 102.6 112.5 110.9 110.5
Volume of industrial production 111.0 111.9 104.9 103.7 107.0 106.1/ 108.3* 104.0*
Agricultural production 104.1 107.7 107.5 101.7 101.5 101.6 102.0
Transport turnover 105.8 104.8 103.2 105.6 107.4 106.4 102.6
Communications 133.1 113.8 119.1 115.6 127.5 129.0 115.7
Retail trade 93.9 108.8 110.7 109.1 108.4 112.5 112.0
Paid services for population 107.0 105.0 102.8 100.4 105.1 108.4 107.5
Foreign trade 86.7 129.7 105.4 108.1 124.6 130.6 133.2
Real monetary incomes 87.7 112.0 108.7 111.1 114.9 109.9 108.8
Real wages 78.0 120.9 119.9 116.2 110.9 110.6 109.7
Real pensions 60.6 128.0 121.4 116.3 104.5 105.5 109.3
Average annual quantity of those employed in the 100.5 100.6 100.6 101.0 99.2 101.8 100.8
national economy
Number of unemployed (by the end of the year) 102 77 90.0 98.0 106.0 96.1 94.0
* The dynamics of industrial production is given by kinds of economic activity. Source: Rosstat.
A positive factor of stable economic development in the recent years was simultaneous expansion of both the internal and external markets. While the dynamics of external demand was formed exceptionally through favourable situation on the world markets of fuel and raw materials, expansion of the internal market was mainly determined by the cu-
mulative effect of greater national business activities and systematic growth of the population's solvent demand in the context of its stably growing monetary earnings.
Source: Rosstat.
Fig. 1. Growth rates of internal and external demand for 1999-2005, in % as against the respective quarter of the preceding year
As can be seen from Fig. 1, the internal and external demand ratio during 1999-2005 experienced rather significant transformations.
Active substitution of imports, from the end of 1999 to the first half of 2001, was a major for successful overcoming negative consequences of the August 1998 financial crisis. In the context where the national business is being more and more guide lined to fill in niches on the domestic market, dominating influence on the economic situation was exerted by dynamic growth of manufacturing, construction industries and infrastructure. High economic growth rates of extractive industries, manifest from the second quarter of 1999, were to a certain extent caused by greater demand for Russia's traditional export commodities as well as intensive growth of the world market prices on hydrocarbons. Nevertheless, it was primarily the internal demand that accounted for almost 75 % of the GDP growth in that particular period.
Greater impacts of external factors on the Russian economic development were being registered beginning from the second half of 2001 up to quarter IV of 2002, and was taking place in the context of restrained internal demand dynamics as well as somewhat unfavourable price shifts on the world commodity and raw materials markets. Besides, it was exactly in this period that the Russian rouble devaluation effect was practically stopped. One of the results being that expansion of the external demand and production in 142
the export-oriented sectors was unable to compensate for shrinking demand on the internal market during the second half of 2001-2002 but resulted, in the long run, in slower growth rates down to the minimum, at least for the last five years, level. The average annual GDP growth rates in 2001-2002 comprised 104.5 %. As regards the economic sectors, this approximately similar GDP growth was determined by expanding internal and external demand, even with rather significant yearly and quarterly changes in the respective growth rates.
The 2003-2005 period registered gradual improvement in the terms of Russia's trade with foreign countries due to both the outstripping price growth on exported commodities and the expanding demand for the basic Russian export trading positions. In 2005, the relative weight of exports in the sumtotal resources reached 36.8 % as against 30.5 % in the pre-crisis 1997. However, even with such exceptionally favourable foreign economic situation, beginning from the second quarter of 2004, gradual slow down of the export growth rates in terms of physical volume was observed. As compared against the year of 2003, these went down by 1 p.p. with regard to the physical export volumes and as concerns fuel and energy commodities - by 1.8 p.p. (see Fig. 2 below). In 2005, slow down of the growth rates was taking place more aggressively and also provoked by somewhat sluggish physical exports dynamics of oil and oil products. Resulting, finally, in obviously weaker influence of external demand on the GDP dynamics.
Fig. 2. Changing GDP Growth Rates, All Exports and Fuel-Energy commodities in 1999-2005 in % as against the Respective Quarter of the Preceding Year
Of principle importance for the Russian economy are both the level of external demand for the mineral and raw materials products and the way foreign economic activity profits are used in practice. In 2005, the VAT share of extractive industries in the industry on the whole reached 33.7 % as against 25.2 % in 2002-2003 and 20 % in 2000. With dynamic growth of prices on hydrocarbons and metals, the export share of mineral raw materials and primary manufacture products in the incomes structure from foreign economic activity comprised 78.4 % in 2005 having thus increased by 4.1 p.p. as compared against the previous year. In 2005, as shown in the resultant finance balance of industrial production, the share of extractive branches comprised 40.2 % as against 38.3 % in 2004 and 33.9 % in 2003. Due to underdeveloped structure of inter-branch redistribution of resources, greater concentration of incomes in the export oriented sector of industry exerted pressure on the internal market.
Beginning from the IV quarter of 2003, expansion of internal demand was already exerting dominating influence on both the structure and dynamics of economic growth. In 2004, growth of internal demand reached 10.3 % as against 7.8 % in 2003 and 4.6 % in 2002. In 2005, restored was the outstripping internal demand growth trend as compared against the external one (8.1 % growth in the 1st half of 2005 and 9.5 % in the 2nd as compared against the respective periods of the previous year). Contribution of internal demand to the 2005 GDP growth is estimated at the level of almost 80 % which corresponds to the 2000 indicators - the year of the best economic dynamics during the last seven years.
Positive internal demand dynamics in 2000-2005 was determined by both growing volumes of internal production and further expansion of the scale of imports. It is also noteworthy that sudden upsurge in the activities of the national business caused by the devaluation of the rouble, on the whole did not last too long. Worse competitive context (much due to stronger rouble), including lesser competitive resources, as well as lower activities in modernizing and reconstruction of production resulted in gradual slowing down of the respective economic growth rates. In 2002, growth of the national production fell down to its minimum level for the last seven years comprising 1.9 %. Saturation of internal market under this situation was determined by the fact that the growth rates of physical imports remained at the level of 117.8 % (Fig. 3). Hence, the share of Russia's own commodity production in forming internal market resources in 2002 decreased almost by 6.6 p.p. as compared against the most favourable 2000. In the period from IV quarter of 2002 to II quarter of 2004, the internal market showed greater growth rates of imports even though under sufficiently unstable dynamics of the national production. The average annual growth rates of own production commodities during this period comprised approximately 4.5 % and those pertaining to the physical imports - 20.5 %. Outstripping growth rates of imports as against the respective internal production, were quite typical for the economic growth of the recent years.
40
30
-40 J
Source: Rosstat.
Fig. 3. Changing Growth Rates of Imports, the National Commodity Production and GDP in 1999-2005, in % as against the Respective Quarter of the Preceding Year
Most significant influence on the structure of internal demand was exerted by the respective consumer and investment ratio. Sharp upsurge of investing in the fixed capital in the 2nd half of 1999 - 1st half of 2001 somewhat stimulated development of the national production, including formation of potential sufficient to control and regulate the changing situation in the consumer sectors of economy. Gradual consumer demand growth, as based on the growth of population's real incomes and dynamic production development of food products, textile and clothing manufacture, retail trade, stimulated restoring of the household end consumption in 2000 up to the level of the pre-crisis year of 1997. Greater share of the national commodity production was registered in the retail trade resources structure but this process was interrupted in 2002 when sharp slow down of growth rate in practically almost all manufacturing industries opened the market for more intensive imports.
The consumption level of the population determined faster growth rates of consumer goods imports and under longer trend of outstripping growth of investments with regard to dynamics of machine building - import of machinery and equipment. In 2003-2005, import exerted stronger influence on dynamics and structure of both end and intermediate demand on the internal markets. Growth of imports in 2005 comprised 28.5 % as against 24.6 % in 2004 and 13.4 % in 2002. Shaping of this trend was supported by growing profits of business from foreign economic activities and by greater efficiency of imports in the context of gradually stronger rouble.
Restoring trend towards greater role of internal demand practically did not change the situation. Although 2005 was characterized with gradual growth of internal production
rates from 4.6 % in the 1st quarter up to 6.3 % in the 3rd and 7.0 % in the 4th quarters, this did not result in any greater influence on the structure of sources forming internal demand resources. Correlation between imported and own, domestic goods remained at approximately the 2004 level. Dominating influence on the 2005 imports structure was exerted by intensive growth of physical volumes of imported investment commodities and quite moderate growth rates of intermediary demand goods. The share of imported machinery and equipment in the overall volume of imports in 2005 comprised 43.5 % as against 41.6 % in 2004 and 37.3 % in 2003.
The turnover structure of retail trade in 2005 also registered further growth in the import share of consumer goods. In view of the slowing down growth rates in consumer industries, as initiated by the permanent crisis in the textile, clothing and footwear productions, the share of domestic inedible commodities in the respective retail trade went down to 44.4 % in 2005 as against 46.4 % in 2004 and 50.0 % in 2001-2002. The dynamics of food imports was restrained by rather strong competitive positions of the Russian producers so the imports share in the overall volume of commodity food resources somehow stabilized at the level of 34 %. Hence, the general competitive positions of Russian producers who are, on the one hand, positively influenced by growth of production and, on the other, experience negative effect of stronger rouble as well as changing correlation between internal prices and imports practically returned to the 1997 pre-crisis level. Which did significantly aggravate competition between domestic and imported commodities having thus shifted the gravity center towards different non-price factors.
Dynamics and share of gross saving and gross accumulation in GDP
According to the comparative by-factor analysis of GDP dynamics, the investment sphere was the one that reacted to the changing volumes and incomes from exports most sharply. Upsurge of investment activity in the 1999-2000 and 2003-2005 periods coincided with dynamic growth of incomes from commodity exports while the respective slowing down of investment rates in 2001-2002 was caused by reduced demand on the foreign market and flabby dynamics on the world markets of oil and metals. Due to lower incomes from exports and moderate investment behaviour in 2001-2002 the average annual GDP growth comprised 4.9 % as against 11.0 % in 2000 while investments in the fixed capital 5.6 % as against 17.4 %, respectively. In 2003-2005, growing incomes from foreign economic activities definitely stimulated business operations. The respective growth rates increased from 108.1 % in 2002 and 130.6 % in 2004 up to 133.2 % in 2005. The average monthly foreign economic trade balance in 2005 comprised about $10 bln as against $6-7 bln in 2003-2004, averagely. The GDP growth rates in 2005 comprised 6.4 % while those of investments in the fixed capital-10.5 % as against similar indicators for the 1999-2004 period (in average) - at the level of 7.2 % and 10.9 %, respectively (Fig. 4).
Exceptionally favourable combination of domestic business activities and the price situation on the world markets of raw materials stipulated quite intensive growth in the gross saving scales. The share of the latter during the recent seven years was within the 31.1 %-38.7 % GDP range as against 24.0 % in the 1997 pre-crisis year. In 2005, under the influence of growing export incomes, on the one hand, and lower household expenditures, on the other, the gross domestic saving comprised 35.1 % GDP as against 33.7 % in 2004 and 31.8 % in 2003.
The phenomenon of Russian economy is that growing export incomes along with greater credit and investment attractiveness have been leading to significant increase in the centralized withdrawal of capital into the respective reserve funds. As beginning from
January 1, 2004, the RF Stabilization Fund started to be being formed for the purpose of lowering risks, as connected with unfavorable foreign economic situation, and as an instrument to adequately sterilize excessive money supply in circulation at the expense of additional budget incomes from high oil prices. In 2004, it comprised 4.4 % GDP and in 2005-almost 6 % GDP, i.e. 1.3 trillion roubles. In the context of higher levels of "available monies" in the Stabilization Fund, the recent two years saw stronger orientation towards more efficient solving of the state's external debts on the one hand, and fulfillment of the adopted social programs, on the other.
Fig. 4. Changes of the GDP Investments Growth Rates in the Fixed Assets and the World Oil Prices in 1992-2005 (in % as against the Preceding Year)
Analysis of operational accounts with such capital does graphically illustrate growing gross saving asymmetry, gross accumulation resources and investments in the fixed capital in the context of gradually weakening loads on economic operations with the rest of the world. Despite the growing volumes of the gross domestic saving, the investment sphere was not involved. The investment share in the fixed GDP capital in 1999-2005 remained averagely at the 15.9 % level which was 1.5 p.p. below the 1997 pre-crisis level (see Fig. 5 below). The policy of withdrawing potential capital into the reserve funds did limit abilities to modernize production thus eventually increasing its dependence on the foreign economic situation. Insufficient investments in the real sector under the existing age, technological and branch structure of the fixed capital exerted negative impacts on the economic growth structure. Which resulted in the 6.4 % GDP growth in 2005 as compared against 7.2 % in the preceding year. The overall influence of internal factors regulating the level of business activity, turned out to be rather insufficient to compensate for weaker external demand on the economic growth rates.
Underdeveloped financial markets could not ensure adequate inter-branch flow of incomes and exporters' accumulations into the sectors serving the internal demand sectors. It is also noteworthy that the impact area of growing incomes from the respective foreign economic activities was rather rigidly limited by the functional branch priorities pertaining to the export-oriented industries.
Source: Rosstat.
Fig. 5. Share of Gross Savings and Investments in the Fixed GDP Capital in 1992-2005 in (%)
As shown by the practical experience of the recent years, it is the investment demand -end consumption ratio that most sensitively reacts to the changes in export incomes and determines specific features of the internal market functioning. Sharp fluctuations in the investment expenses on fixed capital reproduction are compensated through smoothly changing dynamics of end consumption. It is noteworthy here that weaker influence of the investment component was observed beginning from the 2nd quarter of 2004 (see Fig. 6).
Fig. 6. Changing Dynamics of GNP by the End Demand Components in 1999-2005 (in % as against the Respective Quarter of the Preceding Year)
End consumption of households and changing parameters of the population's level of life
Positive dynamics of the end consumption was a major factor influencing internal market development in 2000-2005. Real earnings of the population, real wages and real size of pensions showed a trend towards stable growth. Growing scale of the end consumption was taking place in the context of sufficiently stable correlation between consumption of households and volume of social transfers received from state bodies and non-commercial organizations. In the 2005 structure of GDP use as compared against the previous year, the share of expenditures on end consumption comprised 64.9 % and went down by 1.4 p.p. as compared against the previous year (see Table 2).
In 2001, the end consumption of households returned to its pre-crisis level and then went up by 46.3 % during the following four years. In 2005, growth of the population's real earnings comprised 8.8 % as against 9.9 % in 2004, real wages - 9.7 % as against 10.6 % and real size of pensions - 9.3 % as against 5.5 %. Greater earnings of the population were accompanied with state reduction in the level of poverty. The share of citizens with monetary earnings below the cost of living level went down to 21.9 mln men which comprised 15.8 % of the total population as against 24.9 mln men (17.3 %) in 2004 and 34.6 mln men (24.2 %) in 2002.
Structural shifts in forming monetary earnings of the population were accompanied with changes in distribution of the population with regard to the size of average per capita incomes. In 2005, when the average per capita incomes grew by 123.0 % as compared against the previous year and the nominal wages by 123.6 %, the share of population with
average per capita incomes above 7000 roubles went up by 10.5 p.p., in the 5000-7000 roubles range - by 0.8 p.p. and in the below 5000 roubles brackets - went down by more than 11.3 p.p. However, this did not serve to weaken the social and economic differentiation of the population by earnings. It is estimated that the ratio of funding which defines correlation between average values of the lowest and highest earnings pertaining to the corresponding decile population groups, comprised in 2005 14.8 times as against 14.3 times in 2003 and 14.0 times in 2001-2002. The Jini ratio, describing concentration of incomes, increased up to 0.404 as against 0.400 in 2003 and 0.398 in 2002-2000.
Table 2
Structure of GDP Use in 1998-2004, in % as against the Result
1998 1999 2000 2001 2002 2003 2004 2005
Gross domestic product 100 100 100 100 100 100.0 100 100
Expenditures on end consumption 76.2 68.1 61.3 65.8 68.9 68.1 66.3 64.9
including:
households 55.6 52.3 45.1 48.3 50.0 49.4 48.6 47.9
state bodies 18.7 14.6 15.1 16.4 17.7 17.6 16.7 16.3
Gross accumulation 14.9 14.8 18.7 21.9 20.1 20.8 21.1 21.2
including:
gross accumulation of fixed capital 16.5 14.4 16.9 18.9 17.9 18.4 18.6 18.5
Net export of goods and services 6.8 17.0 20.0 12.7 10.8 11.3 12.6 13.9
* Preliminary data.
Source: Rosstat.
Specific features in incomes distribution did determine peculiarities in the dynamics of current expenses and the level of savings in the household sector as well. Higher purchasing power of the population's incomes resulted in remaining high growth rates of the retail trade turnover: in 2005, it grew by 12.0 %. Changes in the structure of consumer expenditures were determined, for the last seven years, by higher relative weight of expenditures on nonfoods and services accompanied with lesser share of such expenditures on foods. Growth of sales of foods comprised 10.6 % while those of nonfoods - 13.4 %. Changing consumer behaviour was to a certain extent explained by structural price shifts in the basic commodity groups. With consumer prices growth by 10.9 % in 2005, prices on foods in the beginning of the year grew by 9.6 % and on nonfoods by 6.4 %. It is also noteworthy that under the present level of incomes, gradual shifting of the assortment sale structure of foods towards more expensive foods and nonfoods - towards better quality imported goods were statistically registered. Changing demand structure of the population and greater sales share of durable nonfoods and household stimulated more active development of consumer crediting. Volume of credits to physical persons grew 1.82 times from the beginning of the year. In 2005, the share of credits to physical persons comprised 18.9 % of the total crediting given by the respective crediting organizations as against 14.4 % in 2004 and 9.8 % in 2003. It is to be noted that the share of sales through trading companies was stably increasing in 2003-2005.
The dynamics of consumer demand was significantly influenced in 2005 by greater share of expenditures on payment for services. In 2005, the market of paid services to the population was taking shape in the context of higher indices of prices and tariffs by 21.0 % as compared against 17.7 % in the preceding year. Of the services, statistically registered, most dynamic in 2005 was growth of prices and tariffs in the housing and communal services (132.7 %) and the transport sector (115.8 %). Accordingly, the housing and commu-
nal services took the first place in the structure of paid services having comprised over a quarter of the total paid services. This became a factor for almost 1.2 p.p. greater expenditures on services in the monetary incomes structure as compared against 2004. Besides, dynamic growth of household motorization as well as increasing house building on the population's own money initiated active development of the corresponding services markets. Over half of personal services accounted for the total share of services in technical repair and servicing transport vehicles, technical devices and equipment (23.4 %), house building and repair (28.8 %). Dynamic growth of the market of services in technical servicing and repair transport vehicles as combined with expanding sales of cars and growing demand of the population for combustive and lubricating materials also exerted significant influence on the structure of current consumer expenditures of the population. It is to be noted here that 15.8 % growth of prices on petrol in 2005 also significantly influenced the dynamics and structure of expenditures, particularly so in view of the fact that in 2004 such growth of prices on petrol comprised 31.3 %.
The expenditure structure of the population was also influenced by increased inflationary expectations of the population which were traditionally manifested in greater expenditures on buying foreign currency and faster rates of acquiring nonfood consumer goods. This upsurge of consumer activity caused reduction of the cash-in-hand volume. Due to faster growth rates of prices and tariffs for services as compared against 2004, the share of consumer expenditures in the structure of spending monetary earnings in 2005 went up to 70.9 % as compared against 69.8 % in the preceding year (see Fig. 7). It is to be noted here that lesser inclination to saving was registered only during the first half of 2005. Faster growth rates of real earnings of the population in the second half of the year manifested a trend towards returning to the inclination to save. A factor restraining active use of savings on current consumption, was high investing activity of the population in house building. In 2005, the volume of living space build by the population on their own money and/or through credits received grew by 6.8 % as against 5.9 % in the preceding year. However, the influence of this factor on the way the population spends their earnings depends not only on the level of earnings and prices on housing but on the general economic situation and the investment climate as well.
60
50
40
30
20
10
-10 J
payments for compulsory purchase of goods purchase payment services and fees
savings
currency growth (+) and decrease (-) purchases of cash -in-hand
2003
2004
2005
Source: Rosstat.
Fig. 7. Structure of Consumption of Monetary Earnings by the Population In 2003-2005, in % as against the Total
3.1.2. Specific features of GDP Formation by Incomes
Dynamically growing incomes of the population is a specific feature pertaining to the restorative period of the Russian economy in 1999-2005. Supporting the internal market dynamics was based on the growth of real wages and followed with incomes redistribution from enterprises to the population. In 2005, the share of payment for wage earners in the GDP comprised approximately 43.2 % remaining above the respective indicators in 19992000 (see Table 3).
Table 3
Structure of GDP Formation by Incomes in 1999-2005, in %
1999 2000 2001 2002 2003 2004 2005*
100 100 100 100 100 100 100
40.1 40.2 43.0 46.8 47.1 45.4 43.2
15.7 17.1 15.7 17.0 15.9 17.2 19.3
44.2 42.7 41.3 36.2 37.0 37.4 37.4
Gross domestic product including: payment of wage earners (including the hidden ones) Net taxes on production and imports
Gross profits in the economy
and gross mixed incomes__
* Preliminary data. Source: Rosstat.
It is noteworthy that greater payment of wage earners in the structure of incomes was taking place in the context of remaining high differentiation in the average wages area by
0
branches of economy and industry. Dynamic growth of wages in the infrastructure branches, the finance-credit sector and management bodies was accompanied with smoothly decreasing wages paid in the commodity production sector as compared against the respective average level for the economy as a whole. In industry, the said differentiation degree of wages was determined by greater gap in the rates in the export oriented manufacturing branches. The nominal wages paid in the extractive sector, was 2.2 times higher than the average level in the economy as a whole, including in the extraction of fuel and energy fossils - 2.5 times. In the manufacturing branches, respective wages comprised 101.1 %regarding the average for the economy as a whole and 40.2 % with regard to the respective indicator in the extractive branches. 2.3 times exceeding the average indicator of wages for the economy was registered in productions connected with processing and transporting fuel and energy fossils. In education and health care the average wages comprised 64-68 % regarding the average level for the economy as a whole, in transport - 130 % and in finance - 241 %. Specific features of remuneration for labor by kinds of economic activities exerted significant influence on forming the structure of incomes and expenditures, the consumer demand of the population as well as on the nature of employment and distribution of labor resources in the economy.
In the structure of employed population, 92.1 % work for a wage and only 7.9 % account for those who do not work for a wage: employers using hired labor in their own enterprises on a permanent basis, self-employed people. Accordingly, this determined certain peculiarities in forming the incomes structure of the population and the GDP (see Table 4). Over 64.5 % of incomes and 42 % of the GDP accounted for the share of wage earners. The transformational shifts in the business environment stimulated higher activities in the small business sphere and quantity of those employed in it reached 11.3 % of the overall quantity of those employed in the economy as a whole. In the structure of monetary earnings of the population, the share of incomes from entrepreneurship and property in 2005 went up to 20.5 % which exceeded the 2004 level by 0.5 p.p. and by 3.4 p.p. that of 2002.
Table 4
Structure of Monetary Incomes of the Population in 1999-2005, %
1999 2000 2001 2002 2003 2004 2005*
Monetary earnings - total 100 100 1 00 1 00 1 00 1 00 1 00
Wages, including hidden ones 66.5 62.8 64.6 65.8 63.9 64.9 64.5
Incomes from entrepreneurship 12.4 15.4 12.6 11.9 12.0 11.7 11.5
Incomes from property 7.1 6.8 5.7 5.2 7.8 8.3 9.0
Social payments 13.1 13.8 15.2 15.2 1 4.1 12.9 13.0
Other incomes 0.9 1.2 1.9 1.9 2.2 2.2 2.0
* Preliminary data. Source: Rosstat.
Both the level and share of wages in the GDP structure exerted dominating influence on the social parameters. With the economic growth back, significant changes were registered on the labor market. The 1999-2005 period was characterized by a trend towards greater demand for labor. In 2005, the average annual number of those employed in the economy comprised 68.2 mln men as against 65.8 mln men in 2003 and 63.8 mln men in 1998. It is to be noted here that changing demand for labor was also determined by shifting employment from the commodity production sector to activities directly connected with market services. Shaping this trend at early stages of restoring economic growth exerted powerful positive influence on the quality of life and gave impetus to faster growth rates of
the service sector development. However, in the context of slower rates of industrial production and faster imports thus provoking a trend towards reducing the average annual quantity of the respective production personnel. The recent three years registered reduction of employment practically in all industrial branches, with most intensive decreases in the number of jobs taking place in the manufacturing industries. However, the existing efficiency in using labor and fixed capital both in the investment and consumer segments stimulated a gap in the growth rates in the manufacturing and extractive branches what, in the long run, was determining formation of the trend towards slower economic growth rates.
Low efficiency in using factors of production but one of the reasons decreasing competitive advantages of Russian commodities. Negative impacts on the qualitative indicators in the respective economic dynamics were exerted by greater gap between rates of labor productivity and those of wages, in favour of the latter (see Fig. 8). In the 2000-2005 period, real wages increased 2.25 times while the productivity of labor grew 1.42 times. Such order of growth of wages was accompanied with lowering gross profits in the GDP structure from 42.7 % in 2000 down to 37.4 % in 2005.
Fig. 8. Dynamics of Labor Productivity and Real Wages in 1998-2005 (in % vs. the Respective Quarter of the Preceding Year)
In 2003, rates of labor productivity and wages were drawing together in the context of faster rates of production. However, influence of this process on changing efficiency indicators of enterprises and/or organizations was exceptionally weak and unstable. Maintain-
ing a positive internal market dynamics through growing wages and earnings of the population was accompanied with redistribution of incomes from enterprises to the population which, in the long run, resulted in higher production costs and lower profitability of production. In 2004-2005, dynamics of wages 1.04 times exceeded the growth of the labor productivity. However, possibilities for further increase of expenditures on wages were rather limited by changes in the competitive environment on commodity markets taking place due to strengthening of the rouble and higher pressures exerted by imports. Hence, in 2005, the share of wages in the GDP went down by 2 p.p. as compared against 2004.
Since the dominant part of population's incomes is formed through wages, problems of employment and jobs placement acquired priority significance. The total number of unemployed, as calculated by the IOL methodology, went down to 8.9 mln men (13.2 % of economically active population) in 1998, down to 6.2 mln men in 2003 (8.6 %) and down to 5.6 mln men (7.5 %) in 2005 (see Fig. 9). The ratio of tension (number of unemployed citizens officially registered in the respective employment services as per one vacancy) went down to 2.7 men as against 2.7 men as per the end of 2004. Simultaneously with changing demand for the labor force, registered was also a trend towards higher efficiency in using working time. In 2005, de facto length of work time increased in economy as a whole and in industry. As compared against 2004, quantity of those working part time and having forced administrative leaves went down almost by 1/5. Changing motivation to labor was accompanied with a trend towards shorter leaves fully in accordance with the respective active legislation and on own initiative of those employed.
Fig. 9. Changing Growth Rates of the GDP, Real Wages and Relative Share of Unemployed in 1998-2005 (in % vs. the Respective Period of the Preceding Year)
According to analysis of changes in the share of gross profits and business incomes in the GRD, average profitability of the Russian economy has an upward trend of development. The resultant financial balance of organizations in the basic branches of economy in 2005 grew 1.38 times as compared against the similar period of the preceding year.
Analysis of profit formation by sectors of economy shows that the resultant balance was formed in approximately equal shares through production of commodities and services. However, there are sectors within sectors which exert dominant influence on the process of forming and using profits in the national economy.
Industry maintained its leading positions both in the growth dynamics of financial activity results and in the branch structure of profits formation by kinds of economic activity. Faster financial results growth in industry was initiated by greater profits in the extractive branches. The resultant finance balance in the fuel and energy fossils sector increased 1.85 times in January - November, 2005 as compared against the similar period of 2004. Due to growing production costs caused by increasing expenditures on labor, internal prices on energy carriers and tariffs on transport, the situation in the manufacturing branches was less favourable. The resultant financial balance in the manufacturing branches increased 1.77 times. Both the value and dynamics of dynamics in the extractive branches also determined the nature of using enterprises' own monies on investing, production and social aims. Comparing dynamics and structure of education against using the GDP showed that, in 2005, support was continued of a limited number of export oriented branches in the extractive industry, primary processing of raw materials and branches of infrastructure in the context of faster growth of internal demand as compared against the external market development dynamics. Growth of profits in the exporting sector exerted the most significant influence on the connecting infrastructure branches -transport, communication, trade but practically did not affect branches which are mostly internal market-oriented.
3.1.3. Dynamics and Structure of GDP Production
Development of the services sector
Russian economy development in 2005 was formed under the influence of the following most significant factors:
• greater effect of internal demand;
• outstripping growth of the manufacturing industries as compared against the extractive industries;
• outstripping growth of investments in the fixed capital with regard to the GDP dynamics and end demand;
• greater growth rates of imports of the end consumption commodities than the internal production rates;
• intensive growth of the services sector;
• outstripping growth of wages as compared against the labor productivity; preservation of high consumer demand and inclination of the population towards saving;
• faster price growth rates industrial production producers and tariffs on services.
The 1999-2005 economic development was characterized by simultaneous increase business activities in production of commodities and services. Specific features of the Russian economy was defined by stably high share of commodity production and sufficiently strong influence of growth in the industry and construction on the growth rates in the economy as a whole. In 2005, the share of commodity production in the GDP com-
prised 37.3 % 73.9 % of which accounted for industrial production and 13.4 % for construction. The outstripping growth of commodity production was maintained through the infrastructure of the services market developed during the reforms years. The growing business activity indicators in the services sector closely correlates with the business activity level and structural changes in the economy as a whole. The dominant influence on the services market was exerted by faster growth rates in transport, communication, trade, commercial sphere of functioning on the real estate market and operations.
In 2003, faster output growth rates in the basic economic industries of up to 7.3 % as against 3.5 % for the 2001-2002 period in average, were initiated through restoring of the investment demand. Dynamic increase in the volume of work in construction (in the period from early 2003 to quarter 11, 2004) was maintained through faster industrial output due to outstripping production growth of the major commodities and constructive materials. Beginning from quarter 111, 2004, weaker investment activity was registered in the economy which was accompanied with slowing down of industrial growth and work in construction in the context of dynamic scale expansion of the foreign economic activity. Beginning from the second half of 2004, the leading positions in forming both the structure and dynamics of the economic growth belonged to trade and connected branches of the market infrastructure - transport, communication, informational servicing, finance and credit organizations.
Stably increasing share of trade in the structure of the national economy was a phenomenon in the Russian economy. Development of trade was accompanied with intensive development of the industry's material and technical basis and changes in the structure of services provided. Greater role of organized trade in the commodity turnover structure initiated intensive growth of trade space, storage areas, servicing. Trade was making growing demand for equipment, informational, communication and transport services. The share of trade in the 2005 GDP comprised 20.7 % which corresponded to the average indicator for the last five years. It is to be noted here that dynamic structural shifts were quite specific for development of this branch of economy. Favourable changes of demand on the world market determined the outstripping growth and higher relative weight of the foreign trade in the trade turnover structure. At the same time, attention should be paid to the fact that a specific feature of the Russian economy was almost twofold exceeding volumes of wholesale trade with regard to retail trade turnover. Along with higher business activity, intensive growth of wholesale trade was maintained due to expanding internal market demand for material and technical resources.
Greater volumes of trade both inside the country and on the international level were accompanied with the scaled growth of transport activities. Commercial transport turnover of goods in 2005 grew by 2.6 % while that of industrial output increased by 4.0 %. The greatest contribution in the growth of demand for transport services was made by export oriented productions. Growth of commodity transporting through pipelines comprised 2.3 % as compared against 2004. As to volume rates of transporting the major cargoes by rail, the leading positions remained with oil and oil products, ferrous and non ferrous metals, chemical and mineral fertilizers and wood products.
In the context of stably high business activity level, the changing structure of transport services was determined by the overall economic situation as well as by the practical solution of coordination problems in the transport infrastructure. More intensive cargo motor transporting was accompanied with greater share of investment spending on development of the main road system and automobile transport. The state of Russia's transport system is not a direct obstacle to economic growth but its inefficiency is leading to higher transporting costs and loss of profits from the respective transit traffic.
One of the problems directly pertaining to the modern economy structure continued to be higher requirements to coordinated development of different services. Communication remained the most perspective and rapidly development activity. In 2005, volume of communication services grew almost by 15.7 %. The share of new communication operators accounts for nearly 3/5 of the total volume and over half of communication services provided to the population. Most spread among other types of electric communication was the telephone one which produces 3/4 of all profits received from this services of this business, including 40 % from mobile electric communication. As per October 1, 2005, the total number of the cellular communication comprised about 110.3 mln having thus grown by 39.0 mln or by 54.6 % as compared against the beginning of the year (see Fig. 10).
Fig. 10. Changing Production Rates by Types of Activity for 2003-2005 (in % vs. the Respective Period of the Preceding Year)
Industry: rates and structure of production
In the context of restrained dynamics of demand for capital goods and greater influence of imports on the internal market, volumes of output in industry were characterized by gradual slow down in the growth rates and lesser contribution to the economic growth. The industrial growth index in 2005 comprised 104.0 % as against 108.3 % in 2004 (Table 5). In 2003-2005, structural shifts in industry were determined by outstripping development of the manufacturing branches. In 2005, growing production output in the manufacturing branches comprised 5.7 % as against 1.1 % in the extractive branches. 158
When analyzing development trends in extracting minerals, consideration should be taken of such factors of influence as reduction of efficient reserve capacities, low rates of development and putting into operation new fields, limitations on the part of the transport and export expeditionary infrastructure. Underexploitation of the growth potential in the extractive branches was also determined by somewhat restrained rates of minerals processing in metallurgy, petrochemistry and timber productions. In view of the already existing fixed capital assets structure, further increase in the capacity loads was accompanied with greater capital output ratio of production and less efficient use of labor and finance resources. This determined significant influence of output dynamics in the export oriented branches on the structure of industrial production and demand on the internal market.
It is to be noted here that most significant influence on the dynamics of extractive branches in 2005 was exerted by slow down in the rates of fuel-energy minerals extraction. The production index of such in 2005 went down to 101.8 % as compared against 107.7 % in the preceding year and of metal ores - down to 96.8 % as against 108.5 %. Observed under conditions of greater tax load in oil companies was weaker motivation for building up out extraction and exports. Accordingly, this resulted in slowing oil production rates down to 102.2 % and exports - by approximately 2.0 % as compared against 2004.
Table 5
Indices of Industrial Production by Types of Economic Activities in 2002-2005, in % vs. the Preceding Year
2002 2003 2004 2005
Industry - total 103.1 108.9 108.3 104.0
Extraction of minerals 106.8 108.7 106.8 101.3
Extraction of fuel-energy minerals 108.9 111.2 107.7 101.8
Manufacturing productions 101.1 110.3 110.5 105.7
Production and distribution of electrical energy, gas and 104.8 103.3 101.3 101.2
water
Source: Rosstat.
Dynamics of the manufacturing productions is quite significantly differentiated by types of economic activities with the greatest influence exerted by correlation between the production rates of capital and consumer goods.
Functioning of the capital goods market in the structure of the national economy branches in the recent years, according to the respective analysis of its dynamics, points to a rather significant dependence of the level of business activity and profits of the economy on foreign economic activity. Positive dynamics of investments in the fixed capital was registered beginning from the 3rd quarter, 1999, and was maintained through scaled expanding the output of domestic capital goods as well as by greater role of machinery and equipment imports in the reproduction structure of investments. In the context of frontal production rise, branches of economy and production started to show growing demand for both domestic and imported machinery and equipment as connected with more active involvement of competitive capacities in production as well as their modernization and reconstruction. Additional impulse was given by stable growth of economy determined by expanding external market demand, on the one hand, and greater internal market capacity, on the other.
Under the average annual growth rates of industry, in the period of 1999-2005, at the level of 107.3 %, the investment complex - 108.6 % and consumer - 106.2 %, this indicator comprised 105.9 % for the raw material sector. Though correlation of the growth rates for industries was subjected to rather significant fluctuations during the said period, it on
the whole does illustrate gradual turning from growth as oriented towards using the traditional natural - raw materials factors to forming the investment development of resources system (Fig. 11).
Fig. 11. Growth Rates of Production by Complexes in 1999-2005, in % vs. the Previous Year
One of the factors which determined the structural peculiarities of economic development in 2004-2005, was a stable outstripping price growth of industrial commodity producers with regard to the index of consumer prices. In 2005, with about 110.9 % inflation on the consumer market, the price growth of industrial commodity producers comprised 13.3 %.
The dynamics of prices does significantly differentiate by the extractive and manufacturing productions (Table 6). With growth of prices for commodities in the extractive sector by 31.0 %, in production and gas and water distribution by 12.6 %, freight service tariffs - by 16.6 %, the price index of producers in the manufacturing branches comprised 8.1 %. In 2005, changes in the price proportions in industry were initiated through intensive growth of prices on fuels. Faster price growth on fuel and energy commodities was taking place in the context of changing price structure on energy resources. In 2005, index on oil prices comprised 140.9 % as against 166.2 % in 2004, on gas - 118.6 % as against 211.5 % and on electrical energy - 111.9 % as against 111,0 %. In 2005, the tariff for electrical energy provided to consumers, exceeded the average price on gas 2.8 times while in 2004 this correlation comprised 3.1 times and in 2003 - 5.8 times. The restrained price policy of domestic producers of end demand commodities was quite significantly influenced by changes in the competitive environment and stronger pressure of imports in the strengthening of the rouble context.
Table 6
Indices of Producer Prices by Certain Types of Economic Activity in 1999-2005, December vs. December of the Preceding Year, in %
1999 2000 2001 2002 2003 2004 2005
Industry 170.7 131.9 108.3 117.7 112.5 128.8 113.4
Extraction of minerals 225.2 149.1 104 125.8 101.8 164.7 131.0
Manufacturing productions 167.6 124.8 106.3 113.2 115.8 121.5 108.1
Production and distribution of
electrical energy, gas and water Tariffs on freight services 117.7 1 41 .6 127.4 126 114.5 112.5 112.6
118.2 151.5 138.6 118.3 123.5 109.3 116.6
Source: Rosstat.
Significantly greater profitability of extractive productions was determined due to favourable combination of situational price factors on the world market of fuel and natural -raw materials resources. Besides, with the existing correlation between internal and world prices, most part of revenues due to greater rouble value of production but sold for foreign currency, also become profits. Similar was also the internal market trend toward outstripping growth of prices on minerals extraction as compared against the dynamics of prices on manufactured goods. Hence, much greater share of the export oriented productions in the total profits of the economy.
Growth of revenues in the export sector exerted the most significant influence on the connected infrastructure branches - transport, communication, trade practically not involving internal market oriented branches. The situation was less favourable in the internal market oriented manufacturing productions. With high level of material costs, greater prices on raw materials became a factor restraining growth rates of profits and resulted in lesser profitability of production.
Major trends in capital goods production
Restrained dynamics of capital goods output with regard to the rates of industrial growth during the last seven years was registered only in 2002 when production growth in the investment branches went down to its minimum level and comprised 2.1 % as against 6.9 % in 2001 and 18.8 % in 2000. However, the situation radically changed already in 2003. Like in the 2000-2001 period, the investment complex reacted to faster growth rates of production and profits in the export oriented sector by intensive production growth of the capital goods. Output of production in machine building in 2003 grew by 9.2 % as against 1.9 % in 2002 and in building materials production - by 6.4 % as against 3.0 %. An additional factor of growth in machine building was improvement of conditions for trade in domestically made high tech products on foreign markets. In 2004, growth of production in the investment complex comprised 11.0 % thus exceeding the level of the previous year by 1.8 p.p. As to the growth rates of production, machine building preserved its leading positions in industry. At the same time, however, it is to be noted that output of production in individual branches of machine building is subjected to rather significant fluctuations.
In 2005, production growth in electrical appliances, electronic and optic devices comprised 20.7 %, transport means and equipment - 6.0 %, that in the context of stable output of machines and equipment. Stable dynamics output of machines and equipment was maintained mainly due to expanding demand for production of lifting and shifting, railway, energy and agricultural machine building, instrument making, communication means. Besides, stably expanding demand for equipment to be used in the consumer branches
remained during all the last years. Greater output of commodities made by licenses of foreign companies with imported component parts can be marked out among factors positively influencing the dynamics of production. Outstripping growth of production output by enterprises with participation of foreign capital does somewhat change competitive conditions. In motorcar construction, in particular, one of the reasons for lesser output of Russian cars as well as reorientation of demand towards production of foreign producers, under dynamic growth of population's earnings, was a more flexible price and sales policies conducted by dealers of the respective foreign companies.
Negative factors which were exerting influence on the dynamics of machine building in 1999-2005, include sporadic cases of overproduction crisis in motorcar construction as well as instability of the investment demand for domestic machinery in the fuel industry in the context of growing incomes from exports and scaled expansion of imports of machinery and equipment.
Analysis of specific features pertaining to formation of capital goods market, is of principle importance since the dominant influence on the GDP structural shifts during the recent years was exerted by outstripping growth of investments in the fixed capital as compared against the dynamics of the end consumption. Significant influence on both the dynamics and the nature of machine building development was also continuously exerted by outstripping growth rates of imports with regard to the respective domestic production. This is connected with the fact that non-competitiveness of quite many kinds of machinery and equipment as compared against the import "price - quality" analogues as well as lack of adequate capacities for the output of modern machinery and equipment significantly limit market for the domestic machine building. In 2005, growth of imported machinery and equipment comprised (according to the respective preliminary data) 38.5 % (Fig. 12).
The state of investment machine building appears to be the main technological factor which limits possible solution of significant problems of new technology based reconstruction and modernization of production. Preservation of a prolonged trend towards recession of production in the machine tool industry and low rates of the fixed capital renewal in the machine building proper determines servicing of the investment process on the basis of traditionally standard technologies. Although in 1999-2005, growth of investments in machine building comprised approximately 42.8 % with regard to the 1998 level, this did not exert any significant influence on the respective technical and economic parameters of the fixed capital in the branch and industry as a whole. With the average renewal norm of the fixed funding in the branch during the last three years being at the level of 0.9 % and in the industry - at the level of 1.8 %, registered in the structure of machinery fleet was lower share of equipment with the service time less than 10 years. A peculiarity of the branch is also high intensity of employees movement. In the period of 1998-2005, quantity of the respective industrial personnel went down almost by 8.9 %, the industry desperately lacks skilled specialists.
Source: Rosstat.
Fig. 12. Changes of Growth Rates in Machine Building and Imports of Machinery and Equipment in 1999-2005 (in % vs. the Preceding Year)
Output dynamics of consumer goods
The consumer goods producing complex was unable to maintain sufficiently high growth rates during long time which fact is to a considerable extent connected with absence of serious qualitative changes in the technology and structure of production. The growth index of the consumer complex in 2005 comprised 4.3 % as against 2.9 % in 2004 (maximum level for the last seven years). The greatest influence on the structure of consumer goods production was exerted by the falling production trend (registered since 2002) in the textile and clothing manufacture branches - about 3 % annually. In 2005, the consumer complex maintained a prolonged trend towards reduction of investment activities.
The textile and clothing manufacture productions are part of the manufacturing sector characterized by critical indicators of the basic funds deterioration. The retirement ratio of the basic funds due to wear exceeds the indicator of funds renewal more than 4 times over. The textile and clothing manufacture productions experience absolute decrease in the fixed capital volume. The crisis of production resulted in sharp reduction of the demand for labor force. During the last three years, the average annual strength of the industrial and production personnel in the light industry reduced by more than 12 %. Low attractiveness of the branch is also determined by the existing level of payment for labor. Payment in the branch comprised approximately 40-45 % of the average overall level for the branch.
Inconsistency between the material and technical basis and the skill level, on the one hand, and the market criteria, on the other, determined both by lower competitiveness of domestic light industry products with regard to imports and, under the existing currency rates, by expanding niches for foreign goods. Beginning from the 3rd quarter, 1999, registered were trends towards pushing domestic commodities out.
Faster output growth of home appliances and/or house arrangement articles are also among the factors weakening negative impacts of the production rates of textile, clothing manufacturing and footwear on forming the market resources of domestic nonfood products. The dynamics of furniture and construction materials output does correlate with intensive growth of housing construction and high business activity on the real estate market. Significant influence on functioning of these productions as well as on increasing their competitiveness was exerted by introduction of new technologies and scaled output of assembly productions on the basis of imported component parts.
Production dynamics of food products in 1999-2005 was characterized by gradual slowing down of growth rates. Preservation of the food industry positions on the Russian market was maintained through intensive investments flow in the fixed capital and creation of new jobs. Accordingly, investments in the fixed capital of the food industry in the 20012003 period grew almost by one third. With the renewal of machinery and equipment ration increase of up to 4.2 % in 2004 as against 2.4 % in 1998, the funds deterioration degree in this period went down more then by10 p.p. having thus comprised 35.7 %. This potential, however, turned out to be insufficient for maintaining a stable growth trend of production, labor productivity and efficiency. Growth of production in the food industry in 2005 comprised 4.4 % as against 5.1 % in 2003 and 6.5 % in 2002 while the relative weight in the structure of industry comprised up to 13.2 % as against 14.2 %, respectively. Registered was also slowing down of development rates in the food productions with regard to the retail trade turnover dynamics. In the context of greater investment support, the share of investments in the food productions in 2005 went up by 0.8 p.p. with the growth rates of the food productions maintained at the level of 4.4 %.
Output of intermediate demand commodities
Beginning from 2002, the dynamics of productions which form the market of intermediary demand commodities remained within the range of positive values. Functioning of the metallurgic, chemical and woodworking industries was determined by the level of both internal and external demand. For example, in 2005 as compared against 2004, faster rates in production of coke and oil products comprised 3.0 p.p., in metallurgy - 1.8 %, slow down of rates in timber processing and production of finished wood articles - by 8.0 p.p. and chemical production - by 4 p.p. (Fig. 13).
Source: Rosstat.
Fig. 13. Changing Production Rates by Major Activities in the Manufacturing Productions in 2002-2005 (in % vs. the Preceding Year)
Metallurgy
The market of metallurgy production is highly competitive being different in cyclic demand and more dynamic changeability of prices and incomes as compared against other industrial branches. Such highly cyclic production can to a certain extent be explained by the fact that demand for metallurgy production depends not only on the general economic situation but on the state, development level and demand on the part of the basic branches consuming building materials, machine building and construction in particular. A serious problem in functioning of the metallurgy complex was the traditionally existing territorial structure of enterprises placing which results in disproportions in supplying raw and attendant materials which is directly connected with additional transport expenses.
As to the technological level, Russia's metallurgy is definitely inferior to the industrially developed countries. The existing structure of production capacities does not allow for greater depth of redistribution nor to solve the problem of lowering the relative expenditures of material and fuel energy resources and higher productivity of labor. Besides, due to specific features of demand for production, observed in the metallurgy complex are excessive production capacities practically for all trade groups. Negative impacts of this factor were further aggravated through a rather high level of constant expenditures on maintaining the production personnel as well as additional expenditures on wages. In the
165
context of the existing internal solvent demand, stronger export orientation turned out to be the most significant source of monetary receipts. Yet, these implied risks determined by changes in the situation on the world markets as well as anti dumping measures on the part of importing countries.
The specific features in the industry during the last two years were determined by dynamic growth of investing in the fixed capital. In 2005, the share of investments in the fixed capital of the metallurgy production grew by 2.1 p.p. as compared against the preceding year and comprised 5.4 %. Faster rates of production renewal as well as more active withdrawal of obsolete equipment, even though having somewhat resulted in slower production growth with regard to 2003, nevertheless did determine preconditions for both future development of the branch and diversification of production. In the course of the recent years, correlation of the internal consumption and the general volume of production has been demonstrating trend towards growth which is determined by growth of production in the basic consuming branches. The greatest growth of production was registered in the pipe plants which can be explained by growing orders from the oil and gas sector as connected with exploitation of new fields and renewal of the respective production funds. According to the analysis of resources for the ready rolled ferrous metal, the share of its consumption on the internal market increased by 8.4 p.p. as compared against 1998. In 2005, growth of the metallurgy production and ready metallic articles output comprised 5.7 % as compared against 3.9 % in 2004. Significant influence on the dynamics of metallurgy development was exerted by expanding internal demand for metal production on the part of machine building and construction. A peculiarity of 2005 development was outstripping growth of ready metallic articles (122.5 %) as compared against the metallurgy production (102.2 %).
Electrical power industry
The structural parameters of the Russian economy, as retrospectively formed, are characteristic of high inertance and leave a certain imprint on forming interrelationships of the power industry in the system of branches in the modern national economy (Pic. 14). Recession of production in the electrical power industry was less deep as compared against other industries and economy as a whole. Compared with the pre-reform level, electrical power consumption went down by 14.0 %. Analyzing functioning of the Russian economy for the last decade shows that weakening rates of recession were accompanied with stronger energy constituent in the system of factors exerting influence on the GDP dynamics. In 2005, the share of electrical power in the Russian economy comprised 2.7 % GDP, 5.2 % investments in the fixed capital, 1.4 % those employed in the national economy.
Fluctuations of demand for electrical energy during the recent decade closely correlate with the transformational shifts in the national economy. As the crisis phenomena were being recovered and the economic activity vitalized, the trend towards expanding demand for electrical energy was also on the rise. Comparative analysis of the development dynamics of the Russian economy clearly shows that with almost 40 % reduction in the GDP production in the period of 1992-1998 and production in industry by almost 50 %, the output of electrical energy went down by 18 %. This resulted in over 40 % electro capacity growth of the GDP and industry. Typical for the 2002-2005 post devaluation growth period was forming a stable trend towards lower electrical capacity: growth of electrical energy production comprised 10.3 % with the GDP increase by 48.0 % and industrial production -by 46.7 % (Fig. 15).
Fig. 14. Changing Growth Rates in Industry and Electrical Energy Power for the Period of 1971-2005 (in % vs. the Preceding Period)
■ 'gdp —•— commodity production —A- production of services
Source: Rosstat.
Fig. 15. Electrical Energy Capacity in the Period of 1990-2005, in % (1990 = 100)
Changes in the electrical energy capacity of the national economy were determined by two opposite trends. On the one hand, greater share of a less electrical energy capacity sector of services in the GDP structure was conducive to reduction of electrical energy capacity and, on the other, with absence of radical technical and technological shifts in the production of commodities sector, did provoke growth of electrical energy consumption. Thus, in 1990, the share of servicing industries accounted for about a quarter of electrical energy consumed in the economy but in 2005, their relative weight went up to 40 %. Forming the new segments of the servicing market, in particular dynamic development of modern communications systems, data processing, financial credit and insurance companies was accompanied with cardinal changes in the material and technical basis, creation of new jobs and higher productivity of labor. Besides, significant influence on the dynamics of electrical energy capacity in the servicing sector was also exerted by the growing consumer demand for electrical energy as determined by greater demand for domestic electrical appliances as well as intensive construction of new modern housing. Changing technologies of servicing on the basis of a higher level of electrical supply to the labor in the servicing sector became factors which actually determined increasing efficiency in using the potential formed during the reform years.
Dynamics of the relative electrical energy capacity in commodity production is determined by the specific features of the production structure. For Russia on the whole, the share of industry accounts for over half of the electrical energy produced and 85 % of electrical energy consumed in the commodity production sector. Dynamics of electrical energy capacity in industrial production is determined, on the one hand, by increasing of the share of electro- and energy consuming industries in the metallurgy and chemical and forest productions and, on the other hand, can be understood as reflecting low efficiency in using the available resources and restructuring of production. Analysis of consumption structure of electrical energy by industries shows that 36.6 % of the energy consumed fall at the share of metallurgy productions and 33.0 % - at the fuel and energy complex. Accordingly, both the dynamics and efficiency in using electrical energy in these two complexes determines a dominant influence on the electrical energy capacity level in industry as a whole (Fig. 16).
Fig. 16. Changes in the Structure of Electricity Consumption by Industries in 1999-2004 (in % over the Respective Period)
A comparative analysis of the reproduction parameters of the fixed capital, the level of using production capacity and the structure of electrical energy consumption by branches of industry shows that quite typical for the recent decade was gradually decreasing relative norms of electrical energy consumption on production of the respective product (Table 7).
Table 7
Consumption of Electricity for Production of Certain Products and Works,
kWt per Ton
1999 2000 2001 2002 2003 2004
Oil production, including gas condensate 100.2 98.6 102.1 96.0 94.8 97.4
Coal production 30.0 26.8 25.4 26.4 22.7
Oil procession, including gas condensate 47.5 49.9 50.2 48.4 4743 46.8
Electric steel 750.2 714.1 711.3 690.3 671.9 640.8
Finished ferrous metals rolling 154.5 151.7 150.4 148.9 150.1 1 44.6
Synthetic rubber 3067 2971 3193 3118 2865 2749
Source: Rosstat.
In the electrical energy industry itself, however, which is characterized by high wear level of equipment and obsolete technologies, registered was greater relative norms of fuel consumption on production of electrical energy and its consumption for its own needs. Prolonged trend towards reduction of investments in electrical energy production resulted in changes in both the qualitative and the quantitative parameters of the fixed capital in the industry. As compared against the pre-reform level, volume of investing in the electrical energy production went down almost three times over, volumes of new and/or replacing equipment commissioned, in particular as to the generating capacities, - approximately 3 times, for electrical networks - almost 5 times. The ratio of fixed funds renewal in the electrical energy production went down from 4.0 % in 1990 to 1.3 % in 2004. The process of the generating equipment's physical ageing is swelling. By the year of 2004, the capacity resource had already been exhausted in almost 17 % of Russia's electrical power stations. A significant part of such obsolescent equipment with less than 30 % output - input ratio is still in practical operation. Approximately one quarter of the equipment in the respective electrical energy substations have reached their wearlife limit. With the existing technical and economic parameters of the fixed capital, systematic decrease in intensity of using the generating capacities is observed. A significant part of equipment in the electrical energy industry can not be used in production because of its physical and moral wear and tear. High deterioration level of the fixed capital in the electrical energy industry can be considered to be one of the reasons for quite low loads of the respective equipment as well as a factor limiting possibilities for further growth of production. Impossibility of timely replacement of the respective elements in the fixed capital results in longer duration of using inefficient machinery and equipment. In many cases the fixed assets are liquidated only when it becomes practically impossible to use them because of their complete physical wear. Ageing of the fixed assets brings about greater probability of their destruction due to man-caused catastrophes and natural disasters. In 2004, deterioration of the fixed capital in the industry grew up to 57.8 % as against 40.6 % in 1990. Worsening parameters of the fixed capital reproduction in electrical energy is particularly striking if compared against similar indicators in the fuel and non ferrous metals branches which account for about 2/5 electrical energy consumption in the industry. Combination of high wear and loading levels does show critical loads on the respective equipment. In the context when the growth of demand trend for electrical energy is obvious low renewal norms for the fixed capital as well as the existing dynamics of annual capacity introduction create certain dangers of possible deficit thus directly limiting the growth rates of the national economy.
Dynamics of the fixed capital reproduction in the industry depends on the state of the power machine building, the electro technical industry and the power construction complex. Yet, insufficient volumes and irrational structure of machinery and equipment output do obstacle normalizing the reproduction process of the fixed capital. The obsolete material and technical basis of the energy and electrical power machine building as well as low investment activity in machine building proper were factors restraining a stable economic growth trend and maintaining a sufficiently high investment demand.
The policy of energy saving includes problems of price and tariff regulation, changes in the methods to calculate depreciation with regard to energy saving equipment, revision of the existing norms, rules and regulations towards tougher requirements with regard to energy saving; setting up standards for energy consumption and power waste as well as compulsory certification of electrical power consuming appliances and mass consumption equipment. Widely spread in many countries were programs of managing demand for electrical power. Such programs suppose that electrical power companies shall directly participate in stimulating energy saving and regulating the energy consumption regimes. 170
They also include regulating the regimes of consumers' appliances as well as assistance in improving the respective technological processes connected with significant use of electrical power and modernizing or replacement of consumers' equipment, using privileged and stimulating tariffs.
Oil and Gas Sector
The oil and gas sector remains the principal sector of Russia's economy. It plays the leading role in the formation of the state budget revenues and secures the positive trade balance of the country. World oil prices determined the state of Russia's oil and gas sector in 2005. Due to the fact that nearly 75 per cent of Russia's oil is exported in crude or refined form, the level of world oil prices represent major factor determining revenues and financial state of Russia's oil industry.
World oil prices in 2005 were at a very high level, which exceeded $50 per barrel. In the second half of 2005 oil prices reached their historical maximum in the nominal terms. The price of Brent in 2005 exceeded the average level of the previous five years by 87.5 per cent. This situation resulted from the high rate of the world economic growth. In particular, the US and Chinese economies' growth and the low level of spare production capacities available in the oil industry did not allow increasing quickly the oil production in order to satisfy the growing oil demand. OPEC countries refused supporting world oil prices at the previously set price range of $22-28 per barrel. OPEC carried out policy of moderate increase of the oil production within the limits of the available production capacities.
OPEC members announced increase in the oil production quota by 500 thousand barrel per day at the March (2005) OPEC conference. From July 1, 2005 aggregate production quota of OPEC countries went up by another 500 thousand barrels per day and reached 28 million barrels per day. However, these measures did not influence in any way the oil price dynamics. At the September (2005) OPEC conference the members of this organization declared their intension, if there was to be a need, to put into operation spare oil production capacities in the amount of 2 million barrels per day during three months starting with October 1, 2005. However, in reality only Saudi Arabia had considerable spare oil production capacities. Limited demand on heavy sulphur oil to a certain extent hampered oil production growth in the OPEC countries.
Reduction of growth rates in the oil production in Russia and oil production decrease in the Gulf of Mexico resulting from hurricanes considerably influenced oil production dynamics. Problems remained in the sphere of freight transportation and refining. This was due to limited available capacities, which led to high transportation costs and oil refining. Geopolitical risks such as instability in Iraq and possible problems in Nigeria and Venezuela maintained high degree of uncertainty on the world oil market.
As a result, average price of Brent in 2005 came to $54.4 per barrel. Average price of Urals in 2005 came to $50.8 per barrel. Average price of OPEC oil basket during the whole year exceeded the upper price limit set by this organization and on average constituted $50.6 per barrel in 2005. Average price of Russian Urals on the world (European) market was at 47.3 per cent higher in 2005 than the level of the previous year (see Table 8).
The development of the oil and gas sector in Russia in the year 2005 was characterized by continuing growth of the oil production, increase of petroleum products output and increase in natural gas production. This tendency started in 2003-2004. The oil production including gas condensate in 2005 exceeded the 1991 level and reached 470 million tones. At the same time, growth rates of the oil extraction plunged. Oil extraction growth including gas condensate in 2005 in comparison with the previous year amounted to only 2.2 per
cent where as in 2002-2004 the oil extraction growth constituted 8.9-11 per cent annually. If we analyze the oil production dynamics in Russia during a longer period of time, we notice that oil output in 2005 was by 17.5 per cent below the pre crisis maximum level, which was achieved in 1987 when oil production amounted to 569.4 million tones and by 56 per cent above the minimum oil production level of 1996 when the oil production plunged to 301.3 million tones. The volume of preliminary petroleum refining increased by 6.2 per cent in 2005. Investment in the oil and gas sector significantly decreased: installation of the new oil wells went down by 28 per cent in 2005 in comparison with the previous year. The natural gas production growth continued in 2005 although at a lower rate. In 2005 it amounted to 0.5 per cent (see Table 9).
Table 8
World Oil Prices in 2000-2005, US$ per Barrel
Price of Brent, Great Britain Price of Urals, Russia Price of OPEC Oil Basket
2000 28.50 26.63 27.60
2001 24.44 22.97 23.12
2002 25.02 23.73 24.34
2003 28.83 27.04 28.13
2004 38.21 34.45 36.05
2005 1st quarter 47.50 43.10 43.66
2005 2nd quarter 51.59 48.44 49.54
2005 3rd quarter 61.54 57.34 56.28
2005 4th quarter 56.90 54.10 52.86
2005 54.38 50.75 50.64
Source: OECD International Energy Agency, OPEC.
Table 9
Production of Crude Oil, Petroleum Products and Natural Gas in 2000-2005
in Percent to the Previous Year
2000 2001 2002 2003 2004 2005
Crude oil including gas condensate 106.0 107.7 109,0 111,0 108,9 102,2
Preliminary petroleum refining Motor oil 102.7 103.2 103.3 102.7 102.6 106.2
103.6 100.6 104.9 101.2 103.8 104.8
Diesel oil 104.9 102.0 104.7 102.0 102.7 108.5
Fuel oil 98.3 104.2 107.1 100.3 97.8 105.8
Natural gas, billion cubic m. 98.5 99.2 101.9 103.4 101.6 100.5
Source: Russian Statistical Agency.
LUKOIL, TNK-BP, Rosneft and Surgutneftegas extracted the highest volumes of crude oil in 2005. Major part of Rosneft oil extraction was done by Yuganskneftegas, which was separated from YUKOS and attached to Rosneft in the end of 2004. YUKOS oil production went down sharply. In 2005 YUKOS' oil production (without Yuganskneftegas) went down by 24.5 per cent in comparison with the previous year. The share of the company on Russia's oil market fell down to 5.1 per cent. At the same time, the share of Gazprom on Russia's oil market sharply increased resulting from acquiring Sibneft. Gazprom's share in Russia's oil production went up from 2.6 per cent in 2004 to 9.7 per cent in 2005. As a result, the share of state companies (Rosneft and Gazprom including Sibneft) on Russia's oil
market increased to 25.6 per cent in 2005. Production sharing operators produced 0.6 per cent of Russian oil in 2005. The share of other producers who number about 150 small oil-producing companies accounts to 4.3 per cent of oil production in the country (Table 10).
Gazprom dominated gas production. Its share in the all-Russia gas production amounted to 85.4 per cent. At the same time, oil companied increased gas production too. However, the share of oil companies in gas production remains low. Surgutneftegas, Ros-neft and TNK-BP remain the largest gas producers among the oil companies.
Table 10
The Structure of Oil and Gas Production in 2005*
Oil production mill. tones Share in the overall production in % Gas production billion cubic m Share in the overall production in %
Russia, total 470.0 100.0 640.6 100.0
LUKOIL 88.3 18.8 5.7 0.9
TNK-BP Holding 75.3 16.0 8.7 1.4
including:
Tuymen NK 54.0 11.5 6.5 1.0
SIDANKO 21.3 4.5 2.3 0.4
Rosneft 74.4 15.8 13.0 2.0
Surgutneftegas 63.9 13.6 1 4.4 2.2
Gazprom+Sibneft 45.8 9.7 549.2 85.7
including:
Gazprom 12.8 2.7 547.2 85.4
Sibneft 33.0 7.0 2.0 0.3
Tatneft 25.3 5.4 0.7 0.1
Slavneft 24.2 5.1 1.0 0.2
YUKOS 23.9 5.1 2.0 0.3
RussNeft 13.9 3.0 1.1 0.2
Bashneft 11.9 2.5 0.4 0.1
Other producers 23.1 4.9 44.4 6.9
For information:
Public companies,
total:
Rosneft+Gazprom+ 120.2 25.6 562.2 87.8
Sibneft
including:
Yuganskneftegas 51.2 10.9 1.4 0.2
* According to organizational structure as of 31.12.2005. Source: Minpromenergo of Russia, authors' estimates.
In 2005 there was a significant domestic price growth on oil and oil products due to the world oil price growth. Producers' prices on crude oil, motor oil, diesel oil and fuel oil in 2005 reached maximum indices for the whole reform period. In October 2005 average domestic price of oil (producers' price) in dollar terms reached 201 dollars per ton. Average price of motor oil reached 386.6 dollars per ton, which equals the maximum price level of oil and motor oil for the whole reform period (Table 11). In September 2005 under the government's pressure major oil companies took an obligation to stabilize domestic sales price of motor oil. As a result, in October-December 2005 consumer prices of motor oil stabilized.
Domestic prices of natural gas also continued growing. Producers' prices on natural gas in 2005 significantly exceeded pre devaluation level and in December 2005 constituted 11.5 dollars per a thousand cubic meters. Average purchase price of natural gas in industry, which both included gas production costs and transportation costs and trade allowance reached 49.9 dollars per a thousand cubic meters in December 2005.
Table 11
Domestic Prices of Oil, Oil Products and Natural Gas in Dollar Terms in 2000-2005
(Average Producers' Prices, US$/t)
Gas,
Oil Motor oil Diesel oil Fuel oil US$/thous. cub. m
December 2000 54.9 199.3 185.0 79.7 3.1
December 2001 49.9 151.5 158.5 47.1 4.8
December 2002 60.7 168.8 153.8 66.1 5.9
December 2003 70.1 236.9 214.3 66.0 4.4
December 2004 123.5 333.1 364.3 69.4 10.5
March 2005 120.7 287.2 347.5 75.4 12.1
June 2005 150.4 316.4 347.4 117.8 11.9
September 2005 194.9 379.1 439.9 168.5 12.3
October 2005 201.0 386.6 455.6 178.1 13.1
November 2005 190.4 362.2 437.2 161.3 11.4
December 2005 167.2 318.2 417.0 142.7 11.5
Source: Calculated on Russian Statistical Agency data.
Oil export in natural terms went down by 1.9 per cent in January-November 2005 in comparison with the corresponding period of the previous year. Export of oil products went up by 16.4 per cent (Table 12). The share of export in the fuel oil output in January-November 2005 constituted 69 per cent, diesel oil-56.9 per cent, motor oil-18.6 per cent (for comparison: in 1999 the share of export in the motor oil output constituted only 7.2 per cent, in 2004-14 per cent). Contrary to several previous years, which were characterized by significant growth of petroleum products imports, 2005 posted reduction in petroleum products imports. In January-November 2005 import of petroleum products went down by 71 per cent in comparison with corresponding period of the pervious year. At the same time, import of motor oil went down by 98 per cent in comparison with the previous year and the share of import of petrol constituted only 0.03 per cent (for comparison: in the first six months of 1998, i.e. before the ruble devaluation unit weighted of import in petrol production constituted 8.7 per cent, in 2004 - 1.7 per cent).
In comparison with the previous year, gas export growth rates decreased, which was stipulated by gas supplies to CIS countries (gas supplies to these countries in January-November 2005 decreased by 13 per cent).
Table 12
Export of Oil, Petroleum Products and Natural Gas from Russia in % to the Previous Year
2002 2003 2004 2005 (11 months)
Oil, total 113.9 117.8 115.0 98.1
including: non-CIS countries 109.9 118.9 116.3 98.5
To CIS countries 137.3 112.4 108.3 96.0
Petroleum products, total 118.5 103.6 105.5 116.4
including: non-CIS countries 119.1 102.6 104.9 117.6
To CIS countries 102.8 132.3 117.9 92.9
Gas, total 102.4 102.0 105.5 103.1
Source: Russian Statistical Agency.
Analysis of production and export of oil and petroleum products illustrates (Table 13) that practically all additionally produced in 2005 oil was exported in the form of petroleum products. Net export of oil and petroleum products in 2005 reached 345.3 million tones, i.e. increased by 10.7 million tones in comparison with the previous year (by 3.2 per cent). In other words as in 2000-2004 precisely growth of export volumes determined increase in the oil production in 2005. As a result, unit weight of net oil export and petroleum products export in the oil production reached 73.5 per cent volume. At the same time, net oil export constituted 53.2 per cent of its production volume. Unit weight of net export in gas production in 2005 constituted 31.3 per cent.
Table 13
Ratio of Production, Consumption and Export of the Energy Resources in 2000-2005
1
Oil, mill. t
Production Export, total
Export to non-CIS countries Export to CIS countries Net export
Domestic consumption Net export in % to production Petroleum products, mill. t
Export, total
Export to non-CIS countries Export to CIS countries Net export
Oil and petroleum products, mill. t
Net export of oil and petroleum products
Net export of oil and petroleum products in % to oil output
2000 2001 2002
2 3 4
323.2 348.1 379.6
1 44.5 159.7 187.5
127.6 137.1 154.8
16.9 22.7 32.7
138.7 154.7 181.3
123.0 122.9 123.5
42.9 44.4 47.8
61.9 70.8 75.0
58.4 68.3 72.5
3.5 2.5 2.6
61.5 70.5 74.8
200.2 225.2 256.1
61.9 64.7 67.5
2005
2003 2004 (esti-
mate)
5 6 7
421.4 458.8 470.0
223.5 257.4 252.5
186.4 217.3 214.0
37.1 40.1 38.5
213.4 253.2 249.9
129.8 124.2 124.7
50.6 55.2 53.2
78.4 82.1 95.6
74.9 78.0 91.7
3.5 4.1 3.9
78.2 81.4 95.4
291.6 334.6 345.3
69.2 72.9 73.5
1 2 3 4 5 6 7
Natural gas, bill. cubic m
Production 584.2 581.5 594.5 620.3 634.0 636.0
Export, total 193.8 180.9 185.5 189.3 200.4 206.6
Export to non-CIS countries 133.8 131.9 134.2 142.0 145.3 158.8
Export to CIS countries 60.0 48.9 51.3 47.3 55.1 47.8
Net export 189.7 176.8 178.3 180.5 193.5 199.0
Domestic consumption 394.5 404.7 416.2 439.8 440.5 437.0
Net export in % to production 32.5 30.4 30.0 29.1 30.5 31.3
Source: Russian Statistical Agency, Minpromenergo of Russia, Federal Customs Service, authors' estimates.
Export of crude oil, which constituted nearly three quarters of the overall export of oil and petroleum products, dominated in the structure of the oil export with certain increase of the share of petroleum products. Fuel oil and diesel oil constituted major share in the export of petroleum products. Fuel oil is used in Europe are as raw material for further refining. Major part of the energy resources (85 per cent of oil, 96 per cent of petroleum products and 77 per cent of gas) was exported outside of CIS.
Analysis of the dynamics of the Russian oil export over a long period of time demonstrates that aggregate net oil and petroleum products export in 2005 reached its historical maximum and by 53.7 mill. t (by 18.4 per cent) exceeded the 1988 level, which was characterized by the maximum oil export volumes (291.6 mill. t). At the same time, the share of petroleum products in the oil export grew. Its unit weight increased from 18.2 per cent in 1990 up to 27.6 per cent in 2005 (Table 14). Resulting from a sharp reduction in domestic oil consumption (according to our estimates, it decreased from 269.9 mill. t in 1990 down to 124.7 mill. t in 2005, i.e. by half), unit weight of export of oil and petroleum products in the oil production for this period increased from 47.7 per cent to 73.5 per cent. In contrast to export of oil and petroleum products, the net gas export and its share in gas production over last years do not exceed the level of late 1990-s, although unit weight of the net gas export in its production volume remains somewhat above pre reform period (31.3 per cent in 2005 against 28 per cent in 1990).
Table 14
Structure of the Net Export of Oil and Petroleum Products
2002
2003
2004
2005 (estimate)
Oil and petroleum products Oil
Petroleum products
mill. t % mill. t % mill. t % mill. t %
256.1 100.0 291.6 100.0 334.6 100.0 345.3 100.0
181.3 70.8 213.4 73.2 253.2 75.7 249.9 72.4
74.8 29.2 78.2 26.8 81.4 24.3 95.4 27.6
Sources: Russian Statistical Agency, Federal Customs Service, International Energy Agency, authors' estimates.
These data demonstrates strengthening of the export orientation of the oil and gas sector in comparison with the pre reform period. However, one should bare in mind that this fact is connected not only with the increase of absolute export volumes but with a significant decline in domestic oil and gas consumption, which resulted from the market-oriented reforms, which took place in the Russian economy.
High levels of world oil prices predetermined significant revenue growth in the oil sector. Aggregate earnings obtained from the oil export and main petroleum products export (motor oil, diesel oil and fuel oil) in January-November 2005 reached 101.7 billion dol-176
lars, which is a record level for the whole reform period (Table 15). For comparison, one can note that the minimum level of earnings from the oil export was recorded during the 1998 fall of the world oil prices, when oil export earnings constituted only 14 billion dollars.
The share of fuel and energy products in Russian export in January-October 2005 reached 63.5 per cent (in January-October 2004 this index constituted 57.6 per cent). Unit weight of crude oil in Russian export in January-November 2005 constituted 34.8 per cent (in 2004-32.5 per cent).
Table 15
Earnings from the Oil and Petroleum Products Export in 2000-2005, bill. Dollars
2000 2001 2002 2003 2004 2005 (11 months)
Earnings from the oil and main petroleum products export 34.9 33.4 38.7 51.1 74.6 101.7
Source: calculated on Russian Statistical Agency data.
Passed year was characterized by a significant growth of tax burden in the oil and gas sector. In 2005 the new rates of severance tax on oil and natural gas were introduced. Also amended formula for calculating coefficient characterizing the dynamics of the world oil prices was introduced, which was applied to the base tax rate. From the beginning of 2005, the base severance tax rate for oil was set at 419 rubles per ton (i.e. increased by 20.7 per cent in comparison with 2004) and coefficient, which characterizes the dynamics of the world oil prices, is determined by the formula ^ = ^ - 9) x P / 261, where Ц is an average for the fiscal period level of the oil prices of Urals in US$ per barrel, P is an average for a fiscal period index of the US$-ruble exchange rate set by the Central Bank of the Russian Federation (Table 16). Severance tax rate for the natural gas was raised beginning with 2005 up to 135 rubles per a thousand cubic meters (by 26.2 per cent in comparison with 2004).
Table 16
Severance Tax Rate on Oil Production in 2002-2005
2002-2003 2004 2005
Base severance tax rate, rubles/t 340 347 419
Coefficient, which characterizes
dynamics of the world oil prices ^-8)xP/252 (^9)xP/261
Sources: Federal Law No. 33-FZ of 07.05.2004, Federal Law No. 126-FZ of 08.08.2001.
Increase of the base severance tax rate on oil production and amendment of the formula for calculating adjustment coefficient led to a noticeable increase of real rate of severance tax in 2005. Severance tax rate significantly depends on the world oil price level after the introduction of the adjustment coefficient. According to the formula, at an average dollar exchange rate of 28.28 rubles per US$ coefficient ^ grows from 0 at the price of Urals at 9 US$ per barrel up to 5.5 at the price of Urals at 60 US$ per barrel (Table 17). Calculations demonstrate that the increase of base severance tax rate, which took place in 2005, and amendment of the formula for calculating the adjustment coefficient led to an increase of the real severance tax rate at the price on Urals of 50 US$ per barrel from 7.9 US$ per barrel under the 2004 tax system to 9.0 US$ per barrel under the 2005 tax system or by 13.9 per cent. As a result, at the price of 50 US$ per barrel the share of the severance tax in the price of oil increased from 15.8 per cent under the 2004 tax system up to 18 per cent under the 2005 tax system.
Table 17
Severance Tax Rate on the Oil Production Under the 2005 Tax System, Rubles/t
_Price of Urals, US$/b_
20
30
40
50
60
Severance tax base rate 419 419 419 419 419
Coefficient ^ 1.1924 2.2764 3.3604 4.4444 5.5284
Severance tax real rate 500 954 1408 1862 2316 Increase of severance tax real
rate in comparison with the 2004 7.1 11.3 13.0 13.9 14.4
tax system, in %_
Source: Table 16, authors' estimates.
In 2005 there was a more progressive scale for calculating marginal rate of the crude oil export rate set by the Federal Law No. 33-FZ of 07.05.2004 "On Introducing Amendments in Article 3 of the Law of the Russian Federation 'On Customs Tariff' and in Article 5 of the federal Law 'On Introducing Amendments and Additions in the Second Part of the Tax Code of the Russian Federation and Also Declare Invalid Several Legal Acts of the Russian Federation'" and enact it in august 2004. This scale is designed to withdraw super profit obtained from oil exports in the circumstances of high world oil prices (Table11).
Table 18
Export Duty Rate on Oil in 2002-2005
World price on Urals
To 15 US$/t From 15 to 20 US$/t From 20 to 25 US$/t Above 25 US$/t_
Rate of duty, US$/t
2002-31 July 2004
1 August 2004-2005
0
0.35x^-15)x7.3 25.53+0.4x^-25)x7.3
0
0.35x^-15)x7.3 12.78+0.45x^-20)x7.3 29.2+0.65x^-25)x7.3
Source: Federal Law No. 33-FZ of 07.05.2004, Federal Law No. 126-FZ of 08.08.2001.
Introduced changes allowed significantly increasing the efficiency of the tax system. According to our calculations made with the help of an IET model of financial flows of the oil sector1 tax payments of the sector went from US$ 48.8 in 2004 up to (preliminary estimate) US$ 88.4 in 2005. That growth of tax payments was determined both by the growth of proper taxes and a significant growth of the world oil prices and increase of output and export volumes. As a result, the share of taxes in the oil sector revenues, according to our estimates, increased from 45.4 per cent in 2004 to 59.5 per cent in 2005. The share of taxes in the net profit equals to gross earnings minus capital and operational costs increased from 81 per cent in 2004 to 91 per cent in 2005. Correspondingly, the share of enterprises in the net profit shrank from 19 down to 9 per cent.
Consolidated results of tax payments of the oil sector are illustrated in Table 19. According to this data, the tax payments of the oil sector increased from US$15.0 in 2000 up to US$88.4, according to preliminary estimate, in 2005. In this connection, growth of tax payments was determined both by the taxation reform and significant growth of the oil production and oil and petroleum products exports and increase in the world oil prices.
Under the oil sector we understand both oil producing and petroleum refining branches of industry and part of trade and sales, which is engaged in the export of crude oil and petroleum products and in the marketing of petroleum products on the domestic market.
Table 19
Tax Payments of the Oil Sector in 2000-2005
Taxes, bill. dollars 2000 2001 2002 2003 2004 2005*
Profit tax 6.17 4.63 4.05 5.42 7.24 6.51
Severance tax 2.51 3.21 7.92 10.51 16.24 29.58
Export duty 3.92 5.60 5.45 8.65 19.15 44.17
VAT 7.06 8.92 9.21 11.77 15.21 21.09
VAT to suppliers 6.53 8.33 9.14 11.45 14.23 18.93
VAT to pay 0.53 0.59 0.07 0.33 0.98 2.15
Excises 0.45 2.19 2.11 2.22 3.51 4.22
Other taxes 1.46 1.65 1.81 1.94 1.68 1 .78
Total taxes 15.04 17.88 21.42 29.06 48.80 88.41
Preliminary estimate.
Source: authors' estimates.
The role of the severance tax and export duties sharply increased in the structure of tax payments made by the oil sector: unit weight of the severance tax in the tax structure increased from 17-18 per cent in 2000-20022 up to 33-37 per cent in 2002-2005; unit weight of the export duties increased to 39-50 per cent in 2004-2005. At the same time, there was a decline in the profit tax, reduction of unit weight of excises and other taxes. On the whole, unit weight of special taxes increased from 46 per cent in 2000 up to 80-88 per cent in 2004-2005.
In Table 20 we illustrate main indicators of the tax burden in the oil sector in 20002005. According to our estimates, the share of taxes in the oil sector earnings increased over that period from 28.3 per cent in 2000 up to 59.5 per cent in 2005, and the share of taxes in the net earnings-from 57 to 91 per cent. As a result, the share of companies in the net earnings shrank from 43 per cent in 2000 down to 9 per cent in 2005. Thus, financial resources remaining at the disposal of companies in 2005 constituted 6 per cent of the returns.
Table 20
Main Indicators of the Tax Burden on the Oil Sector in 2000-2005
*
2000 2001 2002 2003 2004 2005*
Earnings, bill. dollars 53.23 54.26 60.12 77.68 107.52 148.58
Net profits, bill. dollars 26.35 23.96 25.29 36.35 60.40 97.60
Taxes, bill. dollars 15.04 17.88 21.42 29.06 48.80 88.41
Special taxes, bill. dollars. 6.88 11.00 15.48 21.37 38.90 77.97
Net profits per a ton of extracted crude oil, dollars/t 81.54 68.82 66.62 86.25 131.64 208.10
Taxes per a ton of extracted crude oil, dollars/t 46.54 51.35 56.42 68.96 106.37 188.50
Net profits, in % to earnings 50 44 42 47 56 66
Taxes, in % to earnings 28.3 32.9 35.6 37.4 45.4 59.5
Taxes, in % to net profits 57 75 85 80 81 91
Net profits left at the disposal of enterprises 21 11 6 9 11 6
Net profits, which remains at the
disposal of enterprises, in % to 43 25 15 20 19 9
net earnings
* Preliminary estimate. Source: authors' estimates.
2 The severance tax was introduced in 2002. Prior to 2002 oil companies paid for the use of the subsoil resources, allocations for the restoration of the raw materials base and excise on oil.
As a result of the taxation reform, the progressiveness of the tax system significantly improved. Tables 21 and22 illustrate results of the model calculations of the tax burden on the oil sector in circumstances of different world oil prices for the 2002 tax system and for the 2005 tax system. In order to secure comparativeness, calculations were carried out under the 2005 tax system in both cases. As can be seen from the given data, the progressiveness of the 2005 tax system in significantly higher than the 2002 tax system. Under the 2005 tax system with the growth both of the world oil prices and of the production profitability the share of taxes in the net returns increases from 56 per cent under the price of Urals at US$12 per barrel up to 91 per cent under the price of Urals of US$50 per barrel, and under the 2002 tax system - correspondingly from 56 per cent up to 76 per cent.
Table 21
Indices of Tax Burden on the Oil Sector Under the 2002 Tax System
Price of Urals, US$/barrel
Earnings, billion dollars Net profit, billion dollars Taxes, billion dollars Taxes on a ton of extracted crude oil, dollars/t Net profit, in percent to earnings Taxes, in percent to earnings Taxes, in percent to net profit Net profit left at enterprises' disposal, in percent to earnings Net profit left at enterprises' disposal, in percent to net earnings
12 17 22 30 40 50
83.13 91.86 100.58 114.54 131.99 149.44
32.16 40.89 49.61 63.57 81.02 98.47
18.03 23.05 30.58 43.11 59.05 75.03
38.44 49.14 65.20 91.92 125.92 159.99
39 45 49 56 61 66
22 25 30 38 45 50
56 56 62 68 73 76
17 19 19 18 17 16
44 44 38 32 27 24
Source: authors' estimates.
Table 22
Indices of the Tax Burden on the Oil Sector Under the 2005 Tax System
_Price of Urals, dollars/barrel_
12 17 22 30 40 50
Earnings, billion dollars Net profit, billion dollars Taxes, billion dollars Taxes on a ton of extracted crude oil, dollars/ton Net profit, in per cent to earnings
Taxes, in per cent to earnings Taxes, in per cent to net profit
Net profit left at enterprises' disposal, in per cent to earnings Net profit left at enterprises' disposal, in per cent to net earnings
Source: authors' estimates.
Thereby, the taxation reform carried out in the oil and gas sector over the last years in Russia allowed to improve the budget efficiency of the tax system, to overcome its regres-
83.13 32.16 18.10
38.58
39 22 56
17
91.86 40.89 23.61
50.34
45 26 58
19
100.58
49.61
31.82
67.86
49 32 64
18
114.54
63.57
47.57
56 42 75
14
131.99 81.02 68.51
101.43 146.08
61 52 85
9
149.44
98.47
89.46
190.74
66 60 91
6
44
42
36
25
15
9
sive nature, neutralize negative fiscal consequences of the transfer pricing, secure transparency of tax rates and make Russian taxation system compatible with the world one.
Dynamics of certain development indices of the oil and gas sector is given in Fig. 17-20.
Oil -Fuel Oil
Source: estimated on Russian Statistical Agency data.
Fig. 17. Average export price of oil and of fuel oil in 1996-2005, dollars/t
80 n
75 -70 -65 - 10700 - 9700
60 - 55 50 8700 7700
45 -40 -35 6700 - 5700
30 -25 -20 4700 3700
15 - 2700
10 5 - 1700
0 111111111111111 УмУ 1111111111111111111111111111111111111111111111111111111111111111111111111111111 700
h- h- со со CD CD CD о о Т- ч- CN CN CN О со со LO LO
CD CD CD CD CD CD CD CD о о о о О О о о о о о О о
с го с ^ > о z cl < Q. Ш CO .Q Ш Ll_ 3 О Ш Q >. го s "о о го s Ö. < С го С > О Z cl < Q. Ш СО .Q Ш LL 3 о ш Q >. го s "о о
mill t (left scale) mill dollars (right scale)
Source: estimated on Russian Statistical Agency data.
Fig. 18. Export of oil and petroleum products in natural and monetary
terms in 1997-2005
Source: estimated on Russian Statistical Agency data.
Fig. 19. Average Producers' Prices on Oil and Gas in Dollar Terms in 1992-2005, Dollars/t, Dollars/Thousand Cubic Meters
Source: estimated on Russian Statistical Agency data.
Fig. 20. Average Producers' Prices on Motor Oil and Fuel Oil in Dollar Terms
in 1992-2005, Dollars/t
3.2. The IET Business Surveys3
3.2.1. The 2005 Dynamics of Demand for Industrial Output
The 2005 dynamics of the main indicator of Russian industrial sector - that is, effective demand - displayed a number of particularities.
First, the end of 2004 did not prove to be as negative as in the prior years. It was in the 3rd quarter 2004 that growth rates of sales of industrial produce were the lowest ones. The intensity of the growth in the demand was consequently growing and the start of the new year was not particularly gloomy for Russian enterprises.
Second, it was expected that January 2005 would substantially worsen the companies' positions. The first long winter holidays in new Russia's history resulted in a drastic decline in business activity, with the noted intensity indicator plunged (by the data not cleared off from seasonality) down to - 26% (by balance), which, however, became comparable with the prior year's results. Once cleared off from seasonality, the balance became positive, while exclusion of random fluctuations made increased its value up to 5 balance per cent. The 2004 average annual value of the balance of change of effective demand was the same (after it was cleared off from seasonal and random components).
Third, an intense rise of sales of industrial production started In February already. The demand growth rates reached 12 balance points, or became greater than results of the respective months between 2001 and 2004. Once cleared off from seasonality, the intensity of the balance growth rates became unparalleled save October 2000. In February, sales were growing in all the industries, except ferrous metallurgy and forestry complex. The champion became the industry of building materials (+16%), followed by food processing (+15%) and machine engineering (+13%). In March, the surveys registered the further solidification of the positive trends in the demand dynamics and the intensity (balance) of the demand growth prior to clearing off from seasonality hit +25%. It became an ever record-breaking value for the period between 1993-2005. Once seasonality was excluded, the value made up +11%, albeit still a breath-taking one. The greatest growth rates of the demand were reported in June 1999 (+17%). Let us note that then, in a few months post-default and given a rapid depreciation of the Ruble and the intense import substitution, it was much simpler to boost sales than today, when everyone speaks of the pressure on the domestic producers on the part of the appreciating Ruble and growing imports. The growth in cash sales continued in April, too, albeit a bit less intensively (see Fig. 21). The growth rate of the effective demand slowed down by 10 points vis-à-vis March, but it remained fairly high - it was just thrice that a greater rise of sales was registered since early 2004. The monthly dynamics of the demand between February through April 2005 became inferior just to the one reported in 2000. Seasonality excluded, it fell only by 4 points, while less the random component, it displayed that the previous, greatest for the period 200105, growth rates of sales were still there.
3 This section is based on business surveys IET holds monthly on heads of industrial enterprises since September 1992. The surveys are nationwide, with the size of the panel of a. 1,200 enterprises at which over 15% of industrial employees work. The panel is biased towards large enterprises. The questionnaire return rate is a. 65-70%.
% 30
•7 0 i | i | i 1 i | i | i |i | i | ] | i | i | i | i | 1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06
Fig.21. Change in Effective Demand, Seasonality Excluded (Balance =% growth - % fall)
Fourth, in the middle of the 2nd quarter Russian industrial sector faced serious problems with sales. As it should be expected, the May data (not cleared from seasonality) showed an absolute fall in demand for industrial output. The balance plunged by 23 p.p. down to -8, which became unique phenomenon not reported since 2002. The demand was growing only in the industry of building materials, while other sectors reported either a fall in, or the same volumes of sales. Seasonality excluded, the fall rates in demand across the industrial sector as a whole became just smaller and reached -3%. June did not help much Russian enterprises - while the effective demand began to grow, but at a very low pace that was down vis-à-vis its respective indices of the 2 prior years. Furthermore, the fall in the effective demand continued in June in the sector for machine engineering, forestry, and light industry. Cleared from seasonality, the picture became yet gloomier- the June growth rates of sales by the industrial sector as a whole proved to be the worst ones since July 2004. Until June enterprises had cherished hopes for high growth rates of sales of their output. Forecasts of the change in demand had remained at a fairly high (optimistic) level. All the sectors hoped for a rise in sales, but the non-ferrous metallurgy wherein the balance of forecasts form the beginning of the year had dropped from 29 to 1 p.p.
The volumes of sales in July did not enable Russian industrial sector to "take off" as well. After a relatively small growth in demand in June, which, nonetheless, enabled enterprises to restore the growth in their output, sales discontinued to grow in July. The balance of growth of demand became negative both by original data and after seasonality was excluded. However, its small absolute values in May-July (the balance of change in demand after seasonality was cleared off found itself within the range between -3...+1) allow the conclusion that the demand for Russian corporations' industrial output did not grow across the industrial sector on the whole, nor it fell further on. In July, enterprises lost their hopes for high sales rates and the forecasts of changes in demand underwent a drastic drop. Cleared from seasonality, the data proved to be the worst ones over the past 1.5 years. The drop in optimism with respect to forecasts of sales was noted in all the industries except for the light one.
August proved the enterprises' negative forecasts - according to their own assessments, sales growth rates remained zero. As a result, the demand for domestic industrial produce was being stagnant for three straight months already. It was the light, food-processing and fuel sectors that reported the greatest problems with sales. The absence of growth in sales compelled enterprises to fundamentally lower their forecasts of demand. After the adjustment for seasonality the balance of their forecasts lost 17 p.p. and became negative for the first time since early 1999 - at the time, under the post-default recovery the share of enterprises that expected a fall in their sales was greater than those that predicted their rise. In August 2005, however, the excess proved to be minimum, with the bulk of enterprises hoping for keeping the previously reported volumes of sales.
September, however, did not bring the long-awaited revival to the Russian industrial sector. The survey results mirrored the ongoing absence of a rise in effective demand for industrial output. Thus, the volumes of its sales remained unchanged for straight 5 months. Cleared of from seasonality, the balance of the change on demand (growth-fall) was at that time within the range between - 2 and +1, which gives enough grounds to conclude that the volume of demand for domestic production had stabilized. However, in September forecasts of sales discontinue to loose their optimism. The balance of forecasts (after the adjustment for seasonality) grew by 9 p.p. The rise in optimism of sales forecasts was registered in all the industries, with the light and food-processing sectors being the most optimistic ones.
However, the September optimistic mood failed to be realized in October. That contradicted the customs of forecasts being most often matched in the first month after the moment they were actually made. The situation with the sales of industrial production continued to worsen in October. The demand for it began to contract already - the share of responses of the fall in sales exceeded the proportion of reports of their growth. Such a situation has not been registered in October since 1998, even in the hardest in this regard 2002. Adjusted for seasonality, the conclusion was accurate - the demand growth rates reported for October 2005 proved to be the worst ones since August 2002. An absolute fall in sales was reported by the fuel, chemicals, petrochemicals, machine-building and food-processing sectors. Real problems with sales compelled enterprises to revise their forecasts in favor of their decline and they once again began to loose optimism. The balance of expected changes not cleared off from seasonality became negative for the first time since end- 2002 and the forecasts of decline in sales began prevalent among enterprises. On the sectoral level, such a situation was registered in the fuel, metallurgical and light industries. The adjustment for seasonality corrected the forecasts to the better, however, the worsening of expectations vs. September was still there.
The absolute contraction in demand for domestic industrial output ceased in November 2005, however, it was too premature to contemplate a start of a rise in sales across the industrial sector as a whole. The initial data demonstrated a minimum contraction in demand (balance -1%), while seasonally adjusted, it showed zero balance, which, because of exclusion of random fluctuations ultimately became negative (-2%). However, the November results became the best vis-à-vis the 3-4 prior months. As concerns the sectoral level, it was only forestry, wood-working and food-processing industries that reported a stable (free from seasonality) rise in demand, while either sectors reported either a fall in sales, or a slowdown of their growth.
The effective demand for industrial output finally began to climb up as late as December 2005, and the rise was fairly intense. Russian industrial sector has not for long demonstrated such impressive performance at the end of the year, save yet higher growth rates registered 5 years ago. Once adjusted for seasonality, the balance of change of this
185
critical indicator soared by 6 p.p. at once and hit +9%, which became the best value for the past 9 months. The rise of the indicator in December was driven by the metallurgical sector and those for chemicals, petrochemicals, and food processing.
3.2.2. Enterprises' Assessments of Effective Demand in 2005
The assessments of effective demand on the scale "above norm- normal -below norm" proved the aggravation of problems with sales in Russia's industrial sector in 2005. Given that in 2004 responses "normal" dominated the enterprises' responses for 10 months, in 2005 the situation changed for the worse - the domination of the enterprises satisfied with the demand was noted only in 5 months out of 12 (see Fig.22).
Fig. 22. The Dynamics of Main Assessments of Effective Demand
As a result, the difference between assessments of the 2005 results became slightly worse, albeit remained positive, i.e. the domestic producers still satisfied with the demand for their output prevailed over those who were displeased with it (see Table 23).
At the sectoral level, the situation in most cases likewise changed for the worse. The difference between "normal" and "below norm" assessments dropped for all the industries, except the non-ferrous metallurgy and industry of building materials (see Table 24). In the latter case the correlation between the assessments underwent a fundamental change - it became positive and greater by the value. The cause for such a "transition" is obvious - the current nationwide construction boom (primarily in the housing sector) fueled great volumes of demand for the construction industry. Consequently the difference between the assessments grew by 16 points- o far the best sectoral record. However, it was the non-ferrous metallurgy that found itself in far and away the most privileged position. Only as many as 13% after 24% in 2004) enterprises on average considered the demand for their output insufficient in 2005, while their satisfaction rate hit 78%. Albeit not the best result ever recorder, as shown by the table below, but still impressive, especially as long as the general background is concerned. The cause for it is evident - a very favorable state of af-
fairs on the world market for non-ferrous metals. By contrast, the fuel sector that has not less favorite position on the world market lowered its forecasts of the demand, which is likely to be attributed to a wrong pricing policy domestically wherein a substantial part of its output is sold. After the situation improved in the industry of building materials, there remained just two industries still unsatisfied with the demand - that is, machine engineering and light ones. Both saw their assessments worsened- and quite considerably.
Table 23
The Dynamics of Main Assessments of Volumes of Effective Demand (as % to the Number of Those Who Responded)
«Norma» «Below norm» Difference of assessments
1993 37 55 -18
1994 14 82 -67
1995 14 84 -69
1996 8 91 -83
1997 12 85 -74
1998 10 88 -78
1 999 25 72 -48
2000 33 64 -30
2001 35 62 -27
2002 32 65 -33
2003 45 51 -6
2004 53 45 8
2005 51 47 4
Table 24
Main Assessments of Volumes of Effective Demand in 2004 and 2005, by Industries (as % to the Number of Those Who Responded, the Average Annual Data)
« Normal» «Below norm » Difference in assessments
2004 2005 2004 2005 2004 2005
Fuel 83 70 14 30 69 40
Ferrous metallurgy 71 70 23 28 48 42
Non-ferrous metallurgy 76 78 24 13 52 65
Chemicals and petrochemicals 65 59 33 39 32 20
Machine engineering 45 42 53 56 -8 -14
Forestry complex 62 59 36 39 26 20
Construction industry 47 55 50 42 -3 13
Light 39 35 57 63 -18 -28
Food 59 59 38 39 21 20
Most non-public enterprises (AOs) maintained in 2005 their skill to adjust to the current market conditions, despite the overall aggravation of problems with sales. As shown
by the survey results, the answers "normal" once again dominated in this category of enterprises, so far as assessment of the effective demand is concerned (Fig. 23). However, the final result for 2005 proved to be down vs. the 2004 one - the average annual prevalence rate dropped from 12 to 7 p.p. The situation has not changed over the year in question in the public sector, with the same 11 p.p. domination of the "below norm" answers. Notably enough, in 2005 this sector only once 9in September) happened to demonstrate the prevalence of satisfaction with the demand, while in 2004 such a situation was noted four times. The gap between the public sector's assessments and those made by the private one became narrower, but the former has failed to reach satisfaction with effective demand and most of its enterprises have ultimately failed to adapt to the current market conditions. More than that, with sales problem clearly intensifying and industrial growth decelerating, they demonstrated independence from these processes, which can hardly be conceived as a success in reforming the industrial sector.
Fig.23. The Average Difference between Main Assessments of Demand by property Forms
The gap between the level of adoption to Russian market conditions between enterprises of different sizes was still in place in 2005. As before, leaders in this regard are huge enterprises with the number of employees over 2,000 (see Fig.24) - in April and September 2005, the proportion of "normal" assessments of the demand in the group was 60% and it was at 24 p.p. over the proportion of responses "below norm". The average annual excess made up 12 p.p., but failed to overrun the 18 p.p. difference reported in 2004. As concerns the group of medium-sized enterprises, in 2005, on average dominating were assessments "below norm", while the excess remained unchanged (-9 p.p.). This result is the best over the whole period of monitoring. However, in late 2005 these enterprises managed to reach the level of satisfaction with the demand - between August to December the proportion of assessments "normal" was steadily over the one of assessments "below norm". Our surveys first registered such a situation in 2003, but it had been lasting for just three months then and the value of the excess was small (+3 ...+6 p.p.). By end-2-5
the excess rate had already reached 10 p.p. and is likely to grow further on. The group of small-size enterprises (with the number of employees under 500) demonstrates the lowest level of adjustment to the Russian market. As in the past years, they likewise find themselves in the negative segment and too far from the transition to the positive one - the 2005 gap between the proportion of responses "normal" and those "below norm" accounted for -27 p.p. and proved to be worse than in the prior year. The best value in 2005 was registered in September and made up -11 p.p., while the 2005 maximum value in the group of medium-sized enterprises was 10 p.p. and that in the group of large enterprises was 24 p.p.
60
%
40 20 0 -20 -40 -60 -SO -100
1/94 1/95 1/96 1/97 1 /98 I >99 1/00 1/01 1/02 1/03 1/04 1/05 1/06
Fig.24. Difference between Main Assessments of Effective Demand by Enterprises'
Sizes ('Normal"-"below Norm")
In 2005, Russian enterprises reported their existing production capacities were sufficient to secure the match between their output and normal, in their view, volumes of demand. However, the surplus of the capacities was minimum. This can be concluded on the basis of analysis of the dynamics of balances of assessments of capacities computed for two main assessments of the demand ("normal" and "below norm"). After 2004, when the average balance of assessments for normal demand for the first time became negative, the value of the indicator once again bounced back to the positive zone, albeit with its absolute value being minimum. Thus, in last 2 years the national industrial sector was balancing on the verge of a minimum possible match between demand and production capacities (see Fig. 25).
Fig. 25. Average Annual Balances of capacity Assessments for Different Assessments of Demand
The excess in capacities in 2005 was associated with lower growth rates of demand, rather than the growth in their placement into operation, albeit the enterprises' investment activity has also contributed to the expansion of production capabilities of the industrial sector. In early 2005, as many as nearly 1/3 of Russian enterprises considered the 2004 actual level of capital investment to be sufficient due to expected changes in effective demand. This index (31%) appeared the best one over the whole period of its monitoring. In the first post-default years, investments satisfied demand just at 15% (see Table 25).
Table 25
Assessment of Sufficiency of Capital Investment in Conjunction with Expected Demand (as % to the Number of Those Who Responded)
1997 1998 1 999 2000 2001 2002 2003 2004 2005
More than enough 1 1 1 1 1 1 2 1 4
Sufficient 16 13 15 15 21 22 20 29 31
Insufficient 83 86 84 84 78 77 78 70 65
3.2.3. Constraints to Industrial Growth in 2005
While the 2005 dynamics of effective demand tended to be negative, rather than positive, and resulted in worse market positions of most Russian companies, the survey data witnessed that the changes in output did not appear to have similar tendencies (see Fig. 26).
70 [ I 1 l | I | l | I | I | I | I | l | I | I | 1 | I | '
1/93 I /94 I /95 1 /96 I /97 I /98 1 /99 I /00 1/01 I /02 1 /03 I /04 I /05 I /06
Fig. 26. Changes in Demand and Output Cleared from Seasonal and random Fluctuations (Balance=% of growth- % of Decline)
A rapid growth at the beginning of the year enabled enterprises to boost the production intensity without the risk of outpacing demand. In March, the balance of the change in output grew up to +47%, which appeared an absolute record-breaking value over the whole period of monitoring this indicator. Once cleared from seasonality, it plunged to +24%, however, it retained certain advantages: the survey evidence that output has not grown at such a pace since 2000. The intensity of the growth in output fell to +15% ...+19% in the 2nd and 3rd quarters (by the balance), followed by a growing intensity of the production activity.
The quarterly monitoring of obstacles to growth in output (see Fig. 27) displays emergence of new trends in the structure of the factors that inhibit the advancement of the national industrial sector, however, one can reckon that the old defects aggravated, while new ones emerged.
90
%
75
60
45
30
15
0 I I I I I 1 I I I I I I i I I I I I -| I I I I [ I I ! /93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06
Fig. 27. Obstacles to Growth in Output
First, the enterprises began to more frequently cite insufficient domestic demand as an obstacle to growth in output. While in late 2004 only 38% of them referred to this factor, which can be considered a historic minimum, as early as in the 2nd and 3rd quarters the respective frequency grew up to 52-53% and it once gain formed the most widespread obstacle to growth in output. In 2005, it was an obstacle for 50% of enterprises on average. The same situation was also noted in all the industries - a low demand became the most frequently cited obstacle to growth in output and as such it inhibited production expansion at a range between 43% of enterprises in the sector for chemicals and petrochemicals up to 52% of metallurgical companies (see Table 26). On the sectoral level the inhibiting impact of demand dropped over the year only in the sector for chemical and petrochemicals (from 52% to 43%) and remained practically unchanged in the industry of construction materials (49 after 50%). In other sectors, the frequency of the obstacle grew largely by 59 p.p., while it was only metallurgy where the respective references rose by 21 p.p. at once (from 31 up to 52%). Let us note that the numbers of enterprises in different sectors that cited this obstacle in 2005 have converged, while the standard bias dropped to 3.21 after 7.67 reported in 2004. The maximum value of this particular indicator was registered in 1999 when it accounted for 14.64. At the time, the reference to demand as an obstacle to growth in output had been in the range between 22 (the forestry complex) and 65% (the construction industry).
Second, low sales were followed by lack of liquid assets. By the 4th quarter the frequency of its citing had grown up to 49%, thus showing a drastic rise at 7 p.p. after the 3rd quarter. The results proved to be the worst on over the past 9 quarters. However, as in early 2005 liquid assets inhibited rise in output not so frequently (they were still under the impact of successful results of sales of end-2004), the 2005 result proved to be just at 1 p.p. worse than that of 20044. The outspread of this obstacle in 2005 across industries varied very considerably - with the standard bias being 10.21, form 27% in metallurgy to 52%
4 Given that, completion of liquid assets is the most popular way of using borrowed capital. In 2005, 70% of enterprises reported that they used borrowed resources for that particular purpose, while 36% of them spent borrowed capital on production rearmament, and 24% - to expand their production.
in machine engineering. The change also varied seriously vis-à-vis 2004. In machine engineering and forestry complex it formed an obstacle to a greater number of enterprises, while metallurgy saw no fundamental change, and its inhibiting influence dropped by 4-9 p.p. in other industries.
Table 26
Frequency of Citing the Domestic Demand as an Obstacle to growth of Output in Industry Branches ( as % to the Number of Those Who Responded,
the Average Annual Data)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Industrial sector on the whole 56 64 61 63 51 45 47 62 58 46 50
Metallurgy 64 66 57 63 38 35 64 81 61 31 52
Chemicals and petrochemicals 50 71 69 63 51 47 46 65 54 52 43
Machine engineering 62 63 62 66 59 54 51 60 62 49 51
Forestry complex 49 70 55 45 22 26 32 39 29 38 47
Construction industry 55 67 66 73 65 45 44 59 53 50 49
Light 54 58 49 53 42 40 37 53 47 39 48
Food 52 51 62 62 56 52 41 46 49 40 45
Standard bias 5.80 7.00 6.72 9.13 14.64 9.54 10.39 13.75 11.14 7.67 3.21
Third, in 2005 the third most often cited obstacles became 2 factors that differ in popularity in the respective literature - that is, lack of qualified staff and competing imports. While the former impede the boost of output at 26% of enterprises (2 p.p. up vs. 2004), while the latter - at 25% (5p.p. up). Let us consider the lack of stuff, as competition with imports will be considered in a greater detail below.
Fig. 28. Resource-Based Obstacles to Production Growth
As concerns other resource-based obstacles, lack of staff has long and steadily been on the top o the list (see Fig. 28). In the past 5 years it has overrun by frequency of
referring to it once such a very widespread factor as the lack of raw materials and other material resources, while since 1999 (when its value slid to absolute minimum) the number of references to it were growing constantly and reached its absolute maximum by late 2005. It was machine engineering that cited the lack of staff most often in 2005 (35% of enterprises). In this particular industry branch lack of staff has traditionally held the third position, following insufficient demand and lack of liquid assets. Competing imports in machine building in 2005 lagged behind lack of staff by 11 p.p., being even inferior by referring to them to insufficient export demand. It is worthwhile noting that in the sector for machine engineering the lack of staff has always (except for 1998) constrained output at a greater number of enterprises than competing imports did (see Table 27).
Table 27
Obstacles Facing Machine-Engineering Enterprises' Attempts to Boost Output (as % to the Number of Those Who Responded, Average Annual Data
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
None 0 0 1 0 0 1 1 1 1 3 3
Domestic effective demand 62 63 62 66 59 54 51 60 62 49 51
Low export demand 12 13 20 20 21 22 23 25 29 28 25
Competing imports 6 11 10 11 5 6 10 16 21 22 24
Consumers' non-payments 75 74 72 69 44 37 32 39 30 19 21
Lack of liquid assets 78 73 72 71 69 65 60 63 56 50 52
Shortage of qualified staff 19 12 12 9 17 29 33 30 30 34 35
Lack of equipment 5 3 4 3 5 15 19 16 18 21 17
Lack of raw materials 20 26 27 26 29 26 22 17 12 11 10
Lack of electricity 6 6 5 6 4 7 7 4 5 2 2
Others 9 7 8 5 5 4 7 5 7 6 4
The shortage of staff in Russian industrial sector is still combined with an excessive employment. The quarterly monitoring of assessments of the current number of staff in conjunction with expected changes in demand show that in 2005 some 12% of enterprises reported more than sufficient number of personnel. However, this value has declined over recent years and by late 2005 it reached its minimum ever observed over the whole period of monitoring of the indicator in question (1996-2005). By contrast, the proportion of enterprises with a normal quantity of staff reached its maximum (74%) in 2005. The best results by the latter indicator were reported by the fuel (91% of enterprises with an adequate number of staff), metallurgical (86%) and food-processing (85%) industries. The other, relatively close, pole is formed by machine engineering (86%) and light (67%) industries. In 2005, some 14% of enterprises on average assessed the number of their staff as being insufficient (vs. 15% in 2004). As a result, the average annual balance became negative, which testifies to the shortage of employees in the national industrial sector and particularly so far as demand is concerned. Such a situation was last time registered in 2000-01, i.e. right in the aftermath of the default and in the period of an intense and quite unexpected rise in demand and output. In 2005, the national enterprises' position was different -demand was growing, albeit not as intensively as before and it was hardly unexpected. So, the enterprises' problems with staff reported in 2005 testify to the formation of indeed long-term negative tendencies with respect to staff problems in the sector. The cause for then lies in an intense staff migration to other sectors (primarily those for services and
trade), which is driven by low salaries and the absence of an inflow of new staff from universities and secondary special educational institutions.
50
■30 -
1/96 1/97 1/98 1/99 1/00 1/0! 1/02 1/03 1/04 1/05 1/06
Fig. 29. Balances of Assessments of Staff Due to the property Form (Balance=More than Enough -Less than Enough)
In 2005, public enterprises saw the situation with staffing drastically complicating (see Fig. 29). The average annual balance of assessments fell to -13%, which became the worst result over the past five years. Analogous problems with staff (with the balance accounting for -18%) emerged in the sector in 2000, but at the time they were explained by an intense post-default rise of sales and output. Given that the non-public sector of the national industrial sector did not experience substantial biases of the actual number of employees from the desired one, it can be argued that public industrial enterprises have begun being defeated by non-public ones on the labor market. This became evident after the 1998 default (see Fig. 29). Until 1998 employment assessments balances had displayed the existence of roughly similar problems in the public and non-public sectors, wherein the staff was excessive to a roughly equal extent. However, with the start of the post-default growth public enterprises sensed serious staff shortages - in the 4th quarter 2000, 39% of enterprises reported they lacked workers to fulfill orders. Join-stock companies proved to be better prepared for the rise in output and finished 2000 with zero balance. It was in the 3rd quarter 2002 that non-public enterprises reported the greatest staff shortages (22%). The 2002 annual balance of employment assessments for the non-public sector in industry proved to be extremely high (+8%) vs. other pos-default years. The 2001 balance was -1% (a small shortage of staff), while in 2002-05 it steadily was being +1% (a small excess of staff). Notably enough, given the specificity of the national market and a low mobility of labor resources, enterprises clearly prefer excessive staff to its shortage.
50
%
40
30 --
20 --
10
0
-10 --
-20 I i I i I i I i I i I i I i I i I i I i I i I i I i I i I i I i I i I i I i I i 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06
Fig. 30. Balances of Staff Assessments due to the Size of an Enterprise (Balance=More - Less than Enough)
The excess of workforce was no longer in existence at large enterprises in 2005. The survey results show that until recently large producers had kept a greater surplus of staff than small- and medium-sized ones (see Fig.30). Post-default and through the end-2004 the balance of their assessments more often was positive than negative and sometimes it would reach great values (+ 14%...+16%). The "reserve" had exhausted by the 4th quarter 2004, thanks to fairly good demand and production indicators, as well as the staff migration to sectors with greater salaries paid. The flagship industrial enterprises consequently ran into staff shortages in early 2005. However, the decline in business activity at the end of the year allowed them to get rid of the problem in question and return to a small surplus of workforce. The group of medium-sized enterprises likewise reported negative balance. This particular sector of the national industry had to operate in the conditions of staff shortages already since mid-1999, which is why the 2005 result (-1%) looks as a successful one, rather than displays an aggravation of the challenge. Until 2005 the annual balance of assessments in this group would slid to -6.-7%. The greatest problems with staff persisted in the group of small enterprises (with the number of employees under 500). Their 2005 annual balance made up -9%, albeit it can also be viewed as an improvement of the situation, for in 2004 it had been -13% and -10% - in 2003.
Fourth, the year of 2005 saw the discontinuation of progress with payments and settlements in the national industrial sector. According to enterprises' assessments, last year, the inhibiting impact of non-payments on rise in output grew up to 20% on average vs. 17% reported in 2004. The later result still is the best one from the start of an extended monitoring of impediments in 1995. Pre-default, the non-payments affected up to 77% of enterprises (in 1995) and at best would slide to 59%. Right after August 1998 the situation with settlements began to improve and as early as in the 3rd quarter 1999 non-payments formed an impediment just to 30% of Russian industrial enterprises (with the 1999 average annual result being 39%). The inhibiting effect of non-payments has been on decline over the next years, with 2002 being an exception - that year, problems with sales and slow-
down in the rise in output triggered an expansion of non-payment practices up to 32%. In 2004, the frequency of citing non-payments was steadily low and fluctuated between 16 to 19% from quarter to quarter.
Table 28
Frequency of Referring to Non-Payments as an Obstacle to Rise in Output in Industries ( as % to the Number of Those Who Responded, Average Annual Data)
1995 1996 1997 1998 1 999 2000 2001 2002 2003 2004 2005
Metallurgy 60 51 52 54 25 11 21 23 11 6 11
Chemicals and petrochemicals 67 72 70 59 44 23 27 27 41 19 16
Machine engineering 75 74 72 69 44 37 32 39 30 19 21
Forestry complex 52 68 67 48 22 17 17 19 7 6 15
Construction industry 77 69 71 61 48 39 24 26 32 27 20
Light 74 63 55 49 25 19 14 15 18 15 19
Food processing 68 62 63 48 31 22 14 13 15 13 16
Standard bias 9.15 7.74 8.14 8.03 11.04 10.40 6.78 8.62 12.49 7.70 3.52
In 2005, it was metallurgical enterprises that experienced minimum problems with non-payments (see Table 28). Only 11% of the sector on average believed non-payments inhibited their production growth. Interestingly, in 2004 the respective result was even better. Analogous situation was noted in the forestry complex wherein the frequency of citing non-payments grew from 6% in the prior year to 15% in 2005. The most affected by nonpayments output in 2005 was reported by machine engineering and industry of building materials. However, if the former sector referred to them more often than in the prior year (21% vs. 19%, respectively), the latter reported their decline from 27 to 20%. The construction industry that back-ups the construction boom as consequently reported a minimum inhibiting impact of non-payments.
3.2.4. The Dynamics of Competition Relationship in Russia's Industrial Sector in 2005
The year of 2005 became a period of a drastic intensification of competition within the national industrial sector, as well as with Far-and Near-Abroad producers. The aggregate competition indices IET computes twice a year demonstrated the greatest rise since the start of monitoring of this particular indicator in 1995. The aggregate competition index grew by 0.39 p. and hit an unprecedented 3.65 (see Table 7).
In 2002, driven by the domestic competition the indicator rose as high as 3.25 maximum. By contrast, in 2005, the competition on the Russian industrial enterprises' sales markets was largely steered by their rivalry with Near- and Far Abroad counterparts. The indices of these directions of competition showed a 0.45 p. growth each over the year. Our surveys have not ever registered such a drastic rise. By contrast, in 2004, enterprises assessed competition as weakening in all the areas and particularly with the Near-Abroad producers.
The competition between national producers themselves has remained the strongest one (see Fig. 31). In 2005, the level of the domestic competition for the first time ever overrun the level "moderate" and fixed itself on a new one. The competition with Far-Abroad producers also intensified drastically, with its 2005 values of its index being over the pre-
default peak. In other words, today Russian producers' goods compete with imports with an unparalleled intensity.
Table 29
Values of Annual Indices of Competition with Different Producers
Russian Near Abroad Far Abroad Aggregate index
1995 3.39 2.65 2.79 2.94
1996 3.46 2.82 3.01 3.10
1997 3.55 2.81 3.02 3.13
1998 3.52 2.79 3.09 3.13
1999 3.61 2.73 2.87 3.07
2000 3.60 2.70 2.80 3.03
2001 3.73 2.89 2.90 3.17
2002 3.87 2.93 2.96 3.25
2003 3.95 2.92 3.08 3.32
2004 3.94 2.82 3.03 3.27
2005 4.20 3.27 3.48 3.65
Fig. 31. The Dynamics of the Competition Level with Different Producers Across the Industrial Sector as a Whole
The domestic competition intensified in all the industry branches (except or the light one) and in each of them it reached its historic maximum values. Interestingly, industry-specific competition indexes display no strong difference from each other (as it used to be before) - enterprises in all sectors experience a similar and fairly strong competition pressure on the part of other Russian producers. It was just the light industry wherein the surveys failed to register any growth in the domestic competition - its respective index slid
(albeit insignificantly) to its 2003 level (see Fig.32). This particular industry branch reported a considerable growth in competition in 2002, but it has been stable and found itself on a relatively high level (evidently above the mark "moderate") ever since. In 2002, the light industry saw its competition with imports intensify - at the time, its index grew by 0.77 points and for the first time ever after the default it overrun the level " loose". It slightly bounced back shortly afterwards, however, ultimately remained above that mark. The next time the competition with imports from Far Abroad rose rapidly was in the first half 2005 -at the time, it nearly climbed up to the "moderate" mark and the level of intensity of the domestic competition. It slid back again, however, at the end of the year.
Fig. 32. The Dynamics of Competition with Different Producers in the Light Industry
The food-processing industry reported in 2005 a minimum growth in the domestic competition (see Fig. 33). In the 2nd half 2005 its competition index reached its historical peak and became slightly greater than its respective values of 2002 and 1996. The domestic competition level in the industry has been the most stable and the greatest one (very rarely sinking below the mark "moderate") over the past decade. In the industry, the competition with imports begins to approach the pre-default level, with the last index value already being over the April 1998 competition intensity assessment (the last one prior to the default), however, it still is 0.40 down compared with the peak values of the index registered in 1996-97. Nevertheless, an absolute level of competition with Far-Abroad imports in the sector is still very low. Since early 1998 it has never overshot the mark "loose", while in 2002 it slid nearly to the level "absent". Indeed, imports are not a threat to the domestic food-processing sector.
Fig. 33. The Dynamics of Competition with Different Producers in the Food-Processing Industry
The decade of monitoring of factors that intensify competition on the Russian industrial enterprises' sales markets demonstrated interesting results that appeared quite correspondent to the traditional statistical available data (see Table 30). First, enterprises referred to contraction in the volume of domestic demand and rising volumes of import. In 2005, these factors were cited by 40% of enterprises each and more frequently than before. The contribution of the domestic demand to formation of competition has been falling from 81% reported in 1996 and reached its minimum (31%) in 2004. The impact of import was minimum in 1999 and it was growing since 2001, reaching its maximum in 2005. Second, enterprises quite often cited in 2005 such a factor of formation of competition as other Russian producers' penetrating their sales markets. In 2003-04 this particular factor topped the respective list and even supplanted the traditional import, while prior to the default references to it were as or even more frequent than those to import. Unlike the aforementioned factors it has not undergone such intense fluctuations from year to year. Third, it seems that the price competition between Russian producers is fading and gives room to other, more civilized, methods of struggle for consumer. However, import prices begin to exercise their pressure on Russian producers' price policies. In 2005 they began troubling some j of Russian producers, which was more often than Russian competitors' prices and, most importantly, the pre-default import prices. The better quality of imports also contributes to intensification of competition on the sales markets for Russian goods, particularly in the machine engineering (26% of enterprises referring to this factor). Enterprises in other sectors are far less afraid of import, which is grounded and easy explainable in the case of the food-processing industry (with just 3% of enterprises being concerned of that), but not in the light industry (11%).
Table 30
Frequency of Citing the Factors That Intensify Competition on the Russian Industrial Enterprises' Sales Markets, as %
1996 1997 1998 1 999 2000 2001 2002 2003 2004 2005
Contraction of the domestic effective demand 81 81 76 64 48 53 53 37 31 40
Growth in import volumes 31 23 28 8 9 14 23 30 30 40
Better quality of imports 7 9 11 7 14 10 18 20 26 24
Low prices for imports 17 14 18 5 9 12 12 24 16 26
Possibility to advertise the produce 4 2 4 3 6 4 5 8 4 6
Price containment by Russian rivals 14 15 15 20 23 23 26 31 24 22
Russian producers' penetration to the sales markets 18 25 25 26 34 36 44 42 45 35
Activity by the Federal Anti-Trust
Committee and the RF Govern- 8 9 4 6 3 5 6 4 3 6
ment
Trade and intermediate organizations' activity 9 13 16 24 22 18 15 15 16 12
Others 11 6 6 6 9 7 5 2 2 7
Note. In 1998 the question was posed in March.
3.3. Investment Processes in the Real Sector of the Economy
3.3.1. Domestic Investment in Fixed Assets
One of the specific features characterizing the development of the Russian economy in 1999 through 2005 is the outpacing rates of growth in investments in fixed assets as compared with the GDP dynamics and the output of products of base sectors of the economy.
The stable positive dynamics of production has changed the situation observed in the investment sector. The post-crisis recovery of economic growth has initially based on the mobilization of internal resources and use of competitive capacities. The expansion of investment demand has been registered since 1999 and supported by exceptionally favorable changes in the price situation on world markets of hydrocarbon raw materials and metals (see Fig. 34), on the one hand, and by an active policy pursued by the Russian businesses, which was aimed at the filling of the niches existing on the domestic market with Russia-made goods, on the other hand.
The growth in the profitability of production and increasing business earnings have determined the expansion of the demand for capital goods. Due to the fact that manufacturers were oriented towards the implementation of an active modernization and reconstruction of production, the export sector and manufacturing industries have begun to increase demand for machinery and equipment. As concerns the technological structure of investments, since 2000 there has been observed a growth in the share of expenditures for machinery and equipment (see Table 31).
Fig. 34. Rates of growth in GDP and Investments in Fixed Capital in 1998 through 2005, in per cent of the Figures Registered in the Respective Period of the Preceding Year
Table 31
Technological Structure of Investments in Fixed Assets in 1992 through 2005,
in per cent of the Total
1992 1995 2000 2001 2002 2003 2004 2005*
Investments in fixed assets, total 100 100 100 100 100 100 100 100
including:
Construction and installation
works 58.0 63.9 46.8 47.4 47.9 49.6 48.4 48.6
Equipment, tools, fixtures 20.5 21.9 34.3 32.9 35.6 35.0 34.7 35.7
Other capital works and expendi- 21.5 14.2 18.9 19.7 16.5 15.4 16.9 15.7
tures
* Preliminary data. Source: Rosstat.
An exceptionally high growth in investment demand observed in the year 2000, which was caused by a dynamic increase in the proceeds of extractive industries has been replaced by rather weak dynamics of 2001 through 2002 observed at the backdrop of contracting domestic demand and falling profitability of production resulting from the changes in relative prices registered on the domestic and external markets. The recovery of the
outpacing rates of growth in investments in fixed assets as compared with the GDP dynamics has been observed since the early 2003 and was accompanied by a growth in prices on the world markets of fuel and energy resources, as well as the raw materials markets. In 2005, the amount of investments in fixed capital increased by 10.5 per cent in comparison with the figures registered in the preceding year and made 3431.0 billion rubles.
In spite of the positive impact the proceeds of the economy derived from the external economic activities had on the rates of economic growth, their influence on the dynamics of investment activities was limited by the trend towards a decline in the level of transformation of the gross national savings in investment expenditures. Under the impact of the disproportions in the movement of fixed capital, investment expenditures, and the dynamics of domestic mechanical engineering existing in the Russian economy, the domestic market was influenced by the dynamic growth in import of machinery and equipment. In the period from 2000 till 2005, in which investments in fixed assets increased by 80.8 per cent, the increase in production in mechanical engineering made 68.0 per cent, whereas the scale of import of machinery, equipment, and vehicles grew 3.6 times.
The decline in the share of imports in the overall consumption of mechanical engineering products was observed for a short time only (in the period from the 4th quarter of 1998 till the 3rd quarter of 1999). The dynamics of output of capital goods across branches of mechanical engineering reflected the immediate reaction of Russian businesses to the shifts in the business situation on the domestic market. As concerned the output of investment goods, in this sphere the branches engaged in the production of equipment for oil and chemical industries, as well as the branches of mechanical engineering traditionally oriented towards the domestic market - railroad and metallurgical mechanical engineering -established themselves as the leaders. The intensive development of infrastructure industries had given an impetus to the increase in the volumes of production of road-building machinery and hoisting and conveying equipment.
However, as the products of domestic mechanical engineering have been loosing their competitive advantages with respect to similar imported products in the price / quality ratio terms, the situation on the market of capital goods changed dramatically. The surge in demand for imported machinery and equipment was registered in the year 2000 and since that time the trend towards outpacing rates of growth in the import of machinery and equipment in comparison with the rates of development of domestic mechanical engineering has become stable and corresponded with the dynamics of investment activities. In 2005, the amount of investments for purchase of imported equipment made 213.3 billion rubles, or 20.6 per cent of the total amount of investment in machinery, equipment, and vehicles.
The growth in proceeds derived by the economy at large, household savings, and the enhancing activity of the banking sector have positively affected the nature of development and permitted to overcome the trend towards the deceleration of the rates of investment activities, which formed in 2001 and 2002. The principally new factor of economic growth was the shift from the financing of investments in fixed assets at the expense of own funds of enterprises and organizations to the expanding participation of borrowed funds. It was a graphic illustration of the qualitative changes occurring in the mechanism of investment development oriented towards the rationalization of flows of investment resources. In 2005, the share of borrowed funds amounted to 52.3 per cent of the total amount of investments in fixed assets, what corresponded to the figures registered in 2000, when there was observed the peak of investment demand in the whole period of recovery growth.
In contradistinction to the situation of 2004, in the structure of investment resources there was observed a 2.2 p. p. growth in the share of budgetary funds in the financing of
investment expenditures initiated by the increase in investments at the expense of the federal budgetary funds. In 2005, the share of banks in the crediting of investments made 6.5 per cent decreasing by 1.4 p. p. in comparison with the figures registered in the preceding year. At the background of moderate behavior of the banking sector, there persisted the trend towards increasing participation of insurance and investment companies, industrial and trade enterprises, as well as foreign capital in the financing of investment activities.
Fig. 35. Rates of Growth in Investments in Fixed Capital, Production and Import of Capital Goods in 1992 through 2005, in per cent of the Figures Registered
in the Preceding Year
Among the factors positively affecting the dynamics of credits and attraction of borrowings from other organizations there may be specifically mentioned the dedollarization of household savings. The decline in the amounts of foreign exchange denominated cash on hand disposed of by households and the scale of conversion of this cash in rubles was accompanied by the increasing amounts of deposits with banking structures. Given the average level of profitability existing in the economy, the low real costs of credit resources determined the growth in the number of enterprises making borrowings in the sectors of the economy oriented towards the domestic markets.
In spite of the observed deceleration of the rates of economic development, foreign investors are still interested in the Russian market. By the end of 2005, the amount of accumulated foreign capital made US $ 111.8 billion, whereas the share of foreign investments in the total amount of investments made in the national economy remained at about the average level registered in 2003 and 2004. No doubt that the lack of confidence in the Russian institutions introduced to protect property rights results in higher risks associated with provision of borrowings for foreign banks. However, the stable growth of proceeds derived from the export of oil and natural gas, as well as the assignment of the investment grade rating to Russia completely justifies the retention of high rates of investment in Rus-
sia for the international banking business from the viewpoint of the geographical diversification of activities. Although the dynamics of foreign investments made in the Russia's economy in 2005 were at about the level registered in the preceding year, foreign direct investments increased by 38.8 per cent and their share in the total amount of foreign investments grew from 23.3 per cent to 24.4 per cent. The trend towards the growth in the amount of foreign direct investments reflects the reaction of foreign investors to the improvement of the components of the investment climate existing in Russia and the implementation of reforms. As concerns foreign investors, since recently they have preferred to invest in industry. Trade and public catering alongside with the general commercial activities relating to market servicing remain the next most attractive objects for investments.
Table 32
Structure of Investments in Fixed Assets as broken down by the Sources of Financing, in per cent of the Total
2000 2001 2002 2003 2004 2005
Investments in fixed assets, total 100 100 100 100 100 100
Including investments as broken down
by the sources of financing::
Own funds 47.7 49.4 48.0 46.2 46.8 47.7
of which:
profits 23.4 24.0 20.5 17.2 18.3 22.4
Borrowed funds 52.5 50.6 52.0 53.8 52.6 52.3
of which:
Bank credits 2.9 4.4 4.8 5.2 7.3 6.5
Including credits extended by foreign banks 0.6 0.9 0.5 0.8 1.3 1.0
Borrowings from other organizations 7.2 4.9 6.0 8.6 7.3 7.3
Budgetary resources: 22.0 20.4 19.6 18.8 17.4 20.1
from the federal budget 6.0 5.8 6.0 6.5 5.1 6.7
from budgets of RF subjects and local budgets 16.0 1 4.6 13.6 11.5 11.3 12.4
Foreign investments in the total amount 4.7 4.5 4.1 4.7 5.0 4.8
of investments in fixed assets
Source: Rosstat.
In the period from 2000 till 2005, investments in the sector of services increased from 54.7 per cent to 56.8 per cent of the total amount of investments in the national economy, whereas the specific weight of the sector of goods declined from 45.3 per cent to 43.2 per cent over the same time. Redistribution of investment flows in the sector of services was accompanied by an increase in the share of infrastructure branches. In the period from 1999 till 2005, on the average the share of transport, communications, and trade accounted for one fifth of the total amount of investments in fixed assets as compared with 12 per cent registered in the period from 1992 till 1996. Over the years of reforms, the share of transport in the structure of investments in the real sector of the economy has increased almost two times. In 2005, the share of transport in investments increased up to 22.1 per cent as compared with 20.3 per cent observed in 2004. While in 1992 the share of investments in communications made less than 0.6 per cent of the total amount of investments in the national economy, in year 2000 this figure made 2.6 per cent, whereas in 2003 and 2005 this indicator was registered to be at 4.8 per cent and 6.7 per cent respectively. The enhancing investment activity in infrastructure branches and the growing de-
mand for services of these branches are indicators of the economic potential of growth, moreover taking into account the fact that the investment policies pursued in this sector are mainly oriented towards the settlement of problems expected to be encountered in the future.
Source: Rosstat.
Fig. 36. Dynamics of Growth in Investments in Fixed Assets as broken down by the Sectors and Branches of the Economy in the Period from 2000 till 2005, in per cent of the Figures Registered in 1999
In 2005, the dynamics of investment demand were determined by the aggregate impact of factors of changes in the sectoral, technological, and reproduction structures of the national economy. The redistribution of investment flows was accompanied by the increase in the share of the service sector. The share of investments in transport and communications in the total amount of investments in fixed assets made in 2005 made 28.8 per cent growing by 3.8 p. p. in comparison with the figures registered in the respective period of the preceding year. The structure of investments in transport was determined by the outpacing rates of growth in investments in railroad transport (119.8 per cent) in comparison with the respective figures characterizing investments in pipeline transport (106.4 per cent). It should be mentioned that in 2005 at the backdrop of steadily increasing demand for services provided by trade there was observed the enhancement of investment activity in this sector of activities up to 113.1 per cent as compared with 108.1 registered in 2004.
Fig. 37. Changes in the Rates of Growth in Investments in Fixed Assets as broken down by the Types of Economic Activities in 2005, in per cent of the Figures Registered in the Preceding Year
In 2005, the share of investments in fixed assets in the industries manufacturing goods persisted at about the same level, as registered in the preceding year. This fact was determined by the rather moderate growth of investments made in industry. It should be noted that in comparison with the figures observed in 2004, there was registered a decline in the rates of enhancement of investment activity in the export oriented extractive sector, whereas the share of manufacturing industries oriented towards the domestic market grew. In 2005, the share of manufacturing industries in the structure of investments in fixed assets in the sphere of industry made 43.3 per cent, whereas these indicators characterizing investments in extractive industries and production and redistribution of electrical power, natural gas, and water were registered to be at 37.4 per cent and 19.27 per cent respectively. The increment in investments in manufacturing industries made 10.9 per cent in 2005.
An analysis of business activity in industry observed in industry in the period from 2000 till 2005 reveals that fuel and energy industries have had the most significant impact on the dynamics and structure of investments. The share of fuel industries in the amount of investments in fixed assets made in 2000 through 2005 was on the average at 18.7 per cent. In 2005, the share of extraction of fuel and energy mineral resources accounted for 13.2 per cent (15.2 per cent in 2004) of the total amount of investments and 1.8 per cent of the amount of production of fuel products. However, in absolute terms the investments in extractive industries declined by 2.6 per cent and made Rub. 362.7 million.
In 1999 through 2001, the favorable external and internal business situation determined the growth in the amounts of investments in oil extraction 2.3 times, whereas these indicators characterizing the amounts of investments in oil processing and natural gas industry increased 2.1 times, while the total amount of investments in industry grew 1.58 times and in the economy at large - 1.36 times. However, as the situation changed in the period from 2002 till 2005, in the oil sector there was registered an average annual decline
in the amounts of investments at the level of about 9.0 per cent. In 2004, the amount of investments in oil extraction declined by 20.3 per cent. Although in early 2005 the growth of investments in oil extraction increased by almost one third in comparison with the figures registered in the 1st quarter of 2004, these developments failed to help overcome the negative effects of low rates of enhancement of investment activity observed in the preceding year. The proportions of the distribution of investments between the extractive and processing industries of the oil complex changed in the direction of growing share of oil extraction.
□ Oil extraction and oil processing ^Oil extraction ■ Oil processing
Source: Rosstat.
Fig. 38. Share of Investments in Fixed Assets of Oil Extraction and Oil Processing
Industries in 1990 through 2005, in per cent of the Total Amount of Investments
Made in the Economy
In accordance with the data presented by "Gazporm" OAO, the dynamics of extraction of natural gas were significantly affected by the absolute decline in the amounts of investments by 1.7 per cent in comparison with the figures registered in January through August of 2004. In the same period, there was registered even more pronounced dip in the share of investments made in extraction of natural gas initiated by the shift in priorities of investment activity in favor of the development of the pipeline network. As a result, in 2005 the increase in investments in production and distribution of gaseous fuels made 17.4 per cent.
The increase in the share of investments made in manufacturing industries observed in 2005 was caused by higher rates of growth in investments in the metallurgical production by 24.5 per cent in comparison with the figures registered in 2004, whereas investments in the production of coke, chemicals, pulp and paper products, as well as food
products grew by 94.8 per cent, 37.5 per cent, 13.5 per cent, and 7.5 per cent respectively.
While the investment activity in production of foods was determined by the growing demand on the domestic market, in metallurgy the main factor affecting production remained the increasing demand for metallurgy products and metal articles on foreign markets. It should be noted that in metallurgy there was observed the simultaneous growth in investment in both extractive and processing industries. As concerned fuel and energy industries, one of the most urgent problems remained the more pronounced trend towards a decline in investments in oil processing. It should be noted that at the backdrop of high world prices of hydrocarbons, the low rates of transformation and diversification of growing proceeds derived from exports into investments in reconstruction and modernization of facilities involved in the extraction and processing had a negative impact on the indicators characterizing economic growth. The increase in the rates of growth in investments in production of coke and oil turned out to be insufficient as concerned the change in the role played by these types of production in the structure of Russian industry.
In 2005, the share of industries manufacturing capital goods accounted for about 6/0 per cent of the total amount of investments in industry. In the framework of the given age, technological, and reproduction structure of fixed assets, a factor decelerating the general rates of economic growth was the low rates of investments in these industries. The decline in the amounts of investments in production of transport vehicles, machinery, and equipment had a negative impact on the nature of economic growth in 2005. The lack of a definite strategy of development of mechanical engineering branches and targeted support of individual productions resulted in imbalances on the market of investment goods and deteriorating competitive power. In the framework of the given structure of domestic production of investment goods, imports retained their role as one of the major sources of renewal of fixed capital, reconstruction, and modernization of production.
The effective growth of the Russian economy significantly depended on the intensity of changes in the structure of investments in favor of the industries oriented towards the domestic market. The implementation of such shifts envisages coordination of decisions taken in the spheres of budgetary, tax, tariff, customs, and monetary policies. The processes of transformation of the structure of the economy and enhancement of investment attractiveness of manufacturing branches of industry in particular depend on the equalization of conditions of efficiency of the utilization of investment resources at the expense of redistribution of fiscal burden between the raw materials and the non-raw materials sectors of the economy. In the case the traditionally high concentration of proceeds within the export oriented oil and raw materials sectors persists and taking into account the lack of mechanisms of inter-sectoral flow of capitals, it may be hardly expected that the rates of investment would increase and radical changes would occur in the nature of the reproduction of fixed capital.
Among the factors able to positively affect investment activity in the short term and medium term outlook there were noted the following: cheaper prices of imported machinery and equipment caused by the real appreciation of ruble; growing real disposable household incomes; and respective changes in the legal framework. The creation of special economic zones in the territory of the Russian Federation and the introduction of tax and customs privileges stipulated by law, establishment of an adequate infrastructure, and non-burdensome administrative controls should facilitate the attraction of investments in enterprises of the manufacturing sector and innovative sectors of the economy.
3,0
2,0
1,0
0,0
-1,0
-2,0
-3,0 J
ÏT
H
XT
E E
n
C^ = 5
Source: Rosstat.
Fig. 39. Changes in the Structure of Investments in Fixed Assets as broken down by the Types of Economic Activities in January through September of 2005, in per cent of the Figures Registered in the Respective Period of 2004
3.3.2. Flows of Foreign Investments in the Russian Economy
In the process of formation of a market economy and active involvement of Russia in the system of the global economy, there has been increasing the interest of foreign capital in the receptive and promising Russian market. The moderate dynamics of foreign investments in the Russian economy observed in the post-crisis period of 1999 through 2002 was replaced with a trend towards the outpacing rates of growth in foreign direct investments with respect to the rates of expansion of the scale of the domestic capital and GDP dynamics in 2003 through 2005. The share of foreign investments in the total amount of investments in fixed assets made in the Russian economy increased from 4.7 per cent registered in year 2000 to 5.9 per cent in 2004, whereas in 2005 in accordance with preliminary estimates it made 5.3 per cent. No doubt, the investment attractiveness of the Russian economy was positively affected by the fact that in 2003 and 2004 foreign rating agencies (Fitch, Standard & Poor's, and Moody's) raised Russia's sovereign credit rating to investment grade. However, in 2005 there was observed a decline in the flow of foreign investments in the Russian economy, even in spite of the fact that three leading rating agencies had raised Russia's investment rating. In August of 2005, agency Fitch and in
October agency Moody's raised Russia's rating one notch over the minimal "investment" grade. Evidence of the growing confidence of foreign investors making direct investments in the Russian economy was the position Russia had in the Foreign Direct Investment Confidence Index published in November of 2005 by the global management consulting firm A. T. Kearney: last year Russia was for the first time ever ranked as the 6th most attractive market globally (in 2004 it was ranked 11th, in 2003 - 8th, in 2002 - 17th, in 2001 - 32nd)5.
' i GDP i i Domestic investments in fixed assets
■ Foreign investments, total • - Foreign direct investments
Source: Rosstat.
Fig. 40. Indices of GDP Volumes, Investments in Fixed Assets, and Foreign Direct Investments in 1996 through 2005, in per cent of the Figures Registered in the Preceding Year
Over the last three years, in Russia there persisted a trend towards the excess of foreign investment inflowing in the Russian economy over the investments taken from Russia abroad. In January through September of 2005, the investments in the Russian economy
5
The rating characterizes investment attractiveness of countries of the world by reflecting not the current amounts of foreign direct investments, but only moods and intentions of investors.
exceeded the amount of investments exported from the country by US $ 4 billion, whereas in 2004 this indicator was registered to be at US $ 6.74 billion.
■ Inflow of foreign investments in RF, US $ million ^Russian investments abroad, US $ million
Source: Rosstat.
Fig. 41. Foreign Investments in Russia and Russia's investments abroad in 2000 through 2005, US $ billion
As concerns the changes in the structure of foreign investments, the specific feature here was the persistence of the trend towards an increase in the share of direct investments formed in 2003. In 2005, the growth in foreign direct investments made 38.9 per cent, and the share of such investments in the total amount of foreign investments increased to 24.4 per cent as compared with 23.3 per cent registered a year ago. The total amount of foreign investments made in the non-financial sector of the Russian economy amounted to US $ 53.65 billion growing by 32.4 per cent. In contradistinction to the developments observed in the preceding year, the positive dynamics of growth in portfolio investments have recovered, whereas the rates of increase in "other" investments have become more moderate6.
6 Investments not defined as direct or portfolio investments are indicated as "other investments" and include all operations not associated with direct and portfolio investments. "Other investments" are classified by the types of respective financial instruments: loans and borrowings; trade credits, credits granted not by direct investors, for instance, by international financial organizations: World Bank, International Monetary Fund, International Bank of Reconstruction and Development, European Bank of Reconstruction and Development, the credits extended by foreign governments against guarantees of the Government of the Russian Federation, etc.
The opposing dynamics of changes in the ratio between direct and "other" investments had resulted in changes in the structure of foreign investments in Russian industry.
Table 33
Amount of Foreign Investments Made in the Non-Financial Sector of the Russian Economy
US $ mil.
In % of the figures registered in the preceding year
Total Direct Portfolio Other Total Direct Portfolio Other
2001 14 258 3 980 451 9 827 130.1 89.9 71.5 153.9
2002 19 780 4 002 472 15 306 138.7 100.6 104.7 155.8
2003 29 699 6 781 401 22 517 150.1 169.4 85.0 147.1
2004 40 509 9 420 333 30 756 136.4 138.9 83.0 136.6
2005 53651 13072 453 40126 132.4 138.8 136.6 130.3
Source: Rosstat.
In 2005, there persisted the trend towards the concentration of foreign investments in two spheres of the Russian economy: in industry (45.3 per cent of the total amount of foreign investments) and the sphere of trade (38.1 per cent, see Table 34). At the same time, it should be noted that the dynamics and changes in the shares of investments in industry are increasingly affected by the enhancement of investment attractiveness of new segments of the market of services. For instance, the share of investments in communications as one of the most dynamically developing types of economic activities increased from 3.4 per cent registered in 2004 to 6.1 per cent in 2005.
The decline in the share of investments in industry in the total amount of foreign investments inflowing in the country was accompanied by cardinal transformational shifts in the ratio between the extractive and manufacturing industries. While the amount of investments in the extraction of fuel and energy mineral resources decreased from US $ 8766 million in 2004 to US $ 5165 million in 2005, investments in manufacturing industries grew 1.76 times and made US $ 17987 million. In 2005, there was registered an increase in the activity of foreign investors with respect to the production of food products, chemicals, transport vehicles, and equipment. At the backdrop of stabilization observed with respect to the foreign direct investments in extractive industries, there was registered almost threefold drop in the scale of "other" investments made in this sphere, what completely accounts for the changes in the dynamics of investments in the extraction of mineral resources. As concerns the manufacturing industries, there was registered the simultaneous growth in both direct foreign investments (US $ 6028 million in 2005 as compared with US $ 2911 million in 2004), and "other" investments (US $ 11837 million as compared with US $ 7196 million respectively). The largest share of "other" investments was observed in the metallurgical and chemical industries, as well as production of transport vehicles. As it seems these developments were related to the increasing amounts of tied credits against goods.
Table 34
The Sectoral Structure of Foreign Investments Made in the Russian Economy as broken down by the Types of Activities in 2003 through 2005, in per cent
US $ mil. In % of the total
2003 2004 2005 2003 2004 2005
Industry 12 330 20 170 24318 41.5 49.8 45.3
Transport and communications 1 083 2 033 3840 3.6 5.0 7.2
Wholesale and retail trade; re-
pairs of motor vehicles, motorcycles, household appliances, 10 516 13 037 20461 35.4 32.2 37.2
and personal demand items
Real estate operations, renting and rendering of services 3 403 2 572 2602 11.5 6.3 3.4
Financial operations 640 1 001 1823 2.2 2.5 4.8
Other sectors 1 727 1 697 381 5.8 4.2 1.2
Source: Rosstat.
80,0
70,0
60,0
50,0
40,0
30,0
20,0
10,0
0,0
49,3
24,7
43,5
21,2
74,0
25,3
Extraction of Extraction of fuel Manufacturing Production of Chemical industry Metallurgy Production of Production and mineral resources and energy industries food products transport vehicles distribution of
mineral resources electrical power,
natural gas, and water
2004
2005
Source: Rosstat.
Fig. 42. Sectoral Structure of Foreign Investments in Industry in 2004 through 2005, in per cent of the Total Amount of Investments in Industry
As concerns the dynamics of foreign investments as broken down by Russia's regions, large financial and industrial centers have retained their leading positions. It should be noted that in 2005 there was observed that investments shifted from peripheral regions to central regions. The bulk of foreign investments had been traditionally made in Moscow and the Moscow oblast. In 2005, the amount of investments flowing in Moscow increased 1.64 times and exceeded US $ 25.2 billion, whereas the amount of investments made in the Moscow oblast grew 1.5 times and made US $ 2.7 billion. In 2005, Moscow accounted for 47.0 per cent of the total amount of foreign investments as compared with 37.9 per cent registered in 2004, whereas the respective figures for the Moscow oblast made 5.1 per cent and 4.5 per cent respectively. The investment attractiveness of the North West federal okrug had increased. The inflow of investments in St. Petersburg grew 1.44 times making US $ 1.4 billion, whereas the amount of investments made in the Leningrad oblast increased 2.2 times in comparison with the levels observed in the preceding year and made US $ 351.2 million. Oil and natural gas producing regions retained their investment attractiveness: the Sakhalin (US $ 4861.6 million), Tyumen (US $ 3433.3 million), and Arkhangelsk (US $ 642.3 million) oblasts, as well as the territories with high concentration of metallurgical production facilities - the Krasnoyarsk krai (US $ 660.7 million) and the Vologda oblast (US $ 450.9 million). The scale of investments in the traditional centers of mechanical engineering (the Sverdlovsk oblast - US $ 1093.8 million and Samara oblast - US $ 922.6 million) had increased. This year, the Omsk oblast demonstrated the most intensive dynamics - the amount of investments in this region grew 4.75 times in comparison with the figures registered in 2004 and made US $ 5145.8 million, or 9.6 per cent of the total amount of foreign investments (in 2004 the respective indicator was observed to be at 2.7 per cent).
Table 35
Structure and Rates of Growth in Foreign Investments Made in the Russian Economy as broken down by Federal Okrugs
. . n. ... . . . Rates of growth, 2005 as com-Structure, in % of the total 3 . _|_pared with 2004_
2004 2005
Russian Federation 100 100 132.4
Central federal okrug 47.6 53.9 150.1
North West federal 7.1 6.5 120.9
okrug
Southern federal okrug 1.8 1.7 143.4
Privolzhski federal 5.9 4.1 90.0
okrug
Ural federal okrug 17.4 10.0 76.3
Siberian federal okrug 7.8 12.6 215.3
Far East federal okrug 12.5 11.1 117.0
Source: Rosstat.
As concerns the geographical structure of foreign investments made in the Russian economy in 2005, Luxemburg (25.7 per cent of the total amount of foreign investments made in the Russian economy), the Netherlands (16.6 per cent), and Great Britain (16.0 per cent) were registered as the major investing countries. As at the end of 2005, the amount of accumulated foreign capital made US $ 111.8 billion, what was by 36.3 per cent above the figures registered in the beginning of 2005. In terms of accumulated capital, Luxemburg, Cyprus, and the Netherlands retained their leading positions, whereas Cyprus
(28.0 per cent) and the Netherlands (32.4 per cent) remained leaders in terms of the amounts of accumulated foreign direct investments.
Table 36
Structure of Accumulated Foreign Investments as broken down by Major Investing
Countries in 2005, US $ mil.
Accumulated Including Invested
total in % of the total direct portfolio other 2004 2005
Investments, total 111835 100 49751 1903 60181 40509 53651
Of which, from major investing countries 99214 88.7 43492 1640 54082 35088 46389
Including:
Luxemburg 20984 18.8 451 1 20532 8431 13841
Cyprus 19279 17.2 13915 883 4481 5473 51 15
Netherlands 18909 16.9 16125 31 2753 5107 8898
Great Britain 12752 11.4 2044 144 10564 6988 8588
Germany 9726 8.7 2714 29 6983 1733 3010
USA 6844 6.1 4361 404 2079 1850 1554
France 3918 3.5 905 0.0 3013 2332 1428
Virgin Islands (Brit.) 2463 2.2 1200 61 1202 805 1211
Switzerland 2364 2.1 1128 85 1151 1558 2014
Bahama Islands 1975 1.8 649 2 1324 n/a 730
Source: Rosstat.
The changes in the dynamics of foreign investments made in the Russian economy were accompanied by certain shifts in sectoral priorities. The increase of investments from the Netherlands 1.74 times in comparison with the figures registered in 2004 occurred as the backdrop of an intensive growth in investments in manufacturing industries, whereas the amount of investments in the extraction of mineral resources grew insignificantly from US $ 3296 million to US $ 3799 million in 2004. Investors from Great Britain increased their presence in manufacturing industries: the amounts of respective investments grew 1.67 times in comparison with the figures observed in the preceding year.
Table 37
Inflow of Foreign Investments as broken down by Investing Countries and Types of
Activities in 2004 through 2005
Invested, US $ mil.
In % of the total by the type of activity
2004 2005 2004 2005
1 2 3 4 5
Extraction of mineral resources 9934 6003 100 100
including:
Netherlands 3296 3799 33.2 63.3
Luxemburg 3814 41 3 38.4 6.9
Cyprus 1294 13.0
Manufacturing industries 10236 17987 100 100
including:
Netherlands n/a 41 79 n/a 23.2
Great Britain 1794 3175 17.6 17.7
1 2 3 4 5
Cyprus 1690 1608 16.5 8.9
Germany n/a 1528 n/a 8.5
Chemical production n/a 1 440 100 100
including:
Switzerland n/a 437 n/a 30.4
Great Britain n/a 239 n/a 16.6
Germany n/a 213 n/a 14.8
Metallurgical production and production of fin-
ished metal products 5102 3420 n/a 100
including:
Great Britain 1386 650 n/a 19.0
Netherlands n/a 450 n/a 13.2
France n/a 399 n/a 11.7
Cyprus 1175 348 n/a 10.2
Wholesale and retail trade; repairs of motor vehi-
cles, motorcycles, household appliances, and per-
sonal demand items 13037 20461 100 100
including:
Luxemburg 2988 12009 22.9 58.7
Great Britain 3729 3315 28.6 16.2
Cyprus 1841 9.0
Transport and communications 2033 3840 100 100
including:
Luxemburg 784 1215 38.6 31.6
Great Britain 481 1135 23.7 29.6
Netherlands n/a 492 n/a 12.8
Of which communications n/a 3287 100 100
including:
Great Britain 419 1134 30.4 34.5
Luxemburg 784 1123 56.9 34.2
Netherlands n/a 377 n/a 11.5
Source: Rosstat.
The most active cooperation with foreign companies and firms in the framework of the largest investment projects implemented in the territory of Russia was observed in oil and natural gas production, aircraft and motor industries, the agri-industrial complex, and food industry, as well as in the sphere of communications.
As concerns the factors positively affecting the investment attractiveness of the Russian economy, potential investors rank first the significant capacities of the Russian sales markets of both consumer and industrial goods, high rates of economic growth, and the gradual decrease in the rates of inflation. According to investors' evaluations, the situation in Russia is rather favorable with respect to such indicators as profitability of investment projects and the conditions of conduct of business. In the world community, there is gradually forming a positive image of Russia. Among the major competitive advantages of Russia, there may be listed the following: skilled work force, high rates of growth of the economy, high scientific capacity, and significant reserves of natural resources. Several structural reforms are implemented in order to improve the investment climate in the country. Special attention is paid to the reform of state administration aimed at the reduction of the excessive interference of the state in the economy.
3.4. Russian Agrifood Sector: Basic Trends in 2005
3.4.1. Dynamics and Factors of Growth
No important changes have taken place in the dynamics of Russian agrifood sector in 2005 - the average growth rates remained quite low (Fig. 43 and 44). The pre-reform production volumes in agriculture and food industry have been restored by approximately 74%. Annual output indicators for basic livestock products are falling (Fig. 45) while crop production displays some growth that is still not sufficient to change the situation radically (Fig. 46). The export-import balance for agricultural and food products continues to worsen, first of all due to growing imports.
In addition to intra-sector factors, growth was strongly hindered by macroeconomic trends. The strengthening of ruble by 3-5% impaired the competitiveness of domestic products on the home market and the competitiveness of exported products on the world markets. The rising prices for fuels and oils lower profitability of grain production and ceteris paribus induce contraction of areas planted in grain crops being one of the foundations of Russian agriculture.
At the same time structural shifts are taking place that enable us to speak of positive developments in the sector. As mentioned earlier7, the process of sharp differentiation of producers is underway - some of them are actively developing, modernizing production and involving investments while others become more and more marginal and go bankrupt. The latter segment of the agrifood sector pulls the average efficiency and growth indicators down.
Producers' differentiation proceeds in line with further shaping of regions with intensive farm production. Just 7 regions - Moscow, Leningrad and Novosibirsk oblasts, Krasnodar and Altay krays, Tatarstan and Bashkortostan republics - currently produce one third of the country's milk output. In 2005 milk production in these regions grew by an average 0.6% while the total national indicator fell by 3%. According to data of the Federal Service of State Statistics, 1/5 of domestic whole milk products is produced in 3 regions -Moscow, Saint Petersburg and Krasnodar kray. The concentration is all the more noteworthy as in the Soviet economy production of milk was dispersed all over the country and in the last decade of Soviet period milk cattle inventories demonstrated the biggest increase in Magadan and Murmansk oblasts, in Kamchatka and Sakhalin. In other words, zones of intensive production of some agricultural products are forming. These regions have better average indicators of productivity and profitability; although their growth rates may be not impressively high, it's quite explainable given relatively large production volumes.
The sector structure of agriculture is shaping as well: some sectors prove their competitive advantages on international and domestic markets while others are shrinking at a higher or lower pace. For instance, the output of sunflower seeds, vegetables and potatoes is growing and is now above the Soviet period level. Production of grain is primarily constrained by domestic demand limitations and vague perspectives on the world market.
Despite generally poor performance of the livestock sector, some segments therein demonstrate very high growth. For instance, the annual growth rates in poultry meat production amounted to 17%. The intensive production of pork is growing as well.
The situation in food industry is similar. Output of some products (e.g. vegetable oils and white sugar) has already surpassed the pre-reform level. Production volumes of some products have been nearly restored - e.g. sausages, pastas, margarine and some other
7 «Russian economy in 2003. Trends and prospects». No. 25. Moscow, IET, 2004. 218
products. Production of meat and milk products is constrained by population's purchasing power but is still growing (Table 38).
Real personal incomes increased by 8.8%, retail food turnover - by 10.6%. Faster growth of retail turnover as compared with real personal incomes is most likely due to accelerated growth of incomes in the three lower quintile income groups (e.g. real pensions were up 9.6%, Gini coefficient reduced from 0.408 to 0.404, ratio of incomes in the top and the bottom income groups - from 15.1 to 14.7) where the elasticity of demand for food is the highest. This fact can also be one of the explanations of speedy rise of prices for meat being one of the most income elastic products. The structure of meat consumption is optimizing. In Russia the share of beef in the overall meat consumption is very high. In 2005 sales of poultry grew faster than total meat sales (by 10.3% versus 5%). At the same time, the demand for cheese and fruits (products that are largely consumed by higher income groups) expanded even more - by 10% and 11.4% respectively.
A positive development factor was a certain improvement in rural social sphere. For the first time wages in agriculture grew faster than in mining or manufacturing (November 2005/ November 2004). Wages earned in farm production still constitute the basis of rural residents' well being. Employment in rural areas was up 1.6 percent points as compared with 2004. Although the shifts are not yet large, it's the trend that is important.
All these positive processes are going on in spite of an actual withdrawal of federal authorities from agrifood sector regulation. Budget support of the sector is in fact transferred to the regional level while measures still implemented at the federal level are largely non-efficient.
10
C\l CO ^ LO O O O O O CD O O O O CD
0 -5 -10 -15 -20
Source: Federal Service of State Statistics.
Fig. 43. Russian Agriculture: Percent Change of Annual Output in 1985-2005
15 -10 -5 0
-5 -
-10--1
-15
-20--
-25--
-30--
Source: Federal Service of State Statistics.
Fig. 44. Russian Food Industry: Percent Change of Annual Output in 1986-2005
120 T 100 -80 -60 B 40 -20 0
it y _£— _X— —*—
X— —— i Jk JK — r * - ;—7k "" , *
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
—•—grain (left axis) □ sugar beets ■ potatoes O vegetables
Source: Federal Service of State Statistics.
sunflower seeds
Fig. 45. Gross Output of Basic Farm Crops (million tons)
T 50 40 -- 30
20
o
10
0
5 0 0 2
60 50 40 30 20 10 0
1990 1995 1996 1997 1998 2000 2001 2002 2003 2004 2005 —A—slaughter livestock and poultry —B—milk —•—eggs, billion pieces
Source: Federal Service of State Statistics.
Fig. 46. Gross Output of Basic Livestock Products (million tons)
Table 38
Production of Basic Food Products
1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 I-XI
Meat, thous. t. 6484 2370 1900 1510 1315 1113 1193 1284 1456 1677 1698 1827
Sausages, thous. t. 2283 1293 1296 1 1 47 1087 948 1052 1224 1468 1700 1832 1957
Butter, thous. t. 833 421 323 292 276 262 267 271 279 285 271 277
Whole milk prod-
ucts in milk equiva- 20.8 5.6 5.3 5.2 5.6 5.6 6.2 6.7 7.7 8.5 8.7 9.5
lent, million t.
Vegetable oils, thous. t. 1159 802 879 687 782 881 1375 1281 1197 1598 1867 2206
Granulated sugar, thous. t. 3758 3155 3294 3778 4745 6808 6077 6590 6165 5841 4852 5588
Flour, million tons, thous. t. 20.7 14 11.8 12.2 12 12.7 12.1 12 10.9 11.2 10.8 10.2
Cereal products, thous. t. 2854 1 41 8 988 992 1085 899 932 994 951 890 893 926
Pastas, 1038 603 444 453 554 707 704 764 821 874 950 982
Margarine products, thous. t. 808 198 200 222 239 379 462 515 536 542 561 630
Source: Social and economic situation in Russia (respective years).
Table 39
Production of Agricultural Inputs: Machinery (Thousand Pieces) and Mineral Fertilizers (Million Tons)
1990 1 995 2000 2001 2002 2003 2004 2005
Tractors 214 21.2 19.2 1 4.2 9.2 8.1 8.7 5.5
Tractor ploughs 85.7 4 2.8 3.1 2.3 1 1.2 1.8
Tractor seeders 51.1 1.6 5.2 6.4 5.3 4.2 5.7 6.5
Tractor cultivators 101 2 4.7 5.6 5.6 6.2 6.7 8.6
Grain harvesters 65.7 6.2 5.2 9.1 7.5 5.4 7.9 7.5
Mineral fertilizers 16.0 9.6 12.2 13.0 13.6 1 4.1 15.7 16.6
Source: Social and economic situation in Russia (respective years).
3.4.2. Financial Performance of Russian Agriculture
The process of bankrupting farm producers has started: while in 2004 3455 bankruptcy proceedings against agricultural entities were initiated, by early November 2005 6210 bankruptcy cases were under examination. It had a positive effect on the sector's average financial performance (Table 40). The share of profitable farms increased while the total credit indebtedness fell. By the beginning of 2005 77% of farms had overdue debts, by August - only 70.7%.
It's customary to think that the crucial factor of improving agriculture's financial performance is the implementation of farm debts' restructuring program that continued in 2005. According to data of the RF Ministry of Agriculture, by the 1st of October about 12 thousand farms (almost half of their total number) signed debt restructuring agreements. The amount of restructured debts of farms that signed the agreements totaled 81.7 billion rubles (including 43.4 billion rubles of fines and penalties of which 28.2 billion rubles were written off). Given that the credit indebtedness of farms reduced by only 22 billion rubles.
This proves the assertion not once made in our earlier surveys that the restructuring of debts of some marginal producers results in an almost proportional marginalization of pre-marginal producers and does not notably improve the sector's average performance.
To all appearance, the improvement of the sector's financial performance in general is due to the increase of efficiency in the upper producer groups, their higher attractiveness for investors. In 2005 investments in fixed capital expanded by 16.8% (9 months 2005 versus 9 months 2004). Beginning from 2002 the amount of foreign investments grows not only in food industry but also in primary agricultural production. Although in 2005 foreign investments in agriculture are likely to be somewhat below the 2004 level, they still constitute 3% of the total foreign investments in Russian economy.
Table 40
Financial Performance of Corporate Farms
2000 2001 2002 2003 2004 I-IX, 2005
Aggregate profitability (including subsidies and compensations), % 6.7 9.2 0.2 3 6.4 n.a.
Financial balance (profit less loss), billion rubles 16.1 25.6 -1 2.2 34.7 32.3
Share of profitable farms, % 47 44 42 49 62.2 66.1
Number of farms having overdue debts, thousand 23.9 23.0 21.8 18.9 16.5 13.5
Overdue credit indebtedness, billion 144.1 162.9 162.3 149.9 113.9 91.3
rubles
Source: Federal Service of State Statistics, www.gks.ru.
12 10
■ agriculture
-food industry
Source: Federal Service of State Statistics, www.gks.ru.
Fig. 47. Investments in Agrifood Sector's Fixed Capital, Billion Rubles
(Constant 1995 Prices)
8
6
4
120 -100 -80 60 40 20 0
Source: Federal Service of State Statistics, www.gks.ru.
Fig. 48. Foreign investments in Russian Agriculture, Million US Dollars
3.4.3. Novelties of Domestic Agrifood Policies
Shifting of Farm Sector Regulation to the Regional Level
Radical changes have taken place in the mechanism of budget allocations to agriculture. In compliance with Federal Law No. 95 of July 4, 2003 and Federal Law No. 199 of December 29, 2004 the subsidizing of agriculture was transferred to the competence of Federation's members. These laws delineate farm sector regulation competences only for 2005 but the draft budget law for 2006 also bases on their provisions. The granting to regions of exclusive powers to regulate agriculture will have the most destructive effect on the sector. First of all, regions-donors able to finance support to agriculture on their territories are primarily located in the climatic zones that are the least fit for farming. The shifting of farm budget support's gravity center from the federal to regional level leads to encouraging of agricultural production in these regions implying non-efficient public resource utilization.
The share of farm sector in the economy of regions, having the highest budget capabilities to finance it, is generally low. It's objectively conditioned by the fact that these regions are located in areas with the worst natural conditions for agricultural production. Picture 7 shows the distribution of Russian regions by their budget capabilities8 and the role of farm sector in the economy9. It's obvious that the correlation between these two indicators is clearly negative.
According to these indicators all Russian regions can be divided in 4 groups. Since the area of regions in Figure 49 stretches from the left upper corner to the right lower corner, groups 1 and 3 are more numerous than the two remaining.
8 Index of budget capabilities: Find=EXPind+TRANSFind; EXPind=EXP2002-2004/N2002-2004, where EXP2002-2004 - average expenditures of regional budget in 2002-2004, N2002-2004 - region's population in 2002-2004; TRANSFind=TRANSF2002-2004/EXP2002_2004, where TRANSF2002-2004 - average transfers to the region's budget from the federal budget in 2002-2004.
9 Index of farm sector's role in the economy: AGRind=AGR2002_2003/GDP2002_2003, where AGR2002-2003 - average gross agricultural output, GDP2002-2003 - average gross regional product in 2002-2003.
Foreign investments in agriculture
■ including direct investments
In 2005 after the transfer of farm support competence from the federal level, agricultural production started to shift towards non-agrarian regions with high budget capabilities (Table 41). The regionalization of support has not affected the geographic location of grain growing since regional subsidies are primarily allotted to livestock production. The role of high-income non-agrarian regions in the total Russian meat output notably grew - in 2005 their share in the total production of livestock and poultry for slaughter increased by 3.4% as compared with the average share in 2002-2004.
The presented results show only the general trend - a serious shift of production could not occur in just one year. But even this minor shift resulted in a certain loss of the sector's efficiency and one should understand that as time goes both the shift and the efficiency loss will become greater.
Second, for already many years regional support results in "trade wars" between regions, attempts to oust neighbors from the market by means of direct subsidies to local producers, bans on agricultural and food products' transit, etc. And all this took place despite high share of federal funds. The transfer of agricultural financing authority to regions will support the trend. In other words, this decision of the RF Government brings in the domestic market all the negative effects of protectionism on the world agricultural markets that the WTO Agreement on Agriculture strives to eliminate (meanwhile Russia wants to join this organization with its anti-protectionism principles).
The need to preserve at least some functions in subsidizing of agriculture in order to prevent the above mentioned negative effects made the Ministry of Agriculture change the system of subsidizing by partially transforming subsidies into inter-budget transfers to the agrifood sector. Beginning from 2006 subsidizing of pedigree stockbreeding and elite seed breeding, subsidizing of interest rate on credits, support to insurance and even supply of seeds to northern regions are financed only in the form of inter-budget transfers. First, it makes the farm budget non-transparent - less than one half of subsidies to agriculture is financed under the sub-title "Agriculture" of the functional expenditures' classification while the rest is included into the title "Inter-budget transfers". Second, this type of subsidizing can seriously distort regional agricultural policies. Since federal transfers are granted on the co-financing terms, all regions will start to implement the named programs in order not to lose federal transfers (i.e. each region will have a program of supporting, for instance, production of flax and hemp). The efficiency of respective federal programs as well as of spending regional budget funds on their co-financing will be extremely low. Besides, regions will become short of funds for implementing their own programs that are often more efficient than the federal ones and are more adjusted to regional priorities of agricultural development.
So, the principal problem of agricultural budget is the provisions of Federal Law No. 95. In case they are not abandoned, it will be impossible to implement normal agrifood policies.
Failure to Implement Result-Based Budgeting
The RF Ministry of agriculture has worked out a strategy of agrifood sector development for 2006-2010 coordinated with the principal ministries. But when preparing the draft 2006 budget this strategy hasn't been taken into account. Similar to previous years, there is no cohesion between agrifood policies proclaimed by the Government and budget allocations to their implementation.
According to the elaborated strategy, subsidizing of agriculture is to be financed under the Federal special program "Program of improving the efficiency and development of agriculture's resource potential" incorporating sub-programs of developing livestock production, encouraging grain export, staff education and training, support of small-scale en-
trepreneurship, information services and improvement of soil fertility. But none of the above mentioned items was explicitly included in the draft budget. The budget contains some subsidies to be granted under the program but in other classification sections and not in full. So, the principles of special program budgeting of agrifood sector still remain on paper. There is no cohesion between programs of the Ministry of Agriculture and actual budget expenditures, and thus it's impossible to estimate the efficiency of selected programs and the implementation of strategy at large.
Besides, the strategy itself is inconsistent, the lack of a complex approach to the sector's regulation also prevents from speaking about special program budgeting.
National Project "Development of the Agrifood Sector"
National project "Development of the agrifood sector" became one of the four national priority projects for the coming 2 years the decision about which was taken at the end of 2005.
In the current situation a National project is an attempt to lay down long-term fundamentals of economic development for the period of high budget revenues implying special state financing of the most urgent programs in the national economy. It's obvious that such programs should not be confined to a mere additional funding of programs already being implemented but should rather provide for the solution of some problems that earlier lacked money but can ensure a breakthrough in a certain field. However, a deeper examination shows that all measures proposed in the framework of the National project for the agrifood sector in some way have already been included in the country's recent agricultural policies. So, the message behind adopting the project in its current version is that the present farm policy is absolutely efficient but is short of funds. To our mind, the basic deficiency of the current agricultural policy is not the lack of money but rather its improper use not once stressed in our previous publications.
The project consists of 3 basic components each comprising a set of envisaged measures:
• Accelerated development of livestock production:
- Subsidizing of 2/3 of interest rate on credits for the term up to 8 years (technical re-equipment);
- State support of livestock leasing;Abolition of custom duties on technological equipment.
• Facilitation of small-scale farming:
- Subsidizing of interest on credits to household and individual private farms and their cooperatives to the amount of 100% of Central Bank's discount rate;
- Concept of developing agricultural supply and consumer cooperatives for small-scale farms.
- Inviting of young specialists to agriculture (based on providing them with dwellings).
The project's term is 2 years; its funding during this period will amount to 30 billion
rubles. It's quite a large sum - in 2006 funds allocated to the National project will account for 20% of the total federal expenditures on agriculture.
The system of subsidizing interest rate on credits to agriculture is implemented in Russia from 2000 and proved to bring good results. Several years ago long-term credits also became eligible for this program. The inclusion of this measure in the National project in general does not raise any doubt. However, slightly over 3 billion rubles per annum are envisaged for this purpose (Table 42) although the corresponding 2006 Budget indicator is about 13 billion rubles. In other words, this item of the National project does not seriously influence the level of state support in this field. At the same time, the National project envisages subsidizing of large and long-term (up to 8 years) credits although its own term is only 2 years. This means that investors joining the National project on these terms get
involved in very risky investment projects since there is no certainty about continuation of interest rate subsidizing after the National project's term is over. There is a danger that regional authorities will use "administrative resource" to make large agribusiness companies participate in such projects, and the potential risk will become quite real for them.
The program of developing livestock production envisages rather large investments in import of pedigree livestock. There are plans to buy 100 thousand heads of livestock and to lease them to agricultural producers. (By the way, this is in fact an official admission of the domestic selection's complete failure). One should clearly understand that import of highly productive breeds from abroad per se does not guarantee high animal productivity in Russia since the latter is pre-conditioned by compliance with certain technological standards, reconstruction of premises, skilled management. Many Russian regions have already funded import of pedigree livestock from regional budgets but these efforts proved to be non-efficient. Certainly, there are private businesses that are capable to meet all the requirements but the prescribed implementation scheme leaves no hope for success of this particular project component. Indeed, it starts with allocating 8 billion rubles to limited liability company "Rosagroleasing" for the enlargement of its authorized capital. This state corporation is supposed to buy pedigree stock that will be distributed between agricultural producers on preferential terms. Life shows that our agrarian bureaucratic system knows no other way of distribution than the one by so called limits that are set for regions, districts and agricultural producers. This means that pedigree livestock will be supplied not to the farms (or not always to the farms) that are capable to use it properly. "Rosagroleasing" is not interested in the efficient use of received funds: the corporation gets allocations not specifically for leasing operations but for the enlargement of its authorized capital conditioned by conducting of leasing operations. The scope of these operations is expectedly not fixed in the documents.
Purchase of 100 thousand heads of pedigree livestock is proclaimed. It's quite a large number for the respective world market. Experts say that the available supply is shorter. This means that in order to implement the project livestock with worse quality parameters will be bought. Besides, an a priori announcement of such a sizeable purchase will inevitably result in higher world prices. In other words, not the best livestock will be bought at overstated prices.
Credits to small producers are to be supported by subsidizing of interest rate that will amount to 100% of the RF Central Bank's discount rate (95% will be funded from the federal budget and 5% - from budgets of the Federation's members). Such a subsidy actually means a negative interest on bank credits. Agricultural producers could enjoy similar super-beneficial credit terms in 1992 (then individual private farmers got credits at 8% per annum while average bank interests were as high as 120%). This resulted in an intense criminalization of the sector, mass abuses, dissipation of resources and finally - in the bankruptcy of Agroprombank. The advocates of this measure proceed from good intention to provide small producers access to bank credit but disregard the fact that there are no barriers to prompt creation of small entities just in order to receive such a beneficial credit. To get the status of a household farm it's enough to buy a house in a village and to till 0.01 ha for planting potatoes.
Similar to its first part, the second part of the National project is also inconsistent. It envisages support to cooperatives marketing milk from households. The authorities still think that rural residents can earn money for decent living by selling milk of 1-2 cows. What's the logic then? On the one hand, we assist development of large-scale production by importing highly productive pedigree livestock for large commodity corporate farms and by facilitating their modernization, and, on the other hand, we support old women with 226
their tiny milking business. But these are competing sectors. Supporting milk collecting cooperatives we create competitors for large commodity enterprises that will buy imported highly productive dairy cattle. Rural population urgently needs help in the form of providing alternative income sources (the more so in case the first part of the project succeeds -then rural employment will further fall since handling of productive cows at farms with advanced technology requires 3-4 less workers than today) but why should it be solely household milk production?
What are the expected results of all the named measures? 130 thousand stalls are to be created. Let's suppose that half of them will be created in dairy cattle production and the sector will attain the European level of 8 thousand liters of milk produced per cow annually. Even given this super good performance milk output will increase by slightly over 0.5 million tons per annum while currently the gross domestic output of milk exceeds 30 million tons. The outcome of all the planned measures will be the growth of milk output by 4.5% and meat output - by 7% within 2 years. Let's suppose that the profitability of milk production will become incredibly high - 30%. So, the profit from additionally produced milk will be about 5 billion rubles. Even in case milk production will get only one fourth of the National project's funds, the efficiency of their use will be below 100%. The situation for meat is similar.
There is one more problem that can have long-term negative effects. The major measure targeted at the development of cooperatives in the framework of the National project is the enlargement of "Rosselkhozbank's" (Russian Agricultural Bank's) authorized capital by 9.4 billion rubles within 2 years. "Rosagroleasing's" authorized capital is also to be enlarged by 8 billion rubles in order to implement such measures as import of pedigree animals and renovation of fixed capital in livestock production. So, the implementation of the National project is largely (56% of the envisaged expenditures) confined to the transfer of budget funds to state corporations-monopolists. The intended monopolization of input and financial markets in agriculture hinders their normal development and affects farm producers' access to these resources.
So, in its present version the proposed National project has very low economic efficiency. To say nothing of the project's objective - it is too non-ambitious and does not go beyond tactical tasks of the sector to be recognized as a national priority for the beginning of XXI century.
Subsidizing of Prices for Fuels and Oils
Farm producers' complaints about growth of prices for fuels and oils could not be ignored in the agricultural policies (Fig. 53). The decision was taken to start direct subsidizing of prices for fuels and oils used by farm producers beginning from 2006. 5 billion rubles (about 10% of the federal agricultural budget) are allocated in the budget for partial compensation of their cost. The principal danger of this measure is that no mechanism of control over the use of subsidized fuels and oils is envisaged to prevent their outflow to parallel markets. Similar measure in the West European countries is combined with either distribution of subsidized fuel per hectare of cultivated area or with its colouring. Besides, in Europe this subsidy actually implies an abolition for farmers of very high excise on fuel (about 70%) that coupled with control over use of this fuel exclusively in agriculture results in lower cost of this input. In Russia excise on fuel is not an essential factor of price growth. Since prices for fuel for farm producers tend to rise during periods of mass agricultural works (Picture 11 illustrates the trend - in 2005 prices for fuels and oils surged in April and October) the main problem is not the price for fuel per se but the peak demand for it. Peak demand for fuels and oils coincides with simultaneous sale of farms' output resulting in
seasonal drop of prices for agricultural products. The outcome is price disparity affecting agriculture. Thus the problem should be solved not by subsidizing prices for fuels and oils (the subsidy will eventually outflow to the fuel and energy complex) but by enabling farm producers to extend the sale of their output throughout the marketing year, to get credit on the security of this output and consequently to buy the necessary inputs more evenly during a year.
Source: calculated using data of the RF Ministry of finance and the Federal Service of State Statistics.
Fig. 49. Distribution of Regions by Budget Capabilities and the Role of Farm Sector in the Economy
Table 41
The Changing Role of High-Income non-Agrarian Regions in the Total Russian Output of Selected Agricultural Products10
Group 1. High incomes (Find>0.9), low share of farm sector (AGRind<0.2) Grain: -0.5% Meat: +3,4% Milk: 0% Group 2. High incomes (Find>0.9), high share of farm sector (AGRind>0,2)
Group 4. Low incomes (Find<0.9), low share of farm sector (AGRind<0.2) Group 3. Low incomes (Find<0.9), high share of farm sector (AGRind>0.2) Grain: -0,06% Meat: -3,6% Milk: 0%
Source: calculated using data of the Federal Service of State Statistics.
10 The share of N group in the output of a selected product was calculated by formula: Share=yfor N group(Q/QRF), where Q, output of this product in /-region, QRF - total output of this product in Russia.
I-IX,2005
2004
2003
2002
2001
J_L
J_I_I_L
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
□ Federal □ Regional □ Local
Source: RF Ministry of Finance.
Fig. 50. Structure of Consolidated Budget Expenditures on Agriculture
-in current prices.....in constant 1999 prices
Source: RF Ministry of Finance.
Fig. 51. Consolidated Budget Expenditures on Agriculture, Million Rubles
50 000
40 000
30 000 --
20 000 --
10 000 --
0
federal 2003 regional 2003 federal 2004 regional 2004 federal 2005 regional 2005
(I-IX) (I-IX)
□ plan □ execution
Source: RF Ministry of Finance.
Fig. 52. Execution of Agricultural Budget in 2003-2005 by Federal and Regional Budgets (Million Rubles)
—*—Gasoline 80 _ Diesel fuel —A— Grain
_ Ratio of grain/gasoline indices_
Source: RF Ministry of Agriculture www.mcx.ru, Federal Service of State Statistics www.gks.ru.
Fig. 53. Prices for Agricultural Products, Gasoline and Diesel Fuel in 2005, as % of the Previous Month
Table 42
Financing of the National Project "Development of the Agrifood Sector",
Billion Rubles
2006 2007 Total
Accelerated development of livestock sector
Subsidizing of interest rate 3.45 3.18 6.63
Enlargement of "Rosagroleasing's" authorized capital 4 4 8
Development of small-scale farming
Subsidizing of interest rate 2.9 3.67 6.57
Enlargement of "Rosagroleasing's" authorized capital 3.7 Organizational, methodological, informational support and 0 15 monitoring 0.15 TOTAL 14.2 5.7 0.15 16.7 9.4 0.3 30.9
Source: RF Ministry of Agriculture.
3.4.4. Trends on Selected Agrifood Markets: Market of Meat
In the two last years prices for meat grow at rates exceeding those of consumer price index and of prices for food products at large (Table 43). Since in spring 2002 import quotas on meat were introduced (tariff quotas on beef and pork and volume quotas on poultry), one could suppose that the growth was due to this tool of meat market regulation.
Indeed, according to theory when domestic production substitution indices are not high enough, the introduction of import constraints ceteris paribus results in higher prices.
After the introduction of quotas domestic meat production displays different trends. Production of poultry continues to grow at a rather high rate - 15-20% per annum. However, this growth started before the enforcement of quotas on import of poultry. At the same time production of beef and pork reduces. Overall, within the past three years production of meat in agriculture steadily declines.
However, this decline does not imply a low coefficient of substitution in the meat sector. Actually the introduction of quotas have not curbed the import of meat products to Russia (Fig. 54). They were applied to import of fresh, chilled and frozen meat from the non-CIS countries. Meat and meat products from the CIS are not subject to quotas. As a result the structure of meat import shifted towards larger supplies from the CIS countries (Fig. 55) and bigger share of meat products (Fig. 56).
Larger imports from the CIS contributed to the growth of prices since average contract prices for meat imported from these countries are higher than those for meat from the non-CIS countries (Fig. 57). At the same time prices for meat products from the CIS are lower due to qualitative differences.
Prices were also affected by sharp fluctuations of import supplies of meat to the domestic market due to quotas. Quotas are distributed at the beginning of a year and uncertainty makes suppliers limit their deliveries (Fig. 54). This decrease of supplies to the domestic market can cause elevation of prices that is later reflected in the annual price index.
However, the principal factor of domestic meat price rise was surely the surge of prices for beef on the world markets (due to a series of world cattle epizooties and consequent cattle slaughter as well as lowering of export subsidies in the EU) (Fig. 58).
So, quotas have failed to reach their main goal - protection of domestic producers from competition with import. They entailed large expenditures on their administration,
contributed to the growth of domestic prices, entailed irregularity of supplies and are fraught with corruption. That's why their abolition should be welcomed.
At the same time the abolition of quotas is unlikely to have a direct effect on the lowering of meat prices. First, the world prices are expected to continue growing (Picture 16). Due to the spreading epidemic of bird flu, prices for poultry are likely to follow the upward trend of prices for beef. Second, liberalization of the EU and US markets, reduction of export subsidies already stipulated in the Framework agreement on agriculture of WTO Doha Round will also support growth of the world prices for meat. Third, as mentioned above, one more factor of price growth was the redistribution of meat supplies resulting from the introduction of quotas: the share of non-CIS countries reduced while that of CIS countries was up. However, Picture 13 shows that beginning from 2004 this factor is no more decisive and consequently in case of quotas' abolition won't entail lowering of prices.
Finally, from 2002 to September 2005 real personal incomes in Russia grew by approximately 140% while prices for meat within the same period - by 150%. Gini coefficient is gradually reducing. Meat in Russia is a very income elastic commodity. In this situation the demand for meat and meat products in the nearest future is likely to expand ceteris paribus preventing domestic price from falling.
Changes in the Ukrainian regulation of foreign trade in meat may also become an important factor influencing Russian meat sector. In 2005 Ukraine lowered import duty on meat. Import tariff on fresh, chilled and frozen beef as well as on many kinds on pork currently equals 10% of the customs value but not less than 0.6 euro per kilogram. One can compare it with 2002 rates: then the tariff on fresh and chilled beef amounted to 30% ad valorem but not less than 0.5 euro per kilogram, on frozen beef - 30% ad valorem but not less than 1 euro per kilogram, on pork - 10% ad valorem but not less than 1 euro per kilogram.
Ukraine is a net exporter of beef, veal and pork. Actually the only foreign sales market for the Ukrainian beef and pork is Russia (Fig. 60 and 61). While in 1995 Russia accounted for about 80% of the country's meat export, by 2004 its share grew up to 99.9%. Ukraine exports fresh, chilled and frozen beef as well as products out of beef (frozen beef being the largest item in this group of commodities).
Frozen beef from Ukraine is competitive on the Russian market due to its low price and low cost of transporting meat to the European part of Russia; not a minor factor is the absence of quotas on import of Ukrainian meat.
It's quite logical that lower prices for the Ukrainian beef are compensated by its inferior quality. There is few meat cattle in Ukraine and its number decreases in recent years. According to data of USDA in 2005 meat breeds accounted for only 0.7% of the total cattle inventories in this country.
As to the share of Ukraine on the Russian market of imported beef, in 2002-2003 Ukrainian frozen beef accounted for 1/3 of the total Russia's imports of this product. In 2004 this share fell to 16% primarily due to shorter supplies from Ukraine (the total volume of Russian beef imports didn't change). The share of Ukrainian pork on the Russian market does not exceed 2%.
The lowering of customs duties has already resulted in larger imports of meat to Ukraine. This can seriously influence the Russian market since domestic meat processors may start purchasing meat through Ukraine. As a result re-import of meat from Ukraine will grow while prices on the domestic market will fall.
Despite its inefficiency, the quota mechanism of regulating meat import is supposed to be preserved in 2006 although with some amendments. The volume quota on import of poultry meat will be replaced by tariff one and import duties on out-of-quota import of pork 232
and beef will be reduced. The terms of poultry import were altered in compliance with agreement between Russia and the US in the framework of WTO accession negotiating process.
Table 43
Price Indices, as % of December Previous Year
2002 2003 2004 2005 2005/2001
Consumer price index 115.1 112.0 111.7 110.9 1 5 9. 7
Food products 111.0 110.2 112.3 1 09. 6 150.6
Red and poultry meat 102.7 106.8 1 1 9.6 118.6 155.6
Source: Federal Service of State Statistics.
750000 1
700000 -
650000
600000
550000
500000
450000
400000
350000
300000
250000
CL
Q I, 2003 Q II, 2003 Q III, 2003
Q IV, Q I, 2004 Q II, 2004 Q III, 2003 2004
Q IX, Q I, 2005 Q II, 2005 2004
□Total, tons □ Total, thous. dollars
Source: Customs Statistics of RF foreign trade.
Fig. 54. Import of Beef, Pork, Poultry and Meat Products
800000 700000 600000 500000 400000 300000 200000 I00000
Q I 2003 0 III 2003 Q I 2004 Q III 2004 Q 1 2005 Q VI 2005
QII 2003 Q VI 2003 Q II 2004 Q VI 2004 Q II 2005
n CIS qNon-CIS
Source: Customs Statistics of RF foreign trade.
Fig. 55. Import of Meat and Meat Products From the CIS and non-CIS Countries, Tons
Q I, 2003 Q II, 2003Q III, 2003Q IX, 2003 Q I, 2004 Q II, 2004Q III, 2004Q IX, 2004 Q I, 2005 Q II, 2005
meat -- _meat products (right axis)
Source: Customs Statistics of RF foreign trade.
Fig. 56. Import of Fresh, Chilled and Frozen Meat (Red and Poultry Meat)
and Meat Products, Tons
Q III, 2005 ............................................
QII, 2005 ^Illlllllllllllll Illllllllllllllllllllll
Q I, 2005 .............. ....................... TT1
Q IX, 2004 L-.v.v.v.v.v.-.v.v.v.-. Q III 2004 ................ m-i-rrl 1 1 1 1 1 1 1 1 1 1 1 1 1 ............ Illlllllll
Q II, 2004 ................... ..............
Q I, 2004 ................ Mill
Q IX, 2003 ............... 1
i Q III, 2003 1 Q II, 2003 1 ' ttJII 1 II II II Ml MINIMUM
Q I, 2003 i............. 1
0 0.5 1 1.5 2 2.5
□ Beef, fresh or chilled D Beef, frozen OPork □ Poultry □ Meat products
Source: Customs Statistics of RF foreign trade.
Fig. 57. Ratio of Average Contract Prices for Meat Imported from the CIS and non-CIS Countries
CJ CO ■t in CD CO CO o OJ CO
co CO CO GO CO CO CO CO CO o o O o o
o T— OJ CO if LO S3 S3 CO o T— OJ CO
CO CO CO CO CO CO CO CO CO CO o o o o
160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0,0
' Beef (left axis)
Pork
Poultry
Source: http://www.oecd.org/dataoecd/55/44/32980897.xls
Fig. 58. World Prices for Meat, dollars per 100 kg
""1Beef, Argentine ~Pork, Brazil Poultry, USA
Source: http://www.oecd.org/dataoecd/55/44/32980897.xls
Fig. 59. Forecasted Prices for Selected Kinds of Meat in Countries - Major Suppliers of These Commodities to the World Market (National Currencies of the Respective Countries Per 100 Kg)
Export of frozen beef, tons -including export to Russia
Source: data of USDA (www.usda.gov).
Fig. 60. Export of Frozen Beef From Ukraine in 1995-2004, Tons
—♦—Export of fresh, chilled and frozen pork from Ukraine, tons —■—including export to Russia
Source: data of USDA (www.usda.gov).
Fig. 61. Export of Pork From Ukraine in 1995-2004, Tons
3.4.5. Foreign Trade in Agricultural and Food Products
Exports of Agricultural and Food Products Grow Faster than Respective Imports
In 2005 food exports grew faster than food imports: in January-November export indicators were 40% above the respective 2004 indicators while imports expanded at a far lower rate - 13%. Nevertheless, Russia still retains its traditional status of net importer of food and the modulus of agrifood trade balance continues to grow.
Growth was observed in sale of almost all major items of Russian agrifood export: fish, wheat, flour and flour products, sunflower oil, milk products, chocolate products (Table 44). The oil and fat industry increases export supplies of products with higher value added (vegetable oils and mayonnaise) while reducing exports of raw products (sunflower seeds).
Imports of food increased primarily due to larger purchase of meat and raw sugar (Table 45). Import supplies of meat exceed the established quotas. Probably, their growth is caused by an upsurge of out-of-quota meat imports after the lowering of respective customs tariffs in the middle of 2005. Import of raw sugar is likely to accelerate by the year end since beginning from January 2006 it will be subject to much higher duty (248.64 dollars per ton) as compared with the one effective in 2005 (January-September - 164 dollars per ton, October-December - 140 dollars per ton). According to the mechanism of raw sugar import regulation, the size of duty depends on the average price at the New York Board of Trade during the last three months. Sugar futures started to rise there in the middle of 2005 determining high level of Russian import duty by the beginning of 2006. That's why traders will try to increase sugar imports before the enforcement of higher duty.
Restoration of Grain Export
Russian grain export started to gradually restore after the sharp drop in 2004 (Fig. 63 and 64). Smaller export supplies were then due to poor grain crop in 2003 coupled with temporary restrictions on export of rye, wheat and their mix in 2004. The estimated total
2005 crop is not a record one but is still rather good (78 million tons). The growing supply on the home market shaped quite low domestic prices. The world production of grain grows as well and the world prices also demonstrate a downward trend (Table 9), competition becomes stronger complicating Russian grain export. Grain market interventions are supposed to raise domestic prices but no compensations to exporters are envisaged. In
2006 tariffs for transportation and port services will be elevated. This will further aggravate terms of the Russian grain export. In other words, the domestic policies regulating grain sector create new problems instead of offsetting the worsening situation on the world market.
Growing Export of Farm Machinery
Russia gets deeper and deeper involved in the world trade in farm machinery. In January-October 2005 it exported almost twice more farm machines than in the corresponding period 2004. The major part of these exports goes to Kazakhstan (50.9%), Ukraine (19.3%) and Uzbekistan (10.6%). Imports of farm machinery grew as well - by 65%. The first place in the structure of imports belongs to Germany (24.4%), the second -to the US (15.8%)11.
The upward trend in the Russian export of farm machinery shaped back in 2000 (Fig. 65 and 66). After the 1998 crisis agricultural production started to grow in almost all the CIS countries entailing higher demand for farm machinery and consequently - larger Russian exports to members of the Commonwealth.
In recent years Russia became a net exporter of grain harvesters. In 2005 exports of this machinery increased at record rates. Growth in domestic agricultural machinebuilding started after the 1998 crisis but soon faded away. That's why one should keep in mind that the growing Russian export may to some extent be a re-export to the CIS countries since agency institutions for many trade items (including farm machinery) are located in Russia. Besides, exports may include supplies of used farm machinery to the CIS.
Two factors constitute specific causes of growing imports of farm machinery to Russia. First, in recent years many regional administrations started centralized purchases of imported machinery at the budget account. This machinery is often subsidized or used, i.e. enters the domestic market at initially lower prices and then is distributed between regional farm producers at prices even below the initial ones. Second, an important form of servicing agricultural producers - customer farming (when specialized companies having a set of farm machinery do basic agricultural works for farms) - is currently developing in the country. This service is partially provided by foreign companies, first of all the Turkish ones. Such companies bring their machinery to the Russia's customs territory on temporary import terms and thus do not pay respective taxes.
In order to curb import of used farm machinery at low prices federal authorities introduced a special tariff (in the form of "x euros per cubic centimeter of engine capacity or kW of engine power") on import of used tractors and harvesters. For harvesters this restriction became effective from October 2005. Import of used tractors was curtailed in 2004 and in 2005 the specific tariff was raised. In 2006 import of new grain and silage harvesters will also be additionally (in addition to ad valorem tariff) constrained by the introduced specific duty. This will prevent importers from declaring lower commodity value at the border.
11 Data of "Soyuzagromach"
238
Prospective Provisions of WTO Doha Round Agricultural Agreement and Their Implications for Russia (the Market Access Aspect)
As stated by the head of Trade negotiations department in the RF Ministry of economic development and trade Maxim Medvedkov, Russia can become a WTO member in 2006. One of the key WTO agreements that Russia will have to join is the Agricultural Agreement signed in the course of GATT Uruguay Round in 1994. However, in 2001 a new round of multilateral negotiations on trade in agricultural commodities ("the millennium round") began. In December 2005 a WTO Ministerial Conference was held in Hong Kong where countries-members of the organization specified provisions of the new agricultural agreement establishing rules for further liberalization of trade in agricultural and food commodities in the world. While we negotiate with WTO members the terms of our entering the prior agreement, a new one with more rigid provisions may come into force. We need to contemplate the prospective provisions of this new agreement to accordingly adjust our negotiation position. This can have the strongest effect on one of the three parts of Agricultural Agreement - market access, i.e. protective measures against import.
The new Agreement establishes tiered (or banded) approach as the basic principle for lowering import tariffs suggesting that higher tariffs will be cut more than lower ones. This approach is supposed to overcome the unfairness of 1994 Agricultural Agreement according to which countries-members had to reduce the level of tariff protection by the same rate meaning that the difference in access to their domestic markets persisted although at a lower level. Percent lowering of tariffs will be effected by groups of commodities. Overall four groups of commodities are defined depending on the rate of tariffs on their import. A certain percent of lowering is set for each group (Table 47). For developing countries tariff lowering requirements will be softer than for developed countries. The maximum admissible rates of tariffs, or tariff peaks, will be set between 75% and 100% (150% for developing countries).
The Framework Agreement introduces the notion of a sensitive commodity, i.e. commodity essential for a country's economy and eligible for special protection. The list of commodities that a country can designate as sensitive ones should be coordinated with other WTO members. Tariffs thereon are not subject to the common reduction formula but are to be regulated specially. However, a special regime in respect to these commodities does not release countries from the commitment to expand their imports as compared with the former volumes. This expansion can be facilitated by the mechanism of preferential tariff quotas. The limit for sensitive products is set as follows: their number should not exceed a certain share in the total number of tariff lines (the existing proposals vary from 1% to 15%).
Developing countries will benefit from privileged terms for reducing their tariff support - a special regime. In addition to softer requirements - lower rates of tariff reduction and tariff quota enlargement, longer implementation period - they are granted an opportunity to designate a range of special products, i.e. products essential from the point of view of food security, rural poverty and rural development. A developing country is authorized to include at least 20% of all tariff lines from the group of agricultural and food products in the list of special products. Developing countries will also benefit from special safeguard mechanisms the rules for implementing which are still being debated in WTO.
What are the possible outcomes of further world agricultural trade liberalization for the Russian agrifood sector? Russia joins WTO with the status of developed country. In 2004 the average weighted import tariff for agricultural and food products was about 16%. The bulk of Russian imports of these products (about 80%) is subject to ad valorem duties that do not exceed 20%. Tariff peaks in Russia do not exceed 100% and are observed in import of such commodities as out-of-quota meat (equaling 60% for pork and 40% - for
beef), sugar (90% in ad valorem equivalent) and ethyl alcohol (100%). So, Russia has a rather liberal regime of customs and tariff regulation as compared with other countries. In the EU bound tariff averages 20.5%, in the US - 11.9%. But relatively low averages combine with very high tariff dispersion (a lot of high tariffs and a lot of relatively low tariffs). For instance, the maximum tariff on import of food products in the US reaches 378.7%, in the EU - 218.5%12. That's why when joining the Doha Round agricultural agreement Russia can enjoy more beneficial terms as compared with other countries: having lower initial tariff it will be required to reduce it by a lower percent. But according to WTO rules subject to reduction are bound (i.e. maximum possible in a country) and not the effective tariffs. Russia's position in WTO is as follows: higher bound import tariffs as compared with the effective ones. But under the new agricultural agreement this position may entail larger tariff reduction requirements. As a result bound tariff after its reduction may be even far below the effective one (for more details see the IET survey of October 2005)13. One has to keep this in mind when elaborating Russia's strategy at WTO accession negotiations.
15000 -r 10000 5000 40
-5000 -10000 4-15000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 I-XI
2005
I export
□ import
• balance
*- less trade with Byelorussia.
Source: Customs statistics of RF foreign trade.
Fig. 62. Foreign Trade in Agricultural and Food Products, Million US dollars*
Table 44
Export of Basic Agricultural and Food Products from Russia in 2000-2005,
Thousand Tons*
2000 2001 2002 2003 2004 I-IX 2005 I-IX 2005/I-IX 2004, %
Frozen fish 290.6 324.1 292.8 255.0 142.5 158.6 121
Wheat and wheat/rye mix 419.0 1635.7 10259.3 7587.9 4671.3 6841.8 2.5 fold
Wheat flour 165.7 n.a. 122.8 288.6 134.3 135.6 154
Sunflower oil 194.8 115.3 74.2 84.1 145.1 187.8 174
Sunflower seeds 1114.9 n.a. 86.8 292.1 124.4 59.3 48
Bread and bakery products 34.3 36.9 38.6 52.6 64.4 53.4 117
Milk and cream, condensed 73.7 45.6 35.0 11.3 35.4 29.1 116
Chocolate products 25.7 35.1 35.1 42.2 54.2 45.6 137
* - less trade with Byelorussia.
Source: Customs Statistics of RF foreign trade.
12 Data of IPC.
13 For more details see: Economico-politicheskaya situatsia v Rossii. October 2005. M: IEI, November 2005.
Table 45
Import of Basic Agricultural and Food Products to Russia in 2000-2005,
Thousand Tons*
2000 2001 2002 2003 2004 I-IX 2005/I-IX 2004**
Beef 282.3 459.2 504.6 507.8 510.9 133.3
Pork 212.9 369.6 602.0 535.2 455.2
Poultry meat 687.2 1383.3 1375.2 1190.0 1101.3 123.0
Butter 45.4 81.4 94.1 1 1 4.0 70.3 88.2
Sunflower oil 149.5 182.8 175.7 200.8 160.4 80.9
Wheat and wheat/rye mix 2631.3 916.2 264.8 640.7 1364.1 41.1
Raw sugar 4546.6 5410.4 4441.0 4112.0 2582.9 130.7
White sugar 271.4 143.1 163.2 151.1 200.1 96.9
Citrus fruits 472.2 562.1 701.3 781.1 858.4 110.6
Coffee 20.3 21.6 25.7 32.0 29.4 135.5
Tea 158.3 154.4 165.3 168.9 172.1 105.1
* - less trade with Byelorussia. ** - including trade with Byelorussia.
Source: Customs Statistics of RF foreign trade, data of the Federal Service of State Statistics.
□ wheat_□ barley_□ rye_□ other
Source: WJ Inter Agro.
Fig. 63. Russia: Export of Grain, Thous. Tons
1
1
800 ■ H ly
400 ■ 200 ■ 0 I Ju
Aug. Sept. Oct. Nov. Dec. Jan. Feb. March Apr. May June
□ 2004-2005 D2005-2006
December - estimate of WJ Inter Agro. Source: WJ Inter Agro.
Fig. 64. Grain Export from Russia in 2004-05 and 2005-06 MY, Thous. Tons
4000 -r 3500 -3000
2500 -V)
£ 2000 -1500 -1000 -500 0
240000 220000 200000 -- 180000 -- 160000 -- 140000 -- 120000 -- 100000 80000 60000 40000 20000 0
1997 1998 1999 2000 2001 2002 2003 2004 Jan.-
Oct. 2005
lImport, pieces ■Import, thous. dollars
Export, pieces Export, thous. dollars
* - less trade with Byelorussia.
Source: RF State Customs Committee, Center of Economic Situation Studies of the RF Government, gromach.
Soyuza-
Fig. 65. Russia: Import and Export of Grain Harvesters*
Table 46
World Wheat Supply and Utilization Balance, Million Tons
2003/2004 2004/2005 2005/2006
Production 555 626 611
Consumption 589 609 620
Trade 105 113 110
Ending stocks 132 149 140
Source: http://www.fas.usda.gov/grain/highlights/2005/12-05/4Q_Wheat_ITR05.pdf.
I I Import, pieces I I Export, pieces
Import, million dollars - - - - Export, million dollars
Source: Federal Service of State Statistics.
Fig. 66. Russia: Import and Export of Tractors
Table 47
Proposals of WTO Members on Lowering Tariffs by Groups of Commodities
(for Developed Countries)
Borders of groups Percent lowering within a group
Group 1 0% - 20/30% 20-65
Group 2 20/30% - 40/60% 30-75
Group 3 40/60% - 60/90% 35-85
Group 4 > 60/90% 42-90
Source: Doha Work Programme. Draft Ministerial Declaration. December 18, 2005. WT/MIN(05)/W/3/Rev.2. WTO.
3.5. The Situation in the Sphere of Research and Development
3.5.1. Strategic Targets for the Sphere of Science and Innovations
During the past year, the government's activity, among other things, was focused on the conceptual documents that were to determine the development in science and innovations in the medium term. The primary role there belongs to the RF Strategy for Developing the Sphere of Science and Innovations in the Period until the year 2010 (hereinafter - the Strategy), which is being continually improved by the RF Ministry of Education and Science, as well as to the Ministry's Report "On improving the efficiency of the activity in the public sector of science" and to "The Program for modernizing the structure, functions and mechanisms of financing to the Russian Academy of Sciences (RAS) and other academies". The Draft Strategy became the basic document for preparing the sections on science and innovations incorporated in "The Program for the Socio-Economic Development of the Russian Federation in the Medium Term".
The Strategy having not been adopted by the year's end, the timeline for its completion was extended to March 1, 200614. In the course of last year it was remodeled several times, to become better structured; however, some basic points, which can hardly be judged as acceptable, remained unchanged. Thus, the formal definition of the national in-novational system (NIS) as such, as well as of its constituent components, initially was not quite correctly worded, and still remains so. The notions of a NIS and the sphere of science, or, as it is referred to in the Strategy, the '"knowledge generation" sector', are artificially separated. The universally accepted (including in the OECD countries) definition of a NIS implies that is should incorporate science as one of its key components. As for the Strategy, its approach to this definition is quite unique. However, when this approach, based on separate treatment of science and a NIS, is applied, the concept of an innovation system becomes meaningless, while science and innovations are being promoted by measures that have little coordination between them. It is quite characteristic that in August 2005 the Chairman of the RF Government approved "The main directions for the Russian Federation's policy in the sphere of developing the innovation system in the period until the year 2010" (No. 2473p-P7 of 5 August 2005), based on the classic definition of a NIS. However, no changes in the Strategy followed.
Another "methodology" problem is associated with the lack of clarity as to which exactly sector of research and development is being addressed by the Strategy. Sometimes it is specified that it is the public sector; however, it is defined in terms pertaining to the statistics of science. The public sector should be precisely determined, alongside the same criteria which are applied to the public sector in the national economy. In this case, the public sector should also incorporate public institutions, state unitary enterprises (SUEs), those economic societies where a block of shares (or a stake) in excess of more than 50% of the charter capital is held by economic societies belonging to the public sector. If the public sector in science is thus defined, its limits become much broader. In terms of personnel number, the public sector in science encompasses more than 80% of its total cadres, more than 86% of the fixed assets owned by research organizations, more than 83.5% in the total value of land, and more than 98% in the total volume of financing allocated to science in the consolidated budget. This is the evidence of the disproportional development of Russia's NIS, as well as of the fact that its entrepreneurial sector is almost invisible, while receiving, in effect, no direct support from the State. By way of comparison,
14 For an analysis of the Strategy's initial version, see in: Rossiiskaia ekonomika v 2004 godu. Tendentsii i perspektivy. Vypusk 26. (The Russian economy in the year 2004. Trends and prospects. Issue 26). M.: IET, 2005, p. 337-338.
the statistics concerning industrially developed countries can be cited, demonstrating that the State's share in the funding provided to research and development work (RDW) may be as high as 50% of the total expenditure on RDW received from all sources, while the public sector's share in the implementation of RDW is no more than 20%.
The changed approach to defining the public sector in science may entail a change in priorities, as well as in the very content of the priority goals to be established within the Strategy's framework and in the set of main instruments to be applied in the government policy.
The Strategy has formulated the basic systemic problem and, accordingly, the tasks that will be involved in providing the necessary solution to it. The main systemic problem is seen in the fact that "the rates of development and the structure of the Russian research and development sector satisfy neither the requirements of the national defense system nor the growing demand for state-of-the-art technologies displayed by several segments of the entrepreneurial sector". This interpretation of the existing problem seems to be narrow and not quite correct. First of all, the role of fundamental science and humanities is thus ignored, because these branches cannot be entirely orientated toward the market alone. At the same time, the list of basic measures to be implemented includes those designed to promote accelerated development of fundamental science as a primary goal. Thus, there exists an obvious contradiction. Secondly, when the problem is formulated in such a way, it may become easily reduced to the necessity to ensure growth only in the sphere of defense-oriented RDW. In this connection it is typical that the description of the currently existing situation, which is then reproduced in the Strategy, contains no evidence that science, indeed, does not satisfy the existing requirements in terms of national defense. Instead, it is only stated that science is poorly supplied with resources, and the national economy is not responsive to emerging innovations.
On the whole, the Strategy's main goal still remains unclear. One assumption may be that this goal is to establish, in the country, an innovative national economy through developing a national innovational system. If this assumption is true, the participation of a variety of departments in achieving this goal will be both necessary and justified. In fact, it is in this direction that current development is oriented: the innovation policy is no more the prerogative of the RF Ministry of Education and Science alone. Its practical implementation has also become part of the activities being pursues by the Ministry of Economic Development and Trade, the RF Ministry for Communications and Informatization, and the RF Ministry of Industry and Power Engineering.
If one takes it into consideration that the national innovational system incorporates the research and development sector, it would be more appropriate to recognize, as its major problem, the lack of proper balance in this system, the undeveloped status or sheer absence of some of its important components, including those responsible for the openness of Russian business to innovations.
The Strategy has put forth the main indices to be applied in the assessment of whether the formulated goals are actually being achieved. Among the six target indices pertaining to the Strategy's implementation, three appear to be rather doubtful. Regretfully, it is one and the same set of indices that has been replicated in the other conceptual documents concerning science and innovative development. The basic problem associated with the indices is that a purely statistical approach is applied, with all the limitations imposed by the standard system for the collection of statistical data on science and innovations that has been established in this country. Thus, the target index for the growth in the number of small businesses in the innovation sphere has been set in the amount of up to 30,000 by the year 2011. In this connection, the baseline, or the currently registered
number of such enterprises, is set as being approx. 22,000. However, this is not true. The latter figure is taken from the section of statistical records "Science and science servicing", but it does not reflect the actual situation in the innovation sphere. Meanwhile, more than 30,000 small innovative businesses have so far been established in this country. This has been clearly demonstrated by the computations prepared by the State Fund for the Promotion of Small-Size Forms of Enterprises in the Sphere of Science and Technology, which provides support to small-scale innovational entrepreneurship and therefore has accumulated true figures concerning the existing situation in the small-size business sphere.
The second aspect, which is fraught with problems because of the specific indices being applied, is the orientation toward increasing the patenting activity in the country. In view of the existing system of patent protection and the habitual commercialization of the results of research and development, growth in the number of patents cannot be set as a target. Most of the developments are being applied in the form of know-how, not patents. Patenting in Russia serves primarily the purpose of establishing priorities, similar to publications in scientific periodicals. The point is that a Russian patent does not ensure international protection, while making accessible the information concerning an invention's significant parameters. Therefore it is not by chance that only 35% of the total number of patents are actually in effect, as stated by the Russian Agency for Patents and Trademarks, while their support ceases, on the average, within 4-5 years.
Due to all these reasons, the orientation toward growth in the number of patents will result in a situation resembling that of the Soviet era. Then, the growing number of inventor's certificates was important for winning in socialist competition and thus being allocated additional budget funding. However, if the goal is to develop an innovation-based economy, it becomes more reasonable to use the licensing indices, or other indices that demonstrate the use of inventions.
And finally, an important problem is represented by Russian science's imbalanced cadres, the loss of succession, and young people's low interest in a career in science. The Strategy plans to assess the improvement in the cadre situation and the inflow of young cadres into science by the percentage of personnel aged below 39 years in fundamental research. In fact, this percentage is already growing every year, which, however, is not the proof of an improving cadre situation in science. The share of young scientists under 30 years is increasing, while that of those aged between 30 and 39 is declining, and thus the generation gap is becoming more pronounced. The well-being index in science will become the growing percentage of the middle generation - the scientists aged 30-39. This will mean that young people not only come into the sphere of science, but stay there.
The Strategy has been under discussion for more than a year, during which time, in addition to "The fundamental principles of the Russian Federation's policy in the sphere of developing science and technology in the period until the year 2010 and beyond", approved in 2002, "The Main Directions for the Russian Federation's policy in the sphere of developing the innovation sphere in the period until the year 2010" were adopted. The latter document provides some solutions to the problems formulated in the Strategy, and therefore it must once again be further develop - in order to catch-up with the developments. Within this context the Strategy's timelines - also until 2010 appears to be too short. More feasible would have been the mapping of a Strategy for innovational development of the national economy during 10-15 years, including the development of science and innovation activity.
3.5.2. Reform in the Public Sector of Science
During the past year, much attention at the government level was being paid to further remodeling of the strategic approaches to reforming the public sector of science. The RF Ministry of Education and Science prepared a detailed report concerning this issue, entitled "On improving the activity efficiency in the public sector of science". The organizational structure's reforming will inevitably impinge on property interests, and therefore is has more opponents than proponents.
The report offers a list of the basic problems existing in the public sector of science. Its content is not always based upon factual data, quite often representing unsubstantiated statements. The main problem specified is the lack of efficiency in the public sector of science. In this connection, its efficiency is assessed mainly on the basis of patenting statistics, while the low-key patenting at the state research institutions is by no means an evidence of their unsatisfactory operation, especially in a situation of uncertain status of the rights to intellectual property created at the expense of budget funding. The academic sector's inefficiency is being proved by comparing the growing budget funding of fundamental research to the almost unchanging quotability index. This is not quite correct, either, because the The quotability index is the characteristic of past results, which does not respond instantly to the growth in budget funding seen in the past two or three years only. It is possible indeed to assess the results of science, including expert's estimations, but so far such data have not been systemized. Thus, for example, according to the expert's estimations performed by the Russian Foundation for Basic Research (RFBR), quality research is being done by only 50-70% of scientists, whereas the others either have no desire to get involved in this activity, or simply have no competitive capacity.
It is impossible, on the basis of the data presented in the Report, to get any understanding of the degree to which the non-public sector of science is more efficient than the public one, and, consequently, the degree to which the public sector ought to be reformed. The notion of efficiency as such must be appropriately coordinated with the main goals set for the public sector, whereas the Report does not introduce the notion of the ratio of "mission" to "the efficiency of its implementation. The Report's best-developed aspect deals with the mechanisms to be applied in institutional transformations. By way of generalization, the essence of the suggested changes can put as follows:
• The institutes that work in the applied sphere are to be privatized, including as part of "in-house" science; the system of State Research Centers (SRS) must be fundamentally reorganized.
• The academic sector must improve the efficiency of its activity through self-reforming.
• Science must be strengthened at higher educational establishments, including through the creation of national and innovative universities; also, all types of integration must be implemented in order to ensure closer ties between science and education.
In the RF Strategy for Developing the Sphere of Science and Innovations in the Period until the year 2010 the main targets for transforming the organizational-legal structure of the public sector of science (Table 48).
From this table, it follows that one-half of all state institutions, and almost all state unitary enterprises, are to be reorganized by the year 2010 into other organizational-legal forms.
Table 48
Dynamics of Organizational-Legal Structure of Public Sector of Science
Percentage in total number of organizations in public sector of science 2005 2008 2010
State unitary enterprises 48.0% 2.4% 1.3%
State institutions 50.0% 28.6% 25.0%
State autonomous institutions 0% 11.9% 21.9%
State autonomous not-for-profit organizations 0% 9.5% 15.6%
Joint-stock companies where more than 50% of shares is fed-
eral property 2.0% 47.6% 36.3%
Total 100% 1 00% 1 00%
Number of organizations (as reference) 2600 2100 1600
Source: The RF Strategy for Developing the Sphere of Science and Innovations in the Period until the year
2010. The RF Ministry of Education and Science, December 2005, p.130.
Reforming of the System of State Scientific Centers (SSCs)
The status of a State Scientific Center (SSC) was granted to research institutes with unique and large-scale experimenting bases, engaged in a complete innovation cycle, from fundamental research to pilot production. Their research themes were, in fact, covering the whole spectrum of priority areas in the development of science and technologies (Table 49). Presently, 58 State Scientific Centers are operating in this country, with the total staff of 80,000.
The organizations that had been granted the status of a SSC were developing along different lines, and some of the research centers, indeed, became leaders in their branches, while others were existing only due to the special support on the part of the State. The analysis of the SSC system, based on the results of a series of qualification tests, has demonstrated that all the SSCs can be subdivided into two unequal clusters: the most successfully developing organizations (approx. 30% of all SSCs) and the others, whose indices are much lower. Many SSC have no stable relations with industry and have not found their own niches in the branch system of the national economy. Thus, for example, the capacities of four metallurgic SSCs are not being made use of by metallurgy. Ninety-five percent of this industry has been privatized, and biggest companies have created their own research divisions.
At the same time, the government policy toward SSCs has always been equalization-oriented: the state funding under the support program for SSCs was distributed in the same proportions that had been established during the period when the SSC had been initially created, and no redistribution of funds in favor of more efficient organizations has been done since. No target indices or parameters for the SSCs performance have ever been established, either. In 2004 the SSC status of all the existing Centers was once again prolonged for two more years, but in 2005 the funding under the support program for SSCs was discontinued totally, without any exception being made for any of the Centers. The situation was somewhat softened, however, by the fact that for many of the SSCs' directors it was the status itself that was important, and not the additional budget funding associated with it. The status of a SSC implies tax exemptions (in respect to the taxes on property and land), which are more important that additional funding. Thus, in 2003 tax exemptions made it possible for the SSCs to retain approx. 3 billion roubles, billion roubles while only 1 billion roubles was allocated under the support program for the SSCs in that
year15. From the year 2006 onward the SSCs will be no more enjoying exemption from the land tax, and their situation therefore will become critical. So, it will be necessary either to adjust the terms of the support being provided to the SSCs, or to change their organizational-legal forms (at present, most of the SSCs have the organizational-legal form of a federal state unitary enterprise (FSUE).
Table 49
Areas of SSCs' Scientific and Science-and-Technology Activity, and Their Coordination with Priority Areas of Scientific and Technological
Progress (STP) (Non-Military)
Areas of SSCs' activity*
Machine-building, motor-vehicle industry
Shipbuilding, navigation and acoustics Biotechnologies, virology Medico-biologic problems Plant selection Chemistry and new materials
Informatics, production of instruments and appliances, robot technologies Metallurgy Constructiono
Oceanology, meteorology, water supply and hydrogeology Opto- and photoelectronics
Nuclear physics, nuclear power engineering
Electrotechnologies, power engineering
Mixed-branch fundamental research Total
STP priority area**
New transport technologies
Live system technologies
New materials and chemical technologies
Industrial technologies
Ecology and rational wildlife management
Informational and telecommunications technologies, electronics
Energy-saving technologies
Number of SSCs developing a specific priority area
11
10 8
5 4
9
58
* - According to the Classification of the Association of SSCs.
** - According to the list of priority areas in the development of science, technologies and machinery of the Russian Federation, approved by the President of the Russian Federation as of 30 March 2002, Pr-577. Source: Association of State Scientific Centers of Russia.
The program for improving the efficiency of the public sector of science envisages exactly this - the possibility to change the organizational-legal form of a SSC. In a situation where new organizational-legal forms (of an autonomous institution or a state autonomous not-for-profit organization) have not yet been introduced, it has been suggested that the reforming of the SSC be started within the framework of the already existing organizational-legal forms. It is planned to preserve, in the form of a state institution, only the most viable ones among the SSCs, while to transform the others into joint-stock companies. However, if the respective branches are no more in need of the services provided by the SSCs, their reorganization into joint-stock companies will result in their effective liquida-
8
3
15 Mazurenko S. Znaniia u nas iest'. Nado prevratit' ikh v den'gi. (We do have knowledge. It must be turned into money.) // Izvestiia, 1 April 2005, p.16.
tion. The provision in existing legislation to the effect that the new joint-stock companies should not alter their core activity will only make more agonizing the last few years of their existence. The experience of privatization in recent years has demonstrated that the result of such transformations is a dramatic reduction in the number of design bureaus and the so-called "in-house" science - i.e., the organizations capable of technically developing and implementing in industry the products of those centers for fundamental and applied studies that represent the core object of the ongoing reform. Thus, the new wave of privatization may still further undermine the existing relationships between science and business.
It therefore appears that the reforming of SSCs should be started only after the new organizational-legal forms have been introduced. The prospect of such transformation may seem more appealing to the SSCs if the principles of budget funding are also changed. In particular, for the participation in the tenders for the budget funding of applied research, an additional requirement may also be introduced - that of providing parity-based funding from off-budget sources. In this case, the form of a state institution, while still ensuring a safe status in terms of guaranteed budget funding, will, nevertheless, become disadvantageous in terms of economics.
The list of measures designed to improve the level of the SSCs' activity does not include one important component - the determining of the spectrum of functions to be performed by those Centers which will keep their special status. at the same time, it is not considered feasible, alongside the improvements in the system of SSCs, to create "national laboratories" oriented toward the development of specific strategic areas of research. It is planned to create, by the year 2008, at least 5-7 national laboratories. In this connection it is not clear why indeed one status should be replaced by the other. One explanation may be that the number of national laboratories will be restricted due to the limited capacities of budget funding being provided to big centers for applied studies. Then it would be logical to transform some of the successfully operating SSCs into national laboratories.
It would be feasible to introduce the special status (of a SSC or a national laboratory) only if it is to be granted to those institutes which have been assigned, by the State, to perform certain specific functions - those of expert's assessment, forecasting, etc. In such a case, appropriate targeted funding from the state budget will be necessary, either within the framework of a special program, or as part of the funding allocated within the framework of federal target programs.
Modernization of the Academic Sector of Science
The modernization of the academic sector of science was actually carried out in the year 2005 by the Presidium of the RAS, while the plans of reforming had been developed in cooperation with the RF Ministry of Education and Science, the latter being the leader. In particular, the document entitled "The Program for modernizing the structure, functions and mechanisms of financing the Russian Academy of Sciences (RAS) and other academies"16 has resulted from a compromise achieved between the Ministry and the RAS.
In this document a set of measures is envisaged, which are designed to improve the efficiency of the academic sector of science. These measures include the rating of academic research organizations based on a set of quantitative indices, the support for the best institutes by means of allocating additional budget funding, the creation of a special system for managing the property not being made use of in current research, as well as additional pension benefits to scientists. The program is clearly oriented toward concen-
16 The Program was approved by the Interdepartmental Commission for Science-and-Innovation Policy, Protocol No. 4/04 of 11 October 2005.
trating, within the RAS system, the cadres, property and funding being available in the public sector of science. It consolidates the RAS' leading role in carrying out and coordinating all fundamental research in the public sector. In particular, it is planned to incorporate into the RAS system a number of research organizations belonging to branch academies of sciences, as well as other research organizations engaged in fundamental research. The Program states that it is necessary to increase budget funding allocated to fundamental research in absolute and relative terms so as to achieve, in the year 2008, the level of 58% of the total federal budget expenditures on non-military science 17. This is a very ambitious goal. Even in prosperous countries this item of expenditure amounts to a lesser figure in relative terms18. It does to appear feasible to increase such expenditures, while the system for commercializing the results of research remains underdeveloped. The goal must be that of optimizing the allocation of budget funds throughout all states of the innovation cycle. So far, a rather disproportional structure has emerged in Russia, where the areas of applied research, technology design, designing proper, as well as marketing, are underdeveloped, while fundamental research is far from being so.
The practical implementation of the measures envisaged in the program had begun in two directions - the creation of a branch-based system of remuneration of labor in the RAS and the modernization of the system of departmental research institutions. The experience accumulated so far has demonstrated that any self-reforming, as a rule, is purely decorative. The first practical steps have confirmed this conclusion: the RAS' CEOs began to merge some of its subordinated institutes without any clearing or reduction of the existing "dead weight". Simultaneously, the introduction of the branch-based system of remuneration of labor was started. This will involve an assessment of the institutes in accordance with a number of criteria, with the planned result of 25% of budget-funded jobs being cut within the next three years, with a simultaneous creation of off-budget positions instead. The total number of job losses in the academic sector is not to exceed 10%. It is planned that the scientists employed at budget-funded jobs will be doing fundamental research, while those at off-budget jobs - innovation-oriented projects. Resulting from these changes, as well as the growing expenditures on non-military science, which are to be achieved until the year 2010, the average monthly salary of a scientist in the academic sector is expected to increase to 30,000 roubles. This figure (30,000 roubles) represents a certain mean value, which is to be reached gradually. Only 50% of this amount will be guaranteed, while the rest is to be provided by a variety of incentive payments (bonuses for urgency, important fundamental research, tutoring of post-graduate students, secrecy, etc.).
Is it really necessary to reduce the number of scientific cadres in academic organizations, and what criteria are to be applied when doing so? The answer to the first question is 'Yes", because it is a well-known fact that many institutes are burdened with the so-called "dead weight", whose presence can hardly be justified even by the assumption that there should be "an appropriate environment" for young scientists to develop their abilities in. It would be more difficult to determine precisely the true scope of the existing "dead weight". Some selective assessments have demonstrated that the RAS is planning its job cuts very sparingly. The sociological survey in the academic sector of science, conducted in 2005
17 It appears that the Program, most probably, implies increasing budget funding of fundamental research in particular within the RAS system, because, as seen by the results of the year 2005 reported by the RF Ministry of Education and Science, approximately 67.5% of the total federal budget expenditures allocated to non-military science was spent on the financing of fundamental research.
18 For example, in the USA the share of budget allocations to fundamental research within the total federal expenditure on science amounts to 37.2%. Source: Science & Engineering Indicators - 2004. NSB: Washington, DC, 2004, vol.2, pp.A4-8, A4-12.
on the order of the Center for Strategic Research under the RF Government, has shown that the percentage of the research staff at the academic institutes who work in a well-motivated and productive way amounts to only 22-25%. Another 16-18% (approximately) are being drawn toward the former group19. That is, the Academy's active potential is constituted by approximately 40% of its actual research staff. Some additional data have been collected at the institutes of the Siberian Department of the RAS (SD RAS) concerning the activity of the research staff in generating scientific publications. These have demonstrated that the number of scientists who have produced no scientific papers to be published varied between 20% and 25% of the total research staff20. At the same time, according to some comparative estimations, the research at the Siberian Department of the RAS is more active than the average level of activity in the RAS system. Thus, the volume of offbudget funds attracted by the institutes of the SD RAS is equal to 50% of the department's total volume of funding. This figure is higher than that observed in the RAS' other departments.
As for the criteria to be applied for determining viable research groups, the experience of the SD RAS can also be useful. Since 1998, in the assessment of the results achieved by the subordinated institutes, there has been applied a specific rating system. The rating builds upon a set of indices, including the number of published works, with due regard to the impact factor, the index of scientific references to each work, the patenting index, the volume of attracted off-budget resources, the amount of grants, the share of young scientists and postgraduates, the number of defended dissertations. The comparison of indices is done with consideration for the specificity of each area of research, and additional funding from the centralized fund is allocated to the best institutes.
The ratings, however, have their own limitations: they do not create incentives for better performance for scientists and research groups with "medium" potential. Therefore we believe that assessments still must be based upon scientific expert's estimations, and not upon rating by formal indices. The ratings can be applied as a one-time measure, within the framework of a large-scale inventory of research organizations. The central role, however, must be played by an individual approach to research laboratories, because this is the only way that can ensure than the truly best scientists remain in the sphere of science.
While the procedures for job cuts are being elaborated, the problems associated with normative-legal regulation may arise. The existing legislative base in respect to research staff does not establish any indices for assessing the results of their work that could serve as a justification for a dismissal. The attestations are held in a rather formal manner, based on characteristics signed by heads of laboratories, as stipulated in the provisions adopted in 1985. Under current legislation it is, in effect, impossible to dismiss a researcher who is punctual about his or her working hours but is totally unproductive.
On the whole, the project for a transition to the branch-based system of remuneration of labor, suggested by the RAS, gives rise to some questions and doubts. The very distinction - between those scientists who are engaged in fundamental research and all the others - appears to be an artificial and harsh imposition upon the natural course of research activity. Its possible consequence may be the growth of social tension in research groups and organizations, which is by no means a good incentive for better performance.
19 A. Belanovskii. Otsenka sosloiannia Rossiiskoi akademii nauk. Kratkii otchiot. (An assessment of the status of the Russian Academy of Sciences. A brief report. http://www.polit.ru/dossie/2005/12/15/ran.html
20 http://www.sciencerf.ru/client/news.aspx?ob_no=1378
Moreover, will the increased salaries, as planned, really improve the level of fundamental research - without changing all the other conditions for the work of the research staff?
It is quite typical that the increasing of salaries and mergers of organizations are being done without any relation to the organizational reforming of the RSA itself, which is to be started only as late as Q 2 07. It is intended to increase salaries at the expense of the funding allocated to the renewal of equipment and appliances, which is to be "frozen" for three years21. The main argument in favor of such a decision is that if salaries are not increased, there will be no personnel to operate the new equipment. However, the opposite argument appears no less valid - that if equipment is outdated, science will have no competitive capacity, and besides, it will be difficult to attract off-budget sources, to submit publications to the leading scientific journals, etc. According to the data presented by Chief Academic Secretary of the Presidium of the RAS Valerii Kostiuk22, 57% of equipment in the institutes subordinated to the RAS is already more than ten years old, while the share of new equipment is only 14%. Thus, the approach based on the principle "first - increased salaries, and then - purchases of new equipment" may result in a still further deterioration of the cadres in the sphere of science.
The problem associated with the increasing of salaries and a simultaneous subdivision of scientists into two categories - those whose salaries are funded from the budget, and those whose salaries are funded from off-budget sources, appears even more complex if once scrutinizes all the details of this process. For example, if scientists receive grants from state research funds, will this type of financing be recorded as that requiring a switchover to an off-budget salary, or not? In which way must be treated the budget funding received within the framework of tenders held by various departments (e. g., the Ministry of Education and Science, or the Ministry of Economic Development and Trade) ? The work performed under such projects may well incorporate some elements of fundamental research, and so, in order to categorize it as the additional funding "allowed" as a supplement to a budget-funded salary, it will be necessary to investigate each specific case. So far, the situation has remained unclear. For example, according to one competent opinion, the grants from research funds must now serve a different purpose - instead of being a source of supplementary material support to scientists, they are now to provide for the research process proper (purchases of equipment, supplies, costs of expeditions and business trips)23. If such an approach is applied, it will no more be a problem to categorize this type of additional funding. However, will it indeed be possible in the present situation, when salaries are being increased only very gradually, to eliminate entirely the material support to scientists in the form of grants?
Reform of the public sector of science is closely associated with property issues. In particular, this has to do with the regulation of rights and terms for leasing premises. State unitary enterprises (including SSCs) and the RAS have the right to lease their premises. However, it is not possible to assess the effect of the use of property, because no reliable data are available. As far as the RAS is concerned, even the information concerning the size of its property complex is closed to public. This lack of transparency in terms of information is possible due to the special status of state academies, which are both state institutions and self-governing organizations. One can speak only in indirect terms, pointing to insufficiently effective use of academic property, because the problem associated with the need to redistribute unoccupied premises between the academic institutes has so far re-
21 Intervi'u s akademikom S. Aldoshinym. (An interview with Academician S. Aldoshin.) // Poisk, No 42, 21 October 2005, p.5.
22 Novye Izvestiia, 23 May 2005.
23 Intervi'u s vitse-presidentom RAN akademikom A. Nekipelovym. (An interview with Vice-President of the RAS Academician A. Nekipelov.) // Poisk, No 39, 30 September 2005, p.5.
mained unsolved. Some of them lease out their premises, while others are forced to lease premises from other organizations.
In developed countries, the economic activity at state research centers is taken care of by asset managers (often represented by private companies), which are obliged to direct the proceeds from the use of property to the support of an institution's core activity. This type of asset management organization is one of very common forms of public-private partnership. It is in the asset managers' interests to ensure efficient use of property, because their income depends on it. As for the RAS, the possibility of creating a centralized asset manager was also discussed, however it found no enthusiasm on the part of its Presidium.
On the whole, so far the Academy has kept all its assets, and the number of its personnel has also remained almost unchanged. This is a clear indication that any modernization implemented by the Academy itself has only been limited to "conserving" the existing status quo. No external influences have produced any serious effect oin the academic sector of science - in particular, the academic institutes have not been devoid of their basic source of support, in contrast to the treatment being practiced by the Ministry of Education and Science in respect to SSCs.
The Integration of Science and Education
Science existing within the framework of higher educational establishments (HEEs), as well as its specificity, has hardly ever been mentioned while discussing the problems of organizational reforming. The incentives for HEEs to expand their research activity are created in the course of reforming the educational system. At the same, serious legal issues are faced by science based on HEEs - issues that are not limited just to the sphere of education.
The currently practiced approaches to reforming have demonstrated priority given to the integration inside a HEE, that is, the creation of incentives for them to expand their research and innovation activities. It is this internal integration that is envisaged in the currently being developed concepts of an "innovative HEE" and a "national university".
The "innovative" status is to be granted only to those HEEs, which, among other things, are involved in active and productive research. In 2006, the first ten 10 HEEs will be selected, and in 2007 - another twenty. Each of the HEEs, which will be granted the status of an innovative one, will receive a state grant in the amount of 500 million roubles. The funding is intended for the development of new curricula, renewal of the material base of research and educational activity, attraction of quality faculty personnel, as well as of promising young students, as well as faculty personnel and students from foreign countries. In this connection, the volume of a HEE's own off-budget funds to be invested in the program of its development will constitute no less than a half of the size of budget allocation. The first tender will be held among the most resource-intensive HEEs in the fields of natural sciences, technologies and engineering, medicine, and agricultural sciences. It would be reasonable to pick out universities within each group, because research and education have their specificity depending on a particular field.
The criteria for selecting HEEs must differ from those being applied by the Ministry of Education and Science in its ratings, because, according to specialists, the existing ratings do not adequately reflect the actual quality of HEEs' performance. Besides, it is planned that the selection itself of HEEs will be done by a Commission independent of the Ministry of Education and Science, so as to make as objective as possible the experts' estimation of the applications being submitted.
It follows from the list of criteria submitted for discussion that innovative universities must conduct research at a high level, combining it with state-of-the-art teaching technologies. Regretfully, the resource-based estimation indices (the number of infrastructure elements, types of infrastructure, the ratio of RDW volume to the number of staff, etc.) are given preference to, as before. At the same time, one of the estimation indices for HEEs, universally accepted throughout the globe, is the employment of their alumni. Russian HEEs do not monitor the information concerning their alumni, nor do they estimate the percentage of their alumni seeking employment in foreign countries. Despite the active work aimed at determining the necessary set of criteria, no distinct notion as to what "an innovative HEE" actually is, has emerged so far.
While implementing this initiative, it would be feasible not to forget all the other HEEs, providing them with the chance, in future, also to become "innovative". For this to be achieved, the selection of innovative HEEs must not be a one-time act - such tenders should become regular.
The Ministry of Education and Science is also planning to provide special support to "national universities". The concept of a "national university" underwent significant changes during the past year. In late 2004, national universities were understood as this country's leading HEEs, and it was planned accordingly that about 100 universities will become "national" and receive the budget funding appropriate to their new status24. In 2005, however, after a nation-wide project designed to develop the sphere of education was initiated, the notion of a "national university" was radically transformed.
Now a "national university" is a mega-university, created through merging several HEEs within a region. In the 2006 budget, 3 billion roubles is allocated to the creation of "national universities". It is planned that national universities are to appear in Krasnoyarsk and Rostov-on-Don. However, other HEEs also hope to be granted support in the future, and so merger-oriented activity has been on the rise in some regions (e. g., in Archangel, in Ekaterinburg). The new concept of a "national university" envisages that they are to become a form of public-private partnership: private businesses will provide additional financing to educational activity, participate in the tutoring and program development, as well as in determining a HEE's policy through their representative in the board of trustees.
In Krasnoyarsk, it is planned to merge seven HEEs, having simultaneously cut the number of students from 80,000 to 40,00025. This may result in negative social consequences, because for many of the region's young people it will become problematic to get an education, and for faculty members - to find employment. It seems that no serious assessment of such a merger's outcome has been done so far.
Beside developing HEE-based science through a system of innovative and national universities, it has been envisaged in the Strategy of the Russian Federation that in the sphere of science development and innovations until the year 2010 there should be created incentives for integrating science and education within the framework of an interaction between HEEs and academic organizations, as well as other research centers throughout the country. The integration of science and education is declared to be one of the two key tasks associated with the development of science and innovations; this is also stated in the Program for Socio-Economic Development of the Russian Federation in the medium term (2006-2008). However, the development of this type of integration has been suppressed by a number of the existing normative-legal problems and the absence of tar-
24 For more details, see: Rossiiskaia ekonomika v 2004 godu. Tendentsii i perspektivy. Vypusk 26. (The Russian economy in the year 2004. Trends and prospects. Issue 26). M.: IET, 2005, p.345.
25 Poisk, No. 48, 02.12.2005, c.4.
geted and systemic support to such an integration. There are no definitions in legislation of either the forms of integration traditionally existing in Russia (a basic chair, a problem-oriented laboratory), or the progressive forms (a research university). No in-depth integration can be possible in the existing legal space, and therefore the costs of knowledge transfer become much higher26. The existing remuneration system is not conducive to the integration of science and education, either. The professional and legal status of researchers is different from that of professors and other faculty staff. When the faculty personnel undergo an attestation, the fact of their conducting any research is by no means a basic criterion, and the requirements concerning research are very low27. Furthermore, the basic salary level of the faculty staff at HEEs is several times higher than that of the staff of research departments, while the volume of lectures to be delivered is much greater than that established in foreign countries. All this results in the incentives for research being diminished in Russian HEEs.
Against this background, one positive trend has undoubtedly been represented by an attempt to revive the once successful "Integration" Program through providing support to Scientific-Educational Centers (SEC). Last year, the Ministry of Education and Science held a tender for the creation of 20 SECs, each of which was to be based on the cooperation between at least two organizations. The Centers are to receive 6 million roubles each for two ears, which is not enough for any serious renewal of the equipment base. However, this is by all means better than those financial conditions that were envisaged in the "Integration" Program.
The Academy of Sciences has been attempting to find solutions to the integration issue and the need to augment the cadre potential through creating academic universities. This trend, which first emerged in 2004, is successfully developing. In 2005 the Academic Physico-Technological University in St. Petersburg was granted a state license to educational activity, and now is able to educate specialists within the framework of Master's and Postgraduate Programs. The education has been organized in accordance with similar programs at another academic HEE - the Pushchino State University. The number of students at an academic HEE is no more than 250, and such universities, in effect, satisfy the existing requirements of the academic sector of science. Their further development will depend on their ability to receive adequate funding through the Ministry of Education and Science.
When discussing the issue of science and education being integrated, one cannot overlook the issues relating the status of the research institutes (RI) attached to HEEs. The normative-legal substantiation for their activity has never been clearly stated, and so far those RI that have not become structural subdivisions of HEEs are functioning, in effect, outside the existing legal space. From the year 2006 onward, it is intended that an approach similar to that applied last year to SSC (the discontinuation of targeted funding within the framework of a thematic plan) will also be applied to the RI at HEEs. The thematic plan represents a form of basic support to a RI. It especially important early in a year, when the portfolio of projects based on contracts has not yet been formed. Thematic plans so far have been covering only 20-25% of the HEEs' real needs; however, even this small-scale funding enabled then to maintain a permanent research staff. The simple solution of merely attaching all RIs to HEEs will not necessarily be promoting the growth of the latter's
26 Thus, e. g., if the existing norms are strictly complied with, a HEE, when teaching its students on the basis of laboratories of academic institutes (or basic chair), must pay rent and taxes.
27 Thus, in accordance with the new criteria for assessing the performance of a HEE's faculty, they must conduct research in a volume equal to 18,000 roubles per 1 person per annum. This is three times as high as the previous criterion; however, this new minimum can be easily reached by a purely symbolic participation in a grant or a small-scale commercial contract.
research capacities; on the contrary, it may result in an overall deterioration of the research base in the HEE sector. As a matter of fact, commercial education services represent the most profitable activity for a HEE, the resulting income being much higher than that of research activity. According to the data provided by the Committee on Education and Science at the RF State Duma, the earnings on research contracts of all the state HEEs in Russia in one year amounted to only 3.5% of their total earnings from commercial education services.
3.5.3. Modification of Fundamentals of Public Funding of Research and Development
In 2005, a new budget classification was introduced. Its structure makes it somewhat more difficult to analyze the expenditures on non-military fundamental research. While previously there existed the separate budget section 06, "Fundamental research and promotion of scientific-technological progress", where the amount of funding to be allocated to fundamental and applied research was clearly determined, after the switchover to the new budget classification the expenditures on science are scattered throughout nine directions of the expenditure's functional structure. As for the expenditures on fundamental research, they all are contained in the Section "General State Issues", while the expenditures on applied research are distributed between all the nine items, and in some subsections it is difficult to distinguish them from the expenditures on military fundamental research and development. As a result, the budget does not contain, in an evident form, any data concerning the funding to non-military RDW, and so recalculation is necessarily based on indirect data.
The structure of funding to science in the year 2005 remained almost the same as before: budget funding still constituted 60 % of the overall expenditures on science. Accelerated growth was demonstrated by budget funding to fundamental research, which was compatible with the program documents where priority support to fundamental science was declared. At the same time, the departmental structure of expenditures has remained nearly entirely unchanged: about 40 % of budget allocations to fundamental research went to the Russian Academy of Sciences, 6 % - to the Russian Academy of Medical Sciences, and 5.2 % - to HEEs. According to preliminary estimations, state funding to HEE-based science in 2005 was reduced, amounting to 4.3 % of total budget expenditures on science, against 6.1 % in 2004. Thus, despite the declared rise in the funding to fundamental research at HEEs, which is necessary, in particular, for a more efficient integration of science and education, its volume has remained negligible, as compared to the funding of the academic sector.
In the Explanatory Memorandum for the 2006 Budget is has been specified that among the total expenditures on fundamental research, only 14.6 % will be distributed on a tender basis. Probably, this 14.6 % also includes the funding of fundamental research through state research funds - the RFBR and the Russian Fund for Humanitarian Studies (RFHS). In such a case, only 7.6 % of the funding allocated to fundamental research at academic organizations and HEEs will be distributed on a tender basis.
Budget expenditures on applied research cannot be estimated from the point of view of their distributing among priority areas in science and technologies. It is practically impossible to establish the correlations between the nine priority directions for the development of science, technologies and machinery, approved by the RF President, and the directions of the functional structure of budget expenditures (general state issues, national defense, national secutiory and law-enforcement activity, etc.). At the same time, it is the information concerning the funding for the priority areas in science and technologies that
is important for making an appropriate estimation of the degree of changes in the state policy in the sphere of science.
The year 2005 marked the transition to a large-scale application of tender mechanisms in the funding of projects through the agencies of the Ministry of Education and Science. While in 2004 only 23 % of funding was distributed on a tender basis, in 2005 this figure grew to 73 %. Applied research was implemented predomuinantly through the mechanism of Federal Target Programs. In the sphere of science, the core program is the Federal Target Scientific-Technologic Program (FTSTP) "Research and development in the priority directions for the development of science and technology in the years 20022006". Its scale had been to a substantial degree increased by merging it with several other programs (for example, the program "Integration of Science and Education", the program of support to SSCs, that of support to leading academic schools, and some others)28. As a result, the FTSTP's budget in 2005 amounted to 7.4 billion roubles and became the largest (second only to the Federal Space Program of Russia) in terms of expenditures on research and development. Within the new FTSTP framework, the projects submitted to tenders have also became bigger, both from the point of view of their volumes of financing and their duration. While previously the average volume of financing to a project was 800,000-900,000 roubles, in 2005 the average amount of expenditures on fundamental research projects was already about 3 million roubles, and of that on projects in research and development - 10-20 million roubles.
It might seem that effect of the growth in project volume could have been only positive: in the majority of developed countries, the available funds are focused on a limited number of priorities, and resulting are full-scale projects, to be implemented over a rather long period of time. At the same time, the first practical results have demonstrated that the Russian version of contesting produced a worsened situation.
The emergence of a limited number of large-scale projects, while there still exists a huge public sector oif science where all the organizations rely on budget support, will mean a dramatic fall in the number of state organizations entitled to budget funding. In face of lack of sufficient funding from other sources, this creates incentives for lobbying29 and results in the monopolization of budget funding by a small group of organizations. The situation may still further be aggravated by the existing procedure for selecting applications. When projects are being selected for the allocation of funding, no attention is paid to such indices as the number of publications, the index of scientific references to each work, the number and size of previously received grants, the contrtacts concluded by an organization, and so on. The main criterion is the content of the application itself, and to a certain degree - the status of the applicant team and its director. In some instances the future im-plementers of a project are known even before a tender is started, while the lists of winners demonstrate that there exists a well-established circle of organizations - implementers of projects. As estimated by the Auditing-Consulting Company FBK (ACC FBK), which has analyzed the data on the organizations - winners of tenders for RDW in the sphere of eco-
28 Decree of the RF Government "On making amendments to the Federal Target Scientific-Technologic Program "Research and Development in Priority Areas of the Development of Science and Technology" for the years 2002-2006, No 540, of 12 October 2004.
29 The discussion in the media of the specific features of the contest-based selection of projects within the FTSTP's framework and the estimated scope of corruption in the sphere of science and technologies has been very active. See, for example, N. Sotnikova. Retsidivy imitatsii. (Imitation's relapses) // Poisk, No. 8, 25 February 2005, p. 4; M. Gelfand. Remontirovat' -nie znachit lomat'. (To repair does not mean to break ) // Poisk, No. 12, 25 March 2005, p. 4; Ye. Morgunova. Vperiod, k ruinam? Gosudarstvo khochet izbavit'sia ot otraslevoi nauki. (To move forward, toward ruins? The State wants to get rid of branch science.) // Poisk, No. 25, 24 June 2005, p. 4; Ye. Pis'mennaiia. Otkati, togda pokatit. (Roll it away, and then it will start to roll on.) //Newsweek, No. 57, 25 -31 .July 2005, p. 17-20.
nomics, 10.3 % of all organizations received 31.8 % of the total volume of funding30. As for the leading organization (the State University - Higher School of Economics), it received 25 % of all budget funding allocated through the tenders.
There also exists another problem. Presently, the funding of large-scale applied projects is executed without estimating the prospects for the theme's further development, which must include preliminary patenting and marketing research, the mapping out of potential markets for product sale, and the existence of established contacts with the companies - consumers of RDW results. All this contributes to the risk of inefficient spending. Also, it has almost never happened so that during a project's implementation its intermediate results are assessed, and, in the event of their being negative, the funding is discontinued. So far, procedures have been developed for monitoring the implementation of projects within the FTSTP's framework. This may to a certain extent neutralize the currently existing limitations of funding based on quasi-tenders. It also appears feasible to alter the principles for allocating budget funding through tenders. For example, in the first phase some small-scale funding can be allocated to several competing groups, and then the best project be chosen for further support.
3.5.4. Overseas Funding to Russian Science
During last year, several new divisions (or representative offices) of foreign funds were opened in Russia, in particular that of the Helmholtz Association (Helmholtz Gemeinschaft) and Fraunhofer Gesellshaft (associated institutes for applied research in Germany and elsewhere in Europe). The representative offices are established for purposes of developing closer contacts with Russian scientists and organizations, thus promoting cooperation in the sphere of research and development. Russia represents Europe's important strategic partner, being at the same time a country with prominent schools for fundamental research and a market for high-tech products with a potentially high capacity.
Besides, a number of foreign representative offices have recently expanded their Russia-oriented programs: the German Research Council (Deutsche Forschungsgemeinschaft) (DFG)) has announced a joint tender with the Russian Fund for Humanitarian Studies, the German Academic Exchange Service (DAAD), in partnership with Russian agencies, has initiated a new program for postgraduates and young researchers in the sphere of humanities and social studies. This program is co-financed by the Russian party, and so the DAAD is discussing the possibility to implement supplementary projects (in particular, in the field of medical science), to be funded from additional resources.
The IET's poll, conducted in 2005 among 19 foreign organizations and funds that provide funding for Russian science31, has demonstrated that most of the organization that have been actively cooperating with Russia plan to continue this activity. Only about 20% of the funds that participated in the poll were either planning to round up their operation in Russia by a certain date (on the average - by 2007-2010), or had already stopped implementing their projects in the sphere of science and technologies. The limited timelines for their operation in Russia can be explained by the fact that in a few years Russia will become a full-fledged partner in international programs, and no special initiatives oriented to Russian science will be needed any longer.
30 The study was based on openly available data, published in the newspaper "Konkursnye torgi". The sample incorporated 945 works performed by 386 organizations. Of these, 86.6% were state organizations. Source: Ekonomicheskie issledo-vaniia i ekonomicheskie reformy. Analiticheskii doklad. (Economic studies and economic reforms. An analytical report.). M.: FBK, 2005.
31 I. Dezhina. Vklad mezhdunarodnykh organizatsii i fordov v reformirovaniie nauki v Rossii. (The contribution of international organizations and funds to the reforming of science in Russia). M.: IET, Naucnye trudy (Scientific Works) No. 91R, 2005.
At the same time, the funds intending to continue their operation in Russia have put forth a number of arguments in favor of this decision. The most frequently mentioned reason is the benefits of cooperating with Russian scientists and scientific organizations, some of which have powerful potential. Besides, this cooperation is also rather profitable in terms of economics, because the average salaries of researchers in Russia are lower than those of their counterparts in foreign countries. When providing the funding for joint studies, foreign partners spend on RDW much less than what they would have been paying in their own countries. Also, there exist common interests in the sphere of global research in the spheres of economics, environment protection, power engineering, etc.
The second reason the growing commercial interest displayed by Western partners, their desire to gain assess to certain hi-tech products.
The third reason is the need to promote mobility, prevent "brain drain", participate in reforming. The situation in Russian science, while having indeed improved, is still far from being stable and favorable.
However, this positive trend of international cooperation growth may be reversed if legislation is changed. Early in 2006, the Federal Law "On making amendments to some legislative acts of the Russian Federation" (No. 18-FZ of 10 January 2006) came into force, which at the stage of its development had already stirred a negative response in the "third sector", with a simultaneous large-scale response in foreign countries.
The preparation of amendments to be made to existing legislation was started, resulting from the RF President's declaration that it was unacceptable for political parties and movements to receive financing from abroad through various not-for-profit organizations. Therefore the main goal was to keep the domestic political situation in Russia safe from any foreign influence. Indeed, several funds - foreign-funded Russian ones, as well as foreign proper with representative offices in Russia - have declared "the development of democracy in Russia" to be their principal target. Thus, in the 2006 budget of the US State Department, the allocation of $ 85 million to the programs for promoting democracy and economic reform in Russia has been envisaged. The main bulk of these monies is being distributed through various programs and funds.
Some of the funds that are providing financing to science and education in Russia have at the same time declared, as their goal, the support to democratic values. Many such organizations receive their funding from government sources. Therefore, even the purely "scientific" and "innovational" funds have found themselves to be the target of the new Law.
The new Law has expanded the list of reasons for the refusal of registration of not-for-profit organizations, as well as strengthened state control over the financial and economic activity of such organizations. Foreign funds will be obliged to re-register, and may be faced with a refusal for reasons such as their activity presenting a threat to "the national integrity and uniqueness, cultural heritage and national interests of the Russian Federation". The notions of "uniqueness" and national interests are not defined in detail, and when interpreted broadly may serve as the grounds for a refusal of registration of almost any organization. Now, foreign non-governmental organizations must also inform the registration agency concerning any transfers of monies to the Russian territory, while the physical persons - recipients of grants - inform the same agency about any monies received from any foreign not-for-profit organizations. The recently introduced measures may create serious obstacles for the operation of foreign funds in Russia, because numerous bureaucratic barriers are bound to appear. This may induce the funds to curb their activity in Russia and to move on to countries with more favorable institutional regimes.
3.5.5. Solutions to the Cadre Problems Faced by Science
Among the cadre problems faced by Russian science, there are the changing demographic structures (the overall ageing of personnel, the continually decreasing number of "the medium generation" of scientists, the outflow of young cadres from the sphere of science, the ongoing "brain drain" (mostly of young scientists), the absence of "counterflow", and the very small number of scientists returning to Russia.
The highest annual rate of decline in numbers is seen in respect to the research cadres aged between 30 and 49 years; that is, the gap between the young people coming into the sphere of science and the older generations is continually growing. Thus, the problem of succession in science is becoming more acute. The most negative situation can be observed among top-qualification personnel in academic research organizations. So, one-third of the Doctors of Sciences working at the Siberian Department of the RAS are aged over 65 years. As for young people, only 8% of those who have completed their postgraduate studies do indeed defend their dissertations (the national average index being 20%)32.
The stratification of research cadres in 2005 was becoming more auspicious, and this phenomenon was in part contributed to by the emerging system of budget funding based on quasi-tenders. Those institutes that were capable of creating their own channels for a continual flow of budget funding by means of contests and tenders, succeeded in their material status being greatly improves, and even began to reduce the degree of their participation in foreign contracts, which require harder work and stricter rules for reporting and bearing responsibility than that established for the participation in domestic government programs. A positive aspect of the concentration of funding has become the opportunity for institutes to purchase new equipment, and some institutes practicing modern management approaches have been able to fundamentally renew their material base and equipment. At the same time, even prosperous institutes admit the existence of the problem associated with an outflow of the young from the sphere of science. This had been confirmed by the results of a survey, demonstrating that high salaries do not guarantee a solution to the cadre problems. At Russian research institutes there still exist factors responsible for young people being ousted from science. They are the poor quality of research organization, very vague prospects of career growth, the generally unattractive public image of a Russian scientist, and housing problems. At the same time, the growing rates of enrollment into postgraduate courses does not mean that there exists a growth potential for science: according to the data of the RF Ministry of Education and Science, no more than 10% of the alumni actually stay in the sphere of science.
The "brain drain" problem does not disappear either: there is an continual outflow of research cadres to those countries where the situations in science and in the national economy in general are properly balanced. The trend of young people emigrating from strong and competitive research centers has become more evident. Young people, as a rule, work at such centers for 5-6 years, make necessary connections, and then 20 - 60% of them go to work abroad. Gradually, there have begun to emerge a clearer picture of those areas of research where the demand for specialists is highest in the West. These are microbiology, medical research, computer technologies, chemistry and physics. Young Russian scientists specializing in these areas are finding ever more jobs at centers owned by big companies in foreign countries.
The number of state initiatives addressing the cadre policy, including those formalized as decrees, edicts and other normative-legal acts, has exceeded the number of
32 Poisk, No. 7, 18.02.2005, p.3.
measures aimed at other aspects of the national research complex. However, the measures being implemented are primarily oriented toward establishing additional payments, bonuses to scientists and research administrators, support for the leading research schools, as well as increasing the size of stipends, grants and bonuses to young researchers and postgraduates. The cadre policy was continued in the same vein in 2005. During the year, two RF President's edicts were issued33, which established the size of grants to be paid to young Candidates and Doctors of Sciences be increased, as well as the volume of funding to their research projects. To further develop these measures, a Government's Decree was issued, which determined the procedure for allocating grants to young scientists, as well as to the leading research schools34.
As demonstrated by recent years' experience, any limiting of the cadre policy to the issues of increasing salaries, including those of young personnel, can never result in a better balanced structure of the science sphere in terms of cadres. Besides, the support in the form of grants has its own limitations: firstly, it encompasses a short period (2 years, at most), and therefore the situation faced by the young remains unstable. Secondly, only a very limited number of young researchers can hope to receive such grants. At present, in view of the available data concerning the research cadres aged under 35 years, it appears that state support is being provided to no more than 5% of young researchers. As planned by the Ministry of Education and Science, it is expected that the basic monthly salary of a young scientist by the year 2008 will be increased to 15,000-20,000 roubles. Considering the perpetual inflation, this means that science in terms of salary level will remain disadvantageous, as compared to other spheres of economic activity. Thus, the measures that have been implemented so far do not address the in-depth causes of the cadre problems currently faced by the sphere of science.
3.5.6. Private Companies In the National Innovational System
Big business in all developed countries represents the main source for the funding of research and development, and its role is expected to grow still further in the historic perspective. In Russia, big businesses are also beginning to more actively invest in innovative activity; however, no data is available on the size of funding provided by the business sector to RDW. With rate exceptions, companies do not show their expenditures on RDW in their annual reports. This behavior has partly been due to the provisions of the Tax Code (Part II, Articles 262 and 270), which were not conducive for companies to invest in RDW and, moreover, created incentives for concealing the true costs of RDW. According to Item 2 of Article 262 of the Tax Code, in the wording adopted prior to the enactment of Federal Law No. 58-FZ, of 6 June 2005, a taxpayer's expenditures on RDW being carried out for purposes of creating new technologies or improving the existing ones, in the event they have failed to produce a positive yield, were to be included in the other expenditures on an even basis throughout the period of three years in the amount not exceeding 70 % of the actual expenditures. Investments in RDW are always associated with risks, and it is not always possible to accurately predict their result. Therefore, the introduction of such a norm, in effect, implies that a company's innovative activity will entail losses. In the Tax Code's
33 Edict of the RF President, No. 120, of 3 February 2005, "On additional measures designed to strengthen state support to young Russian scientists - Candidates of Sciences and their Academic Supervisors"; Edict of the RF President No. 121 of 3 February 2005 "On making amendments to Edict of the RF President No. 424 of 27 March 1996 "On some measures designed to strengthen state support to science and higher educational establishments of the Russian Federation".
34 Decree of the RF Government, No. 260, of 27 April 2005, "On measures designed to ensure state support to young Russian scientists - Candidates of Sciences and their Academic Supervisors, young Russian scientists - Doctors of Sciences and the leading academic schools of the Russian Federation".
new version such expenditures are to be written off in full, and hopefully, the information concerning RDW in the business sector will become more open.
Some selective data on several companies have made it possible to conclude that the funding of science by the business sector is on the whole growing, and that the "in-house" research is developing further. The actual situation is somewhat better than any assumptions based on the official statistics published by the Goskomstat. Thus, the expenditures on RDW of four companies ("Gazprom", AvtoVAZ, "Severstal" and GMK "Noril-skii Nikel") in 2004 amounted to more than 4 billion roubles, which, by way of comparison, is higher than the state funding allocated in the 2006 budget to the support of HEE-based science. The company "Russkii Aliuminii" in the last four years spent several million USD on RDW and renewal of technologies; the company "Silovye mashiny" annually spends about $ 30 million on RDW.
At the same time, Russian business is very heterogeneous, and only some companies have adequate potential for the funding of RDW. According to a survey conducted by the Central Economics and Mathematics Institute (CEMI RAS), 20% of domestic companies are experiencing financial grave difficulties, 45% - medium-level difficulties, the situation in 30% is satisfactory, and in only 5% is good. At the same time, according to the IET's polls, the majority of companies fund their innovative activity from their own resources (71 %) and bank loans (12 %)35.
Among the companies that spend their money on research, the expenditures on "in-house" RDW are higher than the outsourcing level (i. e., orders placed with outside organizations, including state research institutes and HEEs). A growing number of companies create their own research divisions or buy the former branch institutes ("Russkii Aliuminii", "Silovye mashiny", "Norilskii Nikel")36. However, outsourcing is growing at a higher rate than "in-house' research, although its share in private companies' total expenditures on RDW remains modest.
As for the relations between companies and outsider research organizations, they are associated with some problems. Firstly, business and science, so to say, "speak different languages", and a special intermediary institution is needed for them to interact successfully (technological brokers, consulting services, centers for technologies transfer). At presence, the shortage of such intermediaries is felt most strongly, while the institutes have not yet learned to adequately promote their projects. Secondly, it is very difficult at the existing institutes, with their outdated material base, to make the transition from the development of a pilot model to serial industrial production. However, the availability of a single pilot model is not always viewed by business companies as a reliable proof of an invention to be capable of successfully working at an industrial scale. Thirdly, research institutes, especially state institutes, have a habit of working under economic agreements concerning RDW, to be completed by the submission of a scientific report. Only few research organizations are actually capable of successful cooperation with businesses. Fourthly, many companies prefer, when placing orders for RDW, to take advantage of their longstanding connections, cooperating in this framework not with institutes but with smaller teams of individual scientists. This selective outsourcing is quite understandable, because it is a well-known fact that research organizations are far from being homogeneous, and therefore it is more convenient for businesses to sign contracts with efficient groups of researchers, instead of dealing with the bureaucratic structure of a whole institute. However,
35 According to the Goskomstat's data, the share of enterprises' own funds in the total expenditures on innovations amounts to 88.3 %. Source: Innovatsiis v tsifrakh: 2004. (Innovation in figures: 2004.). M: TslSN, 2005, p. 94.
36 I. Imamutdinov, D. Medovikov. Za bortom Noieva kovchega. (Overboard Noah's Ark.) // Ekspert, No. 1-2, 16 January 2006.
in view of the existing gaps in the normative-legal regulation of the rights to the results of technologic studies, in case of such outsourcing the institutes quite often lose their intellectual property. As for companies, including big ones, they have, so far, in their patenting activity been lagging behind the leading Russian universities. For example, "LUKoil", including all its subsidiaries, holds no more than 300 patents37.
On the whole, it is competition that provides companies with incentives for investing in RDW, and so this activity is being most prominently displayed by those operating on the international market. Another important factor is represented by antimonopoly legislation, which is still weak in Russia and does not create any obstacles for big companies. Also very important are other institutional signals that serve as incentives for investments in RDW. These are, e. g., various forms of private-pubic partnerships. The partnerships can be effectuated through the joint funding of a company's RDW, which it fully or in part contracts out to other research organizations, or through the funding of RDW being carried out by a research institute on an order placed by an industrial company. The degree of participation, by a company, in the funding of large-scale joint projects depends on the specific type of work being funded. When fundamental research is co-funded, the State's share, as shown by mean indices recorded in foreign countries, amounts to approx. 75 %; when applied studies are funded, it amounts to 50 %, and when development activity is funded - to 25%. This issue was not elaborated within the framework of Russian mega-projects, which today are regarded as nearly the only existing type of private-pubic partnership. The themes addressed by mega-projects demonstrate that they are aimed at providing solutions to some specific technological problems, and are not oriented to large-scale goals. It has so far been difficult to make any final conclusions as to the results of the implementation of such mega-projects, because the first among them are to be completed only in 2006. According to experts' estimations, about one-half of the funded projects will be successful.
Thus, while noting the overall positive trend of the entrepreneurial sector's growing participation in the support of science, it should be admitted that the expenditure on RDW remain modest enough, especially in science-intensive branches. Russia still has no hightech corporations capable of addressing large-scale technological tasks.
3.5.7. The Problem Associated with the Intellectual Property Rights Created at the Expense of Budget Funding
One of the problems that prevent smooth transferring of knowledge from the sphere of science into the market consists in the vague and controversial nature of legislation on the rights to intellectual property. This has provided incentives for organizations to commercialize the results of their research and development through a variety of "gray" schemes, as well as by selling know-how, instead of patenting and registering it as part of their assets. Thus, resulting from the fact that the intellectual property involved in the economic turnover is for most part not registered at the patenting agency, the level of its capitalization in Russian in the past 13 years had amounted, according to the Russian Agency for Patents and Trademarks, to no more than 2 %.
At the end of last year, one important step was made toward improving the normative-legal regulation of intellectual property created at the expense of budget funding. On 17 November, Decree of the RF Government "On the procedure for disposing of the rights to the results of activity in the sphere of science and technology" (No. 685). By this Decree, the provision was approved concerning the consolidation and transfer to economic
37 Poisk, No. 18-19, 13 May 05, p. 3.
264
subjects of the rights to the results of their activity in the sphere of science and technology funded from the federal budget; as well as the changes to be introduced to Decree of the RF Government, of 2 September 1999, No. 982, "On the use of the results of the activity in the sphere of science and technology".
Decree No 685 has outlined in general the potential mechanism for the distribution and consolidation of rights. It is stated that, in the event of government contracts being concluded, the rights to the results of the activity in the sphere of science and technology may be consolidated to the Russian Federation - if these results, by virtue of a law, have been withdrawn from turnover, or restricted in their turnover, or the funding for these results to be developed until the phase of industrial application (including the production of a pilot batch) is to be provided by the Russian Federation. The rights to the results may also be owned jointly by the Russian Federation and the performer of the work - if these results are necessary for the execution of state functions relating to national defense and national security, or to the protection of the population's health. In other cases, the rights to the results of the activity in the sphere of science and technology are consolidated to the performer on the conditions determined in a government contract. In this connection, it is assumed that, in the event of the rights being transferred to the performer, the latter is to pay to the federal budget compensation payments from the monies received as a result of the assignment and use of the rights to the results of the activity in the sphere of science and technology, achieved at the expense of the funding from the federal budget (Item 3).
The Decree has not yet granted to the direct authors of inventions the right to dispose of the intellectual property fully and at their own discretion. A number of aspects here need to be further specified: firstly, the conditions on which the rights are to be consolidated to the performer of the work; secondly, the criteria for determining the range of those types of work in respect to which it is the State who is to undertake the development of their results until the phase of industrial application; thirdly, the procedure for determining the size of the compensation payments, the feasibility of which is, in principle, far from being obvious. At the same time, there is no doubt that a certain movement has occurred toward adapting here the liberal approach. The adoption of this document has rounded up the two-year period of uncertainty, during which state agencies were unable to coordinate the general principles and approaches to the distribution of the rights to intellectual property.
3.5.8. Shaping a New Innovative Infrastructure
Among the infrastructure-oriented projects in the innovation sphere, the focus of attention in 2005 was placed on the creation of the technology implementation zones, which represent one of the two types of special economic zones (SEZ)38, as well as the organization of technoparks, including those specializing in the sphere of information and communications technologies (ICT-parks).
Despite certain similarities, SEZs and technoparks represent different instruments for promoting innovative activity. Firstly, technoparks, in contrast to SEZs, may be created without active participation of the State. Secondly, technoparks may have as their purpose the promotion of primarily small- and medium-size innovational businesses, whereas for SEZ this task can never be the core one. Thirdly, the mechanisms applied for promoting the interaction between science and business are also different. A SEZ always implies certain privileges and preferences, whereas for a technopark this is not necessary. In the event of a technopark being registered as a resident on the territory of a SEZ, the privileges
38 RF Federal Law No. 116-FZ of 22 July 2005 "On special economic zones in the Russian Federation"
are enjoyed by the technopark, not its lessees. This cannot provide solutions to the problems involved in the commercialization of the results of the activity of small-size science-intensive businesses.
The selection of the first few SEZs was completed in December 2005. According to the established Law, the land on which a SE is to be created cannot be owned by either individuals of juridical persons (with the exception of infrastructure objects). This approach is stimulating in terms of the territories' development. At the same time, it becomes obvious when analyzing the list of criteria for selecting a SEZ project39 that the better developed a region is, and the higher is its preparedness to invest its own funds in the zone's creation, the greater is its chance to be granted the desired status.
To the tender for the creation of technology implementation zones, 28 applications were submitted, with the resulting selection of 4 winner projects (Table 50). These were Zelenograd (micro- and nanoelectronics), Dubna (information technologies and technologies based on nuclear physics), St. Petersburg (information technologies and analytical equipment) and Tomsk (biotechnologies and new materials). All these areas represent frontier research, with some powerful, competitive achievements. Thus, the choice of such projects has reflected the desire to support "strong" territories and promising areas of scientific and technological research and thus to produce "success stories".
Table 50
Characteristics of Technology Implementation Zones
Expected
revenues of
Zone's Total costs of Share of budget funding, % budgets of all
Region Area of specialization total area,in creating infrastructure, bil- levels from zone's activity
ha lion roubles in the period of 2006-2025, billion roubles
Zelenograd micro- and nanoelectronics 155 5.0 50 40
Dubna information technologies and technologies based on nuclear physics 187 2.5 70 42*
Tomsk biotechnologies and new materials 197 1.9 70 70-90
St. Peters- information tech- 200 1.5 51 25*
burg nologies and analytical equipment
* - In 2006-2018.
Source: Data provided by the federal Agency for Administering Special Economic Zones.
Despite the wide spectrum of criteria applied in the selection of projects, several months prior to the deadline for the applications to be submitted the representatives of both the executive and the legislative authorities were quite often and with assurance referring to the 4-5 potential winners in the tender for creating the technology implementation zones; among these, Moscow Oblast, St. Petersburg and Tomsk were always mentioned. This is a clear evidence that there already existed a general idea as to wh i ch te rri to ries are most promising in terms of investment. Thus, it was a competition of
39 Decree of the RF Government No. 563 of 13 September 2005 "On approving the Provision concerning the conducting of a tender for the selection of applications for the creation of special economic zones".
266
territories are most promising in terms of investment. Thus, it was a competition of teams, not projects.
The zones are to begin operating in 2007, while the first results will be available for estimation in another two or three years. In 2006, beside the funding from the federal budget to the construction of appropriate infrastructure, each technology implementation zone will receive additional budget funding in the amount of 100 million roubles from the Fund for promoting small-size forms of enterprises in the sphere of science and technology. In particular, the Fund's resources are to be spent on preparing the cadres needed for innovative business. Such cooperation appears to be promising, because it can promote the development of small-size innovative businesses in the SEZs.
The elaboration of privileged tax regimes in the zones is considered to be the most important task. It is also intended to make the zones' residents exempt from all local taxes. The experience of the past years has shown that the introduction of privileges almost always resulted in tax evasion. Therefore it would be more reasonable first to test the indirect regulation mechanism on limited territories, instead of simultaneously introducing in all over the country.
The concepts of zones and technoparks having many similarities, the Ministry of Economic Development and Trade, after having selected the winners in the tender, suggested that it would provide the funding for five technoparks, to be picked out among those applied for by RF subjects. The Ministry has already demonstrated its obvious preferences toward Novosibirsk (information technologies and biotechnologies), Tiumen (prospecting and extraction of hydrocarbons), Kazan (chemistry and pertochemistry), Sarov (medical information and environmental technologies) and Obninsk (information and communications, biotechnologies). Technoparks will be operating without being granted the tax and custom preferences envisaged for a SEZ, but will be receibing state funding for the creation of necessary infrastructure (communications, roads, office buildings). It has not become clear yet whether special measures designed to support innovative businesses are to be implemented on the territories of these technoparks.
In addition to the idea of creating technoparks in accordance with the SEZ model, during last year the Ministry for Communications and Informatization was actively developing the government program for the creation of ICT-parks. The total volume of funding under this program until the year 2010 is to amount to approx. 123 billion roubles. About 20 billion roubles will be allocated in the federal budget to the creation of ICT-parks. It is also planned to attract resources from regional budgets and international credit institutions. In particular, the RF Government has already made the decision to attract a loan from the IBRD in the amount of $ 20 million. It is intended to build at least four ICT - technoparks: in Moscow Oblast (Dubna), St. Petersburg, Nizhnii Novgorod and Novosibirsk. Indeed, these regions are leaders in the development of software and other ICT products. Moscow accounts for 32% of all companies of this specialization, St. Petersburg - 19%, Novosibirsk -8%, Nizhnii Novgorod - 4%, and Tomsk - 3%40. It is planned to create, in each of the technoparks, no less than 10,000 new jobs.
And it is in this connection that the first problem arises. No one yet knows where to find the 10,000 software specialists needed for each ICT park. This problem has already been faced by Novosibirsk, where one of the parks is being created. Today it employs 2,000 software specialists, and the inflow of more cadres can be achieved only by increasing the number of students at the HEEs specializing in this area. However, the results will not be soon to come.
40 Source: CNews Analytics, Fort Ross, 2004http://cnews.ru/.reviews/index.shtml?184141_short
Al the software companies currently operating on Russia's territory employ only a little over 40,000 specialists. By now, the domestic companies have already reached the upper threshold in the inflow of new employees: the number of specialists graduating every year remains unchanged, as well as the approaches toward preparing such specialists. This gives rise to both qualified cadre deficit and to the deficit of any cadres in this field (including, e. g., the growing requirements for those specializing in ICT management). Thus, in 2004, 14,120 vacancies were registered on the Russian ICT market. As seen by the results of the year 2005, this index grew by almost 55% and amounted to 21,850. The number of applications for jobs during the same period grew from only 9,593 to 16,84941. By way of comparison, in early 2005 in India the number of personnel employed at 13 technoparks was more than 450,00042.
The second problem is associated with the lack of confidence, on the part of the ICT community, in the idea of creating ICT parks being meaningful in terms of the prospects for developing such business in this country. According to the results of a survey conducted among the directors of ICT companies, they believe that priority measures, to be implemented by way of government support, are to reduce taxation through a wider application of simplified taxation schemes, or through introducing a presumptive tax on each working place of a company's software specialists, and to support the education of appropriate cadres. Also important is the lifting of barriers in the way of software exports. ICT parks, as a support instrument, were placed at the very bottom of the list43. The opponents of such parks believe that this is an instrument for providing support only to selected entities, based on a territorial principle, instead of supporting the best ones. This factor will be further enhanced in the Russian national economy, where low mobility of workforce is a typical feature. Also, the number of companies included in a technopark will be much smaller than even their overall number in a given region. Consequently, the creation of parks and zones, as an instrument, will be justified only if the goal is to develop backward territories, in order to attract there an inflow of capable workforce.
The third problem is represented by the fact that the projects for new technoparks to be created are being developed without any in-depth analysis of the previous experience of successes and failures. The question as to whether technoparks are really an efficient component of the Russian innovative infrastructure has never been seriously investigated. No reliable data are available on the number of technoparks where successful operation has already been achieved, and how this has been achieved. So far, the network of technoparks in Russia has been developing in absence of any clearly defined rules for their organization and functioning, which has diminished the yield of the majority of them far below the potential capacity of this form of economic activity organization. Many of the previously created technoparks have already ceased their innovative activity, having exhausted the initial funding allocated either from budget sources or in the form of a grant from a foreign organization. Russian technoparks are very small, if one compares the area they occupy to that occupied by an average-sized technopark in a foreign country, which is equal to approx. 10 ha. From the point of view of their organization, Russian technoparks in a majority of cases entirely depend on their basis HEE or research center, being a component of its organizational structure. As a result, technoparks have only limited opportunities for attracting private investments. The emerging picture, on the whole, cannot be described as being very optimistic: in a vast majority of cases technoparks represent projects for the
41 C. NEWS. 2005, No. 9, p. 52.
42 S. Shalmanov. IT v Rossii. Neurozhai umov. (IT in Russia. Bad harvest of minds) // C. NEWS. July 2005, p. 26-30.
43 www.allmedia.ru, 2.12.2005.
exploitation of real estate, because their main function consists in appropriately equipping premises for their subsequent lease. Therefore, it is important to determine those fundamentally new elements that are to be introduced by the ICT park model, for how long and on what conditions the funding from state and regional sources is to be provided, and what an optimal scheme (or schemes) for managing a technopark will look like.
The problem of insufficient reliance on previous experience can also be clearly visualized, if one takes by way of example another type of infrastructure - the Centers for Promoting Technologies (CPT).
The annual number of newly established CPTs is growing, with simultaneous cuts in state expenditures on one such Center (Fig. 62). While in 2003 the budget support to the creation of one CPT amounted to 3 million roubles, in 2005 it went down to only 1.7 million roubles.
Source: Data provided by the Federal Agency for Science and Innovations.
Fig. 62. Centers for Promoting Technologies Created with State Participation
Guaranteed funding from the federal budget is allocated to a CPT for one year only, under the Item "Financing of RDW", which makes more difficult the infrastructure-forming activity. In later years, few Centers still enjoyed such support. Thus, among the first six CPTs established in 2003, further funding from the budget in the form of subventions was provided to only one Center. The new performance-based budgeting system is promoting such an approach still further, because the Ministry of Education and Science must report only the number of infrastructure objects having been created, and not the number of those operating efficiently. However, for such structures to be able to survive and further develop, longer state support is necessary. It would also be feasible to allocate funding to CPTs in the form of subventions or investments.
The existing normative-legal base is not conducive to the development of CPTs, either. Thus, budget-funded organizations, in accordance with the Federal Law "On the Federal Budget for the year 2005" (No. 173-FZ of 23 December 2004) have no right to establish small businesses even at the expense of off-budget sources. This makes it nearly impossible to realize this form of RDW commercialization through the mechanism of CPTs.
269
In 2005, CPTs were also created with the support of the RAS, within the framework of the TACIS Project "Science and commercialization of technologies". Late in the year, on the basis of a tender, seven pilot projects designed to establish centers for the commercialization of the results of scientific research were selected, as well as seven so-called "associated project centers". The latter are to be given some modest financial support, as compared to pilot centers, for personnel training, informational support, exchange of experience with the commercialization centers, access to educational and methodological materials, and aid in the development of adequate connections, including with the European networks for technology transfer.
Today, as estimated by experts, only about 10% of the created CPTs are developing quite rapidly. The growth in their activity is being suppressed not only by the lack of financing, but also by a range of other problems, existing both in the spheres of science and business and within the CPTs proper. In particular, not every CPT visualizes the goal of its activity in the creation of an inflow of off-budget funding to the university or research organization to which it is attached, or in the promotion of small-size innovative businesses. Sometimes the idea of a CPT is perceived in a narrow-minded fashion (as an updated patenting department, as a department for supplementary training, etc.). Besides, with very few exceptions, the existing HEEs and RIs have no efficient management systems. In their turn, the entrepreneurs in the business sector are not inclined toward placing orders for RDW, or supporting small businesses by subcontracting them to carry out some of the orders received by the former. On the whole, in sphere of research and development, supply is still much higher than demand. According to the Russian network for transferring technologies, which encompasses some 30 commercialization centers, the number of companies' requests for technologies is by 20-30 times lower than the number of those available. In the European networks, the average ratio of requests to supply 1 : 4.
Thus, in addition to investigating the past mistakes, it is also important to assess the scope of the actually functioning infrastructure, including that developing without any active support on the part of the State.
One more type of infrastructure, which in 2005 received active state support, was represented by Scientific Cities. In 2005, as many as three territorial formations were granted this status - Petergof, Pushchino and Biisk44. Scientific Cities receive targeted budget funding in the form of subventions, which are not taken into account when inter-budgetary transfers from the federal budget and the budgets of RF subjects are being distributed. The amount of budget funding to be allocated to Scientific Cities is determined on the basis of a city's population (or the number of recipients of budget-funded services). The support to Scientific Cities represents the funding predominantly of their social infrastructure, irrespective of the established goal for their development. At present, the funding mechanism is neutral in respect to the goal of a Scientific City's innovative development. It is believed that the support to Scientific Cities must be coordinated with the programs for their innovative development, which ultimately is to result in growing competitive capacities of the national economy.
As of the end of the year 2005, ten urban entities had the status of a Scientific City. However, those who had been granted it only recently were in an unequal position by comparison with those granted it in earlier years: while prior to 2005 this status was granted for
44 RF Government's Decree of 23 July 2005 No. 449 (Petergof), RF Government's Decree of 27 October 2005 No. 642 (Pushchino), RF Government's Decree of 21 November 2005, No. 688 (Biisk).
the period of 25 years, from the year 2005, under new legislation on Scientific Cities45, municipal formations may be granted it only for a period specially established by the RF Government. In fact, all the new Scientific Cities were granted this status for 5 years. Now Scientific Cities are to a greater degree than before depend on priority areas in the development of science and technology, and they can be deprived of this status in the event of the themes they are exploring having been taken off the list of state priorities. Since the list of priority areas is revised approximately every five years, this explains the specific length of the period established for the status of a Scientific City. These changes predetermine later uneven development of Scientific Cities and are not contributing to the integration of their programs for the development of science and technologies with their socio-economic development programs. It is not improbable that further development of those urban entities, which in fact represent Scientific Cities, will take the form of a SEZ.
The territories being developed as Scientific Cities, in effect, are duplicated by technology implementation zones, as well as by technoparks. The most interesting case is represented by Dubna, which has the status of a Scientific City, that of a technology implementation zones, coupled with the prospects of an ICT park to be created. Simultaneous development of several types of infrastructure-oriented projects is, undoubtedly, a factor that promoted the optimization of the emerging national innovations. However, along what lines will the goals of each infrastructure type are to be coordinated, if they all are concentrated in one territory? Can it happen so that the establishment of a single ICT park within a SEZ will result in unequal competitive environments?
3.5.9. New Programs and Venture Funds for Financing Innovation
The only state fund that supports the development of innovative activity has remained, in effect, the Fund for Supporting Small-Size Forms of Enterprises in the Sphere of Science and Technology (hereinafter - the Support Fund). This Fund is continually developing new promising initiatives (small-size businesses, start-up companies (the START Program), the interaction between small-size and big businesses (the TEMP Program), the training program for innovative management, etc.). However, a fund with an annual budget of about $ 30 million cannot actually change the existing situation on a country-wide scale in any fundamental way - it can only demonstrate the success of certain instruments and approaches being applied. Regretfully, the Fund's experience is only very sparingly used by other state agencies It is the Fund's joint initiatives with other organizations that are mostly being developed (at present - with the RAS, previously - with the RFBR).
The support for small-scale innovative business activity is of importance for the national economic development and results in high yields. This has been demonstrated not only by foreign experience, but also by the recent domestic developments. For example, in Zelenograd, where small-sized businesses are supported through a variety of infrastructure types, they generate 40% of tax revenues in the local budget46. However, this is an exception, and small-sized businesses elsewhere in the country has so far been existing without any special support. It is noteworthy that even in the RF Strategy for Developing the Sphere of Science and Innovations in the Period until the year 2010 small-sized businesses have not been specified, among the Strategy's beneficiaries, as an independent economic agent. The overall economic environment has not yet become sufficiently favor-
45
RF Government's Decree "On approving the Procedure for considering the proposals concerning the granting to a municipal formation of the status of a Scientific City of the Russian Federation, and concerning the termination of such a status", No. 681, of 25 November 2004.
46 Poisk, No. 49, 9 December 2005, p. 4.
able for the development of small-scale innovative business activity, either. Thus, beginner (or start-up) companies have practically no chances to get a bank loan, because it is difficult for them to produce a pledged security (in the form of immovables, equipment or commodity turnover) for the loan's redemption, or to produce reliable proof that their business activity is profitable. In this situation, the START Program47, supported by the Fund and continued in the year 2005, is of paramount importance.
It is typical that the most active participants in this program were universities - their staff submitted 36% of all applications for the creation of small-sized companies, whereas the scientists in the academic sector submitted only 13% of applications, SSC - 1.4%, and other organizations - 18%. The remaining 33% of applications were submitted by the personnel of the already existing small-sized companies. The generalized two-year data concerning the Program's implementation are shown in Table 51.
Table 51
Indices of Tender Activity and Funding for Projects under Program START
2004 2005
Number of applications 2764 1674
Number of contracts concluded 538 421
Level of tender, applications / project 5 4
Total volume of financing, $ million 13.0 12.0
Volume of financing during first phase, per project, $ thousand 24.0 28.5
Source: Data provided by the Fund for Supporting Small-Size Forms of Enterprises in the Sphere of Science and Technology.
The distribution of applications in different areas of activity has demonstrated that the potential of innovative development is focused mainly in the field of electronics, equipment, chemistry and new materials, and information technologies (Fig. 63).
The year 2005 saw the completion of the first phase in the Program's implementation, and more than 10% of the start-up companies moved on to the second phase, when in order to continue the work it will be necessary to find an off-budget source of funding48. This index is quite satisfactory, considering all the difficulties associated with the search for additional financing for a small-sized science-intensive business.
In 2005 the Support Fund began the implementation of a new program aimed at improving the qualification level of cadres in the sphere of innovative activity. The title of the program in PUSC (or partnership of universities with companies), and it is intended for the training of qualified teams capable of commercializing the available developments. It is planned that universities will be training appropriate cadres (economists, managers, market researchers, etc.) in order to eliminate the existing gaps in the educations of those involved in small-scale innovative business activity. The initiative is a timely one; however, the Support Fund will have to find solutions to a number of problems it is faced with. Thus, in accordance with its Charter, the Support Fund cannot provide direct funding to educational activity. Therefore, one possible variant would be for the Ministry of Education and Science to get involved in this initiative and to provide the funding for the remuneration of the tutors preparing the cadres for small-sized businesses.
47 For the description and analysis of the development of the START Program, see: M. Rossiiskaia ekonomika v 2003 godu. Tendentsii i perspektivy. Vypusk 25. (The Russian economy in the year 2003. Trends and prospects. Issue 25) M.: IET, p. 269-270; M. Rossiiskaia ekonomika v 2004 godu. Tendentsii i perspektivy. Vypusk 26. (The Russian economy in the year 2004. Trends and prospects. Issue 26). M.: IET, p. 367-368.
48 The data of the Support Fund as of the end of the year 2005.
Chemistry and new matrials - 20.0 %
Source: Data provided by the Fund for Supporting Small-Size Forms of Enterprises in the Sphere of Science and Technology.
Fig. 63. Distribution of Applications under Program START, by Areas of Activity of Small-Sized Companies
The year 2005 was also marked by a revival in the government activity aimed at the creation of venture funds. Such initiatives were put forth by the Ministry of Economic Development and Trade, the Ministry for Communications and Informatization, as well as regional authorities.
The Ministry of Economic Development and Trade launched a program for the establishment of 6-7 regional public-private funds for supporting the development of venture investments in small-sized businesses and the activity in the sphere of science and technology, in the amount of $ 10-50 million each. It is intended that 25 % of a fund's resources will be transferred from the federal budget, 25 % - from a regional budget, and 50 % -from private investors. These are planned as closed share funds, with the payback period of 5-7 years. Presently, four such funds are being created - in Moscow, in Tatarstan, in Perm Oblast and in Tomsk Oblast. In Tatarstan and Moscow, the budgets of the new funds will amount to 800 million roubles each, of which 200 million roubles will be allocated by the region, 200 million roubles - by the Federal budget, and 400 million roubles - provided by private investors, which may include both Russian and foreign companies.
Despite the promising prospects for this initiative. there still exist some problems associated with the organizational-legal form chosen for these funds. The funds registered as closed mutual funds are subject to a high degree of regulation by the Federal Service for Financial Markets (FSFM), their asset manager must comply with very strict requirements in respect to its own capital, while the investors have practically no influence on the choice of investment objects made by the asset manager. Therefore, this form is not suitable for investing in small-sized high-risk companies of high-tech orientation. It is common international practice for venture funds to be registered as partnerships and thus obtain the necessary freedom and flexibility. A much better form in Russia, as believed by the business community, would be simple partnerships, where contracts between investors and managers can be made on flexible terms, and which are free from excessive regulation.
The Ministry for Communications and Informatization has initiated the establishment of the Russian Investment Fund for Technologies and Innovations. It is planned that its charter capital will amount to approximately $ 100 million, the State's share being substan-
tial at the initial stage. As the fund's concept was being further developed, the initially planned State's share was greatly changed. At first, it was to be 51-75 %, then - 75 %, and by December 2005, during the first year of its operation, the State's share went up to 80 %, with its subsequent gradual diminishment, until complete withdrawal by the end of the fifth year. This fund will be focusing on investing in IT projects. As estimated by the Ministry for Communications and Informatization, the volume of investments in the Russian IT industry will not exceed $ 80 million per annum, the total amount needed being $ 450-600 million per annum. Therefore, the new venture fund is to become a catalyst for investments in IT. At the same time, it represents a political instrument, demonstrating the state's devotion to the development of high-tech industries.
At the regional level, one should mention the activity of the Government of Moscow Oblast, which has initiated the Fund for Supporting Venture Investments in Small-Size Businesses in the Sphere of Science and Technology. The Oblast Government is transferring 50 million roubles to the Fund.
An analysis of foreign experience has demonstrated that promoting the growth of high-tech sectors is usually more successful through the participation in venture funds than through allocating direct government investments. Direct investments are more often influenced by political motives, are prone to lobbying and therefore are not efficient enough. Therefore initiatives aimed at creating venture funds represent a positive trend. This trend is additionally important because venture business in Russia is still too passive: the volume of venture investments in 2005 amounted to $ 62-65 million, and virtually all the transactions were effectuated with developed well-established companies, whose products had earned a good reputation on the market. All the companies are specializing in the sphere of informational and communications technologies and electronics49. The main reason for the low activity in the sphere of providing support to start-up businesses is not the absence of interesting projects, but the cautious approach of investors who are far from being sure in the stability of their economic situation. Under such conditions the participation of the State is a guarantee of the unchangeability of the rules being applied by a venture fund. A the same time, the share of state participation in venture funds in foreign countries is much less significant. There, venture investments are ensured primarily by pension funds, banks and insurance companies.
Meanwhile, many companies are of the opinion that the State must not be present in the business sphere in any form, its function being reduced to establishing transparent general economic rules. A number of companies have chosen to create internal captive venture funds, which provide financing to small companies, whose core activity is close to that of the former. If the commercial effect of a development becomes evident, small companies are taken over by corporations. This strategy is already being practiced by the company "Aerokosmicheskoe Oborudovanie" ["Aerocosmic Equipment"] and the AFK
"Sistema". It should be noted that their venture funds are not registered as share funds.
* * *
Lately, some attempts have been made at the government level to formulate the goals and tasks for the development of science and innovations in the medium term, to find appropriate instruments for promoting stable relations between the participants in an innovation scheme that would ensure the development of science, as well as practical implementation of the results of scientific research. In this connection, foreign experience
49 Yu. Ammosov. Igra na povysheniie. // Ekspert, No. 3, 23 January 2006.
274
has been actively studied and adapted, which is an evidence of a growing openness of the national innovational system.
However, quire often the results of reform-oriented efforts are found to be less impressive than expected. This can be due to a number of reasons:
1. So far, government policy has remained at the stage of developing strategies that are not substantiated by appropriate tactics. Intentions are not always backed by a detailed plan of action. Moreover, even conceptual approaches in some areas are being modified too often. This can be said primarily about the concepts of national, innovative and research universities, reform in the public sector of science, as well as of the new initiatives for simultaneous creation of technoparks, zones, clusters and Scientific Cities.
2. Some practical initiatives are of a fragmentary character and do not take into account the broader economic context and the already accumulated experience. One illustration can be provided by the approaches to solving the cadre problems in the sphere of science and the integration of science and education.
3. Another problem is associated with underdeveloped and incomplete legislation which determines the functioning of the sphere of science and technology, primarily in respect to the issues of intellectual property, the development of small business, the development of venture business, and the integration of science and education.
4. An important gap is represented by the lack of variety in measures designed to promote innovative activity in the business sector. This results in the demand for innovations in the national economy being rather low, as well as in the absence of well-established connections between science, small business and big enterprises.
3.6. The Sociocultural Sphere
3.6.1. Health Care
After the institutional stagnation in the health care sector in the past decade in 2005 for the first time it underwent a nationwide reform of one of its subsystems - that is, provision of targeted categories of the population (the so-called l'gotniks) with medicines
The New Mechanism of Provision of L'gotniks with Medicines
In compliance with Federal Law No. 122 of August 22, 2004 (hereinafter referred to as Law-122), since January 1, 2005, l'gotniks were divided into federal and regional ones. The former group comprises those handicapped and participated in WW II, veterans of the War; family members of died (descended) veterans of the War; residents of the blocked Leningrad; individuals affected by nuclear radiation, disabled children, among others. They are eligible for the state social assistance and monthly allowance payable from the federal budget. The total number of the federal l'gotniks entitled for the said allowance since 2005 initially was estimated at the level of 14.4 mln., however it grew over the year up to 16.4 mln., or at 14%.
In 2005, the number of just disabled grew by 700,000. This process started yet in the 1990s and continued through 005, despite of the reorganization since January 1, 2005, of the government system of medico-social expertise, whose organizations make decisions regarding recognition of disablement of an individual. The system became completely federal, with 88 newly established federal state institutions of medico-social expertise in regions and 1,667 their branches in cities and districts. However, these transformations failed to impact the substance and effectiveness of their operations - the branches usually "sympathize with people" and satisfy their disablement applications.
By late 2005 individuals entitled for various social benefits outnumbered 51 mln., of which 35 mln. are regional l'gotniks (15 mln. veterans of labor, 8 mln. pensioners and 12 mln. of needy families with children. The financial provision of their benefits falls under the competence of budgets of RF Subjects.
A number of the federal l'gotniks' in-kind benefits (free urban and suburban transport rides, housing and communal services, private telephone rates, denture services, etc.) are subject to monetary compensation. Plus, there appeared a new mechanism of provision of medicines, sanatorium and rehabilitation treatment and transportation to the place of such treatment. These services formed the so-called package of social services whose designed value was set at the level of Rb. 450 a month, including Rb. 350 to cover the costs of provision of medicines. The number of individuals eligible for free medicines rose up to 14.7 mln. by late 2005.
The right for free sanatorium and resort treatment was granted to a part of federal l'gotniks whose number initially was estimated at the level of 960,000, however by the end of the year the number of satisfied applications for this particular service rose up to 1,069.000. The average daily cost of this kind of treatment nearly for all the categories of l'gotniks, except for those with spinal problems was set at the level of Rb. 575.
The federal budget expenditures on monthly annual payments substituting for cancelled public transport rides, etc. accounted for Rb. 11.63 bln., while those on financing provision of l'gotniks with medicines - Rb. 50.8 bln., on sanatorium and rehabilitation treatment and transportation to and from the respective location - Rb. 12.1 bln. The aggregate federal budget expenditures on execution of Law 122 in the part of provision of measures of public social support to individual categories of citizens in 2005 accounted for Rb. 208.6 bln. (vs. 45.4 bln. reported in 2004). The Subjects' budgets allocated Rb. 92 bln. (vs. 69 bln. in 2004) on "their" l'gotniks.
Prior to the enactment of Law 122, the provision of l'gotniks with medicines had fallen within the RF Subjects' mandate and was carried out thanks to ubsidies out of the federal budget, with every region organizing the provision on its own. The aggregate volume of the respective spending in 2004 made up Rb. 7.09 bln. Those funds proved to be insufficient to match the essential needs of the noted categories in medicines, with even actually issued prescriptions not being satisfied in full with medicines (the respective rate was 63%). In the 2005 federal budget the amount of spending on covering the costs of medicines for l'gotniks became 6.4-fold greater.
In the past, a part of the l'gotniks received medicines for free, while the other part-with a 50% rebate. Since 2005, they all became eligible for a free provision of medicines. The list of the respective medicines was extended substantially - given that by early 2005 it comprised 362 international non-patented names and 1,986 trademarks, in the end of the year their number reached 500 and 2,346, respectively.
The mechanisms of financing the provision of medicines underwent fundamental modifications. The RF Subjects retained the right to select a pharmacy network through which medicines were to be provided to the l'gotniks an form the demand for the necessary medicines. The prescriptions were produced by medical doctors at both public and municipal medico- therapeutic institutions, while supplies of medicines were given in the hands of distributor companies selected by the Federal Service or supervision in the field of health care and social development (aka Roszdravnadzor). For each Subject of RF there were selected a company that was to provide the l'gotniks with medicines and the list of producers (importers) of medicines included in the noted list. Upon negotiations with companies keen to be on the list the local administrations set marginal rates at which the companies were bound to deliver medicines to the authorized distributor companies. The 276
latter undertook the obligation to supply the medicines to regions upon their request with no down payment. The payments for supplies were made post-factum by territorial Compulsory Medical Insurance (CMI) funds out of targeted funds earmarked for them from the Federal CMI Fund. The RF Subjects were debarred from the selection of suppliers and price setting.
This particular scheme of provision the I'gotniks with medicines held federal authorities responsible for paying for the whole volume of prescribed medicines over which they had no control. The arrangement bore evident risks of the rise of the need in further growth of the respective costs from the federal budget, or social tension due to the impossibility to supply the prescribed medicines in necessary quantities.
Once introduced, the new mechanism triggered a rapid rise in prescriptions that reached its maximum in May, followed by a seasonal fall, then growth in August and September, and stabilization in October and November. Finally, December 2005 saw a record-breaking rise in the volume of prescriptions (see Fig.64).
Source: Minzdravsotsrazvitia RF.
Fig. 64. The Dynamics of Prescriptions on Complementary Provision of certain Categories of Citizens with Medicines
In early 2005, because of a poor design of details of the mechanism, a number of regions faced problems with supplies of the requested medicines. A part of the l'gotniks for some time remained with no medicines, as they were receiving them according to the previous system of provision. By mid-February they received 6.6 mln. prescriptions, of which 88% were satisfied. However, the population's reaction to those problems was incomparable to that to other components of the reform of benefits and primarily to the cancellation of free public transport rides. The RF Ministry for Health care and Social Development and Roszdravnadzor were at pains to fine-tune the mechanism and they gradually solved the problem.
By late 2005 the overall number of prescriptions issued for the l'gotniks accounted for 145.2 mln., of which 138.1 mln., or 95%, were satisfied. Today, it can be argued that the new system of provision of the l'gotniks medicines entered the mode of relatively stable functioning, at least, the delays with provision of much-needed medicines and discontent with the new system have become far less visible.
In all, in 2005 the regions were supplied medicines worth a total of Rb. 44.8 bln., of which they consequently provided the l'gotniks with 33.5 bln.- worth medicines. However, as of late November nearly 40% of volumes of supplies of medicines had not been paid for, i.e. provided in the form of commodity credit. This fairly high rate proves that suppliers and distributors alike are keen to participate in the new arrangement and testifies to the fact that prices at which supplies are carried out include a fairly considerable costs compensation component associated with the commodity credits.
It should be noted that suppliers and distributors generally keep the price agreements on medicines for the l'gotniks, with prices for 312 brands even declining over the year. In actual fact, Minsotszdrav's regulation concerned price caps with regard to medicines delivered by suppliers and distributors, while marginal sales rates, as before, being set by the Subjects themselves.
In October, the RF Government adopted its Resolution of 10/17/2005 "On improving the state regulation of prices for medicines". It was decided that the list of medicines for the l'gotniks became subject to Minsotszdrav's approval. Prices for all the medicines included in the list are regulated by means of state registration of marginal sales prices for both overseas and domestic producers. As well, marginal sales increments to the prices would now be set at the federal level. The registered marginal producer prices would be included in a public register conducted by Roszdravnadzor.
The indicator of an annual aggregate price rise for all medicines including those subject to retail trade and procurements for the l'gotniks and stationary medical institutions made up 15%, while the retail prices for medicines grew by 40%. The comparison of these data compels to assume that both suppliers and distributors introduce extremely high assessments of risks to retail prices, albeit such risks diminish substantially once they are incorporated into the new system.
The main superficial challenges associated with the introduction of the new mechanisms became long lines formed by the the l'gotniks anxious to get their prescriptions, growing pressure on doctors, for now the lion's share of their office time is spent on paperwork related to producing the l'gotniks' prescriptions. Despite the noted considerable extension of the list of the medicines, in some locations there arise problems with their insufficient list to ensure an efficient treatment of certain categories of patients.
The major (and still latent) defect of the recently introduced mechanism became the absence of clearly set forms of regulation of volumes of consumption of medicines. Prior to the reform the volumes of the prescriptions of medicines were pre-set by volumes of their procurements with the use of allocated targeted funds. The health care administrative agencies let every medical institution and, accordingly, each local therapist know of the volume of medicines of different brands they could prescribe to their patient over a given month. Under the new mechanism, doctors were granted with the right to set on their own the volume of prescribed medicines, with no limits being preset "from the top". The refusal of employment of other instruments from the arsenal of pharmaceutical management methods was quite conscious. The Ministry leadership explained that by the desire to exhaust the delayed l'gotniks' demand for the much-needed medicines and in an experimental way find its actual volume. In reality, in all likelihood the equally significant factors became the lack of overseas experiences and a short time for mastering and comprehensive introduction of them.
Indirect constraints in this regard were a pre-set limit of the number of medicines listed in one prescription, relatively long time required to fill it out, and capacity of doctors that do it. In the first year of introduction of the new system the funds reserved in the budget proved to be sufficient to ensure satisfaction of the l'gotniks' actual demand, and 278
the noted indirect constraints were likely to play their part in this respect. This can be proved by numerous facts of long queues in polyclinics for prescriptions for the l'gotniks, a long waiting time, which undoubtedly affected the volume of the demand. However, such means of constraining demand potentially is ineffective and implies high social costs for consumers. Should the policy of refusal of planning volumes of prescribing of medicines be practiced further on, there will arise serious risks of growth in the gap between the size of the demand and its satisfaction. The need to introduce regulation of the volume and costs of prescribed medicines will arise inevitably, however, a panicky reaction would doom one to favor traditional, rough-and-tough methods of limitation of volumes of prescribed medicines over developing methods of soft regulation of offer and demand.
In compliance with Law 122, the l'gotniks were granted with the right to decide on their own between the receipt of the services included in the set of social services and cash compensation worth the value of the set. The choice was to be made until October 1, 2005. Fore reference, the annual value of the provision with medicines in the composition of the set of social services is Rb. 4,200. The actual average costs of medicines delivered per capita accounted for Rb. 2,698, so for many l'gotniks the choice in favor of cash appeared quite grounded. The number of those who have opted for cash roved to be extremely great and accounted for 54%, including: disabled veterans of WW II - 34%, war veterans - 43%, veterans of other military actions - 87%, disabled - 30%, disabled children - 61%, individuals suffered from nuclear radiation - 45%. Let us note that most of those who objectively are in need for a relatively greater volume of medicines refused to receive the set -either they underestimate their need in the medicines and overestimate the possibility to buy those on their own from retail vendors, or they value too much time and other costs associated with obtaining the respective prescriptions. Such a behavioral pattern testifies to the fact that being fairly technological from the managerial perspective, the recently introduced scheme of provision of medicines entailed effects that appear fairly doubtful from the perspective of the state of health of the targeted categories of the population in favor of which the scheme had been introduced.
The said choice - that is, cash vs. the in-kind set, and its results also cause a serious economic challenge - namely, the problem of unfavorable selection, which is a classical problem in the insurance sphere. Those who retain the provision of medicines experience a far greater need in them than those who opted for cash. No one among the l'gotniks that receive very costly medicines (such as hemophiliacs whose treatment costs some USD 10,000) proved to be keen to receive cash, instead of free medicines, which is quite natural. As well, those who are seriously ill and/or afraid of deterioration of their state and, consequently, a growing need in medicines have also remained in the program. However, the size of the average cost of the social package payable to all of those who refused from it was computed proceeding from the costs for provision of medicines to most l'gotniks. Should less than half of them with a higher need in medicines remain in the program, the respective costs for the provision of them with medicines would be greater than the cost of the package multiplied by the number of those who have remained in the program. That is why during the year one will need either to allocate additional funding to secure the provision of medicines to those who remained in the system, or there will arise the noted necessity to introduce limitations on the volume of prescriptions of medicines.
In mid-2005, the top officials of Minsotszdravrazvitia announced a new idea of establishment of a system of voluntary medicinal insurance. Participants in it were promised 5070% discounts in the event of purchase of medicines, should they contribute 70 Rb. a month. Quite naturally, the initiative stirred quite a moderate reaction of insurers that operate in the area of voluntary medical insurance and who are well aware of the noted problem
of unfavorable selection. To make such programs viable, one has either to use sophisticated and hardly fine-tuned methods of computation of insurance tariffs, or their transformation into complementary insurance programs. The initiative was abandoned by the end of 2005.
New Government Policy Priorities
The autumn of 2005 saw notable turbulence of the country's political life, which focused on matters of organization of the health care system on the whole. By the time the one-year idle phase of the program implementation had been over. Just a reminder, in his 2004 Address to the Federal Assembly, President Putin accentuated the health care reform objectives. The Government postponed them and focused on the campaign on monetization of benefits. The discussion of the reform concept and the respective bills was discontinued, and the impression was that scared by the growing social tension due to mistakes in the design and implementation of Law-122 in the part of monetization of transport benefits, the federal agencies decided to restrain from any action associated with even a minimum risk of triggering a negative reaction of the population or professional groups.
Nonetheless, the country's political leadership is obviously well aware of the intensity of problems in the health care sector and the need for, at least, their mitigation. At his meeting with the Cabinet, heads of the Federal Assembly and members of the Presidium of the State Council on 5 September 2005 President Putin declared the task of fulfillment of four priority national projects - "Modern health care", "Education", "Affordable housing", and "Development of Agriculture", with health care as the top priority.
The respective national project planned for 2005-07 is clearly costly, and its evident mission is by means of giving boost to the public funding of the sector to mitigate the intensity of a number of its critical problems and to demonstrate to the population the care of the state of this particular sphere.
Within the project, priority was given to development of the primary medical assistance and provision of the population with highly technological medical assistance. The former priority avenue provides for a transition to new forms of labor compensations for general therapists and pediatricians (an increase of their monthly salary by 10,000 Rb. on average), nurses (at 5,000 Rb. on average), expansion of training of such doctors, equipping municipal medical organizations with diagnostic equipment, equipping ambulance stations with means of communication, cars, procurement of vaccines against hepatitis B, roseola, flu,, and population immunization (37 mln. people annually), prevention and treatment of AIDS- and hepatitis B and C- infected citizens, and clinical examination of various groups of the population. The latter priority avenue implies construction of 15 new federal medical centers and increase in the volume of the free delivery of the so-called highly-technological medical assistance by federal medical organization from 60,000 patients treated in 2004 up to 250,000 in 2008.
The project implies allocation out of the federal budget of Rb. 581. bln. in 2006 and another 87.7 bln. in 2007. As a result, in 2006 the cost of the project "Modern health care" will account for 43% of the total of Rb. 134.5 bln. provided for implementation of all the our national projects.
The selection of the primary and highly-technological medical assistance as priorities of the project "Modern health care" appears well grounded. Technologically, the primary link of provision of medical assistance plays a critical role in the counteraction of a national health care system to unfavorable trends in the population's state of health and sickness rate of non-infection and infection diseases, and it secures the rise in efficiency of opera-
tions of the medical assistance system on the whole. However, the level of labor compensations of employees in the sector and the material base of the primary link appears extremely low vis-a-vis other links of the system which is why the focus on development of the primary medical assistance is justified.
The state of affairs with the availability of highly-technological medical assistance is also extremely hard. According to some estimates, the volume of such assistance delivered at the expense of the federal funding, i.e. formally free for patients accounts for 10% of the actual need. Should the volume more than quadruple over next three years, it would undoubtedly increase the degree of actual availability of this kind assistance.
It should be noted that prior to adoption of this particular project, while discussing the need to boost expenditures n health care, Minzdravsotsrazvitia RF accentuated primarily proposals on building new federal medical centers that might attract additional revenues to the sector by delivering internationally competitive medical services and attracting patients from overseas. This particular task has not been articulated in the adopted national project and the hierarchy of priorities became different, which undoubtedly mirrors positive shifts in the Ministry's future policy.
Nonetheless, it is intended to allocate Rb. 32 bln. to build the 15 medical centers. Overall, the structure of planned expenditures on the project implementation in 2006-07 appears as follows; the transition to new forms of labor compensation - 21%, procurement of medicines - 14%, equipment purchases - 26%, capital construction and equipment to the centers - 22%, payments for delivery of highly-technological assistance - 11%, misc. -6%. Thus, 73% of expenditures on the project are somehow associated with centralized procurements of medicines, equipment, services, and works.
This highlights high the associated risks of corruption. To ensure control over implementation of the national projects, by his decree of 21 October 2005 President established the Council for implementation of the priority national projects. At present it is hard to judge to what degree its operations will help lower the said risks, however, the mere fact of its creation testifies to the top political leadership's anxiety to ensure actual effectiveness of the project and not only a due PR-effect.
In its genuine form, in addition to the boost of funding of the health care sector, the national project provided for limited measures on increase of the efficacy of its functioning. It was suggested to accomplish the transition to new forms of labor compensations for doctors and nurses of the primary link by introducing a performance-based system of material incentives, rather than an automatic rise of salaries. That, however, remained only on paper. Plus, promptly designing a universal nationwide performance-based methodology of stimulation of doctors in a country with a great diversity of conditions of heir operations and the population's state of health is nearly a mission impossible for a single ministry. As a result, the Government ruled that the respective funds would be allocated to regions not in the form of interbudgetary transfers, but in the form of subventions out of the Federal CMI Fund to regional ones, with their consequent earmarking to health care institutions, providing they have concluded agreements with the territorial CMI fund on carrying out a government assignment to deliver complementary medical assistance. The institutions in turn enter into complementary agreements to individual contracts with general therapists and their nurses. It is recommended to incorporate in such agreements conduct of clinical examinations, prescription of medicines to the l'gotniks, conduct of immunization of local residents, etc. Thus, the rise in the primary link personnel's salaries has been linked to the growth in the volume of their assignments, however, in all likelihood the identification of the volumes and control over actual performance will be formal.
It is provided for a modification of procedures of funding federal medical organizations that deliver highly-specialized medical assistance, which will imply transition from the estimate-based funding of their maintenance to their financing on the basis of governmental assignments. This will become effective starting from April 2006. It is also suggested to develop and introduce a system of patients waiting-lists with regard to the possibility to receive such an assistance, which should enhance transparency and fairness of procedures of sending patients from regions to the federal clinics for the sake of receiving such an assistance.
Unfortunately, with this institutional innovation, their list in the project framework is closed. Meanwhile, the challenges that the national health care system is currently facing lie not only with insufficient resources to boost its availability and improve the quality of medical assistance. Rather, those are the substitution for the public funding with private, with the formal keeping of the guarantees, a considerable inequity with respect to availability of medical assistance, low efficiency of the system, and the absence of incentives to its increase. These challenges require a comprehensive reform of the system of state guarantees of provision of medical assistance, the CMI system, and restructuring of the medical services system.
Debates Around Reforms
The introduction of the new system of provision of medicines and the adopted national project do not exhaust the Russian health care reform agenda. It was clearly articulated in the Presidential Address of May 26, 2004 as specification of guarantees of free assistance in the form of standards of medical services, restructuring of the budget institutions network, including modification of their status and transition from the estimate-based principle of their operations to payments for an actually delivered volume and quality of medical assistance in accordance with principles of voluntary medical insurance, and creation of incentives of development of voluntary medical insurance. To get the mission accomplished, Minzdravsotsrazvitiya developed federal bills on state guarantees of medical assistance and compulsory medical insurance, and the draft health care restructuring program. However, the Ministry has abandoned the task of coordination of the bills with other ministries and from the autumn of 2004 shifted its focus on the monetization of benefits and reforming the provision of medicines to the l'gotniks.
Meanwhile, the declared avenues of the suggested health care reform have been harshly criticized by a part of the medical community and mass media. The Cabinet meeting decided to putt of the discussion on the health care reform till the end of the year. In his 2005 Address, President Putin repeated his concern of the state of the national health care system, however, he sated that the problems of its modernization should be tackled with a great caution and there should not be reorganization for the sake of reorganization.
On October 11, 2005, in Penza, the Presidium of the Sate Council debated measures on enhancement of availability and quality of medical assistance. Its Task Force had prepared a report in which articulated the urgency of solving the problems and the need in acceleration of development and enactment of federal statutes "On health care in Russian Federation", "On state guarantees of medical assistance", "On compulsory medical insurance", "On insuring professional responsibility of medical staff", "On autonomous institutions". While addressing the meeting, President Putin also articulated that there was not time left to enact the basic statutes in the area and the Government and Federal Assembly should pass them as soon as possible.
Finally, on October 17, 2005, the Cabinet at its meeting discussed the concept for development of health care and approved main avenues of its development over 20062010, as follows:
• Modernization of the system of compulsory medical insurance;
• Legislative fixing of sate guarantees of provision of medical assistance to the population;
• Transformation of a part of medical institutions into new organizational-legal forms (autonomous institutions);
• Improvement of the system of provision of medical assistance;
• Ensuring the access of citizens to efficient, safe and qualitative medicines, shaping a comprehensive program of provision of individual categories of citizens with medicines;
• Improvement of the state of health of children and women by enhancing the accessibility and quality of medical assistance;
• Attraction of additional financial sources for the health care sector, etc.
While both the President and the Cabinet repetitiously accentuated the need in reforms in the sector and adoption of new laws, there have not been any real changes. Statutes themselves mean too little, when a systematic, consistent efforts at all the levels of power and society are required to modify the system. It is unlikely the much-needed changes will be launched in 2006.
For nearly a decade the country has discussed conceptual options of the health care reform, with the only practical change to date - that is, the introduction of the new system of provision the l'gotniks with medicines. Where does the obstacle to repetitiously declared governmental intents lie?
First, it should be noted that like in other social sectors, the health care financing system is full of institutional traps:
• Any revision of the existing guarantees is associated with huge budget and political costs - the recent monetization clearly demonstrated that it is impossible to change social guarantees without considerable price the government will have to pay for the cancellation of old guarantees;
• The long-standing informal practices of receipt of and payment for social services have formed a block to the division of responsibility between the government and the population for social services delivery and increase of the efficiency of the use of the respective public funding - the practices appear efficient for their subjects, both services suppliers and most consumers of theirs, for should payments be legalized, the latter would pay a greater price for them. That is why the costs needed to limit the practices are huge;
• Modification of the current public funding mechanisms requires huge administrative costs, as demonstrated by the recent campaign on monetization of benefits.
So, the costs of reform implementation in the health care and other social sectors are very huge, while practically all the subjects within the sector find the balance between costs and benefits under status quo being better, or, at least, not worse than in the event of its modification. This forms a major stumbling block on the path of reforms.
Another block is the absence in the society of a sufficiently broad consensus with regard to objectives and substance of much-needed transformations. Most interestingly, the critics attack a phantom, rather than actual substance of reforms (see Table 52). This mirrors, first, a high degree of mistrust in government's actions and, second, the existence of a profound conflict in the society - that is, the gap between demands for fairness and effi-
ciency expressed by the population, regional authorities and sectoral communities on the one hand, and those - by the Government, on the other.
Table 52
Health Care Reform: Reality and Phantom
_What actually proposed:_What is criticized:_
• Specification of state guarantees of free • Liquidation of free medical assistance medical assistance (standards)
• The network restructuring • Closure of much-needed for the people
institutions
• New forms of public institutions_• Malicious intent of privatization_
Since 1997 the much-needed healthcare reform guidelines recognized efficiency requirements as the reform priority, while the population, sectoral communities, and regional bureaucracy valued fairness the most. In the eyes of the population the proclaimed reform does not restore fairness in terms of accessibility of free medical services, while reformers silence the main reasons for the insufficiency of funds to honor the public guarantees-namely, the reforms of the 1990s and corruption. The sectoral communities believe that the reform does not solve the problem of their labor compensations, which are unfairly low, and perceive it as a threat to the maintenance of informal practices of receipt of fair labor compensations. Regional bureaucracy does not support the reform, because they believe it fixes an unfair distribution of funds and responsibility between the federal center and regions. Notably, the ideas of fairness of the above groups appear conflicting, however, it is critical that they differ from the declared reform avenues wherein the priority is granted to the demand of efficiency of the sectors' functioning and use of public funds allocated for the sector.
It should also be stated that the federal center does not appear united in its stance towards the reform, for departmental ideas of efficiency being diverse. The MinFin, Ministry of Economic Development and Trade, Minzdrav and presidential Administration have failed to mobilize a stable consensus on the substance of the proposed transformations over the past eight years.
The experiences with conduct of monetization show that the room for a possible compromise between the noted multi-vector requirements to efficiency is too narrow and it is hard to reach it. That is where the key obstacle to the success in reform lies.
Processes that will help get interests in the reform consolidated will be a continuous rise if inequality in terms of accessibility of medical assistance that also forms a factor of accumulation of protest potential and the apprehension of the inevitability of the national catastrophe, should there be no drastic transformations in the health care system, for without its qualitative modification there will be no chance to reverse current negative demographic trends in the country.
3.6.2. Education
The past year saw a notable activity of the state in developing and implementing both strategic and ongoing measures in the area of support and development of the educational sphere.
It should be noted that the Government has displayed a notable activity with regard to development of strategic documents in the educational area that should form priorities and objectives in support and control of development of education as a critical resource of the new, or knowledge-based, economy. Thus, in December 2004 the Cabinet adjudicated
Priority Avenues of Development of Education that include: development of a modern system of continuous vocational training (extension of additional vocational training, public accrediting); improvement of the quality of vocational training (categories of universities, the level of employers' participation in modification of educational standards); securing the investment attractiveness of the educational sphere (expansion of organizational and legal forms, public institutions); enhancement of accessibility of a qualitative general education (pre-schooling, the structure of educational standards, individual training programs (ITP) in profile training); transition to the per-capita principles of funding, and shaping an efficient market for educational services. The core project and programming vehicle of implementation of the basic reform guidelines is the Federal Program of Development f Education for th e period between 2006-10 that was included in the list of federal targeted programs the Cabinet approved on 11 September 2006. In addition, to ensure implementation of the noted directions there was developed and consequently adjudicated by the Government set of measures aimed at development of the educational system in RF until 2010 (The Government assignment of 25 May 2005, No. AZH-P-44-2534).
However, the intensity of yet unsolved socioeconomic challenges facing the educational sphere, the absence of envisaged effect from budgetary resources spent on implementation of the previous targeted programs and the need for ensuring breakthrough results in the most urgent matters compelled some experts to raise before the Cabinet the idea of implementation of one of priority projects in the educational area. According to its authors, it should provide a strong impetus to the development of the whole system of Russian education.
The National Project in the Educational Sphere
On September 5, 2005 President Putin announced the initiative on launching the four national projects and "Development of Education" in particular. Like the others, it is envisaged for the term of 2 years (2006-07) and focus on the state support to universities and schools that vigorously introduce innovational educational programs, as well as a program on support of the best teachers, informatization of education, support of gifted youth, design of a system of vocational training in the army, upbringing of the secondary school students, among others (see Table 53).
Table 53
Components of the Priority National Project on development of Education
№
Avenue of action
Action magnitude (indicators)
3.
4.
5.
6.
State support to universities and schools that vigorously introduce innovational educational programs
Annual bonuses to the best schoolteachers
Suuport of active users of informational educational technologies
Establishment of new universities in the Southern and Siberian federal okrugs, and business school for management training Supported of the gifted youth Development of the vocational training system in the Army
Support of teachers in the form of bonus for out-of-class guidance of students, including those in the primary school_
30 universities (some 2,5%) 6,000 secondary schools (slightly under 10%)
Rb. 100,000 for the best 10,000 schoolteachers
20,000 secondary schools (some 30%) and 100 universities (less than 10%) 2 universities in the noted okrugs and 2 business schools in Moscow region and St.Petersburg
5,000 grants worth Rb. 60,000 each Not less than 100 educational and vocational training centers Additional monthly bonuses payable to 900,000 schoolteachers
The volume of support on the first avenue should amount to some Rb. 1 mln. for a secondary school and between 500 mln. to 1 bln. for a university. They will be able to spend the funds on staff training and recruitment, modernization of their material base, including software, repair and maintenance works, and development of methodological and tutorial materials. In the case of universities, it is suggested to employ such criteria as: the existence of a strategic program, public management bodies (such as board of trustees, etc.), level of extrabudgetary resources, quality of training according to an employers' independent rating, transition to new mechanisms of financing and new organizational and legal forms, and participation in international projects.
The second direction provides for employment of tender-based procedures designed in collaboration with regions and direct annual grants worth a total of 100,000 each for the best 10,000 schoolteachers.
The third avenue provides for organization of development of a federal portal for distance learning, support of active users of information technologies through equipping schools and universities with modern computerized means and securing access to the Internet for 20,000 schools. The development of the portal, design of 100 distance-learning programs and procurement of equipment worth a total of Rb. 0.2 bln. should ensure the launch of the educational portal in the second half 2007. The support of active users of information technologies will be carried out along two avenues; that is, Rb. 2.0 bln. will be spent on organization of computerized facilities in 100 universities and 2,500 schools, while another Rb. 0.8 bln. will be earmarked on connecting 20,000 schools to the Internet.
On the basis of concentration of the existing universities and research centers' resources the fourth avenue should provide for establishment of two new national universities (with 25-30,000 students, of which 20% should be overseas ones) in the Southern and Siberian federal okrugs, and the launch in Moscow oblast and St. Petersburg of two business schools (with up to 1,000 students) for the purpose of training managerial cadres for large investment projects, promoting entrepreneurial activity and modern management technologies. It is planned to earmark in 2006-08 a total of Rb. 9 bln. for all the stages of establishment of new universities - from the feasibility study to organization of the housing and social-household infrastructure for faculty and students, including Rb. 3 bln. for a university and 1.5 bln. for a business school.
To support young inventors and researchers, talented and initiative young individuals who will have excelled in studies, entrepreneurial and other publicly significant areas, the project's fifth avenue provides for setting 5,000 individual grants of Rb. 60,000 each, as well as organization of competitions, summer schools, stipendiums, grants, development and conduct of data bases of talented young individuals aged 12 to 20. The project also provides for organization of a public movement entitled "Russia of Talents".
The sixth avenue provides for creating conditions for conscript military staff to receive in specially created training centers civil diplomas of primary vocational training, while for draftees (not less than 5,000 of them) - conditions for pre-university training. It is provided to allocate some Rb. 5 mln. for each raining center. According to the RF Ministry of Education, these measures should improve attractiveness of the army and transform it into an educational and vocational vehicle and ensure a greater accessibility of education to certain strata of the population.
Given a particular importance of the pedagogical function of the secondary school, the seventh avenue provides for introduction pf monthly cash bonuses for 900,000 schoolteachers that deal with out-of-class guidance and primary-school teachers.
The volume of financial resources that have to b earmarked from the 2006 federal budget on implementation of the national educational project should account for Rb. 30.8 bln.
According to the designers of the project, the systematic nature of changes in this particular area, which are generated by the implementation of the national project, will depend on implementation of the best practices, organization of training, a vigorous inytro-duction into selection procedures of civil society organizations and potential initiators of changes (other than red tape), intensification of feedback in the educational sphere through the launch of evaluation and monitoring systems.
The national project prima facie is a successful complement to the aforementioned strategic documents, as it suggests a direct boost of funding of education, rather than organizational transformations. It is a common knowledge that the man obstacle to improvement of the quality of education lies in teachers' low salaries - this kind of job is clearly unattractive to talented young individuals. However the question remains as whether they would be eligible for the noted bonuses beyond the project timeframe, as well as whether the bonuses would be taken into account in the course of formation of a new system of labor compensations in the budget sphere. It is unclear if these measures ultimately form elements that would become an organically inseparable components of a new sectoral labor compensations system for budget employees under which a teacher's salary would depend on the quality of his performance, including the out-of-class one, and his ability to adequately communicate with students, rather than the number of hours spent in the classroom. Plus, the selectivity of support of teachers, schools and universities will clearly conflict with the declared mission of equalization of accessibility of qualitative education. While teachers perceive the competition for bonuses as an incentive to professional growth, the educational institutions will view a single financial support as a factor that solidifies the inequality between them.
The poorly designed new system of labor compensations of employees in the educational sphere which was created with a genuine intention to increase the teachers and university faculty's eagerness to provide high quality tuition actually devalues the tender-based stimulation of the best of them. The system provokes corruption and abruptly leaves winners unmotivated on receiving the bonus - the probability of a second award is low, while the regular salary does not ensure normal living standards. Teachers surveys show that they prefer a regular increment (for long service, etc.) to a huge, but single bonus.
There exist risks associated with the rise of teachers' status, for the shortage of teachers of different profiles cannot be solved within a three- year period (even in such cities, as Moscow). The shortage of teachers is often coupled with their low qualification, particularly lack of expertise with regard to new sources, such as the Internet.
As concerns specific measures of the project, there are two that raise questions at most - that is, creation of new universities and business schools (as because of the earlier conducted policy, there are much fewer faculty remaining in the system), and introduction of primary vocational training in the Army, especially in conjunction with the recently declared transition to one-year conscription, for a "standard" primary vocation training requires at minimum a three-year curriculum.
It should be noted that progress in funding the educational sphere will mostly be determined by a degree of employers and big and small businesses' commitment. While addressing an enlarged Collegium of the RF Ministry of Education and Science, the newly elected President of the Russian Union of Industrialists and Entrepreneurs Mr. A. Shokhin stated that the national business community was ready to participate in the process with much gusto, however, expected the government to create attractive conditions, for instance, in the form of tax benefits. In other words, the business community's vigorous con-
tribution to the national project and modernization of education as a whole will have a substantial impact on the sector, only provided there will be a transition from sponsorship to partnership, for instance, in the form of introduction of new organizational and legal forms of educational institutions and banks extending educational loans at beneficial rates, and the state compensating for the respective benefits. Meanwhile, these matters remain beyond the national project framework.
To oversee implementation of the national project, there have been establish some fifteen various structures whose sole mission will be to control financial flows in their frame. This raises a serious question as to if the control units are efficient enough not to inhibit the work on the project. In December 2005, the RF Minister of Science and Education established a Board on Education whose mission will be to ensure coordination of reforms in the educational sphere and primarily the national project. The Board was built according to the territorial principle, with a manager from each federal okrug and heads of a number of regional educational agencies being co-opted into it.
Changes in the System of Labor Compensations to Employees in the System of General Education
The RF Ministry of Education vigorously propones the idea of transition to the sectoral system of labor compensations. Clearly, a universal nationwide system is impossible due both to legal and practical reasons. Specialists of the Department of Economic Affairs and Finance of the Ministry designed a general concept and granted regions with the right to form regional sectoral labor compensations systems.
The Ministry's concept differentiates labor compensations due to teachers' level of education, service record, and position. Thus, the maximum (1.5) coefficient was set for those with the higher profile education, while minimum one (1.0)- for those with secondary complete general education (technical staff). Due to the factor, there was set both the basic size of salary - that is, Rb. 3,975 and 2.560 as the highest and lowest rates. According to the Ministry scale, teachers are divided into 5 groups with account of the length of their service, with inter-record coefficients set for each of them. The coefficients vary within the range between 1 to 1.2.
The greatest coefficient was set for young specialists with the length of service between 2 to 5 years, followed by teachers with the record between 5 to 10 years (1.17), and those with the record between 10 to 15 years (1.15), and those with the greatest record (1.14). Finally, there follows the category of starting teachers with the length of service of up to 2 years.
The Ministry's stance is that it gives preference to young teachers over individuals of the pension and pre-pension age, albeit ultimately the differentiation is insignificant. Besides, one should take into account the fact that he greater is a teacher's length of service, he higher, a rule, his qualification category is and payments for it compensate for a modest value of inter-record coefficients.
The differentiation between labor compensations to educational staff of the 1st and 2nd group, due to their position, is not considerable (20%). Thus, the first group comprises teachers, vocational tutors, speech therapists, defectologists, and mentors, while psychologists, social pedagogues, instructors of physical culture, and pedagogues of complementary education find themselves lower at the scale of labor compensations. According to the hierarchy, the maximum salary, which is Rb. 8,780 is paid to a representative of the first group, a university graduate with the record of service of 15 years and more, while
the minimum one - a representative of the second group, with the secondary vocational education and the length of service up to two years.
As far as labor compensations to heads of educational institutions are concerned, the Ministry suggests to take into account the number of students, level of technical equipment, presence of structural divisions, and other volume- related indicators. With account of these factors, salaries of heads and principals fluctuate within the range of Rb. 7,900 to 14,150. In addition, experts of the Department of Economic Affairs and Finance of the Ministry of Education suggest a system of increasing coefficients that vary between 1.15 to 1.5 for pedagogical and top administrative staff, due to the type of educational institution. In this hierarchy priority is given to teachers of Russian that are employed at educational institutions with a non-Russian language of tuition located in the countryside and urban-type settlements. The Ministry concept emphasizes a special role of and off-tariff fund that should account for not less than 40% of the general labor compensations fund (this index currently does not exceed 20%).
Thus, given that according to the currently effective Uniform Tariff Grid the average teacher's salary is Rb. 2, 296.8 principal's 2.666.2, in the frame of the sectoral system they should make out Rb. 5.860 and 10.370, accordingly. This requires another Rb.172.6 bln. in additional funding.
The regional system of teachers' labor compensations can be exemplified by an arrangement already employed in Tyumen oblast. Since January 1, 2005, the local teachers were broken down into four groups, due to the complexity of subjects. The first group comprises teachers of Russian and foreign languages, literature, mathematics, and providing tuition in the first form of primary school. The second group is formed by teachers of history, social science, geography, physics, chemistry, and teachers of 2nd - 4th forms of primary school. The third group covers teachers of law, economics, and technology, while the fourth one - astronomy, physical culture, fine arts, music, technical drawing and basic survival skills (BSS). The oblast authorities introduced a basic salary rate payable in full to teachers falling under the 4th group, while the others enjoy an increasing coefficient, which makes up for the 3rd group - 1.05, 2nd - 1.1, and 1st one -1.15. Principals are also paid for with account of complexity of their duties - for instance, the more pupils are at a given school, the higher its principal's salary is. In addition, the educational staff are eligible for compensations for state wards 9including honors) of the USSR and RF, scientific degrees (PhD - Rb. 3,000, Dr. - 3,600). The oblast also introduced increasing coefficients for qualification categories, out-of-class education, etc.
The Universal State Examination: the 2005 Results
The experiment on introduction of USE takes place in the framework of implementation of the Concept of Modernization of Russian Education through 2010. It is guided by resolutions of the RF Government : of February 16, 2001, No.119 "On organization of the experiment on introduction of the universal state examination", of April 5, 2002, No. 222 " On participation of educational institution of the secondary vocational raining in the experiment on introduction of the universal state examination", of November 29, 2003 No.725 "On extension over 2004 of the term of conduct of the experiment on introduction of the universal state examination", of March 2, 2005, No.108 "On conducting in 2005 the uniform state examination".
The data that highlight on the scale and volume of the experiment over the past five years are given in Table 54 below:
Table 54
Indicators of the Experiment on Conduct of the Universal State Examination
Number
Year
RF Subjects participating in the experiment
Subjects on which USE is held
Graduates that passed USE
Per-sons/exa m.
Universities and their braches participating in the experiment
Secondary special educat. instit. taking part in the experiment
Ministries and agencies
2001 5 8 30 000 48 524 16 - 3
2002 16 9 298 921 435 146 123 79 10
2003 47 12 654 115 1 226 734 464 928 20
2004 64 13 820 338 1 746 447 946 1525 29
2005 78 13 853 495 1 893 544 1 543 1 765 1550
2006
(pro- 80 13 1 000 000 2 000 000 2 000 2 000
jected)
In 2005, of 78 Russian regions the exam was for the first time held in 14 ones. Almost all the "old" regions have expanded their participation in the experiment, with 32 of them (41%) conducting USE practically by all the basic subjects, another 35 (44.9%) by 3 to 7 subjects, and 11 regions (14.1%) - by 1-2 subjects.
At the stage of the state (final) attestation, USE was conducted by 12 subjects - that is, mathematics, physics, chemistry, biology, geography, Russian history, social science, literature, Russian, English, German and French. At the stage of enrollment examinations to universities and special secondary educational institutions, USE was held by 13 subjects (including informatics).
In 63 Russian regions, universities and special secondary educational institutions ran enrollment examination in the form of and basing on USE materials by 100% of their respective profile specialties, while in another 14 regions that participated in the experiment for the first time they were conducted by 50% of specialties.
According to the pre-set objectives, the work in 2005 was organized by the following avenues:
• Improvement of legal acts and instructive documents;
• Continuation of testing of several technological models of organization and conduct of USE: the basic one - in 69 Subjects of RF, automated informational system "Examination" - in 9, and computerized system - in 5 ones;
• The launch of the testing of the technology of organization and conduct of USE in yadly accessible and remote areas of RF - in rayons of the Republic of Sakha (Yakutia), Khabarovsk krai, Magadan, Tomsk and Chita oblasts, and the area of Yugra in Khanty-Mansy autonomous okrug;
• Development of 465 original variants of control measurement materials by 13 subjects;
• Development of an infrastructure consisting of the federal and 77 regional data processing centers, including the possibility for universities and secondary special educational institutions to verify the USE scores by using the Federal Evidence Base;
50 With account of the contraction in the number of ministries and agencies of the RF Government in the course of the ongoing administrative reform.
• Continuation of the testing of the automated system of informational back-up of the universal competition-based admission to universities and secondary special educational institutions;
• Training at the federal level of specialists that ensure the conduct of USE (organizers, operators, it-staff, members of examination boards, etc );
• Interaction with 1,543 universities and 1,765 secondary special educational institutions to secure their participation in the examination (design of admission procedures, those of organization of enrollment and admission basing on USE results, interaction with the Federal Evidence Base of USE results, monitoring of education, etc.).
In the frame of organization of USE, education management bodies of Subjects of the Federation have worked vigorously with boards of university rectors and principals of secondary special educational institutions, which considerably boosted participation of professional educational institutions in the experiment. With the number of universities and secondary special educational institutions growing, potential enrollees displayed a greater motivation for being attested in the form and by materials of USE. Because of that, as well as due to focus on enhancement of teachers' qualification, the number of unsatisfactory marks fell by all subjects - from 12.6% in 2004 to 10.6% in 2005 on average, while the number of excellent ones grew on average from 12.4% to 14.2%. That resulted in a 1% growth of the average score by each subject vs. 2004.
In 2005, roughly as many as 55,000 enrollees were admitted to 1,543 university (including their branches), which was 2.2 times more than in 2004. Interestingly, 697 universities and their branches in 35 Russian regions mostly practiced admission on the basis of USE results.
Overall, according to VTSIOM data (as of June 2005) nationwide 40% of surveyed citizens expressed their positive attitude towards the cancellation of admission examinations to universities and secondary special educational institutions and replacement of those by USE results, while another 26% was reported to have negative attitude in this regard. At this point, it should be noted that absolutely positive and absolutely negative assessment rates of USE have fallen, which speaks in favor of the lesser intensity of polarization of opinions of USE.
In the frame of monitoring of USE in 45 regions there were held surveys of head administrators in the educational sphere (814 of them) and methodologists (696). The survey results showed that with the length of time of participation in the experiment growing, the proportion of top educational administrators that employ the USE results to control the quality of education and consider it possible to use them while attesting schools and their pedagogical cadres was growing too. It should be stressed that an "immediate" use of the USE results for the sake of attesting institutions of general education and teachers is non-correct and may cause negative effects.
Meanwhile, the organization and conduct of USE in 2005 exposed the following drawbacks:
• In some control and measurement materials (CMM) there were errors and inaccuracies - the overall number of comments on CMM reported to the Federal Institute for Pedagogical Measurements of Rosobrnadzor made up 37, or twice as low as in 2004; of which 20 were rejected by members of the Federal Commission on Subjects, 7- did not entail changes in the graduates' score, while 10 comments (on mathematics, Russian and physics) entailed the correction of the final score for 1.4% of the overall number of those who had passed USE by these subjects. Today, the work is under way to
develop CMM evaluation patterns with attraction of highly qualified experts from regions;
• Individual cases of deliberate breaches of the procedure of holding the experiment by its participants were exposed (the use of cribs, cell phones);
• Delays with the issuance of the certificates of USE results in some localities;
• In some universities and secondary special educational institutions there were exposed cases of admission procedures that appeared conflicting with the respective federal regulation, including, in particular:
- an unjustified introduction of additional admission examinations for those who enrolled to universities on the basis of the USE results;
- some universities failed to fully adhere to the pre-set list of subjects while developing their admission procedures to specialties the admission to which was USE-based;
- while enrollee were submitting their documents to universities, some admission commission required a compulsory submission of original educational certificates, as well as results of USE;
- results of graduate examinations of universities' special training courses (which are not financed from the federal budget), university competitions and early examinations were treated as enrollment examinations.
While discussing the results of the 2005 USE experiment, numerous regions and university presidents councils raised the problem of the need in organization and conduct of USE "in one wave". This, on the one hand, would allow to save a certain part of financial and human resources, while on the other hand, there are groups of enrollees that objectively fail to pass USE in June (those demobilized form the army service, foreign citizens, mostly those from the CIS, offspring of Russian citizens that reside overseas, etc.). Should such a decision be made, these risks could be minimized by means of certain organizational and technological measures, for instance, reserving some days in July. It should be noted that the proportion of graduates of the past years, as well those from institutions of primary, secondary and professional education that take part in the "school" wave grows from year to year. It is appropriate to work out in 200607 standard legal models of modernization of technological provision of holding USE in "one wave", with an ultimate goal to complete the respective transition by 2008.
The transfer of the Secondary and Primary Vocational Training Institutions under Control of Subjects of the Russian Federation
In compliance with Article 26.3 of Federal Law of July 4, 2003, No.95-FZ, since January 1, 2005, the delivery of secondary and primary vocational training has been delegated to government bodies of the RF Subjects. The number of such institutions in Russia totals 6,439, of which in the first quarter 2005 2,536 ones had already been passed under the Subjects' purview, including 191 secondary vocational training institutions. The federal level has kept under its control 251 PVTIs and 1,011 SVTIs.
Until today, while being regional by their essence, such institutions were maintained and managed by the federal center (via educational agencies of the RF Subjects). That is why the purpose of the transfer is to get the educational institutions that satisfy local needs of regional labor markets closer to their immediate consumers represented by enterprises, organizations and agencies.
According to the original design, the transfer of the educational institutions under the RF Subjects' mandate should result in an emergence of regional PVTI and SVTI systems
and their optimization, which suggests their restructuring and integration tat are necessitated by the unfolding hard demographic situation. In the circumstances, a fall in the number of school graduates from the 9th and 11th forms has become notable, and it promises to intensify drastically in the future. In addition, it is necessary to increase the efficiency of utilization of property that is under the noted agencies' operative control.
The RF Subjects received under their mandate the funding (from the federal budget), buildings and facilities that previously hade been the federal center's property. In parallel with that, RF Government Resolution of January 24, 2001, No.64-p approved the List of federal public educational institutions due for the transfer in 2005 under control of Roso-brazovanie from other federal bodies of executive power (531 SVTIs and 1 PVTI). Plus, another 129 federal public educational institutions currently controlled by sectoral ministries (agencies) are also planned to be transferred under the RF Subjects' mandate. The overall number of SVTIs and PVTIs subject to transfer from the federal agencies to regions is presented in Table 55.
Table 55
The Number of Federal Educational Institutions Transferred under Control of Subjects of the Federation
_Ministry (agency)_
Rosobrazovanie Rosenergo Rossport Rosselkhoz
Minsotszdravrazvitia Rossii Minekonomrazvitia Rossii Rosstry
The RF Ministry of Natural Resources Total:
Number of transferred educational institutions
2,536 PVTI u 191 SVTI 10SVTI 3 SVTI 57 SVTI
2 SVTI 8 SVTI 23 SVTI
3 PVTI
2,833 educational institutions, including 2,539 PVTI and 294 SVTI
Source: the data of the RF Ministry of Education and Science.
It should be noted that the transfer of educational institutions under regional control has been underway for quite a while - initiated by a number of Subjects of the Federation back in 1993, it further continued in 1997 when four regions - St. Petersburg, Nizhny and Veliky Novgorod, and Samara Oblast on their own initiative took local professional college on their balance sheets. Since then the regions saw a modification of the list of specialties by one-third, they created councils for staff policy, and the proportion of jobless with primary professional education went down considerably. Principals of professional colleges received the second higher education in the area of social management.
We believe that the most efficient solution to the set tasks is to develop regional programs of provision of functioning of various kinds of vocational training institutions. Such programs have already been developed and efficiently practiced in Samara and Yaroslavl oblasts, and the city of Moscow. Such regional programs in turn should be complemented and further specified by development programs of a specific educational institution.
Many regions report positive trends associated with the functioning of educational institutions transferred to them. Thus, in Murmansk oblast the volume of financing of primary vocational education institutions from the oblast budget grew by 27% vs. that from the federal budget - salaries to schoolteachers were raised by 20%, while it is intended to raise students' stipendiums by 100 Rb. since April 1, 2005. In Yaroslavl oblast, the financing of secondary vocational training institutions grew by 25% vs. that from the federal
budget - students' stipendium is Rb. 140, orphans have the right for a free use of public transport, and boarding costs were raised up to 15 Rb. per capita (vs. the average 9 Rb. nationwide). It is planned to raise teachers' salaries by 20% in th second half 2005.
In compliance with RF Government Resolution of December 3, 2004 No. 1565-p, education management bodies of Subjects of the Federation, in collaboration with territorial branches of the Russian Property Agency, regional property management committees and heads of the transferred educational institutions are completing - and in some regions have already completed- the work on registration of the free assignment of the federal property (including land sites that are in the permanent, termless use) to the state property of Subjects of the Federation and its exclusion from the federal property register.
However, in some regions these processes were connected with a number of certain complexities related primarily to the absence of necessary funds in the regional budgets.
The adoption of federal statutes of July 4, 2003, No. 95-FZ and October 6, 2003, No. 131-FZ, has considerably extended powers of the RF Subjects and local self-governance bodies with regard to setting both the level of labor compensations for budget employees and their conditions. Regions and territories now enjoy the possibility for opting on their own for labor compensations systems in the subordinated institutions and setting procedures of their application.
Overall, the transfer of educational institutions of primary and secondary vocational training under the regional control allows:
• development of social partnership and emergence of close relations between educational institutions and employers in the part of identification of volumes and structure of training, as well as re-training and qualification upgrading of working cadres, both youngsters that receive such education for the first time and jobless adults;
• boosting the quality of education by means of transition of the educational institution from the multi- to mono-profile training on the basis of direct contracts with corporations, as well as the operative management of educational institutions, and shorter term of the actual passage of budget funds;
• improvement of legal, as well as methodological, back-up of the regional budget institutions' functioning.
3.7. Foreign Trade
3.7.1. Foreign Trade Turnover
According to WTO projections51, the pace of growth rate of the world trade in 2005 dropped considerably vs. 2004. The deceleration rate in 005 acounts for nearly 30%. It is envisaged that the global export of goods should grow by just 6.5% vs. the record-breaking 9% in 2004. For reference, in 2003 the respective index accounted for 5%.
While the members of OECD demonstrated growth in trade in the 2nd quarter 2005, the first half of the year saw the growth rates of volume of trade decline, which has had a particularly notable effect on the Asian markets and the US import volumes.
Against such a background the oil prices have broken the 20-year record, which battered consumer and business activity in oil-consuming economies. T is envisaged that a further price rise for energy sources will further be affecting consumers' and businesses' costs.
51 http://www.wto.org, Wto news, 27 October 2005.
294
By contrast, the indicators that characterize Russia's foreign trade were growing through the year of 2005 and broke the 15-year record values. Russia's foreign trade turnover computed by the balance-of-payments methodology made up USD 370.4 bln. in 2005, thus considerably over the respective index of the past years.
400,0 -| 350,0 300,0 250,0 200,0 150,0 100,0 50,0
0,0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
I Export beyond CIS
I Export-CIS
Hmport from beyond CIS
Import-CIS
Source: the Central Bank of RF.
Fig.65. Russia's Foreign Trade Turnover
Russia's foreign trade turnover grew by 33.2% vs. 2004, with its growth rates with non-CIS being greater than with those with the CIS countries. In 005, it sky-rocketed up to USD 314.98 bln., or at 36.7% more than the 2004 indicator. Russia's trade turnover with the CIS nations grew by 10.6% and accounted for USD 55.4 bln.
According to preliminary data, Russia collected revenues from foreign trade equivalent of 7.8% of GDP, or at 2.5% more than in 2004. It was export duties, primarily oil export duties, that contributed at most to the rise. As noted above, the major factor behind such a growth was the price rise for energy sources and, accordingly, the rise in basic prices used to compute the duties. Another cause became the revision of the procedures of computation oil export duties that became effective as of August 2004. More specifically, with the market price within the range between 20 to 25 USD/barrel, the duty rate was increased from 35 to 45% of the price increment over the margin of 20 USD, while with the oil prices over 25 USD/barrel, the respective increase became from 45% to 65%.
In 2005, the nation's positive foreign trade balance made up USD 120.2 bln., which became far greater a figure vs. 2004 (85.8 bln.), which became possible primarily due to the price situation.
3.7.2. The State of Affairs on the World Markets
The rise in the value volumes of Russia's foreign trade in 2005 was fueled by a considerable boost in export supplies, thanks to a favorable state of affairs on the world market for energy sources, in particular and a notable rise in imports that was driven by the growing domestic demand.
The global commodity markets in 2005 proved to be far more favorable for Russian expoeters than in 2004. According to the bank of Russia, international prices, with account of the structure of Russia's export by the totality of traded commodities that included some 70% of its value, grew by 34.9%. In 2005, the average price for rals was 50.4 USD/barrel, which was at 45.6% higher than in 004. The European prices for natural gas soared at 48%, mazut - 52.3%, diesel fuel - 42.7%, gasoline - 26.3%. Overall, during the period in question the prices for energy sources grew by 43.9% on average, those for non-energy commodities - at 10%, including prices for frrous metals - at 14%, non-ferrous metals -10.6%.
The price dynamics for non-ferrous metals are usually driven by the correlation between industrial output and demand. In 2005 the main cause for the price hike noted over recent years was still the same - that is, China continued to boost the demand for them. However, the developed economies likewise pushed the demand up. Even the disastrous hurricanes in the US should have a positive effect in this regard, for it is envisaged that the country should use a lot of metal to restore the ruined facilities.
Against such a background prices for some ferrous metals demonstrated an unprecedented rise in 2005. More specifically, copper quotations grew by 33% and hit their historical maximum of USD 4,600/t. Interestingly, the first half year was relatively calm - it was suggested that after the price hike occurred in early summer 2005, when copper was traded at USD 3,700/t., there should occur a change of the trend, due to the rise in the copper production.
The stock of metal was indeed growing over the summer, but since the autumn the demand for metals grew drastically, due to China's procurements and the noted hurricanes. At that point, it became clear that the copper output was insufficient and its stock was extremely small. For instance, at LME, which is the biggest copper trading venue, its stock accounted for some 60,000 t.,- the quantity the world industry consumes within less than three days. That resulted in a further price rise for copper.
The aluminum market likewise saw a considerable price rise. By late 2005 the prices had grown up to USD 2.270/t., or at 20% more than in early 2005. The stock of aluminum at LME is fairly great, some 500,000 t., but it fell by 180,000 t. over the year. The market was also keeping its watchful eye on China, for it attempts to boost its aluminum production. It was loss-making in early 2005, plus, prices for bauxites and alumina were on the rise, while electricity shortages compelled the government to shut down ten small plants there.
The prices on the market for nickel grew by 6.8% over the year. In early 2005 they were rising because of China's greater demand. However, it ultimately became clear that the demand was not that great, while prices were too high. Plus, the news that Canada was building new nickel plants also affected the market. It is envisaged that offer of nickel should exceed the respective demand in the upcoming years.
Table 56
Average World Prices
Brent, USD/barrel Natural 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
21.33 17.4 14.1 15.9 28.19 24.843 25.022 28.83 37.4 52.85
gas, USD/1 - 1.9642 2.5469 2.1876 4.3442 3.9764 3.3857 5.461 5.993 8.870
mln.BTE
Gas, USD/gallon 0.71 0.615 0.511 0.529 0.887 0.7922 0.755 0.891 1.197 1.508
Copper, USD/t. 2574.9 2369.7 1775.3 1539.9 1863.9 1613.6 1592.9 1785.6 2808.2 3605.7
Aluminum, USD/t. 1590.2 1554.0 1413.5 1318.0 1550.0 1444.7 1350.7 1424.7 1693.2 1871.0
Nickel, USD/t. 8053.9 7312.4 5352.5 5239.5 8624.0 5966.0 6175.1 9580.8 13756.8 14692.3
Source: Computed basing on the LME data, International Oil Exchange London) data.
3.7.3. Export
An extremely favorable state of affairs on the world market boosted Russia's exports that hit record-breaking values in 2005. Its value volume accounted for USD 245.3 bln., or at 33.9% more than in 2004. The rise was steered mostly by the growth in export supplies to the non-CIS countries (at 38%). Exports to the CIS countries was worth a total of USD 33.9 bln., or at 12.1% more than in 2004.
Table 57
The Dynamics of Russian Exports
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Export, as USD bln. 89.7 86.9 74.4 75.6 105.0 101.9 107.2 135.4 183.2 245.3
Including:
Far Abroad 71.1 67.8 58.7 63.6 90.8 86.6 91.0 113.9 152.9 211.6
Growth rates, as % to the prior year
Index of physical volume 100.1 101.8 99.7 109.4 110.2 104.2 115.0 109.5 111.1 103.4
Price index 108.6 98.1 84.2 92.1 128.2 93.8 86.0 113.4 120.5 131.3
Source: The RF Central Bank, there ministry of Economic Development and Trade.
Under a very high 2005 price index one can note a far more moderate growth rates of export in its physical equivalent. While in 2004 Russia's export grew by 11.1% in physical equivalent, in 2005 the rise accounted for meager 3.4%. This can be explained primarily by declining physical volumes of oil export.
In 2005, Russia exported 233.1 mln. t. of oil, or at 2.7% down vs. 2004, while the 2005 oil export proceeds grew by 43.98% and totaled USD 79.2 bln. Russia supplied 214.4 mln. t. of oil worth a total of USD 73.8 to non-CIS countries, while to the CIS ones - 18.7 mln. t. (USD 5.4 bln.), with the physical volume of exported crude oil to Far-Abroad countries falling by 1.4% vs. 2004.
By contrast, the 2005 dynamics of physical volumes of export of gas, oil products and metals retained positive. The natural gas supplies grew by 3.6% vs. 2004, while petroleum derivatives - 18.7%, including: gasoline - 49.0%, diesel fuel - 12.9%, mazut -18.8%. In 2005, Russia collected at 45.4% (up to USD 30.4 bln.) more receipts from export gas supplies vs. 2004, while proceeds form export of oil products grew 1.8 times (up to USD 33.7 bln.) vs. the prior year.
In 2005, the specific weight of fuel and energy commodities accounted for 66.8% of the total export to the noted countries (vs. 59.9% reported in 2004). The growth rate of the value volume of the group of goods in question accounted for 153.1%, due to high international prices for minerals and fuel (primarily oil).
Table 58
Value Volumes of Russia's Export of Oil, Petroleum Derivatives and Gas (as USD mln.) and Their Proportion in the Aggregate Volume of Russian Export (as %)
Oil_Oil products_Gas
USD mln. % USD mln % USD mln. %
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 1 2297 15,2 41 08 5.1 13381 16.5
1996 1 5578 1 7,6 7442 8.4 14683 16.6
1997 1 4346 16,2 71 45 8.1 16420 18.6
1998 1 0254 13,7 4262 5.7
1999 14101 18,8 4713 6.3
2000 25284 24,5 10938 10.6 16644 16.1
2001 24576 24,6 9402 9.4 18303 18.3
2002 28950 27,1 11227 10.5 15897 1 4.9
2003 38816 29,1 14064 10.5 19981 15.0
2004 55024 30,3 18998 10.5 20918 11.5
2005 79216,4 34,5 33650 13.6 30424.2 12.9
Source: the Rosstat, FTS data.
Metals and metal articles still formed the second by significance commodity group of Russian exports. Its share accounted for 14.5% (down 3.1 p.p. vs. 2004), while its export value volume grew by 13.2%.
Export of non-ferrous metal products grew by 20.2% vs. 2004 and reached USD 14.3 bln, of which export to Far-Abroad countries accounted for USD 13.6 bln.(a 20.4% rise vs. the prior year) and to the CIS countries - USD 0.7 bln. (+16.7%), with 80% of the aggregate volume of export supplies falling on aluminum, copper, and nickel.
In 2005, export supplies of nickel from Russia grew by 6% vs. 2004, those of aluminum and its alloys - by 9.6%, and aluminum products - 1.3%. The structure of export supplies of the copper industry in 2005 shifted towards a greater share of export of finished copper goods. While export of refined copper plunged by 8%, the one of finished goods demonstrated a 4.7% growth.
In 2005, the value volume of export of chemicals grew by 25.3%, timber and paper and pulp products - by 18.0%. The specific weight of these groups in the aggregate volume of export to Far-Abroad countries slid just insignificantly vs. 2004 and accounted for 5.5 and 3.4%, respectively. The physical volume of potash fertilizers grew by 15.9%, nitrogen fertilizers - 10.9%, ammonia - 4.1%, caoutchouc - 3.6%, round timber - 15.5%, sawed materials - 14.8%, cellulose - 5.1%, plywood - 3.7%, commercial paper - 3.6%.
The real appreciation of Ruble in 2005 has had an adverse effect on profitability of export transactions, primarily in the manufacturing sector. The share of machinery and equipment in Russia's exports to Far- Abroad made up 3.6% in 2005, or 1.9 p.p. down vs. 2004. The value volume of the supplies in question accounted for USD 12.35 bln., or just at
0.7% more than in 2004. The machinery export to the Far-Abroad countries made up roughly as much as USD 7.6 bln. and to the CIS countries - USD 4.75 bln.
In 2005, Russia exported arms worth a total of USD 6.126 bln., thus breaking the record value over past decade. Rosoboronexport secured 85% of Russia's export of arms, with the remaining 15% being shared by Sukhoy, MIG, and Salyut. The Russian military exporters have shifted their focus towards technical servicing of Russian military craft overseas, establishment of service depos and technical centers, and joint ventures that will cope with this kind of work.
Export of Russian weaponry began its rise in 1998, and since then the volumes of supplies have more than doubled. That occurred against the general decline on the global market for arms - according to US sources, the volume of concluded contracts in the area of arms trade plunged from USD 42.1 bln. in 2000 to 37 bln. in 2004.
As concerns the goods structure of Russia's exports to the CIS countries in 2005, the share of production of the national fuel and energy complex accounted for 40.5% of the aggregate export to the noted countries (against 45.1% reported in 2004), machinery and equipment - 21.1% (21.0%), metals and metal goods - 11.9% (9.8%).
The value volume of fuel and energy commodities grew by 10.7% vs. 2004, machineengineering products - 23.9%, chemicals - 20.9%, metals and metal goods - 49.8%.
Thus, in 2005 Russia has failed to improve the goods structure of its export and reverse its domination by minerals.
Source: FTS RF.
Fig.66. The Goods Structure of Russia's Export
High international prices boosted contractual prices for practically all the main assortment of Russian exports. In 2005, the average contractual prices for oil grew by 47.9%
vs. 2004, with those for Far-Abroad counterparts - at 48.5% (USD 344.3/barrel - up at USD 47.3/barrel). The greatest level of contractual prices for oil in 2005 was registered in September, while the lowest - in January.
The contractual prices for the basic assortment of ferrous and non-ferrous metals grew as well: export prices for raw aluminum grew by 12.5% vs. 2004, copper - 31%, nickel - 11.8%, while those for aluminum goods - 12.5%, and copper ones - at 78.5%.
Table 59
Average Contractual Prices for Main Russian Exports (Supplies to Far Abroad, as USD/t.)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Crude oil 133.5 118.5 74.4 110.9 179.9 156.4 162.4 181.2 231.9 344.3
Oil products 129.9 115.7 75.7 94.5 171.9 145.2 147.9 180.2 230.3 340.6
Natural gas Thos. Cub. m. 84.2 88.6 72.2 55.31 85.91 105.21 91.4 112.3 113.6 154.7
Ammonia 125.6 113.0 83.1 53.0 97.5 81.7 72.4 118.5 158.3 176.2
Nitrogen fertilizers 128.0 90.3 58.3 36.8 57.9 61.8 60.6 76.0 103.1 139.1
Potash fertilizers 7.2 79.7 87.4 86.4 86.6 76.8 74.9 77.8 94.3 133.9
Round timber, cub.m. 59.4 57.5 46.9 43.5 43.4 45.6 44.8 47.8 56.2 59.6
Cellulose 407.3 373.5 342.9 274.0 352.2 293.4 300.0 321.7 371.9 386.1
Commercial paper 473.7 383.4 394.0 349.5 386.6 421.7 332.2 338.3 387.9 455.3
Cast iron 136.8 124.2 104.3 66.8 80.7 86.2 91.1 126.8 242.7 274.4
Ferroalloys 1114 819.2 740.8 548.2 625.6 601.7 625.7 634.6 1097.8 1582.5
Copper 2143 2099 1655 1495 1675 1465.3 1371.4 1564.9 2587.6 3389.8
Nickel 7272 6733 5140 5761 8629 5730.9 6143.9 8584.0 12660.0 14242.5
Aluminum 1500 1401 1352 1157 1296 1176.3 1036.9 1050.0 1162.1 1299.2
Source: FTS data.
The 2005 export quota (the proportion of export in output) grew by petroleum derivatives, natural as, coal, raw timber, flat rolling, cellulose, passenger cars an trucks, while it dropped by oil, mineral fertilizers, plywood, and commercial paper.
Table 60
The Share of Export in the Output of Critical Goods (as %)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Crude oil 41.5 41 .7 41 .6 45.2 44.2 44.8 46.5 49.7 53.1 56.1 54.0
Petroleum derivatives 25.8 32.4 34.7 32.9 33.6 36.3 35.5 40.8 40.9 42.1 46.7
Natural gas 32.2 33.1 35.2 34.5 34.6 33.2 31.2 31.2 32.7 33.9 34.2
Coal 17.1 15.8 1 4.5 15.7 16.7 25.7 22.2 23.8 29.3 35.1 35.3
Mineral fertilizers 83.9 85.9 80.6 86.5 83.2 82.9 81.8 78.1 76.1 78.5 74.5
Raw timber 22.3 23.2 29.3 34.1 40.1 42.4 53.4 51.0 46.1 49.6 60.1
Cellulose 74.8 85.7 82.8 77.6 79.1 82.4 83.7 85.1 82.9 77.5 79.7
Commercial paper 71.1 72.2 70.1 74.6 70.6 69.0 67.4 68.6 66.0 65.6 61.2
Iron and steel flat rolling Passenger cars 53.1 59.7 58.6 63.5 60.6 55.3 43.0 50.5 47.1 46.1 48.4
16.7 10.4 4.9 8.3 7.3 12.2 10.1 12.3 11.7 11.8 12.5
Trucks 25.4 17.4 10.7 9.6 8.3 7.0 12.3 20.8 19.3 23.0 22.8
Source: Rosstat, FTS.
3.7.4. Import
In 2005, Russian import peaked its maximum over the past 15 years. During the year Russia imported goods worth a total of USD 125.1 bln., or at 28.5% more than in 2004, with the share of non-CIS countries accounting for 82.6% (vs. 79.6% reported in the prior year).
Table 61
Russian Import (as USD bln.)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Import, total 68.1 72.0 58.0 39.5 44.9 53.8 60.5 76.1 97.4 125.1
Including:
Far Abroad 47.3 53.4 43.7 29.2 31.4 40.3 48.2 60.1 76.4 103.3
Growth rates, as % to the prior year
Index of physical volume 98.1 121.1 89.0 84.4 129.2 129.1 117.6 119.2 120.8 122.2
Price index 100.2 94.8 92.3 82.1 86.7 94.3 93.4 98.7 103.1 105.9
Source;The Centrak Bank, The RF Ministry of Economic Development and Trade.
High growth rates of Russian import are fueled by an increasingly expanding domestic demand under real appreciation of Ruble, According to preliminary assessments of the RF Ministry of Economic Development and Trade, the Ruble appreciation rate against Euro in December 2005 could make up 0.4-0.6% and roughly as much as 1%- vis-à-vis USD, and the appreciation of real effective rate could account for 0.4-0.5%. In all, in 2005 (December 2004 through December 2005) the real appreciation of Ruble to USD made up roughly 3.7-3.8%, to Euro - 19.3-19.5%, the one of real effective rate - 11% or even slightly more.
The expansion of the domestic demand is generated by rapidly growing real disposable incomes of the population. Since September 2005 the growth rates of this particular indicator were steadily in excess of those reported in 2004. In 2005 as a whole their rise accounted for 108.8%,while for 2004 - 109.9%.
The growth in physical volumes of imports became possible thanks to the rise in supplies from Far-Abroad countries against the fall of those from the CIS countries. Thus, between January through September 2005 the index of physical volume of import supplies from Far-Abroad countries made up 131.4%, while from the CIS countries - 92.8%. The rise of import from the CIS countries was determined by the price component. The rice index for imports from the CIS countries accounted for 117.9%, while that for imports from Far-Abroad countries made up just 103.2%.
Import expanded by most of assortment items. It was import of machine-engineering goods that demonstrated the most rapid dynamics. The specific weight of this particular kind of production in the 2005 structure of Russian imports hit 44.4%, or at 2.8 p.p. greater than in 2004. The rise in the overall volumes of import of machinery and equipment was fueled by the ongoing trend to the registered import of household equipment and consumer radioelectronics, which intensified to the maximum degree since September 2005. Given that between January through August 2005 import supplies of these items soared by 25.3% in value equivalent vs. 2004, between September through December 2005 the respective index was 3.2 times. As a result, in 2005 as a whole, Russia imported household electric devices and consumer radioelectronics worth a total of USD 4.2 bln., or 1.2 times more than in 2004.
It should be particularly noted that according to the RF Customs' statistics, the officially registered import supplies of cellular phones demonstrated a 20-fold rise by value. Their specific weight in the aggregate value volume of imported household electric devices and consumer radioelectronics was 36.4% vs. 3.9% reported in 2004. Russia's 2005 official import of cellular phones made up 15.5 mln. units, or 6 times more than in 2004. Import supplies of color TVs grew by 2.1 times in value equivalent (those with liquid crystal and plasma screens - 2.6 times), and VR- equipment, household refrigerators and freezers -1.7 times.
The year of 2005 saw the rise of contractual prices for many imports.
Table 7
Increment rates of Average Weighted Contractual Import Prices ( as %)
Goods Increment rate (%)
Fresh and deep-frozen meat 4.9
Poultry 6.7
Fresh and deep-frozen fish 24.8
Cream butter 12.0
Sunflower seed oil 11.0
Raw sugar 23.0
Refined sugar 12.5
Pipes 34.7
Trucks 15.5
Coal 30.8
Oil products 11.7
Synthetic and natural caoutchouc 18.5
Source: FTS data.
Overall, in the structure of imports from Far Abroad the share of machinery and equipment accounted for 48.2% (vs. 45.6% in 2004) chemicals - 17.9% (17.7%), food stuffs and raw materials for their production - 17.0% (17.9%).
In 2005 vs. 2004 Russia increased importation from the Far-Abroad countries (in physical volumes) of fresh and deep-frozen meat by 36.9%, poultry - 19.7%, deep-frozen fish - 16.3%, citrus plants - 6.8%, coffee - 35.4%, raw sugar - 12.1%, medicines -17.7%, insecticides and herbicides - 14.5%, synthetic and natural caoutchouc - 17.0%, passenger cars - 46.9%.
In 2005, Russia imported liquors, wine, and soft drinks worth a total of USD 1.507 bln., or at 33% more than in the prior year. Such a rise became possible thanks to a 2-fold boost in supplies of the Ukrainian vodkas. The situation should change this year, however, for in 2006 the regional excise warehouse regime should be abolished and Ukrainian producers will no longer enjoy their advantages vis-à-vis their Russian rivals. Thus, the share of import of liquors should fall.
As concerns imports from the CIS countries, there was a growth in physical volumes of import of tea (at 35.7%) citrus plants - 3-fold, pipes - 7.3%, passenger cars - 53.4%. Import of ferrous metals grew at 27.7% (by value).
Other goods - 3 5 food stuffs and raw agr.
\ mat-Is (exept textile) - 17.1
\ / mineral products —2.6
chemicals and caoutchouc - 16.2
machinery, equipment and means of transport. - 45,6
hide, pelts and the resp. goods - 0.3
metal and metal goods - 7.3
timber, paper and pulp goods —3.2
precious stones aird metals and respect, goods - 0.3 textiles, garments and footwear - 3.9
Source: FTS RF.
Fig. 67. Commodity Structure of Russian Import (as %)
3.7.5. Geographic Structure of Foreign Trade
As far as the geographic structure of Russia's foreign trade is concerned, its largest economic partner is EU with 52.1% share of Russia's foreign trade turnover falling on it in 2005. The CIS countries' share accounted for 15.2% (in 2004 - 18.3%), EurAsEC nations' one - 7.8% (10.3%, APEC countries' - 16.2 (16.8%).
Among Russia's major trade partners in far Abroad in 2005 were Germany (the mutual turnover was USD 33.0 bln. - 138.2% up vs. 2004), the Netherlands - 26.5 bln. (159.4%), Italy - 23.5 bln. (153.5%), China - 20.3 bln. (136.7%), Turkey - 12.6 bln. (145.2%), Poland - 11.4 bln. (141.9%), Switzerland - 11.3 bln. (143.3%), USA - 10.9 bln. (110.8%), Finland - 10.7 bln. (131.4% up).
The decline in the share of the mutual trade between Russia and the CIS countries and those of EurAsEC in particular continued due to a temporary fall in their volume of mutual trade between Russia and Belarus which was driven by the transition to the coun-try-of-origin principle of VAT collection effective as of January 1, 2005. Thus, in 2005 the trade turnover between the two countries fell by 10.7% vs. the respective index of 2004. Interestingly, Russia's import from Belarus plunged by 11.9%, while its export to Belarus slid by 10%.
In addition, the volume of Russia's import from Kazakhstan fell by 6.4%, which resulted from the fall in the physical volume of oil importation that was caused by technical complexities of the transition to the country-of-origin principle. There also occurred a 3% drop of imports from Kyrgystan caused both by political unrest in the latter and a two-month delay with the beginning of supplies of Kyrgyz electricity to Russia vis-à-vis the prior year.
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
2003 January-April 2004 May-December
2004
2005
□ EU □ Candidates for EU □ APEC DCIS □ Others
Source: FTS RF.
Fig. 68. Geographic Structure of Russia's Foreign Trade
3.7.6. Regulation of Foreign Trade
The year 2005 saw discussions on tariff regulation procedures and adjustment of export and import customs duties on a number of goods.
Because of fluctuations of international oil prices, the export duties on oil and petroleum derivatives were subject to numerous revisions.
The Government issued a. 40 resolutions aimed at adjustment of import customs duties mostly towards their lowering.
Notwithstanding a considerable rise of importation of machinery and equipment into Russia, the government will be keen to encourage extension of import supplies of this particular group of goods in the future and it is going to cancel all the import duties on industrial equipment, which is not produced domestically. That would enable Russian enterprises to conduct technical rearmament whose major challenge is a considerable deterioration of fixed assets and insufficient efficiency of production capacities. Today, the domestic machine engineering is incapable of match modern requirements.
Originally, there were 1,200 kinds of equipment the import duties on which accounted for 5 to 15%. The Government has continuously lowered import duties over the past two years. In 2004, Russia canceled the duties on over 200 items, while in 2005 the process took yet a greater pace.
Since May 12, 2005, in compliance with the RF Government's Resolution of April 7, 2005, No. 196) the previous 5% import duty are no longer levied on individual kinds of technological equipment, including bearing conveyors, industrial robots, some elevating equipment.
Table 63
Export Duty Rates on Oil and Oil Products in 2004-2005 (as USD./t)
Oil Oil products
2004
January 31.2 28.1
Since February 1 33.9 30.5
Since April 1 35.2 31.7
Since June 1 41.6 37.5
Since August 1 69.9 45.4
Since October 1 87.9
Since November 20 57.0
Since December 1 101.0
2005 light black
February 1 83.0
March 16 68.2 36.7
April 1 102.6
April 24 81.4 43.8
June 1 136.2
June 27 104.1 56.0
August 1 140
August 23 106.6 57.4
October 1 179.9
October 29 133.5 71.9
December 1 179.6
Source: Resolutions of the RF Government.
Effective as of the same date, the Government introduced a tax-free import regime for some kinds of packing equipment (the earlier rate was 10%) and equipment or production of paper and pulp items (5%) (RF Government's Resolution of April 7, 2005, No. 202).
Since May 14, 2005, the Government temporarily, for 9 months, lowered import customs rates on individual kinds of equipment: from 15 to 5% - on converters; from 10 to 5% -on bridge cranes on stationary feet; some kinds of lathes and grinders; cutting units, hydraulic presses; transformers with capacity over 10,000 kWA; from 5 to 2.5% - on centrifugal fans, single-shaft compressors, air-clearing equipment, equipment for rolling mills, sorting or separating equipment; individual kinds of fuel jets, industrial furnace, measuring devices (RF Government's Resolution of April 11, 2005, No. 203).
Since May 14, 2005, the Government introduced a temporary (for 9 months) duty free regime for importation of offset presses, instead of the earlier effective 5% duty (RF Government's Resolution of April 11, 2005, No. 208).
Since July 1, 2005, the Government lowered from 10 to 5% of their customs value duty rates on some kinds of equipment for filling and capping bottles, jars, other capacities, and packing equipment; wheeled self-propelled hoist engines; and digitally programmed units (RF Government's Resolution of may 26, 2005, No. 330).
Since August 21, 2005, the Government introduced a temporary (for 9 months) dutyfree regime or importation of some sorts of technological equipment for the light and textile industries, including: bearing units used in the textile industry, printing paint-spraying machines, equipment for production and processing of yarn, equipment for processing of hide and leather; equipment for shoe production and repair; extruders; electronic machinery and devices for testing textile materials. The regime was introduced to substitute for the earlier existed 5% duty rate from the customs value of the goods in question. As well, the same regime became effective with regard to individual sorts of equipment on which
the customs rate had been 10% - that is some industrial sewing and knitting machinery (RF Government's Resolution of June 16, 2005, No. 380).
Since September 24, 2005, the Government introduced for 9 months a duty-free import regime with regard to certain kinds of technological equipment for the furniture and wood-working industries, including wood-processing units; disk saws, and drillers, to substitute for the previous duty of 5% from their customs value (RF Government's Resolution of August 16, 2005, No. 527).
In November 2005 the Interdepartmental Commission on Protection Measures in Foreign Trade recommended the Government to cancel import duties by 630 items of technological equipment whose analogues were not produced domestically. The list comprised equipment for oil refining and agriculture, as well as machine engineering, automobile and light industries. The measure is to be effective or 9 months during which the national producers were suggested to run technological re-equipping. It was suggested to compensate for the respective losses of budget revenues with improvement of the customs administration. The respective Government resolution should become effective as of February 1, 2006.
In December 2005 the Interdepartmental Commission ruled to cancel import duties on another 175 items of technological equipment whose analogues were not produced in Russia. The RF Ministry of Economic Development is going to submit to the Government a draft resolution on cancellation of duties on another 700 items of technological equipment.
The means of customs and tariff regulation helped to increase the degree of tariff protection of a number of critical sub-sectors of the agrarian and food sectors.
Since April 10, 2005 the RF Government introduced a new import customs duty rate on rice and lour-grinding and the respective groats products. The new rate, effective for 9 months, became 0.07 Euro/kg and substituted the previous one of 10% of the customs value of the goods, but not less than Euro 0.03/kg ((RF Government's Resolution of March 3, 2005, No. 115).
Since July 15, 2005, the Govrnment increased from 5 to 10% import customs duty rates on dried figs, pineapples and mango As concerns adipose and butter, as well as vegetable oil and grease in primary packing with the net mass not more than 1 kg., the previous ad-valorum 15% duty rates were transformed into 15% combined rates, but not less than Euro 0.12/kg. In parallel with that, the Government lowered duty rates (from 15 to 10%) on canned (with sugar) pineapples, tropical fruits and their mixes (RF Government's Resolution of June 29, 2005, No. 403).
Since July 3, 2005, the Government increased customs import duty rates for 9 months with regard to individual kinds of native and modified starch up to 20%, but not less than Euro 0.06/kg. The previous rates were 10% (for items of group 1108 TA FTA) or 5% (for those falling under group 3505 TA FTA) (RF Government's Resolution of May 31, 2005, No. 344).
In 2005, the government undertook important steps to boost investment attractiveness of the domestic automobile-making industry.
Since April 15, 2005, the bulk of automobile components (chassis, parts of the body, shock-absorbers, mufflers) imported for the purpose of industrial assembly of motorized transport vehicles falling under groups 8701 - 8705 TA FTA) became subject to the decrease of the duty rates from the previous 5 - 20% to 0 - 5%, effective for 9 months. The duty rate of 5% was set on two items - that is, electric accumulators and automobile seats, that of 3% - on car windows and mirrors, locks, fixing fittings and accessories, starters and starters-generators, wire kits for ignition plugs, and automobile speedometers. Other
automobile components are subject to duty-free importation (RF Government's Resolution of March 29, 2005, No. 166).
On the Government's request, the RF Ministry of Economic Development and Trade, Ministry of Finance and Ministry for Industry and Energy have designed a document that defined the concept of "industrial assembly" and procedures of its application with regard to importation of automobile components. The industrial assembly of motorized transportation vehicles is defined as a system of their serial production on the basis of technological processes that ensures an enterprise's annual production capacity of not less than 25,000 units under the two-shift operational mode, including: body welding, painting and assembly; mounting of: the cabin equipment; power aggregate, control mechanism, front and rear suspension brackets, electric equipment, suspension brackets elements, a compulsory conduct of tests of finished vehicles. The importation into the territory of RF of automobile components that the national TA FTA classifies as those for "industrial assembly of motorized transportation vehicles" is carried out on the basis of an agreement to be concluded between the RF ministry of Economic Development and Trade and a Russian legal entity which specifies the list, quantity and value of the said components under the "supplier's warehouse" terms, as well as the timetable of reaching the projected capacity (order of the RF Ministry of Economic development and Trade No. 73, Ministry of Industry and Energy No. 81, MinFin No. 58h of April 15, 2005).
The customs duty rate with respect to automobile components imported for the purpose of industrial assembly approved by Government's Resolution No. 166 for the term of 9 months have become constant effective as of 15 January 2006 (RF Government's Resolution of December 13, 2005, No. 757).
To protect domestic producers' interest, Russia conducted investigations that resulted in undertaking particular protective measures.
Between July 7, 2005 and July 6, 2006, Russia has introduced an antidumping duty on channels originated from Ukraine. The duty rate on the said produce manufactured by OAO "metallurgical plant 'Azovstal' was set at the level of 12.3% of its customs value, and the 17.4% rate is applied to channels produced by other Ukrainian metallurgical plants. These rates are collected in addition to the import customs rate introduced by the RF Customs Committee with regard to this particular product ((RF Government's Resolution of May 24, 2005, No. 324, letter of the FCS of July 29, 2005 No. 06-48/26013).
Since August 14, 2005 the RF Government introduced for the term of 4 months a preliminary compensational duty on rods for reinforcement of ferroconcrete constructions the whose country of origin is Ukraine. The duty rate is 21% of the customs value of the product ((RF Government's Resolution of August 11, 2005, No. 504).
Since 16 October 2005 Russia introduced an antidumping duty on three-phase asynchronous electric motors with the capacity of not less than 0.37kWatt and not more than7.5 kWatt with the height of rotation axle of 80, 100 and 120 mm originated from Ukraine. The duty rate was set as follows: 13.8% on produce of Kharkov electrotechnical plant "Ukrelectromash" and 59.3% on other Ukrainian plants' production (RF Government's Resolution of September 10, 2005, No. 558).
Since November 19, 2005 Russia introduced special duties on a series of confectionery goods imported from Ukraine. More specifically, the starch molasses became subject to the duty of 6.0 Euro/kg, while duty rates on stuffed or unstuffed sweets, caramel and analogous sweets vary from 20% of the respective customs duty rate (but not less than 0.25 Euro/kg) to 6.0 Euro/kg.
The confectionery war between Russia and Ukraine dates back to 2000. At the time, on the request of Russian producers, the RF Ministry of Economic Development and Trade
launched an antidumping investigation which in early 2002 resulted in introduction of a 21% special customs duty . The import supplies of Ukrainian sweets plunged nearly 5-fold -from 72,000 t. in 2007 to 15.600 t. in 2003.
However, keen to keep the Russian market, the Ukrainian producers went a compass. Having realized that the duty had been imposed only on sugar products without cocoa, they began to add half-percent of that into caramel and export the sweets as chocolate products that were exempted from the duty. Export of Ukrainian caramel consequently began growing rapidly and once the effect of the customs duties came to an end in 2004, the Ukrainian producers were holding one-fourth of Russia's confectionery market.
In 2004, the national confectionery association once again appealed to the Commission with a request to reintroduce the duties on imported caramel, particularly that with cocoa. The consequent investigation resulted in the reintroduction of the special duties.
As concerns prohibitive measures against Russian exports, as of October 1, 2005 there were 105 of them in force (as of January 1, 2005 there had been 125 of those), including: 49 cases of introduction of antidumping duties, 11 quota restrictions, 4 pricing restrictions, 10 administrative measures, 1 - restricted assortment, 1 ban on import, 1 additional tax, 2 tariff quotas, 9 technical barriers, 1 phytosanitary measure, 1 excise tax, as well as 10 measures that broke normal competition conditions, and 1 special foreign trade regulation. There also were 7 antidumping and 5 special protective investigations.
As of October 1, 2005, as many as 20 nations, as well as EU, practice protectionist measures against Russian goods. The losses from these actions are estimated at the level of some USD 2 bln. (vs. USD 2.5 bln. reported in 2004).
3.7.7. On Progress with Negotiations on Russia's Accession to WTO
Between 13 and 18 December 2005 Hong Kong hosted the 6th WTO Ministerial Conference. The Conference focused on measures on further liberalization of international trade in the frame of the Doha Round.
It was initially planned that the Doha Round would be basically complete in Hong Kong, however, it became clear as early as in mid 2005 that the disagreement between developed and developing nations was too grate to mobilize consensus by the end of the year. The stumbling block became the problem of subsidies that numerous developed countries grant to their agrarian producers. Most developing countries believe that is what makes their agrarian products noncompetitive on the global and local markets.
The Conference passed a declaration that provided for cancellation of agricultural subsidies by late 2013. The choice of the year as a deadline for cancellation of the subsidies testified to the EU delegation's victory, for it was able to defend its stance. The EU representatives repeatedly argued that their were not ready for radical reforms of their agriculture until 2013, while most other nations were insisting on the EU' cancellation of the subsidies by 2010.
Among other critical provisions of the Declaration was cancellation of all export subsidies for cotton producers by 2006 and provision of duty-free importation of 97% of goods form the least developed countries.
The Declaration, however, failed to suggest any concrete way to tackle two other critical items in the Doha Round agenda - that is, lowering tariffs for industrial produce and liberalization of the services sector. According to the final text of the Declaration, the WTO members should manage to conciliate the remaining matters until April 30, 2006.
Prior to the start of the Conference Russia had completed its negotiations on accession to WTO with 51 out of 58 member nations. At the conference, Russia signed protocols
on completion of negotiations with the Philippines, Nicaragua and Paraguay, as well as a preliminary protocol- with Canada who had proved to be a very tough counterpart.
In January 2006, in Davos, Russia signed agreements on joining WTO with Brazil and Switzerland.
Thus, according to the RF Government, to ensure Russia's accession to WTO, the country needs to reach agreement with just three counterparts - that is, the US, Columbia, and Australia. As concerns Australia, the respective documents should be signed shortly, as there are only technical issues to agree upon.
The main unresolved problem at the Russian-Colombian negotiations has remained the size of sugar duties. The Russian side has forwarded the Colombian counterparts a package of the respective suggestions and the final agreement is a matter of a few weeks.
By contrast, so far Russia's has failed to handle its most complex counterpart - that is, the USA. There are four unresolved problems that complicate the negotiation process: namely, matters of protection of intellectual property, the level of duties on aircraft, veterinary and phytosanitary standards, and access to the market for financial service as the most painful problem.
Protection of intellectual property is a very sensitive issue for the US whose producers of audio and video goods claim that they loose billions of dollars because of Russian pirates. Last year, the even attempted to exclude Russia from the General Preferences System under which Russian exports to the US are tax exempt. Russia boasts serious progress in the area. Its legal enforcement agencies vigorously pursued and shut down pirates' facilities. Over the first ten months of 2005 they brought 3,860 actions, including 2,227 of those falling under Art. 146 of the Criminal Code of RF (infringement of copyright and associated rights), of which 2,122 implied great and extremely great damage. However, the US insists on changing the predominant judicial practice of mostly conditional sentences, rather than real ones.
Clearly, the solution of the problem meets first of all Russia's interests, for it batters both the country's economic potential and its international reputation That is why regardless of Russia's accession to WTO, the country will keep improving its legal base, solidify cooperation between ministries and agencies with associations of copyright owners and international organizations as well as shaping public opinion with regard to counterfeit products.
Another hot issue that complicates the bilateral negotiations is the US side's persistent pressure in favor of cancellation of import duties on the US aircraft. Today, 60% of Russian air carriers' purchases falls on foreign aircraft, primarily produced by Boeing. They pay the duty of 20% of the customs value of the aircraft, which is not a barrier to the US producers to enter Russian market. Meanwhile, Russia admits the possibility for lowering customs duties on imported aircraft upon a transitional period after joining WTO, but not a complete refusal of them. Besides, this requirement falls under the so-called "WTO-plus" category, i.e. forms an extra requirement that toughens standard conditions of the accession. Russia repeatedly argued that she was not going to assume additional obligations while joining the Organization.
The problem of opening in RF branches of foreign banks and insurance companies is an equally complex issue. Today, Russia limits the foreigners' share in banking capital and in the event of sale of a big stake in a bank one needs to seek the bank of Russia's approval. Besides, in compliance with the law, foreign credit institutions may not open branches in the RF territory, but they must to establish daughter banks completely subject to the RF law.
After the bilateral meetings Russia will have to conduct a series of multilateral negotiations on its accession to WTO.
While signing the protocols, the Russian side assumes obligations formed basing on Directives on holding negotiations on granting access to the national market to foreign goods. The Directives were approved by the RF Government and provide for maintenance of the level of the tariff protection of Russian market at the moment of her joining WTO at the currently effective level. As concerns number of "volatile-to-import" goods (agricultural products, automobiles and aircraft), there exists a possibility for keeping a greater level of protection than today and the employment of the tariff quoting mechanism. The Government also reserved the possibility to employ combined customs duty rates tat should preclude one from lowering the customs value while registering export-import transactions with the customs.
To ensure the Russian producers' adaptation to an expanded access of foreign goods to the national market, the Government provided for a transitional period that can vary due to the level of volatility of a given sector to import.
In 2005, the task Force on Russia's accession to WTO held four meetings. At them, the group brainstormed over the third version of its final report on the problem. By now the work on adaptation of Russian legal base to WTO requirements practically has been complete and the group keep reviewing departmental acts and regional law to test their compatibility with the WTO requirements.
3.8. Military Economy and Security of Russia
3.8.1. Military Policy and Military-Economic Activity in 2005
The 2005 year that has just come to a close continued a new exceptional period in Russia's military organization that, in as early as 2003, the President of the Russian Federation called modernization.
From the very beginning of the year it has been clear that the struggle for and against real modernization will continue, as it did in the previous year52. The central apparatus of power agencies, modified and reduced within the 2004 administrative reform framework, started to operate in accordance with goals of modernization and got formally involved in the budget reform. However, management organs' structure was not clearly defined and started to once again expand and branch out, while military expenditures started to grow, although in disagreement with principles of goal-oriented budgeting. Deadlines for development of appropriate documents were not enforced, and completeness of presentation did not correspond to the demands for transparency in military economy, which is a necessary condition for reforms.
Execution of the 2005 budget and development of military expenditures chapters of the 2006 draft largely did not correspond to military expenditures categorization, standardized by the UN. The level of classification of military expenditures increased even more. The list of classified items and categories of expenditures grew considerably larger than allowed by the norms, established by the Law on State Secrets. Thus, in order to avoid raising payments of military personnel's monetary allowances and military veterans' pensions, even the cost of rations was concealed. The 2004 promises of military personnel's salaries indexation were not kept; the indexation was postponed until 2006 and was to constitute 15 per cent, while the 2004-2005 inflation exceeded 20 per cent. Moreover,
52 See «Russian Economy in 2004. Trends and Perspectives." Moscow, IET, 2005.
310
although contract personnel's monetary allowances were increased, housing waiting lists were reduced, allocations were made to savings-mortgage system and to other traditional housing solutions, nevertheless, socio-economic problems of the RF military organization persist.
These problems have an impact on the law and order within the RF military organization. The Council of Europe Commissioner for Human Rights, the Plenipotentiary Ombudsman of the RF for Human Rights, as well as the Chief Military Prosecutor and heads of the Accounting Chamber have officially testified to that fact in their reports. In particular, according to these reports, "the number of cases of draft discharges in exchange for bribes has increased, leading to general deterioration of moral climate in the society, as well as to drafting of young people mostly from indigent families. As a result, the cultural and educational levels of conscripts continue to decline, often barring them from effectively mastering complex military professions". The same relates to unregulated relations, forced labor unrelated to military service, which results in "military service turning into a hotbed of violence, cruelty and legal nihilism". According to the Chief Military Prosecutor of the RF53 summary of the results of the year, "more than a thousand of servicemen were prosecuted last year for encroachments on weaponry, equipment, property and budgetary items."
Let us consider in more detail the interim results of the army modernization in three main blocks.
The first block of problems is the transition to a voluntary army recruitment principle of the state's military organization.
It was confirmed in 2005 that although the federal special-purpose program (FSP) of transition to a voluntary recruitment principle, adopted by the RF Government in 2003, represents a step forward, nevertheless, it encompasses only a few military units of permanent readiness of the Armed forces of the Ministry of Defense, the Interior troops of the Ministry of the Interior and the Border troops of the FSB. FSP does not include any plans to recruit "contract" sergeants.
General transition to a voluntary recruitment principle is realized differently by different agencies. Thus, the FSB completely abandoned the draft in 2005 and is transitioning to exclusively contractual recruitment for the Border troops. The Ministry of the Interior was planning to staff its 46th separate brigade, stationed in Chechnya, with contract recruits only by the end of 2005, and by August, the percentage of "contract" personnel reached 80 per cent. 54 However, full transition of the Interior troops, announced in the President's 2003 Address, is already being rejected. The Ministry of Defense and Main Organizational and Operative Directorate of the General Staff, responsible for this project, are most strongly opposed to all regular troops' transition to a contractual system, even in a distant perspective.
However, appearance in the Russian Federation of military units and even formations, fully and exclusively staffed on a voluntary contractual basis, is an enormous achievement.
As for problems, occurring in the process of FSP realization, and mentioned by the Minister of Defense55, including:
53 "Zakon - fundament gosudarstva (The Law is Foundation of State)," by V. Ustinov in Rossiiskaya Gazeta, February 6, 2006 (No. 23).
54 "46-ya: pyat' let v Chechne (The 46th Division: Five years in Chechnya," by V. Cherkasov and A. Kozachenko in Krasnaya Zvezda, October 26, 2005 (No. 198).
55 Krasnaya zvezda. 2005. the 11 of November (No. 208).
• reaching and maintaining full recruitment quotas due to "attractive conditions of contractual military service";
• introducing necessary corrections in the FSP budget (16 billion 671,7 million rubles were apportioned in 2005, while FSP budget stipulated 19 billion 913,1 million rubles taking into account inflation; 22 billion 306,9 million were apportioned in 2006, when 23 billion 153,8 million required).
These issues were very predictable. These were the same issues discussed at the RF Government meeting before FSP was confirmed. But all warnings have been ignored.
In particular, when doing feasibility studies of the FSP, the Institute for the Economy in Transition developed recommendations, based on opinion polls conducted by VTsIOM, on a system of incentives that could make military service appealing. These incentives included raising monetary allowance (MA) of even private contractual personnel by 10-20 per cent above a national average wage with additional considerable bonuses for participation in military operations. However, the Ministry of Defense assigned priority to bonuses for other personnel, those serving in organs of central administration.
Therefore, as present monetary allowances of contractual personnel do not exceed a national average wage, instead of an expected intensive inflow of contactual recruits, everywhere but in Chechnya we witness an outflow of personnel recruited earlier, mostly from units not included in the list of permanent readiness. However, even in Chechnya service incentives are being pinched. According to publications56, more than 1.3 thousand contractual servicemen quit the 42nd Division, with additional 400 not returning from leave. As it was discovered, they were not receiving appropriate forms of allowance while in service. Furthermore, even the "elite" 76th Division is not doing well, according to the Division Chief of Staff's testimony57. Allowance norms are such that contractual personnel are sometimes forced to purchase their own items of clothing and equipment, including skies for winter operations. Providing contractual servicemen with housing is also a problem. In these conditions, the following data on this division is not surprising: 58 per cent of servicemen have incomplete secondary or secondary general education; more than 90 per cent come from working, peasant and other blue-collar families.
Corrections to FSP and indexation of expenditures were stipulated at its confirmation. However, the Ministry of Defense did not perform these steps in the process of budget development and spent additionally allocated resources on other needs.
The situation with upcoming reduction of the draft service term is even worse. The Resolution of the RF Government, as well as the President's Address state the term of "up to 1 year," interpreted as 12 months, instead of the service term of 6 months, sufficient for mastering the basics of military skills and training for contractual service. These provisions can not be acceptable to young people failing to enter into a college and being drafted. These young people will actually finish their college education 2 years later than other people of their age. There is also no clarity in realizing the promise of "spending the first 6 months acquiring military skills in educational sub-units." There are not enough military units and available slots to educate all draftees. Therefore, young people will be sent to educational sub-units in other military units, where they will face the "grandfathers." Even those enlisted men who pass through educational military units, in the second half-year of their service will find themselves not in permanent readiness units, but in units old-fashionably called "linear". Officially, the Russian Federation does not have any military
56 Voenno-promyshlennyikurier (Military-Industrial Courier), June 20-26, 2005 (No. 26).
57 "Kontraktnaya divisiya uje suschestvuet, a kriteriev otsenki truda voennyh professionalov eschew net (Contact Division Already Exists, but Criteria for Compensating Military Professionals Do Not," by V. Udmantsev in Voenno-promyshlennyi kurier (Military-Industrial Courier), August 17-23, 2005 (No. 30). 2005.
units of such name. At present, these are "categories" of military formations and units in the Armed forces of the RF: of permanent readiness, of reduced effectives (types "A" and "B"), cadre and newly formed.
Possibly due to this ambiguity the Ministry of Defense did not keep the deadline of the 4th quarter of 2003 of presenting a bill on reducing draft terms and service appointment. In stead, the society is being agitated by bills on elimination of military departments in colleges, elimination of draft deferments, etc. Moreover, "feeding grounds" for activities of structures, parasitizing on illegal deferments and draft releases, are being preserved. According to latest estimates by a political scientist G. Satarov, this year's "profits" in this "business" exceeded US$ 350 million. This is why these structures' concealed lobbying efforts against the reform are currently the main factor hindering the Armed forces transformation to a contractual service.
The delay in transition could have some extremely negative consequences, especially considering the upcoming demographic collapse. After 2007 the number of young men annually entering the age of 18 will be cut in half. These conditions will show that the growth rate of numbers of contractual personnel, specified in FSP, accompanied by reduction of the draft service term, are incompatible with the Ministry of Defense and other "siloviki" structures' desire to maintain current strengths of the Armed forces. They will either have to draft almost everybody or to draft some people but for an extended, not reduced service term. As for drafting college graduates, which is being debated, this draft would not be feasible. As a reminder, in the tsar's army people of higher education only served for 6 months.
Looming processes are dangerous from a military point of view, as they simultaneously lead to a draft's negative impact on the economy as well as to a social explosion.
A rational solution would be, first of all, to accelerate the transition and have it completed in regular forces by 2008. However, the Ministry of Defense's leadership rejects this idea, citing lack of fund. The Institute for the Economy in Transition experts performed calculations of means required for forced transition and found that the numbers constitute single digits of percentage of the RF general military spending. In the last year along, the Ministry of Defense received supplementary funds in the amounts several times larger than would be required to speed up the transition to a contractual service system. The 2006 budget supplement is larger than what would be required to speed up the transition to a new recruitment system. However, these means are either being spent elsewhere, or, according to the Chief Military Prosecutor's Office and the Accounting Chamber's data, being simply stolen.
However, there is another circumstance that the Ministry of Defense refuses to admit. When it comes to fighting efficiency, the number of enlisted men in a group made up of contractual servicemen is equal to one and a half of a group made up of drafted conscripts, serving the current term of 2 years. This means that the current numbers of the military organization could be cut in almost 1.5 times without inflicting any damage to the country's defense capabilities. That includes not only privates, seamen, sergeants and sergeant-majors, but also, what more importantly, more costly officers. This could produce no additional expenses but savings, or provide for more rational spending on increased monetary allowances, housing and equipping junior servicemen with more effective weaponry.
The second block of problems includes issues of equipping Russian Armed forces with modern weaponry.
Some undeniable successes should be noted in solving the second block of problems in 2005. These achievements include renewal of strategic missile complexes of the
RF (Topol-M), the basis of nuclear forces of deterrence, as well as equipping the newest anti-submarine missile cruiser with Bulava complex with a unified ballistic missile, which promises future economic effects of unification. They also include development of a high-precision cruise missile with a non-nuclear warhead that will allow to transition from talks of non-nuclear forces of deterrence to actual deployment of such forces, particularly, for deterrence purposes. Finally, development of non-lethal weaponry, although at present equipping special forces only, is extremely important considering the fact that these weapons are essential in armed operations in highly-populated areas.
However, flaws were also discovered last year in exploitation of weaponry and military equipment, mostly due to specific technical reasons, as well as a human factor of inadequate personnel training stemming from lack of financing for combat training.
A number of measures were implemented to solve the above-mentioned problem. Federal Service on Defense Order was established; a system of a "single procurer" in the Ministry of Defense was set up; the Russian Government Commission on Military-Industrial Issues (VPK) commenced its activities, and restructuring of the Defense Industrial Complex (OPK) continues. However, the OPK "fences" oneself off from other enterprises of the RF, while its subsidiaries grow larger and transform into a monopolistic group. These occurrences might be stemming from existing to this day opinion that domestic OPK is the force behind any progress, and investments into the OPK will save Russian economy. Although, while this premise was not correct before58, it is now losing its validity even more, especially in the case of un-scrutinized (by the public) investments.
Available positive practices are unfortunately discounted. In particular, we could cite works of the Defense Advanced Research Projects Agency (DAPRA) in the United States. The Agency directs research and development projects, mostly in the areas of national defense, without forgetting commercial applications of scientific and technical advances. In Russian history, similar and often broader functions were carried out by the ExpertTechnical Committee of the Commission on Military-Industrial Issues (VPK) under the Cabinet of Ministers of the USSR. Joint efforts of coordinating bodies like DARPA and VPK ensured goal-oriented research of dual (civil and military) research, and, more importantly, practical applications of scientific and technical advances in various economic sectors for a range of purposes.
Unfortunately, the function of coordination of research and development in critical areas of scientific and technical progress has yet to be assigned to any agency. As a result, the Russian military organization and the so-called OPK and separate innovation firms located under its canopy, although not under its authority, are alienated from the civil society. Rather modest government spending on scientific and technical progress is dispersed with extremely low returns. According to the General Prosecutor of the RF's evaluation of the 2005 results59, establishment of two new management structures, led by Deputies to the Minister of Defense, is yet to produce any positive results. "The unified body of military procurement has been inactive for a long time. More than a billion rubles earmarked for repairs, procurement and development of new weaponry were unused." The situation with spent funds is also obscure. The second structure, Center for Orders and Deliveries "commenced its activities with gross violations".
58 "Chernyi khleb voennogo biznesa (The Black Bread of Military Business," by V. Shlykov in Otechestvennye zapiski, No. 2(11), 2003, pages 459-472.
59 "Zakon - fundament gosudarstva (The Law is Foundation of State)," by V. Ustinov in Rossiiskaya Gazeta, February 6, 2006 (No. 23).
The Ministry of Defense should deal with issues of weaponry and military equipment unification with products of household applications, as the Ministry of Defense is unable to place large, serial, profitable orders.
Another very important aspect concerns the intellectual property rights. It would be impossible to expect innovations influx until intellectual property rights of researchers and developers, together with procurers, are not legitimized. This issue has been discussed for a long time60, however, an appropriate solution was unfortunately never found.
The state's innovation policy is no less important. As practically all innovations are of dual purpose, an opportunity for unification of different branches of industry arises, with larger production quantities and lower production costs. As a reminder, doubling production in modern machine-building sector usually reduces production costs by 15-20 per cent. This means that a reasonable innovation policy could increase the level of the country's defense capabilities without additional costs. A military-technical policy that would naturally incorporate innovations of dual-purpose into military construction plans would be beneficial to Russia.
Therefore, neither the state armament program, not the state defense order could be confirmed until their projects are supported not only by traditional military-technical reasons, but also by unified substantiations of rational civil applications of technologies and main weaponry and military equipment components.
The third block of problems of the army modernization is a budget reform and a civil society's oversight of power structures' activities.
At the beginning of 1992 the new Russian state's military-political leadership concluded that guaranteeing military security of the country within the framework of the CIS Joint Armed Forces was impossible, and decided to establish its own new military organization and a new system of military construction administration, both based on advanced international experience and domestic traditions. In particular, the following proposals were made 61, based on the U.S. and other states' practices:
1) The principles of program-oriented planning, including "planning, programming and budgeting" (PPRB) known both inside and outside of Russia, were to establish the basis of a new system of administration;
2) Military budget to be considered a main instrument of administration;
3) Military expenditures to be categorized in accordance with the UN norms of international reporting, but to include more detailed break-down of expenditures for domestic purposes and to include mandatory budget substantiation.
At the same time, Main Administration for the Military Budget and Finance (GUVBiF) was established on the basis of the Central Financing Administration of the Ministry of Defense of the USSR. The Ministry of Defense, and therefore, the Main Administration within it, were entrusted with developing a military budget bill by the end of 1992. The Armed forces' structure and strengths were to be confirmed simultaneously with budget confirmation.
However, when planning its spending in the 1990s, the Ministry of Defense and a large number of other government bodies with troops under their authorities followed the traditional path. In reality, in Russia with market economy, the military economy has long
60 "O problemah effektivnogo ispol'zovaniya intellectual'nogo potentsiala OPK (Issues of effective utilization of OPK's intellectual potential," by V.O. Rubanov in Aktual'nye problemy reformirovaniya oboronno-promyshlennogo kompleksa Rossii (Urgent Problems of Reforming Russian Defense-Industrial Complex.) Proceedings of a round-table at the Institute for International Economics and Political Studies, Russian Academy of Science. Moscow, Epicon, 2002, pages 130-139.
61 Declaration by the Presidium of the Supreme Council of the Russian Federation on "Priorities of Military Policy of the Russian Federation" of April 1, 1992.
been maintaining and continues to maintain in some degree a "Gosplan" type mechanism. In this mechanism, goals and budget are not as important as programs and plans that must be implemented "at any cost".
Moreover, Russian Ministry of Defense, much like Soviet Ministry of Defense, regardless of the Law on State Secrets, continues to believe that largest part of military spending must be classified, as it "reflects" programs and plans constituting state secrets, hidden from the majority of Russian public.
It was not until after 1999 that the military security of the Russian Federation started to improve.
Serious hopes for successes in long-term military construction that appeared in 2005 provide us with an opportunity to address the issue of optimal administration. It will not be the return to the conceptions of 1992, although there are many similar key parameters, including the general number of military personnel of less than 1 million, exclusively voluntary recruitment of regular troops, and the priority assigned to increasing fighting capabilities on the basis of fully fledged combat training and XXI century weaponry and military equipment.
General approaches and methodology also showed some newness. In recent years, planning, programming and budgeting (PPRB) was developing in two directions. First, it involved the control stage, including control not only over budget execution, but also over achieving strategic goals. The second direction demanded a stricter and more precise formalization of the system of strategic goals, tactical tasks required for reaching the goals, as well as clear (calculated) indices that would confirm degrees of reaching these goals.
International standards related to financial classification were developed. An international standard of the Classification of the Functions of Government (COFOG), compiled by the Organization for International Economic Co-operation and Development and adopted by the UN in 2000 as part of the 1993 UN System of National Accounts, was deemed appropriate for use as a basis of functional budget classification of the Russian Federation. Furthermore, the use of COFOG was supported by the International Monetary Fund. The IMF included it in its "Government Finance Statistics Manual".
However, the fact that another international standard has been adopted for military expenditures was not considered. Therefore, when realizing the Russian Government Resolution No. 249 of May 22, 2004 that adopted the concept of budget process reforms in the RF and "provided for alignment of budget classification of the Russian Federation with international standards", it is necessary to be guided by all standards. Applied to military expenditures, this should be interpreted as the UN's standardized form, adopted by the UN General Assembly as early as December 12, 1980 (the UN General Assembly Resolution 35/142 B). As a result of such incomplete work, classification of military expenditures became senseless and public control over military spending unrealizable.
3.8.2. Military Expenditures in the 2005 Federal Budget.
In connection with the transition to a new budget classification, the RF military expenditures in the 2005 federal budget were formally consolidated in the chapter "National Defense". This chapter included spending on implementation of international militarytechnical co-operation programs and mobilization preparation of the economy. In addition, two new sections were introduced in this section - "Research and Development in the field of National Defense" and "Other Issues in the field of National Defense. The chapter "Armed Forces of the Russian Federation" included expenditures on railway troops and
special construction administration that had been returned under the authority of the Ministry of Defense.
However, as a result of selective adoption of some of COFOG's recommendations and rejection of other, for example, related to civil defense, some military spending continue to be realized within the chapter "National Defense and Law-Enforcement". Moreover, in 2005 some of power agencies' expenditures were scattered under chapters "Education", "Culture, Cinematography and Mass Media" and "Public Health and Sports", therefore partially classifying expenditures in these sections. Therefore, these changes in budget classification should be considered in comparing military and military-related spending in the 2005 federal budget with spending in previous years.
In February 2005 first amendments were introduced to the federal budget's chapter "National Defense," including increases in military personnel's monetary allowances. These raises coupled with increased fuel prices led to two other amendments in June and October. As a result, expenditures in the chapter "National Defense" grew by 8.9 per cent with general budget expenditures increase by 16.1 per cent. Moreover, 52.5 per cent of that increase included increases in military personnel's monetary allowances (an increase of 22.4 per cent), and 18.6 per cent included expenditures on fuel and lubricant materials (an increase of 25 per cent).
In the end, the 2005 federal budget's chapter "National Defense" (see Table 64) showed 578.4 billion rubles, which is 2.75 per cent of the GDP or 16.3 per cent of all federal budget expenditures. Despite the fact that the total increase in this section's expenditures reached 17.5 per cent compared to 2004, expenditures in the largest chapter "Armed Forces of the Russian Federation" reduced by 7.2 per cent, which should be considered to as one of the results of changes in budget classification leading to reassignment of some expenditures to other sections. Thus, the analysis of distribution of federal budget allocations along types of expenditures in functional classification shows that no less than 52.5 billion rubles (0.25 per cent of GDP or 1.5 per cent of all federal budget expenditures) in the chapters "Education", "Culture, Cinematography and Mass Media" and "Public Health and Sports", are appropriated to military and military-related expenses.
For comparison, 455.3 billion rubles (constituting 2.17 per cent of the GDP or 12.9 per cent of the federal budget expenditures) were allocated in chapter "National Defense and Law-Enforcement Activities", with real general increase of expenditures under that item amounted to 21.9 per cent compared to the previous year. Due to the fact that approximately 2/3 of the expenditures under that item do not belong to the military category, main portion of the increase was obviously allocated to judicial system, while real financing for interior troops and border patrol agencies inexperienced only an insignificant growth (see Table 65). A significant increase of 22.5 per cent was seen in financing in chapter "Emergency Management and Civil Defense", considering that its military aspect - civil defense expenditures - decreased by 16 per cent, probably as a result of already mentioned transfer of certain expenditures under other chapters of the federal budget. The dynamic of expenditures on defense and security in corresponding chapters of the federal budget in current and 1999 prices is shown in Fig. 69.
Table 64
Direct Military Expenditures in the Federal Budget Section"National Defense"
2005, million of rubles/ same in 2004 prices 2005 changes Share of expenditures, % /
compared to changes compared to 2004
№ Chapter and item 2004, million rubles/ increase, % 2005 federal budget GDP
1 National Defense 578 351 517 772 90 396 17.46 16.34 0.90 2.65 0.10
1.1 Armed Forces of the Russian 420 813 -27 064 11.89 2.00
Federation 376 735 -7.18 -2.70 -0.50
1.2 Mobilization and non-military 3 665 -1 415 0.10 0.02
preparation 3 281 -43.15 -0.07 -0.01
1.3 Mobilization preparation of 3 500 2 033 0.10 0.02
economy 3 133 64.89 0.06 0.01
1.4 Collective security & peace- 60 -157 0.00 0.00
keeping 54 -293.06 -0.01 -
1.5 Nuclear weapons complex 8 693 7 783 -10 544 -135.48 0.25 -0.42 0.04 -0.07
Realization of international 6 231 5 475 -4 973 -90.84 0.17 -0.20 0.03 -0.04
1.6 obligations in the militarytechnical cooperation sphere
1.7 R&D, field of national defense 89 402 80 038 - 2.53 0.43
1.8 Other issues, field of national 46 103 1.30 0.22
defense 41 474 - -
Source: Calculations by The Institute for the Economy in Transition, based on data of the Federal Law No. 141 -FZ of April 11, 2005.
Table 65
Direct and Indirect Military Expenditures in the Federal Budget,
Other Sections
№
Chapter and item
2005, million of rubles/ same in 2004 prices
2005 changes compared to 2004, million
rubles/ increase, %
Share of expenditures, % / changes compared to 2004
2005 federal budget
GDP
2 Military expenditures in chapter "National Defense and Law-Enforcement Activities"
2.1 Interior troops
2.2 Security services
2.3 Border patrol agencies
2.4
Personnel, combat training, procurement and repair for civil defense troops of Ministry of Emergency Situations
26 960 789 0.76 0.13
24 136 3.27 -0.08 -0.02
67 557 6 910 1.91 0.32
60 481 11.42 -0.03 -0.01
36 047 1 000 1.02 0.17
32 271 3.10 -0.11 -0.02
6 439 -932 0.18 0.03
5 764 -16.17 -0.06 -0.01
Source: Calculations by The Institute for the Economy in Transition, based on data of the Federal Law No. 141 -FZ of April 11, 2005.
¡999 2000 2001 2002 2003 2004
Source: Calculations by The Institute for the Economy in Transition.
Fig. 69. The Dynamic of Allocations for Defense and Security, Billion of Rubles
The analysis of indirect military expenditures, related to past military activities (see Table 66), in the federal budget shows that in 2005 the Ministry of Defense's budget experienced a 2.4 per cent decrease in real term spending on pensions, while housing expenditures for retiring personnel increased by almost 1.5 times.
Table 66
Indirect military expenditures, related to past military activities
№
Sections and subsections
2005, million of rubles/ same in 2004 prices
2005 changes compared to 2004, million rubles/ in-crease,%
Share of expenditures, %/changes compared to 2004
2005 federal budget
GDP
3.1 Pensions
3.2
Subprogram on "State Housing Vouchers" for 2004-2010
72 687 65 074 14 045 12 574
-1 532 -2.35 5 370 42.71
2.05 -0.35 0.40 0.14
0.35 -0.07 0.07 0.02
Source: Calculations by The Institute for the Economy in Transition, based on data of the Federal Law No. 141-FZ of April 11, 2005.
At a first glance, military expenditures (see Table 67) in absolute and comparative aspects did not experience significant growth, especially in comparison with expenditures on security and law-enforcement activities. However, it is important to remember that 2004 and 2005 budgets' structures could be compared only partially. Certain "hidden" military expenditures reaching, as it was pointed out earlier, up to 0.25 per cent of the GDP or 1.5 per cent of all expenditures in the federal budget, should also be kept in mind.
Table 67
Total Military and Military-Related Expenditures
№
Expenditures
Billion rubles
Share of expenditures, % / changes compared to 2004 2005 federal budget
GDP
General direct military expenditures
Total direct and indirect military expenditures, related to current and past military activities
Total expenditures in the fields of national defense, security and law-enforcement activities
Total direct and indirect federal expenditures related to current and past military, law-enforcement and national defense activities
715 354
802 086
1 033 661
1 171 283
20.21 0.62
22.66 0.27
29.20 2.26
33.09 1.69
3.41 0.04
3.82 -0.02
4.92 0.30
5.58 0.19
Source: Calculations by The Institute for the Economy in Transition.
Unfortunately, the 2005 federal budget maintains traditional excessive classification of certain expenditures. Thus, 41 per cent of expenditures in chapter "National Defense" and 33 per cent of all Ministry of Defense's expenditures are classified. In general, 11.3 per cent of all federal budget expenditures were classified, compared to 9.7 per cent in 2004. Along these lines, starting in 2005, general transparency of the federal budget was seriously reduced due to the already mentioned "scatter" of certain power agencies' expenditures in different chapters, often only indirectly related to defense and security.
There were no grounds for these renovations; moreover, there were no grounds for classifying these expenditures, as proved by the practice of annual Ministry of Defense reporting to the UN and the Organization for Security and Co-operation in Europe. For example, on May 25 2005, the data, presented in Table 68, was reported to the UN in a form of a document on standardized international reporting of military spending. In the original document, expenditures in chapters "Strategic Forces" (1) and "Military Assistance" (2) were left blank, and therefore are absent from Table 68. The content of the document conforms to the initial federal budget, adopted in December 2004 or in force until June 2005, discounting the already mentioned 37.6 billion rubles of the MOD's expenditures concealed in "peaceful" chapters. The document shows that the truly classified is the data on spending on missiles and nuclear weapons, as well as, strangely enough, expenditures on active service personnel of the MOD. Corresponding expenditures of the Interior troops of the Ministry of the Interior, border troops and civil defense troops are disclosed.
Data on execution of military and related expenditures, compiled on the basis on the Federal Treasury reports on execution of the consolidated budget, is provided in Table 69 and Fig. 70. It clearly shows that the characteristic January downfall and the December surge in spending also occurred in 2005, considering the positive nature of the budget, adopted in advance and executed through the Treasury.
1
2
3
4
Table 68
Military Expenditures of the Russian Federation in 2005, Million Rubles
Forces
Articles
Land Forces
Navy
Air Force
Other
Armed
Forces
Central structures of rear provision and
Gen-
Milita- Unas- eral Civil administration rized signed Military De-Admini Forces funds Expen- fense ditures
Provision
s-
tration
1 2 3 4 5 6 7 8 9 10 11
1. Operational expenditures 119 986 32 370 25 879 35 658 53 545 7 267 32 080 76 447 383 232 3 814
1.1. Personnel 73 404 23 413 19 627 25 489 - 6 239 16 653 66 552 231 377 1 759
1.1.1. Conscripts - - - - - - 314 - 314 12
1.1.2. Other military personnel, including reserve 42 553 13 640 14 127 20 278 - 4 45 15 451 66 552 177 066 1 468
1.1.3. Civilian personnel 30 851 9 773 5 500 5211 - 1 774 888 - 53 997 279
1.2. Operation and maintenance 46 582 8 957 6 252 10 169 53 545 1 028 15 427 9 895 151 855 2 055
1.2.1. Funds for current operations 33 251 7 391 5 051 7 699 29 467 694 6 328 - 89 881 687
1.2.2.Service & repairs 5 005 814 807 1 454 397 66 2 759 9 895 21 197 693
1.2.3. Purchased services 7 071 699 353 626 23 681 236 5 804 - 3 8 470 447
1.2.4. Rent - - - - - - 35 - 35 -
1.2.5. Other 1 255 53 41 390 32 501 2 272 228
2. Procurement & Construction 51 431 27 098 23 307 40 962 1 901 2 011 9 426 1 005 157 141 1249
2.1. Procurement 39 112 23 412 19 556 92 997 1 469 356 5 027 - 121 929 977
2.1.1. Aircrafts & engines - 904 11 225 - - - 725 - 12 854 822
2.1.2. Missiles, including non-
nuclear warheads
2.1.3. Nuclear warheads and
bombs
2.1.4. Ships & boats - 12 360 - - - - 1 314 - 13 674 -
2.1.5. Armored vehicles 3 824 - - - - - 220 - 4 044 -
2.1.6. Artillery 1 748 99 - - - - 3 - 1 850 -
2.1.7. Other battle facilities & weapons 13 795 6 401 4 682 16 424 960 250 712 - 43 424 -
2.1.8. Ammunition 3 838 480 408 - - - 63 - 4 789 3
2.1.9. Electronic equipment & communications 4 066 2 289 3 054 14 579 75 106 1 074 - 25 243 46
2.1.10. Non-armored vehicles 4 907 91 - 85 - - 763 - 5 846 -
2.1.11. Other 6 934 788 187 1 709 434 - 151 - 10 203 107
2.2. Construction 12319 3 686 3 751 7 965 432 1 655 4 399 1 005 35 212 272
2.2.1. Air bases, airfields - 1 525 6 - - - - 532 -
2.2.2. Missile locations - - - 1 885 - - - - 1 885 -
2.2.3. Naval bases & structures - 797 - - - - - - 797 -
2.2.4. Electronic complexes, etc. - - 8 70 - - - - 78
2.2.5. Personnel premises 2 670 1 420 2 036 2 410 87 230 2 609 367 11 829 90
2.2.6. Medical facilities 287 232 71 329 276 11 261 - 1 467 -
2.2.7. Educational facilities 117 184 83 56 - 47 - - 487 -
2.2.8. Storage, depositories, 353 160 41 1 31 50 10 - - 745 5
10
11
2.2.9. Administrative facilities 53 373 420 477 5 711 4 - 2 043 13
2.2.10. Fortification structures - - 10 - - - - - 10 -
2.2.11. Shelters - - - - - - - - - -
2.2.12. Land - - - - - - - - - -
2.2.13. Other 8 839 509 567 2 601 14 646 1 525 638 15 339 163
3. Research & Development 2 906 14 142 6 300 11 876 4 418 9 657 114 - 49 413 19
3.1. Fundamental & applied research 2 712 13 840 6 085 8 961 3 707 8 786 - - 44 091 19
3.2. Development, testing & evaluation 194 302 215 2 915 711 571 114 - 5 322 -
4. Total (1+2+3) 174 323 73 610 55 486 88 496 59 864 18 935 41 621 77 452 589 787 5 082
Source: Objective information on military issues, including transparency of military expenditures: the UN Secretary General Report/the UN № A/60/ 159 of July 25, 2005, pages 133-134.
Table 69
Monthly Spending on Military and Related Expenditures in the Federal Budget,
in Billion of Rubles
on ¡O OO Œ №№ Expenditures oj*^ CNtu =
■C 'H c
U. □.¿J "5
it 03
u r
■Q
e
03 2
p
<
> ® re =
2 3
> 3
s u w u
<
e
■Q
E
e
t p
e
w
e
■Q
O
t
U
O
e
■Q
E
s
o
e
■Q
E
e
u
e
o
m p £ Û
= £ w S
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1 National De' fense 531.1578.3 18.6 45.0 53. 5 47.5 44.4 35.5 51.1 41.7 35.2 37.5 49.4 121.6 (2.8)
1 i Armed Forces of 1,1 RF 388.0 420.8 15.2 36.1 32.7 36.1 35.5 26.9 40.9 31.8 27.9 27. 0 39.1 76.9 (5.5)
Mobilization &
1,2 training (outside 1.9 3.7 0* =0 0.1 0.1 0.2 0.2 0.1 0.1 0.2 0.1 0.4 1.7 0.5
forces)
Mobilization
1,3 preparation of 3.5 3.5 0* 0.05 0.1 0.2 0.2 0.2 0.2 0.4 0.2 0.3 0.5 1.0 0.01
economy
Collective secu-
1,4 rity & peace- 0.061 0.06 =0 0.01 0.01 0.01 =0 =0 =0 =0 =0 =0 0* =0 0.03
keeping
1 5 Nuclear weap-, ons complex 8.7 8.7 1.7 1.6 0.1 1.0 0.4 0.3 0.8 0.9 0.02 0.8 0.8 0.1 -
Realization of
international
1 g obligations in , military- 6.2 6.1 0.8 - 0.5 0.8 0.04 0.09 0.9 0.05 0.02 0.9 0.06 0.6 1.3
technical coop-
eration
1 7 R&D in field of , national defense 79.2 89.4 0.2 5.4 10.6 7.4 4.5 5.2 4.5 4.5 4.3 4.8 4.8 32.9 0.2
Other issues in
1,8 field of national 43.5 46.1 0.7 1.8 9.5 1.8 3.6 2.6 3.5 3.9 2.5 3.6 3.7 8.3 0.7
defense
National De-
2. fense & Law 398.9 455.3 19.8 28.1 33.2 36.9 30.9 34.6 37.1 34.6 38.5 36.7 45.2 74.7 5.2
Enforcement
2,1 Interior troops 23.9 26.9 0.8 1.6 1.9 2.2 2.1 2.5 2.0 2.4 2.2 2.2 2.9 4.3 (0.03)
2 2 Security ser, vices 62.3 67.6 3.3 4.3 4.1 6.2 4.6 4.5 5.8 5.2 5.6 5.5 5.8 11.0 1.6
2,3 Border troops 31.7 36.0 1.4 1.8 2.6 2.8 2.9 2.9 3.1 3.1 2.7 2.9 3.7 5.9 0.1
2
3
4
5
6
7
8
9
3 4 5 6 7 8 9 10 11 12 13 14 15 16
Emergency
2.4 management & civil defense R&D in fields of 22.1 23.1 0.9 1.5 1.4 2.6 1.6 1.4 3.4 0.9 1.9 2.4 1.9 3.1 0.1
2.5 national defense & law enforcement Other issues in 2.7 2.8 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.5 0.01
2.6 fields of national defense and law enforcement 19.1 21.9 0.2 0.5 1.3 1.2 0.9 1.2 1.6 2.1 1.4 1.9 2.4 6.9 0.2
*Russian Treasury's report on consolidated budget shows a negative amount.
Source: Calculations by The Institute for the Economy in Transition, based on data of the Treasury of the RF.
Source: Calculations by The Institute for the Economy in Transition, based on data of the Treasury of the
Fig. 70. Execution of Expenditures on Building and Maintenance of the Armed Forces of the Russian Federation in 2005
Judging by the military leadership's statements, in 2005 the priority was given to the realization of the state weapons program that intended to develop approximately 300 of new and modernized weapons samples. It was publicly announced that the leadership made a decision in favor of technical equipment, having increased allocations to weapons program instead of increasing compensations for food rations62 and indexation of monetary allowances of military personnel and salaries of civilian employees.
An intended increase in 2005 allocations to weapons program up to 40 per cent (according to the UN data, the increase amounted to 35 per cent, see Fig. 71) is considered to be a success and the evidence of functional quality of the Armed forces. Moreover, the goal for 2011 is to reach 50 per cent, and in a more distant perspective, up to 70 per cent by 2016. These increases are justified by the necessity to come closer to "world practices", based on the Russian Security Council's recommendations of 2000. However, the
2
62 Voenno-promyshlennyi kurier (Military-Industrial Courier), 2005. No. 4.
analysis of modern structure of military spending of a number of Western countries shows that this premise is radically wrong (see Fig. 72). Current international maximum of capital expenditures in countries reporting their military spending to the UN reaches 45 per cent in Sweden and Switzerland. However, this level of expenditures is provided for by their specific defense expenditures not exceeding respectively 1.8 and 1.1 per cent of the GDP.
CURRENT EXPENSES - 64,9% CAPITAL EXPENSES - 35,1%
Procerement
Source: Calculations by The Institute for the Economy in Transition, based on the UN data.
Fig. 71. Structure of Russian Military Expenditures in 2005
Source: Calculations by The Institute for the Economy in Transition, based on data provided in "Objective Information on Military Issues, Including Transparency of Military Expenditures," the UN, 2004-2005.
Fig. 72. Structure of expenditures on maintenance and equipment of armed forces of other countries in 2004
Judging by actually achieved level of financing of military expenditures, when for several years only jof necessary combat training has been financed, the amounts of monetary compensative for food rations are kept at 1/3 of real costs, and only Sof conscripts are provided with uniforms, the maximum capacity of Russian Armed Forces can not exceed 500-600 servicemen, that is 50 per cent of the existing number, It is obvious that the former number will allow for a real opportunity to not only realize military weapons program, but to simultaneously or preferably in the first place, provide adequate conditions for military and civilian personnel, to enhance military service appeal and improve the image of the Armed forces, Furthermore, combat training will not be hindered by lack of fuel, and a real opportunity to achieve adequate fighting capabilities of the Armed forces will be created,
There is no doubt that vital qualitative improvement in financing of defense expenditures can be obtained as a result of the carried-put administrative reform and a transition to a goal-oriented budgeting, However it is advisable to consider the current absence of the practice of public debate on MOD's budget requests and on the following reinforcement of that request by the highest authority, Thus, there is no answer to the question whether 300 new weapon samples is a lot or a little, to be given to taxpayers,
3.8.3. Urgent Problems of Russia's Military Economy in the Current Period
The achievements results in the area of modernization of the army and military economy, discussed above, provide for certain conclusions and trends of development,
Firstly, modernization of the state military organization either faces concealed counteraction of a number of officials, as it did in previous years, or is being hampered by their low levels of execution and competence, It is also possible that certain criminal structures counteracting any transformations that could infringe on their "business", based on flaws of the acquisition system of the RF military organization, as well as failure of financial and economic safeguards of the country's security and army modernization, have a negative effect, The existing system of state management of modernization is yet to be effective,
An attempt to solve the problem by promoting the Minister of Defense ranking to deputy Chairman of the Russian Government might strengthen coordination of "power" departments' economic activity to a certain extent, However, this appointment of a "civilian" minister does not imply an increase in civilian and public control of the state's military organization,
Secondly, despite obvious achievements that include establishment of a number of military units and formations staffed exclusively with contractual recruits; gradual phasing out of drafted conscripts' involvement in military operations in the Northern Caucuses, the general problem of transition to a modern system of recruitment is not being solved well, Transition to a contractual system is going slowly and is even accompanied by outflow of "contractual recruits", who have signed contracts earlier,
Consequences of delays in regular army transition to a contractual system and in preparation for a reduced military service could be extremely negative both for the country's defense capability as well as for the society, After 2008, when the country will face a sharp decline in numbers of young men of draft age, the situation will be fraught with a social explosion,
Transition to a contractual system must be livened, The service term should come to 6 months, and its purpose should only be the preparation of military-trained "human resource," It is imperative to find opportunities to combine military training with college edu-
cation. A rational solution to the problem might be related to an increased role of the ROSTO (DOSAAF)63.
Thirdly, equipping the RF military organization with latest weaponry and military equipment is proving difficult due to small order quantities and artificial separation of military knowledge, technologies and products from their possible civilian applications with a curtain of secrecy.
A solution to this problem is in obligatory alignment of state armament program and other program within the framework of military construction with programs of innovative development of civilian economy.
It would be expedient to introduce positive practices of DARPA-type foreign institutions in relations with business.
Fourthly, modernization of budget planning system in "power" agencies should be carried out on the basis of international standards, and it is imperative to include the UN standard of categorization of military expenditures.
It is no less important to reconsider the system of strategic goals of the Russian Government related to the section on National Security and to tie it with the correction of the budget categorization. Representatives' of the civil society participation in formulation of strategic goals, and correspondingly, of the spending structure, should also be considered obligatory.
63 Russian Defense Sports/Technical Organization (Voluntary Society for Assistance to the Army, Air Force and Navy).
326
