8Section 3. The Real Sector
3.1. Macrostructure of Production
3.1.1. Trends and Factors of Changes in Final Demand
Influence of Domestic and External Demand on the GDP Dynamics and Structure
The characteristic feature of 2006 was economic growth rates acceleration accompanied by the positive effect of external economic conditions and domestic social and political stability. The increase in business activity was based on the anticipating growth of investments as compared with the dynamics of final consumption and had the most considerable impact on the nature of structural shifts of the produced and used GDP. While in 2006 GDP increased by 6.7%, the real final consumption of households increased by 10.7% and investments in the fixed assets -by 13.5% (Table 1).
Table 1
Indices of the Basic Macroeconomic Indicators in 1999-2006, as percentage to the previous year
1999 2000 2001 2002 2003 2004 2005 2006*
Gross domestic product 106.4 110.0 105.1 104.7 107.3 107.2 106.4 106.7
Real households' final consumption 97.1 107.3 109.5 108.5 107.6. 112.1 112.7 110.7
Investments in fixed assets 105.3 117.4 110.0 102.8 112.5 111.7 110.7 113.5
Volume of industrial production 111.0 108.7 102.9 103.1 108.9 108.3 104.0 103.9
Agricultural production 104.1 107.7 107.5 101.7 101.3 103.0 102.4 102.8
Freight turnover 105.8 105.0 103.2 105.8 108.0 106.5 102.7 102.2
Amount of communication services 133.1 113.8 119.1 115.6 127.5 129.0 115.7 123.7
Retail trade turnover 93.9 109.0 111.0 109.3 108.8 113.3 112.8 113.0
Paid services for the population 107.0 104.7 101.6 103.7 106.6 108.4 107.5 108.1
Foreign trade turnover 86.7 130.2 103.8 108.1 126.0 132.4 1 31.5 127.0
Real disposable cash income 87.7 112.0 108.7 111.1 115.0 110.4 111.1 110.0
Real wages 78.0 120.9 119.9 116.2 110.9 110.6 112.6 113.5
Real scale of granted pensions 60.6 128.0 121.4 116.3 104.5 105.5 109.6 105.1
Average annual number of those employed in the economy 100.6 100.3 100.7 100.9 100.6 100.6 100.6 100.4
Number of officially registered unemployed 102.1 77.0 89.1 99.7 94.9 102.8 90.6 95.6
* Preliminary data
Source: Federal State Statistics Service
The simultaneous expansion of both external and internal markets was the factor of the steady economic development in recent years. Whereas the dynamics of the external demand was formed under the influence of the favorable situation at the world market of fuel and raw materials, the expansion of the domestic market was determined by cumulative influence of business activity growth factors and regular growth in population effective demand.
i igdp ^^^^»Internal demand Externaldemand
Source: Federal State Statistics Service
Fig. 1. Growth Rates of Internal and External Demand over 2001-2006, as percentage to the respective quarter of the preceding year
The ratio of internal and external demand over 2001-2006 has suffered considerable changes (Fig. 1). In 2003-2006 a gradual improvement in the conditions of trade between Russia and foreign countries was observed due to the anticipating growth of prices for export goods as well as the demand expansion for the main Russian items of export. However in extremely favorable economic situation export growth rates deceleration in terms of physical volume has been observed since quarter IV, 2003, and it is from this period that a gradual increase of internal demand influence on the dynamics of the economy development was observed. In 2005-2006 the slowdown of external demand growth rates proceeded in a more acute form and was provoked by dull dynamics of the physical volumes of oil and oil products export. In 2005-2006 the increase in external demand was on average equal to 6.7% against 12.1% in 2003-2004.
The combined influence of internal factors that control the level of business activity turned out to be sufficient to compensate the ebbing of external demand influence on the economic development rates. In 2006 the increase in internal demand reached 10.0% against 9.1% in 2005 and 7.7% in 2003. The contribution of internal demand into the growth of the GDP in 2006 was estimated to be nearly 78%, exceeding considerably the figure of the so far most successful 2000. The positive dynamics of the internal demand was determined both by the extension of internal production output and the expansion of import scale.
The sustention of population consumption level accounted for the consumer goods import rates acceleration, and together with the long-standing trend for anticipating investments growth as compared with the dynamics of the domestic machine-building production output - for machinery and equipment import. The analysis of the GDP dynamics by the components of final consumption demonstrates that estimated import growth in 2006 was 20.3% against 17.0% in 2002 and minimum over the period economic index of 14.6% in 2002. The formation of this trend was sustained by the growing business incomes from the foreign economic activity and the increase in import efficiency against the background of the gradual ruble appreciation.
Fig. 2. The Change in Import Growth Rates and Domestic Goods Production over 2001-2006, as percentage to the respective quarter of the preceding year
In 2005-2006 along with the domestic production rates acceleration the change in the structure of sources of internal demand reserves formation. The differentiation of goods market with respect to demand for import share has increased in the total resources of domestic market.
It was the intensive growth of the physical volumes of export of capital goods and the reserved growth rates of intermediate goods import that had the prevailing impact on import structure in 2006. Machinery and equipment import share in the total amount of import increased up to 48.1% in 2006 as compared with 44.0% in
2005 and 41.2% in 2004. In the structure of the retail trade turnover the share of consumer's goods went up from 40% in 2000 to on average 45% in 2005-2006. In
2006 in view of the trend for growth rates in consumer industries slowing down, 278
which was initiated by the permanent crisis in the textile, clothing and footwear production, the share of the domestic goods in the resources of retail trade of the non-food market decreased down to 44.3% against 45.7% in 2005 and 51.6% in 2000. The dynamics of food import was restrained by quite strong competitive positions of Russian producers and the share of the import in the amount of goods resources of foodstuffs was stabilized at the level of 34% over 2002-2006.
The Dynamics and the Share of Gross Saving and Gross Accumulation in GDP
It is demonstrated by comparative by-factor analysis of GDP that it was the investment sphere that reacted most acutely on the changes in the amount and the dynamics of export earnings. Over 2003-2006 growing economy revenues from the foreign trade have obviously stimulated business activity. In 2006 GDP growth rates were equal to 6.7%, investments in fixed assets growth rates were 13.5%, the corresponding figures for 2001-2005 being on average, respectively, 6.3 and 9.0%. Favorable combination of the domestic business activity factors and price situation at the world market of raw materials accounted for the intensive increase of gross saving scales.
In past 7 years the share of gross saving was in the range 31.1-38.7% of GDP as compared with 24.0% in the pre-crisis 1997. In 2006 under the influence of, on one hand, the growing economy revenues from the export and, on the other hand, the decrease in household expenditures gross national saving was equal to 33.4%, which corresponds to the average figure over 2001-2005. Export revenues increasing and investment and credit attractiveness growing, strategic financial resources of the state were increasing. Since 1 January 2004 Stabilization Fund has started to operate in order to decrease the risks, connected with unfavorable external economic situation and as a tool to sterilize excessive money supply due to additional budget incomes from high oil prices.
As of 01.01.2007 the total volume of Stabilization fund was equal to RUR 2346.9 bln. against RUR 1237 bln. as of the corresponding date for 2006 and RUR 522.3 bln. - for 2005.
In 2005 RUR 677.8 bln. from the Stabilization fund were allocated for the following aims:
- to repay the debt for the International Monetary Fund RUR 93.5 bln.;
- to repay the debt to the Paris Club member countries - RUR 430.1 bln.;
- to repay the debt to the Bank for Foreign Economic Affairs for the credits provided to the Ministry of Finance in 1998-1999 to repay and service the foreign debt of the Russian Federation - RUR 123.8 bln;
- to compensate for the deficit in the Pension Fund of the Russian Federation -RUR 30 bln.
The formation of the Stabilization Fund in the environment of the steady economic growth was one of the reasons for awarding Russia international investment rating as well as for making the decisions on the possibility of accumulated export incomes utilization for investment goals.
Decree of the Government from 25 November 2005 "On the investment fund of the Russian Federation" determined the procedure of maximum volume of the Investment fund formation as (1) the margin between the Federal Budget income, forming the Stabilisation Fund and calculated using the basic price for the crude oil grade Urals and the basic price of crude oil grade Urals decreased by 1 USD per 1 barrel; and (2) forecasted reduction of expenditures for national external debt of the Russian Federation in case of its early repayment. The annual volume of Investment Fund for each year of planning period should not be less than budget commitment for investment projects fulfillment in the corresponding planning period.
In 2006 the means of the Stabilization Fund in amount of RUR 600 bln. were used for early repayment of the debt to the Paris Club. The total saving from the early repayment of the debt will be USD 7.7 bln, including USD 1.2 bln in 2007. These funds have been transferred from the issue of "interest rates expenditures" to "investments", the volume of the Investment fund having thus increased up to RUR 110 bln against allocated from the 2006 budget RUR 69.7
However, in spite of the increasing volume of the gross national saving, the analysis of operations with assets accounts illustrates the sustention of disproportion in the gross saving, gross accumulation resources and investments in the fixed assets in the environment of the gradually weakening loads of capital transfer operations "with the rest of the world" on the economy. The share of the investments in the fixed assets in 2006 was equal to 16.8% of the GDP, the average level in 2001-2005 being 16.5%. (Table 2).
Table 2
Structure of the GDP Use for Gross Saving and Gross Accumulation over 2000-2006 as % to the total
2000 2001 2002 2003 2004 2005 2006*
GDP 100 100 100 100 100 100 100
including:
gross saving 38.7 34.2 31.1 31.9 33.1 33.6 33.4
of which:
Gross accumulation 18.7 21.9 20.1 20.8 20.9 20.1 20.3
Gross accumulation of fixed assets 16.9 18.9 17.9 18.4 18.4 17.8 18.0
Change in material circulation funds 1.8 3.1 2.1 2.4 2.5 2.3 2.3
For reference:
The share of the investments in the fixed 15.9 16.8 16.3 16.5 16.5 16.4 16.8
assets in the GDP
* Preliminary data
Source: Federal State Statistics Service
As it was demonstrate by the past years experience, it is the very ratio of investment demand and final consumption that reacted most acutely on the fluctuations of export revenues and determined the characteristic features of domestic market operation. Sharp fluctuations of investment expenditures for fixed assets reproduction were compensated chiefly by the smooth change in the dynamics of the final consumption. At the same time it should be taken into consideration that
starting with the second half of 2005 a gradual restoration of investment constituent influence on the dynamics of the economy growth has been observed (Fig. 3).
Fig. 3. The Change in the GDP Dynamics by the Components of the Final Consumption in 2001-2006, as percentage to the corresponding quarter
of the preceding year
Households Final Consumption and the Change in Population Standard of Living Parameters
The positive dynamics of final consumption was one of the key factors in domestic market development throughout 2001-2006 - real population incomes, real wages and real scale of granted pensions started to grow steadily. The increase in final consumption scale proceeded in the environment of relatively sTable preservation of the ratio between households' consumption and the amount of social transfers, received from the governmental institutions and non-commercial organizations. In 2006 the share of expenses for final consumption in the structure of GDP was equal to 66.6% which is in line with the average figure for the last two years.
Table 3
Structure of Gross Domestic Product Use over 1998-2004, as percentage to the total
2001 2002 2003 2004 2005 2006*
Gross domestic product 100 100 100,0 100 100 100
including:
Expenditures for final consumption 65.8 68.9 68.1 66.9 66.4 66.6
of which:
Households 48.3 50.0 49.4 49.3 49.2 48.4
Governmental institutions 16.4 17.7 1 7.6 16.7 16.6 17.3
Gross accumulation 21.9 20.1 20.8 20.9 20.1 20.3
Net export of goods and services 12.7 10.8 11.3 12.2 13.6 12.7
* Preliminary data.
Source: Federal State Statistics Service
In 2000 households final consumption reestablished at the pre-crisis level of 1997 and during the next 6 years it increased by 78.6%. Increase in households consumption volumes was secured by steady population cash income growth. Over 2001-2006 the population real incomes increased by 1.88 times, real wages -by 2.18 times real scale of granted pensions - by 1.48 times. It is the anticipating growth of the wages as compared with other sources of income that had the prevailing influence on the population income dynamics. In 2006 the increase in real population incomes was equal to 11.0% against 11.1% in 2005, of real wages -13.5% against 12.6% and the real scale of granted pensions - 13.5% against 9.6%. Population incomes increasing, the steady decrease in the poverty level has been observed. The share of people with cash income lower than subsistence level was reduced to 22.5 mln. people in 2006, which comprises 15.8% of the total number of the population, as compared with 25.2 mln. people (17.6%) in 2004 and 42.3 mln. people (29.0%) in 2000.
Structural shifts in the formation of population cash income were accompanied with the change in distribution of the population with respect to the value of average per capita income. In 2006 average per capita incomes having increased by 123.5% and face value of wages - by 124.5%, the share of the population with the average per capita income higher than RUR 12000 has increased by 8.3 p.p., in the range of RUR 12000-6000 - by 2.3 p.p., and with the income lower than 6000 -decreased by more than 10.6 p.p. This, however, has not slackened social and economic differentiation of the population in regard to the income. According to estimations, fund coefficient, which characterizes the ratio of the average values of the highest and lowest incomes of the respective decile groups of the population, was equal to 15.3 times in 2006 as compared with 14.9 times in 2005 and 14.3 times in 2003. Gini coefficient, which characterizes incomes concentration, increased up to 0.410 against 0.406 in 2005 and 0.400 in 2003.
Specific character of incomes distribution also determined the characteristic features of the current dynamics of expenditures and level of savings in the sector of households. Over the last 6 years the change in consumer expenditures was determined by the increase in the expenditures for non-food goods and services proportion, proportion of the expenditures for food decreasing. It should be noted that at the existing level of income the statistical observation fixed the gradual shift of
food sales assortment structure towards more expensive food, and of non-food sales - towards imported goods of better quality. The change in population demand structure and the increase in the share of non-food durable goods sales and furnishing intensified the development of the consumer crediting. The volume of credits allotted for individuals increased by 1.66 times. In 2006 the share of credits allotted for individuals was equal to 23.2% of the whole sum of credits granted by credit institutions against 18.9% in 2005 and 9.8% in 2003. It should be noted that in 2000-2006 the share of sales through trading organizations increased steadily. It was the anticipating growth of non-foods market that had the prevailing impact on the increase of turnover in 2006 as well as in preceding years: the increase in foodstuffs sales was equal to 10.2%, while in non-food goods - 15.6%. The change in consumer behavior is accounted for, to some extent, by structural shifts of prices in the main goods groups. Consumer's prices growing by 9.0% in 2006, prices for foodstuffs increased by 8.7% from the beginning of the year, while for non-food goods - by 6.0%.
60
50
40
30
20
10
Goods purchase Payments for services
Savings Currency purchase
Compulsory payments and fees
12004
¡2005
Increase (+), decrease (-) of cash money
12006
0
Source: Federal State Statistics Service
Fig. 4. Structure of Population Cash Income Use over 2004-2006,
as percentage to the total
The dynamics of consumer demand in 2006 was considerably influenced by the increase in demand for services. In comparison with 2005 the amount of paid services for the population increased by 8.1% against the background of price and fees for paid services for population growth rates slowdown down to 13.9% against 21.0% in 2005 and 17.7% in 2004. Fees growth rates slowdown was one of the stabilization factors of the share of expenditures for payments for services in the structure of population cash incomes nearly at the level of 2005.
The factor that hindered the use of savings for the current consumption was still a high investment activity at the housing building.
Population real incomes growth rates accelerating since the second half of 2005 the tendency for restoration of the inclination towards savings has emerged (Fig. 4). In the structure of population savings the share of bank deposits and securities purchase was increasing while the expenditures for currency purchase were decreasing. The volume of attracted individual's deposits increased by 35.9% over 2006, including ruble deposits - by 49.2%, against the background of decrease in currency deposits by 4.1% in comparison with December 2005.
3.1.2. The Specific Features of GDP Formation by Incomes
The dynamic growth of the population incomes is one of the characteristic features of Russian economy consumer's growth. The sustention of the domestic market dynamics was based on the growth of real wages and was accompanied by the redistribution of incomes from the enterprises to the population. In 2006 the share of workers for wages remuneration in GDP was approximately 44.2% and remained above the figures of 1999-2001(Table 4).
Table 4
Structure of GDP Formation by Incomes over 2001 -2006, as percentage to the total
2001 2002 2003 2004 2005 2006*
Gross domestic product 100 100 100 100 100 100
including:
Labor remuneration of wage earners (including concealed) 43.0 46.7 47.1 46 43.9 44.2
Net taxes on production and import 15.7 17.0 16.0 17.0 19.7 20.1
Gross profits of economy and gross joint incomes 41.3 36.3 36.9 37 37.4 35.7
* Preliminary data.
Source: Federal State Statistics Service
High differentiation of the average wages by economic activities was preserved. In the industry the level of wages differentiation was defined by the increase in the gap between the rates of the labor remuneration in extraction and manufacturing industries. The nominal accrued wages in minerals extraction was two times higher than the average in the economy, including in fuel fossils extraction - by 2.3 times. In manufacturing industries the wages were equal to 96% of the average in the economy and 48% of the figures of extraction industries. The exceeding of the average added wages figure by 2.0 and 1.97 times, respectively,
was observed in productions, connected with processing and transportation of fuel fossils. In education, public health service the average wages were equal to 7078% of the average in the economy, in government administration and military safety security - to 125% and in financial activity - to 230%. The characteristic features of labor remuneration by the kinds of economic activity had a substantial impact on the incomes and expenditures structure formation, population consumer's demand as well as on the nature of employment and labor resources distribution in the economy.
Only 8% in the structure of the employed population account for people who do not work for a wage; these are employers, who attract employees on a regular base to work for their business, self-employed people. This determined, correspondingly, the character of the formation of population income structure and the GDP. More than 66.4% of population income and 44.2% of GDP accounted for the share of labor remuneration of those, who work for wages (Table 5). In the structure of the population cash income the share of the incomes from the entrepreneur's activity and property in 2006 was 18.4 % against 20.3% in 2005 and 17.1% in 2002.
Table 5
Structure of Population Cash Incomes 1999-2006, as percentage to the total
2001 2002 2003 2004 2005 2006*
Cash income - total 100 100 100 100 100 100
Remuneration of labor, including hidden wages 64.6 65.8 63.9 64.9 64.8 66.4
Entrepreneur's activity income 12.6 11.9 12.0 11.7 11.4 11.2
Property income 5.7 5.2 7.8 8.3 8.9 7.2
Social payments 15.2 15.2 14.1 12.9 12.9 13.2
Other incomes 1.9 1.9 2.2 2.2 2.0 2.0
* Preliminary data.
Source: Federal State Statistics Service
The level and the share of employers' wages in the structure of the GDP had a prevailing influence on the social profile, including labor market. The typical aspect of the period of 2001-2006 was the tendency for the growth in the demand for labor force. Average annual number of the employed in the economy process in 2006 was equal to 68.9 mln. people in comparison with 64.5 mln. people in 2000. It is to be noted, that the change in labor force demand was determined by the shift of the employment to the kinds of activities which provide market services. The formation of this tendency at the initial stage of the economic growth restoration made a powerful effect on the quality of life and gave a stimulus for service sphere development growth rate acceleration. However, against the background of industry growth rate slowdown and import supply acceleration this provoked a trend to the decrease in the average annual industrial and production staff number. In past three years the decrease in employment was observed in almost all branches of industry, the decrease in the number of workplaces being the most intensive in the processing industries. In 2005 the share of those employed in processing industries accounted for 17.2% of the average annual number of those employed in all
kinds of economic activities against 17.7% in 2004 and 18.8% in 2001. The comparison of the labor efficiency dynamics in different kinds of economic activities demonstrates a gradual slackening of the tendency for labor efficiency growth in the industry. With regard to labor efficiency growth rates manufacturing industries are considerably behind the extractive industries (Table 6).
Table 6
The Dynamics of Labor Efficiency, as percentage to the preceding year
2003 2004 2005 2006*
Economy as a whole 107.0 106.5 105.5 106.1
broken by kinds of economic activities:
Agriculture, hunting and forestry 106.0 106.2 100.2 No data
Fishing and fish breeding 102.1 99.2 100.7 No data
Minerals extraction 109.2 107.4 106.1 105.3
Manufacturing industries 108.8 107.5 105.6 104.9
Production and distribution of water, gas and electricity 103.7 100.1 103.9 103.6
Construction 105.3 106.9 105.9 108.6
Whole sale and retail trade; motor-vehicles, motorcycles, house- 109.8 108.9 107.2 106.0
hold appliances and articles of private use service
Hotels and restaurants 100.3 100.4 112.2 No data
Transport and communication 107.5 108.3 100.5 105.2
Operations with real estate, renting, provision of services 102.5 102.1 108.1 No data
* Preliminary data.
Source: Federal State Statistics Service
Low efficiency in factors of production use is one of the main causes of the decrease in competitive advantages of Russian goods (Fig.5). The growth of discrepancy between the rate of labor productivity and wages in favor of the latter had the negative impact on the economic dynamics indices. Over 2000-2006 real accrued wages increased by 2.57 times, while the labor productivity grew by 1.49 times. This rate of labor remuneration growth was accompanied by the decrease in gross economy profit in the structure of the GDP from 42.7% in 2000 to 35.7% in 2006.
In 2003-2004 it was observed that labor efficiency rates and wages rates were brought closer to each other in the environment of production rates acceleration. However the influence of this process on the change of enterprises and organizations' efficiency indices was extremely weak and unsTable. The increase in wages and population incomes was accompanied by the redistribution of incomes from the enterprises to the population and lead as a result to the increase in production costs and the decrease in production profitability. In 2004-2005 the dynamics of wages was on average 1.05 times ahead of the growth of labor efficiency, and in 2006 - 1.07 times. However the possibilities of further increase in costs for labor remuneration are more and more limited by the changes in competitive environment at goods markets due to ruble appreciation and the increase of pressure from the import.
25
20
15
1(
2006
■ Real w ages
Labor efficiency
Source: Federal State Statistics Service
Fig. 5. The Dynamics of Labor Efficiency and Real Accrued Wages over 1999-2006, as percentage to the preceding year
Due to the fact that the prevailing part of population income is formed by labor remuneration the problems of unemployment and provision of employment retained their priority. The total number of unemployed, calculated by the methodology of International Labor Organization, reduced from 8.9 mln. people (13.2% of economically active population) in 1998 to 5.6 mln. people (7.5%) in 2005 and 5.3 mln. people (7.1%) in 2006. Strain coefficient (number of unemployed people registered in the bodies of employment service per one position) decreased to 2.0 people in comparison with 2.5 people at the end of 2005. Simultaneously the tendency for the increase in efficient use of working hours was observed. In 20052006 the real duration of the working day throughout the economy as a whole increased at the expense of the decrease in the number of part-time workers and those having mandatory administrative leave. Besides, the trend for the reduction in duration of voluntary leaves was observed in accordance with existing legislation.
The average profitability of Russian economy tends to decrease. The profitability of sold goods and services throughout the economy as a whole was equal to, according to the preliminary estimation, 13.1% against 13.5% in 2005 (Table 7). The analysis of profits formation by the kinds of activities demonstrates that balanced financial result was formed by 3/5 by economic activities connected with
goods production and by 2/5 by services provision. However inside the sectors the industries are distinguished that have a prevailing impact on the process of profit formation and use in the national economy.
The industry did not retain leading positions neither in the financial activity growth dynamics nor in the industry structure of incomes formation by the kinds of economic activities. The slowdown in industry financial results was initiated by the reserved dynamics of extractive industries productions. Balanced financial result of fuel fossils extraction in January-November 2006 increased by 7.1% in comparison with the corresponding period of 2005. In processing industries against the background of production costs increase due to the growth of expenses for labor force, internal prices for mineral resources used as sources of power and transportation fees the situation is also unfavorable.
Table 7
Profitability of Sold Goods, Production (Work, Services) by kinds of economic activity, as percentage
2003 2004 2005
Economy as a whole 10.2 13.2 13.5
Including the kinds of economic activity:
Minerals extraction 19.2 32.5 35.6
including:
Fossil fuels extraction 18.4 31.8 34.7
Extraction of minerals, excluding fossil fuels 23.8 37.3 42.8
Processing industries 12.4 14.9 15.3
Including:
Food, beverages and tobacco production 8.2 7.5 7.9
Textile and clothing industry 1.4 2.4 2.7
Leather, leather goods and footwear production 2.8 3.7 5.0
Woodwork and manufacture of articles 5.6 4.6 4.2
Pulp and paper production, publishing and editing 10.4 10.8 11.2
Coke and oil products production 15.5 22.3 21.4
Chemical industry 1 0.2 13.8 19.3
Rubber and plastic goods production 5.9 4.4 4.6
Other non-metal mineral products production 10.5 12.0 12.3
Metallurgical production and finished metal fabrics 23.7 32.2 26.7
Machinery and equipment production 5.8 7.5 8.2
Electrical, electronic and optic equipment production 8.3 8.4 8.4
Transport vehicles and equipment production 9.8 7.8 6.9
Electricity, gas and water production and distribution 6.4 5.4 5.3
Construction 5.7 4.2 3.9
Whole sale and retail trade; motor-vehicles, motorcycles, household appliances 8.9 11.3 9.7
and articles of private use service
Transport and communication 15.3 13.4 14.4
Including communication 35.8 32.7 33.6
Financial activity 1.0 -0.3 5.8
Factors of the GDP and the Industry Added Value Economic Growth over 2004-2006
2006 was characterized by a trend, which emerged in recent years, towards GDP growth rates slowdown. Whereas in 2003 GDP growth rates were 7.3%, in 2004 - 7.2%, and in 2005 - 6.4%, in 2006 GDP growth increased and was equal to 6.7%.
Breaking economic growth down by extensive (main growth factors - labor and capital) and intensive constituents (generalized estimation of which is the total factor efficiency TFE) enables to estimate growth quality, forecast further trends in the economy development1.
According to the decomposition results the share of the GDP growth rates accounted for by the change in the main factor input increase: in 2003 their contribution was equal to 32.1%, in 2004 - 41.6%, and in 2006 - already 57.9%2, the only exception being 2005, in which labor and capital inputs determined 29.9% of output growth rates.
In 2006 the increase in the output due to the main factors input was to a greater extent (by 58.6%) accounted for by the change in the level of funds participating in the production. The increase in capital input is mainly determined by the increase of its load - in 2006 this component comprised 41.0% of output growth rates. Despite the increase in investments growth rates (13.5% in 2006 against 10.7% in 2005) the physical volume of the fixed assets varies but negligibly, as the main part of investments is due to the renovation of existing facilities.
The increase in labor input is accounted for by the change in "reserves", i.e. the number of employed people. In 2006 the increase in the demand for labor force led to the increase in the employment level by 0.9%, this figure being, however, lower than employment growth rates in 2004-2005, so the contribution of labor input decreased in 2006. It should be noted that the increase in the number of the people employed was provided by the service sector, whereas in manufacturing sector the employment was decreasing. The change in the time worked out3 determines only 0.3% of the GDP growth rates, which exceeds the level of 2005, which was characterized by the decrease in the number of hours worked out by one employer a year, but is considerably less than the figure of 2004, when the contribution of this labor input component determined 8.3% output growth rates.
In contrast to the GDP growth rates, the dynamics of TFE growth rates did not experience the change of the trend towards growth rates slowdown: efficiency growth rates in 2006 were equal to 2.82 %, which is more than 1.5 times lower than the level of 2003, in which the corresponding figure was equal to 4.96%, i.e. on average the decrease in TFE growth rates over the period was equal to 0.71 p.p. At the same time the contribution of TFE to the output growth rates decreased from 67.9% in 2003 to 58.4% in 2004 and 42.1% in 2006, the exception being 2005, when the change in the efficiency determined 70.1% of the output growth rates. The monetary nature of the indices used for estimation makes TFE estimations dependant on the situation factors and especially on oil prices. On exclusion of oil prices growth component from the TFE figure, efficiency growth free from the
1 Method of economic growth decomposition is presented in the book: Factors of the economic growth, "Scientific work" series, № 70, IET, 2003.
2 Preliminary data - estimation of the fixed assets volume growth in 2006 is based on the assumption that the coefficient of fixed assets retirement and the share of investments in their renewal are constant. The estimation of the extent of facilities load is based on the assumption that the share of energy consumed in the volume of the production output is constant.
3 Estimation for the year is based on the data for January-September 2006
situation at the world markets becomes considerably lower. The contribution of technological component4 into the GDP growth in 2006 makes up for 18 % (50% -in 2003, 13% - in 2004 and 0% - in 2005).
Decomposition of the GDP annual growth rates and Gross Added Value by the kinds of economic activity in 2004-20065.
GAV Factors input Including: TFE
Labor of which: The Time number worke of em- . d out ployed Capital of which: The extent Fixed of the assets . ... ... facili-level ties load...
7.20 2.99 1.02 0.43 0.60 1.97 0.54 1.43 4.21
Total throughout the 6.40 1 .91 0.11 0.30 -0.20 1.81 0.68 1.12 4.49
economy
6.70 3.88 0.30 0.28 0.02 3.58 0.84 2.74 2.82
8.60 0.25 -4.04 -4.04 - 4.28 1.30 2.98 8.35
Minerals extraction 0.90 1 .35 -0.38 -0.38 - 1 .73 1.38 0.36 -0.45
2.10 -0.07 -1.28 -1.396 0.11 1.21 1.21 - 2.17
6.70 -1.31 -3.82 -3.82 - 2.51 0.58 1.92 8.01
Manufacturing indus-
tries 5.70 4.05 -0.45 -0.45 - 4.50 0.83 3.67 1.65
4.90 -0.32 -1.32 -1.36 0.04 1.00 1.00 - 5.22
Electricity, waste and 2.00 -3.98 -3.72 -3.72 - -0.26 -0.26 0.00 5.98
gas production and 1.30 0.12 0.34 0.34 -0.22 -0.22 0.00 1.18
distribution
2.60 0.24 0.14 0.09 0.05 0.09 0.09 - 2.36
* per one worker.
** on the basis of data on the physical volume of fixed assets
*** The estimation of the change in facilities utilization throughout the whole economy is base don the data for electricity consumption, in industrial production - on the data for average annual manufacturing capacity of organization, producing different type of goods. Source: Federal State Statistics Service.
For the enterprises of the minerals extraction sector, as well as for the economy as a whole, the decrease in GAVgrowth rates is observed in 2005 with some acceleration in 2006. Furthermore, the decrease in GAV growth rates in this kind of the economic activity in 2005 in comparison with 2006 (0.9% against 8.6%) as well as its increase in 2006 (up to the level of 2.1%) is more significant than in the case of the GDP. In 2004-2006 the enterprises involved in minerals extraction are characterized by the biggest decrease in output growth rates: on average over the period GAV growth rates decrease by 3.25 p.p.
4 The final balance left after exclusion of efficiency component, which is accounted for by the dynamics of world prices for oil, is referred to as the technological component.
5 For each type of the economic activity the first line gives growth decomposition in 2004, second line - in 2005, third line - in 2006.
6 Preliminary estimation of the number of the employed in the industry production is based on the data on the number of the filled vacant posts in January-September 2006 on the assumption of the constant ratio of those employed in the industry to the number of the filled vacant posts.
In 2006 the increase in the added value of extraction enterprises was accompanied by the reduction of extensive components, so that the increase in output is defined exceptionally by the TFE growth7. The increase in the efficiency almost entirely determines the increase in the output in 2004 as well. The opposite situation is observed in 2005, when the increase in the output was provided for by the main factors input growth against the background of the decrease of their total efficiency.
The contribution of the labor input to the output growth rates for this type of the economic activity remains negative over the whole period of 2004-2006, which is defined by the decrease in the number of those employed in the extraction industry. The capital input, in contrast, was increasing due to the growth of both the industrial facilities and the extent of their utilization.
Taking into the account the decrease in the number of those employed at the enterprises involved in the minerals extraction and the steady growth of the fixed assets physical volumes, secured by the high level of the investment into this kind of the economic activity, the main cause of the output growth rates reduction in 2004-2006 consisted in the decrease of TFE growth rates (it should be noted that the most significant decrease in added value growth rates in 2005 was accompanied by the decrease in the efficiency). Against the background of the favorable price situation at the world raw materials markets this testifies the deterioration of extraction industries technological characteristics operation. This can be due to the fact that fields, characterized by lower efficiency become involved in the production as well as by the decrease in the quality of the administration in the environment of the considerable growth of the price situation. .
Manufacturing industries added value growth rates in 2004-2006 decreased steadily: on average over the period GAVgrowth rates for this type of the economic activity decreased by 0.9 p.p. The structure of manufacturing industry output growth rates is similar to the structure of the extraction industries growth: in 2004 and 2006 against the background of the reduction in the main factors input the prevailing component of the output growth rates is TFE; in 2005 the increase in efficiency defines just 29% of the added value growth rates. Over the whole period of 2004-2006 the decrease in the number of the employed at the manufacturing enterprises determines the negative contribution of the labor input to the output growth rates for this kind of the economic activity; the steady growth in the physical volume of the fixed assets accounts for the increase of the corresponding component contribution, which together with the increase in the intensity of industry capacities utilization accounts for the growth of the capital input contribution. Despite the increase in the TFE growth rates in 2006 on average over 2004-2006 the growth rate of the total factor efficiency of manufacturing industries factors has been decreasing (annual decrease is 1.4 p.p.)
The only sector of the industrial production where the increase in the GAV growth rates is observed in 2006 (5.3%) as compared with 2004 (2.1%) is the pro-
7 In 2006 the estimation of the TFE growth rates in the industrial production can be slightly overrated, for the extent of the industrial facilities utilization was not taken into the account in the calculations.
duction and distribution of the gas, water and electricity. This increase however was provided by the increase of the main factors input in the environment of their total efficiency growth rates slowdown (annual decrease is equal to 1.81 p.p.).
Thus the increase in GDP observed in 2006 was to a great extent secured by the increase of the main production factors input (labor and capital accumulation) and the increase in the efficiency of its use. The contribution of the efficiency to the GDP increase was equal to approximately 42% not taking into the account the oil prices and 18% after exclusion of the price situation impact at the world raw materials markets.
In the industrial sector the estimation of the TFE contribution in 206 is more significant, which can be connected with the absence of the data on the existing facilities utilization efficiency. According to the rough estimations, TFE is a prevailing factor, which determines the growth in the industrial output. At the same time in 2004-2006 the industrial production demonstrates the trend to TFE growth rates slowdown.
A remarkable trend, quite visible upon the sectors analysis, is the decrease in the employment in extraction and manufacturing sectors while the total employment throughout the whole economy is increasing and the employed being redistributed towards the service sector. This trend is characteristic for all the developing economies at the stage of the post-industrial development. It also, however, corresponds to the trends of deindustrialisation (the decrease in the number of those employed in the manufacturing industries) in the environment of so-called "Holland disease". This trend is quite worrying, for if has negative influence on the long-term economic growth and, as known from the world experience, on the quality of the institutional environment.
3.1.3. The Dynamics and the Structure of the Production by the Kinds of the Economic Activities
Main trends and factors of the change of the produced GDP
The development of the Russian economy in 2006 was formed under the influence of the following most significant factors: the increase in domestic demand impact; advance growth of manufacturing industries in comparison with extraction industries, advance growth of investments in fixed assets in comparison with GDP and final demand dynamics; acceleration of final commodities import with regard to domestic production; intensive growth of the service sector; anticipating growth of wages in comparison with labor productivity, sustention of high customer demand and population inclination for savings; the acceleration of prices growth rates of manufacturing goods producers and service tariffs.
Table 8
The Structure of the GDP Produced as Broken by Kinds of Economic Activities in 2002-2006, as percentage in current prices
Section Kind of economic activity 2002 2003 2004 2005 2006*
Gross domestic product 100 100 100 100 100
A Agriculture, hunting and forestry 5.68 5.51 4.99 4.44 3.90
B Fishing, fish-breeding 0.27 0.46 0.37 0.32 0.30
C Minerals extraction 6.01 5.93 8.37 9.58 8.92
D Processing industry 15.61 14.92 15.76 16.51 16.38
E Production and distribution of electricity, gas and water 3.32 3.23 3.32 2.91 2.90
F Construction 4.83 5.41 5.06 4.78 5.09
G Wholesale and retail trade; vehicles, motorcycles, household appliances and articles of private use service 20.38 19.55 17.83 16.73 16.84
H Hotels and restaurants 0.82 0.72 0.83 0.79 0.81
I Transport and communications 9.18 9.53 9.75 8.80 8.48
J Financial activity 2.75 3.00 3.00 3.44 3.70
K Real estate operations, rent and service provision 9.50 9.51 8.34 8.46 8.47
L Government administration and military safety security; essential social security 4.51 4.92 4.71 4.44 4.61
M Education 2.59 2.41 2.35 2.29 2.43
N Public health service and social service provision 2.98 2.84 2.78 2.69 2.80
O Provision of other utilities, social and personal services 1.69 1.66 1.62 1.59 1.73
Net taxes for products 11.5 12.0 12.72 14.31 14.70
* Preliminary data.
Source: Federal State Statistics Service
Economic development in 2002-2006 was characterized by simultaneous increase in business activity of both goods and service production. There remained the big share of goods production and quite strong influence of the industry and the construction on the rates of economic growth. In 2006 the share of goods production in the GDP was equal to 37.5%, 75.0% of it being accounted for by industrial production and 13.6% by construction. On the service market it was the acceleration of rates of transport, communication, trade, financial operations, real estate operations services that had the prevailing impact.
Comparative analysis of the Russian economy with regard to the kinds of activities demonstrates, that the ratio of growth rates of the industry, construction and trade had the most significant impact on the nature and structure of development (Table 8, Fig.6). In 2003-2004 the acceleration of production and services output rates by the basic kinds of economic activity up to 7.2% against 3.5% on average over the period 2001-2002 was initiated by the recovery of the investment demand. The dynamic increase of the construction work volumes was supported by the acceleration of industrial production output due to the anticipating growth of investment goods and construction materials production.
From the second half-year of 2004 to the middle of 2005 the decrease in investment activity, the slow-down in industrial and construction works growth rates was observed in the economy against the background of the dynamic extension of the foreign economic activity scales. The leading positions in the formation of the
structure and the dynamics of the economic growth since the second half of 2004 were held by the trade and connected with it branches of market infrastructure -transportation, communication, information service, financial and credit organizations. The development of the trade was accompanied by the intensive development of the industry's material and technical basis and the change in provided service structure. The increase in the share organized trade form in the structure of the commodity turnover initiated intensive growth of sales and storage areas, services.
Since the second half of 2005 with the increase of the investment activity in the national economy the trade gave leading positions to the construction. The share of retail and wholesale trade in the produced GDP was equal to 16.8% in 2006 against on average 18.3% over 2002-2005. It should be noted that the dynamic structural shifts were characteristic for the development of this kind of activity. The change in the demand at the world market determined anticipating growth and the increase of the foreign trade share in the structure of the trade turnover. Intensive growth of the wholesale trade was sustained due to the extension of the internal demand market of material and technological resources. The volumes of wholesale trade exceeded the retail trade turnover by more than two times.
The extension of the trade in the country and at the international level determined to a great extent the growth of transportation operation. Commercial freight turnover increased by 2.2% over 2006, while the industrial output went up by 3.9%. Production oriented towards export made the biggest contribution to the growth of the demand for transportation services. The increase in production transport by pipelines mains was equal to 2.1% as compared with 2005. By the rates of main kinds of freight transportation with railway oil and oil products, ferrous and non-ferrous metals, ores, chemical and mineral fertilizers and timber industry enterprises' production kept the leading positions.
The state of the transportation system of Russia is not a direct barrier of economic growth, but its inefficiency leads to increased transport costs and the loss of profits from transit transportation.
Communication remains the most promising and dynamically developing among the kinds of economic activities. In 2006 the volume of communication services increased by 23.7%. The share of the main communication operators comprised 3/5 of the total volume of the communication service volume and more than a half of population communication services. The telephone communication got the biggest spreading among the other kinds of electric communication. This kind of communication gives 4/5 of the incomes, obtained from the industry services, of which 40% is the share of mobile electric communication. At the end of December 2006 the total number of mobile phones subscribers was equal to 152 mln., it increased by nearly 40% as compared with the corresponding period of the previous year.
Source: Federal State Statistics Service.
Fig. 6. The Change in the Production Dynamics by Kinds of Economic Activities in 2004-2006, as percentage to the corresponding
period of the preceding year
Industry: Production Rates and Structure
The analysis of industry production in the classification of kinds of economic activity allows estimating the impact on the extraction and manufacturing industries on the nature of the Russian economy growth nature. The comparison of the dynamics of industry indices demonstrates that whereas the Russian industry crisis was initiated by the slump in manufacturing industries in the environment of the reserved decrease of fuel fossils production, the economic growth was based on the increase in manufacturing industries production and the recovery of fossil fuels production at the pre-crisis level in 2003 (Fig. 7). Since that moment the structure shifts in industry were determined by the anticipating growth of manufacturing industry in the Russian economy, the minerals extraction production dynamics being reserved. The changes in the industrial production structure were accompanied by transformation shifts within the main factors of production. At first, the general tendency being towards the increase of the investment activity in the economy, the share of the investments in the minerals extraction in the total volume of the investments into the fixed assets throughout the economy decreased from 19.0% in 2001 to 13.4% in 2006, the proportion of manufacturing industry having increased from 15.9 to 16.8%. Secondly, both for manufacturing and extraction industries it was characteristic for 2001-2005 that the demand for labor force was decreasing against the background of the growth of requirements for labor qualification.
160-, 140 120H 100 80 H 60 40 20
o
=¡5 2 g X
<D
m ■s <u
CL 3 (U >.-
o X <D
□ 1992- 2000 Source: Federal State Statistics Service.
12001-2006
Fig. 7. Production Indices Broken by Kinds of Economic Activity
The main trends for the development of enterprises for minerals extraction was formed under the influence of such factors as the reduction of efficacious reserves facilities, low rates of exploration and putting into operation of new oil fields, limitations from transportation and exploration infrastructure. Underexploitation of extraction industries growth potential was also determined by reserved rates of minerals processing in metallurgy and petrochemistry. The existing structure of fixed assets being what it is the further increase of facilities load was accompanied by production capital intensity and the decrease in labor and financial resources efficiency use. This determined the significant impact of the output dynamics volume of the industries of the complex orientated to export on the structure of the industrial production and demand at the domestic market.
It should be noted that it was the slowdown in the fossil fuels extraction that had the biggest impact on the dynamics of the extraction industries in 2005-2006. The production indices in fossil fuels extraction slowed down to 102.5% in 2006 as compared with 107.5% in 2003, and in metal ores extraction - down to 101.8% against 108.5%. In the environment of tax load growth the slackening of motivation for extraction and export volumes increase was observed among oil companies. The formation of this trend was also supported by the fact that, on the one hand, in the environment of the steady dynamics of the world prices for oil and intensive increase in the domestic market prices the trade groups orientated towards export expand, and on the other hand - in recent years the efficiency of oil products export has increased significantly, which determines the change in the marketing policy of the oil companies. In 2006 the oil production growing by 2.4% the sales at the
0
domestic market increased by 5.4%while the export decreased by 1.2%. The growth of oil products export over the same period was equal to 7.1%.
Table 9
Indices of Industrial Production by Kinds of Economic Activities in 2000-2006, as percentage to the previous year
22000 22001 22002 22003 22004 22005 22006
Industry 108.7 102.9 103.1 108.9 108.3 104 103.9
Minerals extraction 106.4 106 106.8 108.7 106.8 101.3 102.3
Fossil fuels extraction 104.9 106.1 107.3 110.3 107.7 101.8 102.5
Minerals extraction excluding fossil fuels 118.2 96.2 99.1 102.5 108.5 96.8 101.8
Manufacturing industries 110.9 102 101.1 110.3 110.5 105.7 104.4
Electricity, gas and water production and distribution 104 101.4 104.8 103.3 101.3 101.2 104.2
Source: Federal State Statistics Service
Manufacturing Industries
The steady economic growth due to the expansion of the external market demand, on the one hand, and the increase in the capacity of the domestic market, on the other hand, gave additional stimulus for the development of the manufacturing industries. The dynamics of the manufacturing industries differentiates substantially by the kinds of the economic activity, the ratio of the rates of investment and consumer's goods having the biggest influence (Table 10). The growth fluctuations by the kinds of the economic activity being rather considerable, the anticipating growth of machine-building production output was the prevailing tendency of the recovery period, which positively affected the level of business activity of connected industries of construction materials and other intermediate goods production. The ratio of growth rates by kinds of the economic activities in 2000-2006 demonstrates the gradual turn from the growth which was orientated towards natural and raw materials potential towards the formation of the resource system for the investments development. In the environment of the production growth the demand for domestic and imported equipment is growing dynamically.
Table 10
The Change in the Rates of Production by Kinds of Manufacturing Industries Economic Activity in 2000-2006, as percentage to the previous year
1
2000 2001 2002 2003 2004 2005 2006
2 3 4 5 6 7 8
10.9 2 1.1 10.3 10.5 5.7 4.4
5.3 8 7.2 6.9 4.4 4.4 5.4
24.9 7.8 -2.5 1.2 -4 -1.5 7.3
7.6 13.7 11.4 11.5 -0.6 -2.7 16.7
14.1 -2.5 4.2 9.7 8.7 4.5 0.5
18 9.6 4.1 7.8 5.1 1.2 6.4
2.4 2.8 4.6 2.2 2.4 5.4 6.1
15.2 0.3 0.2 5.4 6.6 2.6 1.9
Manufacturing industries
Foodstuffs, including tobacco and beverages production
Textile and clothing industry Leather, leather goods and footwear production Woodwork and wooden goods production Pulp-and-paper production, editing and printing activity
Coke and oil products production Chemistry industry
1 2 3 4 5 6 7 8
Rubber and plastic goods production 26.1 1.6 0.2 5.5 13.5 5.5 11.7
Other non-metal mineral goods production 10.6 3.8 1.2 7.3 8.4 3.5 10.8
Metallurgical production and finished metal goods 15.3 4.6 5.1 7.2 3.9 5.7 8.8
production
Machinery and equipment production 5.7 6.4 -8.8 19 21.1 -0.1 3.3
Electric, electronic and optical equipment production 25 8.4 -7.7 43.2 34.5 20.7 -5.5
Transport vehicles and equipment production 10.7 -26.4 -1 14 11.5 6 3.3
Other productions 11.5 8.5 3.9 10.8 10.5 0.7 7.2
Source: Federal State Statistics Service
The Main Trends of Machine-Building Production Output
The analysis of the dynamics of the investment goods market in recent years indicates that the level of business activity depends considerably on the economy revenues from the foreign economic activity. The reserved dynamics of the investment goods output as compared with the rates of the industrial growth over the last 8 years was observed only in 2002. However already in 2003 the situation experienced fundamental changes. The investment sector replied to the industrial and incomes growth rates acceleration in the export-orientated sector by the intensive increase in the production. The additional factor of machine-building industry growth was the improvement in trade of the high technological equipment produced domestically at the external markets as well as the positive changes in investment environment connected with the gradual decrease of the duties for imported components and equipment and the introduction of industrial assemblage regimes in motor-vehicles production. At the same time it should be noted that the production output in some branches of machine-building is subjected to quite considerable fluctuations.
In 2006 for the first time over the last 4 years the negative dynamics was observed in electric, electronic and optical equipment production after the output increase by 34.5% in 2004 and by 20.7% in 2005.
The development of the Russian electronics over the last 5 years proceeded within the framework of section "Basis for electronic components" of the Federal Targeted Program "National technological basis" the fulfillment of which was envisaged for 2006. In spite of that, however, Russian electronics is in the state of crisis.
In the environment of the dynamic development of the world electronics the state of the domestic technological basis, development and series production of the electronic components basis (ECB) for testifies that the Russian electronic industry is in the state of the deep crisis. The structure of the modern domestic market of electronic equipment is highly dependant on the electronic industry's enterprises possibilities and on the import of foreign produced basis for electronic components and finished goods. The capacity of the domestic market of radio and electronic equipment in 2005 was estimated to be USD 7.9 bln., the domestic production of which being USD 3.5 bln. The positions of the domestic electronic producers at the internal market weakened substantially - the share of the import electronic components base was equal to 65% of the total amount of the electronic
goods, sold in Russia. This is accounted for by a considerable technological lag resulting in the low competitiveness of the Russian ECB.
The main system factors that limit the development of the domestic ECB are:
- moral and physical ageing of the technological equipment and fixed assets of electronic industry due to the lack of investment funds for technological re-equipment over the last 15 years;
- sharp decrease in the production output and the reduction of the assortment of the electronic goods for military purposes produced serially;
- the growth in foreign produced electronic components application with the simultaneous decrease in the level of provision of domestically produced electronic components for the development and serial production of the armaments systems, military and special equipment;
- the situation of the nearly complete absence of the domestic civil sector of the most science-intensive kinds of ECB, applied in computer engineering, communication facilities and telecommunication, navigation equipment etc.
The analysis and development forecast demonstrates that further lag of Russia in production of the electronic components is highly dangerous, since it limits the opportunities for the transformation from the raw materials to innovation economy.
The overcoming of the crisis in the industry depends on the problem of combining the efforts of the government and the private domestic and foreign business. The partnership with the foreign business in this case is defining, as it is foreign firms and enterprises that are the leaders of this industry in the world. Only they have necessary technologies and the experience in this kind of the production organization as well as their effective commercial operation. The capital intensity of the electronic industry being high this model of management restructuring allows o decrease significantly the specific expenses for the production.
Domestic machinery and equipment production increased by 3.3% in 2006, the increase in the import of this kind of goods was, according to the preliminary data, equal to 50.9%. The dynamics of the machinery and equipment output was determined mainly by the extension of the demand for handling machinery, railway, power and agricultural machine-building, instrument making, communication facilities production. Besides, over the last years the steady growth of the demand for the consumer's complex equipment sustained (Table 11).
The characteristic feature of the economic growth in 2000-2006 was the recovery of the positive growth dynamics of the agriculture and tractor machinebuilding. The increase in machinery and equipment output being 1.53 times higher in 2006 as compared with 1999, the tractor and agriculture machine-building output increased by 1.63 times. The output of the tractors with the wheeled mover, motor cultivators and motor cultivators with changing tools, combine harvesters and milking machines grew dynamically. This, however, did not stop recession of the fixed assets in agriculture. The norm for the fixed assets renewals being at the level of 1.0% the retirement coefficient reached 3.1% in 2002-2005, wear and tear of machinery and equipment being 53.7%.
Table 11
The Dynamics of the Machinery and Equipment Production by Kinds of the Economic Activities in 2000-2006, as percentage
to the previous year
2000 2001 2002 2003 2004 2005 2006
Machinery and equipment production: 105.7 106.4 91.2 119.0 121.1 99.9 103.3
including:
Mechanical equipment production 107.3 90.1
Machinery and equipment production for agriculture and forestry * 148.4 129.1 77.6 76.4 130.5 102.0 107.5
Machine-tools construction** 111.5 99.4 81.7 100.5 95.1 99.1 114.4
Production of household appliances not included elsewhere *** 109.5 107.1 115.9 106.6 119.0 103.7 106.8
* Up to 2005 "Tractor and agriculture machine-building". ** Up to 2005 "Machine tools and instruments industry".
*** Up to 2005 "Machine-building for light industry, food processing and households appliances". Source: Federal State Statistics Service
The state of the investment machine-building is the main technological factor, which limits the production reconstruction and modernization on the new technological basis. Though in 2006 the investments in the machine-building increased approximately by 43.6% against the level of 1998, this did not considerably affect the technological and economic characteristics of the industry fixed assets. The average norm of the fixed assets renewals being over the last 2 years at the level of 1.8%, the average age of the equipment in the industry if 21.2 years against 14.3 years in 1998, the proportion of used-up machinery and equipment exceeding 27% (Table 12).
Table 12
Age Structure of the Production Equipment in the Industry, percentage
1995 2000 2001 2002 2003 2004
Equipment - total (by the end of the year) 100 100 100 100 100 100
of which:
under 5 years old 10.1 4.7 5.7 6.7 7.8 8.6
6-10 years old 29.8 10.6 7.6 5.8 4.9 5.1
11-15 years old 22.0 25.5 23.2 20.0 16.4 12.3
16-20 years old 15.0 21.0 21.9 22.6 22.7 22.5
more than 20 years old 23.1 38.2 41.6 44.9 48.2 51.5
Average age of the equipment, years 14.3 18.7 19.4 20.1 20.7 21.2
* by big and middle-sized commercial organizations' Source: Federal State Statistics Service
Machine-tools construction is characterized by unsteady output dynamics and sustention of the crisis phenomena (Table 13). As compared with 1999 the machine-tools production decreased in 2006 by 1.9%. For instance, the production of the machine-tool equipment in the nowadays Russia per capita is tenfold lower than in the last years of the Soviet era, and the facilities load is by 3-7 times back of the level of the beginning of 1990ies. The characteristics of the machinery-tool population being exceptionally unfavorable concerning age, degree of wear, technological level, the share of the new generation of machine-tools with high efficiency, precision and accuracy indices, Russian enterprises cannot produce com-300
8.9 8.3 6.5 5.7 5.4 4.8 5.0
0.2 0.3 0.2 0.1 0.2 0.3 0.3
1.2 1.3 1.2 1.6 1.7 1.5 2.0
11 5 2 1 2 No data No data
10.2 9.7 8.6 8.1 6.7 4.3 4.4
petitive goods in the environment of presently fast growing costs for raw materials and energy. The share of the numerically programming controlled (NPC) equipment in the population of the equipment in operation does not exceed 5%. Abroad, for reference, the proportion of NPC equipment is nearly 50%, and among the enterprises producing production tools (press molds, dies, casting molds) reaches 85%. In this country the production of complex machine-tools in almost undeveloped. For instance, in 2005 in Russia 261 machine-tools with NPC were produced, which is by a factor of ten less than in China and by a factor of hundred - than in Germany.
Table 13
Production Output in Machine-tools Construction
2000 2001 2002 2003 2004 2005* 2006*
Metalcutting machine tools, thou.
Of which the machine-tools with numerical programming control, thou.
Forge-and-press machinery (excluding the machines with manual drive and treadle), thou..
Automatic and semi-automatic lines for machine-building and metal processing, a number of sets
Woodworking__
* Since 2005 "Machine-tools production". Source: Federal State Statistics Service
The structure of the production and the rates of production equipment renewal being what they are the own funds of the machine-tool construction enterprises comprise, according to 2005 data, 78% of the amount of the investments, while in developed countries, in contrast, it is loans, whose share is 70-80% of the investments.
Besides, the countries with the developed machine-tool construction carry out intensive reciprocal trade of this production. According to the UN data, Russia acts as a net importer in 40 out of 45 positions of the machine and technological equipment, taken into account by the statistics. Being the seventh by the amount of the purchase of German machine-tools, Russia is not even among 20 leaders of the exporters of the machine-tools and instruments production to Germany, according to the German association VDW.
According to the operational information, the increase in military industrial complex production was equal to 109.8% in 2006. According to the preliminary estimations, the volume of the export supplies of production for military purpose remained in 2006 almost at the level of 2005.
In 2006 the growth of the investments in military industrial complex by all sources of financing was, according to estimation, 105.6%. The share of own and borrowed funds in the total amount of the investments is estimated, correspondingly, at the level of 67 and 33%. The main amount of the budget funds - around 70% - was directed towards purchase of the new equipment. The steady positive dynamics and anticipating growth of the industrial production output were achieved in the aviation industry (125.2%), in radio and electronics complex (115.3%), in rocket and space industry (113.4%) and in ammunition and special chemicals in-
dustry (110.7%). The industrial production output increased in all the industries with the exception of shipbuilding (84.2% to 2005). The anticipating growth of the military production accounted for the decrease of the share of civil production from 44.3% in 2005 to 42.0% in 2006 of the total production output of the military industrial complex.
Civil production in most branches of the military industrial complex developed unsteadily and extended by 4.2% in 2006 as compared with the previous year, including the increase in shipbuilding civil production was equal to 111.4%, in aviation production - to 108.1%, in rocket and space industry - 106.0%. In 2006 the production of power efficient equipment which can substitute for the import equipment for fuel and energy complex increased, according to the preliminary estimation, by 7.5% against the level of 2005.
Sporadic crisis phenomena of overproduction in motor-car construction as well as steady growth of investment and consumer demand for foreign models against the background of the growing economy and population revenues can be referred to as negative factors which influenced the dynamics of transport vehicles and equipment production in 2005-2006. The dynamics and the character of motor-vehicle construction development was considerably influenced also by the anticipating import growth as compared with the domestic production. This is connected with the fact that many kinds of machinery and equipment are not competitive with the imported analogues by the ratio of "price to quality", as well as the lack of facilities for production of modern kinds of machinery, which considerably limits the market for motor-vehicles produced domestically.
In 2006 1175 thou. cars were produced in Russia, 280 thou. of which were the foreign brands of cars, produced in Russia. The growth of domestic motor-car construction being 9.9%, the import of passenger cars in real terms by legal entities increased by 30.9%, by individuals - by 88.3%. Domestically-produced cars account for 38% of the market, foreign brands of cars, produced in Russia, - by 14% and new foreign brands of cars produced abroad - 35%.
The main reason for motor-vehicles boom in 2006 was the high solvent consumers' demand. According to the data of the Ministry for the Industry and Energy, whereas in 2005 54% of the cars purchased in Russia were bought in the segment below USD 10 thou., and 18% - in the segment below USD 20 thou., in 2006 the dynamics of the purchase suffered serious changes: 46% of cars were bought in the segment below USD 10 thou. and 23% - in the segment below USD 20 thou. The analysis of the growing import structure allows to notice that the share of the used cars of foreign brands import has decreased.
The import impact is highly differentiated with regard to different sectors of the economy and trade markets. For instance, at the market of the intermediate demand goods import of some kinds of raw materials, components for household appliances, and components for car assembly within the framework of the car assembly projects has a positive effect on the restructuring processes and the level of business activity. At the market of capital machine-building goods the increase of import is one of the key factors for investment projects fulfillment, production
modernization and technological innovations implementation. At the same time the intensification of the competitiveness with import is observed in such industries as, for instance, machine-tool construction, road-building equipment construction, agriculture machine-building, motor-vehicles construction. Low investment activity, high extent of the fixed assets depreciation, outdated technologies remained characteristic for these productions. One of the promising development directions for these fields of activities is the active implementation of industrial assembly and the transfer of the foreign companies' activity in the territory of Russia.
Among the factors, having positive effect on the production dynamics, the increase in goods production by the licenses of the foreign firms with the use of the imported components can be singled out. Anticipating growth of the production output at the enterprises with the foreign funds participation is changing the conditions of the competition. In motor-vehicles construction, for instance, one of the reasons for the decrease in Russian passenger cars output and demand reorientation towards the foreign producers goods was more flexible price and sales police of the foreign companies' dealers.
System problem of the transport vehicles machine- building in Russia consists in non-balance between the structure of production facilities, technological level of the transport machine-building production and the demand of the domestic railway transportation for the modern highly efficient rolling-stock. A steady economic growth over the last 7 years led to the increase in freight and passenger transportation, also by railways, which, in its turn, caused a considerable increase in the demand for the production of the transport machine-building. As a result Russian producers started to increase the load of the existing facilities and involve idle non-specialized facilities. Besides, the industry's enterprises suffer from the shortage of the highly qualified workers and engineers.
It was the decrease in the investments into railway transportation by 6.4% in 2006 in comparison with January-September 2005 that had a negative impact on the dynamics of the transport machine-building. The biggest customer for the transport machine-building is the joint-stock company "Russian Railways", which is the owner of 70% of the freight cars, nearly 100% of the passenger cars fleet and approximately 65% of the locomotive fleet. At the moment the conclusion of short-term contracts (within a year) for the supply of transport machine-building production is in practice in Russia presently. In high technological branches of transport machine-building (traction electrical equipment and passenger rolling stock) this does not allow to plan its activity efficiently, including development of the modern grades of the rolling stock. The absence of the long-term contracts conclusion practice is closely connected with price formation system for the production, supplied to JSC "Russian Railways". At present there is no adjusted with JSC "Russian Railways" mechanism of price determination and correction in connection with the changes in prices for materials and components.
The characteristic feature of the transport machine-building is the high proportion of the state funds in industry's enterprises as a consequence of its strategic importance for the national and economic safety. That is why one of the main direc-
tions of institutional development of the transport machine-building is the completion of structure reform on the railway transport and allocation of industrial assets for sale from the structure of JSC "Russian Railways" and their sale into the ownership of private companies. The solution of this problem will allow changing the competitive environment at the market of transport machine-building production and securing equal opportunities for all members of the market.
The Dynamics of the Consumers' Demand Commodities
The complex of industries, producing consumers' goods' was not able to sustain steady growth rates for a long time, which is connected to a great extent with the absence of the serious quality changes in technology and structure of production.
With ruble appreciation and shift of the consumers' preferences towards the average price segments by the ratio of price to quality Russian producers cannot compete with import. The exception is the companies which thanks to production modernization and reconstruction, formation of the fundamentally new marketing and logistics system occupies niche positions after 1998 devaluation. The competitiveness of the domestic foodstuffs producers was supported by active investment policy and existing mechanism for import quotas for some kinds of goods. However this created potential was not sufficient for the sustention of the steady production growth rates. The slowdown in the food production as compared with the dynamics of the retailed trade turnover was also observed. In 2005-2006 against the background of the investment support strengthening the increase in foodstuffs productions growth rates is also observed. The growth index in 2006 was equal to 105.4% against 104.3% in 2005 and the minimum over the last 8 years level of 2.9% in 2004.
In production of the non-food goods Russian producers, as a rule, did not compensate the decrease in price competitiveness by the production modernization which, in the long run, led to the decrease in output rates and permanent crisis in textile, clothing, leather and footwear industries.
An important tool for light industry modernization acceleration and production extension was the abolition of the customs duties for import technological equipment. In October 2005 the Government granted the right of duty-free import of 45 kinds of equipment to the domestic companies. According to the data of the Ministry of the Industry and Energy this enabled the enterprises to purchase 160.9 thou. units of modern equipment and to spare RUR 122 mln. In 2006 (January-September) RUR 2.1 bln. were invested in textile and sewing industry, which is 122.3% to the level of the previous year, whereas in leather and footwear production - RUR 0.8 bln (230.0%). Positive influence of the modernization processes was maintained by the change in the norms of duty-free goods import by individuals and the control reinforcement for customs institutions. As a result, in 2006 for the first time since 2002 the positive dynamics of the textile and clothing industry (107.3%), leather, leather goods and footwear production (116.7%) was observed. However the production output throughout these industries being 20-23% of the pre-reform 1991, this did not have much influence on the domestic demand. Textile
and clothing industries belong to the group of processing industries characterized by critical values of the fixed assets depreciation. The retirement coefficient for the fixed assets exceeds by more than four times the index of assets renewal. The absolute decrease of the amount of the fixed assets is proceeding in textile and clothing industry. Production crisis led to the sharp decrease in the demand for labor force. Over the last three years the average number of industrial and production staff in textile, clothing, leather and footwear production decreased by more than 22%. Low attractiveness of these kinds of activities was also determined by the existing labor remuneration level. The wages were equal approximately to 48-54% of the average level throughout the manufacturing industries. On one hand, the fact that material and technical basis and labor qualification do not meet the market criteria determined the decrease in domestic non-food goods competitiveness, on the other - under the existing exchange rates it led to the expansion of niches for import goods. Russian producers of light industry hold one of the least attractive for foreign investors position. At the beginning of 2006 the accumulated amount of the foreign investments into the industry was equal to USD 147 mln. as compared with USD 5781 mln. in food industry.
The condition that weakens the negative influence of textile, clothing goods and footwear on the formation of the market resources of non-food goods produced domestically is the acceleration of household appliances, furnishing goods production. The dynamics of the furniture and construction materials output (107.8%) corresponds to the intensive growth of housing building and high business activity at the real estate market. The nature of these productions operation and the growth of their competitiveness was considerably influenced by new technologies implementation and the increase in assembly production output based on the imported components.
The production of Intermediate Demand Goods
The dynamics of the intermediate demand goods production has been in the area of the positive values since 2002. The nature of metallurgical, chemistry and woodworking industry operation was determined by the level of internal and external demand.
Chemistry complex is the basic segment of Russian economy. Its proportion in the industry structure by the amount of goods produced comprises about 5.5%. More than 4.5% of the fixed assets of the country are located in this industry. The enterprises secure about 5.4% of the All-Russian currency earnings. Over 20002005 the chemicals production output increased by 1.45 times. Since 2000 the slackening of the development dynamics and systematic decrease in the production profitability is observed in the branch of industry. The situation is aggravated by non-competitiveness of the domestic production at the external market, preferences' shift at the domestic market towards import goods segment and not sufficient purchasing capacity of the producers and the population. The conditions for chemicals import expansion are provided by low consumption quality, limited range of domestically produced chemicals, underdevelopment of domestic market infrastructure, unpreparedness of the consuming economic sectors to process and util-
ize a number of materials, especially polymers. For instance, the average consumption of plastics and many other kinds of chemicals in Russia per capita is by 24 times lower than in industrially developed countries. The non-balance between the polymers production and processing leads to the fact that Russia is the importer of finished plastic goods, including those produced abroad from Russian plastics. The share of import in the structure of domestic consumption increased considerably for plastic goods (up to 72%), chemical fibers and threads (up to 65%), synthetic dies and polystyrene (up to 58%), varnish-and-paint materials (up to 50%).
In 2006 the increase in chemicals production was equal to 1.9% against 2.6% in the previous year, the production of rubber and plastics goods increasing by 11.7% against 5.5%. Structural shifts in the chemicals production are accounted for by the recovery of the economic growth in varnish-and-paint (123% versus 2005), basic chemicals production (101.6%) in the environment of unsteady pharmaceuticals production dynamics and the decrease in artificial and synthetic fibers production (Table 14).
Table 14
Main Kinds of Chemistry, Plastics and Plastics Goods Production
Output in 2000-2006
2000 2001 2002 2003 2004 2005 2006
Chemistry Production
Sulphuric acid, monohydrate, tons mln. 8.3 8.2 8.5 8.8 9.2 9.5 9.3
Soda ahs (100%), thou. tons 2201 2339 2385 2386 2576 2582 2.8
Hydrate of sodium (100%), thous. tons 1241 1197 1146 1113 1188 1245 1266
Mineral fertilizers - total, thou. tons 12213 13026 13562 14053 15800 16625 16170
including: nitric 5818 5890 5968 5995 6591 6725 6879
phosphate, including powdered phosphorite 2379 2391 2513 2593 2802 2766 2772
potash 4016 4745 5080 5465 6405 7131 6511
chemical components for plant protection, thou. tons 10.6 13.0 10.9 8.3 8.4 10.1 11.0
Synthetic resins and plastics, thou. tons 2576 2771 2922 3118 3304 3418 3671
including: Polystyrene and styrene co-polymers 92.2 106 108 135 165 228 278
PVC resin and PVC co-polymers 480 487 528 547 563 580 592
polyethylene 923 951 1012 1038 1069 1049 1075
polypropylene 233 260 269 286 294 349 376
Paint-and-brush materials, thou. tons 575 628 606 597 698 721 886
Chemical fibers and threads - total 164 158 159 187 188 158 152
Rubber and plastic goods production
Tyres for motor-vehicles, agriculture machines, motorcycles, scooters, mln. 29.9 33.7 35.8 38.6 39.5 41.4 39.8
including: For trucks, buses, trolleybuses 10.1 11.4 10.9 11.7 11.7 11.7 10.9
For passenger cars 17.7 19.7 22.2 24.2 25.1 27.3 27.6
Pipes and pipelines details from thermoplastics, thou. tons 50.7 61.7 59.6 65.2 75.4 95.0 115.0
Source: Federal State Statistics Service
Key factors, that limit the functioning of chemistry complex, the capacity of the domestic market for chemicals being quite high are:
- high extent of the equipment wear and tear, technological backwardness;
- the anticipating growth rates of prices and tariffs for natural monopolies production;
- the scantiness of investment resources; 306
- problems with industry's enterprises provision with the main kinds of raw materials, especially hydrocarbons (virgin petrol, condensed gases, ethane, natural gas);
- the decrease in the effective demand for the small capacity chemistry production, in the first row the military industry production.
One of the urgent problems in chemistry and petrochemistry industry development is the effective import substitution and the decrease in the dependence of the domestic market from the influence of the foreign companies, decrease in the economically unjustified import of chemicals for whose production development there are sufficient conditions in the country. The solution of the problem will enable to fill domestic market with high-quality and relatively inexpensive production, satisfy the increasing demand of the domestic market in the chemicals and new materials, expand the assortment of the goods produced as well as the final commodities export volume.
Priority direction of the investment policy is the increase in the investment attractiveness of the chemistry complex at the expense of the decrease in the investment risks and effective protection of the rights and interests of the Russian and foreign investors. As petrochemistry enterprises are rigidly technologically dependant on the oil and gas production and prosessing enterprises, it is necessary to correlate the amount of the investment in the production equipment renewals and the increase of raw materials base of the corresponding kinds of the activity. Otherwise a non-balance between production capacities of chemistry complex branches and capacities providing it with the main kinds of raw materials. Obviously, the changes in the branches and special structure of the chemistry complex will have positive impact towards direction of the decrease in primary production.
Thereupon the formation of the large science and production integrated structures, which enable to fulfill to the utmost extent the advantages of finished technological chains starting with the production and processing of hydrocarbons raw materials, on which 80% of chemistry and petrochemistry production is based, and up to output and sale of the main of its kinds, is gaining special significance. Currently the processes of vertically integrated structures creation, which aim is to provide final commodities production at the Russian factories, are observed. The petrochemistry holding joint-stock company "Sibur", founded by RAO Gasprom is operating quite steadily. At the end of 1999 oil company LUKOIL purchased control stock of large chemistry enterprises. Large vertically integrated holdings are oil company Tatneft, to which open joint-stock company "Efremov factory for synthetic rubber", open joint-stock company "Nizhnekamsktechugol" and open joint-stock company "Nizhnekamskmachine" belong, AMTEL, to which open joint-stock company "Volgograd factory for technical carbon", open joint-stock company "Kirov tire factory", open joint-stock company "Krasnoyarsk tire factory" belong. Another direction in the vertically-integrated structure development is represented by the formation of Kemerov regional holding "Siberian chemistry company" with the aim to revive chemistry industry of Kuzbass.
Extraction Industries
Oil and Gas Sector
Oil and gas sector is the basis for the economy of Russia and plays a leading role in the formation of state budget incomes and active trade balance of the country. The price situation at the world markets had a determining influence on the position of oil and gas sector in the Russian economy in 2006. As nearly 75% of the oil produced in the country is exported in crude or processed form the level of oil world prices is actually the main factor that determines incomes and financial situation of the Russian oil industry.
World prices in 2006 were at an exceptionally high level. In July 2006 the prices for oil reached unprecedented maximum in nominal terms. The average price for oil grade Brent in July 2006 was equal to USD 73.7 per barrel, Urals - USD 69.2 per barrel. The main reasons for such a situation were high world economy growth rates, in particular of the USA and China economies, low level of idle facilities for oil production, which did not enable to increase the production in a short time to satisfy the growing demand for oil. At the same time, OPEC actually refused to sustain world prices for oil in the limits of the principal price range of USD 22-28 per barrel and demonstrated substantial change in the price policy.
Despite exceptionally high level of prices for oil, OPEC conferences, which were held during 2006 confirmed the quotas for oil production for organization member countries which were established in the middle of 2005 at the rate of 28.0 mln. barrels a day again and again. And in October 2006 in the environment of some decrease in the world prices for oil (average price of OPEC basket in October 2006 being USD 55 per barrel), at the advisory meeting of the representatives of OPEC countries it was decided to reduce the volume of oil production by 1.2 mln. barrels a day starting from 1 November 2006. Later at the conference of OPEC in December 2006 it was stipulated to decrease the volume of oil production by OPEC countries by 500 thou. barrels a day more starting with 1 February 2007.
Thus the virtual conduct of OPEC testifies for a considerable shift in price marks of that organization, for its aspiration to sustain oil prices at the level of far above than USD 50 per barrel. At the same time outside OPEC the decrease in oil production growth rates in Russia had a considerable impact on the oil prices dynamics. It can also be noted the presence of quite significant geopolitical risks in 2006 which contributed to the growth of oil world prices, for instance the problems, connected with Iran and Iraq, military operations of Israel in the Lebanon territory.
As a result, the price for oil grade Brent in 2006 was equal on average to USD 65.2 per barrel, the price of Russian oil Urals being USD 61.2 per barrel. The average price for OPEC oil in 2006 was equal to USD 61.1 per barrel. The average price of the Russian oil at the world (European) market was 20.6% higher in 2006 than the average level of the previous year (Table 15).
Table 15
World Prices for Oil in 2000-2006, as USD per barrel
2000 2001 2002 2003 2004
Price for oil grade Brent, Great Britain 28.50 24.44 25.02 28.83 38.21
Price for oil Urals, Russia 26.63 22.97 23.73 27.04 34.45
Price for oil basket of OPEC member countries 27.60 23.12 24.34 28.13 36.05
Table 15 (continuation)
2005 2006 2006 2006 2006 2006
1 quarter 2 quarter 3 quarter 4 quarter
Price for oil grade Brent, Great Britain 54.38 61.75 69.62 69.49 59.68 65.16
Price for oil Urals, Russia 50.75 58.25 64.79 65.39 56.53 61.24
Price for oil basket of OPEC member countries 50.64 57.65 64.72 65.68 56.11 61.08
Source: OECD International Energy Agency, OPEC.
The level of world prices for oil, which was observed in 2006, is exceptionally high not only for the period of post-reform development of the Russian economy but also from the point of view of historical retrospective. Over the period since 1900 higher level of world prices for oil in real terms was observed only in 19791982. For instance, in 1980 the average annual world price for oil in real terms (in 2005 prices) was equal to USD 87.7 per barrel, being in nominal terms USD 36.8 per barrel (Fig. 8). For the sake of comparison it can be noted that in 1998 the average annual price for the oil grade Brent in real terms was only USD 15.7 per barrel. (USD 12.7 per barrel in nominal terms), being on average in 1990-ies USD 24.4
Source: BP.
Fig. 8. The World Price for Oil in Real Terms in 1970-2006*, USD per barrel
During 2006 the highest prices for oil (USD 73.7 per barrel for oil grade Brent) were observed in July, when Israel started military operation in the Lebanon territory and fears of other countries of the region joining into the conflict arose and of decrease in oil supplies to the world market. In September-October prices for oil decreased considerably (price for oil grade Brent in October being USD 57.8 per barrel). The main reasons of such a fall in world prices were the extension of oil production in the countries, which are not members of the OPEC and relative relaxation of the tension at the Middle East after the end of Israel's military operation in the territory of Lebanon, as well as the abatement of expectations for coercion solution of Iranian problem by the USA administration. In December under the influence of the decrease in oil production by OPEC member countries, which was decided on from 1 November 2006, the price for the oil grade Brent increased up to USD 62.3 per barrel (Table 16).
Table 16
Prices for Oil Grades Brent and Urals in 2006, as USD per barrel
2006 2006 2006 2006 2006 2006
January February March April May June
Price for oil grade Brent, Great Britain 63.05 60.12 62.09 70.35 69.83 68.69
Price for oil Urals, Russia 59.57 57.06 58.11 64.95 65.09 64.51
Table 16 (continuation)
2006 2006 2006 2006 2006 2006
July August September October November December
Price for oil grade Brent, Great Britain 73.66 73.11 61.71 57.80 58.92 62.33
Price for oil grade Urals, Russia 69.20 68.49 59.47 55.68 55.95 57.95
Source: OECD/IEA, OPEC.
The development of the gas and oil sector in the Russian economy in 2006 was characterized by the sustention of the tendency for oil, oil products and natural gas production, which evolved in 2000-2005. Oil production, gas condensate included, reached 480 mln. tons in 2006. This figure is by 15.7% lower than pre-crisis maximum, reached in 1987, when oil production was equal to 569.4 mln. tons and by 59% higher than the minimum level of 1996, when the production decreased down to 301.3 mln. tons. The reasons for a considerable growth of oil production in recent years are the expansion of export opportunities, for instance thanks to the creation of the Baltic pipeline system and railway transportation use, as well as the growth in domestic demand.
At the same time oil production growth rates in 2005-2006 decreased considerably. Whereas in 2002-2004 the increase in oil production, gas condensate included, reached 8.9-11% per year, in 2006 the increase in production was only 2.1%. This is the indicator of fast increase reserves depletion in oil production in the country and the evidence of necessity of very active actions to develop new oil fields, in the Eastern part of the country, in particular.
The volume of primary oil processing in 2006 increase by 5.7%, and the extent of oil processing went up by 71.9% (in 2005 this index was equal to 71.6%).The 310
growth of natural gas production, which started in 2005 continued and in 2006 was equal to 2.4% (Table 17).
Table 17
Oil, Oil Products and Natural Gas Production during 2000-2006, as percentage to the preceding year
2000 2001 2002 2003 2004 2005 2006
Oil, including gas condensate 106.0 107.7 109.0 111.0 108.9 102.2 102.1
Primary oil processing 102.7 103.2 103.3 102.7 102.6 106.2 105.7
Motor petrol 103.6 100.6 104.9 101.2 103.8 104.8 107.4
Diesel oil 104.9 102.0 104.7 102.0 102.7 108.5 107.0
Furnace fuel oil 98.3 104.2 107.1 100.3 97.8 105.8 104.5
Natural gas, bln.cu. m 98.5 99.2 101.9 103.4 101.6 100.5 102.4
Source: Federal State Statistics Service
In 2006 the biggest amount of oil was produced by oil companies LUKOIL, Rosneft, TNK-BP, Surgutneftegas and Gasprom. The share of these 5 companies is 75% of the total oil production in the country. The main part of the Rosneft production (68.5%) was secured by Yuganskneftegas, which was apportioned from the YUKOS structure and joined to Rosneft at the end of 2004. At the YUKOS enterprises the decrease in the oil production continued. In 2005 oil production by YUKOS without Yuganskneftegas decreased by 24.5% as compared with the previous year, in January-September 2006 - by 12.5%. As a result the share of the company at the Russian oil market dropped down to 4.5%. At the same time the share of Gasprom at the oil market has increased drama5tically thanks to the purchase of the oil company Sibneft. The proportion of Gasprom, including Gasprom-neft, which was formed to control Gasprom oil assets in 2006 was equal to 9.6% in the All-Russian oil extraction. As a result the share of the state-owned companies -Rosneft and Gasprom, including Gaspromneft - at the Russian oil market in 2006 reached 26.6%. Production sharing operators produced 1.1% of the Russian oil in 2006. The share of other producers, to which around 150 small scale oil enterprises belong, comprised just 4.1% of oil production in the country (Table 18).
The increase in the state-owned companies influence in the oil sector was quite characteristic trend for the recent years. The positions of the state-owned companies strengthened considerably due to the purchase of private-owned companies assets (in 2004 of Yuganskneftegas, in 2005 - Sibneft). In December 2006 Gasprom purchased controlling stock in "Sakhalin-2" project, which is being fulfilled by foreign investors8. In future it can be expected that the share of the state-owned companies at the oil market thanks to the fulfillment of the project "Sakha-lin-2" as well as possible purchase of oil production and processing assets of oil company YUKOS, which was declared bankrupt last year, by the state-owned companies. The share of the state-owned companies in the all-Russian oil production
8 Operator of "Sakhalin-2" project is the Sakhalin Energy Investment Company, whose stocks holders are companies Royal Dutch/Shell (Netherlands/Great Britain), Mitsui and Mitsubishi (Japan). Project is fulfilled on terms of production share agreement.
can reach the level of 31% only due to the purchase of the remaining YUKOS assets.
Gasprom, whose share in all-Russian production was equal to 83.9% in 2006, commands as usual in the gas production. At the same time gas production by oil companies has increased. The share of the oil companies in gas production remains, however, quite low. The biggest gas volumes among oil companies are produced by LUKOIL, Rosneft and Surgutneftegas.
Table 18
The Structure of Oil and Gas Production in 2006*
Oil production, mln. tons The share in the total production, % Gas production, bln. cu. m The share in the total production, %
Russia - total 480.5 100.0 656.2 100.0
LUKOIL 90.4 18.8 14.1 2.1
Rosneft 81.7 17.0 13.6 2.1
TNK-BP 72.4 15.1 8.7 1.3
Surgutneftegas 65.6 13.7 1 4.6 2.2
Gasprom+Gaspromneft 46.1 9.6 552.4 84.2
Of which:
Gasprom 13.4 2.8 550.3 83.9
Gaspromneft 32.7 6.8 2.1 0.3
Tatneft 25.4 5.3 0.7 0.1
Slav-neft 23.3 4.8 0.9 0.1
YUKOS 21.5 4.5 1.9 0.3
RussNeft 1 4.8 3.1 1.6 0.2
Bashneft 11.7 2.4 0.3 0.0
NOVATEC 2.6 0.5 28.8 4.4
Operators of production 5.1 1.1 1.0 0.2
sharing operators
Other producers 19.9 4.1 17.6 2.7
For reference:
State-owned compa-
nies - total:
Rosneft+Gasprom+ 127.8 26.6 566.0 86.3
Gaspromneft
Of which:
Yuganskneftegas 56.0 11.7 1.5 0.2
* According to the organization structure by 31.12.2006 Source: Ministry for Industry and Power, authors' calculations.
In January -September 2006 a considerable growth in prices for oil and oil products at the domestic market was observed due to the increase in world prices. The producers prices for oil, car petrol, diesel fuel and furnace fuel oil (mazut) reached the maximum over the whole post-reform period in 2006. In September 2006 the average internal price for oil (producers' price) in dollar terms reached USD 232.1 per ton, which is the maximum value for oil and car petrol prices over the whole post-reform period (Table 19). In October-December 2006 the prices at the domestic market decreased substantially under the influence of world oil prices fall.
Internal prices for natural gas have also increased. The gas producers' prices considerably exceeded pre-devaluation level and reached USD 16.1 per 1 thou. cu. m in September 2006. Average price for gas purchase in the industry, including both the gas production price and its transportation costs and trade and sales extra charge reached USD 58.8 per 1 thou. cu. m. in September 2006. At the end of the
year the gas producers' price was equal to USD 14.4 per 1 thou. cu. m, price for gas purchase in the industry being USD 60.1 per 1 thou. cu. m.
Table 19
Internal Prices for Oil, Oil products, Natural Gas in US dollar terms over 2000-2006 (average producers' prices, as USD per ton)
2000 2001 2002 2003 2004
December December December December December
Oil 54.9 49.9 60.7 70.1 123.5
Motor petrol 199.3 151.5 168.8 236.9 333.1
Diesel oil 185.0 158.5 153.8 214.3 364.3
Furnace fuel oil 79.7 47.1 66.1 66.0 69.4
Natural gas, as USD per thou. cu. m 3.1 4.8 5.9 4.4 10.5
Table 19 (continuation)
2005 2006 2006 2006
December June September December
Oil 167.2 207.3 232.1 168.4
Motor petrol 318.2 400.7 478.7 416.5
Diesel oil 417.0 455.9 471.2 426.1
Furnace fuel oil 142.7 191.9 194.9 148.8
Natural gas, as USD per thou. cu. m 11.5 1 4.0 16.1 14.4
Source: calculated on the basis of the Federal State Statistics Service data.
In January-November 2006 as compared with the corresponding period of the previous year oil export in natural terms decreased by 1.2% while oil products export increased by 7.1% (Table 20). In January-November 2006 the share of export in furnace fuel oil (mazut) production was equal to 75.2%, diesel oil - to 57.1%, motor petrol - to 18.7% (for comparison: in 1999 export share in motor car petrol production was equal to only 7.2%, in 2005 - to 18.5%). In 2006, as well as in 2005 the decrease in light oil products import was observed. In January-November 2006 import of motor petrol decreased by 11.7% in comparison with the corresponding period of the previous year, and the share of import in petrol resources was equal only to 0.02% (for reference: in the first half-year of 1998, i.e. before ruble devaluation the share of the import in petrol resources was equal to just 8.7%, in 2005 - 0.03%).
Table 20
Oil, Oil Products and Natural Gas Export from Russia, as percentage
to the previous year
2002 2003 2004 2005 2006 (11 months*)
Oil, total 113.9 117.8 115.0 98.0 98.8
including:
to non-CIS countries 109.9 118.9 116.3 98.6 99.3
to CIS countries 137.3 112.4 108.3 94.9 95.9
Oil products, total 118.5 103.6 105.5 117.4 107.1
including:
to non-CIS countries 119.1 102.6 104.9 118.7 105.5
to CIS countries 102.8 132.3 117.9 94.3 143.3
Gas, total 102.4 102.0 105.5 103.4 96.2
* As percentage to January-November 2005. Source: Federal State Statistics Service.
For the first time over the last years gas export supplies decreased, which was due to the reduction of its supplies to CIS countries, to which gas supplies reduced by 15.9% in January-November 2006.
As it is demonstrated by the oil and oil products output and export analysis (Table 21), approximately 60% of the additionally produced oil was consumed at the domestic market, and 40% was exported in the form of oil products obtained from it. In 2006 net oil and oil products export, according to the preliminary estimation, was equal to 351.1 mln. tons, i.e. increased by 4.2 mln. tons as compared with the previous year. As a result, the share of net oil and oil products export in oil production was equal to 73.1%, net oil export being 51.5% of its production. The share of net export in gas production was equal to 29.3%.
Table 21
The Ratio of Energy Supplies Production, Consumption and Export
in 2000-2006
2006
2000 2001 2002 2003 2004 2005 (estimation)
Oil, mln. tons
Production 323.2 348.1 379.6 421.4 458.8 470.0 480.0
Export, total 144.5 159.7 187.5 223.5 257.4 252.5 249.5
Export to non-CIS countries 127.6 137.1 154.8 186.4 217.3 214.4 212.9
Export to CIS countries 16.9 22.7 32.7 37.1 40.1 38.0 36.6
Net export 138.7 154.7 181.3 213.4 253.2 250.1 247.4
Domestic consumption 123.0 122.9 123.5 129.8 124.2 123.1 128.9
Net export, as percentage to the production 42.9 44.4 47.8 50.6 55.2 53.2 51.5
Oil products, mln. tons
Export, total 61.9 70.8 75.0 78.4 82.1 97.0 103.9
Export to non-CIS countries 58.4 68.3 72.5 74.9 78.0 93.1 98.2
Export to CIS countries 3.5 2.5 2.6 3.5 4.1 3.9 5.7
Net export 61.5 70.5 74.8 78.2 81.4 96.8 103.7
Oil and oil products, mln. tons
Oil and oil products net export 200.2 225.2 256.1 291.6 334.6 346.9 351.1
Oil and oil products net export, as percentage of oil production 61.9 64.7 67.5 69.2 72.9 73.8 73.1
Natural gas, bln. cu. m
Production 584.2 581.5 594.5 620.3 634.0 636.0 656.0
Export, total 193.8 180.9 185.5 189.3 200.4 207.3 199.4
Export to non-CIS countries 133.8 131.9 134.2 142.0 145.3 159.8 159.6
Export to CIS countries 60.0 48.9 51.3 47.3 55.1 47.5 39.8
Net export 189.7 176.8 178.3 180.5 193.5 200.4 192.5
Domestic consumption 394.5 404.7 416.2 439.8 440.5 435.6 463.5
Net export, as percentage to the production 32.5 30.4 30.0 29.1 30.5 31.5 29.3
Source: Federal State Statistics Service, Ministry for the Industry and Power, Federal Customs Service, authors' calculations.
The share of oil products export having increased to some extent, the crude oil export, being 70% of the total export volume, still prevailed in the structure of oil export. It was the furnace fuel oil, which is used as a primary product in Europe for further processing, and diesel oil that comprised the main part of the oil products export. The main part of the energy supplies (85% of oil, 95% of oil products and 80% of gas) was exported beyond CIS.
As it is shown by the analysis of the Russian oil export dynamics over the long period of time in 2006 the total net export of oil and oil products reached unprecedented level and exceeded by 59.5 mln. tons the level of 1988, which was characterized by a maximum oil export volumes (291.6 mln. tons). At the same time the increase in oil products share in oil export was observed, their share increasing from 18.2% in 1990 to 29.5% in 2006 (Table 22). In the environment of the sharp reduction of domestic oil consumption (according to our calculations it has decreased from 269.9 mln. tons in 1990 to 128.9 mln. tons in 2006, that is more than by half) the share of oil and oil products net export in oil production increased over this period from 47.7% to 73.1%. In contrast to oil and oil products export the net gas export and its share in production do not exceed the level of 1990ies in recent years though the share of net gas export in its production is a bit higher than in the pre-reform period (29.3% in 2006 against 28% in 1990).
Table 22
Oil Products Net Export in 2002-2006
2002 2003 2004 2005 2006 (estimation)
Oil products net export, mln. tons 74.8 78.2 81.4 96.8 103.7
The share of oil products in net export of oil and oil products, as percentage 29.2 26.8 24.3 27.9 29.5
Source: Federal State Statistics Service, Federal Customs Service, authors' calculations.
The given data testifies that the export orientation of oil sector in comparison with the pre-reform period has reinforced. It should be, however, taken into account that it is connected not only with the increase of the absolute export volumes, but also with a considerable decrease in the domestic oil consumption as a result of Russian economy market transformation.
High level of the world prices for oil, which was observed in 2006, determined considerable incomes growth in the oil sector of the economy. In January-November 2006 total earnings from oil and main kinds of oil products export (car petrol, diesel oil and furnace fuel oil) reached USD 129.0 bln., which is a record level over the whole post-reform period (Table 23). For reference it can be noted that the minimum level of oil export earnings was observed in the environment of world oil prices fall in 1998, when the export profit was only USD 14 bln.
Table 23
Oil and Oil Products Export Earnings in 2000-2006, USD bln.
2006
2000 2001 2002 2003 2004 2005 (11 months)
Oil and main kinds of oil products export earnings 34.9 33.4 38.7 51.1 74.6 112.4 129.0
Source: calculated on the basis of the Federal State Statistics Service.
The share of power and energy commodities in Russian export in 2006 was equal to 65.2% (in 2004 this index was equal to 56.8%, in 2005 - 64.1%). The proportion of the crude oil in Russian export in 2006 was equal to 33.9% (in 2004 -
32.1%, in 2005 - 34.7%). The data on the structure of Russian export of energy suppliers are demonstrated in Table 24.
Table 24
Value and Share of Fuel and Power Commodities in 2005-2006
2005 2006
USD bln. %* USD bln. %*
Fuel and Power commodities, total 154.7 64.1 196.8 65.2
of which:
oil 83.8 34.7 102.3 33.9
natural gas 31.4 13.0 43.8 14.5
* as percentage to the total volume of Russian export Source: Federal State Statistics Service
The dynamics of separate indices of oil and gas sector development is shown in Fig. 9-12 (value indices are given in current prices).
Oil -Mazut
Source: calculated on the basis of Federal State Statistics Service data
Fig. 9. Average Export Prices for Oil and Furnace Fuel Oil (mazut) in 1996-2006, as USD per ton
80 75 + 70 65 60 55 -50 45 40 35 30 -25 -20 -15 10 5 f
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5500
4500
3500
2500
1500
500
■Mln. tons (left-hand axis)
•Mln. USD (right-hand scale)
0
Source: calculated on the basis of Federal State Statistics Service data Fig. 10. Oil and Oil Products Export in Natural and Monetary Terms in 1997-2006
Source: calculated on the basis of Federal State Statistics Service data
Fig. 11. Average Producers Prices for Oil (as USD per ton - left-hand scale) and Gas (as USD per thou. cu. m - right-hand scale) in Dollar Terms in 1996-2006
500
300 -
200
250
350 -
400 -
450 -
100
150
50
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Source: calculated on the basis of Federal State Statistics Service data
Fig. 12. Average Producers' Prices for Motor Petrol and Furnace Fuel Oil in Dollar
Terms in 1996-2006, as USD per ton
A number of factors provide favorable demand and price prerequisites for the further development of oil sector in Russia. The export opportunities of Russian oil to European countries will expand while the demand for oil in the countries of Western and Eastern Europe is increasing and oil production in the Northern Sea is decreasing. At the same time the growth of export demand for oil in the countries of Asian-Pacific Region, China in particular, as well as the predicted considerable aggravation of their dependence upon the import create favorable opportunities for Russia's access to the markets of this region's countries, first of all China, South Korea and Japan and for considerable growth of oil export in this direction. The export expansion requires the formation of the necessary transport infrastructure, especially for oil supplies to China, oil resources exploration in the East part of the country.
For oil resources development in East part of the country both direct state participation in the projects of transportation infrastructure formation for oil transportation and certain tax policy implementation which will stimulate the development of the new oil fields. Since the development of oil fields in Eastern parts of the country is connected with relatively higher production costs, tax policy should include certain measures to stimulate the investments.
New Elements of Taxation System of Oil and Gas Sector
In 2006 Russian taxation system of oil economy sector was supplemented by a number of new elements. The main constituents of the existing taxation system of oil sector are the severance tax and the export duty. Severance tax was introduced from the beginning of 2002 instead of three payments, which were in force at that time: royalty, raw materials and mineral base restoration tax and excise-duty for oil. From the beginning of 2005 severance basic tax rate was fixed at RUR 419 per 1 ton, and the coefficient that characterizes the oil world prices dynamics and is applied to the basic tax rate is calculated by a formula:
Cp = (P - 9) x R / 261,
where P is the average price level for oil grade Urals in USD per barrel over the taxation period;
R is the average over the taxation period value of USD to RUR rate exchange, which is fixed by the Central Bank of the Russian Federation (Table 25).
Table 25
Severance Tax Rate on Oil Production over 2002-2006
2002-2003 2004 2005-2006
Severance base rate, RUR per ton 340 347 419
Coefficient, characterizing the oil world
prices dynamics (Cp) (P-8)xR/252 (P-9)xR/261
Source: Federal Law No. 33-03 from 7 May 2004, Federal Law No. 126-03 from 8 August 2001.
As a result of correction factor implementation a real tax rate depends significantly on the level of world prices for oil. Thus, the average dollar exchange rate being 28.28 RUR/USD in 2005, Cp coefficient along with the growth of world prices increases from 0 when the price for oil grade Urals is below USD 9 per barrel to 5.5 when the oil price is USD 60 per barrel. The applied taxation rate increases correspondingly (Table 26).
Table 26
Severance Rate on Oil Production in the Taxation System of 2005-2006, as RUR per ton
Oil grade Urals price, as USD per barrel
20 30 40 50 60
Severance basic rate 419 419 419 419 419
Cp coefficient 1.1924 2.2764 3.3604 4.4444 5.5284
Real severance rate 500 954 1408 1862 2316
The severance tax introduction enabled to increase significantly the taxation system budget efficiency, to neutralize negative taxation effects of transfer price formation, to ensure the transparence of tax rates ranking, to adjust Russian taxation system to the world practice.
At the same time the existing tax system, which is based on the flat specific severance rate, is intended to be used chiefly under average conditions and does not take into consideration existing differences in oil production conditions, which are accounted for by field characteristics, its location, as well as the extent of its development. As a result, the economy of production at the fields with higher ex-
penses becomes worse, the selective choice of the most effective reserves and the early end of exhausted reserves development is stimulated, oil being lost in the subsoil areas. At the same time the beginning of the development of new oil fields becomes more complicated, especially in unreclaimed regions with undeveloped infrastructure. Higher capital, investment and transport expenses lead to the fact, that in the environment of the existing tax system the realization of many oil fields development projects in new regions does not provide necessary investment return.
The disadvantages of the severance flat rate account for the search of the ways to differentiate tax rate depending on the mining and geological, economic and geographic factors, which characterize real oil production conditions. As a result, a set of suggestions to differentiate severance tax rate was developed by various government bodies, institutes and individual experts.
The analysis of different conceptions of tax rate differentiation depending on the mining, geological, economic and geographic conditions of oil production demonstrates that in the conditions of present-day Russia the complication of administration, potential corruption, the opportunity to manipulate and underdeclare tax liabilities constrain the application of many approaches. The approaches, that can be potentially realized, are only severance differentiation by reserves exhaust and severance differentiation by location, zero rate application in the first years from the start of the development for new oil fields (tax vacations), as well as zero rate application in case of special oil production conditions (superviscous oil).
The existing taxation system was supplemented with a set of new element by the Federal Law No. 151-03 from 27 July 2006, "On amendments to chapter 26 part two of the Tax Code of the Russian Federation and invalidation of specific statues of the Russian Federation". The main amendments, which came into effect on 1 January 2007, are the following.
1. The severance zero rate if fixed for oil fields of East Siberian oil and gas province in the territory of the Republic of Sakha (Yakutia), Irkutsk oblast and the Krasnoyarsk krai till the achievement of 25 mln. tons of accumulated oil production volume on the subsoil area or for 10 years in case of the license to use subsoil with the aim of exploration and for 15 years in case of the license for simultaneous geological exploration and oil production from the moment of the state registration of the license.
The severance zero rate for the period before reaching of 25 mln. tons of accumulated oil production volume on the subsoil area or 10-year period, calculated from 1 January 2007, is applied to all oil fields of these region in the process of development, if the extent of exhaust does not exceed 0.05.
2. An extra coefficient Ce, which is applied to severance basic rate and characterizes the extent of oil reserves exhaust in the subsoil area, is introduced. Ce coefficient is applied if the extent of the subsoil area exhaust is in the range from 0.8 to 1 and is calculated by the following formula:
Ce = 3.8 - 3.5 -N/V,
where N is accumulated oil production in the subsoil area;
V is the initially extracted oil reserves of grades A, B, C1 and C2 at the subsoil
area.
Thus, for oil fields with the reserves exhaust extent of more than 80% a reducing coefficient, which value varies from 1 (corresponding to exhaust extent of 0.8) to 0.3 (corresponding to exhaust extent of 1), is applied to severance rate. If reserves exhaust rate at the subsoil area exceeds 1, Ce coefficient is assumed to be equal to 0.3.
3. Regulations that fix severance specific rate for oil production and the procedure of its application are included directly in the Tax Code of the Russian Federation (chapter 26). Before that the application of severance specific rate and Cp coefficient, which characterizes the world oil prices dynamics, was established by the Federal Laws No. 126-03 from 8 August 2001 and No. 33-03 from 7 May 2004, for the period up to 31 December 2006.
Thus, from 1 January 2007, the application of severance specific rate for oil production is fortified in the Tax Code, while the regulation on ad valorem rate of this tax, which was present in the Tax Code, is excluded.
Passed amendments envisage that severance preferences for new and exhausted oil fields can only be received when applying a direct method of oil production quantity control at the subsoil area. As applied to exhausted oil fields, this regulation limits substantially the sphere of tax remissions application, for not all exhausted oil fields (licensed lots) have got a direct control of oil production quantity.
Severance remission provision for new oil fields in East Siberia gas and oil province does not lead to the reduction of current budget income, for the development of these oil fields in the environment of the existing tax regulations will not proceed because of low investment return.
Adopted amendments are aimed at the stimulation of the development of exhausted and new oil fields. Severance differentiation with regard to reserves exhaust enables to prolong exhausted fields development periods and increase oil extraction extent. The extension of exhausted fields exploitation provides extra inpayments of severance (collected with the lowered rate) as well as other taxes (profit tax, export duties etc.). Severance rate reduction for new oil fields makes it possible to stimulate the development of East Siberia oil and gas province, create the basis for future income of the state budget.
The Directions of Taxation System Improvement of the Oil Sector
Possible directions to improve the taxation system of the oil sector are the changes in the criteria of severance vacations provision, application of regional step-down coefficient to the severance rate for the whole period of the development, transfer to ad valorem severance rate, implementation of some kind of net income taxation.
1. Severance Tax Vacations
An important element of the adopted amendments is the establishment of two criteria for privileged severance rate provision for new oil fields in the East Siberian
oil and gas province: the volume of oil production of 25 mln. tons and the period of 10-15 years depending on the kind of license for the subsoil area exploitation.
If just a volume of production (25 mln. tons) is established as a criteria for tax rates allowances, then the privilege can prolong for quite a long time up to the whole period of exploitation for small-scale oil fields. At the same time this could stimulate the development of small-scale oil fields, whose development, as a rule, is connected with higher capital and exploitation costs as calculated per ton of oil produced (higher costs in this case will be compensated by a longer period of privilege implementation).
If the period of zero rate application (10-15 years) is the only established criteria, this will create strong stimuli for oil production acceleration in the first years of development which will lead to the decrease in the level of final oil extraction. The establishment of the upper limit for accumulated oil production (25 mln. tons), at which the implementation of tax privilege expires, does not create incentives for acceleration of oil production at quite big oil fields.
At the same time the presence of such criteria at small-scale oil fields, oil production at which at normal development rates will be considerably lower than 25 mln. tons, creates strong stimuli for their development with the aim to exempt from taxes the biggest possible amount of the oil produced.
The results of estimations for investment profitability in oil production in East Siberia with the different length of the tax vacations, which were carried out in IET with the application of imitation financial model for a typical oil field developing, are summarized in Table 27. These calculations take into account the stage of the oil field development, i.e. the oil fields that are ready for development are singled out (lines 2 and 3), which can use severance privilege straight from 1 January 2007, and oil fields, which are not ready for the development, which require some time for additional exploration and making first investments to get a state license for subsoil area exploitation (lines 4 and 5). The time for additional exploration and first investments implementation is assumed to be 2 years from the moment of license registering. Thus, for an oil field, which is not ready for the development, tax vacations of 10 years from the moment of license registering correspond to 8 years from the moment of oil production, 7-year-long vacations correspond for the period of 5 years from the moment of oil production beginning.
Calculations that were carried out testify quite low profitability of the investment in East Siberia oil fields in the environment of the state-of-the-art taxation system (line 1 Table 27). At the same time the established criteria for severance allowances provision in the world oil prices range9 are regarded as excessive (the results of the corresponding calculations are given in lines 2 and 4 of Table 27). Ac-
9 Most of the recent forecasts of the leading foreign organizations on world oil prices for middle-term and long-term prospects are in the range of USD 40-57.5 per barrel. Thus, in accordance with the basic version of the last long-term forecast by the USA Ministry of Energy, the average figure for the world price for oil in real terms is USD 57.5 per barrel in 2010, USD 52 per barrel in 2020. Long-term forecast for the world oil prices by the International Energy Agency of Organization for Economic Cooperation and Development is equal to USD 55 per barrel (in prices of 2005). 322
cepTable investment profitability (the price of oil being USD 40 per barrel and higher the internal profitability norm exceeds 20%) is secured by considerably shorter period of tax vacations: 5 years for oil fields, which are ready for the development, and 7 years for the oil fields, not prepared for the development (lines 3 and 5 of Table 27). Quite high profitability is secured also by the extension of severance privilege for the first 15 mln. tons of oil produced (line 6).
Table 27
Profitability of Investments in a Typical Oil Field in East Siberia Profitability under Different Period of Tax Vacations, as percentage
Oil grade Urals price, ; as USD per barrel
30 35 40 45 50 55 60
I.Severance: existing taxation system 7.2 10.1 12.7 15.2 1 7.5 1 9.9 22.2
2. Severance: 10-year tax
vacations for an oil field ready for the develop- 16.4 21.3 26.0 30.6 35.1 39.6 44.1
ment
3. Severance: 5-year tax
vacations for an oil field ready for the develop- 12.1 16.5 20.8 25.1 29.5 33.9 38.4
ment
4. Severance: 10-year tax
vacations for an oil field which is not ready for the 15.2 20.0 24.7 29.3 34.0 38.5 43.1
development
5. Severance: 7-year tax
vacations for an oil field not ready for the devel- 12.1 16.5 20.8 25.1 29.5 33.9 38.4
opment
6. Severance: tax vaca-
tions up to production of 13.3 17.9 22.4 27.0 31.5 36.1 40.7
15 mln. barrels
Source: IET estimations
The analysis of adopted amendments to Chapter 26 of the Tax Code of the Russian Federation, which deals with severance zero rate application at new oil fields of East Siberia oil and gas province, allows drawing the following conclusions:
1. The length of tax vacations should be differentiated not only by kind of the license for subsoil area exploitation, but also by the extent of oil field development: for the oil fields, which are ready for the development or are at an early stage of exploitation, tax vacations should be of shorter length than for the oil fields, which are not ready for the development, as in the former case no time is needed to conduct additional exploration work (or such exploration can be carried out at the same time as oil production) or for the implementation of primary investments.
2. The established length of the tax vacations for the level of the world prices that is forecasted is excessive and can be reduced. According to out estimations, tax vacations for the oil fields of the East Siberia oil and gas province, which are not ready for the development the tax vacations can be reduced from 10 to 7 years, and for oil fields, which are ready for the development or are at the initial exploitation stage - from 10 to 5 years.
3. It would be preferable to establish the application of the scheme with one criterion for severance privilege provision - the amount of the oil produced. And the volume of 25 mln. tons is considered excessive at that. With such a limit the investment profitability seems excessively high, and at the oil fields of middle-scale 4550% of the oil produced is actually exempt from the severance. As the calculations demonstrate, necessary investment profitability is secured by the limit of 15 mln. tons.
The approach that is suggested has the following advantages: first, such a criterion (the volume of accumulated production) does not give incentives for oil production acceleration, as severance privilege provision is not limited by a certain period;
second, such a criterion can be uniform, as it can be applied to all kinds of the licenses (both for the licenses for exploration and production and the licenses for geological exploration (search and exploration) and production), for privilege receipt in this case does not depend on the time of the start of production;
third, such a criteria can be applied to the oil fields at different stages of the development (both for the oil fields that are ready for the development or are at the initial stage of exploitation and for oil fields that are not ready for the development).
It should be, however, taken into account that if the only criterion used is the index of accumulated oil production all the oil produced at the small-scale oil fields can be subjected to severance privilege. However, the development of such oil fields, which otherwise can remain undeveloped, is meanwhile stimulated.
2. The Application of the Territorial Step-down Coefficient to Severance Rate for the Whole Period of the Development
The introduction of a step-down coefficient to severance rate, which is applied at the development of new oil fields in some regions (for instance, East Siberia), for the whole period of the development can be an alternative for severance tax vacations.
The value of such a coefficient can be defined by calculation from the requirement of the necessary investment profitability during the development of the oil fields in the corresponding territory. For instance, the value of such a coefficient for East Siberia can comprise 0.5. Such a value of the coefficient secures accepTable profitability of the investments in oil production (Table 28).
Table 28
Investment in a Typical Oil Field in East Siberia Profitability under the Application of a Step-down Coefficient to Severance Rate, as percentage
Oil grade Urals price, as USD per barrel
30 35 40 45 50 55 60
1. Severance: existing taxation system 7.2 10.1 12.7 15.2 17.5 1 9.9 22.2
2. Severance: step-down coefficient of 0.5 13.0 16.6 20.1 23.6 26.9 30.3 33.6
Source: IET calculations
From our point of view such an approach has several important advantages over the tax vacations scheme:
first, according to this approach, severance is paid from the very start of the production;
second, this approach does not provide incentives for oil production acceleration in the first years of the development. Thus, it does not have distortion effect on the subsoil area managers and production profile;
third, this approach takes into account higher costs for production and sale over the whole period of the development (for instance, in regard to east Siberia higher oil transportation costs take place over the whole period of oil fields exploitation);
fourth, such a coefficient can be uniform, as it is applicable to all kinds of the licenses (both for the licenses for exploration and production and the licenses for geological exploration (search and exploration) and production), and for the oil fields at the different stage of development (both for the oil fields that are ready for the development or are at the initial stage of exploitation and for oil fields that are not ready for the development);
fifth, such an approach provides investor with a lower profit the price for oil growing as compared with the scheme of tax vacations (Tables 27, 28).
3. Transfer for Ad Valorem Severance Rate
Ad valorem severance rate is a more flexible tax tool as compared with the specific tax rate. The tax basis for ad valorem severance rate application is oil price at the production point, which allows to take in account the difference in oil sales price, which is accounted for by its quality and supplies direction as well as the differences in transportation costs of the oil producers due to their geographic location.
Application of ad valorem fixed rate will lead to the results different from the results obtained with the application of the existing formula for specific severance rate calculation. To preserve the mechanism of tax load progressive dependence on the oil price it is necessary to establish progressive dependence of ad valorem severance rate tax on the Urals price. In this case, on the one hand, tax load in relative terms will grow along with oil price, and, on the other hand, the advantages of ad valorem rate will be in effect. For instance, the tax sum will take into account the real price of sales, differences in costs for transportation and in oil quality.
Different approaches can be used to secure progressive ad valorem rate. First, the progressive dependence of the tax rate on the level of world prices for oil can be determined in the form of a Table, similarly to the existing routine of oil export duty determination. Second, in order to do this a certain formula can be used, which determines the progressive dependence of the tax rate from the oil price.
Not only does this approach allows securing the progressive dependence of the severance rate on the oil price, but also to use the advantages of ad valorem rate.
The application of severance ad valorem rate assumes the use of market prices for oil to calculate taxes, the application of ad valorem rate being otherwise
inefficient, as this creates opportunities for tax payers to underdeclare their tax liabilities by selling the oil produced at too low prices. The determination of market prices for oil is, however, connected with a number of serious problems, which are accounted for by the special features of the Russian gas and oil sector and the absence of developed market infrastructure. Russian market for crude oil is characterized by high concentration of oil production and processing within the framework of vertically-integrated oil companies (VIOC), whose share in oil production and processing is more than 90% in the country, by absence of transparence and limited number of participators, most of whom belong to or are connected with VIOC. Transportation limitations make oil market even more incompetitive. As a result, transfer (intracorporative) prices, established by VIOC management, prevail at the internal Russian oil market.
At the same time, before the formation of the developed crude oil market, in our opinion, directive prices (prices established by the government), calculated market prices for oil, determined by a special method on the basis of world oil prices and calculated domestic oil prices, can be used in order to calculate taxes. Calculated domestic oil price for taxation aims is reasonable to determine on the basis of retail trade prices for oil products sales at the domestic market. In contrast to the crude oil market the domestic oil products market is well developed, characterized by a big number of participants and the number of deals, higher transparence, and competitiveness.
4. Net Income Taxation
The taxation of the net income determined in some way is the most perfect form for oil production taxation, applied in a number of developed countries, for instance, in Norway, the Great Britain, and the USA. Such an approach secures really differentiated taxation, since when it is applied not only the gross income, obtained by the producer is taken into account but also costs for oil production at a particular oil field. As a result, no economic obstacles for oil fields development, which are characterized by higher development costs (capital, exploitation or transportation), arise.
There are different forms of such an approach fulfillment. For example, a better taxation system can be created, the basis for severance ad valorem tax rate application being not the value of oil produced but the net income. This way is used in some countries, for instance the USA, to calculate royalty. In this case net income is calculated as the value of oil per wellhead excluding exploitation costs for its extraction (lifting). The value of oil per wellhead is determined by reverse calculation, by the calculation of the net price on the basis of some basic price or independent deals price established by the market.
Ad valorem tax, which is based on oil price per wellhead excluding certain exploitation expenses, allows taking the real conditions of oil production into account, since all mining and geologic, economic and geographic oil field's characteristics are finally reflected in the income, produced by its development. This system of taxation considers not only obtained incomes but also expenses for oil production at a particular oil field, thus securing differentiated approach depending on the real
conditions of oil production (higher expenses mean lower amount of net profit and consequently tax value).
At the same time effective implementation of such an approach in practice in the situation existing in modern Russia is quite difficult since it requires the solution of a number of administration, methodological and technological problems, including the problem of oil market prices determination and application in order to organize registration and control of the incomes and expenses during oil production regarding oil fields (licensed areas).
Application of the tax for additional income from hydrocarbons production (TAI) is another possible form of taxation. TAI taxation base is defined as the value of produced and sold hydrocarbons, decreased by the amount of production output and sales (excluding amortization) costs, production investments and uncompensated expenses of the previous taxation period. Tax rate is determined by the value of P-factor, calculated as a proportion of accumulated from hydrocarbons production and sales income to accumulated capital and exploitation expenses for their production.
In theory, TAI has a number of advantages as compared with the severance tax. In contrast to the severance tax TAI is based on the indices of additional income and P-factor, which reflect real economy efficiency of a particular oil field development. TAI directly takes into account mining and geological, economic and geographic conditions for hydrocarbons production, as it is directly related to the indices of oil field profitability - additional income and P-factor. In case of highly efficient project TAI implementation secures progressive skimming of resource rent for the benefit of the state, the conditions of low efficient project are improving at the same time. An important feature of TAI is the fact that its application intensifies investments in new oil fields development, as the tax is not levied before the total payback of the investments.
At the same time when TAI is implemented it is reasonable to sustain severance tax as a minimum tax, which provides the government with a certain level of tax proceeds from the project fulfillment, first of all, at the initial stages of development and in the periods of low prices. Severance tax, however, should be levied at quite low rates (for example, coefficient being equal to 0.3-0.5) with the implementation of TAI.
It should be, however, noted that the taxation scheme, which is based on TAI is considerably more complicated both in regard to making tax calculations and practical control for their reliability. This creates opportunities for the underdeclaration of tax liabilities by producer, the consequence being the relative decrease in the state budget incomes.
TAI system being the taxation system which is based on the determination of additional income and P-factor, potentially can stimulate the investor to overestimate costs during project fulfillment. The increase of the costs means the decrease in the income amount levied with tax, which leads to the decrease in investor's tax liabilities, P-factor also decreases, reducing correspondingly tax rate. The qualifi-
cation and objectiveness (absence of corruption) of the government control for the project fulfillment costs parameters gains big importance.
Practical application of TAI can be effective only on the condition that the problem of oil market prices for determination and use in order to calculate taxes is solved, otherwise TAI application loses economic base.
Thus, as the implementation of the considered approaches is not possible without creation of particular prerequisites (for instance without solution of the problem for oil market prices for determination and use in order to calculate taxes), the transfer to some net income taxation systems can be fulfilled only in future.
5. Agreements on the Share of Production
The procedure of production share agreement (PSA) enables to secure sTable economic and legislation regime for the investor over the whole period of investment project fulfillment, as well as individual approach for the projects of particular minerals fields development. A considerable part of taxation parameters of PSA, and first of all the parameters of the very sector, are the results of talks between the government and the investment companies. The creation of the scale of production share depending on the field development profitability, which is estimated by the values of the internal profit norm or by R-factor, allows imparting flexibility to the system regarding the natural rent impressments and creating accepTable conditions for both high-profiTable and low-profiTable fields development.
PSA system in Russia has not been development to any noticeable extent. At present there are only 3 PSA, which were concluded in the middle of 1990ies before the entry in effect of the Federal Law "On agreements on share of production" (2 projects are being fulfilled at the Sakhalin island shelf, 1 project - in Nenets Autonomous Okrug ).
Limited development of PSA system in Russia is, in our opinion, accounted for by certain drawbacks, which are characteristic for this system. The drawbacks of PSA system are connected first of all with individualization of conditions for particular projects, which can lead to receipt of unjustified favorable conditions for the implementation of the project in the environment of government officials corruption and insufficient qualification, the consequence of which being the loss of a certain amount of minerals fields development incomes for the government.
PSA system potentially can stimulate the investor to overestimate costs during project fulfillment. The increase of the costs means the decrease in the profiTable production and income amount levied with tax, which leads to the decrease in investor's tax liabilities for expropriated for the benefit of the state profiTable production and income tax. Besides, the value of the internal profitability norm decreases and consequently the share of the government in profiTable production decreases correspondingly.
Factors that are beyond the limits of actual tax legislation are of great importance in case of PSA system regime application. What is at issue is the corruption and the level of qualification of the government officials, who take part both in the negotiation process on PSA conclusion and in process of the regulation of given
projects fulfillment. Corruption and insufficient level of qualification can significantly decrease the efficiency of PSA regime application regarding the receipt of adequate tax proceeds by the government.
Thereupon the implementation of PSA regime should have, in our opinion, extremely limited nature. The application of such a regime at newly licensed fields is accepTable only after negative results of the auction for the granting of subsoil area exploitation on other than production share conditions.
Making any decisions on tax stimulation of the investments in new fields' development should correspond to the real possibilities of the government for administration of implemented taxes. In the present situation Russia it is the application of territory step-down coefficient for oil production over the whole period of the field development that appears to be the best approach. Electric Power Industry
Since 1999 with the overcome for crisis phenomena and reanimation of economic activity the trend for electric power production growth and demand expansion has been retrieving. Over 2000-2006 the increase in electricity production was equal to 16.8%, the volumes of GDP increasing by 58.0% and industrial production -by 49.3% {Table 29).
Table 29
The Dynamics of Electric Power, Industry, GDP and Investments in Fixed Assets over 1991-2006 as percentage to the previous year
Electric power production GDP Industrial production Investments in fixed assets
1991 98.7 95 92 85
1992 94.4 85.5 82 60
1993 94.9 91.3 86 88
1994 91.6 87.3 79 76
1995 98.2 95.9 96.7 89.9
1996 98.5 96.4 95.5 81.9
1997 98.5 101.4 102 95.0
1998 99.2 94.7 94.8 88.0
1999 102.3 106.4 111 105.3
2000 103.7 110 111.9 117.4
2001 101.5 105.1 104.9 110.0
2002 100.0 104.7 103.7 102.8
2003 102.8 107.3 107 112.5
2004 101.7 107.2 106.1 110.9
2005 102.1 106.4 104 110.7
2006* 104.0 106.7 103.9 113.5
* Refined estimations by the Ministry for Economic Development. Source: Federal State Statistics Service.
The change in the level of electricity consumption in the national economy in post-crisis period is accounted for by the dynamic expansion of domestic market demand under the influence of simultaneous growth in both goods and services production. The share of service production sector was 27.9% of the total volume of electricity consumption in the economy against 27.0% in 1999 and 22.2% in
1990. Besides, growing consumers' demand for electricity due to the increase in household appliances demand and intensive construction of modern housing also had a considerable influence on the dynamics of electricity consumption in service sector.
Formation of new segments of services market - for instance, dynamic development of modern communication systems, data-processing service, financial, credit and insurance organizations - was accompanied by fundamental changes in material and technological basis, work creation and the increase in labor efficiency. The change in the technologies of service rendering on the basis of the increase in the level of electricity application in the labor of those employed in the service sector was the factor that determined the increase in effectiveness of the potential created over the years of reforms utilization. According to the data of electricity balance electricity consumption in service sector over 2000-2005 increased by 16.8%. The dynamics of electricity demand was considerably influenced by the change in market situation (Table 30).
Table 30
Electricity Balance of the Russian Federation, kWatt-hour bin.
including
Produc- Received _ . - _ .. .
fmm Consumed - other Supplied
total abroad total industry construction agriculture transport branches of industry line losses abroad
1990 1082.2 35 1073.8 625.9 18.8 96.4 103.8 144.7 84.2 43.4
1991 1068.2 35.1 1056.1 605.2 16.8 103.4 96.7 150.1 83.9 47.2
1992 1008.5 27.7 992.2 554.6 16.3 102.9 86.7 147.5 84.1 44
1993 956.6 24.7 937.9 512.8 15.1 103.8 76.7 148.9 80.8 43.4
1994 875.9 22.2 856.4 447 13.4 97.7 68.4 150.9 79 41.7
1995 860 18.4 840.4 440.2 12.4 88.6 65.2 150.5 83.5 38
1996 847.2 12.3 827.7 424.9 11.2 85.9 64.9 156.3 84.5 31.8
1997 834.1 7.1 814.4 421.4 1 0.3 78.1 63.5 156.7 84.4 26.8
1998 827.2 8.3 809.1 412 9.1 75 60 159.8 93.2 26.4
1999 846.2 8.4 832.1 430.3 9 72 60.6 164 96.2 22.5
2000 877.8 8.8 863.7 455.9 10 68.1 60.9 167.2 101.6 22.9
2001 891.3 9.8 875.3 462.8 9.9 63 63.1 171.1 105.5 25.7
2002 891.3 5.2 878.4 462.5 9.4 60.1 76.8 171 107.6 18.1
2003 916.4 8.2 902.9 479 9.3 57.8 75.2 171.1 110.5 21.6
2004 932 12.2 924.3 490.7 9.5 56.4 80.3 174.8 112.6 1 9.8
2005 953 10.1 941.3 497.0 9.7 55.0 83.2 181.7 114.5 22.5
2006* 991
* Preliminary data.
Source: Federal State Statistics Service, Ministry for the Economic Development.
In 2005 the supply of electricity by RAO "UES of Russia" to its consumers increased by 2.4% in comparison with 2004 and heat energy supply decreased by 0.8%. The proportion of the main groups of the consumers did not change significantly in the structure of profiTable sales of electricity in 2005. In the structure of profiTable heat energy supplies the share of industrial consumers decreased by 4%, the share of housing and communal facilities increased by 6%. Industrial sec-
tor, whose share in 2005 was equal to 48.6% of the total amount of sold electric energy, remained the main consumer at the retail market. The share of energy consumption by the bodies of housing and communal facilities was equal to 12.5%, transport and communication organizations - 11%, population - 7.6%. In the structure of heat energy consumption it is housing and communal service organizations that have the biggest proportion of 47.6%, industrial consumers having the share of 25.4% {Table 31).
Table 31
The Structure of Electric and Heat Energy Sales to the Main Groups of Consumers by RAO "UES of Russia" in 2005
Electric energy sales Heat energy sales
kWt-hour bln. percentage Gcal mln. percentage
Total sales 606.4 100.0 411.1 100.0
Industry 294.7 48.6 104.5 25.4
Agriculture 14.0 2.3 3.5 0.9
And communication 66.5 11.0 4.9 1.2
Construction 6.3 1.0 3.9 1.0
Housing and communal facilities 75.6 12.5 195.9 47.6
Population 46.2 7.6 31.2 7.6
Other fields 102.9 17.0 67.2 16.3
Source: RAO "UES of Russia"
Over 2000-2005 the total demand for electricity in the sector, which produces goods, increased by 10.4%, including in industry - by 16.1%. In Russia on the whole the share of the industry in electricity, consumed in the economy, was equal to 53.1% against 52.8% in 2000 and 58.7% in 1990.
In the structure of electricity consumption by the branches of industry the share of metallurgical enterprises is 36.6% and the share of fuel and energy complex - 34.0%. Correspondingly the dynamics and efficiency of electricity use in these two complexes have a prevailing impact on the level of electric consumption of the industry as a whole. The changes in the structure of electricity consumption by branches of industry are accounted for, on the one hand, by the increase in the share of electric- and power-consuming productions and, on the other hand, low efficiency of resources utilization and technical and technological lag of the production. The dynamics of the demand for electricity structure is considerably influenced by the changes in market structure. Over 2002-2004 the contribution of oil and gas sector in the increase of the demand for electric power in the industry was equal to approximately 45%, of non-ferrous metallurgy - 21%, of ferrous metallurgy - 17%, of chemistry and wood complex and foodstuffs production - of 5% each, construction materials industry - about 6%. In the environment of the existing level of production capacities utilization the demand for electric energy decreased by 3.9% over 2000-2004.
In 2005-2006 the sustention of the trend for the increase in the demand for electric energy in the industry was maintained by the anticipating growth rates of coke and oil products output, metallurgical production and finished metal goods production, some other productions, connected with minerals and raw materials processing. Taking into account that the share of export production of the produc-
tion output in 2006 in the oil production reached 57%, in rolled metals production -39.7%, it can be assumed that it is the external market situation and the expansion of the demand for the traditional Russian export goods that had the crucial influence on the demand for the electricity dynamics.
In 2005 turbine electric power plants with the capacity of 2.2 mln. kWt were built, which exceeded the amount of 2004 implementations by more than two times. Obviously, this also influenced the sales market and stimulated consumers to connect to the centralized sources of the energy supply (Table 32).
Table 32
Putting into Operation of Production Capacities throughout the Electric Power Industry due to New Construction, Expansion, Reconstruction
and Technical Re-Equipment
1995 2000 2001 2002 2003 2004 2005
Turbine electric power plants, thou. kWt 370.2 562.6 1947.3 912.7 1990.8 933.8 2200
Transmission facilities of the voltage of 35 kV and more, km 4902.1 2680.2 2206.1 2488.3 2820.1 2916.2 No data
Transmission facilities for agriculture electrification of the voltage of 6-20 kV and more, km 6943.0 3122.9 3267.0 3290.7 3808.9 3596.1 No data
Transmission facilities for agriculture electrification of the voltage of 0.4 kV and more, km 5812.0 2776.9 3207.2 3534.7 4268.2 4439.0 No data
Transformation step-down substations of the voltage of 35 kV and more, thou. kVA 4320.8 3356.7 2832.9 2403.3 2095.9 3858.1 2800
Steam boilers at heat and power plants, tons per hour 850.-0 1494.8 935.0 1351.0 904.0 605.5 620.3
Heat backbone networks, km 80.6 61.9 61.8 88.7 106.2 79.6 No data
Water-heating boilers at heat and power plants, Gcal per hour 860.0 1372.7 210.0 581.5 440.8 629.8 No data
Source: Federal State Statistics Service.
In 2005 RAO "UES of Russia" put into operation 20 energy units of thet otal capacity of 1903.9MWt, commissioned 15 units of the total capacity of 1279.4 MWt at heat power plants and 5 units at hydroelectric power plants of 624.5 MWt (Table 33).
Table 33
Commissioning of Production Facilities by РАО «ЕЭС России»
2003 2004 2005
Turbin facilities, MWt 2 087.9 980.1 1 903.9
Steam boiler, separately put into operation, ton per hour 800.0 160.0 420.0
Water-heating boiler, Gcal per hour 15.1 121.0 88.4
Source: РАО «ЕЭС России».
So, it was actually the expanded potential of electric energy in 2006 that defined the ratio of development rates of the main kinds of the economic activities and the place of the electric energy industry in Russian economy. In 2006 for the first time over the years of the post-reform development the anticipating growth rates of electric energy production were observed as compared with the dynamics of the industrial growth (Fig. 13).
Fig.13. The Change in the GDP, Industrial Production and Electric Energy Production Growth Rates, as percentage to the corresponding quarter
of the previous year
However the overcoming of the electricity shortage, especially in the aspect of territory, requires both the increase in investment scales in generation, as well as system solution of the problem of electricity saving technologies implementation.
The extent of the equipment tear and wear being high and the technologies being what they are the increase in specific norms of fuel consumption for energy production and in the electric energy consumption for own needs are observed. Long-term tendency for the decrease in the amount of the investments led to the change in qualitative and quantitative characteristics of the fixed assets in the branch. As compared with the pre-reform level the amount of the investments in the electric energy industry decreased by threefold, the volume of new and substituting equipment commissioning, for instance for generating capacities, - by 3 times, for the objects of electricity network - by nearly 5 times. The coefficient of the fixed assets renewals in the electric energy industry decreased from 4.0% in 1990 to 1.3% in 2004. The process of generative facilities physical ageing is accumulating. By 2004 the capacity resource had been worked out at nearly 17% of the electric power plants in Russia. A significant amount of outdated equipment with the efficiency coefficient below 30% is still in operation. About jof the installed
equipment of the electric power substations reached its wearlife limit. A significant part of the equipment in electric energy industry cannot be involved in the production due to its physical and moral depreciation. A high level of fixed assets depreciation in the electric power industry is one of the causes of low capacity load as well as a factor that restricts the opportunities for further production growth. Due to the absence of the opportunity for timely substitution of the fixed assets elements the periods for inefficient machinery and equipment utilization prolonged. In many cases fixed assets are liquidated only when it is nearly totally impossible to use them further due to their physical wear and tear. Because of the ageing of fixed assets the probability of their destruction as a result of anthropogenic catastrophes and natural disasters increases. Fixed assets depreciation increased up to 57.8% in 2004 in comparison with 40.6% in 1990. The combination of the high level of depreciation and capacity load gives evidence of critical loads for the facilities as well as for growing losses during electricity production and transmittance through the networks of common use.
In the situation when the trend for the demand for electricity growth has distinctly outlined, low norms of fixed assets renewal and existing dynamics of the annual capacities commissioning create the danger for the appearance of shortage and became straightforward limitations for the country's economy growth rates.
The dynamics of the fixed assets reproduction in the branch of industry depend on the state of the energy machine-building and energy construction complex. However insufficient volumes and irrational structure of machinery and equipment production does not allow solving the problem of normalization of the process of fixed assets reproduction. Outdated material and technical base of energy and electric technologies machine-building as well as low investment activity became the factors that limit the restoration of the steady trend for economy development and maintenance of high investment demand.
In the environment of the economy growth it became evident that investment management does not correlate with the dynamic processes of economy restructuring. The level and dynamics of the investments in fixed assets are closely connected with the solution of the practical problems of stimulating energy savings and management of the demand for the energy. In order to do this it is necessary to pursue purposeful energy saving policy, which is based on the integral system of economic, legal and administration measures.
The policy of energy saving includes the problems of price and tariff regulation, the change of the methods of amortization calculation for energy-saving equipment, reconsideration of the existing standards, rules and regulations towards reinforcement of the requirements for energy-saving; establishment of the standards for energy consumption and energy losses and obligatory certification of energy consuming appliances and equipment of mass use. In many countries the programs of demand for electricity management are widespread. Such programs assume direct participation of energy companies in the energy-saving stimulation and energy-consumption regimes regulation.
3.2. The situation in industry
The section is based on the data of surveys among the directors of industrial enterprises, which have been conducted by the IET according to the European harmonized methodology on a monthly basis since September 1992 and encompass the whole territory of the Russian Federation. The panel's size is approximately 1100 enterprises, where work more than 15 % of those employed in industry. The panel has a shift towards big enterprises by each of the specified subbranches of the national economy. The return of questionnaires is 65 - 70 %.
These research surveys among the directors of enterprises represent a quick method for collecting data concerning the state of affairs at their enterprises and the expected (or planned) changes in the main indices of their performance. It is a relatively new instrument when applied to economic analysis. The first such survey was conducted by the Ifo Institute for Economic Research (Munich, Germany) in 1949. Soon, this method began to be applied in the UK, France and Italy. From 1962, the EU has been working at harmonizing (making compatible) the results of surveys being conducted in different countries of that continent.
The questionnaire used in a research survey contains a limited number of questions (no more than 15 - 20). These questions are of a qualitative, not quantitative, character. The simple structure of questions and answers makes it possible for the respondents to fill in the questionnaires in a short period of time and without consulting any other staff or documentation. It is of paramount importance that the respondent at each enterprise should be a CEO of the highest level, who has full vision of the enterprise's state of affairs and directly participates in its management. In 2006, 31 % of the filled-in questionnaires were returned by the directors of enterprises, 34 % - by deputy directors, and 24 % - from heads of economic subdivisions.
In the analysis of the results of surveys, a specific derivative index is applied -the so-called balance. Balances are computed as the difference between the percentage of those who have replied "is growing" ( or "is above the norm") and the percentage of those who have replied "is decreasing" ( or "is below the norm"). The result makes it possible to represent the distribution of answers to each question by simple digits with signs "+" or "-".
Balance is interpreted as the first derivative, or process speed. If the balance of answers to the question concerning the expected change in prices has the sign "+", this means that the average prices in the nearest future period are going to grow (there is a prevalence of enterprises who have reported a forecasted growth of their prices). Growth of balance in a month from +10 % to + 17% demonstrates that the average prices in industry are going to display a more intensive growth, because the prevalence of enterprises who forecast growth has also increased). Negative balance implies that average prices will go down (a greater number of enterprises are going to lower their prices). A change in balance from -5 % to -12 % is interpreted as growth in intensity of price decline.
3.2.1. The dynamics of demand for industrial products in 2006
The dynamics of effective demand in 2006 were more than favorable for Russian industry. The demand for domestic products was going throughout the whole year, with good intensity, and in nearly all the branches.
In late 2005, effective demand for industrial products began to grow, and this growth was sufficiently intensive. Russian industry had not been demonstrating such good results at a year's end for a long time. Higher rates of growth in sales (before they were cleared of seasonality) in December were registered in 1999. After it had been cleared of seasonality, the balance of changes in this basic index increased at once by 6 p. p and became equal to +9 %. No such intensive sales growth had been observed during the previous 9 months of 2005. In January 2006, growth in effective demand for industrial products continued. Of course, the initial data demonstrated an absolute decrease in sales, but the intensity of decrease turned out to be less strong than in January 2005 or 2004. After clearance of seasonality, the balance became positive: demand was still growing, and even more intensively than in November - December 2005. Growth in demand for industrial products continued in February, despite the pessimism of the official statistics and the spell of extreme freezing weather. In March, the intensity of its changes (before clearance of seasonality) was + 20 p. p., which is the second high for the whole period of post-default growth (Fig. 14). A more intensive growth in sales after 1998 was observed only in March 2005 ( + 25 p. p.). An increasing rate of growth in sales continued in April.
Fig. 14. Monthly dynamics of demand in 2002 - 2006 (balance = % growth - % decrease)
Source: Hereinafter in this section all the figures and tables have been prepared on the basis of the results of surveys.
The balance of changes in this index reached its 12-month high and became + 12 p. p. (cleared of seasonality). The elimination of the accidental component yielded an even more impressive result, such as had not been observed since late 2000.
In May 2006, the dynamics of effective demand avoided its traditional dramatic fall. The rates of sales growth lowered only slightly (by initial data) by comparison with April and displayed the best values against the corresponding months of all the years of follow-up (since 1993). When cleared of seasonality, the results of May 2006 demonstrated an absolute high: no growth in sales of this intensity has ever been seen during all the 14 years of surveying.
In June, growth in effective demand demonstrated yet another record. By all the indices (initial, cleared of seasonality and accidental fluctuations), the intensity of sales growth became higher than all the previous peak values and reached yet another absolute high (Fig. 14, 15). At the branch level, sales continued to decline
only in the light industry. %
30 15 0 -15 -30 -45 -60 -75
1/1993 1/1995 1/1997 1/1999 1/2001 1/2003 1/2005 1/2007
Fig. 15. Changes of effective demand, cleared of seasonality (balance = % growth - % decrease)
However, in July the intensity of growth in demand became lower. The initial data (before cleared of seasonality and accidental fluctuations) demonstrated a reduction in the balance of sales changes (or growth rate) from 28 to 17 p. p. But the latter value in terms of the year 2006 is not disastrous - it is closer to the average rate of growth in sales during the 6 preceding months. As for the June index, it was found to be an absolute high for the whole period of follow-up. After cleared of seasonality, the fall in demand growth in July became equal to only 5 p. p. (from 21
to 16). After the elimination of accidental fluctuations, demand growth once again demonstrated the previous record values of sales growth rate.
The data on the dynamics of demand in August demonstrated a further slowdown in the growth of sales of industrial products. The growth rate of this index (balance of changes) became lower by further 5 p. p. after it had been cleared of seasonality. During July-August, the intensity of growth in demand "lost" a total of 9 p. p. The balance was still far from being negative (that is, an absolute fall in sales), but the obvious "departure" from the high values seen in May and June was disappointing, for the time being - only for the government and analysts. As for industry proper, the satisfaction with sales remains there at the level of 56 %, which means that the majority of Russian enterprises were, nevertheless, satisfied with their product sales volumes.
The intensity of sales growth in September was no more declining, and instead demonstrated growth, as estimated by enterprises in industry on the whole, by 3 p. p., mainly due to growth in the woodwork and timber industry and in the food industry. This index, however, did not change in machine-building.
In October, the intensity of demand growth did not display any fundamental changes. In industry as a whole, the rates of sales growth (when cleared of seasonality) remained at the previous month's level. A slowdown in demand growth (sometimes even down to an absolute low) was registered only at the branch level: in the production of garments, timber and woodwork, cellulose, paper and cardboard, in metallurgy, and in electrical machine-building and electrical equipment.
In November, the growth rates of sales of industrial products, as estimated by enterprises, remained at the level of July - October. When cleared of seasonality, the intensity of demand growth in industry as a whole during that period was between 12 and 15 b. p. The November value of this index was 14 b p. Sales growth was registered in all the branches of industry, with the exception of the production of textiles, garments, electrical equipment and motor-car industry. The highest rates of demand growth (when cleared of seasonality) were observed in the production of cellulose, paper, timber, machines and equipment, radio and communications equipment, and means of transportation.
As demonstrated by computed growth rates (or balances of changes) of demand by six-month periods, the year 2006 was, indeed, very "comfortable" for Russian industry in terms of demand dynamics (Table 34). During the first six months, the intensity of demand growth was 10 p. p. - which is not the very best result in seven years (in the second half-year 2000, this value was 11 p. p.), but the second half-year demonstrated impressive results: the balance became as high as 15 p. p., which is a record high for the whole follow-up period.
Table 34
Changes in effective demand by six-month periods in 2000 - 2006
Year 6 months Growth No change Fall No answer Balancec
2000 1 22 65 12 2 9
2 22 65 11 2 11
2001 1 18 61 18 3 0
2 19 65 14 2 4
2002 1 15 58 25 1 -9
2 20 62 18 1 1
2003 1 21 58 20 1 1
2 22 62 14 7
2004 1 22 59 18 1 3
2 20 65 14 1 6
2005 1 21 61 17 1 3
2 17 66 16 1 1
2006 1 25 59 15 1 10
2 25 64 9 2 15
The average annual data on the changes in effective demand by branch (Table 35) have shown that the most rapid growth in 2006 was demonstrated by sales of finished metal products, means of transportation, leather and footwear, as well as medical equipment and measuring appliances. A decline in sales was observed only in woodwork and woodwork products. Textiles demonstrated rather a stabilization of sales volumes that their decline (especially after five years of a continual downward trend). Also noteworthy is the onset of a rather intensive growth of sales of furniture after two years of declining demand. The food industry in recent years has been demonstrating stable but low rates of growth in demand for its products.
Table 35
Average Annual Balances of Changes (Growth Rates) in Effective Demand,
by Branch, in 2000 - 2006
2000 2001 2002 2003 2004 2005 2006
1 2 3 4 5 6 7 8
Production of foodstuffs 0 -5 -2 4 3 3 5
Production of textiles 1 -7 -11 -4 -11 -5 -1
Production of garments 8 5 -3 -5 -7 -6 3
Production of leather and footwear 0 9 -8 0 -7 7 22
Timber processing and woodwork 13 0 -2 4 5 -4 -5
Production of cellulose, paper, cardboard 1 -27 5 5 5 0 15
Chemical industry 14 2 0 0 9 13 11
Production of rubber and plastic products 17 -3 -9 9 10 1 7
Production of other non-metal mineral products 8 0 -9 1 0 0 13
Metallurgy 13 -3 -9 8 7 8 18
Production of finished metal products 13 -4 4 5 -8 1 34
Production of machines and equipment 10 9 -12 4 7 0 15
Production of electrical machines and equipment 10 -3 2 12 6 2 13
1 2 3 4 5 6 7 8
Production of radio, television and communications equipment 16 10 10 1 -2 -10 9
Production of medical equipment, measuring appliances, optical equipment 2 2 -8 7 0 0 20
Production of motor cars, trailers and half-trailers 26 10 -10 14 24 14 4
Production of vessels, aircraft and other means of transportation -2 0 9 6 2 7 22
Production of furniture 21 1 7 36 -10 -3 13
3.2.2. Influence of demand on the status of industrial enterprises
Growth in demand for industrial products, which continued in 2006, resulted in growing sales volumes and made it possible for a greater number of enterprises to achieve normal volumes of sales of their products. On the average, the percentage of such estimations received in 2006 was 56 % (Table 36). This is an absolute high for the whole follow-up period. Dissatisfaction with demand was noted in 2006 on the average at 40 % of enterprises (the absolute annual low). As a result, the difference between these two basic estimations of demand became the highest ever -16 p. p. In other words, the prevalence in Russian industry of those enterprises that were satisfied with the demand for their products reached an unprecedented level.
Table 36
Dynamics of basic estimations of effective demand volumes (% of number of respondents)
Year Norm Below norm Difference in estimations
1993 37 55 -18
1994 14 82 -67
1995 14 84 -69
1996 8 91 -83
1997 12 85 -74
1998 10 88 -78
1999 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
2006 56 40 16
The prevalence of those enterprises that were satisfied with demand was registered in 2006 for 10 successive months (Fig. 16), and only in January and February the estimations "below norm" were more numerous (but only by 2 - 4 points). In the second half-year the percentage of the answers "normal" demonstrated yet another monthly high - 67 %, and did not go below 60 % until the year's end. The previous record high (58 %) was exceeded by 9 p. p. As for the percentage of enterprises dissatisfied with demand, it did, quite naturally, go down to an absolute low: in
September, only 29 % of such answers were registered in industry as a whole. The lowest value for 2005 was 39 %, and it also was registered in September.
Fig. 16. Dynamics of basic estimations of effective demand
Last year, in terms of the basic indices of demand, became the best for Russian industry throughout the whole follow-up period. It not only yielded the best difference between the basic estimations of demand, but the growth rates of sales in annual terms reached an absolute high. As a result, the 2006 "coordinates" in the space of these two indices were better that the similar "coordinates" of all past years (Fig. 17). As seen from the Figure, the coordinates of only two last years belong to a positive (by both coordinates) quadrant in the system of coordinates applied here. This means that industry, during that period only, was able, by increasing sales, to achieve acceptable sales volumes. However, this part of the trajectory did not always demonstrate a positive trend of development. After 2004, when both coordinates became positive for the first time, the results of 2005 demonstrated a slight "drawback": a slowdown in demand growth resulted in lowering satisfaction with its volumes. However, both values remained positive, that is, demand was still growing, but slower than the enterprises had expected, which resulted in an insufficient increase of its volumes and a lower satisfaction with it.
40
DIFFERENCE BETWEEN ESTIMATIONS OF DEMAND
200
0
2006
-60
-40
-20
1993
0^ 2003
20
40
2000
1999
1994
1996
-100 -L
BALANCES OF CHANGES IN DEMAND
Fig. 17. Changes in the position of Russian industry in the space of basic
demand indices in 1993 - 2006
The positive dynamics of demand was for the first time demonstrated by the 1999 surveys: then, the balance of changes (or rate of growth) for the first time became positive. However, the volumes of sales were not yet high enough to yield the prevalence in industry of those enterprises that were satisfied with these volumes. After the difference in estimations in 1998, which was - 78 p. p., in 1999 the difference went up quite noticeably (to - 48 p. p. ), but still remained negative. The rates of growth in demand remained positive in 2000 - 2001, but the achieved volumes were still not satisfactory from the point of view of a majority of Russian industrial enterprises. The difference in estimations was improving (at first to - 30, and then to - 27 p. p. ), but remained negative. At the same time, the year 2001 saw a slowdown in the rates of growth in demand by comparison with 2000, and difference in estimations improved only slightly. The year 2002 became the most unpleasant for Russian enterprises during the post-default period. The results of that year demonstrated negative rates of demand growth and a negative difference in the estimations of its volumes. The 2002 coordinates "went back" to the negative quadrant. The next year saw a substantial improvement of the situation in Russian industry, as shown by the system of coordinates applied here. Rates of growth in demand once again became positive, and the estimates of its volume approached zero very nearly. The latter value implies that the share of those who were satisfied with demand levels became nearly equal to the share of the dissatisfied. There was just one last step to be made. And it was made in 2004.
The position of the majority of branches within the space of main indices of demand between 2005 and 2006 also improved. (Fig. 18). Almost all the industries
(except the light industry) were placed, by the results of 2006, within the positive quadrant, that is, they displayed both growth of demand and a positive difference between its main estimations. Only the light industry failed to achieve a positive difference between the estimations of demand in 2006: there one still can observe the prevalence of those enterprises where normal demand volumes have not yet been achieved. Nevertheless, one doubtless achievement of that branch were the positive rates of demand growth in 2006 and better values of the difference between its main estimations.
* TIC - timber industrial complex Fig. 18. Changes of the position of branches of industry within the space of main
estimations of demand in 2005-2006
However, as seen from this chart, not all the branches had a positive vector of the changes of the main indices of demand. In non-ferrous metallurgy, the rates of growth in demand became slightly lower, but the degree of satisfaction with its volume increased. In the food industry, while the rates of growth in demand remained the same, the degree of satisfaction with the volumes of sales became somewhat lower. Ferrous metallurgy, while having rather substantially increased the rates of growth in demand, still could not achieve, judging by the decreasing difference between estimations, the desirable volumes of sales. Five branches demonstrated, by the results of 2006, both increasing rates of growth in demand and growing satisfaction with its volumes. The construction industry achieved the highest growth of sales by the year's results, as compared to the results of 2005, while satisfaction increased only slightly: the expectations there, in view of the current construction
boom, had been somewhat greater. Slightly lower was the increase of the rates of sales growth in machine-building, but that branch's principal achievement was the shift toward positive values of the differences between the estimations of demand -the year's results for the first time demonstrated the prevalence of enterprises satisfied with their volumes of sales. The rates of growth in demand in machinebuilding have been positive since 1999 (with the exception of 2002), and therefore now the sales volumes there became so great that the majority of enterprises (50 % against 47 %) have become satisfied.
The trajectory of the food industry within the space of the rates of growth in demand and the differences between its estimations has demonstrated certain problems with sales in that branch during the last two years (Fig. 19). Firstly, in 2005 the rate of growth in demand became slower by comparison with 2004. At that time, however, this circumstance did not cause strong worries among the enterprises belonging to that branch: the difference between the estimations of demand went down from 22 p. p. to 20 p. p. Last year, the rates of growth in demand did not change by comparison with 2005, and then it became a problem from the point of view of producers, who were forced to rethink their attitude to their volumes of sales. The difference between the estimations "normal" and "below norm" was already 13 p. p., which appeared to be the worst result of the three last years. It should be noted that the demand for the branch's products was growing only during these years. In 1999 - 2002, food enterprises failed to achieve a positive dynamics of demand, although in 2000 - 2002 the rates of decline were very close to zero, while the degree of satisfaction with demand was growing, especially in 2001.
DIFFERENCES BETWEEN ESTIMATIONS OF DEMAND
2004
-50
10
1994
BALANCES OF CHANGES IN DEMAND
Fig. 19. Changes of the position of the food industry within the space of main indices of demand in 1993 - 2006
The improvement of the estimations of demand in Russian industry in 2006 occurred mainly due to the performance of non-state enterprises (Fig. 20). The difference between the estimations "normal" and "below norm" became as high as 19 p. p. in that branch. At state-owned plants, the estimation "below norm" prevails, and during the last four years this prevalence has been stable, within the range -14.. .-9 p. p. Thus, the state sector still cannot achieve the volumes of demand that would be normal from the point of view of its performance, that is, to adapt to the developed market situation. As a result, in 2006 it fell behind joint-stock companies by 28 points. It should be noted that in the 1990s both these sectors were demonstrating a similar dynamic of estimations, and the first major gap between their estimations occurred as late as 2001, but at that time in both sectors the estimations "below norm" were prevalent. The problems with demand in 2002 once more leveled the difference between the estimations by form of ownership, but the year 2003 already demonstrated the advantages of non-state enterprises, the majority of which managed to achieve "normal" volumes of demand. In 2004 the estimations "normal" among joint-stock companies were voiced by an absolute majority, and such a situation has been maintained until now.
40 -20 -0
-20 --40 -60 --80 --100 -
Fig. 20. Average annual differences between the main estimations of demand (normal - below norm), by forms of ownership, in 1993 - 2006
A similar differentiation of the estimations of demand by the size of enterprises can also be seen (Fig. 21). The leading position in the prevalence of the estimations "normal" in 2006 still remained with big enterprises, among which 59 % were satisfied with the demand for their products, and only 38 % cannot achieve normal volumes of sales. By comparison with the previous year, the difference between these estimations improved by 9 points and achieved an absolute high.
345
There is no doubt that the situation at medium-size enterprises (with the staff of 501 - 2000) also improved. For the first time during all the 15 years of follow-up, the majority (54 %) of enterprises in that group achieved volumes of demand that were normal for them, and as a result were no more falling so far behind in the difference of estimations from "the leader group" - big enterprises. In the group of small enterprises, there still exist problems with sales: they display a prevalence of the estimations "below norm". However, the year 2006 also saw an obvious breakthrough in that group, after three years of "stagnation". Normal volumes of sales were achieved by 43 % (in 2003 - 2005 - only 36 %), while the percentage of the estimations "below norm" went down to 53% (after 61 % in the three previous years).
Fig. 21. Average annual differences between the main estimations of demand (normal - below norm) by the size of enterprises in 1993 - 2006
3.2.3. Dynamics of competition
In 2006, Russianan industry was developing under conditions of stable competition: no important changes in competition intensity among enterprises during last year were noted, by comparison with 2005. The main indices of competition, monitored by the IET since 1995, demonstrated that the level of competition in all three areas (domestic - inside Russia, competition with near abroad, competition with far abroad) remained at its previously observed level - the absolute high throughout the whole period of follow-up (Table 37). To be more precise, all the indices' in fact, went down, but very slightly (by 0.02 - 0.09 points), and therefore it would be more correct to speak about the unchangeability of these indices, especially if one takes into account the fact that in 2005 the growth of the indices
amounted to 0.27 - 0.45 points and was a historic high for all the 12 years of follow-up.
Table 37
Annual indices of competition with different producers
Russian From near abroad From far abroad General index
1995 3.39 2.65 2.79 2.94
1996 3.46 2.82 3.01 3.10
1997 3.55 2.81 3.02 3.13
1998 3.52 2.79 3.09 3.13
1999 3.61 2.73 2.87 3.07
2000 3.60 2.70 2.80 3.03
2001 3.73 2.89 2.90 3.17
2002 3.87 2.93 2.96 3.25
2003 3.95 2.92 3.08 3.32
2004 3.94 2.82 3.03 3.27
2005 4.21 3.27 3.49 3.66
2006 4.12 3.20 3.47 3.60
Thus, in 2006 enterprises did not feel that there were occurring any fundamental changes in the conditions for their competition on their sales markets, as compared to the year 2005. Such estimations appear especially unexpected against the background of the prevailing opinion (at least as it is voiced in the mass media and in the public speeches of government officials) that the growing volumes of import are ousting Russian commodities from the sales markets. In truth, Russian manufacturers, whom experts, journalists and government officials are so eager to protect, are voicing very different opinions.
No cardinal changes in 2006 occurred in the spread of competitive markets across Russian industry, either. Competitive markets in this case are understood as the share of enterprises in Russian industry which can report a certain competition with other manufacturers on their sales markets. The share of competitive markets tells nothing about the intensity of competition on those markets - it simply demonstrates the fact of a certain degree of competition that can be felt by enterprises. As shown by the results of our follow-up, industrial enterprises felt the existence of competition with other Russian manufacturers in 2006 on 92 % of the markets, while one year yearlier this index amounted to 94 % (Fig. 22). The competition with manufacturers from far abroad increased by 3 p.p., and now 73 % of Russian enterprises do compete with commodities shipped from beyond the borders of the former USSR.
Fig. 22. Dynamics of the share of competitive markets
The highest numbers of markets where commodities were competing with those from far abroad were registered in 2006 in ferrous metallurgy (83 %), timber industrial complex (81 %) and machine-building (78 %). The "other pole" (lowest numbers of markets where commodities were competing with those from far abroad) is represented, which is, by the way, quite predictable and of little interest in terms of economic analysis, electrical power engineering (33 %), fuel industry (35%) and the construction materials industry (46 %). Then follow the food industry (52%) the light industry (61 %) (according to the All-Russian Classifier of Branches of the National Economy [OKONKh]). While the existence of 52 % of markets where commodities compete with those from far abroad in the food industry appears to be quite predictable, the situation in the light industry, where only 61 % of enterprises feel that they are competing with producers located outside the territory of the former USSR, is not quite compatible with the constantly voiced declarations that enterprises belonging to that branch should be protected from imports. In fact, almost 40% of manufacturers there do not notice any competition with imports on their sales markets (Fig. 23). It should be noted that this is true in respect to both "white" and "grey" imports, because the enterprises, when estimating the level of competition they are faced with, take into account all the commodities that are shipped into this country and then enter the sales markets, no matter what their status might be in terms of customs clearance. As for the number of markets where domestic commodities compete with those from near abroad, in the light industry it is slightly higher - 65 %. The decreasing share of markets where commodities compete with imports (both from near abroad and from far abroad) - by 11 and 14 p. p. in 2006 - is associated, most probably, with improved customs control and
the resulting lower competitive capacity of "grey" imports on the domestic market. And almost all the sales markets in the light industry are competitive in respect to Russian manufacturers: 98 % of enterprises in the light industry experience competitions with other Russian manufacturers. And this latter index has remained relatively stable (in the interval of 94 % - 98 %) since 2002.
Fig. 23. Dynamics of the share of competitive markets in the light industry
The light industry differs not only by its extremely high share of markets with domestic competition, but also by the highest level of that competition and its growth in 2006. The index of domestic competition in this branch increased during one year by 0.21 points and amounts now to 4.48 (by a 5-point score) - approximately in the middle between the estimations "moderate" and "strong" (Fig. 24). This is a historic high of the 12-year period of following up the competition in that branch. As for the competition with imports, it, on the contrary, became weaker. And the decrease of the indices of competition with imports was also the greatest for the whole period of follow-up: the competition with commodities from far abroad "lost" 0.56 points, with commodities from near abroad - 0.40 points. Presently, the competition with commodities from near abroad is estimated by enterprises in the light industry as being at the level of 3.09 points (that is, "weak" ), while the competition with commodities from far abroad - 3.28 points (slightly above the "weak" level).
Fig. 24. Dynamics of the levels of competition with different manufacturers
in the light industry
In machine-building, the share of competitive markets in 2006 continued to grow in respect to all types of competition (Fig. 25). At the same time, the share of markets with domestic competition has also become very close to maximum: in 2006 this index grew by 2 p. p. and reached the level of 97 %. The highest growth of competitive markets was registered in machine-building in respect of competition with commodities from far abroad: this index grew in one year by 6 p. p. and is now 78 %, which is much higher than in the light industry. And a year ago the competition indices of such markets in both these branches were approximately the same. It seems that the proper regulation of customs control had the strongest impact on the imported commodities produced by the light industry and has no noticeable effect on the markets for the products of machine-building, because in the latter case the share of "grey" commodities is much smaller. On the whole, during the post-default period the share of markets where commodities compete with those from far abroad grew by 20 p.p. and achieved in 2006 its historic high.
100
%
80
60
40 -I-1-1-1-1-1-1-1-1-1-1-1-
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Fig. 25. Dynamics of the share of competitive markets in machine-building
The intensity of all types of competition in machine-building did not change in 2006. Both domestic competition and competition with imports remained at the level of 2005, which was the highest since 1995, when we began its follow-up. Similarly to all other branches, domestic competition remains the most intensive type of competition of the sales markers of Russian machine-building. Its estimation is 4.18 points, or slightly above "moderate". It is noteworthy that the estimations of domestic competition became higher than "moderate" only in 2005, having been growing from 1995 to 2004 is a quite gradual way from "weak" to "moderate". Competition with imports from far abroad in 2006 was 3.64 points, competitions with commodities from near abroad - 3.22 points. Thus, the estimations of competition with imports in 2006 were within the interval between "moderate" and "weak", and it is rather unlikely that the intensity of competition with imports will be able to increase in the next few years to the "moderate" level. Also, the level of competition with producers from far abroad in the machine-building branch was found in 2006 to be the highest by comparison with other branches. However, this or a similar picture has been observed in recent years quite often: the machine-building branch, by the intensity of its competition with imports, was either in the first place, or within the group of leaders. And especially so - after the 1998 default. Since 1999, the intensity of competition in that branch amounts, on the average, to 3.26 points (in the light industry - 3.12 points)
In the food industry, the share of markets with domestic competition is stable and high, being substantially higher than the share of the markets with other types of competition (Fig. 26). Domestic competition is felt by the food-producing enter-
prises to be present at 90 - 95 % of markets, and during the post-default period it has demonstrated little changes. In 2006, this index 93 %, falling behind machinebuilding and the light industry only by a few percent point. The competition with commodities from far abroad could be felt in 2006 only at 52 % of markets, having decreased after 2005 by 4 p. p. However, this last value looks negligible, after that index grew in 2005 by as much as 14 p. p. Thus, the past two years were estimated by the enterprises in the food industry as the most difficult, in terms of penetration of competitive imports onto their sales markets. In 2002, the situation was, from this point of view, the most comfortable one: the competition with imports was seen only on 32 % of markets, having decreased by half by comparison with its pre-default historic high. Foodstuffs from near abroad are now competing with Russian products on 64 % of markets. The growth of this type of market competition demonstrated, during last year, a growth of only 2 p. p. after a leap of 12 p. p. in 2005. After the 1998 default, Russian foodstuff producers have more often to compete with producers from near abroad than with those from far abroad.
Fig. 26. Dynamics of the share of competitive markets in the food industry
In the food industry - one of very few - the intensity of domestic competition in 2006 increased (Fig. 27). Growth, however, was slight (0.13 points), but resulting was the achievement of a historic high of the intensity of domestic competition -4.39 points, because this type of competition of the sales markets of the enterprises in that branch of industry is gradually shifting from "moderate" toward "strong". But is happenning, indeed, very gradually, because since 1999 the competition indices in that branch had always been above 4 points ("moderate"), and only during the last two years there emerged a trend of their "breakthrough". The intensity of competition with imports in that branch has also grown, especially the
competition with foodstuffs from near abroad. But the level of competition with imports there is among the lowest in Russian industry (being higher only than that in the construction materials industry). Now, the estimations of this competition are only higher than "weak". As for the intensity of competition with products from far abroad, it is even below that level. In 2002, the situation on the sales markets in respect to the competition with imports was very comfortable for Russian producers: they were competing with imports at a minimum number of markets, while the intensity of competition there was very close to "none".
STRONG 5
MODERATE 4
WEAK 3
NONE 2
FROM RUSSIA^
FROM FAR ABROAD
•X FROM NEAR v. ABROAD
+
-____/
4-
4-
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Fig. 27. Dynamics of competition with different manufacturers in the food industry
The highest number of competitive markets in 2006 was registered in the timber industrial complex (Fig. 28). The share of markets with domestic competition is traditionally high there (just as in other branches) - now at the level of 96 %, which is historic high. Growth during last year amounted to only 1 p. p., while growth by comparison with the pre-default peak was only 8 p. p. Thus, domestic competitions in that branch was sufficiently intensive and stable, while the high values and absence of any great changes in the few past years demonstrate that this index is near its maximum. As for the share of the markets with competition from far abroad and near abroad, it has visible changes during recent years. Firstly, these indices reached the levels of 81 % and 90 %, respectively, and as a result the branch in 2006 was in the first place by these parameters. No such prominent presence of competitive imports is being felt by the enterprises of any other branch. Even the enterprises in the light industry and machine-building have never had so high competition with imports on their sales markets.
Fig. 28. Dynamics of the share of competitive markets in the timber industrial
complex (TIC)
Secondly, since 1999 the penetration of competing imports from far abroad to this branch's sales markets increased from 31% to 81 % (that is, by 50 p. p.), and the penetration of competing imports from near abroad during the same period grew from 31 % to 90 % (59 p. p.). So high expansion of competing imports has not been experienced by any other branch of Russian industry. Thirdly, if this trend of growing imports penetration onto the sale market persists, the enterprises of this branch will have to compete equally often with both Russian and foreign manufacturers. Such a situation has never before occurred in any other branch. Thus, the enterprises belonging to the timber industrial complex have experienced the greatest changes in the scope of their competition with imports during the post-default years, and therefore they are more in need of being protected from imports that all other branches of Russian industry.
However, foreign manufacturers, while actively penetrating the sales markets of the Russian enterprises of the timber industrial complex, have so far created no serious problems for their Russian counterparts. They estimate the level of their competition with imports as being equal to 3.5 points, that is, midway between "weak" and "moderate". It is noteworthy that during the last two years the estimations have grown nearly by one whole point; in 2004 they were between "weak" and "none", while in 1999 - "none". In other words, the sales markets of the enterprises of the Russian timber industrial complex demonstrated the strongest changes in the level of competition with imports.
On the whole, the conditions for domestic competition in the branches of Russian industry in 2006 were very homogeneous (Fig. 29). The only exception was 354
represented by nonferrous metallurgy. The share of competitive markets in other branches is above 92 %, which requires from the regulating agencies only that they should maintain the existing status quo and prevent market monopolization, as the goal of inducing competition among Russian industrial enterprises has already been achieved. The level of domestic competition has also become sufficiently high: in all the branches this index is above "moderate".
STRONG 5
LEVEL OF COMPETITION
MODERATE 4 -S
WEAK 3
NONE 2
DIFFICULT TO
ESTIMATE
1
LIGHT
CON INDU
NONFERROUS^
META
STRUCTION STRY
CHEMICAL
LLURGY
% OF C MARKE
FOOD
OMPETITIVE TS
MACHINE-BUILDING
20
40
60
80
100
0
Fig. 29. Branch indices of domestic competition in 2006
Less homogeneous is the competitive environment characterizing the competition with producers from far abroad (Fig. 30). The share of competitive markets in different branches is from 46 % to 83 %. The intensity of competition is estimated as being between ot 2.76 and 3.64 points. The weakest pressure by imports is being experiences by enterprises in the construction materials industry, the strongest - in metallurgy, machine-building and the timber industrial complex. The situation in the light industry seems to be far from so critical as it could be imagined if one listens to the persistent appeals for the protection of its enterprises. Moreover, the situation there is not so different from that in the food industry, which is traditionally considered to the most protected from imports. Thus, if we should speak of protecting domestic manufacturers, it must be pointed out that the attention of the State should be focused on those branches which are remarkable not by the activity of their lobbyists, but by the level of imports penetration and the intensity of the competition with it.
STRONG 5
COMPETITION LEVEL
MODERATE 4
WEAK
NONE
DIFFICULT TO ESTIMATE
N ONFERROUS MACHINE -BUILDING /
M ETALLURGY LIGHT ♦chemiCAl ( ^♦FERROUS METALLUR
CONSTRUCTI NDUSTRY FOOD ON \ tTIC
GY
20 40 60 80 100
% OF COMPETITIVE MARKETS
Fig. 30. Branch indices of competition with commodities from far abroad in 2006
3
2
1
0
3.3. Investments in the Real Sector of the Economy
3.3.1. Domestic Investments in Fixed Assets
In Russian economy the trend for investments into fixed assets anticipating growth has been observed since 2000 (Fig. 31). Over the period of 2000-2006 the investments into the fixed assets have increased by 2.16 times, the growth of the GDP being at the same time 1.68 times. It should be noted that the investments dynamics suffered considerable fluctuations over the last seven years.
The high growth of the investment demand in 2000, supported by the dynamics economy incomes growth gave place to the flat dynamics in 2002 due to foreign market factors. The restoration of the anticipating growth rates of investments into the fixed assets in comparison with the GDP dynamics has been observed since the beginning of 2003 and was accompanied by the price growth at the world market of the fuel fossils and raw materials and gradual increase of the domestic market share in the economy dynamics formation. In 2006 the volume of the investments in the fixed assets increased by 13.5%, in the previous year - by 10.7%.
Fig. 31. The GDP and Investments in the Fixed Assets Growth Rates in 1991-2006,
as percentage to the preceding year
The steady positive production output has changed the situation at the investment sector. The expansion of the investment demand proceeded along with the favorable changes in the price for hydrocarbon and mineral resources situation at the world markets, on the one hand, and activization of the Russian business at the domestic market, on the other hand. The growth of the economy and business incomes determined the demand extension for investment goods. The coefficient of the fixed assets renewal increased from 1.4% in 2000 up to 1.8% in 2003 and 2.1% on average over the period of 2004-2005. The increase in the coefficient of fixed assets renewal was observed in almost every kind of economic activity, this process being the most intensive in infrastructure branches. Thus, the rate of capital renewals in communication industry has increased from 2.1% in 2000 to 7.1% in 2004, in the trade, correspondingly, - from 2.4% to 6.2%, in transportation - from 1.0% to 1.2%. The orientation of the producers towards production modernization and reconstruction caused the increase in the demand for the machinery and the equipment in almost every kind of economic activity. In the investment in the fixed assets structure by kinds of the fixed assets the increase in costs for machinery, equipment and transport vehicles has been observed. Whereas in 2001 the share of investments in the machinery, equipment and transport was equal to 35% of the
whole amount of the investment, in 2005 their proportion exceeded 40% (Table 38). As a result in the industry wear and tear of the machinery and the equipment decreased from 62.7% in 2001 to 57.3% in 2005, the share of manufacturing facilities, which are under 5 years old, increased from 4.7% in 2000 to 9.5 % in 2005.
Table 38
The Structure of the Fixed Assets by kinds of Fixed Assets in 2000-2006, in % to the total
2000 2001 2002 2003 2004 2005 2005* 2006*
Investments into the fixed assets - total 100 100 100 100 100 100 100 100
Including the following kinds of fixed assets:
housing 11.3 11.4 12.2 12.6 12.2 10.9 7.3 7.2
Buildings and constructions 43.1 41.8 41.0 43.5 42.1 42.8 47.1 48.8
Machinery, equipment, transport 36.6 35.0 37.7 37.1 39.8 40.9 38.5 36.2
others 9.0 11.8 9.1 6.8 5.9 5.4 7.1 7.8
* excluding small enterprises and informal activity parameters. Source: Federal State Statistics Service.
Development rates of domestic machine building industry being reserved as compared with the investments expenditures dynamics and the fixed assets reproduction characteristics, the influence of the demand growth for import machinery and equipment at the domestic market has increased. The decrease in the import share in the machine-building production consumption was of the short-term nature and was observed in the period from the IV quarter 1998 to III quarter 1999. The dynamics of investments goods output in that period reflected the prompt reaction of the Russian business to the economic shifts at the domestic market. It was the enterprises involved in the production of oil and chemistry industry equipment that had the leading positions in the investment goods output. The development of the infrastructure branches stimulated the increase in output volumes of construction and road-making machines, as well as machine-building production traditionally orientated at the domestic market: railway and metallurgic machinebuilding.
The sharp increase in the demand for foreign produced equipment fell on 2000, and since then the trend for the anticipating import growth rates of the machinery and the equipment as compared with the development of the domestic machine-building was of stable nature and corresponded with the dynamics of the investment activity. The factors that had the positive influence on the investment activity in long-term and medium-term prospects were the reduction of prices for foreign produced machinery and equipment due to the real appreciation of ruble as well as the utilization of the industrial assemblage technology, the import duties for foreign produced components being therefore decreased.
Within 2003-2006 average annual increase rates of the investment in the fixed assets being 11.9%, of the domestic machine-building production at the level of 8.7%, this index for machine, equipment and transport vehicles import was equal to 37.9%. Investments into the purchase of the foreign produced equipment in the total amount of the investments in the machines, equipment and transport vehicles
were, according to the data of the Ministry for the Economic Development, 21.5% in 2006 as compared with 20.6% in the previous year.
The influence of the economic revenues from the foreign trade on the economic growth rates being positive, their impact on the investment activity dynamics was limited by the trend for the decrease of the level of the gross national savings transformation into the investment expenditures. The share of the gross national saving in the GDP over 2003-2006 was on average 33.1%, of the investments into the fixed assets - 16.6%.
Economic revenues growing in 2005, the trend for the increase of the budget funds share in the investments in fixed assets financing sources retrieved. In 2005 RUR 540.1 bln. of the investments in the fixed assets were financed by budget funds, which was equal to 20.1% of the total amount of the investments in the fixed assets throughout the economy, including 6.7% by the federal budget funds. In 2006 RUR 700.1bln of the investments in the fixed assets were financed by budget funds, including by federal budget funds - RUR 242.1 bln.
Table 39
Structure of Investments in the Fixed Assets as per Financial Sources,
Percentage to the Total
2000 2001 2002 2003 2004 2005 2005* 2006*
Investments in fixed assets - total 100 100 100 100 100 100 100 100
including a break-down by sources of
investment:
Own capital 47.7 49.4 48.0 46.2 46.8 47.7 45.1 44.3
of which:
profit 23.4 24.0 20.5 1 7.2 18.3 22.4 20.6 20.2
Inflow of funds 52.5 50.6 52.0 53.8 52.6 52.3 54.9 55.7
of which:
bank credits 2.9 4.4 4.8 5.2 7.3 6.5 8.3 8.9
including foreign bank loans 0.6 0.9 0.5 0.8 1.3 1.0 1.0 1.5
loans from other organisations 7.2 4.9 6.0 8.6 7.3 7.3 7.4 5.4
Budget funds: 22.0 20.4 19.6 18.8 1 7.4 20.1 20.7 19.8
Federal Budget funds 6.0 5.8 6.0 6.5 5.1 6.7 7.1 6.9
Funds from the Subjects of the Russian Federation budgets and local budgets 16.0 1 4.6 13.6 11.5 11.3 12.4 12.5 12.0
Share of foreign investments in total investments in fixed assets 4.7 4.5 4.1 4.7 5.0 4.8 5.2 6.1
* small enterprises and informal activity parameters excluded.
Source: Federal State Statistics Service.
The characteristic feature of 2005 and 2006 was the change in Federal budget funds vs. budgets of the Subjects of the Russian Federation funds ratio, allocated for the investments. In 2005 the anticipating growth of investments in fixed assets at the expense of the Federal budget funds had a significant impact on the investment process. The share of the budget funds, which was used for the investments in fixed assets, was 2.63% of the GDP in 2006 against 2.5% of GDP in 2005 and 2.32% of GDP in 2004, including the Federal budget funds being, respectively, 0.91% against 0.83% and 0.68%.
Source: Federal State Statistics Service.
Fig. 32. Structures of the Investments in the Fixed Assets Financing at the Expense of the Budget Funds in 2004-2006, as percentage to the total
In 2006 the amount of the public investments grew by 0.3 p.p. of the GDP in comparison with 2005. According to the priorities of the state investment the funds were allocated to modernize and develop strategically important for the country objects of industrial infrastructure, fulfillment of investment projects on the modern technologies implementation for production of competitive production at the machine-building enterprises, as well as to secure the safety of the energy, transport objects and forestry. In 2006 the share of the state investments in the development of the social sphere increased by 5 p.p. and in the development of special (defensive) complex - by 2.8%, while the share of investments in manufacturing complex changed but negligibly.
Public investments from the budget are carried out by the Investment Fund, Federal Targeted Investment Program (FTIP) and Federal Special Programs (FSP). Investments for different social and economic as well as industrial programs, which are recognized as priorities, are financed by FSP. In 2006 the number of the federal special programs and subprograms financed by the Federal Budget reduced considerably. This enabled to concentrate the resources on the priority directions of social and economic development of the country. It is chiefly the construction of particular objects both necessary for FSP fulfillment and not included in the programs that is financed by FTIP. In 2006 the volume of the Investment Fund was equal to RUR 96 bln., of FTIP - RUR 318.95 bln., of FST (in total) - RUR 363.6 bln.
The share of expenses for FTIP in the GDP in 2006 increased up to 1.38% against 1.17% the previous year, the share of the expenses for defense order (special complex) increasing up to 0.28%. In 2006 FTIP financing was equal to 85.6% of the year limit allocated. To a considerably greater extent, than on the whole throughout the constructions and the establishments for the state needs, the year limit for state investments into manufacturing complex has been financed.
According to the data of the Federal State Statistics Service, the limit of the public investments, allocated for 2006, was equal to RUR 150.4 bln, and at the expense of all the sources of financing for object, envisaged by FTIP, construction the investments of RUR 186.5 bln. were used by the end of 2006. On account of the 2006 year limit public investments of RUR 143.1 bln. were financed, including the construction for agriculture complex - RUR 4.7 bln., transport complex - RUR 67.4 bln., special complex - 5.2 bln, social complex - 51.9 bln., in construction complex financing did not take place.
Table 40
Limits of Public Investments, Allocated for Construction, Financed by Federal Budget in 2005-2006, RUR mln.
2005 2006
Public investments limit Investments used by all sources of financing Public investments limit Investments used by all sources of financing*
Total 158.4 210.6 150.4 186.5
Including by construction
projects for:
Social complex 48.5 72.0 56.8 69.1
Manufacturing complex 93.2 116.3 71.6 83.0
Special complex 6.9 6.1 6.9 6.2
Other construction, not be- 9.7 16.2 14.9 28.1
longing to complexes
* Preliminary data.
Source: Federal State Statistics Service.
The main part of the public investments of FTIP, in the same way as in previous years, was allocated to fulfill the main national, infrastructure and innovation projects, as well as FSP of the development of key economic sectors and industries. Thus, more than one third of the FSP financing was directed towards infrastructure projects in electricity power and transport industry, and provisions for these aims have increased in comparison with 2005 at that. The share of public expenses for electricity power increased from 1.2% in 2005 up to 1.5% in 2006. The expenditures for transportation system development remained prevailing in the structure of FSP budget financing in 2006 and expanded up to 39.4% (against 35.9% in 2005). Budget funds were mainly invested in road building, civil aviation projects and sea transportation.
According to the Federal Targeted Investment Program in 2006 it was envisaged to allocate (by specified list of the Ministry for the Economic Development) public investments for 2802 construction projects but by 1 January 2007 there were 2118 construction projects fully financially provided. In 2006 it was planned to put into commission 1234 construction projects, among them 283 construction projects were put into operation at the total capacity and 59 -partially. Besides, 120 construction projects, planned to be put into operation in following years, were put into commission (34 - at the total capacity, 86 - partially).
Almost at every ninth construction project, envisaged by investment program, construction works did not take place in 2006. By 1 January 2007 1015 construction projects or 36.2% are technically ready in the range from 51.0 to 99.9%.
The growth of economy revenues, the increase in business activity of the bank sector and population savings investment into housing had a positive impact on the nature of investment activity. Fundamentally new feature of the economic growth in the period of 2003-2006 was the shift from the investments in fixed assets financed at the expense of the business' and organizations' own capital to the expansion of debt capital share. This was a graphic evidence of qualitative changes in investment development mechanism, which is orientated on investment resources flow rationalization. As a result of 2006 the share of inflow funds was 55.7% of total amount of investments in fixed assets.
In contrast to 2005 the increase in banks' share of investment financing from 8.3% to 8.9% was observed in investment crediting. The trend for the increase of insurance, investment, industrial and trade companies as well as foreign investment participation in investment activity financing sustained. In 2005 net inward investments were equal to USD 1.3 bln., in 2006 - USD 41.6 bln. Foreign banks credit share in investments in fixed assets financing has grown up to 1.5% against 1.0% in 2005, foreign investment ratio being 6.1% against 5.2%.
Table 41
Net Capital Export of Private Sector, according to Balance
of Payment, USD bln
Including:
Net capital export of private sector, total Net capital export by banks Net capital export by non-financial organizations and households
1999 -20.8 -4.3 -16.5
2000 -24.8 -2.1 -22.8
2001 -15.0 -1.3 -16.2
2002 -8.1 2.5 -10.6
2003 -1.9 10.3 12.2
2004 -8.0 3.5 -11.5
2005 1.3 5.9 -4.6
I quarter 1.5 -2.7 4.2
II quarter -5.3 -2.5 -2.9
III quarter 9.1 6.4 2.7
IV quarter -4 4.6 -8.6
2006 41.6 25.1 16.5
I quarter -4.7 -3 -1.7
II quarter 19.8 9.9 9.9
III quarter 12.7 8.7 4.0
IV quarter 13.7 9.4 4.3
Source: Central Bank of the Russian Federation
Low real value of the credit resources under the average level of profitability existing in the economy accounted for the expansion of enterprises debtors sector. Among the factors that positively affect the credits dynamics and other borrowed funds the growth of the organized forms of the population savings can be
distinguished. The share of funds, directed towards share holding in construction was equal to 3.4% from the total amount of the investments in the fixed assets.
The increase in the investment activity in branches of infrastructure and the increase in demand for these branches' service is the indicator of growth potential, the investment policy in this sector being orientated towards the solution of long-term problems. Over the period of 2002-2005 the share of transport, communication and trade increased by 7.1 p.p. and was equal to 29.8% of the total volume of the investments in the fixed assets. Over the years of reforms, the share of transport in the structure on the investment in the economy real sector nearly doubled, in 2005 its share being 20.4% against 15.1% in 2002. Whereas in 1992 the share of the investments in communications was equal to less than 0.6% of the total amount of the investments in the national economy, in 2002 it reached 3.4% and in 2005 - 5.5%.
Table 42
Structure of Investments in the Fixed Assets by Types of Economic Activities
2000 2001 2002 2003 2004 2005 2005* 2006*
Total 100 100 100 100 100 100 10 0 100
Including break down by types of eco-
nomic activity:
Agriculture, hunting and forestry 3.0 4.0 4.6 4.1 4.1 4.0 3.2 4.0
Industry 40.4 40.4 38.6 38.1 38.3 36.8 40.6 41.5
of which
Minerals extraction 18.1 19.0 16.9 15.9 1 4.8 13.4 15.2 17.3
including fossil fuels extraction 16.7 17.5 15.5 14.4 13.4 11.8 13.5 15.8
Manufacturing industries 16.3 15.9 15.9 15.6 16.5 16.8 17.6 16.4
Electricity, gas and water production and distribution 6.0 5.5 5.8 6.6 7 6.6 7.8 7.8
Construction 6.4 5.2 5.4 4.9 3.6 3.5 2.9 3.3
Whole sale and retail trade; motor-
vehicles, motorcycles, household appliances and articles of private use 2.7 2.9 3.6 3.5 3.6 3.9 2.8 2.9
service
Transportation 18.5 19.2 15.1 17.5 17.6 20.4 22.1 21.3
Communication 2.7 3 3.4 4.8 5.6 5.5 6.7 5.5
Financial activity 0.8 0.8 1 1.2 1.4 1.3 1.3 1.1
Operations with real estate, renting, provision of services 15.2 1 4.7 18.1 1 7.7 1 7.6 16.6 11.5 10.6
Education 1.3 1.5 1.5 1.4 1.5 1.5 1.8 2.1
State administration, military safety 1.5 1.5 2 1.6 1.5 1.5 1.8 1.8
security; compulsory social security
Health care and provision of social services 2.6 2.4 2 2 2.2 2.2 2.3 2.5
Provision of utilities, social and personal services 3.9 3.5 3.8 2.6 2.5 2.4 2.6 2.9
* excluding small enterprises and informal activity parameters.
Source: Federal State Statistics Service.
In 2006 the trend for the growth of investments in the fixed assets in transportation and trade, as well as in the kinds of activities, orientated to the provision of
social services - education, health care - sustained. Characteristic feature of the investment process in the transportation was the change in the structure of investments by kinds of economic activity. The dynamic growth of the pipeline transportation was maintained by the increase of its share in investment expenses up to 39.9% of the total amount of the investments into transportation (34.8% in 2005). In 2006 the reduction of the scale of the investments in railway transport and communication, for which the period of the restoration growth of 1999-2005 was characterized by the growth of the investment activity, was observed.
It should be noted that against the background of the steady growth of the demand for trade services redistribution of the investments by kinds of activities is proceeding in the environment of retail trade and motor vehicles trade material and technical basis expansion, the increase in investments into which was equal, respectively, to 149.7 and 128.0% against the level of 2005.
50
40
30
20
10
45,8
39,7
30,6
19,8
17,5
18,9
"6,4
-10 J
in "ô
-3,4 ■c 5
-2,1
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-agj-c
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E
o
tn 'i; <D (0
E "E
I £
tn
Q. c ro
3 T3 <D
m
s g £ E
^ <D
2005
2006
0
Source: Federal State Statistics Service.
Fig. 33. Change in the Investments in Fixed Assets Growth Rates by Kinds of Services Provided in 2005 and 2006, as percentage to the preceding year
The share of the investments in the fixed assets by kinds of activities in goods production in 2006, exceeded the level of the previous year by 4.3 p.p., which was due mainly to the acceleration of the investments in industry and agriculture growth. The increase in agriculture investments in 2006 was equal to 40.6%, and its
share in investments in fixed assets structure increased up to 4.0%, increase in comparison with the preceding period being 0.8 p.p.
It was fuel and energy production that traditionally had the most significant impact on the dynamics and structure of the investments into the industry. The growth of the Russian economy in 1999-2001 was characterized by extremely high investment activity rates in fuel industry. Against the background of favorable domestic and foreign market situation the investment activity was defined by the increase in the volumes of investments in oil production by 2.3 times, in oil processing and gas industry - by 2.1 times the investment growth being 1.58 on the whole in the industry and 1.36 in the economy. The proportions of the investment distribution between extraction and processing industries of oil complex changed towards the increase of oil production share. The increase in business activity was accompanied by drawing of reserve facilities into production and investments flows rationalization. As a result the coefficient of capital renewals in oil industry increased from 1.7% in 1999 to 2.9% in 2000 and 4.2% in 2001. In 2000 thanks to new constructions, 2.8 thou. oil wells were put into operation, in 2001 - 3.8 thou. More reserved dynamics of investments in oil processing was accompanied with the evolution of the trend to stabilize the proportion of intensified oil processing.
In 2002 in the environment of the change of the situation at the world market of hydrocarbons and the decrease in the production profitability down to 20.7% against 66.7% in 2000 and 46.5% in 2001 the investments in oil production industry decreased by 15.6%. The restoration of the positive investment activity dynamics in 2003 relaxed the tension but did not change the situation. Over the period of 20042005, despite the growth of world prices for hydrocarbons the average annual rate for investment decrease was observed at the level of 15.5%. One of the reasons for sustention of this trend was perhaps connected with tax reclamations for "YUKOS" activity and their assets sales.
Table 43
The Investment Dynamics and Goods Profitability in Oil Production and Oil Processing Industry over 1999-2005
Investment growth rates as percentage to the Production profitability, preceding year in comparable prices_percentage_
Oil production Oil processing Oil production Oil processing
1999 125.8 74.7 57.9 32.1
2000 151.1 240.0 66.7 34.5
2001 123.6 115.5 46.5 24.0
2002 84.4 90.6 20.6 15.5
2003 104.6 98.1 20.7 19.1
2004 79.7 108.7 36.3 22.5
2005* 90.8 104.7 37.3 22.7
* Calculation based on the Federal State Statistics Service Расчет data on kinds of economic activity and investments in crude oil and gas production figures in 2005. Source: Federal State Statistics Service.
The characteristic feature of 2004-2005 was unstable dynamics of investment activity in fuel industry, which is accounted for to a great extent by the factors of the market situation. The proportion of the fuel fossils production in 2005 was 11.8% of the total investment volume against 15.5% in 2002. The decrease of the impact of
the fuel industry in the investment process was initiated by the decrease of oil production industry in the total amount of the investments from 12.7% in 2001 to 7.0% in 2004 and 5.3% in 2005.
Table 44
The Proportion of the Investments by Branches of Fuel Industry in the Total Amount of the Investments in Fixed Assets in the Economy in 1999-2005,
as % to the total (in current prices)
1999 2000 2001 2002 2003 2004 2005
Fuel industry - total 14.0 18.5 19.2 18.2 16.2 15.2 13.5
including:
Oil production and oil processing 9.6 13.4 14.4 12.1 11.0 8.3 7.1
Oil production 8.8 11.6 12.7 10.6 9.7 7.0 5.3
Oil processing 0.8 1.8 1.7 1.5 1.4 1.4 1.7
Source: Federal State Statistics Service.
As it is shown by the analysis of the investment activity indices in the context of oil companies, the total amount of the investments of 10 biggest oil companies decreased by 13.9% in 2004. The reserved investment behavior of oil companies was of short-term nature. In 2005-2006 the positive dynamics for investment assimilation, efficiency of oil wells exploitation fund usage increased at the expense of diminishing the number of idle ones.
Table 45
Investments Use by Oil Companies in 2002-2006 rr.
in current prices, RUR bln.
Growth rates in % to the preceding year in comparable prices*
2002 2003 2004 2005 2006 2003 2004 2005 2006
Investments - total 147.0 167.0 167.1 222.1 309.8 103.0 87.1 118.6 120.9
including
Exploring and production drilling -total 49.7 61.8 65.8 85.4 123.4 112.6 92.7 115.8 125.1
of which:
Exploring drilling 9.4 10.6 9.8 12.7 17.4 102.6 80.0 115.9 118.7
Production drilling 40.3 51.1 56.0 72.8 106.0 1 1 4.9 95.4 115.8 126.2
Equipment not included in construction estimates 35.1 32.4 36.5 51.1 60.0 83.9 97.8 125.1 101.7
Industrial construction 57.8 69.4 62.0 83.1 124.5 108.9 77.8 119.5 129.9
Investments for non-production purposes 4.4 3.4 2.8 2.5 2.0 69.3 72.3 78.6 69.3
* - according to the existing methodology previous year's prices are adopted as comparable prices Source: Ministry for the Industry and Energy Data.
The characteristic feature of 2006 was the overcoming of the trend for the decrease of the share of the investments in minerals extraction, which was observed since 2002. As a result of 2006 the increase in the investments in the minerals extraction was equal to 22.2% against the decrease by 0.3% in 2005, and in electricity, gas and water production and distribution - 2.2% against the decrease by 0.4% in the preceding year. The overcoming of the decrease in the investment activity in this kind of economic activity was accounted for by the increase in investments in 366
power industry by 8.3% in comparison with the previous year. The dynamics of gas production and redistribution was considerably influenced by the priority shifts in investment activity towards pipeline net development. Consequently, as a result of the decrease in investment amount in gaseous fuel production and distribution was equal to 38.1% against the growth of 17.4% in 2005.
7 * 57.3
u | 37,5 __ S
1 c * .2 Z 1 15,4 16,1 <A J c r 1 s 24'5 1 19.6 19.1 pi s E -5 "1 " | "o S t Ë
10,6 rf4 7'5 m or r 5 £ 11,3 iirhfil w. 'A* _ fc _ ■—■ J 1.7 ï- 12,8 -, T3 i i -o £ CL > _CL c '5 S 5 S -i? i
£ I i c L i s 1 " S -s s .E S 1 "S 3 jfi- 9Â ° 1 1 § s ï = 5 e s £ ^ 2 = c i. " ~ S .S s -o fi H 3 S S S ! ! i 11. .! J 1 V o -3 »a -15.3 S S ni -10,3 ;
■i =■ -17,S ™ 1 3 I » as S <1-1 s Z Ci S 73 S 1 11 - 3 a O 3 ■: tT tO L - '5 CL R. P " 3 S — — * § .ï " S ■ -g. | ¡j S & s o 'i s £ ? 1 s » n, * " u UTJ^-C^S 3 1 I 1 U S g -g i i - f| Il ïl l| TJ Si & 3 S -ë
& -a S U e <3 — n = s s S £ Ë -38,2 ~ = £ £ E E g* S s. -e ? = « d O J: S o ïîi «
□ 2005 □ 2006
Source: Federal State Statistics Service.
Fig. 34. The Change in the Investment in Fixed Assets Growth Rates by kinds of Economic Activities in 2005 and 2006, as percentage to the preceding year
In 2006 the investments infixed assets growth rates deceleration down to 7.2% against 10.6% in 2005 was observed for manufacturing industries. The share of the manufacturing industries in the structure of the investments in the fixed assets throughout the economy was equal to 16.4% in 2006 against 17.6% in the preceding year. The incomes concentration remaining high within export-orientated productions and mechanisms of interindustry capital transfer being weakly developed it could have been hardly expected that the investments rates would accelerate and nature of the capital reproduction would change fundamentally. The analysis of the investments dynamics and structure demonstrates that the trend to decrease in the share of the investments in the machine-building production is characteristic for the Russian economy. The share of the enterprises producing capital goods was equal to 2.2% in 2006 against 2.7% in 2002. Under the existing age, technological and reproduction structure of the fixed assets low rates
of investments in the machine-building were the factors restricting the production development rates of final and intermediate goods output. The structure of capital goods production being what it is the import remains one of the main sources for capital renewals, production reconstruction and modernization.
Whereas the investment activity in food production as well as textile, clothing and tanning industries was determined by the increase in the domestic market demand, the metallurgical and chemistry industries were considerably influenced by the increase in demand of the external market. For instance, in 2006 the trend for anticipating growth of the investments in the metallurgical industry retrieved once again (112.8% against 2005) against the background of the decrease in the investment activity in the final metal goods production (89.7%), which lead as a result to the decrease in the final goods export.
The development of the chemistry and petrochemistry industries involves the solution of system problems of structural nature - guaranteeing the conformity of the production output, quality and range of chemistry and petrochemistry production with the total demand of the domestic and external markets. The internal market capacity for chemistry production being relatively high, the main factors restricting the chemistry complex operation are the high rates of the equipment physical depreciation, technology backwardness and investment resources limitation. Taking into account that petrochemistry productions are rigidly dependant in production and technological terms on oil and gas processing production, it seems sensible to compare the amount of the investments in industrial base renewal and the expansion of the raw materials base in the corresponding kinds of activities. Otherwise the situation of non-balance of production capacities of chemistry industry and its provision with the main kinds of raw materials can be reproduced. Thereupon the formation of the large science and production integrated structures, which enable to fulfill the advantages of finished technological chains starting with the production and processing of hydrocarbons raw materials, on which 80% of chemistry and petrochemistry production is based, and up to output and sale of the main of its kinds to the utmost extent, is gaining special significance. Currently the processes of vertically integrated structures creation, which aim is to provide final commodities production at the Russian factories, are observed. Obviously, it will be changes in branch and specific structure of the chemistry complex towards the reduction of raw materials production proportion and the increase in the products of high extent of processing proportion that will have the positive influence on the level and dynamics of the investment expenses. For fuel and power enterprises the strengthening of the trend for the decrease in the investments in oil processing is one of the urgent problems. It should be noted that against the background of high world prices for hydrocarbons low transformation and diversification of export incomes towards the investments in the production reconstruction and modernization had a negative impact on the figures of the economy growth.
3.3.2. Foreign Investments in the Russian Economy
In 2006 USD 55.1 bln. of foreign investments flowed in the Russian economy, which exceeded by USD 2.5 bln. the figure of the previous year. The growth rates of the foreign investments in 2006 were equal to 102.7% the average annual rate over the period 2002-2005 being at the level of 139.2%.
Table 46
Inflow of Foreign Investments in the Russian Economy in
2002-2006
USD mln. As percentage to the previous year
Total Direst Portfolio Others Total Direst Portfolio Others
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 84.98 147.1
2004 40 509 9 420 333 30 756 136.4 138.9 83.0 136.6
2005 53 651 13 072 453 40 126 132.4 138.8 136.3 130.5
2006 55 109 13 678 3 182 38 249 102.7 104.6 700.0 95.3
Source: Federal State Statistics Service.
Analyzing the dynamics and the structure of the foreign investments it should be first of all taken into account that nearly 3/4 of the total amount of the investments, flowing into non-financial sector of the economy, belong to the group of "other investments" - trade credits, foreign countries governments credits extended under the provision of the Government of the Russian Federation, international organizations credits, other credits and bank deposits. Bearing in mind high proportion of this component in the structure of the foreign investments, the change in the dynamics influences greatly the total foreign investment rates figure in the non-financial sector of the economy.
Another characteristic feature of the foreign investments in the Russian economy is the low proportion of the portfolio investments. Over the last 3 years the share of portfolio investments on average did not exceed 1% against 3.2% in 2001 and 2.4% in 2002. The trend for the decrease in the portfolio investments, which was observed in 2003-2004, in 2005 was substituted by the positive dynamics. The specific feature of 2006 was almost sevenfold increase in portfolio investments, direct investments growing but slightly and other investments having negative dynamics.
14000
12000
10000
8000
6000
4000
2000
0
□ direct investments □ portfolio foreign investments
13072
12638
¿420
678
.4429
3l
I IQJ
fgj
I oo fi
2182
"1 r
1 I
2000 2001 2002 2003 2004 2005 2006
Fig. 35. The Amount of Direct and Portfolio Investments Made to Non-financial
Sector 2000-2006, mln.USD
The positive dynamics of the direct investments was observed since 2002, their growth being anticipating in comparison with portfolio investments up to 2006 as well as compared with the internal domestic investments in fixed assets, in 2006, however, the increase in the direct foreign investments was only 4.6% versus 38.8% in the previous year. As a result the share of the direct investments in the total amount of the foreign investments made to the Russian economy in 2006 was equal to 24.8%, which roughly corresponds with the level of the preceding year.
Portfolio investments growth acceleration was connected with the increase in the activity of the foreign investments at the stock market. Investments in shares and stocks grew by 8.8 times and were equal to USD 2.9 bln. Other foreign investments, defined as trade credits, foreign countries governments' credits extended under the provision of the Government of the Russian Federation, as well as international organizations' credits and bank deposits for the first time over the past 10 years demonstrated the negative dynamics.
The foreign investments growth slowdown was accompanied by the change in their flow structure by the kinds of the investment activities. The increase in the investments into industry slowed down to 1.2% against 20.6% in 2005. For the first time over the last 5 years the absolute reduction in investments in trade was observed. In 2006 high rates of foreign investments growth sustained in transport and
communication, their proportion in the total amount of the foreign investments as a result increased up to 9.6% against 5.0% in 2004.
Table 47
Inflow of the Foreign Investments by Kinds of Economic Activity
in 2004-2006
In USD mln As % to the preceding year As % to the total
2004 2005 2006 2004 2005 2006 2004 2005 2006
Industry Transport and communication 20 170 2 033 24 318 3 840 30 603 5 297 163.6 187.7 120.6 188.9 101.2 137.9 49.8 5.0 45.3 7.2 44.7 9.6
Whole sale and retail trade; motor-vehicles, motorcycles, household appliances and articles of private use service 13 037 20 461 13 089 124 156.9 64.0 32.2 38.1 23.8
Real estate operations, renting and provision of services Financial activity 2 572 1 001 2 602 1 813 5 988 4 698 75.6 156.4 101.2 181.1 230.1 259.1 6.3 2.5 4.8 3.4 10.9 8.5
Other industries 1 697 617 885 98.3 36.4 231.8 4.2 1.2 2.6
Source: Federal State Statistics Service.
The foreign investments in the industry growth rates slowed down. For the first time since 2000 the decrease in the amount of the investments in manufacturing industry was observed.
According to the state of affairs by the end of 2006 the accumulated foreign capital in the Russian economy comprise USD 142.9 bln., exceeding the figure of the previous year by 27.8%. The share of the direct investments in the accumulated foreign capital was equal to 47.5%, port folio investments - 3.4%, other investments, fulfilled at the returnable routine - international organizations credits, trade credits - having the biggest proportion of 49.1%.
In the total amount of the accumulated foreign investments, made to the Russian economy, the leading positions are still held by Cyprus, Netherlands, Germany and Luxembourg, whose share was equal to 63.6% of the total amount of the accumulated investments and more than 80% of the accumulated direct investments.
In the structure of the accumulated by the end of 2006 investments it is the direct investments that prevail, whose share was 47.5% against 44.5% in the previous year.
Against the background of the economic growth acceleration the Russian economy is becoming more and more attractive for foreign investors. One of the main guiding lines for the new investors to come to the Russian market and for already operating investors to wish to increase the amount of the investments is the ratings of the world agencies Fitch, Moody's and S&P (see chapter 2.5.3 of this review).
Table 48
Accumulated foreign investments as broken down by Major Investing Countries
Accumulated by the end of 2006 Including (USD mln): As percentage to the previous year
total, (USD mln) as % to the total direct portfolio others total direct
Investments - total 142 926 100 67 887 4902 70 137 127.8 136.5
of which the major investing countries 123 871 86.7 58 502 4245 61 124 124.9 134.5
including: Cyprus 32 276 22.6 22 796 1358 8 122 167.4 163.8
Netherlands 23 451 16.4 19 234 62 4 155 124.0 119.3
Luxembourg 22 870 16.0 587 203 22 080 109.0 130.2
Germany 12 260 8.6 3 320 1692 7 248 126.1 122.3
Great Britain 11 801 8.2 2 907 169 8 725 92.5 142.2
USA 7 698 5.4 4 588 507 2 603 112.5 105.2
Virgin islands (GB) 4 259 3.0 2 410 102 1 747 172.9 200.8
France 3 699 2.6 1 058 0.0 2 641 94.4 116.9
Switzerland 2 832 2.0 1 353 151 1 328 119.8 119.9
Japan 2 725 1.9 249 1 2 475
Source: Federal State Statistics Service.
The increase of the investment activity will be assisted not only by awarding Russia high credit ratings by the leading world agencies but also by the efforts of the Government to change the investment climate in the country for the better.
3.4. Foreign Trade
3.4.1 Foreign Trade Turnover
In September 2006 International Monetary Fund issued regular semi-annual report on the world economy situation and short-term development prospects.
In first six months of 2006, as it is stated in the report, the steady growth of the world economic trend sustained. In 2006 the rates of the world GDP increase, according to the forecast, should have been equal to 5.1%, while in 2007 they will slow down to 4.9%. The current economic upsurge is the most stable since the beginning of the 70ies. Favorable forecast is based on such positive factors as moderate inflationary pressure, which is not supposed to grow due to a moderate increase in interest rates of large countries central banks, expected balancing of domestic demand in developed countries, as well as situation stabilization at the world financial market. Business activity in most regions and countries was at the level of or above of that predicted.
It is multilateral liberalization of the world economy, as well as taking measures against the strengthening of protectionist pressure that remain important conditions for the world economy growth.
Table 49
Dynamics of the World GDP and the World Trade (as percentage to the previous year)
2004 n 2005 n 2006 n1 2007 n
GDP
World as a whole 5.3 4. 9 5. 1 4. 9
Industrially developed countries 3.2 2.6 3.1 2.7
USA 3.9 3.2 3.4 2.9
EU countries 2.1 1.3 2.4 2.0
Canada 3.3 2.9 3.1 3.0
Japan 2.3 2.6 2.7 2.1
Other developed countries 4.6 3.7 4.1 3.7
Developing countries and countries with economy in transition 7.7 7.4 7.3 7.2
Countries of Central and Eastern Europe 6.5 5.4 5.3 5.0
CIS countries 8.4 6.5 6.8 6.5
Russia 7.2 6.4 6.5 6.5
Asian countries 8.8 9.0 8.7 8.6
China 1 0.1 1 0.2 10.0 10.0
Goods and services world trade 1 0.6 7.4 8.9 7.6
Import
Industrially developed countries 9. 1 6.0 7.5 6.0
Developing countries and countries with economy in transition 16.4 11.9 13.0 12.1
Export
Industrially developed countries 8.8 5.5 8.0 6.0
Developing countries and countries with economy in transition 14.6 11.8 10.7 10.6
Footnotes. 1) Estimation. 2) Forecast
Source: The Bulletin of Foreign Commercial Information No 125.
In 2006 indices, characterizing Russian foreign trade, grew steadily and reached record over the last 15 years levels. Russian foreign trade turnover, calculated on the basis of balance-of-payments methodology, was equal to USD 468.4 bln., exceeding significantly yearly figures of the previous years (Fig. 36).
500,0 450,0 400,0 350,0 300,0 250,0 200,0 150,0 100,0 50,0 0,0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
I Export beyond CIS ■ Export to CIS ■ Import from beyond CIS ■ Import from CIS
Source: Central Bank of the Russian Federation
Fig. 36. Russian Foreign Trade Turnover (bln. USD)
2)
The increase in foreign trade turnover in 2006 is accounted for by a significant growth in monetary volume of export sales thanks to a favorable situation at the world market, particularly at the market of mineral resources used as sources of power, as well as noticeable import growth due to the increase in domestic demand.
In comparison with 2005 Russian foreign trade turnover went up by 27%. At the same time the turnover with countries, which are not CIS members, grew at higher rates. Over 2006 it reached USD 399.7 bln., which is by 27.5% higher than the corresponding figure of 2005. Russian trade turnover with CIS countries increased by 24% and reached USD 68.7 bln.
Foreign trade surplus in 2006 was equal to USD 140.7 bln., which is much bigger than in 2005 (USD 118.3 bln.). This is mainly due to price situation factor.
3.4.2. Situation at the World Market
According to the estimations of the Bank of Russia, the world prices, taking into account the structure of Russian export by the set of goods, which include 80% of its cost, were 22% higher than in 2005.
From January to the middle of August prices for oil at the world market increased most of the time. In the second half of August and in September a significant drop in prices was observed.
In 2005 OPEC member countries called off the limits of official price range for the basket, which was USD 22-28 per barrel. From March 2006 price interval for oil basket was declared by the marks of USD 50 and 60 per barrel. The average price for oil grade Brent was by 19.8% higher, for oil grade Urals - by 21.1% more expensive in 2006 in comparison with 2005. Unprecendented maximum for OPEC basket is price mark of USD 72.67 per barrel, which was observed on 8 August 2006.
In 2006 prices for oil products were on average higher than in 2005 (premium petroleum being 18%, diesel fuel - 15%, furnace fuel oil - by 30% more expensive).
Within January-October 2006 natural gas went up in price by 36% in Europe and fell in price by 20% in the USA in comparison with the corresponding period of the previous year.
In 2006 world prices for the production of the Russian fuel and energy complex were 25% higher than in 2005.
In 2006 the world market was characterized by the growth of demand and prices for ferrous and non-ferrous metals. In the environment of world demand increase the expansion of international trade of metal production was observed.
In December 2006 the world prices (West European market) were equal to: reinforcing steel - USD 530-550 per ton (increased by 21% as compared with January 2006), rod - USD 490-510 per ton (increased by 15%), girders and channels (300-600 mm) - USD 520-540 per ton (increased by 2.9%), hot-rolled sheet -USD 600 per ton (increased by 56%), cold-rolled sheet - USD 620 per ton (in-
creased by 20%) and zinc-coated sheet - at the level of USD 700 per ton (increased by 25%).
Favorable situation at the foreign market persisted for non-ferrous metals exporters as well, the level of world prices for all non-ferrous metals reached a maximum over the period of more than last 13 years. In May 2006 the average prices for aluminum and copper were top since 1994. The prices for nickel reached peak level in August 2006 (Table 50).
The increase in prices at the world market of non-ferrous metals was caused by demand increase, low level of reserves at exchange stocks and anticipating growth of prices for raw materials for their production (alumina, copper and zinc concentrates).
The biggest increase in prices was observed for zinc and nickel as a result of a significant growth in demand for these metals, especially from the enterprises, manufacturing coated and stainless steel (Asian countries, especially the Republic of China).
At the world market of non-ferrous metals, according to the results of London Metal Exchange quotations with the immediate delivery period, the prices at the end of December 2006 were: aluminum - USD 2824 per ton (increased by 13% as compared with January 2006), copper - USD 6375 per ton (increased by 30%), nickel - USD 34300 per ton (increased by 2.3 times), zinc - USD 4230 per ton (increased by 82,5%), lead - USD 1645 per ton (increased by 17%), tin - USD 11190 per ton (increased by 45%).
Table 50
Average Annual World Prices
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Oil (Brent),
USD per barrel Natural gas, 221,33 117,4 114,1 115,9 228,19 224,843 225,022 228,83 337,4 554,38 665,15
USD per 1 - 11,9642 22,5469 2,1876 4,3442 3,9764 3,3857 5,461 5,993 8,870 12,2
mln. BTU
Petroleum,
USD per gal- 0,71 0,615 0,511 0,529 0,887 0,7922 0,755 0,891 1 ,1 97 1,508 1,81
lon
Copper, USD per ton 2574,9 2369,7 1775,3 1539,9 1863,9 1613,6 1592,9 1785,6 2808,2 3606 6851,4
Aluminum, USD per ton 1590,2 1554,0 1 41 3,5 1318,0 1550,0 1444,7 1350,7 1424,7 1693,2 1871 2619,4
Nickel, USD per ton 8053,9 7312,4 5352,5 5239,5 8624,0 5966,0 6175,1 9580,8 13757 14692 22038
Source: calculated on the basis of London Metal Exchange, International Petroleum Exchange (London) data
3.4.3. Export
Sustaining favorable situation at the world market had a positive influence on the development of Russian export, which exceeded the annual figures over the last 17 years in 2006. In 2006 the monetary value of Russian export was equal to USD 304.5 bln., which is 25% higher than in 2005. At the same time the growth proceeded both due to the increase of export sales to non-CIS countries (growth
375
by 24.3%) and to CIS countries, where goods worth USD 43.4 bln. were exported, which exceeded the corresponding figure for 2005 by 29.5%.
Table 51
The Dynamics of Russian Export
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Export, as USD bln. 89.7 86.9 74.4 75.6 105.0 101.9 107.2 135.4 183.2 245.3 304.5
including:
non-CIS countries 71.1 67.8 58.7 63.6 90.8 86.6 91.0 113.9 152.9 211.6 261.1
Growth rates, as percentage to the previous year
Quantity index 100.1 101.8 99.7 109.4 110.2 104.2 115.0 109.5 110.7 104.7 105.8
Price index 108.6 98.1 84.2 92.1 128.2 93.8 86.0 1 1 3.4 122.7 126.9 119.7
Source: the Central Bank of the Russian Federation, the Ministry of Economic Development and Trade
Nevertheless throughout 2006 the trend for the decrease in growth rates of Russian export outlined. In August its volume increased by 30.3%, whereas in September - by 19% and in October - only by 12.2%, in November - by 14.9% as compared with the corresponding months of 2005. This is happening due to the drop in oil prices, which began in the middle of the year, as well as the growth of competition at the markets, where Russia was a traditional supplier. For instance, in the Middle East fresh capacities are being put into operation in chemical industry, China is reducing Russian metallurgy import because of the increase in domestic output.
According to the data of the Bank of Russia, efficiency index for exportation of the set of goods, including 75% of the Russian export value, was on average equal to 1.06 within January-August 2006, in January-August 2005 being 1.14.
The profitability of raw materials export decreases mainly due to the change for the worse in the situation at the world market of mineral resources used as sources of power by the end of the year, of non-raw materials export - due to the appreciation of ruble. The decrease in export growth rates starts to have a slowdown effect on the development of the economy.
In export structure the significance of mineral resources used as sources of power continued to increase: in all more than 80% of the increase in monetary volume of export sales was accounted for by mineral products.
High export growth rates were mainly accounted for by a considerable increase in world prices for raw materials. Oil, oil products and gas export in terms of value increased by 33.6%, while other goods export - by 12.7%.
The average world price for oil grade Urals was at the level of USD 57.1 per barrel in December 2006. As a result, even though in the fourth quarter the prices for oil dropped by 14.7% as compared with the preceding quarter, the average price for this Russian oil grade in 2006 was equal to USD 61.0 per barrel, being 21.1% higher than the figure of 2005.
350 -,
2000 2001 2002 2003 2004 2005 2006
□ Oil □ Oil products □ Gas □ Others Fig. 37. Russian Export (bln. USD)
In 2006 the profit of Russian oil exporters increased by 22% from USD 79.216 bln. last year to USD 96.675 bln.
According to the Federal Customs Service data, last year the volume of Russian oil export shipment was equal to 227.538 mln. tons, which is by 2.4% lower than in 2005 - 233.147 mln. tons. Crude oil supplies to non-CIS countries decreased by 1.6% - from 214.435 mln. tons down to 211.171 mln. tons. At the same time the monetary volume increased by 23%. The suppliers' profit was equal to USD 90.755 bln. against USD 73.826 bln. in 2005. Crude oil supplies to CIS countries decreased by 12.5% - from 18.711 mln. tons down to 16.367 mln. tons. In pecuniary terms export to CIS countries increased from USD 5.39 bln. up to USD 5.919 bln. The export volume of oil products in monetary terms increased by 31.4% up to USD 44.217 bln. against USD 33.65 bln. in 2005. The physical volume of oil products export supplies was equal to 102.278 mln. tons, which is by 6% more than last year - 96.451 mln. tons (Fig. 37).
Shipping of diesel fuel increased by 6.7% up to 36.057 mln. tons, exporters' profit - by 25% up to USD 20.246 bln. The volume of motor petrol supplies increased from 5.922 mln. tons up to 6.268 mln. tons, exporters' profit - from USD 2.477 bln. up to USD 3.403 bln. Black oil supplies increased from 45.843 mln. of tons up to 47.534 mln. tons, in pecuniary terms - by 34.5% up to USD 13.718 bln.
In 2006 gas export from Russia decreased by 3% down to 182 bln. cu. m from 187.2 bln. cu. m in the corresponding period of 2005. Exporters' profit grew by 40% - from USD 30.424 bln. up to USD 42.16 bln. Gas export supplies from the
Russian Federation to non-CIS countries increased by 1.3% - from 159.8 bln. cu. m up to 161.8 bln. cu. m, whereas to CIS countries decreased by 26.3% - from 27.4 bln. cu. m down to 20.2 bln. cu. m.
Table 52
Monetary Volumes of Russian Export of Oil, Oil Products and Gas (as USD mln) and Their Proportion in the Aggregate Volume of Russian Export (%)
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 12297 15.2 4108 5.1 13381 16.5
1996 15578 17.6 7442 8.4 14683 16.6
1997 1 4346 16.2 7145 8.1 16420 18.6
1998 10254 13.7 4262 5.7
1999 14101 18.8 4713 6.3
2000 25284 24.1 10938 10.6 16644 16.1
2001 24576 24.1 9402 9.4 18303 18.3
2002 28950 27.0 11227 10.5 15897 14.9
2003 38816 28.6 14064 10.5 19981 15.0
2004 55024 30.0 18998 10.5 20918 11.5
2005 79216 32.5 33650 13.6 30424.2 12.9
2006 96675 31.7 44217 14.5 42160 14.1
Source: Federal Statistics Service, Federal Customs Service data
Russia remains a large-scale exporter of metals, which is the evidence of competitive capacity of Russian goods.
Metals and metal goods are the goods group of second importance in Russian export. The share of this goods group was equal to 13.9%, having decreased by 0.4 p.p. as compared with 2005.
In 2006 metal and metal goods export was equal to USD 40.1 bln. (121.7% versus 2005), including to CIS countries USD 36.5 bln. (120.7%), to CIS countries - USD 3.6 bln (133.2%).
Ferrous metals export decreased by 0.2% and was equal to USD 17.8 bln, including to non-CIS countries - USD 16.1 bln (decrease by 2.1%), to CIS countries - USD 17.1 bln (increase by 22.4%). The main export product is rolled metal whose share in ferrous metals export value is equal to 60%.
In 2006 the physical volume of ferrous rolled metals export (prepared raw materials, profiled iron and sheet products) was equal to 28.4 mln. tons (96.4% versus 2005). At the same time the rolled metal export to non-CIS countries decreased by 6.2% (being 25.5 mln of tons), including profiled metal - by 24.9%, sheet goods -by 14.5%. Export of half-finished products increased by 4.3%. Export prices for steel half-finished products and sheet goods increased by 3.6%, for profiled iron - by 11.9% over 2006. The main increase in prices fell on the II half-year of 2006.
The decrease in the physical volumes of the export of ferrous metals rolling was caused by the limitations implemented my many countries for the import of Russian metal production, as well as the decrease in the supplies to the Asian region which is accounted for by the increase of China rolling supplies to the main sales markets, first of all in countries of East and South-East Asia.
Thereupon the export of sheet products from Russia to Asia region has diminished by nearly 80% (including to China - by 93.5%), the export of profiled iron - by 605%, including to China - by 20%.
Russian exporters of ferrous metals were able to redirect the supplies to other external markets. The rolled metal export to North America (USA, Canada), Europe, South America, and countries of Africa has increased. Middle East is still a promising market. In 2006 the supplies of ferrous metals produced in Russia were made to 90 countries of the world.
In 2006 there increased physical volumes of export supplies of cast iron (by 15.6%) and iron ore materials (by 24.2%), decreased export supplies of coke (by 45.4%), ferroalloys (by 12.5%), steel pipes (by 12.4%). At the same time the supplies to non-CIS countries of cast iron (by 14.5%) and iron ore materials (by 30%) increased, but supplies of coke (by 55%), ferroalloys (by 13%), steel pipes (by 30.3%) decreased as a result of supplies decrease to EU countries because of limitations implementation for seamless pipes.
Russian metallurgists operated most successfully at the markets of CIS countries. The ferrous metals rolling export to CIS countries increased in 2006 by 26.8% against 2005, including profiled iron - by 25.8%, of sheet products - by 22.2%, of steel pipes - by 24.1%.
The monetary volume of main non-ferrous metals (aluminum, copper, nickel) export to non-CIS countries exceeded the level of 2005 by 50.2%. The export growth was reached mainly due to the increase in export prices. Thus, average prices for aluminum grew up by 24.4%, for nickel - by 55.6%, for copper - by 87%. At the same time the physical volumes of export of unprocessed aluminum went up by 9.6%, of nickel decreased by 0.7%, of purified copper - by 12.8%. It is remarkable that the equipment and machinery export grew up intensively in monetary terms: in 2006 monetary volume of this goods group increased by 29.7% against 2005. Thus, despite the fact that considerable appreciation of ruble against dollar and euro must have a negative impact on technological export, the positive dynamics sustains. Nearly half of machinery and equipment export is made to CIS countries, against whose currencies ruble appreciated negligibly. Another explanatory factor is a gradual implementation of the government program of financial and guaranteeing support of industrial export, which lead to the conclusion of several big contracts.
Nevertheless the share of machinery, equipment and transport vehicles in the total volume of the Russian export remains at the low level of 5.5% (in 2005 it was 5.3%).
Fig. 38. Commodity Structure of Russian Export in 2006 (percentage)
Thus, the main problem of Russian export is still its inefficient commodity structure. Fuel and raw materials orientation of the country, which is acceptable at a certain stage and under certain circumstances, does not evolve into more developed forms, connected with the increase in the extent of the processing of raw materials, which restricts considerably the possibilities of Russian presence expansion at the world market.
The main part of deep processed products export consists of the metal wares, machinery, equipment and the chemistry industry production.
Metal goods, supplied for export, include metal constructions made from ferrous metals and aluminum, aluminum foil, stranded wires, razors and blades, tanks, cisterns, pipes, sticks and other goods.
In recent years steady growth of the chemistry production export is sustained, however the decrease in world prices for oil and oil products in the second half of 2006 accounted for the decrease in the export growth rates of this kind of commodities. In 2006 export supplies of chemistry and petrochemistry industries production comprised USD 11.6 bln., i.e. 103% against the level of 2005.
Enterprises of the industry export more than 1/3 of chemicals produced. The main items of Russian export are mineral fertilizers (32%), chemical rubber (9.5%), ammonia (6%), aromatic hydrocarbons (5.3%), car tires (5.3%), plastics (5.3%) and synthetic resins (5.1%).
Wood and paper goods export, including furniture, was equal to USD 9.3 bln. in 2006, being 114.3% against the level of 2005. At the same time the physical volumes of the export growth rates slightly decreased in 2006. Thus, in 2006 round
wood export growth was equal to 106.9% against 115.7% in 2005, carving wood export - to 107.8% (117%), veneer - to 102.9% (107%). At the same time the physical volumes of these goods export to CIS countries are characterized by anticipating growth rates (122.7, 132.9, 136.4% respectively).
In the structure of light industry export unbleached cotton fabrics comprise the main part. Higher demand for domestically produced cotton fabrics in non-CIS countries is due to relatively low prices and 100% content of cotton, there being no dash of man-made fabrics. In 2006 cotton fabrics of 337.1 mln. sq. m (96% against 2005) worth USD 120 mln. were exported. At the same time cotton fabrics of 157.4 mln. sq. m (85% against 2005) worth USD 62 mln. were exported to non-CIS countries.
Favorable situation at the world market secured a considerable growth of contract prices for the main items of Russian export. Over 2006 the average weighted contract prices for oil in non-CIS countries increased by 24.8% in comparison with 2005. The average export contract price for Russian oil in 2006 was equal to USD 429.8 per ton. In August 2006 the average contract price for oil reached its maximum level of USD 485.4 per ton. Since September 2006 the trend for price decrease evolved, price being approximately USD 400 per ton by the end of the year, which corresponds to the price level of January-February 2006 (Table 53).
Average export prices for cast iron, ferroalloys, iron ore materials, coke supplied to non-CIS countries decreased in comparison with 2005 by 10.9%, 5.7%, 23.8% and 34.4% correspondingly, and for steel pipes went up by 18.5%.
Export prices for unprocessed aluminum increased in 2006 in comparison with 2005 by 25.7%, for copper - by 87.7%, for nickel - by 59.2%, for aluminum wares - by 15.2%, for copper goods - by 78.5%.
Table 53
Average Export Prices for Main Russian Export Goods (Supplies to non-CIS Countries, as USD per ton)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Crude oil 133.5 118.5 74.4 110.9 179.9 156.4 162.4 181.2 231.9 344.3 429.8
Oil products 129.9 115.7 75.7 94.5 171.9 145.2 147.9 180.2 230.3 340.6 430.1
Natural gas thos.m3 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 72.4 118.5 158.3 176.2 195.7
Nitrogen fertilizers 128.0 90.3 58.3 36.8 57.9 61.8 60.6 76.0 103.1 139.1 146.0
Potash fertilizers 7.2 79.7 87.4 86.4 86.6 76.8 74.9 77.8 94.3 133.9 150.3
Round timber, m3 59.4 57.5 46.9 43.5 43.4 45.6 44.8 47.8 56.2 59.6 63.8
Cellulose 407.3 373.5 342.9 274.0 352.2 293.4 300.0 321.7 371.9 386.1 436.7
Commercial paper 473.7 383.4 394.0 349.5 386.6 421.7 332.2 338.3 387.9 455.3 498.6
Cast iron 136.8 124.2 104.3 66.8 80.7 86.2 91.1 126.8 242.7 274.4 244.4
Ferroalloys 1114 819.2 740.8 548.2 625.6 601.7 625.7 634.6 1097.8 1582.5 1492.3
Copper 2143 2099 1655 1495 1675 1465.3 1371.4 1564.9 2587.6 3389.8 6361.7
Nickel 7272 6733 5140 5761 8629 5730.9 6143.9 8584.0 12660.0 14242.5 22674.4
Aluminum 1500 1401 1352 1157 1296 1176.3 1036.9 1050.0 1162.1 1299.2 1633.5
Source: Federal Customs Service
Export quota (the share of export in production) in 2006 increased regarding oil, oil products, coal, unprocessed wood materials; decreased in case of gas, mineral fertilizers, flat sections, pulp, commercial paper, passenger cars and trucks.
Table 54
Share of Export in the Output of Major Products (%)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Crude oil 41.5 41.7 41.6 45.2 44.2 44.8 46.5 49.7 53.1 56.1 54.0 57.0
Oil products 25.8 32.4 34.7 32.9 33.6 36.3 35.5 40.8 40.9 42.1 46.7 47.8
Natural gas 32.2 33.1 35.2 34.5 34.6 33.2 31.2 31.2 32.7 33.9 34.2 31.3
Coal 17.1 15.8 14.5 15.7 16.7 25.7 22.2 23.8 30.8 52.9 51.8 53.8
Mineral fertilizers 83.9 85.9 80.6 86.5 83.2 82.9 81.8 78.1 76.1 78.5 74.5 62.7
Round wood 22.3 23.2 29.3 34.1 40.1 42.4 53.4 51.0 46.1 49.6 60.1 61.2
Chemical wood pulp Commercial paper 74.8 85.7 82.8 77.6 79.1 82.4 83.7 85.1 82.9 77.5 79.7 79.2
71.1 72.2 70.1 74.6 70.6 69.0 67.4 68.6 66.0 65.6 61.2 57.3
Iron and
steel flat 53.1 59.7 58.6 63.5 60.6 55.3 43.0 50.5 47.1 46.1 48.4 39.7
sections
Passenger cars 16.7 10.4 4.9 8.3 7.3 12.2 10.1 12.3 11.7 11.8 12.5 10.7
Trucks 25.4 17.4 10.7 9.6 8.3 7.0 12.3 20.8 19.3 23.0 22.8 20.6
Source: Federal Statistics Service, Federal Customs Service
3.4.4. Import
Russian import reached in 2006 its maximum over the last 15 years level, considerably exceeding previous years figures. Over 2006 the goods worth USD 163.9 bln. were imported, which is by 30.8% higher than the similar figure of 2005. Goods worth USD 138.6 bln. were imported from non-CIS countries, growth being 34%, from CIS countries - worth USD 25.2 bln., growth of 15.6%. In the total amount of import the share of non-CIS countries was equal to 84.6% in 2006, in 2005 - 82.6% (Table 55).
Table 55
Import to Russia (as USD bln.)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Import, total 68.1 72.0 58.0 39.5 44.9 53.8 60.5 76.1 97.4 125.3 163.9
including:
non-CIS countries 47.3 53.4 43.7 29.2 31.4 40.3 48.2 60.1 76.4 103.5 138.6
Growth rates, as % vs . the previous year
Quantity index 98.1 121.1 89.0 84.4 129.2 129.1 117.6 119.2 124.2 122.4 130.1
Price index 100.2 94.8 92.3 82.1 86.7 94.3 93.4 98.7 106.1 106.5 105.5
Source: the Central Bank of the Russian Federation, the Ministry of Economic Development and Trade
The growth of the domestic demand due to the incomes increase in the environment of ruble appreciation continued to have intensifying influence on the increase of physical volumes of import for nearly whole range of goods. 382
Real effective ruble exchange rate against the currency basket of the main Russia's trade partners went up by 7.4% in comparison with December 2005. At the same time real ruble exchange rate against US dollar increased by 16.7%, against euro - by 5.6%.
Real effective ruble exchange rate averaged through January to December 2006, in comparison with January-December 2005 increased by 9.4%, to US dollar increase being, in particular, 10.7%, to euro - 11.5%.
It should be remembered that in 2005 real effective ruble exchange rate to the currency basket of Russian main trade partner countries went up by 10.5%, real exchange rate of ruble to dollar increasing by 3.9%, to euro - by 18.8%.
One additional factor, which affected the growth of import supplies, was the improvement in customs regulations. The difference between the volume of declared goods and goods really imported in 2006 was the lowest over 10 years. Whereas in 1996 invisible import reached the proportion of 44.7% of the official, in 2006 it decreased to 20.7%, being 29% in 2005.
The increase of import was observed over almost all range of goods. The machine-building production import developed most dynamically. In 2006 the proportion of this kind of production in the structure of Russian import reached the level of 48.1%, exceeding 2005 figures by 3.6 p.p. The monetary volume of machinery, equipment and transport vehicles import increased by 52.3% in 2006 in comparison with 2005.
The increase of the total amount of the import of machinery and equipment was assisted by the sustaining trend for official import of household appliances and radio electronics growth. Thus from January to September 2006 import supplies of mobile phones to Russia increased more than by 3.3 times, which is equal to 19 mln. of phones, in comparison with the corresponding period of 2005, the average price of the phone being imported increased over this period from USD 39.3 to 149.2. Total value of the imported mobile phones increased by 12.75 times - up to USD 2.84 bln.
From January to September 2006 there were by 2.56 times more of laptops imported than in the corresponding period of the previous year, customs value of supplies increasing by 4.6 times up to USD 163.6 mln. Such growth of import supplies is most likely accounted for by the measures against illegal goods import and undercharging of the declared customs value.
The additional stimulus for the increase in machinery and equipment import in 2006 was nullification of import customs duties for a large list of technological production items, analogues of which are not produced in Russia.
The share of foodstuffs and agriculture raw materials in the total amount of Russian import in 2006 decreased down to 15.6% against 17.5% in 2005. The monetary volume of this kind of goods increased by 25%. The biggest increase was observed for meat and meat products, sugar, confectionery and fruit import.
The proportion of the third in the order of importance goods group -chemistry industry production - decreased from 17 to 16.2%. In 2006 chemistry
production import comprised USD 21.2 bln., which is 134% against the level of 2005.
Goods range and assortment for chemistry and petrochemistry production import is considerably larger than export assortment, which is orientated towards raw materials, and represents mainly the deep processed goods. The main import nomenclature is plastic wares, varnish-and-paint materials, plastics and synthetic resins, polyester fibers and plants protection substances.
Among other items of import supplies it was textile production and footwear supply that was characterized by high growth rates. In 2006 the goods of light industry worth USD 4.8 bln. were imported, which is by 158.4% higher than over the corresponding period of the previous year.
Monetary volume of clothes and footwear export in 2006 went up by record 87%. Footwear import from CIS countries was 58.3% (in total USD 6.5 mln.) higher, and from non-CIS countries by 2.1 times higher (in total 651.5 mln.). It should be remembered that in 1996 customs duty for footwear at the rate of 20% was implemented, after which legal import of footwear decreased nearly by half. The situation was radically changed only in 2006 when the double scale of rating was introduced: for expensive footwear the duty was reduced to 10%, for cheap remained at the level of 20%.
The growth of population real incomes contributed to the increase in luxury goods import. Import of rawstocks, furs and respective goods increased by 63.1%, of precious stones and metals and goods thereof - by 26.7%.
Other goods
3,2% \ Mineral products
\ Foodstuffs and agricultural raw f~ 2,4%
Fuel and energy products
Chemical products, rubber 15,9%
Rawstocks, furs and goods thereof
0,3%
Machinery, equipment and transport vehicles 47,4%
food and pulp-and-paper products
2,8%
Textile, textile goods, footwear
Source: Federal Customs Service of the Russian Federation
Fig. 39. Goods structure of Russian Import in 2006 (%)
In May 2006 the trend for anticipating growth rates of import to Russia against Russian export evolved. While in the 1st quarter of 2006 the export supply grew up by 34.5% as compared with the corresponding period of the previous year, the import supply - by 23.5%, in the 2nd quarter their growth rates were almost equal -28.6 u 29.1, correspondingly, and in the 3rd quarter the export growth rates were far behind the import figures - 23.1 and 31.6, correspondingly. In the 4th quarter 2006 this lag grew further: export grew up by 16.8% in comparison with the 4th quarter 2005, while import - by 35.7%.
The trade balance surplus growth rates declined as a result. While in 2004 as compared with 2003 the balance grew by 43.4%, in 2005 - by 37.8%, in 2006 it grew only by 18.9%.
In 2006 positive trade balance in the amount of RUR 140.6 bln was formed. At the same time the disequilibrium coefficient of the foreign trade (the ratio of trade balance surplus to foreign trade turnover) was a bit lower than in 2005 (30 and 32.1% correspondingly).
In 2006 the index of foreign trade environment with non-CIS countries - the ratio of export and import prices - was equal to 1.14, being 1.22 in 2005.
3.4.5. Geographic Structure of Foreign Trade
The EU remains the biggest economic partner when geographic structure is concerned. Its share in 2006 was equal to 52.7% of Russian goods turnover (in 2005 - 52.0%). (Fig. 40) the share of CIS countries continues to decrease: whereas in 2005 its share was equal to 15.2% of the Russian trade turnover, in 2006it was 14.7%, at the same time the share of the countries of Euro-Asian Economic Community remained approximately at the same level of 7.7% (in 2005 it was 7.8%).
The trade collaboration with the countries of Asia-Pacific Economic Cooperation expands. Their share in Russian trade turnover increased up to 17.1% against 16.2% in 2005.
The major Russian trade partners among non-CIS countries in 2006 were Germany, with the turnover of USD 42.9 bln. (130.1% against 2005), Netherlands -USD 38.5 bln. (145.1%), Italy - USD 30.8 bln. (131.4%), China - USD 28.6 bln. (141.0%), Turkey - USD 17.0 bln. (135.6%), the USA - USD 15.3 bln. (140.7%), Poland - USD 14.9 bln. (130.9%), the UK - USD 14.0 bln. (126.9%), France - USD 13.5 bln. (137.5%), Switzerland - USD 13.4 bln. (114.7%).
100% 90% 80% 70% 60% 50% ^ 40% 30% 20% ^ 10% 0%
2003 January-April May-December
2004 2004
2005
2006
1 EU □ Candidates for EU DAPEC DCIS DOther countries
Source: Federal Customs Service of the Russian Federation
Fig. 40. Geographic Structure of Russia's Foreign Trade
GERMANY NETHERLANDS ITALY CHINA UKRAINE BELARUS TURKEY USA
h
_1
5000 10000 15000 20000 25000 30000 35000 40000
□ export □ import |
Fig. 41. Principal Trade Partners (USD mln.)
0
In contrast to export where the increase of monetary volumes to non-CIS countries was a bit lower than to CIS countries (+24.3 and +29.5%, correspondingly), in the import geographical structure it was the cooperation with non-CIS countries that developed notably more intensively than with the partners among CIS countries (in comparison with 2005 - 34% against 15.6%). This was also promoted by significantly bigger appreciation of ruble exchange rate to dollar and euro than to CIS countries currencies. Thus, according to the National Bank of Belarus-sia data, the real appreciation of Russian currency over 10 months of 2006 to Bela-russian ruble was 5.6%, to hryvna - 2.5%, to Khazakhstanian tenge - the depreciation of 0.9%. Besides, structure causes are also of some importance: the most demanded group of import commodities - machinery and equipment - is purchased chiefly in non-CIS countries.
As a result of 2006 the leader among CIS countries in the trading volume with Russia was the Ukraine, the growth of commodity turnover with which was 19.7% up to USD 24.197 bln. The Russian export to the Ukraine increased by 20.8% up to USD 14.978 bln, while import - by 17.9% up to USD 9.218 bln. The second place is held by Belarus. The commodity turnover between Russia and Belarus grew by 25.9% up to USD 19.934 bln. Khazahstan, the volume of mutual trade with which increased by 31.2% up to USD 12.808 bln, holds the third place.
3.4.6. Foreign Trade Regulation
In the sphere of tariff regulations the issues of import and export customs duties amendments for a set of goods were considered.
In connection with the change in the world prices for oil the export duties rates for oil and oil products were reconsidered for a number of times (Table 56).
Table 56
Export Duty Rates for Oil and Oil Products in 2005-2006 (USD per ton)
Oil Oil products
2005 light dark
1 February 83.0
16 March 68.2 36.7
1 April 102.6
24 April 81.4 43.8
1 June 136.2
27 June 104.1 56.0
1 August 140
23 August 106.6 57.4
1 October 179.9
29 October 133.5 71.9
1 December 179.6
2006
1 February 160.8
7 March 120.7 65
1 April 186.4
6 May 137.9 74.3
1 June 199.8
26 June 146.9 79.2
1 August 216.4
20 August 158.1 85.2
1 October 237.5 172.4 92.9
1 December 180.7 134 72.2
Source: Decrees of the Government of the Russian Federation
In July 2006 the Federal Law No 145-03 "On making amendments to the asset 3 of the Law of the Russian Federation "On customs tariff". The law establishes that the export duty rates both for oil and oil products will be adopted for two calendar months, but put into effect on the 1st day of the second calendar month, which follows the end of monitoring period, and the resolutions of the Government of the Russian Federation on their introduction should be promulgated no later than 10 days before their implementation. This will enable to synchronize the time of the entry into force of the resolutions on the export duties correction both for crude oil and for oil products.
The mechanism that existed earlier had a considerable drawback of the significant gap in time (20 days) between the period during which new duties rates were calculated and the period in which new rates came into effect. The significant gap in time led to the loss of the additional incomes to the Federal Budget. For instance, according to the estimations, over May-June of 2005 the growth of customs rates being USD 2, the losses over just 20 days were equal to approximately USD 6 mln., within January-February of 2005 the duties growth rates being USD 17, the losses over 20 days reached USD 60 mln. The entry into the effect of the Law No. 145-03 will contribute to the raising of additional financial funds to the Federal budget.
In the sphere of the customs and tariffs trade turnover regulation the special attention was given to the making decisions directed to the protection of the domestic market from the increasing goods import, support for domestic producers, attraction of additional investments to goods production in Russia as well as to the increase of the competitiveness of Goods produced in Russia at the world markets.
The Government of the Russian Federation adopted 44 decrees on the change in the goods nomenclature and customs duties rates.
Thus, with the aim to assist the technical reequipment of the Russian economy the Government of the Russian Federation adopted the decree from 24 March 2006 No. 168 "On temporary rates of the import customs duties for some kinds of technological equipment", according to which the duty free customs regime was introduced for a long list of the technological equipment used in agriculture, medical industry, timber industry complex, machine building and other branches of industry.
To stimulate further development of motor car construction in the territory of the Russian Federation the duty free import regime for components, used to produce units and assemblies of motor transport vehicles was adopted (the decree of the Government of the Russian Federation from 16 September 2006 No 566 "On making amendments to the Customs Tariff of the Russian Federation with regard to the motor-vehicles components imported for industrial assemblage").
In order to fulfill the program on aeroengine SAM146 production for Russian regional aircraft RRJ the export duties rates for utilities and raw materials for aeroengines production and technological equipment, used in aviation industry, were called off according to the decree of the Government of the Russian Federation from 26 September 2006 No589 "On temporary import customs rates for utilities and a number of primary goods for aeroengines production"; the decree of the
Government of the Russian Federation from 22 June "On temporary import customs rates for technological equipment for aviation industry".
In order to protect the economic interests of Russian producers of agricultural products, the Government of the Russian Federation adopted a number of decrees:
- from 17 April 2006 No 214 "On approval of the import customs duty rate for some kinds of native and modified starch". Implementation of uniform import customs duty rate for all kinds of starch was caused by the necessity to eliminate unreliable declaration of the goods crossing the border;
- from 25 July 2006 No 456 "On making amendments to the Customs tariff of the Russian Federation with respect to some kinds of cheeses". This decree introduced special import duty rates for cheeses for the period of 9 months in order to protect the market of hard cheeses from the increased import of such products, to increase the domestic output of these goods, to make the competitive conditions equal for domestic producers and importers.
- from 13 August 2006 No 488 "On approval of the import customs duty rate for partially processed fats and oils, margarine products and spreads". The increase of the import customs rates for this kind of the product will enable to increase the volume of the domestic fat and oil production. .
To implement paragraph 8 of the Government of the Russian Federation instruction from 11 October 2004 No MO-ni3-5577 on the decrease of the import duties rates for agriculture raw materials that does not grow in the territory of the Russian Federation, the RF Government adopted a number of decrees, according to which the duty free regime is introduced for not roasted coffee, cacao beans, peanuts (from 13 August 2006 No 487 "On approval of the import customs duties rates for non-roasted coffee", from 13 August 2006 No 486 "On approval of the import customs duties rates for cacao beans, whole or splintered, raw or roasted", from 13 August 2006 No 489 "On approval of the import customs duties rates for some kinds of peanuts").
In order to protect Russian goods producers applying trade protection mechanisms - special protective, antidumping or compensatory measures - the investigations were carried out, as a result of which some special protective measures were implemented regarding the increased import to the Russian Federation.
On the basis of investigations findings some measures were applied:
- special protective duty regarding the increased import of incandescent lamps from 3 March 2006 for 3 years time (the decree of the Government of the Russian Federation from 28 January 2006, No 50);
- antidumping duty for the import of some kinds of steel pipes from the Ukraine from 31 January 2006 for 3 years time (the decree of the Government of the Russian Federation from 29 December 2005, No 824);
- compensatory duty for import of sticks for concrete reinforcement form the Ukraine from 23 January 2006 for 1 year 8 months (the decree of the Government of the Russian Federation from 21 December 2005, No 791).
At present antidumping investigations regarding high-carbon ferromanga-nese, hardware for machine-building, flat cold-rolled metal from the Ukraine are
taking place, compensatory investigation into white sugar from the Republic of Belarus is being carried out.
From 21 December 2006 the protective measures at the market of breeches have been introduced: breeches import with the exception for some countries production is taxed with 8% duty rate. Importers consider this resolution to lead to the monopolization of the Russian market, and domestic producers, on the contrary, are of opinion that this will step up the competition.
The special duty is imposed on all the breeches with the diameter from 508 to 1420 mm, excluding those originated in developing countries, which are privileged according to the national system of the Russian Federation. There are 104 such countries all in all (the list, for instance, includes the breech producers from China, Argentina and Mexico).
Last May the Fund for the Development of the Pipes Industry (FDPI) appealed to the Ministry for the Industry and the Energy with a suggestion to introduce the quotas to set a limit for the use of import pipes at the construction of the big projects of 30%. In the spring the tariff measures were considered sufficient to protect the market from the import in the Government (according to the Federal Customs Service data from January to October 2006 the import comprised 1.1 mln. tons worth USD 1.2 bln.). It was decided to change the conditions only in November when the decree of the Government of the Russian Federation "On measures of Russian breeches producers protection».
The duties will primarily affect the Ukrainian producers of breeches, whose production will be subjected to the additional customs load. Last December the Ukrainian breeches were subjected to the duty of 8.9%.
The characteristic feature of 2006 was the intensification of the operation of the Federal Supervision Service for Consumer's Right Protection in the sphere of import supplies regulations to Russia. Thus, from 27 March 2006 the supplies of Georgian and Moldavian wines and wine materials to Russia were limited in accordance with the resolution of the Federal Supervision Service for Consumer's Right Protection because of the quality complaints.
In April 2006 the import of Moldavian and Georgian cognacs, wines and sparkling wines was banned. The volume of their supplies to Russia was estimated to be at the level of USD 75 mln. per year. In April the decision was made to ban the import to the territory of the Russian Federation of the mineral water marks "Borjomi" and "Nabeglavi" from Georgia because they did not meet the quality requirements of the Russian Federation.
During 2006 the Federal Supervision Service for Consumer's Right Protection implemented the following bans for the import of:
- any agricultural products from Poland due to detected by Federal Supervision Service for the Agriculture mass violations during certificates and customs papers registration;
- vegetable products from Holland because the authorities of this country could not provide the Federal Agency for Veterinary and Phytosanitary Supervision products absolute guarantee of safety;
- cane sugar from Belarus, because Belarus was used as a transit country for the duty free import of sugar from other countries;
- canned fish from Latvia because of the detected by the Federal Supervision Service for Consumer's Right Protection exceeding of maximum permissible concentration of benzopyrene in them;
- meat and cattle from Sweden. The ban was accounted for by the Federal Agency for Veterinary and Phytosanitary Supervision because of the danger of the mad cow disease spread;
- meat from the Ukraine;
- cooled fish and seafood from Norway because of the exceeding of cadmium maximum permissible concentration detected by Federal Supervision Service for Consumer's Right Protection.
In the beginning of 2006 the Government of the Russian Federation again introduced the measures to make the conditions of so-called shuttle business operation tougher. From 26 February 2006 the decree of the Government of the Russian Federation No 29, making amendments to the Statute on the implementation of the uniform customs duties rates and taxes in respect to the goods carried across the border by individuals.
Shuttle business started developing in the beginning of the 90ies when it became the main source of income for many citizens, as well as thanks to the possibility of free import of goods worth less than USD 5000 by individuals. Officially the duties were not imposed only on goods imported for the private use, but this privilege, in fact, opened the channel to the duty-free commercial import. Moreover, at the beginning the shuttle traders, not registering their commercial activity and selling goods at the open-aired clothes markets, did not pay any taxes, excluding the fee for the right to sale, coming in the local budgets.
As a result shuttle trade was characterized by an extremely high efficiency level: for a long time the profit rate remained higher than 100% for one trip. This efficiency and the scale of turnover led to the formation of the developed infrastructure around shuttle business, including whole sales markets, tourism and transportation companies in Russia as well as hotels, shops, stocks and plants in Turkey, China and other countries-suppliers, which specialized on Russian clients servicing.
In order to regulate shuttle business and impose real control over it, on 23 December 1993 the Government of the Russian Federation adopted the decree No 1322 "On the regulations of transportation across the customs border of the Russian Federation the goods, not intended for any industrial or any other commercial activity, by individuals". New regulations put normal and shuttle import on a par. Individuals could bring into the country goods worth up to USD 2,000 duty-free. For the goods exceeding this quota the uniform customs rate was introduced of 60% of their customs value.
According to the decree of the Government of the Russian Federation from 3 June 1995 No 553 the uniform rate was decreased by half - down to 30%, however in order to counteract the underdeclaration of the customs value specific duties were introduced (in ECU per item or per kilo). This included clothing and footwear, TV sets, video games and cartridges for them, toys, leather and fur clothes. In connection with the necessity of compensation for budget losses because of the abolition of the export duties in 1996 the conditions for individuals goods transport
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into the territory of the Russian Federation from foreign countries became stricter once again. According to the decree of the Government of the Russian Federation from 18 July 1996 No 808 «On the regulation of transportation across the border of the Russian Federation goods not intended for any industrial or any other commercial activity by individuals" the norms for the duty free goods transport to the territory of the Russian Federation by individuals were decreased from USD 2000 to 1000 on the condition that the total weight of the goods does not exceed 50 kg. The goods of any commodities group with the worth up to USD 10,000 (no more than 200 kg) were imposed with the customs duties of the uniform rate of 30% of the customs value, not less, however, than 4 ECU per kilo.
From 1 January 2004 the Statute on the implementation of the uniform customs duties rates and taxes for the goods transported across the border of the Russian Federation by the individuals for the private use came into effect, adopted by the Government of the Russian Federation on 29 November 2003 No 718. According to it, the individuals could import goods without paying customs duties whose total value did not exceed RUR 65,000 and the total weight is less than 50 kg(with exception for transport vehicles).
In the new wording of the Statute the norms for the duty-free luggage transport were reconsidered. Now it is possible to import goods without paying the customs duties if the weight does not exceed 35 kg. The frequency of goods crossing the Russian customs border has also been changed. Whereas earlier it was possible to transport duty free goods not oftener than once a week, now it is possible only once a month. The changes did not influence the monetary value of imported goods. As before individuals can transport goods without paying customs duties and taxes with the total value less than RUR 65,000 with the exception for transport vehicles.
The aim of the changes is to create competition environment equal for all participants of the foreign economic activity. The regime of goods import by individuals that existed before gave the commercial structures the opportunity to import goods without paying customs duties with the help of the shuttle traders, who were specifically employed for this aim. As a result the Federal Budget did not receive considerable sums both from customs and domestic taxation. Besides, Russia is actively working on its accession to the WTO and shuttle business is included neither in WTO regulations nor in the regulations of the international trade. What's more, the goods imported into the country duty-free by the shuttle business are the cause of discontent among domestic producers. As imported by the shuttle traders to the country luxury objects are not levied with the excise duties or value added tax, the individuals with high level of incomes are excluded from the taxation. Finally, shuttle business implies rather high level of crime. The goods are not subjected to the due certification on the quality, and infringing goods are often imported. As a result the domestic markets gets overstocked with the import of poor quality.
In 2006 the Government of the Russian Federation paid more attention to the security of free, or at least, nondiscriminatory access of the goods and services to the foreign markets.
By the number of export limitations Russia can be considered as one of the most discriminated countries in the world. Whereas at the beginning of January 2001 the number of limitations did not exceed 100, 111 measures are in force against Russian goods according to the data for 11 December 2006, including 47 antidumping duties, 3 price limitations, 1 assortment limitation, 1 import ban, 2 extra taxes, 2 tariff quotas, 1 plant sanitary measure, 2 excise taxes, 1 tax regulation of foreign trade and 39 measures implemented by the Republic of Belarus. 10 antidumping and 10 special protective investigations as well as 11 revisions of antidumping measures are being carried out.
19 countries (Australia, Argentina, Belarus, Bulgaria, Brazil, Venezuela, India, Kazakhstan, Canada, China, Mexico, Peru, Uzbekistan, the USA, Thailand, Ukraine, SAR, Azerbaijan), as well as EU countries apply protective measures against Russian goods, the damage from which to Russia was equal to USD 2039 mln. Two more countries - Philippines and Indonesia - started investigations.
In the process of the work on the liberalization of Russian goods access to the foreign markets the Government of the Russian Federation has achieved the following:
- within the framework of the five-year revision of the antidumping duties for steel double tees produced in Russia in order to prolong the measure, initiated by Korean producers, South Korea acknowledged the market status of the Russian economy and the measure was called off as a result;
- the prolongation of the antidumping measures for the certain kinds of oxoalco-hols, ferrosilicon in India and of cold-rolled sheets in SAR was prevented;
- the antidumping measures against silicon carbide, aluminum foil of the Russian company "RUSAL-holding" in EU were abolished;
- the reconsideration of the antidumping measure, initially implemented on the condition of non-acknowledgement of the Russian accounting data for hot-rolled steel sheet in Canada;
- in June 2006 the Ukraine called off the decree No 473 from 2004 "On withdrawal of sugar and starch molasses from the free trade regime with the Russian Federation", which led to a considerable increase in Russian goods prices at the Ukrainian market.
As a result of the work intended to protect the interests of the Russian exporters in China it should be noted that despite the fact that against Russian goods 5 antidumping measures are in effect and 3 antidumping investigations are being carried out the implementations of these measures do not do any serious damage to those Russian producers that are really interested in the Chinese market. The only serious obstacle known is the presence of the antidumping duty against synthetic rubber at the rate of 14 to 38%. Two Russian producers and the Ministry for the Economic Development and Trade having actively participated in the procedure of revision, the Chinese side decided to decrease the duty by 19 times.
As a result of the work carried out to find out new obstacles and liberalize the conditions for the access of Russian goods to the Belarus market, 75 administrative sanctions, the damage of whose operation is USD 2.8 bln, were detected. Russia supposes that there are 19 export limitations for Russian goods access to the market that should be abolished. Russia supposes that Belarus should call off 19
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limitations on Russian goods access to the market of the republic. The matter concerns 9 trade barriers, 2 quotas limitations and 8 administrative sanctions. For instance, import to the Republic's territory of the Russian malt beer, sugar, produced from cane raw sugar, as well as ocean fish, seafood and products of its processing is carried out only through shelters. Besides, Belarus introduced general licensing of imported tobacco goods. The import is also hindered by a number of administrative sanctions and quotas.
Belarus imposed a ban on purchasing foreign motor-vehicles of big and middle grade for municipal, local and long-distance passenger traffic.
At the same time up to 2007 Belarus was the only country of CIS, which bought Russian crude oil at prices much lower than the world prices. In 2005 the average price for oil grade Urals for Belarus was USD 29.1 per barrel, while on average at world market it was USD 50.4 per barrel. This was due to the fact that export duty was not included in the price. For its part, in accordance with the bilateral agreement on the creation of common tariff and non-tariff regulation, Belarus, following Russia, should have increased export tariffs for oil and oil products and transfer 85% of the duty for the oil products produced from Russian raw materials to the Russian budget. This agreement, however, was not observed: allocations to the Russian budget were not made, Belarus export duties were more than 30% lower than Russian's. For instance, from 1 December 2006 Russian export duty for light distillates and gas oils was equal to USD 134 per ton, Belorussian - to USD 75.8; furnace fuel oil, lubricating oils and used oil products export duty from Russia - USD 92.9 per ton, while from Belarus - USD 72.2 per ton.
As this situation violated state-of-the-art agreements Russia introduced export duty for oil supplies to Belarus at the rate of USD 180.7 per ton since 1 January 2007. As retaliation Belarus introduced transit duty for Russian oil at the rate of USD 45 per ton. Russia however refused to pay it. After it became known that Russian fuel was taken away by Minsk to pay for new duties, Russian side stopped crude oil pumping through the Belarus's part of pipeline.
As a result, oil supplies to some European countries were stopped on 8 January 2007. After signing Russia- Belarus agreement on January 12, 2007, oil supplies to Europe were recommenced in corpore.
The signed agreement presupposes the establishment of duty for oil, exported to Belarus in the years 2007, 2008 and 2009 at the rate of 29.3; 33.5 and 35.6% from the Russian export duty, correspondingly, and the introduction of export duties for light oil products by Belarus in accordance with the Russian legislation.
To compensate for privileged oil supply schemes for Belarus abolition, the Ministry of the Economy of Belarus announced a sharp rise in transit costs for Russian oil starting from 15 February 2007.
According to the government decree tariffs for oil transit services net of VAT are established at the rate of USD 1.26 to 3.5 per ton for 100 km. Heretofore tariffs in force for oil transit through the territory of Belarus were adjusted with the Ministry of Fuel and Energy of Russia as long ago as December 1995 and did not change since then: they were equal to USD 0.41- 0.6 per ton. The Russian oil of 80 mln tonsper year is on average transported through the territory of Belarus. Do these 394
tariff rates come into the effect, this will considerably affect the profitability of Russian oil transit through Belarus.
In 2006the negotiation process on Russia's accession to the World Trade Organisation continued.
In November 2006 the representatives of Russia and the USA signed the protocol on Russia's accession to the WTO. The agreement with the USA as well as other similar agreements signed by Russia within the framework of the accession to the WTO defines the conditions of goods and services access to the Russian market.
The Russian position according to which no duty will be decreased on the date of Russia's accession to the WTO, and tariffs liberalization for separate kinds of goods will be fulfilled in the transition periods from 1 to 7 years. Average weighted rate on agricultural and industrial production will be decreased by 3 p.p. But for a number of articles the duties will be decreased more sharply. Thus, Russia agreed to open partially the chemicals market (in 3-4 years the decrease of duties rates down to 5-6% will take place), passenger cars (the duties are supposed to be lowered from 25 to 15%) and civil aircrafts (from 20 to 7.5-12%).
Tariff quotas for beef, pork and poultry import will be in the range of existing parameters up to 2009, after which on conclusion of the negotiations with the suppliers interested in them their operation can be prolonged. Prohibitive duty for alcohol will remain unchanged, duties rates for foreign wines and cognacs as well as champagne and whisky will decrease from 20 to 12%.
The search for the compromise in the sector of the financial service was the most difficult. Russia did not assume the liabilities for access of the direct branches of the foreign banks to the market and secured the possibility of 50% quotas implementation for the foreign participation in bank and insurance systems. At the same time Russian side agreed to grant access for the direct insurance companies branches to the market in 9 years time after Russian accession to the WTO.
Georgia remains the only country with which Russia has not concluded bilateral negotiations on the subject of WTO.
In the autumn 2006 the multilateral negotiations on Russia accession to the WTO were suspended upon the request of Georgia. After consultations Georgia took off its embargo on negotiation process.
As a result of negotiations with Georgia, carried out in the context of WTO on 25 January 2007 Georgia waived all its claims for Russia except one. The issue, connected with the operation of check-points in Abkhazia and South Ossetia, remains unsolved. This claim Georgia considers as the consequence of Russian liabilities in bilateral agreement on Russia joining to WTO, which was completed in 2004. As a result of the negotiations the resolution to exchange legal agreements on the subject of the check-points operation at the borders, to give evidence to Georgian party of our customs procedures conformity with WTO regulations, and to make clear the legal character of Georgian claims of the view of our bilateral agreements was made. Next meeting of delegations is scheduled for the end of February, 2007.
Besides the issues of checkpoints operation in Abkhazia and South Ossetia, Georgia also brought up a subject of wine and mineral water supplies to Russia. In Spring 2006 the supplies of wine and mineral water to Russia were banned in
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accordance with the resolution of the Russian consumers' supervision organization because of quality complaints.
Besides Georgia, Russia has to sign an agreement with Guatemala, with which all the issues of bilateral talks have already been adjusted.
Mechanism of the final accession to the WTO involves the following stages:
1) conclusion of all negotiations;
2) conduction of the final meeting of the Working Party and General Council;
3) ratification of the Agreement on the Accession to the WTO by legislaytion authorities;
4) information of WTO headquarters about this;
5) exactly in 30 days after the information letter has been sent the country becomes WTO member.
It is known that Russia is carrying out negotiations in 4 directions. Bilateral negaotiations on tariffs and services (first and second direction) can be considered as the most advanced. Though even here certain problems exist.
1. Despite the fact that 56 out of 152 countries, which have their membership in the WTO have concluded their negotiations with Russia, others can express their desire to conduct bilateral negotiations at any time. Cambodia, which is a new member to the WTO, is an example. At the end of December 2006 Vietnam is accessing the WTO. The possibility that it will express the desire to start bilateral talks with Russia cannot be excluded.
2. A number of countries, with which the agreements have already been concluded start inclining to reconsider them The most characteristic example of this is Georgia.
3. The conclusion of the Ukraine accession to the WTO progam, which is ahead of ours, is highly possible. It is also possible that the signing of the bilateral agreements with the Ukraine will be a difficult process.
The situation with the negotiations on the system questions, i. e. the discussions on the Working Party report, which is the third direction, is also difficult. The latest wording of the report was presented in autumn 2004. In March 2006 the last, 30th meeting of the Working Party was conducted. The fact that, according to the information available, the date of the new meeting has not been scheduled, testifies the absence of the subjects to be discussed. It can be supposed that one of the problems with report writing is not content problem, but staff problem. Besides over the last years Russia adopted a number of laws, which were not discussed at the meetings of the Working Party but can raise the questions among its members. These laws are connected with the Special Economic Zones, state orders, special international sanctions, new amendments to the Customs Code, Tax Code, Civil Code, intellectual property. Besides, any new legislation acts that have been or will be soon adopted should be presented by Russian side for discussion. This will also take some time.
The system of meat quotas distributions, state trade enterprises regulations, agreements on industrial assembly cause dissatisfaction of a number of partners.
The talks on the agricultural issues, comprising the fourth direction, are, in our opinion, on quite an early stage of negotiation process. The conclusion of these can be accelerated only by agreeing with the conditions suggested to us. 396
3.5. Russian agrifood sector: basic trends in 2006
3.5.1. Agricultural performance General outlook
After several years of rapid recovery growth following the 1998 crisis Russian agriculture continues growing at a slower pace (Fig. 42). This growth is primarily driven by crop production (the respective indices equaling 107.5% in 2004, 103.7% in 2005 and 101.3% in 2006) while livestock breeding in 2005-2006 displayed marginal growth after contraction in 2004.
Crop production still accounts for over half of farm output although its share is gradually shrinking.
The current output of Russian agriculture is slightly over s of the pre-reform level. After a short decline following the 1998 crisis imports started to restore. Exports grow quite rapidly too but their increase is smaller. As a result the negative balance of trade in agricultural and food products continues to expand. So, the key factors of agricultural growth in 1999-2001 are exhausted and further progress requires other stimuli.
Source: Federal Service of State Statistics.
Fig. 42. Russia: percent change of annual gross agricultural output in 1985-2006
In addition to intra-sector factors, growth was strongly hindered by macro-economic trends. For instance, the strengthening of ruble during the examined period lowered the competitiveness of domestic output on the home market (by 35%) and the competitiveness of exported products on the world markets. The rising
prices for fuels and oils strongly impaired profitability of grain production and eventually induced contraction of areas planted in grain crops.
At the same time structural shifts are taking place that enable us to speak of positive developments in the sector. As mentioned in 2005 annual survey, the process of producers' bifurcation 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' bifurcation 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% (0.1% average weighted) while the total national indicator fell by 3%. 1/5 of the domestic output of whole milk products is produced in 3 regions - Moscow, Saint Petersburg and Krasnodar kray10. 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 (Fig. 43). 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 (Fig. 50). 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 of a number of food items has been nearly restored - e.g. sausages, pastas, margarine and some other products. Production of meat and milk products is constrained by population's purchasing power but is still growing (Table 53).
Real personal incomes increased by 10%, retail food turnover - by 10.2%. It means that the overall elasticity of demand for food remains still rather high. This fact can also be one of the explanations of the speedy rise of prices for meat being one of the most income elastic products. The 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
10 Data of the Federal Service of State Statistics.
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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% respectively11.
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. 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 the 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.
Crop production
Crop production in Russia is very unstable and largely depends on weather conditions. At the same time some sectors demonstrate high competitive advantages both on domestic and world markets, rapidly restore production on a new technological basis while others are gradually shrinking. For instance, the output of sunflower seeds, sugar beets, vegetables and potatoes is growing at a high rate and is now above the Soviet period indicators (Fig.43). Growth of sunflower production began from the very start of reforms. For the most part it was extensive, i.e. areas planted expanded at the expense of other crops (first of all grains). From 2001 yields of sunflower seeds are growing as well - producers started applying highly productive hybrids and mineral fertilizers (Table 52), i.e. transferred to intensive production methods.
120 -r 100 80 -60 -40 20 0
2 CO 4 LT5 6 8 CO 0 1 2 CO 4 LT5 6
CO CO CO CO CO CO CO CO 0 0 0 0 0 0 0
CO CO CO CO CO CO CO CO 0 0 0 0 0 0 0
1 1 1 1 1 1 1 1 2 2 2 2 2 2 2
# grain (left axis) □ sugar beets )K sunflower seeds ^ potatoes o vegetables Source: Federal Service of State Statistics. Fig.43. Gross output of basic farm crops, million tons
11 Ibid.
Sunflower and grains compete for the same areas and in Russia there is quite an apparent negative correlation between their acreages (Fig. 44). In the last 5-8 years areas under potatoes slightly decreased while gross output of this crop steadily increases beginning from 2002. Although the most part of potatoes in the country is produced by household farms (91.4%), the share of large producers in the recent 5 years is getting larger implying expansion of intensive production in potato growing as well.
♦ sunflower —B—sugar beets —A—potatoes —x—vegetables —©—grain crops
* - grain crops - million hectares (right axis). Source: Federal Service of State Statistics.
Fig. 44. Areas planted in selected farm crops, thousand hectares*
Grains remain the basis of Russian crop production, wheat being the dominant one. Structure of grain production varies a lot by years (Fig. 45) but an apparent trend is the shrinking of traditional production of rye and a certain expansion of corn production. In the last 5 years gross output of corn increased 4 fold while outputs of rye, oats, millet and buckwheat reduced by 10-20%. One of the factors thereof is the situation on the world markets. The growth of demand for corn was most remarkable in the US due to the rapid development of ethanol production. The 2005 US Energy Policy Bill stipulates wider use of biological fuel (on the basis of grains) - up to 7.5 million gallons by 2012 which is twice above the 2005 level12. At the same time the domestic factor is also important - the growing interest of Russian livestock producers in corn as a fodder crop due to its much better nutrition value (as compared with wheat).
12 USDA (2006). USDA Agricultural Baseline Projections to 2015. Baseline Report 0CE-2006-1
USDA. Washington, D.C.
400
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
2000
2001
2002
2003
2004
2005
2006
□wheat Drye □ grain corn Bbarley Boats Bmillet ■buckwheat Drice Dgrain legumes Source: Federal Service of State Statistics.
Fig. 45. Structure of Russian grain production: gross output of selected grain crops as % of the total
The growth of sugar beet production (Fig. 43) started after the revision of sugar trade regime. In 2003 a new regime of regulating foreign trade in sugar was adopted envisaging introduction of variable import duty. Variable duty is bound to the difference between price at the New York Board of Trade and the domestic support price. This regime resulted in larger acreage under and bigger outputs of sugar beets; besides, the share of beet sugar in the total sugar output increased noticeably (from 26% in 2002 to 52% in 2006 - see Fig. 48) surpassing the pre-reform level. According to out estimates the rate of white sugar support grew from 29% in 2001 to 49% in 2004 (percent equivalent of producer support estimate -PSE). However, the growth of sugar beet production in 2006 is due to higher world prices (Fig. 46) rather than the new sugar regime.
380 330 280 230 180
N
N
£
3
3
-2005
■2006
Source: www.mcx.ru
Fig. 46. Prices for raw sugar at the New York Board of Trade (Contract 11), dollars per ton
In 2006 the total area planted in sugar beets expanded by almost 24% (Fig. 44). The acreage grew in almost all traditional regions of sugar beet production except Tatarstan Republic (Fig. 47).
160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0
I II S
ö ä ' £ >
"o MO
m
¿4 H
¡3
M § M M 15 J2 J2
o ■K o o o *0 &
M ■C <D a <U QH 0 1 3
m J GO
□ 2005 ■ 2006
Source: Federal Service of State Statistics.
Fig. 47. Areas planted in sugar beets by regions, thousand hectares
The productivity of sugar beet production is improving as well. Yields are growing for seven years running; in 2006 the indicator was up almost 40% and averaged 298 metric centners per hectare.
7000 6000 5000 4000 3000 2000 1000 0
1990 1995 1996 1997 1998 1999 2000 2001
□ sugar beets □ raw sugar
2002
2003
2004 2005
2006
Source: Federal Service of State Statistics.
Fig. 48. Production of white sugar out of sugar beets and raw sugar,
thousand tons
The change in regulation of rice import starting from 2003 also resulted in larger domestic production of this crop: its gross output and yields are growing for the third season in succession (Fig.49).
2000 2001 2002 2003 2004 2005 2006
I I Area planted, thous.ha ^^B Gross output, thous.tons —a—Yield, 100 kg per harvested ha Source: Federal Service of State Statistics.
Fig. 49. Rice: areas planted, gross output and yields
One more notable trend is the rapid growth of rape production in the last three years. According to expert estimates its output in 2006 reached 0.5 million tons versus 0.1 million tons in 2004. The external factor thereof was surely the EU decision to enlarge production of biological fuel that in Europe is mainly made out of rapeseeds. Today the EU declares the target to expand the use of oilseeds for producing biological fuel - by 2010 5.75% of their gross output should be used for this purpose13. European experts forecast that by 2013 energy production will account for 30%, i.e. over 15 million tons, of the overall oilseeds consumption in the EU versus 3.6 million tons in 2003 and 8 million tons in 200614. This could not fail to result in higher prices for rapeseeds. Growth in domestic livestock sector is the internal factor of expanding production of rape - a valuable fodder crop. One more determinant of bigger gross outputs of rape is the fact that in the last year about j thereof was produced in Tatarstan known for its rather authoritarian policies in the agrifood sector, i.e. expansion of rape growing in the republic could be due to intra-regional policy eventually conditioning higher national indicators.
Following a long recession rooted back in the Soviet period, the Russian flax sector started to demonstrate positive trends after 1998. The growth is due to a more intensive primary agricultural production and a considerable modernization of processing plants. Regional re-specialization of flax production is underway: the West Siberian region becomes one of the major producers of flax fiber while its processing is traditionally concentrated in the European part of the country. Growth in the sector is not so much conditioned by domestic demand as by foreign de-
13 European Commission (2005). Biomass Action Plan [SEC(2005) 1573], Brussels.
14 European Commission. (2006). Prospects for Agricultural Markets and Incomes in the European Union. 2006-2013. Directorate-General for Agriculture. Brussels.
mand for raw material, the product of primary or the initial stage of secondary processing. It is generally known that prices for raw materials on the world markets are very volatile making the situation in the Russian flax sector very unstable. After the period of growth, in 2006 the output of flax reduced by one third.
Livestock production
The situation in Russian livestock production is generally worse than in crop production. Livestock inventories continue falling; the output of basic livestock products is either slightly reducing or marginally and unsteadily growing. However, efforts targeted at the accelerated development of this sector that were made in 2006 resulted in some improvements (Fig. 50 and Fig. 51).
60 50
40 30 20 10 0
-Q-
1990 1995 1996 1997 1998 2000 2001 2002 2003 2004 2005 2006 A slaughter livestock and poultry —B—milk ♦ eggs, billion pieces
* - live weight.
Source: Federal Service of State Statistics.
Fig. 50. Gross output of basic livestock products, million tons*
30000 25000 20000 15000 10000 5000 0
2001
2002
2003
2004
2005
2006
2007
• cattle •
-incl. cows
hogs - - - -sheep and goats
Source: Federal Service of State Statistics.
Fig. 51. Livestock inventories as of January 1, thousand heads
Despite generally poor performance of the livestock sector, some sub-sectors therein are quite rapidly recovering. In particular, poultry meat production grew by an average 17% a year throughout the surveyed period (Fig. 52). Intensive feeding of hogs is growing as well; in 2006 their inventories started to increase noticeably (Fig. 51). Thanks to the intensive feeding of poultry and hogs the total meat output in 2006 was up 4.6%15 (in recent years the share of households in the output of pork and in hog inventories is steadily falling meaning that production increase is provided by large farms applying intensive technologies).
The upsurge of pork production in 2006 resulted in the drop of purchase prices: they lowered by 2% (in nominal terms)16 after rising by 1/3 in 2005. This raises doubt about further production growth and inflow of investments in the sub-sector.
O-t-CMCO-'imCDI-^OOCnOt-CMCO-'im G)G)G)G)G)G)G)G)G)G)000000 G)G)G)G)G)G)G)G)G)G)000000
-Farms of all types, slaughter weight Corporate farms, live weight
Source: Federal Service of State Statistics.
Fig. 52. Production of poultry meat in Russia, thousand tons
The country's averages of livestock productivity are steadily improving (Table 57); annual milk production per cow is already well above the pick figures of the Soviet period.
Table 57
Livestock and poultry productivity in Russia
2000 2001 2002 2003 2004 2005 2006
Annual milk production per 1 cow, kg Annual egg production per 1 laying hen, pieces 2343 264 2553 273 2808 279 2979 285 3070 292 3292 301 3603 251
Source: Federal Service of State Statistics.
In some regions intensive feeding of hogs and poultry grows at the rate far exceeding the average Russian indicators. For instance, in 2006 production of pork and poultry meat in Moscow, Belgorod and Penza oblasts, Krasnoyarsk and Stav-
15 Federal Service of State Statistics.
16 RF Ministry of Agriculture.
ropol krays grew by 130-160%. These regions form as specialized zones of hog and broiler production. Similarly, regions specializing in dairy production emerge -they are characterized by accelerated (as compared with the country's average) rates of growth and higher productivity indicators.
3.5.2. Financial performance of farm producers
Since 1999 the financial performance of Russian agriculture is steadily improving. The share of profitable farms is growing as well as their profitability. This process was mainly determined by the after-effects of 1998 crisis. The only exception was 2002 when agriculture was affected by the sharp drop of prices received by farm producers. Besides, the sector benefited from much stronger government support and growing investments. The farm debt rescheduling campaigns also contributed to the improvement of performance indicators.
A qualitative leap in farm producers' financial performance took place in 2004: its positive balance remarkably grew and the share of profitable enterprises exceeded 50%. The number of farms having overdue debts and the size of these debts are steadily decreasing.
It's generally believed that the most important factor of better financial performance of farm producers is the implementation of farm debt rescheduling program effective since 2003. According to data of the RF Ministry of Agriculture by October 1, 2006 agreements on debt rescheduling were signed by 12388 agricultural producers (about 40% of their total number and 64% of the ones having overdue debts). From October 2005 the number of entities participating in the program is actually stagnant since few new agreements are signed while the dropping out continues. Accordingly, the amount of restructured debts reduces. Overall 80.6 billion rubles of participating farms' debts were restructured including 41.6 billion rubles of fines and penalties of which 29.7 billion rubles were written off. At the same time 12570 agricultural producers cannot participate in the financial recovery program: almost 5 thousand enterprises go through the bankruptcy procedure, 4.5 thousand are unable to make current payments according to the rescheduling terms and the rest cannot join the program due to other reasons. Besides, 3.5 thousand agricultural producers lost the right to participate in the program having failed to meet current commitments; moreover, in almost one thousand enterprises rescheduling was suspended.
The process of bankrupting farm producers is rapidly intensifying: while in 2004 3455 bankruptcy proceedings against agricultural entities were initiated, by early November 2005 6210 bankruptcy cases were under examination. In 10 months 2006 4970 bankruptcy proceedings were initiated. It had a positive effect on the sector's average financial performance (Table 58). In 2006 the share of profitable entities in agriculture for the first time exceeded the corresponding figure in economy at large (67.4% in January-September 2006). The sector's general profitability increased two fold, net profits - by almost 30% while credit indebtedness fell by 20%.
Apparently the improving financial performance of the sector at large is due to the increase of efficiency in the upper producer groups, their higher attractiveness for investors. Investments in fixed capital continued to grow (by 43% as compared with January-September 2005) although in 2005 they had already more than doubled. Foreign investments in agriculture also grew at higher pace: their amount enlarged by 30% as compared with the previous year (in 2004 - by 20%). Beginning from 2002 the amount of foreign investments grows not only in food industry but also in primary agricultural production (Fig. 53).
So, it would be a mistake to think that the observed improvement of agricultural producers' financial performance is entirely due to the implementation of farm financial recovery law.
Table 58
Financial performance of agricultural producers
2000 2001 2002 2003 2004 2005 Jan.-Sept. 2006 Jan.-Sept. 2006 as % of 2005
Profitability of goods, works, services and assets sold, % 6.3 9.3 1 2.7 6.4 7.5 14.9 199
Profit less loss, billion rubles 16.1 25.6 -1 2.2 34.7 32.6 41.8 128
Share of profitable entities, % 47 44 42 49 62.2 59.6 71.7 120
Number of entities having overdue creditor indebtedness, % 23.9 23 21.8 18.9 16.5 13.3 10.6 80
Overdue creditor indebtedness, billion rubles 144.1 162.9 162.3 149.9 113.9 85 67.1 79
Source: Federal Service of State Statistics, www.gks.ru
25 -,
0 H-1-1-1-1-1-1-1-1-1-1-1-
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Jan.-
Sept. 2006
■ ■ agriculture ^^^food industry
Source: Federal Service of State Statistics, www.gks.ru
Fig. 53. Direct investments in the agrifood sector, billion rubles
(constant 1995 prices)
Fig. 54. Foreign investments in Russian agriculture, million US dollars
3.5.3. Structural adjustment of Russian agriculture
The basic trend in the current farm structure development in Russia is the sharp polarization of both large corporate farms and small producers.
Corporate farms - heirs of collective and state farms differ greatly by their performance indicators. For instance, unit production costs at farms located within one area (i.e. in relatively homogeneous conditions) may differ dozens times. Our study embracing 6 regions of the country and 4 basic products revealed that in the three surveyed years (2000-2003) the frequency distribution curve of farms by unit production costs has an apparent right tail. An example of such distribution is shown on Fig. 55.
It should be noted that the mode values of unit production costs of basic products are far below (as in the grain case) or comparable with the world indicators (as in case of milk, major kinds of meat and sugar). This means that at producer level the most part of farm sector is quite competitive.
What are the basic causes of this "tail"? Why don't production factors outflow from "tail" farms to the mode or advanced farms?
One of the reasons is the state support of insolvent farms. This support is provided not in the form of direct subsidies but through various kinds of "producer financial recovery" schemes succeeding each other throughout the reform years. The latest law on financial recovery was adopted in 2002 and came in force after the period examined in the study. However, before 2002 farm debts were also regularly written off ("restructured") and efforts were made to preserve financially unstable producers. The practice of creating farms-"doubles" got widely spread -the actually bankrupt enterprises transferred to them their assets that were not encumbered by debts. In early 2000s up to 40% of registered agricultural producers in fact didn't operate which was largely the effect of this practice. Such farm policy results in forming of the right tail of low-profit producers and thus reduces the sector's average efficiency. Moreover, the disappearance of non-efficient producers
from the market would free a market niche for the most efficient ones that would be able to enlarge production and hence to further improve their efficiency.
:e6ecTOHMOCTb-
X axis - unit production costs, Y axis - frequency.
Source: E.Serova, O.Shick. Soft budget constraints as a factor of financial insolvency of Russian agriculture. In: Proceedings of the II Congress of Russian association of agricultural economists. Moscow, 2006.
Fig. 55. Distribution of corporate farms by grain unit production costs: the Rostov oblast case (rubles per 100 kg, 2000)
Why do then agrifood sector administrators adhere to the policy that preserves the status quo with non-profitable producers? The principal cause behind that is the two so far unsolved problems: the lack of efficient farm bankruptcy mechanism and the absence of strong rural development policy targeted at the creation of alternative rural employment. An efficient farm bankruptcy mechanism should tackle several key problems: the maximum preservation of production complex integrity or at least production resources in agriculture, rational utilization of valuable farmland and most importantly - the ensuring of income sources for rural population in the affected areas. The world practice offers solutions for these problems but we cannot afford discussing them in this paper. Still, the current Russian policies evidence that so far the only way out is recognized - preservation of non-efficient farms somehow addressing social issues. Unfortunately, this is a blind alley undermining competitiveness of the sector at large.
On the other hand, small individual producers (in Russia - household farms) are also extremely polarized. Our study based on the results of pilot census conducted in 2005 in 6 districts of 3 Federation's constituent members (in the framework of All-Russia Agricultural Census) allowed us to estimate the extent of this po-
larization. Pilot census data were used to construct households' distribution curve by gross agricultural output. The results were similar in all the surveyed districts -from 42 to 71% of households produce less than 5% of the respective district GAO. On the average they possess less than 0.1 ha of land and have no livestock or poultry. Fig. 56 illustrates the trend using one district as an example. No doubt, such households are purely subsistence plots producing farm products for personal consumption; sporadic sales of their output account for a small share of family money incomes. On the other hand, about 20% of household farms produce over j of the district GAO. These are surely market-oriented commercial producers, actually individual private farms that do not register as such just in order to avoid taxation and to preserve access to concessionary services of large "mother" farms.
households
Source: E.Serova, T.Tikhonova. Who is the actual agricultural producer among Russian household farms? In: Proceedings of the II Congress of Russian association of agricultural economists. Moscow, 2006.
Fig. 56. Distribution of household farms by gross output in one of the surveyed districts
The land market in agriculture got actually paralyzed after the adoption of new land legislation in 2001-2002 due to the extremely high transaction costs. The law on agricultural land transferability is constantly corrected and supplemented in the State Duma: as of now about 65% of the original text has been amended but the situation remains actually the same.
3.5.4. Production of agricultural inputs
Farm machine building follows the trend of agriculture - after a short upsurge in the early 2000s its growth is slowing down (Table 59). Still, producers of grain harvesters managed to enlarge export supplies 5 fold as compared with 2000 thus supporting the upward trend in the sector. Exports of tractors remain insignificant and therefore shrinking domestic demand results in their smaller production. Cur-
rently annual domestic production of farm machinery amounts to about 1 billion dollars. Imports total about 2/3 of this amount, exports - 10-12%17.
Table 59
Production of selected farm inputs, thousand pieces
1990 1995 2000 2001 2002 2003 2004 2005 2006
Tractors 214 21.2 19.2 1 4.2 9.2 8.1 8.7 5.5 5.5
Tractor ploughs 85.7 4 2.8 3.1 2.3 1 1.2 1.8 1.1
Tractor seeders 51.1 1.6 5.2 6.4 5.3 4.2 5.7 6.5 5.2
Tractor cultivators 101 2 4.7 5.6 5.6 6.2 6.7 8.6 6
Grain harvesters 65.7 6.2 5.2 9.1 7.5 5.4 7.9 7.5 6.9
Mineral fertilizers, million tons 16.0 9.6 12.2 13.0 13.6 14.1 15.7 16.6 16.2
Source: Federal Service of State Statistics.
Production of mineral fertilizers is still export-oriented while domestic consumption grows at a low rate. However, their application for producing the most profitable crops displays much better dynamics.
Table 60
Application of mineral fertilizers in Russian agriculture
2000 2001 2002 2003 2004 2005
Applied total, million nutrient tons 1.4 1.3 1.5 1.3 1.4 1.4
Per 1 ha of planted area, kg
all crops 19 19 21 21 23 25
cereals 20 22 25 24 26 29
sugar beets 119 139 166 177 223 252
flax 73 58 49 49 45 51
sunflower 6 8 12 13 14 15
vegetables and melons 84 82 92 97 115 114
potatoes 155 154 160 186 184 181
fodder crops 13 12 11 11 10 9
Share of fertilized area, % 27 28 30 29 31 32
Source: Federal Service of State Statistics.
3.5.5. Food industry
In the Russian food industry production grows at noticeably higher rates as compared with agriculture but here too the growth is slowing down versus 19992001 indicators (Fig. 57).
Similar to agriculture food industry displays very different dynamics by sub-sectors. Production of some food products, e.g. vegetable oils and sugar, has already exceeded the Soviet period indicators. Pre-reform production levels of some other products, e.g. sausages, pastas and margarine are nearly restored (Table 61). Growth in the milk and meat sub-sectors is strongly constrained by income trends in the lower income groups but is still continuing at a rather high pace.
17 Data of "Soyuzagromach".
15 10 5 0 -5 -10 -15 -20 -25 -30
Source: Federal Service of State Statistics.
Fig. 57. Russian food industry: percent change of annual output
Table 61
Production of basic food products, thousand tons
1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Meat 6484 2370 1900 1510 1315 1113 1193 1284 1456 1677 1698 1827 2100
Sausages 2283 1293 1296 1147 1087 948 1052 1224 1468 1700 1832 1957 2100
Butter 833 421 323 292 276 262 267 271 279 285 271 277 n.a.
Dairy products*, million tons 20.8 5.6 5.3 5.2 5.6 5.6 6.2 6.7 7.7 8.5 8.7 9.5 10.0
Vegetable oils 1159 802 879 687 782 881 1375 1281 1197 1598 1867 2206 2600
Granulated sugar 3758 3155 3294 3778 4745 6808 6077 6590 6165 5841 4852 5588 5800
Flour, million tons 20.7 14 11.8 12.2 12 12.7 12.1 12 10.9 11.2 10.8 10.2 10.2
Groats 2854 1418 988 992 1085 899 932 994 951 890 893 926 966
Pasta 1038 603 444 453 554 707 704 764 821 874 950 982 n.a.
Margarine products 808 198 200 222 239 379 462 515 536 542 561 630 n.a.
* - in liquid milk equivalent
Source: Federal Service of State Statistics.
The demand for food products grows faster than average real incomes. The demand for fruits and cheese (i.e. very income-elastic products) expands at the highest rate - in recent years their sales increase by over 10% annually. Sales of poultry meat also grow fast - faster than the overall meat sales implying change in the structure of meat consumption.
The most expectable trends in the development of food industry in the coming years are the consolidation of assets, establishment of large national companies (primarily through taking-over/affiliation of provincial enterprises) and further growth of foreign investments.
One more noticeable development trend is the strong impetus to integrate both up and down the food chain.
3.5.6. Foreign trade in agricultural and food products
The role of Russia on the world agricultural and food markets is steadily growing: in recent years the volume of foreign trade in respective commodities in-
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creased remarkably and in 2006 reached 22 billion dollars - the record level for the last 12 years.
The growth of foreign trade turnover is due to the expansion of both imports and exports (Fig. 58). It's noteworthy that exports grow faster: in 11 months 2006 their value was over 3.5 fold above the 1998 indicators while that of imports - only 1.7 fold.
While in the first after-crisis years the enlargement of export supplies was primarily due to the ruble devaluation, at present the trend is supported by the strengthening of domestic agriculture's position on the world markets of some products. Imports continue to increase due to the sustained growth of consumer demand in the situation of slowing down progress in the domestic agrifood sector.
Although growth rates of agricultural and food exports were usually above those of imports, Russia still retains its status of traditional net importer of these commodities. The negative trend in the dynamics of agrifood foreign trade deficit that took a start in 2000 still continues (Fig. 58). The negative balance of trade in respective items amounts to about 13 billion rubles.
*- less trade with Belarus.
Source: calculated using data of RF Federal Customs Service.
Fig. 58. Foreign trade in agricultural and food products, million dollars*
The recovery growth that started in the domestic agrifood sector in 1999 revealed the basic segments where Russia has competitive advantages on external and home markets. This had an obvious impact on the commodity structure of foreign trade.
Grains became the principal item of Russian export having surpassed such a traditional item as fish and sea products (Fig. 59). In 2005 they accounted for
34.6% of the total food exports. The share of oilseeds in the export structure fell while that of sunflower oil increased (Fig. 59, Table 62).
2005
2004
2003
2002
2001
2000
10 20 30
■ fish and sea products
100
□ animal and vegetable fats and oils 0 alcohol and beverages
□ milk and milk products
□ oilseeds
■ sugar and sugar confectionery
■ other
*- less trade with Belarus.
Source: calculated using data of RF Federal Customs Service.
Fig. 59. Structure of Russian agricultural and food export, %*
Table 62
Exports of basic agricultural and food products in 2000-2006,
thousand tons*
9 months 2006
2000 2001 2002 2003 2004 2005 as % of 9 months 2005
Frozen fish 290.6 324.1 292.8 255.0 142.5 243.1 103.1
Wheat and wheat/rye mix 419.0 1635.7 10259.3 7587.9 4671.3 10319.6 93.8**
Barley 539.4 1594.7 3026.2 3099.0 955.0 1767.7 n.a.
Wheat flour 165.7 n.a. 122.8 288.6 134.3 231.0 105.8
Sunflower oil 194.8 115.3 74.2 84.1 145.1 313.6 264.8
Sunflower seeds 1114.9 n.a. 86.8 292.1 124.4 284.7 261.2
Bread and bakery products 34.3 36.9 38.6 52.6 64.4 75.3 106.1
Condensed milk and cream 73.7 45.6 35.0 11.3 35.4 41.2 76.5
Chocolate and cocoa products 25.7 35.1 35.1 42.2 54.2 69.4 94.1
*- less trade with Belarus.
** - 11 months 2006 as % of 11 months 2005.
Source: RF Federal Customs Service.
2005 2004 2003 2002 2001 2000
0,0
10,0
20,0
30,0
40,0
50,0
60,0
70,0
80,0
90,0
100,0
Bmeat and meat products H milk and milk products □ vegetables and fruits B animal and vegetable fats and oils ^alcohol and beverages
□ fish and sea products
□ cereals ^oilseeds
^sugar and sugar confectionery Bother
*- less trade with Belarus.
Source: calculated using data of RF Federal Customs Service.
Fig. 60. Structure of Russian agricultural and food import, %*
Table 63
Imports of basic agricultural and food products in 2000-2006,
thousand tons*
11 months 2006
2000 2001 2002 2003 2004 2005 as % of 11 months 2005
Beef Pork 282.3 212.9 459.2 369.6 504.6 602.0 507.8 535.2 510.9 455.2 696.2 562.9 101.4
Poultry meat 687.2 1383.3 1375.2 1190.0 1101.3 1318.5 97.5
Condensed milk and cream 48.0 85.4 11.8 26.5 35.9 35.5 24.5
Butter 45.4 81.4 94.1 114.0 70.3 66.0 142.5
Sunflower oil 149.5 182.8 175.7 200.8 160.4 131.2 74.4
Wheat and wheat/rye mix 2631.3 916.2 264.8 640.7 1364.1 577.1 2.9 fold
Corn 702.2 206.8 448.9 209.5 448.8 200.6 150.3
Meat products and canned meat 20.6 25.1 19.2 24.7 34.3 33.7 77.1
Raw sugar 4546.6 5410.4 4441.0 4112.0 2582.9 2892.9 83.2
White sugar 271.4 143.1 163.2 151.1 200.1 144.9 75.6
Citrus fruits 472.2 562.1 701.3 781.1 858.4 952.6 125.1
Coffee 20.3 21.6 25.7 32.0 29.4 39.7 133.5
Tea 158.3 154.4 165.3 168.9 172.1 179.6 96.1
*- less trade with Belarus.
Source: RF Federal Customs Service.
The commodity structure of import has also changed in recent years. After the introduction of meat quotas in 2003 imports of meat (except beef) fell but already in 2005-2006 started to restore (Table 63). It's noteworthy that import supplies of meat exceed the set quotas. Meat still remains the principal item of Russian agri-food imports accounting for 20% thereof (Fig. 60).
The government foreign trade policy also influenced dynamics of sugar imports. Despite its bottlenecks (see the foreign trade policy section) the mechanism of variable import duty on raw sugar enforced in 2004 still resulted in smaller supplies from abroad (Table 63) thus encouraging rapid development of domestic sugar beet production. The trend became most apparent in 2006.
Russia becomes a stable exporter of grain
All pessimistic forecasts saying that Russia has traditionally been an importer of grain, has no export infrastructure and therefore cannot export more than 5 million tons of grain a year have been disproved by massive export shipments that started in 2002 (Fig. 61). They were encouraged by low prices on the domestic market and high prices on the world market. Having appraised the benefits of grain export, private business started to make large-scale investments in the construction of respective port facilities. The government also allocated funds from the federal budget for partial subsidizing of interest on long-term credits for construction of port elevators. Now it's obvious that Russia becomes a stable exporter of grain. It occupied its niche on the world market exporting annually from 5 to 10 million tons depending on the domestic market situation.
18000 16000 14000 12000 10000 8000 6000 4000 2000
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07*
□ exports □ imports
* - forecast. Source: WJ InterAgro.
Fig. 61. Exports of grain from Russia, thousand tons
In 2006 the competitiveness of Russian grain export was to some extent impaired by higher domestic prices for grain due to the development of livestock sector (hog and poultry production) and bigger consumption of grain for feeding purposes. However, the negative effect of this factor was somewhat mitigated by the upward price trend on the world market (Fig. 62). The foreign trade prospects for Russian exporters are not clear enough. In late 2006 - early 2007 growth of the world prices was superseded by their fall (Fig. 62) due to better crop forecasts in the US and EU. On the other hand, the still rather high prices on the world markets will result in smaller demand from African and Middle East countries being the key buyers of Russian grain. It should be noted that in recent years the geographic structure of Russian grain export changed. India became one of the largest importers of grain from Russia. Due to the effective quota restrictions on supply of grain to the EU Russian traders gradually move to other regions - in 2006 the EU countries accounted for only 9% of the total Russian grain exports (Fig. 63).
230 220 210 200 190 180 170 160 150 140 130 120
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2 2 1 1 1 1 2 1 1 1 1 1 0 0 0 3 2 2 2 0 0 3 2 2 2 2 1 1 1 1 0 0 -HRW 11% -SRW
SRW - soft red winter wheat.
HRW 11.0 - hard red winter wheat, protein content 11 % (moisture 12%). Source: WJ InterAgro.
Fig. 62. Prices for US wheat, $/ton FOB Gulf
Table 64
The world wheat supply and utilization balance
2002/2003 2003/2004 2004/2005 2005/2006 2006/2007*
Production 565 556 629 618 587
Trade 107 103 110 108 109
Consumption 601 595 616 622 607
Ending stocks 165 125 138 1 35 117
* - estimate.
Source: International Grains Council (IGC), http://www.zol.ru.
Source: calculated using data of WJ InterAgro.
Fig. 63. Geographic structure of Russian grain export
These are not only exports of grain that expand in recent years - exports of flour grow as well (Fig. 64). This is due to smaller domestic consumer demand for flour conditioned by diminishing population and decreasing average per capita consumption of flour in Russia18. So, the expansion of foreign demand can well become the factor counteracting stagnation of flourmill industry. From 2000 to 2006 the output of flour fell by 15.7%, output of bread - by 14%.
State policies don't always favour the expansion of grain export. In 2004 its volume fell notably due not only to poor crop in 2003 but also to the introduction of temporary restrictions on export of rye, wheat and wheat/rye mix. Grain interventions carried out in the country affect exporters' interests: they are supposed to raise domestic prices but no compensation is envisaged for exporters. In 2006 conditions for Russian grain export deteriorated due to higher transportation and port service tariffs. In 2007 railway tariffs were raised once again.
18 According to data of the "SovEcon" Analytical Center the average per capita consumption of flour
in Russia fell from 96 kg in 2000 to 92 kg in 2006.
418
300 250 — 200 -150 -100 --
50 0
2002-03 2003-04 2004-05
□ exports □imports
2005-06
Source: WJ InterAgro.
Fig. 64. Russian exports and imports of flour, thousand tons
Growing exports of oilseeds
In recent years export supplies of sunflower oil are growing (Fig. 65). This trend originated in 2000 and was conditioned by expansion of processing facilities and larger domestic output of vegetable oils. As a result in 2005 Russia became a net exporter of sunflower oil while preserving its status of net exporter of sunflower seeds.
600 500
400 300 200 100 0
2002-2003 2003-2004 2004-2005 2005-2006 (Sept.-
June)
□ oilseeds □incl. sunflower seeds Drapeseeds ^vegetable oils
Source: WJ InterAgro.
Fig. 65. Exports of oilseeds and vegetable oils from Russia, thousand tons
A new trend on the Russian market of oilseeds is the growing exports of rape-seeds (Fig. 66, Fig. 67). In recent years the world market of this crop is intensely developing due to the expanding manufacturing of biological fuel out of it.
20 18 16 14 12 10 8 6 4 2 0
□ 2005-2006
□ 2006-2007
u
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<u
o
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I
ft
<
=1
M
=1
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Ph
Source: WJ InterAgro.
Fig. 66. Exports of rapeseeds from Russia in 2005/2006 and 2006/2007 MY, thousand tons
Source: WJ InterAgro.
Fig. 67. Exports of rape meal from Russia in 2005/2006 and 2006/2007 MY, thousand tons
Regulation of rice import
In January 2006 the import duty on rice was elevated from 10% but not less than 0.03 EUR per kg to 0.07 EUR per kg. This measure resulted in some curtailment of imports and an upsurge of domestic prices beginning from 2006 (Fig. 68, Fig. 69). In December 2006 import of rice to Russia was banned completely entailing one more price leap (Fig. 69).
W 0 0 0 0
3 .Q .Q .Q .Q
—3 CT 3 < E 0 tí 0 CO O US O E 0 > o E 0 o 0
z Q
12005 □ 2006
Source: WJ InterAgro.
Fig. 68. Imports of rice to Russia, thousand tons
15 000 14 500 14 000 13 500 13 000 12 500 12 000
5
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5
o
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5
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o
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Source: WJ InterAgro.
Fig. 69. Average prices for rice #1, rubles per ton EXW
We would remind that the regulation of rice import became more active beginning from 2003 when duty thereon was raised. This measure also resulted in higher prices. Historically rice is grown in few regions of our country (primarily in Krasnodar kray) unable to meet market demand in full. Some quantities of rice have always been imported from abroad but they have never been large enough to depress domestic production of this crop.
Regulation of sugar import
In December 2003 a new mechanism of sugar market regulation was introduced in Russia - the variable import tariff. Its effect was lessened by the actual lack of constraints on supply of sugar from the CIS countries accounting for 90% of the total Russia's sugar imports. In order to settle the problem customs control over import of sugar from these countries was stiffened by means of taking samples to prove the commodity's origin. Besides, in order to synchronize measures designed to regulate import of selected sugar-based products tariffs thereon (230 EUR/ton) were imposed. The mechanism of sugar import regulation resulted in larger domestic production of sugar beets. In 2006 sugar output exceeded 3 million tons - a historical record for Russian sugar industry.
Source: "New Informational Technologies".
Fig. 70. Russian imports of sugar from Belarus, tons
A special problem is the duty-free import of beet sugar from Belarus. Under this guise the country exported to Russia cane sugar that according to customs regulations is subject to import duty. It's obvious that such situation affected not
422
only Russian producers but also the RF budget. After the stiffening of control over import of sugar from the CIS countries supplies of white sugar from Belarus reduced (Fig. 70). To finally settle the problem the two countries signed an agreement according to which Belarus assumes self-restriction of white sugar export to Russia: in 2007 180 thousand tons will be supplied, in 2008 - 100 thousand tons. In 2005 Belarus exported to Russia 346 thousand tons, in 2006 - 190 thousand tons of sugar19 while the total Russian sugar imports in 2005 amounted to 145 thousand tons, in 2006 - to about 100 thousand tons20.
3.5.7. Agrifood policies
In 2004-2006 important changes were made in the mechanism of budget support to agriculture. In compliance with Federal Law No. 95 of July 4, 2003 and Federal Law No. 199 of December 29, 2004 the subsidizing of agriculture was transferred to the competence of Federation's members. These laws delineate farm sector regulation competences only for 2005 but both the 2006 budget law and the proposed draft budget for 2007 also base on their provisions. As a result the share of federal budget in the consolidated budget expenditures on agriculture fell to a record low level - 23% (Fig. 71).
Jan.-Nov. 2006
2005
2004
2003
2002
2001
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% □ Federal E Regional □ Local
Source: www.minfin.ru
Fig. 71. Structure of consolidated agricultural budget
The vesting of regions with exclusive powers to regulate agriculture will have the most destructive effect on the sector. First of all, regions-donors able to fi-
19 According to railway statistics of "New Informational Technologies".
20 Since there is no customs border between Russia and Belarus, supplies from this country are not included in import totals.
—I—
mmm mmrn.
m
\m mmm.
1 1 1 T —1
nance 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 the encouraging of agricultural production in these regions implying non-efficient public resource utilization.
Second, for already many years regional support results in "trade wars" between regions, attempts to oust neighbors from the market by means of direct subsidies to local producers, bans on agricultural and food products' transit, etc. And all this took place despite high share of federal funds. The transfer of agricultural financing authority to regions will support the trend. In other words, 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).
Outcomes of transferring agricultural support authority to the regional level
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. Fig. 72 shows the distribution of Russian regions by their budget capabilities21 and the role of farm sector in the economy22. 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 Fig. 72 stretches from the left upper corner to the right lower corner, groups 1 and 3 are more numerous than the two remaining.
Let's examine the shifting of agricultural production to non-agrarian regions with high budget capabilities that started after the transfer of farm support authority to the regional level (Fig. 73). It's interesting to track the strengthening of this trend as time passes. Two years passed since the new delineation of competence was enacted. In the first year grain production was not biased at all - first, regional subsidies are primarily targeted at supporting livestock sector and, second, the time lag of policy effects in crop production is longer due to technological specifics. However, by November 2006 the shifting of grain production to non-agrarian though rich regions became apparent: their share in the total national grain output grew by 1.4% as compared with 2002-2004. The role of high-income non-agrarian regions in production of meat became more important as well - in 2005 their share in the total Russian output of slaughter livestock and poultry increased by 3.4% as compared with the 2002-2004 average, in January-November 2006 - by 4%. The
21 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 200220004; TRANSFind=TRANSF2002-2004/EXP2002-2004, where TRANSF2002-0204 - average transfers to the region's budget from the federal budget in 2002-2004.
22 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.
2006 indicators displayed bias in the production of milk - the share of the first group grew by 2% while that of traditional agrarian regions fell by 4%.
The presented results show just the general trend - a serious shift of production could not occur in just one year. But even this marginal bias resulted in a certain loss of the sector's efficiency and one should understand that as time passes both the bias and the efficiency loss will become greater.
ro c o 'ra
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<u o
3 § "5 °
o <u
ra ro
4—
o (0 o
a:
1,8 -| ♦♦ 1,6 -; 1,41 1,2
-0,2
R2 = 0,4429 Budget capabilities to finance agriculture (index)
Source: calculated using data of the RF Ministry of Finance and the Federal Service of State Statistics.
Fig. 72. Distribution of regions by budget capabilities and the role of agriculture in their economy
The need to retain at least some functions in subsidizing agriculture in order to avoid the above mentioned negative effects made the Ministry of Agriculture change the respective system by converting some 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 agricultural budget nontransparent - 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 seriously distorts regional agricultural policies. Since federal transfers are granted on the co-financing terms, all regions 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.
Group 1. High incomes (Find>0.9), low share of agricul- Group 2. High incomes (Find>0.9), high share of agriculture (AGRind<0.2) ture (AGRind>0.2)
2005 2006 (I-XI)
Grain: -0.5% + 1.4%
Meat: +3.4% +4.0%
Milk: 0% +2%
Group 4. Low incomes (Find<0.9), low share of agricul- Group 3. Low incomes (Find<0.9), high share of agriculture (AGRind<0.2) ture (AGRind>0.2)
2005 2006 (I-XI)
Grain: -0.06% -1.3%
Meat: -3.6% -5.5%
Milk: 0% -4%
Source: calculated using data of the Federal Service of State Statistics.
Fig. 73. The changing role of high-income non-agrarian regions in the national agricultural production23
So, the principal problem of agricultural budget is the provisions of Federal Law No. 95. Unless they are abandoned, it will be impossible to implement normal agrifood policies.
National Project "Development of the agrifood sector"
2006 became the first year of implementing the National Project "Development of the agrifood sector". Initially the Project's term was 2 years but later the decision was taken to extend it into 2008-2009.
In 2006-2007 the National Project's financing should amount to nearly 35 billion rubles (Table 67). This is quite a large sum - in 2006 funds allocated to the Project will account for 20% of the total federal expenditures on agriculture. In 20082009 the National Project will get almost 48 billion rubles.
The priority National project "Development of the agrifood sector" has three components: "Accelerated development of livestock sector", "Facilitation of small-scale farming" and "Providing of young specialists (or their families) with affordable dwellings in rural areas".
The following basic measures are envisaged to fulfill the task of accelerated development of livestock sector:
1. Extended availability of low-interest long-term (up to 8 years) credit resources for construction and modernization of livestock complexes. The principal implementation mechanism is the subsidizing of interest rate in the amount of 2/3
23 The role of N group in production of a selected product (Share) was calculated by the formula: Share=XQ/QRF), where Qi - is the output of this product in /-region within N group, QRF - the total output of this product in Russia. 426
of the Central Bank's discount rate on credits to commercial banks for the term up to 8 years for construction and modernization.
2. Larger supplies under the system of federal leasing of pedigree livestock, machinery and equipment for livestock production. The principal mechanism is the enlargement of "Rosagroleasing's" authorized capital. Interest on the use of "Rosagroleasing's" authorized capital for supplying pedigree livestock is cut to 0% per annum making leasing cheaper by 20% on the average. The term of leasing machinery and equipment to livestock complexes is extended to 10 years.
3. The guaranteed rate of foreign trade protectionism in livestock production. The principal mechanisms are the setting of quotas and customs duties on meat in 2006-2007 and further till 2009 in accordance with the existing intergovernmental agreements and the abolition of import customs duties on technological equipment for livestock production having no domestic analogues.
Facilitation of small-scale farming is to be ensured by the following basic measures:
1. Larger crediting of household and individual private farms and their cooperatives. The principal mechanism is the subsidizing of interest rate on credits received by them in commercial banks in the amount of 95% of the Central Bank's discount rate.
2. Support to developing the network of procurement, supply and marketing, agricultural consumer and credit cooperatives. "Rosselkhozbank" will use allocated funds for providing credit, informational and methodical support to these cooperatives. Besides, "Rosselkhozbank" is supposed to participate in agricultural consumer credit cooperatives as an associated member.
3. Development of crediting on the mortgage of land plots. In 2006-2007 a set of federal laws needed for establishing the system of crediting on land mortgage is to be adopted. In 2006 "Rosselkhozbank" will carry out pilot projects.
The basic tool for housing young specialists in rural areas is the construction and purchase of dwellings by entities at the account of subsidies from the federal budget (not more than 30%), from budgets of RF members (not less than 40%) and employer's own funds (30%) and granting of these rural dwellings to young specialists (or their families) under the commercial rent agreement.
Beginning from 2007 additional tasks were included into the Project: state support of sheep and reindeer production, drove breeding of horses and industrial fish-farming; extending the availability of credit resources for purchasing pedigree livestock, machinery and equipment for livestock production (credits on term up to 5 years). The most part of these tasks (except fish farming and horse breeding) are not new directions of state support - they simply insert programs effective in recent years into the National Project. In this way these directions get larger funds -in 2007 expenditures on pedigree stockbreeding will double as compared with 2006, 2.5 billion rubles are additionally allocated to medium (5-year) term credits and 8.6 billion rubles - to 8-year-term credits (versus 3.4 billion rubles in 2006 and the initially envisaged 3.18 billion rubles for 2007) (Table 67).
Formally the execution of the Project started in January 2006. However, the level of its readiness by this time was so poor that the first three months of the year were spent on elaboration rather than an actual implementation of the Project. Within this period its objectives and tools were defined more clearly, normative and methodical documents as well as implementation logistics were developed. Livestock sector projects were prepared in regions that envisage subsidizing of long-term investment (up to 8 years) credits; an Expert commission for selecting these projects is working in the RF Ministry of Agriculture. "Rosselkhozbank" started selecting household farms for granting them credits; cooperatives are forming in regions. A lot is done for the Project's extension. In particular, the web-site of the RF Ministry of Agriculture contains a comprehensive description of the Project's contents and progress, a special brochure is issued. A hot line of the Centre for informational backup and monitoring of the priority National Project's implementation is opened in "Rosselkhozbank".
So far the Project's implementation is at the initial stage; therefore it's too early to appraise its actual efficiency on the basis of the sector's performance indicators. In January-November 2006 agricultural growth rate equaled 102.2% that is somewhat below the 2005 annual indicators (102.4%). The inventories of cattle and dairy cows continue falling although the Project is primarily targeted at growth in this particular livestock sub-sector. By December 2006 the number of cattle reduced by 2.7%, that of cows - by 5.6%. At the same time the number of hogs notably grew (by 10.7% as compared with December 2006). The output of milk in 2006 is slightly up as compared with the previous year (by 0.3%)24.
In 2006 1195 Project participants got credits to the amount of 53.2 billion rubles for financing 1400 projects in livestock production. The distribution of soft credits between federal districts25 on the whole corresponds with their share in milk output (Table 65). However, while growth rates in production of milk and slaughter livestock and poultry were really the highest in the federal districts that received the largest share of funds under the National Project, the latter failed to stop the decrease of cattle and dairy cow inventories - it was the deepest in Central, Volga and Siberian regions despite their being the major beneficiaries of the Project in its "accelerated development of livestock production" part. At the same time hog inventories in these regions grew quite noticeably. This implies that agricultural producers probably use Project funds for hog breeding to a greater extent than envisaged by the project initiators since this sub-sector has shorter payback period and high profitability.
In the framework of the Project "Rosagroleasing" bought 50.2 thousand heads of cattle, 6.6 thousand heads of hogs and 48.1 thousand heads of sheep to the total amount of 3 billion rubles. Besides, 1 billion rubles was spent on purchasing equipment for livestock production and processing of respective output that allowed to modernize 78.7 thousand stalls.
24 Social and economic situation in Russia - 2006, www.gks.ru.
25 The territory of Russia is divided into 7 federal districts each including several oblasts or republics. 428
Thanks to the Project the turnover of this state corporation has grown enormously: in 2006 "Rosagroleasing" bought twice more pedigree animals than during all the preceding years of its operation while in 2005 only 6 thousand animals were supplied on leasing terms26. However, the total purchase of livestock in 2006 may exceed the previous year indicators just marginally - in 2005 farms bought 54 thousand heads of livestock. The average purchase price was slightly over 50 thousand rubles per one head or somewhat below the world market price (due to the purchase of pedigree livestock from domestic producers).
Table 65
"Development of livestock production": financing and effect
by federal districts
Financing under "development of livestock production" title Share in milk output, 2006 Milk output growth rate, 2006/2005* Growth rate of livestock and poultry production 2006/ 2005 Growth rate of cattle inventories 2006/2005** Growth rate of cow inventories 2006/ 2005** Growth rate of hog inventories 2006/ 2005**
RF total 100 100 100.1 104 96.7 95.7 110
Central 27% 28% 97.6 108.1 93.6 91.6 117.1
North-West 6% 10% 98.3 99.8 95.3 93.4 103.1
Southern 10% 9% 101.9 105.6 100.8 100.9 117
Volga 41% 31% 102.2 103.1 97 95.2 106.3
Urals 4% 6% 102.1 99.5 98.4 96.8 103.1
Siberian 11% 15% 97.8 104.2 95.9 96 103.3
Far East 1% 1% 98.7 103.2 93.2 95.4 97.2
*January-September.
** October 1, 2006 as % of October 1, 2005. Source: www.rost.ru,www.gks.ru
The major banks-participants of the priority National Project are "Rosselkhozbank" (Russian Agricultural Bank - 57% of the total number of signed credit agreements and 32% of the total amount of credit resources) and Sberbank of Russia (Russian Savings Bank - 31% and 41% correspondingly). As compared with the previous year the amounts of crediting grew by an order - up to 40 billion rubles from 3.4 billion rubles in 2005.
In 2006 the number of borrowers exceeded 130 thousand versus 2.5 thousand in 2005, household farms being the major contributors to this increase. Individuals engaged in household farming account for about 55% of extended credits, individual private farmers - for 32% and agricultural consumer cooperatives - for the rest27.
The development of crediting on land mortgage has started. In 24 regions of the Russian Federation "Rosselkhozbank" granted credits to the total amount of 2.1 billion rubles on the mortgage of about 84 thousand hectares of land. The cred-
26 http://www.rosagroleasing.ru/docs/report20061124.pdf
27 http://www.mcx.ru/dep_doc.html?he_id=797&doc_id=11041
its were taken for construction and reconstruction of livestock complexes, purchase of farm machinery, equipment, spare parts, fuels and oils, seeds and seedlings, additional farmland plots and for development of smallholder farms.
In 2006 over 2000 agricultural consumer cooperatives were set up. Their forming was most intense in the federal districts that got more funds under the National Project (Table 66). Leaders in this field are Mordovia Republic, Belgorod and Orenburg oblasts and Sakha Republic (Yakutiya)28.
Table 66
"Facilitation of small-scale farming": financing and effect
by federal districts
Financing under "facilitation of small-scale farming" title, % Cooperatives formed, %
RF total 100 100
Central 20 28
North-West 2 10
Southern 19 9
Volga 38 31
Urals 4 6
Siberian 14 15
Far East 3 1
Source: www.rost.ru,www.gks.ru
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 67) 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 (and may be extended into 2 following years). This means that investors joining the National project on these terms get involved in very risky investment projects since there is no certainty about continuation of interest rate subsidizing after the National project's term is over. There is a danger that regional authorities will use "administrative resource" to make large agribusiness companies participate in such projects, and the potential risk will become quite real for them.
The program of developing livestock production envisages rather large investments in import of pedigree livestock from abroad. There are plans to buy 100 thousand heads of livestock and to lease them to agricultural producers. (By the way, this is in fact an official admission of the domestic selection's complete failure). One should clearly understand that import of highly productive breeds from
28 http://www.mcx.ru/index.html?he_id=981&news_id=2981&n_page=1 430
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 ex-pectedly not fixed in the documents.
Purchase of 100 thousand heads of pedigree livestock within 2 years is proclaimed. It's quite a large number for the respective world market. Experts say that the available supply is shorter. This means that in order to implement the project livestock with worse quality parameters will be bought. Besides, an a priori announcement of such a sizeable purchase will inevitably result in higher world prices. In other words, not the best livestock will be bought at overstated prices.
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 access to bank credit for small producers but disregard the fact that there are no barriers to prompt creation of small entities just in order to receive such a beneficial credit. To get the status of a household farm it's enough to buy a house in a village and to till 0.01 ha for planting potatoes.
Similar to its first part, the second part of the National project is also inconsistent. It envisages support to cooperatives marketing milk from households. The authorities still think that rural residents can earn money for decent living by selling milk of 1-2 cows. What's the logic then? On the one hand, we assist development of large-scale production by importing highly productive pedigree livestock for large commodity corporate farms and by facilitating their modernization, and, on the other hand, we support old women with their tiny milking business. But these are
competing sectors. When 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%. If so, the profit from additionally produced milk will be about 5 billion rubles. Even in case milk production gets only one fourth of the National project's funds, the efficiency of their use 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. On the other hand, neither "Rosselkhozbank" nor "Rosagroleasing" needs enlargement of authorized capital to fulfill functions assigned by the Project. They could cope with their mission even if these funds were simply transferred to their management.
Besides, the initial stage of the Project's implementation revealed some other risks. In particular, the lack of standard designs of livestock farms may result in financing of technically deficient and too expensive projects.
The super-soft crediting of rural residents may also bring negative effects. First, it opens an opportunity for fraud on the credit market. The situation was similar in 1992 when individual private farmers got credits at 8% per annum while the average interest rate in the economy at large surged up to 210% provoking re-sale of these credits. Second, these credits are primarily used for consumer purposes (there is information about a rapid growth of consumer crediting in regions after the Project was launched) implying no sources for their reimbursement. Finally, low-interest money in countryside accompanied by higher prices for alcohol (due to the
new regulation of alcohol market in the country) will inevitably bring about an upsurge of hard drinking and shadow turnover of home-brewed alcohol in rural areas.
One of the basic problems of agricultural and rural development in Russia is the excessiveness of agricultural labour aggravating as productivity of this sector grows. Nowadays the commodity agricultural production accounts for only 1/3 of rural employment. The excessive able-bodied population is ousted to the sector of household farming that produces competing agricultural output with lower productivity. Such a dualism on the rural labour market cannot fail to result in lower incomes from agricultural employment. The opportunities for alternative employment in rural areas are still very scarce and include mainly gathering of wildly growing species, non-formal intra-village services and infant rural tourism. This employment is non-formal and non-regular. It primarily attracts marginal population ousted from principal employment. In this situation the country needs strong rural development policies oriented towards creation of adequate off-farm employment in rural areas. Regardless of this, in the framework of the National Project rural residents can get credits only on agricultural activities that will further aggravate the situation.
Moreover, this complicates implementation of the programs for creating alternative employment already launched in regions. For instance, Perm kray succeeded in establishing municipal funds of rural crediting that for several years have been granting small and tiny credits to rural population for any economic activities. Cooperatives created in the framework of the Project credit only farming. Therefore, not to lose a part of federal financing parallel cooperatives need to be founded in the region.
All state support in the form of credit on mortgage will be provided through only one bank - "Rosselkhozbank". In case such crediting becomes a commercially profitable project, this approach will engender unjustified monopoly of one bank on the respective market with all the associated monopoly costs for borrowers. If one supposes to develop crediting on mortgage as a social project (commercially nonprofitable) this will inevitably result in bankruptcy of "Rosselkhozbank" which was already the case with its predecessor "Agroprombank" in 1994-1995 when it granted commercially disadvantageous credits to agriculture. Both scenarios contradict the goals of national agrifood sector development.
Finally, there is one more serious deficiency of the Project's logistics. The National Project does not comprehend all the agricultural policy issues. At the same time its implementation requires so much effort from the sector's administration that all other fields of work get simply halted.
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. 75). 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 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 (Fig. 75 illustrates the trend - in 2005 and 2006 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 to consequently buy the necessary inputs more evenly during a year.
The law "On agricultural development"
After four years of Russian agrarian establishment's continuous work on Law "On agricultural development", it has at last been adopted by the State Duma and signed by the President (on December 29, 2006).
The start of recovery growth in the domestic agrifood sector after 1999 necessitated legal regulation of agrifood policies. By this time a rather strong agribusiness sector emerged in the country that was interested in and able to lobby for adoption of such legislation, market-consistent agrifood policy tools formed on both the federal and regional levels. It should be also noted that similar legislation efficiently works in almost all developed countries. The most illustrative example of such a law is the so-called US Farm Bill adopted each 5-7 years starting from the 30s that details the US agricultural policies in the medium run.
At the beginning of 2000s the consistency of medium-term farm policies also became an urgent problem in Russia. Growth in the sector after the 1998 crisis, the involvement of large investors in agriculture and affiliated sectors necessitated predictability of state interventions on agricultural and food markets within the investment terms - at least 3-5 years. So far agricultural policies based on annual budget laws and annual government resolutions on support to agriculture. Thus the first and principal objective of the new law was the extension of state policy planning term in the sector.
One would think that given the ongoing budget reform and the transfer to 3-year-term budget planning the idea of agricultural law embracing 3-5 years should have got the most vigorous support from the Federal Ministry of Finance. But the actual collision when passing the law was the confrontation of the Ministry of Agriculture and the Ministry for Economic Development and Trade with the Ministry of
Finance that was flatly against adopting the law with definite budget parameters of state agrifood policies for 3-5 years. The outcome of this long confrontation was a compromise: instead of a law (or two laws) setting parameters of state policies in the medium run, a framework law was adopted envisaging State program for 5-year term with detailed outlining of tools and scale of agrifood sector financing. In the current situation the passing of the Law "On agricultural development" is surely a progress fostering development of the domestic agrifood sector.
The new law introduces the notion of State program that is fully consistent with the concept of result-oriented budgeting. The Program is to set priority targets for agrifood sector development in the medium (5-year-long) term. These targets involve designation of specific tasks to be carried out through respective subprograms. Sub-program is a set of government regulation tools in the sector. Each sub-program specifies goals and, respectively, indicators of their achievement, mechanisms of state regulation and the amount of funds to be allocated from the federal budget in each year of the program's implementation. In principle, State program of this kind should provide a stable basis for development in the agrifood sector, make its investment climate more attractive and serve as a guide for agribusiness.
According to this law, when working out agrifood policy decisions the government must (!) involve producer unions and associations concerned. It's a remarkable step forward not only in elaborating of realistic and balanced agrifood policies but also in forming of civil society in the country. Though, the law requires such unions and associations to produce "over two thirds of the total output of selected agricultural and food products and materials on the territory of Russian Federation". So far, there is hardly any union in the country conforming to this requirement. On the other hand, the prospects for real participation in agrifood policy shaping may encourage producers to form real associations widely representing the sector and having more democratic (as compared with the existing ones) operating rules.
According to the law, State program is the basic document establishing agrifood policies for 5 years. Its implementation is the responsibility of RF Ministry of Agriculture that has to make annual reports not on the performance of agrifood sector in general (which was the case so far) but on the implementation of specific sub-programs within the State program, i.e. on the results of its work. The law envisages preparation and promulgation of an annual National report of the Ministry of Agriculture. Moreover, a year before the end of State program an expert commission is formed including representatives of agrifood sector, independent analysts and government officials (their share is limited to one third of the total number of commission members in order to make the assessment of government's activities under the State program really extramural and independent). The task of this expert commission is to evaluate the results of State program's implementation, to estimate the efficiency of designated tools and to decide what has to be preserved, what has to be adjusted and what - to be abandoned. The commission's conclusions have to be promulgated but they are only recommendatory for the govern-
ment - a useful input for working out a next State program. This is the so-called feedback. Presently many tools of agrifood sector's state regulation continue to be applied just due to inertia and lack of information on their efficiency. The expert estimation of Program's performance is to improve the situation.
Altogether the described measures make the procedure of shaping agrifood policies in the country more transparent, democratic and quite consistent. No doubt, it will actually be such if agrifood market operators wish and are able to participate therein and do not keep aloof.
For the first time the law established the list of information essential for agrifood markets and the regularity of its publishing that the government has to observe. This information is to be placed on the website of the Ministry of Agriculture ensuring equal access for all the parties concerned (presumably a farm producer having no access to Internet does not need the up-to-date market information badly). One more important aspect of the adopted law is the ultimately accepted postulate that rural social development is a component part of domestic agricultural policies.
The law inherited a lot from the previous law "On state regulation of the agrifood sector". Its text largely consists of description of possible government regulation tools; some articles depict mechanisms of specific sub-programs (e.g. support of credit, insurance, interventions). These articles a priori have no legal implications: it's absolutely impossible to answer one essential question - the state must or just can carry out these measures? In case it must but funds thereon are not allocated in the federal budget approved by the legislative assembly, who is to blame? Therefore we find that a large part of the adopted law should be regarded as "white noise", a tribute to legal immaturity of the country's agrarian establishment. At least, there won't be any harm from these provisions.
The State program for 2008-2012 should be worked out by April 2007; otherwise all the envisaged measures won't be included in the budget for 2008 and 2008-2010. The program should not be too ambitious, i.e. attempt to fully revise the effective agricultural policies. To our mind, the complex arrangement and marginal correction of the currently applied policy tools on the federal level can be a good start for the new system of agrifood sector regulation in Russia.
Table 67
Financing of the National project "Development of the agrifood sector",
billion rubles
2006 2007 Total
1 2 3 4
Accelerated development of livestock sector
Subsidizing of interest rate 3.45 3.18 6.63
Enlargement of "Rosagroleasing's" authorized capital 4 4 8
Facilitation of small-scale farming
Subsidizing of interest rate 2.9 3.67 6.57
Enlargement of "Rosselkhozbank's1 including assigned to: " authorized capital „ _ _ _ 3.7 5.7 9.4
436
1 2 3 4
development of the network of consumer cooperatives engaged in procurement, input supply, marketing and processing of output produced by smallholder farms 2.6 3.5 6.1
development of rural credit cooperation 1.0 1.0 2.0
creation of crediting system based on land mortgage 0.1 1.2 1.3
Methodological and informational support 0.15 0.15 0.3
Subsidizing of construction (purchase) of dwellings for housing young specialists (or their families) in rural areas 2.0 2.0 4.0
TOTAL 16.2 18.7 34.9
Source: RF Ministry of Agriculture.
2001 2002 2003 2004 2005 2006 I-XI
in current prices - - -in constant 1999 prices
Source: www.minfin.ru
Fig. 74. Consolidated budget expenditures on agriculture,
million rubles
- - - - 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. 75. Prices for agricultural products, gasoline and diesel fuel in 2005-2006, as % of the previous month
