Section 4. The Real Sector of the Economy Текст научной статьи по специальности «Сельское хозяйство, лесное хозяйство, рыбное хозяйство»

Section 4. The Real Sector of the Economy

4.1. Production Macrostructure

4.1.1. Post-crisis performance of the Russian economy

Analysis of the main performance indicators of the Russian economy in 2008 - 2012 allows us to identify the general and specific factors and conditions of the post-crisis recovery of the national economy. In 2012, as compared to pre-crisis 2007, the GDP had grown by 9.4%, including domestic demand (by 15.8%) and external demand (by 4.7%). However, economic development over the past five years has been extremely unstable and there have been significant qualitative differences during this period: (1) the acute phase of the financial crisis in QIV 2008 - QIV 2009 was followed by (2) the economic recovery in QI 2010 -Q II 2012, and (3) in QQIII - IV 2012 by a period of deceleration of development. But the effects of certain negative trends have been observed throughout the whole period.

The first phase. QIV 2008 - QIV 2009. A simultaneous reduction of foreign and domestic demand. The sharp fall in world commodity prices from QIII 2008 due to restricted demand led to a decrease in Russian exports of goods, both in volume and value. Since the II half of 2009, with the gradual recovery of the global commodity markets and the anti-recessionary measures of the Russian government to support the financial institutions, there has been a gradual remission of the economic downturn. In general, GDP in 2009 was at 92.2%, with foreign demand at 95.3% and domestic demand at 85.8% as compared to the previous year. It should be noted that for the domestic market the biggest change was mostly a reduction of imports by 30.1% compared to 2008. The reduction of domestic production for the domestic market in 2009 was 9.1% compared to the previous year, which slightly reduced the tension in the real sector.

Since QIV 2009, the growth dynamics for external demand were restored, and from QII 2010 domestic production for the domestic market was restored.

The second phase. QI 2010 - QII 2012. In 2010 - 2011, the average annual GDP growth rate was 104.4%, including the domestic demand (108.6%) and foreign demand (103.6%). The ratio of demand factors was differentiated by year. In 2010, production was restored to the 2008 level in the mining sector, and this has determined the dominant influence of foreign demand, but the GDP was still 3.6% below the 2008 level.

The 2008 - 2009 crisis, in contrast to the 1998 crisis, was characterised by a deeper fall in the real sector and a longer recovery period to growth. The dynamics of domestic demand in 2011 developed under the influence of growth in domestic production and imports. Since

2010, there has been a trend towards faster growth of imports relative to domestic production. In 2011, the volume of manufacturing production had recovered to the 2008 level, and this was one of the factors in achieving the pre-crisis level of domestic demand and GDP.

Source: Rosstat.

Fig. 1. GDP by components of the domestic and foreign demand in 2007-2012, as a % of the corresponding period of the previous year

Rapid recovery of consumer demand was another distinctive feature of 2010 -2011. Household consumption in 2011 exceeded the 2008 level by 6.1%. Unlike 1998 - 2001, when low consumer demand limited the rate of expansion of the domestic market, the increase in people's real income, by 9.2% compared to 2008, led to a growth of retail sales in about the same proportion, and this was the dominant factor in the economic recovery. During the same period, an intensive growth of demand for consumer loans began, which in turn positively affected the financial sector.

The crisis in the investment sector was still a negative aspect of the economy in 20102011. The volume of capital investments in 2011 amounted to only 96.7% of the 2008 level.

Table 1

Key macroeconomic indicators in 2007 - 2012, as % of the previous year

2007 2008 2009 2010 2011 2012

1 2 3 4 5 6 7

Gross domestic product 108.5 105.2 92.2 104.5 104.3 103.4

Capital investments 122.7 109.9 84.3 106 108.3 106.6

Construction 118.2 112.8 86.8 103.5 105.1 102.4

Commissioning of housing floorspace 121.1 104.6 93.5 97.6 106.6 104.7

The volume of industrial production 106.8 100.6 90,7 108.2 104.7 102.6

Mining operations 103.3 100.4 99.4 103.6 101.9 101.1

cont'd

1 2 3 4 5 6 7

Manufacturing industry 110.5 100.5 84.8 111.8 106.5 104.1

Power, gas and water 99.4 100.6 96.1 104.1 100.1 101.2

Agricultural production 103.3 110.8 101.4 88.7 123 95.3

Freight turnover 102.4 100.7 89.9 106.9 103.4 101.7

Retail turnover 116.1 113.7 94.9 106.4 107 105.9

foodstuffs 112.6 111.7 98.1 105.1 103.2 103

non-food products 119.1 115.3 91.8 107.7 110.8 108.4

Retail services 107.7 104.3 97.5 101.5 103.2 103.5

Exports 105 96.8 97 106.9 101.6 100.4

Imports 127.1 113.5 63.3 134.8 122.2 105.5

Real disposable income 112.1 102.4 103.1 105.1 100.4 104.2

Real wages 117.2 111.5 96.5 105.2 102.8 107.8

The real size of pensions 104.8 118.1 110.7 134.8 101.2 104.9

The number employed in the economy 102.4 99.7 98.1 100.7 101,3 100.9

Number of unemployed 89.2 98.0 141.1 74.0 89.1 85.3

Number of registered unemployed 101.1 102.2 99.6 100.4 76.3 80.1

Consumer price index 111.9 113.3 108.8 108.8 106.1 105.1

Producer price index of industrial products 125.1 93.0 113.9 116.7 112.0 106.8

Source: Rosstat.

Third phase. QIII - IV 2012. In the second half of 2012 production for the domestic market dramatically slowed due to a reduction in agricultural production, instability of investment demand and a flat manufacturing production performance. Compared to the same period of the previous year, the growth rate of domestic production for the domestic market in the II half of 2012 fell to 102.8% from 105.4% in the I half of 2012. The associated restriction of demand for Russian products on the domestic market was not compensated by an acceleration of exports and imports in QIV 2012 as compared to the previous quarter, and eventually led to a slowdown in growth of domestic demand to 4.4% in the II half of 2012 compared to 8.8% a year earlier.

25,0 20,0

15,0

-15,0

-20,0

Domestic production for the domestic market Domestic production for the export market

Russian production - total

Fig. 2. Domestic production by components used in 2007 - 2012, as % of the previous year

In general, the GDP growth rate in 2012 was 103.4% compared to the previous year, including domestic demand at 104.9% and foreign demand at 101.8%.

The performance of the domestic market was determined, on the one hand, by the growth of domestic production for both domestic consumption and for export markets, and on the other by the dynamics and structure of imports. The slowdown in growth of domestic production from 5.0% in 2010 to 3.9% in 2011 and 3.1% in 2012 resulted from the slowdown in both the export sector and in production for the domestic market.

The dynamics of domestic demand in 2012 were significantly affected by the weakening of the growth rate of investment and of the consumer markets. In 2012, the growth of capital investments was 6.7% against 8.3% a year earlier, retail trade was 5.9% against 7.0% and for the services sector 3.5% against 3.2%. The growth slowdown in 2012 compared to the previous year was also observed in the commodity sector: in the industry sector which was up to 102.6%, including the manufacturing industry (104.1%,) and construction (102.4%). A fall in agricultural production by 4.7% compared to the previous year also negatively affected the economic performance in 2012 (Table 1).

Noting the importance of expanding the domestic market for post-crisis development, we should pay attention to the gap in the dynamics of domestic production compared with the growth of imports. In the Russian economy this trend has operated for a long time now.

Note that from the QIV 2010 a weakening in the growth of imports was recorded simultaneously with a slowdown in domestic demand. Domestic production for the domestic market is recovering very slowly, and in contrast to the 1998 crisis, when the reserve of competitive production capacity initiated a large-scale process of import substitution, this could no longer happen in 2009 - 2012: reserve capacity was not available. In 2012, the growth rate in imports amounted to 8.7% (2011 - 20.3%), domestic production for domestic consumption to 3.6% (5.6%) and domestic demand to 4.9% (8.9%).

Fig. 3. Dynamics of domestic demand by components in 2007-2012, as % of the previous year

In 2010 - 2012, the share of imports in the structure of the domestic market was increasing, and the proportion of investment and intermediate goods in the structure of imports was also increasing, whilst the proportion of imported consumer goods was declining. This kind of shift in the structure of imports was qualitatively new for the Russian economy and took place during the on-going crisis in the investment sector and in several industries for intermediate goods. The share of imports in the commodity resources of the retail trade in 2012 was 44%, including 34% for food products and 52% for non-food products.

Table 2

The structure of retail commodity resources in 2010 - 2012, %

Commodity resources Retail Including

domestic imported

2007 100 53 47

2008 100 56 44

2009 100 59 41

2010 100 56 44

2011 100 57 43

2012 100 56 44

Source: Rosstat.

Analysis of the key macroeconomic trends suggests that although the Russian economy as a whole had overcome the consequences of the crisis by 2012, the unstable dynamics of key macroeconomic indicators and the slow recovery of the investment sector defined the development of a constraints system in the short term. The factors determining the economic dependence on the world commodity markets continued to dominate the economy. Overcoming the effects of the crisis of 2008 as part of the reproduction model formed in 2000-2007 allowed the economy to exceed the level of successful performance in 2007, though the sustainable and effective development of the Russian economy requires changes in the business and competitive environment, improvement of production capacity, strengthening of innovations and an improvement in the quality of human capital.

Real wages Real disposable income Imports Exports Retail services Retail trade turnover Freight turnover Agricultural production Production of power, gas, wa-ter Manufacturing industries Mining

Industrial production Commissioning of housing floorspace Construction Capital investments Gross domestic product

Fig. 4. The annual growth rate of main economic and social indicators in 1999 - 2007 and 2007-2012, %

H 0,5

-3,0.

-20-

4,6-

4,5-

8,2

3 6,0 -54—

-04-

l33?5

1,9

l-U-

-13-

-12-

-13-

-ü-

2,6

-18-

4,7

5,1

6,1

8,2

8,0

=F

7,1

10,3

9,5

11,3 I 11,7

19,5

1,0 5,0

□2008-2012

10,0 15,0 20,0

□ 1999-2007

25,0

9

4.1.2. The main characteristics of GDP utilisation

Throughout 2012 the growth in consumer demand remained one of the key factors in maintaining economic growth. The quarterly dynamics of retail trade turnover in 2012 showed that the slowdown in real income growth and real wage growth was accompanied by a gradual weakening of consumer demand, and that activity here was significantly affected by the rate of inflation, the risks associated with the indexation of regulated tariffs in the second half of the year and the change in exchange rate, with growing expectations of devaluation.

In the first half of 2012 growing consumer demand was associated with wage increases in the public sector and low inflation compared with the corresponding period of the previous year. The feature of consumer behaviour in this period was a sharp increase in demand for food products. While in the I half of 2011, growth in the food market turnover amounted to 1.0%, in the I half of 2012 it was 4.9% compared to the same period of the previous year. The growth rate of the non-food market, however, slowed down from 111.3% to 9.4%.

From the II half of 2012 the acceleration of inflation due to changes in prices and tariffs for paid services and to increasing food prices determined a slowdown in consumer demand both in the food and non-food markets. In general, the food price index in 2012 was 7.5% (2011 -3.9%), the non-food price index was 5.2% (106.7%) and the services price index was 7.3% (8.7%). In the QIII 2012, the growth in retail trade slowed to 4.6% and to 4.5% in the QIV of the previous year against the 7.9% and 9.0% of a year earlier. As a result, the retail trade turnover in 2012 increased by 5.9%, including food products (by 3.1%) and non-food products (by 8.4%).

12 10 8 6 4 2 0 -2

3 Retail trade turnover

Real disposable income Real pensions

"""" Retail services ■ ■ Real wages

Index of prices and tariffs for paid services

Source: Ministry of Economic Development of Russia, Rosstat.

Fig. 5. The dynamics of retail trade, paid services and real income turnover, as % of the corresponding period of the previous year

As in 2011, the growth of retail sales resulted from a reduction in the rate of savings and an increase in consumer lending. Loans to individuals, as at the end of December 2012, amounted to RUR 77,371 trillion and had increased by 1.39 times compared to the same period of

2011. The share of savings in personal incomes decreased by 0.3 percentage points compared to 2011, and amounted to 10.1%. Note that the proportion of income used for currency purchases by the public had increased by 4.9% in 2012 against 4.2% a year earlier.

Table 3

The structure of population income utilisation in 2011-2012., as % of the total

Cash Revenues Including those allocated to

Purchase of goods or payment for services Including Mandatory payments and contributions Savings Incl. Purchase of currency Increase (+), decrease (-) in disposable cash

Purchase of goods Payment for services Deposits and securities

2011

QI 100 77.3 58.1 17.6 9.7 +10.6 +2.8. 3.8 -1.4

QII 100 72.4 55.0 16.1 10.3 10.9 +6.3 3.8 +2.6

QIII 100 76.0 58.7 15.6 10.4 +6.9 +2.3 4.8 +1.9

QIV 100 69.4 54.5 13.6 10.8 +12.7 +8.7 4.3 +2.8

Year 100 73.5 56.4 15.6 10.3 +10.4 +5.3 4.2 +1.6

2012

QI 100 79.9 60.9 16.9 10.6 +7.3 +1.8 5.3 -3.1

QII 100 73.4 56.2 15.4 11.0 +9.9 +7.6 4.4 +1.3

QIII 100 75.9 58.4 15.3 11.2 +7.4 +3.2 5.9 -0.4

QIV 100 69.7 54.5 13.5 10.3 +14.4 +10.8 4.1 +1.5

Year 100 74.2 57.2 15.1 10.8 +10.1 +6.2 4.9 0.0

Source: Rosstat.

The model of post-crisis recovery has been focused primarily on the recovery in domestic demand by maintaining the standard of living of the population. Real personal income in 2009-2012 was positively stable, real wages, retail sales and household consumption in 2010 exceeded the pre-crisis levels of 2008. The full implementation of the State's social obligations which was related to the part of the population with a low level of accumulation led to a change in the GDP structure. The share of final consumption in GDP increased from 64.7% in 2007 to 70.2% in 2012, including household consumption (from 46.1% to 52.9%). By 2012, the gross accumulation had not been restored to pre-crisis levels.

Table 4

Utilised GDP structure in 2007-2012, as % of the total

2007 2008 2009 2010 2011 2012

GDP 100 100 100 100 100 100

Including

Final consumption expenditure 64.7 66.7 69.5 68.9 69.3 70.2

Including

Household 46.1 48.4 49.8 50.3 51.3 52.9

Government 18.2 17.8 19.2 -18.1 17.6 17.0

Gross accumulation 24.3. 25.5 16.3 20.1 23.6 24.0

Net exports 12.5 9.2 15,7 13.1 8,7 7.1

Statistical discrepancy -1.5 -1.5. -1.6 -1.7 -1,8 -1.5.

Source: Rosstat.

In 2012, capital investments increased by 6.7% as compared to the previous year and exceeded the 2008 rate by 3.3%. The share of gross savings and capital investments in GDP for 2010 - 2012 had not reached the pre-crisis level. The share of capital investments in GDP in 2012 is estimated at 21.1%, which corresponds to the 2003 index. Despite the fact that in 2010-2012 capital investments grew faster when compared to GDP, the deep recession in the investment sector in the acute phase of the crisis had been the binding constraint on economic development.

Table 5

The share of gross savings, gross accumulation and investments in fixed assets in GDP in 2007-2012, as % of the total

2007 2008 2009 2010 2011 2012

GDP 100 100 100 100 100 100

Gross savings 35.3 33.3 30.5 31.1 30.7 29.8

Gross accumulation 24.3 25,5 16.3 20.1 23.6 24.0

Including

Gross fixed capital accumulation 21.2 22.3 20.7 21.0 22.2 22.7

Capital investments 20 21,3 19.5 19.7 20.5 21.1

Source: Rosstat.

4.1.3. Changes in the GDP structure by source of income

The domestic market performance in 2009 - 2012 was based on the redistribution of income from enterprises to the public. The share of wages in GDP in 2012 increased to 50.4% compared to the average of 46.7% in 2007.

Table 6

GDP structure by source of income in 2007 - 2012, as % of the total,

at current prices

2007 2008 2009 2010 2011 2012

Gross domestic product 100 100 100 100 100 100

Including

Remuneration of employees, including hidden labour and mixed income 46.7 47.4 52.6 49.7 49.5 50.4

Net taxes on production and imports 19.2 20.0 16.6 17.7 19.5 19.4

Gross operating surplus and gross mixed income 34.1. -32.6 30.8 -32.6 31.0 30.2

Source: Rosstat.

In the structure of the employed population, only 8% are non-hired employees, i.e. employers engaging hired employees on a permanent basis for work at their enterprises, and the self-employed population. Accordingly, this has determined the peculiarities of the population income structure. Almost 66% of the population income in 2012 was comprised of the wages of hired employees with a reducing proportion of income being derived from business activity and property.

A characteristic feature of the Russian economy is the high degree of differentiation of the average wage by economic activity. In industry, the degree of wage differentiation is illustrated by the widening gap in the rate of wage growth in the mining and manufacturing industries. The accrued nominal wage in the mining sector in 2012 was 1.87 times higher than the average in the rest of the economy, including the 2.1 times increase in the fuel and energy production sector. In the manufacturing sector, the wages were 93% of the average for the economy and 45% of that in the extractive industries. A 2.3 time excess over the average monthly wage in the economy was recorded in sectors related to the production of oil products and the transportation of fuel and energy resources, as well as in the financial sector. In the education and public health sectors the average wage increased to 70 - 77% of the average level in the economy. The aspect of wages for work in different economic activities has had a significant influence on the structure of income and spending, consumer demand, the nature of employment and the distribution of labour in the economy.

The level and the share of wages of hired employees in the GDP structure has had the dominating influence on social variables, including the labour market. In 2012, the number of the employed population increased to 71.3 million against 70.7 million in 2011, which caused a decline in the overall unemployment rate to 5.8% from 6.8%.

The intensity ratio (number of unemployed people registered with the state employment services per 100 jobs) fell, in December 2012, from 117.4 to 91.3 compared to January of the same year.

Table 7

Major indicators of the labour market in 2010-2012

2010 2011 Quarters 2012 Quarters

I II III IV I II III IV

The number of employed 69.8 70.7 69.4 70.7 71.9 70.9 71.3 69.9 71.7 72.3 71.4

in the economy, mln.

The number of unemployed, mln. 5.6 5.0 5.6 5.0 4.8 4.7 4.3 4,9 4.2 4.0 4.0

Unemployment rate, as a % of the 7.5 6.6 7.5 6.6 6.2 6.3 5.7 6.5 5.5 5.3 5.3

economically active population

The number of unemployed registered with the state employment 2.2 1.6 1.5 1.3 1.2 1.1 1.3 1.2 1.1 1.0

services, mln.

The registered unemployment rate, 2.5 1.4 2.2 2.0 1.7 1.9 1.5 1.8 1.6 1.4 1.4

as a % of the economically active

population

The average nominal gross wages 21.090 23.369 21.354 23.154 23.352 26.905 26.690 24.407 26.547 26.237 29.702

of employees of organisations, RUR

As a % of the corresponding period of the previous year

The number of employed people in 100.6 101.3 102.1 101.0 101.1 101.1 100.7 100.9 101.4 100.6 100.7

the economy

The number of unemployed 89.1 89.1 85.7 88.1 91.8 91.6 85.3 91.1 84.8 84.4 85.0

The number of unemployed regis- 90.0 76.3 73.1 75.4 78.0 80.2 80.9 80.1 78.5 79.9 82.4

tered with the state employment

services

The average nominal gross wages 112.4 111.5 111.2 112.5 112.2 115.7 113.3 114.6 115.5 113.3 111.0

of employees of organisations

Average gross monthly real wages 105.2 102.8 101.6 102.7 103.8 108.5 107.8 110.3 111.3 106.9 104.2

Source: Rosstat.

Note that in 2000-2012 the changes in demand for labour were determined by shifts of employment into the services sector. In recent years, almost all businesses in the industry have shown a decline in employment with the greatest decrease in jobs in the manufacturing sector. The annual growth rate of labour productivity in 2010 - 2012 was 103.1% and remained well below the pre-crisis levels.

The low efficiency of manufacturing is one of the main reasons for the reduced competitiveness of the Russian economy. The dramatic gap between the growth rates of labour productivity and of wages in the economy in favour of the latter, even during the crisis, negatively affected the quality economic indicators. However, the possibility of further increases in labour costs were fairly tightly confined by changes in the competitive market environments, due to the increased RUR exchange rate and the increasing pressure from imports.

The outpacing of wage growth relative to productivity increased the burden on the economy and affected its financial performance.

Table 8

Development of productivity in the Russian economy, in% to the previous year

OKVED (All-

Russia Classi-

fier of Eco- 2003 2004 2005 2006 2007 2008 2009 2010 2011

nomic Activi-

ties)

Total for the economy 107.0 106.5 105.5 107 107 104.8 95.9 103.0 103.8

Including

Agriculture, hunting and forestry A 105.6 102.9 101.8 104.3 105.0 110.0 104.6 90.0 119.9

Fishing, fish farming B 102.1 104.3 96.5 101.6 103.2 95.4 106.3 76.4 112.5

Mining operations C 109.2 107.3 106.3 103.3 103.1 100.9 108.5 100.6 101.2

Manufacturing industry D 108.8 109.8 106.0 108.5 108.4 102.6 95.9 108.3 105.9

Production and distribution of E 103.7 100.7 103.7 101.9 97.5 102.1 96.3 99.0 99.9

power, gas and water

Construction F 1053 106.8 105.9 115.8 112.8 109.1 94.4 98,7 102.8

Wholesale and retail trade; G 109.8 110.5 105.1 110.8 104.8 108.1 99.0 98.8 104.8

Hotels and restaurants H 100.3 103.1 108.5 109.2 108.0 109.2 86.7 94.5 101.2

Transportation and I 107 108.7 102.1 110.7 107 106.4 95.4 102.4 102.6

Communication

Real estate, renting and services K 102.5 101,3 112.4 106.2 117.1 107 97.5 99.4 101.2

For reference:

real gross wages 110.9 110.6 112.6 113.3 117.2 111.5 96.5 105.2 102.8

Source: Rosstat.

In 2012, pre-crisis levels of profitability in the economy were not achieved. The profitability of sold goods, products and works in 2012 was 9.7%, i.e. 1.8 percentage points below the previous year. Mining activities remained the most profitable activity in 2012.

At current prices on the domestic and world energy markets, the enterprises engaged in mining showed a positive net balanced financial result, of RUR 1.503.9 trillion in 2012, representing 98.4% of the same index for the previous year. The financial status of manufacturing enterprises has slightly improved: in 2012 their balanced net financial result amounted to RUR 2,093.3 trillion and was 12.8% higher than the level of the previous year. With a general trend towards slower growth in industry, in 2012 the profitability of the mining industry decreased to 31.1% against 35.7% in the previous year, and for the manufacturing industries to 11.0% against 13.2%.

Table 9

Profitability of sold goods, products, works, services and assets of organisations by economic activities in 2007-2012, %

For the incomplete range of businesses

2007 2008 2009 2010 2011 and organisations

2011 2012

1 2 3 4 5 6 7 8

Profitability of sold goods, products, works, services

Total for the economy 13.1 -13.0 10.8 10.0 9.6 11.5 9.7

Including:

Agriculture, hunting and 14.3 10.0 7.8 9.1. 9.1 10.3 11.7

forestry

Fishing, fish farming 8,4 7,4 20.7 19.6 18.2 22.0 21.4

Mining operations 30.5 25.4 28.8 31.9 31.4 35.7 31.1

Fossil fuel extraction 30.1 22.6 28.2 29.2 27.5 32.1 28.8

Manufacturing 18.3 17.1 13.4 14.8 13.2 13.2 11.0

Production of vehicles and 6.1 4.1 1.5 4.8 5.5 7.5 6.0

equipment

Production and distribution 5.2 4.9 6.8 7.1 6.4 6.6 4.6

of power, gas and water

cont'd

1 2 3 4 5 6 7 8

Construction 5.8 5.6 5.0 4.5 4.3 6.8 3.7

Wholesale and retail trade 8.8 10.8 7.1 8.3 8.9 10.5 8.2

Transportation and Commu- 15.7 14.2 13.4 13.5 11.4 12.8 12.2

nication

Return on assets

Total for the economy 10.4 5.4 5.5 6.7 6.5 7.0 6.8

Including:

Agriculture, hunting and forestry 6.4 4.8 2.9 2.9 3.9 4.2 4.8

Fishing, fish farming 8.0 1.0 15.1 13.3 11.9 13.8 18.7

Mining operations 11.4 10.5 8.8 11.6 18.4 15.3

Fossil fuel extraction 11.0 10.3 9.1 10.9 13.2 17.9 15.2

Manufacturing 14.8 8.6 6.1 8.2 8.4 8.2 7.9

Production of vehicles and 4.4 -2.0 -5.1 -0.3 2.1 2.9 2.2

equipment

Production and distribution 3.5 2.3 2.2 4.6 1.1 1.4 2.2

of power, gas and water

Construction 4.6 3.1 2.6 2.0 2.1 2.6 2.7

Wholesale and retail trade 9.0 5.3 7.8 7.1 9.8 10.2 8.2

Transportation and Commu- 8.0 5.4 4.4 5.3 4.9 4.7 5.4

nication

Source: Rosstat.

4.1.4. Dynamics and pattern of production by economic activity

In 2012, there was a recorded slackening of the annual and quarterly performance of almost all economic activities. The physical quantum index for basic economic activities was 102.6% of the previous year, against 105.5% in 2011. The slowdown in industrial production determined the reduction of demand for the infrastructure market sectors. The freight turnover index amounted to 101.7% as compared to 2011. The decline in agricultural production in 2012, by 4.7% as compared to the previous year, negatively affected economic performance. During the second half of the year there was a significant slowdown in construction activities.

Table 10

Indices of main indicators of production in 2011-2012, as a % of the previous year

2011 2012

Year Quarter Year Quarter

I II III IV I II III IV

GDP 104.3 104.0 103.4 105.0 104.8 103.4 104.9 103.9 102.9 102.6

Production of goods and services in basic economic activities 105.5 105.6 104.0 106.7 105.6 102.6 105.0 103.2 101.6 101.1

Agricultural sector

Agricultural production 123.0 100.7 100.6 129.7 134.7 95.3 104.0 104.3 94.0 89.4

Industrial sector 104.7 105.9 104.8 105.1 103.3 102.6 104.0 102.3 102.5 101.7

Mining operations 101.9 103.3 101.7 102.2 101.3 101.1 101.9 100.4 101.2 100.9

Manufacturing industry 106.5 110.6 105.8 105.7 104.6 104.1 104.4 104.7 104.5 102.8

Power, gas and water 100.1 99.0 101.9 101.4 98.5 101.2 102.6 100.8 100.0 100.5

Investment sector

Construction 105.1 102.6 99.9 105.6 109.1 102.4 105.0 104.6 98.9 102.8

Commissioning of housing floorspace 106.6 97.6 95.2 114.3 111.8 104.7 105.7 98.7 104.2 107.1

Capital investments 108.3 99.2 105.0 108.2 113.6 106.7 116.6 110.2 107.3 101,3

Machinery and equipment 100.5 111.0 113.2 112.5 100.8 100.4 119.8 88.1 90.2 100.4

Production of construction materials 109.3 112.7 109.3 108.6 106.5 105.6 112.7 109.9 104.8 100.6

Market infrastructure

Retail turnover 107.0 105.0 105.7 107.9 109.0 105.9 107.6 107.0 104.8 104.5

Freight turnover 103.4 103.9 105.2 102.4 102.3 101.7 103.8 99.8 102.8 100.6

The greatest decline in industrial production was recorded in the first half of 2009, when the decline was 14.5% compared to the corresponding period of the previous year This included a 22.3% decline in the manufacturing sector. Since the early second half of 2009, as a result of recovery in foreign demand and government anti-crisis actions, the situation began to improve, and industrial production for the year only decreased by 9% compared to the previous year.

With the recovery of the global and domestic demand for energy, the growth of mining operations in the QIV 2009 provided momentum for the development of the manufacturing industries. Industrial production in the first half of 2010 was 110.2%, including extractive industries (105.8%) and manufacturing industries (114.3%). Since QIII 2010 the economic growth has slowed down due to a decline in export growth rate. The index of industrial production in 2010 was 108.2%, including mining operations (103.5%) and manufacturing industries (111.8%). Note that mining output in 2010 exceeded the pre-crisis 2008 level by 2.3%.

Throughout 2011, industry recorded slow growth largely determined by the high base of the previous year. The industrial production index in 2011 was 104.7%, including 106.5% in the manufacturing industries. At the end of 2011 the manufacturing sector had reached the pre-crisis level, which, in addition to maintaining the growth of mining production, has determined industry recovery to pre-crisis levels.

Having reached pre-crisis levels, starting from the second half of 2012, the Russian economy began to show signs of growth slowdown, as the structure of the economy had not changed significantly, and the potential impact of the factors contributing to the growth was over. In 2012, the industry recorded weakening quarterly dynamics associated with a sharp slowdown in manufacturing industry. In the IV quarter of 2012, the index of processing production fell to 102.8% compared to the same period of the previous year, and the result for the year amounted to 104.1%. The simultaneous slowdown in mining production to 101.1%, and in the production and distribution of electricity, gas and water to 101.2%, compared to 2011 determined the reduction of the general industry index to 102.6%.

iProduction of power, gas and water Industrial production

Source: Rosstat.

Fig. 6. Production growth by economic activity in industry in 2008 - 2012, as a % of the corresponding period of the previous year

The performance of the manufacturing industries is quite significantly differentiated by the types of economic activity, with the largest influence being the result of the ratio of the production rate of capital and consumer goods. Slow recovery in investment demand has determined the characteristics of the machine-building sector.

In the acute phase of the crisis in 2009, the volume of production in the machine-building sector was 2/3 of the 2008 level. The characteristics of the post-crisis machine-building sector were defined by the outstripping growth of production of vehicles and equipment, which was based on government support encouraging demand. In 2012, the production of vehicles and equipment exceeded the 2008 indicators by 16.6%. The dynamics of the production of machinery and equipment, as well as of electrical and optical equipment has been highly volatile during the past four years. Whilst in 2010 the high growth rates for these activities were determined by the low base of the previous year, the inhibited performance in 2011 - 2012 was determined by the weakening of domestic demand for capital goods. In 2012, the production of machinery and equipment remained at 15.5%, and the production of electrical and optical equipment was 8.7% lower than in 2008. Despite the rapid development in the production of vehicles, the machine-building industry has generally not reached pre-crisis levels. This was one of the factors causing the slow recovery of associated production. Metallurgy and finished metal production recovered to pre-crisis levels only in 2012. Low investment activity determined the continued crisis in the production of construction materials. Note that the negative impact of the sharp slowdown of capital investments in QIV 2012 sustained the trend to weakening of the performance of the full range of associated industries.

Table 11

Indices of main production indicators in 2011-2012, as a % of the previous year

2011 2012

Year Quarter Year Quarter

I II III IV I II III IV

GDP 104.3 104.0 103.4 105.0 104.8 103.4 104.9 103.9 102.9 102.6

Production of goods and services in basic economic activities 105.5 105.6 104.0 106.7 105.6 102.6 105.0 103.2 101.6 101.1

Agricultural sector

Agricultural production 123.0 100.7 100.6 129.7 134.7 95.3 104.0 104.3 94.0 89.4

Industrial sector 104.7 105.9 104.8 105.1 103.3 102.6 104.0 102.3 102.5 101.7

Mining operations 101.9 103.3 101.7 102.2 101.3 101.1 101.9 100.4 101.2 100.9

Manufacturing industry 106.5 110.6 105.8 105.7 104.6 104.1 104.4 104.7 104.5 102.8

Power, gas and water 100.1 99.0 101.9 101.4 98.5 101.2 102.6 100.8 100.0 100.5

Investment sector

Construction 105.1 102.6 99.9 105.6 109.1 102.4 105.0 104.6 98.9 102.8

Commissioning of housing floorspace 106.6 97.6 95.2 114.3 111.8 104.7 105.7 98,7 104.2 107.1

Capital investments 108.3 99.2 105.0 108.2 113.6 106.7 116.6 110.2 107.3 101.3

Machinery and equipment 100.5 111.0 113.2 112.5 100.8 100.4 119.8 88.1 90.2 100.4

Production of construction materials 109.3 112.7 109.3 108.6 106.5 105.6 112.7 109.9 104.8 100.6

Market infrastructure

Retail turnover 107.0 105.0 105.7 107.9 109.0 105.9 107.6 107.0 104.8 104.5

Freight turnover 103.4 103.9 105.2 102.4 102.3 101.7 103.8 99.8 102.8 100.6

Source: Ministry of Economic Development of Russia, Rosstat.

In 2009 - 2012, production increased faster in the food processing industry relative to the pre-crisis period. In 2012, the results of the crisis were noted in the textile and clothing industries, as well as in the production of leather and shoes: the decline in production was 2.0% and 10.9% respectively, compared to the previous yea.

Pre-crisis levels in the intermediate goods sector are being exceeded in the production of rubber and plastic products, chemical production and the production of coke and oil products.

This was defined by the simultaneous recovery of the supply of these products to the domestic and foreign markets.

In general, the structure of the post-crisis recovery of industry repeated the pattern of the 1998-2000 developments, when growth started in the production of food products, mining and the industries related to the processing of hydrocarbons and other mineral resources, and then spread to other economic activities in industry. However, in 2012, the unstable dynamics of the key macroeconomic indicators and the slow recovery of the investment and financial sectors determined the system of constraints on the Russian economy in the short term.

Other industries Production of vehicles and equipment Production of electrical equipment Machine-building sector Machine-building industry Metals and finished products Non-metallic mineral products Rubber and plastic products Chemicals and chemical products Coke and oil products Pulp and paper industry Manufacture of wood and goods Production of leather, goods and footwear Textile and textile products Production of food products Manufacturing industry

-20,0 -15,0 -10,0 -5,0 0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0

Source: Rosstat.

Fig. 7. The rate of growth of manufacturing industries by economic activity in 2012, as a % of values in 2008

4.2. Russian Industrial Enterprises (on the basis of the surveys)

The section has been prepared on the basis of business surveys (BS) of managers of industrial enterprises; the above surveys have been carried out by the Gaidar Institute for Economic Policy (IEP) in accordance with the European harmonized methods on a monthly basis since September 1992 and cover the entire territory of the Russian Federation. The size of the panel includes about 1,100 enterprises with workforce exceeding 15% of the workers employed in industry. The panel is shifted towards large enterprises by each sub-industry. The return of queries amounts to 70%-75%.

A BS questionnaire includes a small number of questions (maximum 15 to 20 questions). The questions are of a qualitative, rather than quantitative nature. The simple structure of questions and answers permits the respondents to fill in queries quickly and without any documentation. It is principally important that a respondent at each enterprise is a top level manager who has a comprehensive idea of the state of things at the enterprise and is directly engaged in management of the enterprise.

In analysis of business surveys, a specific derivative index - called the balance - is used. The balances are calculated as a difference between the percentage of those who answered "it increases" (or "above the norm") and the percentage of those who answered "it decreases" (or "below the norm"). The obtained difference permits to present the distribution of the answers to each question by a single figure with the «+» sign or the «-» sign.

The balance is interpreted as the first derivative or the speed of the process. If the balance of the answers to the question about the expected change in prices has the «+» sign, it means that the average prices will soon grow (that is, the number enterprises which reported about the expected growth in their prices prevailed). For example, growth in the balance within a month from +10% to +17% means that prices in industry in general will grow at a higher rate because the number of enterprises which forecasted their growth increased. The negative balance means a decrease in average prices (that is, a larger number of enterprises intends to lower their prices). A change in the balance from -5% to -12% is interpreted as growth in the price reduction rate.

4.2.1. Is the Russian Industry Getting Involved in the Second Wave of the Crisis?

In 2012, the prevailing unclarity and narrowness of the official industrial statistics remained a major problem for its consumers and gave rise to heated disputes on the issue whether the Russian industry was getting involved in the second wave of the crisis or switched over to the state of a "new normality" which was principally different from the dynamic development of the first decade of the 21st century. The above circumstances preserved the relevancy of assessment of the general state of the Russian industry on the basis of the IEP Industrial Optimism Index (IEP IOI)1.

In a situation of the economic crisis, the above index permits to solve a few important tasks. First, it permits to receive almost on-line (as compared to frequency and efficiency of the official statistics) the idea about the state of the domestic industry. Second, enterprises which take part in the IEP's surveys are the "middle class" of the Russian industry. They are situated all over the country and related primarily to manufacturing industries. The information on the state of such enterprises is not always available on time and in the required volume to the authorities and analysts. Third, the Index is calculated on the basis of indices which have no equivalent in the state statistics system, but specify the important aspects of the actual situation in the Russian industry (the demand, reserves and output plans). They characterize accurately and comprehensively the situation of enterprises which fact is confirmed by the 20-year experience in carrying out and analyzing of over 240 business surveys. Long-

1 The index is based on the arithmetic average of balances (the difference of answers) of four questions of the IEP BS queries:

1. The actual change in demand, balance = % growth - % reduction;

2. Assessment of demand, difference of evaluations = % above the norm + % norm - % below the norm;

3. Assessment of the stocks of finished products, balance = % above the norm - % below the norm, the opposite sign;

4. Plans of change in output plans, balance = % growth - % reduction.

Balances of the 1st question and the 4th question are cleared of the seasonal and calendar factors. The Index may assume the value from -100 to +100. The positive values of the index mean that positive assessments prevail. The negative values of the index mean that the negative assessments of the situation prevail. A decrease in the value of the index means a deterioration of the situation. Growth in the value of the index means improvement of the situation.

term, personified and informal relations with respondents (90% of the respondents are mangers of enterprises) create conditions for receipt of the most objective data on the Russian industry. As a result, the IEP IOI gives an idea about the real state of things in the Russian industry.

As seen from calculations, the end of 2011 was highly unsuccessful to the Russian industry. Within the last quarter of 2011, the index fell to the year and a half minimum, though in the middle of 2011 it almost rose to the post-crisis record high level. In January 2012, negative trends consolidated: the index fell to the zero. The first few months of 2012 showed that the industry tried to keep back from the dangerous line beyond which it could get involved into the second wave of the crisis. However, in February-April growth in the index amounted to 3 points and was determined mainly by growth in satisfaction with the current sales volumes due to the effect of insignificant slowdown of the decline rates of demand. However, other components of the Index did not permit it to go up to the previous positive values registered in 2011.

In the 2nd quarter of 2012, sentiments in the industry started to decline again: first to the zero level in May and then to the 28-month minimum. In May-June, the Index lost 7 points and, as a result, the remaining optimism which kept it in the positive zone in the first few months of 2012 vanished. The assessment of the demand was subjected to the most serious adjustment. The industry was becoming less and less prepared to be satisfied with decreasing sales volumes and it seemed to be getting involved in the 2nd wave of the crisis.

There was not much hope in the industry that it would manage to get out of that situation. From the beginning of 2012, the index of forecasts lost 11 points and in July fell to the level of the 34-month minimum. The output plans were the worst hit. In the 2nd quarter, the demand forecasts decreased by 9 points and ceased to be the positive for the first time in 35 months. The hiring plans were explicitly negative as they amounted to -8 points after being cleared of the seasonal factor; from the beginning of 2012 they lost 11 points.

However, in the 3rd quarter the situation in Russian industry started to improve. First, the optimism index recovered from its dip in June thanks to sudden improvement of industrial forecasts and assessments of stocks of finished products. However, demand kept declining at a growing rate. But most enterprises regarded that dynamics as a normal one and that assessment did not change since June when the decline was less intense. It seems the industry expected a more dramatic drop in sales, so, a small worsening (not a recessionary one) of the index was sooner assessed positively, rather than negatively.

Optimism in industry kept growing until the end of the 3rd quarter. In that period, the IEP index rose steadily by 6 points after a steady decrease in the 2nd quarter, while by the end of the 3rd quarter it attained one of the best values in 2012 due to growth in its three out of four components. Stocks of finished products accounted for the largest positive contribution. In September their balance was zero which fact was evidence of the most cautious behavior of manufacturers and their unwillingness to take risks when producing against probable growth in demand in future. However, that factor improved output plans. The industry was prepared to switch over from zero growth rates to the positive output dynamics. According to enterprises, the 4th quarter of 2012 could become the beginning of the exit from the protracted stagnation. All the industry's plans and forecasts for the last months of 2012 underwent positive changes. The IEP composite index of forecasts showed enterprises' readiness to draw the Russian economy out of stagnation late in 2012.

However, at the beginning of the 4th quarter the optimism index underwent dramatic negative changes caused by worsening of its three out of four components. Formal preservation of the fourth component - assessment of stocks of finished products - at "the best" levels in the past year and a half points sooner to the minimal hopes for growth in sales, rather than infea-sibility to meet the demand and utilize of warehouse stocks for those purposes. Calculation of the November value of the IEP optimism index showed further worsening of the situation in the Russian industry. The value of the index became explicitly negative and fell to the three-year minimum. The demand kept depressing the sentiments in the Russian industry. It was only the output forecasts that kept the index from falling even further.

The Russian industry completed the year 2012 in a highly pessimistic mood (see Fig. 8). The optimism index fell to the three-year minimum and consolidated its position in the negative zone, while hopes for revival of industrial growth (the industry forecasts index) are too weak in 2013. The main factor behind a drop in the optimism index was the continued reduction of satisfaction with the current sales volumes.

Fig. 8. The IEP Industrial Optimism Index in the 2005-2012 period

So, in 2012 the dynamics of the main indices of the Russian industry demonstrated the explicit worsening of the situation as compared to 2011. Within a year, the optimism index slightly exceeded the zero level, but fell down to significant negative values.

4.2.2. Dynamics of the Main Indices of the Russian Industry

The beginning of 2012 was problematic to the Russian industry. An explicit drop in demand made enterprises slow down (practically to a complete halt) the output growth rates, lay off workers and exceedingly cautiously raise prices. However, sudden growth in optimism of forecasts showed that the industry hoped for the exit from the protracted crisis.

In the beginning of the year, as usual in the period of national holidays a sudden drop in demand on industrial products took place. However, the January drop in sales became a continuation of negative trends in the dynamics of the demand which was formed as early as September 2011 when sales of products ceased to grow, then started to go down with a growing intensity (rate) and attained in January 2012 such a high rate of drop which was never registered after the 1998 default in any January, except for the recessionary January 2009. Clearing

of the seasonal factor helped improve that result of the beginning of the year, but only to the worst growth rates since September 2009.

Despite the weak demand, in January the balance of assessments of stocks of finished products did not undergo principal changes and remained within the limits of the index since the beginning of the 2nd quarter of 2011. In January 2012, a resolute and negative adjustment of the output in accordance with the predicted dynamics of demand permitted enterprises to bring the coincidence of actual changes in those two indices to 72% which situation has not been observed in the industry since November 2008 - January 2009 when enterprises were left with no other option, but to follow the rapidly declining demand.

In January, on the contrary, enterprises' prices showed growth which is as typical of the beginning of the year as a drop in demand or output. However, disturbances in the dynamics of that index were observed, too. First, growth in prices was registered for the first time in the past 12 months. Throughout the entire 2011, growth rates of prices declined all the time making short stops and within a year lost 55 points. It is to be noted that in December 2011 the most intense drop in that index in the past two and a half years was registered. Second, early in 2012 the growth rates of prices were much lower than those which rose dramatically early in 2011 (it can be explained both by natural calamities of the hot summer 2010 and man-made factors). But growth in prices in January 2012 is lower than price surges in any January of the entire 1999-2008 pre-crises period. Third, throughout 2011 enterprises were well aware of the fact that there was a lack of prospect in switching over to more intense growth in prices and revised constantly downwards their price growth forecasts till October.

Recovery of the normal economic dynamics after the January national holidays was quite uncertain. Demand kept falling and its forecasts remained weak. Hiring of the personnel which just started was weak, too, and had little chances to continue in the following months.

Fig. 9. Changes in the solvent demand cleared of the seasonal factor (balance = % growth - % decrease)

In February, the demand dynamics underwent principal - but traditionally positive -changes and small changes as compared to January (a holiday season) and the 4th quarter of 2011, respectively. (see Fig. 9). However, recovery of sales in February turned out to be weak: balance (the rate of change) rose after January 2012 - which can be regarded as a fail-

ure by the standards of both the mid-crisis 1999-2008 period and the 2009-2011 post-crisis period - to the values which were somewhat better than in the last quarter of 2011. But the most disappointing thing is that it was still in the negative zone. It means that demand in industrial produce kept shrinking. But the balance of assessments of stocks of finished products did not undergo serious changes in February and remained in industry as a whole at the level of a small surplus which situation already became quite an ordinary one. The industry was solving successfully in that mode the problem related to stocks of finished products; it sought to prevent both overstocking and depletion of its warehouses. The latter permitted enterprises to show positive dynamics of output: the initial growth rate improved after the failure in January by 61 points straight, while the one cleared of the seasonal factor, by 9 points.

The 1st quarter of 2012 showed weak results. According to enterprises' forecasts, growth in demand which emerged only at the end of the period and disappeared with the seasonal factor cleared had little chances to continue. That factor resulted in growth in excessive stocks of finished products, a drop in output growth rates and negative adjustment of production plans for the next quarter.

Though in March the dynamics of demand in industrial produce showed positive changes again, nevertheless, with the seasonal factor cleared the balance of the index still remained in the negative zone with meager growth registered, that is, there was only a slowdown of the rate of drop in demand. It is to be noted that further improvement in the sales dynamics appeared quite doubtful. However, even those changes in the sales dynamics were rated highly by enterprises. In February-March 2012, the difference between assessments of satisfaction with the demand improved by 21 points and turned around the industrial optimism index at a dangerous line to which it was descending to throughout the second half of 2011.

In March, the data on the dynamics of output (prior to clearing of the seasonal factor) showed at the first sight that growth rates increased by 10 points. However, the obtained result turned out to be worse than that of any March in the past ten years (except, certainly, for March 2009). Clearing of the seasonal factor showed that in March 2012 the output growth rates after a surge in February returned to the previous low values which were hardly discernable by the Rosstat. The industry was quite unprepared to increase output in a situation of weak growth in demand and low optimism of its forecasts.

45

% 30

15

0

-15

-30 -11/08"

-45 I l I l I l I l I l I l I l I l I l I l I l I l I l I l I l I l

1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12

Fig. 10. Changes in output volumes cleared of a seasonal factor (balance = % growth - % decrease)

Enterprises' production plans confirmed that conclusion (see. Fig. 10). Such sluggish growth (as yet) the industry did not plan since the beginning of 2010. It is to be noted that the March survey showed principal changes in formation of enterprises' production plans. Early in the 1st quarter of 2012, enterprises showed high growth in optimism of output plans which were 26% (more properly, in 26% of cases) ahead of their own forecasts of the demand. Such a significant advance of the forecasts of demand over the output plans was not registered in the industry for four years. However, at the end of the quarter the industry switched over to intense slowdown of its output plans as compared to its own forecasts of the demand: the share of enterprises which planned a lag of changes in production from those in demand rose to 10%. Such a high (that is, pessimistic) value of that index was not registered for more than a year and a half.

Moderate positive changes in the dynamics of the demand and output early in the 2nd quarter, as well as the certainty that followed after the elections were over did not add optimism to the industry. Insufficient demand, growth in excessive stocks of finished products, decrease in the optimism of the output and hiring plans, growth in excessive capacities and disappearance of personnel shortages - such were assessments of the situation by Russian industrial enterprises.

In April, growth rates of change in demand showed growth in sales at the previous positive rate (as in March) on the basis of the initial data. However, with a seasonal factor cleared the index fell to -2 points which situation can be interpreted as a lack of changes. But as compared to the results of the first months of the year when the rate of a drop in demand amounted to -9 -7 points, the value of -2 points appears quite positive. In March-April, the demand forecasts rose to +8 points after a surprising stability at the level of +4 points in September 2011-February 2012, while satisfaction with sales stabilized at the level of 53%.

In April, dynamics of industrial production showed some positive changes. The initial data showed that growth rates remained at the March level, while those cleared of the seasonal factor pointed to improvement to the 11-month maximum.

However, enterprises' plans did not suggest that the achieved output growth rates would be preserved in May-June. Another "drawback" of the output plans was the fact that they lagged behind the forecast of the demand. If earlier, on average, only 6% of enterprises had output plans that lagged behind the forecasts of the demand, in March-April 2012 a lag was registered with 12% of enterprises.

In the 2nd quarter of 2012, principal changes occurred in the system of factors of disturbance which hindered output growth (according to the version of managers of industrial enterprises).

The most significant changes took place as regards the disturbance factor: "the unclear current economic situation and its prospects" (see. Fig. 11).Within a quarter (to be precise, from January 2012), the mention of that factor fell from 39% to 23% and returned to the average level of 2010 and early 2011. Sharp growth in that factor (from 23% to 36%) was registered in October 2011. January 2012 added another 3 p.p. So, a drop in uncertainty in April was sooner related to completion of the hectic period of the State Duma and presidential elections, as well as formation in the society of a perception of distribution of power both in the government and the economy.

70 6% 50 40 30 20 10 0

1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13

Fig. 11. Disturbances to growth in production, 2003-2012

A positive return to the previous level of certainty in the economy was flattened by the fact that enterprises did not have a good idea about the details of that certainty. First, the industry did not see, nor expected revival of the demand in its output. In April 2012, low demand accounted for 55% of the restraining influence in the real sector. Both sustained growth in excessive stocks of finished products and negative adjustment of output plans supported that thesis.

Second, the industry managed to get rid of personnel shortages, which means sooner that it gave up the illusions of a return to the previous output growth rates and the need to hire more workers.

Third, the restraining influence of the working capital shortages went down to the historic minimum of 26% in the entire 20-year history of monitoring. The pre-crisis minimum of that index amounted to 30%, while the historic maximum, to 83%. It appears that the erstwhile most deficit resource (until the end of 2008 as regards the rate of occurrence it used to compete with the insufficient demand) restrained output growth only with 25% of industrial enterprises, while the demand, with more than a half of enterprises. Enterprises had fewer resource limitations hindering the output growth, but more demand limitations. In addition to the above, a shortage of loans had virtually no effect on industrial growth. For five quarters running, only 3% (three!) of industrial enterprises stated that that factor was hindering growth.

Fourth, in industry excessive capacities increased. In April 2012, 21% of enterprises believed that they had "more than enough" machines and equipment due to the expected changes in demand against 5% of enterprises which thought that they lacked them. The above factor had a negative effect on enterprises' investment plans. In April, they decreased by 8 points to the 12-month minimum (if a dip in December 2011 is not taken into account).

In May 2012, the dynamics of demand, output and employment was sooner negative, rather than positive. Assessments of the demand and stocks of finished products pointed to the fact that the mood in industry was getting worse, while forecasts and plans of enterprises did not suggest any improvement of the situation in the months to come.

In May, actual changes in demand failed to retain the positive dynamics as regards both the initial data and that cleared of a seasonal factor. As a result, a small positive surge in MarchApril gave way to stagnation in sales. The initial forecasts of the demand after a surge of 43 points in the 1st quarter kept losing optimism. Though they decreased by 13 points and still

remained in the positive zone (+9 points), but with a seasonal factor cleared they fell to +2 points, which value became the 12-month minimum. The negative dynamics of actual sales and a drop in the optimism of forecasts of the demand provoked further growth in excessive stocks of finished products.

In June, the dynamics of the main indices (demand, output, employment and prices) preserved negative trends and definitely brought the Russian industry closer to the second wave of the crisis. Enterprises' plans and forecasts did not promise any improvement of the situation in the following months. The initial dynamics of the demand in industrial produce underwent at first glance "positive" changes: a drop in demand was followed by stagnation in sales. However, with a seasonal factor cleared the June data lost that positive specifics: the demand kept decreasing and the rate of a drop increased by another two points. Such dynamics of sales was adequately assessed by manufacturers. Within a month, the balance of assessments of the demand got worse by 9 balance points and amounted only to +4 points, though in October 2011 its value amounted to +31. The industry was less prepared to be satisfied with declining sales volumes. Enterprises' forecasts did not promise any improvement of the situation with sales.

Fig. 12. Balance of evaluations of stocks of finished products (balance = % above - % below)

In the meantime, in June the balance of evaluations of stocks of finished products decreased for the first time in the past five months (that is, improved). In May, the index reached the 33-month maximum which meant that the largest excessive (for that situation!) warehouse reserves were formed since August 2009 (see Fig. 12). Further growth in excessive stocks of finished products in a situation of weak demand and diminishing hopes for its revival was regarded by industry as pointless and clearing of warehouses began.

In June, the initial output growth rates lost another 7 points, while the total losses of that index amounted to 24 points in the 2nd quarter. As a result, at the end of the second half-year enterprises estimated the production growth rates at +3 points, while in June 2011 and June 2010, at +25 points and +19 points, respectively. Clearing of the seasonal factor diminished the value of losses of industrial growth within a quarter, but worsened the final result: the balance became equal to +1 point which means that output growth came to a halt in June.

In July, changes in demand continued the trend of the past three months, that is, growing slowdown of sales. However, that situation was assessed by most enterprises (54%) as normal

and even somewhat better than in June (then, the normal demand was recognized by 52% of enterprises), when the decline was less intense. It seems the industry expected a more dramatic drop in sales, so, a modest worsening (not a recessionary one) of that index was assessed sooner positively, rather than negatively. Probably, that factor was behind a dramatic revision by the industry of its sales forecasts. After four months and three months of worsening of the initial data and the one cleared of the seasonal factor, respectively, in June expectations improved by 5 points and 9 points as regards the initial data and the one cleared of a seasonal factor, respectively.

In July, the dynamics of industrial production did not undergo principal changes as compared to June: output growth stopped, while a recessionary slump (and the one similar to that of late 2008) did not begin. It is to be noted that output plans like forecasts of demand changed the trend: after five-month growth in negative expectations that resulted in June in the three-year minimum, the data in July demonstrated a surge of positive forecasts by 9 points straight. Matching of the expected changes in demand and output was registered with 75% of enterprises and only 8% of enterprises believed that changes in output should be ahead of the dynamics of demand. At the first glance, the industry was carefully preparing its production plans in accordance with the forecasts of demand which were fairly positive in that period of time. However, enterprises were not certain that they would manage to realize them.

Fig. 13. The share of enterprises with excessive, sufficient and insufficient capacities

The above was pointed to by assessments of sufficiency of capacities due to the expected changes in the demand (see Fig. 13). In July 2012, the balance of those assessments rose sharply by 9 points and became the 9-quarter maximum. So, a quarter (26%) of industrial enterprises regarded their capacities as excessive against only 11% of enterprises early in 2011.

In August, the state of things in the Russian industry sooner improved, rather than got worse. Slowdown of the demand permitted enterprises to carry on without reducing the output, introduce positive adjustments in output plans and reduce the rate of lay-offs with stocks of finished products put under complete control. However, uncertainty about the future made enterprises minimize investment plans and go ahead with lay-offs.

In August, the dynamics of demand in industrial produce underwent relative positive changes. The initial data and that cleared of a seasonal factor showed growth of 6 points in the index though it still remained in the negative zone, which factor points to slowdown of a drop

in sales. In other words, a decrease in demand in August continues, but not at that rate as in July. The second wave of the crisis which analysts predicted and the government started to get ready for beforehand did not materialize in summer 2012.

100 %

80 60 40 20 0

1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13

Fig. 14. Dynamics of the main assessments of the solvent demand

The above situation permitted the industry "to take breath" and improved satisfaction with the current sales volumes (see Fig. 14).Within a month, the difference of assessments of the demand increased by 8 points and "won back" all the loses of June and July. Only 42% of enterprises were unsatisfied with sales of their products. The above value became the 9-month minimum, that is, the best index value.

In a situation of the continued decline of the demand and uncertainty about changes in it, the industry minimized risks related to accumulation and maintenance of a reasonable surplus of stocks of finished products. Within summer, the balance of assessments lost 8 points after attaining in May the 33-month maximum. In August 2012, the share of the "normal" answers reached the historic maximum of all 243 surveys which had been carried out by that time - as never before the industry was so careful in its policy of management of stocks of finished products.

Following the dynamics of demand, in August the output dynamics underwent positive changes. As a result, the surveys showed that in summer months growth in industrial production stopped (the growth rates were in the range of from -2 points to +2 points, that is, a nil). The fact that the expected recessionary drop in output (or the one close to it) did not materialize added optimism to that data. However, the pessimism of the June-August data cleared of the seasonal factor consisted in absence of any evidence of growth. That evidence could be seen only in enterprises' plans. In the 3rd quarter, their optimism increased by 11 points after a dip in June to the 3-year minimum. Absence of a recessionary slump in output instilled hope to enterprises for revival of production.

However, in October a slowdown of the main indices of demand, output and prices started in industry again. The employment rate was falling, too, but, probably, for another reason: due to low wages and salaries workers started to quit enterprises and, as a result, the latter were no longer confident that with the remaining personnel they would manage to ensure even the stagnating output volumes.

The initial data on the dynamics of demand showed that it fell at a higher rate to -19 points. However, the data cleared of the seasonal factor smoothed the sharp drop and showed a decrease only to -15 points. Lack of positive changes in the dynamics of the demand increased dissatisfaction with its volumes again: 49% of "below the norm" assessments was received; the year's best result (41%) was registered in April. The dynamics of forecasts of the demand did not suggest optimism, either. The initial data got worse by 11 points, while that cleared of a seasonal factor, by 7 points and became negative again. In industry (according to all the data), expectations of a drop in sales prevailed over forecasts of their growth.

Following the demand, the dynamics of output dipped in October, too. The initial rate of a change in the index fell to -7 points. In the past three years, a more intense rate of decrease was registered only in January 2010, January 2011 and January 2012. Clearing of a seasonal factor made the rate of decrease in output in October comparable with the results of June-July 2012 when the worst values of the index were received from the mid-2009.

Output plans underwent explicit negative changes, too: the initial data lost 17 points and became negative, while that cleared of a seasonal factor, 10 points, but remained in the positive zone. As a result, explosive growth in optimism in the 3rd quarter (then, the balance of plans rose by 15 points) was replaced by pessimism which was untypically low for October.

In November, the situation of enterprises kept getting worse. The demand was decreasing and its forecasts did not suggest any optimism. The prevailing stagnation of production resulted in a situation where the dynamics of output was more often in advance of that of sales. That situation contributed to accumulation of risks of failure of production and made enterprises subject their output plans to a serious negative adjustment and use a price reduction for promotion of demand.

The negative dynamics of demand and absence of hopes for its revival (particularly, before the national holidays in January) sent sharply downwards the level of satisfaction with current sales. Within a month, the index got worse by 18 points and hit the 32-month minimum.

In November, output growth rates did not change and remained at a zero level. Such situation was registered by surveys since June 2012 and was confirmed later by the official statistics data. Clearing of a seasonal factor did not introduce any particular changes into the initial data and demonstrated preservation of output growth rates for six months running in the range of from -2 points to +2 points. The stagnation of output in Russian industry continued. Unfortunately, that stagnation was fraught with more serious consequences which were difficult to spot on the basis of the official statistical data.

They included advanced growth in output changes as compared to the dynamics of demand in it. In November, the share of enterprises where changes in output were ahead of changes in demand amounted to 31%, though in 2012 that index was in the range of 12% to 29%. Thus, the apparent stagnation of output contributed to accumulation of risks of future failure of production when enterprises were required to bring their output in harmony with demand in their products.

The first evidence of such harmonization could be found in output plans in November. Within a month, the initial plans fell by 15 points straight and appeared to be the worst ones in the 2010-2012 period; they surpassed even traditionally bad forecasts of December. Clearing of a seasonal factor showed a decrease of only 4 points, but to the worst values since the mid-2009 (if a dip of June 2012 is not taken into account). As a result, in November 2012 correlation between output plans and forecasts of demand amounted to 80%, which is the record

in the 2009-2012 period. In November 2008, that index rose to 83%, while in December, to 88%.

60 %

45 30 15 0 -15 -30

1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12

Fig. 15. Changes in selling prices (balance = % growth - % decrease)

Another measure which was aimed at ensuring the balanced demand and output was enterprises' prices. In November, the industry switched over from the minimal price rises (normally, in the range of from +2 points to +6 points) to a radical price reduction (see Fig. 15). Within a month, the balance fell to -10 points and hit the absolute minimum in the 2009-2012 period, that is, there was no such a dramatic drop in selling prices from December 2008 when the industry was in the midst of the current crisis.

The year 2012 ended up quite unsuccessfully for the industry. Weakening of the demand made enterprises review assessments of it and switch over to explicit reduction of output and prices, but retain control over stocks of finished products. However, workers kept quitting the industry due to low wages and salaries, while investment plans were getting worse.

The dynamics of demand on industrial produce remained negative till the end of 2012. The initial data showed that the rates of drop in sales in December 2012 attained the four-year maximum for that month. Clearing of a seasonal factor (as in July 2012) brought the value of the balance to the 42-month maximum (that is, the worst value in that case). According to all the data, the situation in the Russian industry as regards sales was getting worse. The above conclusion was confirmed by enterprises' assessments of current volumes of the demand. In December, the share of normal assessments fell to 40% and turned out to be the 33-month minimum. In the Russian industry, in November-December losses of satisfaction with sales amounted to 12 p.p.

As a consequence, in December the industry reported a dramatic drop in the rates of change in the output. The initial balance lost 15 points straight, fell to -18 points and became the worst value of the month in the 2009-2012 period. Clearing of a seasonal factor showed a decrease in the balance from the symbolic -2 points to the explicit -9 points. So, after remaining at the stagnation level (-2 .. +2) in June-November, the rate of change in output showed a tangible drop in December. However, slowdown of the dynamics of output permitted the industry to retain under control the stocks of finished products and improve the balance of their assessments by 4 points by means of reduction of the share of the "above the norm" answers.

Expected 01/11

12/08" i 1 i 1 i 1 i 1 i 1 i 1 i 1 i f 12/11 11/12 1 i 1 i 1 i 1 i 1 i 1 i 1 i 1 i

In a situation of weak demand, the industry had to slow down not only output growth, but switch over to price reduction. For two months running, the absolute and most dramatic price reduction for the end of the year in the 2009-2012 period was registered by surveys.

In December 2012, the balance of investment plans dropped by 10 points and hit the 3-year minimum. A similar drop in investment plans (by the value) was registered late in 2011, however, the balance was restored as early as January 2012. Recovery from the latest drop of last December is unlikely to be as fast as a year ago.

4.2.3. Lending to Russian Industry 2012

According to assessments of enterprises, in 2012 bank lending to the Russian industry underwent small negative changes. Though availability of loans to industry changed within narrow limits (from 68% to 72%), the average annual value of the index amounted to 69% as compared to 72% in 2011. The average minimum rate offered by banks increased in industry as a whole from 12.0% per annum in January to 12.8% and 12.9% in October 2012 and January 2013, respectively. Growth in interest rates was registered by all the industries, except for the light industry, and all the size groups of enterprises. However, lack of loans restrained output growth with only 3% (three!) of enterprises and was second to last in the rating of industrial growth limitations. It is to be noted that that the restraining effect of that factor on the industrial production was the minimum one from the 2nd quarter of 2011.

Early in 2012, the conditions of lending to industry were characterized by conflicting trends. On one side, reduction of the average minimum interest rate offered by banks on ruble loans definitely stopped. After amounting to 11.8% in October 2011, that index demonstrated symbolic growth having increased to 12.1% in the next three months. On the other side, general assessments by enterprises of lending conditions showed some easing in January. The aggregate assessment of availability (normal + above the norm) rose by 5 points to the 7-month maximum.

In February-April, conditions of lending to industry did not undergo any particular changes. The aggregate availability of loans ("above the norm" + "normal") remained at the level of 72% with the average minimum rate offered by banks being in the range of 12.1% to 12.3%. With the normal availability of loans, the rate amounted to 11.6%, while in October 2011 it was estimated by enterprises at 11.0%.

In the beginning of the year, enterprises' lending plans did not undergo any principal changes, either. The industry reported about plans of moderate growth in borrowings. In 1st quarter of 2012, the balance of that index amounted to +14 points and did not change as compared to both the 4th quarter of 2011 and the 1st quarter of 2011.

Generally, in the 1st quarter of 2012 banks stopped tightening lending conditions which enterprises reported about in the 2nd quarter of 2011. In that period, after attaining of the postcrisis maximum of satisfaction (78%) in the 2nd quarter of 2011 the index fell to 70%, while the lowest level was registered in December and amounted to 68%. In the 1st quarter of 2012, the most reasonable lending terms were offered to the iron and steel industry (77% of satisfaction). Almost the same level of satisfaction (75%) was observed in engineering.

In the 2nd quarter of 2012, the conditions of lending to the Russian industry did not undergo principal changes as compared to the previous three quarters (see Fig. 16). In that period, the aggregate availability of loans ("above the norm" + "the norm") was in the range of 70% to 72%. The most comfort terms of lending were offered to the food industry where the ag-

gregate availability of loans returned to the level of 80%. The average minimum rate offered by banks in that industry amounted to 12% per annum.

100 %

80 60 40 20 0

1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13

Fig. 16. The share of enterprises with the "above the norm" and 'norm availability of loans

The opposite situation was observed in the iron and steel industry. From the beginning of 2012, banks toughened conditions of lending to that industry by 18 points: if in the 4th quarter 2011, the aggregate availability of loans amounted to 83%, in the 2nd quarter of 2012 it fell to 65%. Within the previous four quarters, the rate in that industry rose from 9.0% to 10.3%. As a result, the iron and steel industry was rated the third as regards availability of loans, though from the mid 2009 till the end of 2011 it enjoyed banks' utmost confidence. Availability of loans to the light industry was the worst one; only 30% to 40% of enterprises had normal accessibility of borrowed funds in the previous seven quarters. However, in the 2nd quarter of 2012 banks made lending easier to that industry by reducing the average minimum rate to 13.4% after it was in the range of 13.9% to 14.2% in the previous five quarters.

However, availability of loans in that industry in general correlated well with the level of ability to service loans in the industry: in the light industry that index amounted to 35%. However, detailed calculations showed that in light industry availability of loans correlated with ability to service them only with 68% of enterprises, while 11% of enterprises believed that they had a reduced accessibility of borrowed funds as compared to the ability to service them. On the contrary, 21% of enterprises of the light industry assessed banks' policy as a risky one as the latter provided access to loans to such an extent that it exceeded enterprises' ability to pay for them.

Precision of banks' lending policy was the highest in the food industry, chemical industry, wood industry and nonferrous industry where it corresponded 80% or more to enterprises' ability to repay loans. The lowest correlation between the availability of loans and ability to service them was registered in the 2nd quarter in building industry (53%). In that industry, banks more often (in 38% of instances) reduced availability of loans as compared to enterprises' actual creditworthiness.

In the 3rd quarter of 2012, it was expected that the Russian industry's need in loans would decrease. In the 2nd quarter of 2012, the balance of forecasts of that index amounted to +9 points after remaining in the range of +12 points to +14 points in the previous five quarters. The strongest demand in loans was possible in the nonferrous industry and building industry

82%, 08/07 78% 72% 06/11

06/1^ ♦

57 /o^ 12/09

/

19%, 12/08

where the balance of forecasts amounted to +20 points. In other industries it amounted to +8 points to +9 points.

In the 3rd quarter, availability of loans to the Russian industry was getting worse. First, average availability of loans was preserved at the level of the 2nd quarter (69%), but only thanks to upturn of the index in August, otherwise, it would have lost 2 points. Second, the average minimum rate offered by banks rose to 12.5% points after 12.3% in the 2nd quarter. In September, loans were extended at the rate of 12.6% per annum in rubles. Third, growth in interest rates on loans took place for all the industries. (see Fig. 17). For the second quarter running, the highest rates on loans were offered to the building materials industry (14.2% and 14.3% per annum). As regards that index, the light industry moved to the second place (13.8%). Banks were prepared to provide loans to the food industry and engineering at the interest rate of 12.6% and 12.2%, respectively. Fourth, a similar situation was observed in respect of enterprises of different sizes, too. A decrease in interest rates was registered in none of the groups; only large enterprises (251,000-500,000 workers) reported about stabilization of a loan supply at the level of 13.1%. Interest rates set for small and mid-sized enterprises rose to 15.0%, while those for very large enterprises (501-1000 workers) and the largest enterprises (over 1,000 workers), to 12.1% and 10.6%, respectively. Thus, banks' priorities in lending to enterprises of different sizes did not change.

I II III IV I II III IV I II III IV I II III IV 2009 2010 2011 2012

Fig. 17. Average minimum rate offered on loans in rubles in different sectors,

quarterly average, % per annum

Early in the 4th quarter, the aggregate availability of loans decreased by 3 points and hit, as a result, the 30-month minimum. However, in November banks' confidence in industry returned to the level of 69% which is typical of the second half-year. In November, the average minimum interest rate offered to industry was equal to 12.6% and preserved the sectorial specifics which is typical of the Russian industry in general.

In the 4th quarter of 2012, the ability of enterprises to repay outstanding loans did not change and amounted to 87%. Within a year, that index demonstrated a surprising stability by remaining in the range of 86% to 88%. At the beginning of monitoring of that index in 2009, only 61% of enterprises believed they were able to service the outstanding loans, while during that year the share of such assessments rose from 52% to 68%.

4.2.4. Personnel Problems of the Russian Industry in 2012

In 2012, the Russian industry had to face new problems on the labor market. Early in 2012, hiring of personnel was short-lived and was less intense as compared to the same period of 2011, while the rate of lay-offs which continued throughout the second half-year surpassed the index of the previous post-crisis years. However, slowdown of industrial growth reduced the severity of personnel shortages to the zero balance. The main reason for which workers quitted enterprises was low wages and salaries.

The year 2012 traditionally began with continued reduction of the number of workers engaged in industry. The balance (rate) of changes in the number of personnel lost within a month another 8 points and fell to the two-year minimum. It is to be noted that explicit reductions began in industry from October 2011 and reached their peak level only in January. However, it was in accordance with enterprises' plans which showed as early as September the intention of enterprises to switch over from hiring of workers to reduction of their number. In December 2011, those plans were the most resolute ones and only 5 points short of the post-default record registered in January 2009. However in January 2012, hiring plans traditionally rose and the balance increased straight by 31 points which is the record change in that index in the entire period of monitoring from 1993.

However, hiring plans could encounter the assessments of personnel redundancy/shortages due to the expected changes in the demand. In January 2012, those assessments underwent serious changes. If within the previous six quarters the "less than sufficient" evaluations prevailed in industry, by the beginning of 2012 the share of those evaluations became equal to that of the "more than sufficient" ones and the balance of evaluations became zero, that is, by the beginning of 2012 enterprises got rid of personnel shortages. As those developments took place in a situation where the number of workers was reduced, it can be supposed that liquidation of the problem of personnel shortages was related not to a change in the number of workers, but revision (a negative one) of the prospects of exit from the phase of a sluggish crisis.

In February, the industry switched over from large-scale lay-offs of personnel to hiring of workers (see Fig. 18). However, the rate of hiring was rather low (the total +3 points) after (-11points and -17 points in December 2011 and January 2012, respectively), but the very fact of a turning point in that negative trend which was formed in the second half of 2011 was important. In addition to the above, it was also important that lay-offs stopped and hiring of personnel began in a situation where enterprises were getting rid of the problem of personnel shortages which had prevailed for a year and a half.

In March-April, enterprises increased somewhat the rate of hiring of personnel. It is to be noted that expansion of hiring in industry took place in a situation where labor shortages disappeared. For two quarters running, the balance of assessments of personnel due to the expected changes in demand was zero (the share of "more than sufficient" answers was balanced by that of "less than sufficient" answers) with the share "sufficient" answers being equal to 75%, that is, the industry in general was quite supplied with personnel to meet the expected growth in demand and supply. For that reason, preservation of the rate of hiring of personnel attained in the first few months of the year appeared highly unlikely to enterprises: hiring plans started to lose optimism and in May they were successfully realized.

30 %

15 0 -15 -30 -45 -60

1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12

Fig. 18. Changes in employment (balance = % growth - % decrease)

In June, the industry as a whole almost maintained the approximate parity between hiring and lay-offs of workers. But the situation differed by sectors. Hiring at an intense rate took place only in building materials industry which fact can be explained by a seasonal revival of production, while other sectors laid off personnel at different rates (from -3 points to -15 points). Hiring plans in June lost small optimism of the first months of the 2nd quarter and pointed to enterprises' willingness to preserve the existing number of workers in the next few months.

However, in July the industry switched over to large-scale lay-offs. Within a month, the rate of lay-offs (the balance) increased by another 12 points and amounted to the values which were comparable to the worst values which are normally registered in January. Clearing of the seasonal factor showed that the rate of lay-offs in June 2012 was the highest one in the past three years. However, the number of workers thus achieved suited enterprises well; 78% of enterprises believed it was adequate to the expected volume of demand in output. Hiring plans did not suggest principal changes in enterprises' HR policy: enterprises had to go ahead with lay-offs.

In August, the industry actually kept losing workers but at a smaller rate than in July. It is to be noted that as before enterprises' plans did not suggest changes in the HR policy of the industry. In August, the initial balance of forecasts fell by another 6 points, while that cleared of the seasonal factor, by 4 points. Enterprises expected that reduction of the number of workers would continue and, more probably, at a higher rate.

The end of the 3rd quarter was characterized by growth in the rate of reduction of workers in industry. The growth rates increased by 3 points as compared to August and pointed to the fact that large-scale lay-offs in industry continued; according to the surveys they lasted during the entire 3rd quarter of 2012. However, it was exactly the situation which was forecasted by enterprises. In October, the Russian industry kept losing personnel, while the forecasts of changes in employment in October attained the level of November in the 2009-2011 period. Industrial enterprises believed that they would lose workers at the end of the year, as well.

Such a situation ceased to be acceptable to enterprises. First, in the second half of 2012 labor shortages became the factor behind slow-down of output with 30% of enterprises. Second, late in 2012 enterprises became less supplied with workers. In industry, the number of enter-

prises with labor shortage explicitly increased as compared to those with redundant workforce (see Fig. 19).

40 %

30 20 10 0 -10 -20 -30

1/96 1/98 1/00 1/02 1/04 1/06 1/08 1/10 1/12

Fig. 19. Balance of assessments of personnel (balance = more than sufficient - less than sufficient)

The main factor is sooner related to raising of wages and salaries in other sectors of the economy, primarily, in the public sector. As a result, the level of remuneration in industry (with working conditions taken into account) ceased to be attractive to potential workers. In October 2012, managers of enterprises started to understand that: for the first time since April 2009 the share of unsatisfactory assessments of the level of remuneration of both workers and experts increased. Earlier, that index fell from 59% to 26%. In October, the share of the "below the norm" answers amounted to 33%.

In November, the industry managed to slow down reduction of the number of workers, but at the level which was critical even for stagnation. Forecasts in October showed that enterprises were less able to correct imbalances between employment and demand. The forecasts in November got worse by another 9 points. The industry did not expect principal changes in solution of their personnel-related problems.

In December, the situation with personnel in industry did not change, either. Reduction of employment continued at a stable rate from July 2012. During the second half-year, the balance of changes in the number of workers (the rate of change) was in the range of -13 points -8 points, while a year ago in the same period it decreased from +3 points to -17 points. In the 4th quarter of 2012, the highest rate of reduction of workforce took place in wood industry (the balance of -17 points), iron and steel industry (-15), light industry (-13) and engineering (-11). Hiring of personnel was registered only in power industry.

The main factor behind lay-offs in industry was low wages and salaries due to which workers had to quit enterprises on their own initiative. Such was the opinion of 46% of managers of enterprises. The second most important factor (39%) is lay-offs on the initiative of workers due to a pensionable age. It is to be noted that only in 7% of cases workers of pensionable age were laid off on the initiative of enterprises. The above factor is rated the last in the rating of the main reasons for lay-offs. Enterprises more often (in 23% of cases) fired workers who breached labor and production discipline, while redundant workers were laid off only by 15% of enterprises.

■ 07/98 01| H/^VVi '09 L

07/00 ^ 07/07

4.2.5. Consequences of Labor Shortages in the Russian Industry

In the 4th quarter of 2012, industrial enterprises surveyed by the IEP reported that they lacked workers due to expectations of changes in demand. For the first time in the past year, the balance of assessments became a negative one, that is, the number of the "less than sufficient" answers happened to be 10 p.p. higher than that of the "more than sufficient" answers. A similar situation took place in industry in the second half of 2010 and during 2011. At that time, within seven quarters the balance of assessments was in the range of -10 points -4 points, while in the 2007-2008 period the balance fell to -20 points..-17 points, which fact is the evidence of the largest labor shortages in industry in the past 17 years. At the first glance, the value of the index of the end of 2012 is not beyond the limits of the range which is typical of the post-crisis years. However, if the dynamics of demand and output is taken into account evaluation of the situation starts to change. Late in 2010 and early in 2011, the industry reported about the highest post-crisis growth rates of demand and output; the IEP optimism index amounted to the post-crisis maximum. It seemed that the eventual exit from the crisis was not far away. Late in 2012, the situation was quite the opposite: demand and output either stopped growing or decreased and the optimism index was close to the post-crisis minimum. Forecasts of change in indices were sooner pessimistic, rather than optimistic. The industry was definitely losing workers and confidence that it would be able to have sufficient workforce to ensure even stagnating volumes of output.

So, the Russian industry encountered again and in a new situation the problem of labor shortages, and due to the above it is worthwhile to make a comprehensive assessment of the consequences of a similar situation.

Our analysis will be based on the outputs of the IEP surveys of enterprises. Such surveys create conditions for receipt of first-hand and trustworthy evaluations of labor shortages as informal and long-standing relations between the IEP and respondents permit the former to ask them direct questions proceeding, primarily, from the common sense, while enterprises can answer those questions without reserve because they do not have to fear that they may provoke the authorities' discontent or cause damage to their business reputation with potential investors. The whole situation with the latest labor shortages in 2012 is supplemented with comparable results received in summer 2008 (that is, the industry's pre-crisis peak level) and summer 2011 (when expectations of a final exit from the 2008-2009 crisis were strong in the industry). The analysis is made comparable due to the fact that the questions asked in 2008, 2011 and 2012 were absolutely identical.

In 2012, the most large-scale consequence of labor shortages in the Russian industry was reduction of output quality: 42% of enterprises reported about that (see Fig. 20). In 2008, such consequences were more dramatic (46%), which situation can be explained, primarily, by the fact that the industry experienced severe labor shortages (the 2008 balance of assessments fell to -20 points against only -10 points in 2012), while the most moderate negative effect on the quality of the output was produced by labor shortages in 2011. But even then a third of industrial enterprises had to sacrifice the quality; due to that factor the above consequence of labor shortages remained on the top of the list.

Due to labor shortages, the quality of the domestic produce of the engineering industry declined more often and steadily. In 2012, 49% of enterprises in that industry reported about that against 54% in 2008, while in 2011 such consequences were specified by 43% of enterprises, thus yielding formally the first place in the industry to another consequence caused by labor shortages, that is, infeasibility to increase the output even with orders being available (45% of

mentions). The aggregate result of the three-year monitoring showed that the quality of engineering products suffered more often than that of products of other industries: 49% (half of the industry!) against 31%-37% (one-third!) in other sectors. So, the industry which is to be the flagship of the real sector in an effort to "break with the oil needle" and promote Russian competitive products on the global market admits the fact of weakening of its positions for reasons which are mainly within the competence of the government (demographic policy and proprieties in the sphere of higher and specialized secondary education). In other sectors, reduction of the quality of output due to a lack of skilled workers was less dramatic and/or stable.

Reduction of the output quality

Infeasibility to increase output

Reduction of output volumes

Growth in wages and salaries of workers and those newly employed

Purchase of more efficient equipment

Upgrading of the installed equipment

Growth in labor efficiency

Switch over to simpler types of the produce, technology, primary products and equipment

0 10 20 30 40 50

Fig. 20. Consequences of labor shortages in the Russian industry in 2008, 2011 and 2012, %

The intense dynamics of the effect of labor shortages on the quality of output was observed by the forms of ownership. During the monitoring, state-run enterprises managed to reduce the negative consequences of that factor: if in 2008 and 2011 reduction of the quality was mentioned by 55% and 48% of enterprises, respectively, in 2012 it was stated by only 9% of plants of that sector. Within a year, a fivefold reduction in the impact of labor shortages on the quality of products took place! During the past year, on the contrary, enterprises of other forms of ownership had to use more extensively the quality-reduction practice due to labor shortages: open joint-stock companies - an increase of 10 points in the above practice (to

42

46

21

25

16

20

13 12

15

10

32 32

39

□ 2012 □ 2011 □ 2008

33

8

9

7

6

6

7

4

43%), closed joint-stock companies - an increase of 5 points (to 37%) and limited liability companies - an increase of 24 points (up to 57%).

The second place in the general rating (and in each year of monitoring) of consequences of labor shortages in the industry was occupied by the factor of infeasibility to increase output even with availability of orders. The above consequence was widespread in the engineering and light industries where it was mentioned by over 50% and about 40% of enterprises in 2008 and 2012, respectively. Growth in output was hindered in other sectors less often due to the above factor: maximum 38% of enterprises in iron and steel industry in 2008 and 24% of plants in the building industry in 2012. Throughout the entire period, the most moderate effect of labor shortages on output was observed in food industry where it was mentioned by only 15% to 19% of enterprises.

More serious consequences of labor shortages for the output dynamics - not only slowdown of growth, but decline of production in absolute terms - were also widespread in the Russian industry. In the past three years, that effect of labor shortages was stated on average by 20% of enterprises, while in 2008 and 2012, by 25% and 21% of plants, respectively. Within the entire period of monitoring, the absolute leader as regards that factor was the light industry where half of enterprises in 2008 and 2012 and one-third of enterprises in 2011 reported about output reduction due to labor shortages. In other sectors, a similar reaction amounted at most to one-third of enterprises in 2008, while in 2012, on average, to only 19% (with the light industry not taken into account). Thus, in addition to the existing problems in the light industry a decline of output is a factor which is extremely widespread there due to labor shortages.

State-run enterprises had more rarely than others to reduce the output due to the above factor: in 2008 there was 15% of such reports, while in 2011 and 2012, there were 16% and 12%, respectively. In summer 2008, enterprises of other forms of ownership resorted to output reduction in absolute terms in 20%-25% of instances, reduced the pressure of labor shortages on output to 13%-18% in 2011 and reported about that factor's growth to 17%-50% in 2012.

Growth in labor remuneration as a consequence of labor shortages (and a measure to get rid of them) was rated the fourth by industrial enterprises despite the fact that such measures by employers are considered a widespread reaction to labor shortages.

A direct survey of managers of enterprises showed that in the Russian industry wages and salaries were increased only by 20% and 11% of enterprises before the 2008 crisis and at the stage of the exit from the crisis in the mid-2011, respectively, as well as by 16% of enterprises in the period of slowdown of the exit in conditions of new labor shortages that prevented to ensure even the stagnating output. Thus, the "remuneration" reaction to the labor shortages took place 2.3 times to 3 times more rarely in the Russian industry than the most popular and far less pleasant one - reduction of the quality of the output.

In an effort to liquidate labor shortages, the remuneration factor was utilized more often in the food industry; 28%, 14% and 36% of enterprises reported about that in 2008, 2011 and 2012, respectively. In 2012, over 30% of enterprises of the building materials industry and the iron and steel industry were prepared to utilize the factor of remuneration growth, as well.

Measures aimed at raising of labor efficiency were rated, on average, the fifth during the monitoring and actually ended up the list of measures which domestic manufacturers were prepared to take in order to cope with labor shortages. The most popular (widespread) measure in that area consisted in purchasing of more efficient equipment; 15%, 12% and 13% of enterprises reported about that in 2008, 2011 and 2012, respectively. The leader as regards

that reaction to labor shortages was the engineering industry (19% of enterprises which buy on average such equipment) and the light industry (over 17%). On the contrary, only 6% and 7% of enterprises were prepared to incur such expenses in the chemical industry and wood industry, respectively.

It is to be stated that only one-tenth of the industry dealt with upgrading of the installed equipment as a response to labor shortages. Almost in all the sectors, the level of that reaction in 2008, 2011 and 2012 was on average the same and within the range of 9% to 12%; only in the chemical industry and light industry it amounted to 4% and 7%, respectively.

But, in the final analysis, the number of Russian industrial enterprises which rely on growth in labor efficiency is even smaller: the average level of that reaction in the industry amounted only to 8% and rose maximum to 10% in 2011. The highest expectations of growth in labor efficiency as a response to labor shortages were registered in the iron and steel industry and light industry, but mainly in 2011 and 2012.

The outputs of the IEP surveys showed that in the Russian industry there was always a fairly large segment of enterprises which were able to cope with labor shortages without resorting to reduction of quality and output volumes and raising of wages and salaries. During the monitoring period, only one-third of enterprises assessed their abilities as such.

In 2008, the number of such enterprises was the smallest one (22%) which fact can be logically explained by overheating of the Russian economy and, as a consequence, acute labor shortages. Early at the stage of the exit from the crisis the industry rated above all its ability to meet the demand in additional workforce at the expense of its own reserves and on the labor market - the number of such enterprises amounted to 38% in 2011. In 2012, slowdown of the economy and industry reduced enterprises' readiness to solve its personnel-related problems to 29%.

Enterprises' ability to solve personnel issues is determined sooner by the level of remuneration and the potential to use that factor to attract new workers on the market. Industries which demonstrate the highest ability to use the remuneration factor in solution of their personnel issues showed that they were able to solve those problems by means of their own reserves or through attraction of workers from the market. In 2012, 35% of enterprises in the food industry, 25% of enterprises in the building industry and 24% of enterprises in iron and steel industry reported about that. However, the need to increase remuneration does not exist in all the sectors. So, in the chemical industry 53% of enterprises declared that they had sufficient workforce or were able to find more workers. In such a situation, the need to increase wages and salaries for solution of their personnel issues is the minimum one (11%) in that industry. It is to be noted that a similar situation (a high level of provision with the personnel and low intentions to increase wages and salaries) took place in the industry throughout all the years of monitoring.

Engineering demonstrates the rather modest potential (intensions) to use a pay rise factor in solution of personnel issues. In 2008, with a 10% ability to solve their personnel issues only 20% of engineering plants increased wages and salaries. In 2011, labor self-sufficiency rose to 26%, while the need to use the remuneration factor fell to 14%. In 2012, the situation got worse: only 21% of enterprises were sufficiently provided with personnel (or were able to find workers), while only 13% of plants were prepared to increase wages and salaries. As a result, as it was stated above, the engineering industry had to reduce the quality of its produce.

A unique dynamics of solution of personnel issues without harm to output (in quantitative and qualitative terms) and the need of investment was demonstrated by state-run enterprises.

If in 2008 only 9% of plants of the state industrial sector had own personnel reserves or was able to hire new workers, in 2011 there was 32% of such enterprises which situation appears quite normal as compared to enterprises of other forms of ownership which assessed their potential in the range of 24% to 45% in 2011. However, the result of 2012 turned out to be absolutely unique: the potential to meet its requirements in personnel rose in the state sector to 73%! The need in additional (potential) utilization of the remuneration factor decreased from 23% in 2008 to 13% and 6% in 2011 and 2012, respectively. With wages and salaries in the state industrial sector becoming so high as compared to neighbor-enterprises and a work load being stable thanks to budget financing, personnel issues in that sector are solved better than anywhere else and require the minimum effort to maintain the status quo.

Thus, the long-term monitoring of personnel issues in the Russian industry shows that the most widespread reaction of enterprises to labor shortages is reduction of the quality of output, rather than growth in wages and salaries. It is to be noted that the quality reduction factor is the most widespread and stable one in domestic engineering - an industry whose degradation means the degradation of this country. Decrease in output volumes (or slowdown of its growth) turned out to be a fairly widespread reaction of the domestic industry to labor shortages. Particularly unpleasant is the fact that those developments took place in 2012 when the industry failed to get out of stagnation. Growth in wages and salaries which was much spoken about in connection with labor shortages took place at best at 20% of enterprises and was rated the fourth by the Russian industry in the rating of consequences of labor shortages, while growth in labor efficiency virtually ended up that gloomy rating.

However, there is a sector in the Russian industry which managed by the year 2012 to bring virtually to naught reduction of output quality due to labor shortages, reduce output volumes more seldom than others, do without upgrading of the equipment under the pressure of labor shortages, refrain from raising workers' wages and salaries and at the same time have a unique potential to solve its personnel-related problems. That sector is state-run enterprises which together with the state-financed sector deprive the rest of the industry of personnel and, thus prevent it from prospering.

Such a reaction of industrial enterprises to labor shortages makes one be cautious in approaching the data on reduction of the number of the unemployed in Russia and should contribute to adjustment of the government policy in the sphere of the higher and specialized secondary education so that correct priorities in training of personnel for the needs of the economy could be set.

4.2.6. Assessment of the Government Anti-Crisis Measures

The prevailing threat of the second wave of the crisis and the governments' efforts to prepare for it permitted in 2012 to evaluate thoroughly (not in a hasty way as it was done late in 2008) the efficiency of the government's anti-crisis package and, particularly, do it in terms of the Russian industry which the government supported in the first wave of the crisis and would not definitely let down if the second one occurred. For that purpose, in July 2012 the IEP asked managers of industrial enterprises to specify the most efficient measures of support of their enterprises. The survey in July became the fourth stage of monitoring of efficiency of the government's anti-crisis measures. The first similar survey was carried out late in 2009, the second one - late in 2010, while the third one - in September 2011 when fears of the second wave of the crisis became too high. As a result, a unique (as regards duration), reliable and,

probably, useful to the authorities array of evaluations of efficiency of the government's measures and plans during the crisis which began in 2008 was accumulated.

It is to be noted that the 2012 survey differs fundamentally from the 2009 and 2010 stages of monitoring by the fact that it precedes the potential application (development) of the government's anti-crisis measures and, as a result, permits to take into account preferences of "the rescued" themselves as early as at the stage of development of those measures. Another important specifics of that survey (as well as all the previous surveys) consisted in the fact that it took into account opinions of hundreds of managers of enterprises of different sizes from all the sectors and locations and was not limited to the opinions of those who had an opportunity to uphold their interests at corridors of power. The IEP's respondents evaluated the state of things in the industry not by the Rosstat's bulletins, but more profoundly (at least at their enterprise and sector). It was those mangers, their deputies and heads of business divisions who experienced as early as November 2008 the power of the first strike of the crisis, witnessed how slowly and at the same time hastily the government was trying to smooth its consequences and as early as 2009 understood that the exit from the crisis - not aggravation of it - began. In 2012, in industry expectations of the second wave of the crisis arose again which situation definitely contributed to development of the plan of anti-crisis measures. So, coordination of actions by the government and enterprises may help them both to overcome the second wave of the crisis if it occurs.

According to the survey of 2012, the most welcome measure for the industry will be reduction of a tax burden (see Fig. 21). The above measure is expected by 73% of enterprises which figure is the absolute record: in the past four years none of the measures has been so popular in the industry. It is to be noted that in 2011 the preference of a tax reduction amounted only to 44%! Moreover, fiscal anti-crisis measures turned out to be the only ones whose popularity within the incomplete year of expectations and preparations rose. In the above period, all other possible government measures were regarded as less desirable by the industry.

What did happen to enterprises' approach to taxes which the government collects from the industry and uses at its own discretion? As no principal changes in taxation of the industry took place between the two surveys and enterprises were sooner adapting to the existing system of taxes, such a surge can be determined more likely by assessment by taxpayers of the lines and efficiency of the government's budget spendings. Actually, if before the second wave of the crisis the government set as priority a reduction of costs and, particularly, at the expense of labor remuneration, in the period from September 2011 to July 2012 the authorities actively increased budget expenditures for obvious reasons - it was an elections period -on pay rises for law-enforcement officers and other public sector employees. More anger could have been provoked by ambitious state projects (building of bridges and stadiums, reconstruction of theatres and other) whose cost estimates steadily increased several times over in a situation of an ongoing public discussion of the percentage of kick-backs. It is to be noted that there were no hopes for real reduction of the tax burden and the authorities explicitly stated that at the end of 2011. So, the industry's overwhelming voting for adjustment of the fiscal policy should be sooner regarded as a call to the authorities to moderate their appetites, rather than a hope to see real steps in that area.

In 2012, limitation of growth in regulated tariffs on railway carriage, gas and heating was rated second by the industry; 60% of enterprises looked forward to see such measures (68% and the first place in 2011). During the first wave of the crisis, the efficiency of those measures was rated positively by 43% and 24% of enterprises in 2009 and 2010, respectively.

Higher popularity of the antitrust component of the anti-crisis package was probably related to unwillingness of natural monopolies to deal with the crisis and adjust their ambitions.

Reduction of the tax burden

Limitation of growth in regulated tariifs on railway carriage, gas and heating

Motivation of demand on enterprises' produce

Subsidizing of a portion of expenditures on payment of % on loans

State support of employment Raising of import customs duties Reduction of corrupt practices' pressure Restructuring of the mandatory payments debt Provision of state guaranties for loans Formation of the list of strategic enterprises Smooth (as in 2008-2009) devaluation of the ruble Support to the banking sector Sudden (as in 1998) devaluation of the ruble

0 20 40 60 80

Fig. 21. Preference of the government's anti-crisis measures to the Russian industry in case of the second wave of the crisis, %

In 2012, demand motivation measures received almost the same support from the industry (55%). During the first wave of the crisis, evaluation of such government measures was more moderate: in 2009 and in 2010 those measures helped 19% and 17% of enterprises, respectively. A sudden (threefold!) surge of expediency to motivate demand at the expense of budget funds was related to a stable negative dynamics of industrial produce sales in 2012 and absence of actual hopes for their revival at the expense of private demand. In such a situation, the government could use more efficiently budget funds on support of at least individual sectors of industry.

According to enterprises, other possible government measures will be less efficient in case of the second wave of the crisis.

Only one-third of the industry would like to receive subsidizing of a portion of expenses related to payment of interests on loans (41% in 2011). As compared to the actual efficiency of that measure in the 2009-2010 period at the level of 20%, 1.5- 2 fold growth can be explained by a hope for priority utilization by the government of that particular method of support of lending to the industry and not by simple pumping of cash to the banking sector with calls not to scale down lending to the real sector. In 2012, the latter measure was supported only by 7% of enterprises (the second to last in the rating). However, in 2009 the government support to banks was rated by the industry as the second to last. At present, 14% of enterpris-

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m/m.

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□ 2012 [3 2011

es expect state guarantees for loans which situation is comparable with the level of positive assessment of that measure in 2009 (11%).

In 2012, government measures related to support of employment were rated the fifth by the industry. In case of the second wave of the crisis they may be required by a quarter of enterprises. Though as early as 2011 the popularity of such measures amounted to 43%, the positive assessment of application of them gained 49% and 41% in 2009 and 2010, respectively. A two-fold decrease in demand in government anti-crisis measures in the labor market can be explained by a number of reasons. First, during the second wave of the crisis a possible drop in demand and output will sooner be of a smoother nature and require no large-scale lay-offs. Second, the continued stagnation of demand permits enterprises smoothly and less painfully to solve even now the employment issues and get better prepared for the second wave of the crisis. Third, achievement of the optimal number (in the current situation) of the employed at enterprises is ensured partially not by administrative measures, but through a natural way.

Protection of the domestic market with customs import duties may turn out to be advantageous only to 20% of enterprises and the above assessment coincides with evaluation of efficiency of the measure in question during the first wave of the crisis. It is to be noted that in 2012 import hindered output growth with 26% of enterprises. Another well-known measure of protection of domestic manufacturers - the devaluation of the ruble - is actually far less popular with the industry. In 2012, only 10% of enterprises believed that smooth depreciation of the ruble could help them go through the second wave of the crisis. The number of supporters of dramatic (as in 1998) devaluation is even smaller (only 3%). Within a year, the views on devaluation did not virtually change in the industry. But in 2009, the efficiency of the above measure was recognized by 20% of enterprises.

Reduction of pressure from corrupt practices in operations with supervising and tax authorities, as well as in state procurements will be more advantageous to the industry than devaluation of the currency. Such is the opinion of 18% of enterprises. In 2009, the government's anticorruption measures (but, probably, to a greater extent - reduction of flows of bribes and kickbacks due to dramatic slowdown of business activities in the most bribe-intense spheres of the economy) were positively rated by 9% of enterprises.

The favorite creation of the authorities - formation of the list of strategic enterprises - is supported by only 14% of enterprises. In 2009, similar target measures were approved by 11% of manufacturers.

Summing up the results of the four-year monitoring of the efficiency of anti-crisis measures of the Russian government, the following can be stated. First, the industry is in no way indifferent to the government's measures. If the most required measures at present are supported by 73% of enterprises, the most unpopular ones, by 3% to 7%. It would be highly unwise to ignore such a dispersion of values. Second, priorities and, consequently, expenses related to support of the industry during the first wave of the crisis need adjustment. There is no point to "get ready for the past war" as only bad generals do. Third, a long period of expectations of the second wave of the crisis permitted the industry to work out and even partially implement its own anti-crisis plan of actions which situation could not but effect evaluation of the expected government actions.

4.2.7. The Anti-Crisis Package of Russian Industrial Enterprises Anti-Crisis Measures of the Russian Industry in Case of a New Wave of the Crisis

Expectation of the second wave of the crisis definitely rose in spring and summer 2012. Aggravation of the problems of the euro area and public statements by members of the government on development of the package of anti-crisis measures made the Russian industry get ready for a new wave of the crisis. The expected reaction of enterprises to declining demand in the mid-2012 was revealed by the regular stage of the crisis monitoring - carried out by the Gaidar Institute for Economic Policy - of the sentiments in the industry.

The survey in June 2012 became the seventh stage of the crisis monitoring carried out by the IEP. The first survey took place as early as December 2008 when questions were included in the December questionnaire and dispatched after the IEP industrial optimism index registered a collapse of the Russian industry on November 18, 2008. Later, questions about the actual reaction and expectations were asked in the 2nd, 3rd, and 4th quarters of 2009 and the 1st quarter of 2010. Explicit positive trends of the second half of 2010 and the beginning of 2011 made continuation of that monitoring irrelevant. However, aggravation of the economic situation in August 2011 triggered higher concerns over the second wave of the crisis and the question about the possible reaction of enterprises to crisis phenomena was included for the sixth time in the IEP questionnaire. As a result, at present a unique array of the data - as regards the content and the time period - on the expected and actual reaction of enterprises to the crisis which began in 2008 and is not over yet has been accumulated.

The main (the most large-scale) reaction of enterprises to the second wave of the crisis will be reduced wages and salaries and incomplete work week. In summer 2012, 63% of enterprises reported about that against 68% in autumn 2011 (other anti-crisis measures explicitly yielded in popularity to enterprises' possible economy on the workforce). It seems the industry evidently has an opportunity to carry out that strategy. According to the data of the IEP surveys, in mid-2012 two-thirds of enterprises paid their workers a "normal" - as believed by the management - remuneration. The above result exceeds by 30 p.p. the crisis minimum of the value registered in the 2nd quarter of 2009. The dramatic cuts in wages and salaries will take place in engineering (75% and 78% of enterprises in that industry reported about that in summer 2012 and autumn 2011, respectively). According to the outputs of the two surveys, the building materials industry is rated the second (62% and 86%, respectively); early in summer the above industry experienced revival and for that reason it adjusted its plans in that sphere due to the seasonal factor. The chemical industry is rated the third; in 2011 67% of enterprises in that industry planned cuts in wages and salaries and a switch-over to incomplete work week, against 62% in 2012. The chemical industry is followed by iron and steel industry and light industry with the average level of such plans at 61%-62%. If the second wave of the crisis occurs, cuts in wages in salaries will the least widespread in the wood industry (such plans were declared by 46% and 44% of enterprises, respectively) and food industry (48% and 39%, respectively). Generally, cuts in wages and salaries and incomplete work week will be the most popular reaction in most sectors of the Russian industry. Only in iron and steel industry and food industry the above measures yield the first place to output reduction and costs reduction, respectively.

Other measures of (anti)crisis policy in the sphere of employment are planned more rarely by enterprises.

According to the data of the survey in 2012, only one-fourth of industrial enterprises plan lay-offs. In the composite rating of anti-crisis measures, the above measure is rated the fifth

and the sixth in the plans of 2012 and 2011, respectively. It seems fears of labor shortages still prevail in the Russian industry.

Such measure as sending of workers to unpaid leaves is possible at about one-fourth of industrial enterprises (in autumn 2011 nearly one-third of enterprises planned to use that measure). The above measure will be the most widespread in the light industry, where it is included at present in the anti-crisis package by 34% of enterprises as compared to 36% in autumn 2011. In most sectors, such unpaid leaves will be practiced at 21% to 27% of enterprises and only in the food industry and wood industry they will be used in 15% to 11% of cases.

The cost-reduction measure is rated the second in the composite rating of anti-crisis measures. In 2012, 51% of enterprises was prepared to resort to the above measure, against 46% in autumn 2011. It is to be noted that that measure turned out to be the only one whose mention was insignificant, but it increased in 2012 as compared to 2011. In iron and steel industry (69% of mentions), chemical industry (64%), food industry (54%) and wood industry (51%), the cost-reduction measure is rated the first on the basis of the outputs of the 2012 survey.

The output-reduction measure was rated the third by the Russian industry; it is the extent of reduction of output by which the government and experts judge about unfolding of the crisis. Only 43% of enterprises are ready to resort to that measure, though in autumn 2011 similar plans were approved by 54% of plants which situation ensured the second place for that anti-crisis measure. The most dramatic output reduction will take place in the iron and steel industry (56% and 89% of enterprises of that industry reported about that now and in autumn 2011, respectively), building industry (55% and 69%), chemical industry (51% and 56%) and engineering (47% and 63%).

More active marketing and search for new buyers and sales markets will be the fourth most popular measure in the industry. In 2012, 39% of enterprises were prepared to resort to that measure, against 44% in autumn 2011. The above 'classical' steps are likely to meet tough resistance on the part of other manufacturers whose markets become endangered as a result of such an intrusion. According to our latest survey of the sentiments and limitations in that sphere, such an impediment for access to new sales markets is expected by 45% of enterprises.

The pricing factor is rated the fifth - with 27% of mentions - in the composite rating of anti-crisis measures in 2012. The same share of enterprises planned to resort to a price reduction in 2011, however, at that time the result in question could ensure the eighth place only. But as (according to evaluations of enterprises) the importance of a larger part of anti-crisis measures diminished during the past few months, the pricing factor moved three positions upward.

Only 23% of enterprises in the industry in general are prepared to agree on delayed receipt of payments from buyers of the produce. In 2011, such delays in payments were approved by 28% of plants, but work in conditions of tough demand limitations permitted enterprises to keep only reliable customers which factor probably reduced the likelihood of non-payments in case of new aggravation of the crisis.

Non-cash forms of settlements (whose renewal was so much feared about in 2008) have small chances to emerge in the Russian industry: only 10% of enterprises in 2012 (12% in 2011) approved them in case of the second wave of the crisis. The building materials industry may become the absolute leader with at least 20% of enterprises prepared to approve such measures in order to support output.

Anti-Crisis Measures of the Russian Industry during the First Wave of the Crisis

For the sake of comparison, it is worthwhile to consider the plan of anti-crisis measures of the Russian industry during the first wave of the crisis. As was stated above, the analysis of those plans was prepared by the Institute for Economic Policy as early as November 2008 when the country was in the dark and the government only cautiously looked out of its "safe haven" on the storm of the global crisis. The above analysis permitted to receive the first-hand and trustworthy information on the initial (2008) anti-crisis package of the Russian industry.

In the beginning of the crisis, nearly all the enterprises (84%) planned to reduce the cost of production (see Fig. 22). Late in 2008, that measure was absolutely justified as in the pre-crisis period the most intense growth in costs was registered from 1999. Only 9% of enterprises declared that they were unlikely to resort to the above measure.

In 2008, the output reduction measure was rated the second both in the industry in general and all the sectors (except for the food industry), in particular. The widespread willingness in the industry to reduce output deserves positive assessment as it means that enterprises are ready to follow the recessionary decline of the solvent demand, rather than work for a warehouse or resort to non-cash forms of settlements. Only 21% of enterprises declared at that time about their open unwillingness to reduce the output even in a situation of the declining demand.

Utilization of survival measures typical of the 90s was planned rather rarely in the Russian industry in 2008. Non-cash forms of settlements were the last in the rating of the industry's anti-crisis measures. Only 38% of enterprises were ready to resort to them, while 56% answered straightforwardly that they would try to avoid them. The latter value turned out to be the maximum one in assessment of the unacceptability of anti-crisis measures. Work for a warehouse and accumulation of stocks of finished products from which the Russian industry suffered much in the 90s turned out to be an unpopular anti-crisis measure in 2008; only 42% of enterprises were prepared to resort to that measure with 54% of enterprises explicitly against it.

Search for new markets and buyers - which measure 69% of enterprises were ready to approve - was sooner a tribute to a book tradition, rather than a real anti-crisis measure in Russian conditions because the extent of a drop in the industrial production along with high protection of markets by traditional manufacturers did not contribute at all to accessibility of those markets by new manufacturers. However, active market position of the Russian industry does impress.

Reduction of wages and salaries, underemployment and unpaid leaves were rated the fourth most popular measure in December 2008 with 62% of enterprises being ready to resort to it. Lay-offs yielded much to other anti-crisis measures which were not related to reduction of personnel. Only 46% of enterprises were ready to use that measure. Large-scale labor shortages which the Russian industry encountered with in 2006 and degradation of the system of the vocational and technical education definitely prevented enterprises from planning more large-scale lay-offs. The industry preferred to maintain redundant personnel in order to have an opportunity to promptly increase output soon after the crisis was over, rather than search for new workers.

The pricing factor was expected to be used in overcoming of the crisis by nearly a half of enterprises in the industry as a whole. However, in the iron and steel industry which encountered with the crisis earlier than other sectors 93% of enterprises were ready to resort to that measure (if only they did not actually start to use it then) and only 7% of enterprises declared

that they would try to avoid that. Quite the opposite plans were in the iron and steel industry where only 30% of plants were prepared to reduce prices, against 70% which planned to avoid that.

Reduction of costs

Reduction of output

Search for new markets and buyers

Reduction of wages and salaries and underemployment

Delay in payments

Reduction of prices

Lay-offs

Growth in stocks of finished products

Non-cash settlements

0 20 40 60 80 100

Fig. 22. The reaction planned in December 2008 to the crisis of the Russian industry, % enterprises

During the crisis of 2009-2010, enterprises' anti-crisis plans were subjected to adjustment; it is to be noted that all the measures lost their popularity, but to a different extent. Reduction of the extent of anti-crisis measures can be explained in our view by the specifics of the unfolding crisis. The main blow of the crisis fell into the end of 2008, while as early as the 1st quarter of 2009 the industry started its exit from the crisis. Such dynamics was explicit both in analysis and utilization of the outputs of the surveys which were received by the respondents. The latter factor permitted them not only to develop effectively anti-crisis plans, but also adjust them.

Output-reduction plans (that is the measures whose monitoring continued in the 20092010 period) were subjected to the most serious adjustment. By the 2nd quarter of 2009, the popularity of the above measure in plans of the Russian industry decreased by nearly a half (from 77% to 40%), by the 3rd quarter 31% of enterprises was prepared to further reduce output volumes and by the end of 2009 and early in 2010 such plans remained with 25% of plants. So, according to enterprises' estimates by the end of monitoring of the first wave of the crisis the need to reduce output decreased by 66.7 % in the Russian industry.

Reduction of wages and salaries, incomplete work week and unpaid leaves became the second most popular measure which was monitored all the time. Popularity of that measure declined considerably in the 2008-2010 period, too. As early as the 2nd quarter of 2009, the above measure lost 20 p.p. and remained in the plans of only 42% of enterprises, while early in 2010 it was planned to be used by 28% of enterprises. However, even with that value the anti-crisis measure in question was rated the second most popular one in 2010.

Popularity of lay-off plans in response to a recessionary drop in demand underwent principal changes by the 2nd quarter of 2009 and stabilized after that in the range of 27%-32% until the end of the first wave of the crisis. There were two factors which could predetermine such

84

77

69

62

46

38

61

51

42

a cautious utilization of that classical anti-crisis measure in the Russian industry. First, the abovementioned shortages in skilled workers in the pre-crisis period when a lack of personnel hindered growth in output with a half of industrial enterprises were replaced by a recessionary redundancy just for three quarters of 2009 to be followed by growth in the share of the "insufficient" answers in the industry in evaluation of the number of workers, which share exceeded by the mid-2010 the share of the "more than sufficient" answers. Second, the government's anti-crisis policy in that area restrained the rate of lay-offs at enterprises, too.

In the 2008-2010 period, popularity of a delay in payments as an anti-crisis measure decreased only by half, that is, from 61% to 32%. Utilization of non-cash forms of settlements as a means of support of output in a situation of a dramatic drop in demand was rated the fifth most popular measure by the Russian industry during the first wave of the crisis and could be accepted at 25% of enterprises. It is to be noted that in 2009-2010 period acceptability of such a measure fluctuated within a very narrow range which factor points to a stable attitude of the industry to that popular anti-crisis measure of the 90s, while the absolute values can serve as evidence of extremely low intentions of enterprises to use non-cash settlements. The only exception was the building materials industry where 36% of enterprises approved such settlements.

In the 2009-2010 period, in the anti-crisis plans of the industry reduction of prices was rated the sixth most popular measure and was planned by 20%-28% of enterprises in the industry in general.

The experience related to overcoming of the crisis phenomena in the 2008-2009 period permitted the Russian industry to select a new system of priorities in solution of the problems related to a possible outbreak of the second wave of the crisis. First, a smoother nature of the new spiral of the crisis and a long preparatory period (and, probably, a partial implementation of measures) reduced the rate of the expected application of most anti-crisis measures. Only such measures as reduction of wages and salaries and underemployment will be utilized by enterprises more often than in 2009-2010 period and at the beginning of the first wave of the crisis. It seems that due to the fact that the problems related to training of personnel remained unsolved the above measure was rated the first in 2012. The situation is supplemented by the most moderate lay-offs plans in the entire period of monitoring. Second, a number of the most unpleasant measures (developments) may not be used (take place) at all during the second wave of the crisis. It concerns changes in the ownership structure, non-cash settlements and suspension of enterprises' operations. Though delays in payments are expected by enterprises, the extent of that measure is the most moderate in the entire period of monitoring. Third, according to the plans of enterprises a recessionary drop in output will not be as large-scale as late in 2008 which situation, probably, makes it easier for the industry to go through the second wave of the crisis, but at the same time it will be difficult to identify it on the basis of the official statistics data and due to that factor the government's anti-crisis measure may not be used timely. If in 2008 the official statistics failed to be timely, at present it may lack clarity.

4.3. Investment activities

4.3.1. Domestic capital investments

In 2010-2011, business activities in the investment sector were characterised by a faster rate in growth than that of the GDP. However, the effects of the deep investment crisis in 2008 - 2009 were overcome only in 2012. In 2012, capital investments were 3.2% higher than

in 2008. In 2012, with the GDP growth at a level of 103.4% compared to the previous year and with capital investments of 106.6%, the share of capital investments in GDP had almost reached the level of 2007 and amounted to 20.2%.

25 20 15 10 5 0 -5 -10 -15 -20

□ Capital investments DGDP

Source: Rosstat.

Fig. 23. Capital investments and GDP in 1999 - 2012, as % of the previous year

The different behaviour of institutional business entities significantly affected how the crisis developed. In the acute crisis phase, when compared to small businesses, the large and medium-sized businesses were forced to pursue a more assertive policy to reduce investment costs. Despite the slowdown in investment activity in 2011, the volume of investments in the small businesses sector for that year almost reached the pre-crisis level of 2008, and then significantly exceeded it in 2012.

The dynamics of capital investments of large and medium-sized businesses in the postcrisis period were quite unstable, and in 2012 this sector recorded a sharp slowdown in investment activity. As a result the capital investments of large and medium-sized businesses amounted to 96.4% of the 2008 pre-crisis level.

It should be noted that the changes in the performance of large and small businesses and organisations was of an opportunistic nature and did not reflect the fundamental changes in the investment climate. Another fundamental point was the change in the structure of the financing of capital investments in 2009-2012. The slow recovery rate of the domestic market, and of income, determined the stronger emphasis on the use of businesses' own funds to finance investment programmes. In late 2012, the share of businesses' own funds in the structure of capital investments increased to 45.4% and exceeded the level of the previous year by 3.5 percentage points.

2 2, 7

1 7, 4 1 137 6, 7

1 10 10 2, 5 1 0, 9 > i 9,9 ,5

5,' , 4,7 ,1 — ,2 ,4 ,2 6 ,3 ,3 ,6 ,4

2,!" 1

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20 09 7 2010 2011 2012

0

5

-1 7

Table 12

Growth in the volume of capital investments, as a % of the previous year

2008 2009 2010 2011 2012

Capital investments (across the full range of organisations, including adjustments for investments not observed through direct statistical methods) 109.9 84.3 106.0 108.3 106.6

Large and medium-sized businesses (capital investments, excluding small businesses and investments not observed through direct statistical methods) 105.6 82.5 105.1 110.4 100.7

Source: Rosstat.

Table 13

Investments in fixed capital by sources of funding (excluding small businesses and investments not observed through statistical methods), as a % of the total

2007 2008 2009 2010 2011 2012

Capital investments - total 100 100 100 100 100 100

Including by sources of funding:

Own funds 40.4 39.5 37.1 41.0 41.9 45.4

Profit disposable by the business (accumulation fund) 19.4 18.5 16,0 17.1 17.9 NA

Borrowed funds 59.6 60.5 62.9 59.0 58.1 54.6

Including:

Bank loans 10.4 11.8 10.3 9.0 8.6 7.9.

Including loans from foreign banks 1.7 3.0 3,2 2.3 1.8 1.2

Borrowed funds of other organisations 7.1 6.2 7.4 6.1 5.8 5.4

Budgetary funds 21.5 20.9 21.9 19.5 19.2 17.9

Including:

Federal funds 8.3 8.0 11.5 10.0 10.1 9.6

Budgetary funds of the subjects of the Russian Federation 11.7 11.3 9.2 8.2 7.9. 7.1

Extra-budgetary funds 0.4 0.3 0.3 0.2 0.2 0.2

Other 20.1 21.2 23.0 24.1 24.3 23.1

Including:

Funds of superior organisations 11.3 13.8 15.9 18.0 19.0 17.8

Funds from the equity in the construction (businesses and individuals) 3.7 3.5 2.6 1.9 2.0 2.0

Including funds derived from the public 1.5 1.9 1.3 1.1 1.3 1.3

Funds from the issuance of corporate bonds 0.1 0.1 0.1 0.01

Funds from the issue of shares 1.8 0.8 1.0 1.4 1.0 1.0

Foreign investments in the total investments in fixed capital 5.4 4.3 4.3 3.8 3.1 2.7

Source: Rosstat.

Although in 2012 the main sources of financing of capital investments were borrowed funds, which accounted for 54.6% of the total investments in the economy, their structure was changed. The share of the budget in such sources decreased from 19.2% in 2011 to 17.9% in 2012. The share of budget funds used for capital investments in GDP was 2.52% of GDP in 2012 against 3.41% of GDP in 2009, including federal budget funds (1.35% against 1.78%, respectively).

The public demand for the products and services of Russian companies was supported through the implementation of planned investment projects in transportation, telecommunications, etc. implemented under FTP and FTIP. According to the federal targeted investment programme, approved by the Russian Ministry of Economic Development, a provision of RUR 755.3 billion was made in 2012 (with updates as at 1 January, 2013), including federal budget funds of RUR 719.0 billion. In 2012, RUR 492.4 billion from the federal budget and RUR 29.4 billion from the budgets of the subjects of the Russian Federation and other sources were allocated under the annual limit. In 2012,there were plans to commission 1,430 projects. Of these 562 projects were commissioned at full capacity and 64 projects were partially commissioned. On 1 January 2013, the technical readiness of 710 sites (with no facilities, as

the design and survey works for future construction are still in progress) ranged from 51.0% to 99.9%.

Table 14

Facilities provided in the targeted investment programme, and the amount of state capital investment for 2012 (excluding construction projects and facilities included in the state defence order)

Number of sites Commissioned State capital investment limit Financed from the federal budget Investment utilised from all sources

Total Including those with commissioning dates in 2012 At full capacity Partially Total Including from the federal budget

Units Bn. RUR

Total 3,777 1,430 562 64 755.3 719.0 492.4 468.7

Including: Agriculture, hunting and forestry 132 58 39 6 5.1 5.1 5.0 5.0

Fishing and fish farming 21 5 - - 2.1 2.1 NA 1.3

Processing industry 51 11 1 - 8.3 7.0 NA 2.6

Production and distribution of power, gas and water 39 14 - - 44.5 42.5 30.5 40.7

Construction 105 49 14 4 18.0 15.2 13.7

Transportation and Communication 608 279 124 15 310.5 299.0 241.7 234.9

Real estate, rent and services 1307 136 22 5 149.4 142.9 NA 32.1

Public administration and defence; 695 515 294 14 55.3 54.4 40.9 35.1

Education 207 110 24 12 40.6 38.3 32.0 29.3

Public health and social services 187 93 26 6 60.3 57.0 44.2 38.4

Other utility, social and personal services 414 158 18 2 59.0 53.4 NA 33.7

Other activities 11 2 - - 2.2 2.2 NA 1.9

Source: Rosstat.

Before the crisis in 2008 the restructuring of the financing of capital investments was associated with increased activity in the banking sector, increasing public investments in residential housing and a heavy influx of foreign capital. Since 2009, the share of borrowed funds to finance capital investments has shown a strong trend towards a narrowing of the participation of banking and debt capital. Moreover, we note that the very slow recovery of the credit activity of domestic banks did not overlap the decline in loans from foreign banks. In 2011, the share of loans in borrowed funds was 13.4% and had decreased by 4.1 percentage points compared to 2007. In 2012, the share of bank capital in borrowed funds remained at about the level of 2011, and the ratio of loans had changed to increase the share of the domestic banks.

900,0 800,0 700,0 600,0 500,0 400,0 300,0 200,0 100,0 0,0

□Bank loans

□Russian bank loans

□Foreign bank loans

2007

544,0

457,1

86,9

2008

791,9

593,7

198,1

2009

621,5

426,3

195,2

2010

595,8

445,8

150,0

E

2011

594,2

475,2

119,0

2010 I 2011 I 2012 January-September

337,7

238,2

99,5

394,2

309,5

,7

444,8

364,6

80,2

Source: Rosstat.

Fig. 24. Bank loans to finance capital investments in 2007-2012, Bn. RUR

The crisis of 2008 was characterised by steeper rates of decline in foreign loans and of investments in the Russian economy relative to the domestic capital. In 2011, direct foreign investment in the Russian economy amounted to 66.2% as compared to 2007 with an increase in domestic investment of 6.3%. In 2012, the overstripping growth of internal investments (106.6% of the previous year) continued with respect to direct foreign investment (101.4% of the previous year). As a result, the share of foreign investment in total capital investment in 2012 decreased to 2.7% from 3.1% in 2011. The discreet participation of Russian and foreign private capital to finance investments was defined by the disinvestment trends existing in 2008. In 2012, the net outflow of capital amounted to USD 56.8 billion. In contrast to the previous year, an absolute reduction of capital outflow was associated with the inflow of capital through the banking sector. The outflow of capital to other sectors of the economy in 2012 had increased and reached 80.4 billion dollars.

Table 15

Net inflow/outflow of capital from the private sector according to the balance

of payments, Bn. USD

Net inflow/outflow of capital from the private sector, Total Net inflow/outflow of capital from banks Net inflow/outflow of capital from other sectors

2007 81.7 45.8 35.9

2008 -133.7 -56.9 -76.8

2009 -56.1 -30.4 -25.8

2010 -33.4 15.9 -50.3

2011 -80.5 -24.2 -56.4

2012 -56.8 23.6 -80.4

QI -33.3 -9.7 -23.5

QII -6.4 11.6 -18.0

QIII -7.6 7.6 -15.2

QIV (estimate) -9.4 14.2 -23.6

Source: Central Bank of the Russian Federation.

In analysing the changes in the financing of capital investments, it is necessary to note the features of the financing of housing construction. In 2009, there was a reversal in housing construction trends. Following the steady increase in housing construction during 2001 -2008, the level of commissioning of residential buildings in 2011 fell by 2.8% compared to the pre-crisis level in 2008.

In 2011, the absolute reduction of investment in housing construction suspended (including small businesses and adjustments). In 2012, the growth of population funds for joint development was RUR 28.7 bn. compared to the previous year. Increasing investments by members of the public was supported by an increasing demand for loans. The volume of residential loans in 2012 amounted to RUR 1,053.6 billion against RUR 746.0 billion in the same period in 2011.

140 n

120 100 80 60 40 20 0

□ Funds received from business for joint development

□ Funds received from the public for joint development

Source: Rosstat.

Fig. 25. Funds received for joint development in 2007 - 2012, bn. RUR

Analysis of capital investments in 2009 - 2012 allows the identification of common and specific features of the change in investment demand by different types of activity. In 2009 -2012, the structural changes in capital investments were determined by the increased share of industry in total capital investment (excluding small businesses). In 2012, industry accounted for 5.3% of capital investment in the economy compared to an average of 44.5% in 2011— 2010. In 2012, investment in industry increased by 7.2% compared to the previous year. There was quite a significant differentiation of rates by economic activity. The recovery was defined both by the higher rate of growth of the fuel and energy sector and of the mining industry, together with higher growth rates of investment demand. Investments in the fixed capital of mining industries production in 2012 compared to 2008 increased by 21.9%; in the production and distribution of power, gas and water by 53.2%, meanwhile in the manufacturing industries overall investment only amounted to 94.5% of the pre-crisis level. The highest rates of growth in investment in manufacturing industry in 2009 - 2012 were observed in the production of coke and oil products, in chemical production and in the production of leather goods and shoes. Investment activity in the production of machin-

ery, equipment and vehicles remained below the pre-crisis levels of 2008. Regarding other economic activities, the rapid growth of investment in pipeline construction should be noted.

Transport and communications Wholesale and retail trade Construction

Production and distribution of power, gas and water Production of vehicles and equipment Production of electrical, electronic and optical equipment Machines and equipment Metals and finished products Non-metallic mineral products Rubber and plastic products Chemicals and chemical products Coke and oil products Pulp and paper industry

Processing of wood and production of wooden goods Production of leather, goods and footwear Textile and textile products Production of food products Manufacturing industry Production of fuel and energy resources Mining Agriculture Total

-60,0 -40,0 -20,0 0,0 20,0 40,0 60,0 80,0 100,0 120,0 Source: Rosstat.

Fig. 26. Capital investments in 2012, as a % of 2008

An analysis of the performance and structure of investments indicates that the recovery of investment activity in the machine-building industry is much slower compared to other economic activities.

According to a sample survey of investment activity conducted by Rosstat, the main purpose of capital investments, as in previous years, has been to replace worn-out equipment and machinery. The structure of capital investments in 2009 shows a steady increase in expenditure for the purchase of machinery, equipment, vehicles, and an increasing shift towards domestic equipment. We must not overestimate the importance of these changes, given the poor development trends and status of production facilities in the Russian machine-building sector.

The existing structure of capital investment related to the type of economic activity with a high proportion going towards the fuel and energy industries and their associated vehicles, has apparently exhausted itself. There is a growing imbalance between investment performance and the production of capital goods. The replacement of fixed assets is slowing down. There are no significant changes in favour of innovative production in manufacturing industry or of improvements in the quality of the labour force. The rapid growth of investments, increasing of the share of investment in GDP at the pre-crisis level with a slowdown in the growth of GDP, is leading to an increased capital intensity for production but this not supported by increased labour productivity.

-22

-0,3

8,3

-24,8 12,3

-2

-6,8 -15,1 27,5

-36,7 -33,7 1,0 19,5

3,2

-1

-10,

6,7

-5,5

20,8 21,9

□ 3,4

26,0

39,0

101,5

Table 16

Capital investments by type of fixed assets in 2007-2012 (excluding small businesses and parameters of the informal economy)

| 2007 | 2008 | 2009 | 2010 | 2011 | 2012

In bn. RUR, for each year

Capital investments 4,908.2 6,272.1 5,769.8 6,413.7 7,701.2 8,764.7

Including:

Houses 371.8 467.2 343.5 372.3 361.8 418.4

Buildings (excluding residential) and other construction 2,436 3,286.8 3,221.2 3,495.8 4,172.5 4,574.1

Machinery, equipment, vehicles 1,736 2,071.3 1,798.2 2,109.6 2,644.3 3,175.7

Including:

Purchase of domestic machinery, equipment and vehicles 1,427.5 1,656.9 1,426.4 1,729.8 2,152 2,661.2

Purchase of imported machinery, equipment and vehicles 308.5 414.4 371.8 379.8 492.3 514.3

Other 364.4 446.8 406.9 436 522.6 600.4

Share, as a % of total

Capital investments 100 100 100 100 100 100

Including:

Buildings (excluding residential) and other construction 7.6 7.4 6.0 5.8 4.7 4.8

Machinery, equipment, vehicles 49.6 52.4 55.8 54.5 54.2 52.7

Including: 35.4 33.0 31.2 32.9 34.3 36.2

Purchase of domestic machinery, equipment and vehicles

Purchase of imported machinery, equipment and vehicles 29.1 26.4 24.7 27.0 27.9 30.3

Buildings (excluding residential) and other construction 6,3 6.6 6.4 5,9 6.4 5.9

Other 7.4 7.1 7.1 6.8 6.8 6.8

For reference:

The share of purchased imported machinery, equipment and vehicles in the total investment in machinery, equipment and vehicles 17.8 20.0 20.7 18.0 18.6 16.2

Source: Rosstat.

4.3.2. Foreign investments

The year of 2012 was characterized by lower interest of foreign investors in the economy of Russia. Foreign investments in the Russian Federation decreased by 18.9% to $154.6bn in 2012 against 2011. In 2012, a total of $136.6bn or 88.3% of foreign investment inflow at that period (against 86.6% in 2011) was withdrawn as returns on foreign investments transferred from Russia to other countries, as well as payments of loan interests and repayment of loans. Capital outflow by the foregoing items decreased by 17.3% against 2011. In 2012, Russian investments in other countries reached $149.9bn, a decrease of 1.2% against 2011, and accounted for 97.0% of total investments in the economy of Russia (against 79.6% in 2011).

Inflow of foreign investments in the economy of Russia as percentage of GDP decreased from 10.0% in 2011 to 7.7% in 2012

In spite of the decrease, foreign investments inflow in the economy of Russia in 2012 remained higher than that prior to the crisis.

Aggregate values decreased in response to a $37.3bn decrease in other investments. Direct investments increased by $251m. Contributions to charter capital, and loans from foreign joint owners of companies accounted for most of direct investments. The former increased by 1.9% to reach $9.2bn in 2012. Loans obtained from foreign joint owners of companies increased by $2.3% to reach $7.7bn. Thus, loans from foreign joint owners of companies saw an increase from 40.7% in 2011 to 41.1% in 2012, whereas contributions to charter capital remained at the preceding year level and stood at 49.5% (against 49.3% in 2011) in the structuree direct foreign investments in the Russian Federation.

12%

2004 2005 2006 2007 2008 2009 2010 2011 2012

total amount of foreign investments inflow as % of GDP direct foreign investments as % of GDP

Source: Federal State Statistics Service of Russia.

Fig. 27. Foreign investments inflow in the economy of Russia in 2004-2012 (as % of GDP)

Table 17

Structure of foreign investments in the economy of Russia1

millions of US dollars As % of the )revious year

Total Direct investments Portfolio investments Other investments Total Direct investments Portfolio investments Other investments

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

2012 154,570 18,666 1,816 134,088 81.1 101.4 in 2.3 times 78.2

Source: Federal State Statistics Service of Russia.

70% 60% 50%

-40% -50%

2007 2008 2009 2010 2011

Global, total ■ Developed countries ■ Developing countries Economies in transition

Source: UNCTAD, World Investment Report 2012, 05.07.2012.

Fig. 28. Changes in direct foreign investments inflow worldwide in 2007-2011

1 Direct investments - investments in real assets, acquisition of a control interest or a corporate governance interest; portfolio investments - investments in securities for the purpose of generating returns on investments only; other investments - revolving investments (loans from international credit institutions, trade loans, etc.).

According to the UN Conference on Trade & Development (UNCTAD, World Investment Report 2012) report on investments which was published in July 2012, по объему привлеченных direct foreign investments in 2011 the Russian Federation was ranked 8 in the world (according to refined data, it was ranked 8 in 2010 and 6 in 2009 thru 2008). According to the foregoing report, in 2011 Russia accounted for 3.5% of direct foreign investments worldwide (3.3% in 2010, 3.0% in 2009, 4.2% in 2008) and 6.8% of direct foreign investments in developing countries, and economies in transition (6.3% in 2010, 6.3% in 2009, 9.7% in 2008).

According to the UNCTAD report, in 2011 total direct foreign investments worldwide remained lower than the peak level of 2007. According to preliminary estimates, in 2012 total direct foreign investments may amount to $1.5 to $1.7 trillion, in 2013 it is expected to grow up to $1.6 to 1.9 trillion, in 2014 up to $1.7 to 2.1 trillion. Such a scenario may be realized as long as no serious problems are faced by the global economy.

Source: UNCTAD, World Investment Report 2012, 05.07.2012.

Fig. 29. Direct foreign investments inflow worldwide, billions of US dollars

With regard to the portfolio investments inflow in the economy of Russia, a growth of 2.3 times was reported in 2012 against 2011. Furthermore, investments in stocks and units increased by 2.7 times in the structure of portfolio investments, thereby increasing its share from 71.7% in 2011 to 84.4% in 2012

Trade-related loans increased from 16.2% in 2011 to 20.9% in 2012 in the structure other investments. With regard to term of loans, loans with a maturity of more than 6 months increased in 2012 to 39.5% against 28.3% in 2011, whereas loans with a maturity of less than 6 months decreased to 33.2% (against 53.4% in 2011).

In 2012, the structure of foreign investments in the economy of Russia saw changes against the preceding year.

vo OO о ,—I <N m in vo 00 О ,—| <N

o. о О О о О О О О о о

o. о о О о о о о о о о о О CD

'—1 '—1 '—1 ■—i <N <N <N <N <N <N <N <N <N <N <N <N <N

Direct investments — -A— Other investments — a — Portfolio in-vestments

Source: Federal State Statistics Service of Russia.

Fig. 30. Structure of foreign investments in the economy of Russia in 1996-2012

In 2012, concentration of foreign investments remained in the financial sector, financial business, industrial production sector, and trade industry. На данные сферы of the economy in Russia in 2012 accounted for 89.3% of total foreign investments inflow (against 90.5% in 2011) in the Russian Federation. Investors heightened their interest in the industrial production sector, trade industry, and real estate business as investments in transport and communications continued to decline, and investments in financial business decreased.

Distribution of foreign investments by key sector of the economy in Russia is presented in Table 18.

Table 18

Sectoral structure of foreign investments in the economy of Russia

in 2010-2012

millions of US dollars Changes as % of the previous year as % of total

2010 2011 2012 2010 2011 2012 2010 2011 2012

Production sector 47,558 61,145 69,201 144.2 128.6 113.2 41.4 32.1 44.8

Transport and communications 6,576 5,943 4,622 47.8 90.4 77.8 5.7 3.1 3.0

Wholesale and retail trade; repair of motor vehicles, motor bikes, household items and personal articles 13,334 24,456 25,379 58.5 183.4 103.8 11.6 12.8 16.4

Real estate business, leasehold, and provision of services 7,341 9,237 10,035 92.5 125.8 108.6 6.4 4.8 6.5

Financial business 37,913 86,885 43,395 1426.3 229.2 49.9 33.0 45.6 28.1

Other industries 2,024 2,977 1,938 111.8 148.1 65.1 1.8 1.6 1.2

Source: Federal State Statistics Service of Russia.

The secondary industry was leading in terms of growth within the structure of foreign investments in the industrial production sector in 2012. Investments in secondary industry sectors increased by 19.8% against 2011 (a growth of 23.9% in 2011). Foreign investments in the mineral production sector decreased by 2.6% (a growth of 34.5% in 2011).

In the secondary industry, investments in the production of coke and oil products increased by 22.4% and in the metallurgical industry by 42.2%, reaching $19.4bn and $13.1bn, respectively (in 2011, investments in production of coke and oil products increased by 19.4% and in the metallurgical industry by 21.1%). In 2012, foreign investments in chemical and food manufacturing industries decreased by 31.8% and 6.6%, to $3.0bn and $2.9bn, respectively,

against 2011 (in 2011, foreign investments in these sectors doubled and increased by 10.6%, respectively).

2012

2011

2010

2009

2008

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Mineral production sector □ Chemical industry □ Metallurgical industry

Food production sector ■ Production of coke and oil products □ Other industries

Source: Federal State Statistics Service of Russia.

Fig. 31. Structure of foreign investments in the industrial production sector in 2008-2012

Portfolio and other investments in the industrial production sector increased by 2.2 times and 14.3% in 2012 against 2011 (in 2011, portfolio investments in the industrial production sector increased by 39.9%, other investments grew up by 26.4%). Direct investments in the industrial production sector increased slightly by 1.0% (2011 saw a growth of 40.6%). Thus, other investments in the industrial production sector increased from 83.5% in 2011 to 84.3% in 2012, portfolio investments increased from 0.9% to 1.8%, whereas direct investments decreased from 15.7% to 14.0%, respectively, at that period.

Changes were noted in the structure of foreign investments by type of economic activity in the industrial production sector of economy. In 2012, direct investments in the mineral production sector reduced by 23.7% to $3.5bn, thereby shrinking their share to 19.4% in total investments in this industry (against 24.8% in 2011). Other investments in the mineral production sector, which increased by 4.9% to amount to $14.6bn in 2012, increased to 80.2% (against 74.4% in 2011).

Other investments dominated in the secondary industry in 2012. They were increased by 17.1% against 2011 to finally account for 86.3% of investments in the secondary industry (against 88.3% in 2011). Direct foreign investments in secondary industry sectors increased by 21.7%. In 2012, direct investments accounted for 11.6% of the secondary industry (against 11.4% in 2011). Portfolio investments increased by 8.7 times, their share grew up to 2.1% in secondary industry sectors (against 0.3% in 2011).

Changes in the list of countries as large suppliers of capital to the Russian Federation come under notice in the geographic structure of foreign investments in the economy of Russia in 2012. The biggest inflow of investments in the Russian Federation, more than $44bn, came from Switzerland, $21.1bn from the Netherlands in 2012. At the year-end (2012), the list of top-3 leading suppliers of capital in the Russian Federation also included Cyprus who invested $16.5bn in the economy of Russia.

In 2012, investments from Luxemburg showed the highest growth, 2.5 times against 2011, investments from the Netherlands increased by 25.6%, investments from Great Britain grew

26,2% 4,3% 19,0% 4,2% 28,0% 18,3%

30,5% 7,1% 15,1% ,1% 25,9% 16,3%

29,1% 4 ,7% 16,0% 5,9 % 27,9% 16,4%

31,3%

,8% 13,6%

16,2%

26,9%

24,9%

6%

26,2%

up by 2.9%. Investments from China decreased by 60.8%, investments from Cyprus, Germany, and France declined by 18.8%, 29.8%, and 3.7%, respectively. The difference in dynamics of investments resulted in changes in the geographic structure of foreign investments in the economy of Russia.

0,5%

2,7%

2012

2011

2010

2009

2008

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cyprus □ Germany

Great Britain USA

The Netherlands Switzerland

Luxemburg France

China

Other countries

Source: Federal State Statistics Service of Russia. Data on investments from the United States in 2009 thru 2012, from China in 2008, from Switzerland in 2008 thru 2010 are included into other investments.

Fig. 32. Geographic structure of foreign investments in the economy

of Russia in 2008-2012

As of the year-end (2012), accumulated foreign capital, net of monetary authorities, commercial and saving banks, including ruble investments converted into US dollars, amounted to $362.4bn, thereby showing a growth of 4.4% against the beginning of 2012. Direct accumulated investments reduced by 2.3%, whereas other investments increased by 9.8% from the beginning of the year.

As of the year-end (2012), Cyrus, the Netherlands, Luxemburg, China, and Great Britain were leaders accounting for 65.0% of total accumulated foreign investments (against 63.5% in 2011). The top-5 countries as investors accounted for 69.1% of other investments (against 63.2% in 2011), 58.9% of the structure of direct investments, and 59.5% of the structure of portfolio investments (against 66.9% and 22.1%, respectively, in 2011).

Other investments prevailed in the structure of accumulated foreign investments at the year-end (2012), accounting for 60.1% of the same (against 57.1% in 2011). Direct foreign investments accounted for 37.5% of the structure of accumulated foreign investments (against 40.1% in 2011).

4.4. The oil and gas sector

The oil and gas industry remains the primary sector of the Russian economy playing a leading part in shaping state budget revenues and the trade balance of the country. By 2012, the continued high levels of world oil and gas prices had had a positive effect on the development of the oil and gas sectors of the Russian economy. This has ensured high revenues for Russian oil and gas companies and considerable state budgetary income. Oil production in

Russia had reached its maximum level for a period since 1990. At the same time, there had been an observed deterioration in the conditions for oil extraction as well as a decline in oil production from "old" oil fields and considerably higher costs relating to the development of new ones, especially in regions with no infrastructure. In these circumstances additional measures have been taken on tax incentives for the development of new oil fields. At the same time, the tax burden on the gas sector has been raised.

4.4.1. The dynamics of world prices for oil and gas

The situation in the world oil market in 2012 was characterised by the persistence of high world oil prices. The average price for Brent crude oil in 2012 was 112.0 USD/bbl while the price for Russian Urals oil on the world (European) market was 110.3 USD/bbl which was higher than the previous year (Table 19, Fig. 32). The main factors explaining the high prices are the increase in oil demand (Table 20) due to growth in the world economy, primarily, the economies of China, India and other Asian countries, sufficiently restrained OPEC policy with regard to increase of oil production by member states, the low growth rates of oil production outside of OPEC and geopolitical risks. In 2012 the aggregate oil production quota for OPEC members was 30 million barrels per day, including Iraq which had not been subject to such limitations before, and to Lebanon (this quota actually corresponded to the level of oil production reached by OPEC in 2011). Despite some overproduction by OPEC countries above the official quota, the world oil market was generally balanced and the average oil production by OPEC countries in 2012 (31.4 million barrels per day) was lower than the 2008 level (31.6 million barrels per day). At the end of 2012 oil production by OPEC countries was close to the official quota and in December reached 30.4 million barrels per day.

Table 19

World oil prices in 2000-2012, USD/bbl

2000 2005 2006 2007 2008 2009 2010

Brent oil price, UK 28.5 54.4 65.2 72.5 97.7 61.9 79.6

Urals oil price, Russia 26.6 50.8 61.2 69.4 94.5 61.0 78.3

cont'd

2011 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Brent oil price, UK 111.0 118.5 108.9 110.0 110.4 112.0

Urals oil price, Russia 109.1 116.9 106.5 109.0 108.8 110.3

Source: IMF, OECD/IEA.

Table 20

World oil prices in 2000-2012, % change compared with relevant year

2008 2009 2010 2011 2012

World, total -0.6 -1.2 3.1 0.9 1.1

OECD countries, including: -3.6 -4.2 1.3 -0.8 -0.9

North America -5.2 -3.7 2.0 -0.3 -1.0

Europe -0.6 -4.7 -0.3 -2.3 -3.6

Asian and Pacific region -4.0 -4.6 1.8 0.4 4.2

Non-members of OECD, including: 3.3 2.5 5.2 3.0 3.3

Asia (excluding Middle East countries and former USSR countries) 1.7 4.4 7.9 3.2 3.3

Source: OECD/IEA.

150 140 130 120 110 100 90 80 70 60 50 40 30 20

Source: Ministry of Economic Development in Russia.

Fig. 33. Prices for Urals oil 2008-2012, USD/bbl

The prices for Russian natural gas on the European market were also quite high, exceeding the level of the preceding year. Prices for natural gas supplied under long-term contracts are determined on the basis of the prices for energy sources which are alternatives to natural gas (mainly, gasoil/diesel fuel and residual oil), and these depend on world oil prices. As a result, world gas prices follow, with a certain lag, world oil prices. The price for Russian natural gas on the European market reached its peak in 2008 while the price minimum occurred in 2010. In 2011-2012, under the conditions of increasing world oil prices, the price for Russian gas on the European market increased considerably (Table 21). At the same time, the changing circumstances in the European gas market had a reducing effect on Russian gas prices. In particular this was the increased gas supply from other gas producing countries (especially due to the considerable growth of supply of compressed natural gas) and the lower level of spot-prices for gas, compared to the prices under Gazprom's long-term contracts (Table 22). This forced Gazprom to reduce its gas prices on the European market.

Table 21

World prices for oil and natural gas in 2002-2012

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Average world oil price, USD/bbl 24.95 28.89 37.76 53.4 64.3 71.1 97.0 61.8 79.0 104.0 105.0

Price for Russian natural gas on the European market, USD/thousand cubic metres 96.0 125.5 135.2 212.9 295.7 293.1 473.0 318.8 296.0 381.5 431.3

Source: IMF.

Table 22

Price for Russian natural gas on the European market in 2011-2012, USD/thousand cubic metres

2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4

Price for Russian natural gas on the European market 329.4 360.6 401.0 434.9 444.7 452.4 409.9 418.2

Spot-price for Russian natural gason the European market, Austria 333.6 357.5 344.5 334.2 355.1 350.0 333.7 361.0

Source: IMF, CEGH.

4.4.2. The dynamics and structure of production in the oil and gas industry

The fast growth of oil production in Russia in the first half of 2000 (in 2002-2004 the oil production growth rate reached 8.9-11% per year) was associated with the expansion of oil export opportunities (in particular, due to the creation of the Baltic Pipeline System), intensification of development of existing deposits (in particular, due to the application of the foreign technologies of horizontal drilling and hydraulic fracturing treatment) and expansion of the investment capabilities of oil companies due to the growth in world prices. In later years, oil production growth rates slowed substantially, while in 2008 a shrinkage was observed (Tables 23, 24). This was an indication of the exhaustion of the capacity to increase the country's oil production due to the intensification of development of existing deposits which evidenced the necessity for more proactive development of new oil fields.

In 2012, against a background of high world prices, oil production in Russia reached 518 million tons, which was the maximum level since 1990. The dynamics of oil production were influenced positively by the start-up, in recent years, of several new large deposits in Eastern Siberia (the Vankorskoe, Talkanskoe and Verkhnechonskoe deposits) and in the north of the European part of the country (the Yuzhno-Khylchuyusskoe deposit), as well as by changes in the taxation system, aimed at reducing the tax burden on the oil sector, stimulating further development of existing deposits and the development of new extraction fields.

The reduction in the growth rate of oil production, which has been observed recently, can be explained, primarily, by the objective worsening of the conditions of its extraction. A considerable part of the existing deposits have entered a declining production phase and new deposits are mostly characterised by poorer mining, geological and geographical parameters. Their development requires higher capital, operational and transportation costs.

Table 23

Oil production and refining in the Russian Federation in 2000-2012

2000 2005 2006 2007 2008 2009 2010 2011 2012

Oil production, including gas condensate, million tons 323.2 470.0 480.5 491.3 488.5 494.2 505.1 511.4 518.0

Primary oil processing, million tons 173.0 208.0 220.0 229.0 236.3 236.0 249.3 258.0 270.0

Oil refining to oil production ratio, % 53.5 44.3 45.8 46.6 48.4 47.8 49.4 50.4 52.1

Depth of crude oil refining, % 71.0 71.6 71.9 71.7 72.0 71.9 71.1 70.8 71.5

Source: Rosstat (Russian Statistics Agency), Ministry of Energy of the RF.

At the same time, in 2012 the growth rates for oil refining remained higher than those for oil production, mainly due to the higher growth rates in exports of oil products, stimulated by lower export duties compared to those on crude oil. In 2005-2012 the growth rates for primary crude oil processing were 3.2-6.2% per year (except for 2009) while oil production growth rates were only 0.8-2.2% per year (excluding 2008). As a result, the oil refining to oil production ratio increased from 42.5% in 2004 to 52.1% in 2012. However, oil refining depth showed practically no increase during this period and was only 71.5% in 2012 (which closely corresponds to the 2005 level).

If we consider a longer period, it can be stated that despite the programme goal set by the government of increasing the oil refining depth, at the moment this figure actually remains close to the pre-reform level (in 1990 the oil refining depth in Russia was 67%) and it is still considerably lower than in developed countries, where the depth of oil refining reaches 90-

95%. The quality of refined oil products produced in Russia is also substantially lower than elsewhere in the world. Modernisation of the oil refining industry is one of the most relevant objectives in the development of the oil sector of the Russian economy.

Table 24

Production of crude oil, oil products and natural gas in 2000-2012,

% to the preceding year

2000 2005 2006 2007 2008 2009 2010 2011 2012

Crude oil, including gas condensate 106.0 102.2 102.1 102.1 99.3 101.2 102.1 100.8 101.3

Primary crude oil refining 102.7 106.2 105.7 103.8 103.2 99.6 105.5 103.3 104.9

Petrol 103.6 104.8 107.4 102.1 101.8 100.5 100.5 102.0 104.3

Diesel fuel 104.9 108.5 107.0 103.4 104.1 97.7 104.2 100.3 98.7

Residual oil 98.3 105.8 104.5 105.2 101.9 100.8 108.5 104.6 101.6

Natural gas 98.5 100.5 102.4 99.2 101.7 87.9 111.4 102.9 97.7

Source: Rosstat (Russian Statistics Agency), Ministry of Energy of the RF.

The largest oil volumes in 2012 were produced by the following oil companies: Rosneft, LUKOIL, TNK-BP, Surgutneftegaz and Gazprom. The share of these five companies was 73.8% of the country's total oil production. The share of medium-sized companies (Tatneft, Slavneft, Bashneft and RussNeft) was 14.3% of the total oil production. Operators of Production-Sharing Contracts produced 2.7% of Russian oil in 2012. The share of other producers, which includes over 100 small oil producing companies, accounted for 8.5% (Table 25).

In October 2012 the state oil company Rosneft announced its acquisition of the TNK-BP oil company, which was previously owned by a Russian consortium, AAP and the British company, BP. The total amount of the transaction, which is to be completed in the first half of 2013, is USD 61 billion. Upon completion of the transaction, in addition to its monetary consideration, BP is supposed to obtain 18.5% of Rosneft shares. As a result, BP's share in the Rosneft share capital will be 19.75% (taking into account the 1.25% of Rosneft shares already owned by BP).

The acquisition of TNK-BP by Rosneft is the largest transaction in the oil and gas sector. Before that, the biggest transaction was the 2005 acquisition by Gazprom of 75.7% of Sibneft shares, for USD 13.1 billion (after the takeover by Gazprom, Sibneft was renamed Gazprom Neft).

Table 25

Oil production structure in 2008-2012

Oil production in 2008, million tons Share in total production, % Oil production in 2010, million tons Share in total production, % Oil production in 2011, million tons Share in total production, % Oil production in 2012, million tons Share in total production, %

1 2 3 4 5 6 7 8 9

Russia, total 488.5 100.0 505.1 100.0 511.4 100.0 518.0 100.0

Rosneft 113.8 23.3 112.4 22.3 114.5 22.4 117.5 22.7

LUKOIL 90.2 18.5 90.1 17.8 85.3 16.7 84.6 16.3

TNK-BP 68.8 14.1 71.7 14.2 72.6 14.2 72.5 14.0

Surgutneftegaz 61.7 12.6 59.5 11.8 60.8 11.9 61.4 11.9

Gazprom + Gazprom Neft 43.4 8.9 43.3 8.6 44.8 8.8 46.1 8.9

including: Gazprom 12.7 2.6 13.5 2.7 14.5 2.8 14.5 2.8

Gazprom Neft 30.7 6.3 29.8 5.9 30.3 5.9 31.6 6.1

Tatneft 26.1 5.3 26.1 5.2 26.2 5.1 26.3 5.1

Slavneft 19.6 4.0 18.4 3.6 18.2 3.6 17.9 3.5

Bashneft 11.7 2.4 14.1 2.8 15.1 3.0 15.4 3.0

cont'd

1 2 3 4 5 6 7 8 9

RussNeft 14.2 2.9 13.0 2.6 13.6 2.7 13.9 2.7

NOVATEK 2.7 0.6 3.8 0.8 4.1 0.8 4.2 0.8

Operators of Production-Sharing Contracts 12.0 2.5 14.4 2.9 15.1 3.0 14.1 2.7

Other producers 24.1 4.9 38.2 7.6 41.1 8.0 44.1 8.5

Source: Ministry of Energy of the RF, IEP calculations.

As a result of the acquisition of TNK-BP, which (including its share in Slavneft) accounts for 15.7% of the total oil production in Russia, Roseft will have considerably strengthened its positions in the Russian oil sector and it will have become one of the largest oil companies in the world. The company's oil production (taking into account its share in other companies' production) will account for about 200 million tons per year, or 38.7% of Russia's total oil production.

The state sector will be considerably expanded. In general, after Rosneft's acquisition of TNK-BP the share of state companies in Russia's overall oil production will increase to 48.1% (Table 26). Note that in 2003, i.e. before Rosneft and Gazprom acquired the assets of the private oil companies YUKOS and Sibneft, and before Gazprom entered into the Sakhalin-2 project, the share of state companies in overall Russian oil production had been only 7.3%.

Table 26

Share of state companies in Russia's oil production, including Rosneft's acquisition of TNK-BP, 2012

Oil production, million tons Share of total oil production, %

Rosneft, including TNK-BP 190.0 36.7

Share of Rosneft and TNK-BP in oil production of other companies (Slavneft, Sakhalin-1) 10.4 2.0

Rosneft, including TNK-BP and the share of Rosneft and TNK-BP in oil production of other companies 200.4 38.7

Gazprom, including Gazprom Nefft 46.1 8.9

Share of Gazprom in oil production of other companies (Sakhalin-2) 2.8 0.5

Gazprom, including Gazprom Nefft and the share of Gazprom in oil production of other companies 48.9 9.4

State companies, total 249.3 48.1

Source: Ministry of Energy of the RF, IEP calculations.

Table 27

Gas production structure in 2008-2012

Gas production in 2008, billion cubic metres Share of total gas production, % Gas production in 2010, billion cubic metres Share of total gas production, % Gas production in 2011, billion cubic metres Share of total gas production, % Gas production in 2012, billion cubic metres Share of total gas production, %

Russia, total 664.9 100.0 665.5 100.0 687.5 100.0 671.5 100.0

Gazprom + Gazprom Neft 553.1 83.2 513.9 77.2 519.0 75.5 489.4 72.9

including: Gazprom 550.9 82.9 509.0 76.5 510.1 74.2 478.5 71.3

Oil companies 54.8 8.2 66.6 10.0 69.1 10.1 71.1 10.6

NOVATEK 30.8 4.6 37.8 5.7 53.5 7.8 51.3 7.6

Operators of Production-Sharing Contracts 8.5 1.3 23.3 3.5 25.2 3.7 26.8 4.0

Other producers 17.6 2.6 23.9 3.6 20.7 3.0 32.9 4.9

Source: Ministry of Energy of the RF, IEP calculations.

As for gas production, Gazprom has traditionally remained the leader. However, its share in overall gas production in Russia has considerably declined over recent years: from 83.2% in 2008 to 72.9% in 2012 (Table 27) while the ratio of other producers (the oil companies, NOVATEK, operators of Production-Sharing Contracts and other producers) in total gas production has increased. The share of state companies in overall Russian gas production in 2012 was 75.9%. After Rosneft's acquisition of TNK-BP, the share of state companies will increase to 79.6% of total Russian gas production (Table 28).

Table 28

Share of state companies in gas production in Russia, including Rosneft's acquisition of TNK-BP, 2012

Gas production, billion cubic metres Share of total gas production, %

Gazprom, including Gazprom Neft 489.4 72.9

Rosneft, including TNK-BP 35.9 5.3

Share of Gazprom and Rosneft in production of other companies (Slavneft, Sakha-lin-1, Sakhalin-2) 9.3 1.4

State companies, total 534.6 79.6

Source: Ministry of Energy of the RF, IEP calculations.

4.4.3. The dynamics and structure of oil and gas exports

Along with growth in oil production a significant increase in oil exports has been observed: according to preliminary estimates the net export of crude oil and oil products in 2012 increased to 375.7 million tons and the ratio of the net export of crude oil and oil products to oil production was 72.5% (Table 29, 30). The growth in oil exports was achieved due to the increased export of oil products (up by 4.4% compared to 2011) while crude oil exports declined (by 1.8%). The proportion of produced crude oil which was exported in 2012 decreased to 46.3%. At the same time, the share in exports of residual oil products in 2012 was 91.0% and for diesel fuel it was 59.4%. Under the influence of restrictive export duty, petrol exports declined in 2012 by 16.5% and the proportion of product petrol which was exported decreased to 8.4% (for comparison: the share of exports in production of petrol was 7.2% in 1999, 18.5% in 2005, 8.2% in 2010, and 10.6% in 2011). Meanwhile, 2012 saw a substantial reduction in imports of oil products (by 63.3% compared to 2011) and a reduction of the proportion of imports to supply domestic demand. Along with a considerable increase in domestic production, the proportion of petrol imported decreased from 2.6% in 2011 to 0.5% in 2012 (for comparison: the proportion of petrol imported was 8.7% in the first half of 1998, 0.7% in 2008 and 1.4% in 2010). The proportion of imported diesel fuel decreased from 1.1% in 2011 to 0.3% in 2012.

Table 29

Export of crude oil, oil products and natural gas from Russia in 2002-2012,

% of the preceding year

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Crude oil, total 113.9 117.8 115.0 98.4 98.0 104.0 94.0 101.8 101.2 97.6 98.2

including: to non-CIS members 109.9 118.9 116.3 99.1 98.0 104.8 92.6 102.9 106.1 95.7 98.7

Oil products, total 118.5 103.6 105.5 117.9 106.3 108.0 105.0 105.3 106.2 98.5 104.4

including: to non-CIS members 119.1 102.6 104.9 119.1 104.5 107.6 102.0 107.1 109.6 94.6 100.8

Gas, total 102.4 102.0 105.5 103.7 97.6 94.6 101.8 86.2 105.6 104.0 96.6

Source: Rosstat (Russian Statistics Agency).

Exports of natural gas in 2012 declined by 3.4% compared to the preceding year. The main reason for the decrease in gas exports in recent years has been the reduction of supplies to Europe, where the share of supply from other gas producing countries has significantly increased. As a result, in 2012, compared to 2006 when the maximum supply volume of Russian gas to Europe was reached, exports of Russian gas to non-CIS countries declined by 30.4%. At the same time, the ratio of net exports compared to gas production decreased from 31.4% in 2005 to 26.0% in 2012.

Table 30

Correlation of oil and natural gas production, consumption and export in 2000-2012

2000 2005 2006 2007 2008 2009 2010 2011 2012

Oil, million tons

Production 323.2 470.0 480.5 491.3 488.5 494.2 505.1 511.4 518.0

Export, total 144.5 252.5 248.4 258.4 243.1 247.4 250.4 244.6 239.9

Export to non-CIS countries 127.6 214.4 211.2 221.3 204.9 210.9 223.9 214.4 211.6

Export to CIS-countries 16.9 38.0 37.3 37.1 38.2 36.5 26.5 30.2 28.4

Net export 138.7 250.1 246.1 255.7 240.6 245.6 249.3 243.5 238.9

Domestic consumption 123.0 123.1 131.2 124.1 130.4 125.3 125.9 140.7 142.3

Net export as a % of production 42.9 53.2 51.2 52.0 49.3 49.7 49.4 47.6 46.1

Oil products, million tons

Export, total 61.9 97.0 103.5 111.8 117.9 124.4 132.2 130.6 138.0

Export to non-CIS countries 58.4 93.1 97.7 105.1 107.6 115.4 126.6 120.0 121.0

Export to CIS-countries 3.5 3.9 5.8 6.7 10.3 9.0 5.6 10.6 17.0

Net export 61.5 96.8 103.2 111.5 117.5 123.3 129.9 127.2 136.8

Oil and oil products, million tons

Net export of oil and oil products 200.2 346.9 349.3 367.2 358.1 368.9 379.2 370.7 375.7

Net export of oil and oil products as a % of oil production 61.9 73.8 72.7 74.7 73.3 74.6 75.1 72.5 72.5

Natural gas, billion cubic metres

Production 584.2 636.0 656.2 654.1 664.9 596.4 665.5 687.5 671.5

Export, total 193.8 207.3 202.8 191.9 195.4 168.4 177.8 184.9 178.7

Export to non-CIS countries 133.8 159.8 161.8 154.4 158.4 120.5 107.4 117.0 112.6

Export to CIS-countries 60.0 47.5 41.0 37.5 37.0 47.9 70.4 67.9 66.0

Net export 189.7 199.6 195.3 184.5 187.5 160.1 173.5 180.6 174.4

Domestic consumption 394.5 436.4 460.9 469.6 477.4 436.3 492.0 506.9 497.1

Net export as a % of production 32.5 31.4 29.8 28.2 28.2 26.8 26.1 26.3 26.0

Source: Rosstat (Russian Statistics Agency), Ministry of Energy of the RF, Federal Customs Service, IEP calculations.

Crude oil export was still dominant in the oil export structure, accounting for 63.6% of the total crude oil and oil product exports in 2012. The major part of the export of oil products was comprised of residual oil and diesel fuel. The major part of energy resources (88% of crude oil and oil products and 63% of gas) was exported outside the CIS.

Analysis of the trends in Russian oil exports over a long period shows a strengthening of the export orientation of the oil sector, compared to the pre-reform period. The ratio of net exports of crude oil and oil products to oil production increased from 47.7% in 1990 to 72.5% in 2012. However, we should take into account that this is connected not only with an increase in absolute export volume but also with a substantial reduction of domestic oil consumption due to the market transformation of the Russian economy and the substitution of residual oil by natural gas. At the same time an increase in the share of oil products in oil exports can be noted: it increased from 18.2% in 1990 to 36.4% in 2012 (Table 31). However, due to the low depth of oil refining the major part of Russian oil product exports is represented by residual oil, which is used in Europe as a raw material for further refining and the pro-

duction of light petroleum products. In 2012 the share of residual oil in the total export of oil products was 55.1%.

Table 31

Net export of oil products in 2002-2012

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Net export of oil products, million tons 74.8 78.2 81.4 96.8 103.2 111.5 117.5 123.3 129.9 127.2 136.8

Share of oil products in net export of crude oil and oil products, % 29.2 26.8 24.3 27.9 29.5 30.4 32.8 33.4 34.3 34.3 36.4

Source: Rosstat (Russian Statistics Agency), Federal Customs Service, IEP calculations.

An increase in world oil prices and the growth of exports growth has resulted in an increase in revenues in the oil sector of the economy (Fig. 34, 35). The aggregate revenues from the export of crude oil and primary oil products (petrol, diesel fuel and residual oil) reached USD 269.1 billion in 2012, which is a record for the entire reforming period (Table 32). For comparison, it should be noted that the minimum level of income from oil exports was in 1998, when world oil prices were falling, and the revenues from crude oil and oil product exports was only USD 14 billion.

Table 32

Revenues from crude oil and oil products export in 2000-2012, billion USD

2000 2005 2006 2007 2008 2009 2010 2011 2012

Revenue from export of crude oil and main types of oil products 34.9 112.4 140.0 164.9 228.9 141.2 193.9 259.5 269.1

Source: calculated based on data of Rosstat (Russian Statistics Agency).

As a result of the growth of world oil and gas prices, and the increase in the physical volumes of export of oil products and coal, the share of fuel and energy products in Russian exports reached 70.4% in 2012, with the share of crude oil being 34.5%, and of natural gas, 12.0% (Table 33).

Table 33

Amount and ratios of exports of fuel and energy products

in 2005-2012

2005 2010 2011 2012

billion USD %* billion USD %* billion USD %* billion USD %*

Fuel and energy goods, total: 154.7 64.1 267.7 67.5 357.2 69.2 369.4 70.4

including: oil 83.8 34.7 134.6 34.0 179.1 34.7 180.9 34.5

natural gas 31.4 13.0 47.6 12.0 63.8 12.4 63.0 12.0

* As a % of the total volume of Russian exports. Source: Rosstat (Russian Statistics Agency).

1000 -|

950 -

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100 -50 0

II|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIII|iiii|IIII|IIII|IIII|IIII|IIII|IIII|IIII|IIIII oooooooooooooooooooooooo^^^^^^^^

I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I

•oil

-fuel oil

Source: calculated based on data of Rosstat Rosstat (Russian Statistics Agency).

Fig. 34. Average export prices for oil and residual oil in 2000-2012, 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

28000,00 26000,00 24000,00 22000,00 20000,00 -- 18000,00 -- 16000,00 -- 14000,00 -- 12000,00 -- 10000,00 8000,00 6000,00 4000,00 2000,00 0,00

■million tons (left scale)

•million USD (right scale)

Source: calculated based on data of Rosstat (Russian Statistics Agency).

Fig. 35. Export of crude oil and oil products in physical and monetary terms in 2000-2012

4.4.4. Trends in the prices for energy goods on the internal market

Prices for oil and oil products in the Russian domestic market are based on world prices for these goods, reflecting the equal profitability of supplies to the external and internal markets, i.e. as the net back price is equal to the world price, less export customs duty and export transportation costs. Since the export duty rate has increased to a lesser extent than the world price (for example, the maximum growth of the export duty rate is only 65% of the growth in the price of Urals oil), an increase in world prices inevitably leads to increases in internal prices. The same was observed in 2012, when, under the influence of world prices, the prices for oil and light petroleum products on the domestic market grew as well. However, these prices remain below the maximum values reached in July 2008 when the average domestic oil price (producers' price) reached USD 410.2 USD per ton and the average price for petrol reached USD 810.3 per ton. At the end of 2008 and at the beginning of 2009, with declining world oil prices, a considerable reduction of the domestic prices for crude oil and oil products (in USD) was observed, however, thereafter due to the growth of world prices the domestic prices for crude oil and oil products grew substantially (Table 34, Fig. 36, 37).

Table 34

Domestic prices for crude oil, oil products and natural gas in USD in 2000-2012

(average producers' prices, USD/ton)

December December December December December December

2000 2005 2006 2007 2008 2009

Crude oil 54.9 167.2 168.4 288.2 114.9 219.3

Petrol 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

Residual oil 79.7 142.7 148.8 276.5 125.0 250.8

Gas, USD/thousand cubic 3.1 11.5 14.4 17.6 18.1 16.9

metres

cont'd

December June December June December

2010 2011 2011 2012 2012

Crude oil 248.2 302.7 303.3 281.8 341.1

Petrol 547.9 647.7 576.9 542.3 628.7

Diesel fuel 536.1 605.2 644.9 597.1 774.2

Residual oil 246.3 308.8 274.6 276.8 275.3

Gas, USD/thousand cubic 20.5 26.8 21.3 28.8 40.3

metres

Source: calculated based on data of Rosstat (Russian Statistics Agency).

Meanwhile, domestic oil prices in Russia still remained lower than world prices. For instance, in 2012 the internal oil price (producers' price) was, on average, only 46.4 USD/bbl, or 42.1% of the world price (Urals oil price on the European market). The gap in the levels of world and domestic prices is the result of the existence of export customs duty and the additional transportation costs relating to exports. Domestic prices for gas remain under state regulation. In order to ensure competitiveness of the national economy the government supports a considerably lower level of domestic gas prices compared to the rest of the world. In the IV quarter of 2012 the internal gas price (the purchase price for industrial consumers without indirect taxes) was only about 26% of the Russian gas price on the European market.

500 n 450 400 350 300 250 200 150 100 50 0

r 80

-- 75 -- 70 i-l- 65 60 55 50 45 ■- 40 35 30 25 20 15 10 5 0

Source: calculated based on data of Rosstat (Russian Statistics Agency).

Fig. 36. Average producers' prices for oil and gas in USD in 2000-2012, USD/ton,

USD/thousand cubic metres

Source: calculated based on data of Rosstat (Russian Statistics Agency).

Fig. 37. Average producers' prices for petrol and residual oil in USD in 2000-2012, USD/ton

4.4.5. Tax regulation of the oil and gas sector

Changes in the taxation system, aimed at reducing the tax burden and encouraging further development of existing deposits and the development of new oil fields, have had a positive

impact on the oil industry Since 2009 a non-taxable price minimum used in the formula for calculation of the coefficient Cp, which reflects the dynamics of world oil prices and applies to the basic MET (Mineral Extraction Tax) rate for oil production, was raised from 9 USD/bbl to 15 USD/bbl (Table 35), which led to a considerable reduction of the MET rate applied to oil production. Furthermore, the requirement for the use of a direct accounting method for oil extracted from specific deposits in order for them to be eligible for the application of a reduced coefficient for the MET rate (Cw) was abolished for deposits with a high degree of resource depletion. This enabled all depleted deposits to benefit from the exemption, which, in turn, stimulated the extension of operation periods and additional oil production.

Table 35

MET rates applied to oil production in 2005-2013

2005 2006 2007 2008 2009 2010 2011 2012 2013

Basic MET rate in oil production, rub/ton 419 419 419 419 419 419 419 446 470

Coefficient reflecting the dynamics of world oil prices (Cp) (P-9)xR/261 (P-15)xR/261

Coefficient reflecting the degree of deposit depletion (Cw) - 3.8 - 3.5 x N/V

Coefficient reflecting the deposit's reserves (Cr) - 0.125xV3 + 0.375

Symbols: P - the average Urals oil price level in USD per barrel over the tax period; R - the average USD/RUR exchange rate set by the Central Bank of the RF over the tax period; N - cumulative amount of oil extracted from the deposit; V - initially extractable oil reserves of categories A, B, C1 and C2 in the deposit; V3 - initially ex-tractable oil reserves of the deposit, million tons.

Source: Tax Code of the RF (revision 2005-2012), Federal Law No.158-FZ dated 22.07.2008, Federal Law No.151-FZ dated 27.07.2006, Federal Law No.33-FZ dated 07.05.2004.

In order to stimulate development of the oil fields located in underdeveloped regions with no infrastructure MET tax holidays were introduced. The mechanism of MET tax holidays is the application of a zero tax rate for the period until a certain cumulative oil production volume is reached, or for a specified period from the date of state registration of the licence for the use of subsurface resources. This speeds up the return on capital investments and ensures the required yield on investments in the development of new oil fields.

The first region where the tax holiday mechanism was applied was the Eastern Siberian oil and gas province in the Sakha (Yakutia) Republic, Irkutsk oblast and Krasnoyarsk krai where, since 2007 a zero MET rate has been set for the period until the cumulative oil production volume reaches 25 million tons, provided that the development of the reserves does not exceed 10 years; or for periods from the date of state licence registration of 10 years, for a licence for the development of subsurface resources, and 15 years for a licence for the use of subsurface resources both for geological studies (exploration and development) and production.

For the purpose of further stimulation of development of fields in the Eastern Siberian oil and gas province the Government of the RF has set zero export duty rates for oil fields located in this regions since 1 December 2009. These rates were applied until 1 July 2010. Thereafter the Government started applying reduced export duty rates to oil extracted in this region.

Starting from 2009, MET tax holidays were also introduced for new oil deposits located in the Nenets Autonomous Okrug and on the Yamal Peninsula, on the continental shelf to the north of the Arctic Circle as well as in the Caspian and Azov Seas. From December 2010 reduced export duty rates also began to apply to deposits located in the Caspian Sea.

Since the beginning of 2012 a number of changes in the taxation of the oil and gas sector have come into force. In order to promote the development of small oil fields a specialpurpose reduction coefficient reflecting the size of the reserves in the relevant deposit (Cr) was introduced for the MET rate for oil production in 2012. This coefficient is calculated using a specific formula (see Table 35) and is applied to deposits with initially recoverable oil reserves of up to 5 million tons and a reserve depletion of up to 0.05. Prior to this, the procedure for calculating MET on oil production had not provided for tax differentiation depending on the size of the oil reserves in the deposit and, as a result, the development of small oil fields usually turned out to be uneconomic due to the high capital and operational costs. The application of the special decreasing coefficient, Cr, to the MET rate should create conditions for the development of new small deposits which would be unprofitable under the general system of taxation.

Within the framework of implementation of the policy for encouraging the development of new production regions the MET tax holiday regime was extended to new oil fields located in the Yamal-Nenets Autonomous Okrug, to the north of the 65th parallel north. For subsurface sites located in this region, with the exception of those located on the Yamal Peninsula, the same parameters of tax holidays as for the Vostochny region were set. Since 2012 the MET tax holiday regime has also been applied to oil fields located in the Black Sea and the Sea of Okhotsk. These decisions should create the necessary economic conditions for the development of the deposits of the Yamal-Nenets Autonomous Okrug, the Black Sea and the Sea of Okhotsk, which are uneconomic under the common system of taxation due to the necessity for large volumes of capital investment needed for the creation of the infrastructure and the special conditions relating to the development of deposits located in these regions.

In 2012 the mechanism of application of reduced export duty rates to new deposits in Eastern Siberia, the Yamal-Netets Autonomous Okrug and the Nenets Autonomous Okrug was legally approved. Such an approach had already been applied in practice: reduced export duty rates were envisaged for deposits in Eastern Siberia, the Caspian Sea, and the Prirazlomnoe field on the Arctic shelf, for high-viscosity oil, although the mechanism for setting such rates was not legally approved.

Considerable undeveloped reserves of oil and gas are located on the continental shelf of the Russian Federation. However, the development of offshore deposits requires extremely high capital and operational costs and under the common system of taxation these would not provide a return on the investments required, so this has impeded the development of these fields. In 2012 the Ministry of Energy of the RF developed a concept for the taxation of hydrocarbon extraction from the Russian continental shelf which provides for special preferential tax treatment for the development of subsea fields. It was proposed to base this tax regime on a reduced ad valorem MET rate, differentiated on the basis of the shelf zone and the standard tax rate. It has been suggested that export duty should not be charged on export products within the offshore project framework.

Within the framework of an effective tax system, a differential reduction of MET rates and of export duty rates for certain regions characterised by high development costs is, in principal, justified because this enables investors gain the necessary return on investments in the development of new fields. At the same time, the tax holidays and reduced rate mechanisms applied for these purposes, which are simple from the point of view of tax administration, are far from perfect. For all fields within a certain region (the shelf zone) a unified, averaged approach is applied where no account is taken of the considerable differences in costs relating to

development of specific fields in the region. As a result, for deposits having the highest costs, an "average" tax burden turns out to be extremely high and these deposits are not being developed.

A better form of taxation for oil production, as applied in developed countries, is the taxation of additional (net) income. This approach ensures automatic differentiation of the tax burden depending on the specific conditions of oil extraction. Such an approach takes into account, not only the gross income gained by the producer (as in the application of MET or export duty) but also the costs relating to oil extraction from particular deposits. The application of such a tax regime would allow for the creation of the conditions necessary for the development of new deposits where there are high capital, operational and transportation costs.

2012 has also become the first year of operation of the new scheme of taxation for crude oil and exported oil products (the so called 60-66-90 scheme). At the end of 2011 the general export duty rate was decreased by applying a coefficient of 0.60 (instead of 0.65) in the formula for the calculation of the export duty rate (Table 36). This has reduced the tax burden on the oil production industry and should have a positive effect on oil production.

Table 36

Maximum rates of oil export duty

World price for Urals oil Rate, USD/ton

Up to 15 USD/bbl 0

From 15 to 20 USD/bbl 0.35 x(P-15)x7.3

From 20 to 25 USD/bbl 12.78+0.45 x(P-20)x7.3

Over 25 USD/bbl 29.2+0.65 x(P-25)x7.3

Symbols: P - Urals oil price, USD/bbl

Source: Law of the RF No.409-FZ on Customs Tariff.

The export duties on petroleum products are set at a lower level compared to the export duties on crude oil. In 2006-2010 the export duty on light petroleum products was about 0.72 of the duty on crude oil exports, and the rate of export duty on dark petroleum products was about 0.39 of the crude oil export duty. This stimulated the growth of oil refining within the country and an increase in the export of oil products. Whilst oil production grew by 7.5% during the period of 2006-2010, primary oil processing increased by 19.9% and the export of oil products grew by 36.3%. The oil refining growth of 85% observed during this period was facilitated by the growth in oil product exports.

At the same time, such differentiation of export duties did not stimulate an increase in the depth of oil refining. In 2011 the oil refining depth in Russia was only 71%, i.e. for the period from 2000 it has shown practically no increase. The growth of Russian exports of petroleum products observed in recent years has mainly been due to the increase in exports of residual oil, which is used in Europe as a raw material for further refining and the production of light petroleum products.

In these circumstances, in order to stimulate modernisation of the Russian oil refining sector and to increase the depth of oil refining, a number of decisions were made in 2010-2011 for a stage-by-stage increase of export duty on residual oil to the level of 66% of the rate of crude oil export duty (Table 37). At the same time, in 2011, under the conditions of the so called "petrol crisis" and market saturation, an increased (limiting) export duty on petrol was introduced at the rate of 90% of the rate of crude oil export duty.

The results for 2012 show that the increase of the export duty on residual oil, up to 66% of the crude oil export duty, did not have any effect on the situation: production of residual oil and its export continued to grow and the depth of oil refining showed practically no increase.

At the same time, the forthcoming increase (to be introduced in 2015) in export duty on residual oil, up to that for crude oil, has provided an incentive for oil companies to begin the modernisation of their oil refining facilities. At the moment oil companies are implementing special programmes for the modernisation of oil refining facilities approved the by federal governmental authorities. Implementation of these programmes should considerably increase the technological level of the oil refining sector and improve the depth of oil refining in Russia.

Table 37

Export duty rates on petroleum products in 2011-2015 (as a ratio to the rate of crude oil export duty)

From 1 January to 30 April 2011 From 1 May to 30 September 2011 From 1 October 2011 to 31 December 2014 From 1 January 2015

Commercial petrol, directly distilled petrol 0.67 0.90 0.90 0.90

Light distillates, medium distillates, diesel fuel 0.67 0.67 0.66 0.66

Residual oil, lubricating oils, etc. 0.467 0.467 0.66 1

Source: Resolutions of the RF Government dated 27.12.2010 No.1155, dated 26.08.2011 No.716.

An important aspect of tax regulation in 2012 was the considerable increase in the tax burden on the gas sector. In 2011-2012 the MET rate on natural gas was raised significantly. For the period of 2006-2010 this rate had remained unchanged whilst wholesale prices for gas on the domestic market had increased more than two-fold. As a result, the MET rate for natural gas during these years decreased both in absolute and relative terms (as a percentage of the price). In 2011 this tax rate was indexed at 1.61 times which actually corresponded to the cumulative inflation for the period 2007-2010.

However, the high profitability of the production, transportation and sale of natural gas evidenced a considerably lower level of tax burden in the Russian gas sector compared to the oil sector and the possibility of a further substantial increase of the MET rate. As shown by calculations based on the annual financial statement data of companies acting in the industry, in 2011, the after-tax income calculated as a percentage of net profit to gross income for the oil sector was 14.6%, whilst for the gas sector it was 33.9%.

As a result, in 2012, the MET rate for natural gas was increased to 509 rubles/thousand cubic metres, or by 2.15 times compared to 2011. For 2013-2015 there are additional increases in this tax rate (Table 38). These should bring the tax burden on the gas sector to that of the oil sector and withdraw a major part of the additional (essentially rental) income from the proposed increase in domestic gas prices for the benefit of the state.

Table 38

MET rate for natural gas production in 2010-2015

2010 2011 2012 2013 I half 2013 II half 2014 2015

MET rate, rubles/thousand cubic metres 147 237 509 582 622 700 788

SSource: Tax Code of the RF (revision of 2010-2012), Federal Law dated 29.11.2012 No.204-FZ.

The decisions made have considerably increased the tax burden on OAO Gazprom, which, as the owner of the Unified Gas Supply System, receives relevant income from the transportation and export of natural gas. For all organisations other than owners of the Unified Gas Supply System facilities and organizations in which owners of the Unifired Gas Supply System facilities hold over 50% of the shares a reduced coefficient is applied to the established rate (in 2012 this coefficient was 0.493).

The increase of the MET rate on natural gas will provide for a more complete withdrawal of gas rent and increase state budget revenues. In the future it is expedient to set the MET rate for natural gas on the basis of a special formula which takes into account the main rent forming factors, above all, the price of gas. At the same time it would be expedient to ensure differentiation of the MET rate for gas, depending on the actual conditions of its extraction. For new gas deposits, the development of which requires higher capital and operational costs (for example, deposits on the continental shelf), it would be expedient to apply reduced MET rates.

In prospect, it is reasonable to introduce a level of tax on additional income from new gas fields which will allow for an automatic differentiation of the tax burden, depending on the conditions relating to the development of the relevant deposits.

4.5. Russian Agriculture and Agricultural Policies in 2012

4.5.1. General Outline of Agricultural Performance

At present about 4% of Russia's GDP is generated in agriculture; however, the sector still accounts for 9.7% of the total number of employed in domestic economy with 26% of the country's population living in rural areas. The latter indicator has remained actually unchanged throughout the 10 recent years.

From 2006 to 2011 agriculture displayed high development indicators1: annual output increased at the average rate of 4.4%, production of meat livestock and poultry over these 6 years grew by 53%. In the first and the second quarters of 2012 the increment of output against the respective periods of 2011 also exceeded 4% (Fig. 38). However, the spring and summer droughts resulted in a sharp drop of production in the third and the beginning of the fourth quarter of 2012. The most affected was the gross output of grain that in 2012 fell by nearly one fourth as compared with 2011 - down to 70.7m tons. Decrease was also observed in the production of sunflower seeds that reduced by 18% (down to 7.96m tons), sugar beets -less by 9% (down to 43.4m tons), potatoes and vegetables - less by 11% and 2%, respectively (down to 29.1 and 14.4m tons). However, the overall reduction of agricultural output in 2012 versus 2011 was less than 5%.

140 130 120 110 100 90 80

! II III IV 1 II III IV 1 II III IV 1 II III | IV 1 II III IV 1 II III IV 1 II III IV i ii mjiv

2005 2006 2007 2008 2009 2010 2011 2012

Source: Rosstat.

Fig. 38. Agricultural Output as % of the Respective Period of Previous Year

1 Hereinafter - the data of Rosstat.

Nevertheless, 2013 has all chances to be more successful - farm producers have managed to sow winter crops at actually the same areas as in 2011 (the decrease being as low as 0.8%).

The drop of crop production was partially offset by the increase of livestock production. In 2012 the number of pigs in farms of all types continued growing (by 7.7% up to 19.3m heads) as well as that of sheep and goats (by 6.4% up to 25.1m heads). Cattle inventories did not reduce as compared with 2011 (20.4m heads) and the number of cows even somewhat increased (by 0.5% up to 8.9m heads). As of December 2012 smallholder farms accounted for 45.9% of cattle population, 25.4% of pig population and 47.6% of that of sheep and goats with the respective shares falling over time (in 2011 they reached 46.9, 31.5 and 50.1% accordingly). 2011 was the first year since early 1990s when an increase (albeit small - less than 1%) was observed in the cattle herd. It's notable that this modest increase was ensured by a sizable growth of cattle population in individual private (peasant) farms where it was up by 15%. The increase of livestock inventories in this type of farms is a new phenomenon resulting from the introduction of a new tool of state support to agriculture - the subsidizing of expenditures on the creation of family dairy farms.

The output of meat and eggs continues growing - in 2012 its increase versus 2011 in all categories of farms amounted to 6% and 2.2%, respectively. It was provided by the growth of production in corporate and individual private farms where the overall output of slaughter livestock and poultry was up 11.7% and 3.8%, respectively. Corporate farms increased output of not only pork (up by 13.4%) and poultry meat (up by 13.4%) but also that of beef and veal (up by 3.2%). Individual private farms expanded production of poultry (by 25.8%) and slaughter cattle (by 10.9%). The increment of eggs production (by 2.2%) was also due to their larger output in corporate farms (up by 2.8%) and individual private farms (up by 6.7%). Low aggregate growth rates of milk production in 2012 (0.9%) resulted from the combination of its increase in corporate farms (by 2.5%) and individual private farms (by 12.8%) and decrease in smallholder farms (by 1.8%). The sector of household farms is losing its positions as compared with 2011: it produced not only less milk but also less meat and eggs. In 2012 the share of smallholder farms in the output of livestock products totaled 45.5% while the share of individual private farms - 4.4%. For the first time since 1995 the share of corporate farms exceeded 50%. The structure of meat production continues changing: the share of poultry meat has approached 58%, the share of pork - 29%.

The production of grain, sugar beets and sunflower seeds is largely concentrated in corporate farms but the share of individual private farms therein is growing year after year. In 2012 they already produced 22.3% of grain and 27.2% of sunflower seeds grown in the country. Potatoes, vegetables, fruit and berries are produced mainly by smallholder farms although in recent years the share of individual private farms is expanding at rather high rates.

The production of basic agricultural products is not growing all over the country. Agriculture has ceased to be a sector developed in any region; at present it is rather an activity specific for certain areas. In the post-Soviet period the principles of locating agricultural production have changed. Instead of being targeted at ensuring regions' self-sufficiency (which was the goal of the Soviet agrarian policies and was regarded as an important component of planned and proportional development of all regions of the country), its current location is shaping taking into account economic expediency considerations. The scale of production is less and less tied to the number of population; it's rather being shifted to regions with the highest profitability. These processes are characteristic for those agricultural products the most part of which is produced in corporate farms. For smallholder producers the profit-generation capaci-

ty of a specific production is less decisive; instead, other priorities can be of greater importance, such as the need to produce healthy food for the family or the possibility for self-employment in case there are no job opportunities in local corporate farms and individual private enterprises.

The drop of agricultural production after the start of market-oriented reforms in the country was catastrophic. It reached its maximum in 1998 when the output of corporate farms fell down to 35% of the 1990 indicator. However, the output of smallholder farms during this period was growing and helped to mitigate the overall drop curbing it at the level of 55%. Livestock production suffered the greatest damage: it was falling not only in corporate but also in smallholder farms.

By 1995 only 19 regions managed to preserve their production at the level of 80-100% of the 1990 reference point (Table 39). The revival of the sector began in the period from 2000 to 2005 when the number of such regions started growing. By early 2012 the scale of production in 16 regions was already above the 1990 level and in 23 regions it ranged from 80 to 100% thereof.

Table 39

Distribution of Regions by the Percent Ratio of Annual Farm Output to the 1990 Reference Point

Intervals, % 1995 2000 2005 2010 As of 1.01.2012

160 and more 1 (Belgorod oblast) 2 (Belgorod oblast, Dagestan)

140 and up to 160 1 (Dagestan) 3 (Lipetsk oblast, Kabardino-Balkaria, Tatarstan)

120 and up to 140 1 (Dagestan) 1 (Kabardino-Balkaria) 3 (Tambov and Voronezh regions, North Ossetia-Alania)

100 and up to 120 1 (Tatarstan) 2 (North Ossetia, Astrakhan oblast) 8 (Astrakhan, Penza, Kursk, Tyumen oblasts, Udmurtia, Bashkortostan, Mordovia, Krasnodar krai)

80 and up to 100 19 4 9 11 23

60 and up to 80 35 35 31 28 24

40 and up to 60 20 31 28 23 8

20 and up to 40 4 4(Arkhan-gelsk,Kamchatk a, Sakhalin and Murmansk oblasts) 7 3 (Murmansk and Sakhalin oblasts, Kamchatka region)

less than 20 2 2 2 (Magadan oblast and Chu-kotka autonomous district) 2 (Magadan oblast and Chukotka autonomous district) 2 (Magadan oblast and Chukotka autonomous district)

Total 76 76 76 76 76

Source: Rosstat.

Agriculture is slowly restoring in some regions of the country. However, for a long time there have remained regions where no signs of restoration after a more than 60%-drop are observed. It's quite explicable if one looks at the list of such territories: Magadan, Murmansk and Sakhalin oblasts, Chukotka autonomous district, Kamchatka region. On the whole, the growth of production has so far failed to offset the overall decline of agricultural sector (in 2012 farm output reached about 92% of the 1990 level).

Agricultural production is concentrating in progressively diminishing number of regions -constituent members of the Russian Federation. While in 1990 the 15 largest regions-producers accounted for 40% of the total country's output, by 2012 their share increased up to 50%. The list of such producers was changing but the leader remained the same - Krasnodar krai (in 1990 it accounted for 4.5% of the total domestic output and as of January 1, 2012 -for already 7% thereof). By the beginning of 2012 Moscow oblast ranked 7th after being 2nd in

1990. Nijny Novgorod, Leningrad, Novosibirsk and Sverdlovsk oblasts and Krasnoyarsk krai have left the ranks of the 15 largest regions-producers. By early 2012 their positions were occupied by Belgorod, Voronezh, Chelyabinsk, Omsk and Tyumen oblasts.

The analysis of labour use dynamics in agriculture leads to the conclusion that the sector's adjustment to market conditions has prompted the improvement of labour productivity coupled with the reduction of the number of employed. In corporate farms the latter fell almost 6 fold during the reform years while the productivity of labour by the end of 2011 was more than 4 fold higher than in 1990. The official statistics estimates labour productivity in both family and corporate farms enabling to see cardinal changes that have taken place. For instance, in 1990 gross output per average annual employee in family farms was 3.7 fold higher than that in corporate farms while by the beginning of 2012 - 3.3 fold lower. It implies qualitative changes in the productivity pattern: corporate farms with better mechanization of labour started to employ far less workers than households using predominantly manual labour.

The data on corporate farms allows to evaluate the changes in labour productivity for some sectors of agricultural production: by the beginning of 2012 direct labour inputs for producing slaughter pigs and sugar beets dropped 8-10 fold as compared with 1990, those for producing potatoes, vegetables and poultry meat - 3.3-4.5 fold, for producing milk, grain, sunflower seeds and eggs - 1.6-2 fold.

At the same time the decrease of employment and the rise of labour productivity in agriculture were not accompanied by state programs aimed at adaptation of rural population - such as retraining, fostering of investments in the development of non-agricultural business in rural areas, encouragement of entrepreneurial self-employment of population. It produced a devastating effect on the rural community. At present advanced corporate farms face the problem of skilled labour shortage despite quite a stable share of rural population over the recent decade: the most qualified and active workers were forced to migrate from rural areas. Such developments have not been duly regarded by the state support policy which is traditionally aimed at the supporting of farm production versus development of rural areas thus aggravating the degradation of depopulated territories.

Up till 1998 the efficiency of farmland use in all categories of farms was falling but in later years it switched to growing. However, the trends for corporate and smallholder farms were different. In corporate farms the shrinking of farmlands was accompanied by the growth of gross output resulting in higher efficiency indicators of their use. The efficiency of land use by family farms in the first years of reforms was rapidly decreasing as their areas expanded. The per hectare output of these farms stabilized only in recent years.

Despite the difference in efficiency trends, small businesses use land much more efficiently than corporate farms. Each hectare used by them generates twice larger gross agricultural output as compared with that of corporate farms.

Yields were falling from the beginning of 1990s. In 1998 they were below the 1990 level for all crops. But in 2011 they already surpassed the 1990 indicators: for fruit and berries -1,8 fold, for sugar beets - 1.6 fold, for soybeans, potatoes and vegetables - 1.3-1.4 fold, for grains - 1.2 fold1. Even in 2012 with its unfavourable weather conditions not all crops demonstrated a drop of yields against the 2011 level and this drop was not dramatic: for grains it amounted to 17%, for sunflower seeds - to 3.6%. Meantime, the yield of sugar beets exceeded the 2011 indicator by 1.6%. Yields are relatively stable despite the sharply decreasing use of mineral and organic fertilizers (Fig. 39-41).

1 Wheat yields reached their maximum in 2008 - 24.5 centners per hectare.

The yields of grains and sugar beets were growing along with the shrinking of areas sown in them. Production was falling mostly in those areas where yields were the lowest. One more factor of higher total grain yields was the increasing share of winter crops that are generally more productive than spring ones. The rise of sugar beet yields was due to the progressive spreading of up-to-date technologies of their production1. The trend for sunflower seeds was an exception with areas sown expanding 2.8 fold as compared with 1990. Production of this crop has shifted to new cultivation areas with less favourable conditions.

The issue of potential growth of farm output is traditionally tied to the need to involve abandoned lands in agricultural production. However, the comparison of yields in Russia with those in developed countries of the world evidences that there is a potential for increasing the output employing only the currently cultivated areas.

90 80 70 60 50 40 30 20 10

9999999999 9999999999

2

1,5 1

0,5

222222222222 Mineral fertilizers applied, kg per ha

^^^ Yield, centners per ha ^^^Organic fertilizers applied, tons per ha

Fig. 39. Grain Yields and Application of Fertilizers in Corporate Farms

90 80 70 60 50 40 30 20 10

0 1 2 3 4 5 6 7 8 999999999 999999999

222222222222

Yield, centners per ha

Organic fertilizers applied, tons per ha

Mineral fertilizers applied, kg per ha

0

0

Fig. 40. Sunflower Seed Yields and Application of Fertilizers in Corporate Farms

1 The yield was maximal in 2008 - 366 centners per hectare which was twice above the 2000 indicator. But it still remains below the level of developed countries of the world. For instance, in Canada it reached 603 centners per ha in the best years, in the US - 646 centners per ha.

450 400 350 300 250 200 150 100 50

1

2

4

5

0

6

3

ON ON

(Nm^r^^o^oo^o

Yield, centners per ha

Organic fertilizers applied, tons per ha

^^^ Mineral fertilizers applied, kg per ha

Fig. 41. Sugar Beet Yields and Application of Fertilizers in Corporate Farms

The growth of productivity was observed in all sectors of livestock and poultry production. Uncontestable leaders by this parameter were poultry and pig breading: as compared with 1990 daily weight gain for broilers was up almost 2.5 fold, for pigs - 1.53 fold. Production of milk per cow grew by 38.3%, production of eggs per laying hen - by 30.9%. In January-October 2012 the per head production of milk reached 4 243 kg which is 6% above the respective indicator for 20111.

A clear evidence of the improving efficiency of livestock production is the reduction of per unit feed inputs: while in 1990 830 kg of feed units were needed to produce 100 kg of pork, at present this rate is almost twice lower - 420 kg. Required feed inputs per 1 kg of milk fell by nearly 31%. In beef production high level of feed consumption that formed back in the Soviet times has failed to reduce so far due to the use of high-input technologies of cattle raising in livestock complexes. Lower feed input requirements are attained in case farms use technologies of loose pasture keeping of calves together with meat cows with further fattening in feed-lots. It's noteworthy that in regions traditionally practicing grazing livestock management (Altai, Dagestan and Kalmykia republics) the number of meat cattle has been growing for already several years.

The productivity of inputs has been steadily improving while their consumption has been falling. Beginning from 1992 prices for inputs have been rising at much higher rates than those for agricultural products2. In these conditions only farms that succeeded in resource saving and efficient utilization have managed to remain profitable. Electric energy consumption dropped in both absolute terms (almost 5 fold) and per Rb 100 of gross output (in 2011 it was three times lower than in 1990). The total application of fertilizers over these years fell almost 5 fold and their use per Rb 100 of gross output - 3.3 fold.

Despite certain annual fluctuations, in 2000-2010 the nominal indicators of aggregate farm support in Russia grew 10 fold in ruble terms and 9 fold - in dollar terms3. The ratio of aggregate farm support to the gross value added in agriculture over this period rose from 11.8% in 2000 to 33.8%.

1 The total for 11 months exceeds the annual output in 1990.

2 Such a trend was observed in all countries but in Russia the disparity between the growth of prices for farm inputs and those for farm products was most dramatic. OECD, 1998.

3 The data on aggregate farm support in 2011 and 2012 are not available.

The prevailing component of support structure are consumer transfers to producers (about 70%) implying that in Russia support is mostly rendered at the expense of consumers of farm products rather than at the expense of the state budget1. Estimates show that the growth of support is accompanied by the lowering of its efficiency: in 2000 the gross output per Rb 1 of state support reached Rb 7.4 but later it fell down to Rb 2-2.6.

In 2012 some changes took place in Russia's agricultural policies. They were fostered by two events. The first of them was the country's accession to the WTO implying the need to adjust the measures of national agrarian policies to WTO requirements. The second was the termination of State program for agricultural development and regulation of agricultural, input and food markets for the period of 2008-2012. A new program may envisage new measures of agricultural policies that meet both the requirements of WTO and the new realities of situation in agriculture and development of rural areas.

4.5.2. Situation on Selected Agricultural and Food Markets Grain Market

Cold winter and hot summer brought about disappointing results of 2012 harvesting campaign. Grain output was below the average indicators for 2000s (Fig. 42 and 43). The crop of barley also fell relative to the previous year level - down to 13.9m tons. The output of corn grew up to 8.0m tons but since the conditions of harvesting were difficult due to rains, it couldn't fail to affect the quality of grain - the percentage of moisture was rather high.

120

100

80

S 60

40

20

2222222222

20 2

Source: "SovEcon" Center.

Fig. 42. Russia: Gross Output of Grains in 2002-2012 and Forecast for 2013

Assessments were made on the basis of OECD data for 2010 since later estimates are not available.

0

S

Source: "SovEcon" Center.

Fig. 43. Russia: Gross Output of Wheat, Barley and Corn in 2002-2012

and Forecast for 2013

The main factor contributing to the decrease of gross output of grains is the lowering of yield which fell down to 18.3 centners per hectare of harvested area (the level of the poor crop 2010). The yield of wheat dropped to 17.7 centners per hectare which is below the 2010 level and is the lowest indicator since 2003.

In July 2011 restrictions on export of grain conditioned by 2010 drought were lifted. In 2012 grain export continued without restrictions. As a result in 2011/2012 MY (June-July) Russia exported 28.1m tons of grain (including flour in grain equivalent) of which wheat accounted for 21.6m tons. This is more than in the rich crop 2009/2010 MY (Table 40).

Given the modest crop and active export supplies, by the beginning of October 2012 the inventories of grains and especially wheat in farms, stock and processing enterprises in actually all major producing regions were noticeably below those of not only the previous year but even the poor crop 2010. For instance, as of November 1, 2012 they amounted to 32.9m tons while as of the same date in 2011 they reached 46m tons, in 2010 - 40m tons. The stringent grain balance fostered the growth of market prices.

Table 40

Supply and Demand Balance for Grains in 2009/10-2011/12 MY (June-July),

million tons

2009/10 2010/11 2011/12

Supply (resources)

Beginning stocks 24.6 28.2 18.6

including intervention stocks 8.25 9.6 6.7

market stocks 18.35 20.6 11.9

Production 97.1 61.0 94.2

Imports* 0.4 1.8 1.7

Total 122.1 91.0 113.8

Consumption

Domestic consumption 72.0 68.0 70.0

Exports* 21.9 4.4 28.1

Total 93.9 72.4 98.1

Intervention purchases 1.75 - 0.4

Ending stocks 28.2 18.6 15.7

including intervention stocks 9.6 6.7 4.7

market stocks 18.6 11.9 11.0

*including flour in grain equivalent. Source: "SovEcon" Center.

With weather conditions being close to the long-term annual average, the Russia's output of grain in 2013 is unlikely to reach the record of 2008 and 2009, i.e. 100m tons. According to the forecast of "SovEcon" it will be about 84-85m tons. However, even despite the expected growth of production the situation on the domestic market in 2013 will remain tight due to the stable export demand for grain in the southern regions and a notable decrease of carry-over stocks. The market will be adjusting to the tightening balance through further growth of domestic prices. Opportunities for regulating domestic market by means of commodity interventions seem to be very limited since the most part of intervention stocks will have been sold by the end of 2012-the beginning of 2013. On the one hand, higher prices will lead to a further decrease of domestic grain consumption (first of all in smallholder farms) which can result in the slaughter of livestock and poultry. On the other hand, the situation may develop so that the accelerated growth of domestic prices will make import of grain more efficient for some regions than its purchase on the domestic market. It concerns not only regions bordering on Kazakhstan but probably also north-western regions of Russia and regions in its center wherein supply of corn from the Ukraine is convenient from the logistical point of view.

Market of Oilseeds and Vegetable Oils

From the beginning of 2000s the market of oilseeds demonstrates a clear trend towards slower growth of sunflower seeds output as compared with that of other oilseeds - rapeseeds, soybeans and oil flax. This is an evidence of both the diversification of oilseeds production and the expansion of their cultivation area in Russia. 2011 set a record in the output of basic oilseed crops: sunflower seeds, rapeseeds, soybeans and oil flax. The dynamic and stable growth of oilseeds production was intermitted only in 2007 and 2010 due to the extreme weather conditions.

According to preliminary estimates the output of sunflower seeds in 2012 will amount to 7.5-7.8m tons. This is below the previous year record but stands second over the whole history of observations (Fig. 44). The outputs of rapeseeds and soybeans are estimated to be somewhat above the record indicators of 2011 - 1.0-1.1m tons and 1.8m tons, respectively (Fig. 45).

12000 10000 8000 6000 4000 2000 0

9697

7350 7800 7500

6470 6743 6454

gassi

2005 2006 2007 2008 2009 2010 2011 2012 2012

(estimate (estimate

of of

SovEcon) USDA)

Source: "SovEcon" Center.

Fig. 44. Russia: Gross Output of Sunflower Seeds in 2005-2012

2000 1800 1600 1400 § 1200 g 1000 3 800 600 400 200 0

1756

1800

1800

1222

944

805

522

630

650 752 746 667

670

1056

1100

1000

2006 2007 2008 2009 2010 2011 2012 2012

(estimate of (estimate of SovEcon) USDA)

□ rapeseeds □ soybeans

Source: "SovEcon" Center.

Fig. 45. Russia: Gross Output of Rapeseeds and Soybeans in 2006-2012

From the beginning of 2000s the gross output of soybeans in Russia demonstrates an upward trend. In the five recent years it grew almost 3 fold and amounted to 1.8m tons in 2012. The record crop of soybeans was harvested owing to the combination of such factors as the expansion of areas sown (that in 2012 reached nearly 1.3m hectares) and favourable weather conditions. The major regions cultivating soybeans in Russia are the Far East (60% of the domestic output), and the Southern and Central regions of the country.

The domestic consumption of soybeans grew in line with their production - over the period concerned it increased 3 fold up to 2.84m tons. Soybeans are largely used by feedstuffs industry and in the production of meat, dairy, bakery products and confectionary. The promising sector attracted many farm investors and a lot of projects for the construction of soybean plants are being elaborated and implemented in Russia.

Conditioned by the abundant 2011 crop, the output of vegetable oils in 2011/2012 MY (October-September) was record (Fig. 46) as well as exports of products of oilseeds processing (Table 41). At the same time imports of palm oil and soybean meal continue growing.

4500 4000 3500 3000 2500 2000 1500 1000 500 0

4185

2009/2010

2010/2011

2011/2012

Source: "SovEcon" Center.

Fig. 46. Russia: Output of Vegetable Oils in 2009/2010-2011/2012 MY

(October-September)

Table 41

Exports and Imports of Oilseeds and Products of Their Processing in 2009/2010-2011/2012 MY (October-September), 1,000 tons

2009/2010 2010/2011 2011/2012

Exports

Sunflower oil: 505.5 193.6 1426.6

raw 350.1 71.9 1223.3

refined 155.4 121.7 203.3

Rapeseed oil 98.0 116.1 186.4

Soybean oil 158.0 129.3 145.0

Sunflower seeds 17.0 10.8 336.1

Rapeseeds 81.0 15.7 48.4

Flax seeds n.a. n.a. 390.8

Sunflower meal 699.3 573.1 1711.3

Imports

Soybean oil 17.2 20.8 8.5

Palm oil 487.2 611.0 507.5

Sunflower oil 7.6 9.7 17.6

Soybean meal 381.6 469.9 512.2

Source: "SovEcon" Center.

In 2011 - first half of 2012 high world prices for vegetable oils prevented the plummeting of prices on the domestic market (due to large output) and ensured a good margin. But by the end of 2012 prices for soybean and sunflower oils on the European markets switched to falling. So, foreign markets were too sluggish to stimulate a dynamic export outflow of vegetable oils from the domestic market. In these conditions the saturation of the latter by the end of 2012 started to increase.

The domestic market of oilseeds faces a permanent price confrontation between processors and farm producers. In 2011/2012 MY the margin received by sunflower processing industry grew owing to the low cost of raw input. But beginning from August 2012 prices for sunflower seeds were rising while prices for sunflower oil remained constant. As a result the margin received by sunflower processors reduced and fell below the indicators of previous years.

Market of Meat

According to preliminary data the output of meat in 2012 demonstrated positive dynamics. The total production of slaughter livestock and poultry in all types of farms reached 11.6m tons (live weight) which is 6.1% above the respective previous year indicator. The biggest increase is observed in the production of poultry - up 12.0%, pigs - up 3.5% and cattle - up 1.3% (Table 42). Meantime imports of meat to the country (except those of poultry meat) have somewhat shrank (Table 43).

Table 42

Production of Slaughter Livestock and Poultry in Farms of All Types,

1,000 tons live weight

2005 2006 2007 2008 2009 2010 2011 2012 2012 as % of 2011

Cattle 3 204.7 3 055.0 3 020.0 3 114.6 3 070.3 3 053.1 2 888.1 2925.9 101.3

Poultry 1 970.0 2 267.1 2 650.1 3 022.3 3 475.2 3 866.4 4 325.3 4842.3 112.0

Source: Rosstat.

The growth in pig breeding is conditioned by the continuing full-scale modernization and restoration of the sector under government support. Over the period from 2006 to 2012 more than Rb 8bn were invested in the sector, about 750 pig-raising facilities were put in operation

and reconstructed (according to data of the National union of pig breeders). As a result the increase of pork output (slaughter weight) over these years amounted to 58%.

Table 43

Imports of Meat to Russia, 1,000 tons__

2008 2009 2010 2011 2012 2012 as % of 2011

Poultry meat, fresh-frozen 1 223. 9 985.8 688.1 493.0 527.5 107.0

Meat, fresh-frozen 1 710. 8 1 437.7 1 441.8 1 428.8 1399.2 97.9

Source: Rosstat, RF Federal Customs Service.

The profitability of highly efficient pig-raising farms reaches 25%, they produce almost one half of the total pork output in the country (Table 44).

Table 44

Profitability of Pig-Raising Farms in Russia

Types of farms by level of efficiency Average profitability Share of farms of the type in the total output

Excluding investment component Including investment component

Highly efficient farms 25% 3% 48%

Efficient farms 10% 3% 42%

Non-efficient farms -4% -4% 10%

Source: National union of pig breeders.

As different from domestic pig breeding, Russian poultry production has already gone through the active investment stage. Therefore, poultry breeders can afford working with minimal profitability that is due to high domestic competition. As a result the gap between prices for poultry meat and pork in Russia is bigger than in other countries: according to data of the National union of pig breeders the ratio between them in slaughter weight equals 0.5 while in China it averages 0.7, in the US and Brazil - 0.9, in the European Union - 1.1. By 2020 when the supply of domestic pork in Russia will grow owing to the completion of investment projects and the credit burden on domestic pig breeders will decline, the gap is expected to become comparable with that in other countries.

According to estimates of the National union of pig breeders the prospective structure of meat consumption in Russia is likely to change. By 2020 the share of pork will grow from the current 33% to 38%, the share of poultry meat - from 38% to 42%, the share of mutton -from 2% to 3%. Meantime, the percentage of beef in the total structure of meat consumption will fall from 26% to 17%.

Taking into account the announced investment projects in the sector and the level of customs and tariff restrictions effective in 2012, the production of pork might increase from 2.428m tons in 2011 (slaughter weight) to 3.923m tons in 2020 and become approximately equal to the projected level of pork consumption in the country - 4.070m tons1. But due to the Russia's commitments to alleviate meat import restrictions upon accession to the WTO, the pig breeding sector may be the most affected. Larger pork imports and lower prices may result in the decline of pig producers' profitability down to 10-12%. If the worst scenario comes true, the output of pork in the country will drop to 2.207m tons and the share of imports in the total consumption may amount to 46%.

1 According to estimates of the National union of pig breeders. 270

4.5.3. Changes in Priorities of Agricultural Policies in 2012 and for the Period of 2013-2020

State Program for Agricultural Development and Regulation of Agricultural, Input and Food Markets

In 2006 following the adoption of Law "On agricultural development" (FZ No. 264 of December 29, 2006) the procedure of allocating funds to the development of agrarian sector changed. From then on budget support to farm producers could be rendered only in case it had been envisaged in the State program for agricultural development and regulation of agricultural, input and food markets (henceforth the State program). This practice has its undeniable merits since all the operators of agricultural market now can - theoretically - plan their activities for a 5-year period knowing in advance the basic rules of the game: the targets of agricultural policies, clearly defined measures of state support and amounts of subsidies they can apply for.

The first State program for agricultural development in 2008-2012 was generally abided by albeit with notable adjustments due to the emergency conditions following the 2009-2010 drought. The next State program was elaborated and came into force beginning from 2013. The draft program for 2013-2020 that had been long discussed by key departments (partially due to the Russia's accession to the WTO) was finally accepted on July 10, 2012.

The government presumes that the problems of agricultural development are as follows:

- Russia's lagging behind developed countries of the world by the technical and technological level of agriculture due to the insufficiency of incomes received by farm producers for carrying out modernization as well as to the stagnation in building of machinery for farm production and food industry;

- limited access of farm producers to the market due to drawbacks in its infrastructure and the increasing monopolization of trade networks;

- slow rates of rural areas' social development conditioning the deterioration of social and demographic situation therein, the outflow of able-bodied population especially of younger age and the shrinkage of rural settlement network.

Indeed, wages in agriculture are as low as 51% of the average wages in economy at large. Many rural areas are depopulating and degrading. Expenditures on food in the structure of households' final consumption average 30% and in the poorest decile group - over 50%.

What are the basic differences of the new State program from the previous one?

First, the amount of financing has notably increased. While the State program for 20082012 envisaged allocation of Rb 551bn of budget funds to the development of domestic agri-food sector (i.e. on the average Rb 110.2bn per annum), the implementation of the State program for 2013-2020 will cost Rb 1509bn (Rb 188.7bn per annum). The structure of support by directions (sub-programs) changed and their number increased to 8 - up from 5 in the previous State program (Fig. 471).

The priority of agricultural policy goals has changed as well: while in the previous State program the development of rural areas ranked (or at least was declared to rank) first, now it is next to last. At present the main declared goal is the ensuring of food supply in compliance

1 Directions of financing under the State program for 2008-2012 were split up into blocks corresponding to the sub-programs envisaged in the draft of the new State program for 2013-2020 in order to facilitate comparisons; the sub-program for development of meat cattle breeding was included in the general expenditures on livestock production.

with parameters set by the country's doctrine of food security. In terms of management the increase of the number of goals reduces the probability of their achievement.

Fig. 47. Structure of Financing by Basic Directions of the State Program

The State program envisages complex development of all sectors, sub-sectors and agribusiness activities taking into account Russia's accession to the WTO. Along with that two levels of priorities are distinguished - for the first time ever. Priorities of the first level include:

in the production sphere - cattle breeding (production of milk and meat) as a system-forming sub-sector using competitive advantages of the country, first of all the availability of extensive agricultural land areas;

in the economic sphere - raising of farm producers' incomes;

- in the social sphere - sustainable development of rural areas as a necessary condition for preserving labour force, territorial integrity of the country and ensuring of economic and physical availability of foodstuffs for vulnerable strata of population according to the rational rates of consumption of selected food items;

- in the sphere of developing production potential - melioration of agricultural lands, employing of idle pasture and other categories of farmlands;

- in the institutional sphere - development of integration links in the agro-industrial complex and shaping of product sub-sectors and territorial clusters;

scientific and educational support - as a vital condition for the forming of innovative agro-industrial complex.

Priorities of the second level include such elements as:

development of import-substituting sub-sectors of agriculture including vegetable and fruit production;

ecological safety of agricultural and food products;

expansion of exports of agricultural, input and food products in line with saturation of domestic market;

minimization of logistical costs and optimization of other factors that determine the competitiveness of domestic produce following Russia's accession to the WTO, in particular

rational location and specialization of agricultural production and food industry by country zones and regions.

Despite the declared goals, tasks and priorities, the actual priority of state policies is the increase of agricultural output (Table 45). According to estimates of the Ministry of agriculture, the implementation of new State program should ensure its average annual growth at the rate 2.5% and more. By 2020 basic indicators envisaged in the country's doctrine of food security should be attained.

The core of the two basic support directions - the development of priority agricultural sub-sectors (in the new State program - sub-programs for the development of crop and livestock production) and the sustainable development of rural areas - was preserved. Measures for regulation of agricultural, input and food markets (the former State program envisaged only the carrying out of purchase and commodity interventions on the grain market), granting of subsidies for compensation of interest rate on received credits and loans and insurance of farm output were transferred into the corresponding sub-programs according to sector profile. On the contrary, melioration of farmlands, technical and technological modernization of agriculture and support of small-scale farming were detached as separate sub-programs.

A new feature is the emergence of tasks targeted at the development of market infrastructure, the ensuring of efficient work of state government bodies administering agricultural development and the development of biotechnologies. More attention - evidently following the accession to WTO - is focused on tasks related to ecology, security and quarantine, preservation and improvement of farmlands' quality.

Table 45

Provisions for Financing of the State Program in 2013-2020

Sub-program Billion rubles

Development of crop production, processing and marketing sub-sector 466.5

Development of livestock production, processing and marketing sub-sector 499.3

Development of meat cattle breeding 65.4

Support of small-scale farming 83.6

Technical and technological modernization, innovation-based development 23.7

Provision of the State program's implementation 202.5

Social development of rural areas till 2013 (federal target program) 9.0

Sustainable development of rural areas in 2014-2017 and for the period till 20201 (federal target program - draft) 90.4

Preservation and restoration of soil fertility of farmlands and of agricultural landscapes as a national endowment of Russia in 2006-2010 and for the period till 2013 (federal target program) 7.4

Development of melioration of Russia's farmlands in 20 1 4—20 202 (federal target program - draft) 62.0

The emergence of sub-program "Development of meat cattle breeding" emphasizes new priorities of agricultural policies - the drop of beef production during the reform years was most dramatic and thus the restoration of cattle population became one of the main targets of the State program. Accordingly, new investment credits will be subsidized only for meat cattle producers while subsidizing of those for construction, reconstruction and modernization of poultry and pig breeding facilities will discontinue beginning from January 1, 2015 and January 1, 2017, respectively.

1 The financing provisions will be adjusted after the adoption of federal target program (draft) "Sustainable development of rural areas in 2014-2017 and for the period till 2020".

2 The financing provisions will be adjusted after the adoption of federal target program (draft) "Development of melioration of Russia's farmlands in 2014-2020".

Sub-programs for the development of crop and livestock production are designed according to a scheme including four blocks of basic measures: production of farm output of corresponding types; its processing; development of infrastructure and regulation of markets; crediting and insurance.

The Minister of agriculture Nickolay Fyodorov stressed that the government "gradually moves away from the former forms of direct subsidizing to the support of farm producers' rates of return"1. Indeed, 207 out of Rb 467bn of state support will be allocated for subsidies to budgets of regions-subjects of the Russian Federation for granting non-bound support to crop producers. However, non-bound measures have so far been envisaged only for crop production and it's not yet quite clear how will this support be provided.

The measure "Creation of logistical centers" in the form of "wholesale distribution centers for marketing of output" is specified rather vaguely and the declaration of "forming of market price and excluding of numerous middlemen in the chain from farm producers to consumers" as one of the targets of agricultural policies seems to be no more than a pretentious declamation. It's not clear who will actually receive these subsidies. Among other beneficiaries the State program names farm producers who by the profile of their operation will hardly engage in the construction of either logistical centers or ports for exporting Russia's agricultural output.

The sub-program "Support of small-scale farming" implies the continuation and extension of government efforts in the following fields:

- development of small-scale entrepreneurship in rural areas including support of beginner farms;

- development of family livestock farms on the basis of peasant (individual private) farms;

- subsidizing of interest rate on received credits;

- assistance to peasant (individual private) farms in registering titles to land plots.

The latter measure leaves perplexed: first, why only peasant farms are eligible for subsidizing of land registration? Second, the area of lands the registration of which one supposes to subsidize is only 960,000 hectares, or less than 0.5% of the total farmland area in Russia, i.e. it won't have any effect except for being a bonus for a small number of farmers. Third and most important, the problem of registering titles to land plots is not a financial one - it's rather a problem of corruption of registering officials at the district level and poor involvement of available remote sensing data obtained at the cost of budget funds in the process of cadastral recording of earlier formed land plots. The development of land market in agriculture can be fostered primarily by the simplification of rules of registering new or certification of earlier obtained titles to agricultural land plots as well as by making the procedure of demarcating boundaries of land plots less expensive.

Regrettably, the measures for supporting the system of agricultural cooperation found no understanding in the RF Ministry for Economic Development. Meantime, such measures as granting of long-term budget loans for the replenishment of rural credit cooperatives' working capital could help to tackle the problem of providing access to credits for small rural entrepreneurs that still produce one half of agricultural output in the country.

Till 2013 the sub-program "Sustainable development of rural areas" will be administered via the federal target program (FTP) "Social development of rural communities till 2013" and afterwards - via the FTP "Sustainable development of rural areas in 2014-2017

1 Rossijskaya gazeta No. 160, July 16, 2012. 274

and in the period till 2020". Measures under the sub-program are divided in the following groups:

- provision of housing for rural residents;

- education;

- health care;

- culture;

- trade and consumer services;

- information and consultation services for rural residents;

- electrification;

- gasification;

- water supply;

- telecommunication;

- complex compact housing development;

- road construction.

The program does not specify what exactly will be financed and on what terms. The previous program defined the measures more clearly:

- encouragement of non-agricultural activities in rural areas;

- amelioration of housing conditions for people living in rural areas including young families and young specialists;

- development of social and engineering infrastructure in rural areas;

- support of complex compact housing development and improvement of living environment in rural settlements in the framework of pilot projects;

- grant support of rural communities' initiatives on the amelioration of living conditions. However, their financing was cut due to the 2010 drought and the implementation of other

priority support measures.

The proportion between amounts of funds allocated to financial support of two subprograms - "Technical and technological modernization, innovation-based development" (1.8%) and "Provision of State program's implementation" (15.1% of the total projected expenditures under the State program less federal target programs "Social development of rural areas" and "Melioration") - is astonishing. The almost 9-fold overbalance of allocations to the sub-program associated with functioning of federal government bodies gives rise to the suggestion that this way the latter, and first of all the RF Ministry of Agriculture, attempt to secure their financial "self-sufficiency".

Along with that the number of reporting forms to be submitted to the RF Ministry of Agriculture increases year after year, they become more detailed and more frequent, sizable funds are allocated to the maintaining of this system. For instance, beginning from 2016 expenditures on the "Forming of state informational resources in the spheres of ensuring food security and administration of Russia's agro-industrial complex" will exceed Rb 1bn per year. At the same time departmental information gets increasingly classified, first of all for scientific community. Starting from 2010 depersonalized data on farm producers became unavailable and starting from 2012 the access to consolidated reports by regions and for the Russian Federation at large was denied as well.

The general impression about the State program is that it was prepared in haste. Not in all cases one can observe a clear and logical inter-connection between targets, tasks and indicators of sub-programs, the measures under which often overlap and duplicate each other. The

degree of elaborating details differs greatly by sub-programs and it's not always clear what this or that measure implies. For instance, it is mentioned in the sub-program for melioration of farmlands that the essentials of financing and the procedure of granting subsidies for application of mineral fertilizers will be specified in other sub-programs but we have failed to find them. The situation is similar with such a new support direction as the improvement of farm producers' rates of return. One can suggest that these will be such subsidies that will be granted to agricultural producers per hectare of arable land but it's not clear from the text of the State program.

One more bottleneck of the program that can be mentioned is the disregard of regional specifics of rural economies in regions-subjects of the Russian Federation. In 30% of them corporate agriculture with large agro-firms and agro-holdings is the prevailing form of farming. In approximately the same number of regions family farming is the primarily developed pattern and in 40% of them the structure is mixed1. However, a unified set of measures is envisaged in the text of the new State program. For instance, most types of subsidies are fit only for regions with intensive agriculture and favourable social conditions for the development of rural areas. Meantime in regions with unfavourable conditions for farming producers have no chances to get subsidies for reimbursement of interest rates on investment credits due to low profitability of their production. A special program of social development measures needs to be elaborated for disadvantaged regions suffering from depopulation and for poorly developed areas with adverse natural conditions. In such regions the amount of subsidies actually granted for the development of agriculture is traditionally below the projected sums, budget funds remain under-used.

It has to be admitted that some measures envisaged in the new State program are the most distorting for the market. The spiral of paying subsidies for the compensation of expenditures on servicing long-term bank credits is still progressing. One can avoid this in case the policies of providing state support are revised: subsidies for the purchase of machinery and equipment should be granted directly to producers2 instead of subsidizing interest rate; funds should be invested in the support of science, education, the system of information and consulting, construction of roads and other forms of improving rural infrastructure, development of agricultural cooperation; subsidies should be granted on a per-hectare or per-head basis instead of supporting selected products and inputs.

The following hazards associated with accession to the WTO were identified when elaborating the State program for the period till 2020:

- lowering of investment prospects and profitability of enterprises;

- failure to achieve target indicators of the food security doctrine;

- bankruptcy of small and medium-sized enterprises due to their low competitiveness;

- diminishing of job opportunities, lowering of incomes and living standards in rural areas.

The RF Ministry of Agriculture has worked out and adopted an intra-departmental plan of

measures for the implementation of Plan of actions of the Government of the Russian Federation targeted at the adaptation of selected sectors of agricultural economy to the terms of RF membership in the WTO.

1 See Uzun V.Ya., Saraykin V.A., Gataulina E.A. Klassifikatsiya sel'skokhozyaystvennykh proizvoditeley na os-nove dannykh Vserossiyskoy Sel 'skokhozyaystvennoy Perepisi 2006 goda. [Classification of farm producers on the basis of data of All-Russian Agricultural Census of 2006.] Moscow, VIAPI named after A.A. Nikonov, 2010, p. 229.

2 Without binding these purchases to the production of a selected product.

A "roadmap" for customs tariff and non-tariff regulation of agricultural import following Russia's accession to the WTO has been adopted. It was elaborated by the structural departments of the Ministry in collaboration with producer associations and integrates the basic directions of support to farm sub-sectors facing hazards due to the accession to WTO.

The national standard for and the system of assessing the quality of cattle meat are being worked out.

The following measures are envisaged to overcome possible negative effects:

- extension of some tax concessions for agricultural producers including profit tax concessions till 2020; exemption of farm producers from the obligation to pay VAT when importing pedigree livestock, embryos and semen till 2020;

- adoption of federal law "On veterinary" aimed to improve the legal regulation in this field and to harmonize domestic legislation with requirements of international organizations;

- preparation of the list of agricultural and food products the purchase of which for state and municipal needs is forbidden in countries other than countries of the Common Economic Space;

- tightening of customs regulation of agricultural products' import (especially that of beef) by the Federal Customs Service;

- introduction of amendments to Law "On agriculture" in order to specify criteria of regions with unfavourable conditions for farming. The support of such regions will be regarded as a "green box" measure and accordingly payments to farm producers won't be subject to restrictions;

- encouragement of demand for agricultural and food products through food aid to low income population strata, supported nutrition of selected social groups (e.g. school meal), reforming of the system of food purchases for state needs (e.g. purchase of domestic food products by the Ministry of Defense, purchases for food reserve, etc.).

The new State program also specifies the mechanism of co-financing of its measures by regions-subjects of the Russian Federation. It implies that in case regional budgets do not provide funds for financing measures under the State program, federal funds won't be used for these purposes as well. The reasoning is clear: an incentive is being created for regions to support agriculture. But the challenges of such reasoning are also high. The first of them has already been mentioned: the set of measures envisaged in the State program is universal and aimed primarily at the support of production. This universal set disregards regional specifics. As a result, depopulated areas with spotty agriculture that require an approach emphasizing development of rural areas, will be supposed to implement a universal package of measures aimed at the development of farm production unless they have their own funds for carrying out special programs. Second, in case regional budgets do not have enough money or regional authorities do not find it proper to accept federal ideology of support, federal funds won't be used for the envisaged directions either. Third, the division of responsibilities between the Federation and its subjects is such that the function of supporting agriculture is assigned to the latter. The channeling of financing through regional budgets implies the transfer of funds from the federal budget which reduces the transparency of support and complicates the estimation of its total amount. Fourth, the division of responsibilities complicates control over amber box measures1. Russia has assumed obligation to diminish them but separate regions

1 According to the WTO terminology all types of support are divided into three "boxes" depending on the degree of consequent market distortion: the green box (non-distorting), the amber box (the most distorting) and the blue box (an intermediate one).

can - within capacities of their own budgets - finance any efforts outside the State program including those that the Russian Federation should cut in compliance with its international commitments.

State Policies Regarding Farmlands

At present there are no grounds to believe that any policy regarding farmlands exists in the country if under this term one understands a voiced public concern over such lands the responding to which is the goal of the respective policy; there are no formulated tasks and implementation mechanisms either. The failure to voice public concern disorients not only various departments engaged in the organization of land transfer but also the society at large. Measures influencing the transfer of farmlands are often contradictory and their implementation implies high transaction costs and conflicts. For lack of goal there simultaneously exist institutional backgrounds for concentration of farmlands in property of a single owner, on the one hand, and hardly efficient but legislatively formalized restrictions on concentration - on the other; the ban on ownership of land by foreign companies and the legal ways of circumventing this ban; the introduction of new register of land titles and the reluctance of state to automatically transfer there the information on previously granted land titles; problems with compiling the new register of land titles and extremely high costs to be born by title owners due to the technical requirements to documents and plot boundaries that are needed for registering; the inability of state to prepare state-owned lands for purchase or lease and the setting of tight time limits for such purchase or lease to be effected by tenants of state lands under the title of permanent (indefinite) use; the inability of state to reduce the cost of boundary demarcation, to organize the work of respective agencies, to impose legal restrictions on transactions (e.g. mortgage) with plots the titles to which are not inserted in the new registers of titles (the procedure being usually conditioned by boundary demarcation); declared inadmissibility of wasting farmlands and their haphazard withdrawal for real estate development regardless of the quality of lands. This list of contradictory interests and actions can be continued.

In 1992 a special body - the Committee on Land Reform and Land Resources under the RF Government (Roskomzem) - was established whose functions included the state administration of land use, the carrying out of land policies and the implementation of land reform in the Russian Federation. This body was working out the strategy and tactics of land reforms taking into account the needs of all sectors. After 1992 it was repeatedly restructured, changed departmental subordination, some of its functions were detached. Beginning from 2004 there is no agency in the country whose statute reads that it is in charge of land resources. Having come a full circle of transformations - from a single body concentrating functions of land policy making and implementation along with administration of land resources to a set of agencies assigned with specific technical functions and then back to a single body - Rosreestr (2009) - the system has lost strategic functions and retained only a mixture of technical ones. The performing of merely technical functions without binding them to strategic goals cannot be successful. However, instead of leading to the re-establishment of a body in charge with land resources, this discontent resulted in nothing more than the dismissal of Rostreestr's head (September 2012). Meantime, without a strategy for the management of land resources it's impossible even to work out the form of the register since it's not clear what information it should include taking into account the emerging new challenges.

Due to the unsatisfactory state of affairs in the organization of land transfer1 in agriculture, in 2008 the RF Ministry of Agriculture managed to secure the transfer under its jurisdiction of the functions of land policy making and implementation as well as of legal regulation of land relations in the part pertaining to lands of agricultural destination. However, the transfer to a branch department of the functions concerning resource that can be used for different purposes hinders its management for the benefit of various groups of stakeholders and agencies. Besides, the branch department is short of personnel capable to elaborate the management strategy and does not have the proper physical and information basis for carrying out these functions.

At present two trends in respect of farmlands have taken shape. The first of them is lobbied by the RF Ministry of Agriculture. It envisages the tightening of measures aimed at the preservation of farmlands' quality and their use for agricultural production. Two Government Resolutions in execution of Federal Law No. 101-FZ of July 24, 2002 "On the transfer of lands of agricultural destination" were adopted:

- RF Government Resolution No. 612 of July 22, 2011 "On the adoption of criteria of critical diminishing of soil fertility of lands of agricultural destination";

- RF Government Resolution No. 369 of April 23, 2012 "On indications of land plots' non-use taking into account specifics of farm production or other related activities in the subjects of Russian Federation".

Besides, the State program for agricultural development envisages the financing of works for monitoring the condition of lands of agricultural destination. However, the implementation of the first Resolution requires regular large-scale examinations of agro-chemical quality of soils while the funds envisaged for that in the State program are very scarce. For instance, only Rb 61.8m were spent for this purpose in 2011 and the projected federal budget allocations for 2012 are as small as Rb 65m. Meantime, only examination of arable lands used by corporate farms and individual private (peasant) farms requires at least Rb 8bn2. It implies that the Ministry's determination is rather a declaration than a real intention.

On the grounds of revealed indications of land non-use (as listed in the second Resolution) one plans to initiate judiciary withdrawal of idle farmlands. In theory this could improve the mobility of land resources. But these indications are so poorly defined that in case a negligent land user has a lawyer it will be very difficult to withdraw his land. The implementation mechanism has a built-in corruption component enabling a bureaucrat to take any decision due to the vagueness of indications. For instance, the Resolution specifies that one of the indications is that "no livestock is grazed on the pastures"3. It's not clear to what conclusion an inspector should come if there is a single goat on a pasture measuring dozens of hectares: does the grazing take place or not? Besides, federal legislation has left no maneuver for regional authorities: they should withdraw non-used lands even in case there is no demand for them from other farm producers. This can result in mass withdrawal of farmlands in territories where their use is still inefficient and the growth of land areas in state ownership. If the non-use is caused by economic factors, the withdrawal of land can't help to reduce the share of idle lands.

1 In foreign literature another term is used - land market.

2 Calculations are based on the costs of examining arable land in selected pilot farms and the total area of arable land in corporate and individual private farms.

3 RF Government Resolution No. 369 of April 23, 2012 "On indications of land plots' non-use taking into account specifics of farm production or other related activities in the subjects of Russian Federation".

Rural families could parcel out plots equivalent to their land shares in large land areas privatized in the course of restructuring collective and state farms for which there is no demand from corporate and individual private farms. However, taken together the amendments made in 2010 to Federal Law "On transfer of lands of agricultural destination", the inability of state to curb prices on works for boundary demarcation, the requirements to normative documents to be submitted when forming a plot make the process very time- and money-consuming. For instance, after the enactment of 2010 amendments the process of parceling out plots in exchange for one land share has actually halted since an owner of such a share has to certify the demarcation layout of not only his plot (usually averaging 4-7 hectares) but also that of the remaining plot with area ranging from hundreds to thousands of hectares. Before the introduction of these amendments each owner could order works for the forming of only his own plot and parcel it out with far less efforts. Due to all these problems in 2009-2010 the RF Ministry of Agriculture started the work on improving land legislation. But in line with the pattern that has become traditional, the introduction of amendments initiated by the RF Ministry of Economic Development and deputies from the Duma's committees on construction and land relations only increased the costs of parceling out plots for rural families instead of making the procedure easier. In the situation when rural residents cannot form their own plots, it does not seem to be fair to qualify lands as non-used and to withdraw them.

At the same time farmlands face growing pressure from developers. The latter have financial capabilities to create formal and informal mechanisms for involving agricultural lands in real estate development irrespective of their value as a non-replenishable natural resource1. The examination of legislative acts shows that in recent years the state attempted to regularize the haphazard withdrawal of land. For instance, by January 1, 2013 the rules of land use and construction in all settlements and city districts should have been adopted. Otherwise, the ban on allotment of land plots for construction from state or municipally owned lands as well as on the issue of permissions for construction or changing of land plots' allowed use category should have come into force. But due to the lack of money and - obviously - of the willingness of officials to regularize the use of land for real estate development such work has not been done in most settlements. Besides, developers need new plots for "dachas" outside residential settlements. In Russia it's customary to create garden and dacha communities - recreation villages for rural residents - on agricultural lands. Only a resolution of local authorities is needed for that. There is no transparent procedure protecting these valuable lands. The practice is highly corruptive.

In June 2012 a draft of the new law "On introducing amendments in the Land Code of the Russian Federation and selected legislative acts of the Russian Federation pertaining to the abolition of land categories and annulling of Federal Law "On transfer of lands or land plots from one category to another"" was introduced to the RF State Duma. According to this draft the currently existing - albeit not very reliable but still protective - mechanisms of managing farmlands are lifted. Taking into account the great lobbying potential of developers the law is very likely to be passed. It predetermines high mobility of agricultural land plots (that will be transferred to developers rather than farm producers) in densely populated areas and their loss for agricultural production. In case the law is adopted - at present it's being discussed - there will emerge additional demand for farmlands from developers, prices will grow and respective plots will become unavailable for agricultural producers.

1 Shagayda N.I. Zashchita zemel' ot iz 'yatiya iz sfery sel 'skokhozyaystvennogo proizvodstva. [Protection of lands against withdrawal from agricultural production.] EKO. - 2008. - No. 5 (407). - Pp. 139-147.

Besides, conflicts are currently aggravating in connection with the withdrawal of land for real estate development by the Foundation for Development of Housing Construction1. The Foundation was created in 2008 in compliance with the President's decision in order to facilitate transfer of federally owned lands that were not used at all or were used for purposes other than their envisaged destination with the aim to encourage construction of residential dwellings and respective infrastructure2. That is, the rational behind creation of the Foundation was the transfer of non-used lands thereto. However, these provisions - i.e. the withdrawal of non-used or misused lands - have not been enshrined in law. Article 15 of Federal Law No. 161-FZ of July 24, 2008 "On facilitation of housing construction" reads that "in case federally-owned land plots are granted to entities on the title of permanent (indefinite) use, this title is terminated without consent of these entities and regardless of the grounds envisaged in Paragraph 2 of Article 45 of the Land Code of the Russian Federation". Article 45 of the Land Code envisages termination of title to permanent (indefinite) land use in two cases: first, different types of violations (littering, non-use, etc.); second, necessity to use the plot for state needs in case of natural and other calamities for some time or forever. Meantime, the provision of Federal Law "On facilitation of housing construction" introduces a broader list of grounds and allows to terminate the title to land without consent of a bona fide user regardless of the fact that the plot is not littered and is rationally used. In fact, the withdrawal of plots and non-replenishable loss of farmlands could be acceptable in some cases, for instance, when a city needs extension of its area. But in this case one mustn't use a punitive mechanism in respect of properly used farmlands; rather, the mechanism of land withdrawal for state and municipal needs should be applied with granting of compensation or an equivalent plot. At present the legislation regulates neither this question nor the question of compensating corporate farms' losses due to the need to purchase additional feeds (that they fail to produce because of the withdrawal of land) and their expenditures associated with non-completed production cycle on this land. Besides, in practice farmlands are by no means always withdrawn for the purposes of facilitating housing construction3.

Beginning from 2011 one of the directions of state support to agriculture is associated with farmlands: the partial subsidizing of expenditures of individual private (peasant) farms (including individual entrepreneurs) on registering of titles to farmland plots used by them. In 2012 the financing of this measure continued. However, the subsidy terms do not contain any limitations as to the amount to be granted per one farm or per hectare. Given budget constraints the result will be the use of these subsidies by only a limited number of farmers having close ties with decision-taking officials as well as the over-pricing of works by cadastral engineers.

4.5.4. Assessment of Outcomes of Russia's Accession to the WTO

Accession to the WTO will require a considerable amendment of Russia's agricultural policies. The meeting of basic WTO requirements will result in the diminishing of import duties and respective budget revenues and in smaller transfers from consumers to producers.

In 2008-2010 the aggregate support to Russian agriculture amounted to Rb 621.8bn including Rb 481.8bn received from consumers of agricultural products and Rb 140bn allocated

1 http://www.permoboz.ru/txt.php?n=9591

2 http ://www.socpolitika.ru/rus/news/document8062. shtml

3 http://www.fondrgs.ru/press/news_detail.php?ID=16949

from the budget (Rb 328.4bn of budget expenditures minus Rb 188.5bn of budget revenues owing to the support measures).

The main direction of Russian agricultural policies' adjustment following the accession to WTO should be the revision of sources of farm support: the reduction of consumer transfers and the growth of allotments from the budget.

Assuming that the amounts of support to domestic agriculture after the accession to WTO remain the same and the country approaches the EU by the structure of sources of support, the allocations from the budget should be increased almost 3 fold (from Rb 140bn to Rb 497bn).

In order to preserve the existing level of support to farm producers (that before joining the WTO was primarily provided at the expense of consumers of farm products), its financing from the budget should grow by approximately $12bn. Without such increment domestic producers will find themselves in unequal competitive conditions and can lose their positions on foreign and home markets. Meantime, it's impossible to increase support by means of amber box measures that are traditionally used in Russia since according to the WTO accession terms they should not exceed $4.4bn. State support is to be provided primarily through green and blue box measures that do not distort the market or distort it to a lesser extent. A mere changing of measures won't help to achieve the desired results. It's obvious that an assessment should be made as to the efficiency of amber box measures, their adjustment to the WTO requirements or substitution by green box measures.

Further follows the assessment of outcomes of Russia's accession to the WTO for selected sectors of agriculture.

1. Pig breeding. In 2010 the domestic purchase price per 1 kg of pork amounted to Rb 107.9 while the respective import price was as low as Rb 62.8, the output of pork totaled 1.993m tons while its consumption - 3.249m tons. Given these prices and volumes, consumer transfers to producers amounted to Rb 89.9bn. Besides, consumer transfers to the state and other agencies owing to imports equaled Rb 56.6bn.

In case the ratio between domestic and world prices - nominal protection rate - falls down to 1 (which is the case in the US and the EU), this will result in the drop of domestic purchase price, the cut of production down to 1.2m tons, the increase of consumption up to 3.7m tons and the expansion of imports from 1.3 to 2.5m tons.

In order to preserve production at the achieved level additional Rb 89.9bn should be allotted to pig breeders from the budget (the compensation for non-received consumer transfers). For output to reach the existing consumption level, allocations from the budget should amount to Rb 146.5bn and complete import substitution is attainable in case of Rb 167.6bn budget spending.

The estimated amounts are well above the total budget provisions for pig producers under the previous and the new State program and even exceed the maximum support to agriculture by means of amber box measures to be achieved by 2018 (as set by Russia's agreement with the WTO). Other measures considered to belong to green box should be elaborated. Besides, it's necessary to modernize the sector, to cut costs and to improve competitiveness of domestic producers on the foreign and home markets without sizable transfers from the budget and consumers.

2. Milk cattle breeding. In compliance with WTO requirements the rate of milk producers' nominal protection will be gradually reducing and the transfers from milk consumers to milk producers will be diminishing as well. In 2010 they amounted to Rb 94.8bn (with output totaling 31.9m tons and the difference between purchase and import prices being Rb 2.9 per kg).

The revenues received by the budget and other organizations owing to consumer transfers per 7.9m tons of imported products will drop by Rb 23.5bn.

In case domestic purchase prices reduce from Rb 12.3 to Rb 9.4 per 1 kg of milk, its production in the country may fall down to 24.2m tons while consumption may rise up to 42.3m tons. To satisfy such demand imports need to be increased up to 18.1m tons implying that their share will grow from 24.8% to 43%.

In order to fulfill the doctrine of food security and meet not less than 90% of demand for milk by domestic production, the latter should amount to 38m tons. It's necessary to allocate Rb 113bn from the budget for compensation of consumer transfers that won't be received by milk producers. It's quite obvious that such a sum cannot be paid under amber box measures. To support milk producers one needs to design measures complying with the requirements of green box, on the one hand, and to work out tools for the reduction of costs and improvement of domestic producers' competitiveness - on the other.

3. Production of beef. The doctrine of food security sets the task to achieve 85% level of self-sufficiency in meat. Its fulfillment is most complicated for beef production. In 2010 about 50% of beef was imported. Crisis in the sector has not been overcome and cattle population continues falling. If following accession to the WTO domestic purchase price (Rb 122.6 per kg) falls down to the level of import price (Rb 100.8 per kg), production will decline even more while consumption will grow and imports will exceed home production almost 1.5 fold.

The 85% level of self-sufficiency will be attained in case domestic production is as large as 2.318m tons. Beef producers should receive Rb 50.7bn from the budget to compensate missing transfers from consumers. However, the problems of meat cattle breeding cannot be solved exclusively by channeling budget funds to the non-competitive sector. Its modernization is required. Meantime, the type of modernization that was used in poultry and pig breeding, i.e. large-scale production concentration is not acceptable for cattle meat breeding. To develop the sector one should start with creating 150,000—200,000 individual private farms that will keep 15-20m meat cows and raise calves up to the weight of 120-200 kg. Basing on this ground echelon it will be possible to develop large-scale businesses - feedlots for fattening cattle, meat processing plants, trade networks.

To launch such a scheme of sector development, one needs respective policies, incentives on the part of government and organizational efforts on the part of large business, the latter's investments not only in feedlots and meat processing but also in contracting farmers engaged in raising of feeder livestock.

4. Broiler poultry production. In the recent decade broiler production has been the most speedily growing sub-sector of agriculture with an annual increment of 10-15%. In the coming 2-3 years Russia can fully satisfy domestic demand for poultry meat and proceed to the exporting of this item. The accession to WTO and the expected lowering of producer protection rate can result in the slowing down of this growth and even in the reduction of output. In 2010 the domestic purchase price amounted to Rb 74.3 per kg of poultry meat while the respective import price equaled Rb 43.6. In case domestic prices drop, the output will fall from 2.7 to 1.6m tons and the consumption will grow from 3.3 to 3.8m tons with imports increasing from 0.6 to 2.2m tons. In order to preserve the achieved level of production Rb 84.3bn need to be transferred from the budget. To secure the achieved rate of satisfying domestic consumption by domestic output Rb 102.3bn need to be allocated and complete import substitution is attainable in case of allocating Rb 117bn.

Such large funds cannot be allotted through amber box measures. Therefore, one needs to elaborate measures complying with green box requirements. Besides, it's necessary to modernize the sub-sector and to switch to production patterns customary for developed countries, i.e. based on collaboration of large companies with smaller broiler farms. Thanks to this collaboration large companies benefit from lower expenditures on investments, electricity, water, protection of environment, resources and output, while farmers receive higher incomes owing to concentration of production, up-to-date technologies, guaranteed marketing, repulsion of encroachments on property and incomes by bandits, raiders, bureaucrats, etc.

5. Production of grain and sunflower seeds. The accession to WTO is likely to produce quite an opposite effect on producers of grain and sunflower seeds. As different from the above examined livestock sectors that will require sizable budget allotments just to preserve the attained levels, membership in the WTO will stimulate domestic production and export of grain and sunflower seeds. Producer transfers to consumers will decrease but this reduction won't affect consumption seriously as the demand for bread, bakery products and vegetable oils is non-elastic.

The accession to WTO and the consequent growth of wheat producers' nominal protection rate up to 1 is expected to have the following effects (estimations based on annual averages for 2008-2010): growth of domestic purchase prices up to the level of export ones (from Rb 4.43 per kg to Rb 4.91 per kg), additional producer revenues amounting to Rb 30bn, increase of output (from 55.7 to 62.3 m tons) and exports (from 14.7 to 22.3 m tons).

4.5.5. Recommendations for Economic Policies

Russia's accession to the WTO necessitates adjustment of domestic agricultural policies to new requirements. The main directions of cardinal revising of the country's farm support policies following this accession are:

- reduction of consumer transfers to producers and to the budget due to the lowering of import customs duties;

- sizable increase of budget support in order to compensate non-received consumer transfers to producers;

- improvement of support structure: reduction of the share of direct support to producers and the growth of expenditures on general support measures;

- revision of support mechanisms: reduction of product-specific subsidies depending on the volume of production of specific products and distorting the market; reduction of input-specific subsidies depending on the volumes of specific inputs' use and also distorting the market; the increasing of subsidies that do not distort the market and belong to green box measures according to the WTO classification;

- ensuring of producers' competitiveness on domestic and foreign markets of all basic farm products primarily by means of modernization and creation of favourable conditions for business. Russia's accession to the WTO implies its consent to the functioning of the whole economy and agriculture in particular in the competitive environment.

State policies should pay more regard to specific conditions of each region: for instance, envisage wider support to rural development instead of prioritizing support to farm production in areas showing signs of its degradation.

In the part pertaining to the improvement of farmland policies it seems rational to develop the concept of state policy envisaging the need to elaborate tools for protecting land use and property rights of bona fide farm producers; to monitor the re-distribution of lands; to curb

concentration of farmlands in property of selected individuals; to classify lands with determining plots of valuable land the involvement of which in real estate development should be limited; to estimate the costs of land transfer and to change procedures entailing high expenditures; to make the spontaneous process of involving farmlands in real estate development more controllable through the adoption of plans for territories' development and agricultural zoning, including the sale of development permits at auctions; to allocate funds to the preparation of state-owned plots for lease or sale; to elaborate standard rules of agricultural zoning with establishing requirements to the density of construction, types of buildings and use of plots; to work out mechanisms of preparing plots for and their transfer to long-term lease by foreign residents while securing the priority of Russian residents and entities in getting titles to these plots; to switch from the procedures of state control over the use of farmland plots to the control by physical and legal bodies interested in the acquiring of non-used plots; to introduce mechanisms forcing owners to use or lease out idle farmland plots; to prioritize the preservation of open spaces on non-used farmlands in order to enable their quick involvement in agricultural production if necessary, etc.

Russia's accession to the WTO necessitates adjustment of domestic farm support measures to the requirements of this organization. Russia traditionally applies measures that are classified as amber box. Adoption of the new State program for the period till 2020 (i.e. to be implemented in compliance with WTO rules) requires estimation of efficiency of amber box measures used under the previous State program that ended in 2012. Before 2009 the collection of initial information from farm producers was assigned to Rosstat and this information was available for calculations and assessment of support measures by independent scientific community. Beginning from 2009 the function of gathering information was transferred from Rosstat to the RF Ministry of Agriculture that abruptly curbed access to this data. For instance, as of December 20, 2012 the information portal EMISS - Common InterDepartmental Information and Statistical System - contained only 2 documents in the section "Ministry of Agriculture": "daily output of milk" and "average daily milk yield". In addition to the fact that local bodies in charge of agriculture each day are engaged in gathering such data from farms, districts and regions irrespective of its questionable usefulness for management of the sector, one can but say that this information is able to satisfy the requests of a very limited set of people. At the same time at present it's impossible to estimate the effect of support measures and to give sound recommendations as to their reduction or expansion basing on calculations. Due to that in order to improve the quality of recommendations it's reasonable to prepare and adopt a government resolution on the rules of getting access to information collected by the Ministry of Agriculture at the expense of Russian taxpayers.

Analysis of the system of state support to agriculture brings to the conclusion that although the principle of co-financing of support measures by the federal and regional authorities has a certain stimulating potential, it needs to be revised in respect to some programs. In order to attain the federal policy goals it's rational to elaborate measures for supporting farm production (including the ones classified as amber box) to be financed from the federal budget irrespective of the capabilities of regional budgets. Meantime it's reasonable to transfer to regions a part of federal funds allocated to the development of rural areas and belonging to green box measures on co-financing terms. This will require re-distribution of authorities between the Federation and regions since at present these are regions that are assigned with this function regardless of the fact that 50% of support of the kind is executed from the federal budget via inter-budgetary transfers. Two federal laws have to be amended in order to revise the distribu-

tion of authorities and the system of channeling budget funds. Since according to the WTO requirements the Russian Federation has to exercise control over expenditures on amber box measures, it's also advisable to work out the mechanisms of controlling such expenditures from the regional budgets. They can include regional quotas for such support established by the federal budget and the possibility to re-distribute them between regions bypassing the Federation - via purchase and sale of quotas between regions. This will also require amendments in the existing legislation as regards the distribution of authorities between the Federation and its subjects and the transfer of control functions to the Federation in case they are associated with the RF international commitments.

In order to preserve the dynamics of growth in some sectors of agriculture after the country's accession to the WTO, additional support should be rendered thereto. This support used to be provided by population that paid higher prices for commodities. The accession to WTO will allow cheaper import products to enter the Russian market and population will stop paying for higher costs of domestic producers due to various reasons. Given that a dramatic increase of budget support will be necessary to compensate funds earlier paid by population. The Russian budget is hardly ready for such an increase. For instance, only producers of pork will need additional Rb 89.9bn to be allocated from the budget (for compensation of non-received consumer transfers) in order to preserve the current level of aggregate support. To increase the output to the existing level of consumption the budget should spend additional Rb 146.5bn and to attain complete import substitution - Rb 167.6bn. These sums are well above the total annual budget expenditures on agriculture under the current and the new State program; they also exceed the maximum amount of funds for amber box measures by 2018 that is established by Russia's agreement with the WTO. One should elaborate other support measures belonging to the green box and to cut transaction costs of pork producers. Besides, the sector needs modernization and diminishing of production costs. Otherwise, it's impossible to secure competitiveness of domestic producers on the home and foreign markets.

In order to fulfill the doctrine of food security as regards milk, i.e. to cover not less 90% of consumption by domestic output, it's necessary to produce 38m tons of milk. Following the accession to WTO consumer transfers to producers (per this quantity of milk) will drop by approximately Rb 113bn. It's quite obvious, that such a sum cannot be paid from the budget. The support to milk producers will require the elaboration of support measures complying with the requirements of green box, on the one hand, and the creation of institutional framework for cutting of farm producers' costs, on the other. The latter goal can be achieved through such steps as, for instance, the lowering of costs charged for connection to utility networks; the transfer to paying for actually consumed electric power versus its preliminarily ordered quantities; the lowering of expenditures on registration of land titles; the encouragement of modernization; improvement of business security; execution of control over milk processors with the view to prevent preferential use of imported dry milk to the detriment of domestic producers of fresh milk, etc.

Following accession to the WTO consumer transfers to producers will drop (due to lower prices). In order to preserve the existing level of support, Rb 50.7bn should be allocated from the budget to producers of beef. However, the problems of meat cattle breeding cannot be solved exclusively by channeling budget funds to the non-competitive sector. Its modernization is required. Meantime, the type of modernization that was used in poultry and pig breeding, i.e. large-scale production concentration is not acceptable for cattle meat breeding. To develop the sector one should start with creating 150,000-200,000 individual private farms

that will keep 15-20m meat cows and raise calves up to the weight of 120-200 kg. Basing on this ground echelon it will be possible to develop large-scale businesses - feedlots for fattening cattle, meat processing plants, trade networks.

To launch such a scheme of sector development, one needs respective policies, incentives on the part of government and organizational efforts on the part of large business, the latter's investments not only in feedlots and meat processing but also in contracting farmers engaged in raising of feeder livestock.

In order to preserve the achieved level of broiler production Rb 84.3bn need to be transferred from the budget. To secure the achieved rate of satisfying domestic consumption by domestic output Rb 102.3bn need to be allocated and complete import substitution is attainable in case of allocating Rb 117bn.

Such large funds cannot be allotted through amber box measures. Therefore, one needs to elaborate measures complying with green box requirements. Besides, it's necessary to modernize the sub-sector and to switch to production patterns customary for developed countries, i.e. based on collaboration of large companies with smaller broiler farms. Thanks to this collaboration large companies benefit from lower expenditures on investments, electricity, water, protection of environment, resources and output, while farmers receive higher incomes owing to concentration of production, up-to-date technologies, guaranteed marketing, repulsion of encroachments on property and incomes by bandits, raiders, bureaucrats, etc.

4.6. Foreign Trade

4.6.1. The State of Global Economy

In 2012 the global economy was developing in the situation of high uncertainty. Although the economic recovery after the global financial crisis continued, its growth rate has slowed down: if in 2010 the global GDP has grown by 5.1%, in 2011 - by 3.8% and in 2012 - by 3.2%.

The major threat to the economy came mainly from the Eurozone, which failed to cope with the sovereign debt crisis. Although most governments in European countries have taken a ply to reducing the budget deficit, significant progress in the fight against the debt crisis could not be reached. According to the second tentative estimates of Eurostat1, the GDP of 27 countries of the European Union (EU-27) in 2012 as compared with the previous year has decreased by 0.3% and GDP of 17 Eurozone countries - by 0.6%. Herewith, in the Eurozone countries the GDP decrease was observed throughout the year. Thus, in Q1 as compared with the same period of 2011, the Eurozone GDP has decreased by 0.1%, and in the Q2 - by 0.5%, in the Q3 - by 0.6%, in the Q4 - by 0. 9%. According to the forecast of the European Central Bank (ECB), the countries of Europe, experiencing the economic crisis can start recovery by the middle of 2013. However, the transition to worldwide economic growth in the region will be visible only by the beginning of 2014.

Throughout 2012 the leading economy of the world - the United States was able to maintain growth, and in Q3 even significantly accelerate its rate. Thus, having slowed down in the Q2 from 2.0 to 1.3% of GDP, the growth rate in annual terms has accelerated in Q3 to 3.1% (according to the US Bureau of Economic Analysis2). However, in Q4 the GDP has declined

1 http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06032013-AP/EN/2-06032013-AP-EN.PDF

2 http://www.bea.gov/national/index.htm#gdp

by 0.1% for the first time since 2009, when the global economy was in a recession. Nevertheless, as per results of 2012, the US economy has demonstrated growth in the amount of 2.2%. Such growth cannot resolve all economic problems, but it represents a further step on the path to sustainable growth and reduction of unemployment, which is an encouraging indicator for the global economy.

Downturn in the Eurozone, the risks associated with the sovereign debts' crisis, forecasts on cooling the global economy and fluctuations of financial markets have provided a significant impact on the economies of developing countries. Throughout the year there was a slowdown of the Chinese economy growth. As a result, over the year the national GDP has grown by 7.8%1, which is the lowest level in the latest 12 years.

The growth rate of the Brazilian economy continues to decrease. The growth rate slowing was started at the beginning of Q1 2010, when Brazil economy has grown by 9.3%. Then, the GDP growth rates were declining steadily from quarter to quarter. In 2012 the economic growth rates have fallen sharply: quarterly growth has never exceeded 1%. Thus, in Q2 2012, the GDP growth rate in annual terms has decreased from 0.8% to 0.5%, in Q3 there was a slight acceleration to 0.9%. Overall, in 2012 Brazilian GDP has increased as compared with

2011 by 1.3% (whereas in 2011 the growth made 2.7%, in 2010 - 7.5%)2.

In the economy of India in 2012 there were noted the slowest rates in three years. Thus, in Q1 2012, the GDP has grown by 5.3% in Q2 - by 5.5%, and in Q3 it has again slowed down to 5.3% against the relevant period of the previous year. In general, the Indian economy has grown by 5.4%3, which is the weakest indicator in the last decade.

International economic organizations during 2012 were repeatedly reducing their forecasts for further development of the global economy. Thus, in October Bulletin Prospects and Outlooks for the Growth of the Global Economy, the International Monetary Fund has cut down its outlook for global growth in 2012 to 3.3% in 2013 to 3.6% in 2013. In the July issue of the Prospects and Outlooks for the Growth of the Global Economy for 2012, the relevant forecast was presented at the level of 3.5 and 3.9%. And even earlier, in the April 2012 Prospects and Outlooks for the Growth of the Global Economy, the outlook for growth in the world economy has been higher than in July. Herewith, the forecasts for both, the countries with advanced economies and for those of emerging market and developing countries. In the January 2013 issue of the Bulletin the forecasts for nearly all countries were downgraded again (See Table 46).

In November 2012, the Organization for Economic Cooperation and Development (OECD)4 has also decreased its forecast for the global economy development, having warned that the greatest threat to global economic growth remains the indebtedness crisis in the Eurozone. The OECD report "Economic Perspectives" has forecasted the global GDP growth in

2012 by 2.9% and by 3.4% in 2013. Thus, there was also a significant adjustment of the forecast given in May 2012. Then the organization was assuming that in 2012, the global economy would grow by 3.4% and in 2013 - by 4.2%. The GDP growth in OECD countries is expected to reach 1.4% in 2013, accelerated in 2014 to 2.3%.

1 https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

2 https://www.cia.gov/library/publications/the-world-factbook/geos/br.html https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2012-

issue-2_eco_outlook-v2012-2-en

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Table 46

Dynamics of the Global GDP and Global Trade Growth Rate in% against

the Preceding Year

IMF estimates Difference between the forecasts made in October 2012 and in January 2013

2010 2011 2012 2013 2014 2013 2014

Global GDP 5.1 3.9 3.2 3.5 4.1 -0.1 -0.1

Countries with advanced economy 3.0 1.6 1.3 1.4 2.2 -0.1 -0.3

USA 2.4 1.8 2.3 2.0 3.0 -0.1 0.1

Eurozone 2.0 1.4 -0.4 -0.2 1.0 -0.3 -0.1

Germany 4.0 3.1 0.9 0.6 1.4 -0.3 0.1

France 1.7 1.7 0.2 0.3 0.9 -0.1 -0.2

Italy 1.8 0.4 -2.1 -1.0 0.5 -0.3 -0.0

Spain -0.3 0.4 -1.4 -1.5 0.8 -0.1 -0.2

Japan 4.5 -0.6 2.0 1.2 0.7 0.0 -0.4

Great Britain 1.8 0.9 -0.2 1.0 1.9 -0.1 -0.3

Canada 3.2 2.6 2.0 1.8 2.3 -0.2 -0.1

Other countries with advanced economy 5.9 3.3 1.9 2.7 3.3 -0.3 -0.1

Newly industrialized Asian economies 8.5 4.0 1.8 3.2 3.9 -0.4 -0.2

Emerging markets and developing countries 7.4 6.3 5.1 5.5 5.9 -0.1 0.0

Central and Eastern Europe 4.6 5.3 1.8 2.4 3.1 -0.1 0.0

CIS 4.8 4.9 3.6 3.8 4.1 -0.3 -0.1

Russia 4.3 4.3 3.6 3.7 3.8 -0.2 -0.1

Outside Russia 6.0 6.2 3.9 4.3 4.7 -0.5 -0.1

Developing Asia 9.5 8.0 6.6 7.1 7.5 -0.1 00

China 10.4 9.3 7.8 8.2 8.5 0.0 0.0

India 10.1 7.9 4.5 5.9 6.4 -0.1 0.0

Latin America and the Caribbean 6.2 4.5 3.0 3.6 3.9 -0.3 -0.1

Brasilia 7.5 2.7 1.0 3.5 4.0 -0.4 -0.2

Mexico 5.6 3.9 3.8 3.5 3.5 0.0 0.0

World trade in goods and services 12.6 5.9 2.8 3.8 5.5 -0.7 -0.3

Imports

Advanced economies 11.4 4.6 1.2 2.2 4.1 -1.1 -0.4

Emerging markets and developing countries 14.9 8.4 6.1 6.5 7.8 -0.1 -0.1

Exports

Advanced economies 12.0 5.6 2.1 2.8 4.5 -0.8 -0.4

Emerging markets and developing countries 13.7 6.6 3.6 5.5 6.9 -0.2 -0.2

Source: http://www.imf.org/external/russian/pubs/ft/weo/2013/update/01/pdf/0113r.pdf

The US economy will grow in 2013 only by 2.0%, while in May the OECD was forecasting the growth at 2.6%. The most serious internal risk to the favorable growth of the U.S. economy is the possibility of a sharper-than-planned budget reduction, if the U.S. politicians fail to reach an agreement on the prevention of substantial automatic tax rates growth and the schedule of costs reduction in early 2013. In the worst-case scenario, the amount of the budget adjustment can reach more than 4% of GDP. Financial adjustment in 2013 will have an impact on the economy of the U.S. and its major trading partners, as well as on the export of raw materials (due to lower cost of raw materials).

In October 2012 the World Trade Organization (WTO) has published the annual package of documents, presenting the detailed statistics on the volume of trade flows and on tariff rates in 20111, according to which the growth of trade in goods in 2011 was 5% under the global GDP growth by 2.5%. In 2010 those indicators were 13.8% and 3.8%, respectively. In the pre-crisis period of 1990-2008 the average indicators of the annual growth rates of trade in goods were at the level of 6%.

1 http://www.wto.org/english/news_e/newsl2_e/stat_23octl2_e.htm

In 2011 the largest exporter of goods in the world (in value terms) was China, the exports of which had increased by 20% to $1.898bn. The share of China's share in the global exports made 10.4%. The USA takes the 2nd place with the exports of $1.48bn, and Germany is at the 3rd place, which has exported goods worth $1.472bn. Russian Federation with exports of $522bn has came up to the 9th place from the 12th, which it held in 2010.

In terms of the volume of imports in 2011 at the 1st place was the United States, which has purchased abroad the goods for $2.266bn. The 2nd place is held by China, imports of which amounted to $1,743bn; the third place is held by Germany, which imported goods for the amount of $1.254bn. The Russian Federations rose from 18th place, which was occupied in 2010, to the 17th place, having bought abroad goods for the amount of $324bn.

In 2012 the foreign trade turnover of the U.S. made $3.82 trillion1, China - $3.87 trillion2. Therefore, as of 2012 results, China became the leader of the global trade in goods, having overcome the United States, which was the leader in this regard since 1945.

WTO has reduced the forecast for growth of the global trade for 2012 to 2.5% from 3.7%, which was given by the organization in the previous forecast, made in April 2012.

For 2012, the growth of exports from developed countries was projected by 1.5%, and from developing countries by 3.5%. Import of the first group of countries will increase by 0.4%, i.e., it will be almost stagnant, and of the second group by 5.4%. The forecast for April 2012 was more optimistic: there is expected growth by 1.9 and 6.2%, accordingly. Relevant indicators are lowered also for 2013: WTO finds that the global trade will grow by 4.5% instead of 5.6%. Herewith, further adjustment can take place in case of continued uncertainty in the European financial system.

The need to revise the WTO forecast in April is largely due to the decline in trade within the EU and the EU trade with the outside world.

4.6.2. Terms of the Russian Foreign Trade: Market Prices for the Major Exported and Imported Goods

In addition to the global slowdown in economy, commodity markets in 2012 were influenced by other factors. The major event in the global energy market was the development of shale oil and gas fields in the U.S. Shale gas production has led to a significant decline in prices in the domestic market. Right now they are lower than in Europe or Asia. Meanwhile, the growth of oil production affects the world market through the reduction in demand from the U.S., which slows down the growth of prices.

The tense situation in the North Africa and the Middle East, as well as the introduction of the EU and U.S. sanctions against Iran have prevented from the sharp fall in the price of energy sources. In 2012 the EU has joined the U.S. stringent sanctions regime in regard to Iran with the purpose to influence the nuclear program of that country. Many traditional buyers have drastically reduced or restrained from purchases energy sources from Iran. In general, tightening of the U.S. and the EU sanctions has led to reduction of oil exports from Iran. Increased supply from Saudi Arabia, Iraq and other countries - OPEC members helped to smooth the effect of the reduction in the supply of Iranian oil to the global market.

One of the most anticipated events of the year was the launch of quantitative easing program (QE3) by the U.S. Federal Reserve. With the expectations of new injections of liquidity by the U.S. Federal Reserve and the rise in the global economy activity commodity quotes

1 http://www.trade.gov/press/press-releases/2013/export-factsheet-february2013-020813 .pdf

2 http://english.customs.gov.cn/tabid/47819/Default.aspx

after a serious correction in the H1 2012 began to rise in the H2 of the year. However, due to the sustained poor dynamics in both, the developed and the developing countries the launching of a new program of asset purchases by the U.S. Federal Reserve was not enough. After a short-term growth, quotations of many primary assets quickly returned to the previous levels achieved before the launch of QE3.

In some regions of the world in 2012 there were noted abnormally hot and dry weather conditions, which affected crop areas of Russia, Australia, Brazil, India. The most serious damage was caused to the agricultural sector of the United States, where by a number of assessments the drought has been the most significant in the last fifty years. Badly damaged were the harvests of soybean, grain, and a number of forage crops. Against this background, food prices began to grow.

However, in general, in 2012 the average FAO Food Price Index1 made 212 points, which is by 7% lower than in 2011. The most significant was the decline in sugar prices index (17.1%), dairy products (14.5%) and vegetable oils (10.7%), to a lesser extent were reduced prices for cereals (2.4%) and meat (1.1%).

The price index of primary commodities (PIPC)2 calculated by the IMF, in 2012 was also lower than in 2011 - 186.2% against 192.2%. A significant reduction was observed in the group of metals, the price index of which has decreased from 229.7% in 2011 to 191% in 2012. In the group of energy sources there was a slight increase from 193.8% in 2011 to 195.2% in 2012.

Energy sources Metals Foodstuff PIPC

Source: IMF.

Fig. 48. IMF price index of primary commodities (PIPC) (2005 = 100)

As a result of the "shale revolution" in the United States, the global energy market got split into two mutually independent parts - the Eurasian market, where high oil and gas prices are retained, and the U.S. market, where a decrease in the prices of these commodities is observed. The U.S. market is almost entirely dependent on the state of the U.S. economy, the continuing tensions in the Middle East are not affecting energy prices in the region. Elsewhere in the world market prices of oil are driven by the demand in Europe and Asia, tensions in the Middle East, as well as the problem of Iran.

1 FAO Food Price Index (Food and Agriculture Organization) is a measure of the change in a basket of international prices of food commodities over the last month.

2 PIPC is a weighted average price index of 51 types of primary commodities, grouped into three main groups -energy sources, industrial resources (mainly base metals) and foodstuff.

As a result, the price dynamics in the global oil market in 2012 was different depending on the brand. Thus, the price of Brent crude oil on average for the year increased by 0.9% to $111.97/bbl, while crude oil WTI price, by contrast, fell down by 0.7% to $94.1/bbl.

Throughout the 2012 difference between the prices of European Brent crude oil and American brand WTI increased by cheaper WTI. In November 2012 Brent price was by $23 more than WTI, despite the fact that until the mid-2009 the U.S. WTI crude oil cost was by $2-3 more expensive than Brent.

Global market prices for Brent crude in 2012 did not demonstrate nether any downfalls, no sharp upsurges. They have reached the maximum level on March 17, having risen to $126.16/bbl. One of the main factors affecting the price dynamics of the oil market in this period was intensified conflict between Iran and the EU: the rise in prices in Q1 was due to the decision taken by the EU on sanctions against Iran and termination of oil imports from this country from July 1. Due to the fears of possible shortages of raw materials the oil price has grown up to the maximum level of the first year above $120/bbl. Brent oil price was sustained from mid-February to mid-April.

In mid-April prices have begun to decline. On June 1 Brent crude fell to $98.53/bbl. and for 1.5 months was kept below $100/bbl. During this period, once again debt problems in Greece were aggravated. The Euro rate against dollar fell down to a two-year minimum. Besides Iran, after eighteen-month pause has resumed negotiations on its nuclear program with the mediators (Russia, Britain, China, the U.S., France and Germany). There was hope that the opposition of the parties could be settled without a conflict. As a result, the price of Brent oil on June 21 has reached an annual minimum - $89.48/bbl.

In Q3 price growth has resumed, and its main cause was the entry into force of the embargo on imports of Iranian oil. Although Saudi Arabia and other OPEC countries increased production and prevented oil shortage, the major role was played by psychological factor. In addition, the market situation was affected in this period Euro strengthening against dollar.

In Q4 of the price dynamics was more regular: the price of Brent crude oil was fluctuating around the value of S110/bbl. The average price of Brent in 2012 has grown by 0.92% as compared with 2011 to $111.97/bbl.

Following the dynamics of the world market, the price of Urals oil in early 2012 began to rise dramatically, and in March its monthly average price exceeded the level of $123/bbl, maximum since 2008. However, in Q2 it began to decline. In June the price was $93.3/bbl, which is the lowest level since December 2010. In Q3 and Q4 the price dynamics got improved. As a result, throughout 2012, the average price of Urals oil surpassed that of 2011 by 1% and reached S110.41/bbl. Recall that in 2011 the Urals oil price increased by 40% as compared with 2010.

The global market for natural gas in 2012 was also rather volatile. In the U.S., because of the large supply of gas produced in shale deposits, its market price for the H1 was below the level of $2.68/ 1 million BTU. Herewith, in April the price in the U.S. has dropped down to $1.95 / 1 million BTU, and in October it has grown up to $3.32 / 1 million BTU. But still the U.S. gas remains the cheapest in the world.

In Southeast Asia the situation was different. Because of the strong earthquake that occurred in 2011, the demand for liquefied natural gas was sharply increased in Japan. The price of gas in this region is the highest in the world. In Europe gas prices are also much higher than in the U.S. However, Qatar, which until recently was supplying large volumes of lique-

fied natural gas to the U.S. market, was forced refocus on Europe, and as a result, prices there have gone down: under the spot contracts the gas sold for $320 per 1000 m3.

The global market of non-ferrous metals began to deteriorate from the end of 2011, which is due to the overall macroeconomic problems - European debt crisis and its impact on the global economic growth and on the slowdown of economic activity in the U.S. and China. A short-term growth rates in the first two months of 2012 was replaced with their downgrading, which lasted until the H2 of August. At the end of Q3 2012, the market has been recovered due to the Euro growth against the dollar, as well as because of promoting measures announced by the U.S. and China to support their economies.

However, according to the London Metal Exchange, in 2012, prices for aluminum were lower than in 2011 by 15.8%, for copper - by 9.8%. The worst of all was the price situation in the nickel market, which has fallen down by 23.4%. Further price decline will be likely restrained by the reduction of metal production and higher production costs.

Under the current trends of the global market, the terms of trade in 2012 in Russia, although remained favorable, have significantly deteriorated as compared with 2011. If in 2011 the terms of trade (the ratio of export price index versus the import price index) was 125.3 points, in 2012 it made only 104.4 points.

Table 47

Average Annual Global Prices

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Oil (Brent), $/bbl 25.02 28.83 37.4 54.38 65.15 72.32 97.64 61.86 79.64 110.9 111.97

Oil WTI, $/bbl 26.09 31.11 41.44 56.44 66.04 72.28 99.56 61.65 79.43 95.05 94.16

Natural gas(USA), $/1m BTU 3.36 5.49 5.89 8.92 6.72 6.98 8.86 3.95 4.39 4.00 2.75

Natural gas, European market, $/1m BTU 3.05 3.91 4.28 6.33 8.47 8.56 13.41 8.71 8.29 10.52 11.47

Natural gas(Japan), $./1m BTU 4.28 4.73 5.13 5.99 7.08 7.68 12.55 8.94 10.85 14.66 16.67

Copper, $./ton 1559 1779 2866 3679 6722 7118 6956 5149 7534 8828 7962.4

Aluminum, $./ton 1350 1431 1715 1898 2570 2638 2573 1665 2173 2401 2023.3

Nickel, $./ton 6772 9629 13823 14744 24254 37230 21111 14655 21809 22910 175476

Source: estimated by the data of the London Metal Exchange (UK, London) and the World Bank

160,0

ft 5 a a

Non-CIS states —

* < ^ O CIS

(N (N (N <N

ft 3 M < ^ o

Source: Ministry of Economic Development of Russia.

Fig. 49. Terms of Foreign Trade Index

4.6.3. Key Indicators of the Russian Foreign Trade

In 2012 the national foreign trade turnover, computed by the balance-of-payments methodology amounted to $864.7bn, which is by 2.2% higher than the relevant indicator of the last

year, while with non-CIS countries it rose by 3.1% to $735.5bn, and with the CIS countries it has decreased by 2.4% to $ 129.2bn.

Foreign trade quota in 2012 decreased as compared to 2011 from 44.5% to 42.9%, though the share of foreign trade in GDP OS remained significant.

It is worth noting that in January 2012 the foreign trade turnover has grown by 28.8% (with respect to January 2011). Imports began the year with the growth by 22.7% and exports - by 31.7%. Then, at the background of the expansion of the debt crisis in the Eurozone and the slowdown in the Russian economy, the dynamics of international trade began to weaken. While in 2011 the average monthly exports growth made up 30.3% and imports - 32.2%, in 2012 they made 2.4% and 4.3%, respectively.

The average monthly growth of Russian exports to the non-CIS countries was reduced from 29.7% in 2011 to 3.2% in 2012 and to the CIS countries from 35.7 to 1%. Average monthly growth of imports to Russia from foreign countries in 2011 was 31%, in 2012 -5.7%. After an average monthly growth of 39.3% in 2011, in 2012 imports from the CIS countries was falling down monthly by 2.9% on average.

Balance Exports Imports

Source: RF Central Bank.

Fig. 50. Key Indicators of the Russian Foreign Trade, $bn

Sustainability positive dynamics of Russian exports throughout the year was mainly due to the price factor. Import growth was based on the increase in its volumes accompanied with lower average prices.

Table 48

Russian Foreign Trade in % vs. Preceding Year

2010 2011 2012

Measured by volume Measured by average prices Measured by volume Measured by average prices Measured by volume Measured by average prices

Exports 110.0 119.8 97.8 132.9 99.9 101.6

Imports 135.4 101.6 122.2 109.1 105.1 97.3

Source: Federal Tax Service of Russia.

The trade balance in 2012 was positive - $193.8bn, which is by 2.2% less than in 2011. The coverage ratio of exports to imports has dropped from 161.2% in 2011 to 157.8% in 2012.

The imbalance of foreign trade ratio (the ratio of surplus to the trade turnover) has also decreased from 23.4% in 2011 to 22.4% in 2012.

Exports Structure Dynamics

External demand for the goods produced in Russia remained weak in 2012. The volume of Russian exports exceeded that of the previous year by 1.4%, having grown to $ 529.3bn. The growth was due to an increase by2% of export to foreign countries, where the Russian goods were exported at the amount of $446.8bn. To the CIS countries there were sold goods worth of $ 82.5bn, which is by 1.6% less than in 2011. The total share of the non-CIS countries in exports has increased from 83.9 to 84.4%.

Table 49

Russian Exports Dynamics, $bn

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Exports, $bn Including 101.9 107.3 135.9 183.2 243.8 303.6 354.4 471.6 303.4 400.6 522.0 529.3

Non-CIS countries 86.6 90.9 114.6 153.0 210.2 260.2 300.6 400.5 255.3 338.0 438.2 446.8

Growth rates in % vs. preceding year

Volume index 104.2 115.0 109.5 110.7 104.7 105.8 105.0 96.8 97.0 110.0 97.8 99.9

Price index 93.8 86.0 113.4 122.7 126.9 119.7 110.9 137.4 76.4 119.8 132.9 101.6

Source: the Bank of Russia, Ministry of Economic Development of Russia.

The share of energy products in the Russian exports remains excessively high, and the share of machinery, equipment and vehicles is rather insignificant. As of the end of 2012, the share of exports of mineral products made 71.4% (including fuel and energy products in the amount of 70.4%), the share of machinery, equipment and vehicles - only 5%, like in 2011.

600

500

400

300

200

100

I

I

i

I

□ Other goods

□ Machinery, equipment, and vehicles

□ Metals, precious gems and manufactures thereof

DO Textile products, footwear

B Chemicals, caoutchouc

2007 2008 2009 2010 2011 2012

Source: Federal Tax Service of Russia.

Fig. 51. Russian Export Commodity Structure, $bn

In 2012 exports of fuel and energy products increased by 2% as compared with 2011, mainly due to the price component.

0

According to the Ministry of Energy, the volume of Russian oil exports in 2012 has decreased by 1% as compared with 2011 - up to 239.64m tons. Oil supplies to the non-CIS countries have decreased by 0.34% - up to 211.48m tons, to the CIS countries - by 5.7% to 28.17m tons.

In 2012 the sales of Russian gas abroad have been decreased by 8.7% against 2011 - to 186.1bn m3. The decline in demand for it on the international market was due to the increased competition from other suppliers and the reduction of gas consumption in Eurozone. The Russian gas supplies were decreased to both, CIS and non-CIS countries.

OAO Gazprom in its report for Q3 2012 also provides data on the decline in sales abroad. As compared with 2011, the sales decreased by 10.8%. Basically this result is due to a sharp decline in exports to Ukraine. However, as can be seen from Table 50, in 2012 almost all countries have reduced the purchase of Russian gas.

Table 50

Natural Gas Imports of OAO Gazprom in 2012

Country m3 bn In % vs. 2011

Germany Italy 33.16 97.4

Italy 15.08 88.3

Turkey 27.02 103.9

France 8.04 84.4

Finland 3.75 89.5

Austria 5.22 96.1

Greece 2.5 86.5

Netherlands 2.31 52.9

Switzerland 0.3 97.4

UK 8.11 99.4

Hungary 5.29 84.6

Poland 9.94 96.7

Slovakia 4.19 71.1

Czechia 7.28 95.9

Rumania 2.17 76.7

Bulgaria 2.53 90.4

Serbia and Montenegro 0.74 53.2

Slovenia 0.5 94.3

Bosnia and Herzegovina 0.26 92.9

Macedonia 0.08 60.4

Ukraine 32.87 82.2

Belorussia 20.26 101.3

Moldavia 3.08 99.3

Lithuania 3.32 97.4

Latvia 1.12 94.5

Estonia 0.62 93.1

Kazakhstan 0.93 99.1

South Ossetia 0.03 115.4

Armenia 1.94 120.5

Georgia 0.25 133.7

Total 202.89 91.8

Source: http://www.gazprom.ru/f/posts/21/499896/qr0412.pdf

According to the International Monetary Fund (IMF), average contract prices for Russian natural gas on the border of Germany have increased over the year on average by 13.8% to $431.3/1000 m3, but in Q4 2012 they have decreased as compared with the same period in 2011 by 3.7% to $418.2/1000 m3. According to the Ministry of Economic Development of Russia, due to increased production of gas from shale deposits in the U.S. and the increased share of spot contracts, OAO Gazprom will no longer be able to maintain high prices for its

long-term contracts. Russian gas price in the markets outside the CIS is forecasted as follows: in 2013 - at the level of $362/1000 m3, in 2014 - $352/1000 m3, in 2015 - $366/1000 m3.

The volume of oil products supply to the non-CIS countries increased by the results of 2012 by 0.9% to 121.0m tons. Herewith, there was almost a nearly twice decrease in exports of gasoline (from 2.4m to 1.4m tons), which is not only due to the increased export duty. Also during this period, there was a 0.1% reduction in the export of diesel fuel - up to 33m tons, however, exports of liquid fuels (heating oil) rose by 3.5% - to 72.9m tons. As a result, the share of heating oil in the total exports of petroleum products to the non-CIS countries has grown, and as of 2012 it amounted to 51.5% against 48.9% in 2011. The growth occurred despite the introduction in 2011 of a new formula for calculating the export duty ("60-66"), which led to a substantial increase of taxes on heavy oil products.

Exports of metals and products therefrom have decreased in 2012 as compared to 2011 by 6.5% (from $47.5bn to $44.5bn). The share of this product group in the total Russian export has decreased to 8.5% against 9.2% in 2011.

Throughout 2012 there was observed a significant increase in the volume of exports of non-ferrous metals: copper export and its products in physical terms has increased by 36.9%, aluminum and its products - by 3.9%, nickel and its products - by 11.9%. Growth of the physical volume of exports of non-ferrous metals to some extent has compensated the loss of revenue of the Russian companies from falling global prices for base metals. Nevertheless, in price terms, exports of aluminum in 2012 have decreased by 4.6% to $ 6.5bn, nickel - by 17.3% to $ 3.7bn, copper exports rose by 18.4% to $1.9 bn. Virtually all exports of copper and nickel were carried out to non-CIS countries. To the CIS countries there were supplied only 8.900 tons of copper and 0.500 tons of nickel.

Exports of chemical products in 2012 amounted in price terms to $32bn, which is lower than the same period of 2011 by 2%. Its share in the total exports of major commodities in 2012 has decreased to 6.1% against 6.3% in 2011. The leading position in this product group occupy fertilizers (2.1% of the total exports of essential goods), inorganic chemistry products (1.4%) and synthetic caoutchouc (0.5%).

In 2012, there was a significant reduction in the export of timber and pulp-and-paper products. While in 2011 the goods of this group were sold abroad in the amount of $11.3bn, in 2012 they were sold only for $10.1bn, i.e., by 10.2% less. This decrease was due to both, lower contract prices, and to reducing the physical volumes. The physical volumes of exports of raw timber have decreased by 16.8%, of timber - by 3.4%, of newsprint - by 6.5%. Physical export volume of pulp has been increased by 12.4%.

In the consolidated list of commodity items the only commodity group, which experienced strong growth in exports in 2012 became the group "foodstuffs and raw materials for production thereof". Cost volume of supply of these products has increased by 24.5% to $16.6bn, and physical volume - by 25.3%. The share of this group has been increased to 3.2% from 2.6% in 2011 due to the high growth dynamics of exports in H1 of the year, during which it increased nearly twice. However, the crop failure prevented from maintaining a high rate of growth in the supply of foodstuffs.

Physical volume of exports of food products were increased primarily due to the export of crops. In addition, the volume of exports of sunflower seed and oil has been significantly increased.

Exports of wheat and meslin increased by 22.9% to $4.5bn mainly due to an increase in contract prices (by 16.6%). In physical terms, this indicator amounted to 16.6m tons, which is

by 5.4% more than last year. The main part of the grain - 15.49m tons ($4.36bn) was exported to the non-CIS countries.

At the same time, the rate of the Russian grain exports from the beginning of the agricultural season (started from July 1, 2012) is lower than in the past. According to the RF Ministry of Agriculture, grain exports from July 1, 2012 to January 30, 2013 amounted to 13.5m tons, as compared to 19.4m tons a year earlier. This is based on the reduced crop harvest due to the drought: in 2012 in the Russian Federation there was harvested 70.7m tons of grain against 94.2m tons in 2011.

As of the of 2012 results, the Russian exports of rice has reached its historical maximum of 334,000 tons, which is more than twice higher than in 2011, and by1.7 times higher than the previous record in 2010. According to the RF Ministry of Agriculture, rice harvest in Russia in 2012 amounted to about 1.5m tons, which almost completely satisfied domestic demand and supply the excess to the world market. 169,000 tons of paddy and 165,000 tons of rice grains were sold abroad. The largest buyers were Libya, which acquired 30% of Russian rice, and Turkey, which has purchased 25% of Russian exports of rice. The overwhelming share of purchases of both countries is paddy. Rice grains are traditionally exported to the former Soviet Union countries: Turkmenistan, Tajikistan, Azerbaijan and Kyrgyzstan.

According to the Russian Union of Sugar Producers, in 2012 there were exported 1.4m tons of sugar of the beet production complex, which is the absolute maximum for the entire post-Soviet period. This happened due to the increased investments in the upgrading of basic production assets and increase of the capacity of the recycling of beet pulp in sugar mills, which were previously considered as waste product.

Exports of machinery, equipment and vehicles increased in 2012 as compared to the previous year by 1.8%. According to the Federal Tax Service of Russia, compared to the 2011, the supply of railway equipment increased by 20.1%, of mechanical equipment - by 11.8%, of optical instruments and apparatus - by 6.3%, of electrical equipment - 2.0%. The cost volume of supply of land transport (except railway equipment) increased by 10.4%.

Imports Structure and Dynamics

Russian imports in 2012 have increased as compared to 2011 by 3.6% to $335.4bn. Imports growth was due to increasing imports from the non-CIS countries, from where the imported goods made $288.7bn, which is by 4.9% exceeds the relevant indicator of 2011. Imports from the CIS countries have decreased by 3.7% to $ 46.8bn. The share of non-CIS countries in the total imports has increased from 85.0% to 86.1%.

Table 51

Russian Imports Dynamics, $bn

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Imports,$ bn, 53.8 61.0 76.1 97.4 125.4 164.3 223.5 291.9 191.8 248.6 323.8 335.4

Including:

Non-CIs coun- 40.7 48.8 61.0 77.5 103.5 140.2 191.7 252.9 167.7 213.3 275.3 288.7

tries

Growth rates in % vs. preceding year

Physical vol- 129.1 117.6 119.2 124.2 122.4 130.1 127.1 113.5 63.3 135.4 122.2 105.1

ume index

Price index 94.3 93.4 98.7 106.1 106.5 105.5 107.6 117.8 99.1 101.6 109.1 97.3

Source: Bank of Russia, Ministry of Economic Development of Russia.

The major trend in 2012 was the slowdown of imports, which has occurred in all major product groups. Imports supplies of food products, metals, products thereof and mineral prod-

ucts were decreased. Imports of machinery, equipment and vehicles, textiles, textiles footwear, chemicals have slightly increased.

Slower growth rates in imports are due to the deterioration of the dynamics of domestic demand at the background of slowing economic growth in Russia. The deterioration of the industrial production dynamics has led to a decline in investment demand. Consumer demand in Russia in 2012 was growing not so much due to increasing incomes, but rather due to the increasing consumer lending and reduction of savings rate. In view of the above, it was difficult to maintain stability of the active consumer demand. Already in July, consumer crediting in the country started to slow down, and against the background of rising interest rates the disposition of population to savings started to increase.

Imports structure in terms of commodities in has not changed much in 2012. The share of the foodstuffs and agricultural raw materials has decreased compared to 2011 by 1 p.p. and amounted to 12.9%. The share of machinery, equipment and vehicles has increased by 1.9 p.p. to 50.5%.

350

300

250

200

150

100

50

I

1

2007 2008 2009 2010 2011 2012

Source: RF Federal Tax Service.

□ Other goods

□ Machinery, equipment, and vehicles

□ Metals, precious gems and manufactures thereof

B Textile products, footwear

□ Chemicals, caoutchouc

Mineral products

□ Foodstuffs and raw agricultural raw materials (excluding textile)

Fig. 52. Russian Imports Commodity Structure, $bn

In 2012 in the Russian Federation there were imported foodstuffs and agricultural raw materials for $40.2bn, which is by 5.5% less than in 2011. The physical volume of deliveries of foodstuffs as compared to 2011 has been decreased by 12.3%.

As a result of the growth of sugar self-sufficiency of Russia, imports of raw sugar in 2012 for the first time in recent history have decreased to 0.5m tons. For comparison, in 2011 there were imported 2.3 m tons, and in 1999 - 6.1m tons of sugar.

0

For some items, a growth of average contract prices is recorded. The utmost growth in the contract prices is noted in fresh meat and ice cream (by 6.9%), poultry (by 3.9%) and tea (by 3.6%).

Table 52

Foodstuffs Imports

2010 2011 2012

Tons, thou. % vs. 2009 Tons, thou. % vs. 2010 Tons, thou. % vs. 2011

Fresh and frozen beef 1442 100.3 1429 99.1 1399 97.9

Fresh and frozen pork 681 102.1 717 105.3 735 102.4

Fresh and frozen poultry 688 69.8 493 71.7 527 107.0

Fresh and frozen fish 792 99.6 705 89.0 736 103.7

Milk and dairy products 677 144.1 383 56.6 367 95.8

Butter 109 106.5 104 96.5 101 96.8

Cheese and curd 421 119.3 421 99.9 393 93.2

Potatoes, fresh or chilled 710 178.9 1511 by 2.1 times more 460 30.4

Raw sugar 2086 166.7 2332 111.8 520 22.3

Source: Russian Statistical Service.

Imports of metals and products thereof decreased by 2.3%. In general, this was mainly due to decrease in the supply of ferrous metal pipes, which in 2012 were decreased by 47.7% as compared to 2011, and according to Russian Statistical Service, production of steel pipes in 2012 decreased against 2011 by 3.3%. The main reason for the drop in production and imports reduction is the completion of the implementation of major pipeline projects. The share of imported pipes in the domestic market in 2012 made 9.4%, which is below the annual average indicator for 2011 by 16.2%, for 2010 by 15.3% and for 2009 by 10.8%.

Import of the chemical complex products in 2012 in the cost terms has reached $47.7bn, having increased against the relevant period of 2011 by 3.6%. The share of imports of chemical products in the total volume of the Russian imports during this period has increased as compared to the same period of the last year from 15.1 to 15.3%, among which pharmaceutical products made 4.1%, plastics and articles thereof - 3 7%, hygienic items - 1.1%, rubber and products thereof - 1.6% and dyes - 0.9%.

The main items of the Russian imports are still machinery, equipment and vehicles. Import of goods under this article has increased in 2012 in comparison with 2011 by 6.1% to $157.1bn. The share of machinery, equipment and vehicles in the total volume of Russian imports increased to 50.3% from 48 4% in 2011.

4.6.4. Russian Foreign Trade in Terms of Geography

The major international trading partner of the Russian Federation is still the European Union. In 2012 the share of the EU in the geographical structure of Russian foreign trade turnover has increased as compared to 2011 by 1.1 p.p. to 49%, while the top trading partner in this group of countries were the Netherlands, the share of which has increased by 1.6 p.p. and amounted to 9.9%. The second place belongs to Germany, with its share in the Russian foreign trade turnover has increased from 8.7% in 2011 to 8.8% in 2012. Italy in 2012 was the third in terms of foreign trade with Russia among the EU countries; its share made 5.5%, having decreased by 0.1 p.p. as compared to 2011. In general, the EU countries in 2012 have increased the volume of foreign trade with Russia in comparison with 2011 by 4.1%, including the volume of the Russian exports grown by 4.2% and imports by 3.8%.

2009 2010 2011 2012

H EC fSAPEC CIS lllll Other countries

Source: RF Federal Tax Service.

Fig. 53. Russian Foreign Trade in Terms of Geography, %

The share of the Asia-Pacific Economic Cooperation (APEC) countries in the Russian foreign trade has increased from 23.8% in 2011 to 24.0% in 2012. The main trade partner of Russia in this group of countries is China, its share in the foreign trade turnover has increased by 0.4 p.p., having reached 10.5%. The second place in this group holds Japan, the share of which has increased from 3.6 to 3.7%. The share of the United States, by contrast, has decreased from 3.8 to 3.4%, bringing the U.S. from the second to the third place in this group of countries. The volume of Russia's trade with APEC countries in 2012 has increased as compared to 2011 by 2.4%. Foreign trade turnover growth with these countries was due to the increase in the Russian imports by 5.6%, while Russian exports to these countries have declined by 1.2%.

The share of CIS countries in the Russian foreign trade has declined in 2012 as compared to 2011 from 15.1 to 14.1%. Major trading partners in the group are Ukraine and Belorussia, which share in 2012 accounted for 5.4% and 4.3%, respectively. Overall, Russia's trade turnover with the countries of this group in 2012 against 2011 has decreased by 5.3%, Russian imports - by 10.1%, Russian exports - by 2.5%.

The trade balance in 2012 was positive for all groups of countries, with the exception of APEC countries (-17,9 $ bn).

In 2012 Russia had a negative balance of trade with 27 countries, whose share in the total turnover of Russia was 35.6%. The most significant contribution to the formation of negative balance of trade in Russia have made China (-$16.1bn), France (-$3.2bn), USA (-$2.4bn), Germany (-$2.7bn) , Canada (-$2.1bn), Austria (-$1.9bn).

4.6.5. Russian Foreign Trade Regulation

In 2012 there were developed and adopted 16 resolutions of the Government of the Russian Federation on amendments to the customs duties on the goods exported from the territory of the Russian Federation outside to the member-states of the Customs Union, including 12 resolutions "On Approval of Export Duties on Crude Oil and Certain Categories of Goods

Produced from Oil" 2 regulations "On Establishing the Export Customs Duty on Unalloyed Nickel, "one regulation "On the Approval of the Export Duty on Soybeans".

Since October 1, 2011 there were harmonized export duties on oil and oil products. Earlier, the export duty for light petroleum products was calculated by a factor of 0.7 of the export duty on oil, for black oil products - by a factor of 0.4. Currently, all ratios for oil products are 0.66.

As a result of the new formula, the export duty on heavy oil products has increased significantly in 2012 as compared with the last year. On average, over the year it has grown over the same period of 2011 by 28.9%. The duty on light oil products has decreased on average by 2.6%. Herewith, the automobile and straight-run petrol are excluded from the list of light oil products, duty on which from mid-2011 makes 90% of the duty on crude oil.

It was assumed that the new formula will make exports of dark oil products less profitable and the export of light petroleum products more profitable and therefore will encourage oil companies to invest more in the more enhanced refinery. As demonstrated by the current results, this goal is not achieved yet: the share of heavy oil in the total exports of refined products exports has decreased.

Table 53

Export Duties on Oil and Oil Products in 2011-2012, $/t

Oil Oil products

light | heavy

2011

January 1 317.5 226.2 121.9

February 1 346.6 232.2 161.8

March 1 365.0 244.6 170.4

April 1 423.7 283.9 197.9

May 1 453.7 304.0 211.8

June 1 462.1 309.0 215.8

July 1 445.1 298.2 207.8

August 1 438.2 293.6 204.6

September 1 444.1 297.5 192.0

October 1 411.4 271.5

November 1 393.0 259.3

December 1 406.6 268.3

2012

January 1 397.5 262.3

February 1 393.7 259.8

March 1 411.2 271.4

April 1 460.7 304.0

May 1 448.6 296.0

June 1 419.8 277.0

July 1 369.3 243.7

August 1 336.6 222.1

September 1 393.8 259.9

October 1 418.9 276.4

November 1 404.5 267.0

December 1 396.5 261.7

Source: RF government regulations.

Since May 28, 2011 the export duty on nickel is determined based on its average price at the London Metal Exchange for the previous quarter. In accordance with this, from March 5, 2012 the export duty on unalloyed nickel exported outside the Customs Union, was reduced from $2117.8 to $1245.5/ton, and from June 5, 2012 it was increased from $1245.5 to $1447.6/ton.

At the end of 2011 there was introduced a progressive rate of export duty on refined copper, which should also be based on the average world prices at the London Metal Exchange for the previous quarter. From June 5, 2012 the rate of export duty on refined copper (cath-

odes and sections, semiproducts for the manufacture of wire and rolling, etc.) amounted to $893 per 1 ton. Previously it was 10% of the customs value.

By the Government Decree No. 408 of May 2, 2012 "On the approval of becoming the export duty rate on soybeans exported outside the member-states of the Customs Union", the rate of export duty on soybeans exported outside the Customs Union is reduced to 5% of the customs value, but not less than Euro 8.5 per 1 ton (previously - 20% of the cost, but not less than Euro 35 per 1 ton).

EurAsEC Customs Union Commission by the Decision No. 913of January 25, 2012 has established, that from May 1 to July 31, 2012 the seasonal customs duty on import of raw sugar will not be reduced to $50/ton, but remain at $140/ton. The adoption of such measure is due to the record harvest of sugar beet in 2011 in the amount of 46.3m tons, out of which there was produced 5m tons of beet sugar. Carryover stock of sugar made 2m tons. These resources are sufficient to meet domestic needs and the saturation of the market before the next harvest season.

Earlier there were two scales of customs duties on raw sugar in the Customs Union. From August to May, sugar mills secured the market with its own raw materials, so the support of the domestic sugar market was intensified: in this period the duties on imported raw sugar (cane sugar) were kept at $140-270/ton (depending on the global prices). From May to August, when the plants have no own raw materials, the duty were be reduced to the minimum of $50/ton, which made it possible to process cane sugar.

On August 22, 2012 the protocol of accession of the Russian Federation to the Marrakesh Agreement on Establishing the World Trade Organization (WTO) came into effect, and thus Russia became the 156th member of the organization.

In the course of negotiations the Russian part managed to defend the most of its priority positions, including:

- maintaining cars' industrial assembly regime up to July 2018;

- establishing the permitted volume of agricultural support at a different level (decrease from $9bn to $4bn by 2018);

- maintaining the tariff quota regime in imports of pork (to the end of 2019), beef and poultry (for indefinite term);

- ban on opening of branches of foreign banks;

- a nine-year moratorium on the opening of branches of foreign insurance companies;

- preservation of the current regime of benefits for SEZ in Kaliningrad and Magadan regions up to April 2016.

On August 23, 2012 there came into force a new version of the Single Commodity Nomenclature of Foreign Trade of the Customs Union (CU FT SCN) and the Single Customs Tariff of the Customs Union (CU HS code), designed to meet the obligations of the Russian Federation to the WTO and approved by the Board of the Eurasian Economic Commission (EEC) on July 16, 2012.

CU SCT includes 11,271 commodity items. The new tariff, like the previous one, mainly consists of ad valorem rates of customs import duties, which are set as a percentage of the customs value of the goods. They account for 84% of the tariff - 9473 items. The lowest ad valorem rate, different from zero, is set at 2% and is applied to the cathodes made of copper and blades for chainsaws. The highest ad valorem rate in the amount of 65% is set on imports of pork exceeding the tariff quotas.

The number of specific rates that are charged in the specified amount per unit of taxable goods includes 235 items (among them 142 in Euro and 93 in dollars). Specific rates in the U.S. dollars are applied only to raw sugar (HS code 1701), because the amount of the import duty is calculated based on the average price on the New York Commodity Exchange.

The lowest specific rate of Euro 0.04 per 1 kg is established on maleic anhydride. The highest specific rate of Euro 22 per 1000 pcs is set on the jars of up to 1 liter for canning beverages.

Combined rates, in which the specific duty and ad valorem duties are summed up, include 1563 items. The lowest combined rate of 5%, but not less than Euro 0.02 per 1 kg is established on some citrus fruit and bananas. The highest combined rate of 100%, but not less than Euro 2 per 1 liter, is set on ethanol.

For 1606 commodity items, which is 14.3% of total import duty rates, a zero duty rate is established.

According to the ad valorem component, the most secure are such groups of the Single Commodity Nomenclature of Foreign Trade of the Customs Union as meat and meat byproducts (an average ad valorem rate of 37%), carpets and floor coating (20%), weapons and ammunition (19%), alcoholic and non-alcoholic beverages (19 %), textile articles (18%), natural pearls (average ad valorem rate 18%).

The new tariff provides for reduction on about 1,000 commodity items. First of all, of import duties that were increase during the crisis in 2008-2009 are returned to their previous level.

The most notable changes occurred in tariffs for foodstuffs and other consumer goods. Thus, the duty on pork imports within the quota is reduced from 15 to 0%, and for pork imports beyond the quota - from 75 to 65%. Import duty on finished meat products is reduced from 25%, but not less than Euro 0.4 per kg to 20%, but not less than Euro 0.4 per kg.

New duty on the import of butter is 15%, but not less than Euro 0.29 per kg against the previous 15%, but not less than Euro 0.4. The import duties for many cheeses are changed. In particular, the import duty for young cheese with a fat content of more than 40% is reduced to 15%, but not less than Euro 0.25 per kg; earlier this specific component made Euro 0.3 per kg. For example, a specific component of the duty on imports of cheeses such as camembert and brie is reduced by 2 times.

In the segment of fruit import duties are reduced on apples, as well as lemons and limes, among vegetables for tomatoes and cucumbers. For example, the import duty on the import on cucumbers is set at 15%, but not less than Euro 0.08 per kg - this rate will be in effect for the entire year. Earlier in the period from May 16 to October 31 the duty was 15%, but not less than Euro 0.12 per kg, and only from November 1 to May 15 the specific component was decreased to Euro 0.08 per kg.

According to the commitments to the WTO, Russia has left unchanged the prohibitive import duty on alcohol, but within three years it will reduce import duty on most of the strong liquors from Euro 2 per 1 liter to Euro 1.5. Also duties on mineral water, beer, wine, champagne, vermouth are significantly reduced.

Duties on finished fish products are reduced slightly - from 15 to 12.5-12% between for the period of 1-3 years. As for the raw fish, many of the types of fees will drop from 10 to 8.6%, in some cases up to 3-5%.

According to the agreement with the WTO, a gradual reduction of duties on most of the textile products, including clothing is foreseen.

According to the commitments of the Russian party, since the date of accession to the WTO duties on household and electronic appliances are sustained, but in future for some items will gradually decline, starting from 2013.

By 2014-2015, some reduction of duties on pharmaceutical products is foreseen on some items from August 23, 2012. For several years, duty on perfumes, cosmetics and hygiene products will be gradually reduced.

Customs duties on new imported cars are decreased from 30 to 25%, and then within seven years they will be reduced to 15%. The rate of customs duty on second-hand cars up to 7 years is reduced from 35 to 25%, and by 2018 it will make 20% of the cost. The rules for import of cars and SUVs over seven years, regardless of their type remained the same - from Euro 2.3 to 2.8 per 1 cm3 of engine.

To compensate for the loss of this position since September 1, 2012 a salvage fee is introduced in Russia. According to the RF government Regulation "On the salvage fee", individuals importing cars for personal use, shall pay the salvage fee in the amount of 0.1% of the base rate, which makes Rb 20,000 for new cars and 0.15% for the cars older 3 years.

Costs of legal entities are higher: thus, for the full weight trucks over 3.5 tons, which are designed for off-road driving, salvage fee make 37-fold new basic rate in the amount of Rb 150,000 for the new cars and 40-fold basic rate for the old ones. For the vehicles up to 2.5 tons legal entities must pay 0.5-times rate of Rb 150,000for the new vehicles and of 0.8 of the rate for those over 3 years.

Export duty rates are brought in line with the obligations of the RF Government Decree No. 756 of 21.07.2012. Export duties remain largely at the same level. In particular, in the case of most types of frozen fish the rate is kept at 5% of the customs value, for crabs - at 10%, natural gas - at 30%, unrefined copper - at 10%, raw hides - at Euro 500 per 1 ton. The minimum fee for wet tanned cattle skin is reduced from Euro 250 to Euro 90 per 1 ton.

Duty rates are revised on certain timber materials. Thus, the combined rate of export duty is established on raw timber from oak to 20%, but not less than Euro 30 per 1 m3 (previously -Euro 100 per 1 m3). A prohibitive duty is foreseen on raw timber from European pine in the amount of 80%, but not less than Euro 55.2 per 1 m3. For these timber materials exported within tariff quotas, the rate is 13-15%.

Export duty is increased on soybeans from 5% (but not less than Euro 8.5 per 1 ton) to 20% (but not less than Euro 35 per 1 ton).

Ad valorem rates are set for refined copper (10%) and non-alloy nickel (5%).

Export duty is reduced on the second-hand axes and wheels of railway locomotives or trams rolling stock (5% instead of 15%, but not less than Euro 15 per 1 ton).

In the framework of the Russian Federation accession to the WTO, the most important element of regulation of foreign trade of the Customs Union became the use of measures of protection the domestic market from the negative impact of foreign competition, such as special protective, antidumping and compensating measures. In the international trade practice these tools are used for effective protection of the industry against dumping, subsidized or increased imports from foreign countries.

Since May 2012 the authority for the protection of antidumping and special safety investigations by national authorities of the countries of the Customs Union is transferred to the Department of the domestic market protection of the Eurasian Economic Commission. Earlier this function was in the authority of the Russian Ministry of Industry and Trade.

On May 24, 2012 the Eurasian Economic Commission Board took the decision to impose since July 1, 2012 an antidumping fee for a period of 5 years on the flat cold-rolled steel of a thickness exceeding 0.2 mm but not exceeding 2 mm, coated, originating from China Republic1. The Commission's decision was made based on the results of antidumping investigation conducted by the Ministry of Industry and Trade of Russia. This is the first such investigation conducted in accordance with the legislation of the Customs Union.

The investigation was started on February 11, 2011 at the request of Russian producers of coated rolled products OAO "Severstal", OAO "Novolipetsk Steel Works" (hereinafter - OAO "NLMK") and OAO "Magnitogorsk Steel Works " (hereinafter - OAO "MMK"). The investigation established the fact of the dumped imports of polymer-coated rolled metal products from the PRC, which cause significant damage to economic sectors of the CU, that under WTO rules is the basis for the imposition of antidumping measures.

Within 2008-2010 import volumes of polymer-coated rolled metal products from the PRC to the CU countries have increased significantly - to 257,700 tons, or nearly twice. The highest growth in imports of those products from China was in H1 2010: as compared with the H1 2009, the volume of imports from China increased by 9.7 times. Within 2008-2010 the share of polymer-coated rolled metal products from China in total imports of goods into the customs territory of the Customs Union has increased from 52.6% in 2008 to 74.7% in 2010. The amount of antidumping fee is 22.6% of the customs value of goods. Herewith, for the three companies - manufacturers of polymer-coated rolled metal products special duties are established, namely for Angang Steel Co., Ltd - 12.9%, for Dalian POSCO Co., Ltd. - 11.4%, for Shandong Guanzhou Co., Ltd. - 8.1%.

According to Eurasian Economic Commission forecasts2, after administration duties and within 1.5 years import polymer-coated rolled metal products from China can be decreased by 200.000-250.000 tons per year3, while the resulting demand almost fully will be satisfied by steel producers of the Customs Union.

According to the Ministry of Economic Development of Russia, 18 countries4 impose protective measures in regard to the Russian goods as of January 1, 2013.

71 measures are in effect in regard to the Russian goods, including 39 measures of antidumping duty, 2 measures of special safeguard duty, 15 measures of non-tariff, 5 measures of technical barriers, 3 measure of quota restrictions, 2 measure of additional tax, 3 measures of the excise tax on a discriminatory basis, one on restriction on the approved list and one the ban on imports.

At the same time, five investigations are conducted, including 3 antidumping and 2 investigations on of special safeguard measures, and seven revisions of antidumping measures and one revision of a safeguard measure.

In 2012 fifteen measures that impede access of Russian goods to foreign markets came out of effect. According to the tentative expert estimates, the amount of avoided damage made approximately $ 70m.

1 http://www.tsouz.ru/db/spec_measures/Pages/def_measures.aspx

2 http://www.tsouz.ru/db/spec_measures/Pages/def_measures.aspx

3 http://www.tsouz.ru/db/spec_measures/Pages/def_measures.aspx

4 Those countries are Australia, Azerbaijan, Armenia, Belarus, Brazil, India, Indonesia, China, South Korea, Mexico, Moldova, the United States, Thailand, Turkey, Turkmenistan, Uzbekistan, Ukraine, and the EU as a single customs territory.