Economic development in Russia after 1998

 

 

Introduction

Russia (Russian Federation) is one of the largest countries in the world (the area of 17,075,400 km2). Over 45% of Russian territory is situated above the polar circle in the area of permafrost and polar nights.  Russia is the sixth most populated country in the world – 132 million inhabitants. Almost 97.7 million people live in urban areas. Russia is a country of rich natural resources. It has 10% of the world's oil deposits, 40% of natural gas deposits and over 45% of hard coal layers and many other rare resources.

Russia is an important player in the world of economy and politics. The political and economic development of this country is in the focal point of the most important international organisations. Many states are interested in economic co-operation with Russia as a strategic supplier of resources and energy carriers as well as a ready market for consumer goods and investment. Russia is a regular and influential artist and of international meetings which take pivotal global decisions.

At the time of the 1980s the country launched market-oriented economic reforms. The scale of economy distortion under the Communist rule was so extensive that despite the objective reasons for all the necessary reforms the transformation came against a number of obstacles. The problems emerged both with the reformers, implementers, the society and the system driven by the deeply rooted bureaucracy. Having lived in the Communist system for many years, the society expected the transformation to bring a number of positive changes; on the other hand, Russians feared the uncertain future of economy and social security. On top of this, there was the resistance of the bureaucratic matter, which made and still makes the Russian reforms fall below the expectations.

Upon launching the social and political reform of the 1980s, Russia reported a decline in production and subsequently economic stagnation. This led to social tensions. Moreover the political situation was far from stable and Russians observed constant changes in top offices. The state was increasingly indebted both internally and externally. In order to cover the budget deficit, the Russian government chose the simplest way, i.e. issued more securities (mainly short-term bonds). Initially, the securities were eagerly purchased by local and foreign entities, however in 1998 the demand dwindled. In the opinion of international rating agencies, the securities issued by a Russian government as of 1989 were considered high risk papers and this opinion did not change with the oncoming years. Meanwhile, the costs of internal debt coverage were progressing. Russia's ratings dropped accompanied by a few financial slumps in Asian markets, Argentina and Mexico. Russian securities lost credibility of foreign investors and many of them sold their papers and withdrew from the Russian market. Consecutive series of national securities found very few buyers. The outflow of foreign capital coincided with the depletion of the national currency reserve.

In mid-1989 the currency market crashed followed by the securities market and interbank market. On 17 August 1989, the Russian government and the bank of Russia took the decision of devaluation of the national currency. The internal and external insolvency was officially pronounced. The residing foreigners were subject to the limitations of foreign currency operations. The government announced a moratorium on the purchase of Russian public debt securities. The 1998 crisis which affected the whole banking system economy resulted in widespread negative consequences for the financial system and the society. In consequence, or quantitative economic indicators deteriorated, for example, industrial production in August 1998 reached 11% of the production in the corresponding period of 1997, in September – 14.5%, in November – 12%. There was a drop in personal income, the rise in budget deficit and sky rocketing inflation.  Many banks lost financial liquidity and ceased to pay out the deposited the money when depositors began to withdraw their savings.

The crisis further led to heightened inflation and next wave of economic recession. The crisis, however, marked a certain turning point. It forced the acceleration of the reform and decision-making that soon transpired as enhancing the transformation and economic recovery.

 

 

Economic situation in Russia after the 1998 crisis

The year 1999 opened with the first positive signs of stabilization and as of the year 2000 we can speak of a dynamic improvement. In the year 2001-2007 the Russian GDP grew from 4 823 billion RUB to 26 882 billion RUB, that is, over 550%[1]. Foreign trade exchange showed an increasing positive balance. Every year brought more and more promising state’s income until a budget surplus – a unique phenomenon in today's global economy. Inflation fell and personal income grew.

The current year continues with positive developmental tendencies in the Russian economy. We can speak of very good results enhancing the hitherto achievements - the growth of GDP, nose-diving inflation, the positive balance of foreign trade exchange. Exceptional economic results much depends on the fact some years Russia has been taking advantage of the positive terms of trade (TOT) indicator in foreign exchange. A rapid rise of crude oil and other energy carriers prices makes Russia a serious beneficiary of these global tendencies and a world leader of development.

 

 

Gross National Product – growth, structure and development factors

The 1998 crisis revealed numerous shortcomings of Russian economy and caused a decline in GDP. However, the year 1999 initiated a series of positive changes reflected in the following phenomena:

·     systematic growth of consumer demand;

·     initial decline and later rise of the share of investment in global demand;

·     growing foreign trade exchange and positive foreign trade balance;

·     the dynamics in demand overwhelmed production and facilitated import growth.

The following table presents the basic Russian macroeconomic parameters of the past few years.

 

Table 1. The dynamics of macroeconomic indicators in Russia in the period between 1999 and 2007

 

 

1.01.01

1.01.02

1.01.03

1.01.04

1.01.05

1.01.06

1.09.06

1.01.07

Gross Domestic Product (billion RUB)

7,302.2

9,040.8

10,863.4

13,243.2

17,048.1

21,614.7

19,288.3

26,781.1

Personal income (billion RUB)

3,659.9

4,966.3

6,696.2

8,901.6

10,976.3

13,522.5

No,date

16,839.2

Ownership equity of banking sector (billion RUB)

286.4

453.9

581.3

814.9

946.6

1,241.8

No,data

1,692.7

Export (million USD)

105,000

101,900

107,300

135,900

183,200

243,569

223,955

303,926

Import (million USD)

44,900

53,800

61,000

76,100

97,400

125,303

112,587

164,692

Foreign trade balance (million USD)

60,100

48,100

46,300

59,800

85,800

118,266

111,368

139,234

Foreign debt (billion USD)

161.4

150.9

153.5

186.0

213.5

258.5

287.4

310.6

Russian currency reserve (billion USD)

27.9

36.6

47.8

76.9

124.5

182.2

299.2

303.7

Official exchange rate RUB/USD

30.69

31.78

31.77

30.68

35.81

26.33

26.77

26.33

Budget surplus (proficit) in billion RUB

12.2

216.1

239.0

228.2

730.7

1,759

2,424

2,259

Inflation %

20.8

21.5

15.8

13.7

11.7

10.9

7.2

9.7

Employment by MOP

9.8

8.8

8.1

8.6

8.2

6.6

6.2

6.9

 

Source: Central Bank of Russia. Social and economic situation in 2003, Moscow 31 March 2003, pp. 3–5. Main Objectives of the Common State Financial and Credit Policy in 2001, Central Bank of Russia, 29 November 2001, p. 14, electronic document: www.cbr.ru/analytics/print.asp?file=macroeconomics.html www.cbr.ru/statistics/credit_statistics/print.asp?file=inter_res_03.htm#week (downloaded 14 March 2006). The Bulletin of Bank Statistics, 2006, no. 12 (163), pp. 7, 83.

 

The basic macroeconomic parameters corroborating Russian economic growth are as follows: the growth rate (7.1 per cent in 2004, 6.4% in 2005, 6.7 per cent in 2006, and 5-6% annually in the years 2002-2006). The Russian GDP rose from 2 741,1 billion RUB in 1999 to 26 621,3 billion RUB in the beginning of 2007. Likewise, the country enjoyed a gradual growth in the production of basic commodities.

 

Table 2. The production volume of basic commodities in the years 19992007

 

 

1999

2000

2001

2002

2003

2004

2005

2006

2007

General production growth in basic branches (industry, agriculture, construction, transportation, retail trade)

In % compared to previous year

104.60

109.00

105.90

103.70

107.30

106.60

106.40

No data

No data

The volume of industrial production

In % compared to previous year

111.00

111.90

104.90

103.70

107.00

107.30

104.00

103.90

106.30

Agricultural production

In % compared to previous year

104.10

107.70

107.50

101.70

101.50

101.60

102.40

103.60

103.30

Construction industry

In % compared to previous year

106.10

111.50

109.90

102.70

114.40

110.10

110.50

115.70

118.20

Land transportation

In % compared to previous year

105.00

105.00

103.00

106.00

107.40

106.20

102.50

102.70

102.20

Retail trade

In % compared to previous year

93.90

108.80

110.70

109.10

108.00

112.10

112.80

113.90

115.20

Services

In % compared to previous year

107.50

105.70

100.80

100.40

105.10

107.00

107.50

No data

No data

 

Source: http://www.icss.ac.ru/macro/index_year.php?id=3 (date of visit: 10 February 2008).

 

Beginning with 1999, the nominal growth rate of GDP (including inflation-driven increase in prices) was above 20% annually. The growth rate of the real GDP 2006 reached 6.7% and was slightly higher than in 2005 (6.4%)[2]. It is worth stressing, however, that the dynamics of GDP growth to some extent results from an elevated global demand for Russian fuels and other resources.

 

Table 3. Gross domestic product in the years 1999–2007

 

 

1999

2000

2001

2002

2003

2004

2005

2006

2007

Nominal GDP

Billion RUB

4,823.2

7,305.6

8,943.6

10,830.5

13,243.2

17,048.1

21,624.6

26,882.9

32,988.6

Real GDP

In % compared to the previous year

106.4

110.0

105.1

104.7

107.3

107.2

106.4

107.4

108.1

GDP deflator

In % compared to the previous year

172.4

137.7

116.5

115.7

114.0

120.1

119.7

115.4

No data

 

Source: http://www.icss.ac.ru/macro/index_year.php?id=2 (date of download: 10 February 2008).

 

In 2000 the nominal Gross Domestic Product in Russia totalled 7,302.2 billion RUB and was greater than in the previous year by 9.0 billion RUB[3]. In 2001 it rose to 9,040.8 billion RUB, i.e. over 20% comparing to the year 2000. The GDP for 2002 increased by 4.7%. In 2003 the GDP continued to rise and exceeded the previous year's figure by 7.3%[4].  The year 2004 opened with the figure of 13,305 billion RUB[5], 2005 with the figure of 17,008.4 billion RUB and 2006 with the figure of 21,665.0 billion RUB. When expressed in foreign currency, the Russian GDP on 1 January 2001equalled 12.537 billion USD (the exchange rate on 1 January 2007, 1 USD = 26.3311 RUB)[6].

The structure of GDP in Russia is the following: services – 46%, goods manufacturing – 42%, taxes – 12%. The recent years have seen a rapid growth in goods manufacturing – over 7% - and services. A quick increase in production has been achieved largely through advancing prices of oil, which translated into the development of extraction industry. High production and individual dem and entailed the expansion of processing industry. A long-term analysis of the GDP dynamics revealed that economic growth in Russia has been relatively high in recent years.

 

Chart 1. The dynamics and nominal GDP values in Russia in the years 1999–2007 (year exit date)

 

 

Source: open study on the basis of data from: the Evaluation of the Banking Sector of the Russian federation, Ventral Bank of Russian Federation, Moscow, 2007, table 1.

 

 According to a medium-term forecast, the oncoming years will continue the upward GDP trend. The GDP growth should reach 5-6% a year and after 2008 exceed 6%. In the expert's opinion,will be facilitated by economic stability and the inflow of foreign capital. Is it going to happen? Much will depend on the  political situation in Russia. President D. Miedwiediew will certainly treat Russian economy is one of his  political priorities.

 

 

The analysis of the GDP growth indicators

 

Industrial production

Russian industry provides employment for over 50 million people, including 30 million employees of the private sector. The main stimulus of economic growth has been exports in different branches such as fuel industry (annual growth of 7%), non-ferrous metals (annual growth of 6%). A considerable dynamics has been visible in the sectors of consumer goods, mainly in food industry (6.5%); this being caused by the increase in personal income and the following consumer demand. The increase of industrial production was facilitated by:

·     growing domestic demand for electrical appliances, cargo vehicles and farming devices;

·     the upping personal income (in particular among low-income citizens) which caused the growth of the reluctantly food production;

·     a relatively high growth rate in mining industry, oil processing and sales, caused by constantly growing oil prices, as well as greater demand for oilfield chemicals in the internal market;

·     the promising situation in the foreign trade exchange, in particular of non-ferrous metals and chemical industry products.

There have also been a number of negative economic phenomena:

·     the increase in the competitiveness of foreign commodities in relation to domestic goods;

·     the decline in production rate of the petrochemical industry (basic chemical manufacture, synthetic rubber and pharmaceuticals);

·     a growing import of light industry products.

However, of greatest influence over the rising industrial production in Russia have been:

a)  the expansion of fuel and energy industry and export-oriented industry branches;

b)  higher investment in machinery industry;

c)  higher production of market commodities, in particular foodstuffs.

The conduct of research reveals that the hardcore of Russian economy is the fuel and power industry.  Only a part of the resources is state-owned. The country has 10% of the world's oil deposits (extracts 20% of world’s oil), over 40% of natural gas deposits, about 45% of hard coal and related resources deposits.

The fuel and power industry consists of three basic branches: coal industry, oil industry and gas industry. The percentage structure is in the following: 50% natural gas, 31% crude oil, 15% hard coal[7]. The role of energy resources in the Russian economy is invaluable. The share in the generation of GDP is estimated at about 15%. The industry in question accounts for about 50% of budget income and over 50% of exports[8].

The proceeds of oil and gas exports constitute the fundamental source of finance for the country's economy. Oil deposits are estimated at 6.7 billion tonnes, which makes Russia the eighth global oil player.  The Russian oil industry is dominated by powerful private enterprises of an integrated vertical structure: LUKoil (over 75 million tonnes of extraction, i.e. about 20% of the overall Russian production in 2002 and 18% of oil processing), Jukos (almost 70 million tonnes of extraction – 18% of national extraction), Tyumen Oil Campaign, Surgutneftegaz and Sibneft. A noteworthy fact is that these concerns, both in terms of production and the volume of available resources, not only lead the way in the Russian market but are in the forefront of the world's extraction and processing industry and are capable to complete with many foreign tycoons such as BP, Mobil or Shell. The Russian oil industry faces some problems related to the fact that most of the extraction and processing plants are outdated and require quick modernisation. Another problem is the looming prospect of total depletion of the main deposits in Western Siberia if we bear in mind than the actual extraction in Russia exceeds the current volume of discovered resources[9].

Some complications in the development of fuel and power industry in Russia follow from the fact that Russian oil and gas has to be carried to Western Europe by the pipelines crossing the territories of the few countries (Russia's relations with some of them is rather frosty).

Russia has the world's largest substantiated deposits of natural gas estimated at 48 trillion of m3. Gas is mainly extracted in the north-west part of Siberia as well as in Ural, the Povolz region, North Caucasus and the Barents Sea. Russia is the world's largest producer of this resource. Gas extraction is monopolised by Gazprom concern. It is the world's largest producer of natural gas (25% of global extraction) which supplies over 90% of domestic production. Gazprom owns the 140 thousand km long pipeline system a few dozen gas compression stations. Gazprom, which has 40% of the state share, is the largest currency supplier of Russia and its taxes account for 25% of the federal budget income.

Of crucial importance to the Russian economy is also iron and steel industry. Russia is in possession of 14% of world's iron ore resources and 15% of non-ferrous metal resources. This country leads the world as the producer of copper, lead, nickel, bauxite, tungsten and precious metals. The non-ferrous metals industry in Russia is highly centralised and monopolised. It is worth stressing that besides unquestionable benefits intense mining poses some threats. For example, the production of non-ferrous metals is very detrimental to the natural environment.

An important branch of Russian economy is the chemical industry. It develops in three dimensions: extraction, organic chemistry and inorganic chemistry. The chemical industry is a very prospective one view to a constantly growing demand for chemical products on the domestic market.

Moreover, Russia produces turning lathes, automate lines, pipes, heavy construction machines, motor trucks, motor cars and buses. This production is mainly addressed to the domestic market.

Russian construction industry and construction materials sector are fairly mature and profitable. The return on investment in these branches reaches about 18%.

Russia is the country of a very well developed armaments industry. This industry is a vast production potential largely influencing the GDP growth.  Russia is a world’s leading exporter of weapons and military technologies, which is a considerable source of foreign currency. The country boasts a number of world famous scientific institutions training highly qualified specialists dealing with state-of-the-art military technologies also applied to civil needs.

 

Agriculture and the Russian economic development

Russia is the country covering 17,075,400 km2, including 220,8 million hectares of arable land (which is about 13% of the entire country’s area)[10]. The agricultural reduction in 2007 rose by 1.6 % comparing with the previous year[11]. The primary reason was larger harvest and a yield of industrial plants, mainly sugar beet and sunflower seeds. The rise was also caused by the improved production performance (in the case of corn up to 19.6 quintal per hectare) and expansion of cultivation areas. Certainly, when compared to other countries, Russia is still falling behind.  As a result of lower crops, the potato and vegetable yields of the last years were below expectations. Likewise, the production of flax and was relatively low but that all results are attributed to the reduction in its conservation area.

Besides, the obsolete farm machinery, there is a number of obsticles that the Russian agriculture needs to face: debts of farm producers, low prices of produce in comparison to the prices of farm machinery and products, advancing degradation of side and reduction of arable land, the low level of income in agriculture disproportionate to the labour and maintenance costs (less than half of the country's average pay).

 

Investment as a growth-generating factor

In 2006 the volume of investment in the basic capital reached 2 181 billion RUB and comparing it with the previous year rose by 13.7%. In 2007 the investment increased by 18.2%[12]. The greatest investment was recorded in transportation and telecommunications. According to S. Szatalow From the Ministry of Finance of the Russian Federation, the Russian economy's dependence on the prices of oil and gas has been produced in recent years. Yet, the most popular investment direction is invariably the extraction industry (16.5% of the overall investment) but comparing to the previous year the stream of capital in this area dwindled by 5.3%[13]. However, the growth of investment comparing to 2006 has slowed down. The decline in the investor's activity has been attributed to a worsening financial situation of enterprises and the surge in prices of investment commodities. The existing investment capital has been primarily consumed for the maintenance of current production output.

Russia declares a more attractive investment climate, in particular the foreign investors, by the improvement of legislation. The new act has been passed on the registration of business activity that simplifies the previously functional regulations. The new law trims down the number of obligatory business concessions. There have also been endeavours to adapt the Russian accounting to the international standards.  The Russian parliament passed a number of acts preventing the introduction of the proceeds of illegal transactions to the official turnover. Some further acts are under construction regulating the market of securities and insurances.

In 2006 the Standard & Poors rating agency upgraded the Russia's long-term rating from B to BB and the short-term rating from C to B. Also JP Morgan changed the Russian classification of an emerging market into a European market. This translates into a growing interest of foreign investors in the Russian market. In 2006 they invested 31 billion USD and the estimates for 2007 exceed 40 billion USD. Nevertheless, the level of foreign investment in the Russian economy is below expectations (more about this problem below). The largest investors in the Russian non-financial sector have been: Cyprus (17%), Holland (14.6%) and the USA (14%). Cyprus, which is topping the list, is a noteworthy example. For many years, Russia suffered from the limitations on the relocation of Russian capital abroad. The most popular destination in this regard was Cyprus, owing to its liberal currency regulations, low taxes and limited number of concessions. In fact, the newly invested capital is Russian capital which returns to the country in the period considered stable and beneficial for overseas investors. Yet, it is officially reported as a foreign capital and thus legally protected and privileged.

 

Transportation and the growth of Russian GDP

In 2006 the share of transportation in the Russian GDP was about 8%. The dominating role, both in cargo and passenger carrying belongs to the railway and road transport. The structure of cargo and passenger transport in Russia is the following: 80% of the cargo transport belongs to railway and in the passenger transport the figures are 40% for railway and 40% for road carriers.

 

Retail trade and services and the growth of Russian GDP

In 2007 the volume of retail trade increased by 15.2% comparing the parallel period of 2006 and reached tha value of 10,757.8 billion RUB. The sale of non-food commodities grew faster than that of foodstuffs – by 12.8% and 6.9% respectively. This led to further drop of the foodstuffs share in the sales structure (down to 46.7%)[14].

According to the estimates, the share of imported goods in the trade offer reached 40% in the period in question. The influence of the upping prices in the post-crisis period over the changes in demand for domestic products has been limited because the importers began to supply more low-cost goods.

 

 

The forecast of Russian GDP

In the years 1999–2000, Russia initiated fundamental structural changes; in 1998 crisis was obviated personal purchasing power was growing. This period brought stable rouble and growing demand for domestic products before imported products.

In the years 2001–2008, a stable economic growth has been achieved based on the domestic advancement stimuli. The interim dynamics of personal income growth reached 5–9% and outdid the GDP growth. The government have managed to al most entirely realise that following priorities:

·     a selective protection of the internal market against external competition;

·     simulating the demand for domestic investment assets, reduced interest for long-term loans;

·     stimulating the price of market balance between the producers and recipients of fules;

·     application of tax system to implement preferences for highly processed domestic production;

·     the interim GDP dynamics at 5–9%, investment capital growth at 8–12% and the personal income growth at 5–7%.

According to the economist affiliated with the Academy of Sciences of the Russian Federation, the following economic scenario is anticipated in the next eight years[15]. In the years 2009–2015, Russia should be concluding the process of entering European and world structures. Russian presence will be determined by its economic position. The competitiveness of Russian products will enable the lifting of limitations protecting local producers and local market. The opening of Russian economy to international markets will be a prerequisite for Russia's participation in the world,market on equal terms was the one that experts estimate that the average annual GDP growth in this period should fluctuate between 3–5%. The feasibility of this scenario much depends on the success in the stabilisation of the monetary policy. This further translates into the competitiveness of the economy and the benefits that Russia may reap from participating in the world markets, let alone the benefits of Russia’s economic engagement to the world. However, the success of this scenario will to the greatest extent be contingent upon the level of oil prices in the world.

Encapsulating the problem of Russian GDP, its recent years’ structure resembles those of free market economies. Services prevailed with the industry and agriculture closely following. The dynamics of the Gross Domestic Product is diversified. It is much dependent on the fluctuation of the prices of oil and oilfield products. In recent years this dynamics has been somewhat reduced. No doubt, the future of Russian economy is a rather bright. After the 1998 crisis, Russia's GDP gained momentum that surpassed the previous forecasts. This is also the success of an effective monitoring and credit policy implemented by the Central Bank of Russia and the high global demand for fuels. The future of Russian economy will also depend on whether the country is able to capitalise on the benefits of of the most profitable export branches and enhances competitiveness, neutralises structural disproportions within the entire economy and base the strategy of economic growth on the internal advancement stimuli.

However, we should not overlook the fact that Russia's growth and economic expansion is still of emerging character, since not all internal advancement stimuli have been taken advantage of. The present-day economy is strongly dependent on the positive foreign trade exchange balance and very advantageous prices for the Russian best exports: fuels. A serious threat is slow progress in the ownership relations. It would be unjustified to provide a positive assessment of the manner of state property privatisation and an vague state's role in this process. A considerable impoverishment of the society does not enhance social and economic reforms. The legal regulations pertaining to issue of private ownership, in particular to land use and sale, are deficient and volatile. Russia’s absence in WTO hampers the implementation of trade regulations applied in market economies. In order to hold off these threats it is necessary to found the Russian economic development on the internal quality factors and to seek independence of the economy from the above-mentioned profit-bearing external conditions. Of primary importance he is the continuation of economic reforms, further privatisation of state property, offering better conditions for foreign investment, consistency in the indispensable social reforms. All these changes will foster stable and enduring social and economic development of Russian.

Despite the very advantageous situation in the foreign resource markets, Russia’s economic growth has been rather slackening recently. Falling prices or dwindling demand for Russian exports in the world markets may lead to a serious slump in Russian economy and put to test its financial stability.

 

 

Inflation

One of the teething problems of new market economy in Russia (after 1990) was hyperinflation. It was neutralised not earlier than in the years 19961997. The anti-inflation measures were mainly administrative decisions. The attempts to suppress inflation entailed a thorough economic recession. Considering the standard of living, Russia was ranked 72 in the world list[16].

The economic crisis of 1989 revealed the amassing economic problems, will words of the purchasing power of the rouble and worsened its relation to foreign currencies in both financial and commodity markets. The emerging situation generated a clash between the production and cash flow in the economy. The reduction of cash flow acted as a brake to economic growth[17]. The result was skyrocketing inflation which rose from 11% in 1997 to 84% in 1998. The authorities attempted to curb it. But in the following year the monthly inflation indicator in January dropped from 8.5% to 4.1% in February and to 2.8% in March. The increase in inflation resulted from a dramatic depression in demand related to an exceptional reduction of personal income levels. The first nine months of 1999 closed with the inflation of 30%, that is, the annual forecast, and in December reached 45%[18].

A drastic reduction of prices of Russian export commodities in 1997 and 1998 forced the Central Bank to modify the currency exchange policy and abandon the administration of the rouble exchange rate. In the middle of 1998, 1 USD was buying 6 RUB and at the end of the year 25 RUB. The departure from tampering the rouble exchange rate resulted in its depreciation in relation to USD. This was the direct stimulus for the 1999 inflation. In 2000 the exchange rate was stable and comparing to 1999 the prices settled down in most economy branches. The quarterly inflation in 2000 was the following: first quarter – 4.1%, second quarter – 5.3%, third quarter – 4.1% and fourth quarter – 5.4%. The prices of foodstuffs in 2000 rose by 17.9%, and the prices of other consumer goods (durables) by 18.5%. In 2000 the cost of services rose by 33.7% with the highest rise in upkeep and public services costs (42.6%). The situation developed two opposing tendencies shaping the inflation.

The basic factors maintaining the high inflation levels of the time where:

1)  faster rise of personal demand than personal income;

2)  the domination of demand over supply of domestic goods (causing uppin prices);

3)  rise in the prices of imported farm products and petroleum products in the world markets.

On the other hand, the inflation was trimmed down by:

a)  halted rise of the monetary mass;

b)  an increased demand for money as a result of the improvement in the system of financial settlements and reduced application of barter trade in the economy;

c)  stable rouble exchange rate;

d)  an increased personal demand for imported commodities caused by growth in real income;

e)  the proximity of prices of domestic products and imported products.

The inflation in Russia in 2002 was shaped by a number of factors. The production costs of domestic goods were continuously high which was considerably impairing their competitiveness. The Central Bank of Russia continued the issuance of money despite low industrial production and slow development of production services. In December 2000 and prices were higher by 20.2% comparing to the previous year[19]. As of 2000 the inflation surge was stopped. In 2001 the prices of services increased by 18.6%; to be more precise, the average cost of upkeep rose by 56.8%, transportation services by 25.3% and telecommunications services by 23.3%. It should be noted that although the cost of public utilities and accommodation rose by more than 50%, the hitherto costs had been particularly low and disproportionate to the actual costs incurred by public administrators.

At this point we would like to point to the positive effects for the lowering of inflation of the monetary and credit policy implemented by the Central Bank. This policy consistent in their stabilisation of foreign currency exchange rates and the strengthening of rouble and accumulation of foreign currency reserves. The government endorsed the bank's policy minding the good condition of the state budżet which was balanced due to the surplus of income (proficit). The Central Bank of Russia declares to take the problem of inflation very seriously. During the meeting of the Association of Russian Banks in 2003, the president of the Central Bank enumerated the combating of inflation as the main objective of his institution[20]. At the end of 2004 the prices of consumer goods increased by 11.7%. The base inflation reached 10.5% and the prices for public utilities were going up the fastest – by 17.7%[21]. In 2005 the base inflation amounted to slightly below 10%.

In 2006 the rise of consumer prices in Russia was 9,0%, that is, 1.8% less than in the previous year. The drop of the consumer prices in this period may be explained by the reduction of public utilities costs following the 2005 reform regulating the level of charges for public services and utilities. The lowering inflation of 2006 may be also justified by a considerable strengthening of the rouble (by 7.4%) in relation to the purchasing power of the currencies representing the countries the Russia's main foreign trade partners[22]. The level of inflation in Russia is not yet satisfactory, however, the authorities' endeavours should not be underestimated. There's strong expectation that if the reforms are implemented this will permanently curbed inflation. This is already taking place, yet the inflation downward trend is not impressive. If the base inflation in 2004 was recorded at 10.5%, in 2007 was nor less than 9.7%.

 

The budget and tax system

A positive outcome of economic growth in Russia is the condition of public finance. Since 2000 the Russian budget has been generating a surplus of income. The surplus of 2004 exceeded 4% and in 2005 8% of GDP. In 2006 the budget surplus was well over 8% of GDP.

 

Chard 2. The relation of the deficit (proficit) of the consolidated Russian budget to the GDP (in %)

 

 

Source: Russian Statistical Office (Rosstat).

 

It was estimated that in 2007 the income of the Russian Federation budget reaches 6,965.3 billion RUB  and the expenditure 5,463.5 billion RUB, which yields a surplus of 1,501.8 billion RUB (about 50 billion Euro). The year 2007 should close with the GDP equalling 31.22 trillion RUB assuming that the average price of oil is not lower than 61 USD per barrel[23].

The positive situation of public finance in Russia results from its former reform. The process of evolution of the financial system in Russia is very interesting. Some budget regulations were incorporated in 1993 Constitution of the Russian Federation. The constitution defines the federal character of the state and provides for the division of powers within the public finance between the federal and republic structures. The republics were granted the right to their own budgets. In 1998 the Budgetary Code of the Russian Federation was adopted which ordered the Russian budget system[24]. The code became effective on 1 January 2000[25].

The budget of the Russian Federation is reported in the statistics of the Central Bank of Russia and the Ministry of Finance of the Russian in three forms: as consolidated budget, as federal budget and the consolidated budget of the Russian Federation entities[26]. The consolidated Russian budget consists of: the federal budget, republic budget, state budget, oblast budget, Moscow’s budget and Sankt Petersburg’s budget, the budgets of autonomous districts, municipal budgets, rural districts budgets. Taken as one, all these budgets constitute a consolidated budget of the Russian Federation.

When analysing the positive changes in the Russian budget, we need to draw attention to the fact that the recent years’ improvement in the Russian economy makes the public finance be on the constant upgrade. Together with economic growth some structural reforms are implemented and the financial condition of many businesses has improved. The positive situation in the foreign trade exchange facilitates their stabilisation of public finance, stimulates the growth of budget income and results in the budget surplus.  All these circumstances aid the realisation of budgetary objectives.

In 2007 the income of the consolidated budget reached 6,965.3 billion RUB, that is, about 25% of the GDP. The budget expenditure was estimated at 5,463.8 billion RUB. The income and expenditure forecast for the oncoming years is presented below[27]:

 

Table 4. The financial forecast of the consolidated budget of the Russian Federation

 

 

2008

2009

2010

 Budget income (billion RUB)

6,673,239

7,421,228

8,035,220

 Budget expenditure (billion RUB)

6,500,300

7,361,900

7,998,700

Proficit (billion RUB)

172.939

59.328

36.520

 

It should be noted that in the case of the consolidated budget of the Russian Federation there has been an income surplus (in other words budget proficit). A similar scenario is anticipated for the years 2008–2010. However, the authors of the state budget realise that a budget surplus entangles economic growth. Therefore, the budget plan for the years 2008–2010 assumes a considerable reduction of the surplus. Nevertheless, the budget proficit will continue due to the growth of industrial production, improving financial condition of businesses, the beneficial situation in international trade, rising prices of Russian exports, sensible planning budget expenditure, the discipline of financial policy when it comes to the budget realization and tax exaction.

Supposedly, the future budget structure would be largely shaped by external (up to 80%) rather than internal (up to 20%) conditions. The escalation of the influence of external conditions may result from further American involvement in the war with Iraq. This stimulates the growth of oil prices and consequently the Russian budgetary income. As for the internal conditions, the budget surplus will continue in the foreseeable future however its dynamics will be limited. If it was only for the internal conditions, the reduction of the budget surplus may lead to the balancing of budgetary income and expenditure.

 

 

The expenditure of the federal budget

The main budgetary expenditure of the federal state is state of the management and local self-government. A considerable share of the budget is consumed by law and judiciary[28]. A considerable growth of expenditure was related to the support of regional and local budgets, in particular the social policy, international activity, internal security and agriculture and transport.

A heavy burden for the Russian budget he is the foreign debt. At the end of 2007, the Central Bank of Russia reported that the Russian Federation was indebted to the tune of 430 billion USD[29].

 

 

The income of the federal budget

The main source of budgetary income is taxes.  Recently, the Russian tax system has been undergoing  in-depth changes. The present system is very complexand suffers from and number of inconsistencies. An attempt to modify the system was made by the Russian parliament which adopted the 1st part of  the Tax Code of the Russian Federation, which entered into force on 1 January 1999. Subsequently, the parliament passed a number of chapters to the 2nd part of the code. So far, the regulations that have been implemented regulate the following: value added tax (VAT), excise tax, personal income tax and a uniform social tax – in force from 1 January 2001. Corporate income tax, sales tax and resource extraction tax became effective on 1 January 2002 and transport tax on 31 August 2002. A positive trend in the Russian tax legislature is the gradual adaptation to the international regulations.

The solutions implemented within the Russian tax system should be subject to a thorough analysis due to their the positive impact over the public finance. The core of the Russian tax system consists in three basic tax categories[30]: federal taxes, regional taxes and local taxes. All of them operate under the federal legislation, yet in the case of two latter taxes the regional and local authorities are entitled to determine the lavy and the resulting exaction procedures. There is a governing rule that the lower level authority may not reduce the taxes of higher category despite the fact that, as in the case of profit tax, the vast part of income generated by this tax funds that regional and local budgets. The regional authorities may only apply the reduction of the regional profit tax to selected social groups but no more than 4%.

Federal taxes are: value added tax (VAT), excise tax (alcohol, tobacco, oil and oil field products), personal income tax, social insurance contributions, tax for securities operations, tariffs and customs charges, natural resources exploitation levy, environmental levy, corporate income tax, road tax, import tax, inheritance and donation tanks, taxes for the use of the words “Russia” and “Russian Federation”, foreign currency purchase tax, gambling tax and charges for the rights and concession to produce and sell spirits.

Regional taxes are: corporate assets tax, forest tax, education levy, sales tax, accumulated income tax.

Local taxes are: personal assets tax, land tax, business registration fares, attacks on industrial facilities within protected zones, tourist fares, special local fares for the maintenance of the police, public property, education, advertisement tax, vehicle and computer sales tax, dog levy (except for official dogs), spirits distribution fare, licence fee for lotteries and auctions, flat allotment fare, fees for the right to use local symbols, e.g. in Moscow 12.5 times the minimal pay annually, horserace fares, stock operations tax, the fare for construction permits in natural reserves, parking fees, filmmaking fees, municipal sanitation fees, residency fees, gambling fees (from 205 times the minimal pay per one gambling machine), pools winning fares and lottery players fees[31].

Taxes, duties and other payments are instituted through a legal act and may only be amended likewise. The calculation and exaction of taxes rests with the Ministry of Taxes. It collaborates with the Ministry of Finance which accounts for the budgetary income, as well as with the Federal Agency for Business and Tax Fraud of the Ministry of Internal Affairs. On 1 July 2003, the agency took over the responsibilities of the Tax Police and received broad authorisation in detecting tax fraud. In the past few years, the Tax Police and the Agency for Business and Tax Fraud detained few important business barons. They were accused of a large-scale tax fraud depleting the state budget by billions of dollars. It is common property that not so long ago both natural persons and corporations in Russia habitually evaded taxes. Such state of affairs made many taxpayers regard the tax obligation as an unenforceable formality. The authorities are determined to remedy the situation and maximally reduce the number of such taxpayers.

From among the collected taxes, the most important for the state budżet is the personal income tax. The Tax Code of the Russian Federation (part 2) introduced a linear personal income tax. As of 1 January 2001, the personal income-tax was reduced to 13%. The effects of the tax reduction were unexpectedly beneficial for the budget[32]. After this operation in 2001, the budget income began to rise by 50% annually[33].

The highest tax rate – 35% – applies to certain types of income, for example, lottery and gambling wins (including gaming machines), and the prizes and awards received in competitions games and quizzes.

From 1 January 2002, the basic tax rate on corporate gains – the Polish equivalent of corporate income tax – was reduced from 35% to 24%. The state's income on the corporate gains tax is divided among particular budget levels: 76% – federal budget; to 16% (no less than 12%) – regional budget and 2% – local budget. This tax is levied on the gains obtained in Russia and abroad by the Russian legal personalities as well as on the gains of foreign legal personalities operating in Russia[34].

Another Russian tax is related to the payroll fund. Part 2 of the Tax Code introduces the so-called uniform social tax. This tax is calculated by diminishing rates from 35.6% to 2%, including the rise in and employees paid, and is payable by the employer. From 2002 the social tax travels two of the federal budget reduced by the obligatory pension insurance. The salaries of foreigners temporarily residing and working in Russia are exempt from this insurance. The root and branch reform of the Russian tax system undertaken in 2000 and 2001 also aimed to reduce the burden of the salaries derivative costs.

The trade in goods and services as well as import to Russia fall under the value added tax (VAT). This tax is added by the sellers of goods and services and by the importers. Some services commissioned to foreign entities but performed for Russian residents (consulting, patent services, concessions, etc.) or so include VAT. Similarly, the services related to the Russian fixed property market. The basic VAT rate is 18%. There is a group of goods and services which add a lower VAT rate of 10% and those of  zero-VAT rate. As for the tax structure, VAT accounts for 36.5% of all collected taxes. After 2008 the government intends to lower the basic VAT rate even to 10%[35].

Another Russian levy easily excise tax. This tax is added to the sale of mass consumption goods such as spirits, wine, beer, tobacco, automobiles, fuels, lubricators and natural gas. The excise tax is paid upon the sale of goods manufactured in Russia; in the case of imported goods, the tax is payable when such goods are a contribution to the initial capital of the company, will be used exclusively for manufacturer’s needs and in other situations. If a manufacturer users goods subject to excise duty as a resource to produce other similarly taxed goods, they can, upon the fulfilment of specific conditions, apply for the return of the tax value paid during the purchase of such resources. The excise tax cheaply paid by manufacturers. The excise tax for imported goods is added and paid during customs clearance. Some goods subject to excise duty such as beverages, couple and tobacco are obligatorily marked by excise stamps. The rates for all goods subject to excise duty, except for natural gas, have been defined in rouble per unit of measure. For example, 1 L of alcohol is taxed 16.2 RUB, 1 L of fuel – 4.60 RUB and 1 ton of petrol – 2 190 RUB[36].

A recently introduced tax (1 January 2003) is the transport tax levied by the regional authorities. Its value mostly depends on the vehicle engine capacity. The rates of this tax are determined by the regional authorities within the limits set by the federal law.

Foreign legal personalities are subject to, in accordance with the Russian law, taxation (profit tax) of the profit generated in the Russian territory. This obligation binds the entities of the so-called fixed structure in Russia. This can be a division, agency, office, bureau or any other structure in which the foreign enterprises does business. Also the foreign entities which undertake business activity in Russia through our agencies are considered as having fixed structure. Such an agency may be a Russian natural or legal person that represents the foreign entity’s interests under a contract, acts on our behalf and is entitled to negotiate and enter contracts.

The representatives and the branches of foreign enterprises are subject to similar tax rules as Russian companies. When determining the tax base, the income may not be reduced by the incurred costs – the same principle applies to a Russian companies. In the event that a Russian company does not establish a fixed structure in Russia and is not protected by it double taxation rules, they are subject to the following flat rate taxes: 15% on dividends and revenue from the share in a foreign capital enterprise, 10% of freight income, 20% on some other income, including the interest on the capital[37].

Besides customs duty, the commodity brought the Russian Federation is subject to value added tax VAT (Rus. NDS) and excise tax. These taxes aimed to balance the tax burden levied on the domestic and imported goods in accordance with international practice and the requirements of GATT/WTO. The VAT rates and excise rates are the same for domestic and imported goods. Besides, Russia collects the tax for customs clearance (customs fares).

In the in coming years the reform of tax system in Russia should address the following areas:

1)  the improvement of tax law through simplification, stabilisation of tax rules and reduction of tax burdens for “honest” taxpayers;

2)  the elimination of contradictory regulations between tax law and civil code;

3)  the combating of tax evasion;

4)  the improvement of the operations of tax exaction agencies.

The existing tax rates are planned to be further reduced. According to the experts[38], the VAT should be lowered to 15% in the near future, social security contributions to 30% (the target rate will be 25%). The proponents of this modification argued that the reduction of tax rates in Russia in recent years have always resulted in the increase of budget income.

The authorities are now working on some new tax solutions for small and medium enterprises.  the basic tax rate will be 6% of corporate income tax or 15% of income tax including tax deductible expenses[39].  The government also intends to simplify the tax system for the smallest, burgeoning companies. Upon the introduction of all these changes, the tax reform would be deemed completed[40]. Nevertheless, a crucial precondition for the effective completion of the public finance reform is the proper realisation of the budget  policy. This policy’s basic task is to financially secure the state's public obligations[41]. In the past few years the effectiveness of the Russian budget policy was alarmingly low. This led to the following phenomena:

·     permanent non-performance of state’s obligations;

·     the weakness of tax system unable to effectively perform its fiscal and regulatory functions (corroborated by  far-reaching tax evasion);

·     “expensive” state in consequence of inefficient activities of administration which is interested in reaping the maximum benefit from the redistribution of economic resources; this, in turn, leads to the development of unfair competition and makes the protection of propriety rights impossible.

The conclusion is that the ineffective Russian budget policy is one of the main barriers in securing a stable economic growth. Next the reform of tax system, which is expected to dramatically improve the budget condition, some other key initiatives of the budget policy should be:

1)  the balancing of state’s obligations and state’s capability of their fulfilment;

2)  the regulation of state’s obligations towards lenders and creditors and their debtors;

3)  the stocktaking of the state’s obligations and the related budget expenditure;

4)  the audit of budget realisation at all levels.

The government should lead to the realisation of state’s obligations towards different social groups and the reduction of foreign debt. A detrimental phenomenal and ease the pressure from the regions and other “beneficiaries” soliciting for central budget subsidies. The primary goal of of the budget reform should be the development of stable, institutional mechanisms stimulating the regional and local authorities to implement the structural reforms of their public finances. This will allow the government to fulfil its financial obligations and will guarantee the citizens’ access to basic services and social benefits. In order to achieve this, the following prerequisites are required:

a)  the centralisation of the budget system with simultaneous delegation to the federal level of the national obligations and securing proper financing of federal needs;

b)  radical modifications of the income and expenditure of local budgets assuming the departure from the division of tax proceeds among the budgets of different levels in favour of the principle “one budget – one  tax”;

c)  co-financing of selected investments (of national priority) with the means of regional budgets.

It is doubtful whether these objectives are achievable in the near future. Without developing an indispensable legal basis, the race and conflicts between the central budget and the regional budgets will not be eradicated. In order to realise the ambitious tax system reform, the Russian government should initiate the following changes[42]:

a)  introduce the minimum the near tax rate on personal income (12%) simultaneously raising the non-taxable minimal income and eliminate most tax reliefs;

b)  create one social tax; reduce the rates and establish the top level for taxable income;

c)  eliminate the revenue tax and compensate for the drop in revenue by instituting the above-mentioned local tax and a raising the excise tax for oil products;

d)  eliminate most reliefs in VAT;

e)  modifying the excise tax rules regarding spirits and petroleum products in order to shift the tax burden on the consumers;

f)   replace the property tax by land tax and podatkiem majątkowym i gruntowym.

Also a number of the six plans initiatives are planned that will improve the quality of administration and the operations of tax offices.

To conclude, the major challenge that Russia is currently facing is taking advantage of the favourable condition in the fuels market and financing the internal development with the obtained means. Russia has money and must decide how to spend it: consumption or investment. So far, most finances have been consumed and less invested. It is not an advisable way as it does not lead to a permanent prosperity based on the internal advancement stimuli.

 

 

Russian foreign trade

International trade exchange is pivotal for the Russian economy from the reasons. Russia is leading the world when it comes to the possessed natural resources. It has enormous reserves of fuels. The energy carriers are the main commodity in Russia's foreign exchange.

 

Table 5. The value and directions of Russian export in the years 19942007

 

Years

Export of goods

Export in total

Distant foreign states*

CIS states

Value

(million USD)

in % comparing to previous year

Value

(million USD)

in % comparing to previous year

Value

(million USD)

in % comparing to previous year

1994

67,826

–,

52,111

–,

15,715

1995

82,913

122.2

65,940

126.5

16,973

108.0

1996

90,563

109.2

71,997

109.2

18,566

109.4

1997

89,008

98.3

69,932

97.1

19,076

102.7

1998

74,884

84.1

59,090

84.5

15,794

82.8

1999

75,666

101.0

63,670

107.8

11,995

75.9

2000

105,565

139.5

91,331

143.4

14,234

118.7

2001

103,192

97.8

88,110

96.5

15,082

106.0

2002

107,247

105.3

90,969

105.0

16,278

106.6

2003

135,403

126.2

113,967

125.3

21,436

130.9

2004

183,452

135.0

153,249

133.8

19,931

132.1

2005

245,255

133.9

211,641

138.3

33,613

111.3

2006

303,926

124.7

260,558

123.9

43,368

129.3

2007

355,175

116.9

301,455

115.7

53,720

123.9

 

* The entities of the Commonwealth of Independent States emerging after the dissolution of the USSR; remaining countries are referred to as distant foreign states.

 

Source: http://www.cbr.ru/statistics/credit_statistics/print.asp?file=trade.htm (16 February 2008); the Bulleting of Bank Statistics, no. 7 (122), Moscow 2003, p. 23.

 

A substantial growth of Russian exports to foreign markets should be noted (outside the CIS). In the last 10 years the total export rose from 67.8 billion USD in 1994 to 355.2 billion USD in 2007. In recent times the export has been rising systematically by few dozens of billions of USD annually; the export to the so-called distant foreign countries has gone up from 52.1 billion USD in 1994 to 301.5 billion USD in 2007. On the other hand, the year of 2007 closed with the export to CIS countries of 53.7 billion USD – it is three times more than in 1994.

As for the structure of exported commodities, there has been no significant changes. The dominating commodity is fuels (mainly oil and natural gas) and oilfield products which account for 50% of the value of exports. Further most popular commodities sold abroad are non-ferrous metals, machines and installations, and chemicals. However, the structure of Russian export makes it vulnerable to the fluctuation of fuel prices in the world markets. Despite the attempts to diversify the export structure, the share of highly processed export commodities is still sizeable. Besides, Russian exports limited amount of farm and food products, textiles and clothes; the value of this export closes at 3%. The Russian contribution to the world export of high technologies is no more than 0.3%. An exception to this is military equipment (almost 30% of global export) and nuclear plant installations – 11% of global export[43].

As presented in the chart below, in the period from 1994 to 2006 the export in total rose from 67.4 billion USD to 243 billion USD. At the same time, the import to Russia increased from 50.5 billion USD in 1994 to 125 billion USD in 2006. For some time, Russia has enjoyed the positive balance of foreign trade exchange.

 

Charts 3. Russian exports and imports in the period of 19942006, in billion USD

 

 

Source: own study on the basis of the data from the Central Bank of Russia, http://www.cbr.ru/statistics/credit_statistics/bp_1994–2006.xls (17 February 2007).

 

The last years have also seen the rise in the import. However, the import dynamics falls behind that of export. The elementary data on the size, directions and modifications in Russian imports in the years 1994–2007 presented in the table below.

 

Table 6. The volume and sources of Russian imports in the period of 19942007

 

Years

Imports to Russia

Total import

Distant foreign countries

CIS countries

Total

(million USD)

in % comparing to previous year

Total

(million USD)

in % comparing to previous year

Total

(million USD)

in % comparing to previous year

1994

50,452

–,

36,455

13,997

1995

62,603

124.1

44,258

121.4

18,345

131.1

1996

68,092

108.8

47,273

106.8

20,819

113.5

1997

71,983

105.7

53,395

113.0

18,588

89.3

1998

58,015

80.6

43,714

81.9

14,301

76.9

1999

39,537

68.1

29,158

66.7

10,379

72.6

2000

44,862

113.5

31,434

107.8

13,428

129.4

2001

53,764

119.8

40,723

129.6

13,041

97.1

2002

60,966

113.4

48,815

119.9

12,151

93.2

2003

75,418

123.7

60,032

123.0

15,386

126.6

2004

96,307

126.6

76,394

125.3

19,913

132.1

2005

125,123

128.5

103,337

133.4

21,786

109.5

2006

164,692

131.3

140,115

135.3

24,577

112.2

2007

223,058

135.4

191,194

136.5

31,864

129.6

 

Source: http://www.cbr.ru/statistics/credit_statistics/print.asp?file=trade.htm (16 February 2008); The Bulletin of Bank Statistics, no. 7 (122), Moscow 2003, p. 23.

 

In the analysed period, the import was rising much slower than export; from 50.4 billion USD in 1994 to 223.1 billion USD in 2007. The revival of trade with CIS countries, including import, has been reported. By contrast, the quantity of goods purchased in distant foreign countries in the period under discussion shot from 36.4 billion USD to 191.2 billion USD.

As with the export so with the import, its structure hasn't been much altered in the last 10 years. From many years, Russia has been primarily importing machines and installations, foodstuffs, beverages and pharmaceuticals, plants, means of transportation and chemicals. Second most popular imports are farm products, metals, textiles and clothes. Apparently, food and other consumer goods comprise the vast part of the import, which confirms the weak condition of domestic processing industry. The rise in the imports of consumer goods has been triggered by a visible improvement in the personal purchasing power and the need to recover the standard of living from before the crisis. Russia claims about 1.6% of the world food import[44].

Lately, there has been a significant progress in the foreign trade exchange indicators, which partly results from the skyrocketing prices of fuels.

 

Table 7. The prices of oil and the balance of current Russia’s turnover in the years 1999–2007

 

 

1999

2000

2001

2002

2003

2004

2005

2006

2007

The price of Urals oil

Average USD per barrel

17.10

26.70

23.00

23.90

27.30

34.20

50.00

61.10

60.00

Current operations balance

Billion USD

24.60

46.80

33.90

29.10

35.40

59.50

84.40

96.10

No data

% to GDP

13.80

18.10

11.40

8.50

8.20

10.10

11.00

9.80

No data

% to previous period

 

190.30

72.50

85.80

121.60

168.10

141.90

113.80

No data

 

Source: http://www.icss.ac.ru/macro/index_year.php?id=9 (date of download 10 February 2008).

 

The Russian foreign trade balance has been constantly on the up since 1994. The trade balance with the distant foreign countries in the period in question has always been positive and has risen sevenfold (from 15.6 billion in 1994 to 110.2 billion USD in 2007). Similarly, the trade balance with the CIS countries has been positive (except in the period of 1995–1996) and rather diversified. The table below shows selected annual values.

 

Table 8. Russian trade balance in the years 1994–2007 (in million USD)

 

Years

Trade balance

Total

Distant foreign countries

CIS countries

1994

17,374

15,656

1,718

1995

20,310

21,682

–,1,372

1996

22,471

24,724

–,2,253

1997

17,025

16,537

488

1998

16,869

15,376

1,493

1999

36,129

34,513

1,616

2000

60,703

59,897

807

2001

49,429

47,387

2,041

2002

46,281

42,154

4,127

2003

59,985

53,935

6,050

2004

87,145

76,855

10,290

2005

120,131

108,304

11,827

2006

139,234

120,443

18,791

2007

132,117

110,261

21,856

 

Source: own calculations on the basis of: http://www.cbr.ru/statistics/credit_statistics/print.asp?file=trade.htm (16 February 2008); the Bulletin of Bank Statistics, no. 7 (122), Moscow 2003, p. 23.

 

Their Russian foreign trade balance in the years 1994–2007 increased from 17.3  billion USD to 132.1  billion USD. This outcome is the effect of  fast growing export. This growth his weighed by advantageous terms of trade in foreign trade. A facilitating factor he is in the first place the rising prices of Russian exports in international markets, mainly fuels, as well as stable import.

The country’s foreign currency reserves are expanding; from 124.5 billion USD at the end of 2004  and almost 300 billion at the beginning of 2007. In the years 2001–2006, Russia gained a total of 345  billion USD of surplus in the foreign trade.  part of this surplus has been allocated to the Stabilization Fund of the Russian Federation.

The Stabilisation Fund of the Russian Federation was established on 1 January 2004 and constitutes a portion of the state budget. The idea of the fund is to secure the state budget liquidity in case of a dramatic decline in the prices of fuels, which dominate in a Russian exports. The fund facilitates the stability of economy growth and is one of the elementary tools for absorbing excess liquidity, reducing inflation pressure, reducing the Russian economy's dependence upon the fluctuating prices in global markets and reducing the influence of uneven export proceeds over the state's foreign currency reserves. The fund relies upon the financial means from extra tariffs levied on oil and the taxation of the extraction of mineral resources should the price of oil exceed the established base price, i.e. 27 USD per barrel (Urals type).

 

Table 9. The statement of the Stabilisation Fund of the Russian Federation

 

Fund status on

USD billion

1.01.2008

166.4

1.01.2007

79.3

1.01.2006

43.1

1.01.2005

18.2

 

Source: Ministry of Finance, electronic document: http://www1.minfin.ru/stabfond_rus/sobj_rus.htm (download 1 February 2008), http://www.tpprf.ru/img/uploaded/2007041114252691.doc (13.03 2008)

 

The means of the fund may be used to make up the budget deficit and should the fund’s reserve exceed 500 billion RUB, it can be consumed for other purposes.

Russia receives better grades from the world rating agencies; this contributes to the betterment of investment climate and the inflow of foreign investment to a Russian economy.

 

Table 10. Foreign investment in Russia in the years 19952006

 

 

1995

2000

2002

2003

2004

2005

2006

million USD

Share in %

million USD

Share in %

million USD

Share in %

million USD

Share in %

million USD

Share in %

million USD

Share in %

million USD

Share in %

Foreign investment in total

2,983

100

10,958

100

19,780

100

29,699

100

40,509

100

53,651

100

55,109

100

Including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Direct investment

2,020

67.7

4,429

40.4

4,002

20.2

6,781

22.8

9,420

23.3

13,072

24.4

13,678

24.8

Including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.1.  Capital payments

1,455

48.8

1,060

9.7

1,713

8.6

2,243

7.5

7,307

18.0

10,360

19.3

1.2.  Credits from foreign shareholders

341

11.4

2,738

25.0

1,300

6.6

2,106

7.1

1,695

4.2

2,165

4.0

1.3.  Other direct investment

224

7.5

631

5.7

989

5.0

2,432

8.2

418

1.1

547

1.1

2.  Portfolio investment

39

1.3

145

1.3

472

2.4

401

1.4

333

0.8

453

0.8

3,182

5.7

3.  Other investment

924

31.0

6,384

58.3

15,306

77.4

22,517

75.8

30,756

75.9

40,126

74.8

38,249

69.4

Including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.1.  Trade credits

187

6.3

1,544

14.1

2,243

11.3

2,973

10.0

3,848

9.5

6,025

11.2

3.2.  Other credits

493

16.5

4,735

43.2

12,928

65.4

19,220

64.7

26,416

65.2

33,745

62.9

3.3.  Other

244

8.2

105

1.0

135

0.7

324

1.1

492

1.2

356

0.7

 

Source: Russian Statistical Office (Rosstat).

 

An interesting phenomenon in the change in the geography of trade exchange. Russia is steering towards the distant foreign countries. The export share to the countries outside the CIS began to grow after 1999 and in the following years reaches approximately 85% of the overall export. Similarly, the import from distant foreign countries has grown. This new trade geography largely affects the Russian trade balance.

 

Russian foreign debt

A serious problem for the Russian economy and a threat to the stability of Russian financial system use of the constantly growing foreign debt. At the beginning of 2007, the debt of the Russian federation approached the figure of 310.6 billion USD[45]. The debt of government institutions is repaid from, for example, the Stabilisation Fund; however, the private sector is increasingly indebted.

 

Table 11. Foreign debt of the Russian Federation (year opening, USD billion)

 

 

2001

2002

2003

2004

2005

2006

2007

2007*

1. Classification by the repayment deadline:

– short-term liabilities

30.7

25.6

36.0

36.1

43.8

56.2

100.7

– long-term liabilities

120.1

126.4

149.7

178.4

214.7

254.4

330.2

In total

161.4

150.8

152.0

185.7

214.5

258.5

310.6

430.9

2. Classification by entities:

2.1. Debt of government institutions, including:

127.5

113.2

96.5

97.9

97.4

71.3

44.7

38.1

– new state’s debt

60.0

51.0

39.8

38.6

39.6

35.6

33.8

29.9

– former USSR debt

66.3

61.2

55.7

58.1

56.1

34.5

9.4

8.2

2.2. Financial and credit institutions

7.5

7.8

8.2

11.0

3.9

13.1

2.3. Banks

9.3

13.6

14.2

24.9

32.5

50.2

101.2

147.7

2.4. Non-financial entities

21.8

24.0

33.8

55.1

76.4

126.0

160.7

230.4

In total

161.4

150.8

152.0

185.7

214.5

258.4

310.6

430.9

 

* 1 October 2007

 

Source: Russian Statistical Office (Rosstat).

 

Russia (and previously the USSR) was taking great advantage of foreign finances in consumption and investment. Consequently, the foreign debt was constantly rising. In 1992 the Russian debt was 95 billion USD. In the following at the debt reached 110 billion USD to surge to 121 billion USD in the years 1994–1996. In relation to the GDP, the debt approximated to 55% in 1994 and 30% in 1996; in relation to the annual value of export, the figure was – 260% in 1994 and 190% in 1996. At the end of 1997, foreign debt reached 123.5 billion USD, including 91.4 billion inherited after the former Soviet Union. In 1998 the country continued borrowing up to 129 billion USD. This resulted from the attempts to stop or at least postpone the state's insolvency towards the domestic creditors. In the second half of 1998, part of the general debt was transformed into foreign debt. This is how the foreign obligations of the Russian Federation rose to 143.9 billion USD. As a result, the country was made to struggle with a heavy burden of debt repayment which in the years 1997-1998 reached 50% of the overall budget expenditure. After the year 2000, owing to the new policy of systematic repayments, the debt began to diminish. It was already in the year 2000 when the debt fell to 148.7 billion USD and in 2001 to 138 billion USD. However, in the period of 2002-2003, the unfavourable exchange rate halted the debt reduction. In relation to the GDP, in the following years the debt shrunk (2000 – 62%, 2001 – 50% and 2002 – 48% of the GDP)[46]. In 2005 the debt of banks increased by 20 billion USD and the debt of non-financial entities by 50 billion USD. Large Russian enterprises procure finances mainly from international financial markets (monetary and capital). It is estimated that the cost of Russian debt service (the repayment of instalments and interest) constitutes almost one third of the Russian federal budget.

 

Table 12. Foreign debt of the Russian Federation (year opening, UDS billion)

 

 

1997

1998

1999

2001

2002

2004

2005

2006

I. Debt of the public sector

143.3

176.4

164.3

161.4

151.1

185.7

211.4

134.8

Debt of the Soviet Union

143.3

176.4

164.3

66.3

61.5

58.1

55.9

8.2

Debt of the Russian Federation

24.2

51.2

51.4

60.0

51.0

38.6

 

43.2

Debt in comparison to other post-Communist states

14.3

11.5

3.6

2.7

1.6

II. Debt of the private sector

11.3

57.3

43.4

31.1

37.6

80.0

106.2

 

Banking sector

Non-financial sector

34.5

22.8

20.2

23.1

9.3

21.8

13.6

24.0

24.9

55.1

32.5

73.7

147.7

Debt of government

(in % to GDP)

36.2

42.5

126.6

49.0

40.0

Date of private sector

(in % to GDP)

2.9

13.8

33.4

 

 Source: own study after: Obzor ekonomiczeskoj politiki w Rossji za 1998 god, “Opublikowannyje issliedowanija”, BEA, Chapter I, tab. 5; Biulletien’ bankowskoj statistiki, Centralnyj Bank Rossijskoj Fiedieracii, 2002, no. 9 (112), p. 16; 2003, no. 7 (112), p. 16; Płatieżnyj balans i wniesznij dołg Rossijskoj Fiedieracii, Moskwa, CBR 2007, table 5.1, 5.2, p. 24ff; data after the Central Bank of Russia: http://www.cbr.ru/statistics/credit_statistics/print.asp?file=debt.htm (29 August 2004); http://www.cbr.ru/statistics/credit_statistics/print.asp?file=debt.htm (9.05.2005).

 

As for the entities indebted, there has been an apparent change in recent years. According to the statistics, the foreign debt of the public sector began to decrease after 1998. In that year that Russia's debt hit the top figure of 176.4 billion UDS due to foreign countries. In 2001 the financial obligations of the public sector were reported at 108.5 billion USD (74% of the entire debt). The government's debt was 110.2 billion USD and that of other entities reached 1 billion USD. The largest creditors where the international financial organizations (48.2 billion RUB), foreign currency debenture buyers (25.6 billion RUB) and the International Monetary Fund (7.3 billion RUB)[47]. This was primarily related to the appreciation of the basic currencies and the resulting f/x differences. It is worth stressing that Russia considerably reduced its debt if compared to other post-Communist countries. In 2002 almost 7 billion of debt was repaid with the remaining 4.1 billion USD. Russia fully repaid its debt to the International Monetary Fund (2.8 billion USD)[48].

The so-called new debt of the Russian public sector[49] was estimated at 43.2 billion USD in January 2007[50]. These are primarily the securities denominated in foreign currencies and financial loans in international financial institutions. The issues related to the high debt and debt servicing further complicate Russia's uneasy position[51].

According to the data of the Central Bank of the Russian Federation, the total foreign debt of Russia (including the debt of the state, banking sector and non-financial enterprises) the beginning of 2007 exceeded the figure of 310 billion USD, yet in October reached 430 billion USD[52] - this being caused by their rising debt of the private sector, in particular of banks and non-financial enterprises.

The beginning of a thousand seven Russia owed the International Bank for Reconstruction and Development 4.4 billion USD. As opposed to the public sector, the debt of the private sector rose in 2007. The foreign debt of Russian banks increased in 2006 to the sum of 101.2 billion USD, chiefly through the new credits – 67.8 billion USD. A significantly higher growth of foreign debt was simple in the companies’ sector; its obligations in 2006 reached the level of 160 billion USD. Within only nine months of 2007 the debt of Russian banks rose from 100 to over 150 billion USD and the debt of the non-financial sector from 140 to over 200 billion USD.

Their domestic analyses and the research of independent experts from the USA and the European Union proved that Russia's foreign debt heavily encumbers the country. About one third of the federal budget is consumed for the repayment of principal instalments and interest on the borrowed money. A huge portion of the debt has been inherited from the Soviet Union. Nevertheless, in recent years Russia has been timely settling her debt even before their maturity dates. Russia repays the debt of the former Soviet Union. This is affordable, since the country reaps the benefit of the high prices of oil and natural gas. On 1 January 2008, The Stabilisation Fund collecting the surplus income from the sales of oil reported to have accumulated over 156.8 billion USD[53]. Thanks to the proceeds from fuels, the Russian foreign currency reserves reached 460 billion USD in 2008. It is the third largest foreign currency reserve after Japan and China. It seems that the repayment of foreign debt is the matter of honour for President W. Putin, who would wish to capitalise on it politically. In 2008 his second and last term of office comes to a close. The reduction of debt is very desired from the economic point of view, since Russia is able to save many billions of dollars of interest. An early repayment may also confirm the Russia's credibility as a debtor and promote future credits for private entities on more preferential terms.

However, in general, Russian liabilities to foreign creditors are mounting – despite the timely repayment of the obligations and the restructurisation of debt – due to the private entities running up further arrears. A recent influx of direct foreign investment corroborates the attractiveness of Russian economy. However, Russia cannot attract – besides few positive examples – satisfactory volume of foreign investment and continues to be a net exporter of capital.

The recent Russian balance of payments has been offset owing to considerable surplus on current accounts of systematic growth of currency reserves. However, the current turnover was affected by the settlement of international services. The balance of capital operations of Russia is negative as a result of the above-mentioned outflow of capital and increase in foreign credits. Nevertheless, Russia reducers have foreign debt though many years she will be incurrin the costs of the past obligations.

A positive occurrence in Russian economy has been a positive dynamics the majority of macroeconomic indicators. The positive trends have been reflected in:

1)  a gradual growth of the GDP; economic growth was possible thanks to: industry, construction and trade; this stimulated the GDP through the increased internal demand;

2)  the growth of the value of production and services in was on the rise, however, after 2001 the growth slowed down;

3)  in 2003, as in the previous year, there was a growth in agricultural production by 1.5%; as reported by the Ministry of Agriculture, the corn yield in 2003 was lower by 22% comparing to 2002. It was estimated that the drop in the corn production in 2003 initiated a rapid uptrend in prices;

4)  the annual rate of direct foreign investment reached the level of 17.7%, i.e. much more than the growth rate of GDP;

5)  the official unemployment figures dropped (according to ILO);

6)  a substantial growth of the budget income in 2004 left a surplus of 2.5% GDP;

7)  foreign debt servicing in 2003 was realized without the support of international financial institutions;

8)  the multiple growth of the foreign currency reserves of the Central Bank of Russia (from 21.0 billion USD on 1 July 2000 to 97.9 billion USD on 3 March 2006[54]);

9)  the positive balance of foreign trade exchange in 2005 reached 120.3 billion USD[55].

It important to note that a long-time Russia has enjoyed a systematic positive balance of foreign trade exchange; in the last 10 years, the country has accumulated 534.6 billion USD of surplus; this result was achievable through the fast growing export, favourable conditions in the world markets and the surge of oil prices and favourable terms of trade in foreign deals.

To conclude, from the viewpoint of the long-range growth trends, an in-depth analysis of the stimuli of the Russian economy growth cannot be exclusively affirmative. The debt of private sector is growing rapidly which may lead Russia towards the debt trap. Many reasons for the economic growth do not arise from this factual economy reforms but from the favourable demand and prices of Russian exports in the international fuel markets. The current condition of the Russian economy is rightly branded the Dutch disease[56], i.e. the dependence of country's economy upon the global demand for natural resources[57]. To cure this disease it is necessary to implement a long-lasting transformation of economic policy, to establish stabilisation funds accumulating the export surplus and to invest in the branches of economy based on new technologies. Only rational and constant structural changes will provide the means to confront this peculiar disease of Russian economy.

 

 

The Russian banking sector and monetary policy in the period of economic growth

The banking sector is an integral part of the economic system, thus any changes to the economy affect the banking system through reciprocity. The positive economic changes stimulate the banking sector; on the other hand, recession and breakdown of economic growth have adverse effect on the condition of banks. The changes in economy and in the commercial banking sector are moulded by the state and its monetary policy[58].

After 1999 Russia developed favourable conditions for the burgeoning of the banking system thanks to the constant economic growth and promising estimates of the foreign trade. The macroeconomic context for the development of the banking sector was extremely encouraging. All of macroeconomic parameters improved together with a dynamic growth of consumption and domestic and foreign investment.

The crisis of August 1998 shuttered the Russian economy and the banking system. The problems of liquidity and insolvency of many credit organisations were commonplace[59]. However, the following year has brought some positive changes in the sector of commercial banks. The banks that endured the crisis were strengthened and financially stable, increased their capital and obtained the general licence. The number of banks with foreign capital and their agencies expanded. The presence of foreign capital in the Russian banking system reflects the interests of foreign investors. These are mainly huge American and European banks. The chiefly arrive from the countries of high trade exchange with Russia or interested in direct investment. The Russian banking sector, as in many other countries, experiences of the processes of capital concentration and consolidation.

 

Table 13. The Russian banking sector in figures

 

 

2001

2002

2003

2004

2005

2006

2007

1. Number of registered credit organisations

2,126

2,003

1,828

1,668

1,518

1,409

1,345

2. Credit organisations undertaking operations

1,311

1,319

1,329

1,329

1,299

1,253

1,189

2.1. Credit organisations licensed to/having:

 

 

 

 

 

 

 

– hold deposits of natural persons

1,239

1,223

1,202

1,190

1,165

1,045

921

– perform operations on foreign currencies

764

810

839

845

839

827

803

– the general licence (to all kinds of banking operations)

244

262

293

310

311

301

287

– perform operations on noble metals

163

171

175

181

182

184

b.d.

3. Number of agencies of credit organisations

3,793

3,433

3,326

3,219

3,238

3,295

3,281

3.1. Including:

 

 

 

 

 

 

 

– branches of Sbierbank RF

1,529

1,233

1,162

1,045

1,011

1,009

859

– branches of foreign capital banks (100%)

7

9

12

15

16

29

90

4. Number of credit organisations with foreign capital

130

125

126

128

131

136

153

4.1. Including credit organisations:

 

 

 

 

 

 

 

– with 100% of foreign capital

22

23

27

32

33

41

52

– 50 to 100% of foreign capital

11

12

10

9

9

11

13

 

Source: Russian Statistical Office (Rosstat).

 

Recent years have also shown positive tendencies of the volume and dynamics of changes in the banking sector. In the first place, the  ownership equity is increasing accompanied by the balance sheet total.

 
Table 14. The basic indicators of the operations of the banking sector of the RF

 

Indicator

01.99

01.00

01.01

01.03

01.04

01.05

01.06

01.07

1. Assets (liabilities) of the banking sector (RUB billion), including:

1,046.6

1,586.4

2,362.5

4,145.3

5,600.7

7,136.9

9,750.3

14,045.6

 

– in % to GDP

38.2

33.3

32.4

38.2

42.3

42.1

45.1

52.8

2. Equity of the banking sector (RUB billion), including:

76.5

168.2

286.4

581.3

814.9

946.6

1,241.8

1,692.7

 

– in % to GDP

2.8

3.5

3.9

5.4

6.2

5.6

5.7

6.4

 

– in % to assets of the banking sector

7.3

10.6

12.1

14.0

14.6

13.3

12.7

12.1

3. Credit for companies and natural persons (RUB billion)

298.6[60]

506.8

847.4

1,796.2

2,684.7

3,887.6

5,454.0

8,031.4

 

in % to GDP

10.9

10.5

11.6

16.6

20.3

22.8

25.2

30.2

4. Securities in bank portfolios (RUB billion)

271.3

325.7

437.2

779.9

1,002.2

1,086.9

1,539.4

1,961.4

5. Deposits natural persons (RUB billion)

199.8

297.1

445.7

1,029.6

1,517.8

1,977.2

2,754.6

3,793.5

6. Resources in business accounts (RUB billion)

281.4

468.4

722.1

1,091.4

1,384.8

1,986.1

2,953.1

4,570.9

7. Earnings (RUB billion)

+1.3

–32.1

+125.3

+114.7

+199.4

+304.5

+444.7

 

Source: Obzor bankowskowo siektora Rossijskoj Fiedieracii, Cientralnyj Bank RF, Departament bankowskogo regulirowanija i nadzora, Moscow 2003, no. 5, March 2003, tab. 1, and February 2007, tab. 1.

 

Regardless of the existing growth of the ownership equity of Russian credit organisations, the problem of Russian banking system is reluctantly low capitalisation of individual banks and the lack of potential sources of increasing the ownership equity. In 2005 analyses showed the growth in the capitalisation of the banking sector. The equity of the banking sector in 2005 rose by 31.2% (in 2004 only by 16.2%) and reached the level of over 1 240 billion RUB  at the end of 2005 (ca. 44 billion USD)[61].

At the outset of 2007 the equity of Russian banks rose up to 1 700 billion RUB (over 64 billion USD)[62]. However, with more demanding capital requirements, most banks will be forced to expand their equity in the near future or merge with other banks. Fusions, mergers and other modifications within the structure of the commercial banking sector are commonplace in the Russian banking system. There is an increase in the number of banks of higher charter capital.

 

Chart 4. The number of operating credit organisations by the charter capital (beginning of the year)

 

 

Source: Russian Statistical Office (Rosstat).

 

As a result of the increase in equity adjusted by the size of risk, the solvency index for the entire sector of commercial banks in December 2005 (16.1%) somewhat decreased comparing to the beginning of 2005 (17.0%). It was caused by rapid growth of risk assets in relation to the ownership equity. Particularly alarming the constantly growing volume of  household loans which put up the level of unpaid mature debt.  the index continues to decreaseand at the beginning of 2007 equalled 14.9%. This means a permanent growth of risk taken by the Russian banks and a manace of the banks’ insolvency in the long run.

The positive macroeconomic changes generate demand for banking services and further the financial condition of the banking sector. Most parameters of the sector have improved. The relation of bank assets to the GDP rose from 42% at the beginning of 2005 to 45% at the beginning of 2006, and almost 53% at the beginning of 2007[63]. Credit organisations also reports high profitability levels. In December 2005 the share of credit organisations rated among the financially stable group of entities reached 96.7%, and their share in in the entire equity of the banking sector was 99.4%.

Banks gradually are increasing their resources – largely through the growth of personal income and favourable economic situation. Personal income is growing systematically. In the last 10 years the growth has been tenfold from 1.7 billion RUB in 1999 to almost 17 billion RUB in 2007. The majority of this income is consumed by households for surging consumption. However, there is an accumulation in savings deposited in the domestic commercial banks both in the rouble and in foreign currencies. The demand for foreign currencies – the most popular manner of saving – is stable (with USD dominating). Yet, in recent time this demand has been dwindling as a result of the stabilisation of the domestic currency and growing trust in the national banking system.

 

Table 15. Personal income and bank deposits in Russia in the years 1999–2007

 

 

01.99

01.00

01.01

01.02

01.03

01.04

01.05

01.06

01.07

Personal income, RUB billion

1,730.7

2,777.8

3,983.9

5,325.8

6,831.0

8,901.6

10,976.3

13,522.5

16,839.2

Personal bank deposits, RUB billion

199.8

297.1

445.7

678.0

1,029.7

1,517.8

1,977.2

2,754.6

3,793.5

 in % to GDP

7.3

6.2

6.1

7.6

9.5

11.5

11.6

12.7

14.2

 in % to liabilities of banking sector

19.1

18.7

18.9

21.5

24.8

27.1

27.7

28.3

27.0

 

Source: own calculations on the basis of the WWW service of the Central Bank of Russia: www.cbr.ru/analytics/Rus1206r.pdf; ww.cbr.ru/analytics/macro/print.asp?file=macro_06.htm; ww.gks.ru/free_doc/2006/b06_13/06-07.htm (downloaded 12 February 2007).

 

Russians take out one more credits this reflects the positive changes in the commercial banks and confirms the position of the banking sector in the Russian economy. Commercial banks multiply their profits, hence heightened ownership equity and improved security[64].

A manace to the financial condition of the banks is the lessening of Russian commercial performance detrimental the quality of bank credit portfolio. Some other threats are: the growing gap between the “strong” and “weak” banks (in terms of management quality, volume of assets, customer credit capacity) and disproportionate development of particular areas of the real sector. They may lead to a worsening of the condition of some banks specialising in crediting the companies operating in the slow developing sectors.

It is also worth noting that despite the ongoing privatisation there is a growth of state capital in the Russian banking system. In 2006 three largest Russian banks Sbierbank, Wniesztotgbank and Gazprombank controlled 40% of the banking sector assets; a year before it was merely 25%[65]. Such state of affairs is differently evaluated by experts yet justifies to the strengthened sway of the state in the system of Russian commercial banks.

The trends of macroeconomic changes and commercial banking development are to some extent modelled by the economic policy, including the monetary policy. The monetary and credit policy in Russia is co-led by the government the central bank though the former is often said to play the second fiddle. The monetary and credit policy concerns: combating inflation, improving the balance of payments, modifying exchange rates and money supply and controlling the demand for cash. The policy objectives for 2007 based on four forecast variants for the Russian microeconomic development. The forecast anticipates the probable prices of oil, the rate of investment in the stated capital, the growth of personal income, the GDP growth rate, foreign trade balance, foreign debt and the volume of currency reserves.

The objectives in question target the stabilisation of prices and state finances, the facilitating of further economic growth and improvement of the standard of living. It has been assumed that the price of 1 barrel of oil reaches 60 USD, the GDP rises by 6.1%, and money supply (M2) by 25–28%. Inflation is planned to drop to the level of 6.5–8.0% in 2007 and down to 4.0–4.5% in 2009. The currency reserves should hit the level of 350 billion USD. Objectives also assume the positive tendencies in the economy-external growth factors, namely the demand for Russian natural resources in foreign markets and their prices. The Central Bank of Russia in its monetary policy inclines towards further liberalisation the foreign currency market and maintenance of controlled shadow exchange rate at the same time interfering with the foreign-exchange market in order to stabilize the rate and the inflation level. A considerable progress is expected in the monetary policy instruments of the central bank[66].

 

Table 16. Main indicators of the monetary policy in the years 2006–2007 (RUB billion)

 

 

1.01.2006

1.01.2007

planned

1.01.2007

executed

Monetary base (in a strict sense)

2,299

3,095

3,208

– cash circulation (outside Bank of Russia)

2,195

2,948

3,062

– obligatory reserve

103

146

146

International reserve net

5,245

7,964

7,998

– in billion USD

182

277

304

Central bank assets net

– 2,946

– 4,869

– 4,789

– governmental loans net

– 2,221

– 3,823

– 3,696

– federal government loans net

– 2,000

– 3,573

– 3,350

– loans for banks net

– 552

– 609

– 810

– other assets net

– 174

– 437

– 283

 

Source: Osnownyje naprawlienija jedinoj dienieżno-krieditnoj politiki na 2007 god, Centralnyj bank Rossijskoj Fiedieracii, Moskwa 2006, p. 11.

 

The size of the influence of the central bank over the prices in the monetary market and the liquidity of the banking sector are limited by the profitability of the financial instruments offered. This limitation you the interest rate calculated on the basis of the parity of the rates operating in the internal and external financial markets. The Central bank of Russia attempts to enhance the attractiveness of the market instruments of the monetary and credit policy and the raise the interest of credit organisations in the investment of free funds in the offered instruments (reduction of the inflation pressure). Detailed information on the available instruments of the monetary policy of the central bank is presented in the table below.

 

Table 17. Instruments of the monetary and credit policy of the central bank in 2006

 

Instrument type

Application

Instrument

Time of offer/procurement

Interest annually

Open market operations

Liquidity offering

Collateral auctions

2 weeks

Acc. to action results (no less than 7%)

Operacje REPO

Od 1 do 7 dni, 1 tydzień, 3 miesiące

Acc. to action results (from 1 to 7 days above 6%, 1 week – above 6.5%, 3 months – above 9%)

Purchase of government securities and bonds of the Central Bank of Russia

Operations outright *

Purchase of foreign currencies