#10 - JRL 6587
Gazeta
No. 222
December 2002
THAT SUBSIDING RUSSIAN ECONOMIC GROWTH
Natalia RAISKAYA, Yakov SERGIYENKO and Alexander FRENKEL, Economics Institute, Russian Academy of Sciences

The preliminary results of Russia's November 2002 economic performance show only too clearly that national economic growth has subsided to some extent. Current demand for Russian- enterprise commodities hit an all-time low for this year. Therefore more and more industries prefer to scale down their machinery-and-equipment purchases. Insufficient demand and lack of money are perceived as the main economic-growth obstacle by 64 percent and 44 percent of all companies, respectively.

That unfavorable economic situation served to stabilize quantitative production parameters. According to preliminary estimates, basic economic sectors, i.e. the industry, the agro-industrial sector, the transport sector and retail trade, produced 3.8 percent more goods and services throughout the January-November 2002 period (on the corresponding 2001 period), what with the industry chalking up a 3.9-percent production increment. It should be mentioned for comparison's sake that these indicators grew by 3.8 percent and 4.0 percent, respectively, over the January-October 2002 period (State Committee for Statistics data - Ed.).

This trend also manifests itself at sectoral level, with most sectors posting a less substantial production increment this past November. Meanwhile non-ferrous metallurgy still expands production more quickly than any other industry. Preliminary estimates have it that the sectoral production increment totalled 8.4 percent over the January-November 2002 period on similar 2001 levels. Meanwhile the January-October increment was 8.9 percent.

The fuel-and-energy sector performed somewhat worse, posting a 6.8-percent production increment; meanwhile the January-October increment was 6.6 percent. The food industry expanded production by 6.6 percent (7.2 percent in January-October).

At the same time, all other sectors posted a rather unimpressive production increment well below average industrial indicators. Preliminary estimates show that the construction industry didn't expand production by more than 3.8 percent (4.2 percent over the January-October period). The timber, wood- working and pulp-and-paper industry chalked up a 3.2-percent production increment (3.1 percent in January-October). The break- down for the chemical and petro-chemical industry, the machine- building industry and the metal-working sector, as well as ferrous metallurgy, is 3.1 percent (3.3 percent), 2.9 percent (3.1 percent) and 2.5 percent (2.3 percent), respectively.

The light industry and the power industry are the only sectors, which were either marked by stagnation or even a recession. The light industry, for one, didn't expand production over the January-November 2002 period (on the corresponding 2001 period). Meanwhile the power industry even generated 0.4 percent less electricity over the July-November 2002 period.

This considerable differentiation in sectoral indicators is directly linked with the highly unstable pattern of Russian economic-growth factors. Exports are rapidly restoring their role as an aggregate industrial-output factor; this is the main current trend.

According to preliminary estimates, the value of Russian exports totalled $95.9 billion over the January-November 2002 period, a 2.6-percent increase on similar 2001 levels. It should be mentioned in this connection that official statistics had registered negative export growth in early fall. The Central Bank of Russia estimates that such exports stood at just $76.6 billion throughout the January-September 2002 period (99.5 percent on the corresponding 2001 period).

Incidentally, Russian enterprise managers believe that export demand will continue to increase. The Transitional Economy Institute (Russian acronym, IEPP) keeps polling local enterprise managers on market-situation issues. The results of such opinion polls show that export-demand fluctuations will total 3 percent at the end of this year.

In the meantime positive export trends influenced the monetary situation right away. The thing is that national money- supply volumes tend to increase as a result of foreign-trade proceeds (i.e. foreign exchange or hard currency), in the first place. According to the Central Bank, national gold-and-forex reserves totalled $47.7 billion by mid-November 2002, thus soaring by $900 million since early November. Money-supply volumes (the M-2 instrument) also increased more quickly, skyrocketing by 15.2 percent over the January-September 2002 period and reaching the 1,846.6-billion-rouble mark.

More impressive money supply facilitated considerable end-consumer solvency. Preliminary estimates show that real disposable incomes of the population increased by 8.6 percent over the January-November 2002 period, with the retail trade turnover soaring by 9.1 percent. However, this didn't influence industrial-production trends very much. The explanation is delightfully simple - virtually the entire consumer-expense increment was spent on imported, rather than Russian, products. According to preliminary estimates, the value of Russian imports increased by 11.2 percent, reaching the $53.4-billion mark.

Those specific sectors, which cater to domestic end consumer-and-investment demand (i.e. the light industry, the food industry and the machine-building sector) were forced to under-state prices against specific consumer-sector inflation trends, thus retaining sectoral production growth. Meanwhile specific outlays tend to grow more quickly. The prime cost of industrial-enterprise goods increased by 38 percent on 21 percent for ready-made product prices. These indicators are to total 30 percent and 28 percent, respectively, over the November-December period.

It goes without saying that selling prices, which lag behind specific outlays, couldn't but affect the industry's financial standing. CEK opinion polls have it that 18 percent of all enterprises had noted the reduction of corporate financial resources already this past October; meanwhile 12 percent noted this back in early fall. At the same time, negative profit balances (minus 3 percent) were posted. Corporate assets make up for the bulk of all investment being received by the Russian economy; therefore the industry's deteriorating financial positions affected investment trends. Preliminary estimates have it that the basic-capital investment increment didn't exceed the 2.5-percent mark over the January-November 2002 period, thereby lagging by almost 1.5 percent behind the production-fluctuation index.

Consequently, the Russian industry moved to streamline employment patterns, with more stable remuneration trends also setting in. The results of IEPP opinion polls imply that corporate plans for hiring new employees hit an all-time low in the past four years by November 2002. Moreover, a negative projected employment balance totals minus 12 percent.

Strange, as it may seem, but the latter circumstance still positively affects current economic-growth rates. First of all, this can be explained by the fact that local enterprises have converted redundant financial resources into investment, after axing redundant jobs. Second, part of the Russian population now opts for cheap domestic goods, rather than their expensive foreign equivalents. However, current dwindling employment won't have any positive long-term influence. You see, lower popular living standards will eventually cause overall demand to plunge accordingly; Russian-made consumer goods would thus be affected.

Therefore one can say with regret that negative economic- development trends, which set in early this fall, continued throughout November, as well. Meanwhile specific economic-growth factors exerted a somewhat contradictory impact.

On the other hand, though, the rather favorable situation on global raw-materials and fuel-and-energy markets facilitated a fast-paced export increment. At the same time, negative trends now bedevilling domestic consumer and investment markets will almost completely nullify those positive foreign-trade trends.