6Section 4. The real sector of the economy
4.1. The macrostructure of production1
4.1.1. The behavior of the Russian economy in 2016: internal and external demand
For the Russian economy, the year 2016 was a period of its gradual adaptation to the new conditions determined by low prices for hydrocarbons and mineral resources coupled with the continuing anti-Russian sanctions and Russian counter-sanctions. The annual and quarter-by-quarter behavior of the economy indicated a gradual relaxation of the current crisis with regard to practically all major macro-parameters, brought about by a notable drop in the rate of inflation, changes in the structure of production, the fall in costs resulting from the ruble's depreciation, progress of the import substitution processes, and a relative stability in the labor market.
Table 1
Main macroeconomic indices for 2013-2016, as %, relative to previous period
2013 2014 2015 2016 Quarter
I II III IV
1 2 3 4 5 6 7 8 9
GDP 101.3 100.7 97.8 99.8 98.8 99.4 99.6 99.3
External factors
Foreign trade turnover (calculated by the balance of payments methodology) 100.0 93.2 66.4 88.6 72.9 81.6 96.2 104.5
exports 98.9 95.2 68.7 82.5 66.8 74.2 90.3 101.9
imports 101.6 90.2 62.7 99.2 85.3 95.8 105.5 108.5
balance 94.2 104.6 78.6 60.8 48.8 50.6 64.0 91.1
Oil prices, USD/barrel 100.41 94.21 50.12 44.05 31.12 39.14 43.14 50.08
Official RUB/USD exchange rate, as of period's end 33.73 56.26 72.88 60.66 67.61 64.26 63.16 60.66
Internal factors
Investment in fixed assets 100.8 98.5 89.9 99.1 95.2 96.1 100.5 98.7
Consumer demand 104.4 102.0 90.2 95.0 95.7 94.8 96.9 98.7
Turnover of retail trade 103.9 102.7 90.0 94.8 94.2 94.1 95.5 95.2
Paid services rendered to population 102.3 101.3 98.0 99.7 99.8 99.5 100.0 100.3
Output of goods and services, by basic type of economic activity 100.1 100.5 95.9 100.4 99.6 100.4 100.4 100.8
Industry 100.4 101.7 96.6 101.1 99.4 101.0 99.9 101.9
Agriculture 105.8 103.5 102.6 104.8 103.6 103.3 105.6 105.0
Cont'd
1 2 3 4 5 6 7 8 9
Building construction 101.1 97.7 95.2 95.7 94.5 91.7 96.4 98.0
Transport 100.6 99.9 100.2 101.8 101.5 101.1 102.8 101.8
Social parameters
Real disposable income 104.0 99.3 96.8 94.1 95.8 93.7 93.5 94.0
Real charged wage 104.8 101.2 91.0 100.6 99.4 100.3 101.2 101.5
Real size of allotted pension 102.8 100.9 96.2 96.6 97.2 95.6 96.2 97.1
Labor market
Number of employed 99.8 100.2 99.6 100.1 99.8 100.0 100.2 100.4
Unemployment rate 5.5 5.2 5.6 5.5 5.9 5.7 5.3 5.4
For reference:
Consumer Price Index (relative to December of previous year 106.5 111.4 112.9 105.4 102.1 103.3 104.1 105.1
Key rate (as of period's end) 5.5 17.0 11.0 10.0
Labor productivity 101.8 100.9 96.8 99.7 99.0 99.4 99.4 98.9
Source: Rosstat.
The principal factors behind the negligible (by 0.2%) slide in GDP in 2016 vs. by 2.7% of GDP a year earlier were the reduction in the rate of decrease of internal demand and the retention of net exports (calculated by the SNA methodology) in positive territory.
The distinctive features of the macroeconomic situation in 2016 were determined by the differently directed dynamics of external and internal demand. The extensive use of major factors of production under changing external conditions increased disproportions in the fields of production, consumption, and investment activity. On the one hand, changes in the global market situation had a negative impact on the level of demand for Russian exports, while on the other, the restrictions related to the anti-Russian sanctions resulted in a considerable drop in imports and a number of structural shifts in their structure. The shrinkage in internal demand, which was not compensated for by the behavior of exports, remained the principal factor behind the decline in the rate of development of the Russian economy. However, judging by the quarter-by-quarter behavior of internal demand, it can be said with confidence that the rate of shrinkage in internal demand was gradually decreasing over the course of 2016, thus promising to become the factor most likely to shape Russia's economic situation in 2017.
110,0
105,0
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100,0
95,0
90,0
85,0
80,0
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2015 2016
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= I I I
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2012 2013 2014 2015 2016
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108,0
106,0
104,0
102,0
100,0
98,0
96,0
94,0
92,0
90,0
Internal demand
External demand / exports
GDP
Fig. 1. Behavior of GDP, by component of internal and external demand, in 2012-2016, as % of the corresponding period of the previous year
A comparative analysis of the changes in internal demand indicates that the distinctive feature of 2015 and 2016 was the simultaneous contraction of the investment and consumer markets. While in the period 2012-2014 the dynamic growth in actual household final consumption had compensated for the shrinkage of the capital market, the shrinkage of consumer demand resulting from the drop in personal income was much more significant than the shrinkage of the investment market. In 2016, household final consumption and investment in fixed assets amounted to 85.87% and 99.1% relative to their 2014 levels respectively. Investment demand was at its lowest point in Q1-Q3 2015, while Q3 2016 saw a 0.5% growth in investment in fixed assets relative to the same period of 2015. However, in Q4 2016, there was a resumption of the slide in investment, with investment returning to its average values of H1 2016. The consumer market had been very slowly recovering from the consequences of the acute crisis of 2015. In 2016, personal real disposable income dropped by 5.9% on the previous year, versus by 3.2% in 2015 relative to 2014. The 2016 decline in personal real disposable income was its largest drop in 15 years.
Investment demand Consumer demand GDP
Fig. 2. The dynamics of investment and consumer demand, as % of the corresponding
period of the previous year
Source: based on data released by Rosstat.
The distinctive features of the formation of the domestic market's resources in 2014-2016 were determined, on the one hand, by changes in the dynamics of production of goods and services for domestic consumption and for export markets, and by the pace and structure of imports, on the other. In 2012 and 2013, one of the major factors behind the sustenance of the domestic market's positive behavior was a broad trend towards accelerating the pace of growth in imports with respect to the dynamics of GDP. The pace of production of goods and services for the domestic market began to decline in Q3 2013. As a result, in 2014 and 2015, that trend was reversed due to the impacts of both internal and external factors, and replaced by a simultaneous drop in imports and domestic output. In 2015, in a situation characterized by
economic uncertainty, a significant rise in inflation and very limited opportunities to remedy the loss of many important external sources of finance, Russia's domestic market notably shrank. The volume of imports (value in comparable prices) amounted to 68.8% of their volume in 2013, notwithstanding the fact that the ruble had been devalued 2.2-fold. The devaluation of the ruble had mixed effects on the Russian economy. On the one hand, it reduced the impacts of external factors on individual sectors of the Russian economy and facilitated imports substitution, while on the other, it led to a rise in production costs due to an increase in the price of intermediate and investment goods imports.
The dynamics of domestic production was determined by the price competiveness of Russian goods and services against their imported analogues, and by the widening gap in production efficiency between the tradable and non-tradable sectors. As a result, in 2015, domestic production of goods and services for the Russian domestic market dropped by 4.6% on the previous year, thus determining the prospects for the Russian economy in 2016.
120,0 115,0 110,0 105,0 100,0 95,0 90,0 85,0 80,0 75,0 70,0
Domestic production for domestic market Imports -Internal demand
Fig. 3. The dynamics of internal demand, by component, in 2012-2016, as % of the corresponding period of the previous year
Source: based on data released by Rosstat.
In 2016, the dynamics of imports was heavily impacted by the gradual strengthening of the ruble, by the positive dynamics of the balanced financial result of enterprises' activity and by the pressure, exacted by deferred demand, toward increase in investment and intermediate goods imports. In H1 2016, the long-going decline in the difference in the depth of the downward slide between imports and exports gave way, in August 2016, to the recovery in import demand.
In 2016, the pace and structure of imports were significantly affected by the pressure of postponed demand. In 2014 and 2015, the drop in investment in fixed assets led to a simultaneous contraction of demand for both domestically produced and imported capital goods and to strengthening negative trends on the domestic market. A number of additional difficulties emerged due to the anti-Russian sanctions and the restrictions on imports of some types of
technological equipment necessary for implementing the investment plans of mineral extracting and processing enterprises, as well as infrastructure projects. In 2016, consumer and intermediate imports declined, while imports of investment goods increased, which gave the internal investment market a boost and provided an additional impetus to overcoming the recession of domestic production.
The sharp drop in imports in 2015 was followed by a number of structural changes in the domestic market: as early as Q2 2016, the share of domestically produced goods in retail trade commodity resources increased to 64%, and to 78% in the commodity resources of retail trade in food products. This trend was sustained by the resumption of the positive dynamics of production in the consumer sector of the economy. The rate of decline in production of goods and services for the domestic market dipped to a low 1.7% from 4.6% a year earlier.
Table 2
Structure of imports, by function type (calculated by the balance of payments methodology), %
Goods
consumer investment intermediate
2012 38.1 24.9 37.0
2013 37.6 24.3 38.0
2014 36.1 24.5 39.4
2015 36.4 23.2 40.4
Q1 37.7 21.6 40.7
Q2 36.4 21.7 41.9
Q3 35.2 23.6 41.2
Q4 36.3 25.6 38.1
2016 38.7 26.7 34.6
Q1 36.9 19.2 43.9
Q2 35.7 23.7 40.6
Q3 36.9 30.9 32.2
Q4 38.7 28.0 33.3
Source: Rosstat.
Table 3
Structure of retail trade commodity resources in actual prices, %
Retail trade commodity resources Including commodities Share of food imports in commodity resources of retail trade in food products
produced domestically imported
2012 100 56 44 34
2013 100 56 44 36
2014 100 58 42 34
2015 100 62 38 28
2016 100 62 38 23
Q1 100 62 38 24
Q2 100 64 36 22
Q3 100 61 39 22
Q4 100 60 40 22
Source: Rosstat.
On the whole in 2016, the dynamics and structure of domestic production of goods and services was determined by a shift towards increasing the output of goods and services for the external market.
110,0 108,0
90,0 -
For domestic market For export markets -Domestic production
Fig. 4. The dynamics of domestic production of goods and services, by component, in 2012-2016, as % of the corresponding quarter of the previous year
Source: based on data released by Rosstat.
4.1.2. The expenditure components of GDP in 2012-2016: consumer and investment demand
The structure of expenditure-based GDP is determined by the ratio between final consumption and gross capital formation. The year 2016 saw a decline in the share and pace of final consumption, which was caused in the main by a notable drop in household final consumption. The dynamics of the expenditure components of GDP are indicative of an increase in the share of gross capital formation due to the growth of circulating tangible assets resources and the reduction in the share of net exports.
Table 4
The structure of expenditure-based GDP, in actual prices, in 2012-2016, %
2012 2013 2014 2015 2016
Gross domestic product 100.0 100.0 100.0 100.0 100.0
including: 0.0 0.0 0.0 0.0 0.0
final consumption expenditure 70.4 73.7 71.4 69.8 69.4
household 51.3 53.6 53.1 52.0 51.0
state government 18.7 19.7 17.9 17.5 18.0
non-profit organizations rendering services to households 0.4 0.4 0.4 0.4 0.4
Gross capital formation 22.9 21.1 22.1 22.4 23.8
gross accumulation of fixed assets 20.2 20.2 21.1 20.7 21.1
changes in circulating tangible assets resources 2.7 0.9 1.0 1.6 2.7
Net exports 6.8 5.6 6.5 8.1 5.0
Statistical deviation -0.1 -0.4 0.0 -0.2 1.8
Source: Rosstat.
One of the distinctive features of the Russian economy in 2015 and 2016 was a more pronounced drop in household final consumption than that demonstrated by Russia's GDP and investment in fixed assets. While in the period 2010-2014 the main factor sustaining the positive trend in the development of the Russian economy was growth in per-capita consumption, in 2015 and 2016 the drop in the real personal income resulted in an almost 15% shrinkage in household final consumption relative to 2014.
Both household final consumption and the retail market were at their lowest points in Q4 2015. As the rate of inflation decreased from 12.9% to 5.4% over the course of 2016, the rate
of decline in consumer demand gradually diminished. In 2016, household final consumption contracted by 5.0% on 2015, while the turnover of retail trade and the market of paid services rendered to the population declined by 5.2% and 0.3% respectively relative to the previous year.
An analysis of the dynamics of consumer prices and consumer demand indicates that the population responded to high inflation and changes in the magnitude and structure of prices by drastically curbing the consumer demand for non-food products and paid services, and by gradually reducing the consumer demand for food products.
As the population became to be better adapted to the new market situation, and the pressure of postponed consumer demand became stronger, the quarterly indices of 2016 gradually began to demonstrate less prominent downward trends in the turnover of retail trade. However, although in 2016 the consumer price index and the food price index stood at their 25-year lows of 105.4% and 104.3% respectively, the accumulated growth potential of consumer prices and the drop in the real income of the population became mighty factors restraining the dynamics of the consumer market. As a result, over the period 2014-2016, the turnover of the food market declined by 13.8%, and that of the non-food market by 15.6%.
85 -
Turnover of retail trade Paid services rendered to population -Household final consumption
Fig. 5. The dynamics of household final consumption in 2012-2016, as % of the corresponding period of the previous year
Source: Rosstat.
The change in the level and structure of prices made a considerable impact on the dynamics and composition of household consumption expenditure. As the growth in nominal income of the population was weak, purchases of food and articles of prime necessity accounted for the major part of household consumption expenditure.
The crisis had a number of consequences, including the narrowing range of available goods, the decline in delivery orders for many expensive commodities, and the withdrawal from the market of quite a few suppliers and manufacturers. The drop in demand affected not only the relatively hi-tech consumer market segments (computers; consumer electronic products; communications equipment), but also the food market segments oriented to the high-income strata of the population.
110 - 118
Turnover of retail trade Food market Non-food market
• » • Consumer price index Food price index Non-food price index
Fig. 6. The dynamics of the turnover of retail trade and consumer prices in 2012-2016, as % of the previous year
Source: Rosstat.
While nominal and real wages continued on a weak upward trend, the shares of earnings, income from property and income from entrepreneurial activity in the personal income structure visibly declined; at the same time, the share of social benefits increased. In 2016, the share of labor remuneration in the money income of the population stood at its 5-year low of 64.8%, while the share of social benefits grew to 19.1%, and the shares of income from property and income from entrepreneurial activity remained at their previous level.
Table 5
Structure of personal money income in 2011-2016,%
2011 2012 2013 2014 2015 2016
Total money income 100 100 100 100 100 100
Earnings, including hidden payments 65.6 66.0 65.3 65.8 65.6 64.8
Social benefits 18.3 18.3 18.6 18.0 18.3 19.1
Income from entrepreneurial activity 8.9 8.6 8.6 8.4 7.9 7.8
Income from property 5.2 5.1 5.5 5.8 6.2 6.3
Other types of income 2.0 2.0 2.0 2.0 2.0 2.0
Source: Rosstat.
The drop in the income of the population and the persistence of pronounced social differentiation and inequality in income distribution resulted in some increase in poverty rates and made a negative impact on the character of consumer activity. In 2016, the growth rate of personal income in nominal terms was on the decline, and there were further changes in the structure of personal money income spending: thus, the share of current consumption expenditure in the total volume of personal money income increased, while the share of savings declined to 11.3% (by 3.0 pp).
10
-10 -
= Purchase of goods and payment for rendered services □ Compulsory payments and various contributions Acquisition of property Purchase of goods and payment for services
Fig. 7. Changes in the structure of personal money income spending, as % of the previous year
Source: based on data released by Rosstat.
The dynamic growth of financial assets in 2015 resulted in a shrinkage of the share of property acquisition due to the high interest rates on housing loans and housing mortgage loans, as well as a plunge of current consumption expenditure due to the shift of demand towards the cheaper goods segment. However, in 2016, while savings displayed an overall downward trend, there were some structural shifts resulting from an increased share of property acquisition expenditure. This trend was sustained by the lowering interest rates on loans, slower pace of inflation, and broader supply in the housing market. Meanwhile, its indices stayed significantly below their pre-crisis level of 2012, both in terms of volume and the actual share of property acquisition expenditure.
Low investment activity of the population and businesses alike represented one of the negative features of the economic situation in 2014-2016.
In 2016, the share of gross savings in GDP amounted to 30.6% vs. 31.2% in 2011. The share of gross savings in 2016 increased to 21.1%, while their structure altered due to the increased share of accumulated reserves. A distinctive feature of Russia's investment model is the substantial share of savings, where a significant portion is not transformed into investment in fixed assets. In 2016, the index of investment in fixed assets as a percentage of GDP shrank to 17.0%, or by nearly 2 pp relative to 2013.
Table 6
The main indicators of the investment potential of the Russian economy in the period 2011-2016, % of GDP
2011 2012 2013 2014 2015 2016
Gross savings 31.2 29.6 26.3 28.6 30.2 30.6
Gross accumulation of fixed assets 20.0 20.2 20.2 21.1 20.7 21.1
Deposits made by individuals, as of end of year 19.9 21.3 23.9 23.4 27.9 27.1
Size of Reserve Fund, as of end of year 1.4 2.8 4.0 6.1 4.4 1.1
Size of National Wealth Fund, as of end of year 4.7 4.0 4.1 5.4 6.3 5.0
Investment in fixed assets 18.5 18.8 18.9 17.6 17.5 17.0
Note. The calculations based on data from 2014 onwards were done by the SNA-2008 methodology, and include the results of R&D and weapon systems investments; therefore these are incomparable with data for the previous years.
Source: Rosstat.
In 2016, the dynamics and structure of Russia's expenditure-based GDP were negatively impacted by a 10.5% drop in investment in fixed assets relative to 2013, the year which saw the emergence of a trend towards stabilization of investment activity. In Q3 2014, the investment slump began to deepen under the impact of the growing cost of credit resources, the restrictions on Russian companies' access to international capital and debt markets, and high geopolitical risks. In 2015, investment in fixed assets shrank by 8.4% relative to 2014. However, in 2016, the rate of decline in construction investment notably slackened, which had a positive effect on Russia's domestic market. In 2016, investment in fixed assets declined by 0.9% on the previous year, while the volume of construction works shrank by 4.3% relative to 2015.
An analysis of Russia's capital account shows that the Russian economy has been in a net creditor position for quite a long time. The drastic change, in 2014, in the global politico-economic situation resulted in the intensification of capital outflow from Russia, which involved both the banking and non-financial sectors. In 2014, capital outflow from Russia hit its 20-year high of USD 153.0bn. In 2015 and 2016, net capital outflow from Russia dipped to USD 57.5bn and USD 15.4bn respectively. An analysis of the structure of Russia's expenditure-based GDP and capital account visibly illustrates the asymmetric character of the formation of internal savings resources and their use for investment purposes.
4.1.3. Changes in the GDP structure by income source
The Russian economy's recent development patterns reflect its shrinking development potential, which has become manifest in the high intensity of the use of production capacities, absence of large-scale investment projects, and low unemployment rate. Besides, the situation has been further complicated by the long-term upward trend displayed by the growth rate of production costs, which has been pushed up by the tariff policies of infrastructure provider monopolies and the accelerated wage growth relative to labor productivity. Low production efficiency remains one of the main factors that push down industry productivity and the low competitive capacity of Russia's domestic products in the domestic and foreign markets. Over the period 2010-2013, productivity decline was demonstrated by practically all major types of economic activity.
Table 7
Productivity indices of sold goods, works, and services by type of economic activity in 2012-2016, as %
2012 2013 2014 2015 2016
National economy, total 8.6 7.0 7.3 9.3 8.1
Agriculture, hunting and forestry 10.7 5.2 17.4 21.3 16.8
Fishery and fish-breeding 16.2 16.5 28.6 49.4 61.0
Mineral extraction 28.0 22.1 19.2 26.8 27.2
Processing industries 10.7 8.8 9.9 12.4 10.5
Production and distribution of electric energy, gas and water 3.9 4.4 3.7 5.5 7.8
Building construction 5.0 8.3 3.4 5.4 5.5
Wholesale and retail trade 6.7 6.5 6.1 7.1 5.3
Hotels and restaurants 5.9 6.0 4.4 5.8 6.1
Transport and communications 11.1 9.7 8.4 10.6 10.8
of these: communications 23.7 23.6 20.8 21.4 18.2
Financial activity 0.8 0.5 1.5 0.5 0.7
Real estate transactions, property lease and services 10.6 10.4 10.7 9.7 12.0
Government administration and military defense; social insurance 8.3 7.8 10.3 11.7 -12.5
Education 2.5 11.8 2.3 6.2 6.2
Healthcare and welfare 6.6 4.8 6.2 7.0 10.6
Over the period 2014-2016, the movement of profitability indices and the financial result achieved by enterprises and organizations (balance of profits and losses) was strongly influenced by changes in producer pricing policies. The year 2014 saw a reversal in the trend that had been visible for four straight years: the producer price indices in industry, building construction and agriculture began to display dynamic growth. In 2015, the producer price index in industry amounted to 110.7%, including processing industries - 111.2%, mineral extraction - 109.8%, building construction - 106.9. The producer price index in agriculture gained 10.8%. In 2016, producer pricing policies were somewhat adjusted. Producers responded to the persistent domestic demand shrinkage trend by restraining the growth of prices for their products. In 2016, the producer price index in industry amounted to 107.4%, that in building construction - to 103.2%, and that in agriculture - to 101.8%. Given that the changes in the movement of prices coincided with an accelerated growth rate of the average nominal wage, the share of gross profits in GDP shrank in 2016 on the previous year, but still remained above its 2011-2014 level. The year 2016 saw a shift in the income structure from its corporate towards personal component. In 2016, the share of wages in GDP amounted to 46.6%, rising 1.61 pp above the corresponding index for 2015. As a result, the total productivity index across the national economy lost 1 pp relative to its 2015 level. The accelerated wage growth trend relative to that of labor productivity reemerged once again.
Table 8
Price and tariff indices in December 2010-2016, to December of previous year, %
2010 2011 2012 2013 2014 2015 2016
Consumer Price Index 108.8 106.1 106.6 106.5 111.4 112.9 105.4
Producer Price Index 116.7 112.0 105.1 103.7 105.9 110.7 107.4
Mineral extraction 117.1 126.3 109.3 107.0 98.4 109.8 107.9
Extraction of fuel and energy resources 116.1 128.1 110.5 107.7 97.0 109.8 107.6
Mineral extraction, less extraction of fuel and energy resources 130.9 112.4 98.9 101.0 109.9 110.0 109.9
Processing industries 116.9 108.3 103.2 101.6 108.5 111.2 107.7
Production and distribution of electric energy, gas and water 113.8 105.1 107.0 108.1 104.5 109.3 105.1
Producer Price Index in agriculture 123.6 94.9 110.8 102.7 114.1 108.5 101.8
Aggregate price index in building construction 109.1 108.0 106.9 104.9 107.2 110.3 103.2
Freight tariff index 133.1 107.7 107.5 108.0 100.9 111.5 105.6
Source: Rosstat.
Table 9
GDP structure, at current prices, by income source, in 2011-2016, %
2011 2012 2013 2014 2015 2016
Gross domestic product 100 100 100 100 100 100
Including:
Wages of hired labor, including hidden remuneration and mixed incomes 43.9 44.2 46.7 47.2 45.0 46.6
Net taxes on production and imports 14.6 14.7 14.2 13.9 11.1 10.7
Gross profit in the economy and gross mixed incomes 41.5 41.1 39.1 38.9 43.9 42.7
Source: Rosstat.
The changes in the structure of costs and the balance of profits and losses were strongly influenced by the highly differentiated wage indices across the economy, depending on type of economic activity. The highest wages, for fifteen years in a row, have been observed in extracting industries, the production of oil and petroleum products, and the financial sector. Processing industries have demonstrated a continuing trend towards employment restructuring through cutting non-productive jobs. As a result, labor productivity in processing industries has
been growing at a rate that is higher than Russia's average, but wages, as before, have also been rising at an accelerated rate.
As wage is the major personal income component, the employment issue is one of the priority factors shaping consumer behavior. In face of the plummeting economic growth rate, the distinctive feature of the period 2015-2016 was an exceptionally low unemployment rate (calculated by the ILO methodology) of 5.5%. The total number of officially registered unemployed individuals declined by 0.2% relative to 2015, and amounted to 1.0m, while the unemployment rate was 1.2%.
The employer demand for workforce (estimated on the basis of applications filed with the local bodies of the Federal Service for Labor and Employment) has remained above its last year's level; the tension coefficient (the number of registered unemployed individuals per 100 job vacancies) in December 2016 was 86.8 vs. 101.3 a year earlier. In compliance with the established tradition in Russian practices, labor market adjustment in crisis situation is mainly achieved by means of wage cuts, part-time employment, and workforce spillover into the 'informal employment' sector, and not through an automatic surge of the unemployment rate. This phenomenon reflects not only the low level of labor force mobility, but also the weakness of government institutions responsible for labor market regulation.
While the labor turnover index (the number of hired vs. dismissed employees) is high, the turnover of jobs (liquidation of old jobs and creation of new ones) as a measure of job renewal has remained rather low. The turnover level is sustained predominantly by the liquidation of jobs by actively operating companies, and not by the creation of new jobs.
When analyzing the situation in the Russian labor market, one should note the following characteristic features: the labor market adapts to crisis conditions not through increasing the unemployment rate, but by relying on flexible remuneration schemes. Due to the underdeveloped contractual recruitment system in the sphere of labor relations and the low unemployment benefits, people prefer to stay employed during a crisis and work for a lower wage, or to work fewer hours.
Our analysis of the developments in the Russian economy over the last two decades demonstrates that, owing to the existing labor market model, the behavior pattern of the unemployment rate to acute economic crisis phenomena was smoother than that of wages, which plunged. In the current situation, the weak response of the unemployment index to unfavorable economic developments can likewise be explained by the employer policy aimed at keeping their qualified workforce, which is becoming cheaper in real terms, in expectation of future revival of economic activity. Besides, the factor that exerted downward pressure on unemployment rate growth was the supply deficit in the labor market determined by demographic factors and the outflow of migrants, whose earnings significantly plummeted due to the ruble's weakening.
The less than efficient use of production factors has remained one of the main reasons behind the dramatic slowdown in the pace of economic growth and the generally declining competitive capacity of the Russian economy as a whole. In the short run, the behavior of incomes and inflation will depend solely on the growth rate of labor productivity and return on investment -that is, total factor productivity.
4.1.4. The movement pattern and structure of production, by type of economic activity
The year-on-year decline in the volume of industrial output, by major type of economic activity, has been observed since 2015. The already unstable economic development pattern has been further destabilized by the declining investment activity, turnover of retail trade, and industrial production indices. Building construction output in 2016 amounted to 95.7%, the turnover of retail trade - to 94.8 % relative to the corresponding period of the previous year. In Q2 2016, after a five-quarter-long plunge, the industrial production index demonstrated slight growth. The year-end industrial production index for 2016 amounted to 101.1%, and specifically in processing industries - to 100.1% relative to its previous year's value. In 2016, as a year earlier, the economic situation was positively influenced by growth in mineral extraction (102.5% relative to 2015), agricultural produce (104.8%), and transport services (101.8%).
115
105
95
85
^^ Industrial production Turnover of retail trade
Volume of construction works Freight turnover
ffiSS Agricultural product ^^^"Output index, by basic type of economic activity
Fig. 8. The pace of industrial production, by type of economic activity, in 2014-2016, as % of the corresponding period of the previous year
Source: Rosstat.
Structural changes across the economy in 2016 were determined by the increasing role of the raw materials sector and related infrastructure. In 2016, growth of mineral extraction in annual terms amounted to 2.5%, including growth of extraction of fuel and energy mineral resources by 2.6%.
The output volume index in processing industries in 2016 followed a highly unstable movement pattern. The production index plunge by 3.1% in Q1 gave way to growth by 1.4% in Q2 relative to the same periods of 2015. When taken in annual terms, the 2016 output index in processing industries slipped into positive zone, with a growth of 0.1%.
The output volume indices in the processing industry are rather significantly diversified by type of economic activity. When the output volume movement patterns for each type of economic activity in 2016 are set against those observed in 2014, when processing industries still possessed some growth potential, it becomes obvious that recovery growth was achieved only in the chemical industry, the manufacturing of rubber & plastic products, and the food industry, which had managed to cope with the crisis phenomena. The specific features of these phenomena point to lack of proper restructuring in the domestic business sector and low motivation to move domestic products to new competitive markets. In such a situation, the
Q1
Q2
1
i
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2 | Q3 | q4| ^f = t = * Q1 = Q2 = Q3 №. I Q4 VaV - ftft Sfc . 1 — w Q1 | Q2 | Q3 Q4
2014 ^ 2015 2016
effects of Russia's retaliatory sanctions were more strongly felt by processing industries, which are oriented in the main to the domestic market.
As before, one of the problems faced by the Russian economy has been the targeted support of certain industries instead of a well-coordinated system of comprehensive measures designed to generally improve the overall conditions for doing business. Low investment demand determined a production decline in the machine-building complex and metallurgy, as well as decline in investment in housing and industrial construction. The most serious difficulties with regard to production recovery growth are experienced by the machinery and equipment manufacturing sector. Its output volume index in 2016 amounted to 96.8% relative to the previous year.
104 102 100 98 96 94 92
rrrK ^/i i /
Q1 Q2 Q3 Q4 QV Q2 1Q Q4 1/ 1 Q2 Q3 Q4 2014 201 5/2016
2014 \ 2015 2016
N H 1
- Industry
Mineral extraction Processing industries ■
Fig. 9. The pace of industrial production, by type of economic activity, in 2014-2016, as % of the corresponding period of previous year
Source: Rosstat.
Table 10
The movement of production indices, by major type of processing industry, 2011-2016, as % of the previous year
2011 2012 2013 2014 2015 2016
Processing industries 108.0 105.1 100.5 102.1 94.6 100.1
Food industry, including beverages and tobacco products 103.9 104.1 100.6 102.5 102 102.4
Textiles & textile products manufacturing 100.8 100.7 104.3 97.5 88.3 105.3
Leather production and leather products & footwear manufacturing 105.7 98.1 95.6 97.2 88.6 105.1
Timber & wood product processing 110.2 96.2 108.0 94.7 96.6 102.8
Cellulose & paper production; publishing and printing 106.5 105.8 94.8 100.4 93.7 100.8
Production of coke & petroleum products 103.8 103.1 102.3 105.7 100.3 97.6
Chemical production 109.5 104.1 105.4 100.1 106.3 105.3
Manufacturing of rubber & plastic products 111.4 112.8 105.9 107.5 96.3 105.4
Manufacturing of other non-metallic mineral products 107.4 110.7 98.0 101.8 92.2 93.4
Metallurgical production & finished products 107.0 104.8 100.0 100.6 93.5 97.7
Machinery & equipment manufacturing 111.1 102.7 96.6 92.2 88.9 103.8
Electric, electronic & optical equipment manufacturing 111.9 106.4 99.0 99.5 92.1 99.0
Transportation equipment manufacturing 117.2 110.3 102.2 108.5 91.5 97.0
Other industries 105.3 102.6 95.4 102.7 94.0 93.8
Source: Rosstat.
In 2015, the behavior of economic induces was negatively influenced by the simultaneous plunge of output both in the tradable and non-tradable sectors. In 2016, the slide of output in the tradable sector into positive zone became the factor that leveled the negative effects of the general situation in the economy. Output in the tradable sector amounted to 101.3%, and in the non-tradable sector - to 99.2% relative to 2015.
The economic development prospects will depend on the possibility to slow down the decline in the non-tradable sector, which is one of the strategic development goals for the Russian economy. It can be achieved by reversing the existing negative trends in the social sphere and boosting the investment and consumption rates.
106,0 -
1
104,0 102,0
100,0 98,0 96,0
I
IN
I'l \ „-i
! I n ¡H
Q1 Q 2 Q3 Q4 Q
i 2015 | i /
J /
\ t
Q1 Q2 Q3 Q4
mi ~
2012 2013 2014 2015 2016
94,0
Tradable goods
Non-tradable goods
Gross value added
Fig. 10. The dynamics of gross value added in the tradable and non-tradable sectors of the economy in 2012-2016, as % of the corresponding quarter of the previous year
Source: based on data released by Rosstat.
4.2. Decomposition of Russia's GDP growth rates in 2016-20191
In his Annual Presidential Address to the Federal Assembly on 30 November 2016, Russian President Vladimir Putin underscored Russia's goal to catch up with the world average growth rates by 2019-2020. As a reminder, the IMF projects 3.7% for the average annual growth rate of the global economy in the coming three years.2 Earlier in November, Russia's Ministry of Economic Development (MED) updated its forecast for Russia's socio-economic development for 2017-20193 whereby a 0.6% decline is projected for Russia's GDP in 2016, while its baseline scenarios (see below) predict that economic growth rates will be barely higher than 2% by 2020 amid low crude oil prices and a lack of structural reforms.
Shortly after the MED's updated forecast was released, the IMF upgraded its forecast for Russia's GDP growth in 2016: while earlier in October the IMF projected a 0.8% year-over-year downturn for the Russian economy in 2016, the revised IMF forecast matches the abovementioned MED's projection of 0.6%. The IMF notes in its comments on the forecast that Russia's economy has managed to withstand the double shock of lower crude oil prices and imposition of sanctions, and there are signs of the economy entering a recovery phase.4 IMF analysts projected a 1.1% growth for Russia's GDP in 2017, with the growth being driven in part by higher crude oil prices.
Furthermore, the year-end 2016 findings that Russian official statistical agencies published in early February 2017 have come to be even more optimistic: GDP growth rate in 2016 was only 0.2% below the value seen in 2015, according to Rosstat's initial assessment.
1 Authors of chapter: S. Drobyshevsky - Gaidar Institute, RANEPA; M. Kazakova - Gaidar Institute, RANEPA.
2 http ://www.imf.org/external/pubs/ft/weo/2016/02/weodata/index.aspx
3 http://economy.gov.ru/minec/activity/sections/macro/2016241101
4 https://www.vedomosti.ru/newsline/economics/news/2016/11/29/667422-mvf-prognoz-vvp
2012
2013
2014
We will consider the foregoing MED's forecast for 2017-2019, as adjusted for the 2017 official findings and for the data on previous periods revised by the Rosstat. As was the case with previous forecasts, this one comprises three scenarios - baseline (aka conservative) scenario, "baseline +" scenario and target scenario.
The MED notes that the underlying scenarios of the forecast rest on the assumption that the policy of sanctions against Russia and Russia's countermeasures will continue over the entire projected period, as well as there will be no geopolitical and economic shocks. The forecast presumes macroeconomic and financial sustainability as long as social and foreign economic commitments are honored.1
The baseline scenario presumes that Russia's economy will operate amid consistent external factors, while an allowance is made for a worsening of the foreign-policy environment and other conditions. This, as noted above, is a conservative scenario whereby the economic development model is not expected to undergo drastic changes. According to the baseline scenario, stagnation will give way to a recovery in 2017, and GDP will be up 0.6% year-over-year, to 2.1% by 2019. The recovery will take place amid rather low global crude oil prices (the Urals crude oil is traded at USD 40 a barrel over the entire projected period) and growth in capital outflows, from USD 18bn in 2016 to USD 25bn by 2019. The MED predicts stable investment activity by mid-2017 and further growth in investment in 2018, to 1.3% in 20182019, due to growth in private investment amid a decline in public investment.
The "baseline +" scenario presumes that Russia's economy will face a benign foreign-economic environment in 2017-2019. For instance, the Urals crude oil is expected to be traded at 48 USD a barrel in 2017, to USD 55 by 2019. The same scenario presumes an increase in household incomes and a consumer demand recovery. It also predicts that capital outflows will take a more subdued pace, down to USD 15bn in 2019. In this context, according to the MED, fixed investment are projected to recover at a faster pace than expected by the baseline scenario: fixed investment are anticipated to increase 2.9% in 2019 due to private and infrastructural investments. Hence the scenario predicts that GDP will raise from 1.1% in 2017 to 2.4% in 2019.
According to MED's documents, the target scenario focuses on achieving target values of socio-economic development and on addressing strategic planning objectives. The scenario presumes that in the medium term Russia's economy will enter a pathway of sustainable growth at a pace not slower than the world average growth rate while macroeconomic equilibrium is secured.2 GDP is expected to grow at a higher rate, from 1.8% to 4.4% in 2017-2019. The target scenario focuses on an external environment similar to that of the "baseline +" scenario (in particular, crude oil price dynamics), however, the target scenario parameters can hardly be achieved, according to the MED, unless Russia's economic development model is transformed to an investment-based model, which implies a moderate growth in consumption spending in the first few years of the projected period, as well as lower costs for businesses. Economic growth under the given scenario will facilitate business environment, and hence it will help discourage net capital outflows which are expected to stop in 2019. The target scenario's active investment policy should facilitate average annual growth in fixed investment, up to 5.2% annually in the period between 2017 and 2019, which will be driven by a higher-than-anticipated growth in private and infrastructural investments.
In our view, given the above preconditions and external factors, the parameters of all the scenarios, excluding the target scenario that, according to the MED, does not expect drastic
1 http://economy.gov.ru/minec/activity/sections/macro/2016241101
2 http://economy.gov.ru/minec/activity/sections/macro/2016241101
changes in the growth model, can be met through serious structural changes to internal conditions for the development of Russia's economy. This assumption holds true based on the findings of decomposition of projected GDP growth rates using a method developed by the Gaidar Institute. The method employs the algorithm of decomposition of GDP growth rates into structural, foreign-trade and cyclical components that is applied in developed countries (OECD). We modified the method so that it could capture the specifics of the Russian economy that is heavily reliant on terms of trade.1 The decomposition was performed using the key parameters of the updated scenario-based forecasting for Russia's socio-economic development for 2016-2019 (see the above-described scenarios of the forecast).
Fig. 11,13-15 show the dynamics of Russia's actual GDP growth rate, as well as the dynamics resulting from decomposition of its structural, foreign-trade and cyclical (the sum of business cycles and random shocks components) components for the period between 1999 and 2019 for all the above three scenarios, as adjusted for Rosstat's data on the -0.2% decline in 2016.
Our estimates show that if the baseline scenario and the "baseline +" scenario materializes, the structural component of GDP growth rate would constantly slow down since 2005, to 0.6% in 2019 (and is apt to stabilize at this level beyond the projected period). A slower pace of the structural component of economic growth is driven by negative dynamics of its fundamental (structural) factors, namely a decline in the employment (the labor factor) due to demography downtrends and slower growth rates in fixed assets in volume terms (proxy variable for the capital factor).
If the target scenario materializes, that, as shown above, allows for transition to a new economic growth model in Russia, that is, growth in structural factors, then the structural component of GDP would go up to 1.5% in 2017, to stabilize at 2% in 2018-2019 (see Fig. 11).
15,00%
----Actual GDP growth rate ("baseline)
™ ~ ™ Actual GDP growth rate (target)
Structural GDP growth rate ("baseline +" and baseline) -*-Structural GDP growth rate (target)
Fig. 11. Actual GDP growth rate and its structural component (all the three scenarios), year-over-year % change, 1999-2019
Sources: Rosstat, MED, IMF, own calculations.
1 This method is described in detail in S. Sinelnikov-Murylev , S. Drobyshevsky, M. Kazakova. Decomposition of Russia's GDP growth rates in 1999-2014 // Ekonomicheskaya Politika [Economic Policy]. 2014. No. 5. PP. 7-37, as well as a monograph on Decomposition of Russia's GDP growth rates / S. Sinelnikov-Murylev [et al.]. - M. : Gaidar Institute Press, 2015. - 128 ps.: (Scientific Works Series / Gaidar Institute for Economic Policy; No. 167P).
Decomposition of projected GDP growth rates in 1999-2019 for all the three scenarios of socio-economic development in the Russian Federation reveals a negative foreign-trade component of GDP growth rates in 2016-2019 (see Fig. 13-15). The negative value is explained by the fact that all the three scenarios envisage global crude oil prices lower than average multiyear values within the given period (USD 74-85 a barrel, Fig. 12).
120,0 -
Actual crude oil price ("baseline +")
™ « ™ Actual crude oil price (baseline)
-*-Actual crude oil price (target)
-■-Average multiyear crude oil price
("baseline +")
-Average multiyear crude oil price
(baseline)
• ••••• Average multiyear crude oil price (target)
Fig. 12. Actual and average multiyear crude oil price, USD/barrel, 1999-2019 (all the three scenarios)
Sources: IMF, own calculations.
15,00%
™ ^ ™ Foreign trade GDP growth rate ("baseline +") -A-Cyclical GDP growth rate ("baseline +")
Fig. 13. Actual GDP growth rate and its foreign-trade and cyclical components, year-over-year % change, 1999-2019 ("baseline +" scenario)
Sources: Rosstat, MED, IMF, own calculations.
15,00%
Actual GDP growth rate (baseline) « ~ « Foreign-trade GDP growth rate (baseline)
Cyclical GDP growth rate (baseline)
Fig. 14. Actual GDP growth rate and its foreign-trade and cyclical components, year-over-year % change, 1999-2019 (baseline scenario)
Sources: Rosstat, MED, IMF, own calculations.
15,00%
Actual GDP growth rate (target) «« « Foreign-trade GDP growth rate (target)
Cyclical GDP growth rate (target)
Fig. 15. Actual GDP growth rate and its foreign-trade and cyclical components, year-over-year % change, 1999-2019 (target scenario)
Sources: Rosstat, MED, IMF, own calculations.
The cyclical component of Russia's GDP growth rate has since 2008 been negative, as shown in Fig. 13-15. It appears that the downward dynamics was driven by raised uncertainty and risks to Russia's economy amid a highly volatile ruble exchange rate and, since 2014, a combined shock of adverse effects of economic sanctions and countersanctions, higher inflation and deteriorated access to fundraising.
The findings of decomposition of Russia's GDP growth rates in 2016-2019 in context of the "baseline +" and baseline scenarios of MED's forecasting of Russia's socio-economic
development whose key parameters are described above, lead to the conclusion that the above scenarios - including projected GDP growth rates amid crude oil pieces lower than average multiyear prices, a lack of growth in the fundamental factors of economic development and the total factor productivity (TFP) (and hence a lower structural component of growth) - cannot materialize unless there is an upsurge of the cyclical component (to about 2.3% by 2019), which, in our view, may happen as a result of an upsurge in cyclical GDP after the negative shock of 2015 is gone, or on the assumption that the economy will stay at the bottom (lower phase) of the business cycle, a marked positive shock of unclear nature.
The target scenario could materialize provided that the cyclical component is slightly higher (to 2.9% by the end of the projected period), however, in such a case, as noted above, Russia's economy would operate under a brand new investment model, which implies a higher structural component of GDP growth whose dynamics is driven by fundamental factors.
We used decomposition of Russia's economic development growth rates to estimate an output gap (i.e., the deviation of actual GDP from a potential output volume), as shown in Fig. 16. According to our estimation, in 2015 the output gap went negative under the baseline and "baseline +" scenarios and would stay negative within a range of -1-2% till 2018. The gap would be positive in 2019 under the above scenarios. As regard the target scenario, the gap would stay negative till 2017, and would regain positive values in 2018, to 2.4% by 2019.
"Baseline +" « ^ « Baseline ----Target
Fig. 16. Gap in Russia's economic output (%), 1999-2019 (all the three scenarios)
Source: own calculations.
The findings lead to the question of what factors that could facilitate the implementation of the parameters envisaged by the above scenarios, except the target scenario. First, as shown above, the Russian economy cannot count on favorable terms of trade because a rather moderate level of crude oil prices, a way below the average multiyear level, is expected over the entire projected period.
Second, neither can the cyclical component facilitate growth rates of that high level because, as noted above, none of the above scenarios envisage preconditions for its growth.
Therefore, it is only through the growth of the structural component - the transition to a new economic development model focused on investment as a key factor - that the desired economic
growth rates can be achieved, as provided for by solely the target scenario. In other words, the best-case scenario for the Russian economy, namely sustainable GDP growth rates at a pace of worldwide average growth rates by 2019 (about 4% year-over-year), can materialize subject to a significant upsurge of GDP fundamental factors. According to our estimates, with the TFP as it is now (this precondition appears to be realistic amid continuing sanctions and a lack of foreign capital, as described by the MED), this goal can be achieved by engaging extra labor resources (about 4.5 million persons), as well as extra Rb 40 trillion of fixed investment in the period between 2016 and 2018.
4.3. Russian industrial enterprises in 2016 (on business surveys' findings)1
Business surveys of industrial enterprises have been conducted by the Gaidar Institute using a European harmonized method in monthly cycles since September 1992, covering the entire territory of the Russian Federation. The panel size is around 1,000 enterprises employing over 13% of industrial employees. The panel is shifted towards large enterprises for each of the segregated sub-industries. The ratio of returned questionnaires is in the range of 70-75%.
Business survey questionnaire contains a limited number of questions (not more than 15-20). The questions are of a qualitative and not quantitative nature. Simple questions structure allows the respondents to fill out the questionnaire quickly and without using any documents. It is paramount that respondent at each enterprise is a manager of the highest level who has a full understanding of state of business and is directly linked to the business management.
We use specific derived index, which we call balance, for the analysis of business surveys results. Balances are calculated as difference between the percent of those who answered "go up" (or "above normal") and percent of those who answered "go down" (or "below normal"). The obtained difference allows us to present responses to each question by one number with "+" or "-".
Balance is interpreted as first derivative or process speed. When the balance of responses to a question of expected price shift is marked "+" this means that the average prices in the near future will be growing (for example, prevail those enterprises with responses about projected increase of their prices). For instance, increase of a monthly balance from +10% to +17% speaks about the fact that prices on average across industry will be growing faster because the number of enterprises projecting their growth have increased. Negative balance means a decline of average prices (more enterprises intend to cut their prices). Change of balance from -5% to -12% is interpreted as an increase of price fall intensity.
4.3.1. 2016: is industry still in crisis?
The Russian economy marked 2016 as a second year of the crisis. However, that is not true of Russian industry. The vast majority of indexes followed by Gaidar Institute in the course of monthly business surveys demonstrated that Russian industry was far crisis during last year.
First and general idea regarding the state in the sector is given by composite indexes computed on the basis of unique for the Russian survey statistics set of base values obtained during the 25-years history of IEP's business surveys. The Industrial Confidence Index is a common derived index for business surveys, the Industry Adaptability Index ("normal") of
industry represents a new instrument of the Institute, which allows to clearly illustrate the features of how the Russian industrial sector goes through the crisis years of 2015-2016.
The Industrial Confidence Index1 demonstrated that the beginning of 2016 was more complicated for Russian industry than the upper turning point in 2015 (Fig. 17).
30 15 0 -15 -30 -45
1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17
Fig. 17. IEP Industrial Confidence Index, 2005-2017
Initial values of the Index in 2016 demonstrated growing pessimism in industry against the background of relatively positive values by the year-end of 2015. For January-February 2016, the Index shed more than 8 points and final decline hit 13 points since August 2015 (when local maximum was obtained). Moreover, the Index was definitely in "minus." However, later the situation started improving: March data regarding the state and forecast of Russian industrial enterprises were full of good news but exclusively regarding those indicators, which were unavailable to the official statistics. Following the February minimum, the Industrial Confidence Index moved up by 5 points and as a result returned to around zero. The April assessments of the state of business in Russian industry also were more positive than negative taking into consideration the publicity, which affected their formation. The Industrial Confidence Index has grown by merely 1 point, which was worth a lot in the context of total pessimism expressed by officials and experts. As a result, the Index secured a strong footing around zero. However, business surveys conducted in May 2016 demonstrated both stabile industrial situation and downward expectations related to the situation in the months that followed. This conclusion was supported by the fact that Confidence Index stayed at the April level amid sharp decline of businesses' optimism. Moreover, sure enough, in June the Index
1 The Index is computed as a simple arithmetic average (difference in responses) to four questions from the IEP's monthly business survey questionnaire:
1) Actual change of demand, balance = % growth - % decline;
2) Estimate of demand, difference of assessments = % above normal + % normal - % below normal;
3) Estimate of stocks of finished products, balance = % above normal - % below normal, opposite sign;
4) Plans for output change, balance = % growth - % decline.
Balances of questions 1 and 4 are seasonally and calendar adjusted. The Index can range from -100 to +100 points. Positive index values imply the prevalence of positive assessments. Negative index values mean that adverse assessments prevail. Decline of index's values is the sign of deteriorating situation. Growth of index's values - the sing of ameliorating situation.
shed several points and dropped to zero mark, thus remaining within previous bounds of uncertainty. Current sales performance nosedive was the main factor for the Index decline.
Aggregate data regarding the state of Russian enterprises in early H2 demonstrated further deterioration of the situation. The IPE's Industrial Confidence Index continued its downward trend having lost all gains posted in late Q1-early Q2 2016. Indicator's reduction in May-July constituted moderate 4 p.p., which, by the way, was rather in line with the slow-rolling current crisis. In July, the Index shed 1.5 p.p. and once again stayed at zero mark. In August, Russian industry exhibited small negative change in the situation. The latter as before said nothing definite about previous probable crisis trends. The IEP's Industrial Confidence Index remained around zero mark where it stayed for five consecutive months surpassing sentiments reduction as of early 2016. The September producers' assessments of state of business in Russian industry triggered growth of the Confidence Index to the best (for that moment) crisis values amid projections of stabilization and deterioration of industrial output dynamics. To note, we do not use the latter in any of our composite indexes, but it is the only index used by the majority of officials and experts even in the context of its small value in terms of information in the course of current slow rolling crisis. The October Industrial Confidence Index value demonstrated small nearly symbolic reduction in assessments of business situation following the September local maximum value of the Index. The November business survey exhibited a fall of the Confidence Index after registering in September-October 2016 of 5-year maximum of this aggregate indicator, which was due to a decrease of all comprising base values minus the Industrial Production Index. The December business surveys data secured stabilization of the Industrial Confidence Index at the November level, which looked very little like crisis and postcrisis values of this index. Industry continues to remain in a state, which is very hard to identify by passed years standards. Moreover, enterprises are rather (nearly by 75% according to our Adaptability Index (normal)) satisfied with their situation.
The Industry Adaptability ("Normality") Index1 significantly improves assessments of enterprises of the second crisis year.
In Q1 2016, business surveys exhibited decline of the Adaptability Index by 3 points. We have not registered so steep adverse change of the Index since the 2008-2009 global crisis. Therefore, the turn of 2016 inspired less confidence in Russian industry than the beginning of 2015. Two paramount for Russian industry indicators, assessments of book orders and assessments of sufficiency of expected book orders with industrial capacities, were drivers for reducing the Index. Then current volumes of book orders were estimated as "normal" by only 42% of enterprises, which was the lowest value of the Index since the beginning of 2010. In these circumstances decline of sufficient security in industrial capacity looked rather logical taking into consideration the fact that the share of responses "more than sufficient" went up. In other words, Russian industry posted increased overhang of excessive capacities to 28%. Solely 7% of businesses posted a shortage of capacities. The most likely reason for adverse assessments of the situation in industry at the turn of the year accounted for the lack of positive dynamics promised by the authorities: "bottom out" did not happen in 2015.
1 The Index is the arithmetical average of the balances (in percentage points) of the responses to the questions about six components: order books, stocks of finished products, stocks of raw materials, available production capacities, current employment, financial and economic state of enterprises. Gaidar Institute for Economic Policy has been analyzing a set of these assessments since 1994. The Indicator is computed on a quarterly basis. The Adaptability Index (normality) shows the level of adaptability of Russian industry to current economic conditions. In other words: to what extent current operating conditions for Russian industry are considered normal.
However, already in Q2 enterprises restored previous non-crisis high assessments of state of business in industry: the Adaptability Index hit an all-time maximum of 72% (Fig. 2). Industry definitely put up with the inability to recover soon from the slow rolling crisis.
Fig. 18. Industrial Adaptability Index, 1994-2017, % (share of enterprises estimating their indicators as "normal")
Next quarter of the slow rolling crisis allowed businesses to better adapt to the current situation. The Adaptability Index hit 74 points, which was an all-time record for the entire 23-year period of its calculation. Previously (during fat "zero years" and during hard "inter-crisis" ones, and during previous "crisis" year) this index reached solely 72 points. Consequently, at the beginning of H2 of the second crisis year, Russian industry found itself well like never before. Because dynamics of the Index for entire previous years coincides with intuitive assessments of an even spare set of data released by the official industrial statistics (not to speak of the ultimate system of indicators of the IEP's survey statistics), than, probably, one can recon that mentioned Index's value correctly assesses the situation in Russian industry. Furthermore, it exceeds previous value by only 2 p.p., in other words is not an "outbreak."
To note that since late 2010 our Index has been demonstrating very high stability. Even in Q1 2015, the Index dipped by only 1.8 points against the value of Q4 2014, although both the authorities and experts were preparing for the type of 2008-2009 crisis when Russian industry was hit hard. In late 2008, the Adaptability Index shed 11 p.p., and in early 2009 lost another 10 p.p. Enterprises and authorities took 6 months in order to return it to pre-crisis values.
At end-2016, the Adaptability Index hit an all-time high for the entire period of its calculation (1994-2016) of 75%. Businesses have miraculously adapted to the realities of the Russian economy and the economic policy. However, continuation and moreover "accomplishment of adaptation" are already fraught with danger of industry to seriously attempt a transition to statistically unquestionable output growth.
Calculation of the Adaptability Index along the sizes of enterprises have demonstrated that the index's growth was secured by very large enterprises (with headcount above one thousand persons). In this group, the Index hit 79% in Q4 2016, which was an all-time high of the group indicator. To note, that these enterprises "entered" the crisis of 2015-2016 with adaptability at 71%, then raised and maintained it at the level of 74%, and in 2016, they managed to raise the Index by additional 5 p.p. Industrial enterprises of other sizes overcome the current crisis
harder. The Adaptability Index for small and medium-size enterprises (1-250 employed) is inferior to the Index of very large enterprises and has no positive dynamics for 2015-2016. During these crisis years, the level of adaptability in the group of small and medium-size enterprises constitutes 57-58%. Large enterprises (251-1,000 employees) assess the situation somewhat better. These businesses have managed to adapt to the current crisis at the level of 64%, but without any positive dynamics exhibited by the end of the second crisis year.
4.3.2. Dynamics of main indexes of Russian industry for 2016
In early 2016, attempts of Russian industry to increase output volumes amid slack and relatively stable demand whose projections for change were also stable resulted in a growth of excessive stocks of finished products, negative adjustment of output plans and investment sentiments. Moreover, stability, which the government was proud of, did not suit the majority of Russian industry. In January 2016, the share of responses "normal" for the current sales volume declined to 42%, which was 3-year minimum, although in august 2015, the level of demand satisfied 59% of producers. At the beginning of 2016, assessments of stocks of finished products gathered negative connotation. In January, the Index value dipped by another 3 points and since November 2015, the surplus moved up by 6 points reaching +10 points. On the one hand, formation of the negative trend for assessments of stocks of finished products was in place following a successful transition through the crisis year of 2015 with minimum level of surplus and with a maximum level of "normality." On the other hand, these values were exceptionally moderate for crisis period. In 2009, balance of responses reached +25 points (according to quarter assessments). However, this indicator's records were registered during the first years of economic reforms: +53 points in 1992, +44 points in 1994.
The February data for Russian industry demonstrated a lack of positive changes of demand and output, deterioration of assessments of existing volumes of demand and stocks amid growing pessimism regarding plans and projections. Attained in February sales volumes did not satisfy already 55% of businesses, which was the worst result of three previous years, although in August 2015 dissatisfaction with demand constituted solely 39% and in August -38%. Attempts taken by Russian industry aimed at increasing production volumes in late 2015-beginning of 2016 and "to bottom out" still were not secured by sufficient book order volumes. Assessments of inventories confirmed this conclusion. In February 2016, the index's balance reached maximum (in other words, lowest value) since May 2014, meanwhile during 20 previous months (by far being simple!) Russian industry steadily controlled the balance of demand and supply by keeping surplus of inventories during the majority of months at the minimum level, which previously was registered during unforgettable for our economy 20062007.
"Vagueness of the current economic situation and its prospects" rose sharply at the turn of 2016 thus becoming one of significant constraints for industrial growth. Respondents mentioned this factor in January 2016 by 8 percentage points more often in comparison with October 2015. This factor hit 48% securing 2nd place on the list of 17 factors, which limit industrial growth. At the same time, conventional (and acknowledged by everybody) constraint, low domestic demand, added solely 1 (one!) p.p. and hampered output growth of 53% of Russian industrial enterprises. Upsurge of misunderstanding by businesses of the current situation and even of its short-term prospects is explained by unfavorable combination of a whole number of factors. Firstly, the slow rolling crisis has denied businesses of a chance for a fast entrance into the crisis and fast exit the crisis. Secondly, protracted character of the crisis
has allowed enterprises to hear a wide range and constantly reviewed array of assessments of the current crisis and projections for its development including those made by the officials. This fact most likely misinformed businesses than contributed to their better understanding of the current economic situation and its prospects. Thirdly, the fact the geopolitical component contributed to the current crisis definitely reduced predictability of economic processes development. Another reason for vagueness were, probably, new ruble exchange rate principles. Drastic devaluation of the national currency in the context of its dependence on the oil price has a significant and ever-increasing negative impact on Russian industry. According to direct responses of enterprises, "undervalued ruble exchange rate and cost increase of imported equipment and raw materials" in early 2016 limit output growth of already one third of Russian industry, which propelled this constraint to 3rd place on the list of negative factors. Meanwhile in July 2014, solely 10% of businesses reported this factor, which put this factor to 9th place and sometimes even to 14th place on the list of 17 negative factors.
Export growth demand following ruble's devaluation has not satisfied expectation of more than one fourth of domestic producers and the "low demand for exports" factor has come to 4th place on the list of constraints of industrial production growth according to proper domestic producers. At the same time, one should mention a reduction of downward pressure of competition with imports on the dynamics of Russian industrial production. In October 2013, imports interfered with one third of industrial producers, in April 2015 - with only 11%, and in January 2016 - with 12% of enterprises. The 1998 default reduced the negative impact of this factor to 3-5%, the 2008-2009 devaluation - to 9%. Thus, the 2014-2016 devaluation strengthened positions of domestic producers on the sales markets (most likely domestic ones), and created for them problems on the equipment and raw materials markets, especially, amid stalling import substitution with no Russian analogues.
In the end of Q1 2016, Russian industry reported abut drastic and positive change of its assessments of stable dynamics of observed by us indexes and positive adjustment of their projections. Dissatisfaction with sales performance fell in March by 6 points. Therefore, negative trend of demand assessments in September 2015-February 2016 was stopped. Growth of confidence in demand projections was another positive sign. Following drastic February setback when seasonally adjusted balance of projections exhibited 11-months minimum, in March the index went up but to conventional for previous months zero level. Assessments of inventories were the third positive sign in March. Balance of this indicator following 6-months (also in September 2015-February 2016) slowdown fell in March by 5 p.p. and returned to a moderate for passed crises and conventional for the beginning of the current crisis level of surplus inventories assessments. Investment plans represented fourth positive sign in March. They achieved the best since September 2014 (in other words, since the onset of the current crisis) values. The balance of the index closely approached to zero mark, although remained negative but very small (-1 p.p.) in absolute magnitude. It should be noted that at the turn of 2015, it dipped below -30 p.p. Consequently, in spring 2016, industry nearly overcame a psychological barrier of investment pessimism (Fig. 19).
Russian businesses consider ruble's strengthening as one of the factors for investments heading into plus. In 2015, the question regarding what ruble exchange rate would benefit the investment growth was asked twice: in May and in December. In December survey, respondents pointed to the investment growth already in 2016. Moreover, always, according to producers' assessments, the impact of ruble exchange rate on the investment activity was rather definite. In May 2015, when ruble was strengthening the need for its revaluation for the investment
growth in proper production was pointed by 61% of enterprises. In December 2015, when ruble was losing strength this need was pointed by already 73% of enterprises.
Fig. 19. Balance of expected changes of investments and satisfaction with their actual volumes
Actual dynamics of demand and output posted at the beginning of Q2 looked reassuringly non-crisis. Enterprises kept a tight control over stocks of finished products, projections and plans continued recovering following the February collapse. Sales volumes of industrial products achieved in April (estimated as "normal" for that stage of out complicated economic development) were satisfied by 53% of businesses, which was 7-moths maximum for the indicator. Industry, hereby, continued exhibiting high adaptability to actually existing but not been understood through conditions of crisis year 2016. Investment intentions, although were not characterized by stable positive dynamics, anyway were not as pessimistic as they were in
2015. In April, they once again "backed off". The April index balance shed 9 points following the current crisis March maximum. The same picture was registered in December 2015-January
2016, when the balance following an upsurge by 13 p.p. returned to the previous levels of stable pessimism. Thus, positive signs of investment intentions in industry have not turned sustainable and have failed to maintain the investment growth. However, the mere fact of such signs at the level of enterprises was undoubtedly a positive signal.
Zero industrial growth of H1 2016 was well provisioned with highly qualified personnel. The share of responses "sufficient" in assessments of headcount of enterprises hit an all-time high of 80% (Fig. 20). Previously such result was obtained only in 2012 and 2013. The remaining 20% of responses were accounted for "more than sufficient" and "less than sufficient." Balance of last two assessments ("more than" and "less than") stays around near-zero values for already three quarters, in other words, excessive headcount in industry on the whole is totally offset by headcount shortage. At the same time, the share of responses "less than sufficient" declined in Q2 2016 to its minimum since 2010, i.e. since the end of the previous crisis. Excessive industrial employment has stabilized at the non-crisis level of 11%.
Prior to default period, the latter index stayed in the range of 35-40%, and during the crisis of 2008-2009 - in the range of 24-35%.
90
60
30
0
1/97 1/99 1/01 1/03 1/05 1/07 1/09 1/11 1/13 1/15 1/17
Fig. 20. Share of enterprises with excessive, sufficient and insufficient headcount,
1997-2016, %
Unexpected May positive demand dynamics increased satisfaction with achieved sales volumes to 54%, but did not boost respondents' confidence in retention of an upward trend: demand projections, which were gaining confidence in March-April along seasonally and calendar adjusted factor data, in May unexpectedly collapsed by 8 points. Pessimism expressed by the officials and experts neither contributed to the industrial confidence growth.
Assessments of stocks of finished products confirm the conclusion about a positive demand dynamics. Excessive (balance) of stocks dipped sharply in March 2016 and stayed at the level of +2..+3 points. In May, building a balance of responses happened amid contraction of both responses "above normal" and responses "below normal." As a result, shares of these responses (10 and 7%, respectively) hit an all-time minimum during the entire period (1992-2016) of instrumental observations of assessments (not volumes!) of inventories in Russian industry. Assessments of inventories as "normal" remained stable in the range of 70-72%. Reduction of the proportion of certain assessments of stocks ("above normal" + "normal" + "below normal") happened owing to growth of percentage of responses "no answer", which reflects a growth of misunderstanding by industry what physical quantity of stock was adequate current situation. In May 2016, rejection of their stock assessment hit 11% and thus exceeded the ration of responses "above normal" or "below normal". Although still in January 2016, solely 5% of businesses rejected their certain assessments of stock.
In the wake of constantly postponed (even officially) industrial growth recovery which expected rate did not promise pleasant surprises, industry revised assessments of capacities provision in view of such pessimistic projections. Moreover, it was done in order to improve capacity provision, which looked absolutely logical. The shortage of capacities amid enterprises' expectations of demand change for output declined in Q2 2016 to 5%. This is nearly a minimum level of equipment shortage reported for the entire monitoring period of the index
since 1993. The IEP business surveys registered lower shortage of capacities (3%) during pre-default period, in April 2009, and in January 2013.
H1 of the crisis year of 2016 brought for Russian industry a more positive demand and output dynamics. However, businesses were not ready to overcome the current low rolling crisis in their plans and projections. Seasonally adjusted balances of demand projections remained around zero value. The initial balance of output plans shed in June 11 points, and when seasonally adjusted - 2, and as a result sank to nearly minimum value of 2012-2016. Businesses did not have sufficient reasons for launching the output growth, which is statistically distinguishable by the authorities, firstly, owing to insufficient demand volumes, and secondly, due to vagueness of prospects for the Russian economic recovery out of a protracted crisis started in 2014.
The beginning of H2 exhibited instability of an upward trend in Russian industry and validity of neo-optimistic forecasts of Q2 2016. In July, demand for industrial products underwent, according to businesses, drastic for the second crisis year changes. However, Russian industry was comfortable with such course of events. The proportion of "normal" responses regarding current demand volumes since April exceeded 50%, in other words the majority of producers were nonetheless satisfied with their sales and more than confidently controlled their inventories. In July 2016, The percent of their "normal" responses hit another all-time record for the entire previous 290-month period of instrumental observation for this index - 76% of businesses considered their volumes as "normal." The remaining 24% of enterprises reported assessments "above normal" but solely by 2-4 percentage points. In other words, traditional balance showed a symbolic and highly rational for the current historical moment excess of stocks of finished products.
At the beginning of Q3, industry selected principal factors, which hampered the output growth in the context of ruble's strengthening. No less than half of Russian enterprises considered insufficient domestic demand was the main (most widespread) impediment for industrial growth. Maximum references of this factor (55%) was accounted for Q1 2016, i.e. by no means at the crisis peak of early 2015. By the way, vagueness of the current economic situation and its prospects - another constraint important for the current historical stage registered peak of references in early 2016. Then, nearly half of Russian industrial managers did not understand what was going on in the Russian economy. However, half a year later the level of misunderstanding fell to traditional for pre-crisis quarters level of 35%. However, growth of understanding most likely is due to perception of the fact that nothing is happening in the Russian economy and its prospects look similar.
Businesses gave 3rd place in the rating of industrial growth constraints to insufficient demand for exports factor. This seems logical in the wake of ruble's appreciation, but reduction of references of this constraint down to 22% after 32% registered in Q4 2015 and 29% posted in Q1 2016 seems illogical. Apparently, previous wave of devaluation shaped then exaggerated and frustrated expectations for external demand growth. However, subsequent ruble's appreciation and upward trend of domestic demand permitted Russian industry to reduce a request for export demand.
In Q3, Russian industry retained customary stagnation amid complete and uncomplicated in such situation control by enterprises of state of business. Following June upsurge of balance of demand change and July dip, industry confirmed a return to slack negative sales dynamics. However, on the whole, the results of survey monitoring of demand changes for the first 9 months of 2016 looked extremely ambiguously. Enterprises' responses did not provide
reasons for concluding about a clear continuation of the crisis nor about its termination. Businesses' forecasts attested to a lack during first 9 months of 2016 of hopes for sales grow by Russian industry. Following a psychologically hard Q1 2015, industry was consistently forecasting approximately zero demand growth. However, at the beginning such forecasts were skeptically perceived by observers, who expected a full-scale crisis in 2015, thinking that enterprises underestimated "true" depth of a slump. In 2016, experts assessed retention of zero demand growth projections in industry as a mistake to the contrary: enterprises do not see "correct" moment for the onset of industrial growth, which will soon unfold, but does not materialize.
Fig. 21 Assessment of inventories balance, 1997-2016
Such demand dynamics enabled the enterprises to steadily control stocks of finished products (Fig. 21). In July-September, the proportion of responses as "normal" regarding physical volumes of inventories remained at all-time (1992-2016) maximum of 75%. The remaining 25% of responses approximately were divided half-and-half between responses "above normal" and "below normal," in other words, their balance stayed around zero level. The maximum (i.e. most crisis) value of inventories balance during current crisis was obtained in February 2016 and constituted +9 points: then 17% businesses assessed their stocks as "above normal" against 8% of responses "below normal." In December 2014 - March 2015 the balance of assessments steadily remained in the range of -2..+3 points and in no way corresponded the crisis pattern of Russian industry drawn by the authorities and experts.
The same situation is observed regarding industrial inputs. In Q3 2016, their proportion in responses "normal" hit an all-time high of 80%. Russian industry as never before was provided with industrial inputs to secure current output and even for its feasible changes, which unlikely will be shocking (but with "plus" sign) for producers. That is why enterprises not only boasted of sufficient industrial capacities but also were well provided with raw materials stock in order to satisfy feasible demand growth on their products.
Q4 2016 signaled clear positive changes in Russian industry. October demonstrated development of first hopes for weathering the stagnation. Demand dynamics for the first time
during the current crisis (even according to traditionally understated enterprises' assessments) exhibited "plus." Projections of sales have also hit positive balance values. Satisfaction with demand volumes retained high and far from crisis values. Meanwhile, enterprises' assessments of stocks of finished products exhibited a shortage of their physical volumes amid industry's unwillingness to start increasing stocks in the wake of uncertainty about stability of upward trends. Monitoring of industrial growth constraints confirms this conclusion. "Vagueness of the current economic situation and its prospects" comes to 2nd place in the rating of 17 negative factors. Since mid-2016, this factor hampered one third of Russian industrial enterprises to shape purposeful output strategy.
Businesses' investment plans demonstrated insufficient confidence of the sector in early start of industrial growth. Fluctuations of investment sentiments registered in mid-year with an upward trend began slowing down signaling growing investment pessimism. Industrial sector unwillingness to invest was explained not only by vagueness and unpredictability of macroeconomic situation, but by sufficiency, according to the majority of producers, of even shrinking volume of existing investments. In Q3 2016, sixty one per cent of enterprises assessed their investments in such a way, which was the crisis maximum of the index. The shortage of investments hampered the output growth in Q4 2016 of only 13% of enterprises, which was already the crisis minimum.
In November, Russian industry faced decline of demand dynamics, which forced the sector to slowdown a symbolic output growth and rather sharply adjust demand projections amid retention of high by the crisis terms of sufficiency of existing sales volumes. In this context, assessments of inventories exhibited rates exceptionally insignificant by volume and without a sign that enterprises were losing control over their volumes. Assessments of industrial inputs demonstrated in Q4 2016 still high readiness of the industrial sector to exit protracted stagnation. Eighty per cent of industrial producers boasted on normal for the current period stocks, which was close to an absolute maximum if the index for the entire 24-year period of IEP monitoring from 1993 through 2016. All-time high of 81% was obtained in early 2012, but it turned out to be unstable. Consequently, year-average assessments of stocks of raw and other materials in 2016 were the best: 79% of businesses assessed them as "normal", 15% - as "below normal", and 3% - as "above normal." Russian industrial sector held "shortage of raw and other material" in 2016 at 12th-13th places on the list of 17 factors that produce a negative impact on industry. Demand dynamics on industrial goods at the end of the year demonstrates non-typical for this time of the year positive outlook
The way Russian industrial sector finishes second crisis year encourages cautious optimism. Demand dynamics on industrial goods posted at the end of the year exhibits non-typical for this time of the year positive outlook. Demand projects avoided traditional December peak of pessimism prior to January national holidays and again registered maximum in the course of the current crisis. Assessments of stock of finished products have undergone changes, which attest to the development of positive sentiments in industry. Balance of responses ("above normal"-"below normal"), which in July-October was consistently negative, since November began gaining "positive" surplus of stocks and reached +3 points. The last value, naturally, in no way can be seen as a sing for overstocking. On the contrary, the industrial sector, most likely, stopped "disbelieving" in commencing output growth (precisely such situation was developing< for instance, during pre-default months) and started maintaining small but well managed surplus of stocks (that is characteristic to sustainable output growth). It should be noted that the industrial sector entered the current crisis anything but in a crisis manner: without
surplus of stocks of finished products. Later under the influence of promises of its prompt termination industry conducted policy of building moderate amounts of stock. However, "rebound from the bottom of recession" that eventually did not happen resulted in forming the largest for 2015-2016 surplus of stocks of finished products. Change in the official rhetoric and the onset of more realistic forecasts about the course of the crisis forced the industrial sector to get rid of surplus stocks of finished products (in May-June 2016) and then achieve "minus"
according to assessments of balance of (July-October 2016) stocks.
* * *
The Russian industrial sector passed through the second year of economic crisis nearly as orderly as it passed the first one. Only in Q1 2016, businesses experienced some difficulties linked to the fact that promised by the authorities "rebound from the bottom of recession" eventually never happened. However, a change in rhetoric and careful policy regarding output and prices enabled Russian industry promptly adapt to officially acknowledged protracted crisis and asses its state at the end of 2016 as unprecedentedly "normal."
4.4. Fixed investment1
4.4.1. Investment resources and financial environment for investment
The period of 2014-2016 saw mixed investment dynamics driven by the factors and conditions for (1) recovery from the crisis of 2009-2012 and (2) for Russian economy's adaptation amid restricted access to global capital markets. Russia's investment crisis hit a peak in H1 2009, and fixed investment recovered bouncing back to pre-crisis levels by 2011 year end. Fixed investment accounted for 19.7% of GDP, one percentage point below the average of 2007-2008, despite a faster rate than GDP growth in the period of 2010-2011. In 2012, the year-on-year fixed investment growth of 6.8% was bolstered by major infrastructure and social investment projects in progress. However, with the savings available at that time, the fixed investment share in 2012 was still smaller than what it was prior to the crisis. Although fixed investment growth rates was close to zero in 2013, the year-on-year growth of 0.8% influenced the investment demand dynamics in the years that followed.
The investment crisis of 2014-2016 was the longest crisis (11 quarters of downturn) over the past 17 years, having its own specific features: the internal market was shrinking as personal and corporate incomes declined; supplies of imported investment products slowed amid sanctions; the structure of investment resources changed; access to global capital markets was restricted.
The investment crisis entered its acute phase in 2015, when fixed investment dropped 8.4% year on year. Fixed investments were discouraged by a soaring cost of credit facilities, mounting inflation, Russian ruble's devaluation, changes to the pricing structure for imported investment products. The central bank key rate in 2015 varied within a range of 17.0% (December 16, 2014) and 11.0% (August 3, 2015), thus affecting the demand for fundraising for investment and for inventory build-up purposes. In 2015, prices of products manufactured
by the investment/construction complex rose 10.3% relative to 2014, thus narrowing the market demand for its services, and therefore the investment/construction complex saw its ROA fall to 3.8% vs. 8.3% in 2013.
imiiim
Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011
85
18 16 14 12 10 8 6 4 2 0
Fixed investment
GDP Key interest rate
Refinancing rate
Fig. 22. Fixed investment dynamics in 2010-2016, % change, year on year Source: Rosstat.
Although the investment crisis continued into 2016, there was an increasingly visible trend for the investment/construction complex toward adapting to a new economic environment.
In 2016, the decline in interests rates to 10.5% (July 14) and then to 10.0% (September 19) enabled the investment/construction complex to slow the fall rate and to recover some, albeit meager, growth in fixed investment (+0.5%) in Q3 2016. Note that the pricing policy of the investment/construction complex, which in 2014-2015 focused on anticipatory strong growth in prices, underwent drastic changes in 2016: the composite price index for investment products and services descended to 3.2% and the machinery and equipment price index decreased by 2.2% year on year. Therefore, the decline in fixed investment in 2016 was slower by 0.9% than that in 2015.
Table 11
Financial environment for investment in 2010-2016
Corrected 2010 2011 2012 2013 2014 2015 2016
Refinancing rate (year end), % 7.75 8.0 8.25 8.25
Key interest rate (year end), % - - - 5.50 17.00 11.0 10.0
Bank of Russia international reserves (year end), USD bn. 479.4 498.6 537.6 509.6 385.5 368.0 377.7
Net capital inflows (-) / outflows (+) in private sector, USD bn 30.8 81.4 53.9 60.3 152.1 57.5 15.4
Price indices, % change, Dec to Dec
Consumer prices for goods and services 108.8 106.1 106.6 106.5 111.4 112.9 105.4
Industrial producer prices 116.7 112.0 105.1 103.7 105.9 112.4 107.4
Composite price index for imported investment products 109.1 108.0 106.9 104.9 107.2 110.3 103.2
Including
producer prices for construction products 109.6 109.3 108.3 104.3 104.6 104.1 106.6
machinery and equipment 106.1 105.6 103.9 103.1 112.3 120.1 97.8
USD/Rb official exchange rate (year end), Rb/USD 30.48 32.20 30.37 32.73 56.26 72.88 62.10
The investment model of 2014-2016 had some specific features: an uptrend for the gross savings share due to a new ruble exchange rate emerged; growth in the share of profit and other mixed income in GDP amid a rising inflation rate had no significant effect on investment decisions; budget-funded investment dropped to 2.0% of GDP, including federal budget-funded investment (down to 1.1% of GDP), in response to a harder line on budget constraints; high interest rates spurred an uptrend for corporate and retail deposits. For instance, in 2015, corporate money in credit institutions and retail deposits accounted for 22.8% and 27.9% of GDP, respectively. The dynamics of corporate deposits in 2016 slowed down to 19.1% of GDP in response to a decline in interest rates.
Table 12
Key features of investment resources in 2011-2016, as % of GDP
2011 2012 2013 2014 2015 2016
Gross savings 31.2 29.6 26.3 28.6 30.2 30.6
Gross fixed capital formation 20.0 20.2 20.2 21.1 20.7 21.1
Fixed investment 18.5 18.8 18.9 17.6 17.5 17.0
Gross profit and other mixed income 41.5 41.1 39.1 38.9 43.9 42.7
Consolidated budget revenues 34.9 35.0 34.4 33.8 32.3 32.0
Budget-funded investment 2.7 2.6 2.7 2.2 2.3 2.0
Including federal budget-funded investment 1.4 1.4 1.4 1.2 1.4 1.1
Financial assets growth and real estate purchase 9.7 8.7 9.3 7.8 11.7 n/a
Retail deposits (individuals) 19.9 21.3 23.9 23.4 27.9 28.1
Corporate deposits (legal entities) 14.0 14.3 15.3 21.5 22.8 19.1
Source: Rosstat.
The dynamics and the structure of capital formation for investment purposes were heavily influenced by restrictions on inward foreign investment in the Russian economy. In 2009, inward foreign direct investment in Russia's economy failed to recover in volume terms to the pre-crisis levels of 2008 despite positive dynamics within four years after a slump by more than a halve.
Table 13
Russia's direct investments in 2007-2016 (balance of payments), Rb bn.
2007 2008 2009 2010 2011 2012 2013 2014 2015 January-September2016*
Direct investment -11.1 -19.1 6.7 9.4 11.8 -1.8 17.3 35.1 15.7 6.0
outward 44.8 55.7 43.3 52.6 66.9 48.8 86.5 57.1 22.2 17.1
inward 55.9 74.8 36.6 43.2 55.1 50.6 69.2 22.0 6.5 11.2
* '+' is positive direct investment balance; '-' is negative direct investment balance. Source: Bank of Russia.
Foreign investors behavior was strongly affected by downgraded sovereign ratings and mounting risks. Both direct investment in the Russian economy and returns on Russia's outward investment declined amid sanctions and restricted access to global capital markets. Inward foreign direct investment in the Russian economy in 2015 contracted by more than 3.4 times compared to 2014, to less than 10.6% over 2013, and outward investment dropped by 2.6 times, down 25.7% over 2013. In 2016, the scale of inward foreign direct investments increased in response to an economic relaxation in Russia, running at USD 11.2bn in the first three quarters compared with USD 6.5bn in the aggregate in 2015. Note that Russia is a net capital exporter since 2009.
4.4.2. Tangible assets of the construction/investment complex
Fixed investment basically focus on new construction projects, representing nearly 3/5 of total investment.
As a result of this policy, the average age of machinery and equipment fell to 11.5 as of the beginning of 2016, compared to 13.5 in 2010. Note, however, that the machinery and equipment fleet is generally characterized as having a high depreciation rate, a big share of used up and low-retirement-rate machinery and equipment. Such an imbalance of the reproductive structure of the machinery and equipment fleet impairs the effectiveness of fixed capital and makes the Russian economy less competitive. (see Table 14).
Table 14
Fixed assets key features as of the beginning of 2016
2011 2012 2013 2014 2015 2016
Fixed assets depreciation rate (at year end), % 47.1 47.9 47.7 48.2 49.4 47.7
The share of used up machinery and equipment (at year end), % 21.0 22.0 21.8 22.1 23.1 24.5
Machinery and equipment average age 13.5 13.3 13.3 13.0 12.4 11.5
Renewal coefficient (new fixed assets, as % of fixed assets at year end, in constant prices) 3.7 4.6 4.8 4.6 4.3 3.9
Retirement rate (fixed assets liquidation, % of fixed assets as of the beginning of the year, in constant prices) 0.8 0.8 0.7 0.7 0.8 0.8
Source: Rosstat.
The share of machinery, equipment and means of transport in investment spending increased because new fixed investment targets were set, as well as owing to type-related specific characteristics of spending on new construction projects, reconstruction, modernization and upgrading of production facilities.
Table 15
Structure of using fixed investment by type of activity (in effective prices, excluding small businesses and investment volumes unobservable by direct statistical methods)*
2005 2010 2011 2012 2013 2014 2015
Fixed investment - total 100 100 100 100 100 100 100
including:
construction 54.5 61.1 58.1 58.3 57.7 59.2 58.6
modernization and reconstruction 21.7 18.8 19.3 19.5 18.8 17.4 17.3
acquisition of new fixed assets 23.8 20.1 22.8 22.2 23.5 23.4 24.1
*The data for 2016 will be released in H2 2017 as prescribed by the regulation for publishing statistical data
Source: Rosstat.
Investment money was reallocated by type of fixed assets under an updated price structure for investment products and services. Price correction was prompted by a 18.2% upsurge of prices of imported investment products in 2014-2015, including spending on machinery and equipment (up 34.9%). In 2016, price indices for investment machinery and equipment stood at 97.8% December over December. The adopted pricing strategy helped reduce costs and attain a positive net result. In 2013-2016, a lack of demand for products, high interest rates, as well as uncertainty about economic prospects, were the key factors preventing companies from investing. The share of enterprises considering the lack of own capital as the main investment constraint was equal to the average over the last five or six years, however, this was worsened by a lack of incentives for enhancing production technologies. Comparative analysis of changes to the structure of main types (by type) reveals an extremely low characteristics of adaptation to varying demand environment and production technologies. There is still a high degree of
deterioration and obsolescence of fixed assets, an adverse age composition of the machinery fleet, slow rates of renewal and retirement.
Russia's machine-building complex has long been developing at a slower pace than fixed investment dynamics. The lack of domestically produced investment products was offset by imports of machinery and equipment. Prior to the financial crisis of 2008-2009 and the ruble's devaluation of 2014-2015, enterprises purchased foreign equipment because of relatively low prices, high quality, and availability of after-sale service and support.
Imports of investment goods Fixed investment
Manufacture of machinery and equipment
Fig. 23. Domestic production dynamics in machine-building complex, imports of machinery and equipment, and fixed investment in 2007-2016, % change, year on year
In January-September 2016, imports of investment products in volume terms accounted for 24.6% of total imports, adding 2.3 percentage points to the level seen in 2015. Positive dynamics of investment product imports and output of domestically manufactured machinery and equipment recovered simultaneously in Q3 2016 relative to the same period previous year, thus contributing to a positive fixed investment dynamics.
The dynamics of domestic production and technical and economic features of fixed assets in the investment/construction complex are definitely not strong enough to be able to boost economic modernization. There are some positive changes though. First, the share of fixed assets by type has changed over the last five years amid a faster than normal growth and renewal coefficients of manufacturing fixed assets as compared to the mineral extraction performance figures, as well as to the production and supply of electricity, gas and water; second, transport fixed assets increased at a fast pace; third, the share of trade and finance fixed assets increased showing an extremely high renewal coefficient; fourth, the share of social funds increased, with renewal coefficients being above the economy-wide average. Improved characteristics of fixed assets can facilitate the labor productivity growth potential contingent upon changes to qualitative characteristics of human capital. The Russian economy is facing growth in the capital-labor ratio amid declining capital-output ratio and labor productivity. Obviously the
investment issue shouldn't be limited to just fixed assets reproduction, it should include human capital investment, too.
Table 16
Capital-labor ratio index and capital-output ratio index in 2013-2015,
% change, year on year*
Capital-labor ratio index Capital-output ratio index
2013 2014 2015 2013 2014 2015
Total 105.2 104.0 103.8 96.7 97.0 93.3
including:
agriculture, hunting and forestry 103.1 103.7 104.5 103.3 99.6 100.5
fishing and fish hatchery 101.5 104.6 100.6 102.3 100.0 97.5
mineral extraction 107.0 107.1 104.8 90.8 95.9 94.8
manufacturing 107.9 108.0 108.0 98.2 94.7 89.4
production and supply of electricity, gas and water 107.9 106.0 106.3 92.2 94.1 94.0
construction 103.6 104.0 105.4 96.4 94.7 90.5
wholesale and retail trade 106.5 104.2 106.6 93.9 95.4 84.7
transport and communications 107.0 103.4 102.4 96.0 96.6 96.7
real estate operations, renting and provision of services 101.4 100.6 100.0 98.8 96.7 95.7
* The data for 2016 will be released in H2 2017 as prescribed by the regulation for publishing statistical data.
Source: Rosstat.
4.4.3. Fixed investment financing by source and by type of ownership
In 2016, own capital, 51.8% of total fixed investment in volume terms, remained the principal source of recourses formation and investment financing at enterprises and organizations. The dynamics and the structure of using own capital to finance fixed investment corresponds closely with financial performance figures. In 2016, the net financial result saw slower growth rates, and profits from sold goods, products and services dropped to 8.2% (January-September) vs. 9.5% a year earlier. This determined structural shifts and the size of fundraising to finance investment programs. In 2016, the share of bank loans was up to 10.6% (+2.4 percentage points over 2015), including Russian banks (up to 7.6%, +1.2 percentage points) and foreign banks (up to 2.9%, +1.2 percentage points). Although inward foreign fixed investment saw absolute decline compared to 2015, it was totally offset by a hike in foreign bank loans. The extent of bank participation in financing investment programs in 2016 was positively influenced by an upturn in the Russian banking sector, on the one hand, and by a slack in the capital outflow trend, on the other hand.
In 2016, budget funds as a source of investment financing represented 16.0% of total fixed investment in volume terms, down by 2.3 percentage points compared to 2015. The transformation of the 2016 year-end structure of budget-funded investment was driven by an increase in volumes and in the share of Russian subjects' budgets and local budgets, thus compensating for the decline in the scale of federal budget-funded investment. In 2016, the federal budget accounted for 9.0% of total fixed investment in volume terms compared to 11.3% in 2015.
Investment by individuals in 2015-2016 was characterized by an absolute decline in volume terms in shared participation (co-ownership) in housing construction projects. In 2016, the share of individual co-investors in housing construction projects shrank to 2.0% of total fixed investment compared to 2.4% a year earlier. In 2016, individual developers that used own
capital and bank loans for construction investment accounted for 39.6% of total commissioned residential property, compared to 41.2% in 2015.
Table 17
Fixed investment structure by source of financing (excluding small businesses and investment volumes unobservable by statistical methods), %
2011 2012 2013 2014 2015 2016
Fixed investment total 100 100 100 100 100 100
Including by source of financing:
own capital 41.9 44.5 45.2 45.7 50.2 51.8
fundraising 58.1 55.5 54.8 54.3 49.8 48.2
of which:
bank loans 8.6 8.4 10.0 10.6 8.1 10.5
Russian bank loans 6.8 7.2 8.9 8.0 6.4 7.6
including foreign bank loans 1.8 1.2 1.1 2.6 1.7 2.9
fundraising from other organizations 5.8 6.1 6.2 6.4 6.7 5.4
inward foreign investments 0.8 0.9 1.1 0.5
budget funds 19.2 17.9 19.0 17.0 18.3 16.0
including:
federal budget funds 10.1 9.7 10.0 9.0 11.3 9.0
subjects of Russia budget funds 7.9 7.1 7.5 6.5 5.7 5.9
off-budget funds 0.2 0.4 0.3 0.2 0.3 0.2
money generated from investment in shared participation in construction projects (legal entities and individuals) 2.0 2.7 2.9 3.5 3.2 2.8
including individuals 1.3 2.1 2.3 2.7 2.4 2.0
other 22.3 20.0 15.6 15.7 12.8 12.1
Source: Rosstat.
300 - 2500,0
2008 2009 2010 2011 2012 2013 2014 2015 2016
Legal entities investment in shared participation in construction projects Individuals investment in shared participation in construction projects ^^^"Consumer spending on real estate
Fig. 24. Investment in shared participation in construction projects, and consumer spending on real estate in 2008-2016, Rb bn.
Source: Rosstat.
Amid a declining real personal cash income In 2015-2016, the share of consumer spending on real estate in total personal cash income and savings shrank gradually from 4.5% in 2014 to 2 9% in 2015, and to 2.5% (preliminary estimates) in 2016.
The national investment strategy of 2009-2016 rested on the acknowledgment that large businesses are major contributors to the national modernization and global competitiveness. To trigger the investment process, the state, first, was actively involved in developing the Russian corporate sector, focusing on the establishment, optimization and structural evolution, as well as improving competitiveness, of large companies. The state over the last few years was actively involved in the establishment of state-owned holding companies in aerospace and shipbuilding industries, railway and oil sectors. However, the financial crises of 2008-2009 and of 20142016 deepened the imbalance of public investment management, thus making it clear that in the absence of well-running ROI enhancement mechanisms the state should restrain from a policy of increasing its involvement and public investment amid budget deficit.
The share of state-owned enterprises and organizations in fixed investment financing contracted from 18.3% in 2008 to 13.7% in 2016. Investment processes were adversely affected by gradually weakening business activity of state-owned corporations.
Table 18
Fixed investment indices in current prices by type of ownership, % change, year on year
All types of ownership Excluding small businesses
2011 2012 2013 2014 2015 2015 2016
Fixed investment - total 120.6 114.0 106.9 103.4 104.7 104.3 107.0
public 118.1 113.6 109.5 89.4 96.6 104.4 110.5
municipal 117.7 116.8 114.4 100.8 81.7 93.6 100.0
private 114.8 106.7 113.6 108.0 110.6 107.1 104.2
Russian mixed ownership 192.0 115.8 83.7 106.3 97.7 100.9 85.8
state-owned corporations 162.6 117.5 108.4 103.9 77.7 78.6 110.1
foreign and mixed Russian/foreign ownership 106.1 144.7 98.3 100.9 103.7 105.8 127.5
Source: Rosstat.
In the period between 2010 and 2016, privately-owned enterprises contributed to further growth in investment in nominal terms and compensated for inconsistent investment activities of state-owned and municipal enterprises. The share of fixed investment by private enterprises increased markedly, while the investment crisis at state-owned enterprises tended to continue and reflected their low efficiency.
The investment crises of 2008-2009 and of 2014-2016 severely affected foreign-owned enterprises. Positive investment dynamics for foreign-owned enterprises and joint ventures recovered at a moderate pace relative to the overall fixed investment dynamics in the Russian economy, as evaluated in current prices.
Analysis of capital formation for fixed investment by type of ownership, excluding small businesses, in 2016 shows that the private sector continued contributing positively to the investment process amid stabilized rates of public and mixed ownership and corrective growth in investment by state-owned corporations.
4.4.4. Fixed investment dynamics
The fixed investment downturn hit the bottom in Q3 2015. In 2016, the investment quarterly dynamics continued to follow the downtrend in the first half of the year, while there was a tiny growth in the third quarter. The annualized fixed investment and completed construction works stood at 99.1% and 95.7%, respectively, at the 2016 year end.
115
110
105
100 =
95
90
85
ITrffl fllrh
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2010 2011 2012
h,---"-----
Q220
Q3 Q4 13
Q1
i 12015 I
Q3 Q4 2016
: Fixed capital
Construction scope of work
GDP
Fig. 25. Fixed investment dynamics in 2010-2016, % change, year on year Source: Rosstat.
A wide gap which in late 2014 developed between the rate of commissioned residential property and the rate of scope of work reflected a decline in the required backlogs and accelerated the downturn in the construction complex in 2015-2016. While the 2014 fast-pace growth in housing construction mitigated the effect of shrinking industrial construction volumes on the overall scope of work dynamics, the simultaneous decline (since H2 2015) in commissioned residential, industrial and social property accelerated the downturn.
In Q3 2016, the rate of commissioned residential property recovered to positive values after a four-quarter-long negative dynamics. The recovery of growth in volume terms was supported by increase in construction investment (100.5% over January-September 2015) and real estate operations (101.8%). The decline in commissioned residential property and residential floor space got stronger in Q4 2016, and therefore the year-end decline was 6.5%, for the first time since 2010.
130
120
110
100
90
h.
I I I I I
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2011 2011 2012 2013
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015
Q3 Q4
1 I
" I
201120122013201420152016
80
Commissioned residential floor space
Construction scope of work
Fig. 26. Dynamics of commissioned residential floor space in 2010-2016,
% change, year on year
2016
The fixed investment dynamics is differentiated by large and small enterprises. With a 0.9% decline in total fixed investment in volume terms in 2016, fixed investment by large and medium-sized enterprises contracted by 1.2%.
Table 19
Dynamics of fixed investment in physical volume, in 2010-2016, % change, year on year
2010 2011 2012 2013 2014 2015 2016
Fixed investment (all types of ownership, including recalculations of investment unobservable by direct statistical methods) 103.7 105.0 109.6 100.8 98.5 89.9 99.1
Large and medium-sized entities (fixed investment excluding small businesses and investment volumes unobservable by direct statistical methods) 96.2 112.1 108.6 93.1 102.3 89.8 98.8
Source: Rosstat.
In 2016, the fixed investment structure by type of economic activity underwent changes compared to the previous year. Mineral extraction investment accelerated by 14.4% in 2016 relative to 2015 as investment in manufacturing and in production and supply of electricity and water dropped by 11.8% and 11.2% respectively, and therefore investment in the industrial sector contracted by 0.5% year on year.
Structural changes in manufacturing sector were determined by a fall in fixed investment in the machine-building complex (down 21.6%) and construction materials (down 29.7%). The specific features of changes to the structure of investment in the machine-building complex in 2016 were influenced by a slump (relative to 2015) in investment in electrical, electronic and optical equipment (down 22.9%) and machinery and equipment (down 35.2%), and means of transport (down 15.1%).
Another specific feature of 2016 was growth in fixed investment in chemicals and chemical products (up 8.3%), pulp and paper (up 20.1%) and metals (up 13.1%), which was related to both an increase in the export potential of these industries, as well as import substitution processes. Investment in refined petroleum products and in consumer sector dropped by 29.4% and 12.3% respectively, compared to 2015.
Table 20
Fixed investment by type of economic activity (excluding small businesses and investment in volume terms unobservable by direct statistical methods),
% change, year on year
2011 2012 2013 2014 2015 2016
Total 108.3 106.6 99.8 95.7 89.8 98.8
Agriculture, hunting and forestry 114.6 92.8 96.0 93.0 89.1 110.6
Fishing and fish hatchery 137.4 127.4 77.4 83.3 60.1 100.0
Mineral extraction 110.9 107.4 96.8 99.9 93.9 99.5
Industry 113.8 111.8 93.6 105.9 110.7 114.1
Production and supply of electricity, gas and water 105.3 106.7 101.4 98.6 90.5 88.2
Agriculture, hunting and forestry 114.7 101.7 95.8 92.9 70.1 88.8
Construction 90.6 79.9 84.0 81.2 83.7 103.5
Wholesale and retail trade 90.0 107.1 103.1 110.7 102.9 103.8
Transport and communications 118.3 98.4 88.5 92.1 86.4 99.7
Finance 136.8 111.4 80.8 74.9 81.5 107.4
Real estate buy/sell transactions 91.9 100.8 104.4 103.1 84.3 88.7
Public administration 112.4 98.7 93.7 84.4 88.7 110.0
Education 122.0 85.2 77.9 97.4 81.9 77.4
Healthcare and social security services 113.0 93.6 98.8 71.9 79.8 91.1
Other services 103.5 111.8 75.0 72.7 82.7 91.8
As regards the issues of promoting economic growth, it is infrastructure that should have been focused on, however, investment in transport and communications in 2016 was down 0.3% compared to 2015, including a 11.2% decline in investment in transport via pipelines. Retail trade investment dropped by 2.4% due to narrowed internal demand, whereas wholesale trade investment increased 27.8%.
The 2016 year-end fixed investment accounted for merely 88.2% of that in 2013, representing the 2017 initial operational terms and conditions for the investment/construction complex. Investment activity was driven by the following key factors: unequal rights for market agents; undue government influence and inefficient regulation of public and monopolized sectors; lack of drastic measures to restructure state-supported old companies; highly limited market access by new companies; poorly developed public and private partnership tools for promoting investment and creating new efficient jobs.
4.5. Oil and gas sector1
The oil and gas sector is among principal sectors of the Russian economy and is the driving force in shaping the state budget revenues and the trade balance. In 2016, Russia's crude oil production hit an all-time peak since 1990, and crude oil exports were close to an all-time high. Under the so-called tax maneuver in force in the oil industry, refining depth went up noticeably, production and export of fuel oil moved down and export of crude oil, a highly lucrative source of the budget revenues, increased.
4.5.1. Dynamics of global crude oil and gas prices
The recent steady supply glut in the world oil market has led to a significant decline in crude oil prices. Growing production of shale oil in the U.S. owing both to introduction of new extraction technologies and to high crude prices were main factors for the world crude oversupply. In this context, OPEC opted not to cut its production quota and de facto launched a policy of retaining its global market share. Subsequently, the price of Russian Urals crude oil dropped to an average of $51.2, and to $41.9 per barrel in 2016 (Table 21). This being said, the price dipped to $28.8 per barrel in January 2016 (Fig. 27).
Table 21
World crude oil prices in 2010-2016, USD/bbl
2010 2011 2012 2013 2014 2015 2016
Brent crude oil, Great Britain 79.6 111.0 112.0 108.8 98.9 52.4 44.0
Urals crude oil, Russia 78.3 109.1 110.3 107.7 97.7 51.2 41.9
Russian gas on European market, USD/thousand cub m 296.0 381.5 431.3 402.0 376.0 267.9 156.7
Sources: IMF, OECD/IEA, Rosstat.
Under the impact of low crude oil prices seen in 2016, the oil sector faced scaling back of oil production on cost-intensive deposits, first of all, on light tight oil deposits in the U.S. Investments in the most cost-intensive non-conventional deposits of oil in the U.S., tar sands in Canada and deepwater field in various parts of the world dipped significantly. At the same time, decrease of oil production in cost-intensive regions was actually offset by OPEC's growing production striving to widen its market share.
Low crude oil prices promote expansion of their global market share for those countries whose revenues decisively depend on crude oil exports. By increasing crude oil shipments, those countries try to offset contraction of the revenues due to price decline. Consequently, OPEC member states constantly exceed their production quota.
140
80 60
20
g si g si g ^sig ^sig ^ si
Fig. 27. Urals crude oil price in 2008-2016, USD/bbl.
Sources: OECD/IEA.
Saudi Arabia, the biggest OPEC producer, significantly built up crude oil production over the last two years. Main contribution in growing oil supply by OPEC in 2015 was attributed to Iraq, and in 2016 to Iran, which received an opportunity to increase oil shipments owing to lifting of sanctions. Consequently, growing oil production seen in Iran in 2016 totally offset decrease of oil production in the U.S.
Falling oil prices impelled oil-producing countries to curtail output volumes. In late 2016, OPEC and a number of non-OPEC producers, including Russia, reached a deal to cut oil output from January 1, 2017. According to the deal, OPEC producers (13 countries) were committed to slash their production by 1.2 mn barrels per day, and non-OPEC 11 producers - by 558 thousand barrels per day, including Russia - by 300,000 bbl/d.
Russian natural gas prices have also dropped on foreign market. Long-term contract prices, as a rule, are linked to petroleum products prices and follow with a certain lag global oil prices. At the same time, changes at the European gas market, which happened in recent years, which materialized in increased supply of gas by other gas producers and lower spot prices on gas in comparison with long-term contract prices offered by Gazprom exerts downward pressure on Russian gas selling prices. In 2015, Russian gas price declined by 29% on European market compared with the previous year and by 41.5% in 2016.
4.5.2. Dynamics and structure of production in oil and gas sector
Russia's crude oil output dynamics stood positive despite falling oil prices and enforcement of financial and technology-related sanctions (Table 22). In 2016, it hit an all-time high of 549 million tons since 1990. Crude oil extraction was positively affected by investment, ruble's devaluation, which reduced expenses of oil companies in dollar terms and ensured efficiency of their operations amid low oil prices. It was also positively influenced by putting into operation of several new large oilfields, as well as tax system updates, which facilitated the
0
development of new oil producing areas and the upgrade of producing oilfields.1 In the meantime, production conditions are deteriorating. Significant part of producing oilfields has entered a declining production stage and new oilfields in the majority of cases have inferior mining-and-geological and geographical factors. Their development required higher investment, exploitation and transportation costs. In order to offset oil output plunge at producing oilfields, it is necessary to develop both new oilfields in areas with underdeveloped or lacking infrastructure and in extracting reserves of inferior quality in developed areas.
Table 22
Production and refining of crude oil in Russia in 2010-2016
2010 2011 2012 2013 2014 2015 2016
Extraction of crude oil including gas condensate, m t 505.1 511.4 518.0 523.3 526.7 534.0 547.6
Primary crude oil refining, m t 249.3 258.0 270.0 278.0 294.4 287.2 284.5
Share of crude oil refining in crude production, % 49.4 50.4 52.1 53.1 55.9 53.8 52.0
Crude oil refining depth, % 71.1 70.8 71.5 71.7 72.4 74.4 79.1
Sources: Federal State Statistics Service (Rosstat), Russian Energy Ministry.
2016 demonstrated that the so called tax maneuver in force in the oil industry - a structural tax reform in this sector envisages stepwise reduction of export duties on both crude oil and petroleum products, as well as a higher mineral extraction tax (MET).2 According to adopted parameters of the so-called tax maneuver, marginal oil export duty rate was cut from 59% in 2014 to 30% in 2017, and fuel oil export duty rate was raised from 66% to 10% from the oil export duty rate.3 This transformational change of the tax system has offered incentives for upgrading oil refining capacities and led to a change of a number of existing trends.
New trends emerged in 2015-2016, and some of them deserve to be mentioned here: first, oil refining depth increased notably as output and exports of fuel oil declined, second, crude oil exports growth more lucrative for state budget revenues than fuel oil exports, third, crude oil refining decline in volume terms owing to the two above factors (Table 23).
In 2016, oil refining depth hit Russia's all-time high of 79.1%. Note, that in the period of 2000-2014, that is, during a long period until the "tax maneuver" took force, depth of oil refining in Russia constituted 71-72%, while it stood at 75.0% in 2015 (by contrast, this indicator comes to 90-95% in leading industrial countries).
Table 23
Production of crude oil, petroleum products and natural gas in 2010-2016, in % to the previous year
2010 2011 2012 2013 2014 2015 2016
Crude oil including gas condensate 102.1 100.8 101.3 100.9 100.7 101.4 102.5
Primary oil refining 105.5 103.3 104.9 102.7 104.9 97.3 98.7
Motor gasoline 100.5 102.0 104.3 101.3 98.8 102.3 101.9
Diesel fuel 104.2 100.3 98.7 103.1 107.4 98.9 100.2
Fuel oil 108.5 104.6 101.6 103.3 102.0 91.1 80.2
Natural gas 111.4 102.9 97.7 102.1 95.7 98.7 101.0
Sources: Federal State Statistics Service, Russian Energy Ministry.
1 See: Yury Bobylev. Development of the Oil Sector in Russia. Voprosy Ekonomiki. 2015. No6, pp. 45-62; Bobylev Yu.N., Rasenko O.A. Russian Oil Sector: main trends. Moscow, Delo Publishers. RANEPA, 2016.
2 See: Bobylev Yu. N., Idrisov G.I, Sinelnikov-Murylev S.G. Export Duties on Oil and Petroleum Products: Cancel Expediency and Scenario Analysis. Moscow, Gaidar Institute Publishers, 2012.
3 See: Yu. Bobylev. Tax Maneuver in the Oil Sector. Russian Economic Development. 2015. No 8, pp. 45-49.
2016 saw a consolidation of state assets in the oil sector resulting from a state-controlled oil firm Rosneft buying controlling stake in Bashneft, another state-controlled oil firm. Rosneft market share has significantly grown because of this deal. In 2016, the share of Rosneft (with Bashneft) in the total Russian crude oil production hit 38.6%. Correspondingly, the portion of major Vertically Integrated Oil Companies on the market went up significantly: five major companies' (Rosneft, LUKOIL, Surgutneftegaz, Gazprom, and Tatneft) proportion accounted for 80.4% of crude oil output in 2016 (Table 24). Segment of small and medium-size oil companies remains relatively underdeveloped. Companies with 2.5 m t of crude oil production (roughly 50,000 barrels per day) account for solely 3.0% of Russia's crude oil output. (By contrast, in the U.S. the sector of small and medium-size oil companied demonstrated efficiently. The share of companies producing up to 50,000 barrels per day account for 46% of the overall crude oil output).
Table 24
Major Russian oil producing companies in 2010-2016
Oil output in 2010, m t Share in total output, % Oil output in 2015, m t Share in total output, % Oil output in 2016, m t Share in total output, %
Rosneft 112.4 22.3 189.2 35.4 211.1 38.6
LUKOIL 90.1 17.8 85.7 16.0 83.0 15.2
TNK-BP 71.7 14.2 - - - -
Surgutneftegaz 59.5 11.8 61.6 11.5 61.8 11.3
Gazprom including Gazprom neft 43.3 8.6 51.3 9.6 55.2 10.1
including: Gazprom 13.5 2.7 17.0 3.2 17.4 3.2
Gazprom neft 29.8 5.9 34.3 6.4 37.8 6.9
Tatneft 26.1 5.2 27.2 5.1 28.7 5.2
Bashneft 14.1 2.8 19.9 3.7 - -
Slavneft 18.4 3.6 15.5 2.9 15.0 2.7
RussNeft 13.0 2.6 7.4 1.4 7.0 1.3
NOVATEK 3.8 0.8 4.7 0.9 8.0 1.5
PSA operators 14.4 2.9 15.0 2.8 16.0 2.9
Other producers 38.2 7.6 56.5 10.6 61.7 11.3
Sources: Russian Energy Ministry, own calculations.
Economic sanctions enforced in 2014 remained in place in 2016. Besides enforced finance-related sanctions, which restrict access of Russian oil and gas companies to foreign sources of financing, a number of developed countries introduced sweeping restrictions on shipments of exploration and production equipment and technologies in connection with deepwater, Arctic shelf, and shale oil and gas projects in Russia. All these projects critically depend on foreign oil and gas related technologies. Regarding the implementation of Arctic shelf and deepwater projects with long-term investment cycle, the negative impact from imposed sanctions can pop up in long-term perspective. Implementation of the majority of these projects is being put off due to their economic failure in the wake of low crude oil prices.
Development of the majority of Russian shale-oil deposits is also unprofitable in the context of low crude oil prices. However, technologies for the development of shale formations (horizontal drilling, hydraulic fracturing) are used in the development of traditional producing oil deposits, first of all, on the deposits with high level of reserve depletion.
It should be noted that there is a rather significant potential for additional output on the producing oilfields due to their more intensive development. Russia's oil recovery factor comes roughly to 28%, which is significantly less than the average world rate (by contrast, in the U/S/
this rate is in the range of 35-43%, in Norway—46%). In the wake of low global crude oil prices and enforced technology related sanctions, the development of extensively depleted fields by raising the production efficiency is of high importance for keeping oil production and export edge.
4.5.3. Dynamics and structure of oil and gas export
In 2016, Russia's exports of crude oil and petroleum products constituted 410.8 m tons, close to the all-time high of 2015. It should be noted that 2016 saw a notable growth of 4.2% of crude oil exports spurred by the so called tax maneuver and a 9.0% decline in exports of petroleum products mainly owing to a fall of fuel oil exports (Tables 25 and 26). The proportion of crude oil in the total oil exports constituted 62.0%, petroleum products—38.0%. This being said, the share of exports in the production came to 63.8%, in production of motor gasoline - 13.0% (by contrast, in 2010, the share of exports of motor gasoline in production of motor gasoline came to 8.2%, in 2015 - 12.1%).
Table 25
Ratio of production, consumption and exports of crude oil and natural gas in 2010-2016
2010 2011 2012 2013 2014 2015 2016
Crude oil, m t
Production 505.1 511.4 518.0 523.3 526.7 534.0 547.6
Exports, total 250.4 244.6 239.9 236.6 223.4 244.5 254.8
Exports to non-CIS countries 223.9 214.4 211.6 208.0 199.3 221.6 236.2
Exports to CIS countries 26.5 30.2 28.4 28.7 24.1 22.9 18.6
Net exports 249.3 243.5 239.1 235.8 222.6 241.6 254.0
Domestic consumption 125.9 140.7 142.1 137.5 141.3 122.2 138.3
Net exports as % of production 49.4 47.6 46.2 45.1 42.3 45.2 46.4
Petroleum products, m t
Exports, total 132.2 130.6 138.1 151.4 164.8 171.5 156.0
Exports to non-CIS countries 126.6 120.0 121.2 141.1 155.2 163.3 148.1
Exports to CIS countries 5.6 10.6 16.9 10.3 9.6 8.3 8.0
Net exports 129.9 127.2 136.8 150.0 162.8 170.2 155.3
Crude oil and petroleum products, m t
Net exports of crude oil and petroleum products 379.2 370.7 375.9 385.8 385.4 411.8 409.3
Net exports of crude oil and petroleum products as % of crude oil extraction 75.1 72.5 72.6 73.7 73.2 77.1 74.7
Natural gas, bn cu m
Production 665.5 687.5 671.5 684.0 654.2 645.9 652.6
Exports, total 177.8 184.9 178.7 196.4 172.6 185.5 198.7
Exports to non-CIS countries 107.4 117.0 112.6 138.0 124.6 144.7 164.7
Exports to CIS countries 70.4 67.9 66.0 58.4 48.0 40.7 34.0
Net exports 173.5 179.2 171.6 189.3 165.5 178.4 189.8
Domestic consumption 492.0 508.3 499.9 494.7 488.7 467.5 462.8
Net exports as % of production 26.1 26.1 25.6 27.7 25.3 27.6 29.1
Sources: Federal State Statistics Service, Russian Energy Ministry, Federal Customs Service, own calculations.
Natural gas exports went up by 7.1% in comparison with the previous year. This being said, natural gas exports to far abroad countries hit an all-time record in 2016. However, due to a decline of gas shipments to CIS countries, the total gas exports failed to achieve the level of mid-2000s. Gas net export ratio in natural gas production came to 29.1% in 2016.
Analysis of Russia's crude oil exports over the course of a long period demonstrates a significant increase in the export-led component of oil industry compared to the pre-reform period.
Table 26
Dynamics of exports of crude oil, petroleum products and natural gas in 2010-2016, in % to previous year
2010 2011 2012 2013 2014 2015 2016
Crude oil 101.2 97.6 98.2 98.6 94.4 109.4 104.2
Petroleum products 106.2 98.5 104.4 109.6 108.7 104.1 91.0
Natural gas 105.6 104.0 96.6 109.9 87.9 107.5 107.1
Sources: Federal State Statistics Service, Federal Customs Service.
The share of net exports of crude oil and petroleum products in crude oil production went up from 47.7% in 1990 to 74.6% in 2016. This, however, is due not only to the increase in absolute volumes of exports but to market transformation of the Russian economy, more efficient oil consumption and the replacement of petroleum products (fuel oil) by natural gas.
The share of fuel and energy products in Russian exports fell from 69.5% in 2014 to 62.9% in 2015, and 58.1% in 2016, in response to a plunge in global crude oil and natural gas prices. In the meantime, the share of crude oil and petroleum products in Russian exports contracted, from 54.2% in 2014 to 41.6% in 2016. The share of natural gas in Russian exports constituted 11.0% in 2016 (Table 27).
Table 27
Fuel and energy products export value and ratio in 2010-2016
2010 2014 2015 2016
USD bn %* USD bn %* USD bn %* USD bn %*
Fuel and energy products, total 267.7 67.5 345.4 69.5 216.1 62.9 166.0 58.1
Including crude oil 134.6 34.0 153.9 31.0 89.6 26.1 73.7 25.8
Natural gas 47.6 12.0 54.7 11.0 41.8 12.2 31.3 11.0
* In % to total volume of Russian exports. Source: Federal State Statistics Service.
4.5.4. Domestic price dynamics on energy products
The pricing mechanism for crude oil in the Russian domestic market is based on equal-netback pricing, that is, prices are equal to the world price less export duty and export transportation costs. The domestic price went up due to growing global crude oil and petroleum products prices. However, in second half of 2014-2016, the domestic price in dollar terms declined too, owing to a tumbling global crude oil price (Table 28, Fig. 28). At the same time, there is still a wide gap between world and domestic oil price due to high export duty. In the meantime, a convergence of international and domestic prices is observed owing to a lower rate of export duty envisaged as part of the tax maneuver. In 2014, the domestic price constituted 42.0% of the global price, while it was 61.0% in 2016.
Table 28
Domestic prices on crude oil, petroleum products and natural gas in 2010-2016 (average producer price at year end, USD/t)
2010 2011 2012 2013 2014 2015 2016
Crude oil 248.2 303.3 341.1 346.1 178.9 156.7 207.8
Motor gasoline 547.9 576.9 628.7 614.4 372.3 301.8 380.3
Diesel fuel 536.1 644.9 774.2 698.0 419.3 349.4 421.3
Fuel oil 246.3 274.6 275.3 235.8 128.7 49.5 129.7
Gas, USD/thousand cu m 20.5 21.3 40.3 39.8 29.1 24.5 23.6
Sources: own calculations based on data released by Rosstat.
Domestic gas prices are under the state regulation. The government maintains a significantly lower level of domestic gas prices in order to preserve a competitive edge of the national economy. At the same time, certain convergence between domestic and world price on gas was observed as a result of a significant reduction of global gas price in 2016. In 2015, domestic gas price (purchase price by industrial consumers less indirect taxes) averaged roughly 26% of Russian gas price on European market, while in 2016 - 40.8%.
1000
™ « ™ Global price Domestic price
Fig. 28. Global and domestic oil prices in 2000-2016, USD/t
Sources: Rosstat, own calculations.
Motor gasoline prices continued the uptrend momentum in the domestic market despite a significant decline of global crude oil prices (Table 29). It primarily stemmed from the ruble's devaluation and increased excises on petroleum products. Producers price their petroleum products so that the price assures a profitability equal to that of exports: the global (tax-free) price on a given product less export duty and export transportation costs (netback price). Domestic consumer pricing for motor gasoline is based on producer prices (netback prices) adjusted for indirect taxes (excises, VAT) and trade increment. Russian producer gasoline prices in dollar terms tumbled, too, amid descending world oil prices. In the meantime, significant depreciation of the ruble against the dollar and growth of excises stemmed an increase in the ruble-denominated consumer price of motor gasoline (Fig. 29).
Table 29
Consumer prices on gasoline in Russia in 2014-2016 RUB/l
2014 2015 2016 2016 2016
January January January July December
Regular unleaded gasoline 29.53 32.35 33.86 35.13 35.28
Gasoline 95 octane 32.64 35.16 36.81 38.14 38.34
Table 30
Excise rate on motor gasoline in 2014-2016 RUB/t
2014 2015 2016 January-March 2016 April-December
Grade 4 9916 7300 10500 13100
Grade 5 6450 5530 7530 10130
Source: RF Tax Code (2014-2016 ed.).
Existing structure of gasoline consumer price against leading industrial countries is characterized by data given in Table 31. European countries have high gasoline prices and the highest tax burden on petroleum products. According to our calculations, the share of indirect taxes in the consumer price of gasoline is 35-43%1 in Russia, whereas it is 65% in EU5 countries (Germany, France, Great Britain, Italy, and Spain), and 20% in the USA. Thus, regarding the tax burden on petroleum products, Russia ranks in the middle between EU5 and the USA, and it is close to Canada, another oil exporter.
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Fig. 29. Consumer price in ruble and dollar terms on regular unleaded gasoline in 2008-2016 Sources: Rosstat, own calculations.
Table 32 provides data as of the beginning of 2014, which gives outlook prior to the fall of crude oil prices and ruble's devaluation. They represent a significant increase of the tax burden in gasoline price during recent two years. According to our calculations, the share of taxes in the consumer price of gasoline went up from 30-40% in 2014 to 35-43% in 2016. The share of taxes in the end consumer price went up on average across leading EU5 from 58 to 65%, and in the USA - from 13 to 20%. It is largely explained by that fact that amid lower gasoline price the share of taxes collected according to specific rates goes up.
1 See: Yu. Bobylev. Gasoline prices in Russia and other countries: comparative analysis. Russian Economic Development. 2016. No. 10, pp. 28-31.
Table 31
Structure of consumer price on motor gasoline in Russia and other countries, July 2016
Consumer price, USD/l Taxes on consumers, USD/l Prices less taxes, USD/l Share of taxes in consumer price, %
Regular unleaded gasoline
Russia 0.524 0.225 0.299 42.9
USA 0.583 0.119 0.464 20.4
Canada 0.791 0.294 0.497 37.2
Japan 1.191 0.634 0.557 53.2
Premium gasoline 95 octane
Russia 0.569 0.199 0.370 35.0
Germany 1.471 0.962 0.509 65.4
Great Britain 1.472 1.009 0.463 68.5
France 1.454 0.963 0.491 66.2
Italy 1.616 1.100 0.516 68.1
Spain 1.291 0.738 0.553 57.2
Average across EU5 1.461 0.954 0.506 65.3
Sources: OECD/IEA; Rosstat; own calculations.
Table 32
Taxes on motor gasoline in Russian and other countries: share of taxes in gasoline consumer price, %
2014 January 2016 July
Regular unleaded gasoline
Russia 40.1 42.9
USA 12.7 20.4
Canada 31.7 37.2
Japan 40.0 53.2
Premium gasoline 95 octane
Russia 29.9 35.0
Germany 58.7 65.4
Great Britain 61.3 68.5
France 57.5 66.2
Italy 60.3 68.1
Spain 50.7 57.2
Average across EU5 57.7 65.3
Sources: own calculations based on data released by OECD/IEA and Rosstat.
Gasoline prices in Russia are approaching the US prices, reaching 90% of the American level stemming from lower taxes in gasoline prices and such tax burden. Furthermore, they remain significantly lower than in other developed economies: 66% less than prices in Canada, 44% less than in Japan, and 39% less compared to EU5 countries (Table 33). One can note a somewhat decline in relative gasoline prices in Russia compared to developed economies during last two years. For example, Russian gasoline price declined from 96% in 2014 to 90% against the USA, and from 44% to 39% against leading EU5.
Table 33
Consumer prices on motor gasoline in Russia against other countries, %
2014 January 2016 July
USA 95.8 89.9
Canada 72.9 66.2
Japan 55.0 44.0
Germany 44.4 38.7
Great Britain 43.3 38.7
France 45.3 39.1
Italy 39.5 35.2
Spain 48.7 44.1
EU5 44.1 38.9
Thus, current regime of export duties and taxes on petroleum products in Russia assure lower prices on motor fuel on the domestic market compared to developed countries.
4.5.5. Prospects for Russian oil and gas sector
Russia disposes of significant oil resources, which allow maintaining high levels of production and export in many years to come. There is a high potential for crude oil extraction owing to both undeveloped deposits in undeveloped areas and oilfields in new producing areas. At the same time, there is a rather significant potential for additional extraction on already producing oilfields thanks to an in-depth development. Moreover, Russia disposes of extensive currently undeveloped unconventional oil reserves including shale oil. The oil refining capacity is important. Upgrade of the oil refining depth allows satisfying domestic demand in motor gasoline with relatively lower volumes of oil consumption.
In future, global demand for oil will grow, which will allow Russia to retain and even to increase current volumes of crude oil exports. This being said, shifts in the regional structure of global oil demand prompt diversification of crude oil exports, expansion of shipments to the East.
Meanwhile, potential of the Russian oil sector development to a significant degree will rely on the world oil prices. The oil market outlook is marked by factors, which will be contributing to the retention of relatively low oil prices. The most important factors are extensive shale oil reserves in the U.S., which will be rapidly put into production and create oil glut with global oil price above USD 60 per barrel and slowdown of economic growth in China.
In the context of low crude oil prices, options for the development of new oilfields and unconventional reserves will be significantly restricted in Russia because investment in the cost demanding projects will be unprofitable (first of all, it is true to the implementation of the Arctic shelf projects). In the circumstances, conventional oil reserves located onshore will be the basis for further development of the Russian oil sector. In-depth development of producing oilfields and increase of the oil recovery rate are of major importance. Options for additional oil production at such oil fields will largely depend on technological progress, development of import substitution aimed at increasing the oil recovery index.
Further development of the oil sector will require necessary tax conditions.1 First, it is necessary to accomplish structural reform of the taxation system in this sector, which includes a gradual reduction of export duties on crude oil and petroleum products (up to their total abolition) and increase of MET. This reform will reduce subsidizing of the downstream sector and create incentives for its upgrading and improve refining margin. Simultaneously, this will cut Russia's subsidies to other EAEU countries and will strengthen incentives for increasing efficiency of the domestic oil consumption.
It is expedient to introduce at the new oilfields Additional Profits Tax (APT), which will ensure both resource rent extraction and necessary conditions for investment. APT is based on net income and represents a more flexible taxation instrument by contrast with MET and export duty. APT automatically brings the tax burden in line with oil production conditions on each specific oilfield. In doing so, necessary conditions for investments are being created including in the development of high cost intensive oilfields.
1 See: Yu. Bobylev, O. Rasenko. Options for tax incentives for the oil sector. Russian Economic Development. 2016. No 7, pp. 66-69.
It is expedient to develop the sector of medium- and small-scale oil producing companies, which can be efficient in the development of relatively small-scale low profit deposits and hard-to-recover reserves. This requires development of a corresponding organizational and legal regime including significant reduction of administrative barriers.
4.6. Growth factors in the agriculture of Russia1
In 2016, record-high yields of grain, including wheat, maize, sunflower, soya and sugar-beet were received. A new record in poultry meat production was set. Despite economic recession, gross agricultural output has been growing in the past few years. Such results are attributed by many experts to the effect of the embargo on imports of food from some countries and import substitution measures. However, neither the embargo nor import substitution was a decisive factor behind growth in agriculture. The most important factors were the interest of the business in developing agriculture, depreciation of the ruble and favorable weather conditions of the past few years.
4.6.1. Agricultural production dynamics
As regards output volumes of the main types of crop products, Russia surpassed the pre-reform levels: 1.4-1.7 times over as regards wheat, sugar-beet and vegetables and 3.3-4.6 times over as regards sunflower, soya and maize (Table 34).
Table 34
Gross harvest of the main agricultural crops, million tons
On average in 1986-1990 2014 2015 2016 (preliminary data) 2016 as % of average in 1986-1990
Grain 104.3 105.3 104.8 119.1 114.2
Including wheat 43.5 59.7 61.8 73.3 168.5
Maize 3.3 11.3 13.2 13.8 418.2
Sugar-beet 33.2 33.5 39.0 48.3 145.5
sunflower 3.1 9.0 9.3 10.7 345.2
Soya 0.6 2.6 2.7 3.1 516.7
Potatoes 35.9 31.5 33.6 31.0 86.4
Vegetables and gourds 11.2 15.5 16.1 16.3 145.5
Fruits and berries 3.3 3.0 2.9 3.3 100.0
Source: Rosstat.
High growth rates were observed in industries with the highest levels of profitability. Russia has entered global markets and secured the leading positions: the country is rated the first as regards production of wheat, buckwheat and sugar beet pulp and the second as regards barley, peas, garbanzo, sunflower oil, oilseed meal, protein meal and flax seeds.
Gross harvest growth took place on the back of higher yields of agricultural crops as a result both of favorable weather conditions and technical and technological modernization based on utilization of the latest international breakthroughs. As compared to the 1986-1990 period, the most significant harvest growth was registered in production of sugar-beet, maize and fruits (almost twofold) and grain (70%) and soya, potatoes and vegetables (50%) (Table 35)
Table 35
Harvest of the main agricultural crops, centner per ha
On average in 1986-1990 2014 2015 2016 (preliminary data) 2016 as % of average in 1986-1990
Grain 15.9 24.1 23.7 26.0 163.5
Including wheat 20.1 25.0 23.9 26.3 130.8
maize 28.7 43.6 49.3 54.6 190.2
Sugar-beet 225 370.1 387.8 460 204.4
Sunflower 12.7 14 14.2 15.1 118.9
Soya 10.3 13.6 13.0 14.8 143.7
Potatoes 108 149.6 159.1 152.7 141.4
Vegetables and gourds 154 217.8 225.1 226.8 147.3
Fruits and berries 39.5 75.9 75.7 86.3 218.5
Source: Rosstat.
In livestock breeding, the situation differs by the sector. Production of poultry meat increased 2.6 times over as compared to the pre-reform period. In those sectors, on average by all the categories of farmsteads productivity indices are insignificantly inferior to those of developed countries.
The main specifics of 2016 consist in reduction of growth rates in production of poultry meat due to saturation of the internal market with domestic products. Poultry production reacts promptly both to changes in the market situation (the broiler growing period is the shortest one) and a drop in households' solvent demand (Table 36). In the past few years, the authorities and business were aimed at import substitution and were not prepared to enter global poultry meat markets.
At the same time, crisis is still going on in cattle breeding. Reduction of livestock and output has not been stopped. A slump in cattle breeding has a mixed dynamics in different categories of agricultural producers. As state support is rendered primarily to agricultural organizations, their milk production is growing, but its rates do not make up for losses of private subsidiary farms: in 2015 growth in agricultural organizations' milk production amounted to 353,000 tons with a drop of 464,000 tons in that of private subsidiary farms. Small business patterns failed to be integrated into vertical production chains despite the fact that their production is not virtually supported by the state unlike that of agricultural organizations. Sustainable growth in production of milk and cattle meat (with a drop in production thereof with farmsteads and agricultural organizations) by farming enterprises points to growth potential of cattle breeding production amid reduction of access barriers to land and lending resources for small business entities.
Table 36
Gross production and livestock output growth indices of all the categories of farmsteads
Gross production
On average in 1986-1990 2014 2015 2016 2015 as % of average in 1986-1990
Cattle and poultry meat, thousand tons of 9671 9070 9565 9894** 102*
slaughter weight
Including cattle stock 4096 1654 1649 n.a. 40.3
Pork 3347 2974 3099 n.a. 92.6
Fowl 1747 4161 4536 n.a. 259.6
Sheep and goats 369 204 205 n.a. 55.6
Other types of livestock 112 77 77 n.a. 68.8
Milk, million tons 54.2 30.8 30.8 30.7 56.6*
Eggs, billion units 47.9 41.9 42.6 43.5 90.8*
* 2016 as % of 1986-1990. ** estimated data Source: Rosstat
Generally, in the past decade annual average growth rates of the agriculture were below than in the economy as a whole. Such a pattern is typical of developing and developed countries. It leads to reduction of the unit weight of agriculture in GDP. If the year 2005 is equal to 100% (Agricultural Sector Development, a national project and the first State Program of Support to Agriculture were started in 2006 and 2008, respectively), it can be seen that GDP growth rates are more stable - they fell only in 2009 and 2015 - while sustainable growth in added value of the agriculture has been observed only since 2012 (Fig. 30).
GDP growth indices : Agriculture added value growth indices
Fig. 30. Growth rates of GDP and agriculture added value (the year 2005 is equal to 100%) Source: Rosstat.
Such unstable dynamics is largely related to prevalence of crop production in the pattern of agriculture which largely depends on weather conditions (in 2015 the share of crop production was equal to 54%). In the past decade, a dramatic drop in agriculture production growth rates was registered in the drought-ridden year of 2010 (12.1%) and 2012. In the past four years, amid dramatic reduction of economic growth rates or even recession growth in the agriculture was observed. (Table 37)
Table 37
Growth rates of GDP and added value in the agriculture, % of the previous period
GDP growth indices Agriculture added value growth indices
2006 108.2 102.7
2007 108.5 101.3
2008 105.2 106.4
2009 92.2 101.5
2010 104.5 87.9
On average in 2006-2010 103.7 100.0
2011 104.3 114.7
2012 103.5 98.5
2013 101.3 104.8
2014 100.7 102.0
2015 97.2 103.0
2016 99.8 104.8
On average in 2011-2016 101.1 104.4
The main factor behind growth in the agriculture is the agrarian reform carried out early in 1990s. That reform brought about both positive and negative changes.1 The positive impetus was given by privatization and development of private agrarian business (over 95% of the gross agrarian output is produced by tens of thousands of agricultural organizations, hundreds of thousands of farms and millions of individuals' farmsteads). The driver of development was private farmsteads' motivation to receive profit and accumulate capital. As a result, there was growth in output of the most profitable types of products on the basis of modernization of production facilities, utilization of international R&D achievements and reduction of costs. The above permitted to win competition on the domestic market as regards most products and enter global markets and secure leading positions there as regards grain and oil-yielding crops. At the same time, low-margin and loss-making industries of the agrarian sector either ceased to develop or shrank.
4.6.2. The main growth factors of agriculture in 2016
The Effect of Weather Conditions. In 2016, good weather conditions contributed to the agrarian sector's output growth. Favorable weather conditions had been observed for a few years. To receive an aggregated assessment of weather conditions, the method of correlation of indices of agricultural output with those of the share of lost seeds in the agricultural organizations' total cultivated area was utilized. From 2014, the index of the share of lost seeds has remained at a low level (Fig. 31). The above indices' correlation ratio amounts to -0.705. With lost seeds decreased by 1%, the agrarian sector's growth rates rise 1.1%.
25 20 15 10 5 0 -5 -10 -15
Fig. 31. Dynamics of agricultural output growth and the share of lost seeds with agricultural organizations, %
Source: The Ministry of Agriculture of the Russian Federation
1 For more details on positive and negative consequences of the agrarian reform in Russia, see the Agrarian Reform in the Post-Soviet Russia: Mechanisms and Results. M. Delo Publishers, 2015. p. 352.
Lost seeds, % : Agricultural output growth, %
With a lack of data on lost seeds in 2016, estimates can be made on the basis of fragmentary data. So, the year 2016 was the warmest year throughout the entire history of agro-weather observations.1 The state of seeds was estimated as a good one.2
According to the estimates of the director of the crop-production department of the Ministry of Agriculture of the Russian Federation, in 2016 the area where seeds were lost was insignificant.3 So, it can be said favorable weather conditions contributed to output growth in 2016.
Depreciation of the Ruble. With multiple factors simultaneously having an effect on development of the agriculture, it is rather difficult to single out the effect of depreciation of the ruble alone. Shown below is an illustration - with no strong evidence claimed - of the nature of that effect in terms of a pork market (Table 38).
Table 38
The effect of the USD exchange rate on competitiveness of domestic pork production
2011 2012 2013 2014 2015 Price of 2015 against 2011, %
USD exchange rate 29.4 31.1 31.8 38.0 60.7 206.7
Global price: USD a ton 3047 3052 2999 3030 2401 78.6
Thousand RUB a ton 89.4 94.8 95.4 115.0 145.6 153.5
Price of import to Russia: USD a ton 3212 3347 3444 4036 3129 93.5
Thousand RUB a ton 94.3 104.0 109.6 153.2 189.8 182.5
Ex-factory meat price 132.7 131.4 121.0 163.5 151.6 115.3
Ratio of import price to sale price, % 71.1 79.1 90.6 93.7 125.2 158.3
Source: Calculations on the basis of the data of the Comtrade, the Federal Customs Service of the Russian Federation and the Unified Interdepartmental Statistical Information System.
In the period under review (2011-2015), the USD exchange rate against the ruble more than doubled, average world pork prices in US dollars fell by 21.4%, while import prices to Russia decreased by 6.5%. However, due to appreciation of the USD exchange rate import prices in rubles kept growing regularly and in 2015 surpassed by 82.2% the 2011 level. Also, prices at which meat-processing plants sold pork were growing, but at a much lower rate: in 2015 they were only 15.3% higher than in 2011. The dynamics of import and sale prices in rubles consistently contributed to higher competitiveness of domestic pork production. In 2011, pork cost 28.9% less with importers than with domestic producers. In subsequent years, the difference between import and domestic prices shrank and in 2015 domestic producers sold pork at a price which was 25.2% less than with importers. It is quite clear that the above happened due to a dramatic depreciation of the ruble in 2015 as compared to 2014 (the exchange rate rose from RUB 38 to RUB 60.7 per $1). If in 2015 the exchange rate of the US dollar remained the same as in 2014 the import pork price would be equal to RUB 118,900 which is much lower than the price of domestic producers.
Similar processes took places in other industries. The above factors contributed to growth in profitability of production (in 2015 in general it was the highest one across agricultural organizations and most types of products in the past ten years). Growth in efficiency and competitiveness contributed to import substitution. However, depreciation of the ruble had the following negative consequences, too: it caused inflation rate growth, reduction of households'
1 Rosgidromet, Report by V.A. Trach-Dolgikh, Director of the All-Russian Research Institute of Meteorology. Russian Crop Production-2016-17.
2 Ibid.
3 P. Chekmarev. Crop Production is the Foundation of the Country's Food Security. Report delivered at the Russian Crop Production-2016-17 Conference sponsored by the Agroinvestor magazine.
real incomes, a decrease in demand on produce, growth in the share of expenditures on food in families' budgets, particularly, low-income families' and growth in prices on import resources and fuel.
Food Embargo and Import Substitution. The government's signals in terms of a food embargo were heard by agricultural producers. Despite appreciation of import resources due to depreciation of the ruble, agricultural producers increased acres in crops which were in demand on domestic and international markets (Table 39).
Table 39
Changes in acres in crops as compared to 2013, %
2014/2013 2015/2013 2016/2013
Grain and grain legumes 101 102 103
Sugar-beet 102 113 123
Sunflower for grain 95 96 104
Potatoes* 99 100 96
Field vegetables 102 103 103
* Reduction of crops of potatoes is related to a high level of food assistance in the country and a traditionally high share of food production at households' farmsteads and agricultural organizations' low procurement prices. Source: Rosstat.
By individual products, the import-export balance improved, too (Table 40). In some months of 2016, Russia approached the positive import-export food balance (see Annex). Such a situation was observed for the first time in the latest history. In the Soviet period it took place for the last time in the 1960s, that is, almost 60 years ago.
Table 40
Import-export balance, % of the respective period of the previous year
2014 2015 January-September 2016
Meat and processed meat 97 67 78
Milk and dairy products 97 86 98
Vegetables and gourds 101 70 n.a.
Fruits and berries 93 97 n.a.
Source: calculated on the basis of the balance data, Rosstat.
Domestic production has started to play an ever greater role in the pattern of potential volume of consumption: its share increased as compared to the total of domestic production and importexport balance (Table 41).
Table 41
The share of domestic production in the pattern of potential volume
of consumption*, %
2014 2015 January-September 2016
Meat and processed meat 83 89 91
Milk and dairy products 78 81 85
Vegetables and gourds 89 92 n.a.
Fruits and berries 35 35 n.a.
*potential volume of consumption is the total of domestic production and import-export balance. Source: calculated on the basis of the balance data, Rosstat.
Also, the share of imports in consumption is shrinking (Table 42).
Table 42
Correlation of volumes of imports and consumption, %
2014 2015 January-September 2016
Meat and processed meat 18 13 11
Milk and dairy products 23 21 16
Vegetables and gourds 16 14 n.a.
Fruits and berries 64 66 n.a.
Source: calculated on the basis of the balance data, Rosstat.
The Rosstat's data on the share of import products in the retail trade's commodity stocks points to active import substitution, too (Table 43).
Table 43
The share of import food in the retail trade's food commodity stocks, %
% %
2013 Q 1 36 2015 Q 1 29
Q 2 35 Q 2 26
Q 3 35 III квартал 27
Q 4 36 IV квартал 30
Indicator value for year 36 Indicator value for year 28
2014 Q 1 36 2016 Q 1 24
Q 2 33 Q 2 22
Q 3 32 Q 3 22
Q 4 36 Q 4 n.a.
Indicator value for year 34 Indicator value for year n.a.
Source: The Unified Interdepartmental Statistical Information System.
If one proceeds from the above aggregate data, it can be concluded that import substitution has crowned with success. However, analysis of actual consumption is required, too, for such a statement to be made. According to the 2015 data, it can be seen that with reduction of imports the actual consumption decreased as well, except for (Table 44) vegetables where not only consumption, but exports were growing (see Annex).
Table 44
The volume of potential and actual consumption (personal and industrial),
% of the previous year
Volume of potential consumption (production + + import-export balance) Actual consumption
2014 2015 January-September 2016 2014 2015 January-September 2016
Meat and processed meat 100 99 103 101 98 102
Milk and dairy products 100 97 99 99 98 99
Vegetables and gourds 104 101 n.a. 103 101 n.a.
Fruits and berries 96 97 n.a. 93 97 n.a.
Source: calculated on the basis of the balance data, Rosstat.
Similar conclusions can be made on the basis of analysis of individual most sensitive goods, rather than groups of products. According to the 2015 data1, it is clear that import substitution was accompanied by simultaneous growth in consumption resources not only in respect of poultry meat and vegetables (from among agricultural products) alone. As regards other numerous products (beef, pork, fruits and berries and cheese), growth in domestic production failed to make up for import shrinkage (Table 45).
Table 45
Import substitution of agricultural products
Types of products Production, thousand tons Import, thousand tons Import substitution, thousand tons Growth (+) reduction (-) consumption, thousand tons
2013 2015 Growth in 2015 as compared to 2013 2013 2015 Growth in 2015 as compared to 2013
Beef, slaughter weight 1633 1649 16.1 661 438 -222.2 16.1 -206.1
Pork, slaughter weight 2816 3099 282.5 620 305 -315.6 282.5 -33.1
Poultry meet, slaughter weight 3831 4535.5 704.6 528 255 -272.8 272.8 431.8
Vegetables 14689 16111 1422.0 3000 2607 -392.6 392.6 1029.4
Fruits and berries (including grape) 3381 3379 -2.1 6412 5105 -1307.5 - -1309.6
Butter 225 256 31.4 118 90 -28.1 28.1 3.3
Cheese and cheese products 435 589 153.8 440 208 -232.6 153.8 -78.8
Powder milk 116 124 7.4 35 33 -1.1 1.1 6.3
Sugar 4986 5748 761.7 612 1010 398.3 - 1160.0
Source: Rosstat and the Federal Customs Service of the Russian Federation
In the past few years, the pattern of food imports has changed dramatically: the share of meat processed and dairy products has decreased, while fruits and vegetables have gained the leading positions (Table 46).
Table 46
The pattern of food imports, %
2013 2014 2015 2016
Meat and meat by-products 15.6 13.8 11.7 9.2
Fish and fish products 6.6 6.4 5.1 5.6
Dairy products, eggs; honey 10.3 9.7 7.7 8.6
Vegetables 6.7 7.4 7.2 5.6
Fruits and nuts 14.8 13.7 14.9 15.4
Alcohol and soft drinks 7.9 7.7 6.7 7.3
Other products 38.1 41.3 46.7 48.4
Total as regards group 1-24 100 100 100 100
Source: The Federal Customs Service of the Russian Federation.
So, both limitations of the market and positive signals to agricultural producers have crowned with some success in production, but import substitution has actually taken place only in production of poultry meat and vegetables.
Technological breakthroughs. After the reforms, the Russian business has gained access to international breakthroughs in agriculture. During the period of implementation of the national project - Development of the Agrarian Sector (2006-2007) - the linked index of investments into capital assets of agricultural organizations rose by 96%. Throughout implementation of state agriculture support programs (2008-2012 and 2013-2020), the index fell to 36% (in 2010) and then rose to 65% (in 2013). In the past two years, the index started to fall again (Fig. 32).
Despite limitation of investment funds, in the above period the Russian business carried out to a large extent technical and technological modernization in agriculture using international R&D breakthroughs. As regards individual crops, utilization of seeds and hybrids of foreign artificial selection was close to 100% (Table 47). According to the data of the Ministry of Agriculture, the share of imported component parts for green-houses, pig-breeding units (including slaughter department equipment) and dairy units amounted to 80%, 75% and 70%, respectively. In 2016, the share of imported herbicides amounted to 56%.
Fig. 32. Linked index of investments in capital assets of agricultural organizations Source: The Unified Interdepartmental Statistical Information System.
Table 47
The share of imported seeds in the total volume of procurement
2013 2016 (H1)
Vegetables 66 23
Maize 43 28
Sunflower 46 44
Sugar beet 96 69
Potatoes 62
Source: The Ministry of Agriculture of the Russian Federation
Application of foreign technologies has contributed to considerable growth in crop yield (Table 47). For fairness' sake, it is to be noted that grain crops are cultivated primaraly from Russian seeds.
Productivity of dairy cows at agricultural organizations rose from 4.3 tons in 2011 to 5.1 tons in 2015, while in 2016 it amounted to 5.3 tons (estimate). Expenditures on fodder per kilo of pork and poultry meat fell by twofold. As regards efficiency, Russian pork-breeding units and poultry farms are in no way inferior to similar ones in developed countries.1 So, state-sponsored technological modernization of the agrarian sector contributed to efficiency growth.
1 Utilization by the business of the latest international technical and technological breakthroughs contributed to growth in efficiency, output volumes and import substitution in the agrarian sector. However, in that period the government did not carry out an active policy to support national science, so, reduction of dependence on imports of products was accompanied by growing dependence on imports of know-how and technologies. That dependence can hardly be broken with the existing level of financing of the Russian science, however, as in the field of production it is important here to identify breakthrough lines in R&D to secure leading positions not only on the domestic market, but also on the international one.
4.6.3. The population's access to food
By 2015, the population of Russia was on average provided with food in accordance with
recommended medical norms and the food pattern improved to become a more balanced one.
Meat consumption even exceeded the recommended norms (Table 48).
Table 48
Food consumption (on average per consumer a year), kg
1990 2000 2014 2015 Specified norm*
Bread products 97 109 95 95 96
Potatoes 94 93 59 58 90
Vegetables and gourds 85 82 98 100 140
Fruits and berries 37 27 76 71 100
Meat and processed meat 70 50 85 85 73
Dairy products 378 199 266 266 325
Eggs, pieces 231 202 216 218 260
Fish and fish products 15 14 22 21 22
Sugar and confectionery 32 30 31 31 24
*"Guidelines for Balanced Food Consumption Norms Meeting Modern Healthy Nutrition Requirements" No.614 of August 19, 2016 of the Ministry of Health of the Russian Federation. Source: Rosstat, budget analysis data.
Order
Improvements in consumption till 2014 were accompanied by reduction of the share of households' expenditures on food and that was a positive trend. However, from Q4 2014 expenditures on food started to grow (Table 49).
Table 49
The share of expenditures on food and alcohol-free beverages in households'
consumer spendings, %
2013 2014 2015 2016
Q 1 28.5 28.2 32.0 33.3
Q 2 26.8 30.1 30.7 33.3
Q 3 28.3 27.9 31.9 31.6
Q 4 26.3 27.8 30.9 n.a.
Source: Rosstat's budget analysis data.
Fig. 33. Food price indices, % (January 11, 2016 against August 4, 2014) Source: The Rosstat.
Growth in expenditures was primarily related to prices rises. So, after the food embargo was introduced, prices on pork and poultry meat used to grow by nearly 1% a week, but later they hit up against households' solvent demand and started to go down. As a result, general growth in prices on pork and poultry meat during the period of the embargo amounted to 4%-7%. (Fig. 33).
Price rises and a drop in households' incomes resulted in a reduction of volumes of purchased food. As early as September 2014, a decrease in sales volumes in comparative prices was observed. The above trend still prevails (Fig. 34).
105
100
95
90
85
2013
2014
2015
2016
Fig. 34. Indices of the physical volume of food purchasing, % of the respective month 2012 Source: The Unified Interdepartmental Statistical Information System.
*
1. In 2016, the agriculture in Russia kept growing. As seen from the analysis, development was aimed at upgrading the level of households' satisfaction with food and ensuring food independence of Russia through import substitution and expansion to the global markets of grain and vegetable oil.
2. The main factors behind growth in the agriculture were favorable weather conditions in the main agricultural regions, depreciation of the ruble and technical modernization of the agrarian sector through utilization of the latest international achievements. The role of the national science and technologies is insignificant, so far. The business gives preference to imported seeds, livestock and fowl breeds, equipment, crop protection agents and biological additives. The above statement should in no way constitute grounds for introduction of limitations, quotas and duties on imports of those resources for agriculture as that may cause their appreciation.
In Russia, funding of the national agrarian science per RUB 1 of the added value of agriculture is tens of times lower than in developed countries. Many transnational companies finance research in agriculture in a volume which largely exceeds the Russian budget. In such a situation, it would be expedient to increase substantially funding, modify the agrarian science,
identify breakthrough research lines to enter the markets of innovative products and stimulate business to make investments in development and promotion of innovative products, rather than impose a ban on import of technologies and know-how.
3. Traditional goals of development of agriculture - growth in the level of consumption and import substitution - have exhausted themselves: the advisable medical norms of consumption of the main products either have been achieved or were almost achieved and the main volumes of the earlier imported products have been replaced by domestic ones. An exception is fruits and berries which cannot be produced in Russian natural climate conditions and dairy products. They occupy a leading position in the pattern of food imports. As households' expenditures grow, seasonal consumption of vegetable, gourds, fruits and berries is smoothed over. In the off-season period, it is more advantageous to meet demand on numerous types of products by means of quality and less expensive import products. In such a situation, an increasingly important role should be given to promotion of exports and expansion to the global markets, otherwise, it would be impossible to maintain the existing growth rates of the agriculture.
4. Export-oriented growth in the agriculture requires radical changes in goal-setting for development. If before lines for development were determined proceeding from unsatisfied demand, the long-term policy should now be based on identification of Russia's competitive advantages on global markets. It is necessary to choose from a variety of types of products those products which can be produced with high quality and on a low cost basis thanks to favorable natural climate conditions and traditional industry. In a northern country, efforts to promote in a winter season cultivation of cucumbers, tomatoes and pepper are unlikely to be effective. In Russia, one should cultivate potatoes, carrots, cabbages and inexpensive field tomatoes and cucumbers, that is, traditional vegetables which are easy to grow. Huge areas of unutilized forage lands can become a base for establishment of cattle-, sheep- and horse-breeding ranchos. Rural territories with an excess of labor are advantageous for cultivation of labor-intensive crop-plants: fruits, vegetables, mushrooms and berries. It is to be noted that outdated production of the above types of products with utilization of obsolete technologies at households' backyards will never ensure access to global markets. For production of quality and inexpensive products, it is important to facilitate establishment of commercial farm enterprises equipped with modern production facilities and integrate them into food chains through cooperatives and integrator-companies.
Annex
5000
2013 2014 2015 2016
« ™ « Imports Exports
Imports and exports of food and agricultural primary products (RF, 1-24 Foreign Economic Activity Commodity Classification), million US dollars
Imports and exports of meat and meat processed byproducts (RF, 02 Foreign Economic Activity Commodity Classification), million US dollars
Imports and exports of dairy products, eggs and natural honey (RF, 04 Foreign Economic Activity Commodity Classification), million US dollars.
Imports and exports of vegetables (RF, 07 Foreign Economic Activity Commodity Classification), million US dollars.
Imports
Exports
Imports and exports of fruits and berries (RF 08 Foreign Economic Activity Commodity Classification), million US dollars.
Source: The Federal Customs Service of the Russian Federation
0
4.7. Foreign trade1
4.7.1. World trade outlook
In early 2017, international financial organizations adjusted their short- and medium-term forecasts. The World Bank report Global Economic Prospects2, released in January 2017, and estimated global growth in 2016 at a post-crisis low of 2.3%. It was noted that growth in emerging markets and developing economies (EMDEs) is projected to rise in 2017 to 2.7%, reflecting receding obstacles to activity in commodity exporters and continued solid domestic demand in commodity importers. An increase in commodity prices will trigger the bottoming out in the largest emerging markets, including Russia and Brazil.
However, the World Bank forecast does not incorporate the spillovers of policy proposals by the new U.S. administration, as their scope and ultimate form are still uncertain. In the context of such uncertainty, weak investment activity will remain, which will hamper economic growth in many countries in medium term. The WB experts downgraded global growth by 0.1 p.p. against June estimates. Projection for 2018 was also revised down by 0.1 p.p. to 2.9%. In 2019, growth rates of the world economy will remain at 2.9%.
The World Bank left unchanged projections of the U.S. economic growth for 2017-2018 at 2.2 and 2.1%, respectively. In 2019, growth rates will decline to 1.9%. Projections of China's GDP for the current and next year were left flat at 6.5 and 6.3%. Projections for 2019 expect growth rate by 6.3%. Japan's GDP growth rates were revised up for 2017 to 0.9% against 0.5%, for 2018 to 0.8% against 0.7%, and for 2019, an increase is expected at 0.4%. Forecast for Eurozone for 2017 was revised down by 0.1 p.p. to 1.5%, for the next year was also downgraded by 0.1 p.p. to 1.4%. In 2019, Eurozone as expected will grow by 1.4%. According to the WB forecast, the Indian economy will be the fastest-growing in the coming three years: in 2017 by 7.6%, and in 2018-2019 by 7.8%.
The WB estimates for Russia compared to the Report on the Russian economy released in November 2016 remained flat: after the GDP decline in 2016 by 0.6% economic activity will accelerate to 1.5, 1.7 and 1.8%, respectively in 2017-2019.
According to the WB estimates, global commodity trade will grow by 2.5% compared to 2015. In 2017, it is expected that global trade will accelerate to 3.6%, and in 2018 - to 4.0%.
The International Monetary Fund expects global growth to accelerate from 3.1% in 2016 to 3.4% in 2017, and to 3.6% in 20183 (Table 50). Events taking place in H2 2016 contributed to the fact that a number of large economies posted higher growth acceleration in early 2017. That is why, it becomes more feasible that the global economy growth in 2017-2018 is forecast to accelerate against slack growth rates of last year. However, this near-term forecast carries a wide range of risks, which can hamper global economy acceleration. For example, among them are high level of public and private indebtedness seen in many countries, retention of weak economic activity growth rates and deflation pressure in a number of advanced economies, unsettled conditions for the UK exit from the European Union, implications of the U.S. elections, and tight schedule of the upcoming national elections, among others.
1 Author of chapter: N. Volovik - Gaidar Institute, RANEPA.
2 http://www.worldbank.org/en/publication/global-economic-prospects
3 http://www.imf.org/external/pubs/ft/weo/2017/update/01/
Table 50
Dynamics of global GDP and world trade (growth rates in % to previous year)
Estimate Projections
2010 2011 2012 2013 2014 2015 2016 2017 2018
Global GDP 5.1 3.9 3.4 3.3 3.4 3.2 3.1 3.4 3.6
Advanced economies 3.0 1.7 1.2 1.4 1.8 2.1 1.6 1.9 2.0
United States 2.4 1.8 2.3 2.2 2.4 2.6 1.6 2.3 2.5
Euro zone 2.0 1.5 -0.7 -0.4 0.9 2.0 1.7 1.6 1.6
Germany 4.0 3.4 0.9 0.5 1.6 1.5 1.7 1.5 1.5
France 1.7 2.0 0.3 0.3 0.2 1.3 1.3 1.3 1.6
Great Britain 1.8 1.1 0.3 1.7 3.0 2.2 2.0 1.5 1.4
Emerging market and developing economies 7.4 6.2 5.1 4.7 4.6 4.0 4.1 4.5 4.8
Commonwealth of Independent States 4.8 4.8 3.4 2.2 1.0 -2.8 -0.1 1.5 1.8
Russia 4.3 4.3 3.4 1.3 0.6 -3.7 -0.6 1.1 1.2
Except Russia 6.0 6.1 3.6 4.2 1.9 -0.5 1.1 2.5 3.3
Developing countries, Asia 9.5 7.8 6.7 6.6 6.8 6.6 6.3 6.4 6.3
China 10.4 9.3 7.7 7.7 7.3 6.6 6.7 6.5 6.0
India 10.1 6.3 4.7 5.0 7.3 7.6 6.6 7.2 7.7
Latin America and Caribbean 6.2 4.6 2.9 2.7 1.3 0.0 -0.7 1.2 2.1
Brazil 7.5 2.7 1.0 2.5 0.1 -3.8 -3.5 0.2 1.5
Mexico 5.6 4.0 4.0 1.1 2.1 2.5 2.2 1.7 2.0
Global trade in goods and services 12.6 6.1 2.9 3.0 3.3 2.7 1.9 3.8 4.4
Advanced economies 11.4 4.7 1.2 1.4 3.4 4.0 2.0 3.6 3.8
Emerging market and developing economies 14.9 8.8 6.0 5.3 3.6 0.3 1.8 4.0 4.7
Source: data released by IMF (http://www.imf.org/external/pubs/ft/weo/2016/02).
According to the Bank of Russia estimates,1 in 2016, the aggregate growth rates of Russia's trade partners remained flat at the 2015 level - around 2.0% per annum. This estimate is based on assumptions about a gradual slowdown of China's economy, on the one hand, and some economic recovery seen in the U.S., on the other hand.
In 2016, China's GDP registered the lowest growth rates seen during last 25 years. According to data released by the National Bureau of Statistics of China,2 in 2016, economic activity in China accelerated by 6.7% up to USD 11.3 trillion. According to the IMF forecast, China's economy expanded by 6.6% over a year. To recap, in 2010, this index stayed at 10.6%, in 2011 - 9.5%, and in 2012 - 7.9%. The outcomes of 2013, China's economic growth slowed down to 7.8% and in 2015 - to 6.9%.3 During recent years, we observe a slowdown of China's industry growth rates as well as investment volume in fixed assets. Economy is decelerating due to high level of indebtedness and supply glut in a number of sectors. Budget investment and bank loans positively affect GDP expansion. According to the IMF forecast, in 2017, China's economy will expand by 6.5%. Principal risks of China's economy are linked with financing investment at the expense of debt buildup as well as with the policy of the new U.S. administration, which threatens China with protectionist measures.
According to the "advance" estimate released by the Bureau of Economic Analysis,4 in U.S. real GDP increased at an annual rate of 1.9% in the fourth quarter of 2016. In Q1 2016, the U.S.
1 Bank of Russia official website. Report on monetary policy, No. 3, September 2016.
2 National Bureau of Statistics of China official website: http://www.stats.gov.cn/english/PressRelease/201701/ t20170124_1457667.html
3 IMF official website: http://www.imf.org/external/pubs/ft/weo/2016/02/weodata/weorept.aspx?sy=2000&ey= 2020&scsm=1&ssd=1&sort=country&ds=.&br=1&c=924&s=NGDP_RPCH%2CNGDPD&grp=0&a=&pr.x=37 &pr.y=11
4 https://www.bea.gov/newsreleases/national/gdp/2017/gdp4q16_adv.htm
GDP increased at an annual rate of 0.8%, in Q2 - 1.4%, and Q3 - 3.5%. The deceleration in real GDP reflected a downturn in exports, an acceleration in imports, a deceleration in personal consumption expenditures, and a downturn in federal government spending. It should be noted that preliminary estimate is based on incomplete data, which is subject to further revision. According to the outcomes of 2016, the U.S. GDP expanded, according to advance estimate, by 1.6%, which is the smallest growth since 2010.
According to data released by Eurostat,1 in Q4 2016 compared to the previous quarter, according to a flash estimate, Eurozone seasonally adjusted GDP (EU19) expanded by 0.4% and by 0.5% in EU28. In Q3 2016, GDP also expanded by 0.4 and 0.5%, respectively. In comparison with Q3 2015, seasonally adjusted GDP increased by 1.7% in Eurozone and in EU28 - by 1.8%.
According to the World Trade Organization forecast,2 world trade in 2016 grows at a slower pace than expected: expanding by just 1.7%, well below the April forecast of 2.8%. Merchandise trade turned out to be weaker amid deceleration in imports and deceleration of GDP growth in a number of advanced countries. Thus, this year would mark the slowest pace of trade and output growth since the financial crisis of 2009. The forecast for 2017 has also been revised down, with trade now expected to grow between 1.8% and 3.1%, down from 3.6% previously projected in the April forecast. This being said, the world trade is slowing down in all regions - in Chia, in EU and in the U.S.
According to data released by the WTO, in 2016, world merchandise trade volume contracted by 2.6% in comparison with 2015.3 Exports from Kazakhstan suffered the most (decline by 20%), Bolivia (by 22.6%) and the Russian Federation (by 17.5%).
In terms of merchandise trade turnover, the United States again ranked first on the list with USD 3,706bn. This said merchandise trade deficit remains: in 2016, it constituted USD 796.7bn.
In terms of merchandise trade turnover, China ranked second with USD 3,685.6bn. Since 1994, China's trade balance is positive and hit USD 510.7bn.
Germany ranked third on the list; its trade turnover in 2016 came to USD 2,394.1bn. Positive trade balance amounts to USD 285.1bn.
Russia's rating on the list of large exporters lost 2 points - from 15th place in 2015 (share of world trade at 2.29%) to 17th place in 2016 (with 1.9% share). In terms of imports, Russia makes it the 22nd largest importer against making it the 17th largest importer in 2015. The share of Russian imports in the overall world imports volume stayed at the 2015 level of 1.28%.
4.7.2. Terms of Russia's foreign trade, market conditions for major products of Russian export and import
World commodity prices downward trend commenced in 2011 and halted in 2016 when their gradual recovery began. In early 2016, world commodity market saw another round of deterioration. For example, Bloomberg Commodity Index (BCOM), which has 22 commodity futures in seven sectors, fell to 72.8759 points - the lowest level since 2009. However, by the year-end, BCOM increased by 19.6% to 87.1439 points. Maximum was registered in June at
1 http://ec.europa.eu/eurostat/documents/2995521/7868348/2-14022017-BP-EN.pdf/da0clc33-2d80-4cc2-9i34-de2dab92aac5
2 Trade statistics and outlook: https://www.wto.org/english/news_e/pres16_e/pr779_e.htm
3 Calculated on data released in «Monthly merchandise trade values»: https://www.wto.org/ english/res_e/statis_e/short_term_stats_e.htm
89.9368 points, which reflected growing prices on metals and crude oil, which grew from the 10-year lows to above USD 50 per barrel level.
Ongoing oil glut on the market, gradual increase of crude oil shipments by Iran after lifting of sanctions and slowdown of China's economy resulted in a new wave of falling oil prices seen in early 2016. In January 2016, Brent prices averaged in the range of USD 36.28 to USD 26.01 per barrel, monthly price averaged USD 30.8 per barrel, which is the lowest level since February 2004. In the following months (except July and November), growth of crude oil prices was observed in comparison with the previous month.
Nevertheless, year-average commodity prices stayed at the lowest for last 12 years level reflecting oversupply amid weak demand (Fig. 35). Compared to 2015, the World Bank energy price index shrank by 15.3%. Non-energy commodity prices declined by 2.6%. Metal prices fell by 5.9% in 2015 compared to 2015, and prices on agricultural raw materials declined by 0.2%.
On November 30, 2016, OPEC member states concluded a production cut agreement for the first time since 2008. These countries account for one third of the world oil production roughly 33.6 m barrels per day. According to the agreement, from January 1, 2017 production is cut by 1.2 m barrels per day.
On December 10, 2016, oil producing countries from outside OPEC agreed to trim production by 562 m barrels per day, including Russia will cut crude oil production by 300,000 barrels per day by May down to 10.95 m barrels per day. This being said, two thirds of the total reduction volume (by 200,000 barrels per day) must be achieved by the end of Q1 2017.
Crude oil price increased to maximum levels since mid-2015 on the back of the agreement about joint oil production cut aimed at reducing oil glut and maintaining market. Brent exceeded USD 55 per barrel level.
200,00 180,00 160,00 140,00 120,00 100,00 80,00 60,00 40,00 20,00 0,00
-•-Energy resources Agricultural products -------Metals
Fig. 35. Commodity price index (2010=100) Source: data released by the World bank (http://www.worldbank.org/en/research/commodity-markets#1).
The Federal Open Market Committee (FOMC) at its meeting held on December 14, 2016, raised the federal funds rate to 0.5 - 0.75% per annum.1 The rate was cut to 0 - 0.25% in December 2008 in order to revive the U.S. market in the wake of the global economic crisis. In December 2015, the rate was raised to the target range of 0.25-0.50%.
In the wake of an increase of the federal funds rate, the dollar strengthened, which led to a decline of commodities prices. On December 15, 2016, dollar index hit 103.56 points -maximum since December 2002. Oil prices strengthened by the agreement to trim oil production concluded by OPEC and other oil producers outside OPEC fell. On December 13, Brent spot price hit maximum USD 55.57 per barrel since July 2015 fell to USD 53.79 per barrel on December 14.
In 2016, Brent averaged USD 44.05 per barrel per annum down 15.9% than in 2015 (USD 52.37 per barrel).
Natural gas prices dynamics are still segmented across regions. In the U.S. in March 2016, natural gas price dipped to USD 1.7 per million BTU - the lowest fall since 1999. However, the price recovered on the back of inventories of underground gas storage facilities replenishment turned out to be below projected. Already in June, natural gas price hit USD 2.57 per barrel. According to the World Bank, natural gas spot price at Henry Hub in 2016 averaged USD 2.49 m BTU down 4.6% against 2015.
The heist natural gas prices remain in the South-East Asia, herewith in 2016, they declined by 33.8% in comparison with 2015. According to the data released by the World Bank, average price of liquefied gas imported by Japan in 2016 constituted USD 6.89 per m BTU.
The natural gas price on the European market fell by 37.2% in 2016 in comparison with 2015. Having said that, one should note commenced price growth since October - in comparison with September natural gas price increased by 1.9%, in November went up by 14.4% compared to the previous month, and in December moved up by 12% reflecting accelerated demand in the energy sector amid contraction of supplies due to natural gas production cut on the largest onshore gas field Groningen in Netherlands amid remaining concerns over high seismic activity.
Excessive supply amid insufficient output reduction and weak demand led to a deceleration of world non-ferrous metal price in late 2015-early 2016 to minimal values since the crisis year of 2009, after which nonferrous metal prices began gradually to revere reflecting an improved balance between demand and supply. The World Bank Price Index on metals up 4.7% in Q2 2016 compared to Q2, in Q3 up 4.3% against Q2. Consequently, aluminum went up by 17.3%, copper - by 21.9%, nickel - by 30.8%, lead - by 32.5% and zinc - by 68.8% in November 2016 compared to January 2016.
Nonetheless, average annual prices on on-ferrous metals hit long-term minimums. According to the London metal exchange data, in 2016, price on aluminum were lower by 3.6%, on nickel - by 22.1%, and on copper - by 11.7% than in 2015 (Table 51).
In 2016, Russia's terms of trade continued to deteriorate. In January-September 2016, terms of trade index constituted 79.1 points. This is due to the fact that prices for goods shipped abroad fell steeper than those imported to the territory of the Russian Federation. Average export price index constituted 76.9, and average import price index - 97.2% for 9 months of 2016 (Fig. 36).
1 https://www.federalreserve.gov/monetarypolicy/default.htm 220
Table 51
Average annual world prices
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Brent, $/bbl. 65.39 72.70 97.64 61.86 79.64 110.94 111.97 108.86 98.94 52.37 44.05
Natural gas (USA), USD/1 m BTU* 6.72 6.98 8.86 3.95 4.39 4.00 2.75 3.73 4.37 2.7 2.39
Natural gas, European market, USD /1 m BTU 8.47 8.56 13.41 8.71 8.29 10.52 11.47 11.79 10.05 7.4 4.47
Natural gas (Japan), USD/1 m BTU 7.08 7.68 12.55 8.94 10.85 14.66 16.55 15.96 16.04 10.6 6.88
Copper, USD/t 6722 7118 6956 5149 7534 8828 7962 7332.1 6863.4 5510.5 4867.9
Aluminum, USD/t 2570 2638 2573 1665 2173 2401 2023.3 1846.7 1867.4 1664.7 1604.2
Nickel, USD/t 24254 37230 21111 14655 21809 22910 17547 15032 16893 11863 9595.2
Source: calculated on data released by the World Bank.
160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0
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2009
2010
2011
2012
2013
2014
2015
o
2016
Distant foreign countries
SIC
Fig. 36. Russia's terms of foreign trade index Source: Ministry of Economic Development of Russia.
4.7.3. Main indexes of Russian foreign trade
Tear 2016 was the fourth one in a row, which saw contraction of foreign trade indexes: Russian foreign trade turnover calculated on balance of payments methodology came to USD 473.2bn down 11.4% against the same indicator of 2015. Foreign trade turnover with distant foreign countries shrank by 10.8% to USD 412.9bn, with CIS - by 15.7% to USD 60.3bn.
Export of goods in 2016 contracted by 17.5% to USD 281.8bn in 2016 compared to 2015, and imports shrank by 0.8% to USD 191.4%. Thus, value of exports is contracting at a high pace; meanwhile imports deceleration has significantly slowed. Current exports and imports dynamics ensured trade balance contraction by 39.1% down to USD 90.4bn - the lowest value since 2004 (Fig. 37).
600,000
Balance ------- Exports Imports
Fig. 37. Main indexes of Russian foreign trade (USD bn)
Source: Bank of Russia.
Just as in last year, Russian export negative dynamics was mainly determined by the price factor amid insignificant growth of quantum of exports abroad. Contraction of imports reflected both by a decline of average import prices and by contraction of quantum of imports to Russia (TTable 52).
Table 52
Russia's foreign trade indexes in 2012-2016 (% to previous year)
2012 2013 2014 2015 2016
Quantum Average price Quantum Average price Quantum Average price Quantum Average price Quantum Average price
Exports 99.9 101.6 104.9 95.7 100.0 94.3 105.4 64.8 102.7 76.9
Imports 105.1 97.3 97.8 102.5 92.5 98.2 77.7 81.1 99.8 97.2
Sources: (Federal Customs Service of Russia (FCS), Ministry of Economic Development of Russia.
Relatively sustainable external demand amid strengthening of the national currency have contributed to a deceleration of exports quantum growth to 2.7% against 5.4% in 2015. Imports quantum have stabilized on the account of low base of last year in the context of easing of domestic consumer and investment demand slump.
Foreign trade imbalance coefficient (ratio between balance and trade turnover) declined from 27.8% in 2015 to 19.1% in 2016, which is the lowest fall since 1998.
Structure and dynamics of exports
2016 remains on track to be the fourth consecutive year with Russian exports contraction: in terms of value, exported goods in 2016 contracted by 17.5% to USD 281.8bn compared to 2015. Although deceleration rates have decreased, they remain high: deliveries to distant foreign countries have shrunk by 17.2%, and to the CIS countries - by 19.1%. The share of distant foreign countries in the overall volume of exports up 0.3 percentage points to 85.8% compared to the previous year (Table 53).
Table 53
Russia's exports dynamics
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Exports, bn USD 240.0 297.5 346.5 466.3 297.2 392.7 515.4 527.4 521.8 496.8 341.5 281.8
Including:
Distant foreign countries 207.3 255.8 294.8 397.7 252.0 333.6 436.7 443.8 443.8 428.1 292.3 242.1
Growth rates, % to previous year
Quantum index 110.7 104.7 105.8 105.0 96.8 97.0 110.0 97.8 99.9 104.9 109 102.7
Price Index 122.7 126.9 119.7 110.9 137.4 76.4 119.8 132.9 101.6 95.7 58.1 76.9
Sources: Bank of Russia, Ministry of Economic Development of Russia.
After falling in Q1 2016 to the lowest level since 2009, quarterly exports exhibited positive dynamics: value of exports increased by 12.5% in Q2 compared to Q1, by 4.9% in Q3 against Q2, and by 16.3% in Q4.
In 2016, export pattern reported the following changes (Fig. 38):
- Compared to 2015, the share of agricultural products went up from 4.7% to 6.0%, of timber and paper and pulp products up from 2.9% to 3.1%, metals and metal products up from 9.6% to 10.2%, machinery, equipment and means of transport up from 7.4% to 8.5%;
- Share of fuel and energy products in the overall volume of Russian exports contracted from 62.9% to 58.1% reflecting continued decline of contract prices amid growth of total volume of deliveries;
- Shares of other commodity groups from extended nomenclature remained practically at the last year level.
□ Other goods
□ Machinery, equipment and means of transport
□ Metals and metal products
■ Timber and pulp and paper products
EJChemical products, rubber
BFuel and energy products
□ Agricultural products and
agricultural raw materials
(except textile) 2008 2009 2010 2011 2012 2013 2014 2015 2016
Fig. 38. Goods-wise dynamics of Russian exports (USD bn)
Source: FCS.
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According to data released by the Ministry of Economic Development,1 at the outcome of first three quarters of 2016, commodities exports declined by 24.1% to USD 91.0bn compared to the same period of 2015 reflecting mainly reduction of average contract prices on fuel and energy products - by 28.9% on crude oil and by 35.0% on natural gas.
Exports of manufactured goods declined by 21.7% to USD 110.6bn, meanwhile its share in the overall volume of exports went up by 0.7 percentage points by 2015 and constituted 54.8%. Negative dynamics of manufactured exports reflects a reduction of oil products exports value by 38.5% both on account of a decline of average prices by 32.1% and a decrease of physical volumes of deliveries by 9.4%.
Exports of industrial exports with high level of processing shrank by 6.7% to USD 20.3bn, advanced technology products - up by 15.7% to USD 6.3bn, and innovation goods - up by 17.6% to USD 16.4bn.
It should be noted, that in 2015 value volumes of exports significantly contracted across all commodity groups from extended classification of goods. Year 2016 demonstrated growth of exports of agricultural goods and agricultural raw materials (by 5.3%), of textiles and textile products and footwear (by 6%), of precious stones, precious metals and their products (by 13.1%), as well as of other goods (by 0.2%).
In 2016, agricultural exports volume constituted USD 17.0bn. Principal factors of agricultural products export growth were increase of domestic output, favorable for import ruble exchange rate, as well as reduction of households' purchasing power resulting in a contraction of domestic market for a majority of manufactured goods.
Russian exports agricultural products over 150 positions (level of 4 digits according to TK VED) in 19 categories. Traditionally, cereals ranked first place in the structure of Russia's agricultural products exports. According to the Food and Agriculture Organization forecast,2 in 2016-2017 agricultural year main volume of cereal exports will account for Australia, the Russian Federation and the United States. According to preliminary data released by Russian State Statistics Service (Rosstat), in 2016, Russia boasted of a record cereal crop amounting to 119.1 m t, which contributed to exports growth. During 10 months of 2016 compared to the same period of 2015, wheat and meslin exports - up by 23.5% in physical terms, and by 8.9% in value terms.
Fish and seafood ranked second in the structure of agricultural exports. Their exports constituted USD 2.03bn during 9 months of 2016 - up by 3.0% against the same indicator seen in 2015.
Animal and vegetable fats and oils ranked third on the list. Their exports went up in January-September 2016 compared to January-September of 201 by 14.2% to USD 1.5bn 5.
Deliveries abroad of other agricultural products increase. For example, exports of meat and edible meat offal went up by 81.9%, of vegetables and some edible roots and tuber crops - up by 28.6%, oil seeds and oil-bearing fruits, medicinal herbs and plants for technical purposes -up by 31.7%.
Structure and dynamics of imports
Russia's imports in 2016 shrank compared to 2015 by 0.8% to USD 191.4 bn. Imports contraction was due to a reduction of deliveries from CIS countries, which cut their deliveries
1 On current situation in the economy of the Russian Federation in January-October 2016 (related to foreign economic activity). Ministry of Economic Development.
2 FAO official website: http://www.fao.org/worldfoodsituation/csdb/ru/
to Russia by 8.1% to USD 20.6bn. Russia imported from distant foreign countries goods to the tune of USD 170.8bn up 0.2% against the same indicator for 2015. The share of distant foreign countries in the total imports volume - up by 0.9 percentage points to 89.2% (Table 54).
Table 54
Russian imports dynamics (USD bn)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Imports, USD bn 123.8 163.2 223.1 288.7 183.9 245.7 318.6 335.8 341.3 307.9 192.9 191.4
Including:
Distant foreign countries 104.3 141.3 194.1 253.8 162.7 213.2 273.8 288.4 295.0 271.9 170.5 170.8
Growth rates, % to previous year
Quantum index 124.2 122.4 130.1 127.1 113.5 63.3 135.4 122.2 105.1 97.8 92.6 99.8
Price Index 106.1 106.5 105.5 107.6 117.8 99.1 101.6 109.1 97.3 102.5 99.8 97.2
Sources: Bank of Russia, Ministry of Economic Development of Russia.
During the year, rates of value of imports contraction were decelerating in line with the stabilization of the situation. In August 2016 for the first time since 2013, dynamics of imports was positive - value of imports exceeded the same indicator of 2015 by 13.0%. In the following months, growth remained - in September it constituted 7.9%, in October - 8.2%, in November -6.4%, and in December - 10.6%.
Over 9 months of 2016, the share of investment goods in the structure of Russia's imports increased compared to the same period of 2015 by 3.4 percentage points to 27.0%, the share of consumer goods, on the contrary, fell by 1.1 percentage points to 28.5%. Of special note is the contraction of proportion of agricultural products from 14.5% to 13.7% and growth of the share of machinery, equipment and means of transport from 44.8% to 47.4% (Fig. 39).
Other goods
Machinery, equipment and means of transport
Metals and metal products Textile, textile products and footwear Timber and pulp and paper products
Chemical products, rubber
Mineral products
Food and agricultural raw materials (except for textile)
Fig. 39. Goods-wise dynamics of Russian imports (USD bn)
Source: FCS.
350
300
250
200
150
100
50
sa
v
m
2008 2009 2010 2011 2012 2013 2014 2015 2016
0
In early August 2014, Russia banned imports of agricultural products from those countries, which introduced sanctions against Russia - the U.S.A., the EU countries, Canada, Australia and Norway. Beef, pork, poultry, sausage, fish, vegetables, fruits, dairy products, among other were banned. In January-September 2016 in comparison with the same period of 2014, value imports of sanctioned products fell by 14.2% to USD 7.6bn.
According to the RF Government Regulation of November 30, 2015 No 1296, from January 1, 2016 imports of certain agricultural products were restricted from Turkey. This measure resulted in a contraction of Russia's imports. In January-September 2016 in comparison with the January-September 2015, it fell by USD 585.3bn. Most of all suffered imports of fresh tomatoes down by USD 281.4bn, fresh grapes down by USD 68.7bn, and tangerines down by USD 43.0bn.
4.7.4. Regional pattern of Russia's foreign trade
The regional pattern of Russia's foreign trade retained growth share of the APEC observed during recent years on account of a contraction of the EU and the CIS countries in the foreign trade turnover. In 2016 compared to 2015, the share of the EU countries declined from 44.8% to 42.8%, the share of the CIS countries down from 12.6% to 12.1%. At the same time, the share of the APEC countries went up in 2016 to 30.0% against 28.1% seen in 2015 (Fig. 40).
The European Union still remains the biggest trading partner of the Russian Federation in spite of contraction of the EU countries' share in Russia's foreign trade turnover. Deterioration of geopolitical situation, the EU sanctions introduced against Russia and retaliatory measures undertaken by Russia resulted in an acceleration of contraction of the EU's share. In 2016, Russia's foreign trade turnover with those countries contracted by 15.0% mainly due to a decline of Russia's exports by 21.2%.
120 100 80 60
40
20
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 HEU BAPEC CCIS -Other countries
Fig. 40. Regional pattern of Russia's foreign trade (% in foreign trade turnover) Source: FCS.
Russia's foreign trade turnover with the APEC countries shrank by 4.9%. Meanwhile, foreign trade turnover with China - up by 4.0%, Indonesia - by 33.4%, and Malaysia - by 12.3%.
Russia's foreign trade with the Commonwealth of Independent States contracted by 14.2%. Mutual trade with Azerbaijan (-30.3%) and Ukraine (-31.6%) has suffered most.
The situation radically changed reflecting triggering on January 1, 2016 of trade and economic chapter of the Association agreement between Ukraine and the EU. The implications of this deal had major significance for Russia amid singing Free Trade Zone Agreement with the CIS. Actually, Ukraine rejected to develop trade and economic cooperation within the CIS countries and opted for moving towards comprehensive integration with the EU. Consequently, in compliance with the Federal Law of December 30, 2015 No 410-FZ "On Suspension of Agreement for a Free Trade Zone with Ukraine" beginning January 1, 2016, which resulted in a further contraction of mutual trade turnover between two countries.
Since 2010, China ranks first on the list of major trade partners of Russia. Its share in Russia's foreign trade turnover went up in 2016 to 14.1% (in 2015 - 12.1%). At the same time, negative trade balance of Russia moved up significantly: in 2015, it amounted to USD 6.3bn, and in 2016-USD 10.1bn.
Russia has a negative trade balance with other APEC countries: with Vietnam (-USD1.1bn), Indonesia (-USD1.8bn), the U.S. (-USD1.3553bn), Malaysia (-USD0.2bn), and Thailand (-USD0.5bn). As a result, Russia has negative trade balance with entire region of Asia-Pacific economic cooperation (Fig. 41).
Fig. 41. Principal indexes of Russia's foreign trade across regions
(USD bn)
Source: FCS.
2016 demonstrated acceleration of foreign trade activity with some other countries. For example, foreign trade turnover with Iran increased by 70.1% compared to 2015, with Cuba -by 82.6%, with Georgia - by 14.1%, and with Switzerland - by 10.1%.
4.7.5. Regulation of Russia's foreign trade2
Tariff regulation
Export duties. In compliance with Regulation of the RF Government of March 29, 2013, No. 276, the Ministry of Economic Development of Russia was monthly revising export customs duty rates on crude oil and certain petroleum-based products.
Table 55
Rates of export customs duties on crude oil and petroleum-based products
in 2014-2016 (USD/t)
Crude oil Petroleum-based products
2014
Diesel fuel Other types of petroleum products, except gasoline and diesel fuel
February 1 386.3 251 254.9
March 1 384.4 249.8 253.7
April 1 387.0 251.5 255.4
May 1 376.1 244.4 248.2
June 1 385.0 250.2 254.1
July 1 385.2 250.3 254.2
August 1 388.4 252.4 256.3
September 1 367.6 238.9 242.6
October 1 344.7 224.0 227.5
November 1 316.7 205.8 209.0
December 1 277.5 180.3 183.1
2015
January 1 170.2 81.6 129.3
February 1 112.9 54.1 85.8
March 1 105.8 50.7 80.4
April 1 130.8 62.7 99.4
May 1 116.5 55.9 88.5
June 1 144.4 69.3 109.7
July 1 143.1 68.6 108.7
August 1 133.1 63.8 101.1
September 1 109.2 52.4 82.9
October 1 91.5 43.9 69.5
November 1 97.1 46.6 73.7
December 1 88.4 42.4 67.1
2016
January 1 73.3 29.3 60.1
February 1 52.0 20.8 42.6
March 1 39.5 15.8 32.3
April 1 54.9 21.9 45.0
May 1 66.0 26.4 54.1
June 1 80.6 32.2 66.0
July 1 95.9 38.3 78.6
August 1 90.1 36.0 73.8
September 1 80.0 32.0 65.6
October 1 91.9 36.7 75.3
November 1 92.7 37.0 76.0
December 1 90.4 36.1 74.1
Sources: Regulation of RF Government, Information released by Ministry of Economic Development of Russia.
Regulation of the RF Government of November 30, 2015 No. 1290 "On Introduction of Amendments into Some Acts Approved by the Government of the Russian Federation" revised methodology for calculation of rates for the export customs duties on crude oil. It was decided
1 Materials of the information and legal portal GARANT.RU were used in drafting this chapter
to apply in 2016 the same terms for calculation of rate for the export customs duty on crude oil when crude oil price exceeding USD 182 per ton as it was done in 2015. Originally, it was envisaged to reduce in 2016 the rate for the export customs duty on crude oil from 42% to 36%. However, in the current circumstances it was decided to 'freeze' the rate at 42%.
Decline of crude oil prices and implementation of the so called tax maneuver resulted in significant reduction in 2015-2016 export customs duties on crude oil and petroleum-based products (Table 55).
In compliance with Regulation of the RF Government of August 15, 2016 No. 797 "On Introduction of Amendments in Rates of Export Customs Duties on Goods Moved from the Russian Federation Outside the Borders of Members of Agreement of Customs Union," since September 2016, export customs duties were lifted on 200 headings, and reduced on 7 headings. For example, export customs duties were reduced on sunflower seeds, lead, zinc and cobalt waste and scrap. Slashed to zero export customs duties on precious and semi-precious stones, unrefined copper, waste and lead scrap, coke and semi-coke from lignite, gas and coal tar, naphthalene, bituminous mastic, red fish (red salmon), soybeans, among other.
Import duties. In the framework of obligations undertaken by the Russian Federation at the accession to the World Trade Organization (WTO), by Decisions of EEC No. 26 of March 29, 2016 and No. 40 of May 16, 2016, starting from September 1, 2016, the new rates were imposed on import customs duties of certain types of goods. Amendments affected more than 1,700 codes of goods nomenclature of the total list of 11,600.
Non-tariff regulation
On November 2015, the WTO released its sixteenth monitoring report on Group of 20 (G20) trade measures.1 G20 economies implemented a total of 85 new trade-restrictive measures during the period from mid-May to mid-October 2016. Currently, G20 apply 1,263 trade-restrictive measures - up by 5.6% compared to the number of such measures seen in the previous monitoring report.
During recent six months, the number of new trade-restrictive measures imposed by G20 decelerated to 17 new measures per month against 21 new measures imposed in the period from October 2015 to May 2016.
According to the WTO data as of June 30, 2016, sanitary and phytosanitary measures accounted for the highest share in the overall number of imposed trade-restrictive measures (27.8% of the total non-tariff measures). They are followed by technical barriers to trade (21.7%) and anti-dumping measures (14.6%).
From 1995 through 2015, India is the leader in imposition of anti-dumping measures by submitting 767 claims, which amounted to 15% of the overall number of filed claims totaling to 4,990. For the same period, the U.S. initiated 570 anti-dumping investigations, meanwhile the EU - 480. However, not all investigations may lead to the imposition of anti-dumping customs duties. India imposed 534 anti-dumping measures, the U.S. - 345, and the EU - 298.
In 2015, the U.S. overtook India by initiating 43 anti-dumping investigations and 22 investigations into unlawful export subsidies. During 2015, and the EU filed 12 claims against unfair trade practices.
In H1 2016, India initiated 48 anti-dumping investigations, the U.S. - 24, and the EU - 5.
1 The World Trade Organization official website: https://www.wto.org/english/news_e/news16_e/trdev 09nov16 e.htm
Metal products, especially steel products, account for the largest share of anti-dumping investigations. Worldwide glut of steel, sharp decline of steel prices, significant change in trade flows, reduction of work places and growth of trade-restrictive measures - all these factors create growing tensions between countries. Therefore, out of 233 anti-dumping claims filed all over the world in 2015, 108 claims related to deliveries of steel products at a bargain price. More often claims relate to deliveries from the People's Republic of China.
Articles 48-50 of the Treaty on Eurasian Economic Union of March 29, 2014 and by the Protocol on Application of special protective, anti-dumping, and countervailing measures with respect to third countries (Annex No 8 to the Treaty on Eurasian Economic Union) regulate imposition of trade-restrictive measures in the Eurasian Economic Union. Seventeen protective measures for domestic market are currently effective in the EAEU (Table 56).
Table 56
Protective measures of domestic market effective in the EAEU
No Product Type of measure Exporter Date of expiry
AD-8 Rolled steel with polymer coating Anti-dumping PRC 30.06.2017
AD-3 Rolling bearings Anti-dumping PRC 20.01.2018
AD-12 Iron enamel tubs Anti-dumping PRC 25.01.2018
AD-9 Graphite electrodes Anti-dumping Ukraine 25.01.2018
AD-11 Cold-worked seamless stainless pipes Anti-dumping PRC 14.05.2018
AD-10 Light commercial vehicles Anti-dumping Germany, Italy, Turkey 14.06.2018
AD-7 Steel forged rolls for rolling mills Anti-dumping Ukraine 25.06.2019
AD-15 Citric acid Anti-dumping PRC 09.04.2020
AD-14 Kitchen and cutlery from corrosion-resistant steel Anti-dumping PRC 18.06.2020
AD-16 Tubing and casing steel seamless pipes for drilling and oil and gas production Anti-dumping PRC 22.09.2020
AD-17 Bulldozers Anti-dumping PRC 11.12.2020
AD-18 Truck tires Anti-dumping PRC 17.12.2020
AD-19 Steel all-rolled wheals Anti-dumping Ukraine 21.01.2021
AD-21 Corrosion-resistant tubes and pipes Anti-dumping Ukraine 25.02.2021
AD-13 Rods Anti-dumping Ukraine 29.04.2021
AD-1 Certain types of steel pipes Anti-dumping Ukraine 01.06.2021
AD-20 Ferrosilicon manganese Anti-dumping Ukraine 27.10.2021
Источник: http://www.eurasiancommission.org/ru/act/trade/podm/mery/Pages/measures_list_applied.aspx
Restrictive measures applied to Russian goods. According to data presented in the Register of restrictive measures,1 as of December 1, 2016, 125 restrictive measures were exposed, which hamper market access for Russian goods. Mainly, they are anti-dumping customs duties, which account for 32% of the overall number of imposed measures, special restrictive measures account for 13.6%, and sanitary and phytosanitary measures account for 8.8% (Table 57).
Currently 22 investigations are initiated, of which 12 are anti-dumping, and 10 - special protective, as well as 4 reviews of anti-dumping measures are initiated. However, two agreements on termination of anti-dumping procedures are in force.
Within the framework of sanctions implemented by the European Union, the U.S., Japan, Ukraine, Switzerland, Norway, Australia, New Zealand, Iceland, Lichtenstein, Montenegro, and Albania a ban is imposed on imports of goods originated from Crimea and Sevastopol.
Table 57
Market protective measures applied by third countries against goods from the Russian Federation
Restrictive measure 2014 2015 2016
Anti-dumping measures 40 39 40
Special safeguard duty 9 15 17
Countervailing duty - 1 1
TBT 9 9 10
SPS 3 7 11
Quotas (including tariff quotas) 2 3 3
Excises on the basis of discrimination 5 4 5
Ban on imports 4 3 4
Risks of imposition of measures 5 5 5
Other non-tariff measures 25 24 29
TOTAL 102 110 125
Source: Register of restrictive measures as of December of corresponding year.
Moreover, in response to events happened in Crimea and in the east of Ukraine, restrictive measures were imposed against a number of Russian organizations and individuals by the European Union, the U.S., Canada, Japan, Ukraine, Switzerland, Norway, Australia, New Zealand, Iceland, Lichtenstein, Montenegro, and Albania.
Integration processes
The free trade zone agreement between Eurasian Economic Union (EAEU) and the Socialist Republic of Vietnam (SRV) will come into force starting October 5, 20161, which creates new conditions for trade and economic activities for business of EAEU and Vietnam. It should be noted that this free trade zone agreement with third country is the first one for the EAEU.
Selection of Vietnam as the first country to have a free trade zone agreement with EAEU members is due to the combination of such factors as insignificant trade risks and big political importance. At the same time, the export pattern of Vietnam and EAEU member states is such that key export positions will not compete with one another on domestic market of member states of the agreement. This fact will allow to achieve balance of interests for all parties, which is the basis for a successful performance of a free trade zone.
As of today, trade turnover between Vietnam and the EAEU member states takes a small share in the trade volume of each of our countries. In 2015, foreign trade turnover between the EAEU member states and Vietnam amounted to USD 4.3bn (1.13% of the foreign trade turnover of Vietnam and 0.64% of the foreign trade turnover of EAEU), meanwhile 90.6% (USD 3.9bn) of the turnover accounts for the Russian Federation.
In 2016, Russia's foreign trade turnover with the Socialist Republic of Vietnam declined by 1.5% to USD 3.83bn reflecting a contraction of Russian goods deliveries to Vietnam by 25.5%. Meanwhile, imports of goods from Vietnam to the territory of the Russian Federation went up by 20.1%.
Until October 5, 2016, trade between the EAEU member states and Vietnam was subject to most favored nation treatment regime. Vietnam applied weighted average tariff of 9.5% (16.3% for agricultural products, and 8.4% for the non-agricultural products). Following the entry into force of this agreement, Vietnam will have to abolish for the EAEU import customs duties for
1 Free trade zone agreement between the Eurasian Economic Union and its member states, on the one hand, and the Socialist Republic of Vietnam, on the other, see: Eurasian Economic Commission website.
over 58% of tariff positions of the total merchandise classification. Regarding further 30% of tariff positions import customs duty rates will be declining over 12 years and will come to 0% by 2027 whereafter the average customs duty rate in Vietnam for trade with the EAEU member states will fall to 1.0%. At the same time, the simple average customs duty rate for Vietnam will decline from 9.7% to 2.0%.
Import customs duties will continue for the remaining 12% of tariff positions for both Vietnam and the EAEU. In other words, the agreement does not envisage total tariff liberalization. Moreover, there is a possibility to protect domestic market with the help of non-tariff measures (NTMs) - protection of intellectual property, principles and rules of competition, mechanisms for disputes resolution, veterinary and phytosanitary measures and many other provisions of the agreement were developed and coordinated by the parties on the basis of the WTO rules, which ensure the best interests of all parties of the agreement. Thus, the agreement envisages mechanisms for protection of domestic market of member states for sensitive goods, as well as protects from low quality goods without turning non-tariff measures into trade barriers. It is expected that owing to the agreement, mutual trade turnover between the EAEU and Vietnam will be worth USD 10bn by 2020.
4.8. Russia's application of WTO dispute settlement mechanisms1
On August 22, 2012, the Russian Federation joined the World Trade Organization (WTO), as well as dispute settlement mechanisms designed to resolve WTO trade disputes and governed by the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU)2. Hence Russia has since August 2012 been entitled to apply this instrument to uphold its commercial interests.
The WTO dispute settlement may be characterized as a five-stage process:
1) bilateral consultations (within 60 days of the request for consultations);
2) establishment and composition of a panel, if requested by any of the parties, to consider the subject matter at issue (45 days of the request for panel composition);
3) panel stage (6-9 months from date when the panel kicks off), and the Dispute Settlement Body (DSB) adopts the panel report and issues recommendations (about 60 days of the panel report);
4) Appellate Body proceedings, if a party to the dispute has filed an appeal (60-90 days of the appeal submittal date), the DSB adopts the Appellate Body report and circulates DSB's recommendations to the parties (30 days of the Appellate Body report);
5) surveillance of the implementation of DSB's recommendations (not more than 1518 months of DSB's adoption of the panel report or the Appellate Body report).
In 2016, Russia filed no complaints to the DSB; Ukraine initiated one dispute against Russia; Russia participated in three trade disputes as third participant. By and large, according to the data as at 2016 year end, Russia participated in 42 disputes within the WTO framework, of which 4 disputes (as complainant), 7 disputes (as respondent), and 31 (as third participant).
The proceedings regarding almost all the disputes to which Russia is a principal party (complainant or respondent) are pending, except the dispute initiated by the European Union
1 Authors of chapter: M. Baeva - RANEPA, VAVT under Economy Ministry of Russia; A. Knobel - RANEPA, VAVT under Ministry of Economy of Russia.
2 https://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm
against Russia regarding customs tariffs on certain agricultural and manufacturing goods, on which the panel report was issued, recommending Russia to bring its measures into compliance. Additionally, there are two protracted disputes between the European Union/Japan against Russia regarding the so-called recycling fee, of which the former is pending at the panel composition stage and the latter at the stage of consultations (see the Appendix hereto).
Some of the disputes to which Russia was a third party were settled, and in some cases Russia derived indirect benefit from participating in in the WTO dispute settlement mechanism. For example, on April 10, 2015, China abolished its countervailing and anti-dumping duties on grain oriented flat-rolled electrical steel from the United States and Russia (DS414).1
4.8.1. Updates on the situation in 2016 regarding WTO trade disputes to which Russia is acting as complainant
DS476: European Union and its Member States — Certain Measures Relating to the Energy Sector
On April 30, 2014, the Russian Federation requested consultations with the European Union and its member States regarding measures relating to the so-called "Third Energy Package" under which gas production companies may not own trunk pipelines located on the EU territory. Russia claims that these and other provisions of the "Third Energy Package" are inconsistent with the European Union's and WTO's obligations regarding the general principles of nondiscrimination and market access.2
Since this dispute failed to be settled through consultations, the Russian Federation requested on May 11, 2015 the establishment of a panel. At its meeting on July 20, 2015, the DSB established a panel.
The dispute between the Russian Federation and the European Union regarding the "Third Energy Package" is pending before the Panel. On August 18, 2016, the Chairperson of the Panel informed the DSB that it expected to issue its final report to the parties in May 2017, in accordance with the timetable adopted after consultation with the parties.
DS493: Ukraine — Anti-Dumping Measures on Ammonium Nitrate from Russia
On 7 May 2015, the Russian Federation requested consultations with Ukraine regarding antidumping measures imposed by Ukraine on imports of ammonium nitrate originating from the Russian Federation.3
Russia challenges that Ukraine, while conducting anti-dumping investigations regarding ammonium nitrate, rejected electric power prices offered by Russian producers and used instead prices of third countries, that is, it used the so-called "cost adjustment". Moreover, Russia claims that Ukraine acted inconsistently with some other terms and provisions of the AntiDumping Agreement.
Since the dispute between Russia and Ukraine failed to be settled through consultations, the Russian Federation requested on February 29, 2016 the establishment of a panel. The dispute is pending currently at the panel composition stage.
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds414_e.htm
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds476_e.htm
3 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds493_e.htm
4.8.2. Updates on the situation in 2016 regarding WTO trade disputes to which Russia is acting as respondent
DS462, DS463: Recycling Fee on Motor Vehicles (DS462 (complaint by the European Union), DS463 (complaint by Japan))
The European Union1 and Japan2 requested, on July 9, 2013 and on July 24, 2013 respectively, consultations with the Russian Federation regarding the Russian Federation's measures relating to a charge, the so called "recycling fee", imposed on imported motor vehicles. The dispute failed to be settled through consultations, whereby the European Union requested on October 11, 2013 the establishment of a panel. At its meeting on November 25, 2013, the DSB established a panel.
However, no progress has been achieved regarding these disputes over the past three years: no panelists have been appointed yet for the former while the latter still remains at the consultations stage, although all the time periods recommended within the dispute settlement mechanism have elapsed. This can be explained by the fact that on January 1, 2014 the Russian government obliged Russian producers to pay a recycling fee on a common basis whereby Russia brought the measures into compliance with the WTO rules and regulations, and the measures ceased to be discriminatory against imported motor vehicles.
DS475: Measures on the Importation of Live Pigs, Pork and Other Pig Products from the European Union (complaint by the European Union)
On April 8, 2014, the European Union requested consultations with the Russian Federation concerning certain measures adopted by the Russian Federation affecting the importation of live pigs and their genetic material, pork, pork products and certain other commodities from the European Union, purportedly because of concerns related to cases of African swine fever, and concerning the imposition of a ban on the importation of all types of finished pig products originating from Poland and Lithuania.3
Since the dispute failed to be settled through consultations, the European Union requested on June 27, 2014 the establishment of a panel. At its meeting on July 22, 2014, the DSB established a panel. On April 22, 2015, the Chairperson of the Panel informed the DSB that the Panel expected to issue its final report to the parties by February 2016.
On August 19, 2016, the panel report was circulated to Members. The Panel found that the bans on imports of the products at issue do not "conform to" the relevant OIE (Office International des Epizooties) standards and thus are inconsistent with the Agreement on the Application of Sanitary and Phytosanitary Measures (SPM). In particular, the Panel also found that Russia failed to duly perform a risk assessment based on scientific data for the application of the principle of regionalization whereby trade may be conducted with certain areas of a country that are claimed pest- or disease free or of low pest or disease prevalence, provided that the rest of the country's territory is facing an unfavorable situation. Russia instead imposed a EU-wide ban on the importation of pork and live pigs. The Panel also resolved that the measures at issue were applied in a discriminatory manner and constitute a hidden ban on trade.
On September 23, 2016, the Russian Federation notified the DSB of its decision to appeal to the Appellate Body certain issues of law and legal interpretations in the panel report. On
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds462_e.htm
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds463_e.htm
3 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds475_e.htm
September 28, 2016, the European Union notified the DSB of its decision to cross-appeal. This dispute is currently pending before the Appellate Body.
DS485: Tariff Treatment of Certain Agricultural and Manufacturing Products (complaint by the European Union)
On October 31, 2014, the European Union requested consultations with the Russian Federation regarding the tariff treatment that it accords to certain goods in both agricultural and manufacturing sectors, which are inconsistent with Russia's obligations as a WTO member.1 In particular, duty rates on goods such as paper and paperboard, equal to 15% or 10%, were applied in excess of the bound rate, which is 5%. Furthermore, when the customs value was below the set value, customs duties on certain goods were charged in excess of the bound rate, thus violating the WTO agreement on customs valuation.2
This dispute failed to be settled at the stage of consultations, whereby the European Union requested on February 26, 2015 the establishment of a panel. At its meeting on March 25, 2015, the DSB established a panel. On August 12, 2016 the panel report on the trade dispute between the European Union and the Russian Federation regarding Russia's import duties on certain agricultural and manufacturing products was circulated to Members.
The Panel upheld in general the EU claims against Russia regarding import duties on palm oil, refrigerators and paper, which were lifted in excess of the bound rate established when Russia acceded to the WTO in 2012. At the same time, the Panel rejected the EU charges of the systemic nature of Russia's violations of its WTO commitments regarding import tariff on paper, palm oil and refrigerators. Additionally, Russia's Ministry of Economic Development noted that all except two import duty rates on the lines at issue were brought into compliance with Russia's obligations as a WTO member, while the rest of them (regarding paper and refrigerators) will be brought into compliance in the short term.
According to the WTO rules, Russia was given about two months (till mid-October 2016) to appeal the Panel's ruling. Russia filed no appeals, whereby the panel report was accepted by the DSB with recommendations to bring the measures into compliance. Such a decision was predictable.
DS512: Measures Concerning Traffic in Transit (complaint by Ukraine)
On September 14, 2016, Ukraine requested consultations with the Russian Federation regarding alleged multiple restrictions on traffic in transit from Ukraine through the Russian Federation to third countries (in Central/Eastern Asia and Caucasus).3 In early July 2016, Russia introduced a requirement for Ukraine to ensure that international railway and motor cargo traffic in transit from Ukraine to the Republic of Kazakhstan and the Republic of Kyrgyzstan through the Russian Federation go strictly from the Republic of Belarus, provided that cargo spaces of motor and railway vehicles, spaces and containers and other places in which goods are or may be contained are equipped with means of identification (stamps), including means of identification that are operated using the technology of Global Navigation Satellite System (GLONASS), as well as drivers of cargo motor vehicles are required to obtain certain registration cards when entering the territory of the Russian Federation, which must be kept during the trip and returned when leaving the territory of the country. Additionally, a ban was
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds485_e.htm
2 The Board of the Eurasian Economic Commission, Decision No. 52 of July 16, 2014 "Concerning the establishment of import duty rates of the unified customs tariff of the Customs Union on certain types of goods pursuant to the obligations of the Russian Federation within the WTO framework"
3 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds512_e.htm
imposed on goods in transit with other than zero tariff rates in conformity with the EEU unified customs tariff, as well as a ban was imposed on the goods in transit covered by sanctions introduced by the Russian government's Executive Order dated 07.08.2014, No. 778.1
Ukraine claims that Russia imposed the measures in response to the taking effect (on 01.01.2016) of the Free-Trade Agreement between Ukraine and the European Union, and the measures are inconsistent with the WTO's provisions concerning free transit, because they violate free transit across the territory of the Russian Federation via the easiest routes for international traffic in transit from Ukraine, and also because Russia's treatment of traffic in transit is based on the national flag on vehicles and the origin of goods. The Russian party is treating traffic in transit from Ukraine less favorably than other goods in transit into/from third countries. Ukraine also claims that the publishing of Russia's respective rules and regulations was deliberately ill-timed so that the Ukrainian government and business community had no opportunity to review them.
Additionally, Ukraine claims that the Russian measures at issue are inconsistent with the WTO provisions concerning the overall abolishment of quantitative restrictions, as well as the Protocol of Russia's Accession to the WTO. Therefore, goods in transit from Ukraine are subject to unnecessary restrictions and delays. According to Ukraine's request for consultations, after Russia imposed the measures restricting goods in transit, the trade between Ukraine and countries in Central/Eastern Asia and Caucasus in January-June 2016 dropped by 35.1% compared to the values seen in the same period of 2015. This dispute is pending at the stage of consultations.
4.8.3. Updates on the situation in 2016 regarding WTO trade disputes to which Russia appears as third participant
Since its accession to the WTO in August 2012, Russia has made 31 appearances as third participant to disputes within the WTO framework, of which 12 disputes were settled. Russia's appearances as third participant is often governed not only by a substantial trade interest, but mostly by the practice of participating in disputes concerning specific issues, as well as the interest in the application of various WTO rules and regulations. Russia tends to participate in disputes against the European Union, China and the United States.
All the WTO disputes to which Russia was a third participant can be conventionally divided into the following subgroups according to their subject matter2:
1) bans on imports (on environmental or other grounds) (DS400, DS401, DS469, DS484, DS495);
2) anti-dumping, countervailing and special safeguard investigations and respective measures imposed (DS414, DS437, DS449, DS454, DS468, DS471, DS473, DS480, DS488, DS490, DS496);
3) bans on exports (DS431, DS432, DS433, DS508, DS509);
4) intellectual property rights (DS441, DS458, DS467);
1 Executive Order of the President of the Russian Federation of 01.07.2016 No. 319, an amendment to the Executive Order of the President dated 01.01.2016 No. 1 "Concerning measures to ensure economic security and national interests of the Russian Federation in international cargo transit from the territory of Ukraine to the territory of Kazakhstan through the territory of the Russian Federation".
2 See Bayeva M. Trade disputes within the WTO framework, to which Russia is a party, and the settlement mechanism // Russian Foreign Economic Bulletin. 2014, No. 3. PP. 75-90.
5) subsidies (including tax and other allowances (D502)) (DS456, DS472, DS487, DS497, DS489);
6) tariffs (DS492).
Note that from time to time some technically different disputes are linked by the same alleged restriction/violation by the respondent. An example is disputes on Export Duties on Certain Raw Materials initiated against China by the United States (DS508) and the European Union (DS509), which Russia joined in 2016.
DS484: Indonesia — Measures Concerning the Importation of Chicken Meat and Chicken Products (complaint by Brazil)
On October 16, 2014, Brazil requested consultations with Indonesia concerning certain measures imposed by Indonesia on the importation of meat from fowls of the species Gallus domesticus and products from fowls of the species Gallus domesticus1. In particular, this refers to the nonrecognition of the Brasil sanitary certificate, the imposition of non-automatic import licensing regime, the need for pre-approval of the importation of goods at issue by the Indonesian Ministry of Agriculture, as well as measures regarding the pricing policy and administration of imports. Russia's participation in this dispute is governed by its interest in how to apply sanitary and phytosanitary measures and technical regulation measures in conformity with the WTO rules and regulations, because the European Union filed a complaint against Russia on measures on the importation of live pigs, pork and other pig products from the European Union (DS475). This dispute is pending before the Appellate Body to which both parties filed an appeal. Additionally, note that Russia do not export chicken meat and chicken products to Indonesia, which may be related to the foregoing Indonesia's restrictions on imports, and if the restrictions are lifted or amended, it may result in sighing respective contracts.2
On October 15, 2015, Brazil requested the establishment of a panel. On its meeting on December 3, 2015, the DSB established a panel. On February 22, 2016, Brazil requested the Director-General to compose the panel. On March 3, 2016, the Director-General composed the panel. This dispute is pending at the panel stage, the final report is expected to be issued early in April 2017.
DS495: Korea — Import Bans, and Testing and Certification Requirements for Radionuclides (complaint by Japan)
On May 21, 2015, Japan requested consultations with Korea regarding measures adopted subsequent to the accident at the Fukushima Daiichi nuclear power plant in March 2011.3 Korea's measures include import bans on certain food products, additional testing and certification requirements regarding the presence of certain radionuclides, a number of alleged omissions concerning transparency obligations under the Agreement on the Application of Sanitary and Phytosanitary Measures.
Russia reserved its third-party rights because Russia imposed a ban on fish imports from Japan subsequent to the accident at the Fukushima Daiichi nuclear power plant. Russia's Federal Service for Veterinary and Phytosanitary Surveillance lifted the ban only in the summer of 2015. This dispute is of interest to Russia from the procedural perspective, and the practice of participating therein is useful to the extent that Russia can better understand the rules of the application of sanitary and phytosanitary measures pursuant to the WTO regulations.
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds484_e.htm
2 UN COMTRADE database // http://comtrade.un.org/
3 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds495_e.htm
Since this dispute failed to be settled through consultations, Japan requested on August 20, 2015 the establishment of a panel. At its meeting on September 28, 2015, the DSB established a panel. On January 27, 2016, Japan requested the Director-General to compose the panel. On February 8, 2016, the Director-General composed a panel. The dispute between Japan and Korea is pending at the panel stage, and the final report is expected to be issued in June 2017.
DS437: United States - Countervailing Duty Measures on Certain Products from China (complaint by China)
On May 25, 2012, China requested consultations with the United States concerning the imposition of countervailing duty measures by the United States on certain products from China.1 China challenges various aspects of certain identified countervailing duty investigations and final determinations that led to the imposition of countervailing duties. China also challenges, the US Department of Commerce incorrectly determined, or did not have a sufficient basis to determine, that certain State-owned enterprises (SOEs) are "public bodies" which confer equivalent subsidies through their sales of inputs to downstream producers, and conduct countervailing duty investigations in violation of the WTO rules.
Russia's interest in participating in this dispute is governed not only by its substantial trade interest in industries at issue (iron and steel industry), but also the practice of participating in disputes concerning countervailing measures in pursuit of better understanding the application of the respective provisions of the Agreement on Subsidies and Countervailing Measures.
On August 20, 2012, China requested the establishment of a panel. At its meeting on September 28, 2012, the DSB established a panel. On July 14, 2014, the panel report was circulated to Members. In late August both parties filed an appeal to the Appellate Body. At its meeting on 16 January 2015, the DSB adopted the Appellate Body report and the panel report, with recommendations to bring the measures into compliance. On October 9, 2015, the Award of the Arbitrator was circulated to Members. The Arbitrator determined the reasonable period of time as 14 months, 16 days. The reasonable period of time will thus expire on April 1, 2016.
On April 15, 2016, China and the United States informed the DSB of Agreed Procedures under Article 21 (Surveillance of Implementation of Recommendations and Rulings) and Article 22 (Compensation and the Suspension of Concessions) of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU).
On May 13, 2016, China requested consultations pursuant to Article 21.5 of the DSU (Surveillance of Implementation of Recommendations and Rulings), in connection with the United States' alleged failure to implement the recommendations and rulings of the DSB in this dispute. On July 8, 2016, China requested, pursuant to Article 21.5 of the DSU, the establishment of a compliance panel. At its meeting on July 21, 2016, the DSB agreed to refer to the original Panel. On October 5, 2016, the Director-General composed the panel. Australia, Canada, the European Union, India, Japan. Korea, Vietnam and the Russian Federation reserved their third party rights in the implementation assessment proceedings.
Russia's interest in participating in this dispute is governed not only by its substantial trade interest in industries at issue (iron and steel industry), but also the practice of participating in disputes concerning countervailing measures in pursuit of better understanding the application of the respective articles and terms of the Agreement on Subsidies and Countervailing
Measures, including the assessment of respondent's implementation of the DSB recommendations in accordance with the findings of the proceedings on the situation at issue.
DS454: China — Measures Imposing Anti-Dumping Duties on High-Performance Stainless Steel Seamless Tubes ("HP-SSST") from Japan (complaint by Japan)
On December 20, 2012, Japan requested consultations with China concerning measures imposing anti-dumping duties on high-performance stainless steel seamless tubes ("HP-SSST") from Japan.1 Japan challenges that China has violated the WTO rules and regulations while determining the injury, providing tye evidence, commencing and carrying out the investigations, issuing a public notice and justifying the decisions made.
This dispute is important for Russia because China imposed anti-dumping measures on certain Russian products (predominantly chemical products). Additionally, Russia is interested in anti-dumping disputes from the procedural perspective ("energy pricing" practices at issue in the European Union (DS474 and DS494) and Ukraine (DS493), "zeroing" practice in the United States (DS471)).
On April 11, 2013, Japan requested the establishment of a panel. At its meeting on May 24, 2013, the DSB established a panel. On February 13, 2015, the panel report was circulated to Members. On 20 May 2015, Japan notified the DSB of its decision to appeal to the Appellate Body certain issues of law and legal interpretation in the panel report. On May 26, 2015, China also notified the DSB of its decision to appeal to the Appellate Body certain issues of law and legal interpretation in the panel report. On October 14, 2015, the Appellate Body report was circulated to Members. At its meeting on October 28, 2015, the DSB adopted the Appellate Body and panel reports, as modified by the Appellate Body, recommending China to bring its measures into compliance with the WTO rules and regulations.
On February 19, 2016, Japan and China informed the DSB that they had agreed that the reasonable period of time for China to implement the DSB recommendations and rulings shall be 9 months and 25 days from the date of adoption of the Appellate Body and panel reports. Accordingly, the reasonable period of time is set to expire on August 22, 2016.
Should China fail to report on the implementation of the DSB recommendations, then Japan may request for implementation assessment proceedings. Note, however, that China seems to be very much inclined to implement the DSB rulings, except one of the 13 disputes that reached this stage, to which China is acting as respondent, when the complainant initiated implementation assessment proceedings.
DS471: United States — Certain Methodologies and their Application to Anti-Dumping Proceedings Involving China (complaint by China)
On December 3, 2013, China requested consultations with the United States regarding the use of zeroing methodology at issue in anti-dumping investigations involving Chinese products. While using the methodology, the weighted average-to-transaction, which is higher or equal to the normal value, is zeroed, as a result of which such transactions are excluded from the determination of the margin of dumping, thus making its value higher than normal. China claims that the zeroing methodology is inconsistent with the articles of the Anti-Dumping Agreement, in particular Determination of Dumping, Evidence, Imposition and Collection of Anti-Dumping Duties.
On February 13, 2014, China requested the establishment of a panel. At its meeting on March 26, 2014, the DSB established a panel. On October 19, 2016, the panel report was
circulated to Members. Note that overall the Panel upheld China's complaints despite the fact that some of the Chinese claims were rejected. In particular, the Panel upheld China's claims that the United States Department of Commerce (USDOC) acted inconsistently with Article 2.4.2 (Determination of Dumping) of the Anti-Dumping Agreement by using the zeroing methodology.
Till late 2016, both parties may appeal the Panel's ruling. Presumably, it is highly likely that the parties will appeal the panel report.
DS473: European Union — Anti-Dumping Measures on Biodiesel from Argentina (complaint by Argentina)
On December 19, 2013, Argentina requested consultations with the European Union regarding Basic Regulation No. 1225/2009 of November 30, 2009 and anti-dumping investigations, as well as the investigation underlying anti-dumping measures of the European Union against biodiesel, including biodiesel from Argentina.1 Argentina claims that the antidumping investigations and the temporal and final anti-dumping measures of the European Union on biodiesel from Argentina were carried out and imposed in an inconsistent manner; in particular, the determination of dumping and of injury, the introduction and collection of antidumping duties, etc. were subject to violation. Argentina challenges, among other things, the method of "adjustment of costs" that the European Union used while carrying out the antidumping investigations.
On March 13, 2014, Argentina requested the establishment of a panel. At its meeting on April 25, 2014, the DSB established a panel. On February 15,2015, the panel was composed. On March 29, 2016, the panel report was circulated to Members.
Acting as third participant to the dispute, Russia presented arguments that are similar to Russia's complaints with regard to the method of adjustment of costs that the European Union used while conducting anti-dumping investigations and establishing anti-dumping duties (see disputes DS474 and DS494 to which Russia is acting as complainant against the European Union on similar issues). Russia noted, among other things, that the amendments to Article 2(3) and 2(5) of the Basic Regulation were made at the time when Russia gained the 'market economy status' within the WTO in 2002. According to Russia, the amendments were made to allow the European Union to use data on other markets, rather than on the country of origin, to establish the normal value. In particular, the amendments to Article 2(5) of the Basic Regulation entitled the European Union to adjust the costs recognized in the documents of producers/exporters and to apply such costs in accordance with "the information on other representative markets". Russia claims that the practice of adjustment of costs is inconsistent with the terms of WTO. The data, under Article 2.2.1.1 (Determination of Dumping) of the Anti-Dumping Agreement, must show the costs associated with the production and sale of products under investigation. Russia also claims that the concept of dumping, as defined in the Anti-Dumping Agreement, cannot be applied to prices of manufacturing resources.
On May 20, 2016, the European Union notified the DSB of its decision to appeal to the Appellate Body certain issues of law and legal interpretation in the panel report. On May 25, 2016, Argentina notified the DSB of its decision to cross-appeal. On October 6, 2016, the Appellate Body report was circulated to Members. The Appellate Body upheld the Panel's finding that the European Union acted inconsistently with Article 2.2.1.1 (Determination of
Dumping) of the Anti-Dumping Agreement by failing to establish the cost biodiesel production according to the data stored by Argentinean producers.
The Appellate Body upheld the Panel's finding that the European Union acted inconsistently with Article 2.2 (Determination of Dumping) of the Anti-Dumping Agreement and Article VI:1(b)(ii) (Anti-Dumping and Countervailing Duties) of the GATT 1994, because the European Union failed to use the cost of production in Argentina while constructing the normal value of biodiesel.
The Appellate Body upheld the Panel's finding that the European Union acted inconsistently with Article 9.3 (Imposition and Collection of Anti-Dumping Duties) of the Anti-Dumping Agreement and Article VI: 2 (Anti-Dumping and Countervailing Duties) of the GATT 1994 by imposing anti-dumping duties in excess of the margin of dumping, which was proved by Argentina's hard evidence.
The Appellate Body upheld the Panel's rejection of Argentina's claims with regard to four factors other than dumped imported allegedly causing injury to the domestic industry, namely the domestic industry's overcapacity, the imports of the investigated product made by the domestic industry, the double-counting regimes of certain EU member States, and the lack of vertical integration of and access to raw material of the EU domestic industry. Argentina claims that the European Union failed to appropriately assess the injury caused by these factors other than dumped imports and to separate and distinguish that injury from the injury caused by the allegedly dumped imports. The Panel rejected Argentina's claim as it concerned each of the four "other factors".
The Appellate Body upheld the Panel's finding that Argentina had not established that the second subparagraph of Article 2(5) of the Basic Regulation is inconsistent "as such" with Article 2.2.1.1 and Article 2.2. (Determination of Dumping) of the Anti-Dumping Agreement. Argentina claims that the European Union allows its member states to reject or adjust the cost data of the producers/exporters as included in their records when those costs reflect prices which are "abnormally or artificially low" because they are affected by an alleged distortion. The Panel and the Appellate Body rejected this.
At its meeting on October 26, 2016, the DSB adopted the Appellate Body report and the panel report, recommending to bring the measures into compliance. Interestingly, the practice of "adjustment" of costs in the European Union under Article 2(5) of the Basic Regulation was not recognized inconsistent with the WTO rules and regulations, although violations thereof were detected in the EU anti-dumping investigations and measures on biodiesel from Argentina. A similar ruling should be expected in the disputes initiated by Russia against the European Union (DS474 and DS494), as well as Ukraine (DS493).
DS441, DS458, DS467: Australia - Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging (DS441 (complaint by the Dominican Republic), (DS458 (complaint by Cuba), DS467(complaint by Indonesia))
On July 18, 2012, the Dominican Republic1, on May 3, 2013, Cuba2, and on September 20, 2013, Indonesia3 requested consultations with Australia regarding Australia's Tobacco Plain Packaging Regulations, which, according to the complainants, is inconsistent with the WTO rules and regulations concerning intellectual property rights.
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds441_e.htm
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds458_e.htm
3 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds467_e.htm
The panel for this dispute was established as early as in late April 2014, however, the panel proceedings have been underway for more than two years. On June 29, 2016, the Chairperson of the Panel informed the DSB that due to the complexity of the dispute, the Panel expected to issue its final report to the parties not before the end of 2016.
This dispute is of interest to Russia because it concerns complex system-wide issues regarding the protection of intellectual property rights pursuant to the WTO rules and regulations, because many of the third participants thereto believe that the Australian regulations should be disputed, otherwise a negative precedent may be created and then followed by other countries. Russia may support Australia in the dispute because Russia has adopted antismoking laws, and a respective antismoking policy is in effect in the country.
DS456: Indian — Certain Measures Relating to Solar Cells and Solar Modules (complaint by the United States)
In February 2013, the United States requested consultations with India concerning certain measures of India relating to domestic content requirements (DCR) under the Jawaharlal Nehru National Solar Mission ("NSM") for solar cells and solar modules.1 In fact, Indian state-owned energy companies are not allowed (since 2011) to employ foreign-made components, including solar cells. The United States claims that these measures are inconsistent with the national treatment principle because they accord "less favorable treatment" to imported products than to domestic ones, as well as constitute prohibited subsidies in the case of using domestic rather than imported products.
On April 14, 2014, the United States requested the establishment of a panel. At its meeting on May 23, 2014, the DSB established a panel. The panel was composed within 4 months of the panel establishment date. On February 24, 2016, the panel report was circulated to Members.
By and large, the Panel upheld the US claims by finding that the DCR measures do accord "less favorable treatment" within the meaning of that provision, which is inconsistent with Article III:4 (National Treatment on Internal Taxation and Regulation) of the GATT 1994. With reference to the Appellate Body's report concerning the dispute initiated by the European Union against Canada regarding the Measures Relating to the Feed-in Tariff Program (DS426)2, the Panel found that the DCR measures for solar cells and solar modules are not justified as the procurement by governmental agencies of products purchased for governmental purposes under Article III:8(a) (National Treatment on Internal Taxation and Regulation) of the GATT 1994. In particular, the Panel found that the electricity purchased by the government is not in a "competitive relationship" with the solar cells and modules subject to discrimination under the DCR measures. The Panel therefore found that India failed to demonstrate that the challenged measures are justified under Article XX of the GATT 1994.
On April 20, 2016, India notified the DSB of its decision to appeal to the Appellate Body certain issues of law and legal interpretation in the panel report. On September 16, 2016, the Appellate Body report was circulated to Members. By and large, The Appellate Body upheld each of the Panel conclusions, with minor corrections, appealed by India. At its meeting on 14 October 2016, the DSB adopted the Appellate Body report and the panel report and recommended to bring the measures into compliance.
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds456_e.htm
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds426_e.htm
The DSB therefore ruled that India acted inconsistently with the world trade rules by imposing the measures relating to domestic content requirements for solar cells and solar modules.
This dispute is of importance for Russia not only from the perspective of having the opportunity to ramp up Russia's exports of the products at issue to India as soon as the restrictions are lifted, given that exports of these products to India account for about 5% of total Russia's exports of these goods.1 Additionally, considering high importance of developing alternative types of energy in Russia, one should consider the domestic content of products in manufacturing, as well as subsidies that may be treated as inconsistent with the WTO rules and regulations.
DS487: United States — Conditional Tax Incentives for Large Civil Aircraft (complaint by the European Union)
On December 19, 2014, the European Union requested consultations with the United States with respect to conditional tax incentives established by the State of Washington in relation to the development, manufacture, and sale of large civil aircraft. 2
In November 2013, the United States broadened largely the scope of aerospace tax allowances in order to encourage the Boeing Company to manufacture new models of large civil aircraft 777X in the State of Washington. The company was granted extra subsidies to the tune of USD 1bn, including while using components manufactured in the State of Washington. The European Union alleges that these measures constitute a type of the subsidies prohibited in the WTO.
On February 12, 2015, the European Union requested the establishment of a panel. At its meeting on February 23, 2015, the DSB established a panel. The panel was composed within 2 months of the panel establishment date. On November 28, 2016, the panel report was circulated to Members.
The Panel concluded that all the aerospace tax measures at issue constitute de facto subsidies under Article 1 (Definition of a Subsidy) of the Agreement on Subsidies and Countervailing Measures.
The Panel concluded that the European Union had not demonstrated that, acting together, the First Siting Provision and the Second Siting Provision make the challenged aerospace tax measures de jure contingent upon the use of domestic over imported goods. However, the Panel upheld the European Union that there are de facto amendments to aerospace taxation contingent upon the use of domestic over imported goods. The Panel found that the reduced business and occupation tax rate for the manufacturing or sale of commercial airplanes under the 777X program) is inconsistent with Article 3 (Prohibition) of the Agreement on Subsidies and Countervailing Measures.
The United States and the European Union may within about 2 months appeal the Panel's ruling, which is very likely to happen.
This dispute is of interest to Russia from the perspective of domestic content in manufacturing, as well as tax allowances that may lead to specific subsidies and may be treated as inconsistent with the WTO rules and regulations.
DS489: China — Measures Related to Demonstration Bases and Common Service Platforms Programs (complaint by the United States)
1 UN COMTRADE database // http://comtrade.un.org/
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds487_e.htm
On February 11, 2015, the United States requested consultations with China with regard to certain measures providing subsidies contingent upon export performance to enterprises in several industries in China.1 This dispute concerned China's programs - Transformation of International Trade and Modernization of Demonstration Bases (hereinafter - the Demonstration Bases) and Common Service Platforms - which, according to the US allegations, resulted in export subsidies by the use of the Common Service Platforms for free or at a discount, or through grants in cash.
On April 14, 2016, China and the United States informed the DSB that they had reached an agreement in relation to this dispute in the form of a Memorandum of Understanding.
The dispute is of interest to Russia to the extent that it was settled in an amicable manner, because the way it was settled may have a certain effect on manufacturers, exporters and consumers in Russia. In this context, there are industries that may be most sensitive to Russia, namely manufacture of textiles, agricultural industry, manufacture of medical products, consumer industry, special-purpose chemical engineering, manufacture of metal products and construction materials.
DS502: Columbia — Measures Concerning Imported Spirits (complaint by the European Union)
On January 13, 2016, the European Union requested consultations with Colombia regarding certain measures in relation to the treatment that Colombia accords at national and departmental level to imported alcoholic beverages. These measures allegedly adversely affect exports of spirits classified under HS 22.08 from the European Union to Colombia.2 The dispute concerns discriminatory, according to the EU allegations, taxation on imports of alcoholic beverages. Columbia is divided into 32 departments whose regional governments often own producers of rum and vodka located on their territory, as well as they control sales of hard liquids on their territory. Under the Columbian fiscal treatment, the consumption of alcoholic beverages are subject to the national excise duty, except the application of the so-called "fiscal monopoly" on alcoholic beverages at departments or other regional and local areas. In return, the departments collect duties associated with their fiscal monopoly. The size of both taxes and duties is contingent upon the strength of alcoholic beverages, with a higher tax rate on alcoholic beverages of more than 35% ABV. Furthermore, there are departments where domestically produced alcoholic beverages that aim to stimulate sales are subject to tax exemption, whereas imported alcoholic beverages are not subject to a similar tax exemption.
Additionally, the departments impose certain requirements for products at issue, which Columbia applies in a manner, according to the EU allegations, inconsistent with the terms provided for by the GATT 1994, namely the requirement for imports of alcoholic beverages to a department, which they normally receive upon investigation of economic and financial feasibility, the requirement for the insurance policy to an contract, minimum quotas and minimum prices, etc. For example, departments that import, produce or distribute alcoholic beverages are required to affix excise tax stamps on imported alcoholic beverages, thus ensuring that internal taxes and duties have been paid. The requirement is not applied to alcoholic beverages of similar type that are produced in the department.
Therefore, Columbia's internal taxes and duties on imported alcoholic beverages are higher than on domestically produced alcoholic beverages. While protecting domestic manufacturers, Columbia acts inconsistently with the principles of National Treatment on Internal Taxation
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds489_e.htm
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds502_e.htm
and Regulation (Article III of the GATT 1994). The European Union also claims that Columbia acted inconsistently with the rule of administering in a uniform, impartial and reasonable manner all its laws, regulations, decisions and rulings of the kind described in Article X:3(a) (Publication and Administration of Trade Regulations) of the GATT 1994.
Additionally, the foregoing measures prevent EU exporters enjoy the benefits offered by the free-trade zone established between the European Union and Columbia in 2013, because Columbia fails to meet the requirement for taking such reasonable measures as may be available to it to ensure observance of the provisions of the GATT 1994 (Article XXIV:12 (Territorial Application - Frontier Traffic - Customs Unions and Free-trade Areas)) by the regional and local governments and authorities within its territories.
Since the dispute between the European Union and Columbia failed to be settled through consultations, the European Union requested on August 22, 2016 the establishment of a panel. At its meeting on September 26, 2016, the DSB established a panel. The dispute is currently at the panel composition stage.
Note that in 2012 the European Union (DS396)1 and the United States (DS403)2 initiated similar disputes against Philippines. The DSB ruled that Philippines' excise duties on imported strong alcoholic beverages are discriminatory and Philippines must bring its measures into compliance with the WTO rules and regulations.
As regard to Russia's participation in the dispute, note that Russia's exports of alcoholic beverages to Columbia were extremely small in terms of volume in 2013 and 2014, as well as they were zero in 2015. This dispute is supposedly of interest to Russia from the perspective of entering new markets, because Russia is listed among the major exporters of the products at issue (under HS 22.08). Additionally, this dispute may be useful to Russia from the perspective of gaining experience in the settlement of disputes regarding taxation, because in 2013 the European Union (DS462)3 and Japan (DS463)4 initiated disputes against Russia on taxation (the so-called "recycling fee"), which are still pending despite the discriminatory component have been eliminated by Russia.
DS508: China—Export Duties on Certain Raw Materials (complaint by the United States), DS509: China — Duties and other Measures concerning the Exportation of Certain Raw Materials (complaint by the European Union)
On July 13, 2016, the United States requested consultations with China regarding China's export duties on various forms of antimony, cobalt, copper, graphite, lead, magnesia, talc, tantalum, and tin.5 Additionally, on July 19, 2016, the European Union requested consultations with China regarding China's duties and other alleged restrictions on the export of various forms of antimony, chromium, cobalt, copper, graphite, indium, lead, magnesia, talc, tantalum and tin.
On July 19, 2016, the European Union requested consultations with China regarding China's duties and other alleged restrictions on the export of various forms of antimony, chromium, cobalt, copper, graphite, indium, lead, magnesia, talc, tantalum and tin.6 China also imposes
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds396_e.htm
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds403_e.htm
3 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds462_e.htm
4 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds463_e.htm
5 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds508_e.htm
6 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds509_e.htm
restrictions on the trade-related rights of producers seeking to export such products, thereby treating foreign equity companies in a less favorable manner than domestic companies.
The complainants claim, as with disputes against China regarding rare earth metals (DS431, DS432, DS433), that China acts inconsistently with the terms and provisions of the WTO (Article XI:1 (General Elimination of Quantitative Restrictions) of the GATT 1994), and China's measures are not uniform, impartial and reasonable (Article X:3(a) of the GATT 1994). Additionally, the complainants claim that China has failed to justify that the measures can be treated as "General Exceptions" (Article XX of the GATT 1994) and constitute an excuse for failing to honor China's commitments to eliminate export duties pursuant to the China's Protocol on the Accession to the WTO.
Since the dispute failed to be settled through consultations, on 13 October 2016, the United States requested the establishment of a panel. At its meeting on November 8, 2016, the DSB established a panel. On October 26, 2016, the European Union requested the establishment of a panel. However, at its meeting on November 8, 2016, the DSB deferred the establishment of a panel. These disputes concerning the same China's measures on the exportation of raw materials may expectedly be considered by a common panel.
Russia participated in the foregoing disputes as third participant because they are of substantial trade interest to Russia. Imports of these China's raw materials that are used by the Russian industry account for about 10% of total Russia imports and about 2% of total China exports of such raw materials. This is not the first time that Russia participated in disputes initiated against China regarding restricted exports of raw materials (see above disputes regarding rare earth metals).
* * *
Russia continues applying the WTO dispute settlement mechanism. In 2016, Russia was involved in four new WTO disputes as respondent (one dispute) and as third participant (three disputes).
Only one of the disputes initiated against Russia in the period between 2012 and 2016 is pending at the panel stage. The panel report on the dispute against the European Union regarding the "Third Energy Package" (DS476) is expected to be issued in May 2017.
As regard trade disputes to which Russia is respondent, panel reports were issued for two of the seven disputes in 2016. In the dispute regarding tariffs on the importation of certain products that are lifted in excess of the bound rate Russia was predictably recommended to bring its tariffs into compliance with the WTO treaty commitments, and Russia has almost complied with the recommendations. As to the dispute regarding the measures on the importation of live pigs, pork, pork products, Russia and the European Union appealed the Panel's ruling in 2016. The dispute initiated by the European Union against Russia regarding anti-dumping measures on light commercial vehicles is pending before the Panel. The two disputes initiated in 2013 by the European Union/European Union and Japan against Russia regarding the "recycling fee" are still pending at the stage of panel composition and consultations. The two disputes initiated by Ukraine in 2015-2016 against Russia are pending at the stage of consultations.
In 2016, panel reports and, in some instances, Appellate Body's reports were issued in four disputes to which Russia reserved its rights as third party. Of most importance for Russia is the dispute initiated by Argentina against the European Union regarding anti-dumping measures on biodiesel, because Russia's complaints against the European Union are similar Argentina's
complaints (DS474, DS494). Note that the Panel rejected Argentina's allegations that the provisions at issue of the relevant Basic Regulation regarding the method of "adjustment of costs" that the European Union used while carrying out anti-dumping investigations are inconsistent "as such" with the WTO rules and regulations.
Most of the WTO disputes to which Russia is complainant or respondent involve claims against/by the European Union and Ukraine. Russia, as complainant, is, above all, interested in anti-dumping investigations and anti-dumping measures, especially in iron and steel and chemical industries. Most of WTO members' complaints against Russia cover the following issues: technical barriers to trade, sanitary and phytosanitary measures, anti-dumping measures, trade-related investment measures, tariffs, measures on transit.
Russia, as third participant, tends to participate in disputes regarding goods manufactured by such industries as iron and steel, agriculture, automobile and aircraft. Russia's participation as third party are often associated with not only substantial trade interests, but also the practice of participating in disputes, as well as Russia is interested in the application of the WTO rules and regulations.
It is of outmost importance for Russia to maintain the appropriate position and tactics in WTO disputes to develop mutual trade relations with other WTO members in concordance with the WTO rules and regulations while upholding its interests.
Appendix
WTO trade disputes to which Russia is the party (complainant or respondent)
Dispute Particulars of the claim Current stage
1 2 3
As complainant
DS474: European Union - Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia (23.12.20131) Regarding "cost adjustment" methodologies used by the EU for the calculation of dumping margins in anti-dumping investigations and reviews (European Union rejected cost and price information of producers and exporters in the country of origin (Russia)). The effect of such rejection of cost and price data on the determination of dumping margins and injury caused by dumped imports. Panel composition stage (22.07.2014)
DS476: European Union and its Member States - Certain Measures Relating to the Energy Sector (30.04.2014) Regarding the EU "Third Energy Package" under which gas producers may not own trunk pipelines located on the EU territory. If operating companies are foreign owned/controlled, they must be subject to a special certification procedure: they must meet extra requirements. Panel stage (07.03.2016)
DS493: Ukraine - Anti-Dumping Measures on Ammonium Nitrate from Russia (07.05.2015) Ukraine, while conducting anti-dumping investigations regarding ammonium nitrate, rejected electric power prices offered by Russian producers and used instead prices of third countries, that is, it used the so-called "cost adjustment". Panel composition stage (22.04.2016)
DS494: European Union - Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia - (Second complaint) (07.05.2015) The European Union, while conducting anti-dumping investigations regarding welded pipes and ammonium nitrate from Russia, used prices of third countries (cost adjustment) to determine dumping margins and rejected cost and price information of producers and exporters in the country of origin (Russia). Consultations (07.05.2015)
Cont'd
1 2 3
As respondent
DS462: Russian Federation - Recycling Fee on Motor Vehicles (complaint by the European Union, 09.07.2013) The Russian Federation imposes measures relating to a charge, the so called "recycling fee", imposed on motor vehicles, whereas domestically manufactured motor vehicles are, under specific conditions, are exempted from the foregoing fee. The structure of Russia's methodology for determining the fee amount has a detrimental impact on imported vehicles as compared with relevant domestic vehicles, because the fee is progressive and differentiates between brand new and secondhand motor vehicles. Panel composition stage (25.11.2013)
DS463: Russian Federation - Recycling Fee on Motor Vehicles (complaint by Japan, 24.07.2013) Russian Federation imposes extra charges on imported motor vehicles (recycling fee), whereas domestically manufactured motor vehicles are, under specific conditions, are exempted from extra charges. Consultations (24.07.2013)
DS475: Russian Federation - Measures on the Importation of Live Pigs, Pork and Other Pig Products from the European Union (complaint by the European Union, 08.04.2014) Russia's EU-wide ban on the importation of pork and other pig products from Poland and Lithuania constitutes a disproportional measure, because only a few insignificant cases of African swine fever (ASF) were confirmed with wild boars near the border with Belarus and promptly contained. The European Union challenges Russia's ASF regionalization of the EU territory. Both parties have appealed the panel report. Работа Appellate Body (23.09.2016)
DS479: Russian Federation - AntiDumping Duties on Light Commercial Vehicles from Germany and Italy (complaint by the European Union, 21.05.2014) Russia's anti-dumping investigations and determination of dumping margins on light commercial vehicle inconsistent with the WTO rules; in particular Determination of Dumping, Determination of Injury, Evidence, Definition of Domestic Industry, Public Notice and Explanation of Determinations. Panel stage (18.12.2014)
DS485: Russian Federation - Tariff Treatment of Certain Agricultural and Manufacturing Products (complaint by the European Union, 31.10.2014) Russia's duty rates on goods such as paper and paperboard, equal to 15% or 10%, were applied in excess of the bound rate, which is 5%. When the customs value was below the set value, customs duties on certain goods were charged in excess of the bound rate. DSB adopted the panel report and recommended to bring the measures into compliance (26.09.2016)
DS499: Russian Federation - Measures affecting the importation of railway equipment and parts thereof (complaint by Ukraine, 21.10.2015) The Russian Federation has suspended conformance certificates issued to manufactures railway equipment and railway rolling stock until new technical regulations are introduced. The Russian Federation has rejected applications for new certificates. Consultations (21.10.2015)
DS512: Russian Federation - Measures Concerning Traffic in Transit (complaint by Ukraine, 14.09.2016) The Russian Federation imposes multiple restrictions on traffic in transit from Ukraine through the Russian Federation to third countries (in Central/Eastern Asia and Caucasus). The Russian Federation introduced a requirement for Ukraine to ensure that international railway and motor cargo traffic in transit from Ukraine to the Republic of Kazakhstan and the Republic of Kyrgyzstan through the Russian Federation go strictly from the Republic of Belarus, provided that certain conditions are met. Additionally, a ban was imposed on goods in transit with other than zero tariff rates in conformity with the EEU unified customs tariff, as well as a ban was imposed on the goods in transit covered by Russia's sanctions. Consultations (14.09.2016)
Source: own compilation based on the data posted on the official WTO website: https://www.wto.org/english/ tratop_e/dispu_e/dispu_by_country_e.htm
