Markets. Russian economy. Tendencies. Prospectives.

Markets
Russian economy. Tendencies. Prospectives.

Economic rise in Russia has been going on for more than 3 years. During this period GDP has grown by more than 15 % - from 275 billion dollars in autumn 1998 to about 315 billion before 2002. GDP per capita had grown over the same period from 1900 dollars to around 2200 dollars a month, and average wage - from 40 to 120 dollars a month.
Good situation on the external market permitted the country to accumulate almost 40 billion dollars of gold & currency reserves and consequently, create supply for living through the period of deterioration inevitable for living economy. However, it is not so much the figures that are important, as structural changes, which happened in the country's economy.
It is during these years that Russia for the first time deviated from export- and raw materials-oriented model of economy and felt the potential, which gives its own internal market. Key distinction of 2001 from the previous two years is that this year Russian economy, which up till now developed as raw- and export oriented began to grow, in the first place, at the expense of internal demand growth.
As regards real incomes of the population, after having stopped by the end of 2000, they began to rise already by the end of the first quarter of 2001, and reached 15-17% by autumn in tendency. It is due to this growth of real incomes of Russian citizens that consumer boom of mid 2001 started, which was so much admired by retailers. It has become the source of consumer optimism of the Russians, which, as Consumer Preferences Index (CPI) has also reached its peak during last year autumn.
The second in significance rise factor became internal investments, which in 2001 grew by 8,8% and this time were mainly directed into branches servicing internal demand. In the first half of the last year import volume almost leaped by more than 30% - from 3,5 to 4,75 billion dollars a month. Over the last year import has risen minimum 6-7 fold above production growth, taking up the bigger part of internal demand increase. In consumer sector (consumer import makes up 54% of the total import volume) footwear makers were number one among the failure leaders.
How can such rapid victory of import be accounted for (it was so swift that the representatives of western companies complain that they have not prepared for the rise in Russia, otherwise they would have sold much more)? The answer at the microeconomic level is evident - most Russian manufacturers cannot produce either good quality or cheap.
Retailers ( who feel best of all what is going on on the consumer market) witness that the gap in prices between imported and domestic goods by the beginning of 2001 has reduced to such extent, that it became insignificant for the consumer.
This reduction happened because during the first two years after devaluation, producers of raw materials, enjoying grown demand, dashingly rose prices and, accordingly, forced manufacturers of ready consumer items to rise prices too. The latter could also have risen their output, but for this it was necessary to modernize production, while only few could or had time to do this.As a result labor productivity at many domestic enterprises is minimum 3-4 times and maximum - 15-20 times less than at foreign competitors' enterprises. Naturally it was simply impossible to control cost price and prices, productivity being low and cost of resources rising.
Notwithstanding all the success of the previous years and evident growth of investment into the economy the norm of accumulations in the post-war Gemany and Japan, which had experienced collapse stronger than ours was within range 30-50%. Even in relatively rich USA in 50-60- ies about 25% of GDP was preserved.
However, it should be observed that modernization process has yet begun. The increase of internal investments, which happened in 2001, was the result of this modernization, which is distinqushed by quality, as that year machinery import grew in different categories from 30% to 60%. That means that the process has begun, but rather late and lacking in vigour.
Autumn of 2001 brought numerous signs of slack on the domestic market. In autumn the tendency of physical persons and legal entities for savings has grown. The grown tendency for savings was caused by the saturation of demand, but this process was enhanced by the sharp growth of devaluation expectations against the background of falling world prices for raw materials.
Important mid-term tendency should also be noted. The average profitability of Russian industry over the last two years has diminished twofold - from 20% at the end of 1999 up to 10% in the last autumn. That means that the significant part of Russian eneterprises is already unprofitable and they should vanish - together with the contribution they bring in GDP. In other words, our economy is on the eve of the structural crisis. But this is quite normal and even stimulating for free economic systems.
According to calculations of experts of the Centre of macroeconomic analysis and short terms prognosis (CMEASTP), the estimated fall of export in 2002 will result in "subtracting" one per cent from the official appraisal of GDP growth rates by 4,3%. On the other hand, market situation being not very favorable in many countries, which traditionally attract large foreign investments, will probably help to increase foreign investments in Russia. Investment companies, engaged in attracting western capitals to Russia, are unanimous about sharp rise of interest to direct investments in companies, working in Russia. What is important, traditional raw materials sectors become in less demand and consumer sectors - in greater demand. As regards leakage of capital most experts come to the the same opinion: tendency to reduction of clean export of capital is evident. In the nearest months these tendencies should strengthen.
According to experts in the first half of 2002 Russia will experience light structural crisis which will be neither deep nor long. And by the end of the year a more powerful investment rise is expected which, theoretically, is to bring about a new upsurge.
Light industry. In 2000 and 2001 import growth rates of light industry goods were higher than export growth rates. For instance, over 8 months of 2001 footwear import grew by 94,5%. In 2001 the situation in footwear industry deteriorated. Over 10 months of 2001 growth rates of production fell up to 5,2% (in 2000 they were 22%).
Real incomes of the population in Russia are expected to grow about 5-6% annually. By 2004 they will be 22-30% more than in 2000. If Russian output is not increased import purchases will grow in proportion.
Industrial capacities of footwear industry in principle enable in a short time considerably increase production, but there are serious obstacles on this way. Financial position of light industry enterprises is extremely difficult. Credit debts as of September1,2001 was 31 billion rubles, which is about 90% of all working capitals of the industry ( it should be reminded that official statistic data is used). Out of it almost 60% are overdue debts. As of September, 1 two thirds of all the enterprises of the industry had overdue debts. Lack of money makes many enterprises work on "raw materials against finished goods" basis which has a negative effect on profitability of business. Profitability in the first half of 2001 was only 4,7% to the cost price. Lack of funds makes it impossible to sell goods on delayed payment basis, which gives competitive advantages for importers, who have access to cheap credits granted abroad on better conditions.
After desintegration of USSR Russia's light industry fell behind not only the leading countries, but developing countries of South -East Asia and Turkey, where light industry grows quicker based on modern machinery.
The machinery over the last years was practically not renovated, it becomes obsolete both physically and morally, leading to decrease of competitiveness of domestic manufacturers. Wear of fixed assets in light industry as of beginning of 2000 was 55,7%, - the average wear in the industry being 51,9%.
The share of production capacities which are not in conformity with manufacturing competitive goods in light industry is 40,1%. This is the highest index among all the industry sectors (the average being 30,6%).
Investments into the main capital in light industry in 2000 in actual prices have grown as compared with 1999 by 0,1 billion rubles ( from 1,3 to 1,4 billion rubles). But taking into consideration the inflation, these investments have diminished. Out of total investment into industry investments to light industry are only 0,3%, which is 5 times less than the share of light industry production in the total volume of industrial production, manufactured in Russia. Investments into the main capital in light industry per unit of production are 2,5 times less than in food industry and 1,7 times less than in machine-building industry. In the first half of 2001 investments into the main capital in actual prices were 1 billion rubles, and foreign investments - 11 million dollars, including 6 million dollars - direct ones. It is clear that these figures are insignificant for Russia.
Limited financial means for many Russian enterprises of light industry makes technical re-equipment practically impossible at their own expense. High rates of commercial credits together with the low level of profitability of most investments projects make these projects unrealiazable. That is why many large enterpises of light industry can afford attracting means only for partial substitution of worn out equipment. Lack of demand in the internal market resulted in sharp reduction of domestic production of equipment for light industry. Today wages in light industry are 2,4 less than on the average industrial level.
Branch lobby believes the state's assistance is vital in order to achieve considerable changes for the better in foreseeable future.
Taking into consideration errors of the official statistics one can suppose, that real indices are somewhat better than abovesaid. Many wholesale import firms had to reduce import of clothes and footwear after August, 1998. Free funds were channeled for manufacturing goods. Today external circumstances give us one more chance. Western economies suffer hard recession and there are very few places for effective investment of capital. Russia still looks very attractive against such background. Shall we sucсeed in using this new advantage?

RLN Sources: CMEASTP, Legprominfo
12.02.2002

RUSSIAN LEATHERNET