7Section 4. The Real Sector of the Economy
4.1. Production Macrostructure
4.1.1. Major trends and economic drivers in 2011
Macroeconomic trends of 2011 were determined by factors having formed during the preceding two years of post-crisis recovery. As an outcome of 2010-2011, average annual rate of GDP growth made 4.3%, and thus, judging by this development indicator, Russian economy has achieved the pre-crisis level of 2008.
The analysis of financial and economic recovery drivers and conditions allows for identifying special characteristics of economy rehabilitation in 2010-2011.
domestic demand global demand (export) -GDP
*preliminary estimates.
Source: Federal Statistics Service, RF Ministry of Economic Development.
Fig. 1. GDP dynamics by domestic and global demand components during 2007-2011, % to the respective period of the previous year
Low investment activity is a real characteristic feature of the recovering growth of the recent two years. In 2011 fixed capital investment constituted 96.7, the amount of work in construction constituted 94.4% and the amount of residential space commissioned - 97.1% of 2008 performance. In 1998 post-crisis recovery was completely based on dramatic business activity boom in the investment sector of the economy and was one of the key drivers for overcoming all the negative consequences of production shrinking. On the contrary, in 20102011 low investment activity during the recovery period was impeding the growth both in production and financial sectors of the economy.
Another special feature of 2010-2011 was pretty quick recovery of the consumer demand. Household demand in 2011 exceeded 2008 level by 6.1%. Contrary to the situation of 19982001 when low consumer demand limited the pace of domestic market expansion, 8.1% retail turnover growth in 2011 versus 2008 supported by approximately equal increase of the real income of the population became the dominating driver of economic recovery, including recovery of the financial sector at the expense of intensive growth of demand for cash loans.
When comparing the processes of post-crisis recovery in 1998 and in 2008, the impact of foreign trade should be noted. In the environment of rapid global economic recovery after 1998 crisis and favorable dynamics of global energy and raw materials markets, Russian economy was able to restore its export during one year. After long global economic recession in 2008 Russia was able to regain its export at the pre-crisis level only in 2010, and as of the end of 2011 its physical export volumes exceeded 2008 level by 3.0%.
Given GDP growth in 2011 at the level of 4.3%, the domestic demand grew by 8.8% (in 2010 - by 8.2%), including the domestic production - by 5.1% (3.8%), and the external demand - by 1.0% (7.1%) versus the preceding year.
Te domestic market dynamics was defined by the ratio between the domestic production growth rates for domestic and foreign consumption, on one hand, and imports dynamics and structure - on the other hand. In 2010 the outrunning growth of the exporting sector defined the intensity of post-crisis recovery for domestic manufacturing targeted at the domestic market, but in 2011 acceleration of domestic production growth (5.1% versus 3.8% in the preceding year) obviously turned out to be insufficient to counteract the consequences of abrupt export slowdown. Eventually, in 2011 the domestic manufacturing growth rate made 103.7% and was 1.2 p.p. lower, than in 2010. Let us note, that slowdown of the growth rate was accompanied by maintaining high import dynamics.
20,0 16,0 12,0 8,0 4,0 0,0 -4,0 -8,0 -12,0 -16,0 -20,0
* preliminary estimates.
Source: Federal Statistics Service, RF Ministry of Economic Development.
Fig. 2. Domestic manufacturing dynamics by components of usage in 2007-2011, % to the respective period in the preceding year
In terms of descending import, 2009 is comparable with 1998-1999; however, the recovery was completely different. 4.53 devaluation of ruble versus dollar in 1998-1999 resulted in dramatic fall of import efficiency in the domestic market and stimulated intense growth of import-substituting production and expansion of niches for domestically manufactured products (in that period domestic inflation was 251.7%). In 2008-2009 dollar versus ruble exchange rate went up only by 23.2% compared to 2007, which correlated with inflation growth rate. Quick recovery of global market demand starting from Q2 2009 and global prices change in favor of Russia throughout 2010 resulted in foreign trade price conditions index exceeding the post-crisis value.
In 2010-2011 the effective exchange rate of ruble got up and the domestic market situation was formed in the context of increased imports and pretty modest dynamics of domestic manufacturing of consumer goods. Besides, the recovery of demand for imported goods was supported by the maintained positive growth dynamics of the real income of population.
No large-scale import-substituting production growth was observed in 2009-2011 in the context of the ratio between ruble exchange rate and domestic inflation, as well as production dynamics and structure and lack of competitive back-up production capacities.
The out-running physical import growth rate versus export and GDP was a special characteristic in 2010-2011. As of the end of 2011, foreign trade turnover (physical volumes, as of SNA methodology) went up by 8.7%, including export - by 1.0% and import - by 21.5% versus the preceding year1.
domestic manufacturing for domestic market imported goods -domestic demand
* preliminary estimates.
Source: Federal Statistics Service, RF Ministry of Economic Development.
Fig. 3. Internal demand dynamics by components in 2007-2011, % to the respective period in the preceding year
1 Foreign trade turnover index value (balance of payments methodology) in 2011 versus the preceding year made 130.2%, export - 130.4% , import - 129.9%
Domestic market expansion was an important dominating driver for post-crisis economic development in 2010-2011. In this context special attention needs to be paid to the following trend which is growing stronger: supplies of imported goods outgrow the domestic production dynamics. The domestic production targeted at domestic market needs was recovering very slowly despite the fact that during the acute phase of the crisis (2009) its fall had been not as deep as import shrinking.
The share of import in 2011 goods/materials retail circulation was 43%, including 33% for food products and 51% for non-foods.
Table 1
Retail trade resources structure in 2010-2011, %
Retail trade resources Including
domestically manufactured imported
2010
Q1 100 56 44
Q2 100 58 42
Q3 100 55 45
Q4 100 55 45
Annual 100 56 44
2011
Q1 100 57 43
Q2 100 58 42
Q3 100 57 43
Q4 100 55 45
Annual 100 57 43
Source: Federal Statistics Service.
In the producer goods market gradual raise of imported goods share was also observed. The shifts in the overall structure of imported goods were defined by the trend for increased share of the intermediate demand goods. During H1 2011 the share of imported producer goods made 19.2% versus 17.8% in the preceding year, and the share of imported intermediate goods made 42.9% versus 40.7%. Despite the increase of imported producer goods share starting from Q3 2011, the share of intermediate goods continued to remain much higher than in 2008-2010.
The increase of producer and intermediate goods share in the import structure with simultaneous decrease of the consumer goods share was a qualitatively new process in the Russian economy, which may turn out to be the start of priority change and increased incentives to production development in the environment of limited domestic material and technical resources. It seems that further development of the real economy sector in such situation will be dependent on the intensity of fixed capital investment targeted at modernization and diversification of the production. Besides, adjustment of capital goods and associated goods volumes characteristic for the period 2007-2008 has led to changes in industrial sector recovery structure in 2010-2011.
In industrial sector the post-crisis recovery both in 2008 and in 1998 started with the recovery of the growth rates in mineral wealth extraction driven by changes both in the global and domestic markets. In 2011 the mineral wealth extraction index made 104.9% versus the pre-crisis values of 2008. In processing crisis was more protracted during 2008-2009 compared to 1998 crisis, so getting back to the upward curve took twice as much time. Recovery of yields in processing and achieving the pre-crisis level of 2008 took place as late as in 2011.
The dependence of domestic production development dynamics, specifically - of enterprises operating under the industrial assembly regime, on the imported goods supplies was
growing. In this context the import-replacing production and localization issues are becoming more and more relevant taking into account the special characteristics of development and modernization of certain processing industries of Russian economy. In the "Social and Economic Development Forecast for the RF in 2012 and for the Planned Period of 2013 and 2014" it is declared that the key economic growth driver in the mid-term perspective should be not just in increase of investment and consumption, but more - in increasing the level of competitiveness of domestic goods, which is to balance-off ruble exchange rate strengthening. However, the domestic market dynamics forecast for 2012-2014 is still based on import boom.
Table 2
Russian Federation Import Structure (balance of payments methodology),
% to the outcome
Goods
consumer producer intermediate
2006 46.2 17.0 36.8
2007 44.4 18.9 36.7
2008 41.8 23.8 34.4
2009 44.3 19.7 36.0
2010 40.7 19.5 39.8
Q1 43.5 16.8 39.7
Q2 39.6 18.7 41.7
Q3 40.6 19.7 39.7
Q4 40.0 21.5 38.5
2011 36.6 21.4 42.0
Q1 40.2 18.2 41.6
Q2 35.2 20.3 44.5
Q3 35.0 23.0 42.0
Q4 37.0 23.0 40.0
Source: Federal Statistics Service.
As of the end of 2011 the GDP growth rate made 104.3% versus the preceding year. During H1 2011 this growth was mainly associated with favorable situation in the global market for raw materials and with consumer market expansion. Capital investment in H1 2011 grew by 2.7% with GDP growing by 3.7% versus the similar period of the preceding year.
In H2 of 2011 the accelerated GDP dynamics is connected with the structural specifics of the economic growth: capital investment growth rates were speeding up, as well as construction and agricultural production volumes, versus the similar period of the preceding year. In the end of 2011 capital investment grew by 6.2%, construction volumes - by 5.1%, and agricultural production - by 22.1%. As a result, 2011 domestic market dynamics was determined by simultaneous growth of the demand both for consumer goods and for investment. Retail trade turnover made 107.2% versus 2010, and the level of fee-based public services made 102.9%. The cumulative impact of these factors was enough to weaken the trend for slowing down the domestic demand for industrial products and infrastructure services.
In 2011 the industrial production growth was that of a recovery nature targeting the pre-crisis development trajectory. As of the year end, the industrial production index made 104.7% versus 2010. The outrunning growth rate in processing had the dominating impact on the whole industrial sector dynamics and structure. In processing production index made 106.5%, and in mining - 101.9% versus the same indicators of 2010.
Table 3
Major macroeconomic indicators indices in 2010-2011, % to the preceding year
2010 Quarters 2011 Quarters
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Gross domestic product 104.3 103.5 105.0 103.1 104.5 104.3 104.1 103.4 104.8 104.9*
Capital investment 106.0 95.2 105.6 105.3 111.1 108.3 99.2 105.0 108.2 113.6
Construction 103.5 92.7 100.8 106.6 107.1 105.1 101.6 101.0 107.6 106.9
Residential space commissioning 97.6 91.1 107.3 85.7 102.3 106.6 97.8 95.1 115.0 111.4
Industrial output 108.2 109.5 110.9 106.4 106.5 104.7 105.9 104.8 105.1 103.3
Extraction of mineral resources 103.6 106.7 104.8 101.3 102.0 101.9 103.3 101.7 102.2 101.3
Processing / manufacturing 111.8 112.1 116.3 109.5 109.9 106.5 110.6 105.8 105.7 104.6
Production of electric energy, gas and water 104.1 107.7 102.6 103.9 101.6 100.1 99.0 101.9 101.4 98.5
Agricultural output 88.7 100.5 98.6 79.2 96.2 122.1 100.7 100.6 116.9 132.6
Freight turnover 106.9 111.6 113.0 101.7 102.5 103.4 103.9 105.2 102.4 102.3
Retail turnover 106.3 102.2 106.9 108.4 107.4 107.2 105.2 106.1 107.9 109.1
-food products 105.1 103.7 105.7 107.3 103.7 103.6 101.4 101.3 103.8 107.1
-non-food products 107.6 100.9 108.1 109.5 111.0 110.7 109.0 111.0 111.8 110.9
-fee-based public services 101.5 99.9 101.6 101.5 102.6 103.0 102.9 103.8 102.4 102.8
Foreign trade turnover 131.1 144.1 139.0 126.3 121.4 130.2 129.8 139.5 130.0 124.1
-export 132.0 161.1 143.4 118.4 118.1 130.4 123.8 138.4 134.2 128.2
-import 129.7 118.8 132.4 139.5 126.7 129.9 141.9 141.5 124.1 118.0
Real disposable cash income 104.2 107.3 103.7 104.5 102.1 100.8 100.0 99.0 101.6 102.7
Real wages 105.2 103.1 106.1 105.1 104.2 104.2 101.6 102.7 103.8 108.5
Total number of unemployed 88.9 96.2 86.6 86.8 85.2 89.1 85.7 88.1 91.8 91.6
Number of officially registered unemployed 90.0 114.2 91.1 81 74.9 76.9 73.1 75.4 78.0 80.2
* preliminary estimates.
Source: Federal Statistics Service, RF Ministry of Economic Development.
Last year's domestic market expansion was taking place in the context of changes in the structure of the demand for domestic goods. Special feature of 2011 situation was growth of stock in the second half of the year. Dynamic growth of stock remained one of the key drivers for higher GDP growth rates in the second half of the year despite the fact that production growth in industry overall was slowing down. Let us note, that the forecast for 20l2 by the RF Ministry of economic development assumes some slowdown of the economic growth to 103.7%, including - due to exhaustion of the stock contribution into the recovery growth of the economy.
4.1.2. Major characteristics of GDP utilization
The trend of investment growth acting across the whole period between 2000 and 2008 demonstrated a breaking point in 2009, so the decline of capital investment was registered for the first time after 1998 crisis. Recovery of capital investment in 2010-2011 was characterized by pretty slow pace and was taking shape under the inertial influence of the preceding three years and factors acting at that time. Starting from Q2 2010 investment started to grow. In 2010 capital investment growth rate made 106.0%, and in 2011 it was 108.3% b 2011. However, when evaluating the dynamics of this indicator, one needs to take into account that in 2009 the base line was very low. In 2009 capital investment fell by 15.7%, so the decline was much deeper than during 1998 crisis. As the result, capital investment in 2011 made 96.7% of 2008 level.
Fig. 4. GDP and capital investment dynamics in 2008-2011, % to the preceding year
In the context of the situation with capital markets and savings resources the capital investment share in GDP structure during 2009-2010 period went down to 20.4% (compare with 21.3% - the maximum value for the last decade registered in 2008). In 2011, despite the savings ratio going up to 31.9% GDP thus exceeding the average of the preceding two years by almost 3 p.p. GDP, the capital investment share in GDP structure made 19.4% and remained below the average of the preceding two years by 1 p.p. GDP.
Table 4
Gross savings, gross capital formation and capital investment shares in GDP structure during 1998-2010, % of total
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Gross savings 30.8 31.4 32.6 33.2 33.8 33.9 33.3 24.6 29.0 31.9
Gross capital formation 20.0 20.7 20.8 20.0 21.2 24.4 25.1 18.6 22.3 24.9
including:
gross fixed capital formation 17.9 18.3 18.3 17.7 18.5 21.2 22.0 21.6 21.3 20.5
Capital investment 16.3 16.6 16.8 16.7 17.6 20.2 21.3 20.6 20.3 19.4
Source: Federal Statistics Service.
Consumer demand growth across the whole 2011 remained one of the main supporting economic growth drivers. In 2011 real income of the population made 100.8%, real wages -104.2%, and real granted pension amounts - 101.2% to the respective 2010 values.
Overall, during the period of 2009-2011 real disposable income of the population went up by 9.8% versus the pre-crisis indicator of 2008. Let us note that structural specifics of real income dynamics were determined by the growth of the granted pensions (161.1% to 2008) outrunning the growth of the real wages (105.8%).
In the context of growth of the real income of population in 2010 the consumer market recovered at the pre-crisis level of 2008. Retail sales turnover in 2011 went up by 7.2% versus the preceding year. Snap acceleration of the non-food goods markets growth rate in the context of food products retail turnover rates slowdown became the characteristic feature of
2011. Non-food market turnover growth index made 110.7% versus 2010, and for food products it was 103.6%. At the same time, it is worth noting that while the food product market exceeded the pre-crisis level of 2008 by 3.3% in 2010 and by 7.1% in 2011, the non-food market was able to recover at the pre-crisis level only in 2011. Inflation rate slowdown in 2011 had a significant impact on forming of this trend: in food products market inflation rate went down to 103.9% (compare with 112.9% in the preceding year), and the price change was bigger in non-food market (106.7% in 2011 versus 105.7% in 2010) and fee-based public services market (108.7% versus 108.1%).
-food products price index — — food products price index курс
*preliminary estimates.
Source: Federal Statistics Service, RF Ministry of Economic Development.
Fig. 5. Consumer markets and prices growth rates in 2008-2011, % to the respective period of the preceding year
70 -|
50 -40 -30 -20 -10 -0 -
in III
tl К ll, In
2010 2011 I II III IV 2010 Q II III IV 2011 Q
Purchase of goods 53,7 57,2 55,3 51,8 55,4 52,6 60,4 55,7 58,5 55
Paying for services 15,1 15,4 16,4 15,2 15,6 13,6 16,7 15,7 15,8 13,9
Making mandatory payments and charges 9,8 10,1 9,4 9,7 10,1 10,1 9,6 9,8 10,4 10,4
Savings - total 14,6 10,3 15,8 15,5 12,1 15,1 10,6 11,1 6,8 12,4
including in deposits and security 7,7 5,3 6,6 8,7 5 9,9 2,8 6,1 2,5 8,8
Purchase of currency 3,7 4,3 3,2 3,2 4,1 4 3,8 3, 4,8 4,4
Cash in hand 2 1,2 -1,3 3,5 1,3 3,6 -2,6 2,4 1,9 2,5
Source: Federal Statistics Service.
Fig. 6. Structure of using cash income of population in 2010-2011, % of total
Retail sales growth factors in 2011 remained based on savings ratio going down and consumer crediting going up. The share of savings in the income of population went down to 10.3% versus 14.6% in 2010, including savings in deposits and securities going down to 5.3% versus 7.7%. As of the end of December 2011 loans to individuals were issued for Rb 5,550.9bn and increased 1.36 times versus the same month of 2010.
4.1.3. Changes in GDP structure formation - by revenue sources
Domestic market growth support in 2011 was based on redistribution of income from enterprises to the population. The share of wages in GDP in 2011 made 49.9% versus the average of 46.1% in the period between 2002 and 2008. The insurance premiums increase impacted the structure of GDP formation from the revenues point of view. It resulted in decrease of the gross profit of the economy as GDP share in 2011 by 1.2 p.p. versus the preceding year remaining below the pre-crisis level of 20081.
Table 5
Structure of GDP formation by revenue sources in 2008-2011, % of total, on current basis
2008 2009 2010 2011 2011
Q1 Q2 Q3 Q4
Gross domestic product 100 100 100 100 100.0 100.0 100.0 100.0
including:
Wages of hired employees, including latent salaries and mixed income 47.4 52.6 49.9 49.3 53.8 51.7 47.5 45.4
Net production and import taxes 20.0 16.7 18.2 20 19.4 20.8 19.6 20.3
Gross profit in economics and gross mixed income 32.6 30.7 31.9 30.7 26.8 27.5 32.9 34.2
Source: Federal Statistics Service.
Within the structure of employed population employers providing for full-time employment of their hires and the self-employed make 8%. This is the factor determining the specific characteristics of GDP and population income structure. Almost 66% of population income in 2011 was formed at the expense of hired employees' wages.
High level of salary differentiation by types of business is a characteristic feature of Russian economy. In industrial production the degree of differentiation is determined by the growing gap in manufacturing and in sectors associated with mineral resources extraction. In the latter the nominal gross payroll in 2011 was 1.88 times higher the average level of wages across the economy. As for fuel-and-energy sector, the wages there were 2.2 times above the average. In manufacturing wages were 93% of the average level and only 45% of the wages at producing facilities. Gross payroll on petroleum products production and transportation of fuel and energy resources, as well as in financial sector was 2.3 higher than average level across the economy. In education and healthcare average wages got down to 65-74% of average level across the economy. The specifics of wages by types of business significantly impacted the structure of both revenue and expenditure formation, on consumer demand, on employment profile and distribution of resources across the economy.
1As per the RF Ministry of Finance, in 2009 at 26% rate insurance premiums revenues made 5.93% of GDP and in 2011 at 34% rate - 6.49% of GDP. In 2009 Individual Income Tax made 4.29% of GDP, in 2010 - 3.96%, and in 2011 - 3.67%. Aggregate IIT + insurance premiums revenues decreased from 10.22% of GDP down to 10.16%. It may be assumed, that the insurance premiums increase has led to increase in the latent salaries and mixed income.
Mitigation of labor market tension and recovery of demand for labor force in 2011 were the major outcomes of 2009-2010 anti-crisis program. The number of economically active population in 2011 was 75.7m persons, including 70.7m of gainfully employed and 5.0m of unemployed (using ILO methodology). The level of employment in 2011 made 63.8% exceeding the preceding year level by 1.1 p.p. in the context of the overall unemployment rates going down to 6.6% (by 0.9 p.p. versus 2010).
The total number of unemployed as of the end of 2011 exceeded the number of unemployed registered with government employment agencies 3.6 times in December 2011. 1,286,000 people were registered as unemployed with government employment agencies. The tension coefficient (the number of registered unemployed per 100 vacancies) in December 2011 was 175.9 (compare with 120.7 persons in January of the same year).
Table 6
Labor market fundamentals dynamics in 2009-2011
2009 2010 Quarters 2011 Quarters
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Number of employed in economy, m pers. 69.4 69.8 68.0 70.0 71.1 70.1 70.7 69.4 70.7 71.9 70.9
Number of unemployed, m pers. 6.3 5.6 6.6 5.6 5.2 5.2 5.0 5.6 5.0 4.8 4.7
Unemployment level, % to economically active population 8.4 7.5 8.8 7.4 6.8 6.9 6.6 7.5 6.6 6.2 6.3
Number of unemployed registered with government employment agencies, m pers. 2.1 2.2 2.2 2.0 1.7 1.5 1.4 1.6 1.5 1.3 1.2
Registered unemployment level, % to economically active population 2.8 2.5 3.0 2.7 2.2 2.1 1.9 2.2 2.0 1.7 1.6
Average monthly accrued nominal wages, Rb 18,785 21,090 19,485 20,809 21,031 23,045 23,532 21,354 23,154 23,352 26,202
% to the same period of the preceding year
Number of employed in the economy 97.8 100.6 99.6 101.0 101.0 100.9 101.3 102.1 101.0 101.1 101.1
Number of unemployed 131.1 89.1 96.3 86.7 87.2 85.2 89.1 87.5 88.1 91.8 91.6
Number of unemployed registered with government employment agencies 148.0 90.0 114.2 91.1 81.0 74.9 73.6 73.1 75.4 78.0 80.2
Average monthly accrued nominal wages, RB 108.5 112.4 110.5 112.4 111.6 112.7 112.2 111.2 112.5 112.2 113.1
Average monthly accrued real wages, RB 97.2 105.2 103.1 105.1 104.2 102.4 104.2 101.6 102.7 103.8 105.9*
* preliminary estimates.
Source: Federal Statistics Service.
During 2000-2011 deviations in the demand for labor force were based on shifting the majority of employed to the services sector. Employment decrease was registered in the industrial sector practically for all types of business. This decrease of employment was especially intensive in the manufacturing sector. During the last three years the situation became even more complicated due to 2008 crisis which caused abrupt decrease in number of jobs in trade and construction.
Comparing the dynamics of employment, wages and GDP one can see that outrunning growth of wages versus labor productivity resulted in increased load on the economy and impacted financial performance of companies.
In 2011 positive balanced financial result of companies' performance was obtained in the amount of Rb 7,252.7bn, which is 20.0% above the preceding year performance. However, despite certain positive trends, overall in the economy the pre-crisis profitability level was not achieved. Profitability of goods sold, production output and work done as of the end of 2011 made 11.0% and were 2.0 p.p. below 2008 level. Extraction of mineral resources continued to remain the most profitable business activity in 2011.
Table 7
Labor productivity in Russia, % to the preceding year
Code of business activity by All-Russian Classifier 2003 2004 2005 2006 2007 2008 2009 2010
Total for the economy 107.0 106.5 105.5 107.5 107.5 104.8 95.9 102.7
including:
Agriculture, hunting and forestry A 105.6 102.9 101.8 104.3 105.0 110.0 104.4 89.3
Fishery and fish-breeding B 102.1 104.3 96.5 101.6 103.2 95.4 106.2 101.4
Extraction of commercial minerals C 109.2 107.3 106.3 103.3 103.1 100.9 108.5 101.3
Processing and manufacturing D 108.8 109.8 106.0 108.5 108.4 102.6 95.9 109.0
Production and distribution of electric energy, gas and water E 103.7 100.7 103.7 101.9 97.5 102.1 96.3 98.9
Construction F 105.3 106.8 105.9 115.8 112.8 109.1 94.4 94.8
Wholesale and retail G 109.8 110.5 105.1 110.8 104.8 108.1 99.0 98.5
Hotels and restaurants H 100.3 103.1 108.5 109.2 108.0 109.2 86.7 93.7
Transport and communications I 107.5 108.7 102.1 110.7 107.5 106.4 95.5 103.9
Real estate transactions, leasing and provision of services K 102.5 101.3 112.4 106.2 117.1 107.5 95.3 94.2
For reference: real accrued wages 110.9 110.6 112.6 113.3 117.2 111.5 96.5 105.2
Source: Federal Statistics Service.
Favorable situation at the global market of hydrocarbons and mineral resources allowed for producing companies quick recovery. Their profits continued to grow across the entire 2010 (151.7% versus the preceding year). This trend was maintained in 2011, the financial performance of these companies made Rb 1981.0bn (148.7% versus 2010), the drivers of which were such as producers' prices growth by 29.1% and global prices growth by 39.3% (Brent) in the context of production growth by 1.3% in 2011 versus the preceding year. The total profit margin for mineral resources extraction sector made 35.7% having grown by 2.2 p.p. versus 2010. The cost-effectiveness of hydrocarbons production in 2011 made 32.1%, of other mineral resources extraction - 64.5%, which was the maximum level starting from 2005.
Financial performance of processing and manufacturing companies in 2011 made Rb 1904.1bn, thus exceeding 2010 level by 20.4%, and production output growth made 6.5%. Let us note that given unstable external demand in H2 2011, reduction of balanced financial result by 3.1% to the respective period of the preceding year was registered due to weaker dynamics of export-oriented enterprises operations. The balanced financial result of companies trading in foreign markets increased by 15.1% in 2011, and for companies oriented towards domestic markets - by 32.9%.
During the post-crisis period financial performance in oil refining were also gradually improving. As of the end of 2011, financial performance of oil refineries made Rb 735.0bn, which is 22.9% above the preceding year level. During 2011 oil refining output increased by 3.3%, and the producers' prices grew by 17.6% versus 2010. However, the refining margin in 2011 went down to 19.8% versus 23.1% in the preceding year due to the increase of production costs and lack of positive trends in upgrading the feedstock processing technology.
Chemical enterprises have been demonstrating improvement of financial metrics since 2010. In 2011 balanced financial result of such enterprises made Rb 274.4bn having increased by 65.1% versus the same period of the preceding year. Let us note that in chemical sector the
producers' prices growth in 2011 was 110.3% and production output growth - 105.2% versus the preceding year. High level of machines and equipment wear-and-tear, poor product mix and poor quality of domestic supplies versus the exported products had a very negative impact on chemical enterprises performance. Profitability in chemical sector in 2011 made 24.9% and exceeded the level of 2010 by 5.1 p.p. at the expense of intensive reduction of production costs due to reduction of the employed people number.
Table 8
Profitability of goods sold, production output, work done, services rendered and assets of companies in 2008-2011 by types of business, %
Profitability of goods/work/ services sold, Profitability of assets For reference
December
2011 versus 2010 2011 vs. December
1 2010
o 20 o 20 ,-H 20 20 o 20 o 20 20 1 20 Finan- Gross
cial per-formanc e rate Value Added physical indices Prices indices
Total 13.0 11.5 11.4 11.0 5.4 5.7 6.8 7.0 120.0 104.3
including: 10 8.4 10.3 10.3 4.8 3.1 3.4 4.2 144.5 116.1 94.9
Agriculture, hunting and forestry
Fishery and fish- 7.4 21.4 20.8 22.0 1.0 14.5 13.9 13.8 129.2 113.2
breeding
Extraction of commercial 25.4 29.2 35.5 35.7 10.5 11.3 14.5 18.4 148.7 101.7 126.7
minerals
Processing and manufac- 17.1 12.5 14.3 13.2 8.6 5.6 7.8 8.2 120.4 106.1 108.3
turing
Production and distribu- 4.9 7.6 7.2 6.7 2.3 3.6 5.3 1.4 33.3 100.4 105.1
tion of electric energy, gas and water
Construction 5.6 6.6 5.7 6.6 3.1 2.9 2.2 2.4 102.9 104.8 108.0
Wholesale and retail; 10.8 8.3 9.2 8.9 5.3 7.9 6.9 10.4 178.0 105.0
maintenance of motor
vehicles, bikes, house-
hold appliances and individual supplies
Transport and communi- 14.2 14.1 13.8 12.8 5.4 4.5 5.0 4.7 107.6 102.9 108.4
cations
Source: Federal Statistics Service.
In metal industry balanced financial result in 2011 made Rb 370.9bn meaning 8.1% decrease versus the preceding year. Starting from H2 2011 external demand for Russian metal-lurgic products was going down, which became the cause for deterioration of balanced financial result. Production profitability in metal industry decreased by 2.8 p.p. versus 2010 and made 15.9%. As of the end of 2011 the production output level in metal manufacturing and metal goods manufacturing grew only by 2.9% versus 12.4% growth in the preceding year, and producers' process growth went down from 122.4% to 104.7%.
In timber industry balanced financial result decreased by 12.3% versus 2010. In the environment of production rates slowing down in wood processing and in pulp-and-paper production the profitability level was maintained at the expense of increased producer's prices.
Currently the pre-crisis levels of production capacity utilization have been achieved in processing sector. Hitting the intensive growth limit at the expense of increasing the capacity
utilization rates is accompanied by intensive import of foreign goods. Combination of these two factors leads to volatile dynamics of processing industries output.
Companies producing goods non-marketable in foreign markets are in the majority of cases inefficient. It is worth noting that despite financial performance improvement in business activities targeted at meeting the internal investment demand, the situation in these fields remains not quite favorable.
In construction materials production the profitability rate in 2011 was 11.8%, which is a 3.9 p.p. increase versus the preceding year. However, this indicator is still significantly lower than the pre-crisis level (18.9% in Q1 2008). Last year the profitability growth was driven by gradual growth of demand and by production output growth by 9.3% versus 2010, on one hand, and by facilitated growth of prices for products and services in this sector - by 113.5% versus 103.6% a year earlier.
In the mechanic engineering sector the balanced financial result of 2011 exceeded the level of the preceding year 1.86 times, but significant differentiation by types of business may be observed here. Given a pretty much restrained pricing policy, indicative for this sector, the dynamics of production yield and the level of production costs had the dominating impact on the profitability level. Also, performance of mechanical engineering companies was significantly impacted by the outrunning growth of production costs in this sector versus the economy in general and processing enterprises in particular at the expense of labor costs growth. The profitability of machines and equipment manufacturing in 2011 made 7.0% versus 7.3% in the preceding year, and the profitability of electric equipment, electronic and optical equipment manufacturing - 10.0% versus 10.1% respectively.
In 2010-2011 significant growth was observed in transportation vehicles and equipment manufacturing, which was related with implementation of car-manufacturing anti-crisis support programs. In 2011 transportation vehicles and equipment manufacturing maintained its leading position with regard to production output growth rates versus other areas of mechanical engineering sector. As of the end of 2011 the balanced financial result in transportation vehicles and equipment manufacturing made Rb 86.4bn, and sales profitability exceeded the pre-crisis level making 7.5%, which was 2.7 p.p. versus the preceding year.
In consumer goods manufacturing output growth rates slowdown was accompanied by facilitated dynamics of manufacturers' prices and gradual slowdown of wages growth rates. Profitability of textile and clothing manufacturing in 2011 grew up to 7.1% versus 5.4% in the preceding year, and in leather and leather garments manufacturing profitability went down to 7.5% versus 8.0%. In food products manufacturing profitability decreased by 4.1 p.p. versus 2010 and made 8.1%. Slowdown of foods products manufacturing growth rates (down to 101.0%) in 2011 with simultaneous growth of the manufacturers' prices by 1.8% became one of the key factors here determining poorer performance. Financial result in food products manufacturing in 2011 made Rb 147.0bn, which was 25.8% lower the result of 2010.
In general, the analysis of production dynamics and financial results allows for making a conclusion about gradual post-crisis recovery of the economy and overcoming of 2008-2009 phenomena. However, financial results were improving versus the preceding year mainly due to pricing factors. Given a slowdown in the economy growth rates, the production costs did not go down, and the efficiency of labor and capital utilization went down. Surely, the increase in labor costs and insurance premiums on salaries (from 26% up to 34% in 2011) impacted the financial performance of businesses and companies. In 2011 the financial result
growth rate under the cumulative impact of all the above listed factors made 120.0% versus 142.8% in 2010, and profitability went down by 0.4 p.p. versus the preceding year.
4.1.4. Production dynamics and structure by types of economic activity
Overcoming the negative consequences of 2008-2009 crisis and hitting the growth trajectory is determined by specific features of operations in certain sectors of the national economy and certain types of business. In general, the structure of restored economic growth of 2009-2011 period mirrors the post-crisis development pattern of 1998-2000, when the growth emerged in food products manufacturing and in mineral resources extraction, as well as other processing enterprises associated with processing hydrocarbons and other mineral resources. Then this growth rolled-out to sectors of industrial production. Speaking of the basic sectors, the biggest decrease of production was registered in H1 2009, when the decline made 13.9% to the level of the respective period of the preceding year. Starting from H2 2009 due to recovery of external demand and due to government anti-crisis measures the situation began to improve and as of the end of the year the decline in industrial production was making only 9% of the preceding year level. Recovery of demand for energy in domestic and foreign markets resulted in mineral resources extraction growth in Q4 2009, which, in its turn, contributed to further development of processing manufacturing sectors. In H1 2010 the industrial output growth rate was 110.2%, including 105.8% for extraction and 141.3% for processing.
Starting from Q3 2010 some slowdown of the economic growth could be observed, caused by decline of export growth rate. In Q3 2010 industrial production index made 106.3%. However, in Q4 while rather high rates of investment growth and consumer market development were preserved, total industrial growth rate was 6.5%, including 9.9% in processing.
During 2011 the growth rates in industry slowed down, which was to a great extent determined by high base of the previous year. In 2011 industrial production index made 104.7%, including 101.9%, for mineral resources extraction, 106.5% in processing and 100.1% in producing and distributing electric energy, gas and water. In 2011 situation in industrial sector was unique - contrary to the entire period of 2000th when the growth was supported mainly by mineral resources extraction, last year the growth in industrial production took place mainly at the expense of processing sectors output growth.
As of the end of 2011 processing industries achieved the level of 2008, but the growth rates differ significantly by certain types of business. The recovery growth of 2010-2011 identified structural misbalances of Russian industrial sector. On one hand, the sectors which are of strategic priority for Russian economy - i.e., mineral resources extraction; food products, leather and footwear manufacturing; coke and petroleum products production; chemical production; rubber and plastic goods manufacturing; transportation vehicles and equipment manufacturing - proved their sustainability and exceeded the pre-crisis output level in 2011. On the other hand, some serious lag still exists in the recovery dynamics of mechanical engineering, electrical equipment manufacturing, metallurgy, timber production and construction materials manufacturing, where 2008 level has not been achieved yet.
Slow recovery rates in mechanical engineering constituted the dominating factor negatively impacting the level of business activity in adjacent sectors of manufacturing of structural materials and other producers' goods.
mineral resources extraction i i processing electric energy, gas and water production -total industrial output
Fig. 7. Industrial growth rates by types of business and sectors in 2008-2011, % to similar period of the preceding year
ctrical equipment, :tronics and optic; nufacturing; -11.7
mechanical engin
other nc produ
timber wooden good
metallurgy; -0.4
n-metal goods :tion; -9.0
pulp an manufactur
processign and s manufacturing; 4.7
textile and clc manufacturing
I other manufac
transp equipmer
d paper ng; -5.7
thing -3.2 L
>rtation vehicles a t manufacturing;
rubber and manufac
Processing; 0,0 0,0 5,0
:turing; 1.1
plastic goods uring; 20.7
and petroleum pro production; 7.4
food products manufacturing; 5
chemical product ducts
leather, le footwear mani
ther goods and ifacturing; 26.3
ele
m
ering; -12.0
9
15,0
5,0
10,0
15,0
30,0
Source: Federal Statistics Service.
Fig. 8. Industrial growth rates by types of business in 2011, % to 2008 level
We can discuss the specifics of post-crisis recovery in mechanical engineering only in connection with transportation vehicles manufacturing. This is determined by a big-scale government support of domestic passenger cars manufacturing and growth of foreign brands assembly lines output.
Situation with strategically important high-tech and mid-tech sectors (electrical equipment, electronics and optics manufacturing, as well as mechanical engineering) constituted one of the most serious problems. These sectors turned out to be the most vulnerable in the conditions of crisis, because the accumulated issues of poor compatibility of various types of engi-
neering products versus imported foreign analogues judging by "value-for-money", as well as due to lack of capacity for manufacturing state-of-the-art machinery. All of those factors significantly impeded the recovery of domestic mechanical engineering. At the same time abrupt import shrinkage took place in the crisis conditions, while as over the course of the last several years it was import which significantly impacted the pattern of mechanical engineering development and machines market.
Overestimated market positions of domestic construction and investment sector during the period of intensive growth in 2006-2008, when no adequate measures were taken to improve efficiency of capital investment, resulted in unprecedented decline in construction and structural materials manufacturing, as well as in adjacent mechanical engineering and metallurgic enterprises.
In 2011 index of machines and equipment production versus 2010 made 109.5%. Such growth is associated with implementation of measures supporting domestic manufacturers. Growth was observed for all sub-glasses of this group of goods. Utilizing the resources of OJSC Rosselkhozbank and OJSC Rosagroleasing for incentivizing the demand for Russian machines and equipment for agriculture and timber husbandry, as well as increase of capital investment in agriculture resulted in accelerated production of machinery for these businesses: 37.6% versus 2010. Implementation of long-term projects in technical modernization of metallurgic, mining, oil-and-gas enterprises, high degree of depreciation and obsolescence of equipment, as well as growth of mineral resources production in 2011 contributed to 23.0% growth of machines and equipment production (versus 2010). Consistent implementation of investment programs for technology modernization of companies provided for increased effective demand for process equipment, thus determining the growth of machines production in 2011 by 14.6%, and for mechanical equipment - by 6.9% versus 2010. Incentivizing customer demand utilizing loan mechanisms went along with increase in household appliances production by 8.8% versus 2010.
In 2011 electrical equipment, electronics and optics manufacturing grew by 5.1% versus 2010. It was not sufficient to compensate for the downfall of the preceding two years. In 2011 transportation vehicles and equipment production index was 124.6% versus 2010. That was mainly determined by financial and economic stabilization of key manufacturers and customers transportation vehicles and equipment after 2008-2009 crisis.
The railway cargo turnover growth during 2011 made 5.7% versus 2010 and provided for growth of production of railway machinery used for cargoes transportation. At the same time with passenger turnover at 2011 level manufacturing of passenger railcars decreased by 2.6% during the year.
In 2011 production of passenger cars grew by 44.5% versus 2010, and trucks production grew by 33.4%. Implementation of programs to incentivize the demand for automobiles (including old cars utilization and concessional car loans programs) was a significant driver of passenger cars production growth. For trucks production similar role was played by development of mechanisms for domestic vehicles sales via leasing and loans schemes. Implementation of such programs accounted for 11.7% and 10% of total sales at passenger cars and light commercial vehicles markets respectively. However, in 2011 the share of imported passenger cars and truck in 2011 grew even more versus 2010 (51.9%, and 87.5% respectively).
The lag in recovery of production is concentrated in metallurgy, timber industry and production of construction materials. In 2011 metals and metal ware production index made 102.9% versus the preceding year including for metallurgy - 105.2%, for metal ware produc-
tion - 98.2%. Non-ferrous metals production index in 2011 made 108.7% versus 2010. The growth of production yields in this sector is maintained due to growing final process stages output (118.9% versus 2010), utilized primarily in the domestic market.
In mid-2011 the overall situation in the non-ferrous metals markets got worse leading to suspension of export supplies, deterioration of financial and economic indicators of companies and enterprises' performance slide down. Despite all of that, some rehabilitation of investment activities was observed in non-ferrous metallurgy compared to 2010 - specifically in non-ferrous ores production and concentration.
Production index in timber processing and wooden goods manufacturing in 2011 made 104.0% versus 2010; in pulp-and-paper manufacturing, publishing and printing - 101.8%; for timber harvesting - 103.1%. Business activity in this sector was supported by the state. Thus, the following subsidies were granted from the federal budget in 2011: partial compensation of costs incurred by Russian exporters of industrial products when paying interest on loans received in Russian credit institutions; subsidizing interest rates on loans received by timber industry enterprises from Russian credit organizations in 2008-2009 to set-up inter-seasonal stock of timber, feedstock and fuel; subsidizing interest rates on loans which Russian companies operating in agricultural and tractor vehicles manufacturing and in timber industry received from Russian credit institutions and from Vnesheconombank in 2008-2011 for technical re-equipment for 5 years.
Construction materials production index in 2011 made 109.3% versus the preceding year. However, despite its high dynamics during the last two years, it remained 9% below the pre-crisis level of 2008. Simultaneously with expansion of scope of work in construction and growth of demand for construction materials in 2011 production growth for practically all types of goods of this sector was observed. Given the outrunning growth rates of construction materials domestic market capacity, the demand was satisfied at the expense of both rerouting cement supplies from external market to domestic market and import volumes growth.
The key macroeconomic trends analysis provides for the following conclusion: in 2011 Russian economy in general was able to recover from the crisis. In the environment of integration between Russian and global economy the 2009-2011 recovery growth illustrates the preserved dependency of growth rates on the global situation with commodities prices and demand for them in foreign markets. Respectively, quick recovery of production growth rates in export-oriented sector of mineral resources extraction provided incentives for development of domestic manufacturing sectors. However, the delayed response of domestic manufacturers to the domestic demand changes resulted in outrunning growth of import versus the domestic manufacturing recovery rates. The situation grew even more complicated due slow recovery of investment and financial crediting sectors. The inertial impact of these factors determines the system of growth limitations in the short-term perspective.
4.2. Russian industry in 2011
The section was prepared using data of monthly surveys conducted by the Gaidar Institute for Economic Policy (IEP) among managers of industrial enterprises since September 1992. The surveys are based on the European harmonized methodology and encompass the entire territory of the Russian Federation. The size of the panel is about 1100 enterprises that employ over 15% of the total number of employed in industry. The panel is biased towards large enterprises in each of the selected sub-industries. The rate of response to questionnaires ranges from 65% to 70%.
The industrial survey questionnaire contains quite a small number of questions (not more than 15-20). They are of qualitative rather than quantitative nature. The simple formulation of questions and answers allows the respondents to fill in the forms quickly and without engaging other staff members or consulting documentation. It's essential that the respondent at each enterprise should be an executive of the highest level possible who is fully aware of the situation at the enterprise and is directly involved in its management.
When analyzing the results of industrial surveys a specific derivative indicator is used which is termed "balance". The balance is calculated as the difference between the percentage of respondents who answered "will grow" (or "above normal") and the percentage of respondents who answered "will decrease" (or "below normal"). The resulting difference allows to present the distribution of answers to each question by one figure with "+" or "-" sign.
The balance is interpreted as the first derivative or the rate of the process. If the balance of responses to the question about expected change in prices has the "+" sign, it means that in the near future average prices will grow (e.g. the prevailing number of enterprises reported their intention to raise prices). The increase of balance from +10% to +17% over a month implies that average prices in industry will grow at a higher rate as the prevalence of enterprises anticipating their growth became more convincing. A negative balance is the sign of future reduction of average prices (more enterprises project to lower their prices). The changing of balance from -5% to -12% is interpreted as greater intensity of price decline.
4.2.1. Is Russian industry recovering from the crisis?
The estimate of general trends in the Russian industry both in the crisis situation and at the stage of recovery from it does not seem to be an easy task. Low immediacy and insufficient frequency of the official data release became evident at the end of 2008 - the beginning of 2009.
In 2011 users of official industrial statistics faced one more problem: the insignificance of monthly changes in output complicates interpretation of this data while possible (or at least expected) second wave of the crisis reinforces demand for anticipatory indicators. In this situation the Business Surveys Department of IEP resumed regular calculation of IEP's Industrial Optimism Index (IEP IOI)1.
In the situation of economic crisis this index helps to tackle several important tasks. First, it provides an opportunity for an actually real-time (as compared with the frequency and immediacy of official statistics) insight into the performance of domestic industry. Second, enterprises participating in the IEP surveys are "the middle class" of Russian industry. They are located all over the country's territory and operate basically in processing industries. Authorities and experts not always get timely and sufficient information on the performance of such
1 The index is calculated as the simple average of balances (differences in responses) for four questions from the IEP questionnaire:
1) actual change of demand, balance = % growth - % decrease;
2) estimate of demand, balance = % above normal + % normal - % below normal;
3) estimate of finished goods stocks, balance = % above normal - % below normal;
4) output projections, balance = % growth - % decrease.
Balances of responses to the 1st and the 4th questions are adjusted for the seasonal and calendar factors. The index can range from -100 to +100. A positive value of the index implies the prevalence of positive estimates. A negative value of the index means that negative estimates prevail. Lowering of the index value is the sign of deteriorating situation while its growth - the sign of ameliorating situation.
enterprises. Third, the index is calculated on the basis of indicators having no analogues in the system of state statistics but describing the key features of real situation in the Russian industry (demand, stocks, output projections). The 19-year experience of conducting such surveys (the number of which exceeded 230) and analyzing their results proves that they provide a very precise and comprehensive outline of enterprises' performance. Long-standing, personified and non-formal relationships with respondents (90% of which are chief executive officers of enterprises) facilitate gathering of the most objective information on the performance of Russian industry. As a result the IEP's Industrial Optimism Index illustrates the true state of affairs therein.
The post-crisis maximum of the indicator was achieved in October 2010, followed by 4 months of unsuccessful attempts to continue recovery from the recession. But by March 2011 the optimistic spirit in industry faded away. In April the indicator of optimism lost two more points. In May no principal changes took place as compared with April, with the index remaining at the minimum level over the previous 11 months. So, a relatively steady (with few exceptions) overcoming of the late 2008 crisis has evidently come to an end (see Fig. 9).
Fig. 9. IEP's Industrial Optimism Index, 2005-2012
The major contributor to the loss of industrial optimism in 2011 was the demand trend. From December 2010 the growth rates of sales were down 16 points. An evident growth of demand was replaced by an equally evident decline. The indicators for May were the worst since autumn 2009 (!). In the following months enterprises hoped to reverse this negative trend. At least, those were their projections.
According to opinion of enterprises' executives, in June the situation clearly improved. The basic driver of the Index growth was the dynamics of demand. In June it experienced positive changes that were the most sizable over the previous 24 months. The growth rates of sales (when seasonally adjusted) increased and changed the sign: the decline of demand in May was superseded by the growth of sales in June. The latter pushed up production projections of enterprises. In June they improved by 5 more points and peaked (after seasonal adjustment) to a 3-year maximum. The stocks of finished goods made a very modest positive contribution to the growth of enterprises' optimism. The estimate of (satisfaction with) de-
mand had no impact on the Index. This indicator demonstrates astonishing stability ranging from 56% to 59%. Most enterprises seem to get accustomed to the situation of sluggish recovery from the crisis and are reluctant to respond to swings of sales.
However, in a month it became clear that the surge of optimism in June was occasional and the spirits in industry returned to their worst patterns in the past 12 months. The sharp drop of the Index (having no analogues in the previous 13 months) was conditioned by the negative dynamics of all its components.
The greatest changes occurred in the level of satisfaction with the sales volumes. Within a month this indicator lost 6 points and plunged down to a 6-month minimum. Such a dramatic revision of demand estimates was due to the evident slow-down of demand growth. When adjusted for the seasonal factor, this indicator demonstrated a complete halting of growth as regards sales of industrial produce in July. The divergence of actual demand trends in July from the June forecasts pushed the estimates of demand even lower. Enterprises anticipated continuing growth of sales in July. The latter circumstance impelled them to revise their estimates of stocks of finished goods downwards. After a long period of stability and proximity to zero, in July this indicator fell down to a 15-month minimum (see Fig. 10).
60
-80 4-H—H—I—i—H—I— li —i—H—I—i—I—i—H—H—H—I—H—i—I—i—H—I—i 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12
Fig. 10. Components of Industrial Optimism Index, 2005-2012
The discontinued growth of sales and the worse estimates of finished goods stocks had a negative effect on output projections. After a 3-month rebound enterprises decided to notably cut production growth rates in the nearest months. Meantime, forecasts of demand growth remained optimistic, i.e. industry planned (would have liked to) meet the demand by utilizing stocks of finished goods. Indeed, in the following months enterprises anticipated further and more intense decrease of stocks.
In August the situation in Russian industry on the whole did not deteriorate. The positive trends in output projections and satisfaction with sales were leveled off by weaker demand and worsening estimates of finished goods stocks.
The September estimates of Russian industry's performance showed the lowering of enterprises' optimism. On the whole the IEP Index did not demonstrate a pre-crisis (and already expected) drop similar to the one registered 3 years before. As compared with the 2011 maximum the decrease was only 5.3 points. But the dynamics of Index components and other indicators, monitored by IEP experts on a monthly basis, then caused concern.
First, the demand for industrial goods was stagnating for the third month in turn. However, till August industry went on hoping for its revitalization. In September these illusions were superseded by a drastic revision of forecasts: within a month the balance of expectations dropped from +13 to -5 points as judged from initial data. The September demand forecasts suggested a very sizable negative adjustment of the actual sales dynamics in the last months of 2011. Second, after a period of relative stability, the satisfaction with demand level instantly fell by 10 points. Industry could no longer bear slack demand. Although in September it preserved the same output growth rates but - third, - production projections lost 12 points within a month and 37 points as compared with the year's maximum. When adjusted for seasonality, the indicator displayed reduction to a 5-month minimum. Fourth, estimates of finished goods stocks showed their apparent surplus which could be due to both the stagnant demand and the slowing down of unit costs' growth. Fifth, in order to revive demand enterprises once again refrained from raising prices. Russian industry does not often resort to price tools: the halting of growth of ex-factory prices and their further reduction was recorded by surveys before the 1998 default, prior to and on the exit from the 2008 crisis.
At first glance, the value of Index calculated in October 2011 did not evidence the strengthening of negative trends in the performance of Russian industry. It improved by 4 points and reached the average level for that year.
But detailed analysis revealed that the Index grew owing to two subjective indicators: the estimate of finished goods stocks and the satisfaction with demand. The first of them instantly improved by 12 points and as a result quite a sizable surplus of stocks typical for the previous months was superseded by their shortage. The latter fact in the situation of apparent weakening of demand and faint hopes for resumption of sales growth rather evidenced that industry "cleared" its stocks of finished goods and did not plan to replenish them in the near future. Therefore, the shortage of stocks in the situation of sluggish (or decreasing) demand was rather a sign of the firm conviction in the development under negative scenario than of the industry's inability to satisfy the effective demand.
The satisfaction with sales in October also improved. This indicator instantly grew by 10 points and achieved a post-crisis maximum. It appears that even modest demand seemed normal for most (65%) enterprises in the situation of nervousness on the world markets and uncertainty about even the nearest future. The demand for industrial output continued to decrease. The rate of change (after seasonal adjustment) reached a 20-month minimum, i.e. no such an intensive drop of sales had been observed since February 2010. The output projections plunged to a 14-month minimum.
In November the situation in industry deteriorated as compared with October and returned back to the September level when minimal since June 2010 value of the indicator was recorded.
The principal cause of the November lowering of Index was the intensifying drop of demand for industrial products. As a result, the satisfaction with sales volume fell. One more sequence of the shrinking demand was the worsening balance of estimates of finished goods stocks even despite reduction of their physical volumes. To the opinion of enterprises, revi-
talization of industry in these conditions and, moreover, on the eve of nation-wide New Year holidays was unlikely. In November their initial production projections plummeted to the minus area down to the value that had never been registered either in the pre-crisis years or in the current year. However, the adjustment for seasonality flattened this nose-dive up to the level of the previous two months.
The Index for December showed that situation at enterprises continued to deteriorate. The industrial performance indicators by the end of 2011 were apparently worse than in the previous year. In the last months of the year the most sizable changes for the worse were observed in estimates of sales. Despite positive dynamics of demand, this indicator lost 11 points after its October surge. However, the positivity of demand trend was relative. In December the growth rates of sales demonstrated just the slowing down of decline, the intensity of which in the two previous months was record for 2010-2011. The aggravation of the European debt crisis became the turning point for output projections. In September they fell by 9 points and failed to restore till the end of the year. It appeared that managers of enterprises adequately assessed the prospects for Russian industry.
At the beginning of 2012 the Industrial Optimism Index fell to the minimum level recorded in the last 18 months. And even higher optimism of projections failed to make up for the worsening of actual dynamics and its estimates. The situation in Russian industry has evidently deteriorated.
Summing up, one can state that according to IEP's IOI in 2011 the recovery of Russian industry from the crisis has apparently slowed down. The rally registered in June turned out to be incidental and failed to reverse the general trend of the past year when optimism sooner fell than grew. The results of the recent months show that the industry is plunging into the second wave of the crisis rather than finding a way out of it.
Following the aggravation of European problems in autumn and the growing uncertainty on the world markets, the Index of Industrial Projections which is based on three projections of enterprises (demand, output and employment) and in all other respects is similar to the Industrial Optimism Index, demonstrated a sharp decline of enterprises' expectations and their stabilization at the level which was minimal since August 2010 (see Fig. 11). The initial plans and projections of enterprises had been decreasing with different intensity since August 2011.
However, in January 2012 surveys recorded a cardinal improvement of projections for all the basic indicators: those of demand, output, employment and investments. As a result the Index of Industrial Projections was up 5 points. Most probably, there are no economic grounds for such a surge in the situation of aggravating crisis of Eurozone and the growing pessimism of experts' expectations. But it can have a political explanation. It seems that home politics have intervened in home economy: the national peculiarities of counting votes at the elections to the State Duma, the society's response to them and convulsive attempts of authorities to extinguish discontent with a view to remain in power. Which of the taken away from the society and the economy within the previous 10 years will be given back, who will attend to this and which of the pre-election promises will be materialized - these seem to be the factors concerned by Russian enterprises when making projections for recovery from the protracted crisis.
Fig. 11. Index of Industrial Projections, 2005-2012
So, the second wave of the crisis, or its new stage, or the continuation of the recent crisis is quite possible and is just a matter of time. Other issues in question are certainly the scale, deepness and other specifics of future developments as compared with the ones that took place in Russian industry at the end of 2008. With regard to this in September-October 2011 managers of enterprises participating in IEP's surveys were asked the question, "What is your enterprise going to do (what can happen) in case of the second wave of the crisis and the lowering of demand for the produced output?", and the following 13 variants of response were suggested:
1) lowering of ex-factory PRICES;
2) significant (15% and more) reduction of OUTPUT;
3) lowering of COSTS;
4) increase of DELAYED payments by buyers;
5) increase of NON-MONEy settlements with buyers;
6) lowering of WAGES, part-time working week;
7) DISMISSAL of employees;
8) halting of enterprise OPERATION;
9) complete or partial changing of OWNERS;
10) real risk of BANCRUPTSY;
11) forced LEAVES of employees without pay;
12) more active MARKETING, searching for new buyers and markets;
13) NONE of the above mentioned.
First time we included (or, to be more exact, managed to include) this question in the questionnaire in December 2008, after the IEP's surveys were the first to register the actual rather than expected beginning of the crisis (the record of November 18, 2008). Later the questions about the actual business responses and expectations were asked four more times, the last in March 2010. As a result we obtained a unique by its immediacy and frequency array of data on expectations, plans and responses of enterprises to the crisis that began in Russian industry
in November 2008. The question posed in 2011 can help both Russian enterprises and Russian ministers to get prepared for the possible new wave of the crisis.
Lowering of wages, part-time working week Significant reduction of output Lowering of costs More active marketing, searching for new markets Dismissal of employees Leaves of employees without pay Delay of payments by buyers Lowering of ex-factory prices Halting of enterprise operation Risk of bankruptcy Increase of non-money settlements Complete or partial changing of owners None of the above mentioned
] 29
H 24
H 18
H 12
H 9
□ 4 =13
□ '69
□ 54
□ 46
H39
137
]31
0
10
20
30
40
50
60
70
Fig. 12. Possible responses of enterprises to the second wave of the crisis, %
In case of the second wave of the crisis (let's term so possible negative developments in the nearest future) Russian industrial enterprises first of all plan to cut wages and switch to a part-time working week (see Fig. 12). 69% of enterprises will take such actions. These anticrisis measures hold the first place by their popularity with enterprises of all sizes and among respondents of different ranks (from the director to an average executive). The latter fact illustrates a sort of "class" consensus that formed in the industry during the first three years of the crisis. But the possibility of such response greatly differs by branches. While in ferrous metallurgy, machine-building and construction materials industry over 80% of enterprises are ready to take such measures (and except for ferrous metallurgy they are the most widely spread), in timber processing they are possible at 40% of enterprises, in food industry - at 28%, in electric power industry - at 14% and not at a single enterprise in the non-ferrous metallurgy.
One can suggest that the most likely reason why Russian enterprises name the lowering of wages and switching to a part-time working week first in the list of measures to be taken in response to the crisis is the normalization of situation with wages in the Russian industry after the acute (first?) phase of the current crisis was overcome. This indicator was included in the quarterly questionnaire in 2007 and now permits to trace the assessment of employees' wages by executives. According to estimates of enterprise managers (and these are the ones who take decisions on revision of wages), at the end of 2011 wages reached "normal" levels at 64% of enterprises. On the eve of 2008 crisis only 53% of respondents could provide "normal" wages to their workers (see Fig. 13). So, one can assume that in autumn 20l1 industrial enterprises had much better opportunities for wage maneuver in case of the crisis escalation as compared with the end of 2008.
Fig. 13. Assessment of wages paid to workers and specialists by enterprise managers
To check this hypothesis, let's compare the probability of wage responses to the second wave of the crisis by enterprises that pay "normal" wages to their workers and by the ones that assess the paid wages as being "below normal" (see Fig.14). It turned out that the "normal" level of wages is not conducive to the lowering of wages and enforcement of a part-time working week in case of the second wave of the crisis. It's rather vice versa.
But it seems that the second wave of the crisis can "finish off" enterprises which have failed to restore after the peak of the first wave and still pay insufficient wages to their workers. Such enterprises 1) four times more often expect that their operation will be halted; 2) two times more often are ready to send their workers on unpaid leaves or just simply dismiss them; 3) will more often be forced to reduce output thus further aggravating the situation. Meantime, "delayed payments by buyers" are less acceptable for enterprises with insufficient wages; they are in desperate need of pay for their produce, even in the form of "non-money settlements" which they are twice more ready to accept as compared with enterprises that are able to provide "normal" wages to their workers. The latter will assume more active (aggressive) position in case of the new escalation of the crisis: they are 1.5 times more disposed to intensify marketing and search for new markets.
In December 2008 the lowering of wages and switching to a part-time working week ranked third (59% probability) being surpassed by such classical anti-crisis measures as the lowering of costs and searching for new markets and buyers. As the crisis was overcome, its expected application fell from 43% in the II quarter of 2009 to 28% in the I quarter of 2010. But the actual extent of its use was greater and ranged from 64% to 53%.
Only 37% of enterprises in industry at large are ready to apply the most severe measures -dismissals - in relation to their employees. The probability of such actions does not depend on the size of enterprise but apparently varies by branches (see Fig.15). While in non-ferrous metallurgy, timber processing and food industry dismissals are possible at approximately 20% of enterprises, in ferrous metallurgy, machine-building and consumer goods industry this share is as high as almost one half of enterprises. There is also less consent about this extreme
measure between executives of different ranks: top-managers are ready to reduce personnel in 40% of cases while average executives - twice more rarely.
Consumer goods industry 149
- 1 1 1 1 1 1 1 1
Ferrous mettalurgy 147
- 1 1 1 1 1 1 1 1
Machine-building 147
- 1 1 1 1 i i i i
Construction materials industry 36
- 1 1 i i
Chemical industry 31
1 1 i i
Food industry | 23 i i
1 1 1 1 i i i i
Non-ferrous metallurgy 118 i i
- I I I I i i i i
Timber processing 118 i i
0 10 20 30 40 50 60
Fig. 15. Probability of dismissals in case of the second wave of the crisis by branches, %
In 2008 the probability of dismissals was estimated by enterprises at 47% and ranged 7th among the after-effects of the crisis. As the situation developed (2009-2010), the lay-off projections were initially registered at 30% of enterprises and then fell down to 24%. Actually
they were implemented at 38% of enterprises in the II quarter of 2009, with further reduction of this share down to 30% in the I quarter of 2010. The higher initial estimate of lay-offs' probability as compared with later projections and even the actual implementation is most likely due to the surprisingly active (sometimes even too active) efforts of the government to halt dismissals as compared with the respective efforts (or, to be exact, their total absence) during the previous crisis of 1998. In 2011 enterprises already "adjusted" their projections taking into account the experience of the first wave of the crisis and, probably, national peculiarities of the election campaign. Lay-off projections are also constrained by chronic shortage of skilled labour in industry even in the situation of sluggish and/or fading industrial growth in 2010-2011.
The sending of employees on unpaid leaves is the last in the list of HR policy measures that enterprises are ready to take. The probability of such actions in industry at large is 31%. Their application rate won't depend on the size of enterprises but will differ greatly by branches. Similar to dismissals, their most active use is probable in ferrous metallurgy (56% of enterprises), consumer goods industry (39%) and machine-building (37%). As compared with other HR policy tools, their probability is high in non-ferrous metallurgy (33%). Such practices will be less spread in food industry (15%) and timber processing (17%).
In 2011 "significant (15% and more) reduction of output" held the second place among possible anti-crisis actions of enterprises. 54% of producers in industry at large were ready to take this step. It was named second by enterprises of all sizes and by only two branches (machine-building and construction materials industry). At the same time, in ferrous metallurgy the reduction of output will be the most popular response to the crisis as claimed by 96% of factories in this sector (see Fig. 16). No other anti-crisis measure has such a high rating neither in industry at large nor in any of the surveyed categories of enterprises. Meantime, in food industry and non-ferrous metallurgy the probability of output reductions in case of the second wave of the crisis is the lowest.
Ferrous metallurgy Construction materials industry Machine-building Consumer goods industry Chemical industry Timber processing Food industry Non-ferrous metallurgy
113
□ 11
133
143
20
40
155
196
173
167
60
80
100
120
0
Fig. 16. Probability of output reductions in case of the second wave of the crisis
by branches, %
Although at the end of 2008 the reduction of output ranked only 4th in the list with 56% probability, the realities of the first quarters of the crisis turned out to be more tough. At the beginning of 2009 75% of enterprises reported the actual reduction of output. By the I quarter
of 2010 this figure fell down to only 62%. For this indicator the gap between enterprise projections and the severe reality was the biggest. In the II quarter of 2009 the reduction of output was projected by only 40% of enterprises, and by the end of monitoring their share fell down to 24%. But in fact no such (or even close) results were obtained within that period.
At the onset of the crisis (i.e. in December 2008) Russian industrial enterprises gave preference to the two classical anti-crisis measures: the lowering of costs (77% probability) and more active marketing and search for new buyers and markets (78%). The almost three-yearlong crisis experience of 2009-2011 made them revise their attitude towards these measures. In 2011 only 46% of producers were ready to cut costs and only 39% of enterprises believed in the efficiency of efforts to intensify marketing and search for new markets and buyers. The probability of (and opportunity for) lowering unit costs in case of the second wave of the crisis is the highest in metallurgy (53% in ferrous metallurgy and 62% in non-ferrous metallurgy). Similar projections are made by enterprises of chemical (53%) and food (48%) industries. The reserves for cutting costs in case of the new phase of the crisis are the smallest in machine-building (43%) and construction materials industry (36%). The most optimistic about the effects of marketing and search for new buyers and markets are enterprises of food industry (60%) and ferrous metallurgy (53%) while enterprises of non-ferrous metallurgy have almost lost belief in these tools - only 9% of them will attempt to take respective steps.
The analysis of possible responses of enterprises to the second wave of the crisis revealed that industry at large is ready to face it with due regard to its own experience and actions of authorities during the first wave thereof. Enterprises will respond to the inevitable reduction of output by the lowering of costs and dismissal of employees. The switching to non-money forms of settlement for the produce with a view to preserve the staff and continue operation is very unlikely as proved by the first wave of the crisis in 2008-2009. Therefore, one should not expect the growth of barter transactions (so much feared by observers at the onset of the crisis). But the second wave of the crisis can lead to the liquidation of inefficient enterprises that have survived owing to the state support and resources accumulated in 2003-2008. Three years of sluggish crisis have lowered the safety margin of our industry, and the feebleness of hopes for the restoration of former economic growth rates appears to undermine the optimism ofowners and managers in fighting for survival oftheir enterprises.
4.2.2. Dynamics of demand and output
At the beginning of the year the volumes of sales traditionally demonstrated negative dynamics according to the initial (prior to adjustment for seasonality) data. The growth rates (the balance of change) lost 21 points and fell deep below zero, which, however, was the pattern observed in all the non-crisis years and became habitual for enterprises. Adjustment for the seasonal and calendar factors leveled off the situation: sales of industrial products continued growing. On the contrary, demand projections in January seriously improved. Within a month the balance of initial responses increased by 32 points which is also a normal change for this indicator. Adjustment for seasonality flattened out the January surge of optimism and as a result a slight worsening of projections compared with December expectations was registered.
The dynamics of output in the early 2011 was also quite typical. The initial data indicated the reverse from December growth to January decline with the balance decreasing by 45 points at a time. However, adjustment for seasonality flattened out this sharp swing in output dynamics: just a slowing down of growth took place in January. Production projections
also underwent expectable changes in January: the pessimism of November-December was superseded by high optimism traditional for the start of a year. When adjusted for seasonality, no principal changes were traced in enterprises' projections: as before, industry expected quite acceptable (by crisis standards) rates of production growth in February-March.
The February data demonstrated only the halting of decrease in demand but not its growth. Adjustment for seasonality also revealed no growth of sales in February. Demand projections (initial) in February improved by 10 more points and reached a maximum for the pre-crisis and crisis period. No similar prevalence of sales growth expectations over their decline expectations had been registered since July 2008. Adjustment for seasonality flattened out the optimism of initial expectations down to the average level of the 5 preceding months: beginning from October 2010 the most stable and optimistic projections for demand growth were registered in industry.
In February the initial output growth rates (in case of surveys - the balance of responses) restored after the January decrease up to the average indicators of the IV quarter of 2010. Adjustment for seasonality left this result unchanged. According to estimates of enterprises, production growth rates remained at approximately the same level since May 2010. Initial production projections grew by 15 points in February and also attained a maximum for the pre-crisis and crisis period. Growth of output was expected in all branches, the most intensive one - in ferrous metallurgy and construction materials industry. Adjustment for season-ality leveled off the January-February soaring of projections down to the level typical for previous months.
In March the formal increase of initial sales growth rates up to +9 points from +3 points in February was flattened out by adjustment for seasonality: the growth of sales at the end of the quarter apparently ceased. So, the balance of demand change (growth rates) lost 9 points from the start of the year and became zero after having been apparently positive. No similar slowdown in recovery from the crisis had been ever recorded. Negative dynamics of sales affected projections made for them. After the most optimistic crisis expectations recorded in December 2010, by the end of the I quarter of 2011 the balance of projections lost 7 points and fell to an 8-month minimum.
However, the rates of output change still demonstrated (albeit slow) resumption of production growth after the traditional January drop and the return to average levels recorded in the previous 11 months. As a result the divergence between output and demand dynamics grew bigger. In March 2011 only 58% of enterprises reported similar changes in sales and output (in January - 65%, in February - 62%) while at 35% of enterprises output outpaced demand (in January - at 14% of enterprises, in February - at 28%). Such a low level of the first indicator and such a high level of the second had not been observed in the Russian industry since April 2008. Meantime production projections of enterprises indicated that they were not ready to bring output growth rates in compliance with demand dynamics. In March the share of factories where the projected increase of output exceeded the increase of demand projections, reached 25% which was an 8-month maximum. And only 68% of enterprises were ready to change output in line with the expected demand dynamics (a minimum for the same 8 months).
In April the initial rates of demand growth fell down to zero after the crisis record they set in March, i.e. sales ceased growing. Adjustment for seasonality further worsened the April indicators that consequently showed an absolute reduction of demand by -7 points (see Fig. 17). Such an intensive decrease of demand for industrial products had not been registered by sur-
veys since January 2010. Similar radical revisions took place in sales projections. According to initial data, by April they fell down to +12 points following the previous crisis record of +31 points that was registered in February 2011. Adjustment for the seasonal and calendar factors indicated stabilization of sales projections at +4 points which was a 15-month minimum.
Fig. 17. Change of solvent demand adjusted for seasonality (balance = % growth - % decrease)
In May the lowering of demand for industrial products continued. The seasonally adjusted data displayed a decrease at the rate of -5 points. As a result sales growth rates lost 13 points from December 2010, i.e. an apparent growth of demand was superseded by its equally apparent reduction. But enterprises expected that in the following months this negative trend would be reversed. In May output growth rates (according to initial data) continued falling but remained positive, i.e. production went on growing. Adjustment for seasonality indicated the preservation of April growth rates (minimal from February 2010) in May.
In June the dynamics of demand underwent the greatest positive changes. Sales growth rates (after seasonal adjustment) increased by 9 points within a month and altered sign: reduction of demand in May (-5 points) was followed by increase of sales in June (+4 points). Higher growth rates of sales at the stage of recovery from the crisis were registered only twice. Production quite adequately responded to larger sales: output growth rates according to both the initial and seasonally adjusted data demonstrated rise up to the best crisis levels. The adjusted balance (output growth rate) was up 4 points. In June production projections of enterprises continued to improve and reached a 3-year maximum (according to data adjusted for seasonality), i.e. the Russian industry had never been so optimistic about the growth of output since July 2008.
But in July 2011 sales failed to sustain the June achievements and demonstrated an apparent slowing down as judged from initial data and zero growth as judged from seasonally adjusted data. So, the demand for industrial products was still slack and its growth - unstable. However, demand projections remained optimistic. In the three previous months they improved by 9 points and as a result reached a 3-year maximum, i.e. the expectations of sales
expansion in industry were the most positive since July 2008. Negative dynamics of demand resulted in the slowing down of production growth in July. After seasonal adjustment the balance of this indicator returned to the average level of January-May 2011. The halting of sales expansion and worse assessments of finished goods stocks had a negative impact on production projections. After 3 months of their improvement enterprises decided to reduce output growth rates in the following months.
In August the actual dynamics of demand for industrial products continued to deteriorate. The growth rates of sales fell down to zero as judged from initial data and became negative as judged from seasonally adjusted data - after the June upsurge, the demand for industrial products resumed weakening. Negative trends in sales were registered in all branches except machine-building. But then demand projections evidenced that enterprises still went on hoping for revitalization of sales in autumn. Both initial and seasonally adjusted expectations improved in August. The latter even attained a 3-year (i.e. crisis) maximum. Despite a clear worsening of demand dynamics, the intensity of output growth in August increased according to all data. As a result the changes in production outpaced changes in demand at 28% of enterprises while in the previous two months this indicator equaled only 22% and in 2010 averaged 24%. Production projections of enterprises improved as well: slightly - as judged from initial data, and up to a crisis maximum - as judged from seasonally adjusted data.
According to estimates of enterprises, in September the demand for produce in industry at large apparently stopped growing. Surveys indicated its stagnation for the second month in turn as judged from initial data and for the third month in turn - as judged from seasonally adjusted data. However, if one excludes a slight increase of sales in June, the stagnation went on since the start of the year.
Until August industrial enterprises still cherished hopes for the revival of demand. In September these illusions were superseded by a drastic revision of projections: within a month the balance of expectations dropped from +13 to -10 points as judged from the initial data. Adjustment for seasonality indicated its lowering from +13 to +4 points. Negative trends in the expected dynamics of sales (either a slowing down of growth or an absolute reduction) were recorded in all branches except for food industry.
45 %
30
15
0
-15
-30
-45 11/08
1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12
Fig. 18. Change of output adjusted for seasonality (balance = % growth - % decrease)
According to initial data, in September the intensity of production growth decreased by 10 points as compared with August, and when adjusted for seasonality hit the bottom for the previous 18 months (see Fig. 18). Russian industry was struggling to sustain output growth in the conditions of clearly stagnating demand, growing surplus of stocks and nervousness on the world markets. In August dynamics of production outpaced dynamics of demand at 30% of enterprises, in September - at 26%, and projections for October-November suggested that this trend would persist at 26% of enterprises. The latter indicator was a 45-month maximum. In other words, production projections had never diverged so much from the demand projections since January 2008. And all this even despite the fact that the balance of output projections in September fell to +7 points down from +25 points in August as judged from initial data and down to a 13-month minimum as judged from seasonally adjusted data.
In October the absolute reduction of demand continued. The initial balance fell to -7 points and when adjusted for seasonality - down to -4 points. Since the start of 2010 a more intensive drop of sales was registered only once - in April 2011. Initial demand projections remained negative for the second month in turn, i.e. downward expectations in industry prevailed over upward expectations. Adjustment for seasonality changed the sign of October projections' balance for "+"; however, the value of this indicator was the lowest since May 2011.
In November 2011 surveys revealed more intensive lowering of demand for industrial products. The initial balance (growth rate) of sales fell by 6 more points (down to -16 points) and as a result became comparable to indications that used to be registered in January in pre-crisis years and in the current year. Adjustment for seasonality corrected the balance to -9 points which was the worst indicator since September 2009. Demand projections after the September nose-dive by 22 points lost 15 more points in November. As a result the November balance of projections (before adjustment for seasonality) was as low as -20 points. Over the 20-year history of surveys the values of this indicator were worse only 3 times: in 1998, 2008 and 2009. So, at the end of the year industry had very faint hopes for the revival of demand. However, formal methods of adjustment for seasonality leveled off the pessimism of enterprises and reversed the sign of demand projections balance from "-" to "+". Still, its value remained minimal for the current year and was clearly behind projections of late 2010.
In November production growth rates didn't change as judged from either initial or seasonally adjusted data. The initial balance in November (as well as in the previous months) was around zero and remained the worst (certainly, excluding the nation-wide January timeout) since the start of 2010. Adjustment for seasonality increased its absolute value but left it at the minimal level since March 2010. Enterprises didn't trace any revival in industry.
They didn't expect it in the coming months either. In November production projections of enterprises (before adjustment for seasonality) fell by 16 more points and became negative (there appeared more enterprises planning to cut output) thus continuing the downward trend that formed at the beginning of the second half of 2011. As a result within the 5 preceding months these projections lost 45 points while within the same period of the previous year the loss was 25 points. Adjustment for seasonality smoothed out the situation and stabilized output projections for September-November at one level, albeit the lowest in 2011 and 9 balance points below the level of September-November 2010.
At the beginning of 2012 the demand for industrial products sharply dropped which was usual for the period of national vacations. However, this time the January plunge of sales was a continuation of negative trends in demand dynamics that formed in September 2011 when
sales stopped growing and started to fall with increasing intensity. In January 2012 these accelerating rates of decline were as high as in no other January since the 1998 default (certainly, except for the crisis January of 2009). Adjustment for seasonality smoothed out this result but only to the level of the worst growth rate since September 2009. Meantime, an apparent lowering of sales is going on since October 2011.
In 2011 a new configuration of constraints to production growth started forming in industry that reflected the specifics of sluggish recovery from the 2008 crisis (see Fig.19). First, in the first three quarters of 2011 the constraining effect of short demand increased by 8 points after the crisis minimum of late 2010. Enterprises clearly expected a more dynamic revival of demand. Second, the negative impact of working capital shortage reduced (as judged from the average annual data) down to the historical minimum. In 2011 it was mentioned by only 30% of enterprises while the best indicator for inter-crises period equaled 34% (in 2007). So, as it's customary to say nowadays, industry has surpassed the pre-crisis level by this indicator. Third, staff constraints to industrial growth continue to aggravate. In 2011 the share of enterprises where shortage of employees constrained production equaled 28% as compared with 25% in 2010, notwithstanding slow and unstable growth of both demand and output. Fourth, in the first three quarters of 2011 the constraining effect of competition with import decreased and stabilized after a steady growth in 2009-2010. It's all the more noteworthy given a sizable increase of imports according to the official statistical data and an apparent stagnation of demand for domestic products. This combination of factors leads to the conclusion that in early 2011 imported items were not considered by enterprises as competing. And one more conclusion: domestic statistics are sometimes not as bad as their ... interpretation. Fifth, the negative impact of non-payments, so much feared of at the beginning of the crisis, has stabilized although not at such a low level that was registered in 2007 - early 2008. Sixth, in the III quarter of 2011 the mentioning of shortage of credits (as a hindrance to output growth) fell down to a concern-triggering level of 2%. The effective supply (and terms) of credits is such that industry does not need its further expansion for increasing output.
70 %
60
50
40
30
20
10
COMPETING IMPORT
NON-PAYMENTS EQUIPMENT
0
1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12
Fig. 19. Constraints to production growth in 2003-2012
At the end of the year the structure of constraints to industrial growth changed due to the growing uncertainty in the world economy and the temporary devaluation of ruble. As before, enterprises regard low demand as a key hindrance to production growth. This factor has been ranking first in the quarterly rating of constraints since the start of the crisis (which is quite explainable). However, in the IV quarter the frequency of its mentioning reduced to 47% as compared with 52% in the III quarter of 2011 and almost reached a post-crisis minimum (45%) registered a year before. The shortage of working capital that ranked second during all the phases of the current crisis was also mentioned less frequently. Moreover, in the IV quarter its constraining effect on the growth of output fell down to a historical minimum (!) over the whole period of monitoring since 1993. The third crisis factor which is hallmark for Russia - non-payments by consumers - now ranks only 8th with a stable share of 17%.
But the IV quarter of 2011 was marked by an apparent increase of constraining effects of two factors: the uncertainty of current economic situation and its further development and the competing import. Within a quarter the mentioning of the former grew from 22% to 38% and as a result brought it to the second place in the rating. Such a surge seems absolutely normal taking into account the persisting uncertainty about the outcome of European debt crisis, other problems on the world markets and poor understandability of Russian state statistics, the monthly interpretation of which looks like guessing from the childish rhyme "maybe snow, maybe hail, maybe sour grapes".
At the end of 2011 after notable swings of the ruble exchange rate, competing import was considered to be a hindrance to production growth at 27% of Russian industrial enterprises while in the first three quarters of the year it was mentioned by 21-23% of producers. Moreover, the indicator of the last quarter became a post-crisis maximum and closely approached the pre-crisis (and absolute!) maximum of 31% registered in July 2008. It seems that the uncertainty about the ability and/or wish of authorities to safeguard ruble from devaluation makes consumers to more actively spend their savings on the purchase of imported products at not yet inflated prices to the detriment of domestic commodities.
At the beginning of 2012 the new configuration of constraints to output growth continued forming in the Russian industry. Factors that earlier one could hardly suspect of great influence on enterprises are becoming "leaders", while traditional "sores" of our industry are losing their negative impact on its performance
However, insufficient demand remains a definite and logical leader of the current crisis. It's mentioned by 51% of enterprises which is 16 points less than at the peak of the crisis but is still the maximum level over the recent 6 quarters.
The factor of uncertainty of the current economic situation and its further development climbed to the second place in autumn 2011 (as the crisis of Eurozone started to aggravate) and seriously reinforced its positions at the beginning of 2012. Its mentioning grew up to 41% although back in summer 2011 only 24% of enterprises complained of it.
The negative impact of competing import on the domestic industry attained its historical (1995-2012!) maximum and now ranks third. At the beginning of 2012 one third of surveyed enterprises suffered from the pressure of import that ousts Russian products from the markets. The pre-crisis maximum of this indicator registered in July 2008 was 31%. Before the 1998 default only 16% of enterprises complained about import. At present its pressure is most detrimental for enterprises in machine-building (41%), ferrous metallurgy (35%) and consumer goods industry (34%).
The negative effect of shortage of working capital fell down to 27% which is a historical minimum (!) of mentioning this constraint. At the peak of the current crisis 50% of enterprises were affected by this factor, while the absolute maximum was registered in 1995 and reached 83%. The picture is completed by an actual lack of negative effect of credit shortage on the output dynamics in Russian industry. For the fourth quarter in turn only 2-3% of enterprises complain about it.
4.2.3. Price policies of enterprises
In January 2011 factory prices demonstrated the highest growth rates over the past 15 years (!), i.e. they had not grown so rapidly since the end of 1995. Within a month their growth rates (i.e. balance in case of surveys) increased from +18 to +50 points. While in December 2010 78% of enterprises (in 2010 - 77% on the average) reported constancy of their prices, in January 2011 the share of such responses fell down to 46%. Certainly, a month before enterprises planned a sizable increase of prices at the beginning of 2011 - but not to such an extent! Plans of enterprises showed their intentions to preserve the high rates of price growth in the coming months. It's projected intensity was somewhat lower but not low enough to stop a powerful inflationary wave that formed in the Russian economy at the end of 2010.
In February the growth of factory prices slowed down by 12 points after the January surge. However, its intensity did not return to the pre-New Year levels: the actual balance of price growth was as high as 35 points while in the IV quarter of 2010 - 17 points. So, enterprises had to raise their prices twice faster than at the end of the previous year. The most intensive growth was registered in ferrous metallurgy, chemical and petrochemical industries. In February factory prices stopped growing only in food industry. Enterprises' projections suggested possible maintaining of February growth rates in March-April. The balance of expected change of this indicator equaled 37 points and remained at the level of January projections.
In February 2011 unit costs at industrial enterprises demonstrated the most intensive growth since the onset of the crisis which was quite exactly forecasted back in November 2010. The biggest increase took place in ferrous metallurgy (balance +73 p.p.), timber processing, consumer goods industry and machine-building (+64 p.p. in each), chemical and petrochemical industries (+61 p.p.).
However, in March the inflationary wave that formed in the Russian economy at the end of 2010 - the beginning of 2011 started to fade out. The actual rates of price growth halved as compared with the January surge - down from 47 to 23 balance points. It's worth noting that in the IV quarter of 2010 surveys registered growth of factory prices at the rate of 17 b.p., in the III quarter - 7 b.p. In March the actual growth of prices decelerated in all branches except for chemical industry and construction materials industry. For the second month in turn it was the slowest in food industry. Price projections experienced similar adjustments. After the December surge they lost 14 points and approached the level of November 2010.
In April inflation continued to decelerate (see Fig. 20). As compared with January the rate of price growth fell by 28 points and returned to the level of the IV quarter of 2010. Similar changes occurred in price projections: as compared with the peak of December 2010 they lost 27 points.
In May the growth of factory prices slowed down once again but only by 4 points. As a result within the 4 preceding months its intensity decreased 3.5 fold (as judged from balance). However, further lowering of this indicator was already questionable. In May enterprises' projections indicated the reversal of their price policies. While from January to April price projections steadily declined, in May this trend discontinued, and for the first time in 2011 Russian producers declared their intention to accelerate growth of prices or at least stop its deceleration.
Indeed, in June the slowing down of price growth recorded by surveys since February seemed to halt. The balance stopped falling which indicated the preservation of May growth rates. It's possible that the increase of sales enabled enterprises to modify their price policies and halt the decline of price change balance (rate) that lost 36 points within the previous 4 months. Price projections of enterprises reflected this intention in May and proved it in June. Within these 2 months the balance between upward and downward price projections remained actually unchanged and was somewhat above the indications of April that were the lowest since October 2010. It's noteworthy that it was last October when an inflationary wave formed in Russian industry, generated by drought and the forthcoming raising of unified social tax (UST). In December 2010 (as judged from expectations) and in January 2011 (as judged from the actual growth) it reached its peak.
In July the growth rates of prices for industrial products remained the same as in June. Price projections of enterprises didn't change either and reflected the intention of producers to halt the slowdown of factory price growth that was observed in the first months of the year.
Principal changes took place in the growth rates of unit costs in Russian industry (see Fig. 21). According to estimates of enterprises, in the III quarter of 2011 unit costs of industrial products grew at minimal rates over the whole period of monitoring this indicator since 1997 (!). Even before the 1998 default the intensity of their growth was 3 times above the current level. Unit cost projections for the III quarter suggested the slowing down of their growth, but not as critical as was actually observed. Probably, it was this factor that primarily conditioned the preservation of high (as compared with demand) growth rates of output and replenishment of finished goods stocks that enterprises planned to sell in autumn and winter when prices and costs returned to their usual growth patterns.
Fig. 21. Change of unit costs (balance = % growth - % decrease)
Long-term stagnation of demand and attempts to sustain output growth made enterprises return to the application of price levers. In August the growth rates of prices once again declined and in September producers refrained from raising prices for the first time since January 2010. Russian industry rarely resorted to this tool: the halting of factory prices growth and their further lowering was registered by surveys on the eve of the 1998 default, on the eve of the 2008 crisis and on the exit from the 2008 crisis.
Price projections of enterprises also continued falling but not as rapidly as in the first half of the year when industry restored status quo after the traditional New Year surge of tariffs that this time was reinforced by the increase of social insurance rates. Within the III quarter price projections of enterprises lost 11 points, in September - only 2 points.
Negative dynamics of sales forced industrial enterprises to more actively use price policies with a view to revive demand. While in September factory prices stopped growing, in October they started to decline absolutely. Last time industry resorted to this tool in December 2009. But then the actual lowering of prices was accompanied by projections of their traditional growth at the beginning of next year. In October 2011 the situation was principally different. The decision of the RF Government to protract the raising of tariffs (that used to take place in January) and thus to smoothen the usual surge of prices at the beginning of the year prevented the traditional rise of enterprises' price projections at the end of the year. From the beginning of the second half of the year the balance of industrial price projections lost 17 points, from the start of the year - 40 points and was close to demonstrating the industry's intention to refrain from raising prices at the stage of projections as well. Similar situation was earlier observed only in 1998 and 2008.
In November industrial enterprises attempted to reverse the downward trend in price growth for the second time since the start of the year. The first attempt was made in May-July. Then price growth rates stabilized at the level of 11 points after 4 months of lowering from the record 47 points (the highest indicator in the post-default period). In November the general balance experienced actually no change and remained in the zero area: factory prices neither grew, nor fell.
In November price projections of enterprises were most seriously revised. While a month before growth expectations were minimal, at the end of the year industry planned to return to the sizable raising of prices. Within a month the balance of projections was up 9 points.
During almost all months of 2011 industrial enterprises pursued similar price policies of halting factory price growth after the January surge of this indicator that was due to both the man-made factors (the raising of unified social tax) and natural calamities (the drought of 2010). The combination of these two factors conditioned the soaring of price change balance up to the record level in January 2011. The end of the year was no less unique: in December 2011 enterprises shifted to quite an intensive lowering of their prices. Over the 17 years of monitoring a higher rate of decrease was observed only in December 2008 and in July 1998. And one more remark: within the pre-crisis 2008 the balance fell by 56 points (the indicator of the crisis December being -24 balance points), in 2011 - by 55 points (the December indicator being -8 balance points).
4.2.4. Staff problems of Russian industry
The dynamics of employment in Russian industry in 2011 experienced minimal state interference as regards both the prevention of dismissals at the stage of slowing recovery from the crisis and the provision of industry with personnel. In the situation of constant shortage of staff enterprises pursued cautious HR policies.
Last year the annual rates of employment change were close to zero, i.e. on the average the share of responses stating lay-off of employees was equal to the share of responses stating their hire. Similar result was obtained in 2010. In 2009 dismissals prevailed over hire by 23 p.p. But 2011 differs from all the previous crisis and inter-crises years by the maximum share of responses stating no change in the number of employed. This indicator reached 76% as compared with 73% in 2010. It was minimal (62%) in 2009 when dismissals in industry were most sizable over the whole period of monitoring actual employment in 2003-2011.
At the beginning of 2011 the number of employed in industry notably reduced. After 4 months of fluctuations around zero in late 2010, in January the initial (i.e. not adjusted for seasonality) balance of staff change lost 10 points and reached a 12-month minimum - enterprises carried out the most radical lay-offs (see Fig. 22). However, adjustment for seasonality reversed zero and negative balances into positive (i.e. industrial enterprises still hired staff).
Equal by importance but opposite by direction changes took place in HR projections of enterprises. In January the initial balance of employment projections increased by 16 points, became clearly positive and reached a crisis maximum. In other words, after 3 months of prevailing lay-off intentions enterprises planned to switch to the most intensive recruiting of personnel. Adjustment for seasonality revealed the highest optimism of recruitment projections in December 2010 and its slight decline in January 2011.
Industrial enterprises were impelled to intensively hire personnel in order to adjust employment to demand projections. At the beginning of the year the balance between these indicators once again (similar to mid-2010) became negative - enterprises felt short of employees for the expected growth of sales and output. Facility projections also supported hopes for the resumption of demand and output growth. In January 2011 after 3 quarters of stabilization (in 2010) the balance of these projections fell by 11 points and became zero - industry got rid of surplus facilities (so far - only as related to demand projections).
In February enterprises resumed hiring of personnel (as judged from initial data). However, seasonal adjustment reduced this indicator down to zero implying that the recruitment was not intensive enough when compared with previous years. Meantime, the initial HR projections for March-April reached a crisis maximum (i.e. the prevalence of hire intentions over lay-off intentions in industry had never been so convincing since the III quarter of 2008). Adjustment for seasonality lowered the post-crisis record but not much, leaving the early 2011 projections at one of the highest levels over this period (see Fig. 23). So, the high optimism of demand and output projections as well as the vanishing of labour surplus (however - only as related to demand projections) pushed up both the actual and the projected intensity of staff recruitment.
Fig. 23. Change of employment adjusted for seasonality (balance = % growth - % decrease)
The end of the I quarter was marked by record by its intensity hiring of personnel in Russian industry. In March its rate increased up to +17 balance points and reached the maximum
level of the last 4 years (!), i.e. such a massive recruitment had not been observed since the spring of 2007. Adjustment for seasonality lowered the initial result but not much, leaving it on the second place after an absolute post-crisis record of December 2010. So, in February enterprises made quite correct projections about the scale of personnel recruitment in March. Then they amounted to +15 balance points and reached a crisis maximum.
In April the rates of hiring employees in industry fell (when adjusted for seasonality -down to zero) after being maximal in March. HR projections underwent similar adjustment. It seems that enterprises continued hiring labour as a reserve because of the fear (quite well-grounded, by the way) to face a deficit of this input in case of sustainable growth of demand. Shortage of personnel as related to demand projections had been registered in industry since the III quarter of 2010. In the II quarter of 2011 it was recorded in all branches except for the construction materials industry.
Since the II quarter of 2010 the shortage of personnel ranked third in the rating of constraints to industrial growth (as assessed by enterprises). Only insufficient demand and deficit of working capital were mentioned more often. In the II quarter of 2011 32% of enterprises considered shortage of personnel to be a hindrance to output growth. The crisis (2008) minimum of its mentioning was 14% registered in the II and the III quarters of 2009. The pre-crisis and absolute maximum equals 46% registered in the III quarter of 2008.
In May industry halted (according to the initial data) the hiring of personnel that went on in the previous 3 months. After being record in March, the rate of employment growth lost 15 points within 2 months and approached zero. Further adjustment for seasonality revealed an absolute reduction of the number of employed. However, as judged from HR projections, at that time Russian industrial enterprises did not intend to continue lay-offs. In May the initial balance of HR projections remained actually at the April level and when adjusted for seasonality even improved.
In June in response to larger sales industry resumed hiring personnel and continued it in July which could be due to the persisting shortage of workers. According to estimates of enterprises, in the III quarter of 2011 industry still experienced deficit of staff as related to demand projections. It was registered at 15% of enterprises versus surplus of labour at 8% thereof. Both figures were close to the post-crisis records. As a result their balance fell down to nearly a post-crisis minimum. But at the stage of recovery from the crisis most enterprises still managed to improve labour sufficiency as related to demand projections. In the III quarter of 2011 the share of enterprises with sufficient number of employees reached 78% which became an absolute record over the whole period of monitoring this indicator since 1996.
However, the deficit of personnel seems to have produced a positive effect on the Russian industry. Shortage of workers made enterprises improve the productivity of labour. In the middle of 2011 it was estimated as "normal" by already 70% of enterprises (see Fig. 24). The pre-crisis maximum equaled 65%, the crisis minimum - 44%. Fully satisfied with labour productivity were all enterprises in fuel industry and metallurgy, 86% - in chemical industry and 79% - in food industry. The lowest satisfaction with this indicator was noted in construction materials industry (49%), timber processing (55%) and consumer goods industry (56%). Such estimates of labour productivity by enterprises reduce the number of advocates of state industrial policies assessing its level as low and definitely requiring improvement.
Another consequence of the deficit of personnel was the growth of wages in industry or, to be more precise, - of the share of enterprises, the administration of which considered the level of wages to be "normal" and thus not requiring raising. In the III quarter of 2011 such level of labour remuneration was attained at 65% of enterprises which was also an absolute record over the whole period of monitoring this indicator since 2007. The biggest share of enterprises with "normal" wages was observed in fuel, metallurgical, chemical and food industries.
In August the negative dynamics of demand resulted in the halting of personnel recruitment by industrial enterprises: in industry at large the share of responses stating expansion of staff equaled the share of responses stating its reduction. Adjustment for seasonality left the zero value of August balance unchanged.
But in September industrial enterprises switched to dismissing employees. Then the intensity of dismissals was minimal but it was well "in tune with" the trend of the previous months. Projections of enterprises showed their readiness for more intensive lay-offs. Within a month the balance of HR projections deteriorated by 6 points and changed the sign: from +3 points in August (indicating moderate plans for hiring personnel) down to -3 points in September (indicating equally moderate plans to cut the number of employed). However, adjustment for seasonality leveled off the situation bringing the balance up to zero.
Large-scale dismissals started in industry in October. While in the previous 8 months enterprises managed to enlarge staff or at least preserve the number of employed, at the beginning of the IV quarter dismissals clearly prevailed over hiring according to both the initial and seasonally adjusted data. This was the case for actually all industries. The only exception was food industry where the balance remained zero. The most intensive lay-offs were registered in chemical, construction materials and consumer goods industries. Projections of enterprises definitely showed their intentions to go on cutting personnel and do so at even higher rates. Indeed, in November dismissals continued. The intensity of this process didn't change and remained at the October level - the highest since March 2010. Adjustment for seasonality gave similar results.
In December the intensity of lay-offs in industry again increased. The balance (rate of change) of this indicator fell to a 23-month minimum, i.e. the number of employed hadn't reduced so rapidly since February 2010. At the end of the year dismissal projections of enterprises also reached record levels since December 2009. This means that the most intensive over the past 2 years reduction of personnel is expected in industry at the beginning of 2012. The value of this indicator was only 10 points behind the record for the current crisis period (registered at end of 2008 - the beginning of 2009). Within 2011 the balance of HR projections lost 33 points and after August (as the crisis of Eurozone started to aggravate) became negative and fell by 20 points within 4 months. In the IV quarter of the last year dismissal (lay-off) projections prevailed in all industries and at all enterprises irrespective of their size and type of ownership. At the end of 2011 enterprises refrained from more massive lay-offs out of fear that in case industrial growth resumed they might fail to find necessary workers and restore the required production volumes. Russian industry remains in this situation since July 2010 when for the first time after the crisis one registered "the shortage of employees as related to demand projections". In October 2011 deficit of personnel was stated by 19% of enterprises which is a post-crisis maximum of this indicator. Before the 2008 crisis it amounted to 26%.
4.2.5. Crediting of industry
In 2011 the credit terms for Russian industry improved by 5 percent points as compared with the 2010 annual average and approached the 2005 level (see Fig. 25). Just 9 percent points are separating this indicator from the best annual average registered in 2007. But its achievement in a short time is not as evident as it may seem. First, the bettering of credit terms over the past year is close to the average annual growth rates of this indicator in 20002007. Second, the post-crisis restoration of credit terms took place mainly in 2009 (then the indicator was up by 29 points and recovered all losses of late 2008) and is most likely over. The relationships between banks and industrial enterprises are entering the trajectory of smooth changing ("growth" doesn't seem to be the right term for it any longer). Third, the annual curve of credit terms for industry in 2010-2011 supports the thesis that their improvement withers away. Fourth, in the situation of sluggish industrial growth enterprises themselves have smaller need for credits, the shortage of which is no longer a constraint to the increase of output in Russian industry (as stated by producers). It seems that insufficient crediting and low rates of its growth are now becoming a problem of banks rather than industrial borrowers.
At the same time, an insight into the overall picture of improving credit terms reveals the existence of "growth points" in Russian industry.
First, banks have reserves for softening the credit terms up to the pre-crisis levels depending on the size of an enterprise. The estimate of average annual availability of credits by size groups of enterprises indicates that banks have made the biggest progress in restoring the pre-crisis level of access to credits for very large entities (with over 1,000 employees). In 2011 the ""normal" average annual availability of credits for this category of borrowers amounted to 78% and was only 5 points behind the record set in 2007. In the group of large enterprises (with 251-1,000 employees) this indicator equaled 57% which was 12 p.p. below the 2007 record for this group. Small and medium enterprises (up to 250 employees) restored "normal" availability of credits in 42% of cases which is 16 p.p. below the pre-crisis maximum (see
Fig. 26). So, banks can improve the general credit terms for industry primarily by more active crediting of small and medium business.
90
75 >1000 employees^^^^^X'A
60 45 Jf"251-1000 JT EMPLOYEES-* \Y p
30 wT -♦^1-250 EMPLOYEES \\//
\y
15 V
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Fig. 26. Share of enterprises with "normal" availability of credits by size groups, %
Second, similar conclusions can be made when analyzing dynamics of "normal" credit availability by branches. The biggest progress in post-crisis crediting was made by banks in metallurgy where already in 2010 81% of enterprises had "normal" access to credits (which was only 5 points below the pre-crisis record) (see Fig. 27). But the slowing down of recovery from the crisis in 2011 halted the facilitation of access to credits and probably the very extension of lending scope in the sector as well. In machine-building banks followed quite different policies. In 2010 they improved the availability of credits therein up to the level of 64% and in 2011 raised it to 75%. As a result within 2 years the availability of credits grew by 41 p.p., with the 2011 indicator falling behind the pre-crisis maximum by only 4 points and ranking second among all branches (metallurgy showing somewhat better result). In case
these trends continue, machine-building may leave metallurgy behind by the convenience of bank crediting as well. The restoration of access to credits in consumer goods industry faces more difficulties. In 2011 only 39% of enterprises stated "normal" availability of credits which is the lowest indicator among all industries. 22 points separate the current indicator from the pre-crisis maximum (the second result after timber processing). In 2011 banks began to tighten credit terms for the industry notwithstanding the fact that in 2010 the availability of credits therein was the lowest as compared with other branches.
90
MACHINE-BUILDING --^ METALLURGY
75 ------------—fy
60
45 / CONSTRUCTION N.^/
30 f MATERIALS INDUSTRY \J
15 CONSUMER GOODS INDUSTRY
0 J
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Fig. 27. Share of enterprises with "normal" availability of credits by branches, %
Let's examine the changes in credit terms for Russian industry in 2011.
At the beginning of the year the availability of credits for industry overcame the December drop of 2010. Then the indicator fell by 6 points and became an 8-month minimum. In January it grew by 8 p.p. and reached the pre-crisis level of summer 2008. The minimal interest rate on ruble credits charged by banks resumed falling. In January 2011 credit institutions were ready to lend rubles at 12.7% per annum on the average while enterprises considered "normal" interest rate to be 11.9% (the value of this indicator in case of "normal" availability of credits). The difference between the interest rate for very large enterprises and that for
small and medium businesses was 4.5 p.p. although in September 2009 it hardly exceeded 1 p.p.
In February the availability of credits for industry failed to maintain the weak upward trend that formed in November and January. As a result 69% of industrial enterprises were satisfied with their access to bank credits. Meantime the priorities of banks didn't change. The most convenient credit terms were offered to enterprises in metallurgy (in January-February 85% of enterprises therein had "normal" access to credits, the minimal interest rate in February averaged 9.4% per annum), food industry (76% and 11.8%, respectively), chemical and petrochemical industry (72% and 11.2%) and machine building (74% and 12.0%). As usual, on the other pole were consumer goods industry (38% and 13.9%) and construction materials industry (53% and 14.5%). At the beginning of the year credits to small- and medium-sized enterprises (1-250 employees) were available at 14.7% per annum, to very large enterprises (over 1,000 employees) - at 10.6%.
In the I quarter of 2011 the need of industry for borrowed funds remained positive, i.e. the share of enterprises that planned to increase demand for credits (24%) was higher than that of enterprises that planned to reduce it (7%). As compared with the IV quarter of 2010 the balance (i.e. the rate of growth) of this indicator didn't change. But Russian industrial enterprises were not strongly concerned about the shortage of credits. On the one hand, in 2010 banks clearly softened credit terms as regards both interest rates and other parameters. On the other hand, slack economic growth conditioned low demand for credits by enterprises. Therefore, in the I quarter of 2011 the deficit of credits had the smallest constraining effect on the growth of industrial output as compared with other inputs.
At the beginning of the year the ability of industry to service credits amounted to 82%. The credit solvency was the highest in metallurgy (100% of enterprises considered themselves to be solvent), machine-building (83%) and food industry (82%).
Results of the I quarter of 2011 revealed that banks restored credit terms for industry at large to the pre-crisis level and did not intend to further soften them. The evidence of that was the share of enterprises discontent with the availability of borrowed funds. Since August 2010 this indicator stabilized in the interval between 11% and 14%. In the pre-crisis period its smaller (i.e. better) values were registered only in summer 2007. Then 8% of enterprises weren't content with the terms of bank offers (the absolute minimum of 11 years of monitoring). In the I quarter of 2011 ruble credits were available to enterprises at 12.6% per annum at best (similar indicator of the IV quarter of 2010 was 13.0%).
At the beginning of the II quarter the terms of bank credits did not change. "Normal" access to credits was stated by 70% of enterprises in industry at large, by 92% - in metallurgy, by 71% - in chemical industry, by 69% - in machine building. The greatest difficulties in getting credits were encountered by enterprises in consumer goods industry (only 28% of them stated "normal" access to credit funds) and in timber processing (47%). At the start of the year the minimal interest rate charged by the banks also stabilized and amounted to 12.7% per annum. However, the shortage of credits had actually no effect on the output dynamics. In the II quarter of 2010 only 5% of enterprises considered it to be a constraint to production growth.
In the middle of the year the ability of enterprises to service credits already extended to them deteriorated. In May this indicator fell down to 81% (of the number of enterprises having debts under credits) from the record 87% in December 2010. This negative trend is due to an apparent worsening of enterprises' financial performance registered in the II quarter of 2011. Coupled with an absolute decrease of sales and the lack of confidence in the future, it forced enterprises to revise their borrowing projections. In the II quarter of 2011 this indicator fell to +10 b.p. down from +18 b.p. in the IV quarter of 2010. In the middle of the year the highest demand for credits was observed in electric power industry (+32 b.p.), timber processing (+19 b.p.) and consumer goods industry (+16 b.p.). The reduction of demand for credits was projected in metallurgy and construction materials industry.
Despite the uncertain economic situation the availability of credits for industrial enterprises continued to improve. In June 2011 only 8% of enterprises found that banks offered them too rigid credit terms. As a result this indicator reached the historical minimum registered in June 2007. Within the II quarter of 2011 the average share of responses "below normal" in respect to the availability of credits fell to 10% down from 11.6% in the I quarter of 2011 (see Fig. 28). So, in the II quarter banks went on softening credit terms for industry.
However, according to the data of RF Central Bank for the I quarter of the year, they planned to stop this softening for corporate borrowers.
Fig. 28. Share of industrial enterprises with "below normal" availability of credits,
average % per quarter
Judging by the dynamics of average minimal interest rates, banks made such an attempt in March-April when they raised the rate first up to 12.8% per annum and then - up to 13% from 12.5% charged in February. But the lack of demand for credits from industry, the pertaining surplus liquidity of the bank system and the difficulty of finding reliable borrowers once again forced banks to reduce interest rates down to 12.5% in May and 12.2% in June.
In July the credit terms for industrial enterprises did not undergo any principal change. The average minimal interest rate on ruble credits offered by banks to industry at large remained at the level of 12.3% per annum. The dependence of interest rate on the size of enterprise persisted as well. In May-July for small- and medium-sized enterprises credits were available at 14.8% per annum, for very large (over 1,000 employees) - at 10.5%.
In August the credit terms offered by banks to industry remained the most convenient from the onset of the crisis: 72% of enterprises considered them to be "normal" and 5% - even "better than normal". In June-August the latter indicator stabilized in the interval from 5 to 6% which was a sign of insistent offering of money (not much needed in the situation of sluggish demand) by banks to enterprises. In August the average minimal interest rate on ruble credits offered by banks remained at the level of 12.3% per annum.
Within the III quarter the availability of credits for industrial enterprises fell by 3 points as compared with the II quarter of 2011 when a quarter maximum (71%) of this indicator since the 2008 crisis was registered. In the second half of the year commercial banks seemed to start the tightening of credit terms that they had promised to the RF Central Bank. But they did it selectively. As judged by borrowers (see Fig. 29), this tightening affected only very large enterprises (with over 1,000 employees). However, it looked rational as it was this group of enterprises that enjoyed the most convenient credit terms in the first half of 2011, more rapidly regained the trust of banks in 2009-2010 and as a result actually restored the pre-crisis level of this indicator.
90 -75 -60 -45 -30 -15 -
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 1/12
Fig. 29. Share of enterprises with "above normal" and "normal" availability of credits
by size groups, average % per quarter
In October industrial enterprises did not experience the tightening of credit terms proclaimed by banks and expected by experts. The general estimate of "normal" availability of credits remained at the level of 68%. Very large enterprises were content with the availability to credits in 80% of cases while small and medium ones - in 35% thereof. Branch priorities persisted in the crediting of industry as well: while in metallurgy and chemical industry over 70% of enterprises had "normal" access to borrowed funds, in the consumer goods industry this share was only 35%.
In October the increase of interest rate charged by banks on credits extended to enterprises didn't take place either. Moreover, it fell to 11.8% down from 12.2% in September. For enterprises stating "normal" availability of credits the rate was as low as 10.8%. To small and medium enterprises credits were offered at 14.3% per annum, to very large (over 1,000 employees) - at 10.0%.
In November the terms of crediting Russian industrial enterprises didn't change. The share of enterprises with "normal" availability of credits stabilized at the level of 68% with the average minimal interest rate charged by banks remaining the same - 11.8%. Banks reduced (although very slightly) only the surplus ("above normal") offering of funds. The share of credits being pressed upon enterprises fell from 6% in June to 3% in November. In the IV quarter of 2011 the most convenient credit terms were offered to ferrous metallurgy (82% - "normal" availability of credits, 10% - "above normal"), chemical industry (68% and 7%, respectively), machine-building (75% and 1%) and construction materials industry (68% and 1%). In food industry 58% of enterprises had "normal" access to credits and 4% - the one "above normal".
However, the projections of banks to credit primarily ferrous metallurgy will hardly come true. Most enterprises in the sector do not plan to enlarge the amount of borrowings in the coming months and prospective changes are likely to have the "minus" sign: in this sector the number of enterprises intending to reduce borrowings prevails over that of enterprises planning to enlarge them. At the beginning of 2012 the most active demand for credits is possible in the consumer goods industry (the balance of credit projections is +29 points), timber processing (+25 points) and construction materials industry (+25 points). In the IV quarter of 2011
221
in industry at large the ratio of adequate credit supply by banks to credit projections of enterprises fell to 60% down from 69% in the III quarter while the share of "unsecured" industry projections grew up to 31% after being 22% a quarter before.
The improvement of credit terms for industry can be examined in connection with demand of enterprises for credits. Indeed, if banks offer very good credit terms to a certain group of enterprises but the latter do not need them or do not plan to enlarge borrowings, a greater availability of credits won't do much good. An opposite situation will be observed in the group of enterprises that intend to borrow more but have not deserved the respective loyalty of banks. Certainly, one can suggest that these are unreliable borrowers who want to get larger credits, and bank refusals to them are quite justified. But in any case such analysis involving principally new initial indicators (availability of credits, borrowing projections, ability to pay under credits, estimate of actual financial and economic performance of enterprises) can further the investigation of relationships between banks and industrial enterprises as regards the crediting of the latter.
The monitoring of enterprises' ability to service already received credits was launched in 2009 and now allows to estimate this indicator over the 3 recent years, which is certainly good but not comparable to opportunities for analyzing other indicators included in the IEP's business surveys and monitored for 10-15 and even 18 years. The first estimates (to be more precise - self-estimates) of the ability to service credits showed that only 61% of enterprises that had borrowed funds considered themselves to be solvable in 2009. For the first entirely crisis year this figure looked quite acceptable. But one should not exclude the possibility that it was overstated since a certain part of enterprises could have overestimated (either intentionally or unintentionally) their ability to pay under credits. 39% of enterprises openly admitted that they had credits but were not quite able to service them. The latter fact evidenced that respondents had enough trust in the surveyor and the data received in the course of surveys was quite reliable. In 2010 the ability of industrial enterprises to service credits grew up to 82%, in 2011 - up to 85% (see Fig. 30). So, the principal changes in industry's credit solvency took place in 2010 while 2011 consolidated the earlier made progress.
100 7
80------------------ t-------
60------V----------------------
40----------------------------------
20----- -------- --------
0 -I------
2009 2010 2011
Fig. 30. Average annual share of enterprises able to service the received credits, %
The results of ranging branches by credit solvency of enterprises in 2011 were quite logical (see Fig. 31) given that not all enterprises in the sector but only the ones having credits were taken as 100%. Metallurgy with its great export potential and high degree of monopolization ranks first. In non-ferrous metallurgy the credit solvency amounts to unprecedented 97%. The third place expectedly belongs to food industry, the financial well-being of which is secured by regular demand of population for food. The fourth and the fifth places are taken by machine-building and construction materials industry, respectively, which can be explained by greater caution of banks when crediting these branches and the selection by them of really reliable borrowers. Chemical industry, timber processing and consumer goods industry round out the rating. While quite low credit solvency of consumer goods industry and timber processing seems quite understandable, the inclusion of chemical industry in this group is explained sooner by insufficient accuracy of banks when crediting enterprises of this branch than by poor financial performance of the latter.
Non-ferrous metallurgy |
Ferrous metallurgy |
Food industry I
Machine-building |
Construction materials industry I
Chemical and petrochemical industries |
Timber processing ~|
Consumer goods industry | 1
0 20 40 60 80 100 120
Fig. 31. Share of enterprises able to service the received credits by branches in 2011, %
Since in the regular IEP's questionnaires there are questions about both the availability of credits (i.e. the position of banks towards enterprises) and the ability of enterprises to service received credits (i.e. the self-estimate of credit solvency by enterprises), one can analyze to what extent these positions coincide (i.e. how adequately banks treat borrowers) or diverge (i.e. how mistaken are banks in estimating the credit solvency of enterprises). Two types of bank mistakes can be examined:
a) banks are too stringent in their estimates of credit solvency and do not extend credits to enterprises that could well pay under them;
b) banks inconsiderately credit enterprises unable to service credits.
In 2011 the estimates of credit availability and credit solvency on the average coincided for 75% of enterprises having liabilities to creditors. This is the best result since the start of monitoring in 2009. As compared with 2010 the indicator grew by only 3 p.p. while between 2009 and 2010 the increase was as big as 15 points. So, by 2010 industrial enterprises and banks had largely overcome the crisis of confidence between creditors and borrowers and in 2011 the situation improved just slightly.
Within 2011 the best result was registered in the I quarter when the availability of credits and credit solvency coincided for 80% of enterprises. Then this indicator fell down to 75, 72 and 74% in the respective quarters of the year. Unfortunately, this coincidence between estimates of enterprises and banks can be compared only with the figures for early 2009 when the economy had already touched the bottom of the crisis and started a slow recovery from it. In the I quarter of 2009 banks extended credits in accordance with credit solvency of borrowers to only 47% of enterprises. For the remaining 53% the availability of credits did not coincide with their credit solvency. As it was noted, this non-coincidence was of two types. Ill-considered crediting of enterprises that should not be credited amounted then to 10%. But the major mistake of banks was lower availability of credits as compared with credit solvency of borrowers. In the I quarter of 2009 the share of such mistakes was 43% which is the maximum value over the 16 quarters following the onset of the crisis. Then the level of mistakes of this kind started to reduce and by the III quarter of 2010 fell down to 10% - its minimum value. But by the end of 2011 banks were over-cautious in respect to already 19% of industrial enterprises. The level of mistakes of opposite kind (crediting of enterprises that should not be credited) within the 3 years rose up to 14% at the most and only twice surpassed the level of over-caution mistakes.
In 2011 banks most often were over-cautious when crediting timber processing. 39% of enterprises in this branch considered that banks underestimated their ability to pay under credits and limited their access to bank loans. The second place with a big gap belonged to consumer goods industry where the level of over-caution was 27%. Then followed chemical industry with 15% and construction materials industry with 14%. The maximum coincidence between assessments of banks and enterprises was registered in ferrous (with the level of banks' over-caution being only 9%) and non-ferrous metallurgy (where the estimates of credit availability fully coincided with the estimates of credit solvency).
The dynamics of unduly limited access to credits relative to credit solvency of enterprises in 2009-2011 shows the development of relationships between banks and enterprises at the stage of recovery from the crisis that started in late 2008. In the I quarter of 2009 banks had the weakest confidence in enterprises of metallurgical sector (see Fig. 32). Then 63% of enterprises in this branch assumed that banks unreasonably constrained their access to credits. But already in a year the metallurgical sector fully restored the confidence of banks and became the leader by this indicator. And one more year later the estimates of credit availability made by enterprises absolutely coincided with the estimates of their credit solvency made by banks, i.e. not a single enterprise in the sector assumed that banks unreasonably constrained its access to credits relative to its credit solvency, and 4% even found that banks overestimated their solvency when providing access to loans. Other branches started recovery from the crisis in more favourable conditions as regards availability of credits but the restoration of banks' confidence in their solvency proceeded at lower rate. However, by the end of 2011 the level of unreasonable limitation of access to credits had almost evened out in most branches. An exception was consumer goods industry where 31% of enterprises believed that banks tightened credit terms for them relative to their actual credit solvency. Similar estimates were made in timber processing. But since 60% of enterprises in these branches found that banks provide them access to credits in accordance with their credit solvency, one can hardly consider the terms of crediting these sectors to be unreasonably stringent.
Fig. 32. Dynamics of unduly limited access to credits relative to credit solvency of enterprises by branches, average % per 6 months
In 2011 significant (although quite explainable) differences in the level of banks' over-caution were also registered for enterprises of different sizes. While small enterprises (up to 100 employees) find that banks unduly limit their access to credits in 37% of cases, in the group of medium-sized enterprises (from 101 to 250 employees) this indicator is 29% and loses 10 more percent points for the group of enterprises employing from 250 to 1,000 workers - there it totals 19%. And for enterprises with over 5,000 employees the level of unreasonable non-confidence of banks as regards their solvency is as low as 8%. Banks are more aware of the solvency of such enterprises and respectively are more precise in establishing credit terms for them.
According to estimates of enterprises in 2011 the credit terms for industry were the best in the post-crisis period. However, in the second half of the year the positive dynamics of monitored indicators discontinued pointing to the exhaustion of banks' capabilities to soften credit terms. Still, in the situation of sluggish recession the industry's demand for credits is almost fully satisfied. Therefore the possible tightening of credit terms in case of preservation of the current macroeconomic trends won't create much problem for the Russian industry.
4.2.6. Response of industrial enterprises to the raising of compulsory insurance contributions (unified social tax - UST)
In May 2010 we included in the regular business survey the question about how enterprises SUPPOSED to respond to the raising of contributions for compulsory pension, social and medical insurance (UST) from 26% to 34% in 2011. A year later we again posed this question but then industrial enterprises were to describe their ACTUAL response to the tax innovation. This allowed us to get adjusted and most reliable first-hand information on the response of enterprises to higher tax burden which seemed to be quite timely in the situation of heated dispute about the abolition of this new regulation.
The most commonly projected response of enterprises to the raising of UST (let's use this elder term) in the period of its active discussion in 2010 was the lifting of prices (see Fig. 33). 70% of enterprises planned to resort to it. This share was the highest for small enterprises (less than 100 employees) - 82% of them made such projections. The analysis by branches
225
showed that the raising of prices was most likely in consumer goods industry, machinebuilding, chemical and petrochemical industries. 80% of state enterprises, 68% of open joint-stock companies, 73% of closed joint-stock companies and 80% of limited liability companies reported their intention to lift prices.
In 2011 65% of enterprises stated that they actually raised prices in response to higher UST. The deviation from the projected 70% is very small. Small enterprises decided to do it in only 65% of cases; the leaders in this respect (77%) were entities employing from 251 to 500 workers. As projected, consumer goods industry used the raising of prices as a protective measure against new UST most often as compared with other industries (in 85% of cases), then followed machine-building (78%) and chemical industry (71%). Meantime, in the food industry only 42% of enterprises reported the increase of prices although 64% of them planned to do it. Apparently, the autumn-winter (2010) period of higher prices for food products enabled the industry to alleviate the problem of UST. State enterprises raised prices in 80% of cases just as they had projected. The leaders by price growth were limited liability companies (89%).
The lowering of profits, i.e. the readiness of enterprises to cover the increase of compulsory insurance contributions at their own expense, ranked second among possible responses to higher UST. In 2010 59% of enterprises mentioned it. Almost all enterprises in fuel industry and ferrous metallurgy, % of enterprises in timber processing and about 60% of enterprises in non-ferrous metallurgy and machine-building were ready to take such a step. On the other pole was consumer goods industry where only 30% of enterprises could afford using profits for payment of higher contributions.
The 2011 survey revealed that profits became the most commonly used source of funds for meeting public commitments. 67% of enterprises resorted to it. In food industry, timber processing and metallurgy profits were used for this purpose by 80% of enterprises. This fact seemed to have a negative effect on the estimates of financial and economic performance of enterprises in the II quarter of 2011 when it clearly deteriorated. For the first time since January 2009 the balance of estimates decreased and the decrease was quite sizable - from -5 to -13 points. This was the result of higher share of "poor" estimates (up from 15 to 21%) and the dropping share of "satisfactory" estimates (down from 71 to 65%). At the stage of recovery from the crisis these indicators had never demonstrated negative dynamics before.
In 2010 29% of industrial enterprises intended to cut investments in case of higher tax burden. These projections turned out to be quite precise. In 2011 the same 29% of enterprises actually responded to tax innovations in such a way. A year before this response was most frequently mentioned as possible in non-ferrous metallurgy (49% of enterprises stated such intentions in 2010 and 39% actually halted development plans in 2011), timber processing (46% and 39%, accordingly) and consumer goods industry (40% and 34%, accordingly). In 2011 machine-building also joined the group of leaders by the decrease of investments due to higher UST: 31% of enterprises in the industry had such intentions and 36% actually materialized them.
In 2010 the reduction of employment benefits (voluntary health insurance, other social benefits to employees, soft loans) ranked third by popularity among 10 possible responses to higher UST rates. Most frequently it was mentioned by large enterprises (which is understandable as such benefits are more widely spread in this group), enterprises in non-ferrous metallurgy and construction materials industry.
Raising of prices Reduction of profits Reduction of employment benefits Reduction of investments Dismissal of inefficient workers Reduction of wages for all workers Illegal employment, shadow schemes Reassigning of wages to skilled workers Reduction of output Halting of production
0 10 20 30 40 50 60 70 80 □ 2010 □ 2011
1 1 1 1 1
1 1 1 1 1 1 1 1 ----"1
-T-T-T-r-1 1 1 1 1 1 1
1 -Il 1 1 1 1 1 1 1 1
1 1 1 1 -1 -1—1 1 1 1 11 1 f Il 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Fig. 33. Projected (2010) and actual (2011) responses of enterprises to the raising of compulsory insurance contributions, as % of respondents
But the actual saving at the expense of employment benefits turned out to be more modest. In 2011 only 24% of enterprises reported using such "sources of financing" bigger expenditures on UST. The accuracy of enterprises' projections regarding this protective measure was the lowest. As a result by the frequency of actual application it stepped backed to the fourth place. It was more often used by small enterprises than by large ones. Among industries the leaders were food industry, timber processing and non-ferrous metallurgy.
Dismissals of inefficient workers due to higher rates of UST were planned by 29% of enterprises in 2010. They could be most sizable in non-ferrous metallurgy and consumer goods industry. Actually 20% of industrial enterprises (first of all small and very large ones, engaged in machine-building and consumer goods industry) managed (opted) to take such steps.
In 2010 18% of enterprises planned to lower wages in order to reduce the amount of compulsory insurance contributions. This measure was more popular with small enterprises; the probability of its implementation reduced in line with the growth of enterprise size. In ferrous metallurgy and construction materials industry 25% of enterprises were ready to take such unpopular steps. However, in 2011 only 13% of enterprises actually cut wages. As expected, small enterprises resorted to this measure more often. Among branches only food industry stood apart with the indicator amounting to 24%.
To our mind, the low popularity of responses affecting employment and labour remuneration can be explained by big problems that Russian enterprises encounter and will continue to encounter on the labour market. On the eve of 2008 crisis the availability of skilled personnel became a serious constraint to production growth in Russian industry. Half of enterprises stated that in July 2008. At the stage of recovery from the crisis producers start to realize that labour can soon become the scarcest resource. The shortage of personnel relative to "expected changes in demand" has long been observed in industry. Therefore the solving of problems at the expense of workers is the last thing enterprises are going to do.
In 2010 only 9-10% of enterprises projected to use "criminal" protective measures (reassignment of wages to the most qualified workers with further redistribution "in envelopes", the reduction of these payments by means of illegal employment, the general escape into the shadows). In 2011 7-8% of enterprises implemented these schemes.
4.3. Investment into Real Economy
4.3.1. Domestic capital investment
The crisis of 2008 drastically changed the situation in the investment sector. During the period from 1999 until 2008 the trend of investment demand expansion with the average annual rate of 112.6% was supported by favorable situation both domestically and in foreign markets. This trend was abruptly terminated by acute crisis in construction and investment complex. In 2009 capital investment slowed down by 15.7% while GDP decline was 7.8%, so this slide of investment was much deeper than during 1998 crisis. The specificity of post-crisis recovery after 2008 was demonstrated in extremely slow recovery rates for business activity in the sphere of investment. In 1999-2000 increasing the share of capital investment in the overall GDP structure was the key driver for intensive recovery of GDP and hitting the pre-crisis level of 1997 quite soon shaping the preconditions for dynamic economic growth in the following years. On the contrary, during the three-year period between 2009 and 2011 the share of capital investment in the GDP remained at the same level of 20.4% having led to slow down of recovery after 2008 financial crisis. In 2011 the level of capital investment still did not reach the 2008 level being 3.3% below it.
After financial crisis of 1998 economic recovery was underpinned by active engagement of standby and under-loaded production capacities. This was the key driver of outrunning capital investment rates for major enterprises. However, simultaneously the impeding factors limiting growth were becoming more and more important: high level of fixed assets depreciation and shortage of skilful workforce. Their negative impact was partially compensated by increased economic activity of small and medium sized businesses. Their share of capital investment (in the total volume of capital investment in Russian economy) grew from 10% in 2000 up to 24% in 2008. During this period of time the average annual capital investment growth rates for small and medium sized businesses were significantly exceeding investment performance of major enterprises.
The situation changed drastically in 2009, when rin the context of financial and economic crisis the decreased volumes of loans and growing of average weighted interest rate for small and medium sized businesses (up to 20%) led to capital investment in this segment falling down almost by 13.4% versus the preceding year, which negatively impacted the situation in investment sector in general. In 2010 financial support of small and medium sized businesses became of the state priorities: the overall budget appropriations for such support made Rb 17.97bn; capital investment grew by 8.7% versus 2009, and their share in the total volume of investment in the economy grew up to 27.6%. In 2010 the dynamic growth of investment demand in small and medium sized businesses segment compensated the retarded dynamics of capital investment of major companies Fig. 34. Unfortunately, these structural changes were rather of opportunistic character and were not supported by the fundamental changes in the overall investment climate of Russia.
80 70 60 50 40 30 20 10 0 -10 -20 -30
■ i capital investment without small businesses and investment not observed by
direct statistical methods 1 1 capital investment of small businesses and not observed by direct statistical methods
^^^total capital investment of companies including additional estimates for investment not observed by direct statistical methods
*preliminary estimates.
Source: Federal Statistics Service.
Fig. 34. Dynamics of capital investment for major companies and small businesses in 2005-2011, % to the preceding year
In 2011 the positive dynamics of investment activities in small and medium sized businesses segment was maintained (Fig. 35). Capital investment rates of small businesses in 2011 were 2.3% higher than in the preceding year, which allowed for hitting the pre-crisis level of 2008. In major companies segment the investment dynamics was positively impacted by implementation of a set of measures from the government's anti-crisis program. In 2010 incremental capital investment for major companies was 5.1%, and in 2011 - 10.1%. Let us note here, that in 2011 increase in capital investment activity by major companies became the driver for improving capital investment growth rates up to 108.3% versus 106.0% in the preceding year (Fig. 35).
25 20 15 10 5 0 -5 -10 -15 -20
Source: Federal Statistics Service.
Fig. 35. GDP and capital investment dynamics in 1998-2011, % to the preceding year
-
■ n
2005 2006 2007 2008 20 )9 YS^ 2010 2011
99 7
] capital investment
■GDP
Over the recent decade the profile of investment by forms of ownership has changed (Fig. 36). The major portion of capital investment falls on private enterprises and organizations, their share in total investment grew from 29.9% in 2000 up to 51.1% in 2008 and 59.4% in 2010. Another characteristic feature is increased share of investment by enterprises and organizations with foreign capital. These investments reached their peaks in 2005-2007. In the following years due to lack of systematic measures targeted at investment climate improvement foreign investors suspended their activity.
90,0 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 _ H 1-1 1 1 1 1 1 1 1 1 1 1 a i i ■ i i i i i i i 1 i 4 i ! 1-I- l V ii I I "j" J n ! ! i i ■ i ■ i ■ i ■ i 11 H H H 1 ! ■ = 1- L
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
□ Joint Russian and foreign capital 12,2 12,2 10,7 11,8 9,7 11,2 10,6 9,8 8,7 8 7,6
E3 Foreign capital 1,5 2,3 3,6 4,1 6,9 8,2 7,8 7,1 7,5 6,8 5,3
E3 Mixed Russian ownership (without foreign capital) 27,8 21,6 18,6 17,4 15,5 12,9 12,2 11,1 10,1 7 7
HE Private ownership 29,9 36,7 42,0 41,2 46,5 44,9 47,5 49,7 51,1 55,2 59,4
B Municipal ownership 4,5 4,9 4,7 4,3 4,1 3,8 4,2 4,4 4,3 3,6 3
HE State ownership 23,9 22,1 20,2 21,0 17,1 18,8 17,5 17,7 18,1 19,3 16,7
Source: Federal Statistics Service.
Fig. 36. Capital investment profile in the Russian Federation by forms of ownership, % to the outcome
During the period of 2000-2010 investment profile by funding sources also changed. The share of capital investment at the expense of borrowed funds grew, and at the same time investment funded by equity capital fell down to 40.4% in 2007, and even during the post-crisis development in 2009-2010 it remained below the average level of the preceding years. However, slow recovery rates of domestic market and overall economy income recovery dictated enterprises and organizations using more equity to fund their investment programs in 2011. As of the end of 2011 the share of equity investment in the overall capital investment grew up to 42.7% and exceeded the preceding year indicator by 1.7 p.p. (Table 9).
Table 9
Capital investment profile by funding sources (without small business entities and investment amounts non observable by statistic methods), % to the outcome
1999 2000 2005 2006 2007 2008 2009 2010 2011
1 2 3 4 5 6 7 8 9 10
Capital investment, total 100 100 100 100 100 100 100 100 100
Including by funding sources:
Equity capital 52.4 47.5 44.5 42.1 40.4 39.5 37.1 41.0 42.7
cont'd
1 2 3 4 5 6 7 8 9 10
Withheld profit (accumulation fund) 15.9 23.4 20.3 19.9 19.4 18.5 16.0 17.1 17.2
Borrowed funds 47.6 52.5 55.5 57.9 59.6 60.5 62.9 59.0 57.3
including:
Bank loans 4.2 2.9 8.1 9.5 10.4 11.8 10.3 9.0 7.7
Including loans by foreign banks 0.6 1.0 1.6 1.7 3.0 3.2 2.3 1.5
Borrowing from other organizations 5.6 7.2 5.9 6.0 7.1 6.2 7.4 6.1 5.0
Budget funds 17.0 22.0 20.4 20.2 21.5 20.9 21.9 19.5 18.8
including:
Funds from the Federal Budget 6.4 6.0 7.0 7.0 8.3 8.0 11.5 10.0 9.8
Funds from sub-national budgets (RF constituents) 9.6 14.3 12.3 11.7 11.7 11.3 9.2 8.2 7.9
Extra-budgetary funds 8.6 4.8 0.5 0.5 0.5 0.4 0.3 0.3 0.2
Others 12.2 15.6 20.6 21.7 20.1 21.2 23.0 24.1 25.6
including:
Superior organizations funds 10.6 12.5 11.3 13.8 15.9 17.5 20.2
Funds received from share participation in construction (from organizations and individuals) 3.8 3.8 3.7 3.5 2.6 2.2 1.9
Including funds from the citizens 1.3 1.5 1.9 1.3 1.2 1.1
Funds from issuing corporate bonds 0.3 0.04 0.1 0.1 0.1 0.01 0.0
Funds from capital stock issues 0.7 0.5 3.1 2.3 1.8 0.8 1.0 1.1 1.0
Within overall capital investment -foreign investment 4.7 6.6 6.9 5.4 4.3 4.3 3.8 3.1
Source: Federal Statistics Service.
Change of the borrowed funds volumes and shares in the overall funding sources profile was accompanied by some structural change. The demand for products and services of Russian enterprises on behalf of the government was supported by implementation of the planned investment projects in transportation, ICT and some other spheres within the framework of federal target programs and Federal Targeted Investment Program (FTIP), as well as by implementation of major infrastructure programs of the Investment Fund. In accordance with the government investment priorities such funds were mostly channeled for modernization and development of strategically important production infrastructure sites, implementation of investment projects focused on introduction of state-of-the-art technology to improve competitiveness of Russian mechanical engineering products, as well as improvement of industrial safety in energy, transportation, waters and forests management. In the crisis environment the government provided incentives for introducing innovations through implementation of "producible" federal target programs. Appropriations for such programs were either maintained at the previously planned level, or immaterially reduced. The share of budget appropriations channeled into capital investment made 3.1% of GDP in 2009 versus 2.54% of GDP in 2007, including Federal Budget appropriations making 1.62% of GDP in 2009 versus 0.98% of GDP in 2007. In 2010 the share of budget funds used as capital investment grew even more and made 2.87% of GDP, and then immaterially decreased in 2011 making 2.66% of GDP. Similar dynamics was observed for investment at the expense of the Federal Budget - 1.47% of GDP and 1.39% of GDP respectively (Fig. 37). In 2010-2011 the ratio between the Federal Budget and regional budgets appropriations channeled to investment changes. In the overall amount of investment at the expense of budget appropriations the Federal Budget share in 2011 was increased up to 52.2% versus 38.2% in 2008.
4,00 3,50 3,00 2,50 2,00 1,50 1,00 0,50 0,00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
□ Share of budget approriations for capital investment § Share of Federal Budget approriations for capital investment
3,18
3,37 3,40 3,41
2,32
2,05
79
78
3,05
86
2,68 2,71-2,73
2,18
2,86
87
82
93
64
94
99
30
30
2,87
78
2,66
47
39
Source: Federal Statistics Service.
Fig. 37. Share of budget appropriations for capital investment during the period
of 1999-2011, % to GDP
In 2011 it was planned to channel Rb 895.0bn from the Federal Budget to construction, revamp, technical re-equipment and acquisition of facilities, as well as to implement major integrated investment projects included into Federal Targeted Investment Program, including budget investment of Rb 769.6bn (subsidies - Rb 125.4bn)1.
As of the end of 2011 taking into account all the changes actual Federal Budget funds allocated for construction and measures within Federal Targeted Investment Program constituted Rb 946.0bn (1.74% of GDP) exceeding 2010 level by Rb 181.6bn.
In 2011 Rb 573.8bn (60.7% of total FTIP investments) were allocated for projects included into federal target programs (program element of FTIP). Rb 372.2bn were allocated for construction of facilities and implementation of measures beyond federal target programs (39.3% of total FTIP investments). Rb 160.2bn were reserved within FTIP for funding specialized work associated with State defense order in 2011 (16.9% of total FTIP investments).
According to the Federal Statistics Service (Rosstat), the level of budget appropriations for FTIP construction sites and facilities (without account of special facilities included into state defense procurement) monitored by Federal Statistics Service in January-December 2011 made Rb 504.6bn, i.e. 70.9% of the annual limit (Table 10).
In accordance with the Federal Targeted Investment Program for 2011 as amended by January 1, 2012, budget appropriations were made for construction and acquisition of 3842 sites with 2226 sites to be commissioned. In reality 500 sites were commissioned in
1 Starting from 2011 Federal Targeted Investment Program includes not only Russian Federal property and property of legal entities not being state or municipal institutions / unitary enterprises, but also capital construction property of the RF constituents (regional governments) and municipal property co-funded out of the Federal Budget. 232
2011: 425 - at full capacity, 75 - partially. As of January 1, 2012, technical availability for 876 sites was within the range from 51.0% to 99.9%.
Table 10
Sites included into FTIP and CAPEX funded out of the federal budget объемы in 2011 (without account of sites included into state defense procurement)
Number of sites in Commissioned in Limit of state CAPEX
2011 2011 for 2011 Funded out of Federal Budget Utilized in-
total Including those with commissioning deadline in 2009 at full capacity partially total Including funded out of the federal budget vestment from all funding sources in 2011
sites Rb bn
Total 3842 2226 425 75 771.4 711.6 504.6 515.6
including: 1110 532 127 11 295.3 276.9 248.9 237.7
transport complex
agricultural complex 184 107 49 13 8.6 8.4 7.7 6.8
special complex 753 545 111 14 55.3 50.4 31.0 31.9
social complex 1611 966 131 34 362.6 332.8 186.2 214.0
Other sites 184 76 16 3 49.5 43.0 30.8 25.2
Source: Federal Statistics Service.
At the expense of annual limit in 2010 Rb 504.9bn were allocated out of the Federal Budget (70.9% of total annual appropriations) and Rb 51.0bn were allocated out of regional budgets (69.4% of the overall funds of regional budgets). In January-December 2011 state customers utilized Rb 515.5bn of state CAPEX, i.e. 66.8% of the annual limit of construction appropriations. The level of budget funding utilization of the total actual appropriations at the expense of all funding sources made 92.8%.
Prior to 2008 crisis the amount of borrowed funds for investment was growing due to increased activity of the banking sector, growth of citizens' investment into housing construction and intensive in-flow of foreign capital. In 2009 absolute shrinkage of bank loans for investment purposes was registered. The key factors suppressing further deepening of the crisis at the investment market during that period were: growth of loans from foreign banks and active borrowing from other companies1. The share of loans from foreign banks for capital investment in the overall banks' loans made 31.4% and reached its maximum over the last decade.
In 2010 the trend of decreasing the share of bank capital and borrowed funds in the overall capital investment started to decrease: out of Rb 2,769.0bn of total borrowed funds Rb 559.2bn fell on bank loans, i.e., 14.8% versus 18.4% in 2008. In this context in 2010 given the trend for stabilization of loans for capital investment issued by Russian banks, loans from foreign banks decreased by Rb 62.5bn and determined the aggregate decrease of bank loans share in the overall funding of capital investment. In 2011 growth of loans from Russian banks fully compensated for decrease of loans from foreign banks. During one year period incremental loans for capital investment issued by Russian banks made Rb 46.0bn (Fig. 38)
1 According to the Methodology Regulations for Statistical Indicators in Construction and Capital Investment (Order by the Federal Statistics Service No.37 issued on March 11, 2009) borrowed funds for capital investment include: bank loans, share sale revenues, charity donations and other contributions, funds from superior joint-stock companies (holdings, industrial and financial groups) on a grant basis; funds borrowed from other organizations including loans from the government on a pay-back basis, loans from foreign investors, bonded debt, loans from institutional investors: equity funds and investment companies, insurance companies, as well as promissory notes and other funds. See,
700,0 600,0 500,0 400,0 300,0 200,0 100,0 0,0
□ loans from Russian banks
□ loans from foreign banks
_
n_ fl-. ill ■ I 1 1
200 200 01
24,5 47,1
6,2 11,5
200 200 23
72,2 94,9
12,9 21,3
200 200 45
129, 207,
26,9 27,9
200 200 67
305, 457,
59,2 86,9
200 200 89
593, 427,
198, 195,
201 201 01
429, 475,
130, 119,
Source: Federal Statistics Service.
Fig. 38. Bank loans for capital investment in 2000-2011, Rb bn
Source: Federal Statistics Service.
Fig. 39. Indices of capital investment, foreign investment and direct foreign investment
during 1998-2011, % of 1997 level
During the period of 1998-2007 foreign investment into Russian economy increased 9.8 times, including direct foreign investment growth of 5.2 times. This resulted in increased share of foreign investment and loans from foreign banks in funding capital investment. For-
eign investment share in the overall capital investment into Russian economy grew from 4.7% in 2000 up to 5.4% in 2007.
2008 crisis featured greater decrease of foreign investment into Russian economy versus domestic investment. Besides, net capital flight (disinvestment) reached its historic maximum of $ 133.9bn in 2008 fully offsetting the positive trends of the preceding two years (Table 11).
In 2009-2011 the foreign investment profile transformed due to sharp decline of the amount and share of direct investment and increase of other investment. In 2010 foreign investment into Russian economy constituted 94.8%, and direct foreign investment constituted 49.7% of 2007 level. At the same time domestic investment decreased by 1.8%. In 2011 direct foreign investment grew by 33.3%, but they still constituted only 2/3 of the pre-crisis level of 2007-2008. The situation was aggravated by the trend to capital flight which persisted during the last three years. Net private capital export in 2009 was making $ 56.9bn, and in 2011 - $ 84.2bn. Eventually the share of foreign investment in the total capital investment fell down to 3.1% in 2011 versus 3.8% in 2010.
Table 11
Net private capital import/export as per balance of payments, $ bn
Net capital import/export in private sector Net capital import/export by banks Net capital import/export in other sectors
1998 -21.7 -6 -15.7
1999 -20.8 -4.3 -16.5
2000 -24.8 -2 -22.8
2001 -15 1.3 -16.2
2002 -8.1 2.5 -10.6
2003 -1.9 10.3 -12.2
2004 -8.9 3.5 -12.4
2005 -0.1 5.9 -6
2006 41.4 27.5 13.9
2007 81.7 45.8 35.9
2008 -133.9 -56.9 -76.9
2009 -56.9 -30.4 -26.5
2010 -33.6 15.9 -49.5
2011 -84.2 -26.2 -57.9
Q1 -20.1 -7.7 -12.5
Q2 -7.3 -2.6 -4.7
Q3 -19.0 -8.5 -10.4
Q4 (estimate) -37.8 -7.5 -30.3
Source: Central Bank of Russia.
In 2009 we can observe a turning point of such trend in the sphere of housing construction. After pretty sustainable growth of housing construction during the period of 2001-2008, in 2009-2010 housing commissioning declined by 8.9%, including commissioning of housing funded by citizens and borrowed funds - by 6.9% versus the pre-crisis level of 2008.
In H1 2011 the decline in housing commissioning was making 3.7% versus similar period of the preceding year. The situation changed in Q3 2011, when housing commissioning grew by 15% versus similar period of the preceding year, and as a result as of the end of the year the increment of commissioned housing made 6.6% of 2010 level. At the same time 26.7m sq. m was commissioned in 2011 at the expense of citizens funds and borrowed funds, which exceeds the level of the preceding year by 1.4m sq. m. As for housing commissioned at the expense of companies/organizations' funds, it demonstrated growth by 3.5m sq. m.
The share of individual housing construction in the overall housing commissioned declined and in 2011 made 42.9% versus 43.7% in 2010 and 47.7% in 2009. Investment activity of the population in 2011 was supported by growing demand for loans in the context of decreasing
the interest rates. However, the impact of this growth on the dynamics of housing commissioning is determined by the time lags within the construction cycle and is visible beyond the preceding year. The amount of issued residential loans in 2011 made Rb 749.2bn (1.38% of GDP) versus Rb 418.2bn (1.28% of GDP) in 2010, including Rb 693.8bn in mortgages (0.93% of GDP) versus Rb 346.6bn (0.77% of GDP) one year before.
Absolute growth of investment into housing construction (by Rb 25.5bn) was observed in 2011, including growth by Rb 14.5bn at the expense of citizens funds invested into construction under shared ownership terms (Fig. 40). However, in the overall capital investment in the economics the share of investment into housing construction in 2011 went down to 1.9% versus 2.2% in 2010 and 3.5% in 2008.
In the capital investment profile by types of fixed assets the share of housing construction expenses decreased in 2011, while the share of expenses for non-residential construction was decreasing (Table 12). Total area of non-residential buildings grew in 2011 by 9.9% versus the preceding year. Along with the increase of share of expenses for industrial construction the share of investment into machines and equipment acquisition was also growing. Let us notice that in 2011 given the unstable dynamics of domestic capital goods production, the share of investment into acquisition of imported machines, equipment and transportation vehicles (without small business entities) in the total investment into machines, equipment and transportation vehicles made 18.6% versus 18.0% in 2010.
140 120 100 80 60 40 20 0
□ organizations' funds invested into construction under shared participation terms
■ citizens' funds invested into construction under shared participation terms
2006 2007 2008 2009 2010 2011
94,5 115,5 107,7 81,1 51,8 62,8
50,2 78,5 124,6 76,9 69,6 84,1
Source: Federal Statistics Service.
Fig. 40. Funds channeled to construction under shared ownership terms
in 2007-2011, Rb bn
Purchasing foreign equipment is more profitable for a number of reasons: its relative price, high quality and post-sale maintenance support. Purchasing foreign equipment became the major type of innovation activities of industrial enterprises.
Table 12
Capital investment by types of fixed assets in 2008-2011 (without small businesses and informal activities), % to the outcome
Rb bn % to the outcome
2008 2009 2010 2011 2008 2009 2010 2011
Capital investment, total 6272.1 5769.8 6413.7 7701.2 100 100 100 100
Including:
housing 467.2 343.5 372.3 361.8 7.5 6.6 5.7 4.7
buildings (without residential) and facilities 3286.8 3221.2 3495.8 4172.5 52.4 53.8 53.6 54.3
machines, equipment, transportation vehicles 2071.3 1798.2 2109.6 2644.3 33.0 32.2 33.4 34.3
other 446.8 406.9 436.0 522.6 7.1 7.4 7.3 6.8
Source: Federal Statistics Service.
The major portion of capital investment during 2010-2011 was channeled to purchasing new machines and equipment. According to Federal Statistics Service, 32-46% of companies/organizations invested into improving the efficiency of production (automation or mechanization of the existing processes, introduction of new technology, reduction of production costs, energy savings); 32% of companies/organizations were seeking increase of production capacity without changing the product slate, and 29% of companies/organizations were striving for increasing production capacity with simultaneous expansion of the product slate. Changes in the capital investment profile by types of business over the last two years allow for identifying the most characteristic features of investment demand transformation. In 2009-2011 an immaterial increase of the industry share in the total capital investment was observed (without small businesses). At the same time quite significant differentiation of capital investment rate by types of business was observed. The post-crisis recovery was determined by both higher growth rates in mineral resources extraction sector and higher growth dynamics of demand for investment in this sector. It also needs to be taken into account that capital investment sagging in mineral resources extraction sector, in generation and distribution of energy, gas and heat was not as deep as in processing. In 2011 capital investment in mineral extraction sector grew by 13.8% versus the preceding year, in generation and distribution of energy, gas and heat - by 8.1% and in processing sector - by 6.3%. Capital investment in mineral extraction sector exceeded 2008 level by 9.4% and in generation and distribution of energy, gas and heat - by almost one third.
In 2011 capital investment growth in processing was observed in the majority of areas, however, the crisis manifestations persisted. Total capital investment in processing made 81.0% versus 2008 (Fig. 41).
The most prominent growth of investment among processing industries was registered in timber processing and timber items production (148.4% of 2010), in chemical production (123.4%), coke and petroleum production (115.5%). Stable high level of investment activity in textile manufacturing and leather production during the preceding three years needs to be highlighted. The key driver here is the change in customs regulations with regard to importing equipment and raw materials.
Slow recovery of demand for capital goods and structural materials determined the volume of investment in metallurgy and commercial metal goods production, which remained at 2010 level. At the same time investment into commercial metal goods production declined by 22% versus the preceding year.
Fig. 41. Capital investment by sectors of industry in 2011, % of 2008
Investment activity in mechanical engineering is recovering a lot slower than in other businesses. In 2011 the share of capital investment in mechanical engineering constituted 2.3% of total investment into economy and 13.5% of investment into processing. Investment into machines and equipment manufacturing increased by 13/0% in 2011, while in transportation vehicles and equipment manufacturing the investment went down by 3.8% versus the preceding year.
The share of investment into transportation development in 2011 went up to 25.3% of total capital investment into the economy. Investment into transportation and communication grew 1.3 times versus 2008, which is connected with intensive implementation of pipeline transportation investment programs during 2009-2011 (Table 13).
Investment into social sphere development is still below the pre-crisis level.
Growth of investment into research and development was registered during the last three years. Between 2009 and 2011 investment into R&D grew 1.7 times and in 2011 made 1.0% of total capital investment into economy.
The conditions of material resources and facilities remain the key factor of successful functioning of R&D sector. Despite positive quantitative characteristics of GDP dynamics, capital investment, labor market and state budget, Russian economy is still lagging behind many developed economies judging by many qualitative parameters. Labor productivity makes only 2/3 of the level of EU countries, and capital investment share in gDp is still insufficient to modernize the economy and intensive progress of scientific research and development.
Table 13
Amount and dynamics of capital investment in 2008-2011 by types of business (without smaller businesses and informal activities parameters)
Rb bn % to the preceding year
2008 2009 2010 2011 2008 2009 2010 2011
Total 6272.1 5769.8 6413.7 7701.2 105.6 82.5 105.1 110.4
including: 243.0 192.6 190.9 251.3 95.7 75.2 88.9 110.9
agriculture, hunting and forestry
mineral resources extraction 1040.9 967.8 1109.8 1312.2 103.9 88.3 108.9 113.8
including: 950 893.5 1021.5 1187.5 104.8 89.1 108.7 112.3
production of fuel and energy reserves
processing industry 1034.0 881.9 993.7 1172.3 107.8 78.2 103.3 106.3
generation and distribution of energy, gas 558.2 585.6 786.3 918.5 111.3 99.8 124.1 108.1
and water
construction 91.7 162.7 194.1 165.1 91.7 66.1 117.3 89.9
wholesale and retail 168.7 138.4 158.4 171.7 95.6 75.7 108.9 88.4
transportation and communications 1628.0 1624.6 1696.1 2223.7 112.4 99.1 109.0 120.6
including communications 257.4 180.6 207.3 274.7 95.1 66.6 108.6 113.4
financial activity 74.7 74.6 77.2 124.3 95.6 99.4 107.1 142.2
transactions with real property, leasing and 733.8 558.2 658.3 607.1 100.9 70.8 92.8 94.9
provision of services
including R&D 31.9 48.9 62.8 74.1 101.9 131.9 114.4 112.5
government administration and defense; 128.2 133.0 120.5 131.5 109.7 89.5 87.0 108.4
mandatory social insurance
образование 162.9 117.4 142.9 170.2 96.9 78.7 113.7 111.3
healthcare and social services 188.0 145.7 161.3 175.9 116.0 82.1 105.6 104.1
other communal, social and personal ser- 128.8 168.6 185.8 239.9 127.9 85.1 102.8 117.7
vices
Source: Federal Statistics Service.
4.3.2. Foreign Investments
In 2011, the inflow of foreign investment into the RF increased by 66.1% on 2010 - to $ 190.6bn, thus rising 57.6% over the historic high registered in 2007 (Table 14).
At the same time, foreign investors continued to leave the Russian market. As seen by the results of the year 2011, the outflow volume amounted to $ 165.2bn, or to 86.6% of the foreign investment inflow observed over that same period. Investment outflow took the form of foreign investors' incomes transferred abroad, as well as the payment of interest on credits and credit redemption. As compared to the 2010 level, capital outflow increased by 36.7%. Besides, in 2011 the volume Russia's overseas investment rose to $ 151.7bn, or by 57.6% on 2010, thus amounting to 79.6% of the volume of investment in the Russian economy (in 2010 - 83.9%).
On the whole, the inflow of foreign investment in the Russian economy increased from 7.8% of GDP in 2010 to 10.3% of GDP in 2011 (Fig. 42).
In 2011, the highest investment growth (by $ 71.6bn) was noted in the 'other investments' segment. Direct investment increased by $ 4.6bn. This growth was contributed to by all categories of direct investment. The bulk of direct investment was constituted by contributions to charter capital and credits obtained from foreign stakeholders in organizations. The former, as seen by the results of the year 2011, rose by 17.9% to $ 9.1bn. The volume of credits received from foreign stakeholders rose by 62.6% to $ 7.5bn. Thus, the share of credits issued by foreign stakeholders in the structure of foreign direct investment (FDI) in the RF increased from 33.4% in 2010 to 40.7% in 2011, while the share of contributions to charter capital dropped from 55.8% to 49.3%.
12% 10%
2004 2005 2006 2007 2008 2009 2010 2011
□ aggregate foreign investment inflow volume, % of GDP
_M foreign direct investment, % of GDP_
Source: Rosstat.
Fig. 42. Foreign Investment Inflow in the Russian economy in 2004-2011 (as % of GDP)
In 2011, the major rating agencies estimated the RF rating credit to be at the same level as in 2010.
Table 14
Structure of Foreign Investment in the Russian Economy1
In m USD As % of previous year
Total Direct Portfolio Other Total Direct Portfolio Other
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...............
2011 ...........190,643.......... ................18,415.......... 805 171,423 166.1 133.3 ..........74.9.................. 171.7................
Source: Rosstat.
According to the UNCTAD's World Investment Report published in July 2011, in 2010 the RF was the 7th most successful country in terms of the volume of attracted foreign direct investment (in 2009 - the 6th; in 2008 - the 5th; in 2007 - the 9th; in 2006 - the 10th; in 2005 -the 15th). As in the previous year, as far as the large developing economies were concerned, Russia came second after China in terms of the FDI volume. As stated in the Report, in 2010 Russia received 3.3% of the world foreign direct investment volume (in 2009 - 3.5%; in 2008 - 4.1%), and 7.1% of the volume of foreign direct investment inflow into developing countries (in 2009 - 8.2%; in 2008 - 11.9%) (Fig 43).
1 Direct investments are investments in real assets, acquisition of a controlling stake or a stake with the right of participation in management; portfolio investments are investments in securities solely for deriving income; other investments are returnable investments (credits issued by international financial organizations, commercial credits, etc.).
50% n 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
39,7% 35,4%
1175%
n^Ti
-----15,7%------ -
-29,5% '-
-22,3%
-22,3% -37,5% -32,1%
12,3%
5,0%
-0,2%
2007
2008
2009
2010
□ Developed countries ■ Developing countries □ World, total
Source: UNCTAD, World Investment Report 2011, 26.07.2011.
Fig. 43. Movement of Foreign Direct Investment Inflow in 2007-2010
In accordance with the UNCTAD's report, the world's aggregate foreign direct investment volume in 2010 rose slightly above its 2009 level (Fig. 44) According to preliminary estimates, in 2011 that index returned to its pre-crisis value, amounting to $ 1.4-1.6 trillion; in 2012 it will increase to $ 1.7 trillion; in 2013 the historic high of 2007 at the level of 1.9 trillion will be reached.
Source: UNCTAD, World Investment Report 2011, 26.07.2011.
Fig. 44. World's Foreign Direct Investment Inflow, bn USD
The implementation of that scenario can be possible in absence of any serious problems in the world economy. According to the pessimistic scenario, in 2011-2013 the aggregate foreign direct investment volume will remain at the level of 2010.
The segment of portfolio investments in the Russian economy in 2011 demonstrated a decline by 25.1% on 2010. Their structure displayed growth of investments in stock capital by 67.6%, with the resulting increase in their share from 32.0% in 2010 to 71.7% in 2011 (in 2007 - 95.5% of portfolio investment volume; in 2008 - 79.6%l un 2009 - 42.9%).
Other investments rose in 2011 by 71.7% on 2010 - by $ 71.4bn. The share of commercial credits within the 'other investments' structure dropped from 17.6% (by the results of the year 2010) to 16.2% in 2011 (in 2008 - 21.5%; in 2009 - 21.4%). In terms of loan period, the share of credits issued for periods over 6 months declined to 28.3% against 38.0% in 2010. (in
2008 - 68.1%; in 2009 - 67.9%). The share of credits issued for periods less than 6 months rose to 53.4% (in 2010 - 10.1%; in 2009 - 10.1%; in 2008 - 8.8%).
Thus, in 2011 the structure of foreign investment in the Russian economy remained practically the same as in the previous year (Table 15).
Table 15
Structure of Foreign Investment in the Russian Economy in 1996-2011, %
Direct investment Portfolio investment Other investments
2000 40.4 1.3 58.3
2001 27.9 3.2 68.9
2002 20.2 2.4 77.4
2003 22.8 1.4 75.8
2004 23.3 0.8 75.9
2005 24.4 0.8 74.8
2006 24.8 5.8 69.4
2007 23.0 3.5 73.5
2008 26.0 1.4 72.6
2009 19.4 1.1 79.5
2010 12.0 1.0 87.0
2011 9.7 0.4 89.9
Source: Rosstat.
In 2011, as before, foreign investment was directed in the main towards the financial sphere, industry and trade. These sectors of the Russian economy accounted for 90.5% of the aggregate foreign investment volume (in 2010 - 86%). Investor interest in investing in transport and communications became less pronounced.
The lower rate of growth of foreign investment in industry and real estate transactions alongside increasing aggregate foreign investment indices and substantial growth of investments in trade and financial activity resulted in certain changes in the structure of foreign investment by comparison with the previous year. The distribution of foreign investment across the main sectors of the Russian economy is shown in Table 16.
Table 16
By Sector Structure of Foreign Investment in the Russian Economy in
2009-2011
In m USD As % of previous year As % of total
2009 2010 2011 2009 2010 2011 2009 2010 2011
Industry 32 980 47 558 61 145 66.4 144.2 128.6 40.3 41.4 32.1
Transport and communications 13 749 6 576 5 943 282.8 47.8 90.4 16.8 5.7 3.1
Wholesale and retail trade; repair of motor vehicles, motorcycles, and personal and household goods 22 792 13 334 24 456 95.3 58.5 183.4 27.8 11.6 12.8
Real estate, renting and service rendering Financial activity Other sectors 7 937 2 658 ..........1 811.......... 7 341 9 237 .........86 885........ 51.6 53.4 92.5 1426.3........ 125.8 229.2 9.7 6.4 4.8
37 913 3.2 33.0 45.6
2 024 2 977 36.6 111.8 148.1 2.2 1.8 1.6
Source: Rosstat.
Within the structure of foreign investment in industry, as seen by the results of the year 2011, the leader in growth was the mining sector (extraction of mineral resources); investments in that sector rose by 34.5% on 2010 (in 2010 - by 34.2%) (Fig. 45). The volume of foreign investment in the processing industry rose by 23.9% (in 2010 - by 49.2%).
Within the processing industry, investments in the production of coke and petroleum products increased by 19.4%, and those in the chemical industry nearly doubled, amounting to
$ 15.8bn and $ 4.4bn respectively (in 2010, the former index increased 2.5 times, and the latter - by 41.3%). Foreign investment in metallurgy in 2011 rose by 21.1% on 2010 - to $ 9.2bn (in 2010 - by 69.7%).
The volume of direct and other investment in industry rose on 2010 by 40.6% and 26.4% respectively (in 2010, the former index declined by 7.9%, and the latter rose - by 62.0%). The volume of portfolio investment in industry increased by 39.9% (in 2010 that index dropped by 41.6%). Thus, the share of the volume of other investment in industry shrank from 84.9% in 2010 to 83.4% in 2011, and those of direct and portfolio investment over the same period increased from 14.3% to 15.7% and 0.8% to 0.9% respectively.
Some changes also occurred in the structure of foreign investment broken down by type of economic activity in industry. Direct investment in mineral resources extraction in 2011 increased 2.3 times to $ 4.6bn, resulting in growth of its share in the aggregate volume of investment in that sector to 24.8% (in 2010 - 14.7%; in 2009 - 30.7%; in 2008 - 40.2%). The share of other investment in mineral resources extraction, which in 2011 increased by 17.8% (to $ 13.9bn), dropped to 74.4% (in 2010 - 85.0%; in 2009 - 65.8%; in 2008 - 59.0%).
In 2011, the bulk of the investment volume in the processing industry was also constituted by other investment, whose volume rose on 2010 by 28.0%, thus amounting to 88.3% of the resulting volume of investment in the processing industry (in 2010 - 85.4%; in 2009 -80.6%). The volume of direct foreign investment in the processing sectors remained almost unchanged, its growth amounting to 0.8%. The share of direct investment in the processing industry in 2011 shrank to 11.4% (in 2010 - 14.0%; in 2009 - 18.5%).
Source: Rosstat.
Fig. 45. Structure of Foreign Investment in Industry in 2007-2011
A noteworthy feature of the geographical structure of foreign investment flowing in the Russian economy in 2011 is the altered order of countries in the list of biggest capital exporters in the RF. In 2011, the highest volume - $ 20.3bn (10.6% of the total foreign investment volume in the Russiany economy over that period) - was transferred from the Cyprus, followed by The Netherlands ($ 16.8bn). The UK came third, its volume of investment in the Russian economy amounting to $ 13.1bn.
In 2011, the highest growth rate was displayed by investments from the Cyprus - 2.3 times on 2010; investments from The Netherlands increased by 57.2%, and those from Luxemburg
and the UK declined by 12.9% and 67.9% respectively. The investment flow from China shrank by 75.3% (Fig. 46).
Source: Rosstat. Data for investments from the USA are for 2009-2011; China's investments in 2007-2008 are listed as other investment.
Fig. 46. Geographical Structure of Foreign Investment in the Russian Economy
in 2007-2011
As of the end of the year 2011, the accumulated foreign capital volume, less that of monetary regulation agencies, commercial and savings banks and including that of ruble-denominated investments recalculated in US dollars, amounted to $ 347.2bn, which is 15.7% more than the value of that index as of the year's beginning. The volume of accumulated direct investment since the year's beginning increased by 19.8%, other investment - by 13.2%.
As seen by the results of the year 2011, the leaders in terms of the accumulated foreign capital volume are Cyprus, The Netherlands, Luxemburg, Germany, and China, their aggregate share amounting 63.5% (in 2010 - to 64.4%; in 2009 - to 66.3%). At the same time, the share of the top five investor countries in the other investment segment is estimated to be at the level of 63.2% (in 2010 - 64.8%; in 2009 - 62.9%), their shares in the structure of direct and portfolio investment is estimated to be 66.9% and 22.1% respectively (in 2010 - 67.1% and 21.9%; in 2009 - 69.0% and 85.1%).
In the structure of foreign investment accumulated as of the end of the year 2011 the share of other investment is highest and amounts to 57.1% (in 2010 - to 58.3%). The same index with regard to foreign direct investment is 40.1% (in 2010 - 38.7%).
4.4. The Oil and Gas Sector
Oil and gas production remain the core sector of Russia economy, which has a leading role in generating federal budget revenue and this country's balance of trade. The factors that exerted the most significant influence on the development of the oil and gas sector of the Russian economy in 2011 were the situation on the world oil market; the situation on the European gas market; and the objective deterioration of the conditions for the extraction of oil and natural gas, which is associated with a declining production at the 'old' deposits and the considerably higher costs of the development of new ones, especially in unpopulated areas with no infrastructure.
4.4.1. The Dynamics of International Prices of Oil and Natural Gas
A decisive influence on the situation on the world oil market in 2011 was produced by the relative rebound of the world economy after the financial and economic crisis of 2008-2009. The price of Brent in 2011 rose to the level of 111.0 USD/barrel, while that of Russia's Urals on the world (European) market increased to 109.1 USD/barrel, which is 39.3% above the previous year's level and 15.4% above the pre-crisis historic high achieved in 2008 (Table 17). The principal factors that determined price growth were as follows: an increasing demand for oil (Table 18) that resulted from growth of the world economy, and first of all the national economies of China, India and other Asian countries; the OPEC's conservative policy towards increasing the volumes of oil extraction in its member countries; the low rate of growth of oil production outside of the OPEC; and the drop in the supplies of oil from Libya as a result of the military actions in that country's territory. In conditions of the shrinking Libyan oil supplies, in April 2011 the international price of Brent surged to 123.1 USD/barrel To compensate for the decline in the supply of oil from Libya, and in fear of a negative effect of high international oil prices on international demand, some OPEC countries (and first of all Saudi Arabia) increased oil production in excess of the quotas established by the OPEC. This pushed down the international oil price to 110 USD/barrel (Table 19, Fig. 47).
In December 2011, on the basis of an estimated demand on the international market for additional supplies of oil, the OPEC increased the aggregate quota for oil extraction by its member countries to 30m barrel per day (including Iraq, on whose extraction volumes no restrictions had been imposed previously, and Libya). The new quota effectively corresponded to the level of oil extraction achieved by the OPEC in 2011. That level, however, is still below the OPEC countries' oil extraction level in 2008 (31.6m barrel per day).
Table 17
International Oil Prices in 2000-2011, USD/barrel
2000 2005 2006 2007 2008 2009
Price of Brent, UK 28.5 54.4 65.2 72.5 97.7 61.9
Price of Urals, Russia 26.6 50.8 61.2 69.4 94.5 61.0
cont'd
2010 2011 2011
Q1 Q2 Q3 Q4
Price of Brent, UK 79.6 104.9 117.1 112.5 109.3 111.0
Price of Urals, Russia 78.3 102.2 114.0 111.5 108.6 109.1
Source: IMF, OECD/IEA, OPEC.
Table 18
International Demand for Oil in 2008-2011, As % of Same Period of Previous Year
2008 2009 2010 2011
World, total -0.6 -1.2 3.2 0.8
OECD countries -3.6 -4.2 1.1 -1.2
including: North America -5.2 -3.7 2.0 -1.4
Europe -0.6 -4.7 -0.5 -1.9
Asia-Pacific Region -4.0 -4.6 1.7 0.5
Non-OECD countries 3.3 2.5 5.5 3.0
including: Asia (without Near East countries and former USSR republics) 1.7 4.4 7.0 3.5
Source: OECD/IEA.
International Oil Prices in 2011, USD/barrel Table 19
January February March April May June
Price of Brent, UK 96.3 104.0 114.4 123.1 114.5 113.8
Price of Urals, Russia 93.8 101.5 111.3 119.2 111.2 111.6
cont'd
July August September October November December
Price of Brent, UK 116.5 110.1 110.9 109.5 110.7 108.0
Price of Urals, Russia 115.0 109.2 110.4 108.1 110.5 107.3
Source: OECD/IEA, OPEC.
The prices of natural gas on the international market are determined, as a rule, by the level of prices of alternative energy carriers, in the main gasoil/diesel fuel and fuel oil, whose prices, in their turn, depend on international oil prices. Therefore the movement of the international prices of natural gas follows, with a certain lag, that of the international oil prices. The price of Russian natural gas on the European market reached its peak in 2008 followed by a historic low in 2010 (Table 20). In 2011, when international oil prices were on the rise, the price of Russian gas natural gas on the European market also rose significantly and amounted to 381.5 USD/1,000 m3, thus climbing 28.9% above the previous year's level. At the same time, the prices of Russian natural gas were declining in response to the changing situation on the European gas market, namely the rising natural gas supply, and in particular, the considerably increased supplies of liquefied natural gas (LNG), coupled with a lower level of natural gas spot prices by comparison with long-term contract prices (Table 21).
Table 20
International Prices of Oil and Natural Gas in 2002-2011, USD/barrel
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Mean international price of oil, USD/barrel 24.95 28.89 37.76 53.4 64.3 71.1 97.0 61.8 79.0 103.9
Price of Russian natural gas on the European market, USD/1,000 m3 96.0 125.5 135.2 212.9 295.7 293.1 473.0 318.8 296.0 381.5
Source: IMF.
Table 21
Prices of Oil and Natural Gas on the European market in 2010-2011,
USD/barrel
2010 2011
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Price of Brent, USD/barrel 76.7 78.7 76.4 86.8 104.9 117.1 112.5 109.3
Price of Russian gas on the European market, USD/1,000 m3 273.2 291.4 306.5 313.0 329.4 360.6 401.0 434.9
Natural gas spot prices gas on the European market (The Netherlands), USD/1,000 m3 145.4 178.8 204.0 224.5 244.7 246.3 239.3 247.1
Source: IMF, Bloomberg.
4.4.2. Production Dynamics and Structure in the Oil and Gas Sector
Growth in the volume of oil extraction in Russia in the first half of the 2000s occurred in response to the expanding opportunities for exports, in particular as a result of the creation of the Baltic Pipeline System, a more intensive development of the existing deposits and the increasing investment potential of oil companies due to the rising international oil prices. In the following years the rate of oil extraction growth dramatically dropped. If in 2002-2004 it was at the level of 8.9 to 11% per annum, in 2006-2007 the rate's per annum growth amounted to only 2.1%, and in 2008, for the first time over the recent period, the volume of oil extraction declined. This was a clear sign that the reserves for increasing oil extraction in this country through intensifying the development of the existing oil fields had been exhausted, and Russia had, from now on, to more actively develop new oil fields. In 2009, the volume of oil extraction once again began to rise, although its growth rate remained relatively low. In 2011, Russia's oil output rose by 0.8% on the previous year (Table 22, 23). This positive dynamics was determined by both the putting in operation of several big oil fields in the north of the European Russia and in Eastern Siberia and by some alterations introduced in taxation with the purpose of lowering the tax load on the oil sector, creating incentives for deeper oil extraction from existing oil fields and to encourage the development of new oil deposits in untapped regions.
Table 22
Oil Production and OIL Refining in the Russian Federation in 2000-2011
2000 2005 2006 2007 2008 2009 2010 2011
Oil extraction, including natural gas 323.2 470.0 480.5 491.3 488.5 494.2 505.1 511.4
condensate, m tons
Primary crude oil distillation, m 173 208 220 229.0 236.3 236.0 249.3 258.0
tons
Share of oil refining in oil extrac- 53.5 44.3 45.8 46.6 48.4 47.8 49.4 50.4
tion, %
Oil refining efficiency, % 71 71.6 71.9 71.7 72.0 71.9 71.1 70.8
Source: RF Federal State Statistics Service.
Table 23
Production of Oil, Petroleum Products and Natural Gas in 2000 - 2011, as a Percentage of the Previous Year
2000 2005 2006 2007 2008 2009 2010 2011
Oil, including natural gas condensate 106.0 102.2 102.1 102.1 99.3 101.2 102.1 100.8
Primary crude oil distillation 102.7 106.2 105.7 103.8 103.2 99.6 105.5 103.3
Motor gasoline 103.6 104.8 107.4 102.1 101.8 100.5 100.5 102.0
Diesel fuel 104.9 108.5 107.0 103.4 104.1 97.7 104.2 100.3
Furnace fuel oil 98.3 105.8 104.5 105.2 101.9 100.8 108.5 104.6
Natural gas 98.5 100.5 102.4 99.2 101.7 87.9 111.4 102.9
Source: RF Federal State Statistics Service.
The volume of oil refining in recent years has been increasing at a faster rate than that of oil extraction, mainly due to a more rapid growth of RF exports of petroleum products induced by the lower exports duties on them as compared to the exports duties on crude oil. In 2005-2011, the growth rate of primary oil refining was 3.2-6.2% per annum (with the exception of 2009), while that of oil extraction was 0.8-2.2% per annum (with the exception of 2008). As a result, the share of the volume of oil refining in the volume of oil extraction rose from 42.5% in 2004 to 50.4% in 2011. At the same time, Russia's oil refining efficiency over the last decade did not increase, and in 2011 it amounted to only 70.8%, which effectively corresponds to the level of 2000 (it can be noted that in the leading industrially developed countries oil refining efficiency is 90-95%). As before, Russia's oil refining efficiency and the quality of its petroleum products remain significantly below international levels.
In 2011, the largest volumes of oil were produced by the oil companies Rosneft, LUKOIL, TNK-BP, Surgutneftegaz, and Gazprom. These five companies accounted for 74 % of Russia's total oil production. Medium-sized companies (Tatnef, Slavneft, Bashneft and RussNeft) accounted for 14.4 % of this country's crude oil output. In 2011, the operators of production sharing agreements accounted for 3 % of all oil extracted in Russia. The share of all the other oil producers that comprised more than 100 small oil-extracting establishments amounted to only 8% (Table 24). State companies (federally owned) accounted for 31.1% of Russia's crude oil output. For reference it can be noted that, in 2003 (i.e., before their takeover of the assets of private oil companies), the share of Rosneft and Gazprom in Russia's crude oil output was only 7.3%.
Table 24
Structure of Oil Production in 2008-2011
Oil extraction Share in total Oil extraction Share in total Oil extraction Share in total
in 2008, m tons output of crude oil, % in 2010, m tons output of crude oil, % in 2011, m tons output of crude oil, %
1 2 3 4 5 6 7
Russia, total 488.5 100.0 505.1 100.0 511.4 100.0
Rosneft 113.8 23.3 112.4 22.3 114.5 22.4
LUKOIL 90.2 18.5 90.1 17.8 85.3 16.7
TNK - BP 68.8 14.1 71.7 14.2 72.6 14.2
Surgutneftegaz 61.7 12.6 59.5 11.8 60.8 11.9
Gazprom + Gazprom Neft 43.4 8.9 43.3 8.6 44.8 8.8
including: Gazprom 12.7 2.6 13.5 2.7 14.5 2.8
Gazprom Neft 30.7 6.3 29.8 5.9 30.3 5.9
Tatneft 26.1 5.3 26.1 5.2 26.2 5.1
Slavneft 19.6 4.0 18.4 3.6 18.2 3.6
Bashneft 11.7 2.4 14.1 2.8 15.1 3.0
cont'd
1 2 3 4 5 6 7
RussNeft 14.2 2.9 13.0 2.6 13.6 2.7
Novatek 2.7 0.6 3.8 0.8 4.1 0.8
Operators of PSA 12.0 2.5 14.4 2.9 15.1 3.0
Other producers 24.1 4.9 38.2 7.6 41.1 8.0
State companies, total: Rosneft + Gazprom + + Gazprom Neft 157.2 32.2 155.7 30.8 159.3 31.1
Source: RF Ministry of Energy; the author's calculations.
Natural gas production was traditionally dominated by Gazprom. At the same time, its share in this country's output of natural gas in recent years has noticeably declined: from 83.2% in 2008 to 75.5% in 2011. At the same time, the share of other producers increased, including that of oil companies, Novatek, and the operators of production sharing agreements. The share of state companies (federally owned) in 2011 accounted for 78.2% of Russia's natural gas output (Table 25).
The decline in the growth rate of oil output can be explained in the main by the deterioration, for objective reasons, of extraction conditions. A considerable number of the currently functioning oil fields are decreasing their output, while the majority of the new oil fields are characterized by somewhat worse geographical and mining parameters, and so their development is associated with higher capital inputs and higher exploitation and transportation costs.
Table 25
Structure of Natural Gas Production in 2008-2011
Gas extrac- Gas extrac- Gas extrac-
tion in 2008, Share in total tion in 2010, Share in total tion in 2011, Share in total
bn cubic output, % bn cubic output, % bn cubic output, %
meters meters meters
Russia, total 664.9 100.0 665.5 100.0 687.5 100.0
Gazprom + Gazprom Neft) 553.1 83.2 513.9 77.2 519.0 75.5
including: Gazprom 550.9 82.9 509.0 76.5 510.1 74.2
Oil companies 54.8 8.2 66.6 10.0 69.1 10.1
Novatek 30.8 4.6 37.8 5.7 53.5 7.8
Operators of PSA 8.5 1.3 23.3 3.5 25.2 3.7
Other producers 17.6 2.6 23.9 3.6 20.7 3.0
State companies, total: Rosneft + Gazprom + + Gazprom Neft 566.1 85.1 531.2 79.8 537.6 78.2
Source: RF Ministry of Energy; the author's calculations.
4.4.3. The Dynamics and Structure of Oil and Gas Exports
While the value of Russia's exports of oil and petroleum products considerably increased due to the rise in international oil prices, its physical volume somewhat declined: according to preliminary estimates, net exports of oil and petroleum products in 2011 amounted to 373.3m tons (Table 26, 27). The share of net exports of oil and petroleum products in total oil output was at the level of 73.0%. Oil exports in 2011 rose to 48.1% of oil output. Over that year, the share of exports in fuel oil and motor gasoline production amounted to 89.5% and 55.5% respectively. At the same time, motor gasoline exports in 2011 rose by 12.4%, while the share of motor gasoline exports in its output rose to 10.6% (for reference: in 1999 the share of exports in motor gasoline production was 7.2%, in 2005 - 18.5%, in 2009 - 12.6%, and in
2010 - 8.2%). Besides, the year 2011 saw a noticeable growth of imports of oil products (by 1.4 times on 2010) and a decline in the share of imports in the coverage of domestic demand. The share of imports in the total volume of motor gasoline resources rose from 0.6% in 2009 to 1.4% in 2010 and to 2.5% in 2011 (for reference: in the first half-tear 1998 share of imports in motor gasoline resources was 8.7%, in 2008 - 0.7%).
Table 26
Exports of Oil, Petroleum Products and Natural Gas from Russia in 2002 - 2011,
as a Percentage of the Previous Year
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 11 months*
Oil, total 113.9 117.8 115.0 98.4 98.0 104.0 94.0 101.8 101.2 98.2
including: to non-CIS countries 109.9 118.9 116.3 99.1 98.0 104.8 92.6 102.9 106.1 96.2
Petroleum products, total 118.5 103.6 105.5 117.9 106.3 108.0 105.0 105.3 106.2 99.6
including: to non-CIS countries 119.1 102.6 104.9 119.1 104.5 107.6 102.0 107.1 109.6 96.1
Natural gas, total 102.4 102.0 105.5 103.7 97.6 94.6 101.8 86.2 105.6 106.5
* As % of relevant period of 2010. Source: RF Federal State Statistics Service.
Table 27
Relationship between the Production, Consumption and Exports of Oil and Natural Gas in 2000 - 2011
2000 2005 2006 2007 2008 2009 2010 2011*
Oil, m tons
Output 323.2 470.0 480.5 491.3 488.5 494.2 505.1 511.4
Exports, total 144.5 252.5 248.4 258.4 243.1 247.4 250.4 245.9
Exports to non-CIS countries 127.6 214.4 211.2 221.3 204.9 210.9 223.9 215.4
Exports to CIS countries 16.9 38.0 37.3 37.1 38.2 36.5 26.5 30.5
Net exports 138.7 250.1 246.1 255.7 240.6 245.6 249.3 244.8
Domestic consumption 123.0 123.1 131.2 124.1 130.4 125.3 125.9 138.1
Net exports, as % of output 42.9 53.2 51.2 52.0 49.3 49.7 49.4 47.9
Petroleum products, m tons
Exports, total 61.9 97.0 103.5 111.8 117.9 124.4 132.2 131.7
Exports to non-CIS countries 58.4 93.1 97.7 105.1 107.6 115.4 126.6 121.7
Exports to CIS countries 3.5 3.9 5.8 6.7 10.3 9.0 5.6 10.0
Net exports 61.5 96.8 103.2 111.5 117.5 123.3 129.9 128.5
Oil and petroleum products, m tons
Net exports of oil and petroleum products 200.2 346.9 349.3 367.2 358.1 368.9 379.2 373.3
Net exports of oil and petroleum products, as % of oil output 61.9 73.8 72.7 74.7 73.3 74.6 75.1 73.0
Natural gas, bn ill3
Production 584.2 636.0 656.2 654.1 664.9 596.4 665.5 687.5
Exports, total 193.8 207.3 202.8 191.9 195.4 168.4 177.8 189.4
Exports to non-CIS countries 133.8 159.8 161.8 154.4 158.4 120.5 107.4 118.2
Exports to CIS countries 60.0 47.5 41.0 37.5 37.0 47.9 70.4 71.2
Net exports 189.7 199.6 195.3 184.5 187.5 160.1 173.5 185.1
Domestic consumption 394.5 436.4 460.9 469.6 477.4 436.3 492.0 502.4
Net exports, as % of petroleum products 32.5 31.4 29.8 28.2 28.2 26.8 26.1 26.9
* Estimation.
Source: RF Federal State Statistics Service; RF Ministry of Energy; Federal Customs Service; the author's calculations.
After a significant drop in natural gas exports in 2009, when as a result of the sharp reduction in its deliveries to Europe it declined to 13.8%, in 2010-2011 the volume of gas exports once again rose and approached its pre-crisis level. At the same time, the share of net exports in natural gas output somewhat shrank - from 28.2% in 2008 to 26.9% in 2011.
While the share of petroleum products in the structure of oil exports had somewhat increased, it nevertheless remained smaller than the share of crude oil exports - in 2011 it amounted to 65.6% of the total volume of exported oil and petroleum products. The bulk of exported petroleum products was constituted by furnace fuel oil (which in Europe is used as raw material for further refining) and diesel fuel. And the bulk of exported energy carriers (in 2011: 88% of crude oil; 92% of petroleum products; and 62% natural gas) was exported to countries outside of the CIS.
An analysis of the changes in Russian oil exports over a long period of time demonstrates an increasing share of petroleum products, which rose from 18.2% in 1990 to 34.4 % in 2011 (Table 28). In conditions of shrinking domestic consumption of oil (according to our estimations, it dropped from 269.9m tons in 1990 to 138.1m tons in 2011), the share of net exports of oil and petroleum products in oil output rose over that period from 47.7 to 73.0%.
Table 28
Net Exports of Petroleum Products in 2002-2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Net exports of petroleum products, m tons 74.8 78.2 81.4 96.8 103.2 111.5 117.5 123.3 129.9 128.5
Share of petroleum products in net exports of oil and petroleum products, % 29.2 26.8 24.3 27.9 29.5 30.4 32.8 33.4 34.3 34.4
* Estimated values.
Source: RF Federal State Statistics Service; Federal Customs Service; the author's calculations.
These data point to a significant strengthening of the oil sector's orientation towards exports by comparison with the pre-reform period. However, it should be remembered that this phenomenon has been associated not only with growth in the volume of exports in absolute terms, but also with a significant drop in the domestic oil consumption as a result of market transformation of the Russian economy. Rapid economic growth in the years preceding the financial and economic crisis of 2008-2009 was accompanied by stable volumes of domestic oil consumption, which is a manifestation of a declining oil intensity of Russia's GDP.
In 2011, the rising international oil prices triggered dramatic growth of incomes in the oil sector of Russia's economy (Fig. 48, 49). The aggregate revenues from exports of oil and the major types of petroleum products (motor gasoline, diesel fuel and fuel oil) in January-November 2011 reached the level of $ 235.7bn - a historic high for the entire post-reform period (Table 29). For reference it can be noted that the historic low of revenues from oil exports was observed in 1998, in response to the drop in the international oil prices, when proceeds from exports amounted to only $ 14bn.
Table 29
Revenues from the Export of Oil and Petroleum Products in 2000 - 2011, bn USD
2000 2005 2006 2007 2008 2009 2010 2011 (11 months)
Revenues from export of oil and major types of petroleum products 34.9 112.4 140.0 164.9 228.9 141.2 193.9 235.7
Source: calculations are based on data provided by the RF Federal State Statistics Service.
In 2011, under the influence of rising international oil prices, the share of fuel and energy products in Russian exports hit the level of 69.2%, including crude oil - 34.7% (Table 30).
Table 30
Value and Share of Exports of Fuel and Energy Products
in 2005-2011
2005 2008 2009 2010 2011
bn USD %* bn USD %* bn USD %* bn USD %* bn USD %*
Fuel and energy products, total 154.7 64.1 321.1 68.6 201.1 66.7 267.7 67.5 357.2 69.2
including: oil 83.8 34.7 161.2 34.4 100.6 33.3 134.6 34.0 179.1 34.7
natural gas 31.4 13.0 69.1 14.8 42.0 13.9 47.6 12.0 63.8 12.4
* As % of total Russian exports. Source: RF Federal State Statistics Service.
OOOOOOOOV
cj ¿M
■Oil
- Fuel oil
Source: calculations are based on data provided by the RF Federal State Statistics Service.
Fig. 48. Mean Export Prices of Oil and Fuel Oil in 2000-2011, 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
28000 26000 24000 22000 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0
-m tons (left-hand scale)
■m USD (right-hand scale)
Source: calculations are based on data provided by the RF Federal State Statistics Service.
Fig. 49. Exports of Oil and Petroleum Products (Physical Volume and Value) in 2000-2011, in m tons and m USD
4.4.4. The Behavior of Prices for Energy Products on the Domestic Market
The changes in international oil prices in 2011 induced a noticeable growth in the prices of oil and petroleum products on the domestic market. However, their prices so far have not reached their historic peaks of July 2008, when the average domestic oil price (producer price) in dollar terms hit the level of 410.2 USD/ton, and the average price of motor gasoline amounted to 810.3 USD/ton. In late 2008 - early 2009, in response to the decline of international oil prices, the domestic prices of oil and petroleum products likewise dropped in dollar terms. However, later on, as international oil prices once again began to climb, the domestic prices also demonstrated a significant growth (Table 31, Fig. 50, 51).
Table 31
Domestic Prices of Crude Oil, Petroleum Products and Natural Gas Expressed in US dollars in 2000 - 2011 (Average Producer Prices, USD/ton)
2000 2005 2006 2007 2008 2009
December December December December December December
Crude oil 54.9 167.2 168.4 288.2 114.9 219.3
Motor gasoline 199.3 318.2 416.5 581.2 305.1 457.4
Diesel fuel 185.0 417.0 426.1 692.5 346.5 394.8
Furnace fuel oil 79.7 142.7 148.8 276.5 125.0 250.8
Natural gas, USD/thousand 3.1 11.5 14.4 17.6 18.1 16.9
cubic meters
cont'd
2010 2011 2011 2011 2011 2011
December January March June September December
Crude oil 248.2 269.2 304.4 302.7 273.2 303.3
Motor gasoline 547.9 524.9 556.7 647.7 607.5 576.9
Diesel fuel 536.1 570.9 584.5 605.2 553.0 644.9
Furnace fuel oil 246.3 264.0 281.7 308.8 303.0 274.6
Natural gas, USD/thousand 20.5 21.9 23.1 26.8 25.7 21.3
cubic meters
Source: calculations are based on data provided by the RF Federal State Statistics Service.
At the same time, Russia's domestic oil prices, as before, remain at a level significantly below that of international oil prices. The gap between the international and domestic oil prices is caused by objective factors: the export duty on oil and the additional transportation costs associated with oil exports. As for the domestic prices of natural gas, these so far have been subject to government regulation. In order to sustain the competitive capacity of Russia's national economy, the RF government maintains the domestic prices of natural gas at a significantly lower level that the prices on the European market.
An extraordinary event for Russia was the so-called gasoline crisis in April - May 2011, whose manifestation was an acute shortage of gasoline in some regions. As a result, these regions experienced a rapid surge of gasoline prices (thus, for example, in mid-May in the Republic of Tyva the prices of gasoline at independent filling stations that did not belong to the vertically integrated structures of oil companies were as high as 50 Rb/liter, while Russia's average price was only 24.8 Rb/liter). Such a situation became possible due to increasing gasoline exports coupled with their shrinking supplies on the domestic market. In this connection, in order to limit exports and fill the domestic market, the export duty on gasoline from May onwards was raised from 67% to 90% of the export duty on oil.
Source: calculations are based on data provided by the RF Federal State Statistics Service.
Fig. 50. Average Producer Prices of Oil and Natural Gas in Dollar Terms in 2000-2011, USD/ton, USD/1000 m3
Source: calculations are based on data provided by the RF Federal State Statistics Service.
Fig. 51. Average Producer Prices of Motor Gasoline and Furnace Fuel Oil in Dollar Terms in 2000-2011, USD/ton
The gasoline crisis had two main causes: the government's pricing policy - namely, the freezing of the prices of gasoline on the domestic market; and the introduction of new technical standards for motor fuel. In January 2011, in response to the rise in international prices and increased rates of excises, the domestic price of petroleum products also climbed up. However, already in early February the RF government, operating, as it frequently happens, in micro-management mode, recommended Russia's oil companies that the prices of gasoline and diesel fuel should be reduced, after which the prices obligingly dropped. In February, March and Aprile the retail prices of gasoline in Russia were below the January level and only slightly above the December 2010 level, while the producer prices were below their December level (Table 32).
Table 32
Prices of Motor Gasoline in Russia in 2010-2011, ruble/liter
2010 December 2011 January 2011 February 2011 March 2011 April 2011 May
Consumer prices of Au92 motor gasoline (Au93, etc.) 23.42 24.25 23.66 23.42 23.63 25.11
Au95 and higher 25.29 26.11 25.60 25.42 25.56 26.89
Producer price of: Au92 12.33 11.48 11.98 11.56 12.21 13.36
Source: RF Federal State Statistics Service.
At the same time, the prices of oil and petroleum products on the world market displayed rapid growth. The price of Urals on the European market rose from 89.5 USD/barrel in December 2010 to 119.2 USD/barrel in Aprile, or by 33%. The price of gasoline on the European market (less indirect taxes) over the same period rose from 0.566 euro/liter to 0.738 euro/liter, or by 30% (Table 33). In Russia, on the contrary, the domestic price of gasoline
255
(producer price) in April was below its December level by 1%, while the retail price of Au92 gasoline rose only by 0.5%. As a result, exports turned out to be more profitable than supplies on the domestic market, and so oil companies responded to that situation by increasing their volume of gasoline exports. According to Rosstat's data, exports of motor gasoline in January - April 2011 rose on the same period of 2010 by 16.0%, while the share of exports in gasoline output increased to 13.6%.
Table 33
Prices of Motor Gasoline in Germany* in 2010-2011, euro/liter
2010 2011 2011
December March April
Consumer price 1.453 1.587 1.658
Tax on consumers 0.887 0.908 0.920
Price less taxes 0.566 0.679 0.738
* Price of Au95.
Source: OECD/IEA.
In this connection, an important role was also played by the introduction of new technical standards for fuel. From 1 January 2011, Russia introduced Euro-3 fuel standard for motor gasoline, with the result that class 2 gasoline (of lower quality) was either no longer produced, or was produced exclusively for exports. Some oil companies, for technical reasons, were unable to replace the production of that class of gasoline by class 3 gasoline, which had a negative impact on the overall gasoline supply. In January - April 2011, the volume of gasoline production amounted to 99.7% of that in the same period of 2010; in particular, the April 2011 volume was only 96.4% of the volume produced in April 2010.
In these conditions, the introduction of an elevated (restrictive) export duty on gasoline in the amount of 90% of the rate of the export duty on oil, as well as a weaker administrative pressure on prices made it possible to increase the supplies of gasoline on the domestic market and thus bring the situation back to normal. Later on, it was decided that this rate of the export duty on gasoline should be maintained.
4.4.5. Tax Regulation of the Oil and Gas Sector
A positive influence on the oil sector was produced by alterations in the system of taxation designed to lower the tax load, create incentives for deeper oil extraction from existing oil fields and to encourage the development of new oil deposits in untapped regions and on the continental shelf. From the year 2009 onwards, the non-taxable minimum in the formula for calculating the Cp coefficient (which reflects the movement of world oil prices and is applied to the Mineral Resources Extraction Tax (MRET) basic rate for oil) was increased from 9 USD per barrel to 15 USD per barrel (Table 34). This resulted in a significant reduction in the MRET rate for oil extraction. Besides, the requirement that the direct method for calculating the physical quantity of oil extracted from each ring-fenced field should be used when applying the regressive coefficient to the MRET rate for highly depleted deposits was abolished. This measure made it possible to extend this benefit to all depleted deposits, thus creating incentives for the prolongation of their exploitation and making some additional oil extraction feasible.
Table 34
The MRET Rate for Oil Extraction in 2005 - 2011
2005 2006 2007 2008 2009 2010 2011
MRET basic rate for oil extraction, Rb/ton 419 419 419 419 419 419 419
Coefficient characterizing movement of world oil prices (Cp) (P-9) x R/261 (P -15)x R /261
Coefficient characterizing degree of deposit depletion (Cd) - 3.8-3.5xN/V
Note: P = average price of one barrel of Urals (USD per barrel) for tax period; R = average Rb / USD exchange rate for tax period as established by the RF Central Bank; N = cumulative oil production per ring-fenced field; V = initial producible oil reserves of A, B, C1, and C2 categories per ring-fenced field.
Source: RF Tax Code; Federal Law of 22 July 2008, No. 158-FZ; Federal Law of 27 July 2006, No. 151-FZ; Federal Law of 7 May 2004, No. 33-FZ.
In order to stimulate the development of untapped basin provinces, tax holidays with regard to MRET were established for the new oil fields situated in territories with no infrastructure (Table 35). Thus, for example, for the development of new oil fields in the East Siberian Oil and Natural Gas Basin Province within the border of the Republic of Sakha (Yakutua), in Irkutsk Oblast and in Krasnoyarsk Krai, the zero rate export duty was introduced on oil production up to the volume of 25m tons per ring-fenced field if the established period of 10 years for its development is not exceeded; or for a period of 10 years under a license obtained for the use of land for the purpose of exploration and extraction, or for a period of 15 years under a license obtained for the simultaneous geological prospecting and exploration work and extraction, beginning from the moment of State registration of a license.
In order to additionally stimulate the development of the oil deposits of the East Siberian Oil and Natural Gas Basin Province, the RF Government introduced, from 1 December 2009 onwards, the zero rate export duty on oil from new oil fields in East Siberia, which was applied until 1 July 2010. Then the RF Government with regard to that oil switched over to a lower rate of export duty. From December 2010, the lower rate of export duty was also applied to the oil fields in the Caspian Sea.
Table 35
Russia's Regions Eligible for and the Parameters of MRET Tax Holidays
Applied to Oil Extraction
Region Cumulative oil extraction per ring-fenced field, m tons License period for exploration and extraction, years License period for geological prospecting and extraction, years Date of introduction
1. Republic of Sakha (Yakutua), Irkutsk Oblast, Krasnoyarsk Krai 25 10 15 01.01.2007
2. Continental shelf north of Arctic Circle 35 10 15 01.01.2009
3. Nenets AO, Yamal Peninsula 15 7 12 01.01.2009
4. Azov and Caspian Seas 10 7 12 01.01.2009
5. Black Sea 20 10 15 01.01.2012
6. Sea of Okhotsk 30 10 15 01.01.2012
7. Yamalo-Nenets AO north of 65°N 25 10 15 01.01.2012
Source: RF Tax Code; Federal Law of 21 July 2011, No. 258-FZ.
The year 2011 saw the introduction of some more amendments to the RF Tax Code in connection with the alteration in the taxation of the oil and gas sector, which came into force from January 2012. In order to create incentives for developing small oil fields, from the year 2012 onwards a downward coefficient is to be applied to the rate of MRET levied on oil ex-
traction, which specifies the size of oil reserves in a given ring-fenced field (Cr). That coefficient is computed by applying a special formula to ring-fenced fields with initial producible oil reserves of up to 5m tons and depletion of up to 0.05. Prior to that, the procedure for computing MRET levied on oil extraction envisaged no gearing of the tax rate by the size of oil reserves. The result was that, as a rule, the development of smaller oil fields with producible oil reserves of up to 5m tons was not feasible due to the high per unit capital and exploitation costs. At the same time, the register of state reserves of mineral resources incorporates about one thousand oil fields with producible oil reserves of up to 5m tons and depletion of less than 5%, with cumulative untapped oil reserves of 1bn tons.
The downward coefficient Cr when applied to the rate of MRET must create appropriate conditions for developing new small oil fields the operation of which would not be feasible under the generally applied taxation system. Thus, it will become possible to recover some additional oil reserves accumulated in such fields.
Within the framework of implementing the policy designed to stimulate the development of new region for oil production, in 2011 the MRET holidays regime was extended to the new oil fields situated in Yamalo-Nenets AO north of 65°N. It is suggested that, to the oil fields situated in that region (with the exception of those in the Yamal Peninsula), the zero rate of MRET is to be applied until the cumulative oil production volume of 25m tons per ring-fenced field is achieved, or for a period of 10 years under a license obtained for the use of land for the purpose of exploration and extraction, or for a period of 15 years under a license obtained for the simultaneous geological prospecting and exploration work u extraction, beginning from the moment of State registration of a relevant license.
The MRET holidays regime was also extended to the oil fields situated in the Black Sea and the Sea of Okhotsk.
These measures are designed to create the necessary economic conditions for developing the oil fields in Yamalo-Nenets Autonomous Okrug, the Black Sea and the Sea of Okhotsk, the operation of which under the generally applied tax regime is not cost-effective because of the huge capital inputs needed for building an appropriate infrastructure compatible with their geographic and geological specificities.
It appears feasible to introduce, within the framework of the existing tax system, differentiated tax loads for regions where mineral resources extraction is associated with higher costs, because this will ensure adequate returns on the investments in the development of new deposits. At the same time, the mechanism of tax holidays, while being simple to apply from the point of view of tax administration, is rather imperfect. It means one and the same generalized approach to all the oil fields situated in a given region (or shelf zone), which does not take into account the real (very broad) variations in the cost of development of each specific oil field. As a result those fields that require highest investments may remain undeveloped.
A better form of levying tax on oil extraction would be taxation of the additional (net) income. Such an approach would ensure an automatic differentiation of tax load depending on the specific conditions of oil production. In this case, not only a producer's gross proceeds are taken into account (as it happens when MRET and export duties are applied), but also the cost of oil extraction in a given oil field. This regime makes it possible to create the necessary preconditions for developing new oil fields the operation of which is associated with higher capital input and exploitation and transport costs.
The amendments introduced in 2011 in the RF Tax Code have dramatically increased the rate of MRET on natural gas. Over the period of 2006 to 2010 its rate remained at the same
level, while the wholesale prices of natural gas more than doubled. As a result, the rate of MRET on natural gas during those years significantly declined both in real and relative terms (as a percentage of its price). From 1 January 2011, as index of 1.61 was applied to the tax rate, which effectively corresponded to the cumulative inflation rate over the period of 20072010. However, the high profitability indices of the activities relating to the production, transmission and sale of natural gas were indicative of a lower level of tax load on the Russian gas sector as compared to the oil sector, and thus of the existence of a potential for a further substantial increase of the rate of MRET. In this connection, from the year 2012 onwards the rate of MRET levied on natural gas was raised to 509 rubles per 1,000 cubic meters, or by 2.15 times on 2011. It is envisaged that in 2013-2014 the rate of MRET on natural gas will be raised somewhat further (Table 36). At the same, a downward coefficient is to be applied to those organizations that do not own any objects belonging to the Unified Gas Supply System of Russia, or in which the stakes owned by the owners of objects belonging to the Unified Gas Supply System of Russia are no more than 50%: in 2012 - 0.493; in 2013 - 0.455; and from 2014 onwards - 0.447.
Table 36
Rate of MRET Applied to Oil and Natural Gas Production in 2010-2014
2010 2011 2012 2013 2014
MRET on oil production, Rb/ton 419 419 446 470 470
MRET on natural oil production, Rb/1,000 m3 147 237 509 582 622
Source: RF Tax Code.
Thus, the recently adopted decisions have significantly increased the tax load on OJSC Gazprom. That company owns the Unified Gas Supply System of Russia and derives the corresponding income from transmission and export of natural gas. For independent natural gas producers, on the contrary, the rate of MRET is only indexed according to the inflation rate and thus remains at a relatively low level (in 2012 - 251 rubles per 1,000 cubic meters).
Besides, in 2011 the scheme for levying taxes on exports of oil and petroleum products was altered, From 1 October 2011 onwards, the general rate of the export duty on oil was decreased by changing the coefficient value from 0.65 to 0.60 (Table 37). This measure resulted in a diminished tax load on the oil extracting industry, which must promote oil production.
Table 37
Marginal Rates of Export Duty on Oil
International price of Urals Rate, USD/ton
Up to 15 USD/barrel 0
From 15 to 20 USD/barrel 0.35x(P-15)x7.3
From 20 to 25 USD/barrel 12.78+0.45x( P-20)x7.3
Over 25 USD/barrel 29.2+0.65x( P-25)x7.3
Note. P is price of Urals (USD/barrel) Source: RF Law 'On Customs Tariff".
The rates of export duties on petroleum products are set at a lower level than those of export duties on oil, which represents a form of subsidizing Russian oil refineries and promotes exports of petroleum products. In recent years, the rate of the export duty on white petroleum products amounted to approximately 0.72 of the rate of the export duty on oil, while that on dark petroleum products - to approximately 0.39.
The lower export duties on petroleum products are conducive to increasing domestic volumes of oil refinement and growth of exports of its products. While the volume of oil production over the period of 2006-2010 rose by 7.5%, that of primary oil refining increased by 19.9%, and exports of petroleum products - by 36.3%. The growth by 85% of oil refining volumes over the same period occurred due to increased exports of petroleum products.
At the same time, this differentiation of export duties was by no means conducive to increasing Russia's oil refining efficiency. In 2011, the depth of oil refining in Russia was only 71%, which means that it had changed little over the previous decade (in developed countries this index now amounts to 90-95%). The growth of Russia's exports of petroleum products was caused in the main by increasing volume of exports of fuel oil, which in Europe is used as raw material for further refining and conversion into white petroleum products.
In 2006-2010 the nearly 3/4 growth of exports of petroleum products resulted from an increase, by 55.8%, of exports of fuel oil, while the share of fuel oil in aggregate exports of petroleum products rose to 54.5%. In this connection, the share of exports of fuel oil in the volume of its output exceeded 90%.
In this situation it is becoming increasingly evident that in order to promote modernization of Russia's oil refining industry and the depth of oil refining it would be feasible to switch over to a single rate of export duty on white and dark petroleum products, and also to approximate it to the export duty on oil. In late 2010 it was decided that, over the next two years, a single rate of export duty on petroleum products amounting to 60% of the rate of export duty on crude oil would be introduced (Table 38).
Table 38
Rates of Export Duties on Petroleum Products Established from 1 January 2011 (Coefficients Applied to the Rate of Export Duty on Oil)
2011 2012 2013
White petroleum products (middle and light distillate products, diesel fuel, etc.) 0.67 0.64 0.60
Dark petroleum products (fuel oil, lubricants, etc.) 0.467 0.529 0.60
Source: Decree of the RF Government of 27 December 2010, No. 1155.
However, in 2011 it became clear that the newly introduced rates had not provided an adequate solution to the problem. The volumes of fuel oil production and exports continued to grow, while the depth of oil refining remained at the same level. Moreover, in April and May 2011 some Russian regions experienced acute shortages of gasoline ('the gasoline crisis') that resulted from its increasing volume of exports coupled with declining volumes of production. In that situation, in May 2011, in order to satisfy domestic demand, an increased (restrictive) export duty on oil was introduced. Then the rates of export duties on the other petroleum products were also revised. The new rates of export duties were introduced from 1 October 2011 (Table 39).
Table 39
Rates of Export Duties on Petroleum Products Established from 1 October 2011 r. (Coefficients Applied to the Rate of Export Duty on Oil)
From 1 October 2011 through 31 December 2014 From 1 January 2015
Commercial gasolines, straight run gasolines 0.90 0.90
Middle and light distillate products, diesel fuel 0.66 0.66
Fuel oil, lubricants, etc. 0.66 1
Source: Decree of the RF Government of 26 August 2011, No. 716.
The purpose of the alterations introduced in 2011 in the taxation system is to promote oil production, to intensify modernization of the oil refining industry and to increase Russia's oil refining efficiency.
4.5. Russian agrifood sector: performance and trends
4.5.1. General outline of agricultural performance
20 years have passed since the start of reforms in Russian agriculture. It's a term allowing to draw some conclusions. Despite all the inconsistency, contradictoriness and non-integrity of government efforts, remarkable changes have taken place in the sector. This review is not supposed to provide a comprehensive analysis of these transformations but the partial analysis of agricultural performance in 2011 is made on the background of these 20 years.
At the moment the implementation of the first State program for agricultural development and regulation of agricultural and food markets in 2008-2012 is proceeding to completion in Russia. It was enacted in compliance with Article 8 of Federal Law No. 264-FZ of December 29, 2006 "On development of agriculture" that envisages adoption of five-year state programs. Although there are serious drawbacks in the effective Program and the mechanisms of its implementation, it has two strong points. First, it lays the foundation for relative sustain-ability of state policies within the program term - 5 years. Second, it determines the set of support measures to be applied and the sources of their financing from budgets of different levels, and first of all from the federal budget. One can state that the Program facilitates access to credit resources and contributes to modernization of agriculture and rural infrastructure. Still, it has smaller effect on the desired outcome - the growth of agricultural output -than such factors as bioclimatic potential and rural population size in a certain region. The latter assertion is supported by a set of studies1.
In Russia climatic conditions are one of the main factors of increased riskiness of farming in the country. The previous 2010 was extremely unfavourable, with drought afflicting 43 regions-constituents of the Federation and resulting in a sharp drop of yields and outputs of basic farm crops. One could expect that dramatic decrease of grain output and poor supply of feeds would affect the performance of livestock sector2.
However, the implemented measures of government regulation, and first of all the ban on export of grain3, allocation of additional Rb 5bn for the preservation of breeding stock and Rb
1 E.Gataulina. Estimated effect of state regulation on development of agricultural production. // Mathematical methods, models and information technologies in the agrifood sector (Nemchinov's readings): Proceedings of Russian Independent Agricultural Economics Association. Issue 15. Publishing house of Russian State Agrarian University - MTAA named after K.A.Timiryazev, 2011. Pp. 84-89.
2 By the beginning of January 2011 the available supply of feeds in corporate farms was 25.2% below the indicator of early 2010. Taking into account that the share of feed grain (except corn) in the structure of grain output reduced, the situation with feed supply caused concern.
3 In general the effect of grain export ban is estimated as negative: it impaired the image of Russia as a reliable partner, weakened the hard-won positions of exporters on the world grain market, reduced profitability of agricultural producers in the year of low grain yields, entailed non-transparent procedure of distributing grain to large livestock producers, etc. However, the ban also had positive effect on the livestock sector. Certainly, its primary beneficiaries were poultry and pig plants.
9bn for the partial compensation of feed costs1 to pig and poultry farms as well as payment of subsidies for the maintaining of cow inventories have helped to prevent production decline in dairy farming and sustain upward trends in livestock population and output of pig and poultry meat.
The past 2011 was favourable for Russian agriculture. The index of agricultural production2 amounted to 121.8%3 (in 2010 - 88.7%). This is the best indicator since 1990 evidencing rapid recovery of agriculture after the hard 2010 (Fig. 52).
The gross output of grains and grain legumes amounted to 97.5m tons in bunker weight. It exceeded the past year crop by almost 50%. In the last 20 years gross outputs were higher only in 2008, 1992 and 1993. The gross output of sugar beets - about 45m tons - is more than twice above the previous year indicator; moreover, it's the highest yield of this crop ever harvested in Russia. The yield of sunflower seeds - 9.4m tons - is also the highest ever in the Russian history. Yields of other oilseeds, i.e. soybeans and rapeseeds, are record as well. The outputs of potatoes and vegetables exceed last year indicators. The expansion of areas under 2012 winter grains lays the basis for further growth of gross grain output in 2012 provided that climatic conditions are favourable. Gross outputs of grains and grain legumes approach those of the Soviet period while the ones of sunflower seeds, sugar beets and vegetables have already surpassed the pre-reform indicators. Taking into account the reduction of rural population and employment in agriculture one can state the improving self-sufficiency in these products and higher productivity of labour as compared with the pre-reform level (Table 40).
130 1
120 -
110 -
100 -
90 -
80 -
70 -
o>—i o^co-^LnuDC— co cno>—lOJ COTLO UDC— cocn
CniCTi CTiCTiCni CTiCTiCniCni CTiOOO OOO OOOO i—i i—i
9999999999000000000000
1—I 1—I 1—Ii—Ii—I 1—I 1—I 1—I 1—I 1—IOJOJOJ OJOJOJ OJOJOJOJ OJOJ
Source: Rosstat.
Fig. 52. Index of agricultural production
1 Report of the RF Minister of Agriculture E.B.Skrynnik at the All-Russian conference "On the implementation of measures envisaged in the State program for agricultural development and regulation of agricultural and food markets in 2008-2012" on November 25, 2011, Moscow. http://mcx.ru/news/news/show/5107.195.htm
2 It is calculated as the percent ratio of agricultural output of the current year to that of the previous year. Comparable prices are used - the ones of the previous year.
3 Data as of November 1, 2012. 262
Table 40
Gross output of basic farm crops, million tons
Annual average 2005 2008 2011
1986-1990 1991-1995 1996-2000
Grain (after primary processing)) 104.3 87.9 65.2 74.3* 102.8 92.6
Potatoes 35.9 36.8 34.5 37.3 28.9 32.1
Vegetables 11.2 10.2 11.4 15.2 13.0 13.5
Sunflower seeds 3.1 3.1 3.3 6.4 7.3 9.4
Sugar beets 33.2 21.7 14 21.4 29.0 43.0
* from 2005 to 2011 adjusted for weig^ Source: Rosstat.
it after processing with coefficient 0.95.
The structure of areas under crops is changing. By the end of 2011 the share of grains and grain legumes in the total acreage of basic crops grew by 4% as compared with 1990 and reached 57.5%; the share of industrial crops almost tripled (up 9.6%) and amounted to 14.5%. This increase is due to a notable reduction of the share of feed crops - from over 38% to 24% (Fig. 53).
Fig. 53. Structure of acreage planted in basic farm crops in 2011, %
While the total acreage planted in grains reduced by 36% as compared with 1990, acreage under wheat increased by 10%, acreage under corn - by 63%. Meantime, areas under rye and barley experienced the sharpest decrease - by 78% and 68%, accordingly. Areas under feed crops fell by 59%, of them areas under root crops - by 93%, under perennial grasses - by 63%, under fodder corn - by 85%. So, the shrinking of acreage and consequently gross output was primarily observed in production of crops that were used for feeding cattle. The exception was rye. The reduction of fodder crop areas was due to the drop of cattle inventories that decreased 2.85 fold between 1990 and 2011 and started to grow slightly only in 2011.
Wheat holds the first place in the structure of areas planted (35.4%)1. Perennial grasses continue to rank second (15.2%). The shares of barley and sunflower seeds are approximately the same - 9.6% and 9.5%, accordingly. The areas under potatoes (as one of the basic food items) and sugar beets (as input for production of sugar) are rather small - respectively 1.5% and 2.9% of the total areas planted. Acreage under food crops produced primarily in corporate
1 Hereinafter the data relates to 2011 if no other year is indicated.
farms didn't demonstrate any notable reduction and acreage under sunflower seeds grew sus-tainably (Fig. 54-56). Yields of these crops increased in all regions.
—■—Area planted —♦—Yield
Source: Rosstat.
Fig. 54. Wheat: areas planted and yields
Area planted —♦—Yield
Source: Rosstat.
Fig. 55. Sugar beets: areas planted and yields
—■—Area planted • Yield
Source: Rosstat.
Fig. 56. Sunflower seeds: areas planted and yields
Acreage under potatoes dropped notably but this reduction (2011 indicator being only 66% of the 1991 level) is largely compensated by higher yields (with the index of yields amounting to 1.42). 2011 output equals 94% of the 1991 indicator (Fig. 57).
area planted —♦— yield
Source: Rosstat.
Fig. 57. Potatoes: areas planted and yields
Production of vegetables is still primarily concentrated in smallholder farms. The total acreage under them demonstrates a steady downward trend since 1999 (index of its change equaling 0.98). However, vegetable yields are also growing (in 2011 the respective index amounted to 1.44 relative to 1991) which ensures the general growth of output that in 2011 was 1.41 fold larger than in 1991 (Fig. 58).
Fig. 58. Open-ground vegetables: areas planted and yields
Developments in livestock production continued the trends of recent years: slow decline of cattle inventories (the reflection of this trend is the restructuring in crop production - areas under crops used for feeding cattle are shrinking) and growth of pig and poultry population.
The trend of cow population is shown at Fig. 59. By the end of 2011 its overall decline in all categories of farms reached 57% as compared with 1991. In corporate farms this indicator was as high as 75%, in smallholder farms - about 10%. In corporate farms the biggest losses in cow population were observed between 1992 and 1998 (annual losses ranging from -7% to -13%) and from 2002 to 2005 (within the interval from -7% to -9% a year). The number of cows kept in smallholder farms notably increased in the first years of reform but then it declined. However, this decline was not as dramatic as the one in corporate farms. The biggest losses took place in 2006-2008 (the annual reduction reaching -4%) and in 2003-2005 (within the interval from -4% to -6%). 58% of all cows are still kept in household farms and few individual private farms engaged in dairy production. The sharp decrease of cow population was partially compensated by higher animal productivity - in 2011 it was 55% higher than in 1991, the average milk yield per cow in 10 months 2011 approaching 4 tons. The result of these opposite trends was the decrease of total milk production down to 67.5% in 2011 as compared with 1991.
Source: Rosstat.
Fig. 59. Cow population, 1,000 head The trend of feeder cattle population largely repeats the one of cow population (Fig. 60). By the end of 2011 the number of animals was slightly over 32% of the 1991 level.
Source: Rosstat.
Fig. 60. Feeder cattle population, 1,000 head
Corporate farms lost 81% of their feeder cattle inventories by the end of 2011. From 1992 to 1998 annual losses ranged from -9% to -16% of the previous year level. The second period of maximum losses was 2003-2005 when they ranged from -9% to -11% annually. 266
On the contrary, in household and individual private farms the population of feeder cattle within these two decades increased: by the end of 2011 there were 11.5% more animals than in 1991. For this type of producers difficult years were 1994-1998 (annual losses ranging from -5% to -7%) and 2004-2005 (annual losses being about -3%). Despite the government measures to support beef cattle breeding, no increase of animal population is observed in the sector beginning from 2008 and in 2010 it even fell by 5%.
Pig population also decreased - in 2011 it was down 45% as compared with 1991. By 2005 corporate farms lost 73% of their inventories. Beginning from 2005 a stable growth trend formed in the sector: by the end of 2011 the increase of pig population reached 60% (being encouraged by government support and rates of customs duties); in some years (2006, 2009) annual increases amounted to 15% but in the last two years (2010 and 2011) they equaled 2% and 4%, respectively. Pig raising has firmly shifted to the sector of corporate farms that now keep 65% of animals (Fig. 61).
Source: Rosstat.
Fig. 61. Pig population, 1,000 head
The number of pigs in household and individual private farms was growing: it more than doubled by 2005 when corporate farms lost about 2/3 of their pig population. As pig raising in corporate farms developed, the number of animals in smallholder farms reduced but even now they keep 1.5 fold more pigs than in 1991.
The population of sheep and goats by 2011 dropped down to about 40% of the 1991 indicator (Fig. 62). In corporate farms it stopped falling and stabilized at the level of 21.9m head, or 56% of the total population in all types of farms1. Population of animals in household and individual private farms has restored up to the pre-crisis level.
1 In most corporate farms animals are only listed but are actually passed over to families of employees on contract terms.
Source: Rosstat.
Fig. 62. Population of sheep and goats, 1,000 head
The population of poultry is steadily growing after the fall by 55% between 1991 and 2000. At present it amounts to 71% of the 1991 level with 80% thereof concentrated in corporate farms. This is a rare sector of farming being evidently abandoned by smallholder farms (Fig. 63). The quality, availability and prices for poultry products in retail stores must have become acceptable for households. In the period between 2001 and 2011 the annual increases of poultry population in corporate farms were below 5% only 4 times; in all the other years they ranged from 7% to 11%.
Source: Rosstat.
Fig. 63. Poultry population, 1,000 head
The analysis of trends in different types of farms shows that livestock population is restoring except for feeder young stock. The population of cows has stopped falling. Household and individual private farms are important producers of beef, milk and sheep products1. Corporate farms became principal producers of pork and poultry products. Household and individual private farms either preserved livestock population at the pre-reform level of 1991 or have already restored it after the fall. The only exception is poultry breeding that smallholder farms abandon despite its seeming simplicity and switch to buying respective products. At present there are some constraints to the development of livestock production in household farms.
1 Including production of contract sheep breeders. 268
First of all, the size of household plots has natural limits in build-up areas; consumer cooperation that could help to form wholesale lots for trade networks and independent stores is not developed; there are no stable links with buyers of raw agricultural products; population that was traditionally engaged in livestock farming is getting older. Until recently rural residents could use plots outside settlements for haying and pasturing as well as for growing feed crops for their farms. The possibility to get such plots appeared at the very start of land reform. But in the middle of 2011 the law was adopted1 that undermines the basis for performance of large household farms: at the federal level the total area of such a plot is limited to 0.5 hectares; regions-constituents of the Russian Federation are granted (but may not use) the right to enlarge it up to 2.5 hectares. These constraints directly affect more than two million rural families (with over six million members) that cultivate about 70% of all lands entitled to household farms2. Institutional restrictions of this kind force agricultural business out to individual private and corporate farms. Despite the attractive goal of the law - to draw agricultural production out to the entrepreneurial field - it brings about more negative than positive effects. Not less than 2 hectares of land are required for keeping one cow and rural families will either use them illegally or will stop keeping cows; the formal abandoning of additional plots will decrease incomes of municipal budgets from land tax, etc.
The aim of this detailed analysis of trends in livestock population was to provide a better understanding of developments in production of basic livestock products. Figure 64 shows dynamics of meat production. It can be seen that after the decline between 1991 and 19981999 production of different kinds of meat (except beef) displays an upward trend and the output of poultry meat in 2011 even exceeds the 1991 level 1.8 fold. Production of beef stabilized at the 2007 level.
Figure 65 shows trends in production of milk and eggs. Beginning from 2004 production of milk stabilized at the level of 31-32m tons and in 2011 equaled only 61% of the 1991 indicator.
In 2011 the trend towards restoring production of eggs (that began since 1996) continued. At present their output reaches 87% of the 1991 level. Table 41 contains data on production of basic livestock products.
Source: Rosstat.
Fig. 64. Production of meat
1 Federal Law No. 147-FZ "On introducing amendments to Article 217 of Part Two of the RF Tax Code and to Article 4 of the Federal Law "On household farm"" of June 21, 2011.
2 V.Ya.Uzun. http://www.agronews.ru/news/detail/116750/
Source: Rosstat.
Fig. 65. Production of milk and eggs
Table 41
Production of basic livestock products in farms of all types
1986-1990 19991-1995 1996-2000 2005 2008 2011* 2011/1991%
Livestock and poultry, million tons slaughter weight 9.7 7.5 4.7 4.9 6.3 7.2 74
Milk, million tons 54.2 45.4 33.6 32.3 32.4 31.8 59
Eggs, million pieces 47.9 40.3 32.8 37.1 38.1 40.6 85
*estimate. Source: Rosstat.
The increase of meat output after its sharp drop since the start of reform is due to the growing production of, firstly, poultry meat and, secondarily, - of pork. These shifts notably change the structure of meat production and consequently consumption. In 1991 the share of beef in the total for the three major types of meat was about 44.7%, the share of pork -35.7%, of poultry meat - 22.5%. In 2011 the share of beef dropped down to 21.2% while the share of poultry meat more than doubled - up to 43.7% and the share of pork reduced slightly. The pre-reform level of egg production hasn't been restored as yet but will be attained in the medium term. The output of milk is still far below the pre-reform indicators. However, there form conditions for positive developments in dairy and beef cattle breeding - the structure of animal population is improving, although the rate of change is very slow and the extent is limited. In the last two years the share of pedigree beef cattle stock grew up to 60% of the total beef cattle herd (1.488m head). In the dairy herd the share of pedigree stock increased up to 12.3% which is almost twice above the 2005 indicator1. However, production costs haven't been reduced yet and this is a hindrance to larger production of these products, and first of all beef 2.
1 Report of RF Minister of agriculture E.Skrynnik at the meeting with top officials of regional bodies administering agrifood sector and rectors of higher education institutions on January 12, 2012, Moscow. http://mcx.ru/news/news/show/5198.195.htm
2 Production of beef is falling everywhere except three territories: Dagestan, Kalmykiya and Republic Altai. In these regions production is growing since there are local breeds of beef cattle and traditional technologies of its pasture raising with maximum utilization of forage lands which allows to reduce production costs. However, the scale of production here is very small.
The change of product structure of output is due to the shifts in division of labour in agriculture. The end of centralized planning in economy entailed the change of production location principles. In the Soviet period production was located with regard to the location of population. It can be seen from the simplest correlation analysis: in the early 1990s there was a close linear correlation between the size of population in a certain region-constituent of the Russian Federation and production of milk and eggs therein, and a mid-level correlation between regional population and production of beef, pork and poultry meat. There was also a weak correlation between population and production of grain in a region. At present these relationships are not so strong: the proximity to market is no longer regarded as the decisive factor for locating production. It's being shifted to regions with the lowest unit production costs1. Areas under farm crops and livestock population are concentrating therein.
The trends in output of farm products evidence that agriculture is restoring after the production declines that accompanied restructuring in the sector. The government declared that in 2011 outputs of grain, sugar, potatoes, vegetables and poultry meat achieved the target indicators set in the Doctrine of food security. The trend in pig raising allows to expect that within the coming 2-3 years the output of domestic producers will fully satisfy the demand for pork2; besides, in 2012 Russia will become a net exporter of vegetable oil. It's evident that the future structure and volumes of agricultural production will be primarily determined by the ability of Russian farm producers to produce competitive output and not by the pre-reform performance patterns.
4.5.2. Situation on selected agricultural and food markets Grain market
In 2011 the share of milling wheat in the total wheat crop amounted to 73%, the share of wheat #3 - to 30%, of wheat #4 - to 43%3. Feed wheat is in the greatest demand on the domestic market and its deficit is increasingly compensated by the use of milling wheat for feeding purposes.
Last year 16.9m tons of barley were harvested. It's above the previous year level but below the 2008-2009 indicators. This decline of barley output is due to the reduction of areas planted to 7.2m ha down from 9-10m ha sown in the period after 2000. The shrinking of acreage was most remarkable in the southern regions where barley is ousted by higher-yielding winter wheat. The decline of barley production in Russia entails the rise of prices for pork and its derivatives.
From the start of 2000s exports of grain from Russia grow at higher rate than its production. From August 2010 till July 2011 the ban on export of grain was in effect in Russia. After the lifting of embargo the ratio of exports to output in 2011/2012 MY can set a record: 25% for grain in general and 35% for wheat4. Along with Ukraine, Kazakhstan and the United States Russia is one of leading world exporters of grain. In 2011/2012 MY it can take the sec-
1 The process is facilitated by the development of technologies that allow to transport fresh products to longer distances and by the lowering of administrative barriers.
2 Report of RF Minister of agriculture E.Skrynnik at the meeting with top officials of regional bodies administering agrifood sector and rectors of higher education institutions on January 12, 2012, Moscow. http://mcx.ru/news/news/show/5198.195.htm
3 Estimate of Sovecon.
4 Estimate of Sovecon.
ond place in the world wheat exports after the US. In the recent decade the share of young countries-suppliers (Russia, Ukraine, Kazakhstan) in the world wheat exports grew from 13% to 27% while the share of traditional exporters fell from 11% to 9%.
So, Russia's integration into the world grain market is increasing. In this respect the question arises as to whether Russia will manage to become the largest exporter of grain.
The growth of exports resulted in shifts in the regional structure of grain production in Russia. For the southern regions of the country export became more attractive than supply to the domestic market. Their export orientation encouraged development of respective infrastructure. Meantime, the infrastructural isolation of Siberia and the Urals aggravated. As a result the share of export-oriented South of Russia in the total grain production increased from 26% in 2000 to 35% in 2011.
Export demand furthered growing production of wheat and the enlargement of its share in the total grain output up to 64%. So, grain production becomes less diversified and grain export - increasingly mono-crop. Exports primarily consist of wheat (mostly wheat #4) while barley is losing its importance as an export item.
The increasing domination of a single crop and a single region in the total grain output entails the risk of sharp production drops and consequently export swings in case of unfavourable climatic conditions and outbreaks of crop diseases.
In the longer term growth of exports is constrained by several factors.
First, there are strong limitations to increasing output by means of expanding areas planted. The potential for enlarging grain acreage in the South is actually exhausted. In Russia the reclamation of abandoned lands that are mostly situated in areas with low bioclimatic potential is likely to be more costly and less efficient than in the EU, the US and other countries.
Besides, the expansion of acreage under grains is hindered by their perpetual competition for land with oilseed crops.
Second, the increase of production by means of extensive factors requires notable growth of investments in agriculture. At present the average yield of wheat in Russia is slightly over 2 tons per hectare while the world average is 3 tons. The sector gets increasingly dependent on import supply of grain and oil crop seeds.
Third, domestic demand for grain in Russia is expected to rise due to the development of livestock breeding. It was the deepest drop in livestock sector in the 1990s that conditioned Russia's entry to the world grain market as a large exporter.
By the beginning of November 2011 high volumes of wheat exports resulted in substantial reduction of producer stocks. For instance, in Krasnodar kray the stocks of wheat were 1/3 below the ones of the previous year. The possibilities for replenishing export resources from the wheat stocks remaining at farms in the southern and central regions were limited.
The replenishment of resources for both export supplies and domestic processing through deliveries from the eastern regions met with a whole range of logistical difficulties. The decisive factor of supply from these regions was not the purchase price for grain but the possibility to deliver it.
The remarkable reduction of wheat stocks conditioned the strengthening of prices for this crop, first of all in the central and southern regions of Russia. From the point of view of regaining impact of Russia's grain export on the world market, the principal consequence of embargo was the discount with which Russian wheat was marketed after its lifting. Time was needed to restore the country's positions on the world grain market. The main partners expected Russia to dump like it was the case in 2002 when the country was entering export
markets. So, till the end of October 2011 the FOB price for wheat shipped from the Black Sea ports was the lowest. By November the price advantages of Russian wheat faded away. On the one hand, domestic prices were rising due to the growing exports and lowering grain stocks. On the other hand, prices for Australian and Argentinean wheat fell - by $20-30 per ton as compared with the end of October, down to $222 per ton (ASW, shipment from the eastern states) and $230 per ton, respectively. At the same time, at the Egyptian GASC tender Russian grain was offered for $247.7-249 per ton1. So, Australia and Argentina are becoming the principal competitors of Russia on the world grain market.
According to estimates of USDA, the world production of wheat in 2011 reached 691.5m tons (Table 42). In 2011/2012 MY record exports of Australian wheat are expected that can put competitive pressure on the Black Sea grain in countries of South-East Asia, Persian Gulf and East Africa.
Table 42
World balance of wheat in 2009/2010-2011/2012 MY*,
million tons
MY Production Supply Trade Consumption Ending stocks
2009/10 685.4 852.5 135.8 650.3 202.1
2010/11 651.7 853.8 131.8 653.9 199.9
2011/12 (forecast) 691.5 891.5 139.4 681.4 210.0
* MY for wheat - July-June. Source: USDA.
Market of sunñower seeds and sunflower oil
In 2011 a record crop of sunflower seeds was harvested - 9.35m tons. Production of sunflower oil in Russia grew by 1.28m tons - up to the record 3.47m tons. Export is supposed to become the major channel for marketing this surplus output - it's volume is projected to grow by 1.05m tons up to 1.23m tons.
Table 43
Russia: supply and utilization balance of sunflower seeds in 2007/2008-2010/2011 MY and forecast for 2011/2012 MY*, 1,000 tons
2007/08 2008/09 2009/10 2010/11 2011/12, forecast Difference
Beginning stocks 51 80 171 106 88 -18
Gross output in standard weight 5670 7300 6300 5690 9350 +3660
Imports 11 16 15 40 25 -15
Total supply 5732 7396 6486 5836 9463 +3627
Processed into oil 5335 6760 6040 5380 8300 +2920
Other consumption 250 275 290 330 390 +60
Used for seeds 30 30 30 30 30 -
Exports 37 160 20 8 520 +512
Ending stocks 80 171 106 88 223 + 135
* MY for sunflower seeds - October-September. Source: Sovecon.
1 Data of Sovecon.
Table 44
Russia: supply and utilization balance of sunflower oil in 2007/2008-2010/2011 MY and forecast for 2011/2012 MY, 1,000 tons
2007/08 2008/09 2009/10 2010/11 2011/12, forecast Difference
Beginning stocks 86 149 134 100 187 +87
Production 2190 2815 2598 2190 3470 + 1280
Imports, total 146 35 52 148 10 -138
including bottled oil 62 5 7 9 5 -4
Total supply 2422 2999 2784 2438 3667 + 1229
Consumption 1950 2025 2179 2070 2300 +230
Exports, total 323 840 505 181 1230 + 1049
including bulk oil 226 663 358 68 1000 +932
bottled oil 97 177 147 113 230 + 117
Ending stocks 149 134 100 187 137 -50
Structure of aggregate consumption
- bottled oil (market capacity) 1170 985 1020 890 930 +40
- bulk oil (household consumption) 70 80 95 105 95 -10
- mayonnaise 320 400 430 400 430 +30
- margarine 92 250 245 225 345 + 120
- paint and varnish products 82 73 90 123 135 + 12
- formula feed 123 122 171 195 210 + 15
- soap 5 16 17 7 15 +8
- other (production of canned food, bakery products, etc.) 88 99 111 125 140 + 15
Source: Sovecon.
After a deep drop in 2010/2011 MY record exports of all main kinds of vegetable oil are expected. Russia will again become its net exporter. Exports will grow almost 4 fold up to 1.6 million tons while imports will reduce from 892 to 634 thousand tons (Fig. 66). The biggest reductions are expected in imports of bulk sunflower and palm oil.
02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12
forecast
-exports — — imports
Source: Sovecon.
Fig. 66. Russia: trends in export and import of vegetable oils in 2002-2011
Domestic consumption of sunflower oil in Russia is about 2.1-2.2m tons (Table 45). Production of margarine and mayonnaise accounts for its bigger share. In the new 2011/2012 MY the expected replacement of palm oil by sunflower oil (prices for which fell due to the abun-
dant crop) on the domestic market will result in the growth of sunflower oil utilization for margarine production up to 345 thousand tons.
For several years in turn the principal company-exporter of sunflower oil from Russia has been "Yug Rusi" ("South of Russia") whose share reached 47% in 2010/2011 MY. Other suppliers of Russian sunflower oil are "Aston", "SolPro", "Bunge", "Glencore", "Efko".
Table 45
Russia: structure of bulk sunflower oil exports by companies-exporters
2008/2009 2009/2010 2010/2011
«Yug Rusi» 34 32 47
«Aston» 10 22 16
«SolPro» 8 5 9
«Bunge» 8 8 4
«Glencore» 9 4 1
«Efko» 1 2 4
Other 30 27 19
Source: Open JSC "Sunny products".
In November 2011 the Russian market of sunflower seeds reached its seasonal minimum while the market of sunflower oil - its seasonal maximum. Domestic prices for sunflower oil amounted to Rb 33,200-34,000 per ton (EXW). The level of domestic prices for sunflower seeds in the South or Russia was about Rb 11,500 per ton, in the Volga region - Rb 8,500 per ton, in Voronezh - Rb 9,300 per ton1. As output of oil grows, prices for it will fall since one will have to market record export volumes in the situation of gradual strengthening of prices for oilseed inputs. Prices for sunflower oil are expected to rise at the end of the season owing to the reduction of its manufacture and stocks.
Market ofvegetables
The climate of Russia allows to grow a wide range of vegetables and fruits. Still, Russia is among the five leading importers of these items in the world. The share of imports on the vegetable market amounts to 25%, on the fruit market - to 80%2. The basic problems of the sector stem from its low productivity, insufficient financing of the production process, complicated logistics, the risk of unfavourable weather conditions in the production regions, the lack of long-term planning.
In 2010 due to the dry spring and hot summer vegetable and fruit producers sustained great losses that resulted in the surge of prices for respective products. The output of potatoes fell noticeably - by 30% as compared with the previous year while selling prices more than doubled - from Rb 8.5 per kg on the average in 2009 up to Rb 23 per kg in 2010.
In 2011 the situation changed cardinally as the gross output of vegetables notably increased. The output of potatoes was record for the last 10 years - over 32.1m tons and areas planted in commercial farms (not including smallholder farms) grew by 10-15%. The output of onions set an absolute record - 1.7m tons. Production of cabbage, beets and carrots also grew as compared with 2010.
The positive dynamics of output will result in lower imports and smaller areas planted in vegetables (onions, cabbage) and potatoes in the 2012 season.
1 Data of Sovecon.
2 Data of "APK-Inform: vegetables and fruits"
Despite the over-production of vegetables in Russia in 2011, retail networks continue to give preference to imported products. This is due to the fact that the quality of domestic fruits and vegetables does not satisfy retailers and even given lower prices domestic products cannot compete with the imported ones. Retail networks are more willing to work with importers since in the season of relatively low prices the marketable condition of commodities plays an important role in their sales.
A serious problem of fruit and vegetable market is the under-development of capacities for storing produce and its further marketing "out of season". Therefore those producers that are short of adequate storage facilities have to sell large volumes of output before the end of the year.
So, by the end of 2011 low demand for domestic root crops coupled with their abundant supply exerted strong pressure on prices. Comparing wholesale prices for vegetables in Moscow region in the middle of December 2011 with the respective prices of 2010, one can see that for potatoes they were Rb 6 and Rb 23 per kg, for carrots - Rb 7.5 and Rb 18 per kg, for onions - Rb 7 and Rb 21 per kg, for beets - Rb 5 and Rb 15 per kg, accordingly1.
The 2011/2012 MY revealed serious problems of the fruit and vegetable sector. In the last two marketing years, when prices were high, producers concentrated on enlarging areas planted and construction of vegetable storage facilities. At the same time, small attention was paid to the development of marketing and improvement of product quality that play the decisive role in the situation of high supply and low prices.
Producers of vegetables and fruits will hardly make profit in the 2011/2012 MY. Those of them who invested in after-treatment and quality of products as well as development of marketing and establishment of ties with retail networks will find themselves in a better situation.
4.5.3. Russia's accession to the WTO
On December 16, 2011 at the Ministerial Conference of the World Trade Organization (WTO) held in Geneva Russia was officially accepted in this organization. Negotiations on the country's accession to the WTO went on for 18 years (!). Russia will become the full-fledged member of this organization beginning from September 2012.
Accession to the WTO imposes certain commitments regarding both the level of customs tariffs applied to imported agricultural and food commodities and the level of state support to agriculture.
The final bound import tariffs2 on agricultural and food products will be 10.8%, lower than the current average of 13.2%. In particular, by the end of implementation period import tariffs for dairy products should be reduced from 19.8% to 14.9%, for cereals - from 15.1% to 10.0%, for oilseeds, fats and vegetable oils - from 9.0% to 7.1%.
The final bound rate will be implemented on the date of accession for more than one third of national tariff lines with another 30% of the tariff cuts to be put in place three years later. The longest implementation period is established for pork.
Tariff quotas are preserved for import of meat - see Table 46.
1 Data of "APK-Inform: vegetables and fruits".
2 The final bound import tariff is the maximum level of tariff allowed by the end of implementation period that cannot be raised without notification of the WTO members or compensation (e.g. lower tariff for another imported item). Implementation period is the period within which a country - member of the WTO should meet its commitments.
One of the basic challenges for the domestic pig raising will be the cut of import duty for live pigs down to 5%, which will notably reduce the level of domestic prices for pork in live weight and increase imports of animals. According to data of the Institute for Agricultural Market Studies (IKAR) imports of live pigs in 2013 may exceed 1m head and amount to nearly 2m head by 2015 entailing the lowering of price by about Rb 10 per kg.
The accession to the WTO will also have a negative effect on the cattle raising and first of all the segment of "high-quality" beef. At present an actually prohibitive duty of €8 per kg is applied here. In summer 2012 it will fall down to 15% and this may entail the growing supply of "non-high-quality" beef since this item is not subject to import quotas. Thus domestic producers that are not numerous as it is may face unfair competition.
Table 46
Measures of customs and tariff regulation of meat import to Russia in compliance
with the WTO rules
Items and their customs Currently applied Currently applied tariff rates Quota upon WTO acces- Beginning bound tariff rates Final bound Analysis of risks and
codes quota sion tariff rates problems
Within the Outside the Within the Outside
quota quota quota the quota
Beef and veal 560,000 15% but not 50% but not 570,000 tons 15% 55% 27.5% in Former
(fresh, chilled, tons less than less than €1 case no regulation
frozen) 0201 €0.2 per kg per kg tariff quotas are applied practices are preserved
Beef by- no 25% but not less than €0.35 no 15% 15% Growing
products per kg imports of cheap byproducts
High-quality no 15% but not less than €8 per no 15% but the price crite- 15% Worse
beef kg rion does not apply to the investment
0201 30 00 5, 0202 30 100 5, USA, Canada and Argentina prospects for the
0202 30 500 5 sector
and
0202 30 900 5
Pork 0203 320,000 15% but not 75% but not 400,000 tons 0% 65% 25% from The basic
tons less than €0.25 per kg less than €1.5 per kg 01.01.2020 challenge for domes-
Pork trim- 30,000 tons 15% but not 75% but not 30,000 tons 0% 65% 25% from tic pig
mings 0203 29 less than €0.25 per kg less than €1.5 per kg 01.01.2020 raising is the lower-
Pork by- no 25% but not less than €0.35 no 15% 15% ing of
products and fat per kg domestic price by 6-
Live pigs 0103 no 40% but not less than €0.5 no 5% but not less than €0.1 5% but not 8% (Rb 10
per kg per kg less than €0.1 per kg per kg of live weight). The loss of domestic pig producers may total from Rb 18bn to Rb 24bn depending on the level of state support
Source: http://www.wto.org/english/news_e/news11_e/acc_rus_10nov11_e.htm; the Institute for Agricultural Market Studies (IKAR).
The total trade distorting state support to agriculture should not exceed $9bn in 2012 and by 2018 should be reduced to $4.4bn. Still, there remains an opportunity for unlimited increase of "green box" support measures (research, training, extension, infrastructural services, food aid, decoupled income support, payment insurance, etc.) that can be used for indirect support of farm producers.
4.5.4. Modification of agricultural policies in 2011
As different from 2010 with its abnormal drought and other natural calamities, the past year was relatively favourable for farming and large allocations from the agricultural budget were not hastily switched from one destination to another. But it has not saved the State program for agricultural development and regulation of agricultural and food markets in 20082012 (hereinafter referred to as the State Program)1 from further amending.
Although 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 financial sustainability of agriculture; V - Regulation of agricultural and food markets) and declares sustainable development of rural areas as its main objective, the bulk of budget funds are spent on increasing subsidizing of farm producers' expenditures on interest rate (see Fig. 67), and this share is growing year after year.
Source: data of the RF Ministry of Agriculture.
Fig. 67. The structure of planned and actual budget expenditures by guidelines set in the State program for agricultural development in 2008-2012
This is primarily due to the fact that the restructuring of debts under agricultural credits not only increased their amounts but also induced "a spiral" of subsidies for reimbursing interest rate on credits. The growing share of respective subsidies in the State Program budget (under the guideline "Attaining of financial sustainability", see Fig. 67) resulted in smaller allocations to soil improvement, sustainable rural development, rural infrastructure, consulting and
1 Approved by the RF Government Resolution No. 446 of June 14, 2007 "On the State program for agricultural development and regulation of agricultural and food markets in 2008-2012".
other services to farm producers1. But one will hardly manage to halt this trend within the framework of ending State Program for 2008-2012 due to both the increased budget commitments on subsidies and the fact that the budget for the 3 coming years has already been adopted.
Similar to the previous year, 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 Rb 552bn projected for 2008-2012. In 2011 Rb 7.7bn were allocated for the improvement of social and engineering infrastructure in rural areas - instead of the initially adopted Rb 28.4bn (Table 47).
The amount of subsidies for reimbursing interest rate was almost twice above the initially projected. 71% of such subsidies from budgets of all levels are allocated to the support of investment projects.
At the same time, the financing of efforts to develop priority agricultural sub-sectors was reduced: in livestock production - by Rb 2bn, in crop production - by 25% (from Rb 4.5bn to Rb 3.4bn). Funds aimed to support farm producers in the Extreme North regions and to establish perennial plantations were again negligibly small, measures to encourage flax and rape production were actually discontinued. An actual withdrawal of support to rape producers is a sign of growing disillusionment and no wish to finance development of alternative bio-energy sources.
Table 47
Basic indicators of the State Program implementation in 2011
Components 2011 indicators Financing from the federal budget, million rubles
planned* as of the reporting date planned* actual
1 2 3 4 5
1. Efficiency indicators
1.1. Index of agricultural production in farms of all types as % of the previous year (in comparable prices) 104.1 122.1 X X
1.2. Share of domestic output in available supply of
1.2.1. meat and meat products, % 68.1 54.6 X X
1.2.2. milk and dairy products, % 80.4 63.3 X X
2. Sustainable development of rural areas
2.1. Financing of measures to improve social and engineering infrastructure in rural settlements, total X X 28 362 7 720
3. Creation of general conditions for farming
3.1. Total financing under the section X X 14 659.5 11 512
3.2. including subsidies to farm producers for the purchase of domestically produced mineral fertilizers and pesticides X X 4 950 5 500
3.3. including creation of the system of state informational support to agriculture X X 1 050 467
3.4. including development of consultative assistance to farm producers X X 1 113.5 0
4. Development of priority agricultural sub-sectors
4.1. Development of livestock production
4.1.1. Subsidies to support pedigree livestock breeding X X 4 807 3 500
4.1.2. Supply of pedigree livestock to Rosagroleasing, head 30 000 8 597 X X
4.1.3. Supply of equipment for livestock production to Rosagroleasing, number of stalls 65 000 11 350 X X
1 In 2010-2011 the growth of carry-over budget commitments on subsidizing of interest rate on credits extended to agriculture entailed more than 3-fold reduction of expenditures on measures under special federal program "Social development of rural areas till 2012".
cont'd
1 2 3 4 5
4.2. Development of crop production
4.2.1. Subsidizing of measures to support elite seed breeding X X 513.2 1 716
4.2.2. including financing of measures to support farm producers in the Extreme North regions X X 1 000 405.6
4.2.3. including financing of measures to support flax production X X 542 246.6
4.2.4. including financing of measures to support rape production X X 1 025 252.7
4.2.5. including financing of measures to establish perennial plantations X X 725 522.5
5. Attaining of financial sustainability of agriculture
5.1. Total amount of subsidized credits (loans), billion rubles 208 200.8 X X
5.1.1. including short-term credits 168 152.3 X X
5.1.2. including investment credits 140 48.5 X X
5.2.1. Subsidizing under short-term credits X X 10 500 18 713
5.2.2. Subsidizing under investment credits X X 29 738 38 591
5.3. Amount of subsidized credits received by smallholder farms 35 31.6 X X
5.4. Subsidizing of interest rates on credits (loans) received by smallholder farms X X 7 400 5 897
5.5. Purchase of tractors by all types of farms, units 41 000 9 799** X X
5.6. Purchase of grain harvesters, units 12 500 2144** X X
5.7. Purchase of fodder harvesters, units 3 500 745** X X
6. Carrying out of grain purchase and commodity interventions, support of export X X 1 430 7 938
TOTAL X X 125 000 125 000
* Resolution No. 446 as in force on July 14, 2007. ** RF Ministry of Agriculture, preliminary data.
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. The primary beneficiaries of this form of state support are producers of mineral fertilizers and petrochemical enterprises. Capital investments in building, reconstruction and restoration of meliorative systems are falling. Allocations to create the system of state informational support to agriculture dropped 2.5 fold. Financing of consultative assistance to farm producers and re-training of agricultural specialists ceased completely despite the most acute deficit of skilled labour. Meantime, allocations to grain purchase and commodity interventions grew 5.6 fold.
So, the range of economic policy tools applied in agriculture gets narrower year after year. They are basically limited to subsidizing of large corporate farms and mega-large agricultural holdings regardless of their technical and financial efficiency1. Development of land and rural infrastructure is not paid due attention to. The set of applied measures is the same for all regions of the country. Meantime, the All-Russian Agricultural Census of 2006 revealed that their farm structure is absolutely different: large-scale corporate agriculture, corporate agriculture, family commodity and non-commodity production. Besides, even within a prosperous region-constituent of the Federation some areas can be classified as zones of agricultural dev-astation2. It's obvious that for territories with a certain farm structure one should apply spe-
1 H. Hockmann (IAMO), E. Gataulina. The significance of market transaction costs and technical efficiency for economic performance (cost rentability) in Russian agriculture. - http://conf.hse.ru/2011/prog_sections (R-05). - 2011.
2 Uzun V.Ya., Saraykin V.A., Gataulina E.A. Classification of farm producers based on data of the All-Russian Agricultural Census of 2006. Moscow, the All-Russian Institute of Agrarian Problems and Informatics named after A.A.Nikonov (VIAPI), ERD, 2010. www.viapi.ru
cific policy measures with due regard to the actual situation. However, this aspect is not taken into account when developing agricultural policies. The data of Agricultural Census does not even serve as one of the basic sources of information that should be considered in this process. The evidence of its extremely limited use is the fact that there are just a few scientific publications based on the analysis of census results and the latter are very rarely referred to in reports of officials determining state policies in the sector1.
At the end of 2011 a draft of the new 8-year State Program for 2013-2020 was submitted to the government.
The new State Program sets the following tasks and objectives:
- sustainable development of rural areas, creation of favorable and attractive social environment for rural residents including housing conditions, health care, education, road, transport and other kinds of infrastructure;
- ensuring commodity farm producers the rate of return sufficient for expanded reproduction of agricultural products and maintenance of their financial sustainability and competitiveness on domestic and foreign markets;
- modernization and switching to the innovational pattern of agrifood sector development, accelerated adoption of advanced research and technology enabling to improve productivity of labour and reduce per-unit input requirements;
- recultivation and more efficient use of land and other natural resources;
- development of smallholder farming and cooperation as an important factor of income growth for farm producers and facilitation of their access to agricultural and food markets;
- informational support to agrifood sector operators and providing them with state services in electronic form;
- increase of export resources of grain and other agricultural products with the view to expand Russia's share on the world food market.
However, the draft Program fails to cope with some risks that became evident in previous years. In particular, the need to pay subsidies under the already issued long-term credits will notably reduce the amount of subsidies for new credits. The Program does not set limits for subsidizing interest rate to specific participants of food chains. This can lead to the rechannel-ing of subsidies in favour of processing and logistical companies. Their great lobbying capacities can result in the worsening of farm producers' access to credits, especially the short-term ones. Experts2 recommend to establish limits on compensating expenditures on credits to processors and logisticians, for instance not more than 30% (at present their actual share is already about 45%).
Regrettably, at the last stage of adoption the principal measures for developing agricultural cooperation were withdrawn from the sub-program "Support of small-scale farming", i.e.:
- granting of subsidies to agricultural credit cooperatives for replenishment of the fund for mutual financial assistance;
1 One of the reasons is that the primary impersonal results of the census are actually unavailable for researchers and the opportunity to analyze aggregated data published by Rosstat is very limited.
2 See, for instance, V.Ya.Uzun, E.A.Gataulina et al. Agrarian protectionism: scientific fundamentals and implementation mechanisms in the market environment. - Moscow, the All-Russian Institute of Agrarian Problems and Informatics named after A.A.Nikonov (VIAPI), 2010, p. 278.
- reimbursement of 50% of documented expenditures of agricultural consumer cooperatives - non-credit cooperatives - on establishment of their material basis (construction, purchase of machinery and technological equipment, etc.).
These support measure were proposed after the monitoring of implementation of the effective State Program (carried out by the RF Ministry of Agriculture1) revealed that the principal hindrances to development in the opinion of small farm producers were the undercapitalization of material and technical basis in input supply and marketing cooperation and the shortage of current capital in credit cooperation. The pre-revolution Russia's experience proved the efficiency of such measures for supporting cooperation: the state granted respective loans and they were repaid prior to maturity. Notwithstanding all the above, these measures have not been included in the draft of the new State Program. Now the prospects for development of agricultural cooperation are rather vague and progress will be made only in the regions that have their own programs of support to cooperation.
Measures concerning development of market transfer of farmlands and its monitoring are not well thought over. For instance, it's planned to monitor up to 90% of lands of agricultural designation. Meantime, over half of them are not farmlands and are covered with forest, shrubs, swamps, etc. Their area is constantly reducing as non-agricultural lands are transferred to other categories of lands. Besides, one discusses the possibility to eliminate the notion of "lands of agricultural designation" as a category of lands. It would be more rational to monitor farmlands suitable for agricultural production rather than lands of agricultural designation.
The distribution of funds in the draft State Program is not duly substantiated. For instance, it envisages providing subsidies to individual private farms for registration of ownership titles to 9m hectares of land. The question arises: why farm producers of only this organizational type are eligible for subsidies and how was this acreage determined given that individual private farms use more than 20m hectares without legal registration? Besides, the total amount of compensation per farm or per hectare is not limited. This provides ample opportunities for abuse - compensation of highly overstated prices for works of cadastral engineers facing no competition and the use of limited resources to the benefit of selected farmers having access to authorities that chose recipients of such compensations. There are a lot of such inconsistencies and discrepancies in the draft of the new State Program.
According to the State Program's draft version of November 11, 20112 allocations to soil improvement and rural development are to increase 7.5 fold while allocations to subsidizing of interest rate on credits - less than 2 fold as compared with the previous State Program. About 41% of the planned Rb 2,113bn of state support will be used for compensating input costs and supporting market prices. A great share of state support is tied to selected products and inputs and thus can be referred to as "amber box" measures. It should be noted that despite many years of negotiations with the WTO, traditional measures of state support are not adjusted to the requirements of this organization.
4.5.5. Recommendations
1. The analysis of farm performance shows that the sector has restructured after the protracted crisis that accompanied the structural reform in agriculture in the post-Soviet period.
1 Monitoring of State Program implementation (2008-2009). Moscow, Kolos, 2010.
2 http://www.mcx.ru/documents/document/show/16834.342.htm 282
Production of basic crop products as well as poultry and pig meat, eggs, and to a smaller extent products of sheep raising, is growing. Corporate farms concentrate not only on cultivation of grain and industrial crops but also on breeding of poultry and pigs; the share of cattle kept by them is growing as well. It's obvious that smallholder farms have been the buffer that throughout the twenty years provided for the maintaining of livestock population at an actually constant level while the drop of the latter in corporate farms was disastrous. The role of smallholder farms is especially important in raising of cattle, the population of which fell most dramatically. It's clear that until production of beef and milk becomes profitable for corporate farms, the maintaining of the country's food security necessitates stronger support to smallholder farms in proportion to their contribution to the production of these products. But in fact the government supports corporate farms instead of smallholder farms. The evidence of that is the level of state support to smallholder farms1, the limitations imposed on the acreage of household plots that were introduced in 20112 and other similar constraints.
2. The duty to monitor implementation of the State Program for supporting agriculture is assigned to the department that bears the principal responsibility for it - the RF Ministry of Agriculture. At present the Ministry gathers the bigger share of information from farm producers including that on the implementation of the State Program. The access to this information is actually closed: only general information is available that does not allow to carry out detailed analysis and research in the field of agriculture and its state support. Due to that it's hard to speak about the real results of the program, its efficiency for different groups of producers, areas and products and to work out proposals for improving the state support to agriculture.
Formally, there are no infringements in providing access to information: the government and departmental documents specify the general list of information and declare the principle of its availability. However, the summarized data does not allow to reveal latent problems of agricultural performance.
At the same time, the draft of the new State Program for supporting agriculture again envisages expenditures on different kinds of monitoring and data collection carried out by the Ministry of Agriculture. In case the existing practice of providing access to information is maintained and the Ministry continues to perform the function of monitoring the State Program implementation, these funds can be regarded as the funds for supporting the Ministry itself.
In order to put a stop to the formal approach to ensuring access to information that is currently practiced by the RF Ministry of Agriculture, one should publicly discuss and adopt the rules in compliance with which the department will provide informational services. They should concern the list, way and terms of submitting information and the procedure of getting access to it.
1 For instance, in Pskov oblast corporate farms receive 13.7 kopecks of state subsidies per 1 ruble of gross output, individual private farms - less that 2 kopecks. At the same time household farms get for only 1 kopeck of subsidies per 100 rubles of output. Data of Zernov I.V., dissertation paper "Family entities and their role in the agrarian sector (the case of Pskov oblast)", www.vak.ru.
2 An amendment was made in the Federal Law No. 112-FZ of July 7, 2003 "On household farm" that limits the size of such a farm to 0.5 hectares. This amendment concerns plots of all legal titles, not just the ones privately owned. The law envisages that regions-constituents of the Russian Federation can enlarge this acreage but in fact no such decisions are taken. www.consultant.ru.
Besides, the function of preparing the national report on implementation of the State program for agricultural development and regulation of agricultural and food markets should not be performed by the Ministry of Agriculture as it is the chief agency responsible for this implementation. The national report should be drawn up by an external organization, not subordinate to the Ministry of Agriculture. This will help to give an objective estimate of all aspects of the State Program implementation and its efficiency, to make the necessary adjustments and improve the quality of state support in order to serve the public rather that departmental interests.
3. In the context of Russia's accession to the WTO one should examine measures of state support to domestic agricultural producers applied in the country. These measures should be adjusted to the requirements to "green box" support that is not subject to any restrictions. It's worth examining the possibility to apply such measures as payment of subsidies per hectare or per livestock unit (in order to diminish the ties between output of a selected product and the level of state support), partial compensation of expenditures on new machinery and equipment (in order to stimulate modernization of farm sector) and other measures, the application of which gave good results in other countries - members of the WTO.
4. In order to provide equal access to state support, it would be rational to set limits on its amount received by one farm producer, either physical or legal body.
5. When elaborating federal agricultural policies one should take into account the whole variety of farm structures in regions-constituents of the Federation and administrative districts within them. Federal policies should be designed so that not only regions and districts with large-scale corporate farming but also areas with prevailing small-scale farming could get access to state support. Special measures are needed for areas of agricultural devastation. The efficiency of support should be taken into account when shaping the mechanisms of state support to agriculture. In regions showing good return per ruble of investments it's worth supporting farm production. Meantime, in territories where the return of support allocations is low but rural population is still preserved, it's rational to use state funds for the development of rural areas and any kinds of business.
4.6. Foreign Trade
4.6.1. Situation in the World Economy
The succession of events that occurred in 2011 created some real threats to the world economy's revival that had begun in 2010. The political instabilities in the Near East and North African countries, natural disasters in Australia and Japan made the world economy's exit from the crisis more difficult. In the spring of 2011, Europe was hit by yet another wave of sovereign debt crisis which mainly affected the peripheral eurozone countries - Greece, Ireland and Portugal. In early June, the US government debt situation took a turn for the worse. By the end of the year, economic conditions in Europe had continued to deteriorate.
The World Bank's report Global Economic Prospects, published on 18 January 20121, emphasizes that the world economy has entered a very difficult phase which is characterized by some considerable vulnerabilities and uncertainties. The present course of world events fully corresponds to one of the decelerating economic growth scenarios considered to be risky
1 http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1322593305595/8287139-1326374900917/
GEP_January_2012a_FullReport_FINAL.pdf
in the previous Report (June 2011). As a result, the World Bank has significantly downgraded its global economic growth forecast:
- the growth rate of the global economy will amount to 2.5% in 2012 and to 3.1% in 2013, vs. 3.6% for both these years as forecasted in the June 2011 Report;
- in 2012, high-income countries are expected to have a 1.4% economic growth (a 0.3% drop for the eurozone and a 2.1% growth for the other high-income countries); in 2013 - a 2% growth (vs. a 2.7% growth in 2011 and a 2.6% growth in 2013 predicted in the June 2011 Report);
- the growth forecast for developing counties is reduced, by comparison with the June 2011 Report, from 6.2% in 2012 and 6.3% in 2013 to 5.4% and 6% respectively;
- the 2012 growth forecast for the Russian Federation is cut from 4.1% to 3.5%.
According to the World Bank, the growth rate of world trade in 2011 amounted to 6.6%
(vs. 12.4% in 2010). Bearing in mind the forecasted reduction in the growth rate of the global economy in 2012, the World Bank expects that the growth rate of world trade will drop to 4.7% in 2012, but then will rebound to 6.8% in 2013.
The IMF World Economic Outlook (WEO) Update1 published on 24 January 2012 also registers a slowdown in the global economic recovery and an escalation in downside risks. According to the Update, in late 2011 the crisis in the eurozone entered a 'dangerous new phase'; in 2012 the eurozone economy is expected to go into a mild recession that will also affect other countries of the world, including the United States, emerging market countries and developing economies (Table 48).
Table 48
Changes in World Output and World Trade Volume
Growth Rates as Percentage of Previous Year Difference between September 2011 WEO Projections and January 2012 WEO Projections
1 2 3
2010 2011 2012 2013 2012 2013
World Output 5.2 3.8 3.3 3.9 -0.7 -0.6
Advanced Economies 3.2 1.6 1.2 1.9 -0.7 -0.5
United States 3.0 1.8 1.8 2.2 0.0 -0.3
Eurozone 1.9 1.6 -0.5 0.8 -1.6 -0.7
Germany 3.6 3.0 0.3 1.5 -1.0 0.0
France 1.4 1.6 0.2 1.0 -1.2 -0.9
Italy 1.5 0.4 -2.2 -0.6 -2.5 -1.1
Spain -0.1 0.7 -1.7 -0.3 -2.8 -2.1
Japan 4.4 -0.9 1.7 1.6 -0.6 -0.4
United Kingdom 2.1 0.9 0.6 2.0 -1.0 -0.4
Canada 3.2 2.3 1.7 2.0 -0.2 -0.5
Other Advanced Economies 5.8 3.3 2.6 3.4 -1.1 -0.3
Newly Industrialized Asian Economies 8.4 4.2 3.3 4.1 -1.2 -0.3
Emerging and Developing Economies 7.3 6.2 5.4 5.9 -0.7 -0.6
Central and Eastern Europe 4.5 5.1 1.1 2.4 -1.6 -1.1
Commonwealth of Independent States 4.6 4.5 3.7 3.8 -0.7 -0.6
Russia 4.0 4.1 3.3 3.5 -0.8 -0.5
Excluding Russia 6.0 5.5 4.4 4.7 -0.7 -0.4
Developing Asia 9.5 7.9 7.3 7.8 -0.7 -0.6
China 10.4 9.2 8.2 8.8 -0.8 -0.7
India 9.9 7.4 7.0 7.3 -0.5 -0.8
Latin America and the Caribbean 6.1 4.6 3.6 3.9 -0.4 -0.2
Brazil 7.5 2.9 3.0 4.0 -0.6 -0.2
Mexico 5.4 4.1 3.5 3.5 -0.1 -0.2
1 http://www.imf.org/external/pubs/ft/weo/2012/update/01/pdf/0112.pdf
cont'd
1 2 3
World Trade Volume (Goods and Services) 12.7 6.9 3.8 5.4 -2.0 -1.0
Imports
Advanced Economies 11.5 4.8 2.0 3.9 -2.0 -0.8
Emerging and Developing Economies 15.0 11.3 7.1 7.7 -1.0 -1.0
Exports
Advanced Economies 12.2 5.5 2.4 4.7 -2.8 -0.8
Emerging and Developing Economies 13.8 9.0 6.1 7.0 -1.7 -1.6
Source: The IMF World Economic Outlook (http://www.imf.org/external/pubs/ft/weo/2012/update/01/index. htm#tbl1).
On the whole, the IMF forecasts that, in 2012, activity in the advanced economies will expand by a meager 1.2 % on average (representing a 0.75 p.p. drop on the September 2011 WEO), while in 2013 it will increase by 1.9%. The current year's global economic growth is expected to hover around 3.3%.
Growth in emerging and developing economies is expected to weaken owing to the deterioration in the external environment and the slowdown in the domestic demand. The average economic growth rates in these countries are forecasted at around 5.4%, which represents a considerable drop on the growth rates registered in 2010-2011, and a 0.7 p.p. - decline by comparison with the September 2011 WEO.
The highest growth rates are still expected to be achieved by the developing countries of Asia. According to the IMF, their economies will grow at 7.3 to 7.8% on average. Despite a substantial downward revision of their growth rates, China and India remain the most dynamically developing economies of the world.
4.6.2. The Terms of Russia's Foreign Trade: Prices for Major Russian Exports and Imports
In 2011, the terms of Russia's foreign trade considerably improved by comparison with the previous year due to the prices of exports rising at a higher rate than the prices of imports: Russia's Terms of Trade Index amounted to 121.8. In 2010, this index was notably lower -117.9 (Fig. 68).
In 2011, the price situation on the world markets of major Russian exports was notably favorable (Table 49). The prices of raw commodities peaked in Q1, but then experienced a decline owing to a contraction in demand. Over the course of the year, the prices of non-energy goods dwindled by 11%, which involved practically all goods of that category, except for fertilizers, timber and grain. The prices of energy goods rose by 14%1.
In 2011, the behavior of oil prices was determined by the worsening political situation in the countries of North Africa and the Middle East and by the slowdown in global economic growth that had resulted from the public debt problems in the USA and the EU. On 7 February 2011, the price of Brent crude dropped to its 2011 low of $ 99.23 per barrel, but then quickly recovered and never sank below $ 100 per barrel over the remaining course of that year.
1 http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1111002331357/829378-1326493099587/ CommodityMarketsReview_January2012.pdf 286
160.0
_—»— Far Abroad_-»- CIS
Fig. 68. The Terms of Trade Index
On 9 April 2011, the political developments in the Middle East and North Africa pushed up the price of Brent crude to its 2011 high of $ 126.9 per barrel. On 5 May 2011, oil prices experienced a strong downward adjustment: the price of a barrel of Brent crude shed $ 11.39 in one day (a 9% drop), thus returning to its March 2011 level. This adjustment was caused by fears that demand for oil would decline against the background of the latest (quite unimpressive) release of US macroeconomic statistics.
Over the course of 2011, the average price of Brent crude was $ 110.94 per barrel, or by 39.3% more than in 20101.
The price of Urals crude hit its 2011 high on 28 April, when it climbed to $ 123 per barrel (its historic high of $ 139.8 per barrel was registered on 11 June 2008). In 2011, the average price of Urals crude was $ 109.3 per barrel, which represented a 39.8% rise on 2010.
In 2011, natural gas prices in the European market rose by 26.5% on 20102.
The behavior of prices3 in the non-ferrous metals market went through a number of notable phase changes over the course of 2011. Over January-February 2011, prices were growingt rapidly, spurred on by political developments in North Africa and Middle East. Thus, in February, the price of copper soared to its historic high of more than $ 10,000 per ton. The behavior of the prices of aluminum, lead and zinc was more moderate. The prices of these metals were rising only in January, while in February they became stabilized.
1 http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1111002388669/829392-1325803576657/ Pnk_0112.pdf
2 Ibid.
3 http://www.lme.com/dataprices_historical.asp
Table 49
Average Per Annum World Prices
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Oil (Brent), $/barrel 24.84 25.02 28.83 37.4 54.38 65.15 72.32 97.64 61.86 79.64 110.94
Natural gas, European market, $/m BTU 4.06 3.05 3.91 4.28 6.33 8.47 8.56 13.41 8.71 8.29 10.52
Gasoline, $/gallon 0.792 0.755 0.891 1.197 1.508 1.81 2.06 2.703 1.68 2.13
Copper. $/ton 1,578 1,559 1,779 2,866 3,679 6,722 7,118 6,956 5,149 7,534 8,828
Aluminum,. $/ton 1,444 1,350 1,431 1,715 1,898 2,570 2,638 2,573 1,665 2,173 2,401
Nickel, $/ton 5,945 6,772 9,629 13,823 14,744 24,254 37,230 21,111 14,655 21,809 22,910
Source: estimates are based on data published by the London Metal Exc lange (London, UK) and t ie World
Bank.
The earthquake in Japan caused a fall in metal prices. The biggest price-losers were pewter, nickel and copper. The prices of aluminum, lead and zinc were less affected by the disaster. And as early as late March the prices of all metals began to rise once again.
It should be noted that the non-ferrous metals market is heavily influenced by the situation in the foreign exchange market. From late March through early May 2011, the euro was strengthening against the US dollar, which became one of the crucial factors behind the rise in non-ferrous metals prices that was taking place during that period.
However, on having reached their peak values in April 2011, the prices of non-ferrous metals began to descend in May. Thus, in April, the price of nickel at the London Metal Exchange climbed to its post-crisis high of about $ 28,000 per ton, and then started to decline. The main factor behind the downward trend in non-ferrous metals prices observed during that period was the contraction of demand for those metals on the part of their biggest consumers - Europe, hard hit by its budgetary and debt problems, and China, whose GDP growth rate had significantly shrunk by then.
The downward trend in non-ferrous metals prices lasted until the end of 2011. As a result, in December 2011, the price of aluminum hit its lowest level since July 2010. The price of copper shrank by 20.8% since the beginning of 2011, while the price of nickel dwindled by 28.8%, to its lowest level since December 2009. However, in 2011 the prices of aluminum, copper and nickel were by 10.5%, 17.2% and 5.0% respectively higher than in 2010.
After having reached their record highs in February 2011, the prices of food commodities and agricultural raw materials in the world market persistently declined over the remaining course of that year. In February 2011, the FAO Food Price Index, which reflects the monthly change in international prices of the basket of food commodities, including cereals, vegetable oils, dairy products, meat and sugar, averaged 237.91 - its highest level since 1990 when the FAO first introduced its food price index.
The second half-year of 2011 saw a drop in food commodities prices. In December 2011, the FAO Food Price Index averaged 211 points, which represented a 27-point drop on its record-high value registered in February 2011. That drop was determined by the sharp reduction in world prices for cereals, sugar and oils resulting from the good harvests in 2011, by the dwindling demand for those products, and by the strengthening of the US dollar.
1 http://www.fao.org/news/story/ru/item/119849/icode/ 288
However, despite the afore-said drop in prices in the second half-year of 2011, the global FAO Food Price Index averaged 228 points in 2011, which represents its highest level since the beginning of price monitoring. The previous record high was achieved by the FAO Food Price Index in 2008, when it averaged 200 points (Table 50)
Table 50
Changes in the Average World Prices of Some Agricultural Goods
2006 2007 2008 2009 2010 2011
Wheat, USD / t
Canadian, CWRS 216.8 300.4 454.6 300.5 312.4 439.64
US, HRW 192.0 255.2 326.0 224.1 223.6 316.26
US, SRW 159.0 238.6 271.5 186.0 229.7 285.9
Corn, US, USD / t 122.9 163.0 223.1 165.5 185.9 291.7
Barley, USD / t 117.0 172.0 200.5 128.3 158.4 207.2
Soya beans, USD / kg 268.4 384.0 523.0 437.0 450.0 540.9
Soya oil, USD / t 598.6 881.0 1,258 849.0 1,005.0 1,299.3
Rice, Thailand, USD / t 304.9 326.4 650.1 555.0 488.9 543.0
Raw sugar in USA, import price, price c.i.f. New-York quotation, US cents / kg 48.76 45.77 46.86 54.88 79.25 83.92
Source: World Bank.
4.6.3. Major Indicators of Russian Foreign Trade
In 2011, Russia's foreign trade turnover, calculated in accordance with the balance of payments methodology, amounted to $ 845.2bn, representing a 30.3% increase on 2010, and a 10.7% increase on 2008. Thus, Russia's foreign trade turnover hit its record high since the beginning of its monitoring.
The export quota (the ratio of the value of exports to that of GDP) amounted to 28%.
Fig. 69. Major Indicators of Russia's Foreign Trade (million US dollars)
Throughout 2011, Russian foreign trade volumes continued to recover to their pre-crisis highs registered in July 2008; the recovery process had, in fact, actually started in 2010 (Fig. 69). In the first half-year of 2011, the growth rate of imports considerably exceeded that of exports. In July 2011, as a result of the low base effect having worn out in the first half-year of 2010, the accelerated growth trend in imports finally came to an end. In January 2011, exports grew by 12.1% in annual terms, while imports rose by 43.4%. In June 2011, these indicators amounted to 38.6% and 40.1% respectively, in July - to 35.7% and 30.6% respectively, and in November - to 34.4% and 22.7% respectively.
In the main, the rise in the value of exports was taking place in response to the price situation in world markets remaining favorable for Russian exporters throughout 2011 against the background of a reduction in the physical volume of exports. The rise in imports was taking place in response to an increase in both the physical volume and the price of imports (Table 51).
Table 51
Russia's Foreign Trade Indices (As % of Same Periods of 2010)
Q12011 1st half-year 2011 January-September 2011 2011
physical volume average prices physical volume average prices physical volume average prices physical volume average prices
Exports 97.2 119.9 99.5 127.2 97.9 131 97.8 132.9
Imports 135.4 106.2 130 109.8 125.5 109.8 122.2 109.1
Source: RF Ministry of Economic Development.
Russia's balance of trade remained positive. Its surplus amounted to $ 198.8bn, representing a 31.1% rise on 2010 and a 10.6% rise on 2008.
In 2011, the imbalance coefficient of foreign trade (the ratio of the trade balance to the trade turnover) amounted to 0.235, thus remaining practically at the same level as in 2010 (0.234).
The Structure and Dynamics of Exports
In 2011, Russian exports rose to $ 521.97bn, which represented a 30.4% increase on 2010 and a 10.7% increase on 2008. In the main, that rise in exports was due to the ongoing increase in contract prices concurrent with a reduction in the physical volume of exports. The average export price index amounted to 132.9%, while its physical volume index - to 97.8% (Table 52).
Table 52
The Dynamics of Russian Exports
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Exports, bn USD dollars 105.0 101.9 107.2 135.4 183.2 245.3 303.9 355.2 471.6 303.4 400.0 521.97
Including:
To far abroad 90.8 86.6 91.0 113.9 152.9 211.6 260.6 301.5 400.5 255.3 337.7 438.3
Growth rate as percentage of previous year
Physical volume index 110.2 104.2 115.0 109.5 110.7 104.7 105.8 105.0 96.8 97.0 110.0 97.8
Price index 128.2 93.8 86.0 113.4 122.7 126.9 119.7 110.9 137.4 76.4 119.8 132.9
Source: RF Central Bank, RF Ministry of Economic Development.
Fuel and energy products remained the most important item in Russian exports. In 2011, their share increased to 71.2% vs. 69% in 2010. The value of exported fuel and energy prod-
ucts increased by 32.49% in response to the favorable foreign trade situation in the world energy resources market.
As before, the principal item of Russian exports was oil, whose share in the net volume of Russian exports in 2011 amounted to 34.9% (vs. 33.9% in 2010). According to the RF Federal Customs Service, in 2011 Russia exported 219.1m tons of crude oil worth $ 171.7bn, which means that the physical volume of oil exports declined by 6.3% on 2010, while their value rose by 33.1%. The share of oil experts in the volume of oil extraction dropped to 47.7% in 2011 from 49.1% in 2010. Russia remained the world's biggest oil producer: in November 2011 it produced 9,867 thousand barrels per day, while the daily oil production of all OPEC members taken together amounted to 30,367 thousand barrels (including Iraq's 2,681 thousand barrels and Saudi Arabia's 9,597 thousand barrels).
Despite a considerable growth in the physical volume of petroleum product exports to CIS countries (by 83.8%), Russia's net volume of petroleum product exports dwindled by 4.9% due to a 5.2% drop in petroleum product exports to far abroad countries (which accounted for 96.1% of Russian petroleum product exports). Owing to the rise in contract prices, the value of petroleum product exports grew by 31.5%.
In 2011, as a result of the European Union's growing demand for Russian natural gas which was taking place against the background of a decline in the energy production of nuclear power plants, Russian natural gas exports increased by 5.9% on 2010, while their value shot up by 34.3%.
Metal and metal products remained the second most important item in Russian exports. In 2011, their share in the net value of exports amounted to 9.1%, which represented a 1.5 percentage-point drop on 2010. The value of metal and metal products exports rose by 9.9% on
2010, while their physical volume shrank by 9.7%.
The year 2011 saw a considerable reduction in Russia's participation in the international nickel and refined copper market, caused by a number of factors, including an increase in the stocks of these metals traded on stock exchanges, and a reduction in China's and Japan's demand for refined copper. To a certain extent, the drop in copper and nickel exports was caused by the re-introduction, from early 2011, of the 10-percent exports duty on these metals. The physical volume of copper exports declined by 60.1%, while that of nickel exports -by 18.7%. On the other hand, the physical volume of aluminum exports rose by 2.4%.
The year 2011 also witnessed a rise increase in the average contract prices for most types of exported chemical products. Thus, there were price increases for ammonia (by 45.3%), methanol (by 22%), mineral nitric fertilizers (by 28.4%), and synthetic rubber (by 33.6%). As a result, the rise in the value of exports belonging to this category of goods amounted to 27.6%. In 2011, the share of chemical product exports in Russia's total exports remained at its 2010 level of 6%.
The share of machinery and equipment exports dropped from 5.2% in 2010 to 4.4% in
2011. This exports category yielded $ 21.1bn, which represented a 7.8% rise on 2010.
In 2011, the physical volume of passenger car exports rose by 49.2% on the previous year. This rise was accounted for solely by a 65.9% increase in the number of cars exported to CIS countries. Russia's passenger car exports to far-abroad countries fell by 19%.
A considerable share in exports belonging to the machinery and equipment category of goods was accounted for by military-purpose products. According to OjSC Rosobornnex-
pori1 in 2011 Russia's military-purpose exports amounted to over $ 10.7bn (vs. $ 8.7bn in 2010). Rosoboronexport's leading export item was Air Force arms and equipment (51%), followed by Ground Forces arms and equipment (21%), Navy arms and equipment (11%), Air-Defense arms and equipment (11%), and arms and equipment designated for other categories of armed forces (4%). In 2011, OJSC Rosoboronexport maintained its military-technical cooperation with 57 countries. During that period, the main importers of Russian arms and military equipment were India and Venezuela.
The rise in the average contract prices for most products belonging to the timber, wood-pulp and paper products category of goods caused a 12.6% increase in the value of those exports. Thus, the price of veneer rose by 25%, the price of newsprint - by 21.5% and that of wood pulp - by 8.8%. The share of exports belonging to that category of goods in Russia's total exports dropped from 2.5% in 2010 to 2.2% in 2011. The physical volumes of saw timber exports, pulp wood exports and veneer exports increased by 12.3%, 8.2% and 1.9% respectively, while the physical volume of newsprint exports dwindled by 6.1%, and that of unprocessed timber exports - by 1.5%.
After having dropped by 10.2% in 2010 due to the introduction of a grain export embargo, Russia's export of food products and their raw materials began to gradually recover over the course of 2011. The embargo had been in effect from 15 August 2010 through 1 July 2011. On having lifted the embargo in July 2011, Russia managed to reclaim its position as one the world's biggest grain exporters. According to the Russian Federal Statistics Service (Rosstai), in 2011 Russia harvested 93.9 million tons of grain, which represented a 28.1% rise on the previous year.
Russia's 2011 sugar beet harvest was 2.1 times larger than that of 2010. As a result, her beet sugar output increased, over the course of 2011, to 4.7 million tons, which represented a 69.9% rise on 2010. The surge in beet sugar production and the resulting drop in domestic sugar prices made it possible for Russia to substantially increase the physical volume of sugar exports. According to the Russian Sugar Producers Association (Soyuzrossakhar), over the course of 2011, Russia exported more than 240,000 tons of sugar, which represented its alltime high. Traditionally, a large part of Russian sugar exports went to the CIS countries, primarily Kazakhstan. In 2011, the geographic spread of Russian sugar exports was extended to Syria, the United Kingdom and Montenegro. Small amounts of powdery sugar, pressed refined sugar and small-packaged sugar were exported to Belize, China, Norway, Japan, Mexico, Panama, the USA, and a number of other countries.
In 2011, Russia's export of food commodities and their raw materials surged by 40% on the previous year. The share of these exports in her total exports rose to 2.4% from 2.2% in 2010.
Thus, the year 2011 saw no changes in the commodity structure of Russian exports. The improvement of its quantitative indicators was almost exclusively brought about by the ongoing increase in the prices of raw materials, primarily oil - a clear indication that the Russian export commodity pattern remained heavily dependent on the situation in the world raw materials market (Fig. 70).
1 http://www.roe.ru/news/pr_rel/pr_rel_rus/pr_rus_12_02_03.html
292
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
□ Food products and agricultural raw materials □ Mineral products
□ Chemical industry products and rubber □ Timber and pulp and paper products
S Metals and metal products Q Machinery, equipment and transport vehicles
□ Other goods
Source: RF Federal Customs Service.
Fig. 70. The Commodity Structure of Russian Exports (%)
The Structure and Dynamics of Imports
In the first half-year of 2011, the value of Russia's imports rapidly grew in response to a notable rise in external demand caused by the intensified credit activity of the population and the strengthening of the ruble. In the second half of 2011, the rate of import value growth reduced. Nevertheless, over the course of 2011 the value of imports rose by 10.7% from its pre-crisis level registered in 2008. As compared with 2010, the value of imports grew by 29.9% to $ 323.2bn. The latter increase in imports value was caused both by the growth of their physical volume, whose index shot up to 122.2%, and the import price index's rise to 109.1% (Table 53).
Table 53
Imports into Russia (billion US dollars)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Imports, bn USD 44.9 53.8 60.5 76.1 97.4 125.3 163.9 223.1 291.97 191.8 248.4 323.2
Including:
From far-abroad countries 31.4 40.3 48.2 60.1 76.4 103.5 138.6 191.2 253.1 167.7 213.3 275.5
Growth rates, as percentage of previous year
Physical vol- I 129.2 ume index 129.1 117.6 119.2 124.2 122.4 130.1 127.1 113.5 63.3 135.4 122.2
Price index | 86.7 94.3 93.4 98.7 106.1 106.5 105.5 107.6 117.8 99.1 101.6 109.1
Source: Bank of Russia, RF Ministry of Economic Development.
As before, the main commodity group imported by the Russian Federation was machinery, equipment and transport vehicles, whose share in Russia's total imports increased from 45.4% in 2010 to 49.6% in 2011 (Fig. 71). This commodity group was the biggest contributor to the rise in the value of Russian imports: in 2011, the value of machinery imports grew by 43% on 2010. The physical volume of passenger car imports surged by 43.3%, while that of trucks - by 85.7%.
2008
2009
2010
2011
The share of Russia's imports of food commodities and their raw materials in her total imports declined from 15.5% in 2010 to 13.8% in 2011. As compared with 2010, the value of food commodity imports grew by 16.3%. At the same time, it should be noted that the rise in their value was predominantly caused by the across-the-board price increase with regard to practically all food commodities. Thus, the price of meat rose by 11.1%, the price of poultry meat - by 6.5%, the price of butter - by 29.5%, the price of coffee - by 41.5%, the price of sunflower oil - by 29.2% and the price of white refined sugar - by 20.6%. The big harvests of wheat, sugar beet and sunflower made it possible for Russia to reduce sunflower oil imports and white refined sugar imports by 19.2% and 42.9% respectively, and to reduce her 2011 wheat imports almost to zero.
In 2011, the share of chemical products in Russia's total imports amounted to 15.5% (vs. 16.5% in 2010). As compared with 2010, the value of chemical product imports rose by 22.8%.
The share of textile articles and footwear in Russia's total imports amounted to 5.5% (vs. 6.1% in 2010). Clothes and footwear were predominantly imported from far-abroad countries, and only 6.2% of clothes imports and 1.2% of footwear imports came from CIS countries.
In 2011, the share of metals and metal articles in Russia's total imports amounted 7% (vs. 7.1% in 2010). The value of imports belonging to this commodity group rose by 28.4% on 2010 in response to a 23.1% increase in the value these imports. The physical volume of Russia's imports of ferrous metals and ferrous metal articles grew by 16.2%, including imports of rolled steel and ordinary carbon steel by 14.6%.
□ Other goods
Machinery, equipment and transport vehicles
Metals and metal products Textile and footwear
□ Timber and pulp and paper products
□ Chemical industry products and rubber Mineral products
Food products and agricultural raw materials
Source: RF Federal Customs Service.
Fig. 71. The Commodity Structure of Russian Imports (%)
The growth rates of major imports substantially exceed the growth rates of domestic output of the corresponding products, driving up their share in Russia's domestic market (Table 54). According to the Bank of Russia, in 2010 the share of imports in retail trade commodity resources rose on 2009 by 3.0 percentage points - to 44%. In the first half-year of 2011, their share dropped to 42%, while the share of non-food imports amounted to 50.5%, having remained at the same level as in the corresponding period of 2010. The share of food commodity imports decreased by 1 percentage point to 34%. At the same time, according to the Rus-
sian Federal Statistics Service (Rosstat), the share of meat and poultry imports in retail trade commodity resources rose from 29.7% in 2010 to 30.4% in 2011, the share of butter imports rose from 29.8% to 32.6%, and the share of vegetable oil increased from 20.7% to 26.2%.
Table 54
Changes in the Output of Some Russian Industries and the Behavior of the Corresponding Imports (as a Percentage of the Corresponding Period
of the Previous Year)
2010 2011
Q1 Q2 Q3 Q4 year Q1 Q2 Q3 Q4 year
Output of food prod- 103.8 106.4 105.4 105.9 105.4 101.7 100.5 99.3 102.5 101.0
ucts, including beverages & tobacco
Imports of food 124.0 125.2 118.1 118.4 121.5 131.4 183.2 123.8 119.5 116.3
commodities & agri-
cultural raw materials
(excluding textile ones)
T textile & apparel 110.2 115.6 111.4 111.3 112.1 107.7 102.8 103.1 97.1 102.6
output
Leather, leather arti- 126.3 120.0 111.4 118.4 118.7 112.8 107.8 109.3 104.0 108.6
cles & footwear
output
Imports of textile, 114.7 138.1 151.3 150.3 149 141.4 215.7 119.9 117.4 117.2
textile articles &
footwear
Timber processing & 111.1 112.6 111.4 110.5 111.4 106.9 106.2 103.8 99.0 104.0
wood articles produc-
tion
Pulp & paper produc- 106.7 111.7 106.7 97.8 105.9 99.5 100.5 100.4 107.0 101.8
tion; publishing & graphic arts activities
Imports of timber & 119.0 120.8 115.6 114.8 115.6 128.0 199.2 122.8 115.1 113.8
pulp-and-paper articles
Chemical industry 123.8 115.7 112.5 108.1 114.6 108.0 105.8 105.9 101.0 105.2
output
Imports of chemical 137.2 136.0 139.9 134.2 133.6 129.8 204.1 123.7 123.7 122.8
products & rubber
Metallurgical and 118.8 119.6 107.3 104.8 112.4 109.1 96.5 102.4 102.8 102.9
metal product output
Imports of metals & 138.4 152.6 157.1 153.4 155.1 143.8 222.4 133.9 130.5 128.4
metal products
Machinery & equip- 109.1 130.5 101.4 110.5 112.2 111.6 113.2 112.5 103.8 109.5
ment output
Imports of machin- 109.5 127.8 137.3 139.2 140.1 160.6 264.0 151.8 146.6 143.3
ery, equipment & transport vehicles
Source: RF Ministry of Economic Development, RF Fed
eral Customs Service.
4.6.4. The Geographical Profile of Russia's Foreign Trade
In 2011, the European Union continued to be the main trading partner of the Russian Federation. Its share in Russia's foreign-trade turnover amounted to 48%, which represented a 1 p.p. drop on 2010 (Fig. 72). The leader in European trade with Russia was Germany, whose share in Russia's foreign trade turnover increased from 8.4% in 2010 to 8.7% in 2011. The Netherlands, whose share dropped by 1 p.p. to 8.3%, ranked second. By the volume of trade with Russia, Italy remained in third place, while her share in Russia's foreign-trade turnover increased to 5.6%, which represented a 0.4 p.p. rise on 2010. On the whole, over the course of
2011, the EU countries increased their volume of trade with Russia by 28.3% on 2010. Russia's exports to the EU rose by 26%, while her imports from the European Union grew by 33.5%.
The share of OPEC (the Asia-Pacific Economic Cooperation Forum) member countries in Russia's foreign trade turnover climbed from 23.2% to 23.9%. Over the course of 2011, Russian exports to OPEC countries surged by 38.3% on 2010, while Russia's imports from them jumped by 32.7%. Russia's biggest trading partner belonging to the APEC was China, whose share in Russian foreign trade turnover increased by 0.7 p.p. to 10.2%. As before, second place in this group of countries went to the USA, whose share in Russian aggregate foreign trade turnover rose from 3.7% in 2010 to 3.8% in 2011. Over the course of 2011, Japan's share declined by 0.1 p.p. to 3.6%.
The share of CIS countries in Russian foreign trade turnover climbed from 14.6% in 2010 to 14.9% in 2011. Russia's top trading partners in the CIS were Ukraine and Belarus, whose shares in Russian foreign trade turnover amounted, in 2011, to 6.2% and 4.7% respectively. On the whole, Russia's foreign trade turnover with the CIS rose by 34.2% on 2010, with imports having increased by 39%.6%, and exports - by 31.3%.
2005 2006 2007 2008 2009 2010 2011
□ EC DAPEC DCIS □ Other Countries
Source: RF Federal Customs Service.
Fig. 72. The Geographical Pattern of Russia's Foreign Trade Turnover
The balance of Russia's foreign trade with all groups of countries (excepting the APEC) was positive. In 2011, Russia registered a trade deficit with 24 countries, whose share in Russian aggregate trade turnover amounted to 51% (in 2010, Russia ran a trade deficit with 22 countries, whose share amounted to 45%). The biggest contributors to Russia's trade deficit were China (-$ 13.0bn), Germany (-$ 3.5bn), Brazil 9-2.3bn), Canada (-$1.2bn) and Malaysia (-$ 1.1bn).
4.6.5. Regulation of Russian Foreign Trade
In 2011, the main legal documents regulating Russia's external economic activities were the RF Customs Code that came into force on 1 July 2010, and RF Federal Law of 27 November 2010, No. 311-FZ 'On Customs Regulation in the Russian Federation'. The RF Customs Code envisages that:
- the period for customs clearance and the release of goods should be reduced from three days to one day;
- the number of required documents for export of non-primary goods should be reduced from 25 to 7;
- the amount of security payment should be reduced for a customs representative from Rb 50m to Rb 40m, or by 20%, and for a customs carrier - from Rb 20m to Rb 8m, or by 60%;
- the deadline for payment of customs duties should be extended from 15 days to 4 months. The Federal Law 'On Customs Regulation in the Russian Federation' also contains a number of provisions simplifying the conduct of export-import transactions. Thus, the newly introduced Law:
- establishes the list of documents that external economic activity participants may be required to submit to customs authorities (previously such lists were to be established by departmental acts issued by the RF Federal Customs Service);
- reduces the number of documents for the release of non-primary goods from 14 to 7, and reduces the deadline for the release of goods from 20 to 4 hours;
- simplifies the procedure for importing and exporting scientific and commercial samples;
- establishes special procedure simplifications for the authorized economic operator;
- legislatively establishes the list of grounds for extending the deadline for the release of goods from 1 to 10 days.
The recent changes to Russian customs legislation feature prominently in Doing Business 2012: Doing Business in a More Transparent World1, a joint report issued by the International Financial Corporation and the World Bank. The report assesses regulations that affect domestic firms in 183 economies, and ranks the economies in 10 areas of business regulation, including international trade.
The report notes that, over the past six years, 163 economies have made their regulatory environment more business-friendly. The Russian Federation is among the 30 economies that have improved the most over time.
In 2011, the Russian Federation improved its ranking in the Trading Across Borders indicator, coming in at 160th in 2011 (in 2010, Russia ranked 166th). This means that, although Russia's rating has slightly improved, Russian customs regulation continues to be unjustifiably restrictive both for exports and imports. Unfounded administrative pressure, nontransparent and cumbersome customs control, red tape and corruption are still making life difficult for external economic activity participants.
It takes at least 3 weeks for a cargo to be processed at the border in accordance with Russian legislative requirements (including the time spent whilst preparing all the necessary documents), while in the majority of countries this process takes three days at most. In Rus-
1 http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Annual-Reports/English/DB12-FullReport.pdf
sia, the time frame for customs processing of cargo at a border crossing point is legislatively set at 2 days, while in many countries this procedure usually takes only a few hours or even minutes. Thus, Russia's current approach to customs process organization is clearly counterproductive to the aims of innovation-driven development.
Doing Business 2012 emphasizes that international trade facilitation is becoming an ever more important factor of business development. The rules prescribing the submission of an excessive number of documents, burdensome customs procedures and red tape inevitably result in some additional costs and delays for exporters and importers alike, to the ultimate detriment of an economy's trade potential.
In 2011, in accordance with Article 3 of the RF Law 'On the Customs Tariff', the RF Government adopted 12 decrees establishing the rates of export customs duties on oil and petroleum products. The export customs duty on crude oil and petroleum products obtained from bituminous minerals exported from the territory of the Russian Federation beyond the borders of the member states of the agreements on the Customs Union was changed monthly on the basis of price monitoring for Urals crude from the 15th day of one calendar month to the 14th of the next month.
In response to the serious fuel shortages having erupted in a number of Russia's regions, RF Government Decree of 28 April 2011, No. 238 'On the Introduction of Alterations to Decree of the Government of the Russian Federation of 27 December 2010 No. 1155' adjusted the procedure for calculating the rates of export customs duties on commercial petrol. Previously, they were determined on the basis of the rate of the export customs duty on crude oil and the coefficient 0.67. The Decree of 28 April 2011 put an end to this practice. From 1 May 2011, the rate of the export customs duty on commercial petrol was increased from $ 283.9 per ton to $ 408.3 per ton.
Between 1 February 2011 and 1 October 2011, the rates of export customs duties on dark and light petroleum products were calculated in compliance with the methodology approved by RF Government Decree of 27 December 2010, No. 1155. In accordance with that document, export customs duties on dark petroleum products and light petroleum products were to be set at 46.7% and 67% respectively of the export customs duty on crude oil.
From 1 October 2011, Russia introduced a new procedure for calculating the rates of export duties on oil and petroleum products (Table 55) - the so-called '60-66' oil regime. The new regime envisages that the rate of the export customs duty on crude oil should be set at 60% of the difference between the average crude oil price revealed by monitoring and a crude oil price of $ 182.5 per ton, and not at 65%. At the same time, the rates of export customs duties on light and dark petroleum products should be equalized: in accordance with RF Government Decree of 27 December 2010, No. 1155 'On the Introduction of Alterations to Decree of the Government of the Russian Federation of 27 December 2010 No. 1155', during the period from 1 October through 31 December 2014, the rate of the export customs duty on any petroleum product except petrols should amount to 66% of the rate of export customs duty on crude oil. The new regime has introduced a prohibitive export duty on petrol in the amount of 90% of the export duty on crude oil. Thus, petrol exports become unprofitable, while fuel oil exports - less profitable. It is planned that, from 1 January onwards, the coefficient for dark petroleum products will be increased to 1.
RF Government Decree No. 840, of 17 October 2011, has introduced a new procedure for calculating the rate of the export customs duty on refined copper: the flat 10% export duty rate has been replaced by a progressive one. In accordance with the Decree, the rate of the
export customs duty on refined copper should be determined on the basis of the average price of copper registered at the London Metal Exchange (LME) over a monitoring period. It should be calculated by different formulae depending on the average price. When the average price for a ton of copper is below $ 6,000, the rate should be zero. When the average price is $ 6,000 to 8,000, the rate should be calculated as follows: $ 800 + 30% of the difference between the current price and $ 8000.
Table 55
The Rates of Export Customs Duties on Crude Oil and Petroleum Products in 2011 (USD/ton)
Crude Oil Petroleum Products
hgta dark
1 January 317.5 226.2 121.9
1 February 346.6 232.2 161.8
1 March 365.0 244.6 170.4
1 April 423.7 283.9 197.9
1 May 453.7 304.0 211.8
1 June 462.1 309.0 215.8
1 July 445.1 298.2 207.8
1 August 438.2 293.6 204.6
1 September 444.1 297.5 192.0
1 October 411.4 271.5
1 November 393.0 259.3
1 December 406.6 268.3
Source: RF Government's decrees.
The monitoring of prices should be carried out by the RF Ministry of Economic Development. The length of the period of monitoring is equal to 1 quarter (3 months). No later than on the 20th day of the calendar month following the end of each period of monitoring, the RF Ministry of Economic Development should submit its proposals concerning the rate to the RF Government. The rate of the export customs duty on copper should come into effect from the fifth day of the third calendar month following the end of a monitoring period.
The progressive export customs rate on nickel set at $ 2,178 per ton has come into effect from 5 December 2011. The relevant decree of the RF Government (Decree No. 875) was signed on 1 November 2011. The previous export customs duty rate for nickel was set at 10% of the declared customs value.
The new method for calculating the export customs rate on nickel based on the quarterly monitoring of nickel prices on the London Metal Exchange (LME) came into effect on 28 May 2011. The cut-off price for determining the rate of export duty on nickel is $ 12,000 per ton. When this price is exceeded, calculation should be based on special formulae with coefficients ranging from 0.05 to 0.3. The length of the period of monitoring is equal to one calendar quarter (3 months).
The new export customs duties were to be introduced in mid-November of last year, but then their introduction was postponed until the fifth day of the third calendar month following the end of the accounting period.
Over the course of 2011, the Customs Union Commission adopted 25 decisions on the adjustment of import customs duties. Thus, the Commission reduced the rates of import duties on coking coal, heparin and its salts, some types of paper and cardboard, high resolution digital cinema projector systems, and ski-track-laying caterpillar tractors. Zero rates were temporarily introduced for import duties on some types of milled cereal products, some types of cereals (wheat and meslin, rye, barley, seed corn and oats), some types of vegetables (carrots,
beets, onion), soy shrot, milled phosphates, some types of juice and mash concentrates for juice manufacturing, some kinds of apple puree, including compotes, and some kinds of concentrated apple juice.
There was an increase in the rates of Customs Union import duties on continuous-action elevators and conveyors, molded fabrics, drill machines for coal or rock mining to the depths of not less than 200 meters, and some types of agricultural machinery.
On having acceded to the World Trade Organization, the Russian Federation will not be able to efficiently protect its domestic market by merely increasing the rates of import duties, because Russia's import tariff is pegged to the level fixed in the process of the accession negations. The only efficient instrument for protecting the domestic market of a country acceded to the WTO is the special protective, anti-dumping and compensatory measures permitted thereby.
The list of the special protective and anti-dumping measures introduced in the customs territory of the Customs Union is posted on the official web site of the Customs Union Commission .
By the Commission's decisions, the following anti-dumping duties are established:
• until 13 May 2012 - in the amount of 21.8% of the customs value of Ukraine-made machine-building fasteners imported into the CU countries. These include bolts and nuts manufactured by the methods listed in the Commission's decision, with specified thread diameters;
• until 20 January 2013 - in the amount of 31.3% and 41.5% of the customs value of goods (specified depending on their manufacturers) on China-made ball bearings imported into the CU countries;
• until 16 June 2013 - in the amount of 19.4% of the customs value of China-made bearing tubes imported into the CU;
• until 24 September 2013 - in the amount of 11.6% of the customs value of Ukraine-made synthetic nylon threads with linear density of 29 to 250 tex imported into the CU;
• until 25 December 2013 on nickel-containing corrosion-resistant rolled steel (in sheets and coils) made in Brazil, China, Korea, and South Africa. The size of duty depends on a product's country of origin and may amount to 4.8-62.8% of its customs value;
• until 26 June 2014 - in the amount of 26% of the customs value of Ukraine-made forged steel rolls for rolling mills, imported into CU territory;
• until 18 November 2015 - on some types of Ukraine-made steel pipes imported into the CU. The size of duty depends on the pipe type and its manufacturer, and may amount to 18.9 - 37.8% of its customs value;
By the Commission's decisions, the following special duties are established:
• until 1 November 2012 - in the amount of 9.9% of the customs value (but no less than $ 1500 per ton) on corrosion-resistant steel pipes with outer diameter of up to 426 mm imported into the CU. That duty is not to be levied on corrosion-resistant steel pipes originating from developing countries, except Brazil and China;
• until 26 December 2012 - in the amounts of $ 1.4 per kg on corrosion-resistant steel cutlery imported into the CU, which are to be coded in accordance with the Commission's decision;
1 http://www.tsouz.ru/db/spec_measures/Pages/Mepbi,geHCTByro^HeHaTTTC.aspx
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• until 17 March 2014 - in the amounts of $ 282.4 per ton on some types of fasteners imported into the CU. This special duty is not to be levied on imported fasteners made in the developing countries applying the CU's Common System of Tariff Preferences. China is an exception;
• until 7 July 2014 - in the amounts of $ 294.1 per ton on caramel imported into the CU.
The Russian Federation's accession to the World Trade Organization
On 16 December 2011, the Ministerial Conference held by the World Trade Organization (WTO) in Geneva approved the package of documents concerning the accession of the Russian Federation. The Russian Federation will be obliged to ratify that package within the period prior to 15 June 2012. Thirty days after the WTO being notified of its ratification, the Russian Federation will become its fully-fledged member. As follows from the information posted to the WTO's official website1, Russia has agreed to ensure a free trade regime and speed up its integration in the world economy, as well as to create transparent and predictable conditions for trade and foreign investments. The Russian Federation has undertaken the following commitments.
Access to Commodity Markets. Access Commitments Relating to Tariffs and Quotas
The ultimate legislatively consolidated rate of bound tariffs on all types of products will amount to 7.8% against the average weighted rate of 10% applied in 2011.
The average bound tariff rates on agricultural commodities will be set at 10.8% against the current average weighted tariff rate of 13.2%.
The average bound tariff on industrial commodities will be set at 7.3% against the current average weighted tariff of 9.5%.
Russia has agreed to lower her tariffs on a broad range of products. After this commitment is fully implemented, the tariff rates will be as follows:
- on dairy products - 14.9% (against the current tariff rate of 19.8%);
- on grain products - 10.0% (against the current tariff rate of 15.1%);
- on vegetable oils, fats and butter - 7.1% (against the current tariff rate of 9.0%);
- on chemical products - 5.2% (against the current tariff rate of 6.5%);
- on automobiles - 12.0% (against the current tariff rate of 15.5%);
- on electric equipment - 6.2% (against the current tariff rate of 8.4%);
- on timber and pulp-and-paper products - 8.0% (against the current tariff rate of 13.4%);
- on sugar - $ 223 per ton (against the current tariff rate of $ 243 per ton).
The bound tariff rates on cotton and information & communications products will be reduced to zero (the current tariff rate on information & communications products is 5.4%).
The finally established bound rates of customs tariffs will be applied, from the date of Russia's accession to the WTO, to more than one-third of the existing tariff items; the tariffs on another one-quarter of items will be reduced three years after the accession. The longest transition period (with maintaining the current tariff rates) is established for poultry and game meats - 8 years, followed by 7-year period for motor cars, helicopters and civil aircraft.
1 http://www.wto.org/english/news_e/news11_e/acc_rus_10nov11_e.htm
Tariff quotas will be applied to beef, pork, poultry and game meats, and some whey milk products. Import duties on products within the limits of these quotas will be levied at lower rates than those levied on other imported goods.
The rates within the quotas are as follows (the corresponding rates outside the quotas are shown in brackets):
- beef - 15% (55%);
- pork - zero (65%). The tariff quotas on pork from 1 January 2020 will be replaced by a flat rate of 25%;
- on some poultry products - 25% (80%);
- on some whey milk products - 10% (15%).
Some of the aforesaid quotas are also subject to the norms established for certain members of the WTO.
Access to Services Markets
The Russian Federation assumed certain responsibilities with regard to 11 sectors and 116 subsectors in the services sphere.
Four years after Russia's accession to the WTO, the restriction on the participation of foreign capital in the sphere of telecommunications will be lifted (at present it is set at 49%). Besides, the Russian Federation agrees to implementing the terms and conditions stipulated in the WTO Basic Telecommunications Agreement. Nine years after the accession, foreign insurance companies will be allowed to establish their affiliations in this country.
Foreign banks will be allowed to open their affiliated structures. The restriction on foreign capital's participation in each individual banking entity will be lifted, but on the whole the share of foreign capital in the Russian Federation's banking system will be limited to 50%. (excluding foreign capital invested in potentially privatized banks).
In the sphere of transport services, the Russian Federation made certain commitments in regard of sea and road transport, including passenger and cargo carriage services.
In the distribution services sphere Russia, after her accession to the WTO, will allow companies with 100% foreign participation to operate in the wholesale, retail and franchising sectors.
Export duties
Export duties will be bound with regard to more than 700 tariff items, including some specific types of products in certain sectors, in particular fish and seafood products, fuel and lubricants, leather raw materials, timber and pulp-and-paper products, and base metals.
General Commitments Ensuring Access to Markets
Those quantitative restrictions with regard to commodity imports that cannot be justified under the existing WTO provisions, such as quotas, bans, import permissions, requirements that relevant permissions should be obtained prior to the start of supply, licensing requirements and/or other requirements or constraints imposed on commodity imports, are not to be renewed or are to be altogether abolished.
The fees for transit cargo shipments via railway transport from July 2013 onwards will be regulated by the WTO provisions. The Russian Federation will apply to product imports the same railway transport fees as those that are established with regard to domestic shipment of
the same types of products. The regulated railway shipment tariffs are to be published prior to their actual introduction.
From the date of Russia's accession to the WTO, the importers of alcohol, pharmaceuticals and products manufactured with the use of cipher technologies will no longer be required to obtain import licenses with regard to these commodities.
After the accession to the WTO, the Russian Federation will apply the Generalized System of Preferences for the customs union of developing and underdeveloped countries which is currently applied by 152 states.
Within that system's framework, the import duties applied to those goods originating from developing countries that are subject to tariff preferences were at the level of 75% of the customs duties established for most favored nations, and 0% of the customs duties established for least developed countries.
In 2012, the Russian Federation will reform her national tariff regime for sugar imports, with its subsequent further liberalization.
By the date of Russia's accession to the WTO, any exemptions from the tariffs established for space products will be granted on the basis of most favored nation treatment.
No import licensing will be required for more than ten types of products based on cipher technologies (this list includes devices for developing electronic digital signatures, smart cards and wireless equipment). With regard to these types of products, all the currently existing restrictions on imports will be lifted, and no new constraints will be introduced, including expert's estimations, permissions and licenses. For those cipher-technology-based products that may be imported only on the basis of mandatory licenses, expert's estimations or permissions, these procedures will be applied on a one-time basis only.
Some products, including alcohol, timber products and meats, will become subject to measures that require customs declarations and/or entry through specially designated customs control points. As of the date of Russia's accession to the WTO, any measures that are contrary to the WTO Accession Agreement will have to be abolished. The Russian Federation will no longer apply the national customs procedures.
The Russian Federation is to apply all the relevant legislative, regulatory and other measures pertaining to the transit of commodities (including energy products) in accordance with GATT and WTO provisions. From the moment of her accession to the WTO, all the laws and regulatory norms applied to customs duties and other fees levied on transit of goods will have to be published.
The Russian Federation will revise the requirements in regard to access to markets that are applied to the affiliations of foreign banks and companies engaged in operations with securities, so as to make them acceptable in the context of the future negotiations on the Russian Federation's accession to the OECD or the next round of the WTO's multilateral trade negotiations.
When participating in preferential trade agreements, Russia will comply with the provisions stipulated in the WTO's Agreements, without making any distinctions between those agreements that will come into force after her accession to the WTO and those that will be adopted in the future.
Agreement on Government Procurement
The Russian Federation intends to join the WTO Agreement on Government Procurement, and so during her accession to the WTO will accordingly notify of that intention the WTO
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Committee on Government Procurement. After the signing of that Agreement, Russia will acquire the status of observer, and within four years from the moment of accession to the WTO she will start negotiations concerning her joining that Agreement. After the accession to the WTO, the Russian government bodies will determine the winners in government procurement tenders in a transparent procedure.
Subsidies to Industrial and Agricultural Producers
Subsidizing of industrial producers
The Russian Federation will discontinue all the programs for subsidizing industrial producers or will modify those programs so as no subsidies be granted to exported goods or with the purpose of improving the competitive capacity of Russia-made goods as compared to imported goods. The Russian Federation will notify the WTO concerning the current subsidies and will not demand that any of the provisions stipulated in Articles 27 and 28 of the WTO Agreement on Subsidies and Countervailing Measures be applied in this connection.
Subsidizing of agricultural producers
The overall distorting effect on trade of the support granted to agricultural producers must not exceed $ 9bn in 2012; by 2018, its amount will have to be gradually reduced to the level of $ 4.4bn.
In order to avoid any excessive focusing of support on certain types of products, from the moment of this country's accession to the WTO and until 31 December 2017 the per annum volume of support provided to the producers of certain types of agricultural goods must not exceed 30% of the amount of support granted to other types of products.
All the export-related subsidies granted to agricultural producers will be bound at a zero level. After Russia's accession to the WTO, the exemption from VAT currently granted to some types of agricultural products will be abolished.
Pricing with Regard to Energy Carriers
The producers and distributors of natural gas in the Russian Federation will operate on the basis of normal commercial prices and the principles of payback and profitability. The Russian Federation will continue her practice of regulating the prices of energy carriers established for the population and non-profit consumers.
Sanitary and Phytosanitary Measures (SPM) and Technical Barriers to Trade (TBT)
All SPM and TBT in the Russian Federation and the Customs Union member states will be elaborated and implemented in accordance with the relevant WTO Agreements.
The Russian Federation will develop and implement international SPM srandards in the framework of her membership in Codex Alimentarius (the internationally recognized guidelines relating to food safety), the World Organization for Animal Health and the International Plant Protection Convention.
The reasons for suspension, recall or refusal of permission for importing products will be made compatible with the international standards and recommendations, as well as with the provisions stipulated in the WTO's SPM Agreement.
The Russian Federation will stage negotiations on veterinary export certificates that contain requirements which are different from the requirements established by the Customs Un-
ion in those cases when the relevant exporter country has submitted a substantiated request that such negotiations are to be conducted in the period until 1 January 2013.
The RF Federal Agency for Veterinary and Phytosanitary Supervision (Rosselkhoznadzor) will no longer suspend the supply of imported products by organizations on the basis of their on-site checks before providing the relevant exporter country with opportunities for suggesting adequate measures for correcting the situation, with the exception of cases fraught with some serious risks to human or animal health. Rosselkhoznadzor is to send a preliminary report to the exporter country's competent agencies in order to obtain the necessary explanations.
The Russian Federation will apply international standards to the development of technical regulation measures, provided that such measures do not turn out to be an inefficient or inadequate instrument for achieving the established goals.
Towards the end of the year 2015, the mandatory requirements to the telecommunication equipment applied in public telecommunication networks will be limited to the requirements stipulated in the technical regulation rules adopted under the agreements concluded by the Eurasian Economic Community and the Customs Union.
In accordance with the WTO's TBT Agreement, the Russian Federation will, on a continual basis, revise the lists of products to be subject to mandatory certification or declaration of conformity, as well as all the technical regulation measures applied in her territory (including the measures envisaged in the framework of the Customs Union and the Eurasian Economic Community, so as to confirm their necessity for achieving the Russian Federation's goals.
Within the period no later than 30 June 2012, the certified accreditation bodies will be replaced by a single national body in change of all accreditation issues. The body's name and other relevant information will be published on the websites of the RF Federal Agency for Technical Regulation and Metrology (Rosstandart) and the Customs Union's Commission.
Trade-Related Investment Measures
The Russian Federation will ensure compatibility of all the laws, regulatory norms and other relevant measures to be implemented under the WTO Trade-Related Investment Measures Agreement with the corresponding WTO provisions.
All the measures that are incompatible with WTO provisions, including preferential tariffs or exemptions from tariffs which are applied to investment programs (including investment programs implemented in the automobile industry) and any agreements concluded in their framework, must be abolished prior to 1 July 2018.
Trade-Related Aspects oflntellectual Property Rights Protection
The Russian Federation will implement in full the provisions stipulated in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights, including the relevant law enforcement provisions, without any transition period.
The Russian government will continue to implement measures designed to prevent the functioning of those websites (whose servers are situated in the Russian Federation's territory) that unlawfully distribute content protected by authorship rights or intermediate rights.
The Russian Federation will initiate investigation and criminal proceedings against those companies that unlawfully distribute via the Internet objects protected by authorship rights or intermediate rights.
By the moment of her accession to the WTO, the Russian Federation will have been applying all the provisions established by the Berne Convention for the Protection of Literary and Artistic Work http://www.multitran.ru/c/m.exe?t=4330237_2_1.
Transparency
The provisions stipulated in the WTO Agreement will be applied uniformly across the entire territory of the Russian Federation, including the regions engaged in frontier trade, special economic zones and other territories where special regimes may be established with regard to tariffs, taxes and regulatory measures.
In accordance with the WTO's requirements, all legislation that can influence trade in commodities, services and intellectual property rights should be subject to immediate publication. The Russian Federation will be renewing, on a regular basis, the relevant official publications, including those posted to websites, and ensure access to these publications for WTO members, individuals and companies.
In order to improve the procedure of access to official publications, the Russian Federation will create an information service whose duty it will be to assist WTO members and all other related parties in gaining such access.
Thus, in particular, the Russian Federation will publish, prior to their enactment, the texts of all the legislative acts that can influence trade in commodities, services and intellectual property rights, and ensure that a reasonably lengthy period of time (no less than 30 days) be established for the WTO members to present their comments, excepting those acts that regulate issues pertaining to emergency situation, national security, monetary policy and other measures, the publication of which will encumber law enforcement procedures, be contrary to public interests or detrimental to the commercial interests of countries or private entrepreneurs. No legislative act that can influence trade in commodities, services and intellectual property rights may come into force prior to its publication.
The Russian Federation will send to WTO members her annual reports on the implementation of the current privatization program over the entire period of its implementation.
From the date of Russia's accession to the WTO, the lists of goods and services whose prices are subject to government control will be published in Rossiiskaia gazeta [The Russian Newspaper]. Russia will apply government control measures to pricing with regard of certain types of goods and services, including natural gas, rough diamonds, vodka, water supply services, natural gas transportation services, baby foods, medical products, public transport services and railway freight and passenger services. Price control measures are not to be applied in order to protect Russia-made products or services.
The Functioning of the Customs Union betweeny Russia, Kazakhstan and Belarus
The Customs Union between Belarus, Kazakhstan, and Russia came into existence as of January 1, 2010. From 1 July 2011, all customs borders between these three countries have been removed.
From 1 January 2012, the three states are to create a single economic space. The Russian Federation will publish all the legislative acts concerning the Customs Union prior to their adoption and ensure that a reasonably lengthy period of time be established for the WTO members and all the key related parties to prepare their comments and submit them to the Customs Union's empowered body.
