21Section 4. The Real Sector of the Economy
4.1. The Macrostructure of Production
4.1.1. Main Trends and Factors of Economic Development in 2010
The macroeconomic situation throughout the year 2010 was characterized by an unstable dynamics of its main indices. Growth over the year's first half, which was sustained by the favorable conditions on the world raw materials market, in the second half-year gave way to a slower rate of economic development due to the effect of certain structural features of the domestic market.
While in the first half-year 2010 the reestablished positive dynamics of investments in fixed assets and an increasing retail turnover resulted in an acceleration of the rate of GDP growth, in Q III the dominant factor that was influencing the value of that index was the slowdown of the rate of industrial production growth and the declining volumes of agricultural production. In the first half-year 2010 the value of production index in agriculture amounted to 102.9 %, followed in Q III by a drop by 18.6 % on the same period of 2009. As a result, in Q III 2010 the rate of GDP growth declined to 2.7 % against 5.2 % in Q II and 3.1 % in Q I of the same period of the previous year. Besides, in Q III the situation was further complicated by the diminished effect of the external factors on the dynamics of economic growth.
In Q IV 2010, the impact of the factors created by an expanding investment and consumer demand proved to be sufficiently strong to compensate for the diminished volumes of agricultural output, and so the growth rate of GDP, according to preliminary estimates, rose to nearly 5.2 % on the same period of the previous year. As a result, GDP growth in 2010 amounted to 104 % as compared to the previous year's level.
The structural peculiarities of the rehabilitative growth in 2010 were determined by an accelerated growth of investments in fixed assets (106.1 % against the 2009 level) and retail turnover (104.4 %). The industrial production growth index in 2010 amounted to 108.2 % of its previous year's level, including that for the processing industries - to 111.8 %, for the extracting industries - to 103.6%, and the production and distribution of electric energy, gas and water - to 104.1 % The agricultural production volume amounted to 88.1 % of its 2009 level. The dynamics of GDP was positively influenced by a rapid revival of exports. As demonstrated by the results of 2010, the physical volumes of exports (as estimated by the methodology based on the system of national accounts (SNA)) rose by 11.1 % on 2009, and so became 5.9 % higher than the level registered in the crisis year (Table 1).
The slowdown in the rate of economic growth throughout the year 2008 and the economic decline in 2009 resulted from the simultaneous shrinkage of external and domestic demand. A comparative analysis of the conditions and factors that determined Russia's exit from crisis in 1998 and 2008 has shown that in both cases the determining factor was a favorable change in the external economic situation. From Q II 2009 onwards, alongside the gradual revival on the world raw materials markets and the adaptation of financial and credit institutions to the crisis situation, the rate of economic decline was also gradually becoming less pronounced. The situation in Q IV 2009 and Q I 2010 was determined by a robust growth in exports, and from Q II 2010 - also by the reestablished positive development of the domestic market. When analyzing the influence of the changes and structure of foreign trade turnover throughout the crisis year 2009, one should take into consideration the fact that the decline in the
physical volume of exports was rather mild in face of the plummeting volumes of imports. As a result, in 2009 - for the first time after the 1998 crisis - the rate of growth of net exports became positive, and thus produced a positive influence on the macroeconomic indices. In 2010, however, this trend disappeared. The shrinkage in the volume of exports in absolute terms was registered since Q II 2010, and the effects of the foreign trade component in the second half-year became markedly weaker (Fig. 1).
Table 1
Main Macroeconomic Indices for 2009 - 2010, As % of a Previous Year's Level
2009 2010
Per Q Per Q
annum I II III IV annum I II III IV
Gross domestic product 92.1 90.7 89.0 91.4 97.1 104.0 103.1 105.2 102.7 105.0*
Investments in fixed assets 83.8 82.7 77.2 81.8 90.6 106.1 95.9 105.3 107.2 112.8*
Housing put in operation 93.5 102.5 99.7 98.8 86.4 97.0 91.7 107.5 85.9 100.5
Production volume in construction 84.0 80.7 80.7 82.8 89.3 99.4 91.9 99.9 102.2 105.6
Industrial production volume 90.7 84.5 86.4 90.4 101.8 108.2 109.5 110.9 106.4 106.5
Extraction of mineral resources 99.4 94.9 97.3 99.9 105.4 103.6 106.7 104.8 101.3 102.0
Processing industries 84.8 76.1 79.3 85.0 100.0 111.8 112.1 116.3 109.5 109.9
Production of electric energy, gas and water 96.1 94.9 94.5 94.0 101.4 104.1 107.7 102.6 103.9 101.6
Agricultural product 101.2 102.3 100.8 99.0 105.2 88.1 103.6 102.3 81.4 91.8
Cargo turnover in transport 89.8 82.8 82.2 93.1 102.0 106.9 111.6 113.0 101.7 102.4
Cargo turnover in transport 95.1 100.4 94.9 91.4 94.5 104.4 101.7 105.3 105.9 104.1
Commercial services to the population 95.8 99.1 95.3 93.6 95.6 101.4 99.9 101.6 101.5 101.5
Foreign trade turnover 64.9 56.2 55.4 59.9 91.0 130.9 144.1 139.0 125.9 119.9*
Real disposable money incomes 102.3 100.7 103.4 96.6 108.2 104.3 107.4 103.2 104.4 102.4
Real wages 96.5 99.2 96.1 94.8 99.3 104.2 103.1 106.1 105.1 102.4
Total number of unemployed 131.7 134.8 152.1 132.2 112.3 89.1 96.3 86.7 87.2 85.3
Number of unemployed, officially 148.9 126.5 157.4 163.0 152.3 90.0 114.2 91.1 81.0 91.2
registered_
* Preliminary estimates. Source: Rosstat.
Source: Rosstat.
Fig. 1. GDP Changes, by Domestic and External Demand Components in 2008 - 2010, As % of the Same Quarter of a Previous Year
The specific combination of the rates of domestic and external demand had a decisive effect on the peculiarities of the post-crisis revival observed in 2010.
The initial conditions for the exit from the crisis were marked by a 9.8 % drop, in 2009, of the physical volumes of output displayed by the main types of economic activity on the previous year, and a drop in the volume of imports by 30.4 %. The plummeting volume of imports had a major impact on the dynamics and structure of the domestic market, because since 2005 the Russian economy had been characterized by an upward trend displayed by the share of imports in trade turnover and investment expenditures. The high share of imported commodities was determining an adequate balance of demand and supply also on the investment market. Although the dynamic growth of imports was conducive to the emergence of a competitive environment, the high share of imports in retail turnover and in the volume of investments in machinery, equipment and means of transportations was increasing the dependence of the domestic market's balance of commodity resources on the changes in the foreign economic situation. The simultaneous large-scale decline in the volumes of domestic production and imports in the crisis years 2008 - 2009 was determining the specificity of the structural changes that occurred on the domestic market. Early on in the crisis, the cumulative effects of the shrinking demand, declining incomes of enterprises and the population alike, and the drop in the ruble's exchange rate resulted in a strengthened position of Russian producers on the domestic market. However, in contrast to the period of 1999 - 2000, no leap in the level of domestic production occurred this time, because while in 1999 - 2000 the positive changes in domestic production resulted from an active involvement of idle competitive capacities and an accelerating rate of investments in fixed assets, the main factor that determined the improved situation on the domestic market in the first half-year 2009 was the availability of accumulated finished products.
The macroeconomic situation started to change from the second half-year 2009, when the rate of economic decline began to slow down in response to the gradual rebound of the foreign market and the revival production in the extracting sector of industry. In Q I 2010 the trend toward stabilization on the domestic market strengthened due to the reestablished positive dynamics of domestic production and imports. However, alongside a very slow revival of domestic production of commodities and services for the domestic market, since early 2010 an expansion of imports has been registered. While growth on the domestic market amounts to 6.2 %, and that of imports - to 25.4 %, the growth of domestic production of commodities and services for domestic consumption is estimated to be at the level of 1.3 %, and that for the foreign market - at the level of 11.1 %. The end of the 1998 crisis was characterized by stabilization, in 1999, of domestic production for the domestic market in face of a remaining downward trend displayed by the level of imports. In the period of 2000 - 2007, the rate of domestic production of commodities and services was persistently increasing, while at the same time, in terms of average per annum growth rate (which amounted to 107.3 %), it was lagging behind both imports (119.7 %) and exports (108.4 %) (Fig. 2).
* preliminary estimates. Source: Rosstat.
Fig. 2. Changes in the Growth Rate of Domestic Demand in 1999 - 2010, by Component, As % of the Same Period of a Previous Year
As the influence of imports on the domestic market became stronger in 2009 - 2010, it caused some negative shifts in the overall supply structure where the share of imports in investment commodities was rapidly shrinking against the backdrop of a reorientation toward the other two types of commodities intended to satisfy consumer and intermediate demand (TTable 2).
Table 2
Shares of Consumer, Intermediate and Investment Commodities in the Russian Federation's Total Imports (Based on Balance of Payments), as % of Result
Type of commodity
Consumer Investment Intermediate
2008
Q I 45.0 22.6 32.4
Q II 41.3 23.9 34.8
Q III 43.6 24.2 32.2
Q IV 37.8 24.4 37.8
Per annum 41.8 23.8 34.4
2009
Q I 46.8 18.6 34.9
Q II 44.0 18.1 38.4
Q III 42.9 20.6 36.5
Q IV 43.9 19.5 36.6
Per annum 44.3 19.7 36.0
2010
Q I 43.5 16.8 39.7
Q II 39.5 18.7 41.8
Q III 42.1 19.8 38.1
Source: Rosstat. 188
The emergence of this trend was followed by an increasing share of imports in the retail commodity resources. The opposite trend observed in 2009, when the share of imports in retail commodities was shrinking, had disappeared. Thus, the share of imports throughout 2010 was systematically increasing, having achieved by Q III the level of 47 % (Table 3).
Table 3
Structure of Retail Commodity Resources in 2009 - 2010, %
Retail commodity resources -Indutling-
Domestic production_Domestic production
2009
Q I 100 55 45
Q II 100 60 40
Q III 100 59 41
Q IV 100 61 39
Year 100 59 41
2010
QI 100 56 44
Q II 100 58 42
q iii_100_53_47_
Source: Rosstat.
An analysis of the dynamics of economic development broken down by component of external and domestic demand can serve as an illustration of its very high dependence on foreign trade. Lack of any significant structural changes, the development by inertia of both exports-oriented and end-demand production (based on extensive use of basic factors), and a high share of imports in the resources available on the domestic market were determining the low competitive capacity of the Russian economy in conditions of the post-crisis rehabilitative growth in 2010.
4.1.2. Main Characteristics of the Use of GDP
The year 2009 saw a reversal of the formerly upward trend in the growth of investments (which could be observed throughout the entire period of 2000 - 2008), and so, for the first time since the 1998 crisis, a decline in the rate of investments in fixed assets was recorded that was much more rapid than the changes observed in the dynamics of GDP. Over the year 2010, the rate of investments in fixed assets was initially, in Q I, determined by the effect of the previous year's factors. From Q II 2010 onwards, the value of this index became positive, while the rate of quarterly growth began to accelerate. By the end of 2010, the rate of growth displayed by investments in fixed assets amounted to 106.0 %, which is by 2 p.p. higher than the rate of GDP growth. However, when estimating the significance of that index, one should take into consideration the low base provided by its level recorded in 2009, when the decline of investments in fixed assets amounted to 16.2 % and was much more pronounced than in the crisis year 1998. As a result, in 2009 the index of investments in fixed assets amounted to 88.8 %, and that of GDP - to 95.9 % of the 2008 level (Fig. 3).
Against the backdrop of a global crisis and the dwindling incomes of the national economy, from late 2008 onwards there occurred a change in the gross national savings to end consumption ratio. As demonstrated by the results of the year 2009, the share of gross savings in GDP fell to 24.3 %, which is comparable to the value of that index recorded in the crisis year 1998. In 2010, the share of savings in GDP increased to 28.0 %, while remaining well below the average level recorded in the period of 2004 - 2008 (33.4 %).
Fig. 3. Changes in Dynamics of GDP and Investment in Fixed Assets in 1998 - 2010, As % of the Previous Year
In face of the then existing situation on the market for capital and savings resources, the share of investments in fixed assets in GDP in 2009 dropped 19.4 % by comparison with the last decade's historic high of its average value of 20.7 % (recorded in 2007 - 2008). However, in 2010 the share in GDP of investments in fixed assets climbed to 20.5 % due to the strengthening trend towards savings' transformation (Table 4).
Table 4
Shares in GDP of Gross Savings, Total Accumulation and Investments in Fixed Assets in 1998 - 2010, as % of Result
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Gross savings 23.8 31.9 38.7 34.2 30.8 31.4 32.6 33.2 33.8 33.9 33.3 24.3 28.0
Total accumulation 15.0 14.8 18.7 21.9 20.1 20.9 20.9 20.1 21.2 24.2 25.5 18.9 21.8
Including:
total accumulation 16.2 14.4 16.9 18.9 17.9 18.4 18.4 17.8 18.5 21.0 22.3 22.0 21.0
of fixed assets
Investments in 15.5 13.9 15.9 16.8 16.3 16.6 16.8 16.7 17.6 20.2 21.3 19.4 20.5
fixed assets
Source: Rosstat.
The dynamic growth of end consumption sustained by increasing real incomes of the population was one of the main factors that determined the upward development of the Russian economy over the period of 2000 - 2008. While households' end consumption over that pe-
riod increased 1.91 times, the population's real incomes rose 2.23 times, real wages - 2.85 times, and the real size of allocated pensions - 2.22 times.
The 2009 crisis had a painful effect on the population's living standards and resulted in a deeper downfall relative to the previous period than that during the 1998 crisis. While the rate of growth of the population's real incomes in 2009 was at the level of 1.9 %, that of end consumption dropped on 2008 by 5.4 %, including end consumption by households - by 8.9 %. It should be noted that the changes occurring in the index of households' consumption was significantly influenced by the decline of real wages by 3.5 % by comparison with the 2008 level, while the growth rate of wages in nominal terms displayed its historic low since 1998 - 7.8 %.
20,0 15,0 10,0 5,0 0,0 -5,0 -10,0 -15,0
Source: Rosstat.
Fig. 4. Changes in End Consumption Costs in GDP by Component in 1998-2010 and by Quarter in 2008-2010, as % of Relevant Period
In 2010, the main indices describing the population's living standards acquired positive values, but one should bear in mind when estimating those values the effect of the low baseline provided by the previous year's level. Judging by the results of the year 2010, the cost of end consumption relative to the previous year's level rose by 2.1 %, including that by households - by 2.7 %, but the corresponding values actually amounted to only 98.7 % and 97.8 % of the 2008 index. The growth of real incomes of the population in 2010 amounted to 4.1 % as compared to the previous year's rate and to 6.4 % as compared to 2008 (over the period of 2004-2008 the average per annum growth rate was 13.4 %). The specific features of the formation of the population's incomes were determined by the accelerating growth of social
benefits allocated within the framework of the government programs aimed at sustaining the population's living standards. Within the structure of the population's incomes the share of social benefits rose from 13.2 % in 2008 to 14.9 % in 2009 and to 18.0 % in 2010. The average size of allocated pensions over the period of 2009 - 2010 increased 1.78 times (in real terms -1.5 times). Changes in the size of wages took a milder character. The growth of real wages in 2010 by 4.2 %, however, made it possible to neutralize the negative trends of the previous year and to achieve the 2008 level.
In 2010, retail turnover rose by 4.4 %, including that of foodstuffs - by 5.1 %, and that of nonfood commodities - by 3.8 %.
The consumer price index in 2010 amounted to 108.8 %, thus remaining at the previous year's level. At the same time, the prices of foodstuffs rose to 112.9 % against 106.1 % in 2009, and those of nonfood commodities - to 105.0 % against 109.7 % (Fig. 4).
4.1.3. Changes in the Structure of GDP, by Source of Income
A dynamic growth of the population's incomes represents one of the typical features of economic growth in the Russian economy. The activity on the domestic market is sustained by growth of real wages and is associated with redistribution of incomes from companies to the population. The share of wages in GDP rose to 52.8 % in 2009 and to 50.2 % in 2010 against its mean index of 46.1 % recorded over the period of 2002 - 2008 (Table 5).
Table 5
Structure of GDP Formation, by Source of Income in 2008 - 2009, as % of Result, in Current Prices
2008 2009 2010
Per annum Per annum Q Per annum Q
I II III IV I II III IV
Gross domestic 100 100 100 100 100 100 100 100 100 100 100
product
Including:
Wages of hired 46.7 52.8 56.9 53.3 47.9 50.1 50.2 52.1 50.1 48.1 50.8
labor, including
hidden remuneration
and mixed incomes
Net taxes on produc- 19.2 16.7 14.3 15.6 17.4 17.8 18.1 17.5 18.4 17.0 19.1
tion and imports
Gross profit in the 34.1 30.5 28.8 31.1 34.7 32.1 31.7 30.4 31.5 34.9 30.1
economy and gross
mixed incomes
Source: Rosstat.
Within the structure of employed population the share of persons who were not working under employment contracts constituted only 8 %; these are employers who employ labor force at their own enterprises on a permanent basis; and self-employed persons. This phenomenon determined the specificity of the formation of the structure of GDP incomes and the population's incomes. More than 66 % of the population's incomes in 2010 was formed by wages paid to the employed, while the share of incomes from entrepreneurial activity and property was shrinking.
A typical feature of Russia's national economy has become a high degree of differentiation of mean wages by type of economic activity. In industry, the degree of differentiation of wages is determined by an increasing gap between the levels of wages in the extracting and
processing industries. In 2010, the amount of wages charges in nominal terms in the sector of extraction of mineral resources was 1.8 times higher than the average level of wages across the entire economy, including in the sector of fuel extraction by 2.2 times. Wages in the processing industries amounted to 90 % of the economy's average and 45 % of the index recorded in the extracting industries. The mean value of the index of charged wages was exceeded 2.3 times in the sectors associated with the production of petroleum products and transportation of mineral fuel and energy resources, as well as in the financial sector. In the spheres of education and public health care wages dropped to 66 - 76 % of the economy's average. The specific forms of remuneration depending on types of economic activity had a significant influence on the structure of incomes and expenditures, on the population's consumer demand, on the type of employment and the distribution of labor resources across the economy.
The level and share of remuneration received by hired labor in the structure of GDP had a dominating effect on the social parameters, including the labor market. In the crisis conditions of 2009 the number of the employed in the economy dropped to 69.4 mln persons against 70.9 mln persons in 2008, resulting in a climb of the rate of total unemployment to 8.4 % against 6.4 %.
The year 2010 saw a continuation of the implementation of anti-crisis measures aimed at supporting the labor market. A total of 39.5 bn Rb was allocated from the federal budget to subsidies granted to the budgets of subjects of the Russian Federation so that they could lower the level of tension on their labor markets within the framework of regional programs. In 2010, as compared to 2009, the number of employed in the economy rose by 0.4 mln, thus amounting to 69.8 mln persons. The level of unemployment, as demonstrated by the results of the year 2010, dropped to 7.5 % against 8.4 % one year earlier, while the overall number of unemployed (as estimated by the ILO methodology) amounted to 5.6 mln against 6.3 mln in 2009. The number of unemployed who were officially registered with government employment agencies slid to 2.2 mln, while the level of registered unemployment became 2.5 % against 3.0 % in early 2010. The improvement of the general situation in the national economy was associated with a stable downward trend displayed by the number of those employed persons who worked part-time, were kept on leave or idle - their number decreased from 1.6 mln in January 2010 to 0.9 mln in November 2010.
The tension coefficient (the number of unemployed persons registered with government employment agencies per 100 vacancies) between January and November 2010 decreased from 310.6 to 177.3 (Table 6).
Table 6
Dynamics of the Main Labor Market Indicators in 2009 - 2010
2009 -Q- 2010 Q
II III IV I II III IV
10 11
Number of employed in national economy, 69.4 68.2 69.4 70.4 69.5 69.8 68.0 70.0 71.1 70.1
Number of unemployed, mln 6.3 6.8 6.5 6.0 6.0 5.6 6.6 5.6 5.2 5.2
Level of unemployment, as % of economi- 8.4 9.1 8.6 7.8 8.0 8.8 8.8 7.4 6.8 6.9
cally active population
Number of unemployed, registered with 2.1 2.0 2.2 2.1 2.1 2.2 2.2 2.0 1.7 1.5
government employment service, mln
Level of registered unemployment, as % of 2.8 2.6 2.8 2.7 2.7 2.5 3.0 2.7 2.2 2.1
economically active population
Average monthly wages of organizations' 18,785 17,441 18,419 18,673 20,626 21,090 19,485 20,809 21,031 23,045
employees, in nominal terms, Rb
I
1
2
3
4
5
6
7
8
9
Table 6 (continued)
1 2 3 4 5 6 7 8 9 10 11
as % of relevant period of previous year
Number of employed in national economy 97.8 97.7 97.1 97.9 98.7 100.6 99.6 101.0 101.0 100.9
Number of unemployed 131.1 134.8 152.1 132.2 112.0 89.1 96.3 86.7 87.2 85.2
Number of unemployed, registered with 148.0 126.5 157.4 163.0 153.2 90.0 114.2 91.1 81.0 74.9
government employment service, mln
Average monthly wages of organizations' 108.5 112.8 108.0 105.7 108.1 111.3 110.5 112.4 111.6 110.7
employees, in nominal terms
Average monthly wages in real terms 97.2 99.2 96.1 94.8 99.0 104.2 103.1 106.1 105.1 102.4
Source: Rosstat.
It is noteworthy that, while in the period of 2000 - 2008 changes in the demand for labor were determined by a shift in employment towards the services sector, during the 2009 crisis the most critical situation was observed in trade, as well as in industry and construction. In recent years employment was on the decline in nearly all the branches of industry, with the most rapid rates of decline in the processing industries. If in 2008 the number of employed in the processing industries dropped on 2004 by 596 thousand, and in the extraction of mineral resources sector - by 44 thousand, in 2009 the drop on the previous year in the average per annum number of employed amounted to 806 thousand and 44 thousand respectively. The formation of that trend occurred against the backdrop of a declining growth rate of labor productivity (Table 7).
Table 7
Changes in Labor Productivity in the National Economy of the Russian Federation, as % of Previous Year
2003 2004 2005 2006 2007 2008 2009
On the whole, across national economy 107.0 106.5 105.5 107.5 107.5 104.8 95.8
Including:
Agriculture, hunting and forestry 105.6 102.9 101.8 104.3 105.0 110.7 105.0
Fishery and fish-breeding 102.1 104.3 96.5 101.6 103.2 95.5 109.2
Extraction of mineral resources 109.2 107.3 106.3 103.3 103.1 101.0 107.5
Processing industries 108.8 109.8 106.0 108.5 108.4 102.6 96.1
Production and distribution of electric energy, 103.7 100.7 103.7 101.9 97.5 102.1 96.3
gas and water
Construction 105.3 106.8 105.9 115.8 112.8 109.1 91.4
Wholesale and retail trade 109.8 110.5 105.1 110.8 104.8 108.1 92.1
Hotels and restaurants 100.3 103.1 108.5 109.2 108.0 109.2 87.1
Transport and communications 107.5 108.7 102.1 110.7 107.5 106.5 100.1
Operations with immovable property, lease and re- 102.5 101.3 112.4 106.2 117.1 107.9 96.7
lated services
For reference: 110.9 110.6 112.6 113.3 117.2 111.5 96.5
real wages
Source: Rosstat.
The low effect of the use of production factors was one of the main caused of the decline in the Russian economy's competitive capacity. A negative influence on the qualitative indices of economic development was exerted by the considerable gap between the rate of labor productivity and the level of remuneration in favor of the latter, which was visible across the entire economy even in crisis conditions. However, opportunities for any further growth in the level of remuneration became rather severely restricted as a result of a changed competitive environment on the commodity markets due to the strengthening of the ruble and a similarly increasing pressure of imports.
A comparison between changes in the indices of the population's employment rate, remuneration level and GDP has demonstrated that an accelerated growth of wages against a slower growth of labor productivity increased the load on the economy and was reflected in the results of financial activity.
Positive changes in the economy improved the financial status of businesses. As shown by operative data, in January - September 2010 they achieved a positive aggregate financial result in the amount of 4,305.5 bn Rb, which is by 51.7 % higher than the same index for the previous year. However, despite the presence of some positive trends, the pre-crisis rate of return indices have not yet been achieved for the entire national economy. The rate of return on sold commodities, products and work, as seen by the results of January - September 2010, was 11.6 %. Production decline and other manifestations of the crisis had different inmplica-tions depending on the type of activity, and so development in 2010 was uneven and had certain specificities. The most profitable type of activity in January - September 2010 remained the extraction of mineral resources.
The favorable situation on the world market for energy carriers make it possible for the companies operating in that sector to receive, in January - September 2010, an aggregate positive financial result in the amount of 959.4 bn Rb, which is by 45 % higher than the same index for the previous year. The financial situation of the businesses operating in the processing industries also improved: as seen by the outcome of the period of January - September 2010, their aggregate financial result was 1,134.6 bn Rb, which is by 59.7 % higher than the previous year's level.
Due to instability of the business activity in the construction sector, the aggregate financial result for January - September amounted to 49.7 bn Rb, or only 80.7 % of the value of the same index for 2009.
Last year's anomalous climatic situation had a negative effect on agricultural output and, consequently, on the financial results achieved by the organizations operating in that sector. The aggregate financial result for the period of January - September in agriculture amounted to 54.9 bn Rb, which is by 12.5 % below the value of the same index for 2009. At the same time, the losses incurred by agricultural organizations rose by 84 % on January - September 2009 (Table 8).
According to our decomposition 1 of quarterly indices (Table 9, Fig. 5), in 2009 - 2010 the rate of GDP growth increased on the average by 29 % due to changes in labor input, but the contribution of that component during the period under consideration was shrinking (from 41.8 % in Q I 2009 to 30.5 % in Q III 2010). A more substantial contribution to the rate of GDP growth was made by changes in the volume of capital input in the process of production, which on the average accounted for 54 % of growth.
By comparison with the previous years the first two quarters of 2009 were marked by certain shifts in the structure of GDP growth, namely a declining contribution of capital input with a simultaneously increasing contribution of labor input. These structural changes reflected the way in which the crisis phenomena in the economy were influencing the behavioral strategies of producers who, while adjusting to new economic conditions, tend to apply a more flexible instrument - labor input management. Beginning from the second half-year 2009, there occurred a revival of the previously existing structure of output growth (typical of
1 For more details concerning our methodology, see Faktory ekonomicheskogo rosta. Nauchnye trudy N 70. [Factors of Economic Growth. Scientific Works No 70.] M. IET, 2003. www.iet.ru
the pre-crisis period), which is characterized by a considerably larger contribution of capital input than that of labor input.
Table 8
Rate of Return on Commodities, Products, Work, Services and Assets Sold by Organizations, by Type of Economic Activity, in January - September
2008 - 2010, as %
For reference
Return on sold commodities, products, work, services
Return on assets
January — September 2010 to January — September 2009
September
2010 to December 2009
2008 2009 2010 2008 2009 2010 rate of financial result physical volume index price indices
Total 15.8 11.2 11.6 6.8 3.8 5.1 152.6 104.8
Including: 15.0 11.4 12.2 4.5 2.9 2.5 90.7 89.3 108.3
agriculture, hunting and forestry
fishery and fish-breeding 10.7 25.9 25.0 4.8 13.0 12.5 121.5 90.0
extraction of mineral resources 36.2 31.3 32.8 14.6 8.5 10.4 145.0 104.2 101.8
processing industries 20.6 12.3 14.4 12.1 3.9 6.0 159.7 112.6 110.5
production and distribution of 3.6 7.3 6.9 0.6 2.9 3.6 140.7 105.1 113.6
electric energy, gas and water
construction 5.6 5.0 4.1 2.6 1.5 1.2 80.9 99.2 107.3
wholesale and retail trade; repair 11.3 7.0 8.3 7.0 3.6 5.7 169.9 104.4 106.2
of motor vehicles, motorcycles,
household appliances and personal
items
transport and communications 16.4 15.8 15.0 5.0 3.9 3.7 115.8 145.0
Source: Rosstat.
The main factor determining the dynamics in rate of output growth in 2009 was TFP (total factor productivity), whose changes can on the average account for 73 % of the rate growth; in 2010 the contribution of that component in the majority of periods was negative.
The negative changes in labor input resulting from the financial crisis first appeared in late 2008 and then persisted in the dynamics of economic indices in 2009 - the year that saw the shrinkage of both the number of employed and their working time. In 2010, the rate of growth demonstrated by labor input was positive (0.8 % in Q I; 1.4 % in Q II; and 0.8 % in Q III), but nevertheless it was far behind the rate of decline observed over the previous year, so that the newly achieved level of labor reserves and the intensity of their use was lower than the corresponding indices recorded in 2007 - 2008.
The structure of labor input in the period under consideration was uneven, which reflected the economic instability on the labor market. In Q I 2009 the shrinkage of labor input was largely determined by the shorter working hours, the contribution of that component to the rate of GDP growth was nearly twice as high as the rate of output growth, which in its turn was determined by the declining number of employed. In Q II the slowdown in the rate of shrinkage of working hours was accompanied by a more rapid downslide in the number of employed, so in that period the contribution of both these components of labor input was practically the same. From Q III onwards the rate of decline demonstrated by labor reserves and the intensity of their use became slower, but this process was more rapid with regard to the latter component. As a result, in the second half-year 2009 the most significant component of labor input that determined its contribution to the rate of GDP growth was the dynamics of labor reserves. In the first two quarters of 2010, manipulating the length of working hours once again became the main instrument of adapting the labor market to changes in the market 196
situation: in Q I the shift of the rate of labor input growth towards positive values occurred exclusively due to longer working hours against the backdrop of the continuing shrinkage of the number of employed; in Q II, although the number of employed also began to increase, the intensity of the use of labor reserves remained the dominant factor that was determining the amount of input labor. In Q III, labor reserves were increasing at a somewhat higher rate than the intensity of their use.
Table 9
Structure of the Rate of GDP Growth (as Compared to the Same Period of Previous Year)1
QI 2009 Q II 2009 Q III 2009 Q IV 2009 QI 2010 Q II 2010 III quarter 2010
Growth rate
GDP - 9.3 - 11.0 - 8.6 - 2.9 3.1 5.2 2.7
I. Factor inputs - 4.9 - 4.2 - 4.2 1.0 5.0 5.0 5.7
1.1. Labor - 3.9 - 3.0 - 1.9 - 0.8 0.8 1.4 0.8
Employment - 1.3 - 1.5 - 1.0 - 0.7 - 0.2 0.5 0.4
Working hours - 2.6 - 1.5 - 0.9 - 0.1 1.0 0.9 0.4
I.2. Capital - 1.0 - 1.2 - 2.3 1.7 4.2 3.7 4.9
Fixed assets 1.4 1.5 1.6 1.5 1.5 1.5 1.7
Use of production capacities * - 2.4 - 2.7 - 3.9 0.2 2.7 2.2 3.2
II. TFP - 4.4 - 6.8 - 4.4 - 3.9 -1.8 0.2 -3.0
as % of rate GDP growth rate
GDP 100.0 100.0 100.0 100.0 100.0 100.0 100.0
I. Factor inputs 52.6 38.3 49.0 - 32.7 158.6 97.1 211.6
1.1. Labor 41.8 27.7 22.5 26.2 24.7 26.6 30.5
Employment 14.3 14.0 11.7 22.5 - 6.5 9.3 16.0
Working hours 27.5 13.7 10.8 3.7 31.2 17.4 14.5
I.2. Capital 10.8 10.7 26.5 - 59.0 133.9 70.4 181.0
Fixed assets - 15.4 - 13.7 - 18.8 - 51.6 46.4 29.0 61.4
Use of production capacities 26.1 24.3 45.3 - 7.3 87.6 41.5 119.6
II. TFP 47.4 61.7 51.0 132.7 -58.6 2.9 -111.6
* The estimates of the changes of the use of production capacities across the national economy are based on the data on the volume of the actually consumed electric energy.
Similarly to the situation with regard to labor cost, the manifestation of the crisis phenomena in the economy was the presence, in the overall dynamics of the capital input index, of a period during which the value of that index was on the decline. However, the duration of the period itself was shorter: instead of late 2008, it began in Q I 2009, while the shift of the capital input growth rate towards positive values was observed as early as Q IV of the same year.
In the first half-year 2009, the contribution of capital input to the rate of GDP growth amounted to almost one-third of that of labor input; in Q III, the contributions of these two components became equal. In Q IV 2009, capital inputs remained the sole factor that had a negative impact on the rate of GDP growth, i.e., it was the only index whose value was demonstrating growth in face of shrinking output. In 2010, capital inputs were growing at an accelerated rate as compared to GDP, which explains the dominant role of that component in the structure of output growth.
1 The deviation from the previously published results occurred due to changes in the data published by Rosstat.
197
In 2009 - 2010, the main factor determining the character and direction of the changes displayed by capital inputs in the first three quarters of 2009 was the volatile intensity of the use of industrial production capacities. The rate of growth in the intensity of the use of capital inputs demonstrated a decline in January - September 2009, which then gave way to an upward trend from Q IV onwards. The mean quarterly growth rate over that period was 0.9 p.p. (in accordance with linear trend - by 1.2 p.p.1).
The rate of growth of capital reserves remained positive throughout the entire period under consideration, although when broken up by quarter it demonstrated a slight decline - from 3.3 % in Q I 2009 to 3.0 % in Q III 2010. In accordance with our estimation methodology,2 changes in capital reserves are determined by the changing volume of investments in fixed assets, whose the rate of growth remained negative until Q II 2010. At the same time, in spite of the growth of investments observed in Q II and III 2010, their volume in real terms remained not only below the 2008 level, but also below that of 2007. Thus, the declining amount of funds allocated to renewal and restoration of fixed assets, with due regard for the significant degree of their depreciation, resulted in a quarterly decline of the growth rate of capital reserves by 0.05 p.p.
14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0
i 2009 ii 2009 iii 2009 iv 2009 i 2010 ii 2010 iii 2010
Fig. 5. By Factor Decomposition of GDP Growth (as Compared with the Same Period of Previous Year), with Estimates of the Effect of Oil Prices
1 Growth rate changes are estimated by linear trends in order to lower the dependence of the resulting estimates on the specific choice of the first and last quarters of the period under consideration.
2 In absence of quarterly statistics, the growth estimates of fixed assets are plotted on the assumption of constancy of the coefficient of their withdrawal and a constant share of investments earmarked for their renewal. In should be noted that the estimate obtained in this manner may be biased because it will not take into consideration the time lag between the moment when investments are received and the moment of their actual implementation.
The contribution of unexplained residual (total factor productivity) during the period under consideration is rather controversial. In 2009, that component was the dominating factor, which determined on the average 73 % of the rate of GDP decline. In Q I and III 2010, the rate of TFP growth remained negative, thus being responsible for its negative (and sufficiently significant) contribution to the rate of output growth; in Q II the contribution of TFP was positive but no more than 3 %. In this connection, similarly to all the other components considered earlier, the dynamics of total factor productivity demonstrates a downward trend with regard to the rate of its decline, with a quarterly average of 0.2 p.p. (or 0.7 p.p. in accordance with a linear trend). However, in contrast to the input of the main factors, this slowdown in the rate of its decline is insufficient for achieving a positive TFP dynamics.
It should be noted that the meaning of TFP after a decomposition of the growth of value indices (as represented by GDP) becomes somewhat different from the traditional understanding of technology-related productivity. The estimation by TFP describes not only the changes in the intensive (and primarily 'technological') components that are conducive to an increased production performance, but also the exogenous shocks, the influence of other indices that are excluded from the estimation of the input of the main factors, and the shifts determined by the uneven character of output prices and capital input1, among which a significant role (especially in the short term) is played by the changes related to the dynamics of world oil prices.
In accordance with our results,2 changes in oil prices (with the exception of Q IV 2009) largely determined the rate of growth of both TFP and GDP. On the average in the period under consideration, changes in the price factor determined approximately 60 % of the rate of output growth, whereas only about 42 % was determined by technology-related productivity (final residual). Besides, after the prices on the world raw materials markets were taken as a separate factor, the changes in the rate of the technology-related component's growth became different from TFP dynamics: the rate of final residual's growth was positive or close to zero only in January - September 2009, and then from Q IV the technology-related component demonstrated a stable decline. On the whole, during that period the dynamics of final residual was characterized by a slower rate of growth, on the average 1.1 p.p. per quarter (or 1.8 p.p. in accordance with linear trend).
Thus, the changes in the rate of GDP growth that were observed in 2009 - 2010 were accompanied by a certain transformation in the structure of its determining factors. It was characterized by a declining contribution of capital input, with a simultaneously increasing contribution of labor input, while in 2009 the role of total factor productivity remained predominant, and then in 2010 capital input once again began to play a dominant role against the backdrop of negative contribution of TFP. In this connection, changes in the growth rates of both labor input and capital input are determined in the main by fluctuations in the degree of their use (the length of working hours and the intensity of the use of production capacities).
1 A price-based estimate of productivity coincides with a 'physical' one if the economy is in conditions of a long-term equilibrium and perfect competition. In other words, this coincidence takes place when all possible exogenous chocks are taken into account in the current equilibrium of the system.
2 The singling out of the conjecture component within TFP and the conduct of the further decomposition of the growth rate of output are based on the presence of a statistically significant interrelation between the growth rate of GDP and the growth rate of world oil prices, which is estimated with a regression analysis of annual data for the 1999-2009 period. The resulting 'final remainder' purged of the influence of price fluctuations on world raw materials markets is a more correct characteristic of technological productivity, i.e., the intensive component of growth in output.
The rates of growth displayed by nearly all the extensive components (with the exception of fixed assets) were changing in a similar way: a negative rate of growth in 2009 followed by a shift towards positive values in late 2009 - early 2010.
On the average, in 2009 - 2010 the contribution of productivity factors to GDP growth amounted to approximately 18 % without oil prices (- 42 %), after the estimates of the contribution of price fluctuations on international raw materials markets were excluded. In this connection, it should be noted that in Q IV 2009 - 2010 the estimates of technology-related productivity were demonstrating a negative rate of growth.
4.1.4. The Dynamics and Structure of Production, by Type of Economic Activity
During the 2008 crisis, a decline in the rate of production was first recorded in the export-oriented industries, and then it spread into the processing industries whose development had been demonstrating a high rate of growth for a number of years. In Q IV 2008, for the first time after the 1998 crisis, a negative rate of development was observed in industry. The crisis in industry was marked by a rapid production decline in the processing industries. Until mid-
2009 the situation was determined by the influence of inertia and the factors that had emerged during the acute phase of the financial crisis in 2008. The deepest slump in production with regard to the main types of economic activity was recorded in the first half-year 2009, when it amounted to only 13.9 % of the level recorded in the same period of the previous year. The drop in industrial production in the first half-year 2009 amounted to 14.5 %, including 22.3 % in the processing industries. Investments in fixed assets in that period dropped by 10.5 %, and those in the consumer market shrank by 2.5 %. The unemployment indices at that time reached their historic high - 8.8 % of the total number of employed.
From the second half-year 2009, in response to a revival of the external demand coupled with the anti-crisis measures, the situation began to improve, and so the year's results on the whole demonstrated that industrial production dropped by 9 % of the previous year's level, including by 0.6 % in the extracting industries and by 15.2 % in the processing industries. However, the situation was complicated by the persisting downward trends on the consumer and investment markets. As seen by the results of the year 2009, retail turnover dropped by 4.5 %, and investments in fixed assets - by 16.2 %.
With the rebound in demand on the international and domestic markets for energy carriers, the growing rate of extraction of mineral resources in Q IV 2009 once again triggered development in the processing industries. Growth of industrial production in the first half-year
2010 amounted to 110.2 %, including by 105.8 % in the extracting industries and by 114.3 % in the processing industries.
In Q III 2010 there occurred a slowdown in the rate of economic growth as a result of a drop by 18.6 % on the same period of the previous year in the volume of agricultural production. as well as a slower growth of exports. The industrial production index in Q III 2010 amounted to 106.3 %. However, in Q IV, alongside a sufficiently high growth rates displayed by investments and the consumer market, the rate of growth in industry was recorded at the level of 6.5 %, including 9.9 % in the processing industries (Fig. 6).
Fig. 6. Changes in the Rate of Production Growth in Industry, by Type of Economic Activity, in 2000 - 2010, as % of the Same Period of a Previous Year
The rate of development in the processing industries differs rather significantly depending on the type of economic activity, with the strongest influence on the specificity of rehabilitative growth being exerted by the ratio between the rates of production of capital and consumer commodities. While the rates of production of foodstuffs, leather products and footwear, coke and petroleum products, chemicals, and rubber and plastic products in 2010 rose above their pre-crisis level, the production of machinery and equipment, means of transportation and metallurgical products were below their 2008 indices (Table 10).
In view of the sufficiently strong fluctuations of the rate of growth between different types of activity across the processing industries, the plummeting rate of output in machine-building became a dominnt factor that negatively influenced the level of business activity in related industries (construction materials and other types of intermediate commodities). The slump in the machine-building complex from Q IV 2008 onwards entered an acute phase, and the rate of production there throughout the year 2009 was far below the average level production in the processing industries.
In 2010, the rate of development in machine-building shifted towards positive values. Thus, in particular, the measures undertaken by the government in order to support the motorcar industry, including those designed to promote demand, resulted in a revival of domestic production growth.
Table 10
Production Indices, by Type of Activity, in the Processing Industries in 2008 - 2010, as % of the Same Period of a Previous Year
2008 2009 Q I Q II Q III Q IV 2010 Q I Q II Q III Q IV
Processing industries 100.5 76.1 79.3 85.0 100 111.8 112.1 116.3 112.6 109.9
Production of foodstuffs, 101.9 99.4 97.5 97.5 97.8 103.9 105.4 103.8 106.4 105.4 105.9
including beverages and to-
bacco
Production of textiles and 94.6 83.8 79.1 78.0 82.6 95.9 112.1 110.2 115.6 111.4 111.3
garments
Production of leather, leather 99.7 99.9 85.8 97.3 104.5 112.3 118.7 126.3 120.0 111.4 118.4
products and footwear
Timber processing and timber 99.9 79.3 71.7 74.7 79.8 92.4 111.4 111.1 112.6 111.4 110.5
products
Pulp and paper production, 100.3 85.7 78.1 82.9 86.3 96.5 105.9 106.7 109.3 106.7 97.8
publishing and printing
Production of coke and petro- 102.8 99.4 95.8 99.8 100.2 101.6 105.0 104.7 105.3 103.5 106.4
leum products
Chemical production 95.4 93.1 77.9 86.4 91.9 123.1 114.6 123.8 115.7 112.5 108.1
Production of rubber and 122.8 87.4 72.7 84.7 89.3 101.4 121.5 122.8 119.2 121.9 122.4
plastic products
Production of other non-metal 72.5 72.5 63.5 66.6 75.0 85.1 110.7 104.9 114.2 109.1 113.2
mineral products
Metallurgy production and 97.8 85.3 70.0 75.2 86.3 114.4 112.4 118.8 119.6 107.3 104.8
production of finished metal
products
Production of machinery and 99.5 68.5 56.5 62.5 70.7 87.8 112.2 109.1 130.5 101.4 110.5
equipment
Production of electrical, elec- 92.6 67.8 56.8 61.3 69.9 82.4 122.8 130.4 127.5 117.3 119.3
tronic and optical equipment
Production of means of trans- 100.4 62.8 61.0 59.2 56.7 74.3 132.2 113.3 141.2 138.1 135.9
portation and transport
equipment
Other industries 98.3 79.3 67.3 70.7 82.7 98.5 117.7 130.7 135.4 117.1 111.4
Source: Rosstat.
Over recent years, imports have continued to significantly influence the rate and character of development in the machine-building sector. This phenomenon occurred due to the fact that the very low competitive capacity of many types of machines and equipment by comparison with their imported foreign counterparts in terms of the price/quality criterion, as well as lack of proper capacities for the production of state-of-the-art technologies imposed considerable restrictions on the market available for the domestic machine-building products. The influence of imports varies significantly between different sectors of the economy and commodities markets. Growth of imports on the market for investment-linked machine-building products was one of the main factors that promoted investment projects, modernization of production the implementation of technological innovations. At the same time, imports competition became more acute, in particular in sectors like machine-tool manufacture, agricultural machine-building, production of construction machines and the motor car industry. These industries were characterized by low levels of investment activity, high rates of depreciation of fixed assets, backward technologies; one of the promising areas of development there was the transfer of foreign companies manufacturing facilities into Russia's territory (assembly plants). An accelerated output growth demonstrated by companies with the participation of foreign capital was altering the competitive environment and promoted the tradi-
tional types of production. However, it were those types of production that proved to be the most vulnerable ones in crisis conditions, because for many years no relevant steps had been taken in order to promote the production of parts by domestic enterprises. Given the well-developed network of inter-branch links in machine-building in general and in the motor-car industry in particular, the plummeting output there had a very painful effect on related industries and the infrastructure, as well as the employment level.
The 2008 crisis hit hard the Russian motor industry: domestic producers were forced to temporarily halt their conveyer belts and to cut their personnel. The dramatic drop in demand negatively influenced production development (among other things, because of the unattractive terms of consumer credits, declining incomes of the population, and overproduction which resulted in increased stock reserves, as well as difficulties experienced by domestic companies when trying to attract credits for replenishing their current capital). The foreign producers operating in the territory of Russia suffered from the instability of the currency exchange rate, because the bulk of spare parts (80 - 100 %) was being imported from the far abroad. Thus, the once very promising Russian market for motor vehicles quite soon began to resemble the stagnating European market, the only difference being that the number of passenger cars per capita in the Russian Federation had never reached the indices typical of West Europe. As a result of the crisis, in 2009 the production level in the Russian motor industry dropped by 60 %, including a drop in the production of domestic brands by 36.7 % as compared to the pre-crisis year 2008, in the production of foreign brands by 47.2 %, and in the import of new cars by 39.7 %.
The roles of raised import duties and the ruble's depreciation were roughly equal, in that the expenditures of Russian sellers rose by nearly 50 % (ruble-denominated). As a result, import of second-hand cars became unprofitable, because their price was higher than that of the foreign-brand cars manufactured in Russia. In this connection, while total sales of imported cars dropped by more than 3.7 times, the sales of new cars dropped 2.5 times, and those of second-hand cars - more than 25 times. The leader in the decline of motor car sales became the passenger car segment as a result of increased import duties.
The program of anti-crisis measures adopted by the Government of the Russian Federation for 2009, including the measures designed to regulate customs tariffs, made it possible for Russian car manufacturers to overcome the consequences of the economic crisis and to avoid bankruptcies and production stoppages through increasing their market share and thus compensating them for their losses resulting from the general drop in sales on the market. Besides, it created additional incentives for the founding of strategic alliances between biggest Russian and foreign producers.
In order to promote investments and the general financial rehabilitation of enterprises, government guarantees were granted to motor car manufacturers. The Open-end Joint-stock Company Avtovaz received financial support. Besides, companies' debts were restructured and the interest rates on credits attracted for the purposes of technological upgrading were subsidized.
In 2010, in addition to the previous decisions, the following measures were planned:
• continuation of the program for granting preferential credits to individuals willing to purchase motor cars of the Russian make;
• prolongation of the mechanism for government purchases of motor cars from Russian producers recognized as 'sole suppliers';
• launching of the program that envisages the purchase by individuals, with a discount of 50,000 Rb, of new Russian motor cars in return for old cars submitted by them for dis-
posal; the funding allocated for the program amounts to 11.05 bn Rb; it is planned to utilize up to 200,000 cars in this manner; • the decision concerning the continuation of subsidizing Russian motor car manufacturers in order to compensate them in part for the payment of interest on credits attracted for the purposes of technological upgrading.
The government anti-crisis measures stabilized the situation, and so motor car output growth in 2010 was 1.7 times higher than the same index for 2009, including a twofold growth of output of passenger cars, a 1.65 times increase in the output of freight motor vehicles and a 1.26 increase in that of buses. Experts predict that the pre-crisis level of the motor vehicle market will be once again achieved by 2013 - 2014.
Nearly all the newly introduced measures had a positive effect on production and the situation on Russia's motor vehicle markets, and also moderated the negative processes on the labor market. While recognizing the significance and efficiency of the short-term anti-crisis measures, it should be emphasized that the stability of development on the motor vehicle market will depend on adequate solutions to the existing fundamental problems and on the implementation of an equally adequate strategy for developing the motor car industry.
The current situation in the Russian motor industry is rather controversial. The rapid growth of the domestic market in the period prior to 2008 sustained by the increasing incomes of the population and expanding consumer crediting as well as by the strengthening of the national currency was accompanied by structural changes in demand, when the share of domestic producers on the motor car market was shrinking alongside a simultaneous intensification of competition inside certain price segments between the foreign-brand cars assembled in Russian territory and imported new motor cars.
The government policy aimed at attracting foreign investments into the motor industry benefited end consumers, but were still insufficient for ensuring a comprehensive development and restructuring of the motor industry.
A significant impact on the dynamics of production was produced by the government program 'The Experiment Designed to Promote the Acquisition of New Means of Automobile Transport in Return to Those Taken Out of Service and Submitted for Utilization'. The age structure of the existing motor car fleet is quite disadvantageous. The mean age of a motor car in Russia is 12 years, and vehicles aged less than 5 years constitute only 26 % of the car fleet, whereas in Europe and the USA the mean age of a motor car is 8.5 years. The per annum rate of withdrawal of old vehicles from the motor car fleet in Russia is 3 - 4 % against 6 - 7 % in developed countries. It should be admitted that utilization of vehicles - given the current changes in the situation on the domestic market, the rate of production and imports - will have only a short-term effect that will soon disappear if such measures are not sustained by a comprehensive strategy of long-term development of the motor car industry. It appears that the age structure of the motor car fleet can be changed more efficiently by measures aimed at promoting purchases of new vehicles, namely establishing a tax on motor cars depending on their ecological class; subsidizing those consumers who buy vehicles of a higher ecological class; increasing the cost of insurance for second-hand vehicles; introducing tougher requirements for mandatory technical checks, etc. A comparison of the domestic motor car industry with foreign practices can serve as an illustration of Russia's significant lag in terms of production volume and investments in companies' fixed assets, research and development, and labor productivity. The funding earmarked by Russian motor car producers to research and development does not exceed 1 % of their annual proceeds, whereas for the leading foreign
manufacturers these expenditures amount to 4 - 5 % or more of their annual turnover. This results in the development cycle of new car models in Russia being much longer that in the case of the world production leaders, and so the rate of renewal is much lower in the case of the former.
The loss of a significant market share has resulted not only from the low level of the domestic motor car technologies, but also from insufficient investments in the development of new platforms and models, from the limited number of models and options offered to the consumers. Russian companies have invested in the development of their industry a share of their proceeds that is 4 - 5 times less that that of their foreign competitors, which is the result of the inefficiency of the financial mechanisms available to them, including those designed to attract credits.
The insufficient competitive capacity of the domestic motor industry's products is the outcome of low investments in fixed assets. This phenomenon can be explained, on the one hand, by the high cost and short terms of the available investment credits, which cannot be taken full advantage of because of the low rate of return on production (traditionally between 6 and 8 %) and companies' solvency levels; and on the other, by insufficient motivation for the government to make investments in the motor car industry.
In order to achieve the long-term development goals for the motor car industry, substantial capital investments will be necessary in the following key areas:
- creation of new production capacities for manufacturing motor cars, their parts and engines, in order to satisfy the growing demand by domestic products;
- modernization and technological upgrading of the existing production capacities in order to bring them up to a competitive level in terms of efficiency, productivity and product quality;
- research and development aimed at creating new platforms and models, the components and equipment needed for the production of those models, as well as purchase of licenses and adaptation of global platforms within the framework of collaboration with international partners;
- financing of current capital needed for sustaining the forecasted growth of sales on the Russian market.
* * *
Our analysis of the main macroeconomic trends has led to the following conclusion. Although in 2010 the Russian economy actually came out of the acute phase of the crisis, the unstable dynamics of the main macroeconomic indices, the slow exit from the crisis of the investment, financial and crediting sectors of the economy, and the complicated situation on the labor market are still imposing a system of restrictions to development in the short-term period.
The national economy continues to be dominated by the same factors that determined the speed and depth of its decline during the crisis and the insufficiently rapid elimination of the acute crisis phenomena: its dependence on changes in the world prices for Russia's exported raw materials; low domestic demand and a lax attitude of domestic producers towards making interventions on the most promising markets for consumer, investment and intermediate commodities; and a weak financial system.
The creation of necessary economic conditions for the economy's transition from the anticrisis mode to rehabilitative growth implies implementing a system of measures aimed at modernization of production capacities, enhancement of innovation activities, and improvement of the quality of human capital.
4.2. Russian Industrial Enterprises in 2010
The section was prepared based on the materials of the surveys among managers of industrial enterprises, conducted by IEP in compliance with the European harmonized methodology monthly, from September 1992 and cover the entire territory of the Russian Federation. The panel is about 1100 companies, which employ more than 15 per cent of the total employment in the industry. The panel is biased towards large enterprises in each of the subindustries. Feedback on questionnaires is 65-70 per cent.
Industrial surveys (IS) among business leaders is a quick way to gather information about the assessment of the situation in their enterprises and the expected (planned) changes in the key performance indicators of the enterprise. IS is a relatively new tool of economic analysis. The first survey was conducted by IFO Institute (Munich, Germany) in 1949. Soon afterwards such polls have been held in Great Britain, France and Italy. Since 1962, the EU is making efforts to harmonize (make comparable) the surveys in the countries of the continent.
There is a rather small number of questions in the IS questionnaire (no more than 15-20). The questions are of qualitative, rather than quantitative nature. Simple design of questions and answers allows the respondents to fill out the forms quickly and without involvement of other employees or any documentation. It is essential that the respondent in each enterprise should be the Manager of the top level, who has a complete Fig. of the situation at the enterprise and directly involved in the company management. In 2008 28 per cent of responses to the IS questionnaires were received from the Directors of enterprises, 37 per cent - from the Deputy Directors, 22 per cent - from the leaders of economic departments.
In analyzing the results of industrial surveys a specific derivative index is applied, known as balance. Balance is calculated as the difference between the percentage of respondents given the answer about their business standing as "increasing" (or "above regular" indicators) and the percentage of respondents whose assessment was as a "declining" (or "below regular"). The resulting difference allows to sort the answers to each question by one number with the sign "+" or "-".
Balance is interpreted as the first derivative or the process rate. If the balance of answers to the question about the expected price change is with the sign "+", it means that the average prices in the near future will continue to grow (for example, there dominating the companies, reported on an expected increase in their prices). The increase of the balance within a month from +10 to +17 per cent means that average prices in the industry will grow more intensely as the increased prevalence of companies, predicting growth. A negative balance means a decrease in average prices (more companies are going to lower their prices). Changing the balance from -5 per cent to -12 per cent is interpreted as plans of the intensity of prices lowering.
4.2.1. First Quarter: an Attempt to Recover from Crisis
In early 2010, Russian industry continued its recovery from the crisis. The dynamics of sales and estimates of the demand allowed businesses to maintain output growth and demand forecasts, backed up by the portfolio of orders, showed the formation of the most popular hopes for recovery from the crisis.
In January 2010, the demand for industrial production for the first time during the current crisis has ceased to decline: the share of reports on falling sales reached the level equal to the reported growth. However, the improvement of the dynamics of demand in comparison with quarter IV of 2009 was negligible and noticeable only to those that was close to zero. Here-
with, the original data quite adequately reflected the nation-wide ten-day vacations, having demonstrated the decrease, which is not cleaned from seasonal factors balance by 8 points versus January level, recorded in 2002-2008. Thus, the January (2010) dynamics of the demand proved to be quite comparable to the pre-crisis level.
This thesis is confirmed by the indicators of satisfaction of the total demand. The share of normal ratings has increased immediately by 10 points and reached 42 per cent for the industry in general, which was the maximum peak over the months preceding the crisis (see Fig. 7 at the end of this section). January 2010 was not such a disaster for the Russian industry, as one might expect is projected November - December 2009.
In January 2010, industrial production, as estimated by businesses, continued (after cleaning from seasonal factors) its growth with the same intensity. Thus, the surveys recorded the output growth over the past five months. The initial data (before treatment on the season) showed, of course, in January the decline in production, but it was the same as happened in January 2002-2008 and two point five times less than in January 2009. In other words, the dynamics of output began to come back to normal after the level of demand.
Production plans of enterprises at the beginning of the year have been improved as compared with the plans, registered in December, by 52 points at a time. Such a sharp rise in optimism has not been mentioned even once in the original surveys over 1992-2010. Clearance from seasonal factors significantly adjusted growth of this indicator (up to 10 points), but the result was still decent (it gave way to Crisis maximum only by 1 percentage point).
The growth of optimism in the plans of production output had quite certain grounds in the industry. According to the companies, the new year of 2010 started with the active portfolio extension. The orders scope for the quarter increased from 4.9 to 6.5 months and therefore, reached the pre-crisis level (January 2006 - 6.7; in 2007 - 6.7; in 2008 - 7 months).
Pricing policies of enterprises in early 2010 was influenced by the growth in demand for manufactured products and the traditional New Year upsurge in prices and tariffs. However, both factors at this time, though not as strong as at the best of times, pushed up the actual price dynamics and price plans of the manufacturers, although a modest crisis result of January 2009 was, of course, surpassed. In January 2010 a moderate decline of prices in November - December gave way to a more intensive growth. The January growth rate of the wholesale prices reached the maximum of the previous crisis months and had all the chances to continue - pricing plans for businesses, too, have reached the crisis peak in January.
HR plans of enterprises suffered in January 2010 the most significant changes. Within the month the balance of intentions has changed from sharply negative (reduction of employees) (-25 points) to expressly positive (recruitment) (+7) and has become another crisis maximum peak (see Fig. 8). Thus, the Russian industry for the first time during the current crisis has declared of the desire to abandon the dismissals and start to hire employees.
Reduction in the number of employees and the positive dynamics of the main industry performance indicators have helped the companies to recover the situation with the payroll. In early 2010, the normal level of salaries of workers and engineering manpower went to the Russian industry 49 per cent of enterprises (see Fig. 9). Before the crisis, this figure exceeded, as a rule, 50 per cent and reached 60 per cent, while the share of enterprises with low wages (below normal level) was then about 40 per cent. In January 2010, the latter indicator dropped from the crisis peak of 59 per cent (in the II quarter of 2009) to 47 per cent.
In February the industries have again demonstrated the dynamics of sales and production, similar to the pre-crisis level. The growth of demand rate (based on initial data) in February
has improved significantly for the first time during the current crisis and ceased to be negative, i.e., the share of enterprises whose sales have increased, becoming equal to the shares of the enterprises, decreasing the sales. But the removal of seasonality has reduced the optimism of the data cleared from seasonal factors - in the industry there were only minimal for the current crisis reduced demand for products, which, incidentally, also looked very good as compared with what happened a year earlier.
In February, the share of normal estimates of demand fell by 9 points and rolled off to the level of September - October 2009 This figure indicated the sharp swings since November 2009, which indicates the disorientation of producers, who do not seem to understand what is happening with the economy and what sales volumes should be considered adequate to the current economic situation.
Production growth rates in the Russian industry (after seasonal clearing) got stabilized at a moderate increase in output. A baseline data, as well as data on demand, have demonstrated quite traditional for 2003-2008 February upsurge. It seems that the dynamics of output in the Russian industry was returning to the pre-crisis trend. Production plans of enterprises in February, too, traditionally (like in pre-crisis period) have improved since the January jump-up in optimism. As a result of the initial data for January - February 2010, the balance of the planned changes in production rose by 68 points: from -25 in December to 43 in February (in 2008 the growth in the same period totaled to 48 points in 2007 - to 43 points and In 2006 -by 51 points). Clearance of the seasonal factors has the New Year growth before stabilization at the level of 21 points, which was the crisis maximum peak.
Idle capacities for the planned increase in production by industrial enterprises was sufficient enough. In late 2009 - early 2010, the excessive capacity (in view of the anticipated changes in demand) were available in 30 per cent of enterprises (see Fig. 10). Thus, it is not just idle capacity, it's power capacity whose use is impossible even with quite optimistic forecasts of demand. The minimum level of security with such "square" was the capacity registered in early 2008 - up to the peak of the very strong heating of the Russian industry made -and 11 per cent.
Another indicator of the possibility of rapid recovery of growth is the mentioning of the lack of equipment by enterprises as an obstacle to growth in production output - from the beginning of 2009 - averaged 10 per cent and was three times lower than the historical maximum (32 per cent), registered in mid-2007 (see Fig. 11).
The growth of prices at the beginning of the year in the industry remained at the highest in the previous 18-month level. Businesses for the third time during the current crisis have turned to price upsurging. The first attempt in March 2009 resulted in the balance of price changes by 2 points, the second one ( in September 2009) - by 7 points, in February 2010 for the second consecutive month the price growth was kept at 11 points. The pricing plans reflected the intention of businesses to continue, or at least to keep such price growth rate in coming months.
In February 2010, the industries have recorded the most moderate rates of staff dismissal since the beginning of the crisis assessments. Balance within the month has grown by 23 points and almost reached the zero level (no layoffs in general in the industry). In February, recruitment of workers is resumed in the food, light and building industries. The balance for plans of changes in employment for the first time during the current crisis has entered the positive zone - the companies confirmed their intention to move from a reduction of workers to their employment.
Availability of credits in the industry has reached 64 per cent (see Fig. 12) in February 2010. Average minimum lending rate has decreased to 16.4 per cent per annum in rubles. Banks continued to reduce the thresholds to access to their monetary resources. In the first place - to the ferrous metallurgy entities (normal access was provided to 98 per cent of the enterprises, the average minimum rate of 14.4 per cent per annum), to chemistry and petrochemistry enterprises (79 and 14.1 per cent), to food businesses (66 and 14.7 per cent) and machine-building (61 and 13.7 per cent) sectors.
The share of bad credits in the industry has declined in early 2010 to 23 per cent (the share of businesses with loans and not able to serve them). Crisis maximum of this index (49 per cent) was registered in April 2009
The first quarter of 2010 was the best since the crisis began, but clearly worse in terms of dynamics. Recovery from the crisis has slowed down. In March, the dynamics of demand has shown only a stabilization of about zero, the fall in demand has deceased, while there was no growth yet. As a result, two thirds of businesses were dissatisfied with sales of their products and only one-third considered them normal. The most comfortable feeling in the first quarter of 2010 was observed among the businesses of food industry (64 per cent of satisfaction), chemistry and petroleum chemistry (55 per cent) and non-ferrous metallurgy (54 per cent). Demand forecasts for the I quarter 2010 have stabilized, remaining the best since the crisis beginning and comparable with the level of the first post-default years. Despite the lack of sales, the businesses had not allowed the increase in surplus stocks of finished goods at their warehouses. Balance of estimated reserves in general in the industry did not change and remained at the crisis level (less the upsurge in November 2009) and at the level of reasonable redundancy, typical for the pre-crisis years.
The intensity of output growth by the end of the first quarter of 2010 has reached the rate of growth of +34 balance points, which was normal for the pre-crisis years. Purification from seasonal factors has decreased the growth rate to +11 balance points, which was the best during crisis and was already comparable to the pre-crisis value of this indicator. Plans of output, as well as demand forecasts, have demonstrated the record in stability (before and after purification from seasonal factors) in the first quarter of 2010. Growth of output in the second quarter should have dominated in all sectors.
The growth of wholesale prices in Russian industry in the first quarter of 2010 remained the highest in the current crisis in terms of intensity. In March all sectors increased the prices, except for the construction industry, which has turned from the policy of reducing prices to the stability thereof. The most intensive growth took place in March in chemical and petrochemical industries (+35 b.p.). However, in the second quarter industry was planning to slow down the prices growth: the New Year inflation upsurge was over. The balance of anticipated changes in prices within March has decreased by 6 points and returned to the level of November 2009. After that, the industry started "price attack" for four months, whereas the previous two ones lasted for two months each.
In March 2010 the industry for the first time during the current crisis has turned from layoffs to hiring employees. Such plans have appeared in January, survived in February, and finally were realized (see Fig. 8). Layoffs continued only in metallurgy and timber industry, while in the other industries the number of personnel was growing, particularly intensively in food and light industries. Positive trend in employment growth gained in intensity during all the I quarter.
4.2.2. Second Quarter: a Pause
At the beginning of the II quarter the Russian industry demonstrated an adaptation to the stagnation of I quarter 2010 .Growth rate in demand for industrial products got stabilized in both, according to the initial data and purified from seasonal factors. But the dynamics of demand within January - April was the best since mid-2008, when the global financial crisis has only started in Russia. However, demand forecasts, which jumped up in January, started to decline.
The assessments of finished products stocks have also stabilized since December 2009 - excessive stocks the industry has established the traditional for the pre-crisis months (see Fig. 13). The majority and stable part of the enterprises (60-64 per cent) believed their stocks were normal since September 2009. In the I quarter of 2010 the physical volume of stocks of finished products continued to reduce. However, the rate of decline gradually reduced, but the plans for the II quarter reflected the intention of businesses to increase the intensity of the stocks reduction.
In April, the change of the output rate has not undergone fundamental changes. Manufacturing continued its growth with a modest (by pre-crisis standards) intensity, which according to the businesses estimates, has not changed since September 2009, when the producers did not recon on special demand growth. In April, output plans have undergone the strongest negative adjustments in January 2009. A small but steady growth in production in April resulted in industrial capacity utilization to 66 per cent (see Fig. 14). With such intensity the equipment was used prior to the crisis in 2005. Herewith, the crisis minimum indicator was recorded in January 2009 and amounted to 53 per cent.
Estimates of excessive capacity have confirmed the positive dynamics of their utilization. In the II quarter of 2010 the share of companies with excessive capacity has decreased to 24 per cent, which also corresponds to the level of 2005. In January 2009 43 per cent of responses "more than enough" have been obtained. Absolute pre-crisis minimum (January and April 2008) of this indicator was 11 per cent.
The businesses continued to regard the insufficient demand for their production as the main obstacle to the growth of output. In the II quarter of 2010, it was mentioned by 53 per cent of manufacturers (the crisis maximum of the I Quarter 2009 was 67 per cent). In the second place was the lack of funds, which was mentioned in the list of barriers by 45 per cent of the companies. Decrease of this hindering effect during the crisis quarters was only 5 points -that is, there were no significant changes here. The third place was taken by the main problem of the Russian industry, i.e., the lack of staff! It was mentioned by 26 per cent of enterprises, the crisis minimum a year earlier amounted to 14 per cent. In the fourth place there were nonpayments of customers and competing imports. Mentioning of non-payment has reduced during the crisis from 41 to 22 per cent, mentioning of imports has increased from 13 to 21 per cent. Vagueness of the current economic situation made it difficult to take decisions only to 20 per cent of the directors of industrial enterprises. A year ago, this factor was considered a hindrance by 45 per cent of IEP (among which 90 per cent were enterprise directors, their deputies and heads of economic units). Thus, the management of enterprises was clearly better informed of the situation.
In April 2010, Russian industries continued to increase the number of their employees. Growth rate remained unchanged as compared with March level, when for the first time during the crisis recruitment exceeded the dismissal level. Staffing plans of the enterprises in April have not changed - for the fourth month in the industries intentions to increase the staff 210
were dominating. As a result, by the II quarter of 2010, industries got rid of the excess of employees in view of anticipated changes in demand: the share of "more than enough" estimates caught up with the share "insufficient" estimates; the balance was zero (see Figure 15). The crisis maximum of this balance has been registered in the I quarter of 2009 and made 26 points, the absolute minimum during the pre-crisis period (-20 points) was recorded in the I quarter 2008 At the level of individual industries a shortage of employees was noted: the answers "insufficient" became dominant in the light industry and construction industry.
Easy access to credits for the industries continued to grow: in April, the normal access to borrowed funds already had 61 per cent of the enterprises. However, within four months in 2010 this indicator increased only by 7 points, whereas in the IV quarter of 2009 it has grown by 14 percentage points. Lending recovery for the Russian industries has definitely slowed down. Average minimum interest rate on ruble loans offered by the banks was decreased in April for the industry in general to 15.7 per cent per annum.
The ability of businesses to serve the existing loans continued to increase. In April 2010, already 78 per cent of the holders of loans thought so, while in February there were 72 per cent of them. Crisis minimum of this indicator (50 per cent) occurred in April 2009. Minimum financial solvency in terms of credit in the II quarter of 2010 were: mechanical engineering (recognized by 24 per cent of businesses with loans), construction industry (also 24 per cent) and LESPROM (22 per cent). The highest self-esteem of solvency has been registered in the metallurgy: only 2 per cent of the industry have acknowledged their failure to service loans .
In May, the weak positive trend in demand for industrial production remained. The rate of sales growth has improved (after cleaning from seasonal factors) for further 2 points and has become more positive - sales began to grow more steadily . Since the beginning of the year, the indicator upgraded by 10 points - insufficient to overcome the crisis, but it is important that the growth is sustained, as in the IV quarter of 2009 the rate of changes in demand has stabilized at a negative level (i.e., the sales level was still declining). In May, the demand estimates were still positive (sales growth continued), but clearly less than at the beginning of the year.
In May 2010, the satisfaction in demand has increased to 58 per cent for the first time during this crisis having exceeded the share of responses "below normal" and has reached the pre-crisis level (September 2008). The gap from the crisis bottom (19 per cent, April 2009) has already reached 39 points. The highest satisfaction with sales volumes was registered in August 2007 and amounted to 72 per cent. Formally the difference between that absolute maximum made 14 points. The sharp increase in sales satisfaction in the previous months (23 points in March - May) at the background of a very slight change in their growth rate (by 6 points over the same three months) demonstrates, that the industries in the II quarter finally came to terms with the sluggish recovery from crisis and had little hope for restoration of former high growth in demand and output.
However, the normal level of demand for businesses before the crisis and that in 2010 are not the same, which is demonstrated by production capacity utilization. On average in 2007, the demand was considered normal if 77 per cent of capacities were utilized, and in the II quarter of 2010 that level reached 72 per cent. In 2001 production capacity utilization with normal volumes of sales was 62 per cent.
The growth rate of output in May has increased (after cleaning of seasonal factors) to 15 points and as a result has reached the maximum of the previous crisis months and the level of
the average indictor of the first half of 2008. In I quarter of 2010 the growth was 10 points, in the IV quarter 2009 - 9 points. Planned output growth have also reached the crisis maximum. In May 2010 they caught up with the plans of August 2008
In May, prices of enterprises continued to increase. The rate of their change since the beginning of the year were within the range of 9 + 13 points, which definitely indicated the confidence of producers in their market power (see Fig. 16). Within the twelve months out of twenty months preceding the crisis, companies have been forced to reduce prices.
At the end of the II quarter low demand for industrial products has become a matter of concern to enterprises, forcing them to amend prices and HR policies, but has not prevented the growth of output and control over stocks of finished products.
In June, the growth in demand for industrial products was sustained, but the rate of its growth has remained very low, little different from zero. Therefore, in the middle of the year there was only a pause in falling sales. The total growth of demand for industrial products has not yet begun. The situation of "neither growth nor decline" was recorded in October 2009 surveys, when the difference in changes of demand for the first time during the current crisis was close to zero. As a result, for the third consecutive quarter there was no substantial progress in the dynamics of sales in the industries.
This uncertainty provoked nervousness in the enterprises assessment of the current sales. Before July 2009 the share of "normal" assessments for about 8 months remained at the bottom of the crisis (satisfaction was at the stable level of 23 per cent), and then went up to the next level of 35 per cent. Then the uncertainty in the industries became to vary: the satisfaction jumped from 33 to 54 per cent at near-zero growth in demand (see Fig. 7). Producers seemed to be trying to figure out, what is happening in the economy and what volumes of demand are adequate to the situation. As the result, in the II quarter of 2010 the enterprises of ferrous metallurgy (74 per cent were satisfied with the sales), chemical and petrochemical enterprises (71 per cent),and food industry (64 per cent) were able better to adapt to the industrial demand dynamics.
Dynamics of stocks of finished goods assessments in the first half of 2010 had a steady positive trend, demonstrating a good management of supplies in this crisis. Only within six months (from November 2008 to April 2009) industries had the highest excessive reserves at their warehouses. In May 2009 the balance of assessments has returned to the level of 20042005, and from December 2009, it was declining gradually to the indicators of 2006-2007. The problem of stocks of finished goods, so acute in the Russian industries in the 90 years of the twentieth century, was the most easily solvable in this crisis.
According to the surveys, output growth in June reached the next crisis record and was closer to the values of this index began in 2008 (see Fig. 17). Therefore, the industries in September 2009 have demonstrated quite good and stable production growth in the time of crisis. Output plans in the first half of 2010 maintained high and relatively steady optimism.
In June the companies had again decided to use price leverage to promote sales of their products and suspended the growth of wholesale prices, which was in effect from the beginning of the year. Monthly rate of price growth has declined from the crisis peak to almost zero (see Fig. 16). There was no such a significant pricing adjustment since December 2008. And the price plans of enterprises since March stabilized at the level of actual growth rate of January - May, indicating that the June adjustment was unplanned and demonstrating the desire to restore the growth of prices in the coming months.
In June, industries have continued recruitment, which began in March. The growth rate of employment within all those months was low, but stable. Businesses were accurate in labor market policies, selecting, apparently, the most skilled workers. Nevertheless, their forecasts for the next six months fell down to a minimum. According to the estimates, in 2010 the companies were more focused in planning its staffing policies on the forecasts of demand , rather than on the output plans. In 2009 the situation was reverse. In 2005-2007 hiring of employees was also dependant on the demand.
The ability of businesses to pay the loans was in the middle of 2010 81 per cent (among those who had credits), but remained virtually unchanged for two months. The worst indicator (monitoring began, unfortunately, only in March 2009) was recorded in April 2009. Afterwards only 50 per cent of the companies, who took loans, recognized their ability to pay its debts. Other 50 per cent critically assessed their ability as insufficient. This distribution of ratings in responses to such a delicate and painful issue demonstrates, in our opinion, the reliable answers of enterprises. The highest inability of businesses to service their loans was recorded in April - June 2010 in construction materials industry. It was noted by 26 per cent of businesses with loans. In second place was mechanical engineering - 22 per cent, in the third place - LESPROM (18 per cent). Only steel mills were confident in their credit ability for 100 per cent.
4.2.3. Third quarter: there is no more optimism
The lack of positive trends in the sales dynamics has misleaded the businesses, started to affect the forecasts and to restrain output growth at the beginning of the second half of the year.
The intensity of demand growth in July did not experienced significant changes and remained almost at the zero level: there was neither particular growth, nor significant reduction of sales in the industry. Similar dynamics of sales was recorded in the surveys in February 2010. The similar Fig. was observed at the baseline data (before cleaning from seasonal factors), although in this case the absolute levels were somewhat higher. But the conclusion was the same: no changes in the dynamics of demand for industrial products were observed in the first half of the year.
This situation has forced the companies to change their estimates of demand again. As a result, in July they were improved by 13 points (in June, deteriorating by 17 points was noted), and got increased again - the share of answers "below normal" again proved to be in the minority. This indicator was highly volatile from the beginning of 2010, which indicated the absence of estimates of the current situation. Confusion in the state industrial statistics resulted in further aggravating of the situation. The lack of positive trends in demand has brought pressure on optimistic forecasts of businesses. In July, the expected changes in demand were the most pessimistic since the beginning of 2010.
In July, the surplus stocks of finished goods were expired in the industries in general - i.e., the share of responses "below normal" caught up with the share of replies "above normal". A similar situation was quite rare for post-default period: companies still prefer to have a small surplus of finished goods inventory to meet unexpected orders. In mid-2010 the share of replies "above normal" has fallen to historic minimum, while the share of responses "normal" has reached the historic maximum (see Fig. 18). This was the result of intense reduction of volumes (not to be confused with estimates!) of stocks in the II quarter. In the III quarter the
industries planned, despite the forecasts of Ministry of Economic Development, to continue to reduce their stocks, and most intensively in 2010.
Low demand has begun to hinder the growth of production in the Russian industry. In the III quarter it was mentioned as an obstacle to growth in output, which increased by 9 points and reached 61 per cent. In the second place remained a lack of operating assets, but the prevalence of this interference was reduced to 30 per cent, which was an absolute (!) minimum within total monitored period since 1993 .The Fig. is complemented with 5 per cent share of responses on the lack of credits, which was recorded in the surveys of two consecutive quarters. In the third place there was the lack of personnel (a quarter of enterprises suffered from this factor over the past two quarters) indicated not so much about the current issues of industry, but demonstrated the high readiness of enterprises to respond on increased demand and that the businesses remember the staffing problems of pre-crisis years.
After five months of stable and relatively high (in terms of crisis indicators) increase of selling prices, in June - July the businesses attempted to activate demand for their products due to more moderate increase in prices. If in January - May 2010 prices were rising at the rate of 11 balance points, in June - July that rate fell down to 4 b.p. However, such an adjustment of price policy was not scheduled. This is reflected in the price plans of enterprises, who have maintained a high anticipated rate of price growth up to July.
HR policy of enterprises in the middle of 2010 was influenced by two opposing trends. On the one hand, the lack of growth in demand forced the companies to be cautious in hiring employees. On the other hand, the lack of growth in demand from month to month increases the probability of its recovery in the next month. The latter increased the industries readiness for the post-crisis breakthrough and urged them to accumulate resources for it (even more so -reserves), and in the first place - the most deficient ones. And in the pre-crisis years it was the personnel. As a result, at the beginning of the III quarter the businesses returned to the same (as in March - May) rates of increase of the number of employees (see Fig. 8).
Assessments of the current number of employees have confirmed the preparation of the businesses to increase production. In the III quarter due to anticipated changes in demand, the staff shortage in the industries has increased. For the first time the shortage (i.e., prevalence of "less than adequate" estimates) was recorded in the surveys of the II quarter of 2010 . Meanwhile, there was no deficit in production capacity, typical for post-crisis output growth. The balance of capacity ratings was positive, i.e., responses of "more than enough" were dominating. In the III quarter capacity prevalence has even increased as compared with the II quarter of 2010, when hopes for an early exit from the crisis were stronger.
The struggle for deficient personnel forced the businesses to increase wages. In the III quarter of 2010, a normal (though, according to business leaders) salary level was achieved in 56 per cent of the plants (see Fig. 9). In the pre-crisis 2007, that indicator rose to 60 per cent, and during the crisis in 2009 it fell down to 37 per cent. In mid-2010 the estimates of the ratio of wages of employees has reached the pre-crisis level. It should be noted, that this is the estimated, rather than the absolute range of salaries.
In August, the Russian industries maintained the same rate of growth of output, prices, employment, but the deterioration in estimates of demand, sales, production planning and recruitment, prudent inventory management policy were demonstrating the growing uncertainty of enterprises.
Decreased demand growth in August did not surpass the zero level, which was sustained since February 2010, i.e., the businesses did not register demand growth for seven months
and got used to this situation. The latter urged businesses to make more realistic assessment of sales - in August 63 per cent of businesses estimated their sales volumes as normal (growth in comparison with July by 13 points). However, estimates of sales index remained the most volatile in 2010. Demand forecasts in August also demonstrated negative dynamics. Both, the original, and cleared from seasonal factors estimates indicated willingness of the industries to zero growth in demand in autumn 2010, whereas in the I quarter of the year the businesses expected sales growth at the rate of+10 ... +13 balance points. Therefore, the optimism of the beginning of the year gradually diminished. In August, for the second consecutive month, the businesses reported an absence of surplus stocks of finished products in the warehouses in the industries in general. The balance of assessments stopped in the negative zone, indicating that the growing prevalence estimates of "below standards" over assessments "above normal" and the uncertainty in demand growth.
Output growth in August, according to the businesses, survived and did not change as compared with previous months in 2010. However, in the autumn months the companies planned to move to a less intensive output growth. Estimated production growth decreased to the annual minimum, according to both, the initial and cleared from the seasonal factors indicators.
In August, the industries continued to hold their prices growth at one of the lowest level in 2010, and in general have not yet succumbed to inflationary fever of abnormally hot July -August. But the food industry, which to increase prices in May - July, in August has reported on the most intensive growth in 2010.
In August the industries returned to the former (+ 5points, as in March - May ),rate of employees' recruitment. Therefore, the businesses continued the recruitment, even in the absence of growth in demand and with a deterioration of forecasts for output and sales. But in the next few months these positive processes were expected to stop. Plans to change employment rate in September - October have been reduced to the annual minimum and reached zero - the industries planned to stop recruitment.
Availability of credits after stabilization in May - July at 65 per cent in August has increased to 69 per cent - the banking system has again lowered the requirements to the borrowers from the industries (see Fig. 12). In August, it has involved mainly machine building plants, whose access to credits has increased from 64 to 71 per cent. The banks and food businesses were in the same position. But the metallurgy still remained at the first place (78 per cent). The light industry is treated by the banks in the worst manner. Average minimum interest rate for ruble credits offered by the banks in August has decreased to 13.5 per cent per annum, with a normal (for the businesses) availability of credits, it was 12.5 per cent.
The ability to service existing credits in the industries has stabilized at 80 per cent (of the number of businesses with loans) from April 2010. During this period 16-19 per cent of the enterprises recognized their failure to meet liabilities to the banks. Therefore, the prevalence of bad loans (of borrowers) in the industries in general has become stable. The greatest credit risks were registered in the construction industry (31 per cent of enterprises), in light (29 per cent) and wood processing (25 per cent) industries .
Final assessments of enterprises of their real (not reporting - for tax) financial and economic standing has stabilized in the II and III quarters of 2010 (see Fig. 19). The overwhelming majority (69 per cent) of producers estimated their position as satisfactory; herewith the share of such assessments did not change during four quarters and has become very close to the middle values of this index in the pre-crisis 2007, when it made 73 per cent. Therefore,
the industries have definitely overcome the crisis in financial terms. In the second place by prevalence were the businesses, estimating their financial and economic standing as "bad". They have stabilized too and averaged 21 per cent (10 per cent before the crisis). In the worst quarters of the crisis the share of these estimates increased to 36 per cent. The share of estimates "good" in the II and III quarters of 2010 has reached the crisis maximum of 9 per cent, but was too far from the average indices of 2007 (17 per cent).
In September, there were no significant positive changes in the dynamics of majority of indicators in the industries. Herewith the assessments of stocks of finished goods and recruitment policies have shown a growing uncertainty of the businesses in the future.
In September, there were no actual changes of demand for industrial products. Therefore, the stagnation of sales (growth rate does not exceed the range -3 ...+ 3 points) remained in the Russian industries since the beginning of the year. Prospects for growth in demand for products also improved in September as compared with August and also has not undergone significant changes against previous months of 2010. Businesses still have not seen tangible opportunities to increase sales of their products. Herewith , satisfaction with the current sales in September has decreased by 6 points, which was a modest change after the growth by 16 points within the previous two months (see Fig. 7). The industries, therefore, still remain in some hesitation about volumes of demand, which are adequate to the current economic situation.
The dynamics of assessment of stocks of finished products more and more clearly indicated, that the confidence of the businesses in the fast sales growth was getting less month by month in 2010. The share of responses "below normal" has reached in September 2010 the seven-years (!) maximum. Meanwhile, the share of responses "above normal" has reached the absolute (1992-2010 years!) minimum. As a result, the balance has decreased to 10 points after -2 and -3 points within the preceding months. It means, that the prevalence of estimates of "below normal" has become even greater in the industries. Such a low value of the balance of estimates for the reserves has not been observed in the Russian industries since 2000, when the businesses believed in the sustainability of the post-default growth and have moved from policy of minimized stocks to maintaining their abundance. In the III quarter there was observed a reverse trend in the situation development. However, there was no objective limitations for replenishment of the warehouses in the industries, some capacities were idle, there was no problem with staffing, credits became cheaper, sales volumes were low. However, the businesses need excessive stocks for quick execution of the new (unplanned) orders. Therefore, the reduction of warehouse stocks in 2010 was a deliberate policy of the Russian producers, who were losing confidence in the appearance of new customers and in soon transfer from stagnation to a noticeable increase in demand.
In general, until September the industries with extreme caution reacted to the inflationary boom, generated by the anomalous heat. The balance of the prices growth varied from +6 to +8 points (see Fig. 16).The reaction of food companies was, of course, the most expressed. While in June - July the share of reports on unchanged prices in the industries amounted to 92-95 per cent, in September it dropped to 62 per cent, whereas the share of reports on price growth has increased from 2 to 38 per cent. But plans to change the prices indicated the desire of the businesses to recover this inflationary impulse in future. In September, pricing intentions have not changed and remained within the indices of the preceding seven months. The exception was, of course, in the food industry, which had an intention to retain high actual rate of prices growth of September in October and November.
In August - September industries have nearly stopped the recruitment of personnel. The growth rate of the number of workers decreased to +3 points after + 8 points in July and +5 points in March - May. The businesses in spring and summer of 2010 began to create a reserve of skilled personnel in anticipation of a possible increase in demand, but the extended recovery from the crisis has forced them to suspend the process. Meanwhile, within recent months of the year, the industries planned to resume the dismissals.
The decreasing tendency of the businesses to improve productivity has become was one of the results of activation of recruiting policy in the II and III quarters of 2010. The index, calculated on the basis of changes in the plans for changes in the output staffing number, has declined to 25 per cent, whereas in the I quarter its value made 36 per cent. Those indicators can be interpreted as the share of industrial enterprises, which are ready to increase output faster than the number of employees.
In Autumn the banks continued to expand opportunities of industries crediting, but only at the expense of reducing the proposed interest rates on loans to enterprises. In September, this indicator decreased generally in the industries up to 13.2 per cent per annum in rubles against 13.7 per cent in August. The lowest rates were offered to large (over 1000 people. employees) businesses - 11.2 per cent; to small and medium businesses, in the best case, at the rate of 15.7 per cent per annum (see Fig. 20).
4.2.4. Fourth Quarter: What is Going on in the Russian Industry?
In October there were no significant changes in the dynamics of demand. The balance of that indicator has remained between -3 ...+ 3 points. Within nine consecutive months the sales growth rate differed little from zero - the stagnation of demand was sustained. Due to this circumstance, businesses have been forced to assess their scope of sales less critically. In August - September the satisfaction of demand in the Russian industries averaged 58 per cent, which became the crisis record. Demand forecasts in October remained at September's level - at the best level of the preceding nine months. The industries have maintained some hope for growth in demand, but the New Year holidays will reduce the optimism of these forecasts.
The stocks of finished products in the Russian industries continued to decline. In October the share of answers "below normal" increased to 22 per cent, resulting in the maximum level from May of 2001 (see Fig. 18). Then, in early 2001, the Russian industries have finally believed in the sustainability of post-default (and importantly - non-barter) growth in demand and have moved from policy of minimized stocks to their abundance. In the second half of 2010, the belief in the imminent restoration of the pre-crisis growth, by contrast, began to decline. It forced more and more companies to minimize their inventories of finished products against the regular levels. As a result of growth in the share of estimates "below normal" and reducing share of estimates "above normal", the balance (i.e., the difference) between them has declined in October to -12 points and has reached the 10-years minimum. Negative balances were recorded in all industrial sectors, indicating a widespread uncertainty of businesses in the early industrial growth.
Dynamics of production in October, according to the businesses' estimates, has not undergone fundamental changes as well. The balance remained between+11 ... +16 points, which was sustained over eight months. Production plans of enterprises remained at the level of the crisis maximum peak. The industry has not finally parted with the hope for significant industrial growth recovery.
Low demand remained the main obstacle to the output growth, but its mentioning has considerably reduced during both, after the crisis peak in January 2009 (69 per cent), and after the III quarter of 2010 (55 per cent). In late 2010 in only 43 per cent of businesses the demand prevented increase of the output. The lack of working capital has reached the historic minimum in hindering the effect of the Russian industries output in the III quarter of 2010, when, perhaps, a modest faith in output growth has matched with the provision of its own resources and the increasing availability of bank access. In the IV quarter the frequency of this factor mentioning has increased by 5 points.
The lack of staff has undergone the strongest changes during the current crisis. Before the crisis (in the III quarter of 2008) a half of the Russian industry suffered from the lack of staff. Afterwards, in the II and III quarters of 2009, the frequency of rate of that obstacle mentioning has increased up to 14 per cent, and to the IV quarter of 2010 it rose up to 32 per cent. Therefore, the businesses have faced the staff deficient already at the stage of stagnation. The combination of the lack of personnel with the dynamics of employment (termination of recruitment and the intention to reduce the personnel) indicates the structural problems in the labor market and the growing prudence in personnel policies of enterprises.
Defaults of payments, which were the main fear at the beginning of the crisis, have reduced their negative impact on the Russian industries. In late 2010, their impact has fallen to 17 per cent after 41 per cent at the peak of the crisis. The imports, on the contrary, have gradually, but still very slowly recovered the impact on domestic producers. At the peak of the current crisis the restraining influence of import fell down to 13 per cent after 31 per cent in the mid-2008 (absolute maximum of all period under review). Within seven crisis quarters of 2010 the imports have already managed to win back 10 points and in the IV quarter of 2010 had interfered with 23 per cent of the businesses. We would like to note, that the default and ruble devaluation in 1998 there was a decline of negative impact of imports on the Russian industries by 3 per cent (in the III quarter of 1999 there was an absolute minimum).
Pricing policies of the businesses have undergone significant changes in October. First, the industries have demonstrated the most significant growth in prices during the current crisis. After saving a relatively modest price growth in June - September at the rate of 8.4 points, the balance growth in October has reached 13 points. Secondly, the price forecasts of the businesses have also increased significantly in October after the seven months of gradual slowdown.
The lack of positive changes in the dynamics of demand and output has forced the businesses to stop recruitment. In October the rate the of employment growth in the industries has definitely lost its positive indicators, but have not yet turned negative: recruitment has apparently ceased, but substantial layoffs have not started yet. However, the plans of enterprises indicated a high probability of the sustained negative trends in the dynamics of employment. The balance of the expected changes in the number of employees as a result of the seven-month decline has become definitely negative, became negative and the worst in 2010 (see Fig. 8).
In November, the surveys have registered positive signals from Russia's industries, while maintaining a number of negative factors. The growth in demand and output continued , the forecasts of these indicators remained at the peak of the crisis. Changes in the estimates of stocks of finished products have demonstrated the readiness of the businesses to the larger increase in demand. Anyway, the acceleration of price growth rates and expectations of inten-
sive growth of costs (most likely due to increased insurance deductions) should have a negative impact on sales. The dynamics in the availability of credit has been reduced.
The source (not cleared from the seasonal factors) data on the dynamics in demand have again showed zero growth in November. This situation with the sales persisted in the industries since August. However, after clearance from seasonal and calendar factors, the growth rate of sales has acquired a positive value: the demand grew, with growth in October and November 2010 - the maximum for the current crisis. A similar situation was observed with the sales forecasts. On the eve of the New Year holidays, the businesses expected to reduce sales of their products, it becomes commonplace for producers and consumers. But the removal of seasonal factors has demonstrates the retention of the highest level of optimism in the forecasts of demand in the industries during the crisis. Positive dynamics of actual sales and forecasts have stabilized by estimates of satisfaction in the demand. After the August upsurge up to 62 per cent, the volatility in the share of normal estimates sales have gradually faded and were fixed at 58 per cent (see Fig. 7).
In November, the businesses have refused to minimize the stocks of finished goods and once again moved to the sustainability of a reasonable surplus. During the preceding five months the share of estimates "below normal" was slowly, but steadily growing up due to reduced share of responses "above normal". As a result, the balance of estimated reserves has become negative and has declined to the ten-year minimum. The industries was clearly loosing the belief in fast recovery of the growth in demand and have minimized their accumulation of storage, prepared for quickly satisfaction of the orders for new buyers. Such a policy of inventory of finished goods control in the businesses was usual in the 90 years of the twentieth century. It has reached the highest peak after August of 1998, when the growing demand and a lack of faith in the stability of post-crisis recovery of the industries have brought the balance of reserves estimates to the record of -25 ...- 21 points in the second half of 1999.
In November, the balance of reserves estimates became zero after 11 points in October. Continuation of this trend in the next few months will mean that the industry has found faith in a speedy recovery. Although we cannot exclude that the growth of surplus stocks has been associated with the rejection of a moderate pricing policy and a transition (possibly forced) to a more intensive increase in the price.
Production capacity utilization rate indicates a growing intensity of the use of machinery and equipment in the industries. In the IV quarter of 2010, this index has increased to 68 per cent and reached the level of the end of 2005. However, since the II quarter of 2010 the load has increased by only 3 percentage points (see Fig. 14).
The assessment of overcapacity also did not change within this period. The .excess of equipment remained in the industries at the level of 13 points. In this case, 71 per cent of businesses had a normal, according to them, provision with the capacity for a possible increase in demand for their products. The latter index has returned to the pre-crisis level.
In November the rate of price growth has increased by several points and has reached the peak of the crisis - selling prices of businesses did not grow up so intensively since August 2008. After a relatively moderate price growth in June - September; from October the industries demonstrated their record growth. As judged by the forecasts, the companies were willing to increase prices, most likely, at the expense their sales volumes. Indeed, the sales growth rates were still very low and did not give industries sufficient grounds for demonstration of their market power. Moreover, comparison of changes in demand and prices has demonstrated, that in November the outpacing increase in prices against demand growth was regis-
tered in the industries already at 29 per cent of the businesses, whereas within the preceding (except for the first, the most inflationary) months of 2010, this ratio of changes in demand versus prices was noted only at18-22 per cent of the enterprises.
Since the traditional New Year's upsurge of prices and tariffs was to come only in January 2011, we have to assume, that the industry was preparing for growth rate of insurance contributions (former UST). According to a special survey of IEP, conducted in May 2010, increased selling prices would be the most common reaction of businesses on this tax innovation. 70 per cent of respondents planned to behave this way . And it seems, that in November the companies have already started preemptive increase in prices, reducing the effectiveness of counter-inflationary policy of the authorities. The second most common response to the growth of the insurance payments should be reduced profits of the businesses, the third one -reduced social deductions for personnel.
Intensification of the actual increase in prices and the intention to maintain it was supported by the forecasts on excessive growth. In November in the Russian industry there was recorded the highest increase of overhead excessive costs over the past seven years. The balance of this index has increased within the quarter by 26 points and has reached +50 (see (See Fig. 21).
In November, the industry in general did not aggravate the situation in the Russian labor market at the expense of staff reduction. The rate of change of the index has not decreased, as it could be expected, according the October forecasts, to distinctly negative values. It remained in the zero zone, which showed the hold-on in employment, but did not mean the beginning of significant layoffs. The businesses seemed not to be able to define their staffing policies. Uncertainty was increased by the lack of positive dynamics in sales. If in the II quarter of 2010, industry got rid of (as a result of layoffs, and the growth of expectations for growth in demand) from the surplus labor resources, in the III quarter it clearly noted a lack of personnel, in the IV quarter this positive trend for the period of crisis has been broken. The lack of personnel has decreased by 7 points or almost disappeared. Plans to change the number of employees reached the annual minimum in November. Reductions were planned in all sectors, except for timber industry. The most intensive - in the construction industry and mechanical engineering.
By the end of the year, the situation in the Russian industry was influenced by contradictory trends. On the one hand, data on the dynamics of demand and output, cleared from seasonal factors, has shown the achievement of the next crisis records. The situation with employment has not deteriorated (as it was expected). On the other hand, reduction of staff was still in the plans. The growth of availability of credits has stopped.
Initial data on the dynamics of demand in December have not changed: the rate of the growth rate remained at the zero level. Therefore, in the industries in general, nearly within entire second half of the year the share of reported sales growth was equal to the reports on their shares decline. Anyway, in December, 2010, formal methods of clearing from seasonal factors have demonstrated an increase in demand growth. As a result, it has reached a crisis peak and the level of their pre-crisis indicators.
In December evident improvement of the demand dynamics has not affected the estimates of its volumes. Satisfaction of demand remained at the level of the preceding months (see Fig. 7). Therefore, it was not too bad, because within the II and III quarters the percentage of normal estimates of demand has been subjected to strong fluctuations, indicating the uncertainty of the businesses in which the volumes of sales could be considered adequate to current
economic conditions. At the end of the year the situation has become probably more understandable for the businesses.
Clear improvement of the dynamics of demand in December did not affect the estimates of its scope. Satisfaction of demand remained at the level of previous months (see Fig. 7). This, however, is not too bad, because in the II and III quarters the percentage of normal estimates of demand has been subject to strong fluctuations, indicating that the uncertainty of enterprises in which the sales take adequate current economic situation. At the end of the year the situation seems to be become more understandable for companies.
Despite the fact, that in the second half of the year the output growth, according to the initial responses of the businesses were demonstrating surprising stability, remaining since May in the range between +13 ...+ 20 points (while excluding October and November, there is a unique range between +18 ... +20), after cleaning from seasonal factors has revived such a monotonous Fig.. As a result, in December, the highest rates of output growth during the current crisis have been received .
Since the beginning of the latter quarter, the industry has fundamentally changed its pricing policy and switched to steady increase in sales prices. If in the III quarter the balance of price changes made 6 points, in the IV quarter of this index was released by an average of 17 points. The leader in intensity of prices growth within the preceding three months of the year was not the food industry, but the light and chemical industries.
In December the price plans of the businesses have also significantly changed. The industries, like in the pre-crisis time, planned a significant increase in their prices within the first months of the new year (see Fig. 16), even, perhaps, to the detriment of sales. But it seems, that the increase in the tax burden did not leave any other choice to the businesses. Such a sharp revision of the price plans has not been observed in the Russian industries since September, 1998.
By the end of the year, despite the clear intention of the preceding moths to reduce staff, the industries have kept in general the number of employees at the same level - there was no significant recruitments or layoffs. In December, the level of pessimism in plans has deceased. If in November it has reached the year (2010) maximum of 5 points, (i.e., extensive dismissals were expected), in December balance of plans improved by 5 points, although it remained negative: the industries still expects to reduce staff. In the IV quarter of 2010 the estimates (not absolute indictors!) of salaries of workers and specialists have reached the pre-crisis level. 59 per cent of business leaders considered the level their employees' wages normal, and 36 per cent considered it below normal (see Fig. 9). A similar ratio was observed in 2007 and in early 2008. At the peak of crisis the assessments were reverse: only 37 per cent of the managers recognized salaries as normal, 59 per cent .of leaders considered it "below normal".
By the end of 2010, the growth of credit availability has stopped. The share of normal assessments of this indicator in the second half of the year has stabilized at 66 per cent. Therefore, the banks have stopped mitigating the credit conditions of the real sector in view of continuing uncertainty. Stabilization of the interest rate, offered by the banks in general for industries at the level of 13 per cent for ruble credits, confirms this conclusion. Herewith, for small and medium-sized businesses the rate has been frozen at 15.0-15.5 per cent, for large businesses it has been maintained at the level of 11-12 per cent per annum.
100
%
80 60 40 20 0
1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11
Fig. 7. Dynamics of the main estimates of effective demand
30 %
15 0 -15 -30 -45 -60
1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11
Fig. 8. Change in employment (balance =% growth -% decrease)
75 %
60 45 30 15
1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11
Fig. 9. Evaluation of salaries of workers and specialists by enterprise managers
<j> Expected
-III! Actual 1 1 1 1 1 1 01/09 i I i
^—i—i—i—i—i—i—i—i—i—i—i—i—i—y
80 %
60 40 20 0
1/93 1/95 1/97 1/99 1/01 1/03 1/05 1/07 1/09
Fig. 10. Share of businesses with excessive, adequate and insufficient facilities
50
%
40 30 20 10 0
1/93 1/95 1/97 1/99 1/01 1/03 1/05 1/07 1/09 1/11
Fig. 11. Resource barriers in output growth %
80 60 40 20 0
1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11
Fig. 12. The share of enterprises with normal access to credits
80%, 08/07
/i
f
17%, 12/08
Fig. 13. Estimates of stocks of finished products balance (balance =% higher
than normal -% below normal)
Fig. 14. Capacity utilization in industry,%
1/93 1/95 1/97 1/99 1/01 1/03 1/05 1/07 1/09 1/11
Fig. 15. Balances of capacities and staff (Balance = "more than enough"- "less than enough")
45 %
30 15 0 -15 -30
1/05 7/051/06 7/061/07 7/071/08 7/081/09 7/091/10 7/101/11
Fig. 16. Changes in selling prices (balance =% growth -% decrease)
45 %
30 15 0 -15 -30 -45
1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11
Fig. 17. Changes in production (balance =% growth -% decrease)
80 %
60 40 20 0
1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11
Fig. 18. Dynamics of assessments of finished goods stocks
Actual Expected M
12/08 - 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Fig. 19. Estimates of the economic situation of enterprises
Fig. 20. The dynamics of the average minimum rate for ruble credits to businesses of different sizes, % per annum
Fig. 21. Changes in the unit costs (balance =% of growth -% decrease)
4.3. Investments in the Real Sector of the Economy
4.3.1. Domestic internal investments in fixed assets
As the domestic economic situation improved in 2010, some gradual changes to the better were also occurring in the investment sector. The first half-year 2009 saw the peak of the investment crisis, and then from Q III onwards there emerged a trend towards a slowdown in the rate of decline in the investment sphere which was due, among other things, to the improving financial situation of businesses. In 2009 the volume of the investment activity had plummeted - while GDP dropped by 7.9 %, investments fell by 16.2 %; however, in Q II - IV 2010 the dynamics of investments became positive, and its rate outstripped that of GDP growth. On the whole, over the year 2010 the rate of growth of investments in fixed assets was 6.0 %, while GDP rose only 4.0 % on the previous year (Fig. 22). The dynamics of investments in fixed assets differed rather significantly between big and small-sized enterprises. The 2008 crisis in its initial phase resulted in some critically low investment activity indices displayed specifically by small-sized enterprises; in 2009, however, it was the investment activity in the small business segment that served as a factor that was playing down the scale of decline in the volume of investments across the entire economy. The government financial support granted to small and medium-sized businesses in 2010 was one of the established priorities. In 2010, the overall volume of budget allocations received by way of government support by small and medium-sized businesses amounted to 17.97 bn Rb. The main emphasis in the government program for supporting entrepreneurial activity was placed on the development of innovation-oriented small-sized enterprises and organizations, as well as those oriented towards modernization of their production facilities. Another direction of support provided to small and medium-sized businesses was the anti-crisis program of crediting through Vneshekonombank. Over the year 2010, investments in fixed assets in the small business segment rose by 8.0 % (in 2009 they dropped by 13.5 %), while their share in the total volume of investments across the national economy increased to 32.1 % against 27.2 % in the previous year. It should be noted that growth of investments in fixed assets made by big enterprises in 2010 amounted to 5.1 %. While in 2009 the volume of big enterprises' investment activity dropped by 17.5 % on the previous year, the volume of investments in fixed assets in 2010 amounted to 86.7 % of the 2008 index.
l l investments ¡n fixed assets I I volume of construction Work
i iresidential buildings put into operation GDP
Source: Rosstat.
Fig. 22. GDP Growth Rate, Investments in Fixed Assets, Volume of Construction Work and Residential Buildings Put into Operation in 1999 - 2010, by Quarter, as % of Same Period of Previous Year
A typical feature of 2009 - 2010 was a decline in the total gross floor space of dwellings put in operation. The decline of that index began in Q II 2009, and amounted to 6.5 % by the year's results. In 2010 it dropped on 2009 by 3.0 % and amounted to 58 mln square meters. The situation in 2010 was negatively influenced by the rapid decline in the number of new housing construction projects that had occurred in 2008 - 2009. Besides, the situation with regard to financing allocated to housing construction was also deteriorating. In 2009 the funding received to cover share construction dropped by 74.3 bn Rb, including the population's investments - by 32.0 bn Rb on 2008.
In 2010, the share of investments in housing construction in the overall structure of investments in fixed assets across the economy shrank to 1.9 % against 2.6 % and 3.3 % in 2009 and 2008 respectively. While the volume of investments in housing construction in 2010 dwindled, that year, in contrast to 2009, saw an increase in both the volume and share of the population's investments in the total amount of financial assets invested in share housing construction, while the investments made by organizations declined. In 2010, the population's investments in share housing construction amounted to 69.6 bn Rb and thus by 10.3 bn exceeded the previous year's index, while the volume of investments made by organizations dropped by 21.9 bn Rb. In this connection it is noteworthy that in 2010 the overall index of gross floor space of dwellings put into operation as a result of investments made by the population (which included both their own and borrowed funds) amounted to 25.3 mln square me-228
ters, which is by 3.2 mln square meters below the previous year's level, while the same index with regard to investments made by organizations rose by 1.5 mln square meters.
250
200
150
100
50
□ funding received for share construction - total
□ population's investments
2007
2008
12009 year
2010
161,9
50,9
207,3 91,3
133
59,3
121,4 69,6
□ organizations' investments
111
116
73,7
51,8
Source: Rosstat.
Fig. 23. Funding Received for Share Construction in 2007 - 2010, bn Rb
Given the existing dynamics of investments and volume of work in the construction sector, the expenditures on housing construction in 2010 amounted to 372.3 bn Rb alongside a persisting downward trend displayed by their share in the structure of investments in fixed assets. Simultaneously with a growing volume of industrial construction, the share of spending on the construction of buildings was also increasing, while the share of spending on the acquisition of machinery and equipment became stabilized (Table 11). It should be noted that, in face of an instable rate of domestic production of capital commodities, investments in the acquisition of imported machinery, equipment, and means of transportation (less those made by small-sized businesses and the indices of informal activity) amounted to 378.9 bn Rb in 2010, or to 18.0 % of the total volume of investments in machinery, equipment, and means of transportation (against 371.8 bn Rb, or 20.7 %, in 2009).
The trend towards a reduction, in absolute terms, in the volume of budget funding allocated to investments in fixed assets which was visible in 2008 - 2009, came to a halt in 2010, but the decline in the share of investments made by the Federation's subjects continued (Table 12). In 2010, budget funded investments in fixed assets amounted to 1,242.7 bn Rb, or by 1.9 bn more than in the previous year. In this connection, the volume of federal budget resources allocated to investments rose by 19.2 bn Rb on 2009 and thus amounted to 642.1 bn Rb which, in fact, compensated for the losses resulting from the cuts made by subjects of the Russian Federation in their own budget funding allocated to investments.
0
Table 11
Structure of Investments in Fixed Assets, by Type of Fixed Assets, in 2008 - 2010 (Less Small-sized Businesses and Informal Activity), % of Total
Bn Rb % of total
2008 2009 2010 2008 2009 2010
Investments in fixed assets - total 6,272.1 5,769.8 6,413.7 100 100 100
including:
in dwellings 467.2 343.5 372.3 7.5 6.6 5.8
in buildings (except dwellings) and struc- 3,286.8 3,221.2 3,495.8 52.4 53.8 54.5
tures
in machinery, equipment, means of transpor- 2,071.3 1,798.2 2,109.6 33.0 32.2 32.9
tation
other 446.8 406.9 436.0 7.1 7.4 6.8
Source: Rosstat.
Table 12
Structure of Investments in Fixed Assets, by Source of Financing, as % of Total (Less Small-sized Businesses and Informal Activity)
Including
2008 2009 2010 Q I 1st half-year January -September
Investments in fixed assets - total 100 100 100 100 100 100
including by source of financing:
companies' own funds 39.5 37.1 41.2 45.1 44.9 43.0
of these:
profits 18.5 14.8 14.7 15.0 16.3 16.0
attracted funds 60.5 62.9 58.8 54.9 55.1 57.0
of these:
banks' credits 11.8 10.3 8.7 9.5 9.2 9.1
including those provided by foreign banks 3.0 3.2 2.0 3.2 2.8 2.7
borrowed funds from other organizations 6.2 7.4 5.6 6.4 6.6 6.6
budget resources: 20.9 21.9 19.4 12.9 15.5 17.4
federal budget 8.0 11.5 10.0 5.5 7.6 8.5
budgets of subjects of Russian Federation 11.3 9.2 8.2 6.6 7.1 7.8
Other 21.2 23.0 24.8 25.9 23.4 23.6
Of these: funding received as share in construction 3.5 2.6 1.9 2.0 2.2 2.0
including population's funds 1.9 1.3 1.1 1.0 11 1.1
Share in total volume of investments in fixed assets 4.3 4.3 3.8 5.8 5.3 4.8
received from abroad
Source: Rosstat.
The government's demand for the products and services of Russian enterprises was sustained through the implementation of the planned investment projects in the fields of transportation, telecommunications, etc. being materialized within the framework of the Federal Targeted Investment Program (FTIP), federal target programs (FTP), and the big infrastructure projects launched by the RF Investment Fund. It should be noted that expenditures within the framework of federal target programs were either preserved at the previously planned level or insignificantly reduced.
In accordance with the list of construction sites and objects to be used for federal government needs as of 1 January 2011 confirmed by Regulation of the RF Government, of 30 December 2009, No 2130-r and included in the Federal Targeted Investment Program for 2010, it was planned that government investments should be allotted to 2,039 construction sites and objects. It was planned that, in the year 2010, 1,036 objects would be put into operation. Only 254 of these objects were put into full-scale operation in January - December 2010, while 31
of them were put into partial operation. Besides these, 5 objects planned to be put into operation in later years were put into full-scale operation, and 25 such objects were put into partial operation.
With all the changes taken into account, the federal budget funding earmarked for the construction of objects and the implementation of the measures included in the FTIP amounted to 651.5 bn Rb, including 321.9 bn Rb to finance the investment-related costs of the FTIP (49.4 % of the total volume of the FTIP) and 231.9 bn Rb to finance the other expenses of the FTIP (35.6 %), and also 97.7 bn Rb to finance the special work included in the state defense order (15.0 %).
In comparison with 2009, the total growth of the sum of federal budget funding allocated for these purposes amounted to 50.2 bn Rb, including a 23.0 bn Rb increase in the financing of the investment-related costs of the FTIP and a 34.1 bn Rb increase in the financing of the other expenses included in the Program.
According to Rosstat, the budget means that were allocated in 2010 to the FTIP construction sites and objects (apart from the special work included in the state defense order) supervised by the RF Federal State Statistics Service amounted to 380.3 bn Rb, or to 71.3 % of the per annum limit (Table 13). In 2010, 1,341 objects were fully funded, and another 435 objects were 51.0 to 99.0 percent technically complete. The per annum limit of government capital investments in the transport, agro-industrial and special complexes was funded to a much higher extent (94.2 %, 77.9 %, and 79.1 %, respectively) than the limit of investments in construction sites and objects to be used for government needs. The social complex received 54.2 % of the budget funds earmarked for that item. In 2010, the customers purposefully spent 344.1 bn Rb in government capital investments or 62.9 % of the per annum limit of funds envisaged for their construction.
Table 13
Objects Included in the Federal Targeted Investment Program and the Volume
of Government Capital Investments in January - October 2010 (Apart from the Construction Sites and Objects Included in the State Defense Order)
Number of objects as of2010
Put into operation in January —October 2010
Limit of government capital investments for 2010
Total
Including
those planned for putting in operation in 2010
into full-
scale operation
into partial operation
Total
Including from federal budget
Funded from federal budget in 2010
Use of investments
from all sources of funding, 2010
Units
Bn Rb
Total 2,039 1,036 259 56 547.7 531.3 380.3 344.1
including:
transport complex 415 230 59 16 201.1 195.7 184.3 160.2
agro-industrial complex 198 89 42 12 7.0 6.8 5.3 5.4
special complex 277 122 32 4 30.6 28.2 22.3 21.0
social complex 1,073 561 122 24 289.6 286.7 155.3 142.3
other objects 76 34 4 - 19.4 13.9 13.1 15.1
Source: Rosstat.
From a territorial point of view, the use of the established limit of the funds envisaged for financing the construction sites and objects included in the FTIP was above the Russian aver-
age in the North-Western, Urals, Siberian, Volga and Far Eastern Federal Districts. The use of budget investments was far below the national average in the Central Federal District.
Table 14
The Use of Funds at Construction Sites and Objects to be Used for Federal Government Needs, by Federal District, in 2010
Limit of allocations from all sources, bn Rb Limit of government investments for year, bn Rb Actually used funds from all sources of financing bn Rb As percentage of per annum limit
Russian Federation 547.5 531.3 344.2 62.9
Central Federal District 252.6 250.1 101.7 40.2
North-Western Federal District 64.2 63.9 64.9 101.2
Southern Federal District 72.0 70.8 44.1 61.2
North Caucasus Federal District 11.1 10.9 7.9 70.6
Volga Federal District 28.6 26.9 23.4 82.0
Urals Federal District 5.1 4.7 4.6 89.7
Siberian Federal District 21.7 21.0 20.5 94.4
Far Eastern Federal District 92.5 83.0 77.1 83.3
Source: Rosstat.
The slow recovery of both the domestic market and the incomes of the economy contributed to the preservation of the trend toward investment programs being financed with companies' own resources. In 2010, their own resources used for investment purposes amounted to 2,644.7 bn Rb against 2,092.0 bn Rb in the previous year, while their share increased from 37.1 % to 41.2 %. The structure of the attracted resources used for financing investments in fixed assets demonstrated an intensification of the trend toward curbing the participation of banking and borrowed capital. In 2010, out of a total of 2,769.0 bn Rb of attracted funds, banks' credits amounted to 559,2 bn Rb, or 14.8 % (against 18.4 % in 2008).
In 2009, the reduction in absolute terms of the volume of banks' credits granted for the purpose of making investments was determined entirely by the shrinking scale of activity of Russian banks. The increased amount of credits attracted from foreign banks and active borrowing of funds from other organizations were the factors that helped to prevent any further deepening of the crisis on the investment market. In 2010, the situation changed for the better: after the banking sector had adapted to the new realities and the business activity revived, growth of crediting granted by domestic banks fully compensated for the diminishing volume of credits provided by foreign banks (Fig. 24).
As a result, the share of investments in fixed assets received from abroad in the total volume of investments in fixed assets made in 2010 dropped to 3.8 % against 4.3 % in the previous year. A significant influence on the volume of investments was exerted by changes in the structure and dynamics of foreign investments. Although, as seen by the results of the year 2010 reported by Rosstat, the amount of foreign investments received by the Russian economy reached 114.7 bn USD, and thus rose by 40.1 % on 2009, the share of direct investments in the structure of received investments declined to 12.1 % against 19.4 % a year earlier. Direct foreign investments in 2009 dropped by 13.2 % on the previous year.
Source: Rosstat.
Fig. 24. Dynamics of Funding Attracted for Financing Investment in Fixed Assets
in 2007 - 2010, in bn Rb
The situation was aggravated by an increase in net capital outflow. According to the preliminary estimated published by the RF CB, in 2010 net export of private capital amounted to 38.3 bn USD (Table 15).
Table 15
Net Capital Import/Export by the Private Sector, According to Balance
of Payments Data, bn USD
Net capital im- Including:
port/export by private sector, total net capital import/export by banks net capital import/export by non-financial enterprises & households
2007 82.4 45.8 36.6
2008 - 132.8 - 56.9 - 75.8
Q I - 23.7 - 9.9 - 13.7
Q II 40.7 22.1 18.6
Q III - 19.3 - 13.5 - 5.8
Q IV -130.5 - 55.6 - 74.9
2009 - 56.9 - 30.4 - 26.6
Q I - 35.0 - 6.9 - 28.1
Q II 3.4 - 5.9 9.2
Q III - 33.8 - 27.5 - 6.3
Q IV 8.5 10.0 - 1.4
2010 (estimate) - 38.3 11.4 - 49.7
Q I - 14.7 0.8 - 15.5
Q II 2.8 6.8 - 4.0
Q III - 3.7 10.0 -13.7
Q IV - 22.7 - 6.2 -16.5
Source: CB of Russia.
Given the general trend toward the weakening of investment activity, the role of institutional investors underwent certain changes in 2009 and 2010. As the share of investments in state property continued to decline, the share of investments in private property rose in 2010 by 3.0 pp and 7.7 pp on 2009 and 2008 respectively. Apparently, private domestic businesses focused on preserving their positions on the domestic and foreign markets, all the more so because the development of this trend was taking place against the background of a decline in both the volume and the share of investments made by enterprises under foreign or joint ownership (between Russian and foreign partners) in the total volume of investments (Table 16).
Table 16
Structure of Investments in Fixed Assets, by Type of Ownership, in 2008 - 2010, as a Percentage of the Total (Less Small-sized Businesses and Informal Activity and Investments Unobservable by Direct Statistical Methods)
_2008_2009_2010
Investments in fixed assets 100 100 100 Including by type of ownership:
Russian 79.4 80.8 83.9
state 23.3 24.9 23.5
federal 13.3 15.4 15.2
subjects of Russian Federation 9.9 9.4 8.1
private 37.5 42.2 45.2
mixed Russian 12.8 8.8 9.9
ownership of state corporations - 1.3
foreign 9.6 8.9 6.2
joint ownership between Russian and foreign partners_11.0_10.3_9.9
Source: Rosstat.
In 2010, the structural shifts in investments in fixed assets were determined by the increasing share of industry in the total volume of investments in fixed assets (less small-sized businesses) - to 45.1 % against 43.2 % in 2009 and 40.9 % in 2008. In this connection, one could observe a rather noticeable differentiation by type of economic activity in the growth rate of that index. In the extracting industries the volume of investments in fixed assets rose in 2010 by 8.9 %, in the processing industries - by 3.3 %, and in the sector of production and distribution of electric energy, gas u water - by 24.1 %. For the majority of types of economic activity, the levels of investments remained far below their pre-crisis indices (Table 17).
With regard to the processing industries, the noteworthy phenomena are the rise, on 2009, in the volumes of investments in the production of coke and petroleum products by 31.5 %, in the production of metal products by 35 %, and in the production of cellulose by 23.7 %. The specific feature of 2010 was an upsurge of the investment activity in the production of textiles and leather as a result of an altered customs regime for importing relevant equipment and raw materials.
A low investment demand for capital commodities and construction materials coupled with a low load on the existing production capacities resulted in a drop, on 2009, in investments in metallurgical production by 11.2 %. As a consequence, in 2010 the volume of investments in this sector amounted to 63.3 % of its pre-crisis level in 2008. A difficult situation also persists with regard to the production of construction materials, where investments dropped by 31.5 % over the period of 2008 - 2010.
The specific feature of the investment activity in 2010 was the reestablished positive growth rate of investments in the machine-building complex. The rise on 2009, as demonstrated by investments in the production of machinery and equipment, was 17.8 %; the same
index for the production of electrical, electronic and optical equipment amounted to 1.7 %, and that for the production of means of transportation - to 4.4 %. At the same time, our analysis of the dynamics and structure of investments points to a lower share of investments in machine-building - 2.4 % of the total volume of investments across the entire economy and 5.3 % of investments in industry. The revival of the investment activity in the machine-building complex occurs at a much slower rate that in the other sectors. As seen by the results of 2010, the volumes of investments in the machine-building complex with regard to some specific types of economic activity were at the level of 68 - 82 % of their 2008 indices.
One positive factor was the rise, by 8.1 % on 2008, of the volume of investmens in the development of transport in 2009 - 2010. However, it should be noted that the dominant influence on the character of investments, by type of transport activity, was exerted by the increasing investments in the development of pipeline transport - by 1.67 times as compared to the 2008 level, while investments in the development of railway transport over the same period dropped by 8 %. The changes in the dynamics and structure of investments in transport require further careful observation, given the fact that in 2010, in terms of the national economy's openness to international trade, Russia ranked 48th on the availability and quality of transport infrastructure, 33rd on the quality of railway infrastructure, 82nd on the quality of aquatic ports, 87th on the quality of airports, and 111th (near the bottom of the list) on the quality of motor road infrastructure.
Table 17
The Volume and Dynamics of Investments in Fixed Assets in 2008 - 2010, by Type of Economic Activity (Less Small-sized Businesses and Informal Activity)
2008 2009 2010 2008 2009 2010
bn Rb as % of previous year
Total 6,272.1 5,769.8 6,413.7 105.6 82.5 105.1
of these: 243.0 192.6 190.9 95.7 75.2 88.9
agriculture, hunting and forestry
extraction of mineral resources 1,040.9 967.8 1,109.8 103.9 88.3 108.9
including: 950 893.5 1021.5 104.8 89.1 108.7
extraction of fuel-and-energy mineral resources
processing industries 1,034.0 881.9 993.7 107.8 78.2 103.3
Production and distribution of electric energy, 558.2 585.6 786.3 111.3 99.8 124.1
gas and water
construction 91.7 162.7 194.1 91.7 66.1 117.3
wholesale and retail trade; repairs 168.7 138.4 158.4 95.6 75.7 108.9
transport and communications 1,628.0 1,624.6 1,696.1 112.4 99.1 109.0
including communications 257.4 180.6 207.3 95.1 66.6 108.6
financial activity 74.7 74.6 77.2 95.6 99.4 107.1
Operations with immovables, lease, services 733.8 558.2 658.3 100.9 70.8 92.8
of these: research and development 31.9 48.9 62.8 101.9 131.9 114.4
state administration and military security; mandatory 128.2 133.0 120.5 109.7 89.5 87.0
social security
education 162.9 117.4 142.9 96.9 78.7 113.7
health care and social services 188.0 145.7 161.3 116.0 82.1 105.6
other communal, social and personal services 128.8 168.6 185.8 127.9 85.1 102.8
Source: Rosstat.
The problems associated with this country's exit from the investment crisis in 2010 had originated mostly from the extremely difficult basic conditions of the previous year. The changes occurring in the structure of investments in fixed assets in 2009 were determined by the rapid decline of the scale of business activity in the sectors of construction, operations with immovables, trade and communications. While there existed a general downward trend
235
in the volume of investments in industry, that process was influenced in particular by the drop in investments in the processingee industries by 20.6 % on 2008. Besides, the situation was further complicated by the decline in the volume of investments in agriculture - by nearly 30 % on 2007 over the period of 2008 - 2009. The year 2010 saw a continuing downward trend in the volume of construction work. Growth of both investments and the volume of work in the construction sector occurred in Q IV 2010. On the whole, in 2010 the volume of investments in fixed assets remained 11 % below the pre-crisis level registered in 2008.
As demonstrated by a sample study (conducted by Rosstat) of the investment activity demonstrated by organizations operating in the sector of extraction of mineral resources, in the processing industries, and in the production and distribution of electric energy, gas and water, the main purpose of investing in fixed assets in 2010, just as in the previous years, was the replacement of deteriorated technologies and equipment. Investments aimed at performance improvement (automation and mechanization of the current production process, implementation of new production technologies, improved cost-effectiveness of production, and energy saving) were made by 32 - 46 % of all organizations; 32 % of organizations were aiming at increasing their production capacities without changing their product assortment; and 29 %, in addition, were aiming at expanding their product assortment.
The bulk of investments in fixed assets in 2010 was earmarked for purchases of new machinery and equipment. Among the organizations included in this study, the share of machinery and equipment aged under 10 years was 37 %; over 10 and up to 20 years - 40 %; over 20 and up to 30 years - 14 %. In the organizations operating in the spheres of production of means of transportation and equipment, chemical production, production of electrical, electronic and optical equipment, machinery, metallurgical products, cellulose, pulp, paper, and cardboard, the mean age of machinery and equipment was greater than that for the total number of organizations observed in this study.
The share of means of transportation aged under 10 years was 51 %, of those aged over 10 and up to 20 years - 33%. This index was above the mean value displayed by the organizations operating in the production of means of transportation and equipment, and in metallurgical and chemical production.
Table 18
Distribution of Organization by the Estimated Age of Their Fixed Assets in 2010, as % of the Total Number of Organizations
Buildings Structures Machinery and equipmente Means of transportation
Under 3 years 2 2 4 5
Over 3 and up to 5 years 3 5 11 14
Over 5 and up to 10 years 5 7 22 32
Over 10 and up to 15 years 6 8 26 20
Over 15 and up to 20 years 9 12 14 13
Over 20 and up to 30 years 25 24 14 4
Over 30 years 38 27 5 1
Mean age (years) 26 21 14 9
Source: Rosstat.
The withdrawal from operation of machines, equipment and means of transportation in 2010 due to their long service life and high rate of wear and tear was pointed to by 68 % of the organizations' directors, while 10 % pointed out as the cause of their withdrawal the low economic efficiency of their use.
The study has shown that new domestically produced machinery and equipment were acquired by 88 % of all organizations, imported products - by 35 % of organizations; domestic equipment on the secondary market was bought by 22 % of organizations, imported equipment - by 7 % of organizations. In the main, they purchased computer technologies, industrial complex and assembly lines, some separate technological units and means of transportation.
Shortage of their own financial means was the principal factor that suppressed, in 2010, the investment activity of organizations operating in the sector of extraction of mineral resources, in the processing industries, and in the production and distribution of electric energy, gas and water.
Table 19
Distribution of Organizations by the Estimated Factors Restricting Investment Activity,
as % of Total Number of Organizations
_2000_2009_2010
Insufficient demand for products 10 29 19
Lack of their own financial resources 41 66 67
High interest on commercial credits 47 36 31
Complicated mechanism for getting credits needed for implementation of 39 19 15 investment projects
Investment risks 35 23 23
Unsatisfactory technological base 18 7 5
Low rate of return on investments in fixed assets 8 10 11
Dubious economic situation in the country 49 48 32
Imperfect normative legal base for regulating investment processes 36 10 10
4.3.2. Foreign Investments
Most of the year 2010 is characterized by a drop in foreign investors' activities in the Russian Federation. In the investment sphere, crisis phenomena which were explicitly evident in 2009 kept prevailing in January-September 2010, while the influx of foreign investments in Russia decreased dramatically. In January-September 2010, the volume of foreign investments in the Russian economy fell by 13.2% as compared to that in the same period of 2009 and, by 46.0% as against the maximum level registered in January-September 2007. Due to substantial growth in foreign investments in the 4th quarter (a 150% increase as compared to the 4th quarter of 2009), the aggregate growth of 40.1% in foreign investments in the Russian economy as against the 2009 figure was registered (Fig. 25). At the same time, the outflow of the earlier invested capital continued. If in the 1st quarter of 2010 and the 4th quarter of 2010 the volume of the withdrawn funds (foreign investors' income which was transferred abroad as well as interest payments on loans and loan repayments) was equal to the volume of foreign investments into the country in the same period, in the 2nd quarter of 2010 and the 3rd quarter of 2010 it exceeded the latter by 12.1% and 22.7%, respectively. Furthermore, in 2010 Russian investments abroad exceeded the volume of foreign investments into the Russian economy. Such trends were typical of the first half of 2010 where such an excess in the 1st quarter of 2010 and the 2nd quarter of 2010 amounted to 72.6% and 64.9%, respectively. In the 3rd quarter of 2010 and in the 4th quarter of 2010, Russian investments abroad amounted to 28.0% and 60.0% of the volume of foreign investments in Russia in the same periods, respectively. It remains to be seen if the above factor is the trend's turning point.
10% -9% -8% -7% -6% -5% -4% -3% -2% -1% -0% -
■
I I ■
2004 2005 2006 2007 2008 2009 2010
□ the aggregate volume of the foreign investment influx, % of the GDP □ Direct foreign investments, % of the GDP
The source: Rosstat.
Fig. 25. The level of the influx of foreign investments into the Russian economy in the 2004-2010 period. (% of the GDP)
In 2010, international rating agencies left Russia's sovereign rating unchanged at the level below the pre-crisis one. At the same time, in December 2009 having registered some improvements in the Russian economy S&P, an international rating agency, raised Russia's rating forecast from the negative one to the stable one and preserved the rating at the "BBB" investment level. In September 2010, having confirmed the current rating level the Fitch Agency upgraded the rating forecast to the positive one. According to Fitch, "the Russian economy is recovering after being seriously affected by the global financial crisis. Such a change of the forecast to the positive one reflects Fitch confidence that a switchover to a more flexible foreign exchange policy, substantial repayment of the foreign debt of the private sector, stabilization of the banking sector and growth in foreign exchange reserves should contribute to a decrease in the number of factors behind the country's financial vulnerability".
According to Moody's, another rating agency the Russia's rating remains at the level of "Baal", while the rating forecast is "stable" (in the 2008-2009 period, unlike S&P and Fitch Moody's did not downgrade Russia's rating, but cut only the rating forecast).
In 2010, foreign investments amounted to 140.1% and 105.8% as against the 2009 figure and the 2008 figure, respectively or USD 114.7 billion. (Table. 20).
In 2010, the largest growth in absolute indices (by USD 34.7 billion) was registered with the segment of other investments which were made on a return basis. Direct investments decreased by USD 2.1 billion. Such a drop took place due to a decrease in values of the following two components: contributions to the charter capital and loans from foreign co-owners of business entities. In 2010, the former fell by 3.7% to USD 7.7 billion, while the latter, by 28.4% to USD 4.6 billion. Thus, the unit weight of loans received from foreign co-owners in the structure of direct investments in the Russian Federation decreased from 40.5% in 2009 to 33.4% in 2010, while the share of contributions to the charter capital grew from 50.3% to 55.8%.
Table 20
The volume and structure of foreign investments in the non-financial sector
of the Russian economy1
In million USD. % of the previous year
Total Direct Portfolio Other Total Direct Portfolio Other
2006 55 109 13 678 3 182 38 249 102.7 104.6 700.0 95.3
2007 120 941 27 797 4 194 88 950 219.5 203.2 131.8 232.6
2008 103 769 27 027 1 415 75 327 85.8 97.2 33.7 84.7
2009 81 927 15 906 882 65 139 79.0 58.9 62.3 86.5
2010 114 746 13 810 1 076 99 860 140.1 86.8 121.9 153.3
The source: Rosstat.
According to the UNCTAD World Investment Report 2010 which was published in July 2010, as regards the volume of direct foreign investments in 2009 Russia is rated 6th in the world (it was rated 5th in 2008, 9th in 2007, 10th in 2006 and 15th in 2005). As in the previous year, among the developing countries Russia is rated 2nd after China. According to the above report, in 2009 Russia accounted for 3.5% of the global foreign investments (4.1% in 2008) and, for 8.2% of the direct foreign investments in developing countries (11.9% in 2008).
50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
39,7%
35,4%
22,0%
Ht5%-
-J-5T7%
-29,5%
24,1%
-37,1%
-44,4%
2007
2008
2009
□ Developed countries
□ Developing countries
□ The world, total
The source: UNCTAD World Investment Report 2010, July 22, 2010
Fig. 26. Changes in the influx of direct foreign investments in the 2007-2009 period.
According to UNCTAD report, decrease in the aggregate volume of the global direct foreign investments was registered from 2008 (Fig. 26). According to preliminary estimates, in 2010 the aggregate volume of the direct foreign investments is virtually at the 2009 level, while in 2011 and 2012 it is expected to amount to USD 1.3-1.5 trillion and USD 1.6-2 trillion, respectively. (Fig. 27).
1 Direct investments are investments in tangible assets and acquisition of a controlling interest or an interest which gives the investor the right to participate in management, while portfolio investments are investments in securities in order to receive income only; other investments are investments which are made on a return basis (loans of international financial institutions, trade loans and other).
2500
2000
1500
1000
500
1515
The average level in the past three pre-crisis years (2005-2007)
2100
1771
1114
-26%
I
1120 I
2007
2008
2009
2010 (evaluation)
0
The source: UNCTAD Global Investment Trends Monitor, October 14, 2010.
Fig. 27. The global influx of direct foreign investments, billion USD.
As regards the segment of portfolio investments into the Russian economy in 2010, a 21.9% growth was registered as compared to that in 2009. At the same time, a decrease in the unit weight of investments in equities and shares from 42.9% in 2009 to 32.0% (against 95.5% of the volume of portfolio investments in 2007 and 79.6% in 2008) was observed.
In 2010, other investments grew by 53.3% as compared to the 2009 figure. The share of trade loans in the structure of other investments went down from 21.4% in 2009 to 17.6% in 2010 (against 21.5% in 2008). As regards the periods the investments were attracted for, the share of loans with a term of over six months fell to 38.0% as compared to 67.9% in 2009 (68.1% in 2008). The unit weight of loans with a term of less than six months increased up to 41.3% (against 10.1% in 2009 and 8.8% in 2008).
So, as compared to 2009 the structure of foreign investments into the Russian economy did not change much in 2010 (Fig. 28).
The source: Rosstat.
Fig. 28. The structure of foreign investments in the Russian economy in the 1996-2010 period.
In 2010, priorities of foreign investors by the type of business changed dramatically; a concentration of foreign investments in industry and the financial sector was registered. In 2010, foreign investments in industry and the financial sector increased by 44.2% and 1,330%, respectively, as compared to 2009.
In 2010, investors took less interest in trade, transport and communications. In 2010, foreign investments in trade decreased by 41.2%, while those in transport and communications, by 52.4%.
Breakdown of foreign investments into the Russian economy by the type of business is shown in Table 21.
Table 21
Breakdown of foreign investments into the Russian economy by the type of business in the 2008-2010 period
In million USD Change, % of the previous year % of the total
2008 2009 2010 2008 2009 2010 2008 2009 2010
Industry 49 704 32 980 47 558 99.1 66.4 144.2 47.9 40.3 41.4
Transport and communications 4 861 13 749 6 576 72.5 282.8 47.8 4.7 16.8 5.7
Wholesale and retail trade; repair of 23 905 22 792 13 334 50.5 95.3 58.5 23.0 27.8 11.6
motor vehicles, motor bikes, household
appliances and personal items
Transactions with real property, rental 15 378 7 937 7 341 182.8 51.6 92.5 14.8 9.7 6.4
and other services
Financial business 4 977 2 658 37 913 111.8 53.4 1426.3 4.8 3.2 33.0
Other industries 4 944 1 811 2 024 126.7 36.6 111.8 4.8 2.2 1.8
The source: Rosstat.
In 2010, in the structure of foreign investments in industry leaders of growth are manufacturing industries; as compared to 2009 investments in them grew by 49.2% (in 2009 a decrease amounted to 34.5%) (Fig. 29). Foreign investments in production of fuel and energy mineral resources increased by 43.2% (in 2009 a drop amounted to 16.0%).
In manufacturing industry, investments in production of gas carbon and petroleum products increased by 150%, while those in iron and steel industry, by 69.7%, thus amounting to USD 13.2 billion and USD 7.6 billion, respectively (in 2009 the growth in investments into
production of gas carbon and petroleum products amounted to 63.7%, while investments in iron and steel industry fell by 68.8%). In 2010, foreign investments in chemical production increased by 41.3% to USD 2.2 billion as compared to 2009 (in 2009 a 37.6% drop in investments in that industry was registered).
□ Production of primary products □ Chemical production
□ Iron and steel industry OFood industry
□ Production of gas carbon and petroleum products □ Other industries
The source: Rosstat.
Fig. 29. The breakdown of foreign investments in industry in the 2006-2010 period, %
In 2010, both direct investments and portfolio investments in industry decreased by 7.9% and 41.6%, respectively, as compared to 2009 (in 2009 they fell by 44.1% and 41.2%, respectively). As compared to 2009, other investments in industry grew by 62.0% (in 2009 a drop of 29.5% was registered). Thus, the unit weight of all other investments in industry grew from 75.6% in 2009 to 84.9% in 2010, while in the same period the share of the direct investments and that of portfolio investments fell from 22.4% and 2.0% to 14.3% and 0.8%, respectively.
Changes in the structure of foreign investments by the type of economic activities in industry were registered. In production of primary products, direct investments kept falling and decreased by 35.9% to USD 2.0 billion. As a result, in 2010 the share of such investments in the aggregate investments in that industry fell to 14.7% (against 30.7% in 2009 and 40.2% in 2008). The share of other investments in production of primary products (in 2010 other investments grew by 70% to USD 11.8 billion) increased up to 85.0% (against 65.8% in 2009 and 59.0% in 2008).
In 2010, in manufacturing industry other investments accounted for a larger part of investments, too. As compared to 2009, such investments increased by 60% and amounted to 85.4% of all the investments in manufacturing industry in 2010 (against 80.6% in 2009). In 2010, direct foreign investments in manufacturing industry increased by 13.3%, while the unit weight of direct investments in manufacturing industry fell to 14.0% (against 18.5% in 2009).
As regards the geographic structure of foreign investments into the Russian economy in 2010, changes have taken place in the list of states which are the main exporters of the capital to the Russian Federation. In 2010, the largest volume of investments, that is, USD 242
40.8 billion (35.5% of the total volume of foreign investments into the Russian economy in the above period) was received from Britain and USD 10.7 billion worth of investments, from the Netherlands. In 2010, the top three leaders as regards investments in the Russian Federation included Germany as well, which country invested USD 10.4 billion in to the Russian economy.
In 2010, investments from Britain showed the highest growth of 530% as compared to that in 2009, while investments from Ireland increased by 240%. Investments from Germany and France rose by 41.7% and 48.6%, respectively. However, investments from Luxemburg, China, Japan and the Netherlands decreased by 54.2%, 21.8%, 63.3% and 8.1%, respectively. Differences in the dynamics of investments have resulted in changes in the geographic structure of foreign investments into the Russian economy (Fig. 30).
2010
2009
2008
2007
2006
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% □ Cyprus DThe Netherlands □ Luxemburg □ Germany DThe UK □ China DThe USA □ France □ Other countries
The Source: Rosstat. The data on investments from the USA in the 2009-2010 period and those from China in the 2006-2008 period is unavailable.
Fig. 30. The geographic structure of foreign investments into the Russian Economy
in the 2006-2010 period, %
As of the end of December 2010, the accumulated foreign capital (without monetary regulation authorities, commercial banks and savings banks taken into account) including RUR investments calculated into US dollars amounted to USD 300.1 billion, which figure is 11.9% higher than the respective value as of the beginning of the year. From the beginning of the year, direct accumulated investments grew by 6.6% (Table 22).
In 2010, Cyprus, the Netherlands, Luxemburg, China and Germany account for a larger portion of the total volume of the accumulated foreign investments. The total share of the above countries amounted to 64.4% (against 66.3% in 2009). At the same time, the share of the above five leaders in the segment of other investments increased to 64.8% (against 62.9% in 2009), while in the segments of direct investments and the portfolio investments it is estimated to amount to 67.1% and 21.9%, respectively (against 69.0% and 85.1% in 2009).
Table 22
The accumulated foreign investments by the investor-country
Accumulated as of January 1, 2011, million USD.
Total Direct investments Portfolio investments Other investments
Ireland 11 488 568 4 10 916
Germany 27 825 9 254 11 18 560
Japan 9 022 824 2 8 196
Britain 21 578 3 501 4 481 13 596
Cyprus 61 961 44 737 1 732 15 492
The Netherlands 40 383 22 401 8 17 974
Luxemburg 35 167 661 203 34 303
China 27 940 942 0.1 26 998
Other countries 64 742 33 311 2 479 28 952
Total 300 106 116 199 8 920 174 987
The source: Rosstat.
Other investments prevail in the structure of foreign investments accumulated as of the end of December 2010. They accounted for 58.3%. A similar index as regards direct foreign investments amounted to 38.7%.
Considering the above, it may be concluded that the situation with investments in Russia started to improve by the end of 2010. Discernable growth in the volume of the accumulated foreign capital was registered. At the same time, a drop in the influx of the direct foreign investments in the Russian economy is a negative factor. Growth in foreign investments took place due to the segment of other investments which are made on a return basis. Thanks to lower interest raters and capital injection in the economy of countries which are the main investors in the Russian Federation, foreign businessmen took greater interest in the financial business in Russia.
In 20010, growth in profits of corporations was observed which factor according to UNCTAD "along with improvements of the situation on the stock markets will create a basis for financing direct foreign investments". Interest of global investors in developing countries is constantly growing. "In particular, Brazil, the Russian Federation, India and China (BRIC countries) have good prospects of attracting direct foreign investments. In developing countries and countries with transition economy, apart from the most labor-intensive segments of the chain of creation of value, foreign investments will also be made far and wide into activities with a greater technological component"1. Thus, with taking into account the registered growth in the foreign investments in the 4th quarter of 2010 a renewal of investments flows to the Russian economy may be expected in 2011.
Taking into account a considerable growth in prices on energy carriers late in 2009 and early in 2011, a substantial volume of investments into the fuel and energy complex can be expected. In addition to the above, both the ongoing liberalization of the legislation regulating foreign investments and measures aimed at making long-term projects more attractive may motivate foreign investors to make investments in other sectors of the Russian economy as well.
1 UNCTAD World Investment Report 2010. 244
4.4. Oil-and-Gas Sector
The oil-and-gas sector has continued being the cornerstone to Russia's economy and as such it plays a pivotal role in forming the state budget revenue and the nation's balance of trade. In 2010, it was the situation in the global oil market, the one in the European gas market, and an objective deterioration of conditions of oil and gas production, decline in output at "old" fields and a considerably greater costs of development of new ones, particularly in the undeveloped regions with no infrastructure therein, that exerted the greatest influence on the national oil-and-gas sector's advancement.
4.4.1. The Dynamic of World Oil and Gas Prices
The recovery of the global economy in the aftermath of the financial and economic crisis had a determining impact on the situation on the global oil market in 2010. In 2008, on the eve of the global crisis, the world oil prices had hit an extremely high level. In July 2008, the average monthly oil prices overshot USD 130/bbl., thus hitting their historical peak, both in nominal and real terms. The main factors propelling the price rise were: an increased demand for oil fueled by high growth rates of the global economy, China, India and other Asian economies' ones in particular, the OPEC's conservative policy in respect to its members' oil output, and low oil production rates outside OPEC. A serious factor that contributed to the oil price boom became a sizeable influx of speculative capital onto commodity exchange markets. In the last months of 2008, the deceleration of the global economic growth rates, decline in demand for oil in developed economies and the capital outflow from the commodity exchange markets sent global oil prices nosedive to USD 40/bbl in December 2008, ie more than thrice vis-à-vis their July 2008 figures (Tables 23, 26). In the conditions of a drastic downfall in world oil prices in the 2nd half 2008, in an attempt to maintain oil prices, OPEC made a number of decisions on contracting its members' output. However, in the conditions of decline in demand for oil in the developed countries as a consequence of the already started recession those measures had no visible effect on the market. In December 2008, OPEC ruled to cut the daily oil output by 4.2 mln.bbl vs. the September 2008 level, effective as of 1 January 2009.
In 2009, the contraction in oil demand in developed countries, which was caused by the financial and economic crisis (Table 24) was compensated by soaring demand on the part of emerging economies, China in the first place, and by the OPEC countries slashing their oil output, and some other oil producing nations (Norway, UK, and Mexico) followed the move. Over the last months of the year, the dynamic of oil prices found itself under a positive impact of renewed economic growth in the leading industrially developed nations. As a result, the world oil prices climbed from USD 40/bbl in the late-2008 up to USD 74-75/bbl in Q4 2009. In the circumstances, at its 2009 conferences OPEC ruled to retain its members' quotas, which had been set on1 January 2009, unchanged.
In 2010, a steady economic growth in Asia, China in the first place, as well as a renewed economic growth in the OECD nations, primarily in the US, fueled a considerable rise in the global demand for oil (Table 25). Those factors were complemented by a relatively severe weather in the Northern hemisphere in Q4 2010. Propelled by the growing global demand, the OPEC production was on the upsurge, albeit at a gradual pace. It was Nigeria and Saudi Arabia that should take the bulk of credit for the rising OPEC's output. Overall, the 2010 OPEC's oil output was greater than the 2009 figures, but substantially lower than the 2008 ones. Nor-
way and UK saw their oil production at the fields in the North Sea continue to decline. Driven by the aforementioned factors, in the last months of 2010 the world oil prices left the range of USD 70-80/bbl., wherein they were over most part of the year and hit USD 90/bbl in December 2010. (Tables 26, Fig. 31). In 2010, Russia's Urals was traded on the global (European) market at the level of USD 78/3/bbl. on the average, or up by 28.4% vs. the previous year's level.
Table 23
World Prices of Oil in Nominal Terms in 2000-2010., as USD/bbl.
2000 2005 2006 2007 2008
Price of Brent, UK 28.5 54.4 65.2 72.5 97.7
Price of Urals, Russia 26.6 50.8 61.2 69.4 94.5
Price of the OPEC oil basket 27.6 50.6 61.1 69.1 94.1
Table 23 (cont'd)
2009 2009 2009 2009 2009
Q1 Q2 Q3 Q4
Price of Brent, UK 45.0 59.1 68.4 75.0 61.9
Price of Urals, Russia 43.7 58.1 68.0 74.3 61.0
Price of the OPEC oil basket 42.9 58.5 67.7 74.3 60.9
Table 23 (cont'd)
2010 2010 2010 2010
Q1 Q2 Q3 Q4 2010
Price of Brent, UK 76.7 78.7 76.4 86.8 79.6
Price of Urals, Russia 75.3 76.9 75.6 85.2 78.3
Source: IMF, OECD/IEA, OPEC.
Table 24
Global Oil Consumption in 2008-2009, as % to the Respective Period of the Prior Year
2008 2009 2009 2009 2009 2009
2008 Q1 Q2 Q3 Q4
The world, total -0.6 -3.2 -2.5 -0.6 0.9 -1.3
OECD nations -3.6 -5.2 -6.1 -3.6 -2.9 -4.5
Including:
North America -5.2 -5.4 -6.1 -1.3 -1.6 -3.6
Europe -0.6 -2.9 -5.7 -7.1 -6.7 -5.6
APR -4.0 -8.5 -7.2 -3.5 0.5 -4.8
Non-OECD countries 3.3 -0.6 1.9 3.0 5.8 2.5
Including:
Asia (less Middle-East and ex-USSR countries ) 1.7 -0.8 4.8 6.7 12.5 5.8
Source: OECD/IEA.
Table 25
Global Oil Consumption in 2010, as % to the Respective Period of the Prior Year
2010 2010 2010 2010 2010
Q1 Q2 Q3 Q4
The world, total 2.3 3.3 3.8 3.5 3.2
OECD nations -1.1 1.6 3.6 1.7 1.5
Including:
North America 0.6 3.6 4.1 2.1 2.6
Europe -4.9 -1.1 2.2 1.8 -0.5
APR 0.9 0.6 4.8 0.4 1.6
Non-OECD countries 6.5 5.2 4.0 5.5 5.3
Including:
Asia (less Middle-East and ex-USSR countries ) 9.9 6.5 3.8 6.9 6.7
Source: OECD/IEA.
Global Prices of Oil in 2010, as USD/bbl
Table 26
£
a Ü
a
•IS
a
<
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a
9
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■s
o 13 O
■s g
■s
e
Price of Brent, UK 76.2 73.6 78.9 84.9 75.2 74.9 75.6 77.2 77.8 82.7 85.3 91.4 Price of Urals, Russia 76.1 72.9 76.9 82.6 73.8 74.4 73.9 75.5 77.3 81.7 84.5 89.5
Source: OECD/IEA, OPEC.
Source: The RF Ministry of Economic Development.
Fig. 31. Price of Urals in 2008-2010, USD/bbl.
Prices for natural gas on the global market are determined, as a rule, on the basis of prices of energy sources alternative to gas (chiefly AOD/diesel fuel, and fuel oil), which depend on world prices of oil. That is why the world prices for natural gas follow oil prices, but with a certain lag. On the European market, following the oil prices, the ones of the Russian gas likewise hit their peak value in 2008 and declined in 2009 (Table. 27).
In 2010, the gas prices were on the upsurge; however, in contrast to oil prices, if averaged over the year, they were below the 2009 figures. This can be ascribed to the impact of two factors. First, the lag between oil and gas prices determined the latter ones passing the price nadir at a moment of time later than that for oil prices. While the minimum quarterly prices for oil were noted in Q1 2009, those of gas - in Q3 2009 r (Table. 28). Second, the change of the situation on the European gas market - namely, a considerable rise in offer of gas, a size-
247
able growth in LNG supplies in tandem with a lower level of spot prices for gas vis-à-vis prices quoted in long-term contracts drove the 2010 Russian gas prices down.
In 2009-2010, the spot gas prices on the European market were lower than the ones of the Russian pipeline gas supplied under long-term contracts (Table 29). Behind the phenomenon were a growing offer of gas, primarily by Norway and Qatar, decline in demand for gas in the conditions of the recession, and a more flexible pricing policy with regard to LNG (contract prices of pipeline gas are determined on the basis of prices of substitute fuels over previous periods, which is why they react to the market situation with a certain lag).
The EU policy on diversification of sources of energy supplies, creation the European RLNG infrastructure, and lower LNG prices in 2009-2010 have entailed a certain decline in the proportion of the Russian gas on the European gas market. According to the East European Gas Analysis, Russia's share in gas imports from outside the EU to the European countries that hold membership i OECD plunged from 39% in 2008 to 33% in the first half 2010, while Norway's share soared from 23 to 27%, and that of Qatar- from 2 up to 8%.
Table 27
World Prices for Oil and Natural Gas in 2002-2010, as USD/bbl.
2002 2003 2004 2005 2006 2007 2008 2009 2010
The average world oil price, 24.95 28.89 37.76 53.4 64.3 71.1 97.0 61.8 79.0
USD/bbl
The prices of Russian gas on 96.0 125.5 135.2 212.9 295.7 293.1 473.0 318.8 296.0
the European market, USD/ Thos. c. m.
Source: IMF.
Table 28
Prices for Oil and Natural Gas on the European Market in 2009-2010,
USD/bbl
2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4
The price of Brent, USD/bbl. The prices of Russian gas on the European market, USD/Thos. c. m. 45.0 503.5 59.1 309.6 68.4 229.8 75.0 232.2 76.7 273.2 78.7 291.4 76.4 306.5 86.8 313.0
Source: IMF.
Contract Prices of Pipeline Gas and Spot Prices of LNG in 2010 Table 29
ST a g a a e ■s ■s a a § ■S a < ST § 0J j S iß = WJ 9 < h ■s = ft u rjl u ■s o u 0 äs ü ■s .a § § o ^ Z O
The average price of Russian pipeline gas in Europe, USD/ USD/Thos. c. m. Spot prices of LNG in Germany, USD/Thos. c. m. 273 230 273 214 273 182 301 194 283 222 290 237 305 270 309 255 306 268 311 287 314 314 295 360
Source: OAO «Gasprom», IMF.
4.4.2. Dynamic and Structure of Production in the Oil-and-Gas Sector
The rise in oil output in Russia in the early 2000s was propelled by extending opportunities for oil export, thanks to the creation of the Baltic pipeline system and the use of railroad transport in particular, as well as by intensification of development of existing fields and the oil companies' greater opportunities due to the price rise for oil. Later, though, the oil production growth rates plunged substantially. While in 2002-2004 the annual oil production increase rate was 8.9-11%, the 2006-2007 figures made up just 2,1%, and the year of 2008, for the first time over recent years, saw oil production decline. That was a clear sign of exhaustion of reserves to boost the nation's oil output at the expense of intensification of development of operating fields, which testifies to the need for more pro-active measures on developing new oil areas.
The growth in oil production renewed in 2009, though the increase rate was relatively low (1.2% vs. the prior year). In 2010, the increase rate accounted for 2.1% thus matching the 2005-2007 figures (Tables. 30, 31). The dynamic of oil output found itself driven by placement in operation of several new large oil fields in the north of Russia's European part and in Eastern Siberia as well as by enactment of a number of amendments to the Tax Code of RF aimed at lowering the tax burden on the oil sector, encouraging a more intense development of existing fields and developing new production areas.
Table 30
Oil Production and Refining in Russian Federation in 2000-2010
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Production of oil, in- 323.2 348.1 379.6 421.4 458.8 470.0 480.5 491.3 488.5 494.2 505.1
cluding gas condensate,
mln. tn.
Primary oil refining, 173 179 185 190 195 208 220 229.0 236.3 236.0 249.3
mln. tn.
The share of oil refining 53.5 51.4 48.7 45.1 42.5 44.3 45.8 46.6 48.4 47.8 49.4
in its production, %
Refining depth of petro- 71 71 70 70 71 71.6 71.9 71.7 72.0 71.9 71.2
leum feedstock, %
Source: the Federal State Statistics Service, the RF Ministry of Energy.
Oil processing has recently grown at a pace greater than its extraction, which can be ascribed chiefly to an accelerated growth in export of oil products, which was encouraged by export duties on oil products being lower than the ones levied on crude oil. Between 2005 and 2010 (except for 2009) the annual growth rates of primary oil refining accounted for 3.26.2% vis-à-vis the annual oil output growth rates that made up 1.2-2.2% (except for the 2008 figures). As a result, the proportion of refined oil in oil output surged from 42.5% in 2004 to 49.4% in 2010. That, however, was still way behind the 2000-2001 figures: at the time, more than a half of extracted oil was supplied to refineries. Meanwhile, the processing depth has practically remained unchanged over the past decade and accounted just for 71.2% in 2010, which basically quadrates with the 2000 figure (for reference: the respective rate in the leading developed economies accounts for 90-95%). Efficacy of oil refining and quality of Russian oil products still substantially fall short of matching international standards.
Table 31
Production of Oil, Petroleum Derivatives and Natural Gas in 2000-2010,
as % to the Prior Year
2000 2001 2002 2003 2004
Oil, including gas condensate 106.0 107.7 109.0 111.0 108.9
Primary oil processing 102.7 103.2 103.3 102.7 102.6
Petrol 103.6 100.6 104.9 101.2 103.8
Diesel fuel 104.9 102.0 104.7 102.0 102.7
Black oil fuel 98.3 104.2 107.1 100.3 97.8
Natural gas 98.5 99.2 101.9 103.4 101.6
Table 31(cont'd)
2005 2006 2007 2008 2009 2010
Oil, including gas condensate 102.2 102.1 102.1 99.3 101.2 102.1
Primary oil processing 106.2 105.7 103.8 103.2 99.6 105.5
Petrol 104.8 107.4 102.1 101.8 100.5 100.5
Diesel fuel 108.5 107.0 103.4 104.1 97.7 104.2
Black oil fuel 105.8 104.5 105.2 101.9 100.8 108.5
Natural gas 100.5 102.4 99.2 101.7 87.9 111.4
Source: the Federal State Statistics Service.
Atop the 2010 list of biggest oil producers in Russia were oil companies Rosneft, LUKOIL, THK-BP, Surgutneftegas, and Gazprom. Their aggregate share in the nation's total oil output accounted for nearly 75%. Meanwhile, medium-sized oil companies' (Tatneft, Slavneft, Bashneft, and Russneft) share made up 14.2%. Companies operating under PSAs produced another 2.9% of Russian oil, while the share of other oil producers (100-plus small oil extracting organizations) was 7.6% (Table 32). The proportion of state-run (belonging to the federal government) companies in the country's total oil output amounted to 30.8%. To put this in perspective, back in 2003, before their taking over private oil companies' assets, Rosneft and Gazprom combined produced only 7.3% of Russian crude.
Table 32
Oil Produced by Various Oil Companies in 2008-2010
Oil output in Share in total Oil output in Share in total Oil output in Share in total
2008, output, 2009, output, 2010, output,
mln. tn. % mln. tn. % mln. tn. %
Russia, total 488.5 100.0 494.2 100.0 505.1 100.0
Rosneft 113.8 23.3 116.3 23.5 112.4 22.3
LUKOIL 90.2 18.5 92.2 18.7 90.1 17.8
THK-BP 68.8 14.1 70.2 14.2 71.7 14.2
Surgutneftegaz 61.7 12.6 59.6 12.1 59.5 11.8
Gazprom +
Gazprom neft 43.4 8.9 41.9 8.5 43.3 8.6
Including:
Gazprom 12.7 2.6 12.0 2.4 13.5 2.7
Gazprom neft 30.7 6.3 29.9 6.1 29.8 5.9
Tatneft 26.1 5.3 26.1 5.3 26.1 5.2
Slavneft 19.6 4.0 18.9 3.8 18.4 3.6
Bashneft 11.7 2.4 12.2 2.5 14.1 2.8
Russneft 14.2 2.9 12.7 2.6 13.0 2.6
NOVATEK 2.7 0.6 3.3 0.7 3.8 0.8
PSA operators 12.0 2.5 14.8 3.0 14.4 2.9
Other producers 24.1 4.9 26.0 5.3 38.2 7.6
Public companies, com-
bined:
Rosneft + Gazprom + 157.2 32.2 158.2 32.0 155.7 30.8
Gazprom neft
Source: the RF Ministry of Energy, author's calculations.
Gazprom traditionally preponderated the gas production area. Meanwhile, as the decline in the national natural gas output can be chiefly ascribed to Gazprom's poorer performance, the company's share in 2009-2010 slid slightly (to 77.2%) vis-à-vis an increasing specific weight of other producers, including oil companies, NOVATEK, PSA operators, and other producers. The 2010 share of public (state-owned) corporations in the nation's gas output accounted for 79.8% (Table 33).
Table 33
Structure of Natural Gas Production in 2008-2010
Gas output in Share in total Gas output in Share in total Gas output in Share in total
2008, output, 2009, output, 2010, output,
bln. m. % bln. m. % bln. m. %
Russia, total 664.9 100.0 596.4 100.0 665.5 100.0
Gazprom + 553.1 83.2 466.6 78.2 513.9 77.2
Gazprom neft
Including:
Gazprom 550.9 82.9 462.3 77.5 509.0 76.5
Oil companies 54.8 8.2 63.5 10.6 66.6 10.0
NOVATEK 30.8 4.6 32.8 5.5 37.8 5.7
PSA operators 8.5 1.3 18.3 3.1 23.3 3.5
Other producers 17.6 2.6 15.2 2.5 23.9 3.6
Public companies, combined:
Rosneft + Gazprom + Gaz-
prom neft 566.1 85.1 484.0 81.2 531.2 79.8
Source: the RF Ministry of Energy, author's calculations
The recently noted decline in the oil output growth rate should be ascribed to the objective deterioration of operating conditions in the first place. A considerable fraction of oil fields in Russia has entered the decollement stage, while new fields mostly display worse mining and geological conditions and geographic parameters, and their development requires greater capital, operating and transportation costs.
A drastic fall in gas production in 2009 (by 12.1% on a year-on-year basis) resulted from the drop in the domestic and external demand caused by the recession and a compulsory contraction of gas supplies to Europe in early 2009 because of the "gas conflict" with Ukraine. In 2010, Russia's gas output caught up with its 2008 figures, but export of gas still was far below the pre-crisis level.
4.4.3. Dynamic and Structure of Export of Oil and Gas
The 2010 aggregate net export of oil and oil products was on the rise against the backdrop of growth in oil production and is estimated to hit 376.6 mln. tn.. This is the historic peak for Russia's oil sector. (Tables 34, 35). The specific weight of net export of oil and oil products in oil production accounted for 74.6%. That said, Russia has substantially cut oil supplies to Belarus, as the counterparts could not agree on levying the export duty on the supplies (between January and November 2010 Russian oil supplies to Belarus plunged by nearly 41% on a year-on-year basis). In 2010, oil export accounted for 49.6% of the nation's oil output. The proportion of export in black oil fuel hit 90.9% between January and November 2010, and that in diesel fuel - 59.4%. The 2010 export of petrol plummeted 34.2%, while the share of export of petrol in the respective output slid to 8.5% (for reference: the 1999 figure was 7.2%, the 2005 one - 18.5, in 2008 - 12.5, and in 2009 - 12.6%).
Meanwhile, the year of 2010 saw a notable rise in import of oil products (up 2.4 times on a year-on-year basis) and growth in the share of import in satisfying the domestic demand. The
share of import in petrol resources soared from 0.6% in 2009 to 1.4% in 2010 (for reference: in the 1st half 1998 the respective figure was 8.7%, in 2008- 0.7%). The 2010 indices for diesel fuel and black oil fuel stood at 0.8 u 1.1%, respectively.
Table 34
Export of Oil, Oil Products and Natural Gas from Russia in Natural Equivalent in 2002-2010,as % on a Year-onYear Basis
2002 2003 2004 2005 2006 2007 2008 2009 2010*
Oil, total 113.9 117.8 115.0 98.4 98.0 104.0 94.0 101.8 101.2
Including:
Non-CIS countries 109.9 118.9 116.3 99.1 98.0 104.8 92.6 102.9 107.4
CIS countries 137.3 112.4 108.3 94.9 98.0 99.4 102.6 95.4 65.2
Oil products, total 118.5 103.6 105.5 117.9 106.3 108.0 105.0 105.3 105.0
Including:
Non-CIS countries 119.1 102.6 104.9 119.1 104.5 107.6 102.0 107.1 108.4
CIS countries 102.8 132.3 117.9 94.6 148.8 115.3 152.2 86.8 61.5
Gas, total 102.4 102.0 105.5 103.7 97.6 94.6 101.8 86.2 106.1
* Estimated.
Source: the Federal State Statistics Service
After a sizeable (by 13.8%) contraction of oil exports in 2009 caused by the fall in export gas supplies to Europe, the next year Russian gas export surged thanks to an increase in supplies to the CIS countries. However, Russian gas export has not yet hit the pre-crisis level. Meanwhile, the specific weight of net export in gas production plummeted from 28.2% in 2008 to 25.6% in 2010.
Table 35
Correlation between Production, Consumption and Export of Oil and Natural Gas in 2000-2010
2000 2005 2006 2007 2008 2009 2010*
Oil, mln. tn.
Production 323.2 470.0 480.5 491.3 488.5 494.2 505.1
Export, total 144.5 252.5 248.4 258.4 243.1 247.4 250.4
Export to non-CIS countries 127.6 214.4 211.2 221.3 204.9 210.9 226.6
Export to CIS countries 16.9 38.0 37.3 37.1 38.2 36.5 23.8
Net export 138.7 250.1 246.1 255.7 240.6 245.6 248.6
Domestic consumption 123.0 123.1 131.2 124.1 130.4 125.3 128.5
Net export as % to production 42.9 53.2 51.2 52.0 49.3 49.7 49.2
Oil products, mln. tn.
Export, total 61.9 97.0 103.5 111.8 117.9 124.4 130.6
Export to non-CIS countries 58.4 93.1 97.7 105.1 107.6 115.4 125.1
Export to CIS countries 3.5 3.9 5.8 6.7 10.3 9.0 5.5
Net export 61.5 96.8 103.2 111.5 117.5 123.3 128.0
Oil and oil products, mln. tn.
Net export of oil and oil products 200.2 346.9 349.3 367.2 358.1 368.9 376.6
Net export of oil and oil products, 61.9 73.8 72.7 74.7 73.3 74.6 74.6
as% to oil production
Natural gas, bln. c.m.
Production 584.2 636.0 656.2 654.1 664.9 596.4 665.5
Export, total 193.8 207.3 202.8 191.9 195.4 168.4 178.7
Export to non-CIS countries 133.8 159.8 161.8 154.4 158.4 120.5 108.6
Export to CIS countries 60.0 47.5 41.0 37.5 37.0 47.9 70.1
Net export 189.7 199.6 195.3 184.5 187.5 160.1 170.4
Domestic consumption 394.5 436.4 460.9 469.6 477.4 436.3 495.1
Net export as % to production 32.5 31.4 29.8 28.2 28.2 26.8 25.6
* Estimated.
Source: the Federal State Statistics Service, the RF Ministry of Energy, the Federal Customs Service, author's calculations.
With some growth in the proportion of oil products, the structure of Russia's oil export was still dominated by export of crude, which in 2010 accounted for 66.0% of the aggregate export of oil and oil products. The bulk of the export of oil products was formed by black fuel oil, which Europeans use for further processing, and by diesel fuel. The bulk of energy resources (in 2010 - as much as 90% of oil, 96% of oil products and 61% of gas) was exported to outside the CIS.
Analysis of the dynamic of Russia's oil export over a long period of time evidences an increase therein of the share of oil products, whose specific weight grew from 18.2% in 1990 to 34.0 % in 2010 r. (Table 36). With a drastic decline in the domestic consumption (our calculations show it plunged from 269.9 mln. tn. in 1990 to 128.5 mln. tn. in 2010), the specific weight of net export of oil and oil products in oil output increased from 47.7 to 74.6% over the period in question.
Table 36
Net Export of Oil Products in 2002-2010
2002 2003 2004 2005 2006 2007 2008 2009 2010*
Net export of oil products, 74.8 78.2 81.4 96.8 103.2 111.5 117.5 123.3 128.0
mln. tn.
Share of oil products in net ex- 29.2 26.8 24.3 27.9 29.5 30.4 32.8 33.4 34.0
port of oil and oil products, %_
* Estimated.
Source: the Federal State Statistics Service, the Federal Customs Service, author's calculations.
The above data evidence a substantial intensification of the oil sector's export orientation against the pre-reform period. That said, it should be noticed that the process in question is associated not only with increase in absolute export volumes, but with a sizeable contraction in the domestic consumption of oil due to the market transformation of Russia's economy, as well. In the period prior to the financial and economic crisis of 2008-2009 the pace of economic growth was high, while the volume of domestic consumption remained fairly stable. This evidences a certain decline in oil intensity rate of Russia's GDP.
The oil price boom in 2008 sent the oil sector's proceeds upswing substantially (Fig. 32, 33). That year, aggregate proceeds from export of oil and main kinds of oil products (petrol, diesel fuel and black fuel oil) accounted for USD 228.9 bln., which was a record-breaking amount ever posted over the whole post-reform period. (Tables 37, 38). It can be noted for reference that the minimum level of oil export proceeds (USD 14 bln.) was recorded in the conditions of the 1998 price downfall. The fall in oil prices in 2009 likewise resulted in a substantial contraction of export revenues, while the subsequent price rise in 2010 made export proceeds bounce upwards substantially. Between January and November 2010 the aggregate proceeds from export of oil and oil products hit USD 173.6 bln.
Table 37
Export Proceeds from Oil and Oil Products in 2000-2010, as USD Bln.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (11 Mec.)
Export gains from oil and 34.9 33.4 38.7 51.1 74.6 112.4 140.0 164.9 228.9 141.2 173.6
main oil products
Source: calculated on the basis of the Federal State Statistics Service's data.
Table 38
Proceeds from Export of Oil and Oil Products in 2008-2010, as USD Bln.
2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Export gains from oil 53.2 64.4 68.9 42.4 25.6 30.6 39.2 45.8 45.2 47.9 46.2
and main oil products
Source: calculated on the basis of the Federal State Statistics Service's data.
Affected by increasing world prices for oil and gas, the proportion of fuel-and-energy commodities in Russian's exports in 2008 hit 68.6%, including crude - 34.4% (Table 39). In 2009, the share of these commodities in the nation's export dropped slightly, but remained high nonetheless. In 2010, the proportion of fuel-and-energy commodities in Russia's exports accounted for 67.5%, including crude - 34.0%.
Table 39
Value and Specific Weight of Export of Fuel-and-Energy Commodities in 2005-2010
2005 2008 2009 2010
USD bin. %* USD bin. %* USD bin. %* USD bin. %*
Fuel-and-energy commodities,
total 154.7 64.1 321.1 68.6 201.1 66.7 267.7 67.5
Including:
oil 83.8 34.7 161.2 34.4 100.6 33.3 134.6 34.0
Natural gas 31.4 13.0 69.1 14.8 42.0 13.9 47.6 12.0
* As % of the total volume of Russian exports. Source: the Federal State Statistics Service.
Source: calculated on the basis of the Federal State Statistics Service
Fig. 32. Average Export Prices of Oil and Black Fuel Oil in 2000-2010, USD/ton
110 105 -100 -95 -90 -85 -80 -75 -70 -65 -60 -55 -50 -45 -40 -35 -30 -25 -20 -15 10 5 -0 4rm
111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111111
- Mln t. (left axis)
m li) li) CD CD CO
o o o o O O o o O o
c c > XI -z: Ô
TO o (D a) a) TO
< z < tn u_ a 5
28000 - - 26000
- - 24000
- - 22000 - - 20000 -- 18000
16000 -- 14000 --12000 --10000 8000 - - 6000
- - 4000
- - 2000 0
■USD mln (right axis)
Source: calculated on the basis of the Federal State Statistics Service's data.
Fig. 33. Export of Oil and Oil Products in Natural and Value Equivalent in 2000-2010, Mln. T/, USD Mln.
4.4.4. Price Dynamic for Energy Commodities on the Domestic Market
Propelled by rising oil prices in 2008, the domestic prices of oil and oil products in Russia likewise were on the upsurge. In the summer of 2008, the prices for oil, petrol, diesel fuel and black oil fuel hit their absolute peaks over the post-reform period. In July 2008, the average domestic price of oil (producer price) in USD equivalent hit USD 410.2/ton, while the one of petrol - USD 810.3/ton. Between September and December 2008, and in the early 2009, the plummeting world oil prices and depreciating Ruble sent domestic prices of oil and oil products in USD equivalent nosedive. In 2009, the domestic price of oil and oil products in USD equivalent notably bounced upwards as a result of rising world oil prices and eventually overrun the 2008 figures. (Table 40, Fig. 34, 35). In 2010, the world prices of oil and light oil products continued climbing up and fueling a further increase in the domestic prices of oil and light oil products in USD equivalent.
Table 40
Domestic Prices of Oil, Oil Products and Natural Gas in USD equivalent in 2000-2010 (Average Producer Prices, as USD/ton)
2000 2005 2006 2007 2008 2008
December December December December July December
Oil 54.9 167.2 168.4 288.2 410.2 114.9
Petrol 199.3 318.2 416.5 581.2 810.3 305.1
Diesel fuel 185.0 417.0 426.1 692.5 902.8 346.5
Black oil fuel 79.7 142.7 148.8 276.5 392.8 125.0
Gas, USD/ c.m. 3.1 11.5 14.4 17.6 23.8 18.1
Table 40 (continued)
2009 2009 2009 2009 2009
January March June September December
Oil 62.2 122.9 194.7 225.9 219.3
Petrol 244.3 318.8 481.5 593.2 457.4
Diesel fuel 306.2 343.1 382.1 388.2 394.8
Black oil fuel 107.2 145.9 210.8 265.8 250.8
Gas, USD/ c.m. 13.5 14.5 22.0 22.4 16.9
Table 40 (continued)
2010 2010 2010 2010 2010
January March June September December
Oil 196.5 216.3 196.7 211.2 248.2
Petrol 483.0 507.3 529.2 544.0 547.9
Diesel fuel 429.5 431.3 406.7 423.8 536.1
Black oil fuel 195.3 229.0 236.3 246.2 246.3
Gas, USD/ c.m. 17.7 18.7 18.7 23.5 20.5
Source: calculated on the basis of the Federal State Statistics Service's data.
Meanwhile, domestic oil prices in Russia still are substantially lower than the world ones. Behind the gap are such objective conditions as the existence of an export customs duty and additional transportation costs. Against such a backdrop government regulators kept keeping a watchful eye on domestic gas prices. It is envisaged to transit, within coming years, to a stage-by-stage increase of domestic gas prices to a level securing the same profitability rate from its sales in Russia as the one ensured by overseas sales. If the move is successful, the gap between domestic and world prices should narrow, with the domestic prices of gas still being lower than the world ones (given the export duty and transportation costs), nonetheless.
Source: calculated on the basis of the Federal State Statistics Service's data.
Fig. 34. Average Producer Prices of Oil and Gas in USD Equivalent in 2000-2010, USD/Ton,
USD/Thos.c.m.
Source: calculated on the basis of the Federal State Statistics Service's data.
Fig. 35. Average Producer Prices of Petrol and Black Fuel Oil in USD Equivalent
in 2000-2010, USD/Ton
4.4.5. Tax Regulation of the Oil-and Gas Sector
Since 2009 amendments were made to the Tax Code of RF. They are aimed at alleviation of the tax burden on the oil-and-gas sector, encouragement of a more intense development of deposits in operation and development of new oil fields in underdeveloped regions and at the continental shelf. Specifically, in the formula calculating the Rp ratio that reflects the world oil prices and is applied to the basic mineral tax rate on produced oil, the exempted price minimum was increased from USD 9/bbl. to 15/bbl. (Table 41), which resulted in a substantial decrease of the effective mineral tax rate on extracted oil. As well, the requirement to use the direct method of accounting the volume of oil output at a specific mining allotment was abolished to ensure the decreased ratio is applied to the mineral tax rate (Kb) employed at oil fields with a high reserves depletion rate. That allowed the benefit in question to cover all the worked-out deposits, which stimulates extension of their operational deadlines and gives boost to an additional oil production.
To give a fillip to development of new oil-and-gas provinces for new oil deposits located in Eastern Siberia, in Nenetsky Autonomous Okrug, in Yamal peninsula (Yamalo-Nenetsky Autonomous Okrug), at the continental shelf of the Russian Federation north of the Arctic Circle, as well as in the Sea of Azov and Caspian Sea, the Government has granted tax holidays in regard to the mineral tax. Specifically, corporations developing new oil deposits of the Eastern-Siberian oil-and-gas province within the borders of the Republic of Sakha (Yakutiya),
Irkutsk oblast and Krasnoyarsk krai now can enjoy zero rate of the mineral tax until they hit the accumulated volume of oil production of 25 mln. tn. at a given mining allotment, provided they meet the 10-year reserves development deadline, or for 10 years for an E&P license and 15 years - for a complex E&P and production license effective since the date of its public registration. (Table 42).
Table 41
The Mineral Tax Rate on Oil Extraction in 2005-2010
2005 2006 2007 2008 2009 2010
The basic mineral tax rate levied on
oil extraction, Rb/ton 419 419 419 419 419 419
The ration characterizing the world
oil prices dynamic (Rp) (P-9) x R/261 (P-15) x R/261
Reserves depletion ratio of a mining
allotment (Kb) 3,8 - 3,5 x N/V
Note: P - the price level for Urals in USD/bbl equivalent averaged over the tax period; R - set by the CBR USD-to-Rb. exchange rate value averaged over the tax period; N - cumulative oil production at a mining allotment; V -initial recoverable reserves of categories A, B, C1 u C2 at a mining allotment.
Source: the Tax Code of RF, Federal Act of 22.07.2008 № 158-FZ, Federal Act of of 27.07.2006 № 151-FZ, Federal Act of 07.05.2004 № 33-FZ.
To additionally encourage development of oil deposits in Eastern-Siberian oil-and-gas province since 1 December 2009 the RF Government set zero oil export duty rate effective through 1 July 2010. The Government subsequently transited to apply lowered export duty rates to the East Siberian oil and since December 2010 extended the effect of the leverage to cover deposits located in Caspian Sea.
Table 42
Regions of Application and tax Holidays Parameters of the Mineral
Tax on Oil Extraction
Region Accumulated volume of oil production at a mining allotment, mln. tn. E&P license validity period, years E&P license validity period, years Date as of which the benefit became effective
1. Republic of Sakha (Yakutia), 25 10 15 01.01.2007
Irkutsk oblast, Krasnoyarsk krai
2. Continental shelf north of the 35 10 15 01.01.2009
Arctic Circle
3. Nenetsky AO, Yamal penin- 15 7 12 01.01.2009
sula
4. Sea of Azov Caspian Sea 10 7 12 01.01.2009
Source: the Tax Code of RF.
In 2010, the RF Government produced a string of new proposals (amendments to Part 2 of the Tax Code of RF) on modifications in taxation of the oil-and-gas sector consequently adopted by the Federal Assembly of RF and promulgated since 2011. The amendments provide for some increase in the mineral tax rate in regard to oil and a substantial increase of the mineral tax rate on natural gas. The basic mineral tax rate on oil will be subject to indexation with account of the projected inflation rate in 2012-2013, that is, they will be raised up to Rb.446 /ton in 2012 and further up to Rb. 470/ ton in 2013. The mineral tax rate on gas will be raised way more substantially. It has remained unchanged since 2006, while since then wholesale gas prices have risen 2.12 time. As a consequence, the mineral tax rate on gas slid considerably both in real and nominal terms (as percentage of its price).
At this juncture we believe a logical move would be to have the mineral tax rate on gas production indexed according with the price rise for gas in the domestic market. The Government, however, tried a more conservative approach: since 1 January 2011 the rate of the tax in question is to be indexed 1.61 times, which de facto quadrates with the inflation accumulated over 2007-2010. The gas mineral tax rate is to be further increased in 2012-2013 to catch up with the projected inflation rate. As a result, since 1 January 2013 the mineral tax rate on gas production will make up Rb. 265 /Thos. c.m. (Table. 43).
Table 43
Mineral Tax Rates on Oil and Natural Gas Production in 2010-2013
2010 2011 2012 2013
Mineral tax rate on oil, Rb/ton 419 419 446 470
Mineral tax rate on gas, Rb/Thos. c.m. 147 237 251 265
Source: the Tax Code of RF
In order to encourage development of small oil deposits, in 2010 the Government prepared amendments to Art. 342 Part Two of the Tax Code of RF on introducing to the mineral tax rate of oil production a special decreasing coefficient that characterizes the amount of field reserves at a given mining allotment, aka Cr. It is suggested to calculate this coefficient by a special formula and apply to mining allotments with initial recoverable oil resources up to 5 mln. tn. and a field depletion rate up to 0.05.
The procedure of calculation of the mineral tax on oil extraction currently does not provide for any correlation between taxation differentiation with the volume of oil reserves at a given mining allotment. As a result, development of small oil deposits with the volume of recoverable resources under 5 mln. tn., as a rule, proves inappropriate from the economic perspective, as specific capital and operational costs remain high. That said, the government list of mining resources comprises some 1,000 oil deposits, which can be classified into the group of small ones, with recoverable resources under 5 mln. tn. and the depletion rate under 5%, whose aggregate reserves account of 1 bln. tn. of oil.
Once applied, Cr should create conditions for development of new small oil fields, which would not be developed otherwise. That should allow extraction of additional oil reserves concentrated therein. The RF Government's calculations show that the use of Cr should result in a 10.2 mln. tn. of extra oil production at such fields in the first year of application of the benefit and 214 mln. tn over the first 10 years.
In the frame of implementation of the policy on encouragement of new regions of oil production, the RF Government coined proposals on employing already effective in a number of regions tax break regime in regard to the mineral tax to new oil fields located in Yamalo-Nenetsky Autonomous Okrug, north of the 65° of northern longitude. It is proposed to apply to mining allotments in that region (except for those located in Yamal peninsula) zero rate of the mineral tax until they hit the accumulated volume of oil production of 25 mln. tn. at a given mining allotment, provided they meet the 10-year reserves development deadline, or for 10 years for an E&P license and 15 years - for a complex E&P and production license effective since the date of its public registration.
If passed, the bill should establish much-needed economic conditions of development of the local deposits, which otherwise would appear unprofitable under the general taxation regime, because of the need to secure huge volumes of capital investments in infrastructure, as dictated by the local deposits' geographic and geological peculiarities.
A differentiated alleviation of the tax burden for certain regions whose specificity lies in increased development costs, appears justifiable in the frame of the present tax law, as it allows a necessary rate of return on investment in development of new deposits. That said, while being a simple mechanism from the perspective of tax administration, the tax break regime seems fairly imperfect. The problem is, it implies a uniform averaged approach to all deposits located in a given region (continental shelf), with no account whatsoever of significant differences in costs of development of each of them.
Plus, as far as relatively small-sized deposits are concerned, during the period of tax holidays, the oil production at them, under a normal pace of development, will be substantially below the set margin, so tax holidays generate incentives to expedite their development to exempt from taxation a maximum volume of produced oil. Hence, a possible drop in public revenues and a fall in the ultimate recovery efficiency rate.
Taxation of additional income, or super profit, seems a more perfect form of taxation. Whereas all geological and geographical characteristics of a given deposit are ultimately reflected in the income from its development, such an approach secures an automatic differentiation of the tax burden, depending on concrete conditions of oil extraction. It also enables one to factor into both the producer's gross income and costs of oil extraction at a concrete deposit.
In the case of highly efficient projects, taxing super profits ensures a progressive withdrawal of the resource rent in favor of the government coupled with improvement of conditions of implementation of low efficient projects. If employed, such a regime allows creation of necessary conditions for development of new deposits that require greater capital, operational and transportation costs.
4.5. Russian agrifood sector in 2010: performance and trends
4.5.1. General outline of agricultural performance in 2010
One of the priority targets of Russia's social and economic policies is the development of national agrifood sector. In the beginning of 2010 the RF President approved the Doctrine of Food Security worked out in the framework of the Strategy of National Security of the Russian Federation till 2020 (enacted by the RF President Decree No. 537 of May 12, 2009). For the first time the Doctrine treats food security not as the self-sufficiency in domestically produced agricultural products but the way it is defined by international institutions - as "the provision of the country's population with safe agricultural products, fishery and other products from aqua bioresources (hereinafter referred to as fishery products) and foodstuffs". Domestic production is regarded as a guarantee of population's access to safe food products. The concept of "food security' as "the covering of demand by domestic production of agricultural products" has transformed into the concept of "food independence of the Russian Federation" - "sustainable domestic production of food products in quantities not below the set thresholds of its share in commodity resources of respective products on the domestic market". For the first time the document contains such notions as "indicators and criteria of food security", "economic availability of food products", "physical availability of food products", the systematization of risks and threats to the RF food security. Besides, the guidelines of state economic policies in the field of ensuring Russia's food security are formulated1.
1 http://www.kremlin.ru/acts/6752 260
Food security is treated as "the country's economic performance when food independence of the Russian Federation is ensured, each citizen is guaranteed physical and economic availability of food products corresponding to requirements of the Russian Federation's law on technical regulation and in quantities not below the rational norms of consumption of food products necessary for active and healthy way of life".
Despite the application of standard international terms, the Doctrine of Food Security in its part addressing guidelines of state economic policies for ensuring food security of the Russian Federation in the field of producing agricultural and fishery products, raw materials and foodstuffs envisages measures formulated similarly to the ones typical for times of centrally planned economy. Thus, efforts should focus on the following directions: improvement of soil fertility and yields, enlargement of areas planted in farm crops by cultivating non-used arable lands, reconstruction and construction of meliorative systems; accelerated development of livestock production; expanded and more intensive use of aqua biological resources and new technologies of their industrial production, etc. So, the declared task is not to support and encourage the increase of farm output and the sustainability of rural economy but to improve, to reconstruct, etc. The exception are market-oriented definitions of some measures such as the perfection of market regulation mechanisms and elimination of price distortions on the markets of agricultural and fishery products and farm inputs. But the experience of recent years shows that it's the current practice of market regulation that is obviously not efficient enough for supporting economic sustainability of agricultural development. The proposed indicators of food security are also questionable. For instance, among them there are disposable household incomes, nutritive value, consumption of basic products, availability of sites for retailing and catering, etc. Although these indicators have a certain impact on food security, they are not the evidence of its attainment. It's not clear what should be the value of an indicator (for instance, the availability of sites for retailing and catering per 1000 persons) to mean that the food security of Russia is strengthening. So, in order to be informative these indicators should be tied to food security criteria with set values. But one specifies other indicators as the criteria, i.e. indicators of domestic output's share in commodity resources. Meantime, there are no indicators describing the access of population to foodstuffs (e.g. the share of population unable to buy or secure consumption of certain quantities or caloric value of food). Despite the use of modern terminology commonly accepted in the world, the document sticks to traditional Russian ideology as regards indicators, criteria and methods of improving agricultural production. This relates not only to the definition of food security (the attainment of threshold levels of self-sufficiency in basic products) but also to the formulation of state economic policy's guidelines in the field of producing agricultural and fishery products, raw materials and foodstuffs.
The key factor determining agricultural performance in 2010 was natural conditions. A very hot summer1 has blown up plans for increasing production and yields as well as for improving the economic availability of food products for population. The heat and the consequent fires affected agricultural performance in 43 regions of the Russian Federation:
1 The head of Roshydromet Alexander Frolov says that such an abnormally hot weather has not been observed on the territory of Russia for at least a thousand years and is an absolutely unique event (http://www.pogoda.ru.net/news/5184). The head of RF Hydrometcenter Roman Vilfand notes that according to paleoclimatic research data there has not been such a summer on the territory of Russia for over one or probably for even five thousand years (http://www.ami-tass.ru/article/68230.html).
- farm crops perished on 13 million 300 thousand hectares, i.e. 30% of areas planted in these regions (17% of the total areas planted and 30% of the total grain acreage in the Russian Federation);
- 25 thousand farms suffered from drought, mainly in Volga and Central federal districts. The reported direct loss of farm producers exceeds 41 billion rubles1. It's clear that the
amount is largely underestimated. Such a hypothesis can be advanced if one compares the value of loss with data on the share of perished farm crops in more than half of RF regions. The loss is reported to amount to only 41 billion rubles while the total agricultural output in 10 months of 2010 equals 2032.3 billion rubles2, i.e. the loss is as small as 2% of the output in current prices. Meantime, crops perished on 13.3 million hectares out of 74.8 million hectares of planted acreage (Rosstat data)3, i.e. on 18% thereof. This means that farm producers may count on compensation of only a minor part of their damage and the result will be a further weakening of agricultural sector in the future.
Fig. 36. Index of agricultural production
Index of agricultural production as percent of the previous year fell down to 88.1% (Fig. 36). This decrease was due to smaller crop production - its index plunged to 74.6%. Livestock production was still unaffected and by the end of 2010 even showed growth by 2.6% as compared with the previous year. However, this increase is the smallest in the five recent years. If examined by types of farm producers, the general production decline down to 88.5%-88.6% was observed in corporate and household farms. Agricultural output of individual private farms fell more dramatically - down to 82.5%. This is due to the sectoral structure of agricultural production therein. Production of grain and industrial crops as well as pig and poultry production is concentrated in corporate farms. Household farms also focus on livestock
1 The report of RF Minister of Agriculture E.B.Skrynnik in the Council of Federation on October 27, 2010. www.mcx.ru.
2 Rosstat, http://www.gks.ru/bgd/regl/b10_01/IssWWW.exe/Stg/d10/2-1-4-1.htm
3 Rosstat, 2010. 262
production and on growing of potatoes and vegetables. Individual private farms produce mainly grain and industrial crops. Because of the small share of livestock production therein, it could not help to slow down the decline driven by the crop sector.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
corporate farms —■— household farms —A— individual private farms
corporate farms —■— household farms —£— individual private farms
Source: Rosstat.
Fig. 37. Indices of crop and livestock production by types of farm producers
In 2010 the biggest decreases as compared with 2009 were observed in the production of grains (by 37.3%), potatoes (32.1%), flax fiber (31.3%), sugar beets (25.5%), sunflower seeds (16.5%) and vegetables (9.4%). The data on sowing of winter crops in autumn of 2010 suggest potential decline of grain production in Russia in 2011 versus relatively good 20091: according to Rosstat the acreage sown in winter crops by November 1 was almost 21% below the previous year indicator - 10.5 million hectares2.
Earlier the decrease of livestock inventories whose dynamics till 1998 were dramatic was halted and a clear upward trend shaped in some sub-sectors (breeding of poultry, pigs and sheep till 2009). From 2009 to 2010 the number of animals reduced but this reduction was insignificant (Fig. 38): from 0.5% for pigs to 3.1% for cattle. However, the drop of grain output by over one third and the rise of prices for it pre-condition a sharp decrease of livestock inventories and as a result - a growth of meat production in the short run. The data on feed stocks for winter season of 2010/2011 support this suggestion: by November 1, 2010 their size amounted to 1000 kg of feed units per conventional animal unit in only 33% of the RF regions. In 2009 such stocks were accumulated in 58% of the RF regions. By the beginning of January 2011 the availability of feeds in corporate farms was 25.2% below the 2009 level. Taking into account that the share of fodder grain (except for corn) in the structure of grain production reduced, the situation with feed supply raises concern. The ban of export of wheat will entail larger offering of expensive food grain for feeding purposes. But it won't help to solve the problem of livestock producers since they are constrained by solvent consumer demand and the use of such grain for feeding is not cost-effective.
1 2009 was chosen as the basis for comparison since 2010 was the year with abnormally bad climatic conditions.
2 At the same time the RF Ministry of Agriculture reported this acreage to be 14 million hectares and promised to increase the area under winter crops up to 15.5 million hectares. The report of RF Minister of Agriculture E.B.Skrynnik in the Council of Federation on October 27, 2010.
Fig. 38. Livestock inventories in all types of farms, thousand head
Until recently only the population of poultry was primarily concentrated in corporate farms; at present the bigger part of cattle and pigs is also kept there. Household farms still account for slightly over one half (51.4%) of sheep and goat inventories, for 46.8% of cattle and for about one third (32.7%) of pig population. However, corporate farms intensely increase stocks of not only pigs (by 4.1%) and poultry (by 5.6%) but also of sheep and goats (by over 6% per annum). A small reduction of cow number in all types of farms (by 2.3% as compared with 2009) goes in line with rising of their productivity - the average annual production of milk per cow grew by over 110 kg up to 3910 kg per head. It's well above the indicators of early 1990s (1.4 fold higher as compared with 1990) but still remains dramatically lower than in developed countries of the world1. However, the growth of average milk yields has not resulted in bigger milk output - it reduced by 2.1% down to 31.9 million tons. The current trends in livestock and poultry inventories entailed larger sales of meat (by 5.2% - up to 10.5 million tons) and eggs (by 2.9% - up to 40.6 billion pieces) in 2010.
The drop of crop production influenced prices received by farm producers. They didn't grow much by the end of the year. By November 1, 2010 the index of prices for crop products received by corporate farms was 109.5% while that for livestock products - only 104.1%.
Taking into account that by November 1, 2010 consumer prices rose by over 9% as compared with December 2009, there are grounds to suggest that incomes of farm producers were re-distributed to the benefit of other links of the food chain. The Rosstat data support this suggestion as well: the indicator of current liquidity in corporate farms equaled 169.1% (while in the country at large - 178.8% given the recommended value of 200%), the availability of own circulating assets - minus 36% (minus 17.9% and plus 10% respectively), the equity-assets ratio - 35.2% (minus 46% and plus 50% respectively). So, the indicators of financial sustain-ability of corporate farms are below the averages for economy at large and far below the rec-
1 In 2006 average milk production per cow in Canada reached 7.6 tons, in the US - 9.1 tons, in Mexico - 6.4 tons, in Finland - 7.5 tons, in Germany - 6.4 tons, in China - 3.0 tons (http://statinfo.biz/Geomap.aspx? re-gion=world&act=6243&lang=1). 264
ommended levels. Although last year the share of profitable corporate farms increased up to 68.2% (versus 66.6% in 2009), the total amount of their profit reduced by 9.3% while the amount of loss grew by almost 55%. Financial performance of individual private farms is not monitored. But the sharp reduction of the their output as compared with 2009 - by almost one fourth - gives grounds tor suggesting that this type of farm producers faced serious financial problems.
The drop of farm producers' incomes in 2010 and unfavorable price situation in 2009 precluded them from repaying credits due in these years. Banks restructured the debts. By the end of October 2010 the amount of extended credits was 4.4 billion rubles1. Meantime the total amount of overdue bank credits and loans reaches 7 billion rubles2, i.e. about 37% of all overdue credits have not been restructured and their holders can be subjected to debt recovery by means of enforcement and bankruptcy proceedings. This is an evidence of aggravating instability in agricultural sector of the economy.
One should also note that as compared with 2009 the amount of investments in the farm sector in 2010 reduced insignificantly - by less than 3%. The reduction was due to smaller domestic investments while foreign investments in 2010 grew by 6.7% up to 2.24 billion dollars.
4.5.2. Situation on selected agricultural and food markets Grain market
Grain crops were the most affected by the abnormal heat and drought in summer 2010. Their output dropped to the lowest level beginning from 1999 - down to 60.3 million tons (Fig. 39). The gross output of wheat fell by 20 million tons - down to 41.6 million tons, that of barley - more than two fold (down to 8.35 million tons).
2005 2006 2007 2008 2009 2010
forecast of Sovecon
I I grain —■—wheat —A—barley
Source: Sovecon.
Fig. 39. Grain production in Russia in 2005-2010
1 The report of RF Minister of agriculture E.B.Skrynnik in the Council of Federation on October 27, 2010.
2 Rosstat, as of November 1, 2010.
The most difficult situation was observed on the market of fodder grain since outputs of feed wheat, barley and corn fell at the same time. The shortage of fodder grain was compensated by larger use of food wheat for feeding purposes and as a result by the end of 2010 the difference between prices for fodder and food grain started to shrink. The basic trend on the Russian grain market this year was the strengthening of prices for all grain crops beginning from August. Prices for barley and corn displayed the highest growth rates (Fig. 5).
-Q
3
9000 8000 7000 6000 5000
& 4000 4
3000 2000 1000 0
Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov-08 09 09 09 09 09 09 10 10 10 10 10 10
•Food wheat #3 - North Caucasus
Food wheat #4 - North Caucasus
Feed wheat - North Caucasus
•Feed barley - North Caucasus
■Feed corn - North Caucasus
•Food rye - Volga region
Source: Sovecon.
Fig. 40. Average offer prices for grain crops in 2008-2010 (VAT included, EXW)
In the Central Black Soil and Volga areas the output of grain fell dramatically (Fig. 41). As a result the supply of the whole Russian grain market depended on three Southern (Krasnodar, Stavropol and Rostov) and four Siberian regions (Altay, Novosibirsk, Omsk and Krasnoyarsk).
25
20
Ü 15
c
o
f 10 5 0
21,6
20,3
21,7
10
18,7
8,6 8,2
18,4
6,4
5,3
13,2
Central FD Southern North Volga FD Urals FD Siberian FD Caucasus FD
FD
□ 2009
□ 2010 forecast
FD- federal district. Source: Sovecon.
Fig. 41. Grain output in basic producing federal districts in 2009-2010
Concerned about the potential shortage of grain on the domestic market and the speculative growth of prices, the Russian government imposed a temporary ban on export of wheat, meslin, barley, rye, corn and wheat or wheat-rye flour from the 15th of August till the end of the year1. The restriction of Russian grain export had an immediate effect on the world market where grain balance was tight as it was - world prices for wheat started to escalate. From July to December 2010 prices for wheat (soft, France, f.o.b.) surged from 190 to 330 USD per ton, prices for corn (USA, f.o.b.) - from 170 to 250 USD per ton2.
The imposition of embargo first of all affected producers in export-oriented regions in the South of Russia where grain crop was not bad. Producers in the Southern and North-Caucasian federal districts had to re-orient their deliveries from the foreign to domestic market. But when the embargo came into effect, grain sales in the South actually stopped. There was poor demand for Southern grain taking into account the cost of delivering it to drought-afflicted regions. As a result the purchase prices for wheat from the country's South automatically fell by the amount of transportation costs. But the price to be paid by drought-afflicted regions didn't suit Southern producers.
The Siberian regions that also became suppliers of grain to drought-afflicted areas were less affected. This is due to the fact that logistical costs of delivering grain from these regions to the European part of the country are comparable to those of delivering it to ports. So, due to logistical factors the supply of grain from the Southern regions was less competitive than that from the Siberian regions. In order to improve the market situation the government lowered tariffs for transporting the Siberian and Southern grain to other regions of the country. From September 1 till December 31, 2010 the tariff for deliveries from Siberia to the distances above 1,100 km was reduced from 50 to 30% of the standard one and for deliveries from the South - from 100 to 50% of the standard one for the distances above 300 km. As a result for most regions-consumers the railway tariffs for grain from the North Caucasus fell more than those for grain from Siberia. The lowering of tariffs supported growth of prices for grain in the North Caucasus and somewhat pulled down prices in the Central Russia.
The drought and the imposition of embargo had a negative effect on the future 2011 crop. The long-drawn drought in some regions led to arrears in sowing. Smaller areas sown in winter crops will result in their smaller output next year. Besides, due to the export ban purchase prices for grain in the South of Russia fell (as mentioned above) thus undermining producers' incentives to make investments in production (as a result - smaller purchases of farm machinery and fertilizers, transfer to reduced technologies).
Tension on the grain market could be alleviated by massive imports and commodity interventions.
In 2009/2010 Russia imported 0.35 million tons of grain, in 2008/2009 - 0.6 million tons. According to forecasts of Sovecon in 2010/2011 about 4.0 million tons of grain (including flour in grain equivalent) can be imported. Kazakhstan and Ukraine were regarded as potential suppliers. But in October 2010 Ukraine imposed quotas on export of grain till the end of 2010 to the amount of 2.7 million tons, including quota on export of corn - 2 million tons. At the end of 2010 import of grain from Kazakhstan was economically inefficient due to its high price. Import deliveries of grain to Russia are also possible in the framework of intergovern-
1 RF Government Resolution No.599 of August 5, 2010.
2 Sovecon data.
mental agreements. The basic components of potential Russian imports can be wheat, rye and barley.
As to the commodity interventions, experts and market operators expect them to be carried out not earlier than February 2011. However, according to estimates of Sovecon even a complete sale of feed wheat and barley intervention funds (3-3.5 million tons) won't be sufficient for relieving tension on the market of fodder grain at large. It will lead only to the stabilization (temporary) in regions where this grain will be sold.
Table 44
Estimate of grain supply and demand balance in 2009/2010 and its forecast
for 2010/2011 (million tons)
2008/09 2009/10 (estimate) 2010/11 (forecast)
Supply (resources) 116.65 117.1 84.5
Beginning stocks 7.85 19.65 20.2
Including intervention stocks 0.2 8.25 9.5
Market stocks 7.65 11.4 10.7
Production 108.2 97.1 60.3
Imports* 0.6 0.35 4.0
Consumption, total 97.0 96.9 76.8
Domestic consumption 73.5 75.0 72.5
Exports* 23.5 21.9 4.3
Intervention purchases 8.05 1.75 -
Ending stocks 19.65 20.2 7.7
Including intervention stocks 8.25 9.5 3.5
Market stocks 11.4 10.7 4.2
* Including flour in grain equivalent. Source: data of Sovecon.
Potato market
In addition to grain crops, dry spring and hot summer largely affected potato production. In 2010 all types of farms harvested 21.1 million tons of potatoes which is 32.2% less than in the previous year (Table 45). Households continue to account for the major share of output in the structure of potato production by types of farms: in 2010 - 84%, in 2009 - 81%. Gross output in household farms fell by 29.3%.
A typical trend is the seasonal lowering of prices for potatoes in July-September but in 2010 they grew due to the poor crop - almost two fold as compared with 2009. In November 2010 retail prices for potatoes averaged 25.6 rubles per kg while in November 2009 - 13.5 rubles per kg.
Table 45
Potato production in 2007-2010, million tons
2007 2008 2009 2010 2010 as % of 2009
Potato production 27.2 28.8 31.1 21.1 67.8
Source: Rosstat.
■m—2009 -2010
Source: Rosstat.
Fig. 42. Russia: dynamics of average consumer prices for potatoes in 2009-2010
In the previous years Russia's self-sufficiency in potatoes was 95% and imports didn't exceed 850 thousand tons. The total domestic demand for potatoes is estimated at 27-29 million tons of which about 16 million tons is used for personal consumption and the rest - for production purposes (planting potatoes and potatoes for industrial processing).
Given the shortage of home-grown potatoes their imports in the 2010/2011 MY may increase. Deliveries can be made from Belarus and Ukraine. Traditional suppliers of fresh potatoes to the Russian market are the Netherlands, Azerbaijan, Egypt and China (they account for about 70% of the Russian potato imports). In order to cope with market deficit the RF government abolished import duties on potatoes including planting potatoes from November 2010 till July 20111.
The deficit of potatoes in Russia and poor crop in some European countries triggered growth of potato prices in Europe. In the beginning of 2011 the stocks of domestic potatoes on the Russian market will be exhausted and the imported product will be offered for sale thus determining the price. So, in 2011 the upward price trend on the Russian potato market will persist.
Meat market
The effect of the drought has not yet impacted the annual indicators of livestock sector performance in 2010. But this effect is only postponed and will affect the performance of livestock farms already in the beginning of 2011.
According to Rosstat data (Table 46) in 10 months 2010 output of livestock and poultry (live weight) in all types of farms increased by 6.3% up to 7.8 million tons. The most dynamic sector was pig production - during this period the output of pork in corporate farms grew by 20.3% (up to 1292.6 thousand tons live weight). Positive trends in poultry production observed throughout the last 10 years preserve - the output in corporate farms increased by
1 Decision of the Customs Union Commission No. 475 of October 14, 2010.
13.3% (up to 2787.7 thousand tons). Meantime the production of beef fell by 0.8% (down to 785.4 thousand tons).
Table 46
Russia: meat production in all types of farms in 2007-2010, million tons
2007 2008 2009 Jan.-Oct. 2010 Jan.-Oct. 2010 as % of Jan.-Sept. 2009
Slaughter livestock and poultry, live 8.7 9.3 9.9 7.8 106.3
weight
including:
beef 3.0 3.1 3.0 n.a. n.a.
pork 2.5 2.7 2.9 n.a. n.a.
poultry meat 2.6 3.0 3.4 n.a. n.a.
Source: Rosstat.
The mentioned growth in meat sector based on the investments of previous years. In 2010 thanks to the pre-crisis investments new pig breeding complexes were put into operation and reached projected capacities and so also did some of the existing ones that had been reconstructed. An additional growth factor was lower prices for feeds due to the weakening of prices for grain in 2009.
Besides, domestic producers of poultry meat were able to enlarge supply owing to the temporary withdrawal from the market of the US products, the import of which was banned from January to August 2010. This restriction was due to the introduction of new RF sanitary regulations forbidding import and marketing of poultry meat treated with chlorine-containing substances.
The US quota in 2010 equaled 600 thousand tons or 77% of the total poultry meat imports. After the restriction of US imports a part of this quota (150 thousand tons) was redistributed between other countries. Within these limits deliveries were primarily made from Europe and Brazil. However, these and other countries have failed to make full use of the allowed volumes due to the deficit of poultry meat supply on the world market and the high prices as compared with prices for poultry from the US.
The non-delivery of US poultry meat to the market was compensated by the output of domestic producers. As a result despite the reduction of imports (by 60.1% in January-September 2010) the capacity of the market remained actually the same1. Table 47 illustrates the dynamics of meat imports.
Poor crop of grain in 2010 entailed high prices for it and consequently - for compound feeds. Livestock farms started to feel their pressure already by the end of 2010 when earlier stocks of cheap 2009 fodder grain were exhausted. As of the end of October 2010 940 kg of feed units per conventional animal unit were stored up while in the previous year - 1 230 kg2.
Higher prices for compound feeds will largely affect the cost of pork and poultry meat production. The likely consequences of larger feed costs are higher prices for meat and decline of meat producers' profitability. Non-efficient farms with poor feed conversion rate may become loss-making and disappear from the market. In the coming years the pig farms' margin will also reduce due to the stronger market competition following the expected growth of domestic pork production. As noted above, in 2010 the major part of new pig breeding complexes reached their projected capacity.
1 According to data of IKAR (the Institute for Agricultural Market Studies) in 7 month 2010 the capacity of poultry meat market fell by only 3%.
2 According to data of Rosstat. 270
Table 47
Imports of meat to Russia in 2007-2010, thousand tons
2007 2008 2009 Jan.-Sept. 2010 Jan.-Sept.2010 as % of Jan.-Sept.2009
Meat, fresh and frozen 1489.4 1710.9 1437.1 1031.3 106.2
Poultry meat 1287.0 1218.0 964.8 259.1 39.9
Source: Rosstat.
Beginning from 2003 meat is imported to Russia within the set tariff quotas. According to the approved regime of import regulation for 2011, the amount of pork and beef quotas won't change as compared with 2010: the quota for fresh and chilled beef will be 30 thousand tons, for frozen beef - 530 thousand tons, for pork - 472.1 thousand tons, for pig trimmings - 27.9 thousand tons. The quota for poultry meat import will reduce more than two fold - from 780 to 350 thousand tons. Besides, beginning from January 1, 2011 Rospotrebnadzor (the Federal Service for Customers' Rights Protection and Human Well-Being Surveillance) imposes the ban on utilization of frozen poultry meat for industrial food production. Actually this means a full ban on import of foreign poultry meat that is usually used in meat processing and as a rule is cheaper than the domestic one. This can lead to higher prices for non-expensive meat and sausage products containing poultry meat. Besides, this forces Russian poultry producers to have quite developed logistics to manage deliveries of chilled meat to long distances taking into account the extended country's territory.
4.5.3. Production of food products
The food industry responded to crisis developments back in 2008: the index of food production fell till the second quarter of 2009. From the second quarter of 2009 till the end of 2010 it was growing. The 2010 dynamics was very much like that of 2006 (Fig. 43). The quarter increases in 2010 ranged from 3.8 to 6.4%.
Fig. 43. Index of food (including beverages and tobacco) production as % of the comparable period previous year
Table 48
Production index for selected groups of food products, %
2010 as % of 2009
Slaughter livestock meat and edible by-products 115.6
Poultry meat and edible by-products 114.7
Sausage products including stuffed 105.4
Sausage products out of heat treated ingredients 116.0
Fish and fish products, processed and canned 102.7
Processed and canned potatoes 105.9
Fruit and vegetable juices 127.9
Crude sunflower oil and its fractions 91.7
Crude soybean oil and its fractions 115.8
Liquid milk, processed 111.4
Kefir 111.9
Wheat and wheat-rye flour 96.5
Buckwheat groats 82.1
Bakery products not for long storage 99.5
Mineral water, non-sweetened and non-flavored 118.6
Source: Rosstat.
Production of sunflower oil, flour, bakery products and buckwheat groats in 2010 reduced as compared with 2009 (Table 48).
Smaller output of vegetable oil was primarily due to the curtailed production of crude oil. In the group of dairy products the biggest decrease is observed in production of condensed milk while its imports doubled as compared with 2009.
Fixed capital investments in food industry in 2010 were 7% smaller than in 2009 and the increase of foreign investments was below 1%.
In general the financial performance of food industry deteriorated. The number of loss-making enterprises decreased slightly (by 1.8%) but the profits of profitable ones fell by more than 9% and the loss grew by 30.7%. The indicators of current liquidity (143.9%) and availability of own circulating assets (-21.3%) as well as the equity-assets ratio (30.3%) in food industry are far below the values considered normal (200, 10 and 50%, respectively). At the same time according to Rosstat data the profitability of food processors' sales and their assets actually hasn't changed.
At present several state support tools are applied to encourage the development of food industry. Among them there are protectionist measures in order to defend domestic producers from food imports, greater support of input sectors, tariff policies aimed at supporting import of equipment having no domestic analogues and other equipment for food industry, subsidizing of interest rate on credits for purchasing domestic raw inputs and for re-equipment. Besides, target programs "Development of Russian sugar beet sub-sector in 2010-2012", "Development of primary livestock processing in 2010-2012", "Development of butter and cheese production in Russia in 2011-2013" were developed. These programs are aimed at the solution of specific problems associated with forming of sustainable input basis and development of food industry enterprises.
4.5.4. Modification of agricultural policies in 2010
The specific conditions of 2010 forced authorities to take urgent measures for regulating agriculture. Revisions were made in the State program for agricultural development and regulation of agricultural and food markets in 2008-2012 (hereinafter referred to as the State pro-
gram) - the five-year plan of the sector's development adopted by the RF Government Resolution No. 446 of July 14, 2007.
The State program sets five guidelines for allocating funds:
- I - Sustainable development of rural areas.
- II - Creation of general conditions for farming.
- III - Development of priority agricultural sub-sectors.
- IV - Attaining of agriculture's financial sustainability.
- V - Regulation of agricultural and food markets.
The projected financing of the State Program in 2008-20101 amounted to: 296.3 billion rubles from the federal budget, 290.1 billion rubles from the regional budgets and 311 billion rubles from non-budget sources. But actually these amounts were largely revised each year in the process of adopting budgets for the next fiscal year.
The initial project envisaged prioritized financing of measures to support rural social and engineering infrastructure and to provide for subsidizing of interest rate on loans in order to improve access to credit funds for the most efficient producers.
However, in 2010 budget funds were primarily allocated to subsidizing of interest rate on credits - the share of this measure in the total State program's financing increased from 40% in 2009 to 76% in 2010 (Fig. 44). The financing of other measures was notably revised downwards.
Sustainable development of rural
Authorized capitals of Rosselkhozbank and Rosagroleasing 28%
Market regulation 6%
Sustainable development of rural areas
Creation of general conditions for farming 11%
Market regulation 4%
Development of —priority sub-sectors 10%
Attaining of agriculture's financial sustainability 40%
Attaining of agriculture's
financial sustainability
Creation of general conditions for farming 8%
Development of priority sub-sectors 5%
2009
Source: State program, the RF Ministry of Agriculture.
2010
Fig. 44. The structure of expenditures under the State program in 2009 and 2010
The financing of section "Sustainable development of rural areas" was cut most severely. According to the initial version of the State program it was to get 20% out of 552 billion rubles projected for 2008-2012. In 2010 7.7 billion rubles were allocated for the improvement of social and engineering infrastructure in rural areas - instead of the initially adopted 23.9 billion rubles (Table 49).
1 Resolution No. 446 as in force on July 14, 2007.
areas
5%
Table 49
Basic indicators of the State program's implementation in 2010
Guidelines
The indicator's value for 2010
Financing from the federal budget, million rubles
Planned* Revised Planned* Actual**
1. Efficiency indicators
1.1. Index of agricultural production in farms of all types as % of 104.1 89.3 X X
the previous year (in comparable prices)
1.2. Index of physical volume of investments in agriculture's 110.2 95.5 X X
fixed capital, %
1.3. Disposable monthly incomes of rural households, rubles per 10 388.0 9 780.7 X X
one member of household
1.4. Share of domestic output in available resources of
1.4.1. meat and meat products, % 65.7 72.6 X X
1.4.2. milk and dairy products, % 79.9 80.7 X X
2. Sustainable development of rural areas
2.1. Financing of measures to improve social and engineering X X 23 943 7 720
infrastructure in rural settlements, total
3. Creation of general conditions for farming
3.1. Total financing under the section X X 13 781 8 961
3.2. including subsidies to farm producers for the purchase of X X 4 120 4 720
domestically produced mineral fertilizers and pesticides
3.3. including creation of system of state informational support to X X 1 021 261
agriculture
3.4. including development of consultative assistance to farm X X 1 055 0
producers
4. Development of priority agricultural sub-sectors
4.1. Development of livestock production
4.1.1. Subsidies to support pedigree livestock breeding X X 4 420 3 549
4.1.2. Supply of pedigree livestock to Rosagroleasing, thousand 30 000 7 640 X X
head
4.1.3. Supply of equipment for livestock production to Rosagro- 65 000 6 415 X X
leasing, thousand stalls
4.2. Development of crop production
4.2.1. Subsidizing of measures to support elite seed breeding X X 490.3 472.1
4.2.2. including financing of measures to support farm producers X X 1 000 0
in Extreme North regions
4.2.3. including financing of measures to support flax production X X 595.8 16.0
4.2.4. including financing of measures to support rape production X X 975.7 11.9
4.2.5. including financing of measures to establish perennial X X 1 367.9 0
plantations
5. Attaining of agriculture's financial sustainability
5.1. Total amount of subsidized credits (loans), billion rubles 290 374.2 X X
5.1.1. including short-term credits 150 258.8 X X
5.1.2. including investment credits 140 115.4 X X
5.2.1. Subsidizing under short-term credits X X 10 000 13 700
5.2.2. Subsidizing under investment credits X X 28 445 54 197
5.3. Amount of subsidized credits received by smallholder farms 35 33.3 X X
5.4. Subsidizing of interest rates on credits (loans) received by X X 8 027 5 800
smallholder farms
5.5. Purchase of tractors by all types of farms, units 35 000 10 565 X X
5.6. Purchase of grain harvesters, units 11 000 3 677 X X
5.7. Purchase of fodder harvesters, units 3 500 1 187 X X
TOTAL X X 120 000 97 940
* Resolution No. 446 as in force on July 14, 2007.
** RF Ministry of Agriculture, preliminary data.
The analysis of preliminary indicators of State program's implementation and their comparison with the planned ones leads to the conclusion that in the 2010 budget financing of all efforts was rechanneled in favour of subsidizing interest rate on credits and loans (primarily investment ones) taken by farm producers. The amount of subsidies for reimbursing interest
rate in 2010 was almost twice above the initially projected (Table 49). 71% of such subsidies from budgets of all levels are allocated to the support of investment projects.
In the framework of these efforts borrowed funds to the total amount of 407.6 billion rubles were found eligible for subsidizing, including short-term credits to the amount of 258.8 billion rubles, investment credits - 115.5 billion rubles and credits to smallholder farms - 44.4 billion rubles (Fig. 45).
Source: National report on implementation of State program in 2009, preliminary data of the Ministry of Agriculture for 2010.
Fig. 45. Amount of credits eligible for reimbursement of interest rate in 2006-2010, billion rubles
At the same time the financing of efforts to develop priority agricultural sub-sectors was reduced: in livestock production - by 3 billion rubles, in crop production - 9 fold (from 4.4 billion rubles to 500 million rubles). Funds aimed to support farm producers in Extreme North regions and to establish perennial plantations were cut down to zero, those to encourage flax and rape production - almost to zero (Table 49). An actual withdrawal of support to rape producers is an indirect sign of no wish to develop alternative energy sources (for instance, in the US the amount of subsidies to farmers for the production of crops to be processed into biodiesel grows year after year).
Following the reduction of subsidies for partial compensation of expenditures on crop insurance the share of insured areas in the total crop acreage continues to decline - in 2010 it fell down to 13%. The monopoly of regional insurance companies in this field remains very strong. The technical modernization of agriculture slows down - in 2010 the number of purchased new tractors and harvesters of all types was 3 fold below the planned indicator (Table 49).
In the section "Creation of general conditions for farming" only one indicator - subsidies to farm producers for the purchase of domestically produced fertilizers and pesticides - displays stable growth. Capital investments in building, reconstruction and restoration of meliorative systems are falling. Allocations to create the system of state informational support to agriculture dropped 4 fold. Financing of consultative assistance to farm producers and re-
training of agricultural specialists ceased completely despite the most acute deficit of skilled labour.
A special section of the State program specifies measures to improve financial sustainabil-ity of smallholder farms whose aim is to increase output and sales of agricultural products by individual private and household farms and to raise incomes of rural residents.
Federal budget funds for subsidizing interest rate on credits and loans to smallholder farms in 2010 amounted to 6 091.2 billion rubles - somewhat below the 2009 indicator (6 327.2 billion rubles) but 1.2 fold above the level of the first year of the State program's implementation (in 2008 subsidies to smallholder farms equaled 5 227.2 billion rubles).
The access of smallholder farms to credits and loans improved - in 2010 the total amount of subsidized credits and loans extended to them exceeded 110 billion rubles (taking into account carry-over credits and loans of previous years). Household farms accounted for the major part of these subsidized credits and loans (65%), individual private farms - for 28% of them, agricultural consumer cooperatives - for 7%. Smallholder farms of the Southern and Volga federal districts got the biggest shares of these credits - 35.5% and 26.3%, respectively.
According to preliminary data submitted by regions the amount of subsidized credits received by individual private and household farms and agricultural consumer cooperatives reached 44.4 billion rubles.
In 2010 the Volga, Urals and partially Southern and Central federal districts were afflicted by drought. Taking into account this situation on the 23rd of June, 2010 emergency team was formed in the RF Ministry of Agriculture aimed to assist farm producers that suffered from drought. The Ministry made an expert estimate of information submitted by regions. According to conclusions of this analysis, farm crops perished on the territory of 13.3 million hectares, 25 173 farms in 895 areas in 43 regions-constituent members of Federation were found afflicted by the 2010 drought. The documented direct loss according to the expert estimate totaled 41.8 billion rubles.
To cope with the aftermath of 2010 drought some measures were adopted to help the affected farm producers. They include the financial assistance rendered in compliance with order of the RF Government Chairman V.V.Putin to the amount of 35 billion rubles, of which:
- 25 billion rubles are budget credits for the term up to 3 years for the partial compensation of regional budgets' deficits;
- 10 billion rubles are subsidies to regional budgets aimed to support their balance.
An additional measure to support drought-afflicted farm producers being currently considered is the extension of bank credits and leasing payments. For instance, Sberbank of Russia decided to extend credits to the amount of 9.6 billion rubles, "Rosselkhozbank" - to the amount of 6.4 billion rubles.
Low percentage of insured farm producers implies the lack of a system of their complex insurance protection. This is due to a whole set of factors:
First, at present the state-supported agricultural insurance is applied in crop production but does not cover livestock farms and farm producers' property. Thus not all agricultural sectors are protected against possible risks.
Second, the cessation of activities of a single insurance organization in some RF regions (for instance, in Altay kray) resulted in complete absence of insured crop areas therein.
Third, the lack of a complex system of re-insurance in the sector results in regional cumulation of risks that strongly deters not only the development of agricultural insurance system
but also the implementation of regional policies for supporting agriculture and its selected sub-sectors.
Finally, the most important factor is that corporate and individual private farms are often unable to pay the insurance rate in due amounts and time.
4.5.5. Conclusions and outlook
1. The Doctrine of food security despite the modern definition of this term still remains the document targeted at increasing the share of domestic output in the country's commodity reserves instead of being the regulation directly ensuring population's access to food products. Because of that its definitions, indicators and criteria of food security contradict each other. These indicators and criteria should be brought into compliance with the notion of "food security" as "the provision of the country's population with safe agricultural products, fishery and other products from aqua bioresources (hereinafter referred to as fishery products) and foodstuffs". Otherwise some tools of state economic policies in the field of ensuring Russian Federation's food security cannot be applied - for instance, monitoring of food security situation in the RF regions. It's also necessary to continue efforts in the framework of the adopted strategy and to define specific tasks for each economic policy guideline. The current version of the strategy is too general and the implementation of its goal - the provision of population with food products and their availability - cannot be monitored.
2. In 2011 the practice of unreasoned rechanneling of budget funds from one section of the State program to another should be discontinued and the budget adopted in 2007 should be executed more strictly. The Ministry of Agriculture should limit the growth of subsidies for compensating interest rate and focus not only on protectionism and import substitution but also on measures supporting competitiveness, investments, innovations and rural development.
3. The increase of investment index in agriculture will be below the State program's objectives due to the slower growth rates of farm producers' incomes and the reducing attractiveness of agrifood sector for outside investors.
4. Next year one can expect the following trends on selected food markets. According to forecast of the Institute for Agricultural Market Studies, the gross output of grain can reach 85 million tons. In this case the ban on grain export should be lifted - otherwise it will result in overstocking of grain in the country's southern regions. The government can introduce export quotas. But the basic bottleneck of this regulation is the difficulty of administrating quotas.
2010 displayed high profitability of potato production. In the coming 3-4 years this trend will continue.
In recent years import substitution was progressing on the pork market supported by import restrictions in the form of tariff quotas. Higher prices for feeds following the drought will force unprofitable pig farms out of the market. First of all the livestock numbers will decrease in households and small farms (with less than 2 thousand animals). This will in turn enlarge the market for highly efficient commercial sector - industrial pig complexes with modern production technologies and capacities for slaughter and primary processing.
5. Measures for regulating grain market cannot be regarded as successful. Federal Law No. 264-FZ of December 12, 2006 "On development of agriculture" sets minimal prices to be used for intervention purchases at commodity exchange for supporting producer prices. When the law was drafted, the minimal price set by the state was supposed to be the bottom purchase price providing guarantee for farm producers. But the law's implementation revealed
several bottlenecks that were highly detrimental for farm producers both in good and poor crop years. First, the timing of interventions. When they are carried out, producers no longer have grain - the bulk of it has already been bought by resellers. Second, the law's definitions allow to bid the established minimal price at Dutch auctions. As a result the minimal price becomes the maximal one and purchases are made at prices below this minimum. Third, farm producers have no access to exchange trade because of the location of tender sites and the size of lots. Only about 2 thousand sellers take part in exchange auctions - less than 3% of 68 thousand farms producing commodity grain. Fourth, at intervention auctions grain is purchased by the United Grain Company acting as a representative of state. At the same time it has the right to purchase it for its own needs, mainly for resale. This is a stimulus for lowering prices1. Fifth, the state spends 1 billion rubles a month for storing the purchased grain2. Sixth, the law does not envisage any limits for the volume of grain to be purchased at minimal prices. But this limit is applied when carrying out purchase interventions.
In order to cope with these bottlenecks it would be rational to announce the minimal prices before the start of next crop sowing. It's necessary to determine terminals for collecting grain at minimal prices, to inform all producers about them, to engage a special organization or local authorities in forming of lots for auction sale, to ensure electronic or other access to tenders for farm producers3.
4.6. Foreign Trade
4.6.1. State of the Global Economy
The year of 2010 saw the global economy continue to recover after the 2008-09 crisis. As many as 20 out of 23 nations that are leading importers of Russian goods posted growth in their GDPs vs. the same period of 2009, while in another three ones (Hungary, Spain and Lithuania) GDP continued to decline. Growth in GDP on a quarter-on quarter basis was constantly noted since Q3 2009 in such economies as the US, the Euro zone countries, Switzerland; since Q4 the same tendency was reported by the UK and Japan. In Q1 2010, the aggregate GDP growth rate of the group of Russia's leading trading partners was down, but, propelled by the acceleration of growth in GDP in the Euro zone, it bounced back substantially in the next quarter.
The National Bureau of Economic Research announced on 20 September 2010 that the longest economic slump in the post-WW II history of the US had come to an end in June 2009. Its length was 18 months (the past recessions of 1973-75 and 1981-82 lasted for 16 months each). The 18 month long recession cost the US 7.3 mln. jobs, the 4.1% fall in the industrial output and 21% of the nation's wealth4.
A stage of the business cycle is defined on the basis of the dynamic of industrial output, employment, sales volume, and the population's real disposable incomes. In the period since the start of the recession the minimal value of industrial output was registered in June 2009, the one of employment - in December 2009, that of the population's real disposable incomes -in October 2009, and the nadir of volume of sales - in March 2009.
1 Uzun V.Ya. http://www.rg.ru/sujet/571.html
2 http://www.kazakh-zerno.kz/index.php?option=com_content&task=view&id=19279
3 Uzun V.Ya. http://www.rg.ru/sujet/571.html
4 http://www.nber.org/cycles/sept2010.html 278
That June 2009 was picked as the end date of the recession can be explained by the fact that GDP had been climbing up in the prior months, while minimal employment often was a typical feature of the period right after the end of the US recession. NBER noted, though, that the end of the recession does not herald the arrival of favorable conditions of economic development and that business activity typically is below normal at early stages of economic recovery.
Since June 2009 the US reported a practically unstoppable (except for a short interegnum in February 2009) growth in industrial output. Meanwhile, the employment still was on a relatively low level. Jobs were on the upswing between February and May 2010, but tumbled again between June and August. The real disposable incomes were growing between February and June and plummeted in July 2010. The sales volumes were on the rise between April 2009 and April 2010, plunged between May and June and bounced upwards in July 2010.
The US's real GDP has been growing during four quarters in a row since Q3 2009. The growth rates hit their peak in Q4 2009 and crayfished over the next two quarters. Their drop in Q1 2010 was chiefly ascribed to the negative effect of net export driven by the slowdown in growth in exports and expansion of import of goods and services.
According to the US DoC data, in Q4 2010 the nation's GDP posted a 3.2% growth in annual terms vs. the previous quarter. This is just the first GDP estimate out of three, and it might be substantially revised later on. In Q3, the US economy grew by 2.6%, and in Q2 - by 1.7%. So, the tendency of acceleration of the pace of economic growth after the recession is there.
The growth in the US's GDP in 2010 was fueled by more robust consumer spending, exports and the federal administration's mass spending. While imports contracted in the last quarter of the year, they ultimately grew over the year, nonetheless.
The World Bank estimates the 2010 global GDP growth rate at 3.9% and forecasts its slowdown to 3.3% in 2011 and some better performance (up to 3.6%) - in 2012. In its statement, the World Bank holds the global economy is in transition from the post-crisis recovery phase to the one of a slow but steady growth, which should last for next two years. The major feature of the future period should be a half of the global growth being propelled by emerging economies. It is envisaged that they combined should post a 7% growth rate in 2010, 6% - in 2011 and 6.1% - in 2012. Thus, in this respect they should outpace high-income nations with their projected growth rates being 2.8% in 2010, 2.4% - in 2011 and 2.7% - in 20121.
After a very painful downturn in 2009, the global trade expanded notably in 2010. The WTO experts believe that after verification of statistical data the last year's increase in global exports should be in the region of 13.5%. If so, it is going to be the all-time high rate ever registered since the beginning of running such statistics in the 1950s. The previous highest growth rate in global trade (12.2%) was registered in 1976. That said, in all fairness, this astounding accomplishment is noted against a very low benchmark.
It is envisaged that emerging economies should post export growth rates higher than developed nations (16.5% vs. 11.5%), with Asian tigers being particularly active (up by some 27%) vis-à-vis other country groupings in this regard.
1 http://go.worldbank.org/88GN6SUPU0
4.6.2. Conditions of Russia's Foreign Trade: Situation with Prices for Major Russian Exports
The 2010 pricing environment for major Russian exports was favorable, with most commodity markets being all bulls.
The positive oil price dynamic in the global market in 2010 was stirred by the renewal of demand for oil which practically hit the 2007 level. Plus, China and other Asian economies were particularly thirsty for oil, forecasts of demand for oil for 2010-2011 were optimistic, and the leading global forex and security markets were in an optimistic mood.
In the first months of 2010, the world oil prices mostly were on the upswing, and on 3 May were at their 19-months highs (with Brent traded at USD 88.94/b). They subsequently dwindled to USD 74/b on fears triggered by the national debt crises in some EU countries and a slowdown of China's growth, uncertainties with the US economy's development, and because of a lax demand for energy resources in Europe.
In July 2010, oil prices picked their growth and on 23 December the official price of Brent stood at its 26-months high (since October 2008) - at USD 93.65/b.
The year of 2010 ultimately saw a 28.7% price rise for Brent on a year-on-year basis, but when compared with 2008, it slid by 18.4% (Table 50).
The price dynamic for oil products was basically following the oil prices. In 2010, the prices of oil products were on average up by 51% on a yearly basis, with gasoline prices adding 26.8%, but loosing 21.2% vs. the 2008 figures.
Table 50
Average Annual World Prices
2GGG 2GG1 2GG2 2GG3 2GG4 2GG5 2GG6 2GG7 2GG8 2GG9 2G1G
Oil (Brent), 28.19 24.843 25.G2 28.83 37.4 54.38 65.15 72.32 97.64 61.86 79.64
USD/b.
Natural gas/ Euro- 4.344 3.976 3.23 3.86 4.4 6.6 9.G3 8.93 13.41 8.71 8.29
pean market газ,
USD/1 mln. BTU
Gasoline G.887 G.792 G.755 G.891 1.197 1.5G8 1.81 2.G6 2.7G3 1.68 2.13
USD/gallon
Copper, USD/ton 1864 1614 1593 1786 28G8 36G6 6851 7119 697G 515G 7537
Aluminum, 155G 14457 1351 1425 1693 1871 2619 2639 2576 1665 21731
USD/ton
Nickel, USD/ton 8624 5966 6175 9581 13757 14692 22G38 3723G 211G8 14655 218G9
Source: calculated by data London Metal Exchange (London, UK), Intercontinental Oil Exchnage (London, UK), International Monetary Fund (IMF).
European prices for natural gas picked their growth in August 2009 and have been soaring through Q1 2010. However, due to the seasonal contraction of demand, they slid slightly in Q2 and resumed their rise in the seconds half of the year, which ultimately resulted in their adding 2.7%. Meanwhile, they remained at 4.8% lower than in the previous year (while in 2009 they were down by 35% against the 2008 figures).
The markets for metals in 2010 found themselves seriously propelled by the general recovery of the global economy and industrial sector and by the situation in China as the hugest consumer of metals in particular. The boom in China's construction sector, launch of ambitious infrastructure projects in India and other emerging economies heralded a bright future for the steel market until 2013, even regardless of a possible slowdown of the global economic advancement rate.
After a drastic fall in aluminum production in 2009, the respective demand began to surge dramatically: after hitting the bottom in February 2009 (1,330 USD/ton) the prices had skyrocketed by more than 80% by the spring of 2010 and outshot the mark of 2,445 USD/ton.
The situation on the copper market in 2010 likewise remained favorable. Over the year, the inventories were shrinking and demand was on the upswing against the backdrop of increasingly optimistic forecasts for the global economy. After their fall in Q2 2010, copper prices picked growth in August and continued to surge through the end of the year. As a result, by December the average monthly price had hit USD 9,147.26/ton against 7,386.25 /ton in January 2010 (3,453.2 USD/ton in Q1 2009). The average 2010 price of copper thus made up 7,535 USD/ton.
The 2010 nickel prices mirrored the most intense recovery dynamic. Plus, there has been no increase in offers on the market. As a result, the average 2010 price of nickel was up by 64.5% more vs. the 2009 figures and accounted 21,809 USD/ton
The price dynamics of food staffs and agricultural raw materials on the global markets were multidirectional: in early 2010, prices for grain crops, vegetable oil and sugar were chiefly on decline, while meat prices were soaring. That said, the world price level for the foods stuffs and agricultural raw materials was on average higher than in 2009
Prices for grain crops (except for barley) were down because of earlier accumulated considerable global reserves and an increase of estimates of carry-over stocks of grain, and growing export supplies from Russia, Ukraine, Kazakhstan, Turkey and other regions of the world. In the first half 2010, prices for the US wheat and corn sank by 23 and 6.5%, respectively, Canadian wheat was down by 17%, barley was traded at 18% higher than in the first half of the prior year (in 2009, the prices of the said grain crops were down by 36, 28, 41 u 46% respectively).
After hitting their peak in January 2010, sugar prices have been dipping drastically until June. As a result, in just five months after hitting their all-time highs, the prices for raw sugar were down 1.9 times and the ones for refined sugar - 1.6 times. Behind such a dramatic downfall were more optimistic forecasts of harvest and the anticipation of greater sugar supplies from Brazil and India in the 2010-11 agricultural year. As well, the appreciation of the USD also sent the prices nosedive. Despite the downfall, the price level of sugar on the world market remained high. In the first half 2010, sugar was traded 1.5 time higher than in the same period of 2009 (in the first half 2009, it was nearly 1.2 times costlier than the year before).
The price dynamics on global markets for food stuffs and agricultural raw materials changed in mid-2010: the month of June saw prices of sugar, Canadian wheat and barley picking growth; in July, they were followed by the US wheat, corn, rice and vegetable oils. By the end of the year prices for soya beans and products of their processing, wheat and corn hit their 2.5 year highs.
Expectations of a considerable fall in the harvest of grain crops because of extremely unfavorable weather conditions (draught in Russia, Kazakhstan, Ukraine; torrential rains in Canada, a number of Asian countries and some European ones; unheard-of chills in some Latin American countries) drove grain prices up drastically. Russia's ban and Ukraine's restrictions on grain exports boosted the trend. As a result, in 2010 the price rise for the US SRW accounted for 23.5%, corn - 12.3%, Canadian wheat -3.9%, barley -23.0% (Table 51).
Table 51
Dynamics of Average World Prices on Some Agricultural
2006 2007 2008 2009 2010
Wheat, USD/ton
Canadian, CWRS 216.8 300.4 454.6 300.5 312.4
US, HRW 192.0 255.2 326.0 224.1 223.6
US, SRW 159.0 238.6 271.5 186.0 229.7
US corn, USD/ton 122.9 163.0 223.1 165.5 185.9
Barley, USD/ton 117.0 172.0 200.5 128.3 158.4
Soya beans, USD/ton 268.4 384.0 523.0 437.0 450.0
Soya bean oil, USD/ton 598.6 881.0 1258 849.0 1005.0
Thai rice, USD/ton 304.9 326.4 650.1 555.0 488.9
Raw sugar in US, import price, CIF New 48.76 45.77 46.86 54.88 79.25
York, US cents/kg Source: World Bank.
While the biggest meat importing nations found themselves better off and on the road to recovery, consumption of beef was up worldwide and in the Asian countries in particular. The Republic of Korea, Hong Kong, Japan and Malaysia became forerunners in this regard, and the 2010 beef prices posted a 27.12% growth vis-à-vis the prior year.
Prices for veal were also up; however, the price rise so far has been more moderate and accounted for 16.8%. Meanwhile poultry prices have not changed since 2009.
Contraction in the harvest of oil-plants due to unfavorable weather conditions drove prices of vegetable oils on the global markets upwards. Meanwhile, the anticipation of high yields of soya beans in a number of regions had a constraining impact on the prices. As a result, the average 2010 prices for palm oil were at 27.4% higher than in the same period of the prior year.
In 2010, it was raw sugar that posted the greatest price rise rate of 44.4% (because of a rapid price rise in the second half of the year), thanks to which the sugar prices hit their 30-year highs.
Because of the advanced growth rates of export prices vis-à-vis import ones, Russia's foreign trade conditions were favorable in 2010. The trade condition index accounted for 117.9 points (in 2009 - 116.0). After a significant deterioration of foreign trade conditions between late-2008 and early 2009, the export-to-import price ratio began improving since the first months of 2010. That said, it was foreign trade conditions with Far-Abroad countries that posted a faster growth rate (Fig. 46).
4.6.3. Main Indicators of Russia's Foreign Trade
In 2010, Russia's foreign trade turnover calculated by the balance-of-payments methodology hit USD 648.4 bln. vs. 495.2 bln. reported in 2009, ie was up by 30.9%. The growth in trade was fueled primarily by improving conditions of foreign trade. Specifically, Russian exports were propelled by the renewed demand for them and a better pricing environment for Russian exporters on world markets. The restoration of the value volumes of import should be ascribed to the growth of Russia's economy, rising real disposable incomes, and a real appreciation of the national currency.
With all these factors in place, Russia failed to catch up with the pre-crisis level, nonetheless: when compared with 2008, the nation's foreign trade turnover contracted 15.1%. So, the 2008 figures stand unbeatable over the whole period of observations. (Fig. 47).
Balance —■— Export —♦— Import
Source: CBR.
Fig. 47. Main Indicators of Russia's Foreign Trade (as USD mln.)
The growth in the volume value of export was fueled mostly by the better pricing environment for Russian exporters, while the main factor behind the increase in the value volume of import was its growing physical volumes. (Table 52).
Table 52
Indexes of Russia's Foreign Trade (as % to the Respective Period of 2009)
Q1 2010 1st half-year 2010 January-September 2010 2010
Physical Average volume prices Physical Average volume prices Physical volume Average prices Physical volume Average prices
Export 120,4 119,5 109,6 119,4 110,2 116,9 110,0 119,8
Import 112,9 103,1 122,6 101,8 130,8 101,2 135,4 101,6
Source: the RF Ministry of Economic Development
The foreign trade data over the recent months show the continuation of the trend to a fast growth in import vs. the subsiding dynamic of export. As a result, the year of 2010 saw a month-to-month contraction in the balance of trade. In August, it was USD 8.3 bln., ie. the 16-month low.
In all, Russia's 2010 balance of foreign trade was positive and accounted for USD 151.6 bln., or up by 35.9% vs. the 2009 figure (USD 111.6 bln.), but 15.6% less than the 2008 one (USD 179.7 bln.).
The 2010 disequilibrium in trade ratio (balance to trade turnover) was 0.234 vs. 0.225 reported in the prior year.
4.6.4. Structure and dynamic of export
In 2010, Russian exports increased up to USD 400.0 bln., or by 31.9% against the prior year (Table 53). The increase was fueled largely by rising contractual prices. The dynamic of exported goods over 2010 evidenced decelerating growth rates vis-à-vis the respective periods of 2009.
The volume of export in Q4 2010 was a maximum one over the year and accounted for USD 112.7 bln. vs. 92.2 bln. in Q1, 97.4 bln. in Q2, and 97.7 bln. in Q3. That said, export growth rates were falling gradually vs. the respective periods of 2009: while in Q1 2010 the value volume of export was up by 61.1% vs. Q1 2009, the Q2 figure was 43.0%, Q3 - a meager 18.5%, and in Q4 - just 17.9%. This is ascribed largely to the fading low-base effect of the prior year.
Table 53
Dynamic of Russian Export
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Export, USD bln. 75.6 105.0 101.9 107.2 135.4 183.2 245.3 303.9 355.2 471.6 303.4 400.0
Including:
Far Abroad 63.6 90.8 86.6 91.0 113.9 152.9 211.6 260.6 301.5 400.5 255.3 337.7
Growth rates, as % to the prior year
Physical volume index 109.4 110.2 104.2 115.0 109.5 110.7 104.7 105.8 105.0 96.8 97.0 110.0
Price index 92.1 128.2 93.8 86.0 113.4 122.7 126.9 119.7 110.9 137.4 76.4 119.8
Source: CBR, the RF Ministry of Economic Development.
Export supplies of the most significant group of goods - that is, fuel and energy commodities - accounted for USD 257.4 bln. Against the background of fairly low value volumes of 2009, the 2010 export of crude and oil products posted an intense growth (1.4 and 1.5 times, respectively). The growth was fueled solely by the global price environment. The physical
volume of exported crude rose just by 3.6%, oil products - by 8.9%, while contractual prices for these commodities rose by 33.3% and 36.2%, respectively. With contractual prices for natural gas adding 9.1% and the physical volume of its exportation increasing by 1.3%, its export value was over USD 43.5 bln., or by 10.5% up vs. the 2009 figure. The aggregate export of the three fuel and energy staples - namely, crude, oil products and natural gas, rose in 2010 by 34.7%, while their proportion in the structure of export soared from 59.6% in 2009 to 64.9% (Fig. 48).
Metallurgical exports rose by 22.8%, up to USD 39.5 bln. According to FCS, physical volumes of raw aluminum plunged by 7.8%, nickel - by 1.8%, copper - by 10.3%. Despite the fall in the physical volumes, the value of export supplies of non-ferrous metals was on the rise, thanks to the price rise for them on the global market. Driven by a simultaneous increase in export prices and supplies in quantitative equivalent, the value volume of ferrous metals surged by 28.4%. When compared with 2009, the 2010 aggregate specific weight of metals, including metal manufactures, in the overall volume of export supplies was down by 0.7 p.p. - to 10.6%.
The chemical industry and its supplier/consumer industries increased its supplies by 30.3%, up to USD 22.8 bln., while the specific weight of goods of this group tumbled from 6.2% to 6.1%. nonetheless.
Export of timber and paper and pulp products soared by 13%, up to USD 9.2 bln., with export of processed timber products adding 16% - up to USD 3.0 bln, which in physical terms was equivalent of 9.9 mln. ton, or by 9.4% up vs. the respective index of 2009. The volume of export of unprocessed timber surged by 0.9% - up to USD 1.8 bln. The 2010 export of unprocessed timber in natural equivalent slid to 21.2 mln. m3., or by 1.9% against the 2009 figure.
By contrast to the 2009 trend of a substantial rise in export supplies of food stuffs, in 2010, export of food stuffs and agricultural raw materials slid by 2.9%. Supplies of goods of this particular group are estimated at the level of USD 8.1 bln., while their proportion in the aggregate export plummeted from 3.3% to 2.2%. The 2010 physical volume of export of wheat and meslin plunged by 29.4% on a year-on-year basis and accounted 11.8 mln. ton. As a reminder, in the summer of 2010, in anticipation of a poor harvest the RF Government imposed a temporary ban on export of wheat, barley, rye, corn and flour (effective between 15 August and 31 December 2010). The reason behind the move was an unheard-of drought and wildfires that seriously affected the volume of the harvest.
After its substantial contraction in 2009, the value volume of export of machinery and equipment rose by 1.7% in 2010 and accounted for USD 19.6 bln. The increase was fueled chiefly by a 21.3% growth in supplies to Far-Abroad countries; however, because of an advanced growth in value volumes of export supplies of raw materials, the proportion of machine-engineering products in export slid from 5.8% to 5.2%.
Nearly a half of export of goods of this group fell on weaponry. According to estimates made by the Federal Service for Military-Technical Cooperation (FSMTC), in 2010, Russia cashed in as much as USD 10 bln.- plus from sales of arms and military hardware and now breathes the US's neck in this respect. However, one should not anticipate a further increase in arms sales, as, first, the global market for arms is expected to shrink in the years to come and, second, the Russian MIC corporations seem to increasingly fall behind their competitors overseas, which gradually lowers competitiveness of its manufactures.
So, Russian export showed no signs of change in its goods structure. The improvement of its qualitative indicators rests mostly upon the growing demand and rising prices of hydrocarbons and crude, ie. the economy remains dependent on the state of affairs on the world market for minerals.
4.6.5. Structure and Dynamic of Import
Against the background of the stalled growth in physical volumes of export (practically across all the key goods) imports were increasing substantially. In 2010, import supplies into the territory of Russian Federation were worth a total of USD 248.8 bln., or up by 29.7% on a year-on-year basis (Table 54). It should be noted that import increase rates in individual months of the summer of 2010 were over 30% vs. the 2009 figures, while in August the respective rate accounted for 53.2%. As a result, it took the share of import in the domestic consumption just several months to bounce back to its pre-crisis level.
In the conditions of a moderate price rise in import prices the increase was secured chiefly by growth in physical volumes of import supplies.
Table 54
Russia's Import (USD bln.)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Import, USD 39.5 44.9 53.8 60.5 76.1 97.4 125.3 163.9 223.1 291.97 191.8 248.4 bln.
Including:
Fra-Abroad 29.2 31.4 40.3 48.2 60.1 76.4 103.5 138.6 191.2 253.1 167.7 213.3 countries
Increase rate, % on a year-on-year basis
Physical vol- 84.4 129.2 129.1 117.6 119.2 124.2 122.4 130.1 127.1 113.5 63.3 135.4 ume index
Price index_82.1 86.7 94.3 93.4 98.7 106.1 106.5 105.5 107.6 117.8 99.1 101.6
Source: CBR, the RF Ministry of Economic Development. 286
Since early 2010 import of goods has been consistently on the rise: in Q1 2010 vs. Q1 2009- by 18.8%, in Q2 vs. Q2 2009- by 32.5%, Q3 - 39.8%, while in Q4 the increase rate was down to 25.8%. That said, it was Q4 when the value volume of import was the biggest one in 2010 and accounted for USD 75.9 bln. (68.6 - in Q3, 58.2 bln. - in Q2, 45.7 bln. - in Q1). Such a notable increase in import supplies became possible thanks to the Rb. appreciation.
In contrast to the negative dynamic of import supplies in 2009, the year of 2010 saw the value volume across all the enlarged items of the trade classification surge.
Import of machinery, equipment and vehicles increased considerably - by 39.7%, up to USD 98.6 bln. The specific weight of machine-building products in the structure of import rose from 43.9% up to 45.4% (Fig. 49). Within this particular group, increase was noted across most of items: the import value of passenger cars was up by 33.8%, while the one of trucks - -2.3 times. The physical volume of importation of passenger cards increased by 33.8% on a year-on-year basis, while that of trucks - 2.2. times.
□ Other goods
® Machinery, equipment, and vehicles
S Metals and metal manufactures
0 Textile, shoes
□ Timber and paper-and-pulp products
□ Chemicals, caoutchouc
® Mineral products
IS] Food stuffs and raw agricultural materials
Source: the RF Ministry of Economic Development
Fig. 49. Goods Structure of Russian Import (%)
In 2010, the nation purchased food stuffs and agricultural raw materials from overseas in volumes at 19.1% greater than in 2009. That said, import of food stuffs from the CIS countries soared by 22.5%, while the one from Far-Abroad countries - by 18.7%.
Physical volumes of import supplies of condensed milk and cream surged nearly 6-fold, barley - 3.4 times, sunflower seed oil - 2/6 times, raw sugar - 1.7 times.
Meat imports were down by 15.7%, or by 345,000 tons. In 2009 the country imported 2.2 mln. ton of meat. It was poultry supplies that suffered a serious blow due to the ban on impor-
I UU /0
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
2008
2009
2010
tation of poultry processed with the use of chlorine-containing preparations, which suspended for long supplies of chicken legs from the US. The ban was lifted only in mid-August after the US producers complied with Russian requirements, but import supplies failed to fully recover and their volumes ultimately dropped by 36.5% (by 340,000 tons). In 2009, import supplies accounted for 942,000 tons.
The beef import was down by 2.5% (16,000 tons) vs. the 2009 figure of 636,000 tons. Meanwhile, pork supplies remained practically unchanged when compared with the 2009 figure of 633,000 tons. As a result, the proportion of imported meat on Russia's domestic market accounted for 20.6% in 2010. It is beef which remains the meat product Russia still most strongly depends on: the specific weight of import supplies of beef in 2010 matched the prior year's level (26.7%). Imported pork held 20% of the market in 2010 vs. 23% reported in 2009, while chicken broiler -17% vs. 27%.
Import of chemicals and products of related industries increased by more than one-third -up to USD 35.9 bln. Import supplies of medicines were up by 30.9%. While the chemical sector is considered a leader of the renewed growth, the dynamic of import evidences no import substitution processes in the sector. Back in 2008, the proportion of imported chemical products on the domestic market was 13.3%, while in 2010 - already 16.5%; so, domestic producers lost a fraction of the national market to their Western rivals.
A similar situation is noted with regard to textile, textile garments, and footwear: the share of import of these items rose from 4.2% in 2008 up to 6.7% in 2010, while the 2010 value volume of the respective import supplies was up by 49.5% on a year-on-year basis. That can be ascribed to increase in the physical volume of import of clothing, cotton fabric and leather footwear, as well as the price rise for cotton hair and leather footwear.
In the 1st half 2010 CBR estimated the proportion of import goods in the retail sector's inventories to soar by 0.5 p.p. and stand at 43%. The increase rate in imported food stuffs was 1 p.p. and accounted for 35%.
Today, Russian producers of investment and consumer goods have no capacity to substantially boost the output of competitive products. Hence, there is no possibility to meet the growing investment and consumer demand without attracting sizeable volumes of imports. A further appreciation of the national currency and the overall rise of economic activity in the country should propel a further expansion of imports.
4.6.6. Regulation of Russia's Foreign Trade
The rise of the Customs Union formed by Russia, Belarus and Kazakhstan made the headlines in 2010. The Union now embraces over 60% of the populace of the whole post-Soviet zone and produces over 85% of its GDP, while the volume of GDP of the three nations combined is over USD 2 trln.
The year of 2010 saw the work on development of the Union's customs law, including the Customs Code, international treaties and decisions made by the Commission of the Customs Union, be in progress.
The forging of a new normative and legal base of regulation of the foreign trade sphere is carried out in compliance with the strategic document of the member states of the Union "Stages and timelines of formation of the single customs territory of the Customs Union of the Republic of Belarus, the Republic of Kazakhstan and the Russian Federation".
The main stages of formation of the single customs territory of the Customs Union and the respective timelines are as follows:
1. The preliminary stage (until 1 January 2010).
During that stage, the work was in progress on designing a normative and legal base and organizing a stage-by-stage transfer of the agreed upon types of government control, except for the border one, onto the external contour of the single customs territory.
The draft Customs Code of the Customs Union had been developed by 1 October 2009. By that time, there three nations had also crafted proposals on amending the normative and legal base with regard to developing provisions of the Customs Code relating to a uniform employment of forms and methods of customs control and customs clearance procedures.
As well, the parties developed and prepared for adoption international treaties on collection of VAT and excise taxes in the territory of the Customs Union in the absence of customs clearance and customs control procedures.
The parties have been coining the Uniform Customs Tariff and a uniform system of non-tariff regulation measures in the frame of the Union; they were devising a mechanism of accrual and allocation of future customs duties and a uniform methodology of running the foreign trade statistics and the one of mutual trade between the Union member states.
On the basis of an analysis of the effective trade regimes of the three member states with regard to third nations the parties identified existing discrepancies and came to an accommodation of their unification. They also evaluated the effective constraining measures of economic nature in mutual trade and reached an agreement on conditions of their cancellation and replacement with uniform rules of competition, subsidizing and other forms provision of state support.
The parties developed measures that should secure a sustainable functioning of the single customs territory after the transfer of the agreed upon types of the state control onto the external borders.
2. The first stage (1 January - I July 2010)
Since 1 January 2010 the uniform customs and tariff (including tariff benefits and preferences) regulation and the non-tariff one came into effect, including:
• The uniform customs tariff and the system of non-tariff regulation measures;
• Abrogation of the existing constraining measures of tariff and non-tariff nature in the mutual trade between the three nations;
• Launch of exercise of the joint control at the Russian-Kazakh border.
Functions in the sphere of customs-tariff and non-tariff regulation were mandated to the Commission of the Customs Union as a single regulatory body.
While shaping the Customs Union, a major challenge was agreeing upon the Uniform Customs Tariff (UCT) rates, for originally the three countries found only 40% of their rates matching each other. So, they were compelled to launch a long process of unification of rates on nearly 11,000 commodity headings.
However, the parties failed to ensure a 100% consensus across all the tariff rates, primarily because Kazakhstan was not ready to change (increase, actually), nearly 55% of its national customs tariffs. That is why Kazakhstan reserved a list of 400 commodity headings, the customs levies on which should remain on a lower (or zero) level through 2014, including medicines, plastic, cardboard and paper, aluminum manufactures, among others.
Russia, too, substantially modified (mostly lowered) its customs duty rates since 1 January 2010. Specifically, the rates were zeroed on 300 more headings of technological equipment, devices and mechanisms. The rates on meat and dairy products, and ferrous metals were raised insignificantly.
It is worthwhile noting that the UCT rates are subject to revision. Specifically, duty rates on some commodity headings the Custom Union member states attribute to the group of 'sensitive' ones may become subject to modification, provided the three nations have mobilized consensus in this respect. This mostly concerns food stuffs, clothing, wooden manufactures, fabrics, etc.
The pilot project on operating and fine-tuning the information exchange between the three national customs agencies for the sake of controlling of moving of goods and vehicles across the single customs territory (the domestic and international transit control) and running the statistics of mutual trade kicked off on 1 April 2010.
3. The second stage - since 1 July 2010
• the Customs Code of the Customs Union implemented and a uniform methodological base developed in its furtherance;
• the exercise of customs clearance of goods and vehicles began with the use of uniform forms of documents by the customs agency of the Union member state whose resident is a participant in foreign economic activity;
• the conduct of statistics of foreign trade and statistics of mutual trade was ensured;
• international treaties relating to indirect taxes and mechanism of information exchange between tax agencies came into effect.
With regard to administering export:
• the Union member states retain the possibility to independently determine export customs duty rates;
• respective amounts of export customs duties are collected to the budget of the Union member state wherefrom the goods originate;
• the Union member states retain the possibility to independently determine and apply non-tariff regulation measures in respect to individual kinds of goods (military and dualpurpose manufactures, natural commodities);
• the possibility to pursue an independent policy in the noted areas of export regulation is secured by execution of mutual obligations in the frame of the international treaty framework of the Customs Union.
The bill "On customs regulation in Russian Federation", which was supposed, once passed, to substitute for the Customs Code of RF, was envisaged to be implemented since 1 July 2010. Its passage was delayed, though: the first draft was developed by FCS under the name "On customs regulation" and the RF Government declined the bill in May, as it seemed to increase the administrative pressure on business. The RF Ministry of Economic Development prepared its own version, but much time was wasted on obtaining other government agencies' approval. Plus, the bill suffered fairly numerous controversies and comprised some 300 reference provisions which would require creating a plethora of various by-laws. As a result, the law has been under development until November 2010.
4. Third stage (since July 2011) envisages:
• transfer of the agreed upon kinds of state control from the Russian-Kazakh border to external borders of the Republic of Kazakhstan and the Russian Federation. At this point, a transitional period was provided for, during which at customs clearance locations in the territory of the Republic of Kazakhstan where monitoring of the exercise of customs clearance procedures will be carried out, along with a temporary retention of individual forms of customs control along the Russian-Kazakh border;
• completion of negotiations with third countries on unification of trade regimes on the basis of earlier reached agreements.
It is envisaged that since 1 July 2011 customs clearance procedures will be abrogated with regard to goods originating from third countries and released for a free circulation in the territory of the Republic of Belarus, Republic of Kazakhstan and the Russian Federation and goods transited within customs territories of the Republic of Belarus, Republic of Kazakhstan and the Russian Federation.
This is the final element of the formation of a single customs territory that secures, within its borders, a free moving of goods originating from therein, as well as goods originating from third countries.
So, the customs regulation of the Customs Union rests upon six blocks of documents that match respective decision making levels:
1) The Customs Code of the Customs Union;
2) International treaties adopted on the basis of CC of CU;
3) Decisions of the Commission of the Customs Union;
4) Customs legislation of the Customs Union member states;
5) Decisions made by national governments of the said states; and
6) Normative and legal acts by their competent government agencies.
The Customs Code of the Customs Union appears substantially different from the RF one. More specifically, the conceptual framework underwent certain modification:
- The term of 'customs broker' was replaced by 'customs representative';
- The term of 'customs regime' was changed for ' customs procedure';
- A new term, 'express cargo', was introduced;
- Such terms as 'free circulation', 'status of goods and vehicles for customs purposes', 'customs clearance' were excised.
The Customs Code of the Customs Union provided for new forms of customs control:
- Account of goods under customs control;
- Examination of the goods accounting and reporting system;
- Customs audit (conducted both in-office and on-site one) instead of customs examination. The Customs Code of the Customs Union now comprises a chapter that regulates procedures of seizure of goods and respective papers in the course of the exercise of customs control.
Declaring goods at the customs should be made solely in writing and in the electronic form with the use of the customs declaration. The oral and tacit forms of declaring goods are not permitted.
For the sake of encouragement of export of hi-tech goods, the Code provides for a reduced and closed list of documents to be submitted along with the declaration on such goods to make them eligible for the customs export procedure.
The Customs Code also provides for a possibility to identify supranational areas of risks which may prove sensitive to all the Union member states. Such areas will be identified by the Commission of the Customs Union.
When compared with the Tax Code of RF, timelines of customs authorities' various operations underwent modification. For instance, they were reduced with regard to the following operations:
- Release of goods - from 3 days to 2 days, while as to goods exported from the Customs Union's territory and exempt from export customs duties, the timeline now is 4 hours;
- Registration by the customs agency of the transit declaration - from 2 hours to 1 hour;
- The maximum term of extension of release of goods was reduced to 10 days from the date following the date of registration of the customs declaration; the document also unequivocally set conditions of such an extension - namely, the need to exercise or complete a form of customs control.
- The following timelines were extended:
- Submission of goods to the customs office under the procedure of their declaring in advance - from 15 to 30 days;
- Processing of goods in the customs territory - from 2 to 3 years;
- The term allowing to place under the customs procedure of re-export the goods earlier placed under the customs procedure of release for the domestic consumption - from 6 months to 1 year.
The document also set timelines with regard to processes for which timelines had not earlier existed:
- The timeline of organization of customs escort by the customs office (within 24 hours from the moment the decision was made);
- The timeline of registration or refusal of registration of the customs declaration (no more than 2 hours from the moment it was submitted; in Russia's Customs Code, the respective timeline was the day of receipt of the customs declaration by the customs agency);
- The timeline of completion by the parties concerned of operations relating to placement of goods under temporary storage or their declaring at the customs (3 hours from the moment of presentation of goods).
As well, changes affected matters associated with the enforcement of customs procedures. For instance, the procedure of the internal customs transit was excised, and the goods transited across the customs territory, including those shipped from one domestic customs authority to another one, will be placed under the customs transit regime (procedure). Presently the shipment of goods starts right at the Customs Union's external border and extends through its recipient's location, regardless of his state of residence. Meanwhile, transport operators, including customs ones, enjoy the right to move across the whole territory of the Customs Union without being subject to the intra-state control in the territory of each of the Customs Union member states. At the same time, the railroad operator in the peremptory order is exempt from depositing a shipment guarantee.
Yet another peculiarity of the Customs Code of the Customs Union lies in the possibility for a concurrent placement of goods under two customs procedures- that is, customs transit and re-export (provided the obligatoriness of exportation of the goods in question) or customs transit and re-export (in the cases set forth by the CC of CU).
Substantial changes occurred with regard to activities relating to running registers. The customs authorities of each Union member state maintain registers of entities that carry out operations in the customs business area. The Commission of the Customs Union forms common registers of such entities at the supranational level. That said, the customs authorities were not tasked to conduct registers of banks, credit organizations and insurance companies.
The conditions of inclusion of entities in the registries were modified too. For instance, there appeared requirements on the absence, as of the date of addressing the customs agency,
of unredeemed arrears with regard to customs payments and fines, and facts of imposition of administrative sanctions for abuses in the customs business area within 1 year from the date of the previous addressing the customs agency. Meanwhile, the insurance contract against torts liability risks was crossed out from the list of conditions under which entities can be included in the register of customs transport operators.
Another novelty became a possibility for establishment by the national law of instances and procedures of suspension and renewal of legal entities' operations in the capacity of customs representatives, owners of a temporary storage warehouse (TSW), customs warehouse and duty-free stores, and authorized economic operators.
The Customs Union law introduces a new model - namely, the Institution of the authorized economic operator (AEO), which is supposed to simplify relationships between bona fide participants in foreign trade and customs authorities. Specifically, a procedure of release of goods prior to submission of the customs declaration and temporary storage of goods in-door, outdoor and in other AEO's territories without including the AEO in the register of owners of TSWs is provided for AEOs. The Institution of AEO rests upon principles stipulated in the 1973 International Convention on the Simplification and Harmonization of Customs Procedures (Kyoto Convention), and it has already been long practiced in the EU countries.
The applicant for the AEO status should meet certain criteria and comply with strictly set rules. Specifically, to become an AEO, a firm should: pledge a Euro 1 mln.- orth collateral with regard to payment of customs duties and taxes (for production companies and (or) exporters whose products are exempt from export customs duties, the respective amount is Euro 150,000 ); have at least 1-year long record of operations in the foreign trade area; have no outstanding liability on customs payments, tax arrears or facts of being brought to responsibility for abusing customs rules (eg. unveracious declaring) for 1 year.
Not only did changes affect the conduct of the register of customs business operators, but the one of intellectual property objects. In addition to national registers, the Union member states provided for conduct of a single customs register of intellectual property objects (in addition to national ones).
The adoption of the new, common, customs law does not mean liquidation of the national ones. Thus, on 29 December 2010, the Act 'On customs regulation in Russian Federation' came into force. The Act became a part of the Customs Union law and comprises provisions and requirements of the Union's Customs Code.
The Act 'On customs regulation in Russian Federation' was designed with account of modern trends of development of customs operations, in particular those associated with simplification of export of hi-tech goods and optimization of customs operations. Behind the adoption of the Act lies the fact that the Customs Code of the Customs Union and the Union member states' international agreements comprise over 200 references to the three states' national law, while the Act includes a maximal number of provisions of direct force, while reference provisions are used mostly with regard to technological matters associated with completion of customs operations.
The Act fixes fundamentals of organization of customs agencies' operations, their functions and responsibilities, locations, operating hours, and responsibilities. The document also fixes main principles of moving of goods in the course of their importation in RF and exportation out of the country, transit across RF under customs control, rules of identification of their country of origin, the procedure of application of customs procedures in the conditions of the Customs Union. The Act also establishes requirements to customs transport operators, repre-
sentatives, TSW owners, duty-free stores, and other organizations. The Act also provides for a centralized procedure of payment of customs duties and taxes. To this end, the payer should enter in the respective agreement with Russia's FCS. In this case, the amount of customs duties and taxes payable over the year should account for between Rb. 50 and 100 bln.
The Act also introduces measures aimed at implementation of key tasks on modernization of Russia's economy and support of hi-tech and innovational production. To this effect, it is proposed to simplify procedures under export of hi-tech equipment and import of assembly parts used for its manufacturing. The Act also determines a simplified procedure of international exchange with research and commercial samples, importation of spare parts for maintenance and repair of foreign vehicles.
A major aspect of a specific concern of businesses is minimization of time costs associated with completion of customs operations under the temporary storage of goods, their declaring at the customs, and release of goods. Under customs regulation this can be ensured by means of simplification (reduction in the number of reference provisions) of legal provisions that contain requirements to entities that move goods. In other words, this can be done by regulating critical for business problems right at the level of a federal Act and developing straight and understandable normative dictates. So, the Customs Union should provide for establishment of such a customs control system, which should be efficient for the state and to a minimal extent burdensome for businesses.
Statistics evidence that Russian customs authorities demand far greater a number of documents from participants in foreign economic activities than their peers in the Union member states. For instance, import operations require filling out 22 clearance documents, while export ones - up to 30 documents (according to the RF ministry of Economic Development). By contrast, Kazakh and Belarus customs authorities in such cases request between 4 and 8 documents. The Russian customs strives to reduce the volume of the documents to 14 ones, but it will still be too much a hurdle, nonetheless.
With the Customs Union in place, Russian customs authorities have faced rivals in the other Union member states: should such challenges as delays in the exercise of customs clearance procedures and problems with an excessive amount of necessary paperwork be not replaced by a customer-friendly approach, it will be no sweat for importers and exporters to switch to the same services in Belarus and Kazakhstan.
Now that an agreement on application of the procedure of collection and allocation of import customs duties came into effect on 1 September 2010, the duties in question are channeled to special accounts in each state and automatically allocated between the three state budgets. They first are accrued onto a single account and subsequently are allocated between the said budgets in accordance with pre-set ratio, under which RF is entitled for 87.97% of the overall amount of customs duties, Belarus - 4.7%, Kazakhstan - 7.33%. According to the Commission of the Customs Union, the first month of implementation of the Agreement (September 2010) resulted in Russia collecting USD 2.05 bln. in customs duties, Belarus - USD 109.4 mln., and Kazakhstan - USD 170. 9 mln.
The Federal Treasury's statistics of execution of the RF budget evidence that having insisted on its variant of splitting the duties, Russia, as a minimum, has not lost any revenues: prior to the implementation of the new mechanism, in July 2010, Russia had collected Rb. 49 bln. in import customs duties, while in August 2010 - Rb. 55 bln. Meanwhile, the September "split" revenues accounted for Rb. 63 bln. The increase in collection could be ascribed to seasonality. Since October 2010 FCS has started singling out split import customs duties out of
their overall volume and in that month they amounted to Rb. 60 bln. In any case, the amount of import duties is smaller (in 2010 - 4-fold) than export duties that form the major revenue item for FCS, with their amount depending on current prices of Urals.
In compliance with art. 3 of the RF Act "On customs tariff', in 2010, the RF Government developed and adopted 12 resolutions to approve export duty rates on crude and oil products.
The export customs duty rate on crude and petroleum derivatives produced from bituminous rock exported from Russia to beyond the borders of the Union member states was changed every month in 2010 on the basis monitoring of prices for crude Urals. The prices were subject to monitoring between the 15th day of each calendar month and the 14th day of the next calendar month (Table 6).
Table 55
Export Duty Rates on Crude and Oil Products in 2010 r. (USD/T)
Oil Oil products
light black
1 January 267.0 192.2 103.5
1 February 270.7 194.7 104.9
1 March 253.7 183.2 98.7
1 April 268.9 193.5 104.2
1 May 284.0 203.7 109.7
1 June 292.1 209.1 112.7
1 July 248.8 179.9 96.9
1 August 263.8 190.0 102.4
1 September 273.5 196.5 105.9
1 October 266.5 191.8 103.3
1 November 290.6 208.1 112.1
1 December 303.8 217.0 116.9
Source: resolutions of the RF Government.
In accordance with the package of agreements on formation of the Common Economic Space signed in December 2010, Russia bound itself to supply exempted from export duty oil to Belarus since 1 January 2011. Meanwhile, Minsk committed itself to refund 100% of export duty on petroleum derivatives produced from the Russian oil, should they be exported to beyond the borders of the Customs Union, while export duties on Belarus's own oil (some 1.7 mln. tons) will be collected to the country's budget.
The bilateral agreement on carbohydrates does not concern the oil Belarus can procure from Venezuela and other third countries. Duties on oil products made from such oil will also be collected to Belarus's budget. Such a scheme will be in place for three years until the moment the three nations develop another mechanism of splitting export customs duties.
As concerns the size of the export duty on oil products Belarus will be transferring to Russia's budget in 2011, it will make up 67% of the duty on crude for light oil products and 46.7% - for black ones, ie. matching the new formula of calculation of export duty on oil products implemented since February 2011 in compliance with RF Government's Resolution of 27 December 2010 № 1155. In 2012, the duty on light oil products will account for 64% of the crude duty, while that on black ones - 52.9%. Since 2013 both duties will become even and make up 60% of the oil duty each.
On the level of bilateral agreements Russia and Kazakhstan also agreed, within the framework of the Customs Union, not to change until 2015 the current regime of collection of export duties on oil Russia supplies to Kazakhstan. Presently Russian oil supplies to Kazakhstan have been exempt from export duty.
On 5 November 2010 the Federal Act "On Russia's joining the International Convention on the Simplification and Harmonization of Customs Procedures of 18 May 1973 as revised in the Protocol on introducing amendments to the International Convention on the Simplification and Harmonization of Customs Procedures of 26 June 1999" was signed.
The International Convention on the Simplification and Harmonization of Customs Procedures (the Kyoto Convention) was adopted on 18 May 1973 in the city of Kyoto and implemented on 25 September 1974. On 26 June 1999, the session of the World Customs Organization approved the revised Convention whose ultimate objective is promoting global trade by simplifying and harmonizing customs rules and procedures. The revised version came into effect in February 2006.
The Convention obligates the signatories to employ uniform international standards in their customs authorities' operations, simplified and automated customs procedures. As well, it provides for the transition to the use of electronic documents and establishment of an electronic one-stop-shop system. Joining this international treaty constitutes a necessary step in the process of accession to WTO.
As a reminder, Russia, Belarus and Kazakhstan put on hold their negotiations on joining WTO in the frame of respective working groups in the summer of 2009, when they decided to establish the Customs Union and hold negotiations together. The decision was subsequently revised and the then would-be Union states agreed they could conduct negotiations on their own, but proceeding from the common stance.
The multilateral consultations held in Geneva on 25 May 2010 resulted in the Working Group on Russia's accession to WTO ruling to renew the negotiations. In late 2010, Russia significantly intensified its efforts in that direction and succeeded in completing negotiations with the US and EU.
The Russian delegation and members of the Working Group on Russia's accession to WTO have to find compromises with regard to the level of agricultural subsidies, the regime of access to Russia's meat market, state-owned trade enterprises' operations, the amount of export duties (on timber in particular), transparency of the national law, among other things.
The Russian side keeps amending the draft Report of the Working Group due to the establishment of the Customs Union between Belarus, Kazakhstan and Russian Federation.
The first block of renewed sections was discussed at the multilateral meeting on 21 September 2010, the second one - on 25 October, and the third one - on 8 December 2010. The general reaction of the WG members was positive. A number of WTO member states put some questions, and the Russian side made clarifications in writing and in the course of bilateral meetings.
On 26 October 2010, Russia held multilateral consultations on agriculture with the4 parties concerned. At the consultations, the Russian side presented revised calculation templates on the state support of the agrarian sector in 2007-08.
In addition to the WG Report, an inseparable part of the Protocol on Russia's accession to WTO shall become consolidated lists of obligations on granting access to the domestic markets for goods and services. The work on development of the consolidated list of access to the market for goods is still in progress, while the consolidated list with regard to access to the market for services was sent out to the WG members in October 2010. In the event of any discrepancies with regard to any obligation enumerated therein, the Russian side will be compelled to hold additional consultations and negotiations with the WTO member states concerned.
The negotiations on meat import quotas are the toughest challenge, for some WTO member states are keen to retain conditions agreed upon back in 2006. Since then Russia has invested heavily in development of its meat complex and now its domestic producers demand to fence them from import, while the importing countries insist on keeping their quotas unchanged.
Russia is going to hold negotiations on meat supplies with 10-15 WTO member states, including the US. This process should take several months to complete. The Russian negotiators' ultimate task is "to agree on such conditions of importation of meat in the country, which would allow <the government> to implement development and investment plans". What Russia offers seems to be tighter than the 2003-05 conditions (at the time, the Government restricted meat imports).
In 2011, the government is going to substantially slash the poultry import quotas, which are supposed to account for 350,000 t. instead of the earlier planned 600,000 t. The decisions should affect primarily the US suppliers' interests. Their 2010 quota was 600,000 t. out of a total of 780,000 t., but the actual volume of the US poultry import made up just 300,000 t. The fall should be ascribed to the US poultry failing to meet the new Russian sanitary- hygienic standards.
The import quota on pork for 2010 and 2011 was set at the level of 472,100 ton, while for 2012 - 425,000 ton. The annual quota on refrigerated beef for 2010-12 accounts for 30,000 ton, while the one on deep-frozen beef - 530,000 ton.
With its Resolution of 29 December 2010 №1190 the RF Government retained the duty on round timber unchanged - that is, 25% of its customs value, but no less that Euro 15/c.m. The duties on Russian timber supplies to Finland until recently have been a major obstacle to Russia's accession to WTO, as the EU has been demanding for their lowering since 2004. But as the country's accession to WTO was delayed, Russia took a course towards bolstering the national word-working sector. In February, the RF Government decided to launch a gradual increase of export duties on unprocessed timber. The duties were raised up to 20% of the value of a shipment since 1 July 2007 and subsequently - up to 25% effective since 1 April 2008. It was envisaged to further increase export duties on round timber up to the protective level of 80% since 1 January 2009; however, under the EU pressure and because the domestic woodworking sector was not ready yet, in 2008 Russia imposed a moratorium on increases of the duties and froze them at the level of 25% of the customs value. The moratorium was set to expire on 1 January 2011, after which the duties might have hit 80%. However, at the Russia-EU summit in the early December 2010 the parties agreed to extend the moratorium and to lower duties upon Russia joining WTO. That said, the Russian side does not waive its right to raise the duty rates since 2012, should the nation fail to join WTO.
Russia has chances to join the Organization in 2011, after nearly 17 years of negotiations. Usually, it takes a nation five to seven years to complete negotiations and the accession procedure.
As a reminder, WTO currently unites 153 states, whose overall proportion in the global trade accounts for 95%.
