By Nina Kulikova, RIA Novosti economic commentator
Yearend results of 2005
The Russian economy has demonstrated quite a few positive results in recent years. Though over the past 15 years it had to renounce the plan-based economic system, create basic market institutions and survive the 1998 crisis, the European Union and the United States have already given Russia the status of a country with a market economy. The macroeconomic situation has gradually stabilised in Russia, creating the basis for the resumption of economic growth.
According to the data of the Institute of World Economy and International Relations (IMEMO) of the Russian Academy of Sciences, in 1999-2005 Russia's GDP increased by nearly 57%, with average annual growth rates constituting 6.6%. The preliminary figure of Russia's GDP growth in 2005 cited by the Federal State Statistics Service (Rosstat) was 6.4%.
Dynamics of Russia's Real GDP in 1996-2005
Source: based on the data of the State Statistics Committee of the Russian Federation
Overall, Russia's industrial output increased by 4% in 2005. At the same time, industrial growth declined year-on-year, primarily because of a slowdown in the fuel and energy sector, mostly in oil and gas production. Agricultural output increased by 2% in the same period, mostly due to a rise in grain yield (83.9 million tonnes), the production of technical crops, and poultry farming.
Year-on-Year Growth of Russia's Key Economic and Social Indicators
2005 2004
Gross domestic product 106.4 107.2
Index of industrial production 104 108.3
Agricultural output 102 103.1
Communications services 115.7 129
Retail trade 112 112.5
Foreign trade, 132.6 132
including:
exports 134.6 134.4
imports 128.9 127.5
Investment in fixed assets (estimate) 110.5 110.9
Source: Federal State Statistics Service
In 2005, the value of Russian exports exceeded $240 billion and that of imports $120 billion, registering a 35% and 29% increase respectively. Energy resources, ferrous and non-ferrous metals, fertilisers and timber continued to dominate Russian exports.
The investment climate in Russia is gradually improving, with more and more foreign companies emerging on the Russian market. According to the AT Kearney's data, Russia rose to the sixth place in the FDI Confidence Index 2005, after China, the United States, Britain, India and Poland (in March 2005, it was given eleventh place in the FDI Index).
According to the data of the Russian Economic Development and Trade Ministry, foreign investment into the Russian economy amounted to $26.8 billion in 2005. By late 2005, accumulated investment totalled $96 billion. The manufacturing industry received the largest portion of the investment funds (26.6%) and was followed by mineral extraction (21.5%). Foreign investment into wholesale and retail trade also registered an increase.
The Russian stock market was also growing in 2005: the RTS Index rose nearly twofold - from 614 to the new historical record of 1125 points. Russia's positions on the IPO global market are growing stronger. Initial public offerings of national companies' shares helped them attract about $6 billion last year alone (against $700 million in 2004). Quite a few companies intend to follow their example next year and among them are state-owned Rosneft and Vneshtorgbank.
The inflation problem was also in the focus of attention last year. Statistics service data show that inflation dropped from 11.7% in 2004 to 10.9% in 2005. However, the inflation target for 2005 (8.5%) was not met. Yevgeny Primakov, head of the Chamber of Commerce and Industry, explained the failure to tangibly reduce inflation in 2005 by corporate price formation at the level of natural, sectoral and local monopolies. The price rise will continue to outpace inflation growth if the state fails to take appropriate economic measures and create mechanisms capable of putting an end to monopoly price formation.
Programmes under way
An exceptionally favourable situation on the world markets of fuel and raw material resources had a positive effect on Russia's economic development in recent years. The recently formed Stabilization Fund of Russia is constantly increasing thanks to oil revenues. It exceeded $44 billion as of January 1, 2006. Even last year, the Central Bank's gold and foreign exchange reserves (GFER) exceeded the state foreign debt and amounted to $182.2 billion by January 1, 2006.
Table 2. Russia's Gold and Foreign Exchange Reserves (GFER) in 1999-2006 (in billions of US dollars)
Jan.19, 1999
Jan. 2000
Jan. 2001
Jan. 2002
Jan. 2003
Jan. 2004
Jan. 2005
Jan. 2006
GFER
12.2
12.8
28
36.7
47.8
77.1
124.6
182.2
Source: Central Bank of the Russian Federation
On the one hand, Russia's socio-economic progress of the past several years was due to the general political stability and structural reforms carried out in the previous period, and, on the other, to an extremely favourable situation on foreign markets. In fact, half of Russia's GDP growth over the past few years was due to high prices of fuel and energy resources and the possibility to further increase their exports.
However, the Economic Development and Trade Ministry forecasts that if the Russian economy's dependence on exports of fuels and raw materials is not reduced in the next few years, it will not be able to maintain stable annual GDP growth rates of over 4-5% even with high oil prices. Therefore, the Russian government is engaged now in an active search for possible growing points in the economy intending to concentrate on efforts promoting its innovative development.
The Mid-Term Programme of Russia's Socio-Economic Development (for 2005-2008) reflects the Russian government's position on economic growth issues and sets forth the priority trends in the country's economic policy for the next few years, i.e., the creation of conditions for enhancing an individual's competitive ability, including through a higher efficiency of the systems of health care, education, pensions, social security and housing and utility services, and also efforts to consistently combat poverty. Therefore, President Putin's four priority national projects set forth by him last autumn, i.e., the development of health care, education, the housing and utilities sphere and agriculture, can be regarded as a basically new, comprehensive approach to the country's economic management.
In addition, in keeping with the programme, the government intends to focus on efforts strengthening guarantees of property rights, including intellectual property rights, and developing competition. It will also have to stimulate the economy's innovative development and enhance the role of R&D work and its contribution to efforts to diversify the economy. Yet another, separate task is to increase the competitiveness of Russian companies and develop small and medium-sized business, which is also a factor helping to attract investment into economic modernisation.
Note that whereas thus far the authorities declined to create instruments of direct state participation in implementing business projects, at present such instruments are created to give targeted support to certain investment projects. They are, above all, special economic zones (SEZs), the Investment Fund, and also concessions.
The main objective of the Investment Fund set up in 2005 is to develop major investment projects of nationwide importance that are to be implemented on the basis of joint financing with the private sector. About $2.5 billion will be earmarked for this purpose in 2006 and analysts hope that the fund will be increased in future.
Apart from this, special economic zones are being set up in the country. There are four technical innovation zones in Russia now - in St Petersburg, Zelenograd (Moscow), Dubna (Moscow region) and Tomsk, and two industrial production zones - in Lipetsk and Yelabuga (Tatarstan). The 2006 federal budget earmarked 8 billion rubles ($280 million) for the creation of SEZs' infrastructure. The republican, regional and municipal budgets allocated the same amount of funds for this purpose. Under the law on SEZs, which are to appear in Russia by late 2007-early 2008, their residents will enjoy customs and tax benefits.
In the opinion of Yury Zhdanov, head of the Federal Agency for SEZ Management, SEZs are growing points of the new economy. These are the projects aiming towards the future, the projects that will gradually steer the country away from its dependence on raw materials and its role of a raw materials appendage, he said.
Forecasts for 2006
The forecast of the country's socio-economic development for 2006 drafted by the Economic Development and Trade Ministry has three scenarios (Table 3).
The first scenario (which is regarded as nearly improbable) implies a steep fall in oil prices (of the Urals brand) from $50.8 per barrel in 2005 to $34 in 2006. In that case, economic growth rates will drop from 6.4% in 2005 to 4.7-4.8% in subsequent years.
In the second scenario, oil price dynamics (for the Urals brand) is more moderate, with a drop to $40 per barrel in 2006. The investment component is to be strengthened and economic growth stimulated through the implementation of a package of institutional reforms, strategies for the development of key economic sectors, and also an increase in federal budget spending on investment. In this case, positive structural changes in the economy and its higher efficiency will help it to attain the GDP growth rate of 5.7%.
The third scenario, while preserving the basic conditions of the second one, takes into account the latest trends in the dynamics of world oil prices and gives the figure of $45 per barrel in 2006. In these conditions, GDP growth may reach 5.7-5.9%.
Industry. The Economic Development and Trade Ministry forecasts the average industrial production growth in 2006 at 4.4%. In 2006-2008, new leaders of growth will appear in industry. Sectors oriented to the domestic market and producing final consumption products will develop at the highest pace. Despite a slowdown in growth, the further diversification of the structure of industrial production is expected. The share of the manufacturing sectors will increase from 47.3% in 2004 to 50.5% in 2008. The share of the extracting sectors in the total industrial output will drop from 52.7% in 2004 to 49.5% in 2008.
Growth rates of production in the Russian oil and gas sector are declining. Last year, oil and gas condensate production increased by 2.2% (to 469.6 million tonnes) and gas production by 1% (to 640.6 billion cu m). In 2004, oil and gas condensate production increased by nearly 9%, and in 2003 by 11%. Sergei Oganesyan, head of the Federal Energy Agency, expects that this year's growth rates of oil production will stay at the 2005 level, or will be close to zero.
Table 4. Oil Production, Sale on the Domestic Market, and Exports in 2005
2005, million tonnes
2005, as % of 2004
Production
469.6
102.2
Sale (refining) on the
domestic market
207.4
106.2
Exports
252.5
98
Share of exports in
production, %
53.8
Source: Federal State Statistics Service
Therefore, among the priorities of the state energy policy, Russia's energy strategy for the period up to 2020 provides for the formation of new oil and gas production centres, primarily through the development of new fields in Eastern Siberia and the Far East and also shelf deposits of northern and Far Eastern seas.
The programme of the development of Eastern Siberia and the Far East is given special importance in the energy strategy. It provides for the creation of an integral system of gas production, transportation and supplies, with due account for possible gas exports to the markets of China and countries of the Asia-Pacific region. Explored gas reserves in Eastern Siberia and the Far East are expected to increase by 6.6 trillion cu m by 2030.
The Shtokman project in the Barents Sea worth $20 billion is undoubtedly the leader among major projects of the future. It is of key importance for Russia from the point of view of a new market (the United States) and possibilities to develop an LNG (liquefied natural gas) market.
Construction of new oil pipelines - the East Siberia-Pacific (Taishet-Nakhodka) pipeline and the North European gas pipeline will promote the development of hydrocarbon deposits in Eastern Siberia and the Far East and gas condensate deposits on the Barents Sea shelf.
Iron and Steel Industry. In the iron and steel sector Russia preserved positive dynamics in 2005, though an increase in absolute volumes of metal production was small. Russian iron and steel business aims mostly at the world market. According to the data of the Federal Customs Service, earnings from the sales of ferrous metals to non-CIS countries rose by more than 50% to about $20 billion. According to the Economic Development and Trade Ministry's forecast, the output of ferrous rolled products is expected to increase by 1-2% a year in the 2006-2008 period, with a 107.1% increase in 2008, as against 2004.
Analysts of the Institute of World Economy and International Relations believe that Russian leading iron and steel business groups have enough idle funds now allowing them, first, to continue production modernisation this year and, second, to step up the purchase of assets abroad and strengthen their positions on the world market through participation in the consolidation processes.
The Russian aluminium industry has been actively modernising production of late. The two leading companies - Russian Aluminium (RUSAL) and the SUAL Group - maintain their stable position among major world producers. Aluminium production costs at Russian plants do not exceed $950 per tonne, with world aluminium prices being twice as high. According to the institute's data, the situation on the world aluminium market will most probably be favourable and the prices stay at a high level. With the current world prices, the two Russian companies have a considerable degree of safety ensuring their high competitiveness on the world market.
The main export-oriented sectors of the Russian timber complex are coniferous forest harvesting and production of sawn coniferous timber, plywood, wood pulp, paper and cardboard. Nearly all Russian timber and paper products are offered on the world market at prices below the world's average. The Russian government is planning to stimulate production and export timber products of a higher degree of processing. According to institute's data, Russia's share on the main export markets of timber and paper products will continue to increase this year. The Economic Development and Trade Ministry forecasts that in 2008 the sector's output will increase by 21.8% against 2004 through an increase in the production of basic timber and paper products.
In the opinion of German Gref, Russian economic development and trade minister, real mechanisms for diversifying the economy were created last year and they should start working this year.
