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Dynamics of the Official USD/RUR and EUR/RUR Exchange Rates in 2004-40.Official USD/RUR exchange rate 39.Official EUR/RUR exchange rate Dynamics of the Dollar/Euro Exchange Rate on the International Markets The US $ continued to appreciate against the Euro on the FOREX market. The major positive factor for the US currency was the statistics of net purchases of US securities by foreign investors, which were significantly above the forecasts. Therefore, the Euro depreciated in January and remained at the level of US $ 1.3 per Euro practically during all month.

In the period from January 1 till January 30, the exchange rate of Euro on the world market depreciated by US $ 0.05 (by 3.86 per cent) and reached US $ 1.3045 per Euro. At this background, there was roubles observed a significant appreciation of the Ruble against the Euro. In the period from January till January 27, the European currency depreciated against the Ruble by RUR 1.22 (by 3.21 per cent) from RUR 37.841 per Euro to RUR 36.625 per Euro. The aggregate turnover of trade at the SELT amounted to Euro 155.9 million in the period from January 11 till January 27, while the average daily turnover was registered at about Euro 12 million (Euro 8.98 in December). These indicators were significantly above their respective levels observed in December. In this period, the highest volume of trade with Euro was registered on January 14 at Euro 27.6 million, and the lowest, Euro 4.53 million, was observed on January 11.

Table Financial Markets Indicators Month September October November December January* Monthly inflation rate 0,4% 1,1% 1,1% 1,1% 2,5% Inflation rate annualized on the basis of this month's trend 4,91% 14,03% 14,03% 14,03% 34,5% CB RF refinancing rate 13% 13% 13% 13% 13% Annualized yield to maturity on OFZ issues (%) 7,13% 6,15% 7,97% 6,11% 7,2% Volume of trading in the secondary GKO-OFZ market for 33,59 30,57 18,07 66,54 28,the month (RUR billion) Yield to maturity on Minfin bonds at the end of the month (% p.a.) 5th tranche 5,84% 5,28% 5,35% 4,99% 5,2% 6th tranche 4,25% 3,80% 3,93% 4,20% 4,4% 7th tranche 6,86% 6,27% 6,38% 5,88% 5,8% 8th tranche 4,76% 4,28% 4,46% 4,49% 4,6% Yield to maturity of Eurobonds at the end of the month (% p.a.) 2005 5,14% 6,26% 8,43% 10,17% 3,8% 2007 5,86% 5,39% 6,33% 6,35% 5,0% 2010 7,01% 6,66% 7,03% 6,95% 7,3% 2018 7,61% 7,21% 7,35% 7,02% 6,5% 2028 8,20% 7,83% 7,86% 7,57% 7,1% 2030 7,24% 6,84% 6,93% 6,64% 6,5% INSTAR-MIACR rate (% p.a.) on interbank overnight loans 3,13% 2,93% 1,26% 1,03% 1,5% at the end of the month Official RUR / US$ exchange rate at the end of the month 29,2171 28,7655 28,2367 27,7487 28,Official RUR / Euro exchange rate at the end of the month 35,9896 36,6472 37,4165 37,8104 36,Average annualized growth in RUR / US$ exchange rate -0,09% -1,55% -1,84% -1,73% 1,21% Average annualized growth in RUR / Euro exchange rate 2,40% 1,83% 2,10% 1,05% -3,14% Volume of trading at the stock market in the RTS for the 262,27 470,87 351,53 365,31 month (US$ million) Value of RTS-1 Index at the end of the month 635,57 663,67 633,34 614,11 Change in value of RTS-1 Index during the month (%) 8,71% 4,42% -4,57% -3,04% 4,2% * Estimate D. Polevoy The Real Sector of the Economy: Factors and Trends In January of 2004, the increase in GDP made 6.9 per cent, while the rates of growth in investment in fixed assets accelerated to 10.9 per cent and the rates of increase in the gross volume of industrial made 6.1 per cent. The outpacing rates of growth in investment demand have significantly affected the nature of structural shifts in final demand, as well as the changes in the contribution of base sectors of the economy in the dynamics of GDP production.

In 2004, the increase in the output of the investment complex made 9.8 per cent, what was by 1 p. p.

above the level registered in the preceding year, while the production of the export oriented sector made 5.7 per cent as compared with 7.7 per cent registered in 2003. Without serious qualitative changes in the technology and structure of production, the complex of industries manufacturing consumer goods failed to maintain high rates of growth. In spite of the increasing role of the investment complex in the dynamics of industrial growth, in 2004 the contribution of internal demand for domestic products remained at the average level of the indicators observed in 1999 through 2003.

The period of 1999 through 2004 was characterized by dynamic development registered across practically all sectors and industries of the economy. The economic recovery occurred at the background of favorable external economic situation an internal social and political stability. The specific feature of functioning and structural shifts in the economy was the expanding domestic market occurring at the background of a dynamic growth in the consumer and investment demand. Over the last years, GDP increased by 47.0 per cent, the actual final consumption of households grew by 45.2 per cent, while investment in fixed assets increased by 72.0 per cent. The enhancement of business activity based on the outpacing rates of growth in investment in comparison with the dynamics of production and consumption had the decisive effect on the nature of structural shifts in produced and utilized GDP in the period of recovery growth. In 2004, the volumes of industrial output increased by 53.4 per cent and agricultural produce by 26.4 per cent as compared with the figures registered in 1998. The growth in production of goods was supported by the infrastructure of the market of services formed in the years of reforms. The commercial freight turnover increased by 37.8 per cent, the amount of communication services by 238.7 per cent, and retail trade by 49.3 per cent as compared with the respective indicators registered in 1998.

Apparently, the nature of economic development observed over the last years was positively affected by the exceptionally favorable situation on the world markets of fuel, mineral, and raw material resources. In 2004, as compared with the situation of 2003, the terms of Russias trade vis--vis foreign countries improved both as a result of outpacing rates of growth in prices of exported goods, and due to the expansion of demand for staple Russian export products (see the section Foreign Trade).

In 2004, as compared with the situation observed in the preceding year, in the commodity structure of exports there were registered an increase in the share of energy goods, ferrous and nonferrous metals at the background of a decline in the share of machinery, equipment, and vehicles. The cumulative effect of the growth in prices and volumes of output in the raw material export oriented sector initiated the acceleration of the dynamics of production in related sectors and had the dominating effect on the changes in the conditions and factors of economic development.

The simultaneous expansion of both domestic and external markets was a specific feature of the recovery growth. At the same time, it should be noted that under the conditions of the recovery growth there was observed a gradual increase in the influence of the factors of internal demand on GDP dynamics. For instance, the deceleration of the rates of growth observed in 2001 and 2002 occurred at the background of a significant lagging of the rates of growth in internal demand behind external demand. Since the 2nd quarter of 2003, the recovery of the outpacing rates of growth in the domestic market at the expense of expansion of investment and consumer demand was the dominating factor facilitating the overcoming of the trend towards the deceleration of the rates of economic development. The favorable external economic situation observed in 2003 and 2004 positively affected the financial standing of exporters and transformed in the increase in the domestic demand. A stable increase in the influence of domestic demand on economic growth was registered across all quarters of 2004. The contribution of internal demand in the increase in GDP grew from 35.4 per cent in 2003 to 50 per cent in 2004. The external factor related to both high oil and metal prices, and the capacity of a significant increment in the volumes of export of energy resources explains more than a half of economic growth. The volume of Russias export of goods registered in January through November of 2004 has increased by 32.1 per cent as compared with the figures registered in the respective period of the preceding year, while the import of goods grew by 24.3 per cent.

In 2004, there were also observed significant volumes of imports. In January through November of 2004, according to the estimates presented by the RF Ministry of Economic Development and Trade, the amount of import of goods increased by 24.6 per cent. The relative decline in the costs of import of raw materials, material and technical resources occurring at the background of gradual Ruble appreciation has in the end been a significant factor behind the changes in the competitive environment and revealed the problem zones of growth. In particular, while the dynamics of consumer imports were checked by the rather strong competitive positions of Russian producers of food goods, the increase in investment imports was accompanied by the squeezing of Russian producers from the respective markets. As a result, the general competitive positions of Russian producers adjusted for the negative effect of changes in internal prices and imports have practically returned to the level observed in the precrisis 1997. These developments have sharply enhanced competition between domestic goods and imports and shifted the center of gravity of competition to non-price factors.

25,20,15,10,5,0,1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 -5,-10,-15,-20,-25,GDP Domestic demand External demand Figure1. Rates of growth in domestic and external demand in 1992 through 2004, in per cent of the figures registered in the preceding year In 2004, a specific feature of economic growth was the growing scale of gross savings. In the exceptionally favorable situation combining the factors of high business activity of domestic business and the price situation observed on the world market of raw materials, the share of gross savings has been in the interval from 28.6 per cent to 36.7 per cent of GDP in the last 5 years. This circumstance permitted to completely service the public external debt and finance social programs. In 2004, the gross national savings increased from 32.3 per cent of GDP in 2003 to 33.5 per cent of GDP under the impact of growing revenues of the economy from exports and the increase in the inflow of foreign investment on the one hand, and the deceleration of the growth in final consumption of households at the increasing propensity to save, on the other hand. The share of investment in fixed assets in GDP observed in 2000 through 2004 persisted at 16.5 per cent on the average, what made about one half of the saved funds. The low level of transformation of savings in investments remains a factor checking the rates of growth of domestic businesses.

As it is demonstrated by the experience accumulated over the last 5 years, exactly the ratio between investment demand and final consumption most acutely react to the changes in the export revenues and determines the specifics of functioning of the domestic market. Sharp fluctuations of investment expenditures for the reproduction of fixed assets were compensated by smooth changes in the dynamics of final consumption. After the recovery of the parameters of social development, there were registered significant shifts in the structure of household incomes and expenditures. As concerns the structure of employment, employees make 92.1 per cent of the total working population, while only 7.9 per cent of working population is outside the hired labor group. Accordingly, this ratio determines the specifics of formation of the structure of household incomes and GDP. Remuneration of hired labor accounts for more than 65 per cent of household incomes and 46.8 per cent of GDP.

Taking into account the fact that the dominating share of household incomes is formed at the expense of wages and salaries, the priority problems are those of employment. In the period of recovery growth (in 1999 through 2004), the specific feature was the trend towards an increase in demand for working force. In 2004, the average annual share of the employed made 67.6 million persons as compared with 65.8 million persons registered in 2003 and 63.8 million persons in 1998, while the unemployment declined to 5.6 million persons in comparison with 6.2 million persons and 8.9 million persons respectively. As the situation on the domestic market changed, the real household incomes, real wages and salaries, and the real gross pensions entered the trajectory of dynamic growth. In 2001, the final household consumption recovered and was at the pre-crisis level of 1997, while in the last three years it increased by 30.5 per cent. The growth in real incomes resulted in a significant decline in the level of poverty of the population. The share of persons with cash incomes below the subsistence minimum declined to 24.9 million persons, what makes 17.3 per cent of the total size of the national population as compared with 35.8 million persons (25 per cent) in 2002.

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