15Section 4. The real sector of the economy
4.1. The macrostructure of production1
4.1.1. The dynamics of the Russian economy in 2017: internal and external demand
The economic situation in 2017 was characterized by a gradual recovery of positive dynamics. GDP in 2017 constituted RUB 92.08 trillion up 1.5 percent compared to the previous year.
First signed of business revival were observed in H2 2016 driven by price growth on hydrocarbons and strengthening of the ruble affected the dynamic and structure of the external trade turnover and domestic production. However, instability of factors both stimulating and curbing economic development provoked changes of quarter-by-quarter GDP dynamics.
Year-on-year and quarter-on-quarter dynamics of macroeconomic indicators for 2016-2017 demonstrate gradual relaxation of the recession depth with regards to all major macroeconomic parameters brought about by a notable drop in the rate of inflation, changes in the structure of production costs resulting from the ruble's depreciation, and renewal of the external trade turnover growth. The share of net exports in GDP in current prices in H1 2017 rose to 6.6 percent, and at the year-end constituted 5.5 percent up 0.2 percentage point against last year.
Amid relatively favorable changes in external economic conditions, renewal of the domestic demand was the main prerequisite for meeting biennial recession. The structure of home demand seen in 2017 was characterized by growing volume of fixed investment and their increased contribution to GDP dynamics. In 2017, fixed investment increment constituted 4.4 percent, household final consumption expenditure up 3.4 percent during 2017. However, one should bear in mind that the dynamics of these indicators was markedly affected by recession in the construction/investment complex and shrinkage of consumer markets during previous three years. In 2017, household final consumption expenditure came to 92.8 percent, fixed investment-92.3 percent, and GDP-99.5 percent against 2013.
Behind the renewal of the Russian economy upward dynamics in 2017 was overcoming of economic recession practically in all basic types of economic activity. In comparison with 2016, increment of gross value added in industrial production constituted 0.8 percent, commerce -3.1 percent, and transportation - 3.7 percent. In 2017, agricultural contribution to gross value added rose amid production growth by 1.2 percent compared to the previous year.
1 This section is written by Olga Izryadnova, the Gaidar Institute, IAES-RANEPA.
Against the backdrop of gradual improvement of the investment climate the snail-paced adaptation of the construction complex to the changes in process, market structure of investment goods and against the background of borrowing on domestic and external capital markets was negatively affecting economic recovery. The factors behind the restriction of demand on construction works and services were retention of high bank interest rates, decline of both economic efficiency and profits of enterprises and organizations, contraction of the households' investment activity on the housing construction market amid decrease of personal income. Construction scope of works in 2017 constituted 98.8 percent of the same indicator of the previous year and 90.5 percent of the 2013 level when stagnation of business activity in the construction/investment complex was observed (Table 1).
Table 1
Characteristics of main economic development factors in 2016-2017, as percent
to the same period of previous year
2016 Quarter 2017 Quarter
I | II | III | IV I II III IV
GDP 99.8 98.8 99.4 99.6 99.3 101.5 100.5 102.5 101.8 101.3
External factors
External trade turnover (calculated by the balance of payments methodology) 88.6 73.1 81.5 96.1 104.5 125.3 132.5 125.3 119.8 123.4
exports 82.5 67.1 74.2 90.1 101.9 125.3 136.5 123.4 118.8 124.2
imports 99.2 85.3 95.6 105.6 108.7 124.1 126.1 128.3 121.2 122.1
balance 60.8 48.8 50.6 64.0 91.1 127.8 154.1 113.3 121.2 128.4
Oil prices, USD/barrel 44.05 31.12 39.14 43.14 50.08 54.39 54.12 50.25 51.74 61.47
Official RUB/USD exchange rate, as of period's end 60.66 67.61 64.26 63.16 60.66 57.06 56.38 59.09 58.02 57.06
Internal factors
Investment in fixed assets 99.8 96,5 96,9 99,2 103,2 104.4 101.4 105.0 102.2 106.4
Consumer demand
Turnover of retail trade 95.4 95.0 95.1 96.1 95.4 101.2 98.4 101.0 102.1 103.0
Paid services rendered to population 99.7 99.8 99.5 100.0 100.3 100.2 100.2 100.6 100.2 100.4
Output of goods and services, by basic type of economic activity 100.5 100.3 100.3 100.6 100.8 101.4 100.6 103.8 102.1 99.5
Industry 101.3 101.1 101.5 101.0 101.7 101.0 100.1 103.8 101.4 98.3
Agriculture 104.8 103.6 103.3 105.6 105.0 102.4 100.9 100.1 105.4 99.8
Construction 97.8 97.3 95.7 97.8 99.4 98.6 95.5 97.4 100.0 99.4
Transport 101.8 101.5 101.0 102.8 101.7 105.4 105.3 109.3 105.5 101.8
Social parameters
Real disposable income 94.2 96.7 94.6 93.1 93.4 98.3 99.4 97.1 98.2 98.7
Real charged wage 100.8 99.4 100.3 101.2 101.8 103.4 101.8 103.4 103.1 105.2
Real size of allotted pension 96.6 97.2 95.6 96.2 97.1 103.6 112.0 99.9 100.7 101.6
Labor market
Number of employed 100.1 99.8 100.0 100.2 100.4 99.0 99.7 99.1 99.0 99.4
Unemployment rate 5.5 5.9 5.7 5.3 5.4 5.2 5.6 5.2 5.0 5.1
For reference
Consumer Price Index (relative to December of previous year 105.4 102.1 103.3 104.1 105.1 102.5 101.0 102.3 101.7 102.5
Price index on investment goods 103.2 99.8 102.3 103.7 103.2 103.0 99.1 101.2 103.0 103.1
Key rate (as of period's end) percent 11.00 11.0 10.5 10.0 7. 75 9.75 9.0 8.5 7.75
Labor productivity 99.7 99.0 99.4 99.4 98.9 102.8 100.8 103.4 102.6 101.2
Source: Rosstat.
The factors behind the negligible slide in GDP in 2016 were the reduction in the rate of decrease of domestic demand and the retention of net exports (calculated by the SNA methodology) in the positive territory and provided added momentum for the GDP growth in 2017.
The distinctive features of the macroeconomic situation in 2017 were determined by the unidirectional positive dynamics of external and home demand. 2014-2015 saw around 10 percent decrease of domestic demand against 2013 that was a turning point in the tree-year trend of domestic market performance. Unprecedented shrinkage in domestic demand seen in 2015-2016, which was not offset by the exports dynamic, remained the principal factor behind the decrease in the rate of development of the Russian economy in this period. Adaptation of the Russian economy to new realities was accompanied by a gradual renewal of the positive dynamic of domestic demand thus markedly determining the prospects for the Russian economy in 2017. To note, in Q1 2017, GDP positive dynamic was maintained by external demand dynamic growth and in Q2 2017 domestic demand growth was outstripping external demand growth. However, H2 2017 reported gradual decrease of domestic demand growth, which was accompanied by slowdown of domestic output and imports (Fig. 1).
110,0 108,0 106,0 104,0 102,0 100,0 98,0 96,0 94,0 92,0 90,0
II III IV
2014
I I
201
I
HI | Jf
u u I
I
I IV I II III IV 2014 20
2016
2017
V
2016 2017
Domestic demand i i External demand/export GDP
Fig. 1. GDP dynamics by component of domestic and external demand in 2012-2017, as percent to the corresponding period of the previous year
Source: based on data released by Rosstat.
Simultaneous growth in the investment and consumer markets was another significant feature of 2017. Investment bust in fixed capital at its lowest point was passed in Q2-Q3 2015 and during entire 2016, improved situation on the capital market was observed. Growth in investments in fixed capital by 4.4 percent against that a year earlier was reported in 2017 for the first time after twelve quarters of contraction. Investment activity peaked in Q2 2017. It was hard to expect significant changes in the GDP structure by components amid retention of investment share in fixed capital practically at the previous year level.
The consumer market had been very slowly recovering from the consequences of the acute crisis of 2015-2016. In 2017, personal real disposable income dropped by 1.7 percent versus 5.8 percent in 2016 and dynamic of the household final consumption expenditure went into positive territory after the two-year fall (Fig. 2).
Household final consumption expenditure Fixed investment ^^^"GDP
Fig. 2. The dynamics of investment and consumer demand 2014-2017, as percent to the corresponding period of the previous year
Source: based on data released by Rosstat.
The dynamics of domestic market was determined both by competitiveness of domestic goods and services compared to their imported analogues by price parameters and by a fall of production efficiency in non-tradable goods and services sectors compared to export oriented tradable sector of the economy. As a result, in 2016, domestic production of goods and services for the Russian domestic market dropped by 4.3 percent on the previous year. Asa result, the pace of production of goods and services for the domestic market decreased by 4.3 percent compared to 2014. Simultaneous contraction of demand on domestic and imported capital goods seen in 2014-2016 contributed to negative trends on the domestic market. The proportion of imports of goods for intermediate consumption reflected insufficient local content of main production. Growth of investment goods imports reflected increased need for renewal of upgrade and modernization of export oriented and import substitution productions. A number of additional difficulties emerged due to tightening on the global credit market, 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. Easing of imports contraction in comparison with exports contraction (according to balance of payments methodology) observed in 2016 positive affected GDP dynamics.
In Q2 2017, there was for the first time since 2014 domestic production growth of goods and services for the home market in comparison with the corresponding period of the previous year. However, on the whole for 2017-year end results, it remained in although small but negative territory.
Fig. 3. Dynamics of domestic demand by components in 2014-2017, as percent to the corresponding period of the previous year
Source: based on data released by Rosstat.
To note, change in the structure of imports due to a reduction of deliveries of consumer and intermediary goods and growth of capital goods imports markedly affected positive dynamics of domestic demand in 2017 (Table 2). This fact gave the domestic investment market a boost and provided an additional momentum to overcome the recession of domestic production.
Table 2
Structure of imports by function type (calculated by the balance of payments methodology, percent
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
2016 35.6 26.5 37.9
2017 33.6 27.5 38.9
Q1 36.8 22.8 40.4
Q2 32.0 27.8 40.2
Q3 32.6 29.0 37.4
Q4 33.6 27.5 38.9
Source: Rosstat.
One can not asses growth of capital goods imports conclusively. Amid unquestionably positive impact of imports on investment demand dynamic and on production incentives oriented towards foreign capital goods and components, renewal of the outstripping growth of imports versus exports and home demand reflected gradual depletion of the ruble's devaluation properties and the effect of import substitution. Essentially, the economy was facing the situation characteristic of 1999-2012 when insufficient production of domestic capital goods were supplemented by imports of capital goods.
By underscoring the importance of domestic demand dynamics as a major factor of the Russian economy development, one should note features of capital formation for the home consumer market. A large scale drop in imports observed in 2015-2017 determined structural changes in the domestic market: amid the contraction of consumer demand owing to a reduction of household income and ruble's depreciation, the proportion of domestically produced goods
in retail trade commodity resources increased to 65 percent in 2017, and to 77 percent 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. (Table 3).
Table 3
Structure of retail trade commodity resources in actual prices (in actual prices), percent
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
2017 100 65 35 23
Q1 100 64 36 24
Q2 100 67 33 22
Q3 100 65 35 22
Q4 100 63 33 22
Source: Rosstat.
On the whole in 2017, 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 (Fig. 4). In 2017, the share of goods and services for the domestic market constituted 72.9 percent of the total domestic production against 74.0 percent in 2016 and 76.1 percent in 2014. Increased share of goods for export was accompanied by a reduction of proportion of high-order goods, which strengthened resource dependence of the Russian economy.
The simultaneous growth of output in the tradable (100.9 percent against 2016) and non-tradable (101.9 percent) sectors of the economy was a positive factor for the renewal of the domestic market positive development in 2017 (Fig. 5). However, contribution of the socially oriented types of economic activity in 2017 contracted compared to the previous year amid increased importance of the commerce-transport and financial infrastructures.
110,0 108,0 106,0 104,0 102,0 100,0 98,0 96,0 94,0 92,0 90,0
2014 2015 2016 2017
i i Goods and services for domestic market i i Goods and services for export -Domestic production
Fig. 4. The dynamics of domestic production of goods and services, by component in 2014-2017, as percent to the corresponding period of the previous year
Source: based on data released by Rosstat. 166
n u [ 0 %o n (1
I II III IV I II III IV I II III IV I II III IV 2014 2015 2016 2017
104,0 103,0 102,0 101,0 100,0 99,0 98,0 97,0 96,0 95,0 94,0
I II III 2014
2012 2013 2014
2016 2017
Tradable goods
Non-tradable goods
Gross value added
Fig. 5. Dynamics of gross value added in tradable and non-tradable sectors of the economy in 2012-2017, as percent to the corresponding period of the previous year
Source: Rosstat.
4.1.2. The expenditure components of GDP in 2014-2017: consumer and investment demand
The structure of expenditure-based GDP is determined by the ratio between final consumption and gross capital formation. In 2016-2017, there was a decline in the share and pace of final consumption, which was caused in the main by a notable drop in household final consumption expenditure. In 2017, 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 stocks and the reduction in the share of net exports (Table 4).
Table 4
The structure of expenditure-based GDP in actual prices in 2012-2017, precent
2012 2013 2014 2015 2016 2017
Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0
including:
Final consumption expenditure 68.8 71.5 71.4 70.1 71.6 70.4
household 50.6 52.6 53.1 52.0 52.8 52.2
state government 17.8 18.5 17.9 17.7 18.5 17.8
non-profit organizations rendering services to households 0.4 0.4 0.4 0.4 0.3 0.4
Gross capital formation 24.5 23.1 22.2 21.9 23.1 24.1
gross accumulation of fixed assets 21.5 21.8 21.2 20.3 21.6 21.8
changes in circulating tangible assets resources 3.0 1.4 1.0 1.6 1.5 2.3
Net exports 6.7 5.4 6.4 8.0 5.3 5.5
Source: Rosstat.
One of the distinctive features of the Russian economy in 2015-2017 was a more pronounced drop in household final consumption expenditure than that demonstrated by Russia's GDP and investments in fixed capital. 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 2015-2017 the drop in the real personal income resulted in an almost 8.9 percent shrinkage in household final consumption expenditure relative to 2014.
Both household final consumption expenditure and the retail market were at their lowest points in Q4 2015. As the rate of inflation decreased from 12.9 percent to 5.4 percent over the course of 2016 and 2.5 percent in 2017, 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. In 2017, growth rates of household final consumption expenditure stepped in the positive territory (3.4 percent against the previous year) (Fig. 6).
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 in 2014-2016 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 deferred consumer demand became stronger, the quarterly indices of 2017 gradually began to demonstrate less prominent downward trends in the turnover of retail trade. The accumulated growth potential of consumer prices amid the drop in the real income of the population became a factor restraining the dynamics of the consumer market (Fig. 7).
105
100
95
90
85
à^r Rr
I II III IV
V I II III IV 2014
] Foodstuffs ^Z^l Non-food products [¿¿¿¿S Paid services
Turnover of retail trade
Fig. 6. The dynamics of household final consumption in 2014-2017, as percent to the corresponding period of the previous year
Source: Rosstat.
110 105 100 95 90
n
2012 2013
n*' I
Food market Food price index
20
Non-food market Non-food price index
115 110 105 100
Fig. 7. The dynamics of the turnover of retail trade and consumer prices in 2012-2017, as percent 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. In 2016-2017, there was an increase in the proportion of food products including beverages and tobacco products in the structure of retail trade turnover. 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.
In 2017, cash personal income constituted RUB 55,447.8 billion up 2.5 percent in comparison with the corresponding period of the previous year. Personal consumption of goods and services in 2017 up 5.1 percent in comparison with the previous year and constituted RUB 41,569.5 billion and personal savings down 12.8 percent. Personal income spending is differentiated by years. In 2015-2016, against the background of high deposit interest rates, continuing interest in purchasing property personal savings behavior dominated. However, two-year trend of falling living standard indicators was telling on the change in household consumer behavior. In 2016-2017, amid a weak growth of nominal personal cash income, there was a further change in proportion of personal income spending. Amid simultaneous decline in inflation, bank interest rates and personal income reported in 2017, there was a trend change -personal spending registered increased share of expenses on purchases of goods amid contraction of savings proportion in personal income to 8.1 percent against 11.2 percent in 2016.
In 2015-2016, while savings displayed an overall downward trend, there were some structural shifts resulting from an increased share of property acquisition expenditure at the level of 2.9 percent of total personal spending when they peaked 4.5 percent in 2014. In 2017, further growth of spending on current consumption amid simultaneous demand growth on consumer loans was observed in the structure of personal spending despite significant decline of inflation rates. Reduction of bank interest rates on mortgages against the backdrop of extended supply on the housing market in a wide price bracket affected personal savings behavior from H2 2017. This fact triggered growth of spending on housing and created preconditions for the development of this trend in the coming year.
Renewed trend towards growing share in gross capital formation as a percentage of GDP hitting 28.9 percent positively affected macroeconomic outlook of the last year (Table 5). The share of gross capital formation amid changes in its structure due to increased savings in stockbuilding hit 24.0 percent of GDP in 2017. However, proportion of capital formation in fixed capital remained at average levels of 2013-2014. A distinctive feature of Russia's investment model is the substantial share of savings, where a notable portion is not transformed into investments in fixed capital. In 2017, the index of investments in fixed capital as a percentage of GDP constituted 17.3% up 0.1 percentage point against indicator of the previous year.
An analysis of Russia's capital account shows that the Russian economy has been in a net creditor position for quite a long time. In 2014, capital outflow from Russia hit its 20-year high of USD 153.0 billion. In 2016 and in 2017, net capital outflow from Russia dipped to USD 19.8 billion and USD 31.1 billion, respectively manly due to banking sector transactions.
Table 5
The main indicators of the investment potential of the Russian economy in the period 2014-2017, as percent of GDP
2014 2015 2016 2017
Gross savings 28.6 29.9 29.0 29.8
Gross accumulation of fixed assets 21.2 20.3 21.4 21.7
Deposits made by individuals, as of year-end 23.4 27.9 28.3 28.3
Size of Reserve Fund, as of year-end 5.9 4.2 1.1 0
Size of National Wealth Fund, as of end of year 5.3 6.1 4.7 3.9
Investment in fixed assets 17.6 17.5 17.2 17.3
Source: Rosstat.
4.1.3. Changes in the GDP structure by income source
In the wake of falling rates of economic growth seen in 2014-2017, producer price policy was adjusted, which determined features of financial results from economic activity and profitability indicators. In January-September 2017, production profitability down 0,1 percentage point in comparison with 2016 (Table 6).
Table 6
Profitability from sold goods, products, works, and services by types of economic activity in 2012-2017, percent
2012 2013 2014 2015 2016 2017
Total in the economy 8.6 7.0 7.3 9.3 7,6 7,5
Agriculture, hunting and forestry 10.7 5.2 17.4 21.3 15,7 17,3
Fishery and fish-breeding 16.2 16.5 28.6 49.4 54,5 49,9
Mineral extraction 28.0 22.1 19.2 26.8 26,2 25,9
Processing industries 10.7 8.8 9.9 12.4 10,1 11,5
Production and distribution of electric energy, gas and water 3.9 4.4 3.7 5.5 7,1 н/д
Building construction 5.0 8.3 3.4 5.4 5,5 7,2
Wholesale and retail trade 6.7 6.5 6.1 7.1 4,8 4,6
Hotels and restaurants 5.9 6.0 4.4 5.8 4,9 7,0
Transport and communications 11.1 9.7 8.4 10.6 10,1 9,7
of these: communications 0.8 0.5 1.5 0.5 1,6 н/д
Financial activity 10.6 10.4 10.7 9.7 15,6 15,5
Real estate transactions, property lease and services 8.3 7.8 10.3 11.7 0,2 1,6
Government administration and military defense; social insurance 2.5 11.8 2.3 6.2 3,1 5,0
Education 6.6 4.8 6.2 7.0 7,0 10,4
Source: Rosstat.
Over the period 2014-2017, 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.
In 2016, producers responded to the persistent domestic demand shrinkage trend by restraining the growth of prices for their products. However, the year 2017 saw a somewhat increase of industrial producers' price rates due to the growing price index for mining and quarrying by 23.9 percent compared to December 2016. Outstripping price growth observed in the mining sector, in raw materials processing and electricity production can result in price adjustment in processing sector in the coming year.
Table 7
Price and tariff indexes in 2010-2017, December-on-December
2014 2015 2016 2017
The consumer price index 111.4 112.9 105.4 102.5
The producer price index for industrial goods, including 105.9 110.7 107.4 108.4
The price index for mining 98.4 109.8 108.5 123.9
The price index for manufacturing 108.5 111.2 107.6 104.2
The price index for producers of agricultural products 114.1 108.5 101.8 92.2
The composite index for construction material prices 107.2 110.3 103.2 103.1
The index of motor freight tariffs 100.9 111.5 105.6 109.0
Source: Rosstat.
The years 2016-2017 saw a shift in the income structure from its corporate towards personal component. In 2017, the share of wages in GDP amounted to 47.8%, rising 1.60 percentage points above the corresponding index for 2015. The proportion of total income in GDP shrank in 2016-2017 in comparison with the previous year although remained above its 2013-2014 indicators. Growth of enterprises' costs led to a reduction of profitability in economy as a whole in 2016 by 1.2 percentage points relative to 2015. In 2017, decelerated trend towards growth of prices and labor costs resulted in growing share of gross income and gross mixed incomes in GDP to 41.5 percent of GDP (Table 8).
Table 8
GDP structure by income sources in 2011-2017, as percent to total in current prices
2011 2012 2013 2014 2015 2016 2017
Gross domestic product 100 100 100 100 100 100 100
Including:
Wages of hired labor, including hidden remuneration and mixed incomes 43.8 44.3 46.2 47.2 46.2 47.9 47.8
Net taxes on production and imports 14.4 14.3 13.8 13.9 11.2 11.0 10.7
Gross profit in the economy and gross mixed incomes 41.8 41.4 40.0 38.9 41.9 41.1 41.5
Source: Rosstat.
The accelerated wage growth trend relative to that of labor productivity renewed from 2016. In the context of accumulated capital and increased level of capital-labor ratio the efficiency of labor service and fixed capital went on the rise. Miniscule dynamics of labor productivity remains one of major constraints for transition to sustainable growth (Table 9).
Table 9
Indices of the use of main production factors in 2011-2017, as percent relative to previous year
2011 2012 2013 2014 2015 2016 2017
Labor productivity 103.8 103.3 102.2 100.7 97.8 99.8 101.8
Capital-labor ratio 103.0 103.6 105.2 104.0 103.8 104.0 105.0
Fixed-asset turnover ratio 100.7 99.9 96.7 97.0 93.3 95.1 97.0
Source: Rosstat.
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. Amid projected contraction of the labor force, labor productivity becomes the main factor for production growth of goods and services. According to short-term forecast, the shortage of skilled labor and rather slow rated of technical and technological upgrade of production will affect the labor productivity dynamics.
The changes in the structure of costs and the balance of profits and losses were strongly influenced by the highly differentiated wage indices by type of economic activity. In the medium-term implementation of social commitments and the ratio of targeted groups' wages, in particular, employed in the budgetary sphere will affect wage dynamics. The highest wages, for fifteen years in a row, have been observed in mining industries, the production of oil and petroleum products, and the financial sector. Manufacturing industries have demonstrated a continuing trend towards employment restructuring through cutting non-productive jobs. As a result, labor productivity in manufacturing 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. In the wake of wage growth rates being close to labor productivity growth there will be no pressure on inflation.
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 2017 was an exceptionally low unemployment rate (calculated by the ILO methodology) of 5.2 percent. The total number of officially registered unemployed persons declined to 85.3 percent relative to 2016, and amounted to 0.9 million persons.
The employer demand for workforce registered by state employment agencies has remained above its last year's level; the tension coefficient (the number of registered unemployed individuals per 100 job vacancies) at the close of 2016 constituted 64.3 persons vs. 86.8 a year earlier. 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.
Besides, the Russian 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.
In the current situation, the weak response of the labor market, including 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 dynamics 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. Decrease of the physical quantity of output by basic types of economic activity compared to the previous year was observed in 2015. The already unstable economic development pattern has been further destabilized by the declining investment activity, turnover of retail trade, and industrial production indices. In Q2 2016, after a five-quarter-long plunge, the index of industrial production demonstrated slight growth. The economic situation in 2017 as a year earlier was positively influenced by industrial production (101.0 percent relative to 2016), agricultural produce (102.4 percent), and transport services (105.8 percent). From Q2 2017, growth of retail trade commenced (Fig. 8).
115
110
105
100
95
90
85
] Industrial production ] Construction works scope ï Agricultural products
■ 1 Turnover of retail trade 1 Freight turnover Intex of output by basic type of economic activity
Source: Rosstat.
Fig. 8. The dynamics of basic types of economic activity in 2015-2017, as percent to corresponding period of the previous year
Structural changes across the economy in 2016-2017 were determined by the increasing role of the raw materials sector and related infrastructure. In 2017, growth of mineral extraction in annual terms amounted to 2.0 percent. The hydrocarbons output cut agreement with OPEC member states notably affected in H2 2017 the dynamics of the extracting sector quarter-on-quarter 2017. Manufacturing industry indicators were highly unstable in 2017. Contraction in manufacturing sector by 0.8 percent seen in Q1 2017 changed for dynamic growth by 3.2 percent observed in Q2 2017 against corresponding period of 2016. However, it did not represent a turning point in the manufacturing sector. When taken in annual terms, the 2017 output index in manufacturing industries constituted merely 0.2 percent versus 0.5 percent a year earlier (Fig. 9).
I I Extraction of raw materials I I Manufacturing production Industry
Fig. 9. The pace of industrial production by type of economic activity in 2014-2017, as percent of the corresponding period of the previous year
Source: Rosstat.
The output volume indices in the manufacturing industry are rather significantly diversified by type of economic activity. Manifestation of crisis developments by types of economic activity speak about weakness of proper restructuring processes in the domestic business sector and low motivation to move domestic products to new competitive marketss. 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. For example, the potential of the manichine building complex was determined by national producers possesing own platforms with high localization level, engeeniaring jurisdictions and intellectual property rights. However, in the current technical level of products and weak international cooperation this fact restricted competitiveness of domestic products both on the home and foreign markets. Development of export oriented productions, foreign distribution and service systems, integration of Russian producers into global lines of production should become one of the ways of supporting machine building complex. This will be a stimulating factor for upgrading main and associated productions.
The dynamics of manufacturing sector in 2017 was determined by the growth in the chemical complex with increased output volume of competitive on external and domestic markets products, which to a large extent was a result of state and private investment growth in creation of new capacities and upgrade of existing ones. Growth in the machine building complex was determined by an increase of state orders and direct subsidies as well as renewal of demand on means of transport. Accelerated dynamics of the consumer market was determined by expanding niches for domestic goods on home market amid reduction of imports. Growth in metallurgical complex was linked with increased demand in the investment/construction complex and positive shifts seen in external environment on metals market.
Along with this production renewal recorded in high and medium-tech components of machine building complex was observed. The index for production of high-tech manufacturing types of activity in 2016 constituted 96.8 percent against the previous year and in 2017 stepped into the positive territory. The share of high-tech and knowledge-based industries in GDP in 2017 constituted 22.1 percent against 20.3 percent in 2012. Production of medicine was growing by exceptionally high rate in 2017. Market of machine building products is traditionally geared towards receptive domestic market (Table 10).
Table 10
The indexes of production by major types of manufacturing industry in 2016-2017, as percent to the previous year
2016 2017
Manufacturing industries 100.5 100.2
Production of foodstuffs 103.1 105.6
Production of beverages 101.3 99.0
Manufacture of textiles 104.6 107.1
Manufacture of clothes 107.1 103.8
Production of leather and leather products 104.4 104.3
Timber and wood products processing 102.8 102.2
Cellulose and paper production 105.1 104.7
Production of coke and petroleum products 98.3 100.6
Chemicals production 106.3 104.3
Production of medicine and materials for medical purposes 107.0 112.3
Manufacture of rubber and plastic products 106.3 104.2
Manufacture of other non-metal mineral products 94.0 102.5
Metallurgical production and 99.0 96.4
Manufacture of finished metal products 101.3 97.3
Manufacture of computers, electronic and optical equipment 100.6 92.7
Manufacture of electrical equipment 100.9 102.8
Manufacture of machinery and equipment 99.3 100.3
Manufacture of means of transport, trailers and semitrailers 100.5 112.9
Manufacture of other means of transport and equipment 104.2 100.6
Manufacture of furniture 97.3 108.7
Manufacture of other finished products 82.4 110.2
Source: Rosstat.
Significant changes are not expected in the industrial production structure in the short-term perspective. The future of economic development is linked with the renewal of the capital goods production, in particular, at the expense of state orders, which will positively tell on the development of machine building and the investment/construction complexes. Stability will remain in export oriented sectors - fuel and energy complex, metallurgy, and chemical production. Implementation of state infrastructure projects will secure demand on construction sector services.
In the medium term, industrial policy is aimed at the change of business environment and creation of conditions for innovation activity including demand incentives for innovations.
4.2. Russian industrial sector in 2017 (based on surveys findings)1
This Chapter has been prepared on the results of business surveys of industrial enterprises which 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 percent of industrial employees.
1 This section is written by Sergey Tsukhlo, the Gaidar Institute.
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 percent.
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 percent to +17 percent 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 -5percent to -12 percent is interpreted as an increase of price fall intensity.
4.2.1. Russian industrial sector in 2015-2017 - business assessment
Recent years have been complicated for the Russian economy as a whole and for industry, in particular. The crisis, which was launched by the ruble devaluation in 2014 lasted for two year. Already now, it is evident that the Russian industrial sector managed to encounter and walk in a relatively smooth manner through the crisis of 2015-2016 and to start recovering in the same manner from the crisis in 2017. This description of the recent years' events in the Russian industry has been backed up by the findings of IEP's (Gaidar Institute for Economic Policy) monthly business surveys of 1992-2017. We now consider the findings on a yearly rather than monthly basis (the latter is most common) to be able to view the crisis of 20152016 and the recovery in 2017 within the context of our long enough history of business industrial surveys.
The following features are characteristic of the crisis years. First, the crisis have not provoked a decline of demand for industrial products and its output. Second, insignificant deterioration of these indicators resonated with a significant time span of the recession. Third, businesses were ready for the recession, and, it seems, for a more adverse recession, which was mostly owing to the authorities and experts who constantly in 2011-2014 discussed the chances for the "second wave of recession". Fourth, this unordinary (compared to the crisis of 20082009) combination allowed Russian industry to smoothly face and pass through the crisis of 2016-2017 and in the same way to exit from the recession in 2017.
Composite indicators that derive from some of the business survey questions provide the first impression and a general view of the Russian economy. One of traditional indicators is The IEP Industrial Confidence Indicator1 Similar surveys of other institutions most commonly rely
1 The Indicator 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 = percent growth - percent decline;
on similar indicators that are reviewed on a monthly basis, which is more useful for online monitoring than for making a generalized analysis of the industry. Therefore, this indicator and the indicators described in this paper are estimated on a yearly basis for the entire period of IEP's surveys with a view to evaluating the crisis of 2015-2016 and the post-crisis period of 2017.
Fig. 10. IEP Industrial Confidence Indicator, 1992-2017, percentage points
The dynamics for the Industrial Confidence Indicator clearly demonstrates the Russian industry's salient features in recent years (Fig. 10).
The industrial sector exhibited a minor recovery in confidence in 2010-2011 following the crisis of 2008-2009. The Indicator climbed to positive, albeit not pre-crisis, values in 2010 and then slid again in 2012, reaching modestly positive, and most importantly, stable values in 2012-2016, including in the crisis of 2015-2016. For the accuracy's sake, there is a point to note that in 2015 the Index averaged annually 3 percentage points below the pre-crisis value of 2014. In particular, the Index lost 15 points during the crisis of 2008 and another 20 points during the crisis of 2009, making a total loss of 35 points during the crisis of 2008-2009. The dynamics for the Industrial Confidence Indicator for 1992-2014 was in line with the commonly held view of the Russian industrial sector. In 2015-2016, however, variations in the indicator started to disagree with the commonly-held views of analysts and government officials that the industrial sector was faced with a crisis. In other words, industrial enterprises did not view the events of 2015 as crisis-induced events.
As to the signs of crisis developments over the past few years in the Russian industrial sector, they started to emerge, according to industrial enterprises, in 2012, when the Industrial Confidence Indicator lost 8 points, varying steadily within a range of +3.. .+6 points throughout the period of 2012-2016. Thus, even such a broad treatment of the crisis facing the Russian industry is an indication of unusual nature of the crisis: a minor fall (posing no threat of crisis
2) Estimate of demand, difference of assessments = percent above normal + percent normal - percent below normal;
3) Estimate of stocks of finished products, balance = percent above normal - percent below normal, opposite sign;
4) Plans for output change, balance = percent growth - percent 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.
whatsoever) of key indicators and a long enough duration of these developments; at least, if one relies on the opinion of industrial enterprises. Our most recent data as of 2017 on the Russian industrial sector show a recovery following the period of 2012-2016. The Industrial Confidence Indicator rose to the level of 2011, marking 2011 as the best year for the industry since the crisis of2008-2009.
The Russian industrial sector has managed to adapt easily to the recent years' economic environment because of the sluggish nature of the crisis. These processes are well depicted by another composite indicator - The Russian Industry Adaptability ('Normality') Index - that is based on a list of questions as part of another IEP's business survey (Fig. 11). The index is computed using only evaluative questions - enterprises are offered to self-assess their key performance indicators using grades such as "above normal", "normal", "below normal". Therefore, the average proportion of "normal" answers indicates that enterprises self-assess their performance, i.e., adaptability to the ongoing economic environment, as "normal".
The dynamics for the Industry Adaptability Index in 1994-2014 was also in line with the commonly held views of the Russian industry. The industry was faced with an extreme hardship prior to the Russian default of 1998, with an average annual level of adaptability ranging within 29-33 percent. After the 1998 default, the Russian industry saw things start turning for the better, with "normal" self-assessments reaching 71percent by 2007. "Normal" self-assessments dropped to 54 percent because of the crisis of 2008-2009, but they recovered since 2011 to the pre-crisis level of 71 percent. The sluggish economic dynamics in 2012-2014 halted the growth in the Adaptability Index, even cutting it back to 69 percent in 2013. In 2014, the industrial sector was 70 percent adapted to the prevailing economic environment.
However, the 2015-2016 and even the 2017 values of the indicator was not in line with the commonly held beliefs based on official statistical data. During the initial and the second years of crisis, 71 percent and 73 percent of enterprises, respectively, said their key indicators (product demand, inventories, labour supply, production capacity, financial standing) were "normal". Thus, not only did industrial enterprises see no crisis-induced threat during the crisis of 2015-2016, but they also said their adaptability to the ongoing economic environment was better than to the pre-crisis periods. Moreover, 77 percent of Russian industrial enterprises were adapted to difficult conditions of recovery from the crisis in 2017, with the indicator hitting an all-time high in the entire 24-year period of monitoring.
Fig. 11. Russia Industry Adaptability ('Normality') Index, 1994-2017, percent We now consider business self-assessments of some key indicators.
The dynamics for product demand (Fig 12) self-assessments was relatively stable in 20102017, when "normal" product demand answers varied within a range of 50-60 percent, with the industry experiencing neither crisis-induced downturn nor any decline in satisfaction with demand in 2015-2016. In 2012-2015, 50-53 percent of industrial enterprises said they were satisfied with their product demand. For comparison, during the crisis of 2008-2009 this indicator plummeted to a historical low of 28percent from the all-time high of 69 percent. The lowest level on record was reached in 1996, when only 8percent of Russian industrial enterprises said their product demand was "normal". However, satisfaction with product demand stood near all-time high throughout the four years preceding the default, increasing to
Fig. 12. "Normal" self-assessment of product demand, 1992-2017, percent
Enterprise inventory self-assessments (finished goods inventory, raw materials and supplies inventory) give a better non-crisis picture of the Russian industrial sector in 2015-2016.
None of the enterprise inventory types exhibited typical crisis-induced dynamics during that period (see Fig. 13). The balance of finished products inventory self-assessments (the difference between the proportion of "above normal" and "below normal" answers) during the initial year of the latest crisis turned out to be hit less (with less overstock) than before the crisis (in 2014). Furthermore, the balance turned out to be negative in the first month of the crisis, that is, enterprises were in need of big finished product stockpiles to be able to meet the expected new demand during the coming crisis. Such an onset is highly exceptional for crisis. Producers are supposed to experience a shock in the first month of crisis, leading to a rapid increase in the overstock of finished products. In 2015, however, the Russian industrial sector swiftly coped with such a non-standard shock, making another record during the initial year of crisis - "normal" finished goods inventory self-assessments hit an all-time high of 71 percent (at that point). "Normal" answers increased to 72 percent during the second year of crisis, according to an inventory monitoring and the balance remained at near zero level. Hence, during that crisis enterprises managed (for the first time since 1992) to control their supply-demand balance and pursued a careful policy of managing their finished products inventory. In 2017 -during the recovery stage - "normal" finished goods inventory self-assessments saw a small decline as a result of scheduled accumulation of finished products overstock to be able to meet the expected increase in demand, with the highest expectations recorded in the second quarter of the year. However, slow recovery from the crisis forced the industrial sector to return to minimizing their overstock inventory, and therefore "normal" answers climbed back to a high level.
Puc. 13. "Normal" self-assessments of finished products inventory and of available industrial inputs, 1992-2017, percent
Against a backdrop of slow rolling 2015-2016 recession and sluggish recovery recorded in 2017, the Russian industrial sector has reached the best level of availability of industrial inputs in the period of 1993-2017. During the initial year of crisis, "normal" raw materials availability answers increased by 2 points from the preceding non-crisis year, getting close to the highest value recorded in 2012. During the second year of crisis, this indicator gained another 3 points, hitting an all-time high. During the recovery stage in 2017, the industrial sector has managed to achieve even a better level of availability of raw materials and supplies, with 81percent of enterprises saying they have "normal" level of availability of raw materials and supplies, according to average annual self-assessments. Thus, the industrial sector during the ongoing crisis has experienced minimum difficulties with raw materials and supplies and managed to reduce their shortage to a historical low. This is what also makes the fading crisis different from previous crises.
Enterprise self-assessments of production capacity and labour supply add more details to the non-crisis picture of Russian industrial sector in 2015-2016 and demonstrate excellent readiness to get out of the crisis (Fig. 14).
According to our surveys, during the crisis of 2015-2016 the Russian industrial sector was able to solve their HR issues through staff recruitment rather than layoffs (as is commonly practiced amid crisis). It was not until the onset of the crisis of 2015-2016 that the former option became available. Enterprises therefore managed to achieve the best possible labour supply in 2017 as the Russian government achieved an unexpectedly low unemployment rate. The HR policy of the Russian industrial sector amid the recent crisis seems to be reasonable enough considering that the industry experienced shortage of qualified employees, primarily blue-collar workers, during years preceding the crisis. Moreover, a new influx of workers from vocational schools cannot be counted on due to a degrading secondary vocational education. In 2017, the Russian industry has managed to cope with the shortage of labour force owing solely to the crisis of 2015-2016.
Fig. 14. Enterprises with adequate capacity and labour supply, 1992-2017, percent
The Russian industrial sector is in need of more qualified workers than production capacity. Enterprises have had excessive production capacity (with a potential to manufacture competitive products) since 2009. The balance of capacity self-assessments in the industry has been positive, which is unusual amid crisis, over the recent 9-year period of our monitoring. In 2017, "adequate production capacity led by the expected changes in demand" has hit a historical high of 78 percent.
Thus 2017 as a whole, was the year when the Russian industry was recovering from the protracted but slow rolling official crisis of 2015-2016. However, this post crisis year is distinctly divided into two periods, which coincide with the calendar half-year periods. In H1 Russian industry remained strong in overcoming the crisis of 2015-2016 and made some progress at the year-end. However, from July onwards positive trends recorded at the onset of the year have slowed down and in October fell to the lowest (worst) point of the first post-crisis year.
4.2.2. Russian industrial sector in H1 2017
The Russian industrial sector started recovering in early 2017 from the protracted unrepresentative crisis of 2015-2016. Actual and forecast changes in demand, assessments of finished products, innovation plans of enterprises-all these indicators have been demonstrating long awaited positive development.
The demand for industrial products in H1 2017 was almost , attended by occasional and hence divergent movements leading toward a positive trend, the first of which was recorded during business surveys in February, the second one was reported in June. In general, however, the sales dynamics was found to be better than that in 2012-2016, even though enterprises tend to underestimate the demand for their products.
A similar positive context was observed through demand surveys. The seasonal and calendar adjusted demand continued to grow in early 2017, reaching a multi-year high in February, whereupon upbeat demand forecasts stopped growing, and the balance was secured at a level of +10 points. As a result, enterprises' expectations in H1 2017 were found to be the highest since 2011.
However, our business surveys regarding gains in (current) volumes of demand show that the Russian industrial sector in early 2017 had inflated expectations and hence forecasts for the pace of recovery from the crisis of 2015-2016. In February, when both actual and predicted demand growth rates reached multi-year highs, enterprises' satisfaction with gains in sales fell to 51 percent because they expected higher volumes of demand. Nevertheless, they were quick in rethinking the inflated expectations, and therefore the satisfaction with demand reached 65 percent as early as May 2017, the highest value on record since 2007.
The dynamics of enterprises' responses about the stock (finished products) adds to the picture of the Russian economy recovering from the "lukewarm" crisis of 2015-2016. In the first few months of 2017, the Russian industrial sector continued officiating the crisis-related ritual of maintaining the indicator around zero, whereas the stock was revised in March, and therefore the balance was up to +11, until June. The 25-year observations show that the specified level of stock glut cannot be attributed to the crisis. The reverse seems to be the case: similar values of the indicator were observed during the periods when enterprises were sure that the demand for their products would soon increase. It is difficult to tell on what volumes of stock their responses rely on, because no official statistics of stock volumes are available in the country. In addition, there is a scenario that cannot be ruled out: there was no growth in volumes of stock (finished products) in March-June 2017; instead, enterprises just "revised" the previous, unchanged volumes of stock after rethinking their expectations for the pace of recovery from the crisis of 2015-2016. This scenario is supported by the fact that demand change forecasts stabilized in February-June 2017.
The dynamics of output plans in H1 2017 also reflects that industrial enterprises varied in their expectations for the pace of recovery from the ongoing crisis. Indeed, this indicator saw a sharp increase in upbeat expectations in early 2017 after hitting in H2 2016 nearly the lowest values in the ongoing crisis (less optimistic responses were recorded only in early 2016, when industrial enterprises realized that promises of quick "rebounding from the bottom" are slippery). However, upbeat output plans were down almost by half in April-May 2017, which seems to be logical amid declining upbeat demand forecasts and spiking stock (finished products) glut. In June, however, the number of enterprises with upbeat output plans increased, reaching the highest level in 2012-2017, which, by the way, was recorded in late 2015, when enterprises' hopes for quick recovery from the crisis were unmet.
Enterprises' pricing policies in H1 2017 reflect both the monetary authorities advance in struggling with inflation and enterprises' efforts to rekindle demand for their products. Although industrial enterprises in January 2017 raised prices more intensively than a year earlier, they failed to reach the price target set in December 2016. It seems that industrial enterprises raised factory-gate prices in response to positive demand dynamics early in the year. However, industrial enterprises had to slow drastically the intensity of growth in actual prices in response to Bank of Russia' consistent struggle with inflation. Enterprises reported in April-May that they had zero growth of factory-gate prices of their products, with price change forecasts in March showing hopes for a more intensive growth of factory-gate prices. Further, the industrial sector in June embarked on absolute price cut (-6 points) while forecasting a change at an average of +9 points for April-June.
In 2017, Russian industrial enterprises' HR policies continued to rip the benefits offered by the "crisis" of 2015-2016. Enterprises made new recruit plans early in 2017 (similar to what they did during the crisis of 2015-2016), which was not the case in the pre-crisis years of 2013 and 2014, and, most importantly, they did manage to hire more employees following the
traditional peak of redundancies in January. Eventually this even resulted in a small oversupply of labour force - the balance of enterprises' responses about labour supply in Q2 2017 reached a positive value, which is quite uncommon for the entire period of 2010-2017 and for the crisis of 2015-2016. Furthermore, no spike in labour force oversupply was recorded at the very beginning of the recession period. Neither were there redundancies - a logical HR policy amid crisis - at industrial enterprises.
In Q1 2017, the Russian industrial sector exhibited a strong growth in upbeat expectations for investment. Twenty-four points were added to the balance of investment plans, eventually hitting a five-year high. Therefore, the 26-month period of upbeat expectations for investment -which began shortly after Russia joined the war of sanctions in August 2014 - is over. The industrial sector was prepared for a new cycle of investment growth. However, the plans stopped clambering higher on upbeat expectations and stabilized in the second quarter following the rethinking of expectations for the pace of recovery from the ongoing crisis. Indeed, there are not many incentives available for Russian enterprises to implement investment plans. Only 14 percent of enterprises considered a lack of investment as a headwind for output, which comprises nearly the smallest share of enterprises considering this factor as a constraint in 2014-2017. Only 9 percent of enterprises faced with a lack of machinery and equipment said investment in output expansion is relevant. Only 7 percent of enterprises said they were facing the issue of low labour productivity. Accordingly, it is also unlikely that the existing production facilities will be upgradeda.
Crediting terms and conditions for the Russian industrial sector in H1 2017 continued recovering after the crisis-related credit crunch that fell, according to surveys, on February 2015, when 45 percent of enterprises reported they were facing the issue of credit availability, which, however, was 20 percentage points below the peak value recorded during the crisis of 2008-2009. Only 12 percent of enterprises faced the issue of credit availability in Q1 2017, 10 percent in Q2 2017, and 11 percent in June. Thus, the lack of credit availability for the Russian industrial sector in H1 2017 was finally secured at the pre-crisis level.
The average minimum interest rate on bank rouble-denominate loans to industrial enterprises dropped by January 2017 to 14.6 percent per annum. The indicator stood at 14.1 percent in March-April, 13.9 percent in May-June. Thus the interest rate dropped by 7 percentage points after hitting a post-crisis high. The inter-crisis lowest value of the indicator was recorded at 11.8 percent in 2011.
In Q2 2017, the ability of industrial enterprises to service their outstanding loans reached an absolute record in the entire period (2009-2017) of monitoring. Today, 90 percent (!) of enterprises have either adequate or more than adequate resources to repay their bank loans. The obtained result fits well with the estimates of financial and economic environment, which was considered good or acceptable by 91 percent of respondents. It should be noted that in this case we talk about the actual state of enterprises and not about reporting.
4.2.3. Russian industrial sector in H2 2017
The second half of 2017 was a tough period for Russian enterprises. in the middle of the year industrial enterprises saw the demand for their products expand at slower pace, which forced businesses to get rid of stocks of finished products, downgrade output, which is ordinary for that period and review for the worse the investment plans. Meanwhile, businesses kept hopes alive (plans) for the output growth and recruited employees. The first few months of H2 2017 saw a slow reversal of feeble positive trends that were seen earlier in the year. The pace
(balance) of actual changes in demand saw a reversal to a negative trend in July. The latter looked rather flat and unlikely was a sign of a new wave of recession, if so a softer one like in 2015 and not a repetition of the across-the-board deterioration of November 2008. Demand forecasts also continued to lose the business confidence gained by February 2017. The industrial sector was still, albeit less intensively, hoping for an increase in sales. In that context, the industry continued to reduce the surplus in finished goods inventory, which was reasonable enough amid uncertainty about the time of switching to a statistically indisputable increase in output. Another logical result from that was the decelerating increase in output. Another logical result from that was the decelerating increase in output-even so symbolic that was observed previously in 2017.
Despite certain signs of slowing demand and output, the industrial sector continued to hire employees, having positive recruitment plans because the Russian industry was still running short of workforce on the back of "anticipated demand change". Although the shortage was relatively small, the very fact of its existence shows which resource-related issue is most critical for the Russian industry.
Russian industry's investment plans underwent sharp negative changes in July 2017, with this indicator balance losing 9 points during the month. Russian industry's investment plans underwent sharp negative changes in July 2017, with this indicator balance losing 9 points during the month. While retaining this indicator at a five-year high level for four months, the industrial sector was not prepared to invest in its own production amid protracted stagnation with unpredictable timeline for recovery.
In August 2017, industrial sector's recovery from the protracted crisis of 2015-2016 continued to lose momentum. The month (August) happened to be a time of hardship for sales. Enterprises' self-assessments of current demand dropped to a 13-month low. The same was true for demand projections. In August 2017, enterprises lost the confidence they accumulated during the previous 15 months. However, Russian industry output dynamics did not change in August. Survey data also show that the industrial production continued to experience near-to-zero growth of the output rates This fact again put at the top of the list competition between experts regarding adjustment of the Rosstat data with respect to industrial output and seasonality in search for an answer to the most popular and crucial question of 2017: "Is there a growth in Russian industry?" Industrial enterprises, however, revised their output plans upward rather than downward, adding 3 points to this indicator balance in August. There were still hopes for regaining growth.
The continuing recruitment of staff by Russian industry corroborates this thesis. In August, the balance of changes remained positive although minimal in absolute terms. The continuing recruitment was registered over six months of 2017 (excluding in January and May). The balance of projected changes in enterprises' staff headcount also remained positive, albeit moderate.
The data for September showed that enterprises were no longer hoping for being able to achieve the demand they needed for rapid recovery from the crisis. Actual changes in sales remained "below zero", the forecast balance also went negative for the first time since early in 2017. Nevertheless, the proportion of enterprises that said their demand was "normal" still remained above 50 percent, thus indicating that the majority of enterprises were still satisfied with their sales volumes.
Revised plans of rapid recovery from the crisis prompted enterprises not to maintain their inventory at levels that can ensure the recovery. In September, the balance of inventories self-
assessments indicated a decline in their surplus down to +6 points, хотя ранее промышленность удерживала показатель в интервале +9..+11 пунктов. Finished goods inventory were updated in September on the back of current output - the industrial sector started making minor cuts in output while adhering to output boost plans for late in 2017. In AugustSeptember, the balance of output plans added 6 points, reaching values that were decent enough in times of crisis. That helped industrial enterprises continue to hire workers even amid slowing recovery from the crisis. Staff recruitment plans remained at a positive level. However, the investment plans balance approached again a zero line late in the third quarter - the industry had completely lost the confidence accumulated in Q1 2017 and maintained at the five-year highest level in Q2 2017.
In October, the dynamics of demand for industrial products continued to be driven by a downward trend. Nevertheless, the majority of businesses said the demand for their products was "normal" in H2 2017. In October, there were 64 percent of "normal" responses, not less than 60 percent since April 2017. However, demand forecasts reflected dimming hopes of successful year-end outturns. The balance of those hopes neared a zero, i.e. businesses hoped for no demand contraction. The latter told on the stocks of finished products. In Q2 2017, enterprises brought the stocks of finished products to a high amount of redundancy, which is characteristic for a steady recovery. However, in late Q3-early Q4 they began to get rid of the unwanted stocks due to the loss of confidence in a prompt recovery. The output dynamics added to the negative outlook in Russian industry. The survey statistics demonstrated continuing output contraction. However, the output plans remained confidence for at least a symbolic growth, which was observed before.
In November 2017, according to Gaidar Institute's survey statistics Russian industry attempted to recover from the prolonged crisis of 2015-2016. Changes in demand and depleted stock of finished products have contributed to it.
Demand for industrial products exhibited positive dynamics in November 2017 Both baseline and seasonally adjusted data showed positive changes of both actual sales and sales projections. Most impressive was a sharp upsurge in the expected demand change shortly before public holidays in January. For that matter, this sharp upsurge of projections confidence continued moderate October improvement of the indicator, which was successfully implemented in November. The latter, most likely, pushed businesses to further growth of demand projects confidence. The Russian industrial sector's finished goods inventory were totally "depleted" due to positive sales dynamics in November and upbeat projections for growing demand. The balance of this indicator self-assessments lost another 6 points down to zero - the proportion of "above normal" answers was offset by the proportion of "below normal" answers, with "normal" answers showing an absolute and strong prevalence, 71 percent in November. The combination of finished goods inventory self-assessments amid increasing demand was supposed to further encourage enterprises to increase volumes of finished goods inventory due to the increase in output.
Indeed, surveys in November registered a positive change in enterprises' actual output dynamics and production plans. November saw output reverse from negative to positive values. Output plans underwent drastic changes in November as well. The seasonally adjusted balance rose during the month to +26 from +15 points, also hitting a multi-year high (like demand projections). Positive dynamics of demand and output coupled with the confidence growth of their forecasts and depletion of stocks of finished products forced businesses to recruit personnel. In November, the balance of change in the actual number of workers again was
positive. Enterprises resumed recruiting workers even against a backdrop of sufficient number (better than ever) of qualified personnel.
In December, enterprises continued to provide positive self-assessments. For instance, the demand growth rate remained above zero and even gained a few percentage points, thus enabling enterprises to be highly satisfied with their current demand, with 66 percent of "normal", as before, answers. Demand projections were also at a steadily positive level, as was registered in H1 2017. The industry's response to the demand dynamics seemed logical enough - enterprises continued to increase output in December. The latter was used to meet the demand and to increase finished goods inventory. As a result, finished goods inventory self-assessments bounced back from a zero to above-zero balance, evidencing that the Russian industrial sector was prepared to recover from the crisis of 2015-2016. Enterprises' investment plans also bolstered this scenario in late 2017/early 2018. While the balance of the plans stabilized, albeit still somewhat below zero, in November-December 2017. In 2018 investment confidence may once again prevail over investment pessimism as long as there will be stronger confidence in success of another attempt to recover from the crisis.
4.2.4. Import substitution in Russian industry
From mid-2014, the issue of import substitution became an important component not only of the economic but also of the political agenda. In the wake of December (2014) ruble's devaluation all buyers of imported goods who through carelessness had become dependent on imports found themselves in the sphere of import substitution. The task was clear for Russian engineers, producers and consumers, but the Russian statistics found itself in a hot seat-it turned out that to measure import substitution in a large open economy was very hard. The Federal service of state statistics provides a rather moderate set of indicators in that sphere. And it was more complicated to comprehend what issues during the implementation of the import substitution policy face Russian consumers (be it the state, companies or households). Just they decide what imports to replace with the Russian analogues.
Traditional approach to import substitution based on the foreign trade statistics provides only limited analysis of those processes in this context. Understanding the difficulty of measuring import substitution and related issues in the context of high demand of the actual data forces us to turn to more flexible tool-surveys. Surveys' findings provide a more comprehensive and extended picture of the current problems of Russian import substitution than general trade statistics.
This chapter discusses the main results of our import substitution surveys, conducted by the Gaidar Institute business surveys laboratory in 2014-2017 on the basis of surveys of directors of industrial enterprises. In this connection, the enterprises were treated not as producers of Russian domestic products capable of ousting their competing counterparts from the Russian marker in the framework of import substitution policy, but as buyers of imported machinery and equipment and imported supplies and raw materials forced to switch over to the domestic analogues of these items in conditions of an administrative ban on certain imports and/or their rising prices resulting from the ruble's depreciation.
The first measurements of the potential changes in planned purchases across industry in response to growth of ruble-denominated import prices were done as early as April 2014, when it was still unlikely that the exchange rate movement was significantly influencing buyer behavior. That survey demonstrated Russian industry's high dependence on imports. The critical dependence index - the impossibility not to rely on imports notwithstanding any scale
of price growth - was then hovering at around 40 percent (the share of enterprises reporting that dependence) with regard to both equipment and raw materials. At the other side of the spectrum of possible reactions to price growth were those enterprises which during that period reported that they were not importing anything. The estimated independence from imports reported by enterprises amounted to 22 percent with regard to machinery & equipment, and 33 percent with regard to raw materials and other supplies. Thus, the remaining group of enterprises continued to purchase imported products, but were prepared to do without those products in the event of further growth of their ruble-denominated prices. In April 2014, this group of enterprises across Russian industry amounted to 25 percent for raw materials, and to 39 percent for machinery and equipment.
Our second opinion survey of the preparedness of enterprises to discontinue import purchases took place specifically in December 2014, when the ruble's plunge trajectory hit its bottom, and the calls of authorities for import substitution were loudest. However, the plans of import purchases across industry remained the same as before. Nearly 40 percent of enterprises were not ready to operate without buying imported machinery and equipment, even in view of the ruble's obvious depreciation inevitably followed by a rise in ruble-denominated prices for these technologies in the forthcoming year 2015. In other words, the scale of Russian industry's critical dependence on imports remained unchanged.
An almost identical situation could be observed with regard to Russian industry's dependence on imports of raw materials - the reported intentions of enterprises concerning purchases of such items. A maximum percentage share of all enterprises (37 percent), as before, were prepared to rely on these imports regardless any surge in their ruble-denominated prices. By late 2014, as before, only a third of all enterprises had not been relying on imports in order to secure their output.
The obvious reluctance (or unpreparedness) of Russian industrial enterprises to do without purchases of imported equipment and raw materials even in face of the inevitable growth (clearly made obvious in December 2014) of their prices urged us to begin monitoring, from 2015 onwards, the existing obstacles to successful import substitution across industry. Over the past three years, the survey participants were asked 5 times to answer the following question: "What prevents your enterprise from switching over from purchases of imported equipment and raw materials to purchases of their domestic analogues?" Their answers have yielded a rather comprehensive picture of the real issues that prevent successful import substitution in enterprises' purchases.
The main issue arising in the event of discontinuation of imports has always been and still remains the absence, in Russia, of any analogues of some imported items, no matter what their quality. The January (2015) assessments of the barriers in the way of import substitution were more than just an emotional reaction to the shock-like depreciation of the ruble in December. And our three-year monitoring failed to yield any positive observations that could confirm the creation, in Russia, of production of new equipment and raw materials (i.e., something that had never been produced before) - rather, the observable trend was the opposite (Fig. 15).
The low quality of domestic equipment and raw materials as compared with that of their imported analogues has been ranked stably second among the obstacles to import substitution. A sizable group of enterprises (on the average, a third of them in all five surveys) constantly pointed to that issue. Other constraints on import substitution were mentioned far more rarely.
Absence of domestic analogues of foreign equipment and raw materials, of any quality
Low quality of domestic equipment and raw materials
Insufficient government support of domestic equipment and raw materials production
Insufficient output of domestic equipment and raw materials production
Overpriced domestic equipment and raw materials
Still affordable prices of imported equipment and raw materials
Insufficient administrative bans (sanctions) on imports of equipment and raw materials
Delays, by enterprises, of their switchover to domestic equipment and raw materials
0 10 20 30 40 50 60 70 80 ■ 2017 July □ 2016 October D2016 March D2015 August IU2015 January
Fig. 15. Hindrances for import substitution faced by Russian industrial enterprises in 2015-2017, %
For example, among the other obstacles, industrialists noted insufficient government support of domestic equipment and raw materials production, but this kind of estimation of the government policy in the sphere of import substitution was voiced by only 18 percent of respondents in January 2015, and by 10 percent in July 2017.
Overall, on the basis of the available set of estimations, it can be concluded that enterprises relied mostly on their own devices, including their ability to adapt to the ruble's new exchange rate. In this respect, by the end of 2017, domestic industry had achieved some very obvious successes: the negative effects on output by 'the weakening ruble and the rising prices of imported equipment and raw materials' (as worded in the questionnaire offered by the Gaidar Institute) in late 2017 were as low as 6 percent.
The estimations of those analogues of imported equipment and raw materials that were already being produced in Russia were also quite stable and well-defined. Complaints about the prices of Russian products that were unreasonably high compared with their quality were reported on the average by 11 percent of those Russian enterprises that were buying them, and these complaints remained unchanged over the three-year period.
Special attention should be focused on the estimates of the ability of Russian industry to increase output in the framework of import substitution. Issues associated with the demand for those products that were already being manufactured in RF territory were mentioned on the average by 12 percent of enterprises. Therefore, Russian industry possesses sufficient reserves (idle capacities) for increasing output in an event of an increased demand for its products in the framework of the import substitution policy.
As demonstrated by the monitoring results obtained in 2015-2017, Russian industry during that period managed to achieve a relatively high success in terms of import substitution when buying new machinery and equipment (Fig. 16). This process was most notable in Q2 2015, when 30 percent of industrial enterprises reported a shrinkage, in terms of physical volume, of the share of imports of machinery and equipment in their total purchases (relative to Q2 2014), or their total disappearance. Perhaps, the corresponding period-end index for Q1 2015 was even more impressive in terms of import substitution scale, but it can be considered to be the upshot of the initial and excessively emotional response to the shock produced by the ruble's December devaluation.
Fig. 16. The actual scale of import substitution in the purchases of equipment and raw
materials by enterprises, percent
However, over the next ten quarters, Russian industry began to play down the intensity of actual import substitution. Therefore, in Q4 2017, only 7 percent of enterprises reported a shrinkage, in terms of physical volume, or a zero percentage of imports in their purchases of machinery and equipment. The shrinkage of imports of raw materials across Russian industry was less intensive due to the lower import substitution potential in that sector. The highest scale of substitution of imports of raw materials was 22 percent, and by Q4 2017, it had declined to 8 percent. The reason for this very modest success was, most probably, the dependence of Russian industry on imports that had emerged over the previous years. Having purchased imported equipment, Russian enterprises are forced to use industrial inputs that are compatible with that equipment. Such materials are not produced domestically, but can be supplied by foreign producers who usually offer comprehensive sets of supplies and take full advantage of any opportunity to make their customers dependent on their products for all the phases of their production cycle.
Another reason for the slow pace of import substitution in the sector of industrial inputs was the mildness of the 2015-2016 crisis, which did not trigger any dramatic output reduction across Russian industry. Such a situation did not require a large-scale substitution for the more expensive imports of raw materials and other supplies, and so the demand of enterprises for raw materials, including imported ones, did not dwindle markedly.
Let us now review the import substitution plans across industry (Fig. 17) over the period from Q3 2015 (survey in July 2015) through Q1 2018 (survey in January 2018).
Fig. 17. The planned scale of import substitution in the purchases of industrial
inputs by enterprises, percent
The quarterly import substitution plans demonstrate that the expectations of a reduced scale of import substitution with regard to raw materials relative to that of machinery and equipment were true only for the year 2015. The plans for 2016-2017 have already confirmed the similarity of intentions of Russian producers in that sphere. The obvious collapse of investment plans and the obviously less than disastrous (non-crisis) scale of output decline predetermined that variance of plans across Russian industry in 2015. The situation became different in 2016, when industry was already capable of assessing the specificities of the protracted crisis of 2015-2016 and adapting to the new production conditions and the monetary policy implemented by the Bank of Russia. This was also true for the investment sector: there appeared certain signs of possible growth of investment in domestic production. Moreover, the strengthening ruble and relatively good financial result enabled enterprises to once again begin to purchase imported machinery and equipment.
The scale of import substitution planned by producers with regard to all categories of purchases (equipment and raw materials alike) was always below that of their own "import conservation" plans. In other words, industry preferred (or was compelled) to maintain the same share of imports in the purchases of new equipment and the use of raw materials.
Thus, the policy of import substitution definitely faces tough challenges, which are hard to overcome. Business surveys conducted before the December 2016 ruble devaluation demonstrated dramatic dependency of Russian industry from imports. The lack local production of necessary equipment, components and raw materials remains the main hindrance for the import substitution policy. The low quality of the local products poses a second problem. Russian industry is able to satisfy growth of import substitution demand for goods, which are already locally produced. In other words, Russian industry boasts of sufficient standby capacity. The ruble's strengthening and successful adaptation of Russian industry to slow rolling crisis of 2015-2016 allowed the industry to cut in 2017 the scale of import substitution in their procurements to the 3-year minimum recorded by monitoring.
4.3. The public sector of the Russian economy: it's size and dynamics1
Two main channels can be pointed out whereby the state participates in value added chains: through the operation of companies with state stakes, and through the services (in a broader sense of the work) produced by enterprises with state stakes and budget-funded organizations. Consequently, the assessment of the state sector scope inside the national economy consists, as a rule, of two components: an analysis of the relative share of biggest companies with state stakes - state-owned enterprises (SOE) in a country's aggregate economic statistics (the scope of state ownership); and an estimation of the input of the general government sector (GGS)2 in GDP.
The relative parameters of the SOE sectors operating in different countries have become one of the most well-studied issues in the framework of research projects and statistics, thanks to the efforts of the Organization for Economic Co-operation and Development (OECD). However, there also exist some serious limitations, like the irregularity of available data concerning the input of SOEs in GDP, or lack of a single methodology for calculating that index. The relevant data on SOEs in Russia, with regard to that index and several other indices (capitalization, number of employed persons, proceeds, etc.) are only fragmentary or based on approximate expert estimations.
There is no single approach, either, to understanding and measuring the general government sector's input in GDP. On the one hand, for a long time already this index has been applied in the systems of national accounts in many countries, in the production account for institutional sectors of the national economy. On the other, its input is frequently measured from the point of view of redistribution of financial flows by the state, i.e., the relative amounts of aggregate state revenues generated by taxes, property ownership, operations with assets, proceeds generated by production of services, etc., or the corresponding items on the expenditure side. In our opinion, such a broad approach to calculating the input of the public sector results in an overestimation of the general government sector's input in GDP, because the beneficiaries of the expenditures of the centralized funds are largely households and private businesses.
The presence of some unresolved issues in the estimation of the inputs of both SOEs and government bodies in GDP makes it difficult to correctly calculate the aggregate input of the public sector in GDP. It can be said that this issue remains unresolved both with regard to the public sector in Russia and to its comparative estimation relative to other countries. Here we will attempt to elaborate a more precise methodology for estimating the inputs in GDP of different sectors of the national economy where SOEs are present, and then, on the basis of available empirical data, to compare the public sector's input in GDP in Russia and other
1 This section was written by Alexander Abramov, IAES-RANEPA; Ivan Aksenov, IAES-RANEPA; Alexander Radygin, the Gaidar Institute, IAES-RANEPA; Maria Chernova, RANEPA.
2 According to the Russian Classification of Institutional Sectors (KIES) introduced by the Federal State Statistics Service (Rosstat), the general government sector (GGS) consists of two types of institutional units:
1) government units of all levels - ministries, government departments, services, agencies, government extrabudgetary funds, etc.;
2) non-market non-profit institutions financed and controlled by the state (schools, hospitals, recreational institutions, etc.).
countries, and to analyze the movement of the corresponding indices over the period 20062016.1
4.3.1. The estimated inputs in the national economy of state-owned enterprises
The official statistics in the majority of countries, Russia including, lacks a unified definition of companies with state stakes. In recent years, useful results in that area have been achieved by the OECD, which has acted as a methodological center, pooling the statistical data of the public sectors of many economies. As an upshot of that activity, a uniform term state-owned enterprise (SOE) has emerged. According to the OECD Guidelines on Corporate Governance of State-owned Enterprises, as amended in 2005 and 2015,2 a legal entity is recognized to be a SOE if the state exercises its right of ownership thereto understood as 'exercise of control'. Based on this approach, a SOE is an organization controlled by the state as the sole owner, which holds a majority or a significant minority block of shares (a stake in the charter capital) amounting to not less than 10 percent. This definition is not a 'canonical' one, it gives rise to many technical questions, i.e., the specific forms of control or their quantitative confirmation, but the term itself is, nevertheless, quite appropriate and is now becoming increasingly widespread in the studies on this subject conducted in different countries.
The notion of control as a criterion to be applied in defining a SOE may imply a variety of forms of state participation in an enterprise, some of these forms being non-transparent. If one relies on the information disclosure rules for issuers of securities introduced in Russia, the best way to describe control-based relations would be through the institutions of direct and indirect state ownership. Direct ownership means that the shares (or stakes) held in state ownership are disposed of by the empowered government bodies, including the RF Federal Agency for State Property Management (Rosimushchestvo). Indirect ownership means that the control of a stake in a company is exercised through the Bank of Russia, state corporations, holding companies, banks, and state enterprises.
In an indirect state ownership model, the state may own a company through a chain of organizations. In this case, when estimating the size of a state stake, a more complex methodology will be needed. The size of a block of shares (or a stake) in a company studied as part of an indirect state ownership model is calculated as the sum of state stake in the core company, the stake held by the core company in its first generation subsidiary, the stake held by the latter in a second generation subsidiary, and so on, all the way down to the company under consideration. In this connection, an additional rule is applied: any majority (above 50 percent) blocks of shares (or stakes in the charter capital) of the core company owned directly by the state are assumed to be 100 percent stakes. In every case, the length of ownership chains for the purpose of indirect ownership calculation is determined on the basis of an expert
1 See also Abramov A., Radygin A., Chernova M. Companies with State Stakes in the Russian Market: Their Ownership Structure and Role in the Economy // Voprosy ekonomiki. 2016. No 12. P. 61-87; Abramov A., Radygin A., Chernova M., Entov R. State Ownership and Efficiency Characteristics // Voprosy ekonomiki. 2017. No 4. P. 5-37; Abramov A.E., Aksenov I.V., Radygin A.D, Chernova M.I. Modern Approaches to Measuring the State Sector: Methodology and Empirics // Economic Policy, 2018, No 1, February, No 2, April.
2 Guidelines on Corporate Governance of State-owned Enterprises. Paris: OECD Publishing, 2005; OECD Guidelines on Corporate Governance of State-Owned Enterprises. Paris: OECD Publishing, 2015.
estimation, with due regard for the possibility to trace the relevant stakes in the official reporting documentation of the companies1.
As Rosstat does not apply the category of state-owned enterprise (SOE) in its official statistics, we assessed the economic parameters of SOEs based on a sample of 208 biggest private and state-owned Russian companies, for which financial reports are publicly available. In 2016, these companies accounted for 94.5 percent of total equity capitalization, and 20.1 percent of the aggregate proceeds in the Russian economy.2 Our data analysis encompasses the period from 2006 through 2016.
In 2016, out of the 208 legal entities included in the sample, only 106 had the status of a SOE;3 of these, 86 were companies with majority state stakes, where the state directly or indirectly held more than 50 percent of voting shares; the remaining 20 were companies with minority state stakes, namely blocks of shares amounting to 10-50 percent. In the group of 106 SOEs, 'non-public' companies prevailed, i.e. issuers of ordinary shares not listed on the MICEX. Among the 106 SOEs, only 34 companies (32.1 percent) were public joint-stock companies (PAOs), the remaining 72 (67.9 percent) were non-public. In addition to PAOs and JSCs, this sample included state unitary enterprises (SUE),4 limited liability companies (LLC),5 three state corporations - RUSNANO Corporation, State Corporation Rostec, and Rosatom Corporation.
Our approach to analyzing the scale of state ownership in Russia based on a sample of SOEs and the national economic indices released by Rosstat in its official reports is compatible with the methodologies applied in a similar study of the role of SOEs in the world's 40 biggest economies conducted by the OECD.6 That study, participated by the government economic departments of many states, on the basis of samples of biggest SOEs analyzed their relative shares in the total capitalization indexes and their personnel numbers. That study lacks the
1 The methodology for a detailed calculation of the size of blocks of shares (or stakes) in indirect ownership was suggested in [Abramov A., Radygin A., Chernova M. Companies with State Stakes in the Russian Market: Ownership Structure and Role in the Economy // Voprosy ekonomiki. 2016. No 12. P. 61-87.]. In their study, the authors reviewed a sample of 114 biggest Russian companies, including 61 SOEs, over the period from 2006 through 2014. This study, which uses a larger sample observed over a longer period, makes it possible to compare the indices of Russian SOEs with those of SOEs across 40 countries, on the basis of data as of 2015, recently published in [The Size and Sectoral Distribution of State-Owned Enterprises, Paris: OECD Publishing, 2017.].
2 Rosstat data contain two different estimates of aggregate proceeds in the Russian economy. One of them is cited in the statistics entered in the national accounts, and the other is entered in the aggregate proceeds data for different sectors of the national economy. Thus, for example, in 2016 the total sales volume in the system of national accounts amounted to RUB 178.5 trillion, while in accordance with Rosstat's Central Statistics Database, the total proceeds of organizations with all forms of ownership amounted to RUB 230.7 trillion. In our calculations for the corresponding years, we applied the proceeds index taken from the Central Statistics Database, because it provides data relative to each form of ownership, and so these data can be compared with our estimations based on our study sample of SOEs.
3 Because of the changes in the ownership structure of Russian companies, their reorganization and absence of publicly available reporting data for several companies for some years, the number of SOEs in the sample varies from year to year, amounting to 70 in 2006, to 82 in 2007, to 85 in 2008, to 96 in 2009, to 98 in 2010, to 103 in 2011, to 109 in 2012, to 107 in 2013, to 110 in 2014, to 105 in 2015, and to 106 in 2016.
4 FSUE Russian Post, SUE Mostransavto, FSUE Rosmorport, Federal State Enterprise Specialized Railroad Security Service of Russia, FSUE Main Military Engineering Administration No 6, FSUE Main Administration for Construction of Roads and Airfields of the RF Ministry of Defense, SUE Vodokanal of St. Petersburg, SUE Fuel and Energy Complex of St. Petersburg, SUE Mosoblgaz, FSUE Center for Operation of Space Ground Base Infrastructure, etc.
5 UAZ, Farmpreparat, METRO Cash and Carry, Volkswagen Group Rus, Japan Tobacco International Russia, MERLION, Avtotor Group, NISSAN Manufacturing Rus, and O'KEY Group.
6 The Size and Sectoral Distribution of State-Owned Enterprises, Paris: OECD Publishing, 2017
corresponding data for Russia. All the calculations were made as of year-end 2015. In our sample for that year, Russia had 105 SOEs.
The aggregate by-country data describing the number of SOEs, their estimated value and personnel number, are shown in Table 11. The indices are calculated separately, with and without the SOE indices for China, because the latter differ significantly from the parameters observed in the other countries. Besides, the pooled OECD estimates do not include data for Saudi Arabia, because these are incomplete.
In 2015, in 39 countries there were a total of 2,443 SOEs, with estimated value of approximately USD 2 trillion, or 4.0 percent of total capitalization of public JSCs in these countries. In the same year, China reported 51,300 SOEs with estimated value of USD 29.2 trillion, which is 3.6 times more than the total capitalization index of public companies in China's economy (which ranks 2nd in the world relative to that index). In Russia, 105 SOEs were identified with estimated market value of USD 175 billion, or 36.9 percent of the total capitalization index of all shares listed on the MICEX.1
The OECD's by-country SOE sample, less China, in 2015 employed 9.2 million personnel, which on the average amounts to 1.1 percent of the total number of employed persons in the national economies; and the same index, China including, is 24.5 million, or 1.9 percent of the total number of employed persons. In Russia, SOEs employed 3.8 million persons, or 5.4 percent of the total number of employed persons in the national economy.
Table 11
Selective indices of SOEs in 41 countries, as of year-end 2015
Number of SOEs Com pany value, billions of US dollars Personnel number
SOE Public stock market capitalization — total Input of SOEs, percent SOE Country's total Input of SOEs, percent
1 2 3 4 5 6 7 8
Argentina 59 28 56 49.2 130,776 13,282,300 1.0
Australia 8 14 1,187 1.1 42,607 9,746, 800 0.4
Austria 10 5 96 5.1 72,491 3,602,100 2.0
Brazil 134 145 491 29.6 597,505 68,150,900 0.9
Canada 44 30 1,593 1.9 83,462 15,185,600 0.5
Chile 25 21 190 10.9 50,361 5,868,200 0.9
Columbia 39 23 86 26.8 33,033 10,808,900 0.3
Costa Rica 32 13 n.d. n.d. 43,013 1,556,200 2.8
Czech Republic 133 29 n.d. n.d. 133,826 4,162,100 3.2
Denmark 21 ** ** ** 18,728 2,520,000 0.7
Estonia 66 ** ** ** 26,026 581,900 4.5
Finland 47 ** ** ** 72,391 2,088,200 3.5
France 51 77 2,088 3.7 826,967 23,324,400 3.5
Germany 71 72 1 716 4.2 370,440 35,821,900 1.0
Greece 42 83 42 198.2 42,927 2,341,300 1.8
Hungary 370 9 18 51.5 148,193 3,748,400 4.0
Iceland 35 ** ** ** 3,636 160,000 2.3
India 270 339 1,516 22.3 3,284,845 288,808,600 1.1
Ireland 25 10 128 8.0 39,079 1,615,000 2.4
Israel 28 n.d. 244 0.0 57,114 3,205,700 1.8
Italy 20 208 587 35.3 499,765 16,988,400 2.9
Japan 8 82 4,895 1.7 256,265 56,899,500 0.5
South Korea 56 218 1,231 17.7 147,833 14,248,900 1,0
Latvia 71 ** ** ** 49,962 782,300 6.4
1 The estimated aggregate value of Russian SOEs, in contrast to that of some other countries, e.g. China, is somewhat understated because it is based only on data on capitalization of public companies listed on the MICEX. Out of 105 SOEs in our sample, only 33 companies were registered as public in 2015.
Cont'd
1 2 3 4 5 6 7 8
Lithuania 128 ** ** ** 40,711 1,169,800 3.5
Mexico 78 21 402 5.3 73,686 34,327,500 0.2
The Netherlands 29 83 728 11.4 110,400 6,896,500 1.6
New Zealand 37 29 74 39.1 36,214 2,008,700 1.8
Norway 55 108 194 55.6 230,601 2,460,500 9.4
Poland 126 16 138 11.4 128,016 12,632,500 1.0
Slovakia 113 n.d. n.d. n.d. 60,471 2,054,400 2.9
Slovenia 37 13 6 207.1 47,052 762,100 6.2
Spain 51 37 787 4.7 94,635 14,761,900 0.6
Sweden 49 37 124,133 4,343,300 2.9
Switzerland 4 45 1,519 2.9 106,883 3,946,100 2.7
Turkey 39 63 189 33.1 438,990 17,879,100 2.5
UK 16 115 3,879 3.0 153,604 26,395,800 0.6
USA 16 -22 25,068 -0.1 535,981 139,208,000 0.4
China 51,341 29,201 8,188 356.6 20,248,999 657,253,800 3.1
NASDAQ OMX Nordic Exchange* n.d. 113 1,268 8.9 n.d. n.d.
total (less China) 2,443 2,023 50,418 4.0 9,212,622 854,343,800 1.1
total (including China) 53,784 31,224 58,606 53.3 29,461,621 1,511,597,600 1.9
Russia 105 175 473 7*** 36.9 3,671,564 68,495,000 5.4
Saudi Arabia 24 139 421 33.1 25,906 10,925,900 0.2
* Pooled stock exchange data for Denmark, Iceland, Latvia, Lithuania, Finland, Sweden, Estonia.
** To avoid duplicated results, in the 'total' rows, the SOE value and stock market capitalization data for Denmark, Iceland, Latvia, Lithuania, Finland, Sweden, and Estonia are entered as aggregate value in the row NASDAQ OMX Nordic Exchange.
*** Capitalization index based on MICEX data for 2015 divided by the annual average USD exchange rate, in rubles.
Source: data on SOEs in 40 countries, less Russia [The Size and Sectoral Distribution of State-Owned Enterprises, Paris: OECD Publishing, 2017]; SOE sample data for Russia, collected by the RANEPA Institute of Applied Economic Research; public share market capitalization - World Development Indicators (WDI). URL: http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators; by-country personnel data - Passport (Euromonitor International) URL: http://go.euromonitor.com/passport_.html.
The countries shown in Fig. 18 (less China) are ranked by the number of their SOEs operating as of 2015. By the number of companies in its sample (105), Russia was 8th among a total of 40 countries. The number of SOEs in the other major developing economies was as follows: 270 in India, 134 in Brazil, 126 in Poland, 78 in Mexico, 56 in South Korea, 39 in Turkey. The number of SOEs in the developed countries was markedly lower than in Russia, in particular 51 each in France and Spain, 49 in Sweden, 47 in Finland, 44 in Canada, and 16 each in the USA and the UK. On the basis of this data it can be assumed that the size of Russia's sample of SOEs is representative, given the available statistics on SOEs in the 40 countries included in the OECD study.
Among these samples data, China stands somewhat apart, because in 2015 it numbered a total of 53,784 SOEs. The distinctive feature of the Chinese model, as noted by Ronald Coase and Nina Wang,1 is that it envisaged a one-time specification and transfer of rights to the relevant economic subjects without an accompanying privatization of the state stake. This is the reason why in the ownership structure of the innumerable commercial enterprises scattered across rural and urban areas, there still remain stakes held by the state and local-self-government bodies, which is manifest in the very sizable sample of SOEs representing that country.
1 Coase R., Wang N. How China Necame Capitalist. [In Russian]. Moscow: Novoye Izdatel'stvo. 2016. P. 261264.
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Source: calculations based on OECD data [The Size and Sectoral Distribution of State-Owned Enterprises, Paris: OECD Publishing, 2017]; for Russia, the sample data collected by the RANEPA Institute of Applied Economic Research are applied.
Fig. 19 demonstrates the SOE value indices, in US dollar terms, for different countries, less China. The market capitalization index of Russian SOEs in 2015 amounted to USD 175 billion. By this criterion, if we disregard China, with its staggering total estimated value of SOEs amounting to USD 29.2 trillion, Russia falls behind only the following three countries included in this sample: India (USD 339 billion), South Korea (USD 218 billion), and Italy (USD 208 billion). At the same time, by the capitalization index of its SOEs, Russia was ahead of several major economies where the share of government ownership was traditionally high: Brazil (USD 145 billion), Saudi Arabia (USD 139 billion), Norway (USD 115 billion), Japan (USD 82 billion), France (USD 77 billion), Germany (USD 72 billion), and Mexico (USD 21 billion). It must be remembered, however, that in the group of Russia's 105 SOE, the resulting index of USD 175 billion was in the main contributed to by only 33 public JSCs whose shares had market value based on their high quotes.
Fig. 20 shows the value indices of SOEs in terms of their share in the market capitalization index of each country. In 2015 in Russia, this index amounted to 36.9 percent, the average for 39 countries (less China) being only 4.0 percent. In China, the ratio of the value index of SOEs to the total capitalization index of that country's market (second in the world in terms of its size) was as high as 356.6 percent, which can be explained by the already mentioned characteristic feature of the Chinese economy. If we disregard China, Russia's share of the value index of SOEs in the total capitalization index will be one of the highest among the countries with liquid stock markets. In 2015, Russia's index was significantly above the corresponding indices for Italy (35.3 percent), Turkey (33.1 percent), Brazil (29.6 percent), India (22.8 percent), Poland (11.4 percent), and Mexico (5.3 percent).
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Fig. 19. Value of SOEs in different countries in 2015, billions of US dollars
Source: calculations based on OECD data [The Size and Sectoral Distribution of State-Owned Enterprises, Paris: OECD Publishing, 2017]; for Russia, the sample data collected by the RANEPA Institute of Applied Economic Research are applied.
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* Finland, Denmark, Sweden, Estonia, Latvia, Lithuania, Iceland.
Fig. 20. The value index of SOEs in different countries in 2015, as a percentage of the total market capitalization index of public companies
Source: calculations based on OECD data [The Size and Sectoral Distribution of State-Owned Enterprises, Paris: OECD Publishing, 2017]; for Russia, the sample data collected by the RANEPA Institute of Applied Economic Research are applied.
Fig. 21 presents the inputs of SOEs operating in different countries in the total number of persons employed in each economy in 2015. Russia's index of 5.4 percent was found to be one of the highest among the 40 countries included in the OECD sample. The corresponding average index for all these countries, including China, was only 1.9 percent. By the input of SOE personnel in the total number of employed persons, Russia was behind only three countries - Norway (9.4 percent), Latvia (6.4 percent), and Slovenia (6.2 percent). At the same
time, by the same index, Russia was ahead of some other countries with a high input of the public sector in their national economies: Hungary (4.0 percent), France (3.5 percent), Finland (3.5 percent), China (3.1 percent), Sweden (2.9 percent), Turkey (2.5 percent), Germany (1.0 percent), Brazil (0.9 percent), and Mexico (0.2 percent).
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Fig. 21. The inputs of SOE personnel in the total number of employed persons in different countries in 2015, percent
Source: calculations based on OECD data [The Size and Sectoral Distribution of State-Owned Enterprises, Paris: OECD Publishing, 2017]; for Russia, the sample data collected by the RANEPA Institute of Applied Economic Research are applied.
At present, on the basis of the available OECD statistics on SOEs operating in different countries, it is not possible to correctly assess the year-on-year movement patterns of the public sector in the entrepreneurial sphere. The relevant estimates can be presented only for Russia, derived on the basis of the time series in our SOE sample over the 11-year period from 2006 through 2016.
Fig. 22 shows the movement patterns, in Russia, of the indices describing the inputs of SOEs in the total market capitalization index, the number of employed persons in the total economy, and proceeds in the total economy. Over 11 years, the input of the capitalization index of SOEs in the total capitalization index of the Russian stock market shrank only slightly, from 50.0 percent in 2006 to 48.7 percent in 2016. At the same time, the changes displayed by that index were cyclical: it was notably on the decline during the period of the Russian stock market's growth, but in the post-crisis year 2009, and then in 2016 during the stock market's rebound, it displayed dramatic surges. Evidently, this 'rebound phenomenon' had to do with the more substantial support provided by the government to biggest SOEs, by comparison with other companies, during the acute phase of the crisis.
The input of SOE employees in the total number of employed persons in Russia's total economy, which was shown (see Fig. 23) to be among the highest in the world, also displayed an obvious trend towards long-term growth. Over the 11-year period, this index for SOEs increased from 2.3 percent in 2006 to 5.8 percent in 2016, or 2.5 times.
The input of SOEs in the total economy's proceeds also increased, although at a more moderate rate compared with the growth rate of the SOE personnel. That index increased from
9.2 percent in 2006 to 11.5 percent in 2016, i.e., approximately by 1/4. It should be noted that the input of proceeds generated by SOEs began to decline specifically from 2012 onwards, when the Russian economy was entering the period of recession - from 13.7 percent in 2011 to 12.4 percent in 2015. In addition to all the other factors, this could be caused by the declining performance level of these companies compared with the private sector of the economy.
The year-on-year data on capitalization, the number of employed persons and proceeds for the SOEs included in our sample over the period from 2006 through 2016 are presented in Fig. 22 and Annex 1.
30
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Input of SOEs in total number of employed persons, percent Input of SOEs in total capitalization Input of SOEs in total proceeds
Fig. 22. The inputs of SOEs in the capitalization index, total number of employed persons and total proceeds in Russia in 2006-2016, percent
Source: calculations based on the sample data collected by the RANEPA Institute of Applied Economic Research.
The data on the number of personnel and the amount of proceeds generated by SOEs across our sample can be set against the corresponding data for a broader group of organizations with state stakes released by Rosstat. In this dataset, there are organizations in federal ownership; in ownership by subjects of the Russian Federation; in municipal ownership; in mixed ownership by Russian residents; and in joint Russian/foreign ownership. The latter may include joint ventures with foreign capital and either state-owned or private stakes on the Russian side, as such entities do not always require the participation of government units. According to Rosstat data, 1 the number of organizations2 in federal ownership plunged from 6,823 in 2006 to 2116 in 2016, or by 69.0 percent. Over the same period, the number of organizations owned by RF subjects shrank by 7,518 to 3,303, or by 56.1 percent; that of organizations in municipal ownership - from 17,116 to 13,067, or by 23.6 percent; that of companies in mixed ownership
0
1 URL: http://cbsd.gks.ru/
2 In accordance with the classification of legal entities by type of ownership, Rosstat recognized the following categories: legal entities registered as commercial organizations; state unitary enterprises (SUEs); joint-stock companies; production co-operatives; non-profit organizations; and consumer co-operatives.
by Russian residents - from 14,227 to 11,336, or by 20.3 percent; and that of organizations in joint Russian/ foreign ownership, on the contrary, increased from 12,030 to 24,590, or 2.1 times.
In Fig. 23, the relative data on the number of employed persons and amount of proceeds for our SOE sample are set against the aggregate data on all organizations in federal ownership, ownership of RF subjects, municipal ownership, mixed Russian ownership, and joint Russian/foreign ownership. On the basis of these data, it becomes evident that in terms of personnel number and proceeds, the gap between the SOEs included in our sample and all the other organizations entered in the Rosstat records is very significant. Thus, for example, in 2016, the input of SOE employees in the number of employed persons in the total economy amounted to 5.8 percent, while the same index for the entire group of organizations in Rosstat's dataset was 54.2 percent; the relative inputs in total proceeds amounted to 11.5 and 16.0 percent respectively. However, this soaring index demonstrated by Rosstat data could largely be explained by the inclusion therein of the group of companies in foreign/Russian ownership where, strictly speaking, the presence of government units among the owners is not mandatory.
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side axis)*
— n. — Proceeds of SOEs (right-hand side axis)
* Companies in federal, subfederal and local self-government ownership; companies in mixed ownership and joint ownership by Russian and foreign entities.
Fig. 23. The input in Russia's national economy of SOEs and organizations owned by federal, subfederal, local self-government bodies, together with companies in mixed ownership and joint ownership by Russian and foreign units, by their number of employed persons and proceeds, percent
Source: calculations based on the sample data collected by the RANEPA Institute of Applied Economic Research.
If the data on the number of employed persons and proceeds are recalculated for the more narrow sample of organizations entered in Rosstat's statistical records, without the companies in joint ownership by Russian and foreign entities, the parameters of SOEs included in our sample will display significantly closer similarities, especially with regards to proceeds (Fig. 24). In 2016, about 20.5 percent of the reported average staffing number in Russia was accounted for by the enterprises in federal, subfederal and local self-government ownership,
and by enterprises in mixed ownership. The comparable index for SOEs was 5.8 percent. At the same time, both SOEs and the enterprises included in Rosstat's sample generated approximately comparable amounts of proceeds. Moreover, in 2016, the relative index of proceeds generated by SOEs - 11.5 percent of the total proceeds index in the national economy -was above the corresponding index for Rosstat's sample, which amounted to only 10.1 percent of the same base.1
These results prove that our SOE sample is sufficiently representative to provide a reliable estimate of the input in total proceeds, and consequently in GDP, of all Russian state-owned enterprises. As for the number of employed persons, our SOE sample does not include those companies where the output per worker is low, or those that generate no proceeds. In the latter case, the system of national accounts places such state-owned enterprises in the institutional sector as government units, where their input in GDP is calculated on the basis of their wage costs. In this study, their input in GDP will be entered not in the SOE sector, but in the general government sector.
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-D — • Proceeds of companies with stakes owned by the state and local self-government bodies (right-hand side axis)
— Proceeds of SOEs (right-hand side axis)
Fig. 24. The input in Russia's national economy of SOEs and organizations in federal, subfederal, and municipal ownership, together with companies in mixed ownership, by their number of employed persons and proceeds, percent
Source: calculations based on data released by Rosstat and the sample data collected by the RANEPA Institute of Applied Economic Research.
4.3.2. Estimation of the input in GDP of state-owned enterprises
There exist different methods of estimating the relative share of SOEs in Russia's GDP. Usually, such calculations are either based on a narrow sample, or made without disclosing the calculation methods. Eurostat published a specialized methodology for deriving such estimates on a company level.2 The calculations of a company's input are largely based on its reported
1 This difference can probably be explained by the presence, in our SOE sample, of companies with stakes indirectly owned by the state, which are not taken into account in Rosstat's sample.
2 Eurostat. Essential SNA: Building the basics. Luxembourg: Publications Office of the European Union. 2014.
profits and losses. Output is calculated as the sum of proceeds, growth of stocks reserves, growth of produced fixed assets, net result of asset resale, growth of unfinished production, growth of goods for resale, and other operating profits. Intermediate consumption consists of purchases of raw materials and other materials less their stocks, other purchases and other transaction costs. The amount of value added generated by a company is calculated as the difference between output volume and intermediate consumption. With due regard for the specificities of national accounting systems, certain technical adjustments to this methodology can be made.
Nevertheless, this methodology is rather complex, it requires that the reports submitted by companies be compatible with the International Financial Reporting Standards (IFRS). Methodologically, it is more difficult to estimate the input of SOEs in GDP, because the reports of such companies must provide data compatible with the IFRS. Regretfully, by far not all the SOEs, even among those that have been selected for our samples, actually publish such data. A generalized estimate of the input of SOEs in GDP based on our sample was derived as follows. At the first stage, we applied the Eurostat methodology to calculate, for the period 2006-2016, the inputs of the two biggest non-financial SOEs - Gazprom and Rosneft - in total proceeds and in GDP. After that, by dividing their input in GDP by their input in total proceeds, we derived a multiplier factor, its average value for the 11-year period being 2.2. By multiplying this value by the input in total proceeds of all the SOEs included in our sample, the input of the latter in GDP can be calculated.1
Additionally, we calculated the input in GDP of the value added created by SUEs. To achieve this, on the basis of data taken from the SPARK information system2 we calculated the amount of proceeds received by SUEs, and then, by applying the same factor of 2.2 (input in GDP/input in total proceeds) to the amount of proceeds received by state-owned enterprises of this type, we derived their value added index.3 To avoid duplicated results, we did not include data for some of the organizations contained in our SOE sample in our calculations of the aggregate indices of SOEs.
The results of our calculations are shown in Fig. 25. Over the entire 11-year period, the input in GDP of the value added index of SOEs increased from 20.2 percent in 2006 to 25.3 percent in 2016. After the financial crisis it jumped from 21.3 percent in 2008 to 30.2 percent in 2011, but later on slid to 25.3 percent in 2016. Over the same period, the input of SUEs in GDP shrank from 2.5 percent in 2006 to 1.5 percent in 2016. That drop was caused primarily by the ongoing privatization processes and various reorganization procedures in that sector, especially in 20112016.
According to other expert estimations, in 2015 in Russia, the input in GDP of companies with state stakes amounted to approximately 29-30 percent.4 Somewhat similar data, although
1 In terms of economics, this factor is applied in order to eliminate, by comparing the input of biggest SOEs in the total economy's proceeds and GDP, the effect of the proceeds index calculated by Rosstat on the basis of the broadest possible database.
2 Hereinafter, we apply data taken from the SPARK information system, available at http://www.spark-interfax.ru/ru/about.
3 In this case, these are SUEs owned by the Russian Federation, subjects of the Russian Federation, and local self-government bodies. Data for both commercial and non-profit organizations are included; data for the SUEs transferred to state corporations are not included.
4 Estimates presented at The Gaidar Forum 2016: Russia and the World. Looking to the Future on 14 January 2016 (the panel discussion 'Publicly-owned Companies - Economic Powerhouse or Deterrent?'. www.gaidarforum.ru).
derived on the basis of a different methodology, were published by the IMF.1 According to these estimations based on data for 26 biggest SOEs, that index in 2012 amounted to 28 percent.
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* Less data for FSUE Russian Post, SUE Mostransavto, the FSUE Rosmorport, Federal State Enterprise Specialized Railroad Security Service of Russia, FSUE Main Military Building Construction Administration No 6, FSUE Main Administration for Construction of Roads and Airfields of the RF Ministry of Defense, SUE Vodokanal of St. Petersburg, SUE Fuel and Energy Complex of St. Petersburg, SUE Mosoblgaz, FSUE Center for Operation of Space Ground Based Infrastructure, and some other SUEs included in our SOE sample.
Fig. 25. The estimated inputs in GDP of the value added indices of SOEs and SUEs, percent
Source: calculations based on the financial reports submitted by SOEs and data distributed by SPARK.
Our data on the input of Russian SOEs in GDP can be compared with available international estimations. According to data released by the OECD,2 in 2009 in 25 of its member states, a total of 2,050 SOEs produced approximately 15 percent of GDP, including 20-30 percent of GDP in transition economies. Russia's corresponding index for the same year was 28.7 percent, which is near the established ceiling for the developing economies.
According to the estimates released by the World Bank,3 in 2006 across the group of developing countries, SOEs generated 15 percent of GDP in Africa, 8 percent in Asia, and 16 percent in Latin America, which was significantly below the input of SOEs in the Russian economy over the same year. In China, the input of SOEs in GDP shrank from 37.6 percent in 1998 to 30 percent in 2010, which roughly corresponds to the input in GDP of Russian SOEs
5
0
1 Hughes R., Josephs T., Karolova V., Krivenkov V., Ljungman G. Russian Federation: Fiscal transparency evaluation. // IMF Country Report. No 14/134. 2014. P. 16.
2 The Size and Composition of the SOE Sector in OECD Countries. OECD Corporate Governance Working Paper 5, 2011. OECD, Paris.
3 Corporate Governance of State-owned Enterprises: A Toolkit. The World Bank, 2014.
over the same year (28.6 percent). As demonstrated by the IMF estimates for the 20-year period1 that ended in 2015, the input of SOEs in Chinese total industry's value added index declined from 40 to 16 percent. In India, the input of SOEs in GDP shrank from 17.5 percent in 19931994 to 13.1 percent in 2006-2007. In contrast to China and India, in Russia the input of SOEs in GDP displays an upward trend.
Thus, in terms of the number of big SOEs, Russia ranks 8th among the 40 countries included in the OECD sample (less China). The number of SOEs in Russia is 105, the average index per country in the OECD sample (less China) being 64. By the number of SOEs in absolute terms, Russia was behind only four countries, China including. In 2015, the capitalization index of Russian SOEs was USD 175 billion, while the sample's average (less China) was USD 62 billion. In terms of the relative value of its SOEs in the capitalization index of public companies, Russia was behind only seven countries, China including. In 2015, this index of Russian SOEs amounted to 36.9 percent, its average for the entire sample (less China) being only 4.0 percent. In terms of the input of the personnel employed by SOEs in the total number of employed persons, Russia was behind only three countries, China including. In 2015, that index for Russia amounted to 5.4 percent, the sample's average, China including, being 1.9 percent.
All these facts confirm the assumption that in Russia, in terms of their size, business value, and personnel number, SOEs as a group weight more than the similar companies operating in most of the other major economies in the world.
An analysis of the movement patterns displayed by the indices describing the scale of activity of SOEs in Russia over the period 2006-2016 revealed the following regularities. The input of SOEs in the market capitalization index of Russian issuers of shares during that period was fluctuating between 36.9 and 52.3 percent, depending on the cyclical behavior of Russia's economy. On the whole, that index demonstrated a slightly downward trend; in 2016, it amounted to 48.7 percent.
The total proceeds of the Russian economy and the total number of employed persons therein over the period 2006-2016, on the contrary, showed a trend towards increasing the role of the public sector. The input of SOE personnel in the total number of employed persons jumped from 2.3 percent in 2006 to 5.8 percent in 2016. A more moderate growth rate over the same period was demonstrated by the per-unit SOE proceeds - that index increased from 9.2 percent in 2006 to 11.5 percent in 2016. The input of SOEs in the total capitalization index of Russia's stock market declined from 50.0 percent in 2006 to 48.7 percent in 2016. Growth in the number of personnel employed by SOEs was not accompanies by a similar growth in sales volume, while the input of SOEs in the aggregate capitalization index over the same period even declined.
The multiplier method described above, where the relevant factor is derived as the ratio of the input of two biggest non-financial SOEs in GDP to their input in total proceeds, makes it possible to estimate the input of SOE sector in GDP. This index points to growth of the input of SOEs in the creation of new value, from 20.2 percent of GDP in 2006 to 25.3 percent of GDP in 2016. In this connection, it becomes obvious that our sample, which consists of only 105 biggest SOEs, represents just a fraction of all the companies with state stakes operating in the Russian economy. However, we believe that our estimates describing the inputs of the companies included in the sample both in GDP and in the total economy's proceeds are sufficiently representative, because the amount of proceeds generated by the SOEs included in
1 Lam R., Rodlauer M., Schipke A. Modernizing China. Investing in Soft Infrastructure. International Monetary Fund, 2017.
our sample is practically the same as the total proceeds of all the companies in federal, subfederal and municipal ownership, as well as those in mixed ownership, entered in Rosstat's dataset.
It is rather difficult to make a comparative analysis of the input of SOEs in GDP, as there are no systematically arranged fresh data for many countries. However, a comparison with available random data for some other countries demonstrates that the input of Russian SOEs in GDP is among the highest, relative to all the other datasets included in our analysis. Besides, as far as Russian companies are concerned, this index was characterized by an upward trend in 2006-2016.
Our estimates of the inputs of SOEs in total proceeds and GDP should, most likely, be regarded as a conservative variant, i.e., as the estimated floors for these indexes' values. It has some value, however, because it relies on an analysis of financial reports of 105 SOEs, including the consolidated financial reporting data of public corporations included in our sample.
Meanwhile, the question as to the size of the inputs in total proceeds and GDP of other SOEs, which were not included in our sample, remains open. The selection of companies entered in the SPARK information system makes it possible to approximately estimate the inputs in total proceeds and GDP of the state-owned companies on Russia's Top 100 list, relative to their proceeds volume. Besides, the SPARK database offers a more accurate by-sector distribution of SOEs.
In each sector of the national economy, we analyzed the indices of 100 biggest companies (relative to their annual volume of proceeds) and estimated the input of aggregate proceeds generated by companies controlled by the state. Companies controlled by the state were understood as the companies operating either under direct or indirect control of the state (taking into account all ownership levels, if those levels secured state control of a subsidiary). The companies with a state stake less than 50 percent+1 share were not included in the sample.
Compared with our relatively small sample of SOEs, the methods employed in processing the statistics in the SPARK sample have several distinctive features. The amount of proceeds for the latter is estimated on the basis of non-consolidated reporting data. This approach results in overestimating the actual indices stored in the system relative to the indices disclosed by big corporations in their reports prepared in accordance with the IFRS.1 Due to the somewhat erroneous nature of the by-sector classifier, the selection of companies controlled by the state across various industries may result in errors, which have to do with duplication of the available information of one and the same company. The actual use of SPARK data is very complicated and time-consuming, and so it is relatively difficult to calculate the proceeds of companies controlled by the state for the entire period from 2006 through 2016. In this case, the estimated amounts of proceeds for different groups of companies were obtained for 2015, and these are presented in Annex 2.
According to our calculations, the highest input of the public sector in the economy, estimated on the basis of proceeds indices obtained for a broader sample of biggest companies, less the sector of budget-funded institutions, amounted to 39.8 percent (Table 12, Annex 2). Table 12, based on data for 2015, also demonstrates the relationship between the inputs of SOEs in total proceeds and GDP, calculated for the sample of 105 companies (a conservative
1 Thus, for example, according to the consolidated reported data, the amount of proceeds generated by PJSK Gazprom in 2016 was RUB 6.1 trillion, while the added-up proceeds reported separately by the holding company and its subsidiaries (according to SPARK data) yield the sum of RUB 9.3 trillion.
estimation of the input of SOE), and the maximum values of these inputs determined on the basis of a broader sample taken from the SPARK information system.
The differences in the estimated proceeds indices are caused not only by the differences in the sample size, but also by the differences in the estimated amounts of the total economy's proceeds in the denominator. If the same proceeds base is used as denominator, the gap between the two estimated indices describing the input of SOEs in total proceeds becomes notably shorter - 12.4 percent in the conservative estimation, and 17.9 percent in the maximum variant based on SPARK data. If we multiply the inputs of SOEs in total proceeds in the conservative and maximum variants by the factor of 2.2, thus converting these indices into those describing inputs in GDP, the resulting input of SOEs in GDP based on data for 2015 will be 27.2 percent in the conservative variant, and 39.4 percent in the maximum variant based on SPARK data.
The use of non-consolidated corporate data taken from the SPARK information system made it possible to correctly distribute between sectors the subsidiaries of holding companies (e.g., the subsidiaries of PJSC Sberbank, PJSC Russian Railways, and other holding companies that produce IT services were placed in the IT sector; the subsidiaries offering education services were likewise placed in the corresponding sector, and so on).
Due to the obvious imbalance, in Russia's national economy, in favor of mineral resources extraction sectors, a general (averaged) estimation of the public sector's size, without a proper by-industry (sectoral) analysis, may produce a seriously distorted picture. In order to obtain more correct estimations of the role of the public sector, we performed a by-industry analysis of Russian companies based on their annual proceeds volume.
Table 12
The conservative and maximum inputs of SOEs in GDP, based on the sample of 105 SOEs and the sample of companies controlled by the state (SPARK data), estimated for 2015
Calculations for SOE-105 sample (conservative estimations) Calculations for SPARK (maximum level)
data incomparable with SOE-105 data comparable with sample SOE-105
1. Proceeds of SOEs, trillions of rubles 25.6 37.1 37.1
2. Proceeds for each sample, trillions of rubles 207 93.3 207
3. Input of SOEs in proceeds (country 1 / country 2 * 100), percent 12.4 39.8 17.9
4. Factor, relative to GDP 2.2 2.2
5. Input of SOEs in GDP (country 3 * country 4), percent 27.2 39.4
Source: calculations based on sample data collected by the RANEPA Institute of Applied Economic Research and SPARK data.
The index of maximum input of the public sector in the economy based on the proceeds of biggest companies varies significantly between sectors. In fact, in each of the following four sectors (energy, transport, mineral resources extraction, and finance), the input of the proceeds of state corporations in the total proceeds of 100 biggest companies is near or above 50 percent. Meanwhile, these 400 biggest companies operating in four sectors (100 in each sector), taken together, generate more than 30 percent of the total proceeds of all Russian companies (Table 13). This proportional distribution pattern largely determines the prominent role of the state in the national economy.
Table 13
The by-sector distribution of companies depending on their proceeds and the input of the public sector
Sector Public sector input (input of state corporations in total proceeds of top 100 companies in each sector), percent
Transport 83.0
Energy 70.9
Mineral resources extraction 70.0
Finance and insurance 46.8
Amenities 31.9
Machine-building, automobile building 30.9
IT, communications, mass media 22.7
Building construction and construction materials 18.4
Real estate activities 15.9
Education* 11.8
Healthcare* 11.5
Chemical production 9.3
Consulting, legal and other services, security services 8.5
Accomodation and food service activities 6.7
Other** 4.9
Metallurgy, metal product manufacturing, metal ore mining 4.4
Culture, arts, sports, lotteries* 3.5
Pharmaceutics 2.6
Forestry, logging, wood processing 1.3
Trade 1.1
AIC and food industry 1.0
Light industry 0.7
* Less the sector of budget-funded institutions.
** Including the incorrectly placed OKVED codes that actually belong to other groups.
Source: calculations based on sample data collected by the RANEPA Institute of Applied Economic Research.
The conclusion concerning the prevalence of the state in four sectors of the Russian economy is largely compatible with the trends observable in other major economies. As demonstrated by the OECD sample of 40 countries, in terms of personnel number and value, the highest relative shares of SOEs were noted in the infrastructure sectors (electricity, natural gas production and supply, transport, and telecommunications), as well as in the financial sector. In 2015, the input of personnel employed by infrastructure SOEs in the total number of personnel employed by SOEs across all countries, less China, on the average amounted to 70 percent; the input of infrastructure SOE in the total market value of companies with state stakes was 51 percent. The SOEs operating in the financial sector accounted for 26 percent of the total market value and 8 percent of the total number of personnel employed by all SOEs. Over the same year in China, infrastructure SOEs accounted for 56 percent of the total number of personnel and 25 percent of total market value in the SOE sector. The inputs of financial SOEs in China amounted to 11 percent of the total number of personnel and 58 percent of the total market value of all state-owned companies.
In view of the dramatic variance in the index describing the input of SOEs in total proceeds across different sectors of the Russian economy, it is necessary that this specificity be taken into account when planning further steps in the sphere of privatization and government property management. In those sectors where SOEs generate less than a third of total proceeds, the state may completely withdraw from their ownership structure, thus creating appropriate conditions for competition. As for the sectors like transport, energy, mineral resources extraction, finance, amenities, where SOEs generate the bulk of proceeds, the withdrawal of the state may be more gradual.
4.3.3. The public sector estimation
The estimation of the public sector's share in GDP, in addition to the input of SOEs, also includes the input of the general government sector (GGS). Overall, this sector can be defined as the input equivalent to the value of public services, paid or unpaid, produced for the benefit of society. If these are paid services, the amount of value added can be derived by adjusting the amount of proceeds by material costs (revenue method) or by incurring the value added components of expenditures (wages and salaries, and some other expenses). If services are free, they are valuated on the basis of compensation of employees.
However, the questions as to how the input of the GGS in GDP can be estimated, and how the corresponding indices can be compared across different countries, have remained open. By way of example, we can point to the estimation methodology employed by the IMF in its overview of the Russian economy.1 Its results are shown in Table 14. The methodology is actually simple: in one variant, the revenue, and in the other - the expenditure of the consolidated budget is added to the corresponding indices of extrabudgetary welfare funds. In both variants, the relevant data are augmented by data on a few extrabudgetary units/entities and the value added indices estimated for 26 biggest state-owned companies. Revenues in the budgetary sector consist of taxes and social contributions, property incomes, revenues generated by the provision of paid services (or work), confiscation mandated by the law, gratis transfers to the budget, incomes generated by operations with assets, and some other types of revenues. Expenditures in the budgetary sector are made up of compensation of employees and the associated social contributions and benefits, purchase of work, services, debt servicing, gratis transfers to organizations and other budgets, welfare expenditures, and some other expenditure types. The records of revenues and expenditures in the budgetary sector are kept by the Federal Treasury and are reflected in public reports in the form of consolidated financial reporting data of public-legal entities of the Russian Federation, budget-funded and autonomous institutions.
IMF experts have come to the conclusion that, taken together with the SOE sector, the input of the GGS in Russia's GDP amounts to 68 percent, which is significantly above the corresponding estimates for other countries. Thus, for example, in one of the IMF publications2 it is stated that in the majority of developing countries, the input of the private sector in GDP is 60 percent, i.e., the share of the public sector is no more than 40 percent. According to another publication,3 the input of the private sector in China's GDP is likewise 60 percent, while that of the public sector is only 40 percent.
In our opinion, the input of the GGS in Russia's GDP as shown here is grossly overestimated. Some components of the aggregate revenue and expenditure indices reflected in the Federal Treasury's reports are not directly linked to the value added actually created by the general government sector in the national economy. Thus, for example, the expenditure index here includes the social benefits paid to households, the cost of work and services bought from other sector of the economy, debt servicing, and operations with assets, those being the items that it would have been more logical to enter in the report as part of revenues received by other sectors
1 Hughes R., Josephs T., Karolova V., Krivenkov V., Ljungman G. Russian Federation: Fiscal transparency evaluation. // IMF Country Report. No 14/134. 2014.
2 IMF Survey: IMF Facilitates Debate on Private Sector, Growth, Jobs in Mideast. IMF Survey. November 27, 2013. URL: https://www.imf.org/en/News/Articles/2015/09/28/04/53/socar112713a.
3 Ding H., He H. A Tale of Transition: An Empirical Analysis of Economic Inequality in Urban China, 19862009. // IMF Working Paper. WP/16/239. 2016.
of the economy. The revenue side also includes tax receipts, social security contributions, property incomes and other payments, which are then redistributed in favor of households and businesses, and so they can hardly be treated as the value added created by the GGS. In this case, the GGS acts as an intermediary in the distribution of these resources. Consequently, its value added consists only of the expenses incurred in the course of its upkeep (the upkeep of government units and budget-funded institutions), and of the even smaller amount of the value added created as a result of production of paid services by government units or budget-funded institutions.
Table 14
Russia: IMF estimates of public sector institutions and finance in 2012,
percent of GDP
Number of units Revenue1 Expenditure1 Difference2 Net transfer input Net difference
1 2 3 = 1 - 2 4 5 = 3 - 4
I. General government (consolidated data) 40,063 44.4 41.4 3.0 -0.8 3.8
Central government (consolidated data) 16,878 30.4 27.7 2.7 -4.0 6.6
Consolidated budget of central government 12,402 22.4 20.2 2.2 -11.5 13.7
Budget-funded and autonomous institutions 4,389 2.5 2.7 -0.3 0.3 -0.6
Welfare funds 87 13.5 12.7 0.7 7.3 -6.5
Governments of RF subjects (consolidated data) 23,185 25.0 24.6 0.4 3.2 -2.8
Governments of RF subjects 83 16.3 16.1 0.3 -1.1 1.3
Local self-government 23,102 8.6 8.5 0.1 4.2 -4.1
II. State-owned companies (consolidated data) 41,891 28.63 28.63 -0.1 0.8 -0.9
Unitary enterprises 22,440
State corporations 308
Joint-stock companies 8,344
Other state-controlled units 10,799
III. Public sector (consolidated data) 81954 71.3 68.3 3.0 0.0 3.0
1 Consolidated revenue/expenditure at subsector and sector level, including internal flows between subsector/sector.
2 Net borrowing / lending.
3 Estimations by IMF experts are based on the annual reports of 26 biggest state-owned companies.
Source: Hughes R., Josephs T., Karolova V., Krivenkov V., Ljungman G. Russian Federation: Fiscal transparency evaluation. // IMF Country Report. No 14/134. 2014. P.15.
Thus, the IMF estimations based on consolidated financial data reported by the Federal Treasury need, at least, to be seriously adjusted. These adjustments will be discussed below, together with the possible variants of calculating the input of the GGS in GDP.
It seems that in order to obtain more correct results, we should compare the quantitative parameters of three different variants of measuring the input of the GGS in GDP.
Variant 1 relies on GGS estimations based on the production account in the system of national accounts (SNA). This approach is simpler than that applied by IMF experts. In the production account, Rosstat reflects the value of the input of the GGS in GDP, calculated by the revenue method. Of course, it can be argued, as a separate issue, if indeed all the units financed by the government are actually included in the general government sector in the system of national accounts. Nevertheless, it should be admitted that the value added created by the GGS is being entered in records, and moreover, these records are kept in accordance with the international accounting standards. In other words, the GGS indices derived on the basis of the
SNA for Russia may indeed be applied in international comparative studies of the scope of the public sector in different countries.
Variant 2 relies on the method applied by [Hughes R. et al., 2014]1. However, in contrast to the estimations by the IMF, where the index is shown only as of 2012, we calculated its movement pattern, by applying the same methodology, over the period from 2011 through 2016, i.e., the entire period for which the initial reporting data are available on the Federal Treasury's official website. The slight deviation of our results for 2012 from the corresponding estimations obtained by the IMF can probably be explained by the subsequent corrections entered by the Federal Treasury in its reports.
Variant 3 implies the use of the same method as applied by the IMF, with certain adjustments. Thus, the input of the GGS is estimated not on the basis of the total sum of the budgetary system's revenue and expenditure, but only the items 'compensation of employees', 'employers' social contributions', 'other expenses' and 'before tax operational result'. These indices, in our opinion, more accurately describe the amount of value added created by the GGS.
The calculated results based on all the three variants are shown in Fig. 26 and in Annex 3. As can be seen in Fig. 26, the estimated input of the GGS in GDP in Variant 2 is significantly higher than the corresponding values obtained in Variants 1 and 3. At the same time, these values (Variants 1 and 3) are relatively close. Thus, in 2015, the input of GGS in GDP was 41.6 percent in Variant 2, 19.2 percent in Variant 1, and 14.0 percent in Variant 3.
The different variants of calculating the input of the GGS demonstrate notably different movement patterns of that index. While in accordance with the estimations based on the IMF methodology (Variant 2) the budget-funded sector's input in GDP increased from 32.7 percent in 2011 to 40.6 percent in 2016, or by 7.9 percentage points, the estimations for the same period based on the adjusted methodology demonstrate a plunge from 16.5 to 12.3 percent. This can be explained by the accelerated growth, after 2008, of the government expenditure component -the transfers earmarked for the payment of social benefits to households - that in accordance with the adjusted methodology is not included in total government expenditure.
In our opinion, out of the three variants, the most reliable one is the estimation of the input of the GGS in GDP in Variant 1, which is based on Rosstat's official statistics reflecting the value of services produced by the public sector of the economy and entered in the production account. These data are obtained directly from the reports submitted by organizations operating in the budget-funded sector of the economy, in accordance with the established international standards of the System of National Accounts. They are comparable with similar estimations recognized in other countries, available for a longer period, and on the average are close to data derived from indirect estimations of the input of the GGS in Variant 3.
In Fig. 27, the input of the GGS in Russia's GDP, as estimated in Variant 1 for 2015, is compared with the corresponding indices for 39 countries. Russia's index amounts to 19.2 percent of GDP, which roughly corresponds to the average index for this group of countries. Thus, the average for the OECD sample is 19.7 percent, and that for the 28 member states of the European Union - 18.6 percent. The highest input of the GGS is noted in the Scandinavian countries (Finland, Denmark, Iceland, Sweden and Norway), where it amounts to 28.4, 27.8, 26.6, 26.1 and 24.8 percent of GDP respectively. The lowest input of the GGS is observed in
1 Hughes R., Josephs T., Karolova V., Krivenkov V., Ljungman G. Russian Federation: Fiscal transparency evaluation. // IMF Country Report. No 14/134. 2014.
India, Ireland, Mexico, Germany and South Korea, where it amounts to 12.2, 12.2, 12.6, 14.3 and 14.3 percent of GDP respectively.
80 70 60 50 40 30 20 10 0
P. 75,4
16,9
- -20,0----192"
45,7 47,7 414 - - - - - ^ - - - 41,9 - - -y 43,7 _ _ _ -4^,
. a-TTr&h____ _
52,7-'"' / 43X 41,6 40,<
16,8
2006
2007
2008
2009
2010
32,7' 18,4
16,8 2011
T8;9"_ --■■
—•—
16,4 2012
2014
--43:6
6
19,2
I--------
14,0 12,3 2015 2016
Variant 1 (general government sector, production account (SNA)) —— O—• Variant 2 (IMF methodology, estimations based on treasury revenue)
Variant 2 (IMF methodology, estimations based on treasury expenditure) —Variant 3 (adjusted IMF methodology)
Note. In Variants 2 and 3, due to the limitations of the published reports of the Federal Treasury, data are available only for the period 2011-2016 [URL: http://datamarts.roskazna.ru/razdely/konsolidirovannye-dannye-po-ppo-i-uchr/konsolidirovannyj-finansovyj-rezultat-publichno-pravovyh-obrazovanij-rf-budjetnyh-i-avtonomnyh-uchrezhdenij/?paramPeriod=2016]. Variant 2, in accordance with the IMF methodology, is based on the total revenue and expenditure index. In Variant 1, data for the period 2006-2015 were taken from the reports for each institutional sector based on the SNA [URL: http://www.gks.ru/bgd/regl/b17_15/Main.htm]. The revenue surge in Variants 2 and 3 can probably be explained by the entry of proceeds of sales, by the RF Government, of foreign currency from the RF Reserve Fund.
Fig. 26. The inputs of GGS in GDP estimated in accordance with different
methodologies, percent
Source: calculations based on sample data collected by the RANEPA Institute of Applied Economic Research.
30 28:427:9-2626;1-
24,8
25 20 15 10 5
. '—-^ - -19,7 - 19,3;
21,3 ' 20,620,3 198/195 19,2 18,8
..... ^I9!5_____19.,1_12,0..1.8,21S:6_18.,ÍS:5.18:5.8,3.18,21
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H 15,6 14,9
14,7
2,612,2 12,2
I
3 e
SN
rt .3 H ut
ic 3 u UK ai is s u ia IB tr st Spain s) ie tri tn ai 1 v m iu JM is d J "o USA a ic ïï£ s d J d J
p e & & Aus u o m 0H ta st o 1e th et e N
h c c 8 o N £ e
e N 2( e N
o U fS
0
Fig. 27. The input of the GGS in GDP in 2015 across different countries, percent
Source: calculations based on data released by OECD.Stat [https://stats.oecd.org/], for Russia - based on data released by SNA Rosstat [URL: http://www.gks.ru/bgd/regl/b17_15/Main.htm].
Table 15 and Fig. 28 demonstrate the movement patterns of the input of the GGS in GDP across the same 39 countries and Russia over the period from 2006 through 2015. In Russia, the input of the GGS in GDP increased from 16.9 percent in 2006 to 19.2 percent in 2016, or by 2.3 percentage points. The arithmetic mean for the OECD member states over the entire 11-year period remained stable, at a level close to 19.2 percent in 2006, or 19.7 percent in 2015. The average input of the GGS in GDP across the 28 member states of the European Union over the same period changed from 18.4 to 18.8 percent. Thus, in accordance with this criterion, Russia's index in 2015 was at the same level as in the high-income countries. The movement patterns of the inputs of the GGS in GDP in the major developing economies over the period 2006-2016 were multi-vectored. In India, this index plunged from 19.5 percent in 2006 to 12.2 percent in 2016; in Poland - from 19.5 to 18.5 percent respectively. It moved in the opposite direction in Mexico, rising from 10.6 percent in 2006 to 12.6 percent in 2016, and in South Korea, rising from 13.7 to 14.3 percent respectively. Thus, in Russia, the growth rate of the input of the GGS in GDP over the period under consideration (by 2.3 percentage points) was one of the fastest in this group of countries. By meeting this criterion, the Russian economy reached the level of developed economies (OECD member states).
The input
of GGS in GDP in different countries over the period 2006-2015, Table 15 percent
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2 3 4 5 6 7 8 9 10 11
17.7 17.6 17.9 18.4 18.1 18.3 18.4 18.2 18.4 19.1
20.1 19.4 19.9 21.3 21.1 20.5 20.4 20.4 20.2 20.2
17.6 17.3 17.9 18.9 18.5 18.6 19.0 19.3 19.1 18.6
21.6 21.7 22.1 24.5 23.9 23.5 23.4 23.3 22.8 23.5
20.8 20.0 20.1 21.5 21.3 20.7 20.3 20.6 20.0 19.5
26.2 26.2 27.0 30.1 29.6 28.8 28.8 28.4 28.2 27.9
17.2 17.1 19.8 22.3 21.4 19.8 19.6 20.1 20.7 21.5
25.2 24.6 25.6 28.7 28.7 28.4 29.2 29.6 29.5 28.4
20.8 20.5 20.6 22.0 21.9 21.7 21.8 22.0 21.9 21.6
13.4 13.1 13.4 14.6 14.5 14.3 14.4 14.5 14.4 14.3
20.2 20.7 20.9 23.1 22.1 21.2 21.7 20.8 20.9 21.0
21.7 21.0 21.7 22.5 22.1 21.1 20.9 20.9 21.3 21.3
26.6 25.9 26.5 27.7 27.7 27.6 27.7 27.3 27.2 26.6
16.3 16.8 18.6 20.1 19.0 18.3 17.5 16.8 15.9 12.2
23.8 23.0 22.9 22.5 22.3 22.1 22.4 22.2 22.2 22.0
18.5 18.1 18.6 19.7 19.5 18.9 19.0 19.2 18.9 18.5
13.7 13.8 14.4 14.7 13.9 13.9 14.1 14.3 14.4 14.3
19.8 19.5 21.7 21.8 21.1 20.6 19.7 19.9 20.0 20.3
14.0 13.4 13.9 15.5 15.0 14.7 15.3 15.2 14.7 14.9
10.6 10.6 10.9 12.1 11.7 11.6 11.9 12.3 12.3 12.6
18.0 17.8 18.2 19.9 19.8 19.3 19.3 19.1 19.0 18.2
17.8 17.6 18.8 18.9 18.7 18.6 18.4 17.9 17.8 17.8
19.6 20.1 19.7 22.9 22.7 22.2 22.1 22.5 23.3 24.8
19.5 19.1 19.5 19.4 19.8 18.7 18.5 18.6 18.8 18.5
21.4 21.0 21.3 22.8 22.2 21.6 20.4 21.0 20.4 19.8
17.3 15.8 15.5 18.2 17.7 17.6 17.4 17.8 18.2 18.7
19.5 18.3 19.1 21.1 22.0 22.5 22.4 21.7 20.8 20.6
16.5 17.1 18.1 19.6 19.7 19.8 19.3 19.3 19.1 19.0
26.2 25.6 26.2 27.5 26.3 26.1 26.8 27.0 26.7 26.1
13.9 13.5 13.8 14.7 14.5 14.6 14.9 15.1 15.1 15.2
15.3 15.3 14.4 15.1 14.8 14.8 14.6
19.7 19.6 20.4 22.0 21.7 20.8 20.5 19.9 19.5 19.3
i
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Israel
Italy
South Korea
Latvia
Luxembourg
Mexico
The
Netherlands
New Zealand
Norway
Poland
Portugal
Slovakia
Slovenia
Spain
Sweden
Switzerland
Turkey
UK
Cont'd
1 2 3 4 5 6 7 8 9 10 11
USA 19.1 19.3 20.2 21.3 21.2 20.7 20.0 19.3 18.8 18.5
OECD -
arithmetic 19.2 18.9 19.5 20.8 20.5 20.0 20.0 20.0 19.9 19.7
mean
European
Union (28 18.4 18.2 18.7 20.1 19.8 19.4 19.4 19.4 19.1 18.8
countries)
Brazil 19.2 19.0 18.9 19.3 19.5
Peru 11.6 11.6 13.4 12.6 12.1 12.8 13.4 14.2 14.7
Columbia 14.0 13.9 14.0 14.9 15.0 13.8 14.3 15.1 15.2 15.6
Costa Rica 13.7 13.4 14.2 16.4 17.4 17.7 17.8 18.4 18.2 18.3
India 19.5 18.2 16.6 16.2 15.9 14.4 12.2 11.8 11.4 12.2
SAR 22.5 24.1 24.5 24.4 24.7 24.8 24.9
Russia 16.9 16.8 17.3 20.0 19.2 18.4 18.9 19.7 19.2 19.2
Source: calculations based on sample data collected by the RANEPA Institute of Applied Economic Research.
10 -
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
_ ■■ "OECD -arithmetic mean -™• - European Union (28 countries) Brazil
-X— Poland ---USA — — — Republic of Korea
India RSA Russia
Fig. 28. The input of the GGS in GDP in 2006-2015, percent Source: calculations based on data released by OECD.Stat
Thus, the index that most closely reflects the input of the GGS in GDP is the one calculated on the basis of the production account in the SNA.
4.3.4. The aggregate estimation of the public sector in Russia's economy
The aggregate estimation of the input of the public sector in GDP consists of three components: the input of SOEs; the input of the GGS; and the input of value produced by state unitary enterprises (SUEs). These three components are shown in Fig. 29. The bulk of the total
input, relative to the size of the public sector, belonged to SOEs, their input in GDP (conservative estimation) increased from 20.2 percent in 2006 to 25.3 percent in 2016. The input of the GGS over the same period also increased, from 16.9 to 19.2 percent. The input of SUEs, on the contrary, shrank from 2.5 to 1.5 percent, which was the upshot of the government policy aimed at gradual elimination of this organizational legal form, because it usually performs inefficiently.
More detailed statistics describing the input of the public sector (and its various components) in GDP are presented in Annex 3.
60
50
40
30
Ph
Q
O 20
■S &
10
2,5
20,2
16,9
2,5
19,9
16,8
2,6
21,3
17,3
3,0
28,7
20,0
2,7
2,7
28,6
19,2
30,2
18,4
1,9 1,7
1,7
28,7
18,9
27,3
19,
29,7
19,2
1,7
1,5
27,2
19,2
25,3
19,2
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0
General government sector (Variant 1)
Fig. 29. The components of the input of the public sector in Russia's GDP
in 2006-2016, percent
Source: calculations based on sample data collected by the RANEPA Institute of Applied Economic Research.
The total input of the public sector in GDP, including the inputs of SOEs, SUEs and the GGS, increased from 39.6 percent in 2006 to 46.0 percent in 2016 (Fig. 30). In this connection, the movement pattern displayed by this index reveals several regularities. The most robust growth rate was observed after the financial crisis of 2008 - from 41.2 percent in 2008 to 51.8 percent in 2009, in part in response to the government measures designed to support those SOEs that were important for the smooth functioning of the entire system, and primarily the big ones; the other growth-triggering factor was the rapid recovery of prices for raw materials in the international markets. The shrinking input of the public sector from 50.6 percent of GDP in 2014 to 46.0 percent in 2016 was caused by the reduced input of SOEs in GDP resulting from the plunging prices of mineral resources and the ruble's weakening. All these changes demonstrate that the most volatile component of the public sector's input in GDP is that of SOEs, which are very susceptible to the shocks in foreign raw materials markets, and this pass-through effect is reflected in the GDP index.
55
50
45
40
35
30
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Fig. 30. The total input of the public sector in Russia's GDP in 2006-2016, percent Source: calculations based on sample data collected by the RANEPA Institute of Applied Economic Research.
In a number of studies, the input of the public sector in GDP is estimated to be higher that it follows from the calculations presented here. According to the estimates1 released by the RF Federal Antimonopoly Service (FAS), the aggregate input of government units and state-owned companies in Russia's GDP in 2015 amounted to approximately 70 percent, whereas in 2005 this index had been not higher than 35 percent. At the same time, the FAS, regretfully, does not disclose the methodology applied in its calculations. According to the calculations published by the IMF,2 the size of the public sector in Russia, including budget-funded organizations, as of 2012 was estimated to be 68 percent (the share of SOEs being about 28 percent and that of the GGS -40 percent of GDP).
Besides, our estimations of the input of the public sector in GDP turned out to be somewhat higher than the corresponding index (35 percent in 2010) derived by the EBRD3.
In China, according to the IMF, this index IMF is about 40 percent. In the IMF publication it is stated4 that in the majority of developing countries the input of the private sector in GDP is 60 percent, i.e., that of the public sector is not more than 40 percent. If we look at the corresponding index for Russia after the 2008 crisis, when it was at 51.8 percent in 2009 and 46.0 percent in 2016, it can be noticed that its value is 6-12 percentage points above the level considered to be typical of the countries with developing markets. This gap could be even wider, given the lack of transparency in the defense-industrial complex and some other non-public segments of the Russian economy.
1 Report on the State of Competition in the Russian Federation for the Year 2015. Moscow. Federal Antimonopoly Service. 2016.
2 Hughes R., Josephs T., Karolova V., Krivenkov V., Ljungman G. Russian Federation: Fiscal transparency evaluation. // IMF Country Report. No 14/134. 2014.
3 According to EBRD data, the input of the public sector of Russia's economy in GDP increased from 30 percent in 2005 to 35 percent in 2010. These data are very instructive from the point of view of tracing the input's dynamics, it should be said, however, that as far as the scope of the Russian public sector is concerned, they appear to be understated [Crisis and Transition: The People's Perspective. Transition Report 2011. EBRD, 2011.).
4 IMF Survey: IMF Facilitates Debate on Private Sector, Growth, Jobs in Mideast. IMF Survey. November 27, 2013. URL: https://www.imf.org/en/News/Articles/2015/09/28/04/53/socar112713a.
The upward trend displayed in 2006-2016 by the input of the public sector in Russia's GDP is an alarming phenomenon. It should be noted that this upward movement happened due to the increasing number of both SOEs and the expansion of the GGS. Unfortunately, due to absence of systematic data on the public sector in other economies, we cannot say just how typical this trend has been on an international level. However, as was mentioned earlier, India in recent years has been demonstrating shrinking inputs not only of the public sector (from 17.5 percent in 1993-1994 to 13.1 percent in 2006-2007), but also of the GGS (from 19.5 percent in 2006 to 12.2 percent in 2016). In China, over a 20-year period that ended in 2015, the input of SOEs in total industry's value added shrank from 40 to 16 percent.
At the same time, the methodology for estimating the input of the public sector in GDP presented here cannot be regarded as a sufficient tool to be employed in assessing the overall role of the state in a national economy. Rather, it assesses the role of the state as a direct participant in the new value creation process. However, in addition to that role, the state can also actively participate, e.g., in redistributing primary incomes across the institutional sectors of the economy, or financial resources across society, and these functions should be borne in mind when attempting a comprehensive study of the direct and indirect influence of the state in the economic sphere.
Annex 1
The capitalization, employee numbers and proceeds of Russian SOEs
over the period 2006-2016
Measur. units 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1.1. Russian stock market capitalization billion s of rubles 25,482 32,740 11,017 23,091 28,975 24,551 24,657 25,256 22,838 28,733 37,748
1.2. Capitalization of SOEs billion s of rubles 12,747 15,759 4,444 12,082 13,283 11,544 11,851 11,759 10,435 10,596 18,366
1.3. Input of SOEs in total capitalization index percent 50.0 48.1 40.3 52.3 45.8 47.0 48.1 46.6 45.7 36.9 48.7
2.1. Number of employed persons in total economy thousands of persons 67,174 68,019 68,474 67,343 67,493 67,644 67,968 67,901 67,813 68,495 68,400
2.2. Number of persons employed by SOEs thousands of persons 1,573 1,755 2,142 2,557 2,964 3,085 3,279 3,920 4,010 3,672 3,951
2.3. Input of SOEs in total number of employed persons, percent percent 2.3 2.6 3.1 3.8 4.4 4.6 4.8 5.8 5.9 5.4 5.8
3.1. Proceeds, total economy billion s of rubles 60,460 75,281 87,605 83,450 102,597 120,183 140,774 174,224 185,319 207,014 234,302
3.2. Proceeds of SOEs billion s of rubles 5,564 6,798 8,463 10,898 13,360 16,488 18,342 21,607 25,035 25,586 26,933
3.3. Input of SOEs in total proceeds percent 9.2 9.0 9.7 13.1 13.0 13.7 13.0 12.4 13.5 12.4 11.5
Source: calculations based on sample data collected by the RANEPA Institute of Applied Economic Research.
Annex 2
The input of the state in the economy (less the sector of budget-funded institutions)
Total proceeds of top 100 state-controlled Input of total
Concentration companies by sector proceeds of
state-controlled companies (out of top 100) in total proceeds of top 100 companies in each sector, percent
Industry Total proceeds of 10,000 biggest companies (billion s of rubles) Total proceeds of 100 biggest companies (billion s of rubles) (input of proceeds of top 100 companies in total proceeds of top 10,000 companies), percent companies controlled by RF (billions of rubles) companies controlled by RF subjects (billions of rubles) companies controlled by municipalities (billions of rubles) SOEs, TOTAL (billions of rubles)
1 2 3 4 5 6 7 8 9
Fishing 332 239 72 - - - - 0.0
Forestry and logging 224 107 48 0.4 2.5 - 2.9 2.7
Crop and animal production 2 527 763 30 16.3 14.2 - 30.5 4.0
Coal mining 870 830 95 5.2 - - 5.2 0.6
Crude oil and
natural gas 26,760 22,819 85 16,978.3 - - 16,978.3 74.4
production
Metal ore mining 1,109 999 90 1.5 - - 1.5 0.2
Other mineral
resources 546 442 81 195.3 0.5 0.7 196.6 44.4
extraction
Mineral
resources extraction - 1,292 1,031 80 410.4 - - 410.4 39.8
servicing
Foodstuff 4,931 2,036 41 0.0
manufacturing
Beverage manufacturing 787 637 81 8.5 13.8 - 22.4 3.5
Tobacco product manufacturing and sales 1,363 1,362 100 - - - - 0.0
Textiles 197 120 61 1.4 - - 1.4 1.2
Clothing 220 126 57 0.5 - - 0.5 0.4
Leather products 74 60 81 0.3 - - 0.3 0.5
Paper 517 394 76 - - - - 0.0
Wood processing 513 282 55 4.7 1.5 - 6.2 2.2
Printing 291 159 55 4.5 0.6 - 5.1 3.2
Furniture 269 125 46 - - - - 0.0
Petroleum products 2,941 2,913 99 389.7 - - 389.7 13.4
Chemical production 2,410 1,857 77 98.4 - - 98.4 5.3
Rubber & plastic products 1,015 455 45 - - - - 0.0
Pharmaceuticals
(manufacturing and sales) 2,339 1,683 72 5.8 37.4 - 43.2 2.6
Cement, glass
and other
biulding construction 1,467 503 34 20.9 - - 20.9 4.2
material
manufacturing
Cont'd
1 2 3 4 5 6 7 8 9
Metallurgy 4,655 4,271 92 168.5 66.2 - 234.6 5.5
Metal product manufacturing 1,316 459 35 17.1 - - 17.1 3.7
Machine-
building, electronic,
optical, 4,006 1,803 45 1,002.8 - - 1,002.8 55.6
electrical
equipment manufacturing
Transportation
equipment manufacturing and sales 2,552 2,328 91 334.0 - - 334.0 14.3
Other finished products 257 166 65 14.5 - - 14.5 8.7
Machinery and
equipment repair and assembly 732 313 43 65.5 5.7 - 71.1 22.7
Electricity, gas, steam supply 7,651 5,044 66 3,394.6 183.0 - 3,577.6 70.9
Water supply 402 246 61 - 106.6 71.9 178.5 72.6
Waste
management and remediation 753 385 51 20.5 2.5 - 22.9 6.0
activities
Construction 10,118 2,881 28 495.3 106.4 - 601.7 20.9
Trade 31,122 8,805 28 97.7 - - 97.7 1.1
Transportation and storage 10,718 6,731 63 5,405.7 180.2 - 5,585.9 83.0
Accomodation
and food service 1,087 473 43 16.8 12.0 2.9 31.7 6.7
activities
IT and
communications, 3,954 2 447 62 547.9 7.9 - 555.8 22.7
mass media
Finance and insurance 15,593 13,574 87 6,348.8 - - 6,348.8 46.8
Real estate activities 2,593 550 21 53.5 21.6 12.6 87.8 15.9
Consulting, legal and other services, 2,708 447 17 34.1 3.9 - 38.0 8.5
security services
Education* 139 40 29 4.5 - 0.3 4.8 11.8
Healthcare* 591 191 32 8.3 13.6 - 22.0 11.5
Culture, arts, sports, lotteries* 286 148 52 3.3 1.8 - 5.1 3.5
Other* * 5,640 2,034 36 100.4 - - 100.4 4.9
TOTAL 159,866 93,279 58 36,276 782 88 37,146 39.8
* Less the sector of budget-funded institutions.
** Including incorrectly placed OKVED codes that actually belong to other groups. Source: calculations based on data released by SPARK.
Annex 3
The estimated public sector's input in Russia's GDP in 2006-2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1. Gross domestic product, billions of rubles 6,917 33,248 41,277 38,807 46,309 60,283 68,164 73,134 79,200 83,233 86,044
2. General government sector
2.1 Variant 1 - calculations based on production account (SNA) a
billions of rubles 4,549 5,580 7,138 7,765 8,901 11,063 12,880 14,392 15,225 15,969 16,520®
percent of GDP 16.9 16.8 17.3 20.0 19.2 18.4 18.9 19.7 19.2 19.2 19.2®
2.2 Variant 2 - calculations based on IMF methodology0
2.2.a Revenue side
billions of rubles 24,937 31,152 34,867 59,718 36,400 37,479
percent of GDP 41.4 45.7 47.7 75.4 43.7 43.6
2.2.b Expenditure side
billions of rubles 19,730 27,286 29,984 33,174 34,661 34,909
percent of GDP 32.7 40.0 41.0 41.9 41.6 40.6
2.3 Variant 3 - adjusted IMF methodologyd
billions of rubles 10,109 11,151 13,529 34,477 11,635 10,622
percent of GDP 16.8 16.4 18.5 43.5 14.0 12.3
4. value added of SOE, based on conservative estimations
billions of rubles 5,450 6,605 8,773 11,149 13,266 18,194 19,539 19,954 23,538 22,632 21,760
percent of GDP 20.2 19.9 21.3 28.7 28.6 30.2 28.7 27.3 29.7 27.2 25.3
5. value added of state unitary enterprises (SUEs)e
billions of rubles 665 841 1,079 1,172 1,260 1,604 1,322 1,235 1,319 1,409 1,307
percent of GDP 2.5 2.5 2.6 3.0 2.7 2.7 1.9 1.7 1.7 1.7 1.5
6. public sector value added - totalf
billions of rubles 10,664 13,026 16,989 20,085 23,428 30,861 33,741 35,581 40,082 40,018 39,587
percent of GDP 39.6 39.2 41.2 51.8 50.6 51.2 49.5 48.7 50.6 48.1 46.0
a SNA - System of National Accounts. b Estimations for 2016.
c [Hughes R., Josephs T., Karolova V., Krivenkov V., Ljungman G. Russian Federation: Fiscal transparency evaluation. // IMF Country Report. No 14/134. 2014. P.15]. The input of government units was estimated as the total revenue and expenditure of the Consolidated Financial Result of Public-Legal Entities of the Russian Federation, Budget and Autonomous Institutions for 2012, published by the Federal Treasury. d Calculations based on the Consolidated Financial Result of Public-Legal Entities of the Russian Federation, Budget and Autonomous Institutions, published online by the Federal Treasury since 2011. It contains data on compensation of employees and employers' social contributions, other expenses, and operational result before taxes.
e Calculations for those SUEs whose proceeds are recorded in the SPARK information system, with due regard to the total economy's average proceeds to value added ratio. These do not include several big SUEs (i.e., post office Russia, etc.); data for the latter are included in the SOE sample.
f The input of the general government sector in GDP is calculated in this table in accordance with Methodology 1. Source: calculations based on sample data collected by the RANEPA Institute of Applied Economic Studies.
4.4. Small and medium-sized enterprises in 2016-20171
Over the period 2016-2017, a number of specialized normative legal acts were introduced with the aim of developing the small and medium-sized business sector (SMB), including the
1 This section is written by Vera Barinova, the Gaidar Institute, IAES-RANEPA; Stepan Zemtsov, the Gaidar Institute, IAES-RANEPA; Yulia Tsareva, IAES-RANEPA.
SMB Development Strategy until 2030;1 the SMB Corporation was set up;2 and the creation of a basic support infrastructure was completed in many regions. The Single Register of SMB Subjects was introduced in order to follow the monthly movement of their basic indices.
In 2017, 77.9 percent of all organizations and individual entrepreneurs (IEs) belonged to the category of SMB subjects, while at year-end 2016, the share of SMB subjects in the national average employment rate (calculated on the basis of their average staffing number index) amounted to 37.9 percent, and in the total turnover of enterprises and organizations - to 37.1 percent. The input of SMBs, IEs including, in GDP over the period from 2011 through 2016 jumped by 0.5 percentage points, and now amounts to approximately 20 percent.3
Small and medium-sized businesses represent a very significant sector in the Russian economy; nevertheless, in spite of the current positive trends that point towards an expanding entrepreneurial activity and an increasing role, overall, of the SMB sector in the national economy, it still remains relatively underdeveloped in Russia, by comparison with other countries.
4.4.1. The movement of the main development indicators in the SMB sector
The main indicators applied in the analysis of the current status and development trends in Russia's SMB sector are the number of SMB subjects, employment, and turnover relative to company size, by-industry and across Russia's regions. Additional parameters make it possible to more precisely analyze the specific features of small and medium-sized companies in Russia.
When working on a general assessment of the SMB sector, it should be noted that for Russian small and medium-sized companies, it is typical to use new technologies on a low scale; Russia's Innovation Index4 is 5.4 percent, which is 4 times below the corresponding indexes in the BRICS countries, and 7 times lower than in the USA. Besides, the majority of entrepreneurs in Russia lack business development plans, the percentage of unregistered entrepreneurs is high and cannot be estimated accurately, and the share of involuntary entrepreneurs is likewise huge, amounting to 31 percent5.
Besides, Russia is characterized by strong structural and regional disproportions across its SMB sector.
1 Strategy of Small and Medium-sized Business Development in the Russian Federation for the Period until 2030, 2016. See http://economy.gov.ru/minec/main
2 In 2015, in accordance with the Executive Order of the President of the Russian Federation 'On Measures Designed to Further Develop Small and Medium-sized Businesses' and Federal Law 'On the Introduction of Alterations in Some Legislative Acts of the Russian Federation Concerning Issues of Small and Medium-sized Business Development in the Russian Federation'.
3 Report on the results achieved in improving conditions for entrepreneurship and development of small and medium-sized businesses, and in increasing support for individual entrepreneurial initiatives, 2017.
4 Product Newness Index / Competition Intensity of Budding and Well-established Entrepreneurs. Source: Verkhovskaya et al., 2016/2017 National Report Global Entrepreneurship Monitor (GEM), St. Petersburg: St. Petersburg University Graduate School of Management, p. 46. URL: http://gsom.spbu.ru/files/docs/gem_ russia_2016-2017.pdf
5 Ibid.
The movement of indices describing the creation and liquidation of SMB subjects
The data entered in the Single Register of Registered Companies (including IEs) are available beginning from 1 August 2016. As of autumn 2017, the total number of SMB subjects operating in Russia was 5.86 million (Fig. 31 and Table 16), and of these, approximately 3.1 million were IEs (~53percent). In Russia, 95.1 percent of all SMB subjects are micro companies (almost 5.5 million), with only one or two employees on average. The number of small companies in Russia is 265,900 (4.5 percent), and that of medium-sized ones is 19,900 (0.3 percent).
Table 16
The Structure of the SMB Sector, by Company Size and Organizational Form,
As of 10 November 2017
Index Total Micro companies Small companies Medium-sized companies
Legal entities
Number of companies, units 2,756,724 2,498,152 238,893 19,679
Share in total number of SMB subjects, percent 47.024 42.613 4.075 0.336
Share in total number of legal entities, percent 100 90.620 8.666 0.714
Individual entrepreneurs
Number of companies, units 3,105,636 3,079,056 26,446 134
Share in total number of SMB subjects, percent 52.976 52.522 0.451 0.002
Share in total number of IEs, percent 100 99.144 0.852 0.004
All SMB subjects
Number of companies, units 5,862,360 5,577,208 265,339 19,813
Share in total number of SMB subjects, percent 100 95.136 4.526 0.338
Source: Single Register of Small and Medium-sized Business Subjects.
Over the period from August 2016 through July 2017 the number of SMB subjects was displaying a positive movement trend (Fig. 31). During that time, their number jumped by 11.6 percent, from 5.52 million to 6.16 million, or approximately by 641,000 units. Meanwhile, the total number of registered legal entities and IEs over the same period remained practically unchanged (decline by 0.02 percent). However, in August 2017, the number of SMB subjects shrank from 6.165 million to 5.543, or by more than 622,000, which nearly offset its previous growth. By November 2017, the number of SMB subjects increased relative to November 2016 by only 74,000, or by less than 1.3 percent. Of course, this movement pattern seems to be questionable. The Single Register of Small and Medium-sized Business Subjects is being augmented by new entities (which do exist, but have not been entered in records), while those companies that effectively do not function and fail to submit their reports are struck off the register only once a year. Therefore data from the Single Register pertaining to current changes in the number of SMB subjects, as well as their employment data, should be treated with caution.
The relative share of SMB subjects in the total number of registered legal entities and IEs in Russia, according to data released by the RF Federal Tax Service,1 as of early November 2017 was 77.9 percent (Fig. 31).2 This index hit its record high in July 2017, when 80.3 percent of
Statistical Information on State Registration, RF Federal Tax Service. See https://www.nalog.ru/rn77/ related_activities/statistics_and_analytics/regstats/
2 It is noteworthy that the number of IEs differs significantly depending on the data source. Rosstat calculates the number of IEs by imputation, extrapolating its collected sample data.
all enterprises and organization were SMB subjects, followed by its already mentioned decline in August 2017. No reduction in the number of other organizations was observed, which indirectly confirms the assumption that the plunge of the number of SMB subjects was caused by certain alterations inside the Single Register, and did not reflect the actually existing situation with regard to registration of economic subjects in the national economy as a whole.
9000
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41,4%
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II II II II II II.......I I I I I II II II II
0
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V3
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■ ■ Small companies
■ i Micro companies
■ ■ Individual entrepreneurs
■ ■ Other legal entities
^^^■Share of SMB subjects in total number of organizations, %
Note. The category of other legal entities includes those entities that are entered in the Single State Register of Legal Entities (with the exception of those legal entities that have terminated their operations), but not entered in the Single Register of Small and Medium-sized Business Subjects.
Fig. 31. The Movement Pattern and Structure of the SMB Sector and Other Legal Entities, by Number of Subjects, from August 1, 2016 through November 10, 2017, Units, %
Source: Single Register of Small and Medium-sized Business Subjects. URL: https://rmsp.nalog.ru/; Statistical Information on State Registration, RF Federal Tax Service. URL: https://www.nalog.ru/rn77/ related_activities/statistics_and_analytics/regstats/
With due regard for the alterations introduced in the classification criteria applied to SMB subjects, on the basis of sample studies conducted by the federal State Statistics Service (Rosstat), we can follow, with some reservations, the multi-year movement pattern of structural changes inside the SMB sector based on the number of companies, from 2008 through 2016 (the years 2010 and 2015 are excluded because Rosstat was then collecting non-selective data for SMBs). The total number of SMB subjects increased by 30 percent, from 4.1 million in 2008 to 5.3 million in 2016, while a sharp surge by 17 percent occurred over the period 20142016.
The Single Register of Small and Medium-sized Business Subjects contains records of those IEs who have simultaneously submitted their complete reporting form set - the statement concerning their staff number and the filled-in reporting forms established for their taxation regime.
The RF Federal Tax Service, in the framework of the Single Register of Individual Entrepreneurs, collects data on the IEs who owe irrecoverable debts, and on those of them who effectively do not operate and do not submit their reports.
From 2008 through 2016, there was stable growth of both the number and relative share of micro companies in the total number of SMB subjects (from 26 percent in 2008 to 49 percent in 2016), alongside a shrinkage of the relative share of IEs, from 67 to 48 percent. At the same time, the aggregate share of micro companies and IEs in the total number of SMB subjects was staying above 90 percent, and in 2016 it amounted to 96.7 percent, as shown in Fig. 32. The number of micro companies increased from 1.87 million in 2014 to 2.6 million in 2016.
6000
5000
4000
S 3000
s
H
2000
1000
0
25,7%
0,3%
J.
6,9%
67,0%
32,1%
0,3%
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36,7%
57,6%
38.
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56,3%
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40,0%
5,1%
54,6%
0,3%
41,2%
L
5,2%
53,3%
48.
0,3%
9%
47,6%
2008 2009 2011 2012 2013 2014 2016
Individual entrepreneurs □ Micro companies □ Small companies ■ Medium-sized companies
Fig. 32. The Movement Pattern and Structure of the SMB Sector in 2008-2016, by Number and Relative Share of Enterprises of Different Sizes
Sources: Small and Medium-sized Enterprises in Russia. Statistics Collections. Rosstat. See http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/publications/catalog/doc_1139841601 359; for 2016, see Institutional Changes in the Economy and the Number of Big and Medium-sized Enterprises and Organizations. Rosstat. http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/publications/ catalog/doc_1139841601359
In the by-sector structure of SMBs, the biggest share is taken up by trading enterprises; according to Rosstat latest available data (year-end 2016), these amounted to 2.3 million, or 42.7 percent of the total number of small and medium-sized companies. Other types of economic activity most commonly practiced by small and medium-sized businesses are real estate transactions (18.3 percent of the total number of enterprises), transport and communications (9.9 percent), building construction (8.1 percent), and manufacturing industries (7.1 percent).
It should be noted that in the SMB sector, the prevailing type of economic activity varies depending on company size. Thus, among small (including micro) companies, 37 percent operate in trade, 22 percent - in real estate business, 12 percent - in building construction, and 9 percent - in manufacturing industries. Among medium-sized ones, there are more companies involved in manufacturing (26 percent) and agriculture (14.5 percent). These activities require more skills and higher competence, and so a company, in order to maintain its competitive capacity on the market, must be bigger in size. Trading was engaged in by approximately
25 percent of medium-sized companies, and about 11 percent were involved in building construction.
The distribution of IEs by type of economic activity also notable differs from that of small and medium-sized companies. Thus, nearly half of all IEs (48.8 percent) are engaged in trading; 14.7 percent - in real estate transactions; and 12.2 percent - in transport and communications, that is, in a sector where capital turnover ratio is high, and low capital/labor ratio. Another noteworthy fact is the high number of IEs providing amenities and household services: 161,500, or 6.4 of the total number of IEs. The bigger the company, the higher its capacity for carrying out technologically complex (manufacturing industry), expensive (extractive industry), and risky (agriculture) activities.
The distribution of small and medium-sized companies across subjects of the Russian Federation corresponds to the population distribution structure. The highest number of small and medium-sized companies, according to the Single Register of Small and Medium-sized Business Subjects, can be found in the Central (30.6 percent of the total number of SMBs), Volga (18 percent), Southern (12 percent), Siberian (11.7 percent), and Northwestern (11.5 percent) Federal Districts.
The leaders among Russia's regions, by their total number of legal entities and IEs entered in the Single Register of Small and Medium-sized Business Subjects, are as follows: the city of Moscow (768,618 SMB subjects, or 13.1 percent of Russia's total); the city of St. Petersburg (347,355, or 5.93 percent); Moscow Oblast (308,378, or 5.26 percent), these three regions accounting for nearly a quarter of all the small and medium-sized companies operating in Russia. The other regions with high numbers of small and medium-sized companies are Krasnodar Krai (276,966); Sverdlovsk Oblast (199,103); Rostov Oblast (173380); the Republic of Tatarstan (152,658); Novosibirsk Oblast (143,366); Chelyabinsk Oblast (142,267); and Nizhny Novgorod Oblast (130,187). These are predominantly the regions housing biggest agglomerations with highly developed services sectors, where the bulk of their SMB subjects are operating.
In terms of their relative share of SMB subjects in the total number of registered organization, the leaders are the regions with a well-developed agricultural sector, where the registered subjects are IEs, including individual farmer households. The relative share of IEs in the structure of SMBs is also above 75 percent in the least developed regions, where many individual farmer households are registered, while the existing institutional conditions impose constraints on their growth into some bigger entities.
The relative share of legal entities above 50 percent is higher in the regions housing biggest agglomerations: in the city of Moscow; the city of St. Petersburg; Novosibirsk Oblast; Samara Oblast; Sverdlovsk Oblast; Nizhny Novgorod Oblast; Tomsk Oblast; and the Republic of Tatarstan. These regions display a greater density of the services sector and industry and a higher purchasing power of their population; thanks to their more favorable economic and geographic situation (as, for example, Yaroslavl Oblast or Tyumen Oblast), they have access to major foreign or domestic markets. The institutional conditions in those regions promote business growth. The highest relative share of medium-sized companies (above 0.4 percent) is registered in the cities of Moscow and St. Petersburg, and in Moscow and Leningrad Oblasts -that is, in the best-developed and most technologically advanced regions of Russia.
Employment in the SMB sector
The companies operating in the SMB sector provide jobs to more than 19.1 million people (see Table 17 and Fig. 33 below), which amounts to approximately 25 percent of the total number of persons employed in this country. According to data in the Single Register of Small and Medium-sized Business Subjects as of November 10, 2017, nearly 10 million are employed by micro companies, 7 million - by small ones, and 2 million - by medium-sized ones. The structure of the SMB sector, by the number of persons employed, has remained relatively stable, although over last year the relative share of micro companies increased.
Table 17
The Structure of the SMB Sector, by Number of Persons Employed and by Organizational Legal Form
Data as of November 10, 2017, persons Micro Small Medium-sized Total
Legal entities 5,452,380 6,290,701 1,904,746 13,647,827
Employed by IEs1 1,557,769 744,531 10,860 2,313,160
IEs2 3,079,056 26,446 134 3,105,636
Total 10,089,205 7,061,678 1,915,740 19,066,623
As percentage of total number of persons employed by SMB subjects
Legal entities 28.6 32.99 9.99 71.58
Employed by IEs 8.17 3.9 0.06 12.13
IEs 16.15 0.14 0 16.29
Total 52.92 37.04 10.05 100
Data as of December 10, 2016, persons Micro Small Medium-sized Total
Legal entities 4986416 6565522 1936627 13488565
Employed by IEs 1533320 861540 39013 2433873
IEs 3017192 28682 378 3046252
Total 9536928 7455744 1976018 18968690
As percentage of total number of persons employed by SMB subjects
Legal entities 26.29 34.61 10.21 71.11
Employed by IEs 8.08 4.54 0.21 12.83
IEs 15.91 0.15 0 16.06
Total 50.28 39.31 10.42 100
Source: Single Register of Small and Medium-sized Business Subjects. See https://ofd.nalog.ru/index.html
Monthly employment data in the Register are available from December 10, 2016 onwards. During all the periods for which data are available, the general distribution of the employment index between micro, macro and medium-sized companies, as well as the total number of persons employed, remained approximately the same (although August 2017 saw a plunge in the number of persons employed (which, as noted earlier, we explain by measurement errors). The total number of persons employed in the SMB sector as of November 10, 2017 relative to December 10, 2016, according to data in the Register, increased by 97,900.
It should be noted that Rosstat annual sample studies have revealed an employment decline in the SMB sector, as confirmed by both the reported average staffing number indices and its relative share (see Fig. 34 below).
1 The index 'Employed by IEs' does not include the number of individual entrepreneurs-employers, it reflects only their hired staff.
2 In fact, this is the number of IEs that we apply in order to reflect, in our employment statistics, the number of those entrepreneurs who set up their IE entities.
2000
1800
1600
1400
•o 1200
e
s 1000
o
fl
800
600
400
200
0
10,2%
34,6%
26,3%
28,9%
34,8%
10,2%
26,2%
28,9%
34,7%
10,2%
26,1%
29,0%
34,6%
10,2%
26,1%
29,1%
10,2%
34,6%
26,1%
29,1%
10,2%
34,6%
26,0%
29,2%
34,5%
10,2%
26,0%
29,3%
34,5%
10,2%
26,0%
29,3%
10,2%
33,2%
28,6%
28,1%
10,3%
33,2%
28,7%
27,9%
10,0%
33,1%
28,6%
28,3%
33,0%
10,0%
28,6%
28,4%
^ ^ ^ ^ ^ ^ ^ ^ ^ ^ <y oV cK cK & <&>y <&y \>
Individual entrepreneurs □ Micro companies □ Small companies □ Medium-sized companies
Fig. 33. The Employment Movement Pattern and the Structure of the SMB Sector, by Company Size and Organizational Legal Form
Source: Single Register of Small and Medium-sized Business Subjects. URL: https://ofd.nalog.ru/index.html
30000
25000
20000
15000
10000
5000
0
29,5
29,7% 6217,1
20,2% 4219,8
39,7% 8314
2008
34,8
25
' ' Average staffing number of medium-sized companies, thousands of persons
i i Average staffing number of small companies, thousands of persons
v/»»» Average staffing number of micro companies, thousands of persons ■ 1 Number of staff employed by IEs, IEs themselves including, thousands of persons
34,7
9,4% 9,4% 31,3% 6557,5 8,2% 7,8% 7,6% 8,0%
27,3% 5720,6 31,1% 6506,8 | | 30,8% 6452,3 | | 30,4% 6358,4 24,1% 5050,2
21,6% 4526,9 - 18,5% 3864,4 20,3% 4248,9 20,7% 4322,9 25,9% 5429,5 21,2% 4431,1 23,9% 5005,7
31,2% 6526 1 26,1% 5453,1 27,0% 5647,1 27,0% 5645,7 27,2% 5682,4
2009 2011 2012 2013 2014 2016
40 35 30 25 20 15 10 5 0
Fig. 34. The Average Staffing Number Movement Pattern in the SMB sector
Source: Small and Medium-sized Enterprises in Russia. Statistics Collections. Rosstat. See http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/publications/catalog/doc_1139841601 359; Institutional Changes in the Economy and the Number of Big and Medium-sized Enterprises and Organizations. Rosstat. See http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/publications/ catalog/doc_1139841601359
36,3
35,2
35,2
34,8
34,8
24,1
The topmost regions in terms of the number of persons employed by SMB subjects: the city of Moscow (12.5 percent of the average staffing number data reported by Russian SMB subjects; 47.4 percent the average staffing number data reported by organizations and IEs in the region), the city of St. Petersburg (6.3 percent and 54.3 percent respectively), Moscow Oblast (5.2 percent and 42.1 percent), Krasnodar Krai (4 percent and 43.8 percent), and Sverdlovsk Oblast (3.3 percent and 38.5 percent).
The relative share of those employed by individual entrepreneurs in the overall structure of SMB subjects is above 50 percent in the underdeveloped regions (the Republic of Tyva, Chechen Republic, the Republic of Kalmykia, and the Republic of Crimea), and it is lowest (below 20 percent) in the highly developed regions - Samara Oblast, the city of St. Petersburg, and the city of Moscow.
The turnover and labor productivity of SMB subjects
The turnover of small and medium-sized companies (less IEs) in 2016 was RUB 46.4 trillion, and the total proceeds of IEs was RUB 12.4 trillion, which adds up to produce the total index for the SMB sector amounting to RUB 58.8 trillion. The total turnover of all organizations1 over 12 months of 2016 was RUB 146 trillion. Thus, the SMB sector (less IEs) accounts for approximately 31.8 percent of the total business turnover. The turnover in the SMB sector increased by 15.5 percent (adjusted for inflation) over the period 2014-2016.2
The input of trading companies in the total turnover of SMB subjects in 2016 amounted to 59.3 percent see Fig. 35).
Agriculture, hunting and forestry; 2,5 Other; 3,8
Transport and communications; 4,7
Building construction; 8,3
Manufacturing , industries; 10,2
Real estate transactions; leasing services; 10,2
Amenities and household services; 1,0
Trade; 59,3
Fig. 35. The Relative Shares of Different Types of Economic Activity in the Turnover of SMB Subjects (Including IEs) in 2016, Percent
Source: Institutional Changes in the Economy and the Number of Big and Medium-sized Enterprises and Organizations. Rosstat. See http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/ enterprise/reform/#
1 Institutional Changes in the Economy and the Number of Big and Medium-sized Enterprises and Organizations. Rosstat. See http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/enterprise/reform/#
2Small and Medium-sized Enterprises in Russia. 2017 Statistics Collection. Rosstat. See http://www.gks.ru/wps/ wcm/connect/rosstat_main/rosstat/ru/statistics/publications/catalog/doc_1139841601359
The decisive share in the aggregate proceeds of all IEs belongs to trading companies -75.8 percent of the total index. Second come real estate transactions, leasing, and services (8.4 percent), followed by transport and communications (4 percent).1
At the same time, the relative share of medium-sized companies in the total turnover does not exceed 13 percent, although elsewhere around the globe it is significantly higher. The highest share of medium-sized companies operate in manufacturing industries and agriculture.
According to the data based on 2017 OKVED (All-Russia Classifier of Economic Activities) Codes (OKVED2), trade and services account for more than 54 percent of the total output of SMB subjects, manufacturing industries - for about 28.5 percent.
More than 50 percent of the turnover of companies operating in the SMB sector occurs in the following 10 regions: the city of Moscow (RUB 11.2 trillion; 19.5 percent of Russia's total index); the city of St. Petersburg (RUB 4 trillion; 6.9 percent); Moscow Oblast (RUB 2.3 trillion; 4 percent); Sverdlovsk Oblast (RUB 2 trillion; 3.5 percent); Krasnodar Krai (RUB 2 trillion; 3.4 percent); Rostov Oblast (RUB 1.7 trillion; 3 percent); the Republic of Tatarstan (RUB 1.7 trillion; 2.9 percent); Chelyabinsk Oblast (RUB 1.3 trillion; 2.2 percent); the Republic of Bashkortostan (RUB 1.2 trillion; 2.1 percent); and Nizhny Novgorod Oblast (RUB 1.2 trillion; 2.1 percent).
Over the period from 2008 through 2016, labor productivity, understood as the ratio of turnover to staffing number, increased across the entire SMB sector by 18 percent (adjusted for inflation),2 and the highest indices were typically reported by medium-sized companies (RUB 4.5 million per person), which is significantly above both the labor productivity index typically reported by IEs (RUB 1.5 million per person) and the corresponding average index for the SMB sector (RUB 2.95 million per person).3
Table 18
The Main Characteristics of the SMB Sector in 2016-2017
Rosstat data for 2016
Individual Micro Small Medium-sized Total, SMB
entrepreneurs companies companies companies subjects
1 2 3 4 5 6
Number of companies, units 2,523,575 2,597,646 172,916 13,315 5,307,452
Employment, thousands of persons 8,206.0 5005.7 5,050.2 1,676.6 19,938.44
Average staffing number per company 3.3 1.9 29.2 125.9 3.8
Turnover, billion RUB 12,369.2 20,138.8 18,738.2 7,586.2 58,832.33
Productivity, million RUB per person 1.5 4.0 3.7 4.5 3.0
Index's relative share depending on company size, percent
By number of companies 47.55 48.94 3.26 0.25 100.00
By staffing number 41.16 25.11 25.33 8.41 100.00
By turnover index 21.02 34.23 31.85 12.89 100.00
Share of SMB sector in GDP 19.9
Data from Single Register of SMB Subjects as of 10.November.2017
Number of companies 3,105,636 2,498,152 238,893 19,679 5,862,360
Employment index, based on average staffing number, thousands of persons 5,418.8 5,452.4 6,290.7 1,904.7 19,066.6
1 Proceeds of IEs, by Type of Economic Activity, in 2016. Institutional Changes in the Economy. Rosstat. See http://www.gks.rU/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/enterprise/reform/#
2 Own calculations based on data released by Rosstat.
3 Own calculations based on data released by Rosstat. See http://www.gks.ru/wps/wcm/connect/rosstat_ main/ rosstat/ru/statistics/enterprise/reform/#
Cont'd
1 2 3 4 5 6
Average staffing number per company 1.7 2.2 26.3 96.8 3.3
Number of SMB subjects (including IE) per thousand residents 39.9
Number of SMBs created over reporting period per 1,000 SMBs operating as of its end date 102.0
Output of goods and services, billion RUB 761 1,665 909 262 3,597
Productivity, million RUB per person 0.1 0.3 0.1 0.1 0.2
Index's relative share depending on company size, percent
By number of companies 52.98 42.61 4.08 0.34 100.00
By average staffing number 28.42 28.60 32.99 9.99 100.00
By output of goods and services 21.16 46.29 25.27 7.28 100.00
Source: Single Register of Small and Medium-sized Business Subjects. See https://ofd.nalog.ru/index.html; Institutional Changes in the Economy and the Number of Big and Medium-sized Enterprises and Organizations. Rosstat. See http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/publications/catalog/doc_ 1139841601359
4.4.2. Improvement of the measures designed to support small and medium-sized businesses in Russia
The systemic policy oriented to SMBs must ensure that the latter are constantly supported during all phases of their evolvement, and helped to survive and grow from a micro company to a small one, and then from a small one to a medium-sized one. A very general outline of the system of measures introduced in Russia is shown in Fig. 36.
Startups Medium-sized companies_
Grants
Patents
Tax holiday
Education
Business navigator
SMBs
Federal Program You Are Entrepreneur
Micro companies
Small companies
Business
Micro ¡loans Preferential leasing
STS (under 150 million) STPI (hired staff under 100 persons)
Purchases Government guarantees Technoparks and industrial parks Subsidizing to COver interest on loans
incubators
Supervision holiday' until 2018 |
Innovation infrastructure Support for small forms of economic activity in rural areas
Support of exports
General
• Education programs
• Investment climate improvement
• Reform of control and supervision procedures, lowering of administrative barriers
Fig. 36. System of Support for Small and Medium-sized Companies in Russia, 2017 Source: own calculations.
In 2016, JSC Federal Corporation for Small and Medium-sized Business Development (SMB Corporation), SMB Bank, and regional guarantee institutions issued more than 10,000
guarantees to SMB subjects, thus enabling the latter to attract a total of more than RUB 172 billion. Over the first 8 months of 2017, the amount of attracted funds rose to RUB 129 billion.
In 2016, the volume of government purchases from SMB subjects amounted to RUB 1.511 trillion. The target index for 2017 is RUB 1.6 trillion (or RUB 2 trillion, with due regard for the extended list of customers); in this connection, over the first 8 months of 2017, the volume of government purchases from SMB subjects amounted to 1.192 trillion. The number of items on the corresponding purchase lists was increased to 150,000.
SMB Corporation, in the course of its operation, created a MSP Business Navigator portal,1 freely available to entrepreneurs and enabling them to make a choice of a business activity type and map a tentative business plan, to learn about the existing loan and guarantee options, the support measures available for small and medium-sized companies, to find appropriate premises for renting, to learn about the forthcoming government purchase tenders, to post advertisements concerning their businesses, and gain access to information and analytical materials. The content offered by the MSP Business Navigator had been found relevant for 171 cities all over Russia with 100,000+ population, and more than 220,000 companies have already registered themselves as that portal's users. From 2016, two educational programs were launched by SMB Corporation Entrepreneurial Basics (on how to create a businessa) and Entrepreneurial School (on business development).
In Russia's regions, a target model designed to Support small and Medium-sized Businesses has been launched2. According to data released by the RF Ministry of Economic Development in July 2017, the average implementation rate across all the 46 indices of the target model was 60 percent3.
The RF Ministry of Economic Development Russia in cooperation with Doing Business Russia have been elaborating Russia's first nationwide platform designed to provide knowledge and service to businesses.
In 2016, 541 multi-function centers for businesses were set up in many RF subjects.4 The Priority Project Small Businesses and Support for Individual Entrepreneurial Initiatives5 is underway, its key goal being to create about 1.2 million jobs with individual entrepreneurs and small businesses, and to provide support to 336,000 business subjects belonging to that category. The other channels of support are JSC SMB Bank, the Foundation for the Support of Small Businesses in the Science and Technology Sector, and the RF Ministry of Agriculture.
From 2005, Russia has been implementing a government program of support for small and medium-sized enterprises, launched by the RF Ministry of Economic Development6, which relies on direct support mechanisms (for example, nonrefundable cash subsidies to startup entrepreneurs in amounts up to RUB 500,000; subsidies covering lease payments designed to
1 MSP Business Navigator website. See https://smbn.ru/msp/main.htm
2 RF Government Order No 147-r of January 31, 2017 'On the Target Models Designed to Simplify the Procedures of Doing Business and Increase the Investment Attractiveness of Subjects of the Russian Federation'. See http://government.ru/docs/all/105437/
3 RF Ministry of Economic Development. Regions Increase their Support for MSB. See http://economy.gov.ru/minec/about/structure/depmb/2017110802
4 See http://economy.gov.ru/minec/about/structure/depmb/2016191205
5 Project Certificate Smal Businesses and Support of Individual Entrepreneurial Initiative. See http://smb .gov.ru/mediacenter/bisnessnews/?action=show&id=17791
6 Decree of the Government of the Russian Federation No 1605 of January 30, 2014 'On the Issuance and Distribution of Subsidies from the Federal Budget to the Budgets of Subjects of the Russian Federation Earmarked for the Government Support of Small and Medium-sized Enterprises, Including Peasant (Farmer) Households'.
fund production modernization; subsidies to entrepreneurs who are welfare recipients, or to young entrepreneurs, etc.), and also on some indirect support measures that imply the creation of special infrastructure components oriented to small and medium-sized companies and providing them with consulting, financial, in-kind, innovation-related, and expert support. The volume of funding allocated to the program and the number of companies receiving such support has been on the decline: in 2017, the allocation amounted to RUB 7.5 billion RUB, and the planned target for 2018 is RUB 5 billion.
50
45
40
35
30
B
U
R 25
n
io
Bi 20
15
10
5
0
82
82
80
82
83
84
85
85
300
250
200
150 £
100
50
2009
2010
2011
2012
2013
2014
2015
2016
■:■:■:■:■:■:■ Budget funding allocated to program, billion RUB — • —Number of SMB subjects receiving government support, units Number of regions participating in program
0
Fig. 37. Parameters of the Federal Program of SMB Support in Russia, 2009-2016 Source: RF Ministry of Economic Development.
From 2017, the program has been implemented as a 'service model' - that is, by way of rendering services to small and medium-sized companies through specialized infrastructure complexes created for the support of enterprises. As seen by the year-end results of 2016, a total of 330 infrastructure entities oriented to the support of businesses operated in RF subjects. Fig. 38 demonstrates the SMB support infrastructure distribution across Russia's regions in 2017.
In 2016, according to data released by the RF Ministry of Economic Development,1 government support was received by more than 167,000 companies in the SMB sector; a total of 39,509 new jobs were created; and 303,800 existing jobs were maintained. The creation of regional export centers was followed by growth in the number of companies - from 10,600 in 2014 to 30,100 in 2017 - that is, 2.8 times.2
1 Report on the results achieved in improving conditions for entrepreneurship and development of small and medium-sized businesses, and in increasing support for individual entrepreneurial initiatives, RF Ministry of Economic Development, 2017.
2 Ibid.
Fig. 38. The distribution of the SMB support infrastructure across Russia's regions in 2017
Source: Own calculations based on data released by the RF Ministry of Economic Development.
The volume of loans received by SMB subject, including IEs, over the first 9 months of 2017 increased by 12.7 percent relative to the same period of 2016. The introduction of the mechanisms that envisaged the issuance of guarantees and sureties to SMB subjects made it possible, in 2016, to double the amount of loans received by them, relative to 2015.1 It also became possible to lower the average weighted interest rate on the ruble-denominated loans issued for a period under 1 year to small and medium-sized companies: in July 2017, it amounted to 13.3 percent, which is above the market average (10.44 percent), but below the corresponding average weighted interest rate for March 2015 (19.12 percent). This had to do, among other things, with the implementation of Program 674 that envisaged subsidizing the interest rate on bank loans (by agreements with Sberbank, VTB Bank, Russian Agricultural Bank), thus bringing down the interest rates for medium-sized companies to 9.6 percent per annum, and for small companies to 10.6 percent.
In addition to the government program and other forms of support, an important component of the policy designed to boost the activity of SMB is the creation of favorable conditions for doing business, including the reduction of the administrative load on businesses. Over recent years, the Russian Federation has significantly improved its ranking with the World Bank,
1 JSC Federal Corporation for Small and Medium-sized Business Development, 2017.
having moved in its Doing Business ranking from 124th place in 2010 to 62th in 2015, and to 40th in 2017. The number of days required to complete the registration for a new company was reduced from 29 in 2008 to 9.8 in 2016, or nearly 3 times; the number of procedures that need to be completed in order to register a company, was reduced from 8 to 4, or by half.1 Meanwhile, the investment climate in Russia's regions has been improving: in 2016-2017, the average index of the National investment climate ranking2 rose by 5.3 points. The ranking index reflected the increased relative share of government purchases from small and medium-sized business, and the shorter period and fewer procedures needed for the registration of a title to an immovable property entity and for the issuance of a building construction permit.
From 1 January 2016 through 31 December 2018, a moratorium has been established on the planned audits, by supervisory bodies, of small companies operating in sectors other than household services, healthcare, education, heating, and electric energy supply.3 The government priority program Control and Supervision Reform has been launched, which aims, among other things, to reducing the burden on businesses. So far, it has resulted in a fewer number of planned checks and audits in the framework of a pilot departmental program (a decrease by 22 percent).
According to data released by the RF Ministry of Economic Development Russia, over the period from 2015 through 2016, the number of off-schedule checks and audits was reduced by 15 percent.4 However, business surveys (RANEPA)5 revealed that about 50 percent of respondents believed that the intensity of government control-and-supervision activity had remained unchanged over the last 5 years; 55.6 percent of respondents admitted that control and supervision was creating administrative barriers for their business activity.
From July 4, 2016, the issuance of a warning as a preventive measure applied to SMBs began to be used more broadly: by Federal Law No 316-FZ of July 3, 2016, an administrative fine imposed for an offence committed for the first time was replaced by a warning, on condition that there had been no damage to valuables protected by the law. As a result, over H1 2017, the number of cases where SMB subjects were brought to administrative responsibility was reduced by 17 percent, while the number of warnings issued over the same period increased to by 52.8 percent. Meanwhile, the number of imposed administrative fines dropped by 23.3 percent.6
Besides, some tax incentives for small and medium-sized companies were introduced.
(1) The criteria for applying a simplified taxation system became more lax:
1 Bazanova E., Papchenkova M. In the New Doing Business Ranking, Russia Simultaneously Rose and Dropped to 40th Place // Vedomosti, 2016.
2 National investment climate ranking of subjects of the Russian Federation, 2017.
3 Report on the results achieved in improving conditions for entrepreneurship and development of small and medium-sized businesses, and increasing support for individual entrepreneurial initiatives, 2017.
4 Ibid.
5 Assessment of the effects of government control (or supervision) of the activity of economic subjects. Preliminary results of a comprehensive assessment of the efficiency and effectiveness of the most commonly applied forms of government supervision, 2017. See http://www.ranepa.ru/images/News/2017-09/12-09-2017-ipei-seminar-pres2.pdf, http://ipei.ranepa.ru/konferencii-ctgu/920-anons-seminara-otsenka-rezultativnosti-i-effektivnosti-kontrolno-nadzornoj-deyatelnosti-na-primere-naibolee-massovykh-vidov-gosudarstvennogo-kontrolya-nadzora
6 Report on the results achieved in improving conditions for entrepreneurship and development of small and medium-sized businesses, and increasing support for individual entrepreneurial initiatives, 2017.
- from January 1, 2017, the income cap that entitles a taxpayer to continue operating under a simplified taxation system has been raised from RUB 60 million1 to RUB 150 million2 (a deflator will not be applied to the income cap until January 1, 20203);
- from January 1, 2017, the cap on corporate income received over a year's first 9 months that entitles a company to switch over to a simplified taxation system has been raised from RUB 45 million4 to RUB 112.5 million5 (a deflator will not be applied to the income cap until January 1, 20206);
- from January 1, 2017, the cap on fixed asset value entitling a company to switch over to STS (simplified taxation system) has been raised from RUB 100 to RUB 150 million.7
(2) the possibility to apply the regime of single tax on presumptive income (STPI) has been extended to January 1, 2021.8
At the same time, it is expected that in 2018, STPI9 will be raised by 3.9 percent relative to the inflation forecast, and this will have a negative effect primarily on the micro companies operating in the trading and services sector.
(3) The tax holiday, introduced for the period from January 1, 2015 through January 1, 2021 continue; for the first time, a registered IE operating under a STS or PTS (patent-based taxation system) has been made exempt from tax over the first two years of his or her operation.10
1 This value was to be calculated annually with a deflator. Thus, in 2016, the income cap that allowed a taxpayer to continue the use of a simplified taxation system amounted to RUB 79.74 million.
2 By Federal Law No 401-FZ of 30 November 2016 'On the Introduction of Alterations to Parts One and Two of the Tax Code of the Russian Federation and Some Legislative Acts of the Russian Federation', the Tax Code of the Russian Federation (Part Two) (as approved by Federal Law No 117-FZ of August 5, 2000, Article 346.13. The Procedure of and Conditions for the Start and Termination of the Use of Simplified Taxation System', Item 4) was amended.
3 Federal Law No 243-FZ of July 3, 2016 (as amended on November 14, 2017) 'On the Introduction of Alterations to Parts One and Two of the Tax Code of the Russian Federation in Connection with the Delegation, to Tax Agencies, of the Powers to Administer the Insurance Contributions to Compulsory Pension, Social, and Medical Insurance.'
4 This value was to be calculated annually with a deflator. Thus, in 2016, the income cap for a year's first 9 months that allowed a taxpayer to continue the use of a simplified taxation system amounted to RUB 51.615 million.
5 By Federal Law No 401-FZ of November 30, 2016 'On the Introduction of Alterations to Parts One and Two of the Tax Code of the Russian Federation and Some Legislative Acts of the Russian Federation', the Tax Code of the Russian Federation (Part Two) (as approved by Federal Law No 117-FZ of August 5, 2000) was amended (Article 346.12 'Taxpayers', Item 2).
6 Federal Law No 243-FZ of July 3, 2016 (as amended on November 14, 2017) 'On the Introduction of Alterations to Parts One and Two of the Tax Code of the Russian Federation in Connection with the Delegation, to Tax Agencies, of the Powers to Administer the Insurance Contributions to Compulsory Pension, Social, and Medical Insurance.'.
7 By Federal Law No 243-FZ of July 3, 2016 (as amended on November 14, 2017) 'On the Introduction of Alterations to Parts One and Two of the Tax Code of the Russian Federation in Connection with the Delegation, to Tax Agencies, of the Powers to Administer the Insurance Contributions to Compulsory Pension, Social, and Medical Insurance', the Tax Code of the Russian Federation (Part Two), as approved by Federal Law No 117-FZ of August 5, 2000, was amended (Article 346.12 'Taxpayers', Item 16).
8 Federal Law No 178-FZ of June 2, 2016 'On the Introduction of Alterations to Article 346.32 of Part Two of the Tax Code of the Russian Federation and Article 5 of the Federal Law 'On the Introduction of Alterations to Parts One and Two of the Tax Code of the Russian Federation and Article 26 of the Federal Law 'On Banks and Banking Activity', Article 2.
9 RBC, 2017. URL: https://www.rbc.ru/economics/12/10/2017/59df6db49a7947d4d4c745d1
10 By Federal Law No 477-FZ of December 29, 2014 'On the Introduction of Alterations to Part Two of the Tax Code of the Russian Federation', a tax holiday is not to be introduced throughout the entire territory of the Russian Federation; instead, RF subjects are granted the right to introduce a tax holiday on their own within their respective
(4) Self-employed citizens that operate without hired staff and render private tutoring services, house cleaning and other household services, care for children and persons with disabilities, who have notified a tax agency of their services rendered to individuals, are to be exempt from PIT in 2017 and 2018.1
4.5. Fixed investment2
4.5.1. Investment resources
The macroeconomic aspect of the investment model is determined by dynamics and structure of major indexes of the real sector and by monetary and financial markets as well as by characteristics of reproduction and usage of principal factors of production economy wide by types of economic activity. This allows not only to assess the investment potential of the economy from the point of view of mobilization of internal development reserves but also to reveal constraints and possibilities for raising the investment attractiveness for the Russian and foreign capital. Institutional environment, norms and rules of regulation the investment activity, development of financial and credit system, risks of changes in social and political, economic, infrastructure and organization and managerial factors represent another feature of the investment model. The investment model being a complex system includes a third aspect -mechanism of interaction of different subjects of the investment process (state sector, corporate sector, households, foreign investors) and investment decision making by economic entities. One should also take into consideration specific features of the investment model depending on time-frame. In short-term perspective, economic growth can be determined by a system of noncapital intensive development factors, in particular, decline in inflation, reduction of costs, and shutdown of inefficient products. In medium- and long-term perspective, the role of investments notably increases due to the need to resolve deep structural issues of modernization of production and raising competitiveness of the economy.
Instability of macroeconomic situation over a prolonged period of time (2013-2016) has determine the development of the investment/construction complex in 2017. The former was due to impact of both accumulated over that period issues linked to the renewal of fixed capital stock and market factors. Renewal of investment flows into the fixed assets seen in 2010 to the pre-crisis level and the outstripping growth of investment demand against the GDP dynamics growth seen in 2011-2012 was not accompanied both by an increase in return on investment and labor and by significant changes in the investment structure and by type of business activity, which has resulted in conservation of structural disproportions and dynamics slowdown. The investment crisis of2013-2016 has taken a protracted nature whose evolvement was aggravated by the changes in availability of resources on the global capital market, structure of capital formation for the gross national savings, movement of capital goods and investments in the wake of sanctions, and downbeat investment plans of Russian and foreign investors on the domestic market. It should be noted that in the acute phase of the investment crisis (Q4 2014-Q4 2015) downbeat of business plans was determined both by a surge of the key rate and by price hike on the investment goods. Dynamics of the investment plans seen in 2016 was mixed
territories. Nevertheless, many regions introduced, within their respective territories, zero taxation of startup entrepreneurs. The list of such regions, as of March 1, 2017, is posted to the RF Ministry of Finances' official website. See https://www.minfin.ru/ru/document/?id_4=117728
1 Item 70 of Article 217 of the Tax Code of the Russian Federation, as amended by Federal Law No 401-FZ of November 30, 2016.
2 This section is written by Olga Izryadnova, the Gaidar Institute, IAES-RANEPA.
amid adaptation of the economy to changed macroeconomic conditions and access to the world capital market. From Q4 2016 onwards, upward trend of investment demand was observed on the back of the adaptation of the investment\construction complex to perform amid sanctions.
Moreover, in 2016, the decline in interests rates to 10.5 percent (July 14) and then to 10.0 percent (September 19) enabled the investment-construction complex to slow the fall rate and to recover some, albeit meager, growth in fixed investment in Q4 2016.
In 2017, the last four-year trend changed-fixed investment were growing at the rates outstripping the GDP growth dynamics and the households' final consumption expenditure. Amid stable positive quarter dynamics increment of fixed investments in 2017 constituted 4.4 percent, meanwhile GDP grew at 1.5 percent against the previous year (Fig. 39).
115 -
110
90
□ Fixed investment_■ ■ Construction volume GDP
85
Fig. 39. Dynamics of GDP, fixed investment and construction volume in 2012-2017, in percent to the corresponding period of the previous year
Source: Rosstat.
Reduction of capital outflows, renewal of direct foreign investments growth in the Russian economy, as well as changes in the terms of borrowing on the domestic market amid reduction of the key rate positively affected financial conditions of investment plans in 2016-2017. In Q2 2017, in the wake of the interest rates decrease the investment\construction complex (amid total deferred demand) renewed an upward trend of the investments in fixed assets and stabilization of construction volumes and commissioning new housing against the same indexes of the previous year. As year-end results as a whole demonstrate that in the context of absence of necessary construction backlogs and current use of investment the dynamics of construction volumes including housing construction remained in the red and would determined the performance of the construction complex in early 2018 (Table 19).
Over a prolonged period, the investment model had such specific feature as significant volumes and high gross savings rate amid low level of their transformation into fixed investments. Unpredictable development of economic situation in 2014-2015 enhanced net private capital outflow, mounting risks, and downgraded sovereign ratings affected foreign investors' plans. With the imposition of sanctions and restricted access to the global capital
markets, there was a simultaneous contraction of direct investments into the Russian economy and fall of revenues proceeding from the foreign investment activity. On the back of changes in the macroeconomic situation seen in 2016-2017, there was an inflow of direct investments in the Russian economy, which for the first time since 2012 exceeded Russian foreign investments (Fig. 40).
Table 19
Financial environment for investment in 2010-2017
2012 2013 2014 2015 2016 2017
Refinancing rate (year-end), percent 8,25 8,25
Key interest rate (year-end), percent - 5,50 17,00 11,0 10,0 7,75
Bank of Russia international reserves (year-end), USD bn. 537,6 509,6 385,5 368,0 376,3 432,1
Net capital inflows (-) / outflows (+) in private sector, USD bn 53,9 60,3 152,1 58,1 19,8 31,3
Price indices, percent change, Dec to Dec 50,6 69,2 22,0 6,9 32,5 25,3*
Consumer prices for goods and services
Industrial producer prices 106,6 106,5 111,4 112,9 105,4 102,5
Composite price index for imported investment goods 105,1 103,7 105,9 112,4 107,5 108,4
Including 106,9 104,9 107,2 110,3 103,2 103,1
producer prices for construction products
machinery and equipment 108,3 104,3 104,6 104,1 106,6 104,9
USD/RUB official exchange rate (year-end), RUB/USD. 103,9 103,1 112,3 120,1 97,8 101,1
Net capital inflows (-) / outflows (+) in private sector, USD bn 30,37 32,73 56,26 72,88 60,66 57,60
* Data for January-September 2017
Source: Rosstat.
Russian foreign investment
■ 1 Foreign investment in Russia ^^^ Direct investment (balance)
* January-September 2017
Fig. 40. Direct foreign investment into the Russian Federation in 2007-2017, balance of payments, USD billion.
Sources: Rosstat, Bank of Russia.
The formation of the savings model determined potential resources of the investment plans in 2013-2017. Amid high interest rates, the share of attracted by the credit institutions corporate
resources constituted 19.0 percent of GDP and households' deposits - to 28.2 percent of GDP in 2016 against 14.8 and 23.2 percent, respectively in 2013. In 2016-2017, in the context of declined inflationary pressure and changes in terms of lending, dynamics of corporate deposits somewhat slowed and their share in GDP fell to 19.2 percent which was dictated by the need to resolve issues related to the renewal of fixed assets. Upward trend of gross savings share resulting from changes in the ruble exchange rate was observed. Growth in the share of revenue and other mixed income in GDP amid current correlation between interest rates and inflation as a whole for the period had no significant effect on investment decisions. Tightening on budgetary constraints led to a reduction of financing share in state investments in 2017 to 2.1 percent of GDP including budget-funded investment - to 1.1 percent of GDP (Table 20).
Table 20
Key features of investment resources in 2012-2017, as percent of GDP
2012 2013 2014 2015 2016 2017
Gross savings 31.2 28.5 28.6 29.9 29.0 29.8
Gross fixed capital formation 18.5 18.4 17.6 16.7 17.2 17.3
Fixed investment 41.3 40.0 38.9 42.0 41.2 41.5
Gross profit and other mixed income 35.8 33.4 33.8 32.3 32.8 33.3
Consolidated budget revenues 2.5 2.6 2.2 2.3 2.2 2.1
Budget-funded investment 1.4 1.4 1.2 1.4 1.2 1.1
Including federal budget-funded investment 20.9 23.2 23.4 27.8 28.2 28.2
Financial assets growth and real estate purchase 14.1 14.8 21.5 22.8 19.0 19.4
Source: Rosstat.
While analyzing the dynamics and the structure of capital formation available for investments, it is paramount to estimate the households' investment potential. In the context of current households' income dynamics seen in recent ten years, there was an increase in retail deposits kept in depository institutions as well as growing volume and increment rate of financial assets in the households' income. In 2014-2017, amid changing dynamics of the nominal and real households' income and decrease in thrift propensity, the households' role in capital formation for investment purposes declined. In 2010, the households accounted for 46.8 percent against 36.1 percent in 2013, and 27.8 percent in 2016 of the total volume of funds available for investment across institutional investors. Changes in the structure of capital formation across institutional investors was determined by the increasing role of non-financial corporations and state administration.
During number of years, high crude oil prices maintained relatively high level of foreign and domestic investment in Russia. Rapid growth of domestic income to a certain extent offset institutional weaknesses of the economy, in other words, the market expansion rates and profits growth dampened risks proceeding from underdevelopment of institutions.
4.5.2. Fixed investment financing by source and by type of ownership
In 2013-2017, own capital of enterprises and institutions remained the principal source for finding investments. In 2017, investments funded by own capital accounted for 52.1 percent of the total fixed investments. At the same time, the financial results obtained by enterprises and institutions as a whole in economy dropped by 6.8 percent compared to 2016 and bank interest rates decreased from 10 to 7.75 percent, which led to growing activity on the credit market.
115
110
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II III IV I II III IV 2012 2013
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5 2016 2017
18 16 14 12 10 8 6 4 2
2017
85 0
■ 1 Fixed capital investment Refinancing rate « « « Key rate
Fig. 41. Fixed investment dynamics and change of key rate in 2012-2017 rr., in percent
Source: Rosstat.
It is hard to assess straightforwardly the extent of bank participation in financing investment programs. 2017 by contrast with the previous year, saw an increment in foreign banks loans, which totally offset the net reduction of Russian banks' investment and loans issued by other institutions in the capital formation available for investment in Russian economy. The share of Russian bank loans in the structure of funding sources for fixed investments in 2017 constituted 5.5 percent and was at all-time low for last 15 years.
Budget funds as a source of fixed investment financing changed. In 2017, budget funds as a source of investment financing represented 16.3 percent of total fixed investment in the economy. The transformation of the 2016-2017 structure of budget-funded investment was driven by an increase in volumes and in the share of Russian subjects' budgets, thus compensating for the decline in the scale of federal budget-funded investment. The dynamics and the structure of state investment was formed according to the priorities in up-grading and development of strategically important facilities, realization of investment projects aimed at the implementation of the state of the art technologies for manufacturing competitive import substitution products as well as development of transportation and energy infrastructure. In 2017, the federal budget accounted for 2.1 percent of the total fixed investment including the federal budget accounted for 1.1 percent compared to 2.6 percent and 1.4 percent, respectively in 2013.
Institutional investors with state participation represented in 2017 other sources of capital formation for investment purposes and accounted for 12.0 percent in total investments following the four-year compression of their share and scale in investment plans.
The redistribution of investment funds by types of fixed assets was accompanied by a reduction of attracted funds from institutions and households for cost-sharing construction projects. Investment in real estate business in 2017 contracted by 4.1 percent compared to the
previous year. One should pay attention to the structural financing features stemming from a reduction of volumes and share of households' funds in the cost-sharing housing construction in the analysis of changes in absolute volumes of investment in housing construction in 20152017. At 2017-year end, the share of individual investors in cost-sharing housing construction projects constituted 2.0% of total fixed investment and shrank by 0.3 percentage point compared to the previous year (Table 21). Individual developers commissioned 32.7 million square meters in comparison with 31.6 million square meters of total floorage a year earlier. In the context of general downward trend in personal income and contraction of saving ratio the development of new programs designed by banking authorities aimed at a reduction of bank interest rates on housing mortgage shapes the investment plans and on the back of this one can expect positive shifts on the mortgage market in the coming year.
Table 21
Fixed investment structure by source of financing (excluding small businesses and investment volumes unobservable by statistical methods), as percent to total
2012 2013 2014 2015 2016 2017
Fixed investment total 100 100 100 100 100 100
Including by source of financing:
own capital 44.5 45.2 45.7 50.2 51.0 52.1
fundraising 55.5 54.8 54.3 49.8 49.0 47.9
of which:
bank loans 8.4 10.0 10.6 8.1 10.4 10.9
Russian bank loans 7.2 8.9 8.0 6.4 7.5 5.5
including foreign bank loans 1.2 1.1 2.6 1.7 2.9 5.4
fundraising from other organizations 6.1 6.2 6.4 6.7 6.0 5.1
inward foreign investments 0.8 0.9 1.1 0.8 0.7
budget funds 17.9 19.0 17.0 18.3 16.4 16.3
including:
federal budget funds 9.7 10.0 9.0 11.3 9.3 8.2
subjects of Russia budget funds 7.1 7.5 6.5 5.7 6.0 6.8
off-budget funds 1.1 1.5 1.5 1.3 1.1 1.3
money generated from investment in shared participation in construction projects (legal entities and individuals) 0.4 0.3 0.2 0.3 0.2 0.2
including individuals 2.7 2.9 3.5 3.2 3.0 2.7
other 2.1 2.3 2.7 2.4 2.3 2.0
Fixed investment total 20.0 15.6 15.7 12.8 12.0 12.2
Source: Rosstat.
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. The investment crisis which engulfed state-owned enterprises turned into a protracted one and reflected their low efficiency. The fall of state corporations' investment in 2015 by 16.0 percent as compared with the previous year determined their weak investment efforts in 2016-2017. Complexity of the investment process management system revealed the issues of the investment climate improvement and strengthening of effort aimed at optimization of the institutional structure, reduction of the state participation in the economy and implementation of privatization plans. Second, the state participated in the investment process as a proactive member and source of funding being a part of public private partnership.
In 2011-2017, privately owned enterprises, foreign-owned enterprises and joint ventures preserved positive nominal volumes of fixed investment which partly offset instability of investment activity of state and municipal enterprises.
Analysis of capital formation for fixed investment by type of ownership in 2017 shows that the private sector continued contributing positively to the investment process amid reduced contribution of public and mixed ownership and investment by state-owned corporations. (Table 22).
Table 22
Fixed investment indices in current prices by type of ownership, in current pricesx,
as percent to the previous year
2011 2012 2013 2014 2015 2016 2017*
Fixed investment - total 120.6 114.0 106.9 103.4 100.0 106.1 106.6
public 118.1 113.6 109.5 89.4 99.2 109.1 105.3
federal 119.1 106.7 103.1 94.9 105.0 99.3 101.7
Subjects of Federation 115.2 129.5 119.2 82.2 90.4 126.2 110.3
municipal 117.7 116.8 114.4 100.8 88.8 97.6 98.7
Russian mixed ownership 192.0 115.8 83.7 106.3 84.3 101.3 104.4
state-owned corporations 162.6 117.4 108.4 103.9 84.0 103.5 96.0
private 114.8 106.7 113.6 108.0 100.9 104.3 116.5
foreign and mixed Russian/foreign ownership 106.1 144.7 98.3 100.9 113.0 114.7 103.0
* less small businesses and investment volumes unobserved by direct statistical methods.
Source: Rosstat.
4.5.3. Use of investment by arias of activity: reproductive structure
Prolonged investment pause determined the increased effect of limiting factors of fixed assets on the economic growth dynamics.
In 2015-2016, amid sharp fixed investment contraction, fewer enterprises and institutions designed long-term plans for high-productivity job creation, implementation of new production technologies and raising environmental characteristics of production. The fixed investment downturn and reduction in commissioned fixed assets seen in 2013-2017 was attended by decline of renovation rates and growing share of used-up fixed assets. Lack of their timely renovation resulted in extended timeline for use of inefficient machinery and equipment. For example, according to sample survey of the investment activity of organizations, in 2016 (corresponding data for 2017 will appear solely in 2018) retirement of obsolete machinery, equipment, and means of transport due large scale of depreciation was reported by 58 percent of organizations meanwhile merely 9 percent reported the reason for their retirement -economic inefficiency of their use. Around 60 percent of organizations carried out reconstruction and upgrade of fixed assets in 2016. This investment strategy resulted in the total depreciation and increased level of wear of fixed assets. The low volume of fixed assets disposal resulted in a high level of wear and the age structure of fixed assets. To note, on the back of the implementation of projects aimed at upgrade, reconstruction and technical retooling of production there appeared an interest in complex renovation of fixed assets including procurement of technological lines, use of electronics and computer technologies and mechanical and automation equipment for engineers and managers and development of communications, which fully corresponded long-term targets to raise effectiveness and competitiveness of production.
Possibilities for stepping up processes of modernization, reconstruction and renewal of productive facilities remained dependent on the level of development and state the
investment/construction complex production facilities. Russia's machine-building complex has long been developing at a slower pace than fixed investment dynamics (Fig. 42). The lack of domestically produced investment goods was offset by imports of machinery and equipment, Although its importance estimated in shares to the total fixed investment volume and to investment in machinery and equipment was gradually falling in the economy as a whole.
150 130 110
90 70 50
■ 1 Manufacture of machinery and equipment ' ' Manufacture of vehicles and equipment Investments in fixed assets
Fig. 42. Dynamics of domestic production of machine-building complex, imports of machinery and equipment and fixed investment in 2002-2017, as percent
to the previous year
Source: Rosstat.
The investment/construction activity in 2016-2017 was characterized by a stronger fall of both construction scope of work and commissioning of housing floor space against fixed investment dynamics. Construction scope of work in 2017 constituted 98.6 percent and commissioning of housing floor space - 97.6 percent compared to the previous year (Fig. 43).
Scope of work in construction r~ i Commissioning of living space Investments in fixed assets
Fig. 43. Dynamics of construction scope of work and commissioning of housing floor space and fixed investment in 2012-2017, as percent to the corresponding period
of the previous year
Source: Rosstat.
The fixed investment structure boasted of increased investment share in construction of industrial buildings amid contraction of investment on housing construction (Table 23).
Table 23
Structure of fixed investment by types of fixed assets in 2013-2017,
as percent to toal
Total enterprises Less small businesses and informal sector
2013 2014 2015 2016 2016 2017
Investment in fixed assets 100 100 100 100 100 100
including:
Housing 12.5 14.5 15.6 15.4 5.7 4.8
Buildings (less residential) and facilities 41.5 40.8 43.7 45.2 51.8 51.1
Machinery, equipment and means of transport 38.8 36.3 31.5 30.6 33.1 33.8
Of which information, computer and telecommunication equipment
Intellectual property assets 2.9 3.9
Other 7.2 8.4 9.2 8.8 7.1 5.7
Source: Rosstat.
Growing share of investment in non-residential structures was determined by growing scope of work and commissioning of industrial and agricultural facilities amid contraction of scope of construction work in administrative, commercial and social spheres. Growing commissioned number of industrial buildings conditions change in the investment technological structure and determines growth of costs on machinery and equipment. However, comparison of domestic manufacture of equipment, imports of investment goods and fixed investment demonstrate that in the context of current dynamics of the machine-building complex and on-going sanctions on imports of certain types of equipment and machinery breakdown of technological structure balance and technological structure of investment becomes one of the major constraints.
At 2017-year end, simultaneous recovery of positive dynamics of investment goods imports and output of domestic machinery and equipment removed tensions in the investment/construction sphere.
Efficiency of capital flows for the renewal of fixed capital remains an issue for the investment activity. In the context of declared tasks aimed at increasing competitiveness a high degree of deterioration and obsolescence of fixed assets, an adverse age composition of the machinery fleet and equipment amid downward fixed investment trend as a whole and especially in active part represent a rather tough economic growth constraint.
4.5.4. Investment financing by types of economic activity
Recovery of the investment activity positive dynamics seen in 2017 was characterized by a simultaneous investment growth in tradable and non-tradable sectors of the economy. Not so deep decrees of fixed investment registered in tradable sector of the economy in 2015 together with a subsequent two-year upward trend resulted in an increase in expenses on the investment activity seen in 2017 by 3.4 percent against 2013, and ensured value added growth by 1.6 percent. Fixed investment in non-tradable sector of the economy in 2017 constituted 86.8 percent against 2013 (Fig. 44).
Change in fixed investment scale failed to offset structural imbalance in renewal of fixed assets. In 2017, the trend to fixed investment growth in raw materials production continued (108.6 percent to 2016) mainly by means of investment in fuel and energy complex
(114.1 percent). The share of total investment in extraction, refining and transportation in the total fixed investment volume in 2017 moved up to 26.8 percent and by 3.6 percentage points exceeded the previous year level owing to outstripping growth of investment in the pipeline industry development. Investment in surface and pipeline transport increased 1.3-fold including in the pipeline transport 1.17-fold compared to 2016. This is explained, in particular, by the implementation of large structural projects and orders for their implementation were placed at domestic enterprises.
Investment in non-tradable goods -Investment - total
Fig. 44. Fixed investment dynamics of tradable and non-tradable goods in 2003-2017,
as percent to previous year
Source: Rosstat.
Structure of fixed investment in industry was determined by an ongoing slump of investment volume in manufacturing. The share of investment in manufacturing in the total volume of fixed assets fell by 0.8 percentage point against 2016, which is due to a contraction of investment in metallurgical and chemical complexes.
Contraction of investment in capital products and construction materials raises risks for the construction/investment complex performance in the long term. Reduction of investment in fixed assets of production of construction materials (82.2 percent to 2016) and in proper construction (96.3 percent) determined low dynamics of construction scope of work and correspondingly assimilation of capital investments. In 2017, the decrease of construction scope of work came to 1.4 percent and commissioning of new housing - 2.1 percent against 2016.
Non-tradable sector of the economy reported an outstripping growth of fixed investment in transport and warehousing (108.8 percent to 2016), in IT development (114.5 percent), in financial and insurance (163.4 percent), sport, culture and recreation (134.0 percent), as well as in the development of health care (112.7 percent). Low investment level in education (93.7 percent), and in R&D (90.8 percent).
Prospects for structural changes and diversification of the economy are determined by resolution of modernization issue amid transition to new technologies and acceleration of development of high-tech manufacturing, which form export potential for goods and service with high value added.
Creation of conditions for transition to sustainable development was linked with the implementation of measures aimed at modernization of industrial potential, expansion of investment and innovation activity and upgrading human capital. Changes in the production
structure are possible solely in case of increasing competition, formation of powerful small and medium-size businesses, reduction of institutional barriers, improved mechanisms for attraction of investment, simplification of doing business procedures, and creation of adequate infrastructure.
4.6. The oil and gas sector1
The oil and gas sector is playing an important role in the income generation for the state budget and Russia's trade balance. In 2017, the volumes of crude oil production somewhat fell owing to Russia's commitments to curb production as a result of the oil output cut agreement between some OPEC and non-OPEC countries. Under the so-called tax maneuver in force in the oil industry, refining depth went up, production and export of fuel oil moved down and export of crude oil, a highly lucrative source of state budget revenues, increased. In 2017, natural gas production and export hit an all-time peak. Despite the plunge of oil and gas world prices, the oil and gas sector continues to constitute over a half of Russian exports.
4.6.1. Dynamics of global oil and gas prices
Global crude oil prices in 2017 were under a spell of two major factor: steady oil supply glut and a drastic fall in crude oil prices and the implementation of the agreement between OPEC and other non-OPEC producers including Russia aimed at cutting production. The growth in supply was driven up basically by a rapid increase in the production of shale oil in the United States because of new shale technologies and high crude oil prices that were present over the past few years. Facing this context, OPEC countries refused to cut their oil production quota and in fact switched to a policy of retaining their market share in the global oil market. In this context, OPEC opted not to cut its oil production quota and de facto launched a policy of retaining its market share. Subsequently, the price of Russian crude oil dropped to an average of $51.2 and $41.9 per barrel in 2015 and 2016, respectively (Table 24, Fig. 45).
Table 24
World crude oil prices in 2010-2017, USD/bbl
2010 2011 2012 2013 2014 2015 2016 2017
Brent crude price, UK 79.6 111.0 112.0 108.8 98.9 52.4 44.0 54.4
Urals crude price, Russia 78.3 109.1 110.3 107.7 97.7 51.2 41.9 53.1
Prices on Russian gas on European market, US$/thousand cubic m. 296.0 381.5 431.3 402.0 376.0 267.9 156.7 194.1
Sources: IMF, OECD/IEA, Rosstat.
The production at cost-intensive oil fields, primarily shale oil fields in the United States, was cut driven by low crude oil prices in 2015-2016. In the meantime, the decline in oil production in cost-intensive regions was actually neutralized by the increase in oil production in OPEC countries seeking to expand their market share and to compensate, at least in part, for falling revenues by boosting oil supplies.
However, significant plunge of crude oil prices recorded in 2016 motivated the oil producing countries to act decisively regarding cutting the oil production. At the end of 2016, OPEC and a group of oil producing countries from outside OPEC, including Russia, concluded a production cut agreement in effect since 1 January 2017. In compliance with this agreement OPEC (13 countries) agrees to reduce its oil production by 1.2 m bpd and the other parties thereto, 11 non-OPEC countries, agree to cut output by 558,000 bpd, Russia by 300,000 bpd
1 This section is written by Yuri Bobylev, the Gaidar Institute, IAES-RANEPA.
against the production level of October 2016. As far as the crude oil production in Russia was growing and in October 2016 peaked its maximum, the implementation of undertaken commitments meant a refusal from further increase in crude oil production and curbing it in 2017 to the average level of 2016.
Fig. 45. Urals crude price in 2008-2017 it., US$/b
Source: PoccTaT.
In an effort to decrease further the oil supply glut, the OPEC and non-OPEC parties to the agreement decided in May 2017 to extend the agreement for another nine months, that is, between July 2017 and March 2018. In late November 2017, parties to the agreement took a decision to extend the effective date of the agreement through the end of 2018.
As a result of the agreement, the excessive supply was cut and the world prices went up noticeably. For example, the Brent price rose from USD 44 a barrel in 2016 to USD 54.4 a barrel in 2017. The Urals price averaged USD 53.1 a barrel in 2017, up USD 11 a barrel against 2016. Meanwhile in December 2017, the Urals price hit USD 63.6 a barrel up USD 19.7 a barrel against November 2016 (the last month prior to signing of agreement on production cut) and up USD 11.5 a barrel compared to December 2016.
The surplus of commercial crude stockpiles (crude oil inventories) have decreased markedly (stocks in oil terminals), thus evidencing a gradual market rebalancing. According to the data released by the monitoring committee of the parties to the agreement, the excess of commercial crude oil stocks for the average five-year level constituted 340 million barrels, by the year-end -118 million barrels down 65 percent.
A markedly buoyant demand also had a positive effect on the market balance and on oil prices. Global oil demand increased 1.5 mb/d in 2017 (or 1.6% year-on-year), according to the International Energy Agency estimates, OECD.
However, the recovering growth in the US shale oil production as well as increased crude oil production by some non-OPEC countries have recently become a challenge to the agreement. Advances in shale oil technologies and cost-effective methods allowed the US oil industry to adapt to a relatively low crude oil prices. As a result, the number of operating oil rigs has been increasing in 2017. According to the recent forecast of the U.S. Energy
Information Administration (EIA), the US crude oil production in 2017 constituted 9.33 million barrels per day, adding another 0.47 million barrels per day (up 5.3 percent) against the previous year.
Prices on Russian natural gas exported abroad on long-term contracts, as a rule, are linked to the prices of petroleum products and owing to this factor follow the world crude oil prices. Following a significant decrease in 2015-2016 the sale price on Russian gas on the European market in 2017 went up to USD 194.1 per thousand cubic meters (up 23.9 percent compared to the previous year). Meanwhile changes that took place on the European market over recent years-increased supply of gas by other natural gas producers and lower spot prices on natural gas compared to the prices of long-term contracts signed by Gazprom produce downward pressure on the Russian natural gas.
4.6.2. Dynamics and production structure in oil and gas sector
Volumes of crude oil production in 2017 were governed by Russia's compliance with its commitment to curb oil production taken within the framework of the agreement between OPEC and a group of non-member countries.1 In 2017, the Russian oil production reached 546.8 million tons or 99.9 percent in comparison with the previous year (Table 25, Table 26). In the meantime, natural gas production (including natural, associated and condensate) went up to 704.1 billion cubic meters, which was an all-time high. Russia boasts of significant capacity potential to maintain and increase oil and gas extraction. At the same time, the oil sector faces deteriorated production conditions. Considerable share of producing fields demonstrate a downward trend of extraction and the new deposits in the majority of cases have not as good mining-and-geological and geographic parameters. Their development requires higher investment, running and transportation costs. In order to offset falling production on the brown fields, it is necessary of develop both new oil deposits in regions with underdeveloped infrastructure or in those regions that lack infrastructure all together, and to develop low quality deposits in developed regions.2
Table 25
Production and refining of crude oil in Russia in 2010-2017
2010 2011 2012 2013 2014 2015 2016 2017
Extraction of crude oil including gas condensate, million tons 505.1 511.4 518.0 523.3 526.7 534.0 547.6 546.8
Primary crude oil refining, million tons 249.3 258.0 270.0 278.0 294.4 287.2 284.5 284.0
Share of crude oil refining in crude production, percent 49.4 50.4 52.1 53.1 55.9 53.8 52.0 51.9
Crude oil refining depth, percent 71.1 70.8 71.5 71.7 72.4 74.4 79.1 81.0
Sources: Rosstat, Russian Energy Ministry.
Year 2017 demonstrates that the tax maneuver has delivered positive outputs: a structural tax reform in this sector envisages gradual reduction of export duties on both crude oil and petroleum products, as well as higher mineral extraction tax (MET).3 According to the adopted
1 See Yu. Bobylev. Global Oil Market in 2017: constraints to production and prices. Russian Economic Developments. 2018. №1, pp. 12-14.
2 See Yu. Bobylev, O. Rasenko. Russia Oil Sector: main trends. Moscow, Delo Publishers, RANEPA, 2016; Yu. Bobylev. Development of Oil Sector in Russia. Voprosy Ekonomiki. 2015. №6, pp. 45-62; Bobylev Yu. The Development of the Russian Oil Sector. Problems of Economic Transition. Vol. 58. 2016. Issue 11-12: The Real Sector Potential. pp. 965-987.
3 See Yu. Bobylev. Tax Maneuver in Oil Industry. Russian Economic Developments. 2015. №8, pp. 45-49.
parameters of tax maneuver effective marginal export duty rate was cut from 59 percent in 2015 to 30 percent in 2017. Meanwhile, export duty rate on heating oil went up from 66 percent to 100 percent from crude oil export duty rate. Such restructuring of the tax system has created incentives for upgrading of oil refining capacities and has resulted in trend changes.
New trends emerged in 2015-2016, and some of them deserve to be mentioned here: (1) oil refining depth increased notably as production and exports of fuel oil declined, (2) crude oil exports, more lucrative for state budget revenues than fuel oil exports, increased, (3) crude oil refining declined in volume terms due to the above two factors (Table 26). In 2017, oil-refining depth hit Russia's all-time high of 81 percent. 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%, meanwhile, this indicator comes to 90-95% in leading industrial countries. Over last three years production of heating oil in Russia contracted by 33.7 percent.
Table 26
Production of crude oil, petroleum products and natural gas in 2010-2017
in percent to previous year
2010 2011 2012 2013 2014 2015 2016 2017
Extraction of crude oil including gas condensate 102.1 100.8 101.3 100.9 100.7 101.4 102.5 99.9
Primary crude oil refining 105.5 103.3 104.9 102.7 104.9 97.3 98.7 99.8
Gasoline 100.5 102.0 104.3 101.3 98.8 102.3 101.9 98.4
Diesel fuel 104.2 100.3 98.7 103.1 107.4 98.9 100.2 101.4
Heating oil 108.5 104.6 101.6 103.3 102.0 91.1 80.2 90.7
Natural gas 111.4 102.9 97.7 102.1 95.7 98.7 101.0 107.9
Sources: Rosstat, Ministry of Energy of Russia.
The structure of the oil sector is characterized by a predominance of major vertically-integrated companies and high share of state property. In 2017, five major companies (Rosneft, LUKOIL, Surgutneftegaz, Gazprom, and Tatneft) accounted for 80 percent of crude oil extraction. Recently, the market share of Rosneft drew significantly. In 2013, Rosneft took over TNK-BP and in 2016 acquired controlling stake in Bashneft. The share of Rosneft in the overall crude oil production moved up from 22.3 percent in 2010 to 38.3 percent in 2017 (Table 27). Small and medium-size oil producing companies are few in Russia. Oil companies producing up to 2.5 million tons per year (up to 50 thousand barrels per day) account for merely 3 percent of the total production (in USA - 46 percent). Such companies are efficient in developing marginal oilfields and tight oil.
Table 27
Crude oil production structure in 2010-2017
Oil production Share in total Oil production Share in total Oil production Share in total
in 2010, production, in 2016, production, in 2017, production,
million t percent million t percent million t percent
1 2 3 4 5 6 7
Rosneft* 112.4 22.3 211.1 38.6 209.3 38.3
LUK 90.1 17.8 83.0 15.2 81.7 14.9
TNK-BP 71.7 14.2 - - - -
Surgutneftegaz 59.5 11.8 61.8 11.3 60.5 11.1
Gazprom, including Gazprom neft 43.3 8.6 55.2 10.1 56.9 10.4
Of which: Gazprom 13.5 2.7 17.4 3.2 17.4 3.2
Gazprom nefft 29.8 5.9 37.8 6.9 39.5 7.2
Tatneft 26.1 5.2 28.7 5.2 28.9 5.3
Cont'd
1 2 3 4 5 6 7
Bashneft 14.1 2.8 - - - -
Slavneft 18.4 3.6 15.0 2.7 14.3 2.6
RussNeft 13.0 2.6 7.0 1.3 7.0 1.3
NOVATEK 3.8 0.8 8.0 1.5 7.7 1.4
PSA operators 14.4 2.9 16.0 2.9 16.5 3.0
Other producers 38.2 7.6 61.7 11.3 64.0 11.7
* From 2016 including Bashneft.
Sources: Ministry of Energy of RF, own calculations.
4.6.3. Dynamics and structure of oil and gas exports
Against a backdrop of falling crude oil production and growth of oil domestic consumption Russia's crude oil exports somewhat contracted in 2017. In 2017, Russia's exports of crude oil and petroleum products constituted 410.8 million tons, down 2.4 percent against the previous year. It should be noted that 2015-2017 saw a notable growth of13.1 percent of crude oil exports spurred by the "tax maneuver" and a 10 percent decline in exports of petroleum products mainly owing to a fall of fuel oil exports (Table 28, Table 29). The share of net exports of crude oil and petroleum products in 2017 constituted 73.1 (Table 28). The share of crude oil in total oil exports constituted 63 percent, and that of petroleum products - 37 percent. At the same time, the share of exports in diesel fuel production accounted for 66.7 percent, and in gasoline production - 11.4 percent (to compare in 2010, the share of exports in gasoline production accounted for 8.2 percent, in 2015 - 12.1 percent, and in 2016 - 13 percent).
Table 28
Ratio of production, consumption and exports of crude oil and natural
gas in 2010-2017
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017
Crude oil, m t
Production 505.1 511.4 518.0 523.3 526.7 534.0 547.6 546.8
Exports, total 250.4 244.6 239.9 236.6 223.4 244.5 254.8 252.6
Exports to - non-CIS countries 223.9 214.4 211.6 208.0 199.3 221.6 236.2 234.5
Exports to CIS countries 26.5 30.2 28.4 28.7 24.1 22.9 18.6 18.1
Net exports 249.3 243.5 239.1 235.8 222.6 241.6 254.0 252.0
Domestic consumption 125.9 140.7 142.1 137.5 141.3 122.2 138.3 147.1
Net exports as percent of production 49.4 47.6 46.2 45.1 42.3 45.2 46.4 46.1
Petroleum products, m t
Exports, total 132.2 130.6 138.1 151.4 164.8 171.5 156.0 148.4
Exports to non-CIS countries 126.6 120.0 121.2 141.1 155.2 163.3 148.1 137.4
Exports to CIS countries 5.6 10.6 16.9 10.3 9.6 8.3 8.0 11.0
Net exports 129.9 127.2 136.8 150.0 162.8 170.2 155.3 147.7
Crude oil and petroleum products, m t
Net exports of crude oil and petroleum products, m t 379.2 370.7 375.9 385.8 385.4 411.8 409.3 399.7
Net exports of crude oil and petroleum products as % of crude oil production 75.1 72.5 72.6 73.7 73.2 77.1 74.7 73.1
Natural gas, billion cubic meters
Production 665.5 687.5 671.5 684.0 654.2 645.9 652.6 704.1
Exports, total 177.8 184.9 178.7 196.4 172.6 185.5 198.7 210.2
Exports to - non-CIS countries 107.4 117.0 112.6 138.0 124.6 144.7 164.7 175.9
Exports to CIS countries 70.4 67.9 66.0 58.4 48.0 40.7 34.0 34.3
Net exports 173.5 179.2 171.6 189.3 165.5 178.4 189.8 201.4
Domestic consumption 492.0 508.3 499.9 494.7 488.7 467.5 462.8 502.7
Net exports in percent to production 26.1 26.1 25.6 27.7 25.3 27.6 29.1 28.6
Sources: Rosstat, Russian Ministry of Energy, Federal Customs Service, own calculations.
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. The share of net exports of crude oil and petroleum products in crude oil production went up from 47.7 percent in 1990 to 73.1 percent 2017. 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 by natural gas.
Exports of natural gas in 2017 went up 5.8% in comparison with the previous year and hit 210.2 billion cubic meters, which is an all-time maximum. Exports growth was achieved due to deliveries to countries of far abroad, exports of natural gas to CIS countries was falling over recent years. Share of net exports in the natural gas production in 2017 constituted 28.6 percent.
Table 29
Dynamics of exports of crude oil, petroleum products and natural gas from Russia 2010-2017, in percent to previous year
2010 2011 2012 2013 2014 2015 2016 2017
Crude oil 101.2 97.6 98.2 98.6 94.4 109.4 104.2 99.1
Petroleum products 106.2 98.5 104.4 109.6 108.7 104.1 91.0 95.1
Natural gas 105.6 104.0 96.6 109.9 87.9 107.5 107.1 105.8
Sources: Rosstat, FCS.
Owing to the plunge of global prices on crude oil and natural gas, the share of oil and gas sector products in Russian exports declined markedly. In 2014, with the world oil price at USD 97.7 a barrel it accounted for 65.2 percent including crude oil and petroleum products -54.2 percent, and natural gas - 11 percent, and already in 2017 it accounted for 52.8 percent, of which crude oil and petroleum products - 42.2 percent and natural gas - 10.6 percent (Table 30). At the same time, in spite of the price plunge oil and gas sector products constitute above one-half of Russian exports.
Table 30
Value and share of exports of oil and gas sector products in Russia's exports in 2017
Exports, billion US dollars. In percent to total volume of Russian exports
Oil and gas sector, total 189.70 52.8
Crude oil and petroleum products 151.55 42.2
Crude oil 93.31 26.0
Petroleum products 58.24 16.2
Natural gas 38.15 10.6
Sources: FCS, own calculations.
4.6.4. Dynamics of domestic prices on energy products
The pricing mechanism for crude oil and petroleum products in the Russian domestic market is based on equal-netback pricing, that is, prices are equal to the world price less export duty and transportation costs. The domestic price in dollar terms declined in the second half of 20142016, due to a tumbling global prices on crude oil and petroleum products (Table 31, Fig. 46). In 2017, owing to a certain upward trend in world prices domestic prices on crude oil and petroleum products went up significantly. At the same time, there is still a wide gap between world and domestic oil prices due to the 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 oil price (producers' price) constituted 42% of the global price Urals crude price on the European market), while in 2017 - 66 percent.
Table 31
Domestic prices on crude oil, petroleum products and natural gas in USD terms in 2010-2017 (average producers' prices at year-end, USD/ton)
2010 2011 2012 2013 2014 2015 2016 2017
Crude oil 248.2 303.3 341.1 346.1 178.9 156.7 207.8 302.4
Gasoline 547.9 576.9 628.7 614.4 372.3 301.8 380.3 460.0
Diesel fuel 536.1 644.9 774.2 698.0 419.3 349.4 421.3 515.2
Heating oil 246.3 274.6 275.3 235.8 128.7 49.5 129.7 166.1
Gas, USD/thousand cubic m 20.5 21.3 40.3 39.8 29.1 24.5 23.6 34.2
Source: own calculations based on data released by Rosstat.
1000 900 800 700 600 500 400 300 200 100 0
oo^^cicimm^'rinin^^hhMM^ffiOOHHcitsnn^'tinin^^hh Global price ^^^»Domestic price
Fig. 46. Global and domestic oil prices in 2000-2017, USD/t Sources: Rosstat, own calculations.
Upward movement of oil prices in 2017 determined growth of consumer prices on motor fuel which set the pricing policy on net-back prices taking into account indirect taxes (excises, VAT) and markup (Table 32, 33, Fig. 47). The share of indirect taxes in the consumer price of gasoline is 35-43% in Russia. Thus, regarding the tax burden on petroleum products, Russia ranks in the middle between EU5 (Germany, France, Great Britain, Italy, and Spain) where the share of the tax burden on gasoline reaches 65%, and 20 percent in the USA. With lower nontax gasoline prices and such level of tax burden the consumer prices on gasoline in Russia are approaching the US prices, but remain significantly lower than in other developed countries. Effective system of export duties and the level of tax burden on petroleum products in Russia ensures lower prices level on motor fuel on domestic market in comparison with the developed countries.1
1 See Yu. Bobylev. Gasoline Prices in Russia and other countries: comparative analysis. Russian Economic Developments. 2016. №10 pp. 28-31.
Table 32
Consumer prices on gasoline in Russia 2014-2017, RUB/liter
2014 January 2015 January 2016 January 2016 January 2017 January 2017 January
Regular unleaded gasoline 29.53 32.35 33.86 35.28 35.57 37.95
Premium 95 octane and plus 32.64 35.16 36.81 38.34 38.69 41.01
Source: Rosstat.
Table 33
Excise rates of gasoline in 2014-2017, RUB/t
2014 2015 2016 January-March 2016 April-December 2017
Class 4 9916 7300 10500 13100 13100
Class 5 6450 5530 7530 10130 10130
Source: Tax Code of RF (2014-2017 edition).
Rb/l (left scale) ^^USD/l (right scale)
Fig. 47. Consumer price in ruble and dollar terms on regular unleaded gasoline in 2008-2017 Sources: Rosstat, own calculations.
Domestic prices on natural gas are under the state regulation. In order to ensure competitiveness of the national economy, the government maintains significantly lower level of domestic process on gas compared to the world gas prices. Meanwhile, owing to a regulated increase of the domestic gas prices and a significant decrease of the world prices on gas there is a gradual convergence of domestic and world gas prices. In 2015, domestic gas price (corporate consumers' price less indirect taxes) averaged 26 percent of the price of Russian gas in the European market, and in 2017, it constituted 38 percent.
4.6.5. Prospects for development of the Russian oil industry
Russia disposes of vast oil reserves, which are enough to maintain high levels of crude oil extraction and exports for 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. Russia's oil refining rate constitutes merely 28 percent, which is markedly less than the average world level (to compare the US boasts of the oil refining rate standing at 35-43 percent, and Norway - 46 percent). Moreover,
Russia disposes of extensive currently undeveloped unconventional oil reserves including shale oil. Upgrade of the oil refining depth allows satisfying domestic demand in motor gasoline with relatively lower volumes of oil consumption. The leading industrial countries boast of oil refining depth at 90-95 percent, while in Russia it constitutes 81 percent.
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 China and other countries of Asia. 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, which will drag oil prices down.
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 this context enforced technological sanctions against Russia, which ban exports to Russia of equipment and technologies for the development of deposits located on the Arctic shelf, deep-water oil fields and shale oil deposits will negatively affect the oil industry development.
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.
Measures adopted within the state tax policy should contribute to the development of the oil sector. First of all, it is essential to complete a structural tax reform in the oil sector taxation system, which envisages stepwise reduction of export duties on both crude oil and petroleum products (right down to their cancellation), as well as a higher Mineral Extraction Tax (MET). This creates incentives for further upgrade of the oil refining sector, decreasing Russia's subsidizing of other EAEU countries and will strengthen incentives to lift energy efficiency.
For the greenfield projects it is expedient to apply a special windfall tax, which will ensure both higher resource rent extraction and will create favorable conditions for investment.1 When in force, windfall tax will automatically make the tax burden compliant with oil production conditions in each specific oil field, thus creating environment suitable for investment, including investment in development projects involving higher-than-normal operating costs
In order to ensure sustainable development of the oil industry it is paramount to implement such measures as conduct coordinated efforts with OPEC countries and other oil producers aimed at maintaining acceptable level of world oil prices, promotion of import substitution capacities of oil exports to East, development of import substitution technologies aimed at upgrading oil extraction index and development of non-conventional oil reserves including shale oil, and development of small- and medium-size oil companies.
1 See Yu. Bobylev, O. Rasenko. Windfall tax to introduce in oil industry. Russian Economic Developments. 2017. № 10, pp. 65-68.
4.7. The year-end results of 2017 and new developments in Russia's agrarian policy1
4.7.1. The behavior of agricultural production
In 2017, the harvest of cereals, including wheat, Russia's top agricultural export commodity, hit its record high. This happened mostly due to a significant rise in wheat harvest against the three previous years (Tables 34, 35). At the same time, the record-high harvest caused problems with the transportation of grain from the regions of the Siberian Federal District. Agricultural producers also note a decline in the profitability of agricultural production (on the average, by 8.4 percent, to 12-14 percent2) due to the accelerated growth in the prices of inputs by comparison with that of the sales price of grain, which lagged behind because of the record-high harvest.
Among the year 2017's most important news events pertaining to the functioning of the grain market was the introduction of the Charter on Grain Turnover. This Charter was developed by the Federal Tax Service of Russia in order to discipline the procedures for reimbursement VAT on grain exports3. The traders that have signed the Charter thereby agree 'to resist VAT avoidance schemes and avoid cooperation with unscrupulous intermediaries that obtain a competitive advantage through the use of illegal VAT refunds'.4
Also, the year 2017 saw a continuation of the rise in barley, oat, buckwheat, and soya bean production. The gross yield of sugar beet was only slightly below its record-high harvest of 2016. Although slightly below last year's level, the gross yield of sunflower seeds was 4 percent above its average level of the past five years (2012-2016). These crops are traditionally produced by the commercial sector (agricultural organizations, peasant (farm) holdings (PFH), and individual entrepreneurs (IE)). Thus, in 2017, the share of agricultural organizations, PFHs, and IEs in the production of cereal grains, sunflower seed and sugar beet amounted to 99 percent. The volumes of production of these crop products exceeded their pre-reform levels of 1986-1990. The growth rates of soya bean, sunflower seed and corn production were especially high (Table 34).
It should be noted, though, that the achievements in the production of labor-intensive cheap crops, where the share of individual households is still high, are not that impressive. Thus, the gross yield of potatoes, where the share of individual households amounted, in 2017, to 77 percent, was almost 5 percent lower than in 2016 and 18 percent lower than in the last pre-reform years5.
A somewhat different trend is observed in the production of vegetables - in 2017, their gross yield at agricultural holdings and enterprises of all types amounted to 16.3 million tons, which represented a 1.5 times rise on the pre-reform level. Having hit its record low of 22 percent in
1 This section is written by Ekaterina Gataulina, IAES-RANEPA; Vasily Uzun, the Gaidar Institute, IAES-RANEPA; Natalia Shagaida, the Gaidar Institute, IAES-RANEPA; Renata Yanbykh, the Gaidar Institute, IAES-RANEPA.
2 URL: http://grainboard.ru/news/zernovie-interventsii-otkladivayutsya-na-2018-god-379413
3 The Charter on Grain Turnover was signed by more than 500 companies. Agroinvestor, URL: http://www. agroinvestor.ru/markets/news/28497-khartiyu-ob-oborote-zerna-podpisali-bolee-500-kompaniy/
4 URL: https://xapTHH-AIC.p$/o-hartii
5 According to data of the All-Russia Agricultural Census 2016, the input of individual households in potato output may be subject to a significant downward adjustment.
2002, the commercial sector's input in their production (22 percent) has been on the gradual increase ever since, reaching 37 percent in 2017, mainly due to the rising share of PFHs and IEs.
Table 34
Gross Yields of Major Agricultural Crops, Millions of Tons
Indices On average during 19861990 2015 2016 2017* 2017 relative to 2016, percent 2017 relative to average for period 1986-1990, percent
Grain 104.3 104.8 120.7 134.1 111.2 128.6
including wheat 43.5 61.8 73.3 85.8 117.1 197.3
Corn 3.3 13.2 15.3 12.1 78.7 365.2
Sugar beet 33.2 39.0 51.4 48.2 93.9 145.3
Sunflower seed 3.1 9.3 11.0 9.6 87.4 310.6
Soya beans 0.6 2.7 3.1 3.6 114.1 595.9
Potatoes 35.9 33.6 31.1 29.6 95.1 82.4
Vegetables, melons and gourds 11.2 16.1 16.28 16.3 100.3 145.8
Fruits and berries 3.3 2.9 3.3 2.9 89.0 89.3
* Preliminary data. Source: Rosstat.
The most significant growth in yield in comparison to the period 1986-1990 was registered for sugar beet, cereals, grains, fruits, vegetables, and potatoes (Table 35).
Table 35
Yields of Major Agricultural Crops, Centners [Russia] per Hectare
Indices On average during 1986-1990 2015 2016 2017* 2017 relative to 2016 2017 relative to average for period 1986-1990, percent
Wheat 17.6 23.9 26.8 31.2 116.4 177.3
Corn 28.7 49.3 55.1 48.7 88.4 169.7
Sugar beet 225 388 470 430 91.5 191.1
Sunflower seed 12.7 14.2 15.1 14.7 97.4 115.7
Soya beans 10.3 13 14.8 14.1 95.3 136.9
Potatoes 108 159 153 156 102.2 144.4
Vegetables. melons and gourds 154 225 227 236 104.3 153.2
Fruits and berries 39.5 75.7 85.6 76.6 89.5 193.9
* Preliminary data. Source: Rosstat.
The growth in yield resulted in a sufficiently high profitability of crop production (Table 36).
Table 36
Profitability (unprofitability) of Sold Goods, Products, Work and Services1
Indices 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Total, national economy 14.0 14.3 14.0 11.5 11.4 11.5 9.7 7.7 8.6 9.3 8.1
Agriculture 10.1 15.7 12.4 9.8 11.1 11.2 12.9 6.8 19.5 22.3 17.6
Crop production 11.3 22.5 18.3 9.8 13.4 15.3 16.4 13.5 22.5 35.9 31.8
Animal husbandry 9.1 10.1 8.1 9.8 9.9 8.8 11.1 3.4 18.4 15.8 10.5
Source: Rosstat (The Unified Interdepartmental Statistical Information Service, UISIS).
The year 2017 also saw some success in the animal husbandry sector. There was growth in egg production (by 2.8 percent relative to 2016). The output of meat and poultry products increased, including that of poultry meat (6.9 percent on the previous year), pork (5 percent), and mutton (2 percent). The pig herd owned by agricultural holdings and enterprises of all types
1 The profitability of the sold goods, products, work and services is calculated as a ratio between the balanced financial result (profit minus loss) of the sales of goods, products, work and services, and the cost of the aforesaid sold goods, products, work and services (including commercial and managerial costs).
increased to a total of 23.3 million head (a rise of 5.7 percent on the previous year); the total number of poultry flock - to 557 million head (0.7 percent on the previous year).
Growth in the production of poultry meat and pork was achieved, in 2017, only by agricultural organizations. Peasant (farm) holdings, IEs including, and individual households reduced their pig herd by nearly 6 percent, and their poultry flock by 3.6 percent. This decline - and particularly with regard to pig breeding - has had to do with the long-term policy of imposing constraints on individual household and small business production in order to reduce the threat of spreading animal diseases to the livestock of big agricultural organizations.
As before, no breakthrough could be achieved in cattle breeding, although thanks to the ongoing government support measures, the rate of cattle herd decline decreased, while milk production has been maintained at a level of 31 million tons for 4 straight years, and in 2017, it even demonstrated slight growth (Table 37). That growth was achieved through increased dairy cow productivity, and not through herd growth (the yield of agricultural organizations in 2017 increased by 5.3 percent to 5.8 tons per head1). Dairy cattle breeding has remained one of the problem ridden sectors. Total national cattle herd decline has been contributed to not only by that at individual households, but by that at agricultural organizations. The only category of agricultural enterprises displaying cattle herd growth is peasant (farm) holdings. However, their share in national milk production is still small (slightly above 7 percent), whilst agricultural organizations account for 50.3 percent, and individual households - for 42 percent of total milk output (2017). In 17 RF subjects, this sector's yield took up more than 70 percent of a given region's milk production. Individual households receive no support from the federal budget for selling their milk, and they have some issues with milk sales. Given these conditions, they have no incentives for maintaining their current production level or increasing their milk output, as they lack a well-developed distribution infrastructure.
Table 37
The movement of gross output value of animal husbandry for agricultural holdings and enterprises of all types
Indices 1991 2014 2015 2016 2017 2017 relative to 2016, percent 2017 relative to 1991, percent
Total meat production, carcass weight, million tons 9,375 9,070.3 9,565.2 9,899.2 10,391.0 105 110.8
Including cattle 3,989 1,654.1 1,649.4 1,619.0 1,618.5 100.0 40.6
Pigs 3,190 2,973.9 3,098.7 3,368.2 3,536.7 105.0 110.9
Poultry 1,751 4,161.4 4,535.5 4,620.8 4,940.9 106.9 282.2
Sheep and goats 347 203.9 204.5 213.1 217.3 102.0 62.6
Milk, million tons 52 30.8 30.8 30.8 31.1 101.2 59.8
Eggs, billion 47 41.9 42.6 43.6 44.8 102.8 95.3
Source: Rosstat, 2017 - estimations based on data released by Rosstat.
Overall in 2017, milk, beef, and mutton production indices were significantly below the corresponding indices for the 1990, while pork and poultry meat production was higher. It is thanks to the development of the latter that the pre-reform meat livestock and poultry output index was exceeded (Table 37).
In recent years, agriculture's higher profitability relative to the national economy's average profitability index translated into a boost in its development: over the last three years, the average annual value added growth rate in agriculture has stayed above the growth rate of GDP (Table 38).
1 In 1990, the average milk yield per cow in agricultural enterprises was 2.8 tonnes per annum.
Table 38
Russia's GDP volume index and gross value added index
for agriculture
GDP growth index, as percent relative to previous year value added growth index in agriculture*
2013 101.8 104.7
2014 100.7 101.3
2015 97.2 102.5
2016 99.8 102.9
2017 101.6** 102.1***
* Including hunting, forestry, fish farming and fishing (calculations based on Rosstat data). ** January-September 2017.
*** January-September 2017, including forestry, hunting, fish farming and fishing.
Source: Rosstat (Unified Interdepartmental Information and Statistics System (EMISS)); Information on the Socioeconomic Situation in Russia (January-November 2017).
Thus, in 2017, the sector displayed the same trends as had been typical of several recent years.
4.7.2. Government support of agriculture
The amount of federal budget allocations for 2017 in the framework of the Government Program of Agriculture Development and Regulation of Agricultural Products, Raw Materials and Foodstuffs for 2013-2020 (hereinafter - Government Program), in accordance with the most recently adjusted budget revenue and expenditure targets, was RUB 242.1 billion. This is RUB 26.3 billion more that was initially envisaged in Federal Law No 415-FZ dated December 19, 2016, and RUB 24 billion above the budget allocation level for 2016. However, the amount of federal government support represents only part of overall state support. In reality, its volume is significantly bigger due to allocations from regional budgets. Regional funding of the agricultural sector takes up between 30percent and 50percent of the aggregate budget allocated to federal and regional support programs targeting agricultural enterprises.1
Over the course of 2016-2017, the Government Program was significantly amended several times.2 While the previously introduced innovations resulted in program detailing and the creation of specifically targeted sub-programs and measures supported and protected by specific items added to their approved budget functions, including the funding of sectors that were vital for import substitution (2015), in the later version of the Government Program some of these directions were pooled. The Government Program, as amended on 1 December 2017, includes 9 subprograms. Their funding and structure are shown in Table 39 and Fig. 483.
1 Data on regional funding for 2017 are not yet available.
2 Decree No 396 dated March 31, 2017 'On Introducing Alterations in the Government Program of Agriculture Development and Regulation of Markets for Agricultural Products, Raw Materials and Foodstuffs for 2013-2020'; Decrees of the RF Government No 902 dated July 29, 2017; and No 1347 dated November 10, 2017.
3 Hereinafter, the Government Program as amended by Decree of the Government No 1347 dated November 10, 2017, which was effective through December 31, 2017, is analyzed. From January 1, 2018, a new version of Government Program was introduced (by Decree of the RF Government No 1544 dated December 13, 2017).
Table 39
Federal Budget Allocations to the Government Program in2017, billions of rubles
Item 2016 2017 2017 Adjusted budget targets relative to planned targets, % 2017 relative to 2016, %
Cash execution as of January 1, 2017 Federal Law No 415—FZ dated December 19, 2016 Adjusted budget revenue and expenditure targets as of September 18, 2017
Total 218.09 215.85 242.15 112.18 111.03
Development of AIC sectors 78.05 55.31 58.33 105.46 74.73
Maintaining ongoing operation of AIC sectors 10.33 11.12 11.29 101.57 109.29
Technical and technological modernization, innovative development 11.16 0.09 14.21 15,788. 89 127.33
Promotion of investment activity in AIC 66.11 91.67 97.12 105.95 146.91
Development of AIC financial and lending system 8 5.00 5.00 100.00 62.50
Management of Government Program implementation 25.04 25.21 27.82 110.35 111.10
Sustainable development of rural territories in 2014-2017 and over period until 2020 12.07 15.45 16.1 104.23 133.39
Agricultural land improvement in Russia in 2014-2020 7.34 11.28 11.43 101.36 155.72
Priority project Export of AIC's products 0 0.73 0.85 116.69
Source: RF Ministry of Agriculture.
Agricultural land improvement ; 4,7
Priority project Export of AIC's products; 0,4
Sustainable development of rural territories ; 6,6
Management of Government Program implementation; 11,5
Development of AIC financial and lending system; 2,1
Development of AIC sectors; 24,1
Maintaining ongoing operation of AIC sectors; 4,7
Promotion of investment
activity in AIC; 40,1
Technical and technological modernization; 5,9
Fig. 48. The structure of federal funding allocated to the Government Program in 2017 (adjusted budget revenue and expenditure targets), percent
In Fig. 48, it can be seen that the lion's share in the allocation structure (a total of approximately 64percent) was taken up by the subprograms oriented to the development of specific sectors: the Subprogram Promotion of Investment Activity in AIC, which envisaged support for low-rate investment loans in the AIC and reimbursement of the direct costs
associated with building construction and modernization of AIC property entities; and the Subprogram Development of AIC Sectors, through which all the subsidies allocated to specific sectors were paid. It is these types of support that were directly addressed to agricultural producers, and were most important for them. In 2017, the funding allocated to practically all the ongoing subprograms was increased relative to 2016 (Table 39), with the exception of the Subprogram Development of AIC Sectors. In the case of the latter, the amount of funding allocated to all the types of support listed in it was substantially reduced (Table 40).
Table 39
Funding of the measures listed in Subprogram Development of AIC Sectors,
billions of rubles
Subprogram measures 2016 2017 2018 2017 relative to 2016, percent
Cash execution as of January 1, 2017 Federal Law No 415—FZ dated December 19, 2016 Adjusted budget revenue and expenditure targets as of September 18, 2017 Draft FZ 'On FB for 2018 and Planning Period 2019 and 2020'
Allocations to Subprogram Development of AIC Sectors, Total 78.05 55.31 58.33 39.00 74.7
Subsidies to non-targeted support of crop production 23.34 11.34 11.34 0.00 48.6
Subsidies to increase productivity in dairy cattle breeding sector 12.67 7.96 7.96 0.00 62.9
Aid in achieving targets set by regional AIC development programs* 42.04 36.00 39.02 39.00 92.8
*In 2016, the subsidy titled Aid in Achieving the Implementation Targets of Regional AIC Development Programs was not yet introduced; for reference, the table lists the support measures that would later be integrated into this subsidy.
As follows from H3 Table 40, the amount of federal funding allocated to the basic support of crop production, which had earlier already incorporated some important subsidies as reimbursement of cost of mineral fertilizers, crop protection, etc, was cut nearly by half. The subsidy to the dairy cattle breeding sector was cut by almost 40percent, although - as demonstrated earlier - this sector is still faced with some grave problems. Nevertheless, the Draft Federal Law 'On the Federal Budget for 2018 and the Planning Period of 2019 and 2020' suggests that all the funding allocated to these items should be discontinued.
This state of affairs can be explained by the necessity to redistribute the funds within the budget actually allocated to the ministry in favor of those investment loans that involve long-term government obligations. When trying to fit its loan agreements into the list of subsidized loans, the RF Ministry of Agriculture aims to stay within the amount of subsidies allocated for a given year. However, in a situation when an agreement is approved for subsidizing, say, in December, the payments are minimal, but they become substantial over the next year, while as a rule, the total amount of subsidies allocated under the Government Program is not increased (see, e.g., the Draft Federal Law 'On Federal Budget for 2018 and the Planning Period of 2019 and 2020'). As a result, in 2016, a total of RUB 55.3 billion was allocated to the reimbursement of part of interest paid on investment loans. In 2017, the amount allocated to that subsidy in accordance with the adjusted budget revenue and expenditure targets was RUB 58.8 billion, while another RUB 25.4 billion was allocated to the newly introduced subsidy received by Russian credit institutions by way of compensation of their loss of income on their loans issued to agricultural producers at a special reduced interest rate, which means a 1.5-times increase. These expenditures were partly covered by increasing the amount of allocations earmarked for
the Government Program, and partly by cutting the basic types of support. However, such a situation cannot be regarded as an optimal one.
In order to make subsidized loans more accessible to small agricultural businesses and small farms, by Decree of the RF Government No 1528 dated December 29, 2016, a mandatory quota was introduced, whereby they were guaranteed to receive subsidy 'in an amount not less than 20percent of the total amount of compensation for the loss of income, by banks, on the short-term loans with a reduced interest rate to be issued by them in the territory of a given RF subject'.1 At the same time, the percent share of subsidy could be changed by the RF Ministry of Agriculture on the basis of proposals submitted by regional authorities. The quota floor in that case would be 'the share of small agricultural businesses and small farms in the total agriculture output of the corresponding RF subject over a reporting financial year'. For investment loans, the share of small agricultural businesses and small farms was set at not less than 10 percent of the amount of subsidy.
The Decree also set a cap on the amount of short-term loans that could be paid to one and the same borrower. The cap was to be determined on the basis of proposals submitted by regional authorities to the RF Ministry of Agriculture for each RF subject in accordance with the methodology introduced by Order No 415 dated August 21, 2017, of the RF Ministry of Agriculture. As a result, the cap on loan in many RF subjects was set at a level above RUB 1 billion, and in some of them it jumped tenfold, thus making it possible to distribute the bulk of an allocated subsidy among only 20-30 biggest recipients.2
Among the other new provisions introduced in 2017 we must note the 'pooling' of measures envisaged in the Government Program in the framework of a single subsidy earmarked for providing aid in the achievement of targets set by regional AIC development programs (hereinafter - single subsidy). It absorbed some important areas of subsidizing, such as support of small agricultural businesses and small farms (previously covered by a separate subprogram) and other areas that are important for the development of agricultural sectors. As a result, it became difficult to trace each declared measure and the funding allocated to it at the federal level. By way of dealing with that issue, and to avoid a loss of certain areas of support, the RF Ministry of Agriculture continues to exercise control and keep records concerning each of the 'pooled' measures through a system of mandatory targets, although the distribution of that subsidy is actually the prerogative of regional authorities. The measures had been pooled with the intention of reducing the associated administrative costs, but in the end these costs, in fact, increased.
At the same time, the structure of the Government Program in 2017 still contained subprograms like Technical and Technological Modernization, Development of the Financial and lending System, and the Priority Project Export of AIC's Products, each envisaging only one or two measures and relying on very modest funding, or with no funding being planned for the nearest future.3
The general services provided to the agricultural sector were funded, in 2017, through the federal target programs Sustainable development of rural territories in 2014-2017 and over the
1 Decree of the RF Government No 1528 dated December 29, 2016 (as amended on July 24, 2017).
2 Uzun V. Restriction of the Size of Subsidies Allocated to One Agricultural Producer: Its Necessity, Mechanisms, and Consequences // APK: Economics and Management, No 11, 2017, pp.12-31.
3 Decree of the RF Government No 717 dated July 14, 2012 (as amended on November 10, 2017) 'On the Government Program of Agriculture Development and Regulation of Markets for Agricultural Products, Raw Materials and Foodstuffs for 2013-2020'.
period until 2020 (FTP SDRT)1 and Agricultural land improvement in Russia in 2014-2020 (FTPMelioration),2 as well as through R&D projects, agricultural education, land monitoring, and supervisory and veterinary agencies covered by the Government Program. Russia currently lacks well-developed agencies capable of providing information and consulting services, or a well-developed market information system, although the Government Program does envisage the relevant funding targets. However, every year the funding is reallocated to some other targets, which the RF Ministry of Agriculture believes to be more important. Thus, in 2016, RUB 0.26 billion was allocated to the measures defined as Formation of State Information Resources in the Sectors Responsible for Food Safety and Agro-industrial Complex Management; in 2017, in accordance with the adjusted budget revenue and expenditure targets, the same amount was allocated. However, its cash execution as of September 1, 2017 was only 16 percent of the planned level.
In 2017, in the framework of FTP SDRT, funding was allocated to measures designed to improve the housing conditions for citizens residing in rural areas, including young families and young specialists, develop the network of general education establishments, midwife obstetric units and general practitioners, sports venues, institutions for cultural and recreational activities, gas and water supply systems, comprehensive development of land plots for building residential communities, motor roads networks providing access to socially significant objects in rural areas and agricultural production and processing entities; grant support of local initiatives of citizens residing in rural areas; promotion and popularization of achievements in the development of rural territories and scientific and methodological backing of the implementation of FTP SDRT.
In 2017, the volume of funding allocated to FTP SDRT from the federal budget, in accordance with the adjusted budget revenue and expenditure targets, was RUB 16.1 billion, which is by RUB 4 billion above the 2016 level. However, its cash execution as of September 1, 2017 was only RUB 6.9 billion, or 43 percent of the planned target. The allocation of federal budget funding to FTP SDRT is handled by the RF Ministry of Agriculture. In 2017, the aforesaid ministry allocated to the Federal Road Agency a total of RUB 6.8 billion (in 2016 -RUB 7.3 billion). The total amount of co-financing from regional budgets in 2017, according to the existing agreements, was RUB 6.9 billion (in 2016 - RUB 7.9 billion)
The allocation of resources from the federal budget to the FTP Melioration in 2017 was significantly increased and amounted to RUB 11.4 billion (in 2016 - RUB 7.4 billion).
From January 1, 2018, the implementation of the FTP SDRT and the FTP Melioration was terminated early by Decree of the RF Government No 1243, dated October 12, 2017, 'On the Implementation of Measures Envisaged in Federal Target Programs and Being Integrated in Separate Government Programs of the Russian Federation'. The measures envisaged in these two programs will be implemented in the framework of specific subprograms incorporated in the Government Program of Agriculture Development and Regulation of Agricultural Products, Raw Materials and Foodstuffs for 2013-2020'.
1 Approved by Decree of the RF Government No 598 dated 15 July 2013 (as amended on May 25, 2016) 'On the Federal Target Program Sustainable development of rural territories in 2014-2017 and over the period until 2020'; it is part of the Government Program.
2 Approved by Decree of the RF Government No 922 dated October 12, 2013 (as amended on 17.05.2017) 'On the Federal Target Program Agricultural Land Improvement in Russia in 2014 - 2020; it is part of the Government Program.
Over the course of 2017, the Government Program was amended 5 times.1 One of the latest innovations was the switchover, from January 1, 2018, to a project-based management principle, followed by yet another revision of the Government Program's structure. As a result, the Government Program now includes 10 subprograms: Development of Those Sectors of the Agro-industrial Complex That Ensure Accelerated Import Substitution of the Main Types of Agricultural Productus; Raw Materials and Foodstuffs; Promotion of Investment Activity in AIC; Technical Modernization of the Agro-industrial Complex; Export of the AIC's Products; Development of Agricultural Land Improvement Measures in Russia; Sustainable Development of Rural Territories; Management of Government Program Implementation; Creation of General Conditions for the Functioning of Sectors in the Agro-industrial Complex. Besides, two separate subprograms were formally established: Scientific and Technological Backing for the Development of Sectors in the Agro-industrial Complex and Development of the Raw-materials Base for Providing Light Industry with Quality Agricultural Raw Materials. The latter encompasses the measures designed to support the production of flax, wool, etc., which previously had existed in the main as part of other subprograms. The succession of relevant measures is also typical of other subprograms.
In order to control the volatility of prices in the domestic market, the RF Ministry of Agriculture, by its Order No 185 dated April 19, 2017, approved a special methodology for calculating price floors and ceilings for grains, dried milk and butter for the purpose of launching public goods and buying interventions. By Order of the RF Ministry of Agriculture No 158 dated March 31, 2017, the price floor was set at which, in 2017-2018, government buying interventions should be launched, targeting the grain harvested in 2017. The Order came in force from July 1, 2017, and is to stay in force until July 1, 2018.
According to the Grain Market Overview released by the RF Ministry of Agriculture on its official website, the price floor was indeed reached, but no interventions took place.
The mechanisms designed to support the incomes of agricultural producers in 2017 demonstrated their weaknesses. First, they are built in such a way that they fail to guarantee purchases at a minimum price to all producers. Second, they cannot promptly respond to changes in the current situation: in face of the large harvest in 2017 relative to 2016, RUB 4.3 billion was allocated to the measures involving government interventions (in 2016 - RUB 6.9 billion). Third, the volume of funding to be allocated to the intervention was determined without taking into account the fact that in October 2017, the RF Ministry of Agriculture had accumulated debt to United Grain Corporation and other holders of grain stocks in the amount of RUB 3.8 billion.2 For all these reasons, the size of the intervention fund was not increased in response to the increased crop yield: as of November 1, 2017 it was the same as in December 2016 - 4 million tons.
The RF Government was urgently trying to find some other support mechanisms. A draft of the RF Government Decree 'Rules for the Allocation, in 2017 - 2018, of Subsidies from the Federal Budget to JSK Russian Railways by Way of Compensating It for the Losses of Income Arising As a Result of Railway Transportation of Grain Cargoes without Charging Carrier Fees'. The volume of subsidized deliveries is estimated to be 3.2 million tons, to the value of
1 As amended by Decrees of the RF Government No 396 dated March 31, 2017; No 902 dated July 29, 2017; No 1347 dated November 10, 2017; No 1544 dated December 13, 2017.
2 Grain Interventions Are To Be Postponed until 2018. URL: http://grainboard.ru/news/zernovie-interventsii-otkladivayutsya-na-2018-god-379413
nearly RUB 3 billion.1 However, the Rules were approved only at the year's end, by Decree of the RF Government No 1595 dated December 20, 2017.
The pressure on the grain market could be lowered by measures designed to promote exports. However, little funding was allocated to the measures implemented in the Priority Project Export of the AIC's Products (support of the activity of the Federal Veterinary and Phytosanitary Supervision aimed at broadening the access, to foreign markets, of the products of Russia's AIC; creation and running of a center for conducting analysis of exports of the agro-industrial complex' products and research of potential foreign sales markets, etc.).
In late 2016, the Presidium of the Presidential Council for Strategic Development and Priority Projects gave high priority to the Development of International Cooperation and Exports Program, one part of which addressed the issue of expanding the national food exports support system. Support of exports is viewed by the RF Ministry of Agriculture as one of market regulation levers. This applies not only to grains, but also to other types of products with export potential. By Order No 524 dated October 19, 2017 of the RF Ministry of Agriculture, 7 programs aimed at promoting and increasing exports were approved, including the products of the sugar beet industry, the fats and oils industry, the poultry breeding sector, and grains. By way of supporting exports, one more priority project - Export of the AIC's Products - was incorporated in the Government Program's structure, to be funded from 2017 onwards. The project's goal is to boost the volume of agro-food exports to USD 21.4 billion by 2020. That project became an integral part of the Government Program of Agriculture Development and Regulation of Agricultural Products, Raw Materials and Foodstuffs for 2013-2020'. The project funding target for 2017 was RUB 745.9 million. The main measures envisaged in the project are as follows:
- consulting services, training of potential exporters;
- creation of a system for analyzing foreign markets for agricultural producers and exporters;
- development of regional sub-brands, their registration, and subsidizing of the cost of promoting the sub-brands on foreign markets;
- improvement of the quality control system for export products;
- support of business travels of importers;
- subsidizing, in part, of the costs of participation in fairs;
- setting up of 117 interdepartmental commissions for cooperation in trade, science and technology (between the RF and foreign countries).
To help promote the products of small agricultural businesses and small farms, it is intended to set up special export co-ops, authorized to represent the interests of their members before various organizations implementing export support programs (in order to help the co-op members to receive loans, insurance products; to participate in fairs and exhibitions, etc.) and ease their access to such products.
Besides, a Russian Export Center has been set up.2 There, potential exporters can order market surveys of their products in those countries where they are planning to supply their products. Some of these services are provided free of charge. At present, the Russian Agency for Export Credit and Investment Insurance (EXIAR) is developing insurance instruments to support Russian export loans and investments in the agro-industrial sector, as well as financing
1 Grain Interventions Are To Be Postponed until 2018. URL: http://grainboard.ru/news/zernovie-interventsii-otkladivayutsya-na-2018-god-379413
2 URL: https://www.exportcenter.ru
instruments for agricultural exports in the framework of Eximbank of Russia, which is part of the Russian Export Center Group.1
To ease the market entry of Russian goods (including all commodity groups, and not only foodstuffs and agricultural produce), the umbrella fund Made in Russia has been registered. The state subsidizes the activities aimed at increasing Russian brand recognizability and thus promoting exports of agro-food products from the Russian Federation.
The RF Ministry of Agriculture has not created a special department charged with the task of promoting exports. Instead, an interdepartmental group for the development and support of exports of agricultural products was set up (hereinafter - IDG).2 A subordinated organization also exists. At present, sectoral programs of developing exports of the AlC's products are being elaborated.
The principal shortcoming of the existing government support system oriented to agricultural producers is the concentration of the bulk of subsidy within a limited group of enterprises.3 That the subsidy can benefit only selective big recipients is recognized as a negative practice by the lawmakers of all countries. In this connection, the developed countries have restricted the opportunities for receiving reimbursable government support.4
4.7.3. Food security
The official system of food security indices demonstrates an improvement of the situation in 2016-2017. Thus, the average consumption, disposable income, behavior of food prices, daily calorie intake, protein intake level, production volume, and dependence on imports, over the period 2016-2017, all improved relative to 2014-2015.5 The share of food imports in total retail turnover in 2017 was at its record low - see Table 41. The food security criteria for agricultural products envisaged in the Food Security Doctrine of the Russian Federation were all met, with the exception of dairy products.
Table 41
The share of food imports in RF retail food stocks, percent
Q1 Q2 Q3 Q4 Year
2012 35 34 34 33 34
2013 36 35 35 36 36
2014 36 33 32 36 34
2015 29 26 27 30 28
2016 24 22 22 24 23
2017 23 21 22
Source: Rosstat.
However, the index of economic access to food in 2017 was worse than in 2013, 2014, 2015, and in part in 2016. The consumption revival noted in 2016 (after its plunge in 2015) was estimated on the basis of budget surveys, and it is not confirmed by data on the physical volume of food purchases in 2017. Thus, a stable decline of food purchases was observed throughout
1 URL: http://www.ved.gov.ru/rus_export/financial_measures/state_specialized_russian_export_import_bank
2 URL: http://mcx.ru/ministry/coordination-and-advisory/export-group/0
3 Report of the Center for Strategic Research 'The Development Trends and Main Challenges of Russia's Agrarian Sector' (in Russian) URL: https://www.csr.ru/wp-content/uploads/2017/12/Report-Agricultural-Sector-November-2017-Web.pdf
4 Uzun V. Restriction of the Size of Subsidies Allocated to One Agricultural Producer: Its Necessity, Mechanisms, and Consequences // APK: Economics and Management, No 11, 2017, pp.12-31.
5 As the final data relative to some food security indices for 2017 will be published in mid-2018, our estimates in this section are partly based on relevant data for 2016.
the period from August 2014 to June 2017.1 In June 2017, this index amounted to -13 percent relative to June 2012. In September, food purchases in comparable prices rose above the level of September 2016 to that of September 2015, while failing to reach the level of September 2014, let alone that of September 2013.
From 2014, the share of total household expenditure spent on food has been on the rise (Fig. 49).
Fig. 49. Economic access to food - household food expenditure share (percent)
In rural families, the share of total household final consumption expenditure spent on food increased from 41.8 percent in 2013 to 45.3 percent in 2016, and in urban families this index moved from 31.3percent to 35.6 percent. This growth was especially noticeable in the poorest families (first decile): from 48.2 percent in 2013 to 54.4 in 2016. Calorie intake in the first decile verged on starvation (2,045 kcal/day in 2016), while the Food and Agriculture Organization (FAO) defines hunger as consumption of 1,600-2,000 kcal/day, and the US Department of Agriculture - 2,100 kcal/day. This population group must be urgently protected by a government food assistance program. In order to raise the average annual food consumption level of the first decile (their current disposable income level preventing them from buying the recommended food basket) at least to that of the second decile, the government will need to spend RUB 144 billion. This represents a serious burden on the budget. Considering the limited potential of the federal and regional budgets, the high number of the needy, and the traditional non-transparency of income sources in many households, it becomes problematic to provide assistance to those who truly need it. It is obvious that the official household income data must be augmented/adjusted with due regard for the real household living standards of those who apply for government food assistance.
If the people cannot afford the recommended food basket, import substitution with Russian products can be justifiable only if the prices of Russian foodstuffs are not higher than those of their imported counterparts. Otherwise the orientation to Russian producers will reduce the economic access to food. According to the OECD estimates, over the period 2014-2016, Russia's population was buying food at prices that were on the average 10 percent higher than
1 It could have been assumed that the shrinkage of household purchases was offset by an increased production of individual households. However, the budget surveys conducted in 2016 (Rosstat) failed to demonstrate production growth at individual households.
the prices in the world food market.1 In this situation, in order to improve the economic access to food, it would be feasible to continue agriculture modernization, promote competition, lift the embargo on food products, and avoid linking government food assistance programs to Russian products alone. If this principle is not complied with, the artificial restrictions on the access to the Russian market of foreign food suppliers will reduce competition, create negative incentives for the reduction of domestic food prices, and thus undermine the country's food security.
The ruble's depreciation conduced to growth of food prices, as well as of the prices of other goods. However, the sharper growth trajectory displayed by food prices after the introduction of an embargo can be explained specifically as the upshot of artificial constraints on competition in the food market food. In Fig. 50 it can be seen that, relative to August 2011, the growth patterns of prices across all groups of goods and services were practically the same as those of the prices of foodstuffs, and this situation lasted until June 2013. But from mid-2013 onwards, food prices began to grow at a faster rate, and this gap further increased after the introduction of the food embargo by Russia.
-Goods and services (total) — — — Foodstuffs
Fig. 50. The price index (January 2011=1)
4.7.4. Conclusions and recommendations
1. Growth in the agricultural sector. For the 5th year in a row, the agricultural sector has been demonstrating stable growth patterns of production, crop and livestock productivity, and labor productivity. The increasing output and productivity translated into Russia's lower dependence on imports, and rising exports of agricultural products and foodstuffs. However, in order to keep up the current growth rates, several issues will have to be properly dealt with:
- the need to increase the volume of both the traditional exports (grains, vegetable oils) and the exports of other products that are now in abundance in the domestic market (pork, poultry meat, sugar, potatoes, some types of vegetables, gourds, and melons);
1 Agricultural Policy Monitoring and Evaluation 2017. OECD, 2017.
- the need to ensure successful development of the grain, fats and oils, and sugar beet industries. The current pig and poultry breeding growth occurs alongside the plunging production indices of beef, milk, potatoes, and sheep breeding. The land and labor resources formerly used to develop those sectors are now largely wasting away. The attempts to halt the decline and boost growth in these sectors by way of launching mega-reform have failed;
- the need to replace by the output of small and medium-sized businesses the shrinking output of potatoes, vegetables, gourds, and melons, fruits and berries by individual households. The agricultural census 2016 revealed vast areas of arable lands being held by individual households; according to Rosstat data, they employ more than 4 million workers. As a rule, big businesses cannot properly handle such resources, they are abandoned, and this situation translates into a patchy agriculture development pattern across the country's territory. The use of this potential can become possible through active development of hi-tech farms specializing in the production of milk, meat cattle and sheep breeding, potato and vegetable production, and management of fruit orchards. In order to promote this process and properly fit small agricultural businesses and small farms into food value added chains, it will be necessary to change the current approaches to government support of agricultural businesses.
2. Changing the approaches to government support. The government agricultural policy must gradually switch over from the support of owners of selective big agricultural firms and holdings to vigorous support, on a massive scale, of predominantly small and medium-sized agricultural businesses. The government's current policy has been focused on preferential treatment of selective big producers, resulting in their having obtained huge arable lands and multiple hired workers, while small and medium-sized businesses were being rapidly ousted from the agricultural market. This practice runs contrary to world historic experience and best practices of the developed countries, which have succeeded in creating a highly-performing agricultural sector. Legislative constraints on the size of subsidy allocated to one recipient represent a widespread international practice. The absence of such constraints in Russian legislation is the factor that prevents efficient development in the agricultural sector. This conclusion is in line with the general theory of government support of agriculture, which should be oriented not only to the existing purely economic issues, but also to sustainable social development of rural areas.
In the framework of measures designed to improve the mechanisms of government support it would be worthwhile to radically alter the principles employed in grain and dairy product pricing. The government public goods and buying interventions must be geared so as to maintain prices in the interval between their floor and ceiling, which will then translate in a similar behavior of the incomes of agricultural producers and household expenditure patterns. So far, this balance has not been achieved. Moreover, the currently applied pricing mechanism runs contrary to the principles established by the Federal Law 'On Agriculture Development'.
3. The launch of a government food assistance program addressing the most vulnerable population group. The main unresolved food security issue in this country is the low economic access to food for the low-income decile. The proper solution would be to introduce, as part of the food security doctrine, a threshold per capita income level ensuring economic access to food. Bringing personal income to the threshold level should be the principle index applied in estimating the country's food security. Food assistance should be provided to the poorest families, where the household monthly income per person is below the threshold level. It is necessary to adjust the methodology employed in identifying the needy, with due regard not only to the official income statements, but also to their actual living conditions. It is not feasible
to 'tie' food assistance only to Russian product, because some of them are more expensive than their foreign counterparts.
4. Adjustment of the indices applied in estimating Russia's food security. Given that the existing set of indices does not reflect the index of economic access to food, the estimation methodology should be revised. In addition to the currently applied consumption indices, the estimations must rely on some other indices, e.g. the share of total household final consumption expenditure spent on food; the share of households where food expenditure patterns correspond to less than 75 percent of the food basket recommended by the RF Ministry of Healthcare; the number of regions where the share of households spending on food more than 50 percent of their total expenditure is above 30 percent. It is likewise feasible to prepare annual reports of the food security situation in the Russian Federation, where the current trends should be analyzed not only on a nationwide level, but also across different income groups and territories.
4.8. Foreign trade1
4.8.1. World trade outlook
In 2016, the growth rates of world economy hit the all-time low since the global financial crisis and constituted 3.2 percent. However, the global economy is experiencing a broad-based cyclical upturn started in mid-2016 is gaining momentum. In this context, international financial organizations have adjusted their short-and medium-term forecasts to the upside.
The World Bank report Global Economic Prospects 2, released in January 2018, estimated 2017 as more successful year than was previously forecast-estimates of global GDP growth in 2017 was upgrade from 2.7 percent to 3 percent. In the wake of benign global financing conditions, generally accommodative policies, rising confidence, and firming commodity prices global economy can edge up to 3.1 percent in 2018. Projections as of June 2017 said that in 2018 the world economy would grow by 2.9 percent, the forecast for 2019 was adjusted from 2.9 to 3 percent growth and forecast for 2020 gave 2.9 percent growth. At the same time, the World Bank experts warn that the lack of structural reforms aimed at the long-term potential for growth world economic growth will be temporary. In the context when the developed economies are close to full employment and their central banks raise interest rates in order to curtail inflation, economic growth in advanced economies is projects to slow in the coming years. According to the World Bank estimates, growth in advanced economies will slow from
2.3 percent in 2017 to 2.2 percent in the current year, and to 1.7 percent by 2020.
GDP growth estimates at 2017 year-end was upgraded by 0.7 percentage point up to
2.4 percent in Euro Area. The 2018 forecast is adjusted upwards by 0.6 percentage point to 2.1 percent. 2019 will see growth slowdown to 1.7 percent in Euro Area and in 2020 down to
1.5 percent.
The US GDP growth estimates at 2017 year-end were upgraded from 2.1 to 2.3 percent. Growth forecast for 2018 was reviewed upwards from 2.2 to 2.5 percent. According to the World bank estimates, economic growth in the US will slow down in 2019 to 2.2 percent and in 2020 down to 2.0 percent.
1 This section is written by Nadezhda Volovik, the Gaidar Institute, IAES-RANEPA; Galina Balandina, IAES-RANEPA.
2 http://www.vsemirnyjbank.org/ru/publication/global-economic-prospects
Economic growth in emerging market and developing economies (EMDEs) is expected to accelerate, hitting 4.5 percent in 2018 against a background of recovery of economic activity in oil exporting countries.
However, developing economies that grew last year by 4.3 percent can also face constraints for growth in the future. For example, GDP of India last year edged up by 6.7 percent instead of projected in June 7.2 percent. The 2018 forecast is revised downward by 0.2 percentage point to 7.3 percent, and for 2019 also down by 0.2 percentage point to 7.5 percent. In 2020, as expected, GDP growth will remain at 7.5 percent in India.
Growth in China is estimated to have reached 6.8 percent in 2017-an upward revision by 0.3 percentage point from June forecasts. Chinese growth is projected to edge up by 0.1 percentage point in 2018 to 6.4 percent.
The World Bank estimates growth in Russia at 1.7 percent, in 2017 and in 2018 the growth is forecast to edge up by 0.4 percentage point and by 0.3 percentage point, respectively.
Amid downside risks regarding long-term world economy growth, the World Bank indicated risks in the near-term perspective. Among these downside risks were tightening of global financing conditions due to a somewhat faster projected pace of U.S. Federal Reserve policy rate hikes in the United States and other development countries or growing sentiments regarding capital markets.
Protectionism and generated by it slack growth of the world economy also remain among the risks. According to the World Bank, the volume of global trading of goods and services edged up by 4.3 percent last year and became an important factor of world economy growth.
UNCTAD 2017 report "Beyond Austerity: Towards a Global New Deal"1 indicates that 2017 observed somewhat recovery although nor sufficient. The forecast for the world economy in 2017 is 2.6 percent, not much higher than in 2016 (2.2 percent). The projections show that the majority of regions will expect slack growth. Markedly better improvement in economic situation is forecast in the Latin American countries that should come out of recession even so that growth rates in those countries will not exceed 1.2 percent. Countries of euro zone registered the highest rates of growth since 2010-1.8 percent, but lower than those recorded in the United States - 2.1 percent. Measures of tight budgetary policy, which still remain the main tool of macroeconomic policy hamper prompt economic recovery in the developed economies.
The IMF report "World Economic Outlook Update" released in January 2018 saw projections for global growth revised upward compared to fall. Global output is estimated to have grown by 3.7 percent in 2017, which is 0.1 percentage point faster than projected in October report, and by 3.9 percent in 2018, which is 0.1 percentage point faster, which reflects economic movement in euro zone, Japan, China and many other emerging market economies. The U.S. growth forecast remained unchanged compared to July estimates: 2.2 percent in 2017 and 2.3 percent in 2018. That was due to no expected reduction of taxes planned by Donald Trump administration. The euro zone forecast growth forecast was revised upward by 0.2 percentage point to 2.1 percent in 2017 and to 1.9 percent in 2018 compared to July estimates. The revision reflects higher exports, stronger domestic demand and reduced political risks. It should be noted that the forecast was computed before the events in Catalonia against a background of referendum for independence from Spain. The forecast for Chinese economy was revised upward by 0.1 percent point to 6.8 percent in 2017 and to 6.5 percent in 2018 (Table 42).
1 UNCTAD web site. Trade and development report 2017. BEYOND AUSTERITY: TOWARDS A GLOBAL NEW DEAL// http://unctad.org/en/PublicationsLibrary/tdr2017_en.pdf
Table 42
Dynamics of global GDP and world trade (growth rates in percent to previous year)
2010 2011 2012 2013 2014 2015 2016 Estimate Projections
2017 2018 2019
Global GDP 5.1 3.9 3.4 3.3 3.4 3.2 3.2 3.7 3.9 3.9
Advanced economies 3.0 1.7 1.2 1.4 1.8 2.1 1.7 2.3 2.3 2.2
United States 2.4 1.8 2.3 2.2 2.4 2.6 1.5 2.3 2.7 2.5
Euro zone 2.0 1.5 -0.7 -0.4 0.9 2.0 1.8 2.4 2.2 2.0
Germany 4.0 3.4 0.9 0.5 1.6 1.5 1.9 2.5 2.3 2.0
France 1.7 2.0 0.3 0.3 0.2 1.3 1.2 1.8 1.9 1.9
Great Britain 1.8 1.1 0.3 1.7 3.0 2.2 1.9 1.7 1.5 1.5
Emerging market and developing economies 7.4 6.2 5.1 4.7 4.6 4.0 4.4 4.7 4.9 5.0
Commonwealth of Independent States 4.8 4.8 3.4 2.2 1.0 -2.8 0.4 2.2 2.2 2.1
Russia 4.3 4.3 3.4 1.3 0.6 -3.7 -0.2 1.8 1.7 1.5
Except Russia 6.0 6.1 3.6 4.2 1.9 -0.5 1.9 3.1 3.4 3.5
Developing countries, Asia 9.5 7.8 6.7 6.6 6.8 6.6 6.4 6.5 6.5 6.6
China 10.4 9.3 7.7 7.7 7.3 6.6 6.7 6.8 6.6 6.4
India 10.1 6.3 4.7 5.0 7.3 7.6 7.1 6.7 7.4 7.8
Latin America and Caribbean 6.2 4.6 2.9 2.7 1.3 0.0 -0.7 1.3 1.9 2.6
Brazil 7.5 2.7 1.0 2.5 0.1 -3.8 -3.5 1.1 1.9 2.1
Mexico 5.6 4.0 4.0 1.1 2.1 2.5 2.9 2.0 2.3 3.0
Global trade in goods and services 12.6 6.1 2.9 3.0 3.3 2.6 2.5 4.7 4.6 4.4
Imports
Advanced economies 11.4 4.7 1.2 1.4 3.4 4.2 2.7 4.0 3.8
Emerging market and developing economies 14.9 8.8 6.0 5.3 3.6 -0.6 2.0 4.4 4.9
Exports
Advanced economies 12.0 5.7 2.0 2.4 3.4 3.6 2.2 3.8 3.6
Emerging market and developing economies 13.7 6.8 4.6 4.4 2.9 1.3 2.5 4.8 4.5
Source: data released by IMF (http://www.imf.org/ru/Publications/WE0/Issues/2018/01/11/world-economic-outlook-update-january-2018)
Against the backdrop of released positive statistics regarding certain advanced and emerging market economies (including European countries as well as China), the Bank of Russia revised upward compared to September Monetary Policy Report its estimate of aggregate GDP growth in trade partners of Russia in 2017 from 2.3-2.4 percent to 2.7 - 2.8 percent.1
In the context of slack global demand, the world trade registers sluggish growth. Meanwhile, the World Trade 0rganization (WT0) experts have revised upward estimates of world trade growth in 2017 from 2.4 percent to 3.6 percent.2 Forecast revision was due to increased trade flows in Asia in the context of interregional supplies and recovery of demand for imports in North America after its marked contraction in 2016. Risks that can hamper world trade recovery are tight monetary policy, geopolitical tension and financial losses from natural catastrophes. Revision of North American Free Trade Agreement (NAFTA) and negotiations on trade agreements following Brexit between the United Kingdom and the European Union also can result in decline of world trade indicators.
The World Trade Outlook Indicator (WTOI) is designed to provide "real time" information on the trajectory of world trade by three to four months prior to release of trade volume statistics. The latest value of 102.33 is little changed from the previous reading of 102.2 in
1 Bank of Russia web site. Monetary Policy Report №4// http://www.cbr.ru/publ/ddcp/2017_04_ddcp.pdf/
2 WTO web site. WTO upgrades forecast for 2017 as trade rebounds strongly// https://www.wto.org/english/news_e/pres17_e/pr800_e.htm
3 WTO web site https://www.wto.org/english/news_e/news18_e/wtoi_12feb18_e.pdf
November last year. indicating continued solid trade volume growth in the first quarter of 2018 following robust expansion in 2017. The WTOI line in the chart below (blue) is slightly below the merchandise trade line (red), which suggests that quarterly merchandise trade volume growth may moderate going forward while still remaining above trend. The WTOI unites several indicators linked to world trade in a single indicator in order to determine near-term trends. Readings of 100 indicate growth in line with medium-term trends; readings greater than
100 suggest above trend growth, while those below 100 indicate the opposite.
Component indices for container port throughput and air freight (104.1) and international
are traffic (104.4) in Q1 2018 are firmly above trend, indicating strong current trade growth. Meanwhile, the forward-looking export orders index (104.2) has reached its highest level since 2011, pointing to sustained recovery in trade flows in the first half of 2018. On the other hand, weaker results for automotive products (99.7), electronic components (97.9) and agricultural raw materials (98.6) could indicate weakening consumer confidence, which can lead to a slowdown of recovery growth of the world trade. According to the data released by the World Trade Organization (WTO), in 2017, world merchandise exports in value terms went up by
101 percent compared to the same period of the previous year. Exports from the Russian Federation demonstrated the highest growth (25.3 percent), Belorussia (24.2 percent), and Viet Nam (21.4 percent). The Russian Federation returned to the rating list of major exporters where it is ranked 15 (2.17 percent of world exports), which it kept since 2015 (with 2.29 percent), following a drop to rank 18 in 2016 (1.83 percent).
In terms of merchandise trade turnover, the Peoples Republic of China ranked first on the list with USD 4,110.6 billion in 2017. Trade balance of China remains positive since 1994 and in 2017, it hit USD 429.7 billion.
In terms of merchandise trade turnover, the United States of America ranked second with USD 3,956.2 billion. This said merchandise trade deficit remains: in 2017, it constituted USD 862.7 billion.
Germany ranked third on the list; its merchandise trade turnover in 2017 came to USD 2,615.5bn. Positive trade balance amounts to USD 281.6bn.
4.8.2. Terms of Russia's foreign trade: market conditions for major products of Russian export and import
The recovery of global demand has reflected on the dynamics of world commodity merchandise markets. For example, by the year-end the composite index of commodity assets Bloomberg Commodity Index (BCOM), which has 22 commodity futures in seven sectors, edged up from the second half of June (when it hit the lowest annual level of 79.6382 points) in the wake of contraction of deliveries amid growing demand for raw materials by 5.8 percent -to the level of 82.2183 points (December 12, 2017). Most critical price growth was observed on the markets of crude oil, coal, basic metals, cotton, and Robusta coffee. Price growth of those markets was driven by contraction of supply on the pretext of curtailment of production, reduction of capacities, environmental projects and simply crop failure.
Global crude oil market in 2017 was markedly under a spell of the crude oil production cut, which resulted in the oil market balancing. Attempts taken by OPEC and other non-OPEC oil producers aimed at cutting crude oil production bore fruit - oil supply glut began edging down,
1 Calculated on data released by WTO «Monthly merchandise trade values»: https://www.wto .org/english/res_e/statis_e/short_term_stats_e.htm
and prices have stabilized. The oil market has positively reacted to the extension of crude oil production cut agreement between OPEC and non-OPEC oil producers singed in November 2017.
The World Bank energy price index edged up in December 2017 by 2 percent compared to the previous month, which was due to surge of coal price by 16.7 percent owing to the implementation of environmental projects aimed at reduction of excessive coal production capacities. In 2017 compared to 2016, the energy price index increased by 23.6 percent (Fig. 51).
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Fig. 51. World Bank commodity price index (2010 =100 percent) Источник: http://www.worldbank.org/en/research/commodity-markets#1
Despite the fact that 22 oil-exporting countries of OPEC and non-OPEC oil producers have raised the level of the crude oil production cut agreement compliance, oil prices were falling in H1 first of all due to accumulated large stocks, shale oil production recovery in the United States as well as increased activity of such OPEC members as Libya and Nigeria, which were not covered by the OPEC+ production cut agreement as their oil industry suffered markedly from the combat activities.
In Q3 2017, crude oil prices were recovering moderately against the backdrop of the oil stock reduction amid growing global demand, improved compliance with oil production cut between OPEC and non-OPEC oil producers as well as shale oil production stabilization in the United States. Crude oil prices edged up by 1.6 percent to USD 50.2 per barrel on average compared with the previous quarter.
On November 30, 2017, members of OPEC agreed on extending the oil production cut agreement through the end of 2018. Other non-OPEC producers agreed to join the oil production cut agreement. Libya and Nigeria have undertaken obligations before OPEC to freeze their oil production at the 2017 level - 2.8 million barrels per day. According to data released by the OPEC report, at the November-end the agreement was executed by 121 percent; according to the data released by the International Energy Agency execution constituted
115 percent (assessment takes into consideration solely OPEC member states). As a result, in November 2017 Brent price exceeded USD 60 per barrel for the first time since December 2014, and on December 11, 2017, it hit USD 65.62 per barrel.
In 2017, Brent price averaged around USD 54.39 per barrel up by 23.5 percent against 2016 (USD 44.05 per barrel).
Oil production cut by OPEC and other oil producers led to the price growth on gas. For example, in the United States in 2017 compared to 2016, natural gas price went up by 18.8 percent, in Europe - by 23.9 percent, liquefied natural gas in Japan - up by 16.8 percent.
However, in Q3 2017 compared to the previous quarter, natural gas prices fell in the US by 4.0 percent to USD 2.93 per 1 million Btu owing to mild weather, corporate demand contraction, which suffered from hurricanes, and sufficient inventories of underground gas storage accumulated during winter. In Q4 price downward trend continued: compared to the previous quarter the price of natural gas in the US decreased by another 2.1 percent. In is projected that the demand for natural gas will go up due to commissioning of new capacities on the chemical industry as well as increased exports via pipelines to Mexico.
Natural gas price delivered to Japan down from USD 8.33 per 1 million Btu in Q2 to USD 8.23 per 1 million Btu in Q3 and to USD 7.92 per 1 million Btu in Q4 2017. Nevertheless, the year-average price on liquefied natural gas edged up from USD 6.89 per 1 million Btu in 2016 to USD 8.05 per 1 million Btu recorded in 2017.
European natural gas prices in Q2 and Q3 remained flat at USD 5.3 per 1 million Btu. In Q4 they rose to USD 6.22 per 1 million Btu. The year-average prices moved up by 23.9 percent to USD 5.65 per 1 million Btu reflecting contraction of nuclear capacities in France, high prices of coal and limited supply of liquefied gas.
Prices of non-energy commodities in 2017 in comparison with the previous year rose by more than 5.6 percent with higher variations among major groups. For instance, metal prices rose by 24.2 percent demonstrating best results among commodity groups due to heightened demand especially in the sphere of real estate, infrastructure and industrial sector in China as well as in the context of limited supplies due to contraction of excessive capacities. In December 2017, average basic metals prices fell by 0.5 percent due to somewhat slowdown of industrial activity and real estate market slump in China recorded in early Q4. In H2, prices recovered reflecting the weaker dollar. Over year as a whole, according to the London Metals Exchange data, price of nickel rose by 8.5 percent, led - by24 percent, aluminum - 22.7 percent, copper -26.7 percent, and zinc - by 38.3 percent.
Prices of precious metals rose by 0.4 percent in the face of strengthening investment demand and weaker dollar. Prices of agricultural products fell by 0.5 percent continuing downward trend from the onset of the year. Prices of food products edged up by 0.7 percent despite price cut of cereals, oil and protein meal. Prices of beverages declined by 9.0 percent (Table 43).
Table 43
Average annual world prices
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1 2 3 4 5 6 7 8 9 10 11 12
Brent, $/bbl. 72.32 97.64 61.86 79.64 110.9 111.97 108.86 98.94 52.37 44.05 54.39
Natural gas (USA), USD/1 m Btu 6.98 8.86 3.95 4.39 4.00 2.75 3.73 4.37 2.61 2.49 2.96
Natural gas, European market, USD /1 m Btu 8.56 13.41 8.71 8.29 10.52 11.47 11.79 10.05 7.26 4.56 5.65
Cont'd
1 2 3 4 5 6 7 8 9 10 11 12
Natural gas (Japan), USD/1 m Btu 7.68 12.55 8.94 10.85 14.66 16.55 15.96 16.04 10.22 6.89 8.05
Copper, USD/t 7118 6956 5149 7534 8828 7962 7332.1 6863.4 5510.5 4867.9 6169.9
Aluminum, USD/t 2638 2573 1665 2173 2401 2023.3 1846.7 1867.4 1664.7 1604.2 1967.6
Nickel, USD/t 37230 21111 14655 21809 22910 17557 15032 16893 11863 9595,2 10409
Source: calculated on data released by the World Bank.
4.8.3. Main indices of Russian foreign trade
Throughout 2017, Russian foreign trade turnover demonstrated the ongoing since late 2016 upward trend. In 2017, it rose compared to 2016 by 24.8 percent to USD 590.9 billion. However, it should be noted that there was a quarterly slowdown of the Russian foreign trade turnover growth rates. In Q1 2017 compared to the same period of 2016, it rose by 36.5 percent, in Q2 - by23.4 percent, and in Q3 - by 18.8 percent. In Q4, the foreign trade turnover grew at 24.2 percent.
Foreign trade turnover with countries of far abroad rose by 24.9 percent to USD 515.8 billion during the year, and with CIS countries - by 24.1 percent to USD 75.1 billion.
Russian exports in 2017 rose compared to the same period of 2016 by 25.3 percent to USD 353.1 billion, and Russian imports - by 24.1 percent to USD 237.8 billion. Long-established dynamics of exports and imports triggered growth of positive trade balance by 27.8 percent -to USD 115.3 billion (Fig. 52).
600,000
■ 1 Balance ^ ^ Exports Imports
Fig. 52. Main indexes of Russian foreign trade (USD bn) Source: Bank of Russia.
Price factor above all has determined positive dynamic of Russian exports amid insignificant growth of export volumes of goods. Growth of value of imports was determined essentially by growth of volumes of delivered goods to Russia (Table 44).
Table 44
Indexes of average prices and volumes of export and import pattern of Russian Federation in 2017 (in percent to corresponding quarter of 2016)
Custom s Tariff Number EAEU Name of commodity group Average price index Volume index
Exports Imports Exports Imports
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
01-24 Food products and agricultural raw materials (minus textile) 108.9 102.6 103.3 103.8 103.5 105.7 109.8 140.5 99.0 100.8 111 119.1
25-27 Mineral commodities 125.6 122.7 122.5 111.6 127.6 117.6 102.9 99.3 100.4 117.5 109.8 112.8
27 Fuel and energy products 125.6 122.4 122.5 110.1 115.5 115.1 102.8 99.3 100.1 103.2 108.6 122.2
28-40 Chemical industry products, rubber 109.2 114.6 107.8 105.8 107.3 110.7 99.1 104.3 106.8 114 103.1 108.2
41-43 Rawhide, furs and articles made of furs 122.3 114.2 99.9 91.5 100.9 91.8 98.5 121.6 93.1 99.5 123.5 180.6
44-49 Timber and pulp and paper products 102.3 107.5 111.5 99.6 98.1 101.9 114.7 106 106.6 105.9 113 105.7
50-67 Textiles, textiles and footwear 90.5 101.4 98.7 92 96.2 96.2 136.6 100.8 110.5 134.9 129.6 136.0
72-83 Metals and metal products 119.4 120.9 123.2 105.1 104.7 105.5 113.8 96.2 105.2 129.3 152 115.6
84-90 Machinery, equipment and transport vehicles 89.1 106.4 122.1 100.1 105.2 108.9 104.6 93.4 109.7 116.4 132 115.2
68-70, 91-97 Other products 89.3 102.4 105.9 99.4 100.7 103.3 71.6 80.6 104.9 130.9 118.5 108.3
Source: data released by FCS.
Russia's terms of trade improved in 2017. According to the data released by the Federal Customs Service (FCS), in November 2017 against November 2016, Russia's terms of trade index hit 116.8 points (in July 2016 - 86.6 points), of which with the countries of far abroad -119.1 points, and with CIS countries - 102.9 points.
Ratio of disequilibrium in trade (balance and trade turover ratio) rose from 19.1 percent in 2016 to 19.5 percent in 2017.
Structure and dynamics of exports
After four consecutive years of downward trend and hitting the 11-year minimum in 2016, the volume of Russian exports began recovering. The value volume of exported goods in 2017 compared to 2016 rose by 25.3 percent to USD 353.1 billion. Deliveries to distant foreign countries increased by 25.4 percent, and to CIS countries - by 24.7 percent. The share of distant foreign countries in the total volume of exports remained at the level of the previous year -85.9 percent.
Table 45
Russia's exports dynamics
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Exports, bn USD 354.4 471.6 303.4 400.6 515.4 529.1 523.3 497.8 341.5 281.9 353.1
Including:
Distant foreign countries 300.6 400.5 255.3 338.0 436.7 443.8 445.2 428.9 292.3 241.9 303.3
Growth rates, in percent to previous year
Quantum index 105.8 105.0 96.8 97.0 110.0 97.8 99.9 104.9 109.0 103.5 105.4
Average price index 119.7 110.9 137.4 76.4 119.8 132.9 101.6 95.7 58.1 76.9 129.9
Sources: Bank of Russia, Ministry of Economic Development of Russia.
Hydrocarbons price growth was the main contribution for high growth of value volumes of Russian exports. Average contract price of crude oil rose in 2017 compared to 2016 by 27.7 percent, oil products - by 33.2 percent, and natural gas - by 15.3 percent.
Moreover, volumes of natural gas deliveries abroad rose by 5.8 percent. In 2016, Gazprom increased natural gas deliveries to distant foreign countries by 12.5 percent - to 179.3 billion cubic meters, which was the all-time high. In 2017, shipments hit 194.4 billion cubic meters, which was the record of gas shipments to distant foreign countries. Practically constant growth of gas exports by Gazprom has been observed since 2012. Over five years, the share of Gazprom in the European market rose by 34.0 percent.
Despite the fact that export volumes of crude oil and petroleum products decreased compared to the previous year by 0.8 percent and 4.9 percent, respectively, value volume of exports of fuel and energy complex rose by 27.4 percent and constituted USD 211.4 billion in 2017 compared to 2016.
In 2017 compared to 2016, export pattern saw the share of fuel and energy products to rise by 1.1 percentage point. Share of other commodity groups of extended nomenclature remained at the last year's level or declines. For example, the share of food products declined from 6.0 percent to 5.8 percent, the share of chemical products-from 7.3 percent to 6.7 percent, timber, pulp and paper products - from 3.4 to 3.3 percent, machinery, equipment and means of transport - from 8.5 to 7.9 percent (Fig. 53).
Other goods
Machinery, equipment and means of transport
Metals and metal products
Timber, pulp and paper products
Chemical products, rubber
Fuel and energy products
Agricultural products and agricultural raw materials (except textile) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Fig. 53. Dynamics of Russian exports (USD bn)
Source: FCS.
600,0
500,0
400,0
300,0
200,0
100,0
0,0
IK:'::] ||KK| Kl:;:
According to the data released by the Federal Customs Service of Russia, non-resource non-energy Russian exports in 2017 hit USD 133.7 billion or 37.5 percent of the total exports volume (in 2016-38.3 percent).1 Compared to 2016, value volume of non-resource non-energy exports rose by 22.5 percent. Upward trend of the global prices and extension of deliveries volume by 9.8 percent as well as strengthened ruble have contributed to exports.
Maximum contribution to the increase of non-resource non-energy exports was made by metal products (32.7 percent of total increase), food products (14.7 percent), engineering products (15.1 percent), chemical products (12.6 percent), precious metals and gems (8.6 percent), and pulp and paper products (8.1 percent).
In 2017, exports of food products and agricultural raw materials continued to demonstrate an upward trend, which volume hit USD 20.7 billion. This indicator surpassed the same indicator for 2016 by 21.5 percent and was a record high for the entire period of observation. Exports volume of that category of products rose by 21.7 percent. Export growth of food products was triggered by increased domestic production, favorable ruble exchange rate against the US dollar, as well as decline of the purchasing power of the population, which led to the contraction of domestic market of the majority of food products.
Cereals traditionally ranked first in the structure of Russian exports of food products. According to the data released by the FCS of Russia, in the current 2017-2018 agricultural year exports of cereals hit 31,427,000 tons up 36.1 percent against the same period of the last season (23,088,000 tons). Wheat exports constituted 24,514,000 tons (up 36.7 percent against the same indicator of last season). Barley exports came to 3,869,000 tons (up 1.9fold). Corn exports hit 2,823,000 tons (down by 5.7 percent). In value terms, exports of wheat and meslin over the calendar year rose by 37.4 percent to USD 5.8 billion. Egypt has accounted to one fourth of that volume up 45 percent, Turkey has accounted for 10 percent (up 29.9 percent), and Bangladesh has accounted for 6 percent (up 14.6 percent).
Fish and seafood ranked second in the structure of food exports: their exports hit 1.6 million tons up 8.4 percent against 2016. Their value volume constituted USD 3.43 billion in 2017 up by 14.3 percent against the same indicator seen in 2016. Frozen fish (59.5 percent) and shellfish (26.9 percent) account for the major part of the turnover. South Korea, China, the Netherlands, and Japan import the major share of these products.
Animal and vegetable fats and oils ranked third on the list. Their exports rose in 2017 by 22.0 percent to USD 2.66 billion. Turkey, Egypt, China, Algeria and many other countries import products of that group.
Over the last two years, Russia began exporting sugar, increased exports volume of pork and poultry meat. For example, exports of meat and edible meat offal rose by 57.6 percent, fruit and nuts - by 29.3 percent, and sugar - twice.
Exports of machinery, equipment and means of transport increased by 15.5 percent to USD 28.1 billion. Its share in the total exports hit 7.9 percent (in 2016 - 8.5 percent).
Exports of foreign-branded cars made in Russia kept rising markedly. At year-end 2017, it increased by 20.3 percent in value terms. Skoda and Lada top the list of Russian automotive industry exports. Skoda top the list with around 40 percent of the total exports of automobiles. Skoda Yeti tops sales. Over 15,000 of these vehicles were exported. Exports of Lada vehicles reached 10,000 unites. Renault ranks third on the list with exports of 3,700 vehicles. Belorussia,
1 FCS web site http://www.customs.ru/index.php?option=com_content&view=article&id=26274:2018-02-12-11-28-37&catid=40:2011-01-24-15-02-45&Itemid=2094&Itemid=1835
Kazakhstan, Check Republic, China, and Germany account for the majority of imports of Russian made cars.
Structure and dynamics of imports
Against a background of domestic demand upward trend and relatively stable dynamics of ruble exchange rate imports in 2017 demonstrated a sustainable growth-imports reached USD 237.8 billion up 24.1 percent against the same indicator seen in 2016 (Table 46). Imports from distant foreign countries amounted to USD 212.5 billion, up 23.0 percent against 2016. The share of distant foreign countries in the total imports volume remained unchanged at 89.4 percent.
Table 46
Russian imports dynamics (USD bn)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Imports, USD bn 223.5 291.9 191.8 248.6 318.6 335.8 341.3 307.9 192.9 191.6 237.8
Including:
Distant foreign countries 191.2 253.1 167.7 213.3 275.5 288.5 295.0 271.9 170.6 171.0 212.5
Growth rates, in percent to previous year
Quantum index 122.4 130.1 127.1 113.5 63.3 135.4 122.2 105.1 97.8 96.6 115.0
Average Price Index 106.5 105.5 107.6 117.8 99.1 101.6 109.1 97.3 102.5 99.8 111.2
Sources: Bank of Russia, Ministry of Economic Development of Russia.
H2 2016 saw a recovery of imports volumes and in mid-2017, this indicator surpassed the average monthly level of 2010. That growth was due to purchases of machinery and equipment, which accounted for 53.6 percent of Russian imports increment. The Russian Federation imported machinery and equipment to the tune of USD 110.28 billion up 27.8 percent against 2016. Russia has imported machinery and equipment to the tune of USD 104.89 billion from the distant foreign countries. Imports of machinery and equipment include energy and special equipment, automotive special machinery, means of transport, vessels and airplanes, instruments and optics. Machinery and equipment as before account for around one-half of the total volume of Russian imports - 48.6 percent.
Imports of chemical products ranked second on the list of Russian imports (17.7 percent) rose in 2017 by 19.2 percent. Pharmaceuticals, plastics and products of plastics account for the major value of imports of chemicals with 27.0 and 22.0 percent, respectively. Rose by 23.7 percent.
Textiles imports reflecting increase of footwear imports by 40.0 percent and knitwear up by 25.0 percent.
In 2017, for the first time since the onset of the "sanctions wars" Russia increased imports of food products and agricultural raw materials.
To note, in August 2014, Russia banned imports of food products from countries, which had imposed sanctions against Russia: the US, the EU countries, Canada, Australia, and Norway. Beef, pork, poultry, sausage, fish, vegetables, fruits, dairy products, among other products were banned. From January 1, 2016, Russia banned imports of certain agricultural products from Turkey.
In 2014, Russia imported 25 million tons of food products and agricultural raw materials to the tune of USD 39.96 billion. In the following years, imports of food products were falling in
the wake of the imposed sanctions. In 2015, imports fell by 15.0 percent in volume terms to 21.4 million tons and by 33.0 percent in value terms down to USD 26.65 billion. In 2016, the downward trend went on to 20.3 million tons and USD 25.0 billion, respectively.
In 2017, imports of food products and agricultural raw materials increased in comparison with 2016 by 15.7 percent to USD 28.8 billion reflecting the rubles strengthening and amid lifting of embargo on imports of food products from Turkey. Fruits with 16 percent, meat and meat bypass with 9 percent, dairy product with 9 percent, alcoholic and non-alcoholic beverages with 9 percent, and vegetables with 6 percent account for major share of food products imports value.
Belorussia remains Russia's most important food and agricultural products exporter to despite a reduction in shipments in volume terms by 6 percent in 2017 down to 3 million tons. In value terms, imports from Belorussia rose by 15 percent to USD 3.9 billion. Belorussia exports dairy products, sugar, cheeses and cottage cheese, as well as meat and meat bypass to Russia.
Brazil ranks second on the list with USD 2.28 billion (in January-November 2017) of foodstuffs and agricultural products exports to Russia. Brazil exports to Russia soybeans, refrigerated and frozen pork, cattle meat and poultry, and peanuts. Ecuador ranks third with USD 1.18 billion of food products exports to Russia. First of all, Ecuador exports bananas to Russia. China ranks fourth with USD 1.55 billion of food products exports. China mostly exports apples and pears, citrus, onions and garlic, as well as tomatoes. Turkey resumed food products exports and agricultural products to Russia in 2017. Shipments of foodstuffs from Turkey in 2017 compared to 2016 rose in volume terms by 81 percent to 1.1 million tons, and in value terms by 66 percent to USD1 billion.
300
I Other goods
250
200
150
100
50
1
1
2008 2009 2010 2011 2012 2013 2014 2015
□ Machinery, equipment and means of transport
□ Metals and metal products
□ Textile, textile products and footwear □I Timber, pulp and paper products
S Chemical products, rubber
□ Mineral products
m Foodstuffs and agricultural raw materials (minus textile)
Fig. 54. Dynamics of Russian imports (USD bn)
Source: FCS.
2017 saw changes in the pattern of Russian imports in favor of investment goods. According to the Ministry of Economic Development, increment of investment goods deliveries came to 28.1 percent. Growth of consumer imports (by 21.6 percent in annual terms) reflected increased consumer unsecured lending.
0
The share of investment goods in Q3 2017 rose compared to Q2 by 1.6 percentage points to 29.2 percent, consumer goods up 0.7 percentage point to 32.6 percent. The share of intermediate goods contracted by 2.3 percentage points to 38.2 percent.
4.8.4. Regional pattern of Russian foreign trade
The share of the EU countries is decreasing in the regional pattern of Russian foreign trade, meanwhile the share of the APEC countries is rising in Russian foreign trade turnover. In 2017 compared to 2016, the share of the EU countries fell from 42.8 percent to 42.2 percent. Meanwhile, the share of the APEC countries rose in 2017 to 30.5 percent against 29.9 percent seen in 2016 (Fig. 55).
Fig. 55. Regional pattern of Russia's foreign trade (percent)
Source: FCS.
The European Union remains by far Russia's most important trade partner. In 2017, Russian foreign trade turnover with the EU countries rose by 22.9 percent notably both of Russian exports (by 22.1 percent) and Russian imports (by 24.4 percent). It should be noted that the growth of Russian foreign trade turnover was observed with all EU countries except Latvia and Estonia.
Russia's foreign trade with the APEC countries has moved up by 27.1 percent, with China by 31.5 percent, with Viet Nam by 36.2 percent, with Indonesia by 25.2 percent, and with Singapore by 94 percent. High growth rates of foreign trade turnover have been observed with countries that imposed sanctions against Russia. For example, foreign trade turnover with Australia in 2017 rose by 18.5 percent, with Canada by 43.2 percent, and with the United States by 16.2 percent.
Russian foreign trade turnover with the CIS countries has grown by 25.8 percent. Restoration of trade links was taking place with all CIS countries minus Turkmenia whose trade turnover with Russia contracted by 52.2 percent.
The Peoples' Republic of China is Russia's top trading partner since 2010. China's share rose to 14.9 percent in 2017 (14.1 percent in 2016) in Russia's foreign trade turnover. At the same time, Russia has adverse balance with China: in 2016, it amounted to USD 10.1 billion, and in 2017 - USD 9.1 billion.
Russia has adverse balance with other APEC countries: Viet Nam (USD -1.4 billion), Indonesia (USD -1.7 billion), the US (USD -1.8 billion), Malaysia (USD -0.9 billion), and Thailand (USD -1.2 billion). As a result, Russia has adverse trade balance with the entire Asia-Pacific economic cooperation region (Fig. 56).
EU
APEC
CIS
Other countries
ZT
160
180
0 20 40 60 80 100 120 140 Import 2017 DExport 2017 Dlmport 2016 DExport 2016
Fig. 56. Principal indexes of Russia's foreign trade across regions (USD bn) Source: FCS of Russia.
4.8.5. Russian foreign trade regulation1
Tariff regulation
Export customs duties. "Important tax maneuver" terminated in 2017 brining down oil export duties and light oil products and raising Mineral extraction tax (MET) and export duty on heavy oil products. The government planned to introduce a fuel oil export duty hike to 100 percent of that on crude oil. However, the oil producing companies lagged behind with upgrading their refining capacities aimed at increasing depth of refining. Ministry of Energy and Ministry of Finance coordinated middle course version, which envisaged gradual increase of fuel oil duties and a hike to 100 percent happened in 2017 (Table 47).
Materials of information and legal web site GARANT.RU were used in drafting this chapter.
Table 47
Rates of export customs duties on crude oil and petroleum-based products
in 2014-2017 (USD/t)
Crude oil Petroleum-based products
2014
January 1 401.0 264.6
Light oil products Heavy oil products
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
September1 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
January1 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
September1 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
September1 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
2017
January 1 79.1 23.7 79.1
February 1 89.5 26.6 89.5
March 1 91.0 27.3 91.0
April 1 88.9 26.6 88.9
May 1 84.0 25.2 84.0
June 1 80.0 24.0 80.0
July 1 80.9 24.2 80.9
August 1 74.4 22.3 74.4
September1 84.1 25.2 84.1
October 1 87.9 26.3 87.9
November 1 96.1 28.8 96.1
December 1 105.0 31.5 105.0
Sources: Regulation of RF Government, Information released by Ministry of Economic Development of Russia.
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 gems, 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.
By the Regulation of the RF Government of August 19, 2017 No 984 "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," and in compliance with Russia's commitments within the WTO, from September 2017, Russia cut export duty rates on rawhide, iron-and-steel waste and scrap, refined copper and copper alloy, and articles made from basic metals.
Import customs duties
Pursuant to the Decision by the Collegium of the Eurasian Economic Commission of May 11, 2017 No. 44, in the framework of commitments undertaken by the Russian Federation at the accession to the World Trade Organization in 2012, from September 1, 2017 Russia reduced rates of Common Customs Tariff (CCT) on around 1,000 tariff headings. Duty rates changed on fish, cheese, vegetables, fruits, seeds for sowing, sources, cosmetics, detergents, ceramics, metal products, scooters, among others. For example, import duty rates were reduced on garments from 9.2 to 6.5 percent, tableware and kitchen utensils, as well as refrigerators from 13.6 to 12 percent, Pacific salmon from 4.4 to 3 percent, cod from 6 to 5 percent, and roses from 7 to 5 percent.
Also within the commitments undertaken by the Russian Federation at the accession to the WTO, the Board of the Eurasian Economic Commission took a decision on June 23, 2017 about the change of import duty rates regarding 472 codes TNVED EAEU from the list of the so called sensitive goods, such as equipment assembled on means of transport, drones, certain types of aircraft, textiles, other products of light industry, fish and sea food, among other. Similar changes were introduced into certain decisions of the EEU Board regarding import duty rates, which were applied during the transition period in Armenia, Kyrgyzstan, and Kazakhstan.
New rates were effective since early September 2017. The average weighted of import duty rate decreased to 5.3 percent (it was 5.4 percent from January 1, 2017). To note, prior to the accession to the WTO in 2012, the average import duty constituted 9.6 percent. During the first year following the accession, the reduction affected solely 10 percent of tariff headings (out of 11,000). By September 2015, the average import duty was reduced to 5.5 percent (in 20142015, rates declined on more than 4,000 tariff headings). By the end of the transition period in 2019, the EAEU average import duty should constitute 4.5 percent.
Non-tariff regulation
In November 2017, the WTO released its sixteenth monitoring report on Group of 20 (G20) trade measures.1 G20 economies implemented a total of 16 new trade-restrictive measures during the period from mid-May to mid-October 2017. They are new of increased effective tariffs, export restrictions and localization of added value. This averaged over three new measures per month against six measures imposed in the period from October 2016 through May 2017. In 2015, around eight new trade-restrictive measures were imposed per month.
1 The World Trade Organization web site: https://www.wto.org/english/news_e/newsl7_e/g20_ wto_report_novemberl7_e.pdf
Over the same period, G20 imposed 28 measures aimed at facilitating trade, including abolishment and reduction of tariffs and simplification of customs procedures. Nevertheless, it should be noted that measures aimed at trade-facilitating during the period under review were applied to goods, which value volume in the world trade turnover came to USD 27 billion, which was notably less than the previous monitoring period - USD 163 billion. During the reporting period, the value volume of good under the trade-restrictive measures also contracted to USD 32 billion against USD 47 billion seen in the previous monitoring period. The majority of trade-facilitating measures imposed in the framework of International Harmonized Commodity Description and Coding System (HS) included such goods, as "Nuclear reactors, boilers, equipment and mechanisms, and their components" (HS84) - 43.5 percent, "Electrical machinery and equipment and their components" (HS 85)-24.9%, "Instruments and optical, photographic, cinematographic, measuring, controlling, precision, medical and surgical devices and instruments, and their components" (HS 90) - 11.4%, and "Cereals" (HS 10) - 3.7 percent.
Currently, G20 economies implement 12,224 trade-restrictive measures. According to the WTO data as of June 30, 2017, sanitary and phytosanitary measures accounted for the highest share in the overall number of imposed trade-restrictive measures (28.5 percent of the total non-tariff measures). They are followed by technical barriers to trade (21.5 percent) and antidumping measures (13.8 percent).
The latest available data for January-June 2017 demonstrate a slight increase of the number of anti-dumping investigations initiated by G20 economies in comparison with the previous six months (July-December 2016). In H1 2017, G20 economies initiated 123 anti-dumping investigations against 118 such investigations initiated in H1 2016. The number of investigations initiated by Brazil, India, and the United States significantly fell from July 2016 to June 2017 compared to July 2015 to June 2016. Over the same period, Argentina notably increased the number of investigations (from 8 to 21), Canada (from 4 to 19), and Turkey (from 8 to 19). Although anti-dumping investigations not always result in anti-dumping measures, the growing number of anti-dumping investigations speak for a probable increase of implemented measures.
In early October 2017, the European Parliament adopted new anti-dumping rules designed to protect jobs and industrial production in the EU. The EU Assembly Resolution1 indicates that they are designed to "update the trade defense instruments to deal with anti-dumping imports" by including in the existing rules social and environmental criteria, freeing European companies from excessive bureaucratic burden, assisting small and medium businesses. The Resolution envisages tougher EU rules against dumping and subsidized dumping from third countries.
The European Union imposed anti-dumping duties on eight type of Russian goods, antidumping investigations are under way against two type of Russian goods (hot-rolled steel and ferrochrome), review of anti-dumping measures are under way on two types of Russian products.
According to the Register of trade-restrictive measures2 as of December 1, 2017, 143 restrictive measures were revealed, which limit access to the markets of Russian good. Mainly, they are anti-dumping duties, which account for 30.1 percent of the overall number of imposed measures, sanitary and phytosanitary measures account for 11.9 percent (SPS measures), and technical barriers - 10.5 percent (TBT measures) (Table 48).
1 European Commission web site // http://europa.eu/rapid/press-release_MEMO-16-3605_en.htm
2 http://www.ved.gov.ru/mdb/information/database/
Table 48
Market protective measures applied by third countries against goods from the Russian Federation
2014 2015 2016 2017
Restrictive measure
Anti-dumping measures 40 39 40 43
Special safeguard duty 9 15 17 13
Countervailing duty - 1 1 1
TBT 9 9 10 15
SPS 3 7 11 17
Quotas (including tariff quotas) 2 3 3 3
Excises on the basis of discrimination 5 4 5 7
Ban on imports 4 3 4 6
Risks of imposition of measures 5 5 5 8
Other non-tariff measures 25 24 29 30
TOTAL 102 110 125 143
Source: Register of restrictive measures as of December 1 of the corresponding year.
Currently 19 investigations against Russian goods have been initiated, of which 13 are antidumping, four are special protective, two investigations regarding impact of imports on the US national security, as well as six reviews of anti-dumping measures. Two agreements on suspension of anti-dumping procedure in the US are in effect. However, two agreements on termination of anti-dumping procedures are in force (regarding uranium products and thick-gage plate).
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.
Moreover, in response to events happened in Crimea and in the east of Ukraine, restrictive measures were applied 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.
Protective measures of domestic market
Application of the protective measures in the Eurasian Economic Union (EAEU) has been regulated by Articles 48-50 of the Treaty on the Eurasian Economic Union of May 29, 2014, and by the Protocol on application of special protective, anti-dumping and countervailing measures in relation to third countries (Annex No. 8 to the Treaty on the Eurasian Economic Union). At present, seventeen protective measures of domestic market are effective in the EAEU.
Table 49
Protective measures of domestic market effective in the EAEU
№ Product Type of measure Exporter Date of expiry
1 2 3 4 5
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
Cont'd
1 2 3 4 5
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
Source: http://www.eurasiancommission.org/ru/act/trade/podm/mery/Pages/measures_list_applied.aspx
Tariff quotas. Decision of the Board of the Eurasian Economic Commission of August 18, 2017 No. 97 "Of implementation for 2018 of tariff quotas regarding certain types of agricultural goods transported to the customs territory of the Eurasian Economic Union, as well as volumes of tariff quotas regarding these goods, transported to the territory of member of the Eurasian Economic Union" imposed tariff quotas on import of meat and meat bypass. This list includes cattle meat, pork, poultry meat and sub products, port trimming, certain types of buttermilk and modified buttermilk. Distribution of quotas among the EAEU member states was established. Quotas are applied to goods under customs procedure for domestic consumption (except produced and imported from the CIS countries).
Embargos and import restrictions. In the course of 2017, agricultural products from Turkey were gradually returning to the Russian market. Decree of the Government of the Russian Federation of November 30, 2015 adopted a list of agricultural products, raw materials and foodstuffs produced in Turkey and are banned from January 1, 2016 for imports to the territory of the Russian Federation. Decree of the Government of the Russian Federation of March 9, 2017 No. 276 this list was reduced. The following products were excluded from the list: carnations, fresh and refrigerated onions, underground onion, cauliflowers and broccoli sprout among others. The Federal Service for Veterinary and Phytosanitary Surveillance lifted the ban on imports of green leaf lettuce, salad iceberg, pepper, vegetable marrows and pumpkins from nine Turkish enterprises starting from September 1, 2017. From October 30, the ban was lifted on imports of aubergines and pomegranates from 27 Turkish enterprises.
Decree of the Government of the Russian Federation of June 2, 2017 No. 672 "On introduction of changes into the Decree of the Government of the Russian Federation of November 30, 2015 No. 1296 and repeal some Acts of the Government of the Russian Federation" lifted the ban on imports to Russia of frozen dressed chickens and turkeys and their by-products, fresh and refrigerated cucumbers and pickling cucumbers, fresh apples, pears, grapes, wild strawberries and strawberries. Decree of the Government of the Russian Federation of October 26, 2017 No. 1301 imports of Turkish tomatoes was permitted from November 1 in volume determined by the Ministry of Agriculture of Russia (not more than 50 thousand tons till the end of 2017).
Executive Order of the President of Russia of June 30, 2017 No 293 "On extension of special economic measures aimed at provision of security of the Russian Federation" in response to the extension of the sanction regime imposed against Russia till the end of 2018 extended the ban o imports of certain types of agricultural products, raw materials and food stuffs originated from the European Union, the U.S., Canada, Ukraine, Norway, Australia, Albania, Montenegro, Iceland, Lichtenstein.
4.8.6. Integration processes
The Federal Law of November 14, 2017 No. 317-FZ ratified Agreement on Customs Code of the Eurasian Economic Union. The Customs Code is designed to optimize customs operations, further liberalization of customs rules and codification of effective agreements. Provision of international agreements under the law of EAEU are being codified. The Code envisages maximum use of the information technologies in declaration and release of goods and simplification of some procedures (for example, customs warehouse). The Code allowed for shorter length for goods release in non-risk deliveries (which does not require revision). Goods release procedure is described in more detail. The Code envisages the status of the authorized economic operator, coordination of customs authorities within the Union have been regulated. On the other hand, customs payment procedure remained unchanged (prior to goods release), significant number of reference rules to bylaws including at the national level, which implies differences in tax administration rules on the EAEU common customs territory, multiple stages of customs clearance. The Customs Code of the EAEU entered into force on January 1, 2018.
Trade and economic agreements of the EAEU. The free trade zone agreement between Eurasian Economic Union (EAEU) and the Socialist Republic of Vietnam (SRV) will come into force starting October 5, 2016,1 which creates new conditions for trade and economic activities for business of EAEU and Vietnam. Vietnam was the first country signing the free trade zone agreement with the EAEU.
Table 50
Negotiation tracks on trade and economic agreements of EAEU as of December 1, 2017
Ratified free trade zone (FTZ) Agreement with the Socialist Republic of Vietnam effective from October 2016
Upon completion of the fifth round of negotiations between EAEC and the Ministry of trade of China, joint statement on the completion of negotiations on the Agreement of trade and economic cooperation was signed on October 1, 2017. Agreement on economic partnership between the Eurasian Economic Union and China is practically ready and can be signed in early next year.
Routs of the dialogue, negotiations/consultations under way. Iran - "abridged" FTZ. India - FTZ. Israel - 3 FTZ. Singapore - FTZ. Egypt - FTZ. Serbia - common FTZ between the EAEU and Serbia will replace bilateral FTZ with Belarus, Kazakhstan, and Russia.
Prospective candidates (working groups, display of interest, memorandums). South Korea. Cambodia. Mongolia. Peru. Chili.
Source: Eurasian Economic Union (Edited by Vinokurova E.Yu.). Center for Integration Studies. St. Petersburg. 2017, p. 163.
Implementation of the Agreement had a positive impact on the Russian-Vietnamese trade turnover, which over ten months of 2017 rose by 36.3 percent and hit USD 3.9 billion. Both Russian exports to Vietnam (up by 43.5 percent) and imports from Vietnam (up by 33.3 percent) demonstrate solid upward trend.
1 Agreement on free economic zone between the Eurasian Economic Union, on the one part, and the Socialist Republic of Vietnam, on the other part: EAEC web site.
During last year, shipments of agricultural products (corn and wheat) from Russia to Vietnam markedly rose owing to the Agreement. Favorable conditions have been created for meat products trade.
In October 2015, Presidents of the EAEU member states adopted a systemic decision for further development of the Union's trade policy. Tasks and landmarks for the EAEU cooperation with key trade partners, strategies for the EAEU promotion in the world trade relations have been formed.
4.8.7. WTO Agreement on trade facilitation
The WTO Trade Facilitation Agreement (TFA) adopted by the 9th Ministerial Conference of the WTO members at Bali (Indonesia) in December 2013. This document was the first major agreement between WTO members since the Uruguay round of twenty years before. This Agreement development was launched in 2004 and took around nine years for completion. Now it is ratified by 110 WTO members.
The TFA contains provisions for expediting the movement, release and clearance of goods, including goods in transit. It also sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues. It further contains provisions for technical assistance and capacity building in this area. Solution of these issues is of high interest for small and medium -size businesses, which will open for them new horizons for international trade participation. The WTO members' commitments to reform customs procedures and red tape, raising efficiency of international shipments, as well as provision of access to information and express-delivery channels will permit small businesses to widen their logistical capacity and proactively participate in global supply chain, reduce costs of exporting their goods.
The WTO report (2013) noted that trade facilitation will result in reduction of costs from USD 350 billion to USD 1 trillion due to reduction of trade costs by 10-15 percent, increase of trade flows and revenues, creation of sustainable business environment and attraction of foreign investment.
On February 26, 2016, the Federation Council of the Russian Federation adopted protocol to the Marrakesh agreement, which envisaged incorporation of Trade Facilitation Agreement into Annex 1 to the Marrakesh Agreement on establishing the WTO.
It should be noted that the Federal Customs Service has been taking serious measures in this direction. Large sums have been invested in electronic declaration, automatic collection and interdepartmental exchange of customs information, all federal okrugs have been developing centers for electronic declaration, and the institute of authorized economic operators is operational. All these innovations mean that Russia has been implementing certain provisions of this WTO Agreement, although problems remain. Implementation of single-window system is lagging behind. There are complaints against methods of levying customs duties on the basis of the so called risk factors.
In the World Bank Doing Business 2018 report, Russia is ranked 100 out of 190 countries up 40 places owing to a new deep-sea port on the Gulf of Finland, which increased competition and reduce costs on border control in St. Petersburg port.
4.9. Russia's participation in the WTO trade dispute settlement system1
The Russian Federation acceded to the World Trade Organization (WTO) on August 22, 2012, and was therefore authorized to participate in the WTO trade dispute settlement system. The WTO dispute settlement system is in place pursuant to the Dispute Settlement Understanding (DSU)2. Hence the Russian Federation has been entitled since August 2012 to resort to the system to uphold its trade interests. Dispute settlement proceedings in the WTO is a five-stage process:
1) bilateral consultations (within 60 days from filing a request for consultations);
2) establishment and composition of a Panel at the request of any party in dispute to consider the subject matter in dispute (within 45 days from filing a request for Panel composition);
3) Panel stage (within 6-9 months from date when the Panel kicks off), and the Dispute Settlement Body (DSB) has authority to adopt a Panel report and to issue recommendations (about 60 days of the Panel report);
4) Appellate Body report proceedings, if a party to a dispute has filed an appeal (60-90 days from filing an appeal), the DSB has authority to adopt the Appellate Body report and to circulate the DSB's recommendations and rulings to the parties (30 days of the Appellate Body report);
5) surveillance of the implementation of the DSB's recommendations and rulings (not more than 15-18 months of DSB's adoption of the Panel report or the Appellate Body report).
According to the 2017 year-end data, the Russian Federation was a party to 54 disputes in the WTO: as the complaining party in 6 disputes, as the responding party in 8 disputes, as a third party in 40 disputes.
B 2017 the Russian Federation filed to the DSB two new complaints: against the European Union over the imposition of anti-dumping measures affecting certain cold-rolled flat steel products from Russia (DS521) and against Ukraine over restrictions, bans, requirements and procedures relating to trade in goods and services and transit (DS525). In 2017, Ukraine filed WTO complaint against the Russian Federation over restrictive measures affecting the importation and transit of certain Ukrainian products (DS532). the Russian Federation has brought its measures into conformity with the WTO rules and regulations in two disputes to which it is the responding party (DS475 and DS485) (see Table 51).
In 2017, the Russian Federation reserved its third-party rights to 9 disputes, some of which were settled. In some cases, the Russian Federation gained indirectly benefits from the participation in the WTO dispute settlement system.
1 This section is written by Marina Baeva, RANEPA, VAVT under Russian Ministry for Economy; Alexander Knobel, the Gaidar Institute, RANEPA, VAVT under Russian Ministry for Economy.
2 https://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm.
Table 51
Russia as complaining or responding party to WTO trade disputes
Dispute Subject matter at issue Current status of disputes (as of 2017 year end)
1 2 3
Complainant
DS474: The European Union -Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia (December 23, 20131) The European Union used "cost adjustment" methodologies for the calculation of dumping margins in anti-dumping investigations and reviews (The European Union rejected cost and price information of producers and exporters in the country of origin (Russia)). The European Union verified the expiration date of the anti-dumping measures without having adequate data on continuation and collection of anti-dumping duties and injury caused. Panel composition stage (July 22, 2014)
DS476: The European Union -Certain Measures Relating to the Energy Sector (April 30, 2014) The European Union's Third Energy Package: Gas producers may not own trunk pipelines located on the EU territory. Operators that are controlled by foreign persons must be subject to a special certification procedure. Panel proceedings (March 7, 2016)
DS493: Ukraine - Anti-Dumping Measures on Ammonium Nitrate (May 7, 2015) When conducting anti-dumping investigations of ammonium nitrate imports from the Russian Federation, Ukraine failed to base its findings on electric power prices offered by Russian producers in the Russian Federation and used instead third countries' prices (cost adjustment). Panel proceedings (February 2,2017)
DS494: The European Union -Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia (May 7, 2015) When conducting anti-dumping investigations of imports of welded pipes and ammonium nitrate imports from the Russian Federation to determine dumping margins, the European Union failed to take account of the information on producer and export costs and prices and, instead, relied on third countries' prices (cost adjustment). Panel composition stage (December 16, 2016)
DS521: Anti-dumping measures on certain cold-rolled flat steel products from Russia (January 27, 2017) When conducting anti-dumping investigations, the European Union failed to failed to base its findings on the information provided by Russian producers and instead had replaced it with unfounded data and incorrect estimates. Consultations stage (January 27, 2017)
DS525: Ukraine - Measures relating to trade in goods and services and transit (May 19, 2017) A complex complaint against Ukraine's restrictive measures affecting the trade in goods and services from the Russian Federation. Consultations stage (May 19, 2017)
Respondent
DS462: The Russian Federation -Recycling fee on motor vehicles (complaint by the European Union, July 9, 2013) The Russian Federation imposed measures, the so called "recycling fee", on motor vehicles while exempting, under certain conditions, domestically manufactured motor vehicles. Fee assessment provides too much of a difference in fee size between brand new and secondhand motor vehicles. Panel composition stage (November 25, 2013)
DS463: The Russian Federation -Recycling fee on motor vehicles (complaint by Japan, July 24, 2013) The Russian Federation imposed extra measures (the recycling fee) on imported motor vehicles while exempting, under certain conditions, domestically manufactured motor vehicles. Consultations stage (July 24, 2013)
DS475: The Russian Federation -Measures on the importation of live pigs, pork and other pig products from the European Union (complaint by the European Union, April 8, 2014) Russia's ban on the importation of pork and other pig products from the European Union constitutes a disproportional measure because just a few minor outbreaks of African swine fever (ASF) of wild boars were confirmed, and promptly contained, near the border with Belarus. The European Union challenges the Russian Federation's ASF regionalization of the EU territory. Request for complaining party's retaliatory measure. Oral hearing (January 3, 2018)
DS479: The Russian Federation -Anti-dumping duties on light commercial vehicles from Germany and Italy (complaint by the European Union, May 21, 2014) Russia's anti-dumping investigations and determination of dumping margins on light commercial motor vehicles are inconsistent with the WTO rules, particularly Determination of Dumping, Determination of Injury, Evidence, Definition of Domestic Industry, Public Notice and Explanation of Determinations. Appeals filed. Appellate Body report proceedings (February 20, 2017)
1 Parenthesized is the date of request for consultations.
Cont'd
1 2 3
DS485: The Russian Federation -Tariff treatment of certain agricultural and manufacturing products (complaint by the European Union (EU, October 31, 2014) Russia's 15 percent or 10 percent duty rates on goods such as paper and paperboard were applied in excess of the 5 percent bound rate. Customs duties on certain types of goods are above the bound rate when their customs value is below the bound rate. The responding party met the DSB's recommendations and rulings (June 8, 2017)
DS499: The Russian Federation -Measures affecting the importation of railway equipment and parts thereof (Ukraine, October 21, 2015) The Russian Federation has suspended validation of certificates issued to manufactures of railway equipment and railway rolling stock until after new technical regulations are introduced. The Russian Federation has rejected applications for new certificates. Panel proceedings (December 16, 2016)
DS512: The Russian Federation -Measures Concerning Traffic in Transit (complaint by Ukraine, September 14, 2016) The Russian Federation imposes restrictions on traffic in transit from Ukraine via the Russian Federation to the Republic of Kazakhstan or the Republic of Kyrgyzstan: Ukrainian railway and motor cargo traffic in transit to the Republic of Kazakhstan and the Republic of Kyrgyzstan through the Russian Federation must go strictly from the Republic of Belarus, provided that certain terms and conditions are met. Additionally, a ban was imposed on goods in transit with other than zero tariff rates, and a ban was imposed on the goods in transit covered by Russia's sanctions. Panel proceedings (June 6, 2017)
DS532: The Russian Federation -Measures concerning the importation and transit of certain Ukrainian products (complaint by Ukraine, October 13, 2017) The Russian Federation imposed restricting measures affecting imports and transit of juice products, beer, beer-based beverages and other alcoholic beverages, confectionary products, wall paper and similar wall coverings originating from Ukraine via the Russian Federation to third countries. Exports of the above Ukrainian products fell considerably, with a halt in exports of a few items. Consultations stage (October 13, 2017)
Source: own compilation based on data posted on the WTO official website: https://www.wto.org/english/ tratop_e/dispu_e/dispu_by_country_e.htm.
4.9.1. 2017 updates on WTO trade disputes to which Russia is the complaining party
DS493: Ukraine — Anti-dumping measures on ammonium nitrate from Russia (complaint by the Russian Federation)
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.1
The Russian Federation challenged that Ukraine, while conducting anti-dumping investigations of ammonium nitrate imports from Russia, had failed to failed to base its findings on the electric power prices of offered by Russian producers in the Russian Federation and instead had relied on third countries' prices (cost adjustment). Furthermore, the Russian Federation claims that Ukraine's measures are inconsistent with some other terms and provisions of the Anti-Dumping Agreement.
Since consultations failed to settle the dispute between the Russian Federation and Ukraine, the Russian Federation requested on February 29, 2016 the establishment of a Panel. At its meeting on 22 April 2016, the DSB established a Panel. On 2 February 2017, the Panel was composed. The Panel expected to issue its final report to the parties not before the first quarter of 2018, in light of the amount and complexity of the work involved.
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds493_e.htm.
DS521: The European Union — Anti-dumping measures on certain cold-rolled flat steel products from Russia (complaint by the Russian Federation)
On January 27, 2017, the Russian Federation filed a request to the WTO for consultations with the European Union in respect to anti-dumping measures affecting certain cold-rolled flat steel products from the Russian Federation.1 Since August 5, 2016, the European Union further extended the EU anti-dumping duties on cold-rolled flat steel products from the Russian Federation at the request of the European Steel Association (Eurofer), which accused Russian and Chinese steel companies of deliberately cutting prices for cold-rolled flat steel products. Russia's exports of the products at issue to the European Union in 2016 dropped 84 percent from 2015, marking a decline in total exports of the products to 10 percent in 2016 from 46 percent in 2015.2 The anti-dumping duties are 34 percent for PAO Severstal, 18.7 percent for OAO Magnitogorsk Iron & Steel Works, 36.1 percent for PAO NLMK and the rest of the companies. The Russian Federation claims the investigation was inconsistent with the AntiDumping Agreement and GATT 1994.
The Russian Federation expressed concerns about the European Union had failed to failed to base its findings on the information provided directly by Russian producers and instead had replaced it with unfounded data and incorrect estimates. The Russian Federation claimed that the determination of injury and the examination of causal relationship between the alleged dumping imports and the injury to the domestic industry had been performed in violation of respective rules and regulations.
The Russian Federation previously filed complaints against the European Union over antidumping measures in respect of the application of "cost adjustment" practice during antidumping investigations (DS474), and anti-dumping measures affecting imports of welded pipes and ammonium nitrate from the Russian Federation (DS494).
DS525: Ukraine — Measures relating to trade in goods and services and transit (complaint by the Russian Federation)
On May 19, 2017, the Russian Federation filed a request to the WTO for consultations with Ukraine in respect to restricting measures, bans, special requirements and measures against Russian goods, services and persons as well as traffic in transit via Ukraine in force since 2014. The request is a complex request that challenges3:
- The import ban covers a number of categories of food products (in particular meat products, dairy products, fish products, confectionary, tea, potato products, such as crisps, etc.), spirits and beer, cigarettes, railway and tram track equipment, diesel-electric locomotives, octanol, potash, chloride, detergents, certain agricultural chemicals, certain plant products, etc.;
- The special treatment of sanitary, phytosanitary and veterinary control in respect of food, light industry products, cosmetic products and household chemicals originating from the Russian Federation;
- The special measures on imports of Russian books and other printed materials. Imports and distribution of printed materials originating from, manufactured in and/or delivered from Russia are prohibited, except materials approved by the Ministry of Information Policy of
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds521_e.htm.
2 UN COMTRADE data base// http://comtrade.un.org/.
3 http://www.interfax.ru/business/563152.
Ukraine. Furthermore, not more than 10 items of printed materials in the luggage of individuals entering Ukraine are allowed;
- The special tax treatment on imports of used motor vehicles from the Russian Federation;
- The prohibition and discriminatory restrictions on the involvement of many Russian companies in Ukrainian industries such as engineering industry, banking sector, service industry (including the Internet), software, air transport services, etc.;
- Residents of the Russian Federation and persons directly or indirectly controlled by or acting on behalf of residents of the Russian Federation may not participate in privatization;
- The restrictive measures on transactions involving the national currency of Ukraine;
- The ban on accreditation of journalists and representatives of certain Russian news agencies and other mass media.
The Russian Federation claimed that the above measures make the treatment granted to products of the Russian Federation less favorable than the one granted to like products from Ukraine and other countries. The measures have an unreasonably restrictive and distorting impact on trade. Furthermore, the measures were not published in a manner that would enable governments and traders to become acquainted with them. Interested persons were not granted an opportunity to comment on proposed regulation. No reasonable period of time between publication and the effective date of the regulation was allowed. The measures were not duly notified to the WTO. According to the Russian Federation, the measures are inconsistent with some of the provisions set forth by the GATT 1994, the Sanitary and Phytosanitary Agreement1, the Agreement on Technical Barriers to Trade 2, the Agreement on Import Licensing Procedures, the GATS3 and the Protocol of Ukraine's Accession to the WTO. The WTO dispute settlement system helps the Russian Federation demonstrate that Ukraine itself is affected by an adverse economic effect of its restrictive measures, underlining the importance of observing the WTO principles.4
4.9.2. 2017 updates on WTO trade disputes to which Russia is the responding party
DS475: The Russian Federation — Measures on the importation of live pigs, pork and other pig products from the European Union (complaint by the European Union)
Early in April of 2014 the European Union filed a request to the WTO for consultations with the Russian Federation concerning certain measures adopted by the Russian Federation that affect the importation of live pigs and their genetic material, pork, pork products and certain other commodities from the European Union, purportedly because of concerns about African swine fever outbreaks and the imposition of a ban on the importation of all types of finished pig products originating from Poland and Lithuania.5
Since consultations failed to settle the dispute, 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 August 19, 2016, the Panel report was circulated to Members. The
1 Sanitary and phytosanitary measures.
2 Technical barriers to trade.
3 General Agreement on Trade in Services.
4 https://www.gazeta.ru/business/2017/05/20/10683623. shtml#page 1.
5 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds475_e.htm.
Panel found that the restricting measures were inconsistent with the standards set out in the OIE (Office International des Epizooties) and, therefore, with the Agreement on the Application of Sanitary and Phytosanitary Measures (SPM). The Panel also found that the Russian Federation failed to duly assess risks 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. The Russian Federation instead imposed a EU-wide ban on the importation of pork and live pigs. The Panel also resolved that the imposed measures were applied in a discriminatory manner and constituted a hidden ban on trade.
On September 23, 2016, the Russian Federation notified the DSB of its decision to appeal to the Appellate Body report certain issues of law and legal interpretations in the Panel report. On September 28, 2016, the European Union notified the DSB of its decision to cross-appeal. The Appellate Body report issued its report on February 23, 2017. The DSB adopted the Appellate Body report on March 21, 2017. The Appellate Body report confirmed the Panel report's inferences about the restrictive manner of Russia's measures imposing a EU-wide import ban on live pigs and certain pork products. The Appellate Body report upheld the Panel report's inferences that the import ban on live pigs and certain pork products from all the EU countries was a restrictive measure of the Russian Federation, and the Appellate Body report also upheld that no limits whatsoever on Panel's assessment of the EU requirements for the restrictive measures were imposed under the terms and conditions of Russia's WTO accession. According to the Ministry of Economic Development of Russia, the inferences were not in line with the previously stated Russia's stance and triggered issues that should be discussed with the European Union on a bilateral basis. In particular, it follows from the Panel report's inferences that the measures are inconsistent with the WTO agreement, and therefore the Russian Federation has no obligation to use the enclosed documents for pig products supplies as previously agreed with European Union. The Appellate Body report thus disowned the Russian obligation to the European Union under the Protocol of Russia's Accession to the WTO to observe the terms and conditions of pork supply, under which live pigs, pork meat and raw meat worth hundreds of millions of euro had already been supplied, and suggested the European Union to reach new agreements with the Russian Federation. In its report, the Appellate Body reported in a more general manner that Russia not only can but also must make, on a unilateral basis, amendments to the bilateral veterinary certificates as previously agreed with other WTO members.1
The Appellate Body report upheld in general the Panel report's inferences, the DSB's recommended that the Russian Federation bring the measures found to be inconsistent with the WTO rules and regulations. On April 19, 2017, the Russian Federation notified the DSB, pursuant to Article 21.3 of the DSU, that it intended to implement the recommendations and rulings of the DSB in accordance with its WTO obligations. The Russian Federation explained that it needed a reasonable period of time for the implementation of the DSB's recommendations and rulings. On June 2, 2017, the Russian Federation and the European Union notified the DSB that they had agreed on a reasonable period of time of 8 months and 15 days from the date of the adoption of the Appellate Body report. Accordingly, the reasonable period of time was set to expire on 6 December 2017, and the Russian Federation had met the DSB's requirements by that time: the ban on the importation of live pigs, pork meat and raw
1 http://pticainfo.ru/news/?ELEMENT_ID=53214.
meat preparations from the entire territory of the European Union and its Member States was removed, excluding ASF affected administrative territories as set out in a respective Appendix. Furthermore, the Russian Federation adopted the EU-Russia agreed forms of bilateral veterinary certificates. Additionally, the Ministry of Economic Development of Russia noted that the ban on food imports imposed in retaliation to European sanctions would stay in force, and was therefore not a subject matter of the dispute.1
The European Union claimed the Russian Federation had failed to bring its measures into compliance with the DSB's recommendations and rulings. Therefore, on December 19, 2017, the European Union the European Union made a request seeking retaliatory measures of suspending concessions under the covered agreements in 1.39 billion euro a year (total value of the relevant exports in 2013) plus a yearly increase rate of 15 percent. The Russian Federation objected to this request. Oral hearing was scheduled for January 3, 2018. On January 25, 2018, the Russian Federation, in its turn, filed a request to the WTO for consultations with the European Union over its compliance assessment with the DSB's recommendations and rulings (the original Panel normally performs compliance assessment).
DS479: The Russian Federation — Anti-dumping duties on light commercial vehicles from Germany and Italy (complaint by the European Union)
May 21, 2014 the European Union filed a request to the WTO for consultations with the Russian Federation over the Russian Federation's levy of anti-dumping duties on light commercial vehicles from Germany and Italy.2 In May 2013, the Eurasian Economic Commission (EEC) imposed 5-year anti-dumping duties on light commercial vehicles from Germany, Italy and Turkey, ranging within a rate of 11.1, 23 or 29.6 percent depending on a specific manufacturer. The measures led to an anti-dumping investigation that the EEC conducted at the request of OOO Sollers Yelabuga.
A Panel was established on October 20, 2014. The Panel presented its report late in January 2017. The Panel found that the EEC's investigation incorrectly defined "the domestic industry", considered only one manufacturer (that submitted its application) while disregarding the GAZ Group, which, according to the Panel, had led to wrong inferences in the examination of the alleged injury to the domestic industry and in the examination of causal relationship between dumping imports and the injury. In addition, the Panel found that the EEC's price analysis had failed to consider appropriately the effect of the financial crisis of 2009 and to assess correctly the amount of dumping margin (the amount by which the normal value of goods in exporting country exceeds the export price). The Panel found that the Russian Federation was acting inconsistently with some of the provisions set forth by the Anti-Dumping Agreement, whereas it rejected most of the EU complaints, recommending the Russian Federation to bring its measures in conformity with the WTO obligations. In February 2017, Russia and the European Union filed their appeals. The Appellate Body failed to present within the recommended period of time its final report to the parties, in light of the amount and complexity of the work involved. The appellate proceedings are pending.
1 https://www.rbc.ru/rbcfreenews/5a27ccc99a79474b20fce4f8.
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds479_e.htm.
DS485: The Russian Federation — Tariff Treatment of Certain Agricultural and Manufacturing Products (complaint by the European Union)
On October 31, 2014, the European Union filed a request to the WTO for 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 of 15 percent or 10 percent on goods such as paper and paperboard, were applied in excess of the 5 percent bound rate. Furthermore, when the customs value was below a certain value, customs duties on certain goods were charged in excess of the bound rate, thus violating the WTO agreement on customs valuation.
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 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, which is an important resolution for the Russian Federation. On November 10, 2016, the Russian Federation and the European Union notified the DSB that they had agreed on a reasonable period of time of 7 months and 15 days to comply with the DSB's recommendation and rulings. The period expired on May 11, 2017. On June 8, 2017, the Russian Federation notified the DSB that it had adopted the respective ECE rulings in order to comply with the DSB's recommendations and rulings.
DS499: The Russian Federation — Measures affecting the importation of railway equipment and parts thereof (complaint by Ukraine)
On October 21, 2015, Ukraine filed a request to the WTO for consultations with Russia over measures affecting the importation of railway equipment and parts thereof (in particular, railways cars and railway points).2
Ukraine claims that the Russian Federation has suspended the conformity assessment certificates previously registered to Ukrainian producers of railway products until new technical regulations are introduced and therefore rejected applications for new conformity assessment certificates. Ukraine's key complaints are that the Russian Federation discriminates goods originating from Ukraine, whereas no discriminatory measures have been imposed on liked products originating from other WTO members and Russia-made products. The foregoing measures have raised unnecessary barriers to the international trade, and no reasoned explanations for the imposed measures were provided by the Russian Federation authorities to Ukrainian exporters and to the Ukrainian authorities. Ukraine claims that the Russian Federation authorities have failed to duly meet some of the conformity assessment procedures. Furthermore, the Russian Federation authorities' conformity assessment requirements have been in excess of the information and payment size requirements. On November 10, 2016, Ukraine requested the establishment of a panel. The Panel proceedings are pending since March 2, 2017. The Panel expects to circulate its report in April 2018.
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds485_e.htm.
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds499_e.htm.
DS512: The Russian Federation — Measures Concerning Traffic in Transit (complaint by Ukraine)
On September 14, 2016, Ukraine filed a request to the WTO for 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).1 In July 2016, 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 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. 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 sanctioned (by Russia) goods in transit.2
Ukraine claimed the Russian Federation imposed the measures in response to the Free-Trade Agreement between Ukraine and the European Union (in effect since January 1, 2016), which were inconsistent with the WTO's provisions concerning free transit, because they violated 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 was based on the national flag on vehicles and the origin of goods. The Russian Federation is treating the traffic in transit from Ukraine less favorably than other goods in transit into/from third countries. Ukraine also claimed 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. Ukraine claimed the Russian measures were inconsistent with the WTO provisions concerning the overall abolishment of quantitative restrictions, as well as the Protocol of Russia's Accession to the WTO. According to data from Ukraine, Ukraine's trade with Central/ Eastern Asian and Caucasian countries dropped by 35.1 percent year-on-year in January-June 2016 as a result of Russia's restricting measures affecting goods in transit.
On February 9, 2017, Ukraine requested the establishment of a panel. The Panel was established on March 21, 2017. The dispute is on pending status at the Panel stage since November 17, 2017. The Panel expects to circulate by the end of 2018 the final report to the parties to the dispute.
DS532: The Russian Federation — Measures Concerning the Importation and Transit of Certain Ukrainian Products (complaint by Ukraine)
On October 15, 2017, Ukraine filed a request to the WTO for consultations with the Russian Federation over restrictive measures affecting the trade of juice products, beer, beer-based beverages and other alcoholic beverages, confectionary products, wall paper and similar wall
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds512_e.htm.
2 Russian President's Executive Order No. 319 of July 1, 2016, an update to the Russian President's Executive Order of No. 1 January 1, 2016 On Measures in the Provision of Economic Security and National Interests of the Russian Federation in International Cargo Transit from the Territory of Ukraine to the Territory of the Republic of Kazakhstan via the Territory of the Russian Federation.
coverings from Ukraine.1 In its consultations request, Ukraine asserts that these measures apply separately and in addition to those previously challenged under DS512, Russia - Traffic in Transit. In 2013-2015, the Russian Federation imposed measures restricting the importation of Ukrainian juice products, beer, beer-based beverages and other alcoholic beverages, confectionary products, wall paper and similar wall coverings. Furthermore, the Russian Federation prohibits traffic in transit of certain of those products from Ukraine, through its territory, to third countries. The exportation of the Ukrainian products at issue from Ukraine to the Russian Federation has dropped significantly, with cessation of exports of a few product items. The exportation of Ukrainian beer into the Russian Federation in 2015 tumbled 99.8 percent from 2012, sugar and confectionary products were down 93 percent, wall paper and liked wall coverings fell 72 percent. Ukrainian beer exports into the Russian Federation plummeted to 1 percent of Russia's total beer exports in 2015 from 73 percent in 2012, and to 0.2 from 33 percent, respectively, of Russia's total beer imports.2
Ukraine claims that the measures were applied in a non-transparent and unpredictable manner by the Russian Federation, and were not published and duly administered, and are inconsistent with some of the provisions set forth by the GATT 1994, the Trade Facilitation Agreement (TFA), the Agreement on Technical Barriers to Trade, the Sanitary and Phytosanitary Agreement and the Protocol of Russia's Accession to the WTO. This is the first case of trade dispute that includes complaints against inconsistency with the TFA provisions in force since February 22, 2017.
4.9.3. 2017 updates on WTO trade disputes to which Russia is a third party
Since the date of accession to the WTO Russia has reserved its right as a third party in 40 WTO trade disputes, about 30 percent of them have been settled. Russia's third-party participation is commonly driven by not just a substantial trade interest, but mostly by the participation practice in certain types of trade disputes as well as an issue of systemic interest in the application of WTO rules and regulations. Technically different disputes initiated by various complaining parties often have common measures imposed by responding parties. WTO disputes to which the Russian Federation is a third party have the following subject matters in general (see Table 52).
Table 52
Russia's third-party participation in WTO trade disputes
Subject matter Disputes
1. Restrictive (environmental or otherwise) measures on imports DS400, DS401, DS469, DS484, DS495
2. Safeguard investigations and measures (anti-dumping measures, countervailing measures and special safeguards) DS414, DS437, DS449, DS454, DS468, DS471, DS473, DS480, DS488, DS490, DS496, DS513, DS516, DS518, DS523
3. Restrictive measures on exports DS431, DS432, DS433, DS508, DS509
4. Intellectual property rights DS441, DS458, DS467
5. Subsidies (including tax incentives and other types of allowances) D502, DS456, DS472, DS487, DS497, DS489, DS510, DS511, DS522
6. Tariffs and tariff quotas DS492, DS517
7. Economic and trade sanctions DS526
Source: Baeva M.A. (2014) WTO Trade disputes to which Russia is a party, and the WTO trade dispute settlement mechanism // Russian Foreign Economic Journal, 3. PP. 75-90.
1 https://www.wto .org/english/tratop_e/dispu_e/cases_e/ds5 32_e.htm.
2 UN COMTRADE data base// http://comtrade.un.org/.
Table 53 presents updates on WTO disputes with Russia's third-party participation until 2017. The following is summary of nine trade disputes to which the Russian Federation reserved its right as a third party in 2017.
Table 53
Status of WTO trade disputes with Russia's third-party participation until 2017
Dispute Subject matter at issue/updates in 2017, interest to Russia
DS456: India -Certain Measures Relating to Solar Cells and Solar Modules (complaint by the United States, February 6, 2013) The DSB found that the Indian government's decision to restrict the use of foreign-made components to meet the domestic content requirements for solar cells and solar modules was inconsistent with WTO non-discriminatory obligations. December 19, 2017, the United States requested the authorization of the DSB to suspend concessions or other obligations on the grounds that India had failed to comply with the DSB's recommendations and rulings. This dispute is of importance for Russia 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 this type of products to India account for about 5 percent of total Russia's exports of of the like goods.1 The highly important issue of developing alternative types of energy in Russia has elevated the interest in using the domestic content of products in manufacturing as well as subsidies that may be deemed inconsistent with the WTO rules and regulations.
DS471: The United States - Certain Methodologies and their Application to Anti-Dumping Proceedings Involving China (complaint by China, December 3, 2013) When doing anti-dumping investigations, the United States used zeroing under the exceptional weighted average-to-transaction (WA-T) methodology: the average-weighted price of export transactions higher than or equal to the normal value is zeroed; therefore, such transactions are excluded from the determination of a single dumping margin rate, thus increasing it. China claims the foregoing methodology is inconsistent with the AntiDumping Agreement, in particular Determination of Dumping, Evidence, Imposition and Collection of AntiDumping Duties. The Panel upheld nearly all of the China's complaints. Following the Appellate Body report, in May 2017, the DSB recommended the United States to bring its measures in conformity with the WTO rules and regulations on a date not later than August 22, 2018. Anti-dumping investigations and measures were the subject matter of most of the disputes initiated by the Russian Federation, indicating that participation in such disputes is an issue of systemic interest of the Russian Federation. In April 2017, the United States initiated anti-dumping investigations into hot-rolled rods against companies from Russia. Therefore, the Russian Federation has interest in the methodologies used by the United States when doing anti-dumping investigations.
DS472, DS497: Brazil - Certain Measures Concerning Taxation and Charges (complaint by the European Union, December 19, 2013 and Japan, July 2, 2015) The complaining parties claimed that Brazil employed specific programs in the automotive sector and the electronics and technology industry, and tax advantages and government support were granted for Brazilian producers and exporters, which was inconsistent with the WTO basic principle (the National Treatment). Domestically manufactured goods enjoyed lower taxes than imported goods, tax advantages were granted when using domestic intermediate goods and subsidies for exporters on a contingency basis. The Panel report was circulated on August 30, 2017. The Panel upheld in general the Brazil's complaints and recognized that the measures were inconsistent with the respective WTO rules and regulations. The Panel found that the discriminatory measures of the program might facilitate the creation of a competitive and sustainable domestic industry that could ensure enough supply to the domestic market. Brazil, however, failed to prove that the imposition of the measures was needed to ensure "continuity of supply" because it failed to consider properly imports. The Panel concluded that the other approaches (such as non-discriminatory subsidies or lifting of trade barriers for imported digital TV equipment) proposed by the complaining parties were in conformity with the WTO rules and regulations and more efficient for the achievement of the stated goals. Brazil and the European Union filed their appeals in the fall of 2017. The Russian Federation has interest in this dispute from the perspective of application of taxation and charging practices, as well as from the settlement perspective of disputes arising therefrom.
DS473: The European Union -Anti-Dumping Measures on Biodiesel from Argentina (complaint by Argentina, December 19, 2013) Argentina challenged Basic Regulation No. 1225/2009 dated November 30, 2009, anti-dumping investigations and EU measures on biodiesel fuel, particularly the application of "adjustment of costs" methodology. On October 26, 2016, the DSB adopted the Appellate Body report and the Panel report and recommended to bring the foregoing measures into conformity with WTO rules and regulations. Although the application of "adjustment of costs" practice was not held inconsistent with the WTO rules and regulations, the EU antidumping investigations and measures affecting biodiesel fuel from Argentina were found inconsistent with the same. At the DSB meeting on October 23, 2017, the European Union notified the DSB that the WTO-inconsistent antidumping measures on biodiesel (Regulation (EU) 2017/1578) had been amended to ensured the full implementation of the DSB recommendations and rulings in this dispute. Argentina welcomed the EU status report and reiterated its satisfaction with the adoption of the Implementing Regulation and further indicated that it was closely monitoring the appeal brought to the European Court of Justice by the EU Commission against the decision of the EU General Court annulling the imposition of a definitive anti-dumping duty on imports of
1 UN COMTRADE data base // http://comtrade.un.org/.
Dispute Subject matter at issue/updates in 2017, interest to Russia
biodiesel from Argentina. In addition, Argentina reiterated its serious concern about the European Biodiesel Board's announcement of its intention to submit a petition to the EU Commission to initiate a subsidy investigation against Argentinean biodiesel imports. Russia noted that the amendments to the EU Regulations were made at the time (in 2002) when the Russian Federation was granted the full market economy status. In particular, the amendments authorized the European Union to adjust costs recognized in documents provided by producers/exporters on the basis of "information on other representative markets." The Russian Federation claims this practice is inconsistent with the WTO rules and regulations. Under the Anti-Dumping Agreement, data must reflect costs relating to the manufacture and sales of goods under investigation. The Russian Federation posits that the meaning of the term "damping" has nothing to do with prices of manufacturing assets.
DS484: Indonesia -Measures Concerning the Importation of Chicken Meat and Chicken Products (complaint by Brazil, October 16, 2014) Brazil challenged restrictive measures and procedures affecting the importation of Brazilian chicken meat and chicken products into the Indonesian market; in particular, the non-recognition of the Brazilian 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, restrictions on transit, etc. On November 17, 2017, the DSB adopted the Panel report and recommended Indonesia to bring the measures in conformity with the WTO rules and regulations. The Panel found that the Indonesia's measures were inconsistent with the provisions of WTO agreements, but some of the respondent's complaints were rejected (transit restrictions). In December 2017, that it required a reasonable period of time to comply with the DSB's recommendations and rulings. The Russian Federation does not export chicken meet and chicken products to Indonesia because of the above Indonesian restricting measures on imports. However, respective export contracts might be signed if the above measures are removed. Russia's participation in the dispute is explained by its interest in the application of Sanitary and Phytosanitary Measures and technical barriers to trade in conformity with the WTO rules and regulations, as well as the practice of resolving such disputes.
DS487: The United States - Conditional Tax Incentives for Large Civil Aircraft (complaint by the European Union) (December 19, 2014) In November 2013, the United States broadened largely the scope of aerospace conditional tax incentives as extra subsidies aimed at promoting the Boeing manufacture of new models of large 777X civil aircraft in relation to the development, manufacture, and sale of large civil aircraft in the State of Washington. The European Union alleges that the measures constitute specific subsidies that are prohibited by the WTO. In its report the Appellate Body rejected the EU appeal. The Appellate Body resolved with the regard to the US appeal that the Panel had failed to prove that the tax rate at issue constituted a subsidy that was deemed inconsistent with the WTO rules and regulations. On September 22, 2017, the DSB adopted the Appellate Body report and the Panel report and resolved that no further actions were required on the side of the responding party. The Russian Federation has interest in the settlement of the above trade dispute from the perspective of domestic content of products in manufacturing, as well as tax incentives that may lead to specific subsidies that can be deemed inconsistent with the WTO rules and regulations, particularly in the airspace industry.
DS488: The United States - AntiDumping Measures on Certain Oil Country Tubular Goods from Korea (complaint by Korea, December 22, 2014) Korea claimed that the U.S. anti-dumping investigations and measures affecting oil country tubular goods (OCTG) were inconsistent with the WTO rules and regulations. The United States used the constructed normal value for the determination of normal value, without properly considering actual data of the Korean respondents and actual third-country market sales. The Panel circulated its report in November 2017, rejecting 7 out of the 8 Korean complaints, upholding that the United States had failed to construct correctly the CV profit, without properly considering the data of the Korean respondents. The Panel rejected requests relating to the consistency with the WTO rules and regulations and the U.S. laws and regulations concerning the determination of normal value and export value, proceedings, public notice. The dispute concerns the application of methodologies for anti-dumping investigations, which is an issue of systemic importance of the Russian Federation. U.S. exports of goods at issue account for 35 percent of total Russian exports of the like goods and for 4 percent of total U.S. imports.1
DS490, DS496: Indonesia -Safeguard on Certain Iron or Steel Products (Chinese Taipei, February 12, 2015 and Viet Nam, June 1, 2015) The complaining parties claimed that investigation and special safeguard measures imposed on imports of certain flat-rolled iron or steel products were inconsistent with the WTO requirements. Using outdated data on imports Indonesia failed to provide evidence of substantial growth in imports and that it had caused a serious injury (or posed a threat of serious injury) to the domestic industry. No evidence was presented of how factors that were not related to imports could have caused the damage. No opportunity for consultations was provided. The measures are inconsistent with the general MFN-treatment because they were imposed on imports from selected countries - Indonesia excluded imports originating in 120 developing countries, including the Russian Federation, from the application of the specific duty. The Panel report was circulated on August 18, 2017, founding that the measures did not constitute special safeguard measures. The Panel recommended to bring the measures in conformity with the MFN-treatment. Appeals were filed in the fall of 2017. The Russian Federation is interested in how disputes over the application of safeguard measures and respective investigations are settled in practice. Russia's interest in the participation in the above dispute is indirectly related to the effect of Indonesia's anti-dumping measures in force since December 27, 2013 to
1 UN COMTRADE data base// http://comtrade.un.org/.
Dispute Subject matter at issue/updates in 2017, interest to Russia
December 26, 2018 on imports of Russian flat-rolled iron or steel products (some companies are subject to 20 percent tax duties).1
DS492: The European Union -Measures Affecting Tariff Concessions on Certain Poultry Meat Products (complaint by China, April 8, 2015) The European Union renegotiated tariff concessions for poultry meat products imported from Thailand and Brazil that were determined as the only WTO Members that held a "principal" or "substantial" supplying interest in the tariff concessions at issue, whereas China was denied negotiations although it held a principal or substantial supplying interest, too. Tariff-rate quotas (TRQ) were applied almost in full to Brazil and/or Thailand, and out-of-quota rates are far above the rates that were prior to the modifications of concessions. The Panel report was circulated in March 2017. With respect to two of the ten TRQs at issue in this dispute, the Panel found that the European Union's allocation of TRQ shares among supplying countries was inconsistent with the requirements. Furthermore, the Panel found that the European Union's allocation of TRQ shares among supplying countries was inconsistent with the requirements of GATT 1994 and upheld China's claim that its increased ability to export poultry products to the European Union following the relaxation of the SPS measures in July 2008 was a "special factor" that had to be taken into account by the European Union when determining which countries had a "substantial interest" in supplying the products concerned, or when determining the TRQ shares to be allocated to the category of "all other" countries that were not recognized as substantial suppliers (including China). The Panel rejected China's other claims in this dispute. The DSB recommended the European Union to bring its measures in conformity with the WTO requirements, the parties to the dispute sought to reach an agreement on a reasonable period of time. The dispute is of interest from the perspective of updates to bound tariffs lists, understanding of negotiation procedures, etc. Furthermore, the European Union has quotas, albeit on insufficient volumes, for the Russian Federation (about 30,000 tons of poultry meat or poultry meat products).2
Source: own compilation based on data posted on the WTO official website: https://www.wto.org/english/tratop e/dispu_e/dispu_by_country_e.htm.
DS510: The United States — Certain Measures Relating to the Renewable Energy Sector (complaint by India)
On September 9, 2016, India filed a request to the WTO for consultations with the United States in respect to U.S. measures relating to domestic content requirements and subsidies instituted by the governments of some of the US states3 through programs that provide performance-based incentives for using domestic content for customers of light and power business for generating electricity through solar, wind and anaerobic digestion technologies, in particular programs on renewable energy cost recovery incentive payment, self-generation, water and power's solar incentives, as well as tax incentives for ethanol production and tax credits for biodiesel blending and storage, etc. India claims that the above measures are incompliant with the US obligations under the National Treatment on Internal Taxation and Regulation, subsidies and quantitative restrictions. On January 17, 2017, India requested the establishment of a panel. The Panel was established on March 21, 2017. However, the dispute was still at the Panel composition stage at the end of 2017 although the recommended dates were up.
The Russian Federation reserved its third-party right in 2017. On the one hand, this trade dispute, as well as the like trade dispute between the United States and India (DS456),4 to which Russia is a third party, is of importance to Russia from the perspective of increasing exports of like goods to the above countries. Russian exports of like goods to India as a percentage of total Russian exports of the like goods dropped to approximately 5 percent in 2016 from 8 percent in 2013.5 On the other hand, the development of alternative sources is significant enough so
1 A review of existing restrictions on Russian goods in foreign markets // http://www.ved.gov.ru/rus export/partners_search/torg_exp/.
2 Ibid.
3 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds510_e.htm.
4 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds456_e.htm.
5 UN COMTRADE data base// http://comtrade.un.org/.
that the Russian Federation pay due consideration to the use of domestic content in production as well as subsidies that may be regarded inconsistent with the WTO rules and regulations.
DS511: China — Domestic Support for Agricultural Producers (complaint by the United States)
On September 13, 2016, the United States filed a request to the WTO for consultations with China regarding certain measures through which China appears to provide domestic support in favor of agricultural producers, in particular, to those producing wheat, India rice, Japonica rice and corn.1 The United States challenges China's statutory and regulatory enactments of 20112016 aimed at accelerating the promotion of agricultural science and technology innovation and continuing to strengthen the capacity to guarantee agricultural product supplies, accelerating the development of modern agriculture and further increasing rural development dynamism, further deepening reform of the grain distribution system, raising the wheat and rise minimum purchase price, national temporary reserve purchases of corn, etc.
The United States claims that China's measures are inconsistent with its WTO obligations because the level of internal support to Chinese agricultural producers is in excess of its commitment level at China's accession to the WTO. In particular, internal support to Chinese agricultural producers, as measured by the current aggregate measurement of support t (AMS), is in excess of its commitment level in 2012-2015 due to internal support to producers of wheat, rice, corn, etc. Annually, China provides domestic support in excess of its product-specific de minimis level of 8.5 percent for each of wheat, Indica rice, Japonica rice, and corn.
The Panel proceedings have been underway since June 27, 2017. The Russian Federation reserved its third-party rights in 2017. The Russian Federation has significant interest in the dispute because during the implementation of the challenged China's statutory and regulatory enactments Russian exports of the products at issue to China as a percentage of total Russian exports of the like products fell to 0.2 percent in 2016 from 7 percent in 2012 as Russian rise exports were down to 0.7 percent from 16 percent.2
DS513: Morocco — Anti-Dumping Measures on Certain Hot-Rolled Steel from Turkey (complaint by Turkey)
On October 3, 2016 Turkey filed a request to the WTO for consultations with Morocco regarding the imposition of definitive anti-dumping measures, and certain aspects of the underlying investigation, by Morocco on imports of certain hot-rolled steel from Turkey3. Turkey considers that the Moroccan "preliminary import declaration" requirements for goods that are subject to anti-dumping duties appear disputable. Turkey considers that the imposition of provisional anti-dumping measures appears to be an additional impermissible "specific action against dumping" that is inconsistent with the WTO rules and regulations.
The complaining party considers that the anti-dumping investigations and measures by themselves cannot be reconciled with the GATT 1994, and the Anti-Dumping Agreement, in particular because the Moroccan authorities failed to conclude the investigation within the maximum 18-month deadline. The Moroccan authorities rejected all the data on sales, costs and other data from Turkish exporters, and instead applied "facts available" to determine the dumping margins. For a reason inconsistent with the WTO standards, the Moroccan authorities
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds511_e.htm.
2 UN COMTRADE data base// http://comtrade.un.org/.
3 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds513_e.htm.
determined incorrectly Turkish exporters' failure to disclose the required data or otherwise denied access to the required data. Not all the essential facts were disclosed with respect to the decision to use available data as well as decisions on whether the data from the exporters were reliable or not and why secondary source data were used. Furthermore, the Moroccan authorities failed to make analysis of injury to the domestic industry, in particular they failed to provide a reasoned and adequate explanation of their finding of injury and causation of the factors in their entirety.
The Panel proceedings are pending since May 17, 2017. The Panel expects to circulate its report not sooner than in the middle of 2018. The Russian Federation has a substantial trade interest in the dispute because in 2016 Russian iron exports to Morocco accounted for 6 percent of total Russian exports of the like products, 1 percent of total Moroccan imports of the like products.1 The Russian Federation has a systemic and practical interest in anti-dumping disputes.
DS516: The European Union — Measures Relating to Price Comparison Methodologies (complaint by China)
On December 12, 2016, China filed a request to the WTO for consultations with the European Union concerning certain provisions of the EU regulation pertaining to the determination of normal value for "non-market economy" countries in anti-dumping proceedings involving products from China.2 When determining normal value, the European Commission will be able to reject data on internal prices and costs in an exporting country if the country has "significant distortions for the goods in question", in which case data on prices and costs (including raw materials) from producers and exporters are not resulting from the play of competitive market forces due to the effect of government participation. The list of such cases remains open. China was treated as "a non-market economy country" within the 15-year transition period following the China's accession to the WTO. Although the period ended on December 11, 2016, the European Union continues to determine normal value using a special methodology. Therefore, China considers that the European Union acts inconsistently with the WTO rules and regulations. The Panel is on pending status since 10 July 2017. The Panel expects to circulate its report not sooner than the second half of 2018.
The Russian Federation filed complaints to the WTO against the European Union over the use of the cost-adjustment methodology during anti-dumping investigations (DS474 and DS494). China and the European Union are Russia's essential trade partners. In 2016, Russian exports to the European Union accounted for 46 percent of total Russia's exports as imports from the European Union represented 38 percent of total Russia's imports, with 10 and 21 percent, respectively, in exports and imports with China.3
DS517: China — Tariff Rate Quotas for Certain Agricultural Products (complaint by the United States)
On December 15, 2016 the United States filed a request to the WTO for consultations with China concerning China's administration of its tariff rate quotas, including those for wheat, short- and medium- grain rice, long grain rice, and corn.4 The United States claimed that China
1 UN COMTRADE data base// http://comtrade.un.org/.
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds516_e.htm.
3 UN COMTRADE data base// http://comtrade.un.org/.
4 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds517_e.htm.
had failed to meet its obligations under the Protocol of China's accession to the WTO because tariff rate quotas for wheat, rice and corn are non-transparent and unpredictable. Furthermore, the United States claimed that China acted inconsistently with provisions of the GATT 1994 because of bans or restrictive measures affecting imports outside duties, taxes and other charges, failed to notify publicly of quantities allowed for imports of each tariff rate quota, and of their updates. On August 18, 2017 the United States filed a request to the WTO for the establishment of a panel. The Panel was established on August 31, 2017.
The Russian Federation has significant interest in the dispute because in 2016 Russia's exports of like products to China fell to 0.2 percent of Russia's total exports of like products from 7 percent in 2012 as rise exports dropped to 0.7 percent from 16 percent, respectively.1
DS518: India — Certain Measures on Imports of Iron and Steel Products (complaint by Japan)
On December 20, 2016, Japan filed a request to the WTO for consultations with India concerning certain measures imposed by India on imports of iron and steel products into India. Japan challenged temporal special safeguard measures imposed by India on imports of "hot-rolled flat products of alloy or non-alloy steel in coils of a width of 600 mm and beyond". On September 14, 2015, a safeguard measure in the form of a 20 percent safeguard duty came into force for a period of 200 days. Final special safeguard measures in the form of ad valorem duty minus anti-dumping duties, if any, progressively being brought down from 20 to 10 percent up until March 13, 2018 were imposed on March 29, 2016. The duties were imposed on products with minimum import prices.
Japan claims that India was acting inconsistently with some of the provisions set forth by the GATT 1994 and the Agreement on Safeguards. In particular, India failed to make reasoned and adequate findings and inferences in its determination with respect to the alleged unforeseen developments, and how those alleged unforeseen developments resulted in increased imports of the products concerned causing or threatening serious injury to domestic producers. India failed to make reasoned and adequate findings and inferences in its determination as to the causal link between the alleged increase in imports and the alleged serious injury and/or threat of serious injury to the domestic industry, and how that effect has resulted in increased imports. India failed to provide reasonable public notice to all interested parties and appropriate means in which interested parties could present evidence and their views, including the opportunity to respond to the presentations of other parties and to submit their views. India failed to notify the Committee on Safeguards upon starting investigation concerned causing or threatening serious injury and the reasons for the investigation. India failed to provide adequate opportunity for prior consultations with Members having a substantial export interest of the products concerned. The Panel proceedings are pending since June 22, 2017.
The Russian Federation has significant interest in the findings of investigations. Russia's exports of all the like products to India contracted 44 percent in 2016 from 2015 and one produce ceased to be exported following India's imposition of the above measures.2
1 UN COMTRADE data base// http://comtrade.un.org/.
2 UN COMTRADE data base// http://comtrade.un.org/.
DS522: Canada — Measures Concerning Trade in Commercial Aircraft (complaint by Brazil)
On February 8, 2017, Brazil filed a request to the WTO for consultations with Canada with respect to measures concerning trade in commercial aircraft.1 That was Brazil's fourth dispute against Canada in respect to Brazilian measures against Canada concerning government support of the aircraft industry. Brazil challenges alleged government subsidies to Bombardier, in particular though the C-Series Aircraft Program. Brazil considers that the government of Quebec, holding a 49 percent interest in Bombardier, invested C$1.3 billion in the Canadian manufacturer of planes, knowingly violating the market competition.2 Furthermore, Brazil considers that the measures appear to be prohibited subsidies and inconsistent with the Agreement on Subsidies and Countervailing Measures. The panel composition is on pending status since September 29, 2017.
In 2015, the Russian Federation already reserved its third-party rights in a like dispute launched by the European Union against the United States with regard to aircraft industry subsidies (DS487, Airbus and Boeing). The industry, the application of measures of support to the industry, the practice of challenging measures that appear to be inconsistent with the WTO rules and regulations, as well as systemic issues of such disputes are critical to the Russian Federation.
DS523: The United States — Countervailing Measures on Certain Pipe and Tube Products (complaint by Turkey)
On March 8, 2017, Turkey filed a request to the WTO for consultations with the United States with respect to countervailing measures imposed by the United States on certain types of pipe and tube products from Turkey.3 Turkey complains that the United States acted inconsistently with the United States' obligations under the Agreement on Subsidies and Countervailing Measures and the GATT 1994, particularly the United States' determination that certain entities are "public bodies", providing an alleged financial impact that conferred a benefit (within the meaning of Article 1 (Definition of a Subsidy) of the Agreement on Subsidies and Countervailing Measures); the United States' determination whether a subsidy is specific to an enterprise or industry or group of enterprises or industries within the meaning of Article 2 (Specificity) of the Agreement on Subsidies and Countervailing Measures, because of the United States' failure to substantiate its determination of specificity on the basis of positive evidence; the United States' use of facts available, and application of adverse inferences, in calculating subsidy rates; the United States' determination of injury based on cumulated imports, including imports from countries not subject to countervailing duty investigations or reviews (Article 15.3 (Determination of Injury) of the Agreement on Subsidies and Countervailing Measures).
The Panel proceedings are pending since September 14, 2017. Apart from having interest in practicing countervailing investigations and respective measures, as well as challenging measures that appear to be inconsistent with the WTO rules and regulations, the Russian Federation has significant practical interest in findings of the dispute. In 2016, Russia's export of like products to the United States dropped nearly 60 percent year-on-year, and Russia's
1 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds522_e.htm.
2 https://aeronautica.online/2016/12/23/brazil-vs-canada-in-wto/.
3 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds523_e.htm.
exports to the United States fell 6 percent of total Russia's exports in 2016 from 14 percent in 2015.1
DS526: The United Arab Emirates — Measures Relating to Trade in Goods and Services, and Trade-Related Aspects of Intellectual Property Rights (complaint by Qatar)
On July 31, 2017, Qatar filed a request to the WTO for consultations with the United Arab Emirates (DS526)2, Bahrain (DS527)3 and Saudi Arabia (DS528)4 over measures relating to trade in goods and services as well as trade-related aspects of intellectual property rights. In June 2017, the foregoing countries and then a few other Arab nations announced they were cutting off all diplomatic relations with Qatar over Qatar's alleged involvement in activities aimed at destabilizing the region. In addition, they imposed economic and trade sanctions against Qatar, including a transit blockade to/from Qatar. The states put forward claims and demands on Qatar. Qatar appealed to the WTO over the measures imposed against Qatar in the context of attempts at economic isolation by the United Arab Emirates, Bahrain and Saudi Arabia (hereafter we consider only the dispute between Qatar and the United Arab Emirates, to which the Russian Federation reserved its rights as a third party).
The UAE appears to institute or maintain prohibitions or restrictions, other than duties, taxes or other charges, on the importation of products of the territory of Qatar, and on exportation of products to the territory of Qatar. The UAE bans Qatari nationals from travelling to and remaining in the UAE in order to provide services, as well as bans on the provision of services by Qatari service suppliers established in the UAE. They include bans on the supply of (digital and other) services from Qatar to consumers of the UAE as well as prohibitions on nationals of the UAE to travel to and remain in Qatar in order to consume Qatari services. Furthermore, the UAE appears to deny freedom of transit through the territory of the UAE, via the routes most convenient for international transit, for traffic in transit to or from the territory of Qatar, which prevents Qatari service suppliers from supplying services. Attempts at economic isolation entail interference with intellectual property rights enjoyed by nationals of Qatar. Specifically, these measures include prohibitions or restrictions on displaying and accessing television content over which Qatari nationals hold copyrights and related broadcasting rights. Qatar considers the above measures are inconsistent with the GATT 1994, the GATS and the TRIPs.
As of the end of 2017, the dispute was at the panel composition stage. Many WTO members, including the Russian Federation, reserved their third-party rights in the dispute between Qatar and the UAE dispute. The Russian Federation has interest in this dispute from the perspective of further mastering the complaint procedure in retaliation of economic and trade sanctions because like disputes are normally not disputed by the DSB, which is a hot issue to the Russian Federation because it is already under sanctions. The Russian Federation also filed a complaint against Ukraine over restrictions, bans, requirements and procedures relating to trade in goods and services and transit (DS525). Furthermore, the complaining parties also demanded closure of Al Jazeera, which is somewhat similar to the restrictions against RT America, a Russian television station which broadcasts on cable in the United States, because both of them provide an alternative content.
1 UN COMTRADE data base// http://comtrade.un.org/.
2 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds526_e.htm.
3 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds527_e.htm.
4 https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds528_e.htm.
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The Russian Federation continues to participate actively in the WTO trade disputes settlement system. In 2017, the Russian Federation was faced with 12 new trade disputes in the WTO: as the complaining party to two disputes, as the responding party to one dispute and as a third party to nine disputes. Only two out of the six disputes initiated by the Russian Federation in the period between 2012 and 2017 were pending as of the end of 2017. Reports on the disputes against the European Union over the European Union's Third Energy Package (DS476) and against Ukraine over anti-dumping measures on ammonium nitrate (DS493) are expected not sooner than late in 2017 and not sooner than in Q1 2018, respectively.
The Russian Federation has brought its measures in conformity with the WTO rules and regulations as a result of two out of the eight disputes to which the Russian Federation is the responding party (DS475 and DS485). The European Union, however, requested for retaliatory measures against one of the above disputes. One dispute against the Russian Federation over anti-dumping duties on light commercial vehicles from Germany and Italy is at Appellate Body stage (DS479). Two disputes initiated by Ukraine are at the Panel stage (DS499 and DS512). Panel reports are expected in April 2018 and late in 2018, respectively.
Most of the WTO disputes to which the Russian Federation is the complaining or responding party are disputes with the European Union and Ukraine. From the complainant's perspective, the Russian Federation has interest mostly in anti-dumping investigations and anti-dumping measures, particularly in steel and chemical industries. Most of the complaints against the Russian Federation concerned technical trade barriers, sanitary and phytosanitary measures, anti-dumping measures, investment measures that affect trade, tariffs, restrictions on traffic in transit.
The Russian Federation tends to reserve its third-party rights in disputes over measures relating to steel products, agricultural produce, automotive and aircraft products, as well as renewable energy sources. A special emphasis is placed on disputes over anti-dumping investigations that lead to anti-dumping measures. The Russian Federation reserves its third-party rights in disputes not only because it has significant trade interest but also the practice of participation in disputes as well as systemic interest in application of WTO rules and regulations. A good illustration is the Russian participation as a third party to the dispute between Qatar and the UAE over measures relating to trade in goods and services as well as trade-related aspects of intellectual property rights (DS526). The Russian Federation has interest in this dispute from the perspective of further mastering the complaint procedure in retaliation of economic and trade sanctions because like disputes are normally not disputed by the DSB, which is a hot issue to the Russian Federation because it is already under sanctions, and because the country filed a complaint against Ukraine over restrictions, bans, requirements and procedures relating to trade in goods and services and transit (DS525).
It's extremely important that the Russian Federation adhere to the right stance and tactics of participation in WTO disputes with a view to developing mutual trade with member-countries pursuant to the WTO rules and regulations while upholding its interests. The Russian Federation should exploit opportunities offered by the WTO trade disputes settlement system should. In addition, the country's reputation as a credible and responsible trade partner and WTO member is particularly essential.
